Flow of Costs and Income Statement

Ginocera Inc. is a designer, manufacturer, and distributor of custom gourment kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 20Y8. In January, the company spent $600,000 to develop a late-night advertising infomercial for the new product. During 20Y8, the company spent an additional $1,400,000 promoting the product through these infomercials, and $800,000 in legal costs. The knives were ready for manufacture on January 1, 20Y8.

Ginocera uses a job order cost system to accumulate costs associated with the Kitchen Ninja Knife. The unit direct materials cost for the knife is:

The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives.

After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.50 per unit.

The knives are sold to stores. Each store is given promotional materials, such as posters and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.20 per knife.

Total completed production was 1,200,000 units during the year. Other information is as follows:

Factory overhead cost is applied to jobs at the rate of $800 per stamping machine hour after the knife blanks are stamped. There were an additional 25,000 stamped knives, handles, and cases in process and waiting to be assembled on December 31, 20Y8.

In your computations, if required, round interim per unit costs to two decimal places.

Required:

1. Prepare an annual income statement for the Kitchen Ninja knife series.

2. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 20Y8.

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,300 for the Sleepeze, 12,510 for the Plushette, and 5,080 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $64,900, a marketing research assistant at $41,350, and an administrative assistant at $24,450) are budgeted for $130,700 next year.
2. Depreciation on the offices and equipment is $17,100 per year.
3. Office supplies and other expenses total $23,450 per year.
4. Advertising has been steady at $17,750 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high-end mattress. Gene believes the company should spend 10 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 5 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores.
6. Last year, shipping for the Sleepeze and Plushette lines averaged $45 per unit sold. Gene expects the Ultima line to ship for $70 per unit sold since this model features a larger mattress.

Suppose that Gene is considering three sales scenarios as follows:

Suppose Gene determines that next year's Sales Division activities include the following:

Research—researching current and future conditions in the industry

Shipping—arranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors

Jobbers—coordinating the efforts of the independent jobbers who sell the mattresses

Basic ads—placing print and television ads for the Sleepeze and Plushette lines

Ultima ads—choosing and working with the advertising agency on the Ultima account

Office management—operating the Sales Division office

The percentage of time spent by each employee of the Sales Division on each of the above activities is given in the following table:

Additional information is as follows:

1. Depreciation on the office equipment belongs to the office management activity.
2. Of the $23,450 for office supplies and other expenses, $5,200 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,200 per year is attributable to Internet connections and fees, and the bulk of these costs (80 percent) are assignable to research. The remainder is a cost of office management. All other office supplies and costs are assigned to the office management activity.

Required:

1. Prepare an activity-based budget for next year by activity. Use the expected level of sales activity. If required, round answers to the nearest dollar.

2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.

Bergamo Bay's computer system generated the following trial balance on December 31, 2017. The company’s manager knows something is wrong with the trial balance because it does not show any balance for Work in Process Inventory but does show a balance for the Factory Overhead account. In addition, the accrued factory payroll (Factory Payroll Payable) has not been recorded.

After examining various files, the manager identifies the following six source documents that need to be processed to bring the accounting records up to date.

Jobs 402 and 404 are the only units in process at year-end. The predetermined overhead rate is 100% of direct labor cost

Prepare an income statement for 2017 and a balance sheet as of December 31, 2017.

Cost allocation is often the centerpiece of conflict that is resolved in court cases. The litigation usually involves the dispute over how costs are allocated to a product or product line that is of interest to the plaintiff. This is particularly an issue when a company produces some products or services for a price-competitive market while other products or services are produced for a governmental unit on a cost-plus or reimbursement basis.

Nursing Care Inc., or NCI, operates both a small nursing home and retirement home. There is a single kitchen used to provide meals to both the nursing home and retirement home, meaning labor costs and utilities costs of the kitchen are shared by the two homes. There is also a centralized cleaning department that provides the cleaning services for both homes as well as the kitchen. The nursing home serves only indigent patients who are on Medicaid. The state Department of Health and Family Services (DHFS) reimburses NCI at Medicaid-approved cost reimbursement rates. The Medicaid reimbursement rates are based on cost information supplied by NCI. The relevant cost and allocation data for the most recent year appear in the following table.

Required:

1. Management of NCI currently allocates the kitchen and cleaning department costs based on the number of residents in each home. Determine the amount of service department costs assigned to each of the homes using this allocation base. (Round percentages to two decimal places in your calculations.)

2. DHFS auditors believe the step method of allocation should be used by first assigning cleaning costs based on square feet and then kitchen costs based on number of residents. Determine the amount of service department costs assigned to each of the homes using this allocation method. (Do not round percentage answers.)

The Decision to Lease or Buy at Warf Computers Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production. Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $7.1 million. Because of the rapid development of new technology, the equipment falls in class 45 with a CCA rate of 45 percent. At the end of four years, the market value of the equipment is expected to be $860,000. Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of $1.86 million due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $440,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent.

Questions

1) Should Warf buy or lease the equipment?

2) Nick mentions to James Hendrix, the president of Hendrix Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Nick would also like to eliminate the security deposit, but he would be willing to increase the lease payments to $3.0 million for each of the two years. When the lease is renewed in two years, Hendrix would consider the increased lease payments in the first two years when calculating the terms of the renewal. The equipment is expected to have a market value of $2.1 million in two years. What is the NAL of the lease contract under these terms? Why might Nick prefer this lease? What are the potential ethical issues concerning the new lease terms?

The following information is available for United Corporation on December 31 for the year just ended.

1. A review of the $12,000 unadjusted balance in the prepaid rent account shows a remaining balance of $8,750 at the end of the year.
2. $2,200 of the television advertising paid for in advance has been used.
3. The yearly depreciation on the building is $150.
4. The yearly depreciation on the equipment is $800.
5. $1,200 of the advertising paid for in advance has been published by the newspaper.
6. Furniture purchased in a previous year for $17,750 will be sold after ten years for $750.
7. Accrued salaries of $29,000 were not recorded at year-end.
8. Of the $7,500 consulting fees United Corporation received in advance, $6,600 has not yet been earned.
9. Interest of $1,690 has accrued on a bank loan and is unrecorded.
10. $11,500 of advertising United Corporation placed in the local newspaper is unrecorded and unpaid.

Prepare the required adjusting entries at December 31, 2014.
Enter the transaction letter as the description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (i.e., January 15 would be 15/Jan). For each journal entry, indicate how each account affects the balance sheet (Assets, Liabilities, Equity). Use + for increase and - for decrease. For example, if an account decreases equity, choose '-Equity'.

On April 1, 2018 Hippocrates Consulting began operations with the following beginning balances entered on April 1^st as seen in the T-accounts below. First show each of the transactions described below as a journal entry including the date and then post each of the entries to the T-accounts below. After you have completed all of the entries as well as the adjusting entries prepare an Income Statement, Statement of Retained Earnings, and Balance Sheet for the month of April, 2018. Make sure that your statements presented in good form (points will be deducted if they are not in good form).

April 1: Paid three months’ rent on a lease rental contract, $4,800

           2: Paid a six-month insurance premium for $1,800

           4: Received cash from clients as an advance payment for services to be          

                 provided and recorded as unearned fees, $5,000

           5: Purchased additional office equipment on account from Office Station Co.,

                 $2,000.

           6: Received cash from clients on account, $1,800.

          10: Paid cash for a newspaper advertisement, $120

          12: Paid Office Station Co. for part of the debt incurred on April 5, $1200.

          12: Recorded services provided on account for the period April 1-12, $4,200.

          14. Paid part-time receptionist for two weeks’ salary, $750.

          17: Recorded cash from cash clients for fees earned during the period April

                  1-16, $6,250.

           18: Paid cash for supplies, $800.

           20: Recorded services provided on account for the period April 13-20, $2,100.

           24: Recorded cash from cash clients for fees earned the period April

                    17-24, $3,850.

           26: Received cash from clients on account, $5,600.

           27: Paid part-time receptionist for two weeks’ salary, $750.

           29: Paid telephone bill for April, $130.

           30: Paid electricity bill for April, $200.

           30: Recorded cash from cash clients for fees earned for the period April 25-30,                

                   $3,050.

           30: Recorded services provided on account for the remainder of April, $1,500.

           30. A dividend of $6,000 was declared and paid.

The following are adjusting entries to be recorded on April 30th:

1. Insurance expired during April is $300.
2. Supplies on hand on April 30 are $1,350.
3. Depreciation of office equipment for April is $700.
4. Accrued receptionist salary on April 30 is $120.
5. Rent expired during April is $1,600.
6. Unearned fees on April 30 are $2,500.

                                              Accounts

        Cash                                 Receivable                   Supplies                      Prepaid Rent

---------------------                 -------------------              --------------                         ---------------

$13,100                             $3,000                          $1,400                                                                   

                                                                                    Office                          Accumulated

                                    Prepaid Insurance              Equipment                       Depreciation

                                    --------------------------         -------------------                  -------------------

                                                                           $12,500

                                                                                     Unearned

Accounts Payable      Salaries Payable                      Fees                          Common Stock

-----------------------        ---------------------                   ----------------               --------------------

                                                                                                                                   $30,000

Retained Earnings             Fees Earned                    Salary Expense          Rent Expense

------------------------           -----------------                      ----------------------        ------------------

                                          Depreciation                                                          Miscellaneous

Supplies Expense               Expense                          Insurance Expense        Expense

-----------------------            ---------------------                -------------------------     -----------------

Capital Allowance

Stephen Marsh operates a successful paint distributor business. The accounts for his business in 2017 showed a profit of $5,450,000 after charging:

• $380,000 depreciation of building, equipment, and furniture;
• $880,000 for salary to his wife Audrey who supervises the office;
• $350,000 to his 18-year-old son Paul, and $1,200,000 to himself
• $120,000 being $78,000 bad debts written off and $42,000 doubtful debts representing 2% of year-end receivables balance.

At year-end December 2016, Stephen Marsh's business assets consist of:

a) Equipment at cost $200,000 (WDV $132,500; A.A. 11.25% SL)

b) Furniture and fixtures at cost of $480,000 (WDV $192,000; A.A. 11.25% SL)

c) A pickup truck purchased in 2014 for $500,000; (WDV $312,500; A.A. 12.5% SL)

d) A non-residential building, acquired in 2010 for $5 million (WDV 3.5 m; A.A 2.5%)

e) There were no acquisitions or disposals of assets in 2017

The Commissioner has determined that the salaries paid to Audrey and Paul are commensurate with their respective responsibilities.

(i) Prepare a summary of Stephen's capital allowances for year-end 2017

(ii) Advise Stephen of his income tax liability for the year of assessment 2017 (1 mark)

(iii) Audrey's only income is her salary from the shop. What is her tax liability for 2013?   

PLEASE NOTE THAT TAX RATE IS 25%

Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following table provides data concerning the company’s costs:

For example, electricity costs are $1,400 per month plus $0.06 per car washed. The company expects to wash 8,200 cars in August and to collect an average of $6.10 per car washed.

The actual operating results for August are as follows:

Required:

Calculate the company's revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Exercise 5.12 (Algorithmic) Predetermined Overhead Rate, Application of Overhead to Jobs, Job Cost On April 1, Sangvikar Company had the following balances in its inventory accounts: Materials Inventory $12,820 Work-in-Process Inventory 21,380 Finished Goods Inventory 8,710 Work-in-process inventory is made up of three jobs with the following costs: Job 114 Job 115 Job 116 Direct materials $2,436 $2,695 $5,058 Direct labor 1,780 1,420 4,020 Applied overhead 979 781 2,211 During April, Sangvikar experienced the transactions listed below. Materials purchased on account, $29,300. Materials requisitioned: Job 114, $16,720; Job 115, $11,750; and Job 116, $5,280. Job tickets were collected and summarized: Job 114, 130 hours at $12 per hour; Job 115, 230 hours at $15 per hour; and Job 116, 90 hours at $19 per hour. Overhead is applied on the basis of direct labor cost. Actual overhead was $4,590. Job 115 was completed and transferred to the finished goods warehouse. Job 115 was shipped, and the customer was billed for 125 percent of the cost. Required: 1. Calculate the predetermined overhead rate based on direct labor cost. 55 % of direct labor cost 2. Calculate the ending balance for each job as of April 30. When required, round your answers to the nearest dollar. Use your rounded answers in subsequent computations, if necessary. Ending Balance Job 114 $ Job 115 $ Job 116 $ 3. Calculate the ending balance of Work in Process as of April 30. When required, round your answer to the nearest dollar. $ 4. Calculate the cost of goods sold for April. When required, round your answer to the nearest dollar. $ 5. Assuming that Sangvikar prices its jobs at cost plus 25 percent, calculate the price of the one job that was sold during April. Round to the nearest dollar. $

Wynn Sheet Metal reported an operating loss of $196,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2014 $ 78,000 30 % $ 23,400 2015 88,000 30 26,400 2016 98,000 40 39,200 2017 78,000 45 35,100 Required: 1. Complete the following table given below and prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option. 2. Show the lower portion of the 2018 income statement that reports the income tax benefit of the operating loss.

The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system.

Compute the following amounts for the month of May using T-accounts.

1. Cost of direct materials used.
2. Cost of direct labor used.
3. Cost of goods manufactured.
4. Cost of goods sold.*
5. Gross profit.
6. Overapplied or underapplied overhead.

  
*Do not consider any underapplied or overapplied overhead.

You take out a 25 year, $275, 000 mortgage with constant payments at the end of each month and i (12) = 6%. After 15 years, you wish to refinance the mortgage with a 10 year mortgage (also with constant payments at the end of each month) so that you pay $100 less each month than you originally were paying. Find the monthly nominal interest rate corresponding to this new mortgage

Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $115,000. The residual value of the lathe was estimated to be $10,000 at the end of a five-year life. The lathe was sold on March 31, 2018, for $34,000. 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.

Required:
1. Prepare a schedule to calculate the gain or loss on the sale. (don't need)
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.