MGAB02 Financial Accounting II – Midterm Exam Review Questions

Question 1:
Grindstone Corp. (Grindstone) produces fad toys for children. In 2014, Grindstone purchased a
new stamping machine to produce the latest fad toy. The machine cost $100,000 plus taxes of
$13,000, and delivery and installation of $12,000. Grindstone's management estimates that the
market for the toy is about 600,000 units and demand will last no more than three years.
Management expects that it will be able to produce and sell 320,000 units in 2014, 210,000 units
in 2015, and 70,000 units in 2016. Once the fad dies, the machine won't be useful for any
purpose and will have to be sold for scrap, about $4,000. Grindstone will use unit-of-production
depreciation for the machine.

Required:

1. Prepare the journal entry to record the purchase of the new machine.
2. Prepare a depreciation schedule showing the depreciation expense for each year and the
carrying amount of the machine at the end of each year.
3. Suppose that at the end of 2015, Grindstone's management realized the fad had died more
quickly than expected and there was no more demand for the toy. Prepare the journal
entry to record the sale and any other journal entries required with respect to the machine
in 2015. Assume that Grindstone produced and sold 75,000 units in 2015 and received
$2,000 from a scrap dealer for the machine.
4. Repeat Requirements (2-3) assuming that Grindstone will use straight-line depreciation
for the machine.
5. Repeat Requirements (2-3) assuming that Grindstone will use declining balance
depreciation at a rate of 50 percent for the machine. Evaluate the appropriateness of the
rate Grindstone will use to depreciate the machine.

Question 2:
In January 2015, Bath Inc. (Bath) purchased an office building on a one hectare piece of land in
Saskatoon for $6,000,000. An appraiser valued the land at $1,375,000. The building is eight
years old and Bath's management expects it to last for another 12 years, after which time it will
have to be demolished. Management has decided to use straight-line depreciation.

Required:

Prepare the journal entries that Bath would make to record the purchase of the land and building.
What entry would be made to record the depreciation expense for the year ended December 31,
2015?

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Question 3:
Arnison Corp. purchased land and a building on May 1, 2011 for $ 385,000. The company paid $
115,000 in cash and signed a 5% note payable for the balance. The note is due on February 1,
2013. At that time, Arnison estimated that the land was worth $ 150,000 and the building $
235,000. The building was estimated to have a 25-year useful life with a $ 35,000 residual value,
The company has a December 31 year end and uses the single declining balance depreciation.
The following are related transactions and adjustments during the next three years:

2011:
Dec. 31 Record the annual depreciation.
Paid the interest owning on the notes payable.

2012:
Feb. 17 Paid $ 225 to have the furnace cleaned and serviced.
Dec. 31 Recorded the annual depreciation.
Paid the interest owing on the note payable.
The land and building were tested for impairment. The land had a net realizable
value amount of $ 120,000 and the value in use of $ 110,000. The building has a
net realizable value of $ 220,000 and a value in use of $ 240,000.

2013:
Jan. 31 Sold the land and building for $ 320,000 cash - $ 110,000 for the land and $
210,000 for the building.
Feb. 1 Paid the note payable and interest owing.

Required:

1. Record the above transactions and adjustments.

2. What factors may have been responsible for the impairment.

Question 4:
On January 1, 2010, Penaji Corporation acquired equipment costing $ 65,000. It was estimated at
that time this equipment would have a useful life of eight years and a residual value of $ 3,000.
The straight line method of depreciation is used by the company for the equipment, and its year
end is December 31. St the beginning of 2012 (the beginning of the third year of the equipment’s
life), the company’s engineers reconsidered their expectations. They estimated that the
equipment’s useful life would more likely be six years in total, instead of the previously
estimated eight years.

Required:
1. Calculate the equipment’s accumulated depreciation and carrying amount at the
beginning of 2012 immediately before the change in useful life.

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

2. Calculate the depreciation expense per year after the change in useful life.

Question 5:
Tagawa Corporation issued $ 500,000 of 10 year, 5% bonds on January 1, 2012, at a price to
yield a market interest rate of 6%. Interest is payable semi-annually on July 1 and January 1.
Tagawa has a December 31 year end.

Required:
(a) Calculate the bond’s issue price on January 1.
(b) Using the effective interest rate method, prepare all the necessary journal entries for 2012.
(c) Would the entry be the same for (b) be the same if the company uses the straight line method
to account for the interest ? Show calculation.
(d) Assume that on December 31, 2016, the company, Tagawa redeemed 20% of the bonds
outstanding at 105. Prepare the journal entry to record the early redemption of the bond.

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Solutions :

Question 1:

1.

Stamping machine $100,000

Taxes 13,000

Delivery & installation 12,000

Total $125,000

Dr. Machinery 125,000

Cr. Cash 125,000

To record the purchase of the stamping machine. (Payments are assumed to be in cash. Other
assumptions are also possible.)

2.

Unit of production

Accumulated Carrying Depreciation Percentage of Number of

total units units
Year End Cost Depreciation Amount Expense produced produced

Purchase date $125,000 $0 $125,000 $0

Dec. 31, 2014 125,000 64,533 60,467 64,533 53.3% 320,000

Dec. 31, 2015 125,000 106,883 18,117 42,350 35.0% 210,000

Dec. 31, 2016 125,000 121,000 4,000 14,117 11.7% 70,000

Total $121,000 100% 600,000

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Estimated number of units 600,000

Cost $125,000

Residual value 4,000

Useful life 3

Depreciation expense = Number of units produced in period

 Cost – Residual value
Estimated number units over asset’s life

3. The machine is sold at the end of 2015 for $2,000. The entry for the 2015 depreciation
expense would be made before the gain or loss is calculated.

Dr. Depreciation expense 15,125

Cr. Accumulated depreciation 15,125

To record the depreciation expense for 2015 (75,000 units/600,000 units  $121,000)

Proceeds $2,000

Carrying amount 45,342

Loss ($43,342)

Carrying amount before disposal = $125,000 – $64,533 – 15,125.= $ 45,342

Accumulated depreciation at the time of disposal = $64,533 + $15,125 = $79,658

There is a loss of $43,342

Dr. Cash 2,000

Accumulated depreciation 79,658

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Loss on disposal of machinery 43,342

Cr. Machinery 125,000

To record disposal of the stamping machine.

4-2..

Straight line

Accumulated Carrying Depreciation

Year End Cost Depreciation Amount Expense

Purchase date $125,000 $0 $125,000 $0

Dec. 31, 2014 125,000 40,333 84,667 40,333

Dec. 31, 2015 125,000 80,667 44,333 40,334

Dec. 31, 2016 125,000 121,000 4,000 40,333

Total $121,000

Cost 125,000

Residual value 4,000

Useful life 3

Depreciation expense = Cost – residual value

Useful life

= $125,000 – $4,000

3 years

Depreciation expense = $40,333

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

This assumes that the machine was purchased early in 2014.

4-3.

The machine is sold at the end of 2015 for $2,000. The entry for the 2015 depreciation expense
would be made before the gain or loss is calculated.

Dr. Depreciation expense 40,333

Cr. Accumulated depreciation 40,333

To record the depreciation expense for 2015.

Proceeds $2,000

Carrying amount 44,333

Loss ($42,333)

There is a loss of $42,333

Dr. Cash 2,000

Accumulated depreciation 80,667

Loss on disposal of machinery 42,333

Cr. Machinery 125,000

To record disposal of the stamping machine.

5-2

Declining balance

Accumulated Carrying Depreciation

Year End Cost Depreciation Amount Expense

Purchase date $125,000 $0 $125,000 $0

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Dec. 31, 2014 125,000 62,500 62,500 62,500

Dec. 31, 2015 125,000 93,750 31,250 31,250

Dec. 31, 2016 125,000 121,000 4,000 27,250

Total $121,000

Cost $125,000

Rate 50%

Residual value $4,000

Useful life 3 years

Carrying Amount = Cost – Accumulated depreciation

Depreciation expense = Rate  Carrying amount at the beginning of the period

Ending balance in accumulated depreciation =

Current depreciation expense + Beginning balance is accumulated depreciation

This assumes that the machine was purchased early in 2014. To adjust the carrying amount to its
estimated residual value of $4,000, a depreciation expense of $27,250 was required in 2016. An
adjustment is required in 2016 to bring the carrying amount to the assets expected residual value.

5-3.

Machine is sold at the end of 2015 for $2,000. The entry for the 2015 depreciation expense
would be made before the gain or loss is calculated.

Dr. Depreciation expense 31,250

Cr. Accumulated depreciation 31,250

To record the depreciation expense for 2015.

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Proceeds $2,000

Carrying Amount 31,250

Loss ($29,250)

There is a loss of $29,250.

Dr. Cash 2,000

Accumulated depreciation 93,750

Loss on disposal of machinery 29,250

Cr. Machinery 125,000

To record disposal of the stamping machine.

Question 2:

Total Purchase $6,000,000

Land 1,375,000

Building $4,625,000

Dr. Land 1,375,000

Building 4,625,000

Cr. Cash 6,000,000

To record the purchase of land and building.

Annual depreciation expense = $4,625,000/12 = $385,417

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Dr. Depreciation expense, building 385,417

Cr. Accumulated depreciation, building 385,417

To record the depreciation expense for the building for the year ended December 31, 2015.

Question 3:

(1) 2011

May 1 Land .............................................................................. 150,000

Building......................................................................... 235,000
Cash ....................................................................... 115,000
Notes Payable ........................................................ 270,000

Dec. 31 Depreciation Expense ................................................... 6,267

Accumulated Depreciation—Building .................. 6,267
(1/25 × 1 = 4%;
$235,000 × 4% × 8/12 = $6,267)

31 Interest Expense ........................................................... 9,000

Cash ....................................................................... 9,000
($270,000 × 5% × 8/12 = $9,000)

2012

Feb. 17 Repair and Maintenance Expense ................................. 225

Cash ....................................................................... 225

Dec. 31 Depreciation Expense ................................................... 9,150

Accumulated Depreciation—Building .................. 9,150
[($235,000 – $6,267) × 4% = $9,150]

31 Interest Expense ............................................................ 13,500

Cash ....................................................................... 13,500
($270,000 × 5% = $13,500)

31 Impairment Loss ........................................................... 30,000

Land ....................................................................... 30,000
($150,000 – $120,000 = $30,000);
Building – no entry as recoverable amount of $240,000 is higher

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

than carrying amount of $219,583; ($235,000 – $6,267 – $9,150

= $219,583)

2013

Jan. 31 Depreciation Expense ................................................... 732

Accumulated Depreciation—Building .................. 732
$219,583 × 4% × 1/12

31 Cash............................................................................... 320,000
Accumulated Depreciation—Building
($6,267 + $9,150 + $732) ............................................. 16,149
Loss on Disposal (below).............................................. 18,851
Land ....................................................................... 120,000
Building ................................................................. 235,000

Proceeds ..................................................... $320,000

Land ....................................................... $120,000

Building ....................................................... $235,000
Less: Accumulated depreciation ................................ 16,149 218,851
Carrying amount ....................................................... 338,851
Loss on disposal ....................................................... $(18,851)

Feb. 1 Interest Expense ($270,000 × 5% × 1/12) .................... 1,125

Notes Payable................................................................ 270,000
Cash ....................................................................... 271,125

(2) The land may have been impaired due to contamination found on it or
surrounding properties. It may also have been because plans for a proposed new
development on adjacent land that would have increased the value of Arnison’s property,
have been permanently shelved.

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 MGAB02 Financial Accounting II – Midterm Exam Review Questions

Question 4:

(1) Equipment
Cost, January 1, 2010 $65,000
Less: Residual value 3,000
Depreciable cost 62,000
Useful life in years ÷ 8
Annual depreciation ($62,000 ÷ 8) $ 7,750

The equipment’s accumulated depreciation on January 1, 2012 will be $15,500 ($7,750 ×

2 years) and the carrying amount will be $49,500 ($65,000 – $15,500).

(2) The depreciation expense after the change in estimate for the life will be $ 12,375 ($
49,500/6-2)

Question 5:

(a) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 3% (6% × 6/12)
Interest payment (PMT) = $12,500 ($500,000 × 5% × 6/12)
Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $500,000 received in 20 periods

($500,000 × 0.55368) (n = 20, i = 3%) $276,840
Present value of $12,500 received each of 20 periods

($500,000 × 2.5% × 14.87747 (n = 20, i = 3%) 185,968

Present value (issue price) of the bonds $462,808

(b) Jan. 1 Cash ......................................................................462,808

Discount on Bonds Payable ……………………. 37, 192
Bonds Payable ........................................................... 500,000

July 1 Interest Expense ($462,808 × 6% × 6/12) ......................... 13,884

Discount on Bonds Payable ($13,884 – $12,500)..... 1,384
Cash ($500,000 × 5% × 6/12) ................................... 12,500

Dec. 31 Interest Expense [($462,808 + $1,364) × 6% × 6/12] ....... 13,925

Discount on Bonds Payable ($13,925 – $12,500)..... 1,425
Interest Payable ($500,000 × 5% × 6/12) ................. 12,500

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c. Using the straight line method, the amounts shown for July 1 and December 31 will be
different:

The Discount on Bonds Payable will be $ 37,192/20 = $ $ 1,860

The Interest Expense = $ 12,500 + $ 1,860 = $ $ 14,360

Entries for July 1 and Dec 31 are as follows :

July 1 Interest Expense ................................................................. 14,360

Discount on Bonds Payable ...................................... 1,860
Cash ($500,000 × 5% × 6/12) ................................... 12,500

Dec. 31 Interest Expense ................................................................. 14,360

Discount on Bonds Payable ...................................... 1,860
Interest Payable ($500,000 × 5% × 6/12) ................. 12,500

(d)

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