Question

1. Mustard Seed LLC recently purchased inventory for $100 million and spent $5 million on off-site storage prior to selling the goods to customers? Mustard Seed charged $_________ to cost of goods sold in respect of this inventory.

2. Like many technology companies, Cinnamon Corp. operates in an environment of steadily declining prices. It’s reported profits will tend to be highest if it accounts for inventory using:

FIFO

LIFO

Weighted Average Cost

Specific Identification

3. Jobvo, Inc. purchased a new machine for its plant, incurring the following costs:

Purchase Price                        $12,980

Freight and Insurance                    1200

Installation                                      700

Testing                                                        100

Maintenance Staff Training           500

At what value should the company record the machine on its balance sheet?

$15,480

$14,980

$14,880

$14,180

$12,980

4. A company borrows $500 million from a bank to finance the construction of its headquarters building. The terms of the loan are as follows: term of the loan is three years; annual interest is 14%; annual payment of interest only, and principal payable at the end of the term. It takes two years to build the building, during which time the company earns $10 million on the unspent loan proceeds. How much of the interest can be capitalized? $ __________________.

Answer 1

1. Storage cost on finished goods is expensed when incurred and is not included in Inventory and is thus not part of cost of goods sold. Mustard Seed charged $100 to cost of goods sold in respect of this inventory.

2. Like many technology companies, Cinnamon Corp. operates in an environment of steadily declining prices. It’s reported profits will tend to be highest if it accounts for inventory using:

LIFO ; As the least cost items are consumed thus the cost of consumption is less and thus the profit is highest.

3. The company record the machine on its balance sheet:

12980+1200+700 =$14,880

4. Capitalized Interest = 500*0.14*2 - 10 = $130.