Mathematics

Wiggins Corporation utilizes an accounting software package that is capable of producing a detailed aging of outstanding accounts receivable. Following is the aging schedule as of December 31, 20X2.

Spreadsheet

f x

A B C D E

1 Age Amount Outstanding

2 0 to 30 days $1,200,000

3 31 to 60 days 700,000

4 61 to 120 days 200,000

5 Over 120 days 25,000

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Casper Wiggins has owned and operated Wiggins Corporation for many years and has a very good sense of the probability of collection of outstanding receivables, based on an aging analysis. The following table reveals the likelihood of collection:

Allowance method: Aging of accounts B-07.05

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Spreadsheet

f x

A B C D E

1 Age Probability of Collection

2 0 to 30 days 98%

3 31 to 60 days 90%

4 61 to 120 days 75%

5 Over 120 days 50%

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(a) Prepare an aging analysis and show how accounts receivable and the related allowance for uncollectibles should appear on the balance sheet at December 31.

(b) Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $15,000 credit.

(c) Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $5,000 debit. How could the allowance account have contained a debit balance?

Morrison Supply sells pressured air devices that assist patients with breathing disorders during sleep. These devices are delivered to patients immediately upon completion of a diagnostics exam, and are subsequently billed to insurance companies. Insurance companies sometime refuse to pay and/or only agree to a reduced price. Patients are then responsible for any amount denied by the insurance company, but are often unable or unwilling to pay. Because clinical standards of cleanliness must be maintained, Morrison is unable to ac- cept returns for resale to others.

Morrison is reluctant to litigate to collect unpaid amounts. As a result, Morrison experiences a high rate of uncollectible accounts, and prepares a monthly adjusting entry for uncollectibles that is equal to 20% of sales.

Morrison’s Monthly sales and write-offs for the first quarter of 20X7 follow:

MONTH SALES ACTUAL WRITEOFFS

January $630,000 $100,000

February $480,000 $ 80,000

March $590,000 $140,000

(a) Prepare monthly journal entries to summarize sales on account, the recording of the provision for uncollectibles, and the actual write-offs.

(b) The provision for uncollectibles is established at 20% of sales. Why are the monthly write-offs not also proportional to that month’s sales? Does the amount written off in a particular month impact net income for that month?

B-07.06 Allowance method: Percentage of sales

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Supreme Vacuum uses television advertising blitzes to generate consumer interest in its highly-touted floor cleaners. Customers are directed to a website for more information. Once on the website, customers are con- stantly confronted with a “video game” where they can use icon-like vacuums to suck up coupons that float on and off their browser windows. At check out, customers are able to clean the contents of their imaginary vacuums and select one of the coupons to apply against their purchase.

The best coupon is a no-moneydown, 4-equal-monthly-payments, coupon. “Magically”, every customer will find at least one of these coupons. Virtually all customers will use this coupon in making their final purchases. As a result, Supreme carries a substantial balance in accounts receivable. It is imperative that Supreme manage credit risk, and careful attention is paid to the “accounts receivable turnover ratio” and the “days outstanding.”

During 20X5, net credit sales were $6,000,000. The sales were evenly spread throughout the year.

The beginning-of-year net realizable value of accounts receivable was $2,150,000 and the end-of-year bal- ance was $2,650,000.

Monitoring receivables: Analysis and ratios B-07.08

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(a) Calculate the “accounts receivable turnover ratio” and the “days outstanding.”

(b) Evaluate the information from part (a) and determine if Supreme’s customer base is in compliance the 4-equal-monthly payments agreement.

(c) In addition to the facts above, suppose Supreme ran a major holiday sales campaign in December of 20X5. This campaign promised no payments until 20X6! This campaign generated an additional $3,000,000 in credit sales (and resulted in an end-of-year receivable balance of $5,650,000). Can Supreme record these sales under generally accepted accounting principles, and what is the impact on the ratios (compared to the values you computed in part (a))?

Vinay Sanja was interviewing for a job at the State Bank of India. The bank requires all job applicants to take a competency test on basic money mathematics. Vinay has completed the interest calculations portion of the exam. Following are his questions and answers. Vinay must correctly answer in at least 3 cases to be eligible for the job. Evaluate and correct Vinay’s answers. Does he qualify for the job?

B-07.10 Notes receivable interest calculations

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(a) Assume the bank holds a 400,000 Indian Rupee (INR) note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?

Answer: 400,000 X 10% X 60/360 =

6,666.67

400,000 + 6,666.67 = 406,666.67

(b) Assume the bank holds a INR 400,000 note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 365 day year and actual days outstanding are used in all calculations. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?

Answer: 400,000 X 10% X 92/365 =

10,082.19

(c) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X5?

Answer: Zero, the note is not due until 20X6

(d) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X6?

Answer: 1,000,000 X 8% X 270/360 =

600,000

Sid Breman Art Gallery operates a retail store in Florida. All art displayed in the gallery is available for purchase. Much of the art is owned by the gallery. However, there are also works on display that belong to other artists. When the consigned art is sold, Sid remits 75% of the proceeds to the creator and retains a 25% commission. Art belonging to the gallery is marked to sell at 200% of cost.

Following is a complete list of art on display in the gallery, along with the retail selling price.

NAME SELLING PRICE OWNERSHIP

See Shining Sea $ 2,500 Gallery

Mermaids 1,800 Artist

Big Fish 910 Gallery

Shells At Dawn 3,000 Gallery

Sand Forever 1,090 Gallery

Development! 4,200 Artist

Taking a Chance 20,000 Gallery

Tides and Moons 500 Gallery

Mystery Sea 1,200 Gallery

On the Beach 1,650 Artist

Too Much Sun 4,775 Artist

Spring Break 5,000 Artist

Inland 7,880 Gallery

Alligators Return 19,720 Artist

Frost and Farm 14,300 Gallery

(a) Identify if Sid Breman Art Gallery is the consignor or the consignee. Should the consigned inventory be reported on the balance sheet of the gallery? What special accounting/control challenges are presented by the existence of consigned inventory?

(b) Determine the correct inventory valuation to be reported by the gallery.

B-08.02 Consigned inventory

x

SPREADSHEET TOOL:

Check boxes

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Patti Devine owns Devine Decorating. One of her most popular items is the Remind-a-Chime digital clock. This programmable clock issues “voice-based” reminders of important events like birthdays, anniversaries, etc.

Following is the Remind-a-Chime inventory activity for January. The clocks on hand at January 1 had a unit cost of $140.

Date Purchases Sales Units on Hand

1-Jan 40

5-Jan 60 units @ $150 each 100

16-Jan 70 units @ $255 each 30

23-Jan 90 units @ $170 each 120

28-Jan 55 units @ $295 each 65

(a) If Devine uses the first-in, first-out (FIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(b) If Devine uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(c) If Devine uses the weighted-average inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

Basic “periodic” calculations for inventory, FIFO, LIFO, average cost B-08.04

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Park Place Luxury Autos uses the specific identification method to value its inventory. Below is a listing of automobiles that were either in beginning inventory or acquired during the year:

Automobile Date Acquired Cost

Bentley Beginning inventory $120,000

Rolls Royce Beginning inventory 160,000

Cadillac January 40,000

Lexus March 50,000

Land Rover June 60,000

Jaguar July 42,000

Porsche September 75,000

Mercedes November 85,000

BMW December 64,000

Infiniti December 39,000

Park Place uses the specific identification method. Total sales during the year were $600,000. Automobiles in ending inventory were the Rolls Royce, Lexus, Jaguar, and BMW. Determine the ending inventory, cost of goods sold, and gross profit for Park Place.

Specific identification method B-08.07

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Aurora Wedding Gowns was burglarized in May of 20X5. It is unclear how many dresses were stolen. Aurora and its insurance company are currently working to estimate the dollar value of the stolen goods in order to reach a financial settlement under the existing property insurance policy.

Aurora’s tax return prepared at the end of 20X4 revealed that the company ended 20X4 with a total inven- tory of $189,000. Aurora uses the same inventory accounting methods for tax and accounting purposes.

The insurance company has contacted Aurora’s suppliers and confirmed Aurora’s claim that purchases for 20X5, prior to the date of the burglary, were $376,000. All inventory was purchased, FOB destination.

20X5 Sales taxes collected by Aurora and remitted to the state, prior to the date of the theft, were $48,000. The sales tax rate is 6% of sales.

An inventory was taken immediately after the burglary and the cost of dresses in stock was $123,000.

Aurora consistently sells dresses at a gross profit margin of 45%.

Use the gross profit method to estimate the dollar value of stolen dresses.

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B-08.09 Gross profit estimation technique

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Beckwith Boots invested $100,000 in 5-year bonds issued by Ace Brick Company. The bonds were purchased at par on January 1, 20X1, and bear interest at a rate of 8% per annum, payable semiannually.

(a) Prepare the journal entry to record the initial investment on January, 20X1.

B-09.05 Bond investment purchased at par

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(b) Prepare the journal entry that Beckwith would record on each interest date.

(c) Prepare the journal entry that Beckwith would record at maturity of the bonds.

(d) How much cash flowed “in” and “out” on this investment, and how does the difference compare to total interest income that was recognized?

Devol Computing invested in $100,000 of face amount of 6-year bonds issued by Horton Micro Chip Company on January 1, 20X1. The bonds were purchased at 103, and bear interest at a stated rate of 8% per annum, payable semiannually.

(a) Prepare the journal entry to record the initial investment on January, 20X1.

(b) Prepare the journal entry that Devol would record on each interest date.

(c) Prepare the journal entry that Devol would record at maturity of the bonds.

(d) How much cash flowed “in” and “out” on this investment, and how does the difference compare to total interest income that was recognized?

Petersen Stores invested in $100,000 of face amount of 4-year bonds issued by Erik Food Supply Company on January 1, 20X1. The bonds were purchased at 98, and bear interest at a stated rate of 8% per annum, payable semiannually.

(a) Prepare the journal entry to record the initial investment on January, 20X1.

(b) Prepare the journal entry that Petersen would record on each interest date.

(c) Prepare the journal entry that Petersen would record at maturity of the bonds.

(d) How much cash flowed “in” and “out” on this investment, and how does the difference compare to total interest income that was recognized?

Bond investment purchased at a premium B-09.06

Bond investment purchased at a discount B-09.07

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