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Accounting 541 Final Exam - Summer, 1996
There are 25 multiple choice problems worth 3 points each, 2 essays (answer only one for 10 points) and 1 problem worth 15 points You must show all your work (i.e., show how you calculated any number not given in the multiple choice questions or the problem) to receive credit.
1. Lamont, Inc. provides a one year warranty on toasters and estimates that warranty costs will equal 10% of sales revenue. In year 1, Lamont has toaster sales of $500,000 and actually spent $34,000 repairing toasters. What amount will appear on Lamont's year end income statement for warranty expense and on the balance sheet as the estimated liability?
Income statementBalance sheet
a. $34,000 $16,000
b.$34,000 $0
c.$50,000 $0
d.$50,000 $16,000
e. none of the above. The answer is ______.
2. During 1993, Mouton Utilities replaced 60 poles at a cost of $350 each. The original cost of the poles was $70 each. Under the replacement method, what were the 1993 depreciation expense and the net addition to the asset account, respectively, as a result of the transaction?
Depreciation expensePoles
a.$4,200 $0
b.$4,200 $16,800
c.$21,000 $0
d.$21,000 $16,800
e. none of the above. The answer is ______.
3. We are being sued for polluting the environment. A loss contingency should
a. be accrued and disclosed if it is probable that we will lose and the amount can reasonably be estimated.
b. be accrued and disclosed if it is reasonable to believe that we will lose and the amount can probably be estimated.
c. disclosed but not accrued if it is probable that we will lose and the amount can reasonably be estimated.
d. not be accrued until the lawsuit is settled.
e. none of the above.
4. Which of the following is not included in an employer's payroll tax expense?
a. Federal income taxes
b. FICA (Social Security)
c. FUTA (federal unemployment taxes)
d. SUTA (state unemployment taxes)
e. none of the above
5. On Feb. 1, 199x1 W. Wood, Inc., purchased a stadium and land for $890,000. The relative fair market of the land was $350,000 and the relative fair market of the stadium was $650,000. Wood should debit land and stadium, respectively, for
a.240,000 & 650,000
b.311,500 & 578,500
c.350,000 & 540,000
d.350,000 & 640,000
e. none of the above. The answer is ______.
6. On Jan. 1, 19x1, Einsdorf Construction Inc. signed a 5 year, 13%, $3,000,000 construction note payable. Other debt outstanding was a 6 year, $4,000,000 8% general obligation note payable and a 7 year, $2,000,000, 12% bond payable. Einsdorf Construction Inc. spent $4,000,000 on construction on July 1, 19x1 and $8,000,000 on October 1, 19x1. How much interest should be capitalized by Einsdorf at 12/31/x1?
a.$390,000
b.$483,333
c.$576,667
d.$770,000
e.none of the above. The answer is ______.
7. Radinsky Corp. uses the composite method of depreciation for its fleet of trains, planes, and automobiles. Radinsky retired one of its trucks and received cash from the salvage company. The net carrying value of the composite asset account was decreased by the
b. cash proceeds received.
b. cash proceeds received and the original cost of the truck.
c. cash proceeds received less the original cost of the truck.
d. original cost of the truck.
e. none of the above
8. Purchased goodwill should be written off
a.immediately by a charge to retained earnings
b.immediately as an extraordinary item
c.systematically over the periods benefited but not more than 40 years.
d.immediately as an expense on the income statement.
e.none of the above.
9. Durham Company bought machinery on January 1, 1989 which it depreciated using the straight-line method. The machinery had an estimated life of 15 years and no salvage value. On January 1, 1994, Durham estimates that the remaining life of this machinery is now 6 years (still no salvage value). How should this change be accounted for by Durham?
a.As a prior period adjustment (to retained earnings)
b.As the cumulative effect of a change in accounting principle.
c. By restating prior years' income statements.
d.By setting future depreciation expense equal to one-sixth the book value of the machinery on January 1, 1994.
e. none of the above
10. In January, 1993, Bere, Inc. purchased a strip mine for $4,250,000. Geologists estimate that the site has 2,000,000 tons of ore. Bere will have to spend about $1,000,000 to return the site to its original condition. Bere hopes to sell the site to the state as a park for $250,000 after restoration. During 1993, 500,000 tons were mined and 375,000 sold. What is the value of Bere's 1993 ending inventory?
a.$250,000
b.$312,500
c.$328,125
d.$937,500
e. none of the above. The answer is ______.
11. From the viewpoint of the employer, the amount of social security (FICA) taxes withheld from an employee's paycheck represents:
a. a current asset
b. wage expense
c.a current liability
d.revenue
e.none of the above
12. An event that does not result in the recording of a liability is
a. the sale of an automobile for cash by a manufacturer that will provide free maintenance for two years.
b. the sale of Chicago White Sox season baseball tickets during the month of January.
c. the declaration of stock dividends to be paid early next year.
d. the declaration of cash dividends to be paid early next year.
e. none of the above.
13. For 1994, Pac Co. estimated its 2-year equipment warranty costs based on
$100 per unit sold in 1994. Experience during 1995 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported
a. In 1995 income from continuing operations.
b. As an accounting change, net of tax, below 1995 income from continuing operations.
c. As an accounting change requiring 1994 financial statements to be
restated.
d. As a correction of an error requiring 1994 financial statements to be
restated.
e. none of the above.
14. Ryan Co. sells major household appliance service contracts for cash. The
service contracts are for a 1-year, 2-year, or 3-year period. Cash receipts
from contracts are credited to unearned service contract revenues. This
account had a balance of $720,000 at December 31, 1994 before year-end
adjustment. Service contract costs are charged as incurred to the service
contract expense account, which had a balance of $180,000 at December 31,
1994. Outstanding service contracts at December 31, 1994 expire as follows:
During 1995 - $150,000
During 1996 - 225,000
During 1997 - 100,000
What amount should be reported as unearned service contract revenues in
Ryan's December 31, 1994 balance sheet?
a. $540,000
b. $475,000
c. $295,000
d. $245,000
e. none of the above. The answer is ______.
15. Land was purchased to be used as the site for the construction of a plant.
A building on the property was sold and removed by the buyer so that
construction on the plant could begin. The proceeds from the sale of the
building should be
a. Classified as other income.
b. Deducted from the cost of the land.
c. Netted against the costs to clear the land and expensed as incurred.
d. Netted against the costs to clear the land and amortized over the life of
the plant.
e. none of the above.
16. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair
values. Each will use the other's goods to promote its own products. The retail price of the car that Vik gave up is less than the retail price of the clothes received. What gain should Vik recognize on the nonmonetary exchange?
a. A gain is not recognized.
b. A gain equal to the difference between the retail prices of the clothes
received and the car.
c. A gain equal to the difference between the retail price and the cost of
the car.
d. A gain equal to the difference between the fair value and the cost of the
car.
e. none of the above.
17. On January 1, 1992, Taft Co. purchased a patent for $714,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2007. During 1995, Taft determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 1995?
a. $428,400
b. $489,600
c. $514,080
d. $523,600
e. none of the above. The answer is ______.
18. During 1995, Lyle Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1, 1995. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated economic life of the patent is 10 years. What amount should Lyle capitalize for the patent on July 1, 1995?
a. $0
b. $41,000
c. $204,000
d. $245,000
e. none of the above. The answer is ______.
19. During 1995, Pitt Corp. incurred costs to develop and produce a routine,
low-risk computer software product, as follows:
Completion of detail program design $13,000
Costs incurred for coding and testing to
establish technological feasibility $10,000
Other coding costs after establishment
of technological feasibility $24,000
Other testing costs after establishment
of technological feasibility $20,000
Costs of producing product masters for
training materials $15,000
Duplication of computer software and
training materials from product masters
(1,000 units) $25,000
Packaging product (500 units) $ 9,000
In Pitt's December 31, 1995 balance sheet, what amount should be reported in
inventory?
a. $25,000
b. $34,000
c. $40,000
d. $49,000
e. none of the above. The answer is ______.
20. Which of the following costs associated with an internally developed patent
should be capitalized?
Research and DevelopmentPatent Registration
a. No Yes
b. No No
c. Yes No
d. Yes Yes
e. none of the above.
21. Gray Co. was granted a patent on January 2, 1991, and appropriately
capitalized $45,000 of related costs. Gray was amortizing the patent over
its estimated useful life of fifteen years. During 1994, Gray paid $15,000
in legal costs in successfully defending an attempted infringement of the
patent. After the legal action was completed, Gray sold the patent to the
plaintiff for $75,000. Gray's policy is to take no amortization in the year
of disposal. In its 1994 income statement, what amount should Gray report
as gain from sale of patent?
a. $15,000
b. $24,000
c. $27,000
d. $39,000
e. none of the above. The answer is ______.
22. Net income is understated if, in the first year, estimated salvage value is
excluded from the depreciation computation when using the
Straight-Line MethodUnits of Production Method
a. Yes No
b. Yes Yes
c. No No
d. No Yes
e. none of the above.
23. In calculating depreciation expense, estimated salvage value is ignored using which of the following methods?
a. Double-declining balance
b. Straight-line
c. Sum-of-the-years’-digits
d. Units of production
e. none of the above.
24. Accelerated depreciation assumes all of the following except that
a. repair expense is less in the early years than in the later years.
b. the asset provides more benefit in the early years.
c. obsolescence makes an asset less valuable in its later years.
d. asset benefit increases with each year of use.
e. all of the above are assumptions of accelerated depreciation.
25. Which of the following statements most appropriately describes depreciation?
a. Physical deterioration of plant assets.
b. Gradual obsolescence of plant assets.
c. Decline in value of plant assets.
d. Allocation of cost of plant assets.
Problem 1 (15 points): On 1/1/91, Company A purchased an asset for $60,000. The machine has an estimated useful life of 10 years and no salvage value. At 12/31/91, the machine has a fair market value of $69,000. Also on 1/1/91, Company B purchased an asset for $81,000. The machine has an estimated useful life of 10 years and no salvage value. At 12/31/91, the machine has a fair market value of $60,000. After recording depreciation for the year, the two companies exchange the assets and Company B also pays Company A $9,000 in cash.
Required: Prepare the necessary journal entries for both companies assuming (a) the assets are similar and (b) the assets are dissimilar.
Choose one of the following 2 essay questions (10 points).
1. Many airlines offer frequent-flier programs. What are the accounting issues involved in reporting the costs of such programs?
2. What are the alternative methods of accounting for oil and gas resources? What are their implications for the balance sheet and income statement? Which method do you think is conceptually superior and why?