Intermediate Accounting Problems

Problem II 25 PointsPart A 15 PointsVance Company reported net incomes for a three-year period as follows:2011, $191,000;2012, $199,000;2013, $180,000.In reviewing the accounts in 2014 after the books for the prior year have been closed, you findthat the following errors have been made in summarizing activities:201120122013Overstatement of ending inventory$42,000 $51,000 $29,000Understatement of accrued advertising expense6,60012,0007,200Instructions(a) Fill out the worksheet below to determine corrected net incomes for 2011, 2012, and 2013.Be sure to use () to indicate subtraction or decreasing amounts.ItemsNet income (unadjusted)2011$191,0002012$199,0002013$180,000Overstatement of ending inventory2011Overstatement of ending inventory2012Overstatement of ending inventory2013Understatement of accrued advertising expense2011Understatement of accrued advertising expense2012Understatement of accrued advertising expense2013Net income (corrected)______$$$(b) Give the entry to bring the books of the company up to date in 2014, assuming that thebooks have been closed for 2013.Part B 10 PointsShow how the following independent errors will affect the net income on the Income Statementand the Balance Sheet using the symbol + (plus) for overstated, – (minus) for understated, and 0(zero) for no effect.2012IncomeBalanceStatementSheetEXAMPLE:Recorded 2012 rent expense in 2013.+1. Ending Inventory in 2012 overstated.2013 ending inventory is correct.2. Failed to accrue 2012 interest revenueuntil 2013.3. A capital expenditure for factoryequipment (useful life 5 years) waserroneously charged to maintenanceexpense in 2012. Not corrected.4. Failed to count office supplies on handat 12/31/12. Cash expenditures havebeen charged to Supplies Expenseduring the year 2012. Supplies wereused in 2013.15. Failed to accrue 2012 wages. Recordedand paid in 2013.1This is an example of initially recordingsupplies as an expense rather than anasset, which is permissible. The Company thenneglected to make the adjusting journal entry(deferral) at the end of 2012.+2013IncomeBalanceStatementSheet-0Problem III 30 PointsPart A 20 PointsThe net changes (not balances) in the selected balance sheet accounts of Keating Corporation forthe year 2013 are shown below.AccountDebitCreditShort-term investments$121,000Accounts receivable83,200Allowance for doubtful accounts13,300Inventory74,200Prepaid expenses22,800Investment in subsidiary (equity method)25,000Plant and equipment210,000Accumulated depreciation130,000Accounts payable80,700Accrued liabilities21,500Deferred tax liability15,5008% serial bonds, long-term70,000Common stock, $10 par90,000Additional paid-in capital150,000Retained earningsAppropriation for bonded indebtedness60,000Retained earningsUnappropriated38,000An analysis of the Retained EarningsUnappropriated account follows:Retained earnings unappropriated, December 31, 2012Add: Net incomeTransfer from appropriation for bonded indebtednessTotalDeduct: Cash dividends$185,000Stock dividend240,000Retained earnings unappropriated, December 31, 2013$1,300,000327,00060,000$1,687,000425,000$1,262,0001. On January 2, 2013 short-term investments (classified as available-for-sale) costing $121,000were sold for $145,000.2. The company paid a cash dividend on February 1, 2013.3. Accounts receivable of $16,200 and $19,400 were considered uncollectible and written off in2013 and 2012, respectively.4. Major repairs of $33,000 to the equipment were correctly debited to the AccumulatedDepreciation account during the year. No assets were retired during 2013. (HINT: This alsoimpacts investing activities.)5. The wholly owned subsidiary reported a net loss for the year of $20,000. The loss wasrecorded by the parent.6. At January 1, 2013, the cash balance was $166,000.InstructionsPrepare a statement of cash flows (indirect method) for the year ended December 31, 2013.Keating Corporation has no securities which are classified as cash equivalents.Keating CorporationStatement of Cash FlowsFor the Year Ended December 31, 2013Increase (Decrease) in CashCash flows from operating activitiesNet income$327,000Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation Expense$________Net cash provided (used) by operating activities$Cash flows from investing activities_________Net cash provided (used) by investing activities$Cash flows from financing activities_________Net cash provided (used) by financing activities$Net increase in cashCash, January 1, 2013Cash, December 31, 2013$166,000$Part B 10 PointsHartman, Inc. has prepared the following comparative balance sheets for 2012 and 2013:20132012Cash$ 287,000$ 153,000Accounts receivable149,000117,000Inventory150,000180,000Prepaid expenses18,00027,000Plant assets1,280,0001,050,000Accumulated depreciation(450,000)(375,000)Patent153,000174,000$1,587,000$1,326,000Accounts payableAccrued liabilitiesMortgage payablePreferred stockAdditional paid-in capitalpreferredCommon stockRetained earnings$ 153,00060,000525,000120,000600,000129,000$1,587,000$ 168,00042,000450,000600,00066,000$1,326,0001. The Accumulated Depreciation account has been credited only for the depreciation expensefor the period.2. The Retained Earnings account has been charged for dividends of $158,000 and credited forthe net income for the year.The income statement for 2013 is as follows:SalesCost of salesGross profitOperating expensesNet income$1,980,0001,089,000891,000670,000$ 221,000InstructionsFrom the information above, prepare a schedule of cash provided (used) by operating activitiesusing the direct method on the next page. You do not have to reconcile to the indirect method.Hartman, Inc.Schedule of Cash Provided by Operating Activities Direct MethodFor Year Ended December 31, 2013Increase (Decrease) in CashCash flows from operating activitiesCash received from customers (1)Cash paid to suppliers (2)Operating expenses paid (3)$Net cash provided by operating activitiesSHOW NUMERIC COMPUTATIONS HERE FOR (1), (2), and (3) above:(1)(2)(3)$Problem IV 15 PointsAn article in Dun’s Review made the following comment:"Every other year, say, companies should print the notes in big type and the base figuresin smaller ones."InstructionsAnswer the following two questions. You do not need to write more than a paragraph or at mosttwo for each question be concise.(a) Are notes considered as part of the financial statements and what basic purpose do theyserve?(b) What are the general types of notes to the financial statements?