Accounting 303 Exam 3, Chapters 7-9 Fall 2013 Section Row

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1 Accounting 303 Name Exam 3, Chapters 7-9 Fall 2013 Section Row I. Multiple Choice Questions. (2 points each, 28 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation? a. Bank service charge. b. Deposit in transit. c. Interest earned on the account. d. Chargeback for NSF check. 2. Why would a company sell receivables to another company? a. To improve the quality of its credit granting process. b. To limit its legal liability. c. To accelerate access to amounts collected. d. To comply with customer agreements. 3. Sun Inc. factors $3,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. What would be recorded as a gain (loss) on the transfer of receivables? a. Loss of $150,000. b. Gain of $265,000. c. Loss of $565,000. d. Loss of $115, Geary Co. assigned $800,000 of accounts receivable to Kwik Finance Co. as security for a loan of $670,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Geary collected $220,000 on assigned accounts after deducting $760 of discounts. Geary accepted returns worth $2,700 and wrote off assigned accounts totaling $5,960. Entries during the first month would include a a. debit to Cash of $670,000. b. debit to Bad Debt Expense of $5,960. c. debit to Interest Expense of $13,400. d. debit to Accounts Receivable of $229,420. 1

2 5. At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 note receivable. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 (net) note receivable on its 2013 year-end balance sheet and $1,000 as sales revenue on its 2013 income statement. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively? a. Overstate, overstate, overstate, zero b. Overstate, understate, understate, understate c. Overstate, overstate, overstate, overstate d. Overstate, understate, understate, zero 6. What is "recourse" as it relates to selling receivables? a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected. 7. Goods in transit which are shipped f.o.b. shipping point should be included in the a. inventory of the seller. b. inventory of the buyer. c. inventory of the shipping company. d. cannot be determined from the information given. 8. 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. 9. In a period of rising prices, the inventory method which tends to give the highest reported net income is a. base stock. b. first-in, first-out. c. last-in, first-out. d. weighted-average. 10. Which of the following accounts is credited in the loss method of writing-down of inventory to its market value? a. Inventory b. Loss Due to Decline of Inventory to market c. Cost of Goods Sold d. Allowance to Reduce Inventory to Market 2

3 11. What is the effect of freight-in on the cost-to-retail ratio when using the conventional (LCM) retail method? a. Increases the cost-to-retail ratio. b. No effect on the cost-to-retail ratio. c. Depends on the amount of the net markups. d. Decreases the cost-to-retail ratio. 12. Muckenthaler Company sells product 2005WSC for $40 per unit. The cost of one unit of 2005WSC is $36, and the replacement cost is $35. The estimated cost to dispose of a unit is $8, and the normal profit is 40% of selling price. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market? a. $16. b. $32. c. $35. d. $ On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory on hand as of January 1 totaled $4,950,000. From January 1 through the time of the fire, the company made purchases of $2,049,000, incurred freight-in of $234,000, and had sales of $3,630,000. Assuming the rate of gross profit to selling price is 30%, what is the approximate value of the inventory that was destroyed? a. $6,144,000. b. $4,458,000. c. $4,692,000. d. $7,233, The original cost of an inventory item is above the replacement cost and the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. As a result, under the lower-of-cost-or-market method, the inventory item should be reported at the a. net realizable value less the normal profit margin. b. net realizable value. c. replacement cost. d. original cost. 3

4 II. Problems (72 points in total) Show all work where appropriate! 1. (15 points) Heliopolis Company entered into the following transactions and has an August 31 accounting year end. Heliopolis used the net method for both purchases and sales and uses the perpetual inventory method. Prepare the correct journal entry for each transaction. (a) On July 1, 2013, Heliopolis sold $9,500 of merchandise to a customer with terms 2/10, n/30. (b) On July 18, 2013, Heliopolis purchased merchandise on account, $9,000, terms 2/20, n/60. (c) On July 19, 2013, Heliopolis received the full payment due from the customer for the July 1 sale. (d) On August 2, 2013, Heliopolis paid the full payment due on the July 18 purchase. (e) On August 31, 2013, Heliopolis had the following balances: Accounts Receivable, $120,000 (debit); Allowance for Doubtful Accounts, $730 (credit); Sales, $510,000 (credit). Heliopolis accounts for bad debts based on 5% of accounts receivable. Make the year end adjusting entry. 4

5 2. (12 points) On December 31, 2013, Mabrouk Consulting Company finished consultation services and accepted as payment a zero interest bearing promissory note with a face value of $600,000 and a due date of December 31, The fair value of the services is not readily determinable and the current market interest rate for this note is 10%. Prepare the necessary journal entries for the following dates for this note. (a) December 31, (b) December 31, (c) December 31,

6 3. (13 points) The following information is available from Giza Products LTD s inventory record for January 1, 2014 through March 31, Units Unit Cost January 1, 2014 (beginning inventory) 1,600 $18.00 Purchases: January 5, ,600 $20.00 January 25, ,400 $21.00 February 16, ,000 $22.00 March 15, ,800 $23.00 A physical inventory on March 31, 2014, shows 2,000 units on hand. What is the ending inventory at March 31, 2014, under each of the following inventory methods? (a) Periodic FIFO (b) Periodic LIFO (c) Weighted-average (periodic average) 6

7 4. (15 points) On December 31, 2011, Sakkara Company adopted the dollar-value LIFO inventory method. The inventory value on that date was $250,000. Other inventory data are as follows: Inventory at Price index Year year-end prices (base year 2011) 2012 $259, , Compute the inventory at December 31, 2012 and 2013, using the dollar-value LIFO method for each year. a b c. Assume Sakkara uses an allowance account to reduce its inventory to LIFO and the balance in the allowance account is $28,750 (credit) before adjustment. Make the necessary adjustment at December 31,

8 5. (17 points) AirMall Department Store uses the LIFO retail inventory method to value its ending inventory. Information relating to the inventory at December 31, 2013, is as follows: Inventory, January 1, 2013: at cost, $70,800; at retail, $98,500 Purchases during 2013: at cost, $219,550; at retail, $294,000 Freight-in during 2013, $3,500; purchase discounts during 2013, $1,250 Net markups during 2013, $18,000; net markdowns during 2013, $21,300 Sales during 2013, $280,100; Sales returns during 2013, $2,600 At Cost At Retail a. Compute the December 31, 2013, ending inventory. Carry out ratio calculations to four decimal places (e.g.,.9999). b. What would be the cost ratio for AirMall for 2013 if they used the LCM (Conventional) Retail method? 8

9 Solutions Multiple Choice Question Answer Question Answer Problems 1 b 11 a 2 c 12 b 3 a 13 c 4 c 14 a 5 d 6 a 7 b 8 d 9 b 10 d Solution for Problem 1 (a) Accounts Receivable... 9,310 Sales... 9,310 (b) Inventory... 8,820 Accounts Payable... 8,820 (c) Cash... 9,500 Sales Discounts Forfeited Accounts Receivable... 9,310 (d) Accounts Payable... 8,820 Cash... 8,820 (b) Bad Debt Expense... 5,270 Allowance for Doubtful Accounts... 5,270 Solution for Problem 2 (a) Notes Receivable ,000 Discount on N/R ,192 Service Revenue ,808 (b) Discount on N/R... 40,981 Interest Revenue... 40, x.10 =

10 (c) Discount on N/R... 45,079 Interest Revenue... 45, = ; x.10 = Solution for Problem 3 a ,800 b ,800 c /9400=20.70; Solution for Problem 4 a Computation of Ending Inventory Ending Inventory at Base-Year Price Increase (Decrease) $259, = $249, , ,000 = (77) Layers at Ending Inventory Base-Year Prices Price Index at Dollar-Value LIFO 2011 Layer $249, = $249,923 b Computation of Ending Inventory Ending Inventory at Base-Year Price Increase (Decrease) $373, = $324, , ,923 = 74,425 Layers at Ending Inventory Base-Year Prices Price Index at Dollar-Value LIFO 2011 Layer $249, = $249, Layer $ 74, = 85,589 $335,512 10

11 (c) Cost of Goods Sold... 8,730 Allowance to Reduce Inventory to LIFO... 8, = 37488; = 8730 Solution for Problem 5 At Cost At Retail Beginning Inventory 70,800 98,500 Purchases 219, ,000 Purchases Discounts (1,250) Freight-In 3,500 Net Markups 18,000 Net Markdowns (21,300) 292, ,200 Sales (280,100) Sales Returns 2,600 Ending Inventory at Retail 111,700 Ending Inventory at Cost a. LIFO Retail Method 221,800/290,700 = ,700 98,500 = 13,200 increase End Retail Ratio End Cost Prior Year Layer 98,500 70,800 Current Year Layer 13, ,072 80,872 b. LCM Retail Method 292,600/410,500 =

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