Problem I -
1. Which of the following is not a criterion to capitalize costs subsequent to the acquisition of an asset?
A. The useful life of the asset must be increased
B. The cost must be significant (material) in amount
C. The quantity of units produced from the asset must be increased
D. The quality of units produced must be enhanced
2. Under the sales warranty approach, recognition of warranty revenue previously correctly recorded as a current liability in a prior year would include
A. a debit to earned warranty revenue
B. a credit to unearned warranty revenue
C. a credit to warranty revenue
D. a debit to cash or accounts receivable
3. On December 31, 2018, Updike Inc. sold a truck which originally cost $50,000, and had accumulated depreciation of $30,000 which included a $5,000 impairment loss. $12,500 of depreciation expense for 2018 has yet to be taken. Updike received $9,000 cash for the truck. The amount of the gain or loss to be recognized on the sale of the truck is
A. $3,500 loss
B. $11,000 loss
C. $1,500 gain
D. $6,500 gain
4. Bellow Corp. were unable to calculate the fair market value of an impaired machine in order to measure the impairment loss. In place of the fair value of the asset, Bellow could
A. subjectively estimate the fair market value of the asset
B. discount the estimated future cash flows associated with the asset
C. use the book value of the asset in place of the fair market value
D. increase the depreciation expense for the current year by the estimated amount of the impairment loss
5. Roth Company wants to maximize their accrual accounting net income in their first year of business operations. They acquired a significant amount of depreciable equipment. All of the equipment has a useful life of five years and no salvage value. They equipment is primarily machines which are expected to run for 15,000 hours in total over the five year period. In their first year of operations the machines were used for 2,700 hours. To achieve maximization of accrual accounting net income, Roth Company should use which of the following depreciation methods?
A. Straight-Line
B. sum-of-the-years digits
C. double-declining balance
d. activity method based on machine hours
6. On December 31, 2018, for the year 2018. Anderson Inc. has weighted-average accumulated expenditures of $500,000 related to a building that is still under construction. Specific borrowing for the building is a $1,000,000 long-term note payable at 12% signed on January 1, 2018. They also have long-term bonds outstanding with a face value of $2,000,000 with 10% interest payable semi-annually. The bonds were issued in 2014 and mature in 2029. Construction started and the first payments were made on January 1, 2018. The amount of interest to be capitalized in 2018 is
A. $120.000
B. $22.0,000
C. $320,000
D. None of the above answers (A, B, or C) are correct
7. Which of the following is not a condition that must be satisfied he ore interest capitalization can begin on a qualifying asset?
A. interest cost is being incurred
B. expenditures for the assets have been made
C. the actual interest rate is equal to or greater than the company's cost of capital
D. activities that are necessary to get the asset ready for its intended use are in progress
8. Dahlberg Corp. purchased a machine in 20t2 at a cost of $500,000. They took a full year depreciation in 2012 using the straight-line method. The machine has an estimated life of 10-years and $20,000 salvage value. On January 1, 2018, they spent $20,000 replacing a gear on the machine. The replacement will increase the useful life of the machine an additional two-years. The quantity and quality of the goods produced will not change and the salvage value will remain the same. The carrying value of the replaced gear is unknown. The journal entry to record the replacement should include
A. a debit to the machine account
B. a debit to the accumulated depreciation account
C. a debit to an expense account
D. None of the above answers (A, B, or C) are correct
9. Doyle Company buys an oil rig for $6,000,000 on January 1, 2018. The life of the rig is 3 years and the expected cost to dismantle the rig at the end of 3 years is $600,000. 10% is an appropriate discount rate for this ARO. Straight-line depreciation is used to depreciate the capitalized amount of the oil rig which includes the ARO. What amount of interest expense should be recorded in 2018 for the ARO?
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Table Factor For three Periods
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Interest Rate 10%
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Future Value of 1
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1.33100
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Present Value of 1
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.75132
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Future Value of Ordinary Annuity of 1
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2.31000
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Present Value of Ordinary Annuity of 1
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2.48685
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A. $45,079
B. $49,736
C. $200,000
D. $260,000
10. Warranty-R-US provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the current year, Warranty-R-US provided 21,000 such warranty contracts at an average price of $81 each. Revenue is recognized each year using the straight-line method. Related to these contracts, the company spent $200,000 servicing the contracts during the current year and expects to spend $1,050,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?
A. $150,333
B. $367,000
C S451,000
D. $567,000
Problem II -
Part A -
The DJ Company has a machine that originally cost $18,000. On January 1, 2016, after recognizing an impairment loss in 2015, annual depreciation expense is $3,000 using the straight-line method, and there is accumulated depreciation of $9,000 (including $3,000 of an impairment loss taken last year). DJ is on a calendar year and they prepare adjusting journal entries once a year on December 31. On November 1, 2016, when its fair market value is $8,000, it is traded for another machine with a fair market value of $9,000. DJ also gave cash of $1,000 to exchange the machines. The machine is being used by DJ at the time of the exchange and is correctly classified as property, plant, and equipment. The exchange lacks commercial substance for the DJ Company.
Required: Prepare all necessary journal entries (omit explanations) for DJ to record the exchange on November 1, 2016.
Part B -
Angel Co. replaced an engine, an integal part of their machine, on one of the machines used to produce their product The machine originally cost $15.000.,000, had a remaining life of three years, and an estimated salvage value of $200,000 exclusive of the engine. The engine was valued at $1,500,000 when the machine was purchased and was properly debited to the asset account titled "Engine. ' The engine had $1,200,000 of up-to-date accumulated depreciation at the time of replacement and there was no estimated salvage value for the engine. The new engine cost $2,000,000 and has an expected life of 5-years and no salvage value. The new engine will increase the life of the machine and increase its' productivity. Required: Prepare the journal entry for the new engine replacement (omit explanations).
Problem III -
Part A -
A machine which cost $50,000 is acquired on October 1, 2017. Its estimated salvage value is $10,000 and its expected life is eight years. Three months depreciation expense was take in 2017.
Required: Calculate depreciation expense for 2018 by each of the following methods. Round all amounts to the nearest dollar
Part B -
Turducky Company has a tangible asset which cost $400,000, has $100,000 of accumulated depreciation, and $50,000 salvage value. The future net cash flows undiscounted are $250,000, including the $50,000 salvage value. The future net cash flows discounted are $185,000, including the salvage value. The fair market value of the asset is $185,000.
Required:
(1) Show all calculations to determine if there is an impairment loss and is so, the amount of the loss, and
(2) Prepare the necessary journal entry (omit explanations). If no journal entry is required write the word "None" and discuss why there is no impairment loss.
Problem IV -
Part A -
Red Squirrel Corporation borrowed $45,000 on November 1, 2017, by signing a $48,000, 4-month, zero-interest-bearing short-term note payable due on March 1, 2018. Red Squirrel amortizes discounts using the straight-line method and is on a calendar year. Red Squirrel does not use reversing journal entries.
Required: (omit explanations):
1. Prepare the journal entry on November 1, 2017.
2. Prepare the journal entry on December 31, 2017.
3. Prepare the journal entry on March 1, 2018.
Parr B -
On December 31, 2018, Fleahead Corp. is involved in a pending court Case. Fleahead Corp. is being sued by a competitor for a patent infringement. Fleahead's lawyers believe it is possible that Fleahead will lose the lawsuit and pay $1,000.000, which is a material amount to Fleahead.
Required:
(1) Briefly discuss the proper accounting treatment for Fleahead Corp.
(2) Prepare any necessary journal entry (omit explanations). If no journal entry is required write the word "None" and explain.
Problem V-
On June 1, 2018, the YOLO Company sold $200,000 in long-term bonds for $229,439. The bonds will mature in 10 years, and have a stated interest rate of 8% and a yield (effective) rate of 6%. The bounds pay interest annually on May 31 of each year. YOLO uses the effective interest method. YOLO is on a calendar year and dopes not prepare reversing journal entries.
Required:
(1) Complete the partial bond amortization table below. Round to the nearest dollar.
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Date
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Cash
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Interest Expense
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(Premium or Discount Amortized)
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Carrying Value of Bonds Payable
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6/1/18
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XXX
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XX XXXXXX
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XXXXXXXXXX
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5/31/19
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|
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|
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5/31/20
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|
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(2) Prepare journal entries on the following dates, rounding to the nearest dollar, omit explanations.
June 1, 2018
December 31, 2018
May 31, 2019