Intermediate Accounting/Week 2

Week 2 Exercises

E4-16 – Statement of Cash Flows Preparation

The following summary transactions occurred during 2011 for Bluebonnet Bakers:

Cash Received from:
Customers	$380,000
Interest on note receivable	6,000
Principal on note receivable	50,000
Sale of investments	30,000
Proceeds from Notes Payable	100,000
Cash Paid for:
Purchase of inventory	160,000
Interest on note payable	5,000
Purchase of equipment	85,000
Salaries to employees	90,000
Principle on notes payable	25,000
Payment on dividends to shareholders	20,000

The balance of cash and cash equivalents at the beginning of 2011 was $17.000.

Required:

Prepare a statement of cash flows for 2011 for Bluebonnet Bakers. Use the direct method for reporting operating activities.

E4-19 – Statement of cash flows directly from transactions

The following transactions occurred during March 2011 for the Wainwright Corporation. The company owns and operates a wholesale warehouse.

1. Issued 30,000 shares of capital stock in exchange for $300,000 in cash.

2. Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable was signed for the balance owed.

3. Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.

4. Credit sales for the month totaled $120,000. The cost of goods sold was $70,000.

5. Paid $5,000 in rent on the warehouse building for the month of March.

6. Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2011.

7. Paid $70,000 on account for the merchandise purchased in 3.

8. Collected $55,000 from customers on account.

9. Recorded depreciation expense of $1,000 for the month on the equipment.

Required:

1. Analyze each transaction and classify each as a financing, investing and/or operating activity (a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark in the appropriate columns.

Example:

Financing Investing Operating

1. $300,000

2. Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $40,000.

E4-22 – Statement of cash flows; indirect method

Presented below is the 2011 income statement and comparative balance sheet information for Tiger Enterprises.

TIGER ENTERPRISES

Income Statement

For the Year Ended December 31, 2011

($ in thousands)		$7,000
Sales Revenue
Operating expenses
Cost of goods sold	$3360
Depreciation	240
Insurance	100
Administrative and other	1,800
Total operating expenses		5,500
Income before income taxes		1,500
Income tax expense		600
Net Income		$900
Balance Sheet Information	Dec. 31, 2011	Dec. 31, 2010
Assets
Cash	$300	$200
Accounts Receivable	750	830
Inventory	640	600
Prepaid Insurance	50	20
Plant and Equipment	2,100	1,800
Less: Accumulated depreciation	(840)	(600)
Total assets	$3,000	$2,850
Liabilities and Shareholders’ Equity	Dec. 31, 2011	Dec. 31, 2010
Accounts payable	$300	$360
Payables for administrative and other expenses	300	400
Income taxes payable	200	150
Note payable (due 12/31/2012)	800	600
Common stock	900	800
Retained earnings	500	540
Total liabilities and shareholders’ equity	$3,000	$2,850

Required:

Prepare Tiger’s statement of cash flows, using the indirect method to present cash flows from operating activities. (Hint: You will have to calculate dividend payments.)

Judgment Case 4-9

Each of the following situations occurred during 2011 for one of your audit clients:

1. The write-off of inventory due to obsolescence.

2. Discovery that depreciation expenses were omitted by accident from 2010’s income statement.

3. The useful lives of all machinery were changed from eight to five years.

4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.

5. Ten million dollars face value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of $500,000. The company considers the event unusual and infrequent.

6. Restructuring costs were incurred.

7. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.

8. The inventory costing method was changed from FIFO to average cost.

Required:

1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):

a. As an extraordinary item.

b. As an unusual or infrequent gain or loss.

c. As a prior period adjustment.

d. As a change in accounting principle.

e. As a discontinued operation.

f. As a change in accounting estimate.

g. As a change in accounting estimate achieved by a change in accounting principle.

2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown to answer requirements 1 and 2.

Situation	Treatment (a-g)	Financial Statement Presentation (CO, BC, or RE)
1.
2.
3.
4.
5.
6.
7.
8.

E5-3 – Installment sales method; journal entries

Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2011 and 2012.

	2011	2012
Installment sales	$360,000	$350,000
Cost of installment sales	234,000	245,000
Cash collections on installment sales during: 2011 2012	150,000 -	100,000 120,000

Required:

Prepare summary journal entries for 2011 and 2012 to account for the installment sales and cash collections. The company uses the perpetual inventory system.

E5-10 – Long-term contract; percentage of completion, completed contract and cost recovery methods

On June 15, 2011, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of 2013, just in time for the 2013 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions)

	2011	2012	2013
Costs incurred during the year	$40	$80	$50
Estimated costs to complete as of 12/31	120	60	-

Required:

1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage-of-completion method.

2. How much revenue will Sanderson report on its 2011 and 2012 income statements related to this contract using the percentage-of-completion method?

3. Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method.

4. Determine the amount of revenue, cost and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate.

5. Suppose the estimated costs to complete at the end of 2012 are $80 million instead of $60 million. Determine the amount of gross profit or loss to be recognized in 2012 using the percentage-of-completion method.

5-23 – Using ratios to test reasonableness of data

Review the information pertaining to the audit of Covington Pike Corporation in problem 5-23.  Use the list of ratios and the notes provided to approximate the current year’s balances in the form of a balance sheet and income statement, to the extent the information allows.  Accompany those financial statements with calculations you use to estimate each amount reported.

You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPA’s often use ratios to test the reasonableness of accounting numbers provided by the client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still hold, prior years’ ratios can be used to estimate what current balances should approximate. However, you never actually performed this kind of analysis until now. The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these reflect the relationships maintained by Covington Pike in recent years.

Profit margin on sales = 5%

Return on assets = 7.5%

Gross profit margin = 40%

Inventory turnover ratio = 6 times

Receivables turnover ratio = 25

Acid-test ratio = .9

Current ratio = 2 to 1

Return on shareholders’ equity = 10%

Debt to equity ratio = 1/3

Times interest earned ratio = 12 times

Jotted in the margin are the following notes:

· Net income $15,000

· Only one short-term note ($5,000); all other current liabilities are trade accounts

· Property, plant, and equipment are the only noncurrent assets

· Bonds payable are the only noncurrent liabilities

· The effective interest rate on short-term notes and bonds is 8%

· No investment securities

· Cash balance totals $15,000

Required:

You are requested to approximate the current year’s balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported.