D Pdf Sample Exam 2

EXAM #2 SAMPLE PROBLEMS (Lessons 5 - 10)

Use the following information to respond to problems 1 - 6 assuming Zee Corp. maintains their inventory records on a perpetual basis: 1/12 1/13 1/22 1/24 1/25 2/2

Zee Corp., a wholesaler of unicycles, buys 20 unicycles on account from a supplier at $100/unit with terms of 2/10,n/30. Zee returns one of the unicycles to the supplier because of a defect and receives credit on their account. Zee pays the supplier in full (net of the discount) for the 1/12 purchase. Zee sells 10 of the unicycles purchased on 1/12 to a customer for $200/unit on account with terms of 1/10,n/30. The customer returns one of the unicycles for credit on account (assume the unicycle is in good condition and can be resold). The customer pays in full the net amount due from the 1/24 sale, net of the discount.

1.

Zee’s journal entry to record the 1/12 transaction would be a. Purchases 2,000 Accounts Payable 2,000 b. Inventory 2,000 Accounts Payable 2,000 c. Purchases 1,960 Accounts Payable 1,960 d. Accounts Payable 2,000 Inventory 2,000 e. None of the above

2.

Zee’s journal entry to record the 1/13 transaction would include a credit to a. Purchases for $98. b. Purchases for $100. c. Accounts Payable for $98. d. Inventory for $100. e. None of the above.

3.

Zee’s journal entry to record the 1/22 transaction would include a credit to a. Cash for $1,900. b. Accounts Payable for $1900. c. Inventory for $38. d. Purchases for $38. e. None of the above.

4.

Zee’s journal entry to record the 1/24 transaction will include debits to a. Accounts Receivable for $2,000 and Cost of Goods Sold for $1,000. b. Sales Revenues for $2,000 and Inventory for $1,000. c. Accounts Receivable for $1,980 and Cost of Goods Sold for $1,000. d. Accounts Receivable for $2,000 and Cost of Goods Sold for $980. e. None of the above.

5.

Zee’s journal entry to record the 1/25 transaction will include debits to a. Sales Returns and Allowances and Inventory. b. Accounts Receivable and Cost of Goods Sold. c. Accounts Receivable and Inventory. d. Sales Revenues and Cost of Goods Sold. e. None of the above.

6.

Zee’s journal entry to record the 2/2 transaction will include a debit to a. Cash for $1,800. b. Accounts Receivable for $1,800. c. Sales Discounts for $18. d. Sales Revenues for $18. e. None of the above.

7.

Which of the following accounts is a contra asset account? a. Sales Discounts b. Sales Returns and Allowances c. Unearned Rental Revenue d. Both a and b. e. None of the above.

8.

Before closing entries at the end of any accounting period, Sales Discounts will typically have a. a debit balance. b. a credit balance. c. no balance. d. Sales discount is not an account that is typically used.

9.

Given the following information: Sales Revenues Sales Returns and Allowances Sales Discounts Selling Expenses Administrative Expenses

$100,000 7,000 3,000 20,000 15,000

and assuming Cost of Goods Sold as a percentage of Net Sales Revenues equals 40%, then the Gross Margin would amount to: a. $19,000. b. $34,000. c. $40,000. d. $54,000. e. $60,000.

10.

Sales Discounts and Sales Returns and Allowances are accounts that are a. utilized to improve management information on lost revenues due to sales return policies and discount offers to customers. b. not required under GAAP but are typically utilized by companies in their accounting for customer returns and discounts. c. deducted from Sales Revenues in the determination of Net Sales Revenues. d. closed to Retained Earnings at the end of an accounting period. e. All of the above are true.

11.

An adjustment at the end of an accounting period for uncollectible accounts receivable is necessary under GAAP to comply with the a. Realization Concept. b. Revenue Recognition Principle. c. Matching Principle. d. Cash Basis of Accounting. e. None of the above.

12.

On December 31, before adjusting for Uncollectible Accounts Receivable for the period, Accounts Receivable has a debit balance of $80,000, and the Allowance for Uncollectible Accounts has a credit balance of $2,500. If 6% of ending Accounts Receivable are estimated to be uncollectible, a. the balance of the Allowance for Uncollectible Accounts should be $2,000 after adjustment. b. the balance of the Allowance for Uncollectible Accounts should be $1,200 after adjustment. c. Uncollectible Accounts Expense for the year should be $10,800. d. the balance of the Allowance for Uncollectible Accounts should be $4,800 after adjustment. e. None of these.

13.

If the 12/31/X3 balance of Accounts Receivable is $40,000 and the balance of the Allowance for Uncollectible Accounts Receivable is a debit balance of $1,500 before any year-end adjustment, the adjusting entry required given uncollectible accounts receivable are estimated a 10% of the balance of Accounts Receivable would require a debit to a. Bad Debt Expense for $4,000. b. Bad Debt Expense for $5,500. c. Bad Debt Expense for $3,500. d. Allowance for Uncollectible Accounts Receivable for $4,000. e. None of the above.

14.

The net realizable value of accounts receivable amounts to a. Accounts Receivable less Bad Debt Expense. b. Bad Debt Expense plus the Allowance for Uncollectible Accounts Receivable. c. Accounts Receivable less the Allowance for Uncollectible Accounts Receivable. d. Net Sales Revenues less Bad Debt Expense. e. None of the above.

15.

Given the following information at the end of the year: Days Past Due Current 0 - 30 days 30 - 60 days 60 - 90 days 90 + days

Accounts Receivable $100,000 $ 50,000 $ 20,000 $ 10,000 $ 8,000 $188,000

Est. Uncollectible 1% 3% 5% 20% 40%

And assuming Net Credit Sales Revenues for the year amounted to $800,000 and the balance in the Allowance for Uncollectible Accounts Receivable account is a credit balance of $500 before adjustment, then the adjusting entry for Bad Debt Expense at the end of the year will include a credit to a. Bad Debt Expense for $8,700. b. Allowance for Uncollectible Accounts Receivable for $9,200. c. Allowance for Uncollectible Accounts Receivable for $8,700 d. Bad Debt Expense for $9,200. e. None of the above. 16.

At the beginning of the year Jones Company had a $50,000 balance in Accounts Receivable. During the year, total sales made on account amounted to $210,000 and total cash collections from customers on accounts receivable amounted to $199,000. In addition, $3,000 in uncollectible accounts receivable were actually written off the books. Determine the balance of accounts receivables before any adjustment for estimated uncollectible accounts receivable for the year. a. $61,000 b. $58,000 c. $64,000 d. $36,000 e. None of these.

17.

The entry to record the writeoff of an uncollectible account receivable would be a. Bad Debt Expense xxx Allowance for Uncollectible A/R xxx b. Allowance for Uncollectible A/R xxx Accounts Receivable xxx c. Bad Debt Expense xxx Accounts Receivable xxx d. Sales Revenues xxx Allowance for Uncollectible A/R xxx e. None of the above.

18.

If a company has a debit balance in the Allowance for Uncollectible Accounts Receivable before any year-end adjustment and fails to make an adjusting entry to record estimated uncollectible accounts receivable at the end of a period, then this error a. understates assets. b. overstates net income. c. overstates expenses. d. understates owners' equity. e. Both a and b are true.

19.

The amount of Bad Debt Expense in any year will always a. equal the amount of estimated uncollectible accounts receivable at the end of the year. b. equal the balance in the Allowance for Uncollectible Accounts Receivable account at the end of the year after adjustment. c. equal the amount of estimated uncollectible accounts receivable at the end of the year plus or minus the prior year’s under or overestimation, respectively, of uncollectible accounts receivable. d. equal the net realizable value of accounts receivable at the end of the year. e. None of the above.

20.

A credit balance in the Allowance for Uncollectible Accounts Receivable account at the end of the year prior to any adjusting entry for the current year’s uncollectible accounts receivable means the prior year’s estimated uncollectible accounts receivables were a. overestimated. b. underestimated. c. has nothing to do with the prior year estimation of uncollectibles.

21.

An entry to record a sale to a customer who uses a credit card to pay will typically include a. a credit to Sales Revenues. b. a debit Credit Card Expense. c. a debit to Cash. d. Both a and b. e. All of the above.

The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Simpson, Inc., for an operating period. Use this information to answer questions 22-24.

22.

Units

Unit Cost

Total Cost

Beginning inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2

20

$ 40

12

46

552

14

36

504

Totals

46

$

Units Sold

800 11 14

$1,856

25

Assuming Simpson, Inc., uses FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for a. $590 b. $644 c. $504 d. $560 e. None of these.

23.

Assuming ,Simpson Inc., uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for a. $504 b. $632 c. $644 d. $590 e. None of these.

24.

Assuming Simpson, Inc., uses moving weighted average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for (round all calculations to the nearest hundredth) a. $591.50 b. $595.25 c. $602.75 d. $608.02 e. None of these.

Use this information to respond to questions 25-26. Inventory data for Newport Surfboard Company for December consists of the following: Date 12/1 12/5 12/8 12/12 12/19 12/27 12/29

Beginning Inventory Purchased Sold Purchased Sold Purchased Sold

Units

Cost

Total

10 25 18 10 18 20 9

$120 130

$1,200 3,250

145

1,450

150

3,000

25.

Assuming Newport uses a perpetual inventory system with a LIFO cost flow, what is the value of ending inventory on 12/31? a. $1,650 b. $2,730 c. $3,000 d. $6,170 e. None of these.

26.

Assuming Newport uses a perpetual inventory system with a FIFO cost flow, what is the amount of Cost of Goods Sold for the month of December? a. $1,650 b. $2,730 c. $3,000 d. $6,170 e. None of these.

27.

Which of the following inventory costing methods most closely matches the actual physical flow of goods in a grocery store? a. Perpetual FIFO b. Perpetual LIFO c. Moving weighted average d. Specific identification e. None of these.

28.

In a period of deflation in the prices of inventory purchases throughout the period, which inventory costing method will yield the lowest income tax liability assuming there is a balance of inventory on hand at the end of the period? a. FIFO b. LIFO c. Moving weighted average d. They would all yield the same result.

29.

In a period of inflation in the prices of inventory purchases throughout the period, which inventory costing method will yield the lowest net income assuming there is a balance of inventory on hand at the end of the period? a. FIFO b. LIFO c. Moving weighted average d. They would all yield the same result.

30.

In a period of inflation in the prices of inventory purchases throughout the period, which inventory costing method will yield the lowest ending inventory balance at the end of the period? a. FIFO b. LIFO c. Moving weighted average d. They would all yield the same result.

31.

In a period of stable prices for inventory purchases throughout the period, which inventory costing method will yield the highest income tax liability assuming there is a balance of inventory on hand at the end of the period? a. FIFO b. LIFO c. Moving weighted average d. They would all yield the same result.

32.

For Unique Antiques, Inc. which carries an inventory of one of a kind antique items, which of the following perpetual inventory methods should be used? a. LIFO b. FIFO c. Specific Identification d. Moving Weighted Average e. A periodic rather than perpetual inventory method should be used.

33.

Internal controls are policies and procedures a. designed to safeguard a company’s assets. b. designed to ensure accurate accounting records. c. designed and implemented by the company’s external auditors. d. Both a and b. e. All of the above.

34.

Which of the following policies or procedures should be included in a system of internal accounting controls over cash? a. Monthly bank reconciliations are to be prepared by a person not involved in the handling of cash. b. All cash disbursements are to be made by pre-numbered, sequenced checks. c. All receipts are deposited daily in the bank. d. Cash handling responsibilities are separated from those responsible for the recording of cash transactions. e. All of the above are part of a good system of internal accounting control over cash.

35.

Payroll information for the week is: Gross wages Employee FICA withholding Employee FIT withholding Employee SIT withholding Employee Union Dues withheld Net wages Employer FICA Employer Fed. Unemployment Insurance Employer State Unemployment Insurance

$10,000 600 1,800 900 300 $ 6,400 $

600 120 80

Given the above, the journal entry to record the obligation for all payroll related costs for the week would include a debit to: a. Wage Expense for $6,400. b. Payroll Tax Expense for $800. c. Wages Payable for $6,400. d. Employee FIT Expense for $1,800. e. Both a and b. 36.

Chang's Chinese Restaurant accepts a VISA card payment from a customer for $20 electronically processed for immediate credit to their bank account. Chang is charged a 3% fee on an processed transaction. The journal entry to record this receipt would include a debit to a. Cash for $20. b. Sales Revenues for $20. c. Credit Card Expense for $ .60. d. Accounts Receivable for $19.40. e. None of the above.

37.

A $100 sale of merchandise requires collection of a state sales tax of $7. If the full $107 is received from the customer in cash, the journal entry on the merchant's books would include a credit to: a. Sales Revenues for $107. b. Sales Taxes Payable for $7. c. Cash for $107. d. Sales Tax Revenues for $7. e. None of the above.

38.

A used truck is purchased for $20,000 ($5,000 cash down and execution of a note payable for $15,000) with additional cash acquisition costs of $1,200 for state sales tax. In addition, $2,000 is incurred and paid for engine overhaul deemed necessary prior to the truck’s initial use. $1,000 of insurance on the truck is prepaid for one year’s coverage. The total capitalized cost for the truck is a. $ 8,200. b. $20,000. c. $21,200. d. $23,200. e. $24,200.

Use the following information for problems 39 and 40. On July 1, 20X1, ABC, Inc., acquired a new machine for $70,000. Its estimated useful life is ten years with an expected salvage value of $3,100. 39.

Assuming straight-line depreciation, 20X1 depreciation expense is a. $3,500. b. $7,000 c. $3,345. d. $6,690. e. None of these.

40.

Assuming straight-line depreciation, the balance of accumulated depreciation at 12/31/X2 would be a. $ 7,000. b. $10,500. c. $ 6,690. d. $13,380 e. None of the above.

41.

Using the information provided for problem #39 above and assuming the total anticipated production of the machine during its useful life is 100,000 units of production with the same $3,100 salvage value, what would the 12/31/X1 book value of the machine be using the units of production method of calculating depreciation and assuming 10,000 units of actual production in 20X1? a. $63,310 b. $60,210 c. $63,000 d. $59,900 e. None of the above.

42.

A truck which originally cost $25,000 has an estimated salvage value of $5,000 at the end of its 10 year estimated useful life and accumulated depreciation after 3 years of $6,000. Assuming that at the end of 3 years the truck's appraised fair market value is $21,000, then the net amount to be reflected on the balance sheet for the truck would be a. $19,000 b. $20,000 c. $21,000 d. $25,000 e. None of the above.

43.

Normal repair and maintenance costs incurred in the recurring maintenance of equipment should be a. capitalized in the period incurred. b. expensed in the period incurred. c. allocated to expense in the future periods of benefit. d. Both a and c. e. None of the above.

44.

Major equipment refurbishment costs that extend the equipment’s original anticipated useful life should be a. capitalized in the period incurred. b. expensed in the period incurred. c. allocated to expense in the future periods of benefit. d. Both a and c. e. None of the above.

45.

On January 1, 20X2, Wilbur Company purchased equipment for $82,000. Wilbur uses straight-line depreciation and estimates a sixteen-year useful life and a $6,000 salvage value for the equipment. On December 31, 20X9, Wilbur sells the equipment for $40,000. In recording this sale, Wilbur should reflect a. a $2,000 gain. b. an $8,000 loss. c. a $4,000 loss. d. no gain or loss. e. None of these.

46.

If equipment which originally cost $50,000 has accumulated depreciation of $25,000 through the date of its resale at a price of $27,000, the journal entry to record this resale would include a a. credit to Equipment for $25,000. b. credit to Gain on Sale for $2,000. c. credit to Accumulated Depreciation for $25,000. d. Both a and b. e. None of the above.

47.

If fully depreciated equipment that had no salvage value is disposed of at no additional cost, then the journal entry to reflect the disposal would include a a. debit to Accumulated Depreciation. b. debit to Loss on Disposal. c. debit to Equipment. d. credit to Gain on Disposal. e. None of the above.

48.

The allocation of an intangible asset’s capitalized cost to expense over its anticipated useful life is referred to as a. amortization. b. depreciation. c. depletion. d. matching. e. None of the above.

49.

The research and development costs incurred by a company in the development of technology that results in a patent that has probable future benefit should be a. capitalized as part of the cost of the asset (“Patent”). b. expensed in the the period incurred. c. expensed in the future when the benefits of the patent are realized. d. None of the above.

50.

The amount of Goodwill reflected on a company’s balance sheet a. represents the true fair market value of the company above the book value of its assets less liabilities at the end of each year. b. is allocated to expense over a period not to exceed 20 years. c. represents the costs associated with the purchase of another business in excess of the fair market value of that business’ acquired assets less assumed liabilities, less any accumulated amortization to date. d. Both b and c are true. e. None of the above.

51.

The following information is available for a company currently considered for potential acquisition:

Assets Liabilities

Book Value

Appraised Fair Market Value

$550,000 $350,000

$900,000 $350,000

Determine the amount of goodwill to be recorded on the acquiring company’s books if all of this business’ assets were acquired and liabilities were assumed at a price of $1,000,000 cash. a. $ 100,000 b. $ 200,000 c. $ 450,000 d. $ 550,000 e. None of the above.

52.

On 4/1/X7 ABC Corp. borrows $1,000,000 under a note payable to a bank due in two years with interest at an annual rate of 8% all due at maturity. Interest expense under this note for the calendar years 20X7, 20X8, and 20X9, respectively would be: a. $0, $0, $160,000 b. $60,000, $80,000, $20,000 c. $80,000, $80,000, $0 d. $0, $0, $1,160,000 e. None of the above.

53.

On 10/1 Jones borrowed $70,000 on a 30-year, fully amortizing mortgage note from Zion's Bank at a fixed annual interest rate of 8%, compounding monthly, with monthly payments of $513.64 due on the 31st of each month. Assuming payments are made on a timely basis, the journal entry to be made with the second monthly payment on 11/30 would include a debit to a. Interest Expense for $466.46. b. Interest Expense for $513.64. c. Mortgage Payable for $46.97. d. Mortgage Payable for $47.29. e. None of the above.

54.

Given the information in problem #54, the balance in the Mortgage Note Payable following the second monthly payment made on 11/30 would amount to a. $69,533.54 b. $69,486.36 c. $69,999.53 d. $69,952.71 e. None of the above. Bonds are issued by a company: a. to raise capital through equity financing. b. to raise capital from the sale of ownership interests in the company. c. to invest excess funds in financial markets. d. to borrow funds from financial markets. e. to secure themselves against legal liability for their actions.

55.

56.

Debentures are a. secured or mortgage-backed bonds. b. convertible bonds. c. the terms governing a bond issuance. d. unsecured bonds. e. serial bonds.

57.

The par value of a company’s common stock reflects a. the fair market value of the stock at the date of issuance. b. the fair market value at the date of financial statement preparation. c. the amount of cash received upon the issuance of the stock. d. None of the above.

58.

River, Inc. issued for $13 per share 6,000 shares of $1 par value common stock. The journal entry to record this transaction is a. Cash 78,000 Common Stock, par value 6,000 Gain on Sale of Stock 72,000 b. Cash 78,000 Common Stock 78,000 c. Cash 78,000 Common Stock, par value 6,000 Retained Earnings 72,000 d. Cash 78,000 Common Stock, par value 6,000 Paid-in Capital in Excess of Par Value 72,000

59.

The issuance of preferred stock at a price above its par value would result in total capital contributions reflected on the balance sheet equal to the number of shares issued times the a. par value. b. issuance price. c. either the par value or issuance price, whichever is lower. d. None of the above.

60.

Benji, Inc. has outstanding 5,000 shares of 5% $100 par value, cumulative preferred stock, and 10,000 shares of $50 par value common stock. If dividends in arrears amount to $25,000, and the total cash dividend declared this year is $110,000, the total amounts distributed to preferred and common stockholders are, respectively, a. $25,000 and $85,000. b. $50,000 and $60,000. c. $35,000 and $75,000. d. $36,667 and $73,333. e. None of these.

61.

Dividends in arrears applies only to a. common stock. b. cumulative preferred stock. c. non-cumulative preferred stock. d. Both a and b. e. All of the above.

62.

Which of the following sequences of dividend-related dates is in the correct chronological order (earliest date first)? a. Declaration date, payment date, record date b. Payment date, declaration date, record date c. Record date, declaration date, payment date d. Declaration date, record date, payment date e. None of these.

63.

Dividends in arrears on preferred stock are recorded as a liability a. in each year the arrearage is created. b. on the date dividends are declared sufficient to pay the arrears. c. on the date of record for dividends declared to pay the arrears. d. dividends in arrears are never recorded as a liability.

64.

Given the following information: Sales Revenues Cost of Goods Sold

20X6 $10,000 $ 5,000

20X7 $30,000 $10,000

the increase in sales revenues from 20X6 to 20X7 are said to have a. increased by 200%. b. increased by 300%. c. doubled. d. tripled. e. Both a and c. f. Both a and d. 65.

Vertical analysis a. is typically used on the balance sheet rather than the income statement. b. eliminates the effects of changes in volume in analyzing the relationship of income statement categories. c. is not commonly used by financial analysts. d. reflects the percentage changes from one year to the next in categories of the financial statements.

66.

If gross margin as a percentage of sales revenues decreases over the year and the cost per unit of inventory purchases was stable throughout the year (no inflation or deflation in inventory costs), then a. sales prices per unit must have decreased during the year. b. sales volume must have decreased during the year. c. sales prices per unit must have increased during the year. d. sales volume must have increased during the year.

The following is to be used to respond to problems 67-76. XYZ Corp. Balance Sheet As of December 31, 20X6 & 20X7 Assets: Current Assets— Cash Accounts Receivable Inventories Total Current Assets Operating Assets— Total Assets Liabilities & Stockholders' Equity: Current Liabilities Accounts Payable Other Payables Total Current Liabilities Long Term Liabilities Total Liabilities Stockholders' Equity: Common Stock (10,000 shares outstanding, no par) Retained Earnings Total Liabilities and Stockholders' Equity

20X6

20X7

$10,000 25,000 15,000 50,000 30,000 $80,000

$ 12,000 32,000 20,000 64,000 40,000 $104,000

$15,000 10,000 25,000 19,000 44,000

$ 16,000 14,000 30,000 29,000 59,000

25,000 11,000 $80,000

25,000 20,000 $104,000

XYZ Corp. Income Statement For the years ended December 31, 20X6 & 20X7

Sales Revenues Cost of Goods Sold Selling and Administrative Expenses Net Income 67.

20X6 $250,000 175,000 75,000 70,000 $ 5,000

20X7 $325,000 234,000 91,000 82,000 $ 9,000

Calculate the percentage increase in total assets from 12/31/X6 to 12/31/X7. a. 23% increase. b. 30% increase. c. 130% increase. d. None of the above.

68.

Calculate the 20X7 current ratio (round to the nearest tenth). a. .4 b. 1.5 c. 1.8 d. 2.1 e. None of the above.

69.

Calculate the 20X7 acid test ratio (round to the nearest tenth). a. .4 b. 1.5 c. 1.8 d. 2.1 e. None of the above.

70.

Calculate the 20X7 number of days sales in receivables (average receivable collection period) assuming all sales are made on account (round to the nearest tenth of day). a. 10.2 b. 11.4 c. 32.0 d. 35.8 e. None of the above.

71.

Calculate the 20X7 inventory turnover (round to the nearest tenth). a. 11.7 b. 13.4 c. 15.6 d. 18.6 e. None of the above.

72.

Calculate the debt to total asset ratio at 12/31/X7 (round to the nearest tenth). a. .3 b. .6 c. 1.3 d. 1.8

73.

Calculate the total debt to total equity ratio at 12/31/X7 (round to the nearest tenth). a. .4 b. .6 c. .7 d. 1.3 e. None of the above.

74.

Calculate the book value per share at 12/31/X7. a. $ 4.50 per share. b. $ 5.90 per share. c. $10.40 per share. d. None of the above.

75.

Calculate the P/E ratio (price/earnings) at 12/31/X7 for the XYZ, Corp. common stock if it is trading at a price of $18.00 per share on that date (round to the nearest tenth). a. 10 b. 20 c. 30 d. 40 e. None of the above.

76.

Calculate the market price of a share of XYZ Corp. common stock at 12/31/X7 at a P/E ratio of 30. a. $9 b. $18 c. $27 d. $36 e. None of the above.

77.

Generally speaking, improved efficiency in managing inventory will be reflected in the inventory turnover ratio by a. a decrease in the ratio from one period to the next. b. an increase in the ratio from one period to the next. c. no change in the ratio from one period to the next. d. The inventory turnover ratio does not reflect management efficiency.

78.

The current ratio measures a company’s a. profitability. b. leverage. c. liquidity. d. value. e. None of the above.

79.

Increased volume of credit sales will always a. increase the accounts receivable turnover ratio. b. decrease gross margin as a percentage of sales revenues. c. decrease the number of days sales in inventory. d. Both a and c. e. None of the above.

SOLUTIONS

1. 2.

b d

Inventory Accounts Payable

2,000

Accounts Payable Inventory

100

3.

c

Accounts Payable Cash Inventory

1,900

4.

d

Accounts Receivable Sales Revenues Cost of Goods Sold Inventory

2,000

5.

6.

a

c

7.

e

8.

a

9.

d

10.

e

11.

c

980

Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold Cash Sales Discounts Accounts Receivable

200 98 1,782 18

2,000 100 1,862 38 2,000 980 200 98

1,800

Sales Returns and Allowances and Sales Discounts are both contra-revenue accounts.

Sales Revenues Less: Sales Returns and Allow. Sales Discounts Net Sales Revenues Less: Cost of Goods Sold ( .4 × 90,000) Gross Margin

$100,000 (7,000) (3,000) $ 90,000 (36,000) $ 54,000

12.

d Allowance for Uncollectible Accounts 2,500

Balance before adjustment

2,300 Adjustment 4,800a

Balance after adjustment

a

Accounts Receivable × Est. Uncollectible Accounts 80,000 × .06 = 4,800 13.

b Allowance for Uncollectible Accounts 1,500

Balance before adjustment 5,500 Adjustment 4,000a

a

Balance after adjustment

Accounts Receivable Balance × % Est. Uncollectible Accounts ($40,000 × .10 = $4,000)

Bad Debt Expense Allowance for Uncollectible A/R 14.

c

5,500 5,500

15.

e

Calculation of Estimated Uncollectible A/R: Days Past Due Accounts Receivable Est. Uncollectible Current $100,000 1% 0 - 30 days $ 50,000 3% 30 - 60 days $ 20,000 5% 60 - 90 days $ 10,000 20% 40% 90 + days $ 8,000 $188,000

Amount $1,000 $1,500 $1,000 $2,000 $3,200 $8,700

Allowance for Uncollectible Accounts 500 8,200 8,700

Balance before adjustment Adjustment Balance after adjustment

Bad Debt Expense Allowance for Uncollectible A/R 16.

8,200

8,200

b Accounts Receivable

17.

b

18.

b

Beg. Balance Sales on A/R

50,000 210,000

End. Balance

58,000

199,000 3,000

Collections on A/R Writeoffs of A/R

A failure to make an adjusting entry for Bad Debt Expense Allowance for Uncollectible A/R

xxx

xxx

Would overstate assets and understate expenses and therefore overstate net income. 19.

c

20.

a Allowance for Uncollectible A/R

Actual writeoffs in current year

xxx

Prior year’s estimate of uncollectible A/R

xxx

Balance before adjustment at the end of the current year

xxx

Prior year overestimation

21.

e

Cash Credit Card Expense Sales Revenues

97 3

100

22.

a

FIFO:

9 units @ $40/ea. = $360 5 units @ $46/ea. = $230 14 units $590

23.

b

LIFO:

12 units @ $46/ea. = $552 2 units @ $40/ea. = $ 80 14 units $632

24.

d

Moving Weighted Average: 9 units @ $40/ea. = $360 12 units @ $46/ea. = $552 21 units $912 Average Cost: $912 ÷ 21 = $ 43.43/ea. Sale #2- 14 units × $43.43 = $608.02

25.

b Inventory Beg. Balance Purchase

1,200 3,250

Purchase

1,450

Purchase End. Balance

26.

2,340

Sale (18@ $130)

2,480

Sale (10@ $145) ( 7@ $130) ( 1@ $120)

1,350

Sale ( 9@ $150)

3,000 2,730

e Cost of Goods Sold 12/5 Sale: (10@ $120) ( 8@ $130)

2,240

12/19 Sale: (17@ $130) ( 1@ $145)

2,355

12/29 Sale: ( 9@$145)

1,305 5,900

27.

a

Oldest inventory is sold first.

28.

a

Method FIFO LIFO

Cost of Goods Sold Higher Lower

Net Income Lower Higher

29.

b

Method FIFO LIFO

Cost of Goods Sold Lower Higher

Net Income Higher Lower

30.

b

Method FIFO LIFO

Cost of Goods Sold Lower Higher

31.

d

Tax Liability Lower Higher

Ending Inventory Higher Lower

32.

c

33.

d

34.

e

35.

b

Wage Expense Employee FICA WH Payable Employee FIT WH Payable Employee SIT WH Payable Employee Union Dues Payable Wages Payable

10,000

Payroll Tax Expense Employer FICA Payable FUI Payable SUI Payable 36.

c

Cash Credit Card Expense Sales Revenues

800

19.40 .60 107

600 1,800 900 300 6,400 600 120 80

20.00

37.

b Cash

38.

d

The $1,000 of prepaid insurance is reflected as a separate asset “Prepaid Insurance” rather than capitalized as part of the cost of the truck.

39.

c

Partial year depreciation in 20X1 (purchased on 7/1/X1): $70,000 - $3,100 = $6,690 depreciation per year 10 Partial year = $6,690 × ½ year = $3,345

40.

e

Sales Revenues Sales Tax Payable

100 7

Accumulated Depreciation 3,345 6,690

20X1 Depreciation 20X2 Depreciation

10,035

12/31/X2 Balance

41.

a

20X1 Depreciation:

$70,000 - $3,100 100,000 units

=

$ .669/per unit depreciation

20X1 units of production = 10,000 units × $ .669 =

$6,690 depreciation

Book Value @ 12/31/X1: Cost Less: Accumulated Depreciation 42.

a

43.

b

44.

d

45.

c

Book value is to be reflected on the balance sheet. Book Value: Cost Less: Accumulated Depreciation

Book value at the date of sale: Cost Less: Accumulated Depreciation $82,000 - $6,000 × 8 yrs. 16 yrs.

$82,000 38,000 $44,000

Gain(Loss) on sale is calculated as: Sales Price $40,000 Less: Book Value 44,000 Loss on Sale $( 4,000)

46.

b

47.

a

48.

a

49.

b

50.

c

Cash Accumulated Depreciation Loss on Sale Equipment

40,000 38,000 4,000

Cash Accumulated Depreciation Equipment Gain on Sale

27,000 25,000

Accumulated Depreciation Equipment

xxx

82,000

50,000 2,000 xxx

$ 70,000 6,690 $ 63,310 $ 25,000 6,000 $ 19,000

51.

c

Purchase Price for Business Less; FMV of Assets less Liabilities: Assets $900,000 Liabilities ( 350,000) Net Assets Purchased Goodwill purchased

$1,000,000

550,000 $ 450,000

1,000,000 × 8% × 9/12 = $60,000 1,000,000 × 8% × 12/12 = 80,000 1,000,000 × 8% × 3/12 = 20,000

52.

b

20X7 20X8 20X9

53.

d

10/31/97 payment: Interest = 70,000 × 8% × 1/12 = 466.67 Principal = 513.64 - 446.64 = 46.97 11/30/97 payment Interest = 69,953.03 × 8% × 1/12 = 466.35 Principal = 513.64 - 446.35 = 47.29 entry: Interest Expense Mortgage Payable Cash

54.

466.35 47.29

513.64

e Mortgage Note Payable Payment 10/31 Payment 11/30

55.

d

56.

d

57.

d

58.

d

59.

b

46.97 47.29

70,000

Beg. Balance

69,905.74

Balance @ 11/30

Total capital contributions equal any par value contributed plus paid in capital in excess of par.

60.

b

Preferred $25,000 $25,000

Preferred: Arrears Current (5% × 5,000 × $100) x 2 years Remainder to Common

61.

b

62.

d

63.

b

64.

f

65.

b

66.

a

67.

b

% increase = 104,000 - 80,000 = .3 or 30% 80,000

68.

d

Current Assets = 64,000 = 2.1 Current Liabilities 30,000

69.

b

70.

c

Common $60,000 $60,000

$50,000

% increase = 30,000 - 10,000 = 2.0 or 200% 10,000

Quick Assets = 12,000 + 32,000 = 1.5 Current Liabilities 30,000

365 A/R Turnover

A/R Turnover

=

Sales Revenues Ave. A/R Balance

=

365 11.4

= 32.01

325,000

=

(

25,000 + 32,000 2

=

)

11.4

71.

b

Inventory Turnover

=

Cost of Goods Sold Ave. Inv. Balance

234,000

=

(

=

15,000 + 20,000

13.4

)

2

72.

b

73.

d

74.

a

Total Liabilities Total Assets

= 59,000 = .57 104,000

Total Liabilities = 59,000 = 1.31 Total Stockholder’s Equity 45,000

Total Owners’ Equity Book Value Per Share

75.

=

# of Shares of Stock

45,000 =

10,000

=

$ 4.50

b Market Price per Share Price/Earnings Ratio

=

EPS

=

EPS

$18.00 =

Net Income

76.

c

77.

b

78.

c

79.

e

# Shares Common Stock

$ .90

=

20

=

.90

9,000 =

10,000

Market Price Per Share = EPS × P/E Ratio 27 = .90 × 30

Increased credit sales will not necessarily increase the turnover ratio if the average balance of accounts receivable also increases significantly.