Fundamentals of Financial Accounting ACC 311

Fundamentals of Financial AccountingACC 311

Fall 2007

Practice Exam II

Form: XX

Name Instructor Section Meeting Time

DO NOT OPENuntil given instructions to do so.

Instructions

1. Assume that the accrual basis of accounting applies to all questions, unless a question specifically instructs otherwise.

2. Confirm that you have XX numbered pages. There are also two blank sheets of paper at the end of the exam that you may use forscratch paper.

3. On your Scantron answer sheet, write and bubble in your name, section number, and the Test Form letter noted above.

4. Use a #2 pencil only to mark your responses on your Scantron answer sheet. Mark clearly and erase completely as needed. You should also mark your answers on your exam. However, only multiple choice answers marked on your Scantron answer sheet willbe graded.

5. Multiple choice questions are 2 points each; all other questions have their point value noted with the problem.

6. Cell phones, PDA's and calculators capable of storing text are NOT allowed at your desk during the exam. Please silence all cell phones and do not access them during the exam.

7. Bring your entire exam, Scantron answer sheet and student ID to the front of the room when you have finished.

8. You are reminded of the University’s honor policy which requires you do your own work and not give or receive assistance on this exam.

Acc 311 – Practice Exam II Page 1 Fall 2007

SECTION I - MULTIPLE CHOICE (50 points - 2 points each) - Please choose the BEST answer for each question and record your answer on the Scantron answer sheet.

1. Ward Company estimates its bad debt expense to be 2% of credit sales. Ward's credit sales for 2006 were $1,000,000. During 2006, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2006. In its December 31, 2006, income statement, whatamount should Ward report as bad debt expense?

A) $23,000B) $20,000C) $18,000D) $17,000E) None of the above

2. An analysis and aging of Jay Company's accounts receivable at December 31, 2006, disclosed the following:

Accounts receivable $900,000Allowance for doubtful accounts (before aging) 50,000Amount deemed uncollectible (per aging)64,000

The net realizable value of the accounts receivable at December 31, 2006 is:


3. If a company sells goods under the terms "3/10, net 45" and the customer sends payment on day 30, how much should the customer send the seller?

A) 103% of the invoice priceB) 100% of the invoice priceC) 97% of the invoice priceD) 90% of the invoice priceE) 55% of the invoice price

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The following information pertains to questions 4 and 5.

The 12/31/2006 financial statements of the New Age Company contained the following:

Income statement 2006Bad debt expense $ 18,000

Balance sheet 2006 2005Accounts receivable (net of Allowance account of $30,000 and $20,000 for 2006 and 2005 respectively)

112,000 $80,000

Statement of cash flows 2006Cash collected from customers $450,000

4. Assuming that no accounts were reinstated during 2006, what was the amount of write-offs for New Age during 2006?

A) $ 8,000B) $10,000C) $18,000D) $20,000E) $30,000

5. Without respect to your answer in the previous question, suppose that the amount of the writeoffs for 2005 was $10,000. What was the amount of credit sales for the year? (Assume all company sales are made on credit.)

A) $492,000B) $502,000C) $550,000D) $592,000E) $602,000

6. The Williams Company estimates that 1% of Net Sales is uncollectible. The journal entry for the current year includes acredit to the Allowance account for $5,000, and the resulting

2


ending credit balance in the Allowance account is $4,500. What was Net Sales for the current year?

A) $ 500B) $ 500,000C) $ 450,000D) $ 550,000E) Cannot be determined

7.When a company ships product to a customer with the terms f.o.b. (free on board) destination, which of the following is true? A) The seller will pay the shipping charges and title will not be

exchanged until goods are received by the customer. B) The buyer will pay the shipping charges and title is exchanged

at point of shipment. C) The seller will pay the shipping and title is exchanged at

point of shipment. D) The buyer will pay the shipping and title is exchanged when

the goods are received by the customer.

8. If ABC Company understates ending inventory in 2006 by $10,000 andno correcting entry is made, what will be the effect of the error on the following:

2006 net income 2007 net income 2007 retained earningsA) overstated understated understatedB) understated overstated overstatedC) understated overstated no effectD) overstated understated no effectE) no effect no effect no effect

Questions 9 and 10 are based on the following information.

Addision Hardware began the month of November with 150 large brass switch plates on hand at a cost of $4.00 each. These switch plates

3


sell for $7.00 each. The following schedule presents the sales and purchases of this item during the month of November:

Purchases

Date of Transaction

QuantityReceived Unit Cost Units

SoldNovember 5 100November 7 200 $4.20November 9 150November 11 200 $4.40November 17 220November 22 250 $4.80November 29 100

9. If Addison uses periodic weighted average inventory costing, the gross profit for November will be

A) $1046B) $1,482C) $1,516D) $1,528E) None of the above

10. If Addison uses periodic LIFO inventory costing, the cost of goodssold for November will be:


11. Generally, which inventory costing method approximates most closely the current cost for each of the following?

Cost of Goods sold Ending InventoryA) LIFO FIFOB) LIFO LIFO

4


C) FIFO FIFOD) FIFO LIFO

12. Which of the following is a true statement about lower of cost ormarket (LCM)? A) It is optional under generally accepted accounting principles,

whether you apply LCM in the year in which net realizable value declines below cost or the company waits until the inventory is sold.

B) LCM can be applied to all cost methods under generally accepted accounting principles except for LIFO.

C) LCM recognizes holding losses in the current period rather than postponing them until inventory is sold.

D) All are true E) None is true

13. If a company uses LIFO and prices are rising, large purchases of inventory near the end of the year under the periodic method will:

A) reduce gross profitB) reduce cost of goods soldC) increase income taxes paidD) have no effect on the amount of cost of goods sold

14. On August 1, Red Company purchased computer equipment for $10,000cash plus 100 shares of White common stock held by Red Company asan investment. The White common stock cost Red Company $5,000 andon August 1 had a market value of $4,200. Installation cost was $700 and shipping cost was $500. What amount should be the total amount debited to the computer equipment account? A) $14,200. B) $15,000. C) $15,400. D) $16,200. E) None of the above is correct.

15. If an expenditure is treated as a capital expenditure, instead ofas a revenue expenditure, which of the following statements is true?

5


A) The current year's net income will be lower and future depreciation expense will be higher.

B) The current year's net income will be higher and future depreciation expense will be lower.

C) The current year's net income will be higher and future depreciation expense will be higher.

D) The current year's net income will be lower and future depreciation expense will be lower.

16. A company that has a policy of trading in its fleet of delivery trucks every three years in comparison to another company with a policy of trading in their trucks every five years would most likely have A) a higher estimate of residual value at the beginning of their

useful lives. B) a lower book value at the end of their useful lives. C) more in accumulated depreciation at the end of their useful

lives. D) Both B and C. E) All of the above.

17. Hill Inc., purchased an asset on January 1, 2009. Hill chose thedouble-declining- balance depreciation method to depreciate the asset. Had Hill chosen the straight-line method A) depreciation expense would be greater in 2009. B) the book value of the asset would be less at the end of 2009. C) net income would be less in 2009. D) all of above are correct. E) none of the above is correct.

18. In accounting, goodwill A) may be recorded whenever a company achieves a level of net

income that exceeds the industry average. B) needs to be amortized if its useful life is indeterminate.C) may be recorded when a company purchases another business. D) must be expensed in the period it is recorded because benefits

from goodwill are difficult to identify. E) is never recorded.

6


19. Williams Company purchased a machine at a cash cost of $25,000 and is depreciating it over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the eighth year,a major overhaul on it was completed at a cost of $8,000, and thetotal estimated useful life was changed to 12 years with the residual value unchanged. Depreciation expense for year 8 would be (assuming straight-line depreciation).A) $2,200. B) $2,920. C) $3,100. D) $8,800. E) None of the above is correct.

20. In 2004, Genentech reported a current ratio of 2.75 and in 2003 it was 3.10. Which of the following is a potential cause of a fall in this ratio?A) An increase in accounts payable.B) A decrease in inventories. C) A decrease in short-term borrowings. D) Both A and B would cause the ratio to fall. E) All of the above would cause the ratio to fall.

21. Which of the following statements is false relating to payroll taxes? A) When recording the payroll entry, the credit to wages payable

is usually more than the debit to wages expense.B) FICA (social security) tax is a “matching” tax with the

employer. C) Income taxes withheld from employees' paychecks are

liabilities of the employer. D) When the salaries expense entry is recorded, the credit to

cash will be for less than the debit to salaries expense.E) Two of the above statements are false.

22. On July 1, 2009, Prism, Inc., borrowed $30,000 from First Bank ona one year, 10% note payable. Interest is payable on June 30, 2010, the due date of the note. Prism’s accounting year ends December 31, 2009. The journal entry required on the company's books to record the interest on this note for 2009, would include

7


a A) debit to Interest Expense for $1,500. B) credit to Interest Expense for $1,500. C) credit to Cash for $1,500.D) debit to Cash for $1,500 E) debit to Notes Payable for $1,500.

23. Young Company is involved in a lawsuit. The liability which couldarise as a result of this lawsuit should be recorded on the booksif the probability of Young owing money as a result of the lawsuit is A) remote and the amount can be reasonably estimated. B) probable and the amount can be reasonably estimate d. C) reasonably possible and the amount can be reasonably estimate

d. D) probable and the amount cannot be reasonably estimate d. E) None of the above is correct.

24. On January 1, 2006, Simko Company acquired a truck that had a purchase price of $20,000. The seller agreed to allow Simko to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 2006 and 2007. The amount of each annual payment the company must make is (round to the nearest dollar) A) $22,267. B) $11,524. C) $14,151. D) $17,751. E) None of the above is correct.

25. Melissa is considering several possible investment alternatives.

Option A:

Melissa could receive $10,000 today.

Option B:

Melissa could receive $3,000 at the end of each year for four years.

Option C:

Melissa could receive $15,000 five years from now.

8


Assuming an opportunity rate of 8%, which option results in the greatest financial benefit to Melissa? A) Option A B) Option B C) Option C D) Option A and B result in the same financial benefit to

Melissa. E) Option A and C result in the same financial benefit to

Melissa.

9


SECTION II (50 points). You MUST show your work to receive credit foryour answers and to receive partial credit. Please try to be as neat and organized as possible.

PROBLEM 1 (12 points)At December 31, 2006, Sycamore Imports reported the following

information on it balance sheet:Accounts receivable $1,020,000Less: Allowance for doubtful accounts 60,000Required:During 2007, the company had the following transactions related to receivables. Please provide the journal entry for each item.

1. Sales on account of $2,670,000.ACCOUNTS DEBIT CREDIT

2. Sales returns and allowances of $40,000.ACCOUNTS DEBIT CREDIT

3. Collections of accounts receivable in the amount of $2,300,000.ACCOUNTS DEBIT CREDIT

4. Wrote off account receivable deemed uncollectible in the amount of $65,000.

ACCOUNTS DEBIT CREDIT

10


11


5. Recovery of bad debts previous written off as uncollectible in the amount of $20,000.


6. Prepare the journal entry to record bad debt expense, assuming thatan aging of accounts receivable indicates that estimated uncollectible accounts total $95,000.


12


PROBLEM 2 (12X points)

Red Robin Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average cost. The company would like to determine the results of operations for 2006 if either the FIFO or LIFO method had been used. For 2006, the accounting records show the following:

Inventories Purchases and Sales Beginning (10,000 units)$22,800 Total net sales (225,000 units)

$865,000Ending (15,000 units) Total cost of goods purchased

578,500 (230,000 units)

Purchases were made quarterly as follows:Quarter Units Unit cost Total cost

1 60,000 $2.30 $138,0002 50,000 2.50 125,0003 50,000 2.60 130,0004 70,000 2.65 185,500

230,000 $578,500

Operating expenses were $147,000, and the company’s income tax rate is30%.

Required1. Calculate the company’s net income under FIFO.

2. Calculate the company’s net income under LIFO.

13


3. How much more cash will be available for management under LIFO thanunder FIFO?

14


PROBLEM 3 (13 points)

Please fill out the chart below with the annual depreciation expense, using the following facts:

Acquisition Cost of Company Van = $65,000Salvage Value of Company Van = $5,000Estimated Useful Life (in years) = 3 yearsEstimated Useful Life (in units) = 150,000 miles

(Note – the van was driven 60,000 miles in Year 1; 50,000 miles in Year 2; and 70,000 miles in Year 3)You must show your work to receive credit for this problem. Round to the nearest dollar.

Year 1 Year 2 Year 3

Straight-Line

Units-of-Production

Double-Declining-Balance

2. The van was sold in Year 4 for $8,000 in cash. Please prepare the journal entry.


15


PROBLEM 4 (13 points)

On January 1, 2006, Mission Company agreed to buy some equipment from Anna Company. Mission signed a note, agreeing to pay Anna one payment of $500,000 for the equipment on December 31, 2008. The market rate ofinterest for this note was 10%.

Required:A. Prepare the journal entry Mission would record on January 1,

2006 related to this purchase.


B. Prepare the December 31, 2006, adjusting entry to record interest expense related to the note for the first year.


C. Prepare the December 31, 2007, adjusting entry to record interest expense related to the note for the second year.


D. Prepare the entry Mission would record on December 31, 2008, the due date of the note to record interest expense for the third year and payment of the note.


16


17


Present Value of $1 to be received after "n" periods at "i" rate.n\i 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20%

10.990

10.980

40.970

90.961

50.952

40.943

40.934

60.925

90.917

40.909

10.900

90.892

90.885

00.877

20.869

60.833

3

20.980

30.961

20.942

60.924

60.907

00.890

00.873

40.857

30.841

70.826

40.811

60.797

20.783

10.769

50.756

10.694

4

30.970

60.942

30.915

10.889

00.863

80.839

60.816

30.793

80.772

20.751

30.731

20.711

80.693

10.675

00.657

50.578

7

40.961

00.923

80.888

50.854

80.822

70.792

10.762

90.735

00.708

40.683

00.658

70.635

50.613

30.592

10.571

80.482

3

50.951

50.905

70.862

60.821

90.783

50.747

30.713

00.680

60.649

90.620

90.593

50.567

40.542

80.519

40.497

20.401

9

60.942

00.888

00.837

50.790

30.746

20.705

00.666

30.630

20.596

30.564

50.534

60.506

60.480

30.455

60.432

30.334

9

70.932

70.870

60.813

10.759

90.710

70.665

10.622

70.583

50.547

00.513

20.481

70.452

30.425

10.399

60.375

90.279

1

80.923

50.853

50.789

40.730

70.676

80.627

40.582

00.540

30.501

90.466

50.433

90.403

90.376

20.350

60.326

90.232

6

90.914

30.836

80.766

40.702

60.644

60.591

90.543

90.500

20.460

40.424

10.390

90.360

60.332

90.307

50.284

30.193

810

0.9053

0.8203

0.7441

0.6756

0.6139

0.5584

0.5083

0.4632

0.4224

0.3855

0.3522

0.3220

0.2946

0.2697

0.2472

0.1615

11

0.8963

0.8043

0.7224

0.6496

0.5847

0.5268

0.4751

0.4289

0.3875

0.3505

0.3173

0.2875

0.2607

0.2366

0.2149

0.1346

12

0.8874

0.7885

0.7014

0.6246

0.5568

0.4970

0.4440

0.3971

0.3555

0.3186

0.2858

0.2567

0.2307

0.2076

0.1869

0.1122

1 0.878 0.773 0.681 0.600 0.530 0.468 0.415 0.367 0.326 0.289 0.257 0.229 0.204 0.182 0.162 0.093

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Acc 311 – Practice Exam II Page 19 Fall 20073 7 0 0 6 3 8 0 7 2 7 5 2 2 1 5 514

0.8700

0.7579

0.6611

0.5775

0.5051

0.4423

0.3878

0.3405

0.2992

0.2633

0.2320

0.2046

0.1807

0.1597

0.1413

0.0779

15

0.8613

0.7430

0.6419

0.5553

0.4810

0.4173

0.3624

0.3152

0.2745

0.2394

0.2090

0.1827

0.1599

0.1401

0.1229

0.0649

16

0.8528

0.7284

0.6232

0.5339

0.4581

0.3936

0.3387

0.2919

0.2519

0.2176

0.1883

0.1631

0.1415

0.1229

0.1069

0.0541

17

0.8444

0.7142

0.6050

0.5134

0.4363

0.3714

0.3166

0.2703

0.2311

0.1978

0.1696

0.1456

0.1252

0.1078

0.0929

0.0451

18

0.8360

0.7002

0.5874

0.4936

0.4155

0.3503

0.2959

0.2502

0.2120

0.1799

0.1528

0.1300

0.1108

0.0946

0.0808

0.0376

19

0.8277

0.6864

0.5703

0.4746

0.3957

0.3305

0.2765

0.2317

0.1945

0.1635

0.1377

0.1161

0.0981

0.0829

0.0703

0.0313

20

0.8195

0.6730

0.5537

0.4564

0.3769

0.3118

0.2584

0.2145

0.1784

0.1486

0.1240

0.1037

0.0868

0.0728

0.0611

0.0261

30

0.7419

0.5521

0.4120

0.3083

0.2314

0.1741

0.1314

0.0994

0.0754

0.0573

0.0437

0.0334

0.0256

0.0196

0.0151

0.0042

40

0.6717

0.4529

0.3066

0.2083

0.1420

0.0972

0.0668

0.0460

0.0318

0.0221

0.0154

0.0107

0.0075

0.0053

0.0037

0.0007

50

0.6080

0.3715

0.2281

0.1407

0.0872

0.0543

0.0339

0.0213

0.0134

0.0085

0.0054

0.0035

0.0022

0.0014

0.0009

0.0001

19


Present Value of an annuity of $1 to be received at the end of each of "n" periods at "i" rate.n\i 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20%

10.990

10.980

40.970

90.961

50.952

40.943

40.934

60.925

90.917

40.909

10.900

90.892

90.885

00.877

20.869

60.833

3

21.970

41.941

61.913

51.886

11.859

41.833

41.808

01.783

31.759

11.735

51.712

51.690

11.668

11.646

71.625

71.527

8

32.941

02.883

92.828

62.775

12.723

22.673

02.624

32.577

12.531

32.486

92.443

72.401

82.361

22.321

62.283

22.106

5

43.902

03.807

73.717

13.629

93.546

03.465

13.387

23.312

13.239

73.169

93.102

43.037

32.974

52.913

72.855

02.588

7

54.853

44.713

54.579

74.451

84.329

54.212

44.100

23.992

73.889

73.790

83.695

93.604

83.517

23.433

13.352

22.990

6

65.795

55.601

45.417

25.242

15.075

74.917

34.766

54.622

94.485

94.355

34.230

54.111

43.997

53.888

73.784

53.325

5

76.728

26.472

06.230

36.002

15.786

45.582

45.389

35.206

45.033

04.868

44.712

24.563

84.422

64.288

34.160

43.604

6

87.651

77.325

57.019

76.732

76.463

26.209

85.971

35.746

65.534

85.334

95.146

14.967

64.798

84.638

94.487

33.837

2

98.566

08.162

27.786

17.435

37.107

86.801

76.515

26.246

95.995

25.759

05.537

05.328

25.131

74.946

44.771

64.031

010

9.4713

8.9826

8.5302

8.1109

7.7217

7.3601

7.0236

6.7101

6.4177

6.1446

5.8892

5.6502

5.4262

5.2161

5.0188

4.1925

11

10.368

9.7868

9.2526

8.7605

8.3064

7.8869

7.4987

7.1390

6.8052

6.4951

6.2065

5.9377

5.6869

5.4527

5.2337

4.3271

12

11.255

10.575

9.9540

9.3851

8.8633

8.3838

7.9427

7.5361

7.1607

6.8137

6.4924

6.1944

5.9176

5.6603

5.4206

4.4392

1 12.13 11.34 10.63 9.985 9.393 8.852 8.357 7.903 7.486 7.103 6.749 6.423 6.121 5.842 5.583 4.532

20

Acc 311 – Practice Exam II Page 21 Fall 20073 4 8 5 6 6 7 7 8 9 4 9 5 8 4 1 714

13.004

12.106

11.296

10.563

9.8986

9.2950

8.7455

8.2442

7.7862

7.3667

6.9819

6.6282

6.3025

6.0021

5.7245

4.6106

15

13.865

12.849

11.938

11.118

10.380

9.7122

9.1079

8.5595

8.0607

7.6061

7.1909

6.8109

6.4624

6.1422

5.8474

4.6755

16

14.718

13.578

12.561

11.652

10.838

10.106

9.4466

8.8514

8.3126

7.8237

7.3792

6.9740

6.6039

6.2651

5.9542

4.7296

17

15.562

14.292

13.166

12.166

11.274

10.477

9.7632

9.1216

8.5436

8.0216

7.5488

7.1196

6.7291

6.3729

6.0472

4.7746

18

16.398

14.992

13.754

12.659

11.690

10.828

10.059

9.3719

8.7556

8.2014

7.7016

7.2497

6.8399

6.4674

6.1280

4.8122

19

17.226

15.678

14.324

13.134

12.085

11.158

10.336

9.6036

8.9501

8.3649

7.8393

7.3658

6.9380

6.5504

6.1982

4.8435

20

18.046

16.351

14.877

13.590

12.462

11.470

10.594

9.8181

9.1285

8.5136

7.9633

7.4694

7.0248

6.6231

6.2593

4.8696

30

25.808

22.396

19.600

17.292

15.372

13.765

12.409

11.258

10.274

9.4269

8.6938

8.0552

7.4957

7.0027

6.5660

4.9789

40

32.835

27.355

23.115

19.793

17.159

15.046

13.332

11.925

10.757

9.7791

8.9511

8.2438

7.6344

7.1050

6.6418

4.9966

50

39.196

31.424

25.730

21.482

18.256

15.762

13.801

12.233

10.962

9.9148

9.0417

8.3045

7.6752

7.1327

6.6605

4.9995

21

Fundamentals of Financial Accounting ACC 311

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