Accounting Essay

Quiz 2

1.  Largo Inc. ended 20x5 by capitalizing interest of $32,000 on the construction of equipment for its own use.  During 20x5 Largo also spent $560,000 on qualifying construction expenditures.  The 12/31/x5 balance in construction in progress therefore is $592,000.  In 20x6 Largo spent $420,000 more in qualifying construction expenditures evenly throughout the year.  The equipment is not yet complete as of 12/31/x6.  Compute AAE for 20x6 for the purpose of capitalizing interest for 20x6.

a.  1,012,000

b.     770,000

*c.     802,000

d.     210,000

e.     790,000

592,000 + 420,000/2 = 802,000

1.  Self-Made Inc. completed the construction of its own warehouse at the end of year 1.  Total costs incurred are as follows:

____ Materials, $20,000

____ Labor, 60,000

____ Overhead, 40,000

____ Capitalized interest, 25,000

In addition to the above information, the firm signed a mortgage note with a one year term on 1/1/year 2.  $10,000 of interest was incurred during year 2 on that note which was then retired at the end of year 2.  The market value of the building was $210,000 upon completion at the end of year 1.  What is the final capitalized amount for the warehouse, at 12/31/year 1?

*a.  145,000

b.  210,000

c.  155,000  

d.  120,000

e.    80,000

20,000 + 60,000 + 40,000 + 25,000 = 145,000 < 210,000 (so no loss).  The 10,000 interest after the building is complete is expensed.

1.  In 20x5 a firm capitalized $67,000 of software development costs for a new product.  20x5 is the first year the firm marketed the product;  amortization of $17,000 was recorded at the end of 20x5.  During 20x6 the firm reported sales of $230,000 for the product and estimates (at year-end) that future sale will total $330,000 over the remaining product life of two years.  Compute amortization of software development costs for 20x6.

*a.  20,536

b.  16,667

c.  25,000

d.  34,849

e.  18,562

50,000 is the bv of capitalized sw costs at the beginning of 20x6 (67,000 – 17,000)

The 2 amort amounts for 20x6 are:

Based on years:  50,000(1/3) = SL amortization = 16,667

Based on revenue:  50,000[230,000/(230,000 + 330,000)] = revenue amortization = 20,536

The largest of the 2 is recognized each year.

1.  At the beginning of 20x4, Quell began constructing technical equipment for its own use.  Debt outstanding the entire year:

___ 5%, $40,000 loan to finance the construction of the equipment