Practice Exam Chapters 1

Intermediate Accounting I, ACCT-2321
Exam 3 Study Guide: Chapters 8 – 10
Exam 3 is comprised of, multiple choice and problem questions. The study questions and
sample problems below should help you prepare for the exam. Please note that the study
format does not directly match the exam format.
Solutions problems can be found at the end of this study guide.
1. Describe each of the following inventory valuation systems including the impact that the
cost flow assumption has on net income (assuming a period of rising prices).
a. LIFO
b. FIFO
2. Differentiate between a periodic and perpetual inventory system.
3. Identify who would pay the shipping charges and have title to merchandise (buyer or seller)
under each of the following shipping terms:
a. FOB Shipping Point
b. FOB Destination
Study Guide Chap 8-10
Page 1 of 13
4. Explain the purpose of a physical inventory count. Include in your discussion a) when the
count should generally occur; b) which items should be included in a company’s physical
inventory count.
5.
6.
Define the following:
a.
inventory cost
b.
net realizable value
c.
plant assets
d.
intangible assets
e.
natural resources
Describe some situations that might require an estimate for ending inventory.
Study Guide Chap 8-10
Page 2 of 13
7.
Identify when asset costs should be capitalized.
8.
Discuss how research and development costs are accounted for and what is included in
these costs.
Problem 1
McLean Mfg. Company sold a three-speed lathe for $24,000 cash. The lathe originally cost
$66,200 and had a book value of $23,200. Prepare the journal entry to record the sale.
Account
Study Guide Chap 8-10
Debit
Credit
Page 3 of 13
Problem 2
Shown below is activity for one of the products of Denver Office Equipment. Determine the
cost of goods sold for each independent requirement below.
Purchases
Date
January 1 (beg balance)
January 10
January 20
Units Unit Cost
500
@ $55
500
@ $60
700
@ $63
Sales
Date
January 12
January 28
Units
800
750
Total Cost
$27,500
$30,000
$44,100
a. Compute the January 31 ending inventory and cost of goods sold for January, assuming
Denver uses LIFO and a perpetual inventory system.
b. Compute the January 31 ending inventory and cost of goods sold for January, assuming
Denver uses FIFO and a periodic inventory system.
Study Guide Chap 8-10
Page 4 of 13
Problem 2 (continued)
c. Compute the January 31 ending inventory and cost of goods sold for January, assuming
Denver uses Average cost and a perpetual inventory system.
Inventory On Hand
Perpetual Weighted
Average
# of
units
Beg Inventory
500
Purchase – Jan 10
500
Cost per
Unit
Inv. Value
Cost of Goods Sold
# of
Units
Sold
Avg Cost
per Unit
Cost of
Goods
Sold
$55
Subtotal Avg Cost
Sale - Jan 12
Subtotal Avg Cost
Purchase – Jan 20
Subtotal Avg Cost
Sale - Jan 28
Total Cost of
Goods Sold
Problem 3
Beaver Products uses the conventional retail method to estimate its ending inventories. The
following data has been summarized for the year 2016. Estimate ending inventory as of
December 31, 2016
Study Guide Chap 8-10
Page 5 of 13
Problem 4
On January 1, 2016, the National Furniture Company adopted the dollar-value LIFO method of
computing inventory. An internal cost index is used to convert ending inventory to base year.
Inventory on January 1 was $200,000. Year-end inventories at year-end costs and cost indexes
for its one inventory pool are shown below. Compute the ending inventory value at the end of
each year.
Year Ended
December 31
2016
2017
2018
Inventory at
Year-end Costs
$259,200
244,400
299,000
Inventory
at year-end
cost
Date
Yearend
cost
index
Cost Index
1.08
1.04
1.15
Inventory
at Base
Year Cost
Real
Inventory
Increase
1/1/2016
12/31/2016
12/31/2017
12/31/2018
Inventory
Layers at
year-end
cost
Yearend
cost
index
Inventory
Layers at
Base Year
Cost
Ending
Inventory
DVL Cost
Base
Base
2016
Base
2016
2017
Base
2016
2017
2018
Study Guide Chap 8-10
Page 6 of 13
Problem 5
On March 17, 2013, a flood destroyed the entire inventory of Beaumont Company. The
following information is available from its accounting records. Compute the estimated cost of
inventory lost in the flood using the Gross Profit Method.
Problem 6
Memphis Wholesale Market applies the lower-of-cost-or-NRV valuation to individual products
and has collected the data presented below.
a) Determine the amount of inventory to be reported on the December 31 balance sheet.
b) Draft the journal entry to adjust inventory assuming this is a commonplace event.
Product A
Cost
Selling Price
Disposal Cost
Product
A
Product B
$70
$100
$15
Cost
NRV
Product C
$75
$125
$20
$80
$80
$18
Inventory
Value
B
C
Totals
Account
Study Guide Chap 8-10
Debit
Credit
Page 7 of 13
Problem 7
Annali Company constructs a warehouse for its own use. Construction began January 1 and
ended December 31 of the current year. The expenditures for construction were as follows:
January 1 $250,000; March 31 $300,000; June 30, $200,000; October 31, $300,000. To help
finance construction, the company arranged a 6% construction loan on January 1 for $350,000.
Other borrowings of the company were outstanding for the entire year and included a $1.5
million loan at 8% and a $2.5 million loan at 6%. Annali uses the specific identification method
of capitalizing interest. Determine the amount of interest to be capitalized for the year.
Study Guide Chap 8-10
Page 8 of 13
Problem 8
On August 15, 2016, Willis Inc. acquired all of the outstanding common stock of Bork Inc.
paying $7,400,000 cash. The book values and fair values of Willis’ assets and liabilities are
listed below. Prepare the journal entry to record the acquisition by Willis Inc.
Account
Debit
Credit
Problem 9
Champion Industries exchanged a dust-scrubbing piece of equipment for another version of the
same type of equipment and received $12,000 cash. The old dust scrubber cost $76,200 and had
a book value of $54,500. Prepare the journal entry to record the exchange. The new dust
scrubber had a fair value of $58,500.
Account
Study Guide Chap 8-10
Debit
Credit
Page 9 of 13
Intermediate Accounting I, ACCT-2154
Exam 3 Study Guide: Chapters 8 – 10
Answer Key
Problem 1
Problem 2
a. LIFO Perpetual
Cost of Goods Sold
$30,000
$16,500
$46,500
$44,100
$ 2,750
$46,850
$93,350
Jan 12
500 X $60
300 X $55
Jan 28
700 X $63
50 X $55
Total Cost of Goods Sold
b. FIFO Periodic
Total units sold: 1,550
Cost of Goods Sold
$27,500
$30,000
$34,650
$92,150
500 X $55
500 X $60
550 X $63
Total Cost of Goods Sold
c. Weighted Average Perpetual
Inventory On Hand
Perpetual Weighted
Average
Beg Inventory
Purchase – Jan 10
Subtotal Avg Cost
Sale - Jan 12
Subtotal Avg Cost
Purchase – Jan 20
Subtotal Avg Cost
Sale - Jan 28
Total Cost of
Goods Sold
# of
units
500
500
Inv.
Cost per Unit
Value
$55
$27,500
$60
30,000
$57.50
1,000 ($57,500/1,000) $57,500
200
700
900
$57.50
$63
$61.78
($55,600/900)
Study Guide Chap 8-10 Answer Key
Cost of Goods Sold
Avg
# of
Cost
Cost of
Units
per
Goods
Sold
Unit
Sold
800
$57.50 $46,000
750
$61.78 $46,335
$11,500
$44,100
$55,600
$92,335
Page 10 of 13
Problem 3
Conventional Retail Method of Estimating Inventory
Problem 4
Inventory
at year-end
cost
Date
Yearend
cost
index
Inventory
at Base
Year Cost
Real
Inventory
Increase
$200,000
1.00
$200,000
12/31/2013
259,200
1.08
240,000
$40,000
12/31/2014
244,400
1.04
235,000
<5,000>
12/31/2015
299,000
1.15
260,000
25,000
1/1/2013
Inventory
Layers at
year-end
cost
Yearend cost
index
Inventory
Layers at
Base Year
Cost
Base
$200,000
1.00
$200,000
Base
$200,000
1.00
$200,000
2013
40,000
1.08
43,200
Base
$200,000
2013
35,000*
1.000
1.08
---
------
Base
$200,000
1.00
$200,000
2013
35,000
1.08
37,800
2015
25,000
--1.15
$243,200
37,800
------
-----
$200,000
$200,000
2014
2014
Ending
Inventory
DVL Cost
$237,800
----28,750
$266,550
* 2013 layer is $40,000 less real decrease of $5,000.
Study Guide Chap 8-10 Answer Key
Page 11 of 13
Problem 5
Gross Profit Method of Estimating Inventory
*$600,000 x (1 - .40)
Problem 6
Net
Realizable
Value
Cost
Product
A
$70
B
75
C
80
Total
$225
Account
Cost of Goods Sold ($225-$207)
Inventory
Study Guide Chap 8-10 Answer Key
$85
105
Inventory
Value
$70
75
62
62
$207
Debit
Credit
18
18
Page 12 of 13
Problem 7
Average accumulated expenditures:
January 1
$250,000 x
March 31
300,000 x
June 30
200,000 x
October 30
300,000 x
Interest capitalized:
$625,000
–350,000
x 6% =
$275,000
x 6.75%* =
12/12
9/12
6/12
2/12
=
=
=
=
$ 250,000
225,000
100,000
50,000
$625,000
$21,000
18,563 (rounded to nearest whole dollar)
$ 39,563 = Interest capitalized
* Weighted-average rate of all other debt:
$1,500,000
x 8% =
$120,000
2,500,000
x 6% =
150,000
$4,000,000
$270,000
$270,000
= 6.75% weighted average
$4,000,000
Problem 8
Problem 9
Study Guide Chap 8-10 Answer Key
Page 13 of 13

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