JUN18L1FRA/C04 R29/29

Question 1
Stamp Inc. has a beginning inventory of 100 units @ $15.00 per unit. The following information further relates to its
transactions concerning Houston Corporation in its first year:

Transaction Units
2-Jan Purchase 100 @ 20.00
8-Jan Sale 115 @ 50.00
23-Jan Purchase 75 @ 25.00
29-Jan Sale 130 @ 50.00

Assuming Houston uses the periodic FIFO costing method assumption, what amount should Houston report as cost of
goods sold?
a) 4,625
b) 4,925
c) 4,789
The first choice is correct. COGS is computed as follows:

8-Jan 100 X 15.00 = 1,500

15 X 20.00 = 300
29-Jan 85 X 20.00 = 1,700
45 X 25.00 = 1,125
Total 4,625

The following information relates to Questions 2 and 3.

Chichester Steel's top analyst, Fredo, is calculating the depreciation expense of a piece of equipment for the fiscal
year 31 December 2011. The equipment was acquired on 1 January 2011. Fredo discovers the following information:

Cost of the equipment $600,000

Estimated residual value $100,000
Expected useful life 5 years
Total productive capacity 350,000 units
Production in FY 2011 110,000 units
Expected production for next 4 years 60,000 units per year

Question 2
If Chichester uses the units-of-production method, the amount of depreciation expense on Chichester's income
statement is closest to:
a) $157,143
b) $188,571
c) $342,857
The carrying cost is 600,000 − 100,000 or $500,000. The depreciation expense is (110,000/350,000) × $500,000, or
$157,143.

Question 3
If Chichester uses the double-declining depreciation method, the amount of depreciation expense on Chichester's
income statement is closest to:
a)
a) $180,000
b)
c) $200,000
d)
e) $240,000
According to the double-declining depreciation method, the expense would be (2/5) × $600,000 or $240,000.

Question 4
On June 30, 2016, a company sold a machine acquired in 2013 at P420,000 for P230,000. The residual value on the
machine was P60,000.
 Furthermore, the company employs the following depreciation policy:
  A full year's depreciation is taken in the year of acquisition.
 No depreciation is taken in the year of disposition.
 Useful life is five years.
 The straight-line method of depreciation is used.
What is the amount of gain or loss on disposal to be recorded for 2016?
a)
a) P26,000 gain
b)
b) P26,000 loss
c)
d) P34,000 loss
The first choice is correct. To get the amount of gain/ loss, we first need the updated carrying amount of the machine
at the date of sale. This is 420,000 − [(420,000 − 60,000/5) × 3] = 204,000. Comparing this to the sale price of
230,000 gives a gain on sale of 230,000 − 204,000 = 26,000.

Question 5
County Publishers Corporation purchases machinery for $12,000 on January 1, 2012. The company records its long-
lived assets using the revaluation model. The asset has a useful life of 10 years and is depreciated using straight-line
depreciation. On December 31, 2012, the fair value of the machinery is $9,000. On December 31, 2013, the fair value
of the machinery is $10,000. What will be the most likely revaluation surplus reported in the income statement of
2013?
a)
a) $1,800.
b)
b) $200.
c)
c) $2,000.

January 1, 2012—Cost $12,000

Depreciation—2012 (Book value/Useful life) 1,200
Book value—December 31, 2012 10,800
Revaluation loss—Income Statement 1,800
Fair value—December 31, 2012 9,000
Depreciation—2013 (Book value/Useful life) 1,000
Book value—December 31, 2013 8,000
Revaluation gain—Income Statement 1,800
Revaluation surplus—Equity 200
Fair value—December 31, 2013 10,000

Question 6
Which of the following costs related to the acquisition of a long-lived asset must generally be expensed in the United
States?
a)
a) Installation costs.
b)
b) Freight and delivery costs.
c)
c) Related research and development costs.
Research and development costs in the United States should be treated as an expense when they occur (except for
certain software development costs).

Question 7
Sapone Inc. reports high inventory turnover ratio compared to its peers in the industry. It isleast likely that Sapone
follows the:
a)
a) LIFO method, whereas its peers follow the FIFO method.
b)
b) FIFO method when prices are falling.
c)
c) LIFO method when prices are falling.
If the LIFO method is followed when prices are falling, the cost of goods sold will be lower and the inventory value will
be high. Therefore, the inventory turnover ratio will be low.

Question 8
Which of the following statements is least accurate?
Capitalization:
a)
a) Decreases cash flow from operating activities in the year of recognition.
b)
b) Increases noncurrent assets.
c)
c) Decreases cash flow from investing activities in the year of recognition.
Capitalization increases noncurrent assets and reduces cash flow from investing activities. Cash flow from operating
activities is not affected.

Question 9
Companies A, B, and C are new entrants in the same industry competing against one another. Details of their
purchases and inventory valuation methods are listed below.

Units Purchased Quarterly Inventory Valuation Method Used

Company A 30,000 FIFO
Company B 10,000 Weighted average cost method
Company C 16,000 LIFO

If industry supply prices steadily increased throughout the year, which company will most likelycalculate the same
value for ending inventory whether they use a periodic or perpetual inventory system?
a)
a) Company A.
b)
b) Company B.
c)
c) Company C.
The use of periodic or a perpetual inventory system is only a potential concern for an analyst when a company uses
LIFO or the weighted average cost method. If the FIFO or specific identification method is used, the same value for
ending inventory and cost of sales will be calculated under either a periodic or a perpetual inventory system.

Question 10
All of the following costs are capitalizable to inventory except:
a)
a) Administrative overhead
b)
b) Factory overhead
c)
c) Normal wastage
The first choice is correct. Administrative expenses are expensed when incurred.

Question 11
Relative to other industry players, which of the following BEST describes a firm reporting high sales growth and high
inventory turnover?
a)
a) The firm has obsolete inventory.
b)
b) The firm incurs lost sales by not carrying insufficient inventory.
c)
c) The firm is efficient in managing its inventory.
The first choice is incorrect. Firms with lower inventory turnover have obsolete inventory, thus causing write-downs.

Question 12
A pharmaceutical company that grows through an active acquisition policy, compared to a company that has grown
organically, will usually report:
a)
a) Lower goodwill.
b)
b) Higher amortization expenses.
c)
c) Lower research and development as an asset on the balance sheet.
Most costs associated with internally generated intangible assets such as research and development, patents are not
recognized on the balance sheet unless they are acquired from another party. So a company which has grown
through acquisition will report higher intangibles on the balance sheet and a related amortization expense, so the
second choice is the correct answer.

Question 13
The decision to use perpetual versus periodic accounting methods for inventory is most likely to change the cost of
sales using which method?
a)
a) FIFO.
b)
b) LIFO.
c)
c) Specific identification.
Cost of sales calculated using FIFO and specific identification methods are not affected by the choice of perpetual
versus periodic inventory accounting, whereas LIFO and weighted-average methods are likely to be affected.

Question 14
Which of the following is recorded at amortized cost?
a)
a) A patent that expires in 15 years.
b)
b) Goodwill that is purchased during acquisition.
 c)
c) A drilling machine that has a useful life of 13 years.
Any intangible asset with a finite life is recorded at amortized cost.

Question 15
ABC Company leases an asset for 5 years. During the term of the lease, ABC must make a payment of $5,000 each
year for using the asset. The rate implicit in the lease is 8%. ABC treats the lease as an operating lease.
The book value of the lease-related liability at the beginning of Year 3 is closest to:
a)
a) $12,885
b)
b) Zero
c)
c) $8,916
In an operating lease, no liability is recognized on the balance sheet.

Question 16
Company A and C are new entrants in a highly competitive industry where prices are steadily declining. Details of their
purchases and inventory valuation methods are listed below.
Units Purchased Quarterly Inventory Valuation Method Used
Company A 30,000 FIFO
Company C 16,000 LIFO

Compared to the cost of replacing inventory, the cost of sales reported by:
a)
a) Company A is too low.
b)
b) Company A is too high.
c)
c) Company C is too low.
Company A uses FIFO so its cost of sales reflect higher prices than the lower price points currently available in a
declining price environment. LIFO, last-in first-out, would accurately reflect current costs in cost of sales in a declining
price environment.

Question 17
Moray Brooms and Brushes purchased a tufting machine on 1 January 2009 for $600,000. The machine is expected
to have a useful life of seven years and a residual value of $110,000. Moray uses the straight-line depreciation
method. On 31 December 2011, Moray sells the machine for $410,000. The sale of the machine likely results in:
a)
a) a loss of $10,000.
b)
b) a gain of $20,000.
c)
c) a gain of $130,000.
The carrying value is $390,000 ($600,000 minus the accumulated depreciation of $210,000). If the sales price is
$410,000, then the gain of $20,000 is recognized on the income statement.

Question 18
Which of the following methods usually gives a valuation of inventory that is closest to its economic value?
a)
a) FIFO.
b)
b) LIFO.
c)
c) Lower of cost or market.
Because FIFO leaves the most recently purchased goods in inventory, the valuation will usually be the closest to
current values.

Question 19
In a period of falling prices and stable inventory quantities, which of the following is most likely?
a) LIFO COGS ﹥ FIFO COGS

b) LIFO CF ﹤ FIFO CF

c) LIFO EI ﹤ FIFO EI
In a period of falling prices and stable inventory quantities, use of LIFO results in lower COGS, higher NI, and higher
taxes. Therefore, CF under LIFO is lower.

Question 20
Which of the following statements is most accurate regarding cash flow impact for a lessee of a finance lease?
a) Total cash outflow each year is the same as the lease payment.
b) All of the rental payments are treated as cash flow from operations.
 c) The rental payments are partly allocated as cash flow from operations and partly as cash flow from
investing.
There is no cash outflow at the beginning of the lease, other than lease payments, since the asset is not purchased.
The rental payments are partly allocated to cash flow from operations and partly to cash flow from financing.

Question 21
Trina Hopkinton, an analyst for Corby Optical, is studying the income statement effect of two alternative depreciation
methods for a piece of equipment it just purchased. The equipment has four years of useful life. Compared with the
straight-line method of depreciation, if the company uses the double-declining balance (DDB) method, its tax
payments in year one will be:
a) higher.
b) lower.
c) the same.
In the first year of carrying the equipment on its books, fifty percent of the original cost will be expensed using the DDB
method, compared to twenty-five percent with straight-line depreciation. The greater the expense, the lower the tax
payments will be.

Question 22

Quarter Units Held/Purchased Unit Cost ($) Total Cost ($)

Opening Inventory 17 28 476
1 20 24 480
2 18 26 468
3 25 20 500
4 20 23 460
Total 100 2,384

Given that the company uses the LIFO cost flow assumption and sells 22, 16, 26, and 14 units in the four quarters
respectively, answer the following questions:
Cost of goods sold under the periodic system is closest to:
a)
a) $1,788
b)
c) $1,884
d)
e) $1,800

Quarter Purchases Cost Sales COGS IOH EI

OI 17 28 17
1 20 24 22 15
2 18 26 16 17
3 25 20 26 16
4 20 23 14 1,788 22 596
Total 100 78

COGS = (20 × 23) + (25 × 20) + (18 × 26) + (15 × 24) = $1,788

Question 23
The following information relates to Rhea Supply Inc.:

2014 2013
Revenue $1,200,000 $1,150,000
Gross profit 420,000 460,300
Net profit 250,000 235,000
Average inventory 60,000 units 62,700 units

Based solely on the given information, it is least likely that Rhea Supply:
a)
a) was holding slow-moving or obsolete inventory in 2014.
b)
b) has written down its inventory values in 2014.
 c)
c) has improved its inventory management efficiency in 2014.
Inventory turnover ratio is used to evaluate the effectiveness of a company's inventory management.
Inventory turnover = Cost of sales / Average inventory
Cost of sales* $780,000 $689,700
Inventory turnover 13 11
*Cost of sales = Revenues – Gross profit
A high inventory turnover ratio relative to industry norms might indicate highly effective inventory management.
Alternatively, it could also indicate that the company does not hold adequate inventory levels or that the company has
written down inventory values. A low inventory turnover can be an indicator of slow moving or obsolete inventory.

Question 24
If a company owns investment property and uses the cost model, then:
a)
a) the company must switch to the fair value model if the property transfers to inventory.
b)
b) the carry amount of the property must be adjusted if the property transfers to owner-occupied status.
c)
c) under IFRS, treatment of this investment property is identical to the cost model for plant, property and
equipment.
Under IFRS, investment property is recognized at carrying cost just like plant, property, and equipment.

Question 25
Recognition of a finance lease as opposed to an operating lease by the lessor most likely results in:
a)
a) Higher total net income over the lease term.
b)
b) Higher total CFI over the lease term.
c)
c) Lower taxes in the early years of the lease term.
Recognition of a finance lease as opposed to an operating lease by the lessor results in the same total net income,
higher total CFI over the lease term, and higher taxes in the early years of the lease.

Question 26
The total accumulated amortization expense over the lifetime of an intangible asset is affected by:
a)
a) the estimate of useful life.
b)
b) choice of amortization method.
c)
c) residual value.
Changing the residual value affects the total amortization expense over the finite life of an intangible asset, since the
total expense is equal to the original acquisition cost minus the residual value. The estimate of useful life and choice of
amortization method affect the annual amortization expense, but not the total expense over the lifetime of the
intangible asset.

Question 27
Assuming a period of inflationary environment, which of the following ratios is least likely to be lower under the LIFO
method in comparison to the FIFO method?
a)
a) Liquidity ratios.
b)
b) Solvency ratios.
c)
c) Profitability ratios.
Solvency ratios are higher under the LIFO method. The value of assets is lower under the LIFO method in comparison
to the FIFO method. This leads to a lower value of equity. Hence, the debt ratio and debt-to-equity ratio are higher
under LIFO.