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Distinction in Accounting Modules
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36. The DEF partnership reported net income of $130,000 for the year ended December 31, 2008. Accordi...The DEF partnership reported net income of $130,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:
D E F
Salaries $25,000 $20,000 $15,000
Bonus on net income 10% ----- -----
Remainder 60% 30% 10%
How should partnership net income for 2008 be allocated to D, E, and F?
D E F
A) $78,000 $39,000 $13,000
B) $72,200 $37,100 $20,700
C) $52,500 $75,000 $22,500
D) $42,500 $42,500 $65,000
A. Option A
B. Option B
C. Option C
D. Option D
37. . If the allowance method of accounting for uncollectible receivables is used, what general...
. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?
a. Uncollectible Accounts Expense
b. Accounts Receivable
c. Allowance for Doubtful Accounts
d. Interest Expense
8. Allowance for Doubt...
38. (Objective 6-4) Describe what is meant by the cycle approach to auditing. What are the advantages...
(Objective 6-4) Describe what is meant by the cycle approach to auditing. What are the advantages of dividing the audit into different cycles?
(Objective 6-4)
FINANCIAL STATEMENT CYCLES
Audits are performed by dividing the financial statements into smaller segments or components. The division makes the audit more manageable and aids in the assign - ment of tasks to different members of the audit team. For example, most auditors treat fixed assets and notes payable as different segments. Each segment is audited separately but not on a completely independent basis. (For example, the audit of fixed assets may reveal an unrecorded note payable.) After the audit of each segment is completed, including interrelationships with other segments, the results are combined. A con - clusion can then be reached about the financial statements taken as a whole. There are different ways of segmenting an audit. One approach is to treat every account balance on the statements as a separate segment. Segmenting that way is usually inefficient. It would result in the independent audit of such closely related accounts as inventory and cost of goods sold. A common way to divide an audit is to keep closely related types (or classes) of trans - actions and account balances in the same segment. This is called the cycle approach. For example, sales, sales returns, cash receipts, and charge-offs of uncollectible accounts are the four classes of transactions that cause accounts receivable to increase and decrease. Therefore, they are all parts of the sales and collection cycle. Similarly, payroll transactions and accrued payroll are parts of the payroll and personnel cycle. The logic of using the cycle approach is that it ties to the way transactions are recorded in journals and summarized in the general ledger and financial statements. Figure 6-3 shows that flow. To the extent that it is practical, the cycle approach combines transactions recorded in different journals with the general ledger balances that result from those transactions. The cycles used in this text are listed below and are then explained in detail. Note that each of these cycles is so important that one or more later chapters address the audit of each cycle:
• Sales and collection cycle
• Inventory and warehousing cycle
• Acquisition and payment cycle
• Capital acquisition and repayment cycle
• Payroll and personnel cycle Figure 6-4 (p. 150) illustrates the application of cycles to audits using the December 31, 2011, trial balance for Hillsburg Hardware Company. (The financial statements pre pared from this trial balance are included in the glossy insert to the textbook.) A trial balance is used to prepare financial statements and is a primary focus of every audit. Prior-year account balances are usually included for comparative purposes, but are excluded from Figure 6-4 in order to focus on transaction cycles. The letter repre senting a cycle is shown for each account in the left column beside the account name. Observe that each account has at least one cycle associated with it, and only cash and inventory are a part of two or more cycles. The accounts for Hillsburg Hardware Co. are summarized in Table 6-1 (p. 151) by cycle, and include the related journals and financial statements in which the accounts appear. The following observations expand on the information contained in Table 6-1.
• All general ledger accounts and journals for Hillsburg Hardware Co. are included at least once. For a different company, the number and titles of journals and general ledger accounts will differ, but all will be included.
• Some journals and general ledger accounts are included in more than one cycle. When that occurs, it means that the journal is used to record transactions from more than one cycle and indicates a tie-in between the cycles. The most important general ledger account included in and affecting several cycles is general cash (cash in bank). General cash connects most cycles.
• The sales and collection cycle is the first cycle listed and is a primary focus on most audits. Collections on trade accounts receivable in the cash receipts journal is the primary operating inflow to cash in the bank.
• The capital acquisition and repayment cycle is closely related to the acquisition and payment cycle. Transactions in the acquisition and payment cycle include the purchase of inventory, supplies, and other goods and services related to opera tions. Transactions in the capital acquisition and repayment cycle are related to financing the business, such as issuing stock or debt, paying dividends, and repaying debt. Although the same journals are used for transactions in the acquisition and pay ment and capital acquisition and repayment cycles, it is useful to separate capital acquisition and repayment cycle transactions into a separate transaction cycle. First, capital acquisitions and repayments relate to financing the business, rather than operations. Second, most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. Considering both reasons, it is more convenient to separate the two cycles.
• The inventory and warehousing cycle is closely related to all other cycles, especially for a manufacturing company. The cost of inventory includes raw materials (acquisition and payment cycle), direct labor (payroll and personnel cycle), and manufacturing overhead (acquisition and payment and payroll and personnel cycles). The sale of finished goods involves the sales and collection cycle. Because inventory is material for most manufacturing companies, it is common to borrow money using inventory as security. In those cases, the capital acquisition and repay ment cycle is also related to inventory and warehousing. Inventory is included as a separate cycle both because it is related to other cycles and because for most manufacturing and retail companies inventory is usually highly material, there are unique systems and controls for inventory, and inventory is often complex to audit.
39. Sala Co. is contemplating the replacement of an old machine with a new one. The following informa...
PLEASE ANSWER ALL, HAVING A HARD TIME. THANK YOU
1.
2.
3.
4.
5.
Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered New Machine Old Machine $500,000 Price $250,000 75,000 Accumulated Depreciation 10 years Remaining useful life Useful life 10 years $200,000 $150,500 Annual operating costs f the old machine is replaced, it can be sold for $20,000. The net advantage (disadvantage) of replacing the old machine is Select one: a. $15,000. b. $20,000. c. $(5,000). d. $(50,000)
40. Which of the following would be classified as an internal failure cost on a quality cost report?
Which of the following would be classified as an internal failure cost on a quality cost report?
A) Quality improvement projects.
B) Supervision of testing and inspection activities.
C) Debugging software errors.
D) Warranty repairs and replacements.
41. Ellix Company manufactures two models of ultra-high fidelity
Ellix Company manufactures two models of ultra-high fidelity speakers, the X200 model and the X99 model. Data regarding the two products follow:
Additional information about the company follows:
a. Model X200 requires $72 in direct materials per unit, and model X99 requires $50.
b. The direct labor rate is $10 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.
d.Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.
e. Because of the special work required in (d) above, the company is considering the use of activity-based costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.
a. Compute the predetermined overhead rate.
b. Compute the unit product cost of each model.
2. Assume that the company decides to use activity-based costing to apply overhead cost to products.
a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based costing system.
b. Compute the unit product cost of each model.
3. Explain why overhead cost shifted from the high-volume model to the low-volume model under activity-basedcosting.
42. A colleague who is aware of your understanding of financial statements asks for help in analyzing...
A colleague who is aware of your understanding of financial statements asks for help in analyzing the transactions and events of Zett Corporation. The following data are provided:
ZETT CORPORATION
Balance Sheets
December 31, Year 1 and Year 2
Year 1 Year 2
Cash $ 34,000 $ 34,500
Accounts receivable, net 12,000 17,000
Inventory 16,000 14,000
Investments (long term) 6,000 —
Fixed assets 80,000 93,000
Accumulated depreciation (48,000) (39,000)
Total assets $100,000 $119,500
43. Par Corporation acquired a 90 percent interest in Sag Corporatio
Par Corporation acquired a 90 percent interest in Sag Corporation’s outstanding voting common stock on January 1, 2011, for $630,000 cash. The stockholders’ equity of Sag on this date consisted of $500,000 capital stock and $200,000 retained earnings. The financial statements of Par and Sag at and for the year ended December 31, 2011, are summarized as follows (in thousands):
During 2011, Par made sales of $50,000 to Sag at a gross profit of $15,000. One-third of these sales were inventoried by Sag at year-end. Sag owed Par $10,000 on open account at December 31, 2011. Sag sold land that cost $20,000 to Par for $30,000 on July 1, 2011. Par still owns the land. On January 1, 2011, Par sold equipment with a book value of $20,000 and a remaining useful life of four years to Sag for $40,000. Sag uses straight-line depreciation and assumes no salvage value on this equipment.
REQUIRED: Prepare a consolidation workpaper for Par and Subsidiary for the year ended December 31,2011.
44. On November 1, Girtz Corporation purchased a six-month insurance policy from The Tomptee Agency for
On November 1, Girtz Corporation purchased a six-month insurance policy from The Tomptee Agency for $4,500.
a. Prepare the necessary adjusting entry for Girtz Corporation on November 30, assuming it recorded the November 1 expenditure as Unexpired Insurance.
b. Prepare the necessary adjusting entry for The Tomptee Agency on November 30, assuming it recorded GirtzAc€?cs payment as Unearned Insurance Premiums.
45. 1. Chang Industries has 2,000 defective units of product that have already cost $14 each to produ...
1. Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is:
$20,000 loss.
$20,000 income.
$12,000 loss.
$32,000 income.
$30,000 income.
46. The following situations suggest a strength or a weakness in
The following situations suggest a strength or a weakness in internal control.
a. Top managers delegate all internal control procedures to the accounting department.
b. The accounting department orders merchandise and approves invoices for payment.
c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.
d. The officer who signs checks need not examine the payment packet because he is confident the amounts are correct.
Requirements
1. Define internal control.
2. The system of internal control must be tested by external auditors. What law or rule requires this testing?
3. Identify each item as either a strength or a weakness in internal control and give the reason for your answer.
47. A well-conceived plan allows managers the ability to
Multiple Choice
A well-conceived plan allows managers the ability to
a. not make decisions again until the next planning session
b. keep lower-level managers from implementing change
c. underestimate costs so that actual operating results will be favorable when comparisons are made
d. take advantage of unforeseen opportunities
48. Which of the following statements is correct concerning an auditor’s required communication of...
Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies?
a. A significant deficiency previously communicated during the prior year’s audit that remains uncorrected causes a scope limitation.
b. An auditor should perform tests of controls on significant deficiencies before communicating them to the client.
c. An auditor’s report on significant deficiencies should include a restriction on the distribution of the report.
d. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
49. Use the following information from Marvel Company for the month of July to answer questions 1...
Use the following information from Marvel Company for the month of July to answer questions 1 through 4.
July 1 Beginning inventory 75 units @ $25 each
July 3 Purchase 348 units @ $27 each
July 8 Sale 300 units
July 15 Purchase 257 units @ $28 each
July 23 Sale 275 units
1. Assume that Marvel uses a perpetual FIFO inventory system.
What is the dollar value of its ending inventory?
a. $2,940
b. $2,685
c. $2,625
d. $2,852
e. $2,705
2. Assume that Marvel uses a perpetual LIFO inventory system.
What is the dollar value of its ending inventory?
a. $2,940
b. $2,685
c. $2,625
d. $2,852
e. $2,705
3. Assume that Marvel uses a perpetual specific identification inventory system. Its ending inventory consists of 20 units from beginning inventory, 40 units from the July 3 purchase, and
45 units from the July 15 purchase. What is the dollar value of its ending inventory?
a. $2,940
b. $2,685
c. $2,625
d. $2,852
e. $2,840
4.A Assume that Marvel uses a periodic FIFO inventory system.
What is the dollar value of its ending inventory?
a. $2,940
b. $2,685
c. $2,625
d. $2,852
e. $2,705
5. A company has cost of goods sold of $85,000 and ending inventory of $18,000. Its days’ sales in inventory equals:
a. 49.32 days
b. 0.21 days
c. 4.72 days
d. 77.29 days
e. 1,723.61 days
50. The accounts in the ledger of Overnight Delivery Service contain the following balances on July 3...
The accounts in the ledger of Overnight Delivery Service contain the following balances on July 31, 2017. Prepare a trial balance and fill in the missing amount for Cash.
