Castleman Holdings, Inc. had the following equity investment portfolio at January 1, 2017.

$$\begin{array}{llr} \text{Evers Company}&\text{1,000 shares @ \$15 each}\hspace{25pt}&\text{\$\hspace{5pt}15,000}\hspace{4pt}\\ \text{Rogers Company}&\text{900 shares @ \$20 each}&\text{18,000}\hspace{4pt}\\ \text{Chance Company}&\text{500 shares @ \$9 each}&\underline{\text{\hspace{15pt}4,500}}\hspace{4pt}\\ \text{Equity investments @ cost}&&\text{37,500}\hspace{4pt}\\ \text{Fair value adjustment}&&\underline{\text{\hspace{15pt}(7,500}})\\ \text{Equity investments @ fair value}&&\underline{\underline{\$\text{\hspace{9pt}30,000}}}\hspace{4pt}\\ \end{array}$$

During 2017, the following transactions took place.

1. On March 1, Rogers Company paid a $2 per share dividend.
2. On April 30, Castleman Holdings, Inc. sold 300 shares of Chance Company for$11 per share.
3. On May 15, Castleman Holdings, Inc. purchased 100 more shares of Evers Company stock at $16 per share.
4. At December 31, 2017, the stocks had the following price per share values: Evers$17, Rogers $19, and Chance$8.

During 2018, the following transactions took place. 5. On February 1, Castleman Holdings, Inc. sold the remaining Chance shares for $8 per share. 6. On March 1, Rogers Company paid a$2 per share dividend. 7. On December 21, Evers Company declared a cash dividend of $3 per share to be paid in the next month. 8. At December 31, 2018, the stocks had the following price per share values: Evers$19 and Rogers $21.

Instructions

• a. Prepare journal entries for each of the above transactions.
• b. Prepare a partial balance sheet showing the investment-related amounts to be reported at December 31, 2017 and 2018.

The Garvis Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of$1.50 per unit. The standard production rate is 20 units per machine hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at$14 per machine-hour based on fixed manufacturing costs of $840,000$\div$60,000 machine-hours, which is the level Garvis uses as its denominator level. The selling price is$10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $2 per unit. Fixed operating (nonmanufacturing) costs are$240,000. Beginning inventory in 2017 is 60,000 units; ending inventory is 80,000 units. Sales in 2017 are 1,080,000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances.

1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at year-end as an adjustment to cost of goods sold.

2. The president has heard about variable costing. She ask you to recast the 2017 statement as it would appear under variable costing.

3. Explain the difference in operating income as calculated in requirements 1 and 2.

4. Graph how fixed manufacturing overhead is accounted for under absorption costing. That is, there will be two lines: one for the budgeted fixed manufacturing overhead (which is equal to the actual fixed manufacturing overhead in this case) and one for the fixed manufacturing overhead allocated. Show the production-volume variance in the graph.

5. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels.

(a) Is variable costing or absorption costing more likely to lead to such buildups? Why?

(b) What can managers do to counteract undesirable inventory buildups?

The unadjusted trial balance of Watson Anvils at December 31, 2018, and the data for the adjustments follow:

$$\begin{array}{c} \textbf{WATSON ANVILS}\\ \textbf{Unadjusted Trial Balance}\\ \textbf{December 31, 2018} \end{array}$$

$$\begin{array}{lrr} {\textbf{Account Title}}&\textbf{Debit\hspace{6pt}}&\textbf{Credit\hspace{4pt}}\\ \text{Cash}&\text{\$\hspace{5pt}13,560}\\ \text{Accounts Receivable}\hspace{10pt}&\text{17,000}\\ \text{Prepaid Rent}&\text{2,140}\\ \text{Office Supplies}&\text{2,800}\\ \text{Equipment}&\text{30,000}\\ \text{Accumulated Depreciation-Equipment}&&\text{\$\hspace{5pt}11,000}\\ \text{Accounts Payable}&&\text{7,200}\\ \text{Salaries Payable}&&\text{}\\ \text{Unearned Revenue}&&\text{5,600}\\ \text{Common Stock}&&\text{12,000}\\ \text{Retained Earnings}&&\text{17,600}\\ \text{Dividends}&\text{4,600}\\ \text{Service Revenue}&&\text{19,000}\\ \text{Salaries Expense}&\text{2,300}\\ \text{Rent Expense}&\text{}\\ \text{Depreciation Expense-Equipment}&\text{}\\ \text{Supplies Expense }&\text{\underline{\hspace{38pt}}}&\text{\underline{\hspace{38pt}}}\\ \text{Total}&\underline{\underline{\$\hspace{5pt}\text{72,400}}}&\underline{\underline{\$\hspace{5pt}\text{72,400}}}\\ \end{array}$$

Adjustment data: a. Unearned Revenue still unearned at December 31, $3,600. b. Prepaid Rent still in force at December 31,$2,000. c. Office Supplies used, $600. d. Depreciation,$400. e. Accrued Salaries Expense at December 31, $180.

Requirements

1. Open the T-accounts using the balances in the unadjusted trial balance.
2. Complete the worksheet for the year ended December 31, 2018 (optional).
3. Prepare the adjusting entries, and post to the accounts.
4. Prepare an adjusted trial balance.
5. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in report form.
6. Prepare the closing entries, and post to the accounts.
7. Prepare a post-closing trial balance.
8. Calculate the current ratio for the company.

The following information was taken from the records of Daughtry Cosmetics, Inc., at December 31, 2016:

$$\begin{array}{lrlr} \text{Prior-period adjustment-net of taxes}&&\text{Interest expense}&\$21,000\\ \quad\text{debit to Retained Earnings}&\$4,000&\text{Gain on lawsuit settlement}&6,000\\ \text{Income tax expense (savings):}&&\text{Dividend revenue}&12,000\\ \quad\text{Continuing operations }&27,600&\text{Treasury stock, common}&\\ \quad\text{Income from discontinued}&&\quad\text{(1,000 shares at cost)}&16,000\\ \quad\text{operations}&4,800&\text{General expenses}&70,900\\ \text{Loss on sale of plant assets}&10,000&\text{Sales revenue}&536,000\\ \text{Income from discontinued}&&\text{Retained earnings, beginning, }&\\ \quad\text{operations}&10,000&\quad\text{as originally reported}&196,000\\ \text{Preferred stock, 6\\\%, \$25 par,}&&\text{Selling expenses}&81,000\\ \quad\text{4,000 shares issued }&40,000&\text{Common stock, no par,}&\\ \text{Cost of goods sold}&302,000&\quad\text{21,000 shares authorized}&\\ \text{Dividends declared on common stock}&28,000&\quad\text{and issued}&350,000\\ \end{array}$$

1. Using the End-of-Chapter Summary Problem as an example, prepare Daughtry Cosmetics’single-step income statement, which lists all revenues together and all expenses together, for the fiscal year ended December 31, 2016. Include earnings-per-share data. For purposes of earnings per share, assume dividends have been declared on preferred stock as of December 31.

2. Evaluate income for the year ended December 31, 2016. Daughtry’s top managers hoped to earn income from continuing operations equal to 7% of sales.

A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.

$$\begin{array}{lcc} &\text{\underline{\hspace{13pt}Dr.\hspace{13pt}}}&\text{\underline{\hspace{13pt}Cr.\hspace{13pt}}}\\ \text{Supplies}&\text{\$\hspace{10pt}2,700}\\ \text{Salaries and wages payable}&&\text{\$\hspace{10pt}1,500}\\ \text{Interest receivable}&\text{\hspace{15pt}5,100}\\ \text{Prepaid insurance}&\text{\hspace{10pt}90,000}\\ \text{Unearned rent}&&\text{\hspace{10pt}–0–}\\ \text{Interest payable}&&\text{\hspace{10pt}15,000}\\ \end{array}$$

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2018, totaled $1,100.
2. Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to$4,400.
3. The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to $4,350 on December 31, 2018.
4. The unexpired portions of the insurance policies totaled$65,000 as of December 31, 2018.
5. $28,000 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.
6. Depreciation on equipment for the year was erroneously recorded as$5,000 rather than the correct figure of $50,000.
7. A further review of depreciation calculations of prior years revealed that equipment depreciation of$7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

• a. Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)
• b. Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)
• c. Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.

Wood Company makes a monthly adjustment for its allowance for uncollectible accounts. The November 30 aging of accounts receivable follows:

The aging of accounts receivable as of December 31 is given in the Working Papers.

Instructions:

2. Use the aging of accounts receivable to estimate the December adjustment to the allowance for uncollectible accounts. The current balance in Allowance for Uncollectible Accounts is a$6,481.18 debit.

Park Co.’s long-term available-for-sale portfolio at December 31, 2010, consists of the following.

Park enters into the following long-term investment transactions during year 2011.

Jan. 29 Sold 7,000 shares of Company B common stock for $158,375 less a brokerage fee of$3,100.
Apr. 17 Purchased 20,000 shares of Company W common stock for $395,000 plus a brokerage fee of$3,500. The shares represent a 30% ownership in Company W.
July 6 Purchased 9,000 shares of Company X common stock for $253,125 plus a brokerage fee of$3,500. The shares represent a 10% ownership in Company X.
Aug. 22 Purchased 100,000 shares of Company Y common stock for $750,000 plus a brokerage fee of$8,200. The shares represent a 51% ownership in Company Y.
Nov. 13 Purchased 17,000 shares of Company Z common stock for $533,800 plus a brokerage fee of$6,900. The shares represent a 5% ownership in Company Z.
Dec. 9 Sold 80,000 shares of Company A common stock for $1,030,000 less a brokerage fee of$4,100.

The fair values of its investments at December 31, 2011, are: B, $162,750; C,$1,220,625; W, $382,500; X,$236,250; Y, $1,062,500; and Z,$557,600.

Required
1. Calculate the amount Park should report on its December 31, 2011, balance sheet for its long-term investments in available-for-sale securities.
2. Prepare any necessary December 31, 2011, adjusting entry to record the fair value adjustment for the long-term investments in available-for-sale securities.
3. What amount of gains or losses on transactions relating to long-term investments in available-for-sale securities should Park report on its December 31, 2011, income statement?

Wesley Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Wesley’s current year’s statement of cash flows must exceed$1 million. President and CEO Samuel Gunkle’s job is secure so long as he produces annual operating cash flows to support the usual dividend.

At the end of the current year, controller Gerald Rondelli presents president Samuel Gunkle with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Gerald, “We must get that amount above$1 million. Isn’t there some way to increase operating cash fl ow by another $30,000?” Gerald answers, “These figures were prepared by my assistant. I’ll go back to my offi ce and see what I can do.” The president replies, “I know you won’t let me down, Gerald.”

Upon close scrutiny of the statement of cash fl ows, Gerald concludes that he can get the operating cash flows above$1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as “Proceeds from bank loan—$60,000.” He will report the note instead as “Increase in payables—$60,000” and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, “You can tell the board to declare their usual divide d. Our net cash flow provided by operating activities is$1,030,000.” “Good man, Gerald! I knew I could count on you,” exults the president.

Instructions (c) Are the board members or anyone else likely to discover the misclassification?

On December 1, 2014, Harrisen Company had the account balances shown below.

$$\begin{array}{lclc} &\underline{\textbf{Debit}}&&\underline{\textbf{Credit}}\\[3pt] \text{Cash}&\text{\$\hspace{5pt}4,800}&\text{Accumulated Depreciation—Equipment}&\text{\$\hspace{5pt}1,500}\\ \text{Accounts Receivable}&\text{\hspace{10pt}3,900}&\text{Accounts Payable}&\text{\hspace{10pt}3,000}\\ \text{Inventory}&\text{\hspace{5pt}1,800*}&\text{Common Stock}&\text{\hspace{5pt}10,000}\\ \text{Equipment}&\underline{\text{\hspace{5pt}21,000}}&\text{Retained Earnings}&\underline{\text{\hspace{5pt}17,000}}\\ &\underline{\underline{\text{\$\hspace{1pt}31,500}}}&&\underline{\underline{\text{\$\hspace{1pt}31,500}}}\\ \end{array}$$

*(3,000 x $0.60)

The following transactions occurred during December.

Dec.  3 Purchased 4,000 units of inventory on account at a cost of$0.72 per unit.
      5 Sold 4,400 units of inventory on account for $0.90 per unit. (It sold 3,000 of the$0.60 units and 1,400 of the $0.72.)
      7 Granted the December 5 customer$180 credit for 200 units of inventory returned costing $150. These units were returned to inventory.
     17 Purchased 2,200 units of inventory for cash at$0.80 each.
     22 Sold 2,000 units of inventory on account for $0.95 per unit. (It sold 2,000 of the$0.72 units.)

Adjustment data:

1. Accrued salaries and wages payable $400.
2. Depreciation on equipment$200 per month.
3. Income tax expense was $215, to be paid next year.

Instructions

(a) Journalize the December transactions and adjusting entries, assuming Harrisen uses the perpetual inventory method.

(b) Enter the December 1 balances in the ledger T-accounts and post the December transactions. In addition to the accounts mentioned above, use the following additional accounts: Income Taxes Payable, Salaries and Wages Payable, Sales Revenue, Sales Returns and Allowances, Cost of Goods Sold, Depreciation Expense, Salaries and Wages Expense, and Income Tax Expense.

On December 1, 2014, Boline Distributing Company had the following account balances.

$$\begin{array}{lclc} &\underline{\textbf{Debit}}&&\underline{\textbf{Credit}}\\[3pt] \text{Cash}&\text{\$\hspace{5pt}7,200}&\text{Accumulated Depreciation—Equipment}&\text{\$\hspace{5pt}2,200}\\ \text{Accounts Receivable}&\text{\hspace{10pt}4,600}&\text{Accounts Payable}&\text{\hspace{10pt}4,500}\\ \text{Inventory}&\text{\hspace{5pt}12,000}&\text{Salaries and Wages Payable}&\text{\hspace{10pt}1,000}\\ \text{Supplies}&\text{\hspace{10pt}1,200}&\text{Common Stock}&\text{\hspace{5pt}15,000}\\ \text{Equipment}&\underline{\text{\hspace{5pt}22,000}}&\text{Retained Earnings}&\underline{\text{\hspace{5pt}24,300}}\\ &\underline{\underline{\text{\$\hspace{1pt}47,000}}}&&\underline{\underline{\text{\$\hspace{1pt}47,000}}}\\ \end{array}$$

During December, the company completed the following summary transactions.

Dec.  6 Paid $1,600 for salaries due employees, of which$600 is for December and $1,000 is for November salaries payable.
      8 Received$1,900 cash from customers in payment of account (no discount allowed).
     10 Sold merchandise for cash $6,300. The cost of the merchandise sold was$4,100.
     13 Purchased merchandise on account from Gong Co. $9,000, terms 2/10, n/30.
     15 Purchased supplies for cash$2,000.
     18 Sold merchandise on account $12,000, terms 3/10, n/30. The cost of the merchandise sold was$8,000.
     20 Paid salaries $1,800.
     23 Paid Gong Co. in full, less discount.
     27 Received collections in full, less discounts, from customers billed on December 18.

Adjustment data:

1. Accrued salaries payable$800.
2. Depreciation $200 per month.
3. Supplies on hand$1,500.
4. Income tax due and unpaid at December 31 is $200.

Instructions

(e) Prepare an income statement and a retained earnings statement for December and a classified balance sheet at December 31.

The unadjusted trial balance of Farish Investment Advisers at December 31, 2018, follows:

$$\begin{array}{c} \textbf{FARISH INVESTMENT ADVISERS}\\ \textbf{Unadjusted Trial Balance}\\ \textbf{December 31, 2018} \end{array}$$

$$\begin{array}{lrr} {\textbf{Account Title}}&\textbf{Debit\hspace{6pt}}&\textbf{Credit\hspace{4pt}}\\ \text{Cash}&\text{\$\hspace{8pt}30,000}\\ \text{Accounts Receivable}\hspace{10pt}&\text{51,000}\\ \text{Office Supplies}&\text{7,000}\\ \text{Equipment}&\text{28,000}\\ \text{Accumulated Depreciation-Equipment}&&\text{\$\hspace{12pt}9,000}\\ \text{Accounts Payable}&&\text{13,000}\\ \text{Salaries Payable}&&\text{}\\ \text{Unearned Revenue}&&\text{5,500}\\ \text{Notes Payable (long-term)}&&\text{21,000}\\ \text{Common Stock}&&\text{27,000}\\ \text{Retained Earnings}&&\text{29,500}\\ \text{Dividends}&\text{29,000}\\ \text{Service Revenue}&&\text{93,000}\\ \text{Insurance Expense}&\text{2,500}\\ \text{Salaries Expense}&\text{40,000}\\ \text{Supplies Expense}&\text{}\\ \text{Interest Expense}&\text{5,500}\\ \text{Rent Expense}&\text{5,000}\\ \text{Depreciation Expense-Equipment }&\text{\underline{\hspace{40pt}}}&\text{\underline{\hspace{40pt}}}\\ \text{Total}&\underline{\underline{\$\hspace{2pt}\text{198,000}}}&\underline{\underline{\$\hspace{2pt}\text{198,000}}}\\ \end{array}$$

Adjustment data at December 31, 2018:

• a. Unearned Revenue earned during the year, $800.
• b. Office Supplies on hand,$4,500.
• c. Depreciation for the year, $4,500.
• d. Accrued Salaries Expense,$5,000.
• e. Accrued Service Revenue, $6,500.

Requirements

1. Prepare a worksheet for Farish Investment Advisers at December 31, 2018.
2. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in account format.
3. Prepare closing entries.

Wesley Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Wesley’s current year’s statement of cash flows must exceed$1 million. President and CEO Samuel Gunkle’s job is secure so long as he produces annual operating cash flows to support the usual dividend.

At the end of the current year, controller Gerald Rondelli presents president Samuel Gunkle with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Gerald, “We must get that amount above$1 million. Isn’t there some way to increase operating cash fl ow by another $30,000?” Gerald answers, “These figures were prepared by my assistant. I’ll go back to my offi ce and see what I can do.” The president replies, “I know you won’t let me down, Gerald.”

Upon close scrutiny of the statement of cash fl ows, Gerald concludes that he can get the operating cash flows above$1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as “Proceeds from bank loan—$60,000.” He will report the note instead as “Increase in payables—$60,000” and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, “You can tell the board to declare their usual divide d. Our net cash flow provided by operating activities is$1,030,000.” “Good man, Gerald! I knew I could count on you,” exults the president.

Instructions (b) Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions?

On December 1, 2014, Boline Distributing Company had the following account balances.

$$\begin{array}{lclc} &\underline{\textbf{Debit}}&&\underline{\textbf{Credit}}\\[3pt] \text{Cash}&\text{\$\hspace{5pt}7,200}&\text{Accumulated Depreciation—Equipment}&\text{\$\hspace{5pt}2,200}\\ \text{Accounts Receivable}&\text{\hspace{10pt}4,600}&\text{Accounts Payable}&\text{\hspace{10pt}4,500}\\ \text{Inventory}&\text{\hspace{5pt}12,000}&\text{Salaries and Wages Payable}&\text{\hspace{10pt}1,000}\\ \text{Supplies}&\text{\hspace{10pt}1,200}&\text{Common Stock}&\text{\hspace{5pt}15,000}\\ \text{Equipment}&\underline{\text{\hspace{5pt}22,000}}&\text{Retained Earnings}&\underline{\text{\hspace{5pt}24,300}}\\ &\underline{\underline{\text{\$\hspace{1pt}47,000}}}&&\underline{\underline{\text{\$\hspace{1pt}47,000}}}\\ \end{array}$$

During December, the company completed the following summary transactions.

Dec.  6 Paid $1,600 for salaries due employees, of which$600 is for December and $1,000 is for November salaries payable.
      8 Received$1,900 cash from customers in payment of account (no discount allowed).
     10 Sold merchandise for cash $6,300. The cost of the merchandise sold was$4,100.
     13 Purchased merchandise on account from Gong Co. $9,000, terms 2/10, n/30.
     15 Purchased supplies for cash$2,000.
     18 Sold merchandise on account $12,000, terms 3/10, n/30. The cost of the merchandise sold was$8,000.
     20 Paid salaries $1,800.
     23 Paid Gong Co. in full, less discount.
     27 Received collections in full, less discounts, from customers billed on December 18.

Adjustment data:

1. Accrued salaries payable$800.
2. Depreciation $200 per month.
3. Supplies on hand$1,500.
4. Income tax due and unpaid at December 31 is $200.

Instructions

(d) Prepare an adjusted trial balance.

The unadjusted trial balance and income statement amounts from the December 31 adjusted trial balance of Durkin Production Company follow. Durkin Production Company

$$\begin{matrix} \text{Account} & \text{Unadjusted Trial Balance} & \quad & \text{From the Adjusted Trial Balance}\\ \text{Cash} & \text{14,200} & \quad & \quad & \quad\\ \text{Prepaid rent } & \text{1,500} & \quad & \quad & \quad\\ \text{Equipment} & \text{44,000} & \quad & \quad & \quad\\ \text{Accumulated depreciation } & \quad & \text{3,500} & \quad & \quad\\ \text{Accounts payable } & \quad & \text{4,700} & \quad & \quad\\ \text{Salary payable } & \quad & \quad & \quad & \quad\\ \text{Unearned service revenue } & \quad & \text{8,400} & \quad & \quad\\ \text{Income tax payable } & \quad & \quad & \quad & \quad\\ \text{Notes payable, long-term } & \quad & \text{17,000} & \quad & \quad\\ \text{Common stock} & \quad & \text{8,700} & \quad & \quad\\ \text{Retained earnings } & \quad & \text{11,400} & \quad & \quad\\ \text{Dividends} & \text{1,100} & \quad & \quad & \quad\\ \text{Service revenue } & \quad & \text{13,300} & \quad & \text{19,600}\\ \text{Salary expense } & \text{4,700} & \quad & \text{5,600} & \quad\\ \text{Rent expense } & \text{1,500} & \quad & \text{2,300} & \quad\\ \text{Depreciation expense} & \quad & \quad & \text{600} & \quad\\ \text{Income tax expense } & \quad & \quad & \text{1,200} & \quad\\ \text{Total} & \text{67,000} & \text{67,000} & \text{9,700} & \text{19,600}\\ \end{matrix}$$

Journalize the adjusting and closing entries of Durkin Production Company at December 31. There was only one adjustment to Service Revenue.