Nonfinancial Assets - Test Bank | 1st

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Chapter 7

Nonfinancial Assets

True/False Questions

1. If a capital expenditure is misclassified as a revenue expenditure, then both assets and expenses are overstated.

Page: p348

1. If revenue expenditure is overstated, then profit will be understated.

Page: p348

1. If a revenue expenditure is misclassified as a capital expenditure, then assets will be overstated and profit overstated.

Page: p348

1. Cost of services can be recorded in inventories when a service business has not recognized related revenue.

Page: p350

1. Carriage-outwards costs are included in inventories.

Page: p351

1. Carriage-inwards costs are included in inventories.

Page: p351

1. A merchandise company has the following costs related to merchandise that has been acquired: Cost to purchase from foreign manufacturer €21 000; transportation into warehouse €700; import duties €120; transportation to retail store €55; and transportation from the retail store to the customer €68. The cost of goods sold related to these inventories would be €21 875.

Page: p351

1. A company pays $75 000 for display equipment to use in its retail outlet. Carriage-inwards was $2 000 and customs duties paid to import the equipment were $4 000. The inventories cost would be $81 000.

Page: p351

1. At the beginning of the reporting period, a company has £70 000 in inventories. At the end of the reporting period inventories were £65 000. Net purchases during the period were £130 000. Cost of goods sold was therefore £135 000.

Page: p353

1. On 31 January 2011, Shetty Garments, Ltd. Reports $212 500 in ending inventories. On June 2011, beginning inventories were $240 000. Shetty purchased $760 000 in merchandise during June of which $50 000 was returned for credit because of defects. Shetty paid the invoices within the terms specified by the supplier and received a 2% purchase discount. Shetty also spent $10 000 in transportation costs to bring the goods to its warehouse. Cost of goods sold reported for January 2011 was $733 300.

Page: p353

1. Cost of goods available is allocated to ending inventories and cost of goods sold by either specific identification or cost flow assumption.

Page: p355

1. Inventories that are not normally interchangeable are assigned to ending inventories and cost of goods sold using the first-in, first-out method rather than average cost method.

Page: p353

1. The FIFO cost flow assumption assigns costs of the oldest inventories to ending inventories.

Page: p356

1. A business which uses the FIFO method to manage physical inventories such as perishable food items could use the average cost flow assumption for accounting for those inventories.

Page: p360

1. When the average cost flow assumption is used, total cost of goods sold is divided by the total number of goods available to calculate the average cost per inventory unit.

Page: p360

1. Under the periodic inventory approach, inventory costs are updated continuously as sales and purchases of inventories are made.

Page: p362

1. A company began the reporting period with no inventories. During November 2011, the company made two purchases; 50 units at $15 each on 5 November and 20 units at $16 each on 17 November. The company uses the perpetual FIFO cost flow assumption. On 10 November, the company sold 40 units at a sales price of $22 each. On 30 November inventories were assigned a cost of $465.

Page: p362

1. A company’s beginning FIFO inventories were €500 for April 2010 On 7 April, the company purchased 100 units for €8 each and on 23 April another 150 for €7 each. On 15 April the company sold 70 units for €10 each. Cost of goods sold for April was €1 860. The company uses the perpetual method when calculating inventories cost.

Page: p362

1. Net realizable value is the estimated selling price in the ordinary course of business less the estimated selling costs of completion and the estimated costs necessary to make the sale.

Page: p373

1. Under lower of cost and net realizable value, if inventories cost is above net realizable value then an adjustment is made by debiting cost of goods sold.

Page: p373

1. If inventories cost have previously been reduced under lower of costs or net realizable value and inventory values subsequently increase, the current period’s cost of goods sold should be credited for the increase.

Page: p373

1. In October 2010, the ending inventories costs was mistakenly understated by $1500. November ending inventories was calculated correctly. The effect of this error was to overstate November’s profit or loss.

Page: p348

1. A company used the FIFO cost flow assumption. Beginning inventories for August had 60 units at $20 each. On 16 August, an additional 100 units were purchased at $21 each and on the 22 August another 70 units were purchased at $19 each. During August, 145 units were sold. The value of the August ending inventories is $1 615.

Page: p359

1. A Company reports ending inventories of €500 for May 2010. During May, the company purchased €1500 in inventories. May’s cost of goods sold was $1600. The inventories turnover ratio is 3.6 (rounded).

Page: p376

1. A company reports beginning inventories of £500 and ending inventories of £750 for March 2011. During March, the company purchased £2500 in inventories. The days in inventory for March was 122 rounded.

Page: p379

1. Property, plant and equipment are expected to be used more than one period.

Page: p380

1. Property, plant and equipment include both tangible and intangible items that are held for use in production or supply of goods or services, for rentals to others, or for administrative purposes.

Page: p380

1. A bakery wants to purchase a van for use in deliveries. The bakery owner finds a used van for sale worth €17 000. However, the seller is willing to sell for only €14 000. The bakery pays the seller €7 000 in cash with the remainder to be paid in six months. The cost of the van would be reported in the bakery’s financial statements as €14 000 when it is acquired.

Page: p382

1. Residual value is the estimated value that an entity would currently obtain from disposal of an asset.

Page: p383

1. Depreciable amount is the cost of an asset less its residual value.

Page: p383

1. Useful life can be measured in terms of the number of production or similar units expected to be obtained from the asset by the entity.

Page: p384

1. A company owns a large construction crane for which it paid £150 000. Residual value is £25 000 and useful life is five years. After five years, the company would report an asset value equal to zero since at that time the crane would be fully depreciated.

Page: p384

1. A company purchases extrusion moulding equipment used to manufacture snack foods for €27 000. It cost the company €1500 for delivery and another €1700 for installation and training. The machine has a residual value estimated at €2 000 with a four year useful life. The carrying amount after two years would be €14 100.

Page: p382

1. A company purchased equipment for $190 000. It cost the company $13 000 for delivery, installation and training. The equipment is expected to operate for a total of 50 000 hours. The company uses a units-of-production method for depreciating equipment. The equipment was operated for 6500 hours during the first year. The accumulated depreciation reported by the company at the end of the first year was $26 390.

Page: p386

1. An agricultural company buys an harvesting machine for $450 000 with a residual value of $50 000 and an eight year useful life. Depreciation expense for the second year if the company uses a double diminishing balance would be $71 875.

Page: p388

1. A company that uses double diminishing balance to depreciate equipment. The useful life of the equipment is seven years. Compared to the straight-line method, the carrying value of the asset would higher after two years.

Page: p389

1. When a change in estimate such as useful life or residual value occurs during the life of a depreciable asset, no change is made to the amount of depreciation expense recognized each period. The original useful life or residual value continues to be used.

Page: p392

1. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

Page: p394

1. IFRS requires that the property, plant and equipment be accounted for only at cost over their useful life.

Page: p395

1. Fair value is the amount for which an asset could be sold within the next 30 days in an a transaction between knowledgeable, willing parties in an arm’s length transaction.

Page: p395

1. Under the revaluation model of accounting for property, plant and equipment any change in fair value is recognized directly in equity as other comprehensive income.

Page: p396

1. When recording a transaction involving the disposal of property, plant and equipment any amount previously recorded in equity because of revaluation would be removed and included in the calculation to determine any gain or loss on the disposal.

Page: p397

1. The cost of an intangible asset is never capitalized if externally acquired.

Page: p401

1. Research expenditures are always expensed when incurred when an intangible asset is internally developed.

Page: p402

1. When amortizing an intangible asset, the credit in the journal entry is recorded as a direct reduction to the intangible asset cost.

Page: p403

1. If the legal life of an intangible asset is shorter than its estimated useful life, the asset is amortized over the useful life.

Page: p403

1. IFRS permits intangible assets to be accounted for under the cost model or the revaluation model.

Page: p404

1. Goodwill is created when the amount paid for the acquired business exceeds the fair value of the net assets acquired.

Page: p405

1. An investment property – like property, plant and equipment – can be accounted for under either the cost model or revaluation model.

Page: p409

1. A gain or loss arising from a change in the fair value of investment property shall be recognized in profit or loss for the period in which it arises.

Page: p410

Multiple Choice Questions

1. If a capital expenditure is understated, then revenue and profit, respectively, on the statement of comprehensive income will be which of the following?
   1. Overstated, overstated
   2. Overstated, understated
   3. Understated, overstated
   4. Understated, understated

Page: p348

1. If a capital expenditure is overstated, then revenue and profit, respectively, on the statement of comprehensive income will be which of the following?
   1. Overstated, overstated
   2. Overstated, understated
   3. Understated, overstated
   4. Understated, understated

Page: p348

1. Which of the following would not be included in inventories?
   1. Finished goods produced by the business but which remain unsold
   2. Land held for resale to individuals who want to build homes
   3. Finished goods purchased by the business which have been sold
   4. Supplies awaiting use in the production process

Page: p350

1. Which of the following costs would not be included in inventories cost?
   1. Sales tax on goods purchased for resale
   2. Cost of delivery of goods to customers
   3. Carriage-inwards
   4. Customs duty on the importation of merchandise

Page: p351

1. Net purchases is calculated by which of the following equations?
   1. Purchases + carriage-inwards + other costs – purchase discounts and allowances – purchase discounts
   2. Purchases + carriage-outwards + other costs – purchase discounts and allowances – purchase discounts
   3. Purchases + carriage-outwards + other costs + purchase discounts and allowances + purchase discounts
   4. Purchases + carriage inwards + other costs + purchase discounts and allowances - purchase discounts

Page: p353

1. Which of the following is the correct calculation of ending inventories?
   1. Beginning inventories + net purchases + cost of goods sold
   2. Beginning inventories - net purchases + cost of goods sold
   3. Net purchases – cost of goods sold + beginning inventories
   4. Beginning inventories + cost of goods sold – net purchases

Page: p353

1. Malaysian Imports, Ltd has the following information about the inventory of electronic components for October 2011.

At the end of October, 220 components remained in inventory. If Malaysian Imports uses the FIFO method of allocating inventory costs, what would is the cost of goods sold for October?

1. $7020
2. $6954
3. $21 430
4. $21 410

Page: p359

1. Malaysian Imports, Ltd has the following information about the inventory of electronic components for October 2011.

At the end of October, 220 components remained in inventory. If Malaysian Imports uses the FIFO method of allocating inventory costs, what would is the ending inventory for October?

1. $7020
2. $6954
3. $21 430
4. $21 410

Page: p359

1. Malaysian Imports, Ltd has the following information about the inventory of electronic components for October 2011.

At the end of October, 220 components remained in inventory. If Malaysian Imports uses the average cost method of allocating inventory costs, what would is the ending inventory for October?

• 1. $7020
  2. $6954
  3. $21 430
  4. $21 410

Page: p359

1. Malaysian Imports, Ltd has the following information about the inventory of electronic components for October 2011.

At the end of October, 220 components remained in inventory. If Malaysian Imports uses the average cost method of allocating inventory costs, what would is the cost of goods sold for October?

• 1. $7020
  2. $6954
  3. $21 430
  4. $21 495

Page: p359

1. Moroccan Leatherworks, LLC has the following information about the inventory of brief cases for January 2012.

If Moroccan Leatherworks use the perpetual average cost method of allocating inventory costs, what would is the cost of goods sold for January?

• 1. €176 000
  2. €129 200
  3. €127 949
  4. €177 251

Page: p368

1. Moroccan Leatherworks, LLC has the following information about the inventory of brief cases for January 2012.

If Moroccan Leatherworks use the perpetual average cost method of allocating inventory costs, what would is the ending inventory for January?

• 1. €176 000
  2. €129 200
  3. €127 949
  4. €177 251

Page: p368

1. Moroccan Leatherworks, LLC has the following information about the inventory of brief cases for January 2012.

If Moroccan Leatherworks use the perpetual FIFO method of allocating inventory costs, what would is the cost of goods sold for January?

• 1. €176 000
  2. €129 200
  3. €127 949
  4. €177 251

Page: p362

1. Moroccan Leatherworks, LLC has the following information about the inventory of brief cases for January 2012.

If Moroccan Leatherworks use the perpetual FIFO method of allocating inventory costs, what would is the ending inventory for January?

• 1. €176 000
  2. €129 200
  3. €127 949
  4. €177 251

Page: p362

1. Adonia Cosmetics, Limited reported a gross profit of €250 000 in 2012 with sales of €700 000. Profit was €60 000. Inventories were €55 000 at the beginning of 2012, and €65 000 at year’s end. What is the inventories turnover ratio for Adonia?
   1. 11.67
   2. 4.17
   3. 1.0
   4. 10.77

Page: p376

1. Adonia Cosmetics, Limited reported a gross profit of €250 000 in 2012 with sales of €700 000. Profit was €60 000. Inventories were €55 000 at the beginning of 2012, and €65 000 at year’s end. What is the inventories turnover ratio for Adonia?
   1. 33.89
   2. 365
   3. 31.28
   4. 87.53

Page: p379

1. Property, plant and equipment that qualifies for recognition as an asset is recorded at which of the following?
   1. Fair value
   2. Discounted value
   3. Replacement value
   4. Cost

Page: p382

1. Sinarline Office Products, SA purchased land for €300 000 on which it built an headquarters office building. The building cost €2 000 000 and went into service on 1 October 2011. The building has a useful life of 20 years and a residual value of €500 000. Sinarline reports financial results on a calendar year basis. What is the depreciation for 2011 if the company uses the straight-line method?
   1. €75 000
   2. €90 000
   3. €22 500
   4. €18 750

Page: p385

1. Sinarline Office Products, SA purchased land for €300 000 on which it built an headquarters office building. The building cost €2 000 000 and went into service on 1 October 2011. The building has a useful life of 20 years and a residual value of €500 000. Sinarline reports financial results on a calendar year basis. What is the depreciation for 2011 if the company uses the double diminishing balance method?
   1. €150 000
   2. €230 000
   3. €200 000
   4. €180 000

Page: p388

1. A company purchases equipment which has a list price of$22 000 on 1 January 2011. The dealer provides a 5% trade discount. Shipping costs for the equipment are $570, installation is $1300, and training related to the use of the new equipment is $1150. The estimated useful life of the equipment is three years at the end of which $1500 will need to be spent to restore the site where the equipment is located. Residual value is $3000. What amount should be recorded on 1 January 2011 when the equipment is first acquired?
   1. $23 920
   2. $20 900
   3. $25 420
   4. $22 420

Page: p383

1. A company purchases equipment which has a list price of$22 000. The dealer provides a 5% trade discount. Shipping costs for the equipment are $570, installation is $1300, and training related to the use of the new equipment is $1150. The estimated useful life of the equipment is three years at the end of which $1500 will need to be spent to restore the site where the equipment is located. Residual value is $3000. What amount (in whole dollars) should be recorded as depreciation expense for the first quarter of 2011 if the company uses the straight-line method?
   1. $7140
   2. $1868
   3. $8473
   4. $2118

Page: p385

1. A company purchases equipment which has a list price of$22 000. The dealer provides a 5% trade discount. Shipping costs for the equipment are $570, installation is $1300, and training related to the use of the new equipment is $1150. The estimated useful life of the equipment is three years at the end of which $1500 will need to be spent to restore the site where the equipment is located. Residual value is $3000. What amount (in whole dollars) should be recorded as depreciation expense for 2012 if the company uses the double diminishing balance method?
   1. $14 281
   2. $4760
   3. $2981
   4. $16 948

Page: p388

1. On 23 August 2010 A company purchases equipment which for £175 000 with a residual value of £25 000. The useful life is expected to be 5 years. The equipment is also expected to produce 300 000 units during this time. In May 2011, the equipment actually produces 5722 units. What is the depreciation expense in whole pounds recorded for May 2011?
   1. £2861
   2. £3338
   3. £668
   4. £572

Page: p386

1. On 31 December 2010, Deutsche Engineering, AB reported the following amounts on its statement of financial position.

Generators (at cost) €1 250 000

Accumulated depreciation (500 000)

Carrying amount €750 000

Generators were being depreciated using the straight line method over 7 years assuming no residual value. On 1 January 2011, management revised their estimate of the residual value to €100 000. What is the annual depreciation expense in whole euros that would be recognized for 2011?

• 1. €125 000
  2. €75 000
  3. €65 000
  4. €108 333

Page: p392

1. On 23 September 2012, Chenard Metals, SA reported the following amounts on its statement of financial position.

Foundries (at cost) €17 800 000

Accumulated depreciation (2 500 000)

Carrying amount €15 300 000

On 31 December 2012, the foundries were sold to Lampron, SA for €14 000 000 cash. The journal entry to record the sale would not include which of the following debits?

• 1. €17 800 000
  2. €2 500 000
  3. €14 000 000
  4. €1 300 000

Page: p397

1. Which of the following is not accurate about the accounting for intangible assets?
   1. Research costs for internally generated intangible assets are always expensed as incurred.
   2. Development costs for internally generated intangible assets are always expensed as incurred.
   3. Externally acquired intangible assets are recorded at cost.
   4. Intangible assets can be accounted for using either the cost model or revaluation model after acquisition.

Page: p401

1. Chaoxiang Ch’in Markets, Limited acquired its competitor, Jason Supermarkets, Corporation on 31 December 2011. On that date, the following schedule showed the net carrying amounts on Jason’s statement of financial position and their fair values

Assuming that Ch’in payed ¥25 000 000 for Jason, how much goodwill would be recognized?

• 1. None
  2. ¥25 000 000
  3. ¥175 000 000
  4. ¥150 000 000

Page: p405

1. Which of the following is true about accounting for investment properties?
   1. A gain or loss on the fair value of an investment property is recognized in other comprehensive income
   2. Investment properties can be accounted for either under the cost method or revaluation method.
   3. An investment property cannot be held by lease
   4. An investment property is held to earn rentals or for capital appreciation

Page: p409

Essay Questions

• • 1. Explain the difference between a capital expenditure and a revenue expenditure.
    2. Describe the two ways in which inventories are created.
    3. What costs are included in inventories?
    4. What are the two methods of allocating inventory costs to costs of goods sold?
    5. What are the two cost flow assumptions allowed under IFRS?
    6. When is it appropriate to use specific identification to allocate inventory costs to cost of goods sold?
    7. Describe the difference between periodic and perpetual methods of allocating inventory costs to cost of goods sold.

Answer

The periodic method calculates the amount of inventory costs to be allocated to cost of goods sold at the end of the accounting period while the perpetual method calculates the amount to be allocated when each sale occurs. Both the periodic and perpetual methods can be used with either the FIFO or AVCO cost flow assumptions.

• • 1. What is the appropriate accounting if the value of inventories decline subsequent to their acquisition?

Answer

If the net realizable value of the inventories declines below their carrying amount, the difference is recognized as part of cost of goods sold.

• • 1. Compare the impact that the three methods of allocating property, plant and equipment costs (straight-line, units-of-production and diminishing balance) have on profit over the useful life of an asset.

Answer

In the earlier part of the asset’s useful life, diminishing balance method will result in higher depreciation expense and lower profit compared to the straight-line method. In the later part of the asset’s useful life, the diminishing balance method will result in lower depreciation expense and higher profit compared to the straight-line method. No comparison can be made with units-of-production because the amount of depreciation expense and profit depends on actual usage which varies.

• • 1. Describe the two methods for accounting for property, plant and equipment permitted by IFRS subsequent to acquisition.

Answer

Cost model. After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation model. After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at the re-valued amount.

• • 1. What is the difference in accounting for intangible assets acquired externally versus those generated internally?

Answer

Externally acquired intangible assets are capitalized. Research costs for internally generated assets are expensed as incurred. Development costs for internally generated assets when they meet certain criteria can be capitalized.

• • 1. What are the two methods of accounting for intangible assets permitted by the IFRS subsequent to acquisition?

Answer

Cost Model. Under the cost model, the intangible asset is carried at cost less any accumulated amortization and any accumulated impairment losses.

Revaluation Model. Under the revaluation model, the intangible asset is carried at fair value less any accumulated amortization and accumulated impairment losses since the date of revaluation.

• • 1. What is goodwill?

Answer

Goodwill is an asset which represents the future economic benefits that arise from assets acquired when one business buys another. Goodwill is created when the amount paid for the acquired business exceeds the fair value of the net assets acquired.

• • 1. What is the difference in accounting for property, plant and equipment and investment property?

Answer

Property, plant and equipment are assets used in production. The costs of these assets are allocated over their useful life. If the value of the asset increased, IFRS permits the increase to be recognized directly in equity. If the asset value decline, IFRS requires an impairment loss to be recognized in profit or loss.

Investment properties include land and buildings held for rental or capital appreciation. IFRS requires that these assets be re-valued to fair market value and any gain or loss is recognized in profit or loss.