Professional Documents
Culture Documents
In
2005, Yvo purchased a new machine and rearranged the assembly line to install this
machine.
The rearrangement did not increase the estimated useful life of the assembly line, but it did
result in significantly more efficient production.
The following expenditures were incurred in connection with this project:
Machine
Labor to install machine
Parts added in rearranging the assembly line to provide future benefits
Labor and overhead to rearrange the assembly line
$75,000
14,000
40,000
18,000
On January 2, 2005, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for
$400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on
Rea's board of directors. Rea reported net income of $500,000 for 2005, and paid dividends
of $150,000.
In its December 31, 2005, balance sheet, what amount should Well report as investment in
Rea?
A. $450,000
B. $435,000
Well has significant influence over Rea given the facts in the
question. Thus, Well should use the equity method to
account for its investment.
On December 31, 2004, Roth Co. issued a $10,000 face value note payable to Wake Co. in
exchange for services rendered to Roth.
The note, made at usual trade terms, is due in nine months and bears interest, payable at
maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest
factor of $1 due in nine months at 8% is .944.
At what amount should the note payable be reported in Roth's December 31, 2004 balance
sheet?
A. $10,300
B. $10,000
This note is a short-term note. Such notes are reported at
face value because the difference between present value and
face value is not considered significant due to the short note
term.
C. $9,652
D. $9,440
Question #4 (AICPA.950537FARFA)
Rye Co. purchased a machine with a four-year estimated useful life and an estimated 10%
salvage value for $80,000 on January 1, 2003. In its income statement, what would Rye
report as the depreciation expense for 2005 using the double declining balance method?
A. $9,000
B. $10,000
The DDB method ignores salvage value in the annual
calculation of depreciation expense. The rate of depreciation
is 2/useful life. Preceding depreciation amounts are
subtracted from cost; the book value at the beginning of the
year is the base for computing depreciation for that year.
Depreciation, 2003 = $80,000(2/4) = $40,000
Depreciation, 2004 = ($80,000 - $40,000)(2/4) = $20,000
Depreciation, 2005 = ($80,000 - $40,000 - $20,000)(2/4) =
$10,000
The salvage value is 10%($80,000) = $8,000.
$20,000
$12,000
$6,000
$38,000
D. $42,000
Question #6 (AICPA.950513FARFA)
During 2005, Jase Co. incurred research and development costs of $136,000 in its
laboratories relating to a patent that was granted on July 1, 2005. Costs of registering the
patent equaled $34,000. The patent's legal life is 17 years, and its estimated economic life
is 10 years.
In its December 31, 2005, balance sheet, what amount should Jase report as patent, net of
accumulated amortization?
A. $32,300
The capitalized cost of the patent includes only the $34,000
cost of registration. The R & D costs are expensed as
incurred. Thus, the ending net book value of the patent
equals: $34,000 - $34,000(1/10)(1/2) = $32,300.
The economic life, rather than the legal life, is used for
amortization purposes because it is the shorter of the two
and represents a better estimate of the actual useful life of
Weir Co. uses straight-line depreciation for its property, plant, and equipment, which,
stated at cost, consisted of the following:
Land
Buildings
Machinery and equipment
Less accumulated depreciation
12/31/05
12/31/04
$ 25,000
195,000
695,000
915,000
400,000
$515,000
=======
$ 25,000
195,000
650,000
870,000
370,000
$500,000
======
Weir's depreciation expense for 2005 and 2004 was $55,000 and $50,000, respectively.
What amount was debited to accumulated depreciation during 2005 because of property,
plant, and equipment retirements?
A. $40,000
B. $25,000
Accumulated depreciation increased a net of $30,000 during
2005 (the change in the balance as reflected in the
comparative statements). Yet depreciation expense for 2005
is $55,000. This expense increases accumulated depreciation
by $55,000.
Therefore, there must have been a decrease in accumulated
depreciation of $25,000 in 2005 ($55,000 - $30,000) for
there to have been a net increase of $30,000 in the account.
Decreases in this account come about through the sale of
plant assets.
C. $20,000
D. $10,000
Question #8 (AICPA.931125FARP1-FA)
On January 2, 2004, Judd Co. bought a trademark from Krug Co. for $500,000.
Judd retained an independent consultant, who estimated the trademark's remaining life to
be unlimited because the trademark will be renewed indefinitely. Its unamortized cost on
Krug's accounting records was $380,000. At the time of sale, Krug estimated the useful life
of the trademark to be 50 years.
In Judd's December 31, 2004 balance sheet, what amount should be reported as
accumulated amortization?
A. $7,600
B. $9,500
C. $10,000
This answer is incorrect. The trademark is not subject to
amortization, only impairment. The firm expects to renew
the trademark indefinitely. Therefore, the trademark is
considered to have an indefinite life. Indefinite life
intangibles are no longer amortized.
D. $0
The trademark is expected to be renewed indefinitely.
Therefore, it should be treated as an indefinite life
intangible. This category of intangibles is not subject to
amortization. There would be no need for an amortization
account.
Question #9 (AICPA.061202FAR)
Cart Co. purchased an office building and the land on which it is located for $750,000 cash
and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at
$960,000, 60% of which is allocated to the building.
At what amount should Cart record the building?
A. $500,000
This response allocates the total cost equally to the land
and building. With the market value information provided,
the building should receive 60% of the total cost of the
purchase, or $600,000.
B. $576,000
C. $600,000
Based on the real estate tax information, the building
accounts for 60% of the total cost of the purchase, based
on market value. The total cost of both building and land is
$1 million ($750,000 cash + $250,000 mortgage assumed).
Market value is used as the means of allocating the total
cost to the two components. 60% of the $1 million total
cost yields $600,000 allocated to the building.
D. $960,000
Question #10 (AICPA.081233FARSIM)
Up Company owns 60% of SideCo, and Down Company owns the other 40% of SideCo. Up
Company and Down Company are competitors in the same market. Which one of the
following sets reflects the most likely level of influence each company has over SideCo?
Up Company
Down Company
Significant
None
Control
None
Because Up Company owns more than 50% of SideCo, it will have control of SideCo.
Because Down Company owns only 40% of SideCo, while Up Company owns
controlling interest and the two companies are competitors, Down Company is not
likely to be able to exert any influence over SideCo.
Significant
Significant
Because Up Company owns more than 50% of SideCo, it will have control of SideCo,
not simply have significant influence over SideCo. Because Down Company owns only
40% of SideCo, while Up Company owns controlling interest and the two companies
are competitors, Down Company is not likely to be able to exert any (significant)
influence over SideCo.
Control
Significant
On July 1, 2005, Casa Development Co. purchased a tract of land for $1,200,000. Casa
incurred additional costs of $300,000 during the remainder of 2005 in preparing the land
for sale. The tract was subdivided into residential lots as follows:
Lot Class
A
B
C
Number of lots
100
100
200
Using the relative sales value method, what amount of costs should be allocated to the
Class A lots?
A. $300,000
B. $375,000
C. $600,000
The total cost is allocated to each lot class based on the
proportion of its sales value to the total sales value of all
lots.
Total cost equals $1,500,000 ($1,200,000 + $300,000).
Total sales value equals 100($24,000) + 100($16,000) +
200($10,000) = $6,000,000.
Cost allocated to class A lots = $1,500,000[100($24,000)/
$6,000,000] = $600,000.
D. $720,000
Question #12 (AICPA.051180FARFA)
On January 2 of the current year, Cruises, Inc. borrowed $3 million at a rate of 10% for
three years and began construction of a cruise ship. The note states that annual payments
of principal and interest in the amount of $1.3 million are due every December 31. Cruises
used all proceeds as a down payment for construction of a new cruise ship that is to be
delivered two years after the start of construction. What should Cruise report as interest
expense related to the note in its income statement for the second year?
A. $0
The firm used the entire proceeds of the loan for
construction purposes. Average accumulated expenditures
thus equals or exceeds the note principal. The entire
amount of interest cost on the loan is capitalized to the
ship balance under FAS 34, which considers such interest
as a necessary part of the construction cost. If the loan
balance had exceeded the amount of proceeds from the
loan paid for construction, then some of the interest would
have been expensed. Interest capitalization is limited to
the average amount of construction expenditures in the
project for the period. As of the beginning of the second
year, the balance in construction in progress was equal to
or greater than $3 million because the entire proceeds
were immediately invested in the construction process.
B. $300,000
C. $600,000
D. $900,000
Question #13 (AICPA.010506FARFA)
Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, 2005, for
$400,000.
The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair
values equaled carrying amounts for all items except equipment, for which fair values
exceeded carrying amounts by $100,000.
The equipment has a five year life. Goodwill, if any, is expected to have a useful life of 10
years. During 2005, Straw reported net income of $150,000.
What amount of income from this investment should Puff report in its 2005 income
statement?
A. $40,000
B. $52,000
Puff's 40% ownership of Straw's voting common stock (in
the absence of evidence otherwise) is assumed to give Puff
significant influence (but not control) over Straw and
requires that Puff account for its investment in Straw using
the equity method of accounting. At the date of its
investment, Puff must determine the difference, if any,
between the cost of its investment and
(1) the book value acquired, and
(2) the fair value acquired. Those calculations are:
Cost of investment
$400,000
Book value acquired (.40 x $900,000)
360,000
Excess cost > Book value acquired
$ 40,000
Allocated to:
FV of Equipment ($100,000 x .40)
40,000
Excess Cost > FV acquired
$ -0- (No goodwill)
Under the equity method, Puff will recognize its share of
The discount resulting from the determination of a note payable's present value should be
reported on the balance sheet as a(an)
A. Addition to the face amount of the note.
B. Deferred charge separate from the note.
C. Deferred credit separate from the note.
D. Direct reduction from the face amount of the note.
The discount is often recorded in an account such as
"discount on note." This account is contra to the note
payable and is subtracted from the face value of the note in
determining the note's book value. Subtracting the
discount reduces the book value to present value.
Question #15 (AICPA.920512FARTH-FA)
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. Netted against the costs to clear the land and expensed as
incurred.
B. Netted against the costs to clear the land and amortized over
the life of the plant.
C. Deducted from the cost of the land.
The cost to raze the old building is included in the cost of
the land because it is a cost incurred to prepare the land for
use. The salvage proceeds are a reduction in this cost, and
thus reduce the final cost of the land.
D. Classified as other income.
Question #16 (AICPA.910520FAR-
TH-FA)
Park Co. uses the equity method to account for its January 1, 2004, purchase of Tun Inc.'s
common stock.
On January 1, 2004, the fair values of Tun's FIFO inventory and land exceeded their
carrying amounts.
How do these excesses of fair values over carrying amounts affect Park's reported equity in
Tun's 2004 earnings?
Inventory
excess
Land excess
Decrease
Decrease
Decrease
No effect
Under the equity method, Park will recognize its share of Tun's net income in its own
income statement as investment revenue. The portion of Park's investment that is its
share of the excess of Tun's fair value over book value of the FIFO inventory no longer
exists at the end of 2004.
The inventory has been sold by Tun. Park must decrease its equity in income of Tun
because Tun's net income reflects the book value of the inventory. Tun's cost of goods
sold is the book value of the inventory sold but Park's corresponding amount must
reflect the price it paid (market value) and adjust its equity in income accordingly.
There is no adjustment for Park's share of the excess of Tun's fair value over book
value of land because land is not depreciated. Tun's income reflects no depreciation for
land and thus Park's equity in income requires no adjustment.
Increase
Increase
Increase
No effect
On July 1, 2005, Pell Co. purchased Green Corp. ten-year, 8% bonds with a face amount of
$500,000 for $420,000. The bonds mature on June 30, 2013 and pay interest semi-annually
on June 30 and December 31. Pell has the intent and ability to hold the bonds until
maturity.
Using the interest method, Pell recorded bond discount amortization of $1,800 for the six
months ended December 31, 2005.
For this held-to-maturity investsment, Pell should report 2005 revenue of
A. $16,800
B. $18,200
C. $20,000
D. $21,800
The journal entry to record interest revenue on December
31, 2005 is:
20,000
1,800
Interest revenue
21,800
Jersey, Inc. is a retailer of home appliances and offers a service contract on each appliance
sold. Jersey sells appliances on installment contracts, but all service contracts must be paid
in full at the time of sale.
Collections received for service contracts should be recorded as an increase in a
A. Deferred revenue account.
The firm has no revenue until the service period begins. At
receipt, the firm has an obligation to honor the customer's
request for service, measured in the amount of the cash
collected. Until the service period begins, there is no earned
revenue.
The firm records the receipt in a deferred revenue account
(liability), and gradually recognizes revenue over the
contract period.
B. Sales contracts receivable valuation account.
C. Stockholders' valuation account.
D. Service revenue account.
Question #19 (AICPA.911141FARP1-FA)
On January 1, 2005, Mega Corp. acquired 10% of the outstanding voting stock of Penny,
Inc.
On January 2, 2006, Mega gained the ability to exercise significant influence over financial
and operating control of Penny by acquiring an additional 20% of Penny's outstanding
stock. The two purchases were made at prices proportionate to the value assigned to
Penny's net assets, which equaled their carrying amounts.
For the years ended December 31, 2005 and 2006, Penny reported the following:
2005
2006
Dividends paid
Net income
$200,000
600,000
$300,000
650,000
In 2006, what amounts should Mega report as current year investment income and as an
adjustment, before income taxes, to 2005 investment income?
2006
investment
income
$195,000
$160,000
$195,000
$100,000
$195,000
$40,000
The second investment purchase brings Mega significant influence over Penny. This
requires a retroactive change to 2005 (the adjustment referred to in the question).
The adjustment amount is based on the 10% ownership during 2005 and equals the
amount of revenue that would have been recognized under the equity method less the
amount of dividends recognized as revenue in 2005 (the equity method was not used
in 2005).
Under the equity method, the amount of investment income recognized is Mega's
share of Penny's income for the year. The dividends reduce the investment account
and are not recognized in Mega's income under the equity method.
2006 investment income
2005 adjustment
= .30($650,000)
= .10($600,000) - .10($200,000)
= $195,000
= $40,000
$40,000
In November and December 2005, Dorr Co., a newly organized magazine publisher,
received $72,000 for 1,000 three-year subscriptions at $24 per year, starting with the
January 2006 issue. Dorr elected to include the entire $72,000 in its 2005 income tax
return.
What amount should Dorr report in its 2005 income statement for subscriptions revenue?
A. $0
No revenue is recognized for accounting purposes because no magazines have been
published and distributed as of the end of 2005. The entire amount received is
deferred revenue. The treatment for tax purposes does not change the reporting for
financial statement purchases. Revenue is earned when magazines are sent to
subscribers.
B. $4,000
C. $24,000
D. $72,000