Accounting 204 Final Exam
This exam has 10 multiple-choice problems worth 2.5 points each, two essays (answer only one for 5 points) and 1 problem worth 20 points. You must show all your work (i.e., show how you calculated any number not given in the multiple-choice questions or the problem) to receive credit.
1. Durham Auto Company donated land to Leon Auto Parts, Inc. as an incentive for Leon to build a plant next door to Durham. How should Leon account for this transaction?
- By debiting land and crediting additional paid in capital
- By debiting land and crediting cash
- By debiting land and crediting retained earnings
- By debiting land and crediting revenue
e.None of the above
2. In January 1997, Bere, Inc. purchased a strip mine for $4,250,000. Geologists estimate that the site has 2,000,000 tons of ore. Bere will have to spend about $1,000,000 to return the site to its original condition. Bere hopes to sell the site to the state as a park for $250,000 after restoration. During 1997, 500,000 tons were mined and 375,000 sold. What is the value of Bere's 1997 ending inventory?
e. None of the above. The answer is ______.
3 On Jan. 1, 19x1, Einsdorf Construction Inc. signed a 5 year, 13%, $3,000,000 construction note payable. Other debt outstanding was a 6-year, $8,000,000, 8% general obligation note payable and a 7 year, $4,000,000, 12% bond payable. Einsdorf Construction Inc. spent $4,000,000 on construction on July 1, 19x1 (six months into the year) and $8,000,000 on October 1, 19x1 (nine months into the year). How much interest should be capitalized by Einsdorf at 12/31/x1?
e.None of the above. The answer is ______.
4. The sale of a depreciable asset that results ineither a gain nor a loss indicates that the proceeds from the sale were
- equal to cost
- equalto book value
- equal to current market value
- part of an exchange of similar assets
- none of the above. The answer is ______.
5. In 1998, Hilton Hotels bought the No-Tell Motel and the land on which the motel is located. In 1999, Hilton tore down the old motel and built a new luxury hotel on the site. The cost of the No-tell hotel should be
- Added to the cost of the land.
- Added to the cost of the new luxury motel and depreciated in a systematic and rational method
- written off as a loss in the year the motel is torn down.
- written off as a loss in the year the motel is purchased.
e.None of the above. The correct answer is ______.
6. Use of the double-declining balance method
- results in a decreasing annual charge to depreciation expense
- means that salvage value is not deducted in computing the depreciable cost of the asset
- means that depreciation expense eventually becomes a plug figure to get book value equal to salvage value.
- All of the above.
- None of the above.
7. A fixed asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life. How would using the double-declining-balance method of depreciation instead of the straight-line method of depreciation affect a gain or loss on the sale of the fixed asset?
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase
e. none of the above. The answer is ______.
8. Depreciation is most appropriately considered to be
- the process of allocating the cost of long-lived assets to the periods in which the assets generate revenue
- the process of valuing the long-lived assets at the lower of book value or fair market value for balance sheet presentation
- the process of determining the amount of decline in the fair market value of long-lived assets over the past accounting period.
- the process of measuring the gradual reduction in value of long-lived assets due to obsolescence.
e. none of the above. The answer is ______.
9. Exxxon, Inc. uses the full-cost method of accounting for oil & gas exploration. Wildcat Corporation uses the successful efforts method. All else being equal, which of the following statements is true?
- Wildcat Corporation will have lower net income than Exxxon.
- Wildcat Corporation will have lower net assets than Exxxon.
- Wildcat Corporation will have lower owner’s equity than Exxxon.
- All of the above are true.
- None of the above is true.
10. ABC Co. paid $1,000,000 to replace the engine in its $20,000,000 corporate jet. ABC estimates that the replacement of the engine will extend the life of the plane three years past what it normally would fly. ABC should record the cost of the new engine by
- increasing expenses
- increasing the asset (“airplane”) account
- decreasing the “accumulated depreciation-airplane” account
- all of the above
- none of the above.
Problem: (20 points)
On 1/1/97, Company A purchased an asset for $60,000. The machine has an estimated useful life of 10 years and no salvage value. At 12/31/97, the machine has a fair market value of $69,000. Also on 1/1/97, Company B purchased an asset for $81,000. The machine has an estimated useful life of 10 years and no salvage value. At 12/31/98, the machine has a fair market value of $60,000. After recording depreciationeach year, the two companies exchange the assets and Company B also pays Company A $9,000 in cash. Company A uses double-declining balance and Company B use straight-line depreciation.
a. Assume that the assets are dissimilar. Prepare the necessary journal entries to record the exchange of assets for both Company A and Company B on 12/31/98.
b. Assume that the assets are similar. Prepare the necessary journal entries to record the exchange of assets for both Company A and Company B on 12/31/98.
Choose one of the following 2 essay questions (5 points).
- Sales of depreciable assets typically lead to gains or losses. Why are these gains or losses considered to be “paper”, rather than real losses? Why is that two companies can sell identical assets purchased for the same price and receive the same amount of cash but recognize differing amounts of gains and/or losses?
2. Start-up companies, e.g., high-tech companies often spend a lot of cash the first few years of existence. What accountingissues does this raise?