Mgmt_200_Spring_2008_Exam_3_solution(4,14)

# Mgmt_200_Spring_2008_Exam_3_solution(4,14) - Name PUID...

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Name: ________________________ PUID: ________________________ Purdue University Krannert School of Management MGMT 200 – Introductory Financial Accounting Spring 2008 Exam 3 – April 2, 2008 - SOLUTION This exam consists of 4 questions on 10 pages (excluding this cover page and the present value tables) for a total of 100 points. Time allowed: 90 minutes. Answer all questions. To ensure full credit and to maximize partial credit, clearly show all supporting calculations. The exam is closed book. A calculator is permitted. GOOD LUCK . Question 1 (25 points) ________ Question 2 (25 points) ________ Question 3 (25 points) ________ Question 4 (25 points) ________ TOTAL (100 points) ________

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Question 1: Property, Plant, and Equipment (25 points) West Baden City Corporation purchased a new waste recycling machine on January 1, 2006. The machine cost \$1,296,000. West Baden paid \$496,000 cash and signed a five- year 6% note for the balance. At the time of purchase the machine was estimated to have a useful life of 12 years and an estimated resale value at the end of year 12 of \$48,000. The machine will be used to sort recyclables collected from households in the city and is estimated to process 3,120,000 tons of recyclables during its 12 year life. Required: a. Prepare the journal entry to record the purchase of the machine on January 1, 2006. Equipment 1,296,000 Cash 496,000 Note Payable 800,000 b. Prepare the journal entry to record depreciation expense for 2006 assuming West Baden City Corporation elects to depreciate the machine using the straight-line method. Depreciation expense 104,000 Accumulated depreciation 104,000 [1,296,000 – 48,000] / 12 years = 104,000 per year c. Prepare the journal entry to record depreciation expense for 2006 assuming West Baden City Corporation elects to depreciate the machine using the double declining- balance method. Depreciation expense 216,000 Accumulated depreciation 216,000 [1,296,000 – 0] x 2/12 = 216,000 Question 1 continued over . . . Mgmt 200 – Exam 3 – Spring 2008 Solution outline – page 1
d. Prepare the journal entry to record depreciation expense for 2006 assuming West Baden City Corporation elects to depreciate the machine using the units-of-production method based on tons of recyclables processed. 195,000 tons of recyclables were processed in 2006. Depreciation expense 78,000 Accumulated depreciation 78,000 [1,296,000 – 48,000] / 3,120,000 tons = 0.40 per ton 195,000 tons at 0.40 per ton = 78,000 e. How much would be reported as depreciation expense in 2007 under each of the three methods, assuming 286,000 tons of recyclables were processed in 2007: Straight-line: ______ 104,000 Double-declining balance: ______ 180,000 = (1,296,000 – 216,000) x 2/12 Units-of-production: ______ 114,400 = 286,000 x 0.40 Mgmt 200 – Exam 3 – Spring 2008 Solution outline – page 2

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Mgmt_200_Spring_2008_Exam_3_solution(4,14) - Name PUID...

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