Exam 9: Reporting and Interpreting Liabilities

The fixed asset turnover ratio measures how much profit is generated by use of operational (fixed) assets.

Pied Piper Pies has been in business 8 years with 4 stores in the San Francisco bay area. Their local reputation for making savoury pies such as curried potatoes is well recognized. A national food distributor has offered to purchase the company. Pied Piper has $1.2 million of assets on their books but those assets have $1.5 million in value at fair market value and $.3 million of liabilities. If the distributor offers to buy Pied Piper for $3.5 million and assume the liabilities of Pied Piper, how much will goodwill be based on the offered purchase price?

Lawson Pet Shop Limited bought new grooming equipment on January 1, 2013 for $13,000. The useful life is estimated to be 3 years with a residual value of $1,000. The company uses straight-line depreciation. On January 1, 2014, Pierre determined that the value of the equipment is impaired, as its recoverable amount is expected to be $4,800. The journal entry to record the impairment would involve debits and credits to the following accounts:

Acquiring and disposing of long-lived assets are financing activities on the cash flow statement.

Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less accumulated depreciation.

A change in the estimated residual value of property, plant, and equipment requires a restatement of prior years' depreciation.

Which of the following statements is false?

Raco Inc. purchased two used machines together to get a lower total cash price of $90,000. The machines were different, although of the same general type. They were designated as Machines A and B. New machines of the same type could be purchased as follows: Machine A, $25,000; Machine B, $75,000. Complete the following entry to record the purchase and show your computations.

FAL Corporation purchased a robot to be used in manufacturing. The purchase was made at the beginning of 20A by paying cash of $500,000. The robot has an estimated residual value of $20,000 and an expected useful life of 10 years. At the beginning of 20C, FAL concluded that the total useful life of the robot will be 8 years rather than 10, and that the residual value will be zero. FAL uses the straight-line method for depreciation. Required: 1. Make the journal entry to record depreciation on the robot for 20B. 2. Make the journal entry to record depreciation on the robot for 20C, including the effect of the changes in estimates. 3. Describe how a business should account for a change in the estimated useful life and/or residual value of a depreciable asset.

A company that is self-constructing a new store, which will open upon completion, is allowed to capitalize the interest during the period of construction if they finance the construction with actual loans.

Weaver Mining Company purchased a site containing a mineral deposit in 20C. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Weaver constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value. Required: 1. Explain the purpose for recording depletion on natural resources. 2. Calculate Weaver's depletion rate per ton of ore for this deposit. 3. Make the journal entry to record depletion for the year 20C, when Weaver mined and sold 150,00 tons of ore. 4. Make the journal entry to record depreciation on the building for 20C. Weaver calculates depreciation on the building using the units of production method based on the amount of ore extracted (150,000 tons in 20C).

In accounting for tangible operational assets, the continuity assumption is important because of which of the following?

Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Angstrom's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Angstrom should record for year 3 under the straight-line method?

On March 1, Chapine Company purchased a new stamping machine for $5,000. Chapine paid cash for the machine. Other costs associated with the machine were: transportation costs, $300; sales tax paid, $200; and installation cost, $100. What cost was recorded for the machine?

Accelerated depreciation methods are not desirable from the income tax point of view because the asset will produce a greater profit when it is new (the early years) than when it is older (the later years).

One example of a capital expenditure is ordinary maintenance cost such as an oil change for a company truck.

In 20B, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma?

Newson's Courier Service recently purchased a new delivery van for $29,000. The van is estimated to have a useful life of 8 years or 250,000 kilometres. The van will have a residual value of $1,000. The company uses the units-of-production method of depreciation. Assuming the van travelled 36,000 kms. during the first year, what is the depreciation expense for the van in year 1?

What is an extraordinary repair to a building?

If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false?