ACT311 Quiz 3 Fall 2014

ACT311 Quiz#3 Fall 2014
1. In periods of rising prices, which method results in the lowest taxable income (Hint: use the four
illustrations in the handout)?
a. FIFO
b. LIFO
c. Weighted Average

2. The Greene Co. started using the dollar-value LIFO method of inventory in 2005, with ending
inventory of $100,000. In 2006 the amount of inventory in base year dollars increased by $40,000. In
2007 the amount of inventory in base year dollars decreased by $30,000. Which of the following is true
when computing the ending inventory for 2007.
a. The ending inventory for 12/31/2007 will consist of layers from 2005, 2006 and 2007.
b. The ending inventory for 12/31/2007 will consist of layers from 2005 and 2007 only.
c. The ending inventory for 12/31/2007 will consist of layers from 2005 and 2006 only.
d. The ending inventory for 12/31/2007 will consist of only a 2007 layer.

3. [COGS] he Silva Co. provided the following information. Beginning inventory = $12,000; Purchases =
$100,000; Purchase Returns = $3,000; Ending inventory = $10,000; Sales = $180,000. Calculate Cost of
Goods Sold:
a. $103,000 b. $101,000 c. $99,000 d. $98,000

4. [Gross Profit Method.] The Cavalas Co. is estimating the amount of inventory using the gross profit
method. The beginning inventory was $40,000; the amount of sales was $120,000 and the amount of
purchases during the year was $100,000. A normal gross profit for this company is 60%. What should
be the estimated amount of ending inventory?
a. $84,000
b. $92,000
c. $68,000
d. $56,000

5. [Retail Method.] The following information pertains to the Roberts Co: Cost of net purchases =
$70,000; cost of beginning inventory = $10,000; net purchases at retail = $130,000; beginning
inventory at retail = $15,000; Sales = $80,000. What is the amount of the ending inventory at retail?
(Choose the closest answer).
a. $145,000 b. $65,000 c. $45,000. d. $20,000 e. $30,000

6. [Retail method.] Ignore Question 5. Assume that ending inventory at retail is $40,000 and that the
cost to retail ratio is 40%. What is the amount of ending inventory at cost. (Choose the closest answer).
a. $16,000 b. $24,000 c. $40,000 d. $66,667

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ACT311 Quiz#3 Fall 2014
7. [LIFO Reserve.] How to covert COGS under LIFO to COGS under FIFO? (Hint: read the text P432 15th e)
a. Add the change in the LIFO reserve to COGS under LIFO to yield COGS under FIFO.
b. Deduct the change in the LIFO reserve from COGS under LIFO to yield COGS under FIFO.
c. Neither of the above.

8. On July 1, 2006, the ABC Co. sold equipment it no longer needed for $100,000. On 12/31/05, the
balance in the Equipment Account was $130,000 and the balance in the Accumulated Depreciation
account as $40,000. The company uses the straight-line depreciation method, based on an estimated
salvage value of $20,000 and estimated life of 11 years. Assuming that the accountant makes all of the
necessary journal entries, what was the amount of gain or loss on the sale. Hint: dont forget to
consider the additional 6 months of depreciation expense before calculating the gain or loss.
a. Loss of $27,500
b. Gain of $12,500
c. Gain of $15,000

9. [$ Value LIFO.] The Green Co. uses the dollar-value LIFO method. At the end of 2005, the base year,
the current cost of the ending inventory was $60,000. At the end of 2006, the current cost of the ending
inventory was $72,000 and the price index was 1.10. What should be the cost of inventory on the
12/31/06 balance sheet ?
a.. $60,000 b. $65,455 c. $66,000 d. $72,000 e. none of the above

10. [LIFO] The Brown Co. has beginning inventory of 11 units at $10 each. A purchase was made early in
the year of 8 units at $8, and later in the year of 7 units at $7. At the end of the year, there were 12
units on hand. What is the amount of ending inventory, if the company uses the LIFO method?
a. $89 b. $116 c. $118 d. $120

11. [Int Cap] Which of the following assets do not qualify for interest capitalization?
a. A new building that is under construction and intended for use by the company.
b. A new building that was purchased ready for use by the company.
c. A new building that a company is building and intends to sell for a profit.

12. When does the period of interest capitalization begin?
a. When expenditures for the asset have been made.
b. When activities that are necessary to get it ready for its intended use are in progress.
c. When interest cost is being incurred.
d. Only when all three of the above conditions are met.

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ACT311 Quiz#3 Fall 2014
13. [COGS] The Grievance Co. uses the periodic inventory procedure and provided the following
information: Sales = $100,000; Beginning Inventory = $30,000; Accounts Receivable = $20,000; Ending
Inventory = $40,000; Purchases = $90,000 Which of the following is the correct journal entry for
recording COGS under the periodic procedure.
a. dr Merch Invty 30,000; dr. COGS 80,000; cr. Purchases 70,000; cr Merch. Invty 40,000
b. dr Merch Invty 40,000; dr. COGS 80,000; cr. Purchases 90,000; cr Merch. Invty 30,000
c. dr Merch Invty 40,000; dr Purchases 90,000; cr. Merch. Invty 30,000; cr COGS 100,000.
d. dr Purchases 90,000; cr. COGS 80,000;
cr. Merch. Invty 10,000;

(Capitalization of Interest) On December 31, 2009, Hurston Inc. borrowed $3,000,000 at 12%
payable annually to finance the construction of a new building. In 2010, the company made the
following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000;
December 1, $1,200,000. Additional information is provided as follows.
1. Other debt outstanding
10-year, 11% bond, December 31, 2003, interest payable annually
6-year, 10% note, dated December 31, 2007, interest payable annually

$4,000,000
$1,600,000

2. March 1 expenditure included land costs of $150,000
Hint: Expenditure for land can be included in calculating weighted average accumulated expenditures
14. Determine the amount of weighted average accumulated expenditure in 2010 in relation to the
construction of the building.
a. 1,500,000
b. 3,660,000
c. 1,600,000

15. Determine the amount of interest to be capitalized in 2010 in relation to the construction of the
building.
a. 180,000
b. 960,000
c. 780,000

16. Determine the total actual interest expenses incurred in year 2010.
a. 180,000
b. 960,000
c. 780,000

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ACT311 Quiz#3 Fall 2014
[ASSET IMPAIRMENT] On 12/31/09, the Stevens Co. had an asset with cost of $10,000 and accumulated
depreciation of $6,000. Because of changes in technology, the auditor inquired as to the expected
future cash flows from the asset. The Company responded that total estimated future cash flows
attributable to the asset amounted to $3,000. On 12/31/09, the fair market value of the asset was
$2,800.
17. Is the asset impaired?
a. yes b. no

18. What is the amount of loss due to impairment?
a. 2,800
b. 1,200
c. 1,000
d. there is no need to record a loss due to impairment

[Depreciation Method] A machine was purchased on 1/1/09 for $80,000. Estimated residual value =
$10,000. Estimated life = 20 years. Required: What is the amount of depreciation expense for the
second year of the assets life
19. Under the Straight-line depreciation method.
a. 4,000
b. 3,500
c. 8,000

20. Under the double-declining balance method.
a. 8,000
b. 7,200
c.4,000

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