Fra inventory, longlive assets 1

Schweser Printable Answers - FRA - Inventory, Longlive Assets 1

Test ID#: 1

Question 1 - #96241

Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran willdepreciate the asset using the straight-line method over a 10-year period with no salvage value. For tax purposesthe asset will be depreciated straight line for five years and Corcoranâ€™s effective tax rate is 30%.Corcoranâ€™s deferred tax liability for 2004 will:

Your answer: A was incorrect. The correct answer was C) increase by $15,000.

Straight-line depreciation per financial reports = 500,000 / 10 = $50,000

Tax depreciation = 500,000 / 5 = $100,000

Temporary difference = 100,000 − 50,000 = $50,000

Deferred tax liability will increase by $50,000 × 30% = $15,000

This question tested from Session 9, Reading 31, LOS d.

Question 2 - #95609

Larry Purcell, an entry-level fixed income analyst at Knowlton & Smeades LLC, was discussing debt covenantswith his supervisor, Andy Holzman. During the meeting Purcell made the following statements regarding bondcovenants:

Statement 1: If a firm violates any of its debt covenants, the company will immediately go into bankruptcy and thecreditors of the firm will take over the liquidation of its assets.

Statement 2: Debt covenants are important in evaluating a firmâ€™s credit risk and to better understand how therestrictions of the covenants can affect the firmâ€™s growth prospects and choice of accounting policies.

With respect to these statements:

Your answer: A was incorrect. The correct answer was C) only one is correct.

Lenders and other creditors use debt covenants in their lending agreements to restrict the activities of the debtorthat could adversely impact the creditorsâ€™ position. If any bond covenant is violated, the firm is in technicaldefault on its debt. The creditors can demand payment of the debt, however, the terms are generallyrenegotiated. As such, the company does not automatically enter into bankruptcy and have its assets liquidated

Back to Test Review Hide Questions Print this Page

A) decrease by $50,000.B) decrease by $15,000.C) increase by $15,000.

A) both are incorrect.B) both are correct.C) only one is correct.

Page 1 of 25Printable Exams

01/04/2014http://127.0.0.1:20507/online_program/test_engine/printable_answers.php

by the creditors.


Question 3 - #104167

Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on pastexperience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alterâ€™saccounts receivable at the end of 20X8 is closest to:

Your answer: A was incorrect. The correct answer was C) $35,000.

For tax purposes, bad debt expense cannot be deducted until the receivables are deemed worthless. Therefore,the tax base is $35,000 since no bad debt expense has been deducted on the tax return. Note that the carryingvalue would be $31,500 since bad debt expense is reflected on the income statement.

This question tested from Session 9, Reading 31, LOS c.

Question 4 - #93949

Given the following data regarding two firms under different scenarios, determine the amount of any deferred taxliability or asset.

Firm 1:

Firm 2:

A) $31,500.B) $3,500.C) $35,000.

Tax Reporting Financial ReportingRevenue $500,000 Revenue $500,000Depreciation $100,000 Depreciation $50,000Taxable income $400,000 Pretax income $450,000Taxes payable $160,000 Tax expense $180,000Net income $240,000 Net income $270,000

Tax Reporting Financial Reporting

Revenue $500,000 Revenue $500,000

Warranty expense $0 Warranty expense $10,000

Taxable income $500,000 Pretax income $490,000

Taxes payable $200,000 Tax expense $196,000

Net income $300,000 Net income $294,000

Firm 1 Deferred Tax: Firm 2 Deferred Tax:



Your answer: A was incorrect. The correct answer was B)

A deferred tax liability and asset is created when an income or expense item is treated differently on financialstatements than it is on the companyâ€™s tax returns.

A deferred tax liability is when that difference results in greater tax expense on the financial statements than taxespayable on the tax return.

The deferred tax liability for firm 1 = $180,000 tax expense - $160,000 taxes payable = $20,000

A deferred tax asset is when that difference results in lower taxes payable on the financial statements than on thetax return.

The deferred tax asset for firm 2 = $200,000 taxes payable - $196,000 tax expense = $4,000



Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using the revaluationmodel. Edgewater needs to determine 1) what Pfaffâ€™s carrying value of property, plant and equipment wouldbe under the historical cost model, and 2) which of Pfaffâ€™s intangible assets have finite useful lives. Will theseitems be disclosed in Pfaffâ€™s financial statements?

Your answer: A was correct!

Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historicalcost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite.

This question tested from Session 9, Reading 30, LOS j.

Question 6 - #94670

Lakeside Co. recently determined that one of its processing machines has become obsolete three years earlyand, unexpectedly, has no salvage value. Which of the following statements is most consistent with thisdiscovery?

A) $30,000 Asset $6,000 Asset

B) $20,000 Liability $4,000 Asset

C) $20,000 Asset $6,000 Liability

$20,000 Liability $4,000 Asset

A) Both of these items are required to be disclosed.B) Neither of these items is required to be disclosed.C) Only one of these items is required to be disclosed.

A) Historically, economic depreciation was overstated.B) Lakeside Co. will owe back taxes.C) Historically, economic depreciation was understated.



Your answer: A was incorrect. The correct answer was C) Historically, economic depreciation was understated.

Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less thanexpected, accounting methods for depreciation have understated the economic depreciation. In addition, if thereis no salvage value when positive salvage value was expected, the understatement problem is compounded.


Question 7 - #95993

Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cashcollections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% inboth cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is thedeferred tax asset or liability? A deferred tax:

Your answer: A was incorrect. The correct answer was C) asset of $17,000.

Since taxable income ($238,000) exceeds pretax income ($188,000), Kruger will have a deferred tax asset of$17,000 [($238,000 − $188,000)(0.34)].



If prices and inventory quantities are increasing, the last-in first-out (LIFO) inventory cost method results in:

Your answer: A was incorrect. The correct answer was B) lower gross profit compared to first-in first-out.

In an environment of increasing prices, LIFO results in higher COGS, lower inventory value, and lower gross profitcompared to FIFO.

This question tested from Session 9, Reading 29, LOS e.

Question 9 - #95135

For a given lease payment and term, which of the following is least accurate regarding the effects of theclassification of the lease as a finance lease as compared to an operating lease?

A) asset of $48,960.B) liability of $17,000.C) asset of $17,000.

A) higher inventory compared to first-in first-out.B) lower gross profit compared to first-in first-out.C) lower cost of goods sold compared to first-in first-out.

A) The lessee's asset turnover will be lower for a finance lease.B) The lessee's debt-to-equity ratio will be higher for a finance lease.C) The lessee's current ratio will be higher for a finance lease.



Your answer: A was incorrect. The correct answer was C) The lessee's current ratio will be higher for a financelease.

The lessee's current ratio will be lower because the current portion of the finance lease increases currentliabilities, hence reducing the current ratio.

This question tested from Session 9, Reading 32, LOS h.


Classifying a lease as an operating lease for a lessee, as opposed to a finance lease, will result in:


For a lessee using operating leases, the current ratio will be higher, the debt/equity ratio will be lower, and theasset turnover will be higher than they would be with finance leases. With operating leases, assets and liabilitiesare lower.

This question tested from Session 9, Reading 32, LOS i.


Which of the following statements regarding a direct financing lease is least accurate?


Interest revenues are calculated by multiplying the implicit interest rate by net receivables at the beginning of theperiod.


Question 12 - #150014

Deferred tax liabilities may result from:

Current Ratio Debt/Equity Ratio Asset TurnoverRatio

A) Higher Lower Higher

B) Higher Lower Lower

C) Lower Lower Higher

A) Interest revenue on the lessor's income statement equals the implicit interest rate times the leasepayment.

B) The principal portion of the lease payment is a cash inflow from investing on the lessor's cash flowstatement.

C) The lessor recognizes no gross profit at the inception of the lease.

A) pretax income greater than taxable income due to temporary differences.




Deferred tax liabilities result from temporary differences that cause pretax income and income tax expense (onthe income statement) to be greater than taxable income and taxes due (on the firmâ€™s tax form). Temporarydifferences that cause pretax income to be less than taxable income are recognized as deferred tax assets.Permanent differences do not result in deferred tax items; instead they cause the effective tax rate to differ fromthe statutory tax rate.

This question tested from Session 9, Reading 31, LOS f.


Which of the following statements regarding capitalizing versus expensing costs is least accurate?

Your answer: A was incorrect. The correct answer was C) Total cash flow is higher with capitalization thanexpensing.

Total cash flow is higher with capitalization than expensing is least accurate because total cash flow would be thesame under both methods, not considering tax implications.

This question tested from Session 9, Reading 30, LOS a.


The Puchalski Company reported the following:

Puchalski has no deferred tax asset or liability prior to Year 1. If the tax rate is 40%, what is the amount of thedeferred tax asset or liability reported at the end of Year 3?

Your answer: A was incorrect. The correct answer was B) Liability of $120.

B) pretax income less than taxable income due to temporary differences.C) pretax income greater than taxable income due to permanent differences.

A) Capitalization results in higher profitability initially.B) Cash flow from investing is higher with expensing than with capitalization.C) Total cash flow is higher with capitalization than expensing.

Year 1 Year 2 Year 3 Year 4

Income before taxes $1,000 $1,000 $900 $800

Taxable income $800 $900 $900 $1,000

A) Asset of $120.B) Liability of $120.C) Asset of $80.

Year 1 Year 2 Year 3Income tax expense $400 $400 $360Taxes paid $320 $360 $360





Which of the following statements about deferred taxes is least accurate? Deferred taxes:

Your answer: A was incorrect. The correct answer was B) can relate to either permanent or temporarydifferences.

Permanent difference will not result in deferred taxes since they are not expected to reverse in the future.



As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely inthe U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group ispreparing an informational packet for shareholders, employees, and the media. Which of the following statementsis least accurate?


Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.



In analyzing disclosures related to the financing liabilities of a company, which of the following disclosures wouldbe least helpful to the analyst?

Your answer: A was incorrect. The correct answer was B) The present value of the future bond paymentsdiscounted at the coupon rate of the bonds.

When analyzing disclosures related to financing liabilities, analysts would review the balance sheet and find the

Deferred tax liability $80 $120 $120

A) arise primarily due to differences between GAAP and IRS code.B) can relate to either permanent or temporary differences.C) may never â€œreverseâ€�in the case of companies that are growing.

A) Write-downs taken on asset values can be reversed in later years if market conditions improve.B) The write-downs are reported as a component of income from continuing operations.C) During the year of the write-downs, retained earnings and deferred taxes will decrease.

A) The interest expense for the period as provided on the income statement or in a footnote.B) The present value of the future bond payments discounted at the coupon rate of the bonds.

C) Filings with the Securities and Exchange Commission (SEC) that disclose all outstanding securitiesand their features.



present value of the promised future liability payments. These payments would then be discounted at the rate ineffect at issuance (i.e., the yield to maturity), not the coupon rate of the bonds.


Question 18 - #127272

Schubert, Inc. acquires 100% of another firm. As a result of the acquisition, Schubert reports on its balance sheet1) a patent with five years remaining and a carrying value of $2 million and 2) goodwill with a carrying value of $4million. Using the straight-line method, total amortization expense in the first year for these two intangible assetsis:

Your answer: A was incorrect. The correct answer was B) $400,000.

Amortization expense for the patent is $2 million / 5 = $400,000. Goodwill is an intangible asset with an indefinitelife and is not amortized.



Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cashcollections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in bothcases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferredtax asset/liability in this case? A deferred tax:

Your answer: A was incorrect. The correct answer was B) asset of $8,500.

Since taxable income ($119,000) exceeds pretax income ($94,000), Camphor will have a deferred tax asset of$8,500 = [($119,000 − $94,000)(0.34)].



For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjustwhich of the following items for a change in market interest rates?

A) $800,000.B) $400,000.C) $1,200,000.

A) asset of $48,960.B) asset of $8,500.C) liability of $8,500.

A) Debt-to-equity ratio.B) Interest expense.C) Cash flow from financing.




For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will changethe debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not thecoupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense willchange when interest rates change, but the market value of the variable-rate debt will not change significantly.)

This question tested from Session 9, Reading 32, LOS b.


Which of the following statements best describes the impact of a valuation allowance on the financial statements?A valuation allowance:

Your answer: A was incorrect. The correct answer was B) reduces reported income, reduces assets, and reducesequity.

A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that thedeferred tax assets will never be realized. The establishment of a valuation allowance reduces reported income,offsets (reduces) assets, and reduces equity.

This question tested from Session 9, Reading 31, LOS g.


An impairment write-down is least likely to decrease a company's:

Your answer: A was incorrect. The correct answer was B) debt-to-equity ratio.

An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would thereforeincrease.



A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financialstatements prepared for shareholders, the company may:

A) reduces reported income, increases liabilities, and reduces equity.B) reduces reported income, reduces assets, and reduces equity.C) increases reported income, reduces assets, and reduces equity.

A) assets.B) debt-to-equity ratio.C) future depreciation expense.

A) use any other inventory method under generally accepted accounting principles (GAAP).B) only use the LIFO method.C) use the FIFO method, but must disclose a LIFO reserve.



Your answer: A was incorrect. The correct answer was B) only use the LIFO method.

The LIFO conformity rule in the U.S. requires firms to use LIFO for their financial statements if they use LIFO forincome tax purposes.


Question 24 - #147048

The present value of benefits earned during the current period by participants in a defined benefit pension plan isbest described as the plan's:

Your answer: A was incorrect. The correct answer was B) service cost.

Service cost refers to the benefits earned in the current period by a defined benefit plan's participants. Pastservice costs are benefits awarded retroactively when a plan is initiated or changed. Net pension liability or netpension asset is the difference between the fair value of a defined benefit plan's assets and the firm's estimatedobligation to pay benefits.

This question tested from Session 9, Reading 32, LOS k.


ACME Grommet sells reinforced eyelets and has been in business since 2012. The exhibit below providesrelevant data and financial statement information about ACMEâ€™s inventory purchases and sales of inventoryfor the last year.

Part 1)

The cost of goods sold using the weighted average cost method is closest to:

Your answer: A was incorrect. The correct answer was C) $5,248.44.

Weighted average = cost of goods available / total units available.[(699 Ã— 5) + (710 Ã— 8)] / (699 + 710) = 6.51171COGS = Units sold Ã— Weighted average cost = 806 Ã— 6.51171 = $5,248.44. (LOS 17.a)

A) past service cost.B) service cost.C) net pension liability.

Units Unit Price

Beginning Inventory 699 $5.00Purchases 710 $8.00Sales 806 $15.00SGA Expenses $3,141 per annum

A) $4,986.02.B) $4,351.00.C) $5,248.44.





Part 2)The cost of goods sold using the first in, first out (FIFO) method is closest to:


FIFO COGS = (699 × 5) + (107 × 8) = $4,351.00. (LOS 17.a)



Part 3)Tthe ending inventory value in dollars using the FIFO method is closest to:


There are (699 + 710 â€“ 806) = 603 items left in inventory. Ending inventory value = 603 Ã— $8 = $4,824. (LOS17.a)


ACME Grommet sells reinforced eyelets and has been in business since 2012. The exhibit below provides

Units Unit Price


A) $4,351.00.B) $4,133.45.C) $5,248.44.

Units Unit Price


A) $6,160.B) $4,582.C) $4,824.



relevant data and financial statement information about ACMEâ€™s inventory purchases and sales of inventoryfor the last year.

Part 4)The value of the ending inventory level in dollars using the last-in-first-out (LIFO) method is closest to:


There are (699 + 710 − 806) = 603 items left in inventory. Ending Inventory = 603 × 5 = $3,015. (LOS 17.a)



Part 5)If the company chooses to use the LIFO method of inventory valuation, the value of the LIFO reserve at the endof the year will be closest to:


LIFO reserve = FIFO inventory − LIFO inventory = 4,824 − 3,015 = $1,809. (LOS 17.b)



Units Unit Price


A) $3,015.B) $6,160.C) $4,824.

Units Unit Price


A) $2,016.B) $3,015.C) $1,809.



Part 6)the company chooses to write-down inventory, which ratio is most likely to improve?

Your answer: A was incorrect. The correct answer was B) Turnover ratio.

The turnover ratio (total asset turnover or inventory turnover) should improve, as the numerator either would notbe affected (sales) or increase (in case of cost of goods sold) while denominator (total assets or inventory) wouldbe lower. Profitability ratio and the debt-to-equity ratio would be worse due to lower profits on account of inventorywritedown. (LOS 17.d)



JME purchased 400 units of inventory that cost $4.00 each. Later the firm purchased an additional 500 units thatcost $5.00 each. JME sold 700 units of inventory for $7.00 each. If JME uses a first in, first out (FIFO) cost flowmethod, the amount of gross profit appearing on the income statement is:

Your answer: A was incorrect. The correct answer was B) $1,800.

(units sold Ã— sales price) â€“ [(inventory cost Ã— unit cost) + (inventory cost Ã— unit cost)] = sales â€“ COGS= gross profit

(700 Ã— 7.00) â€“ [(400 Ã— 4.00) + (300 Ã— 5.00)] = 1,800



The lessee has an incentive to classify a lease as an operating lease, rather than as a finance lease, because anoperating lease:

Units Unit PriceBeginning Inventory 699 $5.00Purchases 710 $8.00Sales 806 $15.00SGA Expenses $3,141 per annum

A) Profitability ratio.B) Turnover ratio.C) Debt to equity ratio.

A) $2,400.B) $1,800.C) $3,100.

A) has no risk involved because the lessor assumes all risk.B) has payments that are less than a capital lease's payments.C) does not appear on the balance sheet.



Your answer: A was incorrect. The correct answer was C) does not appear on the balance sheet.

Having less assets and liabilities on the balance sheet than would exist if the asset were purchased increasesprofitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., the debt to equity ratio).



In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:

Your answer: A was incorrect. The correct answer was B) equals the cost of the leased asset.

In a direct-financing lease, the implicit rate is such that the present value of the MLPs equals the cost of theleased asset. Thus, at lease inception the total assets do not change and no gain is recognized.


Question 29 - #127248

If prices are increasing, the weighted average cost method most likely results in inventory values that are higherthan the inventory values using:


In a increasing price environment, inventory values reported under LIFO are lower than the values reported underFIFO, and the values that result from weighted average cost are between the LIFO and FIFO values. Thus, thevalue of inventory using weighted average cost is higher than inventory using LIFO. The value of inventory usingspecific identification depends on which particular items from inventory are sold, and thus can be higher or lowerthan the inventory values that result from the other methods.


Question 30 - #127261

Novak, Inc. owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvagevalue of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is:

A) equals the sale price of the leased asset.B) equals the cost of the leased asset.C) is lower than the cost of the leased asset.

A) last-in first-out (LIFO).B) first-in first-out (FIFO).C) specific identification.

A) $2,200.B) $2,880.C) $3,000.




DDB depreciation in each year is 2/5 of the carrying value at the beginning of the year, until the carrying valuereaches the estimated salvage value.

Year 1 DDB depreciation = $20,000 Ã— 2/5 = $8,000Carrying value = $20,000 â€“ $8,000 = $12,000

Year 2 DDB depreciation = $12,000 Ã— 2/5 = $4,800Carrying value = $12,000 â€“ $4,800 = $7,200

Year 3 DDB depreciation = $7,200 Ã— 2/5 = $2,880Because $7,200 â€“ $2,880 = $4,320 would depreciate the equipment below its salvage value, depreciation inYear 3 is limited to $7,200 â€“ $5,000 = $2,200.



For purposes of financial analysis, an analyst should:

Your answer: A was incorrect. The correct answer was B) determine the treatment of deferred tax liabilities on acase-by-case basis.

For financial analysis, an analyst must decide on the appropriate treatment of deferred taxes on a case-by-casebasis. These can be classified as liabilities or stockholderâ€™s equity, depending on various factors. Sometimes,deferred taxes are just ignored altogether.


Question 32 - #104171

Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. With respect to the taxes payable for eachfirm when these deferred tax items reverse, a decrease in the firmsâ€™ tax rates will lead to:

Your answer: A was incorrect. The correct answer was C)

When the expected tax rate decreases, income will be taxed at a lower rate when a DTL reverses, resulting in

A) always consider deferred tax liabilities as stockholder's equity.B) determine the treatment of deferred tax liabilities on a case-by-case basis.C) always consider deferred tax liabilities as a liability.

Firm 1 Firm 2

A) Lower taxes payable Lower taxes payable

B) Higher taxes payable Lower taxes payable

C) Lower taxes payable Higher taxes payable

Lower taxes payable Higher taxes payable



lower (cash) taxes payable for Firm 1. In contrast, expenses that will be tax deductible when the DTA reverses willprovide less of a benefit when the tax rate is lower, resulting in higher taxes payable for Firm 2.


Question 33 - #104049

Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The original cost of themachinery was $500,000 and to date has generated accumulated depreciation of $140,000. Which of thefollowing must Spenser record on the income statement if it decides to abandon the asset?

Your answer: A was incorrect. The correct answer was B) Loss of $360,000.

With an abandonment of an asset, the carrying value of the machinery is removed from the balance sheet and aloss of that amount is recognized in the income statement. The carrying value is $360,000, which equals theoriginal cost ($500,000) less the accumulated depreciation ($140,000).

This question tested from Session 9, Reading 30, LOS i.


Indata Company sold a specially manufactured item for $5,000,000 on December 31, 20X6. The item was sold onan installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annualinstallments of $1,000,000 plus interest at the market rate of 6%. Indataâ€™s tax rate is 40% and its costs toconstruct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date thesale is made for accounting purposes, but not until cash is received for tax purposes.

On its balance sheet dated December 31, 20X6, Indata will, as a result of the transaction described above,increase its deferred tax:

Your answer: A was incorrect. The correct answer was C) liability by $800,000.

Accounting profit from the installment sale was $5,000,000 - $2,500,000 = $2,500,000. Income tax expense iscalculated based on 40% of accounting profit, so tax expense from the transaction is $2,500,000 Ã— 0.40 =$1,000,000. Revenue reported on the tax form is $1,000,000 and the year's costs for tax purposes are$2,500,000 Ã— ($1,000,000 / $5,000,000) = $500,000. Income taxes payable, as of December 31, 2006, were($1,000,000 â€“ $500,000) Ã— 0.40 = $200,000. The excess of income tax expense over income taxes payableis a deferred tax liability of $1,000,000 - $200,000 = $800,000.



A) Gain of $40,000.B) Loss of $360,000.C) Loss of $100,000.

A) asset by $800,000.B) liability by $200,000.C) liability by $800,000.



Which of the following statements comparing straight-line depreciation methods to alternative depreciationmethods is least accurate? Companies that use:


Accelerated depreciation methods will not change the total amount of depreciation expense over the life of anasset. Accelerated depreciation methods will increase the amount of depreciation expense in the early years ofthe assetâ€™s life, but the depreciation expense will be less in the latter years of the assetâ€™s life.



If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax:

Your answer: A was incorrect. The correct answer was C) should be considered an increase in equity.

If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities.Â If,however, they are not expected to reverse in the future, then they should be classified as equity.


Question 37 - #104067

A firm buys an asset with an estimated useful life of five years for $100,000 at the beginning of the year. The firmwill depreciate the asset on a straight-line basis with no salvage value on its financial statements and will usedouble declining balance depreciation for tax. The tax basis for this asset at the end of the first year is closest to:


For tax, the assetâ€™s basis is reduced by the DDB depreciation (2/5 × 100,000 = 40,000) from $100,000 to$60,000.


Question 38 - #127263

A) accelerated depreciation methods will increase the total amount of depreciation expense over the lifeof an asset.

B) accelerated depreciation methods will decrease the amount of taxes in early years.

C) straight-line depreciation methods will have higher book values for the assets on the balance sheetthan companies that use accelerated depreciation.

A) must be reduced by a valuation allowance.B) should be considered an asset or liability.C) should be considered an increase in equity.

A) $80,000.B) $40,000.C) $60,000.



An employer offers a defined benefit pension plan and a defined contribution pension plan. The employerâ€™sbalance sheet is most likely to present an asset or liability related to:


Only a defined benefit plan has a funded status that would appear on the balance sheet as an asset or liability.Employer payments into a defined contribution plan are recognized as expenses in the period incurred.



Which of the following statements regarding zero-coupon bonds is most accurate?


The liability initially recorded for a zero-coupon bond is equal to the proceeds received, which is the present valueof the principal repayment discounted at the company's normal borrowing rate. Interest expense is found byapplying the discount rate to the book value of debt at the beginning of the period, and there is no cash outflowfrom operations for a zero coupon bond.



Part 1)What is the cost of goods sold using the weighted average method?


A) the defined benefit plan.B) both of these pension plans.C) the defined contribution plan.

A) A company should initially record zero-coupon bonds at their discounted present value.

B) The interest expense in each period is found by applying the discount rate to the book value of debt atthe end of the period.

C) Interest expense is a combination of operating and financing cash flows.


A) $3,604.02.B) $3,423.82.C) $2,918.00.



Weighted average = cost of goods available / total units available. COGS = Units sold Ã— weighted average =959 Ã— 3.7581 = $3,604.02.


Part 2)What is the cost of goods sold using the first in, first out (FIFO) method?

Your answer: A was incorrect. The correct answer was B) $2,918.00.

COGS = (709 Ã— 2) + (250 Ã— 6) = $2,918.00.


Part 3)What is the ending inventory level in dollars using the FIFO method?

Your answer: A was incorrect. The correct answer was C) $1,836.00.

Ending Inventory = 306 × 6 = $1,836.00.


Question 41 - #150012

For a firm to use the revaluation model for balance sheet reporting of long-lived assets:


A) $8,325.00.B) $2,918.00.C) $2,772.10.


A) $4,142.00.B) $1,744.20.C) $1,836.00.

A) an active market must exist for the assets.B) the firm must choose which assets of each type to revalue, and which to report at cost.




Under IFRS, a firm may use the revaluation model for long-lived assets that have an active market which can beused to determine the fair value of the assets. The firm must use the same model for all assets of a similar type.U.S. GAAP reporting firms must use the cost model for long-lived assets.



Which of the following statements is least accurate? When a bond is issued at a discount:


Upon issuance, cash flow from financing will be increased by the amount of the proceeds.



An analyst determined the following information concerning Franklin, Inc.â€™s stamping machine:

Acquired seven years ago for $22 million Straight line method used for depreciation Useful life estimatedÂ to be 12 years Salvage value originally estimated to be $4 million

The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for$1,000,000. Under U.S. GAAP, the stamping machine is:

Your answer: A was incorrect. The correct answer was B) impaired because its carrying value exceeds expectedfuture cash flows.

The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through7 years was ($22,000,000 - $4,000,000) / 12 Ã— 7 = $10,500,000, so carrying value is $22,000,000 -$10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of(5 Ã— $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.


C) the firm must report under U.S. GAAP.

A) cash flows from financing will be increased by the par value of the bond issue.B) the interest expense will be equal to the coupon payment plus the amortization of the discount.C) the interest expense will increase over time.

A) not impaired.B) impaired because its carrying value exceeds expected future cash flows.C) impaired because expected salvage value has declined.




Given the following information and assuming beginning inventory was zero and a periodic inventory system wasused, what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?


Sales = (15 * 60) + (35 * 45) + (85 * 35) = 5,450

COGSFIFO = (20 * 50) + (35 * 40) + (80 * 30) = 4,800GMFIFO: $5,450 − 4,800 = $650

COGSLIFO = (15 * 50) + (35 * 40) + (85 * 30) = 4,700GMLIFO: $5,450 − $4,700 = $750

COGSAverage = (20 * 50) + (35 * 40) + (85 * 30) = 4,9504,950*135 / 140 = 4,773.21GMCost Average: $5,450 − $4,773.21 = $676.79


Question 45 - #138393

A building owned by a firm is most likely to be classified as investment property if:


Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capitalappreciation, or both.


Purchases Sales

20 units at $50 15 units at $60



FIFO LIFO Cost Average

A) $650 $750 $677

B) $650 $750 $990

C) $677 $650 $677

A) space in the building is rented to other firms.B) the firm uses the building for its corporate headquarters.C) the building is a manufacturing plant or distribution center.



Question 46 - #104166

Judah Inc. prepares its financial statements under IFRS. On December 31, 20X8, Judah has inventory ofmanufactured goods with a cost of $720,000. The estimated selling cost of that inventory is $50,000 and itsmarket value is $740,000. By January 31, 20X9, none of the inventory has been sold but its market value hasincreased to $810,000. Selling costs remain the same. Which of the following entries is most likely permissibleunder IFRS?

Your answer: A was incorrect. The correct answer was C) Write down inventory by $30,000 on December 31,20X8 and write up inventory by $30,000 on January 31, 20X9.

IFRS rules require inventory to be valued at the lower of cost or net realizable value (NRV). NRV is calculated asestimated sales price less estimated selling costs. At December 31, 20X8, NRV = $740,000 − $50,000 =$690,000. Since cost is $720,000, then the lower of cost or NRV is $690,000 and a $30,000 writedown isrequired.

At January 31, 20X9, NRV = $810,000 − $50,000 = $760,000. Under IFRS, when inventory recovers in value afterbeing written down, it may be â€œwritten upâ€�and a gain recognized in the income statement. The amount ofsuch gain, however, is limited to the amount previously recognized as a loss. Under IFRS it is not permissible toreport inventory on the balance sheet at an amount that exceeds original cost, except in the case of someagricultural and mineral products. Since cost is $720,000, the lower of cost of NRV is $720,000.


Question 47 - #104169

At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goodsalready sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firmbelieves that the warranty work will be required over the next two years. The tax base of the warranty liability atthe end of 20X8 is:


The carrying value of the warranty liability is $26,000 (the same amount is recorded as a liability on the balancesheet and as an expense on the income statement). The tax base is equal to the carrying value less any amountsdeductible in the future. Therefore, the tax base is $0 ($26,000 − $26,000) since the warranty expense will bedeductible when the work is performed next year.



A) Write down inventory by $30,000 on December 31, 20X8 and write up inventory by $70,000 onJanuary 31, 20X9.

B) Make no adjustments to the valuation of inventory on either date.

C) Write down inventory by $30,000 on December 31, 20X8 and write up inventory by $30,000 onJanuary 31, 20X9.

A) zero.B) $13,000.C) $26,000.



Which accounting methods are preferable for income statements and balance sheets?

Your answer: A was incorrect. The correct answer was C) Last in, first out (LIFO) for income statements and firstin, first out (FIFO) for the balance sheet.

LIFO allocates the most recent prices to the cost of goods sold and provides a better measure of current income.For balance sheet purposes, inventories based on FIFO are preferable since these values most closely resemblecurrent cost and economic value.


Question 49 - #127259

Which of the following statements about inventory presentation and disclosures is most accurate?

Your answer: A was incorrect. The correct answer was B) IFRS permits reversals of inventory writedowns but thefirm must disclose the circumstances of the reversal in its financial statements.

IFRS requires a firm that reverses an inventory writedown to discuss the circumstances that led to the reversal.Both IFRS and U.S. GAAP require firms to disclose the inventory cost flow method they use. While a change toLIFO from another inventory cost method is a change in accounting principle, under U.S. GAAP this change is notapplied retrospectively. The carrying value of inventory is considered to be the first LIFO layer.



Given the following data what is the ending inventory value using the LIFO method, assuming a periodic inventorysystem?


A) Last in, first out (LIFO) for the balance sheet and first in, first out (FIFO) for the income statement.B) First in, first out (FIFO) for both income statements and balance sheets.C) Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance sheet.

A) An analyst must determine which inventory cost method was used by examining the firmâ€™s currentand historical inventory values.

B) IFRS permits reversals of inventory writedowns but the firm must disclose the circumstances of thereversal in its financial statements.

C) Changing from FIFO to LIFO is a change in accounting principle that must be applied retrospectively.

Purchases Sales50 units at $50/unit 25 units at $55/unit60 units at $45/unit 30 units at $50/unit70 units at $40/unit 45 units at $45/unit

A) $3,850.B) $3,250.C) $3,200.



Purchased 50 + 60 + 70 = 180 units. Sold 25 + 30 + 45 = 100.

Ending inventory = 180 â€“ 100 = 80 of the first units purchased.

(50 units)($50/unit) + (30 units)($45/unit) = $2,500 + $1,350 = $3,850.



United Corporation and Intrepid Company are similar firms operating in the same industry. United follows U.S.Generally Accepted Accounting Principles and Intrepid follows International Financial Reporting Standards. At theend of last year, Intrepid had a higher inventory turnover ratio than United. Are the following plausibleexplanations for the difference?

Explanation #1 â€“ United accounts for its inventory using the first-in, first-out method and Intrepid uses the last-in, first-out method.

Explanation #2 â€“ United recognized an upward valuation of inventory that had been previously written down.Intrepid does not revalue its inventory upward.


While the LIFO firm will typically report lower average inventory (higher inventory turnover), Intrepid cannot be aLIFO firm because LIFO is not permitted under IFRS. An upward revaluation of inventory would lower theinventory turnover ratio; however, United cannot revalue its inventory upward because it follows U.S. GAAP. U.S.GAAP prohibits upward inventory revaluations (except in very limited circumstances which are beyond the scopeof the Level I exam).


Question 52 - #104047

Which of the following items is least likely an example of an intangible asset with an indefinite life?

Your answer: A was incorrect. The correct answer was C) Acquired patents.

Acquired patents are most likely purchased with the intent to use over a specific period of time and thereforewould be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with anindefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with

Explanation #1 Explanation #2

A) No No

B) No Yes

C) Yes No

A) Goodwill.B) Trademarks that can be renewed at minimal cost.C) Acquired patents.



infinite lives.



Which of the following statements about tax deferrals is NOT correct?


Taxes payable are the taxes due to the government and are determined by taxable income and the tax rate. Notethat pretax income is income before tax expense and is used for financial reporting. Taxable income is the incomebased upon IRS rules that determines taxes due and is used for tax reporting.


©2013 Kaplan Schweser. All Rights Reserved.

A) Taxes payable are determined by pretax income and the tax rate.B) A deferred tax liability is expected to result in future cash outflow.C) Income tax paid can include payments or refunds for other years.

Back to Test Review Hide Questions Print this Page



Economy & Finance

Fra inventory, longlive assets 1