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AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: C1
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: C1
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: C1
6-1
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C1
71. Regardless of the inventory costing system used, cost of goods available for sale must be
allocated between
A. beginning inventory and net purchases during the period.
B. ending inventory and beginning inventory.
C. net purchases during the period and ending inventory.
D. ending inventory and cost of goods sold.
E. beginning inventory and cost of goods sold.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: C1
6-2
72. On December 31 of the current year, Hewett Company reported an ending inventory
balance of $215,000. The following additional information is also available:
Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the
goods on that date with shipping terms of FOB shipping point. The goods were not included
in the ending inventory amount of $215,000 because they were not in Hewett's warehouse.
Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB
destination and were received by Hewett on January 2 of the following year. The shipment
was a rush order that was supposed to arrive by December 31. These goods were included in
the ending inventory balance of $215,000.
Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on
consignment from Rumsfeld Company. (Hewett Company is the consignee.)
Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that
were shipped to Hewett on December 27 with shipping terms of FOB destination and were
still in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:
A. $194,000
B. $209,000
C. $200,000
D. $171,000
E. $156,000
Start with beginning inventory of $215,000. The information in the first bullet point was
handled correctly, although the explanation for why is incorrect. No adjustment. For the
second bullet point, the $44,000 of goods should not have been included in ending inventory
since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point,
ending inventory should not include goods held on consignment from another company.
Subtract $15,000. The information in the fourth bullet point was handled correctly.
No adjustment. $215,000 - $44,000 - $15,000 = $156,000.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C1
6-3
73. Gotham Company reported a December 31 ending inventory balance of $412,000. The
following additional information is also available:
The ending inventory balance of $412,000 included $72,000 of consigned inventory for
which Gotham was the consignor.
The ending inventory balance of $412,000 included $22,000 of office supplies that were
stored in the warehouse and were to be used by the company's supervisors and managers
during the coming year.
The ending inventory balance of $412,000 did not include goods costing $48,000 that were
purchased by Gotham on December 28 and shipped FOB destination on that date. Gotham did
not receive the goods until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original cost of
$38,000. The net realizable value of the damaged goods was $10,000.
The ending inventory balance of $412,000 included $43,000 of consigned inventory for
which Gotham was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:
A. $247,000
B. $341,000
C. $362,000
D. $309,000
E. $319,000
Start with beginning inventory of $412,000. The information in the first bullet point was
handled correctly since inventory should include consigned goods for which the subject
company is the consignor. No adjustment. With respect to the second bullet point, inventory
should not include office supplies held for use. Subtract $22,000. The information in the third
bullet point was handled correctly since inventory should not include goods shipped FOB
destination that have not yet been received by the buyer. With respect to the fourth bullet
point, damaged goods should not be included in inventory at their original cost if the net
realizable value is materially below cost. Subtract $28,000 ($38,000 - $10,000). With respect
to the fifth bullet point, inventory should not include the value of consigned inventory for
which the subject company is the consignee. Subtract $43,000. Thus, ending inventory should
be $412,000 - $22,000 - $28,000 - $43,000 = $319,000.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C1
6-4
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: C2
75. Internal controls that should be applied when a business takes a physical count of
inventory should include
A. Prenumbered inventory tickets.
B. Counters of inventory should not be those who are responsible for the inventory.
C. Counters must confirm the validity of inventory existence, amounts, and quality.
D. Second counts by a different counter.
E. All of these.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: C2
AACSB: Communications
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: C2
6-5
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C2
78. During a period of steadily rising costs, the inventory valuation method that yields the
lowest reported net income is:
A. Specific identification method.
B. Average cost method.
C. Weighted-average method.
D. FIFO method.
E. LIFO method.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: A1
79. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. WIFO
AACSB: Communications
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: A1
6-6
6-7
6-8
Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated
by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this
information, the correct cost of goods sold figure for Year 2 would be:
A. $291,000
B. $276,000
C. $264,000
D. $285,000
E. $249,000
If ending inventory for Year 1 was reported at $130,000 but was understated by $15,000, the
correct ending inventory figure for Year 1 was $145,000. That amount becomes the beginning
inventory for Year 2. Add to that amount the $275,000 of cost of goods purchased in Year 2
and you get cost of goods available for sale of $420,000. Finally, the reported ending
inventory figure for Year 2 of $135,000 was overstated by $6,000. Thus, the correct ending
inventory figure for Year 2 was $129,000. Subtracting ending inventory of $129,000 from
cost of goods available for sale of $420,000 yields cost of goods sold of $291,000.
6-9
The beginning inventory balance for Year 1 is correct. The ending inventory balance for Year
2 is also correct. However, the ending inventory figure for Year 1 was overstated by $20,000.
Given this information, the correct gross profit figures for Year 1 and Year 2 would be:
A. $129,000 for Year 1 and $256,000 for Year 2.
B. $281,000 for Year 1 and $274,000 for Year 2.
C. $129,000 for Year 1 and $276,000 for Year 2.
D. $169,000 for Year 1 and $236,000 for Year 2.
E. $169,000 for Year 1 and $276,000 for Year 2.
If ending inventory of $144,000 for Year 1 were overstated by $20,000, the correct amount of
ending inventory was $124,000. As a result, cost of goods sold for Year 1 was not $261,000 as
reported, but rather $281,000. Thus, gross profit for Year 1 was $129,000 (Sales of $410,000 Cost of Goods Sold of $281,000). The adjusted ending inventory balance for Year 1
($124,000) becomes the beginning inventory balance for Year 2. Adding to that figure the
$302,000 of purchases during the year and you get cost of goods available for sale of
$426,000. If we then subtract the $152,000 of ending inventory for Year 2, we get cost of
goods sold in Year 2 of $274,000. Accordingly, gross profit for Year 2 is $276,000 (Sales of
$550,000 - Cost of Goods Sold of $274,000).
6-10
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: A3
6-11
96. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million,
and average inventory of $1,965 million. Its inventory turnover equals:
A. 0.21.
B. 4.51
C. 4.79.
D. 76.1 days.
E. 80.9 days.
9,421/1,965 = 4.79 times
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Med
Learning Objective: A3
6-12
97. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million,
and average inventory turnover of $1,965 million. Its days' sales in inventory equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9.days.
2,089//9,421 * 365 = 80.9 days
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Med
Learning Objective: A3
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: P1
99. Management must confront which of the following considerations when accounting for
inventory:
A. Costing (valuation) method.
B. Inventory system (perpetual or periodic).
C. Items to be included and their cost.
D. Use of lower of cost or market or other estimate.
E. All of these.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: P1
6-13
100. The inventory valuation method that identifies each item in ending inventory with a
specific purchase and invoice is the:
A. Weighted average inventory method.
B. First-in, first-out method.
C. Last-in, first-out method.
D. Specific identification method
E. Retail inventory method.
101. A company had the following purchases during the current year:
On December 31, there were 26 units remaining in ending inventory. These 26 units consisted
of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November.
Using the specific identification method, what is the cost of the ending inventory?
A. $3,500.
B. $3,800.
C. $3,960.
D. $3,280.
E. $3,640.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: P1
6-14
102. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method,
what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
Units available = 5 + 10 + 6 = 21 units
Units in inventory = 21 - 8 units = 13 units
Cost of inventory = (5 x $20) + (8 x $22) = $276
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: P1
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: P1
6-15
104. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual
inventory method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
(10 units x $10) + ($2 x $12) = $124
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: P1
105. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it
purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On
August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value of
the inventory at August 12 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 - 30 = 15 units
Cost of inventory = 15 x $14 each = $210
106. A company had inventory of 5 units at a cost of $20 each on November 1. On November
2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On
November 8, it sold 18 units for $54 each. Using the LIFO perpetual inventory method, what
was the cost of the 18 units sold?
A. $395.
B. $410.
C. $450.
D. $510.
E. $520.
6-16
If the ending inventory is reported at $276, what inventory method was used?
A. LIFO method.
B. FIFO method.
C. Weighted-average method.
D. Specific identification method.
E. Retail inventory method.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: P1
6-17
109. Given the following information, determine the cost of the inventory at June 30 using the
LIFO perpetual inventory method.
6-18
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: P1
110. In applying the lower of cost or market method to inventory valuation, market is defined
as:
A. Historical cost.
B. Current replacement cost.
C. Current sales price.
D. FIFO.
E. LIFO.
111. Generally accepted accounting principles require that the inventory of a company be
reported at:
A. Market value.
B. Historical cost.
C. Lower of cost or market.
D. Replacement cost.
E. Retail value.
6-19
113. A company normally sells its product for $20 per unit. However, the selling price has
fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16
per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this
company's inventory at the lower of cost or market.
A. $2,550.
B. $2,600.
C. $2,700.
D. $3,000.
E. $3,200.
200 units @ $13 per unit = $2,600
114. A company has the following per unit original costs and replacement costs for its
inventory:
Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory
is:
A. $1,180.00.
B. $1,075.00.
C. $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the
inventory as a whole.
D. $1,112.50.
E. $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to
the inventory as a whole.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: P2
6-20
115. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic
inventory method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
(10 units x $10) + ($2 x $12) = $124
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: P3
6-21
In a periodic inventory system, using the weighted-average inventory method, the company's
ending inventory would be:
A. $2,000.
B. $2,200.
C. $2,250.
D. $2,400.
E. $4,400.
6-22
If the ending inventory is reported at $357, what inventory method was used?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
E. Retail inventory method.
6-23
The company's average gross profit ratio is 35%. What is the estimated cost of the lost
inventory?
A. $ 9,705.
B. $25,995.
C. $29,250.
D. $44,000.
E. $45,000.
COGS = ($55,000 - $700) x 65% = $35,295
Goods available for sale = $28,000 + $17,000 = $45,000
EI = $45,000 - $35,295 = $9,705
121. A company reported the following information regarding its inventory.
Beginning inventory: cost is $70,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory showed $105,000 worth of merchandise available at retail prices.
What is the cost of the ending inventory?
A. $ 48,300.
B. $ 56,700.
C. $ 56,441.
D. $ 78,300.
E. $105,000.
6-24
124. On December 31, a company needed to estimate its ending inventory to prepare its fourth
quarter financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross
profit method would be:
A. $ 4,000.
B. $ 6,000.
C. $10,000.
D. $16,000.
E. $34,000.
6-25
6-26
6-27
86. When two clerks share the same cash register it is a violation of which internal control
principle?
A. Establish responsibilities.
B. Maintain adequate records.
C. Insure assets.
D. Bond key employees.
E. Apply technological controls.
6-28
6-29
6-30
95. The following information is available for Holland Company at December 31:
Based on this information, Holland Company should report Cash and Cash Equivalents on
December 31 of:
A. $35,421
B. $50,421
C. $37,546
D. $36,246
E. $40,439
Add $2,790 in money market fund + $22,431 of cash in bank + $200 of cash in petty cash
fund + $10,000 of U.S. Treasury bill with maturity of less than three months on date of
purchase = $35,421.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C2
6-31
96. The following information is available for Johnson Manufacturing Company at June 30:
Based on this information, Johnson Manufacturing Company should report Cash and Cash
Equivalents on June 30 of:
A. $15,062
B. $20,146
C. $20,072
D. $19,205
E. $19,462
Add $6,455 of cash in bank + $12,400 of money market fund, $350 of petty cash balance +
$257 of money orders = $19,462.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: C2
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C3
6-32
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C3
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C3
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C3
6-33
101. For which item does a bank NOT issue a debit memorandum?
A. To notify a depositor of all withdrawals through an ATM.
B. To notify a depositor of a fee assessed to the depositor's account.
C. To notify a depositor of a uncollectible check.
D. To notify a depositor of periodic payments arranged in advance, by a depositor.
E. To notify a depositor of a deposit to their account.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: C3
6-34
6-35
107. A company had net sales of $31,500 and ending accounts receivable of $2,700 for the
current period. Its days' sales uncollected equals:
A. 11.7 days.
B. 23.3 days.
C. 31.3 days.
D. 42.5 days.
E. 46.6 days.
6-36
If net credit sales and cost of goods sold for the current year were $612,000 and $367,200,
respectively, the firm's days' sales uncollected for the year is:
A. 60 days
B. 85 days
C. 42 days
D. 154 days
E. 70 days
($70,422/$612,000) x 365 = 42 days
110. An income statement account that is used to record cash overages and cash shortages
arising from petty cash transactions or from errors in making change is titled:
A. Cash Lost.
B. Bank Reconciliation.
C. Petty Cash.
D. Cash Over and Short.
E. Cash Receivable.
6-37
6-38
B.
C.
D.
E.
118. At the end of the day, the cash register tape shows $1,000 in cash sales but the count of
cash in the register is $1,035. The proper entry to account for this excess includes a:
A. Credit to Cash for $35.
B. Debit to Cash for $35.
C. Credit to Cash Over and Short for $35.
D. Debit to Cash Over and Short for $35.
E. Debit to Petty Cash for $35.
119. A key factor in a voucher system is:
A. Only approved departments and individuals are authorized to incur an obligation that will
result in the payment of cash.
B. Procedures for purchasing, receiving and paying for merchandise are divided among
several departments.
C. The system limits the individuals that can incur cash payment obligations for a company.
D. It should be extended to all expenses.
E. All of these.
6-39
120. The entry necessary to establish a petty cash fund should include:
A. A debit to Cash and a credit to Petty Cash.
B. A debit to Cash and a credit to Cash Over and Short.
C. A debit to Petty Cash and a credit to Cash.
D. A debit to Petty Cash and a credit to Accounts Receivable.
E. A debit to Cash and a credit to Petty Cash Over and Short.
121. The entry to record reimbursement of the petty cash fund for postage expense should
include:
A. A debit to Postage Expense.
B. A debit to Petty Cash.
C. A debit to Cash.
D. A debit to Cash Short and Over.
E. A debit to Supplies.
122. When a petty cash fund is in use:
A. Expenses paid with petty cash are recorded when the fund is replenished.
B. Petty Cash is debited when funds are replenished.
C. Petty Cash is credited when funds are replenished.
D. Expenses are not recorded.
E. Cash is debited when funds are replenished.
123. In reimbursing the petty cash fund:
A. Cash is debited.
B. Petty Cash is credited.
C. Petty Cash is debited.
D. Appropriate expense accounts are debited.
E. No expenses are recorded.
124. Assume that the custodian of a $450 petty cash fund has $62.50 in coins and currency
plus $382.50 in receipts at the end of the month. The entry to replenish the petty cash fund
will include:
A. A debit to Cash for $377.50.
B. A credit to Cash Over and Short for $5.00.
C. A debit to Petty Cash for $382.50.
D. A credit to Cash for $387.50.
E. A debit to Cash for $387.50.
$450 - 62.50 - 382.50 = $5.00 cash shortage
$382.50 + 5.00 = $387.50 reimbursement and credit to cash
125. A company plans to decrease a $200 petty cash fund to $75. The current balance in the
account includes $45 petty cash payment in receipts and $165 in currency. The entry to reduce
the fund will include a:
A. Debit to Cash Short and Over for $10.
B. Debit to Cash for $90.
C. Debit to Miscellaneous Expenses for $35.
D. Credit to Petty Cash for $165.
E. Credit to Cash for $90.
6-40
127. Martha Company has an established petty cash fund in the amount of $500. The fund
was last reimbursed on November 30. At the end of December, the fund contained the
following petty cash receipts:
If, in addition to these receipts, the petty cash fund contains $301 of cash, the journal entry to
reimburse the fund on December 31 will include:
A. A debit to Transportation-In of $73.
B. A debit to Transportation-Out of $73.
C. A credit to Office Supplies of $66.
D. A credit to Cash Over and Short of $10.
E. A debit to Cash Over and Short of $10.
Opening cash balance of $500. Subtract the $189 of disbursements from the petty cash fund
during December (as evidenced by the petty cash receipts). This yields an expected cash
balance of $311. Since there is only $301 of cash in the fund, the journal entry to reimburse
the fund will include a $10 debit to Cash Over and Short.
128. An analysis that explains any differences between the checking account balance
according to the depositor's records and the balance reported on the bank statement is a(n):
A. Internal audit.
B. Bank reconciliation.
C. Bank audit.
D. Trial reconciliation.
E. Analysis of debits and credits.
6-41
129. On a bank reconciliation, an unrecorded debit memorandum for printing checks is:
A. Noted as a memorandum only.
B. Added to the book balance of cash.
C. Deducted from the book balance of cash.
D. Added to the bank balance of cash.
E. Deducted from the bank balance of cash.
130. Outstanding checks refer to checks that have been:
A. Written, recorded, sent to payees, and received and paid by the bank.
B. Written and not yet recorded in the company books.
C. Held as blank checks.
D. Written, recorded on the company books, sent to the customer, but have not yet been paid
by the bank.
E. Issued by the bank.
131. On a bank reconciliation, the amount of an unrecorded bank service charge should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Noted in memorandum form only.
132. A check that was outstanding on last period's bank reconciliation was not among the
cancelled checks returned by the bank this period. As a result, in preparing this period's
reconciliation, the amount of this check should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Ignored in preparing the period's bank reconciliation.
133. A company made a bank deposit on September 30 that did not appear on the bank
statement dated as of September 30. In preparing the September 30 bank reconciliation, the
company should:
A. Deduct the deposit from the bank statement balance.
B. Send the bank a debit memorandum.
C. Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance.
D. Add the deposit to the book balance of cash.
E. Add the deposit to the bank statement balance.
6-42
136. In the process of reconciling Marks Enterprises' bank statement for September, Mr.
Marks compiles the following information:
6-43
137. Which of the following events would cause a bank to debit a depositor's account?
A. The depositor authorizes the bank to charge the depositor's account $50 for new checks.
B. The bank collects a note receivable and related interest on the depositor's behalf.
C. The depositor determines there are outstanding checks drawn on the account at month-end.
D. The depositor determines there are deposits in transit on the account at month-end.
E. The bank determines it incorrectly charged the depositor's account twice for the monthly
service charge in a previous month.
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141. The document that is an itemized statement of goods prepared by a vendor listing the
customer's name, items sold, sales prices, and terms of the sale is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval
142. The internal document that is prepared to notify the appropriate persons that ordered
goods have been received and describes the quantities and condition of the goods is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval
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C.
D.
E.
$2,000 x .99 = $1,980
150. A company records purchases using the net method. On February 1, they purchased
merchandise inventory on account for $8,300 with terms of 1/10, n/30. The February 1 journal
entry to record this transaction would include a:
A. Debit to Merchandise Inventory of $8,300.
B. Debit to Merchandise Inventory of $8,217.
C. Debit to Merchandise Inventory of $83.
D. Credit to Merchandise Inventory of $83.
E. Credit to Accounts Payable of $8,300.
$8,300 x .99 = $8,217
Multiple Choice Questions
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62. The accounting principle that requires financial statements (including notes) to report all
relevant information about the operations and financial condition of a company is called:
A. Relevance.
B. Full disclosure.
C. Evaluation.
D. Materiality.
E. Matching.
63. A promissory note:
A. Is a short-term investment for the maker.
B. Is a written promise to pay a specified amount of money at a certain date.
C. Is a liability to the payee.
D. Is another name for an installment receivable.
E. Cannot be used in payment of an account receivable.
64. The maturity date of a note receivable:
A. Is the day of the credit sale.
B. Is the day the note was signed.
C. Is the day the note is due to be paid.
D. Is the date of the first payment.
E. Is the last day of the month.
65. The interest accrued on $6,500 at 6% for 60 days is:
A. $ 36.
B. $ 42.
C. $ 65.
D. $180.
E. $420.
$6,500 x 0.06 x 60/360 = $65
66. A 90-day note issued on April 10 matures on:
A. July 9.
B. July 10.
C. July 11.
D. July 12.
E. July 13.
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A.
B.
C.
D.
E.
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86. A method of estimating bad debts expense that involves a detailed examination of
outstanding accounts and their length of time past due is the:
A. Direct write-off method.
B. Aging of accounts receivable method.
C. Percentage of sales method.
D. Aging of investments method.
E. Percent of accounts receivable method.
87. An accounting procedure that (1) estimates and reports bad debts expense from credit
sales during the period the sales are recorded, and (2) reports accounts receivable at the
estimated amount of cash to be collected is the:
A. Allowance method of accounting for bad debts.
B. Aging of notes receivable.
C. Adjustment method for uncollectible debts.
D. Direct write-off method of accounting for bad debts.
E. Cash basis method of accounting for bad debts.
8. On December 31 of the current year, a company's unadjusted trial balance included the
following: Accounts Receivable, debit balance of $97,250; Allowance for Doubtful Accounts,
credit balance of $951. What amount should be debited to Bad Debts Expense, assuming 6%
of outstanding accounts receivable at the end of the current year will be uncollectible?
A. $ 951.
B. $3,992.
C. $4,884.
D. $5,835.
E. $6,786.
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D.
E.
90. A company used the percent of sales method to determine its bad debts expense. At the
end of the current year, the company's unadjusted trial balance reported the following selected
amounts:
All sales are made on credit. Based on past experience, the company estimates 0.6% of credit
sales to be uncollectible. What amount should be debited to Bad Debts Expense when the
year-end adjusting entry is prepared?
A. $1,275
B. $1,775
C. $4,500
D. $4,800
E. $5,500
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All sales are made on credit. Based on past experience, the company estimates 0.6% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A.
B.
C.
D.
E.
$800,000 x .006 = $4,800
92. A company has $90,000 in outstanding accounts receivable and it uses the allowance
method to account for uncollectible accounts. Experience suggests that 6% of outstanding
receivables are uncollectible. The current debit balance (before adjustments) in the allowance
for doubtful accounts is $800. The journal entry to record the adjustment to the allowance
account includes a debit to Bad Debts Expense for:
A. $4,600
B. $5,400
C. $6,200
D. $6,800
E. None of these
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93. Electron borrowed $75,000 cash from TechCom by signing a promissory note. TechCom's
entry to record the transaction should include a:
A. Debit to Notes Receivable for $75,000.
B. Debit to Accounts Receivable for $75,000.
C. Credit to Notes Receivable for $75,000.
D. Debit Notes Payable for $75,000.
E. Credit to Sales for $75,000.
94. The amount due on the maturity date of a $6,000, 60-day 8%, note receivable is:
A. $6,000.
B. $6,480.
C. $5,520.
D. $6,080.
E. $5,920.
Interest: $6,000 x .08 x 60/360 = $80
Maturity value: $6,000 + $80 = $6,080
95. Paoli Pizza bought $5,000 worth of merchandise from TechCom and signed a 90-day,
10% promissory note for the $5,000. TechCom's journal entry to record the sales portion of
the transaction is:
A.
B.
C.
D.
E.
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E.
97. When the maker of a note honors a note this indicates that the note is:
A. Signed.
B. Paid in full.
C. Guaranteed.
D. Notarized.
E. Cosigned.
98. Failure by a promissory note's maker to pay the amount due at maturity is known as:
A. Protesting a note.
B. Closing a note.
C. Dishonoring a note.
D. Discounting a note.
E. Depreciating a note.
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99. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. What entry should TechCom make on
January 15 of the next year when the note is paid?
A.
B.
C.
D.
E.
Interest accrued at December 31: $4,800 x .10 x 75/360 = $100
Interest earned during January: $4,800 x .10 x 15/360 = $20
100. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. What entry should TechCom make on
December 31, to record the accrued interest on the note?
A.
B.
C.
D.
E.
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101. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. If the note is dishonored, what entry
should TechCom make on January 15 of the next year?
A.
B.
C.
D.
E.
Interest accrued at December 31: $4,800 x .10 x 75/360 = $100
Interest earned during January: $4,800 x .10 x 15/360 =$20
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Matching Questions
103. Match each of the following terms with the appropriate definitions.
One who signs a note and promises to pay it at
maturity.
The accounts of customers who do not pay what they
2. Payee of a note
have promised to pay a company.
A process of classifying accounts receivable by how
3. Allowance for
long it is past its due date for the purpose of estimating
doubtful accounts
the amount of uncollectible accounts.
4. Accounts
The cost of borrowing money for a borrower,
receivable
alternatively the profit from lending money for a lender.
5. Matching
A written promise to pay a specified amount either on
principle
demand or at a definite future date.
The one to whom the promissory note is made
6. Interest
payable.
Amounts due from customers arising from credit
7. Promissory note
sales.
A contra asset account with a balance approximating
the amount of accounts receivable expected to be
8. Maker of a note
uncollectible.
The expected proceeds from converting an asset into
9. Bad debts
cash.
The accounting principle that requires expenses to be
10. Aging of
reported in the same period as the sales they helped to
accounts receivable
produce.
1. Realizable value
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C1
Learning Objective: C2
Learning Objective: P1
Learning Objective: P2
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8
9
10
6
7
2
4
3
1
5
104. Match each of the following terms with the appropriate definitions.
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6
8
1
2
5
10
9
4
3
7