INTERMEDIATE ACCOUNTING 1

Review Quiz
Lecturer:

Problem 1

The Avesco Company Fiscal period ends on December31, 2022. Shortly thereafter an audit was
completed by a certified public accountant. During the audit, numerous errors were found, among
which are the following:

1 Merchandise in transit costing $10,000 was excluded from inventory. The goods had been
shipped by the vendor f.o.b. shipping point. The vendee has not yet recorded the purchase.

2 Merchandise costing $9,000 was included in the final inventory. The goods are to be returned
because of incorrect specifications. The merchandise had been recorded as a purchase.

3 Merchandise costing $15,000 was excluded from inventory. The goods had been segregated in
the warehouse but there was no contract of sale, a mere purchase order from the customer.
The sale was recorded at $20,000.

4 Merchandise costing $5,000 was out on consignment and was included in the inventory. The
merchandise had been recorded as a sale, $8,000.

5 Merchandise costing $12,000 and sold for $15,000 was included in the inventory. The goods
are shipped f.o.b. shipping point. The sale was not recorded.

6 Merchandise costing $8,000 was excluded from inventory and the sale was not recorded. The
goods had been segregated in the warehouse but there was no contract of sale.

7 Merchandise costing $13,000 was included in the inventory and the purchase was recorded.
The goods had been shipped by the vendor f.o.b. destination. The invoice was received but
the goods are in transit.

8 Merchandise in transit costing $10,000 was excluded from inventory and the purchase had
not been recorded. The term is f.o.b. shipping point.

9 Merchandise costing $3,000 was received on consignment. This was included in the
inventory.

10 Merchandise costing $7,000 and sold for $10,000 is returned by the customer. The sale is
recorded but not the return. The merchandise is included in the inventory.

The financial statements (uncorrected) showed the following:

Inventory $ 70,000
Accounts receivable 80,000
Accounts payable 75,000
Net sales 300,000
Net purchases 200,000
Net income 20,000

Required: (25 minutes)

Prepare a worksheet with one column for each of the account above (starting with
uncorrected balances) showing the corrections to each balance and the corrected
balance.

Solution:

Avesco Company
Working Paper
Year ended December 31, 2005

Accounts Accounts Net Net Net

No. Inventory Receivable Payable Sales Purchases Income
Uncorrected Bal. $70,000 $80,000 $75,000 $300,000 $200,000 $20,000

1 10,000.00 10,000.00 10,000.00

2 (9,000.00) (9,000.00) (9,000.00)
3 15,000.00 (20,000.00) (20,000.00) (5,000.00)
4 (8,000.00) (8,000.00) (8,000.00)
5 (12,000.00) 15,000.00 15,000.00 3,000.00
6 8,000.00 8,000.00
7 (13,000.00) (13,000.00) (13,000.00)
8 10,000.00 10,000.00 10,000.00
9 (3,000.00) (3,000.00)
10 (10,000.00) (10,000.00) (10,000.00)
Corrected Bal. $76,000 $57,000 $73,000 $277,000 $198,000 $5,000
Problem 2

On December 31, 2022, the current position of Xylon Company is as follows:

Current assets:
Cash $ 14,000
Marketable securities 10,000
Accounts receivable 20,000
Merchandise inventory 30,000
Prepaid expenses 1,000 $ 75,000

Current liabilities
Accounts payable $ 15,000
Notes payable 5,000
Accrued expenses 5,000 25,000

Working capital $ 50,000

Upon investigation, it was discovered that the following transactions occurred January 1 to
January 15, 2023 but were predated as of December 31, 2022:

1 Cash sales, $9,000; cost, $6,000.

2 Sales on account, $15,000; cost, $9,000.
3 Collections of accounts, $30,000 minus discount of $1,000.
4 Payment of accounts payable, $34,000 minus discount of $2,000.
5 Salaries, $1,000, January 1-15, 2023, were accrued on December 31, 2022.

Required: (35 minutes)

1 Prepare adjustments on December 31, 2022.
2 Prepare partial balance sheet showing the adjusted current assets and current
liabilities on December 31, 2022.

Solution:

Requirement 1: Adjustments, December 31, 2008.

Debit Credit
1 Sales $9,000
Cash $9,000

Merchandise inventory 6,000

Cost of sales 6,000

2 Sales 15,000
Accounts receivable 15,000

Merchandise inventory 9,000

Cost of sales 9,000

3 Accounts receivable 30,000

Sales discounts 1,000
Cash 29,000

4 Cash 32,000
Purchase discount 2,000
Accounts payable 34,000

5 Accrued expenses 1,000

Salaries expense 1,000

Requirement 2: Partial Balance Sheet

Xylon Company
Partial Balance Sheet
as of December 31, 2008

Current assets:
Cash $ 8,000
Marketable securities 10,000
 Accounts receivable 35,000
Merchandise inventory 45,000
Prepaid expenses 1,000
$ 99,000
Current liabilities
Accounts payable $ 49,000
Notes payable 5,000
Accrued expenses 4,000
$ 58,000

Problem 3

The financial statements of Qierro Company include the following:

December December
2022 2023

Accounts receivable $ 600,000

Allowance for bad debts 10,000
Sales $ 4,000,000
Cash collected from customers 3,800,000

Among the cash collections was the recovery of $7,000 receivable from a customer whose
account had been written off as worthless in 2022. During 2023, it was necessary to
write-off uncollectible customers' accounts of $13,000. On December 1, 2023, a customer
settled his account by issuing a 12%, six-month note for $200,000.

On December 31, 2023, the accounts receivable included $144,000 of past due accounts.
After careful study, the management estimated that the probable loss on past due accounts
was 10% and that in addition, 2% of the current accounts may prove uncollectible.

Required: (40 minutes)

1 What is the balance of accounts receivable on December 31, 2023?
2 What is the balance of the allowance for bad debts before adjustment on
December 31, 2023?
3 How much is the required allowance for bad debts on current accounts and past
due accounts on December 31, 2023?
4 How much increase in allowance for bad debts is required on December 31, 2023?

Solution:

Requirement 1:

Accounts receivable, December 31, 2004 $ 600,000

Add: 2005 Sales $ 4,000,000
Recovery of accounts written-off 7,000 4,007,000
Total $ 4,607,000
Less: Collection from customers $ 3,800,000
Accounts written off 13,000
Account settled by issuance of a 6 month 12% note 200,000 4,013,000
Accounts receivable, December 31, 2005 $ 594,000

Requirement 2:

Allowance for bad debts, December 31, 2004 $ 10,000

Add: Recovery of accounts written-off 7,000
Total $ 17,000
Less: Accounts written-off 13,000
Allowance for bad debts, December 31, 2005 $ 4,000

Requirement 3:
 Required allowance for bad debts, December 31, 2005
On Current accounts (($594,000-$144,000) x 2%) $ 9,000
On past due accounts ($144,000 x 10%) 14,400
Total $ 23,400

Requirement 4:

Required allowance for bad debts, December 31, 2005 $ 23,400

Less: Allowance for bad debts, December 31, 2005 4,000
Increase in allowance for bad debts $ 19,400
 Problem 4

The Investment in Stock account of Symphony Company includes the following:

Debits:
January 12, 2022
1,200 shares at $50 $ 60,000
July 15, 2022
800 shares at $60 $ 48,000
December 21, 2022
50% stock dividend 1,000 shares
March 20, 2023
900 shares at $55 (exercise of 2,700 rights) $ 49,500

Credits:
March 15, 2023
Cash dividend $ 7,000
March 15, 2023
300 rights sold at $4 $ 1,200
December 20, 2023
900 shares sold at $30 (FIFO) $ 27,000

The rights were received in March 2023 permitting the purchase of one share of stock at $55
for every three shares held. It was determined that 5% of the original cost was applicable
to the rights.

Required: (20 minutes)

What is the gain (loss) on sale of right?

Solution:
Block 1 Block 2 Block 3

January 12, 2008

1,200 shares at $50 1,200 60,000
July 15, 2008
800 shares at $60 800 48,000
December 21, 2008
50% stock dividend 600 400
March, 2009 stock rights 5% (3,000) (2,400)
March 20, 2009 acquisition 900 54,400
Dece. 20, 2009 sales (900) (28,500)
900 28,500 1,200 45,600 900 54,400

Selling price (300 x $4) $ 1,200

Less: Cost (300/1,800 x $3,000) 500
Gain on sale $ 700

Blok 3:
Purchase price 49,500
Cost of stock rights exercise ($3,000-$500) + $2,400) 4,900
Cost of new investment 54,400

Problem 5

In making reconciliation of PNB account No. 1 you ascertained the following information
pertaining to Multiple Corporation:

a. Cash balance on October 31: per book, $15,000; per bank, $12,190.
b. When the bookkeeper attempted reconciliation on October 31 he listed the following
outstanding checks:
No. 113 $ 200
No. 125 300
No. 133 400
No.145 200
No. 150 600
 No. 163 700
No. 169 800

Your investigation revealed the following:

--No. 113 was reported lost and payment stopped but not entry made. Check No. 145
was drawn and duly recorded as a substitute.
--No. 125 was charged by the bank to PNB account No. 2 maintained by Multiple
Corporation.
--No. 163 is a certified check.
--No.169 is actually drawn for $80 and not $800.
--The other listed outstanding checks appear to be in order.
c. Receipts deposited on October 31 amounting to $3,950 were recorded by the depositor
as $3,590. These receipts represent cash sales.
d. Among the returned checks accompanying the October bank statement was a "counter
check" in the amount of $500 drawn by the treasurer of the company for personal
purposes.
e. A check in payment of an account payable for $1,000 had been drawn by the depositor
on PNB account No. 2, the check was voided before it was ever released but the
cancellation was incorrectly recorded as affecting PNB No. 1.
f. The following entry correctly reflects a transfer to PNB account No. 1 made in October:
 PNB account No.1 5,000
PNB account No. 2 3,000
PNB account No. 3 2,000

When the entry was posted, the two credits were switched, i.e., No. 2 was credited for
$2,000

Required: (30 minutes)

1 Prepare a bank reconciliation on October 31.
2 Prepare journal entries to correct the cash accounts of Multiple Corporation.

Solution:
Requirement 1:
Multiple Corporation
Bank Reconciliation
For the month of October, 20xx

Cash balance per book, October 31 $ 15,500

Add: Error in recording cash receipts $ 360
Check no 113 200 560
Total $ 16,060
Less: Counter check $ 500
Voided check 1,000 1,500
Corrected book balance, October 31 $ 14,560

Cash balance per bank, October 31 $ 12,190

Outstanding checks:
125 $300
133 400
145 200
150 600
169 80 1580
$ 10,610
Deposit in transit 3,950
Corrected bank balance, October 31 $ 14,560

Requirement 2:

1 Cash in bank 360

Sales 360
To correct the cash receipts recorded.

2 Cash in bank 200

Accounts payable 200
To record check lost and replaced.

3 Receivable from treasurer 500

Cash in bank 500
Counter check drawn by treasurer for perrsonal use.

4 Accounts payable 1,000

Cash in bank 1,000
To record voided check.
4,000,000.00