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A3595E1F13sol_white.docx

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Department
Administrative Studies
Course Code
ADMS 3595
Professor
Sung Kwon

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ADMS 3595, Intermediate Accounting II
Fall 2013
EXAM I (KEY) – White Version
I. MC Answer (30 @ 2 = 60 points)
1.(b) 2.(d) 3.(c) 4.(a) 5.(c) 6.(a) 7.(d) 8.(c) 9.(b) 10.(c)
11.(b) 12.(c)13.(b)14.(c)15.(b)16.(a)17.(b)18.(c)19.(b) 20.(a)
21.(b) 22.(c)23.(a)24.(c)25.(b)26.(a)27.(c)28.(d)29.(b) 30.(c)
7. d $2,000,000 (no agreement in place at year end)
8. c [$450,000 + $600,000] × .09 – $15,000 – $30,000 = $49,500
9. b $500,000 x 2% x 60% = $6,000 – $3,700 costs = $2,300
8,000 + 150,000 + 122,000
10. c ————————————— = 2.80
100,000
17. b Interest June 30 $538,500 x .05 = $26,925
Amortization of premium $30,000 – $26,925 = $3,075
CV is now $538,500 – $3,075 = $535,425
Interest Dec 31 $535,425 × .05 = $26,771
Total interest for 2014 $53,696
18. c
××
7
10
000,27$
03.1000,900$
× 3/9 = $302,700 (CBV of retired bonds)
$302,700 – ($300,000 × .96) = $14,700.
19. b $340,000 – $435,000 = $95,000 (Loss).
($600,000 + $72,000) – $340,000 = $332,000 (Gain).
20. a Interest portion of Dec 31 pmt = $2,333,791 x 9% = $210,041; therefore
principal reduction is $600,000 – $210,041 = $389,959, and carrying value of
note is $2,333,791 – $389,959 = $1,943,832.
27. c $825,000 - $525,000 = $300,000
($100,000 × 30%) + ($100,000 × 25%) + ($100,000 × 25%) = $80,000
28. d ($900,000 – $300,000) × 40% = $240,000 (earnings from associate, not income
for tax purposes); $240,000 × 20% = $48,000
29. b ($40,000 × 25%) = $10,000; $320,000 × 30% = $96,000;
($360,000 – $10,000 – $96,000) = $254,000.
30. c ($360,000 × 30%) = $108,000; $360,000 – $108,000 = $252,000.
II. Asset Retirement Obligation (13 points)
a. To record the purchase of the rights and the ARO:
January 1, 2010 (3 points)
Extraction rights............................................................................. 15,000,000
Cash....................................................................................... 15,000,000
Extraction rights............................................................................. 1,361,160
Asset retirement obligation...................................................... 1,361,160
5 N 8 I 2000000 FV CPT PV => 1,361,160
b. To depreciate the extraction rights over 5 years and also record accretion (interest) expense
on the obligation.
December 31, 2010 (3 points)
Depreciation expense.................................................................... 3,272,232
((15,000,000+1,361,160) ÷ 5)
Accumulated depreciation....................................................... 3,272,232
Interest expense............................................................................ 108,893
(1,361,160 x 8%)
Asset retirement obligation...................................................... 108,893
Statement of financial position amounts: (2 points)
Account Amount Classification
Extraction rights net of
accumulated depreciation 13,088,928* Long-term assets
Asset retirement obligation 1,470,053** Long-term liabilities
*15,000,000 + 1,361,160 – 3,272,232 = 13,088,928
**1,361,160 + 108,893 = 1,470,053
c. For the depreciation of the extraction rights, the journal entry is the same every year.
December 31, 2014 (3 points)
Depreciation expense.................................................................... 3,272,233
Accumulated depreciation....................................................... 3,272,233
For the accretion (interest) costs, first you need to find the carrying value of the ARO at January
1, 2014 and then to calculate the expense. Since the carrying value at January 1, 2014 is
$1,851,851 (PV of $2,000,000 at 8%) , the interest expense is 1,851,851 x 8% = 148,149.
Interest expense............................................................................ 148,149
Asset retirement obligation...................................................... 148,149
Statement of financial position amounts: (2 points)
Account Amount Classification

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Description
ADMS 3595, Intermediate Accounting II Fall 2013 EXAM I (KEY) – White Version I. MC Answer (30 @ 2 = 60 points) 1.(b) 2.(d) 3.(c) 4.(a) 5.(c) 6.(a) 7.(d) 8.(c) 9.(b) 10.(c) 11.(b) 12.(c)13.(b)14.(c)15.(b)16.(a)17.(b)18.(c)19.(b) 20.(a) 21.(b) 22.(c)23.(a)24.(c)25.(b)26.(a)27.(c)28.(d)29.(b) 30.(c) 7. d $2,000,000 (no agreement in place at year end) 8. c [$450,000 + $600,000] × .09 – $15,000 – $30,000 = $49,500 9. b $500,000 x 2% x 60% = $6,000 – $3,700 costs = $2,300 8,000 + 150,000 + 122,000 10. c ————————————— = 2.80 100,000 17. b Interest June 30 $538,500 x .05 = $26,925 Amortization of premium $30,000 – $26,925 = $3,075 CV is now $538,500 – $3,075 = $535,425 Interest Dec 31 $535,425 × .05 = $26,771 Total interest for 2014 $53,696   $900,000×1.03 −  $27,000 ×7  18. c   10  × 3/9 = $302,700 (CBV of retired bonds) $302,700 – ($300,000 × .96) = $14,700. 19. b $340,000 – $435,000 = $95,000 (Loss). ($600,000 + $72,000) – $340,000 = $332,000 (Gain). 20. a Interest portion of Dec 31 pmt = $2,333,791 x 9% = $210,041; therefore principal reduction is $600,000 – $210,041 = $389,959, and carrying value of note is $2,333,791 – $389,959 = $1,943,832. 27. c $825,000 - $525,000 = $300,000 ($100,000 × 30%) + ($100,000 × 25%) + ($100,000 × 25%) = $80,000 28. d ($900,000 – $300,000) × 40% = $240,000 (earnings from associate, not income for tax purposes); $240,000 × 20% = $48,000 29. b ($40,000 × 25%) = $10,000; $320,000 × 30% = $96,000; ($360,000 – $10,000 – $96,000) = $254,000. 30. c ($360,000 × 30%) = $108,000; $360,000 – $108,000 = $252,000. II. Asset Retirement Obligation (13 points) a. To record the purchase of the rights and the ARO: January 1, 2010 (3 points) Extraction rights............................................................................. 15,000,000 Cash........................................................................15,000,000..... Extraction rights............................................................................. 1,361,160 Asset retirement obligation...................................................1,361,160 5 N 8 I 2000000 FV CPT PV => 1,361,160 b. To depreciate the extraction rights over 5 years and also record accretion (interest) expense on the obligation. December 31, 2010 (3 points) Depreciation expense.................................................................... 3,272,232 ((15,000,000+1,361,160) ÷ 5) Accumulated depreciation......................................................3,272,232 Interest expense.......................................................108,893.............. (1,361,160 x 8%) Asset retirement obligation.....................................................108,893 Statement of financial position amounts: (2 points) Account Amount Classification Extraction rights net of accumulated depreciation 13,088,928* Long-term assets Asset retirement obligation 1,470,053** Long-term liabilities *15,000,000 + 1,361,160 – 3,272,232 = 13,088,928 **1,361,160 + 108,893 = 1,470,053 c. For the depreciation of the extraction rights, the journal entry is the same every year. December 31, 2014 (3 points) Depreciation expense.................................................................... 3,272,233 Accumulated depreciation......................................................3,272,233 For the accretion (interest) costs, first you need to find the carrying value of the ARO at January 1, 2014 and then to calculate the expense. Since the carrying value at January 1, 2014 is $1,851,851 (PV of $2,000,000 at 8%) , the interest expense is 1,851,851 x 8% = 148,149. Interest expense.......................................................148,149.............. Asset retirement obligation.....................................................148,149 Statement of financial position amounts: (2 points) Account Amount Classification Extraction rights net of accumulated depreciation 0 Asset retirement obligation 2,000,000 Current liabilities Since by the end of 2014 the liability is due to be discharged within a year, it should be classified as a current liability. III. Bonds Payable (13 points) PV of bonds (i.e. selling price)N 20 %i 5 PMT 20000 (500,000x 4%) FV 500000 CPT PV => $437,689 Discount = 500,000 – (437,689 – 37,689) = 100,000 a. (2 points) Cash.................................................................400,000...................... Bonds payable...............................................................400,000.. b. (4.5 points) 4% 5.7% Interest Discount Carrying Value Date Cash Expense Amortization of Bonds Jun 1/14 400,000 Nov 30/14 20,000 22,800 2,800 402,800 May
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