Part I.

Write the word “True” if the statement is correct and “False” if the
statement is incorrect in the space provided

__________ 1. Under the perpetual inventory system, the adjustment and record of
merchandise inventory account will be made through income summary
account.
__________ 2. During the periods of rising price levels, inventories valued on the FIFO
basis approximate more closely the current cost of inventory.
__________ 3. The cost of a machine includes the cost of damage during installation
process, as a result of carelessness.
__________ 4. Capital expenditures are expenditures that are expensed and deducted
from revenues on the current period’s income statement.
__________ 5. Conservatism discourages undue optimism in measuring and reporting net
assets and net income
__________ 6. Scope of accountings records is one limitation of stable monetary unit
principle
__________ 7. When the home office sends assets to the branch, it debits investment in
branch for the total and credits liability account.
__________ 8. Upon liquidation of the partnership and distribution of assets, the partners
claim on the assets is measured by the amount of the balance in his/her
capital account.
__________ 9. Permanent employees of a governmental organization in Ethiopia are
expected to pay or contribute 4% of their gross earnings to the
government’s pension trust fund
_________ 10. Natural resources are wasting assets that are physically consumed during
production and normally depleted using the unit of production method

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Part II Choose the best answer among the alternatives and write your choice on the
space provided

1. The valuation of inventories at lower of cost or market is valid because of the

concept/principle of:
A. Business entity
B. Going concern
C. Conservatism
D. Materiality
E. None of the above

2. Which of the following items should not be included in the ending inventory of a
merchandising business:
A. Merchandise purchased but in transit, FOB destination
B. Merchandise sold but in transit, FOB destination
C. Merchandise out on consignment basis
D. Merchandise purchased but in transit, FOB shipping point
E. Owned and unsold merchandise in the store

A company Trust starting business made the following four inventory purchases in
Meskerem.
Meskerem 1 140 units Br. 770
Meskerem 6 300 units 1575
Meskerem 20 140 units 510
Meskerem 29 60 units 300
Total Br. 3155

A physical count of merchandise inventory on Meskerem 30 reveals that there are 180
units on hand.

3. Using the FIFO inventory method, the amount allocated to the cost of goods sold for
Meskerem is
A. Br. 980 C. Br. 2175 E. None
B. Br. 2240 D. Br. 915

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4. Using the LIFO inventory method, the value of the ending inventory on Meskerem 30
is:
A. Br. 915 C. Br. 810 E. None
B. Br. 2240 D. Br. 980

5. Using the average cost method, the amount allocated to the ending inventory on
Meskerem 30 is:
A. Br. 2100 C. Br. 946.44 E. None
B. Br. 2208.36 D. Br. 3155

6. Intangible assets are long-lived assets that:

A. Lack physical substance, so they are distinguished from tangible assets
B. Have future economic benefits that are difficult to measure
C. Are amortized over the legal life, or estimated useful life, or 40 years,
which ever is longer.
D. Have a useful life that is difficult to determine
E. All are correct
F. All but C are correct

7. A sum of money given to an employee to compensate for inconvenient circumstance

caused by the employer is
A. Desert allowance D. position allowance
B. House allowance E. none of the above
C. Disturbance allowance

8. On January 10, 1991, Addis Company purchased a mine for iron ore deposit for Br.
5,800,000 cash. The mine was estimated to contain 2,000,000 tones of ore and have a
residual value of Br. 800,000. During the 1991 mining operations at the mine,
600,000 tons ore were mined and sold; the amount of depletion expense for the year
1991 is:
A. Br. 1,500,000 C. Br. 1, 200,000 E. Br. 800,000
B. Br. 1,740,000 D. Br. 4,300,000 F. None

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9. Which of the following is not a characteristic of a partnership:
A. It is a non-taxable entity
B. There is mutual agency in a partnership
C. The partners have the right to always share income equally
D. Once invested, a specific asset doesn’t belong to anyone of the partners

10. The reporting of gross profit by departments is useful in

A. Helping management in directing its efforts toward obtaining a mix of
sales that will maximize profits
B. Cost analysis and control
C. Determining the performance each department
D. All of the above
E. None

Part III. Work outs (show all the necessary computations)

Exercise I
TEAM Company switched recently to the retail inventory method to estimate the cost of
ending inventory. To test this method, the company took a physical inventory one month
after its complementation.
At cost At retail
Jan. 1, Beginning inventory Br. 472,132 Br. 622,800
Purchases 750,000 1,008,400
Purchase returns and allowance (25,200) (34,800)
Freight-in 8,350
Sales 1,060,000
Sales returns and allowances (28,000)
Jan. 31 Physical inventory 508,200

Required:
A. Compute the retail cost ratio based on the above information
B. Compute the estimated ending inventory at retail and at cost

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 C. Compute the estimated value of inventory sold at retail and at cost
D. Calculate the estimated amount of inventory shortage at cost and at retail

Exercise II
On July 5, 1998, Fairness Company purchased office equipment for a price of Br. 46,000.
The company paid Br. 5000 to transport the machine to the company and Br. 8000 for
installing the machine. In addition to these expenditures, the company paid a total of Br.
10,000 to Nile Insurance Company, of which Br. 4000 is for insurance coverage while
transporting the machine. The remaining Br. 6000 is for insurance coverage after the
machine started operation.

The machine has an originally estimated useful life of 5 year and a salvage value Br.
3000. At the beginning of January 1, 2001, the machine received a major overhaul
(extraordinary repair) of Br. 10,000, which resulted in an increase in the useful life 2
years beyond original estimate.

However, on Jan 1, 2002, the machine was exchanged for a machine of a similar use. The
new machine has a price of Br. 90,000 and a boot of Br. 60,000 was paid in cash.

The company uses a straight-line method of recording depreciation expense and assume
the fiscal year of the company runs from Jan. 1 to Dec. 31.

Required:
A. Determine the cost of the machine acquired on June 24, 1998
B. Record the journal entries for the extraordinary repairs made on January 1, 2001
C. Record the journal entry for the exchange made on January 1, 2002.