Comprehensiveexam b

COMPREHENSIVE EXAMINATION BPART 2

(Chapters 7–9)

Problem B-I — Multiple Choice — Cash and Receivables.

Choose the best answer for each of the following questions and enter the identifying letter in the space provided.

_____ 1. When should the loss on an uncollectible account receivable be recorded as an expense for accrual accounting purposes?a. When it is determined that an account cannot be collected.b. In the same period in which the sale on account occurs.c. When the balance is past due for more than 3 months.d. When a lawyer indicates that collection efforts would cost more than the

account is worth.

_____ 2. How should unearned discounts, finance charges, and interest included in the face amount of installment accounts receivable be presented in the balance sheet?a. As a current liability.b. As a deduction from the related installment accounts receivable.c. Within the net amount of installment accounts receivable.d. As an addition to the related installment accounts receivable.

_____ 3. Durler Company's account balances at December 31 for Accounts Receivable and the related Allowance for Doubtful Accounts are $800,000 and $13,000, respectively. From an analysis of accounts receivable, it is estimated that $28,000 of the December 31 receivables will be uncollectible. After adjustment for the above facts, the net realizable value of accounts receivable would bea. $800,000.b. $787,000.c. $759,000.d. $772,000.

_____ 4. Which group of items listed below should be included in the cash account?a. Silver coins, postage stamps, demand deposits, personal checks.b. Promissory notes, demand deposits, money orders, silver coins.c. Money orders, postdated checks, personal checks, time deposits.d. Silver coins, money orders, demand deposits, personal checks.

_____ 5. Which of the following methods of accounting for uncollectible accounts does not properly match costs with revenues?a. Percentage of salesb. Percentage of receivablesc. Direct write-offd. Aging schedule

Comprehensive Exam B

_____ 6. Certain information relative to the 2012 operations of Ball Co. follows:

Accounts receivable, January 1, 2012 $48,000Accounts receivable collected during 2012 92,000Cash sales during 2012 24,000Inventory, January 1, 2012 36,000Inventory, December 31, 2012 33,000Purchases of inventory during 2012 80,000Gross profit on sales 27,000

What is Ball's accounts receivable balance at December 31, 2012?a. $36,000.b. $42,000.c. $48,000.d. $66,000.

Problem B-II — Lower of Cost or Market

Presented below is data relative to the 12/31/12 inventory of Lance Company:

Number Units Original Cost Total CurrentItem In Inventory Per Unit Original Cost Replacement CostA 5,000 $1.09 $5,450 $1.08B 5,000 1.30 6,500 1.15C 5,000 1.50 7,500 1.05D 5,000 1.60 8,000 1.65E 5,000 1.80 9,000 1.70

Total 25,000 $36,450

AppropriateUpper Lower InventoryLimit Limit Designated Valuation

Item ("Ceiling") ("Floor") Market (Totals)

A

B

C

D

E

Total

Additional Data:

Selling price is $2.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 35% of selling price.

InstructionsComplete the last four columns above.

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Problem B-III — Notes Receivable.

On December 31, 2011 Berry Corporation sold some of its product to Flynn Company, accepting a 3%, four-year promissory note having a maturity value of $500,000 (interest payable annually on December 31). Berry Corporation pays 6% for its borrowed funds. Flynn Company, however, pays 8% for its borrowed funds. The product sold is carried on the books of Berry at a manufactured cost of $310,000. Assume Berry uses a perpetual inventory system.

Instructions(a) Prepare the journal entries to record the transaction on the books of Berry

Corporation at December 31, 2011. (Assume that the effective interest method is used. Use the interest tables below and round to the nearest dollar.)

(b) Make all appropriate entries for 2012 on the books of Berry Corporation.

(c) Make all appropriate entries for 2013 on the books of Berry Corporation.

For Use on Problem B-IIITable 1

Future Value of 1

Periods 2% 3% 4% 6% 8% 1 1.02000 1.03000 1.04000 1.06000 1.080002 1.04040 1.06090 1.08160 1.12360 1.166403 1.06121 1.09273 1.12486 1.19102 1.259714 1.08243 1.12551 1.16986 1.26248 1.360495 1.10408 1.15927 1.21665 1.33823 1.46933

Table 2Present Value of 1

Periods 2% 3% 4% 6% 8% 1 0.98039 0.97087 0.96154 0.94340 0.925932 0.96117 0.94260 0.92456 0.89000 0.857343 0.94232 0.91514 0.88900 0.83962 0.793834 0.92385 0.88849 0.85480 0.79209 0.735035 0.90573 0.86261 0.82193 0.74726 0.68058

Table 3Future Value of Ordinary Annuity of 1

Periodic Rents 2% 3% 4% 6% 8% 1 1.00000 1.00000 1.00000 1.00000 1.000002 2.02000 2.03000 2.04000 2.06000 2.080003 3.06040 3.09090 3.12160 3.18360 3.246404 4.12161 4.18363 4.24646 4.37462 4.506115 5.20404 5.30914 5.41632 5.63709 5.86660

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Table 4Present Value of Ordinary Annuity of 1

Periodic Rents 2% 3% 4% 6% 8% 1 0.98039 0.97087 0.96154 0.94340 0.925932 1.94156 1.91347 1.88609 1.83339 1.783263 2.88388 2.82861 2.77509 2.67301 2.577104 3.80773 3.71710 3.62990 3.46511 3.312135 4.71346 4.57971 4.45182 4.21236 3.99271

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Problem B-IV — FIFO vs. LIFO.

In comparing and contrasting FIFO vs. LIFO inventory procedures, the following listing was developed. You are to complete the tabulation with an answer of "YES" or "NO" as demonstrated by the first item. Any combination of yes-no answers is possible in each situation.

FIFO LIFO

0. Usually matches the actual physical flow of goods. Yes__ No ___

1. Emphasizes the income statement in that it matches the more recent costs with revenue. ______ ______

2. Defers tax payments in times of rising prices. ______ ______

3. Possibility of liquidating the base may be a significant negative aspect. ______ ______

4. Will probably not be adopted if prices are expected to decline. ______ ______

5. Emphasizes the balance sheet in that the more recent costs are contained in the inventory account. ______ ______

6. Can use price indexes to cost layers. ______ ______

7. Switching to this method could cause problems in the equity markets, with loan covenants, etc. ______ ______

8. Income figure more accurately reflects cash available for dividends, investments, etc. ______ ______

9. Tends to smooth income in periods of fluctuating prices. ______ ______

10. Income figure is more "real" in that it doesn't contain "paper profits." ______ ______

11. A change to this method must be justified (i.e., to the auditor) other than solely on the basis of the tax effect. ______ ______

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12. Perpetual inventory results may be different from periodic inventory results. ______ ______

13. Is acceptable to the IRS (i.e., for income tax purposes). ______ ______

14. Gives lower profits when prices rise. ______ ______

15. In a period of rising prices has an adverse effect on assets, working capital, and stockholders' equity. ______ ______

16. Quick inventory turnover may have somewhat of a mitigating effect on some of the method's claimed disadvantages. ______ ______

17. Improves cash flow in periods of rising prices. ______ ______

18. If used for tax purposes, it must be used for financial reporting purposes. ______ ______

19. Somewhat opens door for profit manipulation and may cause poor purchase decisions. ______ ______

20. Is a current value, rather than a historical cost, valuation method. ______ ______

Problem B-V — Year-end Inventory Cutoff.

Abel Company's business year ends on December 31. Listed below are purchase transactions which occurred during the last few days of 2012 or during the first few days of 2013. The inventory, determined by physical count, was taken after the close of business on December 31, 2012. The only adjusting entry recorded to date has been to enter the December 31 physical inventory on the books and to remove the beginning inventory.

Instructions(a) On the accompanying chart, indicate the effect of each of these transactions on the

ending inventory and on reported net income for 2012, by writing the words overstated, understated, or no effect in the appropriate column. Both columns must be answered for each transaction.

(b) Prepare all necessary correcting entries for 2012.

(c) Indicate which of the correcting entries must be reversed in 2011 by preparing the necessary reversing entries.

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12/31/12 Physical 2012 Inventory Income

1. An invoice for $9,000, terms f.o.b. shipping point, was received and entered December 30. The invoice shows that the merchandise was shipped December 29, and the receivingreport indicates the merchandise was received January 2. ________ ________

2. An invoice for $300, terms f.o.b. shipping point, was received and entered December 30. The invoice shows that merchandise was shipped December 29, and the receivingreport shows the merchandise was received December 31. ________ ________

3. An invoice for $4,000, terms f.o.b. shipping point, was received and entered January 2. The invoice shows the merchandise was shipped December 30, and the receiving report indicates the merchandise was received December 31. ________ ________

4. An invoice for $800, terms f.o.b. destination, was received and entered December 30. The receiving report shows the merchandise was received January 2. ________ ________

5. An invoice for $500, terms f.o.b. destination, was received and entered December 29. The receiving report indicates that themerchandise was received December 31. ________ ________

6. An invoice for $1,500, terms f.o.b. destination, was received and entered January 2. The receiving report indicates the merchandise was received December 31. ________ ________

7. Merchandise costing $12,000 and with a selling price of $18,000 was on consignment to Maris Distributing Companyand was on that company's premises on December 31. Noentry has been made for the consignment. ________ ________

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Problem B-VI — Conventional and LIFO Retail Method.*

*Note to Instructor. Part B is based on Appendix 9-A.

A. Landmark Book Store uses the conventional retail method.

InstructionsGiven the following data, prepare a neat, labeled schedule showing the computation of the cost of inventory on hand at 12/31/12.

Cost Retail Inventory 1/1/12 $ 28,900 $ 40,000Purchases 366,600 610,000Purchases Returns 9,000 20,000Purchase Discounts 7,000Sales (Gross) 615,000Sales Returns 15,000Employee Discounts 5,000Freight-in 23,500Freight-out 50,000Loss from Breakage 2,500Markups 38,000Markup Cancellations 18,000Markdowns 13,500Markdown Cancellations 8,500

B. Landmark Book Store has decided to switch to the LIFO retail method for the period beginning 1/1/13.

InstructionsPrepare a schedule showing the computation of the 12/31/13 inventory under the LIFO retail method adjusted for price level changes (i.e., dollar-value LIFO Retail.) Without prejudice to your answer in requirement A above, assume that the 12/31/12 inventory computed under the LIFO Retail method was $40,000 and $27,500 at retail and cost, respectively, for purposes of this requirement. Data for 2013 follows:

Cost Retail Purchases (net) $360,000 $485,000Sales (net) 402,000Markups (net) 30,000Markdowns (net) 15,0002012 Price Index 1002013 Price Index 120

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Problem B-VII — Multiple Choice — Inventory

For each of the following questions, select the letter of the statement which best answers the question and write it on the line to the left of the question.

_____ 1. Wade Company estimates the cost of its physical inventory at March 31 for use in an interim financial statement. The rate of markup on cost is 25%. The following account balances are available:

Inventory, March 1 $1,000,000Purchases during March 500,000Purchase returns 26,000Sales during March 850,000

The estimate of the cost of inventory at March 31 would bea. $624,000.b. $680,000.c. $794,000.d. $836,500.

_____ 2. Most methods of pricing inventories are in accord with generally accepted accounting principles and generally are permissible for income tax purposes. The method that must be used for financial reporting purposes if used for tax purposes isa. moving average.b. weighted average.c. LIFO.d. FIFO.

_____ 3. A company has been using the FIFO cost method of inventory valuation since it was started 10 years ago. Its 2012 ending inventory was $120,000, but it would have been $90,000 if LIFO had been used. Thus, if LIFO had been used, this company's income before taxes would have beena. $30,000 less in 2012.b. $30,000 less over the 10-year period.c. $30,000 greater over the 10-year period.d. $30,000 greater in 2012.

_____ 4. Why are inventories included in the computation of net income?a. To determine cost of goods sold.b. To determine sales revenue.c. To determine merchandise returns.d. Inventories are not included in the computation of net income.

_____ 5. On December 31, 2012, Hill Company, which sells only one product, adopted the periodic last-in, first-out method of inventory valuation. The inventory was valued at $40,000 on the December 31, 2012 balance sheet. The number of items in its inventory remained constant during 2013. The December 31, 2013 inventory valuation would bea. less than $40,000 if prices were steadily decreasing.b. less than $40,000 if prices were steadily increasing.c. greater than $40,000 if prices were steadily increasing.d. $40,000 regardless of any price changes.

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_____ *6. Kramer Company values its inventory by using the retail method (LIFO basis, stable prices). The following information is available for the year 2012.

Cost Retail

Beginning inventory $ 78,000 $140,000Purchases 368,000 628,000Freight-in 16,000Markups (net) — 18,000Markdowns (net) — 6,000Sales 610,000

At what amount would Kramer Company report its ending inventory?a. $95,700.b. $96,000.c. $100,300.d. $102,000.

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Solutions — Comprehensive Examination B

Problem B-I — Solution.

1. b 4. d2. c 5. c3. d 6. b

Solutions to computational Multiple Choice Questions.

3. $800,000 – $28,000 = $772,000.6. $80,000 + $3,000 + $27,000 – $24,000 + $48,000 – $92,000 = $42,000.

Problem B-II — Solution.

AppropriateUpper Lower InventoryLimit Limit Designated Valuation

Item ("Ceiling") ("Floor") Market (Totals) A $1.80 $1.10 $1.10 $5,450B 1.80 1.10 1.15 5,750C 1.80 1.10 1.10 5,500D 1.80 1.10 1.65 8,000E 1.80 1.10 1.70 8,500

$33,200

Problem B-III — Solution.

(a) 12/31/11Notes Receivable .......................................................................... 500,000

Discount on Notes Receivable .......................................... 82,803Sales Revenve...................................................................

417,197

Computation of Present Value of Note: (using 8%)$500,000 × .73503 = $367,515 15,000 × 3.31213 = 49,682

Present value of note 417,197Face value of note 500,000Amount of discount $ 82,803

12/31/11Cost of Goods Sold ....................................................................... 310,000

Inventory ...........................................................................310,000

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(b) 12/31/12Cash ............................................................................................ 15,000

Interest Revenue ............................................................... 15,000

Discount on Notes Receivable ..................................................... 18,376Interest Revenue ............................................................... 18,376

($417,197 × .08 = $33,376 – $15,000)

(c) 12/31/13Cash ............................................................................................ 15,000

Interest Revenue ............................................................... 15,000

Discount on Notes Receivable ..................................................... 19,846Interest Revenue ............................................................... 19,846

[($417,197 + $18,376) × .08 = $34,846 – $15,000]

Problem B-IV — Solution.

1. No-Yes 7. No-Yes 13. Yes-Yes 19. No-Yes2. No-Yes 8. No-Yes 14. No-Yes 20. No-No3. No-Yes 9. No-Yes 15. No-Yes4. No-Yes 10. No-Yes 16. Yes-No5. Yes-No 11. Yes-Yes 17. No-Yes6. No-Yes 12. No-Yes 18. No-Yes

Problem B-V — Solution.

(a) 1. Understated/Understated2. No effect/No effect 3. No effect/Overstated4. No effect/Understated5. No effect/No effect6. No effect/Overstated7. Understated/Understated

(b) 1. Inventory ................................................................................. 9,000Cost of Goods Sold ..................................................... 9,000

2. None

3. Purchases ............................................................................... 4,000Accounts Payable ....................................................... 4,000

4. Accounts Payable ................................................................... 800Purchases ................................................................... 800

5. None

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6. Purchases ............................................................................... 1,500Accounts Payable ....................................................... 1,500

7. Inventory ................................................................................. 12,000Cost of Goods Sold ..................................................... 12,000

(c) 3. Accounts Payable ................................................................... 4,000Purchases ................................................................... 4,000

4. Purchases ............................................................................... 800Accounts Payable ....................................................... 800

6. Accounts Payable ................................................................... 1,500Purchases ................................................................... 1,500

Problem B-VI — Solution.

Cost Retail A. Beginning Inventory $ 28,900 $ 40,000

Purchases 366,600 610,000Purchase Returns (9,000)(20,000)Purchase Discounts (7,000)Freight-In 23,500Markups 38,000Markup Cancellations

(18,000)Goods Available $403,000 650,000Cost Ratio = 62%Sales $615,000Sales Returns (15,000)(600,000)Employee Discounts (5,000)Goods Broken (2,500)Markdowns 13,500Markdown Cancellations (8,500)

(5,000)Ending Inventory @ Retail $

37,500Est. Ending Inventory @ Cost (62% × $37,500) $ 23,250

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*B. Cost Retail__ Inventory, December 31, 2012 $ 27,500 $ 40,000Net purchases 360,000 485,000Net markups 30,000Net markdowns (15,000)Total (excluding beginning inventory) 360,000 500,000Total (including beginning inventory) $387,500 540,000Net sales

(402,000)Inventory, December 31, 2013, at retail $ 138,000Cost to retail percentage ($360,000 ÷ $500,000) 72%12/31/13 inventory at base ($138,000 ÷ 1.20) $ 115,00012/31/12 inventory at base $ 27,500

(40,000)Increase at base $ 75,000Increase at current prices, at cost ($75,000 × 1.20 × .72) 64,80012/31/13 inventory at LIFO cost $ 92,300

Problem B-VII — Solution.

1. c 4. a2. c 5. d3. b *6. b

Solutions to computational Multiple Choice Questions.

1. $1,474,000– (80% × $850,000) = $794,000.6. $384,000 ÷ $640,000 = 60%. $78,000 + (60% × $30,000) = $96,000.

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Comprehensiveexam b

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