COMPREHENSIVE EXAMINATION C

PART 3
(Chapters 1014)
Problem C-I Multiple Choice Tangible and Intangible Assets.
Choose the best answer for each of the following questions and enter the
identifying letter in the space provided.
____ 1. When the sum-of-the-years'-digits method is used, depreciation expense
for a given asset will
a. decline by a constant amount each year.
b. be the same each year.
c. decrease rapidly and then slowly over the life of the asset.
d. vary from year to year in relation to changes in output.
____ 2. Perry Corporation acquired land, buildings, and equipment from a
bankrupt company at a lump-sum price of $550,000. At the time of
acquisition Perry paid $50,000 to have the assets appraised. The
appraisal disclosed the following values:
Land
$320,000
Buildings
256,000
Equipment
64,000
What cost should be assigned to the land, buildings, and equipment,
respectively?
a. $400,000, $320,000, and $80,000.
b. $275,000, $220,000, and $55,000.
c. $300,000, $240,000, and $60,000.
d. $200,000, $200,000, and $200,000.
____ 3. In accordance with GAAP, the maximum period over which a patent can
be amortized is
a. 20 years.
b. 28 years.

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c. 40 years.
d. 50 years.
____ 4. Purchased goodwill represents
a. excess of price paid over fair value of net assets obtained in a
combination.
b. excess of price paid over the book value of the net assets obtained in
a combination.
c. the difference in the aggregate amount of the market prices of the
stock of the combining companies.
d. a tangible asset.
Use the following data to answer questions 5 through 9:
Davis Company purchased a new piece of equipment on July 1, 2012 at a cost
of $1,080,000. The equipment has an estimated useful life of 5 years and an
estimated salvage value of $90,000. The current year end is 12/31/13. Davis
records depreciation to the nearest month.
____ 5. What is straight-line depreciation for 2013?
a. $99,000.
b. $108,000.
c. $198,000.
d. $216,000.
____ 6. What is sum-of-the-years'-digits depreciation for 2013?
a. $263,999.
b. $947,000.
c. $324,000.
d. $330,000.
____ 7. What is double-declining-balance depreciation for 2013?
a. $2,59,200.
b. $345,600.

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c. $396,000.
d. $432,000.
____ 8. If Davis expensed the total cost of the equipment at 7/1/12, what was
the effect on 2012 and 2013 income before taxes, assuming Davis uses
straight-line depreciation?
a. $882,000 understated and $198,000 overstated.
b. $972,000 understated and $108,000 overstated.
c. $981,000 understated and $198,000 overstated.
d. $1,080,000 understated and $108,000 overstated.
____ 9. If, at the end of 2014, Davis Company decides the equipment still has
five more years of life beyond 12/31/14, with a salvage value of
$90,000, what is straight-line depreciation for 2014? (Assume straightline used in all years.)
a. $108,000.
b. $115,500.
c. $130,500.
d. $198,000.
Use the following data for questions 10 through 17. Each question is
independent of the other questions.
Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/12 for
$360,000. On 12/31/12 such machines have a selling price and fair market
value of $414,000. When used in production, such machines have an estimated
useful life of 10 years with no salvage value. Use the straight-line method.
Brown Corporation has a machine (Machine B) that it acquired on 1/1/12 for
$486,000. On 12/31/12 such machines have a selling price and fair market
value of $360,000. When used in production, such machines have an estimated
useful life of 10 years with no salvage value. Use the straight-line method.

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Comprehensive Exam C

On 12/31/12 Brown gave Machine B plus $54,000 cash to Sawyer in return for
Machine A.
____10. Assume that both Sawyer and Brown are new machine dealers and that
the machines are still new. Also assume that the exchange lacks
commercial substance. At what amount will Machine A be recorded on
Browns books?
a. $486,000.
b. $414,000.
c. $540,000.
d. $360,000.
____11. Given the assumptions in 10 above, at what amount will Machine B be
recorded on Sawyer's books?
a. $313,043.
b. $486,000.
c. $360,000.
d. $421,044.
____12. Assume that instead of dealers, both Sawyer and Brown are machine
manufacturers and use the machines in production. Assume the
exchange lacks commercial substance. At what amount will Brown
record Machine A?
a. $360,000.
b. $414,000.
c. $486,000.
d. $540,000.
____13. Given the assumption in 12 above, at what amount will Sawyer record
Machine B?
a. $371,739.
b. $270,000.
c. $335,736.

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d. $281,739.
_14.Given the assumption in 12 above except that the fair values of Machines A
and B are $504,000 and $450,000, respectively, at what amount will Brown
record Machine A?
a. $437,400.
b. $504,000.
c. $450,000.
d. $491,400.
____15. Return to the original problem. Assume that Sawyer is a dealer selling
new machines and that Brown is a manufacturer. Assume that the
exchange has commercial substance. For this transaction, at what
amount will Sawyer record the truck?
a. $360,000.
b. $491,400.
c. $414,000.
d. $437,400.
____16. Given the assumptions in 15 above, at what amount will Brown record
Machine A?
a. $360,000.
b. $414,000.
c. $405,000.
d. $364,500.
____17. Given the assumptions in 15 above except that the selling prices and fair
market values of A and B are $504,000 and $450,000, respectively, at
what amount will Brown record Machine A?
a. $437,400.
b. $405,000.
c. $504,000.
d. $450,000.

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Comprehensive Exam C

For the following two questions, indicate the nature of the account or accounts
to be debited when recording each transaction.
____18. A replacement, which extended the life but did not increase the quality
of units produced by the asset, cost $15,000.
a. Asset(s) only.
b. Accumulated amortization, or depletion or depreciation only.
c. Expense only.
d. Asset(s) and expense.
____19. Jim Dolan and Matt Stine, maintenance repairmen, spent five days in
unloading and setting up a new $30,000 precision machine in the plant.
Their wages earned in this five-day period totaled $800.
a. Asset(s) only.
b. Accumulated amortization, depletion, or depreciation only.
c. Expense only.
d. Asset(s) and expense.
____20. Property, plant, and equipment are conventionally presented in the
balance sheet at
a. replacement cost less accumulated depreciation.
b. historical cost less salvage value.
c. original cost less accumulated depreciation.
d. acquisition cost less net book value thereof.
____21. As generally used in accounting, what is depreciation?
a. It is a process of asset valuation for balance sheet purposes.
b. It applies only to long-lived intangible assets.
c. It is used to indicate a decline in market value of a long-lived asset.
d. It is an accounting process which allocates long-lived asset cost to
accounting periods.
Problem C-II Assignment of Costs.

Comprehensive Exam C

Match the following cost items with these appropriate accounts:

a. Land
b. Buildings

c. Land Improvements
d. Other

____ 1. Interest cost incurred during building construction.

____ 2. Back taxes on purchased plot of land to be used for building site.
____ 3. Assessment by city for drainage system.
____ 4. Building permits.
____ 5. Landscaping shrubs planted after building has been constructed.
____ 6. Demolition costs of building on land bought for plant site.
____ 7. Interest cost incurred after completion of building construction.
____ 8. Recording fees for land.
____ 9. Architect's fees.
____10. Grading and filling building site.
____11. Parking lots.
____12. Fences.
Problem C-III Research and Development.
Identify (in accordance with FASB Statement No. 2) each of the following
activities as:
a. Research and development
b. Not research and development
____ 1. Testing in search for, or evaluation of, product or process alternatives.
____ 2. Cost of marketing research to promote new product.
____ 3. Adaptation of an existing capability to a particular requirement or
customer's need.

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Comprehensive Exam C

____ 4. Design, construction, and testing of pre-production prototypes and

models.
____ 5. Routine, on-going efforts to refine, enrich, or improve the qualities of
an existing product.
____ 6. Engineering activity required to advance the design of a product to the
manufacturing stage.
____ 7. Searching for applications of new research findings.
____ 8. Laboratory research aimed at discovery of new knowledge.
____ 9. Conceptual formulation and design of possible product or process
alternatives.
____10. Trouble-shooting break-downs during production.
____11. Periodic design changes to existing products.
____12. Quality control during commercial production including routine
testing.
____13. Costs of testing prototype and design modifications.
____14. Engineering follow-through in an early phase of production.
____15. Design, construction, and operation of a pilot plant not useful for
commercial production.
Problem C-IV Exchange of Assets.
Assume that the following cases are independent and rely on the following
data. Make entries on the books of both companies.
Jensen Co. Merton Co.
Equipment (cost)
$900,000 $1,650,000
Accumulated depreciation
290,000
900,000
Fair value of equipment
700,000
700,000
1. Jensen Co. and Merton Co. traded the above equipment. The exchange has
commercial substance.

Comprehensive Exam C

Jensen Co.'s Books:

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Merton Co.'s Books:

2. Jensen Co. and Merton Co. traded the above equipment. The exchange lacks
commercial substance.
Jensen Co.'s Books:
Merton Co.'s Books:
Assume that the following cases are independent and rely on the following
data. Make entries on the books of both companies.
Jensen Co. Merton Co.
Equipment (cost)
$900,000 $1,650,000
Accumulated depreciation
290,000 1,050,000
Fair value of equipment
560,000
700,000
Cash received (paid)
(140,000)
140,000
3. Jensen Co. and Merton Co. traded the above equipment. The exchange has
commercial substance.
Jensen Co.'s Books:
Merton Co.'s Books:
4. Jensen Co. and Merton Co. traded the above equipment. The exchange lacks
commercial substance.
Jensen Co.'s Books:
Merton Co.'s Books:
Problem C-V Long-Term Debt.
1. On March 31, 2009, Hanson Corporation sold $7,000,000 of its 8%, 10-year
bonds for $6,730,500 including accrued interest. The bonds were dated
January 1, 2009. Interest is paid semiannually on January 1 and July 1. On
April 1, 2013, Hanson purchased 1/2 of the bonds on the open market at 99

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Comprehensive Exam C

plus accrued interest and canceled them. Hanson uses the straight-line
method for amortization of bond premiums and discounts.
(a)

What was the amount of the gain or loss on retirement of the bonds?

(b)
Prepare the journal entry needed at April 1, 2013 to record retirement
of the bonds. Assume that interest and premium or discount amortization
have been recorded through January 1, 2013. Record interest and
amortization on only the bonds retired.
(c)
Prepare the journal entry needed at July 1, 2013 to record interest and
premium or discount amortization.

2. On January 1 of the current year, Feller Corporation issued $3,000,000 of

10% debenture bonds on a basis to yield 9%, receiving $3,134,580. Interest
is payable annually on December 31 and the bonds mature in 6 years. The
effective-interest method is used.
(a)

What is the interest expense for the first year?

(b)

What is the interest expense for the second year?

3. On October 1, 2012, Noller Company issued $4,000,000 par value, 10%, 10year bonds dated July 1, 2012, with interest payable semiannually on January
1 and July 1. The bonds are issued at $4,542,000 (to yield 8%) plus accrued
interest. The effective interest method is used.
(a)

Prepare the journal entry at the date the bonds are issued.

(b)
Prepare the adjusting entry at December 31, 2012, the end of the
fiscal year.

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(c)

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Prepare the entry for the interest payment on January 1, 2013.

Problem C-VI Depreciation Methods.

A high-speed multiple-bit drill press costing $720,000 has an estimated salvage
value of $60,000 and a life of ten years. What is the annual depreciation for
each of the first two full years under the following depreciation methods?
1. Double-declining-balance method:
a. Year one, $______________.
b. Year two, $______________.
2. Units of production (activity) method (lifetime output is estimated at 110,000
units; the press produced 12,000 units in year one and 18,000 in year two):
a. Year one, $______________.
b. Year two, $______________.
3. Sum-of-the-years'-digits method:
a. Year one, $______________.
b. Year two, $______________.
4. Straight-line depreciation method:
a. Year one, $______________.
b. Year two, $______________.

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Comprehensive Exam C

Problem C-VII Current Liabilities.

Moon Company includes 1 coupon in each box of soap powder that it packs, 20
coupons being redeemable for a premium consisting of a kitchen utensil. In
2012, Moon Company purchased 18,000 premiums at $1.00 each and sold
540,000 boxes of soap powder @ $4.00 per box. Based on past experience, it is
estimated that 60% of the coupons will be redeemed. During 2012, 144,000
coupons were presented for redemption.
During 2013, 29,000 premiums were purchased at $1.10. The company sold
1,200,000 boxes of soap at $4.00 and 495,000 coupons were presented for
redemption.
Instructions
Prepare all the entries that would be made relative to sales of soap powder and
to the premium plan in both 2012 and 2013. Assume a FIFO inventory flow.
*Problem C-VIII Accounting for Troubled Debt Restructurings.
On December 31, 2012, Federal Bank enters into a debt restructuring
agreement with Carson Company which is experiencing financial difficulties.
The bank restructures a $3,000,000 note receivable by:
1. Reducing the principal obligation from $4,000,000 to $3,200,000.
2. Extending the maturity date from 12/31/12 to 12/31/15, and
3. Reducing the interest rate from 12% to 6%.
Interest has been paid up to date as of 12/31/12.
Instructions
Discuss the nature of this transaction, indicating whether any gain or loss is
recognized by either party and preparing any 12/31/12 journal entries that may
be required by the debtor (Carson).

Comprehensive Exam C

Solutions Comprehensive Examination C

Problem C-I Solution.
1. a
7. b
2. c
8. c
3. a
9. b
4. a
10. b
5. c
11. a
6. b
12. b

13.
14.
15
16.
17.
18.

d
d
a
b
c
b

19. a
20. c
21. d

Solutions to selected computational Multiple Choice questions.

6. ($990,000 5/15 1/2) + ($990,000 4/15 1/2) = $297,000.
7. $1,080,000 .4 1/2 = $216,000; ($1,080,000 $216,000) .4 =
$345,000.
9. ($1,080,000 $297,000 $90,000) 1/6 = $115,500.
11. $360,000 (360/414 $54,000) = $313,043.
13. $360,000 (360/414 $90,000) = $281,739.
Problem C-II Solution.
1. b
6. a
11. c
2. a
7. d
12. c
3. a
8. a
4. b
9. b
5. a
10. a

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Problem C-III Solution.

1. a
6. a
11.
2. b
7. a
12.
3. b
8. a
13.
4. a
9. a
14.
5. b
10. b
15.

b
b
a
b
a

Problem C-IV Solution.

1. Jensen Co.'s Books
Merton Co.'s Books
Equipment 700,000
Equipment
700,000
Accum. Depreciation290,000
Accum. Depreciation900,000
Gain on Disposal 90,000 Loss on Disposal50,000
Equipment
900,000
Equipment
1,650,000
2. Equipment 610,000
Same as 1.
Accum. Depreciation290,000
Equipment
900,000
3. Equipment 700,000
Equipment
560,000
Accum. Depreciation290,000
Accum. Depreciation1,050,000
Loss on Disposal50,000
Cash
140,000
Equipment
900,000
Gain on Disposal 100,000
Cash
140,000
Equipment
1,650,000
4. Same as 3.

Equipment
480,000
Accum. Depreciation1,050,000
Cash
140,000
Gain on Disposal 20,000
Equipment
1,650,000
[$140,000 ($140,000 + $560,000)
$100,000 = $20,000 gain]

Comprehensive Exam C

Problem C-V Solution.

1. (a)
Face amount of bonds
Total selling price
$6,730,500
Less accrued interest ($7,000,000 .08 3/12)
Carrying value at 3/31/09
$6,590,500

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$7,000,000
400,000

Discount at 3/31/09
$409,500
Less discount amortized ($409,500 117 mos. 48 months)
168,000
Unamortized discount at 4/1/13
241,500
Carrying value at 4/1/13
$6,758,500
Carrying value of 1/2 of the bonds
$ 3,379,250
Less acquisition price ($7,000,000 .99 1/2)
3,465,000
Loss on retirement
$ 85,750
(b)

Interest Expense ................................ 75,250

Discount on Bonds Payable ($1,750 3)
Cash ...................................................
(To accrue interest to 4/1/13:
$7,000,000 .08 3/12 1/2 = $70,000)

5,250
70,000

Bonds Payable ...........................................3,500,000

Loss on Redemption of Bonds................... 85,750
Discount on Bonds Payable ($241,500 1/2)
Cash ...................................................
3,465,000
(To remove carrying value of bonds)
(c) Interest Expense ........................................150,500
Discount on Bonds Payable ..............
10,500
Cash ...................................................
140,000
(Discount amortization:
$409,500 117 mos. 6 mos. 1/2 = $10,500)

120,750

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2. (a)

First year interest expense:

$3,134,580 .09 = $282,112

(b)

Second year interest expense:

$300,000 $282,112 = $17,888

Premium amortization (First year).

$3,134,580 $17,888 = $3,116,692

beginning of the second year.

Book value of bonds at the

$3,116,692 .09 = $280,502 Interest expense.

3. (a)

Cash .....................................................4,642,000
Bonds Payable ...................................
4,000,000
Premium on Bonds Payable ..............
542,000
Interest Payable .................................
100,000

(b)
Interest Expense ................................ 90,840
Premium on Bonds Payable ...................... 9,160
Interest Payable .................................
100,000
(Interest expense: $4,542,000 .08 3/12 = $90,840)
(c)

Interest Payable .................................200,000

Cash ...................................................
200,000

Problem C-VI - Solution.

1. a. $144,000
b. $115,200
2. a. $72,000
b. $108,000

Comprehensive Exam C

3. a. $120,000
b. $108,000
4. a. $66,000
b. $66,000
Problem C-VII Solution.
2012
Premium Inventory (2012) ................................ 18,000
Cash (or Accounts Payable) ......................
18,000
(18,000 $1.00)
Cash (or Accounts Receivable) .........................2,160,000
Sales Revenve............................................
2,160,000
(540,000 $4.00)
Premium Expense ............................................. 7,200
Premium Inventory (2012) ........................
(144,000 20 = 7,200 $1.00 = $7,200)

7,200

Premium Expense ............................................. 9,000

Premium Liability .....................................
9,000
540,000 .60 = 324,000 coupons
324,000 144,000 = 180,000 20 = 9,000 premiums
9,000 $1.00 = $9,000)
2013
Premium Inventory (2013) ................................ 31,900
Cash (or Accounts Payable) ......................
31,900
(29,000 $1.10)
Cash (or Accounts Receivable) .........................4,800,000
Sales Revenve............................................
4,800,000
(1,200,000 $4.00)

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Comprehensive Exam C

Premium Liability ............................................... 9,000

Premium Inventory (2012) ..........................
9,000
(9,000 $1.00 = $9,000; balance of 2012 coupons redeemed)
Premium Expense ...............................................17,145
Premium Inventory (2012) ..........................
1,800
18,000 7,200 9,000 = 1,800 $1.00 = $1,800]
Premium Inventory (2013) ..........................
15,345
[495,000 20 = 24,750 (1,800 + 9,000) = 13,950 $1.10
= $15,345]
Premium Expense ...............................................22,275
Premium Liability .......................................
22,275
[Total 2013 coupons estimated to be redeemed: 1,200,000 .60 = 720,000
Coupons redeemed in 2013
495,000
Coupons redeemed in 2013 attributable to 2012 (180,000) 315,000
Coupons estimated to be redeemed subsequent
to 2013
405,000
Estimated liability 405,000 20 = 20,250 $1.10)

$22,275]

Problem C-VIlI Solution.

The transaction between Carson Company and Federal Bank represents a
"troubled debt restructuring," wherein there is a continuation of the debt with a
modification of terms. Because the total future cash flows after restructuring of
$3,776,000 are less than the total prerestructure carrying amount of $4,000,000,
the debtor must record a gain and the creditor must record a loss due to the
restructuring of the debt.

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Carson Company would record the debt restructure as follows on December 31,
2012:
Note Payable......................................................224,000*
Gain on Restructured Debt.........................
224,000
*[$4,000,000 ($3,200,000 + $192,000 + $192,000 + $192,000)]
Because the new effective interest rate is 0%, all of the future cash flows reduce
the principal balance, and no interest expense would be recognized by the
debtor throughout the remainder of the note.
Federal Bank would calculate its loss based upon the expected future cash
flows discounted at the historical effective rate of the loan. The loss on
restructuring is written off against the allowance account and the note
receivable is reduced.