Chapter 10

For self-constructed assets, time-weighted expenditures are calculated by taking the actual expenditures the occurred on a given date and multiplying it by the...

portion of the year outstanding.

A company acquires equipment by signing an interest-bearing note payable. If the interest rate is realistic, the company will record the equipment at the...

present value of the note payable, which is the face amount of the note.

The type of interest costs that can be treated as capitalized interest can pertain to borrowings that are...

specifically for the construction project, and other loans during the period of construction.

When a company issues its equity securities to purchase land, the common stock is publicly traded, and both the value of the stock and the land is known, the best indicator of fair value is the value of the...

stock.

Capitalization for a self-constructed asset ends either when...

the asset is substantially complete and ready for use, or when interest costs no longer are being incurred.

In a lump-sum purchase of assets, the cost must be allocated to the individual assets because...

the assets have different characteristics and may have different useful lives.

If a specific construction loan is insufficient to cover the average accumulated expenditures, the interest rate on the construction loan is applied to...

the average accumulated expenditures up to the amount of the specific borrowing.

Both US GAAP and IFRS require that companies value donated assets at...

their fair values.

For capitalization of interest on self-constructed assets, the average accumulated expenditures is the...

weighted-average expenditures during the construction period.

The first indicator of fair value when a company acquires assets by issuing debt or equity securities.

The fair value of the debt or equity securities given.

What was FASB's purpose for creating the commercial substance rule for the use of fair value?

To prevent businesses from exchanging property for no business reason other than to recognize a gain.

Formula: Weighted-average interest rate for Self-Constructed Assets

Total interest / Total Loan Amt

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a...

Trademark

True or False: When fair value of both assets in an exchange are not determinable (a rare situation), no gain or loss is recognized.

True

True/False: For a construction period lasting 2.5 years, the Accumulated Expenditures amount at the beginning of year 2 equals the total expenditures in year 1 plus capitalized interest in year 1.

True

True/False: For self-constructed assets, capitalized interest is added to the actual expenditures of the building to determine the building cost.

True

True/False: When recording an exchange of assets that has commercial substance, a gain on the exchange are recorded as a credit.

True

True/False: When recording an exchange of assets that has commercial substance, gains on the exchange are recorded as a credit.

True

A nonmonetary exchange is considered to have this if the future cash flows will change as a result of the exchange.

commercial substance

The approach used for accounting for self-constructed assets where all overhead costs are allocated to production and to self-constructed assets.

full-cost approach

US GAAP and IFRS differ in their standards for recording the values for...

government grants

The accounting rules for a franchise agreement

Amortize the cost of the franchise over its life. Capitalize the cost of the franchise. Expense periodic payments as incurred.

How GAAP requires that donated assets be recorded

As revenue

The accounting impact of FASB's requirement for R&D costs to be expensed immediately.

Assets are understated and expenses are overstated in the current period.

Recorded at either fair values based on an available market price or an appraisal value.

Donated assets

Quarry Corp. has the following costs related to a mine it acquired this year. Cost of land and natural resource rights $200,000 Asset retirement obligation to restore land 50,000 Costs of extraction during year 1 35,000 Equipment used for mining 100,000 Exploration and drilling costs to prepare quarry for extraction 40,000 What amount should be included as an asset for natural resources?

$290,000 Cost of Land + ARO + Exploration Costs

The two IFRS alternatives for recording values for grants related to assets

1. Deduct amount of grant in determining the initial cost of the asset 2. Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the asset's useful life.

Exceptions of R&D costs that are capitalized under U.S. GAAP

1. Development costs for software that has reached the point of technological feasibility 2. R&D performed by the company for sale to others 3. R&D purchased in a business acquisition

A trademark registered with the U.S. Patent Office protects the trademark from use by others for a period of...

10 years

3-Part Formula to calculate capitalized interest for a self-constructed asset

Average Accumulated Expenditures times Interest Rate of Construction Loan times Portion of Year Outstanding

An asset is exchanged for another asset and no cash is exchanged in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Book value of the asset given.

An asset is exchanged for another asset and cash is received in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Cash received plus the book value of the asset given up.

Protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.

Copyright

an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

Copyright

Marlin purchases land and the rights to explore for $200,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $40,000. What journal entry would account for the estimated cost of restoration?

Credit to Asset Retirement Liability: $40,000

Mining Ventures purchases land and the rights to explore for $100,000. Exploration costs are $20,000, and development costs are $30,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $50,000. The journal entry to record the acquisition of the mine will include which entries?

Credit to asset retirement liability of $50,000. Debit to mining assets of $200,000. Credit to cash $150,000

The rate used to calculate the expected cash flows when calculating the fair value of an asset retirement obligation.

Credit-Adjusted Risk-Free Rate

The allocation of a natural resource to the periods extracted.

Depletion Expense

The criteria IFRS employs that require companies to capitalize development expenditures.

Development expenditures are capitalized only if: Development costs can be measured reliably. The product/process is technically and commercially feasible. The company has sufficient resources to complete development. The company intends to use or sell the asset.

How would a company that owns a tract of land with a book value of $1 million and a fair value of $5 million be able to recognize the $4 million dollar difference?

Either by selling the land, or exchanging the land for another nonmonetary asset for a legitimate business purpose. If the land is exchanged for other real property with differing characteristics of the land held, future cash flows would change and therefore the exchange would have commercial substance. If the land is exchanged for another piece of land with identical characteristics (i.e. "similar") to the land that is given, it is unlikely that future cash flows would change, and so the exchange would lack commercial substance and the $4M gain would not be able to be recognized.

Commercial Substance is required in order for THIS to be used when recording an exchange at a gain.

Fair value

True/False: For a construction period lasting 2.5 years, the Accumulated Expenditures amount at the beginning of year 2 equals the total expenditures in year 1 less any capitalized interest.

False

True/False: For self-constructed assets, capitalized interest is added to the time-weighted expenditures of the building to determine the building cost.

False

True/False: When recording an exchange of assets that has commercial substance, a gain on the exchange are recorded as a debit.

False

True/False: When recording an exchange of assets that has commercial substance, a loss on the exchange are recorded as a credit.

False

True or false: If a company has no borrowings, interest costs can be imputed on self-constructed assets.

False: Interest costs may not be imputed; actual interest cost must be incurred.

Costs that are capitalized as an asset for an internally developed patent

Filing Fees and Legal Fees

Ratio often used to measure how effectively managers use PP&E

Fixed-asset turnover ratio

A company's reputation and clientele, its trained employees, and favorable business location may give rise to...

Goodwill

A unique intangible asset whose cost can't be directly associated with any specific identifiable right and the cost is not separable from the company itself.

Goodwill

An asset representing the value of a company over and above its identifiable tangible and intangible assets.

Goodwill

When a nonmonetary exchange is considered to have commercial substance.

If future cash flows will change as a result of the exchange.

Costs that are capitalized as an intangible asset for a franchise

Initial payment for the franchise Legal costs for the franchise agreement

An asset, other than financial assets, that has no physical substance.

Intangible asset

Fixed-asset turnover ratio

Net Sales / Average Fixed Assets

When does goodwill will appear as an asset in a company's balance sheet?

Only when it was purchased in connection with the acquisition of control over another company.

The exclusive legal right to manufacture a product or to use a process.

Patent

A ___________ is the exclusive right to manufacture a product or use a process granted for a period of _____ years.

Patent 20

A purchased intangible is valued at its original cost. What does the original cost for acquiring a patent include?

Purchase Price Legal costs to acquire Required Filing Fees

Situation where the book value is used when recording an exhange of assets instead of the fair value.

When the fair value of both assets are not determinable.

When Interest Capitalization on a self-constructed asset begins

When the first expenditure is made.

Start-up costs such as legal fees and state filings to incorporate should be treated as...

an expense in the period incurred.

Because it is difficult to estimate the future value of research and development, FASB requires that research and development costs be treated as...

an expense on the income statement.

A company issues its equity securities to purchase land. The common stock is not publicly traded. The best indicator of fair value is the...

appraised value of the land.

The initial valuation of purchased intangible assets requires that the intangible asset is recorded...

at original cost

For self-constructed assets, unless all expenditures are made at the outset of the construction period, it's necessary to determine the _______ amount outstanding during the period.

average

Computer software purchased for internal use should be...

capitalized and amortized over its useful life.

If equipment is purchased for research and development, but has an alternative future use, the cost of the equipment is...

capitalized and depreciated as R&D expense in the current and future periods.

Costs incurred after technological feasibility is established but before the software is available to customers should be...

capitalized as an intangible asset.

For a patent developed internally, the research and development costs are....

expensed as incurred.

When a company receives an asset from an unrelated party by a donation, the assets are valued at...

fair value

When a company acquires assets by issuing debt or equity securities, the first indicator of fair value is the...

fair value of the debt or equity securities given.

A contractual arrangement in which one entity grants the purchaser the exclusive right to use the tradename, formulas, and product rights within a specific geographic area for a specific period of time.

franchise

In accounting terminology, the life of a trademark is considered to be...

indefinite

The two important accounting issues related to self-constructed assets

interest charges and allocation of overhead.

The FASB requires research and development costs to be expensed because...

it is difficult to objectively determine the future benefits.

If the amount of interest calculate to be capitalized exceeds the amount of interest actually incurred, the amount of interest capitalized is...

limited to the amount of interest capitalized to actual interest incurred.

Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchase as a ______ purchase.

lump-sum

The initial valuation of purchased intangible assets requires that the intangible asset is recorded at...

original cost