Prelim-Quiz21

Which of the following will happen when inventory is recorded at net realizable
value under the cost-of-goods-sold method?
The net realizable value figure for ending inventory is substituted for cost and the
loss is buried in cost of goods sold.

Let A equal the reported inventory value if the lower-of-cost-or-market rule is

applied to individual items of inventory while B equals the reported inventory
value if the lower of cost or market rule is applied to the inventory as a whole. In
this situation then
A will always be equal to or less than B.

What is the amount to be used for purposes of inventory valuation when a unit of
inventory has declined in value below original cost and the market value is less
than the net realizable value less a normal profit margin?
The net realizable value less a normal profit margin

When the replacement cost of an item exceeds its net realizable value
the company uses net realizable value as the designated market value.

If a firm capitalizes interest cost related to construction of a new asset, it should

write off this cost
over the useful life of the asset.

RL Enterprises originally paid $16,000 for a machine and recorded depreciation at a

rate of $1,200 per year for eight years. It sold the machine at the end of the first
quarter of the ninth year for $6,000. What is RL's amount of loss or gain on the
sale?
$100 Loss

The book value at the time of sale was equal to the original cost - depreciation, or
($16,000 - [$9,600 + $300]) = $6,100. The machine sold for $6,000 while the book
value was $6,100, so the disposal resulted in a $100 loss ($6,000 - $6,100 = -$100).

A firm recently constructed a new facility at a cost of $10 million. Weighted-

average accumulated expenditures for the facility were $4 million, actual interest
was $400,000, and avoidable interest was $200,000. If the useful life of the facility
is 40 years and the expected salvage value is $800,000, then what is the firm's
depreciation expense for the first full year? (Assume the firm is using straight-line
depreciation.)
$335,000

Bonnie is the CFO of a small printing company that has decided to replace its old
printing press with a newer, more efficient model. Bonnie knows the cost of
purchasing and installing the new press, as well as total accumulated depreciation
on the old press. Bonnie wants to capitalize the cost of the new press using the
substitution approach. Given this information, which of the following statement is
true?
Before proceeding with the substitution approach, Bonnie must determine the
original cost of the old press, as well as what (if any) salvage value the old press
has.

During self-construction of a gadget-making machine, RL Enterprises incurred the

costs shown below. Based on this information and assuming a full-costing
approach, what amount of overhead should RL include in the cost of the gadget-
making machine?

Fixed overhead for the year $860K

Portion of fixed OH that would be allocated to asset if it were normal production
$112K
Variable OH attributable to self-construction $98K
$210,000

In a full-costing approach, a portion of overhead is added to the cost of self-

construction. In this case, the data tells us that these portions are $112,000 +
$98,000 = $210,000.

Which of the following describes a commonality of fixed assets and raw materials?
Both fixed assets and raw materials possess physical substance.

JT Engineering designs and constructs a new widget-making machine for use in its
factory. JT allocates overhead to the construction process, just as it does with
normal production. Unfortunately, this causes the cost of the machine to exceed
that of a similar machine available through an independent producer. How should
JT record the excess overhead? Why?
JT should record it as a period loss to avoid capitalizing the asset at more than its
probable fair value.

Ahrens Industries exchanged nonmonetary assets with Lacy Tech. No cash was
exchanged and the exchange did not have commercial substance. The carrying
amount of the asset surrendered by Ahrens exceeded both the fair value of the
asset received and Lacy's carrying amount of that asset. How should Ahrens
recognize this exchange?
It should recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a loss.

If an expenditure increases the number of units produced by an existing machine,

that expenditure should be
capitalized

JT Engineering records depreciation on a widget-making machine at $1,200 at the

end of each year. If JT sells the machine in the middle of 2017, how much
depreciation should it record?
It should record depreciation for the period from the last depreciation entry to the
date of sale, or $600.

How are overhead costs related to self-constructed assets accounted for in a full-
costing approach?
By assigning a pro rata portion of fixed overhead to the asset

firm determines that its avoidable interest is $45,000 and its actual interest is
$48,000. In this case, the firm should choose to capitalize its __________________
interest cost.
avoidable

An expenditure that maintains an existing asset so that it can function in the

manner intended should be
fully expensed in the period in which it is made

If a company disposes of a plant asset by selling it for scrap, how should the
company determine the gain or loss realized from the disposition?
by finding the difference between the asset's scrap value and its book value

The idea that because indirect overhead is fixed in nature and charging a portion of
overhead costs to equipment will reduce current expenses is best described as an
argument
for assigning no fixed overhead to the cost of constructed assets.

If a firm substitutes a similar asset in place of an asset that is currently used, it is

making a(n)
replacement

Which of the following terms is used to describe the termination of an asset's

service due to theft, fire, flood, or condemnation?
involuntary conversion