Accounting Exam 3

FIFO

First in first out Assumes the earliest purchases are the first sold. Most recent purchases are in ending inventory.

Cash Ratio Formula

(cash + marketable securities) / current liabilities

Perpetual Inventory System: Journal Entry Paid off $1,000 Martin Co. account on August 5th. Terms: 1/10 net 30 on August 1st.

Accounts Payable 1,000 Cash 990 Merchandise Inventory 10

Perpetual Inventory System: Journal Entry Received credit from Owen Co. for merchandise returns of $160

Accounts Payable 160 Merchandise Inventory 160

Perpetual Inventory System: Journal Entry Paid Owen Co. in full. Need to look back to Aug 6 (purchase of $2,160,3/10, n/60) and Aug 9 (purchase return of $160)

Accounts Payable 2,000 Cash 1,940 Merchandise Inventory 60

Which assets are amortized and which are impared?

Amortized: Patents Franchise Impaired: Goodwill

Describe the double declining method of depreciation

An accelerated method that produces a larger depreciation expense in early years and smaller expense in later years. (Total value/useful life)*2

Current Liabilities are...

Expected to be retired with existing current assets or creation of new current liabilities Due within one year or one operating cycle, whichever is longer Portions of long term liabilities that are due within 1 year

GAAP required research and development costs to be...

Expensed in the period incurred

Which method will yield the lowest cost of goods sold?

FIFO

On October 1st you borrowed a 60,000, 1 year, 7% note payable. What is your year end adjusting entry?

Interest payable $1,050

Calculating the cost of land

Land is the site of a facility. It is the ONLY PPE asset that does not depreciate - it will always be there!

LIFO

Last in first out Assumes the latest purchases are the first sold. Earliest purchases are in ending inventory.

You sold a machine for $5,000; the original cost of the machine was $11,000; accumulated depreciation was $4500. Was there a gain or a loss and how much?

Loss of $1,500 (5,000+45,000-11,000 = -1,500)

Perpetual Inventory System: Journal Entry •August 1: Purchased golf bags, clubs and balls on account from Martin Co. for $1,000, terms 1/10, n/30

Merchandise Inventory 1,000 Accounts Payable 1,000

Perpetual Inventory System: Journal Entry Purchased golf bags, clubs and balls on account from Owen Co. $2,160, terms 3/10, n/60

Merchandise Inventory 2,160 Accounts Payable 2,160

Perpetual Inventory System: Journal Entry Paid freight on Owen Co. purchases $96

Merchandise Inventory 96 Cash 96

When does ownership of inventory transfer with FOB shipping?

Ownership of inventory passes from seller to buyer at the shipping point. Buyer pays shipping costs ("freight in")

When does ownership of inventory transfer with FOB destination?

Ownership of inventory passes when the goods are delivered to buyer. Seller pays shipping costs ("freight out")

COGS model & calculation for ending inventory

Portion of goods available for sale that remain unsold at end of year. COGS=COGAS-EI

The total amount of interest that will be paid on a 5-year, $90,000 note payable at 11% simple annual interest is? a.$49,500 b.$139,500 c.$9,900 d.$1,980

a.$49,500

On May 1, a company borrowed $30,000 from the First National Bank on a 1-year, 6% note. Assuming the company keeps its records on a calendar year basis, an entry is needed on December 31st to increase a.interest payable by $1,200. b.interest payable by $900. c.interest expense by $600. d.interest expense by $1,800.

a.interest payable by $1,200.

A company purchased a patent for $100,000 at the beginning of the current year which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year? a.$5,000 b.$0 c.$20,000 d.$100,000

c.$20,000

This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.Refer to Fabian Woodworks. If the company uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2020? a.$1,728 b.$2,000 c.$4,800 d.$2,880

d.$2,880

This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.Refer to Fabian Woodworks. If the company uses the straight-line method of depreciation, what is the book value at December 31, 2021? a.$10,000 b.$4,000 c.$6,000 d.$8,000

c.$6,000

Lower of Cost or Market Rule

Based on Historical Cost Principal The price for which inventory can be sold (their market value), may decline due to obsolescence or damage. If the market value (replacement cost) of a company's inventory is lower than its cost, the company reduces the amount recorded in inventory to its market value.

Specific Identification

Based on allocating the cost of purchases according to the physical flow of specific unity through inventory.

How to calculate a gain/loss on fixed assets

Gain/Loss = proceeds from sale - book value

COGAS model & calculation

COGAS=P+BI

Periodic Inventory System

COGS updated at end of a period (small businesses)

Average Days to Sell Inventory Formula

Average days to sell inventory = 365 / inventory turnover

Perpetual Inventory System

COGS updated with each sale (Walmart)

Perpetual Inventory System: Journal Entry Received payments on account from members $1,320

Cash 1,320 Accounts Receivable 1,320

This company has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31.Refer to the information for Gainesville Truck Center. Which of the following statements is true regarding the entry to record wages and the related liabilities? a.Medicare tax payable will be credited in the amount of $145. b.Federal income taxes payable will be credited in the amount of $2,100. c.FICA tax expense will be debited in the amount of $765. d.Social security tax payable will be debited in the amount of $620.

a.Medicare tax payable will be credited in the amount of $145.

On January 1, a company sold a machine for $5,000 that it had used for several years. The machine cost $11,000, and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine for the year ended December 31? a.gain of $5,000 b.gain of $1,500 c.loss of $6,500 d.loss of $1,500

d.loss of $1,500

Prepare a journal entry: Paid cash for research and development costs of $7,400

R&D Expense: 7,400 Cash: 7,400

Perpetual Inventory System: Journal Entry Granted credit to member for shoes that did not fit $72

Sales returns and allowances (sales rev) 72 Accounts receivable 72

Rogers Machinery Company borrowed $330,000 on February 1, with a 6-month, 10%, interest-bearing note. 1. Record the borrowing transaction. 2. Record the repayment transaction.

1. Cash 330,000 . Accounts Payable 330,000 2. Accounts Payable 330,000 Interest Expense 16,500 . Cash 346,500 (330,000*.01*(6/12) = 16,500)

Brand Landscaping offers a promotion where a customer's lawn will be mowed 20 times if the customer pays $700 in advance. 1. Prepare the journal entry to record the customers' prepayment of $700.

1. Cash 700 . Unearned Sales Rev. 700 2. Unearned Sales Rev. 35 . Sales Revenue 35 (700/20=35)

Calculate the depreciable value of an asset costing $25,350 with a salvage value of $1,350. Use the straight line value to determine yearly depreciation expense if the useful life of the asset is 5 years.

25,350-1,350=24,000 24,000/5= $4,800 per year.

Acquisition of operating assets - amortization

Amortization is used for intangible assets. As the service potential declines, the cost of the asset is allocated as an expense among the accounting periods in which the asset is used and benefits are received (the expense recognition principle).

How to determine the depreciable value of an asset?

Cost - Salvage Value = depreciable value

What are research and development costs?

For internally developed intangible assets, the cost of developing the asset is expensed as incurred and normally recorded as research and development expenses.

Is goodwill impaired or amoritized?

Goodwill is impaired.

Expense Recognition Principle

Match expenses with revenues in the period when the company makes efforts to generate those revenues.

What is depreciation?

The process of allocating the cost of an asset (other than land) to expense over the assets useful life.

This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.Refer to Fabian Woodworks. If the company uses the units-of-production method, what is the depreciation rate per hour for the equipment? a.$0.10 b.$0.12 c.$1.10 d.$1.00

a.$0.10

Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019.Refer to the information provided for Eli Company. If the customer pays the amount of the invoice for its purchase on March 14, 2019, how much cash will Eli Company receive? a.$1,980 b.$2,000 c.$1,800 d.$1,400

a.$1,980

A manufacturing company's weekly payroll is $80,000 for a 5-day work week beginning each Monday and ending each Friday. The last time salaries and wages were recorded was Friday, December 26. What adjustment is needed on December 31, the last day of the company's fiscal period? a.Decrease wages payable by $48,000. b.Increase wages expense by $48,000. c.Decrease cash by $48,000. d.No adjustment is necessary since the next payday will not occur until the following year.

b.Increase wages expense by $48,000.

A company purchased land and incurred the following costs: Purchase Price $500,000 Excavation Costs 50,000 Razing Old Building 12,500 Broker Fees 10,000 Cost of a Parking Lot 25,000 What is the cost of the land? a.$550,000 b.$562,500 c.$572,500 d.$597,500

c.$572,500

Season tickets for the Bears are priced at $48 and include 16 games. Revenue is recognized after each game is played. When the season began, the amount credited to Unearned Ticket Revenue was $2,592. By the end of October, $1,782 of the Unearned Ticket Revenue had been recognized as revenue. 1. How many season tickets did the Bears sell? 2. How many home games had the Bears played by the end of October?

1. 54 games 2,592/48=54 2. 16 games 2,592-1,782 = 810 / 48 = 16

June 1 On hand, 50 units at $14.00 each $700 4 Purchased 115 units at $15 each $1,725 5 Sold 100 units 10 Purchased 75 units at $16 each $1,200 24 Sold 50 units Total cost of goods available for sale$3,625 30 On hand, 90 units The June 30th inventory included 45 units from the June 4th purchase and 45 units from the June 10th purchase.Refer to the information provided for Klinc Company. What is the cost of goods sold for June under the specific identification method? a.$2,230 b.$1,500 c.$1,450 d.$1,575

700 +1725 +1200 -675 (45x15) -720 (45*16) ----------------- a.$2,230

Prepare a Journal Entry: Double Declining Method A company sells a car that costed $25,350 after 2 years for $14,000. Yearly depreciation expense is $4,800.

Cash 14,000 Accumulated Depreciation 16,442 Gain 4,874 Car (cost) 25,350 (14,000+16,224-25,350 = 4,874 gain) Accum. Dep. Equation: Year 1 25,350 *0.4= $10,140 depreciation 25,350-10,140 = $15,210 left to depreciate Year 2 15,210*0.4 = 6,084 depreciation 25,350-16,224 = 9,126 left to depreciate

Equipment with a residual value of $50,000 at the end of 10 years was acquired at the beginning of 2019 for $500,000. Assuming the use of the straight-line depreciation method, the journal entry to record depreciation expense for 2021 will have a debit to a.Accumulated Depreciation and a credit to Equipment for $50,000. b.Depreciation Expense and a credit to Equipment for $45,000. c.Depreciation Expense and a credit to Accumulated Depreciation for $45,000. d.Depreciation Expense and a credit to Accumulated Depreciation for $50,000.

c.Depreciation Expense and a credit to Accumulated Depreciation for $45,000.

Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10th; credit terms were 1/10, n/30. Which of the following statements is true? a.The customer can take a 10% discount if the invoice is paid by June 30th. b.The customer must pay $1,010 if payment is made after June 20th. c.The customer should pay $1,000 if the invoice is paid on July 9th. d.The customer must pay a $10 penalty if payment is made after July 9th.

c.The customer should pay $1,000 if the invoice is paid on July 9th.

Calculation for finding the average age of fixed assets

Average age = Accumulated Depreciation / Depreciation expense

Prepare a Journal Entry: Sold 300 units of a new product on credit at $48 per unit, plus 5% sales tax

Accounts Rec. 15,120 . Sales 14,400 . Sales Tax Payable 720 (300*48) = 14,400 14,400 * 0.05 = 720

Journal Entry: Adjustment for Market Rule Cost: 17,000 Net realizable value: 16,700

Difference between cost data amount ($17,000) and net realizable value ($16,700). Cost of goods sold 300 Inventory 300

How is the depreciation expense using the double declining method calculated?

Double declining rate = straight line rate * 2

What impact does recording depreciation for a year have on the accounting equation?

Decrease assets, decrease net income (expense)

Describe the straight line method of depreciation

Describe the straight line method of depreciation

On March 1, the Garner Corporation borrowed $75,000 from the First Bank of Midlothian on a 1-year, 5% note. If the company keeps its records on a calendar year, what adjusting entry should Garner make on December 31?

Interest Expense 3,125 . Interest Payable 3,125 (75,000*0.05*(10/12) = 3,125)

Prepare a Journal Entry: Gibson Shipping orders $25,000 of packing materials on account from Ironman Enterprises on account with a 7% interest rate. Prepare a retired liability journal entry.

Accounts Payable 25,000 Interest Expense 875 . Cash 25,875

Prepare a Journal Entry: Sold merchandise on account for $1,262, including state sales taxes of $48. (Note: Assume a periodic inventory system.)

Accounts Receivable 1,262 . Sales Tax Payable (state) 48 . Sales Revenue 1,214

Perpetual Inventory System: Journal Entry Sold Merchandise on account to club members for $1,092, terms n/30. The merchandise had cost $744

Accounts Receivable 1092 Sales Revenue 1092 Cost of goods sold 744 Merchandise Inventory 744

Prepare a Journal Entry: July 1st: Record amortization of franchise for the year. Franchise = $21,600 with a life of 9 years.

Amortization Expense 1,200 . Franchise 1,200 21,600 / 9 (6/12) = 1,200

Prepare a Journal Entry: Record amortization of patent for the year. Patent = $11,200 with a life of 5 years

Amortization Expense 2,240 . Patent 2,240 11,200 / 5 = 2,240

What are intangible assets?

Assets that represent future economic benefit to the company, but lack physical substance. (Rights, patents, copyrights, etc)

Prepare a Journal Entry: Straight Line Method A company sells a car that costed $25,350 after 2 years for $14,000. Yearly depreciation expense is $4,800.

Cash 14,000 Accumulated Depreciation 9,600 Loss 1,750 Car (cost) 25,350 14,000 + 9,600 - 25,350 = $1,750 loss

Prepare a Journal Entry: Straight Line Method A company sells a car that costed $25,350 after 2 years for $16,000. Yearly depreciation expense is $4,800.

Cash 16,000 Accumulated Depreciation 9,600 Gain 250 Car (cost) 25,350 16,000 + 9,600 - 25,350 = $250 gain

Prepare a Journal Entry: Sold merchandise for cash totaling $3,906, which "includes" 5% sales taxes.

Cash 3,906 . Sales Revenue 3,720 . Sales Tax Payable 186 3,906/1.05=3,720 3,906-3,720=186

COGS model for beginning inventory

Cost of goods available for sale - beginning inventory + purchases

Which would show up on a merchandise company's income statement but not on the income statement of a service company?

Cost of goods sold