Acc 321 ch 10

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

net sales

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.

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.

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.

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

The book value of the asset given up

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

True

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

True

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.)

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

acquisition cost. exploration costs. restoration costs. development costs

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

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

appraisal

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

commercial

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

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

depletion

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

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

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

original cost

Interest capitalization on a self-constructed asset begins when

the first expenditure is made.

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.

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

the related asset.

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

present value of estimated future cash flows

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 Reason: (purchase price + cost of removing old building + title insurance + cost of grading + delinquent property taxes) $100,000 + $7,000 + $1,000 + $4,000 + $2,000 = $114,000

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

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

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:

$1 million

Western Company incurred the following costs during the year related to the creation of a new product: Salaries of researchers $100,000 Depreciation on R&D equipment $30,000 Utilities at R&D facility $5,000 Patent filing and legal costs $8,000 Payment for services in connection with R&D activities $10,000 Adaptation costs for specific needs of a customer $2,000 What amount should Western report as research and development expense in its income statement?

$145,000 ($100,000 + 30,000 + 5,000 + 8,000 + 2,000)

Northern Company incurred the following costs during the year related to the creation of a new product: Salaries Depreciation on R&D equipment Quality control during commercial production Patent filing and legal costs Payment for services in connection with R&D activities Testing of preproduction prototypes and models $200.000 $50,000 $10,000 $8.000 $20,000 $5,000 What amount should Northern report as research and development expense in its income statement?

$275,000

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

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 $50,000 Freight and handling 2,000 Concrete pad for equipment 5,000 Maintenance during year 3,000 Shipping insurance 400

$57,400

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

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

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

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

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

-Initial payment for the franchise -Legal costs for the franchise agreement

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

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

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

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 items qualify for interest capitalization?

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

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.

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

Filing and legal costs for a patent.

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

Donated assets are valued at fair value under

IFRS and U.S. GAAP

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

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

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

Incurred

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

Legal fees to obtain title Realtor commissions Remodeling building

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

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

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

10 years

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.

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

fair value

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

Expense costs as incurred

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 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, equipment, intangible assets

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

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:

$2 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: January 1, 2017 $100,000 April 1, 2017 100,000 November 1, 2017 150,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017?

$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

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 $100,000 Freight and handling 8,000 Trial runs 6,000 Maintenance during year 3,000 Employee training during year 4,000

114000

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

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 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

Assets that do not qualify for interest capitalization are

inventories routinely manufactured.

The FASB requires research and development costs to be expensed because

it is difficult to objectively determine the future benefits.

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

less the fair value of net assets acquired.

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

lump sum purchase

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: January 1, 2017 $200,000 July 1, 2017 $600,000 December 1, 2017 $120,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017?

$510,000

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?

(1) Credit to asset retirement liability of $50,000. (2) Credit to cash $150,000 (3) Debit to mining assets of $200,000

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

(1) the asset is substantially complete and ready for use (2) interest costs are no longer being 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

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

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%.

Bolt Corp. acquires equipment valued at $81,630 by signing a 3-year noninterest- bearing note payable for $100,000. Calculate the implicit interest rate on the note. (Reference present value tables at end of textbook to solve this problem.)

7%

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%

Western Company showed the following: PP&E: $100,000 (Yr. 1) $150,000 (Yr. 2) Net Sales: $1,000,000 (Yr. 1) $1,200,000 (Yr. 2) What is the fixed asset turnover for year 2?

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

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

Cash

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

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

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 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?

DR Building $5,000,000 CR Cash $4,500,000 CR Revenue-donation $500,000

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

False

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

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

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.

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.

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

capitalized as part of the cost of the land.

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

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 or expensed

U.S. GAP and IFS treat research costs as a(n) ___ whereas for IFS, development costs are treated as a(n) ___.

expense; intangible asset

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

expensed as incurred

How does a company measure an asset retirement obligation?

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.

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(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 items should always be capitalized in the cost of equipment?

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

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

future cash flows

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

goodwill

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

historical cost principle

In accounting terminology, the life of a trademark is considered

indefinite

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

intangible asset

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

interest charges and allocation of overhead.

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.

The distinction between land and land improvements is that:

land has an indefinite life

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

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

legal fees and filing fees

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

long-lived revenue-producing

Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchase as a __ purchase

lump sum

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

An asset retirement obligation must be recognized

only if it is a legal obligation.

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

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

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

overhead

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

Which of the following items are intangible assets?

patents, trademarks, copy right

Which of the following are research and development costs?

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

Berner Mining Company estimates that after it completes extraction of valuable metals from a tract of land, $245,000 will be necessary to return the land to its original condition. This cost is considered a(n)

restoration cost

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

restoration costs

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.

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

revenue

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

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

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.

Which of the following are classified as natural resources?

timber tracts and mineral deposits

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