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    Practice Exam Chapters 9-12 Solutions: Problem I

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    Atif Rehman
    1) The document provides solutions to practice exam problems involving inventory accounting, capitalization of interest, depreciation methods, and equity method investments. 2) Key calculations include determining ending inventory under LIFO, weighted average interest rates, depreciation under straight line, SYD and DDB methods, and accounting for investments under the equity method. 3) Multiple choice questions at the end test understanding of concepts covered in the practice problems.

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    Practice Exam Chapters 9-12 Solutions: Problem I

    Uploaded by

    Atif Rehman
    68 views5 pages
    1) The document provides solutions to practice exam problems involving inventory accounting, capitalization of interest, depreciation methods, and equity method investments. 2) Key calculations include determining ending inventory under LIFO, weighted average interest rates, depreciation under straight line, SYD and DDB methods, and accounting for investments under the equity method. 3) Multiple choice questions at the end test understanding of concepts covered in the practice problems.

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    Ch9_12sol_6e

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    1) The document provides solutions to practice exam problems involving inventory accounting, capitalization of interest, depreciation methods, and equity method investments. 2) Key calculations include determining ending inventory under LIFO, weighted average interest rates, depreciation under straight line, SYD and DDB methods, and accounting for investments under the equity method. 3) Multiple choice questions at the end test understanding of concepts covered in the practice problems.

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    68 views5 pages

    Practice Exam Chapters 9-12 Solutions: Problem I

    Uploaded by

    Atif Rehman
    1) The document provides solutions to practice exam problems involving inventory accounting, capitalization of interest, depreciation methods, and equity method investments. 2) Key calculations include determining ending inventory under LIFO, weighted average interest rates, depreciation under straight line, SYD and DDB methods, and accounting for investments under the equity method. 3) Multiple choice questions at the end test understanding of concepts covered in the practice problems.

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    Practice Exam Chapters 9-12

    Solutions

    Problem I

    Cost Retail
    Beginning inventory $138,860 $262,000
    Plus: Net purchases 239,000 413,020
    Net markups 12,000
    Less: Net markdowns (4,000)
    Goods available for sale (excluding beginning inventory) 239,000 421,020
    Goods available for sale (including beginning inventory) 377,860 683,020

    $138,860
    Base year cost-to-retail percentage: ------------ = 53%
    $262,000

    $239,000
    2011 cost-to-retail percentage: ------------- = 56.77%
    $421,020

    Less: Net sales (390,000)


    Normal shortage (5,000)
    Estimated ending inventory at current year retail prices $288,020

    Estimated ending inventory at cost (below) (147,682)


    Estimated cost of goods sold $230,178

    Step 1 Step 2 Step 3


    Ending Ending Inventory Inventory
    Inventory Inventory Layers Layers
    at Year-end at Base Year at Base Year Converted to
    Retail Prices Retail Prices Retail Prices Cost

    $288,020
    $288,020 ------------ = $276,942 $262,000 (base) x 1.00 x 53% = $138,860
    (above) 1.04 14,942 (2011) x 1.04 x 56.77% = 8,822

    Total ending inventory at dollar-value LIFO retail cost ................... $147,682


    Problem II

    Average accumulated expenditures:


    Date of payment
    (expenditure)
    Start of contract $200,000 x 12/ = $200,000
    12
    March 31 250,000 x 9/ = 187,500
    12
    June 30 250,000 x 6/ = 125,000
    12
    September 30 250,000 x 3/ = 62,500
    12
    December 31 250,000 x 0 = -0-
    Average accumulated expenditures $575,000

    $500,000 x 12% = $60,000


    75,000 x 7.5%* = 5,625
    $575,000 $65,625 = Capitalized interest

    Calculated interest is less than actual annual interest of $360,000 ($60,000 + 300,000).

    Weighted-average interest rate of nonconstruction debt:


    $1,500,000 x 10% = $150,000
    2,500,000 x 6% = 150,000
    $4,000,000 $300,000

    $ 300,000
    ------------- = 7.5%*
    $4,000,000
    Problem III

    Year Straight-line SYD DDB


    2011 $6,750 $11,250 $14,400
    2012 9,000 12,750 13,440

    Computations:
    Straight line:

    ($48,000 - 3,000)
    -------------------------- = $9,000 per year x 9/12 for 2011 = $6,750
    5 years

    SYD:
    2011: $45,000 x 5/15 = $15,000 x 9/12 = $11,250

    2012: $45,000 x 5/15 = $15,000 x 3/12 = $ 3,750


    + 45,000 x 4/15 = $12,000 x 9/12 = 9,000
    Total 2012 depreciation $12,750

    DDB:
    2011: $48,000 x 40%* = $19,200 x 9/12 = $14,400

    2012: ($48,000 - 14,400) x 40%* = $13,440

    *2 times the straight-line rate of 20% (1/5)


    Problem IV

    Hardaway purchases the Penny House shares.


    ($ in millions)
    Investment in Penny House shares......................................................... 48
    Cash .................................................................................................. 48

    Penny House reports net income.


    Investment in Penny House shares (30% x $40 million) ...................... 12
    Investment revenue............................................................................ 12

    Penny House pays cash dividends.


    Cash (6 million shares x $1)................................................................... 6
    Investment in Penny House shares.................................................... 6

    Adjustments.

    Depreciation:
    Investment revenue ($6 million [calculation below ‡] ÷ 6 years)........ 1
    Investment in Penny House shares.................................................... 1

    Goodwill:
    No entry. Goodwill is not amortized.

    ‡Calculations:
    Investee Net Assets Difference..............................................................................................
    Net Assets Purchased Attributed to:

      

    Cost $48
    Goodwill:$15
    Fair value: $110* x 30% = $33
    Undervaluation
    Book value: $90 x 30% = $27 of assets: $6

    *[$90 + 20] = $110

    Increase in fair value of shares:


    No entry; equity method investments are not adjusted to fair value.
    Multiple Choice

    1. c.
    2. b.
    3. d.
    4. b.
    5. c.
    6. b.
    7. b.
    8. c.
    9. a.
    10. b.
    11. d.
    12. b.
    13. b.
    14. a.

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