- •108. On July 1, 2006, Jekel & Hyde Inc. Purchased land and incurred other costs relative to the construction of a new warehouse. A summary of economic activities is listed below:
- •Required:
- •Indicate the accounts that would be affected by the above transactions and the resulting balance in each account. Apply the interest on the construction loan to the cost of the building only.
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •In its 2004 annual report to shareholders, Boston Beer Co. Disclosed the following footnote:
- •E. Property, Plant and Equipment
- •128. Use a t- account to show the balances and changes during 2004 in Boston Beer's: Property, Plant and Equipment account and its Accumulated depreciation—Property, Plant & equipment account.
- •Required:
- •130. Use a t- account to show the balances and changes during 2004 in Plank Breweries:
- •Note 4 Property, Plant and Equipment
- •100. A summary of Klugman Company's December 31, 2006, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:
- •101. A summary of London Fashion's December 31, 2006, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:
- •114. Is there any evidence in Winchester's disclosures above that are consistent with earnings management?
- •Required:
- •121. Is there any evidence in hp's disclosures above that are consistent with earnings management?
- •100. Required:
- •101. Required:
- •104. Required:
- •105. Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •Required:
- •127. In its 2004 annual report to shareholders, Martin Marietta Materials, Inc. Included the following in its financial statement footnotes:
- •Note e: property, plant and equipment, net
- •In another footnote, the company reported:
114. Is there any evidence in Winchester's disclosures above that are consistent with earnings management?
Answer: It appears that Winchester has an excessively large loan loss allowance relative to the loans written off ("charge-offs") in the years shown in the disclosure. This appears to have been happening over a long period of time, by charging more loan losses to operations each year that the net loans written off. A substantial cookie jar reserve is available for the future.
Learning Objective: 5 Level of Learning: 2
Use the following to answer questions 115-121:
The following information is taken from the 2004 annual report to shareholders of Hewlett-Packard (HP) Co.
|
|
For Fiscal 2004 |
For Fiscal 2003 |
|
Provision for doubtful accounts--accounts receivable |
$3 million |
29 million |
|
|
At Fiscal Year-end 2004 |
At Fiscal Year-end 2003 |
|
Accounts receivable, net |
10,226 million |
8,921 million |
|
Accounts receivable, gross |
10,512 million |
9,268 million |
Required:
115. What is the balance in HP's Allowance for doubtful accounts at the end of the fiscal years 2004 and 2003, respectively?
Answer:
Allowance for doubtful accounts = Accounts receivable (gross) – Accounts receivable (net)
= $10,512 million - $10,226 million = $286 million in 2004; and $9,268 million - $8,921 million = $347 million in 2003.
Learning Objective: 5 Level of Learning: 2
116. What kind of account is the Provision for doubtful accounts--accounts receivable in HP's financial statements?
Answer: Provision for doubtful accounts is synonymous with Bad debt expense; that is, the charge against income for estimated uncollectible accounts from credit sales in that period.
Learning Objective: 5 Level of Learning: 2
117. Using a T-account for the Allowance for doubtful accounts, identify the changes in the account during fiscal year 2004.
Answer:
|
Allowance for Doubtful Accounts |
|
|
|
Beg. Bal. 347 |
|
Accounts written off (net) 64
|
Provision for doubtful accounts 3 |
|
|
End. Bal. 286 |
|
|
|
Learning Objective: 5 Level of Learning: 2
118. For each posted entry in the Allowance account during 2004, indicate the remaining entry(ies) in other accounts.
Answer:
Provision for doubtful accounts 3 (debit)
Accounts receivable 64 (credit)
Learning Objective: 9 Level of Learning: 3
119. If HP is using the balance sheet approach to determining loan losses and the Allowance account balance, what percentage did it use in 2004 and 2003, respectively?
Answer:
2004: $286/$10,512 = 2.72%;
2003: $347/$9,268 = 3.74%
Learning Objective: 6 Level of Learning: 2
120. How might a company with loan receivables like HP be able to manage earnings in applying generally accepted accounting principles?
Answer: The Allowance method requires that firms estimate the doubtful accounts charged to operations and the balance sheet valuation of the contra-asset account. In good times, firms might be extra conservative in estimating these amounts (i.e., charge more to the losses and allowances) because they can afford to do so. In later years, when they may need to increase earnings, they can "borrow" from the allowance, which was previously overestimated, thereby charging a smaller loss to operations of that period. This is a type of cookie jar reserve in earnings management parlance.
Learning Objective: 5 Level of Learning: 2