Multiple Choice Answers

1. On June 1, 2010, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2011. Expenditures on the project were as follows ($ in millions):
Cash Outflow
Probability
July 1, 2010 54
October 1, 2010 22
February 1, 2011 30
April 1, 2011 21
September 1, 2011 20
October 1, 2011 6

July 1, 2010, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2011. The company’s only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2010 and 2011. The company’s fiscal year-end is December 31.

What is the amount of interest that Crocus should capitalize in 2011, using the specific interest method (rounded to the nearest thousand dollars)?

A. None of these answers is correct.
B. $7,248,000 (rounded)
C. $7,283,000 (rounded)
D. $8,740,000 (rounded)

2. In 2010, Antle, Inc., had acquired Demski Co. and recorded goodwill of $245 million as a result. The net assets (including goodwill) from Antle’s acquisition of Demski Co. had a 2011 year-end book value of $580 million. Antle assessed the fair value of Demski at this date to be $700 million, while the fair value of all of Demski’s identifiable tangible and intangible assets (excluding goodwill) was $550 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2011 is

A. $0.
B. $95 million.
C. $12 million.
D. $150 million.

3. Jung, Inc., owns a patent for which it paid $66 million. At the end of 2011, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung’s management determined that it should assess whether an impairment should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent’s fair value at that point is $35 million. Under these circumstances, Lester would record
A. no impairment loss on the patent.
B. a $7 million impairment loss on the patent.
C. a $15 million impairment loss on the patent.
D. a $31 million impairment loss on the patent.

4. Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country indicates that Rice should investigate for possible impairment. Below are data related to the plant’s assets ($ in millions):
Book value $190
Undiscounted sum of future estimated cash flows 210
Present value of future cash flows 175
Fair value less cost to sell (determined by appraisal) 180

The amount of impairment loss that Rice should recognize according to U.S. GAAP and IFRS, respectively, is
a.$10 million $10 million
b.$15 million $15 million
c. $0 $10 million
d.therer is no impairment both U.S GAAP and IFRS

A. Option a
B. Option c
C. Option d
D. Option b

5. On June 30, 2011, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2011, 24,000 units of product were produced. At the beginning of 2012, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2012, 70,000 units were produced.
Prego would report depreciation in 2012 of
A. $108,000.
B. $105,000.
C. $126,000.
D. $135,230.

6. Broadway Ltd. purchased equipment on 1/1/09 for $800,000, estimating a five-year useful life and no residual value. In 2009 and 2010, Broadway depreciated the asset using the straight-line method. In 2011, Broadway changed to sum-of-years’-digits depreciation for this equipment. What depreciation would Broadway record for the year 2011 on this equipment?
A. $200,000.
B. $240,000.
C. $120,000.
D. $160,000.

7. Grab Manufacturing Co. purchased a ten-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the ten-ton draw press is
A. $183,600.
B. $185,760.
C. $171,000.
D. $187,600.

8. Wilson Inc. owns equipment for which it paid $70 million. At the end of 2011, it had accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson’s management determined that it should assess whether an impairment should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment’s fair value at that point is $50 million. Under these circumstances, Wilson would record
A. an $8 million impairment loss on the equipment.
B. no impairment loss on the equipment.
C. an impairment loss on the equipment not to exceed $1,000.
D. a $20 million impairment loss on the equipment.

9.On June 1, 2010, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2011. Expenditures on the project were as follows ($ in millions):
Cash Outflow
Probability
July 1, 2010 54
October 1, 2010 22
February 1, 2011 30
April 1, 2011 21
September 1, 2011 20
October 1, 2011 6

July 1, 2010, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2011. The company’s only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2010 and 2011. The company’s fiscal year-end is December 31.

What is the amount of interest that Crocus should capitalize in 2010, using the specific interest method?
A. $1.90 million
B. $2.96 million
C. $1.95 million
D. $65 million

10. An asset acquired January 1, 2011, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2012, for $6,000. The entry to record the sale would be
a. Cash 6,000
Loss on sale of equipment 9,000
Equipment 15,000
b. Cash 6,000
Equipment 6,000
c. Cash 6,000
Accumulated depreciation 3,750
Loss on sale of equipment 5,250
Equipment 15,000
d. Cash 6,000
Accumulated depreciation 9,000
Equipment 15,000

A. Option a
B. Option b
C. Option c
D. Option d

11. Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively.
Assuming that the exchange lacks commercial substance, Horton would record land-new at and record a gain/(loss) of Land
Gain/Loss
a. $105,000
$ 0
b.
$105,000
$10,000
c.
$95,000
$ 0
d.
$95,000
$10,000

A. Option c
B. Option b
C. Option a
D. Option d

12. Axcel Software began a new development project in 2010. The project reached technological feasibility on June 30, 2011 and was available for release to customers at the beginning of 2012. Development costs incurred prior to June 30, 2011 were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. 2012 revenues from the sale of the new software were $4,000,000 and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. 2012 amortization of the software development costs would be
A. $1,840,000.
B. $350,000.
C. $560,000.
D. $0.

13. Fryer, Inc., owns equipment for which it paid $90 million. At the end of 2011, it had accumulated depreciation on the equipment of $27 million. Due to adverse economic conditions, Fryer’s management determined that it should assess whether an impairment should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment’s fair value at that point is $40 million. Under these circumstances, Fryer would record
A. an impairment loss on the equipment of less than $1,000.
B. no impairment loss on the equipment.
C. a $23 million impairment loss on the equipment.
D. a $3 million impairment loss on the equipment.

14. Below are data relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.
old equipment cash
book value fair value paid
case A $50.000 $60.000 $15.000
case B $40.000 $35.000 $8.000
In Case B, Grand Forks would record a gain/(loss) of
A. $(3,000).
B. $3,000.
C. $(5,000).
D. $5,000.

15. The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2011. The fixed-asset turnover ratio for 2011 was 4.0 and sales for the year totaled $1,480,000. Net fixed assets at the end of 2010 were
A. $370,000.
B. $320,000.
C. $470,000.
D. $420,000.

16. Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would the accumulated depreciation be at the end of year five under the sum-of-the-years’ digits method?
A. $16.5 million.
B. $8.25 million.
C. $4.5 million.
D. $12 million.

17. Bloomington Inc. exchanged land for equipment and $3,000 in cash. The book value and the fair value of the land were $104,000 and $90,000, respectively.
Bloomington would record equipment at and record a gain/(loss) of
Equipment
Gain/Loss
a. $87,000
$3,000
b. $104,000
$(5,000)
c. $87,000
$(14,000)
d. None of the above.

A. Option c
B. Option a
C. Option d
D. Option b

18. Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be

Building Land Fixtures
a.$1,300,000 $780,000 $520,000
b.$1,200,000 $720,000 $480,000
c.$ 720,000 $1,200,000 $480,000
d.None of the above.

A. Option b
B. Option a
C. Option d
D. Option c

19. Robertson Inc. prepares its financial statements according to International Financial Reporting Standards. At the end of its 2011 fiscal year, the company chooses to revalue its equipment. The equipment cost $540,000, had accumulated depreciation of $240,000 at the end of the year after recording annual depreciation, and had a fair value of $330,000. After the revaluation, the accumulated depreciation account will have a balance of
A. $240,000.
B. $330,000.
C. $270,000.
D. $264,000.

20. Calloway Shoes purchased a delivery truck on September 30, 2011, for $32,000. The estimated useful life of the truck is 10 years with no residual value. After five years, the refrigeration unit will need to be replaced. The $8,000 cost of the unit is included in the cost of the truck. Calloway uses the straight-line depreciation method. Depreciation for 2011 under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is
US GAAP IFRS
a. $3,200 $3,200
b. $800 $800
c. $800 $1,000
d. $3,200 $4,000

A. Option d
B. Option c
C. Option a
D. Option b

21. On June 30, 2011, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2011, 24,000 units of product were produced. At the beginning of 2012, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2012, 70,000 units were produced.
Prego would report depreciation in 2011 of
A. $18,000.
B. $21,950.
C. $43,900.
D. $36,000.

22. Gulf Consulting Co. reported the following on its December 31, 2011, balance sheet:
Equipment (at cost) . . .$700,000
In a disclosure note, Gulf indicates that it uses straight-line depreciation over five years and estimates salvage value as 10% of cost. Gulf’s equipment averages 3.5 years at December 31, 2011.
What is the book value of Gulf’s equipment at December 31, 2011?
A. $490,000
B. $259,000
C. $210,000
D. $441,000

23. P. Chang & Co. exchanged land and $9,000 cash for equipment. The book value and the fair value of the land were $106,000 and $90,000, respectively.
Chang would record equipment at and record a gain/(loss) of
Equipment Gain/Loss
a. $99,000 $(16,000)
b. $99,000 $(25,000)
c. $108,000 $16,000
d. $106,000 $(9,000)

A. Option d
B. Option a
C. Option c
D. Option b

24. Vijay, Inc., purchased a 3-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase date. The capitalized cost of the land is
A. $201,150.
B. $336,150.
C. $336,400.
D. $334,650.

25. On January 1, 2009, Al’s Sporting Goods purchased store fixtures at a cost of $180,000. The anticipated service life was 10 years with no residual value. Al’s has been using the double-declining balance method, but in 2011 adopted the straight-line method because the company believes it provides a better measure of income. Al’s has a December 31 year-end. The journal entry to record depreciation for 2011 is
a. Depreciation expense 23,040
Accumulated depreciation 23,040
b. Depreciation expense 14,400
Accumulated depreciation 14,400
c. Accumulated depreciation 28,800
Retained earnings 28,800
d. No entry

A. Option b
B. Option d
C. Option c
D. Option a