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I. Multiple Choice (33 pts.) Record answer in blank provided.
_____1. Generally, which inventory costing method: a.) approximates most closely the current cost for Cost of Goods Sold and Ending Inventory; and b,) will give you the lowest Net Income? Assume increasing inventory levels over time and increasing prices.
Cost of Goods Sold Ending Inventory Lowest Net Income a. FIFO LIFO FIFO b. LIFO FIFO FIFO c. FIFO FIFO FIFO d. FIFO FIFO LIFO e. LIFO LIFO LIFO f. LIFO FIFO LIFO g. FIFO LIFO LIFO h. LIFO LIFO FIFO
_____ 2. The original cost of an inventory item is below the replacement cost and below the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. Under the lower-of-cost-or-market method, the inventory item should be priced at its:
a. replacement cost b. net realizable value c. net realizable value less the normal profit margin d. original cost
_____ 3. Which of the following items should be excluded in “X” company’s inventory at the balance sheet date?
a. Goods sold to a customer which are in transit and shipped f.o.b. destination. b. “Y” Company’s Finished Goods held by “X”company for sale on consignment. c. Goods in transit which were purchased from our supplier f.o.b. destination. d. (a) and (b) should be excluded e. (a) and (c) should be excluded f. (b) and (c) should be excluded g. (a), (b) and (c) should be excluded
_____4. When a firm sells a receivable to a finance company and at the same time they do not transfer the risk of future collectibility, this is called:
a. pledging a receivable b. collateralizing the receivable c. using the net method of factoring d. discounting the receivable e. transferring the receivable with recourse f. none of the above
_____5. KC Corporation's warehouse burned in the latter part of 19Y. Records rescued from a fireproof safe reveal:
Beginning inventory.......................... $100, Purchases.................................... 234, Purchase returns............................. 9, Sales........................................ 350, Mark up on Cost......................... 33 1/3 %
The best estimate of actual inventory loss (not considering insurance) is: a. $ 25, b. $ 62, c. $ 87, d. $ 91, e. $116, f. Cannot be estimated with the above information.
_____ 6. During 1999, Sloan, Inc. began a project to construct a new corporate headquarters. The following are costs incurred by Sloan for this project:
" $1,000 government fine due to EPA land use restriction violations. " Interest of $147,000 on construction financing incurred during completion of construction. (10% of accumulated expenditures relate to the purchase of the land.) " Interest of $186,000 on construction financing paid after construction. (10% of accumulated expenditures relate to the purchase of the land.) " $12,000 architecture fees. " $65,000 cost of razing existing building on land.
What amount of the above costs should be capitalized to the cost of the land? a. $ 65, b. $ 66, c. $ 77, d. $ 79, e. $ 80, f. $ 98, g. $ 99,
_____ 10. What is the 2002 Ending Inventory using LIFO Perpetual Inventory System?
a. 3, b. 3, c. 4, d. 5, e. 6, f. 7, g. 8, h. 9, i. 10, j. 10,
_____ 11. 2002 Beginning inventory is understated by $700; 2002 Ending inventory is overstated by $250. Assuming these errors are not caught and ignoring income taxes, 2003 Net Income will be:
a. Overstated by $ b. Understated by $ c. Overstated by $ d. Understated by $ e. A correct balance.
II. BAD DEBTS (13 pts.) Beal company estimates their allowance for bad debts in a two step process. During the year, on a monthly basis, they record an estimate of bad debts as 2% of net credit sales. Their final adjusting entry at 12/31 is based on an aging of the accounts receivable as of 12/31. They provide you with the following information for the year 2000:
Allowance for Bad Debts at 1/1/00: $ 22,000 CR Credit Sales from 1/1/00 - 11/30/00: 2,825, Credit Sales Returns 1/1/00 - 11/30/00, no returns occurred in December 125, Accounts written off as of 11/30/00, no accounts were written off in December. 28,
Aging Schedule at 12/31/00: Day's Old Amount Est. Uncollectible 0-30 $250,000 1% 31-89 100,000 15% 90 or > 40,000 60%
REQUIRED: i. Record the SUMMARY journal entry for the accounts written off through 11/30/00.
ii Record the SUMMARY journal entry for the monthly bad debt adjustments through 11/30/00.
iii. Record the necessary adjusting entry at 12/31/00.
iv. Total Bad Debt Expense for 2000 and the ending balance in the Allowance Account at 12/31/00 (after adjustment) is what?
Bad Debt Expense________________ Allow. for Bad Debts (12/31/00)_______________
IV. Dollar Value LIFO (12 pts.)
Basil Corp. adopts Dollar Value LIFO inventory in 2000. They pool all their inventory together. Their ending inventory (units and unit cost) at each year END for their two types of inventory is: Ending Inventory: 1999 2000 2001 2002 Unit Unit Unit Unit Units Cost Total Units Cost Total Units Cost Total Units Cost Total x2 model 550 $12 $6,600 400 $11 $ 4,400 600 $19 $11,400 450 $24 $10, x5 model 200 20 4,000 210 23 4,830 500 24 12,000 500 25 12,
FOR a. and b. ROUND ALL COST PRICE INDEXES TO 2 DECIMAL PLACES (e.g., 1.89)
a. How much is the Base Layer Cost of the Inventory?
b. What is the 2000 layer cost price index?
Ignore the cost price indices derived for a. and b. above, ASSUME and USE the following cost price indices for the remainder of this problem :
Base Layer: 1.00 (100%); 2000 New Layer: 1.10 (110%); 2001 New Layer: 1.25 (125%); 2002 New Layer 1.50 (150%).
c. What is the Dollar Value LIFO ending inventory valuation at December 31, 2000?
d. If purchases in 2001 are $84,000, what is the Cost of Goods Sold for the year 2001?
V. Retail Inventory Method (12 pts.)
Presented below is information related to the Raffle Company's inventory for 2002.
Cost Retail Beginning Inventory $ 62,000 $100, Purchases (net) 515,000 640, Net Additional Markups 20, Net Markdowns 38, Sales 632,
Required: a. Provide the numbers to be used in calculating the cost-to-retail ratios for ending inventory, for each of the following methods. (you need only to provide the numerator & denominator for the ratios, rather than calculating the ratio itself).
i. Average Cost-LCM ( Conventional LCM) [---------------------]
ii. Relevant Purchase layer ratio for LIFO–Stable Dollar [----------------------]
b. Calculate the Average Cost ( NOT LCM) estimate of ending inventory.
c. Assuming b. above , what is the estimate of the cost of goods sold expense for 2002?
d. Now ASSUME that Raffle adopted dollar value LIFO-retail-inventory as of the beginning of
- Beginning inventory for 2002 is the base inventory. The price index at the end of 2002 was 1.35. Use DOLLAR-VALUE-LIFO-RETAIL, and assume retail ending inventory current value is $71,550.
What is the base value of the 2002 retail ending inventory?
What will be the reported cost of the inventory on the 2002 balance sheet?
VII. Interest Capitalization (12pts)
Goodrich began construction on an office building on May 1, 2002. The following expenditures were incurred during 2002 for construction: Date Expenditures 5/1/02 $ 60, 8/1/02 40, 10/1/02 65, 12/1/02 220,
The expenditure on 5/1 was for the purchase of land for the office building. The office was completed on July 1, 2003 (14 months construction). On 1/1/02, a 2-year construction loan was obtained amounting to $150,000 at 5% interest. The only other debt outstanding during 2002 was a $700,000, 10%, 20-year bond payable dated January 1, 1996.
i. The weighted average accumulated expenditures on the construction project for the year 2002 is how much?
ii. How much is the actual interest cost incurred for 2002?
iii. Independent of your answer in (i) above , assume the 2002 average accumulated expenditures for the construction project was $230,000.
a. How much is total 2002 AVOIDABLE interest if the Average capitalization interest method is used?
b. How much is total 2002 AVOIDABLE interest if the Specific capitalization interest method is used?
VIII. EXTRA CREDIT (3 POINTS)
During Fiscal year 2002 the retailer JQ Penny’s Sales Revenue increased 5% as compared to the prior year. Their Cost of Goods Sold Expense decreased 25% in 2002 as compared to 2001. This led to a 31% increase in Gross Profit levels for 2002 as compared to 2001. Since JQ Penny’s started their business ( years ago), there has tended to be inflation over time and in 2002 retail inventory costs have increased about 6%. Their year end inventory levels dropped dramatically in 2002 as compared to 2001. This was due to management’s belief that there would be a severe economic downturn in early 2003 and they did not want to be overstocked. JQ Penny’s uses Retail Dollar Value LIFO to account for inventory.
What would most likely account for the dramatic decrease in cost of goods sold and increase in gross profit, given the above scenario?
