PART I MULTIPLE CHOICE (36 points) Instructions: Designate the best answer for each of the following questions. ____ 1. When a customer returns merchandise purchased on credit, the a. customer should credit Accounts Payable. b. seller should credit Sales Returns and Allowances. c. customer should credit Accounts Receivable. d. none of the above. ____ 2. Credit terms of 2/10, n/30 mean that a. a 10% cash discount may be taken if payment is made immediately; a 2% discount if paid within 30 days. b. a 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise the full amount is due at the end of the month. c. an additional amount equal to 2% of the invoice price must be paid if payment is not received within 10 days; the account is overdue after 30 days. d. a 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise the full amount is due within 30 days. ____ 3. A periodic inventory system a. allows for the determination of cost of goods sold after each sale. b. traditionally has been used with low unit-value items. c. requires that detailed inventory records be kept. d. requires the use of a cost of goods sold account. ____ 4. In accordance with the revenue recognition principle, sales revenues are recorded when a. earned, which typically occurs when the goods are transferred from the seller to the buyer. b. cash is received from the customer for items already delivered. c. an order is received from a customer with delivery of the product expected to take place within the next 30 days. d. the accountant determines which period's income statement "needs" more revenue. ____ 5. Expenses that relate to such activities as personnel management, accounting, and store security generally should appear in a multiple-step income statement in the a. Cost of Goods Sold section. b. Administrative Expenses section. c. Nonoperating section. d. Selling Expenses section. ____ 6. Which of the following accounts should appear in the Nonoperating section of a multiple-step income statement? a. Freight-out b. Sales Discounts c. Sales Returns and Allowances d. Interest Expense ____ 7. Freight terms of FOB shipping point mean that the a. buyer must bear the freight costs. b. seller must debit freight out. c. goods are placed free on board at the buyer's place of business. d. seller must bear the freight costs. ____ 8. With regard to accounting for a merchandising company versus a service enterprise, which of the following is false? a. Additional accounts and entries are typically required for a merchandising company. b. Both retail and wholesale enterprises generally use accounting techniques of a merchandising company. c. The process of measuring net income is conceptually different. d. There are just as many steps as in the accounting cycle for a merchandising company. ____ 9. With regard to the accounts used to record freight costs, a. Freight-out is added to Cost of Goods Sold. b. Freight-out's normal balance is a debit. c. Freight-out is recorded when freight terms are FOB shipping point. d. Freight-out is a contra account to Sales. ____ 10. The Sales Returns and Allowances account a. normally has a credit balance. b. should not be closed at the end of the period. c. is a contra account to Accounts Receivable. d. is used by a merchandising company, but not a service enterprise. ____ 11. A debit to Sales Returns and Allowances is evidence of a a. sale on account. b. return of goods originally purchased on account. c. return of goods originally sold on account. d. purchase of goods on account. ____ 12. Which of the following accounts is not included in the computation of net sales? a. Sales Discounts b. Sales c. Sales Returns and Allowances d. Freight Out ____ 13. Given the following information, compute the amount of cash finally remitted by the customer. Oct. 22Sale on credit, terms of 2/10, n/30$3,000 Oct. 27Allowance granted due to some items being damaged$300 Oct. 31Payment in full received from customer$? a. $2,646. b. $3,000. c. $2,640. d. $2,814. ____ 14. In order to minimize errors when taking a physical inventory, each inventory counter should be required to establish the authenticity of each inventory item. This is an application of the internal control principle of a. documentation procedures. b. independent internal verification. c. segregation of duties. d. establishment of responsibility. ____ 15. Which statement is false regarding the lower of cost or market (LCM) method of inventory? a. Market is defined as current replacement cost, not selling price. b. LCM is an example of the accounting concept of conservatism. c. LCM is applied to individual items listed on the inventory summary sheets. d. All of the above are true regarding LCM. ____ 16. Proponents of LIFO, as opposed to FIFO, point out that LIFO results in a. lower income taxes in a period of deflation. b. a more current cost of goods sold. c. lower net income in a period of deflation. d. higher net income in periods of inflation. ____ 17. Goods in transit should be included in the inventory of the a. buyer when the terms are FOB destination. b. buyer when the terms are FOB shipping point. c. transportation company when the terms are FOB destination. d. seller when the terms are FOB shipping point. ____ 18. The ending inventory of Larkin Company, which uses a periodic inventory system, was understated $7,000 on December 31, 2007, and overstated $3,000 on December 31, 2008. Because of these errors, 2008 net income was a. overstated $3,000. b. overstated $10,000. c. understated $4,000. d. understated $10,000. PART II JOURNAL ENTRIES (26 points) The ledger accounts given below, with an identification number for each, are used by Kiner Company. Instructions: Prepare appropriate entries for the month of August by placing the appropriate identification number(s) in the debit and credit columns provided and the dollar amounts pertaining to each account in the adjoining columns. 1. Cash 7. Accounts Payable 2. Accounts Receivable 8. Sales Returns and Allowances 3. Notes Receivable 9. Sales Discounts 4. Merchandise Inventory 10. Sales 5. Office Supplies 11. Cost of Goods Sold 6. Land 12. Freight-out Account(s) Account(s) Debit Credit Entry Information Debited Credited Amount(s) Amount(s) 0. Aug. 1 Sold merchandise for cash $300. 1 10 $300 $300 The cost of the merchandise sold was $200. 11 4 200 200 1. Aug. 2 Purchased merchandise from ABC Co. on account for $5,000; terms 2/10, n/30. 2. Aug. 4 Sold excess land for $7,000 accepting a 2-year, 12% note. The land was purchased for $7,000 last year. 3. Aug. 6 Sold merchandise to D. Riley on account for $830, terms 2/10, n/30. D. Riley will pay $30 freight costs per the shipping terms. The merchandise sold cost $600. 4. Aug. 8 Accepted a sales return of defective merchandise from D. Rileycredit granted was $280. The returned merchandise cost $200. 5. Aug. 11 Purchased merchandise from Tanner Hardware on account for $2,000; terms 1/10, n/30. 6. Aug. 12 Paid freight of $200 on the shipment from ABC Co. per the shipping terms. 7. Aug. 15 Received payment in full from D. Riley. 8. Aug. 19 Paid ABC Co. in full. 9. Aug. 20 Paid Tanner Hardware in full. 10. Aug. 27 Purchased office supplies for $250 cash. PART III BASIC INVENTORY COMPUTATIONS (18 points) Vaughn Company, which uses a periodic inventory system, had a beginning inventory on May 1, of 400 units of Product A at a cost of $7 per unit. During May, the following purchases and sales were made. Purchases Sales May 6 375 units at $9 May 4 275 units 14 250 units at $10 8 300 units 21 300 units at $11 22 400 units 28 425 units at $13 24 225 units 1,350 1,200 Instructions: Compute the May 31 ending inventory and May cost of goods sold under (a) Average Cost, (b) FIFO, and (c) LIFO. Provide appropriate supporting calculations. (a) Average Ending Inventory = $_________; Cost of Goods Sold = $_________. (b) FIFO Ending Inventory = $_________; Cost of Goods Sold = $_________. (c) LIFO Ending Inventory = $_________; Cost of Goods Sold = $_________. PART IV CLOSING ENTRIES (10 points) Below is a partial listing of accounts in the general ledger of Denton Co. Instructions: Place an X in the appropriate column to designate whether the account should be closed at year end and, if so, whether the appropriate closing entry would require a debit or credit to the account. Not Closed Account Closed Debit Credit 1. Sales 2. Cost of Goods Sold 3. Accumulated Depreciation 4. Merchandise Inventory 5. Sales Returns and Allowances 6. Dividends 7. Freight-out 8. Retained Earnings 9. Interest Expense 10. Sales Discounts PART V INVENTORY: SHORT PROBLEMS (10 points) Instructions: Complete the requirements specified for each of the following independent situations. A. State the missing items identified by ?. 1. Net purchases + ? = Cost of goods purchased 2. Net purchases + ? + ? = Purchases 3. ? + Purchases Purchases discounts Purchases returns and allowances + Freight-in = ? B. Watts Company uses the lower of cost or market (LCM) basis for its inventory. The following information relates to its December 31, 2008 inventory. Determine the amount of the ending inventory applying LCM to individual items. December 31, 2008 Product Units Unit Cost Market A 200 $19 22 B 250 29 26 C 300 16 18 D 150 30 28 E 180 15 17