Comm 457

Practice Midterm

Time: 50 minutes Total Marks: 50 marks

Coverage Marks Available Obtained
Multiple choice 12
Problems
1. Inventory 13
2. Accounts Receivable 13
3. Bank Reconciliation 12
Totals 50
Multiple choice- Circle the best answer (1 mark each)
1. GAAP requires that an entity select the inventory cost flow assumption that:

a. Minimizes income.
b. Provides the most conservative value of inventory on the Balance Sheet.
c. Maximizes income.
d. Most closely matches the physical flow of inventory.
e. None of the above.

2. Trekking Company made the following inventory purchases during the year:

January 1: 10 units at $120

February 1: 20 units at $130
May 1: 15 units at $140
September 1: 12 units at $150
November 1: 10 units at $160

On December 31, there are 26 units remaining in ending inventory. Assuming

Trekking uses the FIFO cost flow assumption, what is the cost of the ending
inventory?

a. $3,500.
b. $3,800.
c. $3,960.
d. $3,280.
e. $3,640.

3. An understatement of beginning inventory causes:

a. Cost of goods sold to be understated and net income to be understated.

b. Cost of goods sold to be understated and net income to be overstated.
c. Cost of goods sold to be overstated and net income to be overstated.
d. Cost of goods sold to be overstated and net income to be understated.
e. Cost of goods sold to be overstated and net income to be correct.

4. Which of the following is not a benefit of using a perpetual inventory system as

compared to a periodic system?

a. It provides more precise amounts due to more frequent calculations.

b. It provides more current information for management decision-making.
c. It provides better inventory control.
d. It eliminates the need for any physical inventory counts or checks.
e. All of the above are benefits of a perpetual system.

2
Use the following information for questions 5-6:

Tapeco Inc.'s books revealed the following data for 2012 after all adjustments were
made:

Cash sales $600,000

Sales returns (on credit sales) 10,000
Allowance for doubtful accounts (credit balance) 1,670
Credit sales 375,000
Accounts receivable 68,000

Tapeco estimates bad debt expense based on 1% of net credit sales.

5. The bad debt expense for 2012 was:

a. $6,000
b. $3,750
c. $3,650
d. $3,070
e. $2,970

6. The net carrying value of accounts receivable on the 2012 balance sheet is:

a. $68,000
b. $69,670
c. $66,330
d. $64,330
e. None of the above.

7. Generally accepted accounting principles require that the inventory of a company

must be reported at:

a. Current selling prices.

b. Net realizable value.
c. Any basis as long as it is consistent with the previous year.
d. Current costs to replace the inventory.
e. None of the above

8. Mandy Smith's account was written off last year. She owed City Company $5,000.
Using the allowance method, the journal entry to reinstate her account involves:

a. a debit to Smith's account receivable and a credit to bad-debt expense

b. a debit to allowance for doubtful accounts and a credit to Smith's account
receivable
c. a debit to bad-debt expense and a credit to Smith's account receivable
d. a debit to Smith's account receivable and a credit to allowance for doubtful
accounts
e. a debit to cash and a credit to Smith’s account receivable
3
9. Because an inventory error causes an offsetting error in the next period:

a. Managers can ignore the error.

b. It is sometimes said to be self-correcting.
c. It affects only income statement accounts.
d. If affects only balance sheet accounts.
e. Managers can ignore the error and it is sometimes said to be self-correcting.

10. Merchandise inventory shown on a Company’s Balance Sheet includes all but
one of the following:

a. All goods located at a company’s warehouse which are owned by the

company and held for sale.
b. Goods in transit which are purchased by the Company on a FOB destination
basis.
c. Goods consigned by the Company to one of its customers.
d. Goods in transit which are sold by the Company on a FOB destination basis
e. All of these answers are correct.

11. If the balance of the Allowance for Doubtful Accounts account exceeds the
amount of a bad debt being written off, the entry to record the write-off against
the allowance account results in:

a. An increase in the expenses of the current period.

b. A reduction in current assets.
c. A reduction in owner's equity.
d. No effect on the expenses of the current period.
e. A reduction in current liabilities.

12. Shrinkage:

a. Refers to the loss of inventory for merchandising companies.

b. Is not able to be directly measured by a perpetual inventory system.
c. Is recognized by debiting Cost of Goods Sold.
d. Can arise because of theft and deterioration of merchandise.
e. All of these answers are correct.

4
Question 1 Inventory (13 marks, 13 minutes)

Home Studio Ltd. (HSL) sells and installs high-definition home studios. They are the
exclusive Vancouver supplier of the Astro line of surround-sound systems.

The following is a list of the purchases and sales for the model “Astro1000” for the
month ended December 31, 2012:

Date Purchases
# of Unit Total
units cost cost
Dec 1 (Beg. Inv.) 40 $5,000 $200,000
Dec 10 80 $5,500 $440,000
Dec 17 40 $5,750 $230,000
Dec 20 100 $6,000 $600,000

Sales
# of Unit Total
units sales sales
price
Dec 11 35 $7,500 $262,500
Dec 19 70 $8,000 $560,000
Dec 26 70 $9,000 $630,000

HSL uses a perpetual inventory system.

Required:

a. Compute the ending inventory value as at December 31, 2012 and the gross profit
for the month of December assuming HSL uses moving-weighted average cost
flow assumption. (8 marks)

5
Question 1 Inventory continued

a. continued

b. Which of the three cost flow assumptions covered in class (Specific Identification,
Moving-weighted average or FIFO) would generate the highest net income for HSL
for the month of December? Why? No numbers are to be used in answering
this question. (2 marks)

c. On December 29, 2012, Panasonic Corporation, Astro’s competitor, introduced its

long awaited wireless home studio technology. The new line has been very well
received by the market and has forced Astro to immediately cut the selling price of
its products by 50%. Will this action have any effect on the value of the inventory
calculated in part a. Provide a brief discussion and an estimate of any effect.
(3 marks)

6
Question 2 Accounts Receivable (13 marks, 13 minutes)

Kelco Inc. generated $5.0 million in sales during the current year of which 85% were
made on credit. Credit sales are sold on a 2/10 net 40 basis. Past experience
suggests that 2.5% of net credit sales prove uncollectible. The credit balance in
allowance for doubtful accounts at December 31, 2012 before any year-end
adjustment is $6,900. Accounts receivable at December 31 before any year-end
adjustments consists of the following:

Account Classification Amount Estimate of uncollectable amounts

Current $ 450,000 1%
31-60 days past due 90,000 3%
60-90 days past due 40,000 20%
Over 90 days past due 30,000 50%

Required:
a. Kelco has decided that two accounts in the over 90 days past due category
totaling $8,000 should be written off. Prepare the necessary journal entry.
(2 marks)
Account Debit Credit

b. Prepare the journal entry for bad debt expense for the current year assuming
Kelco used the aging method in determining its allowance for bad debts.
(5 marks)
Calculations

Account Debit Credit

7
Question 2 Accounts Receivable continued

c. Prepare the journal entry for bad debt expense for the current year assuming
Kelco used the percentage of net credit sales in determining its allowance for bad
debts.(3 marks)

Calculations

Account Debit Credit

d. Kelco’s is considering paying bonuses to members of its senior management

team. The following information will be used to evaluate the manager responsible
for granting credit and collecting Accounts Receivable. Assume it is correct (i.e.
ignore all calculations or information in any of the other parts of this question).

2012 2011 2010

Credit Sales $4,250,000 $4,000,000 $3,750,000
Accounts Receivable 530,000 425,000 350,000

Would you recommend the manager receive a bonus for his/her performance in
2012? Provide support your recommendation. (3 marks)

8
Question 3 Bank reconciliation (12 marks, 12 minutes)

On May 31, 2011 the Cash account of Perkins Supply Company had a balance of
$43,820. On that date, the bank statement indicated a balance of $54,600. The bank
reported the collection of a note receivable for Perkins of $6,300 plus $300 of
interest. The $1,700 cheque of a customer, Raymond Frank, was returned by the
bank because of insufficient funds. The bank charged Perkins $60 for services. The
bank erroneously failed to credit a $4,200 deposit to Perkins' account.

It was determined that the bank statement did not include a deposit of $4,700 made
by Perkins on May 31 and that cheques totalling $13,400 issued by Perkins had not
cleared the bank. Perkins recorded an insurance expense payment of $160 as
$1,600.

Required:
(a) Prepare a bank reconciliation (in good form) as of May 31, 2011.
(b) Prepare, in general journal form, the entry (entries) necessary to adjust Perkins'
records based on the bank reconciliation.