Intermediate Accounting BUS 321
April 25, 2013
Tad Miller
Test 1 - property, plant & equipment
1. Acquisition Costs MILLER MOTOR CO. incurred the following costs. Please classify the costs
as: Land, Building, Land Improvements or Expense. The existing building will be razed to make
room for a new building.
Land
cost of real estate purchased as plant site (land
$580,000 and building $350,000)
commssion to real estate agency
cost of razing existing building
Building
Land
Improve
Expense
930,000
45,000
180,000
architects fees for builidng plans
95,000
excavation costs for new building
400,000
payment to contractor for building
1,750,000
cost of driveways
80,000
3,480,000
0
0
0
0
2. Acquisition Costs On Sept. 1st, MILLER MOTOR CO. bought a computer for $10,000 on
account with terms 1%/30 n/60. Make the entry MILLER MOTOR CO. when pays their account in
full on Oct 19th. (change to Sep 19th)
Computer
Accounts payable
10,000.00
.
10,000.00
3. Lump-Sum Purchases MILLER MOTOR CO. acquires a parts business for $3,600,000 and
receives the land, building and inventory. Prepare the entry to record the purchase.
appraised
value
land
1,400,000
building
2,100,000
inventory
700,000
4,200,000
4. Issuance of Stock Miller Motor Co. issued 100,000 shares of stock to purchase land for a
parking lot for their new parts business. The stock has a $1 par value and currently trades for $9.12
per share. The land appraised for $875,000. Prepare the entry to record this acquisition.
5. Exchange Assume the following transaction does have commercial substance. Prepare the entry
to record the following transaction. JONES NURSERY pays $25,000 and also trades in an old
truck which originally cost $19,000 and has $17,000 accumulated depreciation for a computer
server having a $33,000 market value.
6. Financial Statement Presentation What effect would the previous transaction have on net
income and in which section of the income statement would you report the gains and losses from
the preceding exchanges.
If there is a gain or loss on the exchange in which section of the income statement should it be reported?
Operating
Other (non operating)
below income tax
not applicable
$ _________ Increase
no effect
Decrease
on Net Income
$ _________ Increase
no effect
Decrease
on Total Assets
7. Exchange Assume the following transaction LACKS commercial substance. Prepare the entry
to record the following transaction. JONES NURSERY pays $5 and also trades a piece of land
which originally cost $390 and has current market value of $800 for a similar piece of land that
has a $805 market value.
8. Financial Statement Presentation What effect would the previous transaction have on net
income and in which section of the income statement would you report the gains and losses from
the preceding exchanges.
If there is a gain or loss on the exchange in which section of the income statement should it be reported?
Operating
Other (non operating)
below income tax
not applicable
$ _________ Increase
no effect
Decrease
on Net Income
$ _________ Increase
no effect
Decrease
on Total Assets
9. Exchange Assume the following transaction does have commercial substance. Prepare the entry
to record the following transaction. JONES NURSERY pays $40 and also trades in an old truck
which originally cost $35 and has $17 accumulated depreciation for a new truck having a $55
market value.
10. exchange Assume the following transaction LACKS commercial substance. Prepare the entry to
record the following transaction. JONES NURSERY trades a piece of land which is recorded at its
original cost of $89. The land has a current market value of $80. In exchange for the land, JONES
receives $2 cash and a similar piece of land with a current market value of $78.
11. Financial Statement Presentation What effect would the previous transaction have on net
income and in which section of the income statement would you report the gains and losses from
the preceding exchanges.
If there is a gain or loss on the exchange in which section of the income statement should it be reported?
Operating
Other (non operating)
below income tax
not applicable
$ _________ Increase
no effect
Decrease
on Net Income
$ _________ Increase
no effect
Decrease
on Total Assets
12. Goodwill MILLER MOTOR CO. purchased all of the common stock of The Kar Co. for $18. The
following table provides both the book value and the fair value of the assets and liabilities MMC
will receive with this acquisition. Prepare the journal entry to record this acquisition.
book
fair
value
value
5
12
1
12
5
16
4
12
Receivables
Property plant & equipment
Patent
Accounts payable
13. Contributed Assets MILLER MOTOR CO. owns stock in Intel which is recorded at its original
cost as a $10 investment. Prepare the entry when MMC donates this stock to the American Red
Cross disaster relief fund if the current market value is $8.
14. Involuntary Conversions SLO County exercised its right of eminent domain to condemn Our
Co's factory. The factory originally cost $400,000 and has $200,000 accumulated depreciation.
The County agreed to pay us $500,000 for the property. This transaction is both unusual and
infrequent. Prepare the entry to record this transaction and explain how you would report the gain
or loss on the income statement.
.
15. Partial Year Depreciation On June 30, 2010, we purchased a delivery truck for $42,000. We
expected the truck to be worth $2,000 at the end of a four-year useful life. What would be the
book value of the truck on Sep. 30, 2013?
16. Change in estimates MILLER MOTOR CO. purchased a machine on Jan. 1, 2009 for $100,000.
The machine had $0 residual value and was depreciated over five-years. On Sep. 30, 2013, we
spent $75,000 for modifications that will increase its salvage value to $7,000 and extend its life by
2 years through Dec. 31, 2015. Calculate total depreciation expense for the entire year of 2013.
17. Correction of error MILLER MOTOR CO. purchased a machine on Jan. 1, 2012 for $100,000.
MMC erroneously recorded the transaction as a debt to the Maintenance Expense account. On Jan.
28, 2013, MMC realized their mistake. Make the correcting entry if the machine is expected to
last a total of 4 years and have a $0 residual value.
18. Impairment Please document any and all steps necessary to determine if the Building is
impaired. MILLER MOTOR CO. owns a building which it leases to another business. The building
is recorded at its original cost of $1,000 less $650 accumulated depreciation. The current fair value
of the building is estimated to be $320. The building is expected to last 6 more years and the net
lease payments, after all expenses, equal $5 per month. The present value of the lease payments,
discounted at 4%, is $320. Determine (1) is the building is impaired? and (2) if it is impaired
prepare any journal entries that may be necessary. If the building is not impaired, explain why the
building is not impaired.
19. Goodwill Please document any and all steps necessary to determine if the Goodwill is impaired.
Information about OUR CO’S fully owned subsidiary is shown below. OUR CO. has $5 goodwill
recorded related to the acquisition of this
subsidiary. The current fair value of the
book
fair
subsidiary is $10. Determine (1) is the
value
value
goodwill is impaired? and (2) if it is impaired
5
5
Inventory
prepare any journal entries that may be
13
15 Property plant & equipment
necessary. If the Goodwill is not impaired,
5
Goodwill
explain why it is not impaired.
12
12
Notes Payable
20. Subsequent expenditures We have a machine that originally cost $250,000 which was being
depreciated over 10 years. After depreciating the machine for 6 years, the company spends
$47,000 to upgrade the machine’s 'computerized control system.' The new control system will
increase the machine's output by 13%. The original control system which was replaced cost
$23,000. Prepare the entry record this transaction.
21. Subsequent expenditures We have a 4 year-old machine that originally cost $30,000 and was
depreciated over 10 years. The company spends $7,000 to install a cooling system which will
extend the machines useful life 3 additional years. Prepare the entry record this transaction.
22. subsequent expenditures We have a 2 year-old truck that originally cost $30,000 and is being
depreciated over 5 years. The company spends $500 to replace the tires on the truck. Prepare the
entry record this transaction.
23. subsequent expenditures When capitalizing subsequent expenditures, the book lists three
approaches: substitution approach, capitalizing the new cost, charging accumulated depreciation.
Explain why the substitution approach will have the greatest affect on the current year's net
income?
24. Accelerated Depreciation List two examples of accelerated depreciation that a company might
use for financial reporting. Do not abbreviate.
25. Weighted Average Interest Rate
$450,000
$150,000
Calculate the weighted average interest rate.
2-year note
10-year note
26. Weighted Average Interest Rate
6%
10%
Calculate the weighted average accumulated expenditure
expenditure
amount
date
3/1/2013
6/1/2013
9/1/2013
12/1/2013
500,000
400,000
700,000
500,000
2,100,000
27. Journal Entry Use the information from the preceding problem and the following information
to prepare the journal entry to capitalize interest. You can assume that all interest has been debited
to the interest expense account which is up to date and includes all accruals.
$450,000
$150,000
6%
10%
specific construction loan
weighted ave interest on ALL other borrowings HINT!!
28. Financial Statement Presentation What effect would the previous transaction have on net
income and in which section of the income statement would you report the gains and losses from
the preceding exchanges.
If there is any effect on income in which section of the income statement should it be reported?
Operating
Other (non operating)
below income tax
not applicable
$ _________ Increase
no effect
Decrease
on Net Income
$ _________ Increase
no effect
Decrease
on Total Assets
29. R&D and Software Development There are some similarities in how we account for Research
and Development costs and Software Development costs.
We expense Research & Development costs prior to
and capitalize costs after that milestone
_
When software is being developed for commercial sale, we expense Software Development costs
prior to __ ___
_
___________
and capitalize software development costs after that milestone
When software is being developed for internal use, we expense Software Development costs prior
to___ __
___________
and capitalize software development costs after that milestone