North South University 1.

1. This is a confidential document, it is for your use only, and you cannot share it with anyone
Summer 2021 else. Sharing it with anyone else in any way will result in immediate failure.
ACT 320 2. This is an individual exam. No cheating of any kind.
Midterm exam 3. This exam ends at 10:30 AM on 6th August 2021. If it is submitted late, you will be severely
M. Golam Rabbani penalized.
Total points: 30 4. Course instructor reserves the right to reject any exam for any reason.
5 Problems, 2 pages
Time: 1 hour Good Luck

Problem 1

Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $2,400,000. Oil Products expects to
operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground
storage tanks. It is estimated that it will cost $300,000 to dismantle the depot and remove the tanks at the end of the
depot’s useful life.

a) Prepare the journal entries to record the depot and the asset retirement obligation for the depot on January 1, 2014.
Based on an effective interest rate of 6%, the present value of the asset retirement obligation on January 1, 2014,
is $167,516. (2 points)
b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2014. Oil
Products uses straight-line depreciation; the estimated residual value for the depot is zero. (2 points)
c) On December 31, 2023, Oil Products pays a demolition firm to dismantle the depot and remove the tanks at a
price of $320,000. Prepare the journal entry for the settlement of the asset retirement obligation. (2 points)

Problem 2

Presented below are three independent situations.

a) Snider Corporation incurred the following costs in connection with the issuance of bonds: (1) printing and
engraving costs $40,000; (2) legal fees $120,000, and (3) commissions paid to underwriter $320,000. What
amount should be reported as Unamortized Bond Issue Costs, and where should this amount be reported on the
balance sheet? (3 points)
b) Banks Co. sold $5,000,000 of 6%, 10-year bonds at 104 on January 1, 2014. The bonds were dated January 1,
2014, and pay interest on July 1 and January 1. If Banks uses the straight-line method to amortize bond premium
or discount, determine the amount of interest expense to be reported on July 1, 2014, and December 31, 2014. (3
points)
c) Cey Inc. issued $1,000,000 of 10%, 10-year bonds on June 30, 2014, for $885,296. This price provided a yield of
12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Cey uses the effective-
interest method, determine the amount of interest expense to record if financial statements are issued on October
31, 2014. (3 points)

Problem 3

On May 31, 2014, Core Company issued 1,000, 14%, 10-year $1,000 bonds at 105. Each bond was issued with one
detachable stock warrant. Shortly after issuance, the bonds were selling at 102, but the market value of the warrants
cannot be determined.

a) Prepare the entry to record the issuance of the bonds and warrants. (3 points)
b) Assume the same facts as part (a), except that the warrants had a fair value of $8. Prepare the entry to record the
issuance of the bonds and warrants. (3 points)
Problem 4

On January 1, 2014, LabTech Inc. purchased 40% of the common shares of UnderTech Company for $280,000. During
the year, UnderTech earned net income of $120,000 and paid dividends of $36,000.

a) Prepare the entries for LabTech to record the purchase and any additional entries related to this investment in
UnderTech Company in 2014. (3 points)

Problem 5

On August 15, 2014, Japan Ideas consigned 500 electronic play systems, costing $100 each, to YoYo Toys Company. The
cost of shipping the play systems amounted to $1,250 and was paid by Japan Ideas. On December 31, 2014, an account
sales summary was received from the consignee, reporting that 420 play systems had been sold for $160 each. Remittance
was made by the consignee for the amount due, after deducting a commission of 20% commission.

Compute the following at December 31, 2014:

a) The inventory value of the units unsold in the hands of the consignee. (2 points)
b) The profit for the consignor for the units sold. (2 points)
c) The amount of cash that will be remitted by the consignee. (2 points)