Ans Doc 122


1. In 2007, Redford Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of extractable mineral deposits. The estimated value of the property after the mineral has been removed is $200,000. Extraction activities began in 2008, and by the end of the year, 20,000 tons had been recovered and sold. In 2009, geological studies indicated that the total amount of mineral deposits had been underestimated by 25,000 tons. During 2009, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion rate per ton (rounded to the nearest cent) in 2009?
A. $4.24 C. $4.85
B. $4.32 D. $5.19

2. When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure has occurred?
A. Ordinary repairs and maintenance C. Rearrangement
B. Addition D. Betterment

3. Post Company’s depreciation policy on machinery and equipment is as follows:
• A full year’s depreciation is taken in the year of an asset’s acquisition.
• No depreciation is taken in the year of an asset’s disposition.
• The estimated useful life is five years.
• The straight-line method is used.

On June 30, 2007, Post sold for $230,000 a machine acquired in 2004 for $420,000. The accumulated depreciation for this machine was $216,000 at December 31, 2006, and the original estimated salvage value was $60,000. How much gain or (loss) on the disposal should Post record in 2007?
A. A $14,000 gain C. A $26,000 loss
B. A $26,000 gain D. A $34,000 loss

4. Nimbus Inc., purchased certain plant assets under a deferred payment contract. The agreement was to pay $30,000 per year for 10 years. The plant assets should be valued at
A. $300,000.
B. $300,000 plus imputed interest.
C. present value of $30,000 annuity for 10 years at an imputed interest rate.
D. future value of $30,000 annuity for 10 years at an imputed interest rate.

5. On February 12, Laker Company purchased a tract of land as a factory site for $175,000.
An existing building on the property was razed and construction was begun on a new factory building in March of the same year. Additional data are available as follows:

Cost of razing old building $ 35,000
Title insurance and legal fees to purchase land 12,500
Architect’s fees 42,500
New building construction cost 875,000

The recorded cost of the completed factory building should be
A. $910,000. C. $930,000.
B. $917,500. D. $952,500.
6. Andrews Manufacturing Company purchased a new machine on July 1, 2007. It was expected to produce 200,000 units of product over its estimated useful life of eight years. Total cost of the machine was $600,000, and salvage value was estimated to be $60,000. Actual units produced by the machine in 2007 and 2008 are shown below.

2002 16,000 units
2003 30,000 units

Andrews reports on a calendar-year basis and uses the productive-output method of depreciation. The amount of depreciation expense for this machine in 2008 would be
A. $124,200. C. $81,000.
B. $90,000. D. $74,520.
7. Hendricks Construction purchased a crane on January 1, 2007, for $102,750. At the time of purchase, the crane was estimated to have a life of six years and a residual value of $6,750. In 2009, Hendricks determined that the crane had a total useful life of seven years and a residual value of $4,500. If Hendricks uses the straight-line method of depreciation, what will be the depreciation expense for the crane in 2009?
A. $16,000 C. $9,464
B. $13,250 D. $8,000

8. On June 30, 2007, Hi-Tech Inc. purchased for cash at $50 per share all 150,000 shares of outstanding common stock of Skicraft Company. Skicraft’s balance sheet at June 30, 2007, showed net assets with a book value of $6,000,000. The fair value of Skicraft’s property, plant, and equipment on June 30, 2007, was $800,000 in excess of its book value. What amount, if any, will Hi-Tech record as goodwill on the date of purchase?
A. $0 C. $800,000
B. $700,000 D. $1,500,000
9. Peyton Company started construction of a new office building on January 1, 2007, and moved into the finished building on July 1, 2008. Of the building’s $5,000,000 total cost, $4,000,000 was incurred in 2007 evenly throughout the year. Peyton’s incremental borrowing rate was 12 percent throughout 2007, and the total amount of interest incurred by Peyton during 2007 was $204,000. What amount should Peyton report as capitalized interest at December 31, 2007?
A. $480,000 C. $240,000
B. $300,000 D. $204,000

10. In October 2007, Daryl Company exchanged a used packaging machine having a book value of $240,000 for a dissimilar new machine with a market value of $310,000. The company paid a cash difference of $30,000. The market value of the used packaging machine was determined to be $280,000. In its income statement for the year ended December 31, 2007, how much gain should Daryl recognize on this exchange?
A. $0 C. $30,000
B. $10,000 D. $40,000

11. Luther Soaps purchased a machine on January 1, 2007, for $18,000 cash. The machine has an estimated useful life of four years and a salvage value of $4,700. Luther uses the double-declining-balance method of depreciation for all its assets. What will be the machine’s book value as of December 31, 2008?
A. $5,100 C. $4,500
B. $4,700 D. $4,300

12. A company using the group depreciation method for its delivery trucks retired one of its delivery trucks after the average service life of the group was reached. Cash proceeds were received from a salvage company. The net carrying amount of these group asset accounts would be decreased by the
A. original cost of the truck.
B. original cost of the truck less the cash proceeds.
C. cash proceeds received.
D. cash proceeds received and original cost of the truck.

13. On January 1, 2007, Mackay, Inc. spent $80,000 to acquire a trademark. The trademark has a legal life of costs associated with an internally developed trademark. The trademark has an indefinite legal life as long as it’s used, and as of the end of 2007 Mackay had no reason to assume this wouldn’t be the case. However, they expected that the trademark had an economic life of only 10 years. The trademark wasn’t impaired in any way. If Mackay wishes to maximize current period income with respect to its amortization of the trademark, how much expense should it recognize in 2007?
A. $0 C. $8,000
B. $2,000 D. $80,000

14. Which of the following reasons provides the best theoretical support for accelerated depreciation?
A. Assets are more efficient in early years and initially generate more revenue.
B. Expenses should be allocated in a manner that “smooths” earnings.
C. Repairs and maintenance costs will probably increase in later periods, so depreciation should decline.
D. Accelerated depreciation provides easier replacement because of the time value of money.

15. Eagle Company owns a tract of land that it purchased in 2004 for $200,000. The land is held as a future plant site and has a fair market value of $280,000 on July 1, 2007. Hall Company also owns a tract of land held as a future plant site. Hall paid $360,000 for the land in 2006 and the land has a fair market value of $380,000 on July 1, 2007. On this date, Eagle exchanged its land and paid $100,000 cash for the land owned by Hall. At what amount should Eagle record the land acquired in the exchange?
A. $280,000 C. $320,000
B. $300,000 D. $380,000

16. On January 1, 2006, Carson Company purchased equipment at a cost of $420,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000.
Carson uses the sum-of-the-years’-digits method of depreciation. What should the accumulated depreciation be at December 31, 2008?
A. $240,000 C. $336,000
B. $288,000 D. $360,000

17. On October 1, Takei, Inc. exchanged 8,000 shares of its $25 par value common stock for a parcel of land to be held for a future plant site. Takei’s common stock had a fair market value of $80 per share on the exchange date. Takei received $36,000 from the sale of scrap when an existing building on the site was razed. The land should be carried at
A. $200,000. C. $604,000.
B. $236,000. D. $640,000.

18. The Oscar Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $180,000. At the time of acquisition, Oscar paid $12,000 to have the assets appraised. The appraisal disclosed the following values:

Land $120,000
Buildings 80,000
Equipment 40,000

What cost should be assigned to the land, buildings, and equipment, respectively?
A. $64,000, $64,000, and $64,000 C. $96,000, $64,000, and $32,000
B. $90,000, $60,000, and $30,000 D. $120,000, $80,000, and $40,000

19. A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It’s exchanged along with $5,000 cash for another piece of land having a fair value of $13,000. What is the proper journal entry to record this transaction?

A. Land (new) $15,000
Land (old) $10,000
Cash 5,000

B. Land (new) $13,000
Loss on Exchange 2,000
Land $10,000
Cash 5,000

C. Land (new) $18,000
Land (old) $10,000
Cash 5,000
Gain on Exchange 3,000

D. Land (new) $13,000
Retained Earnings 2,000
Land (old) $10,000
Cash 5,000

20. In January 2007, Vance Mining Corporation purchased a mineral mine for $7,200,000 with removable ore estimated by geological surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore has been extracted. Vance incurred $2,160,000 of development costs preparing the property for the extraction of ore. During 2007, 540,000 tons were removed and 480,000 tons were sold. For the year ended December 31, 2007, Vance should include what amount of depletion in its cost of goods sold?
A. $720,000 C. $960,000
B. $810,000 D. $1,080,000