Name: __________________________

Section: 501

University of Texas at Arlington

Mid-Term 3
Acct 5311- Spring 2008
Chandra Subramaniam

THIS EXAM IS 80 MINUTES LONG.

This exam consists of 3 problems. The first problem uses the multiple choice format. Please use
your Scantron sheet for this section. Answer the remaining problems in the space provided in
this exam. Please make sure that you have ten (10) pages including this cover page.

There are 100 total possible points. Allocate an appropriate amount of time to each question.

The only materials you are permitted to use on this exam are (1) a calculator, (2) a pencil with
eraser or pen.

Be sure to note the relevant dates referred to in each question.

Point Allocation
Problem 1 …………………………….40
Problem 2 …………………………….40
Problem 3 …………………………….20

Total Possible points 100

GOOD LUCK!
Multiple Choice ( 2 points each)

1. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is
located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the
site. The cost of the Holiday Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be
torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

2. If a corporation purchases a lot and building and subsequently tears down the building
and uses the property as a parking lot, the proper accounting treatment of the cost of the
building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost
of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.

3. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.

4. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a
building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the
actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are
temporarily invested, any interest earned should be offset against interest cost
incurred when determining the amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by multiplying a
weighted average interest rate by the amount of average accumulated expenditures
on qualifying assets during the period.

5. The King-Kong Corporation exchanges one plant asset for a similar plant asset and
gives cash in the exchange. The exchange is not expected to cause a material change
in the future cash flows for either entity. If a gain on the disposal of the old asset is
indicated, the gain will
a. be reported in the Other Revenues and Gains section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner's capital account.

2
6. An improvement made to a machine increased its fair market value and its production
capacity by 25% without extending the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.

7. Tyson Chandler Company purchased equipment for $10,000. Sales tax on the purchase
was $500. Other costs incurred were freight charges of $200, warranty costs of one year
for $350, and installation costs of $225. What is the cost of the equipment?
a. $10,000
b. $10,500
c. $10,925
d. $11,275

8. Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average

accumulated expenditures were $4,000,000, actual interest was $600,000, and
avoidable interest was $300,000. If the salvage value is $800,000, and the useful life is
40 years, depreciation expense for the first full year using the straight-line method is
a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.

9. Quayle Company acquired machinery on January 1, 2002 which it depreciated under the
straight-line method with an estimated life of fifteen years and no salvage value. On
January 1, 2007, Quayle estimated that the remaining life of this machinery was six
years with no salvage value. How should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book value on January
1, 2007
d. By continuing to depreciate the machinery over the original fifteen year life

10. George Martin Corporation purchased a depreciable asset for $300,000 on January 1,
2005. The estimated salvage value is $30,000, and the estimated useful life is 9 years.
The straight-line method is used for depreciation. In 2008, George Martin changed its
estimates to a total useful life of 5 years with a salvage value of $50,000. What is 2008
depreciation expense?
a. $30,000
b. $50,000
c. $80,000
d. $90,000

3
11. Jantz Corporation purchased a machine on July 1, 2004, for $750,000. The machine
was estimated to have a useful life of 10 years with an estimated salvage value of
$42,000. During 2007, it became apparent that the machine would become
uneconomical after December 31, 2011, and that the machine would have no scrap
value. Accumulated depreciation on this machine as of December 31, 2006, was
$177,000. What should be the charge for depreciation in 2007 under generally accepted
accounting principles?
a. $106,200
b. $114,600
c. $123,000
d. $143,250

12. Klein Co. purchased machinery on January 2, 2001, for $440,000. The straight-line
method is used and useful life is estimated to be 10 years, with a $40,000 salvage value.
At the beginning of 2007 Klein spent $96,000 to overhaul the machinery. After the
overhaul, Klein estimated that the useful life would be extended 4 years (14 years total),
and the salvage value would be $20,000. The depreciation expense for 2007 should be
a. $28,250.
b. $34,500.
c. $40,000.
d. $37,000.

13. In January, 2007, Miley Corporation purchased a mineral mine for $3,400,000 with
removable ore estimated by geological surveys at 2,000,000 tons. The property has an
estimated value of $200,000 after the ore has been extracted. The company incurred
$1,000,000 of development costs preparing the mine for production. During 2007,
500,000 tons were removed and 400,000 tons were sold. What is the amount of
depletion that Miley should expense for 2007?
a. $640,000
b. $800,000
c. $840,000
d. $1,120,000

14. A plant asset with a five-year estimated useful life and no residual value is sold at the
end of the second year of its useful life. How would using the sum-of-the-years'-digits
method of depreciation instead of the double-declining balance method of depreciation
affect a gain or loss on the sale of the plant asset?
Gain Loss
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase

4
15 Gant Co. purchased a machine on July 1, 2007, for $400,000. The machine has an
estimated useful life of five years and a salvage value of $80,000. The machine is being
depreciated from the date of acquisition by the 150% declining-balance method. For the
year ended December 31, 2007, Gant should record depreciation expense on this
machine of
a. $120,000.
b. $80,000.
c. $60,000.
d. $48,000.

16. Mack Co. takes a full year's depreciation expense in the year of an asset's acquisition
and no depreciation expense in the year of disposition. Data relating to one of Mack's
depreciable assets at December 31, 2007 are as follows:
Acquisition year 2005
Cost $140,000
Residual value 20,000
Accumulated depreciation 96,000
Estimated useful life 5 years
Using the same depreciation method as used in 2005, 2006, and 2007, how much
depreciation expense should Mack record in 2008 for this asset?
a. $16,000
b. $24,000
c. $28,000
d. $32,000

17. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-
ment by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.

18. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.

19. If a company constructs a laboratory building to be used as a research and development

facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been
obtained from the facility.

5
20. Blue Sky Company’s 12/31/08 balance sheet reports assets of $5,000,000 and liabilities
of $2,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except
for land, which has a fair value that is $300,000 greater than its book value. On
12/31/08, Horace Wimp Corporation paid $5,100,000 to acquire Blue Sky. What amount
of goodwill should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $100,000
c. $1,800,000
d. $2,100,000

6
Problem 2 (40 points)

Part A. Two independent companies, Mintz Co. and Pine Co., are in the home building
business. They agree to exchange their equipment for the other. An appraiser was hired, and
from her report and the companies' records, the following information was obtained:
Mintz's Equipment Pine's Equipment
Cost $392,000 $220,000
Accumulated Depreciation 200,000 100,000
Fair value based upon appraisal 240,000 210,000

The exchange was made, and based on the difference in appraised fair values, Pine paid
$30,000 to Mintz. The exchange lacked commercial substance. (20 points)

a. Determine the amount of pre-tax gain or loss Mintz should recognize on this exchange

b. Determine the amount at which the new equipment should be reported in Mintz's books

c. Determine the amount of pre-tax gain or loss Pine should recognize on this exchange

7
 d) Determine the amount at which the new equipment should be reported in Pine's books

Part B. On June 1, 2004, Wordcrafters contracted with Favre Construction to have a new
building constructed for $5,000,000 on land owned by Wordcrafters. The payments made by
Wordcrafters to Favre Constructions are shown in the schedule below.

Date Amount
July 30, 2004 $1,200,000
Jan 30, 2005 1,500,000
May 30, 2005 1,300,000
July 30, 2005 1,000,000
Aug 30, 2005 500,000

Total Payments $5,500,000

Construction was completed and the building was ready for occupancy on September 30, 2005.
Wordcrafters borrowed $2 million on June 1, 2004 at 10% expressly for the construction of the
new building. They had the following debt outstanding at May 31, 2005, and 2006, the end of
its fiscal year.

14.5%, 5-year note payable of $2,000,000, dated April 1, 2001, with interest payable annually
on April 1.
12%, 10-year bond issue of $3,000,000 sold at June 30, 1997, with interest payable annually on
June 30.

Required:

a. Compute the avoidable interest on Wordcrafters’ new building for fiscal year 2005. (5
points)

8
 b. Prepare the adjusting journal on May 31, 2005 to account for the interest expense. (5
points)

c. Compute the avoidable interest on Wordcrafters’ new building for fiscal year 2006. (5
points)

d. Determine the cost of the building reported in Wordcrafters books on May 31, 2006. (5
points)

9
Problem 3 (20 points)

Wardell Company purchased a minicomputer on January 1, 2001, at a cost of $40,000. The

computer was depreciated using the 200% declining balance method over an estimated five-
year life with an estimated residual value of $4,000. The company’s fiscal year ends on
December 31.

a) Prepare the journal entry required for depreciation in 2002

b) On July 1, 2003, the estimate of useful life was changed to a total of 8 years (from the
date of the original purchase), and the estimate of residual value was changed to
$900.Prepare the appropriate journal entries required for depreciation in 2003 to reflect the
revised estimate.

c) On March 31, 2004 Wardell spent $15,000 on the minicomputer to improve its
performance (consider this a betterment). Prepare the appropriate journal entries for the
year 2004 including the adjusting journal entry required for depreciation.

d) On April 31, 2006 Wardell sold the minicomputer for $20,000. Prepare the appropriate
journal entries on this date.

10