ACCT 3120 Main points Midterm 1

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

present value of estimated future cash flows

For a manufacturing company, what type of cost is factory depreciation expense?

product 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

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

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

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

1. Expense periodic payments as incurred. 2. Amortize the cost of the franchise over its life. 3. Capitalize the cost of the franchise.

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

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

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

1. Purchase price 2. freight to deliver the equipment to its location 3. installation and testing of equipment 4. insurance on equipment during shipping

Which of the following items should be considered when choosing an allocation method for a long-term asset?

1. a pattern in which the services are obtained from its use 2. a systematic and rational allocation method

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

1. acquisition cost. 2. restoration costs. 3. exploration costs. 4. development costs.

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

1. filing fees 2. legal fees

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

1. grading the land 2. title insurance 3. costs to remove an old building 4. legal fees to secure title

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

1. intangible assets 2. property, plant, and equipment

U.S. GAAP provides that an intangible should be recognized apart from goodwill when

1. it can be separated from the acquired entity. 2. it is an identifiable asset. 3. it arises from contractual or legal rights.

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

1. legal fees to establish title 2. freight to deliver the equipment 3. installation and testing of equipment 4. sales tax

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

1. purchase price 2. legal fees 3. filing fees

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

1. realtor commissions 2. legal fees to obtain title 3. remodeling building

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

1. set-up cost 2. insurance during transit 3. freight-in

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. Credit to cash $150,000 Debit to mining assets of $200,000.

True or false: Losses on asset retirement obligations are recorded if actual restoration costs are higher than the estimated liability; however, gains on asset retirement obligations are not allowed.

False

Property taxes

are not apart of any capitalization

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 recently issued ASU on revenue recognition specifies that the costs of obtaining and fulfilling contracts should be capitalized as intangible assets

if the contract term exceeds one year

Under what circumstances is depreciation included in inventory?

in a manufacturing environment

The distinction between land and land improvements is that:

land has an indefinite life

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

less the fair value of net assets acquired.

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

long-lived and revenue producing

Capital budgeting decisions are made by estimating future cash flows and using which model?

net present value models

An asset retirement obligation must be recognized

only if it is a legal obligation

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

original

Which of the following are acceptable choices for determining when to recognize an asset retirement obligation?

1. At the inception of the asset's life. 2. Over the asset's life as 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.

In a business acquisition, if the fair value of net assets exceed the fair value of the consideration exchanged, a bargain purchase occurs. This bargain purchase is recorded as

a gain on the income statement in the year of the acquisition.

The difference between an asset retirement liability and the probability weighted expected cash flows is recognized as _________ expense each period.

accretion

A depreciation approach that allocates an asset's cost base using a measure of input or output is referred to as a(n) ____________ method.

activity-based

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

asset retirement

An asset is acquired by signing a non interest-bearing note payable. The interest rate on the note is unknown; however, the fair value of the asset is available from price lists and previous purchases. How should the asset be valued?

at the fair value of the asset

Consistent with the new guidance on revenue recognition, the incremental costs to obtain and fulfill a long-term contract should be

capitalized as an intangible asset

Costs of an asset that produce future benefits are ______, but costs that produce benefits only in the current period are ______.

capitalized; expensed

Using the net present value model, management would acquire an asset if the present value of the future net _______ ________ exceeds the acquisition price of the asset.

cash flows

Krasel Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The asset received had a fair value of $50,000 and a book value of $45,000. The entry to record the transaction includes

credit to equipment-old for $90,000. debit to equipment-new for $50,000. credit to gain on exchange of asset for $30,000. debit to accumulated depreciation $70,000

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?

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

The allocation of a natural resource to the periods extracted is referred to as

depletion expense

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

expense the costs as incurred

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

expensed

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

expensed as incurred

Asset retirement obligations are recorded as a liability and measured 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.

Consistent with IAS No. 20, government grants are recognized in income

over a period of time

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

patent; twenty

If the asset retirement obligation does not equal the restoration costs at the end of an asset's life, how is this difference disclosed?

As a gain or loss on the retirement of the asset in current earnings.

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

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

the related asset

In a lump-sum purchase of assets, the total acquisition cost is allocated to the individual assets by multiplying the lump-sum purchase price times

the relative fair value percentages of each asset.

Goodwill may only be recognized

when another company is acquired