# Comparison of straight line and accelerated methods

Problem 7-2 a Protecting Cash
Osage Farm Supply had poor internal control over its cash transactions. Facts about the company’s cash position at November 30 are described below.
The accounting records showed a cash balance of \$ 35,400, which included a deposit in transit of \$ 1,245. The balance indicated in the bank statement was \$ 20,600. Included in the bank statement were the following debit and credit memoranda:

Debit Memoranda:
Check from customer G. Davis, deposited by Osage Farm Supply, but charged back as NSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 130
Bank service charges for November. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Credit Memorandum:
Proceeds from collection of a note receivable from Regal Farms, which Osage Farm Supply had left with the bank’s collection department . . . . . . . . . . . . . . . . . . . . . . \$ 6,255

Outstanding checks were as follows:
Check No. Amount
8231 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 400
8263 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524
8288 . . . . . . . . . . ……………………………… …..5,000

Bev Escola, the company’s cashier, has been taking portions of the company’s cash receipts for several months. Each month, Escola prepares the company’s bank reconciliation in a manner that conceals her thefts. Her bank reconciliation for November was as follows:

Balance per bank statement, Nov. 30. . . . . . . . . . . . . . . . . . . . . \$ 20,600
Add: Deposits in transit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 2,145
Collection of note from Regal Farms . . . . . . . . . . . . . . . . . . . . .6,255 8,400 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 30,000 Less: Outstanding checks:
No. 8231 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 400
8263 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524
8288 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 1,000 Adjusted cash balance per bank statement . . . . . . . . . . . . . . . . . . . . . . . . \$ 29,000 Balance per accounting records, Nov. 30 . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 35,400
Add: Credit memorandum from bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,255
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 29,145 Less: Debit memoranda from bank:
NSF check of G. Davis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 130
Bank service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 145 Adjusted cash balance per accounting records . . . . . . . . . . . . . . . . . . . . \$ 29,000

Instructions
a. Determine the amount of the cash shortage that has been concealed by Escola in her bank rec-onciliation. ( As a format, we suggest that you prepare the bank reconciliation correctly. The amount of the shortage then will be the difference between the adjusted balances per the bank statement and per the accounting records. You can then list this unrecorded cash shortage as the final adjustment necessary to complete your reconciliation.)
b. Carefully review Escola’s bank reconciliation and explain in detail how she concealed the amount of the shortage. Include a listing of the dollar amounts that were concealed in various ways. This listing should total the amount of the shortage determined in part a.
c. Suggest some specific internal control measures that appear to be necessary for Osage Farm Supply.

Problem7-3a Aging accounts receivable write offs
Super Star, a Hollywood publicity firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year- end, an aging of the accounts receivable produced the following five groupings:
Not yet due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 500,000
1- 30 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000
31- 60 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
61- 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Over 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 835,000

On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group b, 3 percent; Group c, 10 percent; Group d, 20 percent; and Group e, 50 percent.

The Allowance for Doubtful Accounts before adjustment at December 31 showed a credit balance of \$ 11,800.

Instructions
a. Compute the estimated amount of uncollectible accounts based on the above classification by age groups.
b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount.
c. Assume that on January 10 of the following year, Super Star learned that an account receiv-able that had originated on September 1 in the amount of \$ 8,250 was worthless because of the bankruptcy of the client, April Showers. Prepare the journal entry required on January 10 to write off this account.
d. The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest- bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?

Problem 8-2a & 8-3a based on following data:
Speed World Cycles sells high- performance motorcycles and motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:

Purchase Date Quantity Unit Cost Total Cost Dec. 12, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . 600 \$ 29 \$ 17,400
Jan. 9, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . 900 32 28,800
Total on hand . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 \$ 46,200

On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year.

Problem 8-2a Alternative cash flow assumptions in a perpetual system

Assume that Speed World uses a perpetual inventory system. ( See the data given above.) Instructions

a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:
1. Average cost.
2. FIFO.
3. LIFO.
Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a, answer the following questions:
1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? Would this always be the case? Explain.
2. Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? Would you expect this usually to be the case? Explain.
3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? Explain.

Problem 8-3a Alternative cash flow assumptions in a periodic system

Assume that Speed World uses a periodic inventory system. ( See the data given before Problem 8.2A.)
Instructions
a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:
1. Average cost.
2. FIFO.
3. LIFO.
Show the number of units and unit costs in each cost layer of the ending inventory. You may determine the cost of goods sold by deducting ending inventory from the cost of goods avail-able for sale.
b. If Speed World Cycles uses the LIFO cost flow assumption for financial reporting purposes, can it use the FIFO method for income tax purposes? Explain.

Problem 9-2a Comparison of straight line and accelerated methods

Swanson & Hiller, Inc., purchased a new machine on September 1, 2006, at a cost of \$ 108,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was \$ 8,000.

Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2006, under each of the methods listed below ( assume that the half- year convention is used):
1. Straight- line.
2. 200 percent declining- balance.
3. 150 percent declining- balance, switching to straight- line when that maximizes the expense.

b. Which of the three methods computed in part a is most common for financial reporting pur-poses? Explain.
c. Assume that Swanson & Hiller sells the machine on December 31, 2009, for \$ 28,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company’s income statement have any direct cash effects? Explain.

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