FAR - Chapter 3

Question 1

When there are 2 (or more) bank accounts, determine how each bank balance is going to be classified.

Let’s say bank 1 has an operating account with $100k, a savings account with $200k, an operating account with a ($400k) balance and bank 2 has an operating account with $80k and savings with $95k. How are both of them classified and for what amount?

Answer 1

Bank 1 has a total balance of ($100k) [$100k + $200k - $400k = -$100k] so it is a liability of $100k.

Bank 2 is cash with a balance of $175k.

If the overall balance is positive, then it belongs in cash. If the overall balance is negative, then it is a liability.

Question 2

For bank reconciliations, what are the adjustments to the bank statements?
Related to Dottie.

Answer 2

Add: Deposits in transit
Subtract: Outstanding checks

Balance per bank statement
+ Deposits in transit
- Outstanding checks
Net balance per bank

Also, add or subtract any errors such as posting an entry with the wrong amount.

Question 3

For bank reconciliations, what are the adjustments to the books?

Related to Sinbad.

Answer 3

Deduct: Service charges
Add: Interest income
Deduct: Non-sufficient funds (NSF)
Add: Bank collections

Balance per books
- Service charges
+ Interest income
- Non-sufficient funds
+ Bank collections

Also, add or subtract any errors such as posting an entry with the wrong amount.

Question 4

What are the cash disbursements when last month’s statement details are provided as well as some detail for the current month?

Balance per bank statement, end of March $23,250
Add: Deposits in transit $5,150
Less: Outstanding checks $6,300
Balance per books, end of March $22,100

April deposits $29,200
April disbursements $24,800

All reconciling items as of the end of March cleared through the bank in April. Outstanding checks as of the end of April 30 totaled $3,200.

Answer 4

April disbursements $24,800
+ Deposits in transit $0 [none in April]
- Outstanding checks $6,300 (from March - processed in April cash disbursements)
+ Outstanding checks $3,200
April disbursements per book $21,700

Question 5

What are the 4 basic characteristics for cash and cash equivalents?

Answer 5

Are typically used for short-term investing
Have high credit quality
Are considered highly liquid
Have a maturity of three months or less at the time of purchase

Question 6

For the percentage of accounts receivable method, estimate the allowance for doubtful accounts balance. In the unadjusted December 31 trial balance, company had the following balances:

Accounts receivable $45,000
Allowance for doubtful accounts (3,000)

Current expected credit losses (CECL), company estimates that 5% of the gross accounts receivable balance will not be collected. What is the journal entry Aspen will record to adjust the allowance for doubtful accounts balance?

Answer 6

$45,000 x 5% = $2,250

Use allowance for doubtful accounts rollforward:
ADA rollforward $3,000
+ Bad debt expense ($750)
- Write-offs $0
+Recovery $0
Ending ADA balance $2,250

Current allowance for doubtful accounts is $3,000 so that will need to be reduced to $2,250 by $750.

Allowance for doubtful accounts DR $750
Bad debts expense CR $750

Question 7

On June 1, Year 1, Acme sold merchandise with a list price of $5,000 to Coyote on account. Acme allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Acme prepaid $200 of delivery costs for Coyote as an accommodation. On June 12, Year 1, Acme received from Coyote a remittance in full payment amounting to:

Answer 7

Apply the discounts of 30% and 20% separately. Then calculate the discount amount.

List price $5,000
x (1 - 30%) 70%
Adjusted list price with 30% trade discount $3,500
x (1- 20%) 80%
Adjusted list price with 20% trade discount $2,800

Adjusted list price with 30% & 20% discounts $2,800
x (1 - 2% discount) 98%
Price after trade & early pay discounts $2,744

Goods were FOB shipping point, that means that the title transferred from Acme to Coyote when the goods were shipped. So Coyote is responsible for delivery fees.

Price after trade & early pay discounts $2,744
Add: Delivery fees $200
Total invoice & payment amount from Coyote $2,944

Question 8

Describe the LIFO method when a corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory.

Answer 8

The inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.

Question 9

In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?

Answer 9

beginning inventory $50,000
during year inventory $30,000
total base $80,000

during year inventory increase $30,000 x 1.1 = $33,000

$50,000 + $33,000 = $83,000

Question 10

Beginning inventory is understated. Ending inventory is overstated. What does this mean for the cost of goods sold?

Answer 10

Cost of goods sold is understated.

Question 11

Kauf Co. had inventory costing $72,000 on consignment. The consignee sold two-thirds of this inventory in the current period for $80,000. Kauf Co. paid $7,500 to ship the merchandise to the consignee. Advertising was paid for by consignee, but Kauf Co. will reimburse them for the full $4,500. Kauf will also pay a 10% commission due to the consignee for the sale. What amount should Kauf report as net profit (loss) from this transaction for the year?

Answer 11

Consigned inventory $72,000
+ Freight out $7,500
Total consigned inventory $79,500
x Amount sold 2/3
Consigned inventory sold (COGS) $53,000

Commission revenue $80,000
x Commission rate 10%
Commission expense $8,000

Commission revenue $80,000
- Consigned inventory sold (COGS) $53,000
- Commission expense $8,000
- Advertising expense $4,500
Profit generated $14,500

$14,500

Question 12

Tablet Inc performed a physical inventory count on December 31, Year 3 and determined the ending inventory balance was $202,000. Tablet had the following financial information for Year 3 prior to recording any adjustments:

Beginning inventory $276,000
Inventory purchases 168,000
Cost of goods sold 239,000

What adjusting entry, if any, should Tablet record to inventory for the Year 3 financial statements?

Answer 12

Beginning inventory $276,000
+ Inventory purchases $168,000
Cost of Goods Available for Sale $444,000
- COGS $239,000
Ending inventory $205,000

Ending inventory is $3,000 higher than physical inventory so inventory amount needs to be reduced. To reduce:
DR COGS $3,000
CR Inventory $3,000

Question 13

Capital Co. had the following consignment transactions during December:

Inventory shipped on consignment to Live Co. $20,000
Freight paid by Capital 500
Inventory received on consignment from Feed Co. 15,000
Freight paid by Feed Co. 600

No sales of consigned goods were made through December 31. Capital’s December 31 balance sheet should include consigned inventory at:

Answer 13

Inventory shipped on consignment to Live Co. $20,000
+ Freight paid by Capital $500
Total $20,500

Title of the inventory does not transfer from the consignor to a consignee in a consignment relationship so inventory received on consignment from Feed Co. including freight is not added to Capital’s balance sheet.

$20,500

Question 14

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?

Answer 14

Explain the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss is correct.

This was a purchase commitment so corporation has to make the purchase.

Question 15

Hungry Hippo Company uses a perpetual FIFO inventory system. Below is the information related to purchases and sales:

DATE TRANSACTION AMOUNT
January 1, Year 2 Purchase 10 units @ $1.00
January 8, Year 2 Purchase 20 units @ $2.00
January 13, Year 2 Sale 25 units @ $3.00
January 16, Year 2 Purchase 30 units @ $2.50

What is the amount of cost of goods sold for the month of January in Year 2?

Answer 15

Units Cost per Dollar Value Ending
Purchased Unit of units AFS COGS Inv
10 $1.00 $10.00 ($10.00) $0
20 2.00 40.00 ($30.00) $10
30 2.50 75.00 $75
Total ($40.00) $85

$40

Question 16

The beginning inventory, in a periodic inventory system that utilizes the weighted-average cost flow method, is the

Answer 16

Total goods available for sale minus the net purchases.

Beginning inventory
+ Purchases
Cost of Goods Available for Sale
- COGS
Ending inventory

Beginning inventory = Cost of Goods Available for Sale - Purchases

Question 17

The computations involved in the dollar-value LIFO inventory cost flow method are based on

I. Inventory pools of similar items
II. A specific price index for each year

Answer 17

Both.

Dollar-value LIFO uses dollar-value pools which are made up of “similar” items (in terms of interchangeability, type of material, or similarity in use). Dollar-value LIFO determines increases or decreases in ending inventory in terms of dollars of the same purchasing power.

Question 18

Which of the following inventory methods would always produce the same result under both a periodic and perpetual system?

Answer 18

FIFO

Question 19

Paxton Co. signed contracts for the purchase of raw materials to be executed the following year at a firm price of $5 million. The market price of the materials dropped to $3 million on December 31. What amount should Paxton record as an estimated liability on purchase commitments as of December 31?

Answer 19

$2,000,000

The difference between the firm price of $5,000,000 and the market price of $3,000,000.

A firm purchase commitment is an agreement that is legally binding that requires a purchaser to purchase a specified amount of goods at a future point in time. If the contract price is in excess of the market price, and if losses are expected when the purchase is actually made, losses should be recognized at the time of the decline in price.

Question 20

Inventory at the end of the year was understated. Which of the following is true as a result of the understatement?

Net income for the year is overstated.
Net income at the end of the following year would be overstated is correct.
Capital for the year is overstated is incorrect.
Cost of sales for the year is understated is incorrect.

Answer 20

Net income at the end of the following year would be overstated is correct.

Question 21

Tahoe Jet Ski’s had beginning inventory of jet ski’s in the amount of 10 jet skis at a cost of $50 per jet ski. Tahoe Jet Ski’s had the following additional information for the current year:

DATE TRANSACTION AMOUNT
March 4, Year 2 Purchase 6 Jet Ski’s at $55 each
March 12, Year 2 Sale 8 Jet Ski’s at $100 each
March 20, Year 2 Purchase 9 Jet Ski’s at $60 each
March 27, Year 2 Sale 7 Jet Ski’s at $105 each
March 30, Year 2 Purchase 4 Jet Ski’s at $65 each

What was Tahoe Jet Ski’s cost of goods sold using the last in, first out (LIFO) perpetual method?

Answer 21

Existing inventory 10 @ $50; 3/12 Sale 2 @ $50; COGS $100; ending inventory 8 @ $50 = $400
3/4 Purchase 6 @ $55; 3/12 Sale 6 @ $55; COGS $330; ending inventory $0
3/20 Purchase 9 @ $60; 3/27 Sale 7 @ $60; COGS $420; ending inventory $120
3/30 Purchase 4 @ $65

COGS = $100 + $330 + $420 = $850
Ending inventory = $400 + $0 + $120 + $260= $780

$850

Question 22

Which of the following statements below is true?
I. A perpetual inventory system updated accounting records continually for inventory transactions.
II. A perpetual inventory system updates accounting records at the end of the account period

Answer 22

I is true.

For II, it is the periodic inventory system that updates accounting records at the end of the accounting period.

Question 23

For FOB shipping, does the inventory belong to the seller, buyer, or carrier?

Answer 23

Buyer. FOB shipping point is considered the buyers inventory at the moment the goods are shipped.

FOB destination means that it is still the seller’s inventory.

At no point is it the carrier’s inventory.

Question 24

When would the replacement cost of an inventory item be used as a designated market value according to the lower of cost or market method?

Answer 24

When it is below the net realizable value and above the net realizable value less the normal profit margin is correct. Replacement cost can be used as the market value assuming the two following conditions exist:

Market value cannot exceed the net realizable value (NRV) of an item.
Market value cannot be below net realizable value less the normal profit margin.

Question 25

What is the required accounting treatment for abnormal freight-in costs when manufacturing inventory?

Answer 25

Charge to expense for the period.

Typically, normal freight-in expense would be capitalized into inventory, which is the same treatment as the materials purchased. Abnormal freight-in costs are expenses not in the normal course of business so they are expensed in the period.

Question 26

The original cost of an inventory item is above the replacement cost. The inventory item’s replacement cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at:

Answer 26

Net realizable value

Question 27

What is included in the cost of land?

Answer 27

Purchasing price
Draining costs
Clearing trees & brushes
Cost of teardowns
Broker’s commissions
Title & legal fees
Outstanding taxes assumed by the buyer

Include anything that has to happen before property can be built on the land.

Question 28

Which of the following costs, theoretically, incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized?

I. Insurance on machine while in transit
II. Testing and preparation of machine for use

Answer 28

Both. The cost of machinery includes all expenditures incurred in acquiring the asset and preparing it for use. Cost includes the purchase price, freight and handling charges, insurance on the machine while in transit, cost of special foundations, and costs of assembling, installation, and testing. Therefore, both costs given in this problem would be capitalized.

Question 29

Janet purchased a plot of land to use as a site for the construction of a plant. A building on the property was sold and then removed by Janet so that they could start construction on the plant. The proceeds from the building’s sale should be:

Answer 29

Deducted from the cost of the land

Generally, any cost involved in preparing land for its ultimate use is considered a cost of the land. This includes any benefits received from selling a building on the property.

Question 30

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows: Purchase price $1,000,000; Real estate taxes in arrears $15,000; Debt issuance costs $2,000; Attorney fee - title search on land $5,000. The company should record its acquisition of the land in its financial statements at a value of:

Answer 30

$1,020,000

Purchase price $1,000,000
Real estate taxes in arrears $15,000
Attorney fee - title search on land $5,000
Total $1,020,000

Debt issuance costs would not be capitalized as part of the asset.

Question 31

Talton Co. installed new assembly line production equipment at a cost of $185,000. Talton had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost $12,000 and the wall removal cost $3,000. The rearrangement did not increase the life of the assembly line but it did make it more efficient. What amount of these costs should be capitalized by Talton?

Answer 31

$200,000

All of the costs are included in the calculation.

There will be a future benefit for purchasing and installing this equipment, which is why the costs would be capitalized rather than expensed in the period incurred.

Question 32

On January 1st, Year 2, Archer, Inc. issued a purchase order to Cotton Co. for a new copier machine. The machine requires one month to produce and is shipped f.o.b. destination on July 1, Year 2, and is received by Archer on July 15, Year 2. Cotton issues a sales invoice dated July 2, Year 2, for the machine. As of what date should Archer record a liability for the machine?

Answer 32

July 15, Year 2

This was sent f.o.b. destination so it’s not Archer’s liability until they receive the product.

Question 33

Quick Co. acquired the following assets from a liquidating competitor for a $200,000 lump-sum purchase price:

COMPETITOR

’

S

                  CARRYING                     FAIR
                  AMOUNT	                     VALUE Inventory	 $70,000	 	          $50,000 Land	 	   40,000	 	            50,000 Building	 	 110,000	 	          150,000 TOTAL	       $220,000	 	        $250,000

What amount should Quick report as the cost of the building?

Answer 33

$120,000

Inventory $50,000
Land 50,000
Building 150,000
Total $250,000

Inventory $50,000 / $250,000 = 20%
Land $50,000 / $250,000 = 20%
Building $150,000 / $250,000 = 60%

Inventory $200,000 x 20% = $ 40,000
Land $200,000 x 20% = $ 40,000
Building $200,000 x 60% = $120,000

Question 34

In a company’s financial statements, the company is required to disclose information about fixed assets in their summary of significant accounting policies. Which of the following is required to be disclosed in the summary of significant accounting policies?

I. Composition of fixed assets (i.e. land, property, equipment)
II. Depreciation method and estimated useful life by asset type

Answer 34

II. Depreciation method and estimated useful life by asset type

I. Composition of fixed assets (i.e. land, property, equipment) – Included in the notes to the financial statements, but would not be included in the summary of significant policies.

Question 35

On January 1, 20X1, Crater, Inc., purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31, 20X5, for 50% of its original cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation methods did Crater use?

Answer 35

Straight-line

Question 36

In January 2, Year 1, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its Year 1 income statement, what amount should Lem report as depreciation for the machinery?

Answer 36

$10,500

$110,000 - $5,000 salvage value = $105,000 / 10 years = $10,500

Ignore the $130,000 amount since that includes a financing agreement. The cash equivalent amount is $110,000.

Question 37

On January 1, year one, Newport Beach Corp. purchased a machine for $100,000. The machine was depreciated using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Newport’s year 1 financial statements, resulting in a $10,000 overstatement of the book value of the machine on December 31, year 1. The oversight was discovered during the preparation of Newport’s year 2 financial statements. What amount should Newport report for depreciation expense on the machine in the year 2 financial statements?

Answer 37

$10,000 for year 2. The missed $10,000 from year one is an adjustment to retained earnings.

Question 38

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?

Answer 38

$200,000

Since the collection agency is developing computer software for internal use, only the costs incurred after technological feasibility and before the software is ready for use will be capitalized. Based on the information in the question, only the $200,000 paid to write the code will be capitalized. The $50,000 to investigate the feasibility will be expensed, as well as the $70,000 G&A costs.

Question 39

A company is considering a cloud computing arrangement. They are evaluating whether to capitalize the costs associated with this arrangement. Which of the following scenarios would require the company to treat the cloud computing arrangement costs as a purchased software expense?

Answer 39

The company can take ownership of the software at any time during the hosting period without a penalty, and it has the option to run it on its own hardware is correct. For the costs to be treated like purchased software, the company must be able to take ownership of the software any time during the hosting period without a penalty and must be able to run it on the company’s own hardware or contract with another cloud vendor to host it.

Question 40

During the current year, Beta Motor Co. incurred the following costs related to a new solar-powered car:

Salaries of laboratory employees researching how to build the new car $250,000
Legal fees for the patent application for the new car 20,000
Engineering follow-up during the early stages of commercial production (the follow-up occurred during the current year) 50,000
Marketing research to promote the new car 30,000
Design, testing, and construction of a prototype 400,000

What amount should Beta Motor report as research and development expense in its income statement for the current year?

Answer 40

$650,000

Salaries of the laboratory employees researching how to build the car for $250,000 should be expensed.

Legal fees for the patent application for the new car for $20,000 should be capitalized.

Engineering follow-up for $50,000 should be capitalized.

Marketing research for $30,000 should be

Design, testing, and construction of a prototype for $400,000 should be expensed.

Question 41

Brand Co. incurred the following research and development project costs at the beginning of the current year: Equipment purchased for current and future projects $100,000, Equipment purchased for current projects is only $200,000, Research and development salaries for current project $400,000. The equipment has a five-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects on December 31?

Answer 41

$20,000

Equipment purchased for current and future projects $100,000 should be capitalized since it has a future use. So take $100,000 and divide by 5 to calculate the depreciation amount of $20,000.

Equipment purchased for current projects for $200,000 and research and development salaries for current project for $400,000 are expensed. Both of these have no future benefit.

Question 42

Big Trippin Partners recently manufactured a psychedelic drug that is aimed at curing depression. The company received a registered patent that has a legal life of 20 years. However, the company estimates that it will only be able to generate revenue from the patent for 18 years. The company has capitalized the cost of the patent onto the balance sheet. How many years should the company amortize the patent over?

Answer 42

18. Use the lesser between the legal life and the economic life.

Question 43

During the current year, Pedal Co. incurred the following costs related to its intangible assets:

1) Research and development to develop a product for which it was granted a patent: $250,000
2) Legal costs to register the patent: $20,000
3) Legal costs in the defense of a patent (unsuccessful result): $40,000

What is the total amount that Pedal Co. should capitalize in the current year?

Answer 43

$20,000

Legal costs, as well as other associated registration costs will be capitalized in the period that the costs were incurred. The research and development costs related to intangible assets related to the internal development of the patent will be expensed in the year incurred. Only purchased intangible assets will be capitalized, therefore none of the $250,000 will be capitalized. Finally, the legal costs associated with the defense of Pedal Co.’s patent will be expensed, not capitalized due to the unsuccessful result. If the legal defense was successful, the $40,000 would be capitalized.

Question 44

Shane Co. incurred organizational costs of $12,000 when starting its new business unit. Shane Co. should treat the $12,000 organizational cost as:

I. Expensed immediately.
II. Amortized over a 60-month period.

Answer 44

I only is correct. Start-up and organizational costs should be expensed immediately in the current year per U.S. GAAP reporting standards.

Question 45

Which of the following statements is true in regard to a company interested in factoring their accounts receivables?

Answer 45

Factoring receivables without recourse transfers the risk of uncollectible accounts to the buyer.

Question 46

The following information relates to Sneffels accounts receivable for Year 2:

Accounts receivable, 1/1/Year 2 $650,000
Credit sales for Year 2 2,700,000
Sales returns for Year 2 75,000
Accounts written off during Year 2 40,000
Cash collected from customers during Year 2 2,150,000
Estimated future sales returns at 12/31/Year 2 50,000
Estimated uncollectible accounts at 12/31Year 2 100,000

What amount should Sneffels report for accounts receivable, before allowances for sales returns and uncollectible accounts, at December 31, Year 2?

Answer 46

$1,085,000

Beginning AR $650,000
+ Credit sales $2,700,000
- Sales returns $75,000
- Accounts written off $40,000
- Cash collections $2,150,000
Ending AR $1,085,000

Question 47

On August 15, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The 4-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased?

Interest receivable
Prepaid interest
Interest revenue
Unearned discount

Answer 47

Interest revenue

8/15 entry
Notes receivable
Interest receivable
Net revenue

Interest revenue would not be credited since the face value of the note + interest receivable equals the amount of revenue that was earned on the sale.

11/15
Cash
Note receivable
Interest receivable
Interest revenue

Question 48

Hiltop Corporation began operations in Year 1. For the year ended December 31, Year 1, Hilton made available the following information:

Total merchandise purchases for the year: $350,000
Merchandise inventory at December 31, Year 1: $70,000
Collections from customers: $200,000

All merchandise was marked to sell at 40% above cost. Assuming that all sales are on a credit basis and all receivables are collectible, what should be the balance in accounts receivable at December 31, Year 1?

Answer 48

Beginning AR $0
+ Credit sales PLUG
- Cash collections $200,000
- Write offs $0
- Conversion to notes $0
Ending AR

Beginning inventory $0
+ Merchandise Purchases $350,000
- COGS (PLUG) $280,000
Ending inventory $70,000

COGS $280,000
x (1 + 40% mark up) 1.4
Credit sales $392,000

Beginning AR $0
+ Credit sales (PLUG) $392,000
- Cash collections $200,000
- Write offs $0
- Conversion to notes $0
Ending AR $192,000

Question 49

At year-end, Wall corporation estimated its allowance for uncollectible accounts using the aging of accounts receivables method. At the beginning of the year, the uncollectible accounts balance amounted to $28,000. The bad debt expense amount is 3% on credit sales of $800,000. In July of the current year, $19,000 of uncollectible accounts were written off and estimated uncollectible accounts per the aging method are $45,000. After the year-end adjustment, the journal entry to reflect the difference would include:

A debit to accounts receivable
A credit to provision for uncollectible accounts
A debit to provision for uncollectible accounts
A debit to allowance for uncollectible accounts

Answer 49

Beginning allowance for uncollectible accounts $28,000
+ Bad debt $24,000
- Write offs $19,000
Tentative ending balance $33,000

Since ending balance should be $45,000, an additional adjustment of $12,000 is needed.

Debit bad debts expense (aka provisions for uncollectible account expense) $12,000
Credit allowance for doubtful accounts $12,000

Question 50

Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?

FIFO
LIFO
Moving average
Weighted average

Answer 50

FIFO

Question 51

Farmhouse Venture’s ending inventory balance was overstated by $25. Which of the following statements is correct according to a periodic inventory system?

The cost of goods was overstated by $25
The cost of goods available for sale was overstated by $25
The retained earning were overstated by $25
The gross margin was understated by $25

Answer 51

The retained earning were overstated by $25

COGS would be understated by $25
COG AFS not affected
Gross margin overstated by $25

Question 52

On January 1, year 1, a company’s new CEO was awarded a $200,000 bonus that would be paid out in two $100,000 installments in years 3 and 4 of employment, contingent on employment through the year ended December 31, year 2. What amount should the company expense for this bonus for years 2 and 3?

Answer 52

Year 2 $100,000
Year 3 $0

The bonus is earned in years 1 & 2 so those are the years it is expensed. In years 3 & 4, it is paid out.

Question 53

Cali, Inc., had a $4,000,000 note payable due on March 15, Year 4. On January 28, Year 4, before the issuance of its Year 3 financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, Year 3, financial statements?

As a current liability with no disclosure required
As a current liability, with separate disclosure of the note financing
As a non-current liability, with separate disclosure of the note financing
As a non-current liability, with no separate disclosure required

Answer 53

As a non-current liability, with separate disclosure of the note refinancing

Question 54

Lyle, Inc. is preparing its financial statements for the year ended December 31, Year 1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:

At December 31, Year 1, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.
Checks in the amount of $100,000 were written to vendors and recorded on December 29, Year 1. The checks were mailed on January 5, Year 2.

What amount should Lyle report as accounts payable in its December 31, Year 1, balance sheet?

Answer 54

A/P non-adjusted balance $360,000
+ Remove from debit balance $50,000
+ Add back invoices $100,000
Adjusted AP balance $510,000