Exam 2 – LIVE Review Session
Inventory Errors
Desert Company uses a periodic inventory system and reported $300,000 of inventory as of December 31,
2020. Assume all purchases and sales are made on account. Upon reviewing the company’s records, the
auditor noted the following items which may have been recorded incorrectly regarding their inventory:
(a) Goods purchased costing $25,000 were shipped f.o.b. destination by a supplier on December 26th and
were received on January 2nd. Desert received and recorded the invoice on December 29th. The goods
were not on hand for the physical count and therefore not included.
(b) Included in the physical count were goods shipped to a customer f.o.b. shipping point on December
31st. The goods had a cost of $12,000. Desert recorded the sale on December 31st at 50% mark up on cost.
At the close of the business day on December 31st, the shipment was still on Desert’s loading dock
waiting to be picked up by FedEx.
(c) Goods out on consignment were reported at a selling price of $20,000 with a mark-up on sales of 20%
for this type of merchandise. No sales invoice was recorded; the goods were not included in the physical
count because they were not in the warehouse.
1. Determine the effect of any errors on Desert’s financial statements as of December 31, 2020.
Assets
Liabilities
Equity
2. Determine the correct Ending Inventory at December 31, 2020: $______________________
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
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Accounts Receivable
The December 31, 2020 balance sheet of Desert Company disclosed the following information relating to
its receivables:
Accounts Receivable- General (net of $38,850 allowance)
$ 1,580,150
Desert prepares quarterly financial statements. The following transactions occurred during the first
quarter of 2021 regarding Desert’s accounts receivables. Use this information to answer the questions
on the next page.
During the 1st quarter, Desert had credit sales of $4,950,000 and collections on accounts receivable
(general) of $4,215,000. Uncollectible accounts totaling $23,500 were written off, and a $9,340 accounts
receivable previously written off was collected (not included in the $4,215,000.)
The following transactions relating to Desert’s receivables also occurred during the 1st quarter:
Feb. 1 Desert assigned $400,000 of accounts receivable to Cactus Capital on a non-notification
basis. Cactus agreed to loan Desert 85% of the accounts assigned, and the cash proceeds will
be reduced by a finance fee of $5,000. Cactus charges Desert 1% per month on the
outstanding loan balance. Cash collections from assigned accounts are to be remitted
monthly to the Cactus to repay principal and accrued interest. During February, Desert
collected $160,000 on assigned accounts and also accepted a sales return of $6,000. The
February collections were remitted to Cactus on March 1 to repay principal and accrued
interest. During March, Cactus wrote off $3,000 of assigned accounts as uncollectible and
accepted a sales return on an assigned account for $2,500. By March 31, assigned accounts
of $140,000 were collected. The cash collections were remitted to Cactus to repay principal
and accrued interest.
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
2
At the end of the first quarter, on March 31, 2021, Desert performed a review of the collectability
of the Accounts Receivable and estimates that 2.4% of total accounts receivable and accounts
receivable assigned will prove to be uncollectible.
a. Determine Interest Expense
for the first quarter that was
incurred on the Note Payable
for the assigning agreement.
b. Determine Bad Debt
Expense for the first quarter
as of March 31, 2021.
c. Determine the ending
balances in each of the
following accounts at March
31, 2021.
Accounts Receivable – General:
$__________________
Accounts Receivable – Assigned:
$__________________
Allowance for Doubtful Accounts (after adjustment):
$___________________
Note Payable:
$___________________
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
3
Inventory Costing
The following information was disclosed for Elizabeth Bennett, Co. regarding inventory for the month of
June:
June 1st
Beginning Inventory
300 units @ $10
June 10th
Sold
200 units @ $24
June 11th
Purchased
800 units @ $12
th
June 15
Sold
500 units @ $25
June 20th
Purchased
500 units @ $13
June 27th
Sold
300 units @ $27
1. Assuming EB, Co. uses the periodic inventory method, compute COGS and ending inventory under
LIFO (in dollars).
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
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June 1st
June 10th
June 11th
June 15th
June 20th
June 27th
Beginning Inventory
Sold
Purchased
Sold
Purchased
Sold
300 units @ $10
200 units @ $24
800 units @ $12
500 units @ $25
500 units @ $13
300 units @ $27
2. Assuming EB, Co. uses the periodic inventory method, compute COGS and ending inventory under
FIFO (in dollars).
Given the above assumptions, compute gross profit if the inventory is valued using FIFO.
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
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June 1st
June 10th
June 11th
June 15th
June 20th
June 27th
Beginning Inventory
Sold
Purchased
Sold
Purchased
Sold
300 units @ $10
200 units @ $24
800 units @ $12
500 units @ $25
500 units @ $13
300 units @ $27
3. Assuming EB, Co. uses the perpetual inventory method, compute ending inventory under LIFO (in
dollars).
Why is it stated that LIFO usually produces a lower gross profit than FIFO?
ACC340 Exam 2 Review
© Erin Jordan, PhD, Arizona State University
6