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Accy 204 Midterm Exam #2
Spring 1998
Name______
This exam has 10 multiple choice questions worth 2.5 points each. There is also a problem (20 points) and an essay question (choose 1 of two) worth 5 points. You MUST show the calculations you did to provide the answer to any question (including the multiple-choice questions) that requires a number for an answer (e.g., calculating the debit to bad debt expense.)
1. When the allowance method of recognizing bad debt expense is used, the entries to accrue bad debt expense would
a. decrease total assets
b. decrease net income
c. decrease net accounts receivable
d. have no effect on total assets, net income, or net accounts receivable
e. Answers a, b, & c are all correct
2. When the allowance method of recognizing bad debt expense is used, the entries to record the write-off of the account receivable of a specific customer would:
a. decrease total assets
b. decrease net income
c. decrease net accounts receivable
d. have no effect on total assets, net income, or net accounts receivable
e. Answers a, b, & c are all correct
3. ABC Company records accounts receivables net of sales discounts. A discount not taken by ABC's customer is best considered equivalent to:
a. a reduction of sales on ABC's income statement
b. a reduction of purchases on ABC's balance sheet
c. interest expense for ABC.
d. interest revenue for ABC.
e. none of the above.
4. The following information is available for M. Minoso, Inc.:
Allowance for Doubtful Accounts, 12/31/x0 (credit balance) $6,000
Accounts receivable written off during 19x1 $8,000
Recovery in 19x1 of accounts receivable previously written off $1,000
An aging of accounts receivable estimates that $5,000 of the receivables at 12/31/x1 will not be collected. The debit to bad debt expense at 12/31/91 would equal
a. 2,000
b. 5,000
c. 6,000
d. 7,000
e. None of the above. The answer is ______.
5. Which of the following transactions would not be classified as a loan?
a. A general assignment of accounts receivable.
b. A transfer of accounts receivable to a factor without recourse.
c. A specific assignment of accounts receivable.
d. A discounting of a note receivable to a bank with recourse when the bank has the option of requiring the company to repurchase the note.
e. All of the above transactions would be classified as loans.
Use the following schedule to answer question 6:
Beginning This month's This month's Ending
Balance Receipts Disbursements Balance
Per bank $xxxx $xxxx $xxxx $xxxx
Additions (1) (3) (5) (7)
Deductions (2) (4) (6) (8)
Per book $xxxx $xxxx $xxxx $xxxx
Indicate the columns by numbers in which each of the following items would appear in 4-column bank reconciliation:
$20,000 of checks outstanding at the end of last month cleared the bank this month.
a. (1) & (3)
b. (1) & (7)
c. (2) & (6)
d. (6) & 8)
e. none of the above
7. Brand-new Co. started operations this year. If cost of goods sold under the FIFO method exceeds cost of goods sold under the LIFO method, then the trend in inventory prices
a. cannot be determined from this information
b. decreased
c. increased
d. remained the same
e. none of the above
8. Which of the following statements is true?
a. If LIFO is used, ending inventory will approximate the lower of cost or market
b. If FIFO is used for tax accounting, then FIFO must also be used for financial accounting
c. If LIFO is used for tax accounting, then LIFO must also be used for financial accounting
d. LIFO will minimize income taxes when prices are falling
e. none of the above
9. F. Thomas Inc. has determined its ending inventory at 12/31/x1 under the FIFO basis to be $200,000. The following additional information is available:
Estimated selling price $204,000
Estimated selling expenses 10,000
Normal profit margin 30,000
Current replacement cost 160,000
Thomas appropriately records inventory at the lower of cost or market. The loss Thomas should record at 12/31/x1 is
a. $0
b. $6,000
c. $36,000
d. $40,000
e. None of the above. The answer is ______.
10. Alvarez purchased the following items at a lump-sum cost of $36,000:
Item / Quantity / Resale Price Per unitFastball / 4,000 / $2.50
Curveball / 2,000 / $8.00
Forkball / 6,000 / $4.00
Alvarez uses the relative sales method of allocating costs to inventory. The appropriate cost per unit of the inventory is
Fastball / Curveball / Forkballa. / $2.50 / $8.00 / $4.00
b. / $ .70 / $2.28 / $1.12
c. / $1.80 / $5.76 / $2.88
d. / $4.17 / $4.17 / $4.17
e. None of the above. The answers are
Problem 2 (20 points). C. May, Inc. has the following information available for the year ending 12/31/x0:
Cost Retail
BI 36,000 90,000
Purchases 347,000 600,000
PR&A 9,000 20,000
Sales 600,000
Sales Returns 20,000
Freight-in 30,000
Estimated Shoplifting 1,500
Markups 38,000
Markup cancellations 18,000
Markdowns 18,500
Markdown cancellations 8,500
(a) Prepare the schedule to compute 12/31/x0 ending inventory assuming May, Inc. uses the conventional retail inventory method.
(b) Prepare the schedule to compute 12/31/x0 ending inventory assuming May, Inc. uses the LIFO retail inventory method.
(c) Assume the following additional data for 19x1
Cost Retail
Purchases (net) 385,000 485,000
Sales (net) 481,000
Markups (net) 30,000
Markdowns (net) 15,000
19x0 Price index 1.00
19x1 Price index 1.20
Calculate the 12/31/x1 ending inventory using the dollar-value LIFO retail method.
Essay (choose 1, 10 points): There are a variety of methods of estimating inventory (LIFO, FIFO, LIFO Retail, Conventional Retail, Dollar Value LIFO and Dollar Value LIFO Retail. What assumptions are made for each of these techniques and why would we choose one method rather than another? For example, how do the different methods affect the balance sheet and the income statement? How would projected changes in the economy affect our decision?
Essay: A savings and loan company has decided to transfer a package of mortgages to a financing company. The savings and loan company has decided to transfer 75% of the principal of the mortgages and 80% of the interest. What are the accounting issues that need to be resolved in accounting for the transaction?