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HONG KONG UNIVERSITY OF SCIENCE & TECHNOLOGY

DEPARTMENT OF ACCOUNTING
ACCT 2010: Principles of Accounting I
Dr. Shih-Jen Kathy Ho — Fall 2016

Mini Exam 3 Monday November 14, 2016, 8-9 p.m. LTA

STUDENT NAME (print):
STUDENT ID:
English or other name on seating chart:
Instructions:

1. You have 60 minutes to complete this examination.

2. SWITCH OFF MOBILE PHONES BEFORE YOU START.
3. The examination question consists of 6 pages (including this cover page). Please ensure
that you have all of the pages.
4. Show your work. Answers without supporting work will not receive credit.
5. Illegible answers will not be graded.
6. Proctors would not respond to queries about the interpretation of exam questions. Do
your best to understand and answer exam questions.
7. In your answers involving journal entries, you need not write descriptions of transactions.
8. Failure to stop writing once the exam period ends will result in the disqualification of your
exam and a zero grade will be assigned to your mid-term.
9. Please put your answer on the separate answer sheets provided.

Exam part Points Points

Available Awarded
Part I (MC questions) 14 questions @ 2.5 points each 35
Problem 1: 13
Problem 2: 12
Problem 3: 20
Total 80
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Multiple Choice Questions (14 questions @2.5 points each= 35 points total)

1. Which of the following equipment related costs is not capitalized on a balance sheet?

A. Equipment installation costs.

B. Transportation costs associated with the equipment purchase.

C. Equipment maintenance costs.

D. The equipment's purchase price.

2. Failure to record amortization expense on a patent during the current year will result in
which of the following?

A. Net income will be overstated, but there would be no effect on total assets.

B. Net income for the year and total assets would both be overstated.

C. Assets will be overstated, but there would be no effect on net income for the year.

D. Net income and assets will both be understated.

3. Which of the following is most likely to be an intangible asset with an indefinite life?

A. Leasehold

B. Franchise

C. Patent

D. Goodwill

4. Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of
five years and estimated residual value of $5,000. At the beginning of year three, Augie's
managers concluded that the total useful life would be four years, rather than five years.
There was no change in the estimated residual value. What is the amount of depreciation
that Augie should record for year 3 under the straight-line depreciation method?

A. $15,500.

B. $8,250.

C. $11,000.

D. $16,500.
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5. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost
of the equipment was $215,000 with an accumulated depreciation of $185,000. Depreciation
has been taken up to the end of the year. The company found a company that is willing to
buy the equipment for $55,000. What is the amount of the gain or loss on this transaction?

A. Cannot be determined
B. No gain or loss
C. Gain of $25,000
D. Gain of $55,000

6. On March 1, 2016, Anniston Company purchased an oil well at a cost of $1,000,000. It is

estimated that 150,000 barrels of oil can be produced over the remaining life of the well and
the residual value of the well will be $100,000.

During 2016, 15,000 barrels of oil were produced and all of these barrels were sold. Which of
the following statements is correct with respect to the accounting for the oil well?

A. The inventory of oil was $90,000 at December 31, 2016.

B. The accumulated depreciation of oil well increased $90,000 during 2016.

C. The 2016 cost of goods sold was $90,000.

D. The depletion rate is $6.20 per barrel of oil.

Use the following information to solve questions 7 and 8.

On December 1, the G. Baker Corporation borrows $15,000 from a local bank by issuing a 6-month,
12% note payable, with interest and principal amounts paid at maturity.

7. The journal entry for accrued interest on December 31 is:

A. Dr. Interest Expense 150
Cr. Interest Payable 150
B. Dr. Interest Expense 300
Cr. Interest Payable 300
C. Dr. Interest Expense 150
Cr. Cash 150
D. Dr. Interest Expense 300
Cr. Cash 300

8. The total cash paid on the maturity date of the note is:
A. $15,900
B. $15,750
C. $16,800
D. $16,500
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9. Tallakson Company issued a $50,000, 5-year, 8% interest rate when the market rate of
interest was 10%. The bond issuing price will be:

A. $50,000
B. less than $50,000
C. greater than $50,000
D. The bond price cannot be determined.

10. Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability
on the balance sheet?

A. When the loss probability is remote and the amount can be reasonably estimated.

B. When the loss is probable and the amount can be reasonably estimated.

C. When the loss probability is reasonably possible and the amount can be reasonably
estimated.

D. When the loss is probable regardless of whether the loss can be reasonably
estimated.

11. Which of the following results in a decrease in working capital?

A. Supplies purchases with cash.

B. Purchase of a truck in exchange for factory machinery.

C. Acquisition of land in exchange for stock.

D. Purchase of equipment with cash.

12. When a company prepares a bond indenture, certain provisions of the bonds are included.
Which of the following is not specified in the indenture?

A. Date of each interest payment.

B. The coupon interest rate.

C. The maturity date.

D. The market rate of interest.

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13. Which of the following statements is correct?

A. A secured bond has specific assets pledged as collateral to secure it.

B. An unsecured bond can be paid at the option of the issuer.

C. A bond trustee is appointed to represent the issuing company.

D. The bond indenture specifies the market rate of interest the investors will earn.

14. With regard to reporting contingent liabilities on a balance sheet, financial statements
prepared under International Financial Reporting Standards (IFRS) will

A. Have fewer contingent liabilities accrued than under U.S. GAAP because the IFRS
guideline for "probable" is a higher percentage than the U.S. GAAP guideline for
"probable".

B. Have more contingent liabilities accrued than under U.S. GAAP because the IFRS
guideline for "probable" is a lower percentage than the U.S. GAAP guideline for
"probable".

C. Have more contingent liabilities accrued than under U.S. GAAP because IFRS
requires all lawsuits, environmental problems, and product warranties that are
reasonably estimable to be accrued while U.S. GAAP requires accrual only if losses
are reasonably possible of being incurred.

D. Have fewer contingent liabilities accrued than under U.S. GAAP because IFRS
requires a more subjective evaluation of the probability of occurrence than does U.S.
GAAP.
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Problem 1: Fixed Assets Depreciation (13 points)

Hubbard Company purchased a truck on January 1, 2015, at a cost of $34,000. The company
estimated that the truck would have a useful life of 4 years and a residual value of $4,000.

Required:

A. Calculate depreciation expense under straight line and double declining balance for 2015-
2018. (8 points)
B. Which of the two methods would result in lower net income in 2015 and 2018? (5
points)

Problem 2: present value (12 points)

1. An investment will pay $15,000 at the end of each year for ten years and a one-time
payment of $150,000 at the end of the tenth year. Determine the present value of this
investment using an 8 percent interest rate.
2. The Jenkins Corporation has purchased an executive jet. The company has agreed to pay
$280,000 per year for the next 10 years and an additional $1,650,000 at the end of the
10th year. The seller of the jet is charging 10 percent interest. Determine the liabilities
that would be recorded by Jenkins.

Time Period Interest PV of $1 PV of a $1 Annuity

10 10% .386 6.140
10 8% .463 6.710
10 12% .322 5.650

Problem 3: Bonds Payable (20 points)

On January 1, 2013, Lead Inc. issues $100,000, ten-year, 10% bonds at 98; issue price is $98,000.
Interest is paid each December 31.

Required:

(1) Provide the journal entry to record the issuance of the bonds on January 1, 2013.

(2) Provide the journal entries to recognize the interest expense on December 31, 2013 using
straight-line amortization.

(3) Show how the bonds payable should be reported on the December 31, 2014 Balance Sheet.

(4) Give the journal entry to record the repayment of the loan principal on January 1, 2023.