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ACC 2101 Principles of Accounting

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									Fall 2005
                                                    Exam 2
                                  Principles of Accounting
Name___________________________________

PART I. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question. (20 points)

      1) Which characteristic will NOT be found in an effective system of internal control?
          A) a combination of duties
          B) documents and records
          C) a separation of duties
          D) competent, reliable, and ethical personnel

      2) The double-declining-balance method of depreciation causes:
          A) the same amount of depreciation in early years of an asset's use as compared to
             other depreciation methods
          B) less depreciation in early years of an asset's use as compared to other depreciation
             methods
          C) an unacceptable depreciation method according to GAAP
          D) more depreciation in early years of an asset's use as compared to other depreciation
             methods

      3) An unrealized loss on a marketable security means that:
          A) the value of the security at the time of sale exceeded the historical cost of the
             security
          B) the current market value of the security exceeds its original cost
          C) the historical cost of the security exceeds its current market value
          D) the original purchase price of the security exceeded the historical cost

     4) The two accepted methods of recording bad debts are the:
         A) receivables method and the aging method
         B) allowance method and the aging method
         C) allowance method and the direct write-off method
         D) direct write-off method and the percentage-of-sales method

      5) If a bookkeeper mistakenly recorded a disbursement as $540 instead of the correct
         amount of $450, the error should be shown on the bank reconciliation as a:
           A) $450 addition to the books                B) $90 deduction from the books
           C) $450 deduction from the books             D) $90 addition to the books

      6) Trading securities are reported on the balance sheet at:
          A) amortized cost
          B) current market value
          C) original purchase price
          D) historical cost adjusted for investment income




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Fall 2005


      7) Treating a capital expenditure as an immediate expense:
          A) overstates assets and overstates owners' equity
          B) overstates expenses and understates net income
          C) understates expenses and overstates owners' equity
          D) understates expenses and understates assets

      8) If ending inventory on December 31, 2006, is overstated, then:
           A) gross profit for the year ended December 31, 2007, will be understated
           B) gross profit for the year ended December 31, 2006, will be understated
           C) cost of goods sold for the year ended December 31, 2006, will be overstated
           D) cost of goods sold for the year ended December 31, 2007, will be understated

      9) Which of the following statements is true?
          A) Accumulated depreciation is that portion of a plant asset's cost that has been
             recorded previously as an expense.
          B) Depreciation means that a business sets aside cash to replace assets as they become
             fully depreciated.
          C) Accumulated depreciation represents a growing amount of cash to be used to
             replace the existing asset.
          D) Depreciation is a process of objective valuation.

    10) When inventory prices are increasing, the FIFO costing method will generally result in a:
         A) higher gross profit than under LIFO
         B) lower inventory value than under LIFO
         C) higher cost of goods sold than under LIFO
         D) lower owners' equity balance than under LIFO




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Fall 2005
PART II. PROBLEMS

Problem 1. The following data have been gathered for Gilbert Corporation for the month ended September 30,
2005. Prepare a bank reconciliation based on the following information (10 points):

      The bank statement reveals a balance of $3,536
      The September 30, 2007, book balance was $3,200
      There was an EFT deposit of $1,800 on the bank statement for the monthly rent from a tenant
      The bookkeeper had erroneously recorded a $500 check as $50. The check was to settle an account
       payable
      The bank statement revealed $50 in service charges
      Check #1572 for $260 and check #1606 for $285 were not returned with the bank statement
      A deposit made on September 29, 2007, for $1,250 did not appear on the bank statement
      A bank debit memo indicated an NSF check for $259




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Fall 2005
    Problem 2. Gilbert Corporation bought 1,000 shares of Microsoft on Aug 1st, 2004 at $25 per share. On
    Nov. 15th, 2004 they sold 600 shares for $26 per share. On Dec 31st, 2004, the price of Microsoft’s stock
    was $24.80. They sold the rest 400 shares on Feb 1st, 2005 for $25.20 each. Assume there is no transaction
    cost (e.g., commission, brokerage fee, etc.) and Gilbert Corporation’s fiscal year end is Dec 31st:

   (1) Journalize all transactions related to Gilbert Corporation’s short-term investment in 2004. (10 points)




   (2) What is the net impact of Gilbert Corporation’s investment in Microsoft’s stocks on their 2005 earnings?
       (5 points)




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Fall 2005
    Problem 3. Gilbert Corporation had the following information for it’s A/R, sales, Allowance for
    Uncollectible Accounts (AUA) in year 2004.

          Gilbert Corporation had $ 25,000 of A/R at the end of 2003 and $24,000 of A/R at the end of 2004
          Gilbert Corporation had 2,200 of credit balance of AUA at the end of 2003
          Gilbert Corporation’s sales in 2004 were $300,000
          Gilbert Corporation’s collection from customers in 2004 were $299,000
          Gilbert Corporation uses the percent-of-sales method to estimate uncollectible account expense and
           assume that 1% of the sales will be uncollectible

   (1) How much bad debts (or uncollectible A/R) did Gilbert write-off in 2004? (5 points)




   (2) What is the adjustment journal entry that is related to A/R Gilbert Corporation did at the end of 2004? (5
       points)




   (3) At the end of 2004, how much did customers owe to Gilbert Corporation? (2 points)




   (4) At the end of 2004, how much A/R did Gilbert Corporation expect to collect? (3 points)




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Fall 2005
Problem 4. Gilbert Corporation’s inventory record in October 2004 is as follows:

                      Date                   Units                  Unit Cost
Beginning             Oct 1st                30                     $45
Purchase              Oct 3rd                60                     $55
Purchase              Oct 10th               50                     $60
Purchase              Oct 20th               40                     $65

Gilbert Corporation sold 130 units of inventory in October 2004 for $80 each.

Questions:
   1) What would the cost-of-goods-sold be if Gilbert Corporation uses FIFO? [5 points]




   2) What would the ending balance of inventory be if Gilbert Corporation uses LIFO? [5 points]




   3) What would the gross profit be under the average-cost method? Round the unit cost to two decimals.
      [10 points]




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Fall 2005
Problem 5. On Jan 1st, 2001 Gilbert Corporation purchased a delivery truck. The original cost of the truck was
$60,000. The useful life of the truck was estimated to be 10 years (200,000 miles), and the residual value was
estimated to be $5,000. In 2002, the truck was driven for 25,000 miles.

Questions:
1) What was the depreciation expense for this truck in 2002 using straight-line, units-of-production, and
   double-declining balance methods?

Straight Line (3 points):




Units of Production (3 points):




Double Declining Balance (6 points):




2) Gilbert Corporation sold the truck at the end of year 2002 for $40,000. Assuming that the company used the
   double-declining balance method, please journalize this transaction. You must show your calculations to
   receive full credits. (8 points)




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Fall 2005
PART III. EXTRA CREDIT QUESTION:

The accountant of a local car dealership accidentally deleted the sales record. He researched other records and
found the following facts:

      The car dealership had 50 cars with an average cost of $15,000
      The car dealer made two purchases during this period: 20 cars at $14,000 each and 30 cars at $16,000
       each
      The car dealer had $500,000 of inventory when the sales record was deleted
      The car dealer uses the average cost method to measure inventory cost
      The gross profit margin of the car dealership is 20% on average

Based on the above facts, what is your estimate of the car dealership’s sales in this period till the record was
deleted? (10 points)




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Fall 2005
PART I. MULTIPLE CHOICE QUESTIONS

1. A                  2. D                   3. C                   4. C                5. D
6. B                  7. B                   8. A                   9. A                10. A


PART II. PROBLEMS

Problem 1. The following data have been gathered for Gilbert Corporation for the month ended September 30,
2005. Prepare a bank reconciliation based on the following information (10 points):

      The bank statement reveals a balance of $3,536
      The September 30, 2007, book balance was $3,200
      There was an EFT deposit of $1,800 on the bank statement for the monthly rent from a tenant
      The bookkeeper had erroneously recorded a $500 check as $50. The check was to settle an account
       payable
      The bank statement revealed $50 in service charges
      Check #1572 for $260 and check #1606 for $285 were not returned with the bank statement
      A deposit made on September 29, 2007, for $1,250 did not appear on the bank statement
      A bank debit memo indicated an NSF check for $259

                                             Gilbert Corporation
                                             Bank Reconciliation
                                             September 30, 2007

                       Bank Balance             $3,536            Book Balance        $3,200
                   Add:                                    Add:
                          Deposit in transit     1,250          EFT collection        1,800
                   Deduct:                                 Deduct:
                            Outstanding checks                     Book error          (450)
                            #1572                  (260)           NSF check           (259)
                          #1606                   (285)          Service charge        (50)
                   Adjusted Balance          $4,241         Adjusted Balance      $4,241




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Fall 2005
    Problem 2. Gilbert Corporation bought 1,000 shares of Microsoft on Aug 1st, 2004 at $25 per share. On
    Nov. 15th, 2004 they sold 600 shares for $26 per share. On Dec 31st, 2004, the price of Microsoft’s stock
    was $24.80. They sold the rest 400 shares on Feb 1st, 2005 for $25.20 each. Assume there is no transaction
    cost (e.g., commission, brokerage fee, etc.) and Gilbert Corporation’s fiscal year end is Dec 31st:

   (3) Journalize all transactions related to Gilbert Corporation’s short-term investment in 2004. (10 points)

   Aug 1st    Short-term Investment                 25,000
                     Cash                                    25,000

   Nov 15th   Cash                                  15,600
                      Short-term Investment                  15,000
                      Gain on sale of Investment             600

   Dec 31st   Unrealized Loss on Investment         80
                     Short-term Investment                   80


   (4) What is the net impact of Gilbert Corporation’s investment in Microsoft’s stocks on their 2005 earnings?
       (5 points)

       Realized gain: (25.20 – 24.80) * 400 =160




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Fall 2005
    Problem 3. Gilbert Corporation had the following information for it’s A/R, sales, Allowance for
    Uncollectible Accounts (AUA) in year 2004.

          Gilbert Corporation had $ 25,000 of A/R at the end of 2003 and $24,000 of A/R at the end of 2004
          Gilbert Corporation had 2,200 of credit balance of AUA at the end of 2003
          Gilbert Corporation’s sales in 2004 were $300,000
          Gilbert Corporation’s collection from customers in 2004 were $299,000
          Gilbert Corporation uses the percent-of-sales method to estimate uncollectible account expense and
           assume that 1% of the sales will be uncollectible

   (5) How much bad debts (or uncollectible A/R) did Gilbert write-off in 2004? (5 points)
                                              A/R

                                     25,000         299,000
                                     300,000        write-off      So, write-off= 2,000

                                     24,000

   (6) What is the adjustment journal entry that is related to A/R Gilbert Corporation did at the end of 2004? (5
       points)

                      Uncollectible Account Expense                3,000
                             AUA                                           3,000

                      3,000 = 300,000 * 1%

   (7) At the end of 2004, how much did customers owe to Gilbert Corporation? (2 points)

              Ending balance of A/R in 2004 is 24,000, so customers owe $24,000 to Gilbert Corporation

   (8) At the end of 2004, how much A/R did Gilbert Corporation expect to collect? (3 points)

              Net A/R at the end of 2004 = A/R at the end of 2004 – AUA at the end of 2004
              A/R at the end of 2004 = 24,000

                                               AUA

                                                    2,200
                             write-off 2,000        3,000 Uncollectible Account Expense


                                                    3,200
              AUA at the end of 2004 = 3,200
              So, Net A/R is 24,000-32,000 = 20,800




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Fall 2005
              Problem 4. Gilbert Corporation’s inventory record in October 2004 is as follows:

                       Date                  Units                  Unit Cost
Beginning              Oct 1st               30                     $45
Purchase               Oct 3rd               60                     $55
Purchase               Oct 10th              50                     $60
Purchase               Oct 20th              40                     $65

Gilbert Corporation sold 130 units of inventory in October 2004 for $80 each.

Questions:
   4) What would the cost-of-goods-sold be if Gilbert Corporation uses FIFO? [5 points]

       FIFO COGS = 30*45 + 60*55 + 40*60 = 7,050

   5) What would the ending balance of inventory be if Gilbert Corporation uses LIFO? [5 points]

       LIFO ending inventory = 30*45 + 20*55 = 2,450

   6) What would the gross profit be under the average-cost method? Round the unit cost to two decimals.
      [5 points]

       Gross Profit = Sales – COGS
       Sales = 130 * 80 = 10,400
       COGS = Average Unit Cost * Units Sold = 130 * 56.94 = 7,402.20
       So, Gross Profit = 10,400 – 7,402.20 = 2,997.80

               Units                              Unit Cost                            Total Cost
                30                                  $45                                 $1,350
                60                                  $55                                 $3,300
                50                                  $60                                 $3,000
                40                                  $65                                 $2,600
                180                                  $56.94                             $10,250




                                                      12
Fall 2005
Problem 5. On Jan 1st, 2001 Gilbert Corporation purchased a delivery truck. The original cost of the truck was
$60,000. The useful life of the truck was estimated to be 10 years (200,000 miles), and the residual value was
estimated to be $5,000. In 2002, the truck was driven for 25,000 miles.

Questions:
3) What was the depreciation expense for this truck in 2002 using straight-line, units-of-production, and
   double-declining balance methods?

Straight Line (3 points):

(60,000 – 5,000) / 10 = 5,500

Units of Production (3 points):

Depreciation per mile = (60,000 – 5,000) / 200,000 = 0.275
Depreciation in 2002 = 0.275*25,000 = 6,875

Double Declining Balance (4 points):

Depreciation in 2001 = 60,000 * 2/10 = 12,000
Depreciation in 2002 = (60,000 – 12,000) * 2/10 = 9,600


4) Gilbert Corporation sold the truck at the end of year 2002 for $40,000. Assuming that the company used the
   straight-line method, please journalize this transaction. You must show your calculation to receive full
   credits. (5 points)

   Book value at sale = 60,000 – 2*5,500 = 49,000
   Loss on sale of long-term assets = 49,000 – 40,000 = 9,000

   Cash                                     40,000
   Accumulated Depreciation                 11,000
   Loss on Sale of Long-Term Assets         9,000
                     Truck                           60,000




                                                       13
Fall 2005
PART III. EXTRA CREDIT QUESTION:

The accountant of a local car dealership accidentally deleted the sales record. He researched other records and
found the following facts:

      The car dealership had 50 cars with an average cost of $15,000
      The car dealer made two purchases during this period: 20 cars at $14,000 each and 30 cars at $16,000
       each
      The car dealer had $500,000 of inventory when the sales record was deleted
      The car dealer uses the average cost method to measure inventory cost
      The gross profit margin of the car dealership is 20% on average

Based on the above facts, what is your estimate of the car dealership’s sales in this period till the record was
deleted? (10 points)


                                                   Inventory


               Beginning Bal.50* 15,000                        Cost of Goods Sold

                               20 * 14,000
               Purchases
                               30 * 16,000



              Ending Bal.      500,000




                             So, Cost of Goods Sold = 1,010,000

            Gross Margin = Gross Profit / Sales = (Sales – COGS) / Sales = 1-COGS/Sales
                           20% = 1 – 1,010,000/Sales
                           Sales = 1,262,500




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