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Week Two Exercise
Assignment


Revenue and Expenses



1. Revenue and Expenses.
Dave Morris began a law practice several years ago, shortly after graduating
from law school. During 19X1, he was approached by Delores Silva, who had
recently suffered a back injury in an automobile accident. Morris accepted
Silva as a client, and in 19X2 proceeded with a lawsuit against Maddox Motors.
The suit alleged that Maddox had knowingly sold Silva an automobile with
defective brakes. Late in 19X2, the courts awarded Silva $240,000 in damages.
Morris was entitled to 40% of this settlement for his fees. In 19X3, Maddox
Motors paid Silva and Morris their respective shares of the judgment. Morris
incurred secretarial and photocopy charges in 19X2 of $12,000— all related to
the Silva case. Of this amount, $8,000 was paid in 19X2 and the balance was
paid in 19X3. Assuming that Morris uses the accrual basis of accounting, in
what year(s) should the revenue and expense amounts be recognized? Why?



2. Accrual and modified cash
basis.The following information pertains to Beta Company for October:














Services rendered during October to customers on account

$14,380

Cash receipts from

Owner
investment

7,000

Customers on
account

5,650

Cash customers
for services rendered in October

6,800

Cash payments to

Creditors for
expenses incurred during October

4,400

Creditors for
expenses incurred prior to October

2,100

Monroe
Equipment for purchase of new machinery on

October 1

8,400

Expenses incurred during October, to be paid in future

months

3,725



The machinery is expected to have a
service life of five years.



Instructions


Calculate Beta’s net income for
October, using the following methods:


a. Accrual
basis of accounting.


b. Modified
cash basis of accounting.



3. Accounting for prepaid
expenses and unearned revenues.Hawaii-Blue
began business on January 1 of the current year and offers deep sea fishing
trips to tourists. Tourists pay $125 in advance for an all-day outing off the
coast of Maui. The company collected monies during January for 210 outings,
with 30 of the tourists not planning to take their trips until early February.
Hawaii-Blue rents its fishing boat from Pacific Yacht Supply. An agreement was
signed at the beginning of the year, and $72,000 was paid for the rights to use
the boat for two full years.


a. Prepare
journal entries to record (1) the collection of monies from tourists and (2)
the revenue generated during January.


b. Calculate
Hawaii-Blue’s total obligation to tourists at the end of January. On what
financial statement and in which section would this amount appear?



4. Recognition of concepts.Ron Carroll
operates a small company that books entertainers for theaters, parties,
conventions, and so forth. The company’s fiscal year ends on June 30 Consider
the items that follow and classify each as either (1) prepaid expense, (2)
unearned revenue, (3} accrued expense, (4) accrued revenue, or (5) none of the
foregoing.



a. Amounts
paid on June 30 for a one-year insurance policy.


b. Professional
fees earned but not billed as of June 30.


c. Repairs
to the firm’s copy machine, incurred and paid in June.


d. An
advance payment from a client for a performance next month at a convention.


e. The
payment in item (d) from the client’s point of view.


f. Interest
owed on the company’s bank loan, to be paid in early July.


g. The
bank loan payable in item (f).


h. Office
supplies on hand at year-end.


i.
Bank reconciliations: Missing amounts


j.
The following independent cases relate to bank
reconciliations. Compute the missing amounts, assuming that no other
reconciling items exist.













Case A

Case B

Case C

Balance per bank $6,000

$4,000

$ ?

Outstanding checks $500

2,100

1,400

Deposits in transit $2,000

7

1,000

Balance per company records ?

8,000

450

5. Bank reconciliation and
entries.The following
information was taken from the accounting records of Palmetto Company for the
month of January:














Balance per bank

$6,150

Balance per company records

3,580

Bank service charge for January

20

Deposits in transit

940

Interest on note collected by bank

100

Note collected by bank

1,000

NSF check returned by the bank with the

bank statement

650

Outstanding checks

3,080



a.Prepare
Palmetto’s January bank reconciliation.


b.Prepare
any necessary journal entries for Palmetto.



6. Allowance method: Income
statement and balance sheet approaches.Tempe Company reported accounts
receivable of $300,000 and an allowance for uncollectible accounts of $31,000
(credit) on the December 31, 19X2, balance sheet. The following data pertain to
19X3 activities and operations:











Sales on account

$2,000,000

Cash collections from credit customers

1,600,000

Sales discounts

50,000

Sales returns & allowances

100,000

Uncollectible accounts written off

29,000

Collections on accounts that were previously written off

2,700



Instructions


a. Prepare
journal entries to record the sales- and receivables-related transactions from
19X3.


b. Prepare
the December 31, 19X3, adjusting entry for uncollectible accounts assuming that
uncollectibles are estimated to be 2% of net credit sales.


c. Prepare
the December 31, 19X3, adjusting entry for uncollectible accounts assuming that
uncollectibles are estimated at 1% of year-end accounts receivable.


d. Compute
the amount of the adjusting entry in part (c) assuming that $46,000, rather
than $29,000, of accounts were written off in 19X3.



7. Income Statement Review.
Using the annual report of the company that you selected in week 1 please
review the company’s income statement over a three year period. Did sales increase during this time? Did Cost of Good Sold increase
significantly? Has the company been
profitable? Do you notice any positives
based on your analysis of the income statement?
Are there any negatives that potential investors should be aware
of? Write a 150-200 summary of the
results of your income statement analysis.


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Calculate the cost of goods sold and ending
inventory of the Summertime Corporation, using the FIFO and LIFO methods, using
the following information:

Beginning Inventory 5 units @ $2

January 5th 7 units @ $3

January 15th 9 units @ $5

Assume 8 units left in ending inventory.

Show all work and label the Cost of Goods
Sold and Ending Inventory calculations well, labeling the method used for each
calculation. There should be 4 final
answers, worth 5 pts each. Thanks!

Expand the Word Document for your answers
to fit or use separate sheets.

2. During periods of rising prices, which
method will always yield the higher cost of goods sold and explain, in detail,
why. Also, why would some managers want
to use this method?

3. Which method will always yield the more
current ending inventory? Explain in
detail, why. Explain what ‘the more
current ending inventory’ means, too.

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