Becker Week 4

A. Decreases both accounts receivable and the allowance for uncollectible accounts.

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account:

A. Decreases both accounts receivable and the allowance for uncollectible accounts.

B. Decreases accounts receivable and increases the allowance for uncollectible accounts.

C. Increases the allowance for uncollectible accounts and decreases net income.

D. Decreases both accounts receivable and net income.

$1,400,000

Cook Co. had the following balances at December 31, Year 2:

Cash in checking account: 350,000

Cash in money market account: 250,000

U.S. Treasury bill, purchased 12/1/Year 2, maturing 2/28/Year 3: 800,000

U.S. Treasury bond, purchased 3/1/Year 2, maturing 2/28/Year 3: 500,000

Cook's policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, Year 2, balance sheet?

C. Quoted market prices on a stock exchange for an identical asset.

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

A. Discounted cash flow of Favre's operations.

B. Quoted market prices available from a business broker for a similar asset.

C. Quoted market prices on a stock exchange for an identical asset.

D. Historical performance and return on Driver's investment in Favre.

A. LIFO/FIFO

Generally, which U.S. GAAP inventory costing method approximates most closely the current cost for each of the following?

Cost of Goods Sold/Ending Inventory

A. LIFO/FIFO

B. LIFO/LIFO

C. FIFO/FIFO

D. FIFO/LIFO

$1,250,000

Willem Co. reported the following liabilities at December 31, Year 1:

Accounts payable-trade: 750,000

Short-term borrowings: 400,000

Mortgage payable, current portion $100,000: 3,500,000

Other bank loan, matures June 30, Year 2: 1,000,000

The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem's audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1?

$118,220

The following information pertained to Azur Co. for the year:

Purchases: 102,800

Purchase discounts: 10,280

Freight-in: 15,420

Freight-out: 5,140

Beginning inventory: 30,840

Ending inventory: 20,560

What amount should Azur report as cost of goods sold for the year?

III & IV

Which of the following statements regarding fair value is/are correct?

I. The fair value of an asset or liability is specific to the entity making the fair value measurement.

II. Fair value is the price to acquire an asset or assume a liability.

III. Fair value includes transportation costs, but not transaction costs.

IV. The price in the principal market for an asset or liability will be the fair value measurement.

B. Yes/No

Which method of recording uncollectible accounts expense is consistent with accrual accounting?

Allowance/Direct write-off

A. Yes/Yes

B. Yes/No

C. No/Yes

D. No/No

$64,000

Clear Co.'s trial balance has the following selected accounts:

Cash (includes $10,000 in bond sinking fund for long-term bond payable): $50,000

Accounts receivable: 20,000

Allowance for doubtful accounts: 5,000

Deposits received from customers: 3,000

Merchandise inventory: 7,000

Unearned rent: 1,000

Investment in trading securities: 2,000

What amount should Clear report as total current assets in its balance sheet?

D. $15,000

Fireworks, Inc. had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?

A. $50,000

B. $35,000

C. $18,000

D. $15,000

A. Fair value is a market-based measurement.

Which of the following statements is correct regarding fair value measurement?

A. Fair value is a market-based measurement.

B. Fair value is an entity-specific measurement.

C. Fair value measurement does not consider risk.

D. Fair value measurement does not consider restrictions.

C. Milton will retain control of the receivables.

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

A. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

B. Good Neighbor Financing will assume the responsibility of collecting the receivables.

C. Milton will retain control of the receivables.

D. Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.

B. The impairment approach.

Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?

A. The market approach.

B. The impairment approach.

C. The income approach.

D. The cost approach.

C. Current liabilities of $30,000, long-term liabilities of $100,000.

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

A. Long-term liabilities of $130,000.

B. Current liabilities of $130,000.

C. Current liabilities of $30,000, long-term liabilities of $100,000.

D. Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.

A. Increase/No effect

How should the following costs affect a retailer's inventory?

Freight In/Interest on Inventory Loan

A. Increase/No effect

B. Increase/Increase

C. No effect/Increase

D. No effect/No effect

B. $100,000

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

A. $0

B. $100,000

C. $400,000

D. $500,000

A. $683,000

Doren Co.'s officers' compensation expense account had a balance of $490,000 at December 31, Year 1, before any appropriate year-end adjustment relating to the following:

No salary accrual was made for the week of December 25-31, Year 1. Officers' salaries for this period totaled $18,000 and were paid on January 5, Year 2.

Bonuses to officers for Year 1 were paid on January 31, Year 2 in the total amount of $175,000.

The adjusted balance for officers' compensation expense for the year ended December 31, Year 1, should be:

A. $683,000

B. $665,000

C. $508,000

D. $490,000

D. No effect/Increase

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

Accounts receivable/Allowance for uncollectible accounts.

A. Increase/Decrease

B. Increase/No effect

C. No effect/Decrease

D. No effect/Increase

C. Decrease/Decrease

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?

Ending inventory/Net income

A. Increase/Increase

B. Increase/Decrease

C. Decrease/Decrease

D. Decrease/Increase

$55,000

A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's accounting records showed the following:

Inventory, January 1: 35,000

Purchases, January 1 through May 1: 200,000

Sales, January 1 through May 1: 250,000

Inventory not damaged by flood: 30,000

Gross profit percentage on sales: 40%

What amount of inventory was lost in the flood?

C. $2,000,000

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?

A. $5,000,000

B. $3,000,000

C. $2,000,000

D. $0

C. $80,000

On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense?

A. $60,000

B. $75,000

C. $80,000

D. $95,000

$240,000

At December 31, Year 1, Kale Co. had the following balances in the accounts it maintains at First State Bank:

Checking account #101: 175,000

Checking account #201: (10,000)

Money market account: 25,000

90-day certificate of deposit, due 2/28/Year 2: 50,000

180-day certificate of deposit, due 3/15/Year 2: 80,000

Kale classifies investments with original maturities of three months or less as cash equivalents. In its December 31, Year 1, balance sheet, what amount should Kale report as cash and cash equivalents?

A. The retained earnings were overstated by $1,000.

A firm's ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?

A. The retained earnings were overstated by $1,000.

B. The cost of goods sold was overstated by $1,000.

C. The cost of goods available for sale was overstated by $1,000.

D. The gross margin was understated by $1,000.

C. Accrued as a current liability.

Leisure Time Corp. follows the practice of paying all employees for vacation. The vacation pay is not vested, but it carries over for one year if unused. The obligation for earned but unused vacation should be:

A. Accrued or not accrued according to the judgment of management.

B. Disclosed as a contingent liability.

C. Accrued as a current liability.

D. Expensed when paid.

$408,000

The following information applied to Fenn, Inc. for the current year:

Merchandise purchased for resale: 400,000

Freight in: 10,000

Freight out: 5,000

Purchase returns: 2,000

Fenn's current year inventoriable cost was:

A. Aging the receivables.

A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on:

A. Aging the receivables.

B. Direct write off.

C. Gross sales.

D. Credit sales less returns and allowances.

B. $527,500

Walt Co. adopted the U.S. GAAP dollar-value LIFO inventory method as of January 1, when its inventory was valued at $500,000. Walt's entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31 inventory was $577,500 at current year cost, and $525,000 at base year cost. What was Walt's dollar-value LIFO inventory at December 31?

A. $525,000

B. $527,500

C. $552,500

D. $577,500

C. Unobservable inputs for the asset.

Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset?

A. Quoted prices in active markets for identical assets.

B. Quoted prices for similar assets in active markets.

C. Unobservable inputs for the asset.

D. Inputs other than quoted prices that are observable for the asset.

A. Increase the allowance for uncollectible accounts.

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would:

A. Increase the allowance for uncollectible accounts.

B. Increase net income.

C. Decrease the allowance for uncollectible accounts.

D. Have no effect on the allowance for uncollectible accounts.

B. $100,000 for year 2 and $0 for year 3.

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?

A. $0 for year 2 and $100,000 for year 3.

B. $100,000 for year 2 and $0 for year 3.

C. $100,000 for year 2 and $100,000 for year 3.

D. $200,000 for year 2 and $0 for year 3.

B. Level 2.

McClave Enterprises used quoted prices for similar assets as the basis for determining the fair value of its investments. McClave's inputs for determining the fair values of the investments would be classified as which level in the fair value hierarchy?

A. Level 1.

B. Level 2.

C. Level 3.

D. Level 4.

$45,000

Mill Co.'s trial balance included the following account balances at December 31, Year 1:

Accounts payable: 15,000

Bonds payable, due Year 2: 25,000

Discount on bonds payable, due Year 2: 3,000

Dividends payable 1/31/Year 2: 8,000

Notes payable, due Year 3: 20,000

What amount should be included in the current liability section of Mill's December 31, Year 1, balance sheet?

$16,000

A company has the following liabilities at year-end:

Mortgage-note payable; $16,000 due within 12 months: 355,000

Short-term debt that the company is refinancing with long-term debt: 175,000

Deferred tax liability arising from depreciation: 25,000

What amount should the company include in the current liability section of the balance sheet?

$4,800

On March 31, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of Vale's trade accounts receivable at that date revealed the following:

Age/Amount/Estimated uncollectible

0-30 days/$60,000/5%

31-60 days/4,000/10%

Over 60 days/2,000/$1,400

What amount should Vale report as allowance for uncollectible accounts in its March 31 balance sheet?

C. The discount rate Farmer Joe uses in determining the discounted cash flow value of his corn inventory.

Farmer Joe is trying to determine the fair value of his corn inventory. Which of the following would be considered a Level 3 input in this process?

A. The quoted price for a bushel of corn at the Kansas exchange (an active exchange to which Farmer Joe has access).

B. A quoted price for a bushel of sorghum (a crop that is similar to corn) at the Missouri exchange (an active exchange to which Farmer Joe has access).

C. The discount rate Farmer Joe uses in determining the discounted cash flow value of his corn inventory.

D. A quoted price for a bushel of corn at the Delaware exchange (an exchange to which Farmer Joe has access but which rarely buys corn).

C. Overstated/Understated

A company uses a periodic inventory system and has its cost of ending inventory understated by $4,000. Which of the following describes the effects of this error on the company's current year's cost of goods sold and net income, respectively?

Cost of Goods Sold/Net Income

A. Understated/Understated

B. Understated/Overstated

C. Overstated/Understated

D. Overstated/Overstated

D: 35,000

A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets:

Market/Quoted Price

A: $20,000

B: 25,000

C: 30,000

D: 35,000

What is the fair value of the financial asset?

C. Specific uncollectible account is written off.

When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a (an):

A. Account previously written off is collected.

B. Account previously written off becomes collectible.

C. Specific uncollectible account is written off.

D. Provision for uncollectible accounts is recorded.

C. $22,500

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?

A. $0

B. $14,200

C. $22,500

D. $30,000

$103

ABC Company owns stock in XYZ Company. The stock is traded on the New York Stock Exchange and the London Stock Exchange. Stock price information from the two stock exchanges on December 31 is as follows:

Exchange/Quoted Stock Price/Transaction Costs/Net

New York/$103/$1/$102

London/$106/$5/$101

What is the fair value of the XYZ stock on December 31 if there is no principal market for the stock?

C. Has no effect on net income.

Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account:

A. Increases the allowance for uncollectible accounts.

B. Has no effect on the allowance for uncollectible accounts.

C. Has no effect on net income.

D. Decreases net income.

B. Overstated/Overstated

A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?

Current assets/Gross profit

A. Understated/Overstated

B. Overstated/Overstated

C. Understated/Understated

D. Overstated/Understated

A. The goods should be included in ending inventory of the consignor.

What is the appropriate treatment for goods held on consignment?

A. The goods should be included in ending inventory of the consignor.

B. The goods should be included in ending inventory of the consignee.

C. The goods should be included in cost of goods sold of the consignee only when sold.

D. The goods should be included in cost of goods sold of the consignor when transferred to the consignee.

D. Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross.

Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction, which is best described as a:

A. Loan from Ross collateralized by Gar's accounts receivable.

B. Loan from Ross to be repaid by the proceeds from Gar's accounts receivable.

C. Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar.

D. Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross.

D. $850,000

Farmer Joe owns farmland along a busy highway. Farmer Joe originally paid $500,000 for this land. The land sat on top of a reservoir of oil, which when pumped out resulted in total depletion expenses to Farmer Joe of $125,000. The farmland currently has a value of $600,000 if it is used as farmland; however, a developer who wants to build a shopping plaza on the farmland has offered Farmer Joe $850,000 for the farmland. What is the fair value of the farmland?

A. $375,000

B. $500,000

C. $600,000

D. $850,000

A. FIFO (first in, first out).

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

A. FIFO (first in, first out).

B. LIFO (last in, first out).

C. Moving average.

D. Weighted average.

$365,000

Bake Co.'s trial balance included the following at December 31, Year 1:

Accounts payable: 80,000

Bonds payable, due Year 2: 300,000

Discount on bonds payable: 15,000

Deferred income tax liability: 25,000

The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in Year 2. What amount should be included in the current liability section of Bake's December 31, Year 1, balance sheet?

A. $68,000

On April 1, Aloe, Inc. factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables?

A. $68,000

B. $68,400

C. $72,000

D. $76,000

A. FIFO.

Which U.S. GAAP inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

A. FIFO.

B. Dollar-value LIFO.

C. Weighted average.

D. Moving average.

B. Instrument-by-instrument basis.

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?

A. A portion of an asset or liability.

B. Instrument-by-instrument basis.

C. Type-by-type basis.

D. At the entity level.

D. A noncurrent asset.

For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as:

A. An expense.

B. A current asset.

C. A noncurrent liability.

D. A noncurrent asset.

$74

There are multiple active markets for a financial asset with different observable market prices:

Market/Quoted Price/Transaction Costs

A: $76/$5

B: $74/$2

There is no principal market for the financial asset. What is the fair value of the asset?

$9,000

The following information pertains to Tara Co.'s accounts receivable at December 31, Year 2:

Days outstanding/Amount/Estimated % uncollectable

0-60: $120,000/1%

61-120: 90,000/2%

Over 120: 100,000/6%

During Year 2, Tara wrote off $7,000 in receivables and recovered $4,000 that had been written off in prior years. Tara's December 31, Year 1, allowance for uncollectible accounts was $22,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report at December 31, Year 2?