O’Brien Company is in the process of closing its books at the end of 2020. The company's preliminary income statement for 2020 and its reported income statement for 2019 are given below.

O’Brien's records reveal the following information:

1. In examining the preliminary financial statements, O’Brien realized that it failed to accrue sales commissions at the end of each of the last two years. O’Brien should have accrued $3,500 at the end of 2019 and $2,500 at the end of 2020.

2. O’Brien purchased equipment on January 2, 2017, that cost $70,000 and had a useful life of 10 years and zero salvage value. The straight-line method of depreciation was originally chosen. However, in reviewing the preliminary financial statements, O’Brien decided to change the depreciation method from straight-line to sum-of-the-years'-digits; the estimates relating to useful life and salvage value remained unchanged.

3. At the end of 2020, O’Brien decided to change its inventory costing method from FIFO cost to the Average method. An analysis of the accounting records provides the following cost of goods sold amounts under average cost and FIFO:

                                    Year                     FIFO             Average

                                    2018                 426,500            428,000

                                    2019                 428,750            430,000

                                    2020                 427,500            432,000

O’Brien purchased equipment on July 2, 2016. The asset's original cost was $30,000, and this amount was entirely expensed in 2016. This particular asset has a 10-year useful life and a $5,000 residual value. The straight-line method was chosen for depreciation purposes.

Required:

1. Prepare the necessary journal entries at December 31, 2020, to record the above information.

2. Prepare new comparative income statements to reflect the adjustments required (1) through (4) above. You may ignore income taxes.

3. Retained earnings reported for the end of 2019 was $696,380 and at the end of 2018 was $625,400. Dividends of $30,000 were declared in each year. Prepare comparative statements of retained earnings for O’Brien Company for 2020 and 2019, reflecting appropriate adjustments from items (1)-(4) above, ignoring income taxes.

John Deere is operated as a C corporation. The company received an order for a $12,000 tractor from a customer on June 30, 2020 and delivered the tractor to the customer on July 31, 2020. The company sent the customer a bill saying they had to pay for the tractor by no later than January 31, 2021. John Deere uses a calendar year tax period. Based on phone calls with the customer in December of 2020, the customer explained that it may have to file bankruptcy proceedings but was trying to work its way out of financial hardship before taking that option. The customer said that at worst it would be able to pay at least $9,000 of the bill. On January 15, 2021, John Deere received a check from the customer for $9,000 and was informed it would receive no additional payment based on the outcome of the bankruptcy case. In addition to the transaction above, the following occurred:

• A different customer paid for the same type of tractor (at $12,000) on November 1, 2020 and scheduled delivery for January 15, 2021. John Deere included the income in its 2020 financial accounting statements.
• The company both incurred and paid expenses for the following in 2020:
  • Wages:                                                                               $3,000
  • Rental costs for a warehouse:                                            $4,000
  • Repairs:                                                                              $2,000
• The company both incurred and paid expenses for the following in 2021:
  • Wages:                                                                               $4,000
  • Rental costs for a warehouse:                                            $4,000
  • Repairs:                                                                              $3,000

1. Assuming the local John Deere’s operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2020?
   
2. Assuming the local John Deere’s operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2021?
   
3. Assuming the local John Deere’s operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2020?
   

d. Assuming the local John Deere’s operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2021?

The unadjusted trial balance of Vancouver Trucking Inc., at December 31, 2020, is as follows:DebitCreditCash$17,310Accounts Receivable102,500Allowance for Doubtful Accounts$3,390Inventory61,000Prepaid Insurance4,559Bond Investment at Amortized Cost57,120Land31,800Buildings154,000Accumulated Depreciation—Buildings12,560Equipment32,400Accumulated Depreciation—Equipment5,400Goodwill17,000Accounts Payable100,400Bonds Payable (20-year, 7%)162,000Common Shares120,100Retained Earnings61,139Sales Revenue197,000Rent Revenue10,350Advertising Expense23,400Supplies Expense10,300Purchases97,100Purchase Discounts950Salaries and wages expense52,800Interest Expense12,000$673,289$673,289

Preparethe followingadjusting and correcting entries for December 31, 2020, using the information given, for the scenarios below (#1 -#9):

1.Actual advertising costs amounted to $1,580 per month. The company has already paid for advertisements for the first quarter of 2021.

2.The building was purchased and occupied on January 1, 2017, with an estimated useful life of 10 years, and residual value of $38,400. (The company uses straight-line depreciation.)

3.Prepaid insurance contains the premium costs of several policies, including Policy A, cost of $2,807, one-year term, taken out on April 1, 2020; and Policy B, cost of $1,962, three-year term, taken out on September 1, 2020.

4.A portion of Vancouver’s Trucking Inc. building has been converted into a snack bar that has been rented to the Blue Spruce Corp. since July 1, 2018, at a rate of $8,900 per year payable each July 1 in advance.

5.One of the company’s customers declared bankruptcy on December 30, 2020. It is now certain that the $2,680 the customer owes will never be collected. This fact has not been recorded. In addition, the Companyestimates that 3% of the Accounts Receivable balance on December 31, 2020, willbecome uncollectible.

6.An advance of $610 to a salesperson on December 31, 2020, was charged to Salaries and Wages Expense.

7.On November 1, 2015, Vancouver Truckingissued 162 $1,000 bonds at par value. Interest is paid semi-annually on April 30 and October 31.

8.The equipment was purchased on January 1, 2015, with an estimated useful life of 10 years, and no residual value. (The company uses straight-line depreciation.)

9.On August 1, 2020, Vancouver Truckingpurchased at par value 42 $1,860, 8% bonds maturing on July 31, 2019. Interest is paid on July 31 and January

Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

The following financial data are also available:

1. The firm has estimated that its sales for 2020 will be $900,000.

2. The firm expects to pay $35,000 in cash dividends in 2020.

3. The firm wishes to maintain a minimum cash balance of $30,000.

4. Accounts receivable represent approximately 18% of annual sales.

5. The firm’s ending inventory will change directly with changes in sales in 2020.

6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.

7. Accounts payable will change directly in response to changes in sales in 2020.

8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.

9. Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.

1. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.

2. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.

3. Analyze these statements, and discuss the resulting external financing required.

   Red Queen Restaurants Income Statement for the Year Ended December 31, 2019

   Sales revenue $800,000 Less: Cost of goods sold    600,000       Gross profits $200,000 Less: Operating expenses    100,000       Net profits before taxes $100,000 Less: Taxes (rate = 21%)    21,000       Net profits after taxes $ 79,000 Less: Cash dividends    20,000       To retained earnings $ 59,000

   Red Queen Restaurants Balance Sheet December 31, 2019

   Assets Liabilities and stockholders’ equity Cash $ 32,000 Accounts payable $100,000 Marketable securities 18,000 Taxes payable 20,000 Accounts receivable 150,000 Other current liabilities   5,000 Inventories    100,000      Total current liabilities $125,000      Total current assets $300,000 Long-term debt    200,000 Net fixed assets    350,000      Total liabilities $325,000      Total assets $650,000 Common stock 150,000 Retained earnings    175,000 Total liabilities and stockholders’ equity $650,000

Vandals Company has not yet prepared a formal statement of cash flows for the 2020 fiscal year. Comparative balance sheets as of December 31, 2019, and 2020, and a statement of income and retained earnings for the year ended December 31, 2020, are presented below.

Instructions:                                                                                    

Prepare a statement of cash flows using the direct method. Changes in accounts receivable and in accounts payable relate to sales and cost of sales. Do not prepare a reconciliation schedule.      

Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

Red Queen Restaurants Income Statement for the Year Ended December 31, 2019  
Sales revenue    $799,000
Less: Cost of goods sold   599,000
Gross profits    $200,000
Less: Operating expenses   101,000
Net profits before taxes    $99,000
Less: Taxes (21%)   20,790
Net profits after taxes    $78,210
Less: Cash dividends   20,500
To retained earnings    $57,710

      Red Queen Restaurants Balance Sheet December​ 31, 2019        
Assets Liabilities and Stockholders' Equity  
Cash    $32,700 Accounts payable    $99,900
Marketable securities    17,800       Taxes payable    20,600
Accounts receivable    149,800       Other current liabilities   4,500
Inventories   100,400 Total current liabilities   $125,000
Total current assets    $300,700       Long-term debt    $199,700
Net fixed assets   349,500 Common stock   $150,500
Retained earnings   $175,000
Total assets   $650,200 Total liabilities and equity    $650,200

The following financial data are also​ available:

(1) The firm has estimated that its sales for 2020 will be $899,700.

​(2) The firm expects to pay $34,400 in cash dividends in 2020.

​(3) The firm wishes to maintain a minimum cash balance of $31,500.

​(4) Accounts receivable represent approximately 21% of annual sales.

​(5) The​ firm's ending inventory will change directly with changes in sales 2020.

​(6) A new machine costing $43,100will be purchased in 2020.Total depreciation for 2020 will be $15,800.

​(7) Accounts payable will change directly in response to changes in sales in 2020.

​(8) Taxes payable will equal​ one-fourth of the tax liability on the pro forma income statement.

​(9) Marketable​ securities, other current​ liabilities, long-term​ debt, and common stock will remain unchanged.

Questions:

a. Prepare a pro forma income statement for the year ended December​ 31, 2020​, using the ​percent-of-sales method.

b. Prepare a pro forma balance sheet dated December​ 31, 2020​, using the judgmental approach.

c. Analyze these​ statements, and discuss the resulting external financing required.

64) In 2014, the price of peanuts was rising, which lead peanut butter sellers and peanut butter buyers to expect the price of peanut butter would rise in the future. Suppose the effect on the buyers was larger than the effect on the sellers. Consequently, in the current market for peanut butter there is a   in the price of peanut butter and   in the quantity of peanut butter.
A) rise; a decrease
B) fall; an increase
C) rise; an increase
D) fall; a decrease
65) If the money price of wheat increases and no other prices change, the
A) relative price of wheat is unaffected.
B) demand for wheat increases.
C) relative price of wheat falls.
D) opportunity cost of wheat rises.

68) Redbox rents DVDs for $1 per day via self-service kiosks located across the United States. In 2007, each kiosk averaged about 50 rentals per day. Suppose Redbox increases their daily price to $1.50. What is the price elasticity of demand if rentals decrease by 20 per day?
A) 0.8
B) 1
C) 1.25
D) 1.33
69) When the government chooses to spend the tax dollars that it collects on homeland security, its choice
A) primarily affects who gets the goods and services produced.
B) illustrates that scarcity does not always exist.
C) involves a tradeoff of other goods and services such as education for more homeland security.

Which of the following statements is (are) correct?
(x) Price ceilings and price floors usually reduce the welfare of society because quantity demanded does not equal quantity supplied if the price control is binding.
(y) The particular price that results in quantity supplied being equal to quantity demanded is the best price because it maximizes the welfare of buyers and sellers.
(z) A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it maximizes the combined welfare of buyers and sellers.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Suppose the United States changed its laws to allow for the legal sale of a kidney. According to the textbook, which of the following statements is (are) correct?
(x) If the government allowed a free market in organs for transplant then there would be an increase in the price of a kidney and a decrease in the shortage of kidneys for transplant.
(y) At present, the maximum legal price for a human kidney is $0. The price of $0 maximizes both producer surplus and consumer surplus.
(z) If the government allowed a free market for transplant organs such as kidneys to exist, critics argue that such a market would benefit the rich but not the poor.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Which of the following would be most likely to increase the supply of loanable funds and lead to low interest rates?