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					Name: __________________________
Section: 501

                             University of Texas at Arlington
                                       Mid-Term 2
                                  Acct 5311- Fall 2007
                                 Chandra Subramaniam


This exam consists of 3 problems. The first problem uses the multiple choice format.
Please use your Scantron sheet for this section. Answer the remaining two problems in
the space provided in this exam. Please make sure that you have eleven (11) pages
including this cover page. Since the pages are numbered you are more than welcome to
unstaple the pages and staple them back at the conclusion of the exam.

There are 100 total points. Allocate an appropriate amount of time to each question.

The only materials you are permitted to use on this exam are (1) a calculator, (2) a
pencil with eraser or pen.

Be sure to note the relevant dates referred to in each question.

Point Allocation
       Multiple choice …………………………42
       Problem 1      …………………………….28
       Problem 2      …………………………….30
               Total             100

Multiple choice (3 points each)

1.    Bank overdrafts, if material, should be
      a. reported as a deduction from the current asset section.
      b. reported as a deduction from cash.
      c. netted against cash and a net cash amount reported.
      d. reported as a current liability.

2.    Trade discounts are
      a. not recorded in the accounts; rather they are a means of computing a price.
      b. used to avoid frequent changes in catalogues.
      c. used to quote different prices for different quantities purchased.
      d. all of the above.

3.    Which of the following methods of determining bad debt expense does not
      properly match expense and revenue?
      a. Charging bad debts with a percentage of sales under the allowance method.
      b. Charging bad debts with an amount derived from a percentage of accounts
         receivable under the allowance method.
      c. Charging bad debts with an amount derived from aging accounts receivable
         under the allowance method.
      d. Charging bad debts as accounts are written off as uncollectible.

4.    Which of the following is true when accounts receivable are factored without
      a. The transaction may be accounted for either as a secured borrowing or as a
         sale, depending upon the substance of the transaction.
      b. The receivables are used as collateral for a promissory note issued to the
         factor by the owner of the receivables.
      c. The factor assumes the risk of collectibility and absorbs any credit losses in
         collecting the receivables.
      d. The financing cost (interest expense) should be recognized ratably over the
         collection period of the receivables.

5.    Of the following conditions, which is the only one that is not required if the
      transfer of receivables with recourse is to be accounted for as a sale?
      a. The transferor is obligated to make a genuine effort to identify those receiv-
          ables that are uncollectible.
      b. The transferor surrenders control of the future economic benefits of the
      c. The transferee cannot require the transferor to repurchase the receivables.
      d. The transferor's obligation under the recourse provisions can be reasonably

6.    If a company purchases merchandise on terms of 1/10, n/30, the cash discount
      available is equivalent to what effective annual rate of interest (assuming a 360-
      day year)?
      a. 1%
      b. 12%
      c. 18%
      d. 30%

7.    Which of the following items should be included in a company's inventory at the
      balance sheet date?
      a. Goods in transit which were purchased f.o.b. destination.
      b. Goods received from another company for sale on consignment.
      c. Goods sold to a customer which are being held for the customer to call for at
          his or her convenience.
      d. None of these.

8.    If the beginning inventory for 2006 is overstated, the effects of this error on cost
      of goods sold for 2006, net income for 2006, and assets at December 31, 2007,
      respectively, are
      a. overstatement, understatement, overstatement.
      b. overstatement, understatement, no effect.
      c. understatement, overstatement, overstatement.
      d. understatement, overstatement, no effect.

9.    The use of a Discounts Lost account implies that the recorded cost of a
      purchased inventory item is its
      a. invoice price.
      b. invoice price plus the purchase discount lost.
      c. invoice price less the purchase discount taken.
      d. invoice price less the purchase discount allowable whether taken or not.

10.   When using the periodic inventory system, which of the following generally would
      not be separately accounted for in the computation of cost of goods sold?
      a. Trade discounts applicable to purchases during the period
      b. Cash (purchase) discounts taken during the period
      c. Purchase returns and allowances of merchandise during the period
      d. Cost of transportation-in for merchandise purchased during the period

11.   Which inventory costing method most closely approximates current cost for each
      of the following:
           Ending Inventory   Cost of Goods Sold
      a.          FIFO               FIFO
      b.          FIFO               LIFO
      c.          LIFO               FIFO
      d.          LIFO               LIFO

12.   Assuming no beginning inventory, what can be said about the trend of inventory
      prices if cost of goods sold computed when inventory is valued using the FIFO
      method exceeds cost of goods sold when inventory is valued using the LIFO
      a. Prices decreased.
      b. Prices remained unchanged.
      c. Prices increased.
      d. Price trend cannot be determined from information given.

13.    Which of the following is true regarding the use of LIFO for inventory valuation?
       a. If LIFO is used for external financial reporting, then it must also be used for
          internal reports.
       b. For purposes of external financial reporting, LIFO may not be used with the
          lower of cost or market approach.
       c. If LIFO is used for external financial reporting, then it cannot be used for tax
       d. None of these.

Use the following information for questions 14 through 16.

Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2007
and 2006 contained errors as follows:
                                                    2007                   2006
   Ending inventory                         $3,000 overstated      $8,000 overstated
   Purchases                                $2,000 understated $6,000 overstated

 14.   Assume that the proper correcting entries were made at December 31, 2006. By
       how much will 2007 income before taxes be overstated or understated?
       a. $1,000 understated
       b. $1,000 overstated
       c. $2,000 overstated
       d. $5,000 overstated

 15.   Assume that no correcting entries were made at December 31, 2006. Ignoring
       income taxes, by how much will retained earnings at December 31, 2007 be
       overstated or understated?
       a. $1,000 understated
       b. $5,000 overstated
       c. $5,000 understated
       d. $9,000 understated

 16.   Assume that no correcting entries were made at December 31, 2006, or
       December 31, 2007 and that no additional errors occurred in 2008. Ignoring
       income taxes, by how much will retained earnings at December 31, 2008 be
       overstated or understated?
       a. $0
       b. $2,000 overstated
       c. $4,000 understated
       d. $5,000 understated

17.   Carr Co. adopted the dollar-value LIFO inventory method on December 31, 2007.
      Carr's entire inventory constitutes a single pool. On December 31, 2007, the
      inventory was $320,000 under the dollar-value LIFO method. Inventory data for
      2008 are as follows:
             12/31/08 inventory at year-end prices                     $440,000
             Relevant price index at year end (base year 2007)              110
      Using dollar value LIFO, Carr's inventory at December 31, 2008 is
      a. $352,000.
      b. $408,000.
      c. $400,000.
      d. $440,000.

18.   In no case can "market" in the lower-of-cost-or-market rule be more than
      a. estimated selling price in the ordinary course of business.
      b. estimated selling price in the ordinary course of business less reasonably
          predictable costs of completion and disposal.
      c. estimated selling price in the ordinary course of business less reasonably
          predictable costs of completion and disposal and an allowance for an
          approximately normal profit margin.
      d. estimated selling price in the ordinary course of business less reasonably
          predictable costs of completion and disposal, an allowance for an
          approximately normal profit margin, and an adequate reserve for possible
          future losses.

19.   An item of inventory purchased this period for $15.00 has been incorrectly written
      down to its current replacement cost of $10.00. It sells during the following
      period for $30.00, its normal selling price, with disposal costs of $3.00 and
      normal profit of $12.00. Which of the following statements is not true?
      a. The cost of sales of the following year will be understated.
      b. The current year's income is understated.
      c. The closing inventory of the current year is understated.
      d. Income of the following year will be understated.

20.   When inventory declines in value below original (historical) cost, and this decline
      is considered other than temporary, what is the maximum amount that the
      inventory can be valued at?
      a. Sales price
      b. Net realizable value
      c. Historical cost
      d. Net realizable value reduced by a normal profit margin

21.   Joe Crede Corporation sells its product, a rare metal, in a controlled market with
      a quoted price applicable to all quantities. The total cost of 5,000 pounds of the
      metal now held in inventory is $250,000. The total selling price is $600,000, and
      estimated costs of disposal are $10,000. At what amount should the inventory of
      5,000 pounds be reported in the balance sheet?
      a. $240,000.
      b. $250,000.
      c. $590,000.
      d. $600,000.

Problem 2
Part A (20 points)
The partial balance sheet, income statement and statement of cash flow from the 1990
annual report of Hartmarx Corporation are given below. On July 1, 1990, Hartmarx sold
$60 million in accounts receivable to a company called Falcon Asset Securitization
Corporation with recourse. The sale entailed a finance charge of 5% of receivables sold
and required Falcon to withhold another 7%. Hartmarx assumes a recourse liability at
4%. All numbers below are in thousands.

                                                                                         November 30,
                                                                                       1990    1989

Accounts Receivable (net of an allowance for
 doubtful accounts of $13,980, and $12,755
 respectively)................................................................     $132,719   $210,555

                                                                                 Years Ended November 30,
                                                                                       1990     1989_______

Sales.....................................................................         $1,295,840 $1,296,993

                                                                                 Year Ended November 30,

Cash received from customers................................                         $1,306,123   $1,450,505

a) Determine the amount of write-offs experienced by Hartmarx during 1990. (4 points)

b) Determine the amount of bad debt expense recognized by Hartmarx in 1990. (4

c) Ignore the allowance for doubtful accounts given. If Hartmarx had always used the
aging of receivables method to determine the bad debt expense, determine what
Hartmarx would have reported in the 1990 income statement if they estimated that 10%
of ending accounts receivable is uncollectible for both years. (4 points)

d) Journalize the sales of receivables to Falcon Asset Securitization Corp. on July 1,
1990. (4 points)

e) On August 1, 1990 Falcon reports that it had collected $ 56 million and does not
expect to collect any further amount from Hartmarx’s customers. Provide the appropriate
journal entry that Hartmarx will report on August 1, 1990. (4 points)

Part B (8 points)
Grieve Music Company started business in March, 2007. Sales for its first year
were $400,000 sold using a 2/10, net 30 contract. Grieve priced its merchandise
to yield a 50% gross profit based on sales dollars. During the year, customers
returned $20,000 in sales. Grieve uses the net method for sales together with the
perpetual inventory system.

   a) Prepare summary journal entries to record sales during 2007. (4 points)

    b) Prepare summary journal entries to record sales returns during 2007. (4

Problem 3
Part A (10 points)

The inventory footnote to the annual report of Thomas Company reads in part as

       Because of continuing high demand throughout the year, inventories were
       unavoidably reduced and could not be replaced. Under the LIFO system of
       accounting, used for many years by Thomas Company, the net effect of all the
       inventory changes was to increase pretax income by $1,500,000 over what it
       would have been had inventories been maintained at their physical levels at the
       start of the year.

The price of Thomas Company’s merchandise purchases was $30 per unit
during the year, after having risen erratically over past years. Thomas Company
uses a periodic inventory method. Its inventory positions at the beginning and the
end of the year appear below:

Date                 Physical count of inventory           LIFO Cost of inventory
January 1                   400,000 units                        $3,000,000
December 31                 280,000 units                        $?

      a) What was the average cost per unit of the 120,000 units removed from
         the January 1 LIFO inventory? (5 points)

      b) What is the December 31 LIFO cost of inventory? (5 points)

Part B (12 points)
       Bloom Inc adopted dollar-value LIFO on December 31, 1999, considered
as the base year, when the inventory value was $1,850,000. The December 31,
2000, 2001 and 2002 ending inventory at year-end cost was $1,950,000,
$2,250,000 and $2,350,000 respectively. The cost index for the year 2000, 2001
and 2002 are 1.08, 1.15 and 1.20 respectively.

Compute the dollar-value LIFO inventory valuation for the December 31, 2000,
2001 and 2002.

Part C (8 points)
    The Abe Company has six products in its inventory. Information about the
     December 31, 2000 inventory follows:

   Product          Quantity      Unit cost    Replacement      Unit selling
                                                   cost           price
      A              2,000          $12             $13             $15
      B              1,000           15              12             20
      C               800            20              23             25

There is a 12 percent sales commission to dispose of inventory. The normal
profit percentage for each product is 40 percent of the selling price.
       a) Determine the balance sheet inventory carrying value at December 31,
          2000 assuming the LCM rule is applied to individual products. (4

       b) Assuming that Abe recognizes an inventory write-down as a separate
          income statement item, determine the amount of the loss. (4 points)


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