1
Accounting 303
Test 3, Chapters 6-8
Fall 1997
Name _____________________
Section ______
Row ______
I.
Multiple Choice - (2 points each, 36 points total) Read each question
carefully and indicate your answer by circling the letter preceding
the one best answer.
1.
The entry to replenish the petty cash fund for $100 of various minor
expenditures would include a
a.
debit to petty cash.
b.
debit to cash.
c.
credit to petty cash.
d.
credit to cash.
2.
When an uncollectible account is written off under the estimated bad
debts method (allowance method), it
a.
decreases net income.
b.
increases working capital.
c.
increases the accounts receivable net realizable value.
d.
leaves total assets unchanged.
3.
Under the estimated bad debts method of recording bad debts, which
of the following entries, if any, would be made to write off actual
uncollectible accounts of $3,500?
a.
Allowance for Doubtful Accounts......
Accounts Receivable...............
3,500
b.
Bad Debt Expense.....................
Allowance for Doubtful Accounts...
3,500
c.
Bad Debt Expense.....................
Accounts Receivable...............
3,500
d.
no entry is needed
3,500
3,500
3,500
4.
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
b.
$8,070.40
c.
$8,028.80
d.
$7,931.73
5.
A company is in its first year of operations and has never written
off any accounts receivable as uncollectible. When the allowance
method of recognizing bad debt expense is used, the entry to recognize
that expense
a.
increases net income.
b.
decreases current assets.
c.
has no effect on current assets.
d.
has no effect on net income.
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6.
Which of the following statements is true?
a.
FOB destination means the buyer has legal title to the goods
while they are in-transit
b.
FOB shipping point means the seller has legal title to the goods
while they are in-transit
c.
FOB destination means the seller maintains legal title to the
goods until they reach the buyer's place of business
d.
FOB shipping point means the buyer acquires legal title to the
goods when they reach the buyer's place of business
7.
Sylvia's Designs Co. had the following inventory activity during
April:
Units
Unit Cost
Beginning inventory.................... 100
$10
Purchase (April 3).....................
50
12
Sale (April 10)........................
80
Purchase (April 18)....................
40
14
Purchase (April 23)....................
60
15
Sale (April 28)........................ 120
Assuming Sylvia's uses a periodic FIFO cost flow assumption, their
ending inventory for April would be
a.
$ 750
b.
$2,560
c.
$ 500
d.
$2,310
e.
some other amount
8.
On June 1, Corona Company had 40 units of inventory at a cost of $3
each. June purchases and sales for Corona were as follows:
June
Purchases
5
10 units @ $4
12
20 units @ $5
25
10 units @ $8
June
Sales
4
20 units
20
12 units
If the cost of goods sold during June was $136, what inventory
valuation method must Corona be using?
a.
FIFO
b.
LIFO perpetual
c.
weighted average
d.
LIFO periodic
9.
Which of the following is not an advantage of using the FIFO cost flow
assumption?
a.
produces lowest net income in periods of rising prices
b.
provides a relevant ending inventory value
c.
is not as susceptible to profit manipulation by management
d.
does not produce unusual results when inventory liquidation
occurs
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10.
Which of the following cost-flow assumptions provides the lowest
inventory value in periods of rising prices?
a.
FIFO periodic
b.
LIFO periodic
c.
FIFO perpetual
d.
moving average
11.
The application of the lower of cost or market rule to inventories
is an example of which of the following assumptions, principles, or
concepts?
a.
revenue realization principle
b.
going concern assumption
c.
special industry practices
d.
conservatism
12.
The following information is available for SNT, Inc.:
Date
December 31, 1995
December 31, 1996
December 31, 1997
Cost
$250
350
400
Market
$250
325
365
If the direct method of recording lower of cost or market is in use,
which December 31, 1997, entry is correct?
13.
a.
Loss Due to Market Valuation................ 10
Allowance to Reduce Inventory to Market..
10
b.
Inventory................................... 365
Income Summary...........................
365
c.
Loss Due to Market Valuation................ 35
Allowance to Reduce Inventory to Market..
35
d.
Inventory................................... 400
Income Summary...........................
400
Clear Windows used the gross profit method to estimate ending
inventory of $800, a decrease of $200 from the beginning inventory.
Gross purchases for the month amounted to $6,000 and sales were
$7,250, made at a gross profit of 25% on cost. What must have been
the amount of purchase returns?
a.
$1,562.50
b.
$ 400.00
c.
$ 600.00
d.
$1,762.50
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14.
Use the following information to calculate the ending inventory using
the gross profit method:
Freight-in....................................
Purchases.....................................
Sales returns.................................
Beginning inventory...........................
Sales.........................................
Gross profit on net sales.....................
a.
b.
c.
d.
15.
$
400
10,050
100
1,750
13,450
20%
$1,360
$1,075
$1,440
$1,520
The Kansas Company provided the following data for its December 31,
1997, inventory maintained on the retail basis.
Beginning inventory........
Purchases..................
Markups (net)..............
Markdowns (net)............
Sales......................
What
cost
a.
b.
c.
d.
At Cost
$ 60,000
140,000
At Retail
$112,000
198,000
10,000
(20,000)
260,000
is the December 31, 1997, cost ratio used for the lower of average
or market method?
.625
.745
.536
.667
16.
What is the effect on net income if a company failed to record a
purchase in transit (FOB shipping point) and also failed to include
the purchase in physical inventory?
a.
income is overstated
b.
income is understated
c.
income is correct
d.
not enough information is provided to determine the answer
17.
Wooster Trophies reported $5,000 of net income for 1997. The correct
income, however, was $4,000. It was determined that ending inventory
was overstated by $1,500. The only other error was with beginning
inventory. Therefore, beginning inventory must be
a.
understated by $500.
b.
overstated by $2,500.
c.
understated by $2,500.
d.
overstated by $500.
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18.
The replacement cost of an inventory item is below the net realizable
value and above the net realizable value less the normal profit
margin. The original cost of the inventory item is above the
replacement cost and below the net realizable value. As a result,
under the lower of cost or market method, the inventory item should
be valued at the
a.
net realizable value.
b.
original cost.
c.
replacement cost.
d.
net realizable value less the normal profit margin.
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II.
1.
Problems - Show all work as appropriate.
(9 points) Spring Valley Club, Inc., recorded credit sales of
$350,000 during 1997. At December 31, 1997, Spring Valley had a
$65,000 debit balance in its Accounts Receivable account and a $2,500
credit balance in its Allowance for Doubtful Accounts account.
Required:
a. Prepare the necessary adjusting journal entry at December 31, 1997,
to record the estimated bad debts expense assuming that bad debts are
estimated at 2% of credit sales.
b.
Prepare the necessary adjusting journal entry at December 31, 1997,
to record the estimated bad debts expense assuming that bad debts are
estimated at 4% of outstanding accounts receivable.
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2.
(15 points) In order to resolve its cash flow problems, Fallbrook
Resort assigned $120,000 of its accounts receivable to Household
Finance Company on September 1, 1997. Household Finance agreed to
loan Fallbrook 85% of the assigned accounts receivable value less a
service charge of 2% on the cash proceeds of the loan. The agreement
also called for Fallbrook to be charged 13% annual interest on the
outstanding loan balance. During September, Fallbrook collected
$76,000 of the assigned receivables, and remitted that amount plus
the interest to date to Household Finance on September 30, 1997.
Required:
Prepare the following journal entries on Fallbrook's books.
a.
The assignment of the receivables and the receipt of the loan proceeds
on September 1, 1997.
b.
The reclassification of the assigned receivables.
c.
The collections of the assigned receivables during September 1997.
d.
The payment of the collected assigned receivables plus interest to
Household Finance on September 30, 1997.
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3.
(12 points) On October 17, 1997, Beaumont Beauty Supplies bought
$42,000 of goods on terms of 1/10, n/30, from Sun Products, Inc. One
third of the invoice was paid by Beaumont on October 24, (qualifying
for the cash discount) and the remainder of the invoice was paid on
October 31. Beaumont uses the net method of recording purchases and
Sun Products uses the gross method of recording sales.
Required: Journalize the October 17, October 24, and October 31,
transactions on both the books of Beaumont Beauty Supplies and
Sun Products, Inc.
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Sun Products, Inc.
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4.
(14 points) On December 31, 1996, the current cost of Redding
Company's ending inventory was $20,000 and the cost index was 100.
On January 1, 1997, Redding adopted the dollar value LIFO method of
inventory costing. Information from the company's ending inventory
records is shown below.
Year
1996
1997
1998
Cost
Index
100
108
120
Inventory at
Year-End Prices
$20,000
21,295
23,305
Required: Compute the inventory amounts at December 31, 1997, and 1998,
using the dollar-value LIFO inventory method for each year.
1997
1998
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5.
(14 points) The Macomb Company uses the retail-inventory method to
compute ending inventory. Their 1997 information is as follows:
Cost
Retail
Beginning inventory..................
$ 6,250
$ 8,000
Purchases............................
20,500
34,000
Freight-in...........................
1,000
Purchase returns.....................
750
1,000
Sales................................
22,500
Net markups..........................
4,000
Net markdowns........................
1,000
Required: Compute the ending inventory by the retail inventory method for
the following cost flow assumptions:
a.
FIFO
b.
average cost
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Answers
Multiple Choice
1. d
10. b
2. d
11. d
3. a
12. b
4. c
13. b
5. b
14. d
6. c
15. a
7. a
16. c
8. c
17. d
9. a
18. c
Problems
1.
a.
Bad Debt Expense ($350,000 x 0.02)........... 7,000
Allowance for Doubtful Accounts...........
b.
Bad Debt Expense [($65,000x0.04) - $2,500]...
Allowance for Doubtful Accounts...........
2.
Cash [($120,000 x 0.85) - 0.02($120,000 x 0.85)]...
Assignment Service Charge [0.02 ($120,000 x 0.85)].
Note Payable ($120,000 x 0.85).................
100
99,960
2,040
Accounts Receivable Assigned....................... 120,000
Accounts Receivable............................
Cash...............................................
Accounts Receivable Assigned...................
76,000
Note Payable.......................................
Interest Expense ($102,000 x 0.13 x 1/12)..........
Cash...........................................
76,000
1,105
7,000
100
102,000
120,000
76,000
77,105
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3.
Oct 17
Oct 24
Oct 31
Oct 17
Oct 24
Oct 31
4.
Beaumont Beauty Supplies
Purchases
41,580
Accounts Payable
41,580
Accounts Payable
Cash
13,860
13,860
Accounts Payable
Discount Not Taken
Cash
27,720
280
Sun Products, Inc.
Accounts Receivable
Sales
28,000
42,000
42,000
Cash
13,860
Sales Discount
140
Accounts Receivable
14,000
Cash
28,000
Accounts Receivable
28,000
1997:
21205 x 100/108 = 19,718
20,000 - 19,718 = <282>
1996 Layer
1998:
19,718 x 1.00 = 19,718
23,305 x 100/120 = 19,421
19,718 - 19,421 = <289>
1996 Layer
19,421 x 1.00 = 19,421
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5.
Beginning inventory..................
Purchases............................
Freight-in...........................
Purchase returns.....................
Net markups..........................
Net markdowns........................
Less: Sales..........................
Cost
$ 6,250
20,500
1,000
(750)
-----$27,000
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Ending inventory at retail...........
Retail
$ 8,000
34,000
(1,000)
4,000
(1,000)
-----$44,000
(22,500)
-----$21,500
======
a.
$20,750
FIFO Cost-to-retail ratio: ------- = 0.576
$36,000
Ending inventory at FIFO cost: ($21,500 x 0.576) $12,384
b.
$27,000
Average Cost-to-retail ratio: ------- = 0.614
$44,000
Ending inventory at Average cost: ($21,500 x 0.614) $13,201