Fundamental Accounting Principles

Problem 1:

Eiffel Manufacturing Company makes small replicas of major landmarks that it sells to souvenir shops. The company was started on January 1, 2003 when it acquired $60,000 cash from the issue of common stock. During 2003 the company purchased and used raw materials that cost $16,000 cash. It paid wages to workers who made the replicas $22,000 cash. Finally, manufacturing overhead costs, including rental fees paid for facili-ties and equipment, amounted to $12,000 cash. The company started and completed the production of 1,000 replicas during 2003.

Required
a. Determine the amount of expense Eiffel incurred in 2003 assuming none of the repli-cas were sold in 2003.
b. Record the accounting events associated with making the 1,000 replicas in a financial statements model like the one shown below. The event pertaining to the issue of common stock is recorded in the model as an example {see attachment}
c. Determine the cost per unit of the 1,000 replicas. Determine the sales price per unit assuming the products are sold for cost plus 40% of cost.
d. Record the sale of 800 replicas.
e. Record the payment of a $4,000 sales commission to the salesperson who sold the replicas.

Problem 2

Handcappi Manufacturing Company experienced the following accounting events during its first year of operation. Except for the depreciation adjusting entries, all transactions are cash transactions.
1. Acquired $61,000 cash from the issue of common stock.
2. Paid $6,800 for the materials that were used to make its products. All products started were completed during the period.
3. Paid salaries of $4,300 to selling and administrative employees.
4. Paid wages of $7,200 to production workers.
5. Paid $9,000 to buy furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,000 estimated salvage value and a 5-year use-ful life. Code the furniture purchase as Event No. 5a. Code recognition of the annual depreciation as Event No. 5b.
6. Paid $23,000 to buy manufacturing equipment. The equipment was acquired on January 1. It had a $3,000 estimated salvage value and a 4-year useful life. Code the equipment purchase as Event No. 6a. Code recognition of the annual depreciation as Event No. 6b.
7. Completed 4,000 units of product. Determine the cost per unit and the sales price per unit assuming the sales price is cost plus 60% of cost. Record the sale of 3,000 units of product. Code the recognition of revenue as Event No. 7a. Code the recognition of cost of goods sold as Event No. 7b.

Required
Show how these events would affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model like the one shown below. The first event is recorded as an example {see attachment}

Problem 3

Art On Tour, Inc. (AOTI) contracts with artists to exhibit their works to the public. AOTI has agreed to pay a well known artist a $20,000 commission for the right to exhibit his work for one month.

Required
Part a - Identifying Cost Behavior
1. Determine the total commission cost and the commission cost per person if 1,000 / 2,000 / 4,000 people attend the exhibition. Is the commission cost fixed or variable?
2. AOTI provides patrons with books illustrating the artist's work. The books cost $5 each. Determine the total cost of books and the cost per person if 1,000 / 2,000 / 4,000 people attend the exhibition. Is the book cost fixed or variable?

Part b - Operating Leverage and Risk/Reward Relationship
1. AOTI pays an artist a $20,000 commission. It sells 4,000 tickets at $6 each. Prepare an income statement. Then prepare revised income statements assuming 10 percent more than 4,000 and 10 percent fewer than 4,000 patrons attend the exhibition. Cal-culate the percentage change in revenue and net income if attendance increases or de-creases 10 percent.
2. Alternatively, AOTI pays the artist a commission of $5 per ticket sold. It sells 4,000 tickets at $6 each. Prepare an income statement. Then prepare revised income state-ments assuming 10 percent more than 4,000 and 10 percent fewer than 4,000 patrons attend the exhibition. Calculate the percentage change in revenue and net income if attendance increases or decreases 10 percent.

Part c --Fixed and Variable Cost Definitions are Context Sensitive
1. AOTI pays the artist a commission of $20,000 per exhibition. What is the total com-mission cost and the commission cost per person if 1,000 / 2,000 / 4,000 people attend the exhibition? (Same as part a.1.)
2. AOTI pays the artist a commission of $20,000 per exhibition. What is the total com-mission cost and the commission cost per exhibition if AOTI sponsors 1, 2, or 3 exhibitions.