Exam2 - EXAM #2 SOLUTIONS Problem I. Multiple Choice (60...

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Exam #2 Assets 1 E XAM #2 SOLUTIONS Problem I. Multiple Choice (60 points; 3 points each) Calculations and explanations: (Intermediate numbers are shown in italics and the final answer is shown in bold.) 1. E. In order to allow revenue recognition for credit sales, the firm must make an estimate of the amount of bad debts (the reason for Chapter 4). Also, the entries to record the collection of an account previously written off decrease net Accounts Receivable and increase cash (debit Accounts Receivable and credit Allowance – no affect on net Accounts Receivable; debit Cash and credit Accounts Receivable – decreases net Accounts Receivable). The other answers are not true. When the sales-based method is used, the adjusting entry will only increase or have no effect on the Allowance; the adjusting entry cannot decrease the Allowance. Quick assets do include accounts receivable (but not prepaid expenses). 2. A. Use the Allowance T-account to work this problem: the beginning balance of $60,760 + $9,900 of recoveries + Bad Debt Expense – $319,780 of accounts written-off = $55,975 ending balance. Therefore, Bad Debt Expense = $305,095 . $305,095 = ?% x $8,360,000 of credit sales; ? = 3.65% (rounded). 3. C. Cash increased by $517,900 , the amount of Revenue $546,300 – the $21,200 increase in Accounts Receivable ($96,400 – $75,200) [this amount was included in Revenue but was not received in cash] – the $7,200 decrease in Unearned Revenue ($49,100 – $41,900) [this amount also was included in Revenue but was not received in cash during the current year]. Total Assets increased by $539,100 , the $517,900 increase in cash + $21,200 increase in Accounts Receivable. Shareholders’ Equity increased by $546,300 , the amount of Revenues. 4. D. The aging analysis indicates that the desired ending balance in the Allowance account is $203,170 ($632,000 x 3% + $504,900 x 10% + $334,300 x 40). 5. D. There are several ways to work this problem. T-account analysis is useful: 1) set up four T-accounts, one each for Accounts Receivable, Unearned Revenue, Revenue, and Cash, and 2) enter the known amounts. One way to proceed is to move the amounts to the Unearned Revenue account. This gives us Beginning Balance of Unearned Revenue + the $4,253,100 of cash collected – the $159,800 decrease in Accounts Receivable ($481,300 $321,500) – $4,038,600 revenue recognized = $389,900. Therefore, beginning balance = $335,200 . [Alternatively, you can assume any split of the cash and revenue numbers you like. As long as you maintain the algebraic equality of the accounts you will get the correct answer.]
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Exam #2 Assets 2 6. C. Use the Gross Profit % to work this problem: First, work the 2005 numbers: in 2005, Gross profit % = 30% = [$1,795,900 – Cost of Goods Sold] ÷ $1,795,900; therefore, $1,795,900 – Cost of Goods Sold = $538,770 means Cost of Goods Sold = $1,257,130 . 2005 Beginning Inventory + $921,130 of purchases – $121,300 ending inventory = Cost
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Exam2 - EXAM #2 SOLUTIONS Problem I. Multiple Choice (60...

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