1) As of January 1, 2011, Survival Industries, Inc. purchased a boat at a cost of $490,000.
When purchased, the company was using the double declining depreciation method.
Key info on the asset at time of purchase is the following.
Estimated useful life is 7 years.
Residual Value is $0.
At the beginning of 2014, the CFO decided to change to straight-line depreciation method. Compute the depreciation expense for 2014.
It was explained to me that the correct answer is:
[(490,000 – (140,000 – 100,000 – 71,429)] / 3 = $44,643
Purchase Price of Boat = $490,000
3 = 3 years depreciation?
However, I do not understand how the other numbers ($140,000, $100,000, and $71,429) were arrived at.
2) Mystical Corporation found the following errors in their year-end financial statements.
As of Dec. 2012 As of Dec. 2013
Ending Inventory $32,000 understated $46,000 overstated
Depreciation Exp. $7,000 understated
On December 31, 2013, a fully depreciated machine was sold for $35,000 but the sale was not recorded until January 15, 2014 when the cash was received. In 2012, a three-year insurance premium was prepaid for $45,000, of which the entire amount was expensed in the first year.
There were no other errors or corrections. Ignore any tax considerations.
What is the total net effect of errors on Mystical’s 2013 net income?
As explained, $32,000 + $46,000 + $15,000 – $35,000
= overstated Net Income by $58,000,
where $32,000 = understated ending inventory for 12/31/2012
$46,000 = overstated ending inventory for 12/31/2013
$35,000 = depreciated sale price of the machine
Is $15,000 = $45,000/3 years or the amount of depreciation for 2013 only?
Why is it important that the sale was not recorded until 1/15/2014 when the cash was received?
Could you explain in detail how the answer was arrived at.
3) Financial Data of Johnson Company for 2013 & 2012:
Comparative Balance Sheet as of 12/31/2013 & 12/31/2012
Cash $260,000 $230,000
Receivables $156,000 $130,000
Inventory $180,000 $220,000
Plant Assets $160,000 $135,000
Accumulated Deprec. ($80,000) ($76,000)
Long Term Invest
(Held-To-Maturity) $80,000 $93,000
Total $756,000 $722,000
Accounts Payable $135,000 $122,000
Accrued Liabilities $30,000 $33,100
Bonds Payable $135,000 $166,000
Common Stock $180,000 $165,000
Retained Earnings $276,000 $235,000
Total $756,000 $722,000
For the Year Ended 12/31/2013
Cost of Goods Sold $530,000
Gross Margin $220,000
Selling & Administrative Expenses $106,000
Income from Operations $114,000
Other Revenues & Gains
Gain on Sale of Investments $7,000
Income Before Tax $121,000
Income Tax Expense $48,400
Net Income $72,600
During the year, $9,000 of common stock was issued in exchange for plant assets. No plant assets were sold in 2012. Cash dividends were $32,500.
1) Prepare a statement of cash flows using the Indirect Method
2) Prepare a statement of cash flows using the Direct Method. (Do not prepare a Reconciliation Schedule.)
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