Chapter 10: Property, Plant, and Equipment & Intangible Assets: Acquistion

Which of the following are acceptable methods of disclosing R&D expenses? (Select all that apply.)

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

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

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

Expense the costs as incurred.

Wall Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The asset received had a fair value of $80,000 and a book value of $65,000. The entry to record the transaction includes (Select all that apply.)

a debit to equipment-new for $80,000. a credit to gain on exchange of asset for $40,000. a credit to equipment-old for $100,000. a debit to accumulated depreciation for $60,000.

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

asset retirement

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

insurance during transit freight-in set-up cost

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

interest charges and allocation of overhead.

Value of equipment=

land+cash

Which of the following costs are capitalized as an asset for an internally developed patent? (Select all that apply.)

legal fees filing fees

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

less the fair value of net assets acquired.

Capitalized costs include

sales tax, installation, and freight not insurance

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

property, plant, and equipment intangible assets

Answer Mode Multiple Choice QuestionYour Answer incorrect 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

$145,000 Reason: $100,000+$30,000+$5,000+$10,000

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

$224,000 Reason: $200,000 + $8,000 + $14,000 + $2,000 = $224,000

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?

44000 Reason: ($600,000 x 5%)+ ($200,000 x 7%) = $44,000

Abbott exchanges land in a transaction that lacks commercial substance. The net book value of the land exchanged is $50,000. In exchange, Abbott receives land with a fair value of $60,000 and $20,000 in cash. What is the gain that Abbott should recognize?

7500 Reason: Part of the transaction is a monetary transaction, and a partial gain may be recognized. The total gain is $80,000 assets received less $50,000 book value given = $30,000 total gain. However, the gain recognized is calculated as: $20,000 cash received/($60,000 + 20,000) = 25% x $30,000 gain = $7,500 gain recognized.

The cost of natural resources includes which of the following?

Acquisition cost for the use of land. Restoration costs at the end of extraction. Exploration costs before production begins.

Which of the following statements describe the accounting rules for a franchise agreement? (Select all that apply.)

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

An asset is acquired by signing a noninterest-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.

Recording exchange of equipment and land

Debit equipment for fair value Credit land old for book value Credit cash paid Credit gain on transaction

Assets that do not qualify for interest capitalization are

Inventories routinely manufactured

Which of the following are exceptions to expensing research and development costs and should instead be capitalized? (Select all that apply.)

R&D purchased in a business acquisition Technologically feasible software development costs R&D performed for sale to others

The equipment has a seven-year life and will be used for a number of research projects. Depreciation for 2024 is $120,000. Required: Calculate the amount of research and development expense that Delaware should report in its 2024 income statement.

The patent filing and legal costs are capitalized as the cost of the patent. The salaries, wages, and supplies for R&D performed for another company are included as inventory and expensed as cost of goods sold using either the completed contract or percentage-of-completion method.

Capitalizing Costs

To record costs as an asset or part of an asset, not an expense.

The difference between an asset retirement liability and the probability weighted expected cash flows is recognized as ]________] expense each period. (Enter only one word.)

accretion

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.

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

capitalized; expensed

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? (Select all that apply.)

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

Smith company acquires equipment by signing a noninterest-bearing note payable requiring the future payment of $20,000. The present value of the note payable is $15,000. Assuming Smith uses a contra account, Smith should record (Select all that apply.)

debit discount on note payable $5,000 debit machine $15,000 credit note payable $20,000

The costs included in the natural resource account includes (Select all that apply.)

development costs. exploration costs. acquisition costs. restoration costs.

Revenue is recorded when

donations have been given

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

expensed as incurred

If a company purchases research and development that is technologically feasible in a business acquisition, the

fair value is capitalized as an intangible asset.

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

fair value.

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

A company that performs research and development activities for other companies under contract should capitalize the costs related to research and development in the

inventory account.

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

net sales

An asset retirement obligation must be recognized

only if it is a legal obligation.

Goodwill Calculation

paid for the company - fair market value of net assets (assets - liabilities) = goodwill

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

present value of estimated future cash flows

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.

The interest capitalization period begins with the first expenditure and ends when which of the following occur? (Select all that apply.)

the asset is substantially complete and ready for use interest costs are no longer being incurred

Interest capitalization on a self-constructed asset begins when

the first expenditure is made.

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? (Select all that apply.)

the probabilities of cash flows the expected cash flows

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.