Intermediate Accounting 2nd Exam sample exam True/False. If the following statements are true, circle T; if they are false, circle F. 1. T F If a person wanted to know the interest rate that, when compounded annually, would cause a $2,000 deposit to triple in size in 20 years, the problem could be solved by using either an amount of a single sum approach or a present value of a single sum approach. 2. T F In an amount of an annuity due, the final rent occurs one period before the future value. 3. T F The income statement approach of determining bad-debt expense emphasizes the reporting of accounts receivable at net realizable value. 4. T F In a deferred annuity, the deferral period affects the calculation of the present value but not the future value. 5. T F A pledging of accounts receivable is normally accounted for as a sale of the receivables. 6. Tron Corporation's inventory cost on its balance sheet was lower using first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did the cost of purchases move during the period? A. Up. B. Down. C. Steady. D. Cannot be determined. 7. A company using a periodic inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year-end and net income for the year? Stockholders' Net Assets Liabilities Equity Income a. No effect understate overstate overstate b. No effect overstate understate understate c. Understate understate no effect no effect d. Understate no effect understate understate 8. Fredd corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follow: Product A Product B Historical cost $ 68 $ 90 Replacement cost 60 92 Estimated cost to dispose 20 65 Estimated selling price 120 150 In pricing its ending inventory using the lower of cost or market, what unit values should Fredd use for products A and B respectively? A. $64 and $85 B. $60 and $90 C. $68 and $90 D. $60 and $92 9. Cost of goods sold is the same under a periodic system as under a perpetual system when a company uses A. FIFO. B. LIFO. C. Average cost. D. Any of the above methods. 10. Assume that you have an amount of an ordinary annuity of 1 table and want to determine the factor for an amount of an annuity due of 1 for ten periods at 6%. You should locate the amount of an ordinary annuity of 1 factor for A. Ten periods at 6%. B. Nine periods at 6% and add 1. C. Eleven periods at 6% and subtract 1. D. Ten periods at 7% and subtract 1. 12. Factoring of accounts receivable (5 pts) Franklin Company, on June 10 of the current year, factored $12,000 of accounts receivable without recourse on a notification basis with Jackson Finance Company. Jackson charged a factoring fee of 3% of the amount of receivables factored and withheld 15% of the amount of receivables factored to cover possible future sales returns and allowances. Journalize the above transaction on June 10. 13. Accounts receivable--sequential events. (15 pts) The following information pertains to the 1992 calendar-year accounting period of Farm Company. Prepare journal entries to record the information in item 2-6 below. (1) Accounts receivable, net of an allowance for doubtful accounts of $1,550, were $43,000 on January 1. (2) The company sold merchandise for $44,000 cash and $130,000 on credit. (3) The company collected $147,500 from customers paying their accounts. (4) Accounts receivable of $2,500 were written off as uncollectible. (5) The company collected $500 from customers whose accounts had been written off as uncollectible. (6) The company estimated that 6% of the Accounts Receivable balance at year-end would be uncollectible in the future. 14. Lower of cost or market--application methods (15 pts) The following information pertains to Voul Company on December 31, 1994: Per Unit Number Historical Replacement of Units Cost Cost Ceiling Floor Category I Product A 500 $25 $22 $27 $23 Product B 300 31 33 36 29 Category II Product C 600 14 18 20 13 Product D 800 21 21 20 15 Instructions Determine the valuation that should be assigned to Voul's inventory on December 31, 1994, assuming that the company applies the lower of cost or market rule to (1) each product __________ (2) major categories of products __________ and (3) the inventory as a whole __________ 15. Mike Davis has accumulated $152,122.00 in a retirement account that will pay the same rate of interest, compounded annually, during the next fifteen years. If Mike is able to make fifteen annual withdrawals of $20,000 each from his retirement account, with the first withdrawal occurring one year from now, what interest rate will the money in his account earn? (5 pts) 16. On March 1, 1993, Walton, Inc., purchased a new computer system directly from the manufacturer. The manufacturer accepted Walton's promissory note that calls for six annual payments of $100,000 each. The first of these payments is to be made three years from today (3/1/96). The note makes no mention of interest, but similar notes accepted by the manufacturer in late February 1993 had interest rates of 8 percent. Compute the cost of the new computer system. 17. FIFO, average cost, and LIFO (10 pts) The following information is available from the inventory records of Tulsa Company: Number of Unit Units Cost Inventory, March 1 2,000 $10.10 Purchase, March 10 7,000 12.00 Purchase, March 25 5,000 15.00 The company sold 8,000 units on March 21 for $25 each. On March 31, 6,000 units are on hand. Instructions (SHOW YOUR CMPUTATIONS) Compute the cost of the inventory on March 31 under each of the following independent assumptions: A) FIFO method, periodic system __________ B) FIFO method, perpetual system __________ C) Average cost method, periodic system __________ D) LIFO method, perpetual system __________ (****perpetual LIFO and perperpetual FIFO will NOT be tested***) 18. Retail Inventory Method (20 pts) The following information pertains to the 1994 calendar-year accounting period of Hagel Company: Inventory, Jan. 1 At cost $28,350 At retail 45,000 Purchases At cost 103,860 At retail 181,125 Purchase returns At cost 6,210 At retail 10,125 Additional markups 18,000 Markdowns 29,250 Markup cancellations 8,000 Markdown cancellations 17,000 Net sales 168,750 Instructions estimate the December 31 inventory cost in terms of: (Keep four decimal places for all cost-to-retail ratios) 1. Conventional Retail (8 pts) See Next Page 2. Dollar Value Retail LIFO (Assuming that beginning inventory represents the base inventory, and the price index at the end of the year is 1.1) (12 pts) 3. Retail FIFO (5 pts) ****************************** SOLUTIONS 1. T 2. T 3. F 4. T 5. F 6. B 7. C 8. A 9. A 10. C 12. Dr. Cash 9840 Dr. Service Charge Exp 360 Dr. Receivable from 1800 Just 12,00 Cr. AIR 13. 2. Cash 44000 AIR 130000 Sales 174,000 3. Cash 147,500 AIR 147,500 4. Allowances 2500 AIR 2500 5. AIR 500 Allowances 500 Cash 500 AIR 500 6. Dr. Bad debts Exp 1923 Cr. Allowance 1923 14. 1 = 45,200 2 = 46,600 3 = 47,000 15. i = 10% 16. Cost of the new computer = 396,338 17. A. 87,000 B. 87,000 C. 76,800 D. 85,100 18. Retail Inventory Method At Cost At Retail Cost to Retail Ratio Beg. Inv. 28350 45000 63% Purchases 103860 181125 Purchase Returns (6210) (10125) Additional Markups - 18000 Markup Cancellation - (8000) 10000 Additional Markdowns - (29250) Markdown Cancellation - 17000 (12250) Net Purchases 97650 168750 57.87% CTAFS 126000 213750 58.95% Less Sales 168750 Ending Inv. At Retail 45,000 1. Average cost = $26,527.50 2. Conventional = $25,087.50 3. FIFO = $26,041.50 4. LIFO = $28,350.00 5. Dollar Value Retail LIFO = $25,773