Practice Exam Chapters 6-9
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%.
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.
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?
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%.
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?
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%.
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.
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:
Inventory, January 1 $28,900 $ 40,000
Purchases (including freight 86,200 111,800
Purchase returns 1,500 1,800
Net sales 116,000
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.