Survey of Accounting 6th Edition Warren Solutions Manual

Survey of Accounting 6th Edition
Warren Solutions Manual

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CHAPTER 6
RECEIVABLES AND INVENTORIES
CLASS DISCUSSION QUESTIONS
1. Receivables are normally classified as (1) the work-in-process costs are transferred to
accounts receivable, (2) notes receivable, or the finished goods inventory account. Upon
(3) other receivables. sale, the finished goods costs are trans-
2. Transactions in which merchandise is sold ferred to cost of goods sold, to be matched
or services are provided on credit generate against the revenue from sale. Since
accounts receivable. merchandisers only purchase goods for re-
3. a. Current Assets sale, they use a single inventory account,
Merchandise Inventory. Upon sale, the mer-
b. Investments
chandise inventory costs are transferred to
4. Examples of other receivables include inter- cost of merchandise sold, to be matched
est receivable, taxes receivable, and recei- against the revenue from sale. Thus, ac-
vables from officers or employees. counting for the sale of completed goods is
5. Carter’s should use the direct write-off me- similar for both types of firms.
thod because it is a small business that has
11. No, they are not techniques for determining
a relatively small number and volume of ac-
counts receivable. physical quantities. The terms refer to cost
flow assumptions, which affect the determi-
6. The allowance method nation of the cost prices assigned to items in
7. Contra asset the inventory.
8. The accounts receivable and allowance for 12. No, the term refers to the flow of costs rather
doubtful accounts may be reported at a net than the items remaining in the inventory.
amount of $428,200 ($475,000 – $46,800) in The inventory cost is composed of the earli-
the Current Assets section of the balance est acquisitions costs rather than the most
sheet. In this case, the amount of the allow- recent acquisitions costs.
ance for doubtful accounts should be shown
separately in a note to the financial state- 13. a. FIFO c. FIFO
ments or in parentheses on the balance b. LIFO d. LIFO
sheet. Alternatively, the accounts receivable 14. FIFO
may be shown at the gross amount of
$475,000 less the amount of the allowance 15. LIFO. In periods of rising prices, the use of
for doubtful accounts of $46,800, thus yield- LIFO will result in the lowest taxable income
ing net accounts receivable of $428,200. and thus the lowest income tax expense.
9. (1) The percentage rate used is excessive 16. The LIFO reserve is the difference between
in relationship to the volume of accounts the FIFO and LIFO inventory valuation. The
written off as uncollectible; hence, the analyst will adjust earnings to what they
balance in the allowance is excessive. would have been under FIFO. This is be-
(2) A substantial volume of old uncollectible cause the liquidation of a LIFO reserve
accounts is still being carried in the ac- abnormally inflates gross profit and net in-
counts receivable account. come.
10. Manufacturing firms must accumulate the 17. Current Assets
costs for making product. The costs for mak- 18. Net realizable value (estimated selling price
ing product include materials, which are in- less any direct cost of disposition, such as
cluded in materials inventory. Additional sales commissions).
costs, such as direct labor and factory over- 19. By a notation next to “merchandise invento-
head, must be added to materials during ry” on the balance sheet or in a note to the
production. The work-in-process inventory financial statements.
account accumulates these costs during
production. At the completion of production,
155
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EXERCISES
E6–1
Accounts receivable from the U.S. government are significantly different from recei-
vables from commercial aircraft carriers such as Delta and United. Thus, Boeing
should report each type of receivable separately. In the December 31, 2010, filing with
the Securities and Exchange Commission, Boeing reports the receivables together on
the balance sheet, but discloses each receivable separately in a note to the financial
statements.
E6–2
Due Date Interest Due at Maturity

a. Feb. 20 $450 [$40,000 × 0.09 × (45/360)]
b. May 22 $150 [$9,000 × 0.10 × (60/360)]
c. Aug. 28 $360 [$12,000 × 0.12 × (90/360)]
d. Dec. 28 $600 [$18,000 × 0.10 × (120/360)]
e. Nov. 30 $140 [$10,500 × 0.08 × (60/360)]
E6–3
a. MGM: 22.6% ($93,760,000 ÷ $415,654,000)
b. IBM: 3.0% ($324,000,000 ÷ $10,834,000,000)
c. Casino operations experience greater bad debt risk, since it is difficult to

control the creditworthiness of customers entering the casino. In addition,
individuals who may have adequate creditworthiness could overextend them-
selves and lose more than they can afford if they get caught up in the excitement
of gambling. In contrast, IBM’s customers are primarily other businesses such as
aircraft manufacturers and retail store chains.
Note to Instructors: In a separate note in its 10-K SEC filing, MGM disclosed that
its casino accounts receivables of $229,318,000 have an estimated allowance for
doubtful accounts of $85,547,000, which as a percentage of casino receivables is
37.3% ($85,547,000 ÷ $229,318,000). The remaining receivables of MGM are primari-
ly related to its hotel operations.
156
E6–4
Balance Sheet
Statement of Assets = Liabilities + Stockholders’ Equity Income
Cash Flows Accounts Statement
Cash + Receivable
Feb. 14. 9,000 –9,000
Statement of Cash Flows

Feb. 14. Operating 9,000
Balance Sheet
Cash Flows Retained Statement
Accounts Receivable = Earnings
Feb. 14. –45,000 –45,000 Feb. 14.
Income Statement
Feb. 14. Bad debt
expense –45,000
Balance Sheet
Dec. 23. 45,000 45,000 Dec. 23.
Income Statement
Dec. 23. Bad debt
expense 45,000
157
E6–4, Concluded
Balance Sheet
Cash + Receivable
Dec. 23. 45,000 –45,000
Dec. 23. Operating 45,000
E6–5
Balance Sheet
Cash + Receivable
Jan. 31. 8,000 –8,000
Jan. 31. Operating 8,000
Balance Sheet
Cash Flows Accounts Allowance for Statement
Receivable – Doubtful Accounts
Jan. 31. –32,000 32,000
158
E6–5, Concluded
Balance Sheet
Nov. 2. 32,000 –32,000
Balance Sheet
Cash + Receivable
Nov. 2. 32,000 –32,000

Nov. 2. Operating 32,000
159
E6–6
a.
Balance Sheet
Cash Flows Accounts Retained Statement
Receivable = Earnings
–11,575 –11,575
Income Statement
Bad debt
expense –11,575
b.
Balance Sheet
Cash Flows Accts. Allowance for Statement
Rec. – Doubtful Accounts
–11,575 11,575
E6–7
Estimated balance of Allowance for Doubtful Accounts: $26,145
Computed as shown below:
Estimated
Uncollectible Accounts
Age Interval Balance Percent Amount
Not past due ............................................... $667,000 ½% $ 3,335
1–30 days past due .................................... 158,000 2 3,160
31–60 days past due .................................. 54,000 5 2,700
61–90 days past due .................................. 20,500 15 3,075
91–180 days past due ................................ 15,000 40 6,000
Over 180 days past due ............................. 10,500 75 7,875
Total ....................................................... $925,000 $26,145
160
E6–8
Balance Sheet
Cash Flows – Allowance for Retained Statement
Doubtful Accounts = Earnings
Dec. 31. –22,345 –22,345 Dec.31.
Income Statement
Dec. 31. Bad debt
expense –22,345
Note: $22,345 = $26,145 – $3,800
E6–9
a. $13,000 ($5,200,000 × 0.0025) c. $26,000 ($5,200,000 × 0.005)

b. $15,550 ($17,500 – $1,950) d. $24,100 ($21,900 + $2,200)
E6–10
$516,250 [$590,000 + $40,000 – ($6,500,000 × 1¾%)]
E6–11
a. $579,000 [$625,000 + $80,000 – ($7,200,000 × 1¾%)]
b. $119,750 [($113,750 – $40,000) + ($126,000 – $80,000)]
161
E6–12
a. The three different inventories accumulate manufacturing costs as the product is

being produced. Costs flow through these accounts until the product is sold, and
the cost is matched on the income statement as cost of goods sold, shown as fol-
lows:
Materials Work-in-Process Finished Goods Cost of
Inventory Inventory Inventory Goods Sold
b. The materials inventory includes the cost of purchased parts and materials
needed to manufacture wireless communication devices. Work-in-process inven-
tory accumulates direct materials, direct labor, and factory overhead costs that are
incurred during production. The finished goods inventory includes the direct
labor, direct materials, and factory overhead costs for completed product.
162
E6–13
a. The asset categories reflect the life cycle of a film. The initial ―In development‖
costs are associated with efforts to develop a new film. These costs would include
the salaries of writers and other creative people to develop film concepts and
ideas. Once a film is accepted for production, the costs are reclassified as ―In pro-
duction‖ (in process). Additional production costs, including salaries for actors
and actresses, are now accumulated. Once a film is released (completed), the
costs are transferred to the ―In release‖ category.
b. The description above sounds similar to a manufacturing firm. Raw materials (in
development) are transferred to work in process (in process), then to finished
goods (completed). Thus, the reclassification of costs through different asset cat-
egories as the film becomes more complete is similar to a manufacturing firm.
However, with manufactured product, once the product is sold the costs are
shown on the income statement as cost of goods sold. In other words, all of the
costs are matched against the revenue. For DreamWorks, when a film is released,
the costs of the completed film do not all immediately flow to the income state-
ment. Rather, the costs are classified as an asset, termed ―released,‖ and amor-
tized over a short time period (around three years). This reflects the belief that
films can generate revenue longer than the year in which they are first released.
This application of the matching principle is reasonable since such films earn rev-
enues on television, in foreign markets, and in DVD sales.
E6–14
a. $39,600 (48 units at $825)

b. $30,690 [(27 units × $600) + (21 units × $690)] = $16,200 + $14,490
c. $35,712 (48 units at $744; $148,800 ÷ 200 units = $744)
Cost of merchandise available for sale:
27 units at $600 ........................................................ $ 16,200
54 units at $690 ........................................................ 37,260
63 units at $780 ........................................................ 49,140
56 units at $825 ........................................................ 46,200
200 units (at average cost of $744) .......................... $148,800
163
E6–15
Cost
Merchandise Merchandise
Inventory Method Inventory Sold
a. FIFO ..................... $7,728 $21,522
b. LIFO ..................... 6,660 22,590
c. Average cost ....... 7,215 22,035
Cost of merchandise available for sale:
42 units at $180 ........................................................ $ 7,560
58 units at $195 ........................................................ 11,310
20 units at $204 ........................................................ 4,080
30 units at $210 ........................................................ 6,300
150 units (at average cost of $195) .......................... $29,250
a. First-in, first-out:
Merchandise inventory:
30 units at $210 ........................................................ $ 6,300
7 units at $204 ........................................................ 1,428
37 units ..................................................................... $ 7,728
Merchandise sold:
$29,250 – $7,728 ....................................................... $21,522
b. Last-in, first-out:
37 units at $180 ........................................................ $ 6,660
Merchandise sold:
$29,250 – $6,660 ....................................................... $22,590
c. Average cost:
37 units at $195 ($29,250/150 units) ....................... $ 7,215
Merchandise sold:
$29,250 – $7,215 ....................................................... $22,035
164
E6–16
1. a. FIFO inventory > (greater than) LIFO inventory

b. FIFO cost of goods sold < (less than) LIFO cost of goods sold
c. FIFO net income > (greater than) LIFO net income
d. FIFO income tax > (greater than) LIFO income tax
2. In periods of rising prices, the income shown on the company's tax return would
be lower than if FIFO were used; thus, there is a tax advantage of using LIFO.
Note to Instructors: The federal tax laws require that if LIFO is used for tax purposes,
LIFO also must be used for financial reporting purposes. This is known as the LIFO
conformity rule. Thus, selecting LIFO for tax purposes means that the company's re-
ported income also will be lower than if FIFO had been used. Companies using LIFO
believe the tax advantages from using LIFO outweigh any negative impact of reporting
a lower income to shareholders.
E6–17
1. The interest receivable should be reported separately as a current asset. It should

not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts receiva-
ble.
A corrected partial balance sheet would be as follows:
ZABEL COMPANY
Balance Sheet
December 31, 2012
Assets
Current assets:
Cash ............................................................................ $ 75,000
Notes receivable ........................................................ 115,000
Accounts receivable .................................................. $475,000
Less allowance for doubtful accounts ............... 11,150 463,850
Interest receivable ..................................................... 9,000
165
E6–18
A B C D E F G
1 Unit Unit Total
2 Inventory Cost Market
3 Commodity Quantity Price Price Cost Market LCM
4 Buffalo 35 $ 115 $ 120 $ 4,025 $ 4,200 $ 4,025
5 Dakota 67 90 75 6,030 5,025 5,025
6 Frontier 8 300 280 2,400 2,240 2,240
7 Midwest 83 40 30 3,320 2,490 2,490
8 Rainbow 100 90 94 9,000 9,400 9,000
9 Total $ 24,775 $ 23,355 $ 22,780
E6–19
The merchandise inventory would appear in the Current Assets section, as follows:
Merchandise inventory—at lower of cost (FIFO) or market ........ $22,780
Alternatively, the details of the method of determining cost and the method of valua-
tion could be presented in a note.
166
PROBLEMS
P6–1
1.
A B C D E F G H
1 Aging-of-Receivables Schedule
2 December 31, 2012
3 Days Past Due
Not Past Over
4 Customer Balance Due 1–30 31–60 61–90 91–120 120
5 AAA Beauty 19,500 19,500
6 Amelia’s Wigs 8,000 8,000
30 Zim’s Beauty 6,100 6,100

40 Totals 880,000 575,000 140,500 82,700 36,000 25,000 20,800
41 Percent uncollectible 1% 2% 8% 15% 35% 80%
Estimate of
42 uncollectible accounts 45,966 5,750 2,810 6,616 5,400 8,750 16,640
2.
Balance Sheet
2012 2012
Dec. 31. –42,466* –42,466 Dec. 31.
Income Statement
2012 Bad debt
Dec. 31. expense –42,466
*$42,466 = $45,966 – $3,500
167
P6–1, Continued
3.
Balance Sheet
2012 2012
Dec. 31. –62,500* –62,500 Dec. 31.
Income Statement
2012 Bad debt
Dec. 31. expense –62,500
*$62,500 = $5,000,000 × 1.25%
4.
Balance Sheet
2013
Mar. 4. –4,350 4,350
168
P6–1, Continued
5.
Balance Sheet
2013
Aug. 17. 4,350 –4,350
Balance Sheet
Cash + Receivable
2013
Aug. 17. 4,350 –4,350
2013
Aug. 17. Operating 4,350
6. a.
Balance Sheet
2013 2013
Mar. 4. –4,350 –4,350 Mar. 4.
Income Statement
2013 Bad debt

Mar. 4. expense –4,350
169
P6–1, Concluded
6. b.
Balance Sheet
2013 2013
Aug. 17. 4,350 4,350 Aug. 17.
Income Statement
2013 Bad debt
Aug. 17. expense 4,350
Balance Sheet
Cash + Receivable
2013
Aug. 17. 4,350 –4,350

2013
Aug. 17. Operating 4,350
7. Amazon.com uses the allowance method of accounting for uncollectible

accounts receivable. Generally accepted accounting principles require that
companies with a large amount of receivables use the allowance method.
170
P6–2
1.
a. b.
Addition to Allowance Accounts Written
Year for Doubtful Accounts Off During Year
2009 $31,250 ($12,500,000 × 0.0025) $18,450 ($31,250 – $12,800)

2010 31,500 ($12,600,000 × 0.0025) 21,300 ($12,800 + $31,500 – $23,000)
2011 32,000 ($12,800,000 × 0.0025) 21,000 ($23,000 + $32,000 – $34,000)
2012 32,500 ($13,000,000 × 0.0025) 17,500 ($34,000 + $32,500 – $49,000)
2. a. The estimate of ¼ of 1% of credit sales may be too large, since the allow-
ance for doubtful accounts has steadily increased each year. The increas-
ing balance of the allowance for doubtful accounts also may be due to the
failure to write off a large number of uncollectible accounts. These possi-
bilities could be evaluated by examining the accounts in the subsidiary
ledger for collectibility and comparing the result with the balance in the
allowance for doubtful accounts.
Note to Instructors: Since the amount of credit sales has been fairly uniform over
the years, the increase cannot be explained by an expanding volume of sales.
b. The balance of Allowance for Doubtful Accounts that should exist at

December 31, 2012, can only be determined after all attempts have been
made to collect the receivables on hand at December 31, 2012. However,
the account balances at December 31, 2012, could be analyzed, perhaps
using an aging schedule, to determine a reasonable amount of allowance
and to determine accounts that should be written off. Also, past write-offs
of uncollectible accounts could be analyzed in depth in order to develop a
reasonable percentage for future adjusting entries, based on past history.
Caution must be exercised, however, in using historical percentages.
Specifically, inquiries should be made to determine whether any signifi-
cant changes between prior years and the current year may have
occurred, which might reduce the accuracy of the historical data. For
example, a recent change in credit-granting policies or changes in the
general economy (entering a recessionary period, for example) could
reduce the usefulness of analyzing historical data.
Based on the preceding analyses, a recommendation to decrease the
annual rate charged as an expense may be in order (perhaps EquiPrime
Co. is experiencing a lower rate of uncollectibles than is the industry
average), or perhaps a change to the ―estimate based on analysis of
receivables‖ method may be appropriate.
171
P6–3
1. Bad Debt Expense

Increase Balance of
Expense Expense (Decrease) Allowance
Actually Based on in Amount Account,
Year Reported Estimate* of Expense End of Year
1st $ 5,000 $ 11,500 $ 6,500 $ 6,500
2nd 9,000 23,750 14,750 21,250
3rd 23,000 45,000 22,000 43,250
4th 37,500 48,000 10,500 53,750
*Determined by multiplying sales by 0.005 as follows:

Year 1: $11,500 = $2,300,000 × 0.005
Year 2: $23,750 = $4,750,000 × 0.005
Year 3: $45,000 = $9,000,000 × 0.005
Year 4: $48,000 = $9,600,000 × 0.005
2. Yes. The actual write-offs of accounts originating in the first two years are
reasonably close to the expense that would have been charged to those years
on the basis of ½% of sales. The total write-off of receivables originating in
the first year amounted to $11,000 ($5,000 + $4,000 + $2,000), as compared
with bad debt expense, based on the percentage of sales, of $11,500. For the
second year, the comparable amounts were $22,500 ($5,000 + $12,000 +
$5,500) and $23,750.
172
P6–4
1. First-In, First-Out Method

Model Quantity Unit Cost Total Cost
101Sx 6 $225 $ 1,350
3 222 666
256Br 4 140 560
4 130 520
378Wh 4 317 1,268
590Pm 2 535 1,070
2 530 1,060
661Qu 6 542 3,252
1 549 549
828Ts 2 232 464
913Vn 12 39 468
Total ................................................................. $11,227
2. Last-In, First-Out Method

Model Quantity Unit Cost Total Cost
101Sx 9 $213 $ 1,917
256Br 8 120 960
378Wh 4 305 1,220
590Pm 2 520 1,040
2 527 1,054
661Qu 6 520 3,120
1 531 531
828Ts 2 222 444
913Vn 8 35 280
4 36 144
Total ................................................................. $10,710
173
P6–4, Concluded
3. Average Cost Method

Model Quantity Unit Cost* Total Cost
101Sx 9 $218 $ 1,962
256Br 8 126 1,008
378Wh 4 311 1,244
590Pm 4 528 2,112
661Qu 7 534 3,738
828Ts 2 227 454
913Vn 12 37 444
Total ................................................................. $10,962
*Computations of unit costs:

101Sx: $218 = [9 × $213) + (7 × $215) + (6 × $222) + (6 × $225)] ÷ (9 + 7 + 6 + 6)
256Br: $126 = [(20 × $120) + (12 × $130) + (4 × $130) + (4 × $140)] ÷ (20 + 12 + 4 + 4)
378Wh: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 × $317)] ÷ (6 + 3 + 3 + 4)
590Pm: $528 = [(2 × $520) + (2 × $527) + (2 × $530) + (2 × $535)] ÷ (2 + 2 + 2 + 2)
661Qu $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + 8 + 4 + 6)
828Ts: $227 = [(4 × $222) + (4 × $232)] ÷ (4 + 4)
913Vn: $37 = [(8 × $35) + (12 × $36) + (16 × $37) + (14 × $39)] ÷ (8 + 12 + 16 + 14)
4. a. During periods of rising prices, the LIFO method will result in a lesser
amount of inventory, a greater amount of the cost of merchandise sold,
and a lesser amount of net income than the other two methods. For
Icelander Appliances, the LIFO method would be preferred for the current
year, since it would result in a lesser amount of income tax.
b. During periods of declining prices, the FIFO method will result in a lesser
amount of net income and would be preferred for income tax purposes.
174
P6–5
Inventory Sheet
December 31, 2012
Unit Unit Total
Inventory Cost Market
Description Quantity Price Price Cost Market LCM
112Aa 38 25 $ 80 $ 83 $ 2,000 $2,075
13 78 1,014 1,079
3,014 3,154 $ 3,014
B300t 33 118 115 3,894 3,795 3,795
C39f 41 20 66 64 1,320 1,280
21 70 1,470 1,344
2,790 2,624 2,624
Echo9 125 25 26 3,125 3,250 3,125
F900w 18 10 565 550 5,650 5,500
8 560 4,480 4,400
10,130 9,900 9,900
H687 60 15 15 900 900 900
J023 5 385 390 1,925 1,950 1,925
L33y 375 6 6 2,250 2,250 2,250
R66b 90 80 22 18 1,760 1,440
10 21 210 180
1,970 1,620 1,620
S77x 6 5 250 235 1,250 1,175
1 260 260 235
1,510 1,410 1,410
T882m 130 100 20 18 2,000 1,800
30 19 570 540
2,570 2,340 2,340
Z55p 12 9 750 746 6,750 6,714
3 749 2,247 2,238
8,997 8,952 8,952
Total $43,075 $42,145 $41,855
175
ACTIVITIES
A6–1
By computing interest using a 365-day year for depository accounts (payables),

Sybil is minimizing interest expense to the bank. By computing interest using a
360-day year for loans (receivables), Sybil is maximizing interest revenue to the
bank. However, federal legislation (Truth in Lending Act) requires banks to com-
pute interest on a 365-day year. Hence, Sybil is behaving in an unprofessional
manner.
A6–2
Because of the size and number of customers’ accounts, it is probably unreason-

able for Northern Construction Supplies Co. not to allow credit to contractors and
to require cash or credit card payment. To do so, as Janet points out, would
probably cost Northern most of its contractor customers. Thus, Northern is faced
with having to allow credit to its contracting customers.
Many building contractors obtain construction loans from local financial institu-
tions. They are then allowed to draw upon (withdraw) these funds as portions of
the construction are completed. Most of the time, a representative of the financial
institution granting the construction loan must approve the disbursement based
upon an observation of the work to verify that it was actually performed. Building
contractors are, of course, charged interest on the balances withdrawn from their
construction loans. Thus, building contractors have an incentive to delay pay-
ment of construction bills as long as possible. At the same time, it is unreasona-
ble to expect payment from the contractors until the representative of the finan-
cial institution has approved payment. Thus, it is probably reasonable to expect
that accounts will remain open for 30–45 days after the contractor has received
the materials.
176
A6–2, Concluded
The primary problem that Northern Construction Supplies Co. is facing is that
some contractors are apparently abusing Northern’s liberal credit policy. One al-
ternative would be for Northern to allow a discount for payment within 30 days.
For example, Northern might allow a 2% discount if the bill is paid within 30 days.
Credit then might be discontinued for any contractor with a bill outstanding more
than 60 days. This would provide the contractors an incentive to pay their bills
early. That is, a 2% discount for payment 30 days early (the bill must be paid with-
in 60 days) is equivalent to an annual interest rate of 24% (2% × 360 ÷ 30). This
discount rate would easily exceed most interest rates on construction loans.
Such a payment policy would give contractors a ―positive‖ incentive to pay early.
Before initiating such a policy, Northern should consider its effect on profits.
Does the discount offered compensate for the faster collection of accounts
receivable? For example, earlier payments would allow Northern to earn interest
(profit) on the monies received from the contractors.
Note: Statement of activity indicates most contractors pay their receivables, but
they just take their time.
An alternative approach would be to charge contractors interest on past-due
accounts. For example, Northern might charge accounts over 60 days past-due
interest at 1½% per month (equivalent to approximately 18% per year). This ap-
proach would be more of a ―negative‖ approach to motivating contractors to pay
earlier.
Finally, yet another approach would be to stop extending credit to contractors
who routinely abuse Northern’s liberal credit policy. However, this approach is
more extreme than the preceding two approaches. It might be more appropriate
for contractors who continue to abuse the credit policy after one of the preceding
approaches has been implemented.
Regardless of the approach chosen, exceptions probably should be allowed for
good customers who suffer unusual situations. For example, a contractor’s bill
might be past due because of unforeseen construction problems, such as bad
weather, disagreement on contract specifications, etc.
177
A6–3
Since the title to merchandise shipped FOB shipping point passes to the buyer
when the merchandise is shipped, the shipments made before midnight, Decem-
ber 31, 2012, should properly be recorded as sales for the fiscal year ending
December 31, 2012. Hence, Gene Lumpkin is behaving in a professional manner.
However, Gene should realize that recording these sales in 2012 precludes them
from being recognized as sales in 2013. Thus, accelerating the shipment of
orders to increase sales of one period will have the effect of decreasing sales of
the next period.
A6–4
In developing a response to Evan’s concerns, you should probably first emphas-

ize the practical need for an assumption concerning the flow of cost of goods
purchased and sold. That is, when identical goods are frequently purchased, it
may not be practical to specifically identify each item of inventory. If all the iden-
tical goods were purchased at the same price, it wouldn’t make any difference for
financial reporting purposes which goods we assumed were sold first, second,
etc. However, in most cases, goods are purchased over time at different prices,
and, hence, a need arises to determine which goods are sold so that the price
(cost) of those goods can be matched against the revenues to determine operat-
ing income.
Next, you should emphasize that accounting principles allow for the fact that the
physical flow of the goods may differ from the flow of costs. Specifically, ac-
counting principles allow for three cost flow assumptions: first-in, first-out; last-
in, first-out; and average cost. Each of these methods has advantages and disad-
vantages. One primary advantage of the last-in, first-out method is that it better
matches current costs (the cost of goods purchased last) with current revenues.
Therefore, the reported operating income is more reflective of current operations
and what might be expected in the future. Another reason that the last-in, first-out
method is often used is that it tends to minimize taxes during periods of price in-
creases. Since for most businesses prices tend to increase, the LIFO method will
generate lower taxes than will the alternative cost flow methods.
The preceding explanation should help Evan better understand LIFO and its im-
pact on the financial statements and taxes.
178

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Survey of Accounting 6th Edition

Warren Solutions Manual

Due Date Interest Due at Maturity

a. MGM: 22.6% ($93,760,000 ÷ $415,654,000)

b. IBM: 3.0% ($324,000,000 ÷ $10,834,000,000)

c. Casino operations experience greater bad debt risk, since it is difficult to

Statement of Cash Flows

Statement of Cash Flows

Dec. 23. Operating 45,000

Statement of Cash Flows

Jan. 31. Operating 8,000

Statement of Cash Flows

Estimated balance of Allowance for Doubtful Accounts: $26,145

Computed as shown below:

Note: $22,345 = $26,145 – $3,800

a. $13,000 ($5,200,000 × 0.0025) c. $26,000 ($5,200,000 × 0.005)

$516,250 [$590,000 + $40,000 – ($6,500,000 × 1¾%)]

a. $579,000 [$625,000 + $80,000 – ($7,200,000 × 1¾%)]

b. $119,750 [($113,750 – $40,000) + ($126,000 – $80,000)]

a. The three different inventories accumulate manufacturing costs as the product is

a. $39,600 (48 units at $825)

1. a. FIFO inventory > (greater than) LIFO inventory

1. The interest receivable should be reported separately as a current asset. It should

A corrected partial balance sheet would be as follows:

30 Zim’s Beauty 6,100 6,100

*$42,466 = $45,966 – $3,500

*$62,500 = $5,000,000 × 1.25%

Statement of Cash Flows

2013 Bad debt

Statement of Cash Flows

7. Amazon.com uses the allowance method of accounting for uncollectible

2009 $31,250 ($12,500,000 × 0.0025) $18,450 ($31,250 – $12,800)

b. The balance of Allowance for Doubtful Accounts that should exist at

1. Bad Debt Expense

*Determined by multiplying sales by 0.005 as follows:

1. First-In, First-Out Method

2. Last-In, First-Out Method

3. Average Cost Method

*Computations of unit costs:

By computing interest using a 365-day year for depository accounts (payables),

Because of the size and number of customers’ accounts, it is probably unreason-

In developing a response to Evan’s concerns, you should probably first emphas-

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