Accounting 303 Exam 3, Chapters 8-10 Fall 2015

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1 Accounting 303 Exam 3, Chapters 8-10 Fall 2015 Name Row I. Multiple Choice Questions. (2 points each, 24 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. Able sells a piece of equipment to Smythe for $1,800 on August 1. The equipment cost Able $1,000. The equipment is picked up by Smythe on August 10. The contract also includes a 12 month maintenance plan. How many performance obligations are included in this transaction? a. 1 b. 2 c. 3 d The Construction in Progress account is what type of account? a. liability b. revenue c. asset d. expense 3. Which of the following is not an accurate representation concerning revenue recognition? a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when cash is received or when services have been performed. c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale. 4. Under the completed-contract method revenue is recognized a. each year of the contract. b. only the first year of the contract. c. only the last year of the contract. d. only when there is a loss on the contract. 5. What type of account is Allowance for Uncollectible Accounts? a. current liability b. expense c. contra asset d. contra revenue 1

2 6. Lithotech, Inc. had net sales in 2016 of $700,000. At December 31, 2016, before adjusting entries, the balances in selected accounts were: accounts receivable $125,000 debit, and allowance for doubtful accounts $1,200 credit. Lithotech estimates that 2% of its net sales will prove to be uncollectible. What is the net amount of accounts receivables reported on the statement of financial position at December 31, 2016? a. $109,800 b. $111,000 c. $112,200 d. $122, Tee Company began 2017 with accounts receivable of $400,000 and an allowance for uncollectible accounts of $20,000 (credit balance). Bad debt expense for the year was $33,000 and the ending balance in the allowance for uncollectible accounts account was $15,000. What was the amount of accounts receivable written off during the year? a. $5,000 b. $38,000 c. $438,000 d. $405, When comparing the FIFO and LIFO inventory methods, a. LIFO reports the most up-to-date inventory cost on the balance sheet b. FIFO results in the most realistic net income figure c. FIFO matches old inventory costs against revenue d. LIFO matches old inventory costs against revenue 9. Gordon Company has the following data available: Units Total Transaction Units Sold Purchased Unit Cost Beginning Inventory 300 $10 $3000 March 1 Purchase 200 $12 $2400 April 25 Sale 350 June 10 Purchase 300 $14 $4200 July 20 Sale 250 October 30 Purchase 250 $15 $3750 December 15 Sale 400 Totals $13350 If Gordon Company uses a periodic FIFO inventory system, the cost of ending inventory on December 31 is a. $1,500. b. $700. c. $750. d. $500. 2

3 10. Groton Company sells product NorLoCo for $50 per unit. The cost of one unit is $45, and the replacement cost is $43. The estimated unavoidable selling cost of a unit is $10, and the normal profit is 40% of selling price. At what amount per unit should this product be reported, applying lower-of-cost-or-market? a. $20. b. $40. c. $43. d. $ George Co. pledged $800,000 of its accounts receivable to Kuality Finance Co. as part of a financing arrangement. George received $670,000 in cash, was charged a 2% commission on the amount of the receivables, and the interest rate on the financing was 10%. What type of transaction was this? a. sale of accounts receivable without recourse b. sale of accounts receivable with recourse c. circularization of accounts receivable d. secured borrowing 12. Moldcell sold $10,000 of cellular equipment to a customer on November 26, 2015, with terms of 2/15, n45. If Moldcell collects the full amount due from the customer on December 16, 2015, what amount will Moldcell collect assuming Moldcell uses the net method of accounting for sales? a. $10,200 b. $10,000 c. $9,820 d $9,800 3

4 II. Problems (76 points in total) Show all work where appropriate! 1. (14 points) On November 18, 2015, Romstal LTD enters into a contract to sell IT infrastructure products to a new customer. The basic contract is for $300,000 of products, but it also provides an incentive for the customer to purchase additional products during the one year period from the contract date. If total purchases during that period by the customer exceed a given level, the contract provides a volume discount. The discounts are retroactive, so once the volume level is met the discount applies to all purchases made to date and will provide a rebate to the customer for purchases already made. The following table shows the sales volume amounts, the discount percentage, and the expected probabilities estimated by Romstal of the customer of achieving those volume levels. Romstal estimates there is a 15% probability the customer will not purchase any additional products during the one year time period and estimates the following probabilities the customer will make additional purchases that will trigger the discount rebates. Total Sales During Discount One Year Period Percentage Probability $300,000 0% 15% $1,000,000 1% 50% $2,000,000 3% 20% $4,000,000 5% 15% a. Determine the transaction price for the contract signed on November 18 using the expected value approach. b. If the products in the initial contract are delivered to the customer on November 23, 2015, prepare the journal entry to record the transaction on that date. 4

5 2. (14 points) Newman and Sons Construction Company (NSC) was awarded the contract to build a new baseball stadium for UNO. Assume the contract price was $3,500,000 and the project was started on July 1, 2014, and finished on February 29, NSC uses the percentage-of-completion method of accounting for this contract. Other data is as follows: Contract Price $ 3,500,000 $ 3,500,000 $ 3,500,000 Costs Incurred during Year Costs Incurred to Date 980,000 3,060,000 3,440,000 Estimated Costs to Complete 1,820, ,000 0 Total Estimated Cost Percentage Completed Estimated Gross Profit Progress Billings 800,000 2,400, ,000 Cash Collections 600,000 2,400, ,000 Required: a. Prepare all entries for this project for b. For 2015, what is the amount recognized for: Revenue Gross Profit c. For 2016, what is the amount recognized for: Revenue Gross Profit 5

6 3. (14 points) Ming Company sold $2,000,000 of its accounts receivables to Jiffy Finance Company on a without recourse basis. This transaction meets the criteria to be accounted for as a sale. Jiffy Finance assessed a finance charge of 4% of the total accounts receivable factored and retained an amount equal to 5% of the total receivables to cover sales discounts and returns. Jiffy will return the holdback if the receivables are collected in full. a. Prepare the journal entry on Ming s books for this transaction. b. Prepare the journal entry on Ming s books if this transaction was with recourse. Assume the estimate of the recourse liability is $36,000. 6

7 a (17 points) Braşo Mfg. Co. adopted the dollar-value LIFO inventory method on December 31, 2015 (its base year). The inventory on that date using the dollar-value LIFO inventory method was $160,000. Additional inventory data are as follows: Inventory at Price index Year year-end prices (base year 2015) 2015 $160, , , Required: Compute Braşov Mfg. Co. s inventory at December 31, 2016 and 2017, using dollar-value LIFO for each year. b

8 5. (17 points) The following information is available for the month of June for Popa Department store: Sales $79,000 Sales Returns $1,000 Markups $10,000 Markup cancellations $1,000 Markdowns $9,300 Purchases (at cost) $40,000 Purchases (at retail) $107,000 Purchase returns (at cost) $1,200 Purchase returns (at retail) $2,000 Beginning inventory (at cost) $30,000 Beginning inventory (at retail) $46,000 Calculate the ending inventory at cost using the conventional (LCM) retail method. Round the cost ratio to four decimal places. (For example, = ) At Cost At Retail 8

9 Solutions Multiple Choice Question Number Answer 1. a or b 2. c 3. b 4. c 5. c 6. a 7. b 8. c 9. c 10. b 11. d 12. b 9

10 Problem 1 1. (10 points) On November 18, 2015, Romstal LTD enters into a contract to sell IT infrastructure products to a new customer. The basic contract is for $300,000 of products, but it also provides an incentive for the customer to purchase additional products during the one year period from the contract date. If total purchases during that period by the customer exceed a given level, the contract provides a volume discount. The discounts are retroactive, so once the volume level is met the discount applies to all purchases made to date and will provide a rebate to the customer for purchases already made. The following table shows the sales volume amounts, the discount percentage, and the expected probabilities estimated by Romstal of the customer of achieving those volume levels. Romstal estimates there is a 15% probability the customer will not purchase any additional products during the one year time period and estimates the following probabilities the customer will make additional purchases that will trigger the discount rebates. Total Sales During Discount One Year Period Percentage Probability $300,000 0% 15% $1,000,000 1% 50% $2,000,000 3% 20% $4,000,000 5% 15% a. Determine the transaction price for the contract signed on November 18 using the expected value approach. If Total Annual Sales Exceed Discount Percentage Given Consideration Amount for the Nov 18 th Sale Probability Expected Amount $300,000 0% 300,000 x 15% = $45,000 $1,000,000 1% 297,000 x 50% = 148,500 $2,000,000 3% 291,000 x 20% = 58,200 $4,000,000 5% 285,000 x 15% = 42,750 $294,450 b. If the products in the initial contract are delivered to the customer on November 23, 2015, prepare the journal entry to record the transaction on that date. Accounts Receivable 294,450 Sales 294,450 10

11 2. (10 points) Newman and Sons Construction Company (NSC) was awarded the contract to build a new baseball stadium for UNO. Assume the contract price is $3,500,000 and the project was started on July 1, 2014, and finished on February 29, NSC uses the percentage-of-completion method of accounting for this contract. Other data is as follows: Contract Price $ 3,500,000 $ 3,500,000 $ 3,500,000 Costs Incurred during Year 980,000 2,080, ,000 Costs Incurred to Date 980,000 3,060,000 3,370,000 Estimated Costs to Complete 1,820, ,000 0 Total Estimated Costs 2,800,000 3,400,000 3,370,000 Percentage Complete Estimated Gross Profit 700, , ,000 Progress Billings 800,000 2,400, ,000 Cash Collections 600,000 2,400, ,000 Required: a. Prepare all entries for this project for Construction in Progress 980,000 Cash, etc. 980, Acc Rec 800,000 Progress Billings 800, Cash 600,000 Acc Rec 600, Construction Expense 980,000 Construction in Progress 245,000 Construction Revenue 1,225,000 b. For 2015, what is the amount recognized for: Revenue 1,925,000 Gross Profit <155,000> c. For 2016, what is the amount recognized for: Revenue 350,000 Gross Profit 40,000 11

12 Problem 3 (a) Cash 1,820,000 Rec from Factor 100,000 Loss on Sale 80,000 A/R 2,000,000 (b) Cash 1,820,000 Rec from Factor 100,000 Loss on Sale 116,000 A/R 2,000,000 Recourse Lia 36,000 12

13 Problem /1.05 = = Layer x 1.0 = Layer x 1.05 = /1.15 = = <32174> 2015 Layer x 1.0 = Layer x 1.05 =

14 5. (10 points) The following information is available for the month of June for Popa Department store: Sales $79,000 Sales Returns $1,000 Markups $10,000 Markup cancellations $1,000 Markdowns $9,300 Purchases (at cost) $40,000 Purchases (at retail) $107,000 Purchase returns (at cost) $1,200 Purchase returns (at retail) $2,000 Beginning inventory (at cost) $30,000 Beginning inventory (at retail) $46,000 Calculate the ending inventory at cost using the conventional (LCM) retail method. Round the cost ratio to four decimal places. (For example, = ) Answer: Cost Retail Beginning inventory $30,000 $46,000 Purchases $40,000 $107,000 Purchase returns ($1,200) ($2,000) Markups $10,000 Markup cancellations ($1,000) Subtotal for ratio $68,800 $160,000 Ratio $68,800 / $160,000 = 43.00% Markdowns ($9,300) Sales(net) ($78,000) Ending inventory 43.00% $72,700 = $31,261 $72,700 14

Accounting 303 Exam 3, Chapters 7-8 Fall 2014

Accounting 303 Exam 3, Chapters 7-8 Fall 2014 Name Row I. Multiple Choice Questions. (2 points each, 20 points in total) Read each question carefully and indicate your answer by circling the letter preceding