MGT 105
Midterm 1
Winter 2024
Question 1 (15 points)
During its fiscal year ending on December 31, 2024, Alpha Corporation acquired property for a factory. The plant site had an existing building on it which Alpha razed shortly after acquisition. Expenditures and receipts related to the property are as follows:
1. Purchase price (closing statement detailed 20% land and 80% building) $800,000
2. Payment of property taxes not paid by the seller 5,000
3. Payment of unpaid mortgage 18,000
4. Real estate commissions paid 25,000
5. Costs related to demolition of existing building 70,000
6. Building permits 3,000
7. Salvage value related to demolition of the existing building 10,000
8. Costs of surveying and grading the property 20,000
9. Architectural fees 32,000
10. Payments made to contractor for factory construction 400,000
11. Repair of vandalism damage to factory 11,000
12. Construction of parking lots 60,000
13. Insurance proceeds received for partial reimbursement of vandalism repair 9,000
14. Purchase of 12-month insurance policy covering construction period 21,000
15. Fencing 15,000
Required
Prepare a detailed calculation of the following account balances at December 31, 2024:
a. Buildings
b. Land
c. Land Improvements
d. Prepaid Expenses
e. Miscellaneous Expenses
NOTE: You must show every number comprising the total separately or you will receive a zero.
Question 2 (15 points)
Early in 2025, End Corporation engaged Line, Inc. to design and construct a complete modernization of End's manufacturing facility. Construction began on June 1, 2025 and was completed on December 31, 2025. End made the following payments to Line, Inc. during 2025:
Date Payment
June 1, 2025 $2,000,000
August 31, 2025 3,000,000
December 31, 2025 2,500,000
To help finance the construction, End issued the following during 2025:
1. $1,700,000 of 10-year, 9% bonds payable, issued at par on May 31, 2025, with interest payable annually on May 31.
2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2025.
In addition to the 9% bonds payable, the only debt outstanding during 2025 was a $425,000, 12% note payable dated January 1, 2024, due January 1, 2026, with interest payable annually on 1/1.
Required
a. Prepare a detailed computation of the weighted-average accumulated expenditures qualifying for capitalization of interest cost.
b. Prepare a detailed computation of the avoidable interest incurred during 2025.
c. Prepare a detailed computation of the actual interest accrued during 2025.
d. Prepared a detailed computation of the total amount of 2025 interest cost to be capitalized.
Question 3 (15 points)
Presented below is information for equipment owned by Quart Company at December 31, 2025:
Cost $5,800,000
Residual Value 200,000
Expected future net cash flows 2,000,000
Fair value 1,700,000
The equipment was acquired on September 30, 2022. On the purchase date, Quart estimated the equipment had a useful life of 8 years. Assume that Quart will continue to use this asset for the full 8 years. Depreciation is recorded at the end of its fiscal year, December 31st, using the double declining balance method.
Required
a. Prepare the journal entry to record depreciation expense on 12/31/2025. Round calculations to nearest whole amount. Journal entry explanations/descriptions are not required.
b. Perform, and document clearly, the recoverability test at 12/31/2025.
c. Prepare the journal entry (if any) to record the impairment of the asset at 12/31/2025. Journal entry explanation/description is not required.
d. On January 1, 2026, Quart decided to depreciate all of its equipment using the straight-line method. In addition, on January 1, 2026, Quart determined the equipment acquired on September 30, 2022 to have a remaining useful life of three years. The fair value of the equipment at December 31, 2026 is $1,900,000. Prepare the necessary journal entry/entries on 12/31/2026. Journal entry explanations/descriptions not required.
Question 4 (10 points)
On May 31, 2026, Book Company paid $3,500,000 to acquire all the common stock of Library Corporation, which became a division of Book. Library reported the following balance sheet at the time of the acquisition:
Current assets $ 900,000 Current liabilities $ 600,000
PP&E, net 2,200,000 Long-term liabilities 500,000
Patents 500,000 Stockholders’ equity 2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000
The recorded amounts for Library Corporation all approximate current values except property, plant, and equipment (fair value of $2,900,000) and patents (fair value of $400,000).
At December 31, 2026, Library reports the following balance sheet items:
Current assets $ 800,000
Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000
It is determined that the fair value of the Library division is $2,200,000.
Required
a. Compute the amount of goodwill recognized, if any, on May 31, 2026.
b. Determine the impairment loss, if any, to be recorded on December 31, 2026.
c. Assume that the fair value of the Library division is $1,950,000 instead of $2,200,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2026. Journal entry explanation/description is not required.
Question 5 (20 points)
Information regarding Park’s payroll for its mid-month October payroll is as follows:
· Hourly payroll $1,500,000
· Salaried payroll $2,000,000
· Social Security withholdings $200,000 (FICA tax rate 6.2%; Medicare tax rate 1.45%)
· Federal income tax withholdings $250,000
· FUTA $10,000
· SUTA $12,000
· Union dues $20,000
· Withholdings for 401(k) contributions $300,000
Required
a. Identify which items are required deductions and which amounts are optional.
b. Prepare the journal entry to record the payment of the mid-month October payroll. Journal entry explanation/description is not required.
c. Prepare a calculation of payroll tax expense related to mid-month October payroll.
d. When preparing the end of October payroll, Park’s Controller noted an executive’s salary increased to $10,000 per month. The executive’s aggregate compensation through the mid-month October payroll was $141,000. FICA Tax is levied on a maximum of $142,800 of yearly earnings. Prepare a detailed calculation of the Social Security tax to be withheld applicable to this executive’s end of October payroll. Round amounts to two decimal places.