Intermediate Accounting Chapter 10

On September 1, 2017, Alpha Graphics Printing Co. incurred the following costs for one of its printing presses: Purchase of attachment $35,000 Installation of attachment $3,000 Replacement parts for renovation of press $12,000 Labor and overhead in connection with renovation of press $1,000 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?

$51,000. Correct! Since the renovation significantly increased productivity, all $51,000 (Purchase of attachment, $35,000 + Installation of attachment, $3,000 + Replacement parts for renovation of press, $12,000 + Labor and overhead in connection with renovation of press, $1,000) should be capitalized.

Bogle Company purchased machinery for $320,000 on January 1, 2014. Straight-line depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2018 at a gain of $6,000. How much cash did Bogle receive from the sale of the machinery?

$66,000. Correct answer! A cost of $320,000 - $260,000 in accumulated depreciation (Cost, $320,000 - Salvage value, $20,000 / 5 years = $60,000 annual depreciation x 4 years = $240,000 + 2014 Depreciation, $60,000 x 4/12 months, $20,000) results in a book value of $60,000. Adding the $6,000 gain indicates sale price was $66,000.

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

T

Watauga Company purchased equipment on July 1, 2017 for $70,000. Sales tax on the purchase was $700. Other costs incurred were freight charges of $800, insurance during shipping of $ 150, repairs of $1,300 for damage during installation, and installation costs of $1, 050. What is the cost of the equipment?

$72,700 Correct answer The cost is the Purchase price, $70,000 + Sales tax, $700 + Freight charges, $800 + Insurance during shipping, $150 + Installation costs, $1,050 = $72,700. Repair costs are not capitalized.

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.

Indicate which of the following costs should be expensed when incurred. (a)$15,000 paid to replace single pane windows with hurricane-proof windows. (b)$370,000 paid for addition to building (c)$1,400 paid to repaint the interior of a building (d)$4,000 paid for a major overhaul on a truck engine, which extends the useful life (e)$8,500 paid to rearrange and reinstall the assembly line.

a - no b - no c - yes d - no e - no

Burchell Company purchased land and a building for a lump sum cost of $420,000. The land has a fair market value of $160,000 and the building has a fair market value of $320,000. The cost assigned to the land is

$140,000. Correct answer! 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, $160,000/ (Fair market value of land, $160,000 + Fair market value of building, $320,000 = $480,000)] x (Lump sum cost, $420,000) = Cost assigned to the land, $140,000.

Property, plant, and equipment includes

-deposits on machinery not yet received. -idle equipment awaiting sale. -land held for possible use as a future plant site. **none of these answer choices would be classified as Property, plant, and equipment.

Marin Inc. purchased land at a price of $42,120. Closing costs were $2,106. An old barn was removed at a cost of $4,368. What amount should be recorded as the cost of the land?

42120 + 2106 + 4368 = 48594

Kingbird Inc. is constructing a building. Construction began on March 1 and was completed on December 31. Expenditures were $576,000 on March 1, $768,000 on July 1, and $691,200 on December 1.Compute Kingbird's weighted-average accumulated expenditures for interest capitalization purposes.

921600 3/1 576000 10/12 = 480000 7/1 768000 6/12 = 384000 12/1 691200 1/12 = 57600 57600 + 480000 + 384000 = 921600

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

Contribution Revenue account.

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.

F

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

F

If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred.

F

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

F

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

F

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

F

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

They are acquired for resale.

Ridge Company sold equipment with a cost of $75,000 and accumulated depreciation of $40,000 for $37,000. The journal entry to record this transaction will include:

a debit to Accumulated Depreciation - Equipment for $40,000. Correct! 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 ($37,000) and Accumulated Depreciation ($40,000) and credits to Equipment ($75,000) and a gain account ($2,000). The $2,000 Gain = Cost, $75,000 - Accumulated Depreciation, $40,000 or Book Value, $35,000 - Cash proceeds from sale, $37,000.

Delta River Company sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000. The journal entry to record this transaction will include:

a debit to a loss account for $3,000. Correct answer The journal entry to record the sale would include debits to Cash ($9,000), Accumulated Depreciation - Equipment ($32,000) and a loss account ($3,000). Equipment would be credited for $44,000. The loss would be computed as follows: Cost, $44,000 - Accumulated Depreciation, $32,000 = Book value, $12,000 - Cost, $9,000 = Loss, $3,000.

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

assigning a pro rata portion of fixed 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.

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 zero-interest-bearing note 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.

The cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, is equal to

the market value of the securities.