BUS 321 - Intermediate Financial Accounting 1 Burnett Fall Quarter 2013 Exam 1 NAME: This exam is scheduled to be 110 minutes long. Please make sure you have 7 pages including this page. Do not start working on this exam until instructed to do so. This is a closed book, closed notes exam. The use of any electronic device other than a dedicated calculator (i.e., any device that performs functions other than arithmetic operations) constitutes unauthorized assistance. Students found to be in possession of such a device during the exam will be given a score of zero. Cash 1. CASH EQUIVALENTS Instead of 'cash,' most companies report 'cash and cash equivalents.' Briefly define cash equivalents and state two examples. 2. BANK RECONCILIATION The Balance per Bank Statement is $17,394.60. Calculate the correct cash balance. in addition, you are given the following information 1,225.00 Deposit in transit 5,839.70 Outstanding checks 1,800.00 credit memo for a note the bank collected on our behalf 105.00 interest income credited to our account 70.00 returned check NSF 3. BANK RECONCILIATION The balance per the Gen. Ledger $10,944.90. Calculate the correct cash balance? in addition, you are given the following information 1,225.00 Deposit in transit 5,839.70 Outstanding checks 1,800.00 credit memo for a note the bank collected on our behalf 105.00 interest income credited to our account 70.00 returned check NSF 4. Bank Reconciliation Given the information in the previous problems, prepare the entry you would make as a result of the bank reconciliation. Receivables 5. TRADE RECEIVABLES Describe the difference between Trade Discounts and Sales (or cash) Discounts. RECEIVABLES NET METHOD On July10 th we sold merchandise with an invoice price of $30,000 having terms 3/10 n/30 (ignore cost of goods sold/inventory). Prepare the following three entries: 6. On July 10 th to record the sale 7. On July 13 th when the customer returns goods having an invoice price of $4,000 8. On July 18 th when we receive a $10,000 check from the customer. 9. RECEIVABLES GROSS VS. NET METHOD Conceptually, which method of initial measurement of accounts receivable better represents the economic substance of a credit sales transaction that offers terms 2/10, n/30? Please explain why to earn any points. It may help to begin by describing the economic substance of the transaction. 10. BAD DEBT EXPENSE / ALLOWANCE FOR DOUBTFUL ACCOUNTS BURNETT MOTOR CO. had $1,250,000 credit sales. Accounts Receivable had a $209,600 debit balance and Allowance for Doubtful Accounts had a $4,280 credit balance, before adjustments. Prepare the entry to record Allowance for Doubtful Accounts if BURNETT MOTOR CO ages accounts receivables to estimate uncollectible accounts. amount age est % uncollectibe 150,000 < 30 2.0% 30,000 31-60 5.0% 20,000 61-90 10.0% 9,600 >90 40.0% 11. BAD DEBT EXPENSE / ALLOWANCE FOR DOUBTFUL ACCOUNTANTS BURNETT MOTOR CO. ended the year with accounts receivable of $1,300,000 and a $36,000 debit balance in Allowance for Doubtful Accounts. Credit Sales totaled $5,000,000. We calculate Bad Debt Expense based on an estimate that 1.5% of net credit sales will prove uncollectible. What will be the balance in the Allowance for Doubtful Accounts after the adjustment? 12. WRITE OFF Prepare the entry to write off Wm. Tell s account which has a balance of $2,500 assuming the company uses the allowance method. 13. What effect does the entry to write off Wm. Tell s account have on Total Current Assets? What dollar effect will the entry have on Net Income (ignore income taxes)? Current Assets $ increase decrease no effect on CA Net Income $ increase decrease no effect on NI Use this information to calculate ratios for the following problem. 12/31/09 12/31/08 Sales 4,800.00 4,750.00 Cost of goods sold 2,880.00 3,000.00 Gross profit 1,920.00 1,750.00 Accounts receivable 600.00 583.60 Inventory 450.00 510.00 14. ACCOUNTS RECEIVABLE For 2009, calculate the 1) average collection period (assume a 365 day year) and 2) receivables turnover ratio. 1
SALE OF RECEIVABLES Use the following information to answer the following two questions. On June 30, 2013, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $400,000 in receivables to Dogwood with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $25,000 (ignoring the factoring fee). 15. Prepare any necessary journal entry or entries if receivables are factored under Option One. 16. Prepare any necessary journal entry or entries if receivables are factored under Option Two. Inventory 17. WHAT S INCLUDED IN INVENTORY? The Tucson Corporation's fiscal year ends on December 31. Tucson determines inventory quantity by a physical count of inventory on hand at the close of business on December 31. The company's controller has asked for your help in deciding if the following items should be included in the ending inventory. Please state next to each item include or exclude. 1. Goods purchased from a vendor shipped f.o.b. shipping point on December 24 that arrived on January 4. 2. Goods shipped f.o.b. shipping point on December 27 arrived at the customer's location on January 4. 3. Goods purchased from a vendor shipped f.o.b. destination on December 27 that arrived on January 5. 4. Freight charges on goods purchased in 3. 5. Merchandise held on consignment for Masterwear, Inc. 18. LOWER OF COST OR MARKET US GAAP requires inventory to be valued at the lower of cost or market (LCM). Why? Please explain what the floor is in LCM and why it exists? 2
PURCHASES GROSS METHOD - PERPETUAL INVENTORY SYSTEM On July 3 rd, 2013 BURNETT MOTOR CO. purchased merchandise with an invoice price of $50,000 having terms 2/10 n/60 fob destination. The supplier shipped the merchandise on July 4 th. We receive the merchandise on July 5 th. Prepare the following three entries: 19. Prepare the entry to record the purchase with the correct date (xx/xx/2013). 20. On July 10 th we return goods having an invoice price of $12,000. PURCHASES NET METHOD - PERIODIC INVENTORY SYSTEM On July 3 rd, 2013 BURNETT MOTOR CO. purchased merchandise with an invoice price of $50,000 having terms 2/10 n/60 fob shipping point. The supplier shipped the merchandise on July 4 th. We receive the merchandise on July. 5 th. Prepare the following three entries: 21. Prepare the entry to record the purchase with the correct date (xx/xx/2013). 22. On July 12 h when we write a check for $15,000 to pay on our account. 23. On July 29 th when we write a check to pay the remaining balance in or account. COST FLOW ASSUMPTIONS - PERIODIC BURNETT MOTOR CO. sold 80 units for $25 each. Use the following information for the next two problems: qty cost beginning 15 15.00 225 purchase 30 13.00 390 purchase 55 12.00 660 available 100 1,275 sold 80 inventory 20 24. Prepare the closing entry, using Average Cost / Periodic to calculate Cost of Goods Sold and ending Inventory. 25. Use LIFO - Periodic to calculate Cost of Goods Sold and ending Inventory. 3
COST FLOW ASSUMPTIONS - PERPETUAL Use the information presented below to for the next two problems: Purchases Sales Qty Cost qty price 2-Jan 10 15 150 4-Jan 5 20 14-Jan 35 13 455 15-Jan 25 20 24-Jan 20 12 240 28-Jan 10 20 26. FIFO - PERPETUAL. Calculate Cost of Goods Sold for the month using FIFO perpetual. 27. LIFO - PERPETUAL. Calculate Ending Inventory using LIFO perpetual. 28. LOWER OF COST OR MARKET Calculate Market for each of the products in the following table A1 A2 B11 B12 Selling price 50 50 50 50 Normal profit 16 18 18 20 Direct selling costs 10 5 5 0 Replacement cost 20 46 28 28 MARKET (fill in) 4
part no qty cost market 101 20 85.00 88.00 201 12 75.00 70.00 301 15 65.00 55.00 401 10 55.00 57.00 29. LOWER OF COST OR MARKET Use the information in the above table to calculate Lower of Cost or Market on an item by item basis. What amount is total ending inventory? 30. LOWER OF COST OR MARKET Assume that the company in question 29 uses an Allowance for Loss on Inventory for LCM adjustments. The company has two options for how to report the reduction on the income statement. Please write the journal entry to record the LCM adjustment in question 29 for each option and state when each option is preferred. 5