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mid1wkf99 - [oaw—s 6 P bl I 1h r0 em our ”fl aru M 9...

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Unformatted text preview: .[oaw—s 6 P bl I 1h r0 em ( our) . ”fl aru/ M / 9. On l/l/l Anvil Corporation has just incorporated and asks your advice as ts; how to deal with several expenditures. For each of the events below indicate the proper treatment of the expenditure initially and what period of time you will amortize the Est. Theoretically justify your answers and present the asset side of the balance sheet-and the income statement at the end of Years 1 & 2 for all of these expenditures. Assume Anvil uses double declining balance method of depreciation for personal property, straight line depreciation for real property and units of output depletion for natural resources. You may ignore Cash and theoretically justify life of asset you used if not identified for you in the problem. (l) 9 Pays $1,000 plus 200 shares of stock to the attorney who incorporated the business. The stock has a par value of $1/share and a market value of $5/share. ( (2) On XII/l incurs $2,000 in salary and payroll for training staff on how to do their job. Operations began on 3/1/1. _ , arm‘s“? ‘ (3) On 2/1/1 pays $12,000 for land which is to be used for building a plant site. The construction process began 2/1/1 and ended 6/1/2. (4) On 2/ 1/1 borrowed $160,000 to construct a building at 12% and issued a $50,000 bond at par which had an interest rate of 10%. This loan was converted to permanent financing on 6/1/2 — at a rate of 10% ~ and the other borrowing exists for all of Years 1 & 2. The only other borrowings are $30,000 of credit card loans which bear a 16% rate. Expenditures for the building process which started 2/1/1 and was completed on“ 6/1/2 were 3: follows: 4/ 1/ 1 $50,000 6/1/1 50,000 .4» 1 1/1/1 50,000 2/ 1/2 50,000 6/1/2 30,000 (For this part show a schedule of amount to be capitalized as building. You do not have to show liability amounts.) (5) On 3/ 1/1 bought delivery truck for $5,000. The life of the truck was expected to be 3 years and salvage value was set at $15300. ISDO (6) On 7/1/1 purchased a small oil company to help supply oil for operations and generate extra profits. The book value and cost of the oil company’s assets were as follows and payment was made thru the issuance of 30,000 shares of stock whose fair value is still $5/share and par value is still $1. _r_, Machine 5 ear life 50,000 60,000 Land with oil reserves in the round 50,000 70,000 Road im -rovements on oil reserve land 4,000 5,000 - —_ 10.000 10.000 Assume the land has a $20,000 salvage value and will require $2,000 to restore it to salable condition once the oil is removed. wi‘lp' During Year 1 extracted 1,000 barrels of 711 from the ground and put them into inventory tanks of which 200 barrels still remain in the tank. The rest was used in operations. It is estimated 5,000 barrels of oil are at the oil site when purchased. . (7) Other expenditures during Years 1 & 2 H 401E —=_-m ’ 200 r /' (8) On 12/3 1/2 exchanged the machinery acquired in (6) above for anotherlsimilar mahcine which had a fair value of $50,000 and received $5,000 in cash in the exchange. [9 Problem II (fimins) on: Show the 12/31/1 & 2B/S and US impact of the following cost related research and development of a new type of micro processor. The product was patented on 6/ 1/ 1 and is expected to be marketed for 5 yearS. From 6/1/1 to 10/ 1/ 1 the product was fine tuned and tested in various computers to see the best method of production and sales of the product. The product is first sold 10/ 1/ 1. Assume S/L depreciation or amortization for this problem. R&D machinery used on this project this year can be used on other R&D 46“ uro'ects for 5 cars Problem III Short Answers (25 mins) (1) Describe 2 alternative methods to historical cost accounting for fixed assets and list 4 reasons why they are not employed. (2) How are gains & losses on exchanges of assets handled and theoretically support the treatment. How does this rule affect the carrying value of the new asset exchanged for? Justify this. (3) List the 3 most common techniques to depreciate or deplete tangible assets. Also give the 2 best reasons why it may be used and primary reason why it should not be used. Give examples where each is most appropriate. (4) Explain what happens to the carrying value of an asset (with a salvage value) which has reached the end of its expected life but (a) is being used for additional years, (b) is being junked. (5) Software developed internally often has future benefits. Explain how accountants generally treat the cost of producing the software and theoretically justify this treatment. How does the intended use of the software impact the treatment? 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