. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

9-2 Test Bank for Intermediate Accounting, Fourteenth Edition

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
 Inventories: Additional Valuation Issues 9-3

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
9-4 Test Bank for Intermediate Accounting, Fourteenth Edition

53. Which of the following items would Companies use intraperiod tax allocation for all of the
following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9-5

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
9-6 Test Bank for Intermediate Accounting, Fourteenth Edition

b. No No
c. Yes No
d. No Yes
 Inventories: Additional Valuation Issues 9-7

. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

9-8 Test Bank for Intermediate Accounting, Fourteenth Edition

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
 Inventories: Additional Valuation Issues 9-9

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
9 - 10 Test Bank for Intermediate Accounting, Fourteenth Edition

53. Which of the following items would Companies use intraperiod tax allocation for all of the
following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 11

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
9 - 12 Test Bank for Intermediate Accounting, Fourteenth Edition

b. No No
c. Yes No
d. No Yes
 Inventories: Additional Valuation Issues 9 - 13

. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

9 - 14 Test Bank for Intermediate Accounting, Fourteenth Edition

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
 Inventories: Additional Valuation Issues 9 - 15

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
9 - 16 Test Bank for Intermediate Accounting, Fourteenth Edition

53. Which of the following items would Companies use intraperiod tax allocation for all of the
following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 17

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
9 - 18 Test Bank for Intermediate Accounting, Fourteenth Edition

b. No No
c. Yes No
d. No Yes
 Inventories: Additional Valuation Issues 9 - 19

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
9 - 20 Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Computational
70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:

Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.

b. should be reported at $27,000.

c. should be reported at $80,000.

 Inventories: Additional Valuation Issues 9 - 21

d. should be reported at $85,000.

9 - 22 Test Bank for Intermediate Accounting, Fourteenth Edition

73. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $27,000.

c. should be reported at $80,000.

d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:

Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $60,000.

c. should be reported at $180,000.

d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.

b. $12,350,000.

c. $12,175,000.

d. $12,035,000.
 Inventories: Additional Valuation Issues 9 - 23

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related
taxes of $500,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.

b. operating income net of applicable taxes, $1,140,000.

c. a prior period adjustment net of applicable taxes, $1,140,000.

d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income
taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.

b. $555,000.

c. $699,000.

d. $894,000.
9 - 24 Test Bank for Intermediate Accounting, Fourteenth Edition

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000.
Ignoring income taxes, what total amount should Garwood Company report as
extraordinary losses?
a. $339,000

b. $555,000.

c. $699,000.

d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the
amount of $2,740,000. The income taxes payable for the year are $1,440,000, including
$480,000 that is applicable to an extraordinary gain. Thus, the “income before
extraordinary items” is
a. $1,780,000.

b. $820,000.

c. $1,860,000.

d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood damage
of $50,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $400,000.

b. $500,000.

c. $550,000.

d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed
that under the caption "extraordinary losses," Somer reported a total of $1,030,000.
Further analysis revealed that the $1,030,000 in losses was comprised of the following
items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment
formerly used in the business.
 Inventories: Additional Valuation Issues 9 - 25

(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a

result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees,
resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its
2012 income statement?
a. $300,000.

b. $500,000.

c. $800,000.

d. $1,030,000.
9 - 26 Test Bank for Intermediate Accounting, Fourteenth Edition

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

c. infrequent and material in amount, but it need not be unusual in nature.

 Inventories: Additional Valuation Issues 9 - 27

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

c. losses from moving a plant to another city.

9 - 28 Test Bank for Intermediate Accounting, Fourteenth Edition

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting th

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
 Inventories: Additional Valuation Issues 9 - 29

MULTIPLE CHOICE—Computational
70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:

Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.

b. should be reported at $27,000.

c. should be reported at $80,000.

9 - 30 Test Bank for Intermediate Accounting, Fourteenth Edition

d. should be reported at $85,000.

 Inventories: Additional Valuation Issues 9 - 31

73. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $27,000.

c. should be reported at $80,000.

d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:

Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $60,000.

c. should be reported at $180,000.

d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.

b. $12,350,000.

c. $12,175,000.

d. $12,035,000.
9 - 32 Test Bank for Intermediate Accounting, Fourteenth Edition

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related
taxes of $500,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.

b. operating income net of applicable taxes, $1,140,000.

c. a prior period adjustment net of applicable taxes, $1,140,000.

d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income
taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.

b. $555,000.

c. $699,000.

d. $894,000.
 Inventories: Additional Valuation Issues 9 - 33

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000.
Ignoring income taxes, what total amount should Garwood Company report as
extraordinary losses?
a. $339,000

b. $555,000.

c. $699,000.

d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the
amount of $2,740,000. The income taxes payable for the year are $1,440,000, including
$480,000 that is applicable to an extraordinary gain. Thus, the “income before
extraordinary items” is
a. $1,780,000.

b. $820,000.

c. $1,860,000.

d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood damage
of $50,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $400,000.

b. $500,000.

c. $550,000.

d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed
that under the caption "extraordinary losses," Somer reported a total of $1,030,000.
Further analysis revealed that the $1,030,000 in losses was comprised of the following
items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment
formerly used in the business.
9 - 34 Test Bank for Intermediate Accounting, Fourteenth Edition

(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a

result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees,
resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its
2012 income statement?
a. $300,000.

b. $500,000.

c. $800,000.

d. $1,030,000.
 Inventories: Additional Valuation Issues 9 - 35

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

c. infrequent and material in amount, but it need not be unusual in nature.

9 - 36 Test Bank for Intermediate Accounting, Fourteenth Edition

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

c. losses from moving a plant to another city.

 Inventories: Additional Valuation Issues 9 - 37

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting th

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
9 - 38 Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Computational
70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:

Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.

b. should be reported at $27,000.

c. should be reported at $80,000.

 Inventories: Additional Valuation Issues 9 - 39

d. should be reported at $85,000.

9 - 40 Test Bank for Intermediate Accounting, Fourteenth Edition

73. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $27,000.

c. should be reported at $80,000.

d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:

Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $60,000.

c. should be reported at $180,000.

d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.

b. $12,350,000.

c. $12,175,000.

d. $12,035,000.
 Inventories: Additional Valuation Issues 9 - 41

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related
taxes of $500,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.

b. operating income net of applicable taxes, $1,140,000.

c. a prior period adjustment net of applicable taxes, $1,140,000.

d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income
taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.

b. $555,000.

c. $699,000.

d. $894,000.
9 - 42 Test Bank for Intermediate Accounting, Fourteenth Edition

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000.
Ignoring income taxes, what total amount should Garwood Company report as
extraordinary losses?
a. $339,000

b. $555,000.

c. $699,000.

d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the
amount of $2,740,000. The income taxes payable for the year are $1,440,000, including
$480,000 that is applicable to an extraordinary gain. Thus, the “income before
extraordinary items” is
a. $1,780,000.

b. $820,000.

c. $1,860,000.

d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood damage
of $50,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $400,000.

b. $500,000.

c. $550,000.

d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed
that under the caption "extraordinary losses," Somer reported a total of $1,030,000.
Further analysis revealed that the $1,030,000 in losses was comprised of the following
items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment
formerly used in the business.
 Inventories: Additional Valuation Issues 9 - 43

(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a

result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees,
resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its
2012 income statement?
a. $300,000.

b. $500,000.

c. $800,000.

d. $1,030,000.
9 - 44 Test Bank for Intermediate Accounting, Fourteenth Edition

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

c. infrequent and material in amount, but it need not be unusual in nature.

 Inventories: Additional Valuation Issues 9 - 45

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

c. losses from moving a plant to another city.

9 - 46 Test Bank for Intermediate Accounting, Fourteenth Edition

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting thCompanies use intraperiod tax allocation for
all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 47

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
9 - 48 Test Bank for Intermediate Accounting, Fourteenth Edition

b. No No
c. Yes No
d. No Yes
 Inventories: Additional Valuation Issues 9 - 49

60. Which of the following items will not appear in the retained earnings statement?
a. Net loss

b. Prior period adjustment

c. Discontinued operations

d. Dividends

61. Which one of the following types of losses is excluded from the determination of net
income in income statements?
a. Material losses resulting from transactions in the company's investments account.

b. Material losses resulting from unusual sales of assets not acquired for resale.

c. Material losses resulting from the write-off of intangibles.

d. Material losses resulting from correction of errors related to prior periods.

62. Watts Corporation made a very large arithmetical error in the preparation of its year-end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.

b. a component of income for the year in which the error is discovered, but separately listed

on the income statement and fully explained in a note to the financial statements.

c. an extraordinary item for the year in which the error was made.

d. a prior period adjustment.

63. A company is not required to report a per share amount on the face of the income
statement for which of the following items?
a. Net income
b. Prior period adjustment
c. Extraordinary item
d. Discontinued operations

64. Earnings per share data are required on the face of which of the following financial
statements?
a. Statement of retained earnings
9 - 50 Test Bank for Intermediate Accounting, Fourteenth Edition

b. Statement of stockholders' equity

c. Income statement
d. Balance sheet

65. Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.

66. Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity
 Inventories: Additional Valuation Issues 9 - 51

67. Which disclosure method do most companies use to display the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity

68. Comprehensive income includes all of the following except

a. dividend revenue.

b. losses on disposal of assets.

c. investments by owners.

d. unrealized holding gains.

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
9 - 52 Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Computational

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

 Inventories: Additional Valuation Issues 9 - 53

c. infrequent and material in amount, but it need not be unusual in nature.

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

9 - 54 Test Bank for Intermediate Accounting, Fourteenth Edition

c. losses from moving a plant to another city.

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting the criteria for an extraordinary item be
disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and supple-

mented by a footnote if deemed appropriate.

b. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

 Inventories: Additional Valuation Issues 9 - 55

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
9 - 56 Test Bank for Intermediate Accounting, Fourteenth Edition

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 57

53. Which of the following items would Companies use intraperiod tax allocation for all of the
following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
9 - 58 Test Bank for Intermediate Accounting, Fourteenth Edition

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
 Inventories: Additional Valuation Issues 9 - 59

b. No No
c. Yes No
d. No Yes
9 - 60 Test Bank for Intermediate Accounting, Fourteenth Edition

60. Which of the following items will not appear in the retained earnings statement?
a. Net loss

b. Prior period adjustment

c. Discontinued operations

d. Dividends

61. Which one of the following types of losses is excluded from the determination of net
income in income statements?
a. Material losses resulting from transactions in the company's investments account.

b. Material losses resulting from unusual sales of assets not acquired for resale.

c. Material losses resulting from the write-off of intangibles.

d. Material losses resulting from correction of errors related to prior periods.

62. Watts Corporation made a very large arithmetical error in the preparation of its year-end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.

b. a component of income for the year in which the error is discovered, but separately listed

on the income statement and fully explained in a note to the financial statements.

c. an extraordinary item for the year in which the error was made.

d. a prior period adjustment.

63. A company is not required to report a per share amount on the face of the income
statement for which of the following items?
a. Net income
b. Prior period adjustment
c. Extraordinary item
d. Discontinued operations

64. Earnings per share data are required on the face of which of the following financial
statements?
a. Statement of retained earnings
 Inventories: Additional Valuation Issues 9 - 61

b. Statement of stockholders' equity

c. Income statement
d. Balance sheet

65. Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.

66. Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity
9 - 62 Test Bank for Intermediate Accounting, Fourteenth Edition

67. Which disclosure method do most companies use to display the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity

68. Comprehensive income includes all of the following except

a. dividend revenue.

b. losses on disposal of assets.

c. investments by owners.

d. unrealized holding gains.

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
 Inventories: Additional Valuation Issues 9 - 63

MULTIPLE CHOICE—Computational
70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:

Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.

b. should be reported at $27,000.

c. should be reported at $80,000.

9 - 64 Test Bank for Intermediate Accounting, Fourteenth Edition

d. should be reported at $85,000.

 Inventories: Additional Valuation Issues 9 - 65

73. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $27,000.

c. should be reported at $80,000.

d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:

Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $60,000.

c. should be reported at $180,000.

d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.

b. $12,350,000.

c. $12,175,000.

d. $12,035,000.
9 - 66 Test Bank for Intermediate Accounting, Fourteenth Edition

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related
taxes of $500,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.

b. operating income net of applicable taxes, $1,140,000.

c. a prior period adjustment net of applicable taxes, $1,140,000.

d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income
taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.

b. $555,000.

c. $699,000.

d. $894,000.
 Inventories: Additional Valuation Issues 9 - 67

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000.
Ignoring income taxes, what total amount should Garwood Company report as
extraordinary losses?
a. $339,000

b. $555,000.

c. $699,000.

d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the
amount of $2,740,000. The income taxes payable for the year are $1,440,000, including
$480,000 that is applicable to an extraordinary gain. Thus, the “income before
extraordinary items” is
a. $1,780,000.

b. $820,000.

c. $1,860,000.

d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood damage
of $50,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $400,000.

b. $500,000.

c. $550,000.

d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed
that under the caption "extraordinary losses," Somer reported a total of $1,030,000.
Further analysis revealed that the $1,030,000 in losses was comprised of the following
items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment
formerly used in the business.
9 - 68 Test Bank for Intermediate Accounting, Fourteenth Edition

(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a

result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees,
resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its
2012 income statement?
a. $300,000.

b. $500,000.

c. $800,000.

d. $1,030,000.
 Inventories: Additional Valuation Issues 9 - 69

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

c. infrequent and material in amount, but it need not be unusual in nature.

9 - 70 Test Bank for Intermediate Accounting, Fourteenth Edition

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

c. losses from moving a plant to another city.

 Inventories: Additional Valuation Issues 9 - 71

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting the criteria for an extraordinary item be
disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and supple-

mented by a footnote if deemed appropriate.

b. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

9 - 72 Test Bank for Intermediate Accounting, Fourteenth Edition

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
 Inventories: Additional Valuation Issues 9 - 73

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
9 - 74 Test Bank for Intermediate Accounting, Fourteenth Edition

53. Which of the following items would Companies use intraperiod tax allocation for all of the
following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 75

53. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the
income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders'
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S
58. Earnings per share should always be shown separately for
a. net income and gross margin.

b. net income and pretax income.

c. income before extraordinary items.

d. extraordinary items and prior period adjustments.

P
59. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
9 - 76 Test Bank for Intermediate Accounting, Fourteenth Edition

b. No No
c. Yes No
d. No Yes
 Inventories: Additional Valuation Issues 9 - 77

60. Which of the following items will not appear in the retained earnings statement?
a. Net loss

b. Prior period adjustment

c. Discontinued operations

d. Dividends

61. Which one of the following types of losses is excluded from the determination of net
income in income statements?
a. Material losses resulting from transactions in the company's investments account.

b. Material losses resulting from unusual sales of assets not acquired for resale.

c. Material losses resulting from the write-off of intangibles.

d. Material losses resulting from correction of errors related to prior periods.

62. Watts Corporation made a very large arithmetical error in the preparation of its year-end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.

b. a component of income for the year in which the error is discovered, but separately listed

on the income statement and fully explained in a note to the financial statements.

c. an extraordinary item for the year in which the error was made.

d. a prior period adjustment.

63. A company is not required to report a per share amount on the face of the income
statement for which of the following items?
a. Net income
b. Prior period adjustment
c. Extraordinary item
d. Discontinued operations

64. Earnings per share data are required on the face of which of the following financial
statements?
a. Statement of retained earnings
9 - 78 Test Bank for Intermediate Accounting, Fourteenth Edition

b. Statement of stockholders' equity

c. Income statement
d. Balance sheet

65. Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.

66. Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity
 Inventories: Additional Valuation Issues 9 - 79

67. Which disclosure method do most companies use to display the components of other
comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity

68. Comprehensive income includes all of the following except

a. dividend revenue.

b. losses on disposal of assets.

c. investments by owners.

d. unrealized holding gains.

69. The approach most companies use to provide information related to the components of
other comprehensive income is a
a. second separate income statement.

b. combined income statement of comprehensive income.

c. separate column in the statement of changes in stockholders’ equity.

d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. c 35. b 42. a 49. c 56. d 63. b
22. d 29. b 36. c 43. d 50. d 57. d 64. c
23. d 30. a 37. b 44. a 51. d 58. c 65. b
24. d 31. d 38. b 45. d 52. c 59. d 66. a
25. d 32. b 39. a 46. d 53. d 60. c 67. d
26. c 33. d 40. d 47. c 54. d 61. d 68. c
27. b 34. a 41. d 48. c 55. c 62. d 69. c

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.
9 - 80 Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Computational
70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:

Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.

b. should be reported at $27,000.

c. should be reported at $80,000.

 Inventories: Additional Valuation Issues 9 - 81

d. should be reported at $85,000.

9 - 82 Test Bank for Intermediate Accounting, Fourteenth Edition

73. For Mortenson Company, the following information is available:

Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $27,000.

c. should be reported at $80,000.

d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:

Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's multiple-step income statement, gross profit
a. should not be reported

b. should be reported at $60,000.

c. should be reported at $180,000.

d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.

b. $12,350,000.

c. $12,175,000.

d. $12,035,000.
 Inventories: Additional Valuation Issues 9 - 83

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related
taxes of $500,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.

b. operating income net of applicable taxes, $1,140,000.

c. a prior period adjustment net of applicable taxes, $1,140,000.

d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income
taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.

b. $555,000.

c. $699,000.

d. $894,000.
9 - 84 Test Bank for Intermediate Accounting, Fourteenth Edition

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on
disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000.
Ignoring income taxes, what total amount should Garwood Company report as
extraordinary losses?
a. $339,000

b. $555,000.

c. $699,000.

d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the
amount of $2,740,000. The income taxes payable for the year are $1,440,000, including
$480,000 that is applicable to an extraordinary gain. Thus, the “income before
extraordinary items” is
a. $1,780,000.

b. $820,000.

c. $1,860,000.

d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood damage
of $50,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $400,000.

b. $500,000.

c. $550,000.

d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed
that under the caption "extraordinary losses," Somer reported a total of $1,030,000.
Further analysis revealed that the $1,030,000 in losses was comprised of the following
items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment
formerly used in the business.
 Inventories: Additional Valuation Issues 9 - 85

(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a

result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees,
resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its
2012 income statement?
a. $300,000.

b. $500,000.

c. $800,000.

d. $1,030,000.
9 - 86 Test Bank for Intermediate Accounting, Fourteenth Edition

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations
net of tax would be
a. ($35,000).

b. ($77,000).

c. ($133,000).

d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate
for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very
uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).

b. ($735,000).

c. ($777,000).

d. ($833,000).

84. During 2012, Lopez Corporation transaction should be

a. unusual in nature, infrequent, and material in amount.

b. unusual in nature and infrequent, but it need not be material.

c. infrequent and material in amount, but it need not be unusual in nature.

 Inventories: Additional Valuation Issues 9 - 87

d. unusual in nature and material, but it need not be infrequent.

40. Classification as an extraordinary item on the income statement would be appropriate for
the
a. gain or loss on disposal of a component of the business.

b. substantial write-off of obsolete inventories.

c. loss from a strike.

d. none of these.

41. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.

b. Write-off of deferred marketing costs believed to have no future benefit.

c. Gain resulting from the devaluation of the U.S. dollar.

d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an
extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.

b. Only if the flood damage is material in amount and could have been reduced by prudent

management.

c. Under any circumstances as an extraordinary item.

d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is

a. write-off of goodwill.

b. gains from transactions involving foreign currencies.

c. losses from moving a plant to another city.

9 - 88 Test Bank for Intermediate Accounting, Fourteenth Edition

d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting the criteria for an extraordinary item be
disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and supple-

mented by a footnote if deemed appropriate.

b. Shown in operating revenues or expenses if material but not shown as a separate item.

c. Shown net of income tax after ordinary net earnings but before extraordinary items.

d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery

b. A change from FIFO to LIFO

c. A change from straight-line to double-declining-balance

d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.

b. Losses from an expropriation of assets.

c. Gain on a sale of the only security investment a company has ever owned.

d. Losses from exchange or translation of foreign currencies.

 Inventories: Additional Valuation Issues 9 - 89

47. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.

b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items.

c. Earnings per share from both continuing operations and net income should be disclosed on the

face of the income statement.

d. The gain or loss on disposal should not be segregated, but should be reported together with

the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.

b. an extraordinary item.

c. an amount after continuing operations and before extraordinary items.

d. a bulk sale of plant assets included in income from continuing operations.

S
49. A material item which is unusual in nature or infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to

a. extraordinary items.

b. discontinued operations.

c. prior period adjustments.

d. all of these.
9 - 90 Test Bank for Intermediate Accounting, Fourteenth Edition

51. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement

either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not

for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of

tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
 Inventories: Additional Valuation Issues 9 - 91

53. Which of the following items would c.$165,000.

d. $215,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
79. c 83. a 87. d 91. c 95. a
80. a 84. b 88. b 92. c 96. b
81. b 85. c 89. b 93. a
82. d 86. c 90. a 94. b

MULTIPLE CHOICE—CPA Adapted

97. Stine Corp.'s trial balance reflected the following account balances at December 31, 2012:
Accounts receivable (net) $24,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2012 balance sheet, the current assets total is
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
9 - 92 Test Bank for Intermediate Accounting, Fourteenth Edition

Use the following information for questions 98 through 100.

The following trial balance of Reese Corp. at December 31, 2012 has been properly adjusted
except for the income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Property, plant, and equipment (net) 7,366,000
Accounts payable and accrued liabilities $ 1,801,000
Income taxes payable 654,000
Deferred income tax liability 85,000
Common stock 2,350,000
Additional paid-in capital 3,680,000
Retained earnings, 1/1/12 3,450,000
Net sales and other revenues 13,460,000
Costs and expenses 11,180,000
Income tax expenses 1,179,000
$25,480,000 $25,480,000

Other financial data for the year ended December 31, 2012:
 Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly
installments of $150,000. The last payment is due December 29, 2014.
 The balance in the Deferred Income Tax Liability account pertains to a temporary difference
that arose in a prior year, of which $20,000 is classified as a current liability.
 During the year, estimated tax payments of $525,000 were charged to income tax expense.
The current and future tax rate on all types of income is 30%.

In Reese's December 31, 2012 balance sheet,

98. The current assets total is

a. $6,280,000.

b. $5,755,000.

c. $5,605,000.

d. $5,155,000.

99. The current liabilities total is

a. $1,950,000.

b. $2,015,000.
 Inventories: Additional Valuation Issues 9 - 93

c. $2,475,000.

d. $2,540,000.

100. The final retained earnings balance is

a. $4,551,000.

b. $4,636,000.

c. $5,076,000.

d. $5,005,000.

101. On January 4, 2012, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an
annual rental of $100,000. At inception of the lease, Dodd received $400,000 covering the
first two years' rent of $200,000 and a security deposit of $200,000. This deposit will not
be returned to Dodd upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $400,000 should be shown as a
current and long-term liability in Kiley's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $400,000

b. $100,000 $200,000

c. $200,000 $200,000

d. $200,000 $100,000

102. In a statement of cash flows, receipts from sales of property, plant, and equipment and
other productive assets should generally be classified as cash inflows from
a. operating activities.

b. financing activities.

c. investing activities.

d. selling activities.

103. In a statement of cash flows, interest payments to lenders and other creditors should be
classified as cash outflows for
a. operating activities.
9 - 94 Test Bank for Intermediate Accounting, Fourteenth Edition

b. borrowing activities.

c. lending activities.

d. financing activities.

104. In a statement of cash flows, proceeds from issuing equity instruments should be
classified as cash inflows from
a. lending activities.

b. operating activities.

c. investing activities.

d. financing activities.

105. In a statement of cash flows, payments to acquire debt instruments of other entities (other
than cash equivalents) should be classified as cash outflows for
a. operating activities.

b. investing activities.

c. financing activities.

d. lending activities.

106. Which of the following facts concerning fixed assets should be included in the summary of
significant accounting policies?
Depreciation Method Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No
 Inventories: Additional Valuation Issues 9 - 95

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
97. d 99. a 101. b 103. a 105. b
98. d 100. c 102. c 104. d 106. c

DERIVATIONS — Computational
No. Answer Derivation
79. c
80. a
81. b $900,000 – $105,000 + $390,000 = $1,185,000.
82. d
83. a
84. b $900,000 – $105,000 + $454,000 = $1,249,000.
85. c $2,600 – $1,680 = $920.
86. c ($5,400 – $3,240) + $1,280 – $1,080 = $2,360.
87. d $2,166 + $646 – $2,750 = ($62).
88. b $70,000 + $220,000 – $110,000 + $140,000 = $320,000.
89. b $70,000 + $240,000 – $110,000 + $140,000 = $340,000.
90. a $55,000 – $3,000 + $1,000 + $1,500 = $54,500.
91. c $450,000 + $140,000 – $60,000 = $530,000.
92. c $300,000 + $70,000 – $30,000 = $340,000.
93. a $235,000 ÷ ($150,000 + $100,000) = 0.94.
94. b $235,000 – $60,000 – $110,000 = $65,000.
95. a $275,000 ÷ ($150,000 + $100,000) = 1.10.
96. b $275,000 – $60,000 – $110,000 = $105,000.

DERIVATIONS — CPA Adapted

No. Answer Derivation
97. d $24,000 + $6,000 + $16,000 + $30,000 + $2,000 = $78,000.
98. d $975,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $5,155,000.
99. a $1,801,000 + ($654,000 – $525,000) + $20,000 = $1,950,000.
100. c $3,450,000 + $13,460,000 – $11,180,000 – ($1,179,000 – $525,000) =
$5,076,000.
101. b Conceptual.
102. c Conceptual.
9 - 96 Test Bank for Intermediate Accounting, Fourteenth Edition

No. Answer Derivation

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.

EXERCISES

Ex. 5-107—Definitions.
Provide clear, concise answers for the following.

CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual
Answer No. Description
c. $165,000.

d. $215,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
79. c 83. a 87. d 91. c 95. a
80. a 84. b 88. b 92. c 96. b
81. b 85. c 89. b 93. a
82. d 86. c 90. a 94. b

MULTIPLE CHOICE—CPA Adapted

97. Stine Corp.'s trial balance reflected the following account balances at December 31, 2012:
Accounts receivable (net) $24,000
Trading securities 6,000
 Inventories: Additional Valuation Issues 9 - 97

Accumulated depreciation on equipment and furniture 15,000

Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2012 balance sheet, the current assets total is
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.
9 - 98 Test Bank for Intermediate Accounting, Fourteenth Edition

Use the following information for questions 98 through 100.

The following trial balance of Reese Corp. at December 31, 2012 has been properly adjusted
except for the income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Property, plant, and equipment (net) 7,366,000
Accounts payable and accrued liabilities $ 1,801,000
Income taxes payable 654,000
Deferred income tax liability 85,000
Common stock 2,350,000
Additional paid-in capital 3,680,000
Retained earnings, 1/1/12 3,450,000
Net sales and other revenues 13,460,000
Costs and expenses 11,180,000
Income tax expenses 1,179,000
$25,480,000 $25,480,000

Other financial data for the year ended December 31, 2012:
 Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly
installments of $150,000. The last payment is due December 29, 2014.
 The balance in the Deferred Income Tax Liability account pertains to a temporary difference
that arose in a prior year, of which $20,000 is classified as a current liability.
 During the year, estimated tax payments of $525,000 were charged to income tax expense.
The current and future tax rate on all types of income is 30%.

In Reese's December 31, 2012 balance sheet,

98. The current assets total is

a. $6,280,000.

b. $5,755,000.

c. $5,605,000.

d. $5,155,000.

99. The current liabilities total is

a. $1,950,000.

b. $2,015,000.
 Inventories: Additional Valuation Issues 9 - 99

c. $2,475,000.

d. $2,540,000.

100. The final retained earnings balance is

a. $4,551,000.

b. $4,636,000.

c. $5,076,000.

d. $5,005,000.

101. On January 4, 2012, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an
annual rental of $100,000. At inception of the lease, Dodd received $400,000 covering the
first two years' rent of $200,000 and a security deposit of $200,000. This deposit will not
be returned to Dodd upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $400,000 should be shown as a
current and long-term liability in Kiley's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $400,000

b. $100,000 $200,000

c. $200,000 $200,000

d. $200,000 $100,000

102. In a statement of cash flows, receipts from sales of property, plant, and equipment and
other productive assets should generally be classified as cash inflows from
a. operating activities.

b. financing activities.

c. investing activities.

d. selling activities.

103. In a statement of cash flows, interest payments to lenders and other creditors should be
classified as cash outflows for
a. operating activities.
9 - 100 Test Bank for Intermediate Accounting, Fourteenth Edition

b. borrowing activities.

c. lending activities.

d. financing activities.

104. In a statement of cash flows, proceeds from issuing equity instruments should be
classified as cash inflows from
a. lending activities.

b. operating activities.

c. investing activities.

d. financing activities.

105. In a statement of cash flows, payments to acquire debt instruments of other entities (other
than cash equivalents) should be classified as cash outflows for
a. operating activities.

b. investing activities.

c. financing activities.

d. lending activities.

106. Which of the following facts concerning fixed assets should be included in the summary of
a. $3,200.
b. $3,100.
c. $3,250.
d. $3,100.

79. Robust Inc. has the following information related to an item in its ending inventory. Packit
(Product # 874) has a cost of $524, a replacement cost of $402, a net realizable value of
$468, and a normal profit margin of $21. What is the final lower-of-cost-or-market
inventory value for Packit?
a. $447.
b. $524.
c. $402.
d. $468.
 Inventories: Additional Valuation Issues 9 - 101

80. Robust Inc. has the following information related to an item in its ending inventory. Acer
Top has a cost of $251, a replacement cost of $234, a net realizable value of $266, and a
normal profit margin of $34. What is the final lower-of-cost-or-market inventory value for
Acer Top?
a. $232.
b. $251.
c. $234.
d. $266.

81. Mortenson Corporation sells its product, a rare metal, in a controlled market with a quoted
price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in
inventory is $150,000. The total selling price is $360,000, and estimated costs of disposal
are $10,000. At what amount should the inventory of 5,000 pounds be reported in the
balance sheet?
a. $140,000.
b. $150,000.
c. $350,000.
d. $360,000.

82. Rodriguez Corporation sells its product, a rare metal, in a controlled market with a quoted
price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in
inventory is $210,000. The total selling price is $490,000, and estimated costs of disposal
are $5,000. At what amount should the inventory of 5,000 pounds be reported in the
balance sheet?
a. $205,000.
b. $210,000.
c. $485,000.
d. $490,000.

83. Turner Corporation acquired two inventory items at a lump-sum cost of $80,000. The
acquisition included 3,000 units of product LF, and 7,000 units of product 1B. LF normally
sells for $24 per unit, and 1B for $8 per unit. If Turner sells 1,000 units of LF, what amount
of gross profit should it recognize?
a. $3,000
b. $9,000.
c. $16,000.
d. $19,000.

84. Robertson Corporation acquired two inventory items at a lump-sum cost of $60,000. The
acquisition included 3,000 units of product CF, and 7,000 units of product 3B. CF normally
sells for $18 per unit, and 3B for $6 per unit. If Robertson sells 1,000 units of CF, what
amount of gross profit should it recognize?
a. $2,250.
b. $6,750.
c. $12,000.
d. $14,250.
9 - 102 Test Bank for Intermediate Accounting, Fourteenth Edition

85. At a lump-sum cost of $72,000, Pratt Company recently purchased the following items for
resale:
Item No. of Items Purchased Resale Price Per Unit
M 4,000 $3.75
N 2,000 12.00
O 6,000 6.00
The appropriate cost per unit of inventory is:
M N O
a. $3.75 $12.00 $6.00
b. $3.11 $19.86 $3.32
c. $3.60 $11.52 $5.76
d. $6.00 $6.00 $6.00

86. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For
a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are
allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell
for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each.
Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative
sales value method, what is the cost per item in Group 1?
a. $0.150.
b. $0.100.
c. $0.120.
d. $0.225.

87. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For
a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are
allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell
for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each.
Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative
sales value method, what is the cost per item in Group 2?
a. $0.225.
b. $0.360.
c. $0.210.
d. $0.239.

88. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For
a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are
allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell
for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each.
Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative
sales value method, what is the cost per item in Group 3?
a. $0.477.
b. $0.225.
c. $0.720.
d. $0.540.
 Inventories: Additional Valuation Issues 9 - 103

89. During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable
purchase commitment with its primary supplier. Jeremiah agreed to purchase $2.5 million
of raw materials during the next fiscal year under this contract. At the end of the current
fiscal year, the raw material to be purchased under this contract had a market value of
$2.3 million. What is the journal entry at the end of the current fiscal year?
a. Debit Unrealized Holding Gain or Loss for $200,000 and credit Estimated Liability on
Purchase Commitment for $200,000.
b. Debit Estimated liability on Purchase Commitments for $200,000 and credit
Unrealized Holding Gain or Loss for $200,000.
c. Debit Unrealized Holding Gain or Loss for $2,300,000 and credit Estimated Liability on
Purchase Commitments for $2,300,000.
d. No journal entry is required.

90. During the prior fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase
commitment with its primary supplier to purchase $2.5 million of raw materials. Jeremiah
paid the $2.5 million to acquire the raw materials when the raw materials were only worth
$2.3 million. Assume that the purchase commitment was properly recorded. What is the
journal entry to record the purchase?
a. Debit Inventory for $2,300,000, and credit Cash for $2,300,000.
b. Debit Inventory for $2,300,000, debit Unrealized Holding Gain or Loss for $200,000,
and credit Cash for $2,500,000.
c. Debit Inventory for $2,300,000, debit Estimated Liability on Purchase Commitments
for $200,000 and credit Cash for $2,500,000.
d. Debit Inventory for $2,500,000, and credit Cash for $2,500,000.

91. During 2012, Larue Co., a manufacturer of chocolate candies, contracted to purchase
200,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of
2013. Because a record harvest is predicted for 2013, the price per pound for cocoa
beans had fallen to $3.30 by December 31, 2012.
Of the following journal entries, the one which would properly reflect in 2012 the effect of
the commitment of Larue Co. to purchase the 100,000 pounds of cocoa is
a. Cocoa Inventory............................................................. 400,000
Accounts Payable............................................... 400,000
b. Cocoa Inventory............................................................. 330,000
Loss on Purchase Commitments................................... 70,000
Accounts Payable............................................... 400,000
c. Unrealized Holding Gain or Loss-Income....................... 70,000
Estimated Liability on Purchase Commitments... 70,000
d. No entry would be necessary in 2012

92. RS Corporation, a manufacturer of ethnic foods, contracted in 2012 to purchase 500

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2013. By
12/31/12, the price per pound of the spice mixture had risen to $5.40 per pound. In 2012,
AJ should recognize
a. a loss of $2,500.
b. a loss of $200.
c. no gain or loss.
d. a gain of $200.
9 - 104 Test Bank for Intermediate Accounting, Fourteenth Edition

93. LF Corporation, a manufacturer of Mexican foods, contracted in 2012 to purchase 1,000

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2013. By
12/31/12, the price per pound of the spice mixture had dropped to $4.70 per pound. In
2012, LF should recognize
a a loss of $5,000.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.

94. The following information is available for October for Barton Company.
Beginning inventory $150,000
Net purchases 450,000
Net sales 900,000
Percentage markup on cost 66.67%
A fire destroyed Barton’s October 31 inventory, leaving undamaged inventory with a cost
of $9,000. Using the gross profit method, the estimated ending inventory destroyed by fire
is
a. $51,000.
b. $231,000.
c. $240,000.
d. $300,000.

95. The following information is available for October for Norton Company.
Beginning inventory $200,000
Net purchases 600,000
Net sales 1,200,000
Percentage markup on cost 66.67%
A fire destroyed Norton’s October 31 inventory, leaving undamaged inventory with a cost
of $12,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. $68,000.
b. $308,000.
c. $320,000.
d. $400,000.

Use the following information for questions 96 and 97.

Miles Company, a wholesaler, budgeted the following sales for the indicated months:
June July August
Sales on account $2,700,000 $2,760,000 $2,850,000
Cash sales 270,000 300,000 390,000
Total sales $2,970,000 $3,060,000 $3,240,000

All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the
beginning of each month are at 30% of that month's projected cost of goods sold.
 Inventories: Additional Valuation Issues 9 - 105

96. The cost of goods sold for the month of June is anticipated to be
a. $2,160,000.
b. $2,250,000.
c. $2,280,000.
d. $2,475,000.

97. Merchandise purchases for July are anticipated to be

a. $2,448,000.
b. $3,114,000.
c. $2,550,000.
d. $2,595,000.

98. Reyes Company had a gross profit of $480,000, total purchases of $560,000, and an
ending inventory of $320,000 in its first year of operations as a retailer. Reyes’s sales in
its first year must have been
a. $720,000.
b. $880,000.
c. $240,000.
d. $800,000.

99. A markup of 30% on cost is equivalent to what markup on selling price?

a. 23%
b. 30%
c. 70%
d. 77%

100. Kesler, Inc. estimates the cost of its physical inventory at March 31 for use in an interim
financial statement. The rate of markup on cost is 25%. The following account balances
are available:
Inventory, March 1 $385,000
Purchases 301,000
Purchase returns 14,000
Sales during March 525,000
The estimate of the cost of inventory at March 31 would be
a. $147,000.
b. $252,000.
c. $278,250.
d. $196,000.

101. On January 1, 2012, the merchandise inventory of Glaus, Inc. was $1,000,000. During
2012 Glaus purchased $2,000,000 of merchandise and recorded sales of $2,500,000. The
gross profit rate on these sales was 25%. What is the merchandise inventory of Glaus at
December 31, 2012?
a. $500,000.
b. $625,000.
c. $1,125,000.
d. $1,875,000.
9 - 106 Test Bank for Intermediate Accounting, Fourteenth Edition

102. For 2012, cost of goods available for sale for Tate Corporation was $1,800,000. The gross
profit rate was 20%. Sales for the year were $1,600,000. What was the amount of the
ending inventory?
a. $0.
b. $520,000.
c. $360,000.
d. $320,000.

103. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15 $360,000
Inventory, January 1 60,000
Purchases, January 1 through April 15 300,000
Markup on cost 25%
The amount of the inventory loss is estimated to be
a. $72,000.
b. $36,000.
c. $90,000.
d. $60,000.

104. The inventory account of Irick Company at December 31, 2012, included the following
items:
Inventory Amount
Merchandise out on consignment at sales price
(including markup of 40% on selling price) $30,000
Goods purchased, in transit (shipped f.o.b. shipping point) 24,000
Goods held on consignment by Irick 26,000
Goods out on approval (sales price $15,200, cost $12,800) 15,200
Based on the above information, the inventory account at December 31, 2012, should be
reduced by
a. $40,400.
b. $45,200.
c. $64,400.
d. $64,000.

105. The sales price for a product provides a gross profit of 20% of sales price. What is the
gross profit as a percentage of cost?
a. 20%.
b. 17%.
c. 25%.
d. Not enough information is provided to determine.

106. Gamma Ray Corp. has annual sales totaling $975,000 and an average gross profit of 20%
of cost. What is the dollar amount of the gross profit?
a. $195,000.
b. $146,250.
c. $162,500.
d. $243,750.
 Inventories: Additional Valuation Issues 9 - 107

107. On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the
entire inventory on hand at the location. The inventory on hand as of June 30 totaled
$640,000. Since June 30 until the time of the hurricane, the company made purchases of
$170,000 and had sales of $500,000. Assuming the rate of gross profit to selling price is
40%, what is the approximate value of the inventory that was destroyed?
a. $640,000.
b. $363,000.
c. $410,000.
d. $510,000.

108. On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand as
of January 1 totaled $1,360,000. From January 1 through the time of the fire, the company
made purchases of $330,000 and had sales of $720,000. Assuming the rate of gross
profit to selling price is 40%, what is the approximate value of the inventory that was
destroyed?
a. $1,360,000.
b. $1,346,000.
c. $970,000.
d. $1,258,000.

109. On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory
on hand as of January 1 totaled $3,300,000. From January 1 through the time of the fire,
the company made purchases of $1,366,000, incurred freight-in of $156,000, and had
sales of $2,420,000. Assuming the rate of gross profit to selling price is 30%, what is the
approximate value of the inventory that was destroyed?
a. $4,096,000.
b. $2,972,000.
c. $3,128,000.
d. $4,822,000.

110. Dicer uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were $260,000 ($396,000), purchases
during the current year at cost (retail) were $1,370,000 ($2,200,000), freight-in on these
purchases totaled $86,000, sales during the current year totaled $2,100,000, and net
markups (markdowns) were $48,000 ($72,000). What is the ending inventory value at
cost?
a. $306,328.
b. $312,330.
c. $314,824.
d. $472,000.

111. Boxer Inc. uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were $196,500 ($297,000), purchases
during the current year at cost (retail) were $1,704,000 ($2,596,800), freight-in on these
purchases totaled $79,500, sales during the current year totaled $2,433,000, and net
markups were $207,000. What is the ending inventory value at cost?
a. $667,800.
b. $523,098.
c. $426,723.
d. $456,924.
9 - 108 Test Bank for Intermediate Accounting, Fourteenth Edition

112. Barker Pet supply uses the conventional retail method to determine its ending inventory at
cost. Assume the beginning inventory at cost (retail) were $531,200 ($653,800),
purchases during the current year at cost (retail) were $2,137,200 ($2,772,200), freight-in
on these purchases totaled $127,800, sales during the current year totaled $2,604,000,
and net markups (markdowns) were $4,000 ($192,600). What is the ending inventory
value at cost?
a. $633,400.
b. $516,222.
c. $822,000.
d. $493,334.

113. Crane Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Cost Retail
Beginning inventory $ 30,000 $ 50,000
Purchases 175,000 240,000
Freight-in 2,500 —
Net markups — 8,500
Net markdowns — 10,000
Employee discounts — 1,000
Sales — 205,000
If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost to
retail ratio?
a. $207,500 ÷ $290,000
b. $207,500 ÷ $298,500
c. $205,000 ÷ $300,000
d. $207,500 ÷ $288,500

Use the following information for questions 114 through 118.

The following data concerning the retail inventory method are taken from the financial records of
Welch Company.
Cost Retail
Beginning inventory $ 98,000 $ 140,000
Purchases 448,000 640,000
Freight-in 12,000 —
Net markups — 40,000
Net markdowns — 28,000
Sales — 672,000

114. The ending inventory at retail should be

a. $148,000.
b. $120,000.
c. $128,000.
d. $84,000.
 Inventories: Additional Valuation Issues 9 - 109

115. If the ending inventory is to be valued at approximately the lower of cost or market, the
calculation of the cost to retail ratio should be based on goods available for sale at (1) cost
and (2) retail, respectively of
a. $558,000 and $820,000.
b. $558,000 and $792,000.
c. $558,000 and $780,000.
d. $546,000 and $780,000.

116. If the foregoing figures are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to $108,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these.

*117. Assuming no change in the price level if the LIFO inventory method were used in
conjunction with the data, the ending inventory at cost would be
a. $85,200.
b. $84,000.
c. $81,600.
d. $86,400.

*118. Assuming that the LIFO inventory method were used in conjunction with the data and that
the inventory at retail had increased during the period, then the computation of retail in the
cost to retail ratio would
a. exclude both markups and markdowns and include beginning inventory.
b. include markups and exclude both markdowns and beginning inventory.
c. include both markups and markdowns and exclude beginning inventory.
d. exclude markups and include both markdowns and beginning inventory.

119. Drake Corporation had the following amounts, all at retail:

Beginning inventory $ 3,600 Purchases $140,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Drake’s ending inventory at retail?
a. $74,400.
b. $76,000.
c. $77,600.
d. $78,400
9 - 110 Test Bank for Intermediate Accounting, Fourteenth Edition

120. Goren Corporation had the following amounts, all at retail:

Beginning inventory $ 3,600 Purchases $110,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Goren’s ending inventory at retail?
a. $44,400.
b. $46,000.
c. $47,600.
d. $48,400

121. Fry Corporation’s computation of cost of goods sold is:

Beginning inventory $ 60,000
Add: Cost of goods purchased 530,000
Cost of goods available for sale 590,000
Ending inventory 90,000
Cost of goods sold $500,000
The average days to sell inventory for Fry are
a. 43.5 days.
b. 50.3 days.
c. 54.5 days.
d. 65.2 days.

122. East Corporation’s computation of cost of goods sold is:

Beginning inventory $ 60,000
Add: Cost of goods purchased 482,000
Cost of goods available for sale 542,000
Ending inventory 80,000
Cost of goods sold $462,000
The average days to sell inventory for East are
a. 68.3 days.
b. 75.7 days.
c. 55.3 days.
d. 90.9 days.

123. The 2012 financial statements of Sito Company reported a beginning inventory of
$80,000, an ending inventory of $120,000, and cost of goods sold of $800,000 for the
year. Sito’s inventory turnover ratio for 2012 is
a. 10.0 times.
b. 8.0 times.
c. 6.7 times.
d. 5.7 times.
 Inventories: Additional Valuation Issues 9 - 111

124. Boxer Inc. reported inventory at the beginning of the current year of $360,000 and at the
end of the current year of $411,000. If net sales for the current year are $3,321,900 and
the corresponding cost of sales totaled $2,819,100, what is the inventory turnover ratio for
the current year?
a. 8.61.
b. 6.86.
c. 7.83.
d. 7.31.

Use the following information for questions 125 through 129.

Plank Co. uses the retail inventory method. The following information is available for the current
year.
Cost Retail
Beginning inventory $ 156,000 $244,000
Purchases 590,000 830,000
Freight-in 10,000 —
Employee discounts — 4,000
Net markups — 30,000
Net Markdowns — 40,000
Sales — 780,000

125. If the ending inventory is to be valued at approximately lower of average cost or market,
the calculation of the cost ratio should be based on cost and retail of
a. $600,000 and $860,000.
b. $600,000 and $856,000.
c. $746,000 and $1,100,000.
d. $756,000 and $1,104,000.

126. The ending inventory at retail should be

a. $320,000.
b. $300,000.
c. $288,000.
d. $280,000.

127. The approximate cost of the ending inventory by the conventional retail method is
a. $191,800.
b. $189,840.
c. $196,000.
d. $204,960.

*128. If the ending inventory is to be valued at approximately LIFO cost, the calculation of the
cost ratio should be based on cost and retail of
a. $756,000 and $1,104,000.
b. $756,000 and $1,064,000.
c. $600,000 and $820,000.
d. $600,000 and $860,000.
9 - 112 Test Bank for Intermediate Accounting, Fourteenth Edition

*129. Assuming that the LIFO inventory method is used, that the beginning inventory is the base
inventory when the index was 100, and that the index at year end is 112, the ending
inventory at dollar-value LIFO retail cost is
a. $160,920.
b. $185,514.
c. $191,800.
d. $204,960.

Use the following information for questions 130 and 131.

Eaton Company, which uses the retail LIFO method to determine inventory cost, has provided the
following information for 2012:
Cost Retail
Inventory, 1/1/12 $ 141,000 $210,000
Net purchases 567,000 843,000
Net markups 102,000
Net markdowns 45,000
Net sales 795,000

*130. Assuming stable prices (no change in the price index during 2012), what is the cost of
Eaton's inventory at December 31, 2012?
a. $192,150.
b. $207,150.
c. $204,000.
d. $198,450.

*131. Assuming that the price index was 105 at December 31, 2012 and 100 at January 1, 2012,
what is the cost of Eaton's inventory at December 31, 2012 under the dollar-value-LIFO
retail method?
a. $200,535.
b. $208,372.
c. $210,458.
d. $197,700.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans
68. a 78. b 88. a 98. a 108. d *118. c *128. c.
69. b 79. a 89. a 99. a 109. c 119. a *129. a
70. b 80. c 90. c 100. b 110. a 120. a *130. b
71. d 81. c 91. c 101. c 111. c 121. c *131. a
72. b 82. c 92. c 102. b 112. b 122. c
73. c 83. b 93. b 103. a 113. b 123. b
74. c 84. b 94. a 104. a 114. b 124. d
75. b 85. c 95. a 105. c 115. a 125. d
76. d 86. b 96. d 106. c 116. b 126. d
77. c 87. d 97. d 107. d *117. b 127. a
 Inventories: Additional Valuation Issues 9 - 113

MULTIPLE CHOICE—CPA Adapted

132. Ryan Distribution Co. has determined its December 31, 2012 inventory on a FIFO basis at
$500,000. Information pertaining to that inventory follows:
Estimated selling price $510,000
Estimated cost of disposal 20,000
Normal profit margin 60,000
Current replacement cost 450,000
Ryan records losses that result from applying the lower-of-cost-or-market rule. At December
31, 2012, the loss that Ryan should recognize is
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.

133. Under the lower-of-cost-or-market method, the replacement cost of an inventory item
would be used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the
normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.

134. The original cost of an inventory item is above the replacement cost and the net realizable
value. The replacement cost is below the net realizable value less the normal profit
margin. As a result, under the lower-of-cost-or-market method, the inventory item should
be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.

135. Keen Company's accounting records indicated the following information:

Inventory, 1/1/12 $ 900,000
Purchases during 2012 4,500,000
Sales during 2012 5,700,000
A physical inventory taken on December 31, 2012, resulted in an ending inventory of
$1,050,000. Keen's gross profit on sales has remained constant at 25% in recent years.
Keen suspects some inventory may have been taken by a new employee. At December
31, 2012, what is the estimated cost of missing inventory?
a. $75,000.
b. $225,000.
c. $300,000.
d. $375,000.
9 - 114 Test Bank for Intermediate Accounting, Fourteenth Edition

136. Henke Co. uses the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory at July 31, 2012, are as
follows:
Cost Retail
Inventory, 2/1/12 $ 200,000 $ 250,000
Purchases 1,000,000 1,575,000
Markups, net 175,000
Sales 1,650,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-market method, Henke's estimated inventory at July 31, 2012
is
a. $132,000.
b. $144,000.
c. $156,000.
d. $220,000.

137. At December 31, 2012, the following information was available from Kohl Co.'s accounting
records:
Cost Retail
Inventory, 1/1/12 $147,000 $ 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale $980,000 $1,400,000
Sales for the year totaled $1,150,000. Markdowns amounted to $10,000. Under the lower-
of-cost-or-market method, Kohl's inventory at December 31, 2012 was
a. $294,000.
b. $175,000.
c. $182,000.
d. $168,000.

*138. On December 31, 2012, Pacer Co. adopted the dollar-value LIFO retail inventory method.
Inventory data for 2013 are as follows:
LIFO Cost Retail
Inventory, 12/31/12 $450,000 $630,000
Inventory, 12/31/13 ? 825,000
Increase in price level for 2013 10%
Cost to retail ratio for 2013 70%
Under the LIFO retail method, Pacer's inventory at December 31, 2013, should be
a. $542,400.
b. $577,500.
c. $586,500.
d $600,150.

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
132. d 133. b 134. b 135. a 136. a 137. d *138. a
 Inventories: Additional Valuation Issues 9 - 115

DERIVATIONS — Computational
No. Answer Derivation
68. a Product 1: RC = $22.50, NRV = $40 – $5 = $35
NRV – PM = $35 – ($40 × .3) = $23, cost = $20.
Product 2: RC = $27, NRV = $65 – $13 = $52
NRV – PM = $52 – ($65 × .3) = $32.50, cost = $35.

69. b NRV = $30 – $6 = $24, RC = $26

NRV – PM = $24 – ($30 × .40) = $12, cost = $27.

70. b NRV = $50 – $10 = $40, RC = $43

NRV – PM = $40 – ($50 × .40) = $20, cost = $45.

71. d $58 MV, $64 Cost, LCM = $58.

72. b $15.46 ($16.70 – $1.24) MV, $17.00 Cost, LCM = $15.46.

73. c $38.49 MV, $43.31 Cost, LCM = $38.49.

74. c Ceiling $84 ($95 – $11); Floor $46 ($84 – $38), RC $83; $83 MV.

75. b Ceiling $84 ($95 – $11), Floor $46 ($84 – $38), RC $83; $83 MV,
$80 Cost, LCM = $80.

76. d $43 Cost.

77. c Ceiling $49 ($60 – $11), Floor $37 ($49 – $12), RC $40; $40 MV,
$43 Cost, LCM = $40.

78. b $3,100 MV, $3,250 Cost, LCM = $3,100.

79. a $447 ($468 – $21) MV, $524 Cost, LCM = $447.

80. c $234 MV, $251 Cost, LCM = $234.

81. c $360,000 – $10,000 = $350,000.

82. c $490,000 – $5,000 = $485,000.

83. b LF 3,000 × $24 = ($72,000 ÷ $128,000) × $80,000 = $45,000

1B 7,000 × $8 = $56,000; $56,000 + $72,000 = $128,000
(1,000 × $24) – ($45,000 × 1,000/3,000) = $9,000.

84. b CF 3,000 × $18 = ($54,000 ÷ $96,000) × $60,000 = $33,750

3B 7,000 × $6 = $42,000; $42,000 + $54,000 = $96,000
(1,000 × $18) – ($33,750 × 1,000/3,000) = $6,750.
9 - 116 Test Bank for Intermediate Accounting, Fourteenth Edition

DERIVATIONS — Computational (cont.)

No. Answer Derivation
85. c Item # of Items × Price
M 4,000 × $3.75 = $15,000 15 ÷ 75 × $72,000 = $14,400 ÷ 4,000 = $3.60
N 2,000 × $12.00= 24,000 24 ÷ 75 × $72,000 = $23,040 ÷ 2,000 = $11.52
O 6,000 × $6.00 = 36,000 36 ÷ 75 × $72,000 = $34,560 ÷ 6,000 = $5.76
$75,000

86. b (2,500 × $0.15) + (5,500 × $0.36) + (500 × $0.72) = $2,715;

[(2,500 × $0.15) ÷ $2,715] × $1,800 = $249 ÷ 2,500 = $0.100.

87. d (2,500 × $0.15) + (5,500 × $0.36) + (500 × $0.72) = $2,715;

[(5,500 × $0.36) ÷ $2,715] × $1,800 = $1,313 ÷ 5,500 = $0.239.

88. a (2,500 × $0.15) + (5,500 × $0.36) + (500 × $0.72) = $2,715;

[(500 × $0.72) ÷ $2,715] × $1,800 = $239 ÷ 500 = $0.477.

89. a $2.5 million – $2.3 million = $200,000.

90. c $2.5 million – $2.3 million = $200,000.

91. c ($4.00 – $3.30) × 100,000 = $70,000.

92. c No gain or loss since 12/31 price ($5.40) > contract price ($5.00).

93. b ($5.00 – $4.70) × 1,000 = $300.

94. a ($150,000 + $450,000) – ($900,000 ÷ 5/3) – $9,000 = $51,000.

95. a ($200,000 + $600,000) – ($1,200,000 ÷ 5/3) – $12,000 = $68,000.

96. d (1 + .2)C = 2,970,000; C = $2,475,000.

97. d COGS: July = $3,060,000 ÷ 1.2 = $2,550,000

Aug. = $3,240,000 ÷ 1.2 = $2,700,000
July's purchase = ($2,550,000 × .7) + ($2,700,000 × .3) = $2,595,000.

98. a $480,000 + ($540,000 – $320,000) = $720,000.

99. a

100. b COGS = $525,000 ÷ 1.25 = $420,000

($385,000 + $301,000 – $14,000) – $420,000 = $252,000.

101. c COGS = $2,500,000 × .75 = $1,875,000

$1,000,000 + $2,000,000 – $1,875,000 = $1,125,000.

102. b $1,800,000 – ($1,600,000 × .80) = $520,000.

 Inventories: Additional Valuation Issues 9 - 117

DERIVATIONS — Computational (cont.)

No. Answer Derivation
$360,000
103. a $60,000 + $300,000 – ————— = $72,000.
1.25

104. a ($30,000 × 40%) + $26,000 + ($15,200 – $12,800) = $40,400.

105. c 20% ÷ (100% – 20%) = 25%.

106. c $975,000 – ($975,000 ÷ 1.20) = $162,500.

107. d ($640,000 + $170,000) – [$500,000 × (1 – .40)] = $510,000.

108. d ($1,360,000 + $330,000) – [$720,000 × (1 – .40)] = $1,258,000.

109. c $3,300,000 + $1,366,000 + $156,000 – [$2,420,000 × (1 – .30)] = $3,128,000.

110. a $396,000 + $2,200,000 + $48,000 – $2,100,000 – $72,000 = $472,000;

($260,000 + $1,370,000 + $86,000) ÷ ($396,000 + $2,200,000 + $48,000) = .649;
$472,000 × .649 = $306,328.

111. c $297,000 + $2,596,800 + $207,000 – $2,433,000 = $667,800;

($196,500 + $1,704,000 + $79,500) ÷ ($297,000 + $2,596,800 + $207,000) = 63.9%;
$667,800 × .639 = $426,723.

112. b $653,800 + $1,386,100 + $4,000 – $2,604,000 – $192,600 = $633,400;

($531,200 + $2,137,200 + $127,800) ÷ ($653,800 + $2,772,200 + $4,000) = 81.5%;
$633,400 × .815 = $516,222.

113. b Cost: $30,000 + $175,000 + $2,500 = $207,500.

Retail: $50,000 + $240,000 + $8,500 = $298,500.

114. b $140,000 + $640,000 + $40,000 – $28,000 – $672,000 = $120,000.

115. a Cost: $98,000 + $448,000 + $12,000 = $558,000.

Retail: $140,000 + $640,000 + $40,000 = $820,000.

116. b Conceptual.

$98,000
*117. b ———— × $120,000 = $84,000.
$140,000

*118. c Conceptual.

119. a $3,600 + $134,000 + $18,000 – $4,000 – $70,200 – $1,600 – $2,800 – $2,600

= $74,400.

120. a $3,600 + $104,000 + $18,000 – $4,000 – $70,200 – $1,600 – $2,800 – $2,600

= $44,400.
9 - 118 Test Bank for Intermediate Accounting, Fourteenth Edition

DERIVATIONS — Computational (cont.)

No. Answer Derivation
121. c $500,000 ÷ [($60,000 + $90,000) ÷ 2] = 6.7; 365 ÷ 6.7 = 54.5.

122. c $462,000 ÷ [($60,000 + $80,000) ÷ 2] = 6.6; 365 ÷ 6.6 = 55.3.

123. b $800,000 ÷ [($80,000 + $120,000) ÷ 2] = 8 times

124. d $2,819,100 ÷ [($360,000 + $411,000) ÷ 2] = 7.31.

125. d Cost: $156,000 + $590,000 + $10,000 = $756,000.

Retail: $244,000 + $830,000 + $30,000 = $1,104,000.

126. d $244,000 + $830,000 – $4,000 + $30,000 – $40,000 – $780,000 = $280,000.

127. a $280,000 × .685 = $191,800.

*128. c Cost: $590,000 + $10,000 = $600,000.

Retail: $830,000 + $30,000 – $40,000 = $820,000.

*129. a Base year price = EI =

$244,000 @ cost = $156,000

$6,000 × .732* × 1.12 = 4,920
$160,920
$600,000
* ————— = .732
$820,000

*130. b Cost to retail ratio = $567,000 ÷ ($843,000 + $102,000 – $45,000) = 0.63

EI = $210,000 + $843,000 + $102,000 – $45,000 – $795,000
= $315,000 at retail
$315,000 – $210,000 = $105,000
Cost of inventory = $141,000 + ($105,000 × .63) = $207,150.

*131. a Base year price: EI = $315,000 ÷ 1.05 = $300,000

$210,000 @ cost = $ 141,000
90,000 × .63 × 1.05 = 59,535
$300,000 $200,535

DERIVATIONS — CPA Adapted

No. Answer Derivation
132. d $500,000 – $450,000 (RC) = $50,000.

133. b Conceptual.
 Inventories: Additional Valuation Issues 9 - 119

DERIVATIONS — CPA Adapted (cont.)

No. Answer Derivation
134. b Conceptual.

135. a $5,700,000 × .75 = $4,275,000 (COGS)

$900,000 + $4,500,000 – $4,275,000 – $1,050,000 = $75,000.

136. a ($200,000 + $1,000,000) ÷ ($250,000 + $1,575,000 + $175,000) = 0.6

($250,000 + $1,575,000 + $175,000 – $20,000 – $110,000 –
$1,650,000) × 0.6 = $132,000.

137. d $980,000 ÷ $1,400,000 = 0.7

($1,400,000 – $10,000 – $1,150,000) × 0.7 = $168,000.

*138. a $825,000 ÷ 1.1 = $750,000

$450,000 + ($120,000 × 1.1 × .7) = $542,400.

EXERCISES

Ex. 9-139—Lower-of-cost-or-market.
Determine the proper unit inventory price in the following independent cases by applying the
lower of cost or market rule. Circle your choice.
1 2 3 4 5
Cost $8.05 $10.50 $11.75 $5.00 $7.20
Net realizable value 8.85 9.80 12.20 4.25 6.90
Net realizable value less normal profit 8.15 9.00 11.40 3.75 5.70
Market replacement cost 7.90 10.10 12.50 3.80 5.40

Solution 9-139
Case 1 $ 8.05 Case 4 $3.80
Case 2 $9.80 Case 5 $5.70
Case 3 $11.75

Ex. 9-140—Lower-of-cost-or-market.
Determine the unit value that should be used for inventory costing following "lower of cost or
market value" as described in ARB No. 43.
A B C D E F
Cost $2.35 $2.45 $2.15 $2.54 $2.34 $2.40
Replacement cost 2.26 2.55 2.20 2.52 2.33 2.46
Net realizable value 2.50 2.50 2.50 2.48 2.50 2.50
Net realizable value less normal profit 2.32 2.30 2.30 2.30 2.30 2.30
9 - 120 Test Bank for Intermediate Accounting, Fourteenth Edition

Solution 9-140
Case A $2.32 Case D $2.48
Case B $2.45 Case E $2.33
Case C $2.15 Case F $2.40

Ex. 9-141—Lower-of-cost-or-market.
Assume in each case that the selling expenses are $10 per unit and that the normal profit is $5
per unit. Calculate the limits for each case. Then enter the amount that should be used for lower
of cost or market.
Selling Replacement
Price Upper Limit Cost Lower Limit Cost LCM

(a) $54 $______ $38 $______ $40 $______

(b) 47 ______ 36 ______ 40 ______
(c) 56 ______ 39 ______ 40 ______
(d) 48 ______ 42 ______ 40 ______

Solution 9-141
Upper Limit Lower Limit LCM
(a) $44 $39 $39
(b) 37 32 36
(c) 46 41 40
(d) 38 33 38

Ex. 9-142—Lower-of-cost-or-market.
The December 31, 2012 inventory of Gwynn Company consisted of four products, for which
certain information is provided below.
Replacement Estimated Expected Normal Profit
Product Original Cost Cost Disposal Cost Selling Price on Sales
A $25.00 $22.00 $6.50 $37.50 20%
B $42.00 $40.00 $12.00 $48.00 25%
C $120.00 $115.00 $25.00 $160.00 30%
D $16.00 $15.80 $3.00 $22.00 10%

Instructions
Using the lower-of-cost-or-market approach applied on an individual-item basis, compute the
inventory valuation that should be reported for each product on December 31, 2012.
 Inventories: Additional Valuation Issues 9 - 121

Solution 9-142
Lower-of-
Designated Cost-or-
Product Ceiling Floor Market Cost Market
A $37.50 – $6.50 $31.00 – $8.00
= $31.00 = $23.50 $23.50 $25.00 $23.50
B $48.00 – $12.00 $36.00 – $12.00
= $36.00 = $24.00 $36.00 $42.00 $36.00
C $160.00 – $25.00 $135.00 – $48.00
= $135.00 = $87.00 $115.00 $120.00 $115.00
D $22.00 – $3.00 $19.00 – $2.20
= $19.00 = $16.80 $16.80 $16.00 $16.00

Ex. 9-143—Lower-of-cost-or-market.
At 12/31/12, the end of Jenner Company's first year of business, inventory was $4,100 and
$2,800 at cost and at market, respectively.
Following is data relative to the 12/31/13 inventory of Jenner:
Original Net Net Realizable Appropriate
Cost Replacement Realizable Value Less Inventory
Item Per Unit Cost Value Normal Profit Value
A $ .65 $ .45
B .45 .40
C .70 .75
D .75 .65
E .90 .85

Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a
"normal" profit is 30% of selling price. There are 1,000 units of each item in the 12/31/13
inventory.
Instructions
(a) Prepare the entry at 12/31/12 necessary to implement the lower-of-cost-or-market procedure
assuming Jenner uses a contra account for its balance sheet.
(b) Complete the last three columns in the 12/31/13 schedule above based upon the lower-of-
cost-or-market rules.
(c) Prepare the entry(ies) necessary at 12/31/13 based on the data above.
(d) How are inventory losses disclosed on the income statement?

Solution 9-143
(a) Loss Due to Market Decline of Inventory................................... 1,300
Allowance to Reduce Inventory to Market...................... 1,300
9 - 122 Test Bank for Intermediate Accounting, Fourteenth Edition

Solution 9-143 (Cont.)

(b) Original Net Net Realizable Appropriate

Cost Replacement Realizable Value Less Inventory
Item Per Unit Cost Value Normal Profit Value
A $ .65 $ .45 $ .90 $ .60 $ .60
B .45 .40 .90 .60 .45
C .70 .75 .90 .60 .70
D .75 .65 .90 .60 .65
E .90 .85 .90 .60 .85
$3.45 $3.25*
*$3.25 × 1,000 = $3,250

(c) Allowance to Reduce Inventory to Market.................................. 1,300

Cost of Goods Sold........................................................ 1,300

Loss Due to Market Decline of Inventory................................... 200

Allowance to Reduce Inventory to Market...................... 200
(Cost of inventory at 12/31/07 = $7,250)
OR
A student can record a recovery of $1,100.

(d) Inventory losses can be disclosed separately (below gross profit in operating expenses) or
they can be shown as part of cost of goods sold.

Ex. 9-144 – Relative sales value method.

Doran Realty Company purchased a plot of ground for $900,000 and spent $2,100,000 in
developing it for building lots. The lots were classified into Highland, Midland, and Lowland
grades, to sell at $120,000, $90,000, and $60,000 each, respectively.

Instructions
Complete the table below to allocate the cost of the lots using a relative sales value method.
No. of Selling Total % of Apportioned Cost
Grade Lots Price Revenue Total Sales Total Per Lot
Highland 20 $ $ $ $
Midland 40 $ $
Lowland 100 $ $
160 $ $

Solution 9-144
No. of Selling Total % of Apportioned Cost
Grade Lots Price Revenue Total Sales Total Per Lot
Highland 20 $120,000 $ 2,400,000 20% $ 600,000 $30,000
Midland 40 $90,000 3,600,000 30% 900,000 $22,500
Lowland 100 $60,000 6,000,000 50% 1,500,000 $15,000
160 $12,000,000 $3,000,000
 Inventories: Additional Valuation Issues 9 - 123

Ex. 9-145—Gross profit method.

An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of
March 12. The following additional data is available from the books:

Inventory on hand, March 1 $ 84,000

Purchases received, March 1 – 11 63,000
Sales (goods delivered to customers) 105,000

Past records indicate that sales are made at 50% above cost.

Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit
method and determine the amount of the theft loss. Show appropriate titles for all amounts in
your presentation.

Solution 9-145
Beginning Inventory $ 84,000
Purchases 63,000
Goods Available 147,000
Goods Sold ($105,000 ÷ 150%) 70,000
Estimated Ending Inventory 77,000
Physical Inventory 60,000
Theft Loss $ 17,000

Ex. 9-146—Gross profit method.

On January 1, a store had inventory of $48,000. January purchases were $46,000 and January
sales were $80,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit
was 25% of cost. Merchandise with a selling price of $7,500 remained undamaged after the fire.
Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all
figures.

Solution 9-146
Beginning Inventory $ 48,000
Purchases 46,000
Goods available 94,000
Cost of sale ($80,000 ÷ 125%) (64,000)
Estimated ending inventory 30,000
Cost of undamaged inventory ($7,500 ÷ 125%) (6,000)
Estimated fire loss $24,000
9 - 124 Test Bank for Intermediate Accounting, Fourteenth Edition

Ex. 9-147—Gross profit method.

Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus,
month-end inventories must be estimated. All sales are made on account. The rate of mark-up on
cost is 20%. The following information relates to the month of May.

Accounts receivable, May 1 $21,000

Accounts receivable, May 31 15,000
Collections of accounts during May 90,000
Inventory, May 1 45,000
Purchases during May 58,000

Instructions
Calculate the estimated cost of the inventory on May 31.

Solution 9-147
Collections of accounts $ 90,000
Add accounts receivable, May 31 15,000
Deduct accounts receivable, May 1 (21,000)
Sales during May $ 84,000

Inventory, May 1 $ 45,000

Purchases during May 58,000
Goods available 103,000
Cost of sales ($84,000 ÷ 120%) (70,000)
Estimated cost of inventory, May 31 $ 33,000

Ex. 9-148—Comparison of inventory methods.

In the cases cited below, five different conditions are possible when X is compared with Y. These
possibilities are as follows:

a. X equals Y d. X is equal to or greater than Y

b. X is greater than Y e. X is equal to or less than Y
c. X is less than Y

Instructions
In the space provided show the relationship of X and Y for each of the following independent
statements.

_____ 1. "Cost or market, whichever is lower," may be applied to (1) the inventory as a whole or
to (2) categories of inventory items. Compare (X) the reported value of inventory when
procedure (1) is used with (Y) the reported value of inventory when procedure (2) is
used.

_____ 2. Prices have been rising steadily. Physical turnover of goods has occurred approxi-
mately 4 times in the last year. Compare (X) the ending inventory computed by LIFO
method with (Y) the same ending inventory computed by the moving average method.
 Inventories: Additional Valuation Issues 9 - 125

Ex. 9-148 (Cont.)

_____ 3. The retail inventory method has been used by a store during its first year of operation.
Compare (X) markdown cancellations with (Y) markdowns.

_____ 4. Prices have been rising steadily. At the beginning of the year a company adopted a
new inventory method; the physical quantity of the ending inventory is the same as
that of the beginning inventory. Compare (X) the reported value of inventory if LIFO
was the new method with (Y) the reported value of inventory if FIFO was the new
method.

_____ 5. Prices have been rising steadily. Physical turnover of goods has occurred five times in
the last year. Compare (X) unit prices of ending inventory items at moving average
pricing with (Y) those at weighted average pricing.

Solution 9-148
1. d 2. c 3. e 4. c 5. b

PROBLEMS

Pr. 9-149—Gross profit method.

On December 31, 2012 Felt Company's inventory burned. Sales and purchases for the year had
been $1,600,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2012) was
$170,000; in the past Felt's gross profit has averaged 40% of selling price.

Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2012 to
close merchandise accounts.

Solution 9-149
Beginning inventory $ 170,000
Add: Purchases 980,000
Cost of goods available 1,150,000
Sales $1,600,000
Less 40% (640,000) 960,000
Estimated inventory lost $ 190,000

Sales............................................................................................... 1,600,000
Income Summary................................................................. 1,600,000

Cost of Goods Sold......................................................................... 960,000

Fire Loss......................................................................................... 190,000
Inventory.............................................................................. 170,000
Purchases............................................................................ 980,000
9 - 126 Test Bank for Intermediate Accounting, Fourteenth Edition

Pr. 9-150—Retail inventory method.

When you undertook the preparation of the financial statements for Telfer Company at January
31, 2013, the following data were available:
At Cost At Retail
Inventory, February 1, 2012 $70,800 $ 98,500
Markdowns 35,000
Markups 63,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales 325,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000

Instructions
Compute the ending inventory at cost as of January 31, 2013, using the retail method which
approximates lower of cost or market. Your solution should be in good form with amounts clearly
labeled.

Solution 9-150
At Cost At Retail
Beginning inventory, 2/1/12 $ 70,800 $ 98,500
Purchases $219,500 $294,000
Less purchase returns 4,300 215,200 5,500 288,500
Totals $286,000 387,000
Add markups (net) 53,000
Totals 440,000
Deduct markdowns (net) 15,000
Sales price of goods available 425,000
Sales less sales returns 315,000
Ending inventory, 1/31/13 at retail $ 110,000
Ending inventory at cost: Ratio of cost to retail =
$286,000 ÷ $440,000 = 65%;
$110,000 × 65% = $71,500 $ 71,500

*Pr. 9-151—Retail inventory method.

The records of Lohse Stores included the following data:
Inventory, May 1, at retail, $14,500; at cost, $10,440
Purchases during May, at retail, $42,900; at cost, $31,550
Freight-in, $2,000; purchase discounts, $250
Additional markups, $3,800; markup cancellations, $400; net markdowns, $1,300
Sales during May, $44,500

Instructions
Calculate the estimated inventory at May 31 on a LIFO basis. Show your calculations in good
form and label all amounts.
 Inventories: Additional Valuation Issues 9 - 127

*Solution 9-151
Cost Retail Ratio
Inventory, May 1 $10,440 $14,500 .72
Purchases 31,550 42,900
Freight-in 2,000
Purchase discounts (250)
Net markups 3,400
Net markdowns (1,300)
Totals excluding beginning inventory 33,300 45,000 .74
Goods available $43,740 59,500
Sales (44,500)
Inventory, May 31 $15,000
Estimated inventory, May 31 ($15,000 × .72) $ 10,800

*Pr. 9-152—LIFO retail inventory method, fluctuating prices.

Flint Department Store wishes to use the retail LIFO method of valuing inventories for 2013. The
appropriate data are as follows:
At Cost At Retail
December 31, 2012 inventory (base layer) $1,250,000 $2,100,000
Purchases (net of returns, allowances, markups, and markdowns) 2,100,000 3,500,000
Sales 3,080,000
Price index for 2013 105

Instructions
Complete the following schedule (fill in all blanks and show calculations in the parentheses):

Computation of Retail Inventory for 2013 Cost Retail Ratio

Inventory, December 31, 2012 $1,250,000 $2,100,000
Purchases (net of returns, allowances,
markups, and markdowns) %

Total available $

____________________________________

Inventory, December 31, 2013, at retail $

9 - 128 Test Bank for Intermediate Accounting, Fourteenth Edition

*Pr. 9-152 (Cont.)

Adjustment of Inventory to LIFO Basis Cost Retail

Ending inventory at base year prices $

( )

Beginning inventory at base year prices $

Increase at base year prices $

Increase at 2013 retail ( ) $

Increase at 2013 cost ( )

Inventory, December 31, 2013, at LIFO cost $

*Solution 9-152
Computation of Retail Inventory for 2013 Cost Retail Ratio
Inventory, December 31, 2012 $1,250,000 $2,100,000
Purchases (net of returns, allowances, markups, and
markdowns) 2,100,000 3,500,000 60%
Total available $3,350,000 5,600,000
Less: Sales 3,080,000
Inventory, December 31, 2013, at retail $2,520,000

Adjustment of Inventory to LIFO Basis Cost Retail

Ending inventory at base year prices
($2,520,000 ÷ 1.05) $2,400,000
Beginning inventory at base year prices $1,250,000 2,100,000
Increase at base year prices $ 300,000

Increase at 2013 retail ($300,000 × 1.05) $ 315,000

Increase at 2013 cost ($315,000 × 60%) 189,000
Inventory, December 31, 2013 at LIFO cost $1,439,000

*Pr. 9-153—LIFO retail inventory method, stable prices.

Potter Variety Store uses the LIFO retail inventory method. Information relating to the
computation of the inventory at December 31, 2012, follows:
Cost Retail
Inventory, January 1, 2012 $146,000 $220,000
Purchases 480,000 700,000
Freight-in 80,000
Sales 750,000
Net markups 160,000
Net markdowns 60,000
 Inventories: Additional Valuation Issues 9 - 129

Instructions
Assuming that there was no change in the price index during the year, compute the inventory at
December 31, 2012, using the LIFO retail inventory method.

*Solution 9-153
Potter Variety Store
LIFO Retail Computation
December 31, 2012
At Cost At Retail Ratio
Inventory, January 1, 2012 $146,000 $ 220,000
Purchases 480,000 700,000
Freight-in 80,000
Net markups 160,000
Net markdowns (60,000)
Total (excluding beginning inventory) 560,000 800,000 70%
Total (including beginning inventory) $706,000 1,020,000
Less sales 750,000
Inventory, Dec. 31, 2012, at retail $ 270,000

Ending inventory $ 270,000

Beginning inventory $146,000 (220,000)
Increment $ 50,000
Increment at cost ($50,000 × 70%) 35,000
Ending inventory at LIFO cost $181,000

*Pr. 9-154—Dollar-value LIFO-retail method.

The records of Heese Stores provided the following data for the year:
Cost Retail
(Base inventory) Inventory, January 1 $150,000 $ 250,000
Net purchases 830,800 1,318,000
Sales 1,185,000

Other data are: Freight-in, $14,000; net markups, $8,000; net markdowns, $6,000; and the price
index for the year is 110.

Instructions
Determine the approximate valuation of the final inventory by the dollar-value, LIFO-retail method.
Label all figures.
Cost Retail Ratio
9 - 130 Test Bank for Intermediate Accounting, Fourteenth Edition

*Solution 9-154
Cost Retail Ratio
Inventory, January 1 $150,000 $ 250,000
Net purchases 830,800 1,318,000
Freight-in 14,000
Net markups 8,000
Net markdowns (6,000)
Totals excluding beginning inventory 844,800 1,320,000 .64
Goods available $994,800 1,570,000
Sales (1,185,000)
Ending inventory $ 385,000

Ending inventory deflated ($385,000 ÷ 1.10) $ 350,000

Base inventory $150,000 (250,000)
Layer added $ 100,000
New layer at end of year dollars ($100,000 × 1.10 × .64) 70,400
Estimated inventory at dollar value, LIFO $220,400

*Pr. 9-155—Retail LIFO.

Klein Book Store uses the conventional retail method and is now considering converting to the
LIFO retail method for the period beginning 1/1/13. Available information consists of the following:
2012 2013
Cost Retail Cost Retail
Inventory 1/1 $ 12,500 $ 22,500 $ ? $ ?
Purchases (net) 250,000 347,500 245,000 345,000
Net markups — 5,000 — 10,000
Net markdowns — 2,500 — 5,000
Sales (net) — 316,000 — 322,000
Loss from breakage — 500 — -0-
Applicable price index — 100 — 110
Following is a schedule showing the computation of the cost of inventory on hand at 12/31/12
based on the conventional retail method.
Cost Retail Ratio
Inventory 1/1/12 $ 12,500 $ 22,500
Purchases (net) 250,000 347,500
Net markups — 5,000
Goods available $262,500 375,000 70%
Sales (net) (316,000)
Net markdowns (2,500)
Loss from breakage (500)
Inventory 12/31/12 at retail $ 56,000
Inventory 12/31/12 at LCM ($56,000 × 70%) $ 39,200
 Inventories: Additional Valuation Issues 9 - 131

Instructions
(a) Prepare the journal entry to convert the inventory from the conventional retail to the LIFO
retail method. Show detailed calculations to support your entry.
(b) Prepare a schedule showing the computation of the 12/31/13 inventory based on the LIFO
retail method as adjusted for fluctuating prices. Without prejudice to your answer to (a) above,
assume that you computed the 1/1/13 inventory (retail value $49,000) under the LIFO retail
method at a cost of $35,000.

*Solution 9-155
(a) Cost Retail
Goods available $262,500 $375,000
Less: Beginning inventory (12,500) (22,500)
Net markdowns (2,500)
Cost to retail $250,000 $350,000

5/7 × $56,000 = $40,000 – $39,200 = $800 adjustment

Inventory.................................................................................. 800
Adjustment to Record Inventory at Cost......................... 800

(b) Cost Retail Ratio

Inventory $ 34,000 $ 49,000
Purchases 245,000 345,000
Net markups 10,000
Net markdowns (5,000)
Total 245,000 350,000 70%
Total goods available $279,000 399,000
Sales (322,000)
Ending inventory at retail—end of year dollars $ 77,000

Ending inventory deflated ($77,000 ÷ 1.10) $ 70,000

Beginning $ 35,000 49,000
Layer added ($21,000 × 1.10 × 70%) 16,170 $ 21,000
Ending inventory at cost $ 51,170
9 - 132 Test Bank for Intermediate Accounting, Fourteenth Edition

IFRS QUESTIONS

True / False
1. IFRS permits an entity to reverse inventory write-downs in certain situations, whereas U.S.
GAAP does not.

2. IFRS defines market as replacement cost subject to certain constraints.

3. IFRS uses a ceiling to determine market.

4. Similar to U.S. GAAP, certain agricultural products and mineral products can be reported at
net realizable value using IFRS.

5. IFRS records market in the lower-of-cost-or-market differently than U.S. GAAP.

Answers to True/False
1. True
2. False
3. False
4. True
5. True

Multiple Choice Questions

1. Where is the authoritative IFRS guidance related to accounting and reporting for inventories
found?
a. IAS 2
b. IAS 18
c. IAS 41
d. All of these standards deal with inventory.

2. All of the following are key similarities between U.S. GAAP and IFRS with respect to
accounting for inventories except
a. guidelines on ownership of goods are similar.
b. costs to include in inventories are similar.
c. LIFO cost flow assumption where appropriate is used by both sets of standards.
d. fair value valuation of inventories is prohibited by both sets of standards.

3. All of the following are key differences between U.S. GAAP and IFRS with respect to
accounting for inventories except the
a. definition of the lower-of-cost-or-market test for inventory valuation differs between U.S.
GAAP and IFRS.
b. inventory basis determination for writedowns differs between U.S. GAAP and IFRS.
c. guidelines are more principles based under IFRS than they are under U.S. GAAP.
d. average costing method is prohibited under IFRS.
 Inventories: Additional Valuation Issues 9 - 133

4. Alonzo Company in Italy prepares its financial statements in accordance with IFRS. In 2012, it
reported cost of goods sold of €600 million and average inventory of €150 million. What is
Alonzo's inventory turnover ratio?
a. 4 days
b. 25 days
c. 91.25 days
d. 100 days

5. Starfish Company (a company using U.S. GAAP and LIFO inventory method) is considering
changing to IFRS and the FIFO inventory method. How would a comparison of these methods
affect Starfish's financials?
a. During a period of inflation, the current ratio would decrease when IFRS and the FIFO
inventory method are used as compared to U.S. GAAP and LIFO.
b. During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory
method are used as compared to U.S. GAAP and LIFO.
c. During a period of inflation, net income would be greater if IFRS and the FIFO inventory
method are used as compared to [Link] and LIFO.
d. During a period of inflation, working capital would decrease when IFRS and the FIFO
inventory method are used as compared to U.S. GAAP and LIFO.

6. Which of the following statements is true regarding IFRS and inventories?

a. In order to determine market valuation of inventories, IFRS uses a ceiling and a floor.
b. IFRS permits the option of valuing inventories at fair value.
c. With respect to inventories, IFRS defines market as net realizable value.
d. IFRS allows inventory to be written up above its original cost.

7. State Company manufactured a forklift machine at a cost of $60,000. The product is sold for
$66,000 at a 5% discount. The delivery costs are estimated to be $6,000. Under IFRS, how
much should be the carrying amount of this inventory?
a. $60,000
b. $66,000
c. $54,000
d. $56,700

8. The following information relates to Moore Company's inventory:

Cost of inventory = $860
Selling price of inventory = $1,000
Normal profit margin = 10% of selling price
Current replacement cost = $740
Cost of completion and disposal = $100
Under IFRS, which of the following would be the correct measurement value for the
inventory?
a. $860
b. $740
c. $1,000
d. $900
9 - 134 Test Bank for Intermediate Accounting, Fourteenth Edition

9. Assume that Darcy Industries had the following inventory values:

Inventory cost (on December 31, 2011) = $1,500
Inventory market (on December 31, 2011) = $1,350
Inventory net realizable value (on December 31, 2011) = $1,320
Inventory market (on June 30, 2012) = $1,560
Inventory net realizable value (on June 30, 2012) = $1,570
Under IFRS, what is the inventory carrying value on December 31, 2011?
a. $1,500
b. $1,350
c. $1,320
d. $1,390

10. Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2011) = $1,500
Inventory market (on December 31, 2011) = $1,350
Inventory net realizable value (on December 31, 2011) = $1,320
Inventory market (on June 30, 2012) = $1,560
Inventory net realizable value (on June 30, 2012) = $1,570
Under IFRS, what is the inventory carrying value on June 30, 2012?
a. $1,500
b. $1,560
c. $1,570
d. $1,320

Answers to Multiple Choice

1. d
2. c
3. d
4. c
5. c
6. c
7. d
8. d
9. c
10. a

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for inventories.

1. Key Similarities are (1) the guidelines on who owns the goods—goods in transit,
consigned goods, special sales agreements, and the costs to include in inventory are
essentially accounted for the same under IFRS and U.S. GAAP; (2) use of specific
identification cost flow assumption, where appropriate; (3) unlike property plant and
equipment, IFRS does not permit the option of valuing inventories at fair value. As indicated
above, IFRS requires inventory to be written down, but inventory cannot be written up above
its original cost; (4) certain agricultural products and minerals and mineral products can be
reported at net realized value using IFRS.
 Inventories: Additional Valuation Issues 9 - 135

Key differences are related to (1) the LIFO cost flow assumption—U.S. GAAP permits the
use of LIFO for inventory valuation. IFRS prohibits it use. FIFO and average-cost are the only
two acceptable cost flow assumptions permitted under IFRS; (2) lower-of-cost-or-market test
for inventory valuation—IFRS defines market as net realizable value. U.S. GAAP on the other
hand defines market as replacement cost subject to the constraints of net realizable value
(the ceiling) and net realizable value less a normal markup (the floor). That is, IFRS does not
use a ceiling or a floor to determine market; (3) inventory write-downs—under U.S. GAAP, if
inventory is written down under the lower-of-cost-or-market valuation, the new basis is now
considered its cost. As a result, the inventory may be written back up to its original cost in a
subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up
to the amount of the pervious write-down. Both the write-down and any subsequent reversal
should be reported on the income statement; (4) The requirements for accounting and
reporting for inventories are more principles-based under IFRS. That is, U.S. GAAP provides
more detailed guidelines in inventory accounting.

2. Explain the main obstacle to achieving convergence in the area of inventory accounting.

2. IFRS specifically prohibits the LIFO cost flow method. Conversely, the LIFO cost flow
assumption is widely used in the United States because of its favorable tax advantages. In
addition, many argue that LIFO from a financial reporting point of view provides a better
matching of current costs against revenue and therefore a more realistic income is computed.

The problem is compounded in the United States because LIFO cannot be used for tax
purposes unless it is used for financial reporting purposes. As a result, unless the tax law is
changed, it is unlikely that U.S. GAAP will eliminate the use of the LIFO cost flow assumption
because of its substantial tax advantages for many companies.

Also, U.S. GAAP has more detailed rules related to accounting and reporting of inventories
than IFRS. We expect that these more detailed rules will be used internationally because they
provide practical guidance for some inventory accounting and reporting issues.