[$ millions]

20X1

20X0

Revenues

$29,600

$29,300

Receivables, less allowance for uncollectibles

Of $220 and $270, respectively

$3,700

$3,440

Net income

$2,580

$2,740

Add back non-cash expenses: Bad debts

344

280

Answer the following questions assuming that (a) Marston uses the allowance method to estimate bad debts (provision for uncollectibles) and (b) all revenues are credit sales.

Inventory-Related Errors: Swamy Systems Incorporated prepared its draft 20X4 financial statements in February 20X5. The draft income statement showed a tentative net income of $550,000. After the draft statements were prepared, but prior to their approval and release, the auditors discovered several errors:

a. The company had made a calculation error in the worksheets used for the year-end 20X4 physical inventory. Inventory actually should have been $50,000 greater than recorded.

b. Inventory of $40,000 that was received on 29 December 20X4 (and included in the 31 December 20X4 physical inventory count) had not been recorded as an account payable until well into January 20X5.

c. The company had shipped goods worth $150,000 to a distant customer on 28 December 20X4. The revenue (and account receivable) was recorded by Swamy on 4 January 20X5.

1. What effect will correction of these errors have on the tentative net income of $550,000? What will the revised net income be?

2. Suppose that these errors were not discovered until after the 20X4 statements were released. What adjustment(s), if any, should the company make on its books in 20X5?

Sales (gross)ss)

$80,000

Sales returnsrns

2,000

Additional markups markups

9,000

Additional markup cancellations

5,000

Markdownsns

7,000

Purchases:

850,000

At retail

850,000

At cost

459,000

Purchase returns:

At retail

4,000

At cost

2,200

Freight on purchases

7,000

Beginning inventory

At retail

80,000

At cost

45,000

Markdown cancellations

3,000

Required:

1.      Estimate the valuation of the ending inventory and cost of goods sold using the gross margin method. Last year’s gross margin percentage was 51%.

2.      Estimate the valuation of the ending inventory and cost of goods sold using the retail sales method, which approximates LCM.

3.      Which method is likely to be more accurate? Comment.

Research and Development: In 20X1, Chiltoe Company purchased a building site for its proposed research and development laboratory at a cost of $140,000 plus legal fees of $8,000. The building was constructed during 20X2 at a cost of $500,000. The building was put into use on 2 January 20X3 and has been used exclusively for research and development activities ever since. The building has an estimated useful life of 25 years and a salvage value of $100,000 at the end of its useful life. The building is being amortized on a declining-balance basis at the rate of 6% per year. Management estimates that about 60% of the 20X4 projects are development activities that meet the criteria for capitalization of costs. The remaining projects either benefit the current period only or are abandoned before completion. Capitalized development costs are amortized over a six-year period with a full year of amortization provided in the year the project is completed. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 20X4 appears below.

Number of Projects

Salaries and Benefits

Materials, Supplies, the

Completed projects with

Long-term benefits

48

$470,000

$80,000

Abandoned projects or projects

That benefit current period only

25

280,000

110,000

Projects in process

Results indeterminate

7

60,000

50,000

Total

80

$810,000

$240,000

Required:

1. On the basis of the above information, prepare the capital asset and development costs sections of the balance sheet for Chiltoe Company at 31 December 20X4.

2. Determine the research and development-related items that will appear on the income statement for Chiltoe Company for the year ended 31 December 20X4. Assume an appropriate amount of building depreciation is included in “other” expenses above.

Asset Exchange - Two Transactions:

a. A large truck, which cost Company A $100,000 ($60,000 accumulated depreciation), has a market resale value of $ 70,000. The truck is traded to a dealer, plus a cash payment of $20,000, for a new truck that will perform essentially the same services as the old truck, but will look a lot nicer to the customers. The new truck has a list price of $95,000, although discounts of 3% to 4% may be negotiable.

b. Rochester Shipping Company received a new ferry that has a normal purchase price of $1.30 million. In exchange, the company gave the vendor a parcel of land and a building located on the waterfront. The market value of the land and building is $1.15 million. The land cost $300,000; the building cost $700,000 and is 30% depreciated. The vendor will use the land and building to operate a maintenance facility. The new ferry will enable Rochester Shipping to launch a new ferry service across Lake Ontario. The ferry was available because the buyer for whom it had been build went bankrupt and was unable to take delivery. The boat remained unsold for two years before Rochester was able to negotiate the exchange. Because the boat had been dormant for so long, it needed some upgrading and maintenance. Rochester agreed to pay for the necessary work, which was estimated to cost $350,000.

Q.no.1.-1

Cal.of estimated uincollectible accounts increasing or decreasing as a percentage of revenues:-

2001

2000

Bad debts

344

280

Revenues 

29600

29300

% in Revenues 

1.16%

0.96%

uncollectible a/cs are  increased in revenues 

0.21%

1.-2

cal. Of net write off of accounts receivable during 2001

closinsg balance of allowance 

220

344

270

Net Written off during 2001

294

1.-3

cal.of cash collected during 2001

To Bal b/d

3440

To credit sales 

29,600

by bad debt allowance

220

by Bal. c/d

3,700

Total

33,040

Total

33,040

1.-4

The provision for uncollectible  is  added to net income in the operating activities section of the statement of cash flows.  Because it is mere book entry. There is no cash outflows while write off as expense. It would be deducted as expense  in the net income while preparing income statement. thus we have add back with net income while preparing cash flow statement.  The amount of cash collections from receivables would not disclosed in the Balance sheet because, we are following the accounting principles of accrual basis not on cash basis. so it would not be disclosed in the financial statements.

Q>no.2

INVENTORY-RELATED ERRORS:

2.-1

Cal.of Revised net income after adjusting errors:-

Tentative net income

550,000

50,000

add:   Stock with customer on the closing

date of accounting period

150,000

payable (ie., in purchases)

40,000

2.-2

If these error are not discovered and rectified in the 2004 statements the following adjustments has to be made in 2005:-

Inventory a/c Dr.

50,000

stock with customer a/c Dr.

150,000

To Retained earnings a/c

160,000

To Accounts payable a/c

40,000

stock with customer a/c Dr.

150,000

To Sales a/c

150,000

Q.No.3-1

Valuation of Inventory under Gross Margin Method:

Opening sock at cost

45,000

purchases at cost 

459,000

less Purchases return at cost

2200

net purchases 

456,800

Frieght on purchases 

7,000

Total Cost available for sale

508,800

LESS: cost of sales:-

Sales gross less: Sales Return

78,000

GP (51% on sales)

39780

Cost of sales is 

38,220

The Closing Inventory value  is 

470,580

Cal.of cost of goods sold:-

Cost of goods sold = opening inventory + purchases-closing inventory+ Direct expenses 

(45000+456800-470580+7000)

The  cost of goods sold is  

38220

3.2

Valuation of Inventory under Retail sales Method:

cost

Retail

Opening sock 

45,000

80,000

purchases 

459,000

850,000

Purchases return 

Frieght on purchases 

7,000

__

cal.of cost of goods sold 

Goods  available for sale

508,800

926,000

Goods  available for sale

508,800

Cost/Retail price ratio 

55%

less: Ending inventory 

466400

Sales gross less: Sales Return

78,000

The Closing Inventory at retail prices 

848,000

Times Cost /retail price ratio

55%

3.3

The Retail Inventory method is more accurate than gross margin method. However, at the end of the each year, merchandised usually take a physical inventory at retail prices.  Since the retail prices are on the individual items (while at cost is not ), taking an inventory at retail prices is convenient thatn taking an inventory at cost.  Accountants can then compare the results of the physical inventory to the calculation ofo inventory at retail under the retail inventory method for the fourth quarter to determine whether a shortage exists.

5.a

Asset Exchange - 

Book value of the old asset is 

40000

Fair value of the asset is 

70,000

gain on disposal a/c

30,000

it is exchanged for a new truck with cash paypment 

20,000

cost of new truch is 

95000

less discount @4%

3800

purchase price of the new truck 

91200

gain/loss of exchange 

purchase price of the new truck 

91200

less; cash payment

20,000

The net value of the exchange of truck 

71,200

Thebook value of old truck

40,000

New truck a/c Dr.

91,200

Accumulated depreciation a/c Dr.

60,000

To Old truck a/c

100,000

To cash 

20,000

To gain on disposal a/c Dr.

31,200

b.

Book value of the land and building

790000

Fair value of the asset is 

1,150,000

it is exchanged for a new ferry  with cash paypment 

350,000

Purchase price of a new ferry 

1,300,000

cost involved for old ferry = Book value of exchanged asset+ cash cost of renovation +Recognised profit  or FV+cash payment

1500000

Loss of purchase of old ferry will not be  recognizedas loss.

Ferry a/c Dr.*

1,500,000

Accumulated depreciation a/c Dr.

210,000

To Old land and building a/c

1,000,000

To cash 

350,000

To gain on disposal a/c Dr.

360,000

(Note: * the normal purchase price of the new ferry is 1.30million, but the cost the of the purchase of the exchanged ferry is 1500000. we have incurred loss due to its exchange of asset. But it could not be recognized and shown in the journal entry.)

4

Research Development:

The land purchase price 

140000

legal fees

8000

Total cost of the land

148,000

building  2003

500,000

life 25  yrs  and salvage value 100,000

depreciation 

6% per year under WDV method

capitalisation of cost  60% of the project 2004

long term benefits 

550000

it will be amortized  over the period of 6years 

abandand project cost 

390000

projects in process

110000

1

workings: cal. Of depreciation:-

dep for 2003 

30000

Land and Building at cost 

648,000

dep for 2004

28200

less; Depreciation

58200

58200

long term benefits 

550000

less: amortisation for the year 2004

91667

Income statement for the year ending 2004:-

Research and development Revenue  expenditure:-

Abandand project cost 

390,000

Projects in process

110,000

Amortization of capitalised expenditure

91,667

Depreciation on building during the year 

28,200