Accounting 303
Exam 3, Chapters 7-9
Spring 2012
I.
Name _______________________
Row _______
Multiple Choice Questions. (2 points each, 30 points in total) Read each question carefully and
indicate your answer by circling the letter preceding the one best answer.
1.
How can accounting for bad debts under the allowance method be used for earnings
management?
a. Reversing previous write-offs.
b. Using an aging of the accounts receivable balance to determine bad debt expense.
c. Determining which accounts to write-off.
d. Changing the percentage of sales recorded as bad debt expense.
2.
What is the normal journal entry when writing-off an account as uncollectible under the
allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
3.
A trial balance before adjustments included the following:
Debit
Sales
Sales returns and allowance
Accounts receivable
Allowance for doubtful accounts
Credit
$850,000
$28,000
86,000
1,520
If the estimate of uncollectibles is based on 2% of net sales, the amount of the adjustment is
a. $19,480.
b. $17,000.
c. $16,440.
d. $13,400.
4.
Sun Inc. factors $3,000,000 of its accounts receivables with recourse for a finance charge of
3%. The finance company retains an amount equal to 10% of the accounts receivable for
possible adjustments. Sun estimates the fair value of the recourse liability at $150,000. What
would be recorded as a gain (loss) on the transfer of receivables?
a. Gain of $90,000.
b. Loss of 240,000.
c. Gain of $540,000.
d. Loss of $150,000.
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5.
If the beginning inventory for 2012 is overstated, the effects of this error on cost of goods sold
for 2012, net income for 2012, and total assets at December 31, 2012, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
6.
The failure to record a purchase of merchandise on account even though the goods are properly
included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of owners' equity.
7.
Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these are correct.
Use the following information for questions 8 and 9.
Winsor Co. records purchases at net amounts. On May 7 Winsor purchased merchandise on account,
$20,000, terms 2/10, n/30. On May 16, Winsor returned $1,500 of the May 7 purchase and received
credit on account. On May 31 Winsor paid the balance in full.
8.
The amount to be recorded as a purchase return on May 16 is
a. $1,350
b. $1,530
c. $1,500
d. $1,470
9.
What amount is recorded as the credit to cash on May 31?
a. $20,000
b. $19,600
c. $18,500
d. $18,130
10.
How are inventories included in the computation of net income?
a. To determine cost of goods sold.
b. To determine merchandise returns.
c. To determine sales revenue.
d. Inventories are not included in the computation of net income.
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11.
In no case can "market" in the lower-of-cost-or-market rule be more than
a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable costs
of completion and disposal and an allowance for an approximately normal profit margin.
c. estimated selling price in the ordinary course of business less reasonably predictable costs
of completion and disposal.
d. estimated selling price in the ordinary course of business less reasonably predictable costs
of completion and disposal, an allowance for an approximately normal profit margin, and
an adequate reserve for possible future losses.
12.
When calculating the cost ratio for the retail inventory method,
a. if the conventional method (LCM) is used, the beginning inventory is included and
markdowns are included.
b. if the LIFO method is used, the beginning inventory is included and markdowns are not
included.
c. if the conventional method (LCM) is used, the beginning inventory is excluded and
markdowns are excluded.
d. if the LIFO method is used, the beginning inventory is excluded and markdowns are
included.
13.
Given the historical cost of product Z is $80, the selling price of product Z is $95, costs to sell
product Z are $11, the replacement cost for product Z is $83, and the normal profit margin is
40% of sales price, what is the amount that should be used to value the inventory under the
lower-of-cost-or-market method?
a. $46.
b. $80.
c. $84.
d. $83.
14.
The sales price for a product provides a gross profit of 20% of sales price. What is the gross
profit as a percentage of cost?
a. 20%.
b. 17%.
c. 25%.
d. Not enough information is provided to determine.
15.
Keen Company's accounting records indicated the following information:
Inventory, 1/1/12
$ 900,000
Purchases during 2012
4,500,000
Sales during 2012
5,700,000
A physical inventory taken on December 31, 2012, resulted in an ending inventory of
$1,050,000. Keen's gross profit on sales has remained constant at 25% in recent years. Keen
suspects some inventory may have been taken by a new employee. At December 31, 2012,
what is the estimated cost of missing inventory?
a. $75,000.
b. $225,000.
c. $300,000.
d. $375,000.
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II. Problems – (70 points in total) Show all work where appropriate!
1.
(12 points) Prepare journal entries for Mars Co. for the following events.
a.
Accounts receivable in the amount of $1,000,000 were assigned to Utley Finance Co. by Mars
as security for a loan of $850,000. Utley charged a 3% commission on the assigned accounts;
the interest rate on the note is 12%.
b.
During the first month, Mars collected $400,000 on assigned accounts after deducting $900 of
discounts. Mars also wrote off a $1,060 assigned account.
c.
Mars paid Utley the $400,000 amount collected plus one month's interest on the note.
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2.
(13 points) On January 1, 2012, West Co. sold merchandise and received as payment, a $600,000 zerointerest-bearing note receivable due on January 1, 2015. The prevailing rate of interest for a note of
this type at January 1, 2012 was 10%. West Co. has a December 31 accounting year-end. Prepare the
required journal entries for the following dates.
a.
January 1, 2012
b.
December 31, 2012
c.
December 31, 2013
d.
What is the total amount of interest income that will be recognized over the life of this note?
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3.
(15 points) During June, the following changes in inventory item 27 took place:
June 1
14
24
8
10
29
Balance
Purchased
Purchased
Sold
Sold
Sold
1,400 units @ $24 = 33,600
800 units @ $36 = 28,800
700 units @ $30 = 21,000
400 units @ $50 = 20,000
1,000 units @ $40 = 40,000
600 units @ $44 = 26,400
Calculate the June 30 inventory value for item 27 under the following methods?
a.
FIFO periodic.
b. LIFO perpetual.
c.
Periodic average.
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4.
(14 points) On December 31, 2012, Aber Company adopted the dollar-value LIFO inventory
method. The inventory on that date using the dollar-value LIFO inventory method was $270,000.
Other inventory data are as follows:
Inventory at
Price index
Year
year-end prices
(base year 2009)
2013
$387,400
1.04
2014
403,200
1.12
Compute the inventory at December 31, 2013 and 2014, using the dollar-value LIFO method for each year.
2013
2014
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5.
(16 points) Potter Variety Store uses the retail inventory method to value its ending inventory.
Information relating to the computation of the inventory at December 31, 2012, follows:
At Cost
At Retail
Inventory, January 1, 2012
$146,000
$220,000
Purchases
480,000
700,000
Freight-in
80,000
Net markups
160,000
Net markdowns
60,000
Sales
750,000
Compute the December 31, 2012, ending inventory at cost under each of the following
assumptions. Carry out ratio calculations to four decimal places.
a.
Potter uses LCM (conventional) Retail Method?
b.
Potter uses LIFO Retail Method?
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Solutions
Multiple Choice
Question
Answer
Question
Answer
1
2
3
4
5
6
7
8
9
10
d
a
c
b
b
d
b
d
c
a
11
12
13
14
15
c
d
b
c
a
Problems
Solution for Problem 1
(a) Cash .......................................................................................
Interest Expense .......................................................................
Notes Payable ...............................................................
820,000
30,000
(b) Cash .......................................................................................
Sales Discounts ........................................................................
Allowance for Doubtful Accounts...............................................
Accounts Receivable .....................................................
400,000
900
1,060
(c) Notes Payable ..........................................................................
Interest Expense .......................................................................
Cash..............................................................................
400,000
8,500
9
850,000
401,960
408,500
Solution for Problem 2
(a) Notes Receivable ..........................................................................
Discount on N/R ..................................................................
Sales ...................................................................................
600,000
(b) Discount on N/R ............................................................................
Interest Revenue .................................................................
45,079
(c) Discount on N/R ............................................................................
Interest Revenue .................................................................
49,587
149,211
450,789
45,079
49,587
(d) 149,211
Solution for Problem 3
(a) 700 @ $30 =
200 @ $36 =
$21,000
7,200
$28,200
(b) 800 @ $36 =
100 @ $30 =
$28,800
3,000
$31,800
(c) 83,400/2,900 = 28.76;
900 @ 28.76 = 25,883
Solution for Problem 4
At 12/31,
2012
Ending
Inventory at
Base-Year Price
270,000 ÷ 1.00
= $270,000
Layers at
Base-Year
Prices
270,000
×
At 12/31,
2013:
$387,400 ÷ 1.04
= $372,500
$270,000
106,000
×
×
1.00
1.04
=
=
$270,000
106,600
$376,000
At 12/31,
2013:
$403,200 ÷ 1.12
= $360,000
$270,000
$90,000
×
×
1.00
1.04
=
=
$270,000
93,600
$363,600
10
Ending Inventory
Dollar-Value LIFO
$270,000
Price Index
1.00
Solution for Problem 5
(a)
Beginning inventory, 5/1
Purchases
Freight in
Markups (net)
Markdowns (net)
Available for sale
Sales
Ending inventory at retail
At Cost
$ 146,000
480,000
80,000
At Retail
$ 220,000
700,000
$ 706,000
(a)
706000/1080000 = .6537
270,000 x .6537 = 176,499
(b)
560000/800000 = .7000
2011 Layer 220,000
= 146,000
2012 Layer 50,000 x .7000 = 35,000
181,000
11
160,000
<60,000>
$ 1,020,000
<750,000>
$ 270,000