Ch 10 smartbook

Quarry Corp. has the following costs related to a mine it acquired this year. Cost of land and natural resource rights: 200K Asset retirement obligation to restore land: 50K Cost of extraction during Y1: 35K Equipment used for mining: 100K Exploration and drilling costs to prepare quarry for extraction: 40K What amount should be included as an asset for natural resources?

$290,000 ($200,000 + 50,000 + 40,000)

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

- real estate agent commissions - legal fees to secure title - costs to remove an old building

True or false: Asset retirement obligations (AROs) arise only from legal obligations associated with the retirement of a long-lived tangible asset.

True Reason: AROs are legal obligations that result from the retirement of an asset that results from the acquisition, construction, development, or normal operation of a long-lived asset.

In a transaction that lacks commercial substance, no gain is recognized unless some _____ is received.

cash

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

depletion

The allocation of the cost of natural resources to the periods extracted is referred to as _____ expense.

depletion

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.

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

future cash flows

Which of the following items are intangible assets?

goodwill trademarks patents

The amount of interest capitalized on a self-constructed asset is limited to the actual interest _____.

incurred

In accounting terminology, the life of a trademark is considered

indefinite.

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

insurance during transit set-up cost freight-in

Assets that do not qualify for interest capitalization are

inventories routinely manufactured.

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

long-lived revenue-producing

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

original cost.

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

patent

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

patent; 20

A company acquires equipment by signing a note payable. If the note does not bear interest, the company should record the equipment at the

present value of the equipment or note.

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

purchase price. legal costs to acquire. required filing fees.

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

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

A(n) _____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark

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: Start-up costs such as legal fees and state filings to incorporate should be expensed in the period incurred.

true Reason: Start-up costs should be expensed in the period incurred.

When calculating the amount of interest to capitalize on a self-constructed asset, the critical inputs used are an interest rate and

weighted average accumulated expenditures.

South Company acquires North Corporation for $20 million. The book value of North Corporation's net assets is $15 million, while the fair value of the net assets is $18 million. The fair value of the liabilities assumed is $2 million. Goodwill associated with the acquisition is:

$2M Reason: $20 million - $18 million Net assets has already been reduced by the liabilities

Reese Co. constructs a new facility. The average accumulated expenditures were $800,000. Reese borrows $600,000 on a construction loan to build the facility. The interest rate on the construction loan is 5%. Reese also has an additional loan outstanding for $500,000 with an interest rate of 7%. What is the amount of annual interest that Reese should capitalize on the self-constructed facility?

$44,000 Reason: ($600,000 x 5%)+ ($200,000 x 7%) = $44,000

On January 1, Plaid Corporation begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Plaid had the following expenditures on the project during the current year: Jan 1: 200K July 1: 600K Dec 1: 120K What are the average accumulated expenditures used to calculate capitalized interest on the project in the current year?

$510,000 Reason: ($200,000×12/12)+($600,000×6/12)+($120,000×1/12)

Mark Corp. is building a new office building. The office building qualifies as a self-constructed asset. During the year, Mark has weighted-average expenditures on the construction project of $1,500,000. Although Mark does not borrow money specifically to build the office building, Mark has two loans outstanding during the year. Loan A is for $400,000 at 9% interest, and Loan B is for $2,000,000 at 6% interest. What is the interest rate used to capitalize interest on the office building?

6.5% Reason: The interest on Loan A is $400,000 x 9% = 36,000. The interest on Loan B is $2,000,000 x 6% = 120,000. Total interest is $36,000 + $120,000 = $156,000. The weighted-average rate is $156,000/$2,400,000 = 6.5%.

Baker is building a new warehouse. The warehouse qualifies as a self-constructed asset. During the year, Baker has weighted-average expenditures on the construction project of $600,000. Although Baker does not borrow money specifically to build the warehouse, it has two loans outstanding during the year. Loan A is for $400,000 at 6% interest, and Loan B is for $800,000 at 9% interest. What is the interest rate used to capitalize interest on the warehouse?

8% Reason: The interest on Loan A is $400,000 x 6% = 24,000. The interest on Loan B is $800,000 x 9% = 72,000. Total interest is $24,000 + $72,000 = $96,000. The weighted-average rate is $96,000/$1,200,000 = 8%.

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

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

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

Filing and legal costs for a patent.

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.

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.

In a cloud computing arrangement, if the customer cannot run the software on its own, the costs

are expensed as incurred.

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

asset retirement

Obligations associated with disposition of property, plant, equipment, or natural resources are called

asset retirement obligations.

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

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

The City of Metropolis agrees to pay 10% of the cost of a building to encourage Mega Corp. to relocate to its city. The total cost of the building was $5,000,000, and Mega agrees to pay the remaining amount in cash. The journal entry for Mega Corp to record this transaction includes which of the following entries?

credit to cash $4,500,000 credit to revenue $500,000 debit to building $5,000,000

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

depreciated or expensed

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

development costs.

What are the cost components for self-constructed assets?

direct labor direct material manufacturing overhead

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.

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

fair value.

In a business acquisition, goodwill equals the fair value of the consideration exchanged for the company

less the fair value of net assets acquired.

In a cloud computing arrangement, if the customer has a contractual right to take possession of the software without significant penalty and the customer could run the software on its own, the costs are treated as

purchased intangibles.

Josh Corp. receives equipment donated from an unrelated party. Josh records the assets by debiting equipment and crediting

revenue.

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

the related asset.

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.

True or false: The formula for capitalizing interest on self-constructed assets is the interest rate times the weighted average accumulated expenditures.

true Reason: The formula for capitalizing interest is the interest rate times the weighted average accumulated expenditures.

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

weighted-average expenditures during the construction period.

Goodwill may only be recognized

when another company is acquired

U.S. GAAP and IFRS treat research costs as a(n) ______, whereas for IFRS, development costs are treated as a(n) ______.

expense; intangible asset

Asset retirement obligations are recorded as a liability and measured at

fair value.

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

fair, market, appraised, or appraisal

The cost of research and development performed for others is capitalized and recorded as _____.

inventory

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

interest charges and allocation of overhead.

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

expensed as incurred.

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

expensed immediately.

Consistent with U.S. GAAP and IFRS, donated assets generally are valued at _____ value.

fair

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

present value of estimated future cash flows

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

(1) intangible assets(2) Property, plant, and equipment

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

cost of sidewalks cost of parking lots cost of fences

A company that performs research and development activities for other companies under contract should capitalize the costs related to research and development in the

inventory account.

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.

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.

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

commercial

Which method in oil and gas accounting allows all costs to be capitalized as assets, and then expensed in the future as oil and gas are extracted?

full-cost method

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

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

The distinction between land and land improvements is that:

land has an indefinite life

When assets are exchanged and the transaction lacks commercial substance, the asset received is valued at the

book value of the asset given up.

Which of the following are classified as natural resources?

mineral deposits timber tracts

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

$114,000 100,000+7,000+1,000+4,000+2,000

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. Purchase price: $100K Freight&handling: 8K Trial runs: 6K Maintenance during year: 3K Employee training '": 4K

$114,000 Reason: items only associated with getting the part up and running: Cost = Purchase Price + Freight + Trial Runs

Western Company incurred the following costs during the year related to the creation of a new product: Salaries of researchers: 100K Depreciation on R7D equipment: 30K Utilities at R7D facility: 5K Patent filing and legal costs: 8K Payment for services in connection w R&D activities: 10K Adaptation costs for specific needs of a customer: 2K What amount should Western report as research and development expense in its income statement?

$145,000 Reason: $100,000+$30,000+$5,000+$10,000

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

$165,000 ($100,000 + 20,000 + 15,000 + 30,000)

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

$224,000 ($200,000 + 8,000 + 14,000 + 2,000)

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

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

Which of the following statements describe the accounting rules for a franchise agreement?

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

Which of the following are acceptable methods of disclosing R&D expenses?

As a separate line item in the income statement In a disclosure note

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

The cost of natural resources includes which of the following?

Exploration costs before production begins. Acquisition cost for the use of land. Restoration costs at the end of extraction.

Donated assets should be recorded on the balance sheet at what amount?

Fair value

True or false: Internally developed goodwill should be capitalized as an asset.

False Reason: Costs of internally developed goodwill should be expensed as incurred.

Donated assets are valued at fair value under

IFRS and U.S. GAAP

An asset is acquired by signing a note payable. The note does not indicate an interest rate, and the fair value of the asset cannot be reliably determined. At what amount should the asset be recorded?

Present value of the note payable discounted at the market rate

Which of the following should be included in the cost of buildings?

Real estate commissions relating to purchase of building

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

True or false: U.S. GAAP does not distinguish between research activities and development costs; however, IFRS does make this distinction.

True Reason: IFRS distinguishes between research activities and development activities, and it capitalizes development activities.

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

allocation of overhead. treatment of interest charges.

How does a company measure an asset retirement obligation?

at fair value

When a company receives cash in an exchange that lacks commercial substance, the amount of gain that should be recognized is

based on the portion of cash received relative to the total assets received.

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

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

Which of the following costs are capitalized as an asset for an internally developed patent?

legal fees filing fees

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

legal fees to obtain title purchase price

Superior mining Inc. purchases a large piece of land with rich mineral deposits and plans to start extracting the mineral-rich ore immediately. The cost of the piece of land should be reported in this category:

natural resources

The fixed-asset turnover ratio is calculated as ______ divided by average fixed assets.

net sales

An asset retirement obligation must be recognized

only if it is a legal obligation.

The costs to return land or other property to its original condition after extracting natural resources are referred to as

restoration costs.

The interest capitalization period begins with the first expenditure and ends when which of the following occur?

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

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

the assets have different useful lives.

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 expected cash flows the probabilities of cash flows

For self-constructed assets, if no specific money is borrowed to construct the asset, but other debt is outstanding, the interest rate used to capitalize interest is

the weighted-average rate on all loans outstanding.

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 Reason: All costs should be capitalized to bring the asset to its intended and useful state.

Northern Company incurred the following costs during the year related to the creation of a new product: Salaries: $200K Depreciation on R&D equipment: 50K Quality control during commercial production: 10K Patent filing and legal costs: 8K Payment for services in connection with R&D activities: 20K Testing of preproduction prototypes and models: 5K What amount should Northern report as research and development expense in its income statement?

$275,000 Reason: $200,000+$50,000+$20,000+$5,000

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?

Book value of the asset given up less the cash received.

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.

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?

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

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

capitalized

Expenditures needed to get land ready for its intended use should be:

capitalized as part of the cost of land

When assets are exchanged in a nonmonetary exchange and the transaction has commercial substance, either a gain or a loss may be recognized. However, if the transaction lacks commercial substance and no cash is exchanged, a(n) _____ may not be recognized, but a(n) _____ is recognized.

gain; loss

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

goodwill

The future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized are referred to as

goodwill

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.

Which of the following are research and development costs?

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

Western Company showed the following: Property, plant, equipment: Y1: 100K & Y2: 150K Net sales: Y1: 1M & Y2: 1.2M What is the fixed asset turnover for year 2?

9.6 Reason: Net sales/average fixed assets $1,200,000/($100,000 + $150,000/2)

What is the GAAP disclosure requirement for research and development expenses?

As a separate line item on the income statement or in a disclosure note.

James Company acquires Smith Corporation for $10 million. The book value of Smith Corporation's net assets is $7 million, while the fair value of the net assets is $9 million. Goodwill associated with the acquisition is:

$1M Reason: cost of acquisition less fair value of net assets ($10-$9 million)

On January 1, Sonic Corp. begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Sonic had the following expenditures on the project during the year: Jan 1: 100K Apr 1: 100K Nov 1: 150K What are the average accumulated expenditures used to calculate capitalized interest on the project in the current year?

$200,000 Reason: $100,000 x 12/12 = $100,000 $100,000 x 9/12 = $75,000 $150,000 x 2/12 = $25,000 Total: $100,000 + 75,000 + 25,000 = 200,000

Rondo Corp. acquires equipment valued at $170,960 by signing a 4-year noninterest-bearing note payable for $200,000. Calculate the implicit interest rate on the note.

4% Reason: To calculate the implicit interest rate, use the formula $170,960 = $200,000 x PV factor. Solve for the PV factor by $170,960/200,000 = 0.8548. Look at a PV table for four years, and find the factor that most closely matches the PV factor.

Which items qualify for interest capitalization?

Assets built as discrete projects for sale or lease Assets built for a company's own use

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

Successful efforts method

When assets are exchanged and the transaction lacks commercial substance, which of the following occurs?

The asset received is valued at the book value of the asset given.

The costs included in the natural resource account includes

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

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

an expense in the period incurred.

An exchange of assets that has commercial substance is valued at the _____ value of the assets given or received, whichever is more clearly evident, but an exchange that lacks commercial substance is valued at _____ the value of the assets given.

fair; book

Purchased research and development that has received technological feasibility is capitalized as a(n) ______ intangible asset, and purchased in-process R&D that has not reached feasibility is considered a(n) ______ intangible asset.

finite-life; indefinite-life

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

lump-sum

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

Interest capitalization on a self-constructed asset begins when

the first expenditure is made.

Capitalizing interest on a self-constructed asset as a cost to get the asset ready for its intended use is consistent with

the historical cost principle.

Kerry acquires equipment valued at $81,630 by signing a 3-year noninterest-bearing note payable for $100,000. The difference between the $100,000 repayment and the value of the equipment represents

the implicit interest on the note.

If the amount of interest calculated to be capitalized on a self-constructed asset is greater than the amount actually incurred, then

the interest capitalized is limited to the actual interest incurred.

Joy Corp. builds a new office building. The average accumulated expenditures were $2,000,000. Joy borrows $1,500,000 on a construction loan specifically to build the office building. The interest rate on the construction loan is 6%. Joy also has an additional loan outstanding for $3,000,000, with an interest rate of 8%. What is the amount of interest that Joy should capitalize on the self-constructed office building?

$130,000 Reason: ($1,500,000 x 6%) + ($500,000 x 8%) = $130,000

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. Purchase price: $50K Freight & handling: 2K Concrete pad for equipment: 5K Maintenance during year: 3K Shipping insurance: 400

$57,400 Reason: (Purchase price + Fright + Pad for equipment + insurance) ($50,000 + 2,000 + 5,000 + 400)

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

- cost of lawn sprinkler system - cost of sidewalks - cost of driveways

What costs are capitalized as an intangible asset for a franchise?

1. Initial payment for the franchise. 2. Legal costs for the franchise agreement.

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

10 years.

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.

If a company generates its own goodwill through advertising or training, how should these costs be treated?

expense the costs as incurred Reason: Internal generation of goodwill cannot be capitalized and must be expensed.

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

If a company purchases research and development that is technologically feasible in a business acquisition, the

fair value is capitalized as an intangible asset.

The rationale for capitalizing interest on a self-constructed asset is that

interest expense is incurred while getting the asset ready for its intended use and therefore, should be capitalized.

For self-constructed assets, if no specific money is borrowed to construct the asset, but other debt is outstanding,

interest is capitalized because other debt was outstanding.

The FASB requires research and development costs to be expensed because

it is difficult to objectively determine the future benefits.

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

overhead