ACC 5110 Exam #1 Prep

1. In a business combination, goodwill is defined as the excess of cost over the

C. Book value of assets acquired less the liabilities assumed.

2. If the cost of ordinary repairs is capitalized as an addition to the building account during the
current year,

D. Total liabilities at the end of the current year will not be affected.

3. In order to calculate the third year’s depreciation on an asset using the sum of the year’s
digits method, which of the following must be known about the asset?
A. Its acquisition cost
B. Its estimated salvage value
C. Its estimated useful life
D. All of the above must be known

4. On December 1, 2014, Kelso Company acquired new equipment in exchange for old
equipment that it had acquired in 2011. The old equipment was purchased for $140,000 and
had a book value of $53,200. On the date of the exchange, the old equipment had a fair value
of $56,000. In addition, Kelso paid $182,000 cash for the new equipment, which had a list
price of $252,000. The exchange lacks commercial substance. At that amount should Kelso
record the new equipment for financial accounting purposes?

a. $182,000
b. $235,000
c. $238,000
d. $252,000

On March 1, 2014, Newton Company purchased land for an office site by paying $1,800,000
cash. Newton began construction on the office building on March 1. The following expenditures
were incurred for construction:

Date Expendiures
March 1, 2014 $1,200,000 *4/12 = $400,000
April 1, 2014 $1,680,000 *3/12 = $420,000
May 1, 2014 $3,000,000 *2/12 = $500,000
June 1, 2014 $4,800,000 *1/12 = $400,000

The office was completed and ready for occupancy on Jul 1. To help pay for construction and
purchase of land, $2,400,000 was borrowed on March 1, 2014 on a 9%, 3 year note payable.
Other than the construction note, the only debt outstanding during 2014 was a $1,000,000, 12% 6
year note payable dated January 1, 2014.
5. The weighted-average accumulated expenditures on the construction project during 2014
were:

D. $2,320,000

($3,000,000 x 4/12) + ($1,680,000 x 3/12) + ($3,000,000 x 2/12) + ($4,800,000 x 1/12) =

$2,320,000

6. Assume the weighted-average accumulated expenditures for the construction project are
$2,900,000. The amount of interest cost to be capitalized during 2014 is:

C. $300,000

7. Interest cost that is capitalized should:

C. Not be written off until the related asset is fully depreciated or disposed of

8. Use of the double-declining balance method:

a. Results in a decreasing charge to depreciation expense

b. Means salvage value is not deducted in computing the depreciation base
c. Means the book value should not be reduced below salvage Value
d. All of the above

9. On January 1, Stockton Company acquired a machine with a four-year useful life. Stockton
estimates the salvage value of the machine will be equal to ten percent of the acquisition cost.
The company is debating between using either the double-declining balance method or the sum
of the years digits method of depreciation. Comparing the depreciation expense for the first two
years computed using these methods, the depreciation expense for the double-declining balance
method (compared to the sum of the years’ digits method) will match which of the patterns
shown below?

First Year Second Year

c. Higher Lower

10. On January 1, 2014, the Accumulated Depreciation-Machinery account of a particular

company showed a balance of $740,000. At the end of 2014, after the adjusting entries were
posted, it showed a balance of $790,000. During 2014, one of the machines which cost $250,000
was sold for $121,000 cash. This resulted in a loss of $8,000. Assuming that no other assets were
disposed of during the year, how much was depreciation expense for 2014?

C. $50,000

Cash 121,000
Loss 8,000
Acc. Dep. 121,000
Old Asset 250,000

11. Hart Corporation owns machinery with a book value of $285,000. It is estimated that the
machinery will generate future cash flows of $300,000. The machinery has a fair value of
$210,000. Hart should recognize a loss on impairment of:

A. $0

12. When a closely held corporation issues preferred stock for land, the land should be recorded
at the

C. Total liquidating value of the stock issued

13. In 2006, Jarrett Company purchased a tract of land as a possible future plant site. In January,
2014, valuable Sulphur deposits were discovered on adjoining property and Jarrett Company
immediately began explorations on its property. In December 2014, after incurring $800,000 in
exploration costs, which were accumulated in an expense account, Jarrett discovered Sulphur
deposits appraised at $4,500,000 more than the value of the land. To record the discovery of the
deposits, Jarrett should

B. Debit $800,000 to an asset account

14. The following statements are related to accounting for asset impairment of limited life of
intangible assets under IFRS. Which of the following is incorrect?

A. Single step impairment test

15. On June 30, 2015, Cey Inc exchanged 6,000 shares of Seely Corp $30 par value common
stock for a patent owned by Gore Co. The Seely stock was acquired in 2015 at a cost of
$165,000. At the exchange date, Seely common stock had a fair value of $46 per share, and the
patent had a carrying value of $330,000 on Gore’s books. Cey should record the patent at

C. $276,000

Number of shares exchanged: 6,000

Par value of shares: $30
Cost of acquisition of Seely Stock: $165,000
On the date of exchange, fair value of the common stock = $46
Cey should record the patent at the fair value on the date of exchange: $46*4000 = $276,000

16. Day Company purchased a patent on January 1, 2014 for $480,000. The patent had a
remaining useful life of 10 years at that date. In January of 2015, Day successfully defends the
patent at a cost of $216,000, extending the patent’s life to 12/31/26. What amount of
amortization expense would Day record in 2015?

D. $72,000
17. Hall Co incurred research and development costs in 2007 as follows:

Materials used in research and development projects $450,000

Equipment acquired that will have alternate future uses in future R&D projects $3,000,000
Depreciation for 2007 on above equipment $300,000
Personnel costs of persons involved in research and development projects $750,000
Advertising fees paid to finished products from research projects $150,000
Indirect costs reasonably allocable to research and development projects $225,000
Total $4,875,000

The amount of research and development costs charged to Hall’s 2007 income statement should
be

B. $1,725,000

Do not include the $3m and $150k amounts in calculation

18. General Products Company bought Special Products Division in 2014 and appropriately
recorded $750,000 of goodwill related to the purchase. On December 31, 2015, the fair value of
Special Products Division is $6,000,000 and it is carried on General Product’s books for a total
of $5,100,000 including the goodwill. An analysis of Special Products Division’s assets indicates
that goodwill of $600,000 exists on December 31, 2015. What goodwill impairment should be
recognized by General Products in 2015?

A. $0

19. Tongas Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight line basis. At the end of year 1, independent appraisers determine that the asset has a fair
value of $1,500,000. The journal entry to adjust the plant assets to fair value and record
revaluation surplus in year one will include a

D. Credit to revaluation surplus for $300,000

20. Which of the following intangible assets should not be amortized?

C.Perpetual franchises
Problem 1

In 2014, SSK mining purchased land for $8,000,000 that had a natural resource supply estimated
at 5,000,000 tins. When the natural resources are removed, the land will have an estimated
salvage value of $500,000. The present value of the expected cash outflows for the required
restoration cost for the property is estimated to be $900,000. Development costs on the land were
$600,000.

During 2015, additional development costs of $300,00 were incurred, resulting in additional
resources of 600,000 tons. Production for 2014 and 2015 was 800,000 tons and 900,000 tons,
respectively.

1) Compute the total depletion charge for 2014 (Round depletion charge to the nearest cent).

$8,600,000/5,000,000 = $1.60 per ton

800,000 tons x $1.60 = $1,280,000 depletion charge for 2014

2) Compute the total depletion charge for 2015 (Round depletion charge to the nearest cent).

8,000,000 – 1,280,000 = 6,270,000 + 800,000 = $7,020,000

5,000,000 – 800,000 + 600,000 = 4,800,000

$7,020,000/4,800,000 = $1.46 x 900,000 = $1,314,000 depletion charge for 2015

Problem 2

On December 31, 2014, SKK Company held the following three intangible assets:

1. A trademark for $50,000. The trademark has seven years remaining in its legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without
problem.
2. Goodwill for $1,000,000. The goodwill is associated with SKK’s Abacus Manufacturing
reporting unit.
3. A patent was internally developed in Dec. 31, 2012 with a payment of registration fee of
$5,000. At that time, SSK Co. estimated the economic useful life of the patent as five
years (no salvage value). On Jan. 1, 2014, SSK Co. paid the legal fees of $13,000 to
successfully defend the right of the patent. On Dev. 31, 2014, because of market
conditions, it is expected that the patent will have economic value for just three years.

On December 31, 2015, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:
 Because of a decline in the economy, the trademark is now expected to generate cash
flows of just $1,500 per year. The useful life of the trademark still extends beyond
foreseeable horizon.
  The cash flow expected by the Abacus Manufacturing reporting unit is $20,000 per year
for the next 12 years. Book value and fair values of the assets and liabilities of the
Abacus Manufacturing reporting unit are as follows:
Book Values Fair Values
Identifiable Assets $4,000,000 $4,650,000
Goodwill $1,000,000 ?
Liabilities $2,500,000 $2,300,000

 The cash flows expected to be generated by the patent are $4,000 in 2016 and $4,000 in
2017.

The following is the part of the present value factors under the discount rate for all items is 6%:

Discount Rate 5.0% 6.0%

Present value of a single sum for 2 periods .90703 .89000
Present value of a single sum for 12 periods .55684 .49697
Present value of an annuity for 2 periods 1.85941 1.8333
Present value of an annuity for 12 periods 8.86325 8.3838

(a) Prepare all necessary entries related to the patent as of December 31, 2015

5,000/5 = 1,000 per year

4,000 + 13,000 = 17,000/3 = $5,667 per year

Amortization of Patent $5,667

Patent $5,667