RSM 1220 Term 1 2024: Assignment 2
Please answer in the space provided. For multiple choice questions, please circle or highlight the
correct answer.
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1. Which statement is true concerning inventory write-downs?
A) Inventory write-downs are never allowed under IFRS
B) Inventory write-downs are allowed to be revalued later at higher levels up to the acquisition cost
C) Inventory write-downs are never allowed to be reversed under IFRS
D) Inventory write-downs affect the cash flow statement only
2. The following data refer to Carlos Company’s ending inventory:
Item code Quantity Unit Cost Unit Market Cost Market
Small 120 $114 $116 13,680 13,920
Medium 420 76 88 31,920 36,960
Large 610 84 88 51,240 53,680
Extra-Large 220 134 128 29,480 28,160
How much is the inventory if the lower of cost or market rule is applied to each item of inventory?
A) $125,000
B) $126,320
C) $132,720
D) None of the above
3. If inventory at the end of the year is understated by $30,000, what will this error cause?
A) An understatement of cost of goods sold for the year by $30,000
B) An overstatement of gross profit for the year by $30,000
C) An overstatement of inventory for the year by $30,000
D) An understatement of net income for the year by $30,000
4. Fantastic Fabricators, Inc. has 10 units in beginning inventory costing $30 each. It purchased 90
more for $ 24 each during the month. The company sold 80 units during the month.
Calculate cost of goods sold using:
A. FIFO
B. Average cost
Answer:
Closing inventory (units) = 20 units
Under FIFO method
Purchase price = $24
Closing inventory (value) = $480
Under Average cost method
Average purchase price = [(10*30)+(90*24)]/(10+90) = $24.6
Closing inventory value = $24.6*20 = $492
5. Which of the following estimates are required when calculating depreciation expense?
1. Depreciation rate
2. Useful life
3. Expected maintenance costs
4. Salvage value
A) 1, 2, and 4
B) 1, 2, 3, and 4
C) 2 and 4
D) 2, 3, and 4
6. Green Deer Company purchased a tractor at a cost of $120,000. The tractor has an estimated
residual value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor
was purchased on January 1, 2021 and was used 2,400 hours in 2021 and 2,200 hours in 2022.
What method of depreciation will produce the maximum depreciation expense in 2021?
A) Straight-line (12.5%)
B) Double-declining-balance (25%)
C) Units-of-production (20%)
D) All methods produce the same expense in 2021
7. Garden Company purchased a tractor at a cost of $120,000. The tractor has an estimated residual
value of $20,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was
purchased on January 1, 2021 and was used 2,400 hours in 2021 and 2,100 hours in 2022. On
January 1, 2023, the company decided to sell the tractor for $70,000. Garden Co. uses the units-of-
production method to account for the depreciation on the tractor.
Based on this information, the entry to record the sale of the tractor will show:
A) No gain or loss on the sale
B) A loss of $7,500
C) A loss of $5,000
D) A gain of $5,000
8. Nikitas Bus Company had machinery that had originally cost $164,000. The machinery was three
years old and had been depreciated using the double-declining-balance method, over a five-year
useful life with a residual value of $12,000. Answer each of the following independent questions:
A. If the company sold the machinery for $70,000, what would be the effect on the income statement
(please indicate the name of the accounting line item and the amount recorded). Show your
calculations separately as necessary.
B. If the company sold the machinery for $32,000, what would be the effect on the income statement
(please indicate the name of the accounting line item and the amount recorded). Show your
calculations separately as necessary.
Answer: For a five year useful life, double declining rate would be 40% (20%*2)
Year Opening value Depreciation Closing value
1 164,000 65,600 98,400
2 98,400 39,360 59,040
3 59,040 23,616 35,424
A. Sale value = 70,000
Net Book Value = 35,424
Profit = 34,576
This will be recorded under “Other Operating Income” on the Income Statement. Specifically, this
will be classified under “Gain on sale of PPE” in Notes to Accounts.
B. Sale Value = 32,000
Net Book Value = 35,424
Loss = 3,424
This will be recorded under “Other Operating Expenses” on the Income Statement. Specifically,
this will be classified under “Loss on sale of PPE” in Notes to Accounts.
9. Which statement is true as it relates to reporting requirements for internally-developed intangibles?
A) Both research and development costs are required to be capitalised when specific criteria are met
B) Research costs are required to be capitalised when specific criteria are met
C) Development costs are required to be capitalised when specific criteria are met
D) Both research and development costs are always required to be expensed when incurred
10. Which one of the following would be considered a provision?
A) A company owes $22,000 on inventories purchased on credit
B) A company has $490,000 worth of bonds outstanding
C) A company estimates that it will probably have to pay a $24,000 fine for a chemical spill
D) The company has access to a line of credit with a bank in the amount of $288,000
E) The company believes that it is reasonably possible it will lose a lawsuit but is unable to
determine the possible damages
11. Which of the following most likely does not affect the current liabilities section of the balance sheet?
A) Purchase of inventory on credit
B) Wages owning to employees but not yet paid
C) Insurance bill to be paid next month
D) Sale of goods on credit
12. Which of the following costs associated with a trademark would most likely not be capitalized?
A) Attorney fees
B) Consulting fees
C) Early stage research costs
D) Logo design costs
13. For each of the following items, indicate whether the costs should be capitalised or expensed
immediately.
1. Purchased a patent for $24,000
2. Paid $11,000 to overhaul a drilling rig. The overhaul will extend the useful life by 3 years.
3. Paid $1,200 for routine maintenance and lubrication of a tractor.
4. Paid $13,000 to install new equipment in the production line that will “super-cool” the product
and allow for faster shipping of fresher merchandise
Answer:
1. Capitalized
2. Capitalized
3. Expensed
4. Capitalized – this one is subjective. justification to capitalize: (i) can be utilized over several
years, (ii) improves efficiency of the plant (more shipments), (iii) value of the equipment. One
could also argue that it does not increase the life of the plant or number of units produced so
expense it out.
14. Garden Company purchased a tractor at a cost of $120,000. The tractor has an estimated residual
value of $20,000 and an estimated life of 8 years. At the end of two years of service, Garden Co.
reevaluated the tractor’s useful life. Management extended the useful life an additional four years,
but estimated that the tractor would have no residual value at the end of this time.
If the company uses straight-line depreciation, what amount would be recorded as the depreciation
expense each year, beginning with the third year?
A) $9,500
B) $9,375
C) $ 4,750
D) $7,917
Year Opening value Depreciation Closing value
1 120,000 12,500 107,500
2 107,500 12,500 95,000
Original total useful life = 8 years
After two years,
Revised total useful life = 12 years (8+4)
Remaining useful life = 10 years (12-2)
Remaining amount to be depreciated = 95,000
No of years remaining = 10 years
Depreciation per year starting third year = 9,500
