Beta Alpha Psi Practice Questions Solutions Accounting 2121 Exam 3 Chapter 8 C C A A E D B E B A C A 1 What is the difference between a capital expenditure and a revenue expenditure Capital expenditures are those that are included in the cost of a plant asset example initial acquisition while revenue expenditures are expensed immediately example repair expense 2 How would you record the following expenditures You may use options more than once A B C D E Capitalize to Equipment account Expense Capitalize to Land account Capitalize to Land Improvement account Capitalize to Building account Purchase price of land Cost to demolish a building in order to get land ready for intended use Fair value of asset given up to acquire equipment Cost of shipping equipment to our warehouse upon purchase Interest paid during construction of building Amount paid to install a parking lot Cost of annual vehicle registration Cost to test equipment when purchased Cost to drain land when purchased Cost to paint and letter a vehicle Amount paid to repair roof 5 years after purchase does not increase efficiency or life of building Amount paid to repair roof immediately after purchase of building to get building ready for its intended use 3 If a firm improperly capitalizes a revenue expenditure what is the effect on net income Net income will be overstated if a revenue expenditure is capitalized 4 On which financial statement will you find Equipment At what value is it reported Equipment is listed in the Property Plant and Equipment section of the Balance Sheet It is reported at book value cost of the asset less any accumulated depreciation Acct 2121 BAP Exam 3 Review Solutions Pg 1 of 17 5 What is the purpose of recording depreciation We record depreciation in order to allocate the cost of the asset over the period of time in which it provides benefit We do NOT record depreciation in an attempt to match the book value with the asset s fair market value 6 What is the most common method used to depreciate Land Trick question We don t depreciate Land 7 XYZ purchases an asset printer on 1 1 2024 at a cost of 12 000 The printer has an estimated residual value of 2 000 and an anticipated useful life of 5 years A Using the Straight Line method determine amounts needed in the tables below Depreciation Expense 12 000 2 000 5 years 2 000 per year Accumulated Depreciation Total of all Depreciation Expense to date Book Value Cost Accumulated Depreciation Acquisition Cost Depreciation Expense Accumulated Depreciation Book Value Year 1 12 000 2 000 2 000 10 000 Year 2 12 000 2 000 4 000 8 000 Year 3 12 000 2 000 6 000 6 000 B Using the Straight Line method record the adjustment needed for Year 1 depreciation expense Assets Equipment Cash Accumulated Depreciation Liab Liability C S Stockholders Equity Revenue Depreciation Expense Div 2 000 2 000 Date 12 31 24 Explanation Assets Liabilities Stockholders Equity Accum Depreciation Increase 2 000 Increase Contra Asset Decrease Assets 2 000 Depreciation Exp Increase 2 000 Decrease Retained Earnings Decrease Stockholders Equity 2 000 Acct 2121 BAP Exam 3 Review Solutions Pg 2 of 17 C Assume the printer was sold on January 1 Year 3 for 2 500 cash i Using the Straight Line method calculate the gain or loss on sale of the printer Sale Proceeds Book Value Gain Loss 2 500 8 000 5 500 5 500 loss ii Using the Straight Line method record the transaction for the sale of the printer Date Cash Accumulated Depreciation 1 1 26 2 500 12 000 4 000 Assets Equipment Liab Liability C S Stockholders Equity Revenue Loss on Sale Expense 5 500 Div Explanation Assets Liabilities Stockholders Equity Cash Increase 2 500 Equipment Decrease 12 000 Accum Depreciation Decrease 4 000 Increase Assets Decrease Assets 5 500 D Assume instead that the printer was sold on January 1 Year 3 10 500 i Using the Straight Line method calculate the gain or loss on sale of the printer Loss on Sale of Equipment 5 500 Decrease Retained Earnings Decrease Stockholders Equity 5 500 Sale Proceeds Book Value Gain Loss 10 500 8 000 2 500 2 500 gain ii Using the Straight Line method record the transaction for the sale of the printer Date Cash Accumulated Depreciation Assets Equipment Liab Liability C S Stockholders Equity Expense Gain on Sale Revenue Div 1 1 26 10 500 12 000 4 000 2 500 Explanation Assets Liabilities Stockholders Equity Cash Increase 10 500 Equipment Decrease 12 000 Accum Depreciation Decrease 4 000 Increase Assets Increase Assets 2 500 Gain on Disposal of Equip 2 500 Increase Retained Earnings Increase Stockholders Equity 2 500 Acct 2121 BAP Exam 3 Review Solutions Pg 3 of 17 8 What is an intangible asset Provide some examples Intangible assets provide rights and privileges benefits to the firm but do not have physical properties Examples are i Patents rights to an invention which last for a 20 year period ii Copyrights rights to artistic or published works which last for the life of the creator plus 70 years iii Trademarks and trade names rights to distinctive marks insignia or jingles which last for a 20 year period but are renewable indefinitely iv Franchises rights to sell certain products or services may have definite or indefinite life v Goodwill the positive difference between what is paid for an entire business and the fair value of the business Note that research and development costs costs associated with creating an invention or new product are not intangible ASSETS but are instead expensed Intangibles are listed in the Non Current Assets section of the Balance Sheet 9 On what financial statement are Intangible Assets reported Acct 2121 BAP Exam 3 Review Solutions Pg 4 of 17 Chapter 9 10 DIAMOND MOVER INC borrows 10 000 cash and issues a 5 month 12 promissory note on November 1 2024 Diamond s fiscal year end is December 31st Record the following transactions Original Issuance of the Note Adjustment for Accrued Interest Repayment at Maturity Assets Liabilities Interest Payable C S Stockholders Equity Interest Expense Revenue Notes Payable 10 000 200 200 300 Div 3 31 25 10 500 10 000 200 Date Cash 11 1 24 10 000 12 31 24 Explanations Assets Liabilities Stockholders Equity Original Issuance Cash Increase 10 000 Increase Assets 10 000 Adjustment for Accrued Interest Repayment at Maturity Cash Decrease 10 500 Decrease Assets 10 500 Notes Payable Increase 10 000 Increase Liabilities 10 000 Interest Payable Increase 200 Interest Expense Increase 200 10 000 12 2 12 Decrease Retained Earnings Increase