In an effort to boost sales in the current year, Roy’s Gym has implemented a new program (A+)

In an effort to boost sales in the current year, Roy\’s Gym has implemented a new program where members do not have to pay for their annual membership until the end of the year. The program seems to have substantially increased membership and revenues. Below are year-end amounts.

MembershipRevenues AccountsReceivable

Last year $ 112,000 $ 5,400

Current year 310,000 141,000

Arnold, the owner, realizes that many members have not paid their annual membership fees by the end of the year. However, Arnold believes that no allowance for uncollectible accounts should be reported in the current year because none of the nonpaying members\’ accounts have proven uncollectible. Arnold wants to use the direct write-off method to record bad debts, waiting until the end of next year before writing off any accounts.

Required:

1. Do you agree with Arnold\’s reasoning for not reporting any allowance for future uncollectible accounts?

2. Suppose that similar programs in the past have resulted in uncollectible accounts of approximately 80%. If Arnold uses the allowance method, what should be the balance of allowance for uncollectible accounts at the end of the current year?

3. Based on your answer in Part 2, for what amount will total assets and expenses be misstated in the current year if Arnold uses the direct write-off method? Ignore tax effects.

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Pearl E. White Orthodontist specializes in correcting misaligned teeth (A+)

Pearl E. White Orthodontist specializes in correcting misaligned teeth. During 2012, Pearl provides services on account of $584,000. Of this amount, $87,000 remains receivable at the end of the year. An aging schedule as of December 31, 2012, is provided below.

Age Group Amount Receivable Estimated Percent Uncollectible

Not yet due $25,000 15%

0-90 days past due 19,000 20%

91-180 days past due 6,000 35%

More than 180 days past due 37,000 65%

Total $87,000

Required:

1. Calculate the allowance for uncollectible accounts. (Omit the \\\”$\\\” sign in your response.)

2. Record the December 31, 2012, adjustment, assuming the balance of allowance for uncollectible accounts before adjustment is $2,300 (credit). (Omit the \\\”$\\\” sign in your response.)

3. On July 19, 2013, a customer\\\’s account balance of $5,000 is written off as uncollectible. Record the write-off

4. On September 30, 2013, the customer whose account was written off in Part 3 unexpectedly pays the full amount. Record the cash collection.

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The following events occur for The Underwood Corporation during 2012 and 2013, its first two years of operations (A+)

The following events occur for The Underwood Corporation during 2012 and 2013, its first two years of operations.

June 12, 2012 Provide services to customers on account for $36,400.

September 17, 2012 Receive $12,000 from customers on account.

December 31, 2012 Estimate that 40% of accounts receivable at the end of the year will not be received.

March 4, 2013 Provide services to customers on account for $59,000.

May 20, 2013 Receive $19,200 from customers for services provided in 2012.

July 2, 2013 Write off the remaining amounts owed from services provided in 2012.

October 19, 2013 Receive $16,300 from customers for services provided on account in 2013.

December 31, 2013 Estimate that 45% of accounts receivable at the end of the year will not be received.

Required:

1. Record transactions for each date. (Omit the \”$\” sign in your response.)

2. Post transactions to the following accounts: Cash, accounts receivable, and allowance for uncollectible accounts.

3. Calculate the net realizable value of accounts receivable at the end of 2012 and 2013.

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Outdoor Expo provides guided fishing tours (A+)

Outdoor Expo provides guided fishing tours. The company charges $200 per person but offers a 10% discount to parties of four or more. Consider the following transactions during the month of May.

May 2 Charlene books a fishing tour with Outdoor Expo for herself and four friends at the group discount price ($900 = $180 × 5). The tour is scheduled for May 7.

May 7 The fishing tour occurs. Outdoor Expo asks that payment be made within 30 days of the tour and offers a 4% discount for payment within 15 days.

May 9 Charlene is upset that no one caught a single fish and asks management for a discount. Outdoor Expo has a strict policy of no discounts related to number of fish caught.

May 15 Upon deeper investigation, management of Outdoor Expo discovers that Charlene\’s tour was led by a new guide who did not take the group to some of the better fishing spots. In concession, management offers a sales allowance of 40% of the amount due.

May 20 Charlene pays for the tour after deducting the sales allowance.

Required:

1. Record the necessary transaction(s) for Outdoor Expo on each date. (Leave no cells blank. If no entry is required, select \”No journal entry required\” in the account field and zero (0) in the amount field. Round your answers to the nearest dollar amount. Omit the \”$\” sign in your response.)

2. Calculate net sales.

3. Show how Outdoor Expo would present net sales in its income statement

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Polzin Corporation produces two grades of wine from grapes that it buys from California growers (A+)

Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.

Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn\’t until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.

Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.

CoolDay LiteMist

Direct materials per liter $0.40 $1.20

Direct labor cost per liter $0.25 $0.50

Direct labor hours per liter 0.05 0.09

Total direct labor hours 150,000 27,000

Activity Cost Pool Cost Driver Estimated Expected Expected Use of

Overhead Use of Cost Drivers per Product

Cost Drivers CoolDay LiteMis

Grape processing Cart of grapes $145,860 6,600 6,000 600

Aging Total months 396,000 6,600,000 3,000,000 3,600,000

Bottling and corking Number of bottles 270,000 900,000 600,000 300,000

Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000

Maintain and Number of inspections240,800 800 350 450

inspect equipment

Total estimated overhead $1,241,660

Requirement:

Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
Prepare a schedule assigning each activity\’s overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter?
Compute the total manufacturing cost per liter for both products under ABC.

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Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes (A+)

Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.

Overhead Cost Pools Amount

Purchasing $ 57,000

Handling materials 82,000

Production (cutting, milling, finishing) 210,000

Setting up machines 85,000

Inspecting 90,000

Inventory control (raw materials and finished goods) 126,000

Utilities 180,000

Total budget overhead costs $830,000

For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.

Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse\’s request, Neal and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Activity Cost Pools Cost Drivers Expected

Use of

Cost Drivers

Purchasing Number of orders 600

Handling materials Number of moves 8,000

Production (cutting, milling, finishing) Direct labor hours 100,000

Setting up machines Number of setups 1,250

Inspecting Number of inspections 6,000

Inventory control Number of components 168,000

(raw materials and finished goods)

Utilities Square feet occupied 90,000

David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David\’s request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.

Direct materials $103,600

Direct labor $112,000

Machine hours 14,500

Direct labor hours 5,000

Number of purchase orders 60

Number of material moves 800

Number of machine setups 100

Number of inspections 450

Number of components 1 6,000

Number of square feet occupied 8,000

Requirement:

Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
What is the manufacturing cost per stairway under traditional costing?

What is the manufacturing cost per stairway under the proposed activity-based costing?

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Overton Electronics manufactures two large-screen television models (A+)

Overton Electronics manufactures two large-screen television models: the Royale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2011 was as follows.

Traditional Costing Royale Majestic

Direct materials $700 $420

Direct labor ($20 per hour) 120 100

Manufacturing overhead ($38 per DLH) 228 190

Total per unit cost $1,048 $710

In 2011, Overton manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was: Royale $552 or ($1,600 – $1,048), and Majestic $590 or ($1,300 – $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.

Before finalizing its decision, management asks Overton\’s controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2011.

Activity Cost Driver Estimated Overhead Expected Use Activity-Based Overhead Rate

of Cost Drivers

Purchasing Number of orders $1,200,000 40,000 $30/order

Machine setups Number of setups 900,000 18,000 50/setup

Machining Machine hours 4,800,000 120,000 40/hour

Quality control Number of inspections 700,000 28,000 25/inspection

The cost drivers used for each product were:

Cost Driver Royale Majestic Total

Purchase orders 15,000 25,000 40,000

Machine setups 5,000 13,000 18,000

Machine hours 75,000 45,000 120,000

Inspections 9,000 19,000 28,000

Requirement:

Assign the total 2011 manufacturing overhead costs to the two products using activity-based costing (ABC).
What was the cost per unit and gross profit of each model using ABC costing?

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FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers (A+)

FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home 1 model is a high-volume (54,000 units), half-gallon cylinder that holds 2½ pounds of multipurpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,280 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models.

The company\’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Cost Driver Estimated Expected Useof Expected Use

Pool Overhead Cost Drivers of Drivers by Product

Home Commercial

Receiving Pounds $70,350 335,000 215,000 120,000

Forming Machine 150,500 35,000 27,000 8,000

hours

Assembling Number 390,600 217,000 165,000 52,000 of parts

Testing Number 51,000 25,500 15,500 10,000

of tests

Painting Gallons 52,580 5,258 3,680 1,578

Packing Pounds 787,250 335,000 215,000 120,000 and shipping

$1,502,280

Requirement:

Under traditional product costing, compute the total unit cost of both products.
Under ABC, complete the schedule showing the computations of the activity-based overhead rates (per cost driver).
Complete the schedule assigning each activity\’s overhead cost pool to each product based on the use of cost drivers.
Compute the total cost per unit for each product under ABC

Classify each of the activities as a value-added activity or a non-value-added activity.

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Pop Corporation acquired a 70 percent interest in Stu Corporation (A+)

Pop Corporation acquired a 70 percent interest in Stu Corporation on January 1,201I\’ for $1,400,000, when Stu\’s stockholders\’ equity consisted of $1,000,000 capital stock and $600,000 retained earnings. On this date, the book value of Stu\’s assets and liabilities was equal to the fair value, except for inventories that were undervalued by $40,000 and sold in 2011, and plant assets that were undervalued by $160,000 and had a remaining useful life of eight years from January 1. Stu\’s net income and dividends for 2011 were $140,000 and $20,000, respectively.

Separate-company balance sheet information for Pop and Stu Corporations at December 31, 2011, follows (in thousands):

Pop Stu

Cash $ 120 $40

Accounts receivable-customers 880 400

Accounts receivable from PoP – 20

Dividends receivable 14 -

Inventories 1,000 640

Land 200 300

Plant assets-net 1,400 700

Investment in Stu 1,442 -

$5,060 $2,100

Accounts payable-suppliers $ 600 160

Accounts payable to Stu 20 -

Dividends payable 80 20

Long-term debt 1,200 200

Capital stock 2,000 1,000

Retained earnings 1,156 720

$5,060 $2,100

Required:

Prepare consolidated balance sheet work papers for Pop Corporation and Subsidiary at December 31, 2011.

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Par Corporation acquired 70 percent of the outstanding common stock of Set Corporation on January 1, 2011, for $350,000 cash (A+)

Par Corporation acquired 70 percent of the outstanding common stock of Set Corporation on January 1, 2011, for $350,000 cash. Immediately after this acquisition the balance sheet information for the two companies was as follows (in thousands):

Set

Par Book Value Book Value Fair Value

Assets

Cash 70 40 40

Receivables-net 160 60 60

Inventories 140 60 100

Land 200 100 120

Buildings-net 220 140 180

Equipment-net 160 80 60

Investment in Set 350

Total assets 1300 480 560

Liabilitie s and Stockholders\’ Equity

Accounts payable 180 160 160

Other liabilities 20 100 80

Capital stock, $20 par 1000 200

Retained earnings 100 20

Total equities 1300 480

REQUIRED

1- Prepare a schedule to allocate the difference between the fair value of the investment in Set and the book value of the interest to identifiable and unidentifiable net assets.

2 Prepare a consolidated balance sheet for Par Corporation and Subsidiary at January 1, 2011.

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