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– The NINJAs are giving away a NINJA MCQ section of the winner’s choice.
– To enter the drawing, simply post an answer to each question (you don’t have to get them correct to be picked).
– Three (3) winners will be randomly selected from this thread
– You can gift your winning section to someone else (i.e. people who already passed can participate)
– Deadline to answer/enter: Friday – 4pm Eastern
Update: Giveaway is closed – answers posted below. Thanks to everyone who entered!
1. Loft Co. reviewed its inventory values for proper pricing at year-end. The following summarizes two inventory items examined for the lower of cost or market:
Inventory Item #1 Inventory Item #2
Original cost $210,000 $400,000
Replacement cost 150,000 370,000
Net realizable value 240,000 410,000
Net realizable value
less profit margin 208,000 405,000
What amount should Loft include in inventory at year-end, if it uses the total of the inventory to apply the lower of cost or market?
A. $520,000
B. $610,000
C. $613,000
D. $650,000
Answer: B
Inventory must be valued at lower of cost or market when the utility of the inventory is no longer as great as cost. Market is replacement cost unless:
replacement cost is more than net realizable value, in which case market will be net realizable value (the ceiling) or
replacement cost is less than net realizable value reduced by a normal profit margin, in which case market is net realizable value minus a normal profit margin (the floor).
Total original cost $210,000 + $400,000 = $610,000
Total replacement cost $150,000 + $370,000 = $520,000
Total net realizable value $240,000 + $410,000 = $650,000
Total net realizable value less profit margin $208,000 + $405,000 = $613,000
Since replacement cost is less than realizable value less profit margin, market is the floor of $613,000.
The lower of cost or market is then the cost of $610,000.
2. Which of the following disclosures should prospective financial statements include?
A. Summary of significant accounting policies
B. Summary of significant assumptions
C. Both summary of significant accounting policies and summary of significant assumptions
D. Neither summary of significant accounting policies nor summary of significant assumptions
Answer: C
The AICPA’s “Statement of Standards for Accountants’ Services on Prospective Financial Information” governs the preparation of prospective financial statements. It requires that accountants provide summaries of the significant accounting policies and the assumptions used to prepare these forward-looking statements. The same full disclosure principle that guides the preparation of historical financial statements applies to the reporting of prospective financial statements.
3. Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be:
A. ignored.
B. reported as a separately disclosed reduction of retained earnings.
C. reported as an extraordinary loss, net of income taxes.
D. reported as a reduction in income before extraordinary items.
Answer: D
A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. Since the market value of the merchandise was less than its carrying amount, Evie Corp. should report the resulting loss as a reduction in income before extraordinary items.
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