EXAM #2

SAMPLE PROBLEMS

(Lessons 5 - 10)

Use the following information to respond to problems 1 - 6 assuming Zee Corp. maintainstheir inventory records on a perpetual basis:

1/12 Zee Corp., a wholesaler of unicycles, buys 20 unicycles on account from asupplier at $100/unit with terms of 2/10,n/30.

1/13 Zee returns one of the unicycles to the supplier because of a defect andreceives credit on their account.

1/22 Zee pays the supplier in full (net of the discount) for the 1/12 purchase.1/24 Zee sells 10 of the unicycles purchased on 1/12 to a customer for $200/unit

on account with terms of 1/10,n/30.1/25 The customer returns one of the unicycles for credit on account (assume the

unicycle is in good condition and can be resold). 2/2 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 bea. Purchases 2,000

Accounts Payable 2,000b. Inventory 2,000

Accounts Payable 2,000c. Purchases 1,960

Accounts Payable 1,960d. Accounts Payable 2,000

Inventory 2,000e. 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 toa. 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 Discountsb. Sales Returns and Allowancesc. Unearned Rental Revenued. Both a and b.e. None of the above.

8. Before closing entries at the end of any accounting period, Sales Discounts will typicallyhave 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 $100,000Sales Returns and Allowances 7,000Sales Discounts 3,000Selling Expenses 20,000Administrative Expenses 15,000

and assuming Cost of Goods Sold as a percentage of Net Sales Revenues equals 40%, thenthe 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 area. 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 isnecessary under GAAP to comply with thea. 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 UncollectibleAccounts has a credit balance of $2,500. If 6% of ending Accounts Receivable are estimatedto 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 Allowancefor Uncollectible Accounts Receivable is a debit balance of $1,500 before any year-endadjustment, the adjusting entry required given uncollectible accounts receivable areestimated a 10% of the balance of Accounts Receivable would require a debit toa. 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 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% 90 + days $ 8,000 40%

$188,000

And assuming Net Credit Sales Revenues for the year amounted to $800,000 and the balancein the Allowance for Uncollectible Accounts Receivable account is a credit balance of $500before adjustment, then the adjusting entry for Bad Debt Expense at the end of the year willinclude 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 $8,700d. 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 collectionsfrom customers on accounts receivable amounted to $199,000. In addition, $3,000 inuncollectible accounts receivable were actually written off the books. Determine the balanceof accounts receivables before any adjustment for estimated uncollectible accountsreceivable for the year.a. $61,000b. $58,000c. $64,000d. $36,000e. None of these.

17. The entry to record the writeoff of an uncollectible account receivable would bea. Bad Debt Expense xxx

Allowance for Uncollectible A/R xxxb. Allowance for Uncollectible A/R xxx

Accounts Receivable xxxc. Bad Debt Expense xxx

Accounts Receivable xxxd. Sales Revenues xxx

Allowance for Uncollectible A/R xxxe. None of the above.

18. If a company has a debit balance in the Allowance for Uncollectible Accounts Receivablebefore any year-end adjustment and fails to make an adjusting entry to record estimateduncollectible accounts receivable at the end of a period, then this errora. 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 alwaysa. 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 uncollectibleaccounts 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 endof the year prior to any adjusting entry for the current year’s uncollectible accountsreceivable means the prior year’s estimated uncollectible accounts receivables werea. 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 andsales of Simpson, Inc., for an operating period. Use this information to answer questions 22-24.

Units Unit Cost Total Cost Units Sold

Beginning inventorySale No. 1Purchase No. 1Sale No. 2Purchase No. 2

20

12

14

$ 40

46

36

$ 800

552

504

11

14

Totals 46 $1,856 25

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

23. Assuming ,Simpson Inc., uses LIFO perpetual inventory procedures, sale No. 2 is recorded asan entry to Cost of Goods Sold fora. $504b. $632c. $644d. $590e. 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 thenearest hundredth)a. $591.50b. $595.25c. $602.75d. $608.02e. None of these.

Use this information to respond to questions 25-26. Inventory data for Newport Surfboard Companyfor December consists of the following:

Date Units Cost Total

12/112/512/812/1212/1912/2712/29

Beginning InventoryPurchasedSoldPurchasedSoldPurchasedSold

102518101820 9

$120 130

145

150

$1,200 3,250

1,450

3,000

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

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

27. Which of the following inventory costing methods most closely matches the actual physicalflow of goods in a grocery store?a. Perpetual FIFOb. Perpetual LIFOc. Moving weighted averaged. Specific identificatione. None of these.

28. In a period of deflation in the prices of inventory purchases throughout the period, whichinventory costing method will yield the lowest income tax liability assuming there is abalance of inventory on hand at the end of the period?a. FIFOb. LIFOc. Moving weighted averaged. They would all yield the same result.

29. In a period of inflation in the prices of inventory purchases throughout the period, whichinventory costing method will yield the lowest net income assuming there is a balance ofinventory on hand at the end of the period?a. FIFOb. LIFOc. Moving weighted averaged. They would all yield the same result.

30. In a period of inflation in the prices of inventory purchases throughout the period, whichinventory costing method will yield the lowest ending inventory balance at the end of theperiod?a. FIFOb. LIFOc. Moving weighted averaged. They would all yield the same result.

31. In a period of stable prices for inventory purchases throughout the period, which inventorycosting method will yield the highest income tax liability assuming there is a balance ofinventory on hand at the end of the period?a. FIFOb. LIFOc. Moving weighted averaged. They would all yield the same result.

32. For Unique Antiques, Inc. which carries an inventory of one of a kind antique items, whichof the following perpetual inventory methods should be used?a. LIFO b. FIFOc. Specific Identificationd. Moving Weighted Averagee. A periodic rather than perpetual inventory method should be used.

33. Internal controls are policies and proceduresa. 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 internalaccounting 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 $10,000Employee FICA withholding 600Employee FIT withholding 1,800Employee SIT withholding 900Employee Union Dues withheld 300Net wages $ 6,400

Employer FICA $ 600Employer Fed. Unemployment Insurance 120Employer State Unemployment Insurance 80

Given the above, the journal entry to record the obligation for all payroll related costs for theweek 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 $20electronically 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 adebit toa. 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 isreceived from the customer in cash, the journal entry on the merchant's books would includea 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 initialuse. $1,000 of insurance on the truck is prepaid for one year’s coverage. The totalcapitalized cost for the truck isa. $ 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 newmachine 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 isa. $3,500.b. $7,000c. $3,345.d. $6,690.e. None of these.

40. Assuming straight-line depreciation, the balance of accumulated depreciation at 12/31/X2would bea. $ 7,000.b. $10,500.c. $ 6,690.d. $13,380e. None of the above.

41. Using the information provided for problem #39 above and assuming the total anticipatedproduction 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 unitsof production method of calculating depreciation and assuming 10,000 units of actualproduction in 20X1?a. $63,310b. $60,210c. $63,000d. $59,900e. None of the above.

42. A truck which originally cost $25,000 has an estimated salvage value of $5,000 at the end ofits 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, thenthe net amount to be reflected on the balance sheet for the truck would bea. $19,000b. $20,000c. $21,000d. $25,000e. None of the above.

43. Normal repair and maintenance costs incurred in the recurring maintenance of equipmentshould bea. 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 usefullife should bea. 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 usesstraight-line depreciation and estimates a sixteen-year useful life and a $6,000 salvage valuefor the equipment. On December 31, 20X9, Wilbur sells the equipment for $40,000. Inrecording this sale, Wilbur should reflecta. 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 throughthe date of its resale at a price of $27,000, the journal entry to record this resale wouldinclude 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 aa. 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 usefullife 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 oftechnology 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 sheeta. 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 anyaccumulated 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 potentialacquisition:

AppraisedBook Value Fair Market Value

Assets $550,000 $900,000Liabilities $350,000 $350,000

Determine the amount of goodwill to be recorded on the acquiring company’s books if all ofthis business’ assets were acquired and liabilities were assumed at a price of $1,000,000cash.a. $ 100,000b. $ 200,000c. $ 450,000d. $ 550,000e. 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 yearswith interest at an annual rate of 8% all due at maturity. Interest expense under this note forthe calendar years 20X7, 20X8, and 20X9, respectively would be:a. $0, $0, $160,000b. $60,000, $80,000, $20,000c. $80,000, $80,000, $0d. $0, $0, $1,160,000e. None of the above.

53. On 10/1 Jones borrowed $70,000 on a 30-year, fully amortizing mortgage note from Zion'sBank 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, thejournal entry to be made with the second monthly payment on 11/30 would include a debit toa. 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 followingthe second monthly payment made on 11/30 would amount to a. $69,533.54b. $69,486.36c. $69,999.53d. $69,952.71e. None of the above.

55. 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.

56. Debentures area. 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 reflectsa. 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 journalentry to record this transaction isa. Cash 78,000

Common Stock, par value 6,000Gain on Sale of Stock 72,000

b. Cash 78,000Common Stock 78,000

c. Cash 78,000Common Stock, par value 6,000Retained Earnings 72,000

d. Cash 78,000Common Stock, par value 6,000Paid-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 capitalcontributions reflected on the balance sheet equal to the number of shares issued times thea. 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 amountsdistributed 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 chronologicalorder (earliest date first)?a. Declaration date, payment date, record dateb. Payment date, declaration date, record datec. Record date, declaration date, payment dated. Declaration date, record date, payment datee. None of these.

63. Dividends in arrears on preferred stock are recorded as a liabilitya. 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 RevenuesCost 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 havea. increased by 200%.b. increased by 300%.c. doubled.d. tripled.e. Both a and c.f. Both a and d.

65. Vertical analysisa. 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 unitof inventory purchases was stable throughout the year (no inflation or deflation in inventorycosts), 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

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

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

25,000 11,000$80,000

20X7

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

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

25,000 20,000$104,000

XYZ Corp.Income Statement

For the years ended December 31, 20X6 & 20X7

Sales RevenuesCost of Goods Sold

Selling and Administrative ExpensesNet Income

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

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

67. 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. .4b. 1.5c. 1.8d. 2.1e. None of the above.

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

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

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

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

73. Calculate the total debt to total equity ratio at 12/31/X7 (round to the nearest tenth).a. .4b. .6c. .7d. 1.3e. 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 istrading at a price of $18.00 per share on that date (round to the nearest tenth).a. 10b. 20c. 30d. 40e. 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 ratioof 30.a. $ 9b. $18c. $27d. $36e. None of the above.

77. Generally speaking, improved efficiency in managing inventory will be reflected in theinventory turnover ratio bya. 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’sa. profitability.b. leverage.c. liquidity.d. value.e. None of the above.

79. Increased volume of credit sales will alwaysa. 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. b Inventory 2,000Accounts Payable 2,000

2. d Accounts Payable 100Inventory 100

3. c Accounts Payable 1,900Cash 1,862Inventory 38

4. d Accounts Receivable 2,000Sales Revenues 2,000

Cost of Goods Sold 980Inventory 980

5. a Sales Returns and Allowances 200Accounts Receivable 200

Inventory 98Cost of Goods Sold 98

6. c Cash 1,782 Sales Discounts 18

Accounts Receivable 1,800

7. e Sales Returns and Allowances and Sales Discounts are both contra-revenueaccounts.

8. a

9. d Sales RevenuesLess: 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

10. e

11. c

12. d

Allowance forUncollectible Accounts

2,500

2,300

Balance beforeadjustment

Adjustment

4,800a Balance after adjustment

a Accounts Receivable × Est. Uncollectible Accounts80,000 × .06 = 4,800

13. b

Allowance forUncollectible Accounts

1,500

5,500

Balance beforeadjustment

Adjustment

4,000a Balance after adjustment

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

Bad Debt Expense 5,500Allowance for Uncollectible A/R 5,500

14. c

15. e Calculation of Estimated Uncollectible A/R:

Days Past Due Accounts Receivable Est. Uncollectible Amount Current $1,000 0 - 30 days $1,500

30 - 60 days 60 - 90 days $2,000

$1,000

90 + days

1%

5% 3%

20% 40% $3,200

$100,000 $ 50,000 $ 20,000 $ 10,000

$ 8,000 $188,000 $8,700

Allowance forUncollectible Accounts

500

8,200

Balance beforeadjustment

Adjustment

8,700 Balance after adjustment

Bad Debt Expense 8,200Allowance for Uncollectible A/R 8,200

16. b

Accounts Receivable

Beg. BalanceSales on A/R

50,000 210,000

199,000 3,000

Collections on A/RWriteoffs of A/R

End. Balance 58,000

17. b

18. b A failure to make an adjusting entry for

Bad Debt Expense xxx Allowance for Uncollectible A/R xxx

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

19. c

20. a

Allowance for UncollectibleA/R

Actual writeoffs incurrent year

xxx

xxx Prior year’s estimate ofuncollectible A/R

xxxPrior yearoverestimation

Balance before adjustmentat the end of the currentyear

21. e Cash 97Credit Card Expense 3 Sales Revenues 100

22. a FIFO: 9 units @ $40/ea. = $3605 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. = $55221 units $912

Average Cost: $912 ÷ 21 = $ 43.43/ea.

Sale #2- 14 units × $43.43 = $608.02

25. b

Inventory

Beg. BalancePurchase

Purchase

Purchase

1,200 3,250

1,450

3,000

2,340

2,480

1,350

Sale (18@ $130)

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

Sale ( 9@ $150)

End. Balance 2,730

26. e

Cost of Goods Sold

12/5 Sale: (10@ $120) ( 8@ $130)

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

12/29 Sale: ( 9@$145)

2,240

2,355

1,305

5,900

27. a Oldest inventory is sold first.

28. a Method Cost of Goods Sold Net Income Tax Liability FIFO Higher Lower Lower LIFO Lower Higher Higher

29. b Method Cost of Goods Sold Net Income FIFO Lower Higher LIFO Higher Lower

30. b Method Cost of Goods Sold Ending Inventory FIFO Lower Higher LIFO Higher Lower

31. d

32. c

33. d

34. e

35. b Wage Expense 10,000Employee FICA WH Payable 600Employee FIT WH Payable 1,800Employee SIT WH Payable 900Employee Union Dues Payable 300Wages Payable 6,400

Payroll Tax Expense 800Employer FICA Payable 600FUI Payable 120SUI Payable 80

36. c Cash 19.40Credit Card Expense .60

Sales Revenues 20.00

37. b Cash 107Sales Revenues 100Sales Tax Payable 7

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

Accumulated Depreciation

3,345 6,690

20X1 Depreciation20X2 Depreciation

10,035 12/31/X2 Balance

41. a 20X1 Depreciation: $70,000 - $3,100 = $ .669/per unit 100,000 units depreciation

20X1 units of production = 10,000 units × $ .669 = $6,690 depreciation

Book Value @ 12/31/X1: Cost $ 70,000

42. a Book value is to be reflected on the balance sheet. Book Value: Cost $ 25,000

Less: Accumulated Depreciation 6,690$ 63,310

Less: Accumulated Depreciation 6,000$ 19,000

43. b

44. d

45. c Book value at the date of sale:Cost $82,000Less: Accumulated Depreciation

$82,000 - $6,000 × 8 yrs. 38,00016 yrs.

$44,000

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

Loss on Sale $( 4,000)

Cash 40,000Accumulated Depreciation 38,000Loss on Sale 4,000 Equipment 82,000

46. b Cash 27,000Accumulated Depreciation 25,000 Equipment 50,000 Gain on Sale 2,000

47. a Accumulated Depreciation xxx Equipment xxx

48. a

49. b

50. c

51. c Purchase Price for Business $1,000,000Less; FMV of Assets less Liabilities:

Assets $900,000Liabilities ( 350,000)

Net AssetsPurchased 550,000

Goodwill purchased $ 450,000

52. b 20X7 1,000,000 × 8% × 9/12 = $60,00020X8 1,000,000 × 8% × 12/12 = 80,00020X9 1,000,000 × 8% × 3/12 = 20,000

53. d 10/31/97 payment:Interest = 70,000 × 8% × 1/12 = 466.67Principal = 513.64 - 446.64 = 46.97

11/30/97 paymentInterest = 69,953.03 × 8% × 1/12 = 466.35Principal = 513.64 - 446.35 = 47.29

entry:Interest Expense 466.35Mortgage Payable 47.29

Cash 513.64

54. e

Mortgage Note Payable

Payment 10/31Payment 11/30

46.97 47.29

70,000 Beg. Balance

69,905.74 Balance @ 11/30

55. d

56. d

57. d

58. d

59. b Total capital contributions equal any par value contributed plus paid in capital in excessof par.

60. b Preferred CommonPreferred: Arrears $25,000

Current (5% × 5,000 × $100) x 2 years $25,000Remainder to Common $60,000

$50,000 $60,000

61. b

62. d

63. b

64. f % increase = 30,000 - 10,000 = 2.0 or 200% 10,000

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

70. c

365=

365= 32.01

A/R Turnover 11.4

A/R Turnover = = = 11.4Sales Revenues 325,000

Ave. A/R Balance ( 25,000 + 32,000 )2

71. b

InventoryTurnover

= = = 13.4Cost of Goods Sold 234,000

Ave. Inv. Balance ( 15,000 + 20,000 )2

72. b Total Liabilities = 59,000 = .57 Total Assets 104,000

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

74. a

Book Value Per Share =Total Owners’ Equity

=45,000

= $ 4.50# of Shares of Stock 10,000

75. b

Price/Earnings Ratio =Market Price per Share

=$18.00

= 20EPS $ .90

EPS =Net Income

=9,000

= .90# Shares Common Stock 10,000

76. c Market Price Per Share = EPS × P/E Ratio27 = .90 × 30

77. b

78. c

79. e Increased credit sales will not necessarily increase the turnover ratio if the averagebalance of accounts receivable also increases significantly.