P9-5A At December 31, 2008, the trial balance of Worcester Company contained the following amounts before adjustment.

Debits Credits
Accounts Receivable $385,000
Allowance for Doubtful Accounts $ 2,000
Sales 950,000

Instructions
(a) Based on the information given, which method of accounting for bad debts is Worcester Company using—the direct write-off method or the allowance method? How can you tell?
(b) Prepare the adjusting entry at December 31, 2008, for bad debts expense under each of the following independent assumptions.
(1) An aging schedule indicates that $11,750 of accounts receivable will be uncollectible.
(2) The company estimates that 1% of sales will be uncollectible.
(c) Repeat part (b) assuming that instead of a credit balance there is an $2,000 debit balance in Allowance for Doubtful Accounts.
(d) During the next month, January 2009, a $3,000 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off.
(e) Repeat part (d) assuming that Worcester uses the direct write-off method instead of the allowance method in accounting for uncollectible accounts receivable.
(f) What type of account is Allowance for Doubtful Accounts? How does it affect how accounts receivable is reported on the balance sheet at the end of the accounting period?

E12-4 (Intangible Amortization) Presented below is selected information for Palmiero Company.

a) Palmiero purchased a patent from Vania Co. for $1,500,000 on January 1, 2010. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2010. During 2012, Palmeiro determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2012?

b) Palmiero bought a franchise from Dougherty Co. on January 1, 2011, for $350,000. The carrying amount of the franchise on Dougherty’s books on January 1, 2011 was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Palmiero must enter a competitive bidding at the end of 2020, it is unlikely that the franhchise will be retained beyond 2020. What amount should be amortized for the year ended December 31, 2012?

c) On January 1, 2010, Palmiero incurred organization costs of $275,000. What amount of organization expense should be reported in 2012?

d) Palmiero purchased the license for distribution of a popular consumer product on January 1, 2012, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Palmiero can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2012?

Top Switch Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout the state of Tennessee affected Top Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Before the unfortunate incident, recovery specialists cleaned the buildings. The company controller is very nervous and anxious to recover whatever records he can to support the insurance claim for the destroyed inventory. After consulting with the cost accountant, they decide to retrieve the previous year’s annual report for the beginning inventory numbers. In addition, they also agreed that they need first quarter cost data.

The cost accountant was working on the first quarter results before the storm hit, and to his surprise, the report was still in his desk drawer. After reviewing the data , the information shows the following information: Material purchases were $ 325,000; Direct Labor was $ 220,000. Further discussions between the controller and the cost accountant revealed that sales were $ 1,350,000 and the gross margin was 30% of sales. The cost accountant also discovered, while sifting through the information, that cost of goods available for sale was $ 1,020,000 at cost. While assessing the damage, the controller determined that the prime costs were $ 545,000 up to the time of the damage and that manufacturing overhead is 65% of conversion cost. The cost accountant is not sure about all of this, but he decides to see what he can do with the information.

The beginning inventory numbers are as follows:

Raw Materials, $ 41,000
Work in Process, $ 56,000
Finished Goods, $ 35,000
Required:

Determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods Inventory as of the date of the storm. ( Hint: You may wish to reconstruct the various schedules and statements that would have been affected by the company’s accounts during the period.)

E 16-3 Taxable income given; calculate deferred tax liability

Ayres Services acquired an asset for $80 million in 2011. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2011, 2012, 2013, and 2014 are as follows:

2011 2012 2013 2014
Pretax accounting Income 330 350 365 400
Depreciation on the income statement 20 20 20 20
Depreciation on the tax return (25) (33) (15) (7)
Taxable income 325 337 370 413

Required:
For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

E 16-22 Operating loss carryback and carryforward

(This exercise is based on the situation described in the previous exercise, modified to include a carryforward in addition to a carryback.)

Wynn Sheet Metal reported an operating loss of $160,000 for financial reporting and tax purposes in 2011. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

Taxable income Tax rates Income taxes paid
2007 60,000 30% 18,000
2008 70,000 30% 21,000
2009 80,000 40% 32,000
2010 60,000 45% 27,000

Required:
1. Prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option.
2. Show the lower portion of the 2011 income statement that reports the income tax benefit of the operating loss.

E 16-10 Deferred tax asset; taxable income given; valuation allowance

At the end of 2010, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book–tax difference of $75 million in a liability for estimated expenses. At the end of 2011, the temporary difference is $70 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2011 is $180 million and the tax rate is 40%.

Required:
1. Prepare the journal entry(s) to record Payne’s income taxes for 2011, assuming it is more likely than not that the deferred tax asset will be realized.
2. Prepare the journal entry(s) to record Payne’s income taxes for 2011, assuming it is more likely than not that one-half of the deferred tax asset will ultimately be realized.