intermediate accounting final exam

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which of the following is a characteristic of a perpetual inventory system?
a. inventory purchases are debited to a purchase account
b. inventory records are not kept for every item
c. cost of goods sold is recorded with each sale
d. cost of goods sold is determined as the amount of purchases less the change in inventory

cost of goods sold is recorded with each sale

how is a significant amount of consignment inventory reported in the balance sheet?
a. the inventory is reported separately on the consignor's balance sheet
b. the inventory is combined with other inventory on the consignor's balance sheet
c. the inventory is reported separately on the consignee's balance sheet
d. the inventory is combined with other inventory on the consignee's balance sheet

the inventory is reported separately on the consignor's balance sheet

where should goods in transit that were recently purchased f.o.b destination be included on the balance sheet?
a. accounts payable
b. inventory
c. equipment
d. not on the balance sheet

not on the balance sheet

if a company uses the periodic inventory system what is the impact of net income of including goods in transit f.o.b shipping point in purchases, but not ending inventory?
a. overstate net income
b. understate net income
c. no effect on net income
d. not sufficient information to determine effect on net income

understate net income

if a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit f.o.b shipping point in purchases, but not ending inventory?
a. overstate the current ratio
b. understate the current ratio
c. no effect on the current ratio
d. not sufficient information to determine effect on the current ratio

understate the current ratio

what is consigned inventory?
a. goods that are shipped, but title transfers to the receiver
b. goods that are sold, but payment is not required until the goods are sold
c. goods that are shipped, but title remains with the shipper
d. goods that have been segregated for shipment to a customer

goods that are shipped, but title remains with the shipper

when using a perpetual inventory system,
a. no purchases account is used
b. a cost of goods sold account is used
c. two entries are required to record a sale
d. all of these

all of these

goods in transit which are shipped f.o.b shipping point should be
a. included in the inventory of the seller
b. included in the inventory of the buyer
c. included in the inventory of the shipping company
d., none of these

included in the inventory of the buyer

goods in transit which are shipped f.o.b destination should be
a. included in the inventory of the seller
b. included in the inventory of the buyer
c. included in the inventory of the shipping company
d. none of these

included in the inventory of the seller

which of the following items should be included in a company's inventory at the balance sheet date?
a. goods in transit which were purchased f.o.b destination
b. goods received from another company for sale on consignment
c. goods sold to a customer which are being held for the customer to call for at his or her convenience
d. none of these

none of these

During 2012 carne corporation transferred inventory to nolan corporation and agreed to repurchase the merchandise early in 2013. nolan then used the inventory as collateral to borrow from Norwalk bank, remitting the proceeds to carne. in 2013 when carne repurchased the inventory, nolan used the proceeds to repay its bank loan.

the transaction is known as a(n)
a. consignment
b. installment sale
c. assignment for the benefit of creditors
d. product financing agreement

product financing agreement

During 2012 carne corporation transferred inventory to nolan corporation and agreed to repurchase the merchandise early in 2013. nolan then used the inventory as collateral to borrow from Norwalk bank, remitting the proceeds to carne. in 2013 when carne repurchased the inventory, nolan used the proceeds to repay its bank loan.

on whose books should the cost of the inventory appear at the December 31, 2012 balance sheet date?
a. carne corporation
b. nolan corporation
c. norwalk bank
d. nolan corporation, with carne making appropriate note disclosure of the transaction

carne corporation

goods on consignment are
a. included in the consignee's inventory
b. recorded in a consignment out account which is an inventory account
c. recorded in a consignment in account which is an inventory account
d. all of these

recorded in a consignment out account which is an inventory account

valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory
b. the physical goods to be included in inventory
c. the cost of goods held on consignment from other companies
d. the cost flow assumption to be adopted

the cost of goods held on consignment from other companies

the accountant for the pryor sales company is preparing the income statement for 2012 and the balance sheet at december 31, 2012. pryor uses the periodic inventory system. the january 1, 2012 merchandise inventory balance will appear
a. only as an asset on the balance sheet
b. only in the cost of goods sold section of the income statement
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet

only in the cost of goods sold section of the income statement

if the beginning inventory for 2012 is overstated, the effects of this error on cost of goods sold for 2012, net income for 2012, and assets at December 31, 2013 respectively are
a. overstatement, understatement, overstatement
b. overstatement, understatement, no effect
c. understatement, overstatement, overstatement
d. understatement, overstatement, no effect

overstatement, understatement, no effect

the failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in
a. an overstatement of assets and net income
b. an understatement of assets and net income
c. an understatement of cost of goods sold and liabilities and an overstatement of assets
d. an understatement of liabilities and an overstatement of owners' equity

an understatement of liabilities and an overstatement of owners' equity

which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost?
a. purchase discounts lost
b. interest incurred during the production of discrete projects such as ships or real estate projects
c. interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
d. all of these should be capitalized

interest incurred during the production of discrete projects such as ships or real estate projects

which inventory costing method most closely approximates current cost for each of the following: ending inventory, cost of goods sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO

FIFO LIFO

in situations where there is a rapid turnover, an inventory method which produces a balance sheet variation similar to first-in, first-out method is
a. average cost
b. base stock
c. joint cost
d. prime cost

average cost

the pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation:
a. moving average
b. weighted-average
c. FIFO perpetual
d. FIFO

weighted-average

an inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is:
a. FIFO
b. LIFO
c. base stock
d. weighted-average

FIFO

which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
a. average cost
b. first-in, first-out
c. last-in, first-out
d. base stock

first-in, first-out

assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
a. prices decreased
b. prices remained unchanged
c. prices increased
d. price trend cannot be determined from information given

prices decreased

in a period of rising prices, the inventory method which tends to give the highest reported net income is
a. base stock
b. first-in, first-out
c. last-in, first-out
d. weighted-average

first-in, first-out

in a period of rising prices, the inventory method which tends to give the highest reported inventory is
a. FIFO
b. moving average
c. LIFO
d. weighted-average

FIFO

tanner corporation's inventory cost on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. assuming no beginning inventory, in what direction did the cost of purchases move during the period?
a. up
b. down
c. steady
d. cannot be determined

down

in a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
a. FIFO
b. average cost
c. LIFO
d. none of these

LIFO

which of the following statements is not valid as it applies to inventory costing methods?
a. if inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices
b. LIFO tends to smooth out the net income pattern by matching current cost of goods sold with current revenue, when inventories remain at constant quantities
c. when a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue
d. the use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO

the use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO

which of the following is not considered an advantage of LIFO when prices are rising?
a. the inventory will be overstated
b. the more recent costs are matched against current revenues
c. there will be a deferral of income tax
d. a company's future reported earnings will not be affected substantially by future price declines

the inventory will be overstated

which of the following is true regarding the use of LIFO for inventory valuation?
a. if LIFO is used for external financial reporting, then it must also be used for internal reports
b. for purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach
c. if LIFO is used for external financial reporting, then it cannot be used for tax purposes
d. none of these

none of these

if inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices
b. cost of goods sold tends to be stated at approximately current cost on the income statement
c. cost assignments typically parallel the physical flow of goods
d. income tends to be smoothed as prices change over time

income tends to be smoothed as prices change over time

hudson inc, is a calendar-year corporation. its financial statements for the years 2013 and 2012 contained errors as follows:

2013 2012
ending inventory 4500 OS 12000 OS
depreciation expense 3000 US 9000 OS

assume that the proper correcting entries were made at december 31, 2012. by how much will 2013 income before taxes be overstated or understated?
a. 1500 understated
b. 1500 overstated
c. 3000 overstated
d. 7500 overstated

7500 overstated

hudson inc, is a calendar-year corporation. its financial statements for the years 2013 and 2012 contained errors as follows:

2013 2012
ending inventory 4500 OS 12000 OS
depreciation expense 3000 US 9000 OS

assume that no correcting entries were made at december 31 2012. ignoring income taxes, by how much will retained earnings at december 31, 2912 be overstated or understated?
a. 1500 understated
b. 7500 overstated
c. 7500 understated
d. 13500 understated

1500 understated

hudson inc, is a calendar-year corporation. its financial statements for the years 2013 and 2012 contained errors as follows:

2013 2012
ending inventory 4500 OS 12000 OS
depreciation expense 3000 US 9000 OS

assume that no correcting entries were made at december 31 2012 or december 31 2013 and no additional errors occurred in 2014. ignoring income taxes, by how much will working capital at december 31, 2014 be overstated or understated?
a. 0
b. 3000 overstated
c. 3000 understated
d. 7500 understated

0

Morgan Manufacturing Company has the following account balances at year end:

Office Supplies 4000
Raw Materials 27000
Work-in-Process 59000
Finished goods 82000
Prepaid Insurance 6000

What amount should Morgan report as inventories in its balance sheet?
a. 82000
b. 86000
c. 168000
d. 172000

168000

Purchases:
6/1 (Bal.) 1,200 @ 3.20
6/3 3,300 @ 3.10
6/7 1,800 @ 3.30
6/15 2,700 @ 3.40
6/22 750 @ 3.50

Sales:
6/2 900 @ 5.50
6/6 2400 @ 5.50
6/9 1500 @ 5.50
6/10 600 @ 6.00
6/18 2100 @ 6.00
6/25 300 @ 6.00

Assuming that perpetual inventory records are kept in dollars and units, the ending inventory on a LIFO basis is
a. 6165
b. 6240
c. 6435
d. 6705

6435

Purchases:
6/1 (Bal.) 1,200 @ 3.20
6/3 3,300 @ 3.10
6/7 1,800 @ 3.30
6/15 2,700 @ 3.40
6/22 750 @ 3.50

Sales:
6/2 900 @ 5.50
6/6 2400 @ 5.50
6/9 1500 @ 5.50
6/10 600 @ 6.00
6/18 2100 @ 6.00
6/25 300 @ 6.00

Calculate the COGS under the FIFO basis

25110

Purchases:
6/1 (Bal.) 1,200 @ 3.20
6/3 3,300 @ 3.10
6/7 1,800 @ 3.30
6/15 2,700 @ 3.40
6/22 750 @ 3.50

Sales:
6/2 900 @ 5.50
6/6 2400 @ 5.50
6/9 1500 @ 5.50
6/10 600 @ 6.00
6/18 2100 @ 6.00
6/25 300 @ 6.00

Calculate the EI under the FIFO basis

6705

What is a LIFO reserve?
a. the difference between the LIFO inventory and the amount used for internal reporting purposes
b. the tax savings attributed to using the LIFO method
c. the current effect of using LIFO on net income
d. change in the LIFO inventory during the year

the difference between the LIFO inventory and the amount used for internal reporting purposes

Plant assets may properly include
a. deposits on machinery not yet received
b. idle equipment awaiting sale
c. land held for possible use as a future plant site
d. none of these

none of these

which of the following is not a major characteristic of a plant asset?
a. possesses physical substance
b. acquired for resale
c. acquired for use
d. yields services over a number of years

acquired for resale

cotton hotel corporation recently purchased emporia hotel and the land on which it is located with the plan to tear down the emporia hotel and build a new luxury hotel on the site. the cost of the emporia hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down
b. written off as an extraordinary loss in the year the hotel is torn down
c. capitalized as part of the cost of the land
d. capitalized as part of the cost of the new hotel

capitalized as part of the cost of the land

the cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining and clearing costs
b. street lights, sewers and drainage systems cost
c. private driveways and parking lots
d. assumption of any liens or mortgages on the property

private driveways and parking lots

if a corporation purchases a lot and building and subsequently tears down the building and uses the property lot, the proper accounting treating of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building
b. the length of time for which the building was held prior to its demolition
c. the contemplated future use of the parking lot
d. the intention of management for the property when the building was acquired

the intention of management for the property when the building was acquired

the debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
a. the machinery account
b. a separate deferred charge account
c. miscellaneous tax expense (which includes all taxes other than those on income)
d. accumulated depreciation--machinery

the machinery account

fences and parking lots are reported on the balance sheet as
a. current assets
b. land improvements
c. land
d. property and equipment

land improvements

historical cost is the basis advocated for recording the acquisition of property plant and equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value
b. property, plant, and equipment items are always acquired at their original historical cost
c. historical cost involves actual transactions and, as such, is the most reliable basis
d. gains and losses should not be anticipated but should be recognized when the asset is sold

property, plant, and equipment items are always acquired at their original historical cost

to be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
a. allocated on the basis of lost production
b. eliminated completely from the cost of the asset
c. allocated on an opportunity cost basis
d. allocated on a pro rata basis between the asset and normal operations

allocated on a pro rata basis between the asset and normal operations

which of the following costs are capitalized for self-constructed assets?
a. materials and labor only
b. labor and overhead only
c. materials and overhead only
d. materials, labor, and overhead

materials, labor and overhead

which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?
a. assets under construction for an enterprise's own use
b. assets intended for sale or lease that are produced as discrete projects
c. assets financed through the issuance of long-term debt
d. assets not currently undergoing the activities necessary to prepare them for their intended use

assets not currently undergoing the activities necessary to prepare them for their intended use

when computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to
a. the total interest cost actually incurred
b. a cost of capital charge for stockholders' equity
c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made
d. that portion of average accumulated expenditures on which no interest cost was incurred

that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

the period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use
b. no further interest cost is being incurred
c. the asset is abandoned, sold, or fully depreciated
d. the activities that are necessary to get the asset ready for its intended use have begun

the asset is substantially complete and ready for its intended use

which of the following statements is true regarding capitalization of interest?
a. interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account
b. the amount of interest cost capitalized during the period should not exceed the actual interest cost incurred
c. when excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized
d. the minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period

the amount of interest cost capitalized during the period should not exceed the actual interest cost incurred

when a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from
a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature
b. a sale prior to the completion of the estimated useful life of the asset
c. the sale of a fully depreciated asset
d. an abandonment of the asset

an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature

the sale of a depreciable asset resulting in a loss indicates that the processed from the sale were
a. less than current fair value
b. greater than cost
c. greater than book value
d. less than book value

less than book value

which of the following statements about involuntary conversions is false?
a. an involuntary conversion may result from condemnation or fire
b. the gain or loss from an involuntary conversion may be reported as an extraordinary item
c. the gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets
d. all of these

the gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets

arlington company is constructing a building. construction began on january 1 and was completed on december 31. expenditures were $4,000,000 on march 1, $3,300,000 on june 1, and $5,000,000 on december 31. arlington company borrowed $2,000,000 on january 1 on a 5-year, 12% note to help finance construction of the building. in addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable

what are the weighted-average accumulated expenditures?
a. 7300000
b. 5258333
c. 12300000
d. 6150000

5258333

arlington company is constructing a building. construction began on january 1 and was completed on december 31. expenditures were $4,000,000 on march 1, $3,300,000 on june 1, and $5,000,000 on december 31. arlington company borrowed $2,000,000 on january 1 on a 5-year, 12% note to help finance construction of the building. in addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable

what is the weighted-average interest rate used for interest capitalization purposes?
a. 11%
b. 10.85%
c. 10.5%
d. 10.65%

10.65%

arlington company is constructing a building. construction began on january 1 and was completed on december 31. expenditures were $4,000,000 on march 1, $3,300,000 on june 1, and $5,000,000 on december 31. arlington company borrowed $2,000,000 on january 1 on a 5-year, 12% note to help finance construction of the building. in addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable

what is the avoidable interest for arlington company?
a. 240000
b. 773013
c. 273802
d. 587012

587012

arlington company is constructing a building. construction began on january 1 and was completed on december 31. expenditures were $4,000,000 on march 1, $3,300,000 on june 1, and $5,000,000 on december 31. arlington company borrowed $2,000,000 on january 1 on a 5-year, 12% note to help finance construction of the building. in addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable

what is the actual interest for the arlington company?
a. 1465000
b. 1485000
c. 1225000
d. 587012

1465000

arlington company is constructing a building. construction began on january 1 and was completed on december 31. expenditures were $4,000,000 on march 1, $3,300,000 on june 1, and $5,000,000 on december 31. arlington company borrowed $2,000,000 on january 1 on a 5-year, 12% note to help finance construction of the building. in addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable

what amount of interest should be charged to expense?
a. 637987
b. 1225
c. 877987
d. 691987

877987

construction of a qualifying asset is started on april 1 and finished on december 1. the fraction used to multiply an expenditure made on april 1 to find weighted-average accumulated expenditures is
a. 8/8
b. 8/12
c. 9/12
d. 11/12

8/12

when funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. interest earned on these temporary investments should be
a. offset against interests cost incurred during construction
b. used to reduce the cost of assets being constructed
c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized
d. recognized as revenue of the period

recognized as revenue of the period

interest cost that is capitalized should
a. be written off over the remaining term of the debt
b. be accumulated in a separate deferred charge amount and written off equally over a 40-year period
c. not be written off until the related asset is fully depreciated or disposed of
d. none of these

none of these

which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment?
a. capitalize only the actual interest costs incurred during construction
b. charge construction with all costs of funds employed, whether identifiable or not
c. capitalize no interest during construction
d. capitalize interest costs equal to the prime interest rate times the estimated cost of the asset during construction

capitalize only the actual interest costs incurred during construction

which of the following nonmonetary exchange transactions represents a culmination of the earning process?
a. exchange of assets with no difference in future cash flows
b. exchange of products by companies in the same line of business with no difference in future cash flows
c. exchange of assets with a difference in future cash flows
d. exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position

exchange of assets with a difference in future cash flows

when boot is involved in an exchange having commercial substance
a. gains or losses are recognized in their entirely
b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up
c. only gains should be recognized
d. only losses should be recognized

gains or losses are recognized in their entirely

the cost of nonmonetary asset acquired in exchange for another nonmonteary asset and the exchange has commercial substance is usually recorded at
a. the fair value of the asset given up, and a gain or loss is recognized
b. the fair value of the asset given up, and a gain but not a loss may be recognized
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up
d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest lost) to the company

the fair value of the asset given up, and a gain or loss is recognized

ringler corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. the exchange is not expected to cause a material change in the future cash flows for either entity. if a gain on the disposal of the old asset is indicated the gain will
a. be reported in the Other Revenues and Gains section of the income statement
b. effectively reduce the amount to be recorded as the cost of the new asset
c. effectively increase the amount to be recorded as the cost of the new asset
d. be credited directly to the owner's capital account

be credited directly to the owner's capital account

plant assets purchased on long-term credit contracts should be accounted for at
a. the total value of the future payments
b. the future amount of the future payments
c. the present value of the future payments
d. none of these

the present value of the future payments

when a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
a. part value of the stock
b. stated value of the stock
c. book value of the stock
d. fair value of the stock

fair value of the stock

when a closely held corporation issues preferred stock for land, the land should be recorded at the
a. total par value of the stock issued
b. total book value of the stock issued
c. total liquidating value of the stock issued
d. fair value of the land

fair value of the land

accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has
a. no commercial substance and additional cash is paid
b. no commercial substance and additional cash is received
c. commercial substance and additional cash is paid
d. commercial substance and additional cash is received

no commercial substance and additional cash is paid

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