Achievement Test 5: Chapters 9 and 10 Name _________________________
Financial Accounting, 9e Instructor ______________________
Section # _______ Date _________
Part
I
II
III
IV
V
VI
Total
Points
26
13
15
15
16
15
100
Score
PART I — MULTIPLE CHOICE (26 points)
Instructions: Designate the best answer for each of the following questions.
Use the following data for questions 1 and 2 below:
Patton Company bought real estate, on which there was an old office building, for $500,000. It
paid $50,000 in cash as a down payment and signed a 10% mortgage for the remainder. It
immediately had the old building razed at a net cost of $35,000. Attorneys were paid $6,000 in
connection with the land purchase and an additional $3,000 in connection with permits and
zoning variances necessary for Patton’s new office building. $20,000 was paid for excavation for
the basement of the new building, $1,500,000 was paid for construction of the new building, and
$75,000 was paid for a parking lot and necessary walkways and driveways.
____ 1. The new office building should be recorded at
a. $1,500,000.
b. $1,523,000.
c. $1,520,000.
d. $1,558,000.
____ 2. Land should be recorded at a cost of
a. $535,000.
b. $541,000.
c. $564,000.
d. $561,000.
____ 3. Notson Textile purchased machinery for $60,000 eight years ago. It was expected to
have a useful life of ten years, no salvage value, and was depreciated using the
straight-line method. At the end of its eighth year of use, it was retired from service
and given to a junk dealer. The entry to record the retirement includes a
a. debit to Loss on Disposal of Plant Assets for $12,000.
b. credit to Depreciation Expense for $6,000.
c. debit to Equipment for $60,000.
d. credit to Accumulated Depreciation—Equipment for $48,000.
Test Bank for Financial Accounting, Ninth Edition
AT5- 2
____ 4. Which of the following should not be included in the plant assets (property, plant, and
equipment) classification?
a. Land on which warehouse sits
b. Building housing corporate headquarters
c. Parking lot used by visitors
d. All of these answers should be included
____ 5. Salvage (residual) value is deducted in the computation of depreciation expense in all
of the following methods with the exception of
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. All of these answer choices include a deduction of salvage value.
____ a6. When recording exchanges of assets that have commercial substance,
a. both gains and losses are recognized immediately.
b. the gain or loss on the old asset is the difference between its cost and its fair
market value.
c. gains are treated as increases in the cost of the new asset.
d. none of these answer choices are correct.
____ 7. The cost of a patent should be amortized over
a. 20 years.
b. the shorter of its legal life or its useful life.
c. the longer of its legal life or its useful life.
d. its useful life.
____ 8. On June 30, 2015, Fox Enterprises sold equipment with an original cost of $990,000
for $400,000. The equipment was purchased January 1, 2014, and was depreciated
using the straight-line method assuming a five-year useful life and $90,000 salvage
value. The necessary entries for 2015 include a
a. debit to Accumulated Depreciation—Equipment for $180,000.
b. credit to Gain on Disposal of Equipment for $320,000.
c. credit to Cash for $400,000.
d. debit to Depreciation Expense for $90,000.
____ 9. Todd Corporation issues its bonds at a discount. Amortization of the discount will
a. decrease bond interest expense.
b. increase bond interest expense.
c. decrease the carrying value of the bonds on the balance sheet.
d. be reported as a loss on the income statement.
____a 10. Trent Corp. issued $800,000 of 8%, 5-year bonds at 102 on January 1, 2015. The
straight-line method of amortization is used and the bonds pay interest annually on
January 1. The amount of bond interest expense that Trent should report on its
December 31, 2015, income statement is
a. $64,000.
b. $65,280.
c. $60,800.
d. $67,200.
Achievement Test 5
____ 11. Discount on Bonds Payable
a. is a contra revenue account.
b. is a contra liability account.
c. is added to Bonds Payable to determine the carrying value of the bond.
d. has a credit balance.
____ 12. The amortization of premium on bonds payable
a. increases interest expense.
b. increases the carrying value of the bond.
c. is recorded by debiting Premium on Bonds Payable.
d. reduces the cash paid to bondholders.
____ 13. Bonds payable of $1,000,000 sold at 98 would yield proceeds of
a. $900,000.
b. $980,000.
c. $1,000,000.
d. $1,080,000.
Test Bank for Financial Accounting, Ninth Edition
AT5- 4
PART II — DEPRECIATION METHODS (13 points)
Schilling Corporation purchased a machine on January 1, 2014, at a total cost of $1,800,000. The
machine has an estimated useful life of 10 years or 1,000,000 units of output and a salvage value
of $300,000.
Instructions: Complete the following table by presenting the annual depreciation expense for
the years 2014 and 2015, under the indicated depreciation methods. Assume actual activity in
terms of units of output was: 2014—60,000 units and 2015—120,000 units.
———————————————————————————————————————————
Annual Depreciation Expense
2014 2015
———————————————————————————————————————————
Straight-Line: $ $
———————————————————————————————————————————
(Supporting Computations)
———————————————————————————————————————————
Double-Declining-Balance: $ $
———————————————————————————————————————————
(Supporting Computations)
———————————————————————————————————————————
Units-of-Activity: $ $
———————————————————————————————————————————
(Supporting Computations)
Achievement Test 5
PART III — PLANT ASSETS: SHORT PROBLEMS (15 points)
Instructions: Complete the requirements specified for each of the following independent
situations.
A. Riley Company purchased land and an office building on March 1 for a combined cash price
of $1,600,000. The land had a cost of $940,000 and the building had a book value of
$200,000 on the seller’s books. The land and building had fair values of $1,040,000 and
$560,000, respectively on March 1. Riley made the following entry at acquisition:
Land ………………………………………………………………………………. 940,000
Buildings …………………………………………………………………………. 1,000,000
Gain on Purchase …………………………………………………….. 140,000
Accumulated Depreciation—Buildings …………………………. 200,000
Cash ………………………………………………………………………. 1,600,000
Prepare the correct entry for the acquisition.
B. Horton Company bought machinery on January 1, 2013 at a cost of $600,000. The
machinery had an estimated life of ten years and salvage value of $50,000. On January 1,
2015, Horton estimates that the machinery will have a life of only five more years and a
$60,000 salvage value. Horton uses straight-line depreciation. Compute the revised annual
depreciation.
C. Carter Company bought equipment on July 1, 2014 at a total cost of $600,000. The
equipment has an estimated useful life of 5 years and salvage value of $100,000. Carter
uses the double-declining-balance method of depreciation. Compute depreciation for 2014
and 2015.
Test Bank for Financial Accounting, Ninth Edition
AT5- 6
PART IV — ASSET PURCHASES AND DISPOSITIONS (15 points)
a1. Wells Construction gave up a used crane and $224,000 cash for a new crane. The old crane
cost $336,000, had $126,000 of accumulated depreciation, and a fair value of $228,000. The
exchange had commercial substance. In recording this exchange, the new crane should be
recorded at
$_____________.
a2. Brown Builders gave up a used diesel-powered electric generator and $25,000 cash for a new
truck. The generator cost $85,000, had $50,000 of accumulated depreciation, and a fair value
of $30,000. The exchange had commercial substance. In recording this exchange, the new
truck should be recorded at
$_____________.
3. Midwest Mining purchased an iron mine for $4,000,000. The mine was expected to produce
10,000,000 tons of ore over twenty years with no salvage value. During the first year, 600,000
tons of ore were mined and sold. Depletion expense for the first year is
$_____________.
4. Morris Industries purchased equipment costing $80,000 on January 1, 2013. The equipment
has a four-year useful life, $16,000 salvage value, and is being depreciated using the straight–
line method. It was sold at a $24,000 loss on June 30, 2015. The selling price of the
equipment was
$_____________.
5. Hi-Tech Corporation incurred $630,000 of research and development costs to produce a high
technology solar computer, paid filing fees of $60,000 to register a patent on this product, and
paid $420,000 to defend the patent against infringement by a competitor. All of these costs
were incurred in 2014. Production of solar computers began on January 1, 2015. Assuming
the patent has a useful life of 12 years, patent expense for 2015 is
$_____________.
Achievement Test 5
PART V — INTEREST ON SHORT-TERM NOTES PAYABLE (16 points)
The following cases are independent and relate to short-term notes payable. Principal and
interest are to be paid at maturity in all cases. Fill in the missing items in the table below. If no
number is required, enter zero. Items marked XXXX need not be computed.
Note to be Interest Payable 2015 Interest
Case Principal Interest Rate Note Given Repaid 12/31/14 Expense
___________________________________________________________________________
1. $60,000 8% 9/30/14 9/30/15
2. $50,000 10% 12/31/14 3/1/15 XXXX
3. $80,000 8% $3,200 $1,600
4. $40,000 4/1/14 4/1/15 $2,700 XXXX
5. 12% 12/1/14 3/1/15 XXXX $2,100
6. 8% 10/1/14 6/1/15 $1,800 XXXX
ªPART VI — BONDS PAYABLE TRANSACTIONS (15 points)
Record the following transactions for Graber Industries. The company uses the straight-line
amortization method.
January 1 Issued 10-year bonds payable of $4,000,000 at 98. The bonds have a stated
interest rate of 6% and pay interest semi-annually on July 1 and January 1.
July 1 Made first semi-annual interest payment to bondholders and amortized discount.
December 31 Accrued interest and amortized discount.
Test Bank for Financial Accounting, Ninth Edition
AT5- 8
Solutions — Achievement Test 5: Chapters 9 and 10
Achievement Test 5