Accounting 303
Test 3, Chapters 6-8
Fall 1998
Name _____________________
Section _____
Row _____
I.
Multiple Choice - (2 points each, 30 points total) Read each
question carefully and indicate your answer by circling the
letter preceding the one best answer.
1.
Crispee Corp. established a $200 petty cash fund.
it and found the following items in the fund:
Cash and currency........
Expense vouchers.........
Advance to salesman......
IOU from employee........
You audited
$68.38
82.98
20.00
30.00
In the entry to replenish the fund, what amount should be
debited to Cash Short and Over?
a.
$ 1.36
b.
$30.00
c.
$50.00
d.
$
0
2.
When
be:
a.
b.
c.
d.
preparing a bank reconciliation, outstanding checks would
added to
deducted
deducted
added to
the balance per bank statement
from the balance per company records
from the balance per bank statement
the balance per company records
3.
Which of the following is an advantage of using the net price
method for recording cash discounts on credit sales?
a.
it eases communication with customers about their balances
b.
it properly reflects current period sales revenue
c.
it simplifies recording of sales returns & allowances
d.
it requires less record keeping than the gross method
4.
When aging of accounts receivable is used, each age group is
multiplied by its own estimated uncollectible percentage to
determine each age group's estimated uncollectible amount. The
sum of the amounts thus determined:
a.
is the bad debt expense for the year
b.
is the correct balance for the allowance for doubtful
accounts at year-end
c.
is the amount added to the existing credit balance in the
allowance account to determine the bad debt expense for the
year
d.
is the amount that should be written off as uncollectible
for the year
2
5.
Prior to the adjusting entry for bad debt expense, Lierman
Inc.'s balances for accounts receivable and allowance for
doubtful accounts were $720,000 (debit) and $2,200 (debit),
respectively. After the bad debt expense entry was posted, the
net realizable value of accounts receivable was $653,000. How
much was bad debts expense for the year?
a.
$67,800
b.
$69,200
c.
$64,800
d.
$67,000
6.
Which of the following is not a disadvantage of using the direct
write-off method for recording uncollectible accounts?
a.
reports actual losses
b.
violates the matching principle
c.
allows manipulation of income
d.
overstates accounts receivable
7.
On September 1, 1997, Thele Company received an $8,000, 12%,
120-day note from a credit customer wishing to extend its
repayment period. On October 1, 1997, thirty days after the note
was received, Thele discounted the note at the bank at 14%. How
much cash did Thele Company receive from the bank? Use a 360
day year.
a.
$8,280.00
b.
$8,070.40
c.
$8,028.80
d.
$7,931.73
8.
The cost of goods sold can be determined only after a physical
count of inventory on hand under the:
a.
perpetual inventory system
b.
variable costing system
c.
moving average system
d.
periodic system
3
9.
Near the end of 1998, Wilson Co. made the following purchases.
The months involved in all cases are December 1998 and January
1999.
Date
Date
Date
Date
Goods
Invoice Goods Invoice
Amount
FOB
Shipped
Mailed
Rec'd
Rec'd
$1,050
Destination
12/29
1/2
1/5
1/4
1,620
Shipping Point
1/2
12/29
1/4
12/30
1,260
Shipping Point
12/28
1/2
1/3
1/4
1,800
Destination
12/29
12/27
1/2
12/28
What amount of the above purchases should be included in
inventory at December 31, 1998?
a.
$3,160
b.
$1,260
c.
$3,520
d.
$4,210
10.
The Chalet Company uses a periodic inventory system. Beginning
inventory and inventory purchases for the year were as follows:
1/1
5/23
11/5
11/18
Beg. Inventory
Purchased
Purchased
Purchased
20
20
400
100
units
units
units
units
@
@
@
@
$170
$125
$160
$175
per
per
per
per
unit
unit
unit
unit
At year-end, 50 units remain in inventory. What is the cost of
inventory on a LIFO basis?
a.
$7,500
b.
$7,100
c.
$8,750
d.
$8,450
11.
When the net price method is used to record credit sales, the
Sales Discounts Not Taken account is reported as a(n)
a.
addition to sales returns & allowances on the income
statement.
b.
deduction from gross sales on the income statement.
c.
deduction from selling expenses on the income statement.
d.
addition to other revenue on the income statement.
4
12.
Garcia Company uses the lower of cost or market rule in valuing
its inventory. The floor constraint for one item in the
inventory is $78.20. Other additional information is as
follows:
Transportation costs.....
Normal profit margin.....
Packaging costs..........
What
a.
b.
c.
d.
13.
$ 4.90
11.70
5.20
is the net realizable value for this item?
$66.50
$88.30
$89.90
$100.00
As a result of taking a physical inventory count on December 31,
1996, the Chuckles Company inventory was determined to be
$61,500. The auditors for Chuckles suspected an inventory
shortage because of employee theft and used the gross profit
method to confirm their suspicion. The accounting records for
the company contained the following information:
Inventory (1/1/96)......
Purchases (1996)........
Sales (1996)............
Sales Returns (1996)....
Gross Profit Ratio......
$ 65,000
380,000
510,000
30,000
.25 of sales
Using the gross profit method, what is the estimated amount of
the inventory shortage at December 31, 1996?
a.
$ 1,000
b.
$23,500
c.
$62,500
d.
$85,000
14.
If the net markdowns are excluded from the calculation of the
cost-to-retail ratio in the retail inventory method, the ending
inventory's valuation is lower because of which of the following
effects on the cost-to-retail?
a.
the denominator of the ratio will be lower, which results
in a higher cost-to-retail ratio
b.
the denominator of the ratio will be higher, which results
in a lower cost-to-retail ratio
c.
the numerator of the ratio will be higher, which results in
a higher cost-to-retail ratio
d.
the numerator of the ratio will be lower, which results in
a lower cost-to-retail ratio
5
15.
The correct net income for Blessing Corp. was $4,350. The
company reported incorrect net income because beginning
inventory was understated by $250, purchases were overstated by
$200, and ending inventory was overstated by $200. What
incorrect net income did Blessing Corp. report?
a.
$3,900
b.
$4,600
c.
$4,100
d.
$4,800
6
II.
1.
Problems -- Show work as appropriate.
(12 points) Wynola, Inc. uses the allowance method for their
accounts receivable. On December 31, 1998, their general ledger
contained the following balances prior to write-offs and
adjustments.
Trade Accounts Receivable............
Allowance for Doubtful Accounts......
Net Credit Sales.....................
$
615,300
5,800 (credit)
1,529,000
Before completing an aging analysis to determine the estimated
amount uncollectible, Wynola decided to write off a $5,500
account.
After the above write off was made, Wynola's aging of accounts
receivable balance on December 31 indicated the following:
Estimated
Percentage
Age
Amount
Uncollectible
Under 30 days.......
$338,800
1.5%
30-90 days..........
156,000
3.0%
91-180 days.........
86,000
7.0%
Over 180 days.......
29,000
40.0%
$609,800
Required:
a. Prepare the necessary journal entry to record the write-off.
b.
Prepare the adjusting journal entry at December 31, to record
Wynola, Inc.'s estimated bad debts assuming that the company
uses the aging of accounts receivable method.
7
2.
(13 points) Vista West Corporation frequently assigns its
accounts receivable in order to obtain immediate cash. It is
their practice to reclassify the assigned receivables into the
A/R-Assigned account. On May 1, 1998, Vista assigned $50,000 of
its accounts receivable, receiving an advance of 92% of the
gross receivables assigned, less a service charge of 1.8% of the
gross receivables assigned.
During May, Vista collected $15,000 of these receivables, and on
May 31, remitted the collection to the finance company along
with one month's interest at 15%.
Prepare journal entries for the above events in the space
provided.
May 1, 1998 assignment of the receivables:
Collections of receivables during May (Make a single entry for all
the collections):
May 31, 1998 payment:
8
3.
(11 points) Exhibitors Supplies, Inc. records its purchases at
net under a perpetual inventory system. On January 16, 1998
they purchased $12,000 of merchandise from OLA Company under
terms of 3/15, n/45. On January 20, 1998 Exhibitors Supplies
returned $1,000 of the merchandise. On January 29, 1998
Exhibitors Supplies paid OLA Company $6,000 on this purchase,
and paid the remainder due on February 26, 1998. OLA Company
grants cash discounts on partial payments. Prepare the journal
entries on Exhibitors Supplies books for the following dates.
a.
January 16, 1998
b.
January 20, 1998
c.
January 29, 1998
d.
February 26, 1998
9
4.
(12 points) Victor Manufacturing Co. switched from FIFO to
Dollar Value LIFO on January 1, 1997 for external reporting and
income tax purposes. Calculate the December 31, 1997, and
December 31, 1998, ending inventories under the Dollar Value
LIFO method using the following information.
Inventory at
Date
Year-End Costs
December 31, 1996....... $219,000
December 31, 1997.......
231,725
December 31, 1998.......
272,400
1997
1998
Cost
Index
1.00
1.15
1.20
10
5.
(9 points) There are many differences between inventory cost
flow assumptions. Listed below are several descriptive
statements about inventory. For each statement indicate if it
applies more to LIFO or more to FIFO by placing an "X" in the
appropriate column. If the statement applies to both inventory
methods, place an "X" in both columns.
LIFO
FIFO
_____
_____
1.
Places the most recent costs in cost of
goods sold.
_____
_____
2.
Is susceptible to possible income
manipulation.
_____
_____
3.
Includes all of the holding gains in
income.
_____
_____
4.
Usually approximates the physical flow of
goods.
_____
_____
5.
Is required for financial reporting when
used for income taxes.
_____
_____
6.
Results in liquidation profits when unit
sales exceed purchases.
_____
_____
7.
Emphasizes the balance sheet valuation of
inventory.
_____
_____
8.
Can be used with either periodic or
perpetual inventory systems.
11
6.
(13 points) Value Mart uses the retail inventory method to
value its ending inventory. The following 1998 information is
available.
Inventory, January 1................
Purchases (gross)...................
Purchase returns....................
Purchase discounts taken............
Freight-in..........................
Markups.............................
Markdowns...........................
Sales...............................
Cost
$ 8,160
33,600
1,200
720
4,800
Retail
$12,720
45,600
1,920
9,600
2,880
46,320
Required: Determine the 1998 inventory value to be used for
financial reporting for the Value Mart using each of the following
methods. Carry any decimals to four places.
a.
FIFO
b.
Average
c.
LIFO
12
ANSWERS
ANSWERS TO MULTIPLE CHOICE QUESTIONS:
1. D
9. B
2. C
10. A
3. B
11. D
4. B
12. C
5. B
13. B
6. A
14. B
7. C
15. B
8. D
ANSWERS TO PROBLEMS
ANSWERS TO PROBLEM QUESTIONS
1.
a.
b.
Allowance for Doubtful Accounts...
Accounts Receivable............
0.015
0.03
0.07
0.40
x $338,800 =
x 156,000 =
x
86,000 =
x
29,000 =
Balance in allowance account
Bad Debt Expense....................
Allowance for Doubtful Accounts..
5,500
5,500
$ 5,082
4,680
6,020
11,600
$27,382
(300)
$27,082
27,082
27,082
13
2.
May 1, 1998
Accounts Receivable Assigned......
Accounts Receivable............
50,000
50,000
Cash (46,000 - 900)............... 45,100
Assignment Service Charge Expense..
900
Note Payable (50,000 x .92).....
46,000
During May
Cash............................... 15,000
Accounts Receivable Assigned....
15,000
May 31, 1998
Note Payable....................... 15,000
Interest Expense
(46,000 x 0.15 x 1/12)............
575
Cash............................
15,575
3.
a.
b.
c.
d.
Inventory
Accounts Payable
11,640
11,640
Accounts Payable
Inventory
970
Accounts Payable
Cash
5,820
Accounts Payable
Purchase Disc Not Taken
Cash
970
5,820
4,850
150
5,000
14
4.
1997
231,725/1.15 = 201,500
201,500 - 219,000 = <17,500>
1996 Layer
201,500 x 1.0 = 201,500
1998
272,400/1.20 = 227,000
227,000 - 201,500 = 25,500
1998 Layer
1996 Layer
25,500 x 1.20 = 30,600
201,500 x 1.0 = 201,500
232,100
1.
2.
3.
4.
5.
6.
7.
8.
5.
LIFO
LIFO
FIFO
FIFO
LIFO
LIFO
FIFO
LIFO & FIFO
15
6.
Cost
8,160
$33,600
(1,200)
(720)
4,800
Beginning inventory...........
Purchases.....................
Purchase returns..............
Purchase discounts............
Freight-in....................
Net markups...................
Net markdowns.................
Goods available for sale......
Less: Sales...................
Employee discounts............
Ending inventory at retail....
a.
FIFO inventory: 16,800 x
$44,640
$12,160
$36,480
FIFO Cost-to-retail ratio: ------- = 0.7238
$50,400
b.
Average inventory:
LCM Cost ratio:
c.
16,800 x .7072 =
$11,881
$44,640
------- = 0.7072
$63,120
LIFO inventory:
1998 Layer
1997 Layer
4,080 x .7238 =
12,720 x .
=
2,953
8,160
11,113
Retail
12,720
$45,600
(1,920)
9,600
(2,880)
$ 63,120
(45,600)
(720)
$ 16,800