Answer questions #1-25 on your green scantron--write YOUR VERSION # ON YOUR SCANTRON PLEASE!!!

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1 136A fall 09 MIDTERM 2 v. 1 Name Answer questions #1-25 on your green scantron--write YOUR VERSION # ON YOUR SCANTRON PLEASE!!! Answer the remaining questions in your blue-books. 1. Which of the following methods of determining bad debt expense does not properly match expense and revenue? a. Charging bad debts with an amount derived from aging accounts receivable under the allowance method. b. Charging bad debts as accounts are written off as uncollectible. c. Charging bad debts with a percentage of sales under the allowance method. d. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. 2. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $ It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $ Which of the following statements is NOT true? a. The closing inventory of the current year is understated. b. Income of the following year will be understated. c. The cost of sales of the following year will be understated. d. The current year's income is understated. 3. Which of the following is correct? a. Interest costs for routine inventories are product costs. b. All of these. c. Selling costs are product costs. d. Manufacturing overhead costs are product costs. 4. XYZ, Inc. ships goods FOB shipping point which are in transit at the end of the year. As of the end of the year, XYZ should do what with respect to this inventory? a. Include in inventory until the bill from the trucking company is received. b. Include in inventory until the customer pays the invoice. c. Exclude from inventory. d. Include in inventory. 5. Which of the following methods of determining annual bad debt expense best achieves the matching concept? a. Percentage of average accounts receivable b. Direct write-off c. Percentage of sales d. Percentage of ending accounts receivable

2 MIDTERM 2 v. 1--Page 2 6. 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 $9,900 to replace, $200 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 $11,000 and the inventory should be reported on the balance sheet at $10,000. b. The designated market value is $9,900 and the inventory should be reported on the balance sheet at $9,900. c. The designated market value is $10,800 and the inventory should be reported on the balance sheet at $10,000. d. The designated market value is $9,900 and the inventory should be reported on the balance sheet at $10, 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 increased. b. Price trend cannot be determined from information given. c. Prices decreased. d. Prices remained unchanged. 8. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. base stock. b. weighted-average. c. FIFO. d. LIFO. 9. Inventory was overstated at the beginning of the year by $10,000 and was properly stated at the end of the year. During the year, the accounting system recorded cost of sales in the amount of $500,000. The proper amount to report under GAAP for COGS for the year is: a. $510,000 b. none of these c. $490,000 d. $500,000

3 MIDTERM 2 v. 1--Page The bank lent XYZ, Inc. $1 million and XYZ agreed to maintain a cash reserve of at least $100,000 at all times. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $25,000, and deposits in transit of $30,000. In addition, they hold $50,000 of certificates of deposit (CD's) at the bank with an original maturity of 1 month, 90 day treasury bills of $5,000, and stock in AOL at $45,000. Finally, the bank charged XYZ a fee of $500 which XYZ has not yet recorded. How much should XYZ present as cash and cash equivelants on their balance sheet? a. $454,500 b. $499,500 c. $455,000 d. $500, 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 $75,000. Also during the year, Management updated their estimate derived from the percentage of sales method and determined it appropriate to reduce the allowance for doubtful accounts by $10,000 and subsequently wrote-off $5,000 of uncollectible balances. The proper amount for them to include as bad debt expense during the year is: a. $85,000 b. $65,000 c. $55,000 d. $75, Designated market value a. may sometimes exceed net realizable value. b. should always be equal to net realizable value. c. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. d. should always be equal to net realizable value less a normal profit margin. 13. We buy an assortment of overstock items. We received 100 units of product A, 200 units of product B and 500 units of product C. The purchase price was not allocated between the two product types and we paid a total of $9,000 for the whole package. We expect to sell product A for $2.00/ unit, product B for $10.00/ unit, and throw away product C. What is the per unit cost under GAAP for Product C( when doing your computation, round to the nearest dollar): a. $9,000. b. $3,000. c. $0. d. $4,500.

4 MIDTERM 2 v. 1--Page Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. Purchase discounts lost b. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis c. All of these should be capitalized. d. Interest incurred during the production of discrete projects such as ships or real estate projects 15. The bank lent XYZ, Inc. $1 million and XYZ agreed to maintain a cash reserve of at least $100,000 at all times. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $25,000, and deposits in transit of $30,000. In addition, they hold $50,000 of certificates of deposit (CD's) at the bank with an original maturity of 1 month, 90 day treasury bills of $5,000, and stock in AOL at $45,000. Finally, the bank charged XYZ a fee of $500 which XYZ has not yet recorded. XYZ does NOT present cash equivelants on their balance sheet. How much should XYZ report as cash on their balance sheet? a. $499,500 b. $400,000 c. $399,500 d. $500, 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. disclosure is required only if prices have since risen substantially. b. disclosure is required only if prices have declined since the date of the order. c. this fact must be disclosed. d. an appropriation of retained earnings is necessary. 17. If inventory is overstated, then: a. Only balance sheet ratios will be impacted. b. Gross margin and net income will both be understated. c. Gross margin and net income will both be over stated as well. d. Only income ratios will be impacted. 18. 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 recorded as an expense in the period in which the related inventory is sold. c. Be expensed as incurred. d. Be capitalized to inventory only if it adds value.

5 MIDTERM 2 v. 1--Page Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be a. no effect. b. net income, current assets, and current liabilities were overstated. c. net income and current liabilities were overstated. d. net income was correct and current assets and current liabilities were overstated. 20. Which of the following are required inventory disclosures: a. The inventory costing method used. b. Unusual or significant inventory financing arrangements. c. All of these. d. The composition of the ending inventory. 21. ABC, Inc. sells goods on account with terms 2/10 n 30. The full invoice amount is $100,000 and ABC employs the net method. If they receive cash of $50,000 from customers 5 days after the sale, what amount should credited to accounts receivable? a. $52,000 b. $1,000 c. $50,000 d. $49, The category "trade receivables" includes a. income tax refunds receivable. b. claims against insurance companies for casualties sustained. c. none of these. d. advances to officers and employees. 23. The journal entries for a bank reconciliation a. may include a debit to Office Expense for bank service charges. b. may include a credit to Accounts Receivable for an NSF check. c. may include a debit to Accounts Payable for an NSF check. d. are taken from the "balance per bank" section only. 24. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be a. reported as an item of "other expense" in the income statement. b. reported as a deduction from accounts receivable in determining the net realizable value of accounts receivable. c. reported as sales discounts forfeited in the cost of goods sold section of the income statement. d. reported as a deduction from sales in the income statement.

6 MIDTERM 2 v. 1--Page WeCount, Inc. uses a periodic inventory system. At the beginning of the period they had $100,000 of inventory. During the period they made $500,000 of purchases and sold goods to customers for a sales price of $600,000. What should their ending inventory balance be? a. $100,000 b. $1,000,000 c. Insufficient information to answer d. $0 26. XYZ uses the percentage of sales method, assuming 2% of gross sales areuncollectible and has no beginning accounts receivable. Under GAAP, they update the estimate upon the availability of additional relevant information. They use the "net" method to account for sales discounts and record adjustments to sales on the date that such discounts expire. Additionally, they had $100,000 of inventory at the beginning of the accounting period and use periodic inventory. Record the journal entry for each item noted below. Please reference your journal entries according to the number of each relevant fact: 1) Inventory purchases of $3,000,000 are made in cash. 2) Sales on credit of $5,000,000, terms 2/10n30. 3) Cash of $3,920,000 collected within 10 days. 4) Discount period expires 10 days later. 5) Cash of $900,000 collected after the discount period expired. 6) Write-off accounts receivable of $75,000. 7) Review of ALL accounts receivable indicates that the allowance for doubtful accounts should be decreased by $3,000. 8) Cash is collected on balances previously written off in the amount of $1,000 9) Inventory count indicates ending inventory of $150,000. What is the net amount of accounts receivable that should be reported on the balance sheet subsequent to recording all of the above? The same for inventory. 27. Based on the following facts, please compute the ending inventory using each of the following three retail inventory methods: (1) LCM (Conventional LIFO retail) (2) Cost method (Average Cost) (3) Retail LIFO Cost Retail Beginning Inventory 800,000 1,000,000 Purchases 2,000,000 2,700,000 Markups, net 30,000 Markdowns, net (10,000) Net sales (2,500,000) Ending inventory at retail 1,220,000

7 MIDTERM 2 v. 1--Page 7 ANSWER KEY 136A fall Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page b MChoice C b MChoice C d MChoice C c MChoice c MChoice C b MChoice c MChoice C c MChoice C c MChoice a MChoice b MChoice c MChoice C c MChoice d MChoice C c MChoice c MChoice C c MChoice c MChoice d MChoice C c MChoice c MChoice c MChoice C a MChoice C d MChoice C c MChoice Exercise * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

8 MIDTERM 2 v. 1--Page , ,000+50,000+5, =454, Open accounts resulting from short-term extensions of credit to customers. 26. (1) Purchases $3,000,000 Cash $3,000,000 (2) Accounts receivable $4,900,000 Sales $4,900,000 Bad debt expense $ 100,000 Allowance for DA's $ 100,000 (3) Cash $3,920,000 Accounts receivable $3,920,000 (4) Accounts receivable $ 20,000 Sales/ discounts lost $ 20,000 (5) Cash $900,000 Accounts receivable $900,000 (6) Allowance for DA's $ 75,000 Accounts receivable $ 75,000 (7) Accounts receivable $ 75,000 Allowance for DA's $ 75,000 (7) Allowance for DA's $ 3,000 Bad debt expense $ 3,000 (8) Cash $1,000 bad debt expense $1,000 OR Accounts receivable $1,000 Bad debt expense $1,000 Cash $1,000 Accounts receivable $1,000 (9) Inventory $3,000,000 Purchases $3,000,000 COGS $2,950,000 Inventory $2,950,000 NET ACCOUNTS RECEIVABLE: $3,000 INVENTORY: $150,000

9 136A fall 09 MIDTERM 2 v. 2 Name Answer questions #1-25 on your green scantron--write YOUR VERSION # ON YOUR SCANTRON PLEASE!!! Answer the remaining questions in your blue-books. 1. 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. Price trend cannot be determined from information given. b. Prices remained unchanged. c. Prices increased. d. Prices decreased. 2. Inventory was overstated at the beginning of the year by $10,000 and was properly stated at the end of the year. During the year, the accounting system recorded cost of sales in the amount of $500,000. The proper amount to report under GAAP for COGS for the year is: a. none of these b. $500,000 c. $510,000 d. $490, The category "trade receivables" includes a. none of these. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. advances to officers and employees. 4. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $ It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $ Which of the following statements is NOT true? a. Income of the following year will be understated. b. The current year's income is understated. c. The closing inventory of the current year is understated. d. The cost of sales of the following year will be understated. 5. Designated market value a. should always be equal to 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. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.

10 MIDTERM 2 v. 2--Page 2 6. Which of the following are required inventory disclosures: a. All of these. b. The composition of the ending inventory. c. Unusual or significant inventory financing arrangements. d. The inventory costing method used. 7. The bank lent XYZ, Inc. $1 million and XYZ agreed to maintain a cash reserve of at least $100,000 at all times. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $25,000, and deposits in transit of $30,000. In addition, they hold $50,000 of certificates of deposit (CD's) at the bank with an original maturity of 1 month, 90 day treasury bills of $5,000, and stock in AOL at $45,000. Finally, the bank charged XYZ a fee of $500 which XYZ has not yet recorded. XYZ does NOT present cash equivelants on their balance sheet. How much should XYZ report as cash on their balance sheet? a. $500,000 b. $400,000 c. $499,500 d. $399, We buy an assortment of overstock items. We received 100 units of product A, 200 units of product B and 500 units of product C. The purchase price was not allocated between the two product types and we paid a total of $9,000 for the whole package. We expect to sell product A for $2.00/ unit, product B for $10.00/ unit, and throw away product C. What is the per unit cost under GAAP for Product C( when doing your computation, round to the nearest dollar): a. $4,500. b. $3,000. c. $9,000. d. $0. 9. The bank lent XYZ, Inc. $1 million and XYZ agreed to maintain a cash reserve of at least $100,000 at all times. XYZ's general ledger shows cash in the amount of $500,000, which includes checks outstanding of $25,000, and deposits in transit of $30,000. In addition, they hold $50,000 of certificates of deposit (CD's) at the bank with an original maturity of 1 month, 90 day treasury bills of $5,000, and stock in AOL at $45,000. Finally, the bank charged XYZ a fee of $500 which XYZ has not yet recorded. How much should XYZ present as cash and cash equivelants on their balance sheet? a. $454,500 b. $500,000 c. $499,500 d. $455,000

11 MIDTERM 2 v. 2--Page Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. Interest incurred during the production of discrete projects such as ships or real estate projects b. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis c. All of these should be capitalized. d. Purchase discounts lost 11. XYZ, Inc. ships goods FOB shipping point which are in transit at the end of the year. As of the end of the year, XYZ should do what with respect to this inventory? a. Include in inventory until the bill from the trucking company is received. b. Include in inventory. c. Include in inventory until the customer pays the invoice. d. Exclude from inventory. 12. The journal entries for a bank reconciliation a. may include a debit to Office Expense for bank service charges. b. may include a credit to Accounts Receivable for an NSF check. c. may include a debit to Accounts Payable for an NSF check. d. are taken from the "balance per bank" section only. 13. Under recent accounting literature, abnormal costs associated with inventory should be: a. Be recorded as an expense in the period in which the related inventory is sold. b. Be capitalized to inventory only if it adds value. c. Be expensed as incurred. d. Be capitalized to inventory as a cost necessary to make the inventory ready for sale. 14. Which of the following is correct? a. Manufacturing overhead costs are product costs. b. Interest costs for routine inventories are product costs. c. All of these. d. Selling costs are product costs. 15. Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be a. net income was correct and current assets and current liabilities were overstated. b. net income, current assets, and current liabilities were overstated. c. net income and current liabilities were overstated. d. no effect.

12 MIDTERM 2 v. 2--Page Which of the following methods of determining annual bad debt expense best achieves the matching concept? a. Percentage of average accounts receivable b. Percentage of ending accounts receivable c. Direct write-off d. Percentage of sales 17. 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 $9,900 to replace, $200 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 $11,000 and the inventory should be reported on the balance sheet at $10,000. b. The designated market value is $9,900 and the inventory should be reported on the balance sheet at $10,000. c. The designated market value is $9,900 and the inventory should be reported on the balance sheet at $9,900. d. The designated market value is $10,800 and the inventory should be reported on the balance sheet at $10, ABC, Inc. sells goods on account with terms 2/10 n 30. The full invoice amount is $100,000 and ABC employs the net method. If they receive cash of $50,000 from customers 5 days after the sale, what amount should credited to accounts receivable? a. $1,000 b. $49,000 c. $50,000 d. $52, 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 $75,000. Also during the year, Management updated their estimate derived from the percentage of sales method and determined it appropriate to reduce the allowance for doubtful accounts by $10,000 and subsequently wrote-off $5,000 of uncollectible balances. The proper amount for them to include as bad debt expense during the year is: a. $65,000 b. $75,000 c. $55,000 d. $85,000

13 MIDTERM 2 v. 2--Page WeCount, Inc. uses a periodic inventory system. At the beginning of the period they had $100,000 of inventory. During the period they made $500,000 of purchases and sold goods to customers for a sales price of $600,000. What should their ending inventory balance be? a. $1,000,000 b. $100,000 c. Insufficient information to answer d. $0 21. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. base stock. b. LIFO. c. weighted-average. d. FIFO. 22. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be a. reported as a deduction from accounts receivable in determining the net realizable value of accounts receivable. b. reported as an item of "other expense" in the income statement. c. reported as sales discounts forfeited in the cost of goods sold section of the income statement. d. reported as a deduction from sales in the income statement. 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. disclosure is required only if prices have since risen substantially. b. an appropriation of retained earnings is necessary. c. disclosure is required only if prices have declined since the date of the order. d. this fact must be disclosed. 24. Which of the following methods of determining bad debt expense does not properly match expense and revenue? a. Charging bad debts with an amount derived from aging accounts receivable under the allowance method. b. Charging bad debts as accounts are written off as uncollectible. c. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. d. Charging bad debts with a percentage of sales under the allowance method. 25. If inventory is overstated, then: a. Only balance sheet ratios will be impacted. b. Only income ratios will be impacted. c. Gross margin and net income will both be understated. d. Gross margin and net income will both be over stated as well.

14 MIDTERM 2 v. 2--Page XYZ uses the percentage of sales method, assuming 2% of gross sales areuncollectible and has no beginning accounts receivable. Under GAAP, they update the estimate upon the availability of additional relevant information. They use the "net" method to account for sales discounts and record adjustments to sales on the date that such discounts expire. Additionally, they had $100,000 of inventory at the beginning of the accounting period and use periodic inventory. Record the journal entry for each item noted below. Please reference your journal entries according to the number of each relevant fact: 1) Inventory purchases of $3,000,000 are made in cash. 2) Sales on credit of $5,000,000, terms 2/10n30. 3) Cash of $3,920,000 collected within 10 days. 4) Discount period expires 10 days later. 5) Cash of $900,000 collected after the discount period expired. 6) Write-off accounts receivable of $75,000. 7) Review of ALL accounts receivable indicates that the allowance for doubtful accounts should be decreased by $3,000. 8) Cash is collected on balances previously written off in the amount of $1,000 9) Inventory count indicates ending inventory of $150,000. What is the net amount of accounts receivable that should be reported on the balance sheet subsequent to recording all of the above? The same for inventory. 27. Based on the following facts, please compute the ending inventory using each of the following three retail inventory methods: (1) LCM (Conventional LIFO retail) (2) Cost method (Average Cost) (3) Retail LIFO Cost Retail Beginning Inventory 800,000 1,000,000 Purchases 2,000,000 2,700,000 Markups, net 30,000 Markdowns, net (10,000) Net sales (2,500,000) Ending inventory at retail 1,220,000

15 MIDTERM 2 v. 2--Page 7 ANSWER KEY 136A fall Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page d MChoice C d MChoice a MChoice C a MChoice C d MChoice C a MChoice d MChoice d MChoice a MChoice a MChoice C d MChoice a MChoice C c MChoice a MChoice C a MChoice C d MChoice C c MChoice c MChoice a MChoice c MChoice d MChoice C d MChoice C d MChoice C b MChoice C d MChoice Exercise * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

16 MIDTERM 2 v. 2--Page 8 3. Open accounts resulting from short-term extensions of credit to customers , ,000+50,000+5, =454, (1) Purchases $3,000,000 Cash $3,000,000 (2) Accounts receivable $4,900,000 Sales $4,900,000 Bad debt expense $ 100,000 Allowance for DA's $ 100,000 (3) Cash $3,920,000 Accounts receivable $3,920,000 (4) Accounts receivable $ 20,000 Sales/ discounts lost $ 20,000 (5) Cash $900,000 Accounts receivable $900,000 (6) Allowance for DA's $ 75,000 Accounts receivable $ 75,000 (7) Accounts receivable $ 75,000 Allowance for DA's $ 75,000 (7) Allowance for DA's $ 3,000 Bad debt expense $ 3,000 (8) Cash $1,000 bad debt expense $1,000 OR Accounts receivable $1,000 Bad debt expense $1,000 Cash $1,000 Accounts receivable $1,000 (9) Inventory $3,000,000 Purchases $3,000,000 COGS $2,950,000 Inventory $2,950,000 NET ACCOUNTS RECEIVABLE: $3,000 INVENTORY: $150,000

17 27. SOLUTION Cost Retail Beginning Inventory 800,000 1,000,000 Purchases 2,000,000 2,700,000 Markups, net - 30,000 SUBTOTAL FOR LCM RATIO 2,800,000 3,730, % Markdowns, net - (10,000) SUBTOTAL FOR COST RATIO 2,800,000 3,720, % Net sales - (2,500,000) Ending inventory at retail 1,220,000 LCM ENDING INVENTORY 916, % * COST ENDING INVENTORY 918, % *1,220,000 DOLLAR VALUE RETAIL LIFO Cost Retail Purchases 2,000,000 2,700,000 Markups net 30,000 Mardowns net (10,000) 2,000,000 2,720, % RETAIL COST CONV. ENDING RETAIL INVENTORY 1,220,000 OPENING LAYER (1,000,000) 800, ,000 opening layer had cost of $500,000 NEW LAYER 220, , ,000*73.5% LIFO RETAIL ENDING INVENTORY 961,700

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