Accounting chapter 10

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.

A

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.

A

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.

A

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.

D

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.

D

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 answers are correct.

D

61. Termination of an asset's service due to theft, fire, etc, is called: a. special assessment. b. nonreciprocal transfers. c. speculation. d. involuntary conversion.

D

20. If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset's book value.

T

4. Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.

T

6. Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.

T

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

B

1. Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale.

F

18. When an ordinary repair occurs, several periods will usually benefit.

F

2. Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance.

T

14. If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized.

F

15. When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.

F

19. Companies always treat gains or losses from an involuntary conversion as extraordinary items.

F

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.

F

5. Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements.

F

7. Companies should assign no portion of fixed overhead to self-constructed assets.

F

8. When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

F

9. Companies should always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets.

F

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 fully depreciated. d. the activities that are necessary to get the asset ready for its intended use have begun.

A

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.

A

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

A

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.

A

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.

A

S45. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when 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.

A

29. Fences and parking lots are reported on the balance sheet as a. current assets. b. land improvements. c. land. d. property and equipment.

B

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.

B

49. A company should immediately recognize: a. any gain when it makes a bargain purchase. b. any loss when it ignorantly pays too much for an asset originally. c. any gain when it constructs a piece of equipment at a cost savings. d. any loss when it receives any asset lower than its book value.

B

52. When a company 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 answers are correct.

B

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.

B

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.

B

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 value. b. property, plant, and equipment items are always acquired at their original historical cost. c. historical cost involves actual trans¬actions 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.

B

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.

C

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.

C

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.

C

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.

C

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 weighted-average accumulated expenditures on which no interest cost was incurred.

C

38. When a company purchases land as a site for a plant, interest costs capitalized during the period of construction are part of the: a. period cost. b. cost of acquisition. c. cost of the plant. d. cost of the land.

C

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 answers are correct.

C

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).

C

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.

C

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 answers are correct.

C

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

C

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.

C

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 answers are correct.

D

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.

D

27. If a corporation purchases land 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 land 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.

D

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

D

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 get them ready for use.

D

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.

D

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 answers are correct.

D

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.

D

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 of these answers are correct.

D

10. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.

T

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.

T

12. Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.

T

13. When a company makes an unconditional promise to pledge an asset in the future, the company should report the contribution expense and related payable immediately.

T

16. Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits.

T

17. Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used.

T