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Intermediate Accounting 7e Practice Exam Chapters 6-9

By Edward Walker,2015-01-08 21:18
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Intermediate Accounting 7e Practice Exam Chapters 6-9

    Practice Exam Chapters 6-9

Problem I

Short answer exercises (Answer in the space provided)

    1. On April 30, 2013, Jonathan Wells purchased a big screen TV from the Great Guys

    Department Store for $2,600. Jonathan will make 12 equal monthly payments,

    beginning May 31, 2013. The annual interest rate implicit in this agreement is 12%.

Required:

    Calculate the monthly payment necessary for Jonathan to pay for his purchase.

    2. Mary Riley is about to go to court for injuries sustained in an accident. The insurance

    company of the other party has offered Mary three alternatives to settle the case

    before it goes to trial:

    1. $200,000 cash payment to be paid immediately.

     A 10-year annuity of $24,000 beginning immediately. 2.

    3. A 10-year annuity of $28,000 beginning in five years.

Required:

    Mary has decided she wants to settle the case before it goes to trial. Which alternative should she choose assuming that she is able to invest funds at a 5% rate?

Problem II

    The Tidwell Company began 2013 with accounts receivable of $180,000 and an allowance for uncollectible accounts of $12,000 (credit balance). Bad debt expense for the year was $15,000 and the ending balance in the allowance for uncollectible accounts account was $17,000. The accounts receivable turnover ratio for 2013 was 10.0. This ratio was calculated using the average of gross accounts receivable in the denominator (that is, [$180,000 + year-end accounts receivable] divided by 2). Also, the company’s inventory turnover ratio for 2013 was 6.0, its average inventory for the year $200,000, and its gross profit ratio 50%.

Required:

    1. What was the amount of accounts receivable written off during the year? 2. What was the amount of cash collected from customers during the year? (All sales

    are made on a credit basis and there were no collections of previously written off

    receivables or sales returns.) Be sure to show all your work!

    3. Disregard your answer to requirement 2 and the turnover ratios given in the problem,

    and assume that net sales for the year were $3,000,000 and accounts receivable at the

    end of the year totaled $400,000. What was the amount of cash collected from

    customers during the year?

Problem III

    Monsanto Company is a leading global provider of agricultural products for farmers. The following information was included in disclosure notes in the company's 2011 financial statements:

    Inventory Valuation (in part)

    Agricultural Productivity. The cost of the Agricultural Productivity segment

    inventories in the United States (approximately 14 percent and 10 percent of

    total inventories in the United States (approximately 10 percent as of August 31,

    2011 and 14 percent as of Aug. 31, 2010) is determined by using the last-in,

    first-out (LIFO) method, which generally reflects the effects of inflation or

    deflation on cost of goods sold sooner than other inventory cost methods. The

    cost of inventories outside of the United States, as well as supplies inventories

    in the United States, is determined by using the first-in, first-out (FIFO) method;

    FIFO is used outside of the United States because the requirements in the

    countries where Monsanto maintains inventories generally do not allow the use

    of the LIFO method. Inventories at FIFO approximate current cost.

    If all inventories had been valued on a FIFO basis, inventories would have been

    $186 million and $111 million higher than reported at August 31, 2011 and

    , respectively. 2010

The company’s effective tax rate is approximately 30%.

Required:

    1. By how much would year 2011 ending inventory have been different if the company

    used the FIFO inventory method for its entire inventory? Your answer must state if it

    would have been higher or lower and by how much.

    2. By how much would year 2011 net income have been different if the company used

    the FIFO inventory method for its entire inventory? Your answer must state if it

    would have been higher or lower and by how much. (Net income is the bottom line

    of the income statement.)

    3. By how much higher (lower) would retained earnings have been at the end of 2011 if

    Monsanto had used the FIFO inventory method instead of LIFO for its entire

    inventory? Again, your answer must state if it would have been higher or lower and

    by how much.

Problem IV

    Under your guidance, the Santa Clara Sporting Goods Store installed the retail method of accounting for its merchandise inventory as of January 1, 2013. When you undertook the preparation of the store's financial statements at June 30, 2013, the following data were available:

     Cost Retail

    Inventory, January 1 $28,900 $ 40,000

    Purchases (including freight 86,200 111,800

    charges)

    Purchase returns 1,500 1,800

    Markups 15,000

    Markdowns 4,000

    Net sales 116,000

Required:

    1. Prepare a schedule to compute the Santa Clara Sporting Goods Store's June 30, 2013

    ending inventory under the retail method of accounting for inventories. The inventory

    is to be valued at cost using the conventional retail method (average cost, lower-of-

    cost-or-market approximation technique).

    2. Disregarding your solution to requirement 1, assume that you computed the June 30,

    2013, inventory at retail to be $44,100. Also assume that the cost-to-retail percentage

    for 2013 purchases is 80%. The specific price level has increased from 100 (1.00) at

    January 1, 2013, to 105 (1.05) at June 30, 2013. Prepare a schedule to compute the

    June 30, 2013 ending inventory applying the dollar-value LIFO retail method.

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