Information for Exam 2: The exam will be weighted approximately as follows:
Chapter 5: 40%
Chapter 6: 25%
Chapter 7: 35%
The exam will consist of 40 equally weighted questions . There will be significantly more calculations than on Exam 1; be sure
to bring a basic 4+function calculator with you to the exam; more advanced calculators will not be allowed.
The questions will be multiple choice, matching and true/false questions.
Sample Exam Questions for Chapter 5:
1.
A company had sales of $350,000, and cost of goods sold of $200,000. Its gross profit equals $550,000.
A.
True
B.
False
2.
The terms 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days
of the invoice date. Otherwise, the full amount is due in 30 days.
A.
True
B.
False
3.
If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their
destination because the transaction is not complete until that point.
A.
True
B.
False
4.
A company purchased $1,800 of merchandise on December 5. On December 7, it
returned $200 worth of merchandise. On December 8, it paid the balance in full, taking
a 2% discount. The amount of the cash paid on December 8 equals:
A. $ 200.
B. $1,564.
C. $1,568.
D. $1,600.
E. $1,800.
The following information is for the next 5 questions
Match the following terms A through E with the appropriate definition.
A. Gross profit
B. Periodic inventory system
C. Perpetual inventory system
D. Purchase discount
E. Selling expenses
5. An accounting method that continually updates accounting records for merchandise transactions.
6. An accounting method that updates the accounting records for merchandise transactions only at the end of a period.
7. The expenses of promoting sales, by displaying and advertising merchandise, making sales, and delivering goods to
customers.
8. A cash discount taken by a company for paying its account payable within the discount period.
9. Net sales less cost of goods sold.
1
The following information is for the next 3 questions.
Given the following multiple step income statement of Tri-State Company
Sales
$75,000
Cost of goods sold:
Beginning inventory
(a)
Purchases
24,000
Ending inventory
8,000
Cost of goods sold
$28,000
Gross margin
(b)
Operating expenses
(c)
Net income
$16,000
10.
Calculate Item (a), Beginning Inventory:
A.
$12,000
B.
$ 4,000
C.
$44,000
D.
$16,000
11.
Calculate Item (b), Gross Margin:
A.
$12,000
B.
$103,000
C.
$47,000
D.
$28,000
12.
Calculate Item (c), Operating Expenses:
A.
$12,000
B.
$33,000
C.
$16,000
D.
$31,000
13.
A company understated ending inventory at December 31, 2007. What effect would this have on the December 31,
2007 balance sheet?
A. Overstatement of assets and equity
B. Understatement of assets and equity
C. Understatement of assets, no effect on equity
D. Overstatement of assets, no effect on equity
E. No effect on assets or equity.
14.
Under LIFO, the most recent costs are assigned to ending inventory.
A. True
B. False
2
The following information is for the next four questions:
Town Wholesalers had the following inventory activities for 2007:
Date
Activity
Beginning Balance
40 units @ 12 = $ 480
Purchase, Mar. 15
75 units @ 14 = $1,050
Purchase, Apr. 7
70 units @ 16 = $1,120
Purchase, Nov. 3
30 units @ 18 = $ 540
215 units
$ 3,190
During 2007, 160 units were sold.
15.
What is the amount of the December 31, 2007 inventory assuming that Town Wholesalers maintains a FIFO
periodic inventory system?
A.
$ 690
B.
$2,500
C.
$2,250
D.
$ 940
16.
What is the amount of the 2007 cost of goods sold assuming that Town Wholesalers maintains a FIFO periodic
inventory system?
A.
$ 690
B.
$2,500
C.
$2,250
D.
$ 940
17.
What is the amount of the December 31, 2007, inventory assuming that Town Wholesalers maintains a LIFO
periodic inventory system?
A.
$ 690
B.
$2,500
C.
$2,250
D.
$ 940
18.
What is the amount of the 2007 cost of goods sold assuming that Town Wholesalers maintains an Average
periodic inventory system (round to nearest whole dollar)?
A.
$ 816
B.
$2,500
C.
$2,374
D.
$ 11
19.
Company Q understates 2005 ending inventory; this error goes undetected in 2006. All other accounts for
2005 and 2006 are correct. What effect would this 2005 error have on the following 2006 financial
statement balances:
A.
B.
C.
D.
E.
Net Income
Stockholders' Equity
for 2006
at 12/31/2006
no effect
no effect
understated
no effect
overstated
no effect
overstated
overstated
None of the above is correct
20. Which inventory method is preferred for tax purposes in the United States?
A. FIFO
B. LIFO
C. Average
D. Specific Identification
3
21. The journal entry to record the cost of Transportation-in on inventory purchased (using the periodic system) would
include:
A. A debit to Purchase Discounts
B. A debit to Transportation-in
C. A credit to Purchase Discounts
D. A credit to Transportation-in
22.
During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net
income is:
A.
Weighted average method
B.
FIFO method
C.
LIFO method
D.
Perpetual method
23.
Cobra Company negotiated a $200 reduction in the cost of a batch of inventory because some of the goods
were damaged in shipment. This inventory was originally purchased on account. The journal entry to record
this price reduction would be (assuming a periodic system):
A.
Accounts Payable
200
Cash
200
B.
Cash
200
Accounts Payable
C.
D.
24.
200
Accounts Payable
200
Purchase Returns and Allowances
200
Purchase Returns and Allowances
Accounts Payable
200
200
Many countries prohibit the use of LIFO for tax or financial accounting purposes.
A.
True
B.
False
4
The following information is for the next 4 questions:
Match each of the following terms A through D with the appropriate definition.
A. Specific identification
B. LIFO method
C. Gross margin (gross profit)
D. FIFO method
25.
Sales revenue minus the cost of inventory sold.
26.
An inventory valuation method that assumes costs for the most recent items purchased are assigned to cost of
goods sold, and the oldest costs are assigned to ending inventory.
27.
An inventory valuation method that assumes that inventory items are sold in the order acquired.
28.
An inventory method where the unique cost of each item is known, and where that unique cost is included in
cost of goods sold when the item is sold.
5
Answers to Chapter 5 questions:
1. B
2. A
3. B
4. C
5. C
6. B
7. E
8. D
9. A
10. A
11. C
12. D
13.B
14.B
15.D
16.C
17.A
18.C
19.C
20.B
21.B
22.C
23.C
24.A
25.C
26.B
27.D
28.A
6
Chapter 6 Questions
1. Bank service charges of $20 were found in the bank reconciliation for Nachez Company for
June. The entry to correct Nachez’ general ledger for this activity would be:
A.
Service Charge Expense
20
Cash
20
B.
C.
Service Charge Expense
Accounts Payable
20
Cash
20
20
Service Charge Revenue
D.
Accounts Receivable
20
Service Charge Revenue
20
20
2. Outstanding checks are checks the bank has paid and deducted from the customer's account
during the month.
A.
True
B.
False
3. On a bank reconciliation, the amount of an unrecorded bank service charge should be:
A.
Added to the book balance of cash.
B.
Deducted from the book balance of cash.
C.
Added to the bank balance of cash.
D.
Deducted from the bank balance of cash.
E.
Noted in memorandum form only.
4. A check that was outstanding on last period's bank reconciliation was not among the cancelled
checks returned by the bank this period. As a result, in preparing this period's reconciliation, the
amount of this check should be:
A.
Added to the book balance of cash.
B.
Deducted from the book balance of cash.
C.
Added to the bank balance of cash.
D.
Deducted from the bank balance of cash.
E.
Ignored in preparing the period's bank reconciliation.
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5. A company made a bank deposit on September 30 that did not appear on the bank statement
dated as of September 30. In preparing the September 30 bank reconciliation, the company
should:
A.
Deduct the deposit from the bank statement balance.
B.
Send the bank a debit memorandum.
C.
Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance.
D.
Add the deposit to the book balance of cash.
E.
Add the deposit to the bank statement balance.
6. In comparing the cancelled checks on the bank statement with the entries in the accounting
records, it is found that check number 4239 for November's rent was correctly written and drawn
(cleared) for $3,790 but was erroneously entered in the accounting records as $7,390. When
preparing the November bank reconciliation, the company should:
A.
Deduct $3,600 from the book balance of cash.
B.
Add $3,600 to the bank statement balance.
C.
Add $7,390 to the book balance of cash.
D.
Deduct $3,600 from the bank statement balance.
E.
Add $3,600 to the book balance of cash.
The following information is for the next 5 questions.
Identify whether each of the following items would on appear on the bank side or the book side of a bank
reconciliation. Use the following designations to indicate the treatment of each item listed below:
A.
Add to bank balance
B.
Subtract from bank balance
C.
Add to book balance
D.
Subtract from book balance
7. Bank service charges.
8. Outstanding checks.
9. Deposits in transit.
10. NSF returned customer check (notification was received with the bank statement).
11. Collection of a $1,000 note for the depositor by the bank at the end of the month
(notification given in the bank statement).
8
12. Given the following information for Ace Company, derived from the bank reconciliation information for June:
Outstanding checks
$ 6,725
Bank service charges
$ 275
Deposits in transit
$ 1,750
NSF customer check, returned with the bank statement $ 400
Cash balance per bank statement at June 30
$11,200
Cash balance per the books at June 30
$ 6,900 (before reconciliation)
The corrected cash balance following completion of the reconciliation at June 30 is:
A.
$ 6,225
B.
$10,925
C.
$16,175
D.
$ 1,525
13. Refer to question 12 above. After the reconciliation is completed, the journal entry on Ace Company’s books to
correct the cash balance would include:
A. a debit to Bank Service Charges for $275
B. a credit to Accounts Receivable for $400
C. a credit to Deposits in Transit for $1,750
D. a debit to Outstanding Checks for $6,725
E. all of the above answers are correct.
9
Answers to Chapter 6 questions:
1.A
2.B
3.B
4.D
5.E
6.E
7.D
8.B
9.A
10.D
11.C
12.A
13.A
10
Questions Chapter 7
1. The Allowance For Doubtful Accounts is classified in
A.
the current asset section of the balance sheet
B.
the current liability section of the balance sheet
C.
the income statement as an expense
D.
the income statement as a revenue
2. When using the allowance method of accounting for uncollectible accounts, the entry to
record the bad debts expense is a debit to Bad Debts Expense and a credit to Accounts
Receivable.
A. True
B.
False
3. When using the allowance method of accounting for uncollectible accounts, the entry to
write off a specific uncollectible account is a debit to Allowance for Doubtful Accounts
and a credit to Accounts Receivable.
A. True
B.
False
4. The aging of accounts receivable involves classifying each account receivable by how
long it is past its due date.
A. True
B.
False
5. The percent of accounts receivable method for bad debts estimation uses only income statement
account balances to estimate bad debts.
A.
True
B.
False
6. The allowance for doubtful accounts will never have a debit balance after adjusting
journal entries are posted.
A. True
B.
False
7. Which of the following statements is true?
A.
The matching principle requires that a company estimate its uncollectible accounts and record
bad debt expense.
B.
The principle of conservatism requires that bad debt expense not be recognized until the account
receivable is written off.
C.
The principle of revenue recognition requires that revenue be adjusted in the period that the
uncollectible account is written off.
D.
(A), (B), and (C) are all true.
11
8. On October 29 of the current year, a company concluded that a customer's $4,400
account receivable was uncollectible and that the account should be written off. What
effect will this write-off have on this company's net income and total assets assuming
the allowance method is used to account for bad debts?
A) Decrease in net income; no effect on total assets.
B) No effect on net income; no effect on total assets.
C) Decrease in net income; decrease in total assets.
D) Increase in net income; no effect on total assets.
E) No effect on net income; decrease in total assets.
9.
Acer Company ages its accounts receivables to determine its end of period adjustment for bad debts. At
the end of 2008, management used an aging schedule to estimate that $15,000 of the accounts receivable
balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful
Accounts had a debit balance of $200. What adjusting entry should the company make at the end of
2008 to record its estimated bad debts expense?
A.
B.
C.
10.
Bad Debt Expense
Accounts Receivable
15,200
Bad Debt Expense
Accounts Receivable
14,800
Allowance for Doubtful Accounts
Bad Debt Expense
14,800
15,200
14,800
14,800
D.
Accounts Receivable
14,800
Allowance for Doubtful Accounts
14,800
E.
Bad Debt Expense
15,200
Allowance for Doubtful Accounts 15,200
Assume all of the information in Question 9, except that the Allowance account had a $400 credit
balance before the adjusting journal entry. What amount of Bad Debt Expense would Acer recognize in
its 2008 income statement?
A.
$15,000
B.
$15,400
C.
$14,600
D.
$ 200
12
11. A company used the percent of sales method to determine its bad debts expense. At the
end of the current year, the company's unadjusted trial balance reported the following
selected amounts:
Accounts receivable
$245,000 debit
Allowance for doubtful accounts
300 credit
Net credit sales
900,000 credit
All sales are made on credit. Based on past experience, the company estimates 0.5% of
net credit sales to be uncollectible. What amount should be debited to Bad Debts
Expense when the year-end adjusting entry is prepared?
A. $925
B.
$4,800
C,
$4,200
D. $4,500
The following information is for the next two questions:
12. Acme company ages its accounts receivables to determine its end of period adjustment for bad debts. At
the end of the current year, management estimated that $12,000 of the accounts receivable balance of
$200,000 would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful
Accounts had a debit balance of $175. What amount would appear in the Allowance for Doubtful
accounts at the end of the year, after the adjusting journal entry is posted?
A.
$200,000
B.
$12,000
C.
$12,175
D.
$11,825
13. Referring to the information above, what amount would appear in Acme’s balance sheet at the end of the
year for the net realizable value of Accounts receivable (net A/R)?
A.
$200,000
B.
$212,000
C.
$188,000
D.
$188,175
14. Sparkle Water Company prepares an aging schedule before preparing its adjusting journal for the
Allowance for Doubtful Accounts entry at the end of each year. At December 31, 2009, the aging
schedule shows the following:
Age
Accounts Receivable
Percent Uncollectible
Current
$100,000
1%
30 days old
50,000
4%
60 days old
20,000
10%
Over 60 days old 10,000
50%
What amount would appear for net realizable value of accounts receivable on the December 31, 2009
balance sheet?
A.
$180,000
B.
$190,000
C.
$170,000
D.
$ 10,000
13
15. Given the following general ledger activity for Tyner Corporation for 2008, as represented by the Taccount below:
Allowance for Doubtful Accounts
 12,000
10,000  16,000

 18,000
What was the total dollar amount for the write-off of specific accounts receivable during 2008?
A.
$12,000
B.
$10,000
C.
$16,000
D.
$18,000
16. From the T-account in Question 14, what amount was recognized in the adjusting journal entry for bad
debt expense for Tyner Corporation for 2008?
A.
$12,000
B.
$10,000
C.
$16,000
D.
$18,000
The following information is for the next two questions.
On September 1, 2008, Bangor Company sold inventory to Fairbanks Company for $9,000 on a 6-month
Notes Receivable. The note included a 5% annual interest rate, and the full amount of principal and
interest are due on February 28, 2009.
17. The adjusting journal entry at December 31, 2008 to recognize interest earned would be:
A. Interest Receivable
450
Interest Revenue
450
B. Interest Receivable
Interest Revenue
150
C. Interest Receivable
Interest Revenue
225
150
225
D. No adjusting journal entry is required.
18. The journal entry (or entries) on Bangor’s books to record the collection of principal and interest on
February 28, 2009 would be:
A.
B.
C.
D.
a credit to Interest Revenue for $225
a credit to Interest Revenue for $450
a credit to Interest Revenue for $150
a credit to Interest Revenue for $75
14
Answers to Chapter 7 Questions:
1. A
2. B
3. A
4. A
5. B
6. A
7. A
8. B
9.E
10.C
11.D
12.B
13.C
14.C
15.B
16.C
17.B
18.D
15