March 24, 2006 Anderson ECON 136A 8am Class...

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March 24, 2006 Anderson ECON 136A 8am Class FINAL EXAM v. 1 Name _________________________ Complete questions #1-25 on your scantron AND WRITE YOUR EXAM VERSION ON THE SCANTRON. Complete the problems #26-29 in your blue-book 1. Contractor, Inc. exchanges a truck and $10,000 for a bulldozer. The transaction is deemed to have commercial substance. The truck has a fair market value of $15,000, was purchased for $30,000 and has accumulated depreciation of $20,000 on the date of the exchange. Which of the following statements is true regarding this transaction for Contractor, Inc.? a. The bulldozer will be recorded on the books for $25,000 and no gain will be recorded. b. The bulldozer will be capitalized at $25,000 and a gain of $5,000 will also be recorded. c. The bulldozer will be capitalized at $10,000 and a gain of $5,000 will also be recorded. d. The bulldozer will be capitalized at $20,000 and no gain will be recorded. 2. Interest cost that is capitalized should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of these. 3. In a nonmonetary exchange of fixed assets, a gain may be recorded if: a. The property received has a fair value greater than the net book value of the property given. b. The property received has a fair value greater than the net book value of the property given AND the transaction has commercial substance. c. The property given has a fair value in excess of it's net book value. d. The property given has a fair value in excess of it's net book value AND the transaction has commercial substance.

Transcript of March 24, 2006 Anderson ECON 136A 8am Class...

Page 1: March 24, 2006 Anderson ECON 136A 8am Class …econ.ucsb.edu/~anderson/Password/136A_1_W06_final.pdfb. Depreciation of the asset should stop. c. Recovery of previous impairment losses

March 24, 2006 Anderson ECON 136A 8am Class FINAL EXAM v. 1 Name _________________________ Complete questions #1-25 on your scantron AND WRITE YOUR EXAM VERSION ON THE SCANTRON. Complete the problems #26-29 in your blue-book 1. Contractor, Inc. exchanges a truck and $10,000 for a bulldozer. The transaction is deemed to have commercial substance. The truck has a fair market value of $15,000, was purchased for $30,000 and has accumulated depreciation of $20,000 on the date of the exchange. Which of the following statements is true regarding this transaction for Contractor, Inc.? a. The bulldozer will be recorded on the books for $25,000 and no gain will be recorded. b. The bulldozer will be capitalized at $25,000 and a gain of $5,000 will also be recorded. c. The bulldozer will be capitalized at $10,000 and a gain of $5,000 will also be recorded. d. The bulldozer will be capitalized at $20,000 and no gain will be recorded. 2. Interest cost that is capitalized should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of these. 3. In a nonmonetary exchange of fixed assets, a gain may be recorded if: a. The property received has a fair value greater than the net book value of the property given. b. The property received has a fair value greater than the net book value of the property given AND the transaction has commercial substance. c. The property given has a fair value in excess of it's net book value. d. The property given has a fair value in excess of it's net book value AND the transaction has commercial substance.

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FINAL EXAM v. 1--Page 2 4. Which of the following costs is not always be capitalized to land or buildings in connection with the construction of a facility: a. Cost of acquiring the land b. Cost of demolition of structures on the land which were deemed useless at the time the land was acquired c. Interest d. Surveying costs in connection with drawing up plans for the new structure. 5. There has been a negative event causing management to question whether an asset has been impaired. Their analysis reveals that the asset will produce cash flows as follows: Year 1: (20,000) Year 2: (5,000) Year 3: 0 Year 4: 15,000 Year 5: 20,000 Management expects to dispose of the asset at the end of year 5 for $200,000. The asset's net book value is $195,000 and management estimates the asset's fair value to be $130,000. Which of the following statements is accurate. a. The asset is impaired and management should record an impairment loss of $65,000. b. The asset is impaired and management should record an impairment loss of $80,000. c. The asset is not impaired and no adjustment is required as it passes the undiscounted cash flow analysis. d. None of the above. 6. Rich Co. exchanged merchandise that cost $24,000 and normally sold for $36,000 for a new delivery truck with a list price of $40,000. The delivery truck should be recorded on Rich's books at a. $24,000. b. $30,000. c. $36,000. d. $40,000. 7. 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 construc- tion 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.

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FINAL EXAM v. 1--Page 3 8. Which factor below is not a component of depreciation computations? a. Historical cost; b. Estimated service life; c. Estimated economic life; d. Salvage value; 9. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been in- curred if expenditures for asset construction had not been made. d. that portion of average accumulated expenditures on which no interest cost was incurred. 10. The cost of land does NOT include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments. 11. The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these. 12. Which of the following costs may be capitalized in connection with development of a long-lived asset? a. Fees paid to an escrow agent in connection with purchasing land; b. Payments to a contractor for the construction of a facility; c. Payroll to employees who work directly on construction of a facility. d. All of the above. 13. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a. 8/8. b. 8/12. c. 9/12. d. 11/12. 14. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should stop. c. Recovery of previous impairment losses are permitted. d. All of the above.

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FINAL EXAM v. 1--Page 4 15. An asset has exhibited no events or changes in circumstances indicating a possible impairment. Management should: a. Perform an undiscounted cash flow analysis to test for possible impairment. b. Do nothing as impairment testing is not required. c. Perform a discounted cash flow analysis to test for possible impairment. d. Engage a qualified appraiser to estimate fair value for impairment testing. 16. The most common method of recording depletion for accounting purposes is the a. percentage depletion method. b. decreasing charge method. c. straight-line method. d. units-of-production method. 17. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn? a. Vertically and sloping down to the right b. Vertically and sloping up to the right c. Horizontally and sloping down to the right d. Horizontally and sloping up to the right 18. A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods. 19. Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these. 20. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should be recorded on a current and forward basis, based upon the asset's revised book value. c. Recovery of previous impairment losses are NOT permitted. d. All of the above.

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FINAL EXAM v. 1--Page 5 21. Which of the following statements is true regarding the capitalization of costs for fixed assets? a. All costs necessary to bring the asset to it's ready for use condition may be capitalized. Subsequent costs may only be capitalized if they increase the life or productivity of the asset. b. Only costs which are paid to third parties may be capitalized. c. Only costs paid to third parties and which are necessary to bring the asset to it's ready for use condition may be capitalized. d. Costs must increase the productivity and useful life of an asset in order to qualify for capitalization. 22. Which of the following depreciation methods will provide the best matching of cost to benefit: a. Declining balance methods; b. Sum of the years digits; c. Straight line; d. Activity based. 23. Use of the double-declining-balance method a. results in a decreasing charge to depreciation expense. b. means salvage value is not deducted in computing the depreciation base. c. means the book value should not be reduced below salvage value. d. all of these. 24. Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to prepare them for their intended use. 25. Which of these is NOT a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset.

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FINAL EXAM v. 1--Page 6 March 24, 2006 ANSWER KEY Anderson ECON 136A 8am Class +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 10 75 1 b MChoice | | 10 19 2 d MChoice C 4 | | 10 74 3 d MChoice | | 10 73 4 c MChoice | | 11 67 5 c MChoice | | 10 9 6 c MChoice C 5 | | 10 16 7 b MChoice C 4 | | 11 71 8 c MChoice | | 10 14 9 c MChoice C 4 | | 10 6 10 c MChoice C 2 | | 11 5 11 a MChoice C 3 | | 10 77 12 d MChoice | | 10 17 13 b MChoice C 3 | | 11 66 14 d MChoice | | 11 68 15 b MChoice | | 11 21 16 d MChoice C 6 | | 11 10 17 c MChoice C 3 | | 11 11 18 b MChoice C 3 | | 11 4 19 d MChoice C 2 | | 11 69 20 a MChoice | | 10 76 21 a MChoice | | 11 70 22 d MChoice | | 11 8 23 d MChoice C 3 | | 10 12 24 d MChoice C 4 | | 10 3 25 d MChoice C 1 | +-------------------------------------------------------------------------+ * Test Questions are Scrambled

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March 24, 2006 Anderson ECON 136A 8am Class FINAL EXAM v. 2 Name _________________________ Complete questions #1-25 on your scantron AND WRITE YOUR EXAM VERSION ON THE SCANTRON. Complete the problems #26-29 in your blue-book 1. Contractor, Inc. exchanges a truck and $10,000 for a bulldozer. The transaction is deemed to have commercial substance. The truck has a fair market value of $15,000, was purchased for $30,000 and has accumulated depreciation of $20,000 on the date of the exchange. Which of the following statements is true regarding this transaction for Contractor, Inc.? a. The bulldozer will be recorded on the books for $25,000 and no gain will be recorded. b. The bulldozer will be capitalized at $25,000 and a gain of $5,000 will also be recorded. c. The bulldozer will be capitalized at $10,000 and a gain of $5,000 will also be recorded. d. The bulldozer will be capitalized at $20,000 and no gain will be recorded. 2. Use of the double-declining-balance method a. results in a decreasing charge to depreciation expense. b. means salvage value is not deducted in computing the depreciation base. c. means the book value should not be reduced below salvage value. d. all of these. 3. Which of the following depreciation methods will provide the best matching of cost to benefit: a. Declining balance methods; b. Sum of the years digits; c. Straight line; d. Activity based. 4. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been in- curred if expenditures for asset construction had not been made. d. that portion of average accumulated expenditures on which no interest cost was incurred.

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FINAL EXAM v. 2--Page 2 5. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a. 8/8. b. 8/12. c. 9/12. d. 11/12. 6. Interest cost that is capitalized should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of these. 7. An asset has exhibited no events or changes in circumstances indicating a possible impairment. Management should: a. Perform an undiscounted cash flow analysis to test for possible impairment. b. Do nothing as impairment testing is not required. c. Perform a discounted cash flow analysis to test for possible impairment. d. Engage a qualified appraiser to estimate fair value for impairment testing. 8. A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods. 9. The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these. 10. Which of these is NOT a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset.

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FINAL EXAM v. 2--Page 3 11. In a nonmonetary exchange of fixed assets, a gain may be recorded if: a. The property received has a fair value greater than the net book value of the property given. b. The property received has a fair value greater than the net book value of the property given AND the transaction has commercial substance. c. The property given has a fair value in excess of it's net book value. d. The property given has a fair value in excess of it's net book value AND the transaction has commercial substance. 12. Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these. 13. Which of the following costs is not always be capitalized to land or buildings in connection with the construction of a facility: a. Cost of acquiring the land b. Cost of demolition of structures on the land which were deemed useless at the time the land was acquired c. Interest d. Surveying costs in connection with drawing up plans for the new structure. 14. Which of the following costs may be capitalized in connection with development of a long-lived asset? a. Fees paid to an escrow agent in connection with purchasing land; b. Payments to a contractor for the construction of a facility; c. Payroll to employees who work directly on construction of a facility. d. All of the above.

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FINAL EXAM v. 2--Page 4 15. There has been a negative event causing management to question whether an asset has been impaired. Their analysis reveals that the asset will produce cash flows as follows: Year 1: (20,000) Year 2: (5,000) Year 3: 0 Year 4: 15,000 Year 5: 20,000 Management expects to dispose of the asset at the end of year 5 for $200,000. The asset's net book value is $195,000 and management estimates the asset's fair value to be $130,000. Which of the following statements is accurate. a. The asset is impaired and management should record an impairment loss of $65,000. b. The asset is impaired and management should record an impairment loss of $80,000. c. The asset is not impaired and no adjustment is required as it passes the undiscounted cash flow analysis. d. None of the above. 16. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should stop. c. Recovery of previous impairment losses are permitted. d. All of the above. 17. Rich Co. exchanged merchandise that cost $24,000 and normally sold for $36,000 for a new delivery truck with a list price of $40,000. The delivery truck should be recorded on Rich's books at a. $24,000. b. $30,000. c. $36,000. d. $40,000. 18. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should be recorded on a current and forward basis, based upon the asset's revised book value. c. Recovery of previous impairment losses are NOT permitted. d. All of the above. 19. Which factor below is not a component of depreciation computations? a. Historical cost; b. Estimated service life; c. Estimated economic life; d. Salvage value;

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FINAL EXAM v. 2--Page 5 20. Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to prepare them for their intended use. 21. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn? a. Vertically and sloping down to the right b. Vertically and sloping up to the right c. Horizontally and sloping down to the right d. Horizontally and sloping up to the right 22. 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 construc- tion 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. 23. The most common method of recording depletion for accounting purposes is the a. percentage depletion method. b. decreasing charge method. c. straight-line method. d. units-of-production method.

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FINAL EXAM v. 2--Page 6 24. Which of the following statements is true regarding the capitalization of costs for fixed assets? a. All costs necessary to bring the asset to it's ready for use condition may be capitalized. Subsequent costs may only be capitalized if they increase the life or productivity of the asset. b. Only costs which are paid to third parties may be capitalized. c. Only costs paid to third parties and which are necessary to bring the asset to it's ready for use condition may be capitalized. d. Costs must increase the productivity and useful life of an asset in order to qualify for capitalization. 25. The cost of land does NOT include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments.

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FINAL EXAM v. 2--Page 7 March 24, 2006 ANSWER KEY Anderson ECON 136A 8am Class +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 10 75 1 b MChoice | | 11 8 2 d MChoice C 3 | | 11 70 3 d MChoice | | 10 14 4 c MChoice C 4 | | 10 17 5 b MChoice C 3 | | 10 19 6 d MChoice C 4 | | 11 68 7 b MChoice | | 11 11 8 b MChoice C 3 | | 11 5 9 a MChoice C 3 | | 10 3 10 d MChoice C 1 | | 10 74 11 d MChoice | | 11 4 12 d MChoice C 2 | | 10 73 13 c MChoice | | 10 77 14 d MChoice | | 11 67 15 c MChoice | | 11 66 16 d MChoice | | 10 9 17 c MChoice C 5 | | 11 69 18 a MChoice | | 11 71 19 c MChoice | | 10 12 20 d MChoice C 4 | | 11 10 21 c MChoice C 3 | | 10 16 22 b MChoice C 4 | | 11 21 23 d MChoice C 6 | | 10 76 24 a MChoice | | 10 6 25 c MChoice C 2 | +-------------------------------------------------------------------------+ * Test Questions are Scrambled

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26.

Purchased 1/1/1999 1,000,000 Estimated salvage value 20,000 Estimated useful life 10

Old Method New MethodSt. Line Sum Yrs Digits

1999 98,000 178,182 2000 98,000 160,364 2001 98,000 142,545 2002 98,000 124,727 2003 98,000 106,909 2004 98,000 89,091

588,000 801,818

INSTRUCTIONS:(I)

(II)

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from straight line to sum of the years digits depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded anything during 2005 to address the change in principle, state the journal entry required to properly adjust for the change in accounting principle (refer to any tax account simply as "tax effect"). You should ignore 2005 depreciation expense.

27. Now, Inc. is building a new manufacturing facility for use in their business. They purchase the land in 2004 for $500,000 and commence construction on March 1, 2005. The asset is complete on November30, 2005. Payments during 2005 occur as follows:

Jan. 1, 2005 200,000$ (paid in advance to the contractor)June 1, 2005 750,000

Sept. 30, 2005 1,000,000

Now, Inc. has not borrowed any money specifically for construction of the facility. They do have thefollowing outstanding borrowings: Interest incurred during the year was 107,500$

Outstanding Rate500,000 10%250,000 9%500,000 7%

(1) Compute the weighted average accumulated expenditures qualifying for interest capitalization duringthe year ended December 31, 2005.

(2) Compute the weighted average interest rate.

(3) Compute the avoidable interest during 2005 and indicate how much of that should be capitalized.

(3) Compute the avoidable interest during 2005 if they borrowed $1,000,000 at 7% specifically for this construction.

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28.

Historical Cost 1,000,000 Salvage value 100,000 Estimated service life 5 years

a. Straight-Lineb. Sum of the years digitsc. Double declining balance

Scot Hadley purchases equipment with the following relevant information:

Compute the depreciation expense which Scot should record for each of the 5 years of the life of the asset for each of the following methods:

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29. THE FOLLOWING PERTAINS TO XYZ, INC.Cash 250,000

Accounts receivable, net of $5,000 allowance for doubtful accounts 65,000 Inventory 425,000

Marketable securities, at fair value, cost of $10,000 11,500 Fixed assets 750,000 Accumulated depreciation (300,000) Accounts payable 100,000 Debt 500,000 Retained earnings 401,500 Common stock 200,000 -

The following applies to the month ended January 31, 2005 (XYZ uses perpetual inventory accounting):

1. Combined inventory purchases for the month of $600,000, on credit, terms 2/10 net 30, XYZ uses the net method

2. Sell goods to customers for $1,500,000 (no discounts offered). Perpetual inventory system indicates that the cost of the goods sold was $950,000.

3. Combined collections from customers of $1,450,000 of accounts receivable during January.

4. Paid cash of $620,000 against open invoices; some of the invoices were paid after the discount period, resulting in $5,000 of discounts lost.

5. Compensation to employees who work directly on manufacturing was paid in the amount of 10,000. Management and the administrative staff were paid $25,000.

6. Management uses 2.0% of sales to provide the accounts receivable allowance. 7. Management review of the account receivable aging indicates that $10,000 of balances

should be written-off. 8. The debt terms are: 12% rate, payments of interest plus $20,000 of principle per

month until balance is reduced to zero. The January interest payment and principle payment were made on January 31.

9. The Company purchased fixed assets for $100,000, paid in cash. 10. On January 31, 2003, the company borrowed $100,000 under a line of credit. The

borrowings must be paid by the end of the year. 11. The depreciation module indicates current month depreciation to be $35,000. 12. The effective tax rate is 35% and no estimated payments have been made.

I. List the necessary journal entries based on the above information. It is best to number them as per above.

II. PREPARE A CLASSIFIED BALANCE SHEET AND MULTIPLE-STEP INCOME STATEMENT AS OF AND FOR THE MONTH ENDED JANUARY 31, 2003. YOU CAN USE T-ACCOUNTS, A WORKSHEET OR WHATEVER YOU LIKE TO TRACK THE BALANCES AND ACTIVITY.

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SOLUTION:26.

Purchased 1/1/1999 1,000,000 Estimated salvage value 20,000 Estimated useful life 10

Old Method New MethodSt. Line Sum Yrs Digits

1999 98,000 178,182 2000 98,000 160,364 2001 98,000 142,545 2002 98,000 124,727 2003 98,000 106,909 2004 98,000 89,091

588,000 801,818

INSTRUCTIONS:(I)

Old Method 588,000 New method 801,818 CUM. EFFECT 213,818

(II)

Accumulated depreciation 213,818 Beginning Retained earnings 160,363.64Tax effect 53,454.55

-

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from straight line to sum of the years digits depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded anything during 2005 to address the change in principle, state the journal entry required to properly adjust for the change in accounting principle (refer to any tax account simply as "tax effect"). You should ignore 2005 depreciation expense.

(UNDERSTATED DEPRECIATION/ OVERSTATED NET INCOME)

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27.

WTD AVERAGE ACCUMULATED EXPENDITURES:

Borrow date Amount Wtd.March 1, 2005 500,000 9 / 12 375,000 March 1, 2005 200,000 9 / 12 150,000 June 1, 2005 750,000 6 / 12 375,000 Sept. 30, 2005 1,000,000 2 / 12 166,667

Wtd Average accum exp. 1,066,667

WTD AVERAGE RATE

Outstanding Rate % of total Extended500,000$ 10% 40.0% 4.0%250,000$ 9% 20.0% 1.8%500,000$ 7% 40.0% 2.8%

1,250,000$ 100.0% 8.6% Wtd Rate

AVOIDABLE INTERESTWtd Avg accum expend 1,066,667 Wtd Avg Rate 8.6%

91,733$

CAPITALIZABLE All as the avoidable interest is < incurred of 107,500$

IF BORROWED $1,000,000 AT 5% SPECIFICWtd Avg expend. 1,066,667 Specific borrowing (1,000,000) Portion from other borrowings 66,667

Avoidable interest from specific borrowings 70,000$ (1,000,000 @7%)Other avoidable interest 5,733 *

75,733$

* Equals the portion from other borrowings * wtd rate 66,667$ * 8.6%

Solution to problem #

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SOLUTION # 28.

H cost 1,000,000 Salvage 100,000

5 YRS

A) STRAIGHT LINEDep. basis 900,000 Life 5 Dep. Each yr 180,000

B) SUM OF YRS DIGITS5 / 15 * 900,000 300,000 YEAR 14 / 15 * 900,000 240,000 YEAR 23 / 15 * 900,000 180,000 YEAR 32 / 15 * 900,000 120,000 YEAR 41 / 15 * 900,000 60,000 YEAR 5

15 900,000

C) DOUBLE DECLINING BALANCES Line factor 0.20 Double declining 2 DDB Factor 0.40

Factor Dep. Exp. Basis1,000,000

YEAR 1 0.4 400,000 600,000 YEAR 2 0.4 240,000 360,000 YEAR 3 0.4 144,000 216,000 YEAR 4 0.4 86,400 129,600 YEAR 5 0.4 29,600 100,000

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Problem 29. Journal Entry Solution

1 Inventory 588,000 accounts payable 588,000

2 Accounts receivable 1,500,000 Sales 1,500,000

COS 950,000 Inventory 950,000

3 Cash 1,450,000 accounts receivable 1,450,000

4 Accounts payable 615,000 Cash 620,000

COS/ Discounts lost 5,000

5 Inventory 10,000 G&A expense 25,000

Cash 35,000

6 Bad debt exp (SG&A) 30,000 Allowance for DA's 30,000

7 Allowance for DA's 10,000 Accounts receivable 10,000

8 Interest expense 5,000 Debt 20,000

Cash 25,000

9 Fixed assets 100,000 Cash 100,000

10 Cash 100,000 Debt/ Line of credit 100,000

11 Depreciation expense 35,000 Accumulated depreciation 35,000

12 Income tax expense 157,500 Income tax payable 157,500

Page 21: March 24, 2006 Anderson ECON 136A 8am Class …econ.ucsb.edu/~anderson/Password/136A_1_W06_final.pdfb. Depreciation of the asset should stop. c. Recovery of previous impairment losses

Problem Solution# 29. STATEMENT SOLUTION

250,000 620,000 70,000 1,450,000 10,000 5,000 1,450,000 35,000 1,500,000 10,000 30,000

100,000 25,000 Current Assets100,000 Cash 1,020,000 1,020,000

A/R, net of allowance of 25,000 85,000 85,000 Inventory 73,000 73,000

1,020,000 110,000 25,000 Marketable securities, at fairvalue, cost of 10,000_ 11,500 11,500 Total current assets 1,189,500 1,189,500

425,000 950,000 11,500 - 750,000 Fixed assets 850,000 850,000 588,000 - 100,000 Accumulated depreciation (335,000) (335,000) 10,000 - 515,000 515,000

Total Assets 1,704,500 1,704,500

73,000 11,500 850,000 Liabilities & Stockholders Equity

Current liabilities300,000 615,000 100,000 157,500 Accounts payable 73,000 73,000 35,000 588,000 Income tax payable 157,500 157,500

- Line of credit payable 100,000 100,000 Current maturities of debt 240,000 240,000 Total current liabilities 230,500 230,500

335,000 73,000 157,500 Long-term debt 580,000 (100,000) (240,000) 240,000

Stockholders equity:20,000 500,000 401,500 200,000 Common stock 200,000 200,000

100,000 292,500 Accumulated comprehensive loss - - Retained earnings 694,000 694,000

894,000 894,000 TOTAL liabilities and stockholders equity 1,704,500 - 1,704,500

580,000 694,000 200,000

1,500,000 950,000 - 25,000 5,000 30,000

Sales 1,500,000 COS 955,000 Gross profit 545,000

1,500,000 955,000 55,000 Selling general & admin 55,000 Depreciation expense 35,000

- 35,000 - Interest expense 5,000

Income from continuiing operations 450,000

- 35,000 - Income before income taxes 450,000 Income tax provision 157,500

157,500 5,000 - Net income 292,500

157,500 5,000

ImIncome tax exp. Interest expense

RECLASS

XYZ, INC.BALANCE SHEETAS OF 1/31/2004

XYZ, INC.INCOME STATEMENT

MONTH ENDED JANUARY

Sales COS SG&A expense

AOCI Depreciation Impairment

Accum. Dep. A/P Income tax payable

Debt Retained earnings Common stock

Cash Accounts receivable Allowance DA's

Inventory Marktble sec Fixed assets