Multiple Choice Answers

1. Clarabell, Inc., uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
Cost
Retail
Beginning inventory $112,000
$191,000
Net purchases 402,000
703,000
Net markups 43,000
Net markdowns 21,000
Net sales 685,000

To the nearest thousand, estimated ending inventory using the conventional retail method is

A. $124,000.
B. $136,000.
C. $163,000.
D. $127,000.

2. The following information pertains to Jacobsen Co.’s accounts receivable at December 31, 2011:
Days
Outstanding Amount Estimated % Uncollectible
0-30 $420,000 2%
31-60 140,000 5%
61-120 100,000 10%
Over 120 120,000 20%

During 2011, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been written off in prior years. Jacobsen’s December 31, 2010, allowance for uncollectible accounts was $40,000. Under the aging method, what amount of allowance for uncollectible accounts should Jacobsen report at December 31, 2011?

A. $31,400
B. $55,400
C. $28,000
D. $49,400

3. Bond Company adopted the dollar-value LIFO inventory method on January 1, 2011. In applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 3 for the two years following the adoption of LIFO:
Under the dollar-value LIFO method the inventory at December 31, 2012, should be
A. $357,600.
B. $351,600.
C. $600,120.
D. $350,000.

4. Willie Nelson’s Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
Cost
Retail
Beginning inventory $46,000
$63,000
Net purchases 154,000
215,000
Net markups 22,000
Net markdowns 35,000
Net sales 220,000

To the nearest thousand, estimated ending inventory using the conventional retail method is
A. $37,000.
B. $34,000.
C. $30,000.
D. $32,000.

5. Wilson Company had the following cash balance items listed in its trial balance at 12/31/11:
Peterson Savings and Loan:$50,000
Right Bank: (5,000)
Clinton County Trust Bank: 10,000

If Wilson reports under IFRS, its 12/31/11 balance sheet would show what cash balance?
A. $60,000
B. $55,000
C. ($1,000)
D. ($5,000)

6. Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Prunedale’s cost of goods sold for this year was
A. overstated by $31,000.
B. understated by $48,000.
C. overstated by $5,000.
D. understated by $31,000.

7. On January 1, 2011, Badger, Inc., adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. Suppose that Badger’s 2012 ending inventory, valued at year-end costs, was $143,000 and that the relative cost index for this inventory in 2012 was 1.10. In determining the inventory balance should Badger report in its 12/31/12 balance sheet:

A. an additional layer of $22,000 is added to the 1/1/12 balance.
B. None of the answers given is correct.
C. an additional layer of $23,000 is added to the 1/1/12 balance.
D. an additional layer of $11,000 is added to the 1/1/12 balance.

8. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available:
Sales, January 1 through July 8 $700,000
Inventory, January 1 130,000
Purchases, January 1 through July 8 640,000
Gross profit ratio 30%
What is the estimated inventory on July 8 immediately prior to the fire?
A. $280,000
B. $192,000
C. $490,000
D. $510,000

9. Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts.
What entry would Oswego make on April 12?

a. Accounts receivable 46,000
Sales 46,000
b. Accounts receivable 46,000
Sales 45,540
Sales discounts 460
c. Accounts receivable 45,540
Sales 45,540
d. Accounts receivable 45,540
Sales discounts 460
Sales 46,000

A. Option d
B. Option c
C. Option a
D. Option b

10. Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:
Selling price $520,000
Disposal costs 30,000
Normal profit margin 60,000
Replacement cost 440,000
What should be the carrying value of Sullivan’s inventory if the company prepares its financial statements according to International Financial Reporting Standards?
A. $430,000
B. $500,000
C. $440,000
D. $490,000

11. Nueva Company reported the following pretax data for its first year of operations.
Net sales 7,340
Cost of goods available for sale 5,790
Operating expenses 1,728
Effective tax rate 40%
Ending inventories:
If LIFO is elected 618
If FIFO is elected 798

What is Nueva’s net income if it elects LIFO?

A. $620
B. $264
C. $440
D. $372

12. Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedale’s cost of goods sold for this year was
A. Overstated by $94,000.
B. Understated by $94,000.
C. Understated by $30,000.
D. Overstated by $30,000.

13. Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2011, Chez Fred’s credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2011, if $180 in accounts receivable were written off during 2011 and if the allowance account had a balance of $750 on 12/31/11?
A. $31,000
B. 138,000
C. $5,820
D. $31,180

14. Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.
Cost
Retail
Beginning inventory $66,000
$104,000
Net purchases 280,000
420,000
Net markups 20,000
Net markdowns 40,000
Net sales 375,000
Estimated ending inventory at retail is
A. $129,000.
B. $65,000.
C. $169,600.
D. $25,000.

15. Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.
Cost
Retail
Beginning inventory $66,000
$104,000
Net purchases 280,000
420,000
Net markups 20,000
Net markdowns 40,000
Net sales 375,000

Current period cost-to-retail percentage is
A. 70.0%.
B. 68.7%.
C. 63.6%.
D. 63.5%.

16. Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:
Selling price $520,000
Disposal costs 30,000
Normal profit margin 60,000
Replacement cost 440,000
What should be the carrying value of Sullivan’s inventory?
A. $440,000
B. $490,000
C. $500,000
D. $430,000

17. So. California, Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2011. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2011, $300,000; sales and purchases from January 1, 2011, to May 1, 2011, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2011, is
A. $455,000.
B. $360,000.
C. $395,000.
D. $302,500.

18. Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/11:
Currency and coins $ 650
Balance in checking account 2,600
Customer checks waiting to be deposited 1,200
Treasury bills, purchased on 11/1/11, mature on 4/30/12 3,000
Marketable equity securities 10,200
Commercial paper, purchased on 11/1/11, mature on 1/30/12 5,000

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?
A. $19,650
B. $9,450
C. $7,450
D. $12,450

19. San Mateo Company had the following account balances at December 31, 2011 before recording bad debt expense for the year:
Accounts receivable $1,400,000
Allowance for uncollectible accounts (credit balance) 22,000
Credit sales for 2011 1,950,000
San Mateo is considering the following approaches for estimating bad debts for 2011:
* Based on 3% of credit sales
* Based on 6% of year-end accounts receivable
What amount should San Mateo charge to bad debt expense at the end of 2011 under each method?
Percentage of credit sales
Percentage of accounts receivable
a.
$36,500
$62,000
b.
$58,500
$62,000
c.
$58,500
$84,000
d.
$117,000
$95,000

A. Option c
B. Option b
C. Option d
D. Option a

20. Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.
Cost
Retail
Beginning inventory $66,000
$104,000
Net purchases 280,000
420,000
Net markups 20,000
Net markdowns 40,000
Net sales 375,000

Estimated ending inventory at cost is
A. $91,600.
B. $83,500.
C. $67,650.
D. $90,720.

21. False Value Hardware began 2011 with a credit balance of $32,000 in the allowance for sales returns account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2011, customers returned merchandise for credit of $28,000 to their accounts.
What is the balance in the allowance for sales returns account at the end of 2011?
A. $43,000
B. $39,000
C. $21,000
D. $11,000

22. Cinnamon Buns Co. (CBC) started 2011 with $52,000 of merchandise on hand. During 2011, $280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system.
What is cost of goods available for sale, assuming CBC uses the gross method?

A. $312,480
B. $337,000
C. $331,480
D. $326,000

23. Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2011. The note, along with interest at 6%, is due on June 30, 2012. On September 30, 2011, Ireland discounted the note at Cloverdale bank. The bank’s discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?
A. $40,600
B. $36,000
C. $36,820
D. $39,220

24. On April 1 of the current year, Troubled Company factored receivables with a carrying value of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without recourse. On April 1, Troubled would
A. credit deferred interest expense for $25,000.
B. debit discount on liability for $25,000.
C. debit loss on sale of receivables for $25,000.
D. credit factored accounts receivable for $85,000.

25. Nu Company reported the following pretax data for its first year of operations.
Net sales 2,800
Cost of goods available for sale 2,500
Operating expenses 880
Effective tax rate 40%
Ending inventories:
If LIFO is elected
820
If FIFO is elected 1,060

What is Nu’s gross profit ratio if it elects LIFO?
A. 5%
B. 40%
C. 80%
D. 49%