302 Accounting Fall 2004 Midterm Exam. Name _________________________________________ 1. On January 15, 2004, Grant Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2008, at an estimated cost of $2,500,000. Grant plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually. The first deposit was made on July 1, 2004. Future value factors are as follows: Future value of 1 at 10% for 5 periods Future value of ordinary annuity of 1 at 10% for 4 periods Future value of annuity due of 1 at 10% for 4 periods Grant should make four annual deposits of how much? [4 pts] 1.61 4.64 5.11
2. On December 30, 2004, Cey, Inc. purchased a machine from Frank Corp. in exchange for a noninterest-bearing note requiring eight payments of $40,000. The first payment was made on December 30, 2004, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present Value of Ordinary Present Value of Period Annuity of 1 at 11% Annuity Due of 1 at 11% 7 4.712 5.231 8 5.146 5.712 On Cey's December 31, 2004 balance sheet, the net note payable to Frank is how much? [4 pts]
3. On January 1, 2004, Grant Co. issued ten-year bonds with a face amount of $5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.463 0.386 Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145 What was the total issue price of the bonds? [4 pts]
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 4. 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 $170,000. Reiley Co. should report the cost of land as how much? [6 pts]
5. Cairo Company has recently decided to accept a proposal from the City of Bel Aire that publicly owned property with a large warehouse located on it will be donated to Cairo if Cairo will build a branch plant in Bel Aire. The appraised value of the property is $490,000 and of the warehouse is $1,230,000. Below prepare the entry by Cairo for the receipt of the properties. [4 pts]
6. Interest cost that is capitalized should [4 pts] a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of the above.
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 7. Nonmonetary exchange. [8 pts] A machine cost $60,000, has annual depreciation expense of $12,000, and has accumulated depreciation of $30,000 on December 31, 2003. On April 1, 2004, when the machine has a fair value of $24,000, it is exchanged for a similar machine with a fair value of $72,000 and the proper amount of cash is paid. Below prepare all entries that are necessary at April 1, 2004. (Depreciation Expanse has not been recorded in 2004 for any depreciable assets.)
8. 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 [4 pts] a. expensed. b. debited to accumulated depreciation. c. capitalized in the machine account. d. allocated between accumulated depreciation and the machine account. 9. On May 1, 2004, Royster Company began construction of a building. Expenditures of $90,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2004. For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2004 were how much?
[4 pts]
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 10. Farr Co. purchased a machine on July 1, 2004, for $700,000. The machine has an estimated useful life of five years and a salvage value of $140,000. The machine is being depreciated from the date of acquisition by the 150% declining-balance method. For the year ended December 31, 2004, Farr should record how much depreciation expense for this machine? [4 pts]
11. Jenks Co. takes a full year's depreciation expense in the year of an asset's acquisition and no depreciation expense in the year of disposition. Data relating to one of Jenks' depreciable assets at December 31, 2004 are as follows: Acquisition year Cost Residual value Accumulated depreciation Estimated useful life = 5 years 2002 $350,000 50,000 240,000
What depreciation method is Jenks using? [4 pts]
12. On January 1, 2004, Newton Company purchased a machine costing $400,000. The machine is in the MACRS 5-year recovery class (200%) for tax purposes and has an estimated $80,000 salvage value at the end of its economic life. [8 pts] Assuming the company uses the general MACRS approach, the amount of MACRS deduction for tax purposes for the year 2004 is how much?
Assuming the company uses the optional straight-line method, the amount of MACRS deduction for tax purposes for the year 2004 is how much?
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 13. Oates Company purchased for $4,400,000 a mine estimated to contain 2 million tons of ore. When the ore is completely extracted, it was expected that the land would be worth $200,000. A building and equipment costing $2,800,000 were constructed on the mine site, and they will be completely used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of ore were mined, and $600,000 was spent for labor and other operating costs. Oates uses the units-ofproduction method to depreciate building and equipment. Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a schedule giving cost per ton.) [6 pts]
14. A truck was acquired on July 1, 2001, at a cost of $270,000. The truck had a six-year useful life and an estimated salvage value of $30,000. The straight-line method of depreciation was used. On January 1, 2004, the truck was overhauled at a cost of $25,000, which extended the useful life of the truck for an additional two years beyond that originally estimated (salvage value is still estimated at $30,000). In computing depreciation for annual adjustment purposes, expense is calculated for each month the asset is owned. Prepare the appropriate entries for January 1, 200 and December 31, 2004. [8 pts]
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 15. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for legal fees in a successful defense of the patent. What is the total amount capitalized for the patent through March 31, 2004?
[4pts]
16. Which of the following costs of goodwill should be amortized over their estimated useful lives? Costs of goodwill from a business combination Costs of developing accounted for as a purchase goodwill internally a. No No b. c. d. No Yes Yes Yes Yes No
17. In early January 2003, Kenner Corporation applied for a patent, incurring legal costs of $30,000. In January 2004, Kenner incurred $9,000 of legal fees in a successful defense of its patent. [8 pts] (a) (b) Compute 2003 amortization, 12/31/03 carrying value, 2004 amortization, and 12/31/04 carrying value if the company amortizes the patent over 10 years. Compute the 2005 amortization and the 12/31/05 carrying value, assuming that at the beginning of 2005, based on new market research, Kenner determines that the fair value of the patent is $27,500. Estimated future cash flows from the patent are $30,000 on January 3, 2005.
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 18. Briefly discuss the differences in accounting for impairment of: (a) limited-life intangibles, (b) indefinite-life intangibles, and (c) goodwill. [6 pts]
19. How does accounting for development of computer software costs differ from accounting for R&D costs? [4 pts]
20. Generally under GAAP, how do we account for advertising costs? [2 pts.]
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Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________ 1. On January 15, 2004, Grant Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2008, at an estimated cost of $2,500,000. Grant plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually. The first deposit was made on July 1, 2004. Future value factors are as follows: Future value of 1 at 10% for 5 periods Future value of ordinary annuity of 1 at 10% for 4 periods Future value of annuity due of 1 at 10% for 4 periods Grant should make four annual deposits of how much? 5.11 R = $2,500,000; R = $2,500,000 5.11 = $489,237. 1.61 4.64 5.11
2. On December 30, 2004, Cey, Inc. purchased a machine from Frank Corp. in exchange for a noninterest-bearing note requiring eight payments of $40,000. The first payment was made on December 30, 2004, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present Value of Ordinary Present Value of Period Annuity of 1 at 11% Annuity Due of 1 at 11% 7 4.712 5.231 8 5.146 5.712 On Cey's December 31, 2004 balance sheet, the net note payable to Frank is how much?
$40,000 4.712 = $188,480 or ($40,000 5.712) $40,000 = $188,480.
3. On January 1, 2004, Grant Co. issued ten-year with bonds a face amount of $5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.463 0.386 Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145 What was the total issue price of the bonds? $5,000,000 .08 = $400,000 ($400,000 6.145) + ($5,000,000 0.386) = $4,388,000.
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Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
4. 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 $170,000. Reiley Co. should report the cost of land as how much? [6 pts] $1,000,000 + $40,000 $5,400 + $3,480 + $2,400 + $6,400 = $1,046,880.
5. Cairo Company has recently decided to accept a proposal from the City of Bel Aire that publicly owned property with a large warehouse located on it will be donated to Cairo if Cairo will build a branch plant in Bel Aire. The appraised value of the property is $490,000 and of the warehouse is $1,230,000. Below prepare the entry by Cairo for the receipt of the properties.
Building (Warehouse) .................................................................... $ 1,230,000 Land ............................................................................................... 490,000 Contribution Revenue ........................................................
$1,720,000
6. Interest cost that is capitalized should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of the above.
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Accounting 302 Fall 2004 7. Nonmonetary exchange. [8 pts]
Midterm Exam.
****** KEY *****
A machine cost $60,000, has annual depreciation expense of $12,000, and has accumulated depreciation of $30,000 on December 31, 2003. On April 1, 2004, when the machine has a fair value of $24,000, it is exchanged for a similar machine with a fair value of $72,000 and the proper amount of cash is paid. Below prepare all entries that are necessary at April 1, 2004. (Depreciation Expanse has not been recorded in 2004 for any depreciable assets.)
Depreciation Expense ($12,000 3/12)............................................ Accumulated Depreciation .................................................... Accumulated Depreciation ................................................................ Machinery ......................................................................................... Loss on Disposal................................................................................ Machinery ............................................................................. Cash ($72,000 $24,000) .....................................................
$ 3,000 $ 3,000 33,000 72,000 3,000 60,000 48,000
8. 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. 9. On May 1, 2004, Royster Company began construction of a building. Expenditures of $90,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2004. For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2004 were how much? ($90,000 4/12) + ($90,000 3/12) + ($90,000 2/12) + ($90,000 1/12) = $75,000.
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Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
10. Farr Co. purchased a machine on July 1, 2004, for $700,000. The machine has an estimated useful life of five years and a salvage value of $140,000. The machine is being depreciated from the date of acquisition by the 150% declining-balance method. For the year ended December 31, 2004, Farr should record depreciation expense on this machine of $700,000 0.3 0.5 = $105,000
11. Jenks Co. takes a full year's depreciation expense in the year of an asset's acquisition and no depreciation expense in the year of disposition. Data relating to one of Jenks' depreciable assets at December 31, 2004 are as follows: Acquisition year Cost Residual value Accumulated depreciation Estimated useful life = 5 years What depreciation method is Jenks using? SoYD: (5/15 + 4/15 + 3/15) * (350,000 50,000) = $240,000 2002 $350,000 50,000 240,000
12. On January 1, 2004, Newton Company purchased a machine costing $400,000. The machine is in the MACRS 5-year recovery class (200%) for tax purposes and has an estimated $80,000 salvage value at the end of its economic life. Assuming the company uses the general MACRS approach, the amount of MACRS deduction for tax purposes for the year 2004 is how much? 20%*2*1/2*400,000 = $80,000
Assuming the company uses the optional straight-line method, the amount of MACRS deduction for tax purposes for the year 2004 is how much? 20%*1/2*$400,000 = $40,000
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Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
13. Oates Company purchased for $4,400,000 a mine estimated to contain 2 million tons of ore. When the ore is completely extracted, it was expected that the land would be worth $200,000. A building and equipment costing $2,800,000 were constructed on the mine site, and they will be completely used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of ore were mined, and $600,000 was spent for labor and other operating costs. Oates uses the units-ofproduction method to depreciate building and equipment. Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a schedule giving cost per ton.) Item Base Ore $4,200,000 Building and Equipment 2,800,000 Labor and Operating Expenses 600,000 Total Cost Tons 2,000,000 2,000,000 750,000 Per Ton $2.10 1.40 .80 $4.30
14. A truck was acquired on July 1, 2001, at a cost of $270,000. The truck had a six-year useful life and an estimated salvage value of $30,000. The straight-line method of depreciation was used. On January 1, 2004, the truck was overhauled at a cost of $25,000, which extended the useful life of the truck for an additional two years beyond that originally estimated (salvage value is still estimated at $30,000). In computing depreciation for annual adjustment purposes, expense is calculated for each month the asset is owned. Prepare the appropriate entries for January 1, 200 and December 31, 2004. [8 pts] Cost Less salvage value Depreciable base, July 1, 2001 Less depreciation to date [($240,000 6) 2 1/2] Depreciable base, Jan. 1, 2004 (unadjusted) Overhaul Depreciable base, Jan. 1, 2004 (adjusted) $270,000 30,000 240,000 100,000 140,000 25,000 $165,000 25,000 25,000 30,000 30,000
January 1, 2004 Accumulated Depreciation ................................................................ Cash ....................................................................................... December 31, 2004 Depreciation Expense ....................................................................... Accumulated Depreciation ($165,000 5.5 yrs) ..................
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Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
15. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for legal fees in a successful defense of the patent. What is the total amount capitalized for the patent through March 31, 2004?
$100,000 + $150,000 = $250,000. 16. Which of the following costs of goodwill should be amortized over their estimated useful lives? Costs of goodwill from a business combination Costs of developing accounted for as a purchase goodwill internally a. No No b. c. d. No Yes Yes Yes Yes No
17. In early January 2003, Kenner Corporation applied for a patent, incurring legal costs of $30,000. In January 2004, Kenner incurred $9,000 of legal fees in a successful defense of its patent. (a) (b) Compute 2003 amortization, 12/31/03 carrying value, 2004 amortization, and 12/31/04 carrying value if the company amortizes the patent over 10 years. Compute the 2005 amortization and the 12/31/05 carrying value, assuming that at the beginning of 2005, based on new market research, Kenner determines that the fair value of the patent is $27,500. Estimated future cash flows from the patent are $30,000 on January 3, 2005.
(a) 2003 amortization: $30,000 10 yrs. = $3,000 12/31/03 carrying value: $30,000 $3,000 = $27,000 2004 amortization: ($27,000 + $9,000) 9 yrs. = $4,000 12/31/04 carrying value: ($27,000 + $9,000) $4,000 = $32,000 (b) Since the expected future cash flows ($30,000) are less than the carrying value ($32,000), an impairment loss must be computed. Loss on impairment: $32,000 carrying value $27,500 fair value = $4,500 2005 amortization: $27,500 8 yrs. = $3,438 12/31/05 carrying value: $27,500 $3,438 = $24,062
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Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
18. Briefly discuss the differences in accounting for impairment of: (a) limited-life intangibles, (b) indefinite-life intangibles, and (c) goodwill. [6 pts] (a) limited-life intangibles: 2-step test, exactly like PPE (b) indefinite-life intangibles: 1-step test, is FV < CV? (c) goodwill: 2-step test,
19. How does accounting for development of computer software costs differ from accounting for R&D costs?
20. Generally under GAAP, how do we account for advertising costs? [2 pts.] Advertising costs must be expensed as incurred or the first time the advertising takes place.
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