A company with its H.O. at Chennai has a branch at Delhi. The branch receives all goods from H.O. which also remits cash for all expenses. Sales are made by the branch on credit as well as for cash. Total sales by the branch for the year ended Mar 31, 2009 amounted to Rs 2,80,000 out of which 20% is cash sale. Further information taken from the branch reveals:

Expenses actually incurred by the branch during the year were

Sale of furniture on Oct 1, 2008 (book value of furniture on the date of sale Rs 475) amounted to Rs 450.

All sales are made by the branch at cost plus 25%

Depreciation on furniture is 10% p.a.

Prepare Delhi Branch Account in the books of Chennai H.O. For the year ending on Mar 31, 2009.

Goods are sold to customers at cost plus 50%. Depreciate the furniture @ 10%

Comprehensive Receivables Problem – The December 31, 2006 balance sheet of the Blackmon Corporation disclosed the following information relating to its receivables:

*The company is contingently liable for a discounted note receivable of $10,000.

During 2007, credit sales (terms, n/EOM) totaled $2,200,000 and collections on accounts receivable (unassigned) amounted to $1,900,000. Uncollectible accounts totaling $18,000 from several customers were written off, and a $1,350 accounts receivable previously written off was collected. Additionally, the following transactions relating to Blackmon’s receivables occurred during the year:

On December 31, 2007 an aging of the accounts receivable balance indicated the following:

Required

1. Prepare the journal entries to record the preceding receivable transactions during 2007 and the necessary adjusting entry on December 31, 2007.

2. Prepare the receivables portion of Blackmon’s December 31, 2007 balance sheet.

3. Compute Blackmon’s accounts receivable turnover in days, assuming a 365-day business year

LIFO Liquidation Profit – The Hammond Company adopted LIFO when it was formed on January 1, 2005. Since then, the company has had the following purchases and sales of its single inventory item:

In December 2008, the controller realized that because of an unexpected increase in demand, the company had sold 22,000 units but had purchased only 19,000 units during the year. In 2008, each unit had been sold for $19, and each unit purchased had cost $10. The income tax rate is 30%.

Required

1. If the company makes no additional purchases in 2008, how much LIFO liquidation profit will it report?

2. Prepare the appropriate annual report disclosures for 2008.

3. If the company purchases an additional 7,000 units in December 2008, how much income tax will the company save?

4. If the company purchases the additional 7,000 units, how much income tax has the company saved over the four-year period by using LIFO instead of the FIFO cost flow assumption?

Alternative Inventory Methods – The Totman Company has the following transactions during the months of January and February:

The cost of the inventory at January 1 is $24, $23, and $15 per unit, respectively, under the FIFO, average, and LIFO cost flow assumptions.

Required

1. Compute the cost 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.

3. If the company had purchased an additional 25 units for $30 each on February 27, compute the cost of goods sold for February under FIFO periodic and LIFO periodic.

4. For February, compute the company’s inventory turnover under the FIFO and LIFO periodic methods. Use ending inventory instead of average inventory for convenience. Which measure would you use in your evaluation of the company? How would you convert a monthly inventory turnover into an annual measure to use for comparison with other companies? What assumptions are involved?

Allowance for Bad Accounts – The Installment Jewelry Company has been in business for 5 years but has never had an audit made of its financial statements. Engaged to make an audit for 2007, you find that the company’s balance sheet carries no allowance for bad accounts, bad accounts having been expensed as written off and recoveries credited to income as collected. The company’s policy is to write off at December 31 of each year those accounts on which no collections have been received for 3 months. The installment contracts generally are for 2 years. On your recommendation the company agrees to revise its accounts for 2007 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table:

Accounts receivable at December 31, 2007 were as follows:

Required

Prepare the adjusting journal entry or entries with appropriate explanations to set up the Allowance for Bad Accounts.

Allowance for Doubtful Accounts – From inception of operations to December 31, 2006, Harris Corporation provided for uncollectible accounts receivable under the allowance method: Provisions were made monthly at 2% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Harris’s usual credit terms are net 30 days. The balance in the Allowance for Doubtful Accounts was $130,000 at January 1, 2007. During 2007, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Harris upgraded its computer facility in November 2007 and an aging of accounts receivable was prepared for the first time as of December 31, 2007. A summary of the aging is as follows:

Based on the review of collectability of the account balances in the “prior to 1/1/07” aging category, additional receivables totaling $60,000 were written off as of December 31, 2007. Effective with the year ended December 31, 2007, Harris adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Required

1. Prepare a schedule analyzing the changes in the allowance for doubtful accounts for the year ended December 31, 2007. Show supporting computations in good form.

2. Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2007.

LIFO and Inventory Pools – On January 1, 2004 Grover Company changed its inventory cost flow method to the LIFO cost method from the FIFO cost method for its raw materials inventory. It made the change for both financial statement and income tax reporting purposes. Grover uses the multiple-pools approach, under which it groups substantially identical raw materials into LIFO inventory pools; it uses weighted average costs in valuing annual incremental layers. The composition of the December 31, 2006 inventory for the Class F inventory pool is as follows:

Inventory transactions for the Class F inventory pool during 2007 were as follows:

• On March 2, 2007, 4,800 units were purchased at a unit cost of $13.50 for $64,800.
• On September 1, 2007, 7,200 units were purchased at a unit cost of $14.00 for $100,800.
• A total of 15,000 units were used for production during 2007.

The following transactions for the Class F inventory pool took place during 2008:

• On January 11, 2008, 7,500 units were purchased at a unit cost of $14.50 for $108,750.
• On May 14, 2008, 5,500 units were purchased at a unit cost of $15.50 for $85,250.
• On December 29, 2008, 7,000 units were purchased at a unit cost of $16.00 for $112,000.
• A total of 16,000 units were used for production during 2008.

Required

1. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2007. Show supporting computations in good form.

2. Prepare a schedule to compute the cost of Class F raw materials used in production for the year ended December 31, 2007.

3. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2008. Show supporting computations in good form.

Comprehensive Reconciliation – In auditing the Train Company, you obtain directly from the bank Train’s bank statement, canceled checks, and other memoranda which relate to the company’s bank account for December 2007. In reconciling the bank balance on December 31, 2007 with that shown on the company’s books, you observe the following facts:

Required

1. Prepare a reconciliation of the Train Company’s bank account.

2. Prepare journal entries to adjust the Train Company’s books to reflect the correct bank balance on December 31, 2007.

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 Summit’s accounting policy with respect to doubtful accounts was not correct, and determined that an allowance for doubtful accounts was 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:

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.

(Retail merchant CVP) Franklin Optical Shop has been in operation for several

years. Analysis of the firm’s recent financial statements and records reveals the following

The company’s effective tax rate is 40 percent. Samantha Franklin, company president, has asked you to help her answer the following questions about the business.

a. What is the break-even point in pairs of glasses? In dollars?

b. How much revenue must be generated to produce $80,000 of pretax earnings? How many pairs of glasses would this level of revenue represent?

c. How much revenue must be generated to produce $80,000 of after-tax earnings? How many pairs of glasses would this represent?

d. What amount of revenue would be necessary to yield an after-tax profit equal to 20 percent of revenue?

e. Franklin is considering adding a lens-grinding lab, which will save $6 per pair of glasses in lens cost, but will raise annual fixed costs by $8,000. She expects to sell 5,000 pairs of glasses. Should she make this investment?

f. A marketing consultant told Franklin that she could increase the number of glasses sold by 30 percent if she would lower the selling price by 10 percent and spend $20,000 on advertising. She has been selling 3,000 pairs of glasses. Should she make these two related changes?