Intermediate Accounting

I. Income Statement Presentation

Madison Inc.
prepared an adjusted trial balance as of December 31, 2011. Below, you will
find the relevant portions of that trial balance:

Account	Debits	Credits
Cost of goods sold	120,000
Selling expense	35,000
Administrative expense	30,000
Depreciation expense, computer	12,000
Interest expense	5,000
Interest income		13,000
Sales revenue		250,000
Retained earnings, Jan 1, 2011		60,000
Inventory, December 31, 2011	21,000
Computer equipment	60,000
Accumulated Depr. Computers		24,000
Gain on sale of store equipment		15,000
Loss on liability law suit	30,000
Dividends declared	5,000

Financial statements for 2011
will be issued on March 1, 2012. Prior to the issuance of the 2011 statements,
you become aware of the following information:

·
The painting and
decorating department was discontinued in 2011. You view the action as meeting
the requirements for a discontinued operation. The measurement date was
September 1, 2011. Sales and expenses
for the discontinued department were as follows (these amounts are included in
the above trial balance):

	1/1/11 – 8/30/11	9/1/11 – 12/31/11
Sales	60,000	10,000
Cost of goods sold	33,000	12,000
Selling expense	7,000	3,000
Administrative expense	4,000	2,000

·
The gain on store
equipment, already recorded, applies to the painting and decorating department.
It is anticipated that additional painting and decorating department equipment
will be sold at a $20,000 loss in early 2012.

·
The cost of goods
sold shown in the schedule above usedFIFO inventory method. The decision has
been made to switch to the LIFO method effective January 1, 2011. The LIFO
change would lower beginning inventory by $10,000 and the ending inventory
would be $8,000 less. These changes
apply to only continuing operations

·
A decision was
made to change depreciation methods for the computer equipment. The change will
be effective for 2011. The firm will switch from the Straight line method to
DDB depreciation with a 5 year total life. The computers were purchased in
January of 2010 for $60,000. Salvage value is immaterial. Note that 2011
depreciation has already been recorded using the DDB method.

·
The loss on the
liability law suit is considered to be extraordinary

·
The tax rate
applicable to all items (including the prior year) is 40%.

Required:

A. In the space below,
prepare schedules for:

1.
The gain or loss on discontinued operations

2.
Depreciation calculations

3.
Cost of goods sold calculation for continuing operations

B. In the space below, complete a multi-step income statement for 2011:

C. In the space below, prepare a
statement of retained earnings for 2011.

II. Accounts receivable

Factoring

Tailor Company has
accounts receivable of $200,000 with an allowance of bad debts of $6,000.
Tailor factors the accounts to Second Bank with limited recourse. The Bank will
charge a 5% factoring fee and insists on a deposit to cover sales returns and
sales allowances and bad debts of 6%.

Required 1

Record the transaction on
Tailor’s books:

In the following month,
$70,000 of accounts were collected, $2,000 were written off as uncollectible
and sales returns were $2,300

Required 2

Record all transactions
needed on Tailor’s books

III. Concepts

Zea
sold a machine to Able for a stated price of $45,000. The terms were that Able
would make a $10,000 down payment and would pay the $35,000 balance in two
years with no interest charges. Zea would pay 8% annual interest to borrow,
Able would pay 10% annual.

Record
the sale by Zea.

IV. Inventory

A. LIFO

Tran Company began operations on January 1, 2010. Purchases in 2010 were as
follows:

Date	Units	Cost/unit
1/1/10	2,000	$10
6/24/10	3,000	11
10/4/10	3,000	12

7,000
units were sold during 2010 and Tran used the periodic LIFO inventory method.

In
2011, Tran purchased the following units:

Date	Units	Cost/unit
3/1/11	3,000	$13
7/6/11	2,000	14
10/1/11	4,000	16

8,000
units were sold in 2011

Required:

Calculate the Dec.
31, 2011 inventory using the Periodic LIFO method.

B. Lower of cost or market for inventory

Abdo Company had 3 machines in its December 31, 2010
inventory. Information on the machines is as follows:

Machine number	Original Cost	Replacement cost	Estimated selling price
72-798	$12,500	15,000	18,000
83-786	16,000	14,500	20,000
53-304	26,000	24,000	25,000

Abdo
pays a commission equal to 5% of sales to the salesman that sells a machine.
The typical net profit on sales is 20%.

Required:

1. Calculate the total value of
the inventory if lower of cost or market is applied individually to each unit
in the inventory:

2.
Calculate the total value of the inventory if the lower of cost or market
method is applied in the aggregate to the total inventory