Reading 32: Understanding the Income Statement-LOS d 习题精选 2011, accounting, assets, center, method

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 32: Understanding the Income Statement

LOS d: Demonstrate the appropriate method of depreciating long-term assets, accounting for inventory, or amortizing intangibles, based on facts that might influence the decision.

 

 

A video rental store with a large inventory of newly released movies is attempting to determine an appropriate method of depreciation for its movies for rental. As well, it is trying to determine an appropriate method of determining the cost of its inventory of movies for sale. Which of the following treatments is most appropriate for the movies for rental and movies for sale?

Movies for rental

Movies for sale

A) Straight-line depreciation Last-in, first-out

B) Accelerated depreciation Last-in, first-out

C) Accelerated depreciation First-in, first-out

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With the movies for rental, a greater portion of the decrease in the value of newly released movies would reasonably be realized in the first year, given the rapid rate of obsolescence in view of the large number of movies available. Therefore, depreciating this pool of assets by a greater amount in the first year using an accelerated depreciation method better approximates economic depreciation than depreciating it straight line.

With the movies for sale, there are two methods available for accounting as inventory. FIFO is appropriate for inventory that has a limited shelf life and LIFO is appropriate for inventory that does not deteriorate with age. Because the movies have a very limited shelf life and will greatly deteriorate in value with age, especially after the first year, FIFO is the most appropriate method of accounting for the movies for sale.

1215

A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financial statements prepared for shareholders, the company may:

A) use any other inventory method under generally accepted accounting principles (GAAP).

B) only use the LIFO method.

C) use the FIFO method, but must disclose a LIFO reserve.

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The LIFO conformity rule in the U.S. requires firms to use LIFO for their financial statements if they use LIFO for income tax purposes.

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Which of the following statements regarding first in, first out (FIFO) is least accurate?

A) Ending inventory consists of the cost of the most recent purchases.

B) Cost of goods sold consists of the costs of the first purchases.

C) Items sold are a mix of the cost of the purchases.

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With FIFO the cost of the items sold are the first purchased, with LIFO the cost of the items last purchased represent the first to be sold, and with the weighted average cost method the cost of the items sold are a mix of purchases.

1215

In its first year of business, Digmore Corporation’s balance sheet shows gross fixed assets at $90 million and accumulated depreciation of $10 million. If the estimated salvage value of these assets is $10 million, and the original estimated useful life is 8 years, what method of depreciation did Digmore most likely use?

A) Units of production.

B) Straight Line.

C) Double-declining-balance.

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$90 ? $10 million = $80 million; $80 million / 8 = $10 million depreciation per year under Straight Line depreciation.

1215

On January 1, 2004, JME purchased a truck that cost $24,000. The truck had an estimated useful life of 5 years and $4,000 salvage value. The amount of depreciation expense recognized in 2006 assuming that JME uses the double declining balance method is:

A) $5,760.

B) $3,456.

C) $4,000.

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yr. 2004 = 24,000 × 2/5 = 9,600

yr. 2005 = (24,000 ? 9,600) × 2/5 = 5,760

yr. 2006 = (24,000 ? 9,600 ? 5,760) × 2/5 = 3,456

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This information pertains to equipment owned by Brigade Company.

• Cost of equipment: $10,000.

• Estimated residual value: $2,000.

• Estimated useful life: 5 years.

• Depreciation method: straight-line.

The accumulated depreciation at the end of year 3 is:

A) $4,800.

B) $1,600.

C) $5,200.

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Accumulated depreciation at the end of year 3 = [($10,000 ? $2,000) / 5] × 3 = $4,800

1215

Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500. Its salvage value is estimated at $500.

What is the depreciation expense for the second year, assuming Slovac uses the double-declining balance method of depreciation?

A) $1,438.

B) $1,406.

C) $1,875.

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double-declining balance depreciation rate = 2 × 1/8 = ? or 25%

first year deprecation will be $7,500 × 0.25 = $1,875

second year deprecation will be ($7,500 ? $1,875) × 0.25 = $1,406

1215

JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006?

A) $15,000.

B) $6,000.

C) $16,000.

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first two years = (60,000 ? 0) / 10 =  6,000 per year

yr. 2006 = (60,000 ? 12,000 ? 3,000) / 3  = 15,000

1215

Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end of its life it will have an estimated salvage value of $15,000. Using the double-declining balance (DDB) method, depreciation expense in year 2 is closest to:

A) $51,020.

B) $58,750.

C) $71,430.

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Year	2 / Depreciable Life	× Book Value at Beginning of the Year	= Depreciation
1	0.2857	250,000	71,429
2	0.2857	178,571	51,020

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