1. The primary reason for the popularity of LIFO is that it:
A. Provides better matching of physical flow and cost flow.
B. Saves income taxes currently.
C. Simplifies recordkeeping.
D. Provides a permanent reduction of income taxes.
2. The use of LIFO during a long inflationary period can result in:
A. A net increase in income tax expense.
B. An inflated balance sheet.
C. Significant cash flow advantages over FIFO.
D. A reduction in inventory turnover over FIFO.
3. The Mateo Corporation’s inventory at December 31, 2013, was $325,000 based on a physical count priced at cost, and before any necessary adjustment for the following:
▪ Merchandise costing $30,000, shipped f.o.b. shipping point from a vendor on December 30, 2013, was received on January 5, 2014.
▪ Merchandise costing $22,000, shipped f.o.b. destination from a vendor on December 28, 2013, was received on January 3, 2014.
▪ Merchandise costing $38,000 was shipped to a customer f.o.b. destination on December 28, arrived at the customer’s location on January 6, 2014.
▪ Merchandise costing $12,000 was being held on consignment by Traynor Company.
What amount should Mateo Corporation report as inventory in its December 31, 2013, balance sheet?
4. Northwest Fur Co. started 2013 with $94,000 of merchandise inventory on hand. During 2013, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system.
What is ending inventory assuming Northwest uses the gross method to record purchases?
5. Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?
6. Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements is correct?
A. Option a
B. Option b
C. Option c
D. Option d
Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1.
7. The ending inventory assuming LIFO and a periodic inventory system is:
8. Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows:
What should be the carrying value of Montana’s inventory?
On July 10, 2013, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2014. The company’s fiscal year-end is December 31. The contract was exercised on February 1, 2014, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2013, was $180,000. The company uses a perpetual inventory system.
9. How much loss on purchase commitment will Johnson recognize in 2013?
Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:
10. What should be the carrying value of Sullivan’s inventory?
11. What should be the carrying value of Sullivan’s inventory if the company prepares its financial statements according to International Financial Reporting Standards?
12. Asset retirement obligations:
A. Increase the balance in the related asset account.
B. Are measured at fair value in the balance sheet.
C. Are liabilities associated with the restoration of a long-term asset.
D. All of the above are correct.
13. When selling property, plant, and equipment for cash:
A. The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.
B. The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
C. The seller recognizes losses, but not gains.
D. None of the above.
14. Which of the following does not pertain to accounting for asset retirement obligations?
A. They accrete (increase over time) at the company’s credit-adjusted risk-free rate.
B. They must be recognized according to GAAP.
C. Statement of Financial Accounting Concepts No. 7 is applied when adjusting cash flow obligations for uncertainty.
D. All of the above pertain to accounting for asset retirement obligations.
15. Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.
16. Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:
Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.
17. In Case B, Grand Forks would record a gain/(loss) of:
18. Software development costs are capitalized if they are incurred:
A. Prior to the point at which technological feasibility has been established.
B. After commercial production has begun.
C. After technological feasibility has been established but prior to the product availability date.
D. None of the above is correct.
19. Interest is eligible to be capitalized as part of an asset’s cost, rather than being expensed immediately, when:
A. The interest is incurred during the construction period of the asset.
B. The asset is a discrete construction project for sale or lease.
C. The asset is self-constructed, rather than acquired.
D. All of the above are correct.
20. Research and development expense for a given period includes:
A. The full cost of newly acquired equipment that has an alternative future use.
B. Depreciation on a research and development facility.
C. Research and development conducted on a contract basis for another entity.
D. Patent filing and legal costs.
21. Cromartie Ltd. prepares its financial statements according to International Financial Reporting Standards. During 2013 the company incurred $1,245,000 in research expenditures to develop a new product. An additional $756,000 in development expenditures were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new product was patented before the end of the 2013 fiscal year. Sale of the product began in 2012. What amount of the above expenditures would Cromartie expense in its 2013 income statement?
22. Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
C. Double-declining balance.
D. Sum-of-the-year’s digits.
Cutter Enterprises purchased equipment for $72,000 on January 1, 2013. The equipment is expected to have a five-year life and a residual value of $6,000.
23. Using the straight-line method, the book value at December 31, 2013, would be:
24. Using the double-declining balance method, depreciation for 2013 and the book value at December 31, 2013, would be:
A. $26,400 and $45,600.
B. $28,800 and $43,200.
C. $28,800 and $37,200.
D. $26,400 and $36,600.
Archie Co. purchased a framing machine for $45,000 on January 1, 2013. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
25. Using the straight-line method, depreciation for 2013 and book value at December 31, 2013, would be:
A. $10,000 and $30,000.
B. $11,250 and $28,750.
C. $10,000 and $35,000.
D. $11,250 and $33,750.
26. Using the straight-line method, depreciation for 2014 and book value at December 31, 2014, would be:
A. $10,000 and $20,000.
B. $10,000 and $25,000.
C. $11,250 and $17,500.
D. $11,250 and $22,500.
27. Using the double-declining balance method, depreciation for 2013 and book value at December 31, 2013, would be:
A. $22,500 and $22,500.
B. $22,500 and $17,500.
C. $20,000 and $25,000.
D. $20,000 and $20,000.
28. Using the sum-of-the-years’-digits method, depreciation for 2013 and book value at December 31, 2013, would be:
A. $18,000 and $27,000.
B. $16,000 and $29,000.
C. $16,000 and $24,000.
D. $18,000 and $22,000.
29. Classifying liabilities as either current or long-term helps creditors assess:
B. The relative risk of a firm’s liabilities.
C. The degree of a firm’s liabilities.
D. The amount of a firm’s liabilities.
30. In January 2013, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In 2016, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2016 related to the patent should be:
31. The manufacturing facility is:
A. Impaired because its book value exceeds undiscounted future cash flows.
B. Not impaired because its book value exceeds undiscounted future cash flows.
C. Not impaired because it continues to produce revenue.
D. Impaired because its book value exceeds fair value.
At the end of its 2013 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:
32. Jane’s Donut Co. borrowed $200,000 on January 1, 2013, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2015. In connection with this note, Jane’s should report interest expense at December 31, 2013, in the amount of:
33. The key accounting considerations relating to accounts payable are:
A. Determining their existence and ensuring that they are recorded in the appropriate accounting period.
B. Determining their present value and ensuring that they are recorded in the appropriate accounting period.
C. Determining their existence and determining the correct amount.
D. Determining the present value of the principal and the amount of the interest.
34. Which of the following may create employer liabilities in connection with their payrolls?
A. Employee withholding taxes.
B. Employee voluntary deductions.
C. Employee fringe benefits.
D. All of the above are correct
35. Oklahoma Oil Corp. paid interest of $785,000 during 2013, and the interest payable account decreased by $125,000. What was interest expense for the year?
36. Which of the following is a contingency that should be accrued?
A. The company is being sued and a loss is reasonably possible and reasonably estimable.
B. The company deducts life insurance premiums from employees’ paychecks.
C. The company offers a two-year warranty and the expenses can be reasonably estimated.
D. It is probable that the company will receive $100,000 in settlement of a lawsuit.
37. All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?
A. Large increase, because unearned revenue becomes revenue when revenue is earned.
B. Large decrease, because unearned revenue implies that less revenue has been earned, which reduces future revenue.
C. No effect, because unearned revenue is a liability, so payment will use assets rather than providing revenue.
D. Large decrease, because unearned revenue indicates collection problems that will reduce net revenues in future periods.
38. Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline’s fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?
A. In the “mezzanine” between current and noncurrent liabilities.
B. Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances.
C. As a noncurrent liability.
D. As a current liability.
Discount-Mart issued ten thousand $1,000 bonds on January 1, 2013. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
39. What is the stated annual rate of interest on the bonds?
40. What is the effective annual rate of interest on the bonds?
41. When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:
A. Less than the effective interest.
B. Equal to the effective interest.
C. Greater than the effective interest.
D. More than if the bonds had been sold at a discount.
42. When bonds are retired prior to their maturity date:
A. GAAP has been violated.
B. The issuing company probably will report an ordinary gain or loss.
C. The issuing company probably will report an extraordinary gain or loss.
D. The issuing company will report a non-operating gain or loss.
43.When a company issues bonds between interest dates, the entry to record the issuance of the bonds will:
A. Include a credit to interest payable.
B. Include a debit to interest expense.
C. Include a debit to cash that has been reduced by interest accrued from the last interest date.
D. Include a debit to cash that has been increased by interest that will accrue from sale to the next interest date.
44. A $500,000 bond issue sold for 98. Therefore, the bonds:
A. Sold at a discount because the stated rate of interest was lower than the effective rate.
B. Sold for the $500,000 face amount less $10,000 of accrued interest.
C. Sold at a premium because the stated rate of interest was higher than the yield rate.
D. Sold at a discount because the effective interest rate was lower than the face rate.
45. When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?
A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.
B. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.
C. A nominal amount is allocated to the warrants.
D. All of the proceeds are allocated to the bonds.
Here’s the SOLUTION