Adjusting entries and adjusted trial balances

Dickens Company is a small editorial services company owned and operated by Monica Baker. On October 31, 2014, the end of the current year, Dickens
Company’s accounting clerk prepared the unadjusted trial balance shown below.

Dickens Company Unadjusted Trial Balance October 31, 2014
	Debit Balances	Credit Balances
Cash .	7,500
Accounts Receivable .	38,400
Prepaid Insurance . .	7,200
Supplies	1,980
Land .	112,500
Building	150,250
Accumulated Depreciation—Building		87,550
Equipment . .	135,300
Accumulated Depreciation—Equipment		97,950
Accounts Payable . .		12,150
Unearned Rent		6,750
Capital Stock		75,000
Retained Earnings .		146,000
Dividends	15,000
Fees Earned .		324,600
Salaries and Wages Expense	193,370
Utilities Expense	42,375
Advertising Expense .	22,800
Repairs Expense	17,250
Miscellaneous Expense	6,075
	750,000	750,000

The data needed to determine year-end adjustments are as follows:

1. Unexpired insurance at October 31, $5,400.

2. Supplies on hand at October 31, $375.

3. Depreciation of building for the year, $6,000.

4. Depreciation of equipment for the year, $3,000.

5. Rent unearned at October 31, $1,350.

6. Accrued salaries and wages at October 31, $2,900.

7. Fees earned but unbilled on October 31, $18,600.

Instructions

1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation
Expense—Building; Depreciation Expense—Equipment; and Supplies Expense.

2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.

Adjusting entries and errors

At the end of April, the first month of operations, the following selected data were taken from the financial statements of Shelby Crawford, an attorney:

Net income for April	$120,000
Total assets at April 30	750,000
Total liabilities at April 30	300,000
Total stockholders’ equity at April 30	450,000

In preparing the financial statements, adjustments for the following data were overlooked:

1. Supplies used during April, $2,750.

2. Unbilled fees earned at April 30, $23,700.

3. Depreciation of equipment for April, $1,800.

4. Accrued wages at April 30, $1,400.

Instructions

1. Journalize the entries to record the omitted adjustments.

2. Determine the correct amount of net income for April and the total assets, liabilities, and stockholders’ equity at April 30. In addition to indicating
the corrected amounts, indicate the effect of each omitted adjustment by setting up and completing a columnar table similar to the following. Adjustment
(a) is presented as an example.

	Net Income	Total Assets	=	Total Liabilities	+	Total Stockholders’ Equity
Reported amounts	$120,000	$750,000		$300,000		$450,000
Corrections:
Adjustment (a)	-2,750	-2,750				-2,750
Adjustment (b)	____	____		____		____
Adjustment (c)	____	____		____		____
Adjustment (d)	____	____		____		____
Corrected amounts	____	____		____		____

CP 5-2 Purchases discounts and accounts payable

Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a conversation between Cam Pfeifer and Mitzi Wheeler, the chief accountant for Rustic Furniture Co. Cam: Mitzi, I’ve got a question about this recent balance sheet.

Mitzi: Sure, what’s your question? Cam: Well, as you know, I’m applying for a bank loan to finance our new store in Garden Grove, and I noticed that the accounts payable are listed as $320,000.

Mitzi: That’s right. Approximately $275,000 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc.

Cam: That’s what I thought. But as you know, we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount.

Mitzi: That’s right. I can’t remember the last time we missed a discount.

Cam: Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let’s list the accounts payable due suppliers as $314,500, rather than $320,000. Every little bit helps. You never know. It might make the difference between getting the loan and not.

How would you respond to Cam Pfeifer’s request?

CP 5-3 Determining cost of purchase

The following is an excerpt from a conversation between Mark Loomis and Krista Huff.

Mark is debating whether to buy a stereo system from Tru-Sound Systems, a locally owned electronics store, or Wholesale Stereo, an online electronics company.

Mark: Krista, I don’t know what to do about buying my new stereo.

Krista: What’s the problem?

Mark: Well, I can buy it locally at Tru-Sound Systems for $1,175.00. However, Wholesale Stereo has the same system listed for $1,200.00.

Krista: What’s the big deal? Buy it from Tru-Sound Systems.

Mark: It’s not quite that simple. Wholesale Stereo charges $49.99 for shipping and handling. If I have them send it next-day air, it’ll cost $89.99 for shipping and handling.

Krista: So?

Mark: But, that’s not all. Tru-Sound Systems will give an additional 2% discount if I pay cash. Otherwise, they will let me use my VISA, or I can pay it off in three monthly installments. In addition, if I buy it from Tru-Sound Systems, I have to pay 9% sales tax. I won’t have to pay sales tax if I buy it from Wholesale Stereo, since they are out of state.

Krista: Anything else?

Mark: Well . . . Wholesale Stereo says I have to charge it on my VISA. They don’t accept checks.

Krista: I am not surprised. Many online stores don’t accept checks.

Mark: I give up. What would you do?

1. Assuming that Wholesale Stereo doesn’t charge sales tax on the sale to Mark, which company is offering the best buy?

2. What might be some considerations other than price that might influence Mark’s decision on where to buy the stereo system?

(Adapted from 1995 CFA Level I1 exam) Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Arninochem Company (AOC). AOC and LCC have June 30 fiscal year ends. You have compiled the data in Exhibit 17-1 for this purpose. Use a one-year time horizon and assume the following:

• Real gross domestic product is expected to rise 5 percent;
• S&P 500 expected total return of 20 percent;
• U.S. Treasury bills yield 5 percent; and
• 30-year U.S. Treasury bonds yield 8 percent.

EXHIBIT 17-1 Selected Data for Litchfield and Aminochem
	Litchfield Chemical (LCC)	Aminochem (AOC)
Current stock price	$50	$30
Shares outstanding (millions)	10	$20
Projected earnings per share (N 1996)	$4.00	$3.20
Projected dividend per share (EY 1996)	$0.90	$1.60
Projected dividend growth rate	8%	7%
Stock beta	1.2	1.4
Investors” required rate of return Balance sheet data (millions)	10%	11%
Long-term debt	$100	$130
Stockholders” equity	$300	$320

A. Calculate the value of the common stock of LCC and AOC using the constant growth DDM. Show your work.

B. Calculate the expected return over the next year of the common stock of LCC and AOC using the CAPM. Show your work.

C. Calculate the internal (implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work.

D. Recommend LCC or AOC for investment. Justify your choice using your answers to A, B, and C and the information in Exhibit 17- 1.

Job Order Costing in a Service Organization

Peruga Engineering Company specializes in designing automated characters and displays for theme parks. It uses cost-plus profit contracts, and its profit factor is 30 percent of total cost. Peruga uses a job order costing system to track the costs of developing each job. Costs are accumulated for three primary activities: bid and proposal, design, and prototype development. Current service overhead rates based on engineering hours are as follows: bid and proposal, $18 per hour; design, $22 per hour; and prototype development, $20 per hour. Supplies are treated as direct materials, traceable to each job. Peruga worked on three jobs, P-12, P-15, and P-19, during January, 2011. The following table shows the costs for those jobs:

	P-12	P-15	P-19
Beginning Balances
Bid and proposal	$2,460	$2,290	$ 940
Design	1,910	460	—
Prototype development	2,410	1,680	—
Costs During January
Bid and proposal
Supplies	$ —	$ 280	$2,300
Labor: hours	12	$ 20	68
dollars	$ 192	$ 320	$1,088
Design
Supplies	$ 400	$460	$ 290
Labor: hours	64	42	26
dollars	$1,280	$ 840	$ 520
Prototype development
Supplies	$6,744	$7,216	$ 2,400
Labor: hours	120	130	25
dollars	$2,880	$3,120	$ 600

Required

1. Using the format in the answer to requirement 1 of this chapter’s Review Problem, create the job order cost card for each of the three jobs.

2. Peruga completed Jobs P-12 and P-15, and the customers approved the prototype products. Customer A plans to produce 12 special characters using the design and specifications created by Job P-12. Customer B plans to make 18 displays from the design developed by Job P-15. What dollar amount will each customer use as the cost of design for each of those products (i.e., what is the product unit cost for Jobs P-12 and P-15)? (Round to the nearest dollar.)

3. What is the January ending balance of Peruga’s Contract in Process account for the three jobs?

4. Rank the jobs in order from most costly to least costly based on each job’s total cost. From the rankings of cost, what observations can you make?

5. Speculate on the price that Peruga should charge for such jobs.

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Job Order Costing in a Service Organization

Locust Lodge, a restored 1920s lodge located in Alabama, caters and serves special events for businesses and social occasions. The company earns 60 percent of its revenue from weekly luncheon meetings of local clubs like Rotary. The remainder of its business comes from bookings for weddings and receptions.

Locust Lodge uses job order cost cards to keep track of the costs incurred. Job costs are separated into three categories: food and beverage, labor, and facility overhead. The facility overhead cost for weekly events is 10 percent of food and beverage costs, the facility overhead cost for sit-down receptions is 40 percent of food and beverage costs, and the facility overhead cost for stand-up receptions is 20 percent of food and beverage costs. Accumulated costs for three Locust Lodge clients in the current quarter are as follows:

	Food and Beverage	Labor	Facility Overhead
Tuesday Club	Last month: $2,000	Last month: $200	Last month: ?
meetings	This month: $2,500	This month: $250	This month: ?
Doar-Turner	Last month: $3,000	Last month: $1,000	Last month: ?
engagement and	This month: $8,000	This month: $2,000	This month: ?
wedding parties	Both sit-down affairs
Reception for the	This month: $5,000	This month: $1,000	This month: ?
new president	A stand-up affair

The number of attendees served at Tuesday Club meetings is usually 200 per month. The Doar- Turner parties paid for 500 guests. The organizers of the reception for the new president paid for 1,000 invitees.

Required

1. Using the format shown in this chapter’s Review Problem, create a job order cost card for each of the three clients.

2. Calculate the total cost of each of the three jobs on its job order cost card.

3. Calculate the cost per attendee for each job.

4. Rank the jobs in order from most costly to least costly based on each job’s total cost and on the cost per attendee. From the rankings of cost, what observations are you able to make?

5. Speculate on the price that Locust Lodge should charge for such jobs.

Analysis of Product Cost

Ready Tire Corporation makes several lines of automobile and truck tires. The company operates in a competitive marketplace, so it relies heavily on cost data from its FIFO-based process costing system. It uses that information to set prices for its most competitive tires. The company’s radial line has lost some of its market share during each of the past four years. Management believes that price breaks allowed by the company’s three biggest competitors are the main reason for the decline in sales.

The company controller, Sara Birdsong, has been asked to review the product costing information that supports pricing decisions on the radial line. In preparing her report, she collected the following data for last year, the most recent full year of operations:

		Units	Dollars
Equivalent units	Direct materials	84,200
	Conversion costs	82,800
Manufacturing costs:	Direct materials
	Direct labor
	Overhead		$1,978,700
	Direct materials		800,400
Unit cost data:	Conversion costs	1,600,800
Work in process inventory:			23.50
Beginning (70% complete)		4,200	29.00
Ending (30% complete)		3,800

Units started and completed last year totaled 80,400. Attached to the beginning Work in Process Inventory account were direct materials costs of $123,660 and conversion costs of $57,010. Birdsong found that little spoilage had occurred. The proper cost allowance for spoilage was included in the predetermined overhead rate of $2 per direct labor dollar. The review of direct labor cost revealed, however, that $90,500 had been charged twice to the production account, the second time in error. This resulted in overly high overhead costs being charged to the production account. The radial has been selling for $92 per tire. This price was based on last year’s unit data plus a 75 percent markup to cover operating costs and profit. The company’s three main competitors have been charging about $87 for a tire of comparable quality. The company’s process costing system adds all direct materials at the beginning of the process, and conversion costs are incurred uniformly throughout the process.

1. Identify what inaccuracies in costs, inventories, and selling prices result from

the company’s cost-charging error.

2. Prepare a revised process cost report for last year. Round unit costs to two decimal places. Round total costs to whole dollars.

3. What should have been the minimum selling price per tire this year?

4. Suggest ways of preventing such errors in the future.

You are in a world where there are only two assets, gold and stocks. You are interested in

investing your money in one, the other or both assets. Consequently you collect the following

data on the returns on the two assets over the last six years.

	Gold	Stock Market
Average return	8%	20%
Standard deviation	25%	22%
Correlation	-0.4

a. If you were constrained to pick just one, which one would you choose?

b. A friend argues that this is wrong. He says that you are ignoring the big payoffs that you can get on gold. How would you go about alleviating his concern?

c. How would a portfolio composed of equal proportions in gold and stocks do in terms of mean and variance?

d. You now learn that GPEC (a cartel of gold-producing countries) is going to vary the amount of gold it produces with stock prices in the US. (GPEC will produce less gold when stock markets are up and more when it is down.) What effect will this have on your portfolios? Explain.