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mid1wkf00 - H Sander Econ 136B Fall 2000 Midterm#1 Problem...

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Unformatted text preview: H. Sander Econ 136B Fall 2000 Midterm #1 Problem I (20 mins) 1. At.com issued 1,000 shares of $5 market value, $1 par value common stock to an attorney who incorporated the firm. On 1/1/1 At.com has just incorporated and needs some advice on how to account for expenditures made during the year. Indicate the proper treatment for each expenditure. Do so by showing the correct journal entry, B/S presentation (including section) for years 1 and 2, US presentation for years 1 and 2. All intangibles should be amortized over the longest time allowed for each situation. Assume straight line depreciation except for the lathe in Part 4 use DDB. 2. During the 15t month of operations At.com purchased a patent from Bt.com for $75,000. This patent has a legal life of 12 more years. At.com expects to market this product for 5 more years then sell the patent for approx. $ 10,000. 3. On 2/1/1 At.com spent $10,000 in attorney's fees to successfully defend the patent against a competitor who used the same idea. 4. On 3/1/1 purchased a lathe that will be used for research & development. The lathe was purchased for $10,000. This machine will be used for 5 years, with no salvage value. The lathe will be used to work on a new product which the company expects to be useful for 5 additional years. Supplies used by the lathe are $1,000 each year. 5. On 4/31/1 At.com purchased an old building and land on which it is located for $50,000. The old building will be demolished at a cost of $25,000. The demolition will bring $5,000 in salvage proceeds. The land will be used for a new building; construction will take about 2 1/2 years. Closing costs for the purchase were $5,000. Problem II (15 mins) 1. On 6/1/1/ At.com acquired an automobile with a list price of $12,000, and a cash price of $11,800. The firm traded in an old automobile that had originally cost $14,000 (and has a book value of $10,000). In addition At.com received $1,600 cash. Journalize and explain the valuation process of the new similar automobile. The new automobile has a 5 year life and no salvage. The Blue Book value of the original (old) automobile is $13,400. 2. On 6/31/1 At.com traded their compressor (BV 80,000, historical cost $100,000). At.com traded this asset for a piece of land with an FV of $110,000. At.com had to pay $10,000 in the exchange. Show the journal entries for each exchange for At.com and theoretically justify your treatment of any gains. séa 4%36 Problem III (20 mins) a) On 6/30/1 At.com borrowed $250,000 to construct a building at 11%. This is to be paid back with interest on 12/31/3. They invested the $250,000 at 6% interest for the 2 months before payments for construction began. b) On 1/1/1 At.com issued a $200,000 bond at par which has an interest rate of 8%. The company .also‘ issued an N/P for $375,000 @ 14%. Both of these loans were paid off on 12/31/2. The building process began with the planning phase on 8/1/1, but actually began work on 9/1/1. This work continued until it was occupied on 6/30/3. c) Expenditures for the project are as follows: 8/1/1 300,000 / 8/31/1 20,000 / 10/31/1 45,000 / 12/31/1 30,000 “ 1/31/2 245,000 / 7/31/2 125,000 / 12/1/2 30,000‘ 3/1/3 25,000 4/1/3 25,000 5/1/3 25,000 7/15/3 25,000 1) Showing all calculations indicate the amount of interest that can be capitalized in each of years 1-3 and what the carrying value of the building would be on 12/31/3 assuming a 40 year life and 50% salvage value and 150% declining balance depreciation. 2) Theoretically justify your results. Problem IV (15 mins) Decide whether At.com should capitalize or expense the following costs. Support your decision theoretically. If you decide to capitalize indicate the section of the balance sheet it would appear in and the life used for depreciation. 10/31/1 At.com painted all the machines to red, their company color for a cost of $10,000 cash. The new color should attract more attention to the company's assets and would not raise the fair value of the asset. 11/31/1 At.com contracted a new firm to construct a new building starting on 11/3 1/ 1. At.com paid a deposit for the building of $10,000 and the building is still not complete. 2/1/2 At.com purchased a new engine for a company truck. This engine will be able to handle 50% more payload. The cost is $3,000 cash. The engine will last 5 years. The car has only 3 years of intended use left. 0/0 .h.‘ ‘\ f l | '2‘ i l ' ~ .n__V_(10 mins) ~-' ,2 At.com purchased a lumber company. The book value of the company was $350,000 made up of hinery $275,000, land with trees $150,000, N/P $25,000, common stock $50,000. The fair value of p h asset is 20% higher than book value. At.com paid this through this issuance of stock [100,000 ares @ $2 par, market value of $5.35]. Normal earnings of a company in this industry and this size is ,0,000 per year but the old company averaged $80,000/yr. in profits. Assume a capitalization rate of '5 0%. I Reauired I (A) . Describe in general terms how an accountant would attempt to estimate the goodwill amount in this purchase. (B) Describe the amount an accountant would record as goodwill in this purchase. (C) Theoretically justify the amount the accountant used in (B). Problem VI (20 mins) 1. Discuss the type of costs that are included in this depletion base for most wildcatting oil companies and how oil withdrawn from ground but unsold is treated in the BIS and US. Include in your answer all typical costs and why they are capitalized. 2. 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