ACCN 3010
Intermediate Financial Accounting I
Fall 2022
Practice Test 3
Circle your class time:
1:00 pm
2:00 pm
Student Name (Please Print): _____________________
On my Honor, I pledge to follow the Tulane’s Code of Academic Conducts. I
will complete this exam independently, and will not share the exam content
with anyone else.
Signature: ___________________
Date: ____________________
Ensure that your exam has 10 numbered pages, including the cover page. The test is
close book and close note. You have 50 minutes to complete the test.
The exam has 3 sections, labeled Part I through Part III.
Part I Multiple Choices (3 points each, 10 questions)
Part II
Part III
Part IV
Total
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30 points
20 points
30 points
20 points
100 points
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Part I: Multiple Choices - Choose the one alternative that best completes the statement or
answers the question. Please show your answers in the table below.
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2
3
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1)
At the end of a reporting period, a company determines that its ending inventory has a
cost greater than its net realizable value. What would be the effect(s) of the adjusting entry to
write down inventory to net realizable value?
A) Decrease total assets
B) Decrease net income
C) Increase retained earnings
D) Decrease total assets and net income
2)
Data related to the inventories of Mountain Ski Equipment and Supplies is presented
below:
Skis
Boots
Apparel
Supplies
$ 192,000
$ 162,000
$ 132,000
$ 72,000
Selling price
134,000
139,000
96,000
54,000
Cost
132,000
131,200
122,000
62,000
Replacement cost
10%
10%
10%
10%
Sales commission
20%
20%
15%
20%
Normal gross profit ratio
In applying the lower of cost or market rule, the inventory of supplies would be valued at:
A) $64,800.
B) $50,400.
C) $62,000.
D) $54,000.
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3)
A company has determined its year-end inventory on a LIFO basis to be $614,000.
Information pertaining to that inventory is as follows:
$ 734,000
Selling price
36,900
Costs to sell
87,000
Normal profit margin
634,000
Replacement cost
What should be the reported amount of the company's inventory?
A) $614,000
B) $634,000
C) $697,100
D) $610,100
4)
A company uses the conventional retail inventory method to account for inventory. The
following information relates to current year's operations:
Cost
Retail
Beginning inventory and purchases
Net markups
$ 313,500
Net markdowns
Net sales
$ 540,000
30,000
20,000
480,000
What amount should be reported as cost of goods sold for the year?
A) $273,600
B) $272,861
C) $275,000
D) None of the other answer choices are correct.
5)
For financial reporting purposes, goodwill:
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A) may be recorded whenever a company achieves a level of net income that exceeds the
industry average.
B) is amortized over its useful life.
C) is only be recorded when a company acquires control over another company.
D) must be expensed in the period it is recorded because benefits from goodwill are
difficult to identify.
6)
A company attempted to create a new horse transport device and incurred research and
development costs of $250,000 in the first half of the current year. Rather than continue with its
own research, the company decided to purchase a patent for a similar design from another
company for $350,000 on October 1 of the current year. What are the total assets and expenses
recorded for these costs with regard to the new transport device?
A) Assets $600,000; Expenses $0
B) Assets $250,000; Expenses $350,000
C) Assets $350,000; Expenses $250,000
D) Assets $0; Expenses $600,000
7)
A company purchased land for $75,000 cash. Commissions of $4,500, property taxes of
$5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes
$4,000 in back taxes paid by the company on behalf of the seller and $1,000 due for the current
year after the purchase date. For what amount should the company record the land?
A) $83,500
B) $84,300
C) $85,300
D) $75,000
8)
Cutter Enterprises purchased equipment for $102,000 on January 1, 2024. The equipment
is expected to have a five-year life and a residual value of $8,100.
Using the sum-of-the-years'-digits method, depreciation for 2025 and book value on December
31, 2025, would be:
Note: Do not round the depreciation rate per year.
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A) $27,200 and $32,700, respectively.
B) $25,040 and $45,660, respectively.
C) $25,040 and $37,560, respectively.
D) $27,200 and $40,800, respectively.
9)
A company decides to sell equipment it has owned and operated for the past five years.
The equipment’s original estimated service life was eight years. Management calculates the loss
on the sale as the equipment’s original purchase price minus its selling price. Which of the
following statements is correct?
A) Management should calculate the loss as the present value of expected decrease in
cash flows from selling the equipment.
B) Management should subtract the equipment’s accumulated depreciation from the
original purchase price before calculating any loss.
C) Management should not report any loss on the sale of equipment if that equipment has
been used in operations.
D) Management’s calculation is correct.
10)
A major expenditure increased a truck's life beyond the original estimate of life. GAAP
permits the expenditure to be debited to:
A) repairs.
B) accumulated depreciation.
C) major repairs.
D) None of the other answer choices are correct.
11)
A company owns equipment for which it paid $90 million. At the end of 2024, it had
accumulated depreciation on the equipment of $27 million. Due to adverse economic conditions,
the company's management determined that it should assess whether an impairment loss should
be recognized for the equipment. The estimated undiscounted future cash flows to be provided
by the equipment total $60 million, and the equipment's fair value at that point is $40 million.
Under these circumstances, the company would report:
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A) no impairment loss on the equipment.
B) a $3 million impairment loss on the equipment.
C) a $23 million impairment loss on the equipment.
D) None of the other answer choices are correct.
Part II
Crosby Company owns a chain of hardware stores throughout the state. The company uses a
periodic inventory system and the retail inventory method to estimate ending inventory and cost
of goods sold. The following data are available:
Cost
Beginning Inventory
Net purchases
Net markups
Net markdowns
Net sales
Retail
$ 320,000
707,000
$ 382,000
995,000
23,000
8,000
961,000
Required:
Estimate the LIFO cost of ending inventory and cost of goods sold using the information
provided. Assume stable retail prices during the period.
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Part III
On January 1, 2024, the Shagri Company began construction on a new manufacturing facility for
its own use. The building was completed in 2025. The only interest-bearing debt the company
had outstanding during 2024 was long-term bonds with a book value of $10,000,000 and an
effective interest rate of 8%. Construction expenditures incurred during 2024 were as follows:
January 1
March 1
July 31
September 30
December 31
$500,000
600,000
480,000
600,000
300,000
Required:
Calculate the amount of interest capitalized for 2024.
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Part IV
On October 1, 2024, the Allegheny Corporation purchased equipment for $115,000. The
estimated service life of the equipment is 10 years and the estimated residual value is $5,000.
The equipment is expected to produce 220,000 units during its life.
Required:
Calculate depreciation for 2024 and 2025 using each of the following methods. Partial-year
depreciation is calculated based on the number of months the asset is in service.
(1) Straight-line
(2) Double-declining-balance
(3) Units of production (units produced in 2024, 10,000; units produced in 2025, 25,000)
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Answer Key
Part I
1) D
2) D
RC = $62,000
NRV = $72,000 − ($72,000 × 10%) = $64,800
NRV − Normal profit margin = $64,800 − ($72,000 × 20%) = $50,400
Designated market = RC = $62,000
Cost = $54,000
Cost is lower than market.
3) A
Companies that use LIFO or the retail inventory method report inventory using the lower of cost
or market (LCM) approach.
RC = $634,000
NRV = $734,000 − $36,900 = $697,100
NRV − Normal profit margin = $697,100 − $87,000 = $610,100
Designated market is replacement cost = $634,000, which is less than NRV and more than NRV
minus normal profit margin.
Cost = $614,000, which is less than market.
4) C
Cost
Retail
Beginning inventory plus purchases
Net markups
$ 313,500
$ 540,000
30,000
570,000
Cost-to-retail percentage: $313,500/$570,000 = 55%
(20,000)
Less: Net markdowns
Goods available for sale
Less: Net sales
313,500
$ 70,000
Estimated ending inventory at retail
Estimated ending inventory at cost (55% × $70,000)
Estimated cost of goods sold
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550,000
(480,000)
(38,500)
$ 275,000
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5) C
6) C
7) B
$75,000 + $4,500 + $4,000 + $800 = $84,300
8) B
Depreciation, 2024 = ($102,000 − $8,100) × 5/15 = $31,300
Depreciation, 2025 = ($102,000 − $8,100) × 4/15 = $25,040
Book value, 12/31/2025 = $102,000 − $31,300 − $25,040 = $45,660
9) B
10) B
11) C
The book value exceeds the undiscounted cash flows, so an impairment is required. The fair
value ($40 million) is $23 million less than the book value ($63 million).
Part II
Please refer to Chapter 9 Homework Q4
Part III
Part IV
Please refer to Chapter 11 Homework Q4-6
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