ch 10

A machine cost $1,200,000, has annual depreciation of $200,000, and has accumulated depreciation of $950,000 on December 31, 2020. On April 1, 2021, when the machine has a fair value of $275,000, it is exchanged for a machine with a fair value of $1,350,000 and the proper amount of cash is paid. The exchange had commercial substance. The gain to be recorded on the exchange is

$25,000

On December 1, Miser Corporation exchanged 6,000 shares of its $25 par value common stock held in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by Miser at a cost of $40 per share, and on the exchange date the common shares of Miser had a fair value of $50 per share. Miser received $18,000 for selling scrap when an existing building on the property was removed from the site. Based on these facts, the land should be capitalized at

$282,000.

Fogelberg Company purchased equipment for $30,000. Sales tax on the purchase was $1,500. Other costs incurred were freight charges of $400, repairs of $700 for damage during installation, and installation costs of $450. What is the cost of the equipment?

$32,350.

Wilson Co. purchased land as a factory site for $1,350,000. Wilson paid $120,000 to tear down two buildings on the land. Salvage was sold for $8,100. Legal fees of $5,220 were paid for title investigation and making the purchase. Architect's fees were $46,800. Title insurance cost $3,600, and liability insurance during construction cost $3,900. Excavation cost $15,660. The contractor was paid $4,200,000. An assessment made by the city for pavement was $9,600. Interest costs during construction were $255,000. The cost of the building that should be recorded by Wilson Co. is

$4,521,360.

Worthington Chandler Company purchased equipment for $40,000. Sales tax on the purchase was $2,400. Other costs incurred were freight charges of $600, repairs of $350 for damage during installation, and installation costs of $675. What is the cost of the equipment?

$43,675

On August 1, 2020, Hayes Corporation purchased a new machine on a deferred payment basis. A down payment of $18,000 was made and 4 monthly installments of $15,000 each are to be made beginning on September 1, 2020. The cash equivalent price of the machine was $72,000. Hayes incurred and paid installation costs amounting to $3,000. The amount to be capitalized as the cost of the machine is

$75,000.

Each of the following is an example of an asset's involuntary conversion except a. the sale of a fully depreciated asset. b. a condemnation of property. c. a fire damaging an asset. d. a theft of the asset.

a. the sale of a fully depreciated asset.

Assets that qualify for interest cost capitalization include

assets under construction for a company's own use.

An improvement made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be

capitalized in the machine account

Plant assets may properly include a. deposits on machinery not yet received. b. idle equipment awaiting sale. c. land held for possible use as a future plant site. d. None of these answers are correct.

d. None of these answers are correct.

Which of the following is a capital expenditure? a. Payment of an account payable b. Retirement of bonds payable c. Payment of Federal income taxes d. None of these answers are correct.

d. None of these answers are correct.

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has

no commercial substance and additional cash is paid.

For a nonmonetary exchange of plant assets, accounting recognition should not be given to

part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at

the fair value of the asset given up, and a gain or loss is recognized.

If a corporation purchases land and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

the intention of management for the property when the building was acquired.

The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to

the machinery account.

Plant assets purchased on long-term credit contracts should be accounted for at

the present value of the future payments.

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.

A machine cost $1,200,000, has annual depreciation of $200,000, and has accumulated depreciation of $950,000 on December 31, 2020. On April 1, 2021, when the machine has a fair value of $275,000, it is exchanged for a machine with a fair value of $1,350,000 and the proper amount of cash is paid. The exchange had commercial substance. The new machine should be recorded at

$1,350,000.

Wilson Co. purchased land as a factory site for $1,350,000. Wilson paid $120,000 to tear down two buildings on the land. Salvage was sold for $8,100. Legal fees of $5,220 were paid for title investigation and making the purchase. Architect's fees were $46,800. Title insurance cost $3,600, and liability insurance during construction cost $3,900. Excavation cost $15,660. The contractor was paid $4,200,000. An assessment made by the city for pavement was $9,600. Interest costs during construction were $255,000. The cost of the land that should be recorded by Wilson Co. is

$1,480,320.

Jamison Company purchased the assets of Booker Company at an auction for $5,600,000. An independent appraisal of the fair value of the assets is listed below: Land $1,900,000 Building 2,800,000 Equipment 2,100,000 Trucks 3,400,000 Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the Building?

$1,537,255

.Jamison Company purchased the assets of Booker Company at an auction for $5,600,000. An independent appraisal of the fair value of the assets is listed below: Land $1,900,000 Building 2,800,000 Equipment 2,100,000 Trucks 3,400,000 Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the Trucks?

$1,866,667

Horner Company buys a delivery van with a list price of $70,000. The dealer grants a 15% reduction in list price and an additional 2% cash discount on the net price if payment is made in 30 days. Sales taxes amount to $930 and the company paid an extra $700 to have a special device installed. What should be the recorded cost of the van?

$59,940.

In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?

Expenditure made to maintain an existing asset so that it can function in the manner intended

Which of the following is not a capital expenditure? a. Repairs that maintain an asset in operating condition b. An addition c. A betterment d. A replacement

a. Repairs that maintain an asset in operating condition

To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be

allocated on a pro rata basis between the asset and normal operations.

A company should immediately recognize:

any loss when it ignorantly pays too much for a monetary asset originally.

Which of the following is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years

b. Acquired for resale

Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia Hotel should be

capitalized as part of the cost of the land.

30. Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except a. at the date of acquisition, cost reflects fair value. b. property, plant, and equipment items are always acquired at their original historical cost. c. historical cost involves actual transactions and, as such, is the most reliable basis. d. gains and losses should not be anticipated but should be recognized when the asset is sold.

b. property, plant, and equipment items are always acquired at their original historical cost.

When a company is the recipient of a donated asset, the account credited may be a a. paid-in capital account. b. revenue account. c. deferred revenue account. d. All of these answers are correct.

b. revenue account.

Which of the following statements about involuntary conversions is false? a. An involuntary conversion may result from condemnation or fire. b. The gain or loss from an involuntary conversion may be reported as other revenues and gains or other expenses and losses. c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets. d. All of these answers are correct.

c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets.

The cost of land typically includes the purchase price and all of the following costs except a. grading, filling, draining, and clearing costs. b. street lights, sewers, and drainage systems cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property.

c. private driveways and parking lots.

When a company purchases land as a site for a plant, interest costs capitalized during the period of construction are part of the:

cost of the plant.

The cost of land does not include

costs of improvements with limited lives.

Which of these is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset

d. All of these are major characteristics of a plant asset

In order for a subsequent expenditure cost to be capitalized, the following must be present: a. The useful life of an asset must be increased. b. The quantity of assets must be increased. c. The quality of assets must be increased. d. Any of these answers are correct.

d. Any of these answers are correct.

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to get them ready for use.

d. Assets not currently undergoing the activities necessary to get them ready for use.

Which of the following costs are capitalized for self-constructed assets? a. Materials and labor only b. Labor and overhead only c. Materials and overhead only d. Materials, labor, and overhead

d. Materials, labor, and overhead

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be

deducted from the cost of the land.

Siegle Company exchanged 3,000 shares of Guinn Company common stock, which Siegle was holding as an investment, for equipment from Mayo Company. The Guinn Company common stock, which had been purchased by Siegle for $50 per share, had a quoted market value of $58 per share at the date of exchange. The equipment had a recorded amount on Mayo's books of $157,500. What journal entry should Siegle make to record this exchange?

dr. Equipment 174,000 cr. Investment in Guinn Co. Common Stock 150,000 cr. Gain on Disposal of Investment 24,000

Dodson Company traded in a manual pressing machine for an automated pressing machine and gave $40,000 cash. The old machine cost $465,000 and had a net book value of $355,000. The old machine had a fair value of $300,000. What is the correct journal entry to record the exchange assuming commercial substance?

dr. Equipment 340,000 dr. Loss on Disposal 55,000 dr. A/D 110,000 cr. Equipment 465,000 cr. Cash 40,000

Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

effectively reduce the amount to be recorded as the cost of the new asset.

Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale.

false

Companies always treat gains or losses from an involuntary conversion as comprehensive income.

false

Companies should always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets.

false

Companies should assign no portion of fixed overhead to self-constructed assets.

false

If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized.

false

Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements.

false

When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.

false

When an ordinary repair occurs, several periods will usually be

false

When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

false

When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building.

false

When boot is involved in an exchange having commercial substance

gains or losses are recognized in their entirety.

Termination of an asset's service due to theft, fire, etc., is called:

involuntary conversion.

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.

Fences and parking lots are reported on the balance sheet as

land improvements.

When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the

market price of the stock

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.

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

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

Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance.

true

Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.

true

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

true

Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits.

true

If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset's book value.

true

Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used.

true

Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.

true

Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.

true

When a company makes an unconditional promise to pledge an asset in the future, the company should report the contribution expense and related payable immediately.

true

When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

true