Name: _______________________
Section: 501
University of Texas at Arlington
Mid-Term 3
Acct 3311- Fall 2012
Chandra Subramaniam
THIS EXAM IS 80 MINUTES LONG.
This exam consists of 25 multiple choice questions and 3 problems. Please use your Scantron
sheet for the first section. Answer the remaining problem in the space provided in this exam.
Please make sure that you have twelve (12) pages including this cover page.
There are 103 total possible points. Allocate an appropriate amount of time to each question.
The only materials you are permitted to use on this exam are (1) a calculator, (2) a pencil with
eraser or pen.
Be sure to note the relevant dates referred to in each question.
Point Allocation
Multiple Choice …………………………. 50 (max 40 minutes)
Problem 2
…………………………… 13 (max 10 minutes)
Problem 3
…………………………… 20 (max 15 minutes)
Problem 4
…………………………… 20 (max 15 minutes)
Total Possible points
GOOD LUCK!
103
Problem 1 Multiple Choice (2 points each x 25=50 points)
Identify the letter of the choice that best completes the statement or answers the question.
1.
What is the rationale behind the ceiling when applying the lower-of-cost-or-market
method to inventory?
a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.
d. Prevents overstatement of the value of obsolete or damaged inventories.
2.
Why might inventory be reported at sales prices (net realizable value or market price)
rather than cost?
a. When there is a controlled market with a quoted price applicable to all quantities and
when there are no significant costs of disposal.
b. When there are no significant costs of disposal.
c. When a non-cancellable contract exists to sell the inventory.
d. When there is a controlled market with a quoted price applicable to all quantities.
3.
During 2012, Larue Co., a manufacturer of chocolate candies, contracted to purchase
100,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of
2013. Because a record harvest is predicted for 2013, the price per pound for cocoa
beans had fallen to $3.30 by December 31, 2012.
Of the following journal entries, the one which would properly reflect in 2012 the effect of
the commitment of Larue Co. to purchase the 100,000 pounds of cocoa is
a. Cocoa Inventory ...........................................................
400,000
Accounts Payable .............................................
400,000
b. Cocoa Inventory ...........................................................
330,000
Loss on Purchase Commitments ..................................
70,000
Accounts Payable .............................................
400,000
c. Unrealized Holding Gain or Loss-Income......................
70,000
Estimated Liability on Purchase Commitments ..
70,000
d. No entry would be necessary in 2012
4.
The following information is available for October for Barton Company.
Beginning inventory
Net purchases
Net sales
Percentage markup on cost
$150,000
450,000
900,000
66.67%
A fire destroyed Barton’s October 31 inventory, leaving undamaged inventory with a cost
of $9,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. $51,000.
b. $231,000.
c. $240,000.
d. $300,000.
2
5.
On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory
on hand as of January 1 totaled $3,300,000. From January 1 through the time of the fire,
the company made purchases of $1,366,000, incurred freight-in of $156,000, and had
sales of $2,420,000. Assuming the rate of gross profit to selling price is 30%, what is the
approximate value of the inventory that was destroyed?
a. $4,096,000.
b. $2,972,000.
c. $3,128,000.
d. $4,822,000.
6.
On December 31, 2012, Pacer Co. adopted the dollar-value LIFO retail inventory
method. Inventory data for 2013 are as follows:
LIFO Cost
Retail
Inventory, 12/31/12
$450,000
$630,000
Inventory, 12/31/13
?
825,000
Increase in price level for 2013
10%
Cost to retail ratio for 2013
70%
Under the LIFO retail method, Pacer's inventory at December 31, 2013, should be
a. $542,400.
b. $577,500.
c. $586,500.
d $600,150.
7.
Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be used as a
building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the
actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are
temporarily invested, any interest earned should be offset against interest cost
incurred when determining the amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by multiplying a
weighted average interest rate by the amount of average accumulated expenditures
on qualifying assets during the period.
8.
When boot is involved in an exchange having commercial substance.
a. gains or losses are recognized in their entirely.
b. a gain or loss is computed by comparing the fair value of the asset received with the
fair value of the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.
9.
Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except when the exchange has
a. no commercial substance and additional cash is paid.
b. no commercial substance and additional cash is received.
c. commercial substance and additional cash is paid.
d. commercial substance and additional cash is received.
3
Use the following information for questions 10 and 11.
Wilson Co. purchased land as a factory site for $800,000. Wilson paid $80,000 to tear down two
buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 for title investigation,
and $2,400 for title insurance were paid during the purchase. Architect's fees were $31,200, and
liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was
paid $2,500,000. Interest costs during construction were $170,000. An assessment made by the
city for pavement was $6,400.
10.
The cost of the land that should be recorded by Wilson Co. is
a. $880,480.
b. $886,880.
c. $889,880.
d. $896,280.
11.
The cost of the building that should be recorded by Wilson Co. is
a. $2,703,800.
b. $2,704,840.
c. $2,713,200.
d. $2,714,240.
12.
Huffman Corporation constructed a building at a cost of $20,000,000. Average
accumulated expenditures were $8,000,000, actual interest was $1,200,000, and
avoidable interest was $800,000. If the salvage value is $1,600,000, and the useful life is
40 years, depreciation expense for the first full year using the straight-line method is
a. $480,000.
b. $490,000.
c. $520,000.
d. $680,000.
13.
Colt Football Co. had a player contract with Watts that is recorded in its books at
$4,800,000 on July 1, 2012. Day Football Co. had a player contract with Kurtz that is
recorded in its books at $4,000,000 on July 1, 2012. On this date, Colt traded Watts to
Day for Kurtz and paid a cash difference of $1,600,000. The fair value of the Kurtz
contract was $7,200,000 on the exchange date. The exchange had no commercial
substance. After the exchange, the Kurtz contract should be recorded in Colt's books at
a. $6,400,000.
b. $6,000,000.
c. $6,600,000.
d. $7,200,000.
14.
On January 3, 2011, Munoz Co. purchased machinery. The machinery has an estimated
useful life of eight years and an estimated salvage value of $60,000. The depreciation
applicable to this machinery was $130,000 for 2013, computed by the sum-of-the-years'digits method. The acquisition cost of the machinery was
a. $720,000.
b. $780,000.
c. $840,000.
d. $936,000.
4
15.
On January 2, 2012, York Corp. replaced its boiler with a more efficient one. The
following information was available on that date:
Purchase price of new boiler
Carrying amount of old boiler
Fair value of old boiler
Installation cost of new boiler
$170,000
10,000
4,000
20,000
The old boiler was sold for $4,000. What amount should York capitalize as the cost of
the new boiler?
a. $190,000.
b. $186,000.
c. $180,000.
d. $170,000.
16.
Myers Company acquired machinery on January 1, 2007 which it depreciated under the
straight-line method with an estimated life of fifteen years and no salvage value. On
January 1, 2012, Myers estimated that the remaining life of this machinery was six years
with no salvage value. How should this change be accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2012
c. By setting future annual depreciation equal to one-sixth of the book value on January
1, 2012
d. By continuing to depreciate the machinery over the original fifteen year life
17.
Robertson Inc. bought a machine on January 1, 2002 for $400,000. The machine had an
expected life of 20 years and was expected to have a salvage value of $40,000. On July
1, 2012, the company reviewed the potential of the machine and determined that its
undiscounted future net cash flows totaled $200,000 and its discounted future net cash
flows totaled $140,000. If no active market exists for the machine and the company does
not plan to dispose of it, what should Robertson record as an impairment loss on July 1,
2012?
a. $
0
b. $11,000
c. $20,000
d. $71,000
18.
Percy Resources Company acquired a tract of land containing an extractable natural
resource. Percy is required by its 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 2,000,000 tons, and that the land
will have a value of $1,000,000 after restoration. Relevant cost information follows:
Land
Estimated restoration costs
$7,500,000
1,500,000
If Percy maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $3.25
b. $3.75
c. $4.00
d. $4.50
5
19.
A plant asset with a five-year estimated useful life and no residual value is sold at the
end of the second year of its useful life. How would using the sum-of-the-years'-digits
method of depreciation instead of the double-declining balance method of depreciation
affect a gain or loss on the sale of the plant asset?
a.
b.
c.
d.
Gain
Decrease
Decrease
Increase
Increase
Loss
Decrease
Increase
Decrease
Increase
20.
In a business combination, companies record identifiable intangible assets that they can
reliably measure. All other intangible assets, too difficult to identify or measure, are
recorded as:
a. other assets.
b. indirect costs.
c. goodwill.
d. direct costs.
21.
The recoverability test is used to determine any impairment loss on which of the
following types of intangible assets?
a. Indefinite life intangibles other than goodwill.
b. Indefinite life intangibles.
c. Goodwill.
d. Limited life intangibles.
22.
Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.
23.
The costs of organizing a corporation include legal fees, fees paid to the state of
incorporation, fees paid to promoters, and the costs of meetings for organizing the
promoters. These costs are said to benefit the corporation for the entity's entire life.
These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
24.
Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An
independent consultant retained by Ely estimated that the remaining useful life at
January 1, 2013 is 15 years. Its unamortized cost on Baden’s accounting records was
$225,000; the patent had been amortized for 5 years by Baden. How much should be
amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.
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25.
On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an
estimated useful life of 16 years. In January 2013, Russell paid $300,000 for legal fees
in a successful defense of the copyright. Copyright amortization expense for the year
ended December 31, 2013, should be
a. $0.
b. $125,000.
c. $143,750.
d. $150,000.
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Problem 2 (13 points)
When you undertook the preparation of the financial statements for Vancey Company at
January 31, 2012, the following data were available:
At Cost
At Retail
Inventory, February 1, 2011
$170,800
$ 258,500
Abnormal spoilage
5,000
8,000
Freight
4,000
Markdowns
35,000
Additional Markups
63,000
Markdown cancellations
20,000
Markup cancellations
25,000
Employee discount
27,000
Purchases
419,500
554,000
Sales
745,000
Purchases returns and allowances
4,300
5,500
Sales returns and allowances
10,000
Instructions (Please show your work with as much detail as you can for maximum credit)
a) Compute the ending inventory at cost as of January 31, 2012, using the conventional
retail method which approximates LCM. (10 points)
b) Compute the cost of goods sold for 2012 (3 points)
8
Problem 3 (20 points)
On August 1, 2009, Yan Manufacturing Co. began construction of a building to be used as its
office headquarters. The building was completed on September 1, 2010.
Expenditures on the project were as follows:
August 31, 2009
October 1, 2009
November 1, 2009
December 1, 2009
January 1, 2010
April 1, 2010
August 31, 2010
$ 900,000
600,000
900,000
600,000
500,000
585,000
900,000
On August 1, 2009, the company obtained a $1 million, 8 %, 5-year construction loan. The
company’s other interest-bearing debt included two long-term debt notes of $6,000,000 and
$10,000,000 with interest rates of 9% and 10% respectively. Both notes were outstanding
during all of 2009 and 2010. Assume $500,000 included in the first payment is for land
purchased to construct this building. The company’s fiscal year-end is December 31. Use 12
month cycles in your calculations.
a)
Calculate the amount of interest that Mason should capitalize in 2009 using the specific
interest method.
b)
Calculate the amount of interest that Mason should capitalize in 2010 using the specific
interest method.
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c)
Provide the appropriate journals entry related to interest capitalization on September 31,
2010 to recognize capitalized interest
d)
What is the total cost of the building and provide the journal entry to transfer of
construction to property and equipment.
e)
Assume the building is placed in use on September 1, 2010 and is expected to last 20
years. If the company uses the straight line method and salvage is at 5% of the cost,
determine the depreciation expense in 2010 associated with this asset.
10
Problem 4 (20 points)
On April 1, 2007, the KB Toy Company purchased equipment to be used in its manufacturing
process. The equipment cost $48,000, has an eight year useful life, and has no residual value.
The company uses the 150% declining balance depreciation method for all manufacturing
equipment.
On January 4, 2009, $12,350 was spent to repair the equipment and to add a feature that
increased its operating efficiency. Of the total expenditure, $2,000 represented ordinary repairs
and annual maintenance and $10,350 represented the cost of the new feature. In addition, to
increasing operating efficiency, the total useful life of the equipment was extended to 10 years.
a) Prepare the journal entry for depreciation recorded on December 31, 2007
b) Prepare the journal entry for depreciation recorded on December 31, 2008
c) Prepare the appropriate journal entry related to the expenditure on January 4, 2009
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d) Prepare the appropriate journal entry for depreciation on December 31, 2009
e) On August 14, 2010, KB Toys decides to change its depreciation method from 150%
declining balance method to straight line with no change in estimates.
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