March 17, 2005 Anderson Econ 136A 11am class Final Exam Name

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1 March 17, 2005 Anderson Econ 136A 11am class Final Exam Name WRITE YOUR NAME ON: (1) THIS EXAM (2) YOUR BLUE BOOK & (3) YOUR SCANTRON. TURN THEM ALL IN WHEN YOU ARE FINISHED- INCLUDING THIS EXAM. You have three hours to complete the exam. Complete the multiple choice on scantron and all of the problems in your blue book. Be sure to leave a trail in your blue-books for partial credit point allocations Complete on your scantron with No. 2 pencil. 1. 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 useful life of the asset (any one of the three). d. none of the above 2. 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. 3. When a company exchanges equipment for similar equipment, the company may report a gain: a. if the fair value of the equipment they give up exceeds that equipment's net book value. b. if the company receives cash and the fair value of the equipment they give up exceeds that equipment's net book value. c. if the company receives cash and the fair value of the equipment they give up is less than that equipment's net book value. d. if the company gives cash and the fair value of the equipment they give up exceeds that equipment's net book value.

2 Final Exam--Page 2 4. 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. 5. Which of the following is NOT a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years 6. 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. 7. Rich Co. exchanged merchandise that cost $24,000 and normally sold for $36,000 for a new delivery truck with a list price of $40,000. The delivery truck should be recorded on Rich's books at a. $24,000. b. $30,000. c. $36,000. d. $40, The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to a. the machinery account. b. a separate deferred charge account. c. miscellaneous tax expense (which includes all taxes other than those on income). d. accumulated depreciation machinery.

3 Final Exam--Page 3 9. 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. 10. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made. d. that portion of average accumulated expenditures on which no interest cost was incurred. 11. The period of time during which interest must be capitalized ends when a. the asset is substantially complete and ready for its intended use. b. no further interest cost is being incurred. c. the asset is abandoned, sold, or fully depreciated. d. the activities that are necessary to get the asset ready for its intended use have begun. 12. 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/ 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. 14. If there has been no "events or change in circumstance" indicating a possible impairment to a fixed asset, then: a. No further impairment testing is necessary. b. An undiscounted cash flow analysis should be performed. c. The net book value of the asset should be compared to it's fair value and an impairment recorded if the net book value exceeds the assets fair value. d. None of these.

4 Final Exam--Page Once it has been determined that there has been a possible impairment, a company should: a. Test for impairment by applying a discounted cash flow analysis. b. Write the asset down to it's estimate market value. c. Test for impairment by applying an undiscounted cash flow analysis. d. Give up and go to the beach. 16. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should stop. c. Recovery of previous impairment losses are permitted. d. All of the above. 17. 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. 18. For income statement purposes, depreciation is a variable expense if the depreciation method used is a. units-of-production. b. straight-line. c. sum-of-the-years'-digits. d. declining-balance. 19. 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. 20. 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.

5 Final Exam--Page 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 22. 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. 23. White Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should a. recognize an extraordinary loss for the period. b. include a credit to the equipment accumulated depreciation account. c. include a credit to the equipment account. d. not be made if the equipment is still being used. 24. 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. 25. 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. $72,000.

6 Final Exam--Page 6 ANSWER ALL PROBLEMS IN YOUR BLUE BOOK AND REMEMBER TO LEAVE A TRAIL FOR PARTIAL CREDIT ALLOCATIONS 26. Facts: Cost of machine$260,000 Estimated useful life10 years Estimated salvage value$20,000 Productive life in hours60,000 hours Hours machine used 1st year6,000 hours Hours machine used 2nd year12,000 hours Hours machine used 3rd year3,000 hours Compute deprecation in years 1, 2 & 3 Using: Straight line, sum of the years digits, activity based depreciations and double declining value depreciation methods. 27. Scot Hadley exchanges equipment which he bought for $100,000, has a fair value of $35,000 and has accumulated depreciation of $75,000. In return, Scot receives similar equipment and cash in the amount of $5,000 from the entity which he exchanges equipment with. (1) Compute the amount of any gain which Scot Hadley can record from this transaction. (2) Record the journal entry required in connection with the exchange. (3) Extra -credit- show a proof of the resulting basis of the new equipment. 28. Buff, Inc. is building a new gym facility for use in their business. They commence construction on January 1, Payments during 2005 occur as follows: Jan. 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. (2) Compute the amount of interest that Buff, inc. should capitalize. (3) Compute the avoidable interest if they borrowed $1,000,000 at 5% specifically for this construction.

7 Final Exam--Page 7 ANSWER ALL PROBLEMS IN YOUR BLUE BOOK AND REMEMBER TO LEAVE A TRAIL FOR PARTIAL CREDIT ALLOCATIONS 29. Cash 100,000 Accounts receivable, net of $5,000 allowance for doubtful accounts 55,000 Inventory 125,000 Marketable securities, at fair value, cost of $10,000 11,500 Fixed assets 675,000 Accumulated depreciation (225,000) Accounts payable 50,000 Debt 200,000 Retained earnings 391,500 Common stock 100,000 The following applies to the month ended January 31, 2005 (XYZ uses perpetual inventory accounting): 1. Combined inventory purchases for the month of $500,000, on credit, terms 2/10 net 30, XYZ uses the net method 2. Sell goods to customers for $1,200,000 (no discounts offered). Perpetual inventory system indicates that the cost of the goods sold was $800, Combined collections from customers of $1,100,000 of accounts receivable during January. 4. Paid cash of $400,000 against open invoices; some of the invoices were paid after the discount period, resulting in $5,000 of discounts lost. 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 $12,500 of balances should be written-off. 8. The debt terms are: 10% rate, payments of interest plus $10,000 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 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.

8 Final Exam--Page 8 March 17, 2005 ANSWER KEY Anderson Econ 136A 11am class Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice d MChoice b MChoice b MChoice b MChoice C c MChoice C c MChoice C a MChoice C d MChoice C c MChoice C a MChoice C b MChoice C d MChoice C a MChoice c MChoice d MChoice a MChoice C a MChoice C d MChoice C d MChoice C c MChoice C b MChoice C b MChoice C d MChoice C b MChoice P

9 # 26 solution FACTS FROM PROBLEM COMPUTATIONS: DEPRECIABLE BASE Cost 260,000 Cost 260,000 Life 10 Less: estimated salv. V (20,000) Est Salvage value 20,000 Deprec. Base 240,000 * Productive life hours 60,000 * Careful, we don't use this for declining balance methods Yr 1 hours 6,000 Yr 2 hours 12,000 Denominator for sum of the years digits, based on 10 year life: Yr 3 hours 3, years= = 55 STRAIGHT LINE: Depreciable base 240,000 Life 10 Annual depreciation 24,000 YR 1,2 & 3 Units this year 6,000 12,000 3,000 Depreciation is the same in Yr 1,2 & 3 at: 24,000 Total units 60,000 60,000 60,000 Percentage consumed 10% 20% 5% ACITIVITY: Yr. 1 Yr. 2 Yr. 3 Depreciable base 240, , ,000 Units this year/ total estimated units 10% 20% 5% 24,000 48,000 12,000 SUM OF THE YEARS DIGITS Depreciable base 240, , ,000 Years remaining/ Years total 10/55 9/55 8/55 Year/ Years total expressed as a decimal Depreciation expense 43,636 39,273 34,909 DOUBLE-DECLINING BALANCE Not covered in this example, see powerpoint presentation and text illustration 11-7

10 #26 solution continued FACTS FROM PROBLEM TEXT ILLUSTRATION 11-7 Cost 260,000 Life 10 Est Salvage value 20,000 Depreciable base does NOT factor salvage value fo DDB 260,000 Double declining balance factor 0.20 (1/10 years*2) Year DDB factor Depreciation Deprec. Basis Opening 260, , , , , , ,120 * Note that in final yr. We only record as much depreciation expense as necessary to reduce to estimated salvage value.

11 Solution to problem # 27. Cost $ 100,000 Accum dep. $ 75,000 Net Book Value $ 25,000 Fair value $ 35,000 Potential Gain $ 10,000 RECEIVED Cash $ 5,000 Total Fair Value $ 35,000 Value of rec'd eqpt $ 30,000 % of trnsxn rec'd in cash 14% (5,00/35,000 Gain allowed $ 1,429 * * % allowed * potential gain 14% * $ 10,000 = $ 1,429 JOURNAL ENTRY: Cash $ 5,000 Accumulated depreciation (old) $ 75,000 Equipment (old) $ 100,000 Gain on sale $ 1,429 Equipment (new) $ 21,429 EXTRA CREDIT: Fair value of new equipment $ 30,000 Deferred gain $ 8,571 $ 21,429

12 Solution to problem # 28. WTD AVERAGE ACCUMULATED EXPENDITURES: Borrow date Amount Wtd. Jan. 1, , / ,000 June 1, ,000 7 / ,500 Sept. 1, ,250,000 4 / ,667 Dec. 1, ,000 1 / 12 58,333 Wtd Average accum exp. 1,162,500 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 1,162,500 Wtd Avg Rate 8.9% $ 103,568 CAPITALIZABLE All as the avoidable interest is < incurred of $ 245,000 IF BORROWED $1,000,000 AT 5% SPECIFIC Wtd Avg expend. 1,162,500 Specific borrowing (1,000,000) Portion from other borrowings 162,500 Avoidable interest from specific borrowings $ 50,000 Other avoidable interest 14,477 * $ 64,477 * Equals the portion from other borrowings * wtd rate $ 162,500 * 8.9%

13 #29 Solution- Journal Entries 1 Inventory 490,000 accounts payable 490,000 2 Accounts receivable 1,200,000 Sales 1,200,000 COS 800,000 Inventory 800,000 3 Cash 1,100,000 accounts receivable 1,100,000 4 Accounts payable 395,000 Cash 400,000 COS/ Discounts lost 5,000 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 12,500 Accounts receivable 12,500 8 Interest expense 1,667 Debt 10,000 Cash 11,667 9 Fixed assets 75,000 Cash 75, Cash 100,000 Debt/ Line of credit 100, Depreciation expense 25,000 Accumulated depreciation 25, Income tax expense 111,767 Income tax payable 111,767

14 #29 SOLUTION- STATEM,ENTS XYZ, INC. Cash Accounts receivable Allowance DA's BALANCE SHEET 100, ,000 60,000 1,100,000 12,500 5,000 1/31/2004 1,100,000 35,000 1,200,000 12,500 24, ,000 11,667 Current Assets RECLASS 75,000 Cash 778, ,333 A/R, net of allowance of 131, ,000 Inventory (175,000) (175,000) Marketable securities, at fairvalue, cost 778, ,500 16,500 of 11,500 11,500 Total current assets 745, ,833 Inventory Marktble sec Fixed assets 125, ,000 11, ,000 Fixed assets 750, , ,000-75,000 Accumulated depreciation (250,000) (250,000) 10, , ,000 (175,000) 11, ,000 Liabilities & Stockholders Equity Total Assets 1,245,833 ####### Accum. Dep. A/P Income tax payable Current liabilities 225, ,000 50, ,767 Accounts payable 145, ,000 25, ,000 Income tax payable 111, ,767 - Line of credit payable 100, ,000 Current maturities of debt 120, ,000 Total current liabilities 256, , , , ,767 Long-term debt 290,000 (100,000) (120,000) 70,000 Debt Retained earnings Common stock Stockholders equity: 10, , , ,000 Common stock 100, , , ,567 Accumulated comprehensive loss - - Retained earnings 599, , , ,067 TOTAL liabilities and stockholders equity 1,245,833 - ####### 290, , ,000 Sales COS SG&A expense 1,200, ,000-25,000 5,000 24,000 XYZ, INC. INCOME STATEMENT MONTH ENDED JANUARY Sales 1,200,000 COS 805,000 Gross profit 395,000 1,200, ,000 49,000 Selling general & admin 49,000 AOCI Depreciation Impairment Depreciation expense 25,000-25,000 - Interest expense 1,667 Income from continuiing operations 319,333-25,000 - Income before income taxes 319,333 Income tax provision 111,767 ImIncome tax exp. Interest expense 111,767 1,667 - Net income 207, ,767 1,667