(Test Bank) Accounting Principles, Volume 2

Weygandt,Kieso,Kimmel,Trenholm,Warren,Novak, 9

Business

Test Bank

9th Edition

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Test Bank for Accounting Principles, Volume 2, The downloadable file consists of 1209 pages, and the total size of the file is 5.48 MB. Purchase now only for highly discounted price.

Author(s): Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

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Study Note Preview

Test Bank for Accounting Principles, Ninth Canadian Edition 3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, p lant, and equipment. A revision to depreciation will be required if there are (a) capital expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c) changes in the asset’s fair value when using the revaluation model; and/or (d) changes in the appropriate depreciation method, estimated useful life, or residual value. An impairment loss must be recorded if the recoverable amount is less than the carrying amount. Revisions of periodic depreciation are made in present and future periods, not retroactively. The new annual depreciation is determined by using the depreciable amount (carrying amount less the revised residual value), and the remaining useful life, at the time of the revision. 4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for the disposal of a piece of property, plant, or equipment through retirement or sale is as follows: (a) Update any unrecorded depreciation for partial periods since depreciation was last recorded. (b) Calculate the carrying amount (cost – accumulated depreciation). (c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on disposal. (d) Remove the asset and accumulated depreciation acc ounts at the date of disposal. Record the proceeds received and the gain or loss, if any. An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The new asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash received). The fair value of the asset given up is compared with its carrying amount to calculate the gain or loss. If the fair value of the new asset or the asset given up cannot be determined, the new long -lived asset is recorded at the carrying amount of the old asset that was given up, plus any cash paid (or less any cash received). 5. Record natural resource transactions and calculate depletion. The units -of-production method of depreciation is generally used for natur al resources. The depreciable amount per unit is calculated by dividing the total depreciable amount by the number of units estimated to be in the resource. The depreciable amount per unit is multiplied by the number of units that have been extracted to determine the annual depletion . The depletion and any other costs to extract the resource are recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of resource sold on the income statement. Revisions to depletion will be required for capital expenditures during the asset’s useful life, for impairments, and for changes in the total estimated units of the resource. 6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for tangibl e and intangible assets is much the same. Intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite life is amortized over the shorter of its useful life a nd legal life, usually on a straight -line basis. The extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether the intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill ar e not amortized and are tested at least annually for impairment. Impairment losses on goodwill are never reversed under both IFRS and ASPE. Test Bank for Accounting Principles, Ninth Canadian Edition 7. Illustrate the reporting and analysis of long -lived assets. It is common for property, plant, and equipment, an d natural resources to be combined in financial statements under the heading “property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes combined under the heading “intangible assets” or are listed separately. Goodwil l must be presented separately. Either on the balance sheet or in the notes, the cost of the major classes of long -lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must be disclosed either on the balance sheet or in the notes. The depreciation and amortization methods and rates, as well as the annual depreciation expense, must also be indicated. The company’s impairment policy and any impairment losses should be described and reported. Under I FRS, companies must include a reconciliation of the carrying amount at the beginning and end of the period for each class of long -lived assets and state whether the cost or revaluation model is used. The asset turnover ratio (net sales ÷ average total asse ts) is one measure that is used by companies to show how efficiently they are using their assets to generate sales revenue. A second ratio, return on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its assets to generate profit. Test Bank for Accounting Principles, Ninth Canadian Edition EXERCISES Exercise 1 Ed Harris Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land : Debits 1. Cost of real estate purchased as a plant site (land and building). ............................. $ 320,000 2. Legal fees paid at the time of the purchase of the real estate. ................................ ... 6,500 3. Cost of demolishing building to make land suitable for construction of a new building ................................ ................................ ................................ .......... 12,000 4. Architect's fees on building plans. ................................ ................................ ............... 14,000 5. Excavation costs for new building. ................................ ................................ .............. 24,000 6. Cost of filling and grading the land. ................................ ................................ ............. 5,000 7. Insurance and taxes during construction of building. ................................ ................ 6,000 8. Cost of repairs to building under construction cause d by a small fire. ...................... 14,000 9. Interest paid during the year, of which $ 52,000 pertains to the construction period ................................ ................................ ................................ ...... 64,000 10. Full payment to building contractor. ................................ ................................ ........... 760,000 11. Cost of parking lots and driveways. ................................ ................................ ............. 36,000 12. Property taxes paid for the cu rrent year on the land. ................................ ................. 4,000 Total Debits ................................ ................................ ................................ ................... $1,265,500 Credits 13. Insurance proceeds for fire damage. ................................ ................................ ........... $10,000 14. Proceeds from residual of demolished building . ................................ ........................ 3,500 Total Credits ................................ ................................ ................................ ................. $13,500 Instructions Analyz e the above transactions using the columns below. Insert the number of each transaction in the item space and insert the amounts in the appropriate columns. Land Item Land Improvements Building Other Account Title Solution 1 (15 min.) Land Item Land Improvements Building Other Account Title 1. $320,000 2. 6,500 3. 12,000 Test Bank for Accounting Principles, Ninth Canadian Edition 4. $ 14,000 5. 24,000 6. 5,000 7. 6,000 8. $14,000 Fire Loss 9. 52,000 12,000 Interest Expense 10. 760,000 11. $36,000 Land Improvements 12. 4,000 Property Tax Expense 13. (10,000) Fire Loss 14. (3,500 ) Totals $340,0 00 $36,000 $856,000 $20,000 Bloomcode: Analysis Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 2 Rainbow Logistics purchased land with the intention of building an office. Rainbow also engaged other contractors for fencing, paving, li ghting, landscaping, and to remove a dilapidated building to make room for a new office building. The following information relates to these transactions: 1. Purchased land for $350,000. 2. Paid $4,000 for seller's unpaid property taxes. 3. Paid $22,000 to have the dilapidated building removed. 4. Paid a builder $400,000 to design and build the office building. 5. Paid a company $20,000 to grade and clear the land to make it suitable for building purposes. 6. Paid a landscaping company $10,000 for trees and shrubs. 7. Paid a contractor $16,000 for outside lighting around the parking area and sidewalks. 8. Paid $26,000 to have the parking lot paved. Test Bank for Accounting Principles, Ninth Canadian Edition 9. Paid a fence builder $15,000 to construct a security fence around the property. Instructions Determine the cost of the land, the bu ilding, and the land improvements. Solution 2 (10 min.) Land = $350,000 + $22,000 + $4,000 + $20,000 = $396,000 Building = $400,000 Land improvements = $10,000 + $16,000 + $15,000 + $26,000 = $67,000 Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 3 Identify the following expenditures as capital expenditures or operating expenditures : 1. Replacement of worn -out gears on factory machinery 2. Construction of a new wing on an office building 3. Pain ting the exterior of a building 4. Oil change on a company truck 5. Replacing a network server’s hard drive, thereby increas ing data storage capacity by ten times. No ex tension of useful life expected 6. Overhaul of a truck motor. One -year exten sion in useful life is expected 7. Purchased a wastebasket, with an expected us eful life of five years, at a cost of $10 8. Painting and lettering of a used truck upon acquisition of the truck Solution 3 (5 min.) 1. operating 2. capital 3. operat ing 4. operating 5. capital 6. capital 7. operating Test Bank for Accounting Principles, Ninth Canadian Edition 8. capital Bloomcode: Comprehension Difficulty: Easy Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 4 Below are selected entries for Joanna Co.: 1. The $60 cost of repairing a printer was charged to Equipment. 2. The $5,000 cost of a major truck engine overhaul was debited to Repair s Expense. The overhaul is expected to increase the operating efficiency of the truck. 3. The $6,000 closing costs associated with the acquisition of land were debited to Legal Fees Expense. 4. A $600 charge for transportation costs on new equipment purchas ed was debited to Delivery Expense. 5. Freight cost incurred bringing a new piece of equipment to the plant site was charged to Equ ipment . Instructions For each entry above, make a correcting entry if necessary. If the entry given is correct, then state "No entry required." Solution 4 (10 min.) 1. Repair s Expense ................................ ................................ ........................ 60 Equipment ................................ ................................ ......................... 60 2. Vehicles ................................ ................................ ................................ ..... 5,000 Repair s Expense ................................ ................................ ................ 5,000 3. Land ................................ ................................ ................................ .......... 6,000 Legal Fees Expense ................................ ................................ ........... 6,000 4. Equipment ................................ ................................ ................................ 600 Delivery Expense ................................ ................................ ............... 600 5. No entry required . Bloomcode: Analysis Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Test Bank for Accounting Principles, Ninth Canadian Edition CPA: Financial Reporting AACSB: Analytic Exercise 5 Below are transactions for Oriel Company : 1. Purchased land for $900,000 . 2. Paid $20,000 to demolish building located on land . 3. Paid $3,000 for building permit . 4. Paid $2,000 for architect fees . 5. Paid $3,000 for excavation costs . 6. Paid interest of $22,000 during construction of new building . 7. Paid $960,000 to complete the building . 8. Paid $30,000 to pave the parking lot . 9. Paid $4,000 for underground sprinkler . 10. Ordered new equipment, paid $30,000 . 11. Paid $1,500 to install and test new equipment . 12. Paid $250 to insure equipment for one year . 13. Paid $2,500 to paint office walls in the new building . 14. Paid $2,000 to repair equipment. 15. Purchased a truck for $25,000 . 16. Paid $250 for truck licence . 17. Paid $60 for oil change on new truck . 18. Paid $15,000 for fences around the new building . 19. Purchased two cash registers for $1,100 each . 20. Paid $2,200 for annual yard maintenance . Instructions a) Determine if each item should be capitalized (C) or expensed (E). b) Deter mine the balance in the Land account and the Building account . Solution 5 a) 1. C 2. C 3. C 4. C 5. C Test Bank for Accounting Principles, Ninth Canadian Edition 6. C 7. C 8. C 9. C 10. C 11. C 12. E 13. E 14. E 15. C 16. E 17. E 18. C 19. C 20. E b) Land Account = $900,000 + $20,000 = $920,000 Building Account = $3,000 + $2,000 + $3,000 + $22,000 + $960,000 = $990,000 Bloomcode: Analysis Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 6 Extra Company purchased land for $115,000 with the intention of constructing a new operating facility. The land purchase included a dilapidated building that was removed at a cost of $16,000. The only salvage value from this old building was some materials , that were sold for proceeds of $4,000. Test Bank for Accounting Principles, Ninth Canadian Edition Extra had paid surveying costs of $1,800 and legal fees related to land transfer of $6,700. The new building was quickly constructed at a total cost of $422,000. Architectural drawings and permits on the construction of t his new facility totalled $18,000 and $10,650 , respectively. Insurance premiums of $9,200 are paid annually. The production manager is currently on -site facilitating the production start - up. This manager has an annual salary of $85,000. Instructions a) Calculate the acquisition cost of the land. Identify each element of cost clearly. b) Calculate the acquisition cost of the new building. Identify each element of cost clearly. Solution 6 (10 min.) a) Purchase price ................................ ................................ .......................... $115,000 Demolition costs ................................ ................................ ....................... 16,000 Proceeds from salvaged material s ................................ .......................... (4,000) Surveying costs ................................ ................................ ......................... 1,800 Legal fees for land transfer ................................ ................................ ...... 6,700 Acquisition cost of land ................................ ................................ ............ $135,500 b) Construction costs ................................ ................................ .................... $422,000 Architectural drawings ................................ ................................ ............. 18,000 Building permits ................................ ................................ ....................... 10,650 Acquisition cost of building ................................ ................................ ...... $450,65 0 Bloomcode: Application Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 7 On August 1, 2024 , Mark Leamington Engineering paid $1,000,000 in a lump -sum purchase of land, building, and equipment. The payment consisted of $200,000 cash and a note payable for the balance. An appraisal revealed the following fair values at the time of the purchase: Land ................................ .......... $500,000 Building ................................ ..... 450,000 Equi pment ................................ 250,000 Instructions Prepare the necessary journal entry to record this lump -sum purchase (round all percentage calculations to two decimal places). Solution 7 (10 min.) Asset Fair Value Total Fair % of Fair Cost Allocated Test Bank for Accounting Principles, Ninth Canadian Edition Value Value Cost Land $ 500,000 $1,200,000 41.67% $1,000,000 $ 416,700 Building 450,000 1,200,000 37.50% 1,000,000 375,000 Equipment 250,000 1,200,000 20.83% 1,000,000 208,300 Total $1,200,000 $1,000,000 Aug . 1, 2024 Land ................................ ................................ ........................ 416,700 Building ................................ ................................ ................... 375,000 Equipment ................................ ................................ .............. 208,300 Cash ................................ ................................ .............. 200,000 Note s Payable ................................ ............................... 800,000 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic Exercise 8 Shen Athletics purchased factory equipment with an invoice price of $92,000 . Other costs incurred were freight costs, $2,500 ; installation of wiring and foundation, $2,200; material and labour costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; one -year fire insurance policy covering equipment, $1,400 . The equipment is estimated to have a n $8,000 residual value at the end of its five-year useful service life. Instructions a) Calcula te the acquisition cost of the equipment. Identify each element of cost clearly. b) If the double diminishing -balance method of depreciation was used, the constant percentage applied to a diminishing carrying amount would be ______. Solution 8 (10 min.) a) Invoice cost ................................ ................................ ............................... $92,000 Freight costs ................................ ................................ ............................. 2,500 Installation of wiring and foundation ................................ ...................... 2,200 Material and labour costs in testing ................................ ........................ 700 Acquisition cost ................................ ................................ ........................ $97,400 b) If the diminishing -balance method of depreciation was used, the constant percentage applied to a diminishing carrying amount would be 40% (100% ÷ 5 years ) x 2 . Bloomcode: Application Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Test Bank for Accounting Principles, Ninth Canadian Edition Learning Objective : Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic Exercise 9 Dufferin Company uses the straight -line method of depreciation . The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2023 July 1 Purchased a new computer system from The Computer Centre for $37,000 cash and shipping costs of $250. Nov . 3 Incurred ordinary repairs on computer of $3,280. Dec . 31 Recorded 2023 depreciation on the basis of a n estimated five -year life and residual value of $1,250. 2024 Dec . 31 Recorded 2024 depreciation . 2025 Jan . 1 Paid $9,800 for a major upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer. Instructions Prepare the necessary entries. (Show calculations.) Solution 9 (15 min.) 2023 July 1 Equipment ................................ ................................ ......... 37,250 Cash ................................ ................................ ......... 37,250 Nov . 3 Repairs Expense ................................ ................................ 3,280 Cash ................................ ................................ ......... 3,280 Dec . 31 Depreciation Expense ................................ ....................... 3,600 Accumulated Depreciation –Equipment ................. 3,600 [($ 37,250 – $ 1,250) ÷ 5 × 1 /2] 2024 Dec . 31 Depreciation Expense ................................ ....................... 7,200 Accumulated Depreciation –Equipment ................. 7,200 [($ 37,250 – $ 1,250) ÷ 5] 2025 Jan . 1 Equipment ................................ ................................ ......... 9,800 Cash ................................ ................................ ......... 9,800 Bloomcode: Application Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Learning Objective : Apply depreciation methods to property, plant, and equipment. Test Bank for Accounting Principles, Ninth Canadian Edition Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic Exercise 10 On March 31, 2024 , Holland Industries purchased assets for $2,500,000 cash. Before completing the purchase, Holland had an appraisal completed to determine the relative value of each of the assets included in the purchase price. The appraisal indicated that the fair value of the land, if purchased separately, would be $375,000, the building’s value is $1,900,000, the manufacturing equipment $192,500, and the office equipment $55,000. In addition to the land, building and equipment, the purchase price includes inventory with a net realizable value of $27,500 . The anticipated life of the building is 25 years, the manufacturing equipment 10 years, and the office equipment five years, with no residual value for any of them. Holland has a December 31 year end. Instructions a) Record the purchase on March 31, 2024 (round percentages to one decimal place) b) Record the depreciation expense for 2024 using the straight -line method assuming the company chooses to prorate depreciation based on the number of months the asset has been in use . Solution 10 (20 min .) a) Allocation of cost based on fair values: Fair value Percentage Allocation of cost Land $ 375,000 14.7% $ 367,500 Building 1,900,000 74.5% 1,862,500 Manufacturing equipment 192,500 7.5% 187,500 Office equipment 55,000 2.2% 55,000 Inventory 27,500 1.1% 27,500 $2,550, 000 100.0% $2,500,000 Entry to record purchase Land ................................ ................................ ................................ .......... 367,500 Building ................................ ................................ ................................ ..... 1,862,500 Equipment ................................ ................................ ................................ 187,500 Equipment (office) ................................ ................................ .................... 55,000 Merchandise Inventory ................................ ................................ ............. 27,500 Cash ................................ ................................ ................................ ... 2,500,000 b) Depreciation Expense ................................ ................................ ............... 78,188 Accumulated Depreciation –Building ................................ ............... 55,875 ($1,862,500 ÷ 25) x 9 /12 Test Bank for Accounting Principles, Ninth Canadian Edition Accumulated Depreciation –Equip ment ................................ .......... 14,063 ($187,500 ÷ 10) x 9/12) Accumulated Depreciation –Equip ment (office) .............................. 8,250 ($55,000 ÷ 5) x 9/12) Bloomcode: Application Difficulty: Medium Learning Objective : Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Learning Objective : Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic Exercise 11 On May 5, 2024 , Vermilion River Adventures purchased a property for $400,000 cash. The property included the following long -lived assets: Appraised Value Land ................................ ................................ ................................ .......... $120,000 Building ................................ ................................ ................................ ..... 200,000 Equipment ................................ ................................ ................................ 100,000 Paved area ................................ ................................ ................................ 20,000 Outdoor light ing ................................ ................................ ....................... 10,000 $450,000 Instructions a) Give the journal entry to allocate the purchase price between the above assets. Round all amounts to the nearest dollar, if necessary. b) Prepare a compound journal entry to record depreciation of the long -lived assets on December 31, 2024 , assuming the following additional details: Useful Life in Years Residual Value Building 30 $20,000 Equipment 5 10,000 Paved area 4 -0- Outdoor lighting 10 -0- Prorate depreciation based on the number of months the asset has been in use . Solution 11 (20 min.) a) Allocation of % of Appraised Value Purchase Price Land $120,000 ÷ $450,000 × $400,000 = $106,667 Building $200,000 ÷ $450,000 × $400,000 = 177,778 Equipment $100,000 ÷ $450,000 × $400,000 = 88,889 Paved area $20,000 ÷ $450,000 × $400,000 = 17,778