ac551 midterm november 2013

1. Question : (TCO C) The cost of an intangible asset includes all of the following except

Student Answer:purchase price.

legal fees.

other incidental expenses.

All of these are included.

Instructor Explanation:

Chapter 12

Points Received: 5 of 5

Comments:

Question 2.Question : (TCO C) Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be charged to

Student Answer:patents, and amortized over the legal life of the patent.

legal fees, and amortized over 5 years or less.

expenses of the period.

patents, and amortized over the remaining useful life of the patent.


Chapter 12


Comments:

Question 3.Question : (TCO C) Negative goodwill arises when the _____ of the net assets acquired is higher than the purchase price of the assets.

Student Answer:useful life

carrying value

fair value

excess earnings


Chapter 12


Comments:

Question 4.Question : (TCO C) ELO Corporation purchased a patent for $90,000 on September 1, 2008. It had a useful life of 10 years. On January 1, 2010, ELO spent $22,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2010?

Student $20,600

Answer:

$20,000

$18,800

$15,600 Instructor

Explanation:Chapter 12, $90,000 – [($90,000 / 10) X 1 1/3] = $78,000 ($78,000 + $22,000) / 5 = $20,000


Comments:

Question 5.Question : (TCO C) General Products Company bought Special Products Division in 2010 and appropriately recorded $500,000 of goodwill related to the purchase. On December 31, 2011, the fair value of Special Products Division is $4,000,000 and it is carried on General Products’ books for a total of $3,400,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2011. What goodwill impairment should be recognized by General Products in 2011?

Student Answer:$0

$200,000

$50,000

$300,000


Chapter 12. Because $4,000,000 > $3,400,000, $0 impairment


Comments:

Question 6.Question : (TCO D) An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

Student Answer:portion of FICA taxes and unemployment taxes.

portion of FIT, SIT, and Medicare deductions.

portion of FICA taxes, unemployment taxes, and any voluntary

deductions.

portion of FICA taxes and any voluntary deductions. Instructor

Explanation:Chapter 13


Comments:

Question 7.Question : (TCO D) Which gives rise to the requirement to accrue a liability for the cost of compensated absences?

Student Answer:Payment is probable.

Employee rights vest or accumulate.

The amount can be reasonably estimated.

All of the above


Chapter 13


Comments:

Question 8.Question : (TCO D) Which of the following is not acceptable treatment for the presentation of current liabilities?

Student Answer:Listing current liabilities in order of maturity

Listing current liabilities according to amount

Offsetting current liabilities against assets that are to be applied to

their liquidation

Showing current liabilities immediately below current assets to obtain a presentation of working capital


Chapter 13


Comments:

Question 9.Question : (TCO D) Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

Student Answer:$1,500,000.

$2,500,000.

$1,000,000.

$0


Chapter 13, 75,000 X $20 = $1,500,000.


Comments:

Question 10.Question : (TCO D) Tender Foot, Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that it may lose the case. The attorneys estimated that there is a 40% chance of losing. Tender Foot’s attorney

estimated that if it loses, then the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?

Student Answer:Debit Litigation Expense for $500,000 and credit Litigation Liability for

$500,000.

No journal entry is required.

Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.

Debit Litigation Expense for $300,000 and credit Litigation Liability for

$300,000 ( )


Chapter 13, likelihood of loss is only possible, not probable


Comments:

Question 11.Question : (TCO D) Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that

Student Answer:the effective yield or market rate of interest exceeded the stated

(nominal) rate.

the nominal rate of interest exceeded the market rate.

the market and nominal rates coincided.

no necessary relationship exists between the two rates. Instructor

Explanation:Chapter 14


Comments:

Question 12.Question : (TCO D) If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

Student Answer:debit to Interest Payable.

credit to Interest Receivable.

credit to Interest Expense.

credit to Unearned Interest.


Chapter 14


Comments:

Question 13.Question : (TCO D) On January 1, 2010, Ellison Co. issued 8-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are as follows:

Present value of 1 for eight periods at 6% .627Present value of 1 for eight periods at 8% .540Present value of 1 for 16 periods at 3% .623Present value of 1 for 16 periods at 4% .534Present value of annuity for eight periods at 6% 6.210Present value of annuity for eight periods at 8% 5.747Present value of annuity for 16 periods at 3% 12.561Present value of annuity for 16 periods at 4% 11.652

The issue price of the bonds is Student Answer:

$883,560.

$884,820.

$889,560.

$999,600. Instructor

Explanation:Chapter 14, $534,000 + $349,560 = $883,560


Comments:

Question 14.Question : (TCO D) A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. Using effective-interest amortization, how much interest expense will be recognized in 2010?

Student Answer:$195,000

$390,000

$392,124

$392,083


Chapter 14, ($4,901,036 X .04) + ($4,902,077 X .04) = $392,124


Comments:

Question 15.Question : (TCO D) On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of

Student Answer:

$185,130.

$184,500.

$173,550.

$165,000.


Chapter 14, ($3,000,000 X .11) – ($3,195,000 X .10) = $10,500 ($3,195,000 – $3,000,000) – $10,500 = $184,500


Comments:

1. Question : (TCO C) Intangible assets may be internally generated or purchased from another party. In either case, the cost that should be included in the initial valuation of the asset is an issue. Instructions:- Identify the typical costs included in the cash purchase of an intangible asset.- Discuss how to determine the cost of an intangible asset acquired in a noncash transaction.- Describe how to determine the cost of several intangible assets acquired in a basket purchase. Provide a numerical example involving intangibles being acquired for a total price of $120,000.

Student Answer:

a.) Intangible asset purchased by cash from another company are recorded at cost. Costs includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use. Purchase price, legal fees, and other incidental expenses are typical costs included in cash purchase an intangible assets. b) Companies that acquire intangible asset in a non-cash transaction like exchange for stock or other assets, the cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident. c) In case of a basket purchase where company buys several intangibles or a combination or intangibles and tangibles, the company usually allocate the cost on the basis of fair values. The accounting treatment for purchased of intangibles is parallels that for purchased tangible assets. For example the company purchased an intangible asset with a total price of $120,000, this includes internet domains that has a fair market value of $20,000 and a customer database that has a limited life of five years and the fair market value is $100,000.


(Chapter 12) - The typical costs included in the purchase of an intangible asset are purchase price, legal fees, and other incidental expenses.- In a noncash acquisition of an intangible asset, the initial cost of the intangible is either the fair market value of the consideration given or the fair market value of the intangible received, whichever is more clearly evident.- When several intangible assets are acquired in a basket purchase, the cost of the individual assets is based on their relative fair market values. An example is below.

Asset FMV %Allocation Patent A $ 60,000 60 60% x $120,000 = $ 72,000 Patent B 40,000 4040% x $120,000 = 48,000 Totals $100,000 100$120,000


Comments:

Question 2.Question : (TCO C) Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in accordance with generally accepted accounting principles?

Student Answer:

Goodwill is recorded in the accounts only under the circumstances that is is acquired through a purchase of another business or combination of businesses. According to Generally Accepted Accounting Principle under these circumstances where goodwill is acquired through a purchase by another business that it is recognized as having indefinite life and should not be amortized but should be tested for impairment on at least an annual basis.


Chapter 12, Goodwill is recorded only when it is acquired through a business combination. Goodwill acquired in a business combination is considered to have an indefinite life and therefore should not be amortized, but should be tested for impairment on at least an annual basis.


Comments:

Question 3.Question : (TCO D) Irving Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 340,000. Sales for the second period were $840,000, and the coupons redeemed totaled 850,000. Irving Music Shop bought 20,000 posters at $2.00/poster and 20,000 CDs at $6.00/CD. Instructions: Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period.

EntryPeriod 1 Period 2

(a) To record coupons redeemed

(b) To record estimated liability

Student Answer: Entry Period 1 Period 2 (a) To record coupons redeemed dr cr dr cr Estimated liability for premiums 6,600 (700,000*80%)-340,000/100)*$3 Premium Expense (340,000/100)($8-$5) 10,200

18,900 Cash (340,000/100)*$5 17,000 42,500 Inventory of Premium Posters and CDs 27,200 68,000 (b) To record estimated liability Premium expense 6,600 1,260 Estimated liability for Premiums 6,600 1,260 Period 2 Computation Period 1 Inventory of Posters ($340,000/100)*$2................6,800 Inventory of CDs($340,000/100)*$6....................20,400 Total inventory 27,200 (b) To record estimated liability (($700,000*80%)-$340,000)/100) * ($6+$2-$5) = $6,600 Period 2 (a) To record coupons redeemed Premium expense ($850,000/100)($8-$5) - 6,600 = 18,900 Inventory for Posters ($850,000/100)*$2................17,000 Inventory for CDs ($850,000/100)*$6....................51,000 Total inventory......................................................68,000 (b) Estimated liability ((840,000*80%=672,000 - 850,000)/100 * $3) +6,600 = $1,260


Chapter 13 Entry Period 1 Period 2(a) Estimated liability for premiums 6,600Premium expense [(340,000 / 100) X ($8.00 – $5)] 10,200 18,900Cash (340,000 / 100) x $5 17,000 42,500 Inventory of premium posters and CDs 27,200 68,000 (b) Premium expense 6,600 1,260Estimate liability for premiums 6,600 1,260 [(700,000 X .80) – 340,000] / 100 X $3.00


Comments:

Question 4.Question : (TCO D) On January 1, 2011, Piper Co. issued 10-year bonds with a face value of $1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: Present value of 1 for 10 periods at 10% .386 Present value of 1 for 10 periods at 12% .322 Present value of 1 for 20 periods at 5% .377 Present value of 1 for 20 periods at 6% .312 Present value of annuity for 10 periods at 10% 6.145 Present value of annuity for 10 periods at 12% 5.650

Present value of annuity for 20 periods at 5% 12.462 Present value of annuity for 20 periods at 6% 11.470 Instructions:- Calculate the issue price of the bonds.- Without prejudice to your solution in Part (a), assume that the issue price was $884,000. Prepare the amortization table for 2011, assuming that amortization is recorded on interest payment dates.

Student Answer:

(a) Issue Price of the bonds = $312,000+$573,500 = $885,500 $1,000,000*.312 = $312,000 ($1,000,000*10%*6/12)*11.470= $573,500 (b) Amortization table for 2011 1/1/11 Carrying Amount........................$884,000 6/30/11 Interest Expense($884,000*.12)/2........53,040 6/30/11Cash interest amortized ($1,000,000*.05)....50,000 6/30/11 Discount 53,040-50,000..........................3,040 6/30 Carrying amount $884,000-3,040.................880,960 12/31/11 Interest Expense (880,960*.12)/2.....52,858 12/31/11 Cash Amortized1,000,000*.05........50,000 12/31/11 Discount 52,858-50,000.......2,858 12/31/11 Carrying Amount 880,960-2,858 ......878,102 Date Interest Expense Cash Amortized Discount Carrying Amount 1/1/11 $884,000 6/30/11 $53,040 50,000 $3,040 880,960 12/31/11 52,858 50,000 2,858 878,102


Chapter 14 - .312 X $1,000,000 = $312,000 11,470 X $50,000 = 573,500 $885,500 Carrying - Date Cash Expense Amortization Amount 1/1/11 $884,000 6/30/11 $50,000 $53,040 3,040 887,040 12/31/11 50,000 53,222 3,222 890,262


Comments:

Question 5.Question : (TCO D) Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar). The December 31, 2010 balance sheet of Wolfe Co. included the following items:7.5% bonds payable due December 31, 2018 $1,200,000 Unamortized discount on bonds payable 48,000 The bonds were issued on December 31, 2008 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization) On April 1, 2011, Wolfe retired $240,000 of these bonds at 101 plus accrued interest.

Student Answer: Interest Expense......................................4,800 Cash

($240,000*7.5%*3/12).....................................4,500 Discount on Bonds Payable ($48,000*1/5*1/8*3/12)......300 Bonds Payable....................................240,000 Loss on Redemption of Bonds.................11,700 Cash.................................................................242,400 Discount on Bonds Payable (($48,000*1/5)-300).......9,300


Chapter 14 Interest expense 4,800 Cash ($240,000 X 7.5% X 3/12) 4,500 Discount on bonds payable ($48,000 X 1/5 X 3/12) 300 Bonds payable 240,000 Loss on redemption of bonds 11,700 Discount on bonds payable [(1/5 X $48,000) – $300] 9,300 Cash 242,400


ac551 midterm november 2013

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