Chapter 9 practice questions

Ivanhoe Company purchased land and a building for a lump sum cost of $427000. The land has a fair market value of $174000 and the building has a fair market value of $343000. The cost assigned to the land is

$143710 The lump sum price incurred to acquire more than one asset is allocated among them based on their relative fair market values: [Fair market value of land, $174000 / (Fair market value of land, $174000 + Fair market value of building, $343000 = $517000)]x (Lump sum cost, $427000) = Cost assigned to the land, $143710.

On September 1, 2021, Sandhill Printing Co. incurred the following costs for one of its printing presses: Purchase of attachment $35800 Installation of attachment 5900 Replacement parts for renovation of press 12900 Labor and overhead in connection with renovation of press 1600 - Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?

$56200 Since the renovation significantly increased productivity, all $56200 (Purchase of attachment, $35800 + Installation of attachment, $5900 + Replacement parts for renovation of press, $12900 + Labor and overhead in connection with renovation of press, $1600) should be capitalized.

Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated.

Land held for speculative purposes is classified as an Investment. false

Sheridan Company exchanged equipment that cost $66400 and has accumulated depreciation of $31800 for equipment with a fair value of $51900 and received $12600 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is

$5841 gain The formula is [(Cash received, $12600 / {Cash received, $12600 + Fair value, $51900}) X [(Fair value, $51900 + Cash received, $12600 - (Exchanged equipment cost, $66400 - Accumulated Depreciation, $31800)}], or Gain, $5841.

or other assets received in an exchange are referred to as "boot."

Only cash received in an exchange is referred to as "boot." False

The cost of property acquired by the issuance of securities is equal to:

The MARKET VALUE of the SECURITIES. Property acquired in non-cash transactions is recorded at the market value of the item given up or the market value of the property received, whichever is more readily determinable.

During self-construction of an asset by Cullumber Company, the following were among the costs incurred: $1235000 Fixed overhead for the year Portion of $1001000 fixed overhead that would be allocated to asset if it were normal production 36000 Variable overhead attributable to self-construction 30200 What amount of overhead should Cullumber include in the cost of the self-constructed asset?

$66200 The amount of overhead to include in the cost of the self-constructed asset is Portion of fixed overhead that would be allocated to asset if it were normal production, $36000 + Variable overhead attributable to self-construction, $30200, or $66200.

Which of the following statements is true regarding capitalization of interest?

The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

Wildhorse Company purchased machinery for $342100 on January 1, 2021. Straight-line depreciation has been recorded based on a $31000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2025 at a gain of $6500. How much cash did Wildhorse receive from the sale of the machinery?

$78980 A cost of $342100 - $269620 in accumulated depreciation (Cost, $342100 - Salvage value, $31000 / 5 years = $62220 annual depreciation × 4 years = $248880 + 2025 Depreciation, $62220 x 4/12 months, $20740) results in a book value of $72480. Adding the $6500 gain indicates sale price was $78980.

Oriole Company purchased equipment on July 1, 2021 for $81000. Sales tax on the purchase was $810. Other costs incurred were freight charges of $960, insurance during shipping of $250, repairs of $1590 for damage during installation, and installation costs of $1060. What is the cost of the equipment?

$84080 The cost is the Purchase price, $81000 + Sales tax, $810 + Freight charges, $960 + Insurance during shipping, $250 + Installation costs, $1060 = $84080. Repair costs are not capitalized.

The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation.

Accumulated depreciation is a contra account with a credit balance. The entry to record the sale of a plant asset at either a gain or a loss will include a debit, not a credit, to Accumulated Depreciation. False.

Avoidable interest is the lesser of actual interest cost incurred during a fiscal period or the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset.

Avoidable interest is the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset. False

Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to

Contribution Revenue account. FASB requires that such contributions be recognized as revenues in the period received.

The receipt of an asset from a contribution should be recorded as additional paid-in capital.

Contributions received should be recorded as revenue, not additional paid-in-capital, in the period received. False

If an exchange has commercial substance, all losses should be recognized immediately; however, gains should be deferred.

If an exchange has commercial substance, both gains and losses should be recognized immediately. False

Which one of the following is not a characteristic of property, plant, and equipment?

They are acquired for resale.

A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land.

This type of one-time special assessment for sidewalks and drainage system would be included in the cost of the land since it is relatively permanent in nature. True

Cullumber Company sold manufacturing equipment with a cost of $45000 and accumulated depreciation of $32400 for $9900. The journal entry to record this transaction will include:

a debit to a loss account for $2700. When book value exceeds disposal price, a loss has occurred. The journal entry to record the sale would include debits to Cash ($9900), Accumulated Depreciation - Equipment ($32400) and a loss account ($2700). Equipment would be credited for $45000. The loss would be computed as follows: Cost, $45000 - Accumulated Depreciation, $32400 = Book value, $12600 - Cost, $9900 = Loss, $2700.

The most extensively used method of accounting for overhead costs related to self-constructed assets is:

assigning a portion of all overhead to the asset.

Expenditures that extend the useful life of a plant asset without improving its quantity or quality are accounted for:

by debiting Accumulated Depreciation.

The accounting for interest costs incurred during construction recommended under GAAP is to:

capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made.

The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula of:

cash received divided by the total of cash received plus fair value of the asset received.

The cost of manufacturing equipment would include all of the following except:

cost of training the equipment operator.

Sheridan Company sold equipment with a cost of $75800 and accumulated depreciation of $43700 for $37700. The journal entry to record this transaction will include:

debit to Accumulated Depreciation - Equipment for $43700. When plant assets are sold for an amount greater than their book value, a gain is recorded. The journal entry would include debits to Cash ($37700) and Accumulated Depreciation ($43700) and credits to Equipment ($75800) and a gain account ($5600). The $5600 Gain = Cost, $75800 - Accumulated Depreciation, $43700 or Book Value, $32100 - Cash proceeds from sale, $37700.

In an exchange that lacks commercial substance in which a gain exists, and cash is received, the asset received is recorded at the:

fair value of the asset received less the deferred portion of the gain.

In an exchange of nonmonetary assets that lacks commercial substance in which a gain exists and no cash is paid or received, the asset received is recorded at:

fair value of the asset received less the gain deferred.

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at

its fair value

Plant assets purchased in exchange for a long-term credit contracts should be accounted for at the

present value of the note.

The interest rate(s) used in computing avoidable interest is the:

rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures.

Cayo Casta Cabins Corporation recently purchased Ship Island Resort and Casino and the land on which it is located with the plan to tear down the resort and build a new luxury hotel on the site. Cayo Casta Cabin Corporation salvaged fixtures and wood flooring from Ship Island prior to demolishing the building. The proceeds from the sale of the salvaged materials should be

recorded as a reduction of the cost of the land.

Assets acquired in a lump sum purchase should be recorded at:

relative fair market values.

The period of time during which interest must be capitalized ends when

the asset is substantially complete and ready for its intended use.

In an exchange of nonmonetary assets that has commercial substance, when no cash is involved, the new asset is valued at:

the fair value of the new asset.