Accounting 303
Test 2
Spring 1997
Name __________________________
Section _______
Row _______
I.
Multiple Choice - (2.5 points each, 40 points total) Read each
question carefully, and indicate your answer by circling the
letter preceding the one best answer.
1.
For present values of single sums, table factors decrease as
Interest rates
Number of periods
a.
increase
increases
b.
increase
decreases
c.
decrease
increases
d.
decrease
decreases
2.
Which of the following statements is true?
a.
When computing the present value of an ordinary annuity, the
first payment is not discounted.
b.
The future value of an ordinary annuity includes interest
on the last payment.
c.
When computing the present value of an ordinary annuity, the
last payment is not discounted.
d.
The future value of an ordinary annuity includes interest
on the first payment but not on the last payment.
3.
If presented with a choice when borrowing money, which of the
following interest rates is preferable (assume all interest will
be paid when the loan becomes due)?
a.
annual interest of 8% compounded quarterly
b.
annual interest of 8% compounded semiannually
c.
annual interest of 8% compounded monthly
d.
annual simple interest of 8%
4.
If compounding is changed from an annual to a monthly basis, the
present value
future value
a.
decreases
decreases
b.
decreases
increases
c.
increases
decreases
d.
increases
increases
5.
Which of the following statements is true?
a.
The percentage-of-completion method is more conservative
than is the completed contract method.
b.
The completed contract method is more conservative than is
the percentage-of completion method.
c.
Over the entire term of the contract, the
percentage-of-completion method will result in the
d.
recognition of more revenue than will the completed contract
method.
Over the entire term of the contract, the completed contract
method will result in the recognition of more revenue than
will the percentage-of-completion method.
6.
Alexander Corporation is building a 100-mile highway. The
project will take four years to complete. Alexander can make
reasonable estimates of future costs to be incurred. When should
they recognize revenue?
a.
During production.
b.
At completion of production.
c.
At the point of sale.
d.
When cash is collected.
e.
Over the passage of time.
7.
Ball Mining Company extracts precious minerals from its mines.
The minerals are sold at the current market price which fluctuates
every day. When should they recognize revenue?
a.
During production.
b.
At completion of production.
c.
At the point of sale.
d.
When cash is collected.
e.
Over the passage of time.
8.
Delta Copiers, Inc. rents copying machines on multi-year leases.
Delta requires its customers to pay for a year in advance each
year. When should they recognize revenue?
a.
During production.
b.
At completion of production.
c.
At the point of sale.
d.
When cash is collected.
e.
Over the passage of time.
9.
The predominant method of depreciation in use in the U.S. today
is
a.
accelerated.
b.
decelerated.
c.
straight-line.
d.
units-of-production.
10.
Which costs become part of inventory costs?
a.
period
b.
product
c.
neither period nor product
d.
both period and product
11.
Costs of internally developed intangibles
a.
b.
c.
d.
are
are
are
are
12.
What
a.
b.
c.
d.
is the maximum amortization period for capitalized goodwill?
its economic life
40 years
the shorter of its economic life or 40 years
the longer of its economic life or 40 years
13.
Depreciation of a plant asset is the process of
a.
asset valuation for balance sheet purposes.
b.
allocating the cost of the asset to the periods of use.
c.
accumulating a fund for the replacement of the asset.
d.
asset valuation based on current replacement cost data.
14.
If the sum-of-the-years'-digits method of depreciation is being
used for a machine with a 12-year life, what would be the fraction
applied to the cost to be depreciated in the second year?
a.
11/12
b.
11/66
c.
11/72
d.
11/78
e.
Some other fraction.
15.
Nella Corporation computes depreciation to the nearest whole
month. A new piece of equipment was purchased and placed in
operation on September 1, 1997, and it was expected to produce
400,000 units of product in its estimated useful life of 8 years.
Total purchase cost was $300,000, and salvage value was estimated
to be $30,000. Nella employs a calendar year for financial
reporting purposes. If Nella uses the 200% declining-balance
method of depreciation, the amount of depreciation computed for
this equipment for book purposes in the year 1999 would be
a.
$37,134.
b.
$38,672.
c.
$42,188.
d.
$51,563.
e.
Some other amount.
16.
When a fixed plant asset with a 5-year estimated useful life is
sold during the second year, how would the use of a decreasing
charge method of depreciation instead of the straight-line method
affect the gain or loss on the sale of the fixed asset?
a.
expensed as incurred.
amortized over the legal life of the asset.
amortized over the useful life of the asset.
amortized over 40 years.
Gain
Increase
Loss
Increase
b.
c.
d.
Increase
Decrease
Decrease
Decrease
Increase
Decrease
II.
Problems - Show your work as appropriate.
1.
(14 points)
This problem consists of three unrelated parts.
a.
Assume you take out a three-year loan in the amount of $3,000 and
it has a 12% interest rate compounded quarterly. The total amount
of principal and interest is to be repaid in one lump sum at the
end of three years. How much interest will be paid on this loan?
b.
Assume that you have just won the $10,000,000 grand prize in the
Printer's Sweepstakes. Your earnings will be paid as $500,000
per year for the next 20 years, with the first payment made today.
Assuming an 8% interest rate compounded annually, what is the
present value of your winnings?
c.
Sean's grandparents want to help him pay for his college
education. Therefore, they deposited $10,000 on September 1,
1997, in a savings account that pays 6% interest compounded
annually. Sean plans to start college on September 1, 1998, and
to withdraw four equal amounts at one-year intervals with the
first withdrawal on September 1, 1998. How much can Sean withdraw
each time?
2.
(20 points) On June 1, 1997, TuffCo, Inc. began constructing a
new outdoor track and field stadium for the University of
Nebraska. The total contract price was $7,000,000 and completion
was expected by March 15, 1999. Information for 1997 was as
follows:
Material
$ 1,100,000
Labor
950,000
Overhead
350,000
Total Costs $ 2,400,000
Estimated Remaining
Costs (as of 12-31-97)
Amounts Billed by TuffCo
Cash Received by TuffCo
$ 3,550,000
1,000,000
850,000
a.
Assuming that TuffCo used the percentage-of-completion method to
account for this contract, give the four entries made in 1997.
b.
What amount of revenue was recognized in 1997 under the
percentage-of-completion method?
c.
What amount of revenue would have been recognized if the
completed-contract method had been used?
3.
(15 points) On January 1, 1997, MCD Farms, Inc. sold 1,000 acres
of prime farm land to Brad Snyder. Snyder paid for the land by
issuing a $900,000, 10-year, 6% interest-bearing note. The note
calls for interest in the amount of $54,000 to be paid each
December 31, and the principal to be paid at maturity. MCD Farms
is unable to determine the fair market value of the land, and
decides to value this transaction at the present value of the note,
discounted at 10%, which is the current market interest rate for
this type of loan. The land cost MCD Farms $375,000 when they
acquired it.
a.
Make the entries for MCD Farms required by this transaction on
January 1, 1997, and December 31, 1997.
b.
How much interest revenue will MCD Farms recognize in 1998?
4.
(11 points) Sparks County Rural Electric Company (SCREC)
replaces approximately 5% of its utility poles each year. During
1996, SCREC replaced 525 utility poles. The replacement poles
had a total cost of $51,000, and the old poles being replaced had
originally cost $42,000.
a.
Give the journal entry to record depreciation expense if SCREC
uses the retirement (like FIFO) depreciation method.
b.
Give the journal entry to record depreciation expense if SCREC
uses the replacement (like LIFO) depreciation method.
Answers
Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
a
d
d
b
b
a
c
e
c
b
a
c
b
d
d
b
Problems
1.
a.
FV = 3,000 x 1.4258 = 4277
b.
PV(a-due) = 500,000 x 10.6036 = 5,301,800
c.
PV(a-ord) = Pmt x PVIF(6%, 4)
10,000
= Pmt x 3.4651
Pmt
= 2,886
2. a.
Percentage of Completion:
Revenue Recognized:
Interest = 1,277
2,400,000/5,950,000 = 40.3%
7,000,000 x .403 = 2,821,000
Construction in Progress
Cash
2,400,000
Accounts Receivable
Progress Billings
1,000,000
Cash
2,400,000
1,000,000
850,000
Accounts Receivable
Construction Expense
850,000
2,400,000
Construction in Progress
Construction Revenue
b.
c.
3.
a.
$0
PV:
12-31-97
4.
a.
b.
2,821,000
$2,821,000
1-1-97
b.
421,000
900,000
54,000
x
x
.3855
6.1446
=
=
Notes Receivable
Gain on Sale
Land
Cash
Notes Receivable
Interest Revenue
(678,758 x .10 = 67,876)
678,758 + 13,876 = 692,634;
346,950
331,808
678,758
678,758
303,758
375,000
54,000
13,876
67,876
692,634 x .10 = $69,263
Depreciation Expense
Equipment
42,000
Depreciation Expense
Cash
51,000
42,000
51,000