68. Karr Construction built a levee for the state of Mississippi over a three-year period. The
contracted price for the levee was $1,500,000. The costs incurred by Karr and the
payments from the state over the three year period are as follows:
2014
2015
2016
Total
Costs incurred
by Karr
$300,000
$400,000
$100,000
$800,000
Payments from
Mississippi
$600,000
$400,000
$500,000
$1,500,000
If revenue is recognized in proportion to the costs incurred by Karr, how much net
income is reported in 2016?
a. $600,000
b. $400,000
c. $300,000
d. $87,500
69. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$1,500
$3,000
$5,000
B
$2,000
$2,500
$3,000
$4,500
C
$2,500
$4,000
$3,000
$6,000
Based on your calculations of total cash flows, which of the following options is the best
for Bill to pursue with respect to Asset A?
a. Option 1
b. Option 2
3-22 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
c. Option 3
d. Both Options 2 & 3 provide the same total cash flows.
Solution:
70. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Fair
Market
Value
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$1,500
$2,000
$3,000
$5,000
B
$2,000
$2,500
$1,000
$3,000
$4,500
C
$2,500
$4,000
$3,500
$3,000
$6,000
Based on your calculations, what would be the total cash flows associated with selling
and replacing Asset C with an equivalent asset?
a. $2,500
b. $5,500
c. $5,000
d. $4,500
Ans: B
KP 3 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic , Reflective
AICPA BB: Critical Thinking AICPA FN: Decision Modeling
71. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Fair
Market
Present Value of Future
Cash Flows Produced
Present Value of
Future Cash Flows
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-23
by Old Asset
of Equivalent Asset
A
$4,500
$1,500
$3,000
$5,000
B
$2,000
$2,500
$3,000
$4,500
C
$2,500
$4,000
$3,000
$6,000
Based on your calculations of total cash flows, which of the following options is the best
for Bill to pursue with respect to Asset B?
a. Option 1
b. Option 2
c. Option 3
d. Both Options 2 & 3 provide the same total cash flows.
72. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$1,500
$3,000
$5,000
B
$2,000
$2,500
$3,000
$4,500
C
$2,500
$4,000
$3,000
$6,000
On December 31, 2015, just before preparing the company’s financial statements, Bill
decides to replace Asset A and keep both Assets B and C. According to generally
accepted accounting principles, at what dollar amount he report each of these respective
assets on the balance sheet?
a. $4,500; $2,000; $2,500
b. $1,500; $2,000; $2,500
c. $2,000; $1,000; $3,500
d. $1,500; $2,500; $4,000
3-24 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
MATCHING QUESTIONS
1. Match the descriptions listed in letters a through e below with the proper assumption
numbered from 1 through 4 below.
Descriptions
a. The economic life of an entity can be divided into time periods.
b. The financial statements should contain transactions related to only the business
and not the individual owners.
c. Purchasing power of money is constant over time.
d. The dollar value attached to an item on a company’s balance sheet is determined
by the market in which the company operates.
e. Life of the entity is indefinite.
____ 1. Economic entity assumption
____ 2. Stable dollar assumption
____ 3. Going concern assumption
____ 4. Fiscal period assumption
KP 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
2. For each financial statement item listed in 1 through 5 below, identify the financial
statement valuation (listed in a through h) at which it should be reported. You may use
each letter more than once or not at all.
Financial Statement Valuations
a. Residual value
e. Net realizable value
b. Face value
f. Original cost less accumulated depreciation
c. Original cost
g. Present value
d. Fair market value
h. Estimated sales price
____ 1. Cash
____ 2. Short-term investments
____ 3. Accounts receivable
____ 4. Long-term liabilities
____ 5. Office building
KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
3. Match the descriptions listed in letters a through e below with the proper valuation
numbered from 1 through 4.
Descriptions
a. Amount paid is reduced by the measured amount used up
b. Amount that would have to be paid to acquire the same asset at
the balance sheet date
c. Discounted cash flows
d. Amount derived from net equity of company
e. Amount received if the asset were sold
____ 1. Present value
____ 2. Fair market value
____ 3. Replacement cost
____ 4. Residual interest
KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
4. For each financial statement item listed in 1 through 5 below, identify at which financial
statement valuation (listed in a through g) the item should be reported. You may use
each letter more than once or not at all.
Financial Statement Valuations
a. Present value
b. Fair market value
c. Original cost
d. Face value
e. Net realizable value
f. Original cost less accumulated depreciation
g. Lower of cost or market
____ 1. Inventory
____ 2. Plant and equipment (book value)
____ 3. Land used for plant site
____ 4. Current liabilities
____ 5. Long-term notes receivable
KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
5. For each financial concept listed in 1 through 5 below, identify in which category (listed
in a through f) it should be matched. You may use each letter more than once or not at
all.
Categories
a. Similar events are measured using identical accounting methods from one period to
the next.
b. Expense is recognized in the same period that its generated revenue is recognized.
c. Different firms use identical accounting methods to measure similar events.
d. Present value of future cash flows.
e. Significant portion of effort made; major portion of cost incurred, objectively
measured, and reasonably assured of ultimate cash receipt.
f. Reliable measure that is verified by documented evidence.
____ 1. Comparability
____ 2. Objectivity
____ 3. Revenue recognition criteria
____ 4. Matching concept
____ 5. Consistency
KP 2,3,4,5 BT: K Difficulty: Moderate TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-27
SHORT PROBLEMS
1. On May 1, 2015, $12,000 of annual magazine subscriptions were sold by Glolar, Inc.
The subscribed magazines are delivered on the first day of each month beginning on
May 1, 2015. The total cost of the subscribed magazines is $3,600 or $300 per month.
A. Determine the amount of revenue during 2015.
B. Explain how the matching concept is applied relative to the magazines.
Solution:
2. During 2015, Hamot Company sold $40,000 of computer chips to a distributor on
account. The distributor planned to sell those chips to a German company. The sold
chips were shipped to a warehouse owned by Hamot and were still there on December
31, 2015. Hamot’s CFO left two messages for the distributor but received no return calls.
The distributor has had no prior dealings with Hamot or any other manufacturer of
computer chips. None of the past due balance of $40,000 has been paid. How much
sales revenue associated with this transaction would be reported on the income
statement for the year ending December 31, 2015? Explain your selection.
Solution: $0 would be reported because all four of the revenue recognition criteria
3. During January of 2015, Barry Corporation purchased five acres of land for cash of
$120,000 from Foley Company. On December 31, 2015, after Barry built its plant, it was
estimated that the land’s fair market value was $140,000. At what amount would land be
measured on Barry’s December 31, 2015 balance sheet?
4. On December 31, 2015, total assets and liabilities are measured at $18,000 and
$12,000, respectively. The total market value of the company’s common stock is $7,000.
At what amount would shareholders’ equity be measured on the December 31, 2015
balance sheet?
5. Equipment with an original cost of $23,000 has a fair market value of $19,000, current
replacement cost of $26,000, and a depreciated value of $21,000 on December 31,
2015. At what amount would net equipment be measured on the December 31, 2015
balance sheet?
6. Short-term investments have an original cost of $2,500 and a market price of $3,500 at
December 31, 2015. At what amount would the investments be measured on the
December 31, 2015 balance sheet?
AICPA BB: Critical Thinking AICPA FN: Measurement
7. Accounts receivable have a face value of $10,000 and estimated net realizable value of
$9,000 on December 31, 2015. At what amount would the accounts receivable be
measured on the December 31, 2015 balance sheet?
8. Equipment with an original cost of $55,000 has a fair market value of $65,000 and
accumulated depreciation of $15,000 on December 31, 2015. What amount would the
December 31, 2015 balance sheet show as the equipment’s net book value?
9. On December 1, 2015, Karr Company purchased inventory for $54,000. On December
31, 2015, the replacement cost of that inventory is $57,000. At what amount would
inventory be measured on the December 31, 2015 balance sheet?
10. On October 1, 2015, $16,000 of annual magazine subscriptions were sold by Kitchen
Design Magazines. The subscribed magazines are delivered on the first day of each
month beginning on October 1, 2015. The total cost of the subscribed magazines is
$6,000, equal to $500 per month. Determine the amount of revenue and the cost of the
magazines to be recognized during 2015.
11. On October 1, 2015, $24,000 of annual magazine subscriptions were sold by Motocross
Monthly Magazines. The subscribed magazines are delivered on the first day of each
month beginning on October 1, 2015. The total cost of the subscribed magazines is
$15,000 or $1,250 per month. Determine the amount of revenue and the cost of the
magazines to be recognized during 2015 and 2016, respectively. How much profit will
the company recognize during 2015 and 2016?
12. Zurich Corporation sells cases of champagne to customers for $300 a case. Each
customer pays $50 when the case is picked up and then $50 a month for the next five
months. The cost of a case of champagne is $60. Although the payment plan has
significantly increased sales, Zurich has decided to delay the recognition of revenue until
cash is received because of the questionable credit history of the new customers. During
January, 2015, 10 cases of champagne were sold and the initial payment of $50 per
case was collected. The normal first payment of $50 a case was collected on February
1, 2015. List the four revenue recognition criteria and state how each criterion is either
met or not met based on the information provided.
Solution:
KP 4 BT: E Difficulty: Difficult TOT: 8 min. AACSB: Analytic, Communication
AICPA BB: Critical Thinking AICPA FN: Decision Modeling
13. During 2015 and 2016, Orange Company recognized $100,000 and $120,000 of sales,
respectively. The inflation rate between 2015 and 2016 was 10 percent. Did sales
increase 20 percent from 2015 to 2016? Explain.
14. Victor Corporation purchased a packaging machine on January 1, 2015 for $12,000. The
machine is expected to be used for 3 years, and the company believes an equal portion
of the cost should be allocated to each accounting period. How much expense should
Victor recognize during 2015? What concept is illustrated?
15. On January 27, 2015, Lock Company entered into a three-year agreement with Strong
Enterprises to supply 2,000 ounces of platinum for $200 an ounce. During 2015, Lock
mined and purified the 2,000 ounces of platinum at a cost of $200,000. The platinum
was shipped on January 14, 2016 and arrived on January 15, 2016, at Strong’s
warehouse. What is Lock’s revenue and gross profit recognized during 2015, consistent
with the criteria for revenue recognition and the matching concept? Explain.
16. During 2000, Jeter Company purchased property for its plant for $90,000. During
December of 2015, a similar neighboring plot of land was sold for $120,000. At what
amount would land be measured on Jeter Company’s December 31, 2015 balance
sheet?
1. Large public accounting firms employ graduates from state-supported universities, many
of who are graduates with accounting degrees. These firms’ reliance on and use of the
product of subsidized educational institutions seem to imply that these colleges and
universities are important assets. However, they are not recognized as assets on the
balance sheets of these public accounting firms. Which one of the four basic
assumptions might be used to justify the exclusion of educational assets from the
balance sheets of the public accounting firms?
2. What is the fiscal period assumption and why is it used?
Solution: The fiscal period assumption states that the operating life of an economic
entity must be divided into time periods over which performance measures can be
3. Explain the ‘markets’ in which a business entity operates.
Solution: A business entity operates in an input market, where it purchases inputs
(materials, labor, overhead) for its operations, and an output market, where it sells its
outputs (services or inventories). Input market values (purchase prices) are normally
4. Why is materiality a major problem in accounting?
Solution: Materiality requires judgments that can differ considerably among
5. On October 1, 2015, $16,000 of annual magazine subscriptions were sold by Boating
Monthly. The subscribed magazines are delivered on the first day of each month
beginning on October 1, 2015. The total cost of the subscribed magazines is $6,000 or
$500 per monthly delivery. Using the four criteria necessary for revenue recognition,
present an argument for not recognizing $10,000 of revenue during 2015.
Solution: Although during 2015, revenue is objectively measured ($16,000), a
Reflective AICPA BB: Critical Thinking AICPA FN: Decision Modeling
6. When is present value be used on the financial statements? Give an example in your
explanation.
7. Explain the concept of face value.
Solution: A specific form of fair market value is called face value. It is a valuation to
8. Why are market values not used for property, plant, and equipment on the balance
sheet?
Solution: Property, plant, and equipment is sometimes objectively determinable,
9. Why is inflation ignored in accounting?
Solution: If companies were to include inflationary effects on their financial
statements, the amounts would have to be estimated since the rate of inflation will not be
10. Name the four basic assumptions of financial accounting. Indicate why these
assumptions, as a group, are important.
11. What is the most critical question in the matching process? Why is it critical?
Solution: The most critical question is: ‘In what time period will the revenue be
realized?’ Matching requires first identifying in which time period the revenue is
12. If a company changes its accounting method, does this mean that consistency is
violated?
Solution: Management must be able to convince the independent auditors that the
3-40 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
IFRS QUESTIONS
1. Compared to U.S. GAAP, IFRS tends to:
a. require fewer disclosures.
b. allow management to choose between fewer accounting method alternatives.
c. be the same as U.S. GAAP in all respects.
d. provide a stricter interpretation of objectivity than in the U.S.
2. IFRS differs from GAAP in that IFRS tends to be:
a. more rules-based
b. more principles-based
c. focused on historical cost
d. focused more on hypothetical future values