Problem A - Multiple Choice: Circle the one best answer.
1. Inventoriable costs include all of the following except the
a. cost of the goods purchased.
b. freight in.
c. cost of the beginning inventory.
d. all of the above are included.
2. Abaco Enterprises had beginning inventory of $45,000 at March 1, 2013. During the month, the company made purchases of $360,000. The inventory at the end of the month is $51,000. What is cost of goods available for sale for the month of March?
a. $45,000
b. $51,000
c. $354,000
d. $405,000
3. A check correctly written and paid by the bank for $271 is incorrectly recorded on the company's books for $217. The appropriate adjustment on bank reconciliation would be to
a. deduct $271 from the book's balance.
b. deduct $54 from the book's balance.
c. deduct $54 from the bank's balance.
d. add $54 to the bank's balance.
4. The Petty Cash account should be debited
a. whenever an expense is paid from the fund.
b. when the fund is established.
c. whenever the fund is replenished.
d. when the fund is liquidated.
5. A 90-day promissory note dated May 21 matures on
a. August 21.
b. August 20.
c. August 19.
d. August 18.
6. The basis of estimating expected uncollectible accounts that emphasizes the matching of expenses with revenues is the
a. percentage of receivables basis.
b. percentage of sales basis.
c. lower of cost or market basis.
d. direct write-off method.
7. A company just starting business purchased three merchandise inventory items at the following prices: first purchase $920; second purchase $880; third purchase $830. If two items were sold during the period and the company used the LIFO costing method, the gross profit for the period would be how much greater or less than if the FIFO costing method had been used?
a. Gross profit would be $90 greater.
b. Gross profit would be $90 less.
c. Gross profit would be the same.
d. Gross profit would be $40 greater.
8. An error in the physical count of goods on hand at the end of the current period resulted in a $3,000 understatement of the ending inventory. The effect of this error in the current period is to
a. overstate cost of goods sold.
b. understate cost of goods available for sale.
c. overstate gross profit.
d. overstate net income.
9. In a period of rising prices, the inventory method that will show the highest net income is
a. Average Cost.
b. FIFO.
c. LIFO.
d. Moving Average.
10. Cost of goods available for sale includes each of the following except
a. beginning inventory.
b. freight-in.
c. ending inventory.
d. net purchases.
Problem B - Computation of Net Purchases/Cost of Goods Sold
Barkley Company uses a periodic inventory system and has the following account balances: Beginning Inventory $50,000, Ending Inventory $80,000, Freight-in $12,000, Purchases $330,000, Purchase Returns and Allowances $8,000 and Purchase Discounts $6,000.
Instructions
Compute each of the following:
(a) Net purchases
(b) Cost of goods available for sale
(c) Cost of goods sold
Problem C - Internal Control over Cash Receipts and Disbursements
Six internal control principles related to cash transactions are discussed in the textbook. These principles, with code letters, are:
Code Internal Control Principle
A Documentation procedures
B Establishment of responsibility
C Independent internal verification
D Physical controls
E Segregation of duties
F Human resource controls
Instructions: Match the above principles to the following applications related to cash receipts and cash disbursements by placing the code in the space provided. Each code letter can be used once, more than once, or not at all.
1. Cash is received by one employee and recorded in the accounting records by another.
2. Daily cash counts should be made by cashier department supervisors.
3. Payments are approved by one employee while the disbursement is made by another.
4. All checks are pre-numbered.
5. Only the treasurer is authorized to sign checks.
6. Cash register tapes are used for over-the-counter receipts.
7. Each check is compared with an approved invoice before being issued.
8. Employee hours are tracked using a time clock.
9. All personnel who handle cash should be bonded.
10. Inventory is stored in a locked warehouse with restricted access.
Problem D - Bank Reconciliation
Vance Company received a bank statement for the month of October 2013, which showed a balance per bank of $3,600. The company's Cash account in the general ledger showed a balance of $1,204 at October 31. Other information that may be relevant in preparing a bank reconciliation for October follows:
1. The bank returned an NSF check from a customer for $280.
2. The company recorded cash receipts of $250 on October 31 but this amount does not appear on the bank statement.
3. A check correctly written by Vance and paid by the bank for $1,740 was incorrectly recorded in the cash payments journal for $1,470. The check was a payment on account.
4. Checks which were written in September but still had not been presented to the bank for payment at October 31 amounted to $780.
5. The bank included a credit memorandum for $1,236, which represents a collection of a customer's note by the bank for the company; principal amount of the note was $1,200 and the remainder was interest.
6. The bank included a $20 debit memorandum for service charges for the month of October.
7. Checks written in October which have not been paid by the bank at October 31 amounted to $1,200.
Instructions-
1. Prepare a bank reconciliation for Vance Company for October which reconciles the balance per books and the balance per bank to their adjusted correct balances.
2. Prepare the necessary adjusting entries for Vance Company at October 31, 2013.
Problem E- Periodic Inventories
Carson Company uses the periodic inventory method and had the following inventory information available for the month of November.
Date Transaction Units Unit Cost
11/1 Beginning inventory 400 $3
11/5 Purchase No. 1 500 $5
11/12 Sale No. 1 450
11/18 Purchase No. 2 500 $6
11/25 Sale No. 2 900
11/30 Purchase No. 3 600 $7
A physical count of units on November 30 revealed that 650 units were on hand.
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the average cost method. What is the dollar value of the ending inventory on November 30?
2. Assume that the company uses the LIFO inventory method. What is the dollar value of the cost of goods sold during November?
3. Assume that the company uses the FIFO inventory method. The dollar value of the ending inventory on November 30 is:
Problem F - Accounts Receivable
Dolan Company uses the allowance method to account for uncollectible accounts. Prepare the appropriate journal entries to record the following transactions during 2013. You may omit journal entry explanations.
June 20 The account of Sam Nolan for $1,000 was deemed to be uncollectible and is written off as a bad debt.
Oct. 14 Received a check for $1,000 from Sam Nolan, whose account had previously been written off as uncollectible.
Dec. 31 Use the following information for year-end adjusting entries:
The balance of Accounts Receivable and Allowance for Doubtful Accounts at year-end are a debit balance of $126,000and a credit balance $2,900, respectively. It is estimated that bad debts will be 5% of accounts receivable.
Problem G - Correcting Entries
An inexperienced accountant for Morgan Company made the following incorrect entries.
1. Notes Receivable 21,600
Accounts Receivable 20,000
Interest Revenue 1,600
Facts: Accepted a $20,000, 1 year, 8% note from Joe Wood Company for balance due on account.
2. Accounts Receivable 20,000
Sales Revenue 20,000
Facts: Accepted Visa credit card for $20,000; the service fee is 2%.
3. Allowance for Doubtful Accounts 12,300
Notes Receivable 12,000
Interest Revenue 300
Facts: M. Adler dishonored a $12,000, 10%, 3-month note because of bankruptcy. Adler is expected to pay. No interest had been accrued on the note.
Instructions- Prepare entries to correct Morgan Company's books based on the facts given. Do not reverse out incorrect entries that were recorded above, but rather correct the account balances so that they reflect the proper amounts.
Problem H- Notes Receivable
Instructions - Prepare journal entries to record the following events:
Jul. 1 Baker Company accepted a 6%, 3-month, $60,000 note dated July 1 from Whyte Company for account balance due.
Jul. 31 Baker accrued interest on the above note for the month of July.
Oct. 1 Collected Whyte Company note in full. Assume interest was correctly accrued on August 31 and September 30.
Oct. 1 Assume instead that the note is dishonored and that no interest has been accrued. Whyte Company is expected to eventually pay the amount owed.