February 23, 2005 Anderson ECON 136A Midterm #2 Name

February 23, 2005 Anderson ECON 136A Midterm #2 Name Complete the multiple choice on green scantron and problems in your bluebook. WRITE YOUR NAME ON YOUR EXAM AND TURN IT IN WITH YOUR BLUE BOOK AND SCANTRON at the end of the test. Write your name and perm # on the scantron and blue-book before turning in. Complete on scantron. ------------------------- 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. 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 sales in the income statement. b. reported as an item of "other expense" in the income statement. c. reported as a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. reported as sales discounts forfeited in the cost of goods sold section of the income statement. 3. 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 4. 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. $360,000

Midterm #2--Page 2 ------------------------------ A trial balance before adjustments included the following: Debit Credit Sales $425,000 Sales returns and allowance $14,000 Accounts receivable 53,000 Allowance for doubtful accounts 760 5. If the estimate of uncollectibles is made by taking 1% of net sales, the amount of the adjustment is a. $4,000. b. $4,111. c. $4,250. d. None of the above 6. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is a. $4,540. b. $4,000. c. $5,300. d. $6,060. 7. If a company's general ledger indicates that the cash balance at the end of the year is negative, this should be presented in the financial statements: a. As a current liability b. Labeled "bank overdraft" c. As cash, negative d. Both a and b e. None of the above 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 $100,000. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $20,000. The proper amount for them to include as bad debt expense during the year is: a. $100,000 b. $120,000 c. $ 80,000 d. none of the above.

Midterm #2--Page 3 9. According to many accountants and auditors, controls over cash are critical. Consequently,: a. Bank reconciliations serve as an important component of a company's internal control environment. b. Bank reconciliations serve only to reconcile the book cash balance to the bank balance and are not a component of the internal control environment. c. A bank reconciliation should be performed as frequently as possible to detect possible errors and irregularities in a timely fashion. d. Both (a) and (c) above are true. 10. Which of the following items should be included in a company's inventory at the balance sheet date? a. Goods in transit which were purchased f.o.b. destination. b. Goods received from another company for sale on consignment. c. Goods sold to a customer which are being held for the customer to call for at his or her convenience. d. None of these. 11. 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. 12. 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. 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. In a period of rising prices, the inventory method which tends to give the highest reported net income is a. base stock. b. first-in, first-out. c. last-in, first-out. d. weighted-average.

Midterm #2--Page 4 ------------------------------ Queen Co. records purchases at net amounts. On May 5, Queen purchased merchandise on account, $32,000, terms 2/10, n/30. Queen returned $2,000 of the May 5 purchase, and received credit on account. At May 31 the balance had not been paid. 15. The amount to be recorded as a purchase return is a. $1,800. b. $2,040. c. $2,000. d. $1,960. ------------------------------ James Co. has the following data related to an item of inventory: Inventory, March 1 200 units @ $4.20 Purchase, March 7 700 units @ $4.40 Purchase, March 16 140 units @ $4.50 Inventory, March 31 300 units 16. The value assigned to ending inventory if James uses LIFO is a. $1,334. b. $1,280. c. $1,260. d. $1,350. 17. How should the following costs affect a retailer's inventory valuation? Interest on Freight-in Inventory Loan a. Increase No effect b. Increase Increase c. No effect Increase d. No effect No effect 18. 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. 19. 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.

Midterm #2--Page 5 20. 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. 21. To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should a. include markups but not markdowns. b. include markups and markdowns. c. ignore both markups and markdowns. d. include markdowns but not markups. 22. Lynn Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product #1 Product #2 Historical cost $15.00 $30.00 Replacement cost 18.00 27.00 Estimated cost to dispose 5.00 13.00 Estimated selling price 35.00 60.00 In pricing its ending inventory using the lower of cost or market, what unit values should Lynn use for products #1 and #2, respectively? a. $15.00 and $29.00. b. $19.50 and $29.00. c. $19.50 and $30.00. d. $18.00 and $27.00.

Midterm #2--Page 6 23. Flynn Sales Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year: Cost Retail Beginning inventory $ 46,000 $ 65,000 Purchases 174,000 240,000 Freight-in 3,000 Net markups 10,200 Net markdowns 12,000 Employee discounts 1,200 Sales 246,000 If the ending inventory is to be valued at the lower of cost or market, what is the cost to retail ratio? a. $223,000 $305,000 b. $223,000 $315,200 c. $220,000 $315,000 d. $223,000 $303,200 ------------------------------ Colaw Company, which uses the retail LIFO method to determine inventory cost, has provided the following information for 2004: Cost Retail Inventory, 1/1/04 $ 55,000 $ 80,000 Net purchases 189,000 281,000 Net markups 34,000 Net markdowns 15,000 Net sales 254,000 24. Assuming stable prices (no change in the price index during 2004), what is the cost of Colaw's inventory at December 31, 2004? a. $75,600. b. $83,980. c. $82,600. d. $79,380. 25. West Distribution Co. has determined its December 31, 2004 inventory on a FIFO basis at $360,000. Information pertaining to that inventory follows: Estimated selling price $380,000 Estimated cost of disposal 15,000 Normal profit margin 45,000 Current replacement cost 330,000 West records losses that result from applying the lower of cost or market rule. At December 31, 2004, the loss that West should recognize is a. $0. b. $5,000. c. $20,000. d. $30,000.

Midterm #2--Page 7 ------------------------- Complete in your blue-book. Leave a trail for partial credit allocations. 26. Stillraining, Inc. paid $500,000 in one purchase for Widgets A, B & C. The estimated selling price of Widgets A, B & C are $400,000, $250,000 and $350,000 respectively. Using the relative sales value method, compute the amount of cost which should be capitalized for Widgets A, B & C. 27. Rainydays 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: Inventort at Price Dec. 31 Year-end prices Index 2001 250,000 100 2002 300,000 110 2003 305,000 115 2004 400,000 130 Compute the ending inventory using "dollar value LIFO" as of December 31, 2001, 2002, 2003 and 2004.

Midterm #2--Page 8 February 23, 2005 ANSWER KEY Anderson ECON 136A +-------+------+--------+------+--------+--------+--------+--------+------+ Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page +-------+------+--------+------+--------+--------+--------+--------+------+ 7 1 1 d MChoice C 1 7 8 2 a MChoice C 4 7 11 3 a MChoice C 5 7 23 4 b MChoice P 5 7 27 5 b OR D-- TYPO IN EXAM M P 5 7 28 6 a MChoice P 5 7 52 7 d MChoice 7 53 8 a MChoice 7 54 9 d MChoice 8 4 10 d MChoice C 2 8 10 11 a MChoice C 3 8 12 12 b MChoice C 4 8 22 13 a MChoice C 5 8 25 14 b MChoice C 5 8 38 15 d MChoice P 4 8 42 16 b MChoice P 5 8 53 17 a MChoice A 2 9 5 18 a MChoice C 1 9 12 19 a MChoice C 4 9 16 20 d MChoice C 6 9 21 21 a MChoice C 6 9 25 22 a MChoice P 1 9 37 23 b MChoice P 6 9 49 24 b MChoice P 8 9 51 25 d MChoice A 4 9 68 26 Exercise +-------------------------------------------------------------------------+

Midterm #2--Page 9 February 23, 2005 4. $490,000 + ($90,000 - $40,000) = $540,000. 5. ($425,000-14,000)*.01 = $4,111 6. $53,000*.1 = 5,300 is amount should be. Allowance per trial balance is $760. Therefore need to adjust by $5,300-$760 to get from 760 to 5,300= $4,540 10. Goods in transit which were purchased f.o.b. shipping point. 15. $2,000 - ($2,000 x.02) = $1,960. 16. (200 x $4.20) + (100 x $4.40) = $1,280. 17. Conceptual. 22. Product 1: RC = $18, NRV = $35 - $5 = $30 NRV - PM = $30 - ($35 x.3) = $19.50, cost = $15. Product 2: RC = $27, NRV = $60 - $13 = $47. NRV - PM = $47 - ($60 x.3) = $29, cost = $30. 23. Cost: $46,000 + $174,000 + $3,000 = $223,000. Retail: $65,000 + $240,000 + $10,200 = $315,200. 24. Cost to retail ratio = $189,000 ($281,000 + $34,000 - $15,000) = 0.63 EI = $80,000 + $281,000 + $34,000 - $15,000 - $254,000 = $126,000 at retail $126,000 - $80,000 = $46,000 Cost of inventory = $55,000 + ($46,000 x.63) = $83,980. 25. $360,000 - $330,000 (RC) = $30,000. 26. A: 400,000/1,000,000 * 500,000 = $200,000 B: 250,000/1,000,000 * 500,000 = $125,000 C: 350,000/1,000,000 * 500,000 = $175,000

Solution to #27 Inventort at Price Inventory at Base Yr Base Yr 31-Dec Year-end prices Index Base-Year Price Change Layer Adjusted 2001 250,000 100 250,000 250,000 250,000 2002 300,000 110 272,727 22,727 25,000 16,739 2003 305,000 115 265,217 (7,510) decline, no layer - 2004 400,000 130 307,692 42,475 55,217 At December 31, 2001, the ending inventory is 250,000 At December 31, 2002, the ending inventory is Beginning Base year inventory 250,000 Base year increase 25,000 275,000 At December 31, 2003, it is more tricky because there was a decline in base year $'s You "peel" decreases from prior year "layers" then value at that years index Layer available 22,727 Base year decline- "peel off" (7,510) New layer balance after "peel off" 15,217 Price index of peel off year 110 Note that now we multiply by the index 16,739 Prior inventory before peel off 250,000 Ending inventory 266,739 At December 31, 2004, it is back to realtively easy,because it is not declining 2001 Layer 250,000 2002 Layer 16,739 2003 Layer none 2004 Layer 55,217 321,957 adjusted