Royal Lawncare Company produces and sells two packaged products—Weedban and Greengrow. Revenue and cost information relating to the products follow:

Common fixed expenses in the company total $113,000 annually. Last year the company produced and sold 39,000 units of Weedban and 22,000 units of Greengrow.

Required:

Prepare a contribution format income statement segmented by product lines.

Product Line Total Company Weedban Greengrow

Sales $1,094,000 $390,000 $704,000

Variable expenses 375,70089 ________________ 286000

Traceable fixed income _____________ ______________ ______________

Contribution margin 718,300 300, 300    418,000

Traceable fixed expenses _________________ ______________________ ______________

7Product line segment margin7 718,300 $300,300 $418,000

Common fixed expenses not traceable to products __________________ ____________________ ______________

Net operating income $718,300 _____________________ __________________

Information pertaining to Yekstop Corp.'s sales revenue is presented below:

Management estimates that 5% of credit sales are eventually uncollectible. Of the collectible credit sales, 65% are likely to be collected in the month of sale and the remainder in the month following the month of sale. The company desires to begin each month with an inventory equal to 70% of the sales projected for the month. All purchases of inventory are on open account; 30% will be paid in the month of purchase, and the remainder paid in the month following the month of purchase. Purchase costs are approximately 60% of the selling prices.

Budgeted cash payments in December for November inventory purchases by Yekstop Corp. are:

• $72,454.

• $93,906.

• $116,400.

• $162,960.

• $219,114.

Brownsville Novelty Store prepared the following budget information for the month of May:

• Sales are budgeted at $385,000. All sales are on account and a provision for bad debts is made for each month at three percent of sales for the month.
• Inventory was $103,000 on April 30; an inventory increase of $17,000 is planned for May 31.
• All inventory is marked to sell at cost plus 40 percent.
• Estimated cash disbursements for selling and administrative expenses for the month are $67,000.
• Depreciation for May is projected at $7,900.

Brownsville's budgeted cost of goods sold (CGS) in May is:

Multiple Choice

• $110,000.

• $154,000.

• $221,900.

• $292,000.

• $275,000.

(2 pts) Accrual basis vs. basis – revenue and expense recognition: Suppose Capaldi Corp. provides travel services to customers and noted the following transactions for May 2018:

For each transaction, determine the amount of revenue or (expense), if any, that is recorded under accrual-basis accounting and under cash-basis accounting for May 2018. I have completed transaction a. for you as an example.

(2 pts) Accrual Based Accounting: Prepaid expenses – Depreciation of Fixed Assets. Moving On, Inc. purchases a new moving truck (e.g. ‘equipment’) for $56,000 on October 1^st, 2017. At the time of its purchase, the truck is expected to be used in operations for 4 years and will have no resale or scrap value at the end of its life. Assume Moving On, Inc. uses straight-line depreciation (i.e. the asset depreciates evenly) over the expected life of the truck.

Record the journal entry for the original purchase of the truck that occurs on October 1^st, 2017.

Record the adjusting entry to recognize Depreciation Expense on December 31, 2017.

What will the ending balance of the Accumulated Depreciation account be on December 31, 2018 (Assume the beginning balance of Accumulated Depreciation on January 1^st, 2017 is $0 and Moving On, Inc. has no other assets that depreciate)?

What will the net book value of the truck be on December 31, 2018?

(2 pts) Accrual Based Accounting: Deferred (unearned) revenues. Suppose that on November 29^th, 2017 a customer pays Ood Sphere, Ltd. $2,000 cash in advance for merchandise which will be delivered to the customer on December 5^th.

Record the journal entry for the original purchase of the merchandise that occurs on November 29^th, 2017.

Record the adjusting entry Ood Sphere, Ltd. should record on December 5^th to recognize sales revenue.

Suppose the cost of the merchandise sold (i.e. COGS) is $1,600. When should Ood Sphere, Ltd. record this expense? Why? Briefly explain your answer.

6. Consider the following accounts: Utility Expense Accounts Payable Service Revenue Common Stock How many of these accounts are increased with credits? a. One. b. Two. c. Three. d. Four.

7. Schooner Inc. purchased equipment by signing a note payable. This transaction would be recorded as: a. Debit Equipment, credit Cash. b. Debit Cash, credit Notes Payable. c. Debit Notes Payable, credit Equipment. d. Debit Equipment, credit Notes Payable.

8. Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recognized this revenue? a. January. b. February. c. April. d. Evenly in each of the three months.

9. Which of the following regarding adjusting entries is correct? a. Adjusting entries are recorded for all external transactions. b. Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current period. c. Adjusting entries are needed because we use accrual-basis accounting. d. After adjusting entries, all temporary accounts should have a balance of zero. 3 / 10

10. An adjusted trial balance: a. Is a list of all accounts and their balances after adjusting entries. b. Is a list of all accounts and their balances before adjusting entries. c. Is a list of all accounts and their balances after closing entries. d. Is a trial balance adjusted for cash-basis accounting.

Income Statement
For Year Ended December 31, 2018

Sales revenue $97,200

Expenses  

Cost of goods sold 42,000

Depreciation expense 12,000

Salaries expense 18,000

Rent expense 9,000

Insurance expense 3,800

Interest expense 3,600

Utilities expense 2,800

Net income $6,000

Prepare the cash flows from operating activities section only of the company’s 2018 statement of cash flows using the direct method.

Revenue Recognition: Sparrow Film Productions (SPF) wished to expand its production facilities so it borrowed $10,000,000 from First National Bank early in 2018. As a condition of making this loan, the bank requires that the business maintain a current ratio of at least 2 to 1. Business has been pretty good in 2018, but the cost of the expansion has brought the current ratio down below the target. In fact, on December 15, Jack Sparrow, the owner of SPF estimates that the year-end current ratio will be only 1.90 to 1. (A little short of the bank's requirements.) Jerry quickly looks through the signed contracts and sees an unpcoming project that will be started and completed in February 2019 for $500,000. Jerry is thinking about recording the $500,000 as revenue in 2018 instead of in 2019. If he does this, the current ratio at the end of 2018 will be above the required current ratio of 2 to 1. Required: 1. Assume Jerry decides to include the $500,000 as 2018 revenue. Journalize the transaction on 12/31 assuming the cash will be collected in February of 2019. 2. Explain why it would be unethical for Jerry to record the February revenue in 2018. Identify the accounting principle(s) relevant to this situation and give the reasons for your conclusion. This part should be 3-4 sentences. 3. Cite all references used including url or page number (even if you use the textbook). 4. If you were advising Jerry, what else could Jerry do to improve his current ratio that would be acceptable under ethical standards? (2-3 sentences)

Discussion Question

Cash in Hand Topic: Revenue Recognition/Misrepresentation of Fact by Client Characters: Heather Hunter, Senior in CPA firm “Buzz” Thompson, Owner/manager of Fashion First Sandy, part-time bookkeeper of Fashion First Author: Mary Brady Greenawalt, Associate Professor of Business Administration, The Citadel Co-author: Janine Cloutier, Virginia Tech

In addition to the usual mix of compilation, review, and audit clients for which Heather Hunt serves as a senior in a small office of a regional CPA firm, she has been assigned a new client that recently engaged the firm. Fashion First, an incorporated retail outlet, is a thriving local store. The business is run by a single owner/manager, “Buzz” Thompson, who makes all major decisions. The business has not previously used the services of a CPA firm. In addition to preparation of financial statements, the CPA firm will handle tax returns for the business. At her first visit to the client’s office, Heather is introduced to Sandy, the part-time bookkeeper who is also a full-time accounting student at the local university. At a subsequent meeting, Sandy confides to Heather that she found the job at the beginning of the semester after an extensive search. Sandy really needs the money to help finance her education, and feels lucky to have found a good-paying job during the current economic downturn. Feeling that Heather is someone she can talk to and get advice from, Sandy describes a situation that has been on her mind for some time now. Sandy’s concern relates to the handling of sales revenues. When monies from sales revenues are counted and deposited on a weekly basis, a chart is filled out with categories carefully delineating the type of payment: cash, checks, American Express, or Visa/Mastercard. Sandy’s employer, after depositing the weekly total, brings this chart back with his own written-in total of the actual amount deposited. After looking over some of these weekly deposit chats, Sandy noticed that $500 cash was missing from each deposit. After a more thorough inspection of monthly tax documents that “Buzz” Thompson has filled out, Sandy noticed that the reported monthly gross revenue was $2,000 less than what had been actually counted. The employer is the only person handling the money after it has been counted. He is also the only one to deposit the money. When Sandy asked Mr. Thompson about revenue not being reported for tax purposes, he assured her that every dollar of income was reported on the tax forms. Furthermore, “Buzz” asserted, since Sandy wasn’t the person who signed the forms, she shouldn’t be concerned.

Questions: Explain your reasoning for each question in full length! What are the Ethical Issues? Who are the Primary Stakeholders? What are the Possible Alternatives? What are the Ethics of the Alternatives?

Royal Lawncare Company produces and sells two packaged products—Weedban and Greengrow. Revenue and cost information relating to the products follow:

Common fixed expenses in the company total $111,000 annually. Last year the company produced and sold 39,000 units of Weedban and 17,500 units of Greengrow.

Required:

Prepare a contribution format income statement segmented by product lines.

A sequential game A local bee-keeper derives net revenue z(h) from choosing a level of production (number of hives) h given by z(h) = 4h − 2h 2 .

A nearby apple farmer also benefits from being next to the bee-keeper, because the bees help to polinate fruit trees. The value of the bees to the apple farmer is given by y(h) = 12h − 2h 2 .

(a) Show that the bee-keeper maximizes their net benefit by choosing h = 1, while the sum of benefits, y(h) + z(h), is maximized at h = 2.

(b) Suppose that the government has the power to impose a transfer from the farmer to the bee-keeper in amount t. The level of t is chosen after the bee-keeper decides on h. Additionally, the government wishes to maximize the sum of the logarithms of the payoffs of the the two parties, so that it solves max t ln(12h − 2h 2 − t) + ln(4h − 2h 2 + t).

i. Show that by choosing t taking h as given, the government optimally sets t = 4h.

ii. Show that this transfer scheme leads to the bee-keeper wishing to maximize z˜(h) = 8h − 2h 2 .

iii. What level of h will be chosen by the bee-keeper if they anticipate this payment? Show your reasoning.

(c) Would your answer to part (b)(iii) change if the government put less weight on the bee-keeper’s utility so that it solved, instead, max t ln(12h − 2h 2 − t) + 1 2 ln(4h − 2h 2 + t) ?

Justify your answer.