Question 1:

Kahn Co., in applying the lower of cost or market method, reports its inventory at
replacement cost. Which of the following statements are correct?
The net realizable
The original cost is
value, less a
greater
normal profit margin,
than replacement
is greater
cost
than replacement cost
Yes
Yes
Yes
No
No
Yes
No
No
Under LCM, the market value of inventory is the middle of three figures (in amount):
replacement cost
net realizable value
net realizable value less normal profit margin.
If the middle figure (market) is less than cost, then the inventory is reported at
market. The inventory in this question is reported at replacement cost, which means
that replacement cost is market value and replacement cost is less than cost. Also,
replacement cost is the middle of the three figures (or tied with one of the other
two).
Net realizable value less normal profit margin could not exceed replacement cost
because that would imply that replacement cost is the lowest of the three figures,
which contradicts the fact that replacement cost is market value.
Therefore, in terms of the question,
(1) original cost is greater than replacement cost, and
(2) net realizable value less normal profit margin is not greater than replacement
cost.
Question 2:
Information for a firm using the dollar value (DV) LIFO retail method follows. The
cost to retail (C/R) is provided along with price level indices. The data reflects the
use of the method through year one.
Reta
DV
Retail
il
LIFO
Bas Inde Curren C/ Cos
Layer
e
x
t
R t
$20
.
Base
1.00 $200
$80
0
40
year
.
80 1.10 $88
$30
one
34
For year two, ending inventory at retail (by count) totaled $310. The ending pricelevel index for the year was 1.15. The cost-to-retail ratio was .42. What is the
ending inventory for financial reporting purposes for this firm?
$12
1
$10
8
$10

6
$13
0
When ending retail inventory at base is less than the beginning-of-the-year amount,
a layer has been reduced or liquidated. The most recent layer added is used first.
The reduction in retail at base is converted to the retail amount at the prices in
effect when that layer was added. The reduction in retail at that historical price level
index is converted to cost using the cost-to-retail ratio in effect when that layer was
added. The result is the reduction in DV LIFO retail, at cost. The computations are:
Ending inventory, retail, at base = $310(1.00/1.15) = $270
Decrease in retail, at base = ($200 + $80)-$270 = $10
Reduction in year one layer at retail = $10(1.10/1.00) = $11
Decrease in cost = $11(.34) = $4
Ending inventory at cost = ($80 + $30)-$4 = $106
Question 3:
Which of the following statements are correct when a company applying the lower
of cost or market method reports its inventory at replacement cost?
I. The original cost is less than replacement cost.
II. The net realizable value is greater than replacement cost.
I only.
II only.
Both I and II.
Neither I nor
II.
When a company reports its inventory at replacement cost (market value), original
cost must exceed replacement cost. Lower of cost or market means the inventory is
reported at replacement cost when replacement cost is less than original cost. Thus,
statement I is not correct.
When determining market value, net realizable value is the ceiling or maximum
amount. If replacement cost is less than net realizable value, then replacement cost
is used as market (as long as replacement cost exceeds net realizable value less a
normal profit margin - the floor or minimum value for market).
The firm in the question is reporting the inventory at replacement cost. Therefore,
replacement cost must be less than net realizable value.
Question 4:
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
Replacement cost.
Net realizable value.
Net realizable value less normal profit
margin.
Original cost.
Using small numerical examples or a visual helps to solve this type of question. In
the diagram below, the higher an amount is listed, the greater its dollar amount.

----> RC and NRV amounts are the highest; although which of the two is the higher
is not given
----> Original cost
----> NRV - normal profit margin
Under LCM, the market value of the inventory is the middle figure (in dollar amount)
from among RC, NRV and NRV - normal profit margin. Thus, market must be either
RC or NRV, and it does not matter which one of the two is the middle amount. Thus,
original cost is less than market, meaning the inventory is valued at original cost
(which is the lower of cost or market).
Question 5:
Based on a physical inventory taken on December 31, 2004, 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, 2004, balance sheet?
$28,00
0
$26,00
0
$24,00
0
$20,00
0
Market is the middle figure of replacement cost - $20,000, net realizable value $28,000 ($40,000 - $12,000 processing cost), and net realizable value less normal
profit margin - $24,000 ($28,000 - .10 x $40,000). Therefore, market is $24,000, the
middle value of the three. The lower of cost ($26,000) or market ($24,000) is
market ($24,000), and market is the reported amount for the inventory.
Question 6:
A corporation entered into a purchase commitment to buy inventory. At the end of
the accounting period, the current market value of the inventory was less than the
fixed purchase price, by a material amount. Which of the following accounting
treatments is most appropriate?
Describe the nature of the contract in a note to the financial statements, recognize
a loss in the Income Statement, and recognize a liability for the accrued loss.
Describe the nature of the contract and the estimated amount of the loss in a note
to the financial statements, but do not recognize a loss in the Income Statement.
Describe the nature of the contract in a note to the financial statements, recognize
a loss in the Income Statement, and recognize a reduction in inventory equal to the
amount of the loss by use of a valuation account.
Neither describe the purchase obligation nor recognize a loss on the Income
Statement or Balance Sheet.
The firm has committed to a fixed price but must recognize the loss in the period
the decline in price occurred, much like under lower-of-cost-or-market. Inventory is

not reduced because the firm has not purchased the inventory under contract.
There is no asset to reduce, but the decrease in net assets is accomplished by
recording the liability for the portion of the purchase price that has no value.
Question 7:
A firm began the construction of its new manufacturing facility in January of 20x2.
The following expenditures were made on construction in that year:
$40,00
Jan. 1
0
120,00
Mar. 1
0
Oct.
96,000
31
Debt outstanding the entire year:
6%, $60,000 construction loan
4%, $90,000 note payable not related to
construction
6%, $90,000 note payable not related to
construction
Compute interest to be capitalized using the weighted average method.
$6,720
$12,60
0
$8,400
$8,190
Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) +
$96,000(2/12). This method uses the average interest rate on all interest bearing
debt, weighted by principal. That rate is the quotient of the interest on all the debt
divided by the principal on all the debt. The rate = ($3,600 + $3,600 + $5,400)/
$240,000 = .0525. Interest capitalized = (.0525)$156,000 = $8,190.
Question 8:
The following two inventory items were purchased as a group in a liquidation sale
for $1,000.
Replacem Carrying
ent
Value
Ite
On Seller's
Cost
m
Books
A $400
$390
B 700
755
The firm purchasing the inventory records item A at what amount?
$34
1
$39
0
$36
4
$50

0
When items are purchased as a group, the total cost of the group is allocated to the
individual items based on fair value. Replacement cost is the appropriate value to
use in this case. The total replacement cost of the items is $1,100 ($400 + $700).
Therefore, Item A is allocated 4/11 of the purchase cost, or $364 =
($400/$1,100)$1,000.
Question 9:
Losses on purchase commitments are recorded at the end of the current year when:
The current cost of the inventory is less than the inventory cost in the purchase
contract.
The purchase contract is irrevocable.
The contractual cost of the inventory in an irrevocable purchase contract
exceeds the current cost.
The buyer purchased a quantity of inventory that was not sufficient to avoid a
LIFO liquidation.
Both qualities are required for a loss to be recognized. The firm must honor a
contract in a later period by paying more than current cost and, thus, is in a loss
position at the end of the current year.
Question 10:
Immediately after a note payable was signed, its present value was $30,000. This
note and $20,000 cash were used to acquire a used plant asset at the beginning of
the current year. The interest rate implied in the note is 6%. Total interest payments
due on the note over its term amount to $4,000. The term exceeds one year. No
payments on the note are due during the current year. What amount of interest
expense is recognized for the first year (current year) on this note, and what
amount is capitalized to the plant asset account?
Interest
Capitalized
Expense
Amount
$1,800
$50,000
$3,000
$50,000
$4,000
$30,000
$0
$50,000
The interest expense recognized for the first year is .06($30,000) = $1,800.
Although no interest is paid, interest is accrued, increasing the carrying value of the
note. The asset is capitalized at $50,000, the sum of cash down payment and
present value of the note. The interest over the note term is not capitalized because
it does not assist in the process of placing the asset into its intended condition and
location.
Question 11:
Talton Co. installed new assembly line production equipment at a cost of $185,000.
Talton had to rearrange the assembly line and remove a wall to install the
equipment. The rearrangement cost was $12,000 and the wall removal cost was
$3,000. The rearrangement did not increase the life of the assembly line but it did
make it more efficient. What amount of these costs should be capitalized by Talton?
$185,00
0

$188,00
0
$197,00
0
$200,00
0
This response includes all the costs to get the equipment ready for use. The
rearrangement costs and the wall removal costs were needed to put the equipment
into use. The rearrangement costs made the production more efficient.
Question 12:
Merry Co. purchased a machine costing $125,000 for its manufacturing operations
and paid shipping costs of $20,000. Merry spent an additional $10,000 testing and
preparing the machine for use. What amount should Merry record as the cost of the
machine?
$155,00
0
$145,00
0
$135,00
0
$125,00
0
All three costs are included for a total of $155,000. Both the shipping and testing
costs are necessary to place the asset into its intended location and condition for
use. This is the criterion for capitalizing costs on acquisition of plant assets.
Question 13:
Many years after constructing a plant asset, management spent a significant sum
on the asset. Which of the following types of expenditures should be capitalized in
this instance:
(1) an expenditure for routine maintenance that increases the useful life compared
with deferring the maintenance,
(2) an expenditure that increases the useful life of the asset compared with the
original estimate assuming normal maintenance at the required intervals,
(3) an expenditure that increases the utility of the asset.
(1 (2 (3
) ) )
Ye Ye Ye
s s s
Ye Ye
No
s s
Ye
No No
s
Ye
No
No
s
Post-acquisition expenditures, which increase the useful life (assuming normal
maintenance) or the utility (usefulness or productivity) of the asset, are capitalized.
Such expenditures provide value for more than one year. The original useful life of

an asset assumes regular maintenance. Therefore, regular maintenance does not

increase the intended useful life of the asset.
Question 14:
When marking up a specific line of household items for resale, a retailer computes
its markup as 40% of cost. For purposes of estimating ending inventory using the
gross margin method, what percentage is applied to sales when estimating cost of
goods sold?
40
71
60
29
The gross margin method applies the cost to sales ratio to sales in order to derive
an estimate of cost of goods sold. Subtracting the resulting estimate of cost of
goods sold from the cost of goods available for sale yields an estimate of ending
inventory without counting the items. This firm determines the selling price to be
140% of cost because the markup is 40% of cost. Cost plus markup yields selling
price. Therefore, the cost to sales ratio is 1.00/1.40 or .71.
Question 15:
A firm's inventory was destroyed by fire on August 14 of the current year.
Fortunately, the firm had insurance to cover the loss. However, most of the
inventory records were also destroyed in the fire. The average gross margin
percentage is 40%, beginning inventory was $200,000, and $1,000,000 of
purchases had been made through August 13. The firm had recorded sales of
$1,200,000 through that date. Estimate the cost of the inventory lost in the fire.
$0
$480,00
0
$720,00
0
$280,00
0
The gross margin method estimates the cost of inventory at the time of the fire as
follows: Beginning inventory $200,000 + $1,000,000 Purchases = Ending inventory
+ Cost of goods sold. The estimate of cost of goods sold is found by multiplying the
cost to sales ratio and sales. The gross margin percentage plus the cost to sales
ratio is 1; therefore, cost/sales is .60 (= 1 - .40). Estimated cost of goods sold is
$720,000 (= .60($1,200,000)). The equation is Beginning inventory $200,000 +
Purchases $1,000,000 = Ending inventory + Cost of goods sold $720,000. Solving
for ending inventory yields $480,000.
Question 16:
On January 2 of the current year, LTTI Co. entered into a three-year, non-cancelable
contract to buy up to 1 million units of a product each year at $.10 per unit with a
minimum annual guarantee purchase of 200,000 units. At year end, LTTI had only
purchased 80,000 units and decided to cancel sales of the product. What amount
should LTTI report as a loss related to the purchase commitment as of December 31
of the current year?

$0
$
8,000
$12,00
0
$52,00
0
This amount represents the amount of the minimum guaranteed amount ($60,000
{200,000 units a year x 3 years x $.10}) less what was already purchased ($8,000
{80,000 units x $.10}) = $52,000.
Question 17:
A firm began the construction of its new manufacturing facility in January of 20x2.
The following expenditures were made on construction in that year:
$40,00
Jan. 1
0
120,00
Mar. 1
0
Oct.
96,000
31
Debt outstanding the entire year:
6%, $60,000 construction loan
4%, $90,000 note payable not related to
construction
6%, $90,000 note payable not related to
construction
Compute interest to be capitalized using the specific method (use the construction
loan first).
$7,000
$12,60
0
$8,400
$8,190
Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) +
$96,000(2/12). This method uses the specific construction loan first, and then the
remaining debt is applied. The nonspecific loans have the same principal balance.
Therefore, the weighted average interest rate on those two loans is 5% (the
midpoint between 4% and 6%). Capitalized interest = .06($60,000) + .05($156,000$60,000) = $3,600 + $4,800 = $8,400. The weighted average rate on the two
nonspecific loans can also be computed as: [.04($90,000) + .06($90,000)]/($90,000
+ $90,000)] = 5%.
Question 18:
Which of the following is a not requirement for an asset to be categorized as a plant
asset.
Have physical substance.
Have a useful life of at least
three years.

Currently used in operations.

Not held for investment
purposes.
A useful life of at least three years is NOT a requirement for classification of a plant
asset. The plant asset must have a useful life extending more than one year beyond
the Balance Sheet date.
Question 19:
How does the retail inventory method establish the lower-of-cost-or-market
valuation for ending inventory?
The procedure is applied on a cost basis at the unit
level.
By excluding net markups from the cost-to-retail
ratio.
By excluding beginning inventory from the cost-toretail ratio.
By excluding net markdowns from the cost-to-retail
ratio.
Although the result is approximate, by excluding net markdowns from the
denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a
lower ending inventory valuation.
Question 20:
On December 1, 2005, East Co. purchased a tract of land as a factory site for
$300,000. The old building on the property was razed and salvaged materials
resulting from demolition were sold.
Additional costs incurred and salvage proceeds realized during December 2005
were as follows:
$25,00
Cost to raze old building
0
Legal fees for purchase contract and to record
5,000
ownership
Title guarantee insurance
6,000
Proceeds from sale of salvaged materials
4,000
In East's December 31, 2005 Balance Sheet, what amount should be reported as
land?
$311,00
0
$321,00
0
$332,00
0
$336,00
0
The correct answer, $332,000, equals: $300,000 + $25,000-$4,000 + $5,000 +
$6,000.
The net cost to raze the old building ($21,000) is capitalized to land because it is a

cost necessary to bring the land into its intended condition. The legal fees and title
guarantee cost, likewise, must be incurred to avoid future legal problems, and thus
contribute to the value of the land.
Question 21:
At the beginning of the year, Cann Co. started construction on a new $2 million
addition to its plant. Total construction expenditures made during the year were
$200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On
January 2, the company borrowed $500,000 for the construction at 12%. The only
other outstanding debt the company had was a 10% interest rate, long-term
mortgage of $800,000, which had been outstanding the entire year. What amount of
interest should Cann capitalize as part of the cost of the plant addition?
$140,00
0
$132,00
0
$72,500
$60,000
First calculate the Average Accumulated Expenditures (AAE). This gives you the
amount of borrowing from which to calculate avoidable interest ($625,000). Next
calculate avoidable interest ($72,500) and actual interest (($500,000 x 12%) +
($800,000 x 10%) = $140,000). The amount that can be capitalized is the lesser of
the avoidable interest or actual interest. The amount that can be capitalized is
$72,500.
AAE
200,00 12/1 200,00
0
2
0
600,00
8/12 4,000
0
300,00
1/12 25,000
0
625,00
0
Avoidable
interest
500,000 12%

60,00
0

125,000 10%

12,50
0
72,50
0

Question 22:
A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's
accounting records showed the following:
Inventory, January 1
$

35,000
Purchases, January 1 through 200,00
May 1
0
Sales, January 1 through May 250,00
1
0
Inventory not damaged by
30,000
flood
Gross profit percentage on
40%
sales
What amount of inventory was lost in the flood?
$55,000
$85,000
$120,00
0
$150,00
0
The gross margin method of estimating inventory is used to solve this problem. The
cost of inventory lost cannot be identified by count but it can be estimated.
First, an estimate of cost of goods sold is subtracted from the cost of goods
available on the date of the flood yielding the total amount of inventory that would
have been present on May 1.
Second, the amount of inventory not lost is subtracted from the May 1 estimated
total inventory. The result is an estimate of the amount lost.
With gross profit being 40% of sales, cost of goods sold must be 60% of sales, on
average. Therefore, the estimate of cost of goods sold is $150,000 (.60 x $250,000).
Beginning inventory ($35,000) + Purchases ($200,000) = Goods available =
$235,000. Subtracting $150,000 of cost of goods sold yields $85,000 of inventory
on May 1 ($235,000 - $150,000).
With $30,000 of inventory still accounted for, the amount of lost inventory at cost is
$55,000 ($85,000 - $30,000).
Question 23:
Average accumulated expenditures for year five on a construction project amounted
to $70,000. The total cash invested in the project by the end of year five, was
$160,000. During year six, the firm spent another $240,000 (total) on the project,
uniformly throughout the year. Compute average accumulated expenditures for
year six.
$240,00
0
$400,00
0
$190,00
0
$280,00
0
Average accumulated expenditures is the amount of debt for the annual period that
could have been avoided. In this case, the firm has $160,000 already invested in the
project at the beginning of year six. That amount represents $160,000 in debt, that
could have been avoided for year six if the firm had not been involved in the

construction project. The expenditures during year six were incurred evenly.
Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 =
$280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.
Question 24:
Cole Co. began constructing a building for its own use in January 2004. During 2004,
Cole incurred interest of $50,000 on specific construction debt and $20,000 on other
borrowings. Interest computed on the weighted-average amount of accumulated
expenditures for the building during 2004 was $40,000. What amount of interest
cost should Cole capitalize?
$20,00
0
$40,00
0
$50,00
0
$70,00
0
This question requires no calculation. The answer is given in the question.
Capitalized interest is limited to the interest that would have been avoided had the
construction not occurred. This is the amount of interest based on average
accumulated expenditures.
Question 25:
Young Corp. purchased equipment by making a down payment of $4,000 and
issuing a note payable for $18,000. A payment of $6,000 is to be made at the end
of each year for three years. The applicable rate of interest is 8%. The present value
of an ordinary annuity factor for three years at 8% is 2.58, and the present value for
the future amount of a single sum of one dollar for three years at 8% is .735.
Shipping charges for the equipment were $2,000, and installation charges were
$3,500. What is the capitalized cost of the equipment?
$19,48
0
$21,48
0
$24,98
0
$27,50
0
The capitalized cost is the sum of the down payment, present value of the note
payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000
$3,500 = $24,980. The present value of the three payments required on the note is
capitalized, which excludes the interest included in those payments. The two
charges are capitalized because they were incurred to place the asset into its
intended condition and location.
Question 26:

The original cost of an inventory item is above the replacement cost. The inventory
item's replacement cost is above the net realizable value. Under the lower of cost or
market method, the inventory item should be valued at
Original cost.
Replacement cost.
Net realizable value.
Net realizable value LESS normal profit
margin.
Inventory must be carried at lower of cost (such as LIFO, FIFO) or market. Market is
replacement cost subject to a ceiling and floor. The ceiling for replacement cost is
net realizable value (selling price less cost to complete) and the floor is net
realizable value less normal profit margin. Use simple numbers to help solve this
abstract question. In this question original cost (assume = 100) is greater than
market ((replacement cost) assume = 80). Market (80) is greater than net realizable
value (assume = 70). Market is subject to a ceiling of net realizable value (70). In
this case the inventory would be valued at net realizable value.
Question 27:
Union Corp. uses the first-in, first-out retail method of inventory valuation. The
following information is available:
Cost Retail
Beginning
$12,00 $
inventory
0
30,000
110,00
Purchases
60,000
0
Net additional
10,000
markups
Net markdowns
20,000
Sales revenue
90,000
If the lower of cost or market rule is disregarded, what would be the estimated cost
of the ending inventory?
$24,00
0
$20,80
0
$20,00
0
$19,20
0
The cost to retail ratio under FIFO is: [$60,000/($110,000 + $10,000 - $20,000)] = .
60.
Ending inventory at retail is $30,000 + $110,000 + $10,000 - $20,000 - $90,000 =
$40,000.
Ending inventory at cost, therefore, is .60($40,000) = $24,000.
Question 28:

Debt is frequently incurred when plant assets are acquired. For example, debt may
be incurred on the purchase of plant assets. Debt may also be incurred during the
construction of plant assets. How is the interest in these two cases treated for
financial reporting?
Debt for
Debt during
purchase
construction
expense
capitalize
expense
expense
capitalize
capitalize
capitalize
expense
Interest on debt incurred when purchasing a plant asset, is incurred after the asset
has reached its intended condition and location. Therefore, it is expensed as
incurred. Debt incurred during the construction of plant assets is considered
avoidable and also incurred before the asset has reached its intended condition and
location. Therefore, it is capitalized to the asset in the same way material, labor,
and overhead are capitalized. The interest is expensed as part of depreciation
during the service life of the asset.
Question 29:
Information for a firm using the dollar value (DV) LIFO retail method follows. The
cost to retail (C/R) is provided along with price level indices. The data reflects the
use of the method through year one.
Reta
DV
Retail
il
LIFO
Bas Inde Curren C/ Cos
Layer
e
x
t
R t
$20
.
Base
1.00 $200
$80
0
40
year
.
80 1.10 88
$30
one
34
For year two, ending inventory at retail (by count) totaled $450. The ending pricelevel index for the year was 1.15. The cost-to-retail ratio was .42. What is the
ending inventory for financial reporting purposes for this firm?
$16
4
$54
$18
9
$17
7
The DV LIFO retail process applies the DV LIFO method to retail dollars, and then
deflates the retail layer added, now reflecting current prices, to cost, using the costto-retail ratio. The calculations are:
Ending inventory, retail, at base = $450(1.00/1.15) = $391
Increase in retail, current = $111(1.15/1.00) = $128
Increase in cost = $128(.42) = $54
Ending inventory at cost = ($80 + $30) + $54 = $164
Question 30:

A firm uses the dollar value LIFO retail method and has $2,000 in beginning
inventory at retail at the beginning of the current year. The base year equivalent of
this amount is $1,600. The base year index is 1.00. The beginning inventory
reported in the Balance Sheet is $800. During the current year, the firm purchased
$12,000 of inventory at cost and marked that up to $40,000. Sales for the year were
$28,000. The relevant ending price index is 1.60. What amount does this firm report
as inventory in its Balance Sheet at the end of the current year?
$4,286
$13,44
0
$4,232
$4,200
This is a two-step process. First, DV LIFO is applied to retail dollars to determine the
layer added in current-year retail dollars. Then, the FIFO cost-to-retail ratio (C/R) is
applied to convert that layer to cost. Finally, this layer is added to beginning
inventory at cost to yield ending inventory at cost. The calculation is:
EI retail, current index = $2,000 + $40,000-$28,000 = $14,000
EI retail, base = $14,000/1.6 = $8,750
Increase in EI retail, base = $8,750-$1,600 = $7,150
Increase in EI retail, current = $7,150(1.6) = $11,440
C/R (use FIFO, not LCM) = $12,000/$40,000 = .30
Increase in EI, cost = .30($11,440) = $3,432
EI, cost = $800 + $3,432= $4,232
Question 31:
Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004
reported accumulated depreciation balances of $800,000 and $600,000,
respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was
the only property sold in 2005. Depreciation charged to operations in 2005 was:
$190,00
0
$200,00
0
$210,00
0
$220,00
0
The accumulated depreciation on the property sold was $10,000 ($50,000 cost less
$40,000 carrying value). The sale of property requires that the accumulated
depreciation on the property be removed from the accounts. Thus, the $10,000
amount is a decrease in accumulated depreciation. With an overall increase of
$200,000 in accumulated depreciation during the period ($800,000-$600,000),
depreciation must have been $210,000 ($200,000 + $10,000).
Question 32:
On June 18, 2005, Dell Printing Co. incurred the following costs for one of its printing
presses:
Purchase of collating and stapling
$84,00
attachment
0

Installation of attachment
36,000
Replacement parts for overhaul of press 26,000
Labor and overhead in connection with
14,000
overhaul
The overhaul resulted in a significant increase in production. Neither the attachment
nor the overhaul increased the estimated useful life of the press. What amount of
the above costs should be capitalized?
$0
$84,000
$120,00
0
$160,00
0
All four costs should be capitalized because they result in an increase in the
productivity of the asset. Costs that increase EITHER the life OR productivity are
capitalized. Either type of increase results in enhanced asset values. $160,000 is
the sum of the four costs listed.
Question 33:
At the end of 20x4, a firm recognized a loss on a contractual commitment to
purchase inventory for $60,000. The value of the inventory at the end of 20x4 is
$52,000. When the inventory was actually purchased in 20x5, its value had risen to
$62,000. Choose the correct statement concerning reporting in 20x5.
A $10,000 gain is recognized.
The inventory is recorded at $60,000.
The inventory is recorded at $52,000.
There is no additional loss or gain
recognized.
The maximum recorded value of the inventory is $60,000, which is the contractual
amount and, also, the cost. If the firm can sell the inventory for more than $60,000,
then gross margin will be recognized. The value of the inventory more than fully
recovered, but gains are limited to the amount of previously recognized losses,
which in this case, is $8,000.
Question 34:
During 2004, Bay Co. constructed machinery for its own use and for sale to
customers. Bank loans financed these assets both during construction and after
construction was complete. How much of the interest incurred should be reported as
interest expense in the 2004 Income Statement?
Interest incurred for machinery Interest incurred for machinery
for own use
held for sale
All interest incurred
All interest incurred
All interest incurred
Interest incurred after completion
Interest incurred after completion Interest incurred after completion
Interest incurred after completion All interest incurred

Interest during construction on assets constructed for a firm's own use is capitalized
until construction is complete. Thus, only the interest incurred after completion is
expensed.
Interest is capitalized on the construction of assets for sale only if the assets are
large, individual, discrete projects, such as ships or real estate developments. The
equipment constructed for sale does not appear to be a discrete item in that sense
and, thus, none of the interest is capitalized. It is all expensed.
Question 35:
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:
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.
Capitalize the cost of refurbishing by adding the cost to the carrying amount of the
building.
Record a loss in the current period equal to the cost of refurbishing, and continue to
depreciate the original cost of the building.
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.
When the portion of an asset that is removed from a larger asset has identifiable
costs and accumulated depreciation amounts, those amounts are removed from the
books. The difference between these two amounts is the carrying value of the
damaged portion of the larger asset. There is no insurance. Therefore, the carrying
value of the damaged portion is written off as a loss. The replacement assets are
capitalized at cost. The entries are:
New
Portion removed
materials
Loss
Asset
Accumulated
Cash
depreciation
Asset