Accounting 303
Exam 3, Chapters 7-9
Fall 2016
I.
Name _______________________
Row _______
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. $720,565
2. 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. $5,000
4. 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.
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5. Gordon Company has the following data available:
Transaction
Beginning Inventory
March 1 Purchase
April 25 Sale
June 10 Purchase
July 20 Sale
October 30 Purchase
December 15 Sale
Totals
Units Sold
Units
Purchased
300
200
Unit Cost
$10
$12
Total
$3000
$2400
300
$14
$4200
250
$15
$3750
350
250
300
900
1050
$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. $1,500.
6. 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. $45.
9. 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
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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 $280,000
11. 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
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.
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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.
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4.
(12 points) The following transactions took place for Vako, Inc. for the month of February.
Purchases
February 1 (balance) 400 @ $4.20 = $1,680
4
1,300 @ $4.10 = $5,330
14
700 @ $4.40 = $3,080
February 3
6
18
Sales
300 @ $7.00 = $2,100
1,000 @ 7.00 = $7,000
400 @ 7.50 = $3,000
What is Vako's cost of ending inventory under each of following methods? (Show calculations.)
a. Periodic LIFO.
b. Perpetual LIFO.
6
5.
(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:
Year
2014
2015
2016
Inventory at
year-end prices
$150,000
231,000
216,000
Price index
(base year 2014)
100
105
115
Required: Compute Aksa Mfg. Co.’s inventory at December 31, 2015 and 2016, using dollar-value
LIFO for each year.
a.
2015
b.
2016
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6.
(19 points) The following information is available for a recent month for Migros Department store:
Sales
Sales Returns
Net Markups
Net Markdowns
Fright-In
$420,200
$8,200
$8,200
$16,700
$9,400
Purchases (at cost)
Purchases (at retail)
Purchase returns (at cost)
Purchase returns (at retail)
Beginning inventory (at cost)
Beginning inventory (at retail)
At Cost
$336,100
$493,900
$19,500
$27,900
$54,205
$78,000
At Retail
a.
What is ending inventory using the average retail method? Round the cost ratio to four decimal
places. (For example, 0.40127 = 0.4013)
b.
What is ending inventory using the LIFO retail method? Round the cost ratio to four decimal places.
(For example, 0.40127 = 0.4013)
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Solutions
Multiple Choice
Question
Number
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Answer
b
a
c
a
a
c
d
b
d
d
b
c
9
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
Cash
90
9100
10
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)
750000 x .05 = 37500
37500 + 2500 = 40000
Bad Debts
40000
Allowance for Uncollectible Accounts
40000
(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)
1800000 - 50000 = 1750000;
1750000 x .015 = 26250
Bad Debts
26250
Allowance for Uncollectible Accounts
26250
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
Rec from Factor
Loss on Sale
A/R
Recourse Lia
559,000
65,000
38,000
650,000
12,000
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Problem 4.
(10 points) The following transactions took place for Vako, Inc. for the month of February.
Purchases
February 1 (balance) 400 @ $4.20 = $1,680
4
1,300 @ $4.10 = $5,330
14
700 @ $4.40 = $3,080
2400
February 3
6
18
Sales
300 @ $7.00 = $2,100
1,000 @ 7.00 = $7,000
400 @ 7.50 = $3,000
1700
What is Vako's cost of ending inventory under each of following methods? (Show calculations.)
a. Periodic LIFO.
400 @ 4.20 = 1680
300 @ 4.10 = 1230
2910
b. Perpetual LIFO.
400 @ 4.20
100 @ 4.20
1300 @ 4.10
100 @ 4.20
300 @ 4.10
700 @ 4.40
100 @ 4.20 =
300 @ 4.10 =
300 @ 4.40 =
420
1230
1320
2970
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Problem 5
2016
231000/1.05 = 220000
220000 – 150000 = 70000
2015 Layer 150000 x
2016 Layer 70000 x
1.0 = 150000
1.05 = 73500
223500
2017
216000/1.15 = 187826
187826 – 220000 = <32174>
2015 Layer 150000 x
2016 Layer 37826 x
1.0 = 150000
1.05 = 39717
189717
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6.
(15 points) The following information is available for a recent month for Migros Department store:
Sales
Sales Returns
Net Markups
Net Markdowns
Fright-In
$420,200
$8,200
$8,200
$16,700
$9,300
Purchases (at cost)
Purchases (at retail)
Purchase returns (at cost)
Purchase returns (at retail)
Beginning inventory (at cost)
Beginning inventory (at retail)
$336,100
$493,900
$19,500
$27,900
$54,205
$78,000
Answer:
Cost
$54,205
$336,100
9,400
($19,500)
Beginning inventory
Purchases
Freight-In
Purchase returns
Net Markups
Net Markdowns
Cost Available for Sale
_______
380,205
Sales
Sales Returns
Ending inventory at retail
a.
($27,900)
$8,200
($16,700)
535,500
($420,200)
8,200
$123,500
What is ending inventory using the average retail method? Round the cost ratio to four decimal
places. (For example, 0.40127 = 0.4013)
380205/535500 = .7100
b.
Retail
$78,000
$493,900
123,500 x .7100 = 87,685
What is ending inventory using the LIFO retail method? Round the cost ratio to four decimal places.
(For example, 0.40127 = 0.4013)
123500 – 78000 = 45,500
Prior Year Layer
Current Year Layer
326,000/457,500 = .7126
= 54,205
45,500 x .7126 = 32,423
86,628
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