19) Team instructions: Divide the class into teams of three or four people. Give the students time
in class to answer the following questions. Students need access to both the Team Shirts,
financial statements and the transactions to be able to answer these questions. Each team should
turn in only one copy of the answers for grading. All team members will receive the same grade.
Use the Team Shirts, financial statements for April, May, and June to answer the following:
1
Calculate the return on assets for May, rounded to the nearest tenth of a percent.
%
2
Calculate the return on assets for June, rounded to the nearest tenth of a percent.
%
3
Is the return on assets more favorable in May or in June?
4
What business event explains the change in return on assets?
5
Calculate the asset turnover ratio for May.
%
6
Calculate the asset turnover ratio for June.
%
7
Is the asset turnover ratio more favorable in May or in June?
8
Why is accumulated depreciation at the end of June more than depreciation
expense for June?
9
Why would Team Shirts choose to use the activity method to depreciate the
van?
10
Does Team Shirts have any intangible assets?
1
return on assets for May: $6,579/[($17,860 + 31,329)/2]
2
return on assets for June: $9,693/[($31,329 + 69,822)/2]
3
Is the return on assets more favorable in May or in June?
4
5
asset turnover ratio for May: $13,750/[($17,860 + 31,329)/2]
6
asset turnover ratio for June: $24,950/[($31,329 + 69,822)/2]
7
Is the asset turnover ratio more favorable in May or in June?
8
van?
10
Does Team Shirts have any intangible assets?
20) Part A:
Enter the April 2011 transactions and adjustments for Tim’s Tams in the accounting equation.
1. April 1 Collected $3,000 of accounts receivable from March sales.
2. April 2 Purchased 1,200 caps @ $6 each on account.
3. April 6 Paid $700 cash for office supplies.
4. April 20 Tim’s Tams sold 800 baseball caps @ $10 each on account. Cost of goods sold was
$4,800.
5. April 30 Tim’s Tams declared and paid a $400 cash dividend to its shareholder.
6. April 30 Adjusted for insurance used during the month. On February 1, Tim’s Tams paid $600
for 3 months of insurance coverage that began February 1.
7. April 30 Adjusted for rent used during the month. Last month Tim’s Tams paid $1,000 for two
months’ rent.
8. April 30 Recorded one month’s straight-line depreciation on the $18,000 truck that has a 6-
year useful life and no salvage value.
9. April 30 Counted the office supplies and found that $200 of supplies have not been used.
10. April 30 Recorded interest on the $16,000, 4-month, 6% note payable for the month.
Parts B, C, D and E: Complete the financial statements.
Part B: Part C:
Part D:
Part E:
Part F: Using the financial statements above, answer the following questions:
Learning Objective 6-8
1) What is the most significant risk related to long-term assets?
A) Managers will NOT use the assets to satisfy the customers.
B) Someone will steal or misappropriate the assets.
C) They will NOT be paid for on time.
D) They will NOT be sold before they get old.
2) Which of the following is an example of a physical control over assets?
A) unlocked storage rooms
B) cash register
C) complete and reliable record-keeping
D) the people who have physical custody of assets should be different from the people who
maintain the records for those assets
3) Segregation of duties means that ________.
A) only the appropriate people have access to an asset
B) complete and reliable record-keeping is an important internal control
C) the people who have physical custody of assets should be different from the people who
maintain the records for those assets
D) someone needs to make sure that internal controls for assets are working properly
4) A major function of an internal control system is to safeguard assets from theft and damage.
5) Physical controls to safeguard assets are always complicated and expensive.
6) The people who have physical custody of assets should be different from the people who
maintain the records for those assets.
7) Someone needs to make sure that internal controls for assets are working properly.
8) Discuss risks and controls associated with long-term assets.
9) Jim wants to post his resume on Monster.com, but does not have access to a computer. His
friend Mary, an accountant for a large manufacturing firm, says: “I have to work this Saturday.
Come to the office with me and I will let you use one of the company computers. I’ll give you
my user name and password.”
Required:
1. Explain why user names and passwords are assigned.
2. Is it ethical for Mary to allow her friend Jim to use the company’s computers?
10) Put an X in the appropriate box to show whether each of the following is an internal control
strength or weakness in minimizing the risks associated with long-term assets.
Strength
Weakness
1
A physical count of assets is performed by a bookkeeper. If
any assets are missing, the bookkeeper must adjust the
books so as not to overstate assets.
2
The purchaser of the equipment is the one to process the
payment. This ensures that the company is not
overcharged.
3
The internal auditors make sure the controls for long-term
assets are operating properly.
4
The data from the company’s computerized accounting
information system is backed up daily. The backup is
stored offsite.
5
Access to assets is limited to authorized personnel.
any assets are missing, the bookkeeper must adjust the
books so as not to overstate assets.
of duties)
payment. This ensures that the company is not
overcharged.
of duties)
3
The internal auditors make sure the controls for long-term
assets are operating properly.
4
The data from the company’s computerized accounting
information system is backed up daily. The backup is
stored offsite.
5
Access to assets is limited to authorized personnel.
1) Which of the following statements is TRUE?
A) The depreciation expense reported on external financial statements prepared for shareholders
is guided by generally accepted accounting principles.
B) The depreciation expense reported on a federal income tax return is guided by generally
accepted accounting principles.
C) The depreciation expense reported on the income statement must match (the matching
principle) the depreciation expense reported on a Federal income tax return.
D) MACRS is an accelerated depreciation method that can be used for financial reporting.
2) Drudge Company has a 25% marginal tax rate. Assume that the company has income before
depreciation and taxes of $20,000 and elects a tax depreciation method that results in $8,000 of
depreciation for tax purposes. What will be the company’s tax liability this year?
A) $12,000
B) $5,000
C) $3,000
D) $2,000
3) Waylon Company has a 25% marginal tax rate. The company reports depreciation expense of
$10,000 on its annual report for shareholders, which is based on GAAP. For its federal income
tax return, the company chooses a tax depreciation method that results in a depreciation
deduction of $12,000. What is the difference in taxes for the two different depreciation methods?
A) $2,000
B) $500
C) $12,000
D) $0
4) Which of the following depreciation methods is used only on federal tax returns?
A) straight-line
B) double-declining balance
C) activity
D) Modified Accelerated Cost Recovery System (MACRS)
5) How many of the following depreciation methods result in reporting larger depreciation
expense in the early years of asset ownership than is reported in the later years?
∙ Straight-line
∙ Double-declining balance
∙ Modified Accelerated Cost Recovery System (MACRS)
A) none
B) one
C) two
D) all three
6) How many of the following depreciation methods result in reporting equal depreciation
expense for every year an asset is owned and used?
∙ Straight-line
∙ Double-declining balance
∙ Modified Accelerated Cost Recovery System (MACRS)
A) none
B) one
C) two
D) all three
7) The Modified Accelerated Cost Recovery system (MACRS) can be used to calculate
depreciation for company’s annual report, but not for its Federal tax return.
8) The Modified Accelerated Cost Recovery system (MACRS) allows a company to report more
depreciation expense in the early years of an asset’s life.
9) The Internal Revenue Service requires that a corporation must use the same depreciation
method on its tax return that it uses on its annual report.
10) The Internal Revenue Service Code sets accounting rules, including depreciation, used to
prepare financial statements issued to shareholders.
11) Generally accepted accounting principles are used to determine the depreciation deduction
available on a tax return.
12) IFRS sets accounting rules, including depreciation, used to prepare Federal tax returns.