Accounting 303 Exam 3, Chapters 7-9 Fall 2016

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1 Accounting 303 Exam 3, Chapters 7-9 Fall 2016 Name Row I. Multiple Choice Questions. (2 points each, 24 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. On August 31, 2016, Kay Company accepted a three-year non-interesting-bearing note for $605,000 as payment for the sale of merchandise sold to a customer. If the current market interest rate is 6%, what would be the amount credited to sales in the entry Kay would record on August 31, 2016? a. $500,000 b. $507,970 c. $553,661 d. $720, Delta accepted a three-year, noninterest-bearing note in exchange for merchandise sold. Which of the following is true? a. Delta would credit discount on notes receivable when recording the note. b. Delta would debit interest revenue in entries made over the life of the note. c. Delta would debit notes receivable when the note is collected. d. Delta would multiply sales revenue by the effective interest rate to determine interest revenue each period. 3. Zee Company began 2017 with accounts receivable of $400,000 and an allowance for uncollectible accounts of $20,000 (credit balance). Bad debt expense for the year was $33,000 and the ending balance in the allowance for uncollectible accounts account was $15,000. What was the amount of accounts receivable written off during the year? a. $405,000 b. $438,000 c. $38,000 d. $5, The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be a. FIFO. b. LIFO. c. weighted average. d. none of the answer choices is correct. 1

2 5. Gordon Company has the following data available: Units Total Transaction Units Sold Purchased Unit Cost Beginning Inventory 300 $10 $3000 March 1 Purchase 200 $12 $2400 April 25 Sale 350 June 10 Purchase 300 $14 $4200 July 20 Sale 250 October 30 Purchase 250 $15 $3750 December 15 Sale 300 Totals $13350 If Gordon Company uses a periodic FIFO inventory system, the cost of ending inventory on December 31 is a. $2,250. b. $1,907. c. $1,800. d. $1, For a company with an accounting year-end of December 31, ending inventory does not include a. goods shipped out on consignment. b. goods sold on December 31 with shipping terms of f.o.b. destination. c. goods sold on December 31 with shipping terms of f.o.b. shipping point. d. all the good described in a, b, and c would be included in ending inventory. 7. During periods when costs are rising and inventory quantities are stable, ending inventory will be a. higher under LIFO than FIFO. b. lower under average cost than LIFO. c. higher under average cost than FIFO. d. higher under FIFO than LIFO. 8. Groton Company sells product NorLoCo for $50 per unit. The cost of one unit is $45, and the cost to purchase new units of the product is $43 per unit. The estimated unavoidable selling cost of a unit is $10. At what amount per unit should this product be reported, applying lower-of-cost-or-nrv rule? a. $20. b. $40. c. $43. d. $ George Co. pledged $800,000 of its accounts receivable to Kuality Finance Co. as part of a financing arrangement. George received $670,000 in cash, was charged a 2% commission on the amount of the receivables, and the interest rate on the financing was 10%. What type of transaction was this? a. sale of accounts receivable without recourse b. sale of accounts receivable with recourse c. circularization of accounts receivable d. secured borrowing 2

3 10. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available: Sales, January 1 through July 8 $700,000 Inventory, January 1 130,000 Purchases, January 1 through July 8 640,000 Gross profit ratio 30% What is the estimated cost of inventory that was destroyed by fire? a. $192,000 b. $490,000 c. $510,000 d $280, Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage? a. Beginning inventory b. Net Markdowns. c. Purchases. d. Net Markups. 12. Under a periodic inventory system, if purchases made during the year were understated, which of the following is true after year-end after the books are closed? a. ending inventory understated b. retained earnings is understated c. gross profit is overstated d. cost of goods sold overstated 3

4 II. Problems (76 points in total) Show all work where appropriate! 1. (10 points) Izzet, Inc. entered into the following transactions and has an October 31 accounting year end. Izzet uses the net method for both purchases and sales and uses the perpetual inventory method. Prepare the correct journal entry for each transaction. (a) On November 1, 2016, Izzet sold $9,500 of merchandise to a customer with terms 2/10, n/30. The merchandise cost $6,200. (b) On November 8, 2016, Izzet purchased merchandise on account, $9,000, terms 1/20, n/60. (c) On November 9, 2016, Izzet received the full payment due from the customer for the November 1, 2016, sale. (d) On December 2, 2016, Izzet paid the full payment due on the November 8 purchase. 4

5 2. (9 points) The trial balance before adjustment of TurkCell Company reports the following balances. Answer the two independent parts of this question. Dr. Cr. Accounts receivable $750,000 Allowance for doubtful accounts 2,500 Sales (all on credit) $1,800,000 Sales returns and allowances 50,000 (a) Prepare the adjusting entry for estimated bad debts assuming that doubtful accounts are estimated to be 5% of gross accounts receivable. (balance sheet method) (b) Prepare the adjusting entry for estimated bad debts assuming that doubtful accounts are estimated to be 1.5% of net credit sales. (income statement method) 3. (9 points) On July 25, Petkim Company factored $650,000 of accounts receivable to Utley Finance Co. on a with recourse basis. Utley assessed a finance charge of 4% of the total accounts receivable factored and retained an amount equal to 10% of the total receivables to cover sales returns or discounts. Petkim Company estimates the fair value of the recourse provision is $12,000. Prepare the entry on July 25 on the Petkim Company books to record this arrangement. 5

6 4. (12 points) The following transactions took place for Vako, Inc. for the month of February. Purchases Sales February 1 (balance) $4.20 = $1,680 February 3 $7.00 = $2,100 4 $4.10 = $5, = $7, $4.40 = $3, = $3,000 What is Vako's cost of ending inventory under each of following methods? (Show calculations.) a. Periodic LIFO. b. Perpetual LIFO. 6

7 a (17 points) Aksa Mfg. Co. adopted the dollar-value LIFO inventory method on December 31, 2014 (its base year). The inventory on that date using the dollar-value LIFO inventory method was $150,000. Additional inventory data are as follows: Inventory at Price index Year year-end prices (base year 2014) 2014 $150, , , Required: Compute Aksa Mfg. Co. s inventory at December 31, 2015 and 2016, using dollar-value LIFO for each year. b

8 6. (19 points) The following information is available for a recent month for Migros Department store: Sales $420,200 Sales Returns $8,200 Net Markups $8,200 Net Markdowns $16,700 Fright-In $9,400 Purchases (at cost) $336,100 Purchases (at retail) $493,900 Purchase returns (at cost) $19,500 Purchase returns (at retail) $27,900 Beginning inventory (at cost) $54,205 Beginning inventory (at retail) $78,000 At Cost At Retail a. What is ending inventory using the average retail method? Round the cost ratio to four decimal places. (For example, = ) b. What is ending inventory using the LIFO retail method? Round the cost ratio to four decimal places. (For example, = ) 8

9 Solutions Multiple Choice Question Number Answer 1. b 2. a 3. c 4. a 5. a 6. c 7. d 8. b 9. d 10. d 11. b 12. c 9

10 Problem 1. (9 points) Izzet, Inc. entered into the following transactions and has an October 31 accounting year end. Izzet uses the net method for both purchases and sales and uses the perpetual inventory method. Prepare the correct journal entry for each transaction. (a) On November 1, 2016, Izzet sold $9,500 of merchandise to a customer with terms 2/10, n/30. The merchandise cost $6,200. A/R 9310 CGS 6200 Sales 9310 Inventory 6200 (b) On November 8, 2016, Izzet purchased merchandise on account, $9,000, terms 1/20, n/60. Inventory 8910 A/P 8910 (c) On November 9, 2016, Izzet received the full payment due from the customer for the November 1, 2016, sale. Cash 9310 A/R 9310 (d) On December 2, 2016, Izzet paid the full payment due on the November 8 purchase. A/P 8910 Interest Exp 90 Cash

11 Problem 2. (7 points) The trial balance before adjustment of TurkCell Company reports the following balances. Answer the two independent parts of this question. Dr. Cr. Accounts receivable $750,000 Allowance for doubtful accounts 2,500 Sales (all on credit) $1,800,000 Sales returns and allowances 50,000 (a) Prepare the adjusting entry for estimated bad debts assuming that doubtful accounts are estimated to be 5% of gross accounts receivable. (balance sheet method) x.05 = = Bad Debts Allowance for Uncollectible Accounts (b) Prepare the adjusting entry for estimated bad debts assuming that doubtful accounts are estimated to be 1.5% of net credit sales. (income statement method) = ; x.015 = Bad Debts Allowance for Uncollectible Accounts Problem 3 (8 points) On July 25, Petkim Company factored $650,000 of accounts receivable to Utley Finance Co. on a with recourse basis. Utley assessed a finance charge of 4% of the total accounts receivable factored and retained an amount equal to 10% of the total receivables to cover sales returns or discounts. Petkim Company estimates the fair value of the recourse provision is $12,000. Prepare the entry on July 25 on the Petkim Company books to record this arrangement. Cash 559,000 Rec from Factor 65,000 Loss on Sale 38,000 A/R 650,000 Recourse Lia 12,000 11

12 Problem 4. (10 points) The following transactions took place for Vako, Inc. for the month of February. Purchases Sales February 1 (balance) $4.20 = $1,680 February 3 $7.00 = $2,100 4 $4.10 = $5, = $7, $4.40 = $3, = $3, What is Vako's cost of ending inventory under each of following methods? (Show calculations.) a. Periodic LIFO = = b. Perpetual LIFO = = =

13 Problem /1.05 = = Layer x 1.0 = Layer x 1.05 = /1.15 = = <32174> 2015 Layer x 1.0 = Layer x 1.05 =

14 6. (15 points) The following information is available for a recent month for Migros Department store: Sales $420,200 Sales Returns $8,200 Net Markups $8,200 Net Markdowns $16,700 Fright-In $9,300 Answer: Cost Retail Beginning inventory $54,205 $78,000 Purchases $336,100 $493,900 Freight-In 9,400 Purchase returns ($19,500) ($27,900) Net Markups $8,200 Net Markdowns ($16,700) Cost Available for Sale 380, ,500 Purchases (at cost) $336,100 Purchases (at retail) $493,900 Purchase returns (at cost) $19,500 Purchase returns (at retail) $27,900 Beginning inventory (at cost) $54,205 Beginning inventory (at retail) $78,000 Sales ($420,200) Sales Returns 8,200 Ending inventory at retail $123,500 a. What is ending inventory using the average retail method? Round the cost ratio to four decimal places. (For example, = ) / = ,500 x.7100 = 87,685 b. What is ending inventory using the LIFO retail method? Round the cost ratio to four decimal places. (For example, = ) = 45, ,000/457,500 =.7126 Prior Year Layer = 54,205 Current Year Layer 45,500 x.7126 = 32,423 86,628 14