INTRODUCTION TO FINANCIAL ACCOUNTINGJohn M. Olin School of BusinessACCOUNTING 2610 - FALL 2005INTRODUCTION TO FINANCIAL ACCOUNTINGSAMPLE EXAM # 2A (100 Points)(Problem # 2 courtesy of Professor Zach) There are a total of 100 points on this exam. There are five problems, and the points allocated to each problem are as follows: Points EarnedProblem 1 – 25 Points _______ Problem 2 – 30 Points _______Problem 3 – 10 Points _______Problem 4 – 15 Points _______Problem 5 – 20 Points _______ Total - 100 Points _______ Each problem is composed of multiple parts, and the points allocated to each part are indicated. The contribution of this exam to your final score for the class is equal to the percentage of points you earn on this exam multiplied by (25 less the sum of your scores on Quiz 3 and Quiz 4). This exam is closed-book and closed note. You may use a calculator. You may not use your textbook. You have eighty minutes to complete the exam. Partial credit will be given, so be sure to provide support for you answers. Please note that by taking this exam you agree to abide by the Olin School Honor Code, and may be subject to appropriate action for violation of any of its covenants.GOOD LUCK!Name____________________________Mail-file Status: Olin / Non-Olin1Problem 1 – Revenue Recognition and Receivables (25 Points) Fun Furniture Corporation began operations on January 1, 2005 with a store in Clayton,Missouri. Customers who purchase merchandise at the store have three payment options –they may pay cash at the store, they may use a credit card at the store, or they may purchasemerchandise “on account”. Purchases made “on account” are due within 30 days, and FunFurniture offers discounts for customers that make early payment. Whenever FunFurniture makes a sale at the store, they collect 10% sales tax. On the last day of every quarter, Fun Furniture pays the state of Missouri any sales taxthat they have collected during that quarter. On September 30, 2005, Fun Furniture had “Accounts Receivable” on the Balance Sheetin the amount of $ 80,000, and a credit balance of $ 2,000 in “Allowance for DoubtfulAccounts”. The composition of the “Accounts Receivable” was as follows: Category Age of Receivables Amount A Not Yet Due $ 50,000 B 0-30 Days Past Due 25,000 C > 30 Days Past Due 5,000 Please prepare the journal entries for the following transactions that took place duringthe 4th quarter of 2005. If no journal entry is necessary, please indicate this by writing “NO JOURNAL ENTRY NECESSARY”.A. (4) Fun Furniture collected $ 72,000 of cash from the September 30 “Accounts Receivable”. Of this amount, $ 45,000 was collected from “Category A” receivables, $ 24,000 was collected from “Category B” receivables, and $ 3,000 was collected from Category C” receivables. The $ 45,000 collected from “Category A” customers was net of $ 1,000 of “Sales Discounts”. 2B. (3) On November 30, 2005, Fun Furniture “wrote-off” the Accounts Receivable balance owed by Frank Fixerupper. The amount of this write-off was $ 1,000, and this balance had been classified in “Category C” on September 30.C. (4) On December 14, 2005, Fun Furniture sold merchandise in their store with a selling price of $ 200,000. The total amount owed by customers, including sales tax, was $ 220,000. Customers charged $ 150,000 of this amount to their credit cards, paid $ 10,000 of cash, and purchased $ 60,000 of merchandise “on account”. Credit card companies charge Fun Furniture a 2% “discount”, and pay Fun Furniture the amount due on the following day. D. (3) On December 15, 2005, Fun Furniture collected $ 147,000 from the credit card company.3E. (3) On December 20, 2005, Debbie Designer ordered merchandise with a selling price of $ 20,000. Fun Furniture did not have the merchandise on hand, but promised delivery on January 15, 2006. Debbie Designed agreed to pay the full amount due when she picked up the merchandise on January 15, 2006. F. (3) On December 31, 2005, Fun Furniture paid the state of Missouri the amount of Sales Tax owed for 4th quarter sales. G. (5) Given the transactions described above, please prepare the adjusting journal entry for Fun Furniture to record “Bad Debt Expense” for the 4th quarter of 2005. Fun Furniture uses the “Aging of Receivables” approach, and sets the balance in the “Allowance for Doubtful Accounts” equal to 40% of Accounts Receivable more than 30 days “past due”. 4Problem 2 – Inventory Transactions (30 points)Marissa Inc. began operations on 1/1/2003. The table below provides information about the inventory of Marissa Inc. during 2003 and 2004. DateUnitspurchased Price per unit1/15/2003 1,200 $ 106/30/2003 700 1210/31/2003 400 13Total units purchased in 2003 2,3003/31/2004 600 157/15/2004 1,200 1612/31/2004 800 18Total units purchased in 2004 2,600Additional information:Marissa sold 1,800 units during 2003 and 2,800 units during 2004. A. (15) Assume that Marissa uses a periodic system to track and value inventory. In the table below, calculate the value of the Ending Inventory at the end of each year under: FIFO, LIFO and weighted-average. (12 points)Inventory valueInventory CostingMethod2003 2004FIFO(2) (3)LIFO(2) (3)Weighted-Average Cost(2) (3) 5B. (5) Under which method (LIFO or FIFO) will gross profit be lower in 2004? By how much? Explain your answer. C. (5) Suppose that the purchase price on 12/31/2004 is unknown. What would that price be so that LIFO and FIFO will result in the same gross profit in 2004? D. (5) Under what circumstances would the combined gross profits for 2003 and 2004 under LIFO and FIFO be equal? For full credit, you should mention at least two independent circumstances. (Hint: Of course, these circumstances may be different than those presented in
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