ANDERSON ECON 136A FINAL v. 1 Name

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1 ANDERSON ECON 136A FINAL v. 1 Name RETURN YOUR EXAM WITH YOUR BLUE-BOOK AND SCANTRON UPON COMPLETION!! Complete the multiple choice: #1-25 on scantron. Complete problems #26-30 in your blue-book. 1. Use of the sum-of-the-years'-digits method a. results in salvage value being ignored. b. means the denominator is the years remaining at the beginning of the year. c. means the book value should not be reduced below salvage value. d. all of these. 2. On July 1, 2004, Gonzalez Corporation purchased factory equipment for $450,000. Salvage value was estimated to be $12,000. The equipment will be depreciated over ten years using the double-declining-balance method. Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2005 on this equipment of a. $90,000. b. $81,000. c. $78,840. d. $72, If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building. b. the length of time for which the building was held prior to its demolition. c. the contemplated future use of the parking lot. d. the intention of management for the property when the building was acquired. 4. Quayle Company acquired machinery on January 1, 1999 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2004, Quayle estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Quayle? a. As a prior period adjustment b. As the cumulative effect of a change in accounting principle in 2004 c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2004 d. By continuing to depreciate the machinery over the original fifteen year life

2 FINAL v. 1--Page 2 5. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down. b. written off as an extraordinary loss in the year the hotel is torn down. c. capitalized as part of the cost of the land. d. capitalized as part of the cost of the new hotel. 6. On January 1, 2004, Tanner Company purchased a new machine for $2,800,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $100,000. Depreciation was computed on the sum-of-the-years'-digits method. What amount should be shown in Tanner's balance sheet at December 31, 2005, net of accumulated depreciation, for this machine? a. $2,260,000 b. $1,780,000 c. $1,742,222 d. $1,659, A change in estimate should a. result in restatement of prior period statements. b. be handled in current and future periods. c. be handled in future periods only. d. be handled retroactively. 8. Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these. 9. Use of the double-declining-balance method a. results in a decreasing charge to depreciation expense. b. means salvage value is not deducted in computing the depreciation base. c. means the book value should not be reduced below salvage value. d. all of these. 10. RAFS, Inc., receives a 2001 Dodge Durango from it's only shareholder and gives nothing to the shareholder in return. RAFS, Inc. is NOT a non-profit entity. a. RAFS should record the vehicle on their books at its fair value and credit revenue entitled "contributions"; b. RAFS should record the vehicle on their books at its fair value and credit an equity account for a contribution from shareholder; c. RAFS should make no entry as the asset has no "historical cost" to RAFS. d. I have no idea.

3 FINAL v. 1--Page Reiley Co. purchased land as a factory site for $1,000,000. Reiley paid $40,000 to tear down two buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title investigation and making the purchase. Architect's fees were $41,200. Title insurance cost $2,400, and liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was paid $2,400,000. An assessment made by the city for pavement was $6,400. Interest costs during construction were $170, The cost of the land that should be recorded by Reiley Co. is a. $1,040,480. b. $1,046,880. c. $1,049,880. d. $1,056, The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these. 13. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a. 8/8. b. 8/12. c. 9/12. d. 11/ Capitalization of interest incurred in connection with construction of a fixed asset may begin when: a. Expenditures for construction have been incurred. b. Construction activities have begun. c. Interest has been incurred by the company. d. Only once each of the above conditions is present. 15. Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to prepare them for their intended use.

4 FINAL v. 1--Page A general description of the depreciation methods applicable to major classes of depreciable assets a. is not a current practice in financial reporting. b. is not essential to a fair presentation of financial position. c. is needed in financial reporting when company policy differs from income tax policy. d. should be included in corporate financial statements or notes thereto. 17. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at a. the nominal cost of taking title to it. b. its market value. c. one dollar (since the site cost nothing but should be included in the balance sheet). d. the value assigned to it by the company's directors. 18. On January 1, 2004, the Accumulated Depreciation Machinery account of a particular company showed a balance of $1,480,000. At the end of 2004, after the adjusting entries were posted, it showed a balance of $1,580,000. During 2004, one of the machines which cost $500,000 was sold for $242,000 cash. This resulted in a loss of $16,000. Assuming that no other assets were disposed of during the year, how much was depreciation expense for 2004? a. $342,000 b. $374,000 c. $100,000 d. $242, When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the a. par value of the stock. b. stated value of the stock. c. book value of the stock. d. market value of the stock. 20. A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods. 21. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were a. less than current market value. b. greater than cost. c. greater than book value. d. less than book value.

5 FINAL v. 1--Page If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will a. be constant. b. vary with unit sales. c. vary with sales revenue. d. vary with production. 23. To qualify for capitalization, expenditures must: a. increase the useful life of the asset and the productivity of the asset. b. increase the production abilities of the asset and the useful life of the asset. c. increase the useful life of the asset, or the productivity of the asset, or the production abilities of the asset (any one of the three). d. none of the above 24. Jantz Corporation purchased a machine on July 1, 2001, for $500,000. The machine was estimated to have a useful life of 10 years with an estimated salvage value of $28,000. During 2004, it became apparent that the machine would become uneconomical after December 31, 2008, and that the machine would have no scrap value. Accumulated depreciation on this machine as of December 31, 2003, was $118,000. What should be the charge for depreciation in 2004 under generally accepted accounting principles? a. $70,800 b. $76,400 c. $82,000 d. $95, An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be a. expensed. b. debited to accumulated depreciation. c. capitalized in the machine account. d. allocated between accumulated depreciation and the machine account.

6 FINAL v. 1--Page A Company's fixed asset is producing a product which has experienced a substantial decline in demand. Consequently, the assets is functioning at 50% of it's capacity. Management estimates that at this reduced production, the asset will provide $20,000 of positive cash flow for each of the next 5 years and none thereafter. The asset's net book value is $105,000 and it's estimated market value is $75,000. I. Based on the data above: a. Is impairment testing necessary for this asset? Support your answer in one sentence. b. Regardless of your answer to (a) above, there is sufficient data to perform impairment testing. Please show the necessary computations which are required if there is a need to perform impairment testing. c. If you believe there is an impairment entry necessary, record the entry. If you believe there is no impairment necessary, state "no impairment entry necessary" and indicate why that is the case. II. Assume the same asset facts as above but that the asset is expected to provide $20,000 of cash flow for 5.5 years. a. Assume that impairment testing is necessary. Please perform the proper impairment testing necessary. b. If you believe there is an impairment entry necessary, record the entry. If you believe there is no impairment necessary, state "no impairment entry necessary" and indicate why that is the case. 27. Company Weneedincome, Inc. has decided to exchange a delivery truck which they own with a friendly neighbor who owns a similar delivery truck. Weneedincome, Inc. paid $35,000 for their delivery truck and have accumulated depreciation against it of $25,000 on the date of the exchange when it's fair value is $20,000. The new truck will be used in the same fashion as the one they got rid of. PART I: a. Does this transaction qualify for gain recognition? Support your answer as briefly as possible. b. Show the proper journal entries to record the transaction. PART II: Assume the same facts as above, however instead of exchanging for another delivery truck, they make the exchange because they are no longer making deliveries. They receive in exchange, a new photocopy machine and $12,000 cash. a. Does this transaction qualify for gain recognition? Support your answer as briefly as possible. b. Show the proper journal entries to record the transaction.

7 #28. Buff, Inc. is building a new gym facility for use in their business on land that they paid $1,0000,000 for in November They commence construction on March 1, Payments during 2005 occur as follows: April 1, 2005 $ 250,000 June 1, ,000 Sept. 1, ,250,000 Dec. 1, ,000 Buff, Inc. has not borrowed any money specifically for construction of the facility. They do have the following outstanding borrowings: Interest incurred during the year was $ 245,000 Outstanding Rate 500,000 12% 250,000 10% 2,000,000 8% (1) Compute the amount of avoidable interest during (2) Compute the amount of interest that Buff, inc. should capitalize during (3) Compute the avoidable interest during 2005 if they borrowed $1,000,000 at 5% specifically for this construction.

8 #29. The following is from the balance sheet of TRULYSCRUMPTIOUS, Inc. as of December 31, 2003: Common Stock 1,000,000 APIC 9,000,000 Retained earnings 2,750,000 Accumulated comprehensive income, net of $35,000 deferred tax 65,000 Total Stockholders' equity 12,815,000 DURING THE YEAR ENDED DECEMBER 31, 2004, THE FOLLOWING ACTIVITY TOOK PLACE: Net income 700,000 Dividends declared and paid 500,000 Other comprehensive loss (Gross) 10,000 Discovery of an error which overstated prior retained earnings (before taxes) by 210,000 Effective income tax rate 35% BASED ON THE ABOVE INFORMATION, PREPARE THE STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2004

9 # 30 THE FOLLOWING PERTAINS TO XYZ, INC. Cash 100,000 Accounts receivable, net of $5,000 allowance for doubtful accounts 55,000 Inventory 125,000 Fixed assets 675,000 Accumulated depreciation (225,000) Accounts payable 50,000 Debt 200,000 Retained earnings 380,000 Common stock 100,000 - The following applies to the month ended January 31, 2005 (XYZ uses periodic inventory accounting): 1. Combined inventory purchases for the month of $750,000, on credit, terms 2/10 net 30, XYZ uses the gross method. Use the purchases account until month-end count of inventories is completed. 2. Sell goods to customers for $1,200,000 (no discounts offered). 3. Combined collections from customers of $1,000,000 of accounts receivable during January. 4. Paid cash of $400,000 against open invoices; all of the invoices were paid after the discount period. 5. Compensation to employees who work directly on manufacturing was paid in the amount of 10,000. Management and the administrative staff were paid $25, Management uses 2.0% of sales to provide the accounts receivable allowance. 7. Management review of the account receivable aging indicates that $10,000 of balances should be written-off. 8. The debt terms are: 12% rate, payments of interest plus $5,000 of principle per month until balance is reduced to zero. The January interest payment and principle payment were made on January The Company purchased fixed assets for $75,000, paid in cash. 10. On January 31, 2003, the company borrowed $100,000 under a line of credit. The borrowings must be paid by the end of the year. 11. The depreciation module indicates current month depreciation to be $25, The month-end inventory count shows 10,000 units on hand and the cost per unit using their LIFO methodology is $12/ unit. 13. Management computes $1,500 as the amount of qualifying avoidable interest on construction of long-term assets during the month. 14. The effective tax rate is 35% and no estimated payments have been made. I. List the necessary journal entries based on the above information. It is best to number them as per above. II. PREPARE A CLASSIFIED BALANCE SHEET AND MULTIPLE-STEP INCOME STATEMENT AS OF AND FOR THE MONTH ENDED JANUARY 31, YOU CAN USE T-ACCOUNTS, A WORKSHEET OR WHATEVER YOU LIKE TO TRACK THE BALANCES AND ACTIVITY.

10 FINAL v. 1--Page 7 ANSWER KEY ANDERSON ECON 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice C b MChoice P d MChoice C c MChoice C c MChoice C b MChoice P b MChoice C d MChoice C d MChoice C b MChoice b MChoice P a MChoice C b MChoice C d MChoice d MChoice C d MChoice C b MChoice C a MChoice P d MChoice C b MChoice C d MChoice C d MChoice C c MChoice b MChoice P c MChoice C Exercise Exercise * Test Questions are Scrambled

11 FINAL v. 1--Page 8 2. [$450,000 - ($450,000 x 0.1)] x 0.2 = $81, $2,800,000 - [($2,800,000 - $100,000) x (9/45 + 8/45)] = $1,780, $1,000,000 + $40,000 - $5,400 + $3,480 + $2,400 + $6,400 = $1,046, ($1,580,000 - $1,480,000) + [$500,000 - ($242,000 + $16,000)] = $342, ($500,000 - $118,000) 5 = $76, I. a. Yes, necessary because the decreased production is an "event or change in circumstance" indicating that an impairment may have occurred. b. Expected cash flow, undiscounted $100,000 Net book value ($105,000) NBV > Undiscounted cash flows ($ 5,000) c. Impairment necessary b/c the NBV> undiscounted cash flows above. The NBV of $105,000 is $30,000 greated than estimated market value: Impairment loss $30,000 Accumulated depreciation $30,000 II. a. Expected cash flow, undiscounted $110,000 Net book value ($105,000) Undiscounted cash flows>nbv $ 5,000 b. No Impairment necessary b/c the undiscounted cash flows exceeds the NBV and thus the FAS 144 test has been satisfied-- even though FMV is less than the book value. 27. PART I: a. The transaction does not qualify for gain recognition because it lacks commercial substance. b. Accumulated depreciation (old) $25,000 Vehicle/ Fixed asset/ equipment (old) $35,000 Vehicle/ Fixed asset/ equipment (new) $10,000 PART II: a. The transaction qualifies for gain recognition because it posesses commercial substance. b. Accumulated depreciation (old) $25,000 Vehicle/ Fixed asset/ equipment (old) $35,000 Gain (on exchange of fixed assets) $10,000 Cash $12,000 Equipment (new) $ 8,000

12 Solution to problem #28. WTD AVERAGE ACCUMULATED EXPENDITURES: Borrow date Amount Wtd. Mar ,000, / ,333 April 1, ,000 9 / ,500 June 1, ,000 7 / ,500 Sept. 1, ,250,000 4 / ,667 Dec. 1, ,000 1 / 12 58,333 Wtd Average accum exp. 1,933,333 WTD AVERAGE RATE Outstanding Rate % of total Extended $ 500,000 12% 18.2% 2.2% $ 250,000 10% 9.1% 0.9% $ 2,000,000 8% 72.7% 5.8% $ 2,750, % 8.9% Wtd Rate AVOIDABLE INTEREST Wtd Avg accum expend 1,933,333 Wtd Avg Rate 8.9% $ 172,242 CAPITALIZABLE All as the avoidable interest is < incurred of $ 245,000 IF BORROWED $1,000,000 AT 5% SPECIFIC Wtd Avg expend. 1,933,333 Specific borrowing (1,000,000) Portion from other borrowings 933,333 Avoidable interest from specific borrowings $ 50,000 Other avoidable interest 83,152 * $ 133,152 * Equals the portion from other borrowings * wtd rate $ 933,333 * 8.9%

13 #29. TRULYSCRUMPTIOUS, INC. STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2004 Comprehensive Common RETAINED ACCUM. COMP. Income Stock APIC EARNINGS INCOME TOTAL Balance as of December 31, 2004, as previously reported 1,000,000 9,000,000 2,750,000 65,000 12,815,000 Restatement, net of $73,500 deferred tax (136,500) (136,500) Balance as of December 31, 2004, as restated 1,000,000 9,000,000 2,613,500 65,000 12,678,500 Net income 700, , ,000 Other comprehensive loss, net of $3,500 deferred tax (6,500) (6,500) (6,500) Comprehensive income 693,500 - Dividends (500,000) (500,000) 1,000,000 9,000,000 2,813,500 58,500 12,872,000

14 Problem # 30 Journal Entry Solution 1 Purchases 750,000 accounts payable 750,000 2 Accounts receivable 1,200,000 Sales 1,200,000 3 Cash 1,000,000 accounts receivable 1,000,000 4 Accounts payable 400,000 Cash 400,000 5 Inventory 10,000 G&A expense 25,000 Cash 35,000 6 Bad debt exp (SG&A) 24,000 Allowance for DA's 24,000 7 Allowance for DA's 10,000 Accounts receivable 10,000 8 Interest expense 2,000 Debt 5,000 Cash 7,000 9 Fixed assets 75,000 Cash 75, Cash 100,000 Debt/ Line of credit 100, Depreciation expense 25,000 Accumulated depreciation 25, Inventory 750,000 Purchases 750,000 COS 765,000 Inventory 765, ALSO Inventory 15,000 OKAY Purchases 750,000 COS 765, Fixed assets 1,500 Interest expense 1, Income tax expense 126,175 Income tax payable 126,175

15 Problem Solution # 30 STATEMENT SOLUTION XYZ, INC. Cash Accounts receivable Allowance DA's BALANCE SHEET 100,000 60,000 5,000 AS OF 1/31/2004 1,000,000 1,200,000 24, ,000 1,000,000 10,000 Current Assets RECLASS 35,000 10,000 Cash 683, ,000 7,000 A/R, net of allowance of 19, , ,000 75,000 Inventory 120, , ,000 Total current assets 1,034,000 1,034, , ,000 19,000 Inventory Purchases Fixed assets 125, , , ,000 Fixed assets 751, ,500 10,000 75,000 Accumulated depreciation (250,000) (250,000) 750,000 1, , , ,000 Total Assets 1,535,500 1,535, , ,500 Liabilities & Stockholders Equity Accum. Dep. A/P Income tax payable Current liabilities 225,000 50, ,175 Accounts payable 400, ,000 25, ,000 Income tax payable 126, , ,000 Line of credit payable 100, ,000 Current maturities of debt 60,000 60,000 Total current liabilities 526, , , , ,175 Long-term debt 295,000 (60,000) (100,000) 135,000 Debt Retained earnings Common stock Stockholders equity: 200, , ,000 Common stock 100, ,000 5, ,325 Accumulated comprehensive loss ,000 Retained earnings 614, , , ,325 TOTAL liabilities and stockholders equity 1,535,500-1,535, , , ,000 Sales COS SG&A expense 1,200, ,000 25,000 24,000 XYZ, INC. INCOME STATEMENT MONTH ENDED JANUARY Sales 1,200,000 COS 765,000 Gross profit 435,000 1,200, ,000 49,000 Selling general & admin 49,000 AOCI Depreciation Impairment Depreciation expense 25,000 NOT USED 25,000 NOT USED Interest expense 500 Income from continuiing operations 360,500-25,000 - Income before income taxes 360,500 Income tax provision 126,175 ImIncome tax exp. Interest expense 126,175 2,000 Net income 234,325 1, ,