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## Direct Labor Cost: \$10,500 Purchase of Materials: 15,000 Supplies used: 675 Factory Insurance: 350 Advertising: 800 Material Handling: 3,745 Work-in-process inventory, 12/31/2003: 12,500 Work-in-process inventory, 12/31/2004: 14,250 Material Inventory, 12/31/2003: 3,475 Material Inventory, 12/31/2004: 9,500

I have the following problem, that I have done in several ways and I always get an answer that is greater that the correct one. These are the figures (in thousands of dollars): Direct Labor Cost: \$10,500 Purchase of Materials: 15,000 Supplies used: 675 Factory Insurance: 350 Advertising: 800 Material Handling: 3,745 Work-in-process inventory, 12/31/2003: 12,500 Work-in-process inventory, 12/31/2004: 14,250 Material Inventory, 12/31/2003: 3,475 Material Inventory, 12/31/2004: 9,500 Finished goods inventory, 12/31/2003: 6,685 Finished goods inventory, 12/31/2004: 4,250 1. Prepare a statement of cost of goods manufactured. (Correct answer is 24720, my answer is 29780) 2. Prepare a statement of cost of goods sold.

## A department store has a budgeted sales of \$12,000 men's suits in September. Management wants to have 6,000 suits in inventory at the end fo the month to prepare for the winter season. Beginning inventory for September is expected to be \$4,000 suits. What is the dollar amount of purchase of suits? Each suit has a cost of \$75.

A department store has a budgeted sales of \$12,000 men’s suits in September. Management wants to have 6,000 suits in inventory at the end fo the month to prepare for the winter season. Beginning inventory for September is expected to be \$4,000 suits. What is the dollar amount of purchase of suits? Each suit has a cost of \$75.

## From the company’s view point, what is the best conclusion? b) What do you think is George Bush’s desired conclusion? Make sure to include the computations of income. c) By incorporating short-run financial methods of accomplishment as incentives for rewards, what do you think would be the motivation difficulties? d) How can the discrepancies in parts (a) and (b), and the motivation difficulties in part (c) be diminished?

Question 1) There is a company called Walmart, and it deals with machining work that is conventional. A variety of machines are used within the company, and these machines are frequently restored and changed.

George Bush is the manager of this factory, and he has given permission to acquire an automated machine from Machine Ltd. at a price of \$2,000,000. Recently, the new automated machine was set up. It is believed that this new machine will last for 10 years and this new machine will incur operating costs of \$700,000 (on a yearly basis). By the end of the 10 years, the machine will be useless.

George Bush’s salary is \$75,000 and he also obtains ½ of 1% of the corporate net income as his yearly bonus. Brad thinks he will stay with Walmart for an additional 2 years. Afterwards, he believes that by moving to a different company he will obtain a hefty salary increase and a promotion.

Super Machine Ltd. (another company) is offering a new machine. This machine executes the same jobs as the new machine from Machine Ltd. George Bush has his reservations about this new growth. The machine at Super Machine Ltd. costs \$2,500,000 and has the capability of lasting for 10 years. The yearly operating costs are \$300,000 and after 10 years the machine will have a nil salvage value. It has caused Walmart’s machine as outdated and the net of salvage, its present amount has gone down to \$500,000.

Based on the following questions, ignore income taxes and make the assumption that the company’s compulsory return is 14%. In order to calculate the depreciation, this company uses the straight-line method.

a)     From the company’s view point, what is the best conclusion?

b)     What do you think is George Bush’s desired conclusion? Make sure to include the computations of income.

c)      By incorporating short-run financial methods of accomplishment as incentives for rewards, what do you think would be the motivation difficulties?

d)     How can the discrepancies in parts (a) and (b), and the motivation difficulties in part (c) be diminished?

## Seneca Foods is a regional producer of low-priced private-label snack foods. Seneca contracts with local supermarkets to supply good-tasting packaged snack foods that the retailers sell at significantly lower prices to price-sensitive consumers. Because Seneca’s production costs are low, and it spends no money on advertising and promotion, it can sell its products to retailers at much lower prices than can national-brand snack food companies, such as Frito-Lay

Q1) (ACTIVITY BASED MANAGEMENT)

Seneca Foods is a regional producer of low-priced private-label snack foods. Seneca contracts with local supermarkets to supply good-tasting packaged snack foods that the retailers sell at significantly lower prices to price-sensitive consumers. Because Seneca’s production costs are low, and it spends no money on advertising and promotion, it can sell its products to retailers at much lower prices than can national-brand snack food companies, such as Frito-Lay. The low purchase prices often allow the retailer to mark this product up and earn a gross margin well above what it earns from brand products, while still keeping and selling price to the consumer well below the price of the brand products.

Seneca has recently been approached by several large discount food chains who wish to offer their consumers a high-quality but much lower-priced alternative to the heavily advertised and high-priced national brands. But each discount retailer wants the recipe for the snack foods to be customized to its own tastes. Also, each retailer wants its own name and label on the snack foods it sells. Thus, the retailer, not the manufacturer, would be providing the branding for the private-label product. In addition, the retail chains want their own retailer-branded product to offer a full snack product line, just as the national brands do.

Seneca’s managers are intrigued with the potential for quantum growth by becoming the prime producer of retailer-brand snack foods to large, national discount chains. As they contemplated this new opportunity. Dale Williams, the senior marketing manager, proposed that if Seneca enters this business, it can think of even higher growth opportunities. Seneca does not have to sell just to the discount chains that have approached it. Local supermarket chains may also be attracted to the idea of having their own brand of high quality but lower-priced snack products that could compete with the national brands, not just be a low-priced alternative for highly price-sensitive consumers. Perhaps Seneca could launch a marketing effort to regional supermarket chains around the country for a retail-brand snack food product line. Williams noted, however, that the local supermarket chains were not as sophisticated as the national discounters in promoting products under their own brand name. Each supermarket chain likely would need extensive assistance and support to learn how to advertise, merchandise, and promote the store-brand products to be competitive with the national-brand products.

John Thompson, director of logistics for Seneca Foods, noted another issue. The national-brand producers used their own salespeople to deliver their products directly to the retailer’s store and even stocked their products on the retailer’s shelves. Seneca, in contrast, delivered to the retailer’s warehouse or distribution center, leaving the retailer to move the product to the shelves of its various retail outlets. The national producers were trying to dissuade the large discount chains from following their proposed private-label (retailer-brand) strategy by showing them studies that the apparently higher margins they would earn on the private label would be eaten away by much higher warehousing, distribution, and stocking costs for these products.

Heather Gerald, the controller of Seneca, was concerned with the new initiatives. She felt that Seneca’s current success was due to its focus. It currently offered a relatively narrow range of products aimed at the high-volume snack food segments to supermarket chains in its local region. Seneca got good terms from its relatively few supplier because of the high volume of business it did with each of them. Also, the existing production processes were efficient for the products and product range currently produced. She feared that customizing products for each discount or supermarket retailer, plus adding additional products so that they could offer a full product line, would cause problems with both suppliers and the production process. She also wondered about the cost of providing new services, such as consulting and promtoins, to the supermarket chains and of developing some of the new items required for the proposed full product line strategy. Heather was attracted to the growth prospects offered by becoming the preferred supplier to major discount and supermarket chains. But she was not as optimistic as Dale Williams that these retailers truly believed that selling their own private-label foods would be more profitable than selling the national brands. Perhaps they were only using Seneca as a negotiating ploy, threatening to turn to private labels to increase their power in setting terms with the national manufacturers. Once production geared up, how much volume would these retailers provide to Seneca? How could Seneca convince the large retailers about the profitability associated with the new private-label strategy?

Gerald knew that Seneca’s existing cost systems were adequate for their current strategy. Most expenses were related to materials and machine processing, and these costs were well assigned to products with the conventional standard costing system. But the new strategy would seem to involve a lot more spending in areas other than purchasing materials and running machines. She wished she knew how to provide input into the strategic deliberations now under way at Seneca, but she didn’t know how to quantify all the effects of the proposed strategy.

REQUIRED:

a)      How can activity-based costing help Heather Gerald assess the attractiveness of the proposed policy?

b)      Assuming that Seneca starts to supply new customers-large discounters and supermarkets outisde its local region-what ABC systems would be helpful to guide the profitability of the strategy and assist Seneca managers in making decisions?

*NOTE: Make sure to think about the totality of Seneca’s operations, including its relationships with both supplier and customers. (i) Discuss how ABC can be used to manage and controls costs for Seneca’s manufacturing operations. The “whale curve” and some of those concepts can apply to this company. (ii) ABC can be used to measure profitability: internal to the companyand external by modeling the customer. (iii) Finally, use ABC to manage the company’s relationship with suppliers.

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Q2) (COST-BASED DECISION MAKING)

COST COMMITMENT

Using published sources, identify the process of cost commitment during various phases of some product’s life cycle. Try to find several  examples so that you can contrast the rate of cost commitment for different products.

*Note: Provide a minimum of two examples and document the process of cost commitment

during various phases of these products’ life cycles. In particular, indicate what

percentage of the costs will be committed at the design stage.

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Q3) (FORMAL MODELS IN BUDGETING AND INCENTIVE CONTRACTS)

THE REVELATION PRINCIPLE IN BUDGET SETTING

Kentville Orchards grows and sells a wide variety of fruits. Norm Wilson, the vice-president-controller of Kentville Orchards, is responsible for all aspects of budgeting and forecasting in the firm. Norm has becoming both disillusioned and dissatisfied with the traditional approach that Kentville Orchards has taken to budgeting. Norm summarized his concerns as follows:

“The traditional approach, where we set budget objectives and then evaluate performance relative to those objectives, is not working well. First, the budget is focusing attention on the wrong things. The managers are interested in making short-run profit as large as possible and are not doing things to improve long-run profitability. Second, I do not think that the model of evaluating performance based on profits has the scope to evaluate the jobs that the managers are doing. Their jobs are much more complicated than a simple profit measure implies, and we need a more accurate picture of how well they are doing. Finally, the existing system is motivating the managers to build slack into both their standards and performance targets so that they can make budget and earn bonuses. As a result, our forecasting system is unable to predict either sales levels or input usage accurately.”

Norm went on to indicate that he was considering recommending to the senior management committee at Kentville Orchards that the current budgeting system be replaced with a new system using participative budggeting techniques. Specifically, the new system would require that the objectives for each management job in the organization be defined relative to the organization’s strategic goals by negotiations between the job’s incumbent and incumbent’s supervisor. From these general objectives, specific performance objectives would be set for each job each year through negotiations between the incumbent and the incumbent’s supervisor. The objectives would be multidimensional and would include performance objectives for all attributes of the job that are considered important.

The annual evaluation would reflect two dimensions of performance appraisal. First, the incumbent would be evaluated for innovation in developing ways of carrying out assigned responsibilities. Second, the incumbent’s performance would be evaluated relative to the targets that were negotiated with the supervisor. Norm summarized his feelings as follows:

“The only thing that is holding me back is that I do not think that the proposed changes go far enough. The proposed system deals with the problem of inadequate performance measurement but still provides managers with the incentives to understate their potential, since their performance will be evaluated relative to the targets that each manager negotiates with his supervisor. Moreover, the planned system, like the old system, still has the aspect of checking up on people rather than relying on them to do their jobs. Perhaps we should go even further and implement the proposed system but evaluate managers only on their ability to be innovative in undertaking the tasks that they have been assigned. If they are not evaluated relative to the targets that they set jointly with their supervisors, they will be motivated not to understate their potential. The bottom line is that I think that we should get rid of the concept of standards altogether, irrespective of who sets the standards. As a result of eliminating the concept of standards, the budget will serve to communicate and coordinate rather than be a threat and a means of checking up on the managers.”

REQUIRED:

Evaluate the initial proposal for the revision of the budgeting system as well as the proposal that would eliminate the use of standards.

*Note: Start by identifying the problems with the current budgeting and performance

system. Then, comment on the advantages and disadvantages of the proposed new

systems: one in which evaluation is based on participative budgeting and innovation

and the other in which evaluation is based solely on innovation.

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Q4) (FINANCIAL MEASURES OF PERFORMANCE-Internal Transfer Pricing with an Outside Market)

BACKGROUND

The New Brunswick Company is a midsized subsidiary of the Sun Corporation, which manufacturers various textile and similar material composites. Sales are made to affiliate companies within the Sun Corporation, as well as to external companies. Approximately one-half of New Brunswick’s sales are to affiliated companies.

New Brunswick’s formal mission statement reads as follows:

“New Brunswick’s mission is to develop and supply unique, cost effective fabrics and related nonconventional structures to proactively support the Sun Corporation’s worldwide consumer and professional markets. An extension of New Brunswick’s mission is to capitalize on the resultant unique product and fabric capabilities by developing profitable franchises in slective growth-oriented consumer and industrial markets. This will be accomplished while satisfying the expectations of the company and fostering commitment, challenge, and reward for our employees.”

This statement has received wide approval from the corporate level and from the affiliate management boards. It serves as the driving force for New Brunswick’s management and sets clear objectives.

THE PRODUCT

Fifteen years ago, New Brunswick research began evaluating a fabric formation technology (originally developed by the Smith Company, a competitor) called Super Weave. In this technology, fibers are entagled mechanically using water sprayed under high pressure. The resulting fabric is very clothlike in appearance, feel, and comfort. The Smith Company realized early on that this fabric would make an idea barrier in the operating room. The new fabric would provide an effective disposable replacement for operating room drapes and gowns, providing a greater degree of sterility than had been attainable in the past.

Within the Sun Corporation’s family of companies, Sanitech is responsible for asepsis within the operating room. To this end, Sanitech markets operating room apparel, gloves, and disinfectants.

Ten years ago, Sanitech began marketing operating room packs and gowns using the Smith fabric. Although the franchise was successful, the relationship between supplier and customer did have drawbacks, which the Sun Corporation, Sanitech, and New Brunswick fully understood: 1) Product improvements made by Smith might not be exclusive to Sanitech in the future, because Smith could sell to Sanitech’s competitors, 2) Smith’s capacity versus Sanitech’s demand, 3) Lack of a second source, 4) Fear of monopolistic pricing practices.

NEW BRUNSWICK’S ENTRY INTO THE MARKET

Six years ago, New Brunswick developed a material equivalent to the Super Weave fabric for sale to Sanitech. Entering this business required New Brunswick to make a significant capital investment in plant and equipment. The total investment would approach \$30 million, the largest single investment in the company’s long history. Given the Sun Corporation’s policy of decentralized operating companies and New Brunswick’s mission, New Brunswick’s resources alone were used to fund the project. In addition, Sanitech as the marketing company was at liberty to select the fabric that, from its perspective, would best meet its customers’ requirements at the lowest cost to Sanitech.

New Brunswick’s proposal was presented to the executive committee of the Sun Corporation, who gave final approval for New Brunswick to proceed.

SMITH’S RESPONSE

Three years ago, New Brunswick began making fabric of a quality comparable to Smith’s. However, New Brunswick found itself in a significantly changed market environment: 1) Concurrent with New Brunswick’s entry, Smith’s prices to Sanitech immediately dropped, 2) Smith introduced pricing strategies that rewarded Sanitech for high volume and provided multiyear incentives, 3) With the exception of price escalation, Sanitech and smith had developed an effective partnership since 1975, 4) After several years of manufacturing, Smith had been able to maximize manufacturing efficiencies and achieve lower cost. New Brunswick realized it was at a cost disadvantage and could not price on the basis of intercompany transfer formulas (normally, full cost plus a percent return on invested capital and working capital).

New Brunswick understood very quickly and clearly that, in order to be successful, it must beat Smith’s pricing and in the long run minimize manufacturing costs or New Brunswick would have to be content as a secondary source of supply.

NEW BRUNSWICK’S PROBLEM

The vice president of affiliate marketing at New Brunswick requested the assistance of the chief financial officer in developing a plan that would enable New Brunswick to sell itsproduct to Sanitech while achieving the following objectives: 1) Establish a price that is competitive while recovering the capital investment in a reasonable number of years, 2) Establish the longer-term profitability for New Brunswick, 3) Provide the corporation with the lowest-cost product over the long run.

REQUIRED:

a)      How should New Brunswick develop its pricing strategy?

b)      How should the benefit to the Sun Corporation be measured?

c)       What might Smith’s reaction be to your strategy?

d)      Should vertically integrated corporations be forced to procure raw materials from other divisions?

e)      Should intercompany pricing policy be inflexible?

*NOTE: This case involves a basic transfer pricing problem—an external supplier offers a

price that is lower than the full costs of producing the product inside. The questions

in this case are fairly straightforward. For (a), review the case and

recommend a pricing strategy. Provide clear reasons why your pricing strategy would

be most effective. For (b), comment on how each department should be

evaluated, and overall, how the company will be evaluated, based on the strategy

you suggested in (a). Consider whether the total company effect of a

transfer price is important, and think about the financial and non-financial benefits of

producing a product inside. For (c), describe how Smith will respond to the

the pricing strategy suggested in (a). Parts (d) and (e) are general

questions that can be applied to all vertically integrated companies.

## Social security taxes as liabilities. Definition of accumulation rights. Recognizing compensated absences expense. Accruing estimated loss contingency. Disclosing gain contingencies. Sales-type warranty profit. Fair value of asset retirement obligation. Reporting a litigation liability. Expense warranty approach. Acid-test ratio components. Affect on current ratio. Reporting current liabilities

guilt. b. the court will decide the case within one year. c. the damages appear to be material. d. the cause for action occurred during the accounting period covered by the financial statements. Use of the accrual method in accounting for product warranty costs a. is required for federal income tax purposes. b. is frequently justified on the basis of expediency when warranty costs are immaterial. c. finds the expense account being charged when the seller performs in compliance with the warranty. d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale. Which of the following is not acceptable treatment for the presentation of current liabilities? a. Listing current liabilities in order of maturity b. Listing current liabilities according to amount c. Offsetting current liabilities against assets that are to be applied to their liquidation d. Showing current liabilities immediately below current assets to obtain a presentation of working capital The ratio of current assets to current liabilities is called the a. current ratio. b. acid-test ratio. c. current asset turnover ratio. d. current liability turnover ratio. Accrued liabilities are disclosed in financial statements by a. a footnote to the statements. b. showing the amount among the liabilities but not extending it to the liability total. c. an appropriation of retained earnings. d. appropriately classifying them as regular liabilities in the balance sheet. The numerator of the acid-test ratio consists of a. total current assets. b. cash and marketable securities. c. cash and net receivables. d. cash, marketable securities, and net receivables. S 56. S 57. S 58. P 59. 60. 61. 13 – 14 Test Bank for Intermediate Accounting, Twelfth Edition *62. Which of the following is not a permissible method of calculating a bonus to an employee? a. The bonus is based on income before deductions for the bonus and income taxes. b. The bonus is based on income after deduction of the bonus but before deduction of income taxes. c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible. Multiple Choice Answers Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. 22. 23. 24. 25. 26. d d a a b d 27. 28. 29. 30. 31. 32. c d c d c d 33. 34. 35. 36. 37. 38. d d d a d b 39. 40. 41. 42. 43. 44. d d d c d d 45. 46. 47. 48. 49. 50. d b a c d b 51. 52. 53. 54. 55. 56. c c c a b d 57. 58. 59. 60. 61. *62. d c a d d d Solutions to those Multiple Choice questions for which the answer is none of these. 22. A long-term debt maturing currently to be paid with current assets is a current liability. 32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities. 33. The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities. MULTIPLE CHOICE Computational 63. Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 2007 for the purchase of \$150,000 of inventory. The face value of the note was \$152,205. Assuming Edson used a Discount on Note Payable account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2007 will include a a. debit to Discount on Note Payable for \$735. b. debit to Interest Expense for \$1,470. c. credit to Discount on Note Payable for \$735. d. credit to Interest Expense for \$1,470. The effective interest on a 12-month, zero-interest-bearing note payable of \$300,000, discounted at the bank at 10% is a. 10.87%. b. 10%. c. 9.09%. d. 11.11%. 64. Current Liabilities and Contingencies 65. 13 – 15 On February 10, 2007, after issuance of its financial statements for 2006, Flynn Company entered into a financing agreement with Lebo Bank, allowing Flynn Company to borrow up to \$4,000,000 at any time through 2009. Amounts borrowed under the agreement bear interest at 2% above the bank’s prime interest rate and mature two years from the date of loan. Flynn Company presently has \$1,500,000 of notes payable with First National Bank maturing March 15, 2007. The company intends to borrow \$2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires Flynn to maintain a working capital level of \$6,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of Flynn Company as of the December 31, 2007 balance sheet date is a. \$0. b. \$1,500,000. c. \$2,000,000. d. \$4,000,000. On December 31, 2006, Frye Co. has \$2,000,000 of short-term notes payable due on February 14, 2007. On January 10, 2007, Frye arranged a line of credit with County Bank which allows Frye to borrow up to \$1,500,000 at one percent above the prime rate for three years. On February 2, 2007, Frye borrowed \$1,200,000 from County Bank and used \$500,000 additional cash to liquidate \$1,700,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2006 balance sheet which is issued on March 5, 2007 is a. \$0. b. \$300,000. c. \$500,000. d. \$800,000. 66. Use the following information for questions 67 and 68. Raney Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales tax collected. Raney Co. records the sales tax in the Sales account. The amount recorded in the Sales account during May was \$148,400. 67. The amount of sales taxes (to the nearest dollar) for May is a. \$8,726. b. \$8,400. c. \$8,904. d. \$9,438. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is a. \$8,551. b. \$8,232. c. \$8,726. d. \$9,249. 68. 13 – 16 Test Bank for Intermediate Accounting, Twelfth Edition 69. Trent, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2007, Trent remitted \$81,480 tax to the state tax division for March 2007 retail sales. What was Trent ‘s March 2007 retail sales subject to sales tax? a. \$1,629,600. b. \$1,596,000. c. \$1,680,000. d. \$1,645,000. Holbert Corporation has \$2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 shares of common stock. If the stock is sold for \$20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? a. \$1,500,000 b. \$2,500,000 c. \$1,000,000 d. \$0 Grogan Corporation has \$1,800,000 of short-term debt it expects to retire with proceeds from the sale of 60,000 shares of common stock. If the stock is sold for \$20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? a. \$1,200,000 b. \$1,800,000 c. \$600,000 d. \$0 Timmons Co., which has a taxable payroll of \$500,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Timmons Co.? a. \$58,500 b. \$41,000 c. \$20,000 d. \$14,000 Unruh Co., which has a taxable payroll of \$400,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Unruh Co.? a. \$46,800 b. \$32,800 c. \$16,000 d. \$11,200 70. 71. 72. 73. Current Liabilities and Contingencies 74. 13 – 17 A company gives each of its 50 employees (assume they were all employed contin
uously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2007, they made \$14 per hour and in 2008 they made \$16 per hour. During 2008, they took an average of 9 days of vacation each. The company s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively? a. \$67,200; \$93,600 b. \$76,800; \$96,000 c. \$67,200; \$96,000 d. \$76,800; \$93,600 A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2007, they made \$17.50 per hour and in 2008 they made \$20 per hour. During 2008, they took an average of 9 days of vacation each. The company s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively? a. \$84,000; \$117,000 b. \$96,000; \$120,000 c. \$84,000; \$120,000 d. \$96,000; \$117,000 The total payroll of Waters Company for the month of October, 2007 was \$360,000, of which \$90,000 represented amounts paid in excess of \$90,000 to certain employees. \$300,000 represented amounts paid to employees in excess of the \$7,000 maximum subject to unemployment taxes. \$90,000 of federal income taxes and \$9,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employee s wages to \$90,000 and 1.45% in excess of \$90,000. What amount should Waters record as payroll tax expense? a. \$118,620. b. \$113,040. c. \$23,040. d. \$28,440. 75. 76. Use the following information for questions 77 and 78. Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007. Information relative to these employees is as follows: Year 2006 2007 2008 Hourly Wages \$25.80 27.00 28.50 Vacation Days Earned by Each Employee 10 10 10 Vacation Days Used by Each Employee 0 8 10 Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. 13 – 18 Test Bank for Intermediate Accounting, Twelfth Edition 77. What is the amount of expense relative to compensated absences that should be reported on Simson s income statement for 2006? a. \$0. b. \$68,880. c. \$75,600. d. \$72,240. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2008? a. \$94,920. b. \$90,720. c. \$79,800. d. \$95,760. A company offers a cash rebate of \$1 on each \$4 package of light bulbs sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 \$1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31? a. \$400,000; \$400,000 b. \$400,000; \$260,000 c. \$260,000; \$260,000 d. \$140,000; \$260,000 A company buys an oil rig for \$1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is \$200,000 (present value at 10% is \$77,110). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events? a. Depreciation expense of \$120,000 b. Depreciation expense of \$100,000 and interest expense of \$7,711 c. Depreciation expense of \$100,000 and interest expense of \$20,000 d. Depreciation expense of \$107,710 and interest expense of \$7,711 Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them \$1,000,000 per year. The company estimates that on average it will incur losses of \$800,000 per year. During 2007, \$350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2007? a. \$350,000 in losses and no insurance expense b. \$350,000 in losses and \$450,000 in insurance expense c. \$0 in losses and \$800,000 in insurance expense d. \$0 in losses and \$1,000,000 in insurance expense A company offers a cash rebate of \$1 on each \$4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 \$1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31? a. \$600,000; \$600,000 b. \$600,000; \$390,000 c. \$390,000; \$390,000 d. \$210,000; \$390,000 78. 79. 80. 81. 82. Current Liabilities and Contingencies 83. 13 – 19 A company buys an oil rig for \$2,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is \$400,000 (present value at 10% is \$154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events? a. Depreciation expense of \$240,000 b. Depreciation expense of \$200,000 and interest expense of \$15,422 c. Depreciation expense of \$200,000 and interest expense of \$40,000 d. Depreciation expense of \$215,420 and interest expense of \$15,422 During 2006, Younger Co. introduced a new line of machines that carry a three-year warranty against manufacturer s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual expenditures warranty for the first three-year period were as follows: 2006 2007 2008 Sales \$ 600,000 1,500,000 2,100,000 \$4,200,000 Actual Warranty Expenditures \$ 9,000 45,000 135,000 \$189,000 84. What amount should Younger report as a liability at December 31, 2008? a. \$0 b. \$15,000 c. \$204,000 d. \$315,000 85. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Milner Frosted Flakes boxes and \$1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Milner Company \$2.50 each, how much liability for outstanding premiums should be recorded at the end of 2007? a. \$25,000 b. \$37,500 c. \$62,500 d. \$87,500 During 2006, Venable Co. introduced a new line of machines that carry a three-year warranty against manufacturer s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: 2006 2007 2008 Sales \$ 400,000 1,000,000 1,400,000 \$2,800,000 Actual Warranty Expenditures \$ 6,000 30,000 90,000 \$126,000 86. What amount should Venable report as a liability at December 31, 2008? a. \$0 b. \$10,000 c. \$136,000 d. \$210,000 13 – 20 Test Bank for Intermediate Accounting, Twelfth Edition 87. Pryor Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Pryor Frosted Flakes boxes and \$1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost Pryor Company \$2.50 each, how much liability for outstanding premiums should be recorded at the end of 2007? a. \$20,000 b. \$30,000 c. \$50,000 d. \$70,000 Use the following information for questions 88, 89, and 90. Kent Co. includes one coupon in each bag of dog food it sells. In return for eight co
0. 120,000 .6 = 72,000; 72,000

## John Roberts is 55 years old and has been asked to accept an early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: 1. \$180,000 acsh payment to be paid immediately. 2. a 20 year annuity of \$16,000 beginning immediately. 3. a 1o year annuity of \$50,000 beginning at age 65

John Roberts is 55 years old and has been asked to accept an early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: 1. \$180,000 acsh payment to be paid immediately. 2. a 20 year annuity of \$16,000 beginning immediately. 3. a 1o year annuity of \$50,000 beginning at age 65. Which alternative should John choose assuming that he is able to invest funds at a 7% rate?

## On January 1, 2010, Lynn Company borrows \$2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of \$200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its \$2,000,000 loan is

On January 1, 2010, Lynn Company borrows \$2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of \$200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its \$2,000,000 loan is….

## journal entry for E 16 25 (LO1) Flow of Manufacturing Costs Raw Materials Inventory Manufacturing Overhead Beg. Bal. 9,000 (b) 50,000 (d) 7,000 (i) 40,000 (a) 60,000 (d) 7,000 (f) 12,000 (c) 9,000 (h) 25,000 Work-in-Process Inventory Finished Goods Inventory Beg. Bal. 30,000 (j) 120,000 Beg. Bal. 20,000 (k) 135,000 (b) Direct (j) 120,000 materials 50,000 (e) Direct labor 60,000 (i) Mfg. over- head 40,000 Cash (Accounts Payable) Wages Payable (a) 60,000 (e) 60,000 (c) 9,000 (f) 12,000 (g) 32,000 (h) 25,000 Cost of Goods Sold Selling and Administrative Expenses (k) 135,000 (g) 32,000

journal entry for E 16 25 (LO1) Flow of Manufacturing Costs Raw Materials Inventory Manufacturing Overhead Beg. Bal. 9,000 (b) 50,000 (d) 7,000 (i) 40,000 (a) 60,000 (d) 7,000 (f) 12,000 (c) 9,000 (h) 25,000 Work-in-Process Inventory Finished Goods Inventory Beg. Bal. 30,000 (j) 120,000 Beg. Bal. 20,000 (k) 135,000 (b) Direct (j) 120,000 materials 50,000 (e) Direct labor 60,000 (i) Mfg. over- head 40,000 Cash (Accounts Payable) Wages Payable (a) 60,000 (e) 60,000 (c) 9,000 (f) 12,000 (g) 32,000 (h) 25,000 Cost of Goods Sold Selling and Administrative Expenses (k) 135,000 (g) 32,000

## Rory Co. s prepaid insurance was \$50,000 at December 31, 2007, and \$25,000 at December 31, 2006. Insurance expense was \$20,000 for 2007 and \$15,000 for 2006. What amount of cash disbursements for insurance would be reported in Rory s 2007 net cash flows from operating activities presented on a direct basis?

Rory Co. s prepaid insurance was \$50,000 at December 31, 2007, and \$25,000 at December 31, 2006. Insurance expense was \$20,000 for 2007 and \$15,000 for 2006. What amount of cash disbursements for insurance would be reported in Rory s 2007 net cash flows from operating activities presented on a direct basis?