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Sample Quiz ONE Introduction to Accounting Management 711

KEY Name ______________________________________

Part I Part II Part III Part IV Part V Part VI Part VII Total

Points 20 18 18 13 10 10 1 90 Note: Show all work for credit Exam Theme: Accounting is our LIFO.

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Part I. Depreciation As often happens here at the Owen School, a local country music artist (former accounting faculty member) dropped in one afternoon. Looking to lure an MBA into the music business, the artist wanted some accounting advice. During their first year of operations, equipment is depreciated using the straight-line method for financial reporting purposes. They are interested in other methods of depreciation. The only depreciable asset was equipment. Equipment costing $15,000 was purchased on January 1 with an estimated economic life of 6 years and an estimated salvage value of $3,000. Required: Answer the following questions, ignoring income taxes. Show your work for partial credit. 1. Compute the amount of depreciation expense for the first two years using the following methods and compute the book value at the end of year two. (show computations and round to the nearest dollar.)

Depreciation Method 1. Straight-line 2. Sum-of-theyears’-digits 3. Doubledeclining Balance

Depreciation Expense Year One Year Two

Book Value End of year two

($15,000 - $3,000) / 6 = ($15,000 - $3,000) / 6 $2,000 = $2,000 ($15,000 - $3000) * 5 / ($15,000 - $3000) * 6 / 21 = 21 = $2,857.14 $3,428.57 $15,000 * 2 / 6 = $5,000 ($15,000 - $5000) * 2 / 6= $3,333.33

15,000-4,000 = 11,000 15,000- 3,428-2,857 =8,715 15,000-5,0003,333=6,667

2. If the asset is sold at the end of year two for $9,000 cash, determine the gain or the loss under each of the three methods used in part 1. Circle one Dollar amount if a gain Dollar amount if a loss 1. StraightCash less book value = 9,000-11,000=-2,000 line Gain Loss 2. Sum-ofthe-years’digits 3. Doubledeclining Balance

Gain

Gain

Loss

Cash less book value = 9,000-8,715=285

Loss

Cash less book value = 9,000-6,667=2,333

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Part II - Multiple Choice 1. Which of the following is true during periods of rising prices? A) The use of FIFO will result in smaller net income than LIFO. B) The use of FIFO will result in a larger cost of goods sold than LIFO. C) The use of LIFO will result in a smaller cost of goods sold than FIFO. The use of FIFO will result in a higher net income and higher ending D) inventory than LIFO. 2. Consider the following: Sales

$80,000

Beginning merchandise inventory

$10,000

Purchases

$45,000

Cost of goods sold

$50,000

Determine the value of the ending merchandise inventory. A) $10,000 B) $15,000 C) $ 5,000 D) $25,000 3. An asset with an estimated 5-year useful life and an estimated residual value of $5,000 was purchased for $20,000 cash on the first day of the fiscal year. Use the doubledeclining-balance method at twice the straight-line rate and determine the depreciation expense for the second fiscal year? A) $3,600 B) $8,000 C) $4,800 D) $4,000 4. Production equipment with an acquisition cost of $250,000 and updated accumulated depreciation of $200,000 is sold for $60,000 cash. The journal entry to record the disposal (sale) will include: A) a credit to Gain on Sale of Asset of $10,000. B) a debit to Cash for $60,000. C) a credit to Equipment for $250,000. D) all of the above, (A), (B), and (C).

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5. The unadjusted credit balance of the Allowance for Doubtful Accounts account is $650. Uncollectible accounts are estimated to be $15,600, based on an analysis of a schedule of aging of accounts receivable. After recording the appropriate journal entry for the bad debts expense, what will be the adjusted balance of the Allowance for Doubtful Accounts? A) $650 B) $16,250 C) $14,950 D) $15,600 6. Which of the following groups of accounts, with normal balances, would appear in the credit column of an unadjusted trial balance? Accounts Payable, Unearned Revenues, Cost of Sales, and Investment A) Income. B) Unearned Revenues, Accumulated Depreciation, and Prepaid Expenses. C) Accounts Payable, Unearned Revenues, and Accumulated Depreciation. D) Contributed Capital, Retained Earnings, and Cost of Sales. 7. How is net book value calculated? A) acquisition cost of the asset minus its accumulated depreciation B) acquisition cost of the asset minus its depreciation expense C) estimated value of the asset minus its accumulated depreciation D) acquisition cost of the asset plus it accumulated depreciation 8. An accrued revenue would be shown on the balance sheet as: A) A receivable B) A payable C) A prepaid revenue D) Unearned revenue 9. Which of the following is TRUE about every adjusting entry?

A) They affect only income statement accounts. B) They affect a balance sheet account and an income statement account. C) They affect only balance sheet accounts. D) The affect only accounts with normal debit balances.

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Part III - More Fifo vs. Lifo The marketing department is ecstatic, the potential sales of ‘famous accountants figurine’ toys is unlimited. (These figurines also might be included with happy meals at McDonalds.) There are no toy figures in beginning inventory.

Date January 11 February 8 March 16 June 11

Purchases Figures Price per Purchased figure purchased 600 $150 ----300 $175 -----

Figures Sold --160 --280

Sales Selling price per figure --$250 --$250

Required: 1. Compute the dollar amount of ending inventory at June 30 under the following methods: Periodic FIFO Periodic LIFO 160 * $150 + 300 * $175 = 460 * $150 = 69,000 1. Ending Inventory 76,500 460 units 2. Cost of Goods Sold

440 * $150 = $66,000

300 * $175 + 140 * 150 = $73,500

440 units

2. As of June 30, what is the LIFO reserve? $76,500 - $69,000 = 7,500 3. Compute the gross margin (in dollars) at June 30 under the following methods: Periodic FIFO Periodic LIFO Gross Margin $36,500 ($110,000 44,000 ($110,000 $73,500) $66,000) Sales = 160 * $250 + 280 * $250 = 110,000

4. If the tax rate is 40%, which method will report higher net income, FIFO or LIFO? Computer the dollar amount of the difference in net income between FIFO and LIFO. Method with Higher Net Income ____FIFO____ Dollar amount of the difference in net income ___$4,500 or ($44,000 – 36,500) * (140%)_________

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Part IV. Accounts Receivable The Marshmallow Supply Company (MSC) had the following aging schedule of accounts receivable on 12/31/01. Age 0-30 days 31-60 days > 60 days

Amount $40,000 20,000 20,000

% Uncollectible 5% 10% 30%

Other Information for the year: a. Sales on account were $94,000 during 2001. b. The beginning balance (on January 1, 2001) in the allowance for uncollectible accounts was $8,000, and c. Write offs of receivables during the year were $9,500. Required: Answer the following questions. Show your work for credit. 1. If MSC uses the aging method to determine bad debt expense, what is the amount of bad debt expense recorded for 2001? Allowance for uncollectible accounts $8,000 beg bal writeoffs $9,500 11,500 bad debt exp (plug figure) $10,000 end bal per aging Bad debt expense = $11,500 2. Assume instead that MSC uses the percentage-of-credit sales method to estimate bad debts, and that historically 2% of credit sales have been uncollectible. Prepare the journal entry to record bad debt expense for 2001. $94,000 X .02 = $1,880 Bad debt expense $1,880 Allowance for bad debts $1,880 3. Prepare the journal entry to write off the receivables for 2001. Allowance for bad debts Accounts Receivables

$9,500 $9,500

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4. If the balance in accounts receivable on January 1, 2001 was $75,000, what was the cash collected from customers during the year?

Beg bal Credit sales

Accounts receivable $75,000 94,000 $ 9,500 writeoffs 79,500 cash collections (plug figure)

End bal (from aging) $80,000 Par tV Long t e r mi nv e s t me nt s OnMa r c h15 ,2 001 ,Chr i s t i eCo mp a n ya c q u i r e d5, 0 00s ha r e sofAb a c usCo r por a t i on c o mmo ns t oc ka t$ 45pe rs ha r ea sal on g t e r mi n v e s t me n t( t o t a lc os to f$2 25, 0 00) . Ch r i s t i ewa sc on vi n c e dt ha tc o mp u t e r swe r ej u s tap a s s i n gpha s e .Ab a c ush a s15 , 00 0 s h a r e so fou t s t a n d i n gv ot i n gc ommo ns t o c k .Th ef o l l o wi n ga d di t i on a le v e nt soc c ur r e d d ur i n gt h efis c a ly e a re nd i n gDe c e mb e r31,2 001: De c1,2001 Ch r i s t i er e c e i v e dac a s hdi v i de n dof$2. 5 0pe rs ha r ef r om Ab a c us Co r por a t i on De c31,200 1 Ab a c usCo r por a t i ona nno unc e de a r ni n g sf o rt hey e a rof$150 , 00 0 De c31,200 1 Ab a c usc o mmo ns t o c kha dac l os i n gma r k e tpr i c eo f$4 2pe rs ha r e Re qui r e d: 1 .Pr e p a r et hej o ur na le n t r yf o rCh r i s t i eComp a n yt or e c o r dt her e c e i p toft h ed i vi de nd o nDe c e mbe r1 ,200 1. Cas h( 2. 50) ( 5, 00 0) I nv e s t me nti nAbac us

1 2, 5 00 1 2, 5 00

2 .Wha ti st hee nd i n gb a l a n c er e p or t e df o rt heI nv e s t me ntI nAba c usonDe c e mbe r3 1, 2 001ba l a n c es h e e ta f t e ra l lc l o s i n ga n da d j us t i n ge nt r i e sh a v ebe e nr e c o r d e d? ( 5, 0 00/ 1 5, 000 )=% o wne d=3 3. 33 %a tac o s tof$2 25, 000=( $45 ) ( 5, 00 0s har e s ) r e v e nuef r o mi nv e s t me nt=33. 3 3%( e ar ni ng so fAbac us ) =. 33 33( 150, 0 00) =50, 0 00i nc r e a s ei ni nv e s t me nt Di vi de ndsf r o m pa r t1r e duc et hei nv e s t me ntac c ountby12 , 500 I nv e s t me nt=2 25, 000+5 0, 0 00–12, 500=262, 500e ndi ngbal anc e Noadj us t me ntt oma r ke ti sr e qui r e d.

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Part VII - Investments The following is the balance sheet and income statement for Oh Well Everything’s New (OWEN) at the end of the first year of operations. The beginning balance in retained earnings is zero and OWEN did not pay any dividends during the year. During the first year, short-term securities were purchased for $20,000. At the end of the year, these securities had a market value of $26,000. Part A: Complete the first column of the Income Statement and the Balance Sheet assuming that the marketable securities are classified as trading securities. You must put a number or a zero anywhere there is a dotted box or an underline. Ignore taxes. Part B. Complete the second column of the Income Statement and the Balance Sheet assuming that the marketable securities are classified as available for sale securities. You must put a number or a zero anywhere there is a dotted box or an underline. Ignore taxes. Year One Income Statement Available Trading For Sale Securities Securities Sales Revenue $ 10,000 $10,000 Cost of goods sold 4,000 4,000 Gross profit $ 6,000 $ 6,000 Operating expenses 2,000 2,000 Income before gains and losses $ 4,000 $ 4,000 Unrealized gains or losses on marketable securities Realized gains or (losses) on marketable securities

6,000

Net Income 10,000 The Balance Sheet (at end of Year One)

4,000

Assets: Cash Accounts Receivables Marketable securities Total Assets Liabilities: Accounts payable Notes payable Total liabilities Stockholders’ Equity Common stock Retained earnings Net unrealized gains (losses) on securities Total Liabilities and Stockholders’ Equity

$ 6,000 2,000 26,000 $ 34,000

$ 6,000 2,000 26,000 $ 34,000

$ 11,000 7,000 $ 18,000

$ 11,000 7,000 18,000

6,000 10,000 ________ $ 34,000

6,000 4,000 ___6,000_ $ 34,000

Note that the balance sheet equity totals are the same regardless of the classification.

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Part VII - Draw a picture of a famous accountant

FIFO the accounting dinosaur....