Finance Chapter 5 to what amount will its book value at the end

Achievement Test 5: Chapters 9 and 10 Name __________________________

Accounting Instructor _______________________

Kimmel, Weygandt, & Kieso Section # _______ Date _________

Part

I

II

III

IV

V

Total

Points

26

6

28

9

16

15

100

Score

PART I — MULTIPLE CHOICE (26 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Which of the following is included as part of property, plant, and equipment but does

not decline in service potential?

a. Land on which a company warehouse is built

b. Fixed assets used in production

c. A patent that provides a superior product compared to competitors

d. Parking lots and sidewalks providing access for a company’s employees

____ 2. What does the balance of the Accumulated Depreciation account represent?

a. The decline in value of plant assets

b. The accumulation of funds needed to replace the assets at the end of their useful

life

c. The portion of the cost allocated as an expense since the asset was acquired

d. The fair value of the asset that is being depreciated

____ 3. What is the goal when a company is selecting a depreciation method?

a. To select a method that best measures an asset’s contribution to revenue over its

life

b. To select a method that allows the least amount of income taxes to be paid

c. To select the method that is required by GAAP for each particular asset

d. To select a method that measures the asset in units of output

____ 4. When an asset is depreciated, to what amount will its book value at the end of its

useful life be equal?

a. The cost of the asset being depreciated

b. Total accumulated depreciation

c. The salvage value of the asset

d. The annual cost allocation amount

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

AT5-2

____ 5. Which of the following is a true statement as it relates to impairments of plant assets?

a. The assets are recorded at the book value of the asset.

b. The impairment amount is capitalized and depreciated along with the cost of the

original asset.

c. The impairment amount is added to the plant asset account in the year the decline

of value occurs.

d. They are written down to the new fair value during the year in which the decline

occurs.

_____ 6. Which of the following ratios indicates how efficiently a company uses it assets to

generate sales?

a. Profit margin

b. Asset turnover

c. Return on assets

d. Sustainability

____ 7. For which of the following pairs of costs will a company record no amortization

expense?

a. Research and development costs and goodwill

b. Copyrights and licenses

c. Franchises and patents

d. Goodwill and trade names

____ 8. Big Town Retailers operates in Florida and collects sales taxes from customers on all

purchases. How should these sales taxes be reported when collected?

a. As an expense on the income statement

b. As sales revenue along with the selling price of the items sold

c. As unearned revenues

d. As a current liability until paid to the State of Florida

____ 9. Which of the following amounts are deducted from employees’ paychecks?

a. FICA Taxes Payable and State Unemployment Taxes Payable

b. Federal Unemployment Taxes Payable and State Unemployment Taxes Payable

c. Federal Unemployment Taxes Payable and FICA Taxes Payable

d. Federal Income Taxes Payable and FICA Taxes Payable

____ 10. To what is the current market value of bonds equal when determining their issue

price?

a. The present value of the bonds future cash flows

b. The sum of the future interest payments, plus the principal payment when the

bonds mature

c. The difference between the face value of the bonds and the contractual interest

rate

d. The cash that will be paid to the investor when the bonds mature

____ 11. Failure to record a liability will probably

a. understate net income.

b. result in overstated total liabilities and owner’s equity.

c. understate the debt total assets ratio.

d. make a company appear to be less solvent

Achievement Test 5

AT5-3

____ 12. Which statement is true concerning off-balance sheet financing?

a. It allows a company to overstate its debt to assets ratio.

b. It is an intentional effort by a company to structure its financing arrangements to

avoid showing liabilities on its balance sheet.

c. It is a violation of GAAP and causes total liabilities to be understated.

d. It occurs when companies report liabilities on the income statement as expenses

rather than liabilities on the balance sheet.

____ 13. Wilson, Inc. issued bonds that are subject to retirement at a stated dollar amount prior

to maturity at the option of the issuer. What are these bonds called?

a. Convertible bonds

b. Early retirement bonds.

c. Callable bonds

d. Secured bonds

PART II—MATCHING (6 points)

Instructions: Match the cash expenditures given below with the appropriate accounting

treatment. An individual classification may be used more than once, or not at all. If none of the

listed treatments are appropriate for an expenditure, place an ‘X’ in the answer space.

Treatments

A. Record the expenditure as an asset and depreciate it.

B. Record the expenditure as an asset and amortize it.

C. Record the expenditure as an asset but do not systematically allocate it to expense.

D. Record the expenditure as an expense in the current period.

Expenditures

____ 1. Offered a new flavor of one of the company’s products

____ 2. Purchased a copyright from an author

____ 3. Paid for a complete renovation of the office building

____ 4. Paid for research and development costs

____ 5. Paid closing costs in acquiring new property that will be converted into a parking lot

____ 6. Paid legal costs to successfully defend a patent against infringement

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

AT5-4

PART III — PLANT ASSETS: SHORT PROBLEMS (28 points)

Instructions: Complete the requirements specified for each of the following independent

situations.

1. Jumpstart Deliveries acquired a truck at a cost of $64,000 on January 1, 2014. The truck is

expected to have a salvage value of $8,000 at the end of its 4-year useful life. Jumpstart

uses the straight-line method. Prepare the journal entry to record annual depreciation for

2015.

2. DynaChrome Bumpers bought two acres of land with an old office building on it that was

deemed unusable. The cost was $480,000 of which DynaChrome paid $80,000 in cash as a

down payment and signed a 7% mortgage for the remainder. DynaChrome immediately had

the old building razed at a net cost of $8,700 and sold the salvaged materials for $2,200.

Attorneys were paid $1,100 in connection with the purchase. The architect’s fee for drawing

building plans for the new building cost $6,800. DynaChrome paid $3,100 in connection with

permits and zoning variances necessary prior to construction of the new building.

DynaChrome paid the contractor $1,420,000 for construction of the new building, along with

$42,000 for a parking lot and necessary walkways and driveways.

A. At what amount should the land be recorded?

B. At what amount should the new office building be recorded?

3. On July 1, 2014, Winslow Enterprises sold equipment with an original cost of $86,000 for

$33,000. The equipment was purchased January 1, 2011, and was depreciated using the

straight-line method over a five-year useful life with a $9,000 salvage value. Prepare the

journal entry to record the sale of the equipment.

4. Sonic Company bought machinery on January 1, 2009, at a cost of $90,000. The machinery

had an estimated life of 8 years and salvage value of $16,000. On January 1, 2014, Sonic

estimates that the machinery will have a life of only 2 more years from January 1, 2014, and

the salvage value is now estimated to be $4,000. Sonic uses straight-line depreciation.

Compute the annual depreciation expense for 2014.

Achievement Test 5

AT5-5

PART IV — INTANGIBLE ASSET TRANSACTIONS (9 points)

Instructions: Complete the requirements specified for each of the following independent

situations.

1. During 2013, Sunbolt Corporation incurred $120,000 of research and development costs to

produce a solar cell for motorcycles. It then paid filing fees of $6,800 to register a patent on

this product and $23,000 to an attorney who helped obtain the patent. In late 2013 shortly

before Sunbolt put the solar cell into production, it was sued by another company claiming to

own the rights to the patent. Sunbolt paid $40,700 to defend the patent against infringement

by the competitor and won the suit. Production of solar computers began on January 1, 2014.

The patent has a legal life of 20 years and a useful life of 15 years. How much is patent

amortization expense for 2014?

2. Super Tech Industries purchased Jones, Inc. on June 30, 2014 and recorded goodwill of

$62,000 on this purchase. The useful life of the goodwill is estimated to be 20 years. How

much is goodwill amortization expense for 2014?

PART V — RATIO ANALYSIS (16 points)

Jiffy Mart and Quick Shop are two companies of roughly the same size both running a chain of

convenience stores. Each company depreciates its plant assets using the straight–line method.

An investigation of their financial statements reveals the following information:

Jiffy Mart Quick Shop

Net income $ 129,050 $ 129,800

Sales revenue 890,000 1,100,000

Total assets (average) 4,340,000 5,490,000

Plant assets (average) 1,650,000 1,900,000

Instructions: Complete the requirements specified for each of the following independent

situations. Round answers to two decimal places.

1. For each company, calculate:

A. Return on assets

B. Profit margin

C. Asset turnover

2. Based on your calculations in part 1, comment on the relative effectiveness of the two

companies in using their assets to generate sales. What factors complicate your ability to

compare the two companies?

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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PART VI — LIABILITY PROBLEMS (15 points)

Instructions: Complete the requirements specified for each of the following independent

situations.

1. On January 1, 2014, Wicker World issued bonds with a face value of $200,000. The bonds

carry a stated interest of 6% payable each January 1. Prepare the journal entry for the

issuance of the bonds if the bonds are issued at 98.5.

2. Strike Zone Fishing purchased $50,000 of its own bonds on June 30, 2014, at 101 and

immediately retired them. The carrying value of the bonds on the retirement date was

$51,500. The bonds pay semiannual interest and the interest payment due on June 30, 2014,

has been made and recorded. Prepare the entry for the retirement of the bonds.

3. On April 1, the Mactors Company borrows $80,000 from New National Bank by signing a 6-

month, 5%, interest-bearing note.

(a) Prepare the entry on April 1 when the note was issued.

(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual

financial statements. Assume no other interest accrual entries have been made.

Achievement Test 5

AT5-7

Solutions — Achievement Test 5: Chapters 9 and 10

PART I — MULTIPLE CHOICE (26 points)

PART II — MATCHING (6 points)

PART III — PLANT ASSETS: SHORT PROBLEMS (28 points)

PART IV — INTANGIBLE ASSETS (9 points)

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

AT5-8

PART V — RATIO ANALYSIS (16 points)

PART VI — LIABILITY PROBLEMS (15 points)