Test Flashcards by Jennifer Roede

CH10 #4.
Indicate where the following items would be shown on a balance sheet.
a. A lien that was attached to the land when purchased.
b. Landscaping costs.
c. Attorney’s fees and recording fees related to purchasing land.
d. Variable overhead related to construction of machinery.
e. A parking lot servicing employees in the building.
f. Cost of temporary building for workers during construction of
building.
g. Interest expense on bonds payable incurred during construction of
a building.
h.Assessments for sidewalks that are maintained by the city.
i. The cost of demolishing an old building that was on the land when
purchased.

a. Land
b. Land
c. Land
d. Machinery
e. Land Improvements
f. Building
g. Building
h. Land
i. Land

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CH 9
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin.

Under the lower of cost or market method, the inventory item should be valued at:

A. Original Cost
B. Net realizable value less the normal profit margin
C. Replacement Cost
D. Net realizable value

A. Original Cost

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CH. 9
How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory?

A. By excluding net markdowns from the cost-to-retail ratio.
B. The procedure is applied on a cost basis at the unit level
C. By excluding beginning inventory from the cost-to-retail ratio.
D. By excluding net markups form the cost-to-retail ratio.

A. By excluding net markdowns from the cost-to-retail ratio.

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CH. 9
The gross profit method of estimating ending inventory is not acceptable for:

A. Insurance claims for destroyed inventory
B. Interim financial statements
C. Annual financial statements
D. None of these answer choices are correct

C. Annual financial statements

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CH. 9
The inventory turnover ratio is computed by dividing:

A. Cost of goods sold by ending inventory
B. Sales by average inventory
C. Cost of goods sold by average inventory
D. Sales by ending inventory

C. Cost of goods sold by average inventory

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CH. 9
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. Cost will be less than their replacement cost
B. Replacement cost will be more than their net realizable value
C. Selling price will be less than their replacement cost
D. Future utility will be less than their cost

D. Future utility will be less than their cost

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CH. 9
In applying Lower-of-Cost -or-Market, the designated market value is

A. Net realizable value less a normal profit margin
B. The lower of net realizable value or replacement cost
C. The middle value of replacement cost, net realizable value and net realizable value less a normal profit margin
D. The higher of replacement cost of net realizable value less a normal profit margin.

C. The middle value of replacement cost, net realizable value and net realizable value less a normal profit margin

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CH. 9
In the lower cost or market rule, net realizable value is referred to as the:

A. Wall
B. Floor
C. Ceiling
D. Current Market

C. Ceiling

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CH. 9
When net realizable value is lower than cost, and the loss method applying the lower-of-cost-and-net-realizable approach of recording the write-down is used, what account is credited?

A. Inventory
B. Allowance to reduce Inventory to NRV
C. Cost of goods sold
D. A loss account

B. Allowance to reduce Inventory to NRV

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CH. 9
The lower limit (floor) for inventory valuation is defined as the selling price less:

A. The net realizable value
B. Estimated costs of completion and disposal (net realizable value) less a normal profit margin
C. A normal profit margin
D. Estimated costs of completion and disposal

B. Estimated costs of completion and disposal (net realizable value) less a normal profit margin

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Ch. 9
Under the conventional retail inventory method, the cost-to-retail ratio includes the retail price of goods available and:

A. Markups Only
B. Net markdowns only
C. Net markups only
D. Markups and markdowns

C. Net markups only

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CH. 9
Which of the following will happen when inventory is recorded at net realizable value under the cost-of-goods-sold method?

A. A loss is recorded directly in the inventory account by crediting
inventory and debiting loss on inventory decline.
B. The net realizable value figure for ending inventory is substituted for cost and the loss is included in cost of goods sold.
C. 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.
D. Only the portion of the loss attributable to inventory sold during the
period is recorded in the financial statements.

B. The net realizable value figure for ending inventory is substituted for cost and the loss is included in cost of goods sold.

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CH. 9
When using the cost-of-goods-sold method, any loss resulting from a decline in inventory is ________ in the Cost of Goods Sold account.
A. offset
B. hidden
C. highlighted
D. mitigated

B. hidden

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CH. 9
What is a reason that a company would depart from the historical cost principle?
A. The future utility of the inventory has increased.
B. A change in business strategy triggers new inventory valuation procedures.
C. Inventory has declined in value below its original cost.
D. Less bookkeeping is required when using alternate methods.

C. Inventory has declined in value below its original cost.

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CH. 9
What will happen when the cost-of-goods-sold method is used to record inventory at NRV?

A. There is a direct reduction in product selling price results in a loss
being recorded on the income statement prior to the sale.
B. The ending inventory market value figure is substituted for cost and
the loss is included in cost of goods sold.
C. A loss is recorded directly in the inventory account by crediting
inventory and debiting loss on inventory decline.
D. The only portion of the loss attributable to inventory sold during the
period is recorded in the financial statements.

B. The ending inventory market value figure is substituted for cost and the loss is included in cost of goods sold.

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CH. 9
A company should _________ the historical cost principle when
inventory declines in value such that it is below its original cost.

Abandon

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CH 9
Dell Corp. has unfinished inventory with a sales value of $10,000, estimated cost of completion and disposal of $2,000, and a normal profit margin of 20 percent of sales. Determines Dell Corp. net realizable value.

A. $6,000
B. $8,000
C. $2,500
D. $10,000

B. $8,000

10,000 - 2,000 = 8,000

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CH 9
Wigging Corp. has unfinished inventory with a cost of $1050, a sales value of $1,200, estimated cost of completion of $150, and estimated selling costs of $250. What is Wigging Corp.’s net realizable value?

A. $250
B. $800
C. $1200
D. $1050

B. $800

Unfinished Inventory - ECOC - ESC = NRV
1,200 - 150 - 250 = 800

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CH 9.
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?
A. the market value
B. the original cost
C. the net realizable value
D. the net realizable value less a normal profit margin

D. the net realizable value less a normal profit margin

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CH. 9
What amount should be used for inventory valuation for a unit of inventory that has declined in value below original cost when the market value exceeds net realizable value?
A. net realizable value less a normal profit margin
B. original cost
C. net realizable value
D. market value

C. net realizable value

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CH. 9
Why should goods be valued at cost or the designated market value, whichever is lower?
A. This allows any loss of utility to be amortized against the revenues of
several periods.
B. This allows any loss of utility to be charged against the revenues of
whichever period the company chooses.
C. This allows any loss of utility to be charged against the revenues in
the period when the loss occurred.
D. This allows any loss of utility to be charged against the revenues in
the period at the point of sale.

C. This allows any loss of utility to be charged against the revenues in
the period when the loss occurred.

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CH 9.
Why are upper and lower limits needed to value inventory in addition to replacement cost, instead of just using the replacement cost?

A. This is the standard of practice as decreed by IFRS.
B. Sometimes a direct replacement cost is not easy to determine.
C. It prevents companies from manipulating net income by
manipulating replacement cost.
D. It prevents companies from over- or understating inventory.

D. It prevents companies from over- or understating inventory.

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CH. 9
At Hawkeye Security the basic security system for home use has a cost of $160, a replacement cost of $150, a net realizable value of $145, and a normal profit margin of $20. Hawkeye Security would record _________ as the inventory value for this product using the lower-of-cost-or-market rule.
A. $145
B. $125
C. $160
D. $150

A. $145

Calculate floor by subtracting the profit margin in dollars from the NRV. $145 - $20 = $125.
Find the market value by taking the middle value of the replacement cost ($150), floor ($125) and ceiling ($145).

Choose the lower of the market value ($145) or the historical cost ($160).

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Ch. 9
At Hawkeye Security the basic professional grade security system has a cost of $812, a replacement cost of $775, a net realizable value of $800, and a normal profit margin of $50. Hawkeye Security would record ________ as the inventory value for this product using the lower-of-cost-or-market rule.

A. $775
B. $762
C. $800
D. $812

A. $775

Calculate floor by subtracting the profit margin in dollars from the NRV.

$800 - $50 = $750. Find the market value by taking the middle value of the replacement cost ($775), floor ($800) and ceiling ($750).

Choose the lower of the market value ($775) or the historical cost ($812).

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CH. 9 When would the replacement cost of an inventory item be used as the designated market value under the lower-of-cost-or-market method? A. When it is below the net realizable value less the normal profit margin. B. When it is above the net realizable value. C. At all times regardless of net realizable value. D. When it is below the net realizable value and above the net realizable value less the normal profit margin.

D. When it is below the net realizable value and above the net realizable value less the normal profit margin.

Ch. 9 What is the expected result of rising merchandise costs if gross profit percentage remains the same? A. The selling price will be indeterminate. B. The selling price will decrease. C. The selling price will increase. D. The selling price will not change.

C. The selling price will increase.

CH. 9 When using the gross profit method, what is the expected result of applying a blanket gross profit rate to merchandise with varying profit rates? A. a resulting estimate that will not change in terms of accuracy B. an actual inventory value that is not an estimate C. a less accurate estimate D. a more accurate estimate

C. a less accurate estimate

CH. 9 Which of the following are basic assumptions of the gross profit method? 1. The goods to be accounted for equals beginning inventory plus the purchases. 2. Goods not sold must be on hand. 3. 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. 4. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. A. 1, 2, and 4 but not 3 B. 1, 2, and 3 but not 4 C. 1, 2, 3, and 4 D. 1 and 3 but not 2 and 4

B. 1, 2, and 3 but not 4

CH. 9 What information is required to use the gross profit method? A. historical inventory counts for the same period B. market-wide trends in inventory levels C. inventory at cost at the beginning of the period D. accurate inventory counts at the current date

C. inventory at cost at the beginning of the period

CH. 9 Which of the following must be known in order to use the gross profit method? A. beginning inventory at cost B. current inventory at cost C. average inventory at cost D. ending inventory at cost

A. beginning inventory at cost

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 Why might a retailer use markdowns? A. To provide loyalty discounts for employees. B. When there has been an increase in customer demand for an item. C. To adjust a markup that has resulted in prices that are too high for customers. D. When there has been a decrease in general price level

D. When there has been a decrease in general price level

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 Which of the following is a reason the retail inventory method is widely used? A. As a method to identify responsible parties when there’s an inventory shortage. B. So that the company need never make a physical count of the inventory. C. To permit the computation of net income without a physical count of inventory. D. As a method to defer income tax liability.

C. To permit the computation of net income without a physical count of inventory.

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 What is the expected result of a markup cancellation? A. The merchandise is priced below invoice. B. The merchandise is being sold at cost. C. The retail price contains an additional increase over the original markup. D. The retail price is being reduced from an increase over the original retail price.

D. The retail price is being reduced from an increase over the original retail price.

CH. 9 Which of the following is a major advantage of the retail inventory method? A. It gives a less accurate statement of inventory costs than other methods. B. It provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies. C. It hides costs from competitors and customers. D. It provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period.

It provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.

CH 9. The calculation of the cost-to-retail ratio under the conventional retail inventory method includes A. markups and markup cancellations. B. only markups. C. only markdowns. D. markdowns and markdown cancellations.

A. markups and markup cancellations.

CH. 9 Which of the following would be the cause of a markdown followed by a markdown cancellation? A. increased customer demand B. increased marked competition C. a one-day sale D. damaged goods

C. a one-day sale

CH. 9 What is measured by inventory turnover? A. the value of the inventory B. the average normal inventory loss C. the cost of the inventory D. the liquidity of the inventory

D. the liquidity of the inventory

CH. 9 What kind of business will be more successful than others in an industry? A. A company that can maintain a higher turnover with a lower inventory level. B. A company that can maintain a higher turnover with a higher inventory level. C. A company that can maintain a lower turnover with a lower inventory level. D. A company that can maintain a lower turnover with a higher inventory level.

A. A company that can maintain a higher turnover with a lower inventory level.

CH. 9 Why do managers need to evaluate inventory levels? A. to reduce the associated costs B. to maintain levels that are neither too high nor too low C. to prevent stockouts D. to predict income from sales

B. to maintain levels that are neither too high nor too low

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 Which of the following is reported in the financial statements or notes to better illustrate the liquidity of the inventory? A. the origin of the inventory B. the industry turnover ratio C. the composition of the inventory D. the historical turnover ratio

C. the composition of the inventory

CH. 9 Why must companies report inventory composition? A. to better illustrate the liquidity of the inventory B. to prevent changes to net income when costing methods are changed C. so that changes in costing methods between types of inventory may be clearly seen D. to better illustrate the value of the inventory as collateral

A. to better illustrate the liquidity of the inventory

CH. 9 What is the goal of inventory management? A. Inventory levels are targeted to a level that maximizes customer selection while minimizing carrying costs. B. Inventory levels are increased to provide the greatest customer selection. C. Inventory levels are allowed to self-regulate to reflect the most current market conditions. D. Inventory levels are lowered to reduce carrying costs.

A. Inventory levels are targeted to a level that maximizes customer selection while minimizing carrying costs.

CH. 9 Why is the turnover ratio computed with the average inventory levels? A. to represent the entire period B. because it is always less than the cost of goods sold C. to provide the most current inventory estimate without doing a physical inventory D. because ending inventory is not always known

A. to represent the entire period

CH. 9 The following information is available for the silver Company for the 3 months ended March 31 Merchandise inventory Jan. 1 $900,000 Purchased 3,400,000 Freight-in 200,000 Sales 4,800,000 The gross margin recorded was 25% of sales. What should be the merchandise inventory at March 31? A. $1,200,000 B. $900,000 C. $700,000 D. $1,125,000

B. $900,000 900,000 + 3,400,000 + 200,000 - (75% of Sales) 3,600,000 = 900,000

CH. 9 A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's accounting records showed the following: Inventory, Jan. 1 $35,000 Purchased, Jan1 through May 1 200,000 Sales, Jan. 1 through May 1 250,000 Inventory not damaged by flood 30,000 Gross profit percentages on sales 40% What amount of inventory was lost in the flood? A. $85,000 B. $55,000 C. $150,000 D. $120,000

B. $55,000 35,000 + 200,000 - (60% Sales) 150,000 - 30,000 = 55,000

CH 9. Diego Corporation values its inventory at the lower of cost or net realizable value as required by IFRS. Diego has the following information regarding its inventory. Historical Cost $100,000 Estimated selling price 98,000 Estimated costs to complete and sell 3,000 Replacement cost 90,000 What is the amount for inventory that Diego should report on the balance sheet under the lower of cost or net realizable value method? A. $100,000 B. $98,000 C. $95,000 D. $97,000

C. $95,000 NRV = Est. Selling Price - Est. Cost to Complete and Sale 98,000 - 3,000 = 95,000 (NRV) LCNRV = Lower of Cost or NRV Cost = 100,000 NRV = 95,000 LCNRV = 95,000

CH. 9 Loft Co. reviewed its LIFO Inventory values for proper pricing at year-end. The following summarizes two inventory items examined for the lower of cost or market: Inventory #1 Inventory #2 Original Cost 210,000 400,000 Replacement Cost 150,000 370,000 Net realizable value 240,000 410,000 Net realizable value less 208,000 405,000 profit margin What amount should Loft include in inventory at year-end, if it uses the total of the inventory to apply the lower of cost or market? A. $610,000 B. $650,000 C. $520,000 D. $613,000

A. $610,000 Original = 610,000 (210,000 + 400,000) Rep, Cost = 520,000 (150,000 + 370,000) NRV = 650,000 (240,000 + 410,000) CEILING LCNRV = 613,000 (208,000 + 405,000) FLOOR Market Value is the middle of Replacement cost, NRV of LCNRV =613,000 So lower of Cost or Market would be 610,000

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 Lin Co. sell its merchandise at a gross profit of 30%. The following figures are among those pertaining to Lin's operations for the 6 months ended June 30. Sales $200,000 Beginning inventory 50,000 Purchases 130,000 One June 30, all of Lin's inventory was destroyed by fire. The estimated cost of this destroyed inventory was: A. $70,000 B. $120,000 C. $40,000 D. $20,000

C. $40,000 50,000 + 130,000 - (70% of sales) 140,000 = 40,000

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 Presented below is information related to Marigold Inc.'s inventory. per unit Skis Boots Parkas Historical cost 228.00 127.20 63.60 Selling price 254.40 174.00 88.50 Cost to sell 22.80 9.60 3.00 Cost to complete 38.40 34.80 25.50 Determine the following: the net realizable value for each item, and the carrying value of each item under LCNRV. Item Cost NRV LCNRV Skis Boots Parkas

Item Cost NRV LCNRV Skis 228 193.20 193.20 Boots 127.20 129.60 127.20 Parkas 63.60 60.00 60.00

CH. 9 Presented below is information related to Concord Inc.'s inventory assuming Concord uses lower-of-LIFO cost-or-market. per unit Skis Boots Parkas Historical cost 209.00 116.60 58.30 Selling price 233.20 159.50 81.13 Cost to distribute 20.90 8.80 2.75 Current replace cost 223.30 115.50 56.10 Normal Profit Margin 35.20 31.90 23.38 Determine the following: (a) The two limits to market value (i.e. the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis. Ceiling: 212.30 Floor: 177.10 (b) The cost amount that should be used in the lower-of-cost-or-market comparison of boots.

(a) Ceiling: 212.30 Floor: 177.10 (b) 116.60 Market is: 118.80 middle of replacement, ceiling & floor 115.50 150.70 118.80

CH. 9 Waterway Corporation's April 30 inventory was destroyed by fire. January 1 inventory was $160,900, and purchases for January through April totaled $462,200. Sales revenue for the same period was $752,700. Waterway's normal gross profit percentage is 25% on sales. Using the gross profit method, estimate Waterway's April 30 inventory that was destroyed by fire. Estimated ending inventory destroyed in fire: _______________

58,575 160,900 + 462,200 - (75% of sales) 564,525 = 58,575

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 RL Enterprises purchases a parcel of land. The previous owners of the land owe both back taxes and a lien on the property. When determining the cost of the land, what must RL include in its calculation? A. The price paid for the land and the cost of the back taxes B. The price paid for the land, the cost of the back taxes, and the cost of the lien C. The price paid for the land D. The cost of the back taxes and the cost of the lien

B. The price paid for the land, the cost of the back taxes, and the cost of the lien

CH. 9 Martinez Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation's books disclosed the following. Beginning Inventory 230,000 Purchases for the year 875,000 Purchase returns 14,000 Sales 1,040,000 Sales Returns 75,000 Rate of gross margin on net sales 20% Merchandise with a selling price of $46,000 remained undamaged after the fire. Damaged merchandised with an original selling price of $22,000 had a net realizable value of $2,500. Compute the amount of the loss as a result of the fire, assuming that the company had no insurance coverage. Amount of loss: __________________

Answer: $279,700 Beginning Inventory 230,000 Purchases 875,000 1,105,000 Purchase returns (14,000) Goods Available (at cost) 1,091,000 Sales 1,040,000 Sales returns (75,000) Net sales 965,000 Less: Gross profit (20% x 965,000) (193,000) 772,000 Estimated ending inventory (unadjusted for damage) 319.000 Less: Goods on Hand - undamaged at cost. $46,000 x (80%) (36,800) Less: Goods on Hand - damaged (at NRV) (2,500) Fire loss on inventory $ 279,700

CH. 10 Glendale Industries has a 10-year-old milling machine that has fully depreciated. In spite of this depreciation, the machine is still functional and Glendale still uses it on a daily basis. How should Glendale report the milling machine in the balance sheet? A. Glendale should report its historical cost less depreciation as the machine’s value. B. Glendale should report the value of products it produces annually as the machine’s value. C. Glendale should report its salvage or scrap value as the machine’s value. D. Glendale should exclude the machine from its financial statements.

A. Glendale should report its historical cost less depreciation as the machine’s value.

CH 9 The records of Monty's report the following data for the month of April. Purchases (at cost) 88,000 Purchases (at sales price) 187,000 Purchase returns (at cost) 4,400 Purchase returns (at sales price) 6.500 Beginning inventory (at cost) 89,500 Beginning inventory (at sales price) 97,000 Sales Revenue 183,000 Sales Returns 4,400 Additional markups 18,200 Markup cancellations 3,200 Markdowns 19,100 Markdown cancellations 6,200 freight on purchases 2,400 Compute the ending inventory by the conventional retail inventory method. Ending inventory using conventional retail inventory method: _____________________

Answer: 60,600 Cost Retail Beginning Inventory 89,500 97,000 Purchases 88,000 187,000 Purchase Returns (4,400) (6,500) Freight on Purchases 2,400 Total 175,500 277,500 Add: Markups 18,200 Less: Markup Cancellations 3,200 Net Markups 15,000 175,000 292,500 Deduct: Markdowns 19,100 Markdown Cancellations (6,200) 12,900 279,600 Deduct Sales (Net) (183,000-4,400) 178,600 Ending Inventory 101,000 175,500 / 292,500 = 60% 60% X 101,000 = 60,600

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. 10 In which of the following cases should the firm capitalize interest costs related to its land purchase? A. The firm plans to build a new corporate headquarters on the land. B. The firm does not plan to build on the land but does intend to sell it in smaller pieces as part of a new housing development. C. The firm plans to build a new warehouse facility on the land. D. The firm does not plan on developing the land in any way before selling it to another party.

C. The firm plans to build a new warehouse facility on the land.

CH 10 A firm recently had its manufacturing machinery rearranged and reinstalled to better facilitate future production. Ultimately, the firm opts to handle the rearrangement and reinstallation cost as a replacement, which tells us that the firm was A. Able to estimate both the original installation cost and the accumulated depreciation to date. B. Able to estimate the accumulated depreciation to date but not the original installation cost. C. Unable to estimate either the original installation cost or the accumulated depreciation to date. D. Able to estimate the original installation cost but not the accumulated depreciation to date.

A. Able to estimate both the original installation cost and the accumulated depreciation to date.

CH. 10 In which of the following circumstances would a parcel of land be least likely to experience depreciation? A. Land management decisions by a farmer that result in inadequate crop rotation and fertilization B. Subdivision of a large tract of land by a developer who plans to build a housing addition C. Failure by members of a waterfront community to install structures to prevent soil erosion D. Natural disasters such as fires or droughts that damage or destroy the land or its natural resources

B. Subdivision of a large tract of land by a developer who plans to build a housing addition

CH. 10 JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Title fees cost JT $4,320. Architect's fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT’s cost of land? A. $595,540 B. $549,800 C. $578,540 D. $593,940

C. $578,540 COL + TEAR DOWN - SALAVAGE + TITLE + ASSEMENT CITY PAVEMENT 520,000 + 65,000 - 15,400 + 4,320 + 4,620 = 578,540

CH. 10 JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Titles fees and insurance cost JT $4,320. Architect's fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT’s cost of the building? A. $1,528,200 B. $1,548,200 C. $1,521,600 D. $1,549,800

D. $1,549,800 CONTRACTOR + ARCHITECT + LIABILTY INSUR. 1,520,000 + 28,200 + 1,600 = 1,549,800

CH. 10 Which of the following provides the justification for the capitalization of interest costs? A. The revenue recognition principle B. The historical cost principle C. The economic entity assumption D. The conservatism concept

B. The historical cost principle

CH. 10 If a firm purchases land on which it intends to build a new plant, any interest costs related to that land A. Should be capitalized during the period of construction as part of the cost of the plant. B. Should be capitalized prior to the period of construction as part of the cost of the land. C. Should be capitalized prior to the period of construction as part of the cost of the plant. D. Should be capitalized during the period of construction as part of the cost of the land.

A. Should be capitalized during the period of construction as part of the cost of the plant.

CH. 10 On January 1, 2020, Wells Tech signed a $950,000 two-year construction contract. Wells secured $950,000 financing at 7%. In 2020, Wells paid out $650,000; average accumulated expenditures were $375,000. Excess borrowed funds were invested, yielding $120,000 income. What should Wells report as capitalized interest at December 31, 2020? A. $75,000 B. $26,250 C. $120,000 D. $66,500

B. $26,250 Capitalized is lesser of avoidable or actual int. avoid = Acc. Expenditures x interest rate actual = Amount Borr. X interest rate 375,000 * 7% = 26,250 950,000 * 7% = 66,500

CH. 10 Which of the following should a company recognize immediately? A. Any gain created when it constructs a piece of equipment at a cost savings. B. Any gain created when it makes a bargain purchase. C. Any loss incurred when it ignorantly pays too much for an asset originally. D. Any loss incurred when it receives any asset lower than its book value on the other company’s books.

C. Any loss incurred when it ignorantly pays too much for an asset originally.

CH. 10 At what value should assets be accounted for when they are purchased in exchange for a zero-interest-bearing note? A, At book value of the asset received B. At present value of the note C. At face value of the note D. At fair value of the asset received

B. At present value of the note

CH. 10 On August 1, 2020, Liggett Enterprises purchased a new truck on a deferred payment basis. A $12,000 down payment was made and 4 monthly installments of $10,000 each are to be made starting September 1, 2020. The cash equivalent price of the truck was $48,000. Liggett incurred and paid delivery costs of $2,000. What is the amount to be capitalized as the cost of the truck? A. $54,000. B. $52,000. C. $50,000. D. $48,000.

C. $50,000. Purchase amount + Delivery 48,000 + 2,000 = 50,000

When a loss is incurred as the result of a nonmonetary exchange of assets, what should a company do to prevent valuing the assets at more than their cash equivalent price? A. It should recognize part of the loss immediately and defer part of the loss. B. It should not recognize the loss. C. It should defer the loss. D. It should recognize the loss immediately.

D. It should recognize the loss immediately.

Charles is the CFO of a toy factory. The factory’s management has decided to rearrange and reinstall all of the facility’s manufacturing equipment in order to promote a faster, more efficient workflow. Charles knows the original cost for installing all of the facility’s machinery as well as the total cost for the rearrangement and reinstallation. If Charles wants to handle the rearrangement and reinstallation cost as a replacement, which of the following statements is accurate? A. Charles can handle the rearrangement and reinstallation cost as a replacement only if he knows that these costs are immaterial in amount. B. Charles can handle the rearrangement and reinstallation cost as a replacement only if he knows that this cost is material in amount and expected to benefit multiple periods. C. Charles currently has all the information he needs to handle the rearrangement and reinstallation cost as a replacement. D. Charles can handle the rearrangement and reinstallation cost as a replacement only if he is able to estimate the accumulated depreciation on the original installation costs to date.

D. Charles can handle the rearrangement and reinstallation cost as a replacement only if he is able to estimate the accumulated depreciation on the original installation costs to date.

CH. 10 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? A. Bonnie currently has all the information she needs to proceed with the substitution approach. B. 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. C. Bonnie cannot use the substitution approach because the replacement does not extend the press’s useful life. D. Bonnie must determine what (if any) salvage value the old press has before proceeding with the substitution approach.

B. 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.

CH. 10 Maria is the manager of a facility that makes small appliances. The factory’s management has decided to rearrange and reinstall all of the facility’s manufacturing equipment in order to promote a faster, more efficient workflow. Maria knows the total cost for the rearrangement and reinstallation, but that is all the information she currently has available. Given this situation, which of the following statements is accurate? A. Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is material in amount. B. Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine the machinery’s original installation cost. C. Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine both the machinery’s original installation cost and its accumulated depreciation to date. D. Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is immaterial in amount.

A. Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is material in amount.

CH. 10 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? A. $400 loss B. $100 gain C. $100 loss D. $400 gain

C. $100 loss Book Value: Original cost - depreciation = $6100 (16,000 - [9,600+300]) = 6,100 Sold for - book value 6,000 - 6,100 = 100 loss

CH 10. JT Engineering originally paid $10,000 for a machine and recorded depreciation at a rate of $1,000 per year for five years. They sold the machine in the middle of the sixth year for $6,000. What is JT’s amount of loss or gain on the sale? A. $1,500 loss B. $1,000 loss C. $1,500 gain D. $1,000 gain

C. $1,500 gain 10,000 - [6,000 + 500]) = 4,500 6,000 - 4,500 = 1,500 gain

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 You are working to determine the depreciation on an asset purchased in the start of June that has a total depreciation of $5,000 for the current year and a 5-year useful life. Which of the following would be the correct formula to use? A. 7/12 X $5,000 B. $5,000/5 C. 5/12 X $5,000 D. $5,000/4

A. 7/12 X $5,000 7 months (June through December) is divided by 12 and then multiplied by the total depreciation for the asset, which is $5,000.

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.

CH 11 Adding the salvage value to depreciable base will yield A. overall depreciation. B. obsolescence. C. service life. D. acquisition cost.

D. acquisition cost.

CH 11 Kessler GPS spent $180,000 on equipment in January 2019. The equipment had a useful life of 3 years, and Kessler GPS uses straight-line depreciation. In 2020, a new model of equipment came out and Kessler calculated an impairment of $54,000 on August 6, 2020. However, the new model was defective, and older models had an increased market value of $112,000 in 2021. If Kessler GPS is holding their older equipment for disposal, how would they record this late increase in value in March 2021? A. They would record a $112,000 increase in value for the equipment. B. They would not record the increase in value. C. They would record a $46,000 increase in value for the equipment. D. They would record a $68,000 decrease in value for the equipment.

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 An asset was originally purchased by the Sampson Corp. for $260,000. The depreciable base was determined to be $209,000, with an eight-year useful life. Given this information, the salvage value of this asset is A. $26,125. B. $58,625. C. $51,000. D. $35,000.

C. $51,000. Depreciation base under straight line method = Cost of the machine - salvage value =

CH. 11 The ________ method is used most often by companies due to its simplicity. A. activity B. sum-of-the-years’-digits C. declining-balance D. straight-line

D. straight-line The straight-line depreciation method is the simplest whereas, an activity-based depreciation, declining-balance, and sum-of-the-years’-digits are more complex forms of depreciation.

CH. 11 When the cost of a building is written off over a number of years, the expense is called A. amortization. B. acquisition. C. depletion. D. depreciation.

D. depreciation. The systematic and rational allocation of cost of a building over a number of years is called depreciation. Acquisition is the purchase of an asset. Amortization and depletion are cost allocation methods for intangible assets and natural resources, respectively.

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 Every year, Hercules Inc. has invested an increasing amount in manufacturing equipment. Given that there are a large number of relatively inexpensive machines and all the machines have relatively similar useful lives, Hercules has depreciated the machinery as a group at a uniform rate using the straight-line method. Over time, the ratio of the group’s total accumulated depreciation to the total cost of the machinery has increased steadily. Currently, the ratio stands at 0.75 to 1. What is the most likely reason for this increasing ratio? A. The estimated average useful life of Hercules’ machinery is equal to its actual average useful life. B. The estimated average useful life of Hercules’ machinery is greater than its actual average useful life. C. Hercules has been retiring fully depreciated machinery that should have remained in service. D. The estimated average useful life of Hercules’ machinery is less than its actual average useful life.

D. The estimated average useful life of Hercules’ machinery is less than its actual average useful life. Even though the firm is spending slightly more on equipment each year, its ratio of accumulated depreciation to total cost should remain constant, because the increase in total cost should lead to a proportional increase in accumulated depreciation. This, of course, assumes that the firm is accurately estimating the useful life of its machinery. An increase in the accumulated-depreciation-to-total cost ratio suggests that the firm is accumulating depreciation faster than it spends money on new machinery. This in turn suggests that the firm is able to use the machines for a period longer than their estimated average useful lives.

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 Lugo & Associates purchased machinery on January 4, 2013, for $438,000. The straight-line method is used, and useful life is estimated to be 12 years with a $42,000 salvage value. At the beginning of 2019, Lugo spent $118,000 to overhaul the machinery. After the overhaul, Lugo estimated that the useful life would be extended 6 years (18 years total), and the salvage value would be $60,000. The depreciation expense for 2019 should be A. $28,083. B. $29,833. C. $24,833. D. $59,667.

C. $24,833. Purcahse price , Jan 4 2013 $438,000 Accumulated depreciation [($438,000-$42,000)/12 yrs] x 6 yrs ($198,000) Book value at Dec 31, 2018 $240,000 Add: Overhaul $118,000 Book value for 2019 $358,000 (Less): Salvage value ($60,000) Depreciable value $298,000 ÷ Remaining useful life (18 yrs - 6 yrs) 12 yrs = Depreciation expense for 2019 $24,833.33

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 When analyzing asset impairments, how are undiscounted future cash flows different from discounted future cash flows? A. Undiscounted future cash flows are used in the recoverability test to determine if an asset is impaired, and discounted future cash flows are used to calculate the amount of impairment if market value is not available. B. Discounted future cash flows are used to determine if an asset is impaired and to calculate the amount of impairment, and undiscounted future cash flows are not used. C. Undiscounted future cash flows are used to determine if an asset is impaired and to calculate the amount of impairment, and discounted future cash flows are not used. D. Discounted future cash flows are used to determine if an asset is impaired, and undiscounted future cash flows are used to calculate the amount of impairment if market value is not available.

A. Undiscounted future cash flows are used in the recoverability test to determine if an asset is impaired, and discounted future cash flows are used to calculate the amount of impairment if market value is not available. The recoverability test uses undiscounted cash flows to determine if an asset is impaired, whereas, if market value is not available, discounted future cash flows are used.

CH 11 Billings Corporation acquires a coal mine at a cost of $2,000,000. Intangible development costs total $275,000. After extraction has occurred, Billings must restore the property (estimated fair value of the obligation is $305,000), after which it can be sold for $750,000. Billings 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 Inventory for $329,400 B. Debit to Accumulated Depletion for $329,400 C. Credit to Inventory for $135,000 D. Credit to Accumulated Depletion for $1,500,600

A. Debit to Inventory for $329,400 Inventory should be debited for the entire Depletion expense. Depletion cost per unit = (total cost - salvage value)/ total estimated units. (($2,000,000 + $305,000 + $275,000) -$750,000)/5000 = $366. Total depletion, which is the amount to debit is the unit cost times the number of units $366 x 900 =$329,400.

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 Asset turnover ratio = Net sales/Average total assets = 1,600,000/6,400,000 = 0.25

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. Depreciation is a: A. measure of deterioration in the physical condition of an asset. B. means of allocating the cost of a tangible asset to each of the periods that benefit from its use. C. matter of valuation D. means of recording the decline in an asset's fair market value

B. means of allocating the cost of a tangible asset to each of the periods that benefit from its use.

CH 11. The depreciable base (cost) of an asset is its original cost: A. plus accumulated depreciation B. plus salvage value C. less accumulated depreciation D. less salvage value

D. less salvage value

CH. 11 Which of the following depreciation methods uses book value to determine annual depreciation? A. Units of production B. Declining-balance C. Straight-line D. Sum-of-the-years' digits

B. Declining-balance

The major difference between service life of an asset and its physical life is that A. physical life is always longer than service life B. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value C. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last. D. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

C. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

CH. 11 An impairment of property, plant, or equipment has occurred if A. the expected future cash outflows exceeds the asset's carrying value B. the sum of the expected future net cash flow is less than the asset's carrying value C. the revised estimated useful life is less than the original estimated useful life D. the estimated salvage value is less than the actual proceeds received on disposal.

B. the sum of the expected future net cash flow is less than the asset's carrying value

CH. 11 All of the following are economic factors related to depreciation except: A. Obsolescence B. Inadequacy C. Wear and tear D. Supersession

C. Wear and tear

CH. 11 Economic factors that shorten the service life of an asset include A. Obsolescence B. Supersession C. Inadequacy D. All of these answer choices are correct

D. All of these answer choices are correct

CH. 11 A principal objection to the straight-line method of depreciation is that it: A. Tends to result in a constant rate of return on a diminishing investment base B. Assumes that the asset's economic usefulness is that same each year. C. Provides for the declining productivity of an aging asset C. Gives smaller periodic write-offs than decreasing charge methods.

B. Assumes that the asset's economic usefulness is that same each year.

CH. 11 An asset impairment occurs when the asset's carrying amount exceeds A. Asset's fair value B. Present value of expected future net cash flows C. Asset's book value D. Expected future net cash flows

D. Expected future net cash flows

CH. 11 The term "depreciable base", or "depreciation base", as it is used in accounting, refers to: A. The estimated market value of the asset at the end of its useful life B. The total amount to be charged (debited) to expense over an asset's useful life C. The cost of the asset les the related depreciation recorded to date D. The acquisition cost of the asset

B. The total amount to be charged (debited) to expense over an asset's useful life

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

CH. 11 Oriole Company purchased equipment for $238,400 on October 1, 2020. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $15,200. Estimated production is 36,000 units and estimated working hours are 20,000. During 2020, Oriole uses the equipment for 500 hours and the equipment for 500 hours and the equipment produces 1,100 units. Compute depreciation expense under each of the following methods. Oriole is on a calendar -year basis ending December 31. A) Straight-line for 2020 $__________ B) Activity method for 2020 (Units of output) $__________ C) Activity method for 2020 (working hours) $__________ D) Sum-of-the-years'-digits for 2022 $__________ E) Declining-balance-balance method for 2021 $________

A) $6.975 B) $6.820 C) $5.580 D) $41,850 E) $55,875 A) (238,400 - 15,200)/8 = 27,900 year 3 month Depreciation (27,900 X 3/12) = 6,975 B) (238,400 - 15,200) / 36,000 = 6.20 output unit 1,100 units x $6.20 = $6,820 C) (238,400 - 15,200)/20,000 = 11.16 hours 500 hours x $11.16 - $5,580 D) 8+7+6+5+4+3+2+1 = 36 year 1 8/36 x 223,200 = 49,600 year 2 7/36 x 223,200 = 43,400 year 3 6/26 x 223,200 = 37,200 2020 2021 2022 year 1 12,4000 37,200 year 2 10,850 32,550 year 3 9,300 12,400 48,050 41,850 2022: 41,850 = (9/12 2nd year life plus 3/12 of 3rd year life) 49,600 x 3/12 49,600 x 9/12 43,400 x 3/12 43,400 x 9/12 37,200 x 3/12 E) double declining balance 2021 1/8 x 2 = 25% 2020: 0.25 x 238,400 x 3/12 = 14,900 2021:0.25 x 238,400 -14,900 = $55,875

CH. 12 Which of the following is a research and development cost? a. Development or improvement of techniques and processes. b. Offshore oil exploration that is the primary activity of a company. c. Research and development performed under contract for others. d. Market research related to a major product for the company.

a. Development or improvement of techniques and processes.

CH. 12 Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs? A. Litigation costs would be capitalized regardless of the outcome of the litigation. B. Litigation costs would be expensed regardless of the outcome of the litigation. C. Litigation costs would be capitalized only if the patent was purchased rather than internally developed. D. Litigation costs would be capitalized if the patent right is successfully defended.

D. Litigation costs would be capitalized if the patent right is successfully defended.

CH. 12 Which of the following is not a characteristic of intangible assets? A. All answer choices are characteristics of intangible assets. B. They are not financial instruments. C. They are classified as long-term assets. D. They lack physical existence.

A. All answer choices are characteristics of intangible assets.

CH. 12 Which of the following is not a characteristic of intangible assets? A. They are all subject to amortization. B. They are long-term in nature. C. They lack physical existence. D. They are not financial instruments.

A. They are all subject to amortization.

CH. 12 The controversy surrounding the policy to expense all research and development costs associated with internally created intangible assets results in A. Understating assets and understating expenses B. Overstating assets and understating expenses C. Understating assets and overstating expenses D. Overstating assets and overstating expenses

C. Understating assets and overstating expenses

CH. 12 A purchased limited-life intangible asset ______ amortized and is impairment tested using _______________. A. is; the recoverability test and then the fair value test B. is; the fair value test only C. is not; the fair value test only D. is not; the recoverability test and then the fair value test

A. is; the recoverability test and then the fair value test

CH. 12 For indefinite-life intangibles other than goodwill, an impairment test should be conducted at least: a. monthly b. once during its useful life c. quarterly d. annually

d. annually

CH. 12 Which of the following does not describe intangible assets? A. They provide long-term benefits B. They lack physical existence C. They are classified as long-term assets D. They are financial instruments

D. They are financial instruments

CH. 12 Cost incurred internally to create intangibles are A. capitalized B. capitalized if they have an indefinite life C. expensed as incurred D. expensed only if they have a limited life

C. expensed as incurred

CH. 12 The cost of successfully defending a patent suit should be A. charged off in the current period B. added to factory overhead and allocated to production of the product. C. capitalized and amortized over the remaining estimated useful life of the patent D. capitalized and amortized over the legal life of the purchased patent

C. capitalized and amortized over the remaining estimated useful life of the patent

CH. 12 On September 1, 2020, Sarasota Corporation acquired Metlock Enterprises for a cash payment of $690,000. At the time of purchase, Metlock's balance sheet showed assets of $550,000, liabilities of $250,000, and owners' equity of $300,000. The fair value of Metlock's assets is estimated to be $750,000. Compute the amount of goodwill acquired by Sarasota. Value assigned to goodwill $__________________

$190,000 To Calculate: Assets: 750,000 Less: Liabilities (250,000) Net Asset 500,000 Acquisition Cost (690,000) Goodwill 190,000

CH. 12 On December 31, 2018, Appalachian Corporation paid $5,550,000 to acquire Grandview Company and recorded $1,630,000 of goodwill as a result of the purchase. On December 31, 2020, Appalachian determines that the fair value of the Grandview division is $6,500,000 and the carrying amount of Grandview's net assets on that date is $6,200,000 (the carrying value and the fair value of identifiable net assets are the same). What amount of loss on impairment of goodwill should Appalachian record at December 31,2020. A. $1,330,000 B. $0 C. $300,000 D. $1,630,000

B. $0 As the fair value of the Grandview division exceeds the carrying amount of Division's net Assets, there is no impairment on Goodwill.

CH. 12 Tiburon Corporation purchased a patent for $1,8500,000 on November 30,2018. It has a remaining legal life of 18 years. Tiburon estimates that the remaining useful life of the patent is useful life of 15 years. What balance will be reported on the December 31, 2020 balance sheet for the patent (if necessary, round your answer to the nearest dollar)? A. $1,583,678 B. $1,850,000 C. $1,485,606 D. $1,593,056

D. $1,593,056 $1,850,000 (cost) /180 months (useful life) X 25 months (11/30/18 - 12/31/20) = $256,944. $1,8500,000 - $256,944 = $1,593,056

CH. 12 Truffle Inc. acquired a patent on January 1, 2018 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2021, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle's market interest rate, is $2,120,000. What amount, if any, of impairment loss will be reported on Truffle's 2021 income statement? A. $4,680,000 B. $2,120,000 C. $1,340,000 D. $2,560,000

D. $2,560,000 $7,800,000 (cost) /10 yeas (useful life) X 4 years = $3,120,000 $7,800,000 - $3,120,000 = $4,680,000 (carrying value of patent 12/31/21) $4,680,000 - $2,120,000 = $2,560,000

CH. 12 Pinkerton Corp. uses the cost model for intangible assets. On April 10, year 3, Pinkerton acquired assets for $100,000. On December 31, year 3, it was determined that the recoverable amount for these intangible assets was $80,000. On December 31, year 4, it was determined that the intangible assets had a recoverable amount of $84,000. What is the impairment gain or loss recognized in year 3 and year 4 on the income statement? Year 3 Year 4 A. $20,000 loss $16,000 loss B. $20,000 loss $0 C. $20,000 loss $4,000 gain D. $0 $0

C. $20,000 loss $4,000 gain

CH. 12 Blossom Corporation purchased a limited-life intangible asset for $405,000 on May 1, 2019. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2021? A. $121,500 B. $0 C. $108,000 D. $81,000

C. $108,000 2019 - 405,000/10*8/12 = 27,000 2020 - 405,000/10 = 40,500 2021 - 405,000/10 = 40,500 27,000 + 40,500 + 40,500 = 108,000

CH. 12 Oscar Company acquired a patent on a manufacturing process on January 1,2018 for $5,100,000. It was expected to have a 12 year life and no residual value. Oscar uses straight-line amortization for patents. On December 31,2019, the expected future cash flows for the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Oscar's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2019 balance sheet. A. $5,100,000 B. $3,050,000 C. $4,250,000 D. $3,875,000

B. $3,050,000 $5,100,000 - Cost of the patent 12 years - Useful life $5,100,000/12 = $425000 - Annual depreciation Jan 1, 2015 - Date of purchase At the end of 12-31-2016, Book value patent = $5,100,000 - $4,250,000 * 2 year = $4,250,000 $3,050,000 - Present value of cash inflows Amount should be recorded for patent = cost or fair value whichever is lower $4,250,000 or $3,050,000

CH. 12 Jacky Inc. purchased Manzanita Marine on June 1, 2018 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2021 the Manzanita Marine Division had a fair value of $25,400,000. The carrying amount of the net assets of Manzanita (including goodwill) had a value of $24,900,000 at the time. What amount of loss on impairment of goodwill should Jacky record in 2021? A. $600,000 B. $2,600,000 C. $500,000 D $0

D $0 Goodwill is considered impaired when the fair market value of division is less than it's carrying value. The Manzanita Marine Division fair value $25,400,000 exceeds the carrying value of division $24,900,000 ,so the Goodwill is not impaired

CH. 12 Ivanhoe Corporation purchased a patent for $138,000 on September 1, 2019. It had a useful life of 10 years. On January 1, 2021, Ivanhoe spent $35000 to successfully defend the patent in a lawsuit. Ivanhoe feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2021? A. $29080 B. $30920 C. $31840 D. $23920

B. $30920 Total # of month = 10*12 = 120 months Amortization expense = 138,000/120*16 = 18,400 (138,000 - 18,400 + 35,000) / 5 = $30,920

CH. 12 The management of Devin Corporation is testing two of its reporting units for impairment of goodwill. Information about results of these tests are shown below. Segment carrying amount $2,500,000 $3,00,000 (including goodwill) Carrying value of goodwill 500,000 500,000 Estimated fair value of total 2,900,000 2,800,000 Estimated fair value of assets 2,100,000 2,500,000 and liabilities other than goodwill impairment loss reported by Devin Corporation? A. $500,000 B. $0 C. $300,000 D. $200,000

D. $200,000

CH. 12 Crane purchased a patent for Vania Co. for $1,110,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Crane determined that the economic benefits of the patent would not last longer than 6 years from the date of accumulated amortization, at December 31, 2020? The amount to be reported $ _______________

$666,000 Amortization for 2018 & 2019 $1,110,000 / 10 years X 2 years = $222,000 Amortization for 2020 ($1,110,000 - $222,000) / (6-2 years) = $222,000 Accumulated amortization on 12-31-2020 $222,000 + 222,000 = 444,000 Amount for balance sheet $1,110,000 - 444,000 = 666,000

CH. 12 Crane bought a franchise from Alexander Co. on January 1, 2019 for $305,000. The carrying amount of the franchise on Alexander's books on January 1, 2019 was $305,000. The franchise agreement had an estimated useful life of 30 years. Because Crane must enter a competitive bidding at the end of 2021, it is unlikely that the franchise will be retained beyond 2028. What amount should be amortized for the year ended December 31, 2020? The amount to be amortized $ _______________

30,500 $305,000 / 10 years = 30,500

CH. 12 On January 1, 2020, Crane incurred organization costs of $252,500. What amount of organization expense should be reported in 2020? The amount to be reported $_________________

$252,500

CH. 12 Crane purchased the license for distribution of a popular consumer product on January 1, 2020, for $141,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Crane can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2020? The amount to be amortized $ ______________

CH. 12 On July 1, 2020, Sheffield Corporation purchased Johnson Company by paying $187,700 cash and issuing a $65,200 note payable to Steve Johnson. At July 1, 2020, the balance sheet of Johnson Company was as follows. Cash $38,200 A/R 66,000 Inventory 47,800 Land 29,500 Building(net) 56,800 Equipment(net) 52,600 Copyrights 7,500 $325,400 Accounts Payable $162,000 Stockholders' equity 163,400 $325,400 The recorded amounts all approximate current fair values except for land (worth $45,500), inventory (worth $93,700) and copyrights (worth $11,100). Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ _______________________________ ______ ______ Prepare the December 31 entry for Sheffield Corporation to record amortization of intangibles. The copyrights have an estimated remaining useful life of 4 years with a residual value of $2,700. Account Titles and Explanation Debit Credit _______________________________ ______ ______ _______________________________ ______ ______

Account Titles and Explanation Debit Credit Cash 38,200 Accounts Receivable 66,000 Inventory 93,700 Land 45,500 Buildings 56,800 Equipment 52,600 Copyrights 11,100 Goodwill 51,000 Accounts Payable 162,000 Notes Payable 65,200 Cash 187,700 Account Titles and Explanation Debit Credit Amortization Expense 1,050 Copyright 1,050 11,100 - 2,700 = 8,400 8,400 /4 X 6/12 = 1,050

CH. 12 In January, 2016 Pharaoh Corporation purchased a patent for a new consumer product for $972,000. At the time of the purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only 10 years. During 2021 the product was determined to be obsolete due to a competitors new product. What amount should Pharaoh charge to expense during 2021, assuming amortization is recorded at the end of each year? A. $64800 B. $486000 C. $648000 D. $97200

B. $486000 (972,000 / 10) * 5 = $486,000

CH. 12 In January, 2016 Wildhorse Corporation purchased a patent for a new consumer product for $987,000. At the time of the purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only 10 years. During 2021 the product was determined to be obsolete due to a competitors new product. What amount should Wildhorse charge to expense during 2021, assuming amortization is recorded at the end of each year? A. $65800 B. $493500 C. $658000 D. $98700

B. $493500 (987,000 / 10) * 5 = $493,500

CH. 12 The purchase price of a limited life intangible asset should be ________ amortized. A. expensed and B. capitalized but not C. expensed but not D. capitalized and

D. capitalized and

CH. 12 Research and development costs could include A. marketing research to promote a new product. b. periodic alterations to existing production lines. c. construction of prototypes. d. routine efforts to refine an existing product.

c. construction of prototypes.

CH. 12 The fair value of a firm’s identifiable net assets is $7.5 million. If another company pays $7 million to purchase this firm, the purchasing company should record A. goodwill of $500,000. B. a gain of $500,000. C. goodwill of $7 million. D. a gain of $7 million.

B. a gain of $500,000.

CH. 12 On January 1, 2019, Harris Company acquired a patent on a particular oil extraction technique for $6.25 million. The patent was expected to have a 10-year life and no residual value. On December 31, 2020, Harris determined its expected future cash flows from the patent were $750,000 per year for each of the next eight years. The present value of these flows, discounted at Harris’ market interest rate, is $3.5 million. Note that Harris uses straight-line amortization for patents. Given this information, the oil-extraction patent should be carried on the firm’s December 31, 2020, balance sheet at an amount of A. $3.5 million. B. $5 million. C. $6 million. D. $6.25 million.

B. $5 million. $6,250,000 - Cost $1,250,000 - Less: amortization for 3 years (6250000*2 years / 10) $5,000,000 $6,000,000 - Undiscounted sum of future cash flows (750000*8)

CH. 12 Salisbury Enterprises purchased a patent for $525,600 on August 1, 2018. It had a useful life of 15 years. On January 1, 2020, Salisbury spent $75,000 successfully defending the patent in a lawsuit. Salisbury feels that as of that date, the remaining useful life is 10 years. What amount should be reported for patent amortization expense for 2020? A. $53,052 B. $56,556 C. $55,096 D. $42,382

C. $55,096 By the date of the lawsuit, the patent would have been amortized by [($525,600/15) * 5/12] + ($525,600/15) = $14,600 + $35,040 = $49,640. This leaves a balance of $525,600 – $49,640 = $475,960. The cost for defending the patent would be added to this balance for a new balance of $475,960 + $75,000 = $550,960. The amortization expense for 2020 would then be $550,960/10 = $55,096.

CH. 12 Ramsay Enterprises incurred research and development costs of $450,000 and legal fees of $18,000 to acquire a patent. The patent has a legal life of 15 years and a useful life of 9 years. What amount should Ramsay record as Patent Amortization Expense in the first year? A. $52,000 B. $2,000 C. $1,200 D. $31,200

B. $2,000 The useful life of the patent is 9 years, so amortization should be based on 9 years rather than the legal life of 15 years. In addition, only legal fees are capitalized. Research and development costs are expensed as incurred. Therefore, in the first year Ramsay should amortize $18,000/9 = $2,000.

CH. 12 Which of the following characteristics are considered when determining the useful life of an intangible asset? I. Expected actions of competitors. II. Salvage value, except when it is of value to another company. III. Provisions for renewal or extension. IV. Legal life. A. II, III, and IV. B. I, III, and IV. C. I, II, and III. D. I, II, and IV.

B. I, III, and IV. When determining the useful life of an intangible asset, companies consider the legal life of the asset, competitors' actions, and provisions for renewals. They do not consider salvage or residual value.

CH. 12 Matthew and Addison are both analyzing intangible assets for their useful life. After the analysis, Matthew concludes that his asset should not be amortized, but Addison concludes that her asset should be amortized. What is the difference between Matthew’s and Addison’s assets? A. Matthew’s asset was purchased, whereas Addison’s asset was created in-house. B. Matthew’s asset has a limited life, whereas Addison’s asset has an indefinite life. C. Matthew’s asset has an indefinite life, whereas Addison’s asset has a limited life. D. Matthew’s asset was created in-house, whereas Addison’s asset was purchased.

C. Matthew’s asset has an indefinite life, whereas Addison’s asset has a limited life. If no factors limit the useful life of an intangible asset, a company considers its useful life indefinite. A company does not amortize an intangible asset with an indefinite life. However, companies amortize their limited-life intangibles by systematic charges to expense over their useful life.

CH. 12 On April 30, 2020, Miranda Industries exchanged 10,000 shares of Carrillo Enterprises $25 par value common stock for a patent owned by Mejia United. The Carrillo stock was acquired in 2020 at a cost of $230,000. At the exchange date, Carrillo common stock had a fair value of $43 per share, and the patent had a net carrying value of $490,000 on Mejia’s books. Miranda should record the patent at A. $430,000. B. $490,000. C. $230,000. D. $250,000.

A. $430,000. The cost of the patent would be recorded at fair value of the shares, or $43 * 10,000 = $430,000.

CH. 12 Chan Resources incurred $280,000 of research and development costs to develop a product for which a patent was granted on January 2, 2014. Costs associated with obtaining the patent totaled $97,000. On March 31, 2020, Chan paid $180,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2020 should be A. $460,000. B. $277,000. C. $557,000. D. $377,000.

B. $277,000. Only the patent fees are capitalized. Research and development costs are not amortized. Therefore, the total amortized should be $97,000 + $180,000 = $277,000.

CH. 12 Which of the following is a marketing-related intangible asset? A. A copyright B. A brand name C. A customer list D. A franchise

B. A brand name Companies primarily use marketing-related intangible assets in the marketing or promotion of products or services. Examples are trademarks or trade names, brand names, Internet domain names, and noncompetition agreements.

CH. 12 On January 1, 2020, Dennis Company purchases Miles Company for $5 million in cash. Miles’ financial statement dated December 31, 2019, indicates the firm’s net assets have a book value of $3.8 million. An analysis conducted by Dennis on December 31 suggests that the book value of Miles’ tangible assets is $600,000 lower than their fair value. This analysis also indicates that the fair value of Miles’ identifiable intangible assets exceeds their book value by $320,000. Given these figures, what was the fair value of Miles’ identifiable net assets? A. $3,800,000 B. $4,720,000 C. $4,400,000 D. $0

B. $4,720,000 Miles’ net assets have a book value of $3.8 million. However, the tangible portions of these assets (which are by their nature identifiable) are undervalued by $600,000, while the identifiable intangible portion are undervalued by $320,000. Thus, the fair value of Miles’ identifiable net assets is $3.8 million + $600,000 + $320,000 = $4.72 million.

CH. 12 On January 1, 2020, Dennis Company purchases Miles Company for $4.2 million in cash. Miles’ financial statement dated December 31, 2019, indicates the firm’s net assets have a book value of $3.8 million. An analysis conducted by Dennis on December 31 suggests that the book value of Miles’ tangible assets is $600,000 lower than their fair value. This analysis also indicates that the fair value of Miles’ identifiable intangible assets exceeds their book value by $320,000. Given these figures, Dennis should recognize A. a $920,000 gain. B. $400,000 in goodwill. C. a $520,000 gain. D. $520,000 in goodwill.

C. a $520,000 gain. 3,800,000 - Book Value + 600,000 - increase in fair value tangible + 320,000 - increase in fair value intangible - 4,200,000 - Cash Paid for purchaser 520,000 - Gain

CH. 12 In 2020, Bond Inc. bought May Corporation’s net assets for $2 million. At that time, May had total liabilities of $600,000, total current assets of $1.08 million, and total noncurrent assets of $2.52 million. Given these figures, Bond should account for the $1 million difference between the fair value of the net assets acquired and May’s purchase price by A. recording the current assets at $1.08 million and the noncurrent assets at $1.52 million. B. recognizing the $1 million difference as a gain. C. crediting the $1 million difference to retained earnings. D. setting up a deferred credit of $1 million and then amortizing it to income over a period not to exceed 40 year

B. recognizing the $1 million difference as a gain.

CH. 12 On January 1, 2019, Maelstrom Corporation acquired a patent on a particular manufacturing process for $3.75 million. The patent was expected to have a 10-year life and no residual value. On December 31, 2020, Maelstrom determined its expected future cash flows from the patent were $300,000 per year for each of the next eight years. The present value of these flows, discounted at Maelstrom’s market interest rate, is $1.8 million. Note that Maelstrom uses straight-line amortization for patents. Given this information, the manufacturing process patent should be carried on the firm’s December 31, 2020, balance sheet at an amount of A. $1.8 million. B. $2.4 million. C. $3.75 million. D. $300,000.

A. $1.8 million. Patents are considered limited-life intangibles, a recoverability test—comparing the undiscounted future net cash flows from the patent to the carrying amount, must be carried out first. Here, the firm expects undiscounted flows of $300,000 per year for eight years, for a total of $2.4 million. Since Maelstrom uses straight-line amortization and expects this patent to have a 10-year life and no residual value, it should amortize one-tenth of the acquisition price per year, or $3.75 million/10 = $375,000. The book value of the patent decreased (held for two years) by $375,000 x 2 = $750,000 to a total of $3.75 million – $750,000 = $3 million. This means the patent’s fair value of $2.4 million is greater than its carrying amount of $3 million, so there is a loss on impairment. Accordingly, the firm should use the patent’s expected future net cash flows of $1.8 million as its new carrying cost

CH. 12 On January 1, 2020, Jordan Corporation acquired Lincoln Industries for $9 million. Jordan recorded $2.5 million in goodwill as a result of the purchase. As of December 31, 2020, the Lincoln Industries Division of Jordan Corporation had a fair value of $7.8 million, and the division’s net identifiable assets (excluding goodwill) had a fair value of $6.8 million. Given this information, Jordan should record a _______ loss on impairment of goodwill in 2020. A. $1.7 million B. $1.2 million C. $1.4 million D. $1.5 million

D. $1.5 million To find the implied value of the Lincoln Industries Division’s goodwill as of December 31, 2020, subtract the division’s net identifiable assets (excluding goodwill) from the division’s fair value: $7.8 million – $6.8 million = $1 million. This amount is $2.5 million – $1 million = $1.5 million less than the recorded goodwill, which means the firm should record a $1.5 million loss on impairment of goodwill.

CH. 12 Darwin Manufacturing just determined that a particular patent has a carrying amount of $2 million and is expected to generate $2.2 million in future net cash flows. Based on this information, Darwin should A. assume there is no impairment on the patent. B. write off the full carrying amount of the patent. C. proceed to a fair value test. D. proceed to a recoverability test.

A. assume there is no impairment on the patent. A company compares the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. The company does not have to do anything else. If the sum of the expected future net cash flows is less than the carrying amount of the asset, the company measures and recognizes an impairment loss.

CH. 12 Starr Enterprises plans to spend $6.2 million to build a new research facility that will be used to research and develop a prototype flying car with auto-pilot. The building will be built over a two-year period, with 60% of costs incurred in the first year and 40% in the second year. They expect the flying car project to be complete in 20 years after the completion of the building, and they hope to sell the building at the end of the project for $5.7 million. How much of the building costs should they expense in the second year of construction? A. $281,818 B. $0 C. $2,480,000 D. $310,000

B. $0 Although Starr Enterprises is not going to use the new construction facility for another research project, it does have a future use because they plan to sell it at the end of the project. Therefore, they should capitalize the cost of the building over the two years it is being built and then amortize the expected net cost of the building (cost – salvage value) over the 20 years of the research project. Therefore, in the second year of construction, no building costs would be expensed.

CH. 12 Which of the following are considered to be research and development costs? I. Costs associated with marketing research to promote a new product. II. Costs associated with planned search or critical investigation aimed at discovery of new knowledge. III. Costs associated with translation of research findings or other knowledge into a significant improvement of an existing product. IV. Costs associated with translation of research findings or other knowledge into a plan or design for a new product or process. A. I, II, and III. B. I, III, and IV. C. I, II, and IV. D. II, III, and IV.

D. II, III, and IV. R&D costs can be divided into research activities, activities that involve planned search or critical investigation aimed at discovery of new knowledge, and development activities, activities that translate research findings or other knowledge into a plan or design for a new product or process. Marketing research is not part of R&D.

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