COMPREHENSIVE EXAMINATION B

PART 2
(Chapters 79)
Problem B-I Multiple Choice Cash and Receivables.
Choose the best answer for each of the following questions and enter the
identifying letter in the space provided.
___ 1. When should the loss on an uncollectible account receivable be
recorded as an expense for accrual accounting purposes?
a. When it is determined that an account cannot be collected.
b. In the same period in which the sale on account occurs.
c. When the balance is past due for more than 3 months.
d. When a lawyer indicates that collection efforts would cost more than
the account is worth.
___ 2. How should unearned discounts, finance charges, and interest included
in the face amount of installment accounts receivable be presented in
the balance sheet?
a. As a current liability.
b. As a deduction from the related installment accounts receivable.
c. Within the net amount of installment accounts receivable.
d. As an addition to the related installment accounts receivable.
___ 3. Durler Company's account balances at December 31 for Accounts
Receivable and the related Allowance for Doubtful Accounts are
$800,000 and $13,000, respectively. From an analysis of accounts
receivable, it is estimated that $28,000 of the December 31 receivables
will be uncollectible. After adjustment for the above facts, the net
realizable value of accounts receivable would be
a. $800,000.
b. $787,000.
c. $759,000.
d. $772,000.

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Comprehensive Exam B

__ 4. Which group of items listed below should be included in the cash

account?
a. Silver coins, postage stamps, demand deposits, personal checks.
b. Promissory notes, demand deposits, money orders, silver coins.
c. Money orders, postdated checks, personal checks, time deposits.
d. Silver coins, money orders, demand deposits, personal checks.
___ 5. Which of the following methods of accounting for uncollectible
accounts does not properly match costs with revenues?
a. Percentage of sales
b. Percentage of receivables
c. Direct write-off
d. Aging schedule
___ 6. Certain information relative to the 2012 operations of Ball Co. follows:
Accounts receivable, January 1, 2012
$48,000
Accounts receivable collected during 2012 92,000
Cash sales during 2012
24,000
Inventory, January 1, 2012
36,000
Inventory, December 31, 2012
33,000
Purchases of inventory during 2012
80,000
Gross profit on sales
27,000
What is Ball's accounts receivable balance at December 31, 2012?
a. $36,000.
b. $42,000.
c. $48,000.
d. $66,000.
Problem B-II Lower of Cost or Market
Presented below is data relative to the 12/31/12 inventory of Lance Company:
Number UnitsOriginal Cost Total
Current
Item In Inventory Per UnitOriginal CostReplacement Cost

Comprehensive Exam B

A
B
C
D
E
Total

Item
A
B
C
D
E
Total

5,000
5,000
5,000
5,000
5,000
25,000

$1.09
1.30
1.50
1.60
1.80

$5,450
6,500
7,500
8,000
9,000
$36,450

B-3

$1.08
1.15
1.05
1.65
1.70

Appropriate
Upper
Lower
Inventory
Limit
Limit
Designated Valuation
("Ceiling") ("Floor") Market
(Totals)

Additional Data:
Selling price is $2.00/unit for all items. Disposal costs amount to 10% of
selling price and a "normal" profit is 35% of selling price.
Instructions
Complete the last four columns above.
Problem B-III Notes Receivable.
On December 31, 2011 Berry Corporation sold some of its product to Flynn
Company, accepting a 3%, four-year promissory note having a maturity value
of $500,000 (interest payable annually on December 31). Berry Corporation
pays 6% for its borrowed funds. Flynn Company, however, pays 8% for its
borrowed funds. The product sold is carried on the books of Berry at a
manufactured cost of $310,000. Assume Berry uses a perpetual inventory
system.

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Comprehensive Exam B

Instructions
(a) Prepare the journal entries to record the transaction on the books of Berry
Corporation at December 31, 2011. (Assume that the effective interest
method is used. Use the interest tables below and round to the nearest
dollar.)
(b) Make all appropriate entries for 2012 on the books of Berry Corporation.
(c) Make all appropriate entries for 2013 on the books of Berry Corporation.
For Use on Problem B-III
Table 1
Future Value of 1
Periods
2%
3%
4%
6%
8%
1
1.02000 1.03000 1.04000 1.06000 1.08000
2
1.04040 1.06090 1.08160 1.12360 1.16640
3
1.06121 1.09273 1.12486 1.19102 1.25971
4
1.08243 1.12551 1.16986 1.26248 1.36049
5
1.10408 1.15927 1.21665 1.33823 1.46933
Table 2
Present Value of 1
Periods
2%
3%
4%
6%
8%
1
0.98039 0.97087 0.96154 0.94340 0.92593
2
0.96117 0.94260 0.92456 0.89000 0.85734
3
0.94232 0.91514 0.88900 0.83962 0.79383
4
0.92385 0.88849 0.85480 0.79209 0.73503
5
0.90573 0.86261 0.82193 0.74726 0.68058
Table 3
Future Value of Ordinary Annuity of 1
Periodic Rents2%
3%
4%
6%
8%
1
1.00000 1.00000 1.00000 1.00000 1.00000
2
2.02000 2.03000 2.04000 2.06000 2.08000
3
3.06040 3.09090 3.12160 3.18360 3.24640
4
4.12161 4.18363 4.24646 4.37462 4.50611
5
5.20404 5.30914 5.41632 5.63709 5.86660

Comprehensive Exam B

B-5

Table 4
Present Value of Ordinary Annuity of 1
Periodic Rents2%
1
0.98039
2
1.94156
3
2.88388
4
3.80773
5
4.71346

3%
0.97087
1.91347
2.82861
3.71710
4.57971

4%
0.96154
1.88609
2.77509
3.62990
4.45182

6%
0.94340
1.83339
2.67301
3.46511
4.21236

8%
0.92593
1.78326
2.57710
3.31213
3.99271

Problem B-IV FIFO vs. LIFO.

In comparing and contrasting FIFO vs. LIFO inventory procedures, the
following listing was developed. You are to complete the tabulation with an
answer of "YES" or "NO" as demonstrated by the first item. Any combination
of yes-no answers is possible in each situation.
FIFO LIFO
0. Usually matches the actual physical flow of goods. Yes __ No
1. Emphasizes the income statement in that it matches the more
recent costs with revenue.
____
____
2. Defers tax payments in times of rising prices. ____
____
3. Possibility of liquidating the base may be a significant negative
aspect.
____
____
4. Will probably not be adopted if prices are expected to decline.
5. Emphasizes the balance sheet in that the more recent costs
are contained in the inventory account.
____
____
6. Can use price indexes to cost layers.
____
____
7. Switching to this method could cause problems in the equity
markets, with loan covenants, etc.
____
____
8. Income figure more accurately reflects cash available for
dividends, investments, etc.
____
____
9. Tends to smooth income in periods of fluctuating prices. __
10. Income figure is more "real" in that it doesn't contain "paper

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Comprehensive Exam B

profits."
___
___
11. A change to this method must be justified (i.e., to the auditor)
other than solely on the basis of the tax effect. ____
____
12.Perpetual inventory results may be different from periodic
inventory results.
____
____
13. Is acceptable to the IRS (i.e., for income tax purposes). ___
14. Gives lower profits when prices rise.
____
____
15. In a period of rising prices has an adverse effect on assets,
working capital, and stockholders' equity.
____
____
16. Quick inventory turnover may have somewhat of a mitigating
effect on some of the method's claimed disadvantages. ____
17. Improves cash flow in periods of rising prices. ___
____
18. If used for tax purposes, it must be used for financial reporting
purposes.
____
____
19. Somewhat opens door for profit manipulation and may cause
poor purchase decisions.
____
____
20. Is a current value, rather than a historical cost, valuation method.
Problem B-V Year-end Inventory Cutoff.
Abel Company's business year ends on December 31. Listed below are
purchase transactions which occurred during the last few days of 2012 or
during the first few days of 2013. The inventory, determined by physical count,
was taken after the close of business on December 31, 2012. The only adjusting
entry recorded to date has been to enter the December 31 physical inventory on
the books and to remove the beginning inventory.
Instructions
(a) On the accompanying chart, indicate the effect of each of these
transactions on the ending inventory and on reported net income for 2012, by
writing the words overstated, understated, or no effect in the appropriate
column. Both columns must be answered for each transaction.
(b) Prepare all necessary correcting entries for 2012.

Comprehensive Exam B

(c) Indicate which of the correcting entries must be reversed in 2011 by

preparing the necessary reversing entries.
12/31/12
Physical
2012
Inventory
Income
1. An invoice for $9,000, terms f.o.b. shipping point, was received
and entered December 30. The invoice shows that the
merchandise was shipped December 29, and the receiving
report indicates the merchandise was received January 2. __
2. An invoice for $300, terms f.o.b. shipping point, was received
and entered December 30. The invoice shows that
merchandise was shipped December 29, and the receiving
report shows the merchandise was received December 31. _
3. An invoice for $4,000, terms f.o.b. shipping point, was
received and entered January 2. The invoice shows the
merchandise was shipped December 30, and the receiving
report indicates the merchandise was received December 31.
4. An invoice for $800, terms f.o.b. destination, was received and
entered December 30. The receiving report shows the
merchandise was received January 2.
_____ _____
5. An invoice for $500, terms f.o.b. destination, was received and
entered December 29. The receiving report indicates that the
merchandise was received December 31.
_____ _____
6. An invoice for $1,500, terms f.o.b. destination, was received
and entered January 2. The receiving report indicates the
merchandise was received December 31.
_____ _____

B-7

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Comprehensive Exam B

7. Merchandise costing $12,000 and with a selling price of

$18,000 was on consignment to Maris Distributing Company
and was on that company's premises on December 31. No
entry has been made for the consignment. _____ _____
Problem B-VI Conventional and LIFO Retail Method.*
*Note to Instructor. Part B is based on Appendix 9-A.
A.Landmark Book Store uses the conventional retail method.
Instructions
Given the following data, prepare a neat, labeled schedule showing the
computation of the cost of inventory on hand at 12/31/12.

Inventory 1/1/12
Purchases
Purchases Returns
Purchase Discounts
Sales (Gross)
Sales Returns
Employee Discounts
Freight-in
Freight-out
Loss from Breakage
Markups
Markup Cancellations
Markdowns
Markdown Cancellations

Cost
Retail
$ 28,900 $ 40,000
366,600 610,000
9,000
20,000
7,000
615,000
15,000
5,000
23,500
50,000
2,500
38,000
18,000
13,500
8,500

B. Landmark Book Store has decided to switch to the LIFO retail method for
the period beginning 1/1/13.

Comprehensive Exam B

B-9

Instructions
Prepare a schedule showing the computation of the 12/31/13 inventory under
the LIFO retail method adjusted for price level changes (i.e., dollar-value LIFO
Retail.) Without prejudice to your answer in requirement A above, assume that
the 12/31/12 inventory computed under the LIFO Retail method was $40,000
and $27,500 at retail and cost, respectively, for purposes of this requirement.
Data for 2013 follows:
Cost
Retail
Purchases (net)
$360,000 $485,000
Sales (net)
402,000
Markups (net)
30,000
Markdowns (net)
15,000
2012 Price Index
100
2013 Price Index
120
Problem B-VII Multiple Choice Inventory
For each of the following questions, select the letter of the statement which best
answers the question and write it on the line to the left of the question.
___ 1. Wade Company estimates the cost of its physical inventory at March 31
for use in an interim financial statement. The rate of markup on cost is
25%. The following account balances are available:
Inventory, March 1
$1,000,000
Purchases during March
500,000
Purchase returns
26,000
Sales during March
850,000
The estimate of the cost of inventory at March 31 would be
a. $624,000.
b. $680,000.
c. $794,000.
d. $836,500.

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Comprehensive Exam B

__ 2. Most methods of pricing inventories are in accord with generally

accepted accounting principles and generally are permissible for income
tax purposes. The method that must be used for financial reporting
purposes if used for tax purposes is
a. moving average.
b. weighted average.
c. LIFO.
d. FIFO.
___ 3. A company has been using the FIFO cost method of inventory valuation
since it was started 10 years ago. Its 2012 ending inventory was
$120,000, but it would have been $90,000 if LIFO had been used. Thus,
if LIFO had been used, this company's income before taxes would have
been
a. $30,000 less in 2012.
b. $30,000 less over the 10-year period.
c. $30,000 greater over the 10-year period.
d. $30,000 greater in 2012.
___ 4. Why are inventories included in the computation of net income?
a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.
___ 5. On December 31, 2012, Hill Company, which sells only one product,
adopted the periodic last-in, first-out method of inventory valuation.
The inventory was valued at $40,000 on the December 31, 2012 balance
sheet. The number of items in its inventory remained constant during
2013. The December 31, 2013 inventory valuation would be
a. less than $40,000 if prices were steadily decreasing.
b. less than $40,000 if prices were steadily increasing.
c. greater than $40,000 if prices were steadily increasing.

Comprehensive Exam B

B-11

d. $40,000 regardless of any price changes.

___*6. Kramer Company values its inventory by using the retail method (LIFO
basis, stable prices). The following information is available for the year
2012.
Cost
Retail
Beginning inventory
$ 78,000 $140,000
Purchases
368,000 628,000
Freight-in
16,000
Markups (net)
18,000
Markdowns (net)

6,000
Sales
610,000
At what amount would Kramer Company report its ending inventory?
a. $95,700.
b. $96,000.
c. $100,300.
d. $102,000.

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Comprehensive Exam B

Solutions Comprehensive Examination B

Problem B-I Solution.
1. b
4. d
2. c
5. c
3. d
6. b
Solutions to computational Multiple Choice Questions.
3. $800,000 $28,000 = $772,000.
6. $80,000 + $3,000 + $27,000 $24,000 + $48,000 $92,000 = $42,000.
Problem B-II Solution.

Item
A
B
C
D
E

Appropriate
Upper
Lower
Inventory
Limit
Limit
Designated Valuation
("Ceiling") ("Floor")
Market
(Totals)
$1.80
$1.10
$1.10
$5,450
1.80
1.10
1.15
5,750
1.80
1.10
1.10
5,500
1.80
1.10
1.65
8,000
1.80
1.10
1.70
8,500
$33,200

Problem B-III Solution.

(a)
12/31/11
Notes Receivable ....................................... 500,000
Discount on Notes Receivable ...........
82,803
Sales Revenve.....................................
417,197
Computation of Present Value of Note: (using 8%)
$500,000 .73503 = $367,515

Comprehensive Exam B

15,000 3.31213 =
49,682
Present value of note
417,197
Face value of note
500,000
Amount of discount
$ 82,803
12/31/11
Cost of Goods Sold .................................... 310,000
Inventory ...........................................
310,000
(b)

12/31/12
Cash ...........................................................
Interest Revenue ................................

15,000
15,000

Discount on Notes Receivable ................... 18,376

Interest Revenue ................................
18,376
($417,197 .08 = $33,376 $15,000)
(c)

12/31/13
Cash ...........................................................
Interest Revenue ................................

15,000
15,000

Discount on Notes Receivable ................... 19,846

Interest Revenue ................................
19,846
[($417,197 + $18,376) .08 = $34,846 $15,000]
Problem B-IV Solution.
1. No-Yes 7. No-Yes 13.
2. No-Yes 8. No-Yes 14.
3. No-Yes 9. No-Yes 15.
4. No-Yes 10. No-Yes 16.
5. Yes-No 11. Yes-Yes 17.
6. No-Yes 12. No-Yes 18.

Yes-Yes 19. No-Yes

No-Yes 20. No-No
No-Yes
Yes-No
No-Yes
No-Yes

B-13

B-14

Comprehensive Exam B

Problem B-V Solution.

(a) 1. Understated/Understated
2. No effect/No effect
3. No effect/Overstated
4. No effect/Understated
5. No effect/No effect
6. No effect/Overstated
7. Understated/Understated
(b) 1. Inventory ............................................... 9,000
Cost of Goods Sold ........................
2. None
3. Purchases ............................................... 4,000
Accounts Payable ..........................
4. Accounts Payable ..................................
Purchases . ......................................

9,000

4,000

800
800

5. None
6. Purchases ............................................... 1,500
Accounts Payable ..........................

1,500

7. Inventory ............................................... 12,000

Cost of Goods Sold ........................
12,000
(c) 3. Accounts Payable .................................. 4,000
Purchases .......................................
4. Purchases ...............................................
Accounts Payable ..........................

4,000

800

6. Accounts Payable .................................. 1,500

800

Comprehensive Exam B

Purchases .......................................

1,500

Problem B-VI Solution.

Cost
Retail
$ 28,900 $ 40,000
366,600 610,000
(9,000) (20,000)
(7,000)
23,500
38,000
(18,000)
$403,000 650,000

A.Beginning Inventory
Purchases
Purchase Returns
Purchase Discounts
Freight-In
Markups
Markup Cancellations
Goods Available
Cost Ratio = 62%
Sales
$615,000
Sales Returns
(15,000)
Employee Discounts
Goods Broken
Markdowns
13,500
Markdown Cancellations
(8,500)
Ending Inventory @ Retail
Est. Ending Inventory @ Cost (62% $37,500)

(600,000)
(5,000)
(2,500)
(5,000)
$ 37,500
$ 23,250

*B.
Cost
Retail__
Inventory, December 31, 2012
$ 27,500 $ 40,000
Net purchases
360,000 485,000
Net markups
30,000
Net markdowns
(15,000)
Total (excluding beginning inventory) 360,000 500,000
Total (including beginning inventory) $387,500 540,000
Net sales
(402,000)
Inventory, December 31, 2013, at retail
$ 138,000
Cost to retail percentage ($360,000 $500,000)72%
12/31/13 inventory at base ($138,000 1.20)
$ 115,000

B-15

B-16

Comprehensive Exam B

12/31/12 inventory at base

$ 27,500
(40,000)
Increase at base
$ 75,000
Increase at current prices, at cost ($75,000 1.20 .72) 64,800
12/31/13 inventory at LIFO cost
$ 92,300
Problem B-VII Solution.
1. c
2. c
3. b

4. a
5. d
*6. b

Solutions to computational Multiple Choice Questions.

1.
6.

$1,474,000 (80% $850,000) = $794,000.

$384,000 $640,000 = 60%. $78,000 + (60% $30,000) = $96,000.