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Intermediate Accounting I, Fall Semester 2005

Review Questions, Exam #5, Chapters 10 and 11 | |

|1. |Spencer Company purchased manufacturing equipment at a cost of $500,000 with terms of 2/10 n/60. Payment was made within the |

| |discount period. Freight charges to get the equipment delivered to the manufacturing plant were $7,000 including in transit |

| |insurance. The company paid a contractor to remodel the manufacturing plant to accommodate the new equipment at a cost of |

| |$22,000. Installation costs totaled $15,000. The capitalized cost of the manufacturing equipment is: |

|2. |Spencer Company purchased the net assets of Bones, Inc. by paying $800,000 in cash. Spencer Company assumed all of the |

| |liabilities. Book values and fair values of acquired assets and liabilities were: |

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| |Spencer Company would record goodwill of: |

|3. |Spencer Company began construction of a warehouse on May 1, 2003. The warehouse was finished and ready for use on September 30, |

| |2004. Expenditures on the project were as follows: |

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| |Weighted-average accumulated expenditures for 2003 was: |

|4. |Spencer Company purchased manufacturing equipment for $60,000 on August 1, 2002. The equipment is expected to have a ten-year |

| |life, with a residual value of $5,000. |

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| |Using the double-declining balance method, depreciation expense for 2003 and book value at December 31, 2003 would be: |

|5. |On April 1, 2003, Spencer Company purchased a specialized piece of machinery that has an expected capacity of 200,000 units and |

| |an estimated residual value of $100,000. The cost of the machinery was $600,000 and is to be depreciated using the |

| |units-of-production method. During nine months of 2003, 20,000 units of product were produced. During 2004, 50,000 units were |

| |produced. At the end of 2004, engineers estimated that the machine can realistically be used to produce only another 100,000 |

| |units. |

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| |Calculate the amount of depreciation expense that Spencer Company would report in 2003 and 2004. |

|6. |Spencer Company has a fiscal year end of June 30. On November 1, 2003 the company purchased a delivery van for $65,000. The van|

| |is expected to have a five-year life, with a residual value of $5,000. Using the straight-line method, depreciation expense for|

| |fiscal year ended June 30, 2004 will be how much? |

|7. |Spencer Company traded a Chevy truck for a Ford truck in 2004. The Chevy truck originally cost $80,000 and had accumulated |

| |depreciation up to the date of exchange of $60,000. In exchange Spencer Company paid $6,000 and received the Ford truck with a |

| |fair market value of $24,000. |

|A) |Using the format provided, show the calculation of the gain to be recognized from the exchange and the basis in the Dodge truck.|

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|B) |In the format provided prepare the journal entry to record the exchange. |

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|8. |On February 1, 2003, Spencer Company began construction of an office building. The office building was completed and ready for |

| |occupancy on September 30, 2003. The following is a schedule of expenditures during the construction period. |

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|A) |Using the format provided calculate the weighted-average accumulated expenditures. |

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|B) |The company had the following outstanding debt during 2003: |

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| |In the format provided calculate the weighted-average interest rate (cost of capital). |

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|C) |Using the format provided calculate the avoidable interest. |

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|D) |Using the format provided calculate the total interest incurred for the period. |

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|D) |Assuming that interest payments and accruals are recorded as a debit to interest expense throughout the year, using the format |

| |provided prepare the year-end adjusting journal entry to capitalize interest associated with the construction of the warehouse. |

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