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1. The Lux Company experiences the following unrelated events and transactions during Year 1. The company‚s existing current ratio is 2:1 and its quick ratio is 1:2: (1) Lux wrote off $5,000 of accounts receivable as uncollectible. (2) A bank notifies Lux that a customer‚s check for $411 is returned marked insufficient funds.The customer is bankrupt. (3) The owners of Lux Company make an additional cash investment of $7, 500. (4) Inventory costing $600 is judged obsolete when a physical inventory is taken. (5) Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period. (6) Lux purchases long-term investments for $10,000. (7) Accounts payable of $9,000 are paid. (8) Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange. (9) Lux sells a vacant lot for $20,000 that had been used in its operations. (10) A three-year insurance policy is purchased for $1,500. Required: Separately evaluate the immediate effect of each transaction on the company‚s a. Current ratio b. Quick (acid-test) ratio c. Working capital 2. The president of Vancouver Viacom made the following comments to shareholders: ‚Å“Regarding management attitudes, Vancouver Viacom has resisted joining an increasing number of companies who along with earnings announcements make extraordinary or nonrecurring loss announcements.Many of these cases read like regular operating problems.When we close plants, we charge earnings for the costs involved or reserved as we approach the event.These costs, in my judgment, are usually a normal operating expense and something that good management should expect or anticipate.That, of course, raises the question of what earnings figure should be used in assessing a price earnings ratio and the quality of earnings.‚ Required: a. Discuss your reactions to these comments. b. What factors determine whether a gain or loss is extraordinary? c. Explain whether you would classify the following items as extraordinary and why. (1) Loss suffered by foreign subsidiaries due to a change in the foreign exchange rate. (2) Write-down of inventory from cost to market. (3) Loss attributable to an improved product developed by a competitor. (4) Decrease in net income from higher tax rates. (5) Increase in income from liquidation of low-cost LIFO inventories due to a strike. (6) Expenses incurred in relocating plant facilities. (7) Expenses incurred in liquidating unprofitable product lines. (8) Research and development costs written off from a product failure (non-marketed). (9) Software costs written off because demand for a product was weaker than expected. (10) Financial distress of a major customer yielding a bad debts provision. (11) Loss on sale of rental cars by a car rental company. (12) Gains on sales of fixed assets. (13) Rents received from employees who occupy company-owned houses. (14) Uninsured casualty losses. (15) Expropriation by a foreign government of an entire division of the company. (16) Seizure or destruction of property from an act of war. 3.On December 31, Year 1, Carme Company reports its accounts receivable from credit sales to customers.Carme Company uses the allowance method, based on credit sales, to estimate bad debts.Based on past experience, Carme fails to collect about 1% of its credit sales. Carme expects this pattern to continue. Required: a. Discuss the rationale for using an allowance method based on credit sales to estimate bad debts.Contrast this method with an allowance method based on the accounts receivable balance. b. How should Carme report its allowance for bad debts account on its balance sheet at December 31, Year 1? Describe the alternatives, if any, for presentation of bad debt expense in Carme‚s Year 1 income statement. c. Explain the analysis of objectives when evaluating the reasonableness of Carme‚s allowance for bad debts.

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