ACCT Professor Mayper SAMPLE EXAM EXAM II FALL I. Multiple Choice (33 pts.) Record answer in blank provided.

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1 ACCT Professor Mayper SAMPLE EXAM EXAM II FALL 2003 I. Multiple Choice (33 pts.) Record answer in blank provided. 1. Generally, which inventory costing method: a.) approximates most closely the current cost for Cost of Goods Sold and Ending Inventory; and b,) will give you the lowest Net Income? Assume increasing inventory levels over time and increasing prices. Cost of Goods Sold Ending Inventory Lowest Net Income a. FIFO LIFO FIFO b. LIFO FIFO FIFO c. FIFO FIFO FIFO d. FIFO FIFO LIFO e. LIFO LIFO LIFO f. LIFO FIFO LIFO g. FIFO LIFO LIFO h. LIFO LIFO FIFO 2. The original cost of an inventory item is below the replacement cost and below the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. Under the lower-of-cost-or-market method, the inventory item should be priced at its: a. replacement cost b. net realizable value c. net realizable value less the normal profit margin d. original cost 3. Which of the following items should be excluded in X company s inventory at the balance sheet date? a. Goods sold to a customer which are in transit and shipped f.o.b. destination. b. Y Company s Finished Goods held by X company for sale on consignment. c. Goods in transit which were purchased from our supplier f.o.b. destination. d. (a) and (b) should be excluded e. (a) and (c) should be excluded f. (b) and (c) should be excluded g. (a), (b) and (c) should be excluded

2 4. When a firm sells a receivable to a finance company and at the same time they do not transfer the risk of future collectibility, this is called: a. pledging a receivable b. collateralizing the receivable c. using the net method of factoring d. discounting the receivable e. transferring the receivable with recourse f. none of the above 5. KC Corporation's warehouse burned in the latter part of 19Y. Records rescued from a fireproof safe reveal: Beginning inventory... $100,000 Purchases ,000 Purchase returns... 9,000 Sales ,000 Mark up on Cost /3 % The best estimate of actual inventory loss (not considering insurance) is: a. $ 25,000 b. $ 62,500 c. $ 87,500 d. $ 91,667 e. $116,667 f. Cannot be estimated with the above information. 6. During 1999, Sloan, Inc. began a project to construct a new corporate headquarters. The following are costs incurred by Sloan for this project: " $1,000 government fine due to EPA land use restriction violations. " Interest of $147,000 on construction financing incurred during completion of construction. (10% of accumulated expenditures relate to the purchase of the land.) " Interest of $186,000 on construction financing paid after construction. (10% of accumulated expenditures relate to the purchase of the land.) " $12,000 architecture fees. " $65,000 cost of razing existing building on land. What amount of the above costs should be capitalized to the cost of the land? a. $ 65,000 b. $ 66,000 c. $ 77,000 d. $ 79,700 e. $ 80,700 f. $ 98,300 g. $ 99,300

3 7. The Aging of Accounts Receivable method emphasizes: a. The income statement and accurate valuation of the Net Realizable Value of Accounts Receivable. b. The balance sheet and accurate valuation of the Net Realizable Value of Accounts Receivable. c. The income statement and the matching principle. d. The balance sheet and the matching principle. e. All of the above are emphasized. Use the information below to answer questions (Round, if necessary, to nearest answer) DATE NUMBER OF UNITS AT UNIT PRICE TOTAL PRICE 1/1/02 Beginning inventory 800 $11.00 $8,800 2/3/02 Purchases ,000 6/5/02 Sales 875 units 12/10/02 Purchases , What is the 2002 Ending Inventory using LIFO Periodic Inventory System? a. 3,875 b. 3,975 c. 4,375 d. 5,959 e. 6,875 f. 7,425 g. 8,341 h. 9,925 i. 10,325 j. 10, What is the 2002 Cost of Goods Sold using a moving weighted average perpetual system? a. 3,875 b. 3,975 c. 4,375 d. 5,959 e. 6,875 f. 7,425 g. 8,341 h. 9,925 i. 10,325 j. 10,425

4 10. What is the 2002 Ending Inventory using LIFO Perpetual Inventory System? a. 3,875 b. 3,975 c. 4,375 d. 5,959 e. 6,875 f. 7,425 g. 8,341 h. 9,925 i. 10,325 j. 10, Beginning inventory is understated by $700; 2002 Ending inventory is overstated by $250. Assuming these errors are not caught and ignoring income taxes, 2003 Net Income will be: a. Overstated by $950 b. Understated by $950 c. Overstated by $250 d. Understated by $250 e. A correct balance.

5 II. BAD DEBTS (13 pts.) Beal company estimates their allowance for bad debts in a two step process. During the year, on a monthly basis, they record an estimate of bad debts as 2% of net credit sales. Their final adjusting entry at 12/31 is based on an aging of the accounts receivable as of 12/31. They provide you with the following information for the year 2000: Allowance for Bad Debts at 1/1/00: $ 22,000 CR Credit Sales from 1/1/00-11/30/00: 2,825,000 Credit Sales Returns 1/1/00-11/30/00, no returns occurred in December 125,000 Accounts written off as of 11/30/00, no accounts were written off in December. 28,575 Aging Schedule at 12/31/00: Day's Old Amount Est. Uncollectible 0-30 $250,000 1% ,000 15% 90 or > 40,000 60% REQUIRED: i. Record the SUMMARY journal entry for the accounts written off through 11/30/00. ii Record the SUMMARY journal entry for the monthly bad debt adjustments through 11/30/00. iii. Record the necessary adjusting entry at 12/31/00. iv. Total Bad Debt Expense for 2000 and the ending balance in the Allowance Account at 12/31/00 (after adjustment) is what? Bad Debt Expense Allow. for Bad Debts (12/31/00)

6 III. FIFO/LIFO COMPARISON (6 points) Income Statement and Balance Sheet information abstracted from the recent annual report of XION Technologies appear below: BALANCE SHEET ($ IN THOUSANDS) AT 12/31/ INVENTORIES $ 725 $ 674 INCOME STATEMENT ($ IN THOUSANDS) FOR THE YEAR ENDED 12/ NET SALES $8759 $8115 COST OF GOODS SOLD GROSS PROFIT $2609 $2807 FROM THE NOTES TO THE FINANCIAL STATEMENTS: INVENTORY IS VALUED AT LAST-IN FIRST-OUT (LIFO) BASIS. THE INVENTORY HAD A REPLACEMENT COST OF $976 THOUSAND AT YEAR END 2002 AND $959 THOUSAND AT YEAR END THE FIFO COST OF INVENTORY APPROXIMATES REPLACEMENT COST. Required: a. If FIFO inventory valuation is used, how much ending inventory would be reported on the balance sheet at 12/31/02? b. If FIFO inventory valuation is used, how much would cost of goods sold be for the year ended 12/31/02?

7 IV. Dollar Value LIFO (12 pts.) Basil Corp. adopts Dollar Value LIFO inventory in They pool all their inventory together. Their ending inventory (units and unit cost) at each year END for their two types of inventory is: Ending Inventory: Unit Unit Unit Unit Units Cost Total Units Cost Total Units Cost Total Units Cost Total x2 model 550 $12 $6, $11 $ 4, $19 $11, $24 $10,800 x5 model , , , ,500 FOR a. and b. ROUND ALL COST PRICE INDEXES TO 2 DECIMAL PLACES (e.g., 1.89) a. How much is the Base Layer Cost of the Inventory? b. What is the 2000 layer cost price index? Ignore the cost price indices derived for a. and b. above, ASSUME and USE the following cost price indices for the remainder of this problem: Base Layer: 1.00 (100%); 2000 New Layer: 1.10 (110%); 2001 New Layer: 1.25 (125%); 2002 New Layer 1.50 (150%). c. What is the Dollar Value LIFO ending inventory valuation at December 31, 2000? d. If purchases in 2001 are $84,000, what is the Cost of Goods Sold for the year 2001?

8 V. Retail Inventory Method (12 pts.) Presented below is information related to the Raffle Company's inventory for Cost Retail Beginning Inventory $ 62,000 $100,000 Purchases (net) 515, ,000 Net Additional Markups 20,250 Net Markdowns 38,723 Sales 632,000 Required: a. Provide the numbers to be used in calculating the cost-to-retail ratios for ending inventory, for each of the following methods. (you need only to provide the numerator & denominator for the ratios, rather than calculating the ratio itself). i. Average Cost-LCM (Conventional LCM) [ ] ii. Relevant Purchase layer ratio for LIFO Stable Dollar [ ] b. Calculate the Average Cost (NOT LCM) estimate of ending inventory. c. Assuming b. above, what is the estimate of the cost of goods sold expense for 2002? d. Now ASSUME that Raffle adopted dollar value LIFO-retail-inventory as of the beginning of Beginning inventory for 2002 is the base inventory. The price index at the end of 2002 was Use DOLLAR-VALUE-LIFO-RETAIL, and assume retail ending inventory current value is $71,550. What is the base value of the 2002 retail ending inventory? What will be the reported cost of the inventory on the 2002 balance sheet?

9 VI. Exchanges (12 points) In a similar exchange, the Stars traded a whirlpool to the Rangers for a smaller whirlpool on January 2, The following information is provided to you: Stars Cost of whirlpool and related accumulated depreciation (A/D) $850,000 (cost) and 640,000 (A/D) Cash RECEIVED from the Rangers $ 37,000 Fair value of Star s whirlpool $270,000 Rangers Cost of whirlpool and related accumulated depreciation (A/D) $930,000 (cost) and 630,000 (A/D) Cash PAID to the Stars $ 37,000 Fair value of Ranger s whirlpool $ -?- Assume a fair exchange (both parties agreed as to the fair values). i. What was the FAIR value of the Rangers s whirlpool at the time of the exchange? ii. What is the amount of the gain (loss) on exchange recognized by the Rangers? (identify whether this is a gain or a loss). iii. How much Boot did the Rangers receive in this exchange? iv. How much is the total IMPLIED Gain on the exchange for the Stars? v. What percentage of this total implied Gain (in iv above) will the Stars recognize?

10 VII. Interest Capitalization (12pts) Goodrich began construction on an office building on May 1, The following expenditures were incurred during 2002 for construction: Date Expenditures 5/1/02 $ 60,000 8/1/02 40,000 10/1/02 65,000 12/1/02 220,000 The expenditure on 5/1 was for the purchase of land for the office building. The office was completed on July 1, 2003 (14 months construction). On 1/1/02, a 2-year construction loan was obtained amounting to $150,000 at 5% interest. The only other debt outstanding during 2002 was a $700,000, 10%, 20-year bond payable dated January 1, i. The weighted average accumulated expenditures on the construction project for the year 2002 is how much? ii. How much is the actual interest cost incurred for 2002? iii. Independent of your answer in (i) above, assume the 2002 average accumulated expenditures for the construction project was $230,000. a. How much is total 2002 AVOIDABLE interest if the Average capitalization interest method is used? b. How much is total 2002 AVOIDABLE interest if the Specific capitalization interest method is used?

11 VIII. EXTRA CREDIT (3 POINTS) During Fiscal year 2002 the retailer JQ Penny s Sales Revenue increased 5% as compared to the prior year. Their Cost of Goods Sold Expense decreased 25% in 2002 as compared to This led to a 31% increase in Gross Profit levels for 2002 as compared to Since JQ Penny s started their business (78 years ago), there has tended to be inflation over time and in 2002 retail inventory costs have increased about 6%. Their year end inventory levels dropped dramatically in 2002 as compared to This was due to management s belief that there would be a severe economic downturn in early 2003 and they did not want to be overstocked. JQ Penny s uses Retail Dollar Value LIFO to account for inventory. What would most likely account for the dramatic decrease in cost of goods sold and increase in gross profit, given the above scenario?