Financial Accounting: Assets
Question 1 (15 marks)
Computer question
Before you attempt this question, you should work through Computer illustration 9-1 in the Lesson Notes.
This question is based on the following information using the worksheet in FA2L9Q1.
Exquisite Trash Company contracted to buy a Dempster Loader for €54,500 and agreed to make a down payment of €20,000 and five equal payments at the end of each year, at an interest rate of 12% per year. The Dempster Loader has a list price of €54,500, an estimated service life of seven years, and an estimated residual value of €3,000.
Required (round to the nearest euro)
a.(2 marks)
Prepare the journal entries to record the purchase of the loader.
b.(7 marks)
Complete and print the worksheet to determine the amount of the equal annual payments, and answer the following questions:
i)How much is the annual payment?
ii)How much is the total interest component?
iii)Report the formulas in cells D10 and C16.
c.(4 marks)
Assuming Exquisite’s fiscal year end coincides with the payment dates, record the first payment and depreciation expense, using the straight-line method, at the end of the first year.
d.(2 marks)
Give similar entries at the end of the fourth year.
Procedure
1.Open the file FA2L9Q1.
2.Examine the formulas in this worksheet, and note that cells D5, D6, and D8 to D10 are blank. Note also that column C in the schedule of Payment and Interest is blank and that the formulas to calculate the amount of the interest component of each payment need to be entered.
3.Enter the appropriate information in cells D5 to D9 as required.
4.Enter the appropriate formulas in cell D10 and column C, making use of absolute cell references whenever necessary.
5.Save a copy of your worksheet, and print the worksheet.
6.Display and print the formulas.
Question 2 (30 marks)
Multiple choice (1 mark each)
a.Which of the following would not be capitalized as costs related to obtaining and preparing a new machine for its intended use?
1)Shipping costs related to the machine
2)Installation costs related to the machine
3)Depreciation on the machine during its testing period
4)Insurance costs while in transit
b.Property, plant and equipment assets may properly include which of the following?
1)Property held for investment purposes
2)Land held for possible use as a future plant site
3)Deposits on machinery purchased and not yet received
4)Self-constructed assets currently in use
c.How should discounts given for early payment of credit purchases of noncurrent assets be accounted for?
1)Recorded as interest expense at the purchase date
2)Capitalized as a cost of the asset acquired and subsequently allocated to depreciation expense
3)Recorded as interest revenue at purchase date
4)Deducted from the invoice price when determining the cost of the asset
d.When a company issues preference shares in exchange for land, how should the land be recorded?
1)At book value of the land
2)At market value of the shares at the time they are issued
3)At total redemption value of the shares issued
4)At total book value of the shares issued
e.Under the deferral method of accounting for assets acquired with government assistance, how is the amount of the government assistance accounted for?
1)The government assistance is credited to shareholders’ equity.
2)The amount of the government assistance is set up as deferred income and credited and amortized to income on the same basis as the depreciation on the related noncurrent asset.
3)The amount of the government assistance is deducted from the invoice cost of the noncurrent asset.
4)The noncurrent asset is recorded at a nominal value of €1.
f.Which of the following would not normally be used in the apportionment of the purchase price in a lump-sum acquisition of different non-current assets?
1)Book values of the assets to the seller
2)Relative market values of the assets
3)Tax assessment values of the assets
4)Appraised values of the assets
g.Which of the following conventions supports the capitalization of interest?
1)Matching principle
2)Comparability characteristic
3)Full disclosure principle
4)Revenue recognition principle
h.When should capitalization of interest cease on an operational asset under construction?
1)When the asset is substantially complete and ready for its intended use
2)When the asset is actually in use
3)At the end of the first fiscal year of the construction period
4)At the end of the last year in which the construction is completed in all respects
i.How should the costs of reinstalling or rearranging factory machinery to attain greater productive efficiency be accounted for?
1)Treated as a correction of an error
2)Expensed in the period in which the outlays occur
3)Debited to related accumulated depreciation accounts with no change in the depreciation rate
4)Capitalized, then depreciated during current and subsequent periods
j.Rustica and Xanatos exchanged similar non-current assets with no monetary consideration involved. The exchange lacked commercial substance for bothRusticaandXanatos. At what value should the asset received be recorded?
1)Fair value of the asset given up
2)Carrying value of the asset given up, if the carrying value of the asset given up is greater than fair value of asset acquired
3)Carrying value of the asset given up, if the carrying value of the asset given up is less than fair value of asset acquired
4)Carrying value of the asset acquired
k.The following expenditures were among those incurred by Johnson Black during the year ended December 31, 20X6:
Replacement of tiles on portion of roof that
had been leaking...... €4,000
Overhaul of machinery that is expected to extend
its useful life for another two years...... 6,000
How much should be charged to repairs and maintenance expense in 20X6?
1)€0
2)€4,000
3)€6,000
4)€10,000
l.Which of the following costs would not be classified as a capital expenditure?
1)Replacement costs that appropriately were debited to accumulated depreciation
2)A franchise fee purchased for cash, €400,000
3)Special equipment for use in the business purchased with a €180,000, interestbearing note (no cash was paid on purchase date)
4)Ordinary repairs incurred but not yet paid
m.Which of the following is not a characteristic of intangible assets?
1)Their ownership confers rights, but no physical substance.
2)They provide benefits to current operations only.
3)They are relatively long lived.
4)They have no physical substance.
n.What does the intangible asset “goodwill” represent?
1)The excess of a company’s market capitalization over its net book value
2)The worth of a company’s customer list
3)The excess an investor will pay over the fair market value of the identifiable net assets acquired
4)The difference between an asset’s fair value and its carrying value
o.Simon Co. acquired a copyright in exchange for 10,000 of its ordinary shares. The quoted market price on the stock exchange was €14 per share on the day the copyright was acquired. The copyright was estimated by Simon Co. to have a fair value of €150,000. (Assume that the market price of the shares and the fair value of the copyright are equally reliable.) At what amount should SimonCo. record the copyright?
1)€100,000
2)€145,000
3)€140,000
4)€150,000
p.Which of the following assets would not be classified as an intangible asset?
1)A patent owned by the company, amortized over two years less than its legal life
2)1,000 ordinary shares in another corporation purchased for €25 per share (cash)
3)A franchise fee payment of €650,000
4)Goodwill recognized on the acquisition of a subsidiary.
q.What does the allowed alternative treatment to the treatment that requires non-current assets to be carried at cost less accumulated depreciation allow?
1)Non-current assets should be restated to fair value, only if fair value is less than carrying value.
2)Non-current assets should be restated to fair value, only if fair value is greater than carrying value.
3)Non-current assets should be rested to fair value, with any increase or decrease being recognized immediately in income.
4) Non-current assets should be restated to fair value, with any increase credited to a Revaluation surplus account and any decrease debited to the Revaluation surplus account to the extent one exits for the asset and any excess recognized as an expense.
r.The following journal entry was recorded by QRS Ltd.:
Cash...... 30,000
Loss on sale of machine...... 4,000
Accumulated depreciation...... 11,000
Machine...... 45,000
Which of the following would be included in QRS’s cash flow statement?
1)A cash inflow from financing activities of €26,000
2)A cash inflow from investing activities of €26,000
3)A cash inflow from investing activities of €30,000
4)Deduction of €4,000 from net income in using the indirect method of determining cash flows from operating activities
(2 marks each)
s.TakTze acquired a machine and gave 10 instalment notes of €2,000 each. One note matures on the last day of each of the next 10 semi-annual periods. No interest was specified on the notes or the purchase contract. The going rate of interest for such transactions was 10% per annum. At what amount should the cost of the new machine be recorded?
1)€15,444
2)€12,290
3)€18,000
4)€20,000
t.The following information pertains to equipment constructed by a firm for its own use. The construction is finished.
Materials used in construction...... €40,000
Labour cost during construction...... 20,000
Fringe benefits on above labour...... 5,000
Incremental overhead due to construction...... 8,000
Interest cost on debt during construction; assume this meets
the requirements for interest capitalization...... 4,000
The market value of the equipment at completion was €65,000. What is the loss on construction incurred by the firm?
1)€2,000
2)€4,000
3)€8,000
4)€12,000
u.Simpson Associates purchased a factory complex, including land, building, and machinery, for €110,000. These items were carried on the books of the seller as follows: land, €30,000, building, €80,000, and machinery, €40,000. Immediately after the purchase, the assets were appraised at the following values: land, €24,000, building, €30,000, and machinery, €66,000. What cost should Simpson Associates record for the land, building, and machinery?
LandBuildingMachinery
1)€22,000 €27,500 €60,500
2)€22,000 €58,667 €29,333
3)€30,000 €80,000 €40,000
4)€36,666 €36,667 €36,667
v.RJ owns a used crane that was originally purchased on July 1, 20X3, for €180,000. Straight-line monthly depreciation has been recorded on the basis of an estimated useful life of five years and no residual value. On January 1, 20X6, RJ sold the crane for €92,000 cash. What is the pre-tax gain (loss) on the disposal of the crane?
1)€88,000 loss
2)€0
3)€2,000 gain
4)€4,000 gain
w.At January 1, 20X6, Mediera Inc. owns an office building with a carrying value of €100,000 and a current fair value of €140,000. HermanLtd. also owns an office building with a carrying value of €180,000 and a current fair value of €100,000. On this date, Mediera exchanged office buildings with Herman and Mediera received €50,000 cash as part of the deal. (Assume that the fair values of each office building are equally reliable.) At what amount should Mediera record the office building acquired in the exchange?
1)€190,000
2)€150,000
3)€90,000
4)€200,000
x.International Travel Inc. purchased all the outstanding ordinary shares of Hawaii Travel Corporation. Hawaii has one asset whose market value exceeds its book value by €10,000. Hawaii’s capital is €80,000. International Travel agreed with Hawaii that its excess earnings would last for 10 years and International requires a 10% return on its investments. Hawaii’s average annual profit for negotiation purposes is €40,000 and the industry average rate of return is 30% on market value of net assets. Using the “present value of the expected future excess earnings” approach to the calculation of goodwill, what was the purchase price paid for Hawaii?
1)€79,880
2)€169,880
3)€220,000
4)€335,782
Question 3 (16 marks)
The comptroller of Timberlay Construction Inc. is reviewing the accounting for several transactions that occurred during the first quarter of 20X7 These transactions are described below:
a.Timberlay purchased land upon which to build a new facility for its own use. It paid €260,000 in cash and assumed an existing mortgage of €50,000. The cost to raze and remove an old building on the site of the newly proposed facility was €50,000. Usable fixtures from the old building were sold for €10,000. One of Timberlay’s own architects designed the new building at a cost to Timberlay of €4,000, a saving of €6,000 compared to the price of an external consultant. Timberlay estimated that it incurred €600,000 to construct the building made up as follows:
Material & supplies€ 250,000
Paid to subcontractors 100,000
Wages & employee benefits 130,000
Interest on construction loan 10,000
Allocation of office overhead 50,000
Profit margin for Timberlay Construction 60,000
Total€ 600,000
b.Timberlay gave a one-year, interest bearing note for €165,000 to Holitzner Industries in exchange for a temperature monitoring system (TMS) and a conveyor to be installed in the new facility. The conveyor had an estimated value €60,000 at the date of the exchange, and is expected to last for 30 years, and will be needed as long as the facility is used by the company. The TMS had an estimated value of €110,000 at the date of exchange and is expected to last for five years.
c.Timberlay incurred the following costs in developing and securing a trademark:
Design costs€ 5,000
Registration fees 500
Legal fees 1,500
d.Timberlay spent €40,000 searching for practical applications of new research findings that, if found, will be of use to the company for the next 20 years.
e.Timberlay exchanged cranes of similar age and condition with Aztec Construction. The Timberlay crane was located in New York and had a fair market value of €23,000, cost of €50,000 and accumulated depreciation of €20,000 at the date of exchange. Aztec’s crane was located in Tokyo and had a fair market value of €26,000, cost of €56,000 and accumulated depreciation of €22,000 at the date of exchange. The exchange was made to facilitate construction projects on which each company was working.
Required
Indicate which of the costs are to be capitalized and give the journal entry to record each of the transactions on the books of Timberlay.
Question 4 (12 marks)
Yashin Ltd. and Daigle Ltd., agreed on January 1, 20X3, to trade plant facilities. Yashin was looking for a smaller plant and Daigle was looking for a larger plant. Information relating to each of the plant facilities is as follows:
Yashin Ltd.Daigle Ltd.
Year plant acquired19921997
Original cost€400,000€400,000
Accumulated depreciation, Dec. 31, 20X3€250,000€150,000
Appraised value at Dec. 31, 20X3€600,000€550,000
Daigle agreed to give up its plant facilities plus €50,000 cash in exchange for Yashin’s facilities.
Required
a.Prepare the journal entries for Yashin Ltd. to record the trade of the plant facilities assuming the transaction
i)lacks commercial substance
ii)has commercial substance
b.Assume that instead of paying €50,000 in cash Daigle agrees to pay €75,000. Prepare the journal entry for Yashin Ltd. to record the trade of the plant facilities. State any assumptions you must make.
Question 5 (12 marks)
(11/2 marks for each transaction)
Robo Toys commenced operations on January 1, 20X5. The following selected transactions and activities took place during its first year of operations.
a.The company spent €15,000 in legal fees and other costs associated with the initial organization of the company.
b.The company incurred €40,000 in research costs to investigate the feasibility of two Robo toys, €26,000 on the Robo Skateboarder and €14,000 on the Robo Snowboarder.
c.The Robo Skateboarder was determined to be technically and economically feasible thus prototype development and testing was commenced at a cost of €60,000. In addition the company paid €6,000 to have the Robo skateboarder patented.
d.The company commenced sales of the Robo Skateboarder in December of 20X5, paying €30,000 for television advertising during Saturday morning cartoon shows.
e.The company paid €16,000 for the patent for a glow in the dark, long lasting bubble making formula.
f.The company purchased a country wide franchise for Edutoy Stores. The company paid an initial lump sum franchise fee of €50,000 and an additional €7,000 annual fee for general marketing support and training.
g.The owners of Robo Toys are quite pleased with the first year of operations and feel that the company could be sold for €70,000 more than the fair market value of its net assets.
h.The company paid the designer of the Robo Skateboarder a bonus of €10,000.
Required
For each transaction or event state whether the item will be expensed or capitalized, and give the journal entry to record the transaction.
Question 6 (15 marks)
(3 marks each)
The following expenditures occurred at the Redericton GeneralHospital during 20X5. The hospital has a policy of expensing all items that cost less than €1,000.
a.An addition was built, at a cost of € 1,800,000, to allow for an expansion of the emergency and the diagnostic imaging departments. The addition is expected to have a useful life similar to that of the existing building.
b.€27,000 was spent to maintain the grounds and included the cost to plant flower beds, cut lawns and keep the parking lots cleared of snow. The €27,000 included the cost of labour, material and depreciation on equipment. The hospital also paid €900 to purchase a special piece of equipment to assist in the fertilization and aeration of the lawns.
c.A new MRI scanner was purchased at a cost €400,000. Installation costs equalled €5,000 and €3,000 was paid to train technicians to use the machine.
d.€60,000 was spent to overhaul one of the hospital’s CT scanning machines. This expenditure extended the useful life of the machine from 10 to 15 years.
e.€7,000 was spent to paint the surgical ward, paediatric ward, and emergency department.
Required
Prepare the journal entry to record each expenditure. Explain the reason for your treatment of the expenditure.
Suggested solutions
Question 1 (15 marks)
Computer solution
a.(2 marks)
The proper entry to record the purchase is:
Machinery...... 54,500
Note payable — machinery...... 34,500
Cash...... 20,000
b.(7 marks)
i)The annual payment is €9,571.
ii)The total interest component is €13,353.
iii)Formula in cell D10:
=PMT(D8,D9,–D7)
Formula in cell C16:
=IF(B16>0,E15*$D$8,0)
c.(4 marks)
The data can be read off the worksheet for the first year’s payment.
Interest expense...... 4,140
Note payable — machinery...... 5,431
Cash...... 9,571
Deprecation expense...... 7,357
Accumulated depreciation — machine ...... 7,357
Depreciation is: (€54,500 – €3,000) ÷ 7 = €7,357
d.(2 marks)