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# Cumulative Depreciation: Original Purchase Price

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If five years ago, a company purchased a machine for \$30,000. The machine is being depreciated over a ten-year useful life, using straight-line depreciation. Cumulative depreciation is \$15,000. The current net book value is \$15,000 and the current market value is \$18,000. The original purchase price of \$30,000 be:

a. a period cost
b. a opportunity cost
c. a variable cost
d. a sunk cost

#### Solution Summary

The solution explains the cost classification of original purchase price

\$2.19

## Accounting Finance Study Problems

Instructions: Present the journal entries specified below; show supporting calculations.

The trial balance of Garnett Company at December 31, 2002 includes the following:
Debits Credits
Accounts Receivable .................................................................. 100,000
Allowance for Doubtful Accounts ................................................ 500
Sales (all on credit) .................................................................... 600,000
Sales Returns and Allowances .................................................. 30,000

(1) If Garnett uses the aging method and estimates that \$4,000 of receivables will be uncollectible, prepare the adjusting entry.

(2) If Garnett estimates uncollectibles at 1% of net credit sales, prepare the appropriate adjusting entry.

(3) Assume that on February 10, 2003 the specific account of Mark Trane with a balance of \$600, is deemed uncollectible. Record the write-off.

(4) Assume that on May 12, 2003 Trane pays one-half of the above balance in full and is expected to pay the remainder within 30 days. Record the appropriate entries.

Reiner Wholesale Merchandise had 20,000 shares of 5%, \$20 par value preferred stock and 15,000 shares of \$25 par value common stock outstanding throughout 2003. These data apply to each of the independent situations below.

(5) Assuming that total dividends declared in 2003 were \$35,000 and that the preferred stock is not cumulative, common stockholders should receive total 2003 dividends of

\$________________.

(6) Assuming that total dividends declared in 2003 were \$80,000 and that the preferred stock is cumulative with two years' preferred dividends in arrears on December 31, 2002, the preferred stockholders should receive 2003 dividends totaling

\$________________.

(7) Assuming that total dividends in 2003 were \$30,000 and that the preferred stock is cumulative with one year's preferred dividends in arrears on December 31, 2002, the preferred stockholders should receive 2003 dividends totaling

\$________________.

(8) Assuming that total dividends declared in 2003 were \$40,000, that the cumulative preferred stock was issued on January 1, 2002, and that \$10,000 of preferred dividends were declared and paid in 2002, the common stockholders should receive 2003 dividends totaling

\$________________.

(9) Assuming that total dividends declared in 2003 were \$60,000 and that the cumulative preferred stock dividends have not been paid after 2001, the common stockholders should receive total 2003 dividends of

\$________________.
¬¬¬¬¬¬¬¬¬¬II

Instructions: Match each item/event pair below with the indicated change in the item. An individual classification may be used more than once, or not at all. For each dividend, assume that both declaration and payment or distribution has occurred.

Classifications
A. Item increases
B. Item decreases
C. Item is unchanged
D. Direction of change cannot be determined

Item Event
____ 1. Book value per share Stock dividend

____ 2. Par value per common share Cash dividend

____ 3. Total retained earnings Stock split

____ 4. Total stockholders' equity Prior period adjustment
Increases last year's net income

____ 5. Total retained earnings
Restriction of retained earnings

____ 6. Total retained earnings Cash dividend

____ 7. Total paid-in capital Stock dividend

____ 8. Par value per common share Stock split
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III
Instructions: Each of the events below may have an effect on the statement of cash flows. Designate how the event should be reported within the statement of cash flows using the codes provided below. Codes may be used more than once, or not at all.

Codes
A. Investing activity; cash inflow
B. Investing activity; cash outflow
C. Financing activity; cash inflow
D. Financing activity; cash outflow
E. Operating activity; cash inflow
F. Operating activity; cash outflow
G. Noncash investing and financing activity

Events

_____ 1. Issued checks for the weekly payroll

_____ 2. Paid an account payable

_____ 3. Issued bonds payable for cash

_____ 4. Declared and paid a cash dividend

_____ 5. Paid cash for a new car for a traveling salesperson

_____ 6. Purchased treasury stock for cash

_____ 7. Paid cash for 40% interest in another company

_____ 8. Received interest on a long-term bond investment

_____ 9. Converted bonds payable into common stock

_____ 10. Sold a long-term stock investment for cash at book value
VI
Condensed financial data for West Corporation are given below.

WEST CORPORATION
Comparative Balance Sheet
December 31

Assets
2003 2002
Cash \$ 78,000 \$ 20,000
Accounts receivable 39,000 27,000
Inventory 100,000 115,000
Land 720,000 650,000
Equipment 488,000 458,000
Accumulated depreciation (45,000) (20,000)
Total assets \$1,380,000 \$1,250,000

Liabilities and Stockholders' Equity
Accounts payable \$ 52,000 \$ 12,000
Accrued expenses payable 21,000 24,000
Bonds payable 575,000 575,000
Common stock 674,000 604,000
Retained earnings 58,000 35,000
Total liabilities and stockholders' equity \$1,380,000 \$1,250,000

1. A cash dividend of \$15,000 was declared and paid during the year.
2. Additional equipment was purchased for cash.
3. Land was acquired by issuing common stock.

Direct Method
Condensed financial data and additional information for West Corporation are given on the previous page. The income statement for 2000 is as follows:

WEST CORPORATION
Income Statement
For the Year Ended December 31, 2003

Sales \$300,000
Cost of goods sold 120,000
Gross profit \$180,000
Operating expenses \$75,000
Interest expense 50,000 125,000
Income before income taxes 55,000
Income tax expense 17,000
Net income \$ 38,000

1. Operating expenses include depreciation expense.
2. Accounts payable pertain to purchases of merchandise.
3. Accrued expenses payable pertain to operating expenses exclusive of depreciation.

Instructions: Prepare a statement of cash flows using the direct method.
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V
1. Wells Construction gave up a used crane and \$48,000 cash for a similar new crane. The old crane cost \$72,000, had \$27,000 of accumulated depreciation, and a fair market value of \$51,000. In recording this exchange, the new crane should be recorded at

\$_____________.

2. Brown Builders gave up a used diesel-powered electric generator and \$10,000 cash for a new truck. The generator cost \$34,000, had \$20,000 of accumulated depreciation, and a fair market value of \$12,000. In recording this exchange, the new truck should be recorded at

\$_____________.

3. Midwest Mining purchased an iron mine for \$3,000,000. The mine was expected to produce 10,000,000 tons of ore over twenty years with no salvage value. During the first year, 600,000 tons of ore were mined and sold. Depletion expense for the first year is

\$_____________.

4. Morris Industries purchased equipment costing \$60,000 on January 1, 2001. The equipment has a four-year useful life, \$12,000 salvage value, and is being depreciated using the straight-line method. It was sold at an \$18,000 loss on June 30, 2003. The selling price of the equipment was

\$_____________.

5. Hi-Tech Corporation incurred \$85,000 of research and development costs to produce a high technology solar computer, paid filing fees of \$8,000 to register a patent on this product, and paid \$52,000 to defend the patent against infringement by a competitor. All of these costs were incurred in 2002. Production of solar computers began on January 1, 2003. Assuming the patent has a useful life of 15 years, patent expense for 2003 is

\$_____________.

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