General Instructions
1. The following worksheet may be use to complete the exercise/problem.
You may need to refer to your textbook for additional information.
3. The completed exercise/problem may be printed or e-mailed per direction from your instructor.
Integrative
Sales revenue 1,250,000$
Cost of goods sold 636,500
Cash flows from operating activities:
Net income 297,850$
UNITS UNIT COST
Beginning inventory 50,000 2.00$
Purchases:
February 5 25,000 2.10
March 10 30,000 2.20
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
The following income statement, statement of cash flows, and additional information are available
for PEK Company:
PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
PEK COMPANY
April 15 40,000 2.50
June 16 75,000 3.00
September 5 60,000 3.10
October 3 40,000 3.25
b.
c.
Required
Sales revenue 1,250,000$
Cash flows from operating activities:
Net income 263,830$
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
change in income taxes as a result of changes in any income statement items. Assume that income taxes
are paid on December 31 of each year.)
PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
PEK COMPANY
1. Prepare a revised income statement and a revised statement of cash flows to take into account the
omission of the entry to record the purchase of the two assets. (Hint: You will need to take into account any
During the year, the company sold 250,000 units at $5 each.
PEK uses the periodic FIFO method to value its inventory and the straight-line method to depreciate all of its
of a mixing machine and a boiler was not recorded. The fair market values of the mixing machine and the
boiler were $200,000 and $100,000, respectively. Each asset has an estimated useful life of ten years with
no residual value expected. The purchase of the assets was financed by issuing a $270,000 five-year
promissory note directly to the seller. Interest of 8% is paid annually on December 31.
long-term assets.
During the year-end audit, it was discovered that a January 3, 2016, transaction for the lump-sum purchase
PEK COMPANY
FOR THE YEAR ENDED DECEMBER 31, 2016
Sales revenue 1,250,000$
Cost of goods sold 636,500
3. Assume that PEK decides to use the LIFO method rather than the FIFO method to value its inventory and
Treat the answers in requirements (3) and (4) as independent of the other parts.
continue to be depreciated on a straight-line basis. Prepare a revised income statement and a revised
statement of cash flows assuming that the company decides to use the accelerated method for these two
assets rather than the straight-line method, resulting in depreciation of $49,091 for 2016.
PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
2. Assume the same facts as in (1), except that the company is considering the use of an accelerated method
rather than the straight-line method for the assets purchased on January 3, 2016. All other assets would
Decrease in income taxes
b. Increase in other expenses
c. Increase in other expenses
a. LIFO cost of goods sold:
Units Cost Total Cost
40,000 3.25$ 130,000$
60,000 3.10 186,000
75,000 3.00 225,000
800,000$
3%
Times estimated uncollectibles
4. Assume that PEK failed to record an estimate of bad debts for 2016. (Bad debt expense is normally
included in “other expenses.”) Before any adjustment, the balance in Allowance for Doubtful Accounts
is $8,200. The credit manager estimates that 3% of the $800,000 of sales on account will prove to be
uncollectible. Based on this information, compute the effect (amount of increase or decrease) of recognition
of the bad debt estimate on other expenses, income tax expense, and net income.
a. Sales on account
recognize cost of goods sold for 2016. Compute the effect (amount of increase or decrease) this would have
on cost of goods sold, income tax expense, and net income.
b. Additional cost of goods sold
Times the tax rate
c. Additional cost of goods sold
Decrease in income taxes
Total LIFO cost of goods sold
Total FIFO cost of goods sold
b. the asset is purchased.
Calculate the amount of income tax that Rummy must pay each year if:
a. the asset is not purchased
What is the amount of tax shield over the life of the asset?
Total tax if not purchased:
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax
purposes. Assume that Rummy Company is considering the purchase of an asset as of January 1, 2016.
The cost of the asset with a five-year life and zero residual value is $60,000. The company will use the
double-declining-balance method of depreciation.
next five years. The corporation is currently in the 30% tax bracket.
2. The blue cells are for data entry. Enter text in the T cells, formulas in the F cells, percentages in % cells,
What is the amount of tax shield for Rummy if it uses the straight-line method over the life of
the asset?
Depreciation tax shield with straight-line method:
Why would Rummy choose to use the accelerated method?
General Instructions
2. The blue cells are for data entry. Enter text in the T cells, formulas in the F cells, percentages in % cells,
and dollars or numbers in the $ cells.
P8-2
Required
If asset is not purchased:
Income before depreciation 50,000$
amount of income tax that Supreme must pay each year if the asset is purchased. What is the amount of the
depreciation tax shield?
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme
Company is considering the purchase of an asset as of January 1, 2016. The cost of the asset with a five-year life and zero residual
value is $100,000. The company will use the straight-line method of depreciation.
Supreme’s income for tax purposes before recording depreciation on the asset will be $50,000 per year for the next five years.
The corporation is currently in the 35% tax bracket.
Calculate the amount of income tax that Supreme must pay each year if the asset is not purchased. Calculate the
General Instructions
1. The following worksheet may be used to complete the exercise/problem.
You may need to refer to your textbook for additional information.
product. The patent is valid for 15 more years; however, the company expects to
of the four years will be zero.
The equipment is expected to last three years with zero salvage value. The company
uses the double-declining-balance method to depreciate its equipment.
April 1, sold a truck for $1,500. The truck had been purchased for $8,000 exactly
five years earlier, had an expected salvage value of $1,000, and was depreciated over
an eight-year life using the straight-line method.
July 1, purchased a $14,000 patent for a unique baking process to produce a new
January 1, purchased equipment for $2,700 from a competitor who was retiring.
3. The completed exercise/problem may be printed or e-mailed per direction from your instructor.
P8-6A
a.
Required
a. Depreciation should be calculated as follows
Original cost 16,000$
Depreciation or amortization and book values:
For each situation, explain the amount of depreciation or amortization recorded for each
asset in the current year and the book value of each asset at the end of the year. For (c),
indicate the accumulated depreciation and book value at the time of sale.
The following events took place at Tasty-Toppins Inc., a pizza shop that specializes in
home delivery, during 2016:
January 1, purchased a truck for $16,000 and added a cab and an oven at a cost of
$10,900. The truck is expected to last five years and be sold for $300 at the end of
that time. The company uses straight-line depreciation for its trucks.
Book value at end of year 2016 21,580$
b. Depreciation:
c. Depreciation:
Original cost 8,000$
Salvage value 1,000
Depreciable value 7,000$
Depreciation expense 875$
d. Amortization:
Cost of patent 14,000$
Amortization period 4
Amortization expense 3,500$
Amortization expense for the year 2016 1,750$
General Instructions
2. The blue cells are for data entry. Enter text in the T cells, formulas in the F cells,
and dollars or numbers in the $ cells.
P8-9A
Required
Legal costs of $23,800 to acquire the patent
The book value of the patent after 5 years of amortization is:
2. How much amortization expense should Maciel report in each year through the year ended
September 30, 2016?
3. What amount of loss should Maciel report in the year ended September 30, 2017?
process that would make Maciel’s patent completely worthless
On October 1, 2016, Maciel’s competition announced that it had obtained a patent on a new
1. How should Maciel record the $350,000 and $23,800 costs?
Research and development costs of $350,000 in the
During 2011, Maciel Inc.’s research and development department developed a new manufacturing
process. Research and development costs were $350,000. The process was patented
on October 1, 2011. Legal costs to acquire the patent were $23,800. Maciel decided to expense
the patent over a 20-year time period using the straight-line method. Maciel’s fiscal year ends on
September 30.