ACCOUNTING 2610 – SPRING 2008 - QUIZ # 5 QUIZ # 5 (5 Points) Name_______________________ Mail-file Status: Olin / Non-Olin Problem 1 (2 Points) Tax Man, Inc. began operations on January 1, 2005, and provides tax preparation and advisory services for both individual and corporate clients. On January 1, 2005, Tax Man purchased a new computer system for their offices, paying a total of $ 300,000. Tax Man decided to depreciate the computer system using the Double-Declining Balance method. Tax Man Cornucopia assumed that the system would last five years, and would have a salvage value of $ 15,000. A. (1) Based on the information provided above, how much depreciation would be recorded on the system for the year-ending December 31, 2005? B. (1) Suppose that on April 30, 2007, upon completion of the tax busy season, Tax Man, Inc. decided to sell the computer system for $ $ 125,000 of cash. What journal entry(s) should Tax Man, Inc. prepare at the time of the sale?Problem 2 (1 Point) Under an agreement with the NCAA, the team that wins the NCAA Men’s basketball tournament may purchase the hardwood basketball court on which the Final Four games are played. Most of the winning teams elect to do so, and in turn provide segments of thefloor as souvenirs to current and future donors of the university Suppose that you are an accountant at the University of Kansas, and the President of the University has indicated that Kansas will purchase the floor for the purpose indicated above (i.e. to reward and stimulate fundraising). When you credit “Cash” to record the purchase of the hardwood floor, do you debit a “Property Plant & Equipment” account? Why or why not?Problem 3 (1 Point) ____ Under Current U.S. GAAP, which of the following is appropriate when a firm decides to change an estimate used in calculating depreciation?A. The firm should restate previously reported financial statements to reflect what the numbers would have looked like with the revised estimate.B. The firms should report “Other Income” or “Other Expense” in the currentperiod to reflect the cumulative effect of the change in estimate. C. Both Statements A and B are true. D. None of the above statements are true. Problem 4 (1 Point) The following statement is TRUE / FALSE. (Circle One) Holding assumptions constant, the Accumulated Depreciation balance of a firm that always uses Accelerated Depreciation method will NEVER BE LOWER THAN the Accumulated Depreciation balance for the same firm if the firm had always used the Straight-Line Method.SOLUTION TO ACCT 2610 – QUIZ # 5 – SPRING 2008Problem 1A. Under double declining balance, estimate the percentage of remaining book value that would be reported as depreciation expense in any given year. This percentage amount is 40%, calculated as (100% / 5 years ) x 2. Noting that the salvage value is not initially taken into account when calculating depreciation, depreciation for 2005 would be $ 120,000 (i.e. $ 300,000 x 40%)B. In order to prepare the journal entry to record the sale of the machine on April 30, 2007, it is necessary to calculate the book value of the machine at that point in April 30, 2007. Depreciation for 2005, 2006, and the first four months of 2007 would be calculated as follows: Depreciation Accumulated Net Book Expense Depreciation Value2005: $ 300,000 x 40% = $ 120,000 $ 120,000 $ 180,0002006: $ 180,000 x 40% = 72,000 192,000 108,0002007 (4 months): $ 108,000 x 40% x (4/12) = 14,400 206,400 93,600 The entry to record depreciation through the time of the sale would be: DR Depreciation Expense (E+) 14,400 CR Accum. Depr. (XA+) 14,400 And the entry to record the sale itself would be: DR Cash (A+) $ 125,000 DR Accum. Depr. (XA-) 206,400 CR Equipment (A-) 300,000 CR “Gain on Sale” (Inc St) 31,400Problem 2 While one would likely debit an “asset” account, it is unlikely that the asset would be “Property, Plant and Equipment”. Since the university is likely to distribute pieces of the floor to donors, rather than using it, the asset is more likely to be classified as “Inventory”. If the distribution of the pieces was made immediately, it is also possible that the debit could be to a “Marketing Expense” account. Problem 3 The correct answer is D, “None of the Above”. When a firm changes an estimate, the impact of the change is reflected from the point in time in which the change is made, without no restatement of prior periods or gains or losses included in the calculation of Net Income.Problem 4 The statement is TRUE. By definition, an Accelerated Depreciation method is one in which more depreciation is recorded earlier in the life of the asset, relative to the straight line method. Since Accumulated Depreciation records the cumulative depreciation, and over the life of the asset the total depreciation will be the same regardless of method, the Accumulated Depreciation will never be less when calculated under an Accelerated Method relative to the Straight Line Method. ACCT 2610 - QUIZ # 5 – SPRING 2008SUMMARY OF RESULTS Total Score Entire Class 5 3 4 – 4.5 13 3 – 3.5 14 2 – 2.5 4 < 2 3 MEAN 3.50 STD. DEV.
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