Accounting Exam #2

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are:

included in Gerald's inventory

A long-lived asset is assumed to be impaired if its estimated future cash flows are _______ than its book value

less

The measurement of an impairment loss in step 2 is the difference between

the asset's book value and its fair value.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the:

LIFO reserve

A trade discount is:

a percentage reduction from list price

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as:

accounts receivable

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

Jones Corporation's long-term asset has a book value of $100,000 and an estimated fair value of $101,000. Jones estimates that the future cash flows associated with the asset are $95,000. To determine whether the asset may be impaired, Jones should compare the asset's book value to its

estimated future cash flows

When an asset has a significant decline in value and is written down, this is called

impairment

The ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.

lower of cost and net realizable value; greater

A formal credit arrangement between a creditor and debtor is called a

note receivable

When an asset is no longer useful, but cannot be sold, we have a

retirement

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

understated assets, retained earnings, and net income

Impairment losses can be used to manipulate earnings by

writing off impairments in the current year and taking losses to decrease future depreciation and increase future earnings.

Provides better matching of current revenues with current inventory cost

LIFO

Flounder Corp. provided $12,000 of services on account. The entry to record this transaction would include a debit to:

accounts receivable

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

Debit Cost of Goods Sold $1,500; credit Inventory $1,500

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

an entry to reinstate the account receivable and an entry to record payment

Under the allowance method, companies estimate ___________ uncollectible amounts and report those estimates in the __________ year.

future; current

What are classified as receivables?

- loans by a company to other entities - interest due from loans to customers

A retirement or abandonment of an asset is different from a sale of an asset because:

- no cash is received. - a loss must be recognized for the remaining book value.

Sales to customers in which the customers pay within 30 to 60 days are referred to as:

- sales on account - credit sales

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ________ method of accounts receivable.

aging

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

The lower of cost and net realizable value method was developed to:

avoid reporting inventory at an amount that exceeds the benefits it provides

The estimated expense for accounts that may not be collected is referred to as:

bad debt expense

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.

book

Flounder Corp. sold $12,000 of services on account. When Flounder collects on the account, the transaction will include a debit to:

cash

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

debit inventory

Income tax receivable is a:

nontrade receivable

Accounts receivable from sales to customers are __________ receivables.

trade

Sherman Company recognizes cost of goods sold after completing a physical inventory

Periodic inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale.

Perpetual inventory system

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the:

allowance method

FOB shipping point means title to the goods passes:

when they are shipped

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?

$1,500 [($10,000 - 4,000)/4 years = $1,500 per year]

The allowance method is required by:

GAAP (Generally Accepted Accounting Principles)

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

The two conditions that must exist for a sale and the related receivable to be recognized are:

- the company has provided goods or services to the customer - collection from the customer is probable

The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's

book value

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ________ life of the asset.

service

Glasser Corp. provided $20,000 of services on account. The account that should be credited is:

service revenue

Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is

$3.00 per machine hour. [$210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.]

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?

$4,500 [The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.]

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?

- Debit to accumulated depreciation $30,000 - Credit to gain on sale of asset $25,000 - Debit to cash $45,000 - Credit to equipment $50,000

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $10,000 cash. The journal entry to record the sale will include which of the following entries?

- Debit to loss on sale of asset $10,000 - Debit to cash $10,000 - Credit to equipment $50,000 - Debit to accumulated depreciation $30,000

Which of the following methods are available for costing inventory?

- LIFO - Specific identification - FIFO - Weighted-average

Which of the following methods are not used for inventory costing?

- NIFO - Simple-average

What are the two steps in the two-step process of measuring impairments?

- Test for impairment using the future cash flows. - Measurement of the impairment and record the loss.

A company can manipulate income by overstating an impairment loss. The financial statement effects of this are

- future depreciation, depletion, or amortization is unrealistically low. - future income is unrealistically high. - current-year income is low.

Most closely approximates the actual physical flow of inventory

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

Glasser Corp. provided $20,000 of services on account. When Glasser collects on the account, a credit is made to:

accounts receivable

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

as a noncurrent asset

Accounts receivable should be classified as an:

asset

Meller purchases inventory on account. As a result, Meller's:

assets will increase

For a typical credit sale, the seller records revenue:

at the point of delivery

Ling Corporation's long-term asset has a book value of $200,000 and an estimated fair value of $195,000. Ling estimates that the future cash flows associated with the asset are $198,000. To determine whether the asset may be impaired, Ling should compare the asset's book value to its

estimated future cash flows.

Where is a note receivable reported in the balance sheet?

in either current or noncurrent assets, as appropriate

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

inventory

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be __________ than ending inventory determined using the FIFO inventory assumption.

less

A formal, signed credit agreement between a lender and a borrower is called a ________ by the lender.

note receivable

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are:

paid by the supplier

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset:

provides benefits to the company.

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides:

revenues

The service life or useful life of an asset is

the estimated use that the company expects to obtain from the asset before disposing of it.

The allowance method estimates:

uncollectible accounts

On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is:

$10,000 [$200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.]

Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is:

$2.00 per machine hour. [($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.]

On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is:

$5,000 [$100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.]

On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?

$5,000 [The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.]

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

- Cost of Goods Sold - Inventory

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

- Debit Cost of Goods Sold $700; credit Inventory $700 - Debit Accounts Receivable $1,000; credit Sales Revenue $1,000

On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?

- Debit accumulated depreciation $70,000 - Debit cash $80,000 - Credit equipment $100,000 - Credit gain on sale of equipment $50,000

On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following?

- Debit cash $70,000 - Debit loss on sale of equipment $20,000 - Debit accumulated depreciation $60,000 - Credit equipment $150,000