1

*1.
A manufacturing concern would report the cost of units

only partially processed as inventory in the balance sheet.
2. Both merchandising and manufacturing companies normally have multiple inventory

accounts.
3. When using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.
4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.
*5. If ending inventory is understated, then net income is understated.
*6. If both purchases and ending inventory are overstated by the same amount, net income
is not affected.
7. Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
*8. Purchase Discounts Lost is a financial expense and is reported in the “other expenses
and losses” section of the income statement.
9. The cost flow assumption adopted must be consistent with the physical movement of the
goods.
*10. In all cases when FIFO is used, the cost of goods sold would be the same whether a
perpetual or periodic system is used.
*11. The change in the LIFO Reserve from one period to the next is recorded as an
adjustment to Cost of Goods Sold.
12. Many companies use LIFO for both tax and internal reporting purposes.
13. LIFO liquidation often distorts net income, but usually leads to substantial tax savings.
*14. LIFO liquidations can occur frequently when using a specific-goods approach.
*15. Dollar-value LIFO techniques help protect LIFO layers from erosion.
16. The dollar-value LIFO method measures any increases and decreases in a pool in terms
of total dollar value and physical quantity of the goods.
17. A disadvantage of LIFO is that it does not match more recent costs against current
revenues as well as FIFO.
*18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must
also use LIFO for financial accounting purposes.
19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as
production increases.
*20. LIFO is inappropriate where unit costs tend to decrease as production increases.
21. When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
*d. all of these.
22. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
*b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.
23. Goods in transit which are shipped f.o.b. destination should be

*a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
*d. none of these.
24. Which of the following items should be included in a company's inventory at the balance
sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or
her convenience.
*d. None of these.
Use the following information for questions 25 and 26.

During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed to
repurchase the merchandise early in 2008. Kline then used the inventory as collateral to borrow
from Norwalk Bank, remitting the proceeds to Foley. In 2008 when Foley repurchased the
inventory, Kline used the proceeds to repay its bank loan.
25. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
26. On whose books should the cost of the inventory appear at the December 31, 2007
balance sheet date?
a. Foley Corporation
b. Kline Corporation
c. Norwalk Bank
d. Kline Corporation, with Foley making appropriate note disclosure of the transaction
27. Goods on consignment are

a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account.
c. recorded in a Consignment In account which is an inventory account.
d. all of these
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28. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
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29. The accountant for the Orion Sales Company is preparing the income statement for
2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory
system. The January 1, 2007 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
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30. If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods
sold for 2006, net income for 2006, and assets at December 31, 2007, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
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31. The failure to record a purchase of merchandise on account even though the goods are
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of owners' equity.
32. Belle Co. received merchandise on consignment. As of March 31, Belle had recorded
the transaction as a purchase and included the goods in inventory. The effect of this on
its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
33. Eller Co. received merchandise on consignment. As of January 31, Eller included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were
understated.
d. net income, current assets, and retained earnings were understated.
34. Cross Co. accepted delivery of merchandise which it purchased on account. As of
December 31, Cross had recorded the transaction, but did not include the merchandise
in its inventory. The effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.
35. On June 15, 2007, Tolon Corporation accepted delivery of merchandise which it pur-
chased on account. As of June 30, Tolon had not recorded the transaction or included
the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2007
would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets, liabilities, and stockholders' equity were understated.
d. none of these.
36. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.
37. All of the following costs should be charged against revenue in the period in which costs
are incurred except for
a. manufacturing overhead costs for a product manufactured and sold in the same
accounting period.
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. costs of normal shrinkage and scrap incurred for the manufacture of a product in
ending inventory.
38. Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real
estate projects
c. Interest incurred on notes payable to vendors for routine purchases made on a
repetitive basis
d. All of these should be capitalized.
39. The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
40. The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
During 2007, which was the first year of operations, Luther Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30.
Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods
available had been sold at year end.
41. Which of the following recording procedures would result in the highest cost of goods
sold for 2007?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
42. Which of the following recording procedures would result in the highest net income for
2007?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
43.When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
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44. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business
of the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
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45. Which inventory costing method most closely approximates current cost for each of the
following:
Ending Inventory Cost of Goods Sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO
46. In situations where there is a rapid turnover, an inventory method which produces a
balance sheet valuation similar to the first-in, first-out method is
a. average cost.
b. base stock.
c. joint cost.
d. prime cost.
47. The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation:
a. moving average.
b. weighted-average.
c. LIFO perpetual.
d. FIFO.
48. An inventory pricing procedure in which the oldest costs incurred rarely have an effect
on the ending inventory valuation is
a. FIFO.
b. LIFO.
c. base stock.
d. weighted-average.
49. Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Last-in, first-out
d. Base stock
50. Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds
cost of goods sold when inventory is valued using the LIFO method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.
51. In a period of rising prices, the inventory method which tends to give the highest
reported net income is
a. base stock.
b. first-in, first-out.
c. last-in, first-out.
reported inventory is
a. FIFO.
b. moving average.
c. LIFO.
53. Quayle Corporation's inventory cost on its balance sheet was lower using first-in, first-out
than it would have been using last-in, first-out. Assuming no beginning inventory, in
what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
reported cost of goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. none of these.
55.Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested
(plowed back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern by matching current cost of goods
sold with current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old
costs with current revenue.
d. The use of FIFO permits some control by management over the amount of net
income for a period through controlled purchases, which is not true with LIFO.
56. The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it would
be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. LIFO method.
d. FIFO method.
57. When a company uses LIFO for external reporting purposes and FIFO for internal
reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This
account should be reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
d. on the balance sheet in the Current Assets section.
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58. Which of the following statements is not true as it relates to the dollar-value LIFO inven-
tory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with
specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only
one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory
method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and
measured in terms of total dollar value, not physical quantity.
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59. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company's future reported earnings will not be affected substantially by future price
declines.
60. Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal
reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower of
cost or market approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax
purposes.
d. None of these.
61. If inventory levels are stable or increasing, an argument which is not an advantage of the
LIFO method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices.
b. cost of goods sold tends to be stated at approximately current cost on the income
statement.
c. cost assignments typically parallel the physical flow of goods.
d. income tends to be smoothed as prices change over time.
62. TJones Manufacturing Company has the following account balances at year end:
Office supplies $ 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000
What amount should TJones report as inventories in its balance sheet?
a. $72,000.
b. $76,000.
c. $158,000.
d. $162,000.
63. JSmith Manufacturing Company has the following account balances at year end:
Office supplies $ 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 92,000
Prepaid insurance 6,000
What amount should JSmith report as inventories in its balance sheet?
a. $92,000.
b. $96,000.
c. $178,000.
d. $182,000.
64.Briggs Corporation uses the perpetual inventory method. On March 1, it purchased $10,000
of inventory, terms 2/10, n/30. On March 3, Briggs returned goods that cost $1,000. On March
9, Briggs paid the supplier. On March 9, Briggs should credit
a. purchase discounts for $200.
b. inventory for $200.
c. purchase discounts for $180.
d. inventory for $180.
65. Harder Corporation uses the perpetual inventory method. On March 1, it purchased
$30,000 of inventory, terms 2/10, n/30. On March 3, Harder returned goods that cost
$3,000. On March 9, Harder paid the supplier. On March 9, Harder should credit
a. purchase discounts for $600.
b. inventory for $600.
c. purchase discounts for $540.
d. inventory for $540.
Use the following information for questions 66 through 68.
Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2007 and 2006
contained errors as follows:
2007 2006
Ending inventory $3,000 overstated $8,000 overstated
Depreciation expense $2,000 understated $6,000 overstated
66. Assume that the proper correcting entries were made at December 31, 2006. By how
much will 2007 income before taxes be overstated or understated?
a. $1,000 understated
b. $1,000 overstated
c. $2,000 overstated
d. $5,000 overstated
67. Assume that no correcting entries were made at December 31, 2006. Ignoring income
taxes, by how much will retained earnings at December 31, 2007 be overstated or
understated?
a. $1,000 understated
c. $5,000 understated
d. $9,000 understated
68. Assume that no correcting entries were made at December 31, 2006, or December 31,
2007 and that no additional errors occurred in 2008. Ignoring income taxes, by how
much will working capital at December 31, 2008 be overstated or understated?
a. $0
c. $2,000 understated
d. $5,000 understated
69. The following information is available for Kerr Company for 2007:
Freight-in $ 30,000
Purchase returns 75,000
Selling expenses 150,000
Ending inventory 260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of goods
available for sale?
a. $600,000.
b. $890,000.
c. $815,000.
d. $860,000.

Richey Co. records purchases at net amounts. On May 5 Richey purchased merchandise on
account, $16,000, terms 2/10, n/30. Richey returned $1,200 of the May 5 purchase and
received credit on account. At May 31 the balance had not been paid.
70. The amount to be recorded as a purchase return is

a. $1,080.
b. $1,224.
c. $1,200.
d. $1,176.
71. By how much should the account payable be adjusted on May 31?
a. $0.
b. $344.
c. $320.
d. $296.
The following information was available from the inventory records of Neer Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 $9.77 $29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917
Sales:
January 7 (2,500)
January 31 (4,000)
Balance at January 31 1,200
72. Assuming that Neer does not maintain perpetual inventory records, what should be the
inventory at January 31, using the weighted-average inventory method, rounded to the
nearest dollar?
a. $12,606.
b. $12,284.
c. $12,312.
d. $12,432.
73. Assuming that Neer maintains perpetual inventory records, what should be the inventory
at January 31, using the moving-average inventory method, rounded to the nearest
dollar?
a. $12,606.
b. $12,284.
c. $12,312.
d. $12,432.
Kiner Co. has the following data related to an item of inventory:

Inventory, March 1 100 units @ $4.20
Purchase, March 7 350 units @ $4.40
Purchase, March 16 70 units @ $4.50
Inventory, March 31 130 units
74. The value assigned to ending inventory if Kiner uses LIFO is

a. $579.
b. $552.
c. $546.
d. $585.
75. The value assigned to cost of goods sold if Kiner uses FIFO is
a. $579.
b. $552.
c. $1,723.
d. $1,696.
76. Baker Company has been using the LIFO method of inventory valuation for 10 years,
since it began operations. Its 2007 ending inventory was $40,000, but it would have
been $60,000 if FIFO had been used. Thus, if FIFO had been used, Baker's income
before income taxes would have been
a. $20,000 greater over the 10-year period.
b. $20,000 less over the 10-year period.
c. $20,000 greater in 2007.
d. $20,000 less in 2007.

Transactions for the month of June were:
Purchases Sales
June 1 (balance) 800 @ $3.20 June 2 600 @ $5.50
3 2,200 @ 3.10 6 1,600 @ 5.50
7 1,200 @ 3.30 9 1,000 @ 5.50
15 1,800 @ 3.40 10 400 @ 6.00
22 500 @ 3.50 18 1,400 @ 6.00
25 200 @ 6.00
77. Assuming that perpetual inventory records are kept in units only, the ending inventory on
a LIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
78. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a
LIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
79. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a
FIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
80. Assuming that perpetual inventory records are kept in units only, the ending inventory on
an average-cost basis, rounded to the nearest dollar, is
a. $4,096.
b. $4,238.
c. $4,290.
d. $4,322.
81. Johnson Company had 500 units of “Tank” in its inventory at a cost of $4 each. It
purchased, for $2,800, 300 more units of “Tank”. Johnson then sold 400 units at a selling
price of $10 each, resulting in a gross profit of $1,600. The cost flow assumption used by
Johnson
a. is FIFO.
b. is LIFO.
c. is weighted average.
d. cannot be determined from the information given.
82. Kingman Company had 500 units of “Dink” in its inventory at a cost of $5 each. It
purchased, for $2,400, 300 more units of “Dink”. Kingman then sold 600 units at a selling
price of $10 each, resulting in a gross profit of $2,100. The cost flow assumption used by
Kingman
a. is FIFO.
b. is LIFO.
c. is weighted average.
d. cannot be determined from the information given.
83. Brown Corporation uses the FIFO method for internal reporting purposes and LIFO for
external reporting purposes. The balance in the LIFO Reserve account at the end of
2007 was $60,000. The balance in the same account at the end of 2008 is $90,000.
Brown’s Cost of Goods Sold account has a balance of $450,000 from sales transactions
recorded during the year. What amount should Brown report as Cost of Goods Sold in
the 2008 income statement?
a. $420,000.
b. $450,000.
c. $480,000.
d. $540,000.
84. Green Corporation uses the FIFO method for internal reporting purposes and LIFO for
external reporting purposes. The balance in the LIFO Reserve account at the end of
2007 was $80,000. The balance in the same account at the end of 2008 is $120,000.
Green’s Cost of Goods Sold account has a balance of $600,000 from sales transactions
recorded during the year. What amount should Green report as Cost of Goods Sold in
the 2008 income statement?
a. $560,000.
b. $600,000.
c. $640,000.
d. $720,000.
85. Johnson Company had 400 units of “Tank” in its inventory at a cost of $4 each. It
purchased 600 more units of “Tank” at a cost of $6 each. Johnson then sold 700 units at
a selling price of $10 each. The LIFO liquidation overstated normal gross profit by
a. $ -0-
b. $200.
c. $400.
d. $600.
86. Kingman Company had 400 units of “Dink” in its inventory at a cost of $6 each. It
purchased 600 more units of “Dink” at a cost of $9 each. Kingman then sold 700 units at
a selling price of $15 each. The LIFO liquidation overstated normal gross profit by
a. $ -0-
b. $300.
c. $600.
d. $900.
Use the following information for 87 and 88
AJ Company had January 1 inventory of $100,000 when it adopted dollar-value LIFO. During
the year, purchases were $600,000 and sales were $1,000,000. December 31 inventory at year-
end prices was $143,360, and the price index was 112.
87. What is AJ Company’s ending inventory?

a. $100,000.
b. $128,000.
c. $131,360.
d. $143,360.
88. What is AJ Company’s gross profit?

a. $428,000.
b. $431,360.
c. $443,460.
d. $868,640.
Use the following information for 89 and 90
Ely Company had January 1 inventory of $100,000 when it adopted dollar-value LIFO. During
the year, purchases were $600,000 and sales were $1,000,000. December 31 inventory at year-
end prices was $126,500, and the price index was 110.
89. What is Ely Company’s ending inventory?

a. $110,000.
b. $115,000.
c. $116,500.
d. $126,500.
90. What is Ely Company’s gross profit?

a. $415,000.
b. $416,500.
c. $426,500.
d. $883,500.

Dolan Corporation adopted the dollar-value LIFO method of inventory valuation on December
31, 2005. Its inventory at that date was $220,000 and the relevant price index was 100.
Information regarding inventory for subsequent years is as follows:
Inventory at Current
Date Current Prices Price Index
December 31, 2006 $256,800 107
December 31, 2007 290,000 125
December 31, 2008 325,000 130
91. What is the cost of the ending inventory at December 31, 2006 under dollar-value LIFO?
a. $240,000.
b. $256,800.
c. $241,400.
d. $235,400.
a. $232,000.
b. $231,400.
c. $232,840.
d. $240,000.
a. $256,240.
b. $254,800.
c. $250,000.
d. $263,400.
94. Tate Company adopted the dollar-value LIFO method on January 1, 2007, at which time
its inventory consisted of 6,000 units of Item A @ $5.00 each and 3,000 units of Item B
@ $16.00 each. The inventory at December 31, 2007 consisted of 12,000 units of Item A
and 7,000 units of Item B. The most recent actual purchases related to these items were
as follows:
Quantity
Items Purchase Date Purchased Cost Per Unit
A 12/7/07 2,000 $ 6.00
A 12/11/07 10,000 5.75
B 12/15/07 10,000 17.00
Using the double-extension method, what is the price index for 2007 that should be
computed by Tate Company?
a. 108.33%
b. 109.59%
c. 111.05%
d. 220.51%
95. How should the following costs affect a retailer's inventory valuation?
Freight-in Interest on Inventory Loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect
96. The following information applied to Grey, Inc. for 2007:

Merchandise purchased for resale $300,000
Freight-in 8,000
Freight-out 5,000
Grey's 2007 inventoriable cost was
a. $300,000.
b. $303,000.
c. $306,000.
d. $311,000.
97. The following information was derived from the 2007 accounting records of Logan Co.:
Logan 's Goods
Logan 's Central Warehouse Held by Consignees
Beginning inventory $130,000 $ 14,000
Purchases 575,000 70,000
Freight-in 10,000
Transportation to consignees 5,000
Freight-out 30,000 8,000
Ending inventory 145,000 20,000
Logan 's 2007 cost of sales was
a. $570,000.
b. $600,000.
c. $634,000.
d. $639,000.
98. Cole Corp.'s accounts payable at December 31, 2007, totaled $800,000 before any
necessary year-end adjustments relating to the following transactions:
 On December 27, 2007, Cole wrote and recorded checks to creditors totaling
$350,000 causing an overdraft of $100,000 in Cole 's bank account at December 31,
2007. The checks were mailed out on January 10, 2008.
 On December 28, 2007, Cole purchased and received goods for $150,000, terms
2/10, n/30. Cole records purchases and accounts payable at net amounts. The
invoice was recorded and paid January 3, 2008.
 Goods shipped f.o.b. destination on December 20, 2007 from a vendor to Cole were
received January 2, 2008. The invoice cost was $65,000.
At December 31, 2007, what amount should Cole report as total accounts payable?
a. $1,362,000.
b. $1,297,000.
c. $1,050,000.
d. $950,000.
99. The balance in Hill Co.'s accounts payable account at December 31, 2007 was $700,000
before any necessary year-end adjustments relating to the following:
 Goods were in transit to Hill from a vendor on December 31, 2007. The invoice cost
was $40,000. The goods were shipped f.o.b. shipping point on December 29, 2007
and were received on January 4, 2008.
 Goods shipped f.o.b. destination on December 21, 2007 from a vendor to Hill were
received on January 6, 2008. The invoice cost was $25,000.
 On December 27, 2007, Hill wrote and recorded checks to creditors totaling $30,000
that were mailed on January 10, 2008.
In Hill's December 31, 2007 balance sheet, the accounts payable should be
a. $730,000
b. $740,000.
c. $765,000.
d. $770,000.
100. Gear Co.'s accounts payable balance at December 31, 2007 was $1,500,000 before
considering the following transactions:
 Goods were in transit from a vendor to Gear on December 31, 2007. The invoice
price was $70,000, and the goods were shipped f.o.b. shipping point on December
29, 2007. The goods were received on January 4, 2008.
 Goods shipped to Gear, f.o.b. shipping point on December 20, 2007, from a vendor
were lost in transit. The invoice price was $50,000. On January 5, 2008, Gear filed a
$50,000 claim against the common carrier.
In its December 31, 2007 balance sheet, Gear should report accounts payable of
a. $1,620,000.
b. $1,570,000.
c. $1,550,000.
d. $1,500,000.
101. Tysen Retailers purchased merchandise with a list price of $50,000, subject to trade
discounts of 20% and 10%, with no cash discounts allowable. Tysen should record the
cost of this merchandise as
a. $35,000.
b. $36,000.
c. $39,000.
d. $50,000.
102. On June 1, 2007, Mills Corp. sold merchandise with a list price of $20,000 to Linn on
account. Mills allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40
and the sale was made f.o.b. shipping point. Mills prepaid $400 of delivery costs for Linn
as an accommodation. On June 12, 2007, Mills received from Linn a remittance in full
payment amounting to
a. $10,976.
b. $11,368.
c. $11,376.
d. $11,196.
103. Dark Co. recorded the following data pertaining to raw material X during January 2007:
Units
Date Received Cost Issued On Hand
1/1/07 Inventory $8.00 3,200
1/11/07 Issue 1,600 1,600
1/22/07 Purchase 4,000 $9.40 5,600
The moving-average unit cost of X inventory at January 31, 2007 is
a. $8.70.
b. $8.85.
c. $9.00.
d. $9.40.
104. During periods of rising prices, a perpetual inventory system would result in the same
dollar amount of ending inventory as a periodic inventory system under which of the following
inventory cost flow methods?
FIFO LIFO
a. Yes No
b. Yes Yes
c. No Yes
d. No No
105. Earl Co. was formed on January 2, 2007, to sell a single product. Over a two-year
period, Earl's acquisition costs have increased steadily. Physical quantities held in
inventory were equal to three months' sales at December 31, 2007, and zero at
December 31, 2008. Assuming the periodic inventory system, the inventory cost method
which reports the highest amount of each of the following is
Inventory Cost of Sales
December 31, 2007 2008
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO
106. Noll Co. had 450 units of product A on hand at January 1, 2007, costing $42 each.
Purchases of product A during January were as follows:
Date Units Unit Cost
Jan. 10 600 $44
18 750 46
28 300 48
A physical count on January 31, 2007 shows 600 units of product A on hand. The cost of
the inventory at January 31, 2007 under the LIFO method is
a. $28,200.
b. $26,700.
c. $25,500.
d. $24,600.
107. When the double extension approach to the dollar-value LIFO inventory cost flow
method is used, the inventory layer added in the current year is multiplied by an index
number. How would the following be used in the calculation of this index number?
Ending inventory Ending inventory
at current year cost at base year cost
a. Numerator Denominator
b. Numerator Not used
c. Denominator Numerator
d. Not used Denominator
108. Carr Co. adopted the dollar-value LIFO inventory method on December 31, 2007. Carr's
entire inventory constitutes a single pool. On December 31, 2007, the inventory was $320,000
under the dollar-value LIFO method. Inventory data for 2008 are as follows:
12/31/08 inventory at year-end prices $440,000
Relevant price index at year end (base year 2007) 110
Using dollar value LIFO, Carr's inventory at December 31, 2008 is
a. $352,000.
b. $408,000.
c. $400,000.
d. $440,000.
TRUE-FALSE—Conceptual
1. A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
2. The lower-of-cost-or-market method is used for inventory despite being less

conservative than valuing inventory at market value.
3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid

overstating inventory.
4. Application of the lower-of-cost-or-market rule results in inconsistency because a

company may value inventory at cost in one year and at market in the next year.
5. GAAP requires reporting inventory at net realizable value, even if above cost, whenever
there is a controlled market with a quoted price applicable to all quantities.
6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to
obtain the cost figures.
7. In a basket purchase, the cost of the individual assets acquired is determined on the
basis of their relative sales value.
8. A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.
9. Most purchase commitments must be recorded as a liability.
10. If the contract price on a noncancelable purchase commitment exceeds the market
price, the buyer should record any expected losses on the commitment in the period in
which the market decline takes place.
11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
12. The gross profit method can be used to approximate the dollar amount of inventory on
hand.
13. In most situations, the gross profit percentage is stated as a percentage of cost.
14. A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.
15. When the conventional retail method includes both net markups and net markdowns in
the cost-to-retail ratio, it approximates a lower-of-cost-or-market valuation.
16. In the retail inventory method, the term markup means a markup on the original cost of
an inventory item.
17. In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.
18. The inventory turnover ratio is computed by dividing the cost of goods sold by the ending
inventory on hand.
19. The average days to sell inventory represents the average number of days’ sales for
which a company has inventory on hand.
*20. The LIFO retail method assumes that markups and markdowns apply only to the goods
purchased during the period.
21. Which of the following is true about lower-of-cost-or-market?
a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.
22. The primary basis of accounting for inventories is cost. A departure from the cost basis
of pricing the inventory is required where there is evidence that when the goods are sold
in the ordinary course of business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
d. future utility will be less than their cost.
23. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of
the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
24. In no case can "market" in the lower-of-cost-or-market rule be more than

a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal and an allowance for an approximately normal
profit margin.
d. estimated selling price in the ordinary course of business less reasonably predictable
costs of completion and disposal, an allowance for an approximately normal profit
margin, and an adequate reserve for possible future losses.
25. Designated market value
a. is always the middle value of replacement cost, net realizable value, and net
realizable value less a normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.
26. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.
27. An item of inventory purchased this period for $15.00 has been incorrectly written down
to its current replacement cost of $10.00. It sells during the following period for $30.00,
its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which
of the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.
S
28. When the direct method is used to record inventory at market
a. there is a direct reduction in the selling price of the product that results in a loss
being recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting
loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded
in the financial statements.
d. the market value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.
S
29. Recording inventory at net realizable value is permitted, even if it is above cost, when
there are no significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort
reported net income.
30. When inventory declines in value below original (historical) cost, and this decline is
considered other than temporary, what is the maximum amount that the inventory can be
valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
31.Net realizable value is

a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.
32. If a unit of inventory has declined in value below original cost, but the market value
exceeds net realizable value, the amount to be used for purposes of inventory valuation
is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.
33. Inventory may be recorded at net realizable value if

a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.
34. If a material amount of inventory has been ordered through a formal purchase contract
at the balance sheet date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
35. The credit balance that arises when a net loss on a purchase commitment is recognized
should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.
P
36. In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw
materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the
market price for these materials dropped to $510,000. The journal entry to record this
situation at December 31, 2006 will result in a credit that should be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
S
37. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period.
38. The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.
39. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.
40. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.
41. An inventory method which is designed to approximate inventory valuation at the lower
of cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
42. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.
43. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.
44. When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or market.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.
45.To produce an inventory valuation which approximates the lower of cost or market using the
conventional retail inventory method, the computation of the ratio of cost to retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
*46. When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns
are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are
deducted.
c. if it is the LIFO method, the beginning inventory is included and markdowns are not
deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns
are not deducted.
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47. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
which reflects the item's selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.
S
48. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
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49. Which of the following statements is false regarding an assumption of inventory cost
flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during
a period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at
the end of an accounting period.
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50. The average days to sell inventory is computed by dividing
a. 365 days by the inventory turnover ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.
51. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.
*52. When using dollar-value LIFO, if the incremental layer was added last year, it should be
multiplied by
a. last year's cost ratio and this year's index.
b. this year's cost ratio and this year's index.
c. last year's cost ratio and last year's index.
d. this year's cost ratio and last year's index.
MULTIPLE CHOICE—Computational
53. Marr Corporation has two products in its ending inventory, each accounted for at the
lower of cost or market. A profit margin of 30% on selling price is considered normal for
each product. Specific data with respect to each product follows:
Product #1 Product #2
Historical cost $40.00 $ 70.00
Replacement cost 45.00 54.00
Estimated cost to dispose 10.00 26.00
Estimated selling price 80.00 130.00
In pricing its ending inventory using the lower-of-cost-or-market, what unit values should
Marr use for products #1 and #2, respectively?
a. $40.00 and $65.00.
b. $46.00 and $65.00.
c. $46.00 and $60.00.
d. $45.00 and $54.00.
54. Paul Konerko Company sells product 2005WSC for $20 per unit. The cost of one unit of
2005WSC is $18, and the replacement cost is $17. The estimated cost to dispose of a
unit is $4, and the normal profit is 40%. At what amount per unit should product
2005WSC be reported, applying lower-of-cost-or-market?
a. $8.
b. $16.
c. $17.
d. $18.
55. Remington Company sells product 1976NLC for $40 per unit. The cost of one unit of
1976NLC is $36, and the replacement cost is $34. The estimated cost to dispose of a
unit is $8, and the normal profit is 40%. At what amount per unit should product
1976NLC be reported, applying lower-of-cost-or-market?
a. $16.
b. $32.
c. $34.
d. $36.
56. Joe Crede Corporation sells its product, a rare metal, in a controlled market with a
quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now
held in inventory is $250,000. The total selling price is $600,000, and estimated costs of
disposal are $10,000. At what amount should the inventory of 5,000 pounds be reported
in the balance sheet?
a. $240,000.
b. $250,000.
c. $590,000.
d. $600,000.
57. Pettengal Corporation sells its product, a rare metal, in a controlled market with a quoted
price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in
inventory is $150,000. The total selling price is $350,000, and estimated costs of
disposal are $5,000. At what amount should the inventory of 5,000 pounds be reported
in the balance sheet?
a. $145,000.
b. $150,000.
c. $345,000.
d. $350,000.
58. Jermaine Dye Corporation acquired two inventory items at a lump-sum cost of $50,000.
The acquisition included 3,000 units of product LF, and 7,000 units of product 1B. LF
normally sells for $15 per unit, and 1B for $5 per unit. If Dye sells 1,000 units of LF, what
amount of gross profit should it recognize?
a. $1,875
b. $5,625.
c. $10,000.
d. $11,875.
59. Williamson Corporation acquired two inventory items at a lump-sum cost of $40,000.
The acquisition included 3,000 units of product CF, and 7,000 units of product 3B. CF
normally sells for $12 per unit, and 3B for $4 per unit. If Williamson sells 1,000 units of
CF, what amount of gross profit should it recognize?
a. $1,500.
b. $4,500.
c. $8,000.
d. $9,500.
60.At a lump-sum cost of $48,000, Sealy Company recently purchased the following items for
resale:
Item No. of Items Purchased Resale Price Per Unit
M 4,000 $2.50
N 2,000 8.00
O 6,000 4.00
The appropriate cost per unit of inventory is:
M N O
a. $2.50 $8.00 $4.00
b. $2.07 $13.24 $2.21
c. $2.40 $7.68 $3.84
d. $4.00 $4.00 $4.00
61. During 2006, Reese Co., a manufacturer of chocolate candies, contracted to purchase
100,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of
2007. Because a record harvest is predicted for 2007, the price per pound for cocoa
beans had fallen to $3.10 by December 31, 2006.
Of the following journal entries, the one which would properly reflect in 2006 the effect of
the commitment of Reese Co. to purchase the 100,000 pounds of cocoa is
a. Cocoa Inventory ........................................................... 400,000
Accounts Payable ............................................. 400,000
b. Cocoa Inventory ........................................................... 310,000
Loss on Purchase Commitments .................................. 90,000
Accounts Payable ............................................. 400,000
c. Estimated Loss on Purchase Commitments.................. 90,000
Estimated Liability on Purchase Commitments .. 90,000
d. No entry would be necessary in 2006
62. AJ Corporation, a manufacturer of ethnic foods, contracted in 2007 to purchase 500

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By
12/31/07, the price per pound of the spice mixture had risen to $5.60 per pound. In 2007,
AJ should recognize
a. a loss of $2,500.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.
63. DT Corporation, a manufacturer of Mexican foods, contracted in 2007 to purchase 1,000

pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2008. By
12/31/07, the price per pound of the spice mixture had dropped to $4.60 per pound. In
2007, DT should recognize
a a loss of $5,000.
b. a loss of $400.
c. no gain or loss.
d. a gain of $400.
64. The following information is available for October for Jordan Company.
Beginning inventory $ 50,000
Net purchases 150,000
Net sales 300,000
Percentage markup on cost 66.67%
A fire destroyed Jordan’s October 31 inventory, leaving undamaged inventory with a cost
of $3,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. $17,000.
b. $77,000.
c. $80,000.
d. $100,000.
65. The following information is available for October for Horton Company.
Beginning inventory $100,000
Net purchases 300,000
Net sales 600,000
Percentage markup on cost 66.67%
A fire destroyed Horton’s October 31 inventory, leaving undamaged inventory with a cost
of $6,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. $34,000.
b. $154,000.
c. $160,000.
d. $200,000.

Sloan Company, a wholesaler, budgeted the following sales for the indicated months:
June July August
Sales on account $1,800,000 $1,840,000 $1,900,000
Cash sales 180,000 200,000 260,000
Total sales $1,980,000 $2,040,000 $2,160,000
All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the
beginning of each month are at 30% of that month's projected cost of goods sold.
66. The cost of goods sold for the month of June is anticipated to be
a. $1,440,000.
b. $1,500,000.
c. $1,520,000.
d. $1,650,000.
67. Merchandise purchases for July are anticipated to be

a. $1,632,000.
b. $2,076,000.
c. $1,700,000.
d. $1,730,000.
68. Gomez Company had a gross profit of $360,000, total purchases of $420,000, and an
ending inventory of $240,000 in its first year of operations as a retailer. Gomez’s sales in
its first year must have been
a. $540,000.
b. $660,000.
c. $180,000.
d. $600,000.
69. A markup of 40% on cost is equivalent to what markup on selling price?

a. 29%
b. 40%
c. 60%
d. 71%
70. Miller, Inc. estimates the cost of its physical inventory at March 31 for use in an interim
financial statement. The rate of markup on cost is 25%. The following account balances
are available:
Inventory, March 1 $220,000
Purchases 172,000
Sales during March 300,000
The estimate of the cost of inventory at March 31 would be
a. $84,000.
b. $144,000.
c. $159,000.
d. $112,000.
71. On January 1, 2007, the merchandise inventory of Colaw, Inc. was $800,000. During
2007 Colaw purchased $1,600,000 of merchandise and recorded sales of $2,000,000.
The gross profit rate on these sales was 25%. What is the merchandise inventory of
Colaw at December 31, 2007?
a. $400,000.
b. $500,000.
c. $900,000.
d. $1,500,000.
72. For 2007, cost of goods available for sale for Vale Corporation was $900,000. The gross
profit rate was 20%. Sales for the year were $800,000. What was the amount of the
ending inventory?
a. $0.
b. $260,000.
c. $180,000.
d. $160,000.
73. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15 $300,000
Inventory, January 1 50,000
Purchases, January 1 through April 15 250,000
Markup on cost 25%
The amount of the inventory loss is estimated to be
a. $60,000.
b. $30,000.
c. $75,000.
d. $50,000.
74. The inventory account of Lance Company at December 31, 2007, included the following
items:
Inventory Amount
Merchandise out on consignment at sales price
(including markup of 40% on selling price) $15,000
Goods purchased, in transit (shipped f.o.b. shipping point) 12,000
Goods held on consignment by Lance 13,000
Goods out on approval (sales price $7,600, cost $6,400) 7,600
Based on the above information, the inventory account at December 31, 2007, should be
reduced by
a. $20,200.
b. $22,600.
c. $32,200.
d. $32,000.
75. Flynn Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Cost Retail
Beginning inventory $ 30,000 $ 50,000
Purchases 145,000 200,000
Freight-in 2,500 —
Net markups — 8,500
Net markdowns — 10,000
Employee discounts — 1,000
Sales — 205,000
If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost to
retail ratio?
a. $177,500 ÷ $250,000
b. $177,500 ÷ $258,500
c. $175,000 ÷ $260,000
d. $177,500 ÷ $248,500
The following data concerning the retail inventory method are taken from the financial records of
Stone Company.
Cost Retail
Beginning inventory $ 49,000 $ 70,000
Purchases 224,000 320,000
Net markdowns — 14,000
Sales — 336,000
76. The ending inventory at retail should be

a. $74,000.
b. $60,000.
c. $64,000.
d. $42,000.
77. If the ending inventory is to be valued at approximately the lower of cost or market, the
calculation of the cost to retail ratio should be based on goods available for sale at (1)
cost and (2) retail, respectively of
a. $279,000 and $410,000.
b. $279,000 and $396,000.
c. $279,000 and $390,000.
d. $273,000 and $390,000.
78. If the foregoing figures are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to $54,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these.
*79. Assuming no change in the price level if the LIFO inventory method were used in
conjunction with the data, the ending inventory at cost would be
a. $42,600.
b. $42,000.
c. $40,800.
d. $43,200.
*80. Assuming that the LIFO inventory method were used in conjunction with the data and
that the inventory at retail had increased during the period, then the computation of retail
in the cost to retail ratio would
a. exclude both markups and markdowns and include beginning inventory.
b. include markups and exclude both markdowns and beginning inventory.
c. include both markups and markdowns and exclude beginning inventory.
d. exclude markups and include both markdowns and beginning inventory.
81. Gooch Corporation had the following amounts, all at retail:

Beginning inventory $ 3,600 Purchases $120,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Gooch’s ending inventory at retail?
a. $54,400.
b. $56,000.
c. $57,600.
d. $58,400
82. Dryer Corporation had the following amounts, all at retail:
Beginning inventory $ 3,600 Purchases $100,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Dryer’s ending inventory at retail?
a. $34,400.
b. $36,000.
c. $37,600.
d. $38,400
83. Dye Corporation’s computation of cost of goods sold is:

Add: Cost of goods purchased 405,000
Cost of goods available for sale 465,000
Cost of goods sold $375,000
The average days to sell inventory for Dye are
a. 58.4 days.
b. 67.6 days.
c. 73.0 days.
d. 87.6 days.
84. Ace Corporation’s computation of cost of goods sold is:

Add: Cost of goods purchased 405,000
Cost of goods available for sale 465,000
Cost of goods sold $385,000
The average days to sell inventory for Ace are
a. 56.9 days.
b. 63.1 days.
c. 66.4 days.
d. 75.8 days.
85. The 2007 financial statements of Wert Company reported a beginning inventory of
$80,000, an ending inventory of $120,000, and cost of goods sold of $600,000 for the
year. Wert’s inventory turnover ratio for 2007 is
a. 7.5 times.
b. 6.0 times.
c. 5.0 times.
d. 4.3 times.
Trent Co. uses the retail inventory method. The following information is available for the current
year.
Cost Retail
Beginning inventory $ 78,000 $122,000
Purchases 295,000 415,000
Employee discounts — 2,000
Net Markdowns — 20,000
Sales — 390,000
86. If the ending inventory is to be valued at approximately lower of average cost or market,
the calculation of the cost ratio should be based on cost and retail of
a. $300,000 and $430,000.
b. $300,000 and $428,000.
c. $373,000 and $550,000.
d. $378,000 and $552,000.
87. The ending inventory at retail should be

a. $160,000.
b. $150,000.
c. $144,000.
d. $140,000.
88. The approximate cost of the ending inventory by the conventional retail method is
a. $95,900.
b. $94,920.
c. $98,000.
d. $102,480.
*89. If the ending inventory is to be valued at approximately LIFO cost, the calculation of the
cost ratio should be based on cost and retail of
a. $378,000 and $552,000.
b. $378,000 and $532,000.
c. $300,000 and $410,000.
d. $300,000 and $430,000.
*90. Assuming that the LIFO inventory method is used, that the beginning inventory is the
base inventory when the index was 100, and that the index at year end is 112, the
ending inventory at dollar-value LIFO retail cost is
a. $80,460.
b. $92,757.
c. $95,900.
d. $102,480.
Baker Company, which uses the retail LIFO method to determine inventory cost, has provided
the following information for 2007:
Cost Retail
Inventory, 1/1/07 $ 94,000 $140,000
Net purchases 378,000 562,000
Net markups 68,000
Net markdowns 30,000
Net sales 530,000
*91. Assuming stable prices (no change in the price index during 2007), what is the cost of
Baker's inventory at December 31, 2007?
a. $128,100.
b. $138,100.
c. $136,000.
d. $132,300.
*92. Assuming that the price index was 105 at December 31, 2007 and 100 at January 1,
2007, what is the cost of Baker's inventory at December 31, 2007 under the dollar-value-
LIFO retail method?
a. $133,690.
b. $138,915.
c. $140,305.
d. $131,800.
$250,000. Information pertaining to that inventory follows:
Estimated selling price $255,000
Estimated cost of disposal 10,000
Normal profit margin 30,000
Current replacement cost 225,000
Teel records losses that result from applying the lower-of-cost-or-market rule. At
December 31, 2007, the loss that Teel should recognize is
a. $0.
b. $5,000.
c. $20,000.
d. $25,000.
94. Under the lower-of-cost-or-market method, the replacement cost of an inventory item
would be used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the
normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.
95. The original cost of an inventory item is above the replacement cost and the net
realizable value. The replacement cost is below the net realizable value less the normal
profit margin. As a result, under the lower-of-cost-or-market method, the inventory item
should be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.
96. Gore Company's accounting records indicated the following information:

Inventory, 1/1/07 $ 600,000
Purchases during 2007 3,000,000
Sales during 2007 3,800,000
A physical inventory taken on December 31, 2007, resulted in an ending inventory of
$700,000. Gore's gross profit on sales has remained constant at 25% in recent years.
Gore suspects some inventory may have been taken by a new employee. At December
31, 2007, what is the estimated cost of missing inventory?
a. $50,000.
b. $150,000.
c. $200,000.
d. $250,000.
97. Eaton Co. uses the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory at July 31, 2007, are as follows:
Cost Retail
Inventory, 2/1/07 $ 200,000 $ 250,000
Purchases 1,000,000 1,575,000
Markups, net 175,000
Sales 1,750,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-market method, Eaton's estimated inventory at July 31, 2007
is
a. $72,000.
b. $84,000.
c. $96,000.
d. $120,000.
98. At December 31, 2007, the following information was available from Dole Co.'s
accounting records:
Cost Retail
Inventory, 1/1/07 $147,000 $ 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale $980,000 $1,400,000
Sales for the year totaled $1,050,000. Markdowns amounted to $10,000. Under the
lower-of-cost-or-market method, Dole's inventory at December 31, 2007 was
a. $294,000.
b. $245,000.
c. $252,000.
d. $238,000.
*99. On December 31, 2006, Lilly Co. adopted the dollar-value LIFO retail inventory method.
Inventory data for 2007 are as follows:
LIFO Cost Retail
Inventory, 12/31/06 $300,000 $420,000
Inventory, 12/31/07 ? 550,000
Increase in price level for 2007 10%
Cost to retail ratio for 2007 70%
Under the LIFO retail method, Lilly's inventory at December 31, 2007, should be
a. $361,600.
b. $385,000.
c. $391,000.
d $400,100.
TRUE-FALSE—Conceptual
1. Debt securities include corporate bonds and convertible debt, but not U.S. government
securities.
2. Trading securities are securities bought and held primarily for sale in the near term to
generate income on short-term price differences.
3. Unrealized holding gains and losses are recognized in net income for available-for-sale
debt securities.
4. A company can classify a debt security as held-to-maturity if it has the positive intent to
hold the securities to maturity.
5. Companies do not report changes in the fair value of available-for-sale debt securities as
income until the security is sold.
6. The Securities Fair Value Adjustment account has a normal credit balance.
7. Companies report trading securities at fair value, with unrealized holding gains and
losses reported in net income.
8. Equity security holdings between 20 and 50 percent indicates that the investor has a
controlling interest over the investee.
9. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other

compre-hensive income.
10. Significant influence over an investee may be indicated by material intercompany trans-
actions and interchange of managerial personnel.
11. The accounting profession has concluded that an investment of more than 50 percent of
the voting stock of an investee should lead to a presumption of significant influence over
an investee.
12. All dividends received by an investor from the investee decrease the investment’s
carrying value under the equity method.
13. Under the fair value method, the investor reports as revenue its share of the net income
reported by the investee.
14. A controlling interest occurs when one corporation acquires a voting interest of more
than 50 percent in another corporation.
15. Trading securities and available-for-sale securities are classified as current or

noncurrent assets depending on the circumstances.
16. When a company sells available-for-sale securities, a reclassification adjustment is

neces-sary to avoid counting gains and losses twice.
17. If a decline in a security’s value is judged to be temporary, a company needs to write

down the cost basis of the individual security to a new cost basis.
18. Subsequent increases and decreases in the fair value of impaired available-for-sale
securities are included in other comprehensive income.
19. If a company transfers held-to-maturity securities to available-for-sale securities, the

unrealized gain or loss is recognized in income.
20. The transfer of securities from trading to available-for-sale and from available-for-sale to
trading has the same impact on stockholders’ equity and net income.
MULTIPLE CHOICE—Conceptual
21. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
22. A correct valuation is

a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
23. Securities which could be classified as held-to-maturity are

a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.
24. Unrealized holding gains or losses which are recognized in income are from securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.
P
25. When an investor's accounting period ends on a date that does not coincide with an
interest receipt date for bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue
for the amount of interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate
portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue
for the total amount of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide
with the bond's interest period.
S
26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S
27. Debt securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses and are included as other comprehensive income and
as a separate component of stockholders' equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S
28. Use of the effective-interest method in amortizing bond premiums and discounts results
in
a. a greater amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
S
29. Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate
component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
31. Held-to-maturity securities are reported at

a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
32. Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the
securities to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.
33. Which of the following is not correct in regard to trading securities?

a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
35. Investments in debt securities are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.
36. Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds
are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply
the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
37. Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
38. An available-for-sale debt security is purchased at a discount. The entry to record the
amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount
on a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be
applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
40. Which of the following is correct about the effective-interest method of amortization?
a. The effective interest method applied to investments in debt securities is different
from that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of
the investment from period to period.
41. When investments in debt securities are purchased between interest payment dates,
preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally correct about recording a sale of a debt security
before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest
payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium
on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
S
43. When a company has acquired a "passive interest" in another corporation, the acquiring
company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
S
44. Bista Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of the
investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
P
45. An investor has a long-term investment in stocks. Regular cash dividends received by
the investor are recorded as
Fair Value Method Equity Method
a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income
46.When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum-
stances indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
47. If the parent company owns 90% of the subsidiary company's outstanding common
stock, the company should generally account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48. Byner Corporation accounts for its investment in the common stock of Yount Company
under the equity method. Byner Corporation should ordinarily record a cash dividend
received from Yount as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
49. Under the equity method of accounting for investments, an investor recognizes its share
of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
50. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had
net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded
these transactions using the fair value method rather than the equity method of
accounting. What effect would this have on the investment account, net income, and
retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
51. An unrealized holding loss on a company's available-for-sale securities should be
reflected in the current financial statements as
a. an extraordinary item shown as a direct reduction from retained earnings.
b. a current loss resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and deducted in the equity section of the balance
sheet.
52. An unrealized holding gain on a company's available-for-sale securities should be

reflected in the current financial statements as
a. an extraordinary item shown as a direct increase to retained earnings.
b. a current gain resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and included in the equity section of the balance sheet.
53. A reclassification adjustment is reported in the

a. income statement as an Other Revenue or Expense.
b. stockholders’ equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders’ equity.
54. When an investment in a held-to-maturity security is transferred to an available-for-sale

security, the carrying value assigned to the available-for-sale security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.
55. When an investment in an available-for-sale security is transferred to trading because

the company anticipates selling the stock in the near future, the carrying value assigned
to the investment upon entering it in the trading portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.
P
56. A debt security is transferred from one category to another. Generally acceptable
accounting principles require that for this particular reclassification (1) the security be
transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the
date of transfer currently carried as a separate component of stockholders' equity be
amortized over the remaining life of the security. What type of transfer is being
described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity
*57. Companies that attempt to exploit inefficiencies in various derivative markets by

attempting to lock in profits by simultaneously entering into transactions in two or more
markets are called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.
*58. All of the following statements regarding accounting for derivatives are correct except
that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.
*59. All of the following are characteristics of a derivative financial instrument except the
instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.
*60. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*61. Gains or losses on cash flow hedges are

a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.
*62. An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.
*63. All of the following are requirements for disclosures related to financial instruments
except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than
trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net
gain/loss on derivative instruments designated in cash flow hedges.
MULTIPLE CHOICE—Computational
64. On August 1, 2007, Witten Co. acquired 200, $1,000, 9% bonds at 97 plus accrued
interest. The bonds were dated May 1, 2007, and mature on April 30, 2013, with interest
paid each October 31 and April 30. The bonds will be added to Witten’s available-for-
sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2007
is
a. Available-for-Sale Securities ............................................... 198,500
Cash ....................................................................... 198,500
b. Available-for-Sale Securities ............................................... 194,000
Interest Receivable ............................................................. 4,500
Cash ....................................................................... 198,500
c. Available-for-Sale Securities ............................................... 194,000
Interest Revenue ................................................................ 4,500
Cash ....................................................................... 198,500
d. Available-for-Sale Securities ............................................... 200,000
Discount on Debt Securities .................................... 6,000
Cash ...................................................................... 198,500
65. Barr Company purchased bonds with a face amount of $400,000 between interest
payment dates. Barr purchased the bonds at 102, paid brokerage costs of $6,000, and
paid accrued interest for three months of $10,000. The amount to record as the cost of
this long-term investment in bonds is
a. $424,000.
b. $414,000.
c. $408,000.
d. $400,000.
Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying
$376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1.
The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-
interest method and plans to hold these bonds to maturity.
66. On July 1, 2008, Oliver Company should increase its Held-to-Maturity Debt Securities
account for the McGee Co. bonds by
a. $2,392.
b. $1,371.
c. $1,196.
d. $686.
67. For the year ended December 31, 2008, Oliver Company should report interest revenue
from the McGee Co. bonds of:
a. $42,392.
b. $41,409.
c. $41,368.
d. $40,000.
Marten Co. purchased $500,000 of 8%, 5-year bonds from Duggan, Inc. on January 1, 2008,
with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective
interest rate of 7%. Using the effective-interest method, Marten Co. decreased the Available-for-
Sale Debt Securities account for the Duggan, Inc. bonds on July 1, 2008 and December 31,
2008 by the amortized premiums of $1,770 and $1,830, respectively.
68. At December 31, 2008, the fair value of the Duggan, Inc. bonds was $530,000. What
should Marten Co. report as other comprehensive income and as a separate component
of stockholders' equity?
a. $12,810.
b. $9,210.
c. $3,600.
d. No entry should be made.
69. At April 1, 2009, Marten Co. sold the Duggan bonds for $515,000. After accruing for
interest, the carrying value of the Duggan bonds on April 1, 2009 was $516,875.
Assuming Marten Co. has a portfolio of Available-for-Sale Debt Securities, what should
Marten Co. report as a gain or loss on the bonds?
a. ($14,685).
b. ($10,935).
c. ($1,875).
d. $ 0.
70. On August 1, 2007, Bettis Company acquired $200,000 face value 10% bonds of
Hanson Corporation at 104 plus accrued interest. The bonds were dated May 1, 2007,
and mature on April 30, 2012, with interest payable each October 31 and April 30. The
bonds will be held to maturity. What entry should Bettis make to record the purchase of
the bonds on August 1, 2007?
a. Held-to-Maturity Securities.................................................. 208,000
Cash ....................................................................... 213,000
b. Held-to-Maturity Securities.................................................. 213,000
Cash ....................................................................... 213,000
c. Held-to-Maturity Securities.................................................. 213,000
Interest Revenue ..................................................... 5,000
Cash ....................................................................... 208,000
d. Held-to-Maturity Securities.................................................. 200,000
Premium on Bonds ............................................................. 13,000
Cash ....................................................................... 213,000
71. On October 1, 2007, Porter Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds
for $990,000 which includes $15,000 accrued interest. The bonds, which mature on
February 1, 2016, pay interest semiannually on February 1 and August 1. Porter uses
the straight-line method of amortization. The bonds should be reported in the December
31, 2007 balance sheet at a carrying value of
a. $975,000.
b. $975,750.
c. $990,000.
d. $990,250.
72. On November 1, 2007, Little Company purchased 600 of the $1,000 face value, 9%
bonds of Player, Incorporated, for $632,000, which includes accrued interest of $9,000.
The bonds, which mature on January 1, 2012, pay interest semiannually on March 1 and
September 1. Assuming that Little uses the straight-line method of amortization and that
the bonds are appropriately classified as available-for-sale, the net carrying value of the
bonds should be shown on Little's December 31, 2007, balance sheet at
a. $600,000.
b. $623,000.
c. $622,080.
d. $632,000.
73. On November 1, 2007, Morton Co. purchased Gomez, Inc., 10-year, 9%, bonds with a
face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued
interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on
July 1, 2014. Morton uses the straight-line method of amortization. Ignoring income
taxes, the amount reported in Morton's 2007 income statement as a result of Morton's
available-for-sale investment in Gomez was
a. $4,375.
b. $4,167.
c. $3,750.
d. $3,333.
74. On October 1, 2007, Lyman Co. purchased to hold to maturity, 200, $1,000, 9% bonds
for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid
semiannually on December 1 and June 1 and the bonds mature on December 1, 2011.
Lyman uses straight-line amortization. Ignoring income taxes, the amount reported in
Lyman's 2007 income statement from this investment should be
a. $4,500.
b. $4,020.
c. $4,980.
d. $5,460.
75. During 2005, Plano Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the
bonds at December 31, 2007 was $1,960,000. The bonds mature on March 1, 2012, and
pay interest on March 1 and September 1. Plano sells 1,000 bonds on September 1,
2008, for $988,000, after the interest has been received. Plano uses straight-line
amortization. The gain on the sale is
a. $0.
b. $4,800.
c. $8,000.
d. $11,200.
76. Redman Company's trading securities portfolio which is appropriately included in current
assets is as follows:
December 31, 2007
Fair Unrealized
Cost Value Gain (Loss)
Arlington Corp. 250,000 200,000 $(50,000)
Downs, Inc. 245,000 265,000 20,000
$495,000 $465,000 $(30,000)
Ignoring income taxes, what amount should be reported as a charge against income in
Redman's 2007 income statement if 2007 is Redman's first year of operation?
a. $0.
b. $20,000.
c. $30,000.
d. $50,000.
77. On its December 31, 2006, balance sheet, Quinn Co. reported its investment in
available-for-sale securities, which had cost $600,000, at fair value of $550,000. At
December 31, 2007, the fair value of the securities was $585,000. What should Quinn
report on its 2007 income statement as a result of the increase in fair value of the
investments in 2007?
a. $0.
b. Unrealized loss of $15,000.
c. Realized gain of $35,000.
d. Unrealized gain of $35,000.
78. During 2007, Ellis Company purchased 20,000 shares of Hiller Corp. common stock for
$315,000 as an available-for-sale investment. The fair value of these shares was
$300,000 at December 31, 2007. Ellis sold all of the Hiller stock for $17 per share on
December 3, 2008, incurring $14,000 in brokerage commissions. Ellis Company should
report a realized gain on the sale of stock in 2008 of
a. $11,000.
b. $25,000.
c. $26,000.
d. $40,000.
On its December 31, 2007 balance sheet, Klugman Company appropriately reported a $10,000
debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no
change during 2008 in the composition of Klugman’s portfolio of marketable equity securities
held as available-for-sale securities. The following information pertains to that portfolio:
Security Cost Fair value at 12/31/08
X $125,000 $160,000
Y 100,000 95,000
Z 175,000 125,000
$400,000 $380,000
79. What amount of unrealized loss on these securities should be included in Klugman's
stockholders' equity section of the balance sheet at December 31, 2008?
a. $30,000.
b. $20,000.
c. $10,000.
d. $0.
80. The amount of unrealized loss to appear as a component of comprehensive income for
the year ending December 31, 2008 is
a. $30,000.
b. $20,000.
c. $10,000.
d. $0.
81. Kennett Corporation purchased 25,000 shares of common stock of the Swenson
Corporation for $40 per share on January 2, 2008. Swenson Corporation had 100,000
shares of common stock outstanding during 2008, paid cash dividends of $60,000 during
2008, and reported net income of $200,000 for 2008. Kennett Corporation should report
revenue from investment for 2008 in the amount of
a. $15,000.
b. $35,000.
c. $50,000.
d. $55,000.
Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common stock.
During 2008, Steele earns $800,000 and pays cash dividends of $640,000.
82. If the beginning balance in the investment account was $500,000, the balance at
December 31, 2008 should be
a. $820,000.
b. $660,000.
c. $564,000.
d. $500,000.
83. Garrison should report investment revenue for 2008 of

a. $320,000.
b. $256,000.
c. $64,000.
d. $0.
The summarized balance sheets of Elston Company and Alley Company as of December 31,
2007 are as follows:
Elston Company
Balance Sheet
December 31, 2007
Assets $1,200,000
Liabilities $ 150,000
Capital stock 600,000
Retained earnings 450,000
Total equities $1,200,000
Alley Company
Balance Sheet
December 31, 2007
Assets $900,000
Liabilities $225,000
Capital stock 555,000
Retained earnings 120,000
Total equities $900,000
84. If Elston Company acquired a 20% interest in Alley Company on December 31, 2007 for
$195,000 and the fair value method of accounting for the investment were used, the
amount of the debit to Investment in Alley Company Stock would have been
a. $135,000.
b. $111,000.
c. $195,000.
d. $180,000.
$225,000 and the equity method of accounting for the investment were used, the amount
of the debit to Investment in Alley Company Stock would have been
a. $285,000.
b. $225,000.
c. $180,000.
d. $202,500.
$135,000 and during 2008 Alley Company had net income of $75,000 and paid a cash
dividend of $30,000, applying the fair value method would give a debit balance in the
Investment in Alley Company Stock account at the end of 2008 of
a. $111,000.
b. $135,000.
c. $150,000.
d. $144,000.
$202,500 and during 2008 Alley Company had net income of $75,000 and paid a cash
dividend of $30,000, applying the equity method would give a debit balance in the
Investment in Alley Company Stock account at the end of 2008 of
a. $202,500.
b. $216,000.
c. $225,000.
d. $217,500.

Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company's common
stock for $300,000 on January 2, 2007. During 2007, Flynn Company declared dividends of
$50,000 and reported earnings for the year of $200,000.
88. If Karter Company used the fair value method of accounting for its investment in Flynn
Company, its Investment in Flynn Company account on December 31, 2007 should be
a. $290,000.
b. $330,000.
c. $300,000.
d. $340,000.
89. If Karter Company uses the equity method of accounting for its investment in Flynn
Company, its Investment in Flynn Company account at December 31, 2007 should be
a. $290,000.
b. $300,000.
c. $330,000.
d. $340,000.
Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2007. Glenon
Corporation owns 3,000 of the 10,000 outstanding shares of Barry.
90. What amount should Glenon show in the investment account at December 31, 2007 if
the beginning of the year balance in the account was $320,000?
a. $392,000.
b. $320,000.
c. $368,000.
d. $480,000.
91. How much investment income should Glenon report in 2007?

a. $80,000.
b. $72,000.
c. $48,000.
d. $240,000.
92. Young Co. acquired a 60% interest in Tomlin Corp. on December 31, 2006 for $945,000.
During 2007, Tomlin had net income of $600,000 and paid cash dividends of $150,000.
At December 31, 2007, the balance in the investment account should be
a. $945,000.
b. $1,305,000.
c. $1,215,000.
d. $1,395,000.
Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock. During
2007, Maye earns $120,000 and pays cash dividends of $40,000.
93. If the beginning balance in the investment account was $240,000, the balance at
December 31, 2007 should be
a. $240,000.
b. $272,000.
c. $288,000.
d. $320,000.
94. Stone should report investment revenue for 2007 of

a. $16,000.
b. $32,000.
c. $40,000.
d. $48,000.
95. The following information relates to Vernon Company for 2007:

Realized gain on sale of available-for-sale securities $15,000
Unrealized holding gains arising during the period on
available-for-sale securities 35,000
Reclassification adjustment for gains included in net income 10,000
Vernon’s 2007 other comprehensive income is
a. $25,000.
b. $40,000.
c. $50,000.
d. $60,000.
MULTIPLE CHOICE—CPA Adapted

96. On October 1, 2006, Ming Co. purchased 600 of the $1,000 face value, 8% bonds of
Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature
on January 1, 2013, pay interest semiannually on January 1 and July 1. Ming used the
straight-line method of amortization and appropriately recorded the bonds as available-
for-sale. On Ming's December 31, 2007 balance sheet, the carrying value of the bonds is
a. $690,000.
b. $684,000.
c. $681,600.
d. $672,000.
97. Unruh Corp. began operations in 2007. An analysis of Unruh’s equity securities portfolio
acquired in 2007 shows the following totals at December 31, 2007 for trading and
available-for-sale securities:
Trading Available-for-Sale
Securities Securities
Aggregate cost $90,000 $110,000
Aggregate fair value 65,000 95,000
What amount should Unruh report in its 2007 income statement for unrealized holding
loss?
a. $40,000.
b. $10,000.
c. $15,000.
d. $25,000.
98.At December 31, 2007, Malle Corp. had the following equity securities that were purchased
during 2007, its first year of operation:
Fair Unrealized
Cost Value Gain (Loss)
Trading Securities:
Security A $ 90,000 $ 60,000 $(30,000)
B 15,000 20,000 5,000
Totals $105,000 $ 80,000 $(25,000)
Available-for-Sale Securities:
Security Y $ 70,000 $ 80,000 $ 10,000
Z 85,000 55,000 (30,000)
Totals $155,000 $135,000 $(20,000)
All market declines are considered temporary. Fair value adjustments at December 31,
2007 should be established with a corresponding charge against
Income Stockholders’ Equity
a. $45,000 $ 0
b. $30,000 $30,000
c. $25,000 $20,000
d. $25,000 $ 0
99. On December 29, 2008, Greer Co. sold an equity security that had been purchased on
January 4, 2007. Greer owned no other equity securities. An unrealized holding loss was
reported in the 2007 income statement. A realized gain was reported in the 2008 income
statement. Was the equity security classified as available-for-sale and did its 2007
market price decline exceed its 2008 market price recovery?
2007 Market Price
Decline Exceeded 2008
Available-for-Sale Market Price Recovery
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2007 for $400,000. During
2007, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne
gives Kimm the ability to exercise significant influence over Carne's operating and financial
policies. During 2008, Carne earned $200,000 and paid dividends of $60,000 on April 1 and
$60,000 on October 1. On July 1, 2008, Kimm sold half of its stock in Carne for $264,000 cash.
100. Before income taxes, what amount should Kimm include in its 2007 income statement as
a result of the investment?
a. $160,000.
b. $100,000.
c. $48,000.
d. $30,000.
101. The carrying amount of this investment in Kimm's December 31, 2007 balance sheet
should be
a. $400,000.
b. $418,000.
c. $448,000.
d. $460,000.
102. What should be the gain on sale of this investment in Kimm's 2008 income statement?
a. $64,000.
b. $55,000.
c. $49,000.
d. $40,000.
103. On January 1, 2007, Sloane Co. purchased 25% of Orr Corp.'s common stock; no
goodwill resulted from the purchase. Sloane appropriately carries this investment at
equity and the balance in Sloane’s investment account was $720,000 at December 31,
2007. Orr reported net income of $450,000 for the year ended December 31, 2007, and
paid common stock dividends totaling $180,000 during 2007. How much did Sloane pay
for its 25% interest in Orr?
a. $652,500.
b. $765,000.
c. $787,500.
d. $877,500.
104. On December 31, 2006, Nance Co. purchased equity securities as trading securities.
Pertinent data are as follows:
Fair Value
Security Cost At 12/31/07
A $132,000 $117,000
B 168,000 186,000
C 288,000 258,000
On December 31, 2007, Nance transferred its investment in security C from trading to
available-for-sale because Nance intends to retain security C as a long-term investment.
What total amount of gain or loss on its securities should be included in Nance's income
statement for the year ended December 31, 2007?
a. $3,000 gain.
b. $27,000 loss.
c. $30,000 loss.
d. $45,000 loss.
Answers
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 27. b 33. a 39. d 45. b 51. b 57. d
22. b 28. c 34. a 40. a 46. a 52. a 58. a
23. a 29. b 35. d 41. a 47. b 53. b 59. a
24. d 30. b 36. b 42. c 48. a 54. c 60. d
25. d 31. d 37. d 43. a 49. b 55. d 61. c
26. a 32. b 38. b 44. d 50. a 56. d
Multiple Choice Answers—Computational
62. c 67. a 72. b 77. a 82. b 87. c 92. c
63. c 68. a 73. d 78. c 83. c 88. b 93. a
64. d 69. d 74. b 79. d 84. c 89. c 94. b
65. d 70. d 75. d 80. b 85. b 90. b
66. d 71. d 76. a 81. c 86. b 91. c
Multiple Choice Answers—CPA Adapted

95. a 97. d 99. d 101. b 103. c 105. c 107. a
96. c 98. b 100. a 102. c 104. a 106. c 108. b
True False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. F 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. T 19. T
5. F 10. T 15. F 20. T
Multiple Choice Answers—Conceptual

21. d 26. c 31. d 36. b 41. c *46. b 51. c
22. d 27. d 32. a 37. d 42. a 47. a *52. c
23. c 28. d 33. d 38. d 43. d 48. d
24. b 29. c 34. a 39. b 44. b 49. b
25. a 30. b 35. a 40. d 45. a 50. a
53. a 59. b 65. a 71. c 77. a 83. c *89. c
54. b 60. c 66. d 72. b 78. b 84. c *90. a
55. b 61. c 67. d 73. a *79. b 85. b *91. b
56. c 62. c 68. a 74. a *80. c 86. d *92. a
57. c 63. b 69. a 75. b 81. a 87. d
58. b 64. a 70. b 76. b 82. a 88. a

93. d 94.
95. bb 96. a 97. a 98. d *99. a
True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. F 16. T
2. T 7. T 12. T 17. F
3. F 8. F 13. F 18. T
4. F 9. T 14. T 19. F
5. T 10. T 15. F 20. T
Multiple Choice Answers—Conceptual

21. c 28. b 35. c 42. c 49. d 56. d *63. c
22. b 29. a 36. d 43. b 50. d *57. a
23. c 30. d 37. c 44. a 51. d *58. c
24. c 31. b 38. a 45. c 52. d *59. b
25. a 32. c 39. c 46. b 53. c *60. c
26. a 33. d 40. d 47. d 54. b *61. b
27. c 34. c 41. c 48. a 55. b *62. a

64. c 69. c 74. b 79. b 84. c 89. c 94. d
65. b 70. a 75. b 80. a 85. b 90. c 95. b
66. d 71. b 76. c 81. c 86. b 91. b
67. b 72. c 77. a 82. c 87. b 92. c
68. a 73. a 78. a 83. a 88. c 93. b

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
96. d 98. c 100. c 102. c 104. b
97. d 99. d 101. b 103. a

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*1.

A manufacturing concern would report the cost of units

2. Both merchandising and manufacturing companies normally have multiple inventory

*5. If ending inventory is understated, then net income is understated.

21. When using a perpetual inventory system,

23. Goods in transit which are shipped f.o.b. destination should be

Use the following information for questions 25 and 26.

25. This transaction is known as a(n)

27. Goods on consignment are

36. Which of the following is correct?

Use the following information for questions 41 and 42.

Use the following information for questions 66 through 68.

Use the following information for questions 70 and 71.

70. The amount to be recorded as a purchase return is

Use the following information for questions 72 and 73.

Use the following information for questions 74 and 75.

Kiner Co. has the following data related to an item of inventory:

74. The value assigned to ending inventory if Kiner uses LIFO is

Use the following information for questions 77 through 80.

Use the following information for 87 and 88

87. What is AJ Company’s ending inventory?

88. What is AJ Company’s gross profit?

89. What is Ely Company’s ending inventory?

90. What is Ely Company’s gross profit?

Use the following information for questions 91 through 93.

96. The following information applied to Grey, Inc. for 2007:

2. The lower-of-cost-or-market method is used for inventory despite being less

3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid

4. Application of the lower-of-cost-or-market rule results in inconsistency because a

9. Most purchase commitments must be recorded as a liability.

24. In no case can "market" in the lower-of-cost-or-market rule be more than

31.Net realizable value is

33. Inventory may be recorded at net realizable value if

38. The gross profit method of inventory valuation is invalid when

40. A major advantage of the retail inventory method is that it

43. Which statement is true about the retail inventory method?

62. AJ Corporation, a manufacturer of ethnic foods, contracted in 2007 to purchase 500

63. DT Corporation, a manufacturer of Mexican foods, contracted in 2007 to purchase 1,000

Use the following information for questions 66 and 67.

67. Merchandise purchases for July are anticipated to be

69. A markup of 40% on cost is equivalent to what markup on selling price?

Use the following information for questions 76 through 80.

76. The ending inventory at retail should be

81. Gooch Corporation had the following amounts, all at retail:

83. Dye Corporation’s computation of cost of goods sold is:

84. Ace Corporation’s computation of cost of goods sold is:

87. The ending inventory at retail should be

96. Gore Company's accounting records indicated the following information:

9. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other

15. Trading securities and available-for-sale securities are classified as current or

16. When a company sells available-for-sale securities, a reclassification adjustment is

17. If a decline in a security’s value is judged to be temporary, a company needs to write

19. If a company transfers held-to-maturity securities to available-for-sale securities, the

22. A correct valuation is

23. Securities which could be classified as held-to-maturity are

31. Held-to-maturity securities are reported at

33. Which of the following is not correct in regard to trading securities?

37. Investments in debt securities should be recorded on the date of acquisition at

52. An unrealized holding gain on a company's available-for-sale securities should be

53. A reclassification adjustment is reported in the

54. When an investment in a held-to-maturity security is transferred to an available-for-sale

55. When an investment in an available-for-sale security is transferred to trading because

*57. Companies that attempt to exploit inefficiencies in various derivative markets by

*61. Gains or losses on cash flow hedges are