ACC 422 Week 3 CPA Solutions

Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. Under U.S. GAAP, what amount should Alta capitalize related to the patent?

$ 40,000

$ 50,000

$ 90,000

$490,000

In 2005, Ball Labs incurred the following costs:

Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit	$400,000
Research and development costs not included above were:
Depreciation	$300,000
Salaries	700,000
Indirect costs appropriately allocated	200,000
Materials	180,000

What was Ball’s total research and development expense in 2005?

$1,080,000

$1,380,000

$1,580,000

$1,780,000

South Co. purchased a machine that was installed and placed in service on January 1, 2004 at a cost of $240,000. Salvage value was estimated at $40,000. The machine is being depreciated over 10 years by the double declining balance method. For the year ended December 31, 2005, what amount should South report as depreciation expense?

$48,000

$38,400

$32,000

$21,600

A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?

$105,000

$110,000

$120,000

$125,000

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

It is prohibited.

It is required when the reversal is considered permanent.

It must be disclosed in the notes to the financial statements.

It is encouraged, but not required.

Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?

$15,000

$40,000

$120,000

Hull Co. bought a trademark from Roe Corp. on January 1, 2005, for $224,000.

Hull retained an independent consultant who estimated the trademark’s remaining useful life to be 20 years. The trademark most likely will not be renewed. Its unamortized cost on Roe’s accounting records was $112,000.

In Hull’s December 31, 2005 Balance Sheet, what amount should be reported as accumulated amortization?

$11,200

$5,600

$2,800

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method.

$30 million

$12.5 million

$10 million

$22.5 million

Spiro Corp. uses the sum-of-the-years’ digits method to depreciate equipment purchased in January 2003 for $20,000. The estimated salvage value of the equipment is $2,000, and the estimated useful life is four years. What should Spiro report as the asset’s carrying amount as of December 31, 2005?

$1,800

$2,000

$3,800

$4,500

A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset’s estimated useful life?

Straight-line	Double-declining balance
Yes	Yes
Yes	No
No	Yes
No	No

Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 2004.
During 2005, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.

What amount should Ichor report as depreciation expense for 2005?

$19,000

$25,000

$31,000

$34,000

Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?

Litigation costs would be capitalized regardless of the outcome of the litigation.

Litigation costs would be expensed regardless of the outcome of the litigation.

Litigation costs would be capitalized if the patent right is successfully defended.

Litigation costs would be capitalized only if the patent was purchased rather than internally developed.

On April 1, 2004, Kew Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years’-digits method. The accumulated depreciation on this machinery at March 31, 2006 should be:

$192,000

$180,000

$120,000

$100,000

Stam Co. incurred the following research and development project costs during the current year:

Equipment purchased for current and future projects	$100,000
Equipment purchased for current projects only	200,000
Research and development salaries for current projects	400,000
Legal fees to obtain patent	50,000
Material and labor costs for prototype product	600,000

The equipment has a five-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end?

$ 450,000

$1,000,000

$1,220,000

$1,350,000

Star Co. leases a building for its product showroom. The 10-year non-renewable lease will expire on December 31, 2007. In January 2002, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, 2002, Balance Sheet?

$45,600

$45,000

$44,000

$43,200

A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes?

0 years.

25 years

30 years

38 years

Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for the extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would Cantor’s depletion amount be per ton for the current year?

$2.50

$2.60

$3.20

$3.30

On January 1, 2004, Bay Co. acquired a land lease for a 21-year period with no option to renew.

The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 2005, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated market value will be $420,000.

What is the building’s carrying amount in Bay’s December 31, 2005 Balance Sheet?

$798,000

$800,000

$819,000

$820,000

During 2005, Kent Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1, 2005. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated economic life of the patent is 10 years. What amount should Kent capitalize for the patent on July 1, 2005?

$245,000

$204,000

$41,000

During 2005, Orr Co. incurred the following costs:

Research and development services performed by Key Corp. for Orr	$150,000
Design, construction, and testing of preproduction prototypes and models	200,000
Testing in search for new products or process alternatives	175,000

In its 2005 income statement, what should Orr report as research and development expense?

$150,000

$200,000

$350,000

$525,000

Goodwill should be tested for value impairment at which of the following levels?

Each identifiable long-term asset.

Each reporting unit

Each acquisition unit

The entire business as a whole

In which of the following situations is the units of production method of depreciation most appropriate?

An asset’s service potential declines with use.

An asset’s service potential declines with the passage of time.

An asset is subject to rapid obsolescence.

An asset incurs increasing repairs and maintenance with use.

Johan Co. has an intangible asset, which it estimates will have a useful life of 10 years, while Abco Co. has goodwill, which has an indefinite life. Which company should report amortization in its financial statements?

Johan	Abco
Yes	Yes
Yes	No
No	Yes
No	No

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. What amount of depletion is recognized during the current year under the full costing method?

$20 million

$12.5 million

$10 million

$21 million

On January 2, 2005, Ral Co. leased land and a building from an unrelated lessor for a 10-year term. The lease has a renewal option for an additional 10 years, but Ral has not reached a decision with regard to the renewal option. In early January of 2005, Ral completed the following improvements to the property:

Description	Estimated life	Cost
Sales office	10 years	$47,000
Warehouse	25 years	75,000
Parking lot	15 years	18,000

Amortization of leasehold improvements for 2006 should be:

$7,000

$8,900

$12,200

$14,000

Wizard Co. purchased two machines for $250,000 each on January 2, 2005.

The machines were put into use immediately. Machine A has a useful life of 5 years and can only be used in one research project. Machine B will be used for 2 years on a research and development project and then used by the production division for an additional 8 years. Wizard uses the straight-line method of depreciation.

What amount should Wizard include in 2005 research and development expense?

$75,000

$275,000

$375,000

$500,000

Hull Co. bought a trademark from Roe Corp. on January 1, 2005, for $224,000.

In Hull’s December 31, 2005 Balance Sheet, what amount should be reported as accumulated amortization?

$11,200

$5,600

$2,800

A company reported $6 million of goodwill in last year’s statement of financial position. How should the company account for the reported goodwill in the current year?

Determine the current year’s amortizable amount and report the current-year’s amortization expense.

Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement.

Perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value.

Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement.

What factor must be present to use the units of production (activity) method of depreciation?

Total units to be produced can be estimated.

Production is constant over the life of the asset.

Repair costs increase with use.

Obsolescence is expected.

Ajax Corp. has an effective tax rate of 30%. On January 1, 2000, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during 2000 by using the 150% declining-balance method of depreciation for tax purposes instead of the straight-line method?

$1,500

$3,000

$4,500

$5,000

$245,000

$204,000

$41,000

What amount should Ichor report as depreciation expense for 2005?

$19,000

$25,000

$31,000

$34,000

On January 1, 2000, Nobb Corp. signed a 12-year lease for warehouse space. Nobb has an option to renew the lease for an additional 8-year period on or before January 1, 2004.

During January 2002, Nobb made substantial improvements to the warehouse. The cost of these improvements was $540,000, with an estimated useful life of 15 years.

At December 31, 2002, Nobb intended to exercise the renewal option. Nobb has taken a full year’s amortization on this leasehold.

In Nobb’s December 31, 2002 Balance Sheet, the carrying amount of this leasehold improvement should be:

$486,000

$504,000

$510,000

$513,000

$192,000

$180,000

$120,000

$100,000

$105,000

$110,000

$120,000

$125,000

West, Inc. made the following expenditures relating to Product Y:

Legal costs to file a patent on Product Y: $10,000. Production of the finished product would not have been undertaken without the patent.
Special equipment to be used solely for development of Product Y: $60,000. The equipment has no other use and has an estimated useful life of 4 years.
Labor and material costs incurred in producing a prototype model: $200,000.
Cost of testing the prototype: $80,000.

What is the total R & D cost that will be expensed when incurred?

$280,000

$295,000

$340,000

$350,000