1. Use the following data for questions 1 and 2.On March 12, 2005, Trio, Inc. acquired melting equipment for $37,000. The estimated life of the equipment is 7 years, with an estimated residual value of $9,000.Refer to above data. In its financial statements, Trio uses straight-line depreciation with the half-year convention. The book value of the equipment at December 31, 2006, will be:
A.
Some other amount
B.
$35,000
C.
$29,000
D.
$31,000
2. Refer to data in Question 1. In its financial statements, Trio uses double-declining-balance depreciation with half-year convention. The book value of the equipment at December 31, 2006, will be:
A.
Some other amount
B.
$23,286
C.
$22,653
D.
$21,035
3. Koo Dairy sold a delivery truck for cash of $6,400. The original cost of the truck was $26,000, and a loss of $4,000 was recognized on the sale. The accumulated depreciation at the date of sale must have been:
A.
Some other amount
B.
15,600
C.
$10,400
D.
$19,600
4. Doug Corporation purchased Leslie Company's entire business for $3,200,000. The fair market value of Leslie's net identifiable assets is $2,900,000.
A.
Leslie should record amortization over a period not to exceed 40 years.
B.
Doug should charge the $300,000 excess paid for Leslie Company directly to expense.
C.
Doug paid $300,000 for goodwill generated by Leslie.
D.
Leslie should record goodwill of $300,000.
5. Throughout the current year, Horison Company treated sales taxes paid on purchases of plant assets as an operating expense. As a result, the current year's:
A.
None of the above; payments of sales taxes should be treated as revenue expenditures.
B.
Revenue is overstated
C.
Depreciation expense is understated.
D.
Net income is overstated
C.
Depreciation expense is understated.
1. To determine the book value of the equipment at December 31, 2006, using straight-line depreciation with the half-year convention, we need to calculate the annual depreciation expense first.
The formula for straight-line depreciation is:
Annual Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life
In this case, the cost of the equipment is $37,000, the residual value is $9,000, and the useful life is 7 years.
Annual Depreciation Expense = ($37,000 - $9,000) / 7 = $28,000 / 7 = $4,000
Since the half-year convention is used, we need to divide the annual depreciation expense by 2 for the first year. Therefore, the depreciation expense for the first year is $4,000 / 2 = $2,000.
To calculate the book value at the end of the first year, we subtract the depreciation expense for the first year ($2,000) from the cost of the asset ($37,000).
Book Value at December 31, 2006 = Cost of Asset - Depreciation Expense for the First Year
Book Value at December 31, 2006 = $37,000 - $2,000 = $35,000
Therefore, the correct answer is B. $35,000.
2. To determine the book value of the equipment at December 31, 2006, using double-declining-balance depreciation with the half-year convention, we first need to calculate the depreciation rate.
The formula for double-declining-balance depreciation is:
Depreciation Rate = 2 / Useful Life
In this case, the useful life is 7 years, so the depreciation rate is 2 / 7 = 28.57% (rounded to 2 decimal places).
Since the half-year convention is used, we need to multiply the depreciation rate by 2 for the first year. Therefore, the depreciation rate for the first year is 28.57% * 2 = 57.14% (rounded to 2 decimal places).
To calculate the depreciation expense for the first year, we multiply the depreciation rate for the first year (57.14%) by the cost of the asset ($37,000).
Depreciation Expense for the First Year = Depreciation Rate for the First Year * Cost of Asset
Depreciation Expense for the First Year = 57.14% * $37,000 = $21,071.80 (rounded to 2 decimal places)
To calculate the book value at the end of the first year, we subtract the depreciation expense for the first year ($21,071.80) from the cost of the asset ($37,000).
Book Value at December 31, 2006 = Cost of Asset - Depreciation Expense for the First Year
Book Value at December 31, 2006 = $37,000 - $21,071.80 = $15,928.20 (rounded to 2 decimal places)
Therefore, the correct answer is A. Some other amount.
3. To determine the accumulated depreciation at the date of sale, we need to subtract the loss on the sale from the original cost of the truck.
The loss on the sale is given as $4,000, and the original cost of the truck is $26,000.
Accumulated Depreciation at the Date of Sale = Original Cost - Loss on Sale
Accumulated Depreciation at the Date of Sale = $26,000 - $4,000 = $22,000
Therefore, the correct answer is A. Some other amount.
4. Based on the information given, we can determine the correct answer to be C. Doug paid $300,000 for goodwill generated by Leslie. This is because the fair market value of Leslie's net identifiable assets ($2,900,000) is less than the amount paid by Doug Corporation for the acquisition ($3,200,000). The excess amount paid over the fair market value of the net identifiable assets is attributable to goodwill.
5. Based on the information given, we can determine the correct answer to be D. Net income is overstated. This is because sales taxes on purchases of plant assets should be capitalized and treated as part of the cost of the assets, not as an operating expense. Treating sales taxes as an operating expense would result in an overstatement of expenses and therefore a higher net income. The correct treatment is to capitalize the sales taxes and include them in the cost of the plant assets.