Question 1

Tevis Company reports the following for the month of June.

Units Unit Cost Total Cost
June 1 Inventory 250 $7 $1,750
12 Purchase 325 8 2,600
23 Purchase 475 9 4,275
30 Inventory 110
Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO
and (2) LIFO.
(b) Which costing method gives the higher ending inventory? Why?
(c) Which method results in the higher cost of goods sold? Why?
Solution

(a) FIFO
Beginning inventory (250 X $7).................................................................. $1,750
Purchases
June 12 (325 X $8)........................................................................... $2,600
June 23 (475 X $9)........................................................................... 4,275 6,875
Cost of goods available for sale ($1,750 + $6,875)................................... 8,625
Less: Ending inventory (110 X $9)............................................................ 990
Cost of goods sold..................................................................................... $7,635

LIFO
Cost of goods available for sale........................................................ $8,625
Less: Ending inventory (110 X $7).................................................... 770
Cost of goods sold............................................................................. $7,855

(b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this
method, the earliest costs are assigned to cost of goods sold and the latest costs remain in ending
inventory. For Tevis Company, the ending inventory under FIFO is $990 or (110 X $9) compared to $770 or
(110 X $7) under LIFO.

(c) The LIFO method will produce the higher cost of goods sold for Tevis Company. Under LIFO the most
recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory.
The cost of goods sold is $7,855 or [$8,625 – (110 X $7)] compared to $7,635 or ($8,625 –
$990) under FIFO.
 Question 2
Vox Corporation’s comparative balance sheets are presented below.
VOX CORPORATION
Comparative Balance Sheets
December 31
2017 2016
Cash $ 19,300 $ 10,000
Accounts receivable 21,200 23,000
Land 20,000 26,000
Building 70,000 70,000
Accumulated depreciation (15,000) (10,000)
Total $115,500 $119,000

Accounts payable $ 17,370 $ 30,000

Common stock 75,000 69,000
Retained earnings 23,130 20,000
Total $115,500 $119,000
Additional information:
1. Net income was $27,630. Dividends declared and paid were $24,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in
accumulated depreciation. The land was sold for $3,900.
Instructions
(a) Prepare a statement of cash flows for 2017 using the indirect method.
(b) Compute free cash flow.
Solution

(a) VOX CORPORATION

Statement of Cash Flows
For the Year Ended December 31, 2017

Cash flows from operating activities

Net income................................................................................. $ 27,630
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense........................................................ $ 5,000
Loss on disposal of land**................................................. 2,100
Decrease in accounts receivable....................................... 1,800
Decrease in accounts payable.......................................... (12,630 ) (3,730)
Net cash provided by operating activities.................................... 23,900
Cash flows from investing activities
Sale of land................................................................................ 3,900
Cash flows from financing activities
Issuance of common stock ……………………………………………$ 6,000
 Payment of dividends................................................................. (24,500)
Net cash used by financing activities.......................................... (18,500)

Net increase in cash........................................................................... 9,300

Cash at beginning of period................................................................ 10,000
Cash at end of period......................................................................... $ 19,300
**$26,000 – 20,000 – $6,000 – $3,900 = $2,100

(b) Free cash flow = $23,900 – $0 – $24,500 = ($600)

Question 3
Jeffries Company purchased a delivery truck for $50,000 on January 1, 2017. The truck has an expected salvage
value of $4,000 and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles
driven were 15,000 in 2017 and 12,000 in 2018.
Instructions
(a) Compute depreciation expense for 2017 and 2018 using (1) the straight-line method, (2) the units-of-activity
method, and (3) the double-declining balance method.
(b) Assume that Jeffries uses the straight-line method.
(1) Prepare the journal entry to record 2017 depreciation.
(2) Show how the truck would be reported in the December 31, 2017, balance sheet.
Prepare the entry on Ogle Company’s books to record the sale of merchandise.
Solution

(a) (1) 2017: ($50,000 – $4,000)/8 = $5,750

2018: ($50,000 – $4,000)/8 = $5,750

(2) ($50,000 – $4,000)/100,000 = $0.46 per mile

2017: 15,000 X $0.46 = $6,900
2018: 12,000 X $0.46 = $5,520

(3) 2017: $50,000 X 25% = $12,500

2018: ($50,000 – $12,500) X 25% = $9,375

(b) (1) Depreciation Expense................................................................... 5,750

Accumulated Depreciation—Equipment...................................... 5,750

(2) Equipment.................................................................................... $50,000

Less: Accumulated Depreciation— Equipment.......................................................................
5,750
$44,250
 Question 4
A.
Rich Company has accounts receivable of $110,000 at March 31. An analysis of the accounts shows the
following.
Month of Sale Balance, March 31
March $ 62,000
February 18,000
January 17,000
Prior to January 13,000
$110,000
Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $2,100 prior to
adjustment. The company uses the percentage-of-receivables basis for estimating uncollectible accounts. The
company’s estimate of bad debts is as follows.
Estimated Percentage
Age of Accounts Uncollectible .
1–30 days 2.0%
31–60 days 5.0%
61–90 days 30.0%
Over 90 days 50.0%
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31 to record bad debt expense.
B.
On May 10, Ogle Company sold merchandise for $2,700 and accepted the customer’s National Bank MasterCard.
National Bank charges a 4% service charge for credit card sales.
Prepare the entry on Ogle Company’s books to record the sale of merchandise.

Solution
A.
(a) Accounts Receivable Amount % Estimated Uncollectible

1–30 days $62,000 2.0 $ 1,240

31–60 days 18,000 5.0 900
61–90 days 17,000 30.0 5,100
Over 90 days 13,000 50.0 6,500
$13,740

(b) Mar. 31 Bad Debt Expense.............................................................. 11,640

Allowance for Doubtful Accounts
($13,740 – $2,100)................................................. 11,640
B.
May 10 Cash ($2,700 – $108)................................................... 2,592
Service Charge Expense
(4% X $2,700)........................................................... 108
Sales Revenue.................................................... 2,700
 Question 5
The adjusted trial balance columns of the worksheet for Greenwood Company are as follows.
GREENWOOD COMPANY
Worksheet
For the Year Ended December 31, 2017

Adjusted
Account Trial Balance
No. Account Titles Dr. Cr.
101 Cash 18,800
112 Accounts Receivable 16,200
126 Supplies 2,300
130 Prepaid Insurance 4,400
157 Equipment 46,000
158 Accumulated Depreciation—Equipment 20,000
200 Notes Payable 20,000
201 Accounts Payable 8,000
212 Salaries and Wages Payable 2,600
230 Interest Payable 1,000
301 Owner’s Capital 26,000
306 Owner’s Drawings 12,000
400 Service Revenue 87,800
610 Advertising Expense 10,000
631 Supplies Expense 3,700
711 Depreciation Expense 8,000
722 Insurance Expense 4,000
726 Salaries and Wages Expense 39,000
905 Interest Expense 1,000
Totals 165,400 165,400
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns. (Fill in the worksheet
given on the next page).
(b) Prepare an income statement, owner’s equity statement, and a classified balance sheet. (Note: $5,000 of the
notes payable become due in 2018.) T. Greenwood did not make any additional investments in the business
during 2017.

Solution

(a) GREENWOOD COMPANY

Partial Worksheet
For the Year Ended December 31, 2017

Adjusted Income Balance

Account Trial Balance Statement Sheet
No. Titles Dr. Cr. Dr. Cr. Dr. Cr.
101 Cash 18,800 18,800
112 Accounts Receivable 16,200 16,200
126 Supplies 2,300 2,300
130 Prepaid Insurance 4,400 4,400
157 Equipment 46,000 46,000
158 Acc. Depr—Equip. 20,000 20,000
200 Notes Payable 20,000 20,000
201 Accounts Payable 8,000 8,000
212 Salaries and Wages Payable
 2,600 2,600
230 Interest Payable 1,000 1,000
301 Owner’s Capital 26,000 26,000
306 Owner’s Drawings 12,000 12,000
400 Service Revenue 87,800 87,800
610 Advertising Expense 10,000 10,000
631 Supplies Expense 3,700 3,700
711 Depreciation Expense 8,000 8,000
722 Insurance Expense 4,000 4,000
726 Salaries and Wages Expense
39,000 39,000
905 Interest Expense 1,000 1,000
Totals 165,400 165,400 65,700 87,800 99,700 77,600
Net Income 22,100 22,100
87,800 87,800 99,700 99,700
Totals

(a) GREENWOOD COMPANY

Income Statement
For the Year Ended December 31, 2017

Revenues
Service revenue................................................................... $87,800
Expenses
Salaries and wages expense............................................... $39,000
Advertising expense............................................................ 10,000
Depreciation expense.......................................................... 8,000
Insurance expense.............................................................. 4,000
Supplies expense................................................................ 3,700
Interest expense.................................................................. 1,000
Total expenses........................................................... 65,700
Net income ................................................................................... $22,100

GREENWOOD COMPANY
Owner’s Equity Statement
For the Year Ended December 31, 2017

Owner’s Capital, January 1................................................................................... $26,000

Add: Net income............................................................................................. 22,100
48,100
Less: Drawings.................................................................................................... 12,000
Owner’s Capital, December 31............................................................................. $36,100
 GREENWOOD COMPANY
Balance Sheet
For the Year Ended December 31, 2017

Assets
Current assets
Cash ................................................................................... $18,800
Accounts receivable............................................................. 16,200
Supplies............................................................................... 2,300
Prepaid insurance................................................................ 4,400
Total current assets.................................................... $41,700
Property, plant, and equipment
Equipment........................................................................... 46,000
Less: Accumulated depreciation—
equipment.............................................................. 20,000 26,000
Total assets................................................................ $67,700

Liabilities and Owner’s Equity

Current liabilities
Notes payable...................................................................... $5,000
Accounts payable................................................................ 8,000
Salaries and wages payable................................................ 2,600
Interest payable................................................................... 1,000
Total current liabilities................................................. $16,600
Long-term liabilities
Notes payable...................................................................... 15,000
Total liabilities............................................................. 31,600
Owner’s equity
Owner’s capital.................................................................... 36,100
Total liabilities and owner’sequity................................................................ $67,700