Accounting HW

BA 284T Final Exam Fall 2021

FINANCIAL ACCOUNTING HOMEWORK

The questions are based on the fiscal 2020 financial statements of Deere & Company (Deere). When an account title is in quotes (e.g., “Cost of sales”) it refers to a specific line item from Deere’s financial statements or footnotes. All dollar figures in the exam (except as noted) are expressed in millions of dollars, which is consistent with the presentation in Deere’s financial statements.

I. Transactions, Events, and Estimates

Using information in the financial statements and notes, provide the journal entry Deere must have made in fiscal 2020 for the following transactions and events. Assume that Deere recorded these items in a single entry and that the company closes its books annually. You do not need to consider closing entries. Use Deere financial statement line items or other reasonable descriptors as account titles. What is very important is that you indicate whether each account you use is an asset (A), liability (L), owners’ (shareholders’) equity (OE), revenue (R), or expense (E) account. If no entry is required, explain why. Be sure to state any assumptions you make. (4 points each)

The template that follows provides a place for you to provide your answer. Although there is place for multiple debits and credits, your answer might not need them all.

1. Total Depreciation and Amortization expense for fiscal 2020.

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

2. Repurchases of “Common Stock” in fiscal 2020.

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

3. Refer to only to Deere’s income statement, balance sheet, and Note 11—Unconsolidated Affiliated Companies (p. 55). Provide the journal entry that Deere made in fiscal 2020 to record “Equity income (loss) in unconsolidated affiliates.”

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

4. The adjusting entry Deere would have made if the unadjusted trial balance for “Selling, administrative, and general expenses” was $3,100 (million, Dr.) at November 1, 2020.

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

For the following three questions, provide the journal entry that Deere would make for each hypothetical transaction. Follow the procedures Deere outlines in Note 2—Summary of Significant Accounting Policies and your knowledge of generally accepted accounting principles.

5. Deere determined that one of its customers would not pay the $2 million it owes the company

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

6. Deere paid engineers $15 million to work on an electric engine prototype for its agricultural equipment products. The company hopes to release a line of electric equipment before 2030.

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

7. Deere purchased $100 million of green and yellow paint for use in the manufacturing of agricultural equipment. Assume the purchase was on account.

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptions (if any) and explanation

II Inventories

Refer to John Deere’s financial statements and Note 15—Inventories on page 61 of Deere’s financial statements. Deere uses the last-in-first-out (LIFO) cost flow assumption to value a large portion of their inventories.

1. Estimate the cumulative tax savings as of November 1, 2020 that Deere has achieved by using LIFO instead of “current cost” (i.e., FIFO) to value its inventories. State your assumptions.

2. Estimate how long, in days, Deere took to sell its inventory in 2020 and 2019 assuming the company used LIFO to value its inventories. Repeat your analysis assuming they used FIFO and comment on the differences in results. To save time, use ending balances rather than average ones where relevant. Also, assume that the change in the “adjustment to LIFO value” is not large enough for you to adjust for. Recall that fiscal year 2020 has 52 weeks and fiscal 2019 has 53 weeks. Show your work to receive full credit.

Days Sales in Inventory 2020 (LIFO)

Days Sales in Inventory 2019 (LIFO)

Days Sales in Inventory 2020 (FIFO)

Days Sales in Inventory 2019 (FIFO)

Comment on differences between LIFO and FIFO results. Explain which is the better efficiency metric.

3. Explain to a non-accountant what the “pretax favorable income effect from the liquidation of LIFO inventory during 2020” represents. Is the amount material (i.e., significant)? Explain why or why not. You need not use this entire page to receive full credit.

What it represents

Is the amount material? Explain

III Long Term Assets: Capitalized Software

Refer to Note 16. Property and Depreciation on page 61of Deere’s 2020 Form 10-K. Refer to the discussion of capitalized software development costs (second paragraph below the table).

1. Use the following T-accounts to provide a labelled reconciliation of the beginning (November 3,

2019 and ending (November 1, 2020) balances in Capitalized Software Costs and the associated Accumulated Amortization thereon. Assume that Deere disposed of some fully amortized software in 2020 and that there were no foreign currency impacts on these accounts in 2020. Capitalized Software Costs

Accumulated Amortization, Capitalized Software Costs

2. Considering the company’s policy on Software Costs, does the annual amortization figure make economic sense? Explain.

IV. Warranties

The questions are based on the fiscal 2020 financial statements of Deere & Company (Deere). When an account title is in quotes (e.g., “Cost of sales”) it refers to a specific line item from Deere’s financial statements or footnotes. All dollar figures in the exam (except as noted) are expressed in millions of dollars, which is consistent with the presentation in Deere’s financial statements.

Refer to Note 2. Significant Accounting Policies: Product Warranties on page 41 and Note 21:

Commitments and Contingencies on page 64 of the Deere 2020 Form 10-K. In note 21, Deere comingles liabilities for Product Warranties and for Extended Warranties.

Assume that John Deere sold a 1765 Rigid Drawn Planter to an agricultural customer for $75,000 on account. The Planter cost Deere $60,000 to manufacture. Deere estimates that, on average, the cost to Deere of the embedded Product Warranty is $1,500 per Planter.

The customer also purchased a three-year Extended Warranty that covers engine and powertrain components and most major repairs. The customer paid an additional $5,000 for the Extended Warranty.

1. Provide all journal entries Deere would make for the sale of the Planter and the Extended Warranty.

Sale of the Planter (combine all entries)

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$

Sale of the Extended Warranty

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$

2. The table on page 64 is reproduced below. For each line in the table indicate with a check mark (ü) whether it relates to the Product Warranty Liability or the Liability for Extended Warranties.

Product Warranty	Extended Warranty
ü	ü
ü	ü
ü	ü

V. Leases

Refer to Note 3. New Accounting Standards (Leases) on page 43 and Note 25. Leases on page 68 of Deere’s 2020 Form 10-K.

Assume that Deere entered a new finance lease for a building (as lessee) on November 2, 2020 (the first day of fiscal year 2021). The lease terms are:

· The lease runs for 4 years, ending November 1, 2024

· Annual lease payments of $1,000,000 (i.e., a total of $4,000,000) are due on the first day of the fiscal year.

o That is, $1,000,000 is paid on November 2, 2020, November 2, 2021, November 2, 2022, and November 2, 2023.

· Deere faces borrowing costs of 4%.

1. What journal entry will Deer record on November 2, 2020, the date it signs the lease and makes the first payment?

Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Dr.			$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Assumptio	ns (if any)

2. What journal entries will Deere record on November 1, 2021, the last day of fiscal 2021. Assume that Deere closes its books annually. There are two entries.

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$

3. What will the balance sheet value for the right to use leased asset and liability be on November 2, 2023, the first day of fiscal 2024? State your assumptions.

Right to use asset

Right to use liability

VI. Acquisitions and Dispositions

Refer to Note 4 Acquisitions and Dispositions on page 46 of the 2020 Deere Form 10-K. At the top of the column on the left side of that page, Deere outlines the 2019 sale of its construction and forestry retail locations in Canada. Using information in that note, reproduce the journal entry Deere would have recorded for that disposition. The figure below provides more lines than you may need. So, don’t assume that you need information in each line. Please indicate whether each account is an asset, liability, owners’ equity, revenue (including gains), or expense (including losses). Hint: make sure your entry balances!

Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Dr.		$	A, L, OE, R, E
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$
Cr.			A, L, OE, R, E	$

VII. Marketable Securities

Refer to Note 12. Marketable Securities on page 56 of Deere’s 2020 Form 10-K. Use the tables below to indicate how the following hypothetical transactions would impact Deere’s performance in the relevant years. Cells with “$” do not need to be filled in. Use the remaining (i.e., empty) cells to present your answer. You do not need to have a value in each of the empty cells in any given year.

Each investment scenario is independent of the other. Assume neither investment is part of Deere’s financial services business.

Investment in ABC Co. shares (equity securities)

· On June 1, 2020 Deere purchased two shares of ABC Co. for $100 each.

· On October 1, 2020, Deere sold one of the shares of ABC Co. for $125.

· Shares of ABC Co. were trading for $130 on November 1, 2020 (the final day of fiscal 2020).

· Shares of ABC Co. were trading for $120 on November 1, 2021 (the final day of fiscal 2021).

· On October 1, 2022, Deere sold its remaining share of ABC Co. for $127.

à note the order of the years	2020	2021	2022
Revenues
Operating Expenses
Operating Income	$	$	$
Other Income, net
Income before Tax	$	$	$
Income Tax expense	$	$	$
Net Income	$	$	$
Pre-Tax Unrealized gains (losses) on Available-for-Sale Securities
Pre-Tax Reclassification of realized (gains) loss to Other Income
Income Tax effect	$	$	$
Other Comprehensive Income (after tax)	$	$	$
Comprehensive Income	$	$	$

Investment in XYZ Co. bonds (debt securities)

· On June 1, 2020 Deere purchased two XYZ Co. bonds Co. for $100 each.

· On October 1, 2020, Deere sold one of the XYZ Co. bonds for $105.

· XYZ Co. bonds were trading for $103 on November 1, 2020 (the final day of fiscal 2020).

· XYZ Co. bonds were trading for $102 on November 1, 2021 (the final day of fiscal 2021).

· On October 1, 2022, Deere sold its remaining XYZ Co. bond for $104.

à note the order of the years	2020	2021	2022
Revenues
Operating Expenses
Operating Income	$	$	$
Other Income, net
Income before Tax	$	$	$
Income Tax expense	$	$	$
Net Income	$	$	$
Pre-Tax Unrealized gains (losses) on Available-for-Sale Securities
Pre-Tax Reclassification of realized (gains) loss to Other Income
Income Tax effect	$	$	$
Other Comprehensive Income (after tax)	$	$	$
Comprehensive Income	$	$	$

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