Waterway Services Ltd. follows ASPE and had earned accounting income before taxes of $518,000 for the year ended December 31, 2020.

During 2020, Waterway paid $80,000 for meals and entertainment expenses.

In 2017, Waterway’s tax accountant made a mistake when preparing the company’s income tax return. In 2020, Waterway paid $9,700 in penalties related to this error. These penalties were not deductible for tax purposes.

Waterway owned a warehouse building for which it had no current use, so the company chose to use the building as a rental property. At the beginning of 2020, Waterway rented the building to Trung Inc. for two years at $56,000 per year. Trung paid the entire two years’ rent in advance.

Waterway used the straight-line depreciation method for accounting purposes and recorded depreciation expense of $311,600. For tax purposes, Waterway claimed the maximum capital cost allowance of $465,300. This asset had been purchased at the beginning of the year for $3,069,000.

In 2020, Waterway began selling its products with a two-year warranty against manufacturing defects. In 2020, Waterway accrued $294,000 of warranty expenses: actual expenditures for 2020 were $90,600 with the remaining $203,400 anticipated in 2021.

In 2020, Waterway was subject to a 25% income tax rate. During the year, the federal government announced that tax rates would be decreased to 23% for all future years beginning January 1, 2021.

Prepare the journal entries to record current and future income taxes for 2020

Read the article, “House Counts on Honor Amongst Thieves: Votes Against Mandatory Auditor Rotation (Links to an external site.)Links to an external site..” Based on the information presented in the article, discuss the following: What is the main theme of this article; what is the author’s concern? What are the pros and cons regarding auditor rotations? Use facts from the article to support each. What is your opinion? Should rotation be required; why or why not?

Mastery Problem: Job Order Costing

Purl of Great Price Company

Maria Young is the sole stockholder of Purl of Great Price Company (POGP Company), which produces high-end knitted sweaters and sweater vests for sale to retail outlets. The company started in January of the current year, and employs three knitters (each of whom work 40 hours per week) and one office manager/knitting supervisor (this employee works 20 hours per week as office manager, and 20 hours per week as knitting supervisor). All wages are paid in cash at the end of each month.

Each knitter has a knitting machine that is used about 2/3 of the knitter’s time, the rest of the knitter’s time being involved in hand knitting and piecing together the garments. The company also has a packaging machine used to wrap the garments in plastic for shipping, which is operated by the office manager/knitting supervisor approximately 5 hours per week.

The knitting machines were purchased on January 1 of the current year, and cost $2,400 each, with an anticipated useful life of 10 years and no salvage value. The packaging machine was purchased on the same date and cost $4,800, with the same anticipated useful life and salvage value.

Nov. 30 Trial Balance

Predetermined Factory Overhead Rate

Since the company is more reliant on labor than machines, Maria decides to use direct labor hours (DLH) as the activity base for her predetermined factory overhead rate, rather than machine hours (MH).

Compute the predetermined factory overhead rate for the current year.

$10.20 per DLH

Feedback

Review the definitions of items that are included in factory overhead for the computation of estimated total factory overhead costs.

Job Cost Sheets

On December 10, POGP Company receives an order for 200 sweater vests and assigns Job 83 to the order. Review the Materials Requisition table to add the materials to the Job Cost Sheet for Job 83.

On December 15, review the Time Ticket tables to add the appropriate amount of direct labor and factory overhead costs to the Job Cost Sheet for Job 62 for the period December 1 through December 15.

On December 31, the last work day of the year for the knitters, review Time Ticket tables to add the appropriate amount of direct labor and factory overhead costs to the Job Cost Sheet for Job 83 for the period December 16 through December 31.

If there is no amount or an amount is zero, enter "0". If required, round your answers to the nearest cent.

Feedback

Recall that the factory overhead is applied for this company using direct labor hours (DLH).

Journal

On December 10, POGP Company receives an order for 200 sweater vests and assigns Job 83 to the order. Review the Materials Requisition table to journalize the entry to record the addition of the materials to Work in Process. If an amount box does not require an entry, leave it blank.

Feedback

Think about the flow of costs incurred to do a job and the accounts affected by sales to customers.

On December 15, review the Time Ticket tables to journalize the entry to record the addition of direct labor to Work in Process for the period December 1 through December 15. If an amount box does not require an entry, leave it blank.

On December 15, review the Time Ticket tables to journalize the entry to record the addition of factory overhead to Work in Process for the period December 1 through December 15. If an amount box does not require an entry, leave it blank.

On December 21, Job 62 is completed. Review the Job Cost Sheets and your journal entries. Journalize the entry to move the associated costs to the finished goods account. If an amount box does not require an entry, leave it blank.

On December 22, 75 of the 100 sweaters from Job 62 are sold on account for $125 each. Journalize the following transactions:

a. The entry to record the sale.

b. The entry to record the transfer of costs from Finished Goods to Cost of Goods Sold.

If an amount box does not require an entry, leave it blank.

On December 31, the last work day of the year for the knitters, review the Time Ticket tables to journalize the entry to record the addition of direct labor to Work in Process for the period December 16 through December 31. If an amount box does not require an entry, leave it blank.

On December 31, the last work day of the year for the knitters, review the Time Ticket tables to journalize the entry to record the addition of factory overhead to Work in Process for the period December 16 through December 31. If an amount box does not require an entry, leave it blank.

On December 31, journalize the following transactions. Note that expenses (b), (c), and (d) were paid in cash.

a. One month’s depreciation on equipment

b. One month’s payroll for all employees

c. One month’s rent of $2,000

d. One month’s factory utilities of $1,275

If an amount box does not require an entry, leave it blank.

On December 31, prepare the journal entry to dispose of the balance in the factory overhead account. If an amount box does not require an entry, leave it blank.

Feedback

Final Question

What are the balances in the following accounts as of December 31? If an amount is zero, enter "0".

Absorption and Variable Costing Comparisons: Sales Exceed Production
Wright Development purchases, develops, and sells commercial building sites. As the sites are sold, they are cleared at an average cost of $2,500 per site. Storm drains and driveways are also installed at an average cost of $5,500 per site. Selling costs are 10 percent of sales price. Administrative costs are $420,000 per year. During 2016, the company bought 1,000 acres of land for $5,000,000 and divided it into 200 sites of equal size. The average selling price per site was $85,000 during 2016 when 50 sites were sold. During 2017, the company purchased and developed another 1,000 acres, divided into 200 sites. The purchase price was again $5,000,000. Sales totaled 300 sites in 2017 at an average price of $85,000.

Required a. Prepare 2016 and 2017 functional income statements using absorption costing.

Use a negative sign only to indicate a net loss for income. Otherwise, do not use negative signs with your answers.

b. Prepare 2016 and 2017 contribution income statements using variable costing.

Use a negative sign only to indicate a net loss for income. Otherwise, do not use negative signs with your answers.

Thakin Industries Inc. manufactures dorm furniture in separate processes. In each process, materials are entered at the beginning, and conversion costs are incurred uniformly. Production and cost data for the first process in making a product are as follows.

Prepare the production cost report for July 2020.

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Kubin Company’s relevant range of production is 24,000 to 31,000 units. When it produces and sells 27,500 units, its average costs per unit are as follows:

Amount per Unit Direct materials $ 8.40 Direct labor $ 5.40 Variable manufacturing overhead $ 2.90 Fixed manufacturing overhead $ 6.40 Fixed selling expense $ 4.90 Fixed administrative expense $ 3.90 Sales commissions $ 2.40 Variable administrative expense $ 1.90

1. What is the incremental manufacturing cost incurred if the company increases production from 27,500 to 27,501 units? 2. What is the incremental cost incurred if the company increases production and sales from 27,500 to 27,501 units? 3. Assume that Kubin Company produced 27,500 units and expects to sell 27,160 of them. If a new customer unexpectedly emerges and expresses interest in buying the 340 extra units that have been produced by the company and that would otherwise remain unsold, what is the incremental manufacturing cost per unit incurred to sell these units to the customer? 4. Assume that Kubin Company produced 27,500 units and expects to sell 27,160 of them. If a new customer unexpectedly emerges and expresses interest in buying the 340 extra units that have been produced by the company and that would otherwise remain unsold, what incremental selling and administrative cost per unit is incurred to sell these units to the customer?

The following events occurred over the course of a year at Bagby Corp., which uses a job order costing system:

1. Direct materials purchases totaled $460,000.

2. $230,000 of indirect materials were used in production. Bagby uses a separate Supplies Inventory account for indirect materials.

3. $415,000 of direct materials were used in production.

4. The direct labor payroll was $940,000 (credit Wages Payable).

5. Other manufacturing overhead costs incurred during the year totaled $540,000.

6. Bagby applies overhead based on a predetermined overhead rate of $15 per machine hour. The company used 50,000 machine hours during the year.

7. During the year, Bagby transferred goods costing $2,100,000 into the Finished Goods Inventory account.

8. Bagby sold products with a manufacturing cost of $2,050,000 to customers during the year.

Required

a. Prepare journal entries to record these events.

b. Prepare T-accounts for the following accounts: Direct Materials Inventory, Work in Process Inventory, Manufacturing Overhead Control, and Finished Goods Inventory. Record the transactions from part (a) in the T-accounts and calculate ending account balances. Assume the following beginning account balances: Account Balance Direct Materials Inventory $20,000 Work in Process Inventory $12,000 Finished Goods Inventory $35,000

c. Was overhead under- or overapplied for the year? By how much?

103. Green Corp. uses a predetermined overhead rate based on direct labor hours. Green has determined that overhead was overapplied by $20,000 for the year. The WIP ending inventory was $125,000. The finished goods inventory was $200,000 and the COGS was $500,000. Required: A. Make the journal entries to close the overapplied overhead out to COGS. B. Make the journal entries to prorate the overapplied overhead.

Bell Products Corporation manufactures after-market clutch plates for motorcycles, automobiles, racing applications, and heavy industry vehicles. One of the first stages of clutch plate production is to stamp the raw plates out of rolls of metal. The process requires the use of 100 ton presses that stamp out hundreds of plates per minute.

A chemical is used to keep the presses from overheating and is automatically sprayed in fractions of seconds to keep the press operating smoothly to lubricate and prepare the metal. The chemical also keeps the press from sparking during the punching process. A small spark could cause a fire and safety hazard. Therefore, the chemical is crucial to the operation of the stamping process.

The stamping solution contains proprietary ingredients that are toxic and considered to be hazardous waste, and disposal must be through EPA approved methods. The cost to dispose of the chemical is many times greater than regular waste products.

Currently, Bell Products uses a traditional, volume-based costing system for its clutch plate products. Total manufacturing overhead for the period is allocated to the clutch plates based on machine hours.

Fred, who was recently hired, is the controller for Bell Products. He has five years of experience as a cost accountant at a lumber manufacturing facility. At the lumber plant, Fred implemented an activity-based costing system that helped the plant manager determine the profitability of various product lines. After getting to know the manufacturing process at Bell Products, Fred has determined that an activity-based costing system would help management make better decisions and track the costs of the clutch plates more accurately.

Tina is the manager of the stamping department and is good friends with Fred. Tina runs a very efficient department and has earned several bonuses for the stamping department’s production and profitability. Each of the department managers are evaluated based on the profitability of the departments based on internal cost reports.

If activity-based costing is used to allocate costs and the hazardous waste of the stamping chemical is allocated to the department that uses the product, the internally calculated profits of the stamping department would decline drastically. The decline in profitability would be due to the extreme high cost of the stamping chemical and this cost would be directed allocated to the stamping department.

Tina decides to take Fred to an expensive restaurant and eventually brings up the activity-based costing system. She voices her concern about the allocation of the hazardous waste being directly allocated to her department. She asks Fred if there is any way that he could reduce the amount of hazardous waste allocated to the stamping department. Fred values Tina’s friendship and realizes that she is on the compensation committee that evaluates Fred on an annual basis. Fred definitely wants to keep Tina happy and on his side.

As a result, Fred decides to not setup a cost pool for hazardous waste. He reasons that since the hazardous waste has always been a part of the manufacturing process, he will bury it as part of the manufacturing costs that are allocated across all departments. He justifies his decision because the activity-based system will still accurately allocate all other costs and it is much more accurate than the old traditional costing system. Fred feels no one will get hurt. Since the activity-based costing cannot be used for external reporting, Fred feels that his decision is not illegal.

Using the Institute of Management Accountants Statement of Ethical Professional Practice on page 12 of your textbook (Exhibit 1-6) as an ethical framework, answer the following questions:

What are the ethical issues in this case?

1. Activity-based costing cannot be used for external reporting. Does this fact influence your analysis of whether Fred has violated any ethical principles? Why, or why not?
2. Do you agree with Fred that no one will get hurt by burying the hazardous waste into the general manufacturing cost pool shared by all departments? Explain.
3. What are Fred’s responsibilities as a management accountant? What should he do now?

Departmental Overhead Rates

Lansing, Inc., provided the following data for its two producing departments:

Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 25,000 units of Form A produced and sold and 50,000 of Form B.

Required:

1. Calculate the overhead rates for each department.

2. Using departmental rates, assign overhead to the two products and calculate the overhead cost per unit. Round your answers to the nearest cent.

How does this compare with the plantwide rate unit cost, using direct labor hours?
Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.

3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates. Round your answers to the nearest cent.

Compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?

Relative to the plantwide rate, the cost increased  for Form A and decreased for Form B.

Feedback

1. For departmental rates, OH rates are assigned to each production department either per machine hrs. or direct labor hrs. Dept. estimated OH ÷ machine hour = rate per machine hour. Dept. estimated OH ÷ direct labor hour = rate per direct labor hour

2. Machine hours are used to assign OH of the Molding Dept. and direct labor hours are used to assign OH of the Polishing Dept. Total applied OH ÷ Units of production = Unit OH cost (each form). Plantwide rate = total estimated OH ÷ total direct hours

3. Use new numbers given and calculate OH the same as in Requirement 1 & 2, compare departmental to plantwide, and give conclusion of the results.

For each of the following items, tell me where they would go on a balance sheet or that they would not go on a balance sheet. I want the name of the line on the balance sheet and the section (i.e. accounts payable in current liabilities).

1. You buy fertilizer in December to use the next spring. The fertilizer will not be delivered until it is used.
2. The costs associated with planting winter wheat.
3. You sold hay to a neighbor, but he isn’t going to pay you until February.
4. Feeder calves you purchased and plan to feed out then sell.
5. Replacement heifers.
6. Money owed to Cal Ranch at the end of the year.
7. Mortgage
   1. Principal due within the next year
   2. Principal due beyond the next year
   3. Accrued interest at the end of the year
8. Estimated income tax payable during spring 2015 on income generated during 2014 on the December 31, 2014 balance sheet.
9. Family car
10. Farm truck

Except as otherwise indicated, assume that all balance sheet items reflect account balances at December 31, 2019, and that all income statement items reflect activities that occurred during the year ended December 31, 2019. There were no changes in paid-in capital during the year.

Required:

1. Prepare an income statement and statement of changes in stockholders' equity for the year ended December 31, 2019, and a balance sheet at December 31, 2019, for Breanna Inc. Based on the financial statements that you have prepared for part a, answer the questions in parts b-e.
2. What is the company's average income tax rate?
3. What interest rate is charged on long-term debt? Assume that the year-end balance of long-term debt is representative of the average long-term debt account balance throughout the year.
4. What is the par value per share of common stock?
5. What is the company's dividend policy (i.e., what proportion of the company's earnings is used for dividends)?

For this assignment discuss the importance of ethics in financial accounting. What issues may arise if ethics is compromised? How would this impact the company internally, how would it impact the external users such as investors, creditors, government, etc?

Explain how the choice of one of the following accounting methods over the other raises or lowers a company’s net income during a period of continuing inflation.

a. Use of FIFO instead of LIFO for inventory costing.

b. Use of a 6-year life for machinery instead of a 9-year life.

c. Use of straight-line depreciation instead of declining-balance depreciation.