Hancock9e Testbank ch08

Chapter 8 – Accounting for selected assets
TRUE/FALSE
1. Accounts receivable arise when a business sells goods or services to a third party on
credit terms.
ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Accounts receivable.
2. A credit sale of a business where the revenue is not collected due to the customer not
paying is a bad debt.

TOP: Bad debts.
3. The absence of bad debts is an indicator that the credit policy may be too strict, and
can result in the loss of profits.

TOP: Bad debts.
4. The direct write-off method can mean that assets may be overstated in one year and
understated the next.

TOP: Bad debts.
5. A contra account for accounts receivable is the allowance for doubtful debts, which
shows the estimated total of future bad debts.

TOP: Bad debts.
6. Allowance for doubtful debts is a contra account to accounts receivable.

TOP: Bad debts.
7. Bad debts have the effect of reducing assets and reducing profits, which results in a
reduction of equity.

TOP: Bad debts.
8. Management prepares and examines an aged list of Accounts Receivable balances,

which analyses each debt in order to reach a decision on the probability of receipt of payment.

TOP: Bad debts.
9. The direct write-off method for accounting for bad debts is preferred over the
allowance for doubtful debts method, as the latter creates a negative or contra asset which is not
considered a ‘real’ account under accrual accounting.
ANS: F PTS: 1 AACSB: Knowledge, Analytical
TOP: Bad debts.
10. Under the allowance for doubtful debts method, the net amount of assets will not
change when recording a transaction that determines that a specific customer will not pay.

TOP: Bad debts.
11. The failure to allow for uncollectable accounts will cause the owners’ equity to be
overstated.

TOP: Bad debts.
12. The key to the effective management of accounts receivable relies on maximising the
benefits from selling goods on credit, not minimising the losses from bad debts.

TOP: Bad debts.
13. Accounting for bad debts under the direct write-off method involves a reduction of
accounts receivable and a reduction in owners’ equity.

TOP: Bad debts.
14. Goods, other property and services: (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; or (c) to be used up in the production of goods,
other property or services for sale, including consumable stores and supplies, are all various types of
inventory.

TOP: Inventory.
15. Consumable goods for use within the production process are not classified as
inventory under current assets in the balance sheet.

TOP: Inventory.
16. Products and services that are at an intermediate stage of completion form part of the
work in progress.

TOP: Inventory.
17. Goods that have been through the complete production or assembly cycle and are
ready for resale to the customer are finished goods.

TOP: Inventory.
18. The time spent by a barrister briefing a client prior to a court hearing would constitute
‘work in progress’ for the law firm.

TOP: Inventory.
19. The cost of an item is important in considering whether it should be classified as

inventory or not.

TOP: Inventory.
20. Items purchased for incorporation into the manufacture or assembly of goods are
referred to as raw materials, but they do not constitute inventory until the manufacturing or production
process is complete.

TOP: Inventory.
21. The nature of the business will determine if the purchase of 500 litres of paint
constitutes inventory or not.

TOP: Inventory.
22. It is most likely that a manufacturing firm will have inventory that constitutes raw
materials, work in progress and finished goods.

TOP: Inventory.
23. Under AASB 102, where the purchase price (cost) of an item of inventory is $248 and
the net realisable value is $256, inventory should be adjusted to reflect the net realisable value.

TOP: Valuing inventory.
24. Technological changes are likely to cause a downward movement in inventory values,
whereas changes in taste are more likely to cause an upward movement in inventory values.

25. Different valuation rules affect inventory values and therefore cost of sales and profits.

26. LIFO is a method of inventory valuation based on the assumption that cost price
attached to the goods sold is the cost of the most recently purchased inventory. Closing inventory is
therefore assumed to consist of the cost of the earliest units purchased.

TOP: Valuing inventory
27. FIFO is a method of inventory valuation based on the artificial assumption that the
first goods bought are the first sold. Closing inventory is therefore assumed to be that purchased most
recently.

28. The net realisable value of inventory represents selling price less the costs involved in
completing and selling the inventory.

29. ABC Ltd purchased an item inventory at a cost of $27 000. The item was damaged
during storage. The company could sell the item in its damaged state for $23 000, and in doing so
incur selling costs of $1000. The net realisable value of the item of inventory is $23 000.

30. Depreciation spreads the original cost of a non-current asset over its useful life, but it
cannot be considered a precise measure as it is based on forecasts of future outcomes.

TOP: Property, plant and equipment, and depreciation.
31. Residual value can be defined as the estimated disposal (sale) value of an asset when it
is no longer useful to the entity.

TOP: Why depreciate?
32. When technology is changing rapidly, depreciation of an asset will help maintain an
entity’s operating capacity.

33. Depreciation refers to the systematic allocation of the depreciable amount of a

depreciable asset over its useful life.

34. The reducing-balance method is an alternative method to the units-of-output method,

and may be a better reflection of the actual usage of most assets, such as plant and equipment.

TOP: Methods of depreciation.
35. If two entities use different methods of depreciation, then users need to make
adjustments for this when comparing the financial statements of the entities.

TOP: Accounting policies for depreciation and implications for users.
36. A machine was purchased for $30 000 with a life expectancy of five years and a zero
residual value. Under the straight-line method, the depreciation expense would be calculated at 20%
per annum of the cost.

37. Because goodwill is unidentifiable, it cannot be recognised as an asset.

TOP: Intangible assets.
38. Depreciation expense has the effect of reducing profit, equity and assets.

39. The accumulated depreciation account, unlike the allowance for doubtful debts, is not
a contra account.

40. Depreciation is concerned with allocation not valuation.

41. The fundamental difference between identifiable and unidentifiable intangible assets is
whether the assets are separable from the business.

MULTIPLE CHOICE
1. Which of the following statements is incorrect?

A. An accounts receivable arises when a business sells goods or services to a third party on
credit terms.
B. The absence of bad debts is an indicator that the credit policy may be too strict and can
result in the loss of profits.
C. The higher the number of customer being supplied on credit and amount of inventories, the
lower the working capital requirements.
D. The failure to allow for uncollectable accounts will cause the owners’ equity to be overstat-
ed.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Accounts receivable; Bad debts.
2. When goods are sold at a profit on credit, the effect of the sale on the accounting
equation is:
A. an increase in liabilities and an increase in assets.
B. an increase in expenses and a decrease in equity.
C. a decrease in equity and an increase in liabilities.
D. an increase in assets and an increase in equity.
ANS: D PTS: 1 AACSB: Knowledge, Analytical
3. A credit sale results in increases in which of the following pairs of items on the
financial statements?
Statement of comprehensive income Balance Sheet

A. Sales Revenue Cash
B. Accounts Receivable Cash
C. Sales Revenue Accounts Receivable
D. Accounts Receivable Sales Revenue
4. Which of the following transactions would cause a decrease in the accounts receivable
account?
A. A credit sale
B. A collection of cash from a previous credit sale
C. A cash sale
D. A credit purchase
ANS: B PTS: 1 AACSB: Knowledge, Analytical
5. The collection of an account receivable will:

A. increase total assets and increase total owners’ equity.
B. not affect total assets and increase total owners’ equity.
C. decrease total assets and decrease total liabilities.
D. not affect total assets liabilities and owners’ equity.
6. Owens Office Supplies collected $300 that had previously been recorded in Accounts
Receivable. Recording this event in the accounting system caused:
A. assets to increase.
B. assets to decrease.
C. total assets to remain the same.
D. revenues to increase.
7. Which of the following methods of handling bad debts often potentially leads to an
overstatement of assets?
A. Percentage of credit sales method.
B. Ageing of accounts receivable method.
C. Direct write-off method.
D. Allowance for doubtful debts.
TOP: Bad debts.
8. Allowance for doubtful debts is:

A. a liability account.
B. an expense account.
C. a contra liability account.
D. a contra asset account.
TOP: Bad debts.
9. Failure to record bad debt expense at year end will result in an:
A. overstatement of assets.
B. understatement of net profit.
C. overstatement of expenses.
D. understatement of liabilities.
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Bad debts.
10. An increase in the Allowance for Doubtful Debts will:

A. reduce the cash account.
B. reduce total assets.
C. increase total liabilities.
D. increase shareholders’ equity.
TOP: Bad debts.
11. The Allowance for Doubtful Debts is classified on the:

A. statement of comprehensive income as an expense.
B. statement of comprehensive income as revenue.
C. balance sheet as a liability.
D. balance sheet as a deduction to an asset.
TOP: Bad debts.
12. On 15 July Sammy Corporation’s Gross Accounts Receivable had a balance of $2300
and the Allowance for Doubtful Debts had a balance of ($220). A specific account of $80 was written
off on 16 July. If no other relevant transactions had taken place, what is the amount of net receivables
after the write-off?
A. $1920
B. $2160
C. $2080
D. $2220
TOP: Bad debts.
13. The balance of an allowance for doubtful debts was ($10 000) at the start of a year and
($16 000) at the end of that year. During the year, accounts totalling $9000 were written off as bad
debts. What was the bad debts expense for the year?
A. $7000
B. $9000
C. $10 000
D. $15 000
TOP: Bad debts.
14. XYZ Company had an accounts receivable account balance of $300 000 and
allowance for doubtful debts account balance of $12 500 prior to writing off a bad debt of $3000. The
estimated net realisable value of accounts receivable before and after the write-off were, respectively:
A. $12 500 and $309 500.
B. $287 500 and $284 500.
C. $287 500 and $287 500.
D. $300 000 and $297 000.
TOP: Bad debts.
15. The bookkeeper at Kupertino Company is recording information into the accounting
system to recognise the estimated amount of bad debt expense for the fiscal period. This entry into the
accounting system will affect which of the account balances below?
Allowance
for Doubtful Debts Bad Debts Expense
A. Yes Yes
B. Yes No
C. No Yes
D. No No
TOP: Bad debts.
16. Firms should ideally recognise the expense related to uncollectable accounts:
A. during the period of sale.
B. when accounts are written off.
C. when customers declare bankruptcy.
D. never; there is no expense related to uncollectable accounts.
TOP: Bad debts.
17. Hilde Company reported accounts receivable of $40 000 at the beginning of the year.
It now reports a balance of $28 000 at the end of the year. From this information, assuming there were
no accounts written off as bad debts during the year, it is possible to determine that during the year:
A. credit sales were higher than cash collected from customers.
B. credit sales were less than cash collected from customers.
C. the firm was doing a poor job of collecting its receivables.
D. credit sales decreased from the previous year.
TOP: Bad debts.
18. The Philamono Bean Company reported the following accounts receivable balances
for 20X8:
Beginning of the year $84 000
End of the year 90 000
Given that there were no bad debts written off during the year, this information means that:
A. credit sales exceeded cash collections from customers during the year.
B. cash collections from customers exceeded credit sales during the year.
C. the firm did an excellent job of collecting its receivables.
D. credit sales increased during the current year over the previous year.
TOP: Bad debts.
19. What are the two methods of accounting for bad debts?
A. Receivable reduction and bad debt methods
B. Direct write-off and allowance methods
C. Allowance and bad debt methods
D. Direct write-off and receivable reduction methods
TOP: Bad debts.
20. Assuming that the allowance for doubtful debts method of accounting for bad debts is
used, when a customer’s account is determined to be a bad debt, which of the following will occur?
A. Bad debts expense is increased, allowance for doubtful debts is decreased.
B. Allowance for doubtful debts is reduced, accounts receivable is reduced.
C. Allowance for doubtful debts is reduced, bad debts expense is reduced.
D. Allowance for doubtful debts is reduced, accounts payable is increased.
TOP: Bad debts.
21. The net figure for accounts receivable after deducting the allowance for doubtful debts
account:
A. represents the expected cash to be collected.
B. is a contra account.
C. understates the realisable value of accounts receivable.
D. overstates the realisable value of accounts receivable.
TOP: Bad debts.
22. George, a sole trader, sells goods on credit, and uses the direct write-off method for
recording bad debts. The balance for accounts receivable at the end of the last financial year ended 31
December was $12 000. There was $1000 of bad debts that were written off this year. From an accrual
perspective, for last year, which of the following is incorrect?
A. Profit and equity were overstated.
B. Profit and assets were overstated.
C. Accounts receivable and assets were overstated.
D. Profit and liabilities were overstated.
TOP: Bad debts.
23. The balance of the accounts receivable balance of XYZ Pty Ltd was $23 000 at the
beginning of the financial year ended 30 June and $27 000 at the end of the period. The total credit
sales for the company for the financial year was $132 000. Bad debts write-off totalled $5500. What
was the total of the cash received from accounts receivable during the year?
A. $118 500
B. $122 500
C. $128 000
D. $133 500
TOP: Bad debts.
24. Inventories do not include goods and services:

A. held for sale.
B. used up in production.
C. sold to customers.
D. consumed in production.
TOP: Inventory.
25. Inventory should normally be classified on the balance sheet as:

A. a current asset.
B. shareholders’ equity.
C. property, plant, and equipment.
D. an intangible asset.
TOP: Inventory.
26. You would expect to see the account Work-in-Progress Inventory reported on the
balance sheet of a:
Manufacturing firm Merchandising firm

A. Yes No
B. No No
C. Yes Yes
D. No Yes
TOP: Inventory.
27. Different inventory valuation methods do not affect:

A. profit.
B. cost of sales.
C. liabilities.
D. assets.
28. The net realisable value of inventory is:

A. the cost of goods sold.
B. the purchase cost of inventory.
C. the selling price less any costs of sale.
D. the selling price less cost of completion and any costs of sale.
29. The cost of a block of wood is $28 but the net realisable value is $24. Under the
valuation rule in accounting standards, the block of wood is recognised at:
A. $24 or $28.
B. $24.
C. $28.
D. $32.
Consider the following information and answer questions 30 to 32 below.
Units Cost per unit Total costs

Goods in inventory at start of year 1600 $1.20 $3072
Purchases, quarter 1 800 $1.40 $1120
5400 $9552
Goods sold during the year: 3000 units
30. Using the last-in, first-out periodic method, the value of closing inventory is:
A. $4400.
B. $4192.
C. $1840.
D. $3460.
TOP: Effects of price changes.
31. Using the first-in, first-out periodic method, the value of closing inventory is:
A. $4192.
B. $3450.
C. $2510.
D. $4400.
32. Using the weighted-average-cost method, the value of closing inventory is (to the
nearest whole $):
A. $4400.
B. $4192.
C. $4245.
D. $5040.
33. Which of the following methods results in the higher value for cost of goods sold in
times of rising inventory prices?
A. First-in, first-out
B. Weighted average cost
C. Last-in, first-out
D. None of the above
34. First-in, first-out is the same as:

A. weighted average cost.
B. last-in, last-out.
C. last-in, first-out.
D. first-in, last-out.
35. Assuming that there are inflationary trends in the economy, the inventory amount
shown in the balance sheet, if based on LIFO, would normally be:
A. lower than the FIFO value.
B. equal to current market value.
C. higher than the FIFO value.
D. higher than current market value.
36. Which inventory measurement method would have the most recent costs in cost of
goods sold?
A. First-in, first-out (FIFO)
B. Last-in, first-out (LIFO)
C. Weighted average
D. Work-in-progress
37. The inventory valuation method that results in the recognition of the oldest inventory
costs on the balance sheet and statement of comprehensive income, respectively, is:
Balance Sheet Statement of Comprehensive Income
A. FIFO LIFO
B. FIFO FIFO
C. LIFO LIFO
D. LIFO FIFO
38. When the price of inventory is decreasing, which of the following is true regarding the
three best-known inventory valuation methods?
A. The LIFO method will yield the smallest amount for cost of goods sold.
B. The weighted-average method will yield the largest amount for closing inventory.
C. The FIFO method will yield the highest amount for closing inventory.
D. Both LIFO and FIFO will yield a smaller tax obligation than weighted-average.
39. The So-Big Company sells hot-dogs. Inventory information for a recent week is
shown below:
Units Unit Cost Total Cost
Beginning inventory 2 $6 $12
Purchase 4 8 32
Purchase 6 10 60
If five units were sold during the week, what is the cost of goods sold if the LIFO periodic method is
used?
A. $68
B. $54
C. $50
D. $36
40. Schultz-Stein Company has the following inventory information for a recent year:
Beginning inventory $500 (10 units with an average cost of $50 each)
January purchase 10 units @ $48 each
July purchase 30 units @ $52 each
October purchase 20 units @ $48 each
Ending inventory 25 units
The cost of ending inventory, using the weighted-average periodic method, is:
A. $1250.
B. $1240.
C. $1237.50.
D. $1220.
41. An advocate of the LIFO inventory method would maintain that:

A. current costs are matched with current selling prices.
B. the lowest possible costs are always shown in the ending inventory.
C. the oldest inventory is relieved of its cost before the newer purchases.
D. the highest possible costs are always shown in the ending inventory.
42. Davenport Merchandising Company uses the FIFO periodic method of cost
assignment. The following data are available:
Date Units Unit Cost Total Cost

Beginning inventory 1 Jan 400 $24 $9600
Purchase 13 Mar 800 28 22 400
Purchase 20 Jun 1200 32 38 400
Ending inventory 31 Dec 200
The value of the ending inventory will be:
A. $2400.
B. $4800.
C. $5866.
D. $6400.
43. Gamma Bomber Parts uses the FIFO periodic costing method. The following data are
available:
Units Unit Cost Total Cost

Beginning inventory 20 $4000 $80 000
Purchase 20 4800 96 000
Purchase 16 3600 57 600
Sales during the year 25
The cost of goods sold should be:

A. $104 000.
B. $100 800.
C. $129 600.
D. $132 800.
44. J. Q. Adams Co. had beginning inventory of 50 units with a total cost of $1000.
During the period, J. Q. Adams first purchased 20 units for $800 and then 30 units for $1800. The
company uses the LIFO periodic method of costing inventory. If a physical count of ending inventory
showed 45 units, at what amount would they be valued on the balance sheet?
A. $1620
B. $900
C. $2400
D. $3600
45. Which of the following is false concerning the lower-of-cost-or-net realisable value
rule when it is applied to the valuation of inventory?
A. Inventory must be written up (increased) if the net realisable value of ending inventory is
greater than the cost of ending inventory as estimated using the LIFO method.
B. Inventory must be written down (decreased) if the net realisable value of ending inventory
is less than the cost of ending inventory as estimated using the average cost method.
C. Inventory must be written down (decreased) if the current market cost of ending inventory
is less than the cost of ending inventory as estimated using the FIFO method.
D. Writedowns (decreases) are more common in times of rising prices when FIFO is used.
46. Which of the following is incorrect? Depreciation is calculated:

A. on a systematic allocation basis.
B. over the asset’s estimated useful life.
C. to prevent losses.
D. on a depreciable asset.
47. Which of the following assets is not depreciated?

A. Buildings
B. Motor vehicles
C. Land
D. Equipment
48. Which of the following is the main reason for depreciating non-current assets?
A. To show consumption of economic benefits
B. To enable a business to continue production
C. To lessen the losses suffered by businesses
D. To set aside funds for the replacement of assets
49. The expired cost of a depreciable asset is referred to as:

A. residual value.
B. carrying value.
C. accumulated depreciation.
D. depreciable cost.
50. Where an entity exists in a rapidly changing environment, depreciation of a non-

current asset will:
A. show the consumption of economic benefits during a given period.
B. ensure operating capacity is maintained.
C. provide sufficient funds to replace the asset.
D. be inappropriate.
51. The cost of non-current assets recognised as being consumed during a fiscal period is:
A. plant expense.
B. depreciation expense.
C. interest expense.
D. cost of goods sold.
52. When a company reports depreciation expense on the statement of comprehensive

income:
A. it is based on allocations of cost rather than on the current value of the asset.
B. the firm is reporting that asset’s decline in current value during the period.
C. the shortest possible estimated useful life and lowest possible estimated residual value are
usually chosen.
D. the company is ignoring the going-concern concept.
53. How is accumulated depreciation reported in the financial statements?

On the Under the category of
A. balance sheet assets
B. balance sheet liabilities
C. statement of comp income revenues
D. statement of comp income expenses
54. If a firm’s depreciation expense doubles in a period which of the following will
increase as a result of this event?
Net profit Cash flow
A. Yes Yes
B. Yes No
C. No Yes
D. No No
55. Accumulated depreciation, as used in accounting, primarily represents:

A. funds (or cash) set aside to replace the asset being depreciated.
B. earnings retained in the business that will be used to purchase another plant asset when the
present asset becomes fully depreciated.
C. an expense that is shown in the statement of comprehensive income.
D. the portion of the cost of a plant asset written off as an expense since the asset was
acquired.
56. If a firm’s depreciation expense is cut by 25% in a period, which of the following will
decrease as a result of this event?
Net profit Cash flow
A. Yes Yes
B. Yes No
C. No Yes
D. No No
57. A business ended the year with a cash balance of $40 000. During the year, the
following transactions took place:
Cash purchase of a new computer $5000
Depreciation expense 1500
Accumulated depreciation 1500
Assuming no other transactions took place, the cash at the beginning of the year was:
A. $45 000.
B. $48 000.
C. $46 500.
D. $35 000.
58. Depreciation affects profit in which of the following ways?

A. Decreases profit, because it decreases a non-current asset.
B. Increases profit, because it is an acquisition of a non-current asset.
C. Profit decreases, because depreciation is an expense item.
D. Profit does not change, because depreciation is a non-cash expense.
59. The carrying value of plant assets is:

A. the cost of the assets less accumulated depreciation.
B. an indicator of the market value of the assets.
C. cost less residual value.
D. not reported in the financial statements.
ANS: A PTS: 1 AACSB: Analytical
60. A building was purchased for $100 000 and used for four years of its estimated 10-
year life. It has no residual value and the straight-line method is used. The carrying value of the
building after the four years’ usage would be reported on the balance sheet at:
A. $20 000.
B. $40 000.
C. $60 000.
D. $80 000.
61. Consider the following information and answer the question(s) below.
Estimated Residual Depreciation
Machine Cost life value method
HRB-09 $8500 12 years $0 Reducing-balance
(Assume rate = 0.105)
If Machine HRB-09 was purchased 21 months ago, what is the total accumulated depreciation as at 30
June for this machine?
A. $1786
B. $1492
C. $682
D. $1827
62. Mendips Ltd net profit would be understated if in the first year, the residual value
were excluded when determining the depreciation expense using:
Straight-line Reducing balance
A. Yes No
B. Yes Yes
C. No No
D. No Yes
63. On 1 July, Gumi Company purchased equipment at a cost of $22 000. The equipment
has an estimated residual value of $3000 and is being depreciated over an estimated useful life of eight
years under the reducing-balance method of depreciation, at a rate equal to one-and-a-half times the
straight-line depreciation rate. For the six months ended 31 December, Gumi Company had recorded
one-half year’s depreciation. One full year later, what would be the depreciation expense (rounded to
the nearest dollar) on the equipment for the year and what is the written-down book value after this
depreciation expense has been charged?
A. Depreciation expense $2063, written-down book value $19 937
B. Depreciation expense $3158, written-down book value $18 842
C. Depreciation expense $3738, written-down book value $16 199
D. Depreciation expense $5791, written-down book value $14 146
64. Flamingo Corporation purchased a machine for $300 000 on 1 January. The estimated
life is 10 years. Three years later, what is the book value of the machine reported in the balance sheet
as at 31 December, assuming that straight-line depreciation is used and the estimated residual value is
zero?
A. $300 000
B. $210 000
C. $120 000
D. $60 000
65. On 1 January two years’ ago, the local Red Cross affiliate acquired new blood-
processing equipment costing $400 000. The equipment has an estimated useful life of 10 years and an
estimated residual value of $50 000. After making all necessary calculations and entries on 31
December, what are the accumulated depreciation to date and carrying value of the equipment?
(Assume that the straight-line method is used)
Accumulated depreciation Carrying value as of
as of 31 December 31 December
A. $70 000 $330 000
B. $70 000 $280 000
C. $35 000 $330 000
D. $80 000 $320 000
66. Which of the following statements is true of the straight-line and/or reducing-balance
methods (using the theoretical rate) of depreciation?
A. The two methods yield different amounts of total depreciation expense over the useful life
of the asset.
B. The two methods yield the same amount of total depreciation expense over the useful life
of the asset.
C. The straight-line method is applied to assets that wear and tear faster in the earlier years.
D. The reducing-balance method is applied to assets that generate more revenue in later years.
67. Compared to straight-line depreciation, reducing-balance depreciation:

A. results in lower net profit in earlier years and higher net profit in later years.
B. is used more often on the statement of comprehensive income than is the straight-line
method.
C. leads to higher book values for depreciable assets than does the straight-line method.
D. allocates larger portions of cost to later periods than to earlier ones.
68. Sonya’s Fabrics purchased display equipment two years ago on 1 January for $10 000.
Its expected useful life was five years, and its residual value $1000. To record the depreciation for the
current year just ended on 31 December, what would be the accounting entry, using the straight-line
method?
A. Increase both depreciation expense and accumulated depreciation by $2000.
B. Increase depreciation expense and decrease equipment, both by $1000.
C. Increase depreciation expense and increase accumulated depreciation by $1800.
D. Decrease both depreciation expense and accumulated depreciation by $1000.
69. An asset has a cost of $80 000, estimated residual value of $20 000 and estimated
useful life of five years. What is the amount of the depreciation expense for the first year, assuming the
reducing-balance method is used and the annual rate is 30%?
A. $12 000
B. $16 000
C. $18 000
D. $24 000
ANS: D PTS: 1 AACSB: Analytical
70. The useful life of an asset for accounting purposes refers to:
A. the period of time over which an asset is considered to be of use to an entity.
B. the expected life of the asset based on engineering estimates.
C. the maximum physical life of the asset.
D. the shortest of the physical and economic lives of the asset.
71. An example of an intangible asset classification on a balance sheet is:
A. rights held for a radio licence to the Himalayas.
B. shares in BHP Limited.
C. improvements to electric cables.
D. interest on debentures due to be paid in 2010.
72. Which of the following is not an identifiable intangible asset?

A. A patent
B. Copyright
C. Goodwill
D. A brand name
73. A pair of identifiable and unidentifiable assets is:

A. patents and copyrights.
B. brand names and goodwill.
C. copyright and franchises.
D. research and development and patents.
74. Which of the following would not be included in property, plant and equipment?
A. Equipment
B. Buildings
C. Goodwill
D. Land
75. The excess of the cost of acquisition of a company over the fair value of its net
identifiable assets is known as:
A. surplus.
B. amortisation.
C. goodwill.
D. abatement.
ANS: C PTS: 1 AACSB: Knowledge
76. Which of the following is not an intangible asset?

A. Goodwill
B. Patent
C. Copyright
D. Land
ANS: D PTS: 1 AACSB: Knowledge
77. The using-up process or utilisation of intangible assets is referred to as:
A. depreciation.
B. depletion.
C. dilution.
D. amortisation.
78. Goodwill:
A. is the collective name for the unidentifiable assets of an entity.
B. may not be recognised as an asset.
C. is the collective name for identifiable assets.
D. includes trademarks and brand names.
79. Which of the following assets cannot be included as unidentifiable intangibles?

A. Customer relations
B. Size of the market controlled
C. Copyright ownership
D. Superior management skills
SHORT ANSWER
1. What is the nature of the allowance for doubtful debts account and how does it arise?
ANS:
The allowance for doubtful debts account is a contra asset – it is deducted from the aggregate of
accounts receivable to provide the cash equivalent balance of the receivables at reporting date. The
account is the product of the application of accrual accounting and serves the purpose of ensuring that
the associated doubtful debts expense is recognised in the year in which revenue is earned.
PTS: 1 AACSB: Knowledge, Analytical, Communication

TOP: Bad debts.
2. Describe the lower of cost or market (LCM) rule as it applies to the valuation of
closing inventory, and name three different methods of calculating the cost of inventory.
ANS:
As indicated, the acronym LCM stands for the lower of cost and market. The rule as the name suggests
requires that closing inventory is measured at whichever is lower at the date of reporting, the cost or
the market price of the item. Market price refers to net realisable value. Three different methods of
determining cost: first-in-first-out, last-in-first-out and weighted average (specific identification and
standard costing are also relevant here).
Note: AASB 102 Inventories: in respect of not-for-profit entities, inventories held for distribution are
required to be measured at the lower of cost and current replacement cost.
3. How would the composition of the inventory reported in the balance sheet of a retail
organisation, such as Woolworths, be similar to that of a manufacturing entity, and in what way(s)
would it differ?
ANS:
The inventory of both types of entity would be similar in that one would expect them to both hold
finished goods and supplies for consumption in the process of carrying out the entity’s operations.
However, they would differ to the extent that the inventory of a manufacturing entity would also
typically include stocks of raw materials and work-in-progress whereas, whilst Woolworths may have
in-house food processing activity (e.g. bakery, delicatessen and butchery), the greater proportion of the
retailer’s inventories would be in the form of finished goods ready for sale.

TOP: Inventory.
PROBLEM
1. The inventory of Lusitania Ltd contains the following items at 30 June.
Total
Item Type Quantity Cost Cost Market
A 60 $3 $180 $4
B 25 8 200 5
C 10 25 250 21
D 40 6 240 6
E 30 7 210 5
(a) Determine the ending inventory value at 30 June, applying the lower cost and market
(LCM) rule to the individual items.
(b) What would the application of the LCM rule rather than cost have on the financial
statements of the company?
ANS:
(a)
Total LCM
Item Type Quantity Cost Cost Market Rule
A 60 $3 $180 $4 $180
B 25 8 200 5 125
C 10 25 250 21 210
D 40 6 240 6 240
E 30 7 210 5 150
Total 1080 905
(b)
Cost of goods sold would be higher by $175 under the LCM than if the inventory had been measuring
at cost. Thus, the ensuing profit figures (gross and net) will be $175 lower under LCM – leading to a
lower equity figure in the balance sheet. Similarly, the closing inventory figure in the balance sheet
will be lower under the LCM rule than had the inventory been measured at cost.
PTS: 1 AACSB: Knowledge, Analytical
2. During the year ended 30 June Excelsior Soccer sold 1800 soccer balls at $12.50 each.
The entity uses the periodic method of recording inventory. Beginning inventory from 1 July last year
amounted to 200 balls at a cost of $1200. Purchases during the year were made in the following order:
580 units @ $6.20
1100 units @ $6.80
300 units @ $7.00
100 units @ $7.10
(a) Calculate the 30 June closing inventory figure using the following assumptions regarding
the flow of costs (round to the nearest $):
• FIFO, periodic method

• LIFO, periodic method
• Weighted average, periodic method.
(b) Prepare partial statements of comprehensive income for each method to the gross profit
stage.
ANS:
(a)
No items @ Total $
200 $6.00 1200
580 6.20 3596
1100 6.80 7480
300 7.00 2100
100 7.10 710
2280 $15 086
Sold 1800
Closing 480
FIFO @ Total $
100 7.10 710
300 7.00 2100
80 6.80 544
480 3354
LIFO @ Total $
200 $6.00 1200
280 6.20 1736
480 2936
Weighted average @ Total $

$15 086/2 280 = $6.62
480 x $6.62 = $3176
(b)
Statement of comprehensive income for year ended 30 June
FIFO LIFO Weighted av-
erage
Sales $22 500 $22 500 $22 500
Opening inventory 1200 1200 1200
Purchases 13 886 13 886 13 886
15 086 15 086 15 086
Closing inventory 3354 2936 3176
Cost of goods sold 11 732 12 150 11 910
Gross profit 10 768 10 350 10 590

3. Grey Egret Ltd purchased an item of equipment at a total cost of $85 000 nine months
ago on 1 October. The equipment was expected to have residual value of $20 000 at the end of its five-
year useful life to the firm. The company’s financial year ends on 30 June.
(a) For the first and second financial years following the date of acquisition of the
equipment, calculate the annual depreciation expense, assuming that the equip-
ment was depreciated using the straight-line method.
(b) For the first and second financial years following the date of acquisition of the
equipment, calculate the annual depreciation expense, assuming that the equip-
ment was depreciated using the reducing balance method, at a rate of 26% per
annum.
(c) Show how the item of equipment would appear in the balance sheet of Grey
Egret Ltd as at the end of the second financial year assuming the straight-line
method is used.
ANS:
(a) Year ended 30 June Year 1: $85 000 – 20 000 / 5 = $13 000 per annum.
Pro-rata $13 000 x 0.75 = $9750. Year ended 30 June Year 2: $13 000.
(b) Year ended 30 June Year 1: $85 000 x 0.26 x 0.75 = $16 575.
Year ended 30 June Year 2: $85 000 – 16 575 x 0.26 = $17 790.
(c) Balance sheet extract as at 30 June Year 2
Non-current assets
Equipment $85 000
Accumulated depreciation (22 750) $62 250.


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Chapter 8 – Accounting for selected assets

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

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6. Allowance for doubtful debts is a contra account to accounts receivable.

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8. Management prepares and examines an aged list of Accounts Receivable balances,

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ANS: T PTS: 1 AACSB: Knowledge, Analytical

19. The cost of an item is important in considering whether it should be classified as

ANS: F PTS: 1 AACSB: Knowledge, Analytical

ANS: F PTS: 1 AACSB: Knowledge, Analytical

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ANS: T PTS: 1 AACSB: Knowledge, Analytical

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ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

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ANS: F PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: F PTS: 1 AACSB: Knowledge, Analytical

33. Depreciation refers to the systematic allocation of the depreciable amount of a

ANS: T PTS: 1 AACSB: Knowledge, Analytical

34. The reducing-balance method is an alternative method to the units-of-output method,

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

37. Because goodwill is unidentifiable, it cannot be recognised as an asset.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: F PTS: 1 AACSB: Knowledge, Analytical

40. Depreciation is concerned with allocation not valuation.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

ANS: T PTS: 1 AACSB: Knowledge, Analytical

1. Which of the following statements is incorrect?

Statement of comprehensive income Balance Sheet

5. The collection of an account receivable will:

8. Allowance for doubtful debts is:

10. An increase in the Allowance for Doubtful Debts will:

11. The Allowance for Doubtful Debts is classified on the:

24. Inventories do not include goods and services:

25. Inventory should normally be classified on the balance sheet as:

Manufacturing firm Merchandising firm

27. Different inventory valuation methods do not affect:

28. The net realisable value of inventory is:

Consider the following information and answer questions 30 to 32 below.

Units Cost per unit Total costs

Goods sold during the year: 3000 units

34. First-in, first-out is the same as: