Valuation of Inventories: A Cost-Basis Approach: Multiple Choice

CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
MULTIPLE CHOICEConceptual
21. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a
retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.
22. Where should raw materials be classified on the balance sheet?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.
23. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.
24. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.
25. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases 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.
26. 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.
27. 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.
28. If a company uses the periodic inventory system, what is the impact on 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.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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.
34. 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.
Use the following information for questions 35 and 36.

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.
35. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
36. 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
37. 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
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38. 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.
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39. 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.
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40. 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.
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41. 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.
42. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a
purchase and included the goods in inventory. The effect of this on its financial statements for March 31
would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
43. Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory,
but did not record the transaction. The effect of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.
44. Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had
recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its
financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.
45. On June 15, 2012, Wynne Corporation accepted delivery of merchandise which it pur-chased on account.
As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The
effect of this on its balance sheet for June 30, 2012 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets, liabilities, and stockholders' equity were understated.
d. none of these.
46. What is the effect of a $50,000 overstatement of last year's inventory on current years ending retained
earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.
47. Which of the following is a product cost as it relates to inventory?
a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.
48. Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.
49. Which method may be used to record cash discounts a company receives for paying suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. a and b.
50. Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.
51. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.
52. All of the following costs should be charged against revenue in the period in which costs are incurred except
for
a. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
53. 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.
54. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
55. The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
Use the following information for questions 56 and 57.
During 2012, which was the first year of operations, Oswald Company had merchandise purchases of $985,000
before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were
paid for within 10 days of purchase. All of the goods available had been sold at year end.
56. Which of the following recording procedures would result in the highest cost of goods sold for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under
"other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
57. Which of the following recording procedures would result in the highest net income for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under
"other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
58. When using the periodic inventory system, which of the following generally would not be separately
accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
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59. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
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60. 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
61. In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation
similar to the first-in, first-out method is
a. average cost.
b. base stock.
c. joint cost.
d. prime cost.
62. 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. LIFO perpetual.
d. FIFO.
63. 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.
64. 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
65. 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.
66. 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.
67. 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.
68. 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
69. 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.
70. 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.
71. The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this
material at year end will be the same if perpetual records are kept as it would be under a periodic inventory
method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. LIFO method.
d. FIFO method.
72. Which of the following is a reason why the specific identification method may be considered ideal for
assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.
73. In a period of rising prices which inventory method generally provides the greatest amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.
74. In a period of falling prices, which inventory method generally provides the greatest amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.
75. 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.
76. When a company uses LIFO for external reporting purposes and FIFO for internal reporting purposes, an
Allowance to Reduce Inventory to LIFO account is used. This account should be reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
d. on the balance sheet in the Current Assets section.
77. What happens when inventory in base year dollars decreases?

a. LIFO reserve increases.
b. LIFO layer is created.
c. LIFO layer is liquidated.
d. LIFO price index decreases.
78. How might a company obtain a price index in order to apply dollar-value LIFO?
a. Calculate an index based on recent inventory purchases.
b. Use a general price level index published by the government.
c. Use a price index prepared by an industry group.
d. All of the above.
79. In the context of dollar-value LIFO, what is a LIFO layer?

a. The difference between the LIFO inventory and the amount used for internal reporting purposes.
b. The LIFO value of the inventory for a given year.
c. The inventory in base year dollars.
d. The LIFO value of an increase in the inventory for a given year.
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80. Which of the following statements is not true as it relates to the dollar-value LIFO inventory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled
LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of
total dollar value, not physical quantity.
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81. 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.
82. 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.
83. 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.
Multiple Choice AnswersConceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 30. c 39. b 48. d 57. c 66. b 75. a
22. b 31. d 40. b 49. d 58. a 67. a 76. d
23. b 32. b 41. d 50. a 59. d 68. b 77. c
24. a 33. a 42. b 51. b 60. b 69. c 78. d
25. c 34. d 43. a 52. d 61. a 70. d 79. d
26. a 35. d 44. a 53. b 62. b 71. d 80. a
27. d 36. a 45. d 54. d 63. a 72. c 81. a
28. b 37. b 46. b 55. a 64. b 73. b 82. d
29. b 38. c 47. c 56. a 65. a 74. c 83. c
CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES
21. Which of the following is true about lower-of-cost-or-market?
a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.
22. The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the
inventory is required where there is evidence that when the goods are sold in the ordinary course of
business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
d. future utility will be less than their cost.
23. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
24. In no case can "market" in the lower-of-cost-or-market rule be more than

a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal and an allowance for an approximately normal profit margin.
d. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal, an allowance for an approximately normal profit margin, and an adequate
reserve for possible future losses.
25. Designated market value
a. is always the middle value of replacement cost, net realizable value, and net realizable value less a
normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.
26. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.
27. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current
replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with
disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.
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28. When the cost-of-goods-sold method is used to record inventory at market
a. there is a direct reduction in the selling price of the product that results in a loss being recorded on the
income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory
decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded in the financial
statements.
d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods
sold.
29. Lower-of-cost-or-market as it applies to inventory is best described as the

a. drop of future utility below its original cost.
b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
d. change in inventory value to market value.
30. The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the
a. net realizable value.
b. net realizable value less normal profit margin.
c. replacement cost.
d. selling price less costs of completion and disposal.
31. What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?
a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.
d. Prevents overstatement of the value of obsolete or damaged inventories.
32. Why are inventories stated at lower-of-cost-or-market?

a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profits to be recognized.
33. Which of the following is not an acceptable approach in applying the lower-of-cost-or-market method to
inventory?
a. Inventory location.
b. Categories of inventory items.
c. Individual item.
d. Total of the inventory.
34. Which method(s) may be used to record a loss due to a price decline in the value of inventory?
a. Cost-of-goods-sold.
b. Sales method.
c. Loss method
d. Both a and c.
35. Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?
a. When there is a controlled market with a quoted price applicable to all quantities and when there are no
significant costs of disposal.
b. When there are no significant costs of disposal.
c. When a non-cancellable contract exists to sell the inventory.
d. When there is a controlled market with a quoted price applicable to all quantities.
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36. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no
significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort reported net income.
37. When inventory declines in value below original (historical) cost, and this decline is considered other than
temporary, what is the maximum amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
38. Net realizable value is

a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.
39. If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable
value, the amount to be used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.
40. Inventory may be recorded at net realizable value if

a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.
41. If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet
date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
42. The credit balance that arises when a net loss on a purchase commitment is recognized should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.
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43. In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2013 for
$700,000. Before the December 31, 2012 balance sheet date, the market price for these materials dropped
to $510,000. The journal entry to record this situation at December 31, 2012 will result in a credit that should
be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
44. At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the
purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for delivery during the coming summer.
The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of
the year is $4.50, how would this situation be reflected in the annual financial statements?
a. Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.
45. At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1
million gallons of jet fuel at a price of $4.60 per gallon for delivery during the coming summer. The company
prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is
$4.25, how would this situation be reflected in the annual financial statements?
a. Record unrealized gains of $350,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.
46. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories.
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47. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus
purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively unchanged from the
comparable previous period.
48. The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.
49. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.
50. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is different from that of
items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic inventory for certain
types of companies.
51. An inventory method which is designed to approximate inventory valuation at the lower of cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
52. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of high-cost and
low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.
53. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.
54. When the conventional retail inventory method is used, markdowns are commonly ignored in the
computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or market.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no markdown goods have
been sold.
55. To produce an inventory valuation which approximates the lower of cost or market using the conventional
retail inventory method, the computation of the ratio of cost to retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
*56. When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted.
c. if it is the LIFO method, the beginning inventory is included and markdowns are not deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns are not deducted.
S
57. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage which reflects the
item's selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.
S
58. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
59. What condition is not necessary in order to use the retail method to provide inventory results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.
60. What method yields results that are essentially the same as those of the conventional retail method?
a. FIFO.
b. Lower-of-average-cost-or-market.
c. Average cost.
d. LIFO.
61. What is the effect of net markups on the cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.
62. What is the effect of freight-in on the cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.
63. Which of the following is not a common disclosure for inventories?

a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed.
P
64. Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an
accounting period.
P
65. The average days to sell inventory is computed by dividing
a. 365 days by the inventory turnover ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.
66. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.
*67. When using dollar-value LIFO, if the incremental layer was added last year, it should be multiplied by
a. last year's cost ratio and this year's index.
b. this year's cost ratio and this year's index.
c. last year's cost ratio and last year's index.
d. this year's cost ratio and last year's index.

21. d 28. d 35. a 42. a 49. b *56. b 63. b
22. d 29. a 36. c 43. b 50. d 57. a 64. b
23. c 30. b 37. b 44. d 51. c 58. d 65. a
24. b 31. d 38. d 45. c 52. a 59. a 66. c
25. a 32. c 39. a 46. a 53. d 60. b *67. c
26. c 33. a 40. d 47. d 54. b 61. d
27. d 34. d 41. a 48. d 55. a 62. a
CHAPTER 17
INVESTMENTS
21. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
22. A correct valuation is

a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
23. Securities which could be classified as held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.
24. Unrealized holding gains or losses which are recognized in income are from securities classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.
P
25. When an investor's accounting period ends on a date that does not coincide with an interest receipt date for
bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of
interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate portion of the interest
period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount
of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's
interest period.
S
26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S
27. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains
or losses and are included as other comprehensive income and as a separate component of stockholders'
equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S
28. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result from use of the
straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result from use of the
straight-line method.
S
29. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains
or losses as other comprehensive income and as a separate component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
31. Held-to-maturity securities are reported at

a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
32. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the
entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.
33. Which of the following is not correct in regard to trading securities?

a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
35. Investments in debt securities are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.
36. Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
One step in calculating the issue price of the bonds is to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
37. Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
38. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the
discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security,
the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be applied if there is no
material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
40. Which of the following is correct about the effective-interest method of amortization?
a. The effective interest method applied to investments in debt securities is different from that applied to
bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of the investment
from period to period.
41. When investments in debt securities are purchased between interest payment dates, preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally correct about recording a sale of a debt security before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in
Debt Securities.
d. A gain or loss on the sale is not extraordinary.
S
43. When a company has acquired a "passive interest" in another corporation, the acquiring company should
account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
S
44. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the
receipt of those dividends affect the investment account of the investor under each of the following
accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
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45. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are
recorded as
Fair Value Method Equity Method
a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income
46. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the
following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum-stances indicate
that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise
"significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
47. If the parent company owns 90% of the subsidiary company's outstanding common stock, the company
should generally account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity
method. Koehn Corporation should ordinarily record a cash dividend received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
49. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in
the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
50. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, Cosby had net earnings of
$300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value
method rather than the equity method of accounting. What effect would this have on the investment account,
net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
51. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2013 at a cost of $3,000,000. After
applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December
31, 2013 the fair value of the investment is $3,120,000. Which of the following values is acceptable for
Dublin to use in its balance sheet at December 31, 2013?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
52. The fair value option allows a company to

a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value by recording gains and losses as a separate component
of stockholders equity.
d. All of the above are true of the fair value option.
53. Impairments are

a. based on discounted cash flows for securities.
b. recognized as a realized loss if the impairment is judged to be temporary.
c. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity
investments.
d. evaluated at each reporting date for every investment.
54. A reclassification adjustment is reported in the

a. income statement as an Other revenue or expense.
b. stockholders equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders equity.
55. When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying
value assigned to the available-for-sale security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.
56. When an investment in an available-for-sale security is transferred to trading because the company
anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it
in the trading portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.
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57.A debt security is transferred from one category to another. Generally acceptable accounting principles require
that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and
(2) the unrealized gain or loss at the date of transfer currently carried as a separate component of
stockholders' equity be amortized over the remaining life of the security. What type of transfer is being
described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity
58. Gains trading or cherry picking involves

a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-
maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those whose value has
decreased since acquisition.
d. All of the above are considered methods of gains trading or cherry picking.
59. Transfers between categories

a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading.
d. will always result in an impact on net income.
*60. Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits
by simultaneously entering into transactions in two or more markets are called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.
*61. All of the following statements regarding accounting for derivatives are correct except that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways, depending upon the
type of hedge.
*62. All of the following are characteristics of a derivative financial instrument except the instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.
*63. Which of the following are considered equity securities?

I. Convertible debt.
II. Redeemable preferred stock.
III. Call or put options.
a. I and II only.
b. I and III only.
c. II only.
d. III only.
*64. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*65. Gains or losses on cash flow hedges are

a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.
*66. An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.
*67. All of the following are requirements for disclosures related to financial instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net gain/loss on derivative
instruments designated in cash flow hedges.
*68. A variable-interest entity has

a. insufficient equity investment at risk.
b. stockholders who have decision-making rights.
c. stockholders who absorb the losses or receive the benefits of a normal stockholder.
d. All of the above are characteristics of a variable-interest entity.
*69. Under U.S. GAAP, which of the following models may be used to determine if an investment is
consolidated?
Risk-and-reward model Voting-interest approach
a. Yes No
b. No Yes
c. No No
d. Yes Yes

21. c 28. b 35. c 42. c 49. d 56. b *63. d
22. b 29. a 36. d 43. b 50. d 57. d *64. c
23. c 30. d 37. c 44. a 51. d 58. c *65. b
24. c 31. b 38. a 45. c 52. a 59. b *66. a
25. a 32. c 39. c 46. b 53. d *60. a *67. c
26. a 33. d 40. d 47. d 54. c *61. c *68. a
27. c 34. c 41. c 48. a 55. b *62. b *69. d
CHAPTER 14
LONG-TERM LIABILITIES
21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in
the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P
24. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
S
25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
S
26. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest
expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
28. The rate of interest actually earned by bondholders is called the

a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
29. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
30. Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.
d. none of these.
31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If
the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
32. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense
in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been used.
b. be less than what it would have been had the effective-interest method of amortization been used.
c. be the same as what it would have been had the effective-interest method of amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.
33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense
is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization
will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1,
the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
37. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
39. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
40. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase
of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
41. The generally accepted method of accounting for gains or losses from the early extinguishment of debt
treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the
remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the
life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt which should be
recognized in the period of redemption.
P
42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased securities in an
irrevocable trust.
d. a company legally extinguishes debt before its due date.
P
43. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation
is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay
the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you
expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the
annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
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44. A debt instrument with no ready market is exchanged for property whose fair value is currently
indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair value of the property becomes
evident.
c. the board of directors of the entity receiving the property should estimate a value for the property that
will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the
property.
45. When a note payable is issued for property, goods, or services, the present value of the note is measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to
be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar
items or from current fair value of the note.
d. any of these.
47. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these.
48. Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."
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49. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company
a. is attempting to conceal the debt from shareholders by having no information about the debt included in
the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the statement of cash
flow.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily
and at less cost.
d. is in violation of generally accepted accounting principles.
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50. Long-term debt that matures within one year and is to be converted into stock should be reported
a. as a current liability.
b. in a special section between liabilities and stockholders equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.
51. Which of the following must be disclosed relative to long-term debt maturities and sinking fund
requirements?
a. The present value of future payments for sinking fund requirements and long-term debt maturities
during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next five years.
d. The amount of future payments for sinking fund requirements and long-term debt maturities during each
of the next five years.
52. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53. The times interest earned ratio is computed by dividing

a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.
54. The debt to total assets ratio is computed by dividing

a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.
*55. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount
of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*56. A troubled debt restructuring will generally result in a
a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.
*57. In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less
than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the restructuring.
b. a gain on the restructuring.
c. a loss on the restructuring.
d. none of these.
*58.In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at
the date of restructure, but no interest expense should be recognized over the remaining life of the debt,
whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future cash flows.
*59. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount
of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

21. a 27. d 33. d 39. b 45. d 51. d *57. b
22. a 28. d 34. d 40. d 46. d 52. d *58. b
23. b 29. d 35. c 41. d 47. c 53. c *59. c
24. a 30. d 36. d 42. c 48. d 54. c
25. d 31. b 37. d 43. c 49. c *55. c
26. a 32. a 38. c 44. a 50. d *56. d
CHAPTER 10
ACQUISITION AND DISPOSITION OF
PROPERTY, PLANT, AND EQUIPMENT
21. 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.
22. 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
23. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
24. 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.
25. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. 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.
27. If a corporation purchases a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment 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.
28. 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.
29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
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30. 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.
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31. 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.
32. 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
33. 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.
34. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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 interest 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.
40. 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 account 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.
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41. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a
qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company's cost of capital.
d. Activities that are necessary to get the asset ready for its intended use are in progress.
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42. 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 being
constructed.
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43. 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.
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44. 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.
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45. The cost of a nonmonetary asset acquired in exchange for another nonmonetary 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 loss) to the company.
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46. 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.
47. 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.
48. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly
measured by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. fair value of the stock.
49. 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.
50. 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.
51. For a nonmonetary exchange of plant assets, accounting recognition should not be given to
a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
c. part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is
less than 25% of the fair value of the exchange).
d. part of a gain when the exchange has no commercial substance and cash is received (cash paid or
received is less than 25% of the fair value of the exchange).
52. When an enterprise is the recipient of a donated asset, the account credited may be a
a. paid-in capital account.
b. revenue account.
c. deferred revenue account.
d. all of these.
53. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on
the manufacturer's books at
a. the nominal cost of taking title to it.
b. its fair value.
c. one dollar (since the site cost nothing but should be included in the balance sheet).
d. the value assigned to it by the company's directors.
54. In order for a cost to be capitalized (capital expenditure), the following must be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased.
d. Any one of these.
55. An improvement made to a machine increased its fair value and its production capacity by 25% without
extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
56. Which of the following is a capital expenditure?

a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of Federal income taxes
d. None of these
57. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
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58. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully
expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally
anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner intended
d. Expenditure made to add new asset services
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59. An expenditure made in connection with a machine being used by an enterprise should be
a. expensed immediately if it merely extends the useful life but does not improve the quality.
b. expensed immediately if it merely improves the quality but does not extend the useful life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine.
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60. 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.
61. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a. less than current fair value.
b. greater than cost.
c. greater than book value.
d. less than book value.
62. 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.

21. d 27. d 33. d 39. d 45. a 51. c 57. a
22. b 28. a 34. a 40. d 46. b 52. b 58. c
23. d 29. b 35. c 41. c 47. c 53. b 59. d
24. c 30. b 36. a 42. a 48. d 54. d 60. a
25. c 31. d 37. b 43. c 49. d 55. c 61. d
26. c 32. d 38. b 44. a 50. a 56. d 62. c
CHAPTER 11
DEPRECIATION, IMPAIRMENTS, AND DEPLETION
21. The following is true of depreciation accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.
22. Which of the following principles best describes the conceptual rationale for the methods of matching
depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
23. Depreciation accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.
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24. Which of the following most accurately reflects the concept of depreciation as used in accounting?
a. The process of charging the decline in value of an economic resource to income in the period in which
the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to
those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely matches the
physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year to the contra asset
account for the purpose of properly recording the fair market value of tangible assets.
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25. The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life refers to how long the
asset will last.
b. physical life is the life of an asset without consideration of salvage value and service life requires the
use of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to
how long the asset will be used by all owners.
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26. The term "depreciable base," or "depreciation base," as it is used in accounting, refers to
a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.
27. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. all of these.
28. Which of the following is not one of the basic questions that must be answered before the amount of
depreciation charge can be computed?
a. What is the depreciation base to use for the asset?
b. What is the asset's useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?
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29. Which of the following is a realistic assumption of the straight-line method of depreciation?
a. The asset's economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same each period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.
30. The activity method of depreciation

a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.
31. For income statement purposes, depreciation is a variable expense if the depreciation method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.
32. If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset,
factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.
33. Use of the double-declining balance method

a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.
34. Use of the sum-of-the-years'-digits method

a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.
35. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis.
Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits
depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
36. A principal objection to the straight-line method of depreciation is that it

a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.
37. Each year a company has been investing an increasingly greater amount in machinery. Since there is a
large number of small items with relatively similar useful lives, the company has been applying straight-line
depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated
depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00.
The most likely explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully depreciated machinery that should have remained in service.
38. For the composite method, the composite

a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.
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39. Watkins Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its
trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will
be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
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40. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together and the total divided by the
number of items.
b. the cost of individual units within an asset group is charged to expense in the year a unit is retired from
service.
c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in
the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in the asset account and the
cost of replacements is charged to expense when they are acquired.
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41. When depreciation is computed for partial periods under a decreasing charge depreciation method, it is
necessary to
a. charge a full year's depreciation to the year of acquisition.
b. determine depreciation expense for the full year and then prorate the expense between the two periods
involved.
c. use the straight-line method for the year in which the asset is sold or otherwise disposed of.
d. use a salvage value equal to the first year's partial depreciation charge.
42. Depreciation is normally computed on the basis of the nearest

a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.
43. Myers Company acquired machinery on January 1, 2007 which it depreciated under the straight-line method
with an estimated life of fifteen years and no salvage value. On January 1, 2012, Myers estimated that the
remaining life of this machinery was six years with no salvage value. How should this change be accounted
for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2012
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2012
d. By continuing to depreciate the machinery over the original fifteen year life
44. A change in estimate should

a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.
45. Lynch Printing Company determines that a printing press used in its operations has suffered a permanent
impairment in value because of technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
46. Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported in the same classification on the balance sheet.
c. The rates may be changed upon revision of the estimated productive life used in the original rate
computations.
d. Both depreciation and depletion are based on time.
47. Which of the following is not a difference between the accounting treatment for depreciation and cost
depletion?
a. Depletion applies to natural resources while depreciation applies to plant and equipment.
b. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the
wear, tear, and obsolescence of the asset.
c. Many formulas are used in computing depreciation but only one is used to any extent in computing
depletion.
d. The cost of the asset is the starting point from which computation of the amount of the periodic charge
is made to operations for depreciation, but the fair value reassessed each year as the starting point for
the periodic charge for depletion.
48. Dividends representing a return of capital to stockholders are not uncommon among companies which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.
49. Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.
50. The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.
51. Reserve recognition accounting

a. is presently the generally accepted accounting method for financial reporting of oil and gas reserves.
b. is a historical cost method similar to the full cost approach and the successful efforts approach.
c. is used for reporting of oil and gas reserves for federal income tax purposes.
d. requires estimates of future production costs, the appropriate discount rate, and the expected selling
price of oil and gas reserves.
S
52. Of the following costs related to the development of natural resources, which one is not a part of depletion
cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts
S
53. Which of the following disclosures is not required in the financial statements regarding depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.
P
54. The book value of a plant asset is
a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related depreciation recorded to date.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.
55. A general description of the depreciation methods applicable to major classes of depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.
56. The asset turnover ratio is computed by dividing

a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.
57. The rate of return on total assets is computed by dividing

a. Net income by ending total assets.
b. Net sales by average total assets.
c. Net sales by ending total assets.
d. Net income by average total assets.
*58. A major objective of MACRS for tax depreciation is to

a. reduce the amount of depreciation deduction on business firms' tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax depreciation.
*59. Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?
a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value
*60. If income tax effects are ignored, accelerated depreciation methods

a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs on the income statement.
d. tend to decrease the fixed asset turnover ratio.

21. d 27. d 33. d 39. c 45. b 51. d 57. d
22. b 28. d 34. c 40. c 46. d 52. c *58. c
23. c 29. d 35. c 41. b 47. d 53. b *59. d
24. b 30. a 36. b 42. b 48. d 54. b *60. c
25. a 31. a 37. b 43. c 49. a 55. d
26. a 32. d 38. d 44. b 50. d 56. d

Valuation of Inventories: A Cost-Basis Approach: Multiple Choice

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Valuation of Inventories: A Cost-Basis Approach: Multiple Choice

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CHAPTER 8

22. Where should raw materials be classified on the balance sheet?

23. Which of the following accounts is not reported in inventory?

24. Why are inventories included in the computation of net income?

25. Which of the following is a characteristic of a perpetual inventory system?

30. What is consigned inventory?

31. When using a perpetual inventory system,

33. Goods in transit which are shipped f.o.b. destination should be

Use the following information for questions 35 and 36.

35. This transaction is known as a(n)

37. Goods on consignment are

48. Which of the following is a period cost?

50. Which of the following is included in inventory costs?

51. Which of the following is correct?

Use the following information for questions 56 and 57.

75. What is a LIFO reserve?

77. What happens when inventory in base year dollars decreases?

79. In the context of dollar-value LIFO, what is a LIFO layer?

Multiple Choice AnswersConceptual

24. In no case can "market" in the lower-of-cost-or-market rule be more than

29. Lower-of-cost-or-market as it applies to inventory is best described as the

32. Why are inventories stated at lower-of-cost-or-market?

38. Net realizable value is

40. Inventory may be recorded at net realizable value if

48. The gross profit method of inventory valuation is invalid when

50. A major advantage of the retail inventory method is that it

53. Which statement is true about the retail inventory method?

63. Which of the following is not a common disclosure for inventories?

Multiple Choice AnswersConceptual

22. A correct valuation is

31. Held-to-maturity securities are reported at

33. Which of the following is not correct in regard to trading securities?

37. Investments in debt securities should be recorded on the date of acquisition at

52. The fair value option allows a company to

53. Impairments are

54. A reclassification adjustment is reported in the

58. Gains trading or cherry picking involves

59. Transfers between categories

*63. Which of the following are considered equity securities?

*65. Gains or losses on cash flow hedges are

*68. A variable-interest entity has

Multiple Choice AnswersConceptual

28. The rate of interest actually earned by bondholders is called the

Use the following information for questions 29 and 30:

37. Theoretically, the costs of issuing bonds could be

39. Treasury bonds should be shown on the balance sheet as

48. Which of the following is an example of "off-balance-sheet financing"?

53. The times interest earned ratio is computed by dividing

54. The debt to total assets ratio is computed by dividing

Multiple Choice AnswersConceptual

22. Which of the following is not a major characteristic of a plant asset?

25. The cost of land does not include

34. Assets that qualify for interest cost capitalization include

37. Which of the following statements is true regarding capitalization of interest?

40. Interest cost that is capitalized should

56. Which of the following is a capital expenditure?

57. Which of the following is not a capital expenditure?

62. Which of the following statements about involuntary conversions is false?

Multiple Choice AnswersConceptual

30. The activity method of depreciation

33. Use of the double-declining balance method

34. Use of the sum-of-the-years'-digits method

36. A principal objection to the straight-line method of depreciation is that it