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ACC557 Week 5

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ACC557 Chapter 7 E7-2 E7-4 E7-8(a) E7-10 P7-1A P7-5A
E7-2 Presented below are some business transactions that occurred during 2008 for Vicki
Prowitz Company.
(a) Merchandise inventory with a cost of $208,000 is reported at its market value of
$260,000.The following entry was made.
Merchandise Inventory 52,000
Gain 52,000
(b) Equipment worth $62,000 was acquired at a cost of $41,000 from a company that had water
damage in a flood.The following entry was made.
Equipment 62,000
Cash 41,000
Gain on Purchase of Equipment 21,000
(c) The president of Vicki Prowitz Company, Mark Nabke, purchased a truck for personal use
and charged it to his expense account.The following entry was made.
Travel Expense 18,000
Cash 18,000
(d) An electric pencil sharpener costing $50 is being depreciated over 5 years. The following
entry was made.
Depreciation Expense—Pencil Sharpener 10
Accumulated Depreciation—Pencil Sharpener 10
E7-4 Consider the following transactions of Parolini Company for 2008.
1. Sold a 6-month insurance policy to Orosco Corporation for $9,000 on March 1.
2. Leased office space to Easley Supplies for a 1-year period beginning September 1.The rent of
$30,000 was paid in advance.
3. A sales order for merchandise costing $9,000 that had a sales price of $14,000 was received on
December 28 from Guiterrez Company. The goods were shipped FOB shipping point on
December 31 and Guiterrez received them on January 3, 2009.
4. Merchandise inventory on hand at year-end amounted to $160,000. Parolini expects to sell the
inventory in 2009 for $180,000.
For each item above, indicate the amount of revenue Parolini should recognize in calendar year
2008. Explain.
E7-8 Net sales, net income, total assets, and total common stockholders’ equity information for a recent year is available for the following three companies
 Net Sales (in millions)Net Income (in millions)Total Assets (in millions)Total C.E (in Millions)
Southern Company 11,251 1,474 35,045 9,648
Toys "R" Us, Inc. 11,305 229 10,218 4,222
Intel Corp 30,141 5,641 47,143 37,846
Compute the following relationships for each company.
(1) Debt to total assets ratio.
(2) Profit margin percentage (rate of return on sales).
(3) Return on assets.
(4) Return on common stockholders’ equity.
E7-10 Presented is partial balance sheet information related to Batten Ltd., a United Kingdom company at December 31. All financial information has been translated from
pounds to dollars.
Balance Sheet (partial)
(in thousands)
Fixed assets    
   Tangible assets   900,000
Current assets   
   Stocks (inventory)  300,000 
   Debtors   121,000 
   Investments  53,000 
   Cash   62,000 
   Amount falling due within one year 100,000 
Net current assets   436,000
Total assets less current liabilities  1,336,000
   Amount falling due after one year  240,000
Total net assets   1,096,000
(a) Restate the asset side of the balance sheet in accordance with generally accepted accounting
principles in the United States.
(b) What is the amount of total stockholders’ equity?
P7-1A Scott and Quick are accountants for Millenium Computers.They disagree over the following transactions that occurred during the calendar year 2008.
1. Scott suggests that equipment should be reported on the balance sheet at its liquidation
value, which is $15,000 less than its cost.
2. Millenium bought a custom-made piece of equipment for $36,000.This equipment has a useful
life of 6 years. Millenium depreciates equipment using the straight-line method. “Since
the equipment is custom-made, it will have no resale value.Therefore, it shouldn’t be depreciated
but instead should be expensed immediately,” argues Scott. “Besides, it provides for
lower net income.”
3. Depreciation for the year was $18,000. Since net income is expected to be lower this year,
Scott suggests deferring depreciation to a year when there is more net income.
4. Land costing $60,000 was appraised at $90,000. Scott suggests the following journal entry.
Land  30,000 
   Gain on appreciation of land  30,000
5. Millenium purchased equipment for $35,000 at a going-out-of-business sale.The equipment
was worth $45,000. Scott believes that the following entry should be made.
Equipment  45,000 
   Cash   35,000
   Gain on purchase of equipment 10,000
Quick disagrees with Scott on each of the above situations.
Identify the accounting principle or assumption that Scott would be violating if his suggestions were used. Prepare the correct journal entry for each transaction, if any.
P7-5A The ledgers of Mid City Galleries Inc. contain the following balances as of December 31, 2008.
Advertising expense 123,000Miscellaneous administrative expenses 53,200
commissions expense on art sales 1,200,000Miscellaneous selling expenses 39,000
Deprecation expense (administrative) 98,000Net purchases 3,200,000
Dividend revenue 50,000Net sales 9,275,000
Insurance expense 600,000Rent expense 808,000
Interest expense 98,000Freight in 232,000
Inventory, January 1 1,650,000Freight out 82,500
Inventory, December 31 1,424,000Utilities expense 117,000
Loss on the sale of office equipmenet 21,300Wages and salaries 1,264,000
Income taxes are calculated at 30 percent of income. Mid City Galleries had 90,000 shares of
common stock outstanding for the entire year.Total assets amounted to $7,509,000, and common
stockholder’s equity was $3,975,400.
(a) Prepare in good form a multiple-step income statement for Mid City Galleries.
(b) Calculate three measures of profitability and one ratio of solvency.

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