Smartbook Ch 10
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
