Assignment

Exercise 1

Inventory errors and income measurement. The income statements of KeagleCompany for 20X3 and 20X4 follow.

                                   20X3               20X4
Sales                            $100,000        $109,000
Cost of goods sold        62,000            74,000
Gross profit                  38,000            35,000
Expenses                     26,000            22,000
Net income                   $12,000          $ 13,000

A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000.

a. Prepare corrected 20X3 and 20X4 income statements.
b. What is the effect of the error on ending owner's equity for 20X3 and 20X4?

Problem 2

Inventory valuation methods: computations and concepts. Wave Riders Surfboard

Company began business on January 1 of the current year. Purchases of surfboards were as follows:

1/3: 100 boards , $125
3/17: 50 boards , $130
5/9: 246 boards , $140
7/3: 400 boards , $150
10/23: 74 boards , $160

Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.

Instructions

a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

• First-in, first-out
• Last-in, first-out
• Weighted average

b. Which of the three methods would be chosen if management's goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?
(2) approximate the physical flow of a sand and gravel dealer?
(3) report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices?

Exercise 2

Depreciation methods. Betsy Ross Enterprises purchased a delivery van for $30,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8
b. Straight-line
c. Double-declining-balance

Exercise 3

Depreciation computations. Alpha AlphaAlpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $1,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

a. The machine's book value on December 31, 20X5, assuming use of the straight-line depreciation method
b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

Problem 2

Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3220X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions

a. Compute depreciation for 20X3220X7 by using the following methods: straight line, units of output, and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company's depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.