ACCT 3311 Spring 2012 Exam 2B

Name________________________ Signature_____________________

Part 1: Multiple Choice (3 points each), mark your answer on the scantron in pencil: 1. In a period of rising prices, the inventory method which tends to give the highest reported Inventory balance is a. FIFO. b. moving average. c. LIFO. d. weighted-average. On January 1, 2010, East Co. issued a $20,000 four year note which pays interest semi-annually. The market rate of interest for the note is 8%. The stated interest rate is 6%. The journal entry to record the issuance of the note on Jan 1, 2010 includes which of the following (amounts are rounded to the nearest dollar): a. A credit to Note Receivable for $20,000 b. A debit to Note Receivable for $18,653 c. A credit to the Discount on Note Receivable account for $1,347 d. A credit to Cash for 20,000 e. A debit to the discount on note receivable account for $1,325 Welly Co began using dollar-value LIFO for costing its inventory last year. The base year layer consists of $250,000. Assuming the current inventory at end of year prices equals $275,000 and the index for the current year is 1.25, what is the ending inventory using dollar-value LIFO? a. $250,000. b. $251,250. c. $275,000. d. $281,250. e. $220,000. On January 1, 2011, the inventory of Glad, Inc. was $1,000,000. During 2011 Glad purchased $2,000,000 of inventory and recorded sales of $500,000. The markup on cost is 11.11%. The gross profit rate on these sales was 10%. Based upon the gross profit method, what is the estimated inventory of Glad at December 31, 2011? a. $2,550,000. b. $2,950,000. c. $2,555,550. d. $2,944,450. Ace Inc. made a $100,000 sale on account with the following terms: 2/10, n/60. If the company uses the net method to record sales made on credit, what is/are the correct journal entries related to the recording of the sale? a. Debit Sales Discount for $2,000.

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b. Debit Accounts Receivable for $100,000 and Sales Discounts for $2,000. c. Credit Sales for $98,000. d. Debit Accounts Receivable for $98,000 and credit Sales Discounts for $2,000. e. Debit Accounts Receivable for $100,000. 6. A trial balance before adjustments included the following: Debit Sales Sales returns and allowance Purchase Discounts Accounts receivable Allowance for doubtful accounts $20,000 9,000 100,000 1,000 Credit $1,000,000

$30,000 of the accounts receivable balance is greater than 30 days old. The remainder is less than 30 days old. If the company uses the following aging schedule to estimate its uncollectables: 10% of gross account receivables greater than 30 days old are uncollectable and 5% for those that are less than 30 days old. Based upon this information, the amount of the bad debt expense recorded in the adjusting entry is a. $4,500. b. $5,500. c. $6,500. d. $7,500. 7. Transactions for the month of June were: Purchases June 1 (balance) 1,000 @ $1.00 3 2,000 @ 2.00

June 2 6

Sales 500 @ $5.50 1,000 @ 6.50

Assuming that periodic inventory records are kept in units only, the ending inventory on a LIFO basis, rounded to the nearest dollar, is a. $2,500. b. $2,000. c. $3,000. d. $2,333. 8. Yousuf Company began operations in 2009 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2009, and December 31, 2010. This information is presented below. Cost Lower-of-Cost-or-Market 12/31/09 $ 1,200,000 $ 1,170,000 12/31/10 1,025,000 1,000,000 Assuming that the allowance method is used, the journal entry required at December 31, 2010 includes which of the following: a. A debit to a Loss account for $25,000.

b. c. d. e. 9.

A credit to Cost of Goods Sold for $5,000. A debit to the Inventory account for $5,000. A credit to Allowance on Inventory account for $25,000. A debit to the Allowance on Inventory account for $5,000.

Assume that all other methods are identical between U.S. GAAP and International GAAP (iGAAP). Based on your knowledge of the difference between U.S. and iGAAP lower-of-cost-or-market (LCM) valuation methods, if the inventory balance under iGAAP is $2,000,000, the value of the inventory using U.S. GAAP LCM methods will be: a. always less than $2,000,000. b. always greater than $2,000,000. c. greater than or equal to $2,000,000. d. less than or equal to $2,000,000. e. there is not enough information available to answer this question. Marrow Co. inadvertently understates its 2006 ending inventory by $10,000 and overstates its 2007 ending inventory by $5,000. Determine the effect of this error on the following accounts over the following period. Which of the following correctly reflect the effect of these errors in 2007? a. COGS is understated by 5,000 and current assets are overstated by $5,000. b. net income is $15,000 overstated and Retained earnings are $5,000 overstated. c. COGS is $15,000 understated and retained earnings are $15,000 overstated. d. COGS is $15,000 overstated and retained earnings are $5,000 understated. e. net income is $5,000 understated and current assets are $5,000 overstated. On January 1, 2008, Core Company factored receivables with a carrying amount of $100,000 to Fried factor Company. Fried factor Company assesses a finance charge of 1% of the receivables and retains 3% of the receivables for future adjustments. Assume that Core factors the receivables on a without recourse basis. Which of the following entries is correct when Core Company records the journal entries related to the transaction? a. b. c. d. e. Debit the Accounts Receivable account for $100,000. Debit the Recourse Obligation account for $3,000. Debit the Loss on sale of receivables account for $1,000. Debit cash for $99,000. Debit the Loss on sale of receivables account for $4,000.

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The replacement of a component of a machine cost $5,000. It increased the useful life of the machine and increased the fair market value by $4,000. Given that no other information is available, the entry to record the improvement should include: a. a debit to accumulated depreciation for $5,000. b. a debit to a loss account for $1,000. c. a debit to the machine account for $5,000. d. a debit to accumulated depreciation for $4,000. e. a debit to a loss account for $5,000.

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DP Corporation, a manufacturer of English foods, contracted in 2007 to purchase 1,000 pounds of a flour mixture at $1.00 per pound, delivery to be made in spring of 2008. By 12/31/07 (DP corporations fiscal year end), the price per pound of the flour mixture had decreased to $0.90 per pound and is expected to remain at this price in 2008. In 2007, DT should record which of the following journal entries: a b. c. d. e. no journal entry is required at 12/31/2007. Debit an asset account for $1,000. Credit a liability account for $1,000. Credit a gain account for $100. Debit a loss account for $100

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The cost of Equipment typically includes the purchase price and all of the following costs except a. Insurance costs during transportation b. transportation costs. c. Periodic maintenance costs to keep the equipment in good working order over its useful life. d. test-runs to calibrate the equipment. e. installation costs.

The following information should be used to answer the next 2 questions. Barmy Company exchanged equipment used in its manufacturing operations for $2,000 cash and similar equipment used in the operations of Elbow Company. Assume that this transaction lacks commercial substance. The following information pertains to the exchange. Barmy Co. Equipment (cost) Accumulated depreciation Fair value of equipment Cash received Cash given up 15. $50,000 37,000 14,000 4,000 Elbow Co. $50,000 42,000 10,000 4,000

Which of the following is correct regarding the journal entry recorded by Barmy? a. The required journal entry will record a gain of $1,000 b. The required journal entry will record a loss of $1,000 c. The required journal entry will record the new equipment at $9,000 d. The required journal entry will record a gain of $286 e. The required journal entry will record a loss of $286 Which of the following is correct regarding the journal entry recorded by Elbow? a. The required journal entry will record a gain of $2,000 b. The required journal entry will record a loss of $2,000 c. The required journal entry will record the new equipment at $12,000 d. The required journal entry will record a gain of $800 e. The required journal entry will record a loss of $800 Transactions for the month of June were: 4

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17.

June 1 3

Purchases (balance) 1,000 @ $3.00 1,000 @ 4.00

June 2 6

Sales 500 @ $5.50 1,000 @ 7.50

Assuming that periodic inventory records are kept in units only, cost of goods sold on an average cost basis, rounded to the nearest dollar, is a. $5,500. b. $5,167 c. $6,000 d. $5,250.

Part 2: Lower of cost or market (10 points) Determine the proper unit inventory price for each of the following inventory items by applying the lower of cost or market rule. Inventory Item # 5 Cost $7.20 Net realizable value Normal profit Market replacement cost 1 $8.20 8.85 0.70 7.90 2 $10.50 10.10 1.10 10.25 3 $12.00 11.90 1.50 13.90 4 $5.00 4.75 6.90 1.00 0.80 5.10 5.40

Indicate the correct inventory amount for each item (item 1 through 5 below): 1. $8.15 2. $10.10 3. $11.90 4. $4.75 5. $6.10

Part 3: Capitalization of Interest (10 points) On January 1, 2007 the Carter Manufacturing Co. began construction of a building to be used as its office headquarters. The building was completed on November 30,2008. Expenditures on the project were as follows: January 1, 2007 November 30, 2007 December 31, 2007 October 31, 2008 $1,000,000 1,000,000 1,000,000 1,000,000

On January 1, 2007, the company obtained a $1 million, 5 year construction loan with a 10 % interest rate. The companys fiscal year-end is December 31. a) Prepare the journal entry recording the amount of interest that Carter should capitalize in 2007 using the specific interest method. b) Prepare the journal entry recording the amount of interest that Carter should capitalize in 2008 using the specific interest method. c) What is the total cost of the building?

a) 2007 1-Jan 30-Nov 31-Dec

1000000 1000000 1000000

12 1 0

12 1000000 12 83333.33 12 0 1083333 Int rate 0.1 100000 100 000

Wg hted Ave Accum Expend 'ed 1000000 B uilding Intere t E pe e s x ns b) 2008 1-Jan 31-Oct

100 000

3100000 1000000 4100000

11 1

11 3100000 11 90909.09

Wg hted Ave Accum Expend 'ed 1000000 1000000 Ave int rate Int rate 0.1

3190909 100000 91666.67 0 0 9 6 6 7 Capitalizable Int 1 6 .6

B uilding Intere t E pe e s x ns c) 3,100,000.00 1,000,000.00 91,666.67 4 9 ,6 6 7 Cost of building ,1 1 6 .6

966 7 1 6 .6 966 7 1 6 .6

Part 4: Notes Receivable (10 points) On January 1, 2008, Brown Company finished consultation services and accepted in exchange a promissory note with a face value of $200,000, a due date of December 31, 2009, and a stated rate of 16%, with interest payments on June 30th and December 31st of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 8% (market rate). Instructions a. Determine the present value of the note. $58,078.3 2 $170,960. 84 $229,039. 16

PV of interest PV of Principal PV of Note Receivable

b. Prepare any necessary journal entries on December 31, 2009.

12/31/20 09

Cas h Premium on N/R Interest Revenue Cas h Note Receivable

16,00 0 7692. 31 8307. 69 200,0 00 200,0 00

Present Value of $1
Perio ds 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 3% 0.97087 0.94260 0.91514 0.88849 0.86261 0.83748 0.81309 0.78941 0.76642 0.74409 0.72242 0.70138 0.68095 0.66112 0.64186 4% 0.96154 0.92456 0.88900 0.85480 0.82193 0.79031 0.75992 0.73069 0.70259 0.67556 0.64958 0.62460 0.60057 0.57748 0.55526 5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391 0.58468 0.55684 0.53032 0.50507 0.48102 6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55839 0.52679 0.49697 0.46884 0.44230 0.41727 8% 0.92593 0.85734 0.79383 0.73503 0.68058 0.63017 0.58349 0.54027 0.50025 0.46319 0.42888 0.39711 0.36770 0.34046 0.31524 10% 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554 0.35049 0.31863 0.28966 0.26333 0.23939 12% 0.89286 0.79719 0.71178 0.63552 0.56743 0.50663 0.45235 0.40388 0.36061 0.32197 0.28748 0.25668 0.22917 0.20462 0.18270

Present Value of an Ordinary Annuity of $1

Period s 1 2 3 4 5 6 7 8 9 10 11 12 13 14 3% 0.97087 1.91347 2.82861 3.71710 4.57971 5.41719 6.23028 7.01969 7.78611 8.53020 9.25262 9.95400 10.6349 6 11.2960 7 4% 0.96154 1.88609 2.77509 3.62990 4.45182 5.24214 6.00205 6.73274 7.43533 8.11090 8.76048 9.38507 9.98565 10.5631 2 5% 0.95238 1.85941 2.72325 3.54595 4.32948 5.07569 5.78637 6.46321 7.10782 7.72173 8.30641 8.86325 9.39357 9.89864 6% 0.94340 1.83339 2.67301 3.46511 4.21236 4.91732 5.58238 6.20979 6.80169 7.36009 7.88687 8.38384 8.85268 9.29498 8% 0.92593 1.78326 2.57710 3.31213 3.99271 4.62288 5.20637 5.74664 6.24689 6.71008 7.13896 7.53608 7.90378 8.24424 10% 0.90909 1.73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 6.49506 6.81369 7.10336 7.36669 12% 0.89286 1.69005 2.40183 3.03735 3.60478 4.11141 4.56376 4.96764 5.32825 5.65022 5.93770 6.19437 6.42355 6.62817

10

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11.9379 4

11.1183 9

10.3796 6

9.71225

8.55948

7.60608

6.81086

11