COMPREHENSIVE EXAMINATION C
PART 3
(Chapters 10–14)
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 $20,000 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. $320,000, $256,000, and $64,000.
b. $275,000, $220,000, and $55,000.
c. $285,000, $228,000, and $57,000.
d. $190,000, $190,000, and $190,000.
____ 3. In accordance with GAAP, the maximum period over which a patent can be
amortized is
a. 20 years.
b. 28 years.
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.
Comprehensive Exam C
C-2
Use the following data to answer questions 5 through 9:
Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of
$1,800,000. The equipment has an estimated useful life of 5 years and an estimated
salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation
to the nearest month.
____ 5. What is straight-line depreciation for 2015?
a. $165,000.
b. $180,000.
c. $330,000.
d. $360,000.
____ 6. What is sum-of–the-years’-digits depreciation for 2015?
a. $439,998.
b. $495,000.
c. $540,000.
d. $550,000.
____ 7. What is double-declining-balance depreciation for 2015?
a. $432,000.
b. $576,000.
c. $660,000.
d. $720,000.
____ 8. If Davis expensed the total cost of the equipment at 7/1/14, what was the
effect on 2014 and 2015 income before taxes, assuming Davis uses straight–
line depreciation?
a. $1,470,000 understated and $330,000 overstated.
b. $1,620,000 understated and $180,000 overstated.
c. $1,635,000 understated and $330,000 overstated.
d. $1,800,000 understated and $180,000 overstated.
____ 9. If, at the end of 2016, Davis Company decides the equipment still has five
more years of life beyond 12/31/16, with a salvage value of $150,000, what is
straight-line depreciation for 2016? (Assume straight-line used in all years.)
a. $180,000.
b. $192,500.
c. $217,500.
d. $330,000.
Comprehensive Exam C
C-3
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 1/1/14 for $540,000.
On 12/31/14 such machines have a selling price and fair value of $621,000. 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 1/1/14 for $729,000.
On 12/31/14 such machines have a selling price and fair value of $540,000. When used
in production, such machines have an estimated useful life of 10 years with no salvage
value. Use the straight-line method.
On 12/31/14 Brown gave Machine B plus $81,000 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 Brown’s books?
a. $729,000.
b. $621,000.
c. $810,000.
d. $540,000.
____ 11. Given the assumptions in 10 above, at what amount will Machine B be
recorded on Sawyer’s books?
a. $469,565.
b. $729,000.
c. $540,000.
d. $631,566.
____ 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. $540,000.
b. $621,000.
c. $729,000.
d. $810,000.
____ 13. Given the assumption in 12 above, at what amount will Sawyer record
Machine B?
a. $557,609.
b. $405,000.
c. $503,604.
d. $422,609.
Comprehensive Exam C
C-4
____ 14. Given the assumption in 12 above except that the fair values of Machines A
and B are $504,000 and $675,000, respectively, at what amount will Brown
record Machine A?
a. $656,100.
b. $756,000.
c. $675,000.
d. $737,100.
____ 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. $540,000.
b. $737,100.
c. $621,000.
d. $656,100.
____ 16. Given the assumptions in 15 above, at what amount will Brown record
Machine A?
a. $540,000.
b. $737,100.
c. $621,000.
d. $656,100.
____ 17. Given the assumptions in 15 above except that the selling prices and fair
market values of A and B are $756,000 and $675,000, respectively, at what
amount will Brown record Machine A?
a. $656,100.
b. $607,500.
c. $756,000.
d. $675,000.
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.
Comprehensive Exam C
C-5
____ 20. Property, plant, and equipment is usually 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.
Match the following cost items with these appropriate accounts:
a. Land c. Land Improvements
b. Buildings 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.
Comprehensive Exam C
C-6
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.
____ 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.
Comprehensive Exam C
C-7
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) $1,800,000 $3,300,000
Accumulated depreciation 580,000 1,800,000
Fair value of equipment 1,400,000 1,400,000
1. Jensen Co. and Merton Co. traded the above equipment. The exchange has
commercial substance.
Jensen Co.’s Books: 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) $1,800,000 $3,300,000
Accumulated depreciation 580,000 2,100,000
Fair value of equipment 1,120,000 1,400,000
Cash received (paid) (280,000) 280,000
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:
Comprehensive Exam C
C-8
Problem C-V — Long-Term Debt.
1. On March 31, 2011, Hanson Corporation sold $9,000,000 of its 8%, 10-year bonds
for $8,653,500 including accrued interest. The bonds were dated January 1, 2011.
Interest is paid semiannually on January 1 and July 1. On April 1, 2015, Hanson
purchased 1/2 of the bonds on the open market at 99 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, 2015 to record retirement of the
bonds. Assume that interest and premium or discount amortization have been
recorded through January 1, 2015. Record interest and amortization on only the
bonds retired.
(c) Prepare the journal entry needed at July 1, 2015 to record interest and premium
or discount amortization.
2. On January 1 of the current year, Feller Corporation issued $5,000,000 of 10%
debenture bonds on a basis to yield 9%, receiving $5,224,300. 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?
Comprehensive Exam C
C-9
3. On October 1, 2014, Noller Company issued $6,000,000 par value, 10%, 10-year
bonds dated July 1, 2014, with interest payable semiannually on January 1 and July
1. The bonds are issued at $6,813,000 (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, 2014, the end of the fiscal year.
(c) Prepare the entry for the interest payment on January 1, 2015.
Problem C-VI — Depreciation Methods.
A high-speed multiple-bit drill press costing $960,000 has an estimated salvage value of
$80,000 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, $______________.
Comprehensive Exam C
C-10
Problem C-VII — Current Liabilities.
Moon Company includes 1 coupon in each box of soap powder that it packs, 10 coupons
being redeemable for a premium consisting of a kitchen utensil. In 2014, Moon Company
purchased 36,000 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 2014, 144,000 coupons were presented for redemption.
During 2015, 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 2014 and 2015. Assume a FIFO inventory flow.
*Problem C-VIII — Accounting for Troubled Debt Restructurings.
On December 31, 2014, Federal Bank enters into a debt restructuring agreement with
Carson Company which is experiencing financial difficulties. The bank restructures a
$5,000,000 note receivable by:
1. Reducing the principal obligation from $5,000,000 to $4,000,000.
2. Extending the maturity date from 12/31/14 to 12/31/17, and
3. Reducing the interest rate from 12% to 6%.
Interest has been paid up to date as of 12/31/14.
Instructions
Discuss the nature of this transaction, indicating whether any gain or loss is recognized
by either party and preparing any 12/31/14 journal entries that may be required by the
debtor (Carson).
Comprehensive Exam C
C-11
Solutions — Comprehensive Examination C
Problem C-I — Solution.
Solutions to selected computational Multiple Choice questions.
Problem C-II — Solution.
Problem C-III — Solution.
Comprehensive Exam C
C-12
Problem C-IV — Solution.
Problem C-V — Solution.
Comprehensive Exam C
C-13
Problem C-VI –— Solution.
Comprehensive Exam C
C-14
Problem C-VII — Solution. 2014
Comprehensive Exam C
C-15
Problem C-VIlI — Solution.