Discuss whether Colston Company correctly reported the following items in the financial statements:
a. In 2014, the company discovered a clerical error in the prior year’s accounting records. As a result, the reported net income for 2013 was overstated by $45,000. The company corrected this error by restating the prior-year financial statements.
b. In 2014, the company voluntarily changed its method of accounting for long-term construction contracts from the percentage of completion method to the completed contract method. Both methods are acceptable under generally acceptable accounting principles. The cumulative effect of this change was reported as a separate component of income in the 2014 income statement.
Answer:
a. Colston Company reported this item correctly in the financial statements. This item is an error in the recognition, measurement, or presentation in the financial statements, which is correctly handled by retroactively restating prior-period earnings.
b. Colston Company did not report this item correctly. This item is a change from one generally accepted accounting principle to another, which is correctly handled by retroactively restating prior-period earnings. In this case, Colston reports this change cumulatively in the current period, which is incorrect.
Assume that the amount of each of the following items is material to the financial statements. Classify each item as either normally recurring (NR) or extraordinary (E).
a. Loss on the disposal of equipment considered to be obsolete because of the development of new technology.
b. Uninsured loss on building due to hurricane damage. The building was purchased by the company in 1910 and had not previously incurred hurricane damage.
c. Gain on sale of land condemned by the local government for a public works project.
d. Uninsured flood loss. (Flood insurance is unavailable because of periodic flooding in the area.)
e. Interest revenue on notes receivable.
f. Uncollectible accounts expense.
g. Loss on sale of investments in stocks and bonds.
Answer:
a. NR
b. E
c. E
d. NR
e. NR
f. NR
g. NR
Tuesday, October 15, 2019
Indicate whether the following costs of Colgate-Palmolive Company, a maker of consumer products, would be classified as direct materials cost
Indicate whether the following costs of Colgate-Palmolive Company, a maker of consumer products, would be classified as direct materials cost, direct labor cost, or factory overhead cost:
a. Maintenance supplies
b. Wages of production line employees
c. Depreciation on production machinery
d. Resins for soap and shampoo products
e. Plant manager salary for the Clarksville, Indiana, soap plant
f. Packaging materials
g. Depreciation on the Morristown, Tennessee, toothpaste plant
h. Wages paid to Packaging Department employees
i. Scents and fragrances
j. Salary of process engineers
Answer:
a. Factory overhead cost
b. Direct labor cost
c. Factory overhead cost
d. Direct materials cost
e. Factory overhead cost
f. Direct materials cost
g. Factory overhead cost
h. Direct labor cost
i. Direct materials cost
j. Factory overhead cost
Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials cost, direct labor cost, or factory overhead cost:
a. Steering wheel
b. Salary of test driver
c. Depreciation of welding equipment
d. V8 automobile engine
e. Wages of assembly line worker
f. Steel used in body
g. Tires
h. Assembly machinery lubricants
Answer:
a. Direct materials cost
b. Factory overhead cost
c. Factory overhead cost
d. Direct materials cost
e. Direct labor cost
f. Direct materials cost
g. Direct materials cost
h. Factory overhead cost
a. Maintenance supplies
b. Wages of production line employees
c. Depreciation on production machinery
d. Resins for soap and shampoo products
e. Plant manager salary for the Clarksville, Indiana, soap plant
f. Packaging materials
g. Depreciation on the Morristown, Tennessee, toothpaste plant
h. Wages paid to Packaging Department employees
i. Scents and fragrances
j. Salary of process engineers
Answer:
a. Factory overhead cost
b. Direct labor cost
c. Factory overhead cost
d. Direct materials cost
e. Factory overhead cost
f. Direct materials cost
g. Factory overhead cost
h. Direct labor cost
i. Direct materials cost
j. Factory overhead cost
Indicate whether each of the following costs of an automobile manufacturer would be classified as direct materials cost, direct labor cost, or factory overhead cost:
a. Steering wheel
b. Salary of test driver
c. Depreciation of welding equipment
d. V8 automobile engine
e. Wages of assembly line worker
f. Steel used in body
g. Tires
h. Assembly machinery lubricants
Answer:
a. Direct materials cost
b. Factory overhead cost
c. Factory overhead cost
d. Direct materials cost
e. Direct labor cost
f. Direct materials cost
g. Direct materials cost
h. Factory overhead cost
A partial list of the costs for Wisconsin and Minnesota Railroad, a short hauler of freight, is provided below
From the choices presented in parentheses, choose the appropriate term for completing each of the following sentences:
a. The wages of an assembly worker are normally considered a (period, product) cost.
b. Short-term plans are called (strategic, operational) plans.
c. The phase of the management process that uses process information to eliminate the source of problems in a process so that the process delivers the correct product in the correct quantities is called (directing, improving).
d. Direct materials costs combined with direct labor costs are called (prime, conversion) costs.
e. Materials for use in production are called (supplies, materials inventory).
f. The plant manager’s salary would be considered (direct, indirect) to the product.
g. An example of factory overhead is (sales office depreciation, plant depreciation).
Answer:
a. product
b. operational
c. improving
d. prime
e. materials inventory
f. indirect
g. plant depreciation
A partial list of the costs for Wisconsin and Minnesota Railroad, a short hauler of freight, is provided below. Classify each cost as either indirect or direct.
For purposes of classifying each cost, use the train as the cost object.
a. Cost to lease (rent) train locomotives
b. Salaries of dispatching and communications personnel
c. Costs of accident cleanup
d. Wages of switch and classification yard personnel
e. Cost of track and bed (ballast) replacement
f. Wages of train engineers
g. Payroll clerk salaries
h. Safety training costs
i. Fuel costs
j. Maintenance costs of right of way, bridges, and buildings
k. Cost to lease (rent) railroad cars
l. Depreciation of terminal facilities
Answer:
a. direct
b. indirect
c. indirect
d. indirect
e. indirect
f. direct
g. indirect
h. indirect
i. direct
j. indirect
k. direct
l. indirect
a. The wages of an assembly worker are normally considered a (period, product) cost.
b. Short-term plans are called (strategic, operational) plans.
c. The phase of the management process that uses process information to eliminate the source of problems in a process so that the process delivers the correct product in the correct quantities is called (directing, improving).
d. Direct materials costs combined with direct labor costs are called (prime, conversion) costs.
e. Materials for use in production are called (supplies, materials inventory).
f. The plant manager’s salary would be considered (direct, indirect) to the product.
g. An example of factory overhead is (sales office depreciation, plant depreciation).
Answer:
a. product
b. operational
c. improving
d. prime
e. materials inventory
f. indirect
g. plant depreciation
A partial list of the costs for Wisconsin and Minnesota Railroad, a short hauler of freight, is provided below. Classify each cost as either indirect or direct.
For purposes of classifying each cost, use the train as the cost object.
a. Cost to lease (rent) train locomotives
b. Salaries of dispatching and communications personnel
c. Costs of accident cleanup
d. Wages of switch and classification yard personnel
e. Cost of track and bed (ballast) replacement
f. Wages of train engineers
g. Payroll clerk salaries
h. Safety training costs
i. Fuel costs
j. Maintenance costs of right of way, bridges, and buildings
k. Cost to lease (rent) railroad cars
l. Depreciation of terminal facilities
Answer:
a. direct
b. indirect
c. indirect
d. indirect
e. indirect
f. direct
g. indirect
h. indirect
i. direct
j. indirect
k. direct
l. indirect
During the current year, merchandise is sold for $2,450,000. The cost of the merchandise sold is $1,519,000
During the current year, merchandise is sold for $2,450,000. The cost of the merchandise sold is $1,519,000.
a. What is the amount of the gross profit?
b. Compute the gross profit percentage (gross profit divided by sales).
c. Will the income statement necessarily report a net income? Explain.
Answer:
a. $931,000 ($2,450,000 – $1,519,000)
b. 38% ($931,000 ÷ $2,450,000)
c. No. If operating expenses are less than gross profit, there will be a net income. On the other hand, if operating expenses exceed gross profit, there will be a net loss.
From the choices presented in parentheses, choose the appropriate term for completing each of the following sentences:
a. Feedback is often used to (improve, direct) operations.
b. The implementation of automatic, robotic factory equipment normally (increases, decreases) the direct labor component of product costs.
c. Advertising costs are usually viewed as (period, product) costs.
d. The balance sheet of a manufacturer would include an account for (cost of goods sold, work in process inventory).
e. Factory overhead costs combined with direct labor costs are called (prime, conversion) costs.
f. Payments of cash or the commitment to pay cash in the future for the purpose of generating revenues are (costs, expenses).
g. A product, sales territory, department, or activity to which costs are traced is called a (direct cost, cost object).
Answer:
a. improve
b. decreases
c. period
d. work in process inventory
e. conversion
f. costs
g. cost object
a. What is the amount of the gross profit?
b. Compute the gross profit percentage (gross profit divided by sales).
c. Will the income statement necessarily report a net income? Explain.
Answer:
a. $931,000 ($2,450,000 – $1,519,000)
b. 38% ($931,000 ÷ $2,450,000)
c. No. If operating expenses are less than gross profit, there will be a net income. On the other hand, if operating expenses exceed gross profit, there will be a net loss.
From the choices presented in parentheses, choose the appropriate term for completing each of the following sentences:
a. Feedback is often used to (improve, direct) operations.
b. The implementation of automatic, robotic factory equipment normally (increases, decreases) the direct labor component of product costs.
c. Advertising costs are usually viewed as (period, product) costs.
d. The balance sheet of a manufacturer would include an account for (cost of goods sold, work in process inventory).
e. Factory overhead costs combined with direct labor costs are called (prime, conversion) costs.
f. Payments of cash or the commitment to pay cash in the future for the purpose of generating revenues are (costs, expenses).
g. A product, sales territory, department, or activity to which costs are traced is called a (direct cost, cost object).
Answer:
a. improve
b. decreases
c. period
d. work in process inventory
e. conversion
f. costs
g. cost object
Locust Company purchased merchandise on account from a supplier for $34,900, terms 1/10, n/30.
A retailer is considering the purchase of 250 units of a specific item from either of two suppliers. Their offers are as follows:
Supplier One: $400 a unit, total of $100,000, 1/10, n/30, no charge for freight.
Supplier Two: $399 a unit, total of $99,750, 2/10, n/30, plus freight of $975.
Which of the two offers, Supplier One or Supplier Two, yields the lower price?
Answer:
The offer of Supplier Two is lower than the offer of Supplier One. Details are as follows:
Supplier One Supplier Two
List price $100,000 $99,750
Less discount 1,000 1,995
$ 99,000 $97,755
Freight 975
$ 99,000 $98,730
Locust Company purchased merchandise on account from a supplier for $34,900, terms 1/10, n/30. Locust Company returned $6,400 of the merchandise and received full credit.
a. If Locust Company pays the invoice within the discount period, what is the amount of cash required for the payment?
b. Under a perpetual inventory system, what account is credited by Locust Company to record the return?
Answer:
a. $28,215 {Purchase of $34,900, less return of $6,400, less discount of $285 [($34,900 – $6,400) × 1%]}
b. Merchandise Inventory
Supplier One: $400 a unit, total of $100,000, 1/10, n/30, no charge for freight.
Supplier Two: $399 a unit, total of $99,750, 2/10, n/30, plus freight of $975.
Which of the two offers, Supplier One or Supplier Two, yields the lower price?
Answer:
The offer of Supplier Two is lower than the offer of Supplier One. Details are as follows:
Supplier One Supplier Two
List price $100,000 $99,750
Less discount 1,000 1,995
$ 99,000 $97,755
Freight 975
$ 99,000 $98,730
Locust Company purchased merchandise on account from a supplier for $34,900, terms 1/10, n/30. Locust Company returned $6,400 of the merchandise and received full credit.
a. If Locust Company pays the invoice within the discount period, what is the amount of cash required for the payment?
b. Under a perpetual inventory system, what account is credited by Locust Company to record the return?
Answer:
a. $28,215 {Purchase of $34,900, less return of $6,400, less discount of $285 [($34,900 – $6,400) × 1%]}
b. Merchandise Inventory
Paramount Co., a women’s clothing store, purchased $60,000 of merchandise from a supplier on account
Paramount Co., a women’s clothing store, purchased $60,000 of merchandise from a supplier on account, terms FOB destination, 2/10, n/30. Paramount Co. returned $12,000 of the merchandise, receiving a credit memo, and then paid the amount due within the discount period. Journalize Paramount Co.’s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.
Answer:
a.
Merchandise Inventory 60,000
Accounts Payable 60,000
b.
Accounts Payable 12,000
Merchandise Inventory 12,000
Accounts Payable 48,000
c.
Cash 47,040
Merchandise Inventory 960
The debits and credits from four related transactions are presented in the following T accounts. Describe each transaction.
Cash Accounts Payable
(2) 300 (3) 4,000 (1) 21,000
(4) 16,830 (4) 17,000
Merchandise Inventory
(1) 21,000 (3) 4,000
(2) 300 (4) 170
Answer:
(1) Purchased merchandise on account at a cost of $21,000.
(2) Paid freight, $300.
(3) An allowance or return of merchandise was granted by the creditor, $4,000.
(4) Paid the balance due within the discount period: debited Accounts Payable, $17,000, and credited Merchandise Inventory for the amount of the discount, $170, and Cash, $16,830.
Answer:
a.
Merchandise Inventory 60,000
Accounts Payable 60,000
b.
Accounts Payable 12,000
Merchandise Inventory 12,000
Accounts Payable 48,000
c.
Cash 47,040
Merchandise Inventory 960
The debits and credits from four related transactions are presented in the following T accounts. Describe each transaction.
Cash Accounts Payable
(2) 300 (3) 4,000 (1) 21,000
(4) 16,830 (4) 17,000
Merchandise Inventory
(1) 21,000 (3) 4,000
(2) 300 (4) 170
Answer:
(1) Purchased merchandise on account at a cost of $21,000.
(2) Paid freight, $300.
(3) An allowance or return of merchandise was granted by the creditor, $4,000.
(4) Paid the balance due within the discount period: debited Accounts Payable, $17,000, and credited Merchandise Inventory for the amount of the discount, $170, and Cash, $16,830.
Journalize entries for the following related transactions of Platypus Company: a. Purchased $71,500 of merchandise from Sitwell Co. on account, terms
Journalize the entries for the following transactions:
a. Sold merchandise for cash, $45,000. The cost of the merchandise sold was $27,000.
b. Sold merchandise on account, $115,000. The cost of the merchandise sold was $69,000.
c. Sold merchandise to customers who used MasterCard and VISA, $130,000. The cost of the merchandise sold was $78,000.
d. Sold merchandise to customers who used American Express, $100,000. The cost of the merchandise sold was $60,000.
e. Received an invoice from Foley Credit Co. for $9,200, representing a service fee paid for processing MasterCard, VISA, and American Express sales.
Answer:
a.
Cash 45,000
Sales 45,000
Cost of Merchandise Sold 27,000
Merchandise Inventory 27,000
b.
Accounts Receivable 115,000
Sales 115,000
Cost of Merchandise Sold 69,000
Merchandise Inventory 69,000
c.
Cash 130,000
Sales 130,000
Cost of Merchandise Sold 78,000
Merchandise Inventory 78,000
d.
Cash 100,000
Sales 100,000
Cost of Merchandise Sold 60,000
Merchandise Inventory 60,000
e.
Credit Card Expense 9,200
Cash 9,200
Journalize entries for the following related transactions of Platypus Company:
a. Purchased $71,500 of merchandise from Sitwell Co. on account, terms 1/10, n/30.
b. Paid the amount owed on the invoice within the discount period.
c. Discovered that $13,500 (before purchases discount of 1%) of the merchandise was defective and returned items, receiving credit.
d. Purchased $9,000 of merchandise from Sitwell Co. on account, terms n/30.
e. Received a check for the balance owed from the return in (c), after deducting for the purchase in (d).
Answer:
a.
Merchandise Inventory 71,500
Accounts Payable—Sitwell Co. 71,500
b.
Accounts Payable—Sitwell Co. 71,500
Cash 70,785
Merchandise Inventory 715
c.
Accounts Payable*—SitwellCo. 13,365
Merchandise Inventory 13,365
d.
Merchandise Inventory 9,000
Accounts Payable—SitwellCo. 9,000
e.
Cash 4,365
Accounts Payable—Sitwell Co. 4,365
* Note: The debit of $13,500 to Accounts Payable in entry (c) is the amount of cash refund due
from Sitwell Co. It is computed as the amount that was paid for the returned merchandise,
$13,500, less the purchase discount of $135 ($13,500 × 1%). The credit to Accounts Payable
of $9,000 in entry (d) reduces the debit balance in the account to $4,365, which is the amount
of the cash refund in entry (e). The alternative entries below yield the same final results.
c.
Accounts Receivable—Sitwell Co. 13,365
Merchandise Inventory 13,365
d.
Merchandise Inventory 9,000
Accounts Payable—Sitwell Co. 9,000
e.
Cash 4,365
Accounts Payable—Sitwell Co. 9,000
Accounts Receivable—Sitwell Co. 13,365
a. Sold merchandise for cash, $45,000. The cost of the merchandise sold was $27,000.
b. Sold merchandise on account, $115,000. The cost of the merchandise sold was $69,000.
c. Sold merchandise to customers who used MasterCard and VISA, $130,000. The cost of the merchandise sold was $78,000.
d. Sold merchandise to customers who used American Express, $100,000. The cost of the merchandise sold was $60,000.
e. Received an invoice from Foley Credit Co. for $9,200, representing a service fee paid for processing MasterCard, VISA, and American Express sales.
Answer:
a.
Cash 45,000
Sales 45,000
Cost of Merchandise Sold 27,000
Merchandise Inventory 27,000
b.
Accounts Receivable 115,000
Sales 115,000
Cost of Merchandise Sold 69,000
Merchandise Inventory 69,000
c.
Cash 130,000
Sales 130,000
Cost of Merchandise Sold 78,000
Merchandise Inventory 78,000
d.
Cash 100,000
Sales 100,000
Cost of Merchandise Sold 60,000
Merchandise Inventory 60,000
e.
Credit Card Expense 9,200
Cash 9,200
Journalize entries for the following related transactions of Platypus Company:
a. Purchased $71,500 of merchandise from Sitwell Co. on account, terms 1/10, n/30.
b. Paid the amount owed on the invoice within the discount period.
c. Discovered that $13,500 (before purchases discount of 1%) of the merchandise was defective and returned items, receiving credit.
d. Purchased $9,000 of merchandise from Sitwell Co. on account, terms n/30.
e. Received a check for the balance owed from the return in (c), after deducting for the purchase in (d).
Answer:
a.
Merchandise Inventory 71,500
Accounts Payable—Sitwell Co. 71,500
b.
Accounts Payable—Sitwell Co. 71,500
Cash 70,785
Merchandise Inventory 715
c.
Accounts Payable*—SitwellCo. 13,365
Merchandise Inventory 13,365
d.
Merchandise Inventory 9,000
Accounts Payable—SitwellCo. 9,000
e.
Cash 4,365
Accounts Payable—Sitwell Co. 4,365
* Note: The debit of $13,500 to Accounts Payable in entry (c) is the amount of cash refund due
from Sitwell Co. It is computed as the amount that was paid for the returned merchandise,
$13,500, less the purchase discount of $135 ($13,500 × 1%). The credit to Accounts Payable
of $9,000 in entry (d) reduces the debit balance in the account to $4,365, which is the amount
of the cash refund in entry (e). The alternative entries below yield the same final results.
c.
Accounts Receivable—Sitwell Co. 13,365
Merchandise Inventory 13,365
d.
Merchandise Inventory 9,000
Accounts Payable—Sitwell Co. 9,000
e.
Cash 4,365
Accounts Payable—Sitwell Co. 9,000
Accounts Receivable—Sitwell Co. 13,365
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