HYPERINFLATION (THEORIES)
1.
2.
3.
4.
5.
6.
7.
8.
Hyperinflation is indicated by characteristics of the economic environment of a country which include all
of the following, except
a. The general population prefers to keep wealth in nonmonetary assets or in relatively stable foreign
currency.
b. Interest rates, wages and prices are linked to a price index.
c. The cumulative inflation rate over three years is approaching or exceeds 100%.
d. All of these indicate hyperinflation.
All of the following would indicate that hyperinflation exists, except
a. The general population regards monetary amounts in terms of relatively stable foreign currency.
b. The cumulative inflation rate over three years is approaching, or exceeds 100%.
c. Inflation rates have exceeded interest rates in three successive years.
d. The general population prefers to keep wealth in nonmonetary assets.
In a hyperinflationary economy, monetary items
a. Are not restated because they are already expressed in terms of the measuring unit current at the end of
reporting period.
b. Are not restated because they do not represent money held and items to be received or paid in money.
c. Are restated applying the general price index.
d. Are restated applying the specific price index.
Which of the following would indicate that hyperinflation exists?
a. Sales on credit are at lower prices than cash sales.
b. Inflation is approaching or exceeds 20% per year.
c. Monetary items do not increase in value,
d. People prefer to keep their wealth in nonmonetary assets or a stable foreign currency.
All of the following are monetary items, except
a. Trade payables
b. Trade receivables
c. Administration costs paid in cash
d. Loan repayable at par value
The financial statements of an entity that reports in the currency of a hyperinflationary economy shall be
stated in terms of
a. Historical cost
b. Current cost
c. Fair value
d. Measuring unit current at the end of reporting period
The gain of loss on the net monetary position in a hyperinflationary economy shall be included in
a. Profit of loss and separately disclosed
b. Retained earnings
c. Equity
d. Comprehensive income
In a hyperinflationary economy, amounts in the statement of financial position not expressed in the
measuring unit current at the end of reporting period are restated by applying the
a. General price index
b. Specific price index
c. Both the general price index and the specific price index
d. Either the general price index or the specific price index
ANSWER 64-10
1.d
5.c
2.c
6.d
1.
2.
3.
4.
5.
6.
7.
8.
9.
3.a
7.a
4.d
8.a
When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Allowance for doubtful accounts
b. Accumulated depreciation – equipment
c. Unamortized premium on bonds payable
d. Advances to unconsolidated subsidiaries
When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Obligation under warranty
b. Accrued expense
c. Unamortized discount on bonds payable
d. Refundable deposit
When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Cash surrender value
b. Long-term receivable
c. Accrued loss on firm purchase commitment
d. Inventory
When computing information on a constant peso basis, which of the following is classified as monetary?
a. Goodwill
b. Equipment
c. Patent
d. Allowance for doubtful accounts
During a period of inflation, an account balance remains constant. With respect to this account, a
purchasing power loss will be recognized if the account is a
a. Monetary asset
b. Monetary liability
c. Nonmonetary asset
d. Nonmonetary liability
During a period of deflation, an entity would have the greatest gain in general purchasing power by
holding
a. Cash
b. Property, plant and equipment
c. Accounts payable
d. Mortgage payable
During a period of deflation in which a liability account balance remains constant, which of the following
occurs?
a. A purchasing power loss if the item is a nonmonetary liability
b. A purchasing power gain if the item is nonmonetary liability
c. A purchasing power loss if the item is a monetary liability
d. A purchasing power gain if the item is a monetary liability
During a period of inflation in which a liability account balance remains constant, which of the following
occurs?
a. A purchasing power loss if the item is a nonmonetary liability
b. A purchasing power gain if the item is a nonmonetary liability
c. A purchasing power loss if the item is a monetary liability
d. A purchasing power gain if the item is a monetary liability
During a period of inflation, an account balance remains constant. With respect to this account, a
purchasing power gain will be recognized if the account is a
a. Monetary liability
b. Monetary asset
c. Nonmonetary liability
d. Nonmonetary asset
ANSWER 64-11
1.b
6.a
2.a
7.c
3.d
8.d
4.d
9.a
5.a
1.
2.
3.
4.
5.
6.
7.
An entity that wishes to present information about the effect of changing prices in a hyperinflationary
economy should report this information in
a. The body of the financial statements
b. The notes to financial statements
c. Supplementary information to the financial statements
d. Management report
Which of the following arguments in favor of price level adjusted financial statements is not valid?
a. Price level adjusted financial statements use historical cost
b. Price level adjusted financial statements compare uniform purchasing power among various periods
c. Price level adjusted financial statements measure current value
d. Price level adjusted financial statements measure earnings in terms of a common peso
An accountant who recommends the adjustment of financial statements for price level changes should not
support the recommendation by stating that
a. Purchasing power gains or losses are recognized
b. Historical pesos are not comparable to present-day pesos
c. The restatement of asset cost to a common peso basis is a useful extension of the original cost basis of
asset valuation
d. Assets are measured at current cost
A general price level statement of financial position is prepared and presented in terms of
a. The general purchasing power of the peso at the latest end of reporting period
b. The general purchasing power of the peso in the base period
c. The average general purchasing power of the peso for the latest reporting period
d. The general purchasing power of the peso at the time the financial statements are issued
Which of the following methods of reporting attempts to eliminate the effect of the changing value of the
peso?
a. Discounted net present value of future cash flows
b. Historical cost restated for change in the general price level
c. Replacement cost
d. Exit value
The restatement of historical peso financial statements to reflect the general price level change results in
presenting assets at
a. Lower of cost and net realizable value
b. Fair value
c. Cost adjusted for purchasing power change
d. Current replacement cost
For purposes of adjusting financial statements for the changes in the general price level, monetary items
consist of
a. Assets and liabilities whose amounts are fixed by contract or otherwise in terms of pesos regardless of
price level change
b. Assets and liabilities which are classified as current in the statement of financial position
8.
c. Cash and cash equivalents plus all receivables with a fixed maturity date
d. Cash, other assets expected to be converted into cash, and current liabilities
Purchasing power gain or loss results from
a. Monetary asset
b. Monetary liability
c. Monetary asset and monetary liability
d. Nonmonetary asset and nonmonetary liability
ANSWER
1.a
2.c
5.b
6.c
1.
2.
3.
4.
5.
6.
7.
8.
3.d
7.a
4.a
8.c
The realized holding gain for inventory sold is equal to
a. Excess of cost of goods sold at average current cost over cost of goods sold at historical cost
b. Excess cost of goods sold at historical cost over cost of goods sold at average current cost
c. Excess of cost of goods sold at current cost over cost of goods sold at historical cost
d. Excess cost of goods sold at historical cost over cost of goods sold at current cost
The unrealized holding gain for ending inventory is equal to
a. Excess of ending inventory at average current cost over ending inventory at historical cost
b. Excess of ending inventory at historical cost over ending inventory at average current cost
c. Excess of ending inventory at current cost over ending inventory at historical cost
d. Excess of ending inventory at historical cost over ending inventory at average current cost
What is the basis of depreciation under current cost accounting?
a. Current cost
b. Average current cost
c. Historical cost
d. Carrying amount
The realized holding gain for depreciable asset is equal to
a. Excess of depreciation on average current cost over depreciation on historical cost
b. Excess of depreciation on historical cost over depreciation on average current cost
c. Excess of depreciation on current cost over depreciation on historical cost
d. Excess of depreciation on historical cost over depreciation on current cost
What is the net current cost of depreciable asset?
a. Current cost less accumulated depreciation based on current cost
b. Average current cost less accumulated depreciation based on average current cost
c. Historical cost less accumulated depreciation based on historical cost
d. Current cost less accumulated depreciation based on average current cost
The unrealized holding gain for depreciable asset is equal to
a. Excess of net current cost of asset over the carrying amount
b. Excess of carrying amount of asset over the net current cost
c. Excess of current cost over historical cost
d. Excess of historical cost over current cost
The realized holding gain for nondepreciable asset is equal to
a. Excess of current cost at year-end over historical cost
b. Excess of current cost at the date of sale over historical cost
c. Excess of historical cost over current cost at year-end
d. Excess of historical cost over current cost at the date of sale
The unrealized holding gain for nondepreciable asset is equal to
a. Excess of current cost at year-end over historical cost
b. Excess of historical cost over current cost at year-end
c. Excess of average current cost at year-end over historical cost
d. Excess of historical cost over average current cost at year-end
ANSWER
1.a 2.c
6.a .7.b
1.
2.
3.
3.b
8.a
4.a
5.a
In current cost financial statements
a. General price level gains or losses are recognized on net monetary items
b. Amounts are always stated in common purchasing power unit of measurement
c. All items in the statement of financial position are different from historical cost
d. Holding gains are recognized
An entity prepared financial statements on a current cost basis. How should the entity compute cost of
goods sold on a current basis?
a. Number of units sold times average current cost of units during the year
b. Number of units sold times current cost of units at year-end
c. Number of units sold times current cost of units at the beginning of the year
d. Beginning inventory at current cost plus cost of goods purchased less ending inventory at current cost
Current cost financial statements should report holding gains during the period for which of the following?
a. Goods sold
b. Inventory
c. Goods sold and inventory
d. Neither goods sold nor inventory
ANSWER 64-14
1.d
2. A
3. c
PROBLEMS
47-1 Gardenia Company reported the following assets in the statement of financial position:
Cash in bank
Accounts receivable
Inventory
Financial asset at fair value
Patent
Loans to employees
Advances to suppliers
Prepaid expenses
2,000,000
4,000,000
1,500,000
500,000
1,000,000
200,000
400,000
100,000
In preparing financial statements in a hyperinflationary economy, what total amount should be classified as
monetary assets?
A. 6,200,000
B. 6,600,000
C. 6,700,000
D. 7,700,000
SOLUTION: A.
Cash in bank
Accounts receivable
Loans to employees
Total monetary assets
2,000,000
4,000,000
200,000
6,200,000
47-2 Sunflower Company reported the following liabilities in the statement of financial position:
Accounts payable
Accrued expenses
Bonds payable
Finance lease liability
Unearned revenue
Advances from customers
Estimated warranty liability
Deferred tax liability
1,000,000
500,000
3,000,000
4,000,000
300,000
1,200,000
200,000
400,000
In preparing financial statements in a hyperinflationary economy, what total amount should be classified as
monetary liabilities?
A.
B.
C.
D.
4,500,000
8,500,000
9,700,000
8,900,000
SOLUTION: B.
Accounts payable
1,000,000
Accrued expenses
500,000
Bonds payable
3,000,000
Finance lease liability
4,000,000
Total monetary liabilities
8,500,000
47-3 Dahlia Company was formed on January 1, 2011. Selected balances from historical cost statement of financial
position on December 31, 2017 were:
Land purchased on January 1, 2011
Investment in long-term bonds purchased on January 1, 2014
Long term debt issued on January 1, 2011
2,400,000
1,200,000
1,600,000
The general price index was 120 on January 1, 2011, 150 on January 1, 2014 and 300 on December 31, 2017.
1.
2.
What amount should be reported in a hyperinflationary statement of financial position for land?
A. 2,400,000
B. 6,000,000
C. 4,800,000
D. 3,000,000
What amount should be reported in a hyperinflationary statement of financial position for investment in
bonds?
A. 3,000,000
B. 2,400,000
C. 1,200,000
3.
D. 1,500,000
What amount should be reported in a hyperinflationary statement of financial position for long-term debt?
A. 4,000,000
B. 3,200,000
C. 2,000,000
D. 1,600,000
SOLUTION #1: B
Land – nonmonetary (2,400,000 x 300/120)
SOLUTION #2: C
Investment in bonds – monetary
SOLUTION #3: D
Long-term debt – monetary
6,000,000
1,200,000
1,600,000
47-4 Veranus Company provided the following information on December 31, 2017:
Property, plant and equipment
Inventory
Cash
Share capital issued December 31, 2013
Noncurrent liabilities
Current liabilities
Retained earnings
900,000
2,700,000
350,000
400,000
500,000
700,000
2,350,000
The index numbers on December 31 of each year are 2013 – 100, 2014 – 130, 2015 – 150, 2016 – 240, and 2017 –
300.
The property, plant and equipment were purchased on December 31, 2015.
The noncurrent liabilities were raised on December 31, 2016.
1.
2.
3.
What is the amount of total assets after restatement for hyperinflation?
A. 5,150,000
B. 3,950,000
C. 4,800,000
D. 4,850,000
What is the amount of total liabilities after restatement for hyperinflation?
A. 2,400,000
B. 1,200,000
C. 1,325,000
D. 1,500,000
What is the balance of retained earnings after adjusting for hyperinflation?
A. 2,350,000
B. 2,750,000
C. 3,550,000
D. 2,625,000
SOLUTION #1: A
Property, plant and equipment (900,000 x 300/150)
Inventory (2,700,000 x 300/270)
1,800,000
3,000,000
Cash
Total assets
SOLUTION #2: B
Noncurrent liabilities
Current liabilities
Total liabilities
SOLUTION #3: B
Total assets
Total liabilities
Total shareholder’s equity
Share capital as restated (400,000 x 300/100)
Retained earnings
350,000
5,150,000
500,000
700,000
1,200,000
5,150,000
(1,200,000)
3,950,000
(1,200,000)
2,750,000
47-5 Maximus Company provided the following liabilities and equity before and after restatement for
hyperinflation:
Liabilities
Share capital
Revaluation surplus
Retained earnings
Total liabilities and equity
Before restatement
2,000,000
5,000,000
1,000,000
1,500,000
9,500,000
After restatement
2,500,000
8,500,000
?
?
16,000,000
1.
What is the revaluation surplus after adjustment?
A. 5,000,000
B. 1,000,000
C. 3,500,000
D. 0
2. What amount should be reported as retained earnings after restatement?
A. 4,000,000
B. 5,000,000
C. 1,500,000
D. 0
SOLUTION #1: D
SOLUTION #2: B
Liabilities
2,500,000
Share capital
8,500,000
Retained earnings (balancing figure)
5,000,000
Total liabilities and equity
16,000,000
47-6- Camia Company provided the following information about the inventory during 2017:
Inventory – Jan 1
Purchases
Inventory – December 31
1,575,000
5400,000
4800,000
The relevant index numbers are:
January 1,
December 31,
2017
2017
110
370
Average index for
Average index for
201
2016
What is the cost of goods sold in a hyperinflationary income statement?
240
105
a.7,315,909
b.3,353,125
c.6,475,000
d.2,250,000
Solution 47-6 Answer C\
Inventory – Jan 1
Purchases
Goods available for sale
Inventory – Dec 31
Cost of goods sold
Historical
1,575,000
5,400,000
6,975,000
(4,800,000)
2,175,000
Fraction
370/105
370/240
370/240
Restated
5,550,000
8,325,000
13,875,000
(7,400,000)
6,475,000
47-7- Smallville Company reported the following historical income statement for 2017:
Sales
Inventory – Jan 1
Purchases
Inventory – Dec 31
Expenses
Depreciation
500,000
350,000
500,000
500,000
2,000,000
2,000,000
•
•
•
•
Sales are earned and expenses are incurred evenly throughout the year.
Inventory was acquired during the last week of each year
Depreciable assets have a 5-year life and were acquired on Jan 1 2014
The general index numbers were 125 on Jan 1, 2014, 140 on Jan 1, 2017, 360 on Dec 31 2017
1.
What is the amount of sales after restatement for hyperinflation?
a. 7,200,000
b. 5,000,000
c. 7,000,000
d. 9,000,000
What is the cost of goods sold after restatement for hyperinflation?
a. 2,350,000
b. 4,000,000
c. 3,384,000
d. 3,780,000
If the entity is operating in a hyperinflationary economy, what amount should be reported as net loss?
a. 5,440,000
b. 1,350,000
c. 1,944,000
d. 4,824,000
2.
3.
Solution 47-7
Question 1 Answer: a
Question 2 Answer: b
Question 3 Answer: a
Sales
Cost of goods sold:
Historical
5,000,000
Fraction
360/250
Restated
7,200,000
Inventory- Jan 1
Purchases
GAS
Inventory- Dec 31
Cost of Goods sold
4,000,000
350,000
2,500,000
2,850,000
(500,000)
2,350,000
Gross income
2,650.000
Expenses
Depreciation
Total expenses
(2,000,000)
(2,000,000)
(4,000,000)
Net loss
(1,350,000)
360/140
360/250
360/360
900,000
3,600,000
4,500,000
(500,000)
3,200,000
360/250
360/125
(2,880,000)
(5,760,000)
(8,640,000)
(5,440,000)
47-8- Mariposa Company reported the following property, plant and equipment on Dec 31, 2017
Year acquired
Percent depreciated
Cost
Index number
2015
2016
2017
30
20
10
3,000,000
2,000,000
1,000,000
100
125
300
Depreciation is calculated at 10% straight line.
A full year depreciation is charged in the year of acquisition and no depreciation in the year of disposal.
What amount of depreciation should be included in the 2017 income statement adjusted for hyperinflation?
a.
b.
c.
d.
1,480,000
1,800,000
1,620,000
600,000
Solution 47-8 Answer: a
2015
(300000 x 300/100)
2016
(200000 x 300/125)
2017
(100000 x 300/300)
Total depreciation for 2017
900000
480000
100000
1480000