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Financial Accounting for Farley Uncollectible Accounts

This is the Final Examination for ACC 363. It consists of 10 Parts and they add to 150 points toward your final grade. The point value is after the heading for each section. Please post your Final exam ONLY in your personal forum by the last day of class, March 9th to receive credit for the exam. No credit will be possible after the last day of class, March 9th . Good Luck!!!

Instructions: Designate the best answer for each of the following questions.

Use the following data for questions 1 and 2 below:
Quayle Company bought real estate, on which there was an old office building, for $800,000. It paid $80,000 in cash as a down payment and signed a 10% mortgage for the remainder. It immediately had the old building razed at a net cost of $70,000. Attorneys were paid $12,000 in connection with the land purchase and an additional $6,000 in connection with permits and zoning variances necessary for Quayle's new office building. $40,000 was paid for excavation for the basement of the new building, $2,800,000 was paid for construction of the new building, and $150,000 was paid for a parking lot and necessary walkways and driveways.

____ 1. The new office building should be recorded at
a. $2,800,000.
b. $2,846,000.
c. $2,840,000.
d. $2,916,000.

____ 2. Land should be recorded at a cost of
a. $870,000.
b. $882,000.
c. $928,000.
d. $922,000.

____ 3. Kotsch Textile purchased machinery for $80,000 eight years ago. It was expected to have a useful life of ten years, no salvage value, and was depreciated using the straight-line method. At the end of its eighth year of use, it was retired from service and given to a junk dealer. The entry to record the retirement includes a
a. debit to Loss on Disposal for $16,000.
b. credit to Depreciation Expense for $8,000.
c. debit to Machinery for $80,000.
d. credit to Accumulated Depreciation—Machinery for $64,000.

____ 4. Which of the following should not be included in the plant assets (property, plant, and equipment) classification?
a. Land on which warehouse sits
b. Building housing corporate headquarters
c. Parking lot used by visitors
d. All of the above should be included

____ 5. Salvage (residual) value is deducted in the computation of depreciation expense in all of the following methods with the exception of
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. All of the above include a deduction of salvage value.

____ 6. The three primary accounting problems associated with accounts receivable are
a. valuation, disposition, and statement presentation.
b. recognition, valuation, and statement presentation.
c. recognition, valuation, and disposition.
d. revenue recognition, matching, and statement presentation.

____ 7. Allowance for Doubtful Accounts is presented as a(n)
a. addition to Accounts Receivable on the balance sheet.
b. operating expense on the income statement.
c. deduction from Sales on the income statement.
d. contra asset on the balance sheet.

____ 8. Which of the following methods and bases of accounting for uncollectible accounts receivable is inconsistent with the proper application of matching?
a. Direct write-off method
b. Aging of receivables allowance method
c. Percentage of receivables basis
d. Percentage of sales basis

____ a9. When recording exchanges of similar assets,
a. losses are recognized immediately.
b. the gain or loss on the old asset is the difference between its cost and its fair market value.
c. gains are treated as increases in the cost of the new asset.
d. none of the above.

____ 10. The cost of a patent should be amortized over
a. 20 years.
b. the shorter of its legal life or its useful life.
c. the longer of its legal life or its useful life.
d. its useful life.

____ 11. On June 30, 2005, Fox Enterprises sold equipment with an original cost of $990,000 for $400,000. The equipment was purchased January 1, 2004, and was depreciated using the straight-line method assuming a five year useful life and $90,000 salvage value. The necessary entries for 2005 include a
a. debit to Accumulated Depreciation—Equipment for $180,000.
b. credit to Gain on Sale of Equipment for $320,000.
c. credit to Cash for $400,000.
d. debit to Depreciation Expense for $90,000.

____ 12. Which of the following is not an intangible asset?
a. Research and development costs
b. Copyrights
c. Franchises
d. Goodwill

Instructions: Present the journal entries specified below; show supporting calculations.

The trial balance of Farley Company at December 31, 2004 includes the following:
Debits Credits
Accounts Receivable 100,000
Allowance for Doubtful Accounts 500
Sales (all on credit) 700,000
Sales Returns and Allowances 30,000

(1) If Farley uses the aging method and estimates that $5,000 of receivables will be uncollectible, prepare the adjusting entry.

(2) If Farley estimates uncollectible accounts at 1% of net credit sales, prepare the appropriate adjusting entry.

(3) Assume that on February 10, 2005 the specific account of Mark Tresh with a balance of $600, is deemed uncollectible. Record the write-off.

(4) Assume that on May 12, 2005 Tresh pays one-half of the above balance in full and is expected to pay the remainder within 30 days. Record the appropriate entries.

Instructions: Present the journal entries specified below.

(1) Price Company sells $600,000 of accounts receivable to National Factors, Inc. for cash less a 2.5% service charge. Record the sale.

(2) American Express remits cash to Price Company in settlement of credit card billings of $3,000 less a 3% service fee. Record the settlement on the books of Price Company.

Instructions: Match the cash expenditures given below with the appropriate accounting treat-ment. An individual classification may be used more than once, or not at all.

A. Record the expenditure as an asset and depreciate it.
B. Record the expenditure as an asset and amortize it.
C. Record the expenditure as an asset and deplete it.
D. Record the expenditure as an asset but do not systematically allocate it to expense.
E. Record the expenditure as an expense in the current period.
F. None of the above is appropriate.

____ 1. Acquired a truck.
____ 2. Purchased a copyright from an author.
____ 3. Paid for minor repairs to a building.
____ 4. Purchased a producing silver mine.
____ 5. Paid attorney's fees in acquiring land.

Instructions: Prepare journal entries to record the following events:

July 1 Howell Company received an 8%, 4-month $15,000 note dated July 1 from a customer in settlement of the customer's account.

Nov. 1 The note is honored and no interest has been accrued.

Nov. 1 Assume instead that the note is dishonored by its maker and there is hope of future collection.

Nov. 1 Assume instead that the note is dishonored and there is no hope of future collection.

Schilling Corporation purchased a machine on January 1, 2004, at a total cost of $600,000. The machine has an estimated useful life of 10 years or 1,000,000 units of output and a salvage value of $100,000.

Instructions: Complete the following table by presenting the annual depreciation expense for the years 2004 and 2005, under the indicated depreciation methods. Assume actual activity in terms of units of output was: 2004—60,000 units and 2005—120,000 units.

Annual Depreciation Expense
2004 2005
Straight-Line: $ $

(Supporting Computations)

Double-Declining-Balance: $ $

(Supporting Computations)

Units-of-Activity: $ $

(Supporting Computations)

Instructions: Complete the requirements specified for each of the following independent situations.

A. Kiner Company purchased land and an office building on March 1 for a combined cash price of $1,800,000. The land had a cost of $1,050,000 and the building had a book value of $225,000 on the seller's books. The land and building had fair market values of $1,170,000 and $630,000, respectively on March 1. Kiner made the following entry at acquisition:

Land 1,050,000
Building 1,125,000
Gain on Purchase 150,000
Accumulated Depreciation 225,000
Cash 1,800,000

Prepare the correct entry for the acquisition.

B. Melton Company bought machinery on January 1, 2003 at a cost of $500,000. The machinery had an estimated life of 10 years and salvage value of $50,000. In December 2005, Melton estimates that the machinery will have a life of only 5 more years and a $60,000 salvage value. Melton uses straight-line depreciation. Compute the revised annual depreciation.

C. Greene Company bought equipment on July 1, 2004 at a total cost of $900,000. The equipment has an estimated useful life of 5 years and salvage value of $180,000. Greene uses the double-declining-balance method of depreciation. Compute depreciation for 2004 and 2005.

a1. Wells Construction exchanged an old crane and $80,000 cash for a similar new crane. The old crane cost $120,000, had $45,000 of accumulated depreciation, and a fair market value of $85,000. In recording this exchange, the new crane should be recorded at


a2. Brown Builders exchanged an old diesel-powered electric generator and $15,000 cash for a new truck. The generator cost $51,000, had $30,000 of accumulated depreciation, and a fair market value of $18,000. In recording this exchange, the new truck should be recorded at


3. Midwest Mining purchased an iron mine for $2,000,000. The mine was expected to produce 10,000,000 tons of ore over twenty years with no salvage value. During the first year, 600,000 tons of ore were mined and sold. Depletion expense for the first year is


4. Morris Industries purchased equipment costing $100,000 on January 1, 2004. The equipment has a four-year useful life, $20,000 salvage value, and is being depreciated using the straight-line method. It was sold at a $30,000 loss on June 30, 2006. The selling price of the equipment was


5. Hi-Tech Corporation incurred $85,000 of research and development costs to successfully produce a high technology solar computer, paid filing fees of $8,000 to register a patent on this product, and paid $52,000 to defend the patent against infringement by a competitor. All of these costs were incurred in 2004. Production of solar computers began on January 1, 2005. Assuming the patent has a useful life of 12 years, patent expense for 2005 is



Designate the best answer for each of the following questions.

____ 1. The inventory turnover ratio is computed by dividing the average inventories into
a. net sales.
b. total assets.
c. cost of goods sold.
d. stockholders' equity.

____ 2. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities.
d. total expenses.

____ 3. Which one of the following transactions does not affect cash?
a. Acquisition and retirement of bonds payable.
b. Write-off of an uncollectible accounts receivable.
c. Acquisition of treasury stock.
d. Payment of a cash dividend.

_____ 4. The purchase of office equipment for cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flows.

_____ 5. Which of the following is a financing activity?
a. purchase of treasury stock.
b. purchase of trading securities.
c. purchase of inventory.
d. purchase of equipment.

____ 6. If a loss of $13,000 is incurred in selling (for cash) equipment having a book value of $45,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is
a. $32,000.
b. $45,000.
c. $13,000.
d. $58,000.

_____ 7. Roses Paint reported sales of $350,000, total assets of $150,000, total stockholders' equity of $60,000, current assets of $50,000, current liabilities of $30,000, and cash of $15,000. In a vertical analysis of the balance sheet, cash would be shown as
a. 25%.
b. 10%.
c. 30%.
d. 20%.

____ 8. Common size analysis is an alternative term for
a. ratio analysis.
b. horizontal analysis.
c. liquidity analysis.
d. vertical analysis.

____ 9. The purchase of an office building by issuing long-term notes payable should be reported as a
a. cash outflow in the financing section of the statement of cash flows.
b. cash outflow in the investing section of the statement of cash flows.
c. cash outflow in the operating section of the statement of cash flows.
d. noncash investing and financing activity.

____ 10. As an indicator of financial health, a low ratio is desirable for the
a. asset turnover ratio.
b. return on assets ratio.
c. debt to total assets ratio.
d. current ratio.

____ 11. Swanson Company had inventory of $220,000 and $180,000 on December 31, 2004, and December 31, 2005, respectively. Cost of goods sold for 2005 was $1,560,000. Average days in inventory is approximately
a. 46.8.
b. 7.8.
c. 51.1.
d. 7.1.

____ 12. When using the indirect method to compute cash provided by operations
a. income taxes paid may be ignored.
b. depreciation expense is added to net income.
c. increases in inventory are added to net income.
d. decreases in accounts receivable are subtracted from net income.

____ 13. In the statement of cash flows, the activities that affect cash flows are listed in the following order:
a. investing, financing, operating
b. operating, financing, investing
c. financing, operating, investing
d. operating, investing, financing

____ 14. A transaction involving a loss on the sale of equipment affects cash provided (used) by
a. operations and investing activities.
b. operations and financing activities.
c. financing activities and investing activities.
d. operations, financing activities, and investing activities.

____ 15. One major purpose of the statement of cash flows is to provide information about
a. the firm's profitability.
b. the firm's cash receipts and payments during a period.
c. the firm's resources and claims against those resources.
d. changes in retained earnings.

____ 16. Fancy Fashions bought machinery at a cost of $80,000 on January 1, 2004. On January 1, 2006, they decided to switch from the straight-line to the double-declining- balance method of depreciation. The cumulative effect of this change in accounting principle is reported as
a. part of income before irregular items.
b. part of discontinued operations.
c. an extraordinary item.
d. a separate amount between extraordinary items and net income.


Selected financial information for Latimer Corporation as of December are presented below.

2006 2005

Current assets $ 30,000 $ 36,000
Current liabilities 15,000 26,000
Long-term notes payable 35,000 19,000
Stockholders' equity 55,000 45,000
Total assets $110,000 $ 90,000

Additional Information: Net sales and net income for 2006 were $250,000 and $20,000 respectively. Dividends of $ 8,000 were declared for common stockholders in 2006.

Compute the indicated ratios at December 31, 2006, or for the year ended December 31, 2006, as appropriate. Report answers to two decimal places.
1. Return on assets is
2. Profit margin is
3. Payout ratio is
4. Debt to total assets is
5. Current ratio is
6. Return on common stockholders' equity is


Each of the events below may have an effect on the statement of cash flows. Designate how the event should be reported within the statement of cash flows using the codes provided below. Codes may be used more than once, or not at all.

A. Investing activity; cash inflow
B. Investing activity; cash outflow
C. Financing activity; cash inflow
D. Financing activity; cash outflow
E. Operating activity; cash inflow
F. Operating activity; cash outflow
G. Noncash investing and financing activity


_____ 1. Issued checks for the weekly payroll

_____ 2. Paid an account payable

_____ 3. Issued bonds payable for cash

_____ 4. Declared and paid a cash dividend

_____ 5. Paid cash for a new car for a traveling salesperson

_____ 6. Purchased treasury stock for cash

_____ 7. Paid cash for 40% interest in another company

_____ 8. Received interest on a long-term bond investment

_____ 9. Converted bonds payable into common stock

_____ 10. Sold a long-term stock investment for cash at book value


Solution Summary

The solution examines financial accounting for Farley's collectible accounts.