Chapter 10

Which of the following items should be capitalized in the cost of equipment? (Select all that apply.)

-Purchase price -freight to deliver the equipment to its location -insurance on equipment during shipping -installation and testing of equipment -legal fees to establish title -sales tax

Accounting for land improvements requires that the costs of land improvements are (Select all that apply.)

-capitalized. -depreciated or amortized over the periods benefited.

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land? (Select all that apply.)

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

Which of the following costs should be capitalized in the costs of acquiring a building? (Select all that apply.)

-realtor commissions -legal fees to obtain title -remodeling building

Which of the following items should always be capitalized in the cost of equipment? (Select all that apply.)

-sales tax -freight to deliver the equipment -legal fees to establish title -installation and testing of equipment -purchase price -insurance on equipment during shipping

Indicate which costs would be capitalized as part of the cost of manufacturing equipment. (Select all that apply.)

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

Calculation of the amount of interest capitalized 3 steps :

1. Determine the weighted-average accumulating expenditures 2. determine interest to be capitalized for the weighted-average accumulated expenditures 3. Compare calculated interest with the actual interest incurred

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.

Construction began January 1, Year 1 Construction completed June 30, Year 2 Expenditures : January 1, Year 1 = $500,000 + March 31, Year 1 = $400,000 + September 30, Year 1 = $600,000 = Accumulated expenditure at December 31, Year 1 = $1,500,000 Janaury 31, Year 2 = $600,000 April 30, Year 2 = $300,000 On January 1, the company obtained a $1 million construction loan with an 8% interest rate. The loan was outstanding during the entire construction period. Calculate capitalized interest.

Step 1: weighted-average accumulated expenditures Jan 1, Y1 -- 500,000 * 12/12 = $500,000 + Mar 31, Y1 -- 400,000 * 9/12 = $300,000 + Sept 30, Y1 -- 600,000 * 3/12 = $150,000 Total = $950,000 < $1,500,000 Step 2: $950,000 * 0.08 = $76,000 $76,000 + $1,500,000 = $1,576,000 which now includes the interest capitalization Step 3: any interest cost incurred in excess of the $76,000 is expensed

nonmonetary exchange

a company acquires an asset by exchanging another set with the seller rather than paying cash.

when an asset given has fair value > book value then . . .

a gain situation is present, but the gain can only be recognized only if there is a commercial substance this requirement prevents a company from exchanging its asset when its fair value > their book value for the sole purpose of recognizing gain

cost of self-constructed assets include

actual (or implicit) interest incurred during construction

cost of self-constructed asset

all costs necessary to get asset ready for its intended use

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

allocation of overhead. treatment of interest charges.

interest relating to construction expenditures incurred during capitalization period

amount of interest capitalized

Obligations associated with the disposition of property, plant, equipment, and natural resources are called ___________ ______________obligations. (Enter one word per blank.)

asset retirement

self-constructed assets

assets constructed by a company rather than purchased

capitalized interest when there is no construction loan =

average accumulated expenditures * weighted-average rate on other outstanding debt

how is a weighted-average determined?

by time-weighting the expenditures by the number of months from their incurrence to end of construction period

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

capitalized as part of the cost of land

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

capitlalized

gain (loss) has no effect on the amount of . . .

cash given or received

old equipment book value =

cost less accumulated depreciation

record journal entry: old equipment book value = $100,000 old equipment cost = $500,000 old equipment depreciation = $400,000 old equipment fair value = $75,000 new equipment additional cash = $430,000

debit : Equipment -- new $505,000 = (fair value + cash) debit : accumulated depreciation -- old $400,000 debit : Loss on exchange of assets = $25,000 = (fair value - book value) credit : equipment -- old $500,000 credit : cash $430,000

record the journal entry: old equipment book value = $100,000 old equipment cost = $500,000 old equipment depreciation = $400,000 old equipment fair value = $150,000 new equipment additional cash = $430,000

debit : Equipment -- new $580,000 = (fair value + cash) debit : accumulated depreciation -- old $400,000 credit : equipment -- old $500,000 credit : cash $430,000 credit : gain 50,000 = (fair value - book value)

record journal entry: old land book value = $2,500,000 old land fair value = $4,500,000 new land additional cash = $500,000 the exchange lacks commericial substance

debit : land -- new $3,000,000 = (book value + cash) credit : land -- old $2,500,000 credit : cash -- $500,000

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

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

Accounting for land improvements requires that the land improvements are capitalized and then ________ over periods benefited by their use. (Enter only one word.)

depreciated or expensed

unless expenditures are made at the beginning of the construction period, it is necessary to

determine average amount outstanding during the period

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

Expenditures relating to a search for natural resources are referred to as

exploration 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

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

fair value

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

fair value

new equipment =

fair value + cash paid as part of exchange

gain ( loss ) =

fair value of asset given - book value of asset given

cash given or received equalizes the . . .

fair value of assets exchanged

if nonmonetary exchange lacks commercial substance and would otherwise result in a loss, use . . .

fair value of the asset given up +/- cash given or received

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

fair value of the debt or equity securities given.

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

future cash flows

nonmonetary exchange is considered to have commerical substance if . . .

future cash flows will change as a result of the exchange most exchanges are for business reasons

you can record asset received at fair value based on the fair value of the assets

given up or received plus minus any cash exchange

GAAP states interest is NOT capitalized during the construction period for:

inventories routinely manufactured in large quantities on a repetitive basis or assets that already are in use or are ready for their intended use

When assets are purchased in a group for a single sum, it is referred to as a

lump-sum purchase

weighted-average accumulating expenditure =

multiplying the actual expenditures by the portion of the year outstanding

interest to be capitalized for the weighted-average accumulated expenditure =

multiplying the weighted-average accumulating expenditure by the interest rate and subtracting the total from the accumulated expenditures at the end of year 1

______ ______ 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

when getting a self-constructed asset ready for use, interest is a

necessary cost

basic steps in recording nonmonetary asset exchanges:

step 1: record the new asset at fair value step 2: remove the book value of the nonmonetary asset given step 3: record any cash received or paid step 4: record any gain or loss

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.

if fair value cannot be determined, the company will use . . .

the book value of the asset given up +/- cash given or received and no gain or loss will be recognized on the exchange

A gain or loss is recognized for the difference between the fair value and

the book value of the asset given up.

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land? (Select all that apply.)

title insurance costs to remove an old building legal fees to secure title grading the land

average accumulated expenditure =

total accumulated expenditure incurred evenly throughout the period / 2

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

if expenditures are not incurred evenly throughout the period, then a

weighted-average is determined

fair value of asset given is required except:

when fair value can't be determined or the exchange lacks commercial substance

interest capitalization period for self-constructed products ends when

when the asset is complete/ready for use or when interest costs are no longer incurred

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.

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

Real estate commissions relating to purchase of building

interest capitalization period for self-constructed products starts with

Year 1 Q1 the first expenditure of materials, labor, or overhead

nonmonetary exchange lacking commercial substance loss is calculated by

book value of asset given up - fair value of asset given up

Interest Capitalization funds do not actually need to be

borrowed for this specific purpose only that the company does have outstanding debt

financing is required during construction period in a

self-constructed asset

copyright

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

interest not capitalized during the construction period is . . .

expensed as incurred

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

goodwill

An asset representing the value of a company over and above its identifiable tangible and intangible assets is referred to as

goodwill

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

In accounting terminology, the life of a trademark is considered

indefinite

The distinction between land and land improvements is that:

land has an indefinite life

amount of interest capitalized is

only the portion of interest cost incurred during the construction period that could have been avoided if expenditures for the asset had not been made

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

patent

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

patent

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.

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

property, plant, and equipment intangible assets

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

restoration costs

From a financial reporting perspective, property, plant, and equipment and intangible assets exhibit the following characteristics (Select all that apply.)

revenue-producing and long-lived assets

Company did not obtain a loan. long-term notes = $2 million and $4 million interest rates = 6% and 12% weighted average accumulating expenditure = $960,000 both notes were outstanding during the entire construction period. Calculate capitalized interest

$2,000,000 * 0.06 = $120,000 $4,000,000 * .12 = $480,000 2,000,000 + 4,000,000 = $6,000,000 120,000 + 480,000 = $600,000 weighted avg rate = 600,000/6,000,000 = 10% interest capitalized for year 1 = 960,000 * 0.10 = $95,000

What is the gain (loss) recognized on the transaction? old asset book value = $260,000 old asset original cost = $500,000 old asset fair value = $300,000 new asset additional cash = $100,000

$40,000 gain

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.

franchise

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.

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.

GAAP states interest is capitalized during the construction period for:

assets built for a company's own use and assets constructed as discrete projects for sale or lease

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

development costs