Chapter 10 Multiple Choice

Assets that do not qualify for interest capitalization

1. assets in use 2. assets ready for intended use 3. assets that aren't used for company's earning activities and isn't going through the activities necessary to be ready for use. ( ex. land undeveloped, assets need repair or excess capacity)

Qualified assets for interest capitalization

1. assets under construction for a company's own use. 2. intended for sale or lease that are constructed or other wise produced as discrete project.

Fair Market Value - Net Book Value =

Gain/(Loss)

Capitalizing cost condition

Meet 1 1. useful life must be increased 2. quantity of units produced must be increased 3. quality of units produced must be enhanced

Capitalizing period requirement

Meet all 3 1. expenditures for the asset have been made 2. activities necessary to get asset ready for use are in progress 3. interest cost is being incurred

Historical cost - Accumulated Depreciation =

Net Book Value

The accounting for interest costs incurred during construction recommended under GAAP is to: a. capitalize no interest charges during construction. b. charge construction with all costs of funds employed, whether identifiable or not. c. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made. d. capitalize a pro rata portion of all costs of funds employed.

c. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made.

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

c. involuntary conversion

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. that portion of weighted-average accumulated expenditures on which no interest cost was incurred. b. a cost of capital charge for stockholders' equity. c. the total interest cost actually incurred. d. 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 total interest cost which would not have been incurred if expenditures for asset construction had not been made.

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. capitalized as part of the cost of the land. b. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down. c. written off as a loss in the year the hotel is torn down. d. capitalized as part of the cost of the new hotel.

a. capitalized as part of the cost of the land.

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. the fair value of the asset given up, and a gain or loss is recognized.

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. accumulated depreciation - machinery c. a separate deferred charge account. d. miscellaneous tax expense (which includes all taxes other than those on income).

a. the machinery account.

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets? a. Assets financed through the issuance of long-term debt. b. Assets not currently undergoing the activities necessary to get them ready for use. c. Assets under construction for an enterprise's own use. d. Assets intended for sale or lease that are produced as discrete projects.

b. Assets not currently undergoing the activities necessary to get them ready for use.

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 add new asset services. b. Expenditure made to maintain an existing asset so that it can function in the manner intended. c. Expenditure made to increase the efficiency or effectiveness of an existing asset. d. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated.

b. Expenditure made to maintain an existing asset so that it can function in the manner intended.

Interest revenue earned on borrowed funds during the construction of an asset to be used by a firm can be used to reduce the cost of interest to be capitalized. a. True b. False

b. False

The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation. a. True b. False

b. Flase

Which of the following costs are capitalized for self-constructed assets? a. Labor and overhead only b. Materials, labor, and overhead c. Materials and labor only d. Materials and overhead only

b. Materials, labor, and overhead

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? a. Expenditures for the assets have been made. b. The interest rate is equal to or greater than the company's cost of capital. c. Interest cost is being incurred. d. Activities that are necessary to get the asset ready for its intended use are in progress.

b. The interest rate is equal to or greater than the company's cost of capital.

The cost of land doesn't include a. cost of removing old buildings b. cost of improvements with limited lives c. cost of grading, filling, draining, and clearing d. special assessments

b. cost of improvements with limited lives

Which of the following is not a major characteristic of plant asset? a. Yields service for number of years b. Possesses physical substances c. Acquired for resale d. Acquired for use

c. Acquired for resale

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. 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. c. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. 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.

c. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

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. any of these answers are correct.