SECTION IV: PROBLEMS Please show all of your work for each problem. PROBLEM 1 (1

Question

SECTION IV: PROBLEMS

Please show all of your work for each problem.

PROBLEM 1 (15 possible points)

Assume that Able Company purchased a new machine on January 1, 2010, for $80,000. The machine has an estimated useful life of nine years and a residual value of $8,000. Able has chosen to use the straight-line method of depreciation. On January 1, 2012, Able discovered that the machine would not be useful beyond December 31, 2015, and estimated its value at that time would be $2,000.

Required:

1. Calculate the depreciation expense, the accumulated depreciation, and the book value of the asset for each year, 2009 to 2014.

2. Was the depreciation recorded in 2009 and 2010 wrong? If so, why was it not corrected?

PROBLEM 2

The financial statements included in the 2015 Form 10-K of McClarey Hardware reported the following amounts (in thousands of dollars):

        Net Sales, for the year ended December 31, 2015              $1,693,985

        Accounts Receivable, net, December 31, 2015                    351,538

        Accounts Receivable, net, December 31, 2014                    399,181

Required:

1. Compute McClarey Hardware’s accounts receivable turnover ratio for the year ended December 31, 2015. (Assume that all

   sales are on credit.)

2. What is the average collection period in days for an account receivable? Explain your answer.

3. If you were McClarey, how would you assess if the average collection period is appropriate for your business?

Explanation / Answer

Depreciation Method = straight line

MAchine cost = $80000

Salvage Value = $8000

Useful life = 9 years

Depreciation = 80000-8000 = 72000/9 = $8000

The usefull life is now reduced to 6 years in 2012

Depreciation for FIRSTtwo years = 8000x2 =$16000

Depreciaiton for next 4 years = 80000-16000 = 64000

salvage value at the end of Dec2015 = $2000

Deprecaiton for next 4 years= 64000-2000=62000/4 = $15500

2009 - No depreciation for 2009 as machinary was purchased in 2010

2010 - Depreciation Expense = $8000,Accumulated Depreciation = $8000,Book value = 80000-8000 = $72000

2011- depreciation Expense = $8000, Accumulated Depreciation = $8000, Book value = $64000

2012 - Depreciation Expense = $15500, Accumulated Depreciation = $15500, Book value = $48500

2013 - Depreciation Expense = $15500, Accumulated Depreciation =$15500, Book value = $33000

2014 - Depreciation Expense = $15500, Accumulated Depreciation =$15500, Book value = $17500

The Depreciation Expense for the first two years was not wrong as depreciaiton in the first two years have been calculated based on the useful life of 9 years and salvage value = $8000

Problem 2

1) Accounts Receivable turnover ratio = Net Annual credit Sales/(Beginning Accounts Receivable+Ending Accounts Receivable)/2

= 1693985/(399181+351538)/2 = 4.51%

2) Average Collection Period = Number of Working days/AR turnover ratio

= 365/4.51 = 80.93 days.

3)Since the Collection is within 3 months , it is approprite for business.

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