Deck 5: Accounting for Receivables and Inventory Cost Flow

Question 1

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAOn September 1, Year 1, Ruiz Company loaned $10,000 to Alpha company. Show the effect of the December 31, Year 1 adjusting entry to accrue interest on Ruiz's financial statements.

Answer 1

The adjusting entry to recognize interest on the note receivable will increase assets (interest receivable) and increase revenue (interest revenue), which increases net income and stockholders' equity. It does not affect the statement of cash flows.

Question 2

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAOn November 1, Year 1, Gable Company accepted a credit card as payment for $1,500 of services rendered to one of its customers. Assume the credit card fee of 3% is recorded on the date of the sale. Show the effect of this transaction on Gable's financial statements.

Answer 2

Recording a credit card sale increases assets (accounts receivable), increases revenue, and increases expenses (credit card expense). Because the increase to revenue is greater than the increase to expense, net income and stockholders' equity increase. The statement of cash flows is not affected.

Question 3

How do the percent of revenue method and the percent of receivables method to estimate uncollectible accounts expense differ?

Answer 3

The percent of revenue method assigns a percent of the year's net credit sales to the uncollectible accounts expense. This method is more concerned with the income statement presentation. The percent of receivables method uses the process of aging receivables to determine the ending balance in allowance for doubtful accounts. It is more concerned with the balance sheet presentation.

Question 4

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAOn September 1, Year 1, Diaz Company loaned $10,000 to Ace company. Show the effect of this transaction on Diaz's financial statements.

Question 5

Vailes Services Company loaned $6,000 on August 1, Year 1, to an individual who issued Vailes a promissory note with 6% interest. The issuer of the note repaid the principal and interest on July 30, Year 2. How did the August 1, Year 1, event affect Vailes's statement of cash flows? How did the July 30, Year 2 event affect it?

Question 6

Li Company has the following account balances:
$\begin{array}{llr} \text { cash} &\$25,000\\ \text { Accounts receivable } &76,000\\ \text { Allowance for doubtful accounts } &5,100\\ \text { Uncollectible accounts expense } &6,200\\ \text { Credit sales} &115,000\\\end{array}$
Compute the net realizable value of Li's accounts receivable.

Question 7

If Kettler Company loans $24,000 to Beam Company on March 1, Year 1, and the one-year note carries an interest rate of 7%, how much interest revenue will Kettler recognize in Year 1? How much in Year 2?

Question 8

What is meant by the net realizable value for accounts receivable?

Question 9

In the first year of operations, John's Repair Service recognized $220,000 of service revenue on account. The ending accounts receivable balance was $15,100. Jake estimates that 3% of sales on account will not be collected; no accounts receivable had been written off by year end. Assume there were no other transactions affecting accounts receivable.
Required:What amount of cash was collected in Year 1?What amount of uncollectible accounts expense was recognized in Year 1?

Question 10

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
Stan's Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan's uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.
Assume that Stan's Surf Shack made the second purchase of surfboards for cash. How would that purchase affect the financial statements?

Question 11

What is aging of accounts receivable, and how is it used to account for uncollectible accounts?

Question 12

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
Stan's Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan's uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.
Assume that Stan's Surf Shack purchased the first five surfboards on account. How would the purchase transaction affect its financial statements?

Question 13

When a credit card sale is recorded, what is the effect on the accounting equation?

Question 14

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAGable Company collected a receivable due from a credit card transaction company; the credit card fee had previously been recognized when the sale was recorded. Show the effect of collection of the receivable on Gables financial statements.

Question 15

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
Stan's Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan's uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.
How would the sale of the six surfboards affect the financial statements if Stan's Surf Shack uses the LIFO inventory cost flow method? Assume the surfboards were sold to customers for more than their original cost.

Question 16

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAOn March 1, Year 2, King Company collected a note receivable and related interest from Havilland Company The note had been issued one year earlier. Indicate the effects of this event on the elements of King's financial statements.

Question 17

What type of transaction (that is, asset source, asset use, asset exchange, or claims exchange) is the write-off of an uncollectible account using the allowance method?

Question 18

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAGarrison Company uses the allowance method to account for uncollectible accounts. Show how the adjusting entry to recognize uncollectible accounts expense would affect the elements of Garrison's financial statements.

Question 19

After the accounts are adjusted at the end of the year, Accounts Receivable has a balance of $235,000, Uncollectible Accounts Expense has a balance of $17,500, and Allowance for Doubtful Accounts has a balance of $12,500. What is the net realizable value of the accounts receivable?

Question 20

What type of account is Allowance for Doubtful Accounts?

Question 21

Larsen Company began Year 2 with balances in accounts receivable and allowance for doubtful accounts of $45,700 and $1,280, respectively. The company reported credit sales of $475,250 during the year, collected $480,200, and wrote off $800 of uncollectible accounts. Larsen Company estimates that 12% of its accounts receivable balance will be uncollectible.
Required:Calculate Larsen Company's uncollectible accounts expense for Year 2.What will Larsen report as its allowance for doubtful accounts on December 31, Year 2?Calculate Larsen's net realizable value of accounts receivable on December 31, Year 2.

Question 22

On January 1, Year 2, Burton Company had a balance in Accounts Receivable of $90,000 and a balance in the Allowance for Doubtful Accounts account of $2,400. During Year 2, Burton recognized $244,000 of service revenue earned on account and ended the year with a balance in Accounts Receivable of $48,000. During Year 2, Burton also wrote off $1,100 of receivables. Burton uses the allowance method for uncollectible accounts and assumes that 2% of the sales on account will not be collected.
Required:After adjusting entries on December 31, Year 2, what will be the balance in the Allowance for Doubtful Accounts?By what amount did net realizable value of accounts receivable decrease in Year 2 due to the write-off of the receivable?What amount of cash was collected from customers during Year 2?

Question 23

If Bowman Company is using FIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Question 24

Kona Espresso Machine Company provides services on account to its customers. For Year 2, its beginning balance in Accounts Receivable was $190,000. During the year, the company recognized $904,000 of service revenue earned on account, and the amount of cash collected from accounts receivable was $829,900. During the year, uncollectible accounts of $10,100 were written off.
Required:What was the ending balance in Accounts Receivable?

Question 25

In a world with inflation, but no income tax, how does the choice between LIFO and FIFO affect a company's cash flows? Would the presence of an income tax system cause a difference in the amount of cash outflow when using FIFO versus LIFO?

Question 26

Perez Company began Year 2 with a balance of $148,000 in accounts receivable and $8,600 in allowance for doubtful accounts. During the year, the company recognized $656,000 of service earned on account and collected $580,000 cash from accounts receivable. Perez wrote off $6,500 of uncollectible accounts during Year 2. At the end of the year, the company prepared an aging schedule and adjusted its accounts based on the estimate that $12,600 of receivables would not be collected.Required:What was the net realizable value of Perez accounts receivable at the end of Year 2?

Question 27

Define the terms FIFO and LIFO and briefly describe each method.

Question 28

After the accounts are adjusted at the end of the year, Accounts Receivable has a balance of $225,000, Uncollectible Accounts Expense for the year was $17,500, and Allowance for Doubtful Accounts has a balance of $12,500. What is the net realizable value of the accounts receivable?

Question 29

In relation to inventory, differentiate between the flow of cost and the physical flow of goods.

Question 30

In an inflationary period, which cost flow method, LIFO or FIFO, results in the larger dollar amount of assets on the balance sheet?

Question 31

Vincent Company accepted a 12-month, 7% promissory note from a customer, Graves Company, on September 1, Year 1, in exchange for $24,000 of services that Vincent performed. What amount will be collected on August 31, Year 2?

Question 32

Vancouver Company began Year 2 with balances in accounts receivable and allowance for doubtful accounts of $92,800 and $9,280, respectively. The company reported credit sales of $875,550 during the year, collected $870,200, and wrote off $6,800 of uncollectible accounts. Vancouver estimates that 10% of its accounts receivable balance will be uncollectible.Required:What will Vancouver report as its allowance for doubtful accounts on December 31, Year 2?What is Vancouver's net realizable value of accounts receivable on December 31, Year 2?What is Vancouver's uncollectible accounts expense for Year 2?

Question 33

In an inflationary period, which cost flow method of accounting for inventory will produce the smallest amount of net income? Why?

Question 34

Blake Company loaned Jimenez Corporation $18,000 on October 1, Year 1. The 8-month note carried a 6% rate of interest.
Required:How will Blake report the note and interest on its Year 1 income statement, balance sheet, and statement of cash flows?How will Blake report the note and interest on its Year 2 income statement and statement of cash flows?

Question 35

Sierra Company uses the weighted average inventory cost flow method. How would Sierra's accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Question 36

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
Stan's Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan's uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.
Stan's Surf Shack uses the FIFO inventory cost flow method. When its income tax is paid with cash, what is the effect of the entry on the financial statements? Note that no tax liability had been accrued.

Question 37

In an inflationary period, which inventory cost flow method, FIFO or LIFO, is more desirable from a tax standpoint? Why?

Question 38

If Bowman Company is using LIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Question 39

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
Stan's Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan's uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.
How would the sale of the six surfboards affect the financial statements if Stan's Surf Shack uses the FIFO inventory cost flow method? Assume the surfboards were sold to customers for more than their original cost.

Question 40

In the first year of operations, Ralph's Repair Service recognized $480,000 of service revenue earned on account. The ending accounts receivable balance was $88,000. Ralph estimates that 2% of sales on account will not be collected. During the year, Ralph wrote off a $200 receivable that was determined to be uncollectible. Assume there were no other transactions affecting accounts receivable.
Required:What amount of cash was collected in Year 1?What amount of uncollectible accounts expense was recognized in Year 1?What will be Ralph's net realizable value of receivables on the December 31, Year 1 balance sheet?

Question 41

Diaz Company's first year in operation was Year 1. For Year 1, its cost of goods sold using FIFO was $240,000, and its ending inventory was $58,400. If Diaz had used the LIFO cost flow method, its ending inventory would have been $56,000.
Required:What would the cost of goods sold have been with LIFO?Based on this information, was Year 1 a period of rising prices or falling prices?

Question 42

On June 14, Year 1, Sure-Fit Shoe Store sold $12,000 of merchandise that cost $8,000 and accepted credit cards as payment. Sure-Fit electronically transmitted the credit card forms to the credit card company which charges a 3% fee to handle such transactions. On June 18, Year 1, Sure-Fit received the proceeds from the credit card company.How will the entry to record the sale of the merchandise on June 14, Year 1, affect the company's financial statements?
How will the entry to record the credit card proceeds on June 18, Year 1, affect the company's financial statements?

Question 43

Green Acres Lawn Care provided $600,000 of services to customers during Year 1. All customers paid for the services with credit cards. The company submitted the credit card receipts to the credit card company immediately, and the credit card company paid cash in the amount of face value less a 4 percent service charge.Required:Record the credit card sales and collection of the receivables in the horizontal statements model, below. Show dollar amounts of increases and decreases. For cash flows, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element is not affected by an event.

Question 44

The following transactions apply to Sam's Skateboards.
$\begin{array}{lll}1-\text {-January }& \text { Beginning inventory } & 50 \text { units } @\$ 120 \\12 \text {-January } & \text { Purchase } & 30 \text { units } @\$ 104 \\19 \text {-March } & \text { Sales } & 60 \text { units }@ \$ 190 \\\text { 8-January } & \text { Purchase } & 20 \text { units }@ \$ 116 \\\text { 4-November } & \text { Sales } & 35 \text { units }@ \$ 200\end{array}$ Assume the use of the perpetual inventory method and that all transactions were for cash.
Required:Determine the amount of ending inventory using a FIFO cost flow.

Question 45

Maynard Company started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first unit cost $1,100 and the second, $1,200. One of the items was sold during the year. Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory, assuming use of each of the following methods:LIFOFIFOWeighted average

Question 46

Curtis Company uses the FIFO cost flow method in a perpetual inventory system. The company's inventory records reflect the following for the month of October:
$\begin{array}{llr}\text { October } 1 & \text { Beginning inventory } & 950 \text { units @ } \$ 17.00 \\\text { October } 12 & \text { First purchase } & 800 \text { units @ } \$ 19.00 \\\text { October } 18 & \text { Cash sales } & 1,500 \text { units @ } \$ 36.00\\\text { October } 21 & \text { Second purchase } & 600 \text { units @ } \$ 16.40 \\\text { October } 25 & \text { Third purchase } & 300 \text { units @ } \$ 17.40 \\\text { October } 31 & \text { Cash sales } & 1.000 \text { units } @ \$ 38.00\end{array}$
Required:Calculate the cost of goods sold and the ending inventory for the month ending October 31.

Question 47

The Atkins Company had the following beginning inventory, purchases, and sales of inventory during the first quarter of Year 1:
Required:Determine the value of the company's cost of goods sold and ending inventory at the end of March, assuming a perpetual inventory method and FIFO cost flow. Show all calculations.

Question 48

The following information is for Benitez Company for the current year:
$\begin{array}{ll}\text { Beginning inventory }& 300 \text { units @ } \$ 25 \\\text { Purchase April } 8 &150 \text { units }@ \$ 30 \\\text { Purchase September } 12 & 250 \text { units @ } \$ 34 \\\text { Sales } &590 \text { units @ }\$50 \\\end{array}$
Required:Assuming that Benitez uses the FIFO cost flow method,How much product cost would be allocated to Cost of Goods Sold?How much product cost would be allocated to Merchandise Inventory at the end of the year?

Question 49

Curtis Company had the following transactions for the month of January:
$\begin{array}{lll}1 \text {-January } & \text { Beginning inventory } & 30 \text { units @ } \$ 150 \\\text { 6-January } & \text { Purchase } & 40 \text { units @ } \$ 160\\\text { 8-January } & \text { Sales } & 50 \text { units } @ \$ 260 \\\text { 19-January } & \text { Purchase } & 20 \text { units } @ \$ 164 \\22 \text {-January } & \text { Sales } & 30 \text { units }@ \$ 260 \\\text { 30-January } & \text { Purchase } & 15 \text { units } @\$ 156\end{array}$ Assume that Curtis uses the perpetual inventory method and that all transactions were for cash.
Required:Determine the amount of ending inventory using the FIFO cost flow method.

Question 50

The following information is for Poole Company for the current year:
$$\begin{array} { l l } \text { Beginning inventory } & 200 \text { units @} \$ 110 \\\text { Purchase May } 12 & 100 \text { units @} \$ 120 \\\text { Purchase October 9 } & 150 \text { units @} \$ 125 \\\text { Seles} & 360 \text { units @} \$ 180\end{array}$$ Required:Assuming that Poole uses the LIFO cost flow method, determine how much product cost would be allocated to Cost of Goods Sold, and how much to Merchandise Inventory at the end of the year. Show all calculations.Assuming that Poole uses the FIFO cost flow method, determine how much product cost would be allocated to Cost of Goods sold, and how much to Merchandise Inventory at the end of the year. Show all calculations.Compare your results from parts a and b. Do LIFO and FIFO give the same results for inventory turnover? Which is higher, and why?

Question 51

Geary, Incorporated had the following sales during Year 2:
$\begin{array}{ll}\text { Cash sales } & \$ 240,000 \\\text { Credit sales } & 1,200,000 \\\text { Credit card sales } & 4,000,000\end{array}$
Geary also had the following beginning and ending balances in its receivables accounts:
$\begin{array}{lrr}&\text { Beginning}&\text { Ending}\\\text { Credit sales } & \$ 240,000 & \$ 180,000 \\\text { Credit card sales } & 800,000 & 840,000\end{array}$
Geary, who uses the allowance method of accounting for uncollectible accounts, estimated that 3% of the credit sales will go uncollected. The credit card company charges Geary a 4% service charge.Required:How will Geary's year-end adjusting entry for uncollectible accounts expense affect the company's financial statements?
How will the entry to record the credit card sales affect the company's financial statements?
What is Geary's cash flow from customers for the year?

Question 52

The following information is for Choi Company for Year 1:Beginning inventory 120 units @ $100Units purchased 180 units @ $112Choi sold 250 units for $190 each
Required:Calculate gross margin assuming Choi uses FIFO, LIFO, Weighted average.Disregarding the effect of income taxes, what would be the dollar amount of difference in net income between FIFO and LIFO?Calculate the Year 1 cash flow from operating activities assuming that Choi uses LIFO, FIFO. Again, disregard the effect of income taxes.

Question 53

Singh Company sold 75 units @ $350 each on October 31, Year 1. The following information is also available:
$$\begin{array} { l l } \text { Beginning inventory } & 25 \text { units @ } \$ 175 \\\text { February } 2 \text { purchase } & 20 \text { units@ } \$ 180 \\\text { June } 1.5 \text { purchase } & 45 \text { units@ } \$ 200 \\\text { october } 1 \text { purchase } & 30 \text { units@ } \$ 220\end{array}$$ Required:Determine the amount of cost of goods sold using:
FIFO
LIFO
Weighted Average Determine the amount of ending inventory using:
FIFO
LIFO
Weighted Average

Question 54

Chopin Company sells product A. The beginning inventory for product A was 70 units @ $240 per unit. During the year, Chopin purchased 110 units of product A at $216 per unit. The company sold 140 units of product A @ $400 per unit at the end of the year.Required:Determine the amount of product cost that would be allocated to cost of goods sold and ending inventory using (1) FIFO, (2) LIFO, and (3) weighted average.

Question 55

During December Year 1, Crowe Company sold 125 units @ $225 each. Cash selling and administrative expenses for the year were $11,000. All transactions were cash transactions. The following information is also available:
$\begin{array}{ll}\text { Beginning inventory } & 60 \text { units @ } \$ 100 \\\text { April } 18 \text { purchase } & 90 \text { units @ } \$ 115 \\\text { August } 5 \text { purchase } & 30 \text { units @ } \$ 120\end{array}$
The company's income tax rate is 30%.
Required:Prepare an income statement for Crowe Company for Year 1 assuming:
FIFO inventory cost flow
LIFO inventory cost flowPrepare the operating activities section of the statement of cash flows for Year 1 assuming:
FIFO inventory cost flow
LIFO inventory cost flow

Question 56

Jones Company sells exercise bikes. Its beginning inventory was 100 units at $200 per unit. During the year, Jones made two purchases of the bikes: first, a 300-unit purchase at $220 per unit, and then 200 units at $250 per unit. The ending inventory for the year was 250 units.
Required:Determine the amount of product costs that would be allocated to cost of goods sold and ending inventory, assuming that Jones uses each of the following methods. (Round intermediate calculations to 2 decimal places. Round final answers to whole dollars.)FIFOLIFOWeighted average

Question 57

Max Company's first year in operation was Year 1. The following inventory purchase information comes from Max's accounting records for the year.
$\begin{array}{ll}\text { 19-January } & 120 \text { units } @\$ 280 \\20-\text { April } & 240 \text { units }@ \$ 304\\\text { 15-October }&90 \text { units }@\$320\end{array}$
In December Year 1, Max sold 350 units for $480 each. Operating expenses for the year were $30,000, and the tax rate was 30%.
Required:Calculate the cost of goods sold by LIFO and by FIFO.What amount of income tax would Max have to pay if it uses LIFO? If it uses FIFO?Assuming that the results for Year 1 are representative of what Max can generally expect, would you recommend that the company use LIFO or FIFO? Explain.