CH 11

1. T 6. T 11. F 16.
F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
11 - 2 Test Bank for Intermediate Accounting, Fourteenth Edition
TRUE-FALSE—Conceptual
1. A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
2. The lower-of-cost-or-market method is used for inventory despite being less conservative
than valuing inventory at market value.
3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating

inventory.
4. Application of the lower-of-cost-or-market rule results in inconsistency because a

company may value inventory at cost in one year and at market in the next year.
5. GAAP requires reporting inventory at net realizable value, even if above cost, whenever
there is a controlled market with a quoted price applicable to all quantities.
6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to
obtain the cost figures.
7. In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative sales value.
8. A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.
9. Most purchase commitments must be recorded as a liability.
10. If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should record any expected losses on the commitment in the period in which
the market decline takes place.
11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
12. The gross profit method can be used to approximate the dollar amount of inventory on
hand.
13. In most situations, the gross profit percentage is stated as a percentage of cost.
14. A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.
15. When the conventional retail method includes both net markups and net markdowns in the
cost-to-retail ratio, it approximates a lower-of-cost-or-market valuation.
16. In the retail inventory method, the term markup means a markup on the original cost of an
inventory item.
17. In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.
Depreciation, Impairments, and Depletion 11 - 3
18. The inventory turnover ratio is computed by dividing the cost of goods sold by the ending
inventory on hand.
19. The average days to sell inventory represents the average number of days’ sales for
which a company has inventory on hand.
*20. The LIFO retail method assumes that markups and markdowns apply only to the goods
purchased during the period.
True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
MULTIPLE CHOICE—Conceptual
21. Which of the following is true about lower-of-cost-or-market?
a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.
22. The primary basis of accounting for inventories is cost. A departure from the cost basis of
pricing the inventory is required where there is evidence that when the goods are sold in
the ordinary course of business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
d. future utility will be less than their cost.
23. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of
the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
24. In no case can "market" in the lower-of-cost-or-market rule be more than

a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal and an allowance for an approximately normal profit
margin.
d. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal, an allowance for an approximately normal profit
margin, and an adequate reserve for possible future losses.
25. Designated market value
a. is always the middle value of replacement cost, net realizable value, and net realizable
value less a normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.
26. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.
27. An item of inventory purchased this period for $15.00 has been incorrectly written down to
its current replacement cost of $10.00. It sells during the following period for $30.00, its
normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the
following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.
S
28. When the cost-of-goods-sold method is used to record inventory at market
a. there is a direct reduction in the selling price of the product that results in a loss being
recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting
loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded
in the financial statements.
d. the market value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.
29. Lower-of-cost-or-market as it applies to inventory is best described as the

a. drop of future utility below its original cost.
b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
d. change in inventory value to market value.
30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

determined as the
a. net realizable value.
b. net realizable value less normal profit margin.
c. replacement cost.
d. selling price less costs of completion and disposal.
31. What is the rationale behind the ceiling when applying the lower-of-cost-or-market method
to inventory?
a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.

d. Prevents overstatement of the value of obsolete or damaged inventories.
32. Why are inventories stated at lower-of-cost-or-market?

a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profits to be recognized.
33. Which of the following is not an acceptable approach in applying the lower-of-cost-or-
market method to inventory?
a. Inventory location.
b. Categories of inventory items.
c. Individual item.
d. Total of the inventory.
34. Which method(s) may be used to record a loss due to a price decline in the value of
inventory?
a. Cost-of-goods-sold.
b. Sales method.
c. Loss method
d. Both a and c.
35. Why might inventory be reported at sales prices (net realizable value or market price)
rather than cost?
a. When there is a controlled market with a quoted price applicable to all quantities and
when there are no significant costs of disposal.
b. When there are no significant costs of disposal.
c. When a non-cancellable contract exists to sell the inventory.
d. When there is a controlled market with a quoted price applicable to all quantities.
S
36. Recording inventory at net realizable value is permitted, even if it is above cost, when
there are no significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort
reported net income.
37. When inventory declines in value below original (historical) cost, and this decline is
considered other than temporary, what is the maximum amount that the inventory can be
valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
38. Net realizable value is

a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.
39. If a unit of inventory has declined in value below original cost, but the market value
exceeds net realizable value, the amount to be used for purposes of inventory valuation is
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.
40. Inventory may be recorded at net realizable value if

a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.
41. If a material amount of inventory has been ordered through a formal purchase contract at
the balance sheet date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
42. The credit balance that arises when a net loss on a purchase commitment is recognized
should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.
P
43. In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials
in 2013 for $700,000. Before the December 31, 2012 balance sheet date, the market price
for these materials dropped to $510,000. The journal entry to record this situation at
December 31, 2012 will result in a credit that should be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
44. At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase
commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon
for delivery during the coming summer. The company prices its inventory at the lower of
cost or market. If the market price for jet fuel at the end of the year is $4.50, how would
this situation be reflected in the annual financial statements?
a. Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.
45. At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for
the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during
the coming summer. The company prices its inventory at the lower of cost or market. If the
market price for jet fuel at the end of the year is $4.25, how would this situation be
reflected in the annual financial statements?
b. No impact.
46. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories.
S
47. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period.
48. The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.
49. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.
1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
E = Exercise
P = Problem

inventory.

advance.
hand.
the markup.
inventory item.
inventory on hand.

1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
d. All of these.
the term "market"?

margin.
S


determined as the
to inventory?


c. Individual item.
inventory?
b. Sales method.
c. Loss method
d. Both a and c.
rather than cost?
S
valued at?
a. Sales price
c. Historical cost

b. selling price.
b. original cost.
c. market value.

d. all of these.
should be
P
b. No impact.
b. No impact.
S

d. none of these.
d. None of these.
1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
E = Exercise
P = Problem

inventory.

advance.
hand.
the markup.
inventory item.
inventory on hand.

1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
d. All of these.
the term "market"?

margin.
S


determined as the
to inventory?


c. Individual item.
inventory?
b. Sales method.
c. Loss method
d. Both a and c.
rather than cost?
S
valued at?
a. Sales price
c. Historical cost

b. selling price.
b. original cost.
c. market value.

d. all of these.
should be
P
b. No impact.
b. No impact.
S

d. none of these.
d. None of these.
d. All of these.

the term "market"?

margin.
S


determined as the
to inventory?

c. Individual item.
inventory?
b. Sales method.
c. Loss method
d. Both a and c.
rather than cost?
S

valued at?
a. Sales price
c. Historical cost

b. selling price.
b. original cost.
c. market value.

d. all of these.
should be
P
b. No impact.
b. No impact.
S

d. none of these.
d. None of these.
50. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.
51. An inventory method which is designed to approximate inventory valuation at the lower of
cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
52. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.
53. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.
54. When the conventional retail inventory method is used, markdowns are commonly ignored
in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or market.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.
55. To produce an inventory valuation which approximates the lower of cost or market using
the conventional retail inventory method, the computation of the ratio of cost to retail
should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
*56. When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns
are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are
deducted.
c. if it is the LIFO method, the beginning inventory is included and markdowns are not
deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns
are not deducted.
S
57. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
which reflects the item's selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.
S
58. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
59. What condition is not necessary in order to use the retail method to provide inventory
results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.
60. What method yields results that are essentially the same as those of the conventional
retail method?
a. FIFO.
b. Lower-of-average-cost-or-market.
c. Average cost.
d. LIFO.
61. What is the effect of net markups on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.
62. What is the effect of freight-in on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.
63. Which of the following is not a common disclosure for inventories?

a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed.
P
64. Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need
*SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 23. MC 29. MC 68. MC 74. MC 80. MC 141. E
2. TF 24. MC 30. MC 69. MC 75. MC 132. MC 142. E
3. TF 25. MC 31. MC 70. MC 76. MC 133. MC 143. E
4. TF 26. MC 32. MC 71. MC 77. MC 134. MC 148. E
21. MC 27. MC 33. MC 72. MC 78. MC 139. E
22. MC S
28. MC 34. MC 73. MC 79. MC 140. E
5. TF 35. MC 37. MC 39. MC 81. MC
S
6. TF 36. MC 38. MC 40. MC 82. MC
7. TF 83. MC 85. MC 87. MC 144. E
8. TF 84. MC 86. MC 88. MC
9. TF 11. TF 42. MC 44. MC 89. MC 91. MC 93. MC
P
10. TF 41. MC 43. MC 45. MC 90. MC 92. MC
S
12. TF 47. MC 95. MC 99. MC 103. MC 107. MC 145. E
13. TF 48. MC 96. MC 100. MC 104. MC 108. MC 146. E
14. TF 49. MC 97. MC 101. MC 105. MC 109. MC 147. E
46. MC 94. MC 98. MC 102. MC 106. MC 135. MC 149. P
15. TF 52. MC S
57. MC 62. MC 114. MC 125. MC 148. E
S
16. TF 53. MC 58. MC 110. MC 115. MC 126. MC 150. P
17. TF 54. MC 59. MC 111. MC 116. MC 127. MC
50. MC 55. MC 60. MC 112. MC 119. MC 136. MC
51. MC 56. MC 61. MC 113. MC 120. MC 137. MC
18. TF 63. MC P
65. MC 121. MC 123. MC
P
19. TF 64. MC 66. MC 122. MC 124. MC
Learning Objective *8
20. TF 117. MC 129. MC 138. MC 152. P 155. P
56. MC 118. MC 130. MC 148. E 153. P
67. MC 128. MC 131. MC 151. P 154. P
d. All of these.
the term "market"?

margin.
S


determined as the
to inventory?

a *129. Calculate ending inventory cost using dollar-value LIFO.
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
b *130. Calculate cost of ending inventory using LIFO retail.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE—CPA Adapted

d 132. Recognizing a loss due to LCM.
b 133. Appropriate use of replacement costs in LCM.
b 134. Identification of the designated market value.
a 135. Estimate cost of inventory lost by theft.
a 136. Determine cost of ending inventory using retail method.

d 137. Determine cost of ending inventory using retail method.
a *138. Calculate ending inventory using LIFO retail.
82. d 86. c 90. a 94. b

97. Stine Corp.'s trial balance reflected the following account balances at December 31, 2012:
Accounts receivable (net) $24,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2012 balance sheet, the current assets total is
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
Use the following information for questions 98 through 100.
The following trial balance of Reese Corp. at December 31, 2012 has been properly adjusted
except for the income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Property, plant, and equipment (net) 7,366,000
Accounts payable and accrued liabilities $ 1,801,000
Income taxes payable 654,000
Deferred income tax liability 85,000
Common stock 2,350,000
Additional paid-in capital 3,680,000
Retained earnings, 1/1/12 3,450,000
Net sales and other revenues 13,460,000
Costs and expenses 11,180,000
Income tax expenses 1,179,000
$25,480,000 $25,480,000
Other financial data for the year ended December 31, 2012:
 Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly
installments of $150,000. The last payment is due December 29, 2014.
 The balance in the Deferred Income Tax Liability account pertains to a temporary difference
that arose in a prior year, of which $20,000 is classified as a current liability.
 During the year, estimated tax payments of $525,000 were charged to income tax expense.
The current and future tax rate on all types of income is 30%.
In Reese's December 31, 2012 balance sheet,
98. The current assets total is

a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.
99. The current liabilities total is

a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.
100. The final retained earnings balance is

a. $4,551,000.
b. $4,636,000.
c. $5,076,000.
d. $5,005,000.
101. On January 4, 2012, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an
annual rental of $100,000. At inception of the lease, Dodd received $400,000 covering the
first two years' rent of $200,000 and a security deposit of $200,000. This deposit will not
be returned to Dodd upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $400,000 should be shown as a
current and long-term liability in Kiley's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000
102. In a statement of cash flows, receipts from sales of property, plant, and equipment and
other productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.
103. In a statement of cash flows, interest payments to lenders and other creditors should be
classified as cash outflows for
b. borrowing activities.
c. lending activities.
d. financing activities.
104. In a statement of cash flows, proceeds from issuing equity instruments should be
classified as cash inflows from
a. lending activities.
b. operating activities.
105. In a statement of cash flows, payments to acquire debt instruments of other entities (other
than cash equivalents) should be classified as cash outflows for
b. investing activities.
c. financing activities.
d. lending activities.
106. Which of the following facts concerning fixed assets should be included in the summary of
significant accounting policies?
Depreciation Method Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No
Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
97. d 99. a 101. b 103. a 105. b
98. d 100. c 102. c 104. d 106. c
DERIVATIONS — Computational
No. Answer Derivation
79. c
80. a
81. b $900,000 – $105,000 + $390,000 = $1,185,000.
82. d
83. a
84. b $900,000 – $105,000 + $454,000 = $1,249,000.
85. c $2,600 – $1,680 = $920.
86. c ($5,400 – $3,240) + $1,280 – $1,080 = $2,360.
87. d $2,166 + $646 – $2,750 = ($62).
88. b $70,000 + $220,000 – $110,000 + $140,000 = $320,000.
89. b $70,000 + $240,000 – $110,000 + $140,000 = $340,000.
90. a $55,000 – $3,000 + $1,000 + $1,500 = $54,500.
91. c $450,000 + $140,000 – $60,000 = $530,000.
92. c $300,000 + $70,000 – $30,000 = $340,000.
93. a $235,000 ÷ ($150,000 + $100,000) = 0.94.
94. b $235,000 – $60,000 – $110,000 = $65,000.
95. a $275,000 ÷ ($150,000 + $100,000) = 1.10.
96. b $275,000 – $60,000 – $110,000 = $105,000.
DERIVATIONS — CPA Adapted

97. d $24,000 + $6,000 + $16,000 + $30,000 + $2,000 = $78,000.
98. d $975,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $5,155,000.
99. a $1,801,000 + ($654,000 – $525,000) + $20,000 = $1,950,000.
100. c $3,450,000 + $13,460,000 – $11,180,000 – ($1,179,000 – $525,000) =
$5,076,000.
101. b Conceptual.
102. c Conceptual.

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.
EXERCISES
Ex. 5-107—Definitions.
Provide clear, concise answers for the following.
CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
IFRS questions are available at the end of this chapter.
CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES
T 1. When to use lower-of-cost-or-market.
F 2. Lower-of-cost-or-market and conservatism.
F 3. Purpose of the “floor” in LCM.
T 4. Lower-of-cost-or-market and consistency.
F 5. Reporting inventory at net realizable value.
T 6. Valuing inventory at net realizable value.
T 7. Valuation using relative sales value.
F 8. Definition of a basket purchase.
F 9. Recording purchase commitments.
T 10. Loss on purchase commitments.
F 11. Recording noncancelable purchase contract.
T 12. Gross profit method.
F 13. Gross profit percentage.
T 14. Disadvantage of gross profit method.
F 15. Conventional retail method.

F 16. Definition of markup.
T 17. Accounting for abnormal shortages.
F 18. Computing inventory turnover ratio.
T 19. Average days to sell inventory.
T 20 LIFO retail method.
d 21. Knowledge of lower-of-cost-or-market valuations.
d 22. Appropriate use of LCM valuation.
c 23. Definition of "market" under LCM.
b 24. Definition of "ceiling."
a 25. Definition of "designated market value."
c 26. Application of lower-of-cost-or-market valuation.
d 27. Effect of inventory write-down.
S
d 28. Recording inventory loss under direct method.
a 29. Lower-of-cost-or-market description.
b 30. Definition of "floor".
d 31. Rationale of the "ceiling".
c 32. Reason inventories are stated at LCM.
a 33. Acceptable approaches in applying LCM.
d 34. Methods used to record inventory loss.
a 35. Reason for reporting inventory at sales price.
S
c 36. Recording inventory at net realizable value.
MULTIPLE CHOICE—Conceptual (cont.)
b 37. Net realizable value under LCM.
d 38. Definition of "net realizable value."
a 39. Valuation of inventory at net realizable value.
d 40. Appropriate use of net realizable value.
a 41. Material purchase commitments.
a 42. Loss recognition on purchase commitments.
P
b 43. Reporting purchase commitments loss.
d 44. Accounting for purchase commitments.
c 45. Record unrealized losses on purchase commitments.
a 46. Use of gross profit method.
S
d 47. Gross profit method assumptions.
d 48. Appropriate use of the gross profit method.
b 49. Appropriate use of the gross profit method.
d 50. Advantage of retail inventory method.
c 51. Conventional retail inventory method.
a 52. Assumptions of the retail inventory method.
d 53. Appropriate use of the retail inventory method.
b 54. Markdowns and the conventional retail method.
a 55. Markups and the conventional retail method.
b *56. Knowledge of the cost ratio for retail inventory methods.
S
a 57. Information needed in retail inventory method.
d S
58. Reasons for using retail inventory method.
a 59. Condition necessary to use retail method.
b 60. Conventional retail method.
d 61. Net markups and the conventional retail method.
a 62. Freight-in and the conventional retail method.
b 63. Common inventory disclosures.
b P
64. Inventory cost flow assumptions.
P
a 65. Computing average days to sell inventory.
c 66. Inventory turnover ratio.
c *67. Dollar-value LIFO retail method.
MULTIPLE CHOICE—Computational
a 68. Value inventory at LCM.
b 69. Lower-of-cost-or-market.
d 71. Value inventory at LCM.
b 72. Value inventory at LCM.
c 73. Value inventory at LCM.
c 74. Determine market value under LCM.
b 75. Value inventory under LCM.
d 76. Determine cost amount under LCM.
c 77. Value inventory under LCM.
a 79. Value inventory under LCM.
c 81. Determining net realizable value.
b 83. Relative sales value method.
c 85. Relative sales method of inventory valuation.
b 86. Calculate cost using relative sales value method.
d 87. Calculate cost using relative sales value method.
a 88. Calculate cost using relative sales value method.
a 89. Entry for purchase commitment loss.
c 90. Recording purchase under purchase commitment.
c 91. Entry for purchase commitment loss.
c 92. Recognizing loss on purchase commitments.
b 93. Recognizing loss on purchase commitments.
a 94. Estimating ending inventory using gross profit method.
d 96. Calculate cost of goods sold given a markup on cost.
d 97. Calculate merchandise purchases given a markup on cost.
a 98. Calculate total sales from cost information.
a 99. Markup on cost equivalent to a markup on selling price.
b 100. Estimate ending inventory using gross profit method.
c 101. Calculate ending inventory using gross profit method
. b 102. Calculate ending inventory using gross profit method.

a 103. Estimate cost of inventory destroyed by fire.
a 104. Determine items to be included in inventory.
c 105. Determine gross profit as percentage of cost.
c 106. Calculate gross profit amount.
d 107. Calculate ending inventory using gross profit method.
c 109. Calculate ending inventory using gross profit method.
a 110. Calculate ending inventory using conventional retail.
c 111. Calculate ending inventory using conventional retail.
b 112. Calculate ending inventory using conventional retail.
b 113. Calculate cost of retail ratio to approximate LCM.
b 114. Calculate ending inventory at retail.
a 115. Calculate cost to retail ratio approximating LCM.
b 116. Calculate cost of inventory lost using retail method.
b *117. Calculate ending inventory at cost using LIFO retail.
c *118. Determine cost to retail ratio using LIFO retail.
a 119. Calculate ending inventory at retail.
c 121. Average days to sell inventory.
b 123. Calculate inventory turnover ratio.
d 124. Calculate inventory turnover ratio.
d 125. Determine cost to retail ratio to approximate LCM.
d 126. Calculate ending inventory at retail.
c *128. Determine cost to retail ratio using LIFO cost.
P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.

d S
28. Recording inventory loss under direct method.
c S
36. Recording inventory at net realizable value.

b P
43. Reporting purchase commitments loss.
d S
47. Gross profit method assumptions.
a S
57. Information needed in retail inventory method.
S
d 58. Reasons for using retail inventory method.
P
b 64. Inventory cost flow assumptions.
a P
65. Computing average days to sell inventory.


P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Inventory 2,085,000
$25,480,000 $25,480,000

a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.

a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.

a. $4,551,000.
b. $4,636,000.
c. $5,076,000.
d. $5,005,000.
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000
a. No Yes
b. Yes Yes
c. Yes No
d. No No

97. d 99. a 101. b 103. a 105. b
98. d 100. c 102. c 104. d 106. c
79. c
80. a
81. b $900,000 – $105,000 + $390,000 = $1,185,000.
82. d
83. a
84. b $900,000 – $105,000 + $454,000 = $1,249,000.
85. c $2,600 – $1,680 = $920.
86. c ($5,400 – $3,240) + $1,280 – $1,080 = $2,360.
87. d $2,166 + $646 – $2,750 = ($62).
88. b $70,000 + $220,000 – $110,000 + $140,000 = $320,000.
89. b $70,000 + $240,000 – $110,000 + $140,000 = $340,000.
90. a $55,000 – $3,000 + $1,000 + $1,500 = $54,500.
91. c $450,000 + $140,000 – $60,000 = $530,000.
92. c $300,000 + $70,000 – $30,000 = $340,000.
93. a $235,000 ÷ ($150,000 + $100,000) = 0.94.
94. b $235,000 – $60,000 – $110,000 = $65,000.
95. a $275,000 ÷ ($150,000 + $100,000) = 1.10.
96. b $275,000 – $60,000 – $110,000 = $105,000.

97. d $24,000 + $6,000 + $16,000 + $30,000 + $2,000 = $78,000.
98. d $975,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $5,155,000.
99. a $1,801,000 + ($654,000 – $525,000) + $20,000 = $1,950,000.
100. c $3,450,000 + $13,460,000 – $11,180,000 – ($1,179,000 – $525,000) =
$5,076,000.
101. b Conceptual.
102. c Conceptual.

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.
EXERCISES
CHAPTER 8
CHAPTER 9

S
S
P
S
S
d S
b P
P

P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.

d S
c S

b P
d S
a S
S
P
a P


P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Inventory 2,085,000
$25,480,000 $25,480,000

a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.

a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.

a. $4,551,000.
b. $4,636,000.
c. $5,076,000.
d. $5,005,000.
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000
a. No Yes
b. Yes Yes
c. Yes No
d. No No

97. d 99. a 101. b 103. a 105. b
98. d 100. c 102. c 104. d 106. c
79. c
80. a
81. b $900,000 – $105,000 + $390,000 = $1,185,000.
82. d
83. a
84. b $900,000 – $105,000 + $454,000 = $1,249,000.
85. c $2,600 – $1,680 = $920.
86. c ($5,400 – $3,240) + $1,280 – $1,080 = $2,360.
87. d $2,166 + $646 – $2,750 = ($62).
88. b $70,000 + $220,000 – $110,000 + $140,000 = $320,000.
89. b $70,000 + $240,000 – $110,000 + $140,000 = $340,000.
90. a $55,000 – $3,000 + $1,000 + $1,500 = $54,500.
91. c $450,000 + $140,000 – $60,000 = $530,000.
92. c $300,000 + $70,000 – $30,000 = $340,000.
93. a $235,000 ÷ ($150,000 + $100,000) = 0.94.
94. b $235,000 – $60,000 – $110,000 = $65,000.
95. a $275,000 ÷ ($150,000 + $100,000) = 1.10.
96. b $275,000 – $60,000 – $110,000 = $105,000.

97. d $24,000 + $6,000 + $16,000 + $30,000 + $2,000 = $78,000.
98. d $975,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $5,155,000.
99. a $1,801,000 + ($654,000 – $525,000) + $20,000 = $1,950,000.
100. c $3,450,000 + $13,460,000 – $11,180,000 – ($1,179,000 – $525,000) =
$5,076,000.
101. b Conceptual.
102. c Conceptual.

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.
EXERCISES
CHAPTER 8
CHAPTER 9

S
S
P
S
S
d S
b P
P

P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.

d S
c S

b P
d S
a S
S
P
a P


P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Inventory 2,085,000
$25,480,000 $25,480,000

a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.

a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.

a. $4,551,000.
b. $4,636,000.
c. $5,076,000.
d. $5,005,000.
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000
a. No Yes
b. Yes Yes
c. Yes No
d. No No

97. d 99. a 101. b 103. a 105. b
98. d 100. c 102. c 104. d 106. c
79. c
80. a
81. b $900,000 – $105,000 + $390,000 = $1,185,000.
82. d
83. a
84. b $900,000 – $105,000 + $454,000 = $1,249,000.
85. c $2,600 – $1,680 = $920.
86. c ($5,400 – $3,240) + $1,280 – $1,080 = $2,360.
87. d $2,166 + $646 – $2,750 = ($62).
88. b $70,000 + $220,000 – $110,000 + $140,000 = $320,000.
89. b $70,000 + $240,000 – $110,000 + $140,000 = $340,000.
90. a $55,000 – $3,000 + $1,000 + $1,500 = $54,500.
91. c $450,000 + $140,000 – $60,000 = $530,000.
92. c $300,000 + $70,000 – $30,000 = $340,000.
93. a $235,000 ÷ ($150,000 + $100,000) = 0.94.
94. b $235,000 – $60,000 – $110,000 = $65,000.
95. a $275,000 ÷ ($150,000 + $100,000) = 1.10.
96. b $275,000 – $60,000 – $110,000 = $105,000.

97. d $24,000 + $6,000 + $16,000 + $30,000 + $2,000 = $78,000.
98. d $975,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $5,155,000.
99. a $1,801,000 + ($654,000 – $525,000) + $20,000 = $1,950,000.
100. c $3,450,000 + $13,460,000 – $11,180,000 – ($1,179,000 – $525,000) =
$5,076,000.
101. b Conceptual.
102. c Conceptual.

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.
EXERCISES
CHAPTER 8
CHAPTER 9

S
S
P
S
S
d S
b P
P

P
S

82. d 86. c 90. a 94. b

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
CHAPTER LEARNING OBJECTIVES
1. Describe property, plant, and equipment.
2. Identify the costs to include in the initial valuation of property, plant, and equipment.
3. Describe the accounting problems associated with self-constructed assets.
4. Describe the accounting problems associated with interest capitalization.
5. Understand accounting issues related to acquiring and valuing plant assets.
6. Describe the accounting treatment for costs subsequent to acquisition.
7. Describe the accounting treatment for the disposal of property, plant, and equipment.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
1. TF 2. TF 21. MC 22. MC 23. MC
3. TF 24. MC 27. MC 30. MC 65. MC 123. MC 137. E
4. TF 25. MC 28. MC 63. MC 66. MC 124. MC 138. P
5. TF 26. MC 29. MC 64. MC 67. MC 131. E
S
6. TF 31. MC 68. MC 132. E
7. TF S
32. MC 69. MC 133. E
8. TF 35. MC S
41. MC 74. MC 80. MC 86. MC 131. E
S
9. TF 36. MC 42. MC 75. MC 81. MC 87. MC 133. E
10. TF 37. MC 70. MC 76. MC 82. MC 88. MC 137. E
11. TF 38. MC 71. MC 77. MC 83. MC 89. MC 139. P
33. MC 39. MC 72. MC 78. MC 84. MC 90. MC 140. P
34. MC 40. MC 73. MC 79. MC 85. MC 125. MC
12. TF 48. MC 94. MC 103. MC 112. MC 128. MC 144. P
13. TF 49. MC 95. MC 104. MC 113. MC 131. E 145. P
14. TF 50. MC 96. MC 105. MC 114. MC 134. E 146. P
15. TF 51. MC 97. MC 106. MC 115. MC 135. E
S
43. MC 52. MC 98. MC 107. MC 116. MC 136. E
S
44. MC 53. MC 99. MC 108. MC 117. MC 137. E
S
45. MC 91. MC 100. MC 109. MC 118. MC 141. P
P
46. MC 92. MC 101. MC 110. MC 126. MC 142. P
47. MC 93. MC 102. MC 111. MC 127. MC 143. P
S
16. TF 18. TF 55. MC 57. MC 59. MC 130. MC 137. E
17. TF 54. MC 56. MC P
58. MC 129. MC 131. E
19. TF S
60. MC 62. MC 120. MC 122. MC
20. TF 61. MC 119. MC 121. MC
P = Problem
E = Exercise
1. Assets classified as Property, Plant, and Equipment can be either acquired for use in
operations, or acquired for resale.
2. Assets classified as Property, Plant, and Equipment must be both long-term in nature and
possess physical substance.
3. When land with an old building is purchased as a future building site, the cost of removing
the old building is part of the cost of the new building.
4. Insurance on equipment purchased, while the equipment is in transit, is part of the cost of
the equipment.
5. Special assessments for local improvements such as street lights and sewers should be
accounted for as land improvements.
6. Variable overhead costs incurred to self-construct an asset should be included in the cost
of the asset.
7. Companies should assign no portion of fixed overhead to self-constructed assets.
8. When capitalizing interest during construction of an asset, an imputed interest cost on

stock financing must be included.
9. Assets under construction for a company’s own use do not qualify for interest cost
capitalization.
10. Avoidable interest is the amount of interest cost that a company could theoretically avoid if
it had not made expenditures for the asset.
11. When a company purchases land with the intention of developing it for a particular use,
interest costs associated with those expenditures qualify for interest capitalization.
12. Assets purchased on long-term credit contracts should be recorded at the present value of
the consideration exchanged.
13. Companies account for the exchange of nonmonetary assets on the basis of the fair value
of the asset given up or the fair value of the asset received.
14. If a nonmonetary exchange lacks commercial substance, and cash is received, a partial
gain or loss is recognized.
15. When a company exchanges nonmonetary assets and a loss results, the company
recognizes the loss only if the exchange has commercial substance.
16. Costs incurred subsequent to the acquisition of an asset are capitalized if they provide
future benefits.
17. Improvements are often referred to as betterments and involve the substitution of a better
asset for the one currently used.
18. When an ordinary repair occurs, several periods will usually benefit.
19. Companies always treat gains or losses from an involuntary conversion as extraordinary
items.
20. If a company scraps an asset without any cash recovery, it recognizes a loss equal to the
asset’s book value.

1. F 6. T 11. T 16. T
2. T 7. F 12. T 17. T
3. F 8. F 13. T 18. F
4. T 9. F 14. F 19. F
5. F 10. T 15. F 20. T
21. Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.
22. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years
23. Which of these is not a major characteristic of a plant asset?

b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
24. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is
located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the
site. The cost of the Emporia Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be
torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
25. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
27. If a corporation purchases a lot and building and subsequently tears down the building
and uses the property as a parking lot, the proper accounting treatment of the cost of the
building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of
the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.
28. The debit for a sales tax properly levied and paid on the purchase of machinery preferably
would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
S
30. Historical cost is the basis advocated for recording the acquisition of property, plant, and
equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their original historical
cost.
c. historical cost involves actual transactions and, as such, is the most reliable basis.
d. gains and losses should not be anticipated but should be recognized when the asset
is sold.
S
31. To be consistent with the historical cost principle, overhead costs incurred by an
enterprise constructing its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
32. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
33. Which of the following assets do not qualify for capitalization of interest costs incurred
during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their
intended use.
34. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
35. When computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if expenditures
for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest cost was
incurred.
36. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have
begun.
37. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a
building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual
interest cost incurred.
c. When excess borrowed funds not immediately needed Calculate actual interest cost
incurred during year.
b 80. Calculate amount of interest to be capitalized.
c 81. Calculate amount of interest to be capitalized.
c 82. Calculate weighted-average accumulated expenditures.
b 83. Calculate interest to be capitalized.
d 84. Calculate weighted-average accumulated expenditures.
b 86. Calculate weighted-average accumulated expenditures.

d 87. Calculate weighted-average interest rate.
d 88. Calculate amount of avoidable interest.
a 89. Calculate amount of actual interest.
c 90. Calculate amount of interest expense.
a 91. Exchange of nonmonetary assets.
a 92. Exchange lacking commercial substance.
c 93. Exchange lacking commercial substance.
b 94. Valuation of a nonmonetary exchange.
a 95. Valuation of a nonmonetary exchange.
c 96. Calculate gain on exchange lacking commercial substance.
a 97. Allocation of cost in a lump sum purchase.
d 98. Allocation of cost in a lump sum purchase.
c 99. Calculate cost of land acquired.
c 100. Determine cost of purchased machine.
c 101. Calculate cost of truck purchased.
b 102. Calculate cost of machine purchased.
d 103. Allocation of cost of a lump sum purchase.
b 104. Calculate cost of equipment.
d 105. Acquisition of equipment by exchange of stock held as an investment.
b 106. Exchange lacking commercial substance.
c 107. Exchange lacking commercial substance /gain.
b 108. Exchange lacking commercial substance /gain.
d 109. Valuation of a nonmonetary exchange.
a 110. Exchange lacking commercial substance/gain.
b 112. Gain recognition of a nonmonetary exchange.
b 115. Calculate gain on nonmonetary exchange.
d 116. Calculate loss on nonmonetary exchange.
c 119. Calculate cash received from sale of machinery.
b 121. Calculate loss on sale of machine.
b 122. Calculate gain on sale of equipment.

c 123. Determine cost of land.
b 124. Classification of sale of building.
b 125. Determine interest cost to be capitalized.
b 128. Accounting for donated assets.
d 129. Costs subsequent to acquisition.
a 130. Valuation of replacement equipment.
EXERCISES
Item Description
E10-131 Plant asset accounting.
E10-132 Weighted-average accumulated expenditures.
E10-133 Capitalization of interest.
E10-134 Nonmonetary exchange.
E10-136 Donated assets.
E10-137 Capitalizing vs. expensing.
PROBLEMS
Item Description
P10-138 Capitalizing acquisition costs.
P10-139 Capitalization of interest.
P10-141 Asset acquisition
P10-142 Nonmonetary exchange.
1. TF 2. TF 21. MC 22. MC 23. MC
3. TF 24. MC 27. MC 30. MC 65. MC 123. MC 137. E
4. TF 25. MC 28. MC 63. MC 66. MC 124. MC 138. P
5. TF 26. MC 29. MC 64. MC 67. MC 131. E
S
6. TF 31. MC 68. MC 132. E
7. TF S
32. MC 69. MC 133. E
8. TF 35. MC S
41. MC 74. MC 80. MC 86. MC 131. E
S
9. TF 36. MC 42. MC 75. MC 81. MC 87. MC 133. E
10. TF 37. MC 70. MC 76. MC 82. MC 88. MC 137. E
11. TF 38. MC 71. MC 77. MC 83. MC 89. MC 139. P
33. MC 39. MC 72. MC 78. MC 84. MC 90. MC 140. P
34. MC 40. MC 73. MC 79. MC 85. MC 125. MC
12. TF 48. MC 94. MC 103. MC 112. MC 128. MC 144. P
13. TF 49. MC 95. MC 104. MC 113. MC 131. E 145. P
14. TF 50. MC 96. MC 105. MC 114. MC 134. E 146. P
15. TF 51. MC 97. MC 106. MC 115. MC 135. E
S
43. MC 52. MC 98. MC 107. MC 116. MC 136. E
S
44. MC 53. MC 99. MC 108. MC 117. MC 137. E
S
45. MC 91. MC 100. MC 109. MC 118. MC 141. P
P
46. MC 92. MC 101. MC 110. MC 126. MC 142. P
47. MC 93. MC 102. MC 111. MC 127. MC 143. P
S
16. TF 18. TF 55. MC 57. MC 59. MC 130. MC 137. E
17. TF 54. MC 56. MC P
58. MC 129. MC 131. E
19. TF S
60. MC 62. MC 120. MC 122. MC
20. TF 61. MC 119. MC 121. MC
P = Problem
E = Exercise
the equipment.
of the asset.

capitalization.
future benefits.
items.

1. F 6. T 11. T 16. T
2. T 7. F 12. T 17. T
3. F 8. F 13. T 18. F
4. T 9. F 14. F 19. F
5. F 10. T 15. F 20. T
d. none of these.

c. Acquired for use

torn down.
25. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
27. If a corporation purchases a lot and building and subsequently tears down the building
and uses the property as a parking lot, the proper accounting treatment of the cost of the
building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of
the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.
28. The debit for a sales tax properly levied and paid on the purchase of machinery preferably
would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
S
30. Historical cost is the basis advocated for recording the acquisition of property, plant, and
equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their original historical
cost.
c. historical cost involves actual transactions and, as such, is the most reliable basis.
d. gains and losses should not be anticipated but should be recognized when the asset
is sold.
S
31. To be consistent with the historical cost principle, overhead costs incurred by an
enterprise constructing its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
32. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
33. Which of the following assets do not qualify for capitalization of interest costs incurred
during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their
intended use.
34. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
35. When computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if expenditures
for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest cost was
incurred.
36. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have
begun.
37. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a
building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual
interest cost incurred.
c. When excess borrowed funds not immediately needed Calculate actual interest cost
incurred during year.
b 80. Calculate amount of interest to be capitalized.
c 81. Calculate amount of interest to be capitalized.
c 82. Calculate weighted-average accumulated expenditures.
d 84. Calculate weighted-average accumulated expenditures.
b 86. Calculate weighted-average accumulated expenditures.

d 87. Calculate weighted-average interest rate.
d 88. Calculate amount of avoidable interest.
a 89. Calculate amount of actual interest.
c 90. Calculate amount of interest expense.
a 91. Exchange of nonmonetary assets.
c 93. Exchange lacking commercial substance.
c 96. Calculate gain on exchange lacking commercial substance.
a 97. Allocation of cost in a lump sum purchase.
d 98. Allocation of cost in a lump sum purchase.
c 99. Calculate cost of land acquired.
c 100. Determine cost of purchased machine.
c 101. Calculate cost of truck purchased.
b 102. Calculate cost of machine purchased.
d 103. Allocation of cost of a lump sum purchase.
b 104. Calculate cost of equipment.
d 105. Acquisition of equipment by exchange of stock held as an investment.
b 106. Exchange lacking commercial substance.
c 107. Exchange lacking commercial substance /gain.
b 108. Exchange lacking commercial substance /gain.
a 110. Exchange lacking commercial substance/gain.
b 112. Gain recognition of a nonmonetary exchange.
b 121. Calculate loss on sale of machine.
b 122. Calculate gain on sale of equipment.

c 123. Determine cost of land.
b 124. Classification of sale of building.
b 125. Determine interest cost to be capitalized.
b 128. Accounting for donated assets.
d 129. Costs subsequent to acquisition.
a 130. Valuation of replacement equipment.
EXERCISES
Item Description
E10-131 Plant asset accounting.
E10-132 Weighted-average accumulated expenditures.
E10-133 Capitalization of interest.
E10-136 Donated assets.
E10-137 Capitalizing vs. expensing.
PROBLEMS
Item Description
P10-138 Capitalizing acquisition costs.
P10-141 Asset acquisition
1. TF 2. TF 21. MC 22. MC 23. MC
3. TF 24. MC 27. MC 30. MC 65. MC 123. MC 137. E
4. TF 25. MC 28. MC 63. MC 66. MC 124. MC 138. P
5. TF 26. MC 29. MC 64. MC 67. MC 131. E
S
6. TF 31. MC 68. MC 132. E
7. TF S
32. MC 69. MC 133. E
8. TF 35. MC S
41. MC 74. MC 80. MC 86. MC 131. E
S
9. TF 36. MC 42. MC 75. MC 81. MC 87. MC 133. E
10. TF 37. MC 70. MC 76. MC 82. MC 88. MC 137. E
11. TF 38. MC 71. MC 77. MC 83. MC 89. MC 139. P
33. MC 39. MC 72. MC 78. MC 84. MC 90. MC 140. P
34. MC 40. MC 73. MC 79. MC 85. MC 125. MC
12. TF 48. MC 94. MC 103. MC 112. MC 128. MC 144. P
13. TF 49. MC 95. MC 104. MC 113. MC 131. E 145. P
14. TF 50. MC 96. MC 105. MC 114. MC 134. E 146. P
15. TF 51. MC 97. MC 106. MC 115. MC 135. E
S
43. MC 52. MC 98. MC 107. MC 116. MC 136. E
S
44. MC 53. MC 99. MC 108. MC 117. MC 137. E
S
45. MC 91. MC 100. MC 109. MC 118. MC 141. P
P
46. MC 92. MC 101. MC 110. MC 126. MC 142. P
47. MC 93. MC 102. MC 111. MC 127. MC 143. P
S
16. TF 18. TF 55. MC 57. MC 59. MC 130. MC 137. E
17. TF 54. MC 56. MC P
58. MC 129. MC 131. E
19. TF S
60. MC 62. MC 120. MC 122. MC
20. TF 61. MC 119. MC 121. MC
P = Problem
E = Exercise
the equipment.
of the asset.

capitalization.
future benefits.
items.

1. F 6. T 11. T 16. T
2. T 7. F 12. T 17. T
3. F 8. F 13. T 18. F
4. T 9. F 14. F 19. F
5. F 10. T 15. F 20. T
d. none of these.

c. Acquired for use

torn down.
25.
c. 12.9%
d. 11.1%
93. What is the composite life of Ebert's assets?
a. 14.0 years
b. 9.7 years
c. 8.9 years
d. 10.3 years
94. Technique Co. has equipment with a carrying amount of $1,600,000. The expected future
net cash flows from the equipment are $1,630,000, and its fair value is $1,360,000. The
equipment is expected to be used in operations in the future. What amount (if any) should
Technique report as an impairment to its equipment?
a. No impairment should be reported.
b. $240,000
c. $30,000
d. $270,000
95. Robertson Inc. bought a machine on January 1, 2002 for $400,000. The machine had an
expected life of 20 years and was expected to have a salvage value of $40,000. On July
1, 2012, the company reviewed the potential of the machine and determined that its
undiscounted future net cash flows totaled $200,000 and its discounted future net cash
flows totaled $140,000. If no active market exists for the machine and the company does
not plan to dispose of it, what should Robertson record as an impairment loss on July 1,
2012?
a. $ 0
b. $11,000
c. $20,000
d. $71,000
96. Holcomb Corpsssoration owns machinery with a book value of $285,000. It is estimated
that the machinery will generate future cash flows of $300,000. The machinery has a fair
value of $210,000. Holcomb should recognize a loss on impairment of
a. $ -0-.
b. $15,000.
c. $75,000.
d. $90,000.
97. Kohlman Corporation owns machinery with a book value of $380,000. It is estimated that
the machinery will generate future cash flows of $350,000. The machinery has a fair value
of $280,000. Kohlman should recognize a loss on impairment of
a. $ -0-.
b. $ 30,000.
c. $100,000.
d. $ 70,000.
98. Marsh Corporation purchased a machine on July 1, 2010, for $1,250,000. The machine
was estimated to have a useful life of 10 years with an estimated salvage value of
$70,000. During 2013, it became apparent that the machine would become uneconomical
after December 31, 2017, and that the machine would have no scrap value. Accumulated
depreciation on this machine as of December 31, 2012, was $295,000. What should be
the charge for depreciation in 2013 under generally accepted accounting principles?
a. $177,000
b. $191,000
c. $205,000
d. $238,750
99. Rivera Company purchased a tooling machine on January 3, 2006 for $700,000. The
machine was being depreciated on the straight-line method over an estimated useful life
of 10 years, with no salvage value. At the beginning of 2013, the company paid $175,000
to overhaul the machine. As a result of this improvement, the company estimated that the
useful life of the machine would be extended an additional 5 years (15 years total). What
should be the depreciation expense recorded for the machine in 2013?
a. $48,125
b. $58,333
c. $70,000
d. $77,000
100. Gates Co. purchased machinery on January 2, 2007, for $660,000. The straight-line
method is used and useful life is estimated to be 10 years, with a $60,000 salvage value.
At the beginning of 2013 Gates spent $144,000 to overhaul the machinery. After the
overhaul, Gates estimated that the useful life would be extended 4 years (14 years total),
and the salvage value would be $30,000. The depreciation expense for 2013 should be
a. $42,375.
b. $51,750.
c. $60,000.
d. $55,500.
101. Newell, Inc. purchased equipment in 2011 at a cost of $800,000. Two years later it
became apparent to Newell, Inc. that this equipment had suffered an impairment of value.
In early 2013, the book value of the asset is $480,000 and it is estimated that the fair
value is now only $320,000. The entry to record the impairment is
a. No entry is necessary as a write-off violates the historical cost principle.
b. Retained Earnings......................................................... 160,000
Accumulated Depreciation—Equipment............. 160,000
c. Loss on Impairment of Equipment.................................. 160,000
d. Retained Earnings......................................................... 160,000
Reserve for Loss on Impairment of Equipment... 160,000
102. Percy Resources Company acquired a tract of land containing an extractable natural
resource. Percy is required by its purchase contract to restore the land to a condition
suitable for recreational use after it has extracted the natural resource. Geological surveys
estimate that the recoverable reserves will be 2,000,000 tons, and that the land will have a
value of $1,000,000 after restoration. Relevant cost information follows:
Land $7,500,000
Estimated restoration costs 1,500,000
If Percy maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $3.25
b. $3.75
c. $4.00
d. $4.50
103. In January, 2012, Yoder Corporation purchased a mineral mine for $5,100,000 with
removable ore estimated by geological surveys at 2,000,000 tons. The property has an
estimated value of $300,000 after the ore has been extracted. The company incurred
$1,500,000 of development costs preparing the mine for production. During 2012, 500,000
tons were removed and 400,000 tons were sold. What is the amount of depletion that
Yoder should expense for 2012?
a. $960,000
b. $1,200,000
c. $1,260,000
d. $1,680,000
104. During 2012, Eldred Corporation acquired a mineral mine for $3,000,000 of which
$400,000 was ascribed to land value after the mineral has been removed. Geological
surveys have indicated that 10 million units of the mineral could be extracted. During
2012, 1,500,000 units were extracted and 1,200,000 units were sold. What is the amount
of depletion expensed for 2012?
a. $260,000.
b. $312,000.
c. $360,000.
d. $390,000.
105. In March, 2012, Maley Mines Co. purchased a coal mine for $8,000,000. Removable coal
is estimated at 1,500,000 tons. Maley is required to restore the land at an estimated cost
of $960,000, and the land should have a value of $840,000. The company incurred
$2,000,000 of development costs preparing the mine for production. During 2012, 450,000
tons were removed and 300,000 tons were sold. The total amount of depletion that Maley
should record for 2012 is
a. $1,832,000.
b. $2,024,000.
c. $2,748,000.
d. $3,036,000.
106. In 2004, Horton Company purchased a tract of land as a possible future plant site. In
January, 2012, valuable sulphur deposits were discovered on adjoining property and
Horton Company immediately began explorations on its property. In December, 2012,
after incurring $800,000 in exploration costs, which were accumulated in an expense
account, Horton discovered sulphur deposits appraised at $4,500,000 more than the value
of the land. To record the discovery of the deposits, Horton should
a. make no entry.
b. debit $800,000 to an asset account.
c. debit $4,500,000 to an asset account.
d. debit $5,300,000 to an asset account.
107. Balcom Corporation acquires a coal mine at a cost of $1,500,000. Intangible development
costs total $360,000. After extraction has occurred, Balcom must restore the property
(estimated fair value of the obligation is $180,000), after which it can be sold for $510,000.
Balcom estimates that 5,000 tons of coal can be extracted. What is the amount of
depletion per ton?
a. $306
b. $510
c. $300
d. $372
108. Balcom Corporation acquires a coal mine at a cost of $1,500,000. Intangible development
costs total $360,000. After extraction has occurred, Balcom must restore the property
(estimated fair value of the obligation is $180,000), after which it can be sold for $510,000.
Balcom estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the
first year, which of the following would be included in the journal entry to record depletion?
a. Debit to Accumulated Depletion for $275,400
b. Debit to Inventory for $275,400
c. Credit to Inventory for $270,000
d. Credit to Accumulated Depletion for $459,000
109. In 2012, MegaStores reported net income of $5.7 billion, net sales of $164.7 billion, and
average total assets of $61.0 billion. What is MegaStores' asset turnover ratio?
a. 0.37 times
b. 0.09 times.
c. 2.7 times.
d. 10.7 times.
110. In 2012, MegaStores reported net income of $5.7 billion, net sales of $164.7 billion, and
average total assets of $61.0 billion. What is MegaStores' return on total assets?
a. 9.3%
b. 10.7%
c. 37.0%
d. 270%
Use the following information for questions 111 and 112:
For 2012, Hoyle Company reports beginning of the year total assets of $900,000, end of the year
total assets of $1,100,000, net sales of $750,000, and net income of $150,000.
111. Hoyle’s 2012 asset turnover ratio is

a. 0.14 times.
b. 0.15 times.
c. 0.68 times.
d. 0.75 times.
112. The rate of return on assets for Hoyle in 2012 is

a. 12.0%.
b. 13.6%.
c. 15.0%.
d. 16.7%.
113. Markowitz Company reported the following data:

2012 2013
Sales $3,000,000 $3,900,000
Net Income 300,000 400,000
Assets at year end 1,800,000 2,500,000
Liabilities at year end 1,100,000 1,500,000
What is Markowitz’s asset turnover for 2013?
a. 1.56
b. 1.61
c. 1.81
d. 2.17
114. Froelich Company reported the following data:

2012 2013
Sales $3,000,000 $4,200,000
Net Income 300,000 400,000
Assets at year end 1,800,000 2,500,000
Liabilities at year end 1,100,000 1,500,000
What is Froelich’s asset turnover for 2013?
a. 1.68
b. 1.72
c. 1.95
d. 2.33
Use the following information for questions 115 and 116:
On January 1, 2012, Guzman Company purchased a machine costing $250,000. The machine is
in the MACRS 5-year recovery class for tax purposes and has an estimated $50,000 salvage
value at the end of its economic life.
*115. Assuming the company uses the general MACRS approach, the amount of MACRS
deduction for tax purposes for the year 2012 is
a. $50,000.
b. $100,000.
c. $80,000.
d. $40,000.
*116. Assuming the company uses the optional straight-line method, the amount of MACRS
deduction for tax purposes for the year 2012 is
a. $40,000.
b. $50,000.
c. $20,000.
d. $25,000.
Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
61. c 69. b 77. a 85. a 93. c 101. c 109. c
62. c 70. c 78. c 86. d 94. a 102. c 110. a
63. b 71. b 79. c 87. c 95. d 103. c 111. d
64. c 72. b 80. b 88. d 96. a 104. b 112. c
65. b 73. b 81. c 89. c 97. c 105. d 113. c
66. c 74. b 82. a 90. a 98. b 106. b 114. c
67. b 75. c 83. c 91. b 99. a 107. a *115. a
68. c 76. b 84. a 92. b 100. b 108. b *116. d

117. Pike Co. purchased a machine on July 1, 2012, for $800,000. The machine has an
estimated useful life of five years and a salvage value of $160,000. The machine is being
depreciated from the date of acquisition by the 150% declining-balance method. For the
year ended December 31, 2012, Pike should record depreciation expense on this
machine of
a. $240,000.
b. $160,000.
c. $120,000.
d. $96,000.
118. A machine with a five-year estimated useful life and an estimated 10% salvage value was
acquired on January 1, 2011. The depreciation expense for 2013 using the double-
declining balance method would be original cost multiplied by
a. 90% × 40% × 40%.
b. 60% × 60% × 40%.
c. 90% × 60% × 40%.
d. 40% × 40%.
119. On April 1, 2011, Verlin Co. purchased new machinery for $300,000. The machinery has
an estimated useful life of five years, and depreciation is computed by the sum-of-the-
years'-digits method. The accumulated depreciation on this machinery at March 31, 2013,
should be
a. $200,000.
b. $180,000.
c. $120,000.
d. $100,000.
120. Hahn Co. takes a full year's depreciation expense in the year of an asset's acquisition and
no depreciation expense in the year of disposition. Data relating to one of Hahn's
depreciable assets at December 31, 2013 are as follows:
Acquisition year 2011
Cost $210,000
Residual value 30,000
Accumulated depreciation 144,000
Estimated useful life 5 years
Using the same depreciation method as used in 2011, 2012, and 2013, how much
depreciation expense should Hahn record in 2014 for this asset?
a. $24,000
b. $36,000
c. $42,000
d. $48,000
121. A depreciable asset has an estimated 15% salvage value. At the end of its estimated
useful life, the accumulated depreciation would equal the original cost of the asset under
which of the following depreciation methods?
Straight-line Productive Output
a. Yes No
b. Yes Yes
c. No Yes
d. No No
122. Net income is understated if, in the first year, estimated salvage value is excluded from
the depreciation computation when using the
Straight-line Production or
Method Use Method
a. Yes No
b. Yes Yes
c. No No
d. No Yes
123. A plant asset with a five-year estimated useful life and no residual value is sold at the end
of the second year of its useful life. How would using the sum-of-the-years'-digits method
of depreciation instead of the double-declining balance method of depreciation affect a
gain or loss on the sale of the plant asset?
Gain Loss
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase
124. Giger Company acquired a tract of land containing an extractable natural resource. Giger
is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological surveys estimate
that the recoverable reserves will be 5,000,000 tons, and that the land will have a value of
$800,000 after restoration. Relevant cost information follows:
Land $5,600,000
Estimated restoration costs 1,200,000
If Giger maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $1.36
b. $1.20
c. $1.12
d. $0.96
125. In January 2012, Fehr Mining Corporation purchased a mineral mine for $6,300,000 with
removable ore estimated by geological surveys at 2,500,000 tons. The property has an
estimated value of $600,000 after the ore has been extracted. Fehr incurred $1,725,000 of
development costs preparing the property for the extraction of ore. During 2012, 340,000
tons were removed and 300,000 tons were sold. For the year ended December 31, 2012,
Fehr should include what amount of depletion in its cost of goods sold?
a. $775,200
b. $684,000
c. $891,000
d. $1,009,800

117. c 119. b 121. d 123. b 125. c
118. b 120. a 122. b 124. b
61. c $120,000 – $10,000 = $110,000.
62. c $240,000 – $20,000 = $220,000.
63. b ($39,000 – 0) × .50 × 6/12 = $9,750.
64. c ($39,000 – 0) × .50 × 6/12 = $9,750;

($39,000 – $9,750) × .50 = $14,625.
65. b ($90,000 – $3,600) ÷ 120,000 = $.72;

$.72 × 18,000 = $12,960.
66. c ($90,000 – $3,600) ÷ 120,000 = $.72;

$.72 × 32,000 = $23,040.
67. b [$280,000 – $14,000) ÷ 10,000] × 1,100 = $29,260.
68. c $225,000 × [(1 ÷ 8) × 2] = $56,250

($225,000 – $56,250) × [(1 ÷ 8) × 2] = $42,188.
69. b [($800,000 – $40,000) ÷ 10,000] × 1,100 = $83,600.
70. c $450,000 × [(1 ÷ 8) × 2] = $112,500

($450,000 – $112,500) × [(1 ÷ 8) × 2] = $84,375.
71. b [$225,000 – ($225,000 × 0.1)] × 0.2 = $40,500.

DERIVATIONS — Computational (cont.)

72. b [$120,000 × (1 – 0.5)] × 0.5 = $30,000.
73. b [$168,000 – ($168,000 × 0.2 × 0.75)] × 0.2 = $28,560.
74. b [$115,000 – ($115,000 × 0.4)] × 0.4 = $27,600.
75. c ($32,000 – $8,000) × 1/6 = $4,000.
76. b $2,800,000 – [($2,800,000 – $100,000) × (9/45 + 8/45)] = $1,780,000.
77. a ($100,000 – $10,000) × 1/36 = $2,500.
78. c ($270,000 × 8/36 × 9/12) + ($270,000 × 7/36 × 3/12) = $58,125.
79. c (AC – $60,000) × 6/36 = $130,000

AC = $840,000.
80. b (AC – $30,000) × 7/55 = $140,000

AC = $1,130,000.
81. c $60,000 – [($60,000 – $6,000) ÷ 9 × 5] = $30,000 (BV)

$33,000 – $30,000 = $3,000 (gain).
82. a ($790,000 – $740,000) + [$250,000 – ($121,000 + $8,000)] = $171,000.
83. c $930,000 – {$975,000 – [$294,000 – ($176,400 – $12,900)]} = $85,500.
84. a ($260,000 – $20,000) ÷ 12 = $20,000

($390,000 – $30,000) ÷ 10 = 36,000
($195,000 – $15,000) ÷ 6 = 30,000
$845,000 $86,000
$86,000
————— = 10.18
$845,000
85. a ($240,000 + $360,000 + $180,000) ÷ $86,000 = 9.1.
86. d [($350,000 – $35,000) ÷ 5] × 3 1/12 = $194,250.
87. c $400,000 – [($400,000 – $40,000) × 3/9] = $280,000

($280,000 – $60,000) ÷ (5 – 3) = $110,000.
88. d [($500,000 – $50,000) ÷ 5] × 3 1/12 = $277,500.
89. c $630,000 – [$630,000 – $63,000) 3/9] = $441,000

($441,000 – $105,000) ÷ (5 – 3) = $168,000.

90. a $80,000 – $24,000 = $56,000 Accumulated Depreciation.
91. b [($150,000 – 0) 20] × 10 = $75,000

[($150,000 – $75,000) + $25,000] ÷ [(20 – 10) + 5] = $6,667.
92 b [($140,000 – $14,000) 10] + [($75,000 – $7,500) 5]

+ [($164,000 – $8,000) 12] = $39,100;
$39,100 ($140,000 + $75,000 + $164,000) = 10.3%.
93. c ($126,000 + $67,500 + $156,000) $39,100(from #92) = 8.9 yrs.
94. a $1,630,000 > $1,600,000; No impairment.
95. d $200,000 < $211,000 [$400,000 – [($400,000 – $40,000) ÷ 20) × 10.5]

$211,000 – $140,000 = $71,000.
96. a $300,000 > $285,000; No loss recognized.
97. c $350,000 < $380,000; $280,000 – $380,000 = ($100,000).
98. b ($1,250,000 – $295,000) ÷ 5 = $191,000.
99. a [($700,000 ÷ 10) × 7] – $175,000 = $315,000 new (AD)

$700,000 – $315,000 = $385,000; $385,000 ÷ 8 = $48,125 per year.
100. b [($600,000  10) × 6] – $144,000 = $216,000 new (AD)

$660,000 – $216,000 = $444,000 (BV)
($444,000 – $30,000) ÷ 8 = $51,750 per year.
101. c $480,000 – $320,000 = $160,000.
102. c ($7,500,000 + $1,500,000 – $1,000,000) ÷ 2,000,000 = $4.00.
103. c [($5,100,000 – $300,000 + $1,500,000) ÷ 2,000,000] × 400,000 = $1,260,000.
104. b [($3,000,000 – $400,000) ÷ 10,000,000] × 1,200,000 = $312,000.
105. d [($8,000,000 + $960,000 – $840,000 + $2,000,000) ÷ 1,500,000] × 450,000

= $3,036,000.
106. b Discovery value is generally not recognized.
107. a ($1,500,000 + $360,000 + $180,000 – $510,000) ÷ 5,000 = $306.
108. b ($1,500,000 + $360,000 + $180,000 – $510,000) ÷ 5,000 = $306;

900 × $306 = $275,400 dr. to Inventory.

109. c $164.7 ÷ $61 = 2.7 times.
110. a $5.7 ÷ $61 = 9.3%
111. d $750,000 ÷ [($900,000 + $1,100,000) ÷ 2] = 0.75
112. c $150,000 ÷ [($900,000 + $1,100,000) ÷ 2] = 15%
113. c $3,900,000 ÷ [($1,800,000 + $2,500,000) ÷ 2] = 1.81
114. c $4,200,000 ÷ [($1,800,000 + $2,500,000) ÷ 2] = 1.95.
*115. a $250,000 × 20% = $50,000.
*116. d $250,000 ÷ 5 ÷ 2 = $25,000.

117. c $800,000 × 0.3 × 0.5 = $120,000.
118. b Conceptual.
119. b $300,000 × (5/15 + 4/15) = $180,000.
120. a 2/15 × ($210,000 – $30,000) = $24,000.
121. d Conceptual.
122. b Conceptual.
123. b Conceptual.
124. b ($5,600,000 + $1,200,000 – $800,000) ÷ 5,000,000 = $1.20.
125. c [($6,300,000 – $600,000 + $1,725,000) ÷ 2,500,000] × 300,000 = $891,000.

EXERCISES
1. Define depreciation.
2. Define depreciation accounting.
3. Does depreciation accounting provide funds? If not, what does provide funds? What does
depreciation accounting do related to funds?
Solution 11-126
1. Depreciation is the decline in service potentials or in future benefits of a plant asset due to
physical or economic factors.
2. Depreciation accounting is the systematic and rational allocation of the cost of plant assets to
the periods benefited from the use of the assets.
3. Depreciation accounting does not provide funds. Revenues provide funds. Depreciation
accounting retains funds by reducing income taxes and dividends.
Ex. 11-127—True or False.

Place T or F in front of each of the following statements.
_____ 1. The straight-line method of depreciation is based on the assumption that depreciation
expense can be regarded as a constant function of time.
_____ 2. Plant assets should be written down (below cost) when their market value has
declined temporarily.
_____ 3. The accounting profession has developed specifically recommended procedures for
recording appraisal increases with respect to plant assets.
_____ 4. An asset's cost minus its accumulated depreciation equals its book value.
_____ 5. The sum-of-the-years'-digits method of depreciation ignores salvage value in the

computation of an asset's depreciable base.
_____ 6. When using the double-declining balance method of determining depreciation, a

declining percentage is applied to a constant book value.
_____ 7. The book value of plant assets initially declines more rapidly under decreasing-charge
methods than under the straight-line method.
_____ 8. Accounting depreciation is computed by determining the change in the market value of
a company's plant assets during the period under review.
Ex. 11-127 (cont.)
_____ 9. The methods of depreciation based upon output assume that obsolescence will not
significantly affect the usefulness of the asset.
_____ 10. The revision of prior periods' depreciation estimates would be disclosed on the
retained earnings statement.
Solution 11-127
1. T 3. F 5. F 7. T 9. T
2. F 4. T 6. F 8. F 10. F
Ex. 11-128—Depreciation methods.

Each of the statements appearing below is descriptive of one or more of the following
depreciation methods. In the spaces below, place the letter(s) belonging to the method(s) to
which the statement best applies.
a. Declining-balance e. Sum-of-the-years'-digits
b. Group f. Units of output
c. Composite g. Working hours
d. Straight-line
______ 1. The depreciation charged by this method decreases by the same amount each year.
______ 2. These methods are used for depreciating multiple-asset accounts.
______ 3. These methods allocate larger shares of the cost of a plant asset to expense during
the years in which the greatest use is made of the asset.
______ 4. These methods always allocate larger shares of the cost of a plant asset to expense
during the earlier years of its life.
______ 5. Once the depreciable base, scrap value, and life of a plant asset are determined, the
annual charges to operations under this method will be the same.
Solution 11-128
1. e 4. a, e
2. b, c 5. d
3. f, g
Ex. 11-129—Calculate depreciation.

A machine which cost $300,000 is acquired on October 1, 2012. Its estimated salvage value is
$30,000 and its expected life is eight years.
Instructions
Calculate depreciation expense for 2012 and 2013 by each of the following methods, showing the
figures used.
(a) Double-declining balance
(b) Sum-of-the-years'-digits
Solution 11-129
(a) 2012: 25% × $300,000 × ¼ = $18,750
2013: 25% × $187,500 = $70,313
(b) 2012: 8/36 × $270,000 × ¼ = $15,000
2013: 8/36 × $270,000 × ¾ = $45,000

7/36 × $270,000 × ¼ = 13,125
$58,125
Ex. 11-130—Calculate depreciation.

A machine cost $800,000 on April 1, 2012. Its estimated salvage value is $80,000 and its
expected life is eight years.
Instructions
Calculate the depreciation expense (to the nearest dollar) by each of the following methods,
showing the figures used.
(a) Straight-line for 2012
(b) Double-declining balance for 2013
(c) Sum-of-the-years'-digits for 2013
Solution 11-130
(a) 1/8 × $720,000 × ¾ = $ 67,500
(b) 2013: 25% × $650,000* = $162,500

*[$800,000 - ($800,000 x .25 x 9/12)]
(c) 8/36 × $720,000 × ¼ = $ 40,000
7/36 × $720,000 × ¾ = 105,000
$145,000
Ex. 11-131—Asset depreciation and disposition.

Answer each of the following questions.
1. A plant asset purchased for $250,000 has an estimated life of 10 years and a residual value
of $20,000. Depreciation for the second year of use, determined by the declining-balance
method at twice the straight-line rate is $_____________.
2. A plant asset purchased for $300,000 at the beginning of the year has an estimated life of 5
years and a residual value of $30,000. Depreciation for the second year, determined by the
sum-of-the-years'-digits method is $______________.
3. A plant asset with a cost of $320,000 and accumulated depreciation of $90,000, is given
together with cash of $120,000 in exchange for a similar asset worth $330,000. The gain or
loss recognized on the disposal (indicate by "G" or "L") is $______________.
4. A plant asset with a cost of $270,000, estimated life of 5 years, and residual value of $45,000,
is depreciated by the straight-line method. This asset is sold for $200,000 at the end of the
second year of use. The gain or loss on the disposal (indicate by "G" or "L") is $___________.
Solution 11-131
1. $40,000
2. $72,000
3. $20,000 L
4. $20,000 G
Ex. 11-132—Composite depreciation.

Kemp Co. uses the composite method to depreciate its equipment. The following totals are for all
of the equipment in the group:
Initial Residual Depreciable Depreciation
Cost Value Cost Per Year
$900,000 $100,000 $800,000 $80,000
Instructions
(a) What is the composite rate of depreciation? (To nearest tenth of a percent.)
(b) A machine with a cost of $23,000 was sold for $14,000 at the end of the third year. What
entry should be made?
Solution 11-132
(a) $80,000
———— = 8.9%
$900,000
(b) Cash........................................................................................ 14,000

Accumulated Depreciation  Equipment.................................. 9,000
Equipment...................................................................... 23,000
Ex. 11-133—Depletion allowance.

Rojas Company purchased for $3,800,000 a mine estimated to contain 2 million tons of ore.
When the ore is completely extracted, it was expected that the land would be worth $200,000. A
building and equipment costing $1,800,000 were constructed on the mine site, and they will be
completely used up and have no salvage value when the ore is exhausted. During the first year,
750,000 tons of ore were mined, and $300,000 was spent for labor and other operating costs.
Instructions
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a
schedule giving cost per ton.)
Solution 11-133
Item Base Tons Per Ton
Ore $3,600,000 2,000,000 $1.80
Building and Equipment 1,800,000 2,000,000 0.90
Labor and Operating Expenses 300,000 750,000 .40
Total Cost $3.10
PROBLEMS
Pr. 11-134—Depreciation methods.

On July 1, 2012, Sparks Company purchased for $2,880,000 snow-making equipment having an
estimated useful life of 5 years with an estimated salvage value of $120,000. Depreciation is
taken for the portion of the year the asset is used.
Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values
for 2012 and 2013 using the
1. sum-of-the-years'-digits method.
2. double-declining balance method.
Sum-of-the-Years'-Digits Method 2012 2013
Equipment $2,880,000 $2,880,000
Less: Accumulated Depreciation ________ ________
Year-End Book Value ________ ________
Depreciation Expense for the Year ________ ________
Double-Declining Balance Method
Equipment $2,880,000 $2,880,000
Less: Accumulated Depreciation ________ ________
Year-End Book Value ________ ________
Depreciation Expense for the Year ________ ________
(b) Assume the company had used straight-line depreciation during 2012 and 2013. During
2014, the company determined that the equipment would be useful to the company for only
one more year beyond 2014. Salvage value is estimated at $160,000. Compute the amount
of depreciation expense for the 2014 income statement.
Solution 11-134
(a) Sum-of-the-Years'-Digits 2012 2013
Accumulated Depreciation $ 460,000 $ 1,288,000
Book Value 2,420,000 1,592,000
Depreciation Expense 460,000 828,000
Double-Declining Balance
Accumulated Depreciation $ 576,000 $1,497,600
Book Value 2,304,000 1,382,400
Depreciation Expense 576,000 921,600
(b) Cost $2,880,000

Depreciation (828,000)
Salvage (160,000)
$1,892,000 × 1/2 = $946,000, 2014 depreciation
Pr. 11-135—Adjustment of Depreciable Base.

A truck was acquired on July 1, 2010, at a cost of $162,000. The truck had a six-year useful life
and an estimated salvage value of $18,000. The straight-line method of depreciation was used.
On January 1, 2013, the truck was overhauled at a cost of $15,000, which extended the useful life
of the truck for an additional two years beyond that originally estimated (salvage value is still
estimated at $18,000). In computing depreciation for annual adjustment purposes, expense is
calculated for each month the asset is owned.
Instructions
Prepare the appropriate entries for January 1, 2013 and December 31, 2013.
Solution 11-135
Cost $162,000
Less salvage value 18,000
Depreciable base, July 1, 2010 144,000
Less depreciation to date [($144,000 ÷ 6) × 2 1/2] 60,000
Depreciable base, Jan. 1, 2013 (unadjusted) 84,000
Overhaul 15,000
Depreciable base, Jan. 1, 2013 (adjusted) $99,000
January 1, 2013
Accumulated Depreciation—Trucks................................................ 15,000
Cash.................................................................................... 15,000
December 31, 2013

Depreciation Expense..................................................................... 18,000
Accumulated Depreciation—Trucks ($99,000 ÷ 5.5 yrs)...... 18,000
Pr. 11-136—Impairment.
Presented below is information related to equipment owned by Finley Company at December 31,
2012.
Cost $7,000,000
Accumlated depreciation to date ,800,000
Expected future net cash flows 5,000,000
Fair value 3,400,000
Assume that Finley will continue to use this asset in the future. As of December 31, 2012, the
equipment has a remaining useful life of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012.
(b) Prepare the journal entry to record depreciation expense for 2013.
(c) The fair value of the equipment at December 31, 2013 is $4,100,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.
Solution 11-136
(a) December 31, 2012
Loss on Impairment.................................................. 2,800,000
Accumulated Depreciation—Equipment............. 2,800,000
Note: The assent fails the recoverability test ($5,000,000 < $6,200,000)
Cost.................................................. $7,000,000
Accumulated depreciation................ 800,000
Carrying amount............................... 6,200,000
Fair value.......................................... 3,400,000
Loss on impairment.......................... $2,800,000
(b) December 31, 2013

Depreciation Expense.............................................. 850,000
New carrying amount........................ $3,400,000

Useful life......................................... 4 years
Depreciation per year....................... $ 850,000
(c) No entry necessary. Restoration of any impairment loss is not permitted.
Pr. 11-137—Impairment.
Dexter Company uses special strapping equipment in its packaging business. The equipment
was purchased in January 2011 for $8,000,000 and had an estimated useful life of 8 years with
no salvage value. At December 31, 2012, new technology was introduced that would accelerate
the obsolescence of Dexter’s equipment. Dexter’s controller estimates that expected future net
cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is
$4,400,000. Dexter intends to continue using the equipment, but it is estimated that the remaining
useful life is 4 years. Dexter uses straight-line depreciation.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2012.
(b) Prepare any journal entries for the equipment at December 31, 2013. The fair value of the
equipment at December 31, 2013, is estimated to be $4,600,000.
(c) Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the
equipment and that it has not been disposed of as of December 31, 2013.
Solution 11-137
(a) Carrying value of asset: $8,000,000 – $2,000,000* = $6,000,000.

*($8,000,000  8)  2
Future cash flows ($5,000,000) < Carrying value ($6,000,000)
Impairment entry:
Loss on Impairment.................................................. 1,600,000*
Accumulated Depreciation.................................. 1,600,000
*$6,000,000 – $4,400,000
(b) Depreciation Expense.............................................. 1,100,000**

Accumulated Depreciation.................................. 1,100,000
**($4,400,000  4)
(c) No depreciation is recorded on impaired assets to be disposed of. Recovery of impairment

losses are recorded.
12/31/12 Loss on Impairment................................ 1,600,000

Accumulated Depreciation................ 1,600,000
12/31/13 Accumulated Depreciation...................... 200,000

Recovery of Impairment Loss
($4,600,000 – $4,400,000)............ 200,000
IFRS QUESTIONS
True / False
1. Under both IFRS and U.S. GAAP, interest costs incurred during construction must be
capitalized.
2. As with U.S. GAAP, IFRS requires that both direct and indirect costs in self-constructed
assets be capitalized.
3. IFRS, like U.S. GAAP, capitalizes all direct costs in self-constructed assets.
4. Even though IFRS does not employ the first-stage recoverability test used under U.S.
GAAP  comparing the undiscounted cash flows to the carrying amount, the fact that
IFRS uses a fair value test to measure impairment loss makes IFRS stricter than U.S.
GAAP
5. U.S. GAAP, like IFRS permits write-up for subsequent recoveries of impairment, back up
to the original amount before the impairment in all circumstances.
6. Unlike U.S. GAAP, interest costs incurred during construction are not capitalized under
IFRS.
7. Asset revaluations are permitted under IFRS and U.S. GAAP.
8. In general, IFRS adheres to very different principles than U.S. GAAP.
9. U.S. GAAP, per SFAS No. 153, now requires that gains on exchanges of nonmonetary
assets be recognized if the exchange lacks commercial substance.
10. IFRS permits the same depreciation methods as U.S GAAP, with the exception of the
units-of-production method, which is not allowed under IFRS.
Answers to True / False questions
1. True
2. False
3. True
4. True
5. False
6. False
7. False
8. False
9. False
10. False
Multiple-Choice Questions
1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the
first-stage recoverability test under U.S. GAAP  comparing the undiscounted cash flow to
the carrying amount. As a result, the IFRS test is
a. not as strict as U.S. GAAP.
b. more strict than U.S. GAAP.
c. essentially the same strictness as U.S. GAAP.
d. None of the above.
2. Acceptable depreciation methods under IFRS include

a. Straight-line.
b. Accelerated.
c. Units-of-production.
d. All of the above.
3. The primary IFRS related to property, plant and equipment is found in

a. IAS 1 and IAS 34.
b. IAS 11 and IAS 17.
c. IAS 16 and IAS 23.
d. IAS 27 and IAS 39.
4. The accounting exchanges of nonmonetary assets has recently converged between IFRS
and U.S. GAAP, per SFAS No. 153, now requires
a. that gains on exchanges of nonmonetary assets be recognized if the exchange has
commercial substance.
b. that gains on exchanges of nonmonetary assets be recognized if the exchange does
not have commercial substance.
c. that gains on exchanges of nonmonetary assets be recognized if the exchange does
not have commercial substance, and has never been impaired.
d. All of the above.
5. In measuring an impairment loss, IFRS uses

a. undiscounted cash flows.
b. discounted cash flows.
c. a fair value test.
d. a replacement value test.
6. IFRS permits companies to carry assets at historical cost or use a revaluation model for
fixed assets. According to IAS 16, if revaluation is used:
1. it must be applied to all assets in a class of assets.
2. assets must be revalued on an annual basis.
3. assets must be depreciated on the straight-line basis.
4. salvage values must be zero.
a. 1 is correct
b. 2 is correct
c. 1 and 2 are correct
d. All are correct
Questions 7 through 10 are based on the following information:
Simpson Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $1,500,000.
7. The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $100,000.
c. credit to Accumulated Depreciation for $100,000.
d. debit to Depreciation Expense for $400,000.
8. The journal entry to adjust the plant assets to fair value and record revaluation surplus in
year one will include a
b. credit to Depreciation Expense for $300,000.
c. credit to Plant Assets for $300,000.
d. credit to Revaluation Surplus for $300,000.
9. The financial statements for year one will include the following information
a. Accumulated depreciation $400,000.
b. Depreciation expense $100,000.
c. Plant assets $1,500,000.
d. Revaluation surplus $100,000.
10. The entry to record depreciation for this same asset in year two will include a
b. debit to Depreciation Expense for $500,000.
c. credit to Accumulated Depreciation for $300,000.
d. debit to Depreciation Expense for $400,000.
Answers to multiple choice:

1. b
2. d
3. c
4. a
5. c
6. c
7. d
8. d
9. c
10. b
Short Answer:
1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for property, plant, and equipment.
1. IFRS adheres to many of the same principles of U.S. GAAP in the accounting for
property, plant, and equipment. Key similarities are: (1) Under IFRS, capitalization of
interest or borrowing costs incurred during construction of assets can either be expensed or
capitalized. Once certain criteria are met, interest must be capitalized (this accounting has
recently converged to U.S. GAAP; (2) IFRS, like U.S. GAAP, capitalizes all direct costs in
self-constructed assets. IFRS does not address the capitalization of fixed overhead, although
in practice, these costs are generally capitalized; (3) The accounting for exchange of non-
monetary assets has recently converged between IFRS and if the exchange has commercial
substance. This is the framework used in IFRS; (4) IFRS also views depreciation as an
allocation of cost over an asset’s life; IFRS permits the same depreciation methods (straight-
line, accelerated, units-of-production) as U.S. GAAP. Key Difference: IFRS permits asset
revaluation depreciation procedures must be followed. According to IAS 16, if revaluation is
used, it must be applied to all assets in a class of assets and assets must be revalued on an
annual basis.
2. At a recent executive committee meeting, the controller for Marino Company remarked, “With
only a single key difference between U.S. GAAP and IFRS for property, plant, and
equipment, it should be smooth sailing for the FASB and IASB to converge their standards in
this area.” Prepare a response to the controller.
2. While there is a single key difference, it is an important one—the issue of revaluations.

With respect to frameworks, the IASB and the FASB are working on a joint project to
converge their conceptual frameworks. One element of that project will examine the
measurement bases used in accounting. It is too early to say whether a converged
conceptual framework will recommend fair value measurement (and revaluation accounting)
for property, plant, and equipment. However, this is likely to be one of the more contentious
issues, given the long-standing use of historical cost as a measurement basis in U.S. GAAP.

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1. T 6. T 11. F 16.

3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating

4. Application of the lower-of-cost-or-market rule results in inconsistency because a

9. Most purchase commitments must be recorded as a liability.

True False Answers—Conceptual

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

c. Allows for items to be valued at replacement cost.

32. Why are inventories stated at lower-of-cost-or-market?

38. Net realizable value is

40. Inventory may be recorded at net realizable value if

48. The gross profit method of inventory valuation is invalid when

3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating

4. Application of the lower-of-cost-or-market rule results in inconsistency because a

9. Most purchase commitments must be recorded as a liability.

True False Answers—Conceptual

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

c. Allows for items to be valued at replacement cost.

32. Why are inventories stated at lower-of-cost-or-market?

38. Net realizable value is

40. Inventory may be recorded at net realizable value if

48. The gross profit method of inventory valuation is invalid when

3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating

4. Application of the lower-of-cost-or-market rule results in inconsistency because a

9. Most purchase commitments must be recorded as a liability.

True False Answers—Conceptual

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

c. Allows for items to be valued at replacement cost.

32. Why are inventories stated at lower-of-cost-or-market?

38. Net realizable value is

40. Inventory may be recorded at net realizable value if

48. The gross profit method of inventory valuation is invalid when

c. cost will be less than their replacement cost.

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

32. Why are inventories stated at lower-of-cost-or-market?

c. there is a controlled market with a quoted price applicable to all quantities.

38. Net realizable value is

40. Inventory may be recorded at net realizable value if

48. The gross profit method of inventory valuation is invalid when

50. A major advantage of the retail inventory method is that it

53. Which statement is true about the retail inventory method?

63. Which of the following is not a common disclosure for inventories?

*SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is

32. Why are inventories stated at lower-of-cost-or-market?

MULTIPLE CHOICE—CPA Adapted

a 136. Determine cost of ending inventory using retail method.

82. d 86. c 90. a 94. b

MULTIPLE CHOICE—CPA Adapted

Use the following information for questions 98 through 100.

In Reese's December 31, 2012 balance sheet,

98. The current assets total is

99. The current liabilities total is

100. The final retained earnings balance is