ACCT IS 301 701 Financial Reporting I Practice Exam 2 This practice exam provides an example of the nature and types of questions on the actual exam It is not intended to be representative of the length or difficulty of the actual exam Note Solutions are at the end of the exam Multiple Choice Circle the best answer for each question 1 On April 15 of the current year a fire destroyed the entire uninsured inventory of a retail store The following data are available Sales January 1 through April 15 Inventory January 1 at cost Purchases January 1 through April 15 at cost Gross profit percentage on sales 300 000 50 000 250 000 25 The amount of the inventory loss is estimated to be a 60 000 b 30 000 c 75 000 d 50 000 e none of the above 2 Caputo Distribution Co has determined its December 31 2012 inventory on a FIFO basis at 250 000 Information pertaining to that inventory follows Estimated selling price Estimated cost of disposal Normal profit margin Current replacement cost 255 000 10 000 30 000 225 000 Caputo Co records losses that result from applying the lower of cost or market rule At December 31 2012 the loss that Caputo should recognize is a b c d e 0 5 000 20 000 25 000 none of the above 3 Which of the following are valid reasons that a company might NOT choose LIFO as their inventory valuation method a There will be no expected tax benefits e g the company has no tax liability because of a net loss b Regulatory restrictions restrict the use of LIFO c Using LIFO may result in poor inventory ordering practices and high inventory storage costs d The threat of an involuntary LIFO liquidation is high e All of the above 4 Frederick Boot Company uses the FIFO method of inventory valuation for internal reporting purposes and uses LIFO for external reporting purposes At January 1 2012 the LIFO Reserve balance was 20 000 At December 31 2012 the ending inventory was 590 000 as accounted for on a FIFO basis and 560 000 if computed on a LIFO basis What adjusting entry if any should be made at December 31 2012 to the LIFO reserve account a No entry is necessary to adjust the account b Cost of Goods Sold LIFO Reserve c LIFO Reserve Cost of Goods Sold d Cost of Goods Sold LIFO Reserve e LIFO Reserve Cost of Goods Sold 30 000 30 000 30 000 30 000 10 000 10 000 10 000 10 000 5 IFRS allows reversal of impairment losses when a the reversal is greater than the amount of the original impairment b the reversal falls in a subsequent fiscal year of the company s operations c there has been a change in economic conditions or in the expected use of the asset d reversal of impairment losses is never allowed 6 Under Generally Accepted Accounting Principles the purpose of recording depreciation expense on plant assets is a to reflect declines in the service value not restored by maintenance b to allocate the cost of fixed assets to periods in a rational and systematic manner c to provide funds for the replacement of the plant assets d to adjust for changes in the market value of the plant assets during the period 7 Borland Inc purchased equipment in 2010 at a cost of 600 000 Two years later Borland Inc verified this equipment had suffered an impairment of value by conducting the recoverability test as required in ASC 360 10 35 In early 2012 the book value of the asset is 360 000 and it is estimated that the fair value is now only 240 000 The entry to record the impairment is a No entry is necessary as a write off violates the historical cost principle b Retained Earnings 120 000 Accumulated Depreciation Equipment 120 000 c Loss on Impairment of Equipment Accumulated Depreciation Equipment 120 000 120 000 d Retained Earnings 120 000 Reserve for Loss on Impairment of Equipment 120 000 8 The amount of interest cost capitalized during the construction period a May be greater than the total interest cost for the period b May be equal to or less than the total interest cost for the period c Must be equal to the total interest cost for the period d Either a or b 9 The general ledger of the French Corporation as of December 31 2012 includes the following accounts Organization costs legal costs of incorporation 18 000 Deposits with advertising agency to be used to promote goodwill 13 500 Discount on notes payable 33 750 Excess of cost over fair value of identifiable net assets of acquired subsidiary 305 000 Trademarks purchased 45 000 In the preparation of French s balance sheet as of December 31 2012 what should be reported as total intangible assets a 415 250 b 381 500 c 368 000 d 350 000 e none of the above 10 Duckworth Co incurred research and development costs in 2012 as follows Materials used in research and development projects 450 000 Equipment acquired that will have alternate future uses in future research and development projects 3 000 000 Depreciation for 2012 on above equipment 300 000 Personnel costs of persons involved in research and development projects 750 000 Consulting fees paid to outsiders for research and development 150 000 Indirect costs reasonably allocable to research and development projects 225 000 The amount of current research and development expense on Duckworth s 2012 income statement should be a 1 500 000 b 1 650 000 c 1 875 000 d 4 050 000 e none of the above 11 As in U S GAAP under IFRS the costs associated with research and development are segregated into a two components the research phase and the production phase b two components the research phase and the development phase c three components the planning phase the research phase and the production phase d three components the analysis phase the development phase and the production phase Use the following information for questions 12 13 and 14 Pederson Company was formed on December 1 2012 The following information is available from Pederson s inventory records for the product X Date Purchases December 2 2000 units at 4 00 unit 6 000 units at 4 40 unit December 15 December 19 December 30 Sold or Issued 2 000 units 8 000 units 4 000 units 2 000 units at 4 75 unit Balance 4 000 units 6 000 units 12 Assuming that Pederson uses a perpetual inventory system what is ENDING INVENTORY at December 31 2012 under the FIFO method a a b c d 18 100 27 100 16 800 13 800 None of the above 13 Assuming that Pederson uses a perpetual inventory system what is ENDING INVENTORY at December 31 2012 under the LIFO method a a b c d 18 300 17 600 26 300 25 600 None of the above 14 Assuming that Pederson uses a periodic inventory system what is