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Question :

1.

(TCO C) The cost of an intangible asset includes all of the following except purchase price. legal fees. other incidental expenses. all of these are included.

## Instructor Explanation: Chapter 12

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2.

(TCO C) Which of the following is not an intangible asset? Trade name Research and development costs Franchise Copyrights

## Instructor Explanation: Chapter 12

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3.

(TCO C) The intangible asset goodwill may be capitalized only when purchased. capitalized either when purchased or created internally. capitalized only when created internally.

## written off directly to retained earnings.

Instructor Explanation: Chapter 12

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4.

Question :

(TCO C) ELO Corporation purchased a patent for \$90,000 on September 1, 2008. It had a useful life of ten years. On March 1, 2010, ELO spent \$17,500 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is five years. What amount should be reported for patent amortization expense for 2010? \$20,600. \$20,000. \$18,800. \$15,600.

Instructor Explanation:

Chapter 12. \$90,000 [(\$90,000 10) 1 1/2] = \$76,500. (\$76,500 + \$17,500) 5 = \$18,800.
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5.

Question :

(TCO C) Floyd Company purchases Haeger Company for \$800,000 cash on January 1, 2011. The book value of Haeger Companys net assets, as reflected on its December 31, 2010 balance sheet, is \$620,000. An analysis by Floyd on December 31, 2010 indicates that the fair value of Haegers tangible assets exceeded the book value by \$60,000, and the fair value of identifiable intangible assets was equal to book value. How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company? \$ -0\$120,000 \$180,000

\$75,000
Instructor Explanation:

## Chapter 12. \$620,000 + \$60,000 = \$680,000. \$800,000 \$680,000 = \$120,000.

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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 portion of FICA taxes and unemployment taxes. portion of FICA taxes, and unemployment taxes. portion of FICA taxes, unemployment taxes, and any voluntary deductions. portion of FICA taxes and any voluntary deductions.

## Instructor Explanation: Chapter 13

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7.

Question :

(TCO D) Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for one year that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty should be reported as long-term. should be reported as current. should be reported as part current and part long-term. need not be disclosed.

## Instructor Explanation: Chapter 13

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8.

Question :

(TCO D) On December 31, 2010, Irey Co. has \$2,000,000 of short-term notes payable due on February 14, 2011. On January 10, 2011, Irey arranged a line of credit with County Bank which allows Irey to borrow up to \$1,700,000 at one percent above the prime rate for three years. On February 2, 2011, Irey borrowed \$1,700,000 from County Bank and used \$300,000 additional cash to liquidate \$1,700,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2010 balance sheet which is issued on March 5, 2011 is \$0. \$500,000. \$300,000. \$800,000.

Instructor Explanation:

## Chapter 13. \$2,000,000 \$1,700,000 = \$300,000.

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9.

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 they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be \$500,000. What is the required journal entry as a result of this litigation? 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.
Instructor Explanation: Chapter 13. Likelihood of loss is only possible, not probable.

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10.

Question :

(TCO D) Reich, Inc. issued bonds with a maturity amount of \$200,000 and a maturity ten years from date of issue. If the bonds were issued at a discount this indicates that 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

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11.

Question :

(TCO D) If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used. be less than what it would have been had the effective-interest method of amortization been used. be the same as it would have been had the effective-interest method of amortiza-tion been used. be less than the stated (nominal) rate of interest.

## Instructor Explanation: Chapter 14

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12.

Question :

(TCO D)When the interest payment dates of a bond are June 1 and December 1, and a bond issue is sold on November 1, the amount of cash received by the issuer will be increased by accrued interest from June 1 to November 1.

decreased by accrued interest from May 1 to June 1. increased by accrued interest from May 1 to June 1.

## decreased by accrued interest from June 1 to November 1.

Instructor Explanation: Chapter 14

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13.

Question :

(TCO D) Feller Company issues \$20,000,000 of ten-year, 9% bonds on August 1, 2010 at 97 plus accrued interest. The bonds are dated January 1, 2010, and pay interest annually on December 31. What is the total cash received on the issue date? \$19,400,000 \$20,450,000 \$19,700,000 \$19,100,000

Instructor Explanation:

## Chapter 14. (\$20,000,000 .97) + (\$1,800,000 7/12) = \$20,450,000.

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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 December 31. The proceeds from the bonds are \$4,901,036. Using effective-interest amortization, how much interest expense will be recognized in 2010? \$195,000 \$390,000 \$392,124 \$392,083

Instructor Explanation:

## Chapter 14.. (\$4,901,036 .08) = \$392,082.90

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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: \$185,130 \$184,500 \$173,550 \$165,000

Instructor Explanation:

Chapter 14.. (\$3,000,000 .11) (\$3,195,000 .10) = \$10,500 (\$3,195,000 \$3,000,000) \$10,500 = \$184,500.
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Question :

1.

(TCO C) Sisco Co. purchased a patent from Thornton Co. for \$180,000 on July 1, 2007. Sisco amortizes the patent over a period of 10 years. Expenditures of \$92,000 for successful litigation in defense of the patent were paid on July 1, 2011. Sisco estimates that the useful life of the patent will be increase by 10 years from the date of litigation becasue of successfully defending it Instructions: Prepare a computation of the carrying value of the patent at December 31, 2011.

Patent purchased for \$180,000 Journal Entries July 1, Debit (DR) Patents 92,000 Credit (CR) Cash 92,000 (To record legal fees to defend the patent) Debit (DR) Amortization Expense on Patent 3,680 Credit (CR) Patents (Or Accumulated Patent Amortization) 3,680 (To reocord amortization expense on patent) (92,000/10x4/10) 92000 - 3,680 = 88.320 Carrying Value after 1 year

Instructor Explanation:

Solution (Chapter 12) Cost of patent \$180,000 Amortization 7/1/08 to 7/1/11 [(\$180,000 10) 4] (72,000) Carrying value at 7/1/11 108,000 Cost of successful defense 92,000 Carrying value 200,000 Amortization 7/1/11 to 12/31/11 [\$200,000 1/(10 4+10) 1/2] (6,250) Carrying value at 12/31/11 \$193,750

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2.

Question :

(TCO C) Freds Company is considering the write-off of a limited life intangible asset because of its lack of profitability. Explain to the management of Freds how to determine whether a writeoff is permitted.
The write-off of a limited life intangible asset can be assesssed through the process of impairement. Therefore if the intangible asset is no longer

profitable the following steps should be taken. The same rules that are required for impairments of property, plant and equipment applies to the limited - life intangibles. A company should do an annual or periodic evaluation to determine if there are any cahnges in the carrying cost of the assets.. Changes mean the value may not be recoverable. Therefore a recoverability test should be performed by estimating the cash flows to be obtained from the assets. The fair value test should also be applied; which measures the impairment cost. Instructor Explanation:

(Chapter 12) Accounting standards require that if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, then the carrying amount of the asset should be assessed. The assessment or review takes the form of a recoverability test that compares the sum of the expected future cash flows from the asset (undiscounted) to the carrying amount. If the cash flows are less than the carrying amount, the asset has been impaired. The impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of assets is measured by their market value if an active market for them exists. If no market price is available, the present value of the expected future net cash flows from the asset may be used.
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3.

Question :

(TCO D) Edwards Co. includes one coupon in each bag of dog food it sells. In return for four coupons, customers receive a dog toy that the company purchases for \$1.20 each. Edwards's experience indicates that 60 percent of the coupons will be redeemed. During 2010, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 2011, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed. Instructions: Determine the premium expense to be reported in the income statement and the estimated liability for premiums on the balance sheet for 2010 and 2011.

2010 Expense per toy = 1.20 12,000 x 1.20 = 14,400 cost of toys purchased 100,000 x .6 /4 = 15,000 premium expense for 2010 2011 16,000 x 1.20 = 19,200 120,000 x .6/4 = 18,000 premium expense for 2011 Journal entry would debit (DR) the premium expense. The cost of the premium an

Instructor Explanatio n:

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4.

Question :

(TCO D) Prepare journal entries to record the following transactions related to long-term bonds of Quirk Co. (a) On April 1, 2009, Quirk issued \$500,000, 9% bonds for \$537,868 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2019. (b) On July 1, 2011 Quirk retired \$150,000 of the bonds at 102 plus accrued interest. Quirk uses straight-line amortization.
a) Debit (DR) Cash 537,868 Credit (CR) Premium on Bonds Payable 37,869 Credit (CR) Bonds Payable 500,000 (DR) Interest Expense b) 150,000 x 8/10 = 120,000 150,000 120,000 = 30,000 500,000 - 30,000 = 470,000 Carrying Value (DR) Bonds Payable 500,000 (DR) Loss on Acquisition 67,868 (CR) Cash 537,868 (CR) Discount on Bonds Payable 30,000

## Instructor (Chapter 14) Explanatio n:

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5.

Question :

(TCO D) Mann, Inc., which owes Doran Co. \$600,000 in notes payable with accrued interest of \$54,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of \$570,000, an original cost of \$840,000, and accumulated depreciation of \$195,000. Instructions: (a) Compute the gain or loss to Mann on the settlement of the debt. (b) Compute the gain or loss to Mann on the transfer of the equipment.