Comprehensive Problem 2-2A
Ray and Maria Gomez have been married for 3 years. They live at 1610 Quince Ave., McAllen, TX 78701. Ray is a propane salesman for Palm Oil Corporation and Maria works as a city clerk for the City of McAllen. Maria's Social Security number is 444-65-9912 and Ray’s is 469-21-5523. Ray’s birthdate is February 21, 1988 and Marie’s is December 30, 1990. Ray and Maria’s earnings are reported on the following Form W-2s:
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Ray and Maria have interest income of $641 from a savings account at McAllen State Bank. In addition, they own U.S. Savings bonds (Series EE). The bonds had a value of $10,000 on January 1, 2016, and their value is $10,700 on December 31, 2016. They have not made an election with respect to these bonds.
Ray has an ex-wife named Judy Gomez. Pursuant to their divorce decree, Ray pays her $455 per month in alimony. All payments were made on time in 2016. Judy's Social Security number is 566-74-8765.
During 2016, Ray was in the hospital for a successful operation. His health insurance company reimbursed Ray $4,732 for all of his hospital and doctor bills.
In June 2016, Maria's father died. Under a life insurance policy owned and paid for by her father, Maria was paid death benefits of $25,000.
Maria bought a Texas lottery ticket on impulse during 2016. Her ticket was lucky and she won $3,900. The winning amount was paid to Maria in November 2016, with no income tax withheld.
Palm Oil Corporation provide Ray with a company car to drive while he is working. The Corporation spent $5,000 to maintain this vehicle during 2016. Ray never uses the car for personal purposes.
Required:
Complete the Gomez's federal tax return for 2016. Use Form 1040 below. Make realistic assumptions about any missing data. If an amount box does not require an entry or the amount is zero, enter "0".
Click here to access the tax table to use for this problem.
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In: Accounting
Vertical Analysis of Income Statement
Revenue and expense data for Innovation Quarter Inc. for two recent years are as follows:
Current Year | Previous Year | |||
Sales | $454,000 | $409,000 | ||
Cost of goods sold | 267,860 | 216,770 | ||
Selling expenses | 72,640 | 77,710 | ||
Administrative expenses | 81,720 | 69,530 | ||
Income tax expense | 13,620 | 16,360 |
a. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. If required, round percentages to one decimal place. Enter all amounts as positive numbers.
Innovation Quarter Inc. | ||||
Comparative Income Statement | ||||
For the Years Ended December 31 | ||||
Current year Amount | Current year Percent | Previous year Amount | Previous year Percent | |
Sales | $454,000 | % | $409,000 | % |
Cost of goods sold | 267,860 | % | 216,770 | % |
$ | % | $ | % | |
Selling expenses | 72,640 | % | 77,710 | % |
Administrative expenses | 81,720 | % | 69,530 | % |
$ | % | $ | % | |
% | % | |||
Income tax expense | 13,620 | % | 16,360 | % |
$ | % | $ | % |
b. The vertical analysis indicates that the cost of goods sold as a percent of sales by 6 percentage points, while selling expenses by 3 percentage points, and administrative expenses by 1 percentage points. Thus, net income as a percent of sales by 3 percentage points.
In: Accounting
Question:
LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $25.3 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 24%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. & 2. Prepare the journal entry for LCD's purchase of the components on November 1, 2018 and the first installment payment on November 30, 2018.
3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2018?
In: Accounting
Merrill Lynch is a large securities firm which uses the accrual method of accounting in accordance with Generally Accepted Accounting Principles. Merrill Lynch executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 2017, until the end of the month are not settled until mid-January of 2018. Merrill Lynch netted $100,000,000 of sales commissions from these trades in late December 2017. Since the security is not credited to the customer’s account until settlement date, Merrill Lynch wants to report the Revenue on their 2017 Income Statement but wants to declare the income on the tax return for 2018 because it coincides with the settlement dates in 2018. Taxpayer does not receive the money until January 2018. Draft a written memo to the client addressing the following research issues: Merrill Lynch contacts you for guidance on this issue. Should the revenue be reported in 2017 or 2018 for financial statement reporting purposes? Why? Please site the specific guidance you followed in response to your research question. The primary issue you should research is whether an accrual basis securities firm has gross income under sec. 451(a) on the trading date or the next year on the settlement date when all the work is performed, payment is due, and money received?
In: Accounting
Activity-Based Life-Cycle Costing
Kagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $500 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).
Unit-based system:
Variable conversion activity rate: $110 per direct labor hour
Material usage rate: $15 per part
ABC system:
Labor usage: $25 per direct labor hour
Material usage (direct materials): $30 per part
Machining: $80 per machine hour
Purchasing activity: $150 per purchase order
Setup activity: $3,600 per setup hour
Warranty activity: $500 per returned unit (usually requires
extensive rework)
Customer repair cost: $35 per repair hour (average)
Activity and Resource Information (annual estimates) |
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Design A | Design B | |||
Units produced | 20,000 | 20,000 | ||
Direct material usage | 320,000 | parts | 295,000 | parts |
Labor usage | 55,000 | hours | 125,000 | hours |
Machine hours | 55,000 | 65,000 | ||
Purchase orders | 2,000 | 1,500 | ||
Setup hours | 650 | 250 | ||
Returned units | 1,100 | 300 | ||
Repair time (customer) | 2,000 | 500 |
Required:
1. Select the lower-cost design using
unit-based costing.
Are logistical and post-purchase activities considered in this
analysis?
2. Select the lower-cost design using ABC
analysis.
3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design.
Post-Purchase Cost | ||
Design A | $fill in the blank 4 | |
Design B | $fill in the blank 5 |
Assume that the environmental cost is borne by society. Now
which is the better design?
In: Accounting
Johnson Corporation began 2016 with inventory of 10,000 units of its only product. The units cost $8 each. The company uses a periodic inventory system and the LIFO cost method. The following transactions occurred during 2016:
a. Purchased 50,000 additional units at a cost of $10 per unit. Terms of the purchases were 2/10, n/30, and 100% of the purchases were paid for within the 10-day discount period. The company uses the gross method to record purchase discounts. The merchandise was purchased f.o.b. shipping point and freight charges of $.50 per unit were paid by Johnson.
b. 1,000 units purchased during the year were returned to suppliers for credit. Johnson was also given credit for the freight charges of $.50 per unit it had paid on the original purchase. The units were defective and were returned two days after they were received.
c. Sales for the year totaled 45,000 units at $18 per unit.
d. On December 28, 2016, Johnson purchased 5,000 additional units at $10 each. The goods were shipped f.o.b. destination and arrived at Johnson's warehouse on January 4, 2017.
e. 14,000 units were on hand at the end of 2016.
Required:
1. Determine ending inventory and cost of goods sold for 2016.
2. Assuming that operating expenses other than those indicated in the above transactions amounted to $150,000, determine income before income taxes for 2016.
In: Accounting
Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2016, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company’s accounting records:
Fruit toppings | Marshmellow toppings | Chocolate toppings | |
Inventory, January 1, 2016 | $20,000 | $7,000 | $3,000 |
Net purchaes thru Nov. 17 | 150,000 | 36,000 | 12,000 |
Net sales thru Nov. 17 | 200,000 | 55,000 | 20,000 |
Historical gross profit ratio | 20% | 30% | 35% |
Required:
1. Calculate the estimated cost of each of the toppings lost in the fire.
2. What factors could cause the estimates to be over-or understated?
In: Accounting
Tony and Suzie graduate from college in May 2021 and begin developing their new business. They begin by offering clinics for basic outdoor activities such as mountain biking or kayaking. Upon developing a customer base, they’ll hold their first adventure races. These races will involve four-person teams that race from one checkpoint to the next using a combination of kayaking, mountain biking, orienteering, and trail running. In the long run, they plan to sell outdoor gear and develop a ropes course for outdoor enthusiasts.
On July 1, 2021, Tony and Suzie organize their new company as a corporation, Great Adventures Inc. The articles of incorporation state that the corporation will sell 23,000 shares of common stock for $1 each. Each share of stock represents a unit of ownership. Tony and Suzie will act as co-presidents of the company. The following transactions occur from July 1 through December 31.
Jul. | 1 | Sell $11,500 of common stock to Suzie. | ||
Jul. | 1 | Sell $11,500 of common stock to Tony. | ||
Jul. | 1 | Purchase a one-year insurance policy for $5,640 ($470 per month) to cover injuries to participants during outdoor clinics. | ||
Jul. | 2 | Pay legal fees of $1,600 associated with incorporation. | ||
Jul. | 4 | Purchase office supplies of $1,700 on account. | ||
Jul. | 7 | Pay for advertising of $360 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $40 on the day of the clinic. | ||
Jul. | 8 | Purchase 10 mountain bikes, paying $10,200 cash. | ||
Jul. | 15 | On the day of the clinic, Great Adventures receives cash of $1,600 from 40 bikers. Tony conducts the mountain biking clinic. | ||
Jul. | 22 | Because of the success of the first mountain biking clinic, Tony holds another mountain biking clinic and the company receives $2,150. | ||
Jul. | 24 | Pay $780 to a local radio station for advertising to appear immediately. A kayaking clinic will be held on August 10, and attendees can pay $110 in advance or $160 on the day of the clinic. | ||
Jul. | 30 | Great Adventures receives cash of $4,400 in advance from 40 kayakers for the upcoming kayak clinic. | ||
Aug. | 1 | Great Adventures obtains a $41,000 low-interest loan for the company from the city council, which has recently passed an initiative encouraging business development related to outdoor activities. The loan is due in three years, and 6% annual interest is due each year on July 31. | ||
Aug. | 4 | The company purchases 14 kayaks, paying $16,000 cash. | ||
Aug. | 10 | Twenty additional kayakers pay $3,200 ($160 each), in addition to the $4,400 that was paid in advance on July 30, on the day of the clinic. Tony conducts the first kayak clinic. | ||
Aug. | 17 | Tony conducts a second kayak clinic, and the company receives $12,100 cash. | ||
Aug. | 24 | Office supplies of $1,700 purchased on July 4 are paid in full. | ||
Sep. | 1 | To provide better storage of mountain bikes and kayaks when not in use, the company rents a storage shed for one year, paying $3,960 ($330 per month) in advance. | ||
Sep. | 21 | Tony conducts a rock-climbing clinic. The company receives $13,300 cash. | ||
Oct. | 17 | Tony conducts an orienteering clinic. Participants practice how to understand a topographical map, read an altimeter, use a compass, and orient through heavily wooded areas. The company receives $18,200 cash. | ||
Dec. | 1 | Tony decides to hold the company’s first adventure race on December 15. Four-person teams will race from checkpoint to checkpoint using a combination of mountain biking, kayaking, orienteering, trail running, and rock-climbing skills. The first team in each category to complete all checkpoints in order wins. The entry fee for each team is $660. | ||
Dec. | 5 | To help organize and promote the race, Tony hires his college roommate, Victor. Victor will be paid $60 in salary for each team that competes in the race. His salary will be paid after the race. | ||
Dec. | 8 | The company pays $1,000 to purchase a permit from a state park where the race will be held. The amount is recorded as a miscellaneous expense. | ||
Dec. | 12 | The company purchases racing supplies for $2,000 on account due in 30 days. Supplies include trophies for the top-finishing teams in each category, promotional shirts, snack foods and drinks for participants, and field markers to prepare the racecourse. | ||
Dec. | 15 | The company receives $26,400 cash from a total of forty teams, and the race is held. | ||
Dec. | 16 | The company pays Victor’s salary of $2,400. | ||
Dec. | 31 | The company pays a dividend of $4,800 ($2,400 to Tony and $2,400 to Suzie). | ||
Dec. | 31 | Using his personal money, Tony purchases a diamond ring for $3,600. Tony surprises Suzie by proposing that they get married. Suzie accepts and they get married! |
The following information relates to year-end adjusting entries as of December 31, 2021.
In: Accounting
CP13-54 (similar to) After looking into debt financing through notes, mortgage, and bonds payable, Outdoor Adventure Company decides to raise additional capital for a planned business expansion. The company will be able to acquire cash as well as land adjacent to its current business location. Before the following transactions, the balance in Common Stock on January 1, 2021 was $ 170 000 and included 170 000 shares of common stock issued and outstanding. (There was no Paid-In Capital in Excess of Par lCommon.) Outdoor Adventure Company had the following transactions in 2021:
Jan. |
1 |
Issued 30,000 shares of $1 par value common stock for a total of 180,000. |
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10 |
Issued 10,000 shares of 3%,10 par value preferred stock in exchange for land with a market value of 120,000. |
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Dec. |
15 |
Declared total cash dividends of $30,000. | ||||||||
20 |
Declared a 6% common stock dividend when the market value of the stock was 7.00 per share. | |||||||||
31 31 |
Paid the cash dividends.
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Distributed the stock dividend. |
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1. |
Journalize the transactions. |
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2. |
Calculate the balance in Retained Earnings on December 31,
20212021. Assume the balance on January 1,20212021 was$ 5 comma 500$5,500 and net income for the year was$ 472 comma 000$472,000. |
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3. |
Prepare the stockholders' equity section of the balance sheet
as of December 31,
20212021. There was no preferred stock issued prior to the20212021 transactions.
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In: Accounting
Wember Company acquired a subsidiary company on December 31, 2012, and recorded the cost of the intangible assets it acquired as follows:
Patent | $100,000 |
Trade name | 80,000 |
Goodwill | 150,000 |
The patent is being amortized by the straight-line method over an expected life of 10 years with no residual value. Amortization has been recorded for the current year. The trade name was considered to have an indefinite life.
Because of the success of the subsidiary in the past, Wember has not previously considered any of the intangible assets to be impaired. However, in 2016, because of a current recession and technological changes in the subsidiary’s industry, Wember decides to review all of its intangible assets for impairment and record any adjustments at December 31, 2016.
Wember estimates that the fair value of the patent is $42,000. The company estimates the fair value of the trade name to be $90,000 but decides that it now has a limited life of 5 years. The subsidiary company, which qualifies as a reporting unit, has a book value of $700,000, including the goodwill of $150,000. Wember estimates that the fair value of the subsidiary company is $400,000, of which it allocates 80% to the identifiable assets and liabilities.
Required:
1. | Prepare journal entries for Wember to record the impairment of its intangible assets at December 31, 2016. |
2. | Prepare journal entries for Wember to record the amortization expense for its intangibles at December 31, 2017. |
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In: Accounting
Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. All of Halifax's sales are for credit (no cash is collected at the time of sale). The company began 2018 with a refund liability of $330,000. During 2018, Halifax sold merchandise on account for $11,800,000. Halifax's merchandise costs it 70% of merchandise selling price. Also during the year, customers returned $345,000 in sales for credit, with $191,000 of those being returns of merchandise sold prior to 2018, and the rest being merchandise sold during 2018. Sales returns, estimated to be 3% of sales, are recorded as an adjusting entry at the end of the year.
Required:
1. Prepare entries to (a) record actual returns
in 2018 of merchandise that was sold prior to 2018; (b) record
actual returns in 2018 of merchandise that was sold during 2018;
and (c) adjust the refund liability to its appropriate balance at
year end.
2. What is the amount of the year-end refund
liability after the adjusting entry is recorded?
In: Accounting
The Lakeside Company uses a weighted-average process costing system. The following data are available:
Beginning inventory | -0- | ||
Units started in production | 22,200 | ||
Units finished during the period | 17,000 | ||
Units in process
at the end of the period (complete as to materials, ¼ complete as to labor and overhead) |
5,200 |
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Cost of materials used | $ | 48,530 | |
Labor and overhead costs | $ | 50,600 | |
Total cost of the 17,000 units finished is:
Multiple Choice
$90,604.
$99,164.
$84,168.
$88,534.
In: Accounting
High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:
Beginning inventory | 0 | |
Units produced | 41,000 | |
Units sold | 36,000 | |
Selling price per unit | $ | 80 |
Selling and administrative expenses: | ||
Variable per unit | $ | 3 |
Fixed (per month) | $ | 568,000 |
Manufacturing costs: | ||
Direct materials cost per unit | $ | 14 |
Direct labor cost per unit | $ | 7 |
Variable manufacturing overhead cost per unit | $ | 3 |
Fixed manufacturing overhead cost (per month) | $ | 738,000 |
Management is anxious to assess the profitability of the new camp cot during the month of May.
Required:
1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
In: Accounting
Exercise 7-28 (Algo) Receivables; transaction analysis [LO7-3, 7-5, 7-6, 7-7, 7-8]
Weldon Corporation’s fiscal year ends December 31. The following
is a list of transactions involving receivables that occurred
during 2021:
Mar. | 17 | Accounts receivable of $3,100 were written off as uncollectible. The company uses the allowance method. | ||
30 | Loaned an officer of the company $39,000 and received a note requiring principal and interest at 8% to be paid on March 30, 2022. | |||
May | 30 | Discounted the $39,000 note at a local bank. The bank’s discount rate is 9%. The note was discounted without recourse and the sale criteria are met. | ||
June | 30 | Sold merchandise to the Blankenship Company for $26,000. Terms of the sale are 3/10, n/30. Weldon uses the gross method to account for cash discounts. | ||
July | 8 | The Blankenship Company paid its account in full. | ||
Aug. | 31 | Sold stock in a nonpublic company with a book value of $6,400 and accepted a $7,400 noninterest-bearing note with a discount rate of 9%. The $7,400 payment is due on February 28, 2022. The stock has no ready market value. | ||
Dec. | 31 | Weldon estimates that the allowance for uncollectible accounts should have a balance in it at year-end equal to 3% of the gross accounts receivable balance of $930,000. The allowance had a balance of $26,000 at the start of 2021. |
1
Accounts receivable of $3,100 were written off as uncollectible. The company uses the allowance method.
2
Loaned an officer of the company $39,000 and received a note requiring principal and interest at 8% to be paid on March 30, 2022.
3
Record the accrued interest revenue on the discounted note.
4
Record the cash received on the discounted note.
5
Sold merchandise to the Blankenship Company for $26,000. Terms of the sale are 3/10, n/30. Weldon uses the gross method to account for cash discounts.
6
The Blankenship Company paid its account in full.
7
Sold stock with a book value of $6,400 and accepted a $7,400 noninterest-bearing note with a discount rate of 9% due on February 28, 2022.
8
To record the accrual of interest earned on note receivable.
9
To record the accrual of bad debt expense.
In: Accounting
Briefly explain the three classes of creditors specified in the Bankruptcy Code.
In: Accounting