ACC211 Midterm 2 w/ Sicre

A company purchased equipment valued at $259,000. It traded in old equipment for a $114,000 trade-in allowance and the company paid $145,000 cash with the trade-in. The old equipment cost $240,000 and had accumulated depreciation of $144,000. This transaction has commercial substance. What is the recorded value of the new equipment?

$259,000.

Ana Co. uses the allowance method to account for bad debts. At the end of the period, Ana's unadjusted trial balance shows an accounts receivable balance of $40,000; allowance for doubtful accounts balance of $300 (credit); and sales of $500,000. Based on history, Ana estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of

$40,000 x 2%=800-300=$500

Lani Co. uses the allowance method to account for bad debts. At the end of the year, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

$400,000 x 1% = 4,000 + 400 debit balance = $4,400

A company acquires a patent for $20,000 to manufacture and sell an item. The company intends to hold the patent for 5 years. Amortization for the first year will be recorded with a debit to Amortization Expense for

$4000?

The difference between physical flow and the cost flow of inventory

- Business may adopt a cost flow assumption when accounting for perishable items. - Physical flow refers to the actual movement of goods. - Cost flow is an assumption about which goods/items are sold. - Perishable items usually have an actual physical flow of FIFO.

A company purchased a tract of land for its natural resources at a cost of $1,000,000. It expects to harvest 5,000,000 board feet of timber from this land. The salvage value of the land is expected to be $200,000. The depletion expense per board foot of timber is:

0.16

Flask Company reports net sales of $4,343 million; cost of goods sold of $2,808 million; net income of $283 million; and average total assets of $2,150. Compute its total asset turnover.

2.02

Spears Company had net sales of $52,404 million. Its average total assets for the period were $16,202 million. Spears' total asset turnover equals:

3.23

When originally purchased, a vehicle costing $25,380 had an estimated useful life of 8 years and an estimated salvage value of $2,900. After 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5 equals:

5,620

Martin Company purchases a machine at the beginning of the year at a cost of $60,000. The machine is depreciated using the double-declining-balance method. The machine's useful life is estimated to be 4 years with a $5,000 salvage value. The machine's book value at the end of year 3 is:

7,500

Wickland Company installs a manufacturing machine in its production facility at the beginning of the year at a cost of $117,000. The machine's useful life is estimated to be 10 years, or 130,000 units of product, with a $3,000 salvage value. During its second year, the machine produces 10,400 units of product. Determine the machines' second year depreciation under the units-of-production method. (Do not round intermediate calculations.)

9,120

A 90-day note is signed on October 21. The due date of the note is:

90 days = 31-21=10 days in October + 30 days in November + 31 days in December + 19 days in January. Always start with the number of days in the first month and subtract the date of the note. (October: 31-21 = 10)

The kind of business that would use the specific identification method of inventory costing includes

A car dealership

Which of the following situations will result in recognizing a gain on sale of a plant asset

A fully depreciated asset is sold for $1,000.

Ella Co. owns a mineral deposit and recognizes $15,000 of depletion expense during the period. This entry will be recorded with a credit to:

Accumulated Depletion - Mineral Deposit

Receivable

Amount due from another party

Principal

Amount that the signer agrees to pay back, not including interest

Accounts receivable

Amounts due from customers for credit sales

Which of the following statements is true regarding the use of an accelerated depreciation method?

An accelerated method yields more depreciation expense in the early years of an asset's life as compared to the straight-line method.

Notes receivable

An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates

ABC Co. uses a perpetual inventory system and uses the FIFO cost flow assumption. During the month, it had two sales. Calculate the dollar value of its cost of goods sold for the first sale made on Jan. 10.

COGS for Jan10th: (8 x $12) + (3 x $15)= $141

On January 1, JC Co. accepted a 60-day, 6%, note in the amount of $10,000 from a customer. On March 2, the due date of the note, the customer honors the note and pays in full. The journal entry that JC would make to record the receipt of payment of this note would include a debit to:

Cash will be debited for $10,100. $10,000 x .06 x (60/360)=$100. $10,000+$100=$10,100.

Interest

Charge from using money loaned from one entity to another

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

Companies using LIFO will report the smallest cost of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal.

Assume that Widgets, Inc. uses a perpetual specific identification inventory system. During the period, it sold 4 units from beginning inventory, 8 units from the Jan. 5 purchase, and 2 units from the Jan. 29 purchases. Calculate the dollar value of its cost of goods sold for the period.

Cost of goods sold =(4@$12)+(8@$15) +(2@$18) COGS = $204

The understatement of the beginning inventory balance causes:

Cost of goods sold to be understated and net income to be overstated.

Formula: Inventory Turnover Ratio

Cost of goods sold/Average inventory

Which of the following is false regarding a bank (or third party) credit card expense?

Credit card expense is not recorded by the seller.

On January 1, Franz Co. accepted a 30-day, 6% note in the amount of $5,000 from Bria Co., a customer. On January 31, the due date of the note, Bria honors the note and pays in full. The journal entry that Franz would make to record payment of this note would include a

Credit to Notes Receivable for $5,000. Credit to Interest Revenue for $25. $5,000 x .06 x 30/360=$25.

Maturity date

Day that the principal and interest must be paid

Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Company. Jasper's entry to record the collection of the note and interest at maturity should be: (Use 360 days a year.)

Debit Cash $25,437.50; credit Interest Revenue $437.50; credit Notes Receivable $25,000.

Giorgio Italian Market bought $4,400 worth of merchandise from Food Suppliers and signed a 90-day, 10% promissory note for the $4,400. Food Supplier's journal entry to record the collection on the maturity date is: (Use 360 days a year.)

Debit Cash $4,510; credit Interest Revenue $110; credit Notes Receivable $4,400

Jax Recording Studio purchased $7,800 in electronic components from Music World. Jax signed a 60-day, 8% promissory note for $7,800. Music World's journal entry to record the collection on the maturity date is:

Debit Cash $7,904; credit Notes Receivable $7,800; credit Interest Revenue $104

Jervis sells $75,000 of its accounts receivable to Northern Bank in order to obtain necessary cash. Northern Bank charges a 5% factoring fee. What entry should Jervis make to record the transaction?

Debit Cash $71,250; debit Factoring Fee Expense $3,750; credit Accounts Receivable $75,000

True or false: The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts.

FALSE

Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold?

FIFO, LIFO, weighted average and specific Identification

A 60-day note is signed on February 15 (and it's not leap year). The due date of the note is

February 28th - February 15th = 13 days + 31 days for March = 44 days; 60 total days - 44 days = 16; therefore, April 16

Goods on consignment are

Goods sent by the owner to the consignee who sells the goods for the owner.

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

The modified accelerated cost recovery system (MACRS):

IS NOT ACCEPTABLE FOR FINANCIAL REPORTING

Which costs would be included in the recorded cost of merchandise inventory?

Invoice cost Insurance costs Storage costs

Why is LCM used?

LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. Companies cannot report inventory on a balance sheet that is higher than replacement cost. Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost.

The inventory costing method that results in the lowest taxable income in a period of rising costs is

LIFO method.

On December 31, Briar Co. disposed of a piece of equipment that cost $6,000 with accumulated depreciation of $4,500. The entry to record this disposal would include a debit to which account and for how much?

Loss on Disposal of Equipment for $1,500

betterment

Makes an asset more efficient and productive but does not always extend life

Book value is equal to the selling price

No gain or loss recognized

The materiality constraint, as applied to bad debts:

Permits the use of the direct write-off method when its results approximate those of the allowance method.

The advantages of using the allowance method to account for bad debts include

Reports accounts receivable balance at the estimated amount to be collected Matches expenses in the same period with the related sales

Plant assets should be recorded at cost, including all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. This would include which of the following costs?

Testing Shipping charges Assembling

What does FIFO assume

That the first items purchased are sold first

What does the inventory turnover ratio asses

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Payee

The person to whom the note is payable

Why would the physical count of inventory be different than what is shown in perpetual inventory records?

Theft, Damage, Errors, Loss

What is the purpose of taking a physical inventory count?

To adjust the Inventory account balance to the actual inventory available and to determine if there has been any theft, loss, damage or errors

The methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system.

Weighted average Last-in, first-out First-in, first-out Specific identification

methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system

Weighted average Specific identification First-in, first-out Last-in, first-out

Flash Co. uses the allowance method to account for bad debts. At the end of the year, Flash Co.'s unadjusted trial balance shows an accounts receivable balance of $45,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,500,000. Based on history, Flash estimates that bad debts will be 0.5% of sales. The entry to record estimated bad debts will include an debit to Bad Debts Expense in the amount of:

When allowance method is based on sales, do not take into account previous balance in the allowance account. $1,500,000x.005=$7,500

Accounts Receivable Turnover

a measure of both the quality and liquidity of accounts receivable; it indicates how often, on average, receivables are received and collected during the period.

A promissory note received from a customer in exchange for an account receivable is recorded by the payee as:

a note receivable

discarded

a plant asset that is gotten rid of when it is not of use to the company

Promissory note

a written promise to pay a specified amount of money on demand or at a definite time

To record a sale on account, the company should debit:

accounts receivable

two most common receivables

accounts receivable and notes receivable

Revenue expenditure

additional costs of plant assets that do not materially increase the asset's life or capabilities

the method of accounts receivable that uses several percentages to estimate the allowance.

aging method

receivable

amount due from another party

patent

an exclusive right granted to its owner to manufacture and sell an item or use a process for 20 years.

A control account

appears in the general ledger and is supported by a subsidiary ledger.

Natural resources

assets that are physically consumed when used, such as mineral deposits and oil and gas fields

The total asset turnover ratio is computed by taking net sales divided by

average total assets

Cost of Goods Sold Equation

beginning inventory + purchases - ending inventory

Niren Co. made modifications to a manufacturing machine that increased its productivity by 40%. Niren would classify this expense as

betterment

To record a customer's check in full payment for a sale that was made the prior month, the company should debit the

cash account

In September, DK Company sells merchandise to Lions Company on credit. In October, Lions Company pays the balance in full. The entry to record the collection of cash by DK Company in October will include a

credit to Accounts Receivable.

Plant assets are recorded at cost, which includes all expenditures necessary to get the asset in place and ready for use. All of the following would be included as part of the cost of a plant asset except

damage done when unpacking the plant asset

Iron Company collects cash in full from a customer who purchased merchandise last month on credit. To record the receipt of cash, Iron Company should make the following entries in the general journal

debit cash, credit accounts receivable

Zion Company sells merchandise on credit to BRC, Inc. in the amount of $1,200. The entry to record this sale would include a

debit to Accounts Receivable. credit to Sales.

On July 10, Yao Co. collects $740 from Ean, Inc. from a prior credit sale. This entry would be recorded by Yao with a

debit to Cash. credit to Accounts Receivable.

On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 account. Eli's journal entry to record this transaction on November 1, would include a

debit to Notes Receivable for $6,000. credit to Accounts Receivable for $6,000.

The process of allocating the cost of a natural resource to a period when it is consumed requires a debit entry to the

depletion expense account

FIFO cost flow assumption assumes that the cost of items purchased _______ are the costs that will be transferred first to cost of goods sold on the _________

earliest, income statement

Ordinary repairs

expenditures that keep an asset in good operating condition. They are necessary if an asset is to perform to expectations over its useful life.

Book value is less than the selling price

gain on sale of asset

Expense Recognition Principle

inventory costs are expensed as cost of goods sold when inventory is sold

All of the following are inventory costing methods used under a periodic inventory system except:

last in, last out

Book value is greater than the selling price

loss on sale of asset

The purchase of a group of plant assets for one price is called a

lump sum

Forward Co. discarded a machine that cost $5,000 and was fully depreciated. The entry to record this transaction would include a credit to the _________ account.

machinery

the direct write off

method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense.

aging of receivables

method of estimating bad debts uses both past and current receivables information to estimate the allowance amount. Specifically, each receivable is classified by how long it is past its due date

Depletion per unit can be calculated by taking (cost ______)/total units of capacity.

minus salvage value

Honoring a note receivable indicates that the maker has:

paid in full

Estimates of inventory are not usually required when a company uses a _______ inventory system because they would presumably have updated inventory data.

perpetual

assets purchased as a group in a single transaction for a lump-sum price are allocated the purchase price based on their relative market values

plant assets

A company sells merchandise to a customer on credit. The journal entry to record this transaction would include a debit entry to the Accounts ____

receivable

Which of the following expenses would not be considered an ordinary repair

replacing an engine

Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include

the company needs cash. the company does not want to deal with collecting receivables.

Maker

the party in a promissory note who is making the promise to pay

True or false: The two methods companies can use to convert receivables to cash before they are due includes selling them and pledging them.

true