intermediate accounting test bank 1 chap

Name: __________________________

Section: 501

University of Texas at Arlington

Mid-Term 3

Acct 5311- Spring 2008 Chandra Subramaniam

THIS EXAM IS 80 MINUTES LONG.

This exam consists of 3 problems. The first problem uses the multiple choice format. Please use your Scantron sheet for this section. Answer the remaining problems in the space provided in this exam. Please make sure that you have ten (10) pages including this cover page.

There are 100 total possible points. Allocate an appropriate amount of time to each question.

The only materials you are permitted to use on this exam are (1) a calculator, (2) a pencil with eraser or pen.

Be sure to note the relevant dates referred to in each question.

Point Allocation Problem 1 …………………………….40 Problem 2 …………………………….40 Problem 3 …………………………….20 Total Possible points 100

GOOD LUCK!

Multiple Choice ( 2 points each)

1. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is

located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be

a. depreciated over the period from acquisition to the date the hotel is scheduled to be

torn down.

b. written off as an extraordinary loss in the year the hotel is torn down. c. capitalized as part of the cost of the land.

d. capitalized as part of the cost of the new hotel.

2. If a corporation purchases a lot and building and subsequently tears down the building

and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

a. the significance of the cost allocated to the building in relation to the combined cost

of the lot and building.

b. the length of time for which the building was held prior to its demolition. c. the contemplated future use of the parking lot.

d. the intention of management for the property when the building was acquired.

3. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.

b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization.

4. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a

building site should be debited to the land account and not to the building account. b. The amount of interest cost capitalized during the period should not exceed the

actual interest cost incurred.

c. When excess borrowed funds not immediately needed for construction are

temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized.

d. The minimum amount of interest to be capitalized is determined by multiplying a

weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

5. The King-Kong Corporation exchanges one plant asset for a similar plant asset and

gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

a. be reported in the Other Revenues and Gains section of the income statement. b. effectively reduce the amount to be recorded as the cost of the new asset. c. effectively increase the amount to be recorded as the cost of the new asset. d. be credited directly to the owner's capital account.

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An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be a. expensed.

b. debited to accumulated depreciation. c. capitalized in the machine account.

d. allocated between accumulated depreciation and the machine account.

Tyson Chandler Company purchased equipment for $10,000. Sales tax on the purchase was $500. Other costs incurred were freight charges of $200, warranty costs of one year for $350, and installation costs of $225. What is the cost of the equipment? a. $10,000 b. $10,500 c. $10,925 d. $11,275

Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average accumulated expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was $300,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is a. $237,500. b. $245,000. c. $257,500. d. $337,500.

Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2007, Quayle estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Quayle? a. As a prior period adjustment

b. As the cumulative effect of a change in accounting principle in 2007

c. By setting future annual depreciation equal to one-sixth of the book value on January

1, 2007

d. By continuing to depreciate the machinery over the original fifteen year life

George Martin Corporation purchased a depreciable asset for $300,000 on January 1, 2005. The estimated salvage value is $30,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. In 2008, George Martin changed its estimates to a total useful life of 5 years with a salvage value of $50,000. What is 2008 depreciation expense? a. $30,000 b. $50,000 c. $80,000 d. $90,000

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Jantz Corporation purchased a machine on July 1, 2004, for $750,000. The machine was estimated to have a useful life of 10 years with an estimated salvage value of $42,000. During 2007, it became apparent that the machine would become uneconomical after December 31, 2011, and that the machine would have no scrap value. Accumulated depreciation on this machine as of December 31, 2006, was $177,000. What should be the charge for depreciation in 2007 under generally accepted accounting principles? a. $106,200 b. $114,600 c. $123,000 d. $143,250

Klein Co. purchased machinery on January 2, 2001, for $440,000. The straight-line method is used and useful life is estimated to be 10 years, with a $40,000 salvage value. At the beginning of 2007 Klein spent $96,000 to overhaul the machinery. After the overhaul, Klein estimated that the useful life would be extended 4 years (14 years total), and the salvage value would be $20,000. The depreciation expense for 2007 should be a. $28,250. b. $34,500. c. $40,000. d. $37,000.

In January, 2007, Miley Corporation purchased a mineral mine for $3,400,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $200,000 after the ore has been extracted. The company incurred $1,000,000 of development costs preparing the mine for production. During 2007, 500,000 tons were removed and 400,000 tons were sold. What is the amount of depletion that Miley should expense for 2007? a. $640,000 b. $800,000 c. $840,000 d. $1,120,000

A plant 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 sum-of-the-years'-digits method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset? Gain Loss a. Decrease Decrease b. Decrease Increase c. Increase Decrease d. Increase Increase

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