ACC 311 Practice Exam II Note: This practice exam is intended to test your knowledge of the material prior

to the actual exam. Neither the length nor the format of the practice exam is representative of the actual test. 1. Information in the income statement helps users to d. all of these. 2. Which of the following is an example of managing earnings down? b. Revising the estimated life of equipment from 10 years to 8 years. 3. Which of the following is an example of managing earnings up? c. Underestimating warranty claims.

4. Fill in the appropriate blanks for each of the independent situations below. Company A Company B Sales (a) $_______ $343,400 Beginning inventory 52,600 (d) _______ Net purchases 175,300 255,600 Ending inventory 52,200 108,000 Cost of goods sold (b) _______ (e) _______ Gross profit 85,300 98,000 Operating expenses (c) _______ 50,000 Income before taxes 6,000 (f) _______

Company C $540,000 90,000 (g) _______ 63,000 407,000 (h) _______ 48,000 (i) _______

(a) = 261,000; (b) = 175,700; (c) = 79,300 (d) = 97,800; (e) = 245,400; (g) = 380,0000 (h) = 133,000; (i) = 85,000 5. In which account are post-dated checks received classified? a. Receivables. 6. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and d. is so near its maturity that it presents insignificant risk of changes in interest rates. 7. When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) d. cash discount. 8. Why is the allowance method preferred over the direct write-off method of accounting for bad debts? d. Improved matching of bad debt expense with revenue. 9. How can accounting for bad debts be used for earnings management?

b. Changing the percentage of sales recorded as bad debt expense. 10. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach a. gives a reasonably correct statement of receivables in the balance sheet. 11. What is "recourse" as it relates to selling receivables? a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. 12. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)? c. 18% 13. Wellington Corp. has outstanding accounts receivable totaling $2.54 million as of December 31 and sales on credit during the year of $12.8 million. There is also a debit balance of $6,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? $122,000

14. Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year? $508,000

15. Before year-end adjusting entries, Dunn Company's account balances at December 31, 2010, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is b. $537,500. 16. The following information is available for Murphy Company: Allowance for doubtful accounts at December 31, 2009 Credit sales during 2010 Accounts receivable deemed worthless and written off during 2010 $ 8,000 400,000 9,000

As a result of a review and aging of accounts receivable in early January 2011, however, it has been determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2010. What amount should Murphy record as "bad debt expense" for the year ended December 31, 2010?

c. $6,500 17. Black Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of $12,000. During 2010, it wrote off $8,640 of accounts and collected $2,520 on accounts previously written off. The balance in Accounts Receivable was $240,000 at 1/1 and $288,000 at 12/31. At 12/31/10, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/10? d. $14,400. 18. On December 31, 2010, Flint Corporation sold for $75,000 an old machine having an original cost of $135,000 and a book value of $60,000. The terms of the sale were as follows: $15,000 down payment $30,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2010 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) a. $52,773. 19. Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $60,000 payment in two years? $ 49,587 20. Sun Inc. factors $2,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $100,000. What would be recorded as a gain (loss) on the transfer of receivables? b. Loss of 160,000. 21. On December 31, 2010, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $400,000, a due date of December 31, 2012, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. (a) Dec 31, 2010 De. Prepare all journal entries related to the note from origination to maturity.

Note Receivable $365,289 Cr. Consulting Revenues $365,289

Dec 31, 2011 De. De. ,

Cash $20,000 Note Receivable $16,529 Cr. Consulting Revenues $36,529

Dec 31, 2012 De. De. , De.

Cash $20,000 Note Receivable $18,182 Cr. Consulting Revenues $38,182 Cash Cr. Note Receivable $400,000 $400,000

22. A trial balance before adjustment included the following: Debit Accounts receivable $80,000 Allowance for doubtful accounts Sales Sales returns and allowances 8,000

Credit 730 $340,000

Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales. De. Bad debt expense $3,270 Cr. Allowance for doubtful accounts $3,270

and (2) 1% of net sales. De. Bad debt expense $3,320 Cr. Allowance for doubtful accounts $3,320 23. Where should raw materials be classified on the balance sheet? b. Inventory. 24. Which of the following is a characteristic of a perpetual inventory system? c. Cost of goods sold is recorded with each sale. 25. What is consigned inventory? c. Goods that are shipped, but title remains with the shipper. 26. If the beginning inventory for 2010 is overstated, the effects of this error on cost of goods sold for 2010, net income for 2010, and assets at December 31, 2011, respectively, are b. overstatement, understatement, no effect. 27. The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in d. an understatement of liabilities and an overstatement of owners' equity. 28. What is the effect of a $50,000 overstatement of last year's inventory on current years ending retained earning balance? b. No effect.

29. Costs which are inventoriable include all of the following except d. selling costs of a sales department. 30. Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold b. FIFO LIFO 31. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. 32. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method? a. Prices decreased. 33. In a period of rising prices, the inventory method which tends to give the highest reported net income is b. first-in, first-out. 34. What happens when inventory in base year dollars decreases? c. LIFO layer is liquidated. 35. How might a company obtain a price index in order to apply dollar-value LIFO? d. All of the above. 36. Emley Company has been using the LIFO method of inventory valuation for 10 years, since it began operations. Its 2010 ending inventory was $40,000, but it would have been $60,000 if FIFO had been used. Thus, if FIFO had been used, Emley's income before income taxes would have been a. $20,000 greater over the 10-year period. 37. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $65 each. During the month, the company made two purchases: 300 units at $68 each and 150 units at $70 each. Chess Top also sold 500 units during the month. Using the average cost method, what is the amount of ending inventory? $10,131 38. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $12 each. During the month, the company made two purchases: 500 units at $13 each and 2,000 units at $13.50 each. Checkers also sold 2,150 units during the month. Using the FIFO method, what is the ending inventory? $20,925

39. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $12 each. During the month, the company made two purchases: 500 units at $13 each and 2,000 units at $13.50 each. Checkers also sold 2,150 units during the month. Using the LIFO method, what is the ending inventory? $18,950 Use the following information for 51 and 52: RF Company had January 1 inventory of $100,000 when it adopted dollar-value LIFO. During the year, purchases were $600,000 and sales were $1,000,000. December 31 inventory at year-end prices was $143,360, and the price index was 112. 40. What is RF Companys ending inventory? $131,360 41. What is RF Companys gross profit? $431,360 42. Aber Company manufactures one product. On December 31, 2009, Aber adopted the dollarvalue LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was $180,000. Inventory data are as follows: Inventory at Price index Year year-end prices (base year 2009) 2010 $252,000 1.05 2011 368,000 1.15 2012 387,500 1.25 Compute the inventory at December 31, 2010, 2011, and 2012, using the dollar-value LIFO method for each year. 2010 2011 2012 $243,000 $335,000 $323,500

43. In no case can "market" in the lower-of-cost-or-market rule be more than b. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. 44. Designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. 45. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal

selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true? d. Income of the following year will be understated. 46. When the direct method is used to record inventory at market d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold. 47. When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at? b. Net realizable value 48. Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Historical cost Replacement cost Estimated cost to dispose Estimated selling price Product #1 $40.00 45.00 10.00 80.00 Product #2 $ 70.00 54.00 26.00 130.00

In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Oslo use for products #1 and #2, respectively? $40 and $65 49. Ryan Distribution Co. has determined its December 31, 2010 inventory on a FIFO basis at $250,000. Information pertaining to that inventory follows: Estimated selling price Estimated cost of disposal Normal profit margin Current replacement cost $255,000 10,000 30,000 225,000

Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2010, the loss that Ryan should recognize is? $25,000 50. Determine the proper unit inventory price in the following independent cases by applying the lower of cost or market rule. Circle your choice. Cost Net realizable value Net realizable value less normal profit Market replacement cost 1) $8 2) $10 3) $12 4) $4 5) $6 1 $8.00 8.85 8.15 7.90 2 $10.50 10.00 9.00 10.10 3 $12.00 12.20 11.40 12.50 4 $6.00 4.25 3.75 4.00 5 $7.20 6.90 6.00 5.40

51. Risers Inc. reported total assets of $1,600,000 and net income of $85,000 for the current year. Risers determined that inventory was understated by $23,000 at the beginning of the year and $10,000 at the end of the year. What is the corrected amount for total assets and net income for the year? Total assets: Net Income: $1,610,000 $72,000