FAR - Section 2 Flashcards
At the end of year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's year 2 income statement? A. Loss of $2,000 B. Gain of $10,500 C. Gain of $16,500 D. Gain of $18,500
B
Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term. They are reported at fair value (market value) and any unrealized holding gains and losses are included in current earnings. At the end of year 1, the trading securities would have been valued at $92,000 and a gain of $6,000 ($92,000 year-end market value - $86,000 cost) would have been reported on the income statement. In year 2, there would be a gain of $12,500 ($104,500 selling price - $92,000 beginning value) from the initial set of securities and a $2,000 loss ($71,000 year-end market value - $73,000 cost) from the newly acquired trading securities. The net impact of these stock activities would be a $10,500 gain on the income statement in year 2.
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less a normal profit margin. The inventory item’s original cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at
A. Original cost
B. Replacement cost
C. Net realizable value
D. Net realizable value less normal profit margin
B
Under U.S. GAAP, inventory is valued at the Lower of Cost or Market (LCM) if LIFO or retail inventory method is used, where Cost = Original cost of inventory and Market = middle for the following three numbers:- Net realizable Value (NRV). NRV - normal profit margin. Replacement cost. Exception: FASB has issued an update replacing the LCM valuation with lower of cost of net realizable value (LCNRV) valuation for other than LIFO or retail inventory methods. As per LCM, in the given case replacement cost is below the net realizable value and above the net realizable value less a normal profit margin, replacement cost is in middle and is the market. Cost is given to be higher than NRV, and would be higher than replacement cost or the market. Thus, the inventory will be valued at lower of cost or market, in this case, market or replacement cost.
Options (A), (C) and (D) are incorrect based on the above explanation.
On January 2, Gant Co. purchased a franchise with a useful life of five years for $60,000 and an annual fee of 1% of franchise revenues. Franchise revenues were $20,000 during the year. Gant projects future revenues of $40,000 next year and $60,000 per year for the following three years. Gant uses the straightline method of amortization. What amount should Gant report as intangible asset-franchise, net of related amortization in its December 31 balance sheet? A. $48,000 B. $48,160 C. $49,920 D. $56,000
A
A franchise represents a special right to operate under the name and guidance of another enterprise over a limited geographic area. A franchise is always externally purchased; it cannot be internally developed. Capitalize all significant costs incurred to acquire the franchise (e.g., purchase price, legal fees, etc.). If the acquisition cost of the franchise requires future cash payments, these payments should be capitalized at their present value using an appropriate interest rate. On the other hand, periodic service fees charged as a percentage of revenues are not capitalized; these costs represent a current operating expense of the franchisee. The $60,000 frinchise purchase divided by the five years of useful life would mean the intangible asset-franchise would be amortized $12,000 per year. $60,000 - $12,000 = $48,000.
The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower of cost or market method, the inventory item should be valued at
A. Replacement cost.
B. Net realizable value.
C. Net realizable value less normal profit margin.
D. Original cost.
D
According to the lower of cost or market rule, market is defined as replacement cost. Market cannot exceed net realizable value and cannot be less than net realizable value less normal profit margin. In this instance, original cost is between net realizable value and net realizable value less normal profit margin. Since original cost is within the parameters for replacement cost and is less than replacement cost, the inventory should be reported at original cost.
Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?
A. FIFO (first in, first out)
B. LIFO (last in, first out)
C. Moving average
D. Weighted average
A
Inventory turnover ratio = COGS/Average inventory. In an inflationary economy, COGS reported using FIFO is low, leading to higher net profits. Inventory would be higher since it is reported at current prices. Therefore, higher Inventories and lower COGS will result in a lower inventory turnover ratio. In turnover ratios, turn-it-over to the denominator. So, higher inventory and lower COGS would lead to lower inventory ratio.
Option (B) is incorrect because the inventory turnover ratio is lower as the COGS reported are higher because the costs of the units purchased are higher when compared to the cost of the units first purchased and inventory reported are lower as it consists of earlier purchases.
Option (C) and (D) are incorrect as per the above explanation.
On January 1 of the current year, Card Corp. signed a three-year, noncancelable purchase contract, which allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. at $.10 per unit and guarantees a minimum annual purchase of 100,000 units. During the year, the parts unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31 and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its year-end income statement? A. $24,000 B. $20,000 C. $16,000 D. $ 8,000
C
A loss on the purchase commitment should be calculated based only on the minimum unit purchase requirement for the remaining years on the contract. Therefore, Card should calculate its loss at 12/31 based on the two years remaining on the purchase contract.
Minimum annual unit purchase requirement 100,000
Years remaining on contract (3 - 1) x 2
Minimum unit purchase requirement for remaining duration on contract 200,000
Expected loss per unit purchased ($0.10 - $0.02) x $0.08
Probable loss on purchase commitment $ 16,000
Trans Co. had the following balances at December 31, year 4:
Cash in checking account $35,000
Cash in money market account 75,000
U. S. Treasury bill, purchased 11/1 year 4, maturing 1/31, year 5 350,000
U. S. Treasury bill, purchased 12/1 year 4, maturing 3/31, year 5 400,000 Trans’s policy is to treat as cash equivalents all highly-liquid investments with a maturity of three months or less when purchased. What amount should Trans report as cash and cash equivalents in its December 31, year 4, balance sheet?
A. $110,000
B. $385,000
C. $460,000
D. $860,000
C
The $400,000 U.S. Treasury bill purchased 12/1, year 4 and maturing 3/31, year 5 is not included as a cash equivalent because the maturity was more than three months at the time of purchase. Cash and cash equivalents reported at December 31, year 4, are as follows:
Cash in checking account $ 35,000
Cash in money market account 75,000
U. S. Treasury bill, purchased 11/1 year 4, maturing 1/31, year 5 350,000
Total cash and cash equivalents $ 460,000
Bang Inc. acquired 40% stake in Boom Inc. for $120,000 in the beginning of year 1. None of the other investors have more than 20% stake in Boom Inc. The book value and fair value of Boom Inc. is $200,000 and $250,000 respectively. The difference in the book value and fair value is attributable to higher fair value of equipment by $30,000 and land by $20,000. The equipment is depreciated over next 10 years using straight line method. Goodwill is also impaired by 10% during the year and the land is also sold by Boom Inc. If Boom Inc. declares a dividend of $10,000 out of the total earnings of $80,000, what would be the investment income (or charge) recorded in the statement of income of Bang Inc. for the year concerning the investment in Boom Inc?
A. $28,800
B. $32,800
C. ($11,200)
D. $20,800
D
Bang Inc. holds more than 40% stake in Boom Inc. and also further no other group of shareholders has any majority ownership and exercise total control, the investment will be accounted using equity method in the books of Bang Inc. Under equity method following journal entries will be passed:
At the time of purchase of investment (Recording investment at cost):
Investment in Boom Inc. $120,000
Cash $120,000
Recording dividend income:
Cash (i.e. 40% of $10,000) $4,000
Investment in Boom Inc. $4,000
Recording percentage of earnings:
Investment in Boom Inc. $32,000
Equity in earnings $32,000
Write off excess purchase price paid over book value of Boom Inc:
Excess of purchase price over book value = $120,000 – (40% x $200,000) = $40,000.
Of $40,000, $20,000 [i.e. 40% of (30,000 + 20,000)] is attributable to higher fair values of land and equipment. Thus, balance $20,000 will be the goodwill. Impairment of goodwill = 10% of $20,000 = $2,000.
Depreciation on increased fair value of equipment (Bang Inc’s share) = 40% x $30,000 / 10 years = $1,200.
No depreciation is charged on land. Land is sold during the year. Bang Inc. will write off its share of increased fair value of land, i.e. $8,000 (i.e. $20,000 x 40%).
The journal entry would be:
Equity in earnings $11,200 (i.e. $2,000 + $1,200 + $8,000)
Investment in Boom Inc. $11,200
Thus, investment income recorded in the statement of income of Bang Inc. concerning investment in Boom Inc. for the year 1 would be $20,800 (i.e. $32,000 - $11,200).
The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
A. Purchase returns
B. Sales returns
C. Net markups
D. Freight in
A
When the retail method is employed, purchase returns is included in the calculation of both cost and retail amounts of goods available for sale (AFS). Sales returns does not appear in the computation of the cost amount of goods AFS. Net markups appears in the retail amount of goods AFS (assuming the retail method is used to approximate a lower of average cost or market figure) but not in the cost amount of goods AFS. Freight in appears in the cost amount of goods available for sale but not in the retail amount of goods AFS.
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle’s future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
A. No gain or loss in the income statement; $3,000 asset in the balance sheet.
B. No gain or loss in the income statement; $4,000 asset in the balance sheet.
C. $1,000 gain in the income statement; $3,000 asset in the balance sheet.
D. $1,000 gain in the income statement; $4,000 asset in the balance sheet.
The correct answer is (A).
An exchange of non-monetary assets that is not expected to change Isle Co’s cash flows significantly lacks commercial substance. Therefore, accounting for a non-monetary exchange is based on the carrying amount of the assets given up. Also, there is no boot, so no gain is recognized. The computer received by Isle Co is recorded at the carrying amount of the copy machine of $3,000 ($5,000 - $2,000) and no gain or loss is recognized in the income statement.
Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales value of $125,000. The inventory will cost $10,500 to complete. The normal profit margin is 30% of sales. The replacement cost of the inventory was $75,000. What amount should Garcel report as inventory on balance sheet? A. $114,500 B. $85,000 C. $77,000 D. $75,000
C
Garcel should report the unfinished inventory at the lower of cost or market. Market means current replacement cost except that market should not exceed the net realizable value and market should not be less than the net realizable value minus normal profit. The net realizable value is the sales value less reasonably predictable costs of completion ($125,000 – $10,500 = $114,500) and this is the ceiling value. The normal profit is the estimated sales value times the normal profit margin: $125,000 × 30% = $37,500. The net realizable value minus normal profit ($114,500 – $37,500 = $77,000) is the floor value. The replacement cost is $75,000 but the market cannot be lower than the floor value of $77,000 so $77,000 would be the market value. The lower of cost ($85,000) or market ($77,000) is the market value of $77,000.
On January 1 of the current year, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40%
of Iona’s common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much
income from the Iona investment should Point’s year-end income statement report?
A. 10% of Iona’s income for January 1 to July 31, plus 40% of Iona’s income for August 1 to December 31
B. 40% of Iona’s income for August 1 to December 31 only
C. 40% of Iona’s total year income
D. Amount equal to dividends received from Iona
A
On 1/1, Point purchased 10% of Iona’s common stock. On 8/1, when Point increased its investment in Iona’s common stock from 10 percent to 40 percent,
Point gained the ability to exercise significant influence over the financial and operating policies of Iona and accordingly should report its investment using
the equity method. The change from the cost method of reporting the investment to the equity method should be made by prospectively.
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?
A. The other asset group should be tested for an impairment loss before goodwill is tested
B. Impairment testing may be conducted concurrently for the other asset group and goodwill
C. If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment
D. If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment
The correct answer is (A).
Goodwill is calculated at the reporting unit level, which can be an operating segment or one level below. Thus, the other asset group should be tested for an impairment loss before goodwill. Goodwill impairment is a charge that companies record when the goodwill’s carrying value on financial statements exceeds its fair value. Goodwill impairment arises when there is a deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value. Therefore, it is a good idea to test an asset group for impairment loss before any goodwill is tested.
At the end of year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of year 2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for year 2 to properly report the inventory value?
A. Debit inventory for $20 and credit expense for $20
B. Debit inventory for $70 and credit expense for $70
C. Debit inventory for $70, credit retained earnings for $50 and credit expense for $20
D. Debit inventory for $20, debit expense for $30 and credit retained earnings for $50
The correct answer is (A).
Inventory was written down to its NRV of $80 (from $100). Under IFRS, Net Realizable Value (NRV) is the best approximation of how much inventories are expected to realize moving forward. IFRS only allows inventory recovery up to the point that was written off initially - i.e., $100.Although the NRV has increased to well above the original inventory cost (book value), only $20 of recovery is allowed.
The B/S entry would be:
Inventory $20
Expense $20
Note: Recoveries are recorded as expenses in the I/S because they are a Reduction to COGS.
Based on a physical inventory taken on December 31, Chewy Co. determined its chocolate inventory on a FIFO basis at $26,000 with a replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. Chewy’s normal profit margin is 10% of sales. Under the lower of cost or market rule, what amount should Chewy report as chocolate inventory in its December 31 balance sheet?
A. $28,000
B. $26,000
C. $24,000
D. $20,000
B
Inventory is valued at the Lower of Cost or Market (LCM) if LIFO or retail inventory is used. Exception: FASB has issued an update replacing the LCM valuation with lower of cost of net realizable value (LCNRV) valuation for other than LIFO or retail inventory methods. Chewy Co. determined its chocolate inventory on FIFO basis. Inventory should be valued at LCNRV. Cost = $26,000. NRV = Net selling price - Costs to complete and dispose = $40,000 - $12,000 = $28,000. Lower of the two: inventory is $26,000.
Options (A), (C) and (D) are incorrect because these represent the ceiling (NRV), floor (NRV - normal profit margin) and replacement cost respectively
When the equity method is used to account for investments in common stock, which of the following affect(s) the investor's reported investment income? # A change in market value of investee's common stock Cash dividends from investee A. Yes Yes B. Yes No C. No Yes D. No No
D
Under the equity method of accounting for investments in common stock, the investment is recorded at cost. Changes in the market value of the investee’s common stock do not affect the Investment account or the Investment Income account. The investor recognizes as income its share of the investee’s earnings or losses in the periods in which they are reported by the investee. Dividends declared by the investee represent a distribution of earnings previously recognized and, thus, do not affect the Investment Income account.
During the year, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1. Costs of registering the patent equaled $34,000. The patent's legal life is 17 years, and its estimated economic life is 10 years. In its December 31 balance sheet, what amount should Jase report as patent, net of accumulated amortization? A. $ 32,300 B. $ 33,000 C. $161,500 D. $165,000
A
Research and development costs are expensed as incurred. Only the costs of acquiring a patent should be capitalized. Thus, only the cost of registering the patent, $34,000, is capitalized. The capitalized cost of an intangible asset, is amortized over the asset’s economic life. One-half year of amortization is $1,700 ($34,000 / 10 years x 1/2 year). ($34,000 - $1,700) = $32,300.
Rand, Inc. accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31 of the current year. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand's September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of A. $170 B. $200 C. $300 D. $400
A
Face amount of note $ 40,000
Add interest to maturity ($40,000 x 12% × 90/360) 1,200
Maturity value of note $ 41,200
Less bank discount ($41,200 x 15% x 60/360) (1,030)
Proceeds from discounted note $ 40,170
Less face amount of note (40,000)
Accrued interest revenue, 9/30 $ 170
When the market value of an investment in securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year?
# Trading Marketable Securities Available-For-Sale Marketable Securities
A. Market value Market value
B. Carrying amount Carrying amount
C. Carrying amount Market value
D. Market value Carrying amount
A
Marketable securities classified as either trading or available-for-sale are to be accounted for at market.
At the beginning of year 2, a company invested $40,000 in a marketable equity security. At that time the security was appropriately classified security with readily determinable market value. At the end of year 2, the security had a fair value of $28,500. The change in fair value is deemed temporary. How should this change in fair value be reported in the financial statements?
A. As a realized loss of $11,500 as part of net income.
B. As a realized loss of $11,500 as part of other comprehensive income.
C. As an unrealized loss of $11,500 as part of net income.
D. As an unrealized loss of $11,500 as part of other comprehensive income.
C
The correct answer is (C)
As per FASB issued accounting standards update 2016-01, investment in marketable equity securities should be measured at fair value through net income (FVTNI).
All type of changes in fair value of equity securities whether temporary or permanent needs to be routed through net income only. Also, there is no longer classification of equity investments as trading or Available For Sale (AFS), and there is no longer a requirement to recognize unrealized holding gains and losses on equity securities in other comprehensive income as previously required.
(A) is incorrect because loss is not realized and hence should not be reported as realized loss as part of net income.
(B) & (D) are incorrect because unrealized and realized are both types of losses that should be reported as part of net income, not as a part of other comprehensive income.
A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should
A. Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
B. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.
C. Record a loss in the current period equal to the cost of refurbishing and continue to depreciate the original cost of the building.
D. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.
A
The damaged portion of the building was refurbished with upgraded materials which indicates that a ‘betterment’ is involved. There are benefits to future periods as a result of the refurbishing expenditures; thus, they should be capitalized. The cost and related accumulated depreciation of the damaged portion of the building are identifiable so they should be removed from the books (with a resulting debit to ‘loss’ for the difference) because this portion of the building has been replaced to a certain extent and upgraded.
During the current year, Orr Co. incurred the following costs:
Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000 In its current year income statement, what should Orr report as research and development expense?
A. $150,000
B. $200,000
C. $350,000
D. $525,000
D
All three activities are examples of activities that typically are included in research and development and should be expensed. $150,000 + $200,000 + $175,000 = $525,000.
Brock Co. adopted the dollar-value LIFO inventory method as of January 1, year 1. A single inventory pool and an internally computed price index are used
to compute Brock’s LIFO inventory layers. Information about Brock’s dollar value inventory follows:
Inventory
Date At base year cost At current year cost At dollar value LIFO
1/1, year 1 $40,000 $40,000 $40,000
Year 1 layer 5,000 14,000 6,000
12/31, year 1 $45,000 $54,000 $46,000
Year 2 layer 15,000 26,000 ?
12/31, year 2 $60,000 $80,000 ?
What was Brock’s dollar value LIFO inventory at December 31, year 2?
A. $80,000
B. $74,000
C. $66,000
D. $60,000
C
The price index is computed by dividing the ending inventory at current year cost by its base year cost.
Date Layers at base year cost Price index Ending inventory at LIFO cost
01/01, year 1 $40,000 1.0000 [1] $40,000
12/31, year 1 5,000 1.2000 [2] 6,000
12/31, year 2 15,000 1.3333 [3] 20,000
$60,000 $66,000
[1] $40,000 / $40,000 [2] $54,000 / $45,000 [3] $80,000 / $60,000
Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000 At what amount should Oak record the land?
A. $138,125
B. $153,500
C. $154,125
D. $175,625
C
Assets are to be recorded at their acquisition cost. Acquisition cost is defined as the cash price, or equivalent, plus all other costs reasonably necessary to make it ready for it’s intended use. The land is recorded at the $135,000 cash paid for the land plus the additional costs: the $2,500 for county assessment for sewer lines, the $625 for title search fees, and the $16,000 for removal of old building less salvage value ($21,000 - $5,000) = $154,125. The $21,000 excavation cost for construction of a basement is part of the cost of the new building, not the land.
During the previous year, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 as an equity investment. The market value of this investment was $29,500 at December 31 of the previous year. Wall sold all of the Hemp common stock for $14 per share on December 15 of the current year, incurring $1,400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss of
A. $3,500
B. $4,900
C. $2,900
D. $1,500
The correct answer is (C).
The realized loss reported from the sale of the equity securities is determined as the difference between the proceeds received (i.e., the gross selling price of the shares less any brokerage commissions and taxes incurred in the sale) and the carrying value of the securities. Equity securities are recorded at fair value with unrealized gains and losses included in earnings.
Gross selling price of 2,000 share @ $14 $28,000
Less: brokerage commissions and taxes incurred (1,400)
Proceeds received from sale of securities 26,600
Carrying Value of Securities Sold ($31,500 - $2,000) (29,500)
Realized Loss in current year ($ 2,900)
During the current year, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam's current year accounting records: Beginning Inventory $122,000 Purchases 540,000 Freight in 10,000 Transportation to consignees 5,000 Freight out 35,000 Ending Inventory--held by Kam 145,000 Ending Inventory--held by consignees 20,000 In its current year income statement, what amount should Kam report as cost of goods sold? A. $507,000 B. $512,000 C. $527,000 D. $547,000
B
Goods out on consignment remain the property of the consignor and must be included in the consignor’s inventory at purchase price or production cost, including freight and other costs incurred to process the goods up to the time of sale.
Beginning inventory $122,000
Add: Purchases $540,000
Freight in shipping 10,000
Transportation to consignees 5,000
Add: Total inventoriable costs 555,000
Goods available for sale 677,000
Less: Ending inventory ($145,000 + $20,000) (165,000)
Cost of goods sold $512,000
Park Co. uses the equity method to account for its January 1 current year purchase of Tun, Inc.'s common stock. On this date, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's current year earnings? # Inventory excess Land excess A. Decrease Decrease B. Decrease No effect C. Increase Increase D. Increase No effect
B
The excess of the fair value of Tun’s FIFO inventory over its carrying amount would decrease Park’’s reported equity in Tun’s earnings and the excess of the fair value of Tun’’s land over its carrying amount would have no effect on Park’s reported equity in Tun’s earnings.
A company is constructing an asset for its own use. Construction began in the previous year. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in last year and this year at the end of each quarter. The total amount of interest cost capitalized in the current year should be determined by applying the interest rate on the specific new borrowing to the
A. Total accumulated expenditures for the asset in both years.
B. Average accumulated expenditures for the asset in both years.
C. Average expenditures for the asset in the current year.
D. Total expenditures for the asset in the current year.
B
The amount of interest cost to be capitalized is that portion of interest cost incurred during the asset’s acquisition periods that theoretically could have been avoided if expenditures for the asset had not been made. In this question, the amount of interest cost to be capitalized in the current year is determined by applying the interest rate on the specific new borrowing to the average accumulated expenditures for the asset in the previous year and current year.
Which of the following describes portfolio segment disclosure in regards to credit losses?
A. The level used by the entity in developing and documenting a systematic method for determining the allowance for credit losses
B. The level based on initial measurement attributes, risk characteristics of the financing receivables, and methods used by reporting entities related to monitoring and assessing credit risk
C. A fully aggregated basis of disclosure
D. None of the above
A
In order to achieve the disclosure objective, reporting entities need to provide disclosures on two levels of disaggregation: portfolio segment and class of financing receivable. A portfolio segment is defined as the level used by the entity in developing and documenting a systematic method for determining the allowance for credit losses. Class of financing receivables generally represents a disaggregation of a portfolio segment, based on initial measurement attributes, risk characteristics of the financing receivables, and methods used by reporting entities related to monitoring and assessing credit risk.
Turtle Co. purchased equipment on January 2, year 1, for $50,000. The equipment had an estimated five-year service life. Turtle's policy for five-year assets is to use the 200% double-declining depreciation method for the first two years of the asset's life, and then switch to the straight-line depreciation method. In its December 31, year 3, balance sheet, what amount should Turtle report as accumulated depreciation for equipment? A. $30,000 B. $38,000 C. $39,200 D. $42,000
B
On December 31, year 3 Turtle reports $32,000 + $6,000 = $38,000 as accumulated depreciation. Double-declining-balance is computed using twice the straight-line rate, which in this case is 40% (1/5 = 0.20; 0.20 x 2 = .40). In year 3, depreciation is computed by dividing the remaining life of 3 years = $6,000.
Book value beginning of year Rate Depreciation Expense Accumulated Depreciation Book Value End of Year
Year 1 $50,000 40% $20,000 $20,000 $30,000
Year 2 30,000 40% 12,000 32,000 18,000
On January 1, year 1, Poe Company adopted the dollar-value LIFO inventory method. Poe’s entire inventory constitutes a single pool. Inventory data for year 1 and year 2 are as follows:
Date Inventory at current year cost Inventory at base year cost Relevant price index
1/1/, year 1 $150,000 $150,000 1.00
12/31, year 1 220,000 200,000 1.10
12/31, year 2 276,000 230,000 1.20 Poe’s LIFO inventory value at December 31, year 2 is
A. $230,000
B. $236,000
C. $241,000
D. $246,000
C
Date Layers at Base Year Cost Price Index Ending Inventory at LIFO Cost 01/01, year1 $150,000 1.00 $150,000 12/31, year1 50,000 [1] 1.10 55,000 12/31, year2 30,000 [2] 1.20 36,000 $230,000 $241,000 [1] $200,000 - $150,000 [2] $230,000 - $200,000
As of December 31, year 2, a company has an inventory item that was originally purchased for $80 in year 1. The inventory item was written down to its net realizable value of $60 as of December 31, year 1. As of December 31, year 2, the inventory item had a net realizable value of $75 and a replacement cost of $65. Normal profit margins for this company are 20%. Under IFRS, what is the carrying amount of the inventory item as of December 31, year 2?
A. $60
B. $65
C. $75
D. $80
The correct answer is (C)
The carrying amount of the inventory item as of December 31st, year 2 is $75.
Under IFRS, inventories are measured at the lower of cost or net realizable value (NRV). Inventories will be written down if needed, and a write-down can only be reversed up to the original cost. On December 31, year 1 the cost of the inventory was $80 and the net realizable value (NRV) was $60. The inventory would be valued at the lower of the two values and would be recorded at $60 in the financial statements at the end of year 1. As of December 31, year 2, the NRV of the inventory was $75. The original cost was $80. The inventory would continue to be stated at the NRV of $75 as this is lower than the original cost of $80.
