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Comprehensive Receivables Problem; Dollar-Value LIFO

P7-10
(Comprehensive Receivables Problem) Connecticut Inc. had the following long-term receivable
account balances at December 31, 2006.
Note receivable from sale of division $1,800,000
Note receivable from officer 500,000

Transactions during 2007 and other information relating to Connecticut's long-term receivables were
as follows.
1. The $1,800,000 note receivable is dated May 1, 2006, bears interest at 9%, and represents the
balance of the consideration received from the sale of Connecticut's electronics division to New York
Company. Principal payments of $600,000 plus appropriate interest are due on May 1, 2007, 2008,
and 2009. The first principal and interest payment was made on May 1, 2007. Collection of the note
installments is reasonably assured.
2. The $500,000 note receivable is dated December 31, 2006, bears interest at 8%, and is due on
December 31, 2009. The note is due from Sean May, president of Connecticut Inc. and is
collateralized by 10,000 shares of Connecticut's common stock. Interest is payable annually on
December 31, and all interest payments were paid on their due dates through December 31, 2007.
The quoted market price of Connecticut's common stock was $45 per share on December 31, 2007.
3. On April 1, 2007, Connecticut sold a patent to Pennsylvania Company in exchange for a $300,000
zero-interest-bearing note due on April 1, 2009. There was no established exchange price for the
patent, and the note had no ready market. The prevailing rate of interest for a note of this type at
April 1, 2007, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor).
The patent had a carrying value of $40,000 at January 1, 2007, and the amortization for the year
ended December 31, 2007, would have been $8,000. The collection of the note receivable from
Pennsylvania is reasonably assured.

4. On July 1, 2007, Connecticut sold a parcel of land to Harrisburg Company for $200,000 under an
installment sale contract. Harrisburg made a $60,000 cash down payment on July 1, 2007, and
signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and
interest on the note will be $45,125 payable on July 1, 2008, through July 1, 2011. The land could
have been sold at an established cash price of $200,000. The cost of the land to Connecticut was
$150,000. Circumstances are such that the collection of the installments on the note is reasonably
assured.

Instructions
(a) Prepare the long-term receivables section of Connecticut's balance sheet at December 31, 2007.

(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest
receivable that would appear in Connecticut's balance sheet at December 31, 2007.

(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear
on Connecticut's income statement for the year ended December 31, 2007.

E8-25
(Dollar-Value LIFO) Presented below is information related to Dino Radja Company.
Ending Inventory Price
Date (End-of-Year Prices) Index
12/31/04 $80,000 100
12/31/05 115,500 105
12/31/06 107,000 125
12/31/07 122,200 130
12/31/08 154,000 140
12/31/09 176,900 145

Instructions
Compute the ending inventory for Dino Radja Company for 2004 through 2009 using the dollar-value
LIFO method.

E7-2 (Determine Cash Balance) Presented below are a number of independent situations.
Instructions
For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.

1. Checking account balance $725,000; certificate of deposit $200,000; cash advance to subsidiary of $950,000; utility deposit paid to gas company $180.

2. Checking account balance $600,000; an overdraft in special checking account at same bank as normal checking account of $15,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,535.

3. Checking account balance $590,000; postdated check from customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620.

4. Savings account balance at bank $37,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800.

5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.

E7-8 (Recording Bad Debts) At the end of 2007 Aramis Company has accounts receivable of $700,000 and an allowance for doubtful accounts of $50,000. On January 16, 2008, Aramis Company determined that its receivable from Ramirez Company of $8,000 will not be collected, and management authorized its write-off.
Instructions
(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.

(b) What is the net realizable value of Aramis Company's accounts receivable before the write-off of the Ramirez receivable?

(c) What is the net realizable value of Aramis Company's accounts receivable after the write-off of the Ramirez receivable?
p. 402 E8-5 (Inventoriable Costs?Error Adjustments) Craig Company asks you to review its December 31, 2007, inventory values and prepare the necessary adjustments to the books. The following information is given to you.
1. Craig uses the periodic method of recording inventory. A physical count reveals $234,980 of inventory on hand at December 31, 2007.
2. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of $15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.
3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for $12,800 on December 31. The merchandise cost $7,350, and Champy received it on January 3.
4. Not included in the physical count of inventory is $13,420 of merchandise purchased on December 15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.
5. Not included in inventory is $8,540 of merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.
6. Included in inventory was $9,438 of inventory held by Craig on consignment from Jackel Industries.
7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for $18,900 on December 31. The cost of this merchandise was $11,820, and Kemp received the merchandise on January 5.
8. Excluded from inventory was a carton labeled "Please accept for credit." This carton contains merchandise costing $1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged.
Instructions
(a) Determine the proper inventory balance for Craig Company at December 31, 2007.

(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2007. Assume the books have not been closed.

Ch. 8: Question 13

13. FIFO, weighted average, and LIFO methods are often used instead of specific identification for inventory valuation purposes.
Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the
determination of income and asset valuation.

Purchases
April 1 (balance on hand) 600 @ $6.00
4 1,500 @ 6.08
8 800 @ 6.40
13 1,200 @ 6.50
21 700 @ 6.60
29 500 @ 6.79
5,300

Sales
April 3 500 @ $10.00
9 1,400 @ 10.00
11 600 @ 11.00
23 1,200 @ 11.00
27 900 @ 12.00
4,600

FIFO, LIFO and Average Cost Determination) John Adams Company's record of transactions for the month of April was as follows.

please answer the following

"Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average cost.
"

Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

1. Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

1. In an inflationary period, which inventory method?FIFO, LIFO, average cost?will show the highest net income?

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P7-10
(Comprehensive Receivables Problem) Connecticut Inc. had the following long-term receivable
account balances at December 31, 2006.
Note receivable from sale of division $1,800,000
Note receivable from officer 500,000

Transactions during 2007 and other information relating to Connecticut's long-term receivables were
as follows.
1. The $1,800,000 note receivable is dated May 1, 2006, bears interest at 9%, and represents the
balance of the consideration received from the sale of Connecticut's electronics division to New York
Company. Principal payments of $600,000 plus appropriate interest are due on May 1, 2007, 2008,
and 2009. The first principal and interest payment was made on May 1, 2007. Collection of the note
installments is reasonably assured.
2. The $500,000 note receivable is dated December 31, 2006, bears interest at 8%, and is due on
December 31, 2009. The note is due from Sean May, president of Connecticut Inc. and is
collateralized by 10,000 shares of Connecticut's common stock. Interest is payable annually on
December 31, and all interest payments were paid on their due dates through December 31, 2007.
The quoted market price of Connecticut's common stock was $45 per share on December 31, 2007.
3. On April 1, 2007, Connecticut sold a patent to Pennsylvania Company in exchange for a $300,000
zero-interest-bearing note due on April 1, 2009. There was no established exchange price for the
patent, and the note had no ready market. The prevailing rate of interest for a note of this type at
April 1, 2007, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor).
The patent had a carrying value of $40,000 at January 1, 2007, and the amortization for the year
ended December 31, 2007, would have been $8,000. The collection of the note receivable from
Pennsylvania is reasonably assured.

4. On July 1, 2007, Connecticut sold a parcel of land to Harrisburg Company for $200,000 under an
installment sale contract. Harrisburg made a $60,000 cash down payment on July 1, 2007, and
signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and
interest on the note will be $45,125 payable on July 1, 2008, through July ...

Solution Summary

Comprehensive receivables problems are examined. Dollar-values and LIFO are examined.

$2.19