Accounting Three Problems

1. Dexter's Fine Jewelry uses the LIFO cost flow assumption and has a beginning inventory which includes four LIFO layers as follows:
Beginning inventory
Year 1 layer
Year 2 layer
Year 3 layer
Year 4 layer

# of units
150
100
50
200

Unit cost
$50.00
60.00
65.00
75.00

During Year 5, Dexter purchased 4,000 units and sold 4,250. Dexter has to decide whether to purchase 250 additional units now at a price of $140 per unit or wait until February and pay $120 per unit due to an off-season discount promotion by the supplier.
What is the cash cost to Dexter's Fine Jewelry under each alternative? Assume that the tax rate is a flat 30%. (10 points) Alternative A = Buy now; Alternative B = Buy in February.
2. Using accounts receivable to achieve off-balance-sheet financing. Ares Appliance Store has $100,000 of accounts receivable on its books on January 2, 2009. These receivables are due on December 31, 2009. The firm wants to use these accounts receivables to obtain financing. (10 points)

a. Prepare journal entries during 2009 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $100,000 from its bank, using the accounts receivable as collateral. The loan is repayable on December 31, 2009, with interest at 8%.
(2) The firm sells the accounts receivable to the bank for $92,593. It collects amounts due from customers on these accounts and remits the cash to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Ares Appliance Store structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?

3. Washington Corporation purchases a new machine for $50,000 on January 1, 2008. The  machine has a four-year estimated service life and an estimated salvage value of zero. After paying the cost of running and maintaining the machine, the firm enjoys a $25,000-per-year excess of revenues over expenses (except depreciation and taxes). In addition to the $25,000 from the machine, other pretax income each year is $35,000. Washington uses straight-line depreciation for financial reporting and depreciates the machine for tax reporting using the following percentages: 33% in the first year, 44% in the second, 15% in the third, and 8% in the fourth. Depreciation is Woodward’s only temporary difference. Washington pays combined federal and local income taxes at a rate of 40% of taxable income. (10 points)

a. Compute the amount of income taxes currently payable for each of the four years.
b. Compute the carrying value of the machine for financial reporting and the tax basis of the machine for tax reporting at the end of each of the four years. The tax basis is the amortized cost for income tax purposes.
c. Compute the amount of income tax expense for each of the four years.
d. Give the journal entries to record income tax expense and income tax payable for 2008 through 2011.