HYPERINFLATION (THEORIES)

1. Hyperinflation is indicated by characteristics of the economic environment of a country which include all
of the following, except
a. The general population prefers to keep wealth in nonmonetary assets or in relatively stable foreign
currency.
b. Interest rates, wages and prices are linked to a price index.
c. The cumulative inflation rate over three years is approaching or exceeds 100%.
d. All of these indicate hyperinflation.
2. All of the following would indicate that hyperinflation exists, except
a. The general population regards monetary amounts in terms of relatively stable foreign currency.
b. The cumulative inflation rate over three years is approaching, or exceeds 100%.
c. Inflation rates have exceeded interest rates in three successive years.
d. The general population prefers to keep wealth in nonmonetary assets.
3. In a hyperinflationary economy, monetary items
a. Are not restated because they are already expressed in terms of the measuring unit current at the end of
reporting period.
b. Are not restated because they do not represent money held and items to be received or paid in money.
c. Are restated applying the general price index.
d. Are restated applying the specific price index.
4. Which of the following would indicate that hyperinflation exists?
a. Sales on credit are at lower prices than cash sales.
b. Inflation is approaching or exceeds 20% per year.
c. Monetary items do not increase in value,
d. People prefer to keep their wealth in nonmonetary assets or a stable foreign currency.
5. All of the following are monetary items, except
a. Trade payables
b. Trade receivables
c. Administration costs paid in cash
d. Loan repayable at par value
6. The financial statements of an entity that reports in the currency of a hyperinflationary economy shall be
stated in terms of
a. Historical cost
b. Current cost
c. Fair value
d. Measuring unit current at the end of reporting period
7. The gain of loss on the net monetary position in a hyperinflationary economy shall be included in
a. Profit of loss and separately disclosed
b. Retained earnings
c. Equity
d. Comprehensive income
8. In a hyperinflationary economy, amounts in the statement of financial position not expressed in the
measuring unit current at the end of reporting period are restated by applying the
a. General price index
b. Specific price index
c. Both the general price index and the specific price index
d. Either the general price index or the specific price index

ANSWER 64-10
1.d 5.c
2.c 6.d
 3.a 7.a
4.d 8.a
1. When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Allowance for doubtful accounts
b. Accumulated depreciation – equipment
c. Unamortized premium on bonds payable
d. Advances to unconsolidated subsidiaries
2. When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Obligation under warranty
b. Accrued expense
c. Unamortized discount on bonds payable
d. Refundable deposit
3. When computing information on a constant peso basis, which of the following is classified as
nonmonetary?
a. Cash surrender value
b. Long-term receivable
c. Accrued loss on firm purchase commitment
d. Inventory
4. When computing information on a constant peso basis, which of the following is classified as monetary?
a. Goodwill
b. Equipment
c. Patent
d. Allowance for doubtful accounts
5. During a period of inflation, an account balance remains constant. With respect to this account, a
purchasing power loss will be recognized if the account is a
a. Monetary asset
b. Monetary liability
c. Nonmonetary asset
d. Nonmonetary liability
6. During a period of deflation, an entity would have the greatest gain in general purchasing power by
holding
a. Cash
b. Property, plant and equipment
c. Accounts payable
d. Mortgage payable
7. During a period of deflation in which a liability account balance remains constant, which of the following
occurs?
a. A purchasing power loss if the item is a nonmonetary liability
b. A purchasing power gain if the item is nonmonetary liability
c. A purchasing power loss if the item is a monetary liability
d. A purchasing power gain if the item is a monetary liability
8. During a period of inflation in which a liability account balance remains constant, which of the following
occurs?
a. A purchasing power loss if the item is a nonmonetary liability
b. A purchasing power gain if the item is a nonmonetary liability
c. A purchasing power loss if the item is a monetary liability
d. A purchasing power gain if the item is a monetary liability
9. During a period of inflation, an account balance remains constant. With respect to this account, a
purchasing power gain will be recognized if the account is a
a. Monetary liability
 b. Monetary asset
c. Nonmonetary liability
d. Nonmonetary asset

ANSWER 64-11
1.b 6.a
2.a 7.c
3.d 8.d
4.d 9.a
5.a

1. An entity that wishes to present information about the effect of changing prices in a hyperinflationary
economy should report this information in
a. The body of the financial statements
b. The notes to financial statements
c. Supplementary information to the financial statements
d. Management report
2. Which of the following arguments in favor of price level adjusted financial statements is not valid?
a. Price level adjusted financial statements use historical cost
b. Price level adjusted financial statements compare uniform purchasing power among various periods
c. Price level adjusted financial statements measure current value
d. Price level adjusted financial statements measure earnings in terms of a common peso
3. An accountant who recommends the adjustment of financial statements for price level changes should not
support the recommendation by stating that
a. Purchasing power gains or losses are recognized
b. Historical pesos are not comparable to present-day pesos
c. The restatement of asset cost to a common peso basis is a useful extension of the original cost basis of
asset valuation
d. Assets are measured at current cost
4. A general price level statement of financial position is prepared and presented in terms of
a. The general purchasing power of the peso at the latest end of reporting period
b. The general purchasing power of the peso in the base period
c. The average general purchasing power of the peso for the latest reporting period
d. The general purchasing power of the peso at the time the financial statements are issued
5. Which of the following methods of reporting attempts to eliminate the effect of the changing value of the
peso?
a. Discounted net present value of future cash flows
b. Historical cost restated for change in the general price level
c. Replacement cost
d. Exit value
6. The restatement of historical peso financial statements to reflect the general price level change results in
presenting assets at
a. Lower of cost and net realizable value
b. Fair value
c. Cost adjusted for purchasing power change
d. Current replacement cost
7. For purposes of adjusting financial statements for the changes in the general price level, monetary items
consist of
a. Assets and liabilities whose amounts are fixed by contract or otherwise in terms of pesos regardless of
price level change
b. Assets and liabilities which are classified as current in the statement of financial position
 c. Cash and cash equivalents plus all receivables with a fixed maturity date
d. Cash, other assets expected to be converted into cash, and current liabilities
8. Purchasing power gain or loss results from
a. Monetary asset
b. Monetary liability
c. Monetary asset and monetary liability
d. Nonmonetary asset and nonmonetary liability

ANSWER
1.a 2.c 3.d 4.a
5.b 6.c 7.a 8.c

1. The realized holding gain for inventory sold is equal to

a. Excess of cost of goods sold at average current cost over cost of goods sold at historical cost
b. Excess cost of goods sold at historical cost over cost of goods sold at average current cost
c. Excess of cost of goods sold at current cost over cost of goods sold at historical cost
d. Excess cost of goods sold at historical cost over cost of goods sold at current cost
2. The unrealized holding gain for ending inventory is equal to
a. Excess of ending inventory at average current cost over ending inventory at historical cost
b. Excess of ending inventory at historical cost over ending inventory at average current cost
c. Excess of ending inventory at current cost over ending inventory at historical cost
d. Excess of ending inventory at historical cost over ending inventory at average current cost
3. What is the basis of depreciation under current cost accounting?
a. Current cost
b. Average current cost
c. Historical cost
d. Carrying amount
4. The realized holding gain for depreciable asset is equal to
a. Excess of depreciation on average current cost over depreciation on historical cost
b. Excess of depreciation on historical cost over depreciation on average current cost
c. Excess of depreciation on current cost over depreciation on historical cost
d. Excess of depreciation on historical cost over depreciation on current cost
5. What is the net current cost of depreciable asset?
a. Current cost less accumulated depreciation based on current cost
b. Average current cost less accumulated depreciation based on average current cost
c. Historical cost less accumulated depreciation based on historical cost
d. Current cost less accumulated depreciation based on average current cost
6. The unrealized holding gain for depreciable asset is equal to
a. Excess of net current cost of asset over the carrying amount
b. Excess of carrying amount of asset over the net current cost
c. Excess of current cost over historical cost
d. Excess of historical cost over current cost
7. The realized holding gain for nondepreciable asset is equal to
a. Excess of current cost at year-end over historical cost
b. Excess of current cost at the date of sale over historical cost
c. Excess of historical cost over current cost at year-end
d. Excess of historical cost over current cost at the date of sale
8. The unrealized holding gain for nondepreciable asset is equal to
a. Excess of current cost at year-end over historical cost
b. Excess of historical cost over current cost at year-end
 c. Excess of average current cost at year-end over historical cost
d. Excess of historical cost over average current cost at year-end

ANSWER
1.a 2.c 3.b 4.a 5.a
6.a .7.b 8.a

1. In current cost financial statements

a. General price level gains or losses are recognized on net monetary items
b. Amounts are always stated in common purchasing power unit of measurement
c. All items in the statement of financial position are different from historical cost
d. Holding gains are recognized
2. An entity prepared financial statements on a current cost basis. How should the entity compute cost of
goods sold on a current basis?
a. Number of units sold times average current cost of units during the year
b. Number of units sold times current cost of units at year-end
c. Number of units sold times current cost of units at the beginning of the year
d. Beginning inventory at current cost plus cost of goods purchased less ending inventory at current cost
3. Current cost financial statements should report holding gains during the period for which of the following?
a. Goods sold
b. Inventory
c. Goods sold and inventory
d. Neither goods sold nor inventory

ANSWER 64-14
1.d
2. A
3. c

PROBLEMS

47-1 Gardenia Company reported the following assets in the statement of financial position:

Cash in bank 2,000,000

Accounts receivable 4,000,000
Inventory 1,500,000
Financial asset at fair value 500,000
Patent 1,000,000
Loans to employees 200,000
Advances to suppliers 400,000
Prepaid expenses 100,000

In preparing financial statements in a hyperinflationary economy, what total amount should be classified as
monetary assets?

A. 6,200,000
B. 6,600,000
C. 6,700,000
 D. 7,700,000

SOLUTION: A.
Cash in bank 2,000,000
Accounts receivable 4,000,000
Loans to employees 200,000
Total monetary assets 6,200,000

47-2 Sunflower Company reported the following liabilities in the statement of financial position:

Accounts payable 1,000,000

Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Unearned revenue 300,000
Advances from customers 1,200,000
Estimated warranty liability 200,000
Deferred tax liability 400,000

In preparing financial statements in a hyperinflationary economy, what total amount should be classified as
monetary liabilities?

A. 4,500,000
B. 8,500,000
C. 9,700,000
D. 8,900,000

SOLUTION: B.
Accounts payable 1,000,000
Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Total monetary liabilities 8,500,000
47-3 Dahlia Company was formed on January 1, 2011. Selected balances from historical cost statement of financial
position on December 31, 2017 were:

Land purchased on January 1, 2011 2,400,000

Investment in long-term bonds purchased on January 1, 2014 1,200,000
Long term debt issued on January 1, 2011 1,600,000

The general price index was 120 on January 1, 2011, 150 on January 1, 2014 and 300 on December 31, 2017.

1. What amount should be reported in a hyperinflationary statement of financial position for land?
A. 2,400,000
B. 6,000,000
C. 4,800,000
D. 3,000,000
2. What amount should be reported in a hyperinflationary statement of financial position for investment in
bonds?
A. 3,000,000
B. 2,400,000
C. 1,200,000
 D. 1,500,000
3. What amount should be reported in a hyperinflationary statement of financial position for long-term debt?
A. 4,000,000
B. 3,200,000
C. 2,000,000
D. 1,600,000

SOLUTION #1: B
Land – nonmonetary (2,400,000 x 300/120) 6,000,000
SOLUTION #2: C
Investment in bonds – monetary 1,200,000
SOLUTION #3: D
Long-term debt – monetary 1,600,000

47-4 Veranus Company provided the following information on December 31, 2017:

Property, plant and equipment 900,000

Inventory 2,700,000
Cash 350,000
Share capital issued December 31, 2013 400,000
Noncurrent liabilities 500,000
Current liabilities 700,000
Retained earnings 2,350,000

The index numbers on December 31 of each year are 2013 – 100, 2014 – 130, 2015 – 150, 2016 – 240, and 2017 –
300.
The property, plant and equipment were purchased on December 31, 2015.
The noncurrent liabilities were raised on December 31, 2016.

1. What is the amount of total assets after restatement for hyperinflation?

A. 5,150,000
B. 3,950,000
C. 4,800,000
D. 4,850,000
2. What is the amount of total liabilities after restatement for hyperinflation?
A. 2,400,000
B. 1,200,000
C. 1,325,000
D. 1,500,000
3. What is the balance of retained earnings after adjusting for hyperinflation?
A. 2,350,000
B. 2,750,000
C. 3,550,000
D. 2,625,000

SOLUTION #1: A
Property, plant and equipment (900,000 x 300/150) 1,800,000
Inventory (2,700,000 x 300/270) 3,000,000
Cash 350,000
Total assets 5,150,000
SOLUTION #2: B
Noncurrent liabilities 500,000
Current liabilities 700,000
Total liabilities 1,200,000
SOLUTION #3: B
Total assets 5,150,000
Total liabilities (1,200,000)
Total shareholder’s equity 3,950,000
Share capital as restated (400,000 x 300/100) (1,200,000)
Retained earnings 2,750,000

47-5 Maximus Company provided the following liabilities and equity before and after restatement for
hyperinflation:

Before restatement After restatement

Liabilities 2,000,000 2,500,000
Share capital 5,000,000 8,500,000
Revaluation surplus 1,000,000 ?
Retained earnings 1,500,000 ?
Total liabilities and equity 9,500,000 16,000,000

1. What is the revaluation surplus after adjustment?

A. 5,000,000
B. 1,000,000
C. 3,500,000
D. 0
2. What amount should be reported as retained earnings after restatement?
A. 4,000,000
B. 5,000,000
C. 1,500,000
D. 0
SOLUTION #1: D
SOLUTION #2: B
Liabilities 2,500,000
Share capital 8,500,000
Retained earnings (balancing figure) 5,000,000
Total liabilities and equity 16,000,000

47-6- Camia Company provided the following information about the inventory during 2017:

Inventory – Jan 1 1,575,000

Purchases 5400,000
Inventory – December 31 4800,000

The relevant index numbers are:

January 1, 2017 110 Average index for 201 240

December 31, 2017 370 Average index for 2016 105

What is the cost of goods sold in a hyperinflationary income statement?

a.7,315,909
b.3,353,125
c.6,475,000
d.2,250,000

Solution 47-6 Answer C\

Historical Fraction Restated
Inventory – Jan 1 1,575,000 370/105 5,550,000
Purchases 5,400,000 370/240 8,325,000
Goods available for sale 6,975,000 13,875,000
Inventory – Dec 31 (4,800,000) 370/240 (7,400,000)
Cost of goods sold 2,175,000 6,475,000

47-7- Smallville Company reported the following historical income statement for 2017:

Sales 500,000
Inventory – Jan 1 350,000
Purchases 500,000
Inventory – Dec 31 500,000
Expenses 2,000,000
Depreciation 2,000,000

• Sales are earned and expenses are incurred evenly throughout the year.
• Inventory was acquired during the last week of each year
• Depreciable assets have a 5-year life and were acquired on Jan 1 2014
• The general index numbers were 125 on Jan 1, 2014, 140 on Jan 1, 2017, 360 on Dec 31 2017

1. What is the amount of sales after restatement for hyperinflation?

a. 7,200,000
b. 5,000,000
c. 7,000,000
d. 9,000,000
2. What is the cost of goods sold after restatement for hyperinflation?
a. 2,350,000
b. 4,000,000
c. 3,384,000
d. 3,780,000
3. If the entity is operating in a hyperinflationary economy, what amount should be reported as net loss?
a. 5,440,000
b. 1,350,000
c. 1,944,000
d. 4,824,000

Solution 47-7
Question 1 Answer: a
Question 2 Answer: b
Question 3 Answer: a

Historical Fraction Restated

Sales 5,000,000 360/250 7,200,000
Cost of goods sold:
 Inventory- Jan 1 350,000 360/140 900,000
Purchases 2,500,000 360/250 3,600,000
GAS 2,850,000 4,500,000
Inventory- Dec 31 (500,000) 360/360 (500,000)
Cost of Goods sold 2,350,000
4,000,000

Gross income 2,650.000 3,200,000

Expenses (2,000,000) 360/250 (2,880,000)

Depreciation (2,000,000) 360/125 (5,760,000)
Total expenses (4,000,000) (8,640,000)

Net loss (1,350,000) (5,440,000)

47-8- Mariposa Company reported the following property, plant and equipment on Dec 31, 2017

Year acquired Percent depreciated Cost Index number

2015 30 3,000,000 100

2016 20 2,000,000 125
2017 10 1,000,000 300

Depreciation is calculated at 10% straight line.

A full year depreciation is charged in the year of acquisition and no depreciation in the year of disposal.

What amount of depreciation should be included in the 2017 income statement adjusted for hyperinflation?

a. 1,480,000
b. 1,800,000
c. 1,620,000
d. 600,000

Solution 47-8 Answer: a

2015 (300000 x 300/100) 900000
2016 (200000 x 300/125) 480000
2017 (100000 x 300/300) 100000
Total depreciation for 2017 1480000