AYB225 Lecture Notes - Lecture 4: Activity-Based Costing, Income Tax, Accounts Payable
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Selected transactions of Shadrach Computer Corporation duringNovember and December of 2016 are as follows:
| Nov. | 1 | Borrowed money from the bank byissuing a non-interest-bearing, $58,000, 90-day note. The note isdiscounted on a 12% basis. |
| 9 | Sold 125 computers with a 1-yearassurance-type warranty for $5,600 each on credit (ignore cost ofgoods sold). Past experience indicates that warranty costs average$110 per computer. | |
| 12 | Sold 125 software packages at $270each on credit (ignore cost of goods sold). With each softwarepackage, Shadrach offered a premium in the form of a USB drive forthe return of one proof of purchase. The offer expires June 30,2017. The cost of each USB drive is $5, and Shadrach estimates that80% of the premiums will be redeemed; therefore, 100 USB driveswere purchased on credit. | |
| 20 | Paid $2,000 in fulfillment of thewarranty agreement on several of the computers sold on November9. | |
| 30 | Accrued monthly vacation pay.Shadrach has 80 employees who are each paid an average of $180 perday. Shadrach has a policy of allowing each employee 12 daysâ paidvacation per year; the related liability is recorded on a monthlybasis. Employees are paid monthly. | |
| 30 | Paid monthly payroll. Grosssalaries were $430,000. No vacations were taken during November.Income tax withholdings of 20% are applicable to the salaries ofall employees. A F.I.C.A. tax of 8% for both employees andemployers is also applicable. These rates apply to all salariesbecause no employeeâs salary has exceeded the maximum wage limit.The state allows the corporation a 1% unemployment compensationmerit-rating reduction from the normal rate of 5.4%. The federalunemployment rate is 0.6%. Prior to October, each individualemployee had accumulated a gross salary in excess of $7,000 for2016. | |
| Dec. | 14 | Twenty proofs of purchase werereturned from the November 12 sale. |
| 29 | An individual filed suit againstShadrach for damages caused in a November 5 accident that resultedwhen a member of the sales force hit the individualâs car while onpersonal business. The amount of the suit filed was $1,450. Becausethe employee was on personal business, the companyâs insurancecompany will not pay the claim. In Shadrachâs attorneyâs opinion,the amount of the suit is reasonable; furthermore, the companybelieves it is likely to lose the suit. | |
| 31 | Accrued monthly vacation pay. | |
| 31 | Paid monthly payroll. Grosssalaries were $433,000. The salaries included $6,500 of vacationpay in the sales force and $3,300 of vacation pay in the officestaff. The F.I.C.A. tax rate still applies to all wages because noemployeeâs salary exceeded the maximum wage limit. | |
| 31 | Recorded presidentâs bonus. Thepresident receives a 10% bonus on any income over $240,000, beforededucting income taxes and the bonus. Shadrachâs effective incometax rate is 30%, and income before income taxes and bonus for 2016was $560,000. The bonus will be paid in January 2017. |
| Required: | |
| Prepare journal entries torecord the preceding transactions of Shadrach Computer Corporationfor 2016. Include year-end accruals. Round all calculations to thenearest dollar. |
Chart of Accounts
| CHARTOF ACCOUNTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shadrach Computer Corporation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The following are the transactions relating to the formation ofCardinal Mowing Services, Inc., and its first month ofoperations. |
| a. | The firm was organized and the initial stockholders investedcash of $780. |
| b. | The company borrowed $1,170 from a relative of one of theinitial stockholders; a short-term note was signed. |
| c. | Two zero-turn lawn mowers costing $624 each and a professionaltrimmer costing $169 were purchased for cash. The original listprice of each mower was $793, but a discount was received becausethe seller was having a sale. |
| d. | Gasoline, oil, and severalpackages of trash bags were purchased for cash of $117. |
| e. | Advertising flyers announcing the formation of the business anda newspaper ad were purchased. The cost of these items, $221, willbe paid in 30 days. |
| f. | During the first two weeks of operations, 47 lawns were mowed.The total revenue for this work was $917; $605 was collected incash, and the balance will be received within 30 days. |
| g. | Employees were paid $546 fortheir work during the first two weeks. |
| h. | Additional gasoline, oil, andtrash bags costing $143 were purchased for cash. |
| i. | In the last two weeks of thefirst month, revenues totaled $1,196, of which $488 wascollected. |
| j. | Employee wages for the last twoweeks totaled $663; these will be paid during the first week of thenext month. |
| k. | It was determined that at theend of the month the cost of the gasoline, oil, and trash bagsstill on hand was $39. |
| l. | Customers paid a total of $195 due from mowing services providedduring the first two weeks. The revenue for these services wasrecognized in transaction f. |
| Required: |
| Prepare the journal entries for above of the transactions. Journal entry options include: Accounts payable Accounts receivable Accumulated depreciation Additional paid-in capital Advertising expense Allowance for bad debts Apicâpreferred Bad debts expense Bonds payable Buildings Capital lease liability Cash Commissions expense Commissions payable Cost of goods sold Current maturities of long-term debt Deferred income taxes Deferred tax liabilities Depreciation expense Discount on bonds payable Discount on notes payable Dividends payable Employee contributions to pension plan Equipment Estimated health care expense Estimated liability for retiree health care--current Estimated warranty liability Federal unemployment taxes withheld Fica taxes withheld Gain on sale of equipment Goodwill Group hospitalization insurance Income tax expense Income taxes payable Income taxes withheld Insurance expense Interest expense Interest income Interest payable Interest receivable Interest revenue Inventory Keg deposits Keg deposits revenue Keg expense Land Loss of sale of equipment Loss on early retirement of bonds Loss on sale of machine Machine Medical insurance contributions Merchandise inventory Miscellaneous expense Note payable Note receivable Paid-in capital Parts inventory Payroll tax expense Payroll taxes payable Preferred stock Premium on bonds payable Prepaid insurance Prepaid rent Real estate tax expense Real estate taxes payable Rent expense Rent payable Rent revenue Retained earnings Serial bonds payable Service revenue Subscription revenue Supplies Supplies expense Supplies on hand Ticket revenue Treasury stock Trucks Unearned rent revenue Unearned revenues Unearned subscription revenue Unearned ticket revenue Utilities expense Wages expense Wages payable Warranty expense Withholding liabilities and each journal entry is either credit ordebit.!!!! |
You have obtained the following information:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER
| 20X8 | 20X7 | |||
| Note | Draft ($m) | Actual ($m) | ||
| Revenue | (1) | 645.5 | 606.5 | |
| Other income | (2) | 15.6 | 14.4 | |
| Changes in inventories | 3.8 | (16.4) | ||
| Cost of materials | (334.1) | (286.8) | ||
| Employee benefits expense | (91.0) | (83.9) | ||
| Depreciation | (3) | (29.8) | (23.6) | |
| Other expenses | (4) | (116.3) | (100.6) | |
| Interest income, net | (5) | 12.3 | (20.9) | |
| Profit before tax | 106.0 | 130.5 | ||
| Income tax expense | (44.4) | (47.7) | ||
| Profit for the year | 61.6 | 82.8 |
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
| 20X8 | 20X7 | |||
| Note | Draft ($m) | Actual ($m) | ||
| Assets | ||||
| Non-current assets | ||||
| Intangible assets | (6) | 47.8 | 40.5 | |
| Property, plant and equipment | (7) | 124.5 | 102.5 | |
| 172.3 | 143.0 | |||
| Current assets | ||||
| Inventories | (8) | 30.3 | 27.9 | |
| Trade receivables | 73.1 | 50.3 | ||
| Cash and cash equivalents | 111.4 | 86.0 | ||
| Total assets | 387.1 | 307.2 | ||
| Equity and liabilities | ||||
| Equity | 5.8 | 5.8 | ||
| Share capital | 15.3 | 15.3 | ||
| Share premium | 112.1 | 80.1 | ||
| Retained earnings | 133.2 | 101.2 | ||
| Non-current liabilities | ||||
| Provisions | (9) | 160.1 | 121.4 | |
| Current liabilities | ||||
| Trade payables | 33.5 | 31.8 | ||
| Tax | 50.4 | 44.3 | ||
| Other liabilities | 9.9 | 8.5 | ||
| Total equity and liabilities | 387.1 | 307.2 |
Notes
(1) Revenue from business activities:
| Revenue from business activities | ||
| 20X8 ($M) | 20X7 ($M) | |
| Vehicles | 588.0 | 526.0 |
| Parts and accessories | 39.6 | 36.8 |
| Other | 17.9 | 43.7 |
| 645.5 | 606.5 | |
Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.
Average number of employees:
| 20X8 (Draft) | 20X7 (Actual) | |
| Wage earners | 484 | 499 |
| Salaried employees | 483 | 477 |
| Apprentices and trainees | 36 | 37 |
| 1,003 | 1,013 | |
Other expenses include costs for warranties, administration and distribution, maintenance and insurance.
Interest income, net:
| 20X8 (Draft ($m) | 20X7 (Actual $m) | |
| Interest and similar income | 16.8 | 25.1 |
| Interest and similar expenses | (4.5) | (4.2) |
| 12.3 | 20.9 |
Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.
Property, plant and equipment:
| Land and Buildings | Equipment | Assets under construction | Total | |
| $m | $m | $m | $m | |
| Cost | ||||
| 1 January 20X8 | 61.8 | 212.1 | 19.0 | 292.9 |
| Additions | 5.0 | 28.9 | 9.4 | 43.3 |
| Disposals | 0.0 | (4.5) | 0.0 | (4.5) |
| Reclassification | 3.0 | 8.9 | (11.9) | 0.0 |
| 31 December 20X8 | 69.8 | 245.4 | 16.5 | 331.7 |
| Depreciation | ||||
| Current year | 1.9 | 18.4 | 0.0 | 20.3 |
| Accumulated | 28.7 | 178.5 | 0.0 | 207.2 |
| Net book value | ||||
| 31 December 20X8 | 41.1 | 66.9 | 16.5 | 124.5 |
| 31 December 20X7 | 34.9 | 48.6 | 19.0 | 102.5 |
(8) Inventories comprise:
| 20X8 (Draft $m) | 20X7 (Draft $m) | |
| Raw materials, consumables and supplies | 8.3 | 7.3 |
| Work-in-progress | 6.8 | 4.8 |
| Finished goods | 15.2 | 15.8 |
| 30.3 | 27.9 | |
(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.
The following additional information is available:
(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.
(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.
1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.
N.B these are pointers are for this question:
Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.