ACCTG 230 Chapter Notes - Chapter 05: Accounts Receivable
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Financial Accounting, 14th Edition
Carl S. Warren; Jim Reeve; Jonathan Duchac
Final_Multiple choice
1. The primary objectives of control over inventory are
a.safeguarding the inventory from damage and maintainingconstant observation of the inventory
b.reporting inventory in the financial statements
c.maintaining constant observation of the inventory andreporting inventory in the financial statements
d.safeguarding inventory from damage and reporting inventory inthe financial statements
2. When merchandise sold is assumed to be in the order in whichthe purchases were made, the company is using
a.first-in, last-out
b.first-in, first-out
c.last-in, first-out
d.average cost
3. Use the information below to answer the followingquestion.
The Boxwood Company sells blankets for $60 each. The following wastaken from the inventory records during May. The company had nobeginning inventory on May 1.
| Date | Blankets | Units | Cost |
| May 3 | Purchase | 5 | $20 |
| 10 | Sale | 3 | |
| 17 | Purchase | 10 | $24 |
| 20 | Sale | 6 | |
| 23 | Sale | 3 | |
| 30 | Purchase | 10 | $30 |
Assuming that the company uses the perpetual inventory system,determine the gross profit for the sale of May 23 using the FIFOinventory cost method.
a.$72
b.$108
c.$180
d.$120
4.If merchandise inventory is being valued at cost and thepurchase price is steadily falling, which method of costing willyield the largest net income?
a.FIFO
b.LIFO
c.average cost
d.weighted average
5.Stevens Company started the year with an inventory cost of$145,000. During the month of January, Stevens purchased inventorythat cost $53,000. January sales totaled $140,000. Estimated grossprofit is 35%. The estimated ending inventory as of January 31is
a.$58,000
b.$107,000
c.$69,300
d.$91,000
6. Which one of the following below is not anelement of internal control?
a.risk assessment
b.cost-benefit considerations
c.monitoring
d.information and communication
7. A check drawn by a company for $340 in payment of a liabilitywas recorded in the journal as $430. What entry is required in thecompany's accounts?
a.debit Cash; credit Accounts Receivable
b.debit Accounts Receivable; credit Cash
c.debit Accounts Payable; credit Cash
d.debit Cash; credit Accounts Payable
8. A bank reconciliation should be prepared
a.to explain any difference between the company's balance perbooks with the balance per bank
b.by the company's bank
c.whenever the bank refuses to lend the company money
d.by the person who is authorized to sign checks
9.
Pilger Corporation has cash on hand at year-end of $201,000 anda negative cash flow from operations of $144,000. What is the ratioof cash to monthly cash expenses?
a.1.4 months
b.7.2 months
c.12.0 months
d.16.8 months
10. When does an account become uncollectible?
a.when accounts receivable is converted into notesreceivable
b.when a discount is availed on notes receivable
c.at the end of the fiscal year
d.there is no general rule for when an account becomesuncollectible
11.On the balance sheet, the amount shown for the Allowance forDoubtful Accounts is equal to the
a.total estimated uncollectible accounts as of the end of theyear
b.sum of all accounts that are past due
c.total of the accounts receivables written-off during theyear
d.uncollectible accounts expense for the year
12. Allowance for Doubtful Accounts has a debit balance of $600at the end of the year (before adjustment), and an analysis ofaccounts in the customers ledger indicates uncollectiblereceivables of $13,000. Which of the following entries records theproper adjusting entry for bad debt expense?
a.debit Allowance for Doubtful Accounts, $600; credit Bad DebtExpense, $600
b.debit Bad Debt Expense, $600; credit Allowance for DoubtfulAccounts, $600
c.debit Bad Debt Expense, $13,600; credit Allowance for DoubtfulAccounts, $13,600
d.debit Bad Debt Expense, $12,400; credit Allowance for DoubtfulAccounts, $12,400
13. When comparing the direct write-off method and the allowancemethod of accounting for uncollectible receivables, a majordifference is that the direct write-off method
a.is used primarily by small companies with few receivables
b.is used primarily by large companies with many receivables
c.uses an allowance account
d.uses a percentage of sales method to estimate uncollectibleaccounts
14. Accumulated Depreciation
a. is used to show the amount of cost expiration ofintangibles
b.is used to show the amount of cost expiration of naturalresources
c.is the same as Depreciation Expense
d.is a contra asset account
15. Equipment with a cost of $220,000 has an estimated residualvalue of $30,000 and an estimated life of 10 years or 19,000 hours.It is to be depreciated by the straight-line method. What is theamount of depreciation for the first full year, during which theequipment was used 2,100 hours?
a.$19,000
b.$21,000
c.$30,000
d.$22,000
16. The process of transferring the cost of metal ores and otherminerals removed from the earth to an expense account is called
a.depreciation
b.depletion
c.amortization
d.deferral
17. The Bacon Company acquired new machinery with a price of$15,200 by trading in similar old machinery and paying $12,700. Theold machinery originally cost $9,000 and had accumulateddepreciation of $5,000. In recording this transaction, BaconCompany should record
a.a loss of $1,500
b.the new machinery at $12,700
c.a gain of $1,500
d.the new machinery at $16,700
18. Assuming a 360-day year, when a $50,000, 90-day, 9%interest-bearing note payable matures, total payment will be
a.$54,500
b.$4,500
c.$1,125
d.$51,125
19. Which of the following is required to be withheld fromemployee's gross pay?
a.only federal income tax
b.both federal and state unemployment compensation taxes
c.only state unemployment compensation tax
d.only federal unemployment compensation tax
20. Hall Company sells merchandise with a one-year warranty. Inthe current year, sales consisted of 4,500 units. It is estimatedthat warranty repairs will average $10 per unit sold, and 30% ofthe repairs will be made in the current year and 70% in the nextyear. In the current year's income statement, Hall should showwarranty expense of
a.$45,000
b.$0
c.$13,500
d.$31,500
21. Which of the following below is not acharacteristic of a limited liability company?
a.limited legal liability
b.unlimited life
c.taxable
d.moderate ability to raise capital
22. Seth and Beth have original investments of $50,000 and$100,000 respectively in a partnership. The articles of partnershipinclude the following provisions regarding the division of netincome: interest on original investment at 10%; salary allowancesof $27,000 and $18,000, respectively; and the remainder to bedivided equally. How much of the net income of $42,000 is allocatedto Seth?
a.$20,000
b.$23,000
c.$32,000
d.$0
23. Which of the following is not a rightpossessed by common stockholders of a corporation?
a.the right to share in assets upon liquidation
b.the right to receive a minimum amount of dividends
c.the right to sell their stock to anyone they choose
d.the right to vote in the election of the board ofdirectors
24. The charter of a corporation provides for the issuance of100,000 shares of common stock. Assume that 45,000 shares wereoriginally issued and 5,000 were subsequently reacquired. What isthe amount of cash dividends to be paid if a $2 per share dividendis declared?
a.$80,000
b.$100,00
c.$90,000
d.$10,000
25.Which statement below is not a reason for acorporation to buy back its own stock?
a.to increase the shares outstanding
b.for supporting the market price of the stock
c.resale to employees
d.bonus to employees
| The management of Zigby Manufacturing prepared the following estimated balance sheet for March, 2015: |
| ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2015 | |||||
| Assets | |||||
| Cash | $ | 65,000 | |||
| Accounts receivable | 437,760 | ||||
| Raw materials inventory | 90,200 | ||||
| Finished goods inventory | 308,028 | ||||
| Total current assets | 900,988 | ||||
| Equipment, gross | 630,000 | ||||
| Accumulated depreciation | (165,000) | ||||
| Equipment, net | 465,000 | ||||
| Total assets | $ | 1,365,988 | |||
| Liabilities and Equity | |||||
| Accounts payable | 204,500 | ||||
| Short-term notes payable | 27,000 | ||||
| Total current liabilities | $ | 231,500 | |||
| Long-term note payable | 515,000 | ||||
| Total liabilities | 746,500 | ||||
| Common stock | 350,000 | ||||
| Retained earnings | 269,488 | ||||
| Total stockholdersâ equity | 619,488 | ||||
| Total liabilities and equity | $ | 1,365,988 | |||
| To prepare a master budget for April, May, and June of 2015, management gathers the following information. |
| a. | Sales for March total 22,800 units. Forecasted sales in units are as follows: April, 22,800; May, 16,000; June, 23,000; July, 22,800. Sales of 255,000 units are forecasted for the entire year. The productâs selling price is $24.00 per unit and its total product cost is $19.30 per unit. |
| b. | Company policy calls for a given monthâs ending raw materials inventory to equal 50% of the next monthâs materials requirements. The March 31 raw materials inventory is 4,510 units, which complies with the policy. The expected June 30 ending raw materials inventory is 5,500 units. Raw materials cost $20 per unit. Each finished unit requires 0.50 units of raw materials. |
| c. | Company policy calls for a given monthâs ending finished goods inventory to equal 70% of the next monthâs expected unit sales. The March 31 finished goods inventory is 15,960 units, which complies with the policy. |
| d. | Each finished unit requires 0.50 hours of direct labor at a rate of $11 per hour. |
| e. | Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $4.20 per direct labor hour. Depreciation of $35,020 per month is treated as fixed factory overhead. |
| f. | Sales representativesâ commissions are 10% of sales and are paid in the month of the sales. The sales managerâs monthly salary is $4,500. |
| g. | Monthly general and administrative expenses include $27,000 administrative salaries and 0.6% monthly interest on the long-term note payable. |
| h. | The company expects 20% of sales to be for cash and the remaining 80% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of the sale). |
| i. | All raw materials purchases are on credit, and no payables arise from any other transactions. One monthâs raw materials purchases are fully paid in the next month. |
| J. | The minimum ending cash balance for all months is $55,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance. |
| K. | Dividends of $25,000 are to be declared and paid in May. |
| l. | No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 40% in the quarter and paid in the third calendar quarter. |
| m. | Equipment purchases of $145,000 are budgeted for the last day of June. |
| Required: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the second calendar quarter, except as otherwise noted below. Round calculations up to the nearest whole dollar, except for the amount of cash sales, which should be rounded down to the nearest whole dollar: Cash budget.
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Budgeted income statement for the entire first quarter (not for each month separately).
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Budgeted balance sheet.
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Project 2: Review of Merchandising Cycle
[The following information applies to the questions displayed below.]
| Wallyâs Widget Company (WWC) incorporated near the end of 2011. Operations began in January of 2012. WWC prepares adjusting entries and financial statements at the end of each month. Balances in the accounts at the end of January are as follows: |
| Cash | $ | 21,320 | Unearned Revenue (45 units) | $ | 5,250 | ||
| Accounts Receivable | $ | 12,350 | Accounts Payable (Jan Rent) | $ | 3,100 | ||
| Allowance for Doubtful Accounts | $ | (1,800) | Notes Payable | $ | 15,000 | ||
| Inventory (50 units) | $ | 4,250 | Contributed Capital | $ | 6,800 | ||
| Retained Earnings â Feb 1, 2012 | $ | 5,970 | |||||
| ⢠| WWC establishes a policy that it will sell inventory at $175 per unit. |
| ⢠| In January, WWC received a $5,250 advance for 45 units, as reflected in Unearned Revenue. |
| ⢠| WWCâs February 1 inventory balance consisted of 50 units at a total cost of $4,250. |
| ⢠| WWCâs note payable accrues interest at a 12% annual rate. |
| ⢠| WWC will use the FIFO inventory method and record COGS on a perpetual basis. |
| February Transactions | |
| 02/01 | Included in WWCâs February 1 Accounts Receivable balance is a $1,600 account due from Kit Kat, a WWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. WWC arranges with Kit Kat to convert the $1,600 balance to a note, and Kit Kat signs a 6-month note, at 12% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012. |
| 02/02 | WWC paid a $950 insurance premium covering the month of February. The amount paid is recorded directly as an expense. |
| 02/05 | An additional 160 units of inventory are purchased on account by WWC for $12,000 â terms 2/15, n30. |
| 02/05 | WWC paid Federal Express $320 to have the 160 units of inventory delivered overnight. Delivery occurred on 02/06. |
| 02/10 | Sales of 130 units of inventory occurred during the period of 02/07 â 02/10. The sales terms are 2/10, net 30. |
| 02/15 | The 45 units that were paid for in advance and recorded in January are delivered to the customer. |
| 02/15 | 15 units of the inventory that had been sold on 2/10 are returned to WWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are from the 2/05 purchase. |
| 02/16 | WWC pays the first 2 weeks wages to the employees. The total paid is $2,600. |
| 02/17 | Paid in full the amount owed for the 2/05 purchase of inventory. WWC records purchase discounts in the current period rather than as a reduction of inventory costs. |
| 02/18 | Wrote off a customerâs account in the amount of $1,900. |
| 02/19 | $6,200 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense. |
| 02/19 | Collected $9,800 of customersâ Accounts Receivable. Of the $9,800, the discount was taken by customers on $7,000 of account balances; therefore WWC received less than $9,800. |
| 02/26 | WWC recovered $580 cash from the customer whose account had previously been written off (see 02/18). |
| 02/27 | A $850 utility bill for February arrived. It is due on March 15 and will be paid then. |
| 02/28 | WWC declared and paid a $750 cash dividend. |
| Adjusting Entries: |
| 02/29 | Record the $2,600 employee salary that is owed but will be paid March 1. |
| 02/29 | WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts. |
| 02/29 | Record February interest expense accrued on the note payable. |
| 02/29 | Record one monthâs interest earned Kit Katâs note (see 02/01). feb 15c. Record the 15 units of inventory returned |
Feb 15d. Record the sales return and allowance. (keep getting this one wrong)
Feb 29b.WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts
