ACCOUNTING 2610 – SPRING 2011 - QUIZ # 5 QUIZ # 5 (5 Points) Name_______________________ Mail-file Status: Olin / Non-Olin Problem 1 (4 Points) Mobile Fun Company is a traveling company which rents and operates amusement park rides, such as roller coasters, for carnivals, county fairs, and other special events. Most of the rides owned by Mobile Fun are disassembled after each event, are loaded on a semi-truck, and then driven to their next destination. At the next destination, MobileFun will reassemble the ride. In exchange for providing the rides, Mobile Fun typically charges a fixed price plus a percentage of the revenue generated from each ride. On January 1, 2008, Mobile Fun purchased a roller coaster known as “The Corkscrew”.The purchase price of “The Corkscrew” was $ 3,000,000, and Mobile Fun initially expected “The Corkscrew” would last a total of ten years, at which point it would have a salvage value of $ 200,000. On June 30, 2008, after deciding that one roller coaster was sufficient, Mobile Fun soldtheir previous roller coaster, “Widow Maker”, for $ 70,000 of cash. “Widow Maker” hadbeen purchased on January 1, 1983 at a price of $ 200,000, and the Accumulated Depreciation on “Widow Maker” as of December 31, 2007 was $ 150,000. Based on the information provided above, please answer the following questions:A. (1) If Mobile Fun uses the Straight Line Method to depreciate “The Corkscrew”, how much depreciation would Mobile Fun record on “The Corkscrew” for the fiscal year ending December 31, 2008? B. (1) Suppose that after depreciating “The Corkscrew” for seven years using the Straight Line Method, Mobile Fun decided to revisit their depreciation assumptions. On January 1, 2015, Mobile Fun decided that “The Corkscrew” would remain in use through December 31, 2026. If Mobile Fun continues to use the Straight-Line Method, and does not change their estimate of the residual value, how much depreciation will Mobile Fun report for “The Corkscrew” for the fiscal year ending December 31, 2015?C. (1) Refer to the original information. If Mobile Fun initially decided to depreciate “The Corkscrew” using 150% Declining Balance, how much depreciation would they record on “The Corkscrew” for the fiscal year-ending Dec. 31, 2008? D. (1) On June 30, 2008, what journal entry(s) should Mobile Fun prepare to record the sale of the “Widow Maker”? You may assume that Mobile Fun had been depreciating the “Widow Maker” using the Straight Line Method. Problem 2 (1 Point) The following statement is TRUE / FALSE. (Circle One) When a corporation “withholds” taxes from the paycheck of an employee, the corporation will continue to report a liability until the “withholdings” are paid to the applicable government agencies.SOLUTION TO ACCT 2610 – QUIZ # 5 – SPRING 2011 Problem 1A. Under the straight-line method, depreciation for the fiscal-year ending Dec. 31, 2008 would be $ 280,000, calculated as: Cost - Residual Value = $ 3,000,000 - 200,000 = $280,000 per year Useful Life 10 years B. On January 1, 2015, “The Corkscrew” is seven years old. If the annual depreciation is $ 280,000 per year, the Accumulated Depreciation will be $ 1,960,000 (equal to $ 280,000 of depreciation per year x 7 years). The remaining book value on Jan. 1, 2015 is $ 1,040,000 (equal to the cost of $ 3,000,000 less Accumulated Depreciation of $ 1,960,000) If, on January 1, 2015, the estimate of the remaining useful life is increased to twelve years, depreciation for the year-ending Dec. 31, 2015, as well as subsequent years, will be equal to $ 70,000. i.e. ($ 3,000,000 - 1,960,000) - 200,000 = $ 70,000 per year 12 yearsC. For an asset with a useful life of 10 years, under 150% Declining Balance, depreciation is calculated as 15% of the remaining book value at the beginning of the year (i.e. 100 % x 1.5 = 15%) 10 years Thus, for the fiscal year ending Dec. 31, 2008, depreciation would be recorded in The amount of $ 450,000 (equal to $ 3,000,000 x 15%).D. Two entries would be required at the time of the sale. First, depreciation would be reported to the date of the sale. Since a total of $ 150,000 of depreciation was recorded in the first 25 years of the life of the asset, straight-line depreciation must be $ 6,000 per year. If the asset was sold on June 30, 2008, one-half year of depreciation would be recorded via the following entry: DB Depreciation Expense 3,000 CR Accumulated Depreciation 3,000 The entry to record the sale would then be made as follows: DB Cash 70,000 DB Accumulated Depreciation 153,000 CR PP&E (“Widow Maker”) 200,000 CR Gain on Sale 23,000Problem 2 The statement is TRUE, a liability is reported until the withholdings are paid to the applicable governmental agencies.ACCT 2610 - QUIZ # 5 – SPRING 2011SUMMARY OF RESULTS Total Score Entire Class 5 8 4 – 4.5 16 3 – 3.5 9 2 – 2.5 2 < 2 2 MEAN 3.97 STD. DEV. 0.96 By Question
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