Mock Exam Testlet 3 7.16.23 Flashcards

1
Q

On January 1, Year 3, Cougar added an engine to a backhoe at a cost of $65,000, which extended the estimated useful life of the asset by 5 years. The original equipment, purchased January 1, Year 1, cost $120,000 and had an estimated useful life of 12 years. Record the entry needed on December 31, Year 3. Assume that Cougar records depreciation expense annually.

A

On January 1, Year 1, Cougar purchased the original equipment for $120,000. Annual depreciation of the equipment is $10,000 ($120,000 ÷ 12). As of December 31, Year 2, the carrying amount of the equipment is $100,000 [$120,000 – (2 × $10,000)] and the equipment has a remaining estimated useful life of 10 years (12 – 2). Purchase of an engine is a capital expenditure that must be capitalized since it extends the useful life of the backhoe.

On January 1, Year 3, after the addition of the engine, the carrying amount of the equipment is $165,000 ($100,000 + $65,000). The engine extended the estimated useful life of the equipment to 15 years (10 + 5). Consequently, the annual depreciation of the equipment is $11,000 ($165,000 ÷ 15). To record the annual depreciation in Year 3, depreciation expense is debited for $11,000 and accumulated depreciation is credited for the same amount.

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2
Q

Cougar purchased a tractor on March 1, Year 3, for $240,000, and the estimated useful life was 5 years. In May of Year 4, Cougar discovered that a full year of depreciation expense had been recorded for the tractor in Year 3. Assume that Cougar records depreciation expense monthly.

A

The annual depreciation of the tractor is $48,000 ($240,000 ÷ 5 years). As of December 31, Year 3, the tractor had been depreciated for 10 months. Depreciation recorded should have been $40,000 [$48,000 × (10/12)] for Year 3.

Any error discovered related to a prior period must be reported as an error correction by adjusting the carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings at the beginning of the first period reported for the cumulative effect of the error on the prior periods. Since depreciation of $48,000 was recorded in Year 3, the cumulative effect of the error is $8,000.

Overstating the depreciation expense understates the retained earnings and overstates the accumulated depreciation of the tractor in Year 3. Therefore, the carrying amount of the accumulated depreciation should be debited for $8,000 and that of the retained earnings should be credited for the same amount when the error is discovered.

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3
Q

Cougar purchased a snowmobile on October 1, Year 3, for $19,000, with a $1,000 salvage value, and the estimated useful life was 3 years. Due to an oversight, the company failed to record depreciation expense in Years 3 and 4. Record the entry needed on June 30, Year 4, when the oversight was discovered. Assume that Cougar records depreciation expense monthly.

A

Any error discovered related to a prior period must be reported as an error correction by adjusting the carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings at the beginning of the first period reported for the cumulative effect of the error on the prior periods.

The annual depreciation of the snowmobile should be $6,000 [($19,000 – $1,000) ÷ 3 years]. As of December 31, Year 3, the snowmobile should be depreciated for 3 months, and depreciation expense of $1,500 [$6,000 × (3/12)] should have been recognized. Since no depreciation was recorded in Year 3, the cumulative effect of the error on Year 3 is $1,500.

Failure to record depreciation expense in Year 3 results in overstating the carrying amount of retained earnings and understating the accumulated depreciation in Year 3. To correct the error, the retained earnings should be debited and the accumulated depreciation should be credited for $3,000. In addition, depreciation expense for the half-year ended June 30, Year 4, of $3,000 [$6,000 × (6/12)] should be recorded.

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4
Q

During Year 1, Cougar invested $50,000 and $150,000 in the research phase and development phase, respectively, for the internal development of a patent for its own use. The patent was registered and ready for its intended use on January 1, Year 2. When preparing the financial statements for Year 4, the controller discovered that the R&D costs incurred in Year 1 were capitalized for the cost of the patent and amortized from January 1, Year 2, based on the straight-line method over 10 years. Assume that Cougar records depreciation on expense annually.

Prepare the appropriate journal entry that should be recorded in Year 4 based on the facts described above. Assume no journal entry has been recorded in Year 4

A

Research and development costs of internally generated intangible assets must be expensed as incurred. Consequently, the R&D costs of $200,000 incurred in Year 1 should have been expensed and not capitalized. Any error related to a prior period discovered after the statements are, or are available to be, used must be reported as an error correction by restating the prior-period statements. Restatement requires retrospective application. The carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods.

*Retained earnings 1/1/Year 4: Debit $160,000. The company recognized amortization expense of $20,000 ($200,000 ÷ 10) a year in Years 2 and 3. However, R&D expense of $200,000 should have been recognized in Year 1. Thus, the cumulative effect of the error on the prior periods’ income is $160,000 ($200,000 – $40,000). Because the correct net income in the prior years was supposed to be $160,000 lower, the beginning balance of Year 4 retained earnings must be debited (decreased) by this amount.
*Patent: Credit $160,000. At the beginning of the period when the error was discovered (i.e., 1/1/Year 4) the carrying amount of the patent was $160,000 [$200,000 – ($20,000 × 2)]. Because R&D costs should have been expensed in Year 1, no patent should be recognized in the financial statements. The carrying amount of the patent therefore should be eliminated by crediting the patent account.

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