Unit 2 Test: Thursday October 26, 2023.

BAT4M

Please submit your answers as a PDF in the test folder for this test. Thank you and good luck!

Part A: Complete the multiple Choice questions

1. Which is an advantage of perpetual inventory systems:

a) It is not necessary to calculate and record the cost of goods sold with each sale
b) It is not necessary to do a physical count of inventory ever
c) It provides better control over inventory because shortages can more easily be identified
d) It results in less clerical work and is less costly

2. $750 purchase of inventory was made on June 13 terms 2/10 n/30. June 16 merchandise
costing $50 is returned. What will be the payment in full on June 23?

a) $686
b) $700
c) $735
d) $750

3. When goods are shipped with the freight terms FOB shipping point in perpetual inventory
systems:

a) The buyer pays freight costs and debits Merchandise Inventory

b) The buyer pays and debits Freight Expense
c) The seller pays freight and debits Delivery Expense
d) The seller pays and debits Cost of Goods Sold

4. What inventory system is not approved by IFRS?

a) LIFO
b) FIFO
c) Average Weighted
d) They are all approved

5. The following are all common adjustments when adjusting a company’s books to match the
bank statement except:

a) Bank Fees
b) Outstanding Cheques
c) EFTs
d) NSF cheques
6. When a Notes Receivable comes to its maturity date, the following are all possible except:

a) Cash is debited for the principal amount

b) Interest Revenue is credited
c) Notes Receivable is Debited as a new note is issued
d) Accounts Receivable is credited when a customer does not pay

7. The Cost Grid for Inventory Costing includes all the following except:

a) The COGS
b) The total amount of Sales Revenue
c) The increase in inventory
d) The running inventory balance

8. Gross Profit =

a) Sales - COGS
b) # of units sold x inventory price
c) Profit for the year - Expenses
d) Sales Revenue + Common Shares

9. Bank fees automatically withdrawn from the company’s chequing account will result in:

a) A credit to Cash and a debit to Bank Fee expense

b) A debit to Cash and a credit to Accounts Receivable
c) A credit to Cash and a debit to Sales Revenue
d) A credit to bank fee expense and a debit to Cash

10. The following is true about Sales Discounts Not Taken:

a) This account is never used in the perpetual inventory system

b) This account is used when a company applies the sales discount to the transaction
before they are paid
c) It is a Contra Asset Account that is used only at the end of the fiscal year
d) All the above are true.

11. The Allowance for Doubtful Debt balance is a credit of $500, the ending balance in the T
account is $2000. What is the calculated amount for Allowance for Doubtful Debt using an aging
method for that period?

a) Debit $2500
b) Credit $1500
c) Credit $2500
d) Debit $500
12. The Ending Balance for Allowance for Doubtful Debts = $2000, The calculated amt for this
account, for the period, is $1500, The Account Receivable Amount is $10,000. What is the Net
Receivable Amount?

a) $8,500
b) $8,000
c) $6,500
d) $7,500

13. When purchasing inventory and a discount is applied, this account is credited for the
discount:

a) Sales Discounts
b) Sales Discounts Not Taken
c) Estimated Inventory Returns
d) Merchandise Inventory

14. FOB Destination is applied to the shipping of inventory; the proper debit would be:

a) Merchandise Inventory
b) Delivery Expense
c) Cash
d) Accounts Receivable

15. When a return is made and put back on the shelf for resale, there are two entries needed.
The two debits are:

a) Cost of Goods Sold and Cash

b) Sales Returns and Inventory
c) Cash and Sales Returns
d) Cost of Goods Sold and Sales Revenue

16. A Merchandise Business returns inventory; the debit in the journal entry is to:

a) Accounts Receivable
b) Cash
c) Accounts Payable
d) Merchandise Inventory
17. The following is a key difference between perpetual and periodic inventory systems:

a) Periodic Inventory systems do not maintain running balances for COGS and
Merchandise Inventory
b) Periodic Inventory systems never use LIFO
c) Perpetual Inventory Systems never do a physical inventory count
d) None of the above

18. The Income Statement for a Merchandising Business:

a) Calculates Net Capital for the business

b) Includes All Account information
c) Identifies Operating expenses separate from other expenses
d) All of the above

19. These are all contra revenue accounts used in merchandising businesses except:

a) Estimated Inventory Returns

b) Sales Returns
c) Sales Discounts
d) They are all contra revenue accounts

20. This account has a normal debit balance:

a) Cost of Goods Sold

b) Estimated Inventory Returns
c) Sales
d) Interest Expense
Part B: Short Answer (Analysis , Explanation and Understanding)

Instructions: Choose 4 of the 5 questions to answer in paragraph form. Be sure to have

accurate answers and explain your reasoning clearly. (5 marks each = 20 marks)

1. What are the key differences in service business income statements and merchandising
business income statements? Fully explain at least two.

2. Why is bank reconciliation important? How does this relate to the ethical practices of
accounting and the GAAPS?

3. What is the purpose of the account Allowance for Doubtful Accounts? Explain in detail.

4. What are the main differences in periodic inventory accounting and perpetual inventory
accounting. Fully explain 3.

5. Describe two accounts that are used for Merchandising Businesses that are not used in
Service Businesses. Make sure you address the following:
a) Name of the account
b) Type of the account
c) Normal Balance
d) Purpose of the Account (what transactions does it process)
Part C: Problems (30)

1. Merchandising Transactions (20)

NOTE: terms for discounts follow this format : ⅖ n/30 = 2% if paid within 5 days, if
discount not taken payment is due in 30 days.

Provide accurate and complete journal entries for the following transactions; provide a
note to describe and show your calculations when necessary:

1. February 1: Purchased inventory on account: $3,400. Terms: 2/10, n/30.

2. February 5 : Returned $400 of inventory from the February 1 purchase.

3. February 9 : Paid for the inventory purchase of February 1

4. February 11 : Sold inventory for $3,500 on account. The inventory cost $1,600. Terms
2/10, n/30.

5. February 14 : Purchased inventory on account: $2,500. Terms: 1/15, n/30.

6. February 19 : Sold inventory for $1,500 on account. The cost of inventory was $600.
Terms 2/10, n/30.

7. February 21 : Paid for inventory purchase from February 14.

8. February 24 : Customer from February 11 transaction paid the amount owing.

9. February 25 : Customer from the February 19 transaction returns $100 of inventory

(cost: $40). The inventory was in good condition and put back on the shelf for resale.

10. February 28 : Customer from the February 19 sale pays the amount owing.

Romney Inc. uses a perpetual inventory system

Record all journal entries in proper format, add a note and show your calculations.
2. Allowance for Doubtful Accounts: Aging of Receivables Method (10 marks)

Bailey Inc. shows the following information on October 31, 2024, the company’s fiscal year end:

Account Debit Credit

Accounts Receivable $6,000

Allowance For Doubtful $600

Accounts

Sales ($4,00 cash sales) $25,000

The company’s accountant generated the following aging schedule for accounts receivable:

# of days Amt. Receivable Estimated Uncollectible

0-30 $3,000 1%

31-60 1,500 2.5%

61-90 1,000 5%

Over 90 500 10%

Complete the following:

1. Calculate the ending amount of Allowance for Doubtful Accounts; show your work
2. Adjust your T account and determine the missing credit amount; show your work
3. Complete the correct journal entry for this adjustment; show your work
4. Calculate the Accounts Receivable net; show your work.