ACCT 553 Federal Taxes and
Management Decisions Midterm Exam
- (TCO C)
Under current accounting practice, intangible assets are classified as
(Points: 5)
amortizable or unamortizable.
limited-life or indefinite-life.
specifically identifiable or
goodwill-type.
legally restricted or goodwill-type.
- (TCO C)
Which of the following intangible assets should not be amortized? (Points:
5)
Copyrights
Customer lists
Perpetual franchises
All of these intangible assets
should be amortized.
- (TCO C)
The intangible asset goodwill may be (Points: 5)
capitalized only when purchased.
capitalized either when purchased or
created internally.
capitalized only when created
internally.
written off directly to retained
earnings.
- (TCO C)
ELO Corporation purchased a patent for $90,000 on September 1, 2008. It
had a useful life of ten years. On January 1, 2010, ELO spent $22,000 to
successfully defend the patent in a lawsuit. ELO feels that as of that
date, the remaining useful life is five years. What amount should be
reported for patent amortization expense for 2010? (Points: 5)
$20,600.
$20,000.
$18,800.
$15,600.
- (TCO C)
During 2011, Bond Company purchased the net assets of May Corporation for
$1,000,000. On the date of the transaction, May had $300,000 of
liabilities. The fair value of May’s assets when acquired were as follows:
How should the $500,000 difference
between the fair value of the net assets acquired ($1,500,000) and the cost
($1,000,000) be accounted for by Bond? (Points: 5)
The $500,000 difference should be
credited to retained earnings.
The $500,000 difference should be
recognized as a gain.
The current assets should be
recorded at $540,000 and the noncurrent assets should be recorded at $760,000.
A deferred credit of $500,000 should
be set up and then amortized to income over a period not to exceed forty years.
- (TCO D)
Which of the following is a condition for accruing a liability for the
cost of compensation for future absences? (Points: 5)
The obligation relates to the rights
that vest or accumulate.
Payment of the compensation is
probable.
The obligation is attributable to
employee services already performed.
All of these are conditions for the
accrual.
- (TCO D)
Which of the following taxes does not represent a payroll deduction a
company may incur? (Points: 5)
Federal income taxes.
FICA taxes.
State unemployment taxes.
State income taxes.
- (TCO D)
Assume that a manufacturing corporation has (1) good quality control, (2)
a one-year operating cycle, (3) a relatively stable pattern of annual
sales, and (4) a continuing policy of guaranteeing new products against
defects for three years that has resulted in material but rather stable
warranty repair and replacement costs. Any liability for the warranty
(Points: 5)
should be reported as long-term.
should be reported as current.
should be reported as part current
and part long-term.
need not be disclosed.
- (TCO D)
Jenkins Corporation has $2,500,000 of short-term debt it expects to retire
with proceeds from the sale of 75,000 shares of common stock. If the stock
is sold for $20 per share subsequent to the balance sheet date, but before
the balance sheet is issued, what amount of short-term debt could be
excluded from current liabilities? (Points: 5)
$1,500,000
$2,500,000
$1,000,000
$0
- (TCO D)
Tender Foot Inc. is involved in litigation regarding a faulty product sold
in a prior year. The company has consulted with its attorney and
determined that it is possible that they may lose the case. The attorneys
estimated that there is a 40% chance of losing. If this is the case, their
attorney estimated that the amount of any payment would be $500,000. What
is the required journal entry as a result of this litigation? (Points: 5)
Debit Litigation Expense for
$500,000 and credit Litigation liability for $500,000.
No journal entry is required.
Debit Litigation Expense for
$200,000 and credit Litigation Liability for $200,000.
Debit Litigation Expense for
$300,000 and credit Litigation Liability for $300,000.
- (TCO D)
If bonds are initially sold at a discount and the straight-line method of
amortization is used, interest expense in the earlier years will (Points:
5)
exceed what it would have been had
the effective-interest method of amortization been used.
be less than what it would have been
had the effective-interest method of amortization been used.
be the same as it would have been
had the effective-interest method of amortiza-tion been used.
be less than the stated (nominal)
rate of interest.
- (TCO D)When
the interest payment dates of a bond are May 1 and November 1, and a bond
issue is sold on June 1, the amount of cash received by the issuer will be
(Points: 5)
decreased by accrued interest from
June 1 to November 1.
decreased by accrued interest from
May 1 to June 1.
increased by accrued interest from
June 1 to November 1.
increased by accrued interest from
May 1 to June 1.
- (TCO D)
Feller Company issues $20,000,000 of ten-year, 9% bonds on March 1, 2010
at 97 plus accrued interest. The bonds are dated January 1, 2010, and pay
interest on June 30 and December 31. What is the total cash received on
the issue date? (Points: 5)
$19,400,000
$20,450,000
$19,700,000
$19,100,000
- (TCO D)
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January
1, 2010. Interest is paid on June 30 and December 31. The proceeds from
the bonds are $19,604,145. What is interest expense for 2011, using
straight-line amortization? (Points: 5)
$1,540,207
$1,560,000
$1,569,192
$1,579,793
- (TCO D)
On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000.
The market rate of interest for these bonds is 10%. Interest is payable
annually on December 31. Patterson uses the effective-interest method of
amortizing bond discount. At the end of the first year, Patterson should
report unamortized bond discount of (Points: 5)
$274,500.
$285,500.
$258,050.
$255,000.
(TCO C) Sisco Co. purchased a patent from Thornton Co. for $180,000
on July 1, 2008. Expenditures of $68,000 for successful litigation in defense
of the patent were paid on July 1, 2011. Sisco estimates that the useful life
of the patent will be 20 years from the date of acquisition.
Instructions:
Prepare a computation of the
carrying value of the patent at December 31, 2011.
Amortization (2008) = $180,000 / 20
years x 6/12 = $4,500
Amortization (2009 – 2010) =
$180,000 / 20 years x 2 = $18,000
Amortization (2011) = ($180,000 / 20
years) + ($68,000 / 17 years x 6/12) = $11,000
Carrying Value = $180,000 + $68,000
– $4,500 – $18,000 – $11,000 = $214,500
(TCO C) Fred’s Company is considering the write-off of a limited
life intangible asset because of its lack of profitability. Explain to the
management of Fred’s how to determine whether a writeoff is permitted.
- (TCO D)
Edwards Co. includes one coupon in each bag of dog food it sells. In
return for four coupons, customers receive a dog toy that the company
purchases for $1.20 each. Edwards’s experience indicates that 60 percent
of the coupons will be redeemed. During 2010, 100,000 bags of dog food
were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed.
During 2011, 120,000 bags of dog food were sold, 16,000 toys were
purchased, and 60,000 coupons were redeemed.
Instructions:
Determine the premium expense to be
reported in the income statement and the estimated liability for premiums on
the balance sheet for 2010 and 2011.
2010
Premium Expense = 100,000 bags / 4
coupons x 60% x $1.20 = $18,000
Estimated Liability = $18,000 –
(40,000 coupons / 4 coupons x $1.20) = $6,000
2011
Premium Expense = 120,000 bags / 4
coupons x 60% x $1.20 = $21,600
Estimated Liability = $6,000 +
$21,600 – (60,000 coupons / 4 coupons x $1.20) = $9,600
- (TCO D)
Grider Industries, Inc. issued $6,000,000 of 8% debentures on May 1, 2010
and received cash totaling $5,323,577. The bonds pay interest semiannually
on May 1 and November 1. The maturity date on these bonds is November 1,
2018. The firm uses the effective-interest method of amortizing discounts
and premiums. The bonds were sold to yield an effective-interest rate of
10%.
Instructions:
Calculate the total dollar amount of
discount or premium amortization during the first year (5/1/10 through 4/30/11)
these bonds were outstanding. (Show computations and round to the nearest
dollar.)
Discount Amortization (1st Interest
Payment) = ($5,323,577 x 10% x 6/12) – ($6,000,000 x 8% x 6/12) = $26,179
Discount Amortization (2nd Interest
Payment) = [($5,323,577 + $26,179) x 10% x 6/12] – ($6,000,000 x 8% x
6/12) = $27,488
Total Discount Amortized (5/1/10 –
4/30/11) = $26,179 + $27,488 = $53,667
- (TCO D)
Hurst, Incorporated sold its 8% bonds with a maturity value of $3,000,000
on August 1, 2009 for $2,946,000. At the time of the sale, the bonds had
five years until they reached maturity. Interest on the bonds is payable
semiannually on August 1 and February 1. The bonds are callable at 104 at
any time after August 1, 2011. By October 1, 2011, the market rate of
interest has declined and the market price of Hurst’s bonds has risen to a
price of 101. The firm decides to refund the bonds by selling a new 6%
bond issue to mature in five years. Hurst begins to reacquire its 8% bonds
in the market and is able to purchase $500,000 worth at 101. The remainder
of the outstanding bonds is reacquired by exercising the bonds’ call
feature. In the final analysis, how much was the gain or loss experienced
by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line
amortization.) Show calculations.
