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Unformatted text preview: Problem 11 (40 mins) _ (j) 6 2’ The post-closing trial balance as of December 31, 1994 and the adjusted trial balance as of December 31,
1995 are shown here for the Heinz Company: Balance Sheet Balance Sheet
December 31, 1994 December 31, 1995
Cash $2,700 $3,820
Accounts receivable 5,900 6,215
Inventories 15,300 15,530
Prepaid items 1,400 1,000
Investments in bonds (short-term) 8,300 7,300
Land 16,300 17,700
Buildings 68,700 60,700
Accumulated depreciation: buildings $35,000 $34,500
Equipment 29,600 25,600
Accumulated depreciation: equipment , 14,200 14,700
Patents (net of amortization) 8,700 9,185
Accounts payable 8,900 9,195
Interest payable 630 300
Deferred taxes (long term) 2,500 2,600
Bonds payable 23,000 17,000
Discount on bonds payable 0 715
Common stock, $10 par 22,000 22,650
Additional paid-in capital 15,320 15,970
Retained earnings 35,350 30,850 $156,900 £156,900 £147,765 £147,765 Income Statement Sales (net) 50,000
Cost of goods sold 23,800
Wages expense 16,5 10
Other operating expenses 1,100
Depreciation expense: buildings 4,300
Depreciation expense: equipment ’ 6,100
Patent amortization 815
Interest expense 1,715
Interest revenue 790
Income tax expense 650
Totals- Debits/Credits £54,990 £50,7 90 A review of the accounting records reveals the following additional information: (a) Bonds payable with a face value, book value, and market value of $14,000 were retired on June 30,
1995. (b) Bonds payable with a face value of $8,000 were issued at 90.25 on August 1, 1995. They mature on
August 1, 2000. The company uses the straight-line method to amortize bond discount. (c) A tornado completely destroyed a small building that had an original cost of $8,000 and book value of
$4,800. Settlement with the insurance company resulted in proceeds of $4,800. (d) Equipment with a cost of $7,000 and a book value of $1,400 was exchanged for an acre of land valued
at $1,400. No cash was exchanged. The transaction was properly considered to be a dissimilar asset
exchange. w m, h
(e) Short-term investments in bonds being held to maturity with a cost of $1,000 were sold for $1,000. '
(f) Sixty-ﬁve shares of common stock were exchanged for a patent. The common stock was selling for
$20 per share at the time of the exchange.
(g) Dividends of $300 were declared and paid.
(h) Equipment was purchased with cash and has caused the rest of the change in the equipment account.
(i) Bad debts recovered from last year’s write offs was $300 and $1,000 was estimated and written off in
each year. Required
Prepare a worksheet to support a statement of cash ﬂows for 1995. Problem III (20 mins) The Internal Revenue Code allows a corporation to carry back or carry forward an “operating loss” for a
given year. Required 1. Describe an operating loss carryback and a carry-forward and the related tax law. 2. For a carryback, identify and brieﬂy discuss the two important conceptual questions. 3. For a carryforward, identify and brieﬂy discuss the two important conceptual questions.
4. Brieﬂy summarize the way each is measured and presented on ﬁnancial statements if: (a) operating loss carryback is chosen and (b) operating loss carryforward is chosen. Problem IV (20 mins) Certain business “exchanges” are very complex and may qualify as exceptional cases in which the related
revenues and expenses are advanced or deferred. The following are four such cases: 1. Franchiser grants a franchise to a franchisee; it collects part of the initial franchise fee and agrees to
perform related initial services over an extended period. 2. Land development company acquires land for future development into a “sport retirement community,”
subdivides the land into lots, and sells the lots on “credit” with payment to be made on a long—term
basis. 3. Lessor leases equipment to a lessee on a long-term item is greater than the cost, and the ownership of
the leased item is transferred to the lessee by the end of the lease life. Required For each of the preceding exchanges, (a) indicate the revenue recognition issues involved, and (b) discuss
the best choice when the revenue is recognized and by what method. Why? ...
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This note was uploaded on 01/31/2010 for the course ECON 136C taught by Professor Anderson during the Fall '08 term at UCSB.
- Fall '08