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Bad Debts, write offs & Inventory LIFO FIFO

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Consolidated Balance Sheets (partial), Consolidated Statements of Operations (partial), and Inventory

COMP 8-1. Complete the requirement for each of the following independent cases:

Case A. Dr. Pepper Snapple Group, Inc., is a leading integrated brand owner, bottler, and distributor of nonalcoholic beverages in the United States, Canada, and Mexico, Key brands include Dr. Pepper, Snapple, 7-UP, Mott's juices, A&W root beer, Canada Dry ginger ale, Schweppes ginger ale, and Hawaiian Punch, among others.

The following represents selected data from recent financial statements of Dr. Pepper Snapple Group (dollars in millions):

Consolidated Balance Sheets (partial)
(in millions) December 31, 2008 December 31, 2007
Current Assets:
Cash and cash equivalents $214 $ 67
Accounts receivable (net of allowances
of $13 and $20, respectively) 532 538

Consolidated Statements of Operations (partial)
For the Year Ended
December 31
(in millions) 2008 2007 2006

Net Sales $5,710 $5,695 $4,700
Net (loss) income $ (312) $ 497 $ 510

The company also reported bad debt expense of $5 million in 2008, $11 million in 2007, and $7 million in 2006.

1. Record the company's write-offs of uncollectible accounts for 2008.

2. Assuming all sales were on credit, what amount of cash did Dr. Pepper Snapple Group collect from customers in 2008?

3. Compute the company's net profit margin for the three years presented. What does the trend suggest to you about Dr. Pepper Snapple Group?

Case B. Samuda Enterprises uses the aging approach to estimate bad debt expense. At the end of 2011, Samuda reported a balance in accounts receivable of $620,000 and estimated that $12,400 of its accounts receivable would likely be uncollectable. The allowance for doubtful accounts has a $1,500 debit balance at year-end (that is, more was written off during the year than the balance in the account).

1. What amount of bad debt expense should be recorded for 2011?
2. What amount will be reported on the 2011 balance sheet for accounts receivable?

Case C. At the end of 2012, the unadjusted trial balance of Territo, Inc. indicated $5,840,000 in Accounts Receivable, a credit balance of $9,200 in Allowance for Doubtful Accounts, and Sales Revenue (all on credit) of $160,450,000. Based on knowledge that the current economy is in distress, Territo increased in bad debt rate estimate to 0.3 percent on credit sales.

1. What amount of bad debt expense should be recorded for 2012?
2. What amount will be reported on the 2012 balance sheet for accounts receivable?

Case D. Steward Company reports the following inventory records for November 2010:

Date Activity #of Units Cost/Unit
November 1 Beginning balance 100 $18
November 4 Purchase 300 $19
November 7 Sale (@ $50 per unit) 200
November 13 Purchase 500 $21
November 22 Sale (@ $50 per unit) 500

Selling, administrative, and depreciate expenses for the month were $16,000. Stewart's tax rate is 30 percent.

1. Calculate the cost of ending inventory and the cost of goods sold under each of the following methods:
a. First-in, first-out
b. Last-in, first out
c. Weighted average

2. Based on your answers in requirement (1)
a. What is the gross profit percentage under the FIFO method?
b. What is the net income under the LIFO method?
c. Which method would you recommend to Stewart for tax and financial reporting purposes? Explain your recommendation.

3. Stewart applied the lower cost of market method to value its inventory for reporting purposes at the end of the month. Assuming Stewart used the FIFO method and that inventory had a market replacement value of $19.50 per unit, what would Stewart report on the balance sheet for inventory? Why?

Case E. Matson Company purchased the following on January 1, 2011:

Office equipment at a cost of $50,000 with an estimated useful life to the company of three years and a residual value of $15,000. The company uses the double-declining-balance method of depreciation for the equipment.
Factory equipment at an invoice price of $820,000 plus shipping costs of $20,000. The equipment has an estimated useful life of 100,000 hours and no residual value. The company uses the units-of-production method of depreciation for the equipment.
A patent at a cost of $300,000 with an estimated useful life of 15 years. The company uses the straight-line method of amortization for intangible assets with no residual value.

1. Prepare a partial depreciation schedule for 2011, 2012, and 2013 for the following assets (round your answers to the nearest dollar):
a. Office equipment
b. Factory equipment. The company used the equipment for 8,000 hours in 2011, 9,200 hours in 2012, and 8,900 hours in 2013.

2. On January 1, 2014, Matson altered its corporate strategy dramatically. The company sold the factory equipment for $700,000 in cash. Record the entry related to the sale of the factory equipment.

3. On January 1, 2014, when the company changed its corporate strategy, its patent had estimated future cash flows of $210,000 and a fair value of $190,000. What would the company report on the income statement (account and amount) regarding the patent on January 2, 2014? Explain your answer.

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10 Multiple Choice Accounting questions - physical inventory, FIFO, LIFO, outstanding checks, Doubtful Accounts, matching principle, previously written off account, bad debt expense, annual depreciation rate, loss on disposal of a plant asset

1. After the physical inventory is completed,
A) quantities are listed on inventory summary sheets.
B) quantities are entered into various general ledger inventory accounts.
C) the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.
D) unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

2. The manager of Worley is given a bonus based on net income before taxes. The net income after taxes is $5,600 for FIFO and $4,900 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO?
A) $250
B) $140
C) $200
D) $700

3. Jones Company had checks outstanding totaling $5,400 on its June bank reconciliation. In July, Jones Company issued checks totaling $38,900. The July bank statement shows that $26,300 in checks cleared the bank in July. A check from one of Jones Company's customers in the amount of $300 was also returned marked "NSF." The amount of outstanding checks on Davis Company's July bank reconciliation should be
A) $12,600.
B) $18,000.
C) $17,700.
D) $7,200.

4. The account Allowance for Doubtful Accounts is classified as a(n)
A) liability.
B) contra account of Bad Debt Expense.
C) expense.
D) contra account to Accounts Receivable.

5. The matching principle
A) requires that all credit losses be recorded when an individual customer cannot pay.
B) necessitates the recording of an estimated amount for bad debts.
C) results in the recording of a known amount for bad debt losses.
D) is not involved in the decision of when to expense a credit loss.

6. If an account is collected after having been previously written off
A) the allowance account should be debited.
B) only the control account needs to be credited.
C) both income statement and balance sheet accounts will be affected.
D) there will be both a debit and a credit to accounts receivable.

7. Using the allowance method, the uncollectible accounts for the year is estimated to be $28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debt expense for the period?
A) $7,000
B) $21,000
C) $28,000
D) $35,000

8. A truck was purchased for $18,000 and it was estimated to have a $3,000 salvage value at the end of its useful life. Monthly depreciation expense of $250 was recorded using the straight-line method. The annual depreciation rate is
A) 25%.
B) 2%.
C) 16%.
D) 20%.

9. A truck that cost $12,000 and on which $10,000 of accumulated depreciation has been recorded was disposed of for $3,000 cash. The entry to record this event would include a
A) gain of $1,000.
B) loss of $1,000.
C) credit to Truck account for $3,000.
D) credit to Accumulated Depreciation for $10,000.

10. A loss on disposal of a plant asset is reported in the financial statements
A) in the Other Revenues and Gains section of the income statement.
B) in the Other Expenses and Losses section of the income statement.
C) as a direct increase to the capital account on the balance sheet.
D) as a direct decrease to the capital account on the balance sheet.

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