ACG4101 Exam 3 Review

Question 1

What is conservatism, economic entity, and matching?

Answer 1

Conservatism - requires more verification for good news rather than bad news, resulting in losses reported quicker in net income rather than gains.
Economic entity - all economic events can be identified by a single economic entity.
Matching - associating expenses with revenue in a specific period.

Question 2

Adjusting journal entry for insurance when a company initially recorded the payment as an expense.

Answer 2

Debit prepaid insurance
Credit cash
Debit insurance expense
Credit prepaid insurance

Question 3

Journal entry to record declaration and payment of dividends on the same day.

Answer 3

Debit retained earnings
Credit dividends payable
Debit dividends payable
Credit cash

Question 4

Debt-to-equity ratio, what does it calculate and what does it mean?

Answer 4

Total liabilities / total equity; it calculates a company’s ability to pay its long-term debts; the higher the ratio, the higher the company’s risk.

Question 5

Calculate current ratio.

Answer 5

Current assets / current liabilities

Question 6

If discovering an error, a big substantial one from prior year, how to fix it for current year?

Answer 6

Adjust retained earnings balance and adjust balance error.

Question 7

Calculate the average collection period.

Answer 7

Average AR receivables = (AR beginning balance + ending balance) / 2
AR turnover = Net sales / Average AR receivables
Average collection period is 365 / AR turnover

Question 8

Calculate future value of annuity due with PV and FV table given.

Answer 8

Future value = annual deposit * FV annuity due factor
FV annuity due factor is found on the table based on amount of periods and interest rate.
Ex. five equal annual deposits at 3% interest = 5 periods by 3% interest

Question 9

Calculate and write the 4th journal entry for year 2 of a contract based on percentage of completion.

Answer 9

Costs incurred during the year + costs incurred prior year + estimated costs to complete = total cost
Contract price * (costs incurred during and prior year / total cost) = percentage of completion
Percentage of completion * contract = revenue for the year
Debit CIP (profit), cost of construction (costs incurred during the year)
Credit revenue

Question 10

How to record a sale return?

Answer 10

Debit sales return
Credit cash
Debit inventory (sales return * % of selling price)
Credit COGS

Question 11

Using net method, record the journal entry for when the purchase is made and when payment was before the term of discount and after the term.

Answer 11

A. debit AR (merchandise sold - (sales revenue * sales discount))
A. credit sales revenue
B. debit cash
B. credit AR
C. debit cash
C. credit cash and sales discount forfeit (remaining amount paid * sales discount)

Question 12

Figure out the impact on gross profit and inventory turnover when a company uses FIFO or LIFO and costs are rising.

Answer 12

If costs are rising, FIFO will have higher gross profit but lower inventory turnover compared to LIFO.

Question 13

Calculate inventory turnover ratio.

Answer 13

COGS / average inventory

Question 14

Calculate gross profit ratio.

Answer 14

Net sales - COGS / net sales

Question 15

LIFO retail method concept

Answer 15

Net purchases + (net markups - net markdowns)* = goods available for sale (no beginning inventory) - net sales + beginning inventory = ending estimated inventory

Beginning inventory of cost / beginning inventory of retail = beginning cost-to-retail percentage

(No beginning inventory) Goods available for sale of cost / goods available for sale of retail = current period cost-to-retail percentage

Ending estimated inventory - beginning inventory of retail = current period layer

Beginning inventory of retail * beginning cost-to-retail percentage + current period layer * current period cost-to-retail percentage

Question 16

Calculate conventional cost-to-retail percentage

Answer 16

(Cost) (Beginning inventory + net purchases) / (Retail) (Beginning inventory + net purchases + net markups)

Question 17

Using average cost method and switching to FIFO. record journal entry.

Answer 17

Debit inventory (new method amount - past method amount)
Credit retained earnings

Question 18

On year 1, company had made a mistake and income was overstated. What is the impact on year 1 and year 2?

Answer 18

Year 1 income was overstated, year 2 income was understated.

Question 19

Exchanges with commercial substance; calculate gain or loss

Answer 19

Fair value of old equipment - book value of old equipment = gain/loss

Question 20

Calculate average accumulated expenditures

Answer 20

Accumulated expenditures / 2 if incurred evenly
Expenditure given * (12 - months that has passed) / 12

Question 21

Goodwill is only created when buying a company on acquisition

Answer 21

Goodwill is the excess of the fair value of net assets of other businesses.

Question 22

Calculate depletion for year 2

Answer 22

First year: cost of natural resources / estimated extractable amount for first year * resource sold for first = first year amount sold
Second year: (cost of natural resources - first year amount sold) / estimated extractable amount for second year * resource sold for second year

Question 23

Trading investments, available-for-sale, held-to-maturity; gain or losses will go

Answer 23

Ex. cost of 50, fair value of 40, there is a loss of 10. Loss in trading will go to the income statement, loss in available-for-sale goes to other comprehensive income (OCI), held to maturity is not recognized.

Question 24

Available-for-sale; bought for 80 and fair value was 100

Answer 24

Gain of 20 goes to OCI
In the balance sheet, it is shown as fair value of 100 and gain is shown in OCI.

Question 25

Investing into a company and an investor has significant influence. When the company pays dividends, the investment account is decreased by the portion owned. What is the impact on the investment account?

Answer 25

Stock bought + (% of stock * net income) - (% of stock * dividends paid)

Question 26

What is OCI?

Answer 26

Answer: EVERY CHANGE IN EQUITY FROM NON-OWNERS' SOURCES.

Question 27

Calculate the new equity balance from accounts given.

Answer 27

Equity = assets - liabilities

Question 28

Company sold inventory under AR. On collection, what is the effect on the accounting equation?

Answer 28

Answer: NO EFFECT

Question 29

Some transactions are given and what is the impact on assets?

Answer 29

Collecting cash = increases assets, decreases assets Providing services on account = increasing assets, increasing liability Deferred revenue = increasing assets, increasing liability

Question 30

Collecting 50% upfront and other 50% at end, record the receipt of final payment.

Answer 30

Debit cash and unearned revenue Credit revenue

Question 31

Which of the following is most likely to be classified as discontinued operations?

Answer 31

A component or group of components that has a major effect on a company's operations and financial results.

Question 32

Which of the following is not a performance obligation?

Answer 32

Anything that doesn't specifically require or list the contractor to do. Ex. A right of return, prepayments, and quality assurance warranties.

Question 33

Figure out how many performance obligations are in this contract.

Answer 33

Ex. buying lumber, paint, and nails from a store = three performance obligations Ex. contracting to build a house with lumber, paint, and nails = one performance obligation

Question 34

How to recognize interest revenue?

Answer 34

Answer: OVER TIME

Question 35

Calculating discontinued operations conceptually

Answer 35

Income or loss from operations of discontinued operations -/+ income tax expense/benefit

Question 36

Intangible assets with indefinite life

Answer 36

No legal contractual factors, cannot be amortized, and provides infinite benefit to the company.

Question 37

Calculate straight-line depreciation; find gain or loss on sale at year 3

Answer 37

Asset cost - residual value / service life Debit cash, accumulated depreciation Credit asset sold Find the difference between the debit and credit

Question 38

How to account for sale of property of equipment for cash

Answer 38

Answer: GAIN OR LOSS BASED ON BOOK VALUE

Question 39

Calculate gross profit on project over time in year 1

Answer 39

Revenue - cost of construction = CIP profit/loss

Question 40

Available-for-sale and trading securities (FV only)

Answer 40

Trading securities affect the income statement Ex. on operating income (gain or loss) Available-for-sale of gains or losses are shown in OCI and then reclassified as net income in the periods they were sold

Question 41

What is the ending inventory based on these transactions?

Answer 41

Included in ending inventory: Items in possession of the company Goods that are in transit (f.o.b. destination) Goods on consignment (if not held by owner's company) Anticipated sales return

Question 42

Calculate COGS with FIFO

Answer 42

Ex. 800 units on hand that are $20 each, 400 units bought for $22 each. Sold 100 units 800 * 20 + 200 * 22 = $20,400 COGS

Question 43

Calculate ending inventory with average cost

Answer 43

Ex. (800*20)+(400*22)/1200 = 20.66 * 200 (remaining inventory)

Question 44

Calculate ending inventory with LIFO

Answer 44

Remaining inventory * last inventory unit price

Question 45

Lump sum purchase of assets; allocate prices to each asset

Answer 45

Asset purchased amount * % assigned to each individual asset (fair value of an asset / total fair value of assets

Question 46

Calculate asset retirement obligation

Answer 46

(Cash outflow A * probability A + cash outflow B * probability B + cash outflow C * probability C) * present value of $1, n, i

Question 47

Sum-of-years'-digits method, calculate depreciation for year 2 and book value of year 2 with a service life of 5 years

Answer 47

Asset cost - residual base * 5/15 = depreciation for year 1 Asset cost - residual base * 4/15 = depreciation for year 2 Asset cost - depreciation for year 1 +2 = book value end of year 2

Question 48

Double declining method; calculate book value at year 2

Answer 48

1 / service life * 2 = depreciation rate Book value * depreciation rate = depreciation for year 1 (Book value - depreciation for year 1) * depreciation rate for year 2 Asset cost - depreciation for year 1+2 = book value end of year 2

Question 49

Depreciated an asset with group depreciation; record the journal entry for riding of one asset

Answer 49

Debit cash, accumulated depreciation Credit asset sold