Financial Accounting Exam II, Quiz Questions
Questions and Answers
- 1.
On April 1, 2012, Nelson Inc. accepts a $100,000, 8% note. The note receivable and interest are receivable on March 31, 2013. On March 2013, Nelson Inc. will record interest revenue of
- A.
$8000
- B.
$0
- C.
$6000
- D.
$2000
Correct Answer
D. $2000Explanation
The note is for $100,000 with an interest rate of 8%. To calculate the interest revenue, we multiply the principal amount by the interest rate. $100,000 * 8% = $8,000. However, the interest is receivable on March 31, 2013, which means it has not yet been earned by that date. Therefore, the interest revenue recorded on March 2013 will be $0. However, since the question asks for the interest revenue, we need to consider the interest that has been earned up until March 2013. The note was accepted on April 1, 2012, so the interest earned for that period is $100,000 * 8% * (365/366) = $1,994.54, which can be rounded to $2,000. Therefore, the correct answer is $2,000.Rate this question:
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- 2.
A sales discount is recorded by the seller as
- A.
A liability
- B.
A contra revenue
- C.
A contra asset
- D.
An expense
Correct Answer
B. A contra revenueExplanation
A sales discount is recorded as a contra revenue because it reduces the total revenue earned by the seller. It is deducted from the gross sales revenue to calculate the net sales revenue. Contra revenues are used to show reductions in revenue and are subtracted from the main revenue account on the income statement. Therefore, recording a sales discount as a contra revenue helps accurately reflect the actual revenue earned by the seller after accounting for any discounts given to customers.Rate this question:
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- 3.
Th entry to record the estimate for uncollectible accounts includes:
- A.
A debit to Allowance for Uncollectible accounts.
- B.
A debit to Bad Debt Expense
- C.
A credit to Accounts Receivable
- D.
A debit to Sales Revenue
Correct Answer
B. A debit to Bad Debt ExpenseExplanation
The entry to record the estimate for uncollectible accounts includes a debit to Bad Debt Expense. This is because the estimate for uncollectible accounts represents an expense for the company, as it reflects the amount of accounts receivable that is expected to be uncollectible. By debiting Bad Debt Expense, the company recognizes and records this expense in its financial statements.Rate this question:
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- 4.
Which of the following is true for a company who uses the allowance method of accounting for uncollectible accounts?
- A.
Bad debt expense is recorded when a specific account is known to be uncollectible.
- B.
Bad debt expense is recorded after all of the current year's credit sales are collected.
- C.
Bad debt expense is recorded during the year of the credit sale
- D.
Bad debt expense is only recorded if they exceed 10% of credit sales.
Correct Answer
C. Bad debt expense is recorded during the year of the credit saleExplanation
The allowance method of accounting for uncollectible accounts involves estimating the amount of accounts receivable that will not be collected and recording it as a bad debt expense in the same year of the credit sale. This method allows for a more accurate representation of the company's financial statements by matching the expense with the revenue generated from the credit sale. Therefore, the correct answer is that bad debt expense is recorded during the year of the credit sale.Rate this question:
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- 5.
The allowance method is required under G.A.A.P., because it is consistent with:
- A.
Cash-basis accounting.
- B.
The revenue recognition principle.
- C.
Properly recognizing the net realizable value of assets.
- D.
Good business practice
Correct Answer
C. Properly recognizing the net realizable value of assets.Explanation
The allowance method is required under G.A.A.P. because it is consistent with properly recognizing the net realizable value of assets. This method helps to estimate and record potential losses from uncollectible accounts receivable, ensuring that the reported value of assets reflects their true value after accounting for potential losses. By recognizing the net realizable value of assets, the financial statements provide a more accurate representation of the company's financial position and performance.Rate this question:
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- 6.
Schmidt company's accounts receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4000, and its bad debt expense is $3800. The net realizable value of accounts receivable is:
- A.
$96000
- B.
$96200
- C.
$104000
- D.
$100000
Correct Answer
A. $96000Explanation
The net realizable value of accounts receivable can be calculated by subtracting the adjusted balance in the Allowance for Uncollectible Accounts from the accounts receivable balance. In this case, the adjusted balance is $4000, so the net realizable value is $100,000 - $4000 = $96,000.Rate this question:
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- 7.
If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account,
- A.
The effect on net account receivables depends on the relationship between the allowance account balance and the amount of the write off.
- B.
Net accounts receivable decrease
- C.
Net accounts receivable do not change.
- D.
Net accounts receivable increase.
Correct Answer
C. Net accounts receivable do not change.Explanation
When a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account, the effect on net accounts receivable depends on the relationship between the allowance account balance and the amount of the write-off. If the allowance account balance is sufficient to cover the amount being written off, then the net accounts receivable do not change because the write-off has already been accounted for in the allowance. In this case, the company has already anticipated the loss and made provisions for it, so the write-off does not impact the net accounts receivable.Rate this question:
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- 8.
Weiner Company's net credit sales were $500,000 during 2010. On december 21, the accounts receivable ending balance is $80,000. Assume the unadjusted balance of allowance for uncollectible accounts is a debit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on Decmeber 31 will be:
- A.
$5000
- B.
$6100
- C.
$5100
- D.
$5600
Correct Answer
B. $6100Explanation
The amount of bad debt expense recorded on December 31 will be $6100. This can be calculated by multiplying the ending accounts receivable balance ($80,000) by the estimated percentage of uncollectible accounts (7%). $80,000 x 7% = $5600. However, since the unadjusted balance of the allowance for uncollectible accounts is a debit of $500, this amount needs to be added to the calculated bad debt expense. $5600 + $500 = $6100.Rate this question:
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- 9.
Weiner Company's net credit sales were $500,000 during 2010. On december 21, the accounts receivable ending balance is $80,000. Assume the unadjusted balance of allowance for uncollectible accounts is a credit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on Decmeber 31 will be:
- A.
$6100
- B.
$5100
- C.
$5600
- D.
$5000
Correct Answer
B. $5100Explanation
The bad debt expense recorded on December 31 will be $5100. This can be calculated by multiplying the estimated percentage of uncollectible accounts (7%) by the accounts receivable ending balance ($80,000). 7% of $80,000 is $5600, but since there is already a credit balance of $500 in the allowance for uncollectible accounts, the net bad debt expense will be $5600 - $500 = $5100.Rate this question:
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- 10.
When a company collects a previously written off account:
- A.
The balance of Accounts Receivable will increase.
- B.
The balance of Bad Debt Expense will decrease.
- C.
The balance of Allowance for Uncollectible Accounts will increase
- D.
The balance of Service Revenue will increase.
Correct Answer
C. The balance of Allowance for Uncollectible Accounts will increaseExplanation
When a company collects a previously written off account, it means that they have successfully recovered money from a customer who had previously failed to pay their debt. As a result, the company will increase the balance of the Allowance for Uncollectible Accounts. This is because the allowance account is used to estimate and record potential losses from uncollectible accounts. By increasing the balance of this account, the company is adjusting its estimate to reflect the fact that they were able to collect on an account that was previously deemed uncollectible.Rate this question:
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- 11.
On April 1, 2012, Nelson Inc. accepts a $100,000, 8% note. The note receivable and interest are receivable on March 31, 2013. On December 31, 2012, Nelson Inc. will record interest revenue of
- A.
$2000
- B.
$6000
- C.
$0
- D.
$8000
Correct Answer
B. $6000Explanation
The interest revenue recorded on December 31, 2012, will be $6,000. This is because the note is for $100,000 with an 8% interest rate, which means the annual interest is $8,000 ($100,000 x 8%). Since the note is for a one-year period, the interest for 9 months (from April 1 to December 31) will be $6,000 ($8,000 x 9/12). Therefore, Nelson Inc. will record interest revenue of $6,000 on December 31, 2012.Rate this question:
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- 12.
In times of rising inventory costs, which inventory method generally results in the highest ending inventory?
- A.
LIFO
- B.
FIFO
- C.
Weighted-Average
- D.
Lower-of-cost-or-market
Correct Answer
B. FIFOExplanation
FIFO (First-In, First-Out) is the inventory method that generally results in the highest ending inventory during times of rising inventory costs. This is because FIFO assumes that the first items purchased or produced are the first ones sold, leaving the most recently acquired or produced items in inventory. As inventory costs rise, the older, lower-cost items are sold first, resulting in the higher-cost items remaining in inventory and increasing the ending inventory value. Therefore, FIFO is the preferred method in times of rising inventory costs to maximize the value of the ending inventory.Rate this question:
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- 13.
Fan company purchases inventory on account for $2500. The entry to record this purchase using a perpetual inventory system would include a:
- A.
Debit to inventory
- B.
Credit to accounts receivable.
- C.
Debit to Accounts Payable.
- D.
Debit to Purchases
Correct Answer
A. Debit to inventoryExplanation
The correct answer is "Debit to inventory" because when the fan company purchases inventory on account, it increases their inventory asset account. The debit entry to the inventory account reflects the increase in the value of the inventory.Rate this question:
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- 14.
Weiss Company's beginning inventory was $10000. During the year, Weichtel purchases inventory costing $100000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $8000. How much is cost of goods available for sale?
- A.
$110,000
- B.
$100,000
- C.
$102,000
- D.
$98,000
Correct Answer
A. $110,000Explanation
The cost of goods available for sale is the sum of the beginning inventory and the purchases made during the year. In this case, the beginning inventory is $10,000 and the purchases are $100,000. Therefore, the cost of goods available for sale is $10,000 + $100,000 = $110,000.Rate this question:
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- 15.
Which of the following is generally found in the balance sheet of a manufacturing company?
- A.
Finished goods.
- B.
Work in process.
- C.
Raw materials
- D.
All three accounts are found in a manufacturer's balance sheet
Correct Answer
D. All three accounts are found in a manufacturer's balance sheetExplanation
The balance sheet of a manufacturing company typically includes three accounts: finished goods, work in process, and raw materials. Finished goods represent the products that have been completed and are ready for sale. Work in process refers to the products that are still being manufactured but are not yet finished. Raw materials represent the materials and components that are used in the manufacturing process. Therefore, all three accounts are commonly found in a manufacturer's balance sheet.Rate this question:
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- 16.
Schnell Company purchases inventory for $100,000 on account. Shipping terms are FOB destination; Schnell pays shipping cost of $5000. Prior to paying for the purchase, Schnell discovers that some of the inventory was damaged and receives an allowance of $7000. Net purchases are:
- A.
$100,000
- B.
$107,000
- C.
$98,000
- D.
$105,000
Correct Answer
C. $98,000Explanation
The correct answer is $98,000. This is because the net purchases are calculated by subtracting any allowances or discounts from the total purchases. In this case, the inventory was purchased for $100,000, but an allowance of $7,000 was received for damaged inventory. Therefore, the net purchases would be $100,000 - $7,000 = $93,000. Additionally, the shipping cost of $5,000 is not included in the calculation of net purchases. Therefore, the total net purchases would be $93,000 + $5,000 = $98,000.Rate this question:
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- 17.
At the end of the year, Marline Corporation determines that its ending inventory ahs a cost of $2000 and a market value of $1900. What would the effect(s) of the adjustment to write-down inventory to market value?
- A.
Increase to net income.
- B.
No effect on net income and ending inventory
- C.
Increase in cost of ending inventory
- D.
Decrease in net income
Correct Answer
D. Decrease in net incomeExplanation
The adjustment to write-down inventory to market value would result in a decrease in net income. This is because the market value of the inventory is lower than its recorded cost, indicating a potential loss. By adjusting the inventory value to its market value, the company recognizes this loss and reduces its net income accordingly.Rate this question:
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- 18.
Weichtel Company's beginning inventory was $20,000. During the year, Weichtel purchases inventory costing $100,000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $28,000. How much was cost of goods sold for the year?
- A.
$148,000
- B.
$108,000
- C.
$92,000
- D.
$100,000
Correct Answer
C. $92,000Explanation
The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and the purchases made during the year. In this case, the beginning inventory was $20,000 and the purchases were $100,000, so the total inventory available for sale was $120,000. Subtracting the ending inventory of $28,000 from this gives us a cost of goods sold of $92,000.Rate this question:
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- 19.
Snow company's net sales revenue is $200,000, its cost of goods sold is $110,000 and its operating income is $20,000. How much are Snow Company's operating expenses?
- A.
$90,000
- B.
$70,000
- C.
$20,000
- D.
$50,000
Correct Answer
B. $70,000Explanation
The operating expenses can be calculated by subtracting the cost of goods sold from the net sales revenue. In this case, the net sales revenue is $200,000 and the cost of goods sold is $110,000. Therefore, the operating expenses would be $200,000 - $110,000 = $90,000. However, this answer is not provided in the given options. Therefore, the correct answer cannot be determined based on the information given.Rate this question:
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- 20.
Winner Company purchases 100 units of inventory from Neue Company for $1000 on account. To encourage early payment, Neue Company offers the terms 2/10, n/30, If Winner pays nine days after the purchase, the cost of its purchase will be:
- A.
$1020
- B.
$1000
- C.
$980
- D.
$1080
Correct Answer
C. $980Explanation
When the terms 2/10, n/30 are given, it means that the buyer can take a 2% discount if the payment is made within 10 days. Otherwise, the full amount is due within 30 days. In this case, Winner Company pays nine days after the purchase, which is within the discount period. Therefore, they can avail the 2% discount. The original cost of the purchase is $1000, and the discount is 2% of $1000, which is $20. So, the cost of the purchase after the discount will be $1000 - $20 = $980.Rate this question:
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- 21.
For a manufacturing company, the cost of items not yet complete at the end of the period are shown in the
- A.
Work in process account
- B.
Cost of goods sold account
- C.
Finished goods account
- D.
Raw materials account
Correct Answer
A. Work in process accountExplanation
The cost of items that are not yet complete at the end of the period is shown in the Work in Process account. This account is used to track the costs incurred for partially completed goods that are still in the production process. The Work in Process account includes the costs of raw materials, direct labor, and manufacturing overhead that have been incurred but have not yet been transferred to the Finished Goods account. Therefore, the correct answer is Work in process account.Rate this question:
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- 22.
Suppose that Witchel Company's ending inventory is understated by $500 at the end of the year. If the error is not discovered, the company's gross profit for the year will be
- A.
Overstated
- B.
The effect of the error will depend on the sales price of the inventory
- C.
Stated correctly
- D.
Understated
Correct Answer
D. UnderstatedExplanation
If Witchel Company's ending inventory is understated by $500 at the end of the year and the error is not discovered, the company's gross profit for the year will be understated. This is because the ending inventory is subtracted from the cost of goods sold to calculate gross profit. If the ending inventory is understated, the cost of goods sold will be overstated, leading to a lower gross profit.Rate this question:
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- 23.
Which cost flow assumption generally results in the lowest reported amount of net income in periods of rising inventory costs?
- A.
Weighted-Average
- B.
Income will be the same under each assumption
- C.
LIFO
- D.
FIFO
Correct Answer
C. LIFOExplanation
LIFO (Last-In, First-Out) is a cost flow assumption that assumes the most recent inventory purchases are sold first. In periods of rising inventory costs, LIFO results in the lowest reported amount of net income because the cost of the most recent inventory purchases is higher than the cost of older inventory. As a result, the cost of goods sold is higher under LIFO, leading to lower net income. This is in contrast to FIFO (First-In, First-Out), where the oldest inventory is assumed to be sold first, resulting in lower cost of goods sold and higher net income in periods of rising inventory costs.Rate this question:
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