ACCTG 326- Chapter 11 SB

Which of the following assets cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?

goodwill

For intangible assets used in the manufacturing of a product, amortization expense for the period is

included in the cost of inventory

For intangible assets used in the manufacturing of a product, amortization is (select all that apply):

included in the cost of inventory expensed when the inventory is sold

The type of interest costs that can be treated as capitalized interest can pertain to borrowings that are

other loans during the period of construction. specifically for the construction project.

In a cloud computing arrangement, if the customer has a contractual right to take possession of the software without significant penalty and the customer could run the software on its own, the costs are treated as

purchased intangibles

In measuring an impairment loss, the difference between the asset's book value and its fair value is

recognized as an impairment loss.

During the current year, the Mont Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in Montana. Of the 20 wells drilled, 13 were dry holes. Mont uses the full-cost method of accounting. Assuming that none of the oil found is depleted in the current year, what oil exploration expense would Mont charge for this activity in its income statement?

$0 Reason: The full-cost method allows for costs incurred in searching for oil and gas to be capitalized as assets and expensed when well is later depleted.

True or false: Depletion for tax purposes must always equal cost depletion used for GAAP purposes.

False Reason: For tax purposes, companies are allowed to deduct the greater of cost-based depletion or a fixed percentage of gross income.

True or false: If a company has no borrowings, interest costs can be imputed on self-constructed assets.

False Reason: Interest costs may not be imputed; actual interest cost must be incurred.

Which of the following characteristics are unique to goodwill?

Its cost is not separable from the company as a whole. Its cost cannot be directly associated with a specific identifiable right.

Computer software purchased for internal use should be

capitalized and amortized over its useful life.

Costs incurred after technological feasibility is established but before the software is available to customers should be

capitalized as an intangible asset.

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

The gain or loss on disposal of an asset is calculated as

consideration received less the book value of asset sold.

Which of the following items should be capitalized as land improvements?

cost of fences cost of parking lots cost of sidewalks

The allocation of the cost of a tangible fixed asset is referred to as ______ , whereas the allocation of the cost of an intangible asset is referred to as_______.

depreciation; amortization

The formula to calculate the depletion rate of a natural resource is the depletion base divided by the

estimated extractable amount of natural resource.

When assets are acquired in a noncash transaction, if the fair value of the noncash items given is not clearly evident, then the Blank______ value of the assets received is used to record the assets.

fair

If a company purchases research and development that is technologically feasible in a business acquisition, the

fair value is capitalized as an intangible asset.

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.

On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1?

$240,000 Reason: 2 x 1/5 x $400,000 = $160,000 depreciation expense in year 1. Book value is calculated as cost less accumulated depreciation ($400,000 - $160,000 = $240,000) book value at end of year 1.

Lassiter Corp. exchanges land in a transaction that lacks commercial substance. Lassiter's original cost of the land exchanged was $100,000. In exchange for the land, Lassiter receives a tract of land with a fair value of $200,000 and $50,000 cash. What is the gain that Lassiter should recognize?

$30,000 Reason: Part of the transaction is a monetary transaction, and a partial gain may be recognized. The total gain is $250,000 received less $100,000 book value given = $150,000 total gain. However, the gain recognized is calculated as: $50,000/($200,000 + 50,000) = 20% x $150,000 gain = $30,000 gain recognized.

JM Mining has a coal mine with a depletion base of $1,000,000. It is estimated that 500,000 tons will be extracted over the mine's useful life. During year 1, JM extracted 20,000 tons of coal. The depletion expense for year 1 is

$40,000. Reason: $1,000,000/500,000 tons = $2.00 per ton. 20,000 tons extracted x $2.00 = $40,000 depletion expense.

At the beginning of Year 1, Western Inc. acquired a building for $10.6 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 25-year useful life, and a $2.6 million residual value. In Year 3, the estimates of useful life and residual value were changed to 20 years (total) and $660,000, respectively. What is depreciation on the building for Year 3?

$516,667 Reason: (10.6 million - 2.6 million)/25 = $320,000 initial depreciation per year x 2 years = $640,000. ($10.6 - 640,000 - 660,000)/18 remaining years

At the beginning of Year 1, Western Inc. acquired a building for $10.7 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 20-year useful life, and a $2.7 million residual value. In Year 3, the estimates of useful life and residual value were changed to 15 years (total) and $670,000, respectively. What is depreciation on the building for Year 3?

$710,000 Reason: (10.7 million - 2.7 million)/20 = $400,000 initial depreciation per year x 2 years = $800,000. ($10.7 - 800,000 - 670,000)/13 remaining years

Spartan Corp. purchases inventory, land, building, and equipment for $540,000 from Klein Corp. The values of the assets are as follows: Asset. 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?

$90,000 Reason: 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.

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected useful life of 4 years. What is straight-line depreciation expense for year 1?

1500 Reason: ((10,000-4,000)/4 years)

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)

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 ($20 mil- 18 mil)

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 (200,000+50,000+40,000)

On January 1, year 1, Glasser Corp. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1?

32,000 Reason: ($100,000 - $20,000) x (4/10) = $32,000. The denominator in SYD is 1 + 2 + 3 + 4 = 10.

Chen Corporation purchased equipment on January 1, year 1, for $100,000. The equipment was depreciated using the units-of-output method. During years 1 and 2, respectively, Chen recorded depreciation expense of $10,000 and $30,000. During year 3, Chen changed to the straight-line depreciation method and estimated that the equipment had a remaining useful life of 10 years and no residual value. What is the depreciation expense Chen should report during year 3?

6,000 Reason: The book value at the beginning of year 3 is $100,000 less $40,000 accumulated depreciation = $60,000. Depreciation expense is $60,000 / 10 years = $6,000 per year.

Mark Corp. is building a new office building. The office building qualifies as a self-constructed asset. During the year, Mark has weighted-average expenditures on the construction project of $1,500,000. Although Mark does not borrow money specifically to build the office building, Mark has two loans outstanding during the year. Loan A is for $400,000 at 9% interest, and Loan B is for $2,000,000 at 6% interest. What is the interest rate used to capitalize interest on the office building?

6.5% Reason: The interest on Loan A is $400,000 x 9% = 36,000. The interest on Loan B is $2,000,000 x 6% = 120,000. Total interest is $36,000 + $120,000 = $156,000. The weighted-average rate is $156,000/$2,400,000 = 6.5%.

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?

60,000

During the current year, the Mont Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in Montana. Of the 20 wells drilled, 13 were dry holes. Mont uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in the current year, what oil exploration expense would Mont charge for this activity in its income statement?

65,000,000 Reason: The dry wells are expensed under the successful efforts method of accounting so 13 x $5M each

Abbott exchanges land in a transaction that lacks commercial substance. The net book value of the land exchanged is $50,000. In exchange, Abbott receives land with a fair value of $60,000 and $20,000 in cash. What is the gain that Abbott should recognize?

7,500 Reason: Part of the transaction is a monetary transaction, and a partial gain may be recognized. The total gain is $80,000 assets received less $50,000 book value given = $30,000 total gain. However, the gain recognized is calculated as: $20,000 cash received/($60,000 + 20,000) = 25% x $30,000 gain = $7,500 gain recognized.

On January 1, year 1, Glasser Corp. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the book value at the end of year 1?

70,000 Reason: ($120,000 - 20,000) x (3/6) = $50,000. The denominator in SYD is 1 + 2 + 3 = 6. Book value is cost - accumulated depreciation so $120,000 - $50,000

Crane Corp. purchased equipment on January 1, year 1, for $100,000. The equipment had a 10-year life and was depreciated using the double-declining-balance method. In year 3, Crane changed its depreciation method to the straight-line method. The depreciation expense recognized in year 3 is

8,000 Reason: The depreciation rate is 1/10 x 2 = 20%. Year 1 depreciation is $100,000 x 20% = $20,000. Year 2 depreciation is book value of $80,000 x 20% = $16,000. The book value at the beginning of year 3 is $100,000 - $36,000 = $64,000. Depreciation expense using the straight-line method in year 3 is $64,000/8 years remaining = $8,000.

The journal entry to record an impairment loss on goodwill includes which of the following entries?

A credit to goodwill A debit to loss on impairment of goodwill

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.

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?

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

Which of the following statements correctly describes the treatment of the recovery of previously recognized goodwill impairment losses under IFRS and U.S. GAAP?

Impairment losses cannot be reversed

When is it appropriate to recognize a liability for an asset retirement obligation?

Over the asset's life as incurred. At the inception of the asset's life if a legal obligation exists.

Mega Mines acquires a new mine for $1,000,000. Mega Mines determines at the date of acquisition that it will cost $140,000 to restore the land when the mining process is complete in 5 years. Mega Mines has a legal obligation to remove the equipment upon completion of the mining activities. Which of the following are acceptable choices for determining when to recognize an asset retirement obligation?

Over the asset's life as incurred. At the inception of the asset's life.

When assets are exchanged and the transaction lacks commercial substance, which of the following occurs?

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

In a business acquisition, if the fair value of net assets exceed the fair value of the consideration exchanged, a bargain purchase occurs. This bargain purchase is recorded as

a gain on the income statement in the year of the acquisition

A retirement or abandonment of an asset is different from a sale of an asset because

a loss must be recognized for the remaining book value. no consideration is received.

Start-up costs such as legal fees and state filings to incorporate should be treated as

an expense in the period incurred.

In a cloud computing arrangement, if the customer cannot run the software on its own, the costs

are expensed as incurred.

When accounting for impairments, the two categories for recognizing and measuring the loss are

assets to be held and used and assets held for sale.

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the ______ value of the asset sold.

book

An asset retirement is treated similarly to selling an asset; however, a loss equal to the remaining _____ _____ is recorded because there will be no monetary consideration received.

book value

Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include

debit to accumulated depreciation of $40,000. credit to assets of $52,000. debit to loss on impairment of $12,000.

The journal entry to record the amortization of an intangible asset would include (Select all that apply.)

debit to amortization expense. credit to the intangible asset.

For oil, gas, and most mineral natural resources, (Select all that apply.)

depletion could exceed the asset's cost for income tax purposes. companies are allowed to use percentage depletion for income tax purposes.

Purchased research and development that has received technological feasibility is capitalized as a(n) ______ intangible asset, and purchased in-process R&D that has not reached feasibility is considered a(n) _____ intangible asset. Multiple choice question.

finite-life; indefinite-life

In a bargain purchase option situation, the difference between the fair value of the identifiable net assets acquired and the consideration given is recorded as a ____ in the year of the acquisition.

gain

The measurement of an impairment loss in step 2 is the difference between

the asset's book value and its fair value.

An impairment occurs when the

undiscounted sum of estimated future cash flows is less than the asset's book value.