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Week 4 Quiz 3: Chapter 10
ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. Assets
classified as Property, Plant, and Equipment can be either acquired for use in
operations, or acquired for resale.
2. Assets
classified as Property, Plant, and Equipment must be both long-term in nature
and possess physical substance.
3. When
land with an old building is purchased as a future building site, the cost of
removing the old building is part of the cost of the new building.
4. Insurance
on equipment purchased, while the equipment is in transit, is part of the cost
of the equipment.
5. Special
assessments for local improvements such as street lights and sewers should be
accounted for as land improvements.
6. Variable
overhead costs incurred to self-construct an asset should be included in the
cost of the asset.
7. Companies
should assign no portion of fixed overhead to self-constructed assets.
8. When
capitalizing interest during construction of an asset, an imputed interest cost
on stock financing must be included.
9. Assets
under construction for a company’s own use do not qualify for interest cost
capitalization.
10. Avoidable
interest is the amount of interest cost that a company could theoretically
avoid if it had not made expenditures for the asset.
11. When
a company purchases land with the intention of developing it for a particular
use, interest costs associated with those expenditures qualify for interest
capitalization.
12. Assets
purchased on long-term credit contracts should be recorded at the present value
of the consideration exchanged.
13. Companies
account for the exchange of nonmonetary assets on the basis of the fair value
of the asset given up or the fair value of the asset received.
14. If
a nonmonetary exchange lacks commercial substance, and cash is received, a
partial gain or loss is recognized.
15. When
a company exchanges nonmonetary assets and a loss results, the company
recognizes the loss only if the exchange has commercial substance.
16. Costs
incurred subsequent to the acquisition of an asset are capitalized if they
provide future benefits.
17. Improvements
are often referred to as betterments and involve the substitution of a better
asset for the one currently used.
18. When
an ordinary repair occurs, several periods will usually benefit.
19. Companies
always treat gains or losses from an involuntary conversion as extraordinary
items.
20. If
a company scraps an asset without any cash recovery, it recognizes a loss equal
to the asset’s book value.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant
site.
d. none of these.
22. Which of the following is not
a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years
23. Which of these is not
a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a
plant asset.
24. Cotton Hotel Corporation recently purchased Emporia Hotel and
the land on which it is located with the plan to tear down the Emporia Hotel
and build a new luxury hotel on the site. The cost of the Emporia Hotel should
be
a. depreciated over the period from acquisition
to the date the hotel is scheduled to be torn down.
b. written off as an extraordinary loss in the
year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new
hotel.
25. The cost of land does not
include
a. costs of grading, filling, draining, and
clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. The cost of land typically includes the purchase price and all
of the following costs except
a. grading, filling, draining, and clearing
costs.
b. street lights, sewers, and drainage systems
cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the
property.
27. If a corporation purchases a lot and building and subsequently
tears down the building and uses the property as a parking lot, the proper
accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the
building in relation to the combined cost of the lot and building.
b. the length of time for which the building was
held prior to its demolition.
c. the contemplated future use of the parking
lot.
d. the intention of management for the property
when the building was acquired.
28. The debit for a sales tax properly levied and paid on the
purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all
taxes other than those on income).
d. accumulated depreciation--machinery.
29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
S30. Historical cost is the basis advocated for
recording the acquisition of property, plant, and equipment for all of the
following reasons except
a. at the date of acquisition, cost reflects
fair market value.
b. property, plant, and equipment items are
always acquired at their original historical cost.
c. historical cost involves actual transactions
and, as such, is the most reliable basis.
d. gains and losses should not be anticipated
but should be recognized when the asset is sold.
S31. To be consistent with the historical cost
principle, overhead costs incurred by an enterprise constructing its own
building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the
asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the
asset and normal operations.
32. Which of the following costs are capitalized for
self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
33. Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
a. Assets under construction for an enterprise's
own use.
b. Assets intended for sale or lease that are
produced as discrete projects.
c. Assets financed through the issuance of
long-term debt.
d. Assets not currently undergoing the
activities necessary to prepare them for their intended use.
34. Assets that qualify for interest cost capitalization include
a. assets under construction for a company's own
use.
b. assets that are ready for their intended use
in the earnings of the company.
c. assets that are not currently being used
because of excess capacity.
d. All of these assets qualify for interest cost
capitalization.
35. When computing the amount of interest cost to be capitalized,
the concept of "avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders'
equity.
c. that portion of total interest cost which
would not have been incurred if expenditures for asset construction had not
been made.
d. that portion of average accumulated
expenditures on which no interest cost was incurred.
36. The period of time during which interest must be capitalized
ends when
a. the asset is substantially complete and ready
for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully
depreciated.
d. the activities that are necessary to get the
asset ready for its intended use have begun.
37. Which of the following statements is true regarding
capitalization of interest?
a. Interest cost capitalized in
connection with the purchase of land to be used as a building site should be
debited to the land account and not to the building account.
b. The amount of interest cost
capitalized during the period should not exceed the actual interest cost
incurred.
c. When excess borrowed funds not
immediately needed for construction are temporarily invested, any interest
earned should be offset against interest cost incurred when determining the
amount of interest cost to be capitalized.
d. The minimum amount of interest
to be capitalized is determined by multiplying a weighted average interest rate
by the amount of average accumulated expenditures on qualifying assets during
the period.
38. Construction of a qualifying asset is started on April 1 and
finished on December 1. The fraction used to multiply an expenditure made on
April 1 to find weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
39. When funds are borrowed to pay for construction of assets that
qualify for capitalization of interest, the excess funds not needed to pay for
construction may be temporarily invested in interest-bearing securities.
Interest earned on these temporary investments should be
a. offset against interest cost incurred during
construction.
b. used to reduce the cost of assets being
constructed.
c. multiplied by an appropriate interest rate to
determine the amount of interest to be capitalized.
d. recognized as revenue of the period.
40. Interest cost that is capitalized should
a. be written off over the remaining term of the
debt.
b. be accumulated in a separate deferred charge
account and written off equally over a 40-year period.
c. not be written off until the related asset is
fully depreciated or disposed of.
d. none of these.
S41. Which of the following is not a condition
that must be satisfied before interest capitalization can begin on a qualifying
asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than
the company's cost of capital.
d. Activities that are necessary to get the
asset ready for its intended use are in progress.
S42. Which of the following is the recommended
approach to handling interest incurred in financing the construction of
property, plant and equipment?
a. Capitalize only the actual interest costs
incurred during construction.
b. Charge construction with all costs of funds
employed, whether identifiable or not.
c. Capitalize no interest during construction.
d. Capitalize interest costs equal to the prime
interest rate times the estimated cost of the asset being constructed.
S43. Which of the following nonmonetary exchange
transactions represents a culmination of the earning process?
a. Exchange of assets with no difference in
future cash flows.
b. Exchange of products by companies in the same
line of business with no difference in future cash flows.
c. Exchange of assets with a difference in
future cash flows.
d. Exchange of an equivalent interest in similar
productive assets that causes the companies involved to remain in essentially
the same economic position.
S44. When boot is involved in an exchange having
commercial substance.
a. gains or losses are recognized in their
entirely.
b. a gain or loss is computed by comparing the
fair value of the asset received with the fair value of the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.
S45. The cost of a nonmonetary asset acquired in
exchange for another nonmonetary asset and the exchange has commercial
substance is usually recorded at
a. the fair value of the asset given up, and a
gain or loss is recognized.
b. the fair value of the asset given up, and a
gain but not a loss may be recognized.
c. the fair value of the asset received if it is
equally reliable as the fair value of the asset given up.
d. either the fair value of the asset given up
or the asset received, whichever one results in the largest gain (smallest
loss) to the company.
P46. Ringler
Corporation exchanges one plant asset for a similar plant asset and gives cash
in the exchange. The exchange is not expected to cause a material change in the
future cash flows for either entity. If a gain on the disposal of the old asset
is indicated, the gain will
a. be reported in the Other Revenues and Gains
section of the income statement.
b. effectively reduce the amount to be recorded
as the cost of the new asset.
c. effectively increase the amount to be
recorded as the cost of the new asset.
d. be credited directly to the owner's capital
account.
47. Plant assets purchased on long-term credit contracts should be
accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
48. When a plant asset is acquired by issuance of common stock, the
cost of the plant asset is properly measured by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. fair value of the stock.
49. When a closely held corporation issues preferred stock for land,
the land should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair value of the land.
50. Accounting recognition should be given to some or all of the
gain realized on a nonmonetary exchange of plant assets except when the exchange has
a. no commercial substance and additional cash
is paid.
b. no commercial substance and additional cash
is received.
c. commercial substance and additional cash is
paid.
d. commercial substance and additional cash is
received.
51. For a nonmonetary exchange of
plant assets, accounting recognition should not
be given to
a. a loss when the exchange has no commercial
substance.
b. a gain when the exchange has commercial
substance.
c. part of a gain when the exchange has no
commercial substance and cash is paid (cash paid/received is less than 25% of
the fair value of the exchange).
d. part of a gain when the exchange has no
commercial substance and cash is received (cash paid or received is less than
25% of the fair value of the exchange).
52. When an enterprise is the recipient of a donated asset, the
account credited may be a
a. paid-in capital account.
b. revenue account.
c. deferred revenue account.
d. all of these.
53. A plant site donated by a township to a manufacturer that plans
to open a new factory should be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its fair value.
c. one dollar (since the site cost nothing but
should be included in the balance sheet).
d. the value assigned to it by the company's
directors.
54. In order for a cost to be capitalized (capital expenditure), the
following must be present:
a. The useful life of an asset must be
increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased.
d. Any one of these.
55. An improvement made to a machine increased its fair value and
its production capacity by 25% without extending the machine's useful life. The
cost of the improvement should be
a.
expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation
and the machine account.
56. Which of the following is a capital expenditure?
a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of Federal income taxes
d. None of these
57. Which of the following is not
a capital expenditure?
a. Repairs that maintain an asset in operating
condition
b. An addition
c. A betterment
d. A replacement
P58. In
accounting for plant assets, which of the following outlays made subsequent to
acquisition should be fully expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency
or effectiveness of an existing asset
b. Expenditure made to extend the useful life of
an existing asset beyond the time frame originally anticipated
c. Expenditure made to maintain an existing
asset so that it can function in the manner intended
d. Expenditure made to add new asset services
S59. An expenditure made in connection with a
machine being used by an enterprise should be
a. expensed immediately if it merely extends the
useful life but does not improve the quality.
b. expensed immediately if it merely improves
the quality but does not extend the useful life.
c. capitalized if it maintains the machine in
normal operating condition.
d. capitalized if it increases the quantity of
units produced by the machine.
S60. When a plant asset is disposed of, a gain
or loss may result. The gain or loss would be classified as an extraordinary
item on the income statement if it resulted from
a. an involuntary conversion and the conditions
of the disposition are unusual and infrequent in nature.
b. a sale prior to the completion of the
estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.
61. The sale of a depreciable asset resulting in a loss indicates
that the proceeds from the sale were
a. less than current fair value.
b. greater than cost.
c. greater than book value.
d. less than book value.
62. Which of the following statements about involuntary conversions
is false?
a. An involuntary conversion may result from
condemnation or fire.
b. The gain or loss from an involuntary
conversion may be reported as an extraordinary item.
c. The gain or loss from an involuntary
conversion should not be recognized when the enterprise reinvests in
replacement assets.
d. All of these.
Multiple Choice
Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is
“none of these.”
21. Long-lived tangible assets used in the enterprise’s operations.
40. Capitalized interest is depreciated over the related asset’s
useful life.
56. Capital expenditures include additions, betterments,
improvements, and extraordinary repairs.
Multiple Choice—Computational
Use the following information
for questions 63 and 64.
Wilson Co.
purchased land as a factory site for $800,000. Wilson paid $80,000 to tear down
two buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480
were paid for title investigation and making the purchase. Architect's fees
were $31,200. Title insurance cost $2,400, and liability insurance during
construction cost $2,600. Excavation cost $10,440. The contractor was paid $2,500,000.
An assessment made by the city for pavement was $6,400. Interest costs during
construction were $170,000.
63. The cost of the land that should be recorded by Wilson Co. is
a. $880,480.
b. $886,880.
c. $889,880.
d. $896,280.
64. The cost of the building that should be recorded by Wilson Co.
is
a. $2,503,800.
b. $2,504,840.
c. $2,513,200.
d. $2,514,240.
65. On February 1, 2012, Nelson Corporation purchased a parcel of
land as a factory site for $250,000. An old building on the property was demolished,
and construction began on a new building which was completed on November 1,
2012. Costs incurred during this period are listed below:
Demolition of old building $ 20,000
Architect's fees 35,000
Legal fees for
title investigation and purchase contract 5,000
Construction costs 1,290,000
(Salvaged
materials resulting from demolition were sold for $10,000.)
Nelson should record the cost of the land and new building, respectively,
as
a. $275,000 and $1,315,000.
b. $260,000 and $1,330,000.
c. $260,000 and $1,325,000.
d. $265,000 and $1,325,000.
66. Worthington
Chandler Company purchased equipment for $12,000. Sales tax on the purchase was
$800. Other costs incurred were freight charges of $200, repairs of $350 for
damage during installation, and installation costs of $225. What is the cost of
the equipment?
a. $12,000
b. $12,800
c. $13,225
d. $13,575
67. Fogelberg
Company purchased equipment for $15,000. Sales tax on the purchase was $900.
Other costs incurred were freight charges of $240, repairs of $420 for damage
during installation, and installation costs of $270. What is the cost of the
equipment?
a. $15,000.
b. $15,900.
c. $16,410.
d. $16,830.
68. During
self-construction of an asset by Samuelson Company, the following were among the
costs incurred:
Fixed
overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead
that would
be
allocated to asset if it were normal production 50,000
Variable overhead attributable to
self-construction 35,000
What amount of overhead should be included in
the cost of the self-constructed asset?
a. $ -0-
b. $35,000
c. $50,000
d. $85,000
69. During
self-construction of an asset by Richardson Company, the following were among
the costs incurred:
Fixed
overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead
that would
be
allocated to asset if it were normal production 60,000
Variable overhead attributable to
self-construction 75,000
What amount of overhead should be included in
the cost of the self-constructed asset?
a. $ -0-
b. $
60,000
c. $
75,000
d. $135,000
70. Mendenhall
Corporation constructed a building at a cost of $10,000,000. Average
accumulated expenditures were $4,000,000, actual interest was $600,000, and
avoidable interest was $400,000. If the salvage value is $800,000, and the
useful life is 40 years, depreciation expense for the first full year using the
straight-line method is
a. $240,000.
b. $245,000.
c. $260,000.
d. $340,000.
71. Messersmith
Company is constructing a building. Construction began in 2012 and the building
was completed 12/31/12. Messersmith made payments to the construction company
of $1,500,000 on 7/1, $3,150,000 on 9/1, and $3,000,000 on 12/31. Average
accumulated expenditures were
a. $1,537,500.
b. $1,800,000.
c. $4,650,000.
d. $7,650,000.
72. Huffman
Corporation constructed a building at a cost of $20,000,000. Average
accumulated expenditures were $8,000,000, actual interest was $1,200,000, and
avoidable interest was $800,000. If the salvage value is $1,600,000, and the
useful life is 40 years, depreciation expense for the first full year using the
straight-line method is
a. $480,000.
b. $490,000.
c. $520,000.
d. $680,000.
73. Gutierrez
Company is constructing a building. Construction began in 2012 and the building
was completed 12/31/12. Gutierrez made payments to the construction company of
$2,000,000 on 7/1, $4,400,000 on 9/1, and $4,000,000 on 12/31. Average
accumulated expenditures were
a. $2,100,000.
b. $2,466,667.
c. $6,400,000.
d. $10,400,000.
74. On May 1, 2012, Goodman Company began construction of a
building. Expenditures of $240,000 were incurred monthly for 5 months beginning
on May 1. The building was completed and ready for occupancy on September 1,
2012. For the purpose of determining the amount of interest cost to be
capitalized, the average accumulated expenditures on the building during 2012
were
a. $200,000.
b. $240,000.
c. $960,000.
d. $1,200,000.
75. During 2012, Kimmel Co. incurred average accumulated
expenditures of $600,000 during construction of assets that qualified for
capitalization of interest. The only debt outstanding during 2012 was a
$750,000, 10%, 5-year note payable dated January 1, 2010. What is the amount of
interest that should be capitalized by Kimmel during 2012?
a. $0.
b. $15,000.
c. $60,000.
d. $75,000.
76. On March 1, Felt Co. began construction of a small building.
Payments of $160,000 were made monthly for three months beginning March 1. The
building was completed and ready for occupancy on June 1. In determining the
amount of interest cost to be capitalized, the weighted-average accumulated
expenditures are
a. $40,000.
b. $80,000.
c. $160,000.
d. $320,000.
77. On March 1, Imhoff Co. began construction of a small building.
Payments of $240,000 were made monthly for four months beginning March 1. The
building was completed and ready for occupancy on June 1. In determining the
amount of interest cost to be capitalized, the weighted-average accumulated
expenditures are
a. $120,000.
b. $240,000.
c. $480,000.
d. $960,000.
Use the following information for questions 78 through 80.
On March 1, 2012, Newton Company purchased land
for an office site by paying $900,000 cash. Newton began construction on the
office building on March 1. The following expenditures were incurred for construction:
Date Expenditures
March 1, 2012 $ 600,000
April 1, 2012 840,000
May 1, 2012 1,500,000
June 1, 2012 2,400,000
The office was
completed and ready for occupancy on July 1. To help pay for construction,
$1,200,000 was borrowed on March 1, 2012 on a 9%, 3-year note payable. Other
than the construction note, the only debt outstanding during 2012 was a
$500,000, 12%, 6-year note payable dated January 1, 2012.
78. The weighted-average accumulated expenditures on the
construction project during 2012 were
a. $640,000.
b. $4,890,000.
c. $520,000.
d. $1,160,000.
79. The actual interest cost incurred during 2012 was
a. $150,000.
b. $168,000.
c. $84,000.
d. $140,000.
80. Assume the weighted-average accumulated expenditures for the
construction project are $870,000. The amount of interest cost to be
capitalized during 2012 is
a. $130,500.
b. $138,000.
c. $150,000.
d. $168,000.
81. During 2012, Bass Corporation constructed assets costing
$2,000,000. The weighted-average accumulated expenditures on these assets
during 2012 was $600,000. To help pay for construction, $880,000 was borrowed
at 10% on January 1, 2012, and funds not needed for construction were
temporarily invested in short-term securities, yielding $18,000 in interest
revenue. Other than the construction funds borrowed, the only other debt
outstanding during the year was a $1,000,000, 10-year, 9% note payable dated
January 1, 2006. What is the amount of interest that should be capitalized by
Bass during 2012?
a. $120,000.
b. $60,000.
c. $116,800.
d. $188,800.
Use the following information for questions 82 through 85.
On January 2,
2012, Indian River Groves began construction of a new citrus processing plant.
The automated plant was finished and ready for use on September 30, 2013. Expenditures
for the construction were as follows:
January 2, 2012
|
$300,000
|
September 1, 2012
|
900,000
|
December 31, 2012
|
900,000
|
March 31, 2013
|
900,000
|
September 30, 2013
|
600,000
|
Indian River Groves borrowed $1,650,000 on a construction loan at 12%
interest on January 2, 2012. This loan was outstanding during the construction
period. The company also had $6,000,000 in 9% bonds outstanding in 2012 and
2013.
82. What were the weighted-average accumulated expenditures for
2012?
a. $800,000
b. $750,000
c. $600,000
d. $1,500,000
83. The interest capitalized for 2012 was:
a. $270,000
b. $72,000
c. $228,000
d. $90,000
84. What were the weighted-average accumulated expenditures for 2013
by the end of the construction period?
a. $585,000
b. $2,452,500
c. $2,979,000
d. $2,079,000
85. The interest capitalized for 2013 was:
a. $187,110
b. $177,458
c. $ 38,610
d. $ 148,500
Use the following information to answer questions 86 - 90.
Arlington Company
is constructing a building. Construction began on January 1 and was completed
on December 31. Expenditures were $4,000,000 on March 1, $3,300,000 on June 1,
and $5,000,000 on December 31. Arlington Company borrowed $2,000,000 on January
1 on a 5-year, 12% note to help finance construction of the building. In
addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note
payable and an 11%, 4-year, $7,500,000 note payable.
86. What are the weighted-average accumulated expenditures?
a. $7,300,000
b. $5,258,333
c. $12,300,000
d. $6,150,000
87. What is the weighted-average interest rate used for interest
capitalization purposes?
a. 11%
b. 10.85%
c. 10.5%
d. 10.65%
88. What is the avoidable interest for Arlington Company?
a. $240,000
b. $773,013
c. $273,802
d. $587,012
89. What is the actual interest for Arlington Company?
a. $1,465,000
b. $1,485,000
c. $1,225,000
d. $587,012
90. What amount of interest should be charged to expense?
a. $637,987
b. $1,225
c. $877,987
d. $691,987
91. Dodson Company traded in a manual pressing machine for an
automated pressing machine and gave $16,000 cash. The old machine cost $186,000
and had a net book value of $142,000. The old machine had a fair value of
$120,000.
Which of the following
is the correct journal entry to record the exchange?
a. Equipment 136,000
Loss on Disposal 22,000
Accumulated Depreciation 44,000
Equipment 186,000
Cash 16,000
b. Equipment 136,000
Equipment 120,000
Cash 16,000
c. Cash 16,000
Equipment 120,000
Loss on Disposal 22,000
Accumulated Depreciation 44,000
Equipment 202,000
d. Equipment 246,000
Accumulated
Depreciation 44,000
Equipment 186,000
Cash 16,000
Use the following information
to answer questions 92 & 93.
Below is the
information relative to an exchange of assets by Stanton Company. The exchange
lacks commercial substance.
Old Equipment
|
|||
Book Value
|
Fair Value
|
Cash Paid
|
|
Case I
|
$225,000
|
$225,000
|
$45,000
|
Case II
|
$150,000
|
$135,000
|
$21,000
|
92. Which of the following would be correct for Stanton to record in
Case I?
Record Equipment at:
|
Record a gain of (loss) of:
|
|
a.
|
$270,000
|
$0
|
b.
|
$300,000
|
$30,000
|
c.
|
$225,000
|
$(15,000)
|
d.
|
$270,000
|
$30,000
|
93. Which of the following would be correct for Stanton to record in
Case II?
Record Equipment at:
|
Record a gain of (loss) of:
|
|
a.
|
$171,000
|
$15,000
|
b.
|
$150,000
|
$6,000
|
c.
|
$156,000
|
$(15,000)
|
d.
|
$150,000
|
$(6,000)
|
Use the following information
for questions 94 and 95.
Glen Inc. and Armstrong Co. have an exchange with no commercial
substance. The asset given up by Glen Inc. has a book value of $48,000 and a
fair value of $60,000. The asset given up by Armstrong Co. has a book value of
$80,000 and a fair value of $76,000. Boot of $16,000 is received by Armstrong
Co.
94. What amount should Glen Inc. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000
95. What amount should Armstrong Co. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000
96. Hardin Company received $60,000 in cash and a used computer with
a fair value of $180,000 from Page Corporation for Hardin Company's existing
computer having a fair value of $240,000 and an undepreciated cost of $225,000
recorded on its books. The transaction has no commercial substance. How much
gain should Hardin recognize on this exchange, and at what amount should the
acquired computer be recorded, respectively?
a. $0 and $165,000
b. $1,153 and $166,153
c. $15,000 and $180,000
d. $60,000 and $225,000
Use the following information
to answer questions 97 & 98.
Jamison Company purchased the assets of Booker Company
at an auction for $2,800,000. An independent appraisal of the fair value of the
assets is listed below:
Land $950,000
Building 1,400,000
Equipment 1,050,000
Trucks 1,700,000
97. Assuming that specific identification costs are impracticable
and that Jamison allocates the purchase price on the basis of the relative fair
values, what amount would be allocated to the Trucks?
a. $933,333
b. $1,400,000
c. $1,680,000
d. $1,700,000
98. Assuming that specific identification costs are impracticable
and that Jamison allocates the purchase price on the basis of the relative fair
values, what amount would be allocated to the Building?
a. $1,059,460
b. $1,400,000
c. $2,550,000
d. $768,627
99. On December 1, Miser Corporation exchanged 3,000 shares of its
$25 par value common stock held in treasury for a parcel of land to be held for
a future plant site. The treasury shares were acquired by Miser at a cost of
$40 per share, and on the exchange date the common shares of Miser had a fair
value of $50 per share. Miser received $9,000 for selling scrap when an
existing building on the property was removed from the site. Based on these
facts, the land should be capitalized at
a. $111,000.
b. $120,000.
c. $141,000.
d. $150,000.
100. Storm Corporation purchased a new machine on October 31, 2012. A
$3,600 down payment was made and three monthly installments of $10,800 each are
to be made beginning on November 30, 2012. The cash price would have been
$34,800. Storm paid no installation charges under the monthly payment plan but
a $600 installation charge would have been incurred with a cash purchase. The
amount to be capitalized as the cost of the machine on October 31, 2012 would
be
a. $36,600.
b. $36,000.
c. $35,400.
d. $34,800.
101. Horner Company buys a delivery van with a list price of $45,000.
The dealer grants a 15% reduction in list price and an additional 2% cash
discount on the net price if payment is made in 30 days. Sales taxes amount to
$600 and the company paid an extra $450 to have a special device installed.
What should be the recorded cost of the van?
a. $37,485.
b. $38,468.
c. $38,535.
d. $38,085.
102. On August 1, 2012, Hayes
Corporation purchased a new machine on a deferred payment basis. A down payment
of $9,000 was made and 4 monthly installments of $7,500 each are to be made
beginning on September 1, 2012. The cash equivalent price of the machine was
$36,000. Hayes incurred and paid installation costs amounting to $1,500. The
amount to be capitalized as the cost of the machine is
a. $36,000.
b. $37,500.
c. $39,000.
d. $40,500.
103. On April 1, Mooney Corporation purchased for $1,710,000 a tract
of land on which was located a warehouse and office building. The following
data were collected concerning the property:
Current
Assessed Valuation Vendor’s
Original Cost
Land $600,000 $560,000
Warehouse 400,000 360,000
Office building 800,000
680,000
$1,800,000 $1,600,000
What are the
appropriate amounts that Mooney
should record for the land, warehouse, and office building, respectively?
a. Land, $560,000; warehouse, $360,000; office
building, $680,000.
b. Land, $600,000; warehouse, $400,000; office
building, $800,000.
c. Land, $598,500; warehouse, $384,750; office
building, $363,375.
d. Land, $570,000; warehouse, $380,000; office
building, $760,000.
104. On August 1, 2012, Mendez
Corporation purchased a new machine on a deferred payment basis. A down payment
of $2,000 was made and 4 annual installments of $18,000 each are to be made
beginning on September 1, 2012. The cash equivalent price of the machine was
$69,000. Due to an employee strike, Mendez could not install the machine
immediately, and thus incurred $900 of storage costs. Costs of installation
(excluding the storage costs) amounted to $2,400. The amount to be capitalized
as the cost of the machine is
a. $69,000.
b. $71,400.
c. $72,300.
d. $78,000.
105. Siegle Company exchanged 600 shares of
Guinn Company common stock, which Siegle was holding as an investment, for
equipment from Mayo Company. The Guinn Company common stock, which had been
purchased by Siegle for $50 per share, had a quoted market value of $58 per
share at the date of exchange. The equipment had a recorded amount on Mayo's
books of $31,500. What journal entry should Siegle make to record this
exchange?
a. Equipment ............................................................................. 30,000
Investment
in Guinn Co. Common Stock ................... 30,000
b. Equipment ............................................................................. 31,500
Investment
in Guinn Co. Common Stock ................... 30,000
Gain on
Disposal of Investment .................................. 1,500
c. Equipment ............................................................................. 31,500
Loss on Disposal
of Investment ........................................... 3,300
Investment
in Guinn Co. Common Stock ................... 34,800
d. Equipment ............................................................................. 34,800
Investment
in Guinn Co. Common Stock ................... 30,000
Gain on
Disposal of Investment .................................. 4,800
106. On January 2, 2012, Rapid Delivery Company traded in an old
delivery truck for a newer model. The exchange lacked commercial substance.
Data relative to the old and new trucks follow:
Old Truck
Original cost $36,000
Accumulated
depreciation as of January 2, 2012 24,000
Average published
retail value 11,000
New Truck
List price $60,000
Cash price without
trade-in 54,000
Cash paid with
trade-in 45,000
What should be the cost of the new truck
for financial accounting purposes?
a. $45,000.
b. $54,000.
c. $57,000.
d. $60,000.
107. On December 1, 2012, Kelso Company acquired new equipment in
exchange for old equipment that it had acquired in 2009. The old equipment was
purchased for $70,000 and had a book value of $26,600. On the date of the
exchange, the old equipment had a fair value of $28,000. In addition, Kelso
paid $91,000 cash for the new equipment, which had a list price of $126,000.
The exchange lacked commercial substance. At what amount should Kelso record
the new equipment for financial accounting purposes?
a. $91,000.
b. $117,600.
c. $119,000.
d. $126,000.
Use the following information for questions 108 and 109.
A machine cost $360,000, has annual depreciation of
$60,000, and has accumulated depreciation of $270,000 on December 31, 2012. On
April 1, 2013, when the machine has a fair value of $82,500, it is exchanged
for a machine with a fair value of $405,000 and the proper amount of cash is
paid. The exchange lacked commercial substance.
108. The gain to be recorded on the exchange is
a. $0.
b. $7,500 loss.
c. $15,000 gain.
d. $45,000 gain.
109. The new machine should be recorded at
a. $322,500.
b. $367,500.
c. $397,500.
d. $405,000.
Use the following information for questions 110 and 111.
Equipment that
cost $88,000 and has accumulated depreciation of $40,000 is exchanged for
equipment with a fair value of $64,000 and $16,000 cash is received. The
exchange lacked commercial substance.
110. The gain to be recognized from the exchange is
a. $6,400 gain.
b. $8,000 gain.
c. $24,000 gain.
d. $32,000 gain.
111. The new equipment should be recorded at
a. $64,000.
b. $48,000.
c. $40,000.
d. $38,400.
Use the following information for questions 112 through 114.
Two independent
companies, Hager Co. and Shaw Co., are in the home building business. Each owns
a tract of land held for development, but each would prefer to build on the
other's land. They agree to exchange their land. An appraiser was hired, and
from her report and the companies' records, the following information was
obtained:
Hager's
Land Shaw's Land
Cost and
book value $576,000 $360,000
Fair value
based upon appraisal 720,000 630,000
The exchange was made, and based on the
difference in appraised fair values, Shaw paid $90,000 to Hager. The exchange
lacked commercial substance.
112. For financial reporting purposes, Hager should recognize a
pre-tax gain on this exchange of
a. $0.
b. $18,000.
c. $90,000.
d. $144,000.
113. The new land should be
recorded on Hager's books at
a. $504,000.
b. $576,000.
c. $630,000.
d. $720,000.
114. The new land should be recorded on Shaw's books at
a. $360,000.
b. $450,000.
c. $630,000.
d. $720,000.
115. Timmons
Company traded machinery with a book value of $240,000 and a fair value of
$400,000. It received in exchange from Lewis Company a machine with a fair
value of $360,000 and cash of $40,000. Lewis’s machine has a book value of
$380,000. What amount of gain should Timmons recognize on the exchange?
a. $ -0-
b. $16,000
c. $40,000
d. $160,000
116. Lewis
Company traded machinery with a book value of $570,000 and a fair value of
$540,000. It received in exchange from Timmons Company a machine with a fair
value of $600,000. Lewis also paid cash of $60,000 in the exchange. Timmons’s
machine has a book value of $570,000. What amount of gain or loss should Lewis
recognize on the exchange?
a. $60,000 gain
b. $ -0-.
c. $3,000 loss
d. $30,000 loss
117. Durler
Company traded machinery with a book value of $540,000 and a fair value of
$900,000. It received in exchange from Hoyle Company a machine with a fair
value of $810,000 and cash of $90,000. Hoyle’s machine has a book value of
$855,000. What amount of gain should Durler recognize on the exchange?
a. $ -0-
b. $36,000
c. $90,000
d. $360,000
118. Hoyle
Company traded machinery with a book value of $570,000 and a fair value of
$540,000. It received in exchange from Durler Company a machine with a fair
value of $600,000. Hoyle also paid cash of $60,000 in the exchange. Durler’s
machine has a book value of $570,000. What amount of gain or loss should Hoyle
recognize on the exchange?
a. $60,000 gain
b. $ -0-
c. $3,000 loss
d. $30,000 loss
119. Peterson Company purchased machinery for
$480,000 on January 1, 2009. Straight-line depreciation has been recorded based
on a $30,000 salvage value and a 5-year useful life. The machinery was sold on
May 1, 2013 at a gain of $9,000. How much cash did Peterson receive from the
sale of the machinery?
a. $69,000
b. $81,000
c. $99,000
d. $129,000
120. Sutherland
Company purchased machinery for $640,000 on January 1, 2009. Straight-line
depreciation has been recorded based on a $40,000 salvage value and a 5-year
useful life. The machinery was sold on May 1, 2013 at a gain of $12,000. How
much cash did Sutherland receive from the sale of the machinery?
a. $92,000.
b. $108,000.
c. $132,000.
d. $172,000.
121. Ecker Company purchased a new machine on May 1, 2004 for
$264,000. At the time of acquisition, the machine was estimated to have a
useful life of ten years and an estimated salvage value of $12,000. The company
has recorded monthly depreciation using the straight-line method. On March 1,
2013, the machine was sold for $36,000. What should be the loss recognized from
the sale of the machine?
a. $0.
b. $5,400.
c. $12,000.
d. $17,400.
122. On January 1, 2004, Mill
Corporation purchased for $304,000, equipment having a useful life of ten years
and an estimated salvage value of $16,000. Mill has recorded monthly
depreciation of the equipment on the straight-line method. On December 31,
2012, the equipment was sold for $56,000. As a result of this sale, Mill should
recognize a gain of
a. $0.
b. $11,200.
c. $27,200.
d. $56,000.
Multiple Choice
Answers—Computational
Multiple Choice—CPA Adapted
123. On December 1, 2012, Hogan Co. purchased a tract of land as a
factory site for $900,000. The old building on the property was razed, and
salvaged materials resulting from demolition were sold. Additional costs
incurred and salvage proceeds realized during December 2012 were as follows:
Cost to raze old building $70,000
Legal fees for
purchase contract and to record ownership 10,000
Title guarantee
insurance 16,000
Proceeds from sale
of salvaged materials 8,000
In Hogan
's December 31, 2012 balance sheet, what amount should be reported as land?
a. $926,000.
b. $962,000.
c. $988,000.
d. $996,000.
124. Land was purchased to be used as the site for the construction
of a plant. A building on the property was sold and removed by the buyer so
that construction on the plant could begin. The proceeds from the sale of the
building should be
a. classified as other income.
b. deducted from the cost of the land.
c. netted against the costs to clear the land
and expensed as incurred.
d. netted against the costs to clear the land
and amortized over the life of the plant.
125. A company is constructing an asset for its own use. Construction
began in 2012. The asset is being financed entirely with a specific new
borrowing. Construction expenditures were made in 2012 and 2013 at the end of
each quarter. The total amount of interest cost capitalized in 2013 should be
determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset
in 2012 and 2013.
b. average accumulated expenditures for the
asset in 2012 and 2013.
c. average expenditures for the asset in 2013.
d. total expenditures for the asset in 2013.
126. Colt Football Co. had a player contract with Watts that is
recorded in its books at $4,800,000 on July 1, 2012. Day Football Co. had a
player contract with Kurtz that is recorded in its books at $6,000,000 on July
1, 2012. On this date, Colt traded Watts to Day for Kurtz and paid a cash
difference of $600,000. The fair value of the Kurtz contract was $7,200,000 on
the exchange date. The exchange had no commercial substance. After the
exchange, the Kurtz contract should be recorded in Colt's books at
a. $5,400,000.
b. $6,000,000.
c. $6,600,000.
d. $7,200,000.
127. Huff Co. exchanged
nonmonetary assets with Sayler Co. No cash was exchanged and the exchange had
no commercial substance. The carrying amount of the asset surrendered by Huff
exceeded both the fair value of the asset received and Sayler's carrying amount
of that asset. Huff should recognize the difference between the carrying amount
of the asset it surrendered and
a. the fair value of the asset it received as a
loss.
b. the fair value of the asset it received as a
gain.
c. Sayler's carrying amount of the asset it
received as a loss.
d. Sayler's carrying amount of the asset it
received as a gain.
128. Chase County owned an idle parcel of real estate consisting of
land and a factory building. Chase gave title to this realty to Patton Co. as
an incentive for Patton to establish manufacturing operations in the County.
Patton paid nothing for this realty, which had a fair market value of $250,000
at the date of the grant. Patton should record this nonmonetary transaction as
a
a. memo entry only.
b. credit to Contribution Revenue for $250,000.
c. credit to Extraordinary Income for $250,000.
d. credit to Donated Capital for $250,000.
129. On September 10, 2012, Jenks Co. incurred the following costs
for one of its printing presses:
Purchase of attachment $65,000
Installation of
attachment 5,000
Replacement parts
for renovation of press 18,000
Labor and overhead
in connection with renovation of press 7,000
Neither the attachment nor the
renovation increased the estimated useful life of the press. However, the
renovation resulted in significantly increased productivity. What amount of the
costs should be capitalized?
a. $0.
b. $77,000.
c. $88,000.
d. $95,000.
130. On
January 2, 2012, York Corp. replaced its boiler with a more efficient one. The
following information was available on that date:
Purchase price of new boiler $170,000
Carrying amount of
old boiler 10,000
Fair value of old
boiler 4,000
Installation cost
of new boiler 20,000
The old boiler was sold for $4,000. What
amount should York capitalize as the cost of the new boiler?
a. $190,000.
b. $186,000.
c. $180,000.
d. $170,000.
Multiple Choice Answers—CPA
Adapted
IFRS QUESTIONS
True/False
1. Under international accounting
standards, historical cost is the preferred treatment for property, plant, and
equipment.
2. Recently changes to IFRS
require companies to capitalize borrowing costs related to qualifying assets.
3. Under IFRS, interest costs incurred
during construction of a plant asset cannot be capitalized.
4. Under IFRS, if a company uses
the revaluation model for fixed assets, companies must revalue the class of
assets regularly.
5. Under IFRS, assets that qualify
for interest capitalization are assets that are in use or ready for their
intended use.
Answers to True/False:
Multiple Choice
1. Under IFRS, Sampson Company,
who has a non-current asset which has been classified as held-for-sale, should
a. test the asset's value monthly
for impairment.
b. value the asset at its
depreciated historical cost.
c. depreciate the asset over its
remaining life.
d. not depreciate the asset.
2. Miller Company, a company who
uses IFRS reporting standards, sells a non-current asset classified as
held-for-sale. Which of the following statements is true regarding the
treatment of a gain on a subsequent increase in the fair value less cost?
a. The gain should not be
recognized.
b. The gain should be recognized
in full in the income statement.
c. The gain should be recognized
but only in retained earnings.
d. The gain should be recognized
to the extent that it is not in excess of the cumulative impairment loss that
has been recognized.
3. Danson Company, a company who
uses IFRS reporting standards, has a non-current asset that has been classified
as held-for-sale. When the asset no longer meets this definition, Danson should
a. remove the asset from the
statement of financial position.
b. remeasure the asset at fair
value.
c. measure the asset at the lower
of its carrying value before it was classified as held-for-sale and its
recoverable amount at the date when the company decided not to sell it.
d. leave the non-current asset on
the financial statements at the current carrying value.
4. Elton Industries, a company who
uses IFRS reporting standards, has assets and liabilities of a disposal group
classified as held-for-sale shown on its statement of financial position. Which
of the following presents the best treatment for these?
a. These assets and liabilities
should be netted and presented as a single amount - either a current asset or a
current liability on the statement of financial position.
b. On the balance sheet, the
disposal group assets should be shown separately from other assets, while the
disposal group liabilities should be shown separately from other liabilities.
c. The assets and liabilities
should be netted and presented as a deduction from equity on the statement of
financial position.
d. There should be no separate
disclosure of these assets and liabilities on the statement of financial
position.
5. Woodson Company, a company who
uses IFRS reporting standards, has identified a group of plant assets for
disposal. On January 1, 2012, the carrying value of these assets was
$17.5 million. The assets were revalued to $16.5 million on January 5, 2012, when they were identified as property for the disposal group. In addition, Woodson thinks that it will cost
$1.5 million to sell these assets. What carrying amount should these assets reflect for
year-end financial statements to be prepared on January 10, 2012?
$17.5 million. The assets were revalued to $16.5 million on January 5, 2012, when they were identified as property for the disposal group. In addition, Woodson thinks that it will cost
$1.5 million to sell these assets. What carrying amount should these assets reflect for
year-end financial statements to be prepared on January 10, 2012?
a. $17.5 million
b. $16.5 million
c. $16.0 million
d. $15.0 million
6. Thomas Company, a company who
uses IFRS reporting standards, is disposing of a plant asset. The amount of gain
or loss from this disposal is
a. reported as the difference
between the sales proceeds and the carrying amount of the asset.
b. not reported.
c. reported as the fair value less
the recoverable amount.
d. reported as the difference
between the net cash flows of the productive years of the asset and its
carrying value.
7. On January 1, 2012, Jackson
Company has a building with a carrying value of $50,000 and a remaining useful
life 5 years that was recently valued at $150,000. Assuming that the company uses
straight-line depreciation, IFRS would show the depreciation as
a. $10,000
b. $30,000
c. $20,000
d. More than one of these answers
could be correct.
8. Tram Industries, a company who
uses IFRS reporting standards, is installing a new plant. The company has
incurred the following costs
1. Operating losses before
commercial production $ 200,000
2. Cost of the plant 1,500,000
3. Initial delivery and handling
charges 300,000
4. Cost of site preparation 175,000
Which of these costs can Tram
capitalize in accordance with IFRS?
a. 1, 2, 3, & 4
b. 2 & 4
c. 2, 3, & 4
d. 1, 2, & 4
9. Icon Industries, a company who
uses IFRS reporting standards, is installing a new plant. The company has
incurred the following costs
1. Consultants used for advice on
the acquisition of the plant $245,000
2. Interest charges paid to the
supplier of plant for deferred credit $275,000
3. Estimated dismantling cost to
be incurred after 8 years $400,000
4. Cost of the plant $2,300,000
Which of these costs can Tram
capitalize in accordance with IFRS?
a. 1, 2, 3, & 4
b. 4 only
c. 1 & 4
d. 1, 3, & 4
10. All of the following are true
regarding the revaluation model allowed under IFRS except
a. once selected, the revaluation
policy applies to an entire class of property, plant and equipment.
b. revaluations must be made
regularly to ensure that the carrying value is not materially different from
fair value.
c. after initial recognition, the
revalued amount is fair value less subsequent depreciation and impairment
losses.
d. when an asset is revalued, any
increase in carrying amount is reported as miscellaneous revenue.
Answers to Multiple Choice:
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