Accounting Sample Assignment

Business and Management

Accounting 011

Exam #2-Answers

Multiple Choice/Short Answer 10 questions, 4 points each

1. The following information is available for Reagan Company:

Allowance for doubtful accounts at December 31, 2005 $9,000
Credit sales during 2006 $400,000
Accounts receivable deemed worthless and written off during 2006 $8,000

As a result of a review and aging of accounts receivable in early January 2007, however, it has been determined that an allowance for doubtful accounts of $9,500 is needed at December 31, 2006. What amount should Reagan record as "bad debt expense" for the year ended December 31, 2006?

  1. $8,500
  2. $9,500
  3. $10,500
  4. $17,500

Balance in account after writeoff is 1,000 credit. To get to new balance of 9,500 you need to add 8,500.

2. Designated market value

  1. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.
  2. should always be equal to net realizable value.
  3. may sometimes exceed net realizable value.
  4. should always be equal to net realizable value less a normal profit margin.

3. AJ Corporation, a manufacturer of ethnic foods, contracted in 2007 to purchase 500 pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By 12/31/07, the price per pound of the spice mixture had risen to $5.60 per pound. In 2007, AJ should recognize

  1. a loss of $2,500.
  2. a loss of $300.
  3. no gain or loss.
  4. a gain of $300.

Because the price increased AJ actually will benefit from the contract. However, because of conservatism, we do not recognize the gain (whereas we would have recognized the loss).

4. The following information is available for October for Jordan Company.

Beginning inventory $50,000
Net purchases $150,000
Net sales $300,000
Percentage markup on cost 66.67%

A fire destroyed Jordan’s October 31 inventory, leaving undamaged inventory with a cost of $3,000. Using the gross profit method, the estimated ending inventory destroyed by fire is

  1. $17,000.
  2. $77,000.
  3. $80,000.
  4. $100,000.

Cost of goods available for sale is 200,000 (50,000+150,000)

Sales at cost are 300,000 * .6 or 180,000

Inventory before the fire is 20,000, since there is 3,000 left, the inventory destroyed by the fire is 17,00

5. Goods in transit which are shipped f.o.b. shipping point should be

  1. included in the inventory of the seller.
  2. included in the inventory of the buyer.
  3. included in the inventory of the shipping company.
  4. none of these.

6. Goods in transit which are shipped f.o.b. destination should be

  1. included in the inventory of the seller.
  2. included in the inventory of the buyer.
  3. included in the inventory of the shipping company.
  4. none of these.

7. The following accounts were abstracted from Todd Co.'s unadjusted trial balance at December 31, 2007:

Debit Credit

Accounts receivable $750,000

Allowance for uncollectible accounts 8,000

Net credit sales $3,000,000

Todd estimates that 2% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2007, the allowance for uncollectible accounts should have a credit balance of

  1. $60,000.
  2. $52,000.
  3. $23,000.
  4. $15,000.

2% of 750,000

8. Continuing with the information in number 7, the debit to bad debt expense should be.

  1. $15,000
  2. $23,000
  3. $7,000
  4. $68,000

In order to turn the 8,000 debit balance into a 15,000 credit balance you need to debit bad debt expense and credit the allowance for 23,000.

Attached please find the footnotes to the 2005 financial statements for the General Electric corporation. Please identify the following and fill them in on the answer sheet.

9. Difference between LIFO and current replacement cost of inventory as of December 31, 2005. 697 million

10. Allowance for uncollectible accounts as of December 31, 2005. 758 million

Note 11

GE Current Receivables

December 31 (In millions)

2005

2004

Infrastructure

$6,827

$5,861

Industrial

2,255

2,230

Healthcare

2,947

2,862

NBC Universal

3,633

4,067

Corporate items and eliminations

154

251

15,816

15,271

Less allowance for losses

(758)

(738)

Total

$15,058

$14,533

Receivables balances at December 31, 2005 and 2004, before allowance for losses, included $10,250 million and $10,182 million, respectively, from sales of goods and services to customers, and $246 million at both December 31, 2005 and 2004, from transactions with associated companies.

Current receivables of $563 million and $435 million at December 31, 2005 and 2004, respectively, arose from sales, principally of aircraft engine goods and services on open account to various agencies of the U.S. government, our largest single customer. About 4% of our sales of goods and services were to the U.S. government in 2005, 2004 and 2003.

Note 12

Inventories

December 31 (In millions)

2005

2004

GE

Raw materials and work in process

$5,527

$5,042

Finished goods

5,152

4,806

Unbilled shipments

333

402

11,012

10,250

Less revaluation to LIFO

(697)

(661)

10,315

9,589

GECS

Finished goods

159

189

Total

$10,474

$9,778

As of December 31, 2005, we were obligated to acquire certain raw materials at market prices through the year 2027 under various take-or-pay or similar arrangements. Annual minimum commitments under these arrangements are insignificant.

Problem 1 (12 points)

Calculate the following

1. Future value of $10,000 invested for 20 years (compounded semi-annually) at a rate of 6% per year.

Using the formula

10,000 * 1.0340 = 32,620

or

Using table 6-1

10,000 * 3.2604 = 32,620

2. Present value of $20,000 to be received 3 years in the future. Relevant discount rate is 24% per year, to be compounded monthly.

Using the formula

20,000/1.0236 = 9,804

Or

Using table 6-2

20,000 * .49022 = 9,804

3. Present value of an annuity due of $100 per quarter for 3 years (annual rate 36%).

Using table 6-5

100*7.80519 = 781

4. Future value of an ordinary annuity where you invest $100 per quarter for 3 years (annual rate 24%).

Using table 6-3

100*16.86994 = 1,687

Problem 2 (8 points)

A. Montoya Co. uses the gross method to record sales made on credit. On June 1, 2007, it made sales of $45,000 with terms 3/15, n/45. On June 12, 2007, Montoya received full payment for the June 1 sale. Prepare the required journal entries for Montoya Co.

June 1

Accounts Receivable

45,000

Sales

45,000

June 12

Cash

43,650

Discount on Sales

1,350

Accounts Receivable

45,000

Calculation – since payment is made within 15 days the customer is assumed to take the 3% discount, and pay only 97% of the 45,000 or 43,650.

B. Assume that Montoya Co. uses the net method to account for cash discounts. On June 1, 2007, it made sales of $45,000 with terms 3/15, n/45. On June 12, 2007, Montoya received full payment for the June 1 sale. Prepare the required journal entries for Montoya Co.

June 1

Accounts Receivable

43,650

Sales

43,650

June 12

Cash

43,650

Accounts Receivable

43,650

Problem 3 (6 points)

The Very Successful Car Dealership sells cars either for cash or on credit. Currently they are offering 3% interest for 3 years on all purchases. The terms of the transaction are that the purchaser pays interest at the end of the each year and the principal at the end of 3 years. The Short of Cash Corporation purchases a car at the list price of $24,000, electing to take advantage of the low interest financing. Their alternative was to borrow the money from their bank at a rate of 12 percent annually. Record the sale.

Need to calculate the present value of the 3 year ordinary annuity of $720 (3% of 24,000) plus the present value of 24,000 at the end of 3 years, in both cases using a discount rate of 12%.

720*2.40183 = 1,729

24,000*.71178=17,083

1,729+17,083=18,812

Since the list price of the transaction is $24,000 we record the receivable at 24,000. However we can only record the sale at the value computed above, 18,812. Thus we require a contra account to reduce the receivable to its present value 5,188 (24,000-18,812)

Receivable

24,000

Sales

18,812

Discount on Receivable

5,188

Problem 4 (10 points)

The following information relates to the Jimmy Johnson Company.

Date

Ending Inventory (End-of-Year Prices)

Price Index

December 31, 2000

$89,000

100

December 31, 2001

117,390

105

December 31, 2002

123,656

116

December 31, 2003

137,280

120

December 31, 2004

130,000

130

Instructions

Use the dollar-value LIFO method to compute the balance sheet ending inventory for Johnson Company for 2000 through 2004. (Round the results of each computation and the answers to 0 decimal places.)

2000

$ 89,000

2001

$ 112,940

2002

$ 107,480

2003

$ 116,840

2004

$ 100,550

Calculations

2001 Ending inventory at Base year Prices = 117,390/1.05 = 111,800

Less Beginning Inventory at Base year 89,000

Increase at Base Year Prices 22,800

Multiply by current index of 1.05 yields increase of 23,940

So Ending inventory on balance Sheet is 89,000 + 23,940 = 112,940

2002 Ending inventory at Base year Prices = 123,656/1.16 = 106,600

Less Beginning Inventory at Base year (ending inv 2001) 111,800

Decrease at Base Year Prices 5,200

Subtract from most recent (2001) layer at index of 1.05

yields decrease of 5,460

So Ending inventory on balance Sheet is 112,940- 5,460 = 107,480

2003 Ending inventory at Base year Prices = 137,280/1.2 = 114,400

Less Beginning Inventory at Base year (ending inv 2002) 106,600

Increase at Base Year Prices 7,800

Multiply by current index of 1.2 yields increase of 9,360

So Ending inventory on balance Sheet is 107,480 + 9,360 = 116,840

2004 Ending inventory at Base year Prices = 130,000/1.3 = 100,000

Less Beginning Inventory at Base year (ending inv 2003) 114,400

Decrease at Base Year Prices 14,400

Subtract most recently added layer 7,800 * 1.2 9,360

Subtract 6,600 added in 2001 at 1.05 6,930

So Ending inventory on balance Sheet is 116,840 – 9,360 – 6,930 = 100,550

Problem 5 (12 points)

Smashing Pumpkins Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2008, consists of products D, E, F, G, H, and I. Relevant per-unit data for these products appear below.

Item D

Item E

Item F

Item G

Item H

Item I

Estimated selling price

$120

$110

$95

$90

$110

$90

Cost

75

80

80

80

50

36

Replacement cost

120

72

70

30

70

30

Estimated selling expense

30

30

30

25

30

30

Normal profit

20

20

20

20

20

20

Determine the final lower of cost or market inventory value for each item.

D

$ 75

E

$ 72

F

$ 65

G

$ 45

H

$ 50

I

$ 36

Problem 6 (12 points)

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Date

Transaction

Units In

Unit Cost

Total

July 1

Balance

100

$4.10

$ 410

6

Purchase

800

4.20

3,360

12

Purchase

400

4.50

1,800

18

Purchase

300

4.60

1,380

25

Purchase

500

4.58

2,290

Totals

2,100

$9,240

Assuming that the periodic inventory method is used and that 1,400 units are sold, compute ending inventory and cost of goods sold under each of the following cost flow assumptions.

LIFO

FIFO

Average Cost

Inventory

$ 2,930

$ 3,210

$ 3,080

Cost of goods sold

$ 6,310

$ 6,030

$ 6,160

Calculation of Ending Inventory under LIFO = 100*4.10 + 600*4.2 = 2930

Cost of goods sold is then 9,240-2,930 = 6,310

Computation of Ending Inventory under FIFO = 500*4.58 + 200*4..60 = 3,210

Cost of goods sold is then 9,240 -3,210 = 6,030

Computation of Ending Inventory under Average Cost=9,240/2,100=4.40per unit

4.40*700=3,080

Cost of goods sold is then 9,240-3,080 = 6,160