Intermediate Accounting Comprehensive Project

Shivani Desai
2A
Final Examination-Comprehensive Case Project
Chapter 2: Accounting, Analysis, and Principles
Accounting
The Caddie Shack Driving Range
Balance Sheet
31-May-14
Assets
Cash $ 15,100
Building 6,000
Cash Withdrawal 800
Total Assets $ 21,900
Liabilities
Unpaid Advertising $ 150
Unpaid Utility Bill 100
Total Liabilities $ 250
Stockholders' Equity
Capital $ 20,000
Retained Earnings 1,650
Total Stockholders' Equity $ 21,650
Total Liabilities and Stockholders' Equity $ 21,900
Murray was able to determine that the business operated at a profit of $1,650 by
taking the revenues from customers and subtracting his expenses from the particular
period. His revenue minus his expenses from equipment, rent, advertising, paying his
nephews, and utility bill comes out to a net profit of $1,650. As per this information, no
loss was incurred this period.
Analysis
If considering partnership with Murray in his business, a net profit of $1,650
would be more useful in making this decision because despite the investment, the profit
insists that the company is in fact making money rather than losing it. To any investor, a
company operating at a profit of some sort is more attractive than one operating at a loss.
Principles
Under the revenue recognition principle, income according to GAAP is when a
company satisfies performance obligation. In other words, a service performed in May
should be recognized as income in the month of May even if it received the payment in a
following month.

Accounting
The Amato Theater
Adjusting Entries
For the Year Ended December 31, 2014
Debit Credit
31-Dec
Depreciation Expense $ 2,500
Accumulated Depreciation--Equipment $ 2,500
31-Dec
Interest Expense 750
Interest Payable 750
31-Dec
Unearned Service Revenue 10,000
Service Revenue 10,000
31-Dec
Advertising Expense 2,500
Prepaid Advertising 2,500
31-Dec
Salaries and Wages Expense 3,500
Salaries and Wages Payable 3,500
Analysis
The Amato Theater
Income Statement Before Adjusting Entries
Revenues:
Unearned Service Revenue $ 17,500
Ticket Revenue 360,000
Total Revenues $ 377,500
Expenses:
Advertising Expense $ 18,680
Interest Expense 1,400
Total Expenses $ 87,680
Net Income $ 289,820

The Amato Theater
Income Statement After Adjusting Entries
Revenues:
Unearned Service Revenue $ 27,500
Ticket Revenue 360,000
Total Revenues $ 387,500
Expenses:
Depreciation Expense $ 2,500
Interest Expense 2,150
Advertising Expense $ 21,180
Total Expenses $ 96,930
Amato’s bankers should wait until after its year-end adjustments before making a
decision on the loan renewal because after adjusting the entries, it shows that the
company is better off financially.
Principles
Based on the periodicity principle, the shorter the time period, the more difficult it is to
determine the proper net income for the period. The shorter the accounting period, the
less verifiable the result are. Although it is timely, as some decision makers need it to be,
there is an ultimate trade-off with accuracy, as shorter accounting periods, the more likely
the financial information will include errors.

Accounting
a)
Counting Crows Inc.
Single-Step Income Statement
Revenues:
Sales Revenue $ 1,900,000
Rent Revenue 40,000
$ 1,940,000
Expenses:
Cost of Goods Sold $ 850,000
Selling Expenses 300,000
Administrative Expenses 240,000
$ 1,390,000
EPS $ 5.50
b)
Counting Crows Inc.
Statement of Retained Earnings
Retained Earnings, Jan 1 $ 600,000
Add: Net Income 550,000
$ 1,150,000
Less: Cash Dividends 80,000
Retained Earnings, Dec 31 $ 1,070,000
c)
Counting Crows Inc.
Two-Step Comprehensive Income Statement
Sales $ 1,900,000
Cost of Goods Sold 850,000
Gross Profit $ 1,050,000
Operating Expenses 540,000
Other Comprehensive Income
Unrealized Holding Gain, net of tax 15,000
Comprehensive Income $ 525,000

Analysis
Multi-step income statements can provide more useful information then single-step
income statements in that they are not just revenues less expenses. Multi-step income
statements provide a company’s financial information in categories that let you evaluate
how a firm is doing on different bases such as gross profit, operating profit, non-
operating profit, etc. Multi-step income statements also supply resourceful information
about a firm’s discontinued operations, extraordinary items, noncontrolling interest, and
earnings per share.
Principles
Reporting a one-time administrative expense is not consistent with the qualitative
characteristics of accounting information in the conceptual framework. Administrative
costs are period costs, and a direct relationship between period costs and revenue cannot
be determined. Therefore, companies should charge off these expenses in the period
which they are incurred.

Accounting
Hopkins Company
Corrected Balance Sheet
Assets
Current Assets:
Cash $ 60,000
Accounts Receivable 52,000
Less: Allowance for Doubtful Accounts 13,500
Inventory 65,300
Long Term Investment:
Bond Sinking Fun 15,000
Property, Plant, and Equipment:
Equipment (net) 84,000
Intangible Assets:
Patents 15,000
Total Assets $ 277,800
Liabilities
Current Liabilities:
Notes and Accounts Payable $ 52,000
Long Term Liabilities:
Notes Payable (due 2016) 75,000
Total Liabilities 127,000
Common Stock 100,000
Retained Earnings 50,800
Total Stockholders' Equity 150,800
Total Liabilities and Stockholders' Equity $ 277,800
Analysis
If the bank was curious if Hopkins’ would be able to repay the loan if granted, they
should look at the balance sheet and see if the company has enough assets, current or
long-term, to cover its liabilities.
Principles
Objections that the bank may consider during the decision of Hopkins’ loan renewal are
the fact that taking the company’s unrealized gains would follow conservatism, which is
not a desirable quality of financial reporting, and materiality in that it must make a
difference otherwise there is no need for a company to record it. In this case, the gain is
not realized; therefore it is immaterial and should not be relevant to the decision.

Accounting
a)
Semiannual Installment $ 50,000
# of Years 10
Total $ 1,000,000
Total $ 1,000,000
Fair Value of Damaged Inventory 679,517
Interest $ 320,483
Interest $ 320,483
# of Years 10
Interest Per Year $ 32,048
Interest Per Year $ 32,048
Fair Value 679,517
Annual Rate 4.72%
Annual Rate= 9.44%
b) Johnson Co. should record the note receivable at $679,517 on the day the customer
takes delivery of the damaged goods because the first installment is not until 6 months
after the date the damaged inventory is picked up.
Analysis
If the interest rate increases, the fair value of the receivable will decrease because the
higher the interest rate, the lower the future cash flows.
Principles
The trade off between historical cost and fair value is that historical cost is generally
though to be verifiable and provides benchmarks for measuring historical trends, whereas
fair value may be more useful in information about future cash flows related to an asset
or liability.

Accounting
a)
Accounts Receivable
Beginning Balance, Dec 2013 $46,000
Credit Sales 255,000
Collections (228,000)
Amount from Factor (10,000)
Charges Off Uncollectible Accounts (1,600)
Ending Balance, Dec 2014 $61,400
Allowance for Doubtful Accounts
Beginning Balance, Dec 2013 $550
Charges off Uncollectible Accounts 1,600
Bad Debt Expense 2,585
Ending Balance, Dec 2014 $1,535*
* 2.5% of Accounts Receivable balance
b)
The Flatiron Pub
Balance Sheet-Current Assets
Assets
Current Assets:
Cash $5,867
Accounts Receivable 61,400
Less: Allowance for Doubtful Accounts 1,535
Note Receivable 5,000
Interest Receivable 50
Retained from Final Factor 200
Other Current Assets 3,925
Total Current Assets $74,907
Analysis
Flatiron’s current ratio:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠
=
$74,907
($44,600+$400)
= 1.66

Flatiron’s accounts receivable turnover:
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
=
$255,000
(
($45,450+$59,815)
2
)
= 4.84
Based on the results, Flatiron is more liquid than before.
b) Transferring Flatiron’s receivables would have decreased both of the ratios.
Principles
Using past information, a company can estimate the percentage of its outstanding
receivables that will become uncollectible without identifying specific amounts. It gives a
relatively accurate estimate of the receivables’ realizable value.

Accounting
a) FIFO-Residential
Goods Available – Ending Inventory = Cost of Goods Sold
1400 - 500 = 900
Englehart Company
RESIDENTIAL PUMPS-Periodic (FIFO)
Cost of Goods Sold
Units Cost Per Unit Total Cost
28-Feb 200 $ 400 $ 80,000
10-Mar 300 450 135,000
10-Mar 200 450 90,000
20-Mar 200 475 95,000
900 $ 400,000
Ending Inventory
20-Mar 200 $ 475 $ 95,000
30-Mar 300 500 150,000
500 $ 245,000
FIFO-Commercial
Goods Available – Ending Inventory = Cost of Goods Sold
2000 - 500 = 1500
Englehart Company
COMMERCIAL PUMPS-Periodic (FIFO)
Cost of Goods Sold
Units Cost per Unit Total Cost
28-Feb 600 $ 800 $ 480,000
3-Mar 300 900 270,000
3-Mar 300 900 270,000
12-Mar 300 950 285,000
1,500 $ 1,305,000
Ending Inventory
21-Mar 500 $ 1,000 $ 500,000
Total Cost of Goods Sold = $400,000 + $1,305,000 = $1,705,000

Total Ending Inventory = $245,000 + $500,000 = $745,000
b) LIFO-Commercial and Residential
Total Ending Inventory = Residential 500
Commercial 500
1,000 units
RESIDENTIAL- Cost of Ending Inventory at current cost = $245,000
COMMERCIAL- Cost of Ending Inventory at current cost = $500,000
Total at Current Cost $745,000
RESIDENTIAL Cost of Ending Inventory at base cost ($400) = $200,000
COMMERCIAL Cost of Ending Inventory at base cost ($800)= $400,000
Total at Base Cost $600,000
𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑎𝑡 𝑡ℎ𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡
𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑎𝑡 𝑡ℎ𝑒 𝐵𝑎𝑠𝑒 𝐶𝑜𝑠𝑡
= 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑓𝑜𝑟 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟
$745,000
$600,000
= $𝟏. 𝟐𝟒𝟐
Analysis
a) The FIFO Inventory method would yield a more meaningful current ratio because in
general, it is a better depiction of a company’s current position because its older
inventory is being sold first. Also, using LIFO can cause problems like understating
inventory and involuntary liquidation issues.
b) Comparing the result of two companies that use different inventory accounting
methods has become possible because of relaxed LIFE conformity rules. This has
resulted in relaxed restrictions against providing non-LIFO income numbers as well as
supplementary information. This information is what is useful in comparing a company
that uses FIFO with one that uses LIFO.
Principles
Companies can change from one inventory accounting method to another. Switching
from FIFO to LIFO can result in a tax benefit, whereas switching from LIFO to FIFO can
result in a tax burden. Switching from LIFO to FIFO can also increase reported earnings.
Also, using LIFO with an unstable inventory level can result in unwanted involuntary
liquidations.

Accounting
Residential Pumps
Ending Inventory=500 units
Units Cost Total Cost
30-Mar 300 $ 500 $ 150,000
20-Mar 200 $ 475 $ 95,000
$ 245,000
Commercial Pumps
Ending Inventory = 500
21-Mar 500 $ 1,000 $ 500,000
Residential Pumps
Ending Inventory=500 units
500 $ 500 $ 250,000
Commercial Pumps
Ending Inventory = 500
500 $ 1,000 $ 500,000
Analysis
Using the individual product level approach gives the financial statement reader better
information because it offers more accurate valuation of the company’s ending inventory.
Principles
Recording at the market price can involve two methods. One includes the loss/gain in the
cost of goods sold and the other lists it separately. Including a loss in the cost of goods
sold would not give faithful representation of the financial information.

Accounting
Purchase Price of Old Equipment $ 112,000
Less: Salvage Value 12,000
Depreciable Base $ 100,000
Yearly Depreciation $ 20,000
Depreciation Expense (2010-2014) $ 80,000
Purchase Price of Old Equipment $ 112,000
Less: Accumulated Depreciation 80,000
Book Value of Old Equipment $ 32,000
Fair Value of Old Equipment $ 50,000
Less: Book Value of Old Equipment 32,000
Total Gain $ 18,000
Debit Credit
Machinery (new) $ 62,000
Accumulated Depreciation 80,000
Machinery (old) $ 112,000
Gain on Disposal 18,000
Cash 12,000
Analysis
The return on asset ratio is net income divide by total average assets; therefore we would
add/subtract Durler Company’s gain/loss, in this particular case, gain.
Principles
In this example, if the exchange lacked commercial substance, the gain on disposal would
not be recorded and the basis of the new machinery would be reduced. The gain is
recognized through lower depreciation expense or when it is sold at a later time.

Accounting
a) Future cash flows are less than the carrying amount of the asset, so there is
impairment.
Carrying Amount= $36,000,000 - $10,000,000 = $26,000,000
Future cash flows = $4,000,000 X 4 years = $16,000,000
Cash flows at 4 years, 5% = $4,000,000 x 3.54595 = $14,183,800
$16,000,000-14,183,800 = $1,816,200 impairment
b) Carrying amount = $36,000,000 - $10,000,000 = $26,000,000
Future cash flows = $2,720,000 X 10 years = $27,200,000
Since the future cash flows are greater than the current carrying amount, there is no
impairment.
Analysis
Because Electroboy Enterprises will not be selling its assets until the second quarter of
the fiscal year, it has to account for the depreciation that will be accumulated within that
time period.
Principles
Electroboy can write back up the asset as long as the carrying value after the write up
never exceeds the carrying amount of the asset before the impairment.

Accounting
COPYRIGHT
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
= Amortization expense per year
$15,000
10
= $1,500 Amortization per year for the copyright.
The copyright was reported on January 2, 2014 therefore accumulated depreciation at
December 31, 2014 is $1,500.
Debit Credit
31-Dec Amortization Expense $ 1,500
Accumulated Copyright Amortization $ 1,500
The estimated fair value of $16,000 is greater than the carrying value of $15,000 so
impairment has not occurred.
TRADE NAME
Because the trademark can be renewed indefinitely, it does not need to be amortized.
However, because the estimated fair value of $5,000 is less than the carrying value of
$8,500, impairment has occurred in the amount of $3,500 ($8,500-$5,000).
Debit Credit
31-Dec Loss on Impairment $ 3,500
Trade Name $ 3,500
Analysis
Impairments are only accounted for once and do not occur every period which effects
operating income more drastically than it would if it was in fact a reoccurring loss.
Principles
Losses on impairment are not completely relevant. They may be relevant for materiality
purposes, in that omitting or misstating it could influence user’s decisions, but they do
not have predictive value because it is only reported once and would not valuable for use
by investors to form expectations about the future.

Accounting
A)
1.
Debit Credit
31-Dec-14 Warranty Expense $ 51,000
Warranty Liability $ 45,000
Cash 6,000
2.
Debit Credit
31-Dec-14 Interest Expense $ 5,000*
Interest Payable 5,000
* $200,000 X 10% = $20,000 / 4 (for quarterly payments) = $5,000
3.
Debit Credit
31-Dec-14 Remediation $ 50,000*
Asset Retirement Liability $ 50,000
*$500,000 X 10% = $50,000
Analysis
Ratios that affect YellowCard’s liquidity are ratios such as current ratio and acid-test
ratio. Basically, these ratios measure the company’s assets, such as cash, marketable
securities, and receivables over its liabilities. The transactions made by YellowCard
would increase its liabilities, causing both ratios to decrease, causing it to be less liquid.
Principles
The extended warranty would not be considered a liability under generally accepted
accounting principles because they are providing the warranty after the receiving the
additional $50 at the time of purchase.

Accounting
Bugant Inc.
Balance Sheet
Assets
Current Assets:
Cash $1,000
Inventory 1,900
Total Current Assets 2,900
Property, Plant, and Equipment:
Plant and Equipment 2000
Accumulated Depreciation (240)
Total Property, Plant, and Equipment 1,760
Total Assets $4,660
Liabilities
Bonds Payable $1,448
Common Stock $1,500
Retained Earnings 1,712*
Total Liabilities and Stockholders' Equity $4,660
Bugant Inc.
Income Statement
Revenue:
Sales $3,500
Expenses:
Cost of Goods Sold 1,900
Salaries and Wages Expense 700
Depreciation Expense 80
Interest Expense 172
Total Expenses 2,852
Net Income $648
Analysis
Bugant’s analysis of long term debt: (1) Debt-to-assets ratio and (2) Times interest earned
ratio:

(1) Total Liabilities/Total Assets
= $1,426/$4,090 = 34.87% (2014)
= $1,448/$4,660 = 31.07% (2015)
(2) Income before income tax and interest expense/Interest expense
= $550+$169/$169 = 4.25 (2014)
=$648+$172/$172 = 4.77 (2015)
The company’s solvency has not changed much through the year, but it has improved.
Principles
There are trade-offs between relevance and faithful representation when recording debts
at fair value. Fair values are relevant to decision making, but recording debts are fair
value may not provide faithful representation of the company’s financial information.
There is possibility for a lack of neutrality and being free from error.

Intermediate Accounting Comprehensive Project

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