Accounting 303 Exam 3, Chapters 7-9

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1 Accounting 303 Exam 3, Chapters 7-9 Spring 2012 Name Row I. 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 Credit Sales $850,000 Sales returns and allowance $28,000 Accounts receivable 86,000 Allowance for doubtful accounts 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, 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. 1

2 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, What amount is recorded as the credit to cash on May 31? a. $20,000 b. $19,600 c. $18,500 d. $18, 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. 2

3 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. $ 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 ,500,000 Sales during ,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. 3

4 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. 4

5 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, 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? 5

6 3. (15 points) During June, the following changes in inventory item 27 took place: June 1 Balance 1,400 $24 = 33, Purchased 800 $36 = 28, Purchased 700 $30 = 21,000 8 Sold 400 $50 = 20, Sold 1,000 $40 = 40, Sold 600 $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. 6

7 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, , Compute the inventory at December 31, 2013 and 2014, using the dollar-value LIFO method for each year

8 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 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? 8

9 Solutions Multiple Choice Question Answer Question Answer 1 d 11 c 2 a 12 d 3 c 13 b 4 b 14 c 5 b 15 a 6 d 7 b 8 d 9 c 10 a Problems Solution for Problem 1 (a) Cash ,000 Interest Expense... 30,000 Notes Payable ,000 (b) Cash ,000 Sales Discounts Allowance for Doubtful Accounts... 1,060 Accounts Receivable ,960 (c) Notes Payable ,000 Interest Expense... 8,500 Cash ,500 9

10 Solution for Problem 2 (a) Notes Receivable ,000 Discount on N/R ,211 Sales ,789 (b) Discount on N/R... 45,079 Interest Revenue... 45,079 (c) Discount on N/R... 49,587 Interest Revenue... 49,587 (d) 149,211 Solution for Problem 3 (a) $30 = $21,000 $36 = 7,200 $28,200 (b) $36 = $28,800 $30 = 3,000 $31,800 (c) 83,400/2,900 = 28.76; = 25,883 Solution for Problem 4 Ending Layers at Inventory at Base-Year Ending Inventory Base-Year Price Prices Price Index Dollar-Value LIFO At 12/31, 270, , $270, = $270,000 At 12/31, $387, $270, = $270, : = $372, , = 106,600 $376,000 At 12/31, $403, $270, = $270, : = $360,000 $90, = 93,600 $363,600 10

11 Solution for Problem 5 (a) At Cost At Retail Beginning inventory, 5/1 $ 146,000 $ 220,000 Purchases 480, ,000 Freight in 80,000 Markups (net) 160,000 Markdowns (net) <60,000> Available for sale $ 706,000 $ 1,020,000 Sales <750,000> Ending inventory at retail $ 270,000 (a) (b) / = ,000 x.6537 = 176, / = Layer 220,000 = 146, Layer 50,000 x.7000 = 35, ,000 11

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