You set up your own business in merchandising sector. You lease a space of 6,000 square feet to open a luxury watch shop.

The following is minimum information regarding the business:

- Specific sub-sector: Merchandising sector.

-   Business model: buying and selling luxury watches.

-   Investment by owner: $1,000,000

- You hire a shop manager, two accounting staffs who also keep the merchandise, one security officer, and 8 full-time sales assistants.

-   Business costs/expenses should have at least the following: cost of merchandise sold, rent expense, salary, utilities expense, advertising expense, interest expense, and miscellaneous expenses.

1. 1/1/2019 : Opened the business, invested $1,000,000 cash in the business.
2. 1/1/2019; bought a building for the business purpose for 100,000 cash. The building has a useful economic life of 10 years.
3. 1/1/2019; bought store and office fixture for $20000 cash.

4. 1/1/2019: purchased 100 luxury watches (Inventory) for $200,000 with $100,000 cash payment, the remaining amount payable on 2/1/2020. ( each watch costs $2,000)
5. 3/1/2019: purchased 50 luxury watches (Inventory) for $250,000. Each watch costs $5,000.
6. 4/1/2019: purchased 40 luxury watches (Inventory) for $240,000. Each cost $6,000.

7. 6/1/2019: Sold 130 watched for $1,300,000. Of which $300,000 cash was received at the time of sale. The remaining amount to be received on 5/2/2020.

8. 7/1/2019: paid $1,200 in advance for 12 months’ property insurance
9. 8/1/2019: borrowed $500,000 from a local Chase bank. Inrerest rate is 12%/year. Interest is paid every 6 months- the first payment date is 2/1/2020. Principal is paid on 8/1/2020.
10. 9/1/2019: to expand business, you rent a showroom in the next building. Paid $24,000 cash in advance for 12 month’s rent.

11. 12/31/2019: Paid 2019 utilities expense, advertising expense, and miscellaneous expense for $5000, $15,000, and $4,000, respectively.

12. Salary is paid on the last day of each month. Each month’s salary expense is $20,000.

Notes:

13. On 12/31/2019: Physical inventory showed that there were 60 luxury watches on hand at the end of the period. The company used periodic inventory system, and used FIFO costing method.
14. Your business used straight-line depreciation method for all fixed assets.
15. Ignore tax.

16. Prepare financial statements on 12/31/2019.

identify a large company that is currently accumulating a cash hoard, evaluate how the company can use the cash flow statement to project efficient uses of the cash hoard it has accumulated. Suggest at least two (2) advantages and two (2) disadvantages of companies accumulating cash hoards. Provide a rationale for your suggestion.

What are the major advantages and disadvantages of the single-step form of income statement compared to the multiple-step income statement? Can a business incur a gross profit but incur a loss?

Straight-Line, Declining-Balance, and Sum-of-the-Years'-Digits Methods

A light truck is purchased on January 1 at a cost of $38,730. It is expected to serve for eight years and have a salvage value of $5,690. Calculate the depreciation expense for the first and third years of the truck’s life using the following methods. If required, round your answers to the nearest cent.

Cost of Production Report: Weighted average method

Sunrise Coffee Company roasts and packs coffee beans. The process begins in the Roasting Department. From the Roasting Department, the coffee beans are transferred to the Packing Department. The following is a partial work in process account of the Roasting Department at December 31:

Required:

Prepare a cost of production report, using the weighted average method, and identify the missing amounts for Work in Process—Roasting Department. Assume that direct materials are placed in process during production. If required, round your cost per equivalent unit answer to two decimal places.

Overhead Application, Activity-Based Costing, Bid Prices

Firenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is:

Previously, Sanjay Bhatt, Firenza Company's controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours.

Sanjay has been asked to prepare bids for two jobs with the following information:

The typical bid price includes a 40 percent markup over full manufacturing cost.

1. Calculate a plantwide rate for Firenza Company based on machine hours.
$ per machine hour

What is the bid price of each job using this rate?

2. Calculate activity rates for the four overhead activities

What is the bid price of each job using these rates?

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $193,000 after income taxes. Capital employed equaled $2.9 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 6 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 12-point premium above the 5 percent rate on long-term Treasury bonds.

Required:

Use a spreadsheet to perform your calculations and round all interim and percentage figures to four decimal places. If the EVA is negative, enter your answer as a negative amount.

1. No changes are made; calculate EVA using the original data.

$ ????

2. Sugar will be used to replace another natural ingredient (atomic number 33) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term Treasury bills to 10 percent the first year and 7 percent the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $390,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $390,000, and in Year 1, the premium will be 10 percent above the long-term Treasury rate. In Year 2, it will be 7 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.)

Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior month’s reports. “Every month, it’s anyone’s guess whether the lab will show a profit or a loss. Perhaps the only answer is to increase our lab fees again.”

“We can’t,” replied Rhoda Groves, the controller. “There are still a lot of complaints about the last increase, particularly from the insurance companies and government health units. They’re now paying only about 86% of what we bill. I’m beginning to think the problem is on the cost side.”

To determine if the Clearwater lab costs are in line with those of other hospital labs, Goudreau has asked you to evaluate the costs for the past month. Groves has provided you with the following information:

1. Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 2,100 smears and 1,500 blood tests were performed in the lab.
2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 22,000 plates at a cost of $71,808. This cost is net of a 4% purchase discount. A total of 1,200 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.
3. During the past month, 1,760 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $18,392.00.
4. The lab’s variable overhead cost last month totalled $11,000.
5. Fixed overhead cost last month totalled $14,000.

Clearwater Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:

Required:

1. Compute the materials price variance for the plates purchased last month, and compute a materials quantity variance for the plates used last month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

2-a. Compute a labour rate variance and a labour efficiency variance for the lab. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculation and round your final answers to 1 decimal place.)

3-a. Compute the variable overhead spending and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

4. Compute the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Carlsville Company, which began operations in 2017, invests its idle cash in trading securities. The following transactions are from its short-term investments in trading securities.

2017

2018

2019

Required:
Prepare journal entries to record these short-term investment activities for the years shown. On December 31 of each year, prepare the adjusting entry to record any necessary fair value adjustment for the portfolio of trading securities. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations.)

Parker Plastic, Inc., manufactures plastic mats to use with rolling office chairs. Its standard cost information for last year follows:

Parker Plastic had the following actual results for the past year:

Required:
1, 2, 3, & 4. Prepare the journal entry to record Parker Plastic's direct materials, direct labor, variable overhead, fixed overhead costs and related variances. Assume the company purchases raw materials as needed and does not maintain any ending inventories.

1. Record entry for direct materials costs and variances.

2. Record entry for direct labor costs and variances.

3. Record the entry for variable overhead costs and variances.

4. Record the entry for fixed overhead costs and variances.

Exercise 10-18

Pronghorn Company purchased an electric wax meter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

Prepare the journal entries necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Pronghorn’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Please find an organization that you are familiar with and determine if they are using a single or multiple-step income statement? Please name some key differences between the two formats.

ABC, Resource Drivers, Service Industry

Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic’s administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,755,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 21,100 square feet. Hepworth determined that lodging costs would be assigned to each unit based on square feet.

To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected:

The demands associated with patient severity are also provided:

Required:

1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment. If required, round your answer to the nearest cent.
$ per day

2. Compute activity rates using the given activity drivers (combine activities with the same driver). If required, round your answers to the nearest cent.

3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity. Round your interim calculations and final answers to the nearest cent.

Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2006 by two talented engineers with little business training. In 2018, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2018 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

1. A five-year casualty insurance policy was purchased at the beginning of 2016 for $35,000. The full amount was debited to insurance expense at the time.
2. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $600,000 on December 29, 2007, and has been depreciated on a straigh-tline basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000.
3. On December 31, 2017, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
4. The company changed inventory cost methods to FIFO from LIFO at the end of 2018 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2019.
5. At the end of 2017, the company failed to accrue $15,500 of sales commissions earned by employees during 2017. The expense was recorded when the commissions were paid in early 2018.
6. At the beginning of 2016, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be ten years with no salvage value. The machine has been depreciated by the double-declining balance method. Its book value on December 31, 2017, was $460,800. On January 1, 2018, the company changed to the straight-line method.
7. Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.75% is a better indication of the actual cost. Management effects the change in 2018. Credit sales for 2018 are $4,000,000; in 2017 they were $3,700,000.

Required:
For each situation:
1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change. For accounting errors, choose "Not applicable".
2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund income tax.

Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $80,000. The residual value of the lathe was estimated to be $5,000 at the end of a five-year life. The lathe was sold on March 31, 2018, for $17,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

1.Prepare a schedule to calculate the gain or loss on the sale.

2. Prepare the journal entry to record the sale.

3. Assuming that Howarth had instead used the sum-of-the-years'-digits depreciation method, prepare the journal entry to record the sale.