Accounting 303
Exam 3, Chapters 7-9
Fall 2011
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and
indicate your answer by circling the letter preceding the one best answer.
1.
What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.
2.
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. Bank interest earned.
d. Error made on the company’s books.
3.
Why is the allowance method preferred over the direct write-off method of accounting for bad
debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.
4.
Which of the following statements is incorrect regarding the classification of accounts and
notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
5.
Equestrian Roads sold $80,000 of goods and accepted the customer's $80,000 10%
1-year note receivable in exchange. Assuming 10% approximates the market rate of return,
what would be the debit in this journal entry to record the sale?
a. No journal entry until cash is collected.
b. Debit Notes Receivable for $80,000.
c. Debit Accounts Receivable for $80,000.
d. Debit Notes Receivable for $72,000.
1
6.
On December 31, 2012, Flint Corporation sold for $100,000 an old machine having an original
cost of $180,000 and a book value of $80,000. The terms of the sale were as follows:
$20,000 down payment
$40,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this
type of transaction. What should be the amount of the notes receivable net of the unamortized
discount on December 31, 2012 rounded to the nearest dollar? (The present value of an
ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. $70,364
b. $90,364.
c. $80,000.
d. $140,728.
7.
If ending inventory is overstated,
a. net income is understated.
b. gross profit is overstated.
c. cost of goods sold is overstated.
d. the effect cannot be determined without more information.
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 cost
of goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. none of these.
10.
When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the
term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
11.
If a material amount of inventory has been ordered through a formal purchase contract at the
balance sheet date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
2
Use the following information for questions 12 and 13.
Transactions for the month of June were:
Date
Purchases
June 1 (balance) 1,200 @ $3.20 = 3,840
3
3,300 @ 3.10 = 10,230
7
1,800 @ 3.30 = 5,940
15
2,700 @ 3.40 = 9,180
22
750 @ 3.50 = 2,625
Date
June 2
6
9
10
18
25
Sales
900 @ $5.50
2,400 @ 5.50
1,500 @ 5.50
600 @ 6.00
2,100 @ 6.00
300 @ 6.00
12.
Assuming that periodic inventory records are kept, the ending inventory on a LIFO basis is
a. $6,165.
b. $6,240.
c. $6,435.
d. $6,705.
13.
Assuming that perpetual inventory records are kept, the ending inventory on a FIFO basis is
a. $6,165.
b. $6,240.
c. $6,705.
d. $6,435.
14.
Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of
2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a unit is $6,
and the normal profit is 40%. At what amount per unit should product 2005WSC be reported,
applying lower-of-cost-or-market?
a. $12.
b. $24.
c. $26.
d. $27.
15.
On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand as of
January 1 totaled $1,360,000. From January 1 through the time of the fire, the company made
purchases of $330,000 and had sales of $720,000. Assuming the rate of gross profit to selling
price is 40%, what is the approximate value of the inventory that was destroyed?
a. $1,360,000.
b. $1,346,000.
c. $970,000.
d. $1,258,000.
3
16.
Linguini, Inc. had an ending inventory valued at year-end costs of €127,200. Linguini had
adopted dollar-value LIFO at the beginning of the current year when its inventory value was
€100,000 (base year with index 1.00). If for the current year Linguini added a new layer to its
ending inventory (measured in base year amounts) of €20,000, what was the cost index for the
current year?
a. 1.06
b. 1.05
c. 1.025
d. 1.00
17.
Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be
used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is above the net realizable value.
c. when it is below the net realizable value and above the net realizable value less the normal
profit margin.
d. regardless of net realizable value.
4
II. Problems – (66 points in total) Show all work where appropriate!
1.
(10 points) Sofia Company uses the allowance method to account for its bad debts. The December
31, 2011, trial balance for Sofia before adjustment included the following:
Debit
Credit
Accounts receivable
$120,000
Allowance for doubtful accounts
730
Sales
$510,000
Sales returns and allowances
8,000
(a) Give the year end journal entry for bad debts expense assuming Sofia’s estimate is calculated as
5% of gross accounts receivable.
(b) Give the year end journal entry for bad debts expense assuming Sofia’s estimate is calculated as
1% of net sales.
(c) Give the entry for Sofia to write off an accounts receivable with a balance of $200.
5
2.
(14 points) On May 1, 2011, Blagoevgrad, Inc. factored $1,200,000 of accounts receivable with
Quick Finance on a without recourse basis. Under the arrangement, Blagoevgrad was to handle
disputes concerning service, and Quick Finance was to make the collections, handle the sales
discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total
accounts receivable factored and retained an amount equal to 2% of the total receivables to cover
sales discounts.
(a) Prepare the journal entry required on Blagoevgrad's books on May 1.
(b) Instead of factoring without recourse, assume Blagoevgrad factored their $1,200,000 of accounts
receivable with Quick Finance on a with recourse basis. Assume the recourse provision has a fair
value of $21,000. Prepare the journal entry required on Blagoevgrad's books on May 1.
6
3.
(12 points) Skopje Co. records purchases at net amounts and uses periodic inventories. Prepare
entries for the following transactions that took place in 2011:
June 11
15
20
July
7
Purchased merchandise on account, $8,000, terms 2/10, n/30.
Returned $500 of June 11 purchase and received credit on account.
Paid one-half of the invoice.
Paid the remaining amount due on the invoice.
Date
Entry
June 11, 2011
June 15, 2011
June 20, 2011
July 7, 2011
7
4.
(14 points) On December 31, 2011, Rila Ltd. 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)
2012
$281,400
1.05
2013
402,500
1.15
Compute the inventory at December 31, 2012 and 2013, using the dollar-value LIFO method for each
year.
2012
2013
8
5.
(16 points) When you undertook the preparation of the financial statements for Varna Company at
December 31, 2011, you determined that Varna uses the LIFO Retail method for their inventory
valuation, and the following data were available:
At Cost
At Retail
Inventory, January 1, 2011
$70,800
$ 98,500
Purchases
219,500
294,000
Purchases returns and allowances
4,300
5,500
In addition to the above information, you discovered that Net Markdowns were $15,000, Net
Markups were $53,000, Sales were $275,000, and Sales Returns were $10,000.
(a.) In the space provided below, recap the above information in a retail method format.
At Cost
At Retail
(b.) What is Varna’s December 31, 2011, inventory at cost using the LIFO Retail method?
_______________
(c.) If instead, Varna had used the LCM (conventional) Retail method, what would be the Cost Ratio
based on that method? (Do not give ending inventory value, just cost ratio carried out to 4 significant digits.)
_______________
(d.) If instead, Varna had used the Average Retail method, what would be the Cost Ratio based on that
method? (Do not give ending inventory value, just cost ratio carried out to 4 significant digits.)
_______________
9
Solutions
Multiple Choice
Question
Answer
Question
Answer
1
2
3
4
5
6
7
8
9
10
d
b
d
c
b
a
b
d
c
c
11
12
13
14
15
16
17
a
a
c
b
d
a
c
Problems
Solution for Problem 1
(a)
Bad Debt Expense .................................................................
Allowance for Doubtful Accounts ............................
Gross receivables
Rate
Total allowance needed
Present allowance
Adjustment needed
(b)
5,270
$120,000
5%
6,000
(730)
$ 5,270
Bad Debt Expense .................................................................
Allowance for Doubtful Accounts ............................
Sales
Sales returns and allowances
Net sales
Rate
Bad debt expense
(c)
5,270
5,020
5,020
$510,000
8,000
502,000
1%
$ 5,020
Allowance for Doubtful Accounts .........................................
Accounts Receivable .................................................
10
200
200
Solution for Problem 2
(a) Cash.............................................................................................. 1,104,000
Due from Factor (2% × $1,200,000) ..............................................
24,000
Loss on Sale of Receivables (6% × $1,200,000) ...........................
72,000
Accounts Receivable .....................................................
1,200,000
(b) Cash.............................................................................................. 1,104,000
Due from Factor ..........................................................................
24,000
Loss on Sale of Receivables .........................................................
93,000
Accounts Receivable ...........................................................
Recourse Liability ................................................................
1,200,000
21,000
Solution for Problem 3
Solution 8-149
June 11 Purchases (.98 × $8,000) .................................................
Accounts Payable.................................................
15 Accounts Payable (.98 × $500) ........................................
Purchase Returns and Allowances .......................
20 Accounts Payable.............................................................
Cash .....................................................................
July
7 Accounts Payable.............................................................
Purchase Discounts Lost ..................................................
Cash .....................................................................
7,840
7,840
490
490
3675
3675
3675
75
3750
Solution for Problem 4
At 12/31,
2012:
Ending
Inventory at
Base-Year Price
$281,400 ÷ 1.05
= $268,000
Layers at
Base-Year
Prices
$268,000
×
At 12/31,
2013:
$402,500 ÷ 1.15
= $350,000
$268,000
$82,000
×
×
11
Price Index
1.00
=
1.00
1.15
=
=
Ending Inventory
Dollar-Value LIFO
$268,000
$268,000
94,300
$362,300
Solution for Problem 5
(a)
At Cost
Beginning inventory, 5/1
Purchases
Purchase Returns
Markups (net)
Markdowns (net)
Available for sale
Sales
Sales discounts
Ending inventory at retail
$ 70,800
219,500
<4,300>
$286,000
At Retail
$ 98,500
294,000
<5,500>
53,000
<15,000>
$ 425,800
<275,000>
10,000
$ 160,000
(b)
2011 Layer
2012 Layer
At Retail
98,500
61,500
Cost Ratio
x
.71878
x
.6591
(c) LCM Ratio:
$286,000 ÷ $440,000 = .6500
(c) Average Ratio:
$286,000 ÷ $425,000 = .6729
12
At Cost
= 70,800
= 40,535
111,335