Additional Practice Problems for Midterm Exam
Preparation of Multiple-Step Income Statement
Zoomy Zombie Inc. manufactures a wide variety of children’s products including educational toys, safety products, and outdoor toys. Skellan Davis, the company’s controller, had to leave unexpectedly while preparing the 2011 financial statements. Prior to his departure, Skellan had calculated 2011 income from operations before taxes of $22,850,000 (total for all divisions). Additional events and transactions occurring in 2011 that Skellan did not consider in his calculation are as follows. 1. On December 1, 2010 Zoomy made the decision to sell its outdoor toys division, which is considered a component of the entity. On December 31, 2010, the carrying value of the division’s assets was $33,500,000 and the estimated fair value (less costs to sell) was $33,000,000. The company completed the sale in April 2011, at which time the assets were sold for $32,300,000. The outdoor toys division generated pre-tax operating income of $900,000 and $425,000 during 2010 and 2011, respectively. You should assume that Zoomy correctly accounted for this division as a discontinued operation in 2010.
2. Historically Zoomy has depreciated office equipment over a 7-year useful life (using the straight-line method). During 2011 Zoomy reevaluated this choice and determined that five years is a more appropriate estimate of useful life in the current environment. Depreciation expense for 2010 was calculated using a 7-year useful life and would have been $210,000 higher if a 5-year useful life had been used in the calculation. Depreciation expense for 2011 was calculated using a 5-year useful life and is included in 2011 income from operations (above).
3. Zoomy’s accounting manager discovered that cash receipts in the amount of $365,000 had erroneously been recorded as Sales Revenue instead of Unearned Revenue in 2010. This error resulted in an overstatement of Sales Revenue reported on the 2010 income statement and an understatement of liabilities on the December 31, 2010 balance sheet. The error was corrected in 2011.
4. Zoomy decided to call in outstanding bonds, resulting in a pre-tax loss on the early extinguishment of debt of $70,000. The event is considered unusual and infrequent.
Complete the following table for Zoomy Zombie, Inc. after accounting for the above events and transactions. Please round your answers to the nearest dollar and show all supporting calculations to receive partial credit. Assume a 40% income tax rate for all transactions. You may ignore the required per share disclosures.
Zoomy Zombie, Inc.
FYE December 31, 2011
Income from Continuing Operations
Income Tax (at 40%)
Income from Continuing Operations
Discontinued Operations (Total)
Income before Extraordinary Items
Extraordinary Items (Total)
* Relates to outdoor toy division
Indicate the effect (increase (I), decrease (D) or no effect (NE)) on total assets and net income for each of the following independent transactions assuming the company uses the Allowance Method to account for uncollectible accounts. Use the table provided for your answers. a. Record an adjusting entry to record estimated bad debts.
b. Write off an account as uncollectible.
c. Record cash collected for accounts receivable.
Miscellaneous Short Answer
1. William’s Home Furnishings began 2011 with a credit balance of $32,000 in the allowance for sales returns account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. William’s estimates that 6% of all sales will be returned. During 2011, customers returned merchandise for...
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