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mid2wkf98 - H Sander EconlSéB ‘ Fall 1998 Midterm Exam#2...

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Unformatted text preview: H. Sander EconlSéB ‘ _ , Fall 1998 Midterm Exam #2 ' Problem 1 (20 mins) Home Department Stores Inc. constructs its own stores. [n the past, no cost has been added to the asset value for interest on funds borrowed for construction. Management has decided to change its policy and desires to include interest as part of the cost of a new store just being completed. (a) Based on the following information, how much interest would be capitalized in 1987? (b) In 1988 Assume the construction period is 1/2/87 - 11/30/88 and the construction loan was borrowed and paid off on the same dates. (c) Do you agree with the decision to capitalize? Why or why not? Total construction expenditures: January 2, 1987 $200,000 May 1, 1987 600,000 November 1, 1987 500,000 “ March 1, 1988 700,000 September 15, 1988 400,000 December 31, 1988 - . 500,000 $2,900,000 Outstanding company debt: Mortgage related directly to new store: interest rate 12%; term, construction period only $1,000,000 General bond liability: bonds issued in 1986; interest rate 10% for ten years $500,000 bonds issued previously - 8%, mature in five years $1,500,000 Estimated cost of equity capital 14% Problem II (20 mins) An examination of the property, plant, and equipment accounts of Jones Company disclosed the following transactions: a. On January 1, 1997, a new machine was purchased having a list price of $30,000. The company did not take advantage of a 1 percent cash discount available upon firll payment of the invoice within 10 days. Shipping cost paid by the vendor was $100. Installation cost was $400, including $100 that represents 10 percent of the monthly salary of the factory superintendent (installation period, two days). A wall was moved two feet at a cost of $800 to make room for the machine. w, .... ... ........-............._...-... . .. m... M. ...i.;..4...u._.;....., "scum...“ ....- a“... manor/«M4- .w.«n-—~.,...-...__..... _ ., .., _, .. . , H. mu m...“ 1-- b. During January 1997. the first month of operations, the newly purchased machine became inoperative due to a defect in manufacture. The vendor repaired the machine at no cost; however. the specially trained operator was idle during the two weeks the machine was inoperative. The operator was paid regular wages ($650) during the period, although the only work performed was to observe the repair by the factory representative. c. On January 1, 1997, bought fixtures with a list price of $4.500; paid cash $l,500 and gave a one-year non-interest-bearing note payable for the balance. The face value of the note is $3,000 and the present value of it $2,500. d. On July 1, 1997, a contractor completed construction of a building for the company. The company paid the contractor by transferring $400,000 face value 20-year. 8 percent James Company bonds payable at which time financial consultants advised the bonds would sell at 96 (i.e.. 5384.000). e. During January 1998, exchanged the electric motor on the machine purchased on January 1, 1997 for a heavier motor and paid $400 cash. The market value of the new motor was $1,200. The parts list showed a $900 cost for the original motor (estimated life, 10 years). f. On January 1, 1997, purchased an automatic counter to be attached to a machine in use, cost $700. The estimated useful life of the counter was 7 years, and the estimated life of the machine was 10 years. g. On January 1, 1998 Jones painted the machine a more pleasant color which matches the walls of the factory. Reguired 1. Prepare the journal entries to record each of the above transactions as of the date of occurrence. Explain andjustify your decisions on questionable items. James Company uses straight-line depreciation. 2. Record depreciation at the end of 1997 and 1998. None of the assets is expected to have a residual value except the fixtures (residual value is $500). Estimated useful lives: fixtures, 5 years; machinery, 10 years; and building, 40 years. Show all work. 3. Repeat part 2 except using double-declining balance depreciation. Problem 111 (10 mins) Multiple Choice - Explain Why? 1. Able Corporation purchased an old building and the land oN which it is located. The old building will be demolished at a net cost of $10,000. A new building will be Built on the site. The net demolition cost (after salvage proceeds) should be a. depreciated over the remaining life of the new building. b. written off an extraordinary loss in year of demolition. c. capitalized as part of the cost of the land. d. written off an expense. 2. The cost to train employees to run new robotic technology used in manufacturing should be debited to a. machinery. b. deferred charge. H.-." ....._... ..... "W.— .. c. manufacturing expense. d. office salries. 3. At great cost. a special plastic film was applied to all the south- and west-facing windows of a 12-story office building. This film reduces the radiant energy entering the building and is expected to pay for itself in reduced air-conditioning costs in five years. The useful life of the windows is not affected. The cost of this film should be debited to a. maintenance and repair expense. b. building. c. leasehold improvement. d. other expense. 4. The cost of repaving the parking lot with a new, longer-life asphalt should be debited to which of the following accounts? The company owns the land and the lot. The new asphalt will last significantly longer than the old asphalt which is at the end of its economic life of 10 years. a. land improvements b. land c. an expense account d. accumulated depreciation Problem IV (20 mins) During the current year, the accountant for the Cartwright Corporation recorded numerous transactions in an account labeled Intangibles as follows: Jan. 1 Jan. 10 Jan. 25 April 1 May 15 June 30 July 1 Dec. 10 Dec. 31 Dec. 31 Incorporation fees ' $17,500 Legal fees for the incorporating of the company 7,500 Paid for large-scale advertising campaign 15,500 Acquired land for $15,000 and a building for $20,000 to house 35,000 the R&D activities. The building has a 20-year life and several different R&D projects will be conducted in it Purchased materials exclusively for use in R&D activities. Of 15,000 these materials 20% are 1efi at the end of the year and will be used in the same R&D project next year , Received a patent on a product that cost patent legal 100,000 application fees of $5,000 and cost $95,000 to develop the product internally Operating loss for first 6 months of the year 12,000 Purchased an experimental machine from an inventor. The ‘ ' 12,000 machine is expected to be used for several R&D projects for 3 years, afier which it will have no residual value Paid employees involved in R&D 30,000 Paid attorneys fee to defend patent issued on June 30 10,000 . arm—«a twee-”um nguired (A) Prepare adjusting journal entries to eliminate the intangibles account and correctly record {I all the items where necessary. (8) Record amortization of intangibles using the longest life possible where life is questionable. (C) Show your balance sheet at 12/31. Problem V (30 mins) 1. Discuss the theory involved in the decision related to the amount of gain or loss to recognize and the carrying value of the new asset in an exchange of similar assets. 2. Describe the primary goal of the function of depreciation. Theoretically justify the use of the two most popular methods of depreciation and the most popular method of depletion. 3. Describe what is meant by the concept of Goodwill and briefly how an accountant arrives at an amount to record for it. Also theoretically justify the approximate life one should assign to Goodwill when amortizing it if it’s due to (a) a strategic location (b) a reputation built up by a management team that will not remain with the company afier its sale. 4. Describe how sofiware development costs for a software package to be marketed are treated before and after a prototype is produced and justify why. 5. 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