EXAM 1 Flashcards
(46 cards)
CH10 #10.
What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?
When determining the amount to be capitalized, accountants must compare both avoidable and actual amount of interest and use the lower amount. To capture the amount of interest that is avoidable, one would multiply the interest rate(s) by the weighted-average accumulated expenditures on qualifying assets. Companies should use the actual interest rate of the borrowed amounts for the portion of weighted-average accumulated expenses up to the amount specifically borrowed to pay for the asset construction. On the portion of weighted average accumulated expenses that is over the amount borrowed for the asset, they should use a weighted average of interest rates that the company has incurred on their other debts during that time period.
CH12 #4
Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?
- They make the distinction because those intangibles that are made are hard to determine what, if any future service potential there may be. By allowing these to be deferred it would open it up to a large amount of subjectivity where companies can contend that these intangibles would improve future benefits. On the other hand, the intangibles that are purchased have a price that is verifiable, therefore, these items are capitalized.
CH. 9
What is the reason that gross profit based on selling price will always be less than the related percentage based on cost?
A. Selling price is more volatile than cost because of the greater-of-cost-
or-market rule.
B. Retailers wish to obscure the true cost from customers.
C. Companies make more money by increasing the markup on selling
price as compared to cost.
D. Selling price is greater than cost and the gross profit amount is the
same for both.
D. Selling price is greater than cost and the gross profit amount is the
same for both.
CH. 9
What is the consequence of using the same dollar amount of gross profit when computing the gross profit percentage based on selling price or based on cost?
A. The gross profit percentage based on selling price will always be
more than the related percentage based on cost.
B. The gross profit percentage based on selling price will always be
unrelated to the percentage based on cost.
C. The gross profit percentage based on selling price will always be less
than the related percentage based on cost.
D. The gross profit percentage based on selling price will always be the
same as the related percentage based on cost.
C. The gross profit percentage based on selling price will always be less
than the related percentage based on cost.
Ch. 9
Which information would not be needed to determine inventory based on the retail method?
A. A record of the total costs and retail value of goods purchased.
B. A record of the total costs and retail value of goods available for sale.
C. A record of sales for the period.
D. A record of the total costs of products sold for the period.
D. A record of the total costs of products sold for the period.
CH. 9
What is the reason for computing the cost-to-retail ratio in the retail inventory method?
A. to determine the appropriate retail price for new merchandise
B. to determine the amount of markup needed
C. to find the cost of ending inventory
D. to find the retail amount of ending inventory
D. to find the retail amount of ending inventory
CH. 9
Using the following information, what is the inventory turnover ratio for Kipling’s Outfitters for 2020? The 2020 financial statements report a beginning inventory of $350,000, an ending inventory of $450,000, and cost of goods sold of $1,000,000 for the year.
A. 2.2 times
B. 1.3 times
C. 10.0 times
D. 2.5 times
D. 2.5 times
Average Inventory = (Beginning Inventory + Ending Inventory)/2 = ($350,000 + $450,000)/2 = $400,000.
Turnover = COGS/Average Inventory
$1,000,000/$400,000 = 2.5
CH. 9
The following information was obtained form Smith Co:
Sales $275,000
Beginning inventory 30,000
Ending Inventory 18,000
Smith’s gross margin is 20%. What amount represents Smith purchases?
A. $202,000
B. $208,000
C. $232,000
D. $220,000
B. $208,000
(80% of Sales - [Beg Inv - End Inv])
220,000 -12,000 = 208,000
CH. 9
The following information is available for October for Carla Vista Company.
Beginning Inventory $350,000
Net purchases 1,100,000
Net Sales 2,200,000
Percentage markup 66.67%
on cost
A fire destroyed Carla Vista’s October 31 inventory, leaving undamaged inventory with a cost of $21,500. Using the gross profit method, the estimated ending inventory destroyed by fire is:
A. $750,000
B. $108,500
C. $586,667
D. $565,167
B. $108,500
COGS = Net sales / (1.markup %) 1.6667
2,200,000 / 1.6667 = 1,319,973
350,000 + 1,100,000 - 1,319,973 - 21,500 = 108,527
CH. 9
Sheffield Inc. had beginning inventory of $12,000 at cost and $21,500 at retail. Net purchases were $142,872 at cost and $184,000 at retail. Net markups were $9,600, net markdowns were $7,500, and sales revenue was $152,300. Compute ending inventory at cost using the conventional retail method.
Ending inventory using the conventional retail method ___________________
39,816
Cost Retail
Beg Inv 12,000 21,500
Net Purchase 142,872 184,000
Net Markup 9,600
Totals 154,872 215,100
Deduct:
Net markdowns 7,500
Sales Revenue 152,300
End Inv at Retail 55,300
Cost-to-retail = 154,872 / 215,100 = 72%
End inv at lower-of-cost-market
72% * 55,300 = 39,816
CH. 10
In which of the following exchange transactions would a company recognize losses immediately but defer any gains?
A. An exchange that lacks commercial substance and in which cash is
received
B. An exchange that has commercial substance and in which cash is
received
C. An exchange that has commercial substance and in which no cash is
received
D. An exchange that lacks commercial substance and in which no cash
is received
D. An exchange that lacks commercial substance and in which no cash
is received
CH 11
Montana Mining acquires a coal mine at a cost of $1,800,000. Intangible development costs total $360,000. After extraction has occurred, the company must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $210,000. What is the amount of depletion per ton given that Montana Mining estimates 5,000 tons of extractable coal?
A. $384
B. $426
C. $360
D. $468
B - $426
Depletion cost per unit = (total cost - salvage value)/ total estimated units
Total cost is the cost of the mine plus development costs plus restoration costs (($1,800,000 + $360,000 + $180,000) -$210,000)/5,000 = $426
Acquisiton costs 1800000
Add: Intangible development costs 360000
Add: Estimated fair value of the obligation 180000
Less: Salvage value -210000
Cost for Depletion 2130000
Divided by tons of coal 5000
Depletion per ton 426
CH 11
On December 31, 2020, Heart Industries had total assets of $8.4 million. If Heart’s net sales for 2020 were $5.6 million and its asset turnover ratio was 0.7, then what were Heart’s total assets as of January 1, 2020?
A. $15.2 million
B. $8 million
C. $16 million
D. $7.6 million
D. $7.6 million
turnover ratio is equal to its net sales divided by its average total assets. $5.6 million / 0.7 = $8 million.
average total assets is equal to the sum of its assets on the first and last day of the year divided by two.
$8 million * 2 - $8.4 million = $7.6 million as of January 1.
D. $7.6 million
turnover ratio is equal to its net sales divided by its average total assets. $5.6 million / 0.7 = $8 million.
average total assets is equal to the sum of its assets on the first and last day of the year divided by two.
$8 million * 2 - $8.4 million = $7.6 million as of January 1.
C. They would record a $46,000 increase in value for the equipment.
Book value @ purchase =$180,000
Useful life = 3 years
Annual depreciation = $60,000
1/1/20 book value = 120,000.
Loss on impairment =54,000
New book value =$66,000.
If Kessler GPS is holding the equipment for disposal, they could increase the value of the asset up to $120,000 (book value at time of impairment) or $112,000 (market value), whichever is lower.
Therefore, they would record an increased value of $46,000
($112,000 – $66,000).
CH. 11
The Pulton Company purchased a depreciable asset for $400,000 on January 1, 2019. The estimated salvage value is $40,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. In 2022, the company changed its estimates to a total useful life of 5 years with a salvage value of $60,000. In 2022, the depreciation expense was
A. $120,000.
B. $110,000.
C. $60,000.
D. $40,000.
B. $110,000.
accumulated depreciation =($400,000-$40,000)*3/9
=$120,000
=$400,000-$120,000=$280,000
=($280,000-60,000)/(5-3)
=110,000
CH. 11
Kuhn Shoes purchased a lacing machine on January 2, 2012 for $255,000. The machine was being depreciated on the straight-line method over an estimated useful life of 15 years, with no salvage value. At the beginning of 2019, the company paid $35,000 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 8 years (23 years total). What should be the depreciation expense recorded for the machine in 2019?
A. $10,688
B. $4,375
C. $2,188
D. $21,375
A. $10,688
7 yrs depreciation @ rate of $17,000 per yr ($255,000/15) for a total of $119,000.
Book value of $255,000 – $119,000 = $136,000.
Plus cost of the overhaul = new book value $136,000 + $35,000 = $171,000.
Machine now has a useful life of 16 yrs (23 – 7).
Annual depreciation of $171,000/16 = $10,688.
CH 11
Flanagan Concrete owns equipment with a book value of $3,500,000. The equipment is estimated to generate future cash flows of $2,975,000. The equipment has a fair value of $2,890,000. The journal entry to record the impairment loss will
A. record a loss of $85,000.
B. include a $610,000 credit to the Equipment account.
C. reduce income from continuing operations by $525,000.
D. increase the asset’s Accumulated Depreciation account by $610,000.
D. increase the asset’s Accumulated Depreciation account by $610,000.
Impaired asset then the amount of the impairment loss is:
book value - fair value.
$3,500,000 – $2,890,000 = $610,000.
debit (increase) to the Loss on Impairment account credit (increase) to the Accumulated Depreciation—Equipment account.
CH. 11
Ken and Tammy are working with asset valuation. Ken is trying to determine if an asset is impaired, and Tammy is calculating the amount of impairment for an asset that has no available market value. What is the difference between the values used by Ken and Tammy?
A. Ken will be using undiscounted future cash flows, and Tammy will be using discounted future cash flows.
B. Ken will be using average historical cash flows, and Tammy will be using the present value of future cash flows.
C. Ken will be using discounted future cash flows, and Tammy will be using undiscounted future cash flows.
D. Ken will be using the present value of future cash flows, and Tammy will be using average historical cash flows.
A. Ken will be using undiscounted future cash flows, and Tammy will be using discounted future cash flows.
The recoverability test uses undiscounted cash flows to determine if an asset is impaired which is the test Ken would use. Tammy, on the other hand, has an asset for which the market value is not available, she will be using discounted future cash flows
CH. 11
Ceres Corporation acquired a mineral mine for $6,000,000 of which $600,000 was ascribed to land value after the mineral has been removed. Geological surveys have indicated that 9 million units of the mineral could be extracted. During 2020, 1.8 million units were extracted and 1.2 million units were sold. What is the total amount of depletion recorded in Inventory during 2020?
A. $1,080,000
B. $4,000,000
C. $6,000,000
D. $72,000
A. $1,080,000
Depletion cost per unit = (total cost - salvage value)/ total estimated units.
($6,000,000 -$600,000)/9,000,000 = $0.60.
The depletion cost per unit times the units extracted is the amount of depletion for the year. $0.60 x 1,800,000 = $1,080,000
CH. 11
Why do companies compute the depletion cost per unit?
A. to determine the salvage value
B. to estimate the fair value of the property
C. to calculate the total depletion expense for a period
D. to determine the total number of units extracted in a period
C. to calculate the total depletion expense for a period
The depletion cost per unit is used to allocate the costs of the natural resource to each unit extracted. The amount extracted is multiplied by the per unit depletion cost to calculate the total depletion expense for the period. The salvage value is deducted from the total cost and then divided by the total estimated units available to calculate the depletion cost per unit. The total units extracted for a period are not determined by the depletion cost per unit but are used to determine the total depletion expense for the period.
CH. 11
Last year, Beecher Manufacturing had a 12.5% ROA, net income of $800,000, and net sales of $1,600,000. Given these values, what was the firm’s asset turnover ratio?
A. 0.20
B. 0.25
C. 0.45
D. 0.50
B. 0.25
Return on assets = 12.5%
Net income = $800,000
Net sales = $1,600,000
Return on assets = Net income/Average total assets
12.5% = 800,000/Average total assets
Average total assets = $6,400,000
CH. 11
For the fiscal year that just ended, Oliver Industries had a 15% ROA, net income of $2.1 million, and an asset turnover ratio of 0.4. Given these values, what were the firm’s net sales?
A. $3.5 million
B. $9.8 million
C. $5.6 million
D. $14 million
C. $5.6 million
ROA is = to net income / its average total assets. $2,100,000/15% = $14 million.
Net Sales = $14 million x 0.4 =$5.6 million.
CH. 11
Oriole Company purchased a computer for $9,600 on January 1, 2019. Straight-line depreciation is used, based on a 5-year life and a $1,200 salvage value. On January 1, 2021, the estimates are revised. Oriole now feels the computer will be used until December 31, 2022, when is can be sold for $600.
Compute the 2021 depreciation
Depreciation expense, 2021 $____________
$2,820
Annual depreciation expense:
(9,600 - 1,200)/5 = $1,680
Book Value 1/1/21:
9,600 - (2 x 1,680) = $6,240
Depreciation Expense 2021
(6,240 - 600)/2 = $2,820
CH. 11
Bonita Furnace Corp. purchased machinery for $324,000 on May 1, 2020. It is estimated that it will have a useful life of 10 years, scrap value of $48,000 production of 100,000 units, and working hours of 12,500. During 2021 Bonita uses the machinery for 2,000 hours, and the machinery produces 25,000 units.
From the information given, compute the depreciation charge for 2021 under each of the following methods:
A) Straight-line $__________
B) Units-of-output $__________
C) Working Hours $__________
D) Sum-of-the-years’-digits $__________
E) Declining-balance -use 20% for annual rate $________
A) $27,600
B) $69,000
C) $44,160
D) $46,836
E) $56,160
A) $324,000 - $48,00 = 276,000 Depreciable Base
276,000 / 10 years = $27,600
B) $276,000 / 100,000 units = $2.76
25,000 units x $2.76 = $69,000
C) $276,000 / 12,500 hrs = $22.08 per hr
2,000 hours x $22.08 = $44,160
D) 10+9+8+7+6+5+4+3+2+1 = 55
10 / 55 x $276,000 x 1/3 = $16,727
9 / 55 x $276,000 x 2/3 = $30,109
Total for 2021 $46,836
E) $324,000 x 20% x 1/3 = $21,600
[$324,000 - ($324,000 x 20%)] x 20% x2/3 = $34,560
$21,600 + $34,560 = $56,160
