Class: Date: ch9-10 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Unrealized gains and losses would be reported as a separate component of stockholders' equity for which of the following securities? Trading Securities Available-for-Sale Securities a. Yes Yes b. No Yes c. Yes No d. No No 2. How would available-for-sale securities be reported on the balance sheet? a. At original cost b. At fair market value c. At lower-of-cost-or-market d. At amortized cost 3. Under the effective interest method, how will interest revenue change from year to year if bonds are purchased at a discount? a. Interest revenue will increase. b. Interest revenue will decrease. c. Interest revenue will increase if the market rate of interest decreases and decrease if the market rate of interest increases. d. Interest revenue will not change. 4. Which of the following gains would be reported on the income statement for trading securities? Realized Unrealized a. Yes Yes b. Yes No c. No Yes d. No No 5. What percentage of ownership of voting common stock is generally sufficient to presume that the investor has significant influence over the investee? a. 10% b. 15% c. 20% d. 25% 6. Under which of the following circumstances would the purchase of an investment cause the investor to amortize goodwill? a. Purchase of a 15% investment at a price above the market value of the investee's net assets b. Purchase of a 20% investment at a price above the market value of the investee's net assets c. Purchase of 15% investment at a price above the book value of the investee's assets d. Purchase of a 20% investment at a price above the book value of the investee's assets 1
7. On January 1, 2000, Maltin Corp. paid $90,000 for securities, which it classified as available-for-sale; the market value of these securities was $93,000 on December 31, 2000. On December 31, 2001, when the market value was $95,000, Maltin reclassified these securities as trading securities. What amount of gain should be included in the 2001 income statement as a result of this reclassification? a. $0 b. $3,000 c. $5,000 d. $2,000 8. On January 1, 2000, Teton Co. purchased 40,000 shares (30%) of the voting stock of Sierra Corp. for $400,000. The fair value of the net assets of Sierra's assets on that date was $360,000 and their book value was $300,000. During 2000, Sierra had net income of $90,000 and paid dividends of $30,000 What amount of Investment Income should Teton report for 2000, assuming any goodwill arising from the purchase of the Sierra stock is amortized over ten years and any undervalued depreciable assets have a five-year remaining life? a. $9,000 b. $27,000 c. $23,000 d. ($16,800) 9. Ben Cameron owns 1,000 shares of Eric, Inc. common stock, which cost $8.40 per share. On November 30, 2000, Mr. Cameron received 1,000 rights which enable him to purchase 100 shares of Eric common stock at $10 per share. Eric's stock is currently selling at $20 per share, without the rights. Immediately after the issuance of the rights, they sell at $1 each. If Mr. Cameron decides to exercise the rights, what amount should he debit to investment in common stock? a. $2,000 b. $1,000 c. $1,100 d. $1,400 10. Ava Foote purchased 100 bonds with a face value of $1,000 each on January 1, 2000, from Marvelous Co. The bonds had a stated interest rate of 8%, payable annually on December 31. The bonds mature on December 31, 2009, and the market rate of interest at the date of purchase was 9%. Information on present value factors is as follows: Present value of $1 at 8% for 10 periods 0.463 Present value of $1 at 9% for 10 periods 0.422 Present value of an annuity of $1 at 8% for 10 periods 6.710 Present value of an annuity of $1 at 9% for 10 periods 6.418 What was the purchase price of the bonds? a. $93,544 b. $103,990 c. $100,000 d. $51,344 11. An unrealized gain on a company's portfolio of held-to-maturity securities should be reflected in the current financial statements as a. an extraordinary item shown as a direct increase to retained earnings. b. a current gain resulting from holding marketable securities. c. a footnote or parenthetical disclosure only. d. an adjustment to market and included in the equity section of the balance sheet. 2
12. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as a. dividend income. b. a deduction from the investor's share of the investee's profits. c. a deduction from the investment account. d. a deduction from the stockholders' equity account, dividends to stockholders. 13. When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes a. a proportionate interest in the net income of the investee. b. a cash dividend received from the investee. c. periodic amortization of the goodwill related to the purchase. d. depreciation related to the excess of market value over book value of the investee's depreciable assets at the date of purchase by the investor. 14. When an investor uses the equity method to account for investments in common stock, the earnings of the investee reported in the investor's income statement will be affected by which of the following? Cash Dividends from Investee Goodwill Amortization Related to Purchase a. No Yes b. No No c. Yes No d. Yes Yes 15. The balance sheet of a merchandising firm includes a. purchased goods inventory. b. raw materials inventory. c. work-in-process inventory. d. all of the above. 16. Which of the following provides evidence of ownership of inventory? a. Canceled check b. Title to the merchandise c. Receiving report d. Purchase order 17. Which statement is true? a. In a periodic inventory system, the physical count is taken only to verify inventory records. b. In a periodic inventory system, purchases are recorded directly in the inventory account. c. The perpetual inventory system has become more popular as recordkeeping has become computerized. d. LIFO cannot be applied when a periodic system is used. 18. Which of the following sets of inventory cost flow methods provide the same results regardless of whether a periodic or perpetual system is used? a. Average cost and FIFO b. Average cost and specific identification c. Specific identification and FIFO d. LIFO and specific identification 19. Inventory holding losses are recognized in the period when incurred in accordance with the a. stable-unit convention and the conservatism convention. b. conservatism convention and the cost principle. c. cost principle and the matching principle. d. matching principle and the conservatism convention. 3
20. The conservatism convention results in the reporting of Losses on Purchase Commitments Holding Losses a. Yes Yes b. Yes No c. No Yes d. No No 21. Which statement is true? a. While the gross-profit method is acceptable for tax determination purposes, the retail method is not. b. The gross-profit inventory method can be applied using FIFO or LIFO cost assumptions. c. To apply the retail inventory method, a firm must maintain records of markups and markdowns. d. Under the retail inventory method, ending inventory is reported in the balance sheet at retail. 22. A higher inventory turnover may be indicative of a. obsolescence. b. slow-moving merchandise. c. efficient management of inventory. d. all of the above. 23. Driggs Drug Corporation's inventory at December 31, 2000, per physical count of the goods in the warehouse, totaled $100,000. After completing the count, the following items were noted: -- On December 30, Driggs purchased $1,000 in goods from Cousar? Company. The terms of the purchase were 2/10, n/30, FOB shipping? point. The goods were received January 5 and were excluded from? the count above. -- On December 31, Driggs purchased $500 in goods from Pharmacy? Wholesalers. That purchase's terms were net 30 days, FOB? destination. The goods were received January 2 and were excluded? from the count above. -- On December 31, Driggs had shipped goods on consignment totaling? $1,250 to Pinson Pharmaceuticals. The consigned goods were? excluded from the count above. -- On December 31, Driggs sold $2,000 in goods to Hawsey Company.? Hawsey received the goods January 3. Terms of sale were 2/10,? n/30, FOB destination. The sale and shipment occurred late in? the day, so the goods sold were included in the count above. How much inventory should Driggs report on its balance sheet dated December 31, 2000? a. $100,250 b. $100,750 c. $101,250 d. $102,250 4
24. The Blake Company began the month of November with 150 units of Model-XL brass hinges on hand at a cost of $2.00 each. These hinges sell for $3.50 each. The following schedule presents the additional activity in this inventory item during November: Date of Purchases Transaction Quantity Unit Units? in November Received Price Sold 4 100? 6 200 $2.10? 8 150? 10 200 2.20? 16 220? 21 250 2.40? 28 100 If Blake uses perpetual LIFO inventory pricing, the value of the inventory on November 30 would be a. $468. b. $460. c. $523. d. $552. 25. The Blake Company began the month of November with 150 units of Model-XL brass hinges on hand at a cost of $2.00 each. These hinges sell for $3.50 each. The following schedule presents the additional activity in this inventory item during November: Date of Purchases Transaction Quantity Unit Units? in November Received Price Sold 4 100? 6 200 $2.10? 8 150? 10 200 2.20? 16 220? 21 250 2.40? 28 100 If Blake uses perpetual moving average inventory pricing, the sale of 220 items on November 16 would be recorded at a unit cost of a. $2.00. b. $2.10. c. $2.08. d. $2.16. 5
26. The Blake Company began the month of November with 150 units of Model-XL brass hinges on hand at a cost of $2.00 each. These hinges sell for $3.50 each. The following schedule presents the additional activity in this inventory item during November: Date of Purchases Transaction Quantity Unit Units? in November Received Price Sold 4 100? 6 200 $2.10? 8 150? 10 200 2.20? 16 220? 21 250 2.40? 28 100 If Blake uses weighted average inventory pricing on a periodic basis, the gross profit for November would be a. $741. b. $1,254. c. $755. d. $1,041. 27. The acquisition cost of a heavily used raw material changes frequently. The book value of the inventory of this material at year-end would be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the a. weighted average method. b. first-in, first-out method. c. last-in, first-out method. d. base-stock method. 28. The Hastings Company began operations on January 1 of Year 1 and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Year 1 Year 2 Final Inventory:? FIFO $240,000 $270,000? LIFO $200,000 $210,000? Net Income (per FIFO) $120,000 $170,000 Based upon the above information, a change to the LIFO method in Year 2 would result in net income for Year 2 of a. $110,000. b. $150,000. c. $170,000. d. $230,000. 6
29. Selected information from the accounting records of the Vigor Company is as follows: Net A/R at December 31, 1999 $900,000? Net A/R at December 31, 2000 $1,000,000? Accounts receivable turnover 5 to 1? Inventories at December 31, 1999 $1,100,000? Inventories at December 31, 2000 $1,200,000? Inventory turnover 4 to 1 What was Vigor's gross margin for 2000? a. $150,000 b. $200,000 c. $300,000 d. $400,000 30. Using the data presented below, calculate the cost of sales for the Beta Corporation for 2000. Current ratio 3.5? Acid test ratio 3.0? Current liabilities 12/31/00 $600,000? Inventory 12/31/99 $500,000? Inventory turnover 8.0 a. $1,600,000 b. $2,400,000 c. $3,200,000 d. $6,400,000 Problem 31. Available for sale and trading securities. The investment portfolio of Zarabeth Corp. at 12/31/01 included the following equity securities Market Market? Value Value? Company Cost 12/31/00 12/31/01 Leila $35,000 $37,000 $44,000? Amanda 25,000 25,000 31,000 Total $60,000 $62,000 $75,000? ======= ======= ======= Required: Prepare the adjusting entry required at the end of 2001 assuming: a. The securities are designated as available-for-sale securities. b. The securities are designated as trading securities. 7
32. Cost Flow Methods. McEwen Electronics sells televisions and stereos. The beginning inventory, sales and purchases of the Bigtube 27" model during the month of May were as follows: Inventory, May 1 3 units @ $610 each? Sale, May 4 2 units @ $1,000 each? Purchase, May 6 5 units @ $620 each? Purchase, May 7 9 units @ $650 each? Sale, May 9 7 units @ $1,000 each? Sale, May 10 4 units @ $1,000 each? Purchase, May 15 5 units @ $660 each? Sale, May 22 2 units @ $1,000 each? Sale, May 30 1 unit @ $1,000 Required: Determine the cost of the ending inventory, the cost of goods sold and gross profit under each of the following methods: a. FIFO (periodic) b. FIFO (perpetual) c. LIFO (periodic) d. LIFO (perpetual) e. Average (periodic) 33. Dollar-Value LIFO. Hendon, Inc., uses the dollar-value LIFO method to value its inventory. Hendon provides the following information: Date Inventory at Cost Current Price Index Jan. 1, 2000 $240,000 1.20? Dec. 31, 2000 300,000 1.26? Dec. 31, 2001 350,000 1.44? Dec. 31, 2002 320,000 1.50? Dec. 31, 2003 400,000 1.56? Dec. 31, 2004 475,000 1.62 Required: Use dollar-value LIFO to calculate the value of the ending inventory at (round computations to the nearest dollar): a. December 31, 2000 b. December 31, 2001 c. December 31, 2002 d. December 31, 2003 e. December 31, 2004 8
ch9-10 Answer Section MULTIPLE CHOICE 1. B 2. B 3. A 4. A 5. C 6. B 7. C 8. D 9. D 10. A 11. C 12. C 13. A 14. A 15. A 16. B 17. C 18. C 19. D 20. A 21. C 22. C 23. D 24. C 25. D 26. A 27. B 28. A 29. A 30. C PROBLEM 31. a. Investment in Equity Securities--Avail. for Sale 13,000? Unrealized Holding Gain on Equity? Securities--Equity 13,000 b. Investment in Equity Securities--Trading 13,000? Unrealized Holding Gain on Equity? Securities--Income 13,000 1
32. Ending Inventory Cost of Goods Sold Gross Profit a. $3,950 $10,130 $5,870 b. 3,950 10,130 5,870 c. 3,690 10,390 5,610 d. 3,790 10,290 5,710 e. 3,840 10,240 5,760 Additional information related to above solution: 33. Goods available for sale $14,080 (22 units) Sales = $16,000 (16 units) Weighted average cost per unit = $14,080/22 = 640 LIFO ending inventory (perpetual) (1 @ $610) + (3 @ $620) + (2 @ $660) a. $288,000 b. $295,144 c. $256,800 d. $324,000 e. $383,616 Computations: Must first recompute cost indices since base is 1.2 and not 1.0 2000 300,000 / 1.05 = 285,714? layers: 240,000 x 1.00 = 240,000? 45,714 x 1.05 = 48,000? 288,000? =======? 2001 layers: 240,000 x 1.00 = 240,000? 45,714 x 1.05 = 48,000? 5,953 x 1.20 = 7,144? 295,144? =======? 2002 layers: 240,000 x 1.00 = 240,000? 16,000 x 1.05 = 16,800? 256,800? =======? 2003 400,000 / 1.30 = 307,692? layers: 240,000 x 1.00 = 240,000? 16,000 x 1.05 = 16,800? 51,692 x 1.30 = 67,200? 324,000? =======? 2004 475,000 / 1.35 = 351,852? layers: 240,000 x 1.00 = 240,000? 16,000 x 1.05 = 16,800? 51,692 x 1.30 = 67,200? 44,160 x 1.35 = 59,616? 383,616? ======= 2