8-12 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
2. For each account listed in 1 through 12 below, identify which reporting section (a through
d) each would appear on a company’s financial statements. You may use each letter
more than once or not at all.
Reporting Sections of Financial Statements
a. Balance sheet—property, plant, and equipment
b. Balance sheet—intangible assets
c. Balance sheet—other
d. Income statement
_____ 1. Depreciation expense
_____ 2. Accumulated depreciation
_____ 3. Betterments
_____ 4. Oil reserve
_____ 5. Land
_____ 6. Organizational costs
_____ 7. Amortization expense
_____ 8. Total amortization since inception
_____ 9. Gain on sale of patent
_____ 10. Copyright
_____ 11. Patents
_____ 12. Goodwill
Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities 8-13
3. For each transaction numbered 1 through 6 below, identify which accounting
treatment—capitalized or expensed—should be used to properly account for the
transactions. You may use each letter more than once or not at all.
Accounting Treatments
E. Expensed immediately
C. Capitalized as part of the cost of the new asset
______1. Freight costs on production equipment in transit
______2. Sales tax on equipment purchase
______3. Damaged during installation and repair costs
______4. Interest paid on construction loan during the building period
______5. Survey costs by contractor
______6. Construction insurance to cover theft or vandalism during building
construction
SHORT PROBLEMS
1. List two distinct examples of investing activities and two distinct examples of financing
activities.
Solution:
Investing activities:
Purchase or sale of noncurrent assets
Purchase or sale of securities of other entities
Loans or collection of principal of loans to other entities
Financing activities:
Issuance or reacquiring stock
Issuance or redeeming debt
Cash dividends paid to shareholders
KP 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
8-14 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
2. Selected information from Thompson Corporation is provided below for the years ending
December 31, 2009 and 2008.
2009
2008
Accumulated depreciation
Accounts payable
Equipment
During 2009 depreciation expense was recorded. New equipment was acquired for
cash. Old equipment which was 60% depreciated with an orginal cost of $26,000 was
sold for a loss of $4,000. Prepare the investing activities section of the statement of cash
flows.
3. During 2009, equipment was sold for $57,000. This equipment cost $90,000 and had a
book value of $47,000. Accumulated depreciation for equipment was $184,000 at
12/31/05 and $147,000 at 12/31/04. Show how the results of the three items will appear
on the statement of cash flows using the indirect method from this information.
Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities 8-15
4. Lawson Co. sold equipment that cost $40,000 and a current book value of $18,000, for
$20,000 cash. Lawson purchased additional equipment during the year. Data from the
company’s balance sheets at December 31, 2009 and 2008 are:
12/31/09
12/31/08
Equipment
$650,000
$520,000
Accumulated depreciation
106,000
82,000
Show how the results of the transactions will appear on the statement of cash flows
using the indirect method.
5. On May 6, 2009, Galen Company purchased equity securities. At December 31, 2009,
three investments were still owned by Galen. The names, cost, and fair values at
December 31, 2009, are indicated below.
Name
Acquisition Cost
Fair Value
Guy Company
$10,000
$8,000
Nordic Company
$3,000
$4,500
Vernon Company
$7,000
$7,800
The investments have clearly determinable fair values. Galen cannot exercise significant
influence on any of these investments. Galen has determined that the Guy stock will be
held until 2011. Galen intends to sell the Vernon stock by January 2, 2010, for short-term
profits. Galen has no idea how long it will hold the Nordic stock. Show how these
investments and any related yearend adjustments will be reported by completing the
balance sheet below at December 31, 2009.
Balance Sheet at December 31, 2009:
Current Assets
Long-Term Investments
Shareholders’ Equity
Cash flows from operating activities:
Net income
$ XX
Gain on sale of equipment ($20,000 – $18,000)
Depreciation expense ($82,000 – $22,000 – $106,000)
Cash flows from investing activities:
Sale of machine
Purchase of machine ($520,000 – $40,000 – $650,000)
8-16 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
6. On December 31, 2008, Celtic Inc. acquired a 24% interest in Romano Corp. for
$100,000 and appropriately applied the equity method. During 2009, Romano had net
income of $400,000 and paid cash dividends of $50,000. How much will Celtic report for
the year ending December 31, 2009 on its income statement? Show your work.
7. On December 31, 2008, Rory Corp. acquired an 18% interest in Batson Corp. for
$100,000 and appropriately applied the cost method. During 2009, Batson had net
income of $200,000 and paid cash dividends of $50,000. On the last day of 2009, Rory
sold one-half of its investment in Batson Corp. for $180,000. How much should Rory
report on its income statement for the year ending December 31, 2009? Show your
work.
8. Grant Co. purchased a piece of property (land and building) at a tax sale for $100,000.
Reliable estimates of the fair market values of the land and building are $34,000 and
$70,000, respectively. What is the gain that Grant Co. should record from this
advantageous purchase?
Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities 8-17
9. On December 1, Breeze Corp. purchased a tract of land for $320,000 to be used as a
factory site. An old unusable building on the land was razed (torn down), and the
salvaged materials from the demolition were sold. These cash expenditures and receipts
and other costs incurred during December are as follows:
Demolition of old building
$11,000
Proceeds from sale of salvaged materials
5,000
Legal fees to transfer land title
3,000
Title guarantee insurance
1,000
Calculate the balance in Breeze’s Land account on its December 31 balance sheet.
10. Land and a building were purchased for $90,000. A reliable market value of the land is
$40,000 and for the building, $80,000. What are the separate costs assigned to the land
and building?
11. On January 1, Durango Co. paid $80,000 for a new truck. Calculate the book value of
the truck using straight-line depreciation at the end of the second year.
Cost
Less accumulated depreciation
Book value
12. On January 1, Tanker Company paid $80,000 for a copy machine. Calculate
accumulated depreciation using the double-declining-balance method at the end of year
two.
8-18 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
13. On January 1, Weston Company paid $88,000 for a copy machine. It was estimated that
the machine would produce 1,000,000 copies over the next 8 years, at which time it
would have a salvage value of $8,000. During the first and second years, the copies
totaled 180,000 and 300,000, respectively. Calculate depreciation expense using the
activity method for each of the first two years.
14. On January 1, equipment is purchased for $40,000 with an 20-year life expectancy and
salvage value of $4,000. If the double-declining-balance method is used, how much
depreciation expense is recorded for the first year?
15. On September 30, 2009, equipment is purchased for $50,000 with a 4-year life
expectancy and salvage value of $2,000. If the double-declining-balance method is
used, calculate depreciation expense for the year ending December 31, 2009.
16. Carson Co. purchased a printer for $10,000, for which it paid $1,000 a month for 10
months. Carson had the option of paying $9,500 cash for the printer but chose the
delayed payment plan. It cost Carson $80 to transport the printer to its place of business
and $200 for installing and initial timing adjustments to the printer. Calculate the cost of
the printer.
Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities 8-19
17. Several years ago, Raquel Company purchased a copyright. Amortizing occurs on a
straight-line basis over its estimated useful life. The company’s balance sheets follow at
December 31, 2009, and 2008:
(In thousands)
December 31,
2009
December 31,
2008
Copyright, less accumulated amortization of $15,000 (2008)
and $18,000 (2009)
$132,000
$135,000
A. How much amortization expense did Raquel record during 2009?
B. Calculate the original cost of the patent.
C. As of December 31, 2009, over how many years has Raquel amortized the
copyright?
18. On January 1, the balance in accumulated depreciation is $28,000. During the current
year depreciation expense is $10,000 and equipment with a cost of $9,000 was sold for
$3,000 at a loss of $1,000. Calculate the December 31 balance in accumulated
depreciation.
SHORT ESSAY QUESTIONS
1. Why should users be cautious when examining financial statements in which the
company has accounted for investments using the equity method?
8-20 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
2. Under what circumstances are consolidated financial statements prepared?
3. What two criteria must be met for an investment in a security to be considered as current
on an investor’s balance sheet?
4. List the primary reasons a company might invest in equity securities. Explain how each
of these reasons helps to achieve the primary goal of a business entity—to make profit.
Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities 8-21
5. How does the concept of comprehensive income relate to accounting for investments?
6. Dorman Company purchased a new web server on January 1. The following information
and expenditures related to this acquisition were made:
List price
$5,000
Cash price paid
4,200
Transportation-in
300
Insurance during transport
100
Interest paid for the current year related to financing the web server
240
Installation cost
200
One-year maintenance contract
400
Disk drive installed into the web server
1,000
Specify and justify which of the preceding expenditures should be added to the cost of
the web server and disclose that cost. Indicate how the expenditures excluded from the
cost of the web server would be classified.
8-22 Test Bank – Chapter 8 – Long-Term Assets and Investments in Equity Securities
7. Identify the role of the matching principle in accounting for long-lived assets.
8. What primary objective should management attempt to accomplish when selecting the
depreciation method for tax purposes?
9. What are post-acquisition expenditures? How are they accounted for?