Intermediate accounting exam 2
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell's truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway's truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
3700.............If a nonmonetary exchange lacks commercial substance, it is measured at the carrying amount of the assets given up. Accordingly, unless boot is received, no gain is recognized. Campbell gave boot of $700 and a truck with a carrying amount of $3,000 ($23,000 cost - $20,000 accumulated depreciation). The carrying amount of the new truck is therefore $3,700.
Amble In exchanges a truck with a carrying value of 12,000 and a fair value of 20,000 for another truck and 5000 cash. The fair value of the truck received was 15,000. The exchange was not considered to have commercial substance. At what amount should Amble record the truck received in the exchange?
A- 7,000 B- 9000 C 12000 D15000 Answer is 15000. A transaction including nonmonetary assets and boot is considered monetary if the boot equals or exceeds 25% of the fair value of the exchange. 5000 boot = 25% of 20,000 (5000 + 15,000.) Thus the exchange is monetary. Monetary transactions should be based on the fair value of assets involved with Gain or Loss recognized immediately. The party receiving boot measures the asset received at fair value of asset given up minus boot received.
During the current year, Lyle Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated useful life of the patent is 10 years. What amount should Lyle capitalize for the patent on July 1?
A-0 B-245000 C-41000 D204000 R&D costs are required to be expensed as they are incurred. Legal fees and registration fees are excluded from the definition of R&D. Thus, the $41,000 in legal fees and other costs associated with the registration of the patent should be capitalized. The $204,000 in R&D costs should be expensed.
A company exchanged land with an appraised value of 50,000 and an original cost of 20,000 for machinery with a fair value of 55,000. Assuming the transaction has commercial substance what is the Gain on the exchange?
A-0 B-5,000 C-30,000 D-35,000 C- 30,000 If the transaction has commercial substance and the fair value of both assets in the non monetary exchange is determinable, the transaction is measured at the fair value of assets given up and any gain or loss is recognized immediately (accounted for as a monetary exchange.)
A company purchased a building for $45,000 cash and recorded its cost on the books at that amount. However, the fair value of the building was $46,500 on the date of purchase. How should the company account for this $1,500 difference?
A-Amortize it over the useful life of the building. B.-Capitalize it as goodwill. C-.Debit it to the building account.D.Do not record the amount. D. do not record. Answer is D. Property, plant, and equipment should not be written up by an entity to reflect the appraisal, market, or current values that are above cost to the entity. The company should not recognize the unrealized gain of $1,500. The gain won't be realized until you sell it
Which of the following reasons provides the best theoretical support for accelerated depreciation?
A. Assets are more efficient in early years and initially generate more revenue. B.Expenses should be allocated in a manner that "smooths" earnings. C.Repairs and maintenance costs will probably increase in later periods, so depreciation should decline. D.Accelerated depreciation provides easier replacement because of the time value of money. Answer is A
A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment is 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?
A.$105,000 B.$110,000 C.$120,000 Answer (C) is correct.The depreciable base equals historical cost minus salvage value. The historical cost is the price at which the new owners bought the equipment. The salvage value is the estimated amount the equipment will be worth at the end of its useful life. This amount is determined by the new owners. The depreciable base is therefore $120,000 ($135,000 - $15,000).
Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be 3 years. The equipment on which the package is to be used is being depreciated over 5 years. What amount of expense should Standard report on its income statement for the first full year?
A.$2,000,000 B.$3,333,333 C.$0 D.$10,000,000 .. Answer (B) is correct.Amortization of the costs of computer software developed or obtained for internal use should be on a straight-line basis over the useful life of the software unless another systematic and rational basis is more representative. Thus, Standard's amortization expense for the first full year is $3,333,333 ($10,000,000 ÷ 3 years).
On July 1 of the current year, Trey Co. exchanged a truck for 25 shares of Deuce Corp.'s common stock. The fair value of this stock is not readily determinable. On that date, the truck's carrying amount was $2,500, and its fair value was $3,000. Also, the carrying amount of Deuce's stock was $50 per share. Trey cannot exercise significant influence over Deuce. What amount should Trey report in its December 31 current-year balance sheet as investment in Deuce?
A.$3,000 B$2,500 C.$1,250 ...Answer is A. Accounting for nonmonetary transactions usually should be based on the fair values of the assets or services involved. The exceptions arise when (1) the fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits, (2) the exchange facilitates sales of inventory to customers, or (3) the exchange lacks commercial substance. No exception applies because the fair value of the asset relinquished is known, inventory is not involved, and no facts indicate that the exchange lacks commercial substance. Accordingly, the exchange is measured on July 1 at the $3,000 fair value of the asset relinquished. Moreover, this investment in equity securities is subsequently reported at cost (the fair value of the truck on July 1) because (1) their fair value is not readily determinable and (2) the equity method does not apply because Trey cannot exercise significant influence over Deuce.
An entity, upon initial recognition of an asset retirement obligation, should not take which of the following actions? A.Allocate asset retirement cost to expense over the useful life of the related asset. B.Capitalize the asset retirement cost by increasing the carrying amount of the related asset. C.Measure the asset retirement cost at fair value. D.Capitalize the asset retirement cost at its undiscounted cash flow value.
A.Allocate asset retirement cost to expense over the useful life of the related asset. B.Capitalize the asset retirement cost by increasing the carrying amount of the related asset. C.Measure the asset retirement cost at fair value. D.Capitalize the asset retirement cost at its undiscounted cash flow value. Answer (D) is correct.The fair value of the asset retirement cost is initially measured at the expected present value. The liability recognized equals the present value of the future cash flows expected to be paid to settle the obligation discounted at the credit-adjusted risk-free rate. C is not the answer..Answer (C) is incorrect.The fair value of the asset retirement cost is initially measured by using an expected present value technique.
A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts was decreased by the A.Cash proceeds received .B.Cash proceeds received and original cost of the truck .C.Original cost of the truck. D.Original cost of the truck minus the cash proceeds.
Answer (A) is correct.Because both composite and group methods use weighted averages of useful lives and depreciation rates, early and late retirements are expected to offset each other. Consequently, gains and losses on retirements of single assets are treated as adjustments of accumulated depreciation. The entry is to credit the asset at cost, debit cash for any proceeds received, and debit accumulated depreciation for the difference. Thus, the net carrying amount of the composite asset accounts is decreased by the amount of cash received. The net carrying amount of total assets is unchanged.
A state government condemned Epirus Co.'s parcel of real estate. Epirus will receive $1,500,000 for this property, which has a carrying amount of $1,150,000. Epirus incurred the following costs as a result of the condemnation:Appraisal fees to support a $1,500,000 value$5,000 Attorney fees for the closing with the state 7,000Attorney fees to review contract to acquire replacement property 6,000 Title insurance on replacement property 8,000. What amount of cost should Epirus use to determine the gain on the condemnation? A.$1,162,000 B.$1,164,000 C.$1,168,000 D.$1,176,000
Answer (A) is correct.Gain or loss must be recognized even though an enterprise reinvests or is obligated to reinvest the monetary assets in replacement nonmonetary assets. The determination of the gain is based on the carrying amount ($1,150,000) and the costs incurred as a direct result of the condemnation ($5,000 appraisal fees and $7,000 attorney fees), a total of $1,162,000. Because the recipient is not obligated to reinvest the condemnation proceeds in other nonmonetary assets, the costs associated with the acquisition of the replacement property (attorney fees and title insurance) should be treated as part of the consideration paid for that property.
On January 1, Year 1, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period. However, the new product development is expected to take 5 years, and the equipment can be used only for this project. Jambon's Year 1 expense equals A.The total cost of the equipment. B.One-fifth of the cost of the equipment. C.One-tenth of the cost of the equipment. D.Zero.
Answer (A) is correct.The costs of materials, equipment, or facilities that are acquired or constructed for a particular R&D project and that have no alternative future uses and therefore no separate economic values are R&D costs when incurred. R&D costs are expensed in full when incurred.
Auckland Co. determined that, because of obsolescence, equipment with an original cost of $1,800,000 and accumulated depreciation on the first day of the current fiscal year of $840,000 had suffered impairment and, as a result, should have a carrying amount of only $600,000 (the fair value) as of the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 8 years to 3. In its year-end balance sheet, what amount should Auckland report as accumulated depreciation? A.$1,040,000 B.$1,400,000 C.$200,000 D.$1,200,000
Answer (B) is correct. The carrying amount of the equipment before the impairment was $960,000 ($1,800,000 - $840,000). After the impairment, the carrying amount should be $600,000; therefore, $360,000 ($960,000 - $600,000) of additional accumulated depreciation should be recorded to reflect the impairment loss (assuming the entry is to debit the loss and credit accumulated depreciation). In addition, the depreciation for the year should be $200,000 ($600,000 ÷ 3). Hence, the accumulated depreciation in the year-end balance sheet is $1,400,000 ($840,000 + $360,000 impairment loss + $200,000 depreciation for the year).
A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows:Description Amount Purchase price$1,000,000 Real estate taxes in arrears 15,000 Debt issuance costs 2,000 Attorney fee -- title search on land 5,000 The company should record its acquisition of the land in its financial statements at a value of A.$1,000,000 B.$1,015,000 C.$1,020,000 D.$1,022,000
Answer (C) is correct.An item of property, plant, and equipment is measured initially at historical cost (the amount of cash paid to acquire the asset) plus the costs needed to bring the asset to the condition and location necessary for its intended use. The initial cost of the land consists of (1) the costs of acquiring and preparing the land for its expected use of $1,000,000; (2) transaction costs, such as attorney fees, of $5,000; and (3) any encumbrances assumed, such as mortgages or tax liens, of $15,000. Thus, the initial cost of the land is $1,020,000 ($1,000,000 + $5,000 + $15,000). Costs to issue debt securities of $2,000 must be reported in the balance sheet as a direct deduction from the face amount of the debt. These costs are not capitalized as part of the initial cost of the land.
A purchased patent has a remaining legal life of 15 years. It should be A. Expensed in the year of acquisition. B.Amortized over 15 years regardless of its useful life. C.Amortized over its useful life if less than 15 years. D.Amortized over 40 years.
Answer (C) is correct.The amortization period for an intangible asset distinct from goodwill is the shorter of its useful life or the legal life remaining after acquisition.
Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of 5 years but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year? A.$40,000 B.$15,000 C.$120,000 D.$0
Answer (D) is correct. The trademark is expected to be renewed indefinitely. Thus, it has an indefinite useful life and is not amortized. Amortization is recorded only for an intangible asset with a finite useful life. ...We capitalize it because it provides future benefits but we don't expense it.
An impairment loss on a long-lived asset (asset group) to be held and used is reported by a business enterprise in A.Discontinued operations. B.The equity section of the balance sheet as a direct reduction of retained earnings. C.Other comprehensive income. D.Income from continuing operations.
Answer (D) is correct.An impairment loss is included in income from continuing operations before income taxes by a business enterprise (income from continuing operations in the statement of activities by a not-for-profit organization). When a subtotal for "income from operations" is reported, the impairment loss is included.
Which of the following is an intangible asset that is not subject to the recoverability test when testing for impairment? A.A patent. B.Goodwill. C.R&D costs for a patent .D.A trademark with indefinite useful life.
Answer (D) is incorrect.A trademark with indefinite useful life is not subject to the recoverability test. It would be impossible to determine the undiscounted future cash flows expected from the use and disposition of this trademark since it has an indefinite useful life.
In an exchange of assets, Junger Co. received equipment with a fair value equal to the carrying amount of the equipment given up. Junger also contributed cash equal to 10% of the fair value of the exchange. If the exchange is not considered to have commercial substance, Junger should recognize. A.A loss equal to the cash (boot) given up .B.A loss determined by the proportion of cash paid to the total transaction value. C.A gain determined by the proportion of cash paid to the total transaction value .D.Neither gain nor loss.
Answer is A. The accounting for a nonmonetary transaction should be based on the carrying amount of the asset(s) given up when the exchange lacks commercial substance. Because the boot in the transaction is less than 25% of the fair value of the exchange, the exchange is based on the carrying amount of assets given up.......If it lacks commercial substance we cannot recognize a gain unless cash is received. If on the other hand it does have commercial substance cash can be given or received and we can still recognize a gain is FV>BV.
A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts was decreased by the A.Original cost of the truck. B.Original cost of the truck minus the cash proceeds. C.Cash proceeds received
Because both composite and group methods use weighted averages of useful lives and depreciation rates, early and late retirements are expected to offset each other. Consequently, gains and losses on retirements of single assets are treated as adjustments of accumulated depreciation. The entry is to credit the asset at cost, debit cash for any proceeds received, and debit accumulated depreciation for the difference. Thus, the net carrying amount of the composite asset accounts is decreased by the amount of cash received. The net carrying amount of total assets is unchanged. refer to ch 11 page 220
