Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
1. On January 15, 2004, Grant Corp. adopted a plan to accumulate funds for environmental
improvements beginning July 1, 2008, at an estimated cost of $2,500,000. Grant plans to make
four equal annual deposits in a fund that will earn interest at 10% compounded annually. The
first deposit was made on July 1, 2004. Future value factors are as follows:
Future value of 1 at 10% for 5 periods
Future value of ordinary annuity of 1 at 10% for 4 periods
Future value of annuity due of 1 at 10% for 4 periods
1.61
4.64
5.11
Grant should make four annual deposits of how much? [4 pts]
2. On December 30, 2004, Cey, Inc. purchased a machine from Frank Corp. in exchange for a
noninterest-bearing note requiring eight payments of $40,000. The first payment was made on
December 30, 2004, and the others are due annually on December 30. At date of issuance, the
prevailing rate of interest for this type of note was 11%. Present value factors are as follows:
Present Value of Ordinary
Present Value of
Period
Annuity of 1 at 11%
Annuity Due of 1 at 11%
7
4.712
5.231
8
5.146
5.712
On Cey's December 31, 2004 balance sheet, the net note payable to Frank is how much? [4 pts]
3. On January 1, 2004, Grant Co. issued ten-year bonds with a face amount of $5,000,000 and a stated
interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present
value factors are as follows:
At 8%
At 10%
Present value of 1 for 10 periods
0.463
0.386
Present value of an ordinary annuity of 1 for 10 periods
6.710
6.145
What was the total issue price of the bonds? [4 pts]
-1-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
4. Reiley Co. purchased land as a factory site for $1,000,000. Reiley paid $40,000 to tear down two
buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title
investigation and making the purchase. Architect's fees were $41,200. Title insurance cost $2,400,
and liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was
paid $2,400,000. An assessment made by the city for pavement was $6,400. Interest costs during
construction were $170,000.
Reiley Co. should report the cost of land as how much? [6 pts]
5. Cairo Company has recently decided to accept a proposal from the City of Bel Aire that publicly
owned property with a large warehouse located on it will be donated to Cairo if Cairo will build a
branch plant in Bel Aire. The appraised value of the property is $490,000 and of the warehouse is
$1,230,000.
Below prepare the entry by Cairo for the receipt of the properties. [4 pts]
6. Interest cost that is capitalized should [4 pts]
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over a 40-year
period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of the above.
-2-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
7. Nonmonetary exchange. [8 pts]
A machine cost $60,000, has annual depreciation expense of $12,000, and has accumulated
depreciation of $30,000 on December 31, 2003. On April 1, 2004, when the machine has a fair
value of $24,000, it is exchanged for a similar machine with a fair value of $72,000 and the proper
amount of cash is paid.
Below prepare all entries that are necessary at April 1, 2004.
(Depreciation Expanse has not been recorded in 2004 for any depreciable assets.)
8. An improvement made to a machine increased its fair market value and its production capacity by
25% without extending the machine's useful life. The cost of the improvement should be [4 pts]
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
9. On May 1, 2004, Royster Company began construction of a building. Expenditures of $90,000 were
incurred monthly for 5 months beginning on May 1. The building was completed and ready for
occupancy on September 1, 2004. For the purpose of determining the amount of interest cost to be
capitalized, the average accumulated expenditures on the building during 2004 were how much?
[4 pts]
-3-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
10. Farr Co. purchased a machine on July 1, 2004, for $700,000. The machine has an estimated useful
life of five years and a salvage value of $140,000. The machine is being depreciated from the date
of acquisition by the 150% declining-balance method. For the year ended December 31, 2004, Farr
should record how much depreciation expense for this machine? [4 pts]
11. Jenks Co. takes a full year's depreciation expense in the year of an asset's acquisition and no
depreciation expense in the year of disposition. Data relating to one of Jenks' depreciable assets at
December 31, 2004 are as follows:
Acquisition year
Cost
Residual value
Accumulated depreciation
Estimated useful life = 5 years
2002
$350,000
50,000
240,000
What depreciation method is Jenks using? [4 pts]
12. On January 1, 2004, Newton Company purchased a machine costing $400,000. The machine is in
the MACRS 5-year recovery class (200%) for tax purposes and has an estimated $80,000 salvage
value at the end of its economic life. [8 pts]
Assuming the company uses the general MACRS approach, the amount of MACRS deduction for
tax purposes for the year 2004 is how much?
Assuming the company uses the optional straight-line method, the amount of MACRS deduction for
tax purposes for the year 2004 is how much?
-4-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
13. Oates Company purchased for $4,400,000 a mine estimated to contain 2 million tons of ore. When
the ore is completely extracted, it was expected that the land would be worth $200,000. A building
and equipment costing $2,800,000 were constructed on the mine site, and they will be completely
used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of
ore were mined, and $600,000 was spent for labor and other operating costs. Oates uses the units-ofproduction method to depreciate building and equipment.
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a
schedule giving cost per ton.) [6 pts]
14. A truck was acquired on July 1, 2001, at a cost of $270,000. The truck had a six-year useful life and
an estimated salvage value of $30,000. The straight-line method of depreciation was used. On
January 1, 2004, the truck was overhauled at a cost of $25,000, which extended the useful life of the
truck for an additional two years beyond that originally estimated (salvage value is still estimated at
$30,000). In computing depreciation for annual adjustment purposes, expense is calculated for each
month the asset is owned.
Prepare the appropriate entries for January 1, 200 and December 31, 2004. [8 pts]
-5-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
15. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a
patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the
patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for legal fees in a successful
defense of the patent. What is the total amount capitalized for the patent through March 31, 2004?
[4pts]
16. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a
business combination
Costs of developing
accounted for as a purchase
goodwill internally
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No
17. In early January 2003, Kenner Corporation applied for a patent, incurring legal costs of $30,000. In
January 2004, Kenner incurred $9,000 of legal fees in a successful defense of its patent. [8 pts]
(a)
(b)
Compute 2003 amortization, 12/31/03 carrying value, 2004 amortization, and 12/31/04
carrying value if the company amortizes the patent over 10 years.
Compute the 2005 amortization and the 12/31/05 carrying value, assuming that at the
beginning of 2005, based on new market research, Kenner determines that the fair value of
the patent is $27,500. Estimated future cash flows from the patent are $30,000 on January 3,
2005.
-6-
Accounting 302 Fall 2004 Midterm Exam. Name _________________________________________
18. Briefly discuss the differences in accounting for impairment of: (a) limited-life intangibles, (b)
indefinite-life intangibles, and (c) goodwill. [6 pts]
19. How does accounting for development of computer software costs differ from accounting for R&D
costs? [4 pts]
20. Generally under GAAP, how do we account for advertising costs? [2 pts.]
-7-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
1. On January 15, 2004, Grant Corp. adopted a plan to accumulate funds for environmental
improvements beginning July 1, 2008, at an estimated cost of $2,500,000. Grant plans to make
four equal annual deposits in a fund that will earn interest at 10% compounded annually. The
first deposit was made on July 1, 2004. Future value factors are as follows:
Future value of 1 at 10% for 5 periods
Future value of ordinary annuity of 1 at 10% for 4 periods
Future value of annuity due of 1 at 10% for 4 periods
1.61
4.64
5.11
Grant should make four annual deposits of how much?
5.11 × R = $2,500,000; R = $2,500,000 ÷ 5.11 = $489,237.
2. On December 30, 2004, Cey, Inc. purchased a machine from Frank Corp. in exchange for a
noninterest-bearing note requiring eight payments of $40,000. The first payment was made on
December 30, 2004, and the others are due annually on December 30. At date of issuance, the
prevailing rate of interest for this type of note was 11%. Present value factors are as follows:
Present Value of Ordinary
Present Value of
Period
Annuity of 1 at 11%
Annuity Due of 1 at 11%
7
4.712
5.231
8
5.146
5.712
On Cey's December 31, 2004 balance sheet, the net note payable to Frank is how much?
$40,000 × 4.712 = $188,480 or ($40,000 × 5.712) – $40,000 = $188,480.
3. On January 1, 2004, Grant Co. issued ten-year bonds with a face amount of $5,000,000 and a stated
interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present
value factors are as follows:
At 8%
At 10%
Present value of 1 for 10 periods
0.463
0.386
Present value of an ordinary annuity of 1 for 10 periods
6.710
6.145
What was the total issue price of the bonds?
$5,000,000 × .08 = $400,000
($400,000 × 6.145) + ($5,000,000 × 0.386) = $4,388,000.
-8-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
4. Reiley Co. purchased land as a factory site for $1,000,000. Reiley paid $40,000 to tear down two
buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title
investigation and making the purchase. Architect's fees were $41,200. Title insurance cost $2,400,
and liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was
paid $2,400,000. An assessment made by the city for pavement was $6,400. Interest costs during
construction were $170,000.
Reiley Co. should report the cost of land as how much? [6 pts]
$1,000,000 + $40,000 – $5,400 + $3,480 + $2,400 + $6,400 = $1,046,880.
5. Cairo Company has recently decided to accept a proposal from the City of Bel Aire that publicly
owned property with a large warehouse located on it will be donated to Cairo if Cairo will build a
branch plant in Bel Aire. The appraised value of the property is $490,000 and of the warehouse is
$1,230,000.
Below prepare the entry by Cairo for the receipt of the properties.
Building (Warehouse) .................................................................... $ 1,230,000
Land ...............................................................................................
490,000
Contribution Revenue ........................................................
$1,720,000
6. Interest cost that is capitalized should
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over a 40-year
period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of the above.
-9-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
7. Nonmonetary exchange. [8 pts]
A machine cost $60,000, has annual depreciation expense of $12,000, and has accumulated
depreciation of $30,000 on December 31, 2003. On April 1, 2004, when the machine has a fair
value of $24,000, it is exchanged for a similar machine with a fair value of $72,000 and the proper
amount of cash is paid.
Below prepare all entries that are necessary at April 1, 2004.
(Depreciation Expanse has not been recorded in 2004 for any depreciable assets.)
Depreciation Expense ($12,000 × 3/12)............................................
Accumulated Depreciation ....................................................
$ 3,000
Accumulated Depreciation ................................................................
Machinery .........................................................................................
Loss on Disposal ................................................................................
Machinery .............................................................................
Cash ($72,000 – $24,000) .....................................................
33,000
72,000
3,000
$ 3,000
60,000
48,000
8. An improvement made to a machine increased its fair market value and its production capacity by
25% without extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
9. On May 1, 2004, Royster Company began construction of a building. Expenditures of $90,000 were
incurred monthly for 5 months beginning on May 1. The building was completed and ready for
occupancy on September 1, 2004. For the purpose of determining the amount of interest cost to be
capitalized, the average accumulated expenditures on the building during 2004 were how much?
($90,000 × 4/12) + ($90,000 × 3/12) + ($90,000 × 2/12) + ($90,000 × 1/12) = $75,000.
-10-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
10. Farr Co. purchased a machine on July 1, 2004, for $700,000. The machine has an estimated useful
life of five years and a salvage value of $140,000. The machine is being depreciated from the date
of acquisition by the 150% declining-balance method. For the year ended December 31, 2004, Farr
should record depreciation expense on this machine of
$700,000 × 0.3 × 0.5 = $105,000
11. Jenks Co. takes a full year's depreciation expense in the year of an asset's acquisition and no
depreciation expense in the year of disposition. Data relating to one of Jenks' depreciable assets at
December 31, 2004 are as follows:
Acquisition year
Cost
Residual value
Accumulated depreciation
Estimated useful life = 5 years
2002
$350,000
50,000
240,000
What depreciation method is Jenks using?
SoYD: (5/15 + 4/15 + 3/15) * (350,000 – 50,000) = $240,000
12. On January 1, 2004, Newton Company purchased a machine costing $400,000. The machine is in
the MACRS 5-year recovery class (200%) for tax purposes and has an estimated $80,000 salvage
value at the end of its economic life.
Assuming the company uses the general MACRS approach, the amount of MACRS deduction for
tax purposes for the year 2004 is how much?
20%*2*1/2*400,000 = $80,000
Assuming the company uses the optional straight-line method, the amount of MACRS deduction for
tax purposes for the year 2004 is how much?
20%*1/2*$400,000 = $40,000
-11-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
13. Oates Company purchased for $4,400,000 a mine estimated to contain 2 million tons of ore. When
the ore is completely extracted, it was expected that the land would be worth $200,000. A building
and equipment costing $2,800,000 were constructed on the mine site, and they will be completely
used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of
ore were mined, and $600,000 was spent for labor and other operating costs. Oates uses the units-ofproduction method to depreciate building and equipment.
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a
schedule giving cost per ton.)
Item
Base
Ore
$4,200,000
Building and Equipment
2,800,000
Labor and Operating Expenses 600,000
Total Cost
Tons
2,000,000
2,000,000
750,000
Per Ton
$2.10
1.40
.80
$4.30
14. A truck was acquired on July 1, 2001, at a cost of $270,000. The truck had a six-year useful life and
an estimated salvage value of $30,000. The straight-line method of depreciation was used. On
January 1, 2004, the truck was overhauled at a cost of $25,000, which extended the useful life of the
truck for an additional two years beyond that originally estimated (salvage value is still estimated at
$30,000). In computing depreciation for annual adjustment purposes, expense is calculated for each
month the asset is owned.
Prepare the appropriate entries for January 1, 200 and December 31, 2004. [8 pts]
Cost
Less salvage value
Depreciable base, July 1, 2001
Less depreciation to date [($240,000 ÷ 6) × 2 1/2]
Depreciable base, Jan. 1, 2004 (unadjusted)
Overhaul
Depreciable base, Jan. 1, 2004 (adjusted)
$270,000
30,000
240,000
100,000
140,000
25,000
$165,000
January 1, 2004
Accumulated Depreciation ................................................................
Cash .......................................................................................
25,000
December 31, 2004
Depreciation Expense .......................................................................
Accumulated Depreciation ($165,000 ÷ 5.5 yrs) ..................
30,000
25,000
30,000
-12-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
15. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a
patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the
patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for legal fees in a successful
defense of the patent. What is the total amount capitalized for the patent through March 31, 2004?
$100,000 + $150,000 = $250,000.
16. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a
business combination
Costs of developing
accounted for as a purchase
goodwill internally
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No
17. In early January 2003, Kenner Corporation applied for a patent, incurring legal costs of $30,000. In
January 2004, Kenner incurred $9,000 of legal fees in a successful defense of its patent.
(a)
(b)
Compute 2003 amortization, 12/31/03 carrying value, 2004 amortization, and 12/31/04
carrying value if the company amortizes the patent over 10 years.
Compute the 2005 amortization and the 12/31/05 carrying value, assuming that at the
beginning of 2005, based on new market research, Kenner determines that the fair value of
the patent is $27,500. Estimated future cash flows from the patent are $30,000 on January 3,
2005.
(a) 2003 amortization: $30,000 ÷ 10 yrs. = $3,000
12/31/03 carrying value: $30,000 – $3,000 = $27,000
2004 amortization: ($27,000 + $9,000) ÷ 9 yrs. = $4,000
12/31/04 carrying value: ($27,000 + $9,000) – $4,000 = $32,000
(b)
Since the expected future cash flows ($30,000) are less than the carrying value ($32,000), an
impairment loss must be computed.
Loss on impairment: $32,000 carrying value – $27,500 fair value = $4,500
2005 amortization: $27,500 ÷ 8 yrs. = $3,438
12/31/05 carrying value: $27,500 – $3,438 = $24,062
-13-
Accounting 302 Fall 2004
Midterm Exam.
****** KEY *****
18. Briefly discuss the differences in accounting for impairment of: (a) limited-life intangibles, (b)
indefinite-life intangibles, and (c) goodwill. [6 pts]
(a) limited-life intangibles: 2-step test, exactly like PPE
(b) indefinite-life intangibles: 1-step test, is FV < CV?
(c) goodwill: 2-step test,
19. How does accounting for development of computer software costs differ from accounting for R&D
costs?
20. Generally under GAAP, how do we account for advertising costs? [2 pts.]
Advertising costs must be expensed as incurred or the first time the advertising takes place.
-14-