If you choose to answer, can you please put all answers with the apporate question. Thank you!
Part A:
Solve the following problems. Show all work.
1. White Lightning Inc. reported income from continuing operations before income taxes of $626,000 for the year ended December 31, 2004. During October of 2004, WHite Lightning elected to phase out a segment of its business. That segment reported a net loss prior to the measurement date of $74,000. White Lightning expects to incur additional losses of $35,000 during the phase out period. Management estimates a loss on the sale of the assets associated with the segment of $85,000. THe income tax rate for White Lightning is 30 percent.
Prepare the portion of the income statement beginning with "income from continuing operations before income tax" for the yr ended December 31, 2004
1Income from continuing operation / 626000
less: loss from discontinued operation
74000+35000+85000
194000
less taxes (58200)
losses net of taxes / -135800
Income from operation / 490200
2. The following differences between financial and taxable income were reported by Dider Corp. for the current year.
(a) Excess of tax depreciation over book depreciation $60,000
(b) Interest revenue on municipal bonds $9,000
(c) Excess of est. warranty expence over actual expenditures $54,000
(d) Unearned rent received $12,000
(e) Amortization of goodwill 30,000
(f) excess of income reported under percentage-of-completion acct. for financail reporting over competed-contract acct used for tax reporting $45,000
(g) interest on indebtedness incurred to purchase tax-exempt securiteis $3,000
(h) Unrealized losses on marketable securities recognized for financail reporting $18,000
Assume that Dider corp. had pretax accounting income [ before considering items (a) through (h) of $900,000 for the current year. Compute the taxable income for the current year.
Financial Income / 900000less excess depreciation / -60000
less interest revenue municipal bond / -9000
less excess income recorded / -45000
add warranty expenses / 54000
add unearned rent / 12000
add amortization of goodwill / 30000
add interest on exempt securities / 3000
add unrealized losses / 1800
Taxable income / 886800
3. On December 31, 2003, Jamfest Travel Inc. had 450,000 shares of no-par common stock issued and outstanding. All shares were sold for $7.50. On June 30, 2004, the firm issued an additional 135,000 shares for $7 per share. The 2004 income was $319,200. On Sept 1, 2005, a 15 percent stock dividend was issued to all common shareholders. On Oct 1, 2005, 60,000 shares were reacquired as treasury shares. Net income in 2005 was $278,063.
(1) Compute the weighted average number of common shares outstanding for 2004 and 2005 that should be shown on comparative statements at the end of 2005.
(2) Compute the basic earnings per share in 2004 and 2005 to be reported on comparative statements at the end of 2005.
3shares on Dec 31 2003 / 450000
on June 30 2004 / 135000
Sept 1 2005 / 87750
Oct 1 2005 / -60000
Weighted average outstanding share 2004 / 225000
292500
Weighted average outstanding share 2004 / 517500
Basic EPS 2004 / 319200/517500
0.617
Weighted average outstanding share 2005 / 390000
56062.5
153187.5
Weighted average outstanding share 2005 / 599250
Basic Eps 2005 / 278063/599250
0.464
4. The December 31, 2007, balance sheet of Far Imports includes the following items:
9% bonds payable due 12/31/2016 $800,000 Discount on Bonds Payable 21,000
The bonds were issued on Dec 31, 2006, at 97, with interest payable on June 30 and Dec 31 of each year. The straight-line method is used for discount amortization.
On March 1, 2008, Far Imports retired $400,000 of these bonds at 98 plus accured interest. Prepare the journal entries to record retirement of the bonds, including accrual of intrest since the las payment and amortization of the discount.
4Dr. / Cr
March 1 2008
Interest on bonds / 6000
Bonds Payable / 400000
Cash / 398000
Premium on bond redemption / 8000
Interest on bonds / 10200
Discount on bonds payable / 10200
working of discount bonds payable
The balance of discount should be
for remaining $400000 which is as follows
400000*.03/10*9 = 10800
Now it is 21000-10800 = 10200 to be adjusted
Following entries will be passed from 2008 to 2016 twice a year.
30-Jun / Dr. / Cr
Interest on bonds / 18000
Cash / 18000
8000000*.09/2
Interest on bonds / 600
Discount on bonds payable / 600
10800/18
31-Dec
Interest on bonds / 18000
Cash / 18000
8000000*.09/2
Interest on bonds / 600
Discount on bonds payable / 600
800000-776000 = 24000/20
Payment entry on Dec 31 2016
Bonds Payable / 400000
Cash / 400000
5. In 2007, Silverspur Mining, Inc., purchased land for $5,600,000 that had a natural resource supply estimated 4,000,000 tons. WHen the natural resources are removed, the land has an ext. value of $640,000. The required restoration cost for the property is estimated to be $800,000.
Development and road construction cost on hand were $560,000, and a building was constructed at a cost of $88,000 with an estimatted $8,000 salvage value when all the natural resources have been extracted.
During 2008, additional development cost of $272,000 were incurred, but additional resources wernt discovered. Production for 2007 and 2008 was 700,000 tons and 900,000 tons, respectively.
Compute the depletion charge for 2007 and 2008. Include depreciation on the building, if any, as a depletion charge. Round depletion charge to the nearest cent.
5Cost of Natural resources / 5600000
Restoration cost / 800000
development cost
560000+272000 / 832000
building cost / 88000
total cost of the Natural resources / 7320000
less salvage value
640000+8000 / -648000
total cost to be depleted / 6672000
Depletion rate per ton for 2008
6672000-1120000/4000000-700000 / 1.6824
depletion charges for 2008 / 1514182
Depletion rate per ton for 2007
6672000-272000/4000000 / 1.6
depletion charges for 2007 / 1120000
6. Johnson Builders began construction work under a three-year contract at a price of $7,525,000. The firm uses the percentage of completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to the total estimated costs for completing the contract. The financial statement presentations relating to this contract on Dec. 31,2007 are
balance Sheet
account receivable $150,000
Construction in progress $602,000
Less progress billings $562,000 $40,000
Income statement
Gross profit on construction contracts $301,000
(a) Cash Colleted in 2007
(b) estimated income on the contrustion contract
6Cash collected should be equal to
progress billing / 562000
Income should be gross profit completed
work which is / 301000
Part B: Answer each of the following questions. SHOW ALL CALCULATIONS where necessary
1. Your client, Fast Buck, comes into your office bursting with excitement. Fast has a controlling interest in a publicly traded Internet Company, Dotcom.com. Fast is excited about the huge profits made by Dotcom in the current year. He hands you an income statement prepared by the staff accountants at Dotcom. Summarized information from this income statement appears below
Revenue: $10,000,000
Expenses: ($35,000,000)
Gain on Sale of Treasure Stock: $50,000,000
Gain on Sale of Investment $ 3,000,000
Unrealized Loss on Investment ($ 1,000,000)
Net Income: $27,000,000
Verify Dotcom.com's actual income for the current year. If different from the amount shown, explain your answer.
1Revenue: / 10000000
Expenses: / -35000000
Gain on Sale of Investment / 3000000
Unrealized Loss on Investment / -1000000
Net loss / -23000000
Gain on sale of treasury stock should be taken into additional paid in capital account.
2. On Oct 5, Fast Freddie Manufacturing purchased a lot of land for its appraised value of $150,000. The next year, Fast sold the property in exchange for a $200,000 note with no stated interest rate. Assuming the appraised value of the land didn't change, please give the journal entry to record the note payable on the book of fast.
2if appraised value is unchanged and it is $150000
Dr. / Cr.
Notes Receivables / 200000
Land / 150000
Interest income / 50000
if appraised value is $200000
Dr. / Cr.
Notes Receivables / 200000
Land / 150000
Gain on sale of land / 50000
3. The following figures relates to Lackawaxen Industries for fiscal year 2007:
Goods available for sale at retail $250,000
Goods available for sales at cost $150,000
Sales (at retail) $225,000
What is Lackawaxen's Estmated inventory at cost for 2007?
3Goods available for sales at cost / 250000
less Sales (at retail) / 225000
Inventory at retail / 25000
Cost / sales
150000/250000 / 0.60
Inventory at cost
25000 x .6 / 15000
4. All Things Emu, a retail store specializing in emu-based products, opened its doors for business on December 1, 2007. The transaction relating to their product line of emu oil appears below.
Nov 28 Purchase 50 units @ $20 per unit
Dec 5 Purchase 50 @$20
Dec 10 Purchase 250 @$25
Dec 20 Purchase 250 @$30
Dec 24 Sold 400 @$50
What is the gross profit for all Things Emu assuming they used the following inventory methods?
Average Cost
FIFO
LIFO
4Nov 28 Purchase 50 units @ $20 per unit / 50 / 20 / 1000
Dec 5 Purchase 50 @$20 / 50 / 20 / 1000
Dec 10 Purchase 250 @$25 / 250 / 25 / 6250
Dec 20 Purchase 250 @$30 / 250 / 30 / 7500
600 / 15750
Average cost / FIFO / LIFO
Sales / 20000 / 20000 / 20000
less cost of goods sold
15750/600 x 400 / 10500
(50 x 20+50x20+250*25+50*30) / 9750
(250*30+150*25) / 11250
Gross Profit / 9500 / 10250 / 8750
5. Your client, Atty. Sue Happy, was notified on October 5, 2007 that her law firm, Weasel, Skunk, and Happy, P.C. would be the proud recipient of a new building, courtesy of an anonymous donor who was impressed with the years of free legal services provided by Sue's firm to the underprivileged. The fair market value of the building and land on 10/5/06 was $150,000. At the donor's request, title of the land and building would be pass to Weasel, Skunk, and Happy, P.C. upon Sue Happy's satisfactory completion of charm school. Sue completed charm school on December 1, 2007. On 12/1/07 the fair market value of the building and land was $160,000. Land is estimated to compose 20% of the total value of the donation on both 10/5/07 and 12/1/07. What journal entry would Weasel, Skunk, and Happy, P.C. make to record the donated asset?
51/12/2007 / Dr. / Cr.
Land / 32000
Building / 128000
Donated Capital / 160000
6. You've been asked to review the cash control policies of Easy Money Co. In your review you observe the following:
- The cash accounts are reconciled at the end of each month
- Sal A. Mander is in charge of colleting the cash from vendors, making a journal entry on the books to record the cash collected, and depositing the cash at the bank.
- Cash is kept in the top drawer of Mander's desk until he has time to take the deposit to the bank.
- Joe Honest, who works in the financing department, performs the bank reconciliation.
Please identify two problems with Easy's cash control policies.
6The activity of collecting cash, making of journal entry and depositing cash into bank should be separated.
Cash should be deposited on regular (daily) basis, not when the Mander has the time to deposit.
Vendors may be encouraged to pay by plastic money instead of cash.
7. In July of 2007, Old Forge, Inc. issued 1,000 shares of preferred stock with a $25 par value for $50 a share. On December 31, 2009 each share of preferred stock was converted into three shares of common stock (par value $5 per share). Please show the journal entry made in Old Forge's books to account for the conversion.
7Entry of conversion / Dr / Cr
Preferred stock / 25000
Common stock / 15000
Additional paid in capital in excess of par / 10000
8. Alpha Company sold merchandise on credit to Beta Company for $2,500 on July 1, with terms of 2/10, net/30. On July 6, Beta returned $500 worth of merchandise claiming the materials were defected. On July 8, Alpha rec. a payment from Beta and cr. A/R for $1,350. On July 24, Beta Company paid the remaining bal. on its acct. How much was the total sales discounts given to Beta during July?
8Account Receivable / 2500
sales / 2500
sales return / 500
Account Receivable / 500
the discount will be given on 8th July payment / 27
6th July
cash / 1323
Sales discount / 27
Account Receivable / 1350
24th July
cash / 650
Account Receivable / 650
Part c: Answer each of the following questions in 3 or 4 sentences or less as necessary.
- Maryanne was looking to purchase a local business that sold coal jewelry to tourists along the interstate. The present business owner instructed his accountant, Jane Sane, CPA, to provide Maryanne with the company's financial statement and answer any questions she might have regarding the provided data. Sane mailed out the most recent set of financial statements, now three years old, to Maryanne. A few days later Sane received a phone call from Maryanne. Maryanne asked her how the ending inventory was calculated. Sane replied that inventory was calculated using a formula of her own design involving numbers provided by her late father. Explain how the qualitative characteristics of relevance and reliability have been violated in this situation.
As IAS2 of inventory valuation has not been followed and the valuation of inventory has been done by self
which may or may not represent the true and fair view of the financial position of the company. Under IAS 2
only FIFO and Weighted Average method are allowed. Thus, it is not reliable.
Moreover the data is 3 years old therefore it is not relevant to current period.
- On 11/1/05 the Scranton Electric Company issued a check in the amount of $36,000 to the Fly By Night Insurance Company. The amount represented the total premiums on a liability insurance policy for the next three years. The entire $36,000 was recorded as an expense by Scranton when the payment was made. When Scranton's fiscal; year ended on 12/31/05, no additional entries had been made regarding the insurance payment. Explain why Scranton's books are incorrect as of 12/31/05 and give the journal entry to correct Scranton's books at that date.
2
As the amount represents the insurance premiums
for three years it means that for this year the expenses
is only for two months of the payment which is 2000
and the remaining amount is the prepaid expense
for the coming years. This record has understated the profits
by 34000 for this year the entry to correct the record would be
as on 12/31/05 / DR. / CR.
prepaid insurance / 34000
insurance expense / 34000
( to record the prepaid insurance )
- Dunmore Coal and Iron purchased $1,000,000 in corporate bonds and 500,000 shares of common stock in its competitor, Olyphant Iron. Dunmore plans to hold onto the bonds until the maturity date six years from present. The stock will be sold directly after Oylphant's annual shareholder meeting three months from present. If Dunmore's fiscal year were to end today, how would the bonds and shares of stock appear on the classified balance sheet?
3
Bond should be classified as Long term investment as fixed assets
Stocks should be classified as short term investment as current assets.
- Cal Culate, CPA, is compiling a cash flow statement for his client, Happy Hal Printing. Over the course of the year Happy Hal acquired new equipment by putting down half of the purchase price in cash and issuing Happy Hal Printing stock in exchange for the other half. How should Cal Culate correctly account for this transaction on the cash flow statement?
4
Total cost of equipment say $100000
to be shown as outflow under the investing
activities / -100000
50% of 100000 for issuance of stock to be shown under
inflows from financing activities / 50000
OR Alternatively
Only show 50% of equipment cost under
investing activities / -50000
and
write a note as supplementary data to show issuance of stock for 50% cost of equipment
5. Your client, Rent From Nancy, Inc., has just signed a new lease agreement. Nancy has agreed to lease a new emu egg incubator to Fly Right Ranch for a monthly rent payment of $1,000. In your effort to determine the proper lease classification you discover the following information:
Emu egg incubators tend to last about 15 years.
Under the term of the 10-year lease, Fly Right can purchase the incubator from Nancy for $1 at the end of the lease term.
Fly Right Ranch has had trouble recently paying its bills and is currently in danger of being forced into bankruptcy.
What is the proper classification of this lease from the standpoint of Rent from Nancy and the Fly Right Ranch?
5As there is a clause for lessee to buy leased assets at bargain purchase price therefore it should be treated as
finance lease.
Therefore the rental to be separated into 2 elements, one principal amount and other is interest expenses.
6. Your client, Hope, of Hope's Country Corner, is curious about two events will influence both taxable and financial income. The first event involves the purchase of pottery-making equipment. Under the present tax laws, the Country Corner can take the entire cost of equipment as an expense on the current year's tax return, while GAAP dictates the equipment be depreciated over its useful live (seven years). The second event relates to a fine levied against the Country Coner by the local authorities when Hope erected an outdoor sign the size of which was in violation of local ordinance. Explain to Hope both the immediate and long-term effects of the two event in causing differences between taxable and financial income
6The net income will be more in case of financial income as compare to taxable income due to difference in treatment
of depreciation from accounting and tax point of view. The difference is of temporary nature therefore it will create deferred
taxation.
The penalty for violation of local ordinance will not be admitted as expense by the tax authority therefore it should be
excluded from expense list for the purpose of tax calculation. In this case the net income will increase and company will
have to pay more taxes, as the difference in treatment is of permanent nature, therefore there will be no deferred taxation.