Mike O’Shea, Sydney Kendall, Keeshon Tabron
ACCT 30100 – Corporate Financial Reporting
Group Homework 2
15 points
Multiple Choice (5 questions, 1 point each)
1. Given a history of consistently increasing prices, which statement is true?
A) LIFO method reports higher COGS compared to the FIFO method as long as
inventory levels are increasing.
B) FIFO method reports lower ending inventory compared to the LIFO method as long as
inventory levels are increasing.
C) LIFO provides the most useful measure of ending inventory compared to other cost
flow assumptions.
D) FIFO provides the most useful measure of COGS compared to other cost flow
assumptions.
2. Faber Fabrics carries a felt fabric that originally cost $22 per unit, but would cost only $19 to
replace in the current market. Faber would need to pay an additional $2 per unit to sell the fabric
and believes they could get $23 from customers in the current market. A profit margin of 20% on
selling price is considered normal for this product. What unit value should Faber use for this
product under the lower of net realizable value method? Under the LIFO-lower of cost and
market method?
A) LCNRV: $22 LIFO-LCM: $16.40
B) LCNRV: $22 LIFO-LCM: $21
C) LCNRV: $21 LIFO-LCM: $21
D) LCNRV: $21 LIFO-LCM: $19
3. Corbin Inc., develops a new computer software beginning in 2018 and the engineers determine
that the software was technologically feasible on September 1, 2019 before ultimately being
completed at the close of December 2019. The first sales of the software occurred on January 1,
2020. Costs in 2018 and 2019 were $2,310,00 and $4,254,600, respectively. Expenditures were
spread evenly over the respective years. What are R&D expenses incurred in 2019 related to this
new computer software?
A) $1,063,650
B) $1,418,200
C) $2,836,400
D) $3,190,950
4. Which one of the following long-term assets is not depreciated or amortized?
A) The goodwill Priceline recorded when they acquired OpenTable.
B) GM’s new state-of-the-art design studio in Warren, MI.
C) A new corporate jet purchased by Microsoft.
D) A new pharmaceutical drug patent purchased by Johnson and Johnson.
5. Which of the following actions would not be utilized by managers attempting to manager
earnings upward?
A) Selecting FIFO as the cost flow assumption at times with increasing prices and
inventory levels.
B) Opting to make an additional inventory purchase in December when using the
LIFO cost flow assumption while prices are increasing.
C) Increasing the useful lives of tangible assets.
D) Using optimistic estimates of undiscounted future cash flows while testing tangible
assets for impairment.
Free Response (3 questions, 2 points each)
6. The Unique Veronique Company begins 2021 with a balance of 500 units in their inventory,
all acquired at a cost of $15 each during the previous year. The following information is
available for the company’s purchases during 2021:
Transactions
Purchase in January
Purchase in March
Purchase in August
Units
380
320
240
Unit Cost
$13
$11
$10
A count of inventory at year end (12/31/2021) revealed that 600 units remained on hand in
ending inventory. Calculate COGS under both LIFO and weighted average.
Please show your work. You may either type your work directly in the space below or type your
answer below but upload your work in a separate file. Photos of external scratch work are
acceptable.
LIFO
Total Goods Available for Sale: 500+380+320+240 = 1,440
COGS = 1,440 – 600 = 840
240 * $10 = $2,400
320 * $11 = $3,520
280 * $13 = $3,640
COGS = $9,560
Weighted Avg
Total Cost of Goods Purchased: 7,500+4940+3520+2400 = $18,360
Total Goods Available for Sale: 500+380+320+240 = 1,440
Weighted Avg Cost: $18,360 / 1,440 = $12.75
COGS = $12.75 * 840 = $10,710
7. PKP Partners purchased a new asset on April 1, 2019. The asset had a cost of $1,245,000, a
salvage value of $75,000, and an estimated useful life of 15 years. An additional $85,500 was
paid for delivery and installation of the asset. PKP uses the double-declining-balance method of
depreciation. What is the depreciation expense related to this asset for the year ended 2020?
Please show your work. You may either type your work directly in the space below or type your
answer below but upload your work in a separate file. Photos of external scratch work are
acceptable.
(Historical Cost – Accumulated Depreciation) × 2/Useful Life
($1,245,000 + 85,500 - $0) * (2/15) = $177,400
2019 Depreciation = $177,400 * (9/12)
2019 Depreciation = $133,050
2020 Depreciation = ($1,245,000 + 85,500 - $133,050) * (2/15)
2020 Depreciation = $159,660
8. Phaidon Publishing currently uses the LIFO cost flow assumption and has reported the
following information for the year 20X1 and 20X2:
Sales
COGS
Gross Profit
SG&A
Provision for Income Taxes
Net Income
20X1
$1,390,000
510,000
880,000
120,000
159,600
600,400
20X2
$1,840,000
670,000
1,170,000
150,000
214,200
805,800
Ending Inventory
LIFO Reserve
20X1
$320,000
80,000
20X2
$411,000
110,000
Assume an effective tax rate of 21% Based on this information, what would 20X2 Net Income be
under the FIFO method?
Please show your work. You may either type your work directly in the space below or type your
answer below but upload your work in a separate file. Photos of external scratch work are
acceptable.
FIFO Net Income = $805,800 + (110,000-80,000) * (1-21%)
FIFO Net Income = $829,500
FIFO Net Income = LIFO Net Income + ΔLIFO Reserve x (1-tax rate)
Mini Case (4 Points)
9. Mazur Manufacturing acquired a custom machine for use in its South Bend facility at a cost of
$21,500,000 at the start of 20X1. The firm expected the machine to have a six-year useful life
and a salvage value of $500,000. The firm uses the straight-line depreciation method for all
tangible assets. At the end of 20X3, MM determines that the products it produces in South Bend
are unlikely to continue to sell under current market conditions. Based on the quoted market
prices of similar assets, Mazur estimates the machine to have a fair value of $9,750,000. Mazur
also estimates the following information about cash flows from the
20X4
20X5
20X6
Expected Salvage Value
Total Cash Flows
Undiscounted
$6,000,000
3,500,000
1,500,000
500,000
$11,500,000
Discounted
$5,660,377
3,114,988
1,259,429
396,047
$10,430,841
A. Should Mazur recognize an impairment of this asset? Why or why not? If so, what
amount of loss should be recognized? Be sure to discuss all steps.
Depreciation = ($21,500,000 - $500,000) / 6
Depreciation = $3,500,000
Carrying Value in 20X3 = $21,500,000 – ($3,500,000 * 3)
Carrying Value in 20X3 = $11,000,000
The Carrying Value is less than the Undiscounted future cash flows, so therefore you do
not impair the asset.
B. How would your answer change if the facility was in the EU and Mazur was reporting
under IFRS?
Carrying Value in 20X3 = $11,000,000
Fair Value = $9,750,000
Discounted Cash Flows = $10,430,841
Impairment loss = $10,430,841 - $11,000,000
Impairment Loss = $569,159