1) On December 31, 2012, Detroit Co. paid $6,000 cash for insurance coverage for the
year 2013 . What is the effect of this transaction on the financial statements for the 2012
reporting period?
2) Temporary accounts are closed prior to the start of the next accounting cycle. In this
closing process, the amount in each of these accounts is transferred to what account(s)?
3) Indicate how each event affects the elements of financial statements. Use the
following letters to record your answer in the box shown below each element. You do
not need to enter amounts. Assume use of a perpetual inventory system.
Youkilis Company paid $2,000 of selling expenses with cash. Show how the transaction
would affect Youkilis’s financial statements.
4) Indicate which of the budgets and pro forma financial statements the given item
appears on by placing X’s in the appropriate column or columns.
Budgeted sales revenue.
5) Dalton Corporation and Perry Company are similar-sized companies that operate in
different industries. Dalton’s current ratio is 1.89, while Perry’s current ratio is 1.99 . Is
it safe to conclude that Perry’s liquidity position is better than that of Dalton?
6) Indicate how the event affects the elements of the financial statements. Use the
following letters to record your answer in the box shown below each element:
You do not need to enter amounts.
Garza Corporation acquired land by issuing a note payable (a liability).
7) LeBron Company is considering two new machines that should produce considerable
cost savings in its assembly operations. The cost of each machine is $15,000 and neither
is expected to have a salvage value at the end of a 4-year useful life. LeBron’s required
rate of return is 12% and the company prefers that a project return its initial outlay
within the first half of the project’s life. The annual after-tax cash savings for each
machine are provided in the following table:
Required:
1) Compute the payback period for each machine using the incremental approach and
comment on the results.
2) Compute the unadjusted rate of return based on average investment for each
machine. The machines will be depreciated on a straight-line basis.
3) Based on these results (for payback and unadjusted rate of return), which machine
would you recommend? Explain your reasoning.
8) Explain how the gain or loss is computed on the sale of a piece of equipment.