Three Accounting Questions



I. Zurich Co. reports pretax financial income of $70,000 for 20×1. The following items cause taxable income to be different than pretax financial income:
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent earned on the income statement by $22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement. Zurich’s tax rate is 30% for all years and the company expects to report taxable income in all future years.
a) Compute taxable income.
b) Prepare the journal entry to record income tax expense, deferred income tax, and income tax payable for 20×1
c) Prepare the income tax expense section of the income statement for 20×1, beginning with the line “Income before income taxes.”

II. Marie Leasing signs an agreement on January 1, 20×1 to lease equipment to Metro Company.
The following information relates to this agreement.
1. The lease term is 6 years. The equipment has an estimated economic life of 6 years.
2. The cost of the asset to the lessor is $245,000. The fair value at January 1, 20×1 is also $245,000.
3. The asset will revert to the lessor at the end of the lease term at which time the asset is expected to have a residual value of $43,622 (guaranteed by lessee).
4. The agreement requires equal annual payments (each January 1), beginning on January 1, 20×1.
5. Collectibility of the lease payment s is reasonably assured. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual lease payment required.
b) Prepare an amortization schedule for the lease term using the Excel.
c) Prepare all of the journal entries for the lessor for 20×1 and 20×2. Assume the lessor’s annual accounting period ends on December 31.

III. Castle Leasing signs a lease agreement on January 1, 20×1 to lease equipment to Perry Company. The lease term is 2 years and payments are required at the end of each year. The following information relates to this agreement.
Perry Company has the option to purchase the equipment for $8,000 upon the termination of the lease.
The equipment has a cost and fair value of $160,000 to Castle; the useful economic life is 2 years.
Perry Company is required to pay $5,000 each year (on 12/31) to the lessor for executory costs.
Castle Leasing desires to earn a return of 10% on its investment (Perry’s incremental borrowing rate is also 10%).
a) What type of lease is this for the lessee? Explain.
b) Calculate the annual lease payment.
c) Prepare a lease amortization schedule (use the Excel).
d) Prepare the journal entries for the lessee for 20×1 and 20×2.


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Coyote Loco is a manufacturer of salsa. The follow
historical collection pattern for its credit sales are as follows: 70%
collected in month of sale 15% collected in first month after sale 10%
collected in second month after sale 4% collected in third month after sale 1%
uncollectible. The sales on account have been budgeted for the last seven
months as: June – $122,500 July – 150,000 August – 175,000 Sept – 200,000 Oct –
225,000 Nov – 250,000 Dec – 212,500 1. Compute estimated cash collections
during October from credit sales. 2. Compute the estimated total cash
collections during the fourth quarter from sales made on account during the
fourth quarter. 3. Construct an Excel spreadsheet to solve both of the
preceding requirements. Show how the solution will change if the following
information changes: sales in June and July were $100,000 and $130,000
respectively. 2… Sophisticates, Inc., a distributor of jewelry throughout
California, is in the process of assembling a cash budget for the first quarter
of 20×1. The following information has been extracted from the company’s accounting
records: • All sales are on account. Sixty percent of customer accounts are
collected in the month of sale; 35 percent are collected in the following
month. Uncollectibles amounting to 5 percent of sales are anticipated, and
management believes that only 20 percent of the accounts outstanding on
December 31, 20×0, will be recovered and that the recovery will be in January
20×1. • Seventy percent of the merchandise purchases are paid for in the month
of purchase; the remaining 30 percent are paid for in the month after
acquisition. • The December 31, 20×0, balance sheet disclosed the following
selected figures: cash, $60,000; accounts receivable, $165,000; and accounts
payable, $66,000. • Sophisticates, Inc., maintains a $60,000 minimum cash
balance at all times. Financing is available (and retired) in $1,000 multiples
at an 8 percent interest rate, with borrowings taking place at the beginning of
the month and repayments occurring at the end of the month. Interest is paid at
the time of repaying principal and computed on the portion of principal repaid
at that time. Additional data: JanuaryFebruary March Sales revenue
…………………………………………$450,000 $540,000 $555,000
Merchandise purchases …………………………… 270,000300,000420,000
Cash operating costs ………………………………. 93,000 72,000
135,000 Proceeds from sale of equipment……………….. — — 15,000
Required: 1. Prepare a schedule that discloses the firm’s total cash
collections for January through March. 2. Prepare a schedule that discloses the
firm’s total cash disbursements for January through March. 3. Prepare a
schedule that discloses the firm’s cash needs, if any, for January through
March. The schedule should present the following information in the order
cited: Beginning cash balance, total receipts (from requirement 1), total
payments (from requirement 2), the cash excess (deficiency) before financing ,
borrowing needed to maintain minimum balance, loan principal repaid, loan
interest paid, and ending cash balance. 3. Concord Farms produces items made
from local farm products that are distributed to supermarkets. For many years,
Concord’s products have had strong regional sales on the basis of brand
recognition; however, other companies have begun marketing similar products in
the area, and price competition has become increasingly important. Doug
Gilbert, the company’s controller, is planning to implement a standard cost
system for Concord and has gathered considerable information from his co-workers
on production and material requirements for Concord’s products. Gilbert
believes that the use of standard costing will allow Concord to improve cost
control and make better pricing decisions. Concord’s cost popular product is
strawberry jam. The jam is produced in 10-gallon batches, and each batch
requires six quarts of good strawberries. The fresh strawberries are sorted by
hand before entering the production process. Because of imperfections in the
strawberries and normal spoilage, one quart of berries is discarded for every
four quarts of acceptable berries. Three minutes is the standard direct-labor
time for sorting required to obtain one quart of acceptable strawberries. The
acceptable strawberries are then blended with the other ingredients. Blending
requires 12 minutes of direct-labor time per batch. After blending, the jam is
packaged in quart containers. Gilbert has gathered the following information
from Joe Adams, Concord’s cost accountant. • Concord purchases strawberries at
a cost of $1.60 per quart. All other ingredients cost a total of $0.90 per
gallon. • Direct labor is paid at the rate of $18.00 per hour. • The total cost
of material and labor required to package the jam is $0.76 per quart. Adams has
a friend who owns a strawberry farm that has been losing money in recent years.
Because of good crops, there has been an oversupply of strawberries, and prices
have dropped to $1.00 per quart. Adams has arranged for Concord to purchase
strawberries from his friend and hopes that $1.60 per quart will help his
friend’s farm become profitable again. Required: 1. Develop the standard cost
for the direct-cost components of a 10-gallon batch of strawberry jam. The
standard cost should identify the following amounts for each direct-cost component
of a batch of strawberry jam: (a) standard quantity, (b) standard price or
rate, and (c) standard cost per batch. 2. Citing the specific ethical standards
of competence, confidentiality, integrity, and credibility for management
accountants (see “IMA Statement of Ethical Professional Practice” in Chapter
1), explain why Joe Adams’s behavior regarding the cost information provided to
Doug Gilbert is unethical. 3. As part of the implementation of a
standard-costing system at Concord Farms, Doug Gilbert plans to train those
responsible for maintaining the standards in the use of variance analysis.
Gilbert is particularly concerned with the causes of unfavorable variances.
Discuss the possible causes of the following unfavorable variances and identify
the individual(s) who should be held responsible: (a) direct-material purchase
price variance and (b) direct-labor efficiency variance.


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For the
year ended, October 31, 2010

.0001pt; padding: 0px; color: rgb(0, 0, 0); font-family: Arial, Helvetica, Verdana, ‘Bitstream Vera Sans’, sans-serif; font-size: 12px;”>Cash 218,000

Accounts receivable 280,000

Inventories 74,000

Prepaid insurance 6,000

Supplies 4,000

Furnitures and fixtures 100,000

Accumulated depreciation, furnitures & fixtures 60,000

Building 250,000

Accumulated depreciation, building 140,000

Accounts payable 310,000

Accounts payable 310,000

Salaries payable 5,000

Unearned service
revenue 13,000

Notes payable
($12,000 due in the current year) 40,000

Mortgage payable
(1/3 due in the current year) 30,000

earnings (beginning) 293,000

Dividends 65,000

Service revenue 300,000

fees revenue 30,000

Salary expense 170,000

Supplies expense 4,000

expense, furniture & fixtures 20,000

expense, building 11,000

Rent expense 8,000

Interest expense 7,000

expense 4,000

1) Prepare an income statement

2) Prepare a statement of retained earnings

3) Prepare a CLASSIFIED balance sheet

Question 3:
DEPRECIATION METHODS (Use 3 decimal places for the depreciation rate only. The rest of the numbers rounded to a whole

on delivery truck purchased on January 1, 2007:

of delivery truck $50,000

residual value $2,000

useful life:

Years 5 years

Units of production 100,000 miles


depreciation at each year end that applies:

  1. Straight-line
    method (use the table below)

Depreciation Depreciable Depreciation Accumulated Book

Rate Cost Expense Depreciation

  1. Units
    of production method (use the table below)

Assumption: Truck is driven 30,000 miles on the 1st
year, 20,000 on the 2nd year, 23,000 on the 3rd year, 17,000
on the 4th year, and 10,000 during the 5th year.

Depreciation Number of Depreciation Accumulated

Date Per Unit Units Expense Depreciation

  1. Double-declining
    balance method

Accumulated Book

Date DDB Rate Expense Depreciation

Quiz 4:

opened a music store that sells compact disks of pop music. The store is called All Pops. At the end of the year, a physical inventory
count revealed that 3,400 of those disks are on hand.

Assume the following
for All Pops: Strictly Classical purchased 1,000 CDs as follows:

Date No. of disks purchased Cost/Unit Total Cost

1 700 $6.20 $

Mar 8 2,500 $6.45 $ _______

23 3,800 $6.35 $ _______

6 3,000 $6.30 $ _______

15 4,200 $6.25 $ _______

Dec 8 3,000 $6.40 $

______ $ _________

Calculate the Cost of Merchandise Sold and ending inventory value using: (Use
the table below as your guide)

1) FIFO method

2) LIFO method

3) AVERAGE-COST method

Method Ending
Inventory Cost
of Merchandise Sold


Method Ending
Inventory Cost
of Merchandise Sold


Method Ending
Inventory Cost
of Merchandise Sold




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Three Accounting Questions



Won Han Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow.

Indirect Expense Cost Allocation Base
Supervision $ 82,600 Number of employees
Utilities 51,000 Square feet occupied
Insurance 23,000 Value of assets in use

Total $ 156,600
Departmental data for the company’s recent reporting period follow.
Department Employees Square Feet Asset Values
Materials 24 22,000 $ 6,100
Personnel 6 11,000 1,830
Manufacturing 48 55,000 36,600
Packaging 42 22,000 16,470

Total 120 110,000 $ 61,000

(1) Use this information to allocate each of the three indirect expenses across the four departments. (Omit the “$” & “%” signs in your response.)
Supervision expenses
Department % of Total Cost
Materials % $
Totals % $

Utilities expenses
Department % of Total Cost
Materials % $
Totals % $

Insurance expenses
Department % of Total Cost
Materials % $
Totals % $

(2)Prepare a summary table that reports the indirect expenses assigned to each of the four departments. (Omit the “$” sign in your response.)

Supervision Utilities Insurance Total
Materials $ $ $ $
Totals $ $ $ $

1.00 points
Pane Company produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.
Rounded Edge Squared Edge Total
Direct materials $ 9,400 $ 21,700 $ 31,100
Direct labor 6,100 11,800 17,900
Overhead (300% of direct labor cost) 18,300 35,400 53,700

Total cost $ 33,800 $ 68,900 $ 102,700
Quantity produced 10,400 ft. 14,200 ft.
Average cost per ft. $ 3.25 $ 4.85

Pane’s controller wishes to apply activity-based costing (ABC) to allocate the $53,700 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.

Overhead Cost Category (Activity Cost Pool) Cost
Supervision $ 2,148
Depreciation of machinery 28,680
Assembly line preparation 22,872

Total overhead $ 53,700

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines.


Overhead Cost Category
(Activity Cost Pool) Driver Rounded Edge Squared Edge Total
Supervision Direct labor cost ($) $ 6,100 $ 11,800 $ 17,900
Depreciation of machinery Machine hours 300 hours 600 hours 900 hours
Assembly line preparation Setups (number) 30 times 93 times 123 times

1. Assign these three overhead cost pools to each of the two products using ABC. (Do not round your intermediate calculations and round final answers to the nearest dollar amount. Omit the “$” sign in your response.)

Product Assigned Cost
Rounded edge $
Squared edge $

2. Determine average cost per foot for each of the two products using ABC. (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the “$” sign in your response.)

Rounded edge Squared edge
Average cost per foot (ABC) $ $

1.00 points
Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect.

Departmental Income Statements
For Year Ended December 31, 2011
Acoustic Electric
Sales $ 103,400 $ 83,600
Cost of goods sold 44,575 47,350

Gross profit 58,825 36,250
Operating expenses
Advertising expense 5,045 4,290
Depreciation expense-equipment 10,120 8,510
Salaries expense 19,500 17,700
Supplies expense 1,990 1,730
Rent expense 7,055 5,960
Utilities expense 2,955 2,640

Total operating expenses 46,665 40,830
Net income (loss) $ 12,160 $ (4,580 )

(1) Prepare a departmental contribution report that shows each department’s contribution to overhead. (Input all amounts as positive values. Omit the “$” sign in your response.)

Departmental Contribution Statements
For Year Ended December 31, 2011
Acoustic Dept. Electric Dept. Combined


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Three Accounting Questions




7-3 (Show Work)

Determine cost of land

? $715,725

Express Delivery Company acquired an adjacent lot to construct a new warehouse, paying $80,000 and giving a short-term note for $620,000. Legal fees paid were $1,900, delinquent taxes assumed were $9,000, and fees paid to remove an old building from the land were $6,000. Materials salvaged from the demolition of the building were sold for $1,175. A contractor was paid $800,000 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.


Capital and revenue expenditures

Hometown Delivery Co. incurred the following costs related to trucks and vans used in operating its delivery service:Classify each of the costs as a capital expenditure or revenue expenditure.

1. Changed the oil and greased the joints of all the trucks and vans.

2. Changed the radiator fluid on a truck that had been in service for the past four years.

3. Installed a hydraulic lift to a van.

4. Installed security systems on four of the newer trucks.

5. Overhauled the engine on one of the trucks purchased three years ago.

6. Rebuilt the transmission on one of the vans that had been driven 40,000 miles. The van was no longer under warranty.

7. Removed a two-way radio from one of the trucks and installed a new radio with a greater range of communication.

8. Repaired a flat tire on one of the vans.

9. Replaced a truck’s suspension system with a new suspension system that allows for the delivery of heavier loads.

10. Tinted the back and side windows of one of the vans to discourage theft of contents.

7-8 (Show Work)

Straight-line depreciation

? $3,170

A refrigerator used by a meat processor has a cost of $86,750, an estimated residual value of $7,500, and an estimated useful life of 25 years. What is the amount of the annual depreciation computed by the straight-line method?


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Three Accounting Questions




On January 9, 2010, Swifty Delivery Service
purchased a truck at cost of $67,000. Before placing the truck in service,
Swifty spent $2,200 painting it, $500 replacing tires, and $5,000 overhauling
the engine. The truck should remain in service for 6 years and have a residual
value of $14,700. The truck’s annual mileage is expected to be 15,000 miles in
each of the first 4 years and 10,000 miles in each of the next 2 years–80,000
miles in total. In deciding, which depreciation method to use, Jerry Speers,
the general manager, requests a depreciation schedule for each of the
depreciation methods (straight line, units of production, and double declining


1. Prepare a depreciation schedule for each
depreciation method, showing asset cost, depreciation expense, accumulated
depreciation , and asset book value.

2. Swifty prepares financial statements using the
depreciation method that reports the hightest net income in the early years of
asset use. For income tax purposes, the company uses the depreciation method
that minimizes income taxes in the early years. Consider the first year that
Swifty uses the truck. Identify the depreciation methods that meet the general
managers objectives, assuming the income tax authorities permit the use of any
of the methods.


Calculating present value
Axel needs new manufacturing equipment. Two
companies can provide similar equipment but under different payment plans:

Plan A: MRE offers to let Axel pay $55,000 each
year for five years. The payments include interest at 12% per year.

Plan B: Westernhome will let Axel make a single
payment of $425,000 at the end of five years. This payment includes both
principal and interest at 12%.

1. Calculate the present value of Plan A.
2. Calculate the present value of Plan B.
3. Axel will purchase the equipment that costs the
least, as measured by present value. Which equipment should Axel select? Why?


The balance sheet of Ballcraft, Inc.,
reported the following:

Preferred stock, $6 par, 6%
5,000 shares authorized and issued
………………………………. $30,000
Common stock, $4.00 par value, 45,000 shares
10,000 shares issued
………………………………….. $40,000
Additional paid-in-capital-common
…………………… $219,000
Total paid-in-capital …………………………………………..
Retained earnings ……………………………………………. $90,000
Total stockholder’s equity ………………………………….. $379,000

On the
balance sheet date, the market value of the Ballcraft common stock was $31 per

1. Is the preferred stock cumulative or
noncumulative? How can you tell?
2. What is the total paid-in-capital of the company?
3. What was the total market value of the common
4. Compute the book value per share of the common


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