Assessment 3 Instructions: Plant Assets and Receivables Aging

 

Complete an assessment with two main sections, which address (1) accounting for current plant assets and (2) receivables aging and plant assets.

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Introduction

Note: An accounting cycle requires specific steps that must be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

    • Competency 1: Define financial accounting conventions to support practice as a professional in the field.

      Analyze accounts receivable and the allowance for doubtful accounts.
      Apply last in, first out (LIFO) rules to inventory valuation.

    • Competency 2: Examine the role of accounting as an information system.

      Explain how changing depreciation methods for plant assets can be an effective tool for managing earnings.
      Explain how changing estimated useful asset lives can be used as a tool to manage earnings.
      Explain how impairment losses might be used as an earnings management tool.
      Provide an example of how impairment losses might be used as an earnings management tool.

    • Competency 3: Evaluate economic resources of a business enterprise.

      Apply the costs and values for acquiring plant assets.

    • Competency 4: Analyze financial liabilities and equities of an enterprise.

      Calculate depreciation amounts for plant assets.

    • Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

      Explain why a company should adopt the receivable aging method versus direct write-off method.
      Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Preparation

  • Assessment 3 Template [DOC].
  • Part 1 – Receivables Problem Sheet [DOC].
  • Part 2 – Inventory Issues Problem Sheet [DOC].
  • Part 3 – Acquisition Costs of Realty Problem Sheet [DOC].
  • Part 4 – Depreciating Plant Assets Problem Sheet [DOC].

Overview

Note: Do not proceed with this assessment until you have reviewed faculty feedback on Assessment 2.

This assessment has two main sections:

  1. Accounting for Current Plant Assets.
  2. Receivable Aging and Plant Assets.

Section 1 has four parts. Each part requires the use of a separate problem sheet. Record your answers from all four parts in the Assessment 3 Template. All problems sheets and the Assessment 3 Template are linked in the Resources under the Required Resources heading. Submit the completed template.

Section 1: Accounting for Current Plant Assets

Imagine your boss just placed four new files for retail and manufacturing businesses on your desk and told you to finish the work before the end of the day. Complete the following, showing all calculations leading to the final solution, where appropriate.

Part 1: Receivables Reporting

In Part 1:

  • Complete the problems in Part 1 – Receivables Problem Sheet.
  • Use Part 1 of the Assessment 3 Template to record your answers.
Part 2: Inventory Issues

In Part 2:

  • Complete the problems in Part 2 – Inventory Issues Problem Sheet.
  • Use Part 2 of the Assessment 3 Template to record your answers.
Part 3: Acquisition Costs of Realty

In Part 3:

  • Complete the exercise in Part 3 – Acquisition Costs of Realty Problem Sheet.
  • Use Part 3 of the Assessment 3 Template to record your answers.
Part 4: Depreciating Plant Assets

In Part 4:

  • Complete the exercises in Part 4 – Depreciating Plant Assets Problem Sheet.
  • Use Part 4 of the Assessment 3 Template to record your answers.

Section 2: Receivables Aging and Plant Assets

There are two parts to this section. Complete both parts as described below.

Part 1: Receivables Aging

A heavy-duty trucks parts re-manufacturing company has hired you as a consultant to review its current accounting procedures and to provide it with a report addressing changes that you feel need to be made to improve its internal controls, and the accounting and reporting processes.

The company president does not understand the recommendations that you have offered to improve the accounting and reporting of uncollectible accounts. The company currently uses the direct write-off method and you have suggested that it use the accounts receivable aging method to estimate its future bad debts. The president stated:

In my opinion, financial statements should be based on what actually took place rather than what we think will happen in the future. In other words, I think they should be objective rather than subjective. After all, our bad debt expense has been almost the same amount for each of the past three years and is thus very predictable. By using the direct write-off method, we are reporting exactly what took place. Why do we need to change?

Draft a one-page memorandum in Word responding to the concerns and objections of the company president, and in support of your recommendation for the company to adopt the receivable aging method going forward.

Additional Requirements

Part 1 of Section 2 should meet the following requirements:

  • Written communication: Written communication should be clear, well-organized, and support a central idea, with no technical writing errors, as expected of a business professional.
  • References: References and citations should be formatted using current APA guidelines for style and formatting.
  • Length of paper: 1-2 typed, double-spaced pages.
  • Font and font size: Times New Roman, 12 point.
Part 2: Plant Assets

Managers of publicly traded companies are under constant pressure to meet or exceed Wall Street analysts’ earnings projections from stockholders and creditors, so that stock prices will increase and thus the value of stock options will be increased. Some corporate officials turn to earnings management practices to artificially achieve the desired results.

Answer the following questions in regard to these practices:

  • Is changing depreciation methods for plant assets an effective tool for managing earnings? Explain.
  • How might changing estimated useful asset lives be used as a tool to manage earnings? Explain.
  • What are impairment losses? Explain and provide an example of how this might be used as an earnings management tool.

Additional Requirements

Part 2 of Section 2 should meet the following requirements:

  • Written communication: Written communication should be clear, well organized, and support a central idea, with no technical writing errors, as expected of a business professional.
  • References: References and citations should be formatted using current APA guidelines for style and formatting.

  • Length of paper: 2-3 typed, double-spaced pages.
  • Font and font size: Times New Roman, 12 point.

Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
Competency 1: Define financial accounting conventions to support practice as a professional in the field.

Analyze accounts receivable and the allowance for doubtful accounts.
Apply last in, first out (LIFO) rules to inventory valuation.

Competency 2: Examine the role of accounting as an information system.

Explain how changing depreciation methods for plant assets can be an effective tool for managing earnings.
Explain how changing estimated useful asset lives can be used as a tool to manage earnings.
Explain how impairment losses might be used as an earnings management tool.
Provide an example of how impairment losses might be used as an earnings management tool.

Competency 3: Evaluate economic resources of a business enterprise.

Apply the costs and values for acquiring plant assets.

Competency 4: Analyze financial liabilities and equities of an enterprise.

Calculate depreciation amounts for plant assets.

Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Explain why a company should adopt the receivable aging method versus direct write-off method.
Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Jordash Company purchased Machine #573 on May

1

, 2015. The following information relating to Machine #573 was gathered at the end of May:

Price

$40,400

Credit terms

2/10, n/30

Freight-in costs

$ 568

Preparation and installation costs

$ 2,090

Labor costs during regular production operations
$ 5,775

It was expected that the machine could be used for 10 years, after which the salvage value would be zero. Jordash intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $750. The invoice for Machine #573 was paid May 5, 2018. Jordash uses the calendar year as the basis for the preparation of financial statements.

a. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)

1. Straight-line method for 2018.

2. Sum-of-the-years’-digits method for 2019.

3. Double-declining balance method for 2018.

b. Suppose Jodi Scott, the president of Jordash, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?

Record your answers in the Assessment 3 Template. Where appropriate, show all calculations leading to the final solution.

1

The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses:

(a) Money borrowed to pay building contractor (signed a note)

$(

1

51,250)

(b) Payment for construction from note proceeds

151,250

(c) Cost of land fill and clearing

4,400

(d) Delinquent real estate taxes on property assumed by purchaser
3,850

(e) Premium on 6-month insurance policy during construction

3,300

(f) Refund of 1-month insurance premium because construction completed early (550)

(g) Architect’s fee on building

12,100

(h) Cost of real estate purchased as a plant site

(land $100,000 and building $25,000)

137,500

(i) Commission fee paid to real estate agency 4,950

(j) Installation of fences around property
2,200

(k) Cost of razing and removing building
6,050

(l) Proceeds from salvage of demolished building
(2,750)

(m) Interest paid during construction on money borrowed for construction
7,150

(n) Cost of parking lots and driveways 10,450

(o) Cost of trees and shrubbery planted (permanent in nature)
7,700

(p) Excavation costs for new building
1,650

Using the appropriate section in the Assessment 3 Template, identify each item by letter and list the items in columnar form. All receipt amounts should be reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title. Where appropriate, show all calculations leading to the final solution.

1

The following independent situations relate to inventory accounting. Use the Assessment 3 Template to record you answers to each of the questions about inventories and to explain your answers. Where appropriate, show all calculations leading to the final solution.

Problem

1

Northern Co. was able to purchase goods at a list price of $330,000. This purchase came with trades discounts of 15% and 10%; no cash discounts were allowed. What will Northern Co. record as the cost of inventory for these items?

Problem 2

The inventory for Jason’s company was $605,000 as of December 31, 2018, based on a physical inventory count, all goods are priced at cost, and no year-end adjustments have been made for the following goods:

a. Jason’s company received goods on January 4, 2019, with an invoice cost of $37,950. The goods were shipped f.o.b. on December 24, 2018.

b. Suptic Corp was billed for $15,950 of goods f.o.b. shipping point on December 31, 2018. The goods were not picked up by the carrier until January 4, 2019, so they were included in the physical inventory.

What amount will be reported as inventory on the balance sheet?

Problem 3

Federal Corp. had 825 units of part B467 on hand May 1, 2018, costing $10.00 each. Purchases of part B467 during May were as follows.

Units
Unit Cost

May 9
1,100
$10.50

17
1,925
11.00

26
550
11.50

A physical count on May 31, 2018, shows 1,155 units of part B467 on hand. Using the FIFO method, what is the cost of part B467 inventory at May 31, 2018?

Using the LIFO method, what is the inventory cost?

Using the average-cost method, what is the inventory cost?

Problem 4

Frederick Company adopted the dollar-value LIFO method on January 1, 2017 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.

At Base-
At Current-
Price

Inventory
Year Cost
Year Cost
Index

1/1/17

$110,000
$110,000
100

12/31/17
132,000
138,600
105

12/31/18
140,800
157,696
112

Using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2018?

Problem 5

Ramsey, Inc., a retail store chain, had the following information in its general ledger for the year 2018.

Merchandise purchased for resale
$500,170

Interest on notes payable to vendors
4,785

Purchase returns

9,075

Freight-in

12,100

Freight-out

9,405

What is Ramsey’s inventoriable cost for 2018?

1

Presented below are a series of unrelated situations. Use the Assessment 3 Template to record your answers to the questions or solve the problems relating to each of the five independent situations. Where appropriate, show all calculations leading to the final solution.

Problem 1

Spooner Company’s unadjusted trial balance at December 31,

2

018, included the following accounts.

Debit

Credit

Allowance for doubtful accounts
$3,500

Net sales

$825,000

Spooner Company estimates its bad debt expense to be 2% of net sales. Determine its bad debt expense for 2018.

Problem 2

An analysis and aging of Johnson Corp. accounts receivable at December 31, 2018, disclosed the following:

Amounts estimated to be uncollectible
$99,000

Accounts receivable
962,500

Allowance for doubtful accounts (per books)
68,750

What is the net realizable value of Johnson’s receivables at December 31, 2018?

Problem 3

Midwest Pool Co. provides for doubtful accounts based on 1.5% of credit sales. The following data are available for 2018.

Credit sales during 2018
$1,155,000

Allowance for doubtful accounts 1/1/18
9,350

Collection of accounts written off in prior years

(customer credit was reestablished)
4,400

Customer accounts written off as uncollectible during 2018
16,500

What is the balance in the Allowance for Doubtful Accounts at December 31, 2018?

Problem 4

At the end of its first year of operations, December 31, 2018, Chevy Chase Inc. reported the following information.

Accounts receivable, net of allowance for doubtful accounts
$522,500

Customer accounts written off as uncollectible during 2018
13,200

Bad debt expense for 2018
46,200

What should be the balance in accounts receivable at December 31, 2018, before subtracting the allowance for doubtful accounts?

Problem 5

The following accounts were taken from Assistance, Inc.’s trial balance at December 31, 2018.

Debit

Credit

Net credit sales

$825,000

Allowance for doubtful accounts $ 15,400

Accounts receivable
$451,000

If doubtful accounts are 2% of accounts receivable, determine the bad debt expense to be reported for 2018.

2

Assessment 3

Use this template to record your answers to Parts

1

–4 in Assessment 3, Section 1. Submit the completed template for your assessment.

Part 1: Receivables Reporting

Problem 1

Problem 2

Problem 3

Problem 4

Problem 5

Part 2: Inventory Issues

Problem 1
Problem 2

Problem 3

Because no date was associated with the units issued or sold, the periodic (rather than perpetual) inventory method must be assumed.

FIFO inventory cost:

LIFO inventory cost:

Average-cost:

Totals

Ending inventory

Problem 4

Computation of price indexes:

12/31/17

12/31/18

Dollar-value LIFO inventory 12/31/17:

Dollar-value LIFO inventory

Dollar-value LIFO inventory 12/31/18:

Dollar-value LIFO inventory

Problem 5

The inventoriable costs for 2018 are:

Inventoriable cost

Note: Freight-out is a selling expense. Interest on notes payable is a period expense. Neither is an inventoriable cost.

Part 3: Acquisition Costs of Realty

Item

Land

Land Improvements

Building

Other Accounts

(

a)

(

b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)

(m)

(n)

(o)

(p)

Part 4: Depreciating Plant Assets

a)

1. Depreciable Base Computation:

2. Sum-of-the-years’-digits for 2018

3. Double-declining balance for 2018

b)

1

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