ACCT 3331

Exam 2 Review

Chapter 18 – Revenue Recognition

Know the revenue recognition principle and how to account for revenue recognized at the point

of sale / delivery.

Know how to account for long-term construction contracts using use the percentage-of-

completion method (including scenarios with current period losses and overall contract losses).

Know how to account for installment sales using both the installment sales method and the cost

recovery method.

Chapter 7 – Cash and Receivables

Review the accounting for cash discounts using either the gross or net method.

Understand the steps necessary to calculate (1) bad debt expense for a given year, (2) the ending

balance in the allowance for bad debt account, and (3) net realizable value of accounts receivable

using either the income statement (percentage of sales) method or the balance sheet (percentage

of receivables) method.

Know the journal entries required to write-off actual uncollectible accounts and to recover a

previously written-off account.

Be able to use the present value tables to calculate the present value of future cash flows

associated with a Note Receivable.

Understand how to account for zero-interest-bearing notes receivables, as well as notes whose

stated interest rate is different from the market rate of interest.

Be familiar with using an amortization table to determine interest revenue, discount amortization,

carrying value, etc.

Chapter 8 – Inventory

Know the COGS formula used with the periodic inventory system.

Review the accounting for cash discounts using either the gross or net method, as well as the

journal entries used to record purchases and sales of inventory.

Know how to value ending inventory and COGS under the weighted-average method (perpetual

and periodic systems), FIFO (perpetual and periodic systems), and LIFO (perpetual and periodic

systems).

Know the advantages and disadvantages of FIFO versus LIFO.

Understand the conversion from FIFO to Dollar Value (DV) LIFO.

Chapter 9 – Lower of Cost or Market

Be able to calculate floor and ceiling amounts under the lower of cost or market rule (LCM).

Determine ending inventory values under LCM and accounting for write-downs of inventory

when market is lower than cost (using both the direct and indirect methods).

Example Problems Chapters 18 and 7-9

1. Astra Construction Company contracted to build an office building for $4,000,000. Construction

began in 2003 and was completed in 2004. Data relating to the contract are summarized below:

2003 2004

Costs incurred during the year 1,400,000 2,000,000

Estimated costs to complete as of 12/31 2,200,000 0

Billings during the year 1,900,000 2,100,000

Cash collections during the year 1,500,000 2,000,000

What amount of income (e.g., gross profit) on the long term contract would Astra report in 2003 and 2004

if the firm uses the percentage of completion method of accounting for long term contracts?

2003 2004

Income on Long Term Contract

2. In 2004, Mighty Mouse sold equipment to the Littleton Company for $65,000. The equipment cost

Mighty Mouse $47,000. Mighty Mouse collected $20,000 in 2004, $30,000 in 2005 and $15,000 in 2006.

REQUIRED: If Mighty Mouse uses the cost recovery method of accounting for installment sales, what

amount of gross profit will be recognized in each year?

2004 2005 2006

Gross Profit on Installment Sales

3. Duncan’s Appliance Warehouse made sales of $300,000 in 2000 that qualified for the installment sales

method of accounting. The items sold had originally cost Duncan’s $195,000. During 2000, Duncan’s

collected cash from installment customers of $135,000. The remaining amount will be collected in 2001.

REQUIRED: Prepare all of the necessary entries to correctly report the installment sale in the 2000

financial statements.

4. On June 3, Comet Corp. sold merchandise with a sales price of $5,000 under terms of 2/10, n/60. On

June 12, Comet received a check for the balance due from the customer.

A. Prepare the required journal entries on June 3 and June 12, assuming Comet records sales using the

gross method.

B. If this were the only sale that took place during the year, what amount of net sales revenue would

Comet Corp. record on its year-end financial statements?

$ _______________________________

5. At the end of 2008, Comet Company has accounts receivable of $500,000 and an Allowance for Bad

Debt of $25,000 (credit). On January 24, 2009, it learns that the company’s receivable from Crusader Inc.

is not collectible and therefore management authorizes a write-off of their account for $10,000.

a. Prepare the journal entry to record the write-off of the uncollectible account.

b. What is the Net Realizable Value of the Accounts Receivables:

1. Before the write-off _____________________________

2. After the write-off _____________________________

6. The following balances relate to Smith Company:

Credit Sales $1,000,000

ABD (1/1/06) $2,000 (credit)

Accounts Receivable (1/1/06) $48,000

Annual bad debts are estimated to be 3% of credit sales. An account with a balance of $400,

previously written off, is collected during 2006. Furthermore, $800 of the accounts are written off in

2006 as uncollectible. The balance in the Allowance for Bad Debts account at December 31, 2006

(after adjustment) would be:

7. The ledger of the Patio Company at the end of the current year shows accounts receivable of $80,000

and credit sales of $900,000.

If the Allowance for Bad Debt has a debit balance of $500 before adjustment, determine the ending

balance in the Allowance account after adjustment assuming the company uses either of the following

two methods to estimate bad debts (these are independent situations, so work each separately):

1. 0.75% of credit sales –

2. 8% of Accounts Receivable –

8. On December 31, 2010 ABC rendered services in exchange for an 8%, 5 year promissory note having a

face value of $80,000. Interest was to be paid semi-annually. This customer had a credit rating which

required that money be borrowed at 10% interest.

REQUIRED: Answer the following questions.

A. What amount of Service Revenue will ABC record on December 31, 2010 (the date the note is

issued)?

$_____________________________

B. Using the effective interest method, determine interest revenue for ABC for the year ended December

31, 2011.

$ ________________________________

C. What is the unamortized portion of the discount as of December 31, 2011?

$ __________________________________

D. Determine the carrying value of the note on ABC’s balance sheet on December 31, 2012.

$ _________________________________

9. ABC sold one of its best-selling products on January 1st and received in exchange a 5-year, $100,000

zero-interest-bearing note. The market rate of interest for a note of similar risk is 6% (compounded

annually). How does ABC record the receipt of this note on January 1st? What journal entry will ABC

make on December 31st of the same year?

10. True or False? When using the periodic method, new purchases of inventory are credited to the

temporary Purchases account.

11. Use the following data to answer parts A and B below:

Jan. 1 Beginning inventory 2,200 units @ $4

Jan. 15 Purchase 6,000 units @ $4.40

Jan. 19 Sale 4,000 units

Jan. 30 Purchase 2,000 @ 4.75

A. What is (a) ending inventory and (b) cost of goods sold assuming a periodic inventory system

and a LIFO cost flow assumption?

B. What is (a) ending inventory and (b) cost of goods sold assuming a perpetual inventory

system and a weighted-average cost flow assumption?

Suppose a company that handles medical supplies has these inventory records for March 2010:

Date Item Quantity Per Unit Total

Mar. 1 Beg. Inv. 200 $27.00 $5,400

Mar. 4 Purchase 376 $26.50 $9,964

Mar. 13 Purchase 330 $26.00 $8,580

Mar. 19 Purchase 225 $25.40 $5,715

Mar. 24 Purchase 300 $25.00 $7,500

It also made the following sales during the month:

Date Item Quantity Per Unit Total

Mar. 7 Sale 400 $63.00 $25,200

Mar. 22 Sale 570 $63.75 $36,337.50

Mar. 28 Sale 130 $64.50 $8,385

Company records reveal that operating expenses for March were $20,500. Fill in the appropriate value for each of

the questions below (1 pt each).

12. Ending Inventory using FIFO and a perpetual inventory system is (round to nearest dollar):

$

13. Gross profit using the weighted average method and a periodic inventory system is (round unit cost to two

decimal places):

$ ,

14. Net income using FIFO and a periodic inventory system is (round to the nearest dollar):

$

15. Suppose Comet Company adopts dollar-value LIFO on December 31, 2008. Inventory at current

prices on that date was $20,000. Inventory at current prices on Dec. 31, 2009 is $26,400. If prices have

increased 20% during 2009, what is ending inventory on Dec. 31, 2009 using dollar-value LIFO?

16. The following information relates to the Choctaw Company.

Date Ending Inventory (end-of-year

prices)

Price Index

December 31, 2007 70,000 1.00

December 31, 2008 88,200 1.05

December 31, 2009 95,120 1.16

REQUIRED: Use the dollar-value LIFO method to compute the ending inventory for 2007 through 2009.

17. Unit costs of the principle product sold by a company are shown in the top line of the table below for

5 different products. Beneath the actual cost figures are the anticipated selling prices and replacement

costs of the product. Distribution costs average $12 per unit and “normal profit” has averaged 10 percent

of sales prices. Applying lower-of-cost-or-market, determine unit inventory values for each case.

1 2 3 4 5

Actual Cost $140

156 152 160 160

Sales Price 160

180 180 190 190

Replacement Cost 150

154 146 162 158

Ceiling Value

Floor Value

Inventory Value

SOLUTIONS:

1. 2003 gross profit = $155,600

2004 gross profit = $444,400

2. 2004 gross profit = 0

2005 gross profit = $3,000

2006 gross profit = $15,000

3.

Installment A/R 300,000

Installment Revenue 300,000

Cost of Installment Sales 195,000

Inventory 195,000

Cash 135,000

Installment A/R 135,000

Installment Revenue 300,000

Cost of Installment Sales 195,000

Deferred Gross Profit 105,000 (plug)

GP% = (35%)(135,000) = 47,250 realized gross profit

Deferred G.P. 47,250

Realized G.P. 47,250

4. A.

June 3:

A/R 5000

Revenue 5000

June 12:

Cash 4900

Sales Discounts 100

A/R 5000

4. B. 4900

5. A.

ABD 10,000 Before write-off: A/R 500,000

A/R 10,000 -ABD (25,000)

NRV 475,000

After write-off: A/R 490,000

-ABD (15,000)

NRV 475,000

5. B (#1) = 475,000

5. B (#2) = 475,000

6. Ending ABD = 31,600

7. (#1) = 0.0075*900,000 = 6750 Ending balance in ABD = 6250

7. (#2) = 0.08*80,000 = 6400 Ending balance in ABD = 6400

8. A. $73,823 (present value of lump sum + present value of periodic payments of $3200)

8. B. Interest Revenue = $7,407 (3691+3716)

8. C. Unamortized discount on Dec. 2011 = $5,170

8. D. Carrying Value on December 2012 = $75,941

9.

100,000(0.74726) = $74,726

January 1st:

N/R 100,000

Discount on N/R 25,274

Cash 74,726

December 31st:

Carrying value = 74,726 * 0.06 = 4,484 (interest revenue for the 1st year)

Discount on N/R 4484

Interest Revenue 4484

10. FALSE

11. A. Ending Inventory = $26,400 (2200 x 4 + 4000 x 4.40)

Cost of Goods Sold = $18,300 (2000 x 4.75 + 2000 x 4.40)

11. B. Ending Inventory = $17,171

Cost of Goods Sold = $27,529

12. $8287

13. $41,356

14. $20,551

15.

Ending inventory in 2009 at base year prices is $26,400 / 1.20 = $22,000.

20,000*1.00 = 20,000

2,000*1.20 = 2400

First layer of $20,000 + Second layer of $2400 = Ending inventory on Dec. 31, 2009 of $22,400

16. 2007 ending inventory = $70,000

2008 ending inventory = $84,700

($14,000 “real” increase * 1.05 = $14,700 + 70,000 from 2007)

2009 ending inventory = $82,600

($2000 “real” decrease --- layer 2 = $12,000 * 1.05 = $12,600 + 70,000)

17.

1 2 3 4 5

Actual Cost $140 156 152 160 160

Sales Price 160 180 180 190 190

Replacement Cost 150 154 146 162 158

Ceiling Value 148 168 168 178 178

Floor Value 132 150 150 159 159

Inventory Value 140

(cost)

154

(mkt)

150 160 159

For #1 = ceiling = sales price – disposal cost = 160-12 = 148

Floor = NRV – normal profit margin = 148 – (0.10*160) = 132

Market = ceiling = 148