February 28, 2007 Anderson ECON 136A Midterm #2 v. 1 Name

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1 February 28, 2007 Anderson ECON 136A Midterm #2 v. 1 Name THERE IS A PROBLEM IN THIS EXAM WHICH REQUIRES THAT YOU COMPLETE IN THE SPACE PROVIDED... PLEASE BE SURE TO WRITE YOUR NAME ON THE EXAM AND TURN IT IN WITH YOUR BLUE-BOOK AND SCANTRON AT THE END OF CLASS. Complete questions 1-25 on scantron, and the problems in your blue-book unless specifically requested otherwise within the exam. 1. Which of the following is NOT considered cash for financial reporting purposes? a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s 2. Which of the following is correct? a. Selling costs are product costs. b. Manufacturing overhead costs are product costs. c. Interest costs for routine inventories are product costs. d. All of these. 3. We buy an assortment of overstock items. We received 5,000 units of product A and 5,000 units of product B. The purchase price was not allocated between the two product types and we paid a total of $10,000 for both. We expect to sell product A for $2.00/ unit and product B for $1.00/ unit. What is the per unit cost under GAAP (when doing your computation, round to two decimals): a. $1.00/ unit for product A and B. b. $1.34/ unit for product A and $.66/ unit for product B. c. $2.00/ unit for product A and $0.00/ unit for product B. d. $1.50/ unit for product A and $.55/ unit for product B. 4. When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these.

2 Midterm #2 v. 1--Page 2 5. XYZ, Inc. has properly applied their percentage of sales consistently all year in recording bad debt expenses. At the end of the year, they note that the allowance for doubtful accounts balance is $150,000. Management reviews the accounts receivable aging and notes that there are very old balances and other items which lead them to estimate that the allowance needs to be $225,000. Given these facts, which of the following statements is accurate: a. Management should adjust the percentage of sales to increase the allowance on future transactions, but do nothing to adjust the bad debt expense now; b. Management should report a restatement of $75,000; c. Management should do nothing as the additional expense could result in negative comments from financial analysts; d. Management should record an additional bad debt expense of $75,000, reflecting a change in their estimate. 6. XYZ, Inc. ships goods FOB destination point which are in transit at the end of the year. As of the end of the year, these items should be: a. Excluded from inventory. b. Included in inventory. c. Excluded in inventory as of the end of the year if the seller paid the freight charges. d. Excluded from inventory until the associated freight charges have been paid. 7. A company is using the direct write off method for recording bad debt expense. Under this method, they record bad debt expense during the year of $17,500. Had they utilized an allowance method, the bad debt expense during the year would have been $17,450. The difference between the two methods is not considered material to the financial statements. Which of the following statements is true: a. The company should record a debit to the allowance and a credit to the bad debt expense in the amount of $50 because the direct write-off method is not GAAP. b. The company should record a credit to the allowance and a credit to the bad debt expense in the amount of $50 because the direct write-off method is not GAAP c. The company need not record any entry as the direct write off method is producing a result which is materially consistent with GAAP. d. No gaps to GAAP, if it is not GAAP, it must be made GAAP. 8. If inventory is overstated, then: a. Gross margin and net income will both be over stated as well. b. Gross margin and net income will both be understated. c. Only balance sheet ratios will be impacted. d. Only income ratios will be impacted.

3 Midterm #2 v. 1--Page 3 9. A company employs the percentage of sales method for estimating the allowance for doubtful accounts. Using this method, they estimated during the year that the bad debt expense is $200,000. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $10,000. The proper amount for them to include as bad debt expense during the year is: a. $210,000 b. $200,000 c. $190,000 d. $ 10, Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these. 11. A company employs the percentage of sales method for estimating the allowance for doubtful accounts. They use a factor of 2% of credit sales and reported credit sales of $2,000,000 during the year. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $25,000. Subsequent to writing off balances, they received $10,000 on accounts previously written off. The proper amount for them to include as bad debt expense during the year is: a. $30,000 b. $40,000 c. $55,000 d. $65, Which of the following are required inventory disclosures: a. The inventory costing method used. b. The composition of the ending inventory. c. Unusual or significant inventory financing arrangements. d. All of these. 13. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average. 14. Designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. b. should always be equal to net realizable value. c. may sometimes exceed net realizable value. d. should always be equal to net realizable value less a normal profit margin.

4 Midterm #2 v. 1--Page Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2004 and 2003 contained errors as follows: Ending inventory $8,000 overstated $14,000 overstated Depreciation expense $4,000 understated $16,000 overstated 15. Assume that NO correcting entries were made at December 31, IGNORING INCOME TAXES, by how much will retained earnings at December 31, 2004 be overstated or understated? a. $4,000 understated b. $12,000 overstated c. $12,000 understated d. $18,000 understated 16. Assume that the proper correcting entries were made at December 31, By how much will 2004 income before taxes be overstated or understated? a. $4,000 understated b. $4,000 overstated c. $8,000 overstated d. $12,000 overstated 17. Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated. 18. Which statement is true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for interim statements. b. It may be used to estimate inventories for GAAP financial statements. c. It may be used by auditors as an acceptable inventory valuation for GAAP financial statements. d. None of these.

5 Midterm #2 v. 1--Page Inventory is recorded under LIFO by the accounting system at a cost of $10,000. The inventory is expected to sell for $11,000, it would cost $10,500 to replace, $100 in commissions to sell, and has a normal profit margin of 20%. Which of the following is true of this inventory? a. The designated market value is $10,500 and the inventory should be reported on the balance sheet at $10,000. b. The designated market value is $10,500 and the inventory should be reported on the balance sheet at $10,500. c. The designated market value is $8,700 and the inventory should be reported on the balance sheet at $8,700. d. The designated market value is $8,700 and the inventory should be reported on the balance sheet at $10, Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability. 21. A company using the percentage of sales method has gone through its normal process of allowing for doubtful accounts, and written off certain accounts. Subsequently one of the balances they wrote-off has been paid by the customer! This should: a. Increase the bad debt expense b. Reduce the allowance for bad debts c. Increase the allowance for bad debts d. None of these. 22. Inventory was understated at the beginning of the year by $25,000 and was properly stated at the end of the year. During the year, the accounting system recorded cost of sales in the amount of $1,000,000. The proper amount to report under GAAP for COGS for the year is: a. $1,000,000 b. $1,025,000 c. $ 975,000 d. none of these 23. Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price. c. selling price plus costs to complete and sell. d. selling price less costs to complete and sell.

6 Midterm #2 v. 1--Page Under recent accounting literature, abnormal costs associated with inventory should be: a. Be capitalized to inventory as a cost necessary to make the inventory ready for sale. b. Be capitalized to inventory only if it adds value. c. Be recorded as an expense in the period in which the related inventory is sold. d. Be expensed as incurred. 25. When using a periodic inventory system: a. Purchases made before a count occurs should be recorded directly as inventory and adjusted for inventory sold at the time that the inventory count is made. b. Purchases made before a count occurs should be recorded as purchases until the count is made and then moved over to inventory before the adjustment for COGS is made. c. Shrinkage is not factored into COGS d. Only cycle counts are required to determine if the accounting system is working.

7 February 28, 2007 Anderson ECON 136A Midterm #2 v. 2 Name THERE IS A PROBLEM IN THIS EXAM WHICH REQUIRES THAT YOU COMPLETE IN THE SPACE PROVIDED... PLEASE BE SURE TO WRITE YOUR NAME ON THE EXAM AND TURN IT IN WITH YOUR BLUE-BOOK AND SCANTRON AT THE END OF CLASS. Complete questions 1-25 on scantron, and the problems in your blue-book unless specifically requested otherwise within the exam. 1. Which of the following is correct? a. Selling costs are product costs. b. Manufacturing overhead costs are product costs. c. Interest costs for routine inventories are product costs. d. All of these. 2. Inventory is recorded under LIFO by the accounting system at a cost of $10,000. The inventory is expected to sell for $11,000, it would cost $10,500 to replace, $100 in commissions to sell, and has a normal profit margin of 20%. Which of the following is true of this inventory? a. The designated market value is $10,500 and the inventory should be reported on the balance sheet at $10,000. b. The designated market value is $10,500 and the inventory should be reported on the balance sheet at $10,500. c. The designated market value is $8,700 and the inventory should be reported on the balance sheet at $8,700. d. The designated market value is $8,700 and the inventory should be reported on the balance sheet at $10, Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated. 4. XYZ, Inc. ships goods FOB destination point which are in transit at the end of the year. As of the end of the year, these items should be: a. Excluded from inventory. b. Included in inventory. c. Excluded in inventory as of the end of the year if the seller paid the freight charges. d. Excluded from inventory until the associated freight charges have been paid.

8 Midterm #2 v. 2--Page 2 5. A company employs the percentage of sales method for estimating the allowance for doubtful accounts. They use a factor of 2% of credit sales and reported credit sales of $2,000,000 during the year. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $25,000. Subsequent to writing off balances, they received $10,000 on accounts previously written off. The proper amount for them to include as bad debt expense during the year is: a. $30,000 b. $40,000 c. $55,000 d. $65, A company is using the direct write off method for recording bad debt expense. Under this method, they record bad debt expense during the year of $17,500. Had they utilized an allowance method, the bad debt expense during the year would have been $17,450. The difference between the two methods is not considered material to the financial statements. Which of the following statements is true: a. The company should record a debit to the allowance and a credit to the bad debt expense in the amount of $50 because the direct write-off method is not GAAP. b. The company should record a credit to the allowance and a credit to the bad debt expense in the amount of $50 because the direct write-off method is not GAAP c. The company need not record any entry as the direct write off method is producing a result which is materially consistent with GAAP. d. No gaps to GAAP, if it is not GAAP, it must be made GAAP. 7. Under recent accounting literature, abnormal costs associated with inventory should be: a. Be capitalized to inventory as a cost necessary to make the inventory ready for sale. b. Be capitalized to inventory only if it adds value. c. Be recorded as an expense in the period in which the related inventory is sold. d. Be expensed as incurred. 8. A company employs the percentage of sales method for estimating the allowance for doubtful accounts. Using this method, they estimated during the year that the bad debt expense is $200,000. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $10,000. The proper amount for them to include as bad debt expense during the year is: a. $210,000 b. $200,000 c. $190,000 d. $ 10,000

9 Midterm #2 v. 2--Page 3 9. When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these. 10. We buy an assortment of overstock items. We received 5,000 units of product A and 5,000 units of product B. The purchase price was not allocated between the two product types and we paid a total of $10,000 for both. We expect to sell product A for $2.00/ unit and product B for $1.00/ unit. What is the per unit cost under GAAP (when doing your computation, round to two decimals): a. $1.00/ unit for product A and B. b. $1.34/ unit for product A and $.66/ unit for product B. c. $2.00/ unit for product A and $0.00/ unit for product B. d. $1.50/ unit for product A and $.55/ unit for product B. 11. Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these. 12. Designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. b. should always be equal to net realizable value. c. may sometimes exceed net realizable value. d. should always be equal to net realizable value less a normal profit margin. 13. If inventory is overstated, then: a. Gross margin and net income will both be over stated as well. b. Gross margin and net income will both be understated. c. Only balance sheet ratios will be impacted. d. Only income ratios will be impacted Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2004 and 2003 contained errors as follows: Ending inventory $8,000 overstated $14,000 overstated Depreciation expense $4,000 understated $16,000 overstated

10 Midterm #2 v. 2--Page Assume that the proper correcting entries were made at December 31, By how much will 2004 income before taxes be overstated or understated? a. $4,000 understated b. $4,000 overstated c. $8,000 overstated d. $12,000 overstated 15. Assume that NO correcting entries were made at December 31, IGNORING INCOME TAXES, by how much will retained earnings at December 31, 2004 be overstated or understated? a. $4,000 understated b. $12,000 overstated c. $12,000 understated d. $18,000 understated 16. Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability. 17. Which of the following are required inventory disclosures: a. The inventory costing method used. b. The composition of the ending inventory. c. Unusual or significant inventory financing arrangements. d. All of these. 18. XYZ, Inc. has properly applied their percentage of sales consistently all year in recording bad debt expenses. At the end of the year, they note that the allowance for doubtful accounts balance is $150,000. Management reviews the accounts receivable aging and notes that there are very old balances and other items which lead them to estimate that the allowance needs to be $225,000. Given these facts, which of the following statements is accurate: a. Management should adjust the percentage of sales to increase the allowance on future transactions, but do nothing to adjust the bad debt expense now; b. Management should report a restatement of $75,000; c. Management should do nothing as the additional expense could result in negative comments from financial analysts; d. Management should record an additional bad debt expense of $75,000, reflecting a change in their estimate. 19. Which statement is true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for interim statements. b. It may be used to estimate inventories for GAAP financial statements. c. It may be used by auditors as an acceptable inventory valuation for GAAP financial statements. d. None of these.

11 Midterm #2 v. 2--Page A company using the percentage of sales method has gone through its normal process of allowing for doubtful accounts, and written off certain accounts. Subsequently one of the balances they wrote-off has been paid by the customer! This should: a. Increase the bad debt expense b. Reduce the allowance for bad debts c. Increase the allowance for bad debts d. None of these. 21. Which of the following is NOT considered cash for financial reporting purposes? a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s 22. When using a periodic inventory system: a. Purchases made before a count occurs should be recorded directly as inventory and adjusted for inventory sold at the time that the inventory count is made. b. Purchases made before a count occurs should be recorded as purchases until the count is made and then moved over to inventory before the adjustment for COGS is made. c. Shrinkage is not factored into COGS d. Only cycle counts are required to determine if the accounting system is working. 23. Inventory was understated at the beginning of the year by $25,000 and was properly stated at the end of the year. During the year, the accounting system recorded cost of sales in the amount of $1,000,000. The proper amount to report under GAAP for COGS for the year is: a. $1,000,000 b. $1,025,000 c. $ 975,000 d. none of these 24. Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price. c. selling price plus costs to complete and sell. d. selling price less costs to complete and sell. 25. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average.

12 Midterm #2 v. 1--Page 7 February 28, 2007 ANSWER KEY Anderson ECON 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page d MChoice C b MChoice C b MChoice d MChoice C d MChoice b MChoice c MChoice a MChoice b MChoice d MChoice C a MChoice d MChoice a MChoice C a MChoice C a MChoice P d MChoice P a MChoice C a MChoice C a MChoice d MChoice C d MChoice b MChoice d MChoice C d MChoice b MChoice * Test Questions are Scrambled

13 Midterm #2 v. 2--Page 6 February 28, 2007 ANSWER KEY Anderson ECON 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page b MChoice C a MChoice a MChoice C b MChoice a MChoice c MChoice d MChoice b MChoice d MChoice C b MChoice d MChoice C a MChoice C a MChoice d MChoice P a MChoice P d MChoice C d MChoice d MChoice a MChoice C d MChoice d MChoice C b MChoice b MChoice d MChoice C a MChoice C * Test Questions are Scrambled

14 26. XYZ has the following summary trial balance as of, and for the year ended 12/31/06 before any of the activity noted below is recorded, and before closing out net income to retained earnings: DR./ <CR> DR./<CR> Cash 10,000 Available for sale securities 10,000 Accounts receivable 25,000 Inventory 50,000 Tax effect - Accounts payable &accrued expenses (40,000) Common stock (1,000) Accumulated other comprehensive income (2,000) Retained earnings (17,000) Sales (200,000) COGS 140,000 Selling general & administrative expense 25,000 - Hint- what should this # be? Record the Journal entry for each of the following items in your blue book. Assume that XYZ uses a PERIODIC inventory method and uses "tax effect" account for all items requiring net of tax treatment & 35% tax rate. 1. Purchase $10,000 of inventory on credit, terms 2/10n30, using the net method. 2. Sell $20,000 of goods on credit, terms 2/10n30, using the gross method. 3. Collect $4,900 in cash for accounts receivable within the discount period. 4. Pay $9,800 in cash for accounts payables within the discount period. 5. The discount period for both the payables and receivables expires. 6. All remaining accounts receivable and payable from 1 & 2 above are collected and received, respectively. 7. Inventory count is performed resulting in $45,000 of inventory on hand. 8. A loss of $5,000 is experienced on available for sale securities. Determine what the ending balance in each account should be after the effects of each of your above entries. Also, close-out the current income statement accounts to retained earnings. Provide the ending balance in the space provided above.

15 27. Based on the following facts, please compute the ending inventory using only the Dollar Value Retail LIFO method. ROUND PERCENTAGES TO TWO DECIMALS IN YOUR COMPUTATIONS (I.E %= 50.24%) Cost Retail Beginning Inventory 250, ,000 Purchases 1,750,000 3,150,000 Markups, net 12,000 Markdowns, net (6,000) Net sales (3,150,000) Ending inventory at retail 381, Ubetcha Inc. utilizes dollar value LIFO and has only one "pool". The following information pertains to their computation of the inventory balance as of December 31, 2006: Inventort at Price Dec. 31 Year-end prices Index , ,250, ,500, ,450, Compute the ending inventory using "dollar value LIFO" as of December 31, 2003, 2004, 2005 and 2006.

16 #26- SOLUTION 1 Purchases 9,800 Accounts payable 9,800 2 Accounts receivable 20,000 Sales 20,000 3 Cash 4,900 Accounts receivable 5,000 Sales discounts taken (or just sales) Accounts payable 9,800 Cash 9,800 5 No entry, all payables paid within discount period, and receiavbles already recorded "gross" 6 Cash 15,000 Accounts receivable 15,000 (payables already paid in full) 7 Inventory 9,800 Inventory at start 50,000 Purchases 9,800 Puchases 9,800 COGS 14,800 Ending (45,000) Inventory 14,800 COGS 14,800 8 Other comprehensive loss 3,250 Tax effect 1,750 Available for sale securities 5,000 DR./ <CR> DR./<CR> Cash 10,000 20,100 Available for sale securities 10,000 5,000 Accounts receivable 25,000 25,000 Inventory 50,000 45,000 Tax effect - 1,750 Accounts payable &accrued expenses (40,000) (40,000) Common stock (1,000) (1,000) Accumulated other comprehensive income (2,000) 1,250 Retained earnings (17,000) (57,100) Sales (200,000) - COGS 140,000 - Selling general & administrative expense 25,

17 27. SOLUTION - Cost Retail Beginning Inventory 250, ,000 RATIO 66.67% Purchases 1,750,000 3,150,000 Markups, net - 12,000 Markdowns, net - (6,000) 1,750,000 3,156,000 RATIO 55.45% Net sales - (3,150,000) Ending inventory at retail - 381,000 - Ending retail 381,000 Ratio Cost Beginning layer 375, % 250,013 New layer 6, % 3, ,340

18 28-- SOLUTION Inventort at Price Inventory at Base Yr Appropr. Base Yr ANSWER 31-Dec Year-end prices Index Base-Year Price Change Factor Layer YE Balance , , , , , ,250, ,136, , ,000 1,200, ,500, ,304, , ,182 1,393, ,450, ,208,333 (96,014) 115 (110,417) 1,282,765