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Actg 382
Quiz #1 Solutions
Questions and solutions appear below. Correct answer is shown in bold and is underlined. For calculation questions, the supporting calculation is shown in bold font following the question. 1. Assets acquired under multi-year deferred payment contracts are: a. Valued at their fair value on the date of the final payment. b. Valued at the present value of the payments required by the contract. c. Valued at the sum of the payments required by the contract. d. None of the above.

2. A change in the estimated useful life and residual value of machinery in the current year is handled as:
a. A retrospective change back to the date of acquisition as though the current estimated life and residual value had been used all along.
b. A prospective change from the current year through the remainder of its useful life, using the new estimates.
c. A cumulative adjustment to income in the current year for the difference in depreciation under the new vs. old estimates.
d. None of the above is correct.
3. At the end of its 2011 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available: Book value

Estimated undiscounted future cash flows
Fair value

$65 million
$60 million
$50 million

The manufacturing facility is:
a. Impaired because its book value exceeds undiscounted future cash flows b. Not impaired because its book value exceeds undiscounted future cash flows. c. Not impaired because it continues to produce revenue.

d. Impaired because its book value exceeds fair value.
Note that this is not a question about the size of the impairment loss. In other words, it is not a question about the fair value test. It is a question about whether impairment exists. That is answered by the recoverability test which compares the book value of $65 million to the undiscounted future cash flows of $60. If the undiscounted future cash flows are less than the book value, impairment has occurred.

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4. On January 1, 2011, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2012. Expenditures on the project were as follows:

January 1, 2011
$200,000
September 1, 2011
$300,000
December 31, 2011
$300,000
March 31, 2012
$300,000
September 30, 2012
$200,000
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2011. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2011 and 2012.

Interest capitalized for 2011 was:
a. $48,000.
b. $42,000.
c. $60,000.
d. $36,000.
This is a two step process. First, you must compute weighted average accumulated expenditures for 2011:
January 1, 2011
September 1, 2011
December 31, 2011

$200,000
$300,000
$300,000
$800,000

x 12/12
x 4/12
x 0/12

=
=
=

$200,000
100,000
0
$300,000

Note that you would not include the expenditures made in 2012 in this calculation. You are calculating weighted average accumulated expenditures at the end of 2011. The 2012 payments are unknown at that time. You can then compute capitalized interest based on the weighted average accumulated expenditures of $300,000. Since the company has specific debt of $750,000 (an amount in excess of the $300,000), you would use the interest rate on the specific construction debt in your calculation. $300,000 x 12% (interest rate on specific debt) = $36,000

5. Vijay Inc. purchased a 3-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase...
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