INTRODUCTION TO FINANCIAL ACCOUNTINGJohn M. Olin School of BusinessACCOUNTING 2610 - FALL 2005INTRODUCTION TO FINANCIAL ACCOUNTINGSAMPLE EXAM # 2B (100 Points) 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-OlinProblem 1 – Revenue Recognition and Receivables (25 Points) Dandy Candy Company produces a number of different types of confectionary treats.Their regular product line, which consists of bagged candy, is distributed to grocery storesand retail chains. In addition, Dandy manufactures customized and holiday-relatedproducts, selling to customers willing to make such purchases. All sales of Dandy Candy are made “on account”. Customers that make payment within15 days of receiving their order are entitled to a 2% discount of the amount due, whereasthe entire balance on any delivery is due within 45 days of the delivery. Since Dandy doesnot sell directly to consumers, they are not obliged to collect sales tax on their sales. For financial reporting purposes, Dandy Candy uses the “Percentage of Sales” method torecord Bad Debt Expense for the first three quarters of the year. For the final quarter,which ends on December 31, Dandy prepares an “Aging of Receivables” to determine BadDebt Expense for the 4th quarter and the “net realizable value” to be recorded on theDecember 31st Balance Sheet. On January 1, 2005, Dandy Candy had total “Accounts Receivable” of $ 120,000, andtheir “Allowance for Doubtful Accounts” had a credit balance of $ 6,000. At the end ofeach year, Dandy Candy estimates their “Allowance for Doubtful Accounts” as 20% of“Accounts Receivable” that are more than 30 Days Past Due. For each of the following pieces of information, please provide the appropriate journalentry(s). If no journal entry is necessary, write “NO JOURNAL ENTRY ISNECESSARY”. The following things happened during the first nine months of 2005:A. (4) Total Credit Sales for the first nine months of 2005 were $ 1,100,000. The “Uncollectible %” assigned to these sales was 3%.B. (3) Total Cash Collections related to credit sales during the first nine months of 2005 were $ 980,000. Total “Sales Discounts” related to these payments were $ 10,000.2C. (3) Accounts Receivable in the amount of $ 30,000 were “written-off’ during the first nine months of 2005. D. (3) Dandy collected $ 5,000 on an account that had been “written off” in 2004. This $ 5,000 is not included in the $ 980,000 mentioned in Part B. The following things happened during the last three months of 2005.E. (3) Credit Sales were $ 400,000, of which $ 240,000 of cash was collected and $ 5,000 of “Sales Discounts” were properly taken. At the end of the year, $ 40,000 of these Accounts Receivable were more than 30 days past due, and $ 60,000 were still eligible for “Sales Discounts”. F. (3) Of the September 30 “Accounts Receivable”, $ 130,000 of cash was collected. No discounts were taken, and no additional “write-offs” were made during the 4th quarter. G. (3) Given Dandy Candy’s policies and the information provided above, what is the appropriate balance in their “Allowance for Doubtful Accounts” on Dec. 31, 2005.H. (3) What adjusting entry should Dandy Candy prepare on December 31, 2005 so that Their Balance Sheet on that date contains the balance that you indicate in Part G? 3Problem 2 – Inventory Transactions (30 points) Lucky Duck Rain Gear Company began operations on January 1, 1998. Lucky Duck sells high-end umbrellas, which are purchased from a small manufacturing company. Lucky Duck uses a Periodic LIFO Inventory valuation system. As of December 31, 2004, Lucky Duck’s Inventory appeared as follows: 1998 Layer: 1,000 Umbrellas @ $ 6 $ 6,000 2001 Layer: 3,000 Umbrellas @ $ 8 24,000 2004 Layer: 1,000 Umbrellas @ $ 10 10,000 Inventory as indicated on December 31, 2004 Balance Sheet $ 40,000 During 2005, Lucky Duck entered into the following Inventory transactions: Jan. 15, 2005: Purchased 2,000 Umbrellas @ $ 12 each Apr. 30, 2005: Sold 5,000 Umbrellas @ $ 20 each July 12, 2005: Purchased 3,000 Umbrellas @ $ 15 each Nov. 28, 2005: Sold 2,000 Umbrellas @ $ 24 each Based on the information provided above, please answer the following questions:A. (3) What is the “Cost of Umbrellas Available” for Lucky Duck for the year-ending December 31, 2005?B. (4) What is Lucky Duck’s Ending Inventory, in dollars, as of Dec. 31, 2005?C. (3) What is Lucky Duck’s Cost of Goods Sold, in dollars, for the year-ending Dec. 31, 2005? 4D. (3) In 2004, Lucky Duck sold 9,000 Umbrellas. Assuming no umbrellas were stolen or otherwise lost, how many umbrellas did Lucky Duck purchase in 2004?E. (3) If, on December 31, 2004, the replacement cost of an umbrella was $ 10 per umbrella, Lucky Duck would report a “LIFO Reserve” in the amount of $________? F. (4) Suppose that on
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