The income statements of Keagle Company for 20X3 and 20X4 follow.
20X3 20X4
Sales $100,000 $109,000
Cost of goods sold 62,000 74,000
Gross profit $ 38,000 $ 35,000
Expenses 26,000 22,000
Net income $ 12,000 $ 13,000
A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000.
1. Prepare corrected 20X3 and 20X4 income statements.
2. What is the effect of the error on ending owner’s equity for 20X3 and 20X4?
Inventory valuation methods: computations and concepts. Wave Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:
1/3: 100 boards @ $125
3/17: 50 boards @ $130
5/9: 5/9: 246 boards @ $140
7/3: 400 boards @ $150
10/23: 74 boards @ $160
Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.
Instructions
1. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:
• First-in, first-out
• Last-in, first-out
• Weighted average
2. Which of the three methods would be chosen if management’s goal is to
1. produce an up-to-date inventory valuation on the balance sheet?
2. approximate the physical flow of a sand and gravel dealer?
3. report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices?
Depreciation methods. Betsy Ross Enterprises purchased a delivery van for $30,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:
1. Units-of-output, assuming 17,000 miles were driven during 20X8
2. Straight-line
3. Double-declining-balance
Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $1,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:
1. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method
2. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
3. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.
Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3-20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
Instructions
1. Compute depreciation for 20X3-20X7 by using the following methods: straight line, units of output, and double-declining-balance.
2. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.
3. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.