Chapter 10 SG

(L.O. 1) A building owned by a corporation is always classified as property, plant and equipment.

FALSE

Major repairs

Expenditures made to maintain plant assets whereby the expenditures benefit more than one year or one operating cycle, whichever is longer.

Additions

Expenditures on assets which increase or extend them.

Improvements

Expenditures that substitute a better asset for an existing asset.

(L.O. 2) Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant, and equipment? A. Capitalize only the actual interest costs incurred during construction. B. Charge construction with all costs of funds employed, whether identifiable or not. C. Capitalize no interest during construction. D. Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being constructed.

A

Revenue expenditure

An expenditure on an asset whereby (1) the useful life of the asset does not increase, (2) the quantity of units produced from the asset does not increase, and (3) the quality of the units produced is not enhanced.

Capital expenditure

An expenditure on an asset whereby (1) the useful life of the asset is increased, (2) the quantity of units produced from the asset is increased, or (3) the quality of the units produced is enhanced.

Self-constructed assets

Assets constructed by a company rather than purchased.

Property, plant, and equipment

Assets that (1) are acquired for use in operations and not for resale, (2) are longterm in nature and usually subject to depreciation, and (3) possess physical substance.

(L.O. 1) Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except: A. at the date of acquisition, cost reflects fair value. B. property, plant, and equipment items are always acquired at their original historical cost. C. historical cost involves actual transactions and, as such, is the most reliable basis. D. gains and losses should not be anticipated but should be recognized when the asset is sold.

B

(L.O. 1) Stephanie Theater Corporation recently purchased the Whitus Theater and the land on which it is located. Stephanie plans to raze the building immediately and build a new modern theater on the site. The cost to raze the Whitus Theater should be: A. written off as a loss in the year the theater is razed. B. capitalized as part of the cost of land. C. depreciated over the period from the date of acquisition to the date the theater is to be razed. D. capitalized as part of the cost of the new theater.

B

(L.O. 2) If land is purchased as a site for a structure (such as a plant site), interest costs capitalized during the period of construction are part of the cost of the: Plant Land A. Yes Yes B. Yes No C. No No D. No Yes

B

(L.O. 2) On January 1, 2020, Pastorello, Inc. signed a contract to have MCL construct a major plant facility at a cost of $5,000,000. It was estimated that it would take two years to complete the project. In addition, Pastorello financed the construction costs on January 1, 2020 by borrowing $5,000,000 at an interest rate of 9%. During 2020 Pastorello made deposit and progress payments totaling $2,000,000 under the contract; the average amount of accumulated expenditures was $750,000 for the year. The excess borrowed funds were invested in shortterm securities, from which Pastorello realized investment income of $300,000. What amount should Pastorello report as capitalized interest at December 31, 2020? A. $ 40,500 B. $ 67,500 C. $180,000 D. $450,000

B

(L.O. 1) On January 15, 2020, Rudek Corporation purchased a parcel of land as a factory site for $100,000. An old building on the property was demolished, and construction began on a new building which was completed on October 18, 2020. Costs incurred during this period are listed below: Demolition of old building $ 6,000 Architect's fees 15,000 Legal fees for title investigation and purchase contract 5,000 Construction costs 600,000 (Salvaged materials resulting from demolition were sold for $3,000.) Thorne should record the cost of the land and new building respectively as: Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment 10 - 15 A. $100,000 and $623,000 B. $105,000 and $618,000 C. $108,000 and $615,000 D. $111,000 and $615,000

C

(L.O. 1) Which of the following is not a necessary characteristic for an item to be classified as property, plant, and equipment? A. Usually subject to depreciation. B. Characterized by physical substance. C. Can be used in operations for at least 5 years. D. Not acquired for resale.

C

L.O. 2) Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? A. Interest cost is being incurred. B. Expenditures for the assets have been made. C. The interest rate is equal to or greater than the company's cost of capital. D. Activities that are necessary to get the asset ready for its intended use are in progress.

C

(L.O. 1) To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be: A. allocated on the basis of lost production. B. eliminated completely from the cost of the asset. C. allocated on an opportunity cost basis. D. allocated on a pro rata basis between the asset and normal operations.

D

(L.O. 2) The capitalization of interest costs is justified as being necessary in order to fulfill the: A. Conservatism concept. B. Economic entity assumption. C. Revenue recognition principle. D. Historical cost principle.

D

(L.O. 4) An expenditure made in connection with a machine being used by an enterprise should be: A. expensed immediately if it merely extends the useful life but does not improve the quality. B. expensed immediately if it merely improves the quality but does not extend the useful life. C. capitalized if it maintains the machine in normal operating condition. D. capitalized if it increases the quantity of units produced by the machine.

D

Ordinary repairs

Expenditures made to maintain plant assets in operating condition.

(L.O. 1) The cost of items classified as property, plant, and equipment should include all expenditures related to the asset incurred during the first three months of the asset's useful life.

FALSE

(L.O. 1) When land has been purchased for the purpose of constructing a new building, all costs incurred in connection with preparing the land for excavation are considered building costs.

FALSE

(L.O. 2) Land that is not being developed qualifies for interest capitalization.

FALSE

(L.O. 2) The amount of interest to be capitalized is the higher of actual interest cost incurred during the period or avoidable interest.

FALSE

(L.O. 2) The interest costs on funds used to acquire an asset should not be capitalized even if a significant period of time is required to bring the asset to a condition or location necessary for its intended use.

FALSE

(L.O. 4) Once an asset has been placed into productive use, the major criterion used to determine whether an expenditure should be capitalized or expensed is the significance of that expenditure in relation to the original cost.

FALSE

(L.O. 1) If the allocation of overhead to self-constructed assets results in an asset cost that is greater than the cost that would be charged by an independent producer, the excess overhead should be recorded as a period loss.

TRUE

(L.O. 1) The cash or cash equivalent price of items classified as property, plant and equipment best measures the value of the asset on the date of acquisition.

TRUE

(L.O. 1) Use of the current replacement cost method to account for property, plant and equipment would most likely result in the recognition of gains and losses prior to the time the asset is sold.

TRUE

(L.O. 2) The interest incurred on the specific borrowings is used for the portion of weighted-average accumulated expenditures that is less than or equal to any amounts borrowed specifically to finance construction of the assets.

TRUE

(L.O. 4) If a capital expenditure related to a machine increases the useful life but does not improve its quality, the expenditure may be debited to accumulated depreciation rather than to the asset account

TRUE

2. (L.O. 4) By definition, any addition to a building or machine is capitalized because a new asset has been created.

TRUE

Avoidable interest

The amount of interest cost during the period that theoretically could have been avoided if expenditures for the asset had not been made

Weighted-average accumulated expenditures

The construction expenditures that are weighted by the amount of time that interest cost could be incurred on the expenditure.

Capitalization period

The period of time during which interest must be capitalized. It begins when (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred. The time ends when the asset is substantially complete and ready for its intended use.

Historical cost

The value of an asset measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.