May 22, 2006 Anderson ECON 136A Midterm #2 Name

May 22, 2006 Anderson ECON 136A Midterm #2 Name Complete questions 1-15 (multiple choice) on green scantron with pencil, and the rest, #16-21 (problems/ short answers) in your blue-book. 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. 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. 3. 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. 4. A company using the percentage of sales method has gone through its normal process of allowing for doubtful accounts, and written off certain accounts. Subsequently one of the balances they wrote-off has been paid by the customer! This should: a. Result in a credit to the income statement b. Reduce the allowance for bad debts c. Increase the allowance for bad debts d. Increase the bad debt expense 5. 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 $50,000. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $5,000. Subsequent to writing off balances, they received $1,000 on accounts previously written off. The proper amount for them to include as bad debt expense during the year is: a. $55,000 b. $45,000 c. $49,000 d. $51,000

Midterm #2--Page 2 6. 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. 7. 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. 8. 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 was correct and current assets and current liabilities were overstated. c. net income, current assets, and current liabilities were overstated. d. net income and current liabilities were overstated. 9. 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. ------------------------------ During 2004, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end. 10. Which of the following recording procedures would result in the highest net income for 2004? 1. Recording purchases at gross amounts. 2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement. a. 1 b. 2 c. Either 1 or 2 will result in the same net income. d. Cannot be determined from the information provided. 11. 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.

Midterm #2--Page 3 12. 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. 13. Which statement is 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 GAAP financial statements. c. It may be used by auditors as an acceptable inventory valuation for GAAP financial statements. d. None of these. 14. When calculating the cost ratio for the retail inventory method, a. if it is the conventional method, the beginning inventory is included and markdowns are deducted. b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted. c. if it is the LIFO method, the beginning inventory is included and markdowns are not deducted. d. if it is the conventional method, the beginning inventory is excluded and markdowns are not deducted. 15. 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 4 16. On January 1, 2006 Acme, Inc. had $1,000,000 of accounts receivable, excluding the allowance for doubtful accounts of $20,000. On January 1, 2006 they sold goods to various customers for $500,000 with terms 2/10 n30 (they account for trade discounts using the net method and report the effect of discounts not taken on the date that the discount period expires). Assume that all of the $1 million opening balances receivable as of January 1, 2006 are beyond the discount period and that Acme has already reflected adjustments to reflect the expiration of the discount period. Additionally, Acme estimates their bad debt expenses using a percentage of sales method. Their historical experience indicates that approximately 2% of the gross sale value (excluding discounts) will not be collectible. Acme received a cash payment from customers in the amount of $196, 000 on January 5, 2006, all related to the January 1, 2006 sales. Acme received additional payments of $800,000 after January 10, 2006. Further, Acme uses the gross profit method for estimating the cost of inventory sold for interim reporting and uses a 25% markup on costs (excluding discounts) for estimating the cost of inventory sold. The gross profit method should be utilized in answering the following questions. a. What journal entries should Acme record on January 1, 2006? b. What journal entry should Acme record to reflect the payment received on January 5, 2006? c. What journal entry should Acme record upon expiration of the discount period, assuming the payment recorded in (b) above is the only payment made before expiration of the discount period? d. What journal entry should Acme record to reflect receipt of the $800,000 payments received after January 10, 2006? e. Management reviews the accounts receivable and determines that an additional allowance of $5,000 should be recordedwhat is the journal entry? f. Management writes-off $2,500 of accounts receivable- what is the journal entry? g. Management collects $2,000 on accounts previously written off- what is the journal entry? h. What is the balance after all of the above in accounts receivable and in the allowance for doubtful accounts? 17. State two reasons why internal controls over cash are important.

Midterm #2--Page 5 18. Your general ledger shows a cash balance of $1,750,000. Additional facts: - A bank fee of $50 was noted on the bank statement which you have not recorded; - A check paid in the amount of $75 which you erroneously recorded at $57; - A deposit wired to the bank directly in the amount of $100,000 which you did not record; - Travel advances to employees were $10,000; - You hold 60 day CD's with a cost of $25,000 which are not restricted to any purpose; - A debt covenant requires that you maintain $250,000 cash on hand at all times for capital improvements. Compute what "cash and cash equivalents" you should report in your financial statements. 19. Under what circumstance is the rect write-off accounts receivable method permissible under GAAP? 20. Smith, Inc. uses dollar-value LIFO. On December 31, 2003, the inventory was $500,000 under the dollar-value LIFO method. Inventory data for 2004 and 2005 are as follows: 12/31/04 inventory at year-end prices $660,000 Relevant price index at year-end (base year 2003) 110 12/31/05 inventory at year-end prices $350,000 Relevant price index at year-end (base year 2003) 115 Using dollar value LIFO, compute Dyer's inventory at December 31, 2005. 21. Bobsucks, Inc. tracks their inventory at retail utilizing a sophisticated point of sale system. The inventory at cost at the beginning of the period was $1,000,000 with a retail value of $1,500,000. During the period, they purchased inventory for $750,000 which has an expected retail value of 1,000,000. Freight charges for the inventory purchased are $10,000 (not included in the $750,000 cost), markups are $15,000 and there were no markdowns. Some of the inventory was returned, having a cost of 25,000 and a retail value of $30,000. During the period there were sales of $2,000,000 and sales returns of $100,000. NOTE: Round percentages to nearest whole percent (i.e 1.75%=2%) a. Compute the ending inventory at cost using LIFO retail only; b. State the entry necessary to adjust inventory based on your computation in (a) above.

Midterm #2--Page 6 May 22, 2006 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 6 2 d MChoice C 3 7 8 3 a MChoice C 4 7 56 4 a MChoice 7 58 5 c MChoice 8 1 6 d MChoice C 2 8 2 7 b MChoice C 2 8 8 8 b MChoice C 3 8 12 9 b MChoice C 4 8 18 10 c MChoice C 4 9 9 11 d MChoice C 2 9 12 12 a MChoice C 4 9 15 13 a MChoice C 5 9 22 14 b MChoice C 8 9 25 15 a MChoice P 1 7 58 16 Exercise 7 59 17 Exercise 7 60 18 Exercise 7 61 19 Exercise 8 77 20 Exercise 9 69 21 Exercise +-------------------------------------------------------------------------+

Midterm #2--Page 7 May 22, 2006 2. Open accounts resulting from short-term extensions of credit to customers. 15. 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. 16. a. Accounts receivable 490,000 Sales 490,000 COS 400,000 Inventory 400,000 Bad debt expense 10,000 Allowance for DA's 10,000 b. Cash 196,000 Accounts receivable 196,000 c. 490,000-196,000=294,000/.98=300,000, recorded at 294,000=6,000 discount expired. OR 40% paid within discount period leaves 60% after the discount period the discount was 10,000 so there is 6,000 which expired. Accounts receivable 6,000 Sales/ OR Discounts lost 6,000 d. Cash 800,000 Accounts receivable 800,000 e. Bad debt expense 5,000 Allowance for DA's 5,000 f. Allowance for DA's 2,500 Accounts receivable 2,500 g. Cash 2,000 Bad debt expense 2,000 -OR- Accounts receivable 2,000 Bad debt expense 2,000 Cash 2,000 Accounts receivable 2,000 h. A/R= 497,500 Allowance= 32,500 17. (1) Cash is most susceptible asset to theft (2) Cash encompasses activity impacting virtually every other account and activity. 18. 1,750,000-50-(75-57)+100,000+25,000-250,000= 1,624,932 19. Direct write-off is not GAAP, but may be used if it produces a result materially consistent with utilizing an allowance method.

Midterm #2--Page 8 May 22, 2006 20. 2003 layer=500,000 2004 layer=(660,000/1.1=600,000-500,000=100,000*1.1=110,000 2004 ending inventory= 610,000 (500,000+110,000) 2005 layer=(350,000/1.15)=304,348-600,000=-295,652 decline (100,000 from 2004,and the rest [195,652] from 2003): 100,000*1.1=110,000 195,652*1.0=195,652 Decline 305,652-610,000 end 2004=304,348 21. Cost Retail Beginning 67% 1,000,000 1,500,000 Purchases 750,000 1,000,000 Purchase returns (25,000) (30,000) Freight 10,000 - M-ups - 15,000 New Layer only 735,000 985,000 Ratio 75% New & old combin 1,735,000 2,485,000 Sales, net? (1,900,000) Ending at retail 585,000 Convert to cost all at 67% 391,950 Ending inventory at cost 391,950 Inventory on books 1,735,000 Adjustment required 1,343,050 JE COS 1,343,050 Inventory 1,343,050