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    Engvall: Complete the correct amount of operating income or

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    Engvall, Inc is a manufacturer with a calender accounting year. A physical inventory is taken on January 1, and any items not in inventory are charged to cost of goods sold. The current year is 2010 and all transactions occur in 2010 unless otherwise specified.

    a. In late September, Engvall signed a $3,500,000 contract with Hawthorn, Inc. for production and installation of custom machinery at Hawthorn's plant. On December 22, Engvall shipped Hawthorn the completed the machinery, and billed Hawthorn $3,500,000 debiting a receivable and crediting revenue. Engvall also debited COGS and credited inventory for $2,550,000, the cost of producing the machinery. The machinery is of no use to Hawthorn without installation and calibration by Engvall employees. This work had not been begun as of December 31.

    b. In August, Engvall signed a lease on an office building to be used for administrative (not manufacturing) purposes. An advance rent payment of $1,000,000 was made and debited to Prepaid Rent. The controller forgot to make the year-end adjusting entry to record the expiration of $450,000 of this prepayment during 2010.

    c. In December, Engvall shipped goods on consignment to a dealer, booking revenue and an account receivable of $350,000 and cost of goods sold of $235,000. None of these goods had actually been sold to a customers by year-end.

    d. Two years ago, Engvall acquired another manufacturing company whose operations have been integrated with Engvall's. The acquisition price included $5,000,000 for goodwill, which has not been amortized. An appraiser with expertise in this industry estimates that the goodwill has lost 45% of its original value due to changes in the industry. Engvall's management disregarded this appraisal in preparing the financial statements.

    e. Engvall sells its products with one-year warranty. Estimated cost of servicing warranties on products sold in 2010 is $893,000. During the year, Engvall actually incurred warranty service costs of $842,000 to product warranty expense, and made no other entries to that account.


    For 2010, Engvall reported operating income (before interest and taxes) of $20,000,000. Complete the correct amount of operating income/loss, showing any necessary calculations and explaining your reasoning.

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    Solution Summary

    Your analysis of corrected operating income/loss is shown in excel (attached) with each item indicating the accounts changed. Click in cells to see calculations.