Chapter 11

In a nonmonetary exchange of assets where a loss is indicated, which of the following occurs? (Select all that apply.)

The new asset is recorded at fair value. The loss is recognized.

Goodwill may only be recognized

when another company is acquired.

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

Under what circumstances is a nonmonetary exchange not recorded at fair value? (Select all that apply.)

When the fair value cannot be determined. When the transaction lacks commercial substance.

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 Reason: cost of acquisition less fair value of net assets ($10 - $9 million)

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

On January 2, 2022, McClelland Company purchased a machine and signed a noninterest-bearing note in payment. The note matures in 4 years and requires McClelland to pay $70,000 at maturity. McClelland also had the option to purchase the the machine in cash from a different vendor for $56,505. At what amount should the machine be recorded upon purchase?

$56,505

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 Reason: $20 million - $18 million Net assets has already been reduced by the liabilities

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.

What is the transaction that required the following journal entry: $41,323 debit to Equipment, $8,677 debit to Discount on note payable, and $50,000 credit to Note payable?

Acquired an asset by signing a noninterest-bearing note payable.

Pearce Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The asset received had a fair value of $50,000 and a book value of $32,000. What journal entries should be recorded? (Select all that apply.)

Credit equipment-old $120,000. Debit loss on exchange $30,000. Debit equipment-new $50,000. Debit accumulated depreciation $40,000.

Pearce Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The asset received had a fair value of $50,000 and a book value of $32,000. What journal entries should be recorded? (Select all that apply.)

Debit accumulated depreciation $40,000. Debit loss on exchange $30,000. Credit equipment-old $120,000. Debit equipment-new $50,000.

Cheng 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 $40,000. The asset received had a fair value of $40,000 and a book value of $35,000. What journal entry should be recorded? (Select all that apply.)

Debit equipment-new $40,000. Debit accumulated depreciation $40,000. Credit equipment-old $90,000. Debit loss on exchange $10,000.

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

Expense the costs as incurred Reason: Internal generation of goodwill cannot be capitalized and must be expensed.

When a company receives an asset from an unrelated party by a donation, the assets are valued at ___________ value. (Enter only one word.)

Fair

Donated assets should be recorded on the balance sheet at what amount?

Fair value

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

Filing and legal costs for a patent.

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?

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

When assets are exchanged and the transaction lacks commercial substance, which of the following occurs? (Select all that apply.)

The asset received is valued at the book value of the asset given.

In a nonmonetary exchange of assets where a loss is indicated, which of the following occurs? (Select all that apply.)

The loss is recognized. The new asset is recorded at fair value.

Spartan Corp. purchases inventory, land, building, and equipment for $540,000 from Klein Corp. The values of the assets are as follows: Asset Klein Corp's Book Value Fair Value Inventory $ 80,000 $100,000 Land 140,000 180,000 Equipment 80,000 120,000 Building 200,000 200,000 At what amount should Spartan record the inventory?

The lump-sum price is allocated based on the relative fair values of the assets. The amount allocated to the inventory is $100,000/$600,000 (total fair value of the assets purchased) x $540,000 = $90,000.

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

If natural resources are developed by a company, the initial valuation should include (Select all that apply.)

acquisition cost. development costs. restoration costs. exploration 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 assets are exchanged and the transaction lacks commercial substance, the asset received is valued at the

book value of the asset given up.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______. Multiple choice question.

capitalized

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

capitalized; expensed

The cost of a major improvement that extends the useful life of an asset would be ______; the cost of maintenance that does not increase the future benefits would be ______.

capitalized; expensed

Fill in the blank question. In a transaction that lacks commercial substance, no gain is recognized unless some ____________ is received.

cash

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

cash

A nonmonetary exchange is considered to have ___________ substance if the future cash flows will change as a result of the exchange. (Enter only one word.)

commercial

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

future 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 (Select all that apply.)

credit to equipment-old for $90,000. debit to accumulated depreciation $70,000 credit to gain on exchange of asset for $30,000. debit to equipment-new for $50,000. Reason: The book value of the equipment is $20,000 when surrendered. The gain is $50,000 - $20,000

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? (Select all that apply.)

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

The costs incurred after a natural resource has been discovered but before production begins are referred to as

development costs

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.

A company's reputation and clientele, its trained employees, and favorable business location may give rise to . (Enter only one word.)

goodwill

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.

Fill in the blank question. When an asset is purchased with a noninterest-bearing note, some portion of the payment(s) required by the note, in reality, is .

interest

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.

An asset is acquired by signing a 4-year noninterest-bearing note payable for $100,000. The fair value of the equipment is $80,000. The difference between the maturity value of the note and the fair value of the equipment is recognized as

interest expense over the life of the note.

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

less the fair value of net assets acquired.

In a nonmonetary exchange of assets, when the fair value of the asset given is less than its book value, a ____________ is recorded and the asset is recorded at______________ ________________ .

loss, fair, value

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

lump-sum

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.

When an asset is acquired by signing a noninterest-bearing note payable, and the estimated fair value of the asset is not known, the asset should be recorded at the fair value of the note, which is the

present value of the note discounted at the market rate.

A lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's ______.

relative fair value

Which of the following are research and development costs? (Select all that apply.)

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

Which of the following are research and development costs? (Select all that apply.) Multiple select question.

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

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

restoration costs. development costs. acquisition costs. exploration 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.

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

revenue is recorded.

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

revenue.

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

the historical cost principle.

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.

Which of the following are required financial statement disclosures for capitalized interest?

the total amount of interest capitalized

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?

$114,000Reason: items only associated with getting the part up and running:Cost = Purchase Price + Freight + Trial Runs

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

$57,400Reason: (Purchase price + Fright + Pad for equipment + insurance)($50,000 + 2,000 + 5,000 + 400)

True or false: If the amount is material, the total amount of interest costs capitalized must be disclosed.

True Reason: The total amount of interest costs capitalized must be disclosed

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.)

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

Walnut Corp. purchases land, building, and equipment for $420,000 from Pine Corp. The values of the assets are as follows: Asset Pine Corp.'s Book Value Fair Value Land $140,000 $100,000 Equipment 60,000 80,000 Building 200,000 300,000 At what amount should Walnut record the building?

$100,000 + $80,000 + $300,000 = $480,000 Book value of building: = $300,000 X $420,000 / $480,000 = $262,500

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

$114,000Reason: items only associated with getting the part up and running:Cost = Purchase Price + Freight + Trial Runs

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 disposition of property, plant, equipment, or natural resources are called

asset retirement obligations.

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.

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

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

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($100,000 + 20,000 + 15,000 + 30,000)

Which items qualify for interest capitalization? (Select all that apply.)

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

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.

Cheng 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 $40,000. The asset received had a fair value of $40,000 and a book value of $35,000. What journal entry should be recorded? (Select all that apply.)

Debit equipment-new $40,000. Debit accumulated depreciation $40,000. Debit loss on exchange $10,000. Credit equipment-old $90,000.

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.

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

fair value.

True or false: A nonmonetary exchange is recorded at fair value even if the exchange lacks commercial substance.

false Reason: A nonmonetary exchange is recorded at fair value except when the fair value cannot be determined or when the exchange lacks commercial substance.

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

false Reason: Costs of internally developed goodwill should be expensed as incurred.

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.

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.