On July 10, 2013, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2014. The company’s fiscal year-end is December 31. The contract was exercised on February 1, 2014, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2013, was $180,000. The company uses a perpetual inventory system.


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9.  How much loss on purchase commitment will Johnson recognize in 2013?

A. $10,000.

B. $20,000.

C. $30,000.

D. None.

Asset retirement obligations:

A. Increase the balance in the related asset account.

B. Are measured at fair value in the balance sheet.

C. Are liabilities associated with the restoration of a long-term asset.

D. All of the above are correct.


13.  When selling property, plant, and equipment for cash:

A. The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.

B. The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.

C. The seller recognizes losses, but not gains.

D. None of the above.


14.  Which of the following does not pertain to accounting for asset retirement obligations?

A. They accrete (increase over time) at the company’s credit-adjusted risk-free rate.

B. They must be recognized according to GAAP.

C. Statement of Financial Accounting Concepts No. 7 is applied when adjusting cash flow obligations for uncertainty.

D. All of the above pertain to accounting for asset retirement obligations.


15.  Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:

A. $455,000.

B. $446,000.

C. $437,000.

D. $435,000.


Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.


16.  Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:

A. $26,000.

B. $8,000.

C. $(8,000).

D. $0.


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