Accounting Exam 2 Q & A
The ending balance of Accounts Receivable account was $20,000. Services billed to customers for the period were $50,000, and collections on account from customers were $40,000. What was the beginning of Accounts Receivable? A. $30,000 B. $15,000 C. $10,000 D. $20,000
$10,000 ( Dr Cr ) 10,000 50,000 40,000 20,000
Greenwich, Inc. sells deluxe grass mowers to customers over the internet. History has shown that 5% of Greenwich's mowers will need repair under the warranty program. For the year, Greenwich has sold 5000 mowers and 150 have been repaired. If the estimated cost to repair a mower is $100, what would be the warranty liability at the end of the year? A. $10,000 B. $15,000 C. $20,000 D. $25,000
$10,000 (Cr. $25,000 Dr. $15,000 $10,000)
Consider the following year-end information for JW Enterprises Inc.: Cost of goods sold $600,000 Sales revenue $1,000,000 Operating expense $300,000 Non-operating expenses $50,000 Income tax expense $50,000 What amount will JW Enterprises report for operating profit? A. $200,000 B. $100,000 C. $50,000 D. $0
$100,000 (Sales $1,000,000 Cost of goods sold (600,000) Gross profit 400,000 Operating expense (300,000) Operating profit 100,000 )
Given the information in the table below, what is the company's gross profit? Sales revenue $350,000 Accounts receivable $280,000 Ending inventory $230,000 Cost of goods sold $180,000 Sales returns $50,000 Sales discount $20,000 A. $280,000 B. $170,000 C. $50,000 D. $100,000
$100,000 Sales $350,000 Sales returns (50,000) Sales discounts (20,000) Net sales $280,000 Cost of goods sold (180,000) Gross profit $100,00
Boiler Catering, Inc. purchased a commercial dishwasher by paying cash of $10,000. The dishwasher's fair value on the date of the purchase was $12,000. The company incurred $500 in transportation costs, $500 installation fees, and paid $250 for annual property insurance for the equipment. What amount will the catering company record the dishwasher? A. $13,250. B. $11,250. C. $11,000. D. $10,000.
$11,000 (10,000+500+500)
Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory. Baker will report the cost of goods sold equal to: A. $150,000 B. $158,000 C. $142,000 D. $170,00
$142,000 (Beginning Inventory $12,000 Purchases 150,000 Cost of goods available for sale 162,000 Ending Inventory (20,000) Cost of Goods Sold $142,000)
Bamburg Corporation purchased equipment for $100,000 on January 1, 2018. The equipment is expected to have a five‐year life, with a residual value of $20,000 at the end of five years. Using the straight‐line method, depreciation expense for 2018 would be: A. $100,000 B. $ 20,000 C. $ 16,000 D. $ 10,000
$16,000 ($100,000 - $20,000)/ 5 years) = $16,000
Inventory records for Burlingame, Inc. revealing the following: Burlington sold 600 units of inventory during the month. Cost of goods sold assuming LIFO would be: A. $1300 B. $1600 C. $1800 D. $1900
$1600 (200 units * $2) = $400 (400 units * $3) = $1200
Brighton Company, Inc. began the period with $10,000 in inventory. Brighton also purchased an additional $25,000 of inventory and returned $5,000 for full credit. A physical count of the inventory at year‐end revealed an inventory on hand of $10,000. What was Brighton's cost of goods sold (CGS) for the period? A. $40,000 B. $25,000 C. $20,000 D. $10,000
$20,000 (beg. balance $10,000 purchases $25,000 $5000 returns $20,000 CGS ending balance $10,000)
Bampton, Inc. uses the percentage-of-credit-sales method to record its expected credit losses. It estimates its losses at 2% of credit sales, which were $1,000,000 during the year. The Allowance for Doubtful Accounts had a credit balance of $5000 before adjustment at year-end. What is the adjustments to Bad Debt Expense and the Allowance for Doubtful Accounts? A. $5000 B. $25,000 C. $20,000 D. $15,000
$20,000 Dr. Cr. $5000 (beg. balance) 20,000 (expense) ($1,000,000*2%) $25,000 (ending balance)
Greenwich, Inc. sells deluxe grass mowers to customers over the internet. History has shown that 5% of Greenwich's mowers will need repair under a warranty program. For the year, Greenwich has sold 5,000 mowers and 150 have been repaired. If the estimated cost to repair a mower is $80, what would be the warranty expense for the year? A. $20,000 B. $25,000 C. $15,000 D. $10,000
$25,000 (5000 mowers sold * 5% = 250) Repair cost per mower = $100 Estimated warranty expense: $25,000 Dr. Warranty expense $25,000 Cr. Warranty liability $25,000
Hayne Company purchased land, building, and equipment, for $500,000. The estimated fair values of the land, building, and equipment are $100,000, $500,000, and $400,000, respectively. At what amount would Hayne record the building? A. $1,000,000 B. $500,000 C. $250,000 D. $100,000
$250,000 ($500,000 (purchase price) * 50%) (Building = 50%)
A company's Accounts Receivable balance at its December 31 year-end is $100,000, and its Allowance for Doubtful Accounts has a credit balance of $200 before year-end adjustment. It estimates that 4% of outstanding accounts receivable are uncollectible. What amount of bad debt expense is recording at December 31? A. $200 B. $4200 C. $4000 D. $3800
$3800 Dr. Cr. 200 3800 (bad debt expense) 4000 (desired balance $100,000*4%)
Cambridge Company has the following information: Total sales $500,000 Sales returns and allowances $50,000 Sales salaries costs (expense) $20,000 Sales travel costs (expense) $5,000 What is the amount of net sales for Cambridge? A. $500,000 B. $450,000 C. $430,000 D. $425,000
$450,000 (500,000-50,000)
On August 1, 2017, Kensal Green Corp. lends cash and accepts a $1000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Kensal Green report during 2017? A. $60 B. $50 C. $40 D. $30
$50 (interest revenue = 1000 * 12% * 5/12)
Hampton, Inc. has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $2 each Jan. 15 Purchase 100 units @ $3 each Jan. 31 Purchase 100 units @ $4 each What would be the cost of goods sold under the FIFO method if 200 units were sold in January? A. $ 800 B. $ 700 C. $ 500 D. $ 400
$500 (Beginning Balance) 100 * 2 = $200 (Purchase on Jan. 15) 100* 3 = $300 200 units = $500
Inventory records for Modern Company revealed the following: Modern sold 2300 units of inventory during the month. Ending inventory assuming FIFO would be: A. $5140 B. $5080 C. $5060 D. $5050
$5140 (100*$7.30) + (600* $7.35)
San Bruno has the following inventory activity for the month of April. Under the FIFO inventory costing method and the perpetual inventory system, how much is San Bruno's cost of goods sold for April 14? April 1 Beg. inventory 10 units $10/unit April 8 Purchase 25 units $20/unit April 10 Purchase 30 units $25/unit April 14 Sale 35 units $40/unit April 27 Sale 42 units $40/unit A. $525 B. $650 C. $600 D. $850
$600 (10 units * $10 = 100 25 units * $20 = 500 35 units sold on 4/14 = $600)
Inventory records for Brugge, Inc. revealed the following: Jan 1 Beg. Inventory 500 units $2 Jan 20 Purchase 500 units $2.50 Sale (700) Ending Inventory 300 Brugge sold 700 units of inventory during the month. Ending inventory assuming LIFO would be: A. $750 B. $600 C. $480 D. $400
$600 (300 units * $2)
Dover Company reports the following inventory information: March 7: Purchase 15 units $3 March 12: Purchase 10 units $4 At what amount would Dover report ending inventory using FIFO cost flow assumptions? A. $55 B. $70 C. $110 D. $170
$70 ((10 units * $3) + (10 units * $4))
Oxford Publishing Company purchases a copyright for $75,000. The copyright has a remaining legal life of 20 years, but only an expected useful life of ten years with no residual value. Assuming the company uses the straight-line method, what is the amortization expense for the first year? A. $0 B. $3750 C. $7500 D. $75,000
$7500 ($75,000/10 years)
At December 31, Bampton Co., reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be A. $6540 B. $7740 C. $7800 D. $7140
$7740 (Balance $600 $7740 Adjusting entry $7140 Balance (238,000*3%))
Which is the amount of depreciation, using the double-declining balance method, for the first year of use for equipment costing $12,000, with an estimated residual value of $500 and an estimated life of 3 years? A. $12,000 B. $8000 C. $7667 D. $4000
$8000 Equipment = $12000 Year 1 ($12,000 * (2/3)) = (8000) Book value = 4000 Year 2 ($4000 * 2/3) = (2667) Book value = 1333 Year 3 = (833) Book value = 500
Using the percentage of net sales method, uncollectible accounts expense for the year is estimated to be $75,000. If the balance of the Allowance for Uncollectible Accounts is a $15,000 credit before adjustment, what is the balance after adjustment? A. $15,000 B. $75,000 C. $90,000 D. $60,000
$90,000 (75,000 + 15,000 = 90,000)
A company accepts a note receivable of $5000 on October 1, 2018, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2018 and 2019? A. 2018 = $100; 2019 = $150 B. 2018 = $150; 2019 = $100 C. 2018 = $75; 2019 = $175 D. 2018 = $0; 2019 = $250
2018 = $75; 2019 = $175 (interest revenue = face value * annual interest rate * fraction of the year)
At December 31, 2018, Hillsborough Corporation reports following inventory amounts: Item A: 100 units: $4 NRV = $3 Item B: 150 units: $8 NRV = $6 The year-end adjustment using the lower of cost and net realizable value would include: A. A debit to Cost of Goods Sold for $300 B. A debit to Inventory for $500 C. A credit to Inventory for $400 D. A credit to Cost of Goods Sold for $900
A credit to Inventory for $400 ((inventory cost = 100 * $4 + 150 $8 = 1600) (NRV = 1200 Year end adjustment (loss) = $400)
Kensal Green, Inc. purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a new building. The costs incurred to tear down the building should be A. expensed as incurred. B. added to the cost of the land. C. added to the cost of the new building. D. spread over the estimated time period between the tearing down of the building and the completion of the plant.
Added to the cost of land
Which of the following describes depreciation? A. Allocation of cost of plant asset B. Physical deterioration of plant asset C. Decline in value of plant asset D. Gradual obsolescence of plant asset
Allocation of cost of plant asset
A company should classify a building and land held for a new plant facility as A. an investment B. a current asset C. an intangible asset D. property, plant, equipment
An investment
Bampton Corporation filed suit against Cambridge, Inc., seeking damages for patent violations. Cambridge's legal counsel believes it is probable that Cambridge will settle the lawsuit for an estimated amount in the range of $500,000 to $1,000,000, with all amounts in the range considered equally likely. How should Cambridge report this litigation? A. As a liability for $1,000,000 with disclosure of the range. B. As a liability for $750,000 with disclosure of the range. C. As a liability for $500,000 with disclosure of the range. D. As a disclosure only. No liability is reported.
As a liability for $500,000 with disclosure of the range
The matching principle A. results in the recording of a known amount for bad-debt losses B. necessitates the recording of an estimated amount for bad debts C. requires that all bad-debt losses be recorded when an individual customer doesn't pay D. is violated when the allowance method is employed
B
Cost of goods sold equals: A. Beginning inventory - net purchases + ending inventory B. Beginning inventory - accounts payable - net purchases C. Net purchases + ending inventory - beginning inventory D. Beginning inventory + net purchases - end inventory
Beginning inventory + net purchases - end inventory
Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts? A. This method is referred to as the balance sheet approach B. This method does not allow for future uncollectible accounts C. The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts D. Under the method, bad debt expense is recorded at the time of an actual bad debt
C
To which account is the cost of inventory transferred when a product is sold? A. Sales B. Freight expense C. Gross margin D. Cost of goods sold
Cost of goods sold
Which of the following is not a subtotal? A. Gross margin B. Net income C. Income of operations D. Cost of goods sold
Cost of goods sold
Which of the following would be considered a capital expenditure? A. Cost to acquire a patent B. Cost to oil or lubricate equipment C. Cost to replace some light bulbs D. Cost to paint the office building
Cost to acquire a patent
Clifford Gardens, Inc., sold inventory for $1000 that was purchased for $800. Clifford Gardens records which of the following when it sells inventory using a perpetual inventory system? A. No entry is required for cost of goods sold and inventory B. Debit Cost of Goods Sold $800; credit Inventory $800 C. Debit Cost of Goods Sold $1000; credit Inventory $1000 D. Debit Inventory $800; credit Cost of Goods Sold $800
Debit Cost of Goods Sold $800; credit Inventory $800
Cotswolds, Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation? A. Decrease assets and decrease stockholders' equity B. Decrease assets and decrease liabilities C. Increase assets and decrease stockholders' equity D. Increase liabilities and decrease stockholders' equity
Decrease assets and decrease stockholders' equity
When a gain contingency is probable an d the amount of gain is reasonably estimable, the gain should be A. Offset against stockholders' equity B. Reported in the income statement and disclosed C. Reported in the income statement, but not disclosed D. Disclosed, but not recognized in the income statemnet
Disclosed, but not recognized in the income statement
The cost of goods sold during the year is classified as a(n) ___________ in the ___________. A. Revenue; Income statement B. Asset; Balance sheet C. Expense; Income statement D. Liability; Balance sheet
Expense; Income statement
Research and development costs should be: A. Expensed in the period they are determined to be unsuccessful B. Expensed in the period incurred C. Deferred pending determination of success D. Expensed if unsuccessful, capitalized if successful
Expensed in the period incurred
The inventory cost flow assumption that generally best matches the physical flow of inventory is: A. FIFO B. LIFO C. Weighted-average D. Lower of cost or net realizable value
FIFO
During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income. A. True B. False
False
During periods of rising costs, FIFO generally results in a higher cost of goods sold. A. True B. False
False
For inventory that is shipped FOB destination, title transfers from seller to the buyer once the seller ships the inventory. A. True B. False
False
Hayne Corporation had avg. inventory of $1000 and cost of goods sold of $5000 during 2017. Hayne's inventory turnover ratio is 0.5. A. True B. False
False
In accounting for inventory, the assumed cost flow must match the physical goods flow. A. True B. False
False
Perpetual inventory refers to an inventory costing system as compared to a processing system? A. True B. False
False
Uncollectible accounts cannot be estimated because it is not possible to know which accounts will not be collected A. True B. False
False
Under the periodic inventory system, cost of goods sold is recorded throughout the accounting period as inventory is sold. A. True B. False
False
Clifford Gardens, Inc. has ending inventory of $20,000, purchases during the year of $50,000, and beginning inventory of $10,000, cost of goods sold equals $40,000. A. True B. False
False (Beginning Inventory $10,000 Purchases 50,000 Cost of goods available for sale 60,000 Ending inventory (20,000) Cost of goods sold $40,000
The Sales Returns account is an expense account A. True B. False
False (Sales Returns is a contra revenue account)
Sales revenues less cost of goods sold is referred to as operating income A. True B. False
False (Sales revenue less cost of goods sold equals gross profit)
The term goods flow refers to the association of costs with their assumed flow in the operation of a business A. True B. False
False (goods flow represents actual physical movement of goods)
The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the total of all accounts written off over the years. A. True B. False
False (represents an estimate of bad debts for amounts in the accounts receivable balance)
A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances A. True B. False
False (sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable)
If a company has total revenues of $1,000,000, sales discounts of $50,000, sales returns of $50,000, and sales allowances of $100,000, the income statement will report net revenues of $750,000. A. True B. False
False Revenues $1,000,000 Less: sales discounts (50,000) Less: sales returns (50,000) Less: sales allowances (50,000) Net Revenues $80,000
If Greenwich, Inc. sells a $100 product with a 20% trade discount, Greenwich will record $100 of revenue and $20 of sales expense. A. True B. False
False (record $80 as sales revenue)
Which of the following items is not shown on a single-step income statement? A. Cost of goods sold B. Interest expense C. Selling expense D. Gross margin
Gross margin
Advantage of extending credit to customers A. Lower profitability B. Higher revenues C. Delay or failure to collect cash D. Less collection costs
Higher revenues
Which of the following appears in different sections of the income statement when prepared on a simple-step basis and when prepared on a multistep basis? A. Sales commissions B. Rent expense C. Interest expense D. Sales
Interest expense
Which of the following is not considered an operating expense? A. Rent expense B. Interest expense C. Administrative (office) expense D. Advertising expense
Interest expense
One of the major differences between an airline and a steel manufacturer is that a steel manufacturer must account for: A. Revenues B. Inventory C. Salary expenses D. Employee salaries
Inventory (airlines (service companies) sell as service not a product (inventory))
Big Valley Farms, Inc. uses a perpetual inventory system. Big Valley purchased seed from Midwest Co., Inc. at a cost of $20,000, payable at time of delivery. The entry to record the delivery would be a. Inventory ........................................... Cash ................................................ 20,000 20,000 b. Purchases ........................................... Accounts Payable ............................ 20,000 20,000 c. Purchases ......................................... Cash ............................................... 20,000 20,000 d. Inventory ......................................... Accounts Payable ........................... 20,000 20,000
Inventory ..........20,000 Cash..................20,000
The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is: A. FIFO B. LIFO C. Weighted-average D. Specific identification
LIFO
Which inventory method generally best follows the matching principle? A. Weighted-average cost B. LIFO C. FIFO
LIFO
The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the: A. Net realizable value B. LIFO reserve C. Inventory allowance D. FIFO adjustment
LIFO reserve
A perpetual inventory system measures cost of goods sold by: A. Making entries to the inventory account for each purchase and sale B. Estimating the amount of inventory sold C. Counting inventory at the end of the period D. Debiting cost of goods sold for all purchases of inventory
Making entries to the inventory account for each purchase and sale
The principle of using the lower of cost or net realizable value to value inventory reflects which of the following? A. Periodicity B. Matching C. Revenue recognition D. Historical cost
Matching
Bampton, Inc. merchandise inventory account showed a balance of $5,000 before year‐end adjustments. The physical inventory count of goods on hand totaled $6,000. Bampton uses a perpetual inventory system. To adjust the accounts which entry is required? Accounts & Description Debit Credit a. Cost of goods sold $1,000 Merchandise inventory $1,000 b. Merchandise inventory $1,000 Accounts receivable $1,000 c. Accounts payable $1,000 Merchandise inventory $1,000 d. Merchandise inventory $1,000 Cost of goods sold $1,000
Merchandise inventory $1000 Cost of Goods Sold $1000
The formula for the receivable turnover ratio is A. Average accounts receivable divided by average total assets B. Net credit sales divided by average total assets C. Average accounts receivable divided by net credit sales D. Net credit sales divided by average accounts receivable
Net credit sales divided by average accounts receivable
Costs that are expensed when incurred are called? A. Product costs B. Direct costs C. Inventoriable costs D. Period costs
Period costs (includes selling expenses, advertising expenses, administrative expenses)
Which of the following statements is true? A. Product costs affect only the balance sheet B. Product costs affect only the income statement C. Product costs eventually affect both the balance sheet and the income statement D. Period costs affect only the balance sheet
Product costs eventually affect both the balance sheet (inventory) and the income statement (cost of goods sold)
If the receivables turnover ratio increased during the year, A. receivable collection improved. B. receivables collection slowed down. C. sales revenues increased at a faster rate that accounts receivables increased. D. the days to collect also increased.
Receivable collection improved
Kensal Green, Inc. is facing a class‐action lawsuit in the upcoming year. It is probable that the corporation will have to pay a settlement of approximately $10,000,000 in the next twelve months. How would this fact be reported, if financial statements are prepared at the end of the current month? A. Report $10,000,000 as a current liability and describe the matter in the notes to the financial statements. B. Report $10,000,000 as a long‐term liability and describe the matter in the notes to the financial statements. C. Describe the potential liability in the notes to the financial statements. D. Reporting is not required for this matter.
Report $10,000,000 as a current liability and describe the matter in the notes to the financial statements
Burford Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the paint after being offered a 10% price reduction. The price reduction is an example of a A. sales discount. B. sales return. C. sales allowance. D. sales expense.
Sales allowance
When customers purchase products on accounts, Bufford, Inc. offers them a 1% reduction in the amount owed if they pay within 10 days. This is an example of a: A. Sales discount B. Sales return C. Sales allowances D. Bad debt
Sales discount (Cash--------------------------990 Sales Discounts (contra) -----10 Accounts Receivable---- 1000)
A fur coat dealer probably would use which of the following inventory methods? A. Specific identification B. FIFO C. Weighted‐average cost D. LIFO
Specific identification
An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system. A. True B. False
True
At the time of a credit sale, a company would record an increase in assets and an increase in revenues. A. True B. False
True
Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. A. True B. False
True
Driveways and parking lots are properly included in the Land Improvements account because they are subject to depreciation. A. True B. False
True
Freight charges associated with the purchase of inventory normally are included in inventory cost. A. True B. False
True
Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory. A. True B. False
True
Goods in transit shipped FOB destination should be included in the seller's ending inventory. A. True B. False
True
Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. A. True B. False
True
The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. A. True B. False
True
The higher the inventory turnover, the lower the days' inventory on hand. A. True B. False
True
Which of the following is not a period cost? A. Wages for a machine operation B. Sales salaries C. The salaries of a company's administrative office D. Sales commissions
Wages for a machine operation (product costs)
The cost of a long-term asset is expensed A. in the period in which it is sold B. as the asset benefits the company C. in the period in which it is acquired D. when it is paid for
as the asset benefits the company
Hillsborough, Inc. can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be A. disclosed and reported as a liability B. neither disclosed nor reported as a liability C. disclosed, but not reported as a liability D. reported as a liability, but not disclosed
disclosed, but not reported as a liability
Book value or carrying value A. equals asset cost less residual value B. equals asset cost less accumulated depreciation C. is the expired cost of an asset D. is the same as residual value
equals asset cost less accumulated depreciation
The matching rule relates to credit losses by stating that Uncollectible Accounts Expense should be recorded A. in the period of the loss B. for an exact amount C. generally in the subsequent year D. in the period of the sale
in the period of the sale
Goodwill should be recorded in the accounting records only when A. it is purchased from another company B. it can be established that a definite benefit or advantage has resulted to a firm from some item such as a good name, capable staff, or reputation C. it is acquired through the purchase of another business entity D. a firm reports above normal earnings for five or more consecutive years
it is acquired through the purchase of another business entity
Subaru estimates warranty parts & labor costs in the same year a vehicle is sold. This best follows which of the following accounting principles? A. historical cost B. consistency C. relevance D. matching
matching
The depreciable cost of an asset is A. the unexpired cost of the asset B. original cost less residual value C. original cost less accumulated depreciation D. the expired cost of the asset
original cost less residual value
A contingency is best described as (an) A. legal liability B. probably liability C. potential liability D. estimated liability
potential liability
Which of the following inventory accounts consists of items for which the manufacturing process has not begun? A. Raw materials B. Work-In-Progress C. Cost of goods sold D. Finished goods
raw materials