MGAB02 Financial Accounting II – Midterm Review Questions

Question 1:

Grindstone Corp. (Grindstone) produces fad toys for children. In 2024, 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 2024, 210,000 units
in 2025, and 70,000 units in 2026. 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 2025, 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 2025. Assume that Grindstone produced and sold 75,000 units in 2025 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 2025, 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,
2025?

Question 3:
Arnison Corp. purchased land and a building on May 1, 2021 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,
2023. 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:

2021:
Dec. 31 Record the annual depreciation.
Paid the interest owning on the notes payable.

2022:
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.

2023:
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.

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Question 4:

On January 1, 2020, 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 2022 (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
2022 immediately before the change in useful life.
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, 2022, 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 2022.
(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, 2026, 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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