1.AUD
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund?
A. The custodian endorses reimbursement checks.
B. The custodian occasionally uses the cash fund to cash employee checks.
C. Reimbursement occurs twice each week.
D. Reimbursement vouchers are not prenumbered.
2.BEC
Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and an operating loss of $10,000. By how much would Koby have to increase its sales in order to achieve an operating income of 10% of sales?
A. $200,000
B. $231,000
C. $400,000
D. $251,000
3.REG
Larkin is a wholesaler of computers. Larkin sold 40 computers to Elk Appliance for $80,000. Elk paid $20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the following statements is correct?
a.Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security.
b.Larkin's security interest is superior provided it repossesses the computers before Quarry does.
c.Quarry's security interest is superior because Larkin's time to file a financing statement in Blackacre had expired prior to Quarry's filing.
d.Quarry's security interest is superior because Quarry had no actual notice of Larkin's security interest.
4.FAR
On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in francs one month after their receipt at Velec's factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 22 francs, 20 francs, and 21 francs on October 1, December 15, and December 31, respectively. Velec should account for the exchange rate fluctuation as:
a.A loss included in net income before extraordinary items.
b.A gain included in net income before extraordinary items.
c.An extraordinary loss.
d.An extraordinary gain.
Answer:
1.C
C is corrent because a petty cash fund is most frequently used for small expenditures and one would not expect to find one in which the imprest amount of $500 was being reimbursed twice weekly. The auditor would be likely to intensify an examination of the petty cash fund if this situation occurred.
A is incorrect because the custodian will normally endorse reimbursement checks to the petty cash fund.
B is incorrect because a petty cash fund could be used to cash employee checks. This would be a normal use of the petty cash fund and would not cause the auditor to intensify the examination.
D is incorrect because even though prenumbered vouchers are advisable, the limited amount in petty cash and the self-checking feature of the imprest system will mitigate for this deficiency.
2.A
A is corrent. The solutions approach is to use the standard breakeven formula and solve for sales (S). Variable costs are $150,000 at a sales level of $200,000; therefore, variable costs are .75S ($150,000/$200,000). S = VC + FC + Expected profit S = .75S + $60,000 + .10S .15S = $ 60,000 S = $400,000 Remember that the requirement was the increase in sales to achieve a profit of 10% of sales. The correct answer is $200,000 ($400,000 total sales needed less $200,000 present sales level).
3.A
Choice "A" is correct. When a security interest in collateral is perfected and the collateral is subsequently moved to another state, the collateral is temporarily perfected for four months in the state into which the collateral is moved. Thus, because Larkin's security interest in Elk's computers was perfected in Whiteacre, the interest was temporarily perfected in Blackacre. Since the default occurred within the four month temporary perfection period, Larkin has priority over the bank's subsequently perfected security interest.
4.B
Choice "B" is correct. The transaction would first be journalized when title transfers to the buyer on December 15. At fiscal year-end, the exchange rate has increased from one dollar to 20 francs on 12/15 to one dollar to 21 francs on 12/31, so a foreign exchange gain would be recognized.
Choice "a" is incorrect. The transaction would first be journalized when title transfers to the buyer. At fiscal year-end, the exchange rate has increased so a foreign exchange gain would be recognized.
Choice "c"and"d" is incorrect. Foreign exchange gains and losses are not classified as extraordinary items.
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