CMA Exercises On Long Term Items With Answer Key and Rationale PDF

Session 3 – October 25, 2019, Friday – 1:00 pm – 5:00 pm Walter Paraiso, CPA, CMA – Lead Instructor
Part 1: External Financial Reporting Decisions

Measurement, Valuation and Disclosure: Long-Term Items
CONTENTS
Exercises on Measurement, Valuation and Disclosure – Long Term Items ............................... 2
PROPERTY, PLANT & EQUIPMENT .............................................................................................. 2
INTANGIBLES ................................................................................................................................ 16
Reporting on the Costs of Start-Up Activities .................................................................................... 21
Computer Software Costs ................................................................................................................. 22
LONG-TERM LIABILITIES AND BONDS ...................................................................................... 23
Convertible Bonds ............................................................................................................................ 28
Extinguishment of Debt .................................................................................................................... 29
INCOME TAXES ............................................................................................................................. 30
LEASES ........................................................................................................................................... 33
1|CMAREVIEW201 9 PICPA-RIYADH

Exercises on Measurement, Valuation and Disclosure – Long Term Items
PROPERTY, PLANT & EQUIPMENT

1. To determine if the impairment of a depreciable fixed asset has occurred, a company must compare the
a. book value of the asset and the present value of the future cash flows expected to be generated by the
asset.
b. original cost of the asset and the fair market value of the asset.
c. book value of the asset and the undiscounted future cash flows expected to be generated by the asset.
d. original cost of the asset and the book value of the asset.
2. In accordance with Statements of Financial Accounting Standards No. 121, “Accounting

for the Impairment of Long-Lived Assets,” Blake Corporation has determined that an impairment exists on
one of its machines. However, the company expects to continue to use the asset for another three full years
as no active market exists for this machine.
Selected information on the impaired asset (on the date that impairment was determined
to exist) is provided below.
Original cost of the machine $22,000

Book (carrying) value of the machine 20,000
Undiscounted future cash flows expected to be generated by the machine 15,000
Fair value of the machine (determined by computing the present value of the future cash flows expected to
be generated by the machine) 12,000
After recognition of the impairment loss, the carrying amount (book value) of the impaired asset will be
a. Zero.
b. $12,000.
c. $14,000.
d. $15,000.
Feedback: The correct answer is: $12,000. If the undiscounted future cash flows expected are less than the
book (carrying) value of the machine, then there is an impairment. In this case, $15,000 is less than
$20,000. Therefore, there is an impairment. The machine should be written down to its fair value of
$12,000. Fair value is market value if it exists. If no market value exists, then the present value of the future
cash flows expected to be generated by the machine would be used as the estimate of fair value.
3. In accordance with Statements of Financial Accounting Standards No. 121, “Accounting for the
Impairment of Long-Lived Assets,” Blake Corporation has determined that an impairment exists on one of
its machines. However, the company expects to continue to use the asset for another three full years as no
active market exists for this machine.
Selected information on the impaired asset (on the date that impairment was determined to exist) is provided
below.

Original cost of the machine $22,000

Book (carrying) value of the machine 20,000
Undiscounted future cash flows expected to be generated by the machine 15,000
Fair value of the machine (determined by computing the present value of the future cashflows expected to
be generated by the machine) 12,000
What is the amount of the impairment loss to be recorded by Blake?
a. $3,000.
b. $5,000.
c. $7,000.
d. $8,000.
Feedback: The correct answer is: $8,000. If the undiscounted future cash flows expected are less than the
book (carrying) value of the machine, there is an impairment. In this case, $15,000 is less than $20,000.
Therefore, there is an impairment. The machine should be written down to its fair value of $12,000. Fair
value is market value if it exists. If no market value exists, then the present value of the future cash flows
expected to be generated by the machine would be used as the estimate of fair value. Amount of
impairment loss = (carrying value) – (fair value) Amount of impairment loss = ($20,000) – ($12,000) =
$8,000
4. The Board of Directors of Ingold Industries Inc. authorized Don Burger, president of Ingold, to pay as
much as $90,000 to purchase a tract of land adjacent to the main factory. Burger negotiated a price of
$75,800 for the land, and legal fees for closing costs amounted to $820. A contractor cleared, filled, and
graded the land for $6,800, and dug the foundation for a new building for $4,300. A prefabricated
building was erected at a cost of $181,000. The building has an estimated useful life of 20 years with no
residual value. The contractor’s bill indicated that the cost of the parking lot and driveways was $7,060.
The parking lot and the driveways will need to be replaced in 15 years. The proper amount to be recorded
in Ingold’s land account is
a. $76,620.
b. $83,420.
c. $87,720.
d. $90,480.
5. Widner Corporation acquired machinery on January 1 for $9,000 for use in its manufacturing plant.
During the year, the machine was used to produce 1,000 units, of which 600 were sold. There was no
work-in-process inventory at the beginning or at the end of the year. Installation charges of $300 and
delivery charges of $200 were also incurred. During the installation process, one of the machine parts was
damaged and had to be repaired at a cost of $100. The machine is expected to have a useful life of five
years with an estimated salvage value of $1,500. Widner uses the straight-line depreciation method.
How will the straight-line depreciation amount be reported in Widner’s financial statement?

a. The entire amount will be reported as a selling and administrative expense.

b. Part of the amount will be in selling and administrative expense and part in cost of goods sold.
c. The entire amount will be reported in cost of goods sold.
d. Part of the amount will be reported in finished goods inventory and part in cost of goods sold.
6. Albright Company uses the sum-of-the-years’ digits method of depreciation. On January 1, the company
purchased a machine for $50,000, with an estimated life of 5 years and no residual value. Depreciation for
the first year would be
a. $10,000.
b. $15,000.
c. $16,667.
d. $20,000.
7. A newly acquired plant asset is to be depreciated over its useful life. The best rationale for this process is
the
A. Revenue recognition assumption.
B. Monetary unit assumption.
C. Materiality assumption.
D. Matching assumption.
D. Depreciation is the systematic and rational allocation of the cost of the asset over its life. It is a process of
trying to match the revenues that the asset generates with the expense of the asset.
8. An employee of M, a public company, developed a new product that has just been patented. The
development costs of this product were negligible, but the patent rights are almost certainly worth many
millions of dollars. Which accounting concept would prevent the company from recognizing the value of
this patent as a non-current asset in its balance sheet?
A. Historical cost
B. Conservatism
C. Going concern
D. Materiality
A. Because this was an internally generated asset, there is no transaction with which to measure the true
value of the patent. In this case, the development costs were almost zero. But even if the development costs
had been substantial, they would not have been capitalized as an asset on the balance sheet. A patent is an
intangible asset, and the only costs of patents that can be capitalized as assets on the balance sheet are costs
incurred in connection with securing the patent such as registration fees and attorney’s fees for filing the
patent application. Research and development costs related to the development of a product, process, or idea
that is subsequently patented must be expensed as incurred.
9. The following information is available for Paragon as of November 30, 20X5.

Property, plant and equipment

Land $27,500
Building $36,000
Accumulated depreciation (13,500)
Paragon's building is being depreciated using the straight-line method. The building has a 20-year estimated
useful life and an estimated salvage value of $6,000. The number of years the building has been depreciated
by Paragon as of November 30, 20X5 is
A. 9.0 years.
B. 12.5 years.
C. 15.0 years.
D. 7.5 years.
A. Given that the building has a salvage value of $6,000 and a cost of $36,000, the depreciable amount of the
building is $30,000. Since it is being depreciated by the straight-line method over 20 years, the annual
depreciation expense is $1,500. Since there has been a total depreciation of $13,500 recognized, we can
determine the number of years it has been depreciated by dividing accumulated depreciation by the annual
depreciation charge. This gives us 9 years that the building has been depreciated ($13,500 ÷ $1,500).
10. Nella Corporation computes depreciation to the nearest whole month. A new piece of equipment was
placed in operation on July 1, 20X1. It was expected to produce 400,000 units of product in its
estimated useful life of eight years. Total cost was $300,000; salvage value was estimated to be
$30,000. Nella employs a calendar year for financial reporting purposes. Actual production for the past
3 years was as follows.
Year 1 - 34,000 units

If Nella uses the sum-of-the-years'-digits method of depreciation, the amount of depreciation computed for
this equipment for book purposes in 20X3 would be
A. $48,750
B. $18,750
C. $52,500
D. $45,000
A. Under the sum-of-the-years'-digits method, the depreciation expense is calculated as the depreciable
amount (original cost - salvage value) multiplied by a fraction. For the amount of annual depreciation, the
numerator of the fraction is the number of years remaining in the asset's useful life, and the denominator is
the sum of all of its expected years of life. For an asset with an 8-year life, the denominator is 8 + 7 + 6 + 5 +
4 + 3 + 2 + 1= 36.

However, since Nella calculates depreciation to the nearest whole month rather than by year and this asset
was purchased on July 1, the amount of depreciation in the first year (20X1) will be only half of a year's
depreciation. Therefore, in 20X1 the fraction will be 4/36. This is the same as taking half of the first year's
depreciation in 20X1, or 0.5 × 8/36. In 20X2 it will be 7.5/36. This is the same as taking half of the first
year's depreciation (0.5 × 8/36) and half of the second year's depreciation (0.5 × 7/36). In 20X3 the fraction
to use will be 6.5/36. This fraction is multiplied by the depreciable amount, which is the cost minus the
salvage value. The cost of the asset is $300,000 and the salvage value is $30,000, giving a depreciable
amount of $270,000. Multiplying $270,000 by 6.5/36 we get the 20X3 depreciation expense of $48,750.
11. Since Year 1, Ames Steel Company has replaced all of its major manufacturing equipment and now has
the following equipment recorded in the appropriate accounts. Ames uses a calendar year as its fiscal
year.
• A forge purchased January 1, Year 1 for $100,000. Installation costs were $20,000, and the forge has an
estimated 5-year life with a salvage value of $10,000.
• A grinding machine costing $45,000 purchased January 1, Year 2. The machine has an estimated 5-year
life with a salvage value of $5,000.
• A lathe purchased January 1, Year 4 for $60,000. The lathe has an estimated 5-year life with a salvage
value of $7,000.
Using the double-declining-balance method, Ames' Year 4 depreciation expense is

A. $40,848
B. $40,334
C. $36,464
D. $45,000
A. In order to answer this question we will need to calculate the depreciation expense in the fourth year
under the double declining balance method for each of the three assets. Under double declining depreciation,
the depreciation expense is calculated as follows: (the book value of the asset at the beginning of the period
× twice the straight-line percentage). In this question all of the assets have a five year useful life. With a five
year useful life the depreciation under the straight-line method would be 20% per year. This means that we
will use 40% for the depreciation calculation. Also, remember that this method uses the beginning book
value of the asset. Therefore, in order to calculate the depreciation in year 4, we will also need to calculate
the depreciation expense for the prior periods of the assets' lives as well. Remember also that the cost of the
asset includes all of the costs necessary to get the asset ready for its intended use.
For the forge the original cost is $120,000. In year 1 depreciation was 40% of this, or $48,000. This reduced
the book value to $72,000. In year 2 depreciation was 40% of this, or $28,800. This reduced the book value
to $43,200 at the start of year 3. Year 3 depreciation was 40% of this, or $17,280, reducing the book value to
$25,920 at the start of year 4. Therefore, in year 4 the depreciation expense for the forge was $10,368.
For the grinding machine the original cost is $45,000, and this item was purchased in year 2. In year 2
depreciation was 40% of this cost, or $18,000. This reduced the book value to $27,000. In year 3
depreciation was 40% of this, or $10,800. This reduced the book value to $16,200 at the start of year 4.
Therefore, in year 4 the depreciation expense for the grinding machine was $6,480.

The lathe was purchased at the beginning of year 4, so its depreciation in year 4 is simply 40% of its original
cost. Its original cost was $60,000, so 40% of this is $24,000.
Adding these three amounts together we get a total depreciation expense of $40,848 for year 4 under the
double declining balance method.
12. WD Mining Company purchased a section of land for $600,000 in 20X0 to develop a zinc mine. The
mine began operating in 20X1. At that time, management estimated that the mine would produce
200,000 tons of quality ore. A total of 100,000 tons of ore was mined and processed from 20X1 through
December 31, 20X8. During January 20X9, a very promising vein was discovered. The revised estimate
of ore still to be mined was 250,000 tons. Estimated salvage value for the mine land was $100,000 in
both 20X1 and 20X9. Assuming that 10,000 tons of ore was mined in 20X9, the computation WD
Mining company should use to determine the amount of depletion to record in 20X9 would be
A. [($600,000 - $100,000) / 350,000 tons] x 10,000 tons
B. [($600,000 - $100,000) / 450,000 tons] x 10,000 tons
C. [($600,000 - $100,000 - $250,000) / 250,000 tons] x 10,000 tons
D. [($600,000 - $100,000 - $250,000) / 350,000] x 10,000 tons
C. This is a change in accounting estimate. A change in accounting estimate is accounted for prospectively.
When the estimated useful life of an asset is changed, the company uses the current book value of the asset
as its cost for depreciation (or in this case depletion) calculations going forward.
The current book value of the mine is the $600,000 purchase price minus the $100,000 salvage value minus
the amount of depletion recorded during the years from 20X1 through 20X8. The original depreciable base
was $500,000 ($600,000 􀃭 $100,000 salvage value), and one-half of the previously estimated production
had been mined between 20X1 and 20X8, so $250,000 of depletion had been recorded through the end of
20X8. Therefore, book value of the mine and the numerator is $600,000 – $100,000 – $250,000, or
$250,000. That is the amount of depletion to be recorded going forward.
As of 20X9, the mine is expected to produce another 250,000 tons. This is the denominator that must be used
to calculate the usage for the depletion expense.
($600,000 - $100,000 - $250,000) / 250,000 tons] is the amount of depletion to be recorded for each ton of
zinc ore produced by the mine, or $1.00 per ton. Since the mine produced 10,000 tons of zinc ore in 20X9,
the amount of depletion per ton of ore is multiplied by 10,000 to find the amount of depletion to be recorded
in 20X9.
13. Since Year 1, Ames Steel Company has replaced all of its major manufacturing equipment and now has
the following equipment recorded in the appropriate accounts. Ames uses a calendar year as its fiscal
year.
• A forge purchased January 1, Year 1 for $100,000. Installation costs were $20,000, and the forge has
an estimated 5-year life with a salvage value of $10,000.
• A grinding machine costing $45,000 purchased January 1, Year 2. The machine has an estimated 5-
year life with a salvage value of $5,000.
• A lathe purchased January 1, Year 4 for $60,000. The lathe has an estimated 5-year life with a
salvage value of $7,000.

Using the straight-line depreciation method, Ames' Year 4 depreciation expense is
A. $40,848
B. $45,000
C. $40,600
D. $36,464
C. In order to answer this question we will need to calculate the depreciation expense in the fourth year
under the straight-line method for each of the three assets. Under straight-line depreciation, the depreciation
expense is calculated as follows: [(the cost of the asset 􀃭 salvage value) ÷ useful life]. Remember that the
cost of the asset includes all of the costs necessary to get the asset ready for its intended use.
For the forge, the depreciation expense is ($120,000 - $10,000) ÷ 5 = $22,000.

For the grinding machine, the depreciation expense is ($450,000 - $5,000) ÷ 5 = $8,000.
For the lathe, the depreciation expense is ($60,000 - $7,000) ÷ 5 = $10,600.
Adding these three amounts together, we get $40,600 depreciation expense for year 4.
14. Which of the following is not an appropriate basis for measuring the historical cost of fixed assets?
A. The costs of improvements to equipment incurred after its acquisition should be added to the asset's cost
if they provide future service potential.
B. Proceeds obtained in the process of readying land for its intended purpose, such as from the sale of
cleared timber, should be recognized immediately in income.
C. The purchase price, freight costs, and installation costs of a productive asset should be included in the
asset's cost.
D. Special assessments imposed by a local government for sewage and drainage systems are recorded by the
owner of the land in the land account.
B. Any proceeds that are received from the sale of something in getting land ready for its use should be
treated as a reduction of the cost of the land, not as income. The question asks which is not an appropriate
method and since this is not appropriate, it is the correct answer.
15. When Pyne Co. decided to go into the business of delivering pizzas at lunch time to a nearby office
complex, the company acquired a delivery truck at the cost of $20,000. The truck had an estimated
useful life of 5 years and a $2,000 salvage value. The company also acquired a used car for deliveries at
a cost of $4,800, with an estimated useful life of 3 years and a $600 salvage value.
The depreciation on Pyne's used delivery car for year three using the sum-of-the-years'-digits (SYD) method
would be
A. $1,400
B. $1,600
C. $800
D. $700
D. Under the sum-of-the-years'-digits method, the depreciation expense is calculated as the depreciable

amount (original cost 􀃭 salvage value) multiplied by a fraction. For assets with a three year useful life the
fraction consists of the number of remaining years of useful life in the numerator and 6 (3 + 2 + 1) in the
denominator. This fraction is multiplied by the depreciable amount, which is the cost minus the salvage
value. The cost of the car is $4,800 and the salvage value was $600, giving a depreciable amount of $4,200.
Multiplying $4,200 by 1/6 we get the year 3 depreciation expense of $700. We use 1 in the numerator
because in year 3 there is only one remaining year of use: year 3.
16. Maple Industries purchased a lathe on June 1, Year 1, the beginning of the fiscal year. The lathe cost
$43,200 and has an estimated salvage value of $3,600 and an estimated useful life of 8 years. The lathe
has been used throughout the year. Assuming that Maple Industries recognizes a full year's depreciation
on all assets purchased during the year but no depreciation on assets retired during the year, the amount
of sum-of-the-years'-digits (SYD) depreciation that would be taken for financial reporting purposes in
the fiscal year ending May 31, Year 2 would be
A. $8,800
B. $1,100
C. $10,800
D. $9,600
A. Under the sum-of-the-years'-digits method the depreciation expense is calculated as the depreciable
amount (cost - salvage value) multiplied by a fraction. The numerator of the fraction is the number of
remaining years of useful life, including the current year. The denominator is based on the useful life of the
asset and for an 8 year asset it is 36 (8 + 7 + 6 + 5 + 4 + 3 + 2 + 1). For year 1 the depreciation expense is
therefore $8,800 ($39,600 × 8/36).
17. Nella Corporation computes depreciation to the nearest whole month. A new piece of equipment was
placed in operation on July 1, 20X1. It was expected to produce 400,000 units of product in its estimated
useful life of eight years. Total cost was $300,000; salvage value was estimated to be $30,000. Nella
employs a calendar year for financial reporting purposes. Actual production for the past 3 years was as
follows.
If Nella had used the units-of-production method of depreciation, the amount of depreciation computed for
this equipment for book purposes in 20X1 would have been
A. $12,750
B. $25,500
C. $22,950
D. $11,475
C. Under the units-of-production method the depreciable amount (original cost - salvage value) is multiplied
by the percentage of the total expected output that was produced during the period. In this question the
depreciable amount is $270,000 ($300,000 cost - $30,000 salvage value) and the percentage of production
done this period was 8.5% (34,000 units out of an expected 400,000). Therefore, the depreciation expense
for 20X1 was $22,950 ($270,000 × 0.085).

18. When a fixed plant asset with a 5-year estimated useful life is sold during the second year, how would
the use of an accelerated depreciation method instead of the straight-line method affect the gain or loss
on the sale of the fixed plant asset?
A. A gain would decrease, and a loss would decrease.
B. A gain would increase, and a loss would decrease.
C. A gain would decrease, and a loss would increase.
D. A gain would increase, and a loss would increase.
B. The accelerated method will depreciate the asset faster than the straight-line method would in the early
years, thereby reducing its book value faster and increasing any gain on the sale. On the other hand, the
reduced book value would cause any loss on the sale during the second year to be less with the accelerated
method, since the book value would be less then under the straight-line method.
19. A steel press machine is purchased for $50,000 cash and a $100,000 interest bearing note payable. The
cost to be recorded as an asset (in addition to the $150,000 purchase price) should include all of the
following except
A. Insurance while in transit.
B. Interest on the note payable.
C. Freight and handling charges.
D. Assembly and installation costs.
B. Any cost that is incurred in order to get the asset ready and available for use should be included in the cost
of that asset. Interest that will be incurred on the note payable is a financing decision and is not necessary in
order for the asset to be used. This interest will be recognized as interest expense when it is incurred.
20. The factors primarily relied upon to determine the economic life of an asset are
A. Passage of time, asset usage, and obsolescence.
B. Tax regulations and asset usage.
C. Tax regulations and SEC (Security Exchange Commission) guidelines.
D. SEC (Security Exchange Commission) guidelines and asset usage.
A. These three items are the factors that are used in the determination of the economic life of an asset.
21. A company has just purchased a machine for $100,000 that has a five-year estimated useful life and a
zero estimated salvage value. It is expected to be used to produce 250,000 units of output, and 75,000 of
those units are expected to be produced in the first year. Which of the following depreciation methods
will result in the greatest amount of depreciation expense for this machine in its first year?
A. Activity method based on units of production.
B. Double declining balance method.
C. Straight line.
D. Sum of the years' digits.
B. In order to answer this question we can calculate the depreciation expense under the four methods listed
as choices. Under straight-line the depreciation expense will be $20,000 ($100,000 ÷ 5). Under the units of
production method it will be $30,000 ($100,000 × 75,000/250,000). Under the sum-of-the-years'-digits
10 | C M A R E V I E W 2 0 1 9 PICPA-RIYADH

method it will be $33,333 ($100,000 × 5/15). Under the double declining balance method it will be $40,000
($100,000 × 0.4). The highest is the double declining balance method.
22. Under which of the following depreciation methods is it possible for depreciation expense to be higher
in the later years of an asset's useful life?
A. Weighted average.
B. Activity method based on units of production.
C. Sum of the years' digits.
D. Straight line.
B. Only under the activity method (also called units of production method) can depreciation expense be
higher in a later year in the asset's life than an earlier year. This will happen if the asset produces more in a
later year than an earlier as this will result in a higher depreciation.
23. The Pryor Company uses the straight-line depreciation method based on the composite depreciation rate
and the composite economic life for depreciating its machinery and equipment. An advantage of using
the composite depreciation basis is that
A. Salvage value for assets in the composite group is ignored.
B. Depreciation expense is matched more accurately with the revenue stream generated by the use of the
assets.
C. Depreciation expense in the early years of the assets' lives is higher than if the individual assets were
depreciated.
D. When an asset is retired from use or is sold, no gain or loss will be recognized in the accounting records.
D. In composite depreciation an assumption is made that any asset that is sold is sold for a price that equals
its book values. This means that there is no gain or loss on the sale of an asset under composite
depreciation. This assumption about the sales price of the asset and the book value of that asset must be
made because of the fact that there is no accumulated depreciation for an individual asset under the
composite method.
24. Maple Industries purchased a lathe on June 1, Year 1, the beginning of the fiscal year. The lathe cost
$43,200 and has an estimated salvage value of $3,600 and an estimated useful life of 8 years. The lathe
has been used throughout the year.
Assuming that Maple Industries recognizes one-half year's depreciation on all assets purchased or sold
during the year, the amount of straight-line depreciation that would be taken for financial reporting
purposes in the fiscal year ending May 31, Year 2 would be
A. $2,475
B. $5,400
C. $2,700
D. $4,950
A. Maple uses the mid year convention meaning that only six months of depreciation is taken in the first year
that the asset is owned. This is a little bit confusing in this question since the asset was purchased on June 1,
but what this means is that for the period from June 1, year 1 - May 31, year 2, they will take only 6 months

of depreciation. Under the straight line method we simply divide the depreciable amount (cost - salvage
value) by the estimated useful life to get the annual depreciation. In this question, we will need to divide this
by 2 to get the first year's depreciation. The depreciable amount is $39,600 ($43,200 - $3,600) and the useful
life is 8 years. The annual depreciation is $4,950, but dividing this by 2 gives us the depreciation expense for
the first year of $2,475.
25. Most plant assets have a limited useful physical life. All of the following factors limit the useful life of a
plant asset except
A. Deterioration and decay.
B. Wear and tear.
C. Obsolescence.
D. Tax regulations.
D. The tax regulations in place do not affect how long an asset will be useful. The tax regulations determine
the period over which depreciation will be taken for tax purposes, but that does not affect the useful life of
the asset.
26. Aston Company acquired a new machine at a cost of $200,000 and incurred costs of $2,000 to have the
machine shipped to its factory. Aston also paid $4,500 to construct and prepare a site for the new machine
and $3,500 to install the necessary electrical connections. Aston estimates that the useful life of this new
machine will be 5 years and that it will have a salvage value of $15,000 at the end of that period.
Assuming that Aston acquired the machine on January 1 and will take a full year's depreciation in the first
year of ownership, the proper amount of depreciation expense to be recorded by Aston for the first year if
it uses the double-declining-balance method is
A. $78,000
B. $84,000
C. $80,800
D. $74,000
B. The first step is to include the initial cost of the asset. Fixed assets are originally recorded at all of the
costs necessary to get the asset ready for use. This includes the cost of the asset itself, shipping, installation,
testing, insurance during transit, any import taxes, and any other costs that needed to be incurred in order to
prepare the asset for its intended use. Therefore, Aston should include the $200,000 cost, the $2,00 in
shipping, the $4,500 in construction of a new site and $3,500 in electrical connections. This totals $210,000.
Under the double declining balance method depreciation is calculated as the book value of the asset
multiplied by twice what the straight-line percentage would be. The asset has a useful life of 5 years so under
the straight-line method depreciation would be 20% per year. Twice this is 40% so Aston should take 40% of
the book value of the asset as depreciation expense. The book value was $210,000 for the first year and 40%
of this is $84,000. Note that under the double declining balance method the salvage value of the asset is not
needed until later in the life of the asset. Salvage value is used only at the end to make sure that the asset is
not depreciated below the salvage value.
27. Depreciation of plant assets refers to

A. Accumulating a fund for the replacement of the asset.

B. Accounting for costs to reflect the change in general price levels.
C. Allocating the cost of the asset to the periods of use.
D. Asset valuation for statement of financial position purposes.
C. The definition of depreciation is the systematic and rational allocation of the costs of the asset over the
time period in which it is used. This is the allocation of the cost of the asset to the periods of use.
28. Costs that are capitalized with regard to a patent include

A. Legal fees of obtaining the patent, incidental costs of obtaining the patent, and research and development
costs incurred on the invention that is patented.
B. Legal fees of obtaining the patent, incidental costs of obtaining the patent, and costs of successful patent
infringement suits.
C. Incidental costs of obtaining the patent, costs of successful and unsuccessful patent infringement suits,
and the value of any signed patent licensing agreement.
D. Legal fees of obtaining the patent, costs of successful patent infringement suits, and research and
development costs incurred on the invention that is patented.
B. All of these costs related to a patent may be capitalized.
29. Pearl Corporation acquired manufacturing machinery on January 1 for $9,000. During the year, the
machine produced 1,000 units, of which 600 were sold. There was no work-in-process inventory at the
beginning or at the end of the year. Installation charges of $300 and delivery charges of $200 were also
incurred. The machine is expected to have a useful life of five years with an estimated salvage value of
$1,500. Pearl uses the straight-line depreciation method.
The original cost of the machinery to be recorded in Pearl's books is

A. $9,500
B. $9,200
C. $9,300
D. $9,000
A. Fixed assets are originally recorded at all of the costs necessary to get the asset ready for use. This
includes the cost of the asset itself, shipping, installation, testing, insurance during transit, any import taxes,
and any other costs that needed to be incurred in order to prepare the asset for its intended use. Therefore,
Pearl should include the $9,000 cost of the asset as well as the installation charges of $300 and the delivery
charges of $200, for a total of $9,500. This $9,500 minus the estimated salvage value of $1,500 will be used
to calculate the straight-line depreciation over the life of the asset.
30. Panco, Inc. owns 90% of the voting stock of Spany Corporation. After consolidated financial statements
have been prepared, the entries to eliminate intercompany payables and receivables will
A. Be reflected in the accounts of both Panco and Spany.
B. Be reflected only in the accounts of Panco.
C. Be reflected only in the accounts of Spany.
D. Not be reflected in the accounts of either company

D. The adjustments that are made to eliminate intercompany transactions are not actually recorded in the
books of either company. They are simply adjustments in a worksheet that is used to prepare the
consolidated accounts. This makes sense because even though payables and receivables are eliminated in the
consolidation process, each of the two companies does have a payable or receivable that they will collect or
pay. Therefore, this item cannot be eliminated in the consolidation process in either company's books
because it does still exist.
31. The value of property, plant, and equipment that is included in total assets on the statement of financial
position is
A. Replacement cost.
B. Acquisition cost.
C. Cost minus accumulated depreciation.
D. Appraisal or market value
C. The carrying value of property, plant and equipment is determined as the historical cost minus
accumulated depreciation. The exception to this is if the asset has been impaired, but this is not given as a
choice.
32. The correct form of the journal entry recorded upon the sale of a plant asset sold for an amount of cash in
excess of its net book value is as follows:
A. Dr Cash; Dr Machinery; Cr Accumulated depreciation - machinery; Cr Gain on disposal of machinery
B. Dr Cash; Dr Accumulated depreciation; Cr Machinery; Cr Gain on disposal of machinery
C. No journal entry is required.
D. Dr Cash; Dr Accumulated depreciation - machinery; Dr Gain on disposal of machinery; Cr Machinery
B. In the event of the sale of a plant asset for more cash than the carrying value, this is the correct journal
entry to record the event.
33. When preparing consolidated financial statements, the entity being accounted for is the
A. Parent.
B. Legal entity.
C. Economic entity.
D. Minority interest.
C. Consolidated financial statements are prepared as though the parent (the investor corporation) and the
subsidiary or subsidiaries (the investee[s]) are a single economic entity, not the legal entities that exist.
34. Lambert Company acquired a machine on October 1 that was placed in service on November 30. The
cost of the machine was $63,000, of which $20,000 was given as a down payment. The remainder was
borrowed at 12% annual interest. Additional costs included $2,500 for shipping, $4,000 for installation,
$3,000 for testing, and $1,290 of interest on the borrowed funds. How much should be reported for this
acquisition in the machine account on Lambert Company's statement of financial position as of
November 30?
A. $63,000

B. $72,500
C. $73,790
D. $69,500
B. The amount used to record fixed assets includes all of the costs necessary to get the asset ready and
available for use. This includes the cost of the asset itself, shipping, installation and testing. It does not
include the interest on the borrowed funds, as this is a financing decision, not part of the cost of the asset
itself. Adding together all of the items to be included we get $72,500 ($63,000 + $2,500 + $4,000 + $3,000).
35. On December 1, year 4, Boyd Co. purchased a $400,000 tract of land for a factory site. Boyd razed an
old building on the property and sold the materials it salvaged from the demolition. Boyd incurred
additional costs and realized salvage proceeds during December year 4 as follows:
Demolition of old building $50,000

Legal fees for purchase contract and recording ownership 10,000
Title guarantee insurance 12,000
Proceeds from sale of salvaged materials 8,000
In its December 31, year 4 balance sheet, Boyd should report a balance in the land account of
a. $464,000
b. $460,000
c. $442,000
d. $422,000
(a) Any cost involved in preparing land for its ultimate use (such as a factory site) is considered part of the
cost of theland. Before the land can be used as a building site, it must be purchased (involving costs such as
purchase price, legal fees, and title insurance) and the old building must be razed (cost of demolition less
proceeds from sale of scrap). The total balance in the land account should be $464,000.
Purchase price $400,000
Legal fees 10,000
Title insurance 12,000
Net cost of demolition ($50,000 – $8,000) 42,000
$464,000
36. On July 1, year 4, 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, year 4, 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,
year 4 balance sheet as investment in Ace?
a. $3,000
b. $2,500
c. $1,500
d. $1,250

(a) 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/Y4 balance sheet at $3,000. The book value of Ace’s stock
does not affect the amount recorded on Balt’s books.
37. A nonmonetary exchange is recognized at fair value of the assets exchanged unless
a. Exchange has commercial substance.
b. Fair value is not determinable.
c. The assets are similar in nature.
d. The assets are dissimilar.
(b) A nonmonetary exchange is recognized at fair value unless the fair value is not determinable, the
exchange transaction is to facilitate sales to customers, or the exchange transactions lacks commercial
substance. Answer (a) is incorrect, because the exchange must lack commercial substance. Answers (c) and
(d) are incorrect because there is no longer the distinction of similar or dissimilar assets in
non-monetary exchanges.
INTANGIBLES
38. In a business combination to be accounted for as a purchase, Warner Company paid $1,300,000 for an
80% interest in Sun Company on January 2. At the time, Sun’s net assets had a book value of
$1,000,000, while the market value of Sun’s land was $300,000 more than book value and the market
value of Sun’s patents was $200,000 more than book value. All other assets and liabilities had book
values equal to market value. In this situation, Warner should allocate the excess of cost over book value
as
a. $300,000 to land and $200,000 to patents.
b. $240,000 to land, $160,000 to patents, and $100,000 to goodwill.
c. $500,000 to goodwill.
d. $300,000 to land and $200,000 to goodwill.
39. Alton Corporation purchased 100% of the shares of Jones Corporation for $600,000. Financial
information for Jones Corporation is provided below
Jones Corporation ($000)
Book Value Fair Market Value
Cash $ 50 $ 50
Accounts receivable 100 100
Inventory 150 100
Total current assets 300 250
Property, plant & equipment (net) 500 600
Total assets $800 $850

Current liabilities $150 $150
Long-term debt 200 200
Total liabilities 350 350
Common stock 150 150
Paid-in-capital 80 80
Retained earnings 220
Total shareholders’ equity 450
Total liabilities & shareholders’ equity $800
The amount of goodwill resulting from this purchase, if any, would be
a. $200,000.
b. $150,000.
c. $100,000.
d. Zero.
40. A liability arising from a loss contingency should be recorded if the
a. amount of the loss can be reasonably estimated.

b. contingent future events have a reasonably possible chance of occurring.
c. contingent future events have a reasonably possible chance of occurring and the amount of the loss can be
reasonably estimated.
d. contingent future events will probably occur and the amount of the loss can be reasonably estimated.
41. Linden Corporation is a defendant in a lawsuit where the plaintiff is seeking $1,000,000 in damages. The
company had terminated the plaintiff, George Russell, from his position with Linden after Russell
allegedly sold specifications for one of Linden’s new products to a competitor. Russell, who helped to
develop the new product specifications, admitted he received cash for these plans but claimed he was
wrongfully terminated from his position because Linden had no stated policy regarding this issue.
Linden’s attorney believes that it is quite possible Linden will lose the case and, if so, damages could
range from $100,000 to $200,000. Regardless of the outcome of the case, Linden’s accountants estimate
the company will incur an additional $5,000 in unemployment costs because of Russell’s termination.
The amount that Linden should accrue because of the contingency in this situation is
a. $200,000.
b. $100,000.
c. $5,000.
d. Zero.
42. Ichabod Company is the plaintiff in two lawsuits. The first suit involves a competitor who has made an
exact copy of one of Ichabod’s products, and Ichabod is suing for patent infringement. The attorneys
estimate a $5,000,000 award for Ichabod; however, it is anticipated that the case will be in litigation for
2 to 3 years before final resolution. The second case also involves patent infringement; however, in this

instance, the attorneys do not believe Ichabod has a strong case. It is estimated the company has a 50%
chance of winning, and the award, if any, would be in the $250,000 to $1,000,000 range. The most
appropriate amount to be recorded as a gain contingency would be
a. Zero.
b. $5,000,000.
c. $5,125,000.
d. $5,250,000.
43. On December 31, year 3, Byte Co. had capitalized software costs of $600,000 with an economic life of
four years. Sales for year 4 were 10% of expected total sales of the software. At December 31, year 4,
the software had a net realizable value of $480,000. In its December 31, year 4 balance sheet, what
amount should Byte report as net capitalized cost of computer software?
a. $432,000
b. $450,000
c. $480,000
d. $540,000
(b) The software should be valued at the lower of its unamortized cost or its net realizable value. The
software’s unamortized cost is $450,000, which is equal to $600,000 – $150,000 ($600,000/4). Answer (c) is
incorrect because the software’s unamortized cost is less than its net realizable value.
44. On January 2, year 4, Judd Co. bought a trademark from Krug 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, year 4 balance sheet, what
amount should be reported as accumulated amortization?
a. $ 7,600
b. $ 9,500
c. $10,000
d. $12,500
(c) 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 fi fty years.
Therefore, the year 4 amortization expense and 12/31/Y4 accumulated amortization is $10,000 ($500,000 ÷
50 years).
45. On January 2, year 4, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of
$200,000. During the fi rst quarter of year 4, Paye spent an additional $80,000 on expenditures designed
to maintain goodwill. In its December 31, year 4 balance sheet, what amount should Paye report as
goodwill?
a. $180,000
b. $200,000
c. $252,000
d. $280,000

(b) A company should record as an asset the cost of intangible assets such as goodwill acquired from other
entities. Costs of developing intangible assets such as goodwill “which are not specifically identifiable, have
indeterminate lives, or are inherent in a continuing business and related to an entity as a whole” should be
expensed when incurred. Therefore, only the $200,000 (and not the additional
$80,000) should be capitalized as goodwill. Goodwill should not be amortized.
46. Northern Airline purchased airline gate rights at Newark International Airport for $2,000,000 with a
legal life of five years. However, Northern has the ability and right to extend the rights every ten years
for an indefinite period of time. Over what period of time should Northern amortize the gate rights?
a. 5 years.
b. 15 years.
c. 40 years.
d. The rights should not be amortized.
(d) In determining the useful life of an intangible, consideration should be given to the legal, regulatory or
contractual life, including rights to extension. Since Northern has the ability and intent to renew the rights
indefinitely, the intangible should not be amortized.
47. On January 2, year 1, 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, year 4, 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 year 4, assuming amortization is
recorded at the end of each year?
a. $ 9,000
b. $54,000
c. $63,000
d. $72,000
(c) Before year 4, Lava would record total amortization of $27,000 [($90,000 × 1/10) × 3 years], resulting in
a 12/31/Y3 carrying amount of $63,000 ($90,000 – $27,000). Since the patent became worthless at 12/31/Y4
due to government prohibition of the product, the entire carrying amount ($63,000) should be charged
against income in year 4 as an impairment loss.
48. What does ASC Topic 350 require with respect to accounting for goodwill?
a. Goodwill should be amortized over a five-year period.
b. Goodwill should be amortized over its expected useful life.
c. Goodwill should be recorded and never adjusted.
d. Goodwill should be recorded and periodically evaluated for impairment.
(d) Goodwill should not be amortized. Instead, goodwill remains at the amount established at the time of the
business combination unless it is determined to be impaired. Goodwill should be tested for impairment
annually or more often if events and circumstances indicate that goodwill may be impaired.

49. Which of the following statements concerning patents is correct?
a. Legal costs incurred to successfully defend an internally developed patent should be capitalized and
amortized over the patent’s remaining economic life.
b. Legal fees and other direct costs incurred in registering a patent should be capitalized and amortized on a
straight-line basis over a five-year period.
c. Research and development contract services purchased from others and used to develop a patented
manufacturing process should be capitalized and amortized over the patent’s economic life.
d. Research and development costs incurred to develop a patented item should be capitalized and amortized
on a straight-line basis over seventeen years.
(a) Costs incurred in connection with securing a patent, as well as attorney’s fees and other unrecovered
costs of a successful legal suit to protect the patent, can be capitalized as part of patent costs. Therefore,
answer (a) is correct because legal fees and other costs incurred to successfully defend a patent should be
amortized along with the acquisition cost over the remaining economic life of the patent. Answer (b) is
incorrect because legal fees and other direct costs incurred in registering a patent should be capitalized and
amortized on a straight-line basis over its economic life, not five years. Answers (c) and (d) are incorrect
because research and development costs related to the development of the product, process or idea that is
subsequently patented must be expensed as incurred, not capitalized and amortized.
50. Under ASC Topic 350, goodwill should be tested periodically for impairment
a. For the entity as a whole.
b. At the subsidiary level.
c. At the industry segment level.
d. At the operating segment level or one level below.
(d) Goodwill is allocated to reporting units which are operating segments of the business or one level below.
Goodwill is also tested for impairment at the level of the reporting unit.
51. Sloan Corporation is performing its annual test of the impairment of goodwill for its Financing reporting
unit. It has determined that the fair value of the unit exceeds it carrying value. Which of the following is
correct concerning this test of impairment?
a. Impairment is not indicated and no additional analysis is necessary.
b. Goodwill should be written down as impaired.
c. The assets and liabilities should be valued to determine if there has been an impairment of goodwill.
d. Goodwill should be retested at the entity level.
(a) There are two steps in the test of impairment of goodwill. The first is to compare the carrying value of the
reporting unit to its fair value. If the fair value exceeds the carrying value there is no need to perform the
second step of valuing the unit’s assets and liabilities. Goodwill is never tested at the entity level.
52. Wilson Corporation is performing the test of impairment of its Technology reporting unit at 9/30/Y4. In
the first step of the process, Wilson has valued the unit using a multiple of earnings approach at
$2,000,000. The carrying value of the net assets of the Technology unit is $2,100,000. What should
Wilson do with this information?
a. Record an impairment loss of $100,000.

b. Record no impairment loss.
c. Value goodwill individually.
d. Perform step two of the test of impairment.
(d) Since the fair value of the reporting unit is less than its carrying amount, the second step in the test should
be performed. The assets and liabilities of the unit should be valued and compared to value of the total unit.
The implied value of goodwill is the difference. The impairment is equal to the difference between the
implied value and the carrying amount of the goodwill.
Reporting on the Costs of Start-Up Activities

53. 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?

a. $975,000
b. $160,000
c. $0
d. $139,200
(b) Start-up activities are defined broadly as those onetime activities related to opening a new facility as well
as introducing a new product or service and conducting business in a new territory. 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.
Answer (b) which includes the costs of training local employees ($120,000) and travel costs of salaried
employees ($40,000) is the correct answer.
54. On January 1, year 4, Kew Corp. incurred organization costs of $24,000. What portion of the
organization costs will Kew defer to years subsequent to year 4?
a. $23,400
b. $19,200
c. $ 4,800
d. $0
(d) Organization costs are those incurred in the formation of a corporation. These costs should be expensed
as incurred. The rationale is that uncertainty exists concerning the future benefit of these costs in future
years. Thus, they are properly recorded as an expense in year 4.
55. 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. Cost of research and development should be expensed as incurred.
a. I only.
b. III only.
c. Both I and III.
d. I, II, and III.
(b) 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.
Computer Software Costs
56. 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.
(b) 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.
57. Which of the following statements is (are) correct regarding the proper accounting treatment for
internal-use software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as incurred.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
(b) Application and development costs create probable future benefit. Therefore, they should be capitalized
as incurred. However, preliminary costs are similar to research and development costs and are expensed as
incurred, not capitalized.

LONG-TERM LIABILITIES AND BONDS
58. Karen's Crafts, Inc. has the following accounts included in its December 31 trial balance:
Accounts payable $250,000

Discount on bonds payable 34,000
Wages payable 29,000
Interest payable 14,000
Bonds payable
(Issued 1/1/96; due 1/1/06) 500,000
Income taxes payable 26,000
What amount of current liabilities will be reported on Karen's December 31statement of financial position?
A. $285,000
B. $319,000
C. $353,000
D. $819,000
59. Florida Corporation has the following items on its Statement of Financial Position.
Treasury stock $ 8,000
5-year note payable 12,000
Capital lease obligations 15,000
Deferred income taxes 7,000
20-year bond 20,000
Dividends payable 3,000
Retained earnings 14,000
What is the amount that should be classified as long-term debt?
a. $54,000.
b. $62,000.
c. $68,000.
d. $79,000.
60. On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five
years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel
uses the effective interest method of amortizing bond discount. Interest on the bonds is payable annually
on December 31. What is the amount of interest to be paid at the end of the first year?
a. $8,659.

b. $9,000.
c. $9,621.
d. $10,000.
uses the effective interest method of amortizing bond discount. Interest is payable annually on December
31. What is the amount of interest expense that should be reported on Evangel’s Income Statement for
the second year?
a. $8,779.
b. $9,000.
c. $9,559.
d. $9,683.
62. On January 1, bonds with a face value of $200,000, an 8% annual effective yield, and a 7% annual
coupon rate were sold by Thomas Dynamics Inc. for $180,000, The bonds pay interest January 1 and
July 1. Using the effective interest method, the company’s interest expense for the first six months ended
July 1 will be
a. $7,000.
b. $7,200.
c. $14,000.
d. $14,400.
31. What is the amount of Evangel’s unamortized bond discount at the end of the first year?
a. $621.
b. $2,452.
c. $3,172.
d. $3,793.
31. The carrying amount of the bonds payable, net of discount at the end of the first year, is
a. $94,866.
b. $95,586.
c. $96,828.

d. $97,548.
31. What is the amount of interest expense that should be reported on Evangel’s Income Statement at the
end of the first year?
a. $8,659.
b. $9,000.
c. $9,621.
d. $10,000.
66. A premium on bonds payable arises when
a. the semi-annual bond interest becomes due.

b. the prevailing interest rate after the bond issuance falls below the nominal rate of the bonds.
c. the amount received from sale of the bonds at issuance exceeds the face value of the bonds.
d. the cost of issuing the bonds is capitalized.
67. Alabaster Company issued $1,000,000 in bonds that sold for a $50,000 premium. The bond premium
should be recorded as a(n)
a. reduction to the long-term liability account Bonds Payable.

b. increase to the long-term asset account Premium on Bonds Payable.
c. increase to the valuation liability account Premium on Bonds Payable.
d. increase to the long-term liability account Bonds Payable.
68. On July 1, year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The
bonds are dated April 1, year 1, and mature on April 1, year 11. Interest is payable semiannually on April
1 and October 1. What amount did Eagle receive from the bond issuance?
a. $579,000
b. $594,000
c. $600,000
d. $609,000
(d) To determine the net cash received from the bond issuance, the solutions approach is to prepare the
journal entry for the issuance
Cash ?
Discount on BP 6,000
Bonds payable 600,000
Interest expense 15,000

The bonds were issued at 99 ($600,000 × 99% = $594,000), so the discount is $6,000 ($600,000 –
$594,000). The accrued interest covers the three months from 4/1 to 7/1 ($600,000 × 10% × 3/12 = $15,000).
The cash received includes the $594,000 for the bonds and the $15,000 for the accrued interest, for a total of
$609,000.
69. Perk, Inc. issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk
calculate the net proceeds to be received from the issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond issuance costs.
d. Discount the bonds at the market rate of interest and deduct bond issuance costs.
(d) The question asks for net proceeds to be received from the issuance. The market value of a bond is equal
to the maturity value and the interest payments discounted at the market rate of interest. The net proceeds
will be the market value of the bond less the bond issuance costs.
70. The market price of a bond issued at a discount is the present value of its principal amount at the market
(effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
(c) The market price of a bond issued at any amount (par, premium, or discount) is equal to the present value
of all of its future cash flows, discounted at the current market (effective) interest rate. The market price of a
bond issued at a discount is equal to the present value of both its principal and periodic future cash interest
payments at the stated (cash) rate of interest, discounted at the current market (effective) rate.
71. For the issuer of a ten-year term bond, the amount of amortization using the interest method would
increase each year if the bond was sold at a
Discount Premium
a. No No
b. Yes Yes
c. No Yes
d. Yes No

(b) The requirement is to determine whether the amount of amortization increases each year using the
interest method when a bond is sold either at a discount or premium or both. Using the interest method,
interest expense for the period is based on the carrying value of the bond multiplied by the effective rate of
interest. Cash interest paid for the period equals the face value of the bond multiplied by the stated rate of
interest. The difference between these two resulting figures is the amortization of the discount or premium
each period. The solutions approach is to prepare a table for a bond issued at a discount and at a premium
and examine the direction of the successive amortization amounts. Consider $100,000 of 8% bonds issued on
January 1, year 1, due on January 1, year 6, with interest payable each July 1 and January 1. Investors wish
to obtain a yield of 10% on the issue. The amortization for the first two periods is as follows:
Dates Credit cash Debit interest Credit bond Carrying value
expense discount of bonds
1/1/Y1 $92,278
7/1/Y1 $4,000 $4,614 $614 92,892
1/1/Y2 4,000 4,645 645 93,537
Assume the same facts, except the investors wish to obtain a yield of only 6% on the issue.
Dates Credit cash Debit interest Debit bond Carrying value

expense premium of bonds
1/1/Y1 $108,530
7/1/Y1 $4,000 $3,256 $744 107,786
1/1/Y2 4,000 3,234 766 107,020
The above tables show that when bonds are sold at either a discount or a premium, the amount of
amortization using the interest method will increase each year.
72. On July 1, year 1, East Co. purchased as a long-term investment $500,000 face amount, 8% bonds of
Rand Corp. for $461,500 to yield 10% per year. The bonds pay interest semiannually on January 1 and
July 1. East does not elect the fair value option for reporting these securities. In its December 31, year 1
balance sheet, East should report interest receivable of
a. $18,460
b. $20,000
c. $23,075
d. $25,000
(b) Interest receivable on an investment in bonds is computed using the basic interest formula
Face value × Stated rate × Time period = Interest receivable
$500,000 × 8% × 6/12 = $20,000
Note that interest revenue is $23,075 ($461,500 × 10% × 6/12) using the interest method
73. An investor purchased a bond as a long-term investment on January 1. Annual interest was received on
December 31. The investor’s interest income for the year would be highest if the bond was purchased at

a. Par.
b. Face value.
c. A discount.
d. A premium.
(c) The requirement is to determine the purchase price of a bond which will yield the highest interest income
for the investor. If the bond’s market rate of interest on the date of acquisition is different than the stated rate,
the bonds will sell at a premium or discount. If the market rate of interest
is higher than the bond’s stated rate, the purchase price will be lower than the face value (i.e., discounted).
The discount will be recognized over the life of the investment as an addition to interest income. Annual
interest income will equal the cash interest received plus the discount amortization for the year. If the bonds
are purchased at par (face value), the interest income will equal the cash interest received. The interest
income for a bond purchased at a premium would equal the cash interest received less the premium
amortization for the year.
74. On March 1, year 1, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method
instead of the effective interest method to amortize the discount. Clark does not elect the fair value
option to report these securities. How were the following amounts, as of December 31, year 1, affected
by the error?
Bond carrying amount Retained earnings
a. Overstated Overstated
b. Understated Understated
c. Overstated Understated
d. Understated Overstated
(c) When a company uses the effective interest method to amortize a discount on bonds payable, interest
expense (which is based on the carrying value of the bonds) is lower in earlier years when compared to
interest expense under the straightline method. Therefore, the straight-line method results in higher interest
expense, lower net income, and understated retained earnings. Since more interest expense is recorded under
the straight-line method, amortization of the discount on bonds payable will be greater under the straight-line
method when compared to the effective-interest method. Therefore, the carrying amount of the bonds under
the straight-line method is overstated.
Convertible Bonds
75. On July 1, year 1, after recording interest and amortization, York Co. converted $1,000,000 of its 12%
convertible bonds into 50,000 shares of $1 par value common stock. On the conversion date the carrying
amount of the bonds was $1,300,000, the market value of the bonds was $1,400,000, and York’s
common stock was publicly trading at $30 per share. Using the book value method, what amount of
additional paid-in capital should York record as a result of the conversion?
a. $ 950,000
b. $1,250,000
c. $1,350,000
d. $1,500,000

(b) Using the book value method, the common stock is recorded at the carrying amount of the converted
bonds, less any conversion expenses. Since there are no conversion expenses in this case, the common stock
is recorded at the $1,300,000 carrying amount of the converted bonds. The par value of the stock issued is
$50,000 (50,000 × $1), so additional paid-in capital (APIC) of $1,250,000 ($1,300,000 – $50,000) is
recorded. The entry is
Bonds payable 1,000,000
Premium on B.P. 300,000
Common stock 50,000
APIC 1,250,000
Note that when the book value method is used, the fair value is not considered, and no gain or loss is
recognized.
76. On March 31, year 1, Ashley, Inc.’s bondholders exchanged their convertible bonds for common stock.
The carrying amount of these bonds on Ashley’s books was less than the market value but greater than
the par value of the common stock issued. If Ashley used the book value method of accounting for the
conversion, which of the following statements correctly states an effect of this conversion?
a. Stockholders’ equity is increased.
b. Additional paid-in capital is decreased.
c. Retained earnings is increased.
d. An extraordinary loss is recognized.
(a) Under the book value method, the common stock will be recorded at the book value of the bonds at the
date of conversion. Thus, no gain or loss is recognized on the conversion. The conversion entry credits
common stock and APIC, which increases stockholders’ equity. The amount of additional paid-in capital is
the difference between the book value of the bonds and the par value of the stock. The
effect of the conversion would be to increase the APIC. The conversion has no effect on retained earnings.
No gain or loss is recognized.
Extinguishment of Debt
77. On June 30, year 1, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30,
year 6. Interest was payable semiannually every June 30 and December 31. King did not elect the fair
value option for reporting its fi nancial liabilities. On June 30, year 1, after amortization was recorded for
the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively.
On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June
30, year 1, what amount should King recognize as gain before income taxes on redemption of bonds?
a. $ 20,000
b. $ 80,000
c. $120,000
d. $180,000
(b) A gain or loss on redemption of bonds is the difference between the cash paid ($5,000,000 × 98% =
$4,900,000) and the net book value of the bonds. To compute the net book value, premium or discount and
bond issue costs must be considered. Book value is $4,980,000 ($5,000,000 face value, less $50,000 bond
issue costs, plus $30,000 premium). Therefore the gain or redemption is $80,000 ($4,980,000 book value
less $4,900,000 cash paid).

78. On January 1, year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds
were to mature on January 1, year 11 but were callable at 101 any time after December 31, year 4.
Interest was payable semiannually on July 1 and January 1. Fox did not elect the fair value option for
reporting its financial liabilities. On July 1, year 6, Fox called all of the bonds and retired them. Bond
premium was amortized on a straight-line basis. Before income taxes, Fox’s gain or loss in year 6 on this
early extinguishment of debt was
a. $30,000 gain.
b. $12,000 gain.
c. $10,000 loss.
d. $ 8,000 gain.
(d) The gain on early extinguishment of debt is the excess of the book value of the bonds at the time of
retirement over the cash paid ($1,000,000 × 101% = $1,010,000). On 1/1/ Y1, the original balance in the
premium account was $40,000 ($1,040,000 – $1,000,000). At 7/1/Y1, the premium had been amortized for
five and one-half years, or eleven sixmonth periods (1/1/Y1 to 7/1/Y6). Since the bond term was ten years,
or twenty six-month periods, the total premium amortized was $22,000 ($40,000 × 11/20). Therefore, the
unamortized premium was $18,000 ($40,000 – $22,000) and the book value of the bonds was $1,018,000
($1,000,000 + $18,000). A shortcut approach is to take the 1/1/Y1 book value ($1,040,000) and subtract the
amortization ($22,000) to determine the 7/1/Y6 book value of $1,018,000. The gain is $8,000 ($1,018,000
book value less $1,010,000 cash paid).
INCOME TAXES
79. At the end of its first year in business, Pebbles Corporation reported pretax financial statement income of
$50,000. Included in pretax income were $10,000 of revenue from installment sales and depreciation
expense of $12,000. On the tax return, $5,000 of installment sales revenue was reported, and
depreciation expense of $16,000 was deducted. The income tax rate was 40%. Pebbles reports
installment sales receivables as current assets. On its year-end Statement of Financial Position, Pebbles
should report deferred tax balances of
a. $2,000 as a current liability and $1,600 as a current asset.

b. $4,000 as a current asset and $5,000 as a noncurrent asset.
c. $2,000 as a current liability and $1,600 as a noncurrent liability.
d. $4,000 as a noncurrent liability and $5,000 as a current liability.
Feedback: The correct answer is: $2,000 as a current liability and $1,600 as a noncurrent liability. Deferred
taxes result from the temporary (reversible) differences between revenues and expenses reported for taxes
versus revenues and expenses reported for financial purposes. The reporting of $5,000 in installment
revenues for taxes versus $10,000 for financial reporting creates a current deferred tax liability (due in one
year) of 40% of the difference, or (0.4)($5,000) = $2,000. The reporting of $16,000 in depreciation for
taxes versus $12,000 for financial reporting creates a noncurrent deferred tax liability (due after one year) of
40% of the difference, or (0.4)($4,000) = $1,600.
80. Lucas Company computed the following deferred tax balances for the two most recent years. Deferred
tax assets are considered fully realizable.

Year 1 Year 2
Current deferred tax assets $3,000 $10,000
Noncurrent deferred tax assets 6,000 7,000
Current deferred tax liabilities 8,000 9,000
Noncurrent deferred tax liabilities 5,000 14,000
What deferred tax amounts will appear on Lucas’s Statement of Financial Position at the end of Year 2?
Assets Liabilities
Current Noncurrent Current Noncurrent
a. $0 $1,000 $5,000 $0.
b. $7,000 $1,000 $1,000 $9,000.
c. $1,000 $0 $0 $7,000.
d. $10,000 $7,000 $9,000 $14,000.
Feedback: The correct answer is: $1,000, $0, $0, $7,000. The deferred tax amounts on the statement of
financial position at the end of year 2 will be the net of the current deferred tax items and the net of the
noncurrent deferred tax items.
Current deferred tax amount items = (current deferred tax assets) – (deferred tax liabilities) Current deferred
tax amount items = ($10,000) – ($9,000) = $1,000 in current deferred tax assets
Noncurrent deferred tax items = (noncurrent deferred tax assets) – (noncurrent deferred tax liabilities)
Noncurrent deferred tax items = ($7,000) – ($14,000) = $7,000 noncurrent deferred tax liabilities.
81. Lucas Company computed the following deferred tax balances for the two most recent years. Deferred
tax assets are considered fully realizable.
Year 1 Year 2
Current deferred tax assets $3,000 $10,000
Noncurrent deferred tax assets 6,000 7,000
Current deferred tax liabilities 8,000 9,000
Noncurrent deferred tax liabilities 5,000 14,000
If Lucas calculates taxable income of $1,000,000 for Year 2 and is taxed at an effective income tax rate of
40%, how much income tax expense will be reported on Lucas Income Statement for Year 2?
a. $400,000. b. $402,000. c. $404,000. d. $406,000.
Feedback: The correct answer is: $402,000. The year 2 income tax expense of $402,000 is the amount
needed to balance the journal entry to record the income tax payable and the changes in the deferred tax
assets and liabilities.

The income tax payable is calculated as follows: Income tax payable = (tax rate)(taxable income) Income tax
payable = (0.4)($1,000,000) = $400,000
The required journal entry at the end of year 2 would be:
Income tax expense 402,000

Current deferred tax assets 7,000 (10,000 - 3,000)
Noncurrent deferred tax assets 1,000 (7,000 - 6,000)
Current deferred tax liabilities 1,000 (9,000 – 8,000)
Noncurrent deferred tax liabilities 9,000 (14,000 – 5,000)
Income taxes payable 400,000
82. Selected financial information for Windham Inc. for the year just ended is shown below.
Pretax income $5,000,000

Interest received on municipal bonds 600,000
Gain on the sale of land reported this year but not taxable until next year 1,000,000
Tax rate for all years 40%
Beginning balances: Income taxes payable -0–

Deferred tax liability $50,000
The total income tax expense reported on Windham’s Income Statement for the year just ended should be
a. $960,000. b. $1,360,000. c. $1,760,000. d. $2,640,000.
Feedback: The correct answer is: $1,760,000. Taxable income in this case is calculated as follows: Taxable
income = (pretax income – interest received on municipal bonds) Taxable income = ($5,000,000 - $600,000)
= $4,400,000
Income tax expense is calculated as follows: Income tax expense = (tax rate)(taxable income) Income tax
expense = (40%)($4,400,000) Income tax expense = $1,760,000
83. Moore Corporation’s income tax computations gave rise to the following accounts.
Deferred Tax Asset - Current $20,000

Deferred Tax Asset - Noncurrent 30,000
Deferred Tax Liability - Current 10,000
Deferred Tax Liability - Noncurrent 80,000
The account(s) relating to Moore’s taxes that should appear on the Statement of Financial Position is (are)
a. a noncurrent Deferred Tax Liability of $40,000.
b. a noncurrent Deferred Tax Liability of $90,000 and a noncurrent Deferred Tax Asset of $50,000.
c. a current Deferred Tax Asset of $10,000 and a noncurrent Deferred Tax Liability of $50,000.

d. a current Deferred Tax Asset of $20,000, a noncurrent Deferred Tax Asset of $30,000, a current Deferred
Tax Liability of $10,000, and a noncurrent Deferred Tax Liability of $80,000.
Feedback: The correct answer is: a current Deferred Tax Asset of $10,000 and a noncurrent Deferred Tax
Liability of $50,000. The deferred tax amounts on the statement of financial position includes the following:
Deferred tax amount = (net of current deferred tax assets and liabilities) and (net of noncurrent deferred tax
assets and liabilities)
Net of current deferred tax assets and liabilities = (current deferred tax assets) – (current deferred tax
liabilities) Net of current deferred tax assets and liabilities = ($20,000 - $10,000) = $10,000 current deferred
tax asset
Net of noncurrent deferred tax assets and liabilities = (noncurrent deferred tax assets) – (noncurrent deferred
tax liabilities) Net of noncurrent deferred tax assets and liabilities = ($30,000) – ($80,000) = -($50,000)
noncurrent deferred tax liability
LEASES
84. Block Corporation wants to buy a new piece of machinery costing $1 million that is expected to last for
3 years. Block can finance this purchase with a 3-year, equal payment loan having an annual interest
rate of 10%. Alternatively, Block can lease the equipment for $400,000 per year with payments due at
the beginning of the year. Block is responsible for the maintenance under either choice and has a 40%
tax rate. What is the after-tax present value of the lease payments?
a. $720,000. b. $656,640 c. $596,880. d. $437,760.
Feedback: The correct answer is: $656,640. The after-tax present value of the lease payments is calculated
by taking the three after-tax lease payments discounted at 10%. The after-tax lease payment per year is
$240,000. This is calculated by taking the annual lease payment and multiplying it by one minus the tax
rate, or ($400,000)(1 - 0.4) = $240,000.
The after-tax present value of the lease payments = $240,000 + (present value (PV) of an annuity of
$240,000, for 2 years) The after-tax present value of the lease payments = $240,000 + $240,000(1.736) The
after-tax present value of the lease payments = $656,640.
The factor 1.737 is the present value of annuity for 2 periods at 10% from a present value table.
85. Neary Company has entered into a contract to lease computers from Baldwin Company starting on
January 1. Relevant information pertaining to the lease is provided below.
• Lease term 4 Years

• Useful life of computers 5 Years
• Present value of future lease payments $100,000
• Fair value of leased asset on date of lease 105,000
• Baldwin’s implicit rate 10%

At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has properly
classified this lease as a capital lease on its financial statements, and uses straight-line depreciation on
comparable assets.
What is the annual depreciation expense that Neary will record on the leased computers?
a. $20,000. b. $21,000. c. $25,000. d. $26,250.
Feedback: The correct answer is: $20,000. Because the lease is a capital lease and the life of the computer
exceeds the lease term, the life of the computer is used to determine the depreciation amount. The annual
straight-line depreciation is calculated as follows: Annual straight-line depreciation = (value of the lease and
computer) / (life of computer) Annual straight-line depreciation = $100,000 / 5 = $20,000
"I hated every minute of training, but I said, 'Don't quit. Suffer now and live the rest of your life as a
champion.'" Muhammad Ali
-End-

1. 16. 31. 46. 61. 76.
2. 17. 32. 47. 62. 77.
3. 18. 33. 48. 63. 78.
4. 19. 34. 49. 64. 79.
5. 20. 35. 50. 65. 80.
6. 21. 36. 51. 66. 81.
7. 22. 37. 52. 67. 82.
8. 23. 38. 53. 68. 83.
9. 24. 39. 54. 69. 84.
10. 25. 40. 55. 70. 85.
11. 26. 41. 56. 71. End
12. 27. 42. 57. 72.
13. 28. 43. 58. 73.
14. 29. 44. 59. 74.
15. 30. 45. 60. 75.
Raw Score: ______________________________
Candidate Name:
________________________________________

CMA Exercises On Long Term Items With Answer Key and Rationale PDF

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Session 3 – October 25, 2019, Friday – 1:00 pm – 5:00 pm Walter Paraiso, CPA, CMA – Lead Instructor

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Exercises on Measurement, Valuation and Disclosure – Long Term Items

PROPERTY, PLANT & EQUIPMENT

2. In accordance with Statements of Financial Accounting Standards No. 121, “Accounting

Original cost of the machine $22,000

Part 1: External Financial Reporting Decisions

Original cost of the machine $22,000

What is the amount of the impairment loss to be recorded by Blake?

Part 1: External Financial Reporting Decisions

a. The entire amount will be reported as a selling and administrative expense.

9. The following information is available for Paragon as of November 30, 20X5.

Part 1: External Financial Reporting Decisions

Property, plant and equipment

Year 1 - 34,000 units

Part 1: External Financial Reporting Decisions

Using the double-declining-balance method, Ames' Year 4 depreciation expense is

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

For the forge, the depreciation expense is ($120,000 - $10,000) ÷ 5 = $22,000.

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

27. Depreciation of plant assets refers to

Part 1: External Financial Reporting Decisions

28. Costs that are capitalized with regard to a patent include

B. All of these costs related to a patent may be capitalized.

The original cost of the machinery to be recorded in Pearl's books is

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Demolition of old building $50,000

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

The amount of goodwill resulting from this purchase, if any, would be

40. A liability arising from a loss contingency should be recorded if the

a. amount of the loss can be reasonably estimated.

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Reporting on the Costs of Start-Up Activities

What portion of the organizational costs will be expensed?

Part 1: External Financial Reporting Decisions

Computer Software Costs

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

Part 1: External Financial Reporting Decisions

LONG-TERM LIABILITIES AND BONDS

Accounts payable $250,000

What is the amount that should be classified as long-term debt?

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

66. A premium on bonds payable arises when

a. the semi-annual bond interest becomes due.

a. reduction to the long-term liability account Bonds Payable.

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Dates Credit cash Debit interest Debit bond Carrying value

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

Part 1: External Financial Reporting Decisions

a. $2,000 as a current liability and $1,600 as a current asset.