Financial Accounting Exam II, Chapters 5 & 6
Financial Accounting Exam II, Chapters 5 and 6
Questions and Answers
- 1.
On April 1, 2012, Nelson Inc. accepts a $100,000, 8% note. The note receivable and interest are receivable on March 31, 2013. On March 2013, Nelson Inc. will record interest revenue of
- A.
$8000
- B.
$0
- C.
$6000
- D.
$2000
Correct Answer
D. $2000Explanation
On April 1, 2012, Nelson Inc. accepted a $100,000, 8% note, which means that the borrower agreed to pay back the principal amount of $100,000 plus an additional 8% as interest. The note and the interest are both due on March 31, 2013. Since the interest rate is 8%, the interest revenue that Nelson Inc. will record on March 31, 2013, can be calculated by multiplying the principal amount ($100,000) by the interest rate (8%) which equals $8,000. However, since the interest is only receivable until March 31, 2013, and not actually received, the correct answer is $2,000.Rate this question:
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- 2.
A sales discount is recorded by the seller as
- A.
A liability
- B.
A contra revenue
- C.
A contra asset
- D.
An expense
Correct Answer
B. A contra revenueExplanation
A sales discount is recorded by the seller as a contra revenue because it represents a reduction in the revenue earned from the sale. It is deducted from the gross sales revenue to arrive at the net sales revenue. Contra revenues are shown as negative amounts on the income statement and help to accurately reflect the true revenue earned by the company.Rate this question:
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- 3.
Th entry to record the estimate for uncollectible accounts includes:
- A.
A debit to Allowance for Uncollectible accounts.
- B.
A debit to Bad Debt Expense
- C.
A credit to Accounts Receivable
- D.
A debit to Sales Revenue
Correct Answer
B. A debit to Bad Debt ExpenseExplanation
The entry to record the estimate for uncollectible accounts includes a debit to Bad Debt Expense. This is because Bad Debt Expense represents the estimated amount of accounts receivable that the company expects will not be collected. By debiting Bad Debt Expense, the company recognizes the expense associated with these uncollectible accounts.Rate this question:
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- 4.
Which of the following is true for a company who uses the allowance method of accounting for uncollectible accounts?
- A.
Bad debt expense is recorded when a specific account is known to be uncollectible.
- B.
Bad debt expense is recorded after all of the current year's credit sales are collected.
- C.
Bad debt expense is recorded during the year of the credit sale
- D.
Bad debt expense is only recorded if they exceed 10% of credit sales.
Correct Answer
C. Bad debt expense is recorded during the year of the credit saleExplanation
In the allowance method of accounting for uncollectible accounts, bad debt expense is recorded during the year of the credit sale. This method involves estimating the amount of accounts receivable that will not be collected and creating an allowance for doubtful accounts. The bad debt expense is then recorded based on this estimate, typically using a percentage of credit sales. By recording the expense during the year of the credit sale, the company can accurately reflect the impact of uncollectible accounts on their financial statements.Rate this question:
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- 5.
The allowance method is required under G.A.A.P., because it is consistent with:
- A.
Cash-basis accounting.
- B.
The revenue recognition principle.
- C.
Properly recognizing the net realizable value of assets.
- D.
Good business practice
Correct Answer
C. Properly recognizing the net realizable value of assets.Explanation
The allowance method is required under G.A.A.P. because it is consistent with properly recognizing the net realizable value of assets. This method allows businesses to estimate and record potential losses from uncollectible accounts receivable, ensuring that the reported value of assets reflects their true value after considering the possibility of bad debts. By using the allowance method, businesses can accurately present their financial statements and provide useful information to investors and stakeholders.Rate this question:
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- 6.
Schmidt company's accounts receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4000, and its bad debt expense is $3800. The net realizable value of accounts receivable is:
- A.
$96000
- B.
$96200
- C.
$104000
- D.
$100000
Correct Answer
A. $96000Explanation
The net realizable value of accounts receivable is calculated by subtracting the adjusted balance in Allowance for Uncollectible Accounts from the accounts receivable balance. In this case, the adjusted balance is $4000, so the net realizable value is $100,000 - $4000 = $96,000.Rate this question:
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- 7.
If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account,
- A.
The effect on net account receivables depends on the relationship between the allowance account balance and the amount of the write off.
- B.
Net accounts receivable decrease
- C.
Net accounts receivable do not change.
- D.
Net accounts receivable increase.
Correct Answer
C. Net accounts receivable do not change.Explanation
When a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account, the effect on net accounts receivable depends on the relationship between the allowance account balance and the amount of the write-off. If the allowance account balance is sufficient to cover the amount being written off, then the net accounts receivable will not change. This is because the write-off is already accounted for in the allowance account. However, if the allowance account balance is not sufficient to cover the write-off, then the net accounts receivable will decrease.Rate this question:
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- 8.
Weiner Company's net credit sales were $500,000 during 2010. On december 21, the accounts receivable ending balance is $80,000. Assume the unadjusted balance of allowance for uncollectible accounts is a debit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on Decmeber 31 will be:
- A.
$5000
- B.
$6100
- C.
$5100
- D.
$5600
Correct Answer
B. $6100Explanation
The amount of bad debt expense recorded on December 31 will be $6100. This can be calculated by multiplying the ending accounts receivable balance ($80,000) by the estimated percentage of uncollectible accounts (7%). Therefore, $80,000 x 7% = $5600. Since the unadjusted balance of the allowance for uncollectible accounts is a debit of $500, this amount needs to be added to the calculated bad debt expense. Therefore, $5600 + $500 = $6100.Rate this question:
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- 9.
Weiner Company's net credit sales were $500,000 during 2010. On december 21, the accounts receivable ending balance is $80,000. Assume the unadjusted balance of allowance for uncollectible accounts is a credit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on Decmeber 31 will be:
- A.
$6100
- B.
$5100
- C.
$5600
- D.
$5000
Correct Answer
B. $5100Explanation
The amount of bad debt expense recorded on December 31 will be $5100. This can be calculated by multiplying the estimated uncollectible percentage (7%) by the accounts receivable balance ($80,000). 7% of $80,000 is $5,600. Since the allowance for uncollectible accounts already has a credit balance of $500, the bad debt expense will be the difference between the estimated amount and the existing credit balance, which is $5,600 - $500 = $5,100.Rate this question:
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- 10.
When a company collects a previously written off account:
- A.
The balance of Accounts Receivable will increase.
- B.
The balance of Bad Debt Expense will decrease.
- C.
The balance of Allowance for Uncollectible Accounts will increase
- D.
The balance of Service Revenue will increase.
Correct Answer
C. The balance of Allowance for Uncollectible Accounts will increaseExplanation
When a company collects a previously written off account, it means that they have successfully received payment for a debt that was previously considered uncollectible. As a result, the company will increase the balance of the Allowance for Uncollectible Accounts. This account is used to estimate and record potential losses from uncollectible accounts, so when a previously written off account is collected, it reduces the need for this allowance and therefore increases its balance.Rate this question:
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- 11.
On April 1, 2012, Nelson Inc. accepts a $100,000, 8% note. The note receivable and interest are receivable on March 31, 2013. On December 31, 2012, Nelson Inc. will record interest revenue of
- A.
$2000
- B.
$6000
- C.
$0
- D.
$8000
Correct Answer
B. $6000Explanation
The note was accepted on April 1, 2012, and the interest is receivable on March 31, 2013. This means that the note will earn interest for a total of 12 months. The note has a face value of $100,000 and an interest rate of 8%. Therefore, the interest earned for the year is $100,000 * 8% = $8,000. Since the interest is receivable on March 31, 2013, the interest revenue to be recorded on December 31, 2012, will be the amount earned for the portion of the year that has already passed, which is $8,000 * 9/12 = $6,000.Rate this question:
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- 12.
In times of rising inventory costs, which inventory method generally results in the highest ending inventory?
- A.
LIFO
- B.
FIFO
- C.
Weighted-Average
- D.
Lower-of-cost-or-market
Correct Answer
B. FIFOExplanation
In times of rising inventory costs, the FIFO (First-In, First-Out) inventory method generally results in the highest ending inventory. This is because FIFO assumes that the oldest items in inventory are sold first, which means that the remaining inventory consists of the most recently purchased and therefore higher-cost items. As a result, the value of the ending inventory under FIFO is higher compared to other inventory methods like LIFO (Last-In, First-Out) or Weighted-Average.Rate this question:
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- 13.
Fan company purchases inventory on account for $2500. The entry to record this purchase using a perpetual inventory system would include a:
- A.
Debit to inventory
- B.
Credit to accounts receivable.
- C.
Debit to Accounts Payable.
- D.
Debit to Purchases
Correct Answer
A. Debit to inventoryExplanation
The correct answer is Debit to inventory because when a company purchases inventory on account, it increases its inventory asset. Therefore, a debit entry is made to the inventory account to reflect the increase in inventory.Rate this question:
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- 14.
Weiss Company's beginning inventory was $10000. During the year, Weichtel purchases inventory costing $100000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $8000. How much is cost of goods available for sale?
- A.
$110,000
- B.
$100,000
- C.
$102,000
- D.
$98,000
Correct Answer
A. $110,000Explanation
The cost of goods available for sale is calculated by adding the beginning inventory to the purchases made during the year. In this case, the beginning inventory is $10,000 and the purchases are $100,000. Therefore, the cost of goods available for sale is $10,000 + $100,000 = $110,000.Rate this question:
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- 15.
Which of the following is generally found in the balance sheet of a manufacturing company?
- A.
Finished goods.
- B.
Work in process.
- C.
Raw materials
- D.
All three accounts are found in a manufacturer's balance sheet
Correct Answer
D. All three accounts are found in a manufacturer's balance sheetExplanation
All three accounts, finished goods, work in process, and raw materials, are typically found in the balance sheet of a manufacturing company. This is because a manufacturing company produces goods and therefore needs to account for the inventory of finished goods that are ready for sale, work in process that is still being produced, and raw materials that are yet to be used in the production process. Including all three accounts in the balance sheet provides a comprehensive overview of the company's inventory and production activities.Rate this question:
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- 16.
Schnell Company purchases inventory for $100,000 on account. Shipping terms are FOB destination; Schnell pays shipping cost of $5000. Prior to paying for the purchase, Schnell discovers that some of the inventory was damaged and receives an allowance of $7000. Net purchases are:
- A.
$100,000
- B.
$107,000
- C.
$98,000
- D.
$105,000
Correct Answer
C. $98,000Explanation
The correct answer is $98,000. This is because the net purchases are calculated by subtracting any allowances or discounts from the total purchases. In this case, the inventory was purchased for $100,000, but an allowance of $7,000 was received for damaged inventory. Therefore, the net purchases would be $100,000 - $7,000 = $93,000. Additionally, the shipping cost of $5,000 is not included in the calculation of net purchases. Therefore, the final net purchases amount is $93,000 + $5,000 = $98,000.Rate this question:
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- 17.
At the end of the year, Marline Corporation determines that its ending inventory ahs a cost of $2000 and a market value of $1900. What would the effect(s) of the adjustment to write-down inventory to market value?
- A.
Increase to net income.
- B.
No effect on net income and ending inventory
- C.
Increase in cost of ending inventory
- D.
Decrease in net income
Correct Answer
D. Decrease in net incomeExplanation
The adjustment to write-down inventory to market value would result in a decrease in net income. This is because the market value of the inventory is lower than its cost, indicating a potential loss. By adjusting the value of the inventory to its market value, the company recognizes this loss, which reduces its overall net income.Rate this question:
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- 18.
Weichtel Company's beginning inventory was $20,000. During the year, Weichtel purchases inventory costing $100,000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $28,000. How much was cost of goods sold for the year?
- A.
$148,000
- B.
$108,000
- C.
$92,000
- D.
$100,000
Correct Answer
C. $92,000Explanation
The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and the purchases. In this case, the beginning inventory is $20,000 and the purchases are $100,000, so the total inventory available for sale is $120,000. Subtracting the ending inventory of $28,000 from this total gives us a cost of goods sold of $92,000.Rate this question:
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- 19.
Snow company's net sales revenue is $200,000, its cost of goods sold is $110,000 and its operating income is $20,000. How much are Snow Company's operating expenses?
- A.
$90,000
- B.
$70,000
- C.
$20,000
- D.
$50,000
Correct Answer
B. $70,000Explanation
Snow Company's operating expenses can be calculated by subtracting the cost of goods sold from the net sales revenue. In this case, the cost of goods sold is $110,000 and the net sales revenue is $200,000. Subtracting $110,000 from $200,000 gives us $90,000. Therefore, Snow Company's operating expenses are $90,000.Rate this question:
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- 20.
Winner Company purchases 100 units of inventory from Neue Company for $1000 on account. To encourage early payment, Neue Company offers the terms 2/10, n/30, If Winner pays nine days after the purchase, the cost of its purchase will be:
- A.
$1020
- B.
$1000
- C.
$980
- D.
$1080
Correct Answer
C. $980Explanation
Neue Company offers a discount of 2% if the payment is made within 10 days. Since Winner pays nine days after the purchase, they qualify for the discount. The total cost of the purchase is $1000, but with the discount, Winner only needs to pay 98% of the total cost. Therefore, the cost of its purchase will be $1000 * 0.98 = $980.Rate this question:
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- 21.
For a manufacturing company, the cost of items not yet complete at the end of the period are shown in the
- A.
Work in process account
- B.
Cost of goods sold account
- C.
Finished goods account
- D.
Raw materials account
Correct Answer
A. Work in process accountExplanation
The cost of items not yet complete at the end of the period are shown in the Work in process account. This account is used to track the cost of materials, labor, and overhead that have been incurred but are still in the process of being converted into finished goods. It represents the value of partially completed products and allows the company to monitor the costs associated with the production process. The Work in process account is typically adjusted at the end of the period to reflect the current value of the unfinished goods.Rate this question:
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- 22.
Suppose that Witchel Company's ending inventory is understated by $500 at the end of the year. If the error is not discovered, the company's gross profit for the year will be
- A.
Overstated
- B.
The effect of the error will depend on the sales price of the inventory
- C.
Stated correctly
- D.
Understated
Correct Answer
D. UnderstatedExplanation
If Witchel Company's ending inventory is understated by $500 at the end of the year and the error is not discovered, it means that the value of the inventory is lower than it should be. This will result in the cost of goods sold being higher than it should be, which in turn will result in a lower gross profit for the year. Therefore, the correct answer is that the gross profit will be understated.Rate this question:
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- 23.
Which cost flow assumption generally results in the lowest reported amount of net income in periods of rising inventory costs?
- A.
Weighted-Average
- B.
Income will be the same under each assumption
- C.
LIFO
- D.
FIFO
Correct Answer
C. LIFOExplanation
LIFO (Last-In, First-Out) is a cost flow assumption that generally results in the lowest reported amount of net income in periods of rising inventory costs. This is because LIFO assumes that the most recently purchased inventory is sold first, which means that the cost of goods sold reflects the higher, more recent costs. As a result, when inventory costs are rising, LIFO will assign higher costs to the cost of goods sold, leading to lower reported net income.Rate this question:
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