Exercises Chapter 6 (Barril) PDF

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Chapter 6 exercises...

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Chapter 6 Calculating the Accounting Earnings Exercises

Main lecturer: Encarna Guillamon Saorin [email protected] 4-1

EXERCISE 6-1 On January 2, 20X1, Ahmadi Distributing Co. purchased a computer at a cost of $224,000. Before placing the computer in service, the company spent $6,200 for special chips, $3,100 for keyboards, and $6,700 for four colour monitors. Ahmadi management estimates that the computer will remain in service for five years and have a residual value of $20,000 Required: Prepare a depreciation schedule for the straight-line depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book 4-2 value

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EXERCISE 6-2 At the end of 20X0, Sprint Corporation had total assets of $15.2 billion and total liabilities of $10.5 billion. Included among the assets were property, plant, and equipment with a cost of $6.6 billion and accumulated depreciation of $2.4 billion Assume that Sprint completed the following selected transactions during 20X1: •

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The company earned total revenues of $20.5 billion and incurred total expenses of $18.3 billion, which included depreciation of $0.7 billion During the year Sprint paid $0.7 billion for new property, plant, and equipment and sold old plant assets for $0.5 4-3 billion

EXERCISE 6-2 (continued) •

The cost of the assets sold was $0.8 billion, and their accumulated depreciation was $0.4 billion

Required: 1. Explain how to determine whether Sprint had a gain or a loss on the sale of old plant assets. What was the amount of the gain or loss, if any? 2. Show how Sprint Corporation would report property, plant, and equipment on the balance sheet at December 31, 20X1

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EXERCISE 6-3 Norwest Bank has an annual salary expense of $800,000. In addition, the bank incurs payroll tax expense equal to 9% of the total payroll • At December 31, Norwest owes salaries of $7,000 and payroll taxes of $2,000. The bank will pay these amounts early next year • Show what Norwest Bank will report for the foregoing on its income statement and year-end balance sheet

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EXERCISE 6-4 Suppose you work for KPMG, the accounting firm, all year and earn a montly salary of $6,000. Your withheld income taxes consume 15% of gross pay. In addition to payroll taxes, you elect to contribute 5% montly to your retirement plan. KPMG also reducts $200 montly for your co-pay of the health insurance premium. Required: Compute your net pay for November. Use a 8% FICA tax rate. 4-6

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EXERCISE 6-5 Eric Associates reported short-term notes payable and salary payable as follows:

During 2008, Eric paid off both current liabilities that were left over from 2007. During 2008, Eric borrowed money on short-term notes payable and accrued salary expense during 2008. Required: Journalize all four of these transactions for Eric during 2008. 4-7

EXERCISE 6-6 MOVIE S.L. general ledger at September 30, 2008, the end of the company´s fiscal year, includes the following account balances before adjusting entries:

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EXERCISE 6-6 (continued) The additional data needed to develop the adjusting entries at September 30 are as follows: • a. The long-term note payable is payable in annual installments of $50,000, with the next installment due on January 31, 2009. On that date, the company will also pay one year´s interest at 6%. Interest was last paid on January 31. Make the adjusting entry to shift the current installment of the note payable to a current liability. Also accrue interest expense at year end. • b. Gross salaries for the last payroll of the fiscal year were $4,300. Of this amount, employee payroll taxes payable were $950. 4-9

EXERCISE 6-6 (continued) • c. Employer payroll taxex payable were $890. • d. On August 1, the company collected six months´ rent of $3,900 in advance. Requirements: 1. Open the listed accounts, inserting their unadjusted September 30 balances. 2. Journalize and post the September 30 adjusting entries to the accounts that you opened. Key adjusting entries by letter. 3. Prepare the liabilities section of MOVIE´s balance sheet at September 30, 2008. Show total current liabilities and total liabilities. 4-10

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EXERCISE 6-7 Prada company´s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate accumulated depreciation account for each asset. During 2007, Prada completed the following transactions: Jan. 1 Traded in old office equipment with book value of $11,000 (cost of $96,000 and accumulated depreciation of $85,000) for new equipment. Prada also paid $19,000 in cash. Apr. 1 Acquired land and communication equipment in a group purchase. Total cost was $80,000 paid in cash. An independent appraisal valued the land at $90,000 and the communication equipment at $10,000.

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EXERCISE 6-7 (continued) Sep. 1 Sold a building that had cost $128,000 (accumulated depreciation of $100,000 through December 31 of the preceding year). Prada received $60,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 30-year useful life and a residual value of $20,000. Dec. 31 Recorded depreciations as follows: -Communication equipment is depreciated by the straight-line method over a 5-year life with zero residual value. -Office equipment is depreciated straight-line over 6 years with $3,000 residual value. Required: Record the transactions for Prada. 4-12

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EXERCISE 6-8 On January 2, 2006, Speedway Delivery Service purchased a truck at a cost of $63,000. Before placing the truck in service, Speedway spent $2,200 painting it, $800 replacing tires, and $4,000 overhauling the engine. The truck should remain in service for 6 years and have a residual value of $14,200. Required: Prepare a depreciation schedule for the straightline depreciation method.

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EXERCISE 6-9 The accounts of Vella Company include Land, Buildings and Equipment. Vella has a separate accumulated depreciation account for each asset. During 2007, the company completed the following transactions: Jan. 1 Traded in equipment with accumulated depreciation of $90,000 (cost of $130,000) for similar new equipment. Vella also paid $80,000 cash. July 1 Sold a building that cost $550,000 and that had accumulated depreciation of $250,000 through December 31 of the preceding year. Vella received $100,000 cash and a $200,000 note receivable. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of $50,000.

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EXERCISE 6-9 (continued) Aug. 31 Purchased land and a building for a lump-sum payment of $300,000. An independent appraisal valued the land at $105,000 and the building at $210,000. Dec. 31 Depreciation on buildings is straight-line. The new building has a 40-year useful life and a residual value equal to $50,000. Required: Record the transactions in Vella´s journal. 4-15

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