Question 1

Items bought under repurchase agreements are recorded as liabilities by the purchasing company.

Accepted Answer

A) True 
 B)False

Question 2

A company buys large recreational vehicles ("RVS") and sells them on credit. The company uses a perpetual inventory system and always pays for purchases within the discount period by borrowing. Information about the latest purchase of an RV is: $\begin{array} { | l | l | } 
\hline \text { Purchase price } & \$ 60,000 \
\hline \text { Delivery charges } & 2,500 \
\hline \text { Terms, on credit, } 5 / 30 , \mathrm { n } / 90 \text { Insurance premium paid } & 3,000 \
\hline \text { Cleaning and making ready for sale } & 250 \
\hline \text { Interest on purchase loan } & 7,200 \
\hline \text { Cost of permanent shed built to display the RV pending sale } & 3,750 \
\hline
\end{array}$The cost that should be assigned to the RV for inventory purposes is:

Accepted Answer

A)  $65,750 
B)  $62,750 
C)  $59,750 
D)  $60,000

Question 3

The gross profit method may be used to estimate inventory during interim periods when a full physical count cannot be performed, or to test the reasonableness of a physical count.

Accepted Answer

A) True 
 B)False

Question 4

An independent accounting firm has been engaged to audit the 2014 financial statements of a corporation which has never undergone an audit. During the audit, it is concluded that the 2014 ending inventory presented by management is in error. The inventory cannot be counted because much of it has been sold as of the time of the audit. Therefore, a "test of reasonableness" of the inventory is performed by using the following data from the 2014 income statement prepared by the client.
(a) Sales revenue, $182,000; return sales, $2,000
(b) Purchases, $100,000, purchase returns, $1,000
(c) Freight-in, $2,000
(d) Beginning inventory, $26,000; ending inventory, $60,000
Estimated gross margin rate, 45 percent on sales.
Required:
The approximate 2014 ending inventory is, $_______________ Computations:

Accepted Answer

The answer of An independent accounting firm has been engaged...

Question 5

Borrowing costs incurred on items routinely purchased for resale may be capitalized or expensed.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following note disclosure are NOT required under ASPE with respect to inventories?

Accepted Answer

A)  Accounting policies and cost flows. 
B)  Inventory write-downs. 
C)  Amount of inventory expensed through cost of sales. 
D)  Carrying values of inventory by category.

Question 7

When a periodic inventory system is used:

Accepted Answer

A)  Cost of goods sold is a residual amount. 
B)  Ending inventory is transferred to expense and the beginning inventory is transferred to assets. 
C)  Two entries must be made when goods are purchased. 
D)  A purchases account is not used; all inventory purchase entries are debits to the inventory account.

Question 8

During 2014, XYZ Furniture Villa sold an inventory item for $200 that cost $130. At date of sale, $60 was collected and the balance was to be paid in seven equal instalments. After making two payments, the customer defaulted (in the year following the sale). The item was repossessed in damaged condition; estimates at that date were: Cost to repair, $22; resale costs, $12, and resale value after repair, $80. Give the entry to record the repossession, assuming a perpetual inventory system is used.

Accepted Answer

The answer of During 2014, XYZ Furniture Villa sold an...

Question 9

The records of Weight Unlimited showed the following for June:$\begin{array}{|l|l|}
\hline \text { Sales } & 2,100 \text { units at } \$ 100 \text { each } \
\hline \text { Purchases } & 2,000 \text { units at } \$ 75 \text { each } \
\hline \text { Beginning inventory } & 3,000 \text { units at } \$ 56 \text { each } \
\hline
\end{array}$
 Assuming the periodic inventory system is used complete the following tabulation. $\begin{array} { | l | l | l | } 
\hline & \text { FIFO } & \text { Weighted Average } \
\hline \text { (1) Sales } & \$ & \$ \
\hline \text { (2) Cost of goods sold } & \$ & \$ \
\hline \text { (3) Gross margin } & \$ & \$ \
\hline \text { (4) Ending inventory } & \$ & \$ \
\hline
\end{array}$

Accepted Answer

The answer of The records of Weight Unlimited showed the...

Question 10

The difference between the gross margin percentage and cost ratio is usually called the mark-up rate.

Accepted Answer

A) True 
 B)False

Question 11

Food Depot Ltd. assembled the following information at the end of the current reporting period: $\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 56,400 \
\hline \text { Beginning inventory } & 21,250 \
\hline \text { Purchases } & 9,000 \
\hline \text { Purchase returns } & 600 \
\hline \text { Freight-in } & 950 \
\hline \text { Selling expense } & 15,750 \
\hline \text { Mark-up on cost (estimated) } & 25 \text { percent } \
\hline
\end{array}$
 If the gross margin method is used to estimate ending inventory, what amount should be reported as pre-tax income or loss?

Accepted Answer

A)  $4,470 loss 
B)  $15,975 income 
C)  $26,870 income 
D)  $29,370 income 
E)  $5,345 loss

Question 12

When a perpetual inventory system is used, the inventory account is usually a control account maintained in the general ledger.

Accepted Answer

A) True 
 B)False

Question 13

At the end of the first year of a firm's operations, the total inventory at cost was $200 and the market value (for purposes of Lower of Cost or NRV valuation) was $220. The corresponding values at the end of years 2 and 3 are as follows: $\begin{array} { | l | l | l | } 
\hline & \text { Year 2 } & \text { Year 3 } \
\hline \text { Cost } & \$ 400 & \$ 600 \
\hline \text { Market } & 340 & 640 \
\hline
\end{array}$
 Required:
provide the adjusting entries at the end of years 2 and 3 to record inventory at Lower of Cost or NRV using:
(a) the direct reduction method, and
(b) the inventory allowance method.
For both methods, use the cost of goods sold account when recording ending inventory (periodic system).

Accepted Answer

The answer of At the end of the first year...

Question 14

Between January 1 and April 30, a company's sales amounted to $140,000 and its purchases amounted to $120,000. The January 1 inventory was $34,000. Using the gross margin method, what is a reliable estimate of the April 30 inventory if the prior period's gross margin has been:
(a) 40 percent based on cost? April ending inventory is $_____________.
(b) 40 percent based on selling prices? April ending inventory is $_____________.

Accepted Answer

The answer of Between January 1 and April 30, a...

Question 15

When the moving-average inventory costing method is used, how long does the unit cost of any individual item of inventory remain in the average? Explain in terms of how the method calculates each moving average M1, M2 and so forth.

Accepted Answer

The answer of When the moving-average inventory costing method is...

Question 16

The records of Dollars 2 Donuts Ltd. showed the following for June: $\begin{array} { | l | l | } 
\hline \text { Sales } & 4,200 \text { units at } \$ 200 \text { each } \
\hline \text { Purchase } & 4,000 \text { units at } \$ 150 \text { each } \
\hline \text { Beginning Inventory } & 6,000 \text { units at } \$ 100 \text { each } \
\hline
\end{array}$
Assuming the periodic inventory system is used complete the following tabulation. $\begin{array} { | l | l | l | } 
\hline & \text { FIFO } & \text { Weighted Average } \
\hline \text { (1) Sales } & \$ & \$ \
\hline \text { (2) Cost of goods sold } & \text { \$ } & \text { \$ } \
\hline \text { (3) Gross margin } & \$ & \$ \
\hline \text { (4) Ending inventory } & \$ & \$ \
\hline
\end{array}$

Accepted Answer

The answer of The records of Dollars 2 Donuts Ltd....

Question 17

ABC Inc. had net sales of $120,000 during 2013. Its finished goods inventories were valued at $20,000 on January 1st, 2013. During the year, $60,000 of goods was purchased for resale. The company has a gross profit percentage of 40%. What was the company's estimated inventory at December 31st, 2013 under the Gross Profit method?

Accepted Answer

A)  $8,000. 
B)  $72,000. 
C)  $48,000. 
D)  $60,000.

Question 18

Data summarizing the inventory activity during 2013 for a merchandising company are (000's): $\begin{array} { | l | l | l | } 
\hline & \text { Cost } & \text { Retail } \
\hline \text { Beginning inventory } & \$ 110 & \$ 216 \
\hline \text { Net purchases } & 618 & 880 \
\hline \text { Net mark-ups } & 24 & \
\hline \text { Net markdowns } & ( 80 ) & \
\hline \text { Goods available for sale } & \$ 728 & \$ 1,040 \
\hline \text { Net sales } & ( 880 ) & \
\hline \text { Ending inventory at retail } \$ 160 & \
\hline
\end{array}$
 The company uses the retail method of valuing inventory, at average, lower-of-cost-or-market. The 2013 inventory valuation is:

Accepted Answer

A)  $99 
B)  $104 
C)  $112 
D)  $160

Question 19

On December 31 (end of the accounting period) a company completed an inventory count and included some merchandise that had been received but was not unpacked. No purchase had been recorded. The error causes an:

Accepted Answer

A)  understatement of inventory, purchases, and accounts payable. 
B)  understatement of both income and assets by the same amount. 
C)  overstatement of income and understatement of accounts payable. 
D)  overstatement of inventory, purchases, and accounts payable.

Question 20

Items purchased for resale with a right of return must be presented separately from other inventories.

Accepted Answer

A) True 
 B)False

Exam 8: Cost-Based Inventories and Cost of Sales

Items bought under repurchase agreements are recorded as liabilities by the purchasing company.

The gross profit method may be used to estimate inventory during interim periods when a full physical count cannot be performed, or to test the reasonableness of a physical count.

Borrowing costs incurred on items routinely purchased for resale may be capitalized or expensed.

Which of the following note disclosure are NOT required under ASPE with respect to inventories?

When a periodic inventory system is used:

The difference between the gross margin percentage and cost ratio is usually called the mark-up rate.

When a perpetual inventory system is used, the inventory account is usually a control account maintained in the general ledger.

When the moving-average inventory costing method is used, how long does the unit cost of any individual item of inventory remain in the average? Explain in terms of how the method calculates each moving average M1, M2 and so forth.

On December 31 (end of the accounting period) a company completed an inventory count and included some merchandise that had been received but was not unpacked. No purchase had been recorded. The error causes an:

Items purchased for resale with a right of return must be presented separately from other inventories.