Intermediate Accounting: Midterm Study Guide (14 MCQs and 4 Essays)

Intermediate Accounting
Midterm Study Guide (14 MCQs and 4 Essays)

1. (TCO 1 and TCO 3) Goodwill is: (Points: 5)
Amortized over the greater of its estimated life or forty years.
Only recorded by the seller of a business.
The excess of the fair market value of a business over the fair market value of all net identifiable assets.
Not subject to amortization for purposes of income taxes.

2. (TCO 1 and TCO 3) Research and development costs: (Points: 5)
Are always expensed in the period incurred.
May be expensed or capitalized, at the option of the reporting entity.
Must be capitalized and amortized.
Generally pertain to activities that occur prior to the start of production.

3. Land donated to the Zachery Corporation by Christopher County should be recorded in Zachery's accounting records at: (Points: 5)
Christopher County's book value.
Historical cost.
Fair value on the donation date.
Its tax assessment value which is half fair value.

4. (TCO 1, TCO 2,TCO 3) Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is: (Points: 5)
$455,000.
$446,000.
$437,000.
$435,000.

5. (TCO 1, TCO 2,TCO 3) On July 1, 2006, Larkin Co. purchased a $400,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2006 as follows: Demolition of existing building on site $75000 legal and other fees to close escrow $12000 Proceeds from sale of demolition scrap $10000
What would be the balance in the land account as of December 31, 2006? (Points: 5)
$400,000.
$475,000.
$477,000.
$487,000.

6. (TCO 1, TCO 2,TCO 3) Productive assets that are depleted per GAAP are: (Points: 5)
Equipment.
Land.
Land improvements.
Natural resources.

7. (TCO 4) Accounting for impairment losses: (Points: 5)
Involves a two-step process for recoverability and measurement.
Applies only to depreciable, operational assets.
Applies only to assets with finite lives.
Applies only when the firm is insolvent.

8. (TCO 4) In testing for recoverability of an operational asset, an impairment loss is required if: (Points: 5)
Asset's book value exceeds the present value of its expected future cash flows.
Undiscounted sum of its expected future cash flows exceeds the asset's book value.
Present value of expected future cash flows exceeds its carrying value.
Asset's book value exceeds the undiscounted sum of expected future cash flows.

9. (TCO 4) Archie Co. purchased a framing machine for $45,000 on January 1, 2009. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining balance method, depreciation expense for 2009 would be: (Points: 5)
$22,500
$22,000
$20,000 .
$25,500.

10. (TCO 5)The fair value of debt securities not regularly traded can be reasonably approximated by: (Points: 5)
Calculating the discounted present value of the principal and interest payments.
Determining the value using similar securities in the NASDAQ market.
Using the relative fair value method.
Calling a licensed and registered stockbroker.

11. (TCO 5) Which of the following is not a characteristic of trading securities? (Points: 5)
Investment is adjusted annually to fair value.
Investment is originally recorded at cost.
Dividend income is recorded in revenue of the current period.
Unrealized gains or losses are reported under stockholders' equity.

12. (TCO 5)The investment category for which the investor's "positive intent and ability to hold" is important is: (Points: 5)
Securities reported under the equity method.
Trading securities.
Securities classified as held to maturity.
Securities available for sale.

13. (TCO 5) Stephanie Corporation purchased junk bonds at a discount on the open market as an investment alternative with the intention to hold the bonds until they mature. How should Stephanie account for these bonds on the balance sheet? (Points: 5)
Lower of cost or market.
Amortized cost
Original cost.
Fair value.

14. (TCO 5) Which of the following investment securities are not reported at fair value in its balance sheet? (Points: 5)
Common stock held as available for sale securities
Debt securities held to maturity
Preferred stock held as trading securities
Non voting stock in a foreign corporation.

1. (TCO 2) On August 15, 2006, Willis Inc. purchased all of the outstanding common stock of Bork Inc. paying $7,400,000 cash. The book values and fair values of Willis' assets and liabilities are listed below:

Book Value Fair Value
Account Receivable $1,080,000 975,000
Inventories $1,620,000 $2,400,000
Property Plant and equipment5,400,000 6,975,000
Account Payable 1,800,000 1,800,000
Bond Payable 2,700,000 2,475,000

Required:
Prepare the journal entry to record the acquisition by Willis Inc.

2. (TCO 2) Mad Hatter Enterprises purchased new equipment for $365,000, FOB shipping point. Other costs connected with the purchase were as follows:
State sales tax $29,200 Freight cost $5600 Insurance while in transit $800 Insurance after equipment placed in service $1200 Installation Cost $2000 Testing, including $300 of spoilage $700
Required:
Determine the capitalized cost of the equipment.

3. (TCO4) In 2008, Dooling Corporation acquired Oxford Inc. for $250 million, of which $50 million was attributed to goodwill. Dooling tests for goodwill impairment at the end of each fiscal year. At the end of 2009, Dooling's accountants derive the following information: Book Value Oxford, including goodwill 234.5 million Fair Value Oxford Assets, without goodwill 204.9 million Fair Value Oxford, the reporting unit 260 million Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

Book Value Oxford, including goodwill 234.5 million
Fair Value Oxford Assets, without goodwill 204.9 million
Fair Value Oxford, the reporting unit 260 million

Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

4. (TCO5). Previously, marketable equity securities were reported using a technique referred to as "lower of cost or market." The current accounting standard requires fair value reporting for trading securities and securities available for sale. Some accountants believe that the FASB was inconsistent when Statement No. 115 was released requiring changes in the value of trading securities to be reported in the income statement and balance sheet, while changes in the value of securities available for sale are reported only in the balance sheet.

Evaluate the rationale for these two diverse reporting requirements for equity securities. What arguments could be made to support each treatment?
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