1. On July 1, 2008, Balt Co. exchanged a truck for twenty five shares of Ace Corp.’s common stock. On that date, the truck’s carrying amount was $2,500, and its fair value was $3,000. Also, the book value of Ace’s stock was $60 per share. On December 31, 2008, Ace had 250 shares of common stock outstanding and its book value per share was $50. What amount should Balt report in its December 31, 2008 balance sheet as investment in Ace?
When the investment was acquired, it was recorded at cost – the fair market value of the asset surrendered to acquire it. The July 1 entry was
Inv. in Ace stock 3,000
Truck 2,500
Gain on disposal 500 ($3,000 - $2,500)
The investment would be reported in the 12/31/08 balance sheet at $3,000. The book value of Ace’s stock does not affect the amount recorded on Balt’s books.
2. Cole Co. Began constructing a building for its own use in January 2008. During 2008, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowing. Interest computed on the weighted-average amount of accumulated expenditures for the building during 2008 was $40,000. What amount of interest cost should Cole capitalize?
The amount of interest cost which should be capitalized during building construction is the lowe3r of avoidable interest or actual interest. Avoidable interest equals the interest computed on the weighted-average amount of accumulated expenditures on the building ($40,000). Since actual interest is $70,000 ($50,000 + $20,000), the amount capitalized should be $40,000.
3. Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $2,500 cash. The cash flows from the new truck are not expected to be significantly different from the cash flows of the old truck. The fair value of the truck received was $17,500. At what amount should Amble record the truck received in the exchange?
Because the cash flows of the exchanged assets will not be significantly different, the transaction lacks commercial substances. Therefore, book value is used to record the transition. When the assets are exchanged, boot is received, and a gain results, the exchange is treated as part sale and part exchange. The earnings process is assumed to be complete for the portion relating to the boot received. The gain recognized is computed as follows:
[Boot received/(boot received + FMV of assets received)] x Total gain = Gain recognized
Total Gain = (17,500 + 2,500) – 12,000 = 8,000
= Assets received – Book value of asset given up
The gain recognized = [2,500/(17,500 + 2,500)] x 8,000 = $1,000
The asset acquired is recorded at the book value of the asset surrendered plus the gain recognized less boot received ($12,000 + $1,000 - $2,500 = $10,500). The journal entry is

Truck (new) 10,500
Cash 2,500
Truck (old) 12,000
Gain on sale 1,000
4. In an exchange of assets that is deemed to lack commercial substance, Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. Transit also contributed cash. As a result of the exchange, Transit recognized
a. A loss equal to the cash given up.
b. A loss determined by the proportion of cash paid to the total transaction value.
c. A gain determined by the proportion of cash paid to the total transaction value.
d. Neither gain nor loss.
Per APB 29 if a loss is indicated by the terms of the transaction, the entire loss on the exchange should be recognized. In this case, a loss results because Transit received an asset whose fair value equaled the book value of the asset give up and paid cash. Therefore, Transit gave up more than they received, the difference being the loss.
5. An entity disposes of a nonmonetary asset in a non-reciprocal transfer. A gain or loss should be recognized on the disposition of the asset when the fair value of the asset transferred is determinable and the nonreciprocal transfer is to
Another entity A stockholder of the entity
a. No Yes
b. No No
c. Yes No
d. Yes Yes
Per APB 29, (as amended by SFAS 153) a transfer of a nonmonetary asset in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, with a gain or loss recognized on the disposition, whether the transfer is made to a stockholder or to another entity.
6. During 2008, King Company made the following expenditures relating to its plant building:

Continuing and frequent repairs $40,000
Repainted the plant building 10,000
Major improvements to the electrical wiring system 32,000
Partial replacement of roof tiles 14,000

How much should be charged to repair and maintenance expense in 2008?
The requirement is to calculate the amount to be charged to repair and maintenance expense in 2008. Generally, a cost should be capitalized if it improves the asset and expensed if it merely maintains the asset at its current level. Continuing and frequent repairs ($40,000) should be expensed. Similarly, the cost of repainting the plant building ($10,000) and the cost of partially replacing the roof tiles ($14,000) should be expensed. These are ordinary, regularly occurring expenditures which maintain, rather than improve, the plant building. The work on the electrical wiring system ($32,000) is capitalized instead of expensed since it is a major improvement. Therefore, the total amount expensed is $64,000 ($40,000 + $10,000 + $14,000).
7. On January 2, 2008, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus twenty-four monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of ten years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its 2008 income statement, what amount should Lem report as depreciation for this machinery?
Machinery is recorded at its historical cost, which is measured by the cash or cash equivalent price of obtaining the machine and preparing it for use. The journal entry to record this acquisition would be
Machinery 110,000 (cash equivalent)
Discount on N.P. 20,000 (130,000 – 110,000)
N.P. 120,000 (24 x 5,000)
Cash 10,000

The 20,000 discount represents future interest expense (the cost associated with paying for the asset over two years instead of immediately) rather than part of the cost of the machine. Straight-line depreciation for 2008 is computed as follows:
(Cost – Salvage value) x 1/useful life = Depre. Expense
(110,000 – 5,000) x 1/10 = 10,500
8. A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the
a. Cash proceeds received and original cost of the truck.
b. Cash proceeds received.
c. Original cost of the truck less the cash proceeds.
d. Original cost of the truck.
The solutions approach is to prepare the journal entry that would be made when an asset is retired under the composite depreciation method.

Cash (cash proceeds)
Acc. Depre. (Plug)
Truck (original cost)
The net decrease in the carrying amount of the assets is the credit to the asset account less the plug to accumulated depreciation. This amount would be equal to the cash proceeds received.
9. Taft Inc. recognized a loss in 2007 related to long-lived assets that it intended to sell. These assets were not sold during 2008, and the company estimated, at December 31, 2008, that the loss recognized in 2007 had been more than recovered. On the December 31, 2008 balance sheet, Taft should report these long-lived assets at their
a. Fair value on December 31, 2007.
b. Fair value less cost to sell on December 31, 2007
c. Fair value on December 31, 2008.
d. Carrying amount on December 31, 2007.
In 2007, Taft recognized a loss on the long-lived assets that were to be sold and changed the carrying amount of these assets to fair value less cost to sell. In 2008, the assets have still not been sold. The loss recognized has been more than recovered. Per SFAS 144, subsequent revisions in estimates of fair value less cost to sell shall be reported as adjustments of the carrying amount may not be increased above the carrying amount prior to impairment. The same amount recognized as a loss in 2007 would be recognized as a recovery (gain) in the 2008 income statement.
10. Synthia, Inc., a clothing manufacturing, purchased a sewing machine for $10,000 on July 1, 2006. The machine had a ten-year life, a $500 salvage value, and was depreciated using the straight-line method. On December 31, 2008, a test for impairment indicates that the undiscounted cash flows from the sewing machine are less than its carrying value. The machine’s actual fair value on December 31, 2008 is $3,000. What is Synthia’s loss on impairment on December 31, 2008?
The loss on impairment is calculated by subtracting the machine’s actual fair value from its carrying value at the date of impairment.

10,000 – 500 = 9,500
9,500/10 = 950 depreciation per year
950 x 2.5 years = 2,375 accumulated depreciation
10,000 – 2,375 = 7,625 carrying value on 12/31/08
7,625 – 3,000 = 4,625 loss on impairment

11. On January 2, 2008, Judd Co. bought a trademark from Drug Co. for $500,000. Judd retained an independent consultant, who estimated the trademark’s remaining life to be fifty years. Its unamortized cost on Krug’s accounting records was $380,000. In Judd’s December 31, 2008 balance sheet, what amount should be reported as accumulated amortization?
Judd Company would record the trademark at its cost of $500,000. The unamortized cost on the seller’s books ($380,000) is irrelevant to the buyer. The trademark has a remaining useful life of fifty years. Therefore, the 2008 amortization expense and 12/31/08 accumulated amortization is $10,000 ($500,000/50years).
12. On January 2, 2005, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent’s useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, 2008, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during 2008, assuming amortization is recorded at the end of each year?
Before 2008, Lava would record total amortization of $27,000 [(90,000 x 1/10) x 3 years], resulting in a 12/31/07 carrying amount of $63,000 (90,000 – 27,000). Since the patent became worthless at 12/31/08 due to government prohibition of the product, the entire carrying amount ($63,000) should be charged against income in 2008 as an impairment loss.
13. Brunson Corp., a major US winery, begins construction of a new facility in Italy. Following are some of the costs incurred in conjunction with the start-up activities of the new facility:
Production equipment 815,000
Travel costs of salaried employees 40,000
License fees 14,000
Training of local employees for production
And maintenance operations 120,000
Advertising costs 85,200
What portion of the organizational costs will be expensed?
Start-up activities are defined broadly as hose onetime activities related to opening a new facility as well as introducing a new product or service and conducting business in a new territory (SOP 98-5). Certain costs that may be incurred in conjunction with start-up activities are not subject to these provisions. These costs include the costs of acquiring long-lived assets such as production equipment, costs of advertising, and license fees, and are not subject to the provisions of SOP 98-5. Correct answer is $160,000.
14. Which of the following statements is(are) correct regarding the treatment of start-up activities related to the opening of a new facility?
I. Costs of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their intended use should be expensed as incurred.
III. Costs of research and development should be expensed as incurred.

According to SOP 98-5, the costs of raising capital and the costs of acquiring or constructing long-lived assets and getting them ready for their intended use are not expensed as incurred. Such costs should be accounted for in accordance with other existing authoritative accounting literature. Research and development (R&D) costs are expensed as incurred per SFAS 2.

15. In 2008, Ball Labs incurred the following costs:

Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit
$400,000

Research and development costs not included above were:
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials 180,000

What was Ball’s total research and development expense in 2008?
Per SFAS 2, all R&D costs must be expensed when incurred. However, R&D costs incurred when performing R&D work under contract for other entities are specifically excluded from the requirements of SFAS 2. Generally such costs are deferred and matched with revenue under the completed-contract or percentage-of-completion method. Ball’s 2008 research and development expense is $1,380,000.

16. Brill Co. made the following expenditures during 2008:

Cost to develop computer software for internal use in Brill’s general management information system
100,000

Costs of Market research activities 75,000

What amount of these expenditures should Brill report in its 2008 income statement as research and development expenses?

In SFAS 2, the FASB excludes from its definitions of research and development expense the acquisition, development, or improvement of a product or process for use in its selling or administrative activities. Both costs given in this problem relate to selling or administrative activities, so the expenditures of $175,000 would not be reported as research and development expense.
17. During 2008, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows:

Completion of detailed program design 13,000
Costs incurred for coding and testing to establish technological feasibility 10,000
Other coding costs after establishment of technological feasibility 24,000
Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training material 15,000
Duplication of computer software and training materials from product masters 25,000
Packaging product 9,000

In Pitt’s December 31, 2008 balance sheet, what amount should be reported in inventory and what amount should be capitalized as software cost, subject to amortization?

Costs incurred in creating a computer software product should be charged to research and development expense when incurred until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detailed program design or working model. In this case, $23,000 would be recorded as expense ($13,000 for completion of detailed program design and $10,000 for coding and testing to establish technological feasibility until the time when product costs are incurred are capitalized as software costs. In this situation, 59,000 is capitalized as software cost (24k + 20K + 15K). Product costs that can be easily associated with the inventory items are reported as inventory (in this case, 25k for duplication of computer software and training materials and 9K of packaging costs, for total of 34K).

18. On December 31, 2007, Bit Co. had capitalized costs for a new computer software product with an economic life of five years. Sales for 2008 were 30% of expected total sales of the software. At December 31, 2008, the software had a net realizable value equal to 90% of the capitalized cost.

Per SFAS 86, the annual amortization of capitalized software costs shall be the greater of

1. The ratio of the software’s current sales to its expected total sales, or
2. The straight-line method over the economic life of the product.

In this case, the ratio of current to expected total sales is 30% (given). The annual straight-line rate is 20% per year (1 / economic life of five years). The 30% amortization should be recorded in 2008, since it is the higher of the two. The unamortized cost on the 12/31/08 balance sheet should, therefore, be 70% (100% - 30% amortization). Note that SFAS 86 requires that the unamortized cost of capitalized software products must be compared to the net realizable value of those assets at each balance sheet date. Any excess of the amortized cost over the net realizable value (90%) was above the unamortized cost (70%), so no additional write-off was required.

19. Which of the following statements is incorrect regarding internal-use software?

a. The application and development costs of internal-use software should be amortized on a straight-line basis unless another systematic and rational basis is more representative of its costs.
b. Internal-use software is considered to be software that is marketed as a separate product or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should be expensed as incurred.
According to SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, internal-use software is software having the following characteristics: (1) The software is acquired, internally developed, or modified solely to meet the entity’s internal needs, and (2) during the software’s development or modification, no substantive plan exists to market the software externally.

Studying at Work

Lately, I feel like I'm getting paid to study at work.  After the busy season, work load has gone down to the point that I actually want to study.  I know second mini-busy season is just around the corner for the 2010 extension deadline.  I'll probably be working overtime in few weeks to meet the deadline.  Instead of studying, I'm using the time to blog about how I'm studying at work. I'll be posting what topic I'm studying at the moment and some of the questions I keep missing.  I know I'll have to review those questions before the test date, Aug 21.