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    Inventory, Income Tax, Cash Flows, Allowance Accounts

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    P 3-8
    The Ferdon Company uses a periodic inventory system. The following is partial information from its income statements for 2007 and 2008:
    2007 2008
    Beginning inventory $(2) $(4)
    Sales 220,000 (6)
    Purchases 118,000 140,000
    Purchases returns 2,000 3,000
    Ending Inventory 48,000 74,000
    Sales returns 1,000 3,000
    Gross Profit (1) 77,000
    Cost of goods sold 106,000 (5)
    Expenses 65,000 62,000
    Net Income (3) 15,000

    P 5-5
    The Houston Manufacturing Company presents the following partial list of account balances, after adjustments, as of December 31, 2007:
    Sales salaries expense 27,400 Sales personnel travel expenses 8,300
    Misc admin expenses 3,000 Property taxes and insurance expenses 9,000
    Sales Returns 5,000 Retained earnings, Jan 1, 2007 200,800
    Sales 468,200 Depreciation expense: sales equip 9,000
    Interest revenue 3,200 Advertising expenses 15,700
    Office & admin salaries 30,000 Misc rent revenue 5,900
    Delivery expenses 11,700 Common stock, $10 par 200,000
    Loss on sales of factory equip 4,100 Depreciation expense: buildings & office equip 14,400
    Cost of goods sold 232,200
    The following information is also available but is not reflected in the preceding accounts:

    1. The company sold Division E (a component of the company) on August 1, 2007. During 2007, Division E had incurred a pretax loss from operations of $16,000. However, because the acquiring company could vertically integrate Division E into its facilities, the Houston Manufacturing Company was able to recognize a $42,000 pretax gain on the sale.

    2. On January 2, 2007, without warning, a foreign country expropriated a factory of Houston Manufacturing Company which had been operating in that country. As a result of that expropriation, the company has incurred a pretax loss of $30,000.

    3. In preparing its 2007 adjusting entries at year-end, the company discovered that it had no recorded $10,100 of depreciation on its office building during 2006. This error did not affect the 2007 depreciation expense.

    4. The common stock was outstanding for the entire year. A cash dividend of $1.20 per share was declared and paid in 2007.

    5. The 2007 income tax expense totals $28,020 and consists of the following:
    Tax expense on income from continuing operations $32,250
    Tax credit on Division E operating loss (4,800)
    Tax expense on gain from sale of Division E 12,600
    Tax credit on loss from expropriation (9,000)
    Tax credit on 2006 depreciation error (3,030)

    P 5-19
    Statement of Cash Flows. A list of selected items involving the cash flow activities of the Topps Company for 2007 is presented here:

    a. Patent amortization expense, $3,500
    b. Machinery was purchased for $39,500
    c. At year-end, bonds payable with a face value of $20,000 were issued for $17,000
    d. Net income, $47,200
    e. Dividends paid, $16,000
    f. Depreciation expense, $12,900
    g. Preferred stock was issued for $13,600
    h. Investments were acquired for $21,000
    i. Accounts receivable increased by $4,300
    j. Land was sold at cost, $11,000
    k. Inventories increased by $15,400
    l. Accounts payable increased by $2,700
    m. Beginning cash balance, $19,400

    P 7-13
    Examination of Accounts Receivable. You are engaged in the annual examination of Faulane Company, a wholesale office supply business, for the year ended June 20, 2007. You have been assigned to examine the accounts receivable. The following information is available at June 30, 2007.
    1. Your review of accounts receivable and discussions with the client disclose that the following items are included in the accounts receivable (of both the control and the subsidiary ledgers):
    a. Accounts with credit balances total $1,746
    b. Receivables from officers total $8,500
    c. Advances to employees total $1,411
    d. Accounts that are definitely uncollectible total $1,187
    2. Uncollectible accounts are estimated to be 0.50% of the year's net credit sales of $16,750,000

    Required
    Prepare any journal entry (entries) required:
    1. to reclassify items that are not trade accounts receivable ,
    2. to write off uncollectible accounts, and
    3. to adjust the allowance for doubtful accounts.

    P 7-16
    Correction of Allowance Account. From inception of operations in 2004 Summit carried no allowance for doubtful accounts. Uncollectible receivables were expensed as written off, and recoveries were credited to income as collected. On March 1, 2008 (after the 2007 financial statements were issued), management recognized that accounts were necessary. A policy was established to maintain an allowance for doubtful accounts based on Summit's historical bad debt loss percentage applied to year-end accounts receivable. The historical bad debt loss percentage is to be recomputed each year based on the relationship of net write-offs to credit sales for all available past years up to a maximum of five years.
    Information from Summit's records for five years is as follows:

    Credit Accounts
    Year Sales Written Off Recoveries
    2004 $1,500,000 $15,000 $0
    2005 2,250,000 38,000 2,700
    2006 2,950,000 52,000 2,500s
    2007 3,300,000 65,000 4,800
    2008 4,000,000 83,000 5,000

    Accounts receivable balances were $1,250,000 and $1,460,000 at December 31, 2007 and December 31, 2008 respectively.

    Required
    1. Prepare the journal entry, with appropriate explanation, to set up the Allowance for Doubtful Accounts as of January 1, 2008. Disregard income taxes. Show supporting computations in good form.
    2. Prepare a schedule analyzing the changes in the Allowance for Doubtful Accounts account for the year ended December 31, 2008. Show supporting computations in good form.

    P 8-5
    The Garrett Company has the following transactions during the months of April and May:
    Date Transaction Units Cost/unit
    4/1 Balance 400
    4/17 Purchase 200 $5.50
    4/25 Sale 150
    4/28 Purchase 100 $5.75
    5/5 Purchase 250 $5.50
    5/18 Sale 300
    5/22 Sale 50
    The cost of the inventory on April 1is $5, $4, and $2 per unit, respectively, under the FIFO, average, and LIFO cost flow assumptions.
    Required:
    1. Compute the costs of goods sold for each month and the inventories at the end of each month for the following alternatives:
    a. FIFO periodic
    b. FIFO perpetual
    c. LIFO periodic
    d. LIFO perpetual
    e. Weighted average (round unit costs to 2 decimal places)
    f. Moving average (round unit costs to 2 decimal places)
    2. Reconcile the difference between the LIFO periodic and the LIFO perpetual results.

    P 8-10
    The Kwestel Company adopted the dollar-value LIFO method for inventory valuation at the beginning of 2006. The following information about the inventory at the end of each year is available from the company records:
    Year Current Cost Index
    2005 $8,000 100
    2006 10,800 120
    2007 11,500 130
    2008 14,000 145
    2009 10,500 125

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    QUESTIONS

    P 3-8, P 5-5, P 5-13, P 5-19, P 7-13, P 7-16, P 8-5, P 8-10, P 10-10,
    P 3-8
    The Ferdon Company uses a periodic inventory system. The following is partial information from its income statements for 2007 and 2008:
    2007 2008
    Beginning inventory $(2) $(4)
    Sales 220,000 (6)
    Purchases 118,000 140,000
    Purchases returns 2,000 3,000
    Ending Inventory 48,000 74,000
    Sales returns 1,000 3,000
    Gross Profit (1) 77,000
    Cost of goods sold 106,000 (5)
    Expenses 65,000 62,000
    Net Income (3) 15,000
    Fill in the blanks numbered 1 through 6

    P 5-5
    The Houston Manufacturing Company presents the following partial list of account balances, after adjustments, as of December 31, 2007:
    Sales salaries expense 27,400 Sales personnel travel expenses 8,300
    Misc admin expenses 3,000 Property taxes and insurance expenses 9,000
    Sales Returns 5,000 Retained earnings, Jan 1, 2007 200,800
    Sales 468,200 Depreciation expense: sales equip 9,000
    Interest revenue 3,200 Advertising expenses 15,700
    Office & admin salaries 30,000 Misc rent revenue 5,900
    Delivery expenses 11,700 Common stock, $10 par 200,000
    Loss on sales of factory equip 4,100 Depreciation expense: buildings & office equip 14,400
    Cost of goods sold 232,200
    The following information is also available but is not reflected in the preceding accounts:
    1. The company sold Division E (a component of the company) on August 1, 2007. During 2007, Division E had incurred a pretax loss from operations of $16,000. However, because the acquiring company could vertically integrate Division E into its facilities, the Houston Manufacturing Company was able to recognize a $42,000 pretax gain on the sale.
    2. On January 2, 2007, without warning, a foreign country expropriated a factory of Houston Manufacturing Company which had been operating in that country. As a result of that expropriation, the company has incurred a pretax loss of $30,000.
    3. In preparing its 2007 adjusting entries at year-end, the company discovered that it had no recorded $10,100 of depreciation on its office building during 2006. This error did not affect the 2007 depreciation expense.
    4. The common stock was outstanding for the entire year. A cash dividend of $1.20 per ...

    Solution Summary

    Inventory, income tax, cash flows and allowance accounts are examined.

    $2.19