1. In 2007, Redford Company paid $1,000,000 to purchase landcontaining a total estimated 160,000 tons of extractable mineraldeposits. The estimated value of the property after the mineralhas been removed is $200,000. Extraction activities began in2008, and by the end of the year, 20,000 tons had beenrecovered and sold. In 2009, geological studies indicated thatthe total amount of mineral deposits had been underestimatedby 25,000 tons. During 2009, 30,000 tons were extracted, and28,000 tons were sold. What is the depletion rate per ton(rounded to the nearest cent) in 2009?
A. $4.24C. $4.85
B. $4.32 D. $5.19
2. When a company replaces an old asphalt roof on its plant with a new fiberglass insulatedroof, which of the following types of expenditure has occurred?
A. Ordinary repairs and maintenance C. Rearrangement
B. Addition D. Betterment
3. Post Company’s depreciation policy on machinery and equipment is as follows:
• A full year’s depreciation is taken in the year of an asset’s acquisition.
• No depreciation is taken in the year of an asset’s disposition.
• The estimated useful life is five years.
• The straight-line method is used.
On June 30, 2007, Post sold for $230,000 a machine acquired in 2004 for $420,000. Theaccumulated depreciation for this machine was $216,000 at December 31, 2006, and theoriginal estimated salvage value was $60,000. How much gain or (loss) on the disposalshould Post record in 2007?
A. A $14,000 gain C. A $26,000 loss
B. A $26,000 gainD. A $34,000 loss
Book Value of the machine at Dec 31, 2007 = $420,000 - $216,000
= $204,000
Gain on Disposal = $230,000 - $204,000
= $26,000
4. Nimbus Inc., purchased certain plant assets under a deferred payment contract. Theagreement was to pay $30,000 per year for 10 years. The plant assets should bevalued at
A. $300,000.
B. $300,000 plus imputed interest.
C. present value of $30,000 annuity for 10 years at an imputed interest rate.
D. future value of $30,000 annuity for 10 years at an imputed interest rate.
5. On February 12, Laker Company purchased a tract of land as a factory site for $175,000.
An existing building on the property was razed and construction was begun on a newfactory building in March of the same year. Additional data are available as follows:
Cost of razing old building $ 35,000
Title insurance and legal fees to purchase land 12,500
Architect’s fees 42,500
New building construction cost 875,000
The recorded cost of the completed factory building should be
A. $910,000. C. $930,000.
B. $917,500. D. $952,500.
= $875,000 + $42,500
= $917,500
6. Andrews Manufacturing Company purchased a new machine on July 1, 2007. It wasexpected to produce 200,000 units of product over its estimated useful life of eight years.Total cost of the machine was $600,000, and salvage value was estimated to be $60,000.Actual units produced by the machine in 2007 and 2008 are shown below.
2002 16,000 units
2003 30,000 units
Andrews reports on a calendar-year basis and uses the productive-output method ofdepreciation. The amount of depreciation expense for this machine in 2008 would be
A. $124,200. C. $81,000.
B. $90,000. D. $74,520.
Depreciation Expense =
=
= $81,000
7. Hendricks Construction purchased a crane on January 1, 2007, for $102,750. At the timeof purchase, the crane was estimated to have a life of six years and a residual value of$6,750. In 2009, Hendricks determined that the crane had a total useful life of seven yearsand a residual value of $4,500. If Hendricks uses the straight-line method of depreciation,what will be the depreciation expense for the crane in 2009?
A. $16,000 C. $9,464
B. $13,250 D. $8,000
Original Annual Depreciation = ($102,750 - $6,750) / 6 = $16,000
That would be the annual depreciation for 2007, & 2008. Therefore at the beginning of 2009, the accumulated depreciation = $32,000
The Book Value = $102,750 - $32,000
= $70,750
In 2009 the depreciable cost = ($70,750 - $4,500) / 5 years
= $13,250
8. On June 30, 2007, Hi-Tech Inc. purchased for cash at $50 per share all 150,000 shares ofoutstanding common stock of Skicraft Company. Skicraft’s balance sheet at June 30, 2007,showed net assets with a book value of $6,000,000. The fair value of Skicraft’s property,plant, and equipment on June 30, 2007, was $800,000 in excess of its book value. Whatamount, if any, will Hi-Tech record as goodwill on the date of purchase?
A. $0 C. $800,000
B. $700,000D. $1,500,000
Goodwill = Purchase Price - Fair Market Value of the Asset
Purchase Price = $50 x 150,000 = $7,500,000
FMV of Asset = $6,000,000 (book value) + $800,000 (excess in book value) = $6,800,000
Goodwill = $7,500,000 - $6,800,00 = $700,000
9. Peyton Company started construction of a new office building on January 1, 2007, andmoved into the finished building on July 1, 2008. Of the building’s $5,000,000 total cost,$4,000,000 was incurred in 2007 evenly throughout the year. Peyton’s incrementalborrowing rate was 12 percent throughout 2007, and the total amount of interest incurredby Peyton during 2007 was $204,000. What amount should Peyton report as capitalizedinterest at December 31, 2007?
A. $480,000 C. $240,000
B. $300,000 D. $204,000
Interest to be capitalized = incremental interest or actual interest incurred (whichever is lower)
Incremental Interest = $4,000,000 x 0.12 = $480,000
Interest Incurred = $204,000
10. In October 2007, Daryl Company exchanged a used packaging machine having a bookvalue of $240,000 for a dissimilar new machine with a market value of $310,000. Thecompany paid a cash difference of $30,000. The market value of the used packagingmachine was determined to be $280,000. In its income statement for the year endedDecember 31, 2007, how much gain should Daryl recognize on this exchange?
A. $0 C. $30,000
B. $10,000 D. $40,000
11. Luther Soaps purchased a machine on January 1, 2007, for $18,000 cash. The machinehas an estimated useful life of four years and a salvage value of $4,700. Luther uses thedouble-declining-balance method of depreciation for all its assets. What will be themachine’s book value as of December 31, 2008?
A. $5,100 C. $4,500
B. $4,700D. $4,300
12. A company using the group depreciation method for its delivery trucks retired one of itsdelivery trucks after the average service life of the group was reached. Cash proceedswere received from a salvage company. The net carrying amount of these group assetaccounts would be decreased by the
A. original cost of the truck.
B. original cost of the truck less the cash proceeds.
C. cash proceeds received.
D. cash proceeds received and original cost of the truck.
13. On January 1, 2007, Mackay, Inc. spent $80,000 to acquire a trademark. The trademark has a legal life of costs associated with an internally developed trademark. The trademark has an indefinite legal life as long as it’s used, and as of the end of 2007 Mackay had no reason to assume this wouldn’t be the case. However, they expected that the trademark had an economic life of only 10 years. The trademark wasn’t impaired in any way. If Mackay wishes to maximize current period income with respect to its amortization of the trademark, how much expense should it recognize in 2007?
A. $0C. $8,000
B. $2,000 D. $80,000
14. Which of the following reasons provides the best theoretical support foraccelerated depreciation?
A. Assets are more efficient in early years and initially generate more revenue.
B. Expenses should be allocated in a manner that “smooths” earnings.
C. Repairs and maintenance costs will probably increase in later periods, sodepreciation should decline.
D. Accelerated depreciation provides easier replacement because of the timevalue of money.
15. Eagle Company owns a tract of land that it purchased in 2004 for $200,000. The land isheld as a future plant site and has a fair market value of $280,000 on July 1, 2007. HallCompany also owns a tract of land held as a future plant site. Hall paid $360,000 for theland in 2006 and the land has a fair market value of $380,000 on July 1, 2007. On thisdate, Eagle exchanged its land and paid $100,000 cash for the land owned by Hall.At what amount should Eagle record the land acquired in the exchange?
A. $280,000 C. $320,000
B. $300,000 D. $380,000
16. On January 1, 2006, Carson Company purchased equipment at a cost of $420,000. Theequipment was estimated to have a useful life of five years and a salvage value of $60,000.
Carson uses the sum-of-the-years’-digits method of depreciation. What should theaccumulated depreciation be at December 31, 2008?
A. $240,000 C. $336,000
B. $288,000D. $360,000
17. On October 1, Takei, Inc. exchanged 8,000 shares of its $25 par value common stockfor a parcel of land to be held for a future plant site. Takei’s common stock had a fairmarket value of $80 per share on the exchange date. Takei received $36,000 from thesale of scrap when an existing building on the site was razed. The land should be carriedat
A. $200,000. C. $604,000.
B. $236,000. D. $640,000.
18. The Oscar Corporation acquired land, buildings, and equipment from a bankrupt companyat a lump-sum price of $180,000. At the time of acquisition, Oscar paid $12,000 to havethe assets appraised. The appraisal disclosed the following values:
Land $120,000
Buildings 80,000
Equipment 40,000
What cost should be assigned to the land, buildings, and equipment, respectively?
A. $64,000, $64,000, and $64,000 C. $96,000, $64,000, and $32,000
B. $90,000, $60,000, and $30,000 D. $120,000, $80,000, and $40,000
19. A company owns a piece of land that originally cost $10,000 and has a fair market valueof $8,000. It’s exchanged along with $5,000 cash for another piece of land having a fairvalue of $13,000. What is the proper journal entry to record this transaction?
A. Land (new) $15,000
Land (old) $10,000
Cash 5,000
B. Land (new) $13,000
Loss on Exchange 2,000
Land $10,000
Cash 5,000
C. Land (new) $18,000
Land (old) $10,000
Cash 5,000
Gain on Exchange 3,000
D.Land (new) $13,000
Retained Earnings 2,000
Land (old) $10,000
Cash 5,000
20. In January 2007, Vance Mining Corporation purchased a mineral mine for $7,200,000with removable ore estimated by geological surveys at 4,320,000 tons. The property hasan estimated value of $720,000 after the ore has been extracted. Vance incurred $2,160,000of development costs preparing the property for the extraction of ore. During 2007, 540,000tons were removed and 480,000 tons were sold. For the year ended December 31, 2007,Vance should include what amount of depletion in its cost of goods sold?
A. $720,000 C. $960,000
B. $810,000 D. $1,080,000