Smartbook Ch 10

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Polly Corporation purchases land for $200,000. Polly incurs the following costs associated with the land acquisition: Property taxes for current year $4,000 Delinquent property taxes 8,000 Commission to broker 14,000 Cost of grading 2,000 Cost of land improvements 12,000 What is the amount that Polly should capitalize in the land account?

$224,000

Polly Corporation purchases land for $200,000. Polly incurs the following costs associated with the land acquisition:

$224,000 Reason: $200,000 + $8,000 + $14,000 + $2,000 = $224,000

Ayesha Corp. purchases equipment to be used in manufacturing. Given the following expenditures during the year, calculate the amount capitalized as the cost of equipment.

$57,400

Which of the following costs should be capitalized in the costs of acquiring a building?

-purchase price -realtor commissions -legal fees to obtain title

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.

Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?

Cost of driveways Cost of lawn sprinkler system Cost of sidewalks

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. The journal entry to record the acquisition of the mine will include which of the following entries?

Credit to asset retirement liability of $40,000.

When calculating the fair value of an asset retirement obligation, what rate is used to calculate the expected cash flows?

Credit-adjusted risk-free rate

Which of the following items should be capitalized in the cost of equipment?

Purchase price Installation and testing of equipment Freight to deliver the equipment to its location Insurance on equipment during shipping

True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

True (All costs should be capitalized to bring the asset to its intended and useful state.)

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.

Obligations associated with the disposition of property, plant, equipment, and natural resources are called __________ _________ obligations.

asset retirement

A(n) _______ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

Depreciation expense is recorded for tangible fixed assets, whereas ______ expense is recorded for natural resources.

depletion

Which of the following are research and development costs?

design, construction, and testing of pre-production prototypes research aimed at discovering new knowledge

A company acquires a mine and incurs costs such as expenditures to build tunnels and shafts before production may begin. These expenditures are classified as

development costs

The costs incurred after a natural resource has been discovered but before production begins are referred to as

development costs

When assets are acquired in a noncash transaction, if the fair value of the noncash items given is not clearly evident, then the ______ value of the assets received is used to record the assets.

fair

Asset retirement obligations are recorded as a liability and measured at

fair value

How does a company measure an asset retirement obligation?

fair value

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 is called a

franchise

Which approach to accounting for self-constructed assets is required by U.S. GAAP?

full-cost approach

A nonmonetary exchange has commercial substance if the ______ will change as a result of the exchange.

future cash flows

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

goodwill

The two important accounting issues related to self-constructed assets are

interest charges and allocation of overhead.

A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include

legal costs to acquire required filing fees purchase price

______ ______ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process, whereas equipment, land, and buildings have physical characteristics that remain unchanged.

natural resources

For capitalized interest on self-constructed assets, weighted-average expenditures is determined by weighting the individual expenditures by the

number of months from incurrence to the end of the construction period

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.

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

revenue is recorded

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

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

the assets have different useful lives.

When an asset retirement obligation is recorded as a liability, the offsetting journal entry is a debit to

the related asset.

Which of the following are classified as natural resources?

timber tracts and mineral deposits

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

Norbert Company has an exclusive right to display a specific symbol and routinely uses it on its promotional materials, company letterhead, and other media to distinguish its company from other firms. This right is referred to as a

trademark

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

weighted-average expenditures during the construction period

The FASB requires research and development costs to be expensed because

it is difficult to objectively determine the future benefits.

Which of the following are included in research and development costs?

labor costs of research personnel allocation of overhead for lab facilities equipment in the lab

The distinction between land and land improvements is that:

land has an indefinite life

A(n) __________ is the exclusive right to manufacture a product or use a process granted for a period of _________ years.

patent, 20

What amount is used to measure the fair value of an asset retirement obligation?

present value of estimated future cash flows

The two important accounting issues related to self-constructed assets are

-allocation of overhead -treatment of interest charges

The cost of natural resources includes which of the following?

-development -acquisition cost for the use of land -exploration costs before production begins -restoration costs at the end of extraction

What are the cost components for self-constructed assets?

-direct material -manufacturing overhead -direct labor

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.

capitalized

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.

A(n) ______ is 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

If equipment is purchased specifically for one research and development project, the cost of the equipment is

expensed immediately

The basic principle for valuing assets in a nonmonetary exchange is to value the asset received 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.

Which of the following are included in research and development costs?

Salaries of researchers Allocation of indirect costs related to research Materials used in the lab

If natural resources are developed by a company, the initial valuation should include

development costs. restoration costs. acquisition cost. exploration costs.

A(n) _________ is 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

Collin Corp. purchases equipment to be used in manufacturing. Given the following expenditures during the year, calculate the amount capitalized as the cost of equipment.

$114,000

Sherman Corporation purchases land for $100,000. Sherman incurs the following costs associated with the land acquisition: Property taxes for current year $3,000 Cost of removing old building 7,000 Title insurance 1,000 Cost of grading 4,000 Delinquent property taxes 2,000 What is the cost that Sherman should capitalize in the cost of land?

$114,000

Which of the following is not included in research and development expenses?

Filing and legal costs for a patent.

When is it appropriate to recognize a liability for an asset retirement obligation?

Over the asset's life as incurred. At the inception of the asset's life if a legal obligation exists.

Which method in oil and gas accounting requires the cost of unsuccessful wells be expensed in the current period?

Successful efforts method

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

Title insurance Costs to remove an old building Legal fees to secure title Grading the land

Which of the following are included in research and development costs?

allocation of overhead for lab facilities labor costs of research personnel equipment in the lab

A company acquires equipment by signing an interest-bearing note payable for $20,000. The interest rate is realistic so the company will record

debit machine $20,000 credit note payable $20,000

Which of the following items should always be capitalized in the cost of equipment?

freight to deliver the equipment installation and testing of equipment sales tax legal fees to establish title

An asset, other than financial assets, that has no physical substance is referred to as a(n)

intangible asset

Long-term assets are typically classified in one of these two categories:

intangible assets property, plant, and equipment

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

Manfred Mining Company is required to restore a piece of land to its original condition after it completes extraction of precious metals. From a financial reporting perspective, the related obligation is referred to as an asset

retirement obligation.

When the expected cash flow approach is used to measure an asset retirement obligation at fair value, what assumptions or estimates must be made by the accountant?

the probabilities of cash flows the expected cash flows

Which of the following items are intangible assets?

trademarks and goodwill

The two generally accepted methods for oil and gas accounting for U.S. GAAP are the

-full-cost method -successful efforts method

Which of the following items should always be capitalized in the cost of equipment?

Purchase price freight to deliver the equipment to its location installation and testing of equipment insurance on equipment during shipping

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

The costs included in the natural resource account includes

acquisition costs. exploration costs. restoration costs. development costs.

Indicate which costs would be capitalized as part of the cost of manufacturing equipment.

-freight-in -insurance during transit -set-up cost

The exclusive legal right to manufacture a product or to use a process is called a(n)

patent

Western Company incurred the following costs during the year related to the creation of a new product:

$145,000

GeoMines Corp. has the following costs related to a mine it acquired this year. Cost of land and natural resource rights $100,000 Development cost before production begins 20,000 Future cost to restore land after mining 15,000 Equipment used for mining 80,000 Exploration and drilling costs 30,000 What amount should be included as an asset for natural resources?

$165,000

Which of the following is true regarding a nonmonetary exchange of assets?

A gain or loss is recognized for the difference between the fair value and the book value of the asset given up.

Which of the following items should be capitalized as land improvements?

Cost of fences Cost of parking lots Cost of sidewalks

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?

Costs to remove an old building Legal fees to secure title Commissions

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 of the following entries?

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

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 is referred to as:

Goodwill

Which of the following costs should be capitalized in the costs of acquiring a building?

Legal fees to obtain title Realtor commissions Remodeling building

Mega Mines acquires a new mine for $1,000,000. Mega Mines determines at the date of acquisition that it will cost $140,000 to restore the land when the mining process is complete in 5 years. Mega Mines has a legal obligation to remove the equipment upon completion of the mining activities. Which of the following are acceptable choices for determining when to recognize an asset retirement obligation? (Select all that apply.)

Over the asset's life as incurred. At the inception of the asset's life.

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

commercial

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

The allocation of a natural resource to the periods extracted is referred to as

depletion expense

Accounting for land improvements requires that the land improvements are capitalized and then _______ over periods benefited by their use.

depreciated

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

fair

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

full cost

For self-constructed assets, the costs incurred include labor, materials, and

overhead

From a financial reporting perspective, property, plant, and equipment and intangible assets exhibit the following characteristics

revenue-producing long-lived


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