Capital Expenditures, Depreciation, and Disposal

Merton Company purchased a building on January 1, 2015, at a cost of $367,000. Merton estimated that its life would be 25 years and its residual value would be $11,000.

On January 1, 2016, the company made several expenditures related to the building. The entire building was painted and floors were refinished at a cost of $19,000. A federal agency required Merton to install additional pollution control devices in the building at a cost of $48,000. With the new devices, Merton believed it was possible to extend the life of the building by six years.

In 2017, Merton altered its corporate strategy dramatically. The company sold the building on April 1, 2017, for $396,000 in cash and relocated all operations to another state.

Required:

1. Determine the depreciation that should be on the income statement for 2015 and 2016.
Indicate the effect on financial statement items by selecting "–" for decrease (or negative effect), "+" for increase (or positive effect) and "NE" for No Entry (or no effect) on the financial statement.

2. Explain why the cost of the pollution control equipment was not expensed in 2016.

1. The asset was capitalized because it provided a current year tax advantage.
2. Since the pollution control equipment has an unknown life, the asset was capitalized.
3. Since the pollution control equipment extended the life of the asset, the asset was capitalized.
4. Extending the life of the asset makes no difference on whether to expense or capitalize, so the company chose to capitalize it for lower taxes in the current year.

3. What amount of gain or loss did Merton record when it sold the building? Do not round intermediate calculations.

What amount of gain or loss would have been reported if the pollution control equipment had been expensed in 2016?

The Stockholders’ Equity section of the Balance Sheet of Carpenter Corporation on December 31, 2015, showed Cumulative Preferred 9% Stock, $45 par (1,303 shares authorized, 550 shares issued); Common Stock, $23 par (28,910 shares authorized, 14,910 shares issued); and Retained Earnings of $1,074. The Notes to the Financial Statements in the Annual Corporate Report for 2015 indicate that the market values of the stock are $40 per share (Cumulative Preferred) and $17 per share (Common). Forecasts in the Annual Report also indicate that investments in future growth in 2016 are expected to result in sustained increased profits. In consideration of these matters, the Board of Directors has secured approval from the Securities and Exchange Commission for a bond issuance. The Board of Directors has also decided to forego paying dividends in 2015, and to repurchase shares of the corporation’s common stock at par, with a view to reselling the stock when market rates rise with increased profitability. On January 2, 2016, $213,463 in 10 year, 7% bonds with a market interest rate of 9%, and interest payable semiannually, were issued for $188,430. On January 3, the corporation purchased 2,002 shares of its common stock at par. Profits soared during 2016, and on May 1, the corporation resold 1,517 shares of treasury stock, at $8 above par. On June 30, bond interest was paid. On December 31, the corporation showed an after tax Net Income of $53,800. On December 31, bond interest was paid; and dividends were declared and paid. Common shareholders received $2.33 per share. What is the Earnings per Share on December 31, 2016?

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $24,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of $6,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $51,000 per year for each of the next five years. A driver will cost $37,000 in 2016, with an expected annual salary increase of $3,000 for each year thereafter. The annual operating costs for the truck are estimated to be $2,000 per year.

Auditing Question:

You are the auditor of ABC Limited for the year ended 31 December 2016. There are $20,000,000 bank balances and time deposit of $500,000,000 recorded.

Bank balances
The following are the bank reconciliations prepared by ABC:

A Bank $   B Bank $  

Balance per bank statement : 24,000,000    (3,000,000)

Reconciling items:
(i) An unpresented cheque payable (5,000,000)

to a supplier which was issued

in January 2016

(ii) Cheque deposit from a customer 4,000,000

rejected by the bank (note a)


Balance per ledger   19,000,000     1,000,000

Note:
Further information:
(a) The rejected cheque was due to inadequate funds in the customer’s bank account.

Time deposit
The financial controller of ABC provided you with a time deposit slip issued by UK Bank on 1 September 2012. Its respective terms are as follows:

Principal amount: HK$500,000,000
Term: Not specified, withdrawal of the time deposit is permitted at any time
Interest rate: 3% per annum payable on a quarterly basis
Required:

(a) For reconciling item (i), explain the possible causes of this incidence. Propose adjustment(s) to correct the misstatements that may exist in ABC's 2016 financial statements.

(b) For reconciling item (ii), propose adjustment(s) to correct the misstatements and advise the implications that may exist in ABC’s 2016 financial statements.

(c) With respect to the time deposit, the financial controller of ABC considers that it may take too long for UK Bank to reply regarding the bank confirmation. He asks you to rely on the time deposit slip instead of sending a bank confirmation request to UK Bank. Advise and explain whether you would rely only on the time deposit slip as audit evidence to confirm its existence.

Exercise 13-13

The condensed financial statements of Crane Company for the years 2016 and 2017 are presented below.

Compute the following ratios for 2017 and 2016. (Round current ratio and inventory turnover to 2 decimal places, e.g 1.83 and all other answers to 1 decimal place, e.g. 1.8 or 12.6%.)

The Stockholders’ Equity section of the Balance Sheet of Carpenter Corporation on December 31, 2015, showed Cumulative Preferred 8% Stock, $48 par (1,220 shares authorized, 524 shares issued); Common Stock, $23 par (28,895 shares authorized, 10,295 shares issued); and Retained Earnings of $1,076. The Notes to the Financial Statements in the Annual Corporate Report for 2015 indicate that the market values of the stock are $42 per share (Cumulative Preferred) and $18 per share (Common). Forecasts in the Annual Report also indicate that investments in future growth in 2016 are expected to result in sustained increased profits. In consideration of these matters, the Board of Directors has secured approval from the Securities and Exchange Commission for a bond issuance. The Board of Directors has also decided to forego paying dividends in 2015, and to repurchase shares of the corporation’s common stock at par, with a view to reselling the stock when market rates rise with increased profitability. On January 2, 2016, $245,415 in 10 year, 7% bonds with a market interest rate of 9%, and interest payable semiannually, were issued for $182,517. On January 3, the corporation purchased 2,010 shares of its common stock at par. Profits soared during 2016, and on May 1, the corporation resold 1,537 shares of treasury stock, at $5 above par. On June 30, bond interest was paid. On December 31, the corporation showed an after tax Net Income of $50,614. On December 31, bond interest was paid; and dividends were declared and paid. Common shareholders received $2.17 per share. What is the effect of the stock and bond transactions on Cash on the Balance Sheet on December 31, 2016?

Question: Quantitative Problem: Rosnan Industries' 2017 and 2016 balance sheets and income statements are s...

Quantitative Problem: Rosnan Industries' 2017 and 2016 balance sheets and income statements are shown below. All of the balance of Cash and Equivalents is an operating asset.

Job Cost Journal Entries

Prior to the beginning of 2016, Stapleton Company estimated that it would incur $153,000 of manufacturing overhead cost during 2016, using 17,000 direct labor hours to produce the desired volume of goods. On January 1, 2016, beginning balances of Materials Inventory, Work in Process Inventory, and Finished Goods Inventory were $48,000, $-0-, and $87,000, respectively.

Required

Prepare general journal entries to record the following for 2016:

A. Purchased materials on account, $316,000.

Material inventory 316000

Accounts payable 316000

B. Of the total dollar value of materials used, $284,000 represented direct material and $35,000 indirect material.

Work in process inventory 284000

Manufacturing overhead                             35000

Materials inventory 319000

C.Determined total factory labor, $189,000 (18,000 hrs. @ $10.50/hr.).

D.Of the factory labor, 15,800 were direct labor hours.

                                                                                Debit                                    Credit

Work in process inventory 165900

Manufacturing overhead 23100

Wages payable 319000

E.Applied manufacturing overhead based on direct labor hours to work in process.

                                                                                Debit                                    Credit

  Work in process inventory                            ?

        Material inventory                                                                               ?

F.Determined actual manufacturing overhead other than those items already recorded, $83,000. (Credit Accounts Payable.)

                                                                                Debit                                    Credit

Manufacturing overhead ?

Accounts payable ?

G.Ending inventories of work in process and finished goods were $57,000 and $71,800, respectively. Determine the cost of finished goods (credit WIP) and the cost of goods sold (credit FG inventory). Make separate entries.

Debit                                    Credit

Manufacturing overhead ?

Work in process inventory ?

H.Transferred the balance in Manufacturing Overhead to Cost of Goods Sold.

                                                                 Debit                                    Credit

       Manufacturing overhead                                ?

              Cost of good sold ?

The following transactions relate to Academy Towing Service. Assume the transactions for the purchase of the wrecker and any capital improvements occur on January 1 of each year. 2016 1. Acquired $79,000 cash from the issue of common stock. 2. Purchased a used wrecker for $41,000. It has an estimated useful life of three years and a $10,000 salvage value. 3. Paid sales tax on the wrecker of $5,000. 4. Collected $65,100 in towing fees. 5. Paid $12,900 for gasoline and oil. 6. Recorded straight-line depreciation on the wrecker for 2016. 7. Closed the revenue and expense accounts to Retained Earnings at the end of 2016. 2017 1. Paid for a tune-up for the wrecker’s engine, $1,800. 2. Bought four new tires, $2,150. 3. Collected $71,000 in towing fees. 4. Paid $18,900 for gasoline and oil. 5. Recorded straight-line depreciation for 2017. 6. Closed the revenue and expense accounts to Retained Earnings at the end of 2017. 2018 1. Paid to overhaul the wrecker’s engine, $5,700, which extended the life of the wrecker to a total of four years. The salvage value did not change. 2. Paid for gasoline and oil, $20,000. 3. Collected $74,000 in towing fees. 4. Recorded straight-line depreciation for 2018. 5. Closed the revenue and expense accounts at the end of 2018. 4.value: 50.00 pointsRequired information b. For each year, record the transactions in general journal form and post them to T-accounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2016: 2017: 2018: