Time Value of Money
Altman Company will invest $500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is
$669,115.
Invest Today Means: PV= 500,000
I/YR= 6%
N= 5
FV= 669,112(Look for the closest value in Exam)
What is a LIFO reserve?
The difference between the LIFO inventory and the amount used for internal reportingpurposes.
The tax savings attributed to using the LIFO method.
The current effect of using LIFO on net income.
Change in the LIFO inventory during the year.
1. The difference between the LIFO inventory and the amount used for internal reporting purposes.
Morgan Manufacturing Company has the following account balances at year end:
Office supplies 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 82,000
Prepaid insurance. 6000
What amount should Morgan report as inventories in its balance sheet?
$168,000.
27,000+59,000+82,000
Lawrence Company has cash in bank of $22,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of
$22,000
Angie invested $100,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually?
$162,890
PV= 100,000
I/YR= 10/2
N=5*2=10
FV= ??
What happens when inventory in base year dollars decreases?
LIFO reserve increases.
LIFO layer is created.
LIFO layer is liquidated.
LIFO price index decreases.
3. LIFO layer is liquidated.
Niles Co. has the following data related to an item of inventory:
Inventory, March 1. 100 units @ $2.10
Purchase,March 7 350 units @ $2.20
Purchase, March 16 70 units @ $2.25
Inventory, March 31. 130 units
The value assigned to ending inventory if Niles uses LIFO is
$276
LIFO; Last In FIrst Out = First In Still Here
Ending Inv= 130units
FISH Start wil Fist= 100*2.10= 210
Remaning 30 units= 30*2.20= 66
Ending Inventory = 130 units= 210+66= $276
AG Inc. made a $15,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?
Debit Accounts Receivable for $14,700.
If Gross Method Used:
Dr A/R 15,000
Note: Sales Discount when Discount Taken Gross Method. There is no Sales Discount A/C used under Net Method
Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost them $600,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?
$70,476
PV=600,00(This is today)
N= 20
I/YR= 10%
PMT=??
Note: No FV, Put FV 0 if your calculator asks FV.
Gross Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 2011. Its inventory at that date was $440,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Date Inv @ Current Price. Price Index
Dec 31, 2012 513,600 107
Dec 31, 2013 580,000. 125
Dec 31, 2014 650,000 130
What is the cost of the ending inventory at December 31, 2012 under dollar-value LIFO?
$482,800.
Base Year Price= 440,000*
End Inv, 2012 @ Base Year Price= 513,600/1.07=480,000
Base Year Added= 480,000-440,000= 40,000
Base Year Added @ Current Year Price(Dec 2012 Price Index)=40,000*1.07= 42,800*
Ending inventory at December 31, 2012 under dollar-value LIFO= 440,000*+42,800*=482,800
Niles Co. has the following data related to an item of inventory:
Inventory, March 1. 100 units @ $2.10
Purchase,March 7 350 units @ $2.20
Purchase, March 16 70 units @ $2.25
Inventory, March 31. 130 units
The value assigned to cost of goods sold if Niles uses FIFO is
$848.
FIFO; Fist In First Out
COGS=??
Unit Sold= Beg Inv+Purchases-End Inv= (100+350+70)-130= 390 Units
Sold Beg Inv 1st 100*2.10= 210
Remaining= 290*2.20= 638
COGS= 210+638 =$ 848
Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $3,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?
$61,000
% Of Sales Method= Direct Method
1% of 6,400,000= 64000(This is Bad Debt Under % of Sales)
ADA= DR 3,000(Given)
Journal Entry:
Bad Debt Exp dr 64,000
ADA Cr 64,000
End ADA Bal= 64,000-3000= 61,000
Note: Subtract bc ADA Beg Bal is Dr
If $6,000 is deposited annually starting on January 1, 2012 and it earns 9%, how much will accumulate by December 31, 2021?
$99,362.
PMT= 6000(Beg) Use Beg because starting Jan 1
N=10 (Jan2012-Dec2021)(Its not 9 but 10)
I/YR= 9%
FV=??
Note: No PV
Gross Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 2011. Its inventory at that date was $440,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Date Inv @ Current Price. Price Index
Dec 31, 2012 513,600 107
Dec 31, 2013 580,000. 125
Dec 31, 2014 650,000 130
What is the cost of the ending inventory at December 31, 2013 under dollar-value LIFO?
$465,680
Base Year Price= 440,000*
End Inv, 2012 @ Base Year Price= 513,600/1.07=480,000
Base Year Added= 480,000-440,000= 40,000
Base Year Added @ Current Year Price(Dec 2012 Price Index)=40,000*1.07= 42,800*
Ending inventory at December 31, 2012 under dollar-value LIFO= 440,000*+42,800*=482,800
End Inv, 2013@ Base Year Price= 580,000/1.25=464,000
Base Layer Added= 464,000-(440,000+40,000)= -16,000 Negative
Layer Liquidated from 2012=16,000*1.07=17,120
Ending inventory at December 31, 2013 under dollar-value LIFO= 482,800-17,120= 465,680
Milford Company had 400 units of “Tank” in its inventory at a cost of $8 each. It purchased 600 more units of “Tank” at a cost of $12 each. Milford then sold 700 units at a selling price of $20 each. The LIFO liquidation overstated normal gross profit by
$400.
Beg Inv= 400@ $8
Purch= 600@ $ 12
Selling Price = 700*20= $14,000
COGS using LIFO= (600*12)+(100*8)
= 7200+800= 8,000
Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?
% of A/R= Indirect Method
8% of 6,500,000= 520,000
Judy Thomas has a $1,800 overdue debt for medical books and supplies at Joe's Bookstore. She has only $600 in her checking account and doesn't want her parents to know about this debt. Joe's tells her that she may settle the account in one of two ways since she can't pay it all now:
Pay $600 now and $1,500 when she completes her residency, two years from today.
Pay $2,400 one year after completion of residency, three years from today.
Assuming that the cost of money is the only factor in Judy's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations.
Alternative 1 is preferable.
Alternative 1. Divide into Two parts:
Part A: $600 now. PV=$600(Its today)
Part b: $1,500 in 2 yrs; PV=??
N= 2; I/YR= 8%; FV= 1500; PV=?? 1286
Now add, Part A & B= 600+ 1286= 1886
Alternative 2: Pay 2,400 in 3 yrs; PV=??
N= 3; I/YR=8%; FV= 2400; PV=?? 1905
Choose the Alternative with less PV, bc you want to pay less as possible.
Gross Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 2011. Its inventory at that date was $440,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Date Inv @ Current Price. Price Index
Dec 31, 2012 513,600 107
Dec 31, 2013 580,000. 125
Dec 31, 2014 650,000 130
What is the cost of the ending inventory at December 31, 2014 under dollar-value LIFO?
$512,480
Base Layer= 440,000
End Inv, 2012 @ Base Year Price= 513,600/1.07=480,000
2012 Base Year Added= 480,000-440,000= 40,000
Base Year Added @ Current Year Price(Dec 2012 Price Index)=40,000*1.07= 42,800
Layer Liquidated from 2012=16,000*1.07=17,120
End 2012 Layer=465,680**
2013= NO LAYER ADDED(Reduction/Liquidation)
2014 End Inv @ Base Year Price= 650,000/1.30=500,000
2014 Layer Added= 500,000- 440,000-(40,000-16,000)= 36,000
2014 @LIFO= 36,000*1.30= 46,800
END INV Dec 2014= 465,680**+46,800= 512,480
In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
FIFO.
average cost.
LIFO.
none of these.
LIFO
On May 1, Dexter, Inc. factored $1,200,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.
Instructions
1. Prepare the journal entry required on Dexter's books on May 1.
2. Assume Dexter factors the $1,200,000 of accounts receivable with Quick Finance on a with recourse basis instead. The recourse provision has a fair value of $21,000. Prepare the journal entry required on Dexter’s books on May 1.
1. Cash ................................1,104,000(dr)
Due from Factor (2% × $1,200,000...24,000(dr)
Loss on Sale of Receivables........72,000(dr)
(6% × $1,200,000)
Accounts Receivable.................1,200,000(cr)
2. Cash ....................1,104,000(dr)
Due from Factor ...........24,000(dr)
Loss on Sale of Receivables ......93,000(dr)
Accounts Receivable........1,200,000(cr)
Recourse Liability ................21,000(cr)