November 17, 2004 Anderson Econ 136A Midterm #2 Name

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1 November 17, 2004 Anderson Econ 136A Midterm #2 Name Write your name, perm #, Eon 136B Midterm #2 on both your scantron and blue-book. Use your scantrons for questions Use your blue-book for questions 26, 27 & Complete on your scantron using #2 pencil. 1. Present value is a. the value now of a future amount. b. the amount that must be invested now to produce a known future value. c. always smaller than the future value. d. all of these. 2. Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today? a. Future value of 1 or present value of 1 b. Future value of an annuity due of 1 c. Future value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1 3. An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at a. 8% for eight periods. b. 2% for eight periods. c. 8% for 32 periods. d. 2% for 32 periods. 4. Ann Ruth wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $50,000 accumulated. How should she compute her required annual investment? a. $50,000 times the future value of a 5-year, 6% ordinary annuity of 1. b. $50,000 divided by the future value of a 5-year, 6% ordinary annuity of 1. c. $50,000 times the present value of a 5-year, 6% ordinary annuity of 1. d. $50,000 divided by the present value of a 5-year, 6% ordinary annuity of Which of the following is true? a. Rents occur at the beginning of each period of an ordinary annuity. b. Rents occur at the end of each period of an annuity due. c. Rents occur at the beginning of each period of an annuity due. d. None of these.

2 Midterm #2--Page Given below are the future value factors for 1 at 8% for one to five periods. Each item is based on 8% interest compounded annually. Periods Future Value of 1 at 8% If $10,000 is put in a savings account today, what amount will be available three years from today? a. $10, b. $10,000 x c. $10,000 x x 3 d. ($10,000 x 1.080) + ($10,000 x 1.166) + ($10,000 x 1.260) 7. If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using a. 5 periods at 4%. b. 5 periods at 1%. c. 20 periods at 4%. d. 20 periods at 1%. 8. 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 9. 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. 10. The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. none of these. 11. Which of the following methods of determining annual bad debt expense best achieves the matching concept? a. Percentage of sales b. Percentage of ending accounts receivable c. Percentage of average accounts receivable d. Direct write-off

3 Midterm #2--Page When preparing a bank reconciliation, bank credits are a. added to the bank statement balance. b. deducted from the bank statement balance. c. added to the balance per books. d. deducted from the balance per books. 13. At the close of its first year of operations, December 31, 2004, the Linn Company had accounts receivable of $490,000, after deducting the related allowance for doubtful accounts. During 2004, the company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000. What should the company report on its balance sheet at December 31, 2004, as accounts receivable before the allowance for doubtful accounts? a. $620,000 b. $540,000 c. $440,000 d. $360, 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. 15. Goods in transit which are f.o.b. shipping point should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these. 16. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus the purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not. 17. When using the periodic inventory system, which of the following generally would NOT be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases during the period b. Cash (purchase) discounts taken during the period c. Purchase returns and allowances of merchandise during the period d. Cost of transportation-in for merchandise purchased during the period 18. In a period of rising prices, the inventory method which tends to give the highest reported inventory is a. FIFO. b. moving average. c. LIFO. d. weighted-average.

4 Midterm #2--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 19. 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 20. In no case can "market" in the lower of cost or market rule be more than a. estimated selling price in the ordinary course of business. b. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. c. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. d. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. 21. 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. 22. 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. 23. If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, a. this fact must be disclosed. b. disclosure is required only if prices have declined since the date of the order. c. disclosure is required only if prices have since risen substantially. d. an appropriation of retained earnings is necessary.

5 Midterm #2--Page Which statement is NOT 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 annual statements. c. It may be used by auditors. d. None of these. 25. A major advantage of the retail inventory method is that it a. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period. b. hides costs from competitors and customers. c. gives a more accurate statement of inventory costs than other methods. d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies Complete in your blue-book. Remember to leave a trail for partial credit points. 26. Dyer Co. adopted the dollar-value LIFO inventory method on December 31, Dyer's entire inventory constitutes a single pool. On December 31, 2004, the inventory was $240,000 under the dollar-value LIFO method. Inventory data for 2005 are as follows: 12/31/05 inventory at year-end prices $330,000 Relevant price index at year-end (base year 2004) 110 Using dollar value LIFO, compute Dyer's inventory at December 31, 2005.

6 Midterm #2--Page Complete in your blue-book. Remember to leave a trail for partial credit points. 27. On December 31, 2004, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2007, 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%. The services were all provided prior to December 31, 2004 and none of the revenue has yet to be recorded by Green Company. The following interest factors are provided: Interest Rate Table Factors For Three Periods 5% 10% Future Value of Present Value of Future Value of Ordinary Annuity of Present Value of Ordinary Annuity of INSTRUCTIONS (a) Determine the present value of the note. (b) Show the opening journal entry necessary to record the revenue from the services provided, the note receivable and any premium or discount on the note receivable. 28. Miller Variety Store uses the LIFO retail inventory method. Information relating to the computation of the inventory at December 31, 2004, follows: Cost Retail Inventory, January 1, 2004 $155,000 $240,000 Purchases 480, ,000 Freight-in 80,000 Net markups 160,000 Net markdowns 60,000 Sales 750,000 INSTRUCTIONS Assuming that there was no change in the price index during the year, compute the inventory at December 31, 2004, using the LIFO retail inventory method. (Instructor hint: Using LIFO retail, both markups and markdowns are included in computing the new layer cost to retail ratio.)

7 Midterm #2--Page 7 November 17, 2004 ANSWER KEY Anderson Econ 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page d MChoice C a MChoice C d MChoice C b MChoice C c MChoice C b MChoice P d MChoice P d MChoice C d MChoice C d MChoice C a MChoice C c MChoice C b MChoice P d MChoice C b MChoice C d MChoice C a MChoice C a MChoice C d MChoice P b MChoice C a MChoice C d MChoice C a MChoice C b MChoice C d MChoice C Exercise Problem Problem

8 Midterm #2--Page 8 November 17, x $10, x 5 = 20 periods; 4% 4 = 1%. 10. Open accounts resulting from short-term extensions of credit to customers. 13. $490,000 + ($90,000 - $40,000) = $540, $8,000 + $4,000 = $12, Y.E Price Index B.Yr. $'s B. Yr. Change Layer , ,000 n/a 240, , ,000 60,000 66, Ending Inventory $306, (a) Present value of interest = $30,000 x = $ 74,606 Present value of maturity value = $600,000 x = 450,792 $525,398 (b) Note receivable 600,000 Revenue 525,398 Note discount 74,602 SHORTCUT ALTERNATE ENTRY ACCEPTABLE IF (C) BELOW TREATED IN SAME FASHION: Note receivable 525,340 Revenue 525,340

9 Midterm #2--Page 9 November 17, Miller Variety Store LIFO Retail Computation December 31, 2004 At Cost At Retail Ratio Inventory, January 1, 2004 $155,000 $ 240, % Purchases 480, ,000 Freight-in 80,000 Net markups 160,000 Net markdowns (60,000) Total (excluding beg. inventory) 560, ,000 70% Total (including beg. inventory) $715,000 1,040,000 Less sales 750,000 Inventory, Dec. 31, 2004, at retail $ 290,000 Ending inventory $ 290,000 Beginning inventory $155,000 (240,000) Increment $ 50,000 Increment at cost ($50,000 x 70%) 35,000 Ending inventory at LIFO cost $190,000