Acquisition Cost of Long-Lived Assets

The following items represent expenditures (or receipts) related to the construction of a new home office for Lowrey Company.

Cost of land site, which included an old apartment building appraised at $75,000	$166,000
Legal fees, including fee for title search	2,200
Payment of apartment building mortgage and related interest due at time of sale	9,400
Payment for delinquent property taxes assumed by the purchaser	4,100
Cost of razing the apartment building	18,000
Proceeds from sale of salvaged materials	(3,900)
Grading to establish proper drainage flow on land site	2,000
Architect's fees on new building	310,000
Proceeds from sales of excess dirt (from basement excavation) to owner of adjoining property (dirt was used to fill in a low area on property)	(3,000)
Payment to building contractor	6,000,000
Payment of medical bills of employee accidentally injured while inspecting building construction	2,400
Special assessment for paving city sidewalks (paid to city)	19,000
Cost of paving driveway and parking lot	26,000
Cost of installing lights in parking lot	10,200
Premium for insurance on building during construction	8,500
Cost of open house party to celebrate opening of new building	9,000

Required

From the given data, calculate the proper balances for the Land, Building, and Land Improvements accounts of Lowrey Company.

Land
Building
Land Improvements

Camden Biotechnology began operations in September 2018. The following selected transactions relate to liabilities of the company for September 2018 through March 2019. Camden’s fiscal year ends on December 31. Its financial statements are issued in April.

2018

1. On September 5, opened checking accounts at Second Commercial Bank and negotiated a short-term line of credit of up to $25,000,000 at the bank’s prime rate (9.5% at the time). The company will pay no commitment fees.
2. On October 1, borrowed $22 million cash from Second Commercial Bank under the line of credit and issued a five-month promissory note. Interest at the prime rate of 9% was payable at maturity. Management planned to issue 10-year bonds in February to repay the note.
3. Received $4,200 of refundable deposits in December for reusable containers used to transport and store chemical-based products.
4. For the September–December period, sales on account totaled $4,630,000. The state sales tax rate is 3% and the local sales tax rate is 3%. (This is a summary journal entry for the many individual sales transactions for the period.)
5. Recorded the adjusting entry for accrued interest.

2019

6. In February, issued $20 million of 10-year bonds at face value and paid the bank loan on the March 1 due date.
7. Half of the storage containers covered by refundable deposits were returned in March. The remaining containers are expected to be returned during the next six months.

Required:
1. Prepare the appropriate journal entries for 2018 and 2019 transactions.
2. Prepare the current and long-term liability sections of the December 31, 2018, balance sheet. Trade accounts payable on that date were $302,000.

Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In the conditions listed below, how much income should each report from SleepEZ for 2017 under both the daily allocation and the specific identification allocation method? Refer to the following table for the timing of SleepEZ’s income. Period Income January 1 through March 17 (76 days) $ 215,000 March 18 through December 31 (289 days) 431,000 January 1 through December 31, 2017 (365 days) $ 646,000 (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

a. There are no sales of SleepEZ stock during the year.

b. On March 17, 2017, Blinkin sells his shares to Nod.

c. On March 17, 2017, Winkin and Nod each sell their shares to Blinkin.

Ps. this is one question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.29 per unit. This year, total costs to produce 58,000 units were: Direct materials $371,200 Direct labor 336,400 Variable overhead 179,800 Fixed overhead 104,400 If X Company buys the part, it can avoid $34,452 of the fixed overhead. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $65,000. The marketing manager is uncertain what demand will be next year. What level of demand will make the company indifferent between making the part and buying it?

Bessrawl Corporation is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. The company reported income in 2014 of $1,000,000 and stockholders’ equity at December 31, 2014, of $8,000,000. The CFO of Bessrawl has learned that the U.S. Securities and Exchange Commission is considering requiring U.S. companies to use IFRS in preparing consolidated financial statements. The company wishes to determine the impact that a switch to IFRS would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders’ equity from U.S. GAAP to IFRS. You have identified the following four areas in which Bessrawl’s accounting principles based on U.S. GAAP differ from IFRS.

1)Inventory

2)Property, plant, and equipment

3)Intangible assets

4)Research and development costs.

Bessrawl provides the following information with respect to each of these accounting differences.

Inventory

At year-end 2014, inventory had a historical cost of $250,000, a replacement cost of $180,000, a net realizable value of $190,000, and a normal profit margin of 20 percent.

Property, Plant, and Equipment

The company acquired a building at the beginning of 2013 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $250,000, and is being depreciated on a straight-line basis. At the beginning of 2014, the building was appraised and determined to have a fair value of $3,250,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.

Intangible Assets

As part of a business combination in 2011, the company acquired a brand with a fair value of $40,000. The brand is classified as an intangible asset with an in- definite life. At year-end 2014, the brand is determined to have a selling price of $35,000 with zero cost to sell. Expected future cash flows from continued use of the brand are $42,000, and the present value of the expected future cash flows is $34,000.

Research and Development Costs

The company incurred research and development costs of $200,000 in 2014. Of this amount, 40 percent related to development activities subsequent to the point at which criteria had been met indicating that an intangible asset existed. As of the end of the 2014, development of the new product had not been completed.

Required

Prepare a reconciliation schedule to convert 2014 income and December 31, 2014, stockholders’ equity from a U.S. GAAP basis to IFRS. Ignore income taxes.

Prepare a note to explain each adjustment made in the reconciliation schedule.

Thunder Creek Company is preparing budgets for the first quarter of 2018.

#1 Create a sales budget.

Thunder Creek Company expects sales of 18,000 units in January 2018, 24,000 units in February, 30,000 units in March, 34,000 in April, and 36,000 in May. The sales price is $48 per unit.

#2 Create a production budget.

Thunder Creek wants to finish each month with 20% of next month's sales in units.

#3 Create a Direct Materials Budget

Thunder Creek Company uses 2 pounds of direct materials for each unit it produces, at a cost of $4.00 per pound. The company begins the year with 9,500 pounds of material in Raw Materials Inventory. Management desires an ending inventory of 25% of next month's materials requirements

#4 Create a Direct Labor Budget

Thunder Creek Company's workers require 30 minutes of labor to produce each unit of product. The labor cost is $20 per hour

Budget #5: Create a Manufacturing Overhead Budget

1. Thunder Creek Company prepares its Manufacturing Overhead Budget. For each direct labor hour, the variable overhead costs are:
Indirect Materials = $1.00 per DLH; Indirect Labor Cost = $1.30 per DLH; Maintenance = $1.20 per DLH

2. The Fixed Overhead Costs per month are: Salaries of $40,000, Depreciation =$20,000 and Maintenance = $10,000.

3. ROUND the predetermined overhead allocation rate to two decimal places. Manufacturing overhead is allocated using direct labor hours.

Budget #6: Create a Cost of Goods Sold Budget. Thunder Creek Company uses the first-in, first-out (FIFO) inventory costing method.

The Beginning Finished Goods Inventory is $86,400 consisting of 3,600 units.

Budget #7: Selling and Administrative Expense Budget

Thunder Creek Company's variable supplies expense per month is $3.00 per unit. The fixed selling and administrative expenses per month consist of Salaries: $245,000; Advertising: $30,000; and Depreciation: $28,000

Potz and Pans, a small gift shop, has current assets of $45,000 (including inventory valued at $30,000) and $9,000 in current liabilities. Wannabees, a specialty clothing store has current assets of $150,000 (including inventory valued at $125,000) and $85,000 in current liabilities. Both business have applied for loans. Click the calculators box on the toolbar at bankrate.com then click on Small Business to answer the following questions.

1) Calculate and present the current ratio for each company. Which company is more likely to get the loan? Why?

2) The acid test ratio subtracts the value of the firm's inventory from its total current assets. Because inventory is often difficult to sell, this ratio is considered an even more reliable measure of a business's ability to repay loans than the current ration. Calculate and present the acid test ratio for each business and decide whether you would give either the loan. Why or why not for each?

A delivery truck was acquired on January 1, 2017, at a cost of $65,000. The delivery truck was originally estimated to have a residual value of $5,000 and an estimated life of five years. The truck is expected to be driven a total of 200,000 kilometers during its life, distributed as:

Year	Number of Components   37,000 42,000 45,000 40,000 36,000
2017
2018
2019
2020
2021

Using the straight-line, units-of-production, and double-diminishing balance methods, answer the following questions.

1. The 2017 depreciation expense using the units-of-production method is:

2. The 2018 depreciation expense using the straight-line method is:

3. The 2018 depreciation expense using the double-diminishing balance method is:

4. The 2019 depreciation expense using the units-of-production method is:

5. The book value on December 31, 2018, using the straight-line method is:

6. The book value on December 31, 2018, using the double-diminishing balance method is:

7. Which method results in the lowest depreciation expense in the first two years?

8. Prepare the adjusting entry to record the 2020 depreciation expense based on the units-of- production method.

Date	Account Titles	Debit	Credit

in your book, on pages 478-485 read about the issuance of bonds. Why might a company choose to raise money through bonds, rather than take out a note payable? What are the advantages and disadvantages of bonds? What does it mean to issue a bond at a premium or a discount?

Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $813,600 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost		Expected Activity
Machining	Machine-hours	$	249,600	12,000	MHs
Machine setups	Number of setups	$	162,400	280	setups
Product design	Number of products	$	92,000	2	products
General factory	Direct labor-hours	$	309,600	14,400	DLHs

Activity Measure	Product Y	Product Z
Machine-hours	7,800	4,200
Number of setups	40	240
Number of products	1	1
Direct labor-hours	8,800	5,600

8. Which of the four activities is a product-level activity?

Product design activity

Machine setups activity

General factory activity

Machining activity

9. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y? (Round all intermediate calculations to 2 decimal places.)

10. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z?

11. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z? (Round your "Percentage" answers to 2 decimal place.)

12. Using the ABC system, what percentage of the Machining costs is assigned to Product Y and Product Z? (Round your "Percentage" answers to 2 decimal places.)

13. Using the ABC system, what percentage of Machine Setups cost is assigned to Product Y and Product Z? (Round your "Percentage" answers to 2 decimal places.)

14. Using the ABC system, what percentage of the Product Design cost is assigned to Product Y and Product Z?

15. Using the ABC system, what percentage of the General Factory cost is assigned to Product Y and Product Z? (Round your "Percentage" answers to 2 decimal place.)

Job Cost Sheet

Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of $2,632 to carpet the consulting firm’s newly leased office. The estimate was based on the following data:

Estimated direct materials:
30 meters at $30 per meter	$ 900
Estimated direct labor:
28 hours at $20 per hour	560
Estimated factory overhead (75% of direct labor cost)	420
Total estimated costs	$1,880
Markup (40% of production costs)	752
Total estimate	$2,632

On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10.

The related materials requisitions and time tickets are summarized as follows:

Materials Requisition No.	Description	Amount
112	15 meters at $30	$450
114	19 meters at $30	570

Time Ticket No.	Description	Amount
H10	14 hours at $20	$280
H11	18 hours at $20	360

Required:

Enter amounts as positive numbers.

1. Complete that portion of the job order cost sheet that would be prepared when the estimate is given to the customer.

2. Record the costs incurred, and complete the job order cost sheet.

JOB ORDER COST SHEET
Customer Jackson Consulting Date October 1 Date wanted October 10 Date completed October 10 Job. No. ESTIMATE
Direct Materials			Direct Labor			Summary
		Amount			Amount		Amount
30 Meters at $30		$	28 Hours at $20		$	Direct Materials	$
						Direct Labor
						Factory Overhead
Total		$	Total		$	Total cost	$
ACTUAL
Direct Materials			Direct Labor			Summary
Mat. Req. No.	Description	Amount	Time Ticket No.	Description	Amount	Item	Amount
112	15 Meters at $30	$	H10	14 Hours at $20	$	Direct Materials	$
						Direct Labor
114	19 Meters at $30		H11	18 Hours at $20		Factory Overhead
Total		$	Total		$	Total Cost	$

What is the best explanation for the variances between actual costs and estimated costs. (For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.)

1. The direct materials cost exceeded the estimate by $120 because 4 meters of materials were spoiled. The direct labor cost exceeded the estimate by $80 because an additional 4 hours of labor were used by an inexperienced employee. The factory overhead cost exceeded the estimate because an additional $60 of factory overhead was allocated because of the increase in direct labor.
2. Management didn't provide enough direction to complete tasks on budget.
3. The direct materials cost exceeded the estimate by $75 because 3 meters of materials were spoiled.
4. The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee.

Select the correct answer from the above choices.

Case 9-31 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, LO9-10]

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$18 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)	22,800	June (budget)	52,800
February (actual)	28,800	July (budget)	32,800
March (actual)	42,800	August (budget)	30,800
April (budget)	67,800	September (budget)	27,800
May (budget)	102,800

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $5.4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4%	of sales
Fixed:
Advertising	$	340,000
Rent	$	32,000
Salaries	$	134,000
Utilities	$	14,000
Insurance	$	4,400
Depreciation	$	28,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

Assets
Cash	$	88,000
Accounts receivable ($51,840 February sales;$616,320 March sales)		668,160
Inventory		146,448
Prepaid insurance		28,000
Property and equipment (net)		1,090,000
Total assets	$	2,020,608
Liabilities and Stockholders’ Equity
Accounts payable	$	114,000
Dividends payable		25,500
Common stock		1,080,000
Retained earnings		801,108
Total liabilities and stockholders’ equity	$	2,020,608
The company maintains a minimum cash balance of $64,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $64,000 in cash.

REQUIRED:

2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases 0 Advertising 0 Rent 0 Salaries 0 Commissions 0 Utilities 0 Equipment purchases 0 Dividends paid 0 Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings 0 Repayments 0 Interest 0 Total financing 0 0 0 0 Ending cash balance $0 $0 $0 $0

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

	Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30    Variable expenses: 0 0 Fixed expenses: 0 0 0

4. A budgeted balance sheet as of June 30.

	Earrings Unlimited Budgeted Balance Sheet June 30 Assets    Total assets $0 Liabilities and Stockholders’ Equity Total liabilities and stockholders’ equity $0

Two Hollywood companies had the following balance sheet accounts as of December 31, 20X7 ($ in millions):

                                         Lexia   Hudson                                        Lexia       Hudson
Cash and receivables       $60   $44        Current liabilities               $100       $40
Inventories                         240   6            Common stock                   200       20
Plant assets, net                300   190        Retained earnings              300       180
Total assets                      $600   $240     Total liab. and stk. eq.       $600       $240
Net income for 20X7         $38     $8

On January 4, 20X8, these entities combined. Lexia issued $360 million of its shares (at market value) in exchange for all the shares of Hudson, a motion picture division of a large company. The inventory of films acquired through the combination had been fully amortized on Hudson's books.

During 20X8, Hudson received revenue of $42 million from the rental of films from its inventory.
Lexia earned $40 million on its other operations (i.e., excluding Hudson) during 20X8. Hudson
broke even on its other operations (i.e., excluding the film rental contracts)
during 20X8.

1. Prepare a consolidated balance sheet for the combined company immediately after the combination. Assume $160 million of the purchase price was assigned to the inventory of films. The fair values of all other Hudson assets and liabilities were equal to their book values.

2. Prepare a comparison of Lexia's consolidated net income between 20X7 and 20X8, where the cost of the film inventories would be amortized on a straight-line basis over 4 years. What would be the net income for 20X8 if the $160 million were assigned to goodwill instead of the inventory of films and goodwill was not amortized?

Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $160,000. The following table presents the estimated cash inflows for the two alternatives:

	Year 1			Year 2			Year 3			Year 4
Opportunity #1	$	44,000		$	47,200		$	63,200		$	80,000
Opportunity #2		81,600			86,400			16,000			16,000

Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach?

2. Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B

Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach? (Round your intermediate calculations and final answer to two decimal places.)

	Net Present Value Opportunity 1 Opportunity 2 Which opportunity should be chosen?

• Required B

Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?

	Payback Period Opportunity 1 years Opportunity 2 years Which opportunity should be chosen?

An entity has the following cost components for 150,000 units of product for the year:
Direct Materials	325,000
Direct Labor	175,000
Manufacturing Overhead	225,000
Selling and Administrative expense	175,000
All costs are variable except for 75,000 of manufacturing overhead and 75,000 of selling and administrative expenses. The total costs to produce and sell 175,000 units for the year are:
	Answer: