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?

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

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

$$\begin{array}{lrr} {\textbf{Account Title}}&\textbf{Debit\hspace{6pt}}&\textbf{Credit\hspace{4pt}}\\ \text{Cash}&\text{\$\hspace{8pt}25,000}\\ \text{Accounts Receivable}\hspace{10pt}&\text{51,000}\\ \text{Office Supplies}&\text{7,500}\\ \text{Equipment}&\text{26,000}\\ \text{Accumulated Depreciation-Equipment}&&\text{\$\hspace{7pt}19,000}\\ \text{Accounts Payable}&&\text{14,000}\\ \text{Salaries Payable}&&\text{}\\ \text{Unearned Revenue}&&\text{4,500}\\ \text{Notes Payable (long-term)}&&\text{26,000}\\ \text{Common Stock}&&\text{15,000}\\ \text{Retained Earnings}&&\text{5,500}\\ \text{Dividends}&\text{28,000}\\ \text{Service Revenue}&&\text{99,000}\\ \text{Insurance Expense}&\text{2,500}\\ \text{Salaries Expense}&\text{33,000}\\ \text{Supplies Expense}&\text{}\\ \text{Interest Expense}&\text{3,000}\\ \text{Rent Expense}&\text{7,000}\\ \text{Depreciation Expense-Equipment}&\text{\underline{\hspace{40pt}}}&\text{\underline{\hspace{40pt}}}\\ \text{Total}&\underline{\underline{\$\hspace{2pt}\text{183,000}}}&\underline{\underline{\$\hspace{2pt}\text{183,000}}}\\ \end{array}$$

Adjustment data at December 31, 2018:

• a. Unearned Revenue earned during the year, $700.
• b. Office Supplies on hand,$3,000.
• c. Depreciation for the year, $3,000.
• d. Accrued Salaries Expense,$4,500.
• e. Accrued Service Revenue, $9,000.

Requirements

1. Prepare a worksheet for Fleming 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.

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?

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.

Lipscomb Inc. purchased a portfolio of available-for-sale securities in $2009$, its first year of operations. The cost and fair value of this portfolio on December $31$, $2009$, was as follows:

$$\begin{array}{lccc} \textbf{Name} & \textbf{Number of Shares} & \textbf{Total Cost} & \textbf{Total Fair Value}\\ \hline \text{Loomis, Inc.} & \hspace{10pt}600 & \$\hspace{5pt}9,000 & \$10,000\\ \text{Parker Corp.} & \hspace{10pt}900 & \hspace{5pt}21,000 & \hspace{5pt}22,800\\ \text{Smithfield Corp.} & 1,800 &\underline{\hspace{5pt}32,500} & \underline{\hspace{5pt}31,000}\\ \hspace{5pt}\text{Total} && \underline{\underline{\$62,500}} & \underline{\underline{\$63,800}} \end{array}$$

$\hspace{10pt}$ On May $10$, $2010$, Lipscomb purchased 700 shares of Nova Inc. at $\$50$ per share plus a $\$150$ brokerage fee. On December $31$, $2010$, the available-for-sale security portfolio had the following cost and fair value:

$$\begin{array}{lccc} \textbf{Name} & \textbf{Number of Shares} & \textbf{Total Cost} & \textbf{Total Fair Value}\\ \hline \text{Loomis, Inc.} & \hspace{10pt}600 & \$\hspace{5pt}9,000 & \$10,000\\ \text{Nova, Inc.} & \hspace{10pt}700 & \hspace{5pt}35,150 & \hspace{5pt}36,100\\ \text{Parker Corp.} & \hspace{10pt}900 & \hspace{5pt}21,000 & \hspace{5pt}22,800\\ \text{Smithfield Corp.} & 1,800 &\underline{\hspace{5pt}32,500} & \underline{\hspace{5pt}31,000}\\ \hspace{5pt}\text{Total} && \underline{\underline{\$62,500}} & \underline{\underline{\$63,800}} \end{array}$$

Provide the journal entries to record the following:
$\hspace{20pt}$ The adjustment of the available-for-sale security portfolio to fair value on December $31$, $2009$.

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 trial balance of Giambi Investment Advisers at December 31, 2012, follows:

$$\begin{array}{c} \hline \text{BROOKE'S MOTORS}\\ \text{Trial Balance}\\ \text{December 31, 2012}\\\hline \end{array}$$

$$\begin{array}{l|r||r} \hline \text { Account } & \text { Debit } & \text { Credit } \\ \hline \text { Cash } & \$ 28,000 & \\ \text { Accounts receivable } & 50,000 & \\ \text { Supplies } & 8,000 & \\ \text { Equipment } & 26,000 & \\ \text { Accumulated depreciation } & & \$ 16,000 \\ \text { Accounts payable } & & 14,000 \\ \text { Salary payable } & & \\ \text { Unearned service revenue } & & 1,000 \\ \text { Note payable, long-term } & & 44,000 \\ \text { Giambi, capital } & & 40,000 \\ \text { Giambi, drawing } & 50,000 & \\ \text { Service revenue } & & 97,000 \\ \text { Salary expense } & & \\ \text { Supplies expense } & 32,000 & \\ \text { Depreciation expense } & & \\ \text { Interest expense } & 7,000 & \\ \text { Rent expense } & 7,000 & \\ \text { Insurance expense } & 4,000 &\\ \text{Total}&\$212,000&\$212,000\\\hline \end{array}$$

Adjustment data at December 31, 2012:

a. Unearned service revenue earned during the year, $500. b. Supplies on hand,$5,000. c. Depreciation for the year, $8,000. d. Accrued salary expense,$1,000. e. Accrued service revenue, $3,000

Requirements

1. Enter the account data in the Trial Balance columns of a worksheet, and complete the worksheet through the Adjusted Trial Balance. Key each adjusting entry by the letter corresponding to the data given. Leave a blank line under Service revenue.
2. Prepare the income statement, the statement of owner’s equity, and the classified balance sheet in account format.
3. Prepare closing journal entries from the worksheet.
4. Did the company have a good or a bad year during 2012? Give the reason for your answer. (Challenge)

From inception of operations to December 31, 2012, Fortner Corporation provided for uncollectible accounts receivable under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days.

The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2012. During 2012, credit sales totaled$9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to$15,000. Fortner installed a computer system in November 2012, and an aging of accounts receivable was prepared for the first time as of December 31, 2012. A summary of the aging is as follows.

$$\begin{array}{lrc} \textbf{Classification by Month of Sale} & \textbf{Balance in} & \textbf{Estimated \%}\\ & \textbf{Each Category} & \textbf{Uncollectible}\\ \\ \text{November–December 2012} & \$1,080,000 & 2\%\\ \text{July–October} & 650,000 & 10\%\\ \text{January–June} & 420,000 & 25\%\\ \text{Prior to 1/1/12} & \underline{150,000} & 80\%\\ & \underline{\underline{\$2,300,000}}\\ \end{array}$$

Based on the review of collectibility of the account balances in the “prior to 1/1/12” aging category, additional receivables totaling $60,000 were written off as of December 31, 2012. The 80% uncollectible estimate applies to the remaining$90,000 in the category. Effective with the year ended December 31, 2012, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Instructions

(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2012. Show supporting computations in good form. (Hint: In computing the 12/31/12 allowance, subtract the $60,000 write-off).

(b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2012.

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?

Pete's Tennis Shop has the following transactions related to its top-selling Wilson tennis racket for the month of August:

$$\begin{matrix} \text{Date} & \text{Transactions} & \text{Units} & \text{Cost per Unit} & \text{Total Cost}\\ \hline \text{August 1} & \text{Beginning inventory} & \text{8} & \text{\$160} & \text{\$1,280}\\ \text{August 4} & \text{Sale $(\$ 225 \text { each) }$} & \text{5} & \text{ } & \text{ }\\ \text{August 11} & \text{Purchase} & \text{10} & \text{150} & \text{1,500}\\ \text{August 13} & \text{Sale $(\$ 240 \text { each) }$} & \text{8} & \text{ } & \text{ }\\ \text{August 20} & \text{Purchase} & \text{10} & \text{140} & \text{1,400}\\ \text{August 26} & \text{Sale $(\$ 250 \text { each) }$} & \text{11} & \text{ } & \text{ }\\ \text{August 29} & \text{Purchase} & \text{11} & \text{130} & \underline{1,430}\\ \text{ } & \text{ } & \text{ } & \text{ } & \underline{\underline{\$5,610}}\\ \end{matrix}$$

1. Calculate ending inventory and cost of goods sold at August 31, using the specific identification method. The August 4 sale consists of rackets from beginning inventory, the August 13 sale consists of rackets from the August 11 purchase, and the August 26 sale consists of one racket from beginning inventory and 10 rackets from the August 20 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at August 31. 3. Using LIFO, calculate ending inventory and cost of goods sold at August 31. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at August 31. 5. Calculate sales revenue and gross profit under each of the four methods. 6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain. 7. If Pete's chooses to report inventory using LIFO, record the LIFO adjustment.

Zeidman Security Services Co. offers security services to business clients. Complete the following end-of-period spreadsheet (work sheet) for Zeidman Security Services Co.

$$\begin{array}{c} \textbf{Zeidman Security Services Co.}\\ \textbf{End-of-Period Spreadsheet (Work sheet)}\\ \textbf{For the Year Ended July 31,2012}\\ \end{array}$$

$$\begin{array}{lccc} \hline&\textbf{Adjusted}&\textbf{Income}&\textbf{Balance}\\ &\underline{\textbf{Trial Balance}}&\underline{\textbf{Adjustment}}&\underline{\textbf{Trial balance}}\\ \textbf{Account Title}&\textbf{Dr.}\quad\quad\quad\textbf{Cr.}&\textbf{Dr.}\quad\quad\quad\textbf{Cr.}&\textbf{Dr.}\quad\quad\quad\textbf{Cr.} \\ \hline\text{Cash}&12\quad\quad\quad\quad\quad\\ \text{Accounts Receivable}&89\quad\quad\quad\quad\quad\\ \text{Supplies}&3\quad\quad\quad\quad\quad\\ \text{Prepaid Insurance}&4\quad\quad\quad\quad\quad\\ \text{Land}&100\quad\quad\quad\quad\quad\\ \text{Equipment}&40\quad\quad\quad\quad\quad\\ \text{Accum. Depr.- Equipment}&8\\ \text{Accounts Payable}&36\\ \text{Wages Payable}&1\\ \text{Alex Zeidman, Capital}&170\\ \text{Alex Zeidman, Drawing}&8\quad\quad\quad\quad\quad\\ \text{Fees Earned}&99\\ \text{Wages Expense}&21\quad\quad\quad\quad\quad\\ \text{Rent Expense}&12\quad\quad\quad\quad\quad\\ \text{Insurance Expense}&8\quad\quad\quad\quad\quad\\ \text{Utilities Expense}&6\quad\quad\quad\quad\quad\\ \text{Supplies Expense}&5\quad\quad\quad\quad\quad\\ \text{Depreciation Expense}&4\quad\quad\quad\quad\quad\\ \text{Miscellaneous Expense}&2\quad\quad\quad\quad\quad\\ \hline &314\quad\quad\quad314\\ \hline\hline \text{Net income (loss)} \end{array}$$

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 trial balance of Customer Choice Wholesale Company contained the accounts shown at December 31, the end of the company’s fiscal year.

$$\begin{array}{c} \textbf{CUSTOMER CHOICE WHOLESALE COMPANY}\\ \textbf{Trial Balance}\\ \textbf{December 31, 2014}\\ \end{array}$$

$$\begin{array}{lcc} &\underline{\textbf{Debit}}&\underline{\textbf{Credit}}\\[3pt] \text{Cash}&\text{\$\hspace{17pt}31,400}\\ \text{Accounts Receivable}&\text{\hspace{22pt}37,600}\\ \text{Inventory}&\text{\hspace{22pt}70,000}\\ \text{Land}&\text{\hspace{22pt}92,000}\\ \text{Buildings}&\text{\hspace{17pt}200,000}\\ \text{Accumulated Depreciation—Buildings}&&\text{\$\hspace{17pt}60,000}\\ \text{Equipment}&\text{\hspace{22pt}83,500}\\ \text{Accumulated Depreciation—Equipment}&&\text{\hspace{22pt}40,500}\\ \text{Notes Payable}&&\text{\hspace{22pt}54,700}\\ \text{Accounts Payable}&&\text{\hspace{22pt}17,500}\\ \text{Common Stock}&&\text{\hspace{17pt}160,000}\\ \text{Retained Earnings}&&\text{\hspace{22pt}67,200}\\ \text{Dividends}&\text{\hspace{22pt}10,000}\\ \text{Sales Revenue}&&\text{\hspace{17pt}922,100}\\ \text{Sales Discounts}&\text{\hspace{27pt}6,000}\\ \text{Cost of Goods Sold}&\text{\hspace{17pt}709,900}\\ \text{Salaries and Wages Expense}&\text{\hspace{22pt}51,300}\\ \text{Utilities Expense}&\text{\hspace{22pt}11,400}\\ \text{Maintenance and Repairs Expense}&\text{\hspace{27pt}8,900}\\ \text{Advertising Expense}&\text{\hspace{27pt}5,200}\\ \text{Insurance Expense}&\underline{\text{\hspace{27pt}4,800}}&\underline{\hspace{50pt}}\\ &\underline{\underline{\text{\$\hspace{1pt}}1,322,000}}&\underline{\underline{\text{\$\hspace{1pt}}1,322,000}}\\ \end{array}$$

Adjustment data:

 1. Depreciation is $8,000 on buildings and$7,000 on equipment. (Both are operating expenses.)
 2. Interest of $4,500 is due and unpaid on notes payable at December 31.
 3. Income tax due and unpaid at December 31 is$24,000.

Other data: $15,000 of the notes payable are payable next year.

Instructions

(d) Prepare a multiple-step income statement and a retained earnings statement for the year, and a classified balance sheet at December 31, 2014.

The Mavis Company uses an absorption-costing system based on standard costs. Total variable manufacturing cost, including direct material cost, is $3 per unit; the standard production rate is 10 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are$420,000. Fixed manufacturing overhead is allocated at $7 per machine-hour ($420,000 $\div$ 60,000 machine-hours of denominator level). Selling price is $5 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is$1 per unit. Fixed operating (nonmanufacturing) costs are $120,000. Beginning inventory in 2014 is 30,000 units; ending inventory is 40,000 units. Sales in 2014 are 540,000 units. The same standard unit costs persisted throughout 2013 and 2014. For simplicity, assume that there are no price, spending, or efficiency variances.

1. Prepare an income statement for 2014 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 asks you to recast the 2014 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?