Dr Azer Önel

Cost Analysis Review Problems-II

2009

LONG TERM (PLANT) ASSETS & DEPRECIATION

(Note: There may be typographical errors. Check results for all problems!)

1. Land with a price of TL60,000 is acquired for future use in operations. Accrued taxes of
TL1,500 on the parcel were paid to clear the title. Legal fees to complete the purchase total
TL2,500. A small building on the parcel will not be used and is demolished at a net cost of
TL4,000. What will be the recorded cost of the land?

Recorded cost of land = 60,000 + 1,500 + 2,500 + 4,000 = TL68,000

2. A company purchased for cash a machine with a list price of TL90,000. The machine was
shipped FOB shipping point at a cost of TL5,000. Installation and test runs of the machine
cost TL3,000. The recorded acquisition cost of the machine is which amount?

Acquisition cost of machine = 90,000 + 5,000 + 3,000 = TL98,000

3. Which of the following items is an intangible asset?

a. Patents c. Franchises
b. Copyrights d. All of the above

4. Which of the following assets are not depreciated?

a. Factory buildings c. Factory land
b. Office equipment d. Delivery equipment

5. What is the annual straight-line depreciation for an asset that cost TL34,600, has an
estimated service life of 8 years?

Annual depreciation expense (charge) = TL34,600/8 = 34,600*12.5% = TL4,325

Notes:
• Depreciation rate = 1/8 = 12.5%

6. On April 14th of last year, a car is purchased and placed into service for a cost of TL20,000.
The estimated service life of the car is 5 years. What is the amount of the first-year
depreciation, using straight-line depreciation, when the kıst amortisman method is applied?
What is the amount of the last-year depreciation expense?

Depreciation rate = 1/5 = 20%

Depreciation expense/year = TL4,000
Note: The car is purchased in April; therefore it is used 9 months in the first year.
First-year depreciation expense: Depreciation expense for 9 months =
TL4,000*(9/12) = TL3,000
Last-year depreciation expense: 4,000 + (4,000 – 3,000) = TL5,000
7. An asset cost TL50,000, and has an estimated useful life of 8 years.
a. What is the (double-)declining-balance depreciation rate?

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 Declining balance rate = 2*straight line rate ≤ 50% under Turkish Law
Declining balance rate = 2*1/8 = 25%

b. What is the depreciation expense for the second year?

c. What is the book value for the third year?
d. What is the depreciation expense for the eight year?

Year Acquisition Depreciation Accumulated Book Value (BV)

Cost Expense (BV*Rate) Depreciation (Undepreciated Balance)
0 50,000 - - 50,000
1 ......... 50,000*0.25 .............. 50,000 – 12,500
......... = 12,500 ..... 12,500 ........ = 37,500
2 ......... b. 9,375 ..... 21,875 ........ 28,125
3 7,031 28,906 c. 21,094
4 5,274 34,180 15,820
5 3,955 38,135 11,865
6 2,966 41,101 8,899
7 2,225 43,326 6,674
8 d. 6,674 50,000 0

e. Assume at the beginning of year 3, the company decides to switch to straight line
depreciation method. What will be the accumulated depreciation in the fifth year?

Year Acquisition Depreciation Accumulated Book Value

Cost Expense (BV*Rate) Depreciation (Undepreciated Balance)
0 50,000 - - 50,000
1 ......... 50,000*0.25 .............. 50,000 – 12,500
......... = 12,500 ..... 12,500 ........ = 37,500
2 ......... 9,375 ..... 21,875 ........ 28,125
3 ......... 28,125/6
......... = 4,687.5 ..... 26,562.5 ........ 23,473.5
4 4,687.5 31,250 18,750
5 4,687.5 35,937.5 14,062.5

Note: Companies are allowed to switch from Declining Balance method to Straight Line
method, and not vice versa. In this case, depreciation expense equals BV/remaining number
of years. In this example; depreciation expense = TL28,125/6 years = TL4,687.5 per year.

LIABILITIES & EQUITY

1. Which of the following is an example of debt financing?

a. issuing common stock for cash
b. issuing common stock for a building
c. issuing bonds payable
d. using retained earnings to acquire asset

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2. A note payable of TL20,000 was issued on October 1. The note requires 20 monthly
payments of TL1,108, which includes principal and interest. The yearly interest rate is 12%.
Determine the missing values (a, b, and c) of the amortization table for the note.

Interest Monthly Payment Interest Expense Reduction in Unpaid Unpaid Principal

Period Principal Balance Balance
1 TL1,108 200.00 908.00 19,092.00
2 1,108 (a) (b) (c)

a. TL19,092*1% = TL190.92
Note: The 12% interest rate is yearly, but payments are monthly. Thus monthly interest rate is
12%/12 = 1%.

b. TL1,108 – 190.92 = TL917.08

c. TL19,092 – 917.08 = TL18,174.92

3. Which of the following describes bondholders?

a. Creditors of the business.
b. Stockholders of the business.
c. Entitled to dividends.
d. Owners of the business.

BASIC FINANCIAL STATEMENTS

1. Performing services on account will have the following effects on the components of the
basic accounting equation:
a. increase assets and decrease owners’ equity
b. increase assets and increase owners’ equity
c. increase assets and increase liabilities
d. increase liabilities and increase owners’ equity

*Accounts receivable will increase and equity (through services revenues) will increase.

2. If during the accounting period the assets decreased by TL10,000, and equity increased by
TL2,000, then how did liabilities change?
a. Increased by TL12,000
b. Increased by TL8,000
c. Decreased by TL12,000 (A = L + OE; -10,000 = L + 2,000)
d. Decreased by TL8,000

Use the following information to answer questions 3 and 4:

The following accounts and balances relate to the Desktop Publishing Company on December
31, 2007:
Lale Gül, Capital TL56,500
Lale Gül, Withdrawals 20,800
Service Revenue 48,200

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 Rent Expense 13,200
Wages Expense 5,750
Insurance Expense 1,100
Utilities Expense 3,700

3. What was Desktop Publishing Company's net income for the year ended 2007?
a. TL3,650
b. TL35,700
c. TL24,450 (48,200-13,200-5,750-1,100-3,700)
d. TL60,150

4. Assuming she made no additional contributions to capital during the year, what was Lale
Gül's ending Capital balance on the statement of owner's equity for the year ended Dec. 31,
2007?
a. TL60,150 (56,500-20,800+24,450)
b. TL56,500
c. TL35,700
d. TL80,750

5. The cost of goods sold was TL240,000. Beginning and ending inventory balances were
TL20,000 and TL30,000, respectively. What was the inventory turnover?
a. 8.0 times
b. 12.0 times
c. 7.0 times
d. 9.6 times (TL240,000/((TL20,000 + TL30,000)/2) = 9.6)
e. None of the above

6. The debt ratio is calculated by dividing total liabilities by total equity.

a. True
b. False (The debt ratio is calculated by dividing total liabilities by total assets. The equity
ratio is calculated by dividing total equity by total assets.)

7. The profit margin indicates the amount of net income each TL of sales generates.
a. True
b. False

8. If a company has a return on assets of 18.0%, and net income of TL36,000, then its average
total assets are TL180,000.
a. True
b. False (Return on Assets = Net Income/Average Total Assets
18.0% = TL36,000/Average Total Assets;
Average Total Assets = TL36,000/0.18 = TL200,000.)