ACC 371 Week 8 Quiz 10

ACC 371 Week 8 Quiz 10 | Mercer University

Question 1

On June 1, 2020, Mackenzie Inc. entered into a noncancelable contract to purchase 100,000 units of raw materials inventory at $60 per unit, which is the current market price of the inventory at that date. The contract period extends for one year from the date of its inception. Mackenzie’s accounting period ends December 31. On December 31, 2020, raw materials were being sold for $58 per unit. 

What loss, if any, should Mackenzie recognize on December 31, 2020?  

$200,000 

$100,000 

$116,667  

$-0- 

The difference between $60 and $58 per unit multiplied by 100,000 units is recognized as a loss on December 31. Such a loss is recognized before the actual purchase of inventory as required in ASC 330-10-35-17.

Question 2

In 2021, Alpha Jax Inc. discovered errors in previously reported financial statements that understated ending inventory on December 31, 2020, by $5,000 and on December 31, 2019, by $11,000. 

Ignoring income taxes and assuming an operating cycle of less than one year, what is included in the correcting journal entry on January 1, 2021?  

A debit to inventory for $11,000.  

A debit to inventory for $6,000.  

A debit to Retained Earnings for $6,000 

A credit to Retained Earnings for $5,000.

Question 3

Ragherty Inc. purchased land for development for $2,500,000. The land will be parceled into lots and sold for vacation homes as follows: 10 lots (Type A) to sell for  $100,000 each; 15 lots (Type B) to sell for $70,000 each; and 20 lots (Type C) to sell for $50,000 each. 

What is the gross profit for the sale of six Type A lots?  

$  75,000  

$193,333 

$108,197  

$266,667

Question 4

Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the designated market value  

When it is below the net realizable value less the normal profit margin.  

When it is at or below the net realizable value and at or above the net realizable value less the normal profit margin.  

When it is above the net realizable value.  

Regardless of net realizable value.

The replacement cost is used when it falls between the ceiling (net realizable value) and the floor (net realizable value less the normal profit margin).

Question 5

Jeptha Co.’s accounting records include the following information. 

Item      Amount

Inventory, January 1, 2020           $1,000,000

Purchases during 2020   5,000,000

Sales during 2020             6,400,000 

A physical inventory taken on December 31, 2020, resulted in an ending inventory of $1,150,000. Jeptha's gross margin on sales has remained constant at 25% in recent years. Jeptha suspects that an unusual amount of inventory may have been damaged and disposed of without appropriate tracking. 

At December 31, 2020, what is the estimated cost of missing inventory?  

$  50,000  

$200,000 

$350,000  

$450,000 

Question 6

Data relating to the computation of the inventory at June 30, 2020, for Daphne Inc. follow. 

Item      Cost       Retail

Beginning inventory, July 1, 2019              $  252,000            $  350,000

Purchases           1,428,000             2,362,500

Markups, net                    245,000

Sales                     2,415,000

Markdowns, net                             175,000 

What is ending inventory at cost on June 30, 2020, using the average cost retail method?  

$221,887  

$367,500  

$208,757  

$184,450

Question 7

On June 1, 2020, Mackenzie Inc. entered into a noncancelable contract to purchase 100,000 units of raw materials inventory at $60 per unit, which is the current market price of the inventory at that date. The contract period extends for one year from the date of its inception. Mackenzie’s accounting period ends December 31. On December 31, 2020, raw materials were being sold for $62 per unit. 

What gain, if any, should Mackenzie recognize on December 31, 2020?  

$200,000  

$100,000  

$116,667  

$-0-

Question 8

The original cost of an inventory item is above the replacement cost and above the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. Under the lower-of-cost-or-market method the inventory item should be priced at its  

Original cost.  

Replacement cost.  

Net realizable value.  

Net realizable value less the normal profit margin. 

Question 9

Waltham Distribution Company has determined its December 31, 2020, inventory on a LIFO basis at $200,000. Information pertaining to that inventory follows. 

Item      Amount

Estimated selling price   $208,000

Estimated cost of disposal            10,000

Normal profit margin      30,000

Current replacement cost            190,000 

At December 31, 2020, what is the loss that Waltham should recognize?  Assume no previously recorded inventory holding loss.  

$32,000  

$10,000  

$2,000  

$-0- 

Question 10

Which of the following statements regarding a valuation loss determined through the application of the lower-of-cost-or-net realizable value rule is true?  

A significant valuation loss considered unusual or infrequent would be reported either as cost of goods sold or as part of other expenses and losses.  

A valuation loss may not be recorded when cost exceeds net realizable value under certain cases such as when there is an effective government-controlled market.  

On the balance sheet, the valuation loss is reflected either as a reduction to inventory directly or in a contra asset account.  

A and C  

B and C  

A and B