Exam practice
IE University
Final Exam (December 2011)
Financial Accounting
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QUESTION 1. (40 MINUTES)
On December, 31st 2004, Luxury Shoes Company purchased new machinery to produce a new model of shoes. The acquisition cost of the machinery is $ 1,000,000. At this moment of the economy, Tax Authorities allow the company to depreciate this machinery in the way that they prefer (the company is absolutely free to decide how to depreciate this machinery).
This machinery has an expected useful life of 5 years and its residual value after 5 years will be 0. With this equipment, Luxury Shoes Co. will be able to manufacture the following amounts of shoes per year:
2005 – 500,000 units
2006 – 250,000 units
2007 – 125,000 units
2008 – 75,000 units
2009 – 50,000 units
Total units produced over five years will be 1,000,000 units. This company also sells other types of shoes that are handmade.
Below you can see the pro-forma income statement for the company for the following 5 years:
2005
2006
2007
2008
2009
Sales Revenue
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
Cost of Goods Sold
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
Other expenses
(250,000)
(200,000)
(150,000)
(100,000)
(75,000)
Income before depreciation and taxes 250,000 300,000 350,000 400,000 425,000 In order to make a decision, the company asks you to inform about the following:
1. How would you depreciate this machinery using the criteria of the units of production? How would you depreciate this machinery using the straight-line depreciation model? Which other alternatives can you consider for depreciating the machinery?
2. In 2007, you have an unexpected repairing expense of $ 100,000 in this machinery. How would you record that? What journal entries would have to be made, in 2007 because of this transaction?
3. What implications does choosing one or the other alternative systems have,
Final Exam (December 2011)
Financial Accounting
--------------------------------------
QUESTION 1. (40 MINUTES)
On December, 31st 2004, Luxury Shoes Company purchased new machinery to produce a new model of shoes. The acquisition cost of the machinery is $ 1,000,000. At this moment of the economy, Tax Authorities allow the company to depreciate this machinery in the way that they prefer (the company is absolutely free to decide how to depreciate this machinery).
This machinery has an expected useful life of 5 years and its residual value after 5 years will be 0. With this equipment, Luxury Shoes Co. will be able to manufacture the following amounts of shoes per year:
2005 – 500,000 units
2006 – 250,000 units
2007 – 125,000 units
2008 – 75,000 units
2009 – 50,000 units
Total units produced over five years will be 1,000,000 units. This company also sells other types of shoes that are handmade.
Below you can see the pro-forma income statement for the company for the following 5 years:
2005
2006
2007
2008
2009
Sales Revenue
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
Cost of Goods Sold
(500,000)
(500,000)
(500,000)
(500,000)
(500,000)
Other expenses
(250,000)
(200,000)
(150,000)
(100,000)
(75,000)
Income before depreciation and taxes 250,000 300,000 350,000 400,000 425,000 In order to make a decision, the company asks you to inform about the following:
1. How would you depreciate this machinery using the criteria of the units of production? How would you depreciate this machinery using the straight-line depreciation model? Which other alternatives can you consider for depreciating the machinery?
2. In 2007, you have an unexpected repairing expense of $ 100,000 in this machinery. How would you record that? What journal entries would have to be made, in 2007 because of this transaction?
3. What implications does choosing one or the other alternative systems have,