March 18, 2005 Anderson Econ 136A 88am class Final Exam Name

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1 March 18, 2005 Anderson Econ 136A 88am class Final Exam Name Write your name on your blue book and scantron. You have three hours to complete the exam. Complete the multiple choice on your scantron and the problems in your blue-book. Be sure to leave a trail in your blue-books for partial credit allocations Complete all multiple choice questions (#1-25) on your scantron using No. 2 pencil. 1. The cost of land typically includes the purchase price and all of the following costs except a. grading, filling, draining, and clearing costs. b. street lights, sewers, and drainage systems cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property. 2. Assets that qualify for interest cost capitalization include a. assets under construction for a company's own use. b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization. 3. Which of the following statements is true regarding capitalization of interest? a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period. 4. 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. 11/12.

2 Final Exam--Page 2 5. Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets EXCEPT where the assets exchanged are a. similar and additional cash is paid. b. similar and additional cash is received. c. dissimilar and additional cash is paid. d. dissimilar and additional cash is received. 6. Which of the following is a NOT capital expenditure? a. Repairs that maintain an asset in operating condition b. An addition c. A betterment d. A replacement 7. 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 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, 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

3 Final Exam--Page 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. 11. 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. 12. 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. 13. 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. 14. 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. 15. 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.

4 Final Exam--Page 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. 17. 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. 18. 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. 19. Loran Corporation purchased factory equipment that was installed and put into service January 2, 2004, at a total cost of $120,000. Salvage value was estimated at $8,000. The equipment is being depreciated over four years using the double-declining-balance method. For the year 2005, Loran should record depreciation expense on this equipment of a. $28,000. b. $30,000. c. $56,000. d. $60, 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, 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. $242,000

5 Final Exam--Page Truman, Inc. purchased equipment in 2002 at a cost of $1,400,000. Two years later it became apparent to Truman, Inc. that this equipment had suffered an impairment of value. In early 2004, the book value of the asset is $840,000 and it is estimated that the fair value is now only $560,000. The entry to record the impairment is a. No entry is necessary as a write-off violates the historical cost principle. b. Retained Earnings ,000 Accumulated Depreciation Equipment ,000 c. Loss on Impairment of Equipment ,000 Accumulated Depreciation Equipment ,000 d. Retained Earnings ,000 Reserve for Loss on Impairment of Equipment , 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. 24. 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. 25. 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.

6 Final Exam--Page Complete in your blue-book and be sure to leave a trail for partial credit allocations. 26. On April 1, Tyler Co. began construction of a small building. Payments of $180,000 were made monthly for four months beginning on April 1. The building was completed and ready for occupancy on August 1. (1) For the purpose of determining the amount of interest cost to be capitalized, calculate the annual weighted-average accumulated expenditures on the building by completing the schedule below (in your blue-book): Capitalization Weighted-Average Date Expenditures Period Expenditures (2) Assuming that Tyler Co. borrowed $100,000 to construct the building on a construction loan that bears interest at 8% and the weighted average borrowing rate on Tyler's other borrowings is 12%, compute the amount of capitalizable interest. (3) If Tyloer Co. had total interest expense for the year of $10,000, how much interest could Tyler capitalize for the building? 27. Equipment that cost $60,000 and has accumulated depreciation of $48,000 is exchanged for similar equipment with a fair value of $20,000 and $5,000 cash is received. INSTRUCTIONS (a) Show the calculation of the gain to be recognized from the exchange. (b) Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment.

7 28. XYZ has the following opening balance sheet as of January 1, 2005 Cash 250,000 Accounts receivable, net of $5,000 allowance for doubtful accounts 60,000 Inventory 125,000 Marketable securities, at fair value, cost of $10,000 11,500 Fixed assets 650,000 Accumulated depreciation (285,000) Accounts payable 60,000 Debt 200,000 Retained earnings 451,500 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 $600,000, on credit, terms 2/10 net 30, XYZ uses the net method 2. Sell goods to customers for $1,000,000 (no discounts offered). Perpetual inventory system indicates that the cost of the goods sold was $800, Combined collections from customers of $900,000 of accounts receivable during January. 4. Paid cash of $575,000 against open invoices; some of the invoices were paid after the discount period, resulting in $7,000 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 $10,000 of balances should be written-off. 8. The debt terms are: 8% rate, payments of interest plus $7,500 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 $125,000, 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 $30, 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 7 March 18, 2005 ANSWER KEY Anderson Econ 136A 88am class Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice C a MChoice C b MChoice C b MChoice C a MChoice C a MChoice C d MChoice C b MChoice P c MChoice d MChoice b MChoice b MChoice a MChoice C a MChoice C d MChoice C d MChoice C c MChoice C b MChoice C b MChoice P b MChoice P a MChoice P c MChoice P a MChoice c MChoice d MChoice Exercise Exercise Exercise

9 Final Exam--Page 8 March 18, $1,000,000 + $40,000 - $5,400 + $3,480 + $2,400 + $6,400 = $1,046, [$120,000 x (1-0.5)] x 0.5 = $30, $2,800,000 - [($2,800,000 - $100,000) x (9/45 + 8/45)] = $1,780, ($1,580,000 - $1,480,000) + [$500,000 - ($242,000 + $16,000)] = $342, $840,000 - $560,000 = $280, Date Expenditures Period Expenditures April 1 $180,000 4/12 $ 60,000 May 1 180,000 3/12 45,000 June 1 180,000 2/12 30,000 July 1 180,000 1/12 15,000 $150,000 (2) Of the $150,000 qualifying expenditures, $100,000 is specific to the project and should be computed at 8% and the remaining $50,000 at 12%. Because the wtd. average qualifying expenditures already includes the period those expenditures were outstanding during the year, there is no adjustment to decrease the rate to a monthly, quarterly or other amount: 8%= $8,000 12%= $6,000 Total capitalizable $14,000 (3) In the example, Tyler's interest expense of $10,000 is less than the $14,000 capitalizable. A company shall not capitalize more interest than is incurred. Therefore only $10,000 would be capitalized.

10 Final Exam--Page 9 March 18, (a) Cost $60,000 Accumulated depreciation (48,000) Book value 12,000 Fair value ($20,000 + $5,000) 25,000 Gain $13,000 Gain recognized (5/25 x $13,000) $ 2,600 (b) Accumulated Depreciation... 48,000 Equipment... 60,000 Cash... 5,000 Gain on Disposal... 2,600 Equipment... 9,600 (plug- see check value below) Check: Fair value $20,000 Less deferred gain (10,400) Basis of new equipment $ 9,600

11 Problem 28. Journal Entry Solution 1 Inventory 588,000 accounts payable 588,000 2 Accounts receivable 1,000,000 Sales 1,000,000 COS 800,000 Inventory 800,000 3 Cash 900,000 accounts receivable 900,000 4 Accounts payable 568,000 Cash 575,000 COS/ Discounts lost 7,000 5 Inventory 10,000 G&A expense 25,000 Cash 35,000 6 Bad debt exp (SG&A) 20,000 Allowance for DA's 20,000 7 Allowance for DA's 10,000 Accounts receivable 10,000 8 Interest expense 1,333 Debt 7,500 Cash 8,833 9 Fixed assets 125,000 Cash 125, Cash 100,000 Debt/ Line of credit 100, Depreciation expense 30,000 Accumulated depreciation 30, Income tax expense 40,833 Income tax payable 40,833

12 Problem Solution# 28. STATEMENT SOLUTION XYZ, INC. Cash Accounts receivable Allowance DA's BALANCE SHEET 250, ,000 65, ,000 10,000 5,000 1/31/ ,000 35,000 1,000,000 10,000 20, ,000 8,833 Current Assets RECLASS 125,000 Cash 506, ,167 A/R, net of allowance of 15, , ,000 Inventory (77,000) (77,000) Marketable securities, at fairvalue, cost 506, ,000 15,000 of _10,000_ 11,500 11,500 Total current assets 580, ,667 Inventory Marktble sec Fixed assets 125, ,000 11, ,000 Fixed assets 775, , , ,000 Accumulated depreciation (315,000) (315,000) 10, , ,000 (77,000) 11, ,000 Liabilities & Stockholders Equity Total Assets 1,040,667 1,040,667 Accum. Dep. A/P Income tax payable Current liabilities 285, ,000 60,000 40,833 Accounts payable 80,000 80,000 30, ,000 Income tax payable 40,833 40,833 - Line of credit payable 100, ,000 Current maturities of debt 90,000 90,000 Total current liabilities 120, , ,000 80,000 40,833 Long-term debt 292,500 (100,000) (90,000) 102,500 Debt Retained earnings Common stock Stockholders equity: 7, , , ,000 Common stock 100, , ,000 75,833 Accumulated comprehensive loss - - Retained earnings 527, , , ,333 TOTAL liabilities and stockholders equity 1,040,667-1,040, , , ,000 Sales COS SG&A expense 1,000, ,000-25,000 7,000 20,000 XYZ, INC. INCOME STATEMENT MONTH ENDED JANUARY Sales 1,000,000 COS 807,000 Gross profit 193,000 1,000, ,000 45,000 Selling general & admin 45,000 AOCI Depreciation Impairment Depreciation expense 30,000-30,000 - Interest expense 1,333 Income from continuiing operations 116,667-30,000 - Income before income taxes 116,667 Income tax provision 40,833 ImIncome tax exp. Interest expense 40,833 1,333 - Net income 75,833 40,833 1,333

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

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