AC501: Financial Accounting and Reporting
Unit 3 Midterm Exam
A review of the ledger of Oklahoma Company at December 31, 2008, produces the following data pertaining to the preparation of annual adjusting entries.
(1) Salaries Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $700 each per week, and three employees earn $500 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.
(2) Unearned Rent Revenue $ 369,000. The company began subleasing office space in its new building on November 1. Each tenant is required to make a $ 5,000 security deposit that is not refundable until occupancy is terminated. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease.
(in months) Monthly Rent Number of
Nov. 1 6 $ 4,000 5
Dec. 1 6 $ 8,500 4
(3) Prepaid Advertising $ 13,200. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The term of the contracts are shown at the top of page 135.
Contract Date Amount Number of
A650 May 1 $ 6,000 12
B974 Oct. 1 $ 7,200 24
The first advertisement runs in the month in which the contract is signed.
(4) Notes Payable $ 80,000. This balance consists of a note for one year at an annual interest rate of 12%, dated June 1.
Prepare the adjusting entries at December 31, 2008. (Show all computations).
P4-2(Balance Sheet Preparation)
Presented below are a number of balance sheet items for Letterman Inc., for the current year, 2008.
Goodwill $ 125,000 Accumulated depreciation-equipment $ 292,000
Payroll taxes payable 177, 591 Inventories 239,800
Bonds payable 300,000 Rent payable—short-term 45,000
Discount on bonds payable 15,000 Taxes payable 98,362
Cash 360,000 Long-term rental obligations 480,000
Land 480,000 Common stocks, $ 1 par value 200,000
Notes receivable 545,700 Preferred stock, $ 10 par value 150,000
Notes payable to banks 265,000 Prepaid expenses 87,920
Accounts payable 590,000 Equipment 1,470,000
Retained earnings ? Trading securities 121,000
Income taxes receivable 97,630 Accumulated depreciation-building 170,200
Unsecured notes payable (long-term) 1,600,000 Building 1,640,000
Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term, unless stated otherwise. Cost and fair value of trading securities are the same.
P5-1(Multiple-Step Income, Retained Earnings)
Presented below is information related to P. J. Harvey Company for 2008.
Retained earnings balance, January 1, 2008 $ 980,000
Sales for the year 25,000,000
Cost of goods sold 17,000,000
Interest revenue 70,000
Selling and administrative expense 4,700,000
Write-off of goodwill (not tax deductible) 820,000
Income taxes for 2008 905,000
Gain on the sale of investments (normal recurring) 110,000
Loss due to flood damage-extraordinary item (net of tax) 390,000
Loss on the disposition of the wholesale division (net of tax) 440,000
Loss on operations of the wholesale division (net of tax) 90,000
Dividends declared on common stock 250,000
Dividends declared on preferred stock 70,000
Prepare a multiple-step income statement and a retained earnings statement. P. J. Harvey Company decided to discontinue its entire wholesale operations and to retain its manufacturing operations. On September 15, P. J. Harvey sold the wholesale operations to Rogers Company. During 2008, there were 300,000 shares of common stock outstanding all year.
P8-2 (Bad-Debt Reporting)
Presented below are a series of unrelated situations.
(1) Spock Company’s unadjusted trial balance at December 31, 2008, included the following accounts.
Allowance for doubtful accounts $ 4,000
Net Sales $ 1,5000,000
Spock Company estimates its bad debt expense to be 1 ½% of net sales. Determine its bad debt expense for 2008.
(2) An analysis and aging of Scotty Corp. accounts receivable at December 31, 2008, disclosed the following:
Amounts estimated to be uncollectible $ 180,000
Accounts receivable 1,750,000
Allowance for doubtful accounts (per Books) 125,000
What is the net realizable value of Scotty’s receivable at December 31, 2008?
(3) Uhura Co. provides for doubtful account based on 3% of credit sales. The following data are available for 2008.
Credit sales during 2008 $ 2,100,000
Allowance for doubtful accounts 1/1/08 17,000
Collection of accounts written off in prior years
(customer credit was reestablished) 8,000
Customer accounts written off as uncollectible during 2008 30,000
What is the balance in the Allowance for Doubtful Accounts at December 31, 2008?
(4) At the end of the first year of operations, December 31, 2008, Chekov Inc. reported the following information.
Accounts receivable, net of allowance for doubtful accounts $ 950,000
Customer accounts written off as uncollectible during 2008 24,000
Bad debt expense for 2008 84,000
What should be the balance in accounts receivable at December 31, 2008, before subtracting the allowance for doubtful accounts?
(5) The following accounts were taken from Chappel Inc.’s trial balance at December 31, 2008.
Net credit sales $ 750,000
Allowance for doubtful accounts $ 14,000
Accounts receivable 410,000
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2008.
Answer the questions related to each of the five independent situations as requested.
P9-6 (Dollar-Value LIFO)
Falcon’s Televisions Produces television sets in three categories: portable, mid-size, and flatscreen. On January 1, 2007, Falcon adopted dollar-value LIFO and decided to use a single inventory pool. The company’s January 1 inventory consists of:
Category Quantity Cost per Unit Total Cost
Portable 6,000 $ 100 $ 600,000
Midsize 8,000 250 2,000,000
Flatscreen 3,000 400 1,200,000
17,000 $ 3,800,000
During 2007, the company had the following purchases and sales.
Purchased Cost per Unit Quantity
Sold Selling Price
Portable 15,000 $ 120 14,000 $ 150
Midsize 20,000 300 24,000 405
Flatscreen 10,000 460 6,000 600
(Round to four decimals.)
(a) Compute ending inventory, cost of goods sold, and gross profit.
(b) Assume the company uses three inventory pools instead of one, Repeat instruction (a).