March 24, 2007 Anderson ECON 136A 11am Class Winter 2007 Final v. 1 Name

March 24, 2007 Anderson ECON 136A 11am Class Winter 2007 Final v. 1 Name Complete Questions 1-25 on your green scantron AND WRITE YOUR EXAM VERSION # ON YOUR SCANTRON. Complete the problems in your blue-book. 1. Los Arboles, Inc. began capitalizing interest on a piece of property under development. During construction, they determined that development should halt until such time as the leasing market improved. Which of the following statements is true: a. Interest capitalization may continue during the delay as long as development is expected to commence again within 12 months. b. Any interest previously capitalized should be expensed when development was halted. c. If there is a borrowing specifically for construction, interest capitalization should continue for as long as the debt is outstanding. d. Interest capitalization should cease when development was halted. 2. Brittney Biggs exchanges equipment which she bought for $100,000 and has $60,000 of accumulated depreciation for similar equipment in a transaction which does not have commercial substance. The fair value of the equipment which Brittney gave up is $50,000. Brittney also receives $10,000 in cash. What should Brittney recognize in her journal entry to record the transaction? a. No gain or loss b. Loss of $10,000 c. Gain of $ 2,000 d. Gain of $10,000 3. Luca Hadley exchanges equipment which he bought for $200,000 and has $120,000 of accumulated depreciation for similar equipment in a transaction which lacks commercial substance. The fair value of the equipment which Luca gave up is $60,000. Luca receives $3,000 of cash in the transaction. What should Luca recognize in his journal entry to record the transaction? a. Loss of $20,000 b. No gain or loss c. Gain of $60,000 d. Loss of $1,000

Winter 2007 Final v. 1--Page 2 4. 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 contemplated future use of the parking lot. b. the significance of the cost allocated to the building in relation to the combined cost of the lot and building. c. the intention of management for the property when the building was acquired. d. the length of time for which the building was held prior to its demolition. 5. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn? a. Horizontally and sloping down to the right b. Vertically and sloping down to the right c. Horizontally and sloping up to the right d. Vertically and sloping up to the right 6. 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. 9/12. c. 8/12. d. 11/12. 7. 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 continuing to depreciate the machinery over the original fifteen year life d. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2004 8. Which of the following should be reported as repairs and maintenance expense: a. Rebuilding an engine which extends the useful life of an asset. b. Upgrading equipment to operate more efficiently. c. Tim the Toolman Taylor making the asset do twice the work it was designed to do. d. Oil change and servicing to maintain an asset.

Winter 2007 Final v. 1--Page 3 9. If there has been an event indicating that a fixed asset may be impaired, then: a. No further impairment testing is necessary. b. 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. c. An undiscounted cash flow analysis should be performed. d. None of these. 10. A change in estimate should a. result in restatement of prior period statements. b. be handled in future periods only. c. be handled in current and future periods. d. be handled retroactively. 11. 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. market value of the stock. d. book value of the stock. 12. The life that an asset should be depreciated over is: a. It's economic life b. It's democratic life c. It's physical life d. The life designated for that type of equipment by the Association of Life Estimators (the ALE) 13. Brittney Biggs exchanges equipment which she bought for $100,000 and has $60,000 of accumulated depreciation for similar equipment in a transaction which HAS commercial substance. The fair value of the equipment which Brittney gave up is $50,000. Brittney also receives $10,000 in cash. What should Brittney recognize in her journal entry to record the transaction? a. Loss of $10,000 b. No gain or loss c. Gain of $10,000 d. Gain of $ 2,000 14. On January 3, 2003, Lopez Co. purchased machinery. The machinery has an estimated useful life of eight years and an estimated salvage value of $84,000. The depreciation applicable to this machinery was $182,000 for 2005, computed by the sum-of-the-years'-digits method. The acquisition cost of the machinery was a. $1,008,000. b. $1,092,000. c. $1,310,400. d. $1,176,000.

Winter 2007 Final v. 1--Page 4 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 not currently undergoing the activities necessary to prepare them for their intended use. d. Assets financed through the issuance of long-term debt. 16. A general description of the depreciation methods applicable to major classes of depreciable assets a. is not essential to a fair presentation of financial position. b. is not a current practice in financial reporting. c. should be included in corporate financial statements or notes thereto. d. is needed in financial reporting when company policy differs from income tax policy. 17. A not-for-profit organization receives a free computers from Dell. The not-for-profit organization should report the following: a. Debit fixed assets and credit revenue for Dell's cost of the computers. b. Debit fixed assets and credit revenue for the fair value of the computers. c. Make no entry as they have no "basis" in the asset. d. Debit fixed assets and credit equity for the fair value of the computers. 18. 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. debited to accumulated depreciation. b. expensed. c. allocated between accumulated depreciation and the machine account. d. capitalized in the machine account. 19. Which of the following statements is true regarding capitalization of interest? a. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. b. 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. 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.

Winter 2007 Final v. 1--Page 5 20. Minefordollars, Inc. just spent $100,000 searching for a new site to drill for oil. The site they found was then explored by geologists and other specialists to estimate the quantity of oil in the ground, which cost another $50,000. The purchase price of the property, including mineral rights is $2,000,000 and Minefordollars determined that this price is too high based upon the estimated quantity of oil in the ground, and consequently, will not purchase the property. What is the amount which should be capitalized in connection with this project? a. $150,000 b. $2,150,000 c. $0 d. $50,000 21. If a fixed asset is deemed to be "held for use" and its value is impaired, then: a. Depreciation of the asset should stop. b. Recovery of previous impairment losses are permitted. c. The asset should be written down to it's estimated market value, excluding any costs to sell. d. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. 22. Depletion expense a. includes tangible equipment costs in the depletion base. b. excludes intangible development costs from the depletion base. c. excludes restoration costs from the depletion base. d. is usually part of cost of goods sold. 23. Which of the following depreciation methods generally provides the strongest matching of cost to benefit? a. Sum of the years digits; b. Straight line; c. Activity based. d. Declining balance methods; 24. Which of the following costs may increase the recorded amount of buildings: a. Title insurance b. Interest c. Sale of scrap from development of the site. d. Cost of acquiring the land

Winter 2007 Final v. 1--Page 6 25. If there is an event indicating a possible impairment, the undiscounted cash flows are $100,000, the estimated fair value is $70,000 and the asset has a net book value of $105,000, then: a. Impairment expense should be debited for $35,000 b. Impairment expense should be debited for $5,000 c. Retained earnings should be debited for $5,000 d. There is no impairment

27 Newco, Inc. is building a new office facility for use in their business. They purchase the land in November 2004 for $1,000,000 and commence construction on February 1, 2006. The asset is completed on November 30, 2006. Jan. 1, 2006 $ 200,000 (paid in advance to the contractor) June 1, 2006 700,000 October 31, 2006 1,200,000 Newco has not borrowed any money specifically for construction of the facility. They do have the following outstanding borrowings: Interest incurred during the year was $ 133,000 Outstanding Rate 200,000 10% 1,100,000 9% 200,000 7% (1) Compute the weighted average accumulated expenditures qualifying for interest capitalization during the year ended December 31, 2006. (2) Compute the weighted average interest rate. (3) Compute the avoidable interest during 2006 and indicate how much of that should be capitalized. (3) Compute the avoidable interest during 2006 if they borrowed $1,000,000 at 5% specifically for this construction. 28. Drew Anderson purchases equipment with the following relevant information: Historical Cost 505,000 Salvage value 5,000 Estimated service life 5 years Compute the depreciation expense which Drew should record for each of the 5 years of the life of the asset for each of the following methods: a. Straight-Line b. Sum of the years digits (II) AAssume that in year four, it is determined that the estimated life is extended from 5 to 9 years from acquisition and a salvage value of zero. Also assume that the straight line method has been, and will continue to be used. What is the appropriate amount of depreciation expense to be reported in years 3, 4 and 5?

29. THE FOLLOWING PERTAINS TO XYZ, INC. 1/1/07 Cash 200,000 Investments 175,000 Accounts receivable, net of $5,000 allowance for doubtful accounts 100,000 Inventory 250,000 Fixed assets 600,000 Accumulated depreciation (400,000) Accounts payable 100,000 Debt 200,000 Retained earnings 375,000 Accumulated other comprehensive income 100,000 Common stock 150,000 - The following applies to the month ended January 31, 2007 (XYZ uses periodic inventory accounting- use a purchases account and close that out to inventory when the count is made) ALSO any items which are treated net of tax should debit or credit the tax effect to an account entitled tax effect, a current asset: 1. Combined inventory purchases for the month of $2,500,000, on credit, terms 2/10 net 30, XYZ uses the net method. 2. Sell goods to customers for $3,000,000 on credit (no discounts offered). 3. Combined collections from customers of $2,950,000 of accounts receivable during January. 4. Paid cash of $510,000 against open invoices; some of the invoices were paid after the discount period, resulting in $5,500 of discounts lost. 5. Management uses 2.0% of sales to provide the accounts receivable allowance. 6. Management review of the account receivable aging indicates that $7,500 of balances should be written-off. 7. The debt terms are: 12% rate, payments of interest plus $8,000 of principle per month until balance is reduced to zero. The January interest and principal payment was paid on January 31, 2007. 8. The depreciation module indicates current month depreciation to be $25,000. 9. Inventory count on January 31, 2005 notes 30,000 units of inventory at a cost of $10.00 each. 10. Management reviews the allowance for doubtful accounts and determines that their estimate should be updated to increase the allowance an additional $5,000. 11. Unrealized loss on available for sale securities: $10,000. 12. 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. a. For partial credit allocations, show your income before income taxes as well as your net income for the month ended January 31, 2006. II. PREPARE A CLASSIFIED BALANCE SHEET AND COMBINED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME AS OF AND FOR THE MONTH ENDED JANUARY 31, 2007. YOU CAN USE T-ACCOUNTS, A WORKSHEET OR WHATEVER YOU LIKE TO TRACK THE BALANCES AND ACTIVITY.

Winter 2007 Final v. 1--Page 7 March 24, 2007 ANSWER KEY Anderson ECON 136A 11am Class +-------+------+--------+------+--------+--------+--------+--------+------+ Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page +-------+------+--------+------+--------+--------+--------+--------+------+ 10 88 1 d MChoice 10 84 2 c MChoice 10 86 3 a MChoice 10 8 4 c MChoice C 2 11 10 5 a MChoice C 3 10 17 6 c MChoice C 3 11 15 7 d MChoice C 5 10 87 8 d MChoice 11 75 9 c MChoice 11 16 10 c MChoice C 5 10 20 11 c MChoice C 5 11 79 12 a MChoice 10 85 13 c MChoice 11 35 14 d MChoice P 3 10 12 15 c MChoice C 4 11 18 16 c MChoice C 7 10 89 17 b MChoice 10 27 18 d MChoice C 6 10 16 19 a MChoice C 4 11 74 20 c MChoice 11 77 21 c MChoice 11 20 22 d MChoice C 6 11 78 23 c MChoice 10 90 24 b MChoice 11 76 25 a MChoice 11 75 26 Exercise +-------------------------------------------------------------------------+ * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

Winter 2007 Final v. 1--Page 8 March 24, 2007 14. (AC - $84,000) x 6/36 = $182,000 AC = $1,176,000. 26. (Not presented, not used as test topic for future exams

Solution to problem # 27 WTD AVERAGE ACCUMULATED EXPENDITURES: Borrow date Amount Wtd. February 1, 2006 1,000,000 10 / 12 833,333 February 1, 2006 200,000 10 / 12 166,667 June 1, 2006 700,000 6 / 12 350,000 October 31, 2006 1,200,000 1 / 12 100,000 Wtd Average accum exp. 1,450,000 WTD AVERAGE RATE Outstanding Rate % of total Extended $ 200,000 10% 13.3% 1.3% $ 1,100,000 9% 73.3% 6.6% $ 200,000 7% 13.3% 0.9% $ 1,500,000 100.0% 8.9% Wtd Rate AVOIDABLE INTEREST Wtd Avg accum expend 1,450,000 Wtd Avg Rate 8.9% $ 128,567 CAPITALIZABLE All as the avoidable interest is < incurred of $ 133,000 IF BORROWED $1,000,000 AT 5% SPECIFIC Wtd Avg expend. 1,450,000 Specific borrowing (1,000,000) Portion from other borrowings 450,000 Avoidable interest from specific borrowings $ 50,000 (1,000,000 @5%) Other avoidable interest 39,900 * $ 89,900 * Equals the portion from other borrowings * wtd rate $ 450,000 * 8.9%

SOLUTION # 28. H cost 505,000 Salvage 5,000 5 YRS A) STRAIGHT LINE Dep. basis 500,000 Life 5 Dep. Each yr 100,000 B) SUM OF YRS DIGITS 5 / 15 * 500,000 166,667 YEAR 1 4 / 15 * 500,000 133,333 YEAR 2 3 / 15 * 500,000 100,000 YEAR 3 2 / 15 * 500,000 66,667 YEAR 4 1 / 15 * 500,000 33,333 YEAR 5 15 500,000 II. At the beginning of year 4, accumulated depreciation is 300,000 Cost was 505,000 NBV is therefore 205,000 Impact of salvage is - Depreciable basis 205,000 Years remaining 6 Annual depreciation Year 4-9 34,167 Year 3 depreciation was proper at 100,000 Year 4 depreciation 34,167 Year 5 depreciation 34,167

Problem 29. Journal Entry Solution 1 Purchases 2,450,000 accounts payable 2,450,000 2 Accounts receivable 3,000,000 Sales 3,000,000 3 Cash 2,950,000 accounts receivable 2,950,000 4 Accounts payable 504,500 Cash 510,000 COS/ Discounts lost 5,500 5 Bad debt exp (SG&A) 60,000 Allowance for DA's 60,000 6 Allowance for DA's 7,500 Accounts receivable 7,500 7 Interest expense 2,000 Cash 10,000 Debt 8,000 8 Depreciation expense 25,000 Accumulated depreciation 25,000 9 Inventory 2,450,000 Purchases 2,450,000 COS 2,400,000 Inventory 2,400,000 10 Bad debt exp. (SG&A) 5,000 Allowance for DA's 5,000 11 Investments 10,000 Other comprehensive income 6,500 Tax effect 3,500 NET INCOME BEFORE TAXES 502,500 12 Income tax expense 175,875 Income tax payable 175,875 NET INCOME 326,625

Problem Solution# 29. STATEMENT SOLUTION XYZ, INC. Cash Accounts receivable Allowance DA's BALANCE SHEET 200,000 105,000 5,000 AS OF 1/31/2007 2,950,000 3,000,000 60,000 510,000 2,950,000 7,500 Current Assets RECLASS 7,500 5,000 Cash 2,630,000 2,630,000 10,000 A/R, net of allowance of $ 85,000 85,000 Investments 165,000 165,000 2,630,000 147,500 62,500 Inventory 300,000 300,000 Tax effect 3,500 3,500 Inventory Purchases Fixed assets Total current assets 3,183,500 3,183,500 250,000 600,000 2,450,000 2,450,000 Fixed assets 600,000 600,000 2,400,000 2,450,000 Accumulated depreciation (425,000) (425,000) 175,000-175,000 Total Assets 3,358,500 3,358,500 300,000-600,000 Liabilities & Stockholders Equity Accum. Dep. A/P Income tax payable Current liabilities 400,000 100,000 175,875 25,000 2,450,000 Accounts payable 2,045,500 2,045,500 504,500 Income tax payable 175,875 175,875 Current maturities of debt 96,000 96,000 Total current liabilities 2,221,375 96,000 2,317,375 425,000 2,045,500 175,875 Long term debt 192,000 (96,000) 96,000 Stockholders equity: - Debt Retained earnings Common stock Common stock 150,000 150,000 200,000 375,000 150,000 Accumulated comprehensive income 93,500 93,500 8,000 Retained earnings 701,625 701,625 326,625 - TOTAL liabilities and stockholders equity 3,358,500 3,358,500 192,000 701,625 150,000 - Sales COS SG&A expense 3,000,000 5,500 60,000 2,400,000 5,000 3,000,000 2,405,500 65,000 XYZ COMBINED STATEMENT OF S.HOLDER EQUITY & COMPREH. INCOME FOR THE MONTH ENDED JANUARY 31, 2007 AOCI Depreciation Investments Comprh. Retained Accum comp Common 100,000 25,000 175,000 Iincome Earnings Income Stock Total 6,500 10,000 Balance 1/1/06 375,000 100,000 150,000 625,000 Net income 326,625 326,625 326,625 OCIoss, net of $3,500 tax effect (6,500) (6,500) (6,500) Comprehinsive income 320,125-93,500 25,000 165,000 Balance 1/31/06 701,625 93,500 150,000 945,125 - ImIncome tax exp. Interest expense 175,875 2,000 175,875 2,000 not used Tax effect 3,500 - Balance sheet accts that did not fit 3,500 above

March 24, 2007 Anderson ECON 136A 11am Class Winter 2007 Final v. 2 Name Complete Questions 1-25 on your green scantron AND WRITE YOUR EXAM VERSION # ON YOUR SCANTRON. Complete the problems in your blue-book. 1. Luca Hadley exchanges equipment which he bought for $200,000 and has $120,000 of accumulated depreciation for similar equipment in a transaction which lacks commercial substance. The fair value of the equipment which Luca gave up is $60,000. Luca receives $3,000 of cash in the transaction. What should Luca recognize in his journal entry to record the transaction? a. No gain or loss b. Loss of $1,000 c. Gain of $60,000 d. Loss of $20,000 2. 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 intention of management for the property when the building was acquired. d. the contemplated future use of the parking lot. 3. Los Arboles, Inc. began capitalizing interest on a piece of property under development. During construction, they determined that development should halt until such time as the leasing market improved. Which of the following statements is true: a. Interest capitalization should cease when development was halted. b. Any interest previously capitalized should be expensed when development was halted. c. Interest capitalization may continue during the delay as long as development is expected to commence again within 12 months. d. If there is a borrowing specifically for construction, interest capitalization should continue for as long as the debt is outstanding.

Winter 2007 Final v. 2--Page 2 4. Brittney Biggs exchanges equipment which she bought for $100,000 and has $60,000 of accumulated depreciation for similar equipment in a transaction which HAS commercial substance. The fair value of the equipment which Brittney gave up is $50,000. Brittney also receives $10,000 in cash. What should Brittney recognize in her journal entry to record the transaction? a. Gain of $10,000 b. Loss of $10,000 c. No gain or loss d. Gain of $ 2,000 5. Depletion expense a. includes tangible equipment costs in the depletion base. b. is usually part of cost of goods sold. c. excludes intangible development costs from the depletion base. d. excludes restoration costs from the depletion base. 6. Which of the following statements is true regarding capitalization of interest? a. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. b. 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. 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. 7. Which of the following should be reported as repairs and maintenance expense: a. Rebuilding an engine which extends the useful life of an asset. b. Upgrading equipment to operate more efficiently. c. Tim the Toolman Taylor making the asset do twice the work it was designed to do. d. Oil change and servicing to maintain an asset. 8. On January 3, 2003, Lopez Co. purchased machinery. The machinery has an estimated useful life of eight years and an estimated salvage value of $84,000. The depreciation applicable to this machinery was $182,000 for 2005, computed by the sum-of-the-years'-digits method. The acquisition cost of the machinery was a. $1,008,000. b. $1,092,000. c. $1,310,400. d. $1,176,000.

Winter 2007 Final v. 2--Page 3 9. The life that an asset should be depreciated over is: a. It's physical life b. It's economic life c. It's democratic life d. The life designated for that type of equipment by the Association of Life Estimators (the ALE) 10. Which of the following depreciation methods generally provides the strongest matching of cost to benefit? a. Straight line; b. Activity based. c. Declining balance methods; d. Sum of the years digits; 11. 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. capitalized in the machine account. b. allocated between accumulated depreciation and the machine account. c. expensed. d. debited to accumulated depreciation. 12. If there is an event indicating a possible impairment, the undiscounted cash flows are $100,000, the estimated fair value is $70,000 and the asset has a net book value of $105,000, then: a. Impairment expense should be debited for $5,000 b. Retained earnings should be debited for $5,000 c. There is no impairment d. Impairment expense should be debited for $35,000 13. A not-for-profit organization receives a free computers from Dell. The not-for-profit organization should report the following: a. Make no entry as they have no "basis" in the asset. b. Debit fixed assets and credit equity for the fair value of the computers. c. Debit fixed assets and credit revenue for the fair value of the computers. d. Debit fixed assets and credit revenue for Dell's cost of the computers. 14. 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. 9/12. b. 11/12. c. 8/8. d. 8/12.

Winter 2007 Final v. 2--Page 4 15. Brittney Biggs exchanges equipment which she bought for $100,000 and has $60,000 of accumulated depreciation for similar equipment in a transaction which does not have commercial substance. The fair value of the equipment which Brittney gave up is $50,000. Brittney also receives $10,000 in cash. What should Brittney recognize in her journal entry to record the transaction? a. No gain or loss b. Gain of $ 2,000 c. Loss of $10,000 d. Gain of $10,000 16. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the a. book value of the stock. b. market value of the stock. c. par value of the stock. d. stated value of the stock. 17. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn? a. Horizontally and sloping down to the right b. Horizontally and sloping up to the right c. Vertically and sloping down to the right d. Vertically and sloping up to the right 18. Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets? a. Assets not currently undergoing the activities necessary to prepare them for their intended use. b. Assets under construction for an enterprise's own use. c. Assets financed through the issuance of long-term debt. d. Assets intended for sale or lease that are produced as discrete projects. 19. A change in estimate should a. be handled retroactively. b. result in restatement of prior period statements. c. be handled in future periods only. d. be handled in current and future periods. 20. A general description of the depreciation methods applicable to major classes of depreciable assets a. should be included in corporate financial statements or notes thereto. b. is not a current practice in financial reporting. c. is needed in financial reporting when company policy differs from income tax policy. d. is not essential to a fair presentation of financial position.

Winter 2007 Final v. 2--Page 5 21. Which of the following costs may increase the recorded amount of buildings: a. Cost of acquiring the land b. Interest c. Title insurance d. Sale of scrap from development of the site. 22. If a fixed asset is deemed to be "held for use" and its value is impaired, then: a. The asset should be written down to it's estimated market value, excluding any costs to sell. b. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. c. Recovery of previous impairment losses are permitted. d. Depreciation of the asset should stop. 23. 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. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2004 c. As the cumulative effect of a change in accounting principle in 2004 d. By continuing to depreciate the machinery over the original fifteen year life 24. If there has been an event indicating that a fixed asset may be impaired, then: a. None of these. b. No further impairment testing is necessary. 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. An undiscounted cash flow analysis should be performed.

Winter 2007 Final v. 2--Page 6 25. Minefordollars, Inc. just spent $100,000 searching for a new site to drill for oil. The site they found was then explored by geologists and other specialists to estimate the quantity of oil in the ground, which cost another $50,000. The purchase price of the property, including mineral rights is $2,000,000 and Minefordollars determined that this price is too high based upon the estimated quantity of oil in the ground, and consequently, will not purchase the property. What is the amount which should be capitalized in connection with this project? a. $0 b. $2,150,000 c. $50,000 d. $150,000 26. Wedrill, Inc. spent $100,000 searching for a new site to drill for oil. The site they found was then explored by geologists and other specialists to estimate the quantity of oil in the ground, who drilled 10 deep exploratory wells, at a cost of $10,000 each. They decided that the estimated 25,000 barrels of oil at the site justified the purchase of the land and mineral rights for $300,000. Only the 5th well will be used and they spent an estimated $10,000 total for all) to fill-in the other 9 holes. They spent $250,000 purchasing pumping equipment, and $20,000 installing the equipment. They estimate that when they have fully depleted the oil at the site, they will incur an additional $140,000 in restoration costs for the property, at which time they can sell the land for $200, 000 (salvage value). (I) Compute the amount which should be capitalized on the balance sheet for this project based upon the facts above at the time that they commence drilling. (II) Compute the basis for depletion, net of estimated salvage value. (III) Assuming that in year 1 they pump out 5,000 barrels, in year 2 they pump out 12,500 barrels and in year 3 they pump out 5,000 barrels, what is the depletion expense in years 1, 2 and 3? (IV) Now assume that after the activity in III above, in year 4, they determine that there are still an estimated 10,000 barrels in the ground and they pump out 5,000 of them (5,000 estimate remaining at the end of the year). What amount of depletion expense should be recorded in year 4?

Winter 2007 Final v. 2--Page 7 March 24, 2007 ANSWER KEY Anderson ECON 136A 11am Class +-------+------+--------+------+--------+--------+--------+--------+------+ Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page +-------+------+--------+------+--------+--------+--------+--------+------+ 10 86 1 d MChoice 10 8 2 c MChoice C 2 10 88 3 a MChoice 10 85 4 a MChoice 11 20 5 b MChoice C 6 10 16 6 a MChoice C 4 10 87 7 d MChoice 11 35 8 d MChoice P 3 11 79 9 b MChoice 11 78 10 b MChoice 10 27 11 a MChoice C 6 11 76 12 d MChoice 10 89 13 c MChoice 10 17 14 d MChoice C 3 10 84 15 b MChoice 10 20 16 b MChoice C 5 11 10 17 a MChoice C 3 10 12 18 a MChoice C 4 11 16 19 d MChoice C 5 11 18 20 a MChoice C 7 10 90 21 b MChoice 11 77 22 a MChoice 11 15 23 b MChoice C 5 11 75 24 d MChoice 11 74 25 a MChoice 11 75 26 Exercise +-------------------------------------------------------------------------+ * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

Winter 2007 Final v. 2--Page 8 March 24, 2007 8. (AC - $84,000) x 6/36 = $182,000 AC = $1,176,000. 26. (I) Capitalize what is capitalizable and spent (restoration is relevant to the depletion but not capitalized until incurred): Land $300,000 Exploration $100,000 Geology $100,000 Fill-in $ 90,000 Equipment $250,000 Installation $ 20,000 Total capitalize $860,000 (II) Costs capitalized $860,000 Estimated restoration $340,000 Estimated salvage -200,000 Depletion base $1,000,000 III. Depletion Base $1,000,000 and estimated 25,000 barrels Year 1: 5,000/25,000*1,000,000= $200,000 Year 2: 12,500/25,000*1,000,000= $500,000 Year 3: 5,000/25,000*1,000,000= $200,000 NOTE for next part, total depletion at end yr 3= $900,000 (IV) Remaining to deplete $100,000 ($1million less 900,000 above) Remaining barrels 10,000 Depletion/ barrel $10 Yr 4 barrels is 5,000 @$10/ barrel= $50,000 OR 5,000/10,000*$100,000= $50,000.