Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions

1. Prepare an adjusted trial balance showing adjustments. Show the adjustments and add any new accounts required because of the adjustments.

Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions

1. Which inventory system (perpetual or periodic) would provide the most cost-benefit to the owner?

Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions to Answered

1. Prepare a multiple step external income statement and classified balance sheet for the owner.

Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions

1. Calculate the mark-up on total costs for the owner.

1. Firms is a perfectly competitive market are...

a. unaffected by costs

b. price setters

c. unaffected by price

d. price takers

2. What rule does a perfectly competitive firm use to determine its profit maximizing level of output?

a. MR = AFC

b. MR = TR

c. MC = ATC

d. MC = MR

3. Which is of the following is NOT an assumption of perfect competition?

a. no barriers to entry

b. homogeneous product

c. imperfect information

d. perfect information

4. In the long run , a perfectly competitive firm can expect...

a. zero economic profits

b. positive economic profits

c. many fixed inputs

d. negative economics profits

5. A perfectly competitive firm computes total revenue as

a. MC x MR

b. Price x Quantity

c. Price x MC

d. Price x Fixed Costs

6. A perfectly competitive firm should shut down when...

it cannot cover its total revenue

it cannot cover its total costs

it cannot cover its marginal revenue

it cannot cover its variable costs

7. A firm may enter a perfectly competitive market when...

it sees short run economic costs

it sees short run economic profits

the price is below the shutdown point

it sees short run economic losses

8. Perfectly competitive markets...

avoid marginal cost pricing

display allocation efficiency

use fixed cost pricing

display allocation inefficiency

9. Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for $62 each. The fixed costs of production are $150. The total variable costs are $64 for one unit, $84 for two units, $114 for three units, $184 for four units, and $270 for five units. What is the marginal cost of going from two units of output to three units of output?

10

20

30

40

10. Which of the following is true about demand in a perfectly competitive environment?

MC < Price

Price < MR

MR > MC

Price = MC

TipTop Flight School offers flying lessons at a small municipal airport. The school’s owner and manager has been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual results. A recent variance report appears below:

After several months of using such variance reports, the owner has become frustrated. For example, she is quite confident that instructor wages were very tightly controlled in July, but the report shows an unfavorable variance.

The planning budget was developed using the following formulas, where q is the number of lessons sold:

  
Required:

2. Complete the flexible budget performance report for the school for July. (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.)

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $2,500 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $250 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $2,500 per day and any bonus due are paid in one lump payment shortly after the end of each month.

On July 1, based on prior experience, Rocky estimated there is a 40% chance it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15.

On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 90% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31.

On August 5 Rocky learned it did not receive an average evaluation of “excellent” for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours.

Rocky bases estimates of variable consideration on the most likely amount it expects to receive.

Required:
1. to 3. Prepare the journal entries to record the transactions above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Record Rocky's July 15 journal entry to record revenue for tours given from July 1 - July 15.

2. Record Rocky's July 31 journal entry to record revenue for tours given from July 16 - July 31.

3. Record Rocky's August 5 journal entry to record the receipt of payment from Wilderness.

4. Record Rocky's August 5 journal entry to record any necessary adjustments to revenue.

_{Matching Exercise – Costs of Production}

_TERM

1. _{Implicit Cost}

2. _{Normal Profit}

3. _{Factor substitution}

4. _{Explicit Cost}

5. _{Alternative cost}

6. _{Decreasing Returns to Scale}

7. _{Envelope Curve}

8. _{MC=MR rule}

9. _{Marginal Cost}

10. _{Economic profit}

11. _{Profit maximization in the short run}

12. _{Total fixed costs}

13. _{Constant costs industry}

14. _{Stage II}

15. _{Production function}

16. _{Shutdown point}

17. _{Variable input}

18. _{Marginal Revenue}

19. _{Sunk Cost}

20. _{Variable Costs}

_DEFINITION

_{a. The area in which every firm will produce.}

_{b. Another name for the long run average total cost curve.}

_{c. The cost of self-owned, self-utilized resources}

_{d. The profits necessary to ensure that a firm stays in business. Considered by economists to be part of implicit costs.}

_{e. The change in total cost associated with a one unit change in output.}

_{f. Inputs that rise and fall with the quantity of output.}

_{g. The substituting of one input for another to produce a given level of output.}

_{h. The addition to total revenue from selling one more unit of the product}

_{i. The ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials. Accounting Costs}

_{j. A cost that has been incurred and cannot be recovered}

_{k. Costs of the fixed inputs such as rent. Does not change with changes in output. Also called overhead costs.}

_{l. The costs resulting from variable inputs.}

_{m. The rule a firm should follow to find the profit maximizing quantity.}

_{n. The production relationship that would lead to increasing costs.}

_{o. The value of what particular resources could have produced had they been used in the best alternative way; opportunity cost.}

_{p. An industry with a horizontal long run supply curve; its expansion does not result in an increase or decrease in input prices.}

_{q. The difference between total cost and total revenue.}

_{r. The relationship between the inputs used in production and the level of output.}

_{s. Considered to be the goal of every firm.}

_{t. The minimum point on the AVC. The lowest price at which the firm will produce.}

Working with the following data for a particular good, X:

Price                                                    Quantity Demanded                

$6.00/unit                                                        0                                              

$5.00/unit                                                        100                                          

$4.00/unit                                                        200                                          

$3.00/unit                                                        300                  

$2.00/unit                                                        400

$1.00/unit                                                        500

$0.00/unit                                                        600                  

1. Using graph paper or some other charting process (but don’t do it completely free-hand, accuracy counts in this assignment), draw a graph of the demand curve for good X.  Remember: The vertical axis should be Price; the horizontal axis should be Quantity.
2. Now draw another graph showing on the vertical axis the Total Revenue associated with each of the above values for Quantity demanded (which should be represented, as it was in your graph for (A), on the horizontal axis.
3. Redraw the demand curve you created in (A) above. Now add to that graph a new line below the demand curve which intersects the vertical axis (Price) at $6.00 and intersects the horizontal axis (Quantity) at the quantity value where Total Revenue is shown to be maximized on the graph you drew in (B). This new line you just created is the Marginal Revenue (MR) curve which was discussed in the lectures. More on this in the instructor-led discussion group.
4. Almost done with the graphs. To the graph that you just created in (C) above, now add a curve representing the Marginal Costs (MC) associated with producing Good X), using the following data to draw this supply curve:

Quantity                                                          Marginal Cost

0                                                                      $0.00

100                                                                  $1.00

200                                                                  $2.00

300                                                                  $3.00

400                                                                  $4.00

500                                                                  $5.00

600                                                                  $6.00

(E) Examining the graph you created in (D) above and drawing upon this unit’s lectures and readings about pricing in different types of markets, identify:

1. the equilibrium price P_C (expressed in $ per unit) and quantity Q_C (expressed in number of units) of good X in a perfectly competitive market, and
2. the equilibrium price P_M (expressed in $ per unit) and quantity Q_M (expressed in number of units) in a market served by a monopolist.
3. In addition to giving the values for price and quantity in each of these types of markets, briefly comment on any differences in the values of P and Q in your answers to (1) and (2).

1. At a price of $10, and assuming the price doesn't increase in the future, should the firm continue to produce in the short-run or shut down in the short-run? Should the firm continue in the long-run or exit in the long-run?

   		Continue to operate in both the short-run and also in the long-run.
   		Continue to operate in the short-run but exit in the long-run
   		Shut down in the short-run but continue in the long-run
   		Shut down in the short-run and also exit in the long-run

QUESTION 7

1. 2b. At a price of $8, What is the profit-maximizing number the firm should produce each day? (Again, do not necessarily just look at economic profit. Look at marginal revenue and marginal cost.)

QUESTION 8

1. At a price of $8, and assuming the price doesn't increase in the future, should the firm continue to produce in the short-run or shut down in the short-run? Should the firm continue in the long-run or exit in the long-run?

   		Continue to operate in both the short-run and also in the long-run.
   		Continue to operate in the short-run but exit in the long-run
   		Shut down in the short-run but continue in the long-run
   		Shut down in the short-run and also exit in the long-run

QUESTION 9

1. 3i. What is the minimum market price for which the firm would chose to produce a positive quantity and take a loss? (round to the nearest penny)

QUESTION 10

1. Assuming this is a perfectly competitive industry, what will be the long-run market price? (round to the nearest penny)