Accounting 303 Exam 3, Chapters 7-8 Fall 2014

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1 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 the one best answer. 1. Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation? a. Bank service charge. b. Deposit in transit. c. Bank collection of note with interest. d. Chargeback for NSF check. 2. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a. As offsets to capital. b. By means of footnotes only. c. As assets but separately from other receivables. d. As trade notes and accounts receivable if they otherwise qualify as current assets. 3. What is the normal journal entry when writing-off an account as uncollectible under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts. 4. Which of the following is true when accounts receivable are factored without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables. 5. Which of the following is a characteristic of a perpetual inventory system? a. Inventory purchases are debited to a Purchases account. b. Inventory records are not kept up-to-date for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory. 1

2 6. Goods in transit which are shipped f.o.b. destination 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 answers are correct. 7. What is the effect of a $50,000 overstatement of last year's ending inventory on current year s ending retained earning balance? a. Understated by $50,000. b. No effect. c. Overstated by $50,000. d. Need more information to determine. 8. CSK Company purchased merchandise with an invoice price of $1,400 on terms of 2/15, n/45. CSK uses the perpetual net method to record purchases. Which of the following is the correct entry they should make to record this purchase? a. Purchases 1,400 Accounts Payable 1,400 b. Purchases 1,372 Accounts Payable 1,372 c. Inventory 1,400 Accounts Payable 1,400 d. Inventory 1,372 Accounts Payable 1, Winsor Co. records purchases at net amounts. On May 5 Winsor purchased merchandise on account, $40,000, terms 2/10, n/30. Winsor returned $3,000 of the May 5 purchase and received credit on account. At May 31 the balance had not been paid. The amount to be recorded as a purchase return is a. $2,700. b. $3,060 c. $3,000. d. $2, Risers Inc. reported total assets of $3,200,000 and net income of $255,000 for the current year. Risers determined that inventory was understated by $30,000 at the end of the year. What is the corrected amount for total assets and net income at the end of the year? a. $3,230,000 and $285,000. b. $3,170,000 and $294,000. c. $3,230,000 and $216,000. d. $3,200,000 and $255,000. 2

3 II. Problems (60 points in total) Show all work where appropriate! 1. (10 points) The trial balance before adjustment of Valdamo Company shows the following balances on December 31, 2014: Dr. Cr. Accounts receivable $250,000 Allowance for doubtful accounts 4,500 Sales (all on credit) $1,850,000 Sales returns and allowances 54,000 Required: Prepare the December 31, 2014, year-end adjusting entry for Valdamo s estimated bad debts assuming that doubtful accounts are estimated to be (a) 6% of gross accounts receivable. (b) 1% of net sales. 3

4 2. (12 points) On December 31, 2014, Parma Company sold equipment and accepted as payment a promissory note with a face value of $4,000,000, a due date of December 31, 2018, and a stated interest rate of 5%, with interest to be paid at the end of each year starting December 31, The cash price of the equipment at the date of sale would have been $3,481,645. Required (a) Determine the imputed interest rate of the note. (b) Prepare the required journal entry or entries on Parma Company s books for December 31, (c) Prepare the required journal entry or entries on Parma Company s books for December 31, 2015 assuming the imputed interest rate is 10%. 4

5 3. (10 points) On May 1, Siena, Inc. factored $1,000,000 of its accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Siena was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 7% of the total accounts receivable factored and retained an amount equal to 4% of the total receivables to cover sales discounts and returns. Required (a) Prepare the journal entry required on Siena's books on May 1. (b) Assume Siena factored the accounts receivable with Quick Finance on a with recourse basis instead. Siena estimates the recourse provision has a fair value of $21,000. Under these assumptions, what amount of loss would Siena report as part of their May 1 entry. 5

6 4. (13 points) Monterosso Company was formed on December 1, The following information is available from Monterosso's inventory records. Units Unit Amount Total January 1, 2014 (beginning inventory) 1,600 $ ,800 Purchases: January 5, 2014 Purchase 2,600 $ ,000 January 10, 2014 Sale 3,000 January 25, 2014 Purchase 2,400 $ ,400 February 1, 2014 Sale 1,100 February 16, 2014 Purchase 1,000 $ ,000 March 15, 2014 Purchase 1,800 $ ,400 March 27, 2014 Sale 3,300 9,400 7, ,600 Required: Compute the ending inventory at March 31, 2014, under each of the following inventory methods. Show supporting computations in good form. (a) Periodic FIFO (b) Perpetual LIFO (c) Weighted-average 6

7 a (15 points) Vernazza Company manufactures one product. On December 31, 2013, Vernazza adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was $450,000. Inventory data are as follows: Inventory at Price index Year year-end prices (base year 2013) 2014 $630, , , Required: Compute Vernazza s inventory at December 31, 2014, 2015, and 2016, using dollar-value LIFO for each year. b c

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

9 Problem 1 (a) Bad Debt Expense... 19,500 Allowance for Doubtful Accounts... 19,500 Gross receivables $250,000 Rate 6% Total allowance needed 15,000 Present allowance 4,500 Bad debt expense $ 19,500 (b) Bad Debt Expense... 17,960 Allowance for Doubtful Accounts... 17,960 Sales $1,850,000 Sales returns and allowances (54,000) Net sales 1,796,000 Rate 1% Bad debt expense $ 17,960 9

10 2. (a) n = 4 PMT = PV = FV = CPT i = 9% (b) Notes Receivable Discount on N/R Sales (c) Cash Discount on N/R Interest Revenue (a) Cash Due from Factor ( x.04) Loss on Sale ( x.07) Acc Rec (b) Cash Due from Factor ( x.04) Loss on Sale ( x.07) Acc Rec Recourse Liability

11 4. (a) 11

12 Problem 5 12