Fall2021 Exam2 reformatted

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Purdue University *

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Accounting

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Jan 9, 2024

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If a firm uses the allowance method for uncollectible accounts, then the journal entry to write-off an individual account results in a) No change in net total assets b) A decrease in net total assets c) An increase in net total assets d) An increase in net income e) A decrease in net income Which of the following statements about purchase commitments is accurate? a) If a firm has a cancellable agreement to acquire inventory and the market price of that inventory decreased, the company would record a loss during the year of the price decrease. b) If a firm has a cancellable agreement to acquire inventory and the market price of that inventory increased, the company would record a gain during the year of the price increase. c) If a firm has a noncancellable agreement to acquire inventory and the market price of that inventory decreased, the company would record a loss during the year of the price decrease. d) If a firm has a noncancellable agreement to acquire inventory and the market price of that inventory increased, the company would record a gain during the year of the price increase. DEF’s balance sheet reported: 2021 2020 change Accounts receivable 430,00 0 400,00 0 30,000 Inventory 510,00 0 500,00 0 10,000 Accounts payable 590,00 0 600,00 0 (10,000 ) DEF’s 2021 income statement reported: 2021 2020 Sales 900,00 0 800,00 0 Cost of goods sold 600,00 0 500,00 0 Net income 300,00 0 200,00 0 How much cash did DEF pay to its suppliers in 2021? a) 580,000 b) 610,000 c) 620,000 d) 630,000 e) 640,000

On January 2, 2020, ABC Inc. sells production equipment to Fargo for $50,000. ABC includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2020. During 2020, ABC incurs costs related to the warranties of $1,500. At December 31, 2020, ABC estimates that $700 of warranty costs will incurred in the second year of the warranty. How much warranty expense does ABC reports on its income statement for the year ended 12/31/2020? a) 2,200 b) 1,500 c) 700 d) 800 ABC sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet Tablet Bundle A sells a tablet with 4 years of Internet service. The price for the tablet and a 4-year Internet connection service contract is $400. The standalone selling price of the tablet is $150 (the cost to ABC is $100). ABC sells the Internet access service independently for an upfront payment of $350. On January 2, 2020, ABC signed 10 contracts, receiving a total of $4,000 in cash. Assume ABC performs all necessary entries on January 2, 2020 and then performs adjusting entries on December 31, 2020. Which of the following statements is accurate: a) On December 31, 2020, ABC recognizes revenue of $300 b) On December 31, 2020, ABC recognizes revenue of $700 c) On December 31, 2020, ABC recognizes revenue of $1,000 d) On December 31, 2020, ABC recognizes revenue of $2,000 e) On December 31, 2020, ABC recognizes revenue of $2,800 What would you pay for a $100,000 debenture bond that matures in 10 years and pays $14,000 a year in interest if you wanted to earn a yield of 10%? a) 130,424 b) 124,578 c) 118,434 d) 112,289

Presented below is information from ABC Incorporated July 1 Sold $200,000 of computers to DEF Company with terms 3/10, n/60 July 4 DEF paid ABC for its purchase on July 1 July 10 Sold $200,000 of computers to XYZ Company with terms 3/10, n/60 July 30 XYZ paid ABC for its purchase on July 10 Assume ABC uses the net method . Which of the following statements is accurate? a) On July 1, ABC records revenue of $200,000 b) On July 4, ABC records discounts forfeited of $6,000. c) On July 4, ABC records sales discounts of $2,000 d) On July 30, ABC records sales discounts of $2,000 e) On July 30, ABC records discounts forfeited of $6,000. XYZ reports the following financial information before adjustments. Dr. Cr. Account Receivable $400,000 Allowance for Doubtful Accounts 1,500 Sales Revenue (all on credit) 2,000,000 Sales Returns and Allowances 30,000 What does XYZ record as bad debt expense assuming XYZ estimates bad debt at 8% of accounts receivable? a) 33,500 b) 32,750 c) 32,000 d) 31,750 e) 30,500 In its December 31, 2019 balance sheet, Rocky reported accounts receivable of $800,000 and an allowance for uncollectible accounts of $60,000. During 2020, credit sales were $4,000,000, cash collections from customers $3,750,000, and $50,000 in accounts receivable were written off. On 12/31/2020, Rocky estimates that 8% of its receivables will not be collectible. What does Rocky record as bad debt expense for 2020? a) 70,000 b) 80,000 c) 90,000 d) 100,000 e) 110,000

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Before any year-end adjustments the balance of Perry’s Accounts Receivable account was $600,000 and Allowance for doubtful accounts had a credit balance of $20,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below. Days Account Outstanding Amount Probability of collection Less than 10 days $300,000 0.90 Between 10 and 30 days 200,000 0.80 Great than 30 days 100,000 0.40 What is the appropriate balance for Allowance for Doubtful Accounts after adjusting entries? a) 100,000 b) 110,000 c) 120,000 d) 130,000 e) 140,000 Martin Company’s inventory balance on December 31, 2019, was $300,000 (based on a 12/31/2019 physical count) before considering the following transactions:  Goods shipped to Martin f.o.b. shipping point on December 28, 2019, were received on January 5, 2020. The invoice cost was $5,000.  Goods shipped to Martin f.o.b. destination on December 20, 2019, were received on January 4, 2020. The invoice cost was $3,000.  Goods shipped from Martin to a customer f.o.b. shipping point on December 28, 2020, were received by the customer on January 4, 2020. The sales price was $6,000 and the merchandise cost $2,000.  Goods shipped from Martin to a customer f.o.b. destination on December 27, 2019, were received by the customer on January 3, 2020. The sales price was $3,000 and the merchandise cost $1,000. Based on the above information, what amount should appear on Martin’s balance sheet at December 31, 2019, for inventory? a) 305,000 b) 306,000 c) 308,000 d) 309,000 e) 311,000

The net income per books of Chris Inc. was determined without knowledge of the errors indicated. Year Net Income per Books Error in Ending Inventory 2015 $100,000 Understated $3,000 2016 110,000 Understated $3,000 2017 120,000 Overstated $2,000 2018 130,000 No error What would adjusted net income be for 2017 taking into account the inventory error? a) 125,000 b) 118,000 c) 117,000 d) 115,000 Ryder determined its ending inventory at cost and at LCNRV at December 31, 2020, December 31, 2021, and December 31, 2022, as shown below. Cost NRV 12/31/20 $500,000 $500,000 12/31/21 610,000 606,000 12/31/22 713,000 701,000 Assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used, how much cost of goods sold is recorded on 12/31/2022 related to the decline in the value of inventory? a) 4,000 b) 8,000 c) 12,000 d) 16,000 e) 20,000 Food Cost Replacement Cost Net Realizable Value Net Realizable Value less a normal profit margin Spinach $125 $80 $95 $75 Carrots 125 98 120 105 Cut beans 125 99 96 82 What is the lower-of-cost-or-market for the Carrots? a) 125 b) 120 c) 98 d) 105

Ferris Company began 2006 with 10,000 units of its principal product. The cost of each unit is $4. Merchandise transactions for the month of January 2006 are as follows: Purchases Date of Purchase Units Unit Cost Total Cost January 10 8,000 $6 $48,000 January 18 12,000 8 96,000 Totals 20,000 144,000 Sales Date of sale Units January 5 5,000 January 12 5,000 January 20 8,000 Totals 18,000 12,000 units were on hand at the end of the month. Assuming that periodic inventory records are kept, Cost of goods sold on a LIFO basis is a) 90,000 b) 144,000 c) 132,000 d) 120,000 e) 108,000 Assuming that perpetual inventory records are kept, Cost of goods sold on a LIFO basis is a) 90,000 b) 132,000 c) 120,000 d) 114,000 e) 108,000 Assuming that perpetual inventory records are kept, Cost of goods sold on a FIFO basis is a) 94,000 b) 92,000 c) 88,000 d) 90,000 e) 86,000

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Marshall Company uses the dollar-value LIFO method of computing inventory. An external price index is used to convert ending inventory to base year. The company began operations on January 1, 2006, with an inventory of $300,000. Year-end inventories at year-end costs and cost indexes for its one inventory pool were as follows: Year Ended December 31 Inventory at Year-End Costs Cost Index (Relative to Base Year) 2006 $336,000 1.05 2007 $369,600 1.12 What amount is reported as ending inventory on the 12/31/2007 balance sheet? a) 322,200 b) 326,200 c) 328,200 d) 332,200 On January 1, 2020, the Pagano Construction Company entered into a three-year construction contract to build a mall for a price of $28,000 (all amounts are in thousands). 2020 2021 2022 Costs incurred during the year $10,000 $8,000 $15,000 Estimated costs to complete (yet to be incurred) 15,000 12,000 0 Billings during the year 6,000 12,000 10,000 Cash collections during the year 3,000 8,000 17,000 Assume that Pagano uses the percentage-of-completion method for revenue recognition. Prepare all journal entries for 2021 based on the information above.

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Which of the following is an example of a conservative accounting practice? a. Estimate the allowance for uncollectible accounts to be a larger amount.b. Do not write down inventory for declines in net realizable value (estimated selling price).c. Record a lower amount of depreciation expense in the earlier years of an asset’s life.d. Record sales revenue before it is actually earned.

When a company determines that the net realizable value of its ending inventory is lower than its cost, what would be the effect(s) of the adjustment to write down inventory to net realizable value? a. Decrease total assets. b. Decrease net income. c. Decrease retained earnings. d. All of these answer choices are correct.

The following statements are correct except a.Under the allowance method, estimated losses from uncollectible accounts are recognized as expenses in the subsequent period in which the related sales occur. b.A trade discount is the reduction in the list sales price of an item to arrive at the net sales price actually charged to the customer. c.When it appears that the estimate of uncollectible accounts of a prior period was too low, the corrections must be reported as corrections to the current period financial statements. d.The bad debt expense for a period should be determined by recognizing the estimated losses from uncollectible accounts in the period in which receivables are determined to be uncollectible.

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Which of the following statements about receivables turnover is false? Receivables turnover measures the efficiency of the firm in managing and selling inventory Receivables turnover measures the liquidity of the firm's receivables Receivables turnover is calculated with revenue in the numerator A low receivables turnover indicates efficient receivables management

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Which of the following statements about the use of the FIFO assumption is NOT true? a. The FIFO assumption assigns the more recent purchase costs to the balance sheet inventory asset account. b. The FIFO assumption is not affected by the inventory control method. c. In periods of rising prices it produces a higher profit than LIFO. d. The FIFO assumption produces inventory asset values that are based on older purchase costs.

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What is the effect on net income if a company fails to record a purchase in transit (FOB shipping point) and also fails to include the purchase in physical inventory? Income is understated. Income is overstated. Not enough information is provided to determine the answer. Income is correct.

Which one of the following statements is true? a. Income manipulation is difficult under LIFO.b. Accounting principles do not require that the inventory cost flow approximate the physical flow of goods.c. Companies may use LIFO for tax purposes and FIFO in the financial statements.d. In periods of declining prices, LIFO will result in the payment of less income taxes.