exam 2

Question 1

Ownership passes to the buyer when purchased goods are received by the buyer from a public carrier if the goods are shipped

Answer 1

FOB destination.

Question 2

At December 31, Moore Company’s inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following:

(1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3.

(2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2.

(3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6.

(4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4.

(5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company.

What is Moore’s correct ending inventory balance at December 31?

Answer 2

Do not include the following in a company’s inventory:
1. FOB destination purchases not yet received (i.e., $23,000)
2. FOB shipping point goods sold and shipped (i.e., $8,000)
3. Goods held on consignment (i.e., None)
Ending inventory = $400,000 - 23,000 - 8,000 =

$369,000

Question 3

Sales revenue is $1,000,000, cost of goods purchased is $480,000, beginning inventory is $40,000, and cost of goods sold is $440,000. How much is ending inventory?

Answer 3

$80,000

Question 3

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true?

Answer 3

The company using FIFO will have the highest ending inventory.

Question 3

Which of the following is true of the FIFO inventory method?

Answer 3

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

Question 4

company has the following:

                                                                  Units           Cost per unit

         Dec. 1         Beginning balance       72                  $90

         Dec. 14       Purchase                     124                  $94

         Dec. 21       Purchase                       88                  $98

The company sold 204 units at $126 each on December 23. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO?

Answer 4

Solution:
Sales revenue = 204 units x $126/unit = $25,704
Cost of goods sold using LIFO = (88 units x $98/unit) + [(204 – 88) x $94/unit] = $8,624 + 10,904 = $19,528
Gross profit = Sales revenue – Cost of goods sold = $25,704 – 19,528 =

$6,176

Question 5

When applying the lower of cost or market rule to inventory valuation, market generally means

Answer 5

current replacement cost.

Question 6

A company has three categories of inventory in stock:

Category

Cost

Market value

Tin

$400

$350

Stainless steel

200

150

Aluminum

300

500

Apply the lower of cost or market rule to determine the company’s ending inventory.

Answer 6

Solution:

LCM for Tin = $350

LCM for Stainless steel = $150

LCM for Aluminum = $300

Total LCM = $800

Question 7

A company has the following:

 Sales revenue, $2,200,000

 Beginning inventory, $220,000

 Ending inventory, $280,000

 Gross profit, $1,200,000

 Net income, $100,000

What is its inventory turnover ratio?

Answer 7

Solution:
Cost of goods sold is the difference between sales revenue and gross profit:
$2,200,000 - $1,200,000 = $1,000,000.
Inventory turnover ratio = Cost of goods sold divided by average inventory:
$1,000,000/[($220,000 + $280,000)/2] =

4.0.

Question 8

A company has the following:

 Net sales, $2,000,000

 Cost of goods sold, $960,000

 Beginning inventory, $25,000

 Ending inventory, $35,000

 Net income, $20,000

What is its days’ sales in inventory?

Answer 8

Days’ sales in inventory = 365 days x Ending inventory/Cost of goods sold

Days’ sales in inventory = 365 x $35,000/$960,000 = 13.3 days

Question 9

A company has the following:

 Dec. 1            Beginning inventory          15 units at $6.00

 Dec. 5            Purchases                            60 units at $6.60

 Dec. 14          Sale                                      40 units

 Dec. 21          Purchases                           30 units at $7.20

 Dec. 30          Sale                                      28 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?

Answer 9

Solution:
When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale

On Dec. 14, the company sold 40 units from the Dec. 5 layer of inventory.
On Dec. 30, the company sold 28 units from the Dec. 21 layer of inventory.

Cost of goods sold = (40 x $6.60) + (28 x $7.20) = 264 + 201.60 = $465.60

Question 10

A company has the following:

December 1     Beginning inventory of 15 units at $6.00 per unit
December 7     Purchased 60 units at $6.25 per unit
December 12   Sold 25 units
December 20   Purchased 30 units at $7.75 per unit
December 29   Sold 10 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

Answer 10

When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory.
On Dec. 12, the company sold 25 units.
On Dec. 29, the company sold 15 units.
Cost of goods sold is based on the last 35 units of inventory acquired; ending inventory includes the oldest 70 units of inventory = (15 x $6.00) + (55 x $6.25) = 90 + 343.75 = $433.75

Question 11

If the ending inventory is overstated, what occurs?

Answer 11

Assets are overstated and stockholders’ equity is overstated.

Question 12

When an uncollectible account is recovered after it has been written off, two journal entries are recorded. Which of the following accounts will be debited in these two journal entries?

Answer 12

First Accounts Receivable and second Cash

Question 13

On December 14, a company sold $5,000 of merchandise on account to a customer with terms 1/10, n/30. On December 20, the customer returned $1,200 of merchandise to the company. The company received no payments from that customer in December. On December 21, the company received $1,500 from a different customer for merchandise to be delivered in January. Assuming the company has only these two customers, what is its accounts receivable on December 31?

Answer 13

A customer bought $5,000 of merchandise on account but returned $1,200 for a net purchase of $3,800. The customer did not pay during December. Another customer paid in advance which the seller would record as an increase in cash—not accounts receivable—and an increase in unearned revenue.
Accounts receivable = $5,000 – 1,200 = $3,800

Question 14

A company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will the company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

Answer 14

The Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment; it should be credited for $10,000, and bad debt expense should be debited for $10,000.

Question 15

A company uses the allowance method for uncollectible accounts. Last year, a customer purchased $100 of services on account from the company. In the current year, the company is notified that the customer is bankrupt and will not pay the company the amount owed. What journal entry does the company record when it is notified that the customer will not pay?

Answer 15

debit Allowance for Doubtful Accounts and credit Accounts Receivable.

Question 16

During the current year, a company had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, the company also collected $5,800 from a customer whose account the company had written off as uncollectible in the prior year. As a result of these transactions, the current year change in the accounts receivable balance is a

Answer 16

Accounts receivable increase by sales on account, decrease when cash is collected on customers’ accounts, increased and decreased by equal amounts when previously written off accounts are recovered = $528,000 - 336,000 + 5,800 - 5,800 = $192,000
Cash sales do not affect accounts receivable

Question 17

At the start of the current year, a company’s allowance for doubtful accounts had a credit balance of $15,000. During the current year, it had net credit sales of $600,000 and it wrote-off $24,000 of accounts receivable as uncollectible. The company’s accounts receivable at the end of the year is $160,000. Past experience indicates that the allowance should be 10% of the balance in receivables. What is the bad debt expense for the year?

Answer 17

At the end of the period, accounts receivable has a balance of $160,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is has a balance equal to 10% of the end-of-period accounts receivable balance (i.e., given). So, the Allowance for Doubtful Accounts needs a credit balance of $16,000 (i.e., 10% x $160,000 = $16,000). Prior to recording the adjusting entry, it had a debit balance of $9,000 (i.e., credit balance of $15,000 but debited by $24,000 when receivables were written-off). In order to change the balance from a $9,000 debit balance to a $16,000 credit balance, the company needs to credit the Allowance for Doubtful Accounts by $25,000.

Question 18

At the start of the year, a company’s Allowance for Doubtful Accounts had a debit balance of $36,000. During the year, it had credit sales of $1,500,000. It also wrote-off $45,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 5% of the balance in receivables. If the accounts receivable balance at December 31 was $400,000, what is the bad debt expense for the year?

Answer 18

Bad debt expense = Ending accounts receivable times percent uncollectible minus the subtotal balance in the allowance
Bad debt expense = ($400,000 x 5%) + (36,000 + 45,000) = $101,000
Note: the allowance had a $36,000 debit balance that was debited by $45,000 producing a$ 81,000 debit balance, and the allowance needs to have a $20,000 credit balance. The adjustment is $101,000.

Question 19

The following information relates to the beginning of the year:
Accounts receivable, $150,000
Allowance for doubtful accounts (credit balance), $7,500
During the current year, sales on account were $850,000 and collections on account were $775,000. Also during the current year, the company wrote off $6,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have an $8,500 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

Answer 19

Ending accounts receivable, $150,000 + 850,000 - 775,000 - 6,000 = 219,000
Ending allowance for doubtful accounts, $8,500 (given)
Ending cash realizable value, $219,000 – 8,500 = 210,500
Beginning cash realizable value, $150,000 – 7,500 = $142,500
Increase (decrease) in cash realizable value, $210,500 – 142,500 = $68,000

Question 20

Which one of the following accounts is a temporary account?

Answer 20

Bad Debts Expense

Question 21

Which of the following is the correct sequence to report receivables on the balance sheet?

Answer 21

Accounts receivable, a 6-month note receivable, other receivable

Question 22

What is the maturity value of a $25,000, 12%, 3-month note receivable dated March 1?

Answer 22

The maturity value is the face value (i.e., principal) plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest.
Interest = Principal x interest rate x time = $25,000 x 12% x 3/12 = $750
Remember, all interest rates are annual interest rates unless designated otherwise.
Maturity value = Principal + interest = $25,000 + 750 = $25,750.
Chapter 8, Learning objective 4: Compute the interest on notes receivable.

Question 23

A company holds a $10,000, 120-day, 9% note issued by a corporation. What is the journal entry recorded by the company that holds the note when it matures assuming no interest has previously been accrued?

Answer 23

Debit Cash for $10,300, credit Notes Receivable for $10,000, and credit Interest Revenue for $300 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $10,000 × 9% × 120/360 = $300. Total cash received = $10,000 + 300 = $10,300.

Question 24

A company accepted $60,000 of Visa credit card charges for merchandise sold on July 1. The bank that issued the Visa card charges 4% for its credit card use. The company's journal entry to record this transaction will include a debit or debits to

Answer 24

Cash for $57,600 and Service Charge Expense for $2,400

Question 25

A company sells $200,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should include

Answer 25

The factor purchases the accounts receivable but charges a fee or commission. The company selling the receivables to the factor receives cash but charges the fee to an expense account. Debit cash for $196,000 (i.e., $200,000 - 2% x $200,000) Debit Service Charge Expense for $4,000 (i.e., 2% x $200,000) Credit accounts receivable by $200,000

Question 26

Which one of the following costs will not be included in the cost of equipment?

Answer 26

Maintenance costs

Question 27

A company acquires land for $140,000 cash. Additional costs are as follows: Removal of shed, $1,000 Filling and grading, $2,500 Salvage value of lumber of shed, $200 Broker commission, $4,000 Paving of parking lot, $13,000 Closing costs, $1,700 The company should record the acquisition cost of the land as

Answer 27

Solution: Purchase price, 140,000 Add: Removal of shed less salvages (i.e., 1,000 - 200), 800 Add: Filling and grading, 2,500 Add: Broker’s commission, 4,000 Add: Closing costs, 1,700 Acquisition costs of land, 149,000

Question 28

A change in the estimated useful life of equipment requires

Answer 28

that the amount of periodic depreciation be changed in the current year and in future years.

Question 29

A company purchased a plant asset for $45,000. It has a salvage value of $5,000 and a useful life of 8 years. It calculates depreciation using the straight-line method. The balance of the company's Accumulated Depreciation account at the end of the current year after-adjusting entries is $25,000. What is the asset's remaining useful life?

Answer 29

Depreciation per year = (Cost – salvage value)/Useful life Solving for useful life: Useful life = ($45,000 - 5,000)/8 years = $5,000 per year Years expired = Accumulated depreciation/Depreciation per year = $25,000/$5,000 = 5 years Remaining life = Useful life – Years expired = (8 - 5) = 3 years.

Question 30

A company purchased machinery for $125,000 on July 1, 2021. The company also paid freight charges of $10,000 and installation costs of $15,000. It is estimated that the machinery will have a $20,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

Answer 30

Depreciation per year = ($125,000 + 10,000 + 15,000 – 20,000)/5 years = $26,000 per year Accumulated depreciation after 1.5 years = $26,000 x 1.5 = $39,000

Question 31

On September 1, a company purchased equipment for $25,000. The equipment’s estimated salvage value is $3,400. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

Answer 31

$1,800 debit to Depreciation Expense and a $1,800 credit to Accumulated Depreciation. Straight-line annual depreciation per year = (Cost – Salvage value)/Life = (25,000 – 3,400)/4 = $5,400 per year The correct adjusting entry to record depreciation for 4 months (i.e., September 1 through December 31) is $5,400 per year x 4/12 = $1,800. The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

Question 32

A company purchased a truck for $50,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 8 years with an estimated salvage value of $10,000. At the end of the fourth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the fourth year?

Answer 32

For the first three years, the annual depreciation expense is ($50,000 - $10,000)/8 years = $5,000 per year. In the fourth year, before depreciation is recorded, the asset’s book value is ($50,000 – 3 x 5,000 = $35,000), and this remaining book value should be depreciated to the asset’s revised salvage value over the asset’s remaining estimated useful life: ($35,000 - $2,000)/(6-3) = $11,000.

Question 33

In the current year, a company sold equipment for $20,000. The original cost was $80,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

Answer 33

The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $8,000 = $12,000 gain.

Question 34

A plant asset with a cost of $480,000 and accumulated depreciation of $456,000 is sold for $56,000. What is the amount of the gain or loss on disposal of the plant asset?

Answer 34

Book value = Cost - Accumulated depreciation =$480,000 - 456,000 = $24,000 Since the sales price is more than the book value the company recognizes a gain, computed as follows: Gain = Sales proceeds from selling the asset - Book value of the asset sold Gain = $56,000 - 24,000 = $32,000

Question 35

A company has the following: Net income for the current year is $390,000 Net income for the prior year was $350,000 Net sales for the current year is $4,100,000 Net sales for the prior year were $3,800,000 Total assets as of the end of the current year is $4,000,000 Total assets as of the end of the prior year was $3,000,000 What is the company’s total asset turnover ratio for the current year?

Answer 35

Total assets turnover = Net sales/Average total assets Total asset turnover = $4,100,000/[($3,000,000 + 4,000,000)/2] = 1.17 or 1.17 times per year

Question 36

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Research and development $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 2,500,000 Equipment 1,500,000 Patents 2,000,000

Answer 36

for this company, intangibles include trademarks, goodwill, and patents. Intangibles = $1,000,000 + 2,500,000 + 2,000,000 = $5,500,000

Question 37

On April 1, a company purchased a patent for $90,000. The patent had been issued exactly 10 years earlier to another party. The company's amortization expense for the current year would be

Answer 37

Amortization expense = $90,000/10 years x 9/12 = $6,750

Question 38

A company purchased a truck for $100,000 on January 1 of its first year. The company uses the units-of-activity method and it estimates that the truck’s useful life will be 150,000 miles. The truck will have an estimated salvage value of $10,000. The company drives the truck 15,000 miles in the first year and drives it 25,000 miles in the second year. How much accumulated depreciation will be reported on the company’s balance sheet as of the end of the second year?

Answer 38

The depreciation rate to use for units-of-activity is calculated as: (Cost - Salvage value)/Total activity expected. To compute accumulated depreciation at the end of two years, the depreciation rate (i.e., per mile) should then be multiplied by the units of activity (i.e., miles driven) for both years. Depreciation rate = ($100,000 – 10,000)/150,000 miles = $0.6 per mile Accumulated depreciation = (15,000 + 25,000) x $0.6 per mile = $24,000