December 16, 2006

Anderson
136A 8AM Class
Final v. 1
Name _________________________

Answer multiple choice questions #1-25 on green scantron and problems #

26-29 in your blue book. You may take this exam with you.

DONT FORGET TO WRITE YOUR EXAM VERSION # ON YOUR SCANTRON.

1. The sale of a depreciable asset resulting in a loss indicates that

the proceeds from the sale were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.

2. On January 2, 2004, Pine Corp. replaced its boiler with a

more efficient one. The following information was available on that
date:

Purchase price of new boiler $120,000

Carrying amount of old boiler 5,000
Fair value of old boiler 3,000
Installation cost of new boiler 10,000

The old boiler was sold for $3,000. What amount should Pine
capitalize as the cost of the new boiler?
a. $130,000.
b. $122,000.
c. $125,000.
d. $120,000.

3. During 2004, Bolton Corporation acquired a mineral mine for

$3,000,000 of which $400,000 was ascribed to land value after the
mineral has been removed. Geological surveys have indicated that 10
million units of the mineral could be extracted. During 2004,
2,000,000 units were extracted and 1,600,000 units were sold. What
is the amount of depletion expensed for 2004?
a. $600,000.
b. $416,000.
c. $480,000.
d. $520,000.

4. Jeter Company purchased a new machine on May 1, 1995 for $264,000.

At the time of acquisition, the machine was estimated to have a
useful life of ten years and an estimated salvage value of $12,000.
The company has recorded monthly depreciation using the
straight-line method. On March 1, 2004, the machine was sold for
$36,000. What should be the loss recognized from the sale of the
machine?
a. $0.
b. $5,400.
c. $12,000.
d. $17,400.
Final v. 1--Page 2

5. For income statement purposes, depreciation is a variable expense if

the depreciation method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.

6. To qualify for capitalization, expenditures must:

a. increase the useful life of the asset and the productivity of

the asset.
b. increase the productivity of the asset and the appearance of
the asset.
c. increase the useful life of the asset, or the productivity
of the asset (either of the two).
d. none of the above

7. To qualify for capitalization, expenditures must:

a. Maintain the asset in its present condition

b. Add to the useful life of the asset and its productivity
c. Add to either the useful life of the asset or its productivity
d. None of these answers are correct

8. A general description of the depreciation methods applicable to

major classes of depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from
income tax policy.
d. should be included in corporate financial statements or notes
thereto.

9. On December 1, 2004, Neely Co. purchased a tract of land as a

factory site for $700,000. The old building on the property was
razed, and salvaged materials resulting from demolition were sold.
Additional costs incurred and salvage proceeds realized during
December 2004 were as follows:

Cost to raze old building $25,000

Legal fees for purchase contract and to record ownership 5,000
Title guarantee insurance 8,000
Proceeds from sale of salvaged materials 4,000

In Neely's December 31, 2004 balance sheet, what amount should be

reported as land?
a. $713,000.
b. $721,000.
c. $734,000.
d. $738,000.
Final v. 1--Page 3

10. On February 1, 2004, Larkin Corporation purchased a parcel of land

as a factory site for $400,000. An old building on the property was
demolished, and construction began on a new building which was com-
pleted on November 1, 2004. Costs incurred during this period are
listed below:

Demolition of old building $ 25,000

Architect's fees 35,000
Legal fees for title investigation and
purchase contract 5,000
Construction costs 890,000
(Salvaged materials resulting from demolition
were sold for $10,000.)

Larkin should record the cost of the land and new building,
respectively, as
a. $430,000 and $915,000.
b. $415,000 and $930,000.
c. $415,000 and $925,000.
d. $420,000 and $925,000.

11. During 2004, Geiger Co. sold equipment that had cost $294,000 for
$176,400. This resulted in a gain of $12,900. The balance in
Accumulated Depreciation Equipment was $975,000 on January 1, 2004,
and $930,000 on December 31. No other equipment was disposed of
during 2004. Depreciation expense for 2004 was
a. $45,000.
b. $57,900.
c. $85,500.
d. $175,500.

12. Mintz Company acquired a tract of land containing an extractable

natural resource. Mintz is required by the purchase contract to
restore the land to a condition suitable for recreational use after
it has extracted the natural resource. Geological surveys estimate
that the recoverable reserves will be 4,000,000 tons, and that the
land will have a value of $1,000,000 after restoration. Relevant
cost information follows:

Land $7,000,000
Estimated restoration costs 1,500,000

If Mintz maintains no inventories of extracted material, what should

be the charge to depletion expense per ton of extracted material?
a. $2.13
b. $1.88
c. $1.76
d. $1.50
Final v. 1--Page 4

13. There has been a negative event causing management to question

whether along-lived asset has been impaired. Their analysis reveals
that the asset will produce cash flows as follows:
Year 1: 20,000
Year 2: 10,000
Year 3: 10,000
Year 4: 10,000
Year 5: 10,000
Management expects to dispose of the asset at the end of year 5 for
$95,000. The asset's net book value is $175,000 and management
estimates the asset's fair value to be $125,000. Which of the
following statements is accurate.

a. The asset is impaired and management should record an impairment

loss of $80,000.
b. The asset is impaired and management should record an impairment
loss of $50,000.
c. The asset is not impaired and no adjustment is required as it
passes the undiscounted cash flow analysis.
d. None of these statements are true.

14. When a company exchanges equipment for similar equipment, the

company may report a gain:

a. if the fair value of the equipment they give up exceeds that

equipment's net book value.
b. if the fair value of the equipment they give up exceeds that
equipment's net book value and the transaction has commercial
substance.
c. if the company believes that it makes good common sense.
d. if the new equipment is similar to the exchaged asset and the
asset given up has a net book value less than it's fair value.

15. Which of the following costs is not always be capitalized to land or

buildings in connection with the construction of a facility:

a. Cost of acquiring the land

b. Cost of demolition of structures on the land which were deemed
useless at the time the land was acquired
c. Interest
d. Surveying costs in connection with drawing up plans for the new
structure.

16. A company is constructing an asset for its own use. Construction

began in 2003. The asset is being financed entirely with a specific
new borrowing. Construction expenditures were made in 2003 and 2004
at the end of each quarter. The total amount of interest cost
capitalized in 2004 should be determined by applying the interest
rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 2003 and 2004.
b. average accumulated expenditures for the asset in 2003 and 2004.
c. average expenditures for the asset in 2004.
d. total expenditures for the asset in 2004.
Final v. 1--Page 5

17. A change in estimate should

a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

18. A principal objection to the straight-line method of depreciation

is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing
investment base.
d. gives smaller periodic write-offs than decreasing charge methods.

19. A depreciable asset has an estimated 15% salvage value. At the end
of its estimated useful life, the accumulated depreciation would
equal the original cost of the asset under which of the following
depreciation methods?
Straight-line Productive Output

a. Yes No
b. Yes Yes
c. No Yes
d. No No

20. There has been a negative event causing management to question

whether along-lived asset has been impaired. Their analysis reveals
that the asset will produce cash flows as follows:
Year 1: (25,000)
Year 2: (10,000)
Year 3: 5,000
Year 4: 15,000
Year 5: 25,000
Management expects to dispose of the asset at the end of year 5 for
$225,000. The asset's net book value is $230,000 and management
estimates the asset's fair value to be $180,000. Which of the
following statements is accurate.

a. The asset is impaired and management should record an impairment

loss of $50,000.
b. The asset is impaired and management should record an impairment
loss of $5,000.
c. The asset is not impaired and no adjustment is required as it
passes the undiscounted cash flow analysis.
d. None of these statements are true.

21. Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.
Final v. 1--Page 6

22. Assuming that a non-monetary exchange of assets lacks commercial

substance, which of the following statements is true:

a. No gain nor loss should be recognized on the transaction.

b. A loss may only be recognized if the fair value of the asset
given up is less than its net book value on the date of the
exchange.
c. A gain may never be recorded.
d. UCSB Gauchos Soccor kicks butt (though true, this is not a
correct answer)

23. Land was purchased years ago, and on February 1 of this year, a
company began construction activities, including payments to the
contractor. On November 1 of the same year, construction ceased as
the project was complete. However, the tenant to whom the new
building will be leased to will not move into the new building until
the following year. Which of the following statements is true based
on the above:

a. All of the avoidable interest for the entire year should be

capitalized.
b. Avoidable interest for the period from February 1 to November 1
should be capitalized.
c. Avoidable interest for the period from February 1 to November 1
may be capitalized, depending on the amount of interest actually
incurred.
d. Interest may only be capitalized if the building was financed
through a construction loan.

24. Contractor, Inc. exchanges a truck and $10,000 for a van. The
transaction is deemed to have commercial substance. The truck has a
fair market value of $20,000, was purchased for $30,000 and has
accumulated depreciation of $25,000 on the date of the exchange.
Which of the following statements is true regarding this transaction
for Contractor, Inc.?

a. The van will be capitalized at $10,000 and a gain

of $10,000 will also be recorded.
b. The van will be recorded on the books for $15,000 and no
gain will be recorded.
c. The van will be capitalized at $20,000 and no gain will be
recorded.
d. The van will be capitalized at $30,000 and a gain
of $15,000 will also be recorded.

25. White Printing Company determines that a printing press used in

its operations has suffered a permanent impairment in value because
of technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation
account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
26. For the situations below, use the designation (old) and (new) in your journal entry to identify
which is being added vs. removed by your entry.

A. Equipment is exchanged for similar equipment in a “non-monetary” exchange, which is

deemed to lack commercial substance. The Company gives equipment with cost of $200,000,
accumulated depreciation of $150,000 in exchange for equipment with a fair value of $75,000.
What is the journal entry which should be recorded to account for this transaction?

B. Company A gives a truck and $50,000 cash in exchange for a piece of equipment in a “non-
monetary” exchange, which is deemed to have commercial substance. The truck had a cost of
$30,000 and accumulated depreciation of $25,000 on the date of the exchange. The fair value
of the equipment received is $75,000. What is the journal entry which should be recorded by
Company A to account for this transaction?

C. Same as above (B) except that the fair value of the equipment received is $40,000… What is
the journal entry which should be recorded to account for this transaction?

D. Company A gives a truck in exchange for a piece of equipment and also receives $50,000 in a
“non-monetary” exchange, which is deemed to have commercial substance. The truck had a
cost of $30,000 and accumulated depreciation of $25,000 on the date of the exchange. The fair
value of the equipment received is $5,000. What is the journal entry which should be recorded
by Company A to account for this transaction?

27. Dowry, Inc. is building a new bridal shower center for use in their business. They purchase the land in 2005
for $750,000 and commence construction on July 1, 2006. The construction continued uninterrupted through
November 30, 2006.
During construction, the following expenditures were made.
July 1, 2006 $ 100,000 (paid in advance to the contractor)
August 1, 2006 $ 75,000
September 1, 2006 $ 25,000
October 1, 2006 $ 100,000
November 1, 2006 $ 400,000
700,000
Dowry, Inc. has not borrowed any money specifically for construction of the facility and has a weighted
average borrowing rate of 10% resulting in total interest expense of $40,000 for the year.
(1) Compute the weighted average accumulated expenditures qualifying for interest capitalization during
the year ended December 31, 2006.
(2) Compute the avoidable interest during 2006 and indicate how much of that should be capitalized.
(3) What is the journal entry to record interest capitalization based on the above?
PART II assume all the same facts as above, EXCEPT that the company borrowed $400,000 specifically for
construction of this project at 6% interest.
(1) What is the weighted average accumulated expenditures qualifying for interest capitalization during
the year ended December 31, 2006.
(2) Compute the avoidable interest during 2006 and indicate how much of that should be capitalized.
(3) What is the journal entry to record interest capitalization based on the above?
28. Max Hadley purchases equipment with the following relevant information:

Historical Cost 1,100,000

Salvage value 100,000
Estimated service life 5 years

Compute the depreciation expense which Max should record for each of the 5 years of the life of the asset for
each of the following methods:

a. Straight-Line
b. Sum of the years digits
c. Double declining balance
29. THE FOLLOWING PERTAINS TO XYZ, INC.
1/1/06
Cash 400,000
Investments 200,000
Accounts receivable, net of $5,000 allowance
for doubtful accounts 120,000
Inventory 100,000
Fixed assets 500,000
Accumulated depreciation (225,000)
Accounts payable 100,000
Debt 100,000
Retained earnings 750,000
Accumulated comprehensive income 45,000
Common stock 100,000 -
The following applies to the month ended January 31, 2006 (XYZ uses periodic inventory
accounting- use a purchases account and close that out to inventory when the count is made)
ALSO any items which are treated “net of tax” should debit or credit the tax effect to an
account entitled “tax effect”, a current asset:

1. Combined inventory purchases for the month of $600,000, on credit, terms 2/10 net
30, XYZ uses the net method
2. Sell goods to customers for $2,000,000 (no discounts offered).
3. Combined collections from customers of $2,050,000 of accounts receivable during
January.
4. Paid cash of $610,000 against open invoices; some of the invoices were paid after
the discount period, resulting in $7,500 of discounts lost.
5. Management uses 2.0% of sales to provide the accounts receivable allowance.
6. Management review of the account receivable aging indicates that $7,500 of
balances should be written-off.
7. The debt terms are: 12% rate, payments of interest plus $5,000 of principle per
month until balance is reduced to zero. The January payment was not paid
until February.
8. The depreciation module indicates current month depreciation to be $25,000.
9. Inventory count on January 31, 2005 notes 11,000 units of inventory at a cost of
$10.00 each.
10. Paid $100,000 in dividends.
11. Unrealized loss on available for sale securities: $50,000.
12. The effective tax rate is 35% and no estimated payments have been made.

I. List the necessary journal entries based on the above information. It is best to number
them as per above.
II. For partial credit allocations, show your income before income taxes as well as your
net income for the month ended January 31, 2006.
III. PREPARE A CLASSIFIED BALANCE SHEET AND COMBINED STATEMENT
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME AS OF AND
FOR THE MONTH ENDED JANUARY 31, 2006. YOU CAN USE T-ACCOUNTS,
A WORKSHEET OR WHATEVER YOU LIKE TO TRACK THE BALANCES
AND ACTIVITY.
Final v. 1--Page 7 December 16, 2006
ANSWER KEY
Anderson 136A 8AM Class
+-------+------+--------+------+--------+--------+--------+--------+------+
| Text | Bank | Exam | | | Ques | Diff | Lrng | |
|Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page |
+-------+------+--------+------+--------+--------+--------+--------+------+
| 10 30 1 d MChoice C 7 |
| 10 68 2 a MChoice A 6 |
| 11 48 3 b MChoice P 6 |
| 10 59 4 b MChoice P 7 |
| 11 6 5 a MChoice C 3 |
| 10 69 6 c MChoice |
| 10 80 7 c MChoice |
| 11 18 8 d MChoice C 7 |
| 10 61 9 c MChoice A 2 |
| 10 35 10 d MChoice P 2 |
| 11 39 11 c MChoice P 3 |
| 11 62 12 b MChoice A 6 |
| 11 73 13 b MChoice |
| 10 71 14 b MChoice |
| 10 73 15 c MChoice |
| 10 63 16 b MChoice A 4 |
| 11 16 17 b MChoice C 5 |
| 11 11 18 b MChoice C 3 |
| 11 59 19 d MChoice A 3 |
| 11 72 20 c MChoice |
| 11 20 21 a MChoice C 6 |
| 10 82 22 a MChoice |
| 10 81 23 c MChoice |
| 10 83 24 d MChoice |
| 11 17 25 b MChoice C 5 |
+-------------------------------------------------------------------------+
* Test Questions are Scrambled
Final v. 1--Page 8 December 16, 2006

2. $120,000 + $10,000 = $130,000.

3. [($3,000,000 - $400,000) 10,000,000] x 1,600,000 = $416,000.

4. ($264,000 - $12,000) (10 x 12) = $2,100 per month

$36,000 - [$264,000 - ($2,100 x 106 mo.)] = -$5,400.

9. $700,000 + $25,000 + $5,000 + $8,000 - $4,000 = $734,000.

10. Land: $400,000 + $25,000 + $5,000 - $10,000 = $420,000.

Building: $35,000 + $890,000 = $925,000.

11. $930,000 - {$975,000 - [$294,000 - ($176,400 - $12,900)]} = $85,500.

12. ($7,000,000 + $1,500,000 - $1,000,000) 4,000,000 = $1.88.

16. Conceptual.

19. Conceptual.
 26. For the situations below, use the designation (old) and (new) in your journal entry to
identify which is being added vs. removed by your entry.

A.
Accumulated depreciation 150,000
Equipment (old) 200,000
Equipment (new) 50,000

B.
Accumulated depreciation 25,000
Vehicle (old) 30,000
Cash 50,000
Equipment (new) 75,000
Gain on exchange 20,000

C.
Accumulated depreciation 25,000
Vehicle (old) 30,000
Cash 50,000
Equipment (new) 40,000
Loss on exchange 15,000

D.
Accumulated depreciation 25,000
Vehicle (old) 30,000
Cash 50,000
Equipment (new) 5,000
Gain on exchange 50,000
27. SOLUTION
(1) Compute the weighted average accumulated expenditures qualifying for interest capitalization during
the year ended December 31, 2006.

750,000 5/12 312,500

100,000 5/12 41,667
75,000 4/12 25,000
25,000 3/12 6,250
100,000 2/12 16,667
400,000 1/12 33,333
435,417

(2) Compute the avoidable interest during 2006 and indicate how much of that should be capitalized.
Wtd Average accum. Expend. 435,417
Wtd average borrowing rate 10%
43,542
ONLY THE $40K INCURRED MAY BE CAPITALIZED

(3) What is the journal entry to record interest capitalization based on the above?
Building 40,000
Interest expense 40,000

PART II
(1) WAAE is the same as before… $435,417
(2) Avoidable interest
WAAE 435,417 Rate Avoidable
Specific borrowing 400,000 6% 24,000
35,417 10% 3,542
27,542
ALL OF THE INTEREST IS CAPITALIZABLE AS <$40K INCURRED (WHICH WOULD ONLY
INCREASE DUE TO THE NEW FINANCING)
(3) JOURNAL ENTRY
Building 27,542
Interest expense 27,542
 SOLUTION # 28.

H cost 1,100,000
Salvage 100,000
5 YRS
A) STRAIGHT LINE
Dep. basis 1,000,000
Life 5
Dep. Each yr 200,000

B) SUM OF YRS DIGITS

5 / 15 * 1,000,000 333,333 YEAR 1
4 / 15 * 1,000,000 266,667 YEAR 2
3 / 15 * 1,000,000 200,000 YEAR 3
2 / 15 * 1,000,000 133,333 YEAR 4
1 / 15 * 1,000,000 66,667 YEAR 5
15 1,000,000

C) DOUBLE DECLINING BALANCE

S Line factor 0.20
Double declining 2
DDB Factor 0.40

Factor Dep. Exp. Basis

1,100,000
YEAR 1 0.4 440,000 660,000
YEAR 2 0.4 264,000 396,000
YEAR 3 0.4 158,400 237,600
YEAR 4 0.4 95,040 142,560
YEAR 5 0.4 42,560 100,000
1,000,000
Problem 27. Journal Entry Solution

1 Purchases 588,000
accounts payable 588,000

2 Accounts receivable 2,000,000

Sales 2,000,000

3 Cash 2,050,000
accounts receivable 2,050,000

4 Accounts payable 602,500

Cash 610,000
COS/ Discounts lost 7,500

5 Bad debt exp (SG&A) 40,000

Allowance for DA's 40,000

6 Allowance for DA's 7,500

Accounts receivable 7,500

7 Interest expense 1,000

Accrued interest 1,000

8 Depreciation expense 25,000

Accumulated depreciation 25,000

9 Inventory 588,000
Purchases 588,000
COS 578,000
Inventory 578,000

10 Dividends/ Retained Earnings 100,000

Cash 100,000

11 Investments 50,000
Other comprehensive income 32,500
Tax effect 17,500

NET INCOME BEFORE TAXES 1,348,500

12 Income tax expense 471,975

Income tax payable 471,975

NET INCOME 876,525

Problem Solution# 27. STATEMENT SOLUTION XYZ, INC.
Cash Accounts receivable Allowance DA's BALANCE SHEET
400,000 125,000 5,000 AS OF 1/31/2006
2,050,000 2,000,000 40,000
610,000 2,050,000 7,500 Current Assets RECLASS
100,000 7,500 Cash 1,740,000 1,740,000
A/R, net of allowance of $ 30,000 30,000
Investments 150,000 150,000
1,740,000 67,500 37,500 Inventory 110,000 110,000
Tax effect 17,500 17,500
Inventory Purchases Fixed assets Total current assets 2,047,500 2,047,500
100,000 500,000 Fixed assets
588,000 588,000 Accumulated depreciation 500,000 500,000
578,000 588,000 (250,000) (250,000)
250,000 - 250,000
Total Assets
2,297,500 2,297,500
110,000 - 500,000 Liabilities & Stockholders Equity

Accum. Dep. A/P Income tax payable Current liabilities

225,000 100,000 471,975
25,000 588,000 Accounts payable 85,500 85,500
602,500 Accreud interest payable 1,000 1,000
Income tax payable 471,975 471,975
Current maturities of debt 60,000 60,000
Total current liabilities 558,475 60,000 618,475
250,000 85,500 471,975 Long term debt 100,000 (60,000) 40,000
Stockholders equity: -
Debt Retained earnings Common stock Common stock 100,000 100,000
100,000 750,000 100,000 Accumulated comprehensive income 12,500 12,500
100,000 Retained earnings 1,526,525 1,526,525
876,525 -
TOTAL liabilities and stockholders equity 2,297,500 - 2,297,500

100,000 1,526,525 100,000

Sales COS SG&A expense

2,000,000 7,500 40,000
578,000

XYZ
COMBINED STATEMENT OF S.HOLDER EQUITY & COMPREH. INCOME
2,000,000 585,500 40,000 FOR THE MONTH ENDED JANUARY 31, 2006

AOCI Depreciation Investments Comprh. Retained Accum comp Common

45,000 25,000 200,000 Iincome Earnings Income Stock Total
32,500 50,000 Balance 1/1/06 750,000 45,000 100,000 895,000
Net income 876,525 876,525 876,525
OCIoss, net of $14,000 tax effect (32,500) (32,500) (32,500)
Comprehinsive income 844,025 -
12,500 25,000 150,000 Dividends (100,000) (100,000)
Balance 1/31/06 1,526,525 12,500 100,000 1,639,025
ImIncome tax exp. Interest expense -
471,975 1,000

Accrued interest
471,975 1,000 1,000

Tax effect
17,500

1,000

Balance sheet accts that did not fit

17,500 above