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Chapter 04 Modern Advanced Accounting PDF
Chapter 04 Modern Advanced Accounting PDF
Chapter 04 Modern Advanced Accounting PDF
The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.
SOLUTIONS TO EXERCISES
Ex. 41 1. c 8. a
2. b 9. a
3. c 10. d
4. a 11. d
5. c 12. a (.20 1.20 = 16 2/3%)
6. c 13. b
7. a
Ex. 42 a. Journal entries in accounting records of home office:
2005
Sept. 1 Investment in San Marino Branch 10,000
Cash 10,000
2 Investment in San Marino Branch 75,000
Inventories 60,000
Allowance for Overvaluation of Inventories:
San Marino Branch ($60,000 x 0.25) 15,000
3 Equipment: San Marino Branch 3,000
Investment in San Marino Branch 3,000
b. Journal entries in accounting records of San Marino Branch:
2005
Sept. 1 Cash 10,000
Home Office 10,000
2 Inventories [$60,000 (1.00 0.20)] 75,000
Home Office 75,000
3 Home Office 3,000
Cash 3,000
CASES
Case 41 Although the appropriate interpretation of Lewis Hanson's contract with Longo Company probably
requires a legal opinion, logic suggests that neither Hanson's view nor the Longo controller's view is
appropriate. Absent any provision in Hanson's contract to the contrary, the method used by the
branch accountant to measure net income of Santee Branch during its operating phase should be
applied to Santee's last operating period. The resultant net loss precludes a bonus to Hanson, but
"tinkering" with the measurement of branch net income appears unsupportable with respect to both
Hanson's suggestion and the Longo controller's suggestion.
Case 42 Before deciding on an answer to the case, it is appropriate to consider the following
pronouncements of the Financial Accounting Standards Board in Statement of Financial
Accounting Concepts No. 6, Elements of Financial Statements (CON 6); Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5); Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Assets are probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events. (CON 6, para. 25)
Contingencies that might result in gains [contingent assets] usually are not reflected in the
accounts since to do so might be to recognize revenue prior to its realization. (FAS 5, para. 17a)
Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of
both) from delivering or producing goods, rendering services, or carrying out other activities that
constitute the entity's ongoing major or central operations. (CON 6, para. 81)
Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from expenses or distributions to owners. (CON 6, para. 83)
The McGraw-Hill Companies, Inc., 2006
154 Modern Advanced Accounting, 10/e
Costs of internally developing, maintaining, or restoring intangible assets (including goodwill)
that are not specifically identifiable, that have indeterminate lives, or that are inherent in a
continuing business and related to an entity as a whole, shall be recognized as an expense when
incurred. (FAS 142, para. 10)
Given the foregoing definitions, there is no support for Fortunato Company's deferral of pre-operating
costs incurred for the new branch. Apart from the costs of testing the manufacturing equipment,
which may be capitalized as part of the cost of the equipment, all remaining start-up costs should be
recognized either as expenses or as losses. Because of the uncertainty as to when, if ever, regulatory
agency approval for the branch's production and sale of products will be obtained, the probable
criterion for the recognition of an asset is not met. Given such uncertainty, Robert Engle's
characterization of the pre-operating costs as contingent assets is appropriate; they are not to be
recognized until realized. The costs incurred other than for testing equipment, research, and
development, do not qualify as expenses because they do not result from delivering or producing
goods. Thus, recognition of such costs as losses appears to be an appropriate course of action for
Fortunato Company.
Case 43 Kevin Carter's dilemma is a difficult one. The cost-benefit aspects of any course of action he selects
must be considered. However, the current practice for plugging differences between reciprocal
ledger accounts of the home office and branches of Oilers, Inc., should be forbidden at once. At the
same time, an independent audit of Oilers' financial statements would be prohibitively expensive,
given the chaotic state of the accounting records. Adjusting the 14 branches' Home Office ledger
account balances to agree with the home office's reciprocal account balances is the least costly
alternative; if it is accompanied by strong measures to ensure future monthly reconciliations of the
reciprocal account balances, it might suffice. However, Carter might elect to select one of the 14
branches for a detailed analysis of differences between the reciprocal ledger account balances; such a
course of action might disclose a pattern of recurring errors common to other branches and facilitate
discovery of most, if not all, of the reconciling items.
Case 44 TO: The Board of Directors, Windsor Company
FROM: ___________________________________________, Controller
DATE: ________________________
SUBJECT: Separate Financial Statements for Southwark Branch
You have asked my opinion as to whether separate financial statements for Southwark Branch
may be prepared for its prospective purchaser. My review of professional literature leads me to
conclude that the statements may be prepared. In reaching my conclusion, I considered the
following:
AICPA Professional Standards, Volume 2;
Section ET92.04 Definition of financial statements
Section AR100.04 Definition of financial statements
Statement of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by
Business Enterprises, par. 6 Most frequently provided financial statements (CON 1)
Cash 4 5 0 0 0 0
Sales 4 5 0 0 0 0
To record sales for 2005.
Operation Expenses 9 6 0 0 0
Cash 9 6 0 0 0
To record payment of expenses.
Income Summary 5 4 0 0 0
Home Office 5 4 0 0 0
To close Income Summary ledger account.
Hartman, Inc.
Home Office
Journal Entries
Investment in Reno Branch 3 7 5 0 0 0
Shipments to Branch 3 0 0 0 0 0
Allowance for Overvaluation of Inventories
Reno Branch ($300,000 x 0.20) 6 0 0 0 0
Cash 1 5 0 0 0
To record shipment to branch of merchandise with
cost of $300,000 and payment of $15,000 freight costs.
31 Cash in Transit 2 5 0 0
Inventories in Transit 2 2 0 0
Investment in Wade Branch 4 7 0 0
To record cash and merchandise in transit from branch.
31 Home Office 1 1 0 0
Trade Accounts Receivable 1 1 0 0
To record collection of branch trade accounts
receivable by home office.
a. Styler Corporation
Journal Entries in Accounting Records of Branch
March 10, 2005
Loss from Fire 1 9 8 0 0
Inventories 1 9 8 0 0
To record loss of merchandise in fire, at prices billed to branch by home
office.
Home Office 1 9 8 0 0
Loss from Fire 1 9 8 0 0
To close Loss from Fire ledger account.
b. Styler Corporation
Journal Entries in Accounting Records of Home Office
March 10, 2005
Loss from Fire: Branch 1 6 5 0 0
Allowance for Overvaluation of Branch Inventories 3 3 0 0
Investment in Branch 1 9 8 0 0
To record loss of merchandise at branch and to adjust allowance
account by excess of billed prices of merchandise destroyed over cost
to home office.
b. Yugo Company
Journal Entries in Accounting Records of Home Office
December 31, 2005
(1) No journal entry required.
d. Yugo Company
Reconciliation of Reciprocal Ledger Accounts
December 31, 2005
Investment in
Ryble Branch Home Office
(In home office (in Ryble Branch
accounting accounting
records) records)
Balances before adjustments (see a) $ 5 5 5 0 0 dr $ 4 9 6 8 0 cr
Add: Shipment of merchandise in transit to branch 5 8 0 0
Collection by branch of home office trade accounts receivable 5 6 0
Correction of journal entry to record remittance of cash to branch 2 0 0 0 2 0 0 0
Less: Correction of home office accounts for error in recording net income
reported by branch ( 3 6 0 )
Shipment of supplies by branch to home office ( 2 2 0 )
Balances after adjustments $ 5 7 4 8 0 dr $ 5 7 4 8 0 cr
Cash 8 0 0 0 0
Cost of Goods Sold 7 0 0 0 0
Sales 8 0 0 0 0
Inventories 7 0 0 0 0
To record sales and cost of goods sold, determined on
basis of prices billed to branch by home office.
Operating Expenses 1 6 5 0 0
Cash 1 6 5 0 0
To record operating expenses.
Sales 8 0 0 0 0
Income Summary 8 0 4 0
Cost of Goods Sold ($70,000 + $1,540) 7 1 5 4 0
Operating Expenses 1 6 5 0 0
To close revenue and expense ledger accounts.
Home Office 8 0 4 0
Income Summary 8 0 4 0
To close net loss for year.
b. Trudie Company
Journal Entries for First Year of Operations
(Periodic Inventory System)
(1) In accounting records of Savoy Branch:
Cash 8 0 0 0 0
Sales 8 0 0 0 0
To record sales.
Operating Expenses 1 6 5 0 0
Cash 1 6 5 0 0
To record operating expenses.
Sales 8 0 0 0 0
Inventories (end of first year) 8 2 4 6 0
Income Summary 8 0 4 0
Shipments from Home Office 1 5 4 0 0 0
Operating Expenses 1 6 5 0 0
To record ending inventories and to close revenue
and expense accounts.
Home Office 8 0 4 0
Income Summary 8 0 4 0
To close net loss for year.
20 05
Dec. 31 Cash 1 7 0 0
Investment in Branch 1 7 0 0
To record cash deposits by branch not entered in
accounting records of home office:
Dec. 30, 2005 $1,100
Dec. 31, 2005 600
Total cash deposits not recorded $1,700
31 Shipments to Branch 1 0 0 0 0
Allowance for Overvaluation of Branch
Inventories 1 0 0 0 0
To record intracompany markup on merchandise
shipments to branch: $110,000 ($110,000 1.1)
= $10,000
b. Kosti-Marian Company
Journal Entries in Accounting Records of Branch
20 05
Dec. 31 Cash in Transit 1 8 0 0
Home Office 1 8 0 0
To record reimbursement check mailed by home
office; the check is in transit.
Balance sheet
Cash 2 3 7 0 0 1 1 9 7 5 3 5 6 7 5
Inventories, Dec. 31, 2005 3 0 0 0 0 1 6 1 7 0 (c) ( 1 4 0 0 ) 4 4 7 7 0
Investment in branch 5 8 3 0 0 (e) ( 5 8 3 0 0 )
Allowance for overvaluation
of branch inventories ( 1 1 0 0 0 ) (a) 1 0 0 0 0
(b) 1 0 0 0
Other assets (net) 1 9 7 0 0 0 4 8 4 5 0 2 4 5 4 5 0
Current liabilities ( 3 5 0 0 0 ) ( 8 7 7 5 ) ( 4 3 7 7 5 )
Common stock, $2.50 par ( 2 0 0 0 0 0 ) ( 2 0 0 0 0 0 )
Retained earnings (from
statement of retained
earnings above) ( 8 2 1 2 0 )
Home office ( 5 8 3 0 0 ) (e) 5 8 3 0 0
Totals - 0 - - 0 - - 0 - - 0 -
Balance sheet
Cash 4 6 0 0 0 1 4 6 0 0 6 0 6 0 0
Notes receivable 7 0 0 0 7 0 0 0
Trade accounts receivable
(net) 8 0 4 0 0 3 7 3 0 0 1 1 7 7 0 0
Inventories 9 5 8 0 0 2 4 2 0 0 1 2 0 0 0 0
Investment in branch 8 2 7 0 0 (a) ( 8 2 7 0 0 )
Furniture and equipment
(net) 4 8 1 0 0 4 8 1 0 0
Trade accounts payable ( 4 1 0 0 0 ) ( 4 1 0 0 0 )
Common stock, $2 par ( 2 0 0 0 0 0 ) ( 2 0 0 0 0 0 )
Retained earnings (from
statement of retained
earnings above) ( 1 1 2 4 0 0 )
Home Office ( 8 2 7 0 0 ) (a) 8 2 7 0 0
Totals - 0 - - 0 - - 0 - - 0 -
20 05
Dec. 31 Sales 1 0 1 1 0 0
Income Summary 6 6 0 0
Cost of Goods Sold 8 5 8 0 0
Operating Expenses 2 1 9 0 0
To close revenue and expense ledger accounts.
31 Home Office 6 6 0 0
Income Summary 6 6 0 0
To transfer net loss to Home Office ledger account.
c. Solis Company
Adjusting and Closing Entries for Home Office
20 05
Dec. 31 Loss: Branch 6 6 0 0
Investment in Branch 6 6 0 0
To record net loss reported by branch.
31 Sales 3 9 4 0 0 0
Cost of Goods Sold 2 0 0 5 0 0
Operating Expenses 6 9 5 0 0
Loss: Branch 6 6 0 0
Income Summary 1 1 7 4 0 0
To close revenue and expense ledger accounts.
31 Income Summary 1 1 7 4 0 0
Retained Earnings 1 1 7 4 0 0
To close combined net income to Retained Earnings
ledger account.
50 Minutes, Medium
The McGraw-Hill Companies, Inc., 2006
Solutions Manual, Chapter 4 169
Calco Corporation Pr. 48
a. Calco Corporation
Journal Entries in Accounting Records of Home Office
20 05
Dec. 31 Equipment: Branch 5 0 0
Investment in Branch 5 0 0
To record acquisition of equipment by branch.
31 Cash in Transit 5 0 0 0
Investment in Branch 5 0 0 0
To record cash in transit from branch.
31 Sales 4 8 0 0 0
Shipments to Branch 4 0 0 0 0
Investment in Branch 8 0 0 0
To eliminate shipments to branch from sales ($45,000
+ $3,000 = $48,000) and to record shipments at cost
($48,000 1.2 = $40,000).
b. Calco Corporation
Journal Entries in Accounting Records of Branch
20 05
Dec. 31 Home Office 2 0 0 0
Trade Accounts Receivable 2 0 0 0
To record collection of trade accounts receivable by
home office.
31 Operating Expenses 4 5 0 0
Home Office 4 5 0 0
To correct amount of expenses allocated to branch by
home office ($5,000 $500 = $4,500).
31 Home Office 8 0 0 0
Shipments from Home Office 8 0 0 0
To eliminate intracompany markup on merchandise
received from home office ($48,000 x 1/6 = $8,000).
Net income $ 8 7 0 0 0 $ 2 0 0 0 0 $ 1 0 7 0 0 0
Less:
Reduction in preliminary net
income recorded in Home
Office ledger account:
Operating expenses not
recorded $ 1 2 0 0
Understatement of shipments
from home office ($7,840
$7,480) 3 6 0
Loss on disposal of branch
equipment 2 5 0
Repair bill paid by branch for
home office $ 3 7 5
Excess merchandise returned
by branch to home office not
recorded by home office 5 2 0 5
Subtotals $ 1 4 8 9 7 0 $ 5 5 8 0 $ 1 8 1 0 $ 1 4 5 2 0 0
Balances after adjustments 1 4 3 3 9 0 1 4 3 3 9 0
Totals $ 1 4 8 9 7 0 $ 1 4 8 9 7 0 $ 1 4 5 2 0 0 $ 1 4 5 2 0 0
20 05
Apr 30 Cost of Goods Sold 3 6 0
Home Office 3 6 0
To correct error in recording amount of merchandise
received from home office on Feb. 8, 2005
[($49.00 $46.75) x 160 = $360].
30 Operating Expenses 1 2 0 0
Loss on Disposal of Equipment 2 5 0
Home Office 1 4 5 0
To record operating expenses allocated to branch by
home office and loss reported on disposal of branch
equipment.
30 Home Office 1 8 1 0
Income Summary 1 8 1 0
To correct preliminary net income recorded for quarter
ended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.
20 05
Apr 30 Investment in Branch 3 5 0
Trade Accounts Receivable 3 5 0
To record collection by branch of home office trade
accounts receivable.
30 Investment in Branch 2 7 5 0
Trade Accounts Payable 2 7 5 0
To record liability for merchandise received by branch
on Feb. 14, 2005.
30 Investment in Branch 1 1 9 0 0
Income: Branch 1 1 9 0 0
To record net income of branch for quarter ended
Apr. 30, 2005: $13,710 $1,810 = $11,900.
A
30 Inventories in Transit 5 2 0 5
Investment in Branch 5 2 0 5
To record excess merchandise returned to home
office by branch on Apr. 30, 2005.
20 05
Dec. 31 Arnold Nance, Capital 1 2 0 0
Allowance for Overvaluation of Inventories:
Vida Branch 1 2 0 0
To establish allowance for overvaluation of
beginning inventories of branch
[$6,000 ($6,000 1.25) = $1,200].
31 Sales 1 0 5 0 0 0
Cost of Goods Sold 8 4 0 0 0
Allowance for Overvaluation of Inventories:
Vida Branch 2 1 0 0 0
To correct journal entries for shipments of
merchandise to branch ($105,000 1.25 = $84,000).
31 Cash in Transit 1 0 0 0 0
Investment in Branch 1 0 0 0 0
To record cash in transit from branch:
Dec. 30, 2005 $ 3,000
Dec. 31, 2005 7,000
Total cash in transit $10,000
b. Arnies
Journal Entries in Accounting Records of Vida Branch
20 05
Dec. 31 Operating Expenses 1 2 0 0 0
Home Office 1 2 0 0 0
To record expense allocated to branch by the home
office.
31 Cash in Transit 3 0 0 0
Home Office 3 0 0 0
To record cash in transit from home office.
31 Inventories in Transit 1 0 0 0 0
Home Office 1 0 0 0 0
To record shipment of merchandise in transit from
home office, determined as follows:
Inventories, Jan. 1, 2005 $ 6,000
Shipments from home office 105,000
Subtotal $111,000
Less: Cost of goods sold per
branch accounting
records $93,000
Inventories, Dec. 31,
2005, per branch
accounting records 8,000 101,000
Shipment of merchandise in
transit from home office $ 10,000
Balance sheet
Cash 4 1 0 0 0 1 6 0 0 0 5 7 0 0 0
Trade accounts receivable (net) 2 0 0 0 0 2 2 0 0 0 4 2 0 0 0
Inventories 4 0 0 0 0 1 8 0 0 0 (a) ( 3 6 0 0 ) 5 4 4 0 0
Investment in Vida Branch 3 5 0 0 0 (c) ( 3 5 0 0 0 )
Allowance for overvaluation of
inventories: Vida Branch ( 2 2 2 0 0 ) (a) 2 2 2 0 0
Equipment (net) 1 5 0 0 0 0 1 5 0 0 0 0
Trade accounts payable ( 2 3 0 0 0 ) ( 2 3 0 0 0 )
Accrued liabilities ( 2 0 0 0 ) ( 2 0 0 0 )
Note payable, due 2008 ( 5 1 0 0 0 ) ( 5 1 0 0 0 )
Home office ( 3 5 0 0 0 ) (c) 3 5 0 0 0
Arnold Nance, capital (from
statement of proprietors
capital above) ( 2 2 7 4 0 0 )
Totals - 0 - - 0 - - 0 - - 0 -
(a) To reduce ending inventories ($18,000 x 0.20 = $3,600) and cost of goods sold ($93,000 x 0.20 = $18,600) of
branch to cost, and to eliminate balance of Allowance for Overvaluation of Inventories: Vida Branch ledger account.
(b) To increase net income of home office by portion of merchandise markup that was realized by branch sales.
(c) To eliminate reciprocal ledger account balances.
20 05
Dec 31 Investment in Vida Branch 1 9 0 0 0
Income: Vida Branch 1 9 0 0 0
To record net income reported by branch.
31 Income Summary 8 6 6 0 0
Arnold Nance, Capital 8 6 6 0 0
To close Income Summary ledger account (net income
for year) to proprietors capital account.