Using the periodic inventory method.

Determine whether each of the following is true or false.
1. If the period revenues are more than the period expenses, and there are no gains or losses, then Retained Earnings must increase during the period.
2. In a post-closing trial balance, revenue and expense accounts must have a zero balance..
3. If debits equal credits on the trial balance, you can be confident that your records are correct.
4. At the end of the first year of ownership of a long-term asset, if double-declining balance depreciation is used, the net book value of the asset will always be equal to or less than the market value of the asset.
5. If prices are decreasing then LIFO, compared with FIFO,
will show a lower net income for the period.
6. At the end of the second year of ownership of a depreciable
asset, before the closing entry is made, the balance in the accumulated depreciation account must be equal to or greater than the balance in the depreciation expense account.

II. (16 points)
For each numbered item place the letter that best
describes its category from the following possibilities:
(A)Assets, (L)Liabilities, (SE)Stockholders’ Equity,
(R)Revenue, and (E)Expense.

1. Equipment 5. Dividends
2. Accounts receivable 6. Unearned revenue
3. Rent expense 7. Allowance for depreciation
4. Retained earnings 8. Cost of Goods Sold

III. (16 points)
Sarah Jones started a new business in January, 2012. The following are selected events that occurred in the business during the first year of business. Please provide journal entries for these events (explanations are not necessary).

1. Sarah invested $68,000 to start the business, SaJon Inc. and received 200 shares of stock from the business.
2. Purchased inventory of $60,000 on account.
3. Signed a lease for two years for $48,000. The company paid $7,000 immediately; this was one month’s rent in advance plus a security deposit.
4. Sold inventory, costing $45,000, on account for $90,000 (recognize both the revenue and the expense).
5. Paid for the inventory purchased in 2).
6. Received payment for the amount billed in 4).
7. Paid $8,500 in salaries.
8. Recognized the rent expense for the first month.
IV. (18 points)
The ABC Company has the following inventory records.
2/1 Beginning balance 10@ $ 7 $ 70
2/5 Purchase 15@ 10 150
2/10 Sale 17@ 100 1,700
2/17 Purchase 20@ 12 240
2/23 Sale 25@ 100 2,500
2/25 Purchase 5@ 15 75

3/10 Purchase 8@ 20 160
3/15 Sale 7@ 100 700
3/19 Purchase 4@ 21 84

Required
For the above data set please answer the following questions. Use the periodic inventory method. Compute, for each month separately, the cost of goods sold, using
a) FIFO
b) LIFO
c) Weighted-average

V. (18 points)
Assume the following events for the year 2011.
1. Credit sales $200,000
2. Cash sales 300,000
3. Accounts receivable balance 1/1/11 25,000
4. Accounts written off during the year were 4,600
5. Allowance for Uncollectibles balance 1/1/11 1,250
6. Sixty percent (60%) of this year’s credit sales are collected during the year.

Required
Scenario One
Use the above data set. Assume that the company estimates its
annual bad debt expense at 3% of credit sales.
1. Compute the Bad Debt Expense and provide the journal entry
to show its recognition.
2. Provide the journal entry showing the write-off of bad
debts.
3. Show the balance sheet presentation of net accounts
receivable.
Scenario Two
Use the above data set. Ignore Scenario One. Assume that
the company estimates that 5% of its accounts receivable will not
get collected.
1. Compute the Bad Debt Expense and provide the journal entry
to show its recognition.
2. Provide the journal entry showing the write-off of bad
debts.
3. Show the balance sheet presentation of net accounts
receivable.

VI. (12 points)
The ABC Company, located in Boston, purchased a piece of equipment from a dealer in Chicago for $390,000. The cost of shipping the equipment, $18,000, will be paid for by ABC Co. It is estimated that the asset will last four years and at the end of its useful life will have a salvage value of $8,000. When the equipment arrives it has to be set up and adjusted, at a cost of $20,000.

Required
Compute the depreciation expense for year one and year two (do each year separately) using

1. Straight-line
2. Double-declining balance
3. This part is independent of parts one and two. Assume that a company purchased an asset for $550,000. At the end of three years the balance in the accumulated depreciation account is $260,000, at which time the asset is sold for $285,000.

Required
Provide the journal entry for the sale of the asset.

VII. (8 points).
Consider each of the following scenarios independently.

1. If the ending balance in Salaries Payable was $5,500, during the year the cash paid for salaries (earned both last year and this year) was $130,000, and the Salary Expense for the year was $100,000, what was the beginning balance in Salaries Payable?

2. On September 1, 2010 a four year insurance policy was purchased for $48,000. By mistake this entire cost was expensed immediately and this error was never corrected. Ignore taxes. At the end of 2012 is the Retained Earnings correctly stated and, if not, is it overstated or understated and by how much?

3. Assume the following. Net assets (assets minus liabilities) at the beginning of the year were $70,000 and at the end of the year they were $60,000; common stock increased (some were issued) during the year by $13,000; and dividends declared for the year were $ 11,000. What must have been the net income for the year?

4. The MNH Company had cost of goods sold equal to $43,000. If the beginning balance in inventory was $51,000 and the ending balance in inventory was $47,000, what were the purchases of inventory during the year?

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