Intermediate Accounting 1 - D03 - WGU
Which statement accurately describes the fair value principle?
Fair value is generally more relevant than historical cost.
Fair value is a cost-based measure.
Measurements based on fair value decrease the subjectivity in financial reporting.
Measurements by generally accepted accounting principles (GAAP) require fair value
for equity accounts. - ANS-Fair value is generally more relevant than histori
Which basic objective is associated with the conceptual framework for financial
reporting?
Compliance
Efficiency
Decision usefulness
Full disclosure - ANS-Decision Usefulness
In the lower of cost or market rule, what is referred to by the net realizable value? -
ANS-Ceiling:
The term net realizable value (NRV) refers to the net amount that a company expects to
realize from the sale of inventory. This is the ceiling - the most that company can
possibly realize upon the sale of the inventory. (ie: the selling price less costs
associated with finishing or delivering the inventory to the customer).
Generally, what does the the term "market" in the phrase "lower of cost or market"
mean? - ANS-Replacement cost:
The term "market" refers to the amount the company would pay to purchase the same
inventory - or the replacement cost.
Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of
2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a
unit is $6, and the normal profit is 40% of selling price. At what amount per unit should
product 2005WSC be reported, applying lower-of-cost-or-market? - ANS-$24
Correct. First, determine the ""market"" value - use the middle value of the ceiling
(NRV), replacement cost, and Floor (NRV less normal profit margin). Second, determine
which is lower: the historical cost of the item or the ""market"" value of the item. For
Product 2005WSC: Ceiling: $30-$6 = $24; Replacement Cost: $26; Floor: $24 less ($30
x 40%) = $12. Market value is $24. Historical Cost is $27. The product is valued at $24.
, When the cost-of-goods-sold method is used to adjust cost to "net realizable value" in
the lower-of-cost-and-net-realizable-value (LCNRV) approach, what account is debited?
- ANS-Cost of Goods Sold:
Using the cost-of-goods-sold method to adjust inventory, the correct entry is: Debit Cost
of Goods Sold, Credit Inventory. (Under the loss method: Debit Loss Due to Decline of
Inventory to NRV, Credit Inventory)
In applying Lower-of-Cost-or-Market, what is the correct designated market value? -
ANS-The middle value of replacement cost, net realizable value and net realizable
value less a normal profit margin:
The designated market value is always the middle value of three amounts: replacement
cost, net realizable value, and net realizable value less a normal profit margin.
What happens when the cost-of-goods-sold method is used to record inventory at net
realizable value? - ANS-The market value figure for ending inventory is substituted for
cost and the loss is buried in cost of goods sold:
When using the cost-of-goods-sold method, the correct entry is: Debit Cost of Goods
Sold, Credit Inventory.
A company deposits $10,000 in a bank where it will earn simple interest of 10%
annually. What is the amount of interest earned in Year 2?
$1,000
$1,100
$2,000
$2,100 - ANS-$1000
A company is putting together a list of transactions that are affected by the time value of
money. Which transaction should be included in this list?
Current notes receivable
Investments in active markets
Long-term leases
Short-term liabilities - ANS-Long-term Leases
Company A sells a parcel of land to Company B in exchange for a note receivable. The
terms of the note require Company B to make a single payment of $600,000 in two
years. Using a 10% interest rate, the implied annual interest is $600,000 × 0.10 =
$60,000, and the present value of the note is $600,000 × 0.82645 = $495,870.Which
amount must Company A consider as the proceeds from the sale of the land in order to
calculate gross profit or gain/loss on the sale in accordance with generally accepted
accounting principles (GAAP)?
Which statement accurately describes the fair value principle?
Fair value is generally more relevant than historical cost.
Fair value is a cost-based measure.
Measurements based on fair value decrease the subjectivity in financial reporting.
Measurements by generally accepted accounting principles (GAAP) require fair value
for equity accounts. - ANS-Fair value is generally more relevant than histori
Which basic objective is associated with the conceptual framework for financial
reporting?
Compliance
Efficiency
Decision usefulness
Full disclosure - ANS-Decision Usefulness
In the lower of cost or market rule, what is referred to by the net realizable value? -
ANS-Ceiling:
The term net realizable value (NRV) refers to the net amount that a company expects to
realize from the sale of inventory. This is the ceiling - the most that company can
possibly realize upon the sale of the inventory. (ie: the selling price less costs
associated with finishing or delivering the inventory to the customer).
Generally, what does the the term "market" in the phrase "lower of cost or market"
mean? - ANS-Replacement cost:
The term "market" refers to the amount the company would pay to purchase the same
inventory - or the replacement cost.
Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of
2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a
unit is $6, and the normal profit is 40% of selling price. At what amount per unit should
product 2005WSC be reported, applying lower-of-cost-or-market? - ANS-$24
Correct. First, determine the ""market"" value - use the middle value of the ceiling
(NRV), replacement cost, and Floor (NRV less normal profit margin). Second, determine
which is lower: the historical cost of the item or the ""market"" value of the item. For
Product 2005WSC: Ceiling: $30-$6 = $24; Replacement Cost: $26; Floor: $24 less ($30
x 40%) = $12. Market value is $24. Historical Cost is $27. The product is valued at $24.
, When the cost-of-goods-sold method is used to adjust cost to "net realizable value" in
the lower-of-cost-and-net-realizable-value (LCNRV) approach, what account is debited?
- ANS-Cost of Goods Sold:
Using the cost-of-goods-sold method to adjust inventory, the correct entry is: Debit Cost
of Goods Sold, Credit Inventory. (Under the loss method: Debit Loss Due to Decline of
Inventory to NRV, Credit Inventory)
In applying Lower-of-Cost-or-Market, what is the correct designated market value? -
ANS-The middle value of replacement cost, net realizable value and net realizable
value less a normal profit margin:
The designated market value is always the middle value of three amounts: replacement
cost, net realizable value, and net realizable value less a normal profit margin.
What happens when the cost-of-goods-sold method is used to record inventory at net
realizable value? - ANS-The market value figure for ending inventory is substituted for
cost and the loss is buried in cost of goods sold:
When using the cost-of-goods-sold method, the correct entry is: Debit Cost of Goods
Sold, Credit Inventory.
A company deposits $10,000 in a bank where it will earn simple interest of 10%
annually. What is the amount of interest earned in Year 2?
$1,000
$1,100
$2,000
$2,100 - ANS-$1000
A company is putting together a list of transactions that are affected by the time value of
money. Which transaction should be included in this list?
Current notes receivable
Investments in active markets
Long-term leases
Short-term liabilities - ANS-Long-term Leases
Company A sells a parcel of land to Company B in exchange for a note receivable. The
terms of the note require Company B to make a single payment of $600,000 in two
years. Using a 10% interest rate, the implied annual interest is $600,000 × 0.10 =
$60,000, and the present value of the note is $600,000 × 0.82645 = $495,870.Which
amount must Company A consider as the proceeds from the sale of the land in order to
calculate gross profit or gain/loss on the sale in accordance with generally accepted
accounting principles (GAAP)?
