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Question 1 - Adjusting Entries
Question 1 - Adjusting Entries
Question 1 - Adjusting Entries
On April 30, a ten-month, 4% note for $40,000 was received from a customer.
3.
On March 1, $8,400 was collected as rent for one year and a nominal (temporary)
account was credited.
Solution
1. Supplies Expense (8,350 + 16,650 6,810)........................
Supplies Inventory .......................................................
2.
3.
18,190
18,190
400
4,900
400
4,900
Rent of $4,200 for six months for a portion of the building was received on
November 1, 2013.
Solution
1. Prepaid Insurance ...................................................................
Cash .............................................................................
Insurance Expense (4,800 x 9/24) ........................................
Prepaid Insurance .........................................................
2.
Cash........................................................................................
Unearned Rent .............................................................
Unearned Rent (4,200 x 2/6) ...............................................
Rent Revenue ...............................................................
4,800
4,800
1,800
1,800
4,200
4,200
1,400
1,400
$975,000
19,500
(408,500)
(155,000)
(215,000)
(13,000)
203,000
(30,000)
(80,000)
(27,900)
65,100
Instructions
In good form, prepare a multiple-step income statement for 2014 for Poodle Corporation that is
presented in accordance with generally accepted accounting principles (including format and
terminology). Poodle Corporation has 50,000 common shares outstanding and has a 20% income
tax rate on all tax related items. As a private corporation, Poodle does not disclose earnings per
share information.
Solution
POODLE CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales .......................................................................................................................
Cost of goods sold ..................................................................................................
Gross profit.............................................................................................................
Selling expenses .....................................................................................................
Administrative expenses ........................................................................................
Income from operations ........................................................................................
Other revenue Interest revenue..........................................................................
Other expenses Interest expense ........................................................................
Fire loss ..................................................................................................................
$975,000
408,500
566,500
$155,000
215,000
370,000
196,500
19,500
216,000
13,000
80,000
123,000
24,600
98,400
24,000
$ 74,400
b)
Solution
SPANIEL CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales .......................................................................................................................
Cost of goods sold
Merchandise inventory, Jan. 1 .......................................................................
Purchases
$720,000
Less purchase discounts
18,000
Net purchases ........................................................................................
Merchandise available for sale ......................................................................
Less merchandise inventory, Dec. 31 .............................................................
Cost of goods sold ..................................................................................
Gross profit on sales...............................................................................................
Operating expenses
Selling expenses .............................................................................................
General and administrative expenses ............................................................
Total operating expenses .......................................................................
Operating income...................................................................................................
Other revenue and gains
Dividend revenue ...........................................................................................
Other expenses and losses
Interest expense.............................................................................................
Loss from earthquake ....................................................................................
Income before taxes ...............................................................................................
Income taxes ..................................................................................................
Net income .............................................................................................................
$1,200,000
$152,000
702,000
854,000
125,000
729,000
471,000
128,000
160,000
288,000
183,000
18,000
(17,000)
(60,000)
(77,000)
124,000
37,200
86,800
$4.34
SPANIEL CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, 2014 .......................................................................
Cumulative effect of change in depreciation methods,
net of applicable taxes of $15,000 ..................................................................
Adjusted beginning retained earnings ...................................................................
Add: Net income ....................................................................................................
Deduct: Dividends declared ...................................................................................
Retained earnings, December 31, 2014 .................................................................
$270,000
(35,000)
235,000
$86,800
29,000
57,800
$292,800
Accounts receivable
Prepaid insurance
Accounts payable
Interest payable
Income taxes payable
Unearned revenue
2014
56,000
5,000
59,000
600
4,200
20,000
2013
40,000
6,000
47,000
1,500
6,000
14,000
Instructions
Prepare a Statement of Cash Flows (for operating activities only) for the year ended December 31,
2014, using the
a. direct method.
b. Indirect method
620,000
410,000
210,000
22,000
232,000
92,800
139,200
$ 620,000
(16,000)
6,000
$ 610,000
$ 410,000
(1,000)
(12,000)
$ 397,000
$ 8,000
900
$ 8,900
$ 92,800
1,800
$ 94,600
$610,000
$397,000
$8,900
$94,600
$500,500
$109,500
$139,200
(30,000)
(16,000)
1,000
12,000
(900)
(1,800)
6,000
$109,500
POC
Question 1
Comparison of accounting methods for long-term contracts
Compare the percentage-of-completion and completed-contract methods.
Solution 1
The percentage-of-completion method recognizes revenue before completion of the project. A
major advantage of this method is that the contractors' revenue stream is not distorted. However,
the reliance on estimates, rather than on actual numbers, is a disadvantage. This method
conforms to the earnings-based view of revenue recognition.
Under the completed contract method, revenue recognition is deferred until the completion of
the project. A major advantage of this method is the use of actual numbers, rather than
estimates. A major disadvantage is the distortion of income, as no revenue is recognized during
the contract. This method does not conform to the earnings-based view of revenue recognition.
Question 2 - Bundled sales
Loon Inc., a software company sells new accounting software and user support bundled together.
The fair value of the software is $1,500 and the fair value of the user support is $500. The user
support is valid for a period of 12 months from the date of software purchase. To be able to
compete with a competitor's offering, Loon decided to sell the bundle at a discount for $1,800.
During its first month of sales, 100 units of this software bundle were sold at the discounted price,
and expenses were $50,000.
Instructions
a)
Calculate the sale price that should be allocated to each component of the bundle using the
relative fair value method.
b)
Calculate the sale price that should be allocated to each component of the bundle using the
residual value method.
c)
Assuming that the relative fair value method is used and income tax rate is 30%, calculate
the net income applicable to Loon's first month of sales.
Solution
a) Relative fair value method:
Software: $1,500 x [$1,800 / ($1,500 + $500)] =
User Support: $500 x [$1,800 / ($1,500 + $500)] =
$1,350
450
$1,800
$1,300
500
$1,800
$180,000
(50,000)
(41,250)
88,750
(26,625)
$62,125
2.
Construction activities for the year ended December 31, 2014, were as follows:
Total contract
Project
Billings through
Cash collections
price
12/31/14
615,000
$ 340,000
450,000
135,000
135,000
475,000
475,000
390,000
600,000
240,000
160,000
480,000
400,000
400,000
$2,620,000
$1,590,000
$1,395,000
Contract costs
Estimated
incurred through
additional costs to
Project
A
12/31/14
$
through 12/31/14
$
310,000
complete contracts
510,000
$120,000
130,000
260,000
350,000
-0-
370,000
290,000
320,000
80,000
$1,680,000
$750,000
3.
4.
Instructions
a)
Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2014
calendar year, which would be reported under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated costs).
Solution 3
a) (1) and (2)
Projects
Contract price
Contract costs incurred
Additional costs
to complete
Total cost
Total gross profit
(loss)
A
$615,000
510,000
B
$450,000
130,000
C
$475,000
350,000
D
$600,000
370,000
E
$480,000
320,000
120,000
630,000
260,000
390,000
-0350,000
290,000
660,000
80,000
400,000
60,000
$125,000
$ (60,000)
$ (15,000)
The amount reported as gross profit (loss) under the completed-contract method for 2014 is:
Project A
$(15,000)
B
-0C
125,000
D
(60,000)
E
-0$ 50,000
The amount reported as gross profit (loss) under the percentage-of-completion method for 2014
is:
Project A
$(15,000)
B
20,000
$60,000 ($130,000 $390,000)
C
125,000
D
(60,000)
E
64,000
$80,000 ($320,000 $400,000)
$134,000
$ 80,000