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Flashcards in FAR 13 Deck (18):
1

If ending inventory for 20x5 is understated because certain items were missed in the count, then:

A.
Net income for 20x5 will be overstated.

B.
CGS for 20x5 will be understated.

C.
Net income for 20x5 will be understated, but net income for 20x6 will be unaffected.

D.
Net income for 20x5 will be understated and CGS for 20x6 will be understated.

D.
Net income for 20x5 will be understated and CGS for 20x6 will be understated.

BI
+ Purchases
------------------
Goods Available
-COGS
---------------------
EI



Correct!

Use the equation BI + PUR = EI CGS. When EI is understated, CGS must be overstated to maintain the equation. Net income, therefore, is understated (20x5). Then next year, BI is also understated because BI for 20x6 is EI for 20x5. Using the equation, if BI is understated, CGS is also understated to maintain the equation.

2

When an inventory overstatement in year one counterbalances in year two, this means:

A.
There are no reporting errors, even if the overstatement is never discovered.

B.
A prior period adjustment is recorded if the error is discovered in year three.

C.
The year one Balance Sheet does not need to be restated if the error is discovered in year three.

D.
A prior period adjustment is recorded if the error is discovered in year two

D.
A prior period adjustment is recorded if the error is discovered in year two

Counterbalancing simply means that the effect of the inventory error in the second year is opposite that of the first year. Discovery in year two provides an opportunity for the firm to correct year two beginning retained earnings, which is overstated by the error in year one. The overstatement of inventory in year one caused cost of goods sold to be understated and income overstated in year one. The prior period adjustment, dated as of the beginning of year two, is a debit to retained earnings for the after-tax effect of the income overstatement in year one. Inventory is credited for the amount of the overstatement. This allows year two to begin with corrected balances.

3

Cost of Goods Sold Formula

BI+Purcases= Goods Available - EI = COGS

4

Bren Co.'s beginning inventory at January 1, 2005 was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren's cost of goods sold for 2005 was:
A. Understated by $26,000.
B. Overstated by $26,000.
C. Understated by $78,000.
D. Overstated by $78,000.

Understated by $78,000.

The effect of the beginning-inventory error is to understate cost of goods sold $26,000. The effect of the ending-inventory error is to understate cost of goods sold $52,000. The total effect then is to understate cost of goods sold $78,000.
These effects are analyzed by using the equation:
Beginning inventory + Purchases-Ending inventory = Cost of goods sold

For example, if beginning inventory is understated, then the right hand side of the equation (cost of goods sold) must also be understated by the same amount.

5

A retailer failed to record a purchase of inventory on credit near the end of the current year. The goods did arrive and were included in the inventory count. The purchase will be recorded next year, when the goods are paid for. As a result,

A.
Cost of goods sold is understated for the current year.

B.
Net income for next year is overstated.

C.
Income tax expense for the next year is overstated.

D.
By the end of next year, all of the effects of the error will be automatically eliminated.

A.
Cost of goods sold is understated for the current year.

The error affects purchases but not ending inventory. Therefore, cost of goods sold for the current period is understated because goods available is understated. When ending inventory (which is not in error) is subtracted from goods available, cost of goods sold is understated by the amount of the understatement in purchases.

6

A company manufactures and distributes replacement parts for various industries. As of December 31, year 1, the following amounts pertain to the company's inventory:
Item Cost Net
replacement
cost Sale price Cost to
sell or
dispose Normal
profit
margin
Blades $41,000 $ 38,000 $ 50,000 $ 2,000 $15,000
Towers 52,000 40,000 54,000 4,000 14,000
Generators 20,000 24,000 30,000 2,000 6,000
Gearboxes 80,000 105,000 120,000 12,000 8,000
What is the total carrying value of the company's inventory as of December 31, year 1, under IFRS?

A. $178,000
B. $191,000
C. $193,000
D. $207,000

Inventory under IFRS is reported at the lower of cost or net realizable value (NRV) where NRV is the selling price less the cost to complete or dispose. The table below calculates the NRV for each inventory item.
NRV Cost Lower of Cost
or NRV
Blades 50,000 - 2,000 = 48,000 41,000 41,000
Towers 54,000 - 4,000 = 50,000 52,000 50,000
Generators 30,000 - 2,000 = 28,000 20,000 20,000
Gearboxes 120,000 - 12,000 = 108,000 80,000 80,000
Total 191,000

7

A manufacturer has the following per-unit costs and values for its sole product:
Cost 10.00
Current replacement cost 5.50
Net realizable value 6.00
Net realizable value less normal profit margin 5.20
In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer's statement of financial position?

A. 5.20
B. 5.50
C. 6.00
D. 10.00

C. 6.00

IFRS requires that inventory be reported at the lower of cost or net realizable value. Net realizable value is defined by IAS 2 as "the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale." In this question, NRV is lower than cost, therefore the inventory should be reported at NRV of 6.00.

8

Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 20X5 and 20X4.
During 20X5, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.
What amount should Ichor report as depreciation expense for 20X5?

A. $19,000
B. $25,000
C. $31,000
D. $34,000

C. $31,000

Net equipment at end of 20X4: $344,000-$128,000 = $216,000
Equipment purchase 50,000
Book value of equipment sold (9,000)
Depreciation in 20X5 ?
Equals net equipment at end of 20X5: $379,000-$153,000 = $226,000
Solving for depreciation yields $31,000 depreciation for 20X5.

9

In which of the following situations is the units of production method of depreciation most appropriate?
A. An asset's service potential declines with use.
B. An asset's service potential declines with the passage of time.
C. An asset is subject to rapid obsolescence.
D. An asset incurs increasing repairs and maintenance with use.

A. An asset's service potential declines with use.

This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.
Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

10

On January 1, 20X5, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years.
Brecon's 20X5 multi-step Income Statement should include:

A. One-fifth of the cabinet costs in cost of goods sold.
B. One-fifth of the cabinet costs in selling, general, and administrative expenses.
C. All of the cabinet costs in cost of goods sold.
D. All of the cabinet costs in selling, general, and administrative expenses.

B. One-fifth of the cabinet costs in selling, general, and administrative expenses.

In practice that shit wouldn't happen. But, in textbooks, sure.

11

In 20X2, Spirit, Inc. determined that the 12-year estimated useful life of a machine purchased for $48,000 in January 1997 should be extended by three years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, 20X2?
A. $2,800
B. $3,200
C. $43,200
D. $4,800

A. $2,800

This is a change in estimate and is handled currently and prospectively by allocating the remaining book value at the beginning of 20X2 over the revised estimate of remaining years at that point. Through the beginning of 20X2, the asset has been used five years. Therefore, seven years remain in the original book value. The book value at the beginning of 20X2 is 7/12 x $48,000 or $28,000. The remaining useful life of seven years is extended to 10. Therefore, depreciation expense for 20X2 is $28,000 x 1/10 or $2,800.

12

Zahn Corp.'s comprehensive Balance Sheet at December 31, 20X5 and 20X4 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 20X5.
Depreciation charged to operations in 20X5 was:

A. $190,000
B. $200,000
C. $210,000
D. $220,000

C. 210,000

200 K is allocated for accumulated depreciation, but because the asset was sold with an accumulated depreciation balance of 10,000. the asset's value had to increased to cost and thus we had to remove the accumulated deprecation balance of the asset.

* ASK MA*

13

What factor must be present to use the units of production (activity) method of depreciation?
A. Total units to be produced can be estimated.
B. Production is constant over the life of the asset.
C. Repair costs increase with use.
D. Obsolescence is expected.

Without an estimate for total units to be produced, depreciation could not be computed. Annual depreciation under this method is:
[(Cost-salvage value)/(Total estimated production)](units produced year).

The quantity in square brackets is the rate of depreciation per unit.

14

Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the
Straight-line method Production or use method
Yes No
Yes Yes
No No
No Yes

Straight-line method Production or use method
Yes Yes

When salvage value is excluded from the computation of depreciation, excessive depreciation is recognized each year under BOTH methods. Therefore, income is understated for both methods.

Annual depreciation under straight-line is:
(1/n)(cost-salvage)
where n is the number of years in the useful life.
Annual depreciation under the production method is:
(current year production/tot.est.production)(cost-salvage)


In both cases, if salvage value is excluded from the computation, depreciation is overstated because cost, rather than depreciable cost, is used as the basis for depreciation.

15

On January 2, year 1, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000.
The cash-equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation.

In its year 1 Income Statement, what amount should Lem report as depreciation for this machinery?

A. $10,500
B. $11,000
C. $12,500
D. $13,000

A. $10,500

The capitalized cost of the equipment is $110,000, not the total of the cash payments to be made. The latter amount includes interest.
Thus, annual depreciation is $10,500:
($110,000-$5,000)/10.

12,500 means you are also reducing interest. (incorrect)

16

A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?

A.
$105,000

B.
$110,000

C.
$120,000

D.
$125,000


C.
$120,000

The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

17

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method.

A.
$30 million

B.
$12.5 million

C.
$10 million

D.
$22.5 million

40 Mill in Mineral Rights
100 Mill in exploring - 1/4 = 25
60 Mill in development
10 Mill in wages

The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 $10,000,000 (wages) = $22,500,000.

D. 22.5 million

Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).

18

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. What amount of depletion is recognized during the current year under the full costing method?

A.
$20 million

B.
$12.5 million

C.
$10 million

D.
$21 million

A.
$20 million

The depletion rate = ($40 + $100 + $60)/20 = $10/ton. Depletion = 2,000,000($10/ton) = $20,000,000. Depletion for a period is the cost of the deposit allocated to the inventory removed for the period. In this case, the entire amount is included in cost of goods sold because there is no ending inventory. However, if there had been ore left at the end of the period, the $10/ton rate would have been applied to the units remaining. That would not change the answer to the question, however.