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Operating Activities ♦ 463
2. Flextronics Corporation sold merchandise with a sales price of $20 million during 2007.
Flextronics allowed its customers $4 million of quantity discounts. Flextronics expects a return
rate of 6% of the amount billed, which is net of the discount. How much revenue (after discounts)
should Flextronics report for 2007?
3. Klondike Company reported accounts receivable at the end of 2006 of $5,000,000 before allowing
for doubtful accounts. During 2007, it recorded sales of $24 million on credit and collected $22
million from customers. At the end of 2007, before adjustments, Klondike had a $200,000 balance
in allowance for doubtful accounts and estimated that it required an allowance equal to 5% of
accounts receivable.
a.
What was the net amount of accounts receivable reported on the 2007 balance sheet?
b.
What amount of doubtful accounts expense did Klondike report for 2007?
464 ♦ Chapter 13
4. Montana Company reported accounts receivable at the end of 2007 of $6,000,000 before allowing
for doubtful accounts. During 2008, it recorded sales of $28 million on credit and collected $29
million from customers. At the end of 2008, before adjustments, Montana had a $180,000 balance
in allowance for doubtful accounts and estimated that it required an allowance equal to 6% of
accounts receivable.
Required:
a. What was the net amount of accounts receivable reported on the 2008 balance sheet?
b. What amount of doubtful accounts expense did Montana report for 2008?
5. Mollini Corporation sold merchandise with a sales price of $35 million during 2007. Mollini
allowed its customers $5 million of quantity discounts. Mollini expects a return rate of 5% of the
amount billed, after the discount is applied. How much revenue (after discounts and returns)
should Mollini report for 2007?
Operating Activities ♦ 465
6. On November 10, Roberts Distributors purchased 4,000 tables at an invoice price of $300 each
and paid for them on November 20, earning a 3% cash discount. Roberts sold all of the tables at
$500 each. The customer earned a 1% cash discount.
Required:
a. What amount should Roberts report as net sales?
b. What amount should Roberts report as cost of goods sold?
7. On August 15, 2007, Michael’s Construction Company was notified that it was the low bidder on
a new headquarters building of a large bank. The bid price was $6,000,000 and the firm estimated
that its cost to complete the project would be $4,500,000. Any cost overruns must be absorbed by
the bidder. As of December 31, 2007, the company has incurred $1,500,000 in costs toward the
project. The firm recognizes revenue in proportion to the amount of the contract that has been
completed.
Required:
Determine the amount of profit that should be recognized to date under each of the following
situations.
a.
The firm estimates that it will cost another $3 million dollars to complete the
contract.
b.
The firm estimates that it will cost another $3.6 million dollars to complete the
contract.
c.
If the company had the option to wait until the end of the project to record its
revenue, explain how your answers to parts (a) and (b).
466 ♦ Chapter 13
8. Mardell’s General Store recorded sales totaling $3,600,000 during 2007. Even though the
company carefully screens the customers to whom it sells on credit, there are always some
customers who will not pay or cannot pay.
Required:
Show how the following events will be entered into the accounting system.
a. At year-end, it is estimated that 4% of sales will ultimately become uncollectible.
b. The company has learned that Marlene Walker has passed away, heavily in debt, and leaving no
assets. Her account receivable balance of $4,700 is deemed worthless.
Account ASSETS = LIABILITIES + OWNERS’ EQUITY
Operating Activities ♦ 467
9. On May 7, 2007, Dolly Company purchased inventory costing $280,000 on 30-day credit. The
seller offered a 3% discount if the bill was paid within 10 days. It is Dolly’s policy to take all such
discounts. On May 14, one-fourth of the previously acquired goods were sold to customers at a
price of $100,000. One-half of these goods sold were sold for cash with the balance on account.
No discounts were offered.
Required:
Show how these two transactions would be recorded in the accounting system. Dolly records all
transactions net of any discount offered.
Account ASSETS = LIABILITIES + OWNER’S EQUITY
10. Roman House of Pizza (RHP) sells frozen pizzas to grocery stores. At the end of the current year,
RHP had an accounts receivable balance of $175,000. Sales (all credit) for the year were
$556,000. $2,700 in sales were returned because the expiration date on the products had passed.
The balance in the allowance for doubtful accounts at the beginning of the year was $6,546. One
account in the amount of $1,440 was written off because the customer went out of business. On
the last day of the year, RHP recorded bad debts expense of $4,500. Prepare a schedule showing
the ending balance in accounts receivable less the allowance for doubtful accounts.
468 ♦ Chapter 13
11. All-Pages Book Company reports the following inventory transactions during the current month:
Date
Event
Number
of Units
Unit
Cost
Total
Cost
1st
Beg. Inventory
200
$12
$2,400
8th
Purchase
600
14
8,400
13th
Sale
400
24th
Purchase
200
16
3,200
30th
Sale
400
Required:
Fill in the following table using the periodic inventory system approach:
FIFO
LIFO
Ending Inventory
Cost of Goods Sold
Operating Activities ♦ 469
12. Record each of the following transactions net of any discount that applies:
a. Goods costing $148,000 were purchased from a supplier (on credit) for resale to customers. The
goods were shipped FOB destination and arrived this morning.
b. Inventory was sold on credit to customers for $62,400 subject to a sales discount of 2% when
payment is received within 10 days after the sale.
c. The next day, a customer returned goods that she had purchased for $3,500 (net)
d. At year-end it was estimated that 3% of the firm’s annual sales would ultimately be
uncollectible. Annual sales totaled $2,000,000.
e. $6,420 of accounts receivable was determined to be uncollectible.
Account ASSETS = LIABILITIES + OWNERS’ EQUITY
13. Armorrell Corporation began 2007 with $115,000 of raw material inventory, $250,000 of work-in-
process inventory, and $98,000 of finished goods inventory. During the year, Armorrell purchased
$560,000 of raw material and used $540,000 in production. Labor used in production during the
year was $1,120,000. Overhead was $640,000. Cost of goods completed was $2,370,000 and cost
of goods sold was $2,340,000.
Required:
Prepare a schedule to determine ending balances for raw material, work-in-process, and finished
goods inventories.
470 ♦ Chapter 13
14. The following inventory information is available for Donaldson Company:
Units
Unit cost
Total cost
Beginning inventory
400
$56
$22,400
Jan. 14 purchase
1,000
66
66,000
Jan. 25 purchase
1,000
70
70,000
Ending inventory
600
Required:
Fill in the table below (assume periodic inventory method).
FIFO
LIFO
Weighted average
Ending inventory
Cost of goods sold
Operating Activities ♦ 471
15. The following inventory information is available for San Pedro Company:
Units
Unit cost
Total cost
Beginning inventory
300
$28
$ 8,400
May 9 purchase
1,000
32
32,000
May 16 sale
900
May 20 purchase
1,000
36
36,000
May 25 sale
1,200
Required:
Using the perpetual method, fill in the table below. Round the final answer to the nearest $.01.
FIFO
LIFO
Weighted average
Ending inventory
Cost of goods
sold
472 ♦ Chapter 13
16. Seaside Ventures began 2007 with $150,000 of raw material inventory, $430,000 of work-in-
process inventory, and $128,000 of finished goods inventory. During the year, Seaside purchased
$700,000 of raw material and used $780,000 in production. Labor used in production during the
year was $840,000. Overhead was $1,120,000. Cost of goods completed was $3,120,000 and cost
of goods sold was $3,040,000.
Required:
Prepare a schedule to determine ending balances for raw material, work-in-process, and finished
goods inventories.
17. The following inventory information is available for Niedermyer Company:
Units
Unit cost
Total cost
Beginning inventory
1,000
$72
$ 72,000
April. 14 purchase
2,000
84
168,000
April. 26 purchase
2,000
90
180,000
Ending inventory
500
Required:
Fill in the table below (assume periodic inventory method).
FIFO
LIFO
Weighted average
Ending inventory
Cost of goods sold
Operating Activities ♦ 473
18. The following inventory information is available for Miami Lakes Company:
Units
Unit cost
Total cost
Beginning inventory
20
$16
$ 320
June 9 purchase
100
20
2,000
June 16 sale
85
June 20 purchase
100
24
2,400
June 25 sale
110
Required:
Using the perpetual method, fill in the table below. Round all unit costs to the nearest $.01.
FIFO
LIFO
Weighted average
Ending inventory
Cost of goods sold
474 ♦ Chapter 13
19. Rayon Blimp Company has the following inventory information available from a recent fiscal
year:
Date
Description
Units
Unit Cost
Total Cost
Feb. 1
Beginning Inv.
20
$50
$1,000
March. 9
Purchase
50
40
2,000
Sept. 4
Purchase
100
60
6,000
$9,000
Ending inventory via year-end physical count totaled 50 units.
Required:
Fill in the following table. Show your work in the space provided. Round answers to nearest
whole number.
FIFO
LIFO
Weighted Average
Ending Inventory
Cost of Goods Sold
Operating Activities ♦ 475
20. Gardenias and More Shop had the following acquisitions of inventory during the most recent year:
Event
Units
Unit Cost
Total Cost
Beginning Inventory
2,000
$ 8
$ 16,000
Purchase #1
3,000
10
30,000
Purchase #2
6,000
12
72,000
Purchase #3
8,000
14
112,000
Goods Available
19,000
$230,000
During the year, 14,000 units were sold at an average selling price of $36.
Required:
a.
Determine ending inventory and cost of goods sold assuming the FIFO method is
used. Show computations.
b.
Determine ending inventory and cost of goods sold assuming the LIFO method is
used. Show computations.
c.
Determine ending inventory and cost of goods sold assuming the weighted
average method is used. Show computations.
21. The 2007 income statement for Lozier Company is shown below:
Net sales
$189,060
Cost of goods sold
135,780
53,280
General and administrative expenses
38,920
14,360
Interest expense
240
14,120
Income tax expense
5,648
8,472
Discontinued operations
2,804
5,668
Required:
a. What was Lozier's gross profit?
b. What was Lozier's income from operations?
c. What was Lozier's income before income tax?
d. What was Lozier's income from continuing operations?
e. What was Lozier's net income?
476 ♦ Chapter 13
22. The 2007 income statement for Sun-Ra Company is shown below:
Net sales
$138,906
Cost of goods sold
93,578
45,328
General and administrative expenses
36,804
8,524
Interest expense
204
8,320
Income tax expense
5,728
2,592
Discontinued operations
612
$ 1,980
Required:
a. What was Sun-Ra's gross profit?
b. What was Sun-Ra's income from operations?
c. What was Sun-Ra's income before income tax?
d. What was Sun-Ra's income from continuing operations?
e. What was Sun-Ra's net income?
Operating Activities ♦ 477
23. G. W. Clinton manufactures golf equipment. Listed below are selected accounts that relate to the
previous month of operation.
Sales
$310,000
Bad debts expense
4,300
Raw materials inventory
Beginning of month (RMI-bom)
30,000
Raw materials inventory
End of month (RMI-eom)
12,400
Allowance for uncollectible accounts
1,470
Overhead costs
8,700
Labor costs
13,000
Accounts receivable
17,855
Finished goods inventory
Beginning of month (FGI-bom)
104,000
Materials purchased during month
17,000
Cost of goods sold (COGS)
124,400
Work-in-process
End of month (WIP-eom)
31,000
Work-in-process
Beginning of month (WIP-bom)
40,000
Required:
a. Calculate the cost of materials used in production.
b. Calculate the cost of goods completed.
c. Calculate finished goods inventory at the end of the month.
478 ♦ Chapter 13
24. Crested Butte Company is preparing its year-end 2007 financial statements. For each of the cases
that follow, indicate the amount that should be reported as part of inventory cost at December 31,
2007.
Inventory Transaction
Amount to be
recorded
as inventory cost
a.
On December 20, inventory costing $10,000 was purchased FOB
destination. At December 31, 2007 these goods had not yet
arrived.
______________
b.
Freight costs of $600 cash were paid to a shipping company for
transporting goods received on December 31, 2007, and which
are unsold.
______________
c.
On December 26, 2007, inventory costing $18,000 was purchased
subject to a 3% discount if paid for within 10 days. CB has a
policy of taking all such discounts but had not done so by year-
end.
______________
d.
On December 23, inventory costing $24,000 was purchased FOB
shipping point. At December 31, 2007 these goods had not yet
arrived.
______________
25. Palm-Joe Manufacturing had the following inventory-related transactions during August of 2007.
For each event, show how it would be entered into the accounting system:
a. Raw materials costing $192,000 were acquired from a supplier on credit.
b. One-half of the materials purchased in part a. were entered into production.
c. Direct labor costs totaling $70,000 were incurred in production.
d. Overhead costs incurred for the period included supplies (16,000), depreciation of factory
equipment (26,000), and indiect labor (10,000). As of the end of the month, the indirect labor costs
had not been paid.
e. Goods having a total production cost of $200,000 were completed and moved from the factory
to the warehouse for sale to customers.
f. One-half of the goods from part (e) were sold to customers for $170,000
ACCOUNT ASSETS = LIABILITIES + OWNERS’ EQUITY
Operating Activities ♦ 479
ESSAY
1. There are four indicators of profitability found on many income statements. In random order, they
are net income, gross profit, pretax income, and operating income. Carefully distinguish each of
these from the others and indicate the order in which they would be found on an income statement.
480 ♦ Chapter 13
2. Today is the last day of your firm's fiscal year. This morning's mail delivery contained an invoice
from an out of state supplier for goods shipped last week by railroad car. The goods are scheduled
to arrive in another four days. Explain why the FOB terms on the invoice would affect how you
account for this event.
3. While studying the accounting for accounts receivable with a friend, she says, "Why do companies
bother to set up an allowance for doubtful accounts anyway? Wouldn't it just be easier to wait until
an account becomes uncollectible and then write it off directly against accounts receivable?" How
would you respond to your friend?
Operating Activities ♦ 481
4. Accountants are always careful to record sales, and the related accounts receivable, net of any
sales discounts, sales returns, or sales allowances. Why does it matter if these items are considered
or not? Wouldn't they always be immaterial?
5. Among the FIFO, LIFO, and weighted average methods of inventory costing, which method will
generally yield an inventory cost most nearly approximating current replacement cost? Why?
6. Use of the LIFO inventory method for financial reporting purposes is often attacked as being an
unrealistic method that yields distorted inventory and cost of goods sold results. Some have argued
that this inventory method should be banned from financial reporting. Why is it considered by
some to be an unrealistic method and would you support banning it? Does LIFO have any
theoretical justification?
482 ♦ Chapter 13
7. Operating activities are reported on both the income statement and statement of cash flows.
Describe the difference(s) in reporting on the two statements.
8. On some income statements, there is a section titled "Discontinued Operations." What does the
information in this section represent, and why is it presented separately from the rest of the income
statement data?
9. While reviewing the income statement of a large firm, you notice a separate line titled
extraordinary item. Explain what is being reported on this line of the income statement.
