Exam 8: Accounting for Selected Assets

Which of the following assets is not depreciated?

The net realisable value of inventory is:

The nature of the business will determine if the purchase of 500 litres of paint constitutes inventory or not.

Flamingo Corporation purchased a machine for $300 000 on 1 January. The estimated life is 10 years. Three years later, what is the book value of the machine reported in the balance sheet as at 31 December, assuming that straight-line depreciation is used and the estimated residual value is zero?

Which of the following would not be included in property, plant and equipment?

XYZ Company had an accounts receivable account balance of $300 000 and allowance for doubtful debts account balance of $12 500 prior to writing off a bad debt of $3000. The estimated net realisable value of accounts receivable before and after the write-off were, respectively:

A contra account for accounts receivable is the allowance for doubtful debts, which shows the estimated total of future bad debts.

Hilde Company reported accounts receivable of $40 000 at the beginning of the year. It now reports a balance of $28 000 at the end of the year. From this information, assuming there were no accounts written off as bad debts during the year, it is possible to determine that during the year:

Which of the following is the main reason for depreciating non-current assets?

The absence of bad debts is an indicator that the credit policy may be too strict, and can result in the loss of profits.

Bad debts have the effect of reducing assets and reducing profits, which results in a reduction of equity.

Accounts receivable arise when a business sells goods or services to a third party on credit terms.

If two entities use different methods of depreciation, then users need to make adjustments for this when comparing the financial statements of the entities.

The expired cost of a depreciable asset is referred to as:

FIFO is a method of inventory valuation based on the artificial assumption that the first goods bought are the first sold. Closing inventory is therefore assumed to be that purchased most recently.

Compared to straight-line depreciation, reducing-balance depreciation:

Mendips Ltd net profit would be understated if in the first year, the residual value were excluded when determining the depreciation expense using: Straight-line Reducing balance

The excess of the cost of acquisition of a company over the fair value of its net identifiable assets is known as:

Under the allowance for doubtful debts method, the net amount of assets will not change when recording a transaction that determines that a specific customer will not pay.

Describe the lower of cost or market (LCM) rule as it applies to the valuation of closing inventory, and name three different methods of calculating the cost of inventory.