CH10 orion

In early January 2017, Southland Growers began construction of a new, fully automated citrus processing plant. The plant was finished and ready for use on September 30 of the following year. Southland's total expenditures for construction of the facility were as follows: To finance construction of the facility, Southland took out a $2,200,000, 12% loan on January 2, 2017. This loan was outstanding for the duration of the construction period. The firm also had $8,000,000 in 9% bonds outstanding in both 2017 and 2018. Given these figures, Southland's total weighted-average accumulated expenditures for 2018 are

$2,772,000.

Arlington Corporation began construction of a new building on January 1 and completed construction on December 31 of the same year. The firm's construction expenditures were as follows: No alt text provided for this image On January 1, Arlington borrowed $2,400,000 on a 5-year, 12% note to help finance construction of the building. In addition to this debt, the firm had two other debts that were outstanding for the entirety of the year: a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable. Given these figures, Arlington should charge _______ of interest to expense.

$1,053,585

On March 1, a firm paid $1,800,000 cash to purchase land on which to construct a new facility. Construction began the same day. Total expenditures incurred for construction were as follows: No alt text provided for this image The new facility was finished and ready for use on July 1. To finance the building's construction, the firm borrowed $2,400,000 on March 1 on a 9%, 3-year note payable. Other than the construction note, the firm's only other outstanding debt during the year was a $1 million, 12%, 6-year note payable dated January 1. Given this information, what was the firm's actual interest cost incurred during the year?

$300,000

Arlington Corporation began construction of a new building on January 1 and completed construction on December 31 of the same year. The firm's construction expenditures were as follows: On January 1, Arlington borrowed $2,400,000 on a 5-year, 12% note to help finance construction of the building. In addition to this debt, the firm had two other debts that were outstanding for the entirety of the year: a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable. Given these figures, Arlington's capitalized interest for the year is

$704,415.

On March 1, a firm paid $1,800,000 cash to purchase land on which to construct a new facility. Construction began the same day. Total expenditures incurred for construction were as follows: The new facility was finished and ready for use on July 1. To finance the building's construction, the firm borrowed $2,400,000 on March 1 on a 9%, 3-year note payable. Other than the construction note, the firm's only other outstanding debt during the year was a $1 million, 12%, 6-year note payable dated January 1. If the weighted-average accumulated expenditures for the construction project were $2,900,000, then what amount of interest cost should the firm capitalize for the year?

$92,000

During self-construction of a widget-making machine , JT Engineering incurred the costs shown below. Based on this information and assuming a full-costing approach, what amount of overhead should JT include in the cost of the widget-making machine? Fixed overhead for the year--- $500,000 Portion of fixed overhead that would be allocated to asset if it were normal production--- 25,000 Variable overhead attributable to self-construction A : $25,000. B : $15,000. C : $0 D : $40,000

(25,000+15000) D : $40,000

JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Title fees cost JT $4,320. Architect's fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT's cost of land? A : $578,540 B : $593,940 C : $595,540 D : $549,800

(520,000+ 65,000-15400+4320+4620) A : $578,540

Arlington Corporation began construction of a new building on January 1 and completed construction on December 31 of the same year. The firm's construction expenditures were as follows: No alt text provided for this image On January 1, Arlington borrowed $2,400,000 on a 5-year, 12% note to help finance construction of the building. In addition to this debt, the firm had two other debts that were outstanding for the entirety of the year: a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable. When capitalizing the interest for this project, Arlington should use a weighted-average interest rate of

10.65%.

People who believe that no interest charges should be capitalized during construction typically argue that interest should be considered a A : cost of financing. B : cost of construction. C : part of general overhead. D : part of stockholders' equity.

A : cost of financing.

A firm should write off any capitalized interest cost as a part of A : depreciation over the useful life of the assets involved. B : the expected salvage value of the assets involved at the end of their useful life. C : depreciation over the term of the debt. D : the current salvage value of the assets involved.

A : depreciation over the useful life of the assets involved.

The amount of interest cost capitalized during a period when a building is constructed A : should not exceed the actual interest cost incurred. B : should be debited to the land account and not to the building account. C : may, in some cases, exceed the actual interest cost incurred. D : should be debited to both the land account and the building account.

A : should not exceed the actual interest cost incurred.

Which of the following are considered building costs? Select all that apply. A : securing building permits B : professional fees C : overhead incurred during construction D : removing any old buildings

A : securing building permits B : professional fees C : overhead incurred during construction

Which of the following would be classified as cost of equipment? Select all that apply A : furnishings B : factory equipment C : light fixtures D : fences E : landscaping F : driveways and sidewalks

A furnishings B factory equipment C light fixtures

Which of the following would be included in the cost of manufacturing equipment? Select all that apply. A The freight costs for the equipment B The cost of training the equipment operator C The installation costs associated with the equipment D The purchase price reduced by any discount taken

A, C, D

Which of the following assets is not depreciated and is measured at the lower of its carrying amount or fair value less costs to sell? A : Land improvements. B : A long-lived asset held for sale. C : Intangible assets such as patents. D : Farmland which has had poor crop rotation.

B

Tangible assets differ from intangible assets by the fact that they do not physically become part of a product held for resale. A : True B : False

B : False

The period of time during which a company must capitalize interest related to an asset under construction is commonly referred to as the compounding period. A : True B : False

B : False

A firm began a construction project on January 1. As of September 30 of the same year, the new facility was finished and ready for its intended use. If the firm had a construction expenditure for which it incurred six months' worth of interest costs, when was this expenditure made? A : May 31 B : March 31 C : February 28 D : April 30

B : March 31

What costs must be capitalized when assets are self-constructed? A : Materials and overhead B : Materials, labor, and overhead C : Materials and labor D : Labor and overhead

B : Materials, labor, and overhead

Which of the following is typically included in the Land Improvements account? A : The cost of assuming any liens or mortgages on the property. B : The cost of installing private driveways and parking lots. C : The cost of special assessments for street lights, sewers, and drainage systems. D : The cost of grading, filling, draining, and clearing the land.

B : The cost of installing private driveways and parking lots.

Which of the following would be classified as a land cost? A : professional fees associated with construction of a new building B : demolition of an old building prior to construction of a new building C : materials, labor, and overhead costs incurred in construction of a new building D : building permits necessary for beginning construction of a new building

B : demolition of an old building prior to construction of a new building

If a firm is constructing a building for its own use, then this asset A : only qualifies for interest cost capitalization if it is ready for its intended use. B : qualifies for interest cost capitalization. C : only qualifies for interest cost capitalization if it is currently in use. D : doesn't qualify for interest cost capitalization.

B : qualifies for interest cost capitalization.

In which of the following circumstances would a parcel of land be least likely to experience depreciation? A : land management decisions by a farmer that result in inadequate crop rotation and fertilization B : subdivision of a large tract of land by a developer who plans to build a housing addition C : natural disasters such as fires or droughts that damage or destroy the land or its natural resources D : failure by members of a waterfront community to install structures to prevent soil erosion

B : subdivision of a large tract of land by a developer who plans to build a housing addition

Wick Development purchases a warehouse and all of the furniture, equipment, and tools within it. Wick renovates the warehouse into apartments, which it sells. It also sells off the equipment and tools because it has no use for them. However, Wick retains the furniture for use in its offices. Which of the items included in Wick's purchase is a fixed asset? A : the warehouse B : the furniture C : the equipment D : the tools

B : the furniture

Which of the following purchases by RL Enterprises is best described as an investment? A : the construction of an addition to the existing office space that adds 8,000 square feet to the building B : the purchase of a parcel of land in a heavily populated area with the hope that the land will increase in value C : the installation of trees, plants, sod, and a small pond on the company property to improve its aesthetic appeal D : the cost of installing a streetlight in front of the company's office building to make it easier to enter and exit the parking lot

B : the purchase of a parcel of land in a heavily populated area with the hope that the land will increase in value

Carter and Dwight inherit a large tract of farmland from their father. They split the land in half. Carter continues farming his half and plants corn on it. Dwight develops his half into a subdivision and sells off the lots. In this scenario, _______________ land is a fixed asset and ______ land is inventory.

Carter's, Dwight's

JT Engineering purchased a widget-making machine for $65,000. Sales tax was $650. Other costs incurred were $620 in freight charges, $175 for insurance during shipping, and $1,250 in installation costs. What is the cost of the widget-making machine? A : $65,000 B : $66,270 C : $66,445 D : $67,695

D : $67,695

If a firm could have saved $25,000 in interest costs by not making expenditures for a particular asset, then this $25,000 may be classified as A : accumulated interest. B : preventable interest. C : incurred interest. D : avoidable interest.

D : avoidable interest.

Which of the following is a major characteristic of plant assets? Such assets are A : currently idle. B : Used in the production of a product. C : acquired for resale. D : obtained for operational use.

D : obtained for operational use.

The period of time during which a company must capitalize interest related to an asset under construction is commonly referred to as the compounding period. A : True B : False

False

The period of time during which a company must capitalize interest related to an asset under construction is commonly referred to as the compounding period. You got it wrong : A True This is correct answer : B False

False

Under normal circumstances, land is the only fixed asset that does not incur periodic depreciation charges in future periods. a. True b. False

a. True

On March 1, a firm paid $1,800,000 cash to purchase land on which to construct a new facility. Construction began the same day. Total expenditures incurred for construction were as follows: No alt text provided for this image The new facility was finished and ready for use on July 1. To finance the building's construction, the firm borrowed $2,400,000 on March 1 on a 9%, 3-year note payable. Other than the construction note, the firm's only other outstanding debt during the year was a $1 million, 12%, 6-year note payable dated January 1. Given this information, what were the firm's weighted-average accumulated expenditures on the construction project for the year?

$2,320,000

In early January 2017, Southland Growers began construction of a new, fully automated citrus processing plant. The plant was finished and ready for use on September 30 of the following year. Southland's total expenditures for construction of the facility were as follows: To finance construction of the facility, Southland took out a $2,200,000, 12% loan on January 2, 2017. This loan was outstanding for the duration of the construction period. The firm also had $8,000,000 in 9% bonds outstanding in both 2017 and 2018. Given these figures, how much interest did the firm capitalize for 2018?

$315,480

In early January 2017, Southland Growers began construction of a new, fully automated citrus processing plant. The plant was finished and ready for use on September 30 of the following year. Southland's total expenditures for construction of the facility were as follows: To finance construction of the facility, Southland took out a $2,200,000, 12% loan on January 2, 2017. This loan was outstanding for the duration of the construction period. The firm also had $8,000,000 in 9% bonds outstanding in both 2017 and 2018. Given these figures, Southland's weighted-average accumulated expenditures for 2017 were

$800,000

Andy's Candy purchased equipment for $35,000. Sales tax on the purchase was $3,500. Other costs incurred were freight charges of $940, and installation costs of $1,120. What is the cost of the equipment?

(add all of them) $40,560

JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Titles fees and insurance cost JT $4,320. Architect's fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT's cost of the building? A : $1,528,200 B : $1,549,800 C : $1,548,200 D : $1,521,600

28,200+ 1,600+1,520,000 B : $1,549,800

Arlington Corporation began construction of a new building on January 1 and completed construction on December 31 of the same year. The firm's construction expenditures were as follows: No alt text provided for this image On January 1, Arlington borrowed $2,400,000 on a 5-year, 12% note to help finance construction of the building. In addition to this debt, the firm had two other debts that were outstanding for the entirety of the year: a 10%, 3-year, $4,800,000 note payable and an 11%, 4-year, $9,000,000 note payable. Given these figures, Arlington's weighted-average accumulated expenditures for the year were

6,310,000

MW_Why do many companies assign a pro rata portion of fixed overhead to self-constructed assets? A : Because doing so results in better recognition of costs in the periods benefited. B : Because doing so lowers the historical costs involved in constructing the asset. C : Because doing so understates the initial cost of the asset. D : Because doing so reduces current expenses and overstates income for the current period.

A : Because doing so results in better recognition of costs in the periods benefited.

Which of the following costs is typically depreciated over its estimated life? A : The cost of a private driveway B : Closing costs and recording fees C : The assumption of any liens and mortgages D : Salvage receipts from the demolition of an old building

A : The cost of a private driveway

Which of the following is a characteristic of assets classified as property, plant, or equipment? A : These assets typically yield service over a number of years. B : These assets become part of a product manufactured by the company. C : These assets are tangible (equipment) or intangible (patent). D : These assets can either be acquired for use in operations or for resale.

A : These assets typically yield service over a number of years.

During construction, a firm should capitalize its avoidable interest amount only if that amount is less than its actual interest amount. A : True B : False

A : True

For self-constructed assets, why is it less problematic to allocate costs for materials and direct labor than to allocate costs for overhead? A : because materials and direct labor used in construction can be easily traced using work and material orders, while overhead cannot B : because materials and direct labor payments are pretax expenditures, while overhead is not C : because materials and direct labor receive separate lines on the balance sheet, while overhead does not D : because material and direct labor costs occur only once during the construction process, while overhead occurs throughout

A : because materials and direct labor used in construction can be easily traced using work and material orders, while overhead cannot

If a firm's actual interest cost for the year is $325,000, this amount is the ________ for the year. A : maximum amount of interest the firm may capitalize B : same as the firm's weighted-average accumulated expenditures C : minimum amount of interest the firm may capitalize D : exact amount of interest the firm may capitalize

A : maximum amount of interest the firm may capitalize

RL Enterprises purchases a parcel of land. The previous owners of the land owe both back taxes and a lien on the property. When determining the cost of the land, what must RL include in its calculation? A : the cost of the back taxes and the cost of the lien B : the price paid for the land and the cost of the back taxes C : the price paid for the land

A : the cost of the back taxes and the cost of the lien

A firm started and completed construction of a new plant within the course of a single year. In August of that year, the firm began reporting all interest related to the construction project as an expense. This indicates that A : the facility must have been completed and ready for use as of July 31. B : the facility must have been completed and ready for use as of August 31. C : construction of the facility must have begun on July 31. D : construction of the facility must have begun on August 31.

A : the facility must have been completed and ready for use as of July 31.

Which of the following would be included in the cost of manufacturing equipment? Select all that apply. A : The installation costs associated with the equipment B : The freight costs for the equipment C : The cost of training the equipment operator D : The purchase price reduced by any discount taken

A : The installation costs associated with the equipment B : The freight costs for the equipment D : The purchase price reduced by any discount taken

Clark Industries purchases an unused factory and all of the equipment, vehicles, and tools within the factory. Clark begins production of widgets at the factory using the equipment and tools, but sells the vehicles because it has no use for them. Which of the items included in Clark's purchase is a fixed asset? Select all that apply. A : the tools B : the vehicles C : the equipment D : the factory

A : the tools C : the equipment D : the factory

A firm recently constructed a new facility at a cost of $10 million. Weighted-average accumulated expenditures for the facility were $4 million, actual interest was $400,000, and avoidable interest was $200,000. If the useful life of the facility is 40 years and the expected salvage value is $800,000, then what is the firm's depreciation expense for the first full year? (Assume the firm is using straight-line depreciation.) A : $235,000 B : $240,000 C : $255,000 D : $335,000

A firm should write off capitalized interest cost as part of depreciation over the useful life of the asset. Here, we know the amount of interest to be capitalized by the firm is $200,000, because this amount is lower than the actual interest amount. This means the firm should write off $200,000/40 = $5,000 of capitalized interest cost per year. We also know that the facility depreciates by a total of ($10,000,000 - $800,000)/40 = $230,000 per year. So, if we add the $5,000 of capitalized interest to this amount, we find the firm's depreciation expense for the first full year is $230,000+5,000=$235,000. A : $235,000

JT Engineering purchases a parcel of land for $35,600. In doing so, JT assumes accrued property taxes of $8,000 and liens of $12,000 on the property. What is JT's cost of land for this parcel? A : $55,600 B : $20,000 C : $35,600 D : $43,600

A.

Which of the following assets would be classified as plant assets? Select all that apply. A : machinery B : warehouses C : factories D : tools E : offices F : land

ALL

A firm decides to undertake a construction project on March 1 and makes its first expenditure related to the project on April 1. Thus, the firm should begin to capitalize interest costs related to the project in ________ .

April

For self-constructed assets, how are indirect costs assigned in a full-costing approach? A : No fixed overhead is assigned to the cost of the constructed asset. B : A portion of all overhead is assigned to the construction process. C : Half of all overhead costs are assigned to the construction process and half are assigned to other processes. D : Variable overhead costs for each asset are assigned individually to those assets.

B : A portion of all overhead is assigned to the construction process.

A firm is constructing a new facility for its own use, and it decides to finance the project entirely through a specific new borrowing. The financing was obtained in the first year of the project, and construction expenditures were made at the end of each quarter for the two consecutive years. How should the firm determine the total amount of interest cost to be capitalized for the project? A : It should multiply the interest rate on the borrowing by the total accumulated expenditures for the facility during the two-year construction period. B : It should multiply the interest rate on the borrowing by the weighted-average accumulated expenditures for the facility during the two-year construction period. C : It should multiply the interest rate on the borrowing by the weighted-average accumulated expenditures for the facility during the first year of construction. D : It should multiply the interest rate on the borrowing by the weighted-average accumulated expenditures for the facility during the second year of construction.

B : It should multiply the interest rate on the borrowing by the weighted-average accumulated expenditures for the facility during the two-year construction period

JT Engineering designs and constructs a new widget-making machine for use in its factory. JT allocates overhead to the construction process, just as it does with normal production. Unfortunately, this causes the cost of the machine to exceed that of a similar machine available through an independent producer. How should JT record the excess overhead? Why? A : JT should capitalize it to avoid diminishing the value of the asset to less than its probable fair value. B : JT should record it as a period loss to avoid capitalizing the asset at more than its probable fair value. C : JT should capitalize it to avoid inflating the value of the asset to more than its probable fair value. D : JT should record it as a period loss to avoid capitalizing the asset at less than its probable fair value.

B : JT should record it as a period loss to avoid capitalizing the asset at more than its probable fair value.

Which of the following companies would classify a land purchase as inventory rather than a fixed asset? A : a farmer who plans to grow wheat on the property B : a developer that plans to subdivide and resell the property C : a store that plans to put a parking lot on the property D : a company that plans to build a factory on the property

B : a developer that plans to subdivide and resell the property

Which of the following most accurately defines overhead or burden? A : money paid to the local government for improvements that benefit the company, such as streetlights and drainage systems B : indirect manufacturing costs for power, light, heat, insurance, property taxes, supervisory labor, depreciation of fixed assets, and supplies C : cash or cash equivalent price of obtaining an asset and bringing it to the location and condition necessary for use D : costs attached to all products and assets that the company either manufactures or constructs itself

B : indirect manufacturing costs for power, light, heat, insurance, property taxes, supervisory labor, depreciation of fixed assets, and supplies

A firm completed construction of a new facility on October 31. Beginning November 1, any interest related to the construction project should be A : partially capitalized. B : reported as an expense. C : reported as revenue. D : fully capitalized.

B : reported as an expense.

When valuing property, plant, and equipment, what are historical costs? A : the gains or losses experienced by other companies holding similar assets at the time those assets were sold B : the cash or cash equivalent price of obtaining an asset and bringing it to the location and condition necessary for use C : the combined taxes and other fees paid by the asset's previous owner during the duration of his or her ownership D : the average cost of utilities and upkeep on an asset over the past five years, broken down to a monthly amount

B : the cash or cash equivalent price of obtaining an asset and bringing it to the location and condition necessary for use

Which of the following are considered equipment? Select all that apply. A : warehouses B : tools C : machinery D : furniture

B : tools C : machinery D : furniture

JT Engineering purchased a piece of property for construction of a new factory. There was an existing building on the property, which JT has demolished. How should JT record the cost of this demolition? A : as a depreciation cost B : as a land cost C : as a building cost D : as an equipment cost

B. as a land cost

Wick Development purchases a warehouse and all of the furniture, equipment, and tools within it. Wick renovates the warehouse into apartments, which it sells. It also sells off the equipment and tools because it has no use for them. However, Wick retains the furniture for use in its offices. Which of the items included in Wick's purchase is a fixed asset? A : the equipment B : the tools C : the furniture D : the warehouse

C

On March 1, a firm took out a $2 million construction loan at 8% interest. The firm's only other outstanding debt for the year was a $1 million note payable at 10% interest. If the firm uses an 8% interest rate when calculating its avoidable interest, then it must have had weighted-average accumulated expenditures of A : exactly $1 million. B : exactly $2 million. C : $2 million or less. D : $1 million or more.

C : $2 million or less.

A firm began a construction project on January 1. As of November 30 of the same year, the new facility was finished and ready for its intended use. If the firm had its first construction expenditure of $400,000 on April 30, how many months' worth of interest cost did it incur on this expenditure? A : 8 months B : 10 months C : 7 months D : 9 months

C : 7 months

What is the preferred method for recording the debit for sales tax paid on a machinery purchase? A : As a charge to a miscellaneous tax expense account B : As a charge to an accumulated depreciation account C : As a charge to the machinery account D : As a charge to a separate deferred charge account

C : As a charge to the machinery account

Which of the following describes a commonality of fixed assets and raw materials? A : Both fixed assets and raw materials are considered intangible assets. B : Both fixed assets and raw materials are classified as inventory. C : Both fixed assets and raw materials possess physical substance. D : Both fixed assets and raw materials are not subject to depreciation.

C : Both fixed assets and raw materials possess physical substance.

How are overhead costs related to self-constructed assets accounted for in a full-costing approach? A : By assigning only variable overhead to the asset B : By allocating overhead on the basis of lost production C : By assigning a pro rata portion of fixed overhead to the asset D : By assigning no fixed overhead to the asset

C : By assigning a pro rata portion of fixed overhead to the asset

JT Engineering recently purchased an old factory and the land on which it stands. JT plans to tear down the factory and build a new factory on the site. How should the cost of the old factory be accounted for? A : It should be depreciated over the period from acquisition to the date the factory is torn down. B : It should be capitalized as part of the cost of the new factory. C : It should be capitalized as part of the cost of the land. D : It should be written off as a loss in the year the factory is torn down.

C : It should be capitalized as part of the cost of the land.

JT Engineering installs a fence around its office building. How should JT depreciate the cost of this improvement? A : It should depreciate the cost over the first year of the improvement's life. B : It should depreciate the cost over the estimated life of the office building. C : It should depreciate the cost over the estimated life of the fence. D : It should not depreciate the cost because it is an improvement to the land.

C : It should depreciate the cost over the estimated life of the fence.

In which of the following cases should the firm capitalize interest costs related to its land purchase? A : The firm plans to build a new warehouse facility on the land. B : The firm plans to build a new corporate headquarters on the land. C : The firm does not plan to build on the land but does intend to sell it in smaller pieces as part of a new housing development. D : The firm does not plan on developing the land in any way before selling it to another party.

C : The firm does not plan to build on the land but does intend to sell it in smaller pieces as part of a new housing development.

Will is an inventor who designs a new widget-making machine and patents his design. Anna is a factory owner who purchases one of Will's machines for her widget factory. Which of the assets in this scenario would be considered an intangible asset? A : Anna's inventory of widgets held for resale B : Anna's widget factory C : Will's widget-making machine patent D : Anna's widget-making machine

C : Will's widget-making machine patent

The idea that because indirect overhead is fixed in nature and charging a portion of overhead costs to equipment will reduce current expenses is best described as an argument A : against assigning no fixed overhead to the cost of constructed assets. B : for assigning a portion of variable overhead to the construction process. C : for assigning no fixed overhead to the cost of constructed assets. D : against assigning a portion of variable overhead to the construction process.

C : for assigning no fixed overhead to the cost of constructed assets.

If a firm incurs $250,000 in total interest costs during a given period, it must A : charge the full amount to expense. B : indicate whether it charged the full amount to expense or capitalized the full amount. C : indicate what portion of this amount was charged to expense and what portion was capitalized. D : capitalize the full amount.

C : indicate what portion of this amount was charged to expense and what portion was capitalized.

In June, a firm begins to capitalize interest costs related to construction of a new asset. This tells us that the firm ________ in June. A : first decided to undertake the construction project B : made its last expenditure related to the asset C : made its first expenditure related to the asset D : completed construction of the asset

C : made its first expenditure related to the asset

If a firm capitalizes interest cost related to construction of a new asset, it should write off this cost A : as soon as construction of the asset is complete. B : as soon as construction of the asset begins. C : over the useful life of the asset. D : over the remaining term of the debt.

C : over the useful life of the asset.

Indirect manufacturing costs for power, light, heat, insurance, property taxes, supervisory labor, depreciation of fixed assets, and supplies are commonly referred to as A : pro rata costs. B : speculative costs. C : overhead. D : avoidable costs.

C : overhead.

When a firm is selecting the appropriate interest rate for the portion of weighted-average accumulated expenditures that is less than any amounts borrowed specifically to finance construction of the assets, it should use A : the current prime interest rate as set by the Federal Reserve. B : the weighted average of the interest rates incurred on all of the firm's borrowings. C : the interest rate incurred on the specific borrowings. D : the weighted average of interest rates incurred on all other outstanding debt during the period.

C : the interest rate incurred on the specific borrowings.

Which of the following are classified as a cost of land? 1. Grading, filling, draining, and clearing the land 2. Removing old buildings from the land 3. Special assessments on the land 4. Improvements such as driveways and parking lots A : 1 and 3 but not 2 and 4 B : 1, 2, and 4, but not 3 C : 2 and 4 but not 1 and 3 D : 1, 2, 3, but not 4

D : 1, 2, 3, but not 4

On February 1, a firm took out a $5,000,000 construction loan at 10% interest. The firm's only other outstanding debt for the year was a $4,000,000 note payable at 11% interest. If the firm has weighted-average accumulated expenditures of $4,000,000 for the year, what rate should it use when calculating its avoidable interest? A : 11%. B : 10.75% C : 10.5% D : 10%

D : 10%

Which of the following best describes the major argument for using a full-costing approach with constructed assets? A : Failure to allocate overhead costs overstates the initial cost of the asset and results in an inaccurate future allocation. B : Failure to allocate overhead costs understates income of the current period. C : Failure to allocate overhead costs overstates current expenses. D : Failure to allocate overhead costs understates the initial cost of the asset and results in an inaccurate future allocation.

D : Failure to allocate overhead costs understates the initial cost of the asset and results in an inaccurate future allocation.

In order to be consistent with the historical cost principle, how must a company that self-constructs an asset allocate its overhead costs? A : It must allocate them on an opportunity cost basis. B : It must allocate them on the basis of lost production. C : It must eliminate them completely from the cost of the asset. D : It must allocate them on a pro rata basis between the asset and normal operations.

D : It must allocate them on a pro rata basis between the asset and normal operations.

JT Engineering purchases two adjacent tracts of land. On Tract A, JT builds a new office building. JT does not plan to build on Tract B, but to hold on to the land and see if the price increases. What is the best way for JT to classify the Tract B land? Why? A : It should classify the land as a special assessment because JT is in the process of assessing how it will use the land. B : It should classify the land as part of property, plant, and equipment because it is a fixed asset. C : It should classify the land as inventory because it is holding on to the land with the intent of resale. D : It should classify the land as an investment because JT is using the land for speculative purposes.

D : It should classify the land as an investment because JT is using the land for speculative purposes.

RL enterprises designs and constructs a new gadget-making machine for use in its factory. The overhead for the construction project is recorded as a period loss rather than being capitalized for fear that doing so would cause the machine to be capitalized at more than its probable fair value. Based on this, which of the following assumptions can you make? A : The allocated overhead caused the cost of the machine to exceed the amount budgeted for construction of the machine. B : The allocated overhead caused the cost of the machine to fall below the cost of similar machines available for purchase on the market. C : The allocated overhead caused the cost of the machine to fall below the amount budgeted for construction of the machine. D : The allocated overhead caused the cost of the machine to exceed the cost of similar machines available for purchase on the market.

D : The allocated overhead caused the cost of the machine to exceed the cost of similar machines available for purchase on the market.

How should variable overhead costs incurred to self-construct an asset be recorded? A : They should be written off as a loss for the period. B : They should be recorded as a one-time special assessment in a separate asset account. C : They should be assigned to the cost of inventory production. D : They should be included in the cost of the asset.

D : They should be included in the cost of the asset.

How should the costs associated with furnishings be recorded? A : as a building cost B : as a historical cost C : as a land cost D : as an equipment cost

D : as an equipment cost

The capitalization period is the period of time during which a company must A : cease all expenditures related to an asset under construction. B : capitalize principal related to an asset under construction. C : cease activities intended to get an asset ready for its intended use. D : capitalize interest related to an asset under construction.

D : capitalize interest related to an asset under construction.

If the nonoperating section of a firm's income statement indicates the firm's total interest cost and its amount of interest capitalized, then we can use this information to determine A : how much the firm borrowed during the year to finance construction of one or more assets. B : the firm's weighted-average interest rate for the year. C : the firm's weighted-average accumulated expenditures for the year. D : how much of the total interest cost was charged to expense.

D : how much of the total interest cost was charged to expense.

A firm cannot begin to capitalize the interest on a qualifying asset until it determines that A : the asset is fully ready for its intended use. B : the firm's avoidable interest amount is lower than its actual interest amount. C : the interest rate is equal to or greater than the firm's cost of capital. D : interest cost is actually being incurred.

D : interest cost is actually being incurred.

If a firm earns interest income on any excess funds borrowed to pay for construction of a new asset, it should A : offset this income against the principal amount of the construction loan. B : offset this income against the interest cost incurred during construction. C : recognize this income as a liability for the current period. D : recognize this income as revenue for the current period.

D : recognize this income as revenue for the current period.

If a firm purchases land on which it intends to build a new plant, any interest costs related to that land A : should be capitalized during the period of construction as part of the cost of the land. B : should be capitalized prior to the period of construction as part of the cost of the land. C : should be capitalized prior to the period of construction as part of the cost of the plant. D : should be capitalized during the period of construction as part of the cost of the plant.

D : should be capitalized during the period of construction as part of the cost of the plant.

After several months of construction, a company's new manufacturing facility is complete and ready for use. At this point, the company should A : determine what rate to use when capitalizing interest related to the construction. B : begin capitalizing interest related to the construction. C : determine whether its avoidable interest related to the construction was less than its actual interest related to the construction. D : stop capitalizing interest related to the construction.

D : stop capitalizing interest related to the construction.

A firm incurs interest charges when financing the construction of property, plant, and equipment. If the firm opts not to capitalize any of these charges during construction, then it is not acting in accordance with GAAP.

Is not

The depreciation amount listed for an asset________ include a write-off of capitalized interest related to the asset's financing.

MAY

What is the primary difference between fixed assets and raw materials? a. Raw materials physically become part of a product that is resold, while fixed assets do not. b. Raw materials represent assets used in normal business operations, while fixed assets do not. C : Raw materials are subject to depreciation, while fixed assets are not. D : Raw materials are not classified as inventory, while fixed assets are classified that way.

a. Raw materials physically become part of a product that is resold, while fixed assets do not.

Which of the following may be considered plant assets? a. small tools. b. Land held for possible use as a future plant site c. Deposits on machinery not yet received d. Idle equipment awaiting sale

a. Small tools

Land Brokers Ltd is a company that purchases and sells tracts of land. It currently has four pieces of land in its inventory. Which of these tracts is likely to experience the least amount of deprecation? A : a piece of land located in an area of severe drought B : a piece of farmland upon which crops have not been properly rotated C : a piece of waterfront land with an erosion prevention solution in place D : a piece of forest that has recently experienced a fire

c. a piece of waterfront land with an erosion prevention solution in place

JT Engineering recently opened a new factory in the town of Westport. After purchasing the land for the factory and constructing the factory, JT purchased much of its equipment from other companies in Westport, generating a lot of goodwill among the residents of the town. Which of the assets in this scenario would be included in the buildings account? a. the goodwill created by the factory b. the equipment within the factory c. the factory itself d. the land upon which the factory built

c. the factory itself

A company _____ capitalize the interest costs associated with a land purchase if it has the intention of developing that land for a particular use.

can

Under GAAP, when a firm is accounting for interest costs incurred during construction, the amount of interest to capitalize is limited to the _______ of actual interest cost incurred during the period or avoidable interest.

lower

Individuals who believe that interest should be considered a cost of financing usually _______ the capitalization of interest charges during construction.

oppose

A firm ______ capitalize the interest costs associated with assets that require a period of time to get them ready for their intended use.

should

According to GAAP, when a firm capitalizes interest during construction of an asset, it ____ impute the cost of stock financing.

should not

If a firm purchases a piece of land with the intent of selling it as is and as soon as possible, then the firm _____capitalize interest costs related to the land purchase.

should not

In general, when determining the amount of interest to be capitalized as part of the construction cost assets, a firm _____ offset interest revenue against interest cost.

should not

According to proponents of a full-costing approach for constructed assets, failure to allocate overhead costs ______ the initial cost of the asset and results in an inaccurate future allocation.

understates