Ichiro Manufacturing Company & Darby Sporting Goods Inc.

1.) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2013, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2010 to 2013, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2010



Truck No. 1 purchased Jan. 1, 2007, cost




$55,980



Truck No. 2 purchased July 1, 2007, cost




68,420



Truck No. 3 purchased Jan. 1, 2009, cost




93,300



Truck No. 4 purchased July 1, 2009, cost




74,640



Balance, Jan. 1, 2010




$292,340





The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2010, and entered in the ledger, had a balance on that date of $93,922 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2010.



Transactions between January 1, 2010, and December 31, 2013, which were recorded in the ledger, are as follows.





July 1, 2010




Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was $124,400. Ichiro Mfg. Co. paid the automobile dealer $68,420 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, $68,420. The transaction has commercial substance.



Jan. 1, 2011




Truck No. 1 was sold for $10,885 cash; entry debited Cash and credited Trucks, $10,885.



July 1, 2012




A new truck (No. 6) was acquired for $130,620 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)



July 1, 2012




Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for $2,177 cash. Ichiro Mfg. Co. received $7,775 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $9,952, and credits to Miscellaneous Income, $2,177, and Trucks, $7,775.





Entries for depreciation had been made at the close of each year as follows: 2010, $65,310; 2011, $69,975; 2012, $77,906; 2013, $94,544.



(a) For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations. (Enter Credit amounts and Understated Income amounts with a negative sign preceding the number, e.g. -2,520 or in parenthesis, e.g. (2,520).)



Per Company Books




As Adjusted




Net



Trucks dr. (cr.)




Acc. Dep. Trucks dr. (cr.)




Retained Earnings dr. (cr.)




Trucks dr. (cr.)




Acc. Dep., Trucks dr, (cr.)




Retained Earnings dr, (cr.)




Income Overstated (Understated)




1/1/10




Balance




$




$




$




$




$




$




$




7/1/10




Purchase Truck #5




Trade Truck #3




12/31/10




Depreciation




12/31/10




Balances




1/1/11




Sale of Truck #1




12/31/11




Depreciation




12/31/11




Balances




7/1/12




Purchase of Truck #6




7/1/12




Disposal of Truck #4




12/31/12




Depreciation




12/31/12




Balances




12/31/13




Depreciation




12/31/13




Balance




$




$




$




$




$




$




$






(b) Prepare one compound journal entry as of December 31, 2013, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2013. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)







2.) Darby Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games greatly increased the popularity of basketball around the world. As a result, a European sports retailing consortium entered into an agreement with Darby’s Roundball Division to purchase basketballs and other accessories on an increasing basis over the next 5 years.



To be able to meet the quantity commitments of this agreement, Darby had to obtain additional manufacturing capacity. A real estate firm located an available factory in close proximity to Darby’s Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2011. Renovations were necessary to convert the factory for Darby’s manufacturing use.



The terms of the agreement required Darby to pay Encino $96,000 when renovations started on January 1, 2012, with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was $768,000. The building renovations were contracted to Malone Construction at $192,000. The payments made, as renovations progressed during 2012, are shown below. The factory was placed in service on January 1, 2013.



1/1




4/1




10/1




12/31



Encino




$96,000




$172,800




$211,200




$288,000



Malone




57,600




57,600




76,800






On January 1, 2012, Darby secured a $960,000 line-of-credit with a 12% interest rate to finance the purchase cost of the factory and machinery, and the renovation costs. Darby drew down on the line-of-credit to meet the payment schedule shown above; this was Darby’s only outstanding loan during 2012.



Bob Sprague, Darby’s controller, will capitalize the maximum allowable interest costs for this project. Darby’s policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of the purchase price over the remaining items. The building had originally cost Encino $576,000 and had a net book value of $96,000, while the machinery originally cost $240,000 and had a net book value of $76,800 on the date of sale. The land was recorded on Encino’s books at $76,800. An appraisal, conducted by independent appraisers at the time of acquisition, valued the land at $556,800, the building at $201,600, and the machinery at $86,400.



Angie Justice, chief engineer, estimated that the renovated plant would be used for 15 years, with an estimated salvage value of $57,600. Justice estimated that the productive machinery would have a remaining useful life of 5 years and a salvage value of $5,760. Darby’s depreciation policy specifies the 200% declining-balance method for machinery and the 150% declining-balance method for the plant. One-half year’s depreciation is taken in the year the plant is placed in service and one-half year is allowed when the property is disposed of or retired. Darby uses a 360-day year for calculating interest costs.



(a) Determine the amounts to be recorded on the books of Darby Sporting Goods Inc. as of December 31, 2012, for each of the following properties acquired from Encino Athletic Equipment Company. (Do not round intermediate calculations for computational purposes. Round final answers to 0 decimal places, e.g. $45,892.)



(1)




Land




$



(2)




Buildings




$



(3)




Machinery




$





(b) Calculate Darby Sporting Goods Inc.’s 2013 depreciation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Company.



Depreciation Expense



(1)




Land




$



(2)




Buildings




$



(3)




Machinery




$





3.) You are the senior accountant for a company that has determined the useful life of a machine costing $100,000 will be 7 years rather than 10 years as originally thought. You are in year 6 when this is discovered. Log onto the FASB.org website and locate guidelines for recording this transaction. Prepare a memo to the CFO explaining your position on this matter.
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