chapter 9

Which of the following is the recommended approach to accounting for interest incurred in financing the construction of plant and equipment? a. Capitalize only the actual interest costs incurred during construction if lower than avoidable interest. b. Charge construction with all costs of funds employed, whether identifiable or not. c. Capitalize no interest during construction. d. Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being constructed.

a. Capitalize only the actual interest costs incurred during construction if lower than avoidable interest.

Examples of existing legal obligations that require recognition of an Asset Retirement Obligation (ARO) include the following except: a. acquisition costs of an oil or gas property. b. decommissioning nuclear facilities. c. reclamation costs of mining facilities. d. post-closure costs of landfills.

a. acquisition costs of an oil or gas property.

When an improvement to a piece of equipment extends the equipment's useful life without increasing its productive capacity, the cost of the improvement should be a. debited to accumulated depreciation. b. capitalized to the equipment account. c. expensed. d. debited to a prepaid asset account.

a. debited to accumulated depreciation.

When an asset is sold in the middle of the fiscal year, a. depreciation should be updated through the date of the sale. b. the gain or loss will be deferred until the following year. c. the gain or loss cannot be determined. d.the gain or loss is based on the asset's book value at the end of the last fiscal year

a. depreciation should be updated through the date of the sale.

When boot is involved in an exchange having commercial substance, a. gains or losses are recognized in their entirety. b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up. c. only gains should be recognized. d. only losses should be recognized.

a. gains or losses are recognized in their entirety.

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 a. no commercial substance and additional cash is paid. b. no commercial substance and additional cash is received. c. commercial substance and additional cash is paid. d. commercial substance and additional cash is received.

a. no commercial substance and additional cash is paid.

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

The period of time during which interest must be capitalized ends when a. the asset is substantially complete and ready for its intended use. b. no further interest cost is being incurred. c. the asset is fully depreciated. d.the activities that are necessary to get the

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

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at a. the fair value of the asset given up, and a gain or loss is recognized. b. the fair value of the asset given up, and a gain but not a loss may be recognized. c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up. d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (or smallest loss) to the company.

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

The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to a. the machinery account. b. a separate deferred charge account. c. miscellaneous tax expense (which includes all taxes other than those on income). d. accumulated depreciation--machinery.

a. the machinery account.

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.

Which of the following statements is true regarding capitalization of interest? a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

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

A company should immediately recognize a. a gain when it makes a bargain purchase. b. a loss when it acquires a nonmonetary asset at more than the fair value. c. a gain when it constructs a piece of equipment at a cost savings. d. a gain when a company receives no cash for a nonmonetary asset received in an exchange.

b. a loss when it acquires a nonmonetary asset at more than the fair value.

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

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 a. be reported in the Other Revenues and Gains section of the income statement. b. effectively reduce the amount to be recorded as the cost of the new asset. c. effectively increase the amount to be recorded as the cost of the new asset. d. be credited directly to the owner's capital account.

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

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 a. the nominal cost of taking title to it. b. its fair value. c. one dollar (since the site cost nothing but should be included in the balance sheet). d. the value assigned to it by the company's directors.

b. its fair value.

Fences and parking lots are reported on the balance sheet as a. current assets. b. land improvements. c. land. d. property, plant, and equipment.

b. land improvements.

Which of the following would not be considered a remediation cost? a. cleaning up groundwater b. permit costs to acquire landfill site c. removing soil contamination d. controlling methane gas migration

b. permit costs to acquire landfill site

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, the 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 is a a. paid-in capital account. b. revenue account. c. deferred revenue account. d. contribution expense account.

b. revenue account.

Which of the following statements is not true regarding capitalization of interest? a. The amount of interest cost capitalized during the period is referred to as avoidable interest and cannot exceed the actual interest cost incurred. b. Interest cost capitalized in connection with the purchase of land to be used as a building site is charged to the building account. c. If the weighted-average accumulated expenditures exceed the specific borrowings, a weighted-average interest rate is calculated based on the specific borrowings. d. When borrowed funds not immediately needed for construction are temporarily invested, the interest revenue earned cannot be offset against interest expense incurred.

c. If the weighted-average accumulated expenditures exceed the specific borrowings, a weighted-average interest rate is calculated based on the specific borrowings.

What is the accounting treatment for the donor when land is donated without conditions? a. The donation is recorded as a contribution expense at the book value of the land. b. The donation is recorded as a contribution expense at fair market value of the land only if there has been a loss in value. c. The donation is recorded as a contribution expense at fair market value and any gains or losses are recognized. d. The donation is recorded as goodwill at the fair market value of the land and any gains or losses are recognized.

c. The donation is recorded as a contribution expense at fair market value and any gains or losses are recognized.

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 is reported as other revenues and gains or other expenses and losses. c. The gain or loss from an involuntary conversion is not recognized when the enterprise reinvests in replacement assets. d.Losses equivalent to the asset's book value are recognized if the asset is abandoned

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

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? a. Interest cost is being incurred. b. Expenditures for the assets have been made. c. The interest rate is equal to or greater than the company's cost of capital. d. Activities that are necessary to get the asset ready for its intended use are in progress.

c. The interest rate is equal to or greater than the company's cost of capital.

Accretion on an Asset Retirement Obligation is recorded with a. a credit to accretion expense and a debit to the ARO liability. b. debits to accretion expense and interest expense, and a credit to the ARO liability. c. a debit to accretion expense and a credit to the ARO liability. d. a debit to interest expense and a credit to the ARO liability

c. a debit to accretion expense and a credit to the ARO liability.

An Asset Retirement Obligation (ARO) is reported on the Balance Sheet a. as an asset at the fair value of the legal obligation. b. as a liability at the same cost as the asset acquired. c. as a liability at the fair value of the legal obligation. d. at zero because the future value can not be determined.

c. as a liability at the fair value of the legal obligation.

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 a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down. b. written off as a loss in the year the hotel is torn down. c. capitalized as part of the cost of the land. d. capitalized as part of the cost of the new hotel.

c. capitalized as part of the cost of the land.

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 a. expensed. b. debited to accumulated depreciation. c. capitalized in the machine account. d. allocated between accumulated depreciation and the machine account.

c. capitalized in the machine account.

When a company purchases land as a construction site for a plant, any interest costs capitalized during the period of construction are part of the a. period cost. b. cost of land improvement. c. cost of the plant. d. cost of the land.

c. cost of the plant.

The cost of land purchased as a building site does not include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments.

c. costs of improvements with limited lives.

Which of the following nonmonetary exchange transactions generally results in the recognition of gains or losses? a. exchange of assets with no change in the future cash flows as a result of the transaction b. exchange of products by companies in the same line of business with no difference in future cash flows c. exchange of assets with a change in the future cash flows as a result of the transaction d. exchange of an equivalent interest in a similarly productive asset that causes the companies involved to remain in essentially the same economic position

c. exchange of assets with a change in the future cash flows as a result of the transaction

In accounting for plant assets, which of the following outlays made after acquisition should be fully expensed in the period the expenditure is made? a. expenditure made to increase the efficiency or effectiveness of an existing asset b. expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated c. expenditure made to maintain an existing asset so that it can function in the manner intended d. expenditure made to add new asset services

c. expenditure made to maintain an existing asset so that it can function in the manner intended

Kelley Company purchased land, a building, and equipment for $1,200,000 from Bagley Enterprises. The portion of the total cost recorded for the equipment a. cannot be determined so the three assets are recorded in one account. b. is equal to the book value of the asset on Bagley's books. c. is computed by taking the fair value of the equipment divided by the fair value of the three assets and then multiplying that percentage by the total cost of $1,200,000 d. is reduced by the difference between the fair value of the equipment and Bagley's cost.

c. is computed by taking the fair value of the equipment divided by the fair value of the three assets and then multiplying that percentage by the total cost of $1,200,000

Land Improvements typically include all of the following except a. fencing. b. parking lots. c. removal of old buildings. d. lighting.

c. removal of old buildings.

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost incurred during the period. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost that would not have been incurred if expenditures for asset construction had not been made. d. that portion of weighted-average accumulated expenditures on which no interest cost was incurred.

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

Plant assets purchased on long-term credit contracts should be accounted for at a. the total value of the future payments. b. the future amount of the future payments. c. the present value of the future payments. d. the fair market value of the asset.

c. the present value of the future payments.

Which of the following assets do not qualify for capitalization of interest costs incurred during the 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

In which of the following situations would a cost incurred after an asset's acquisition be capitalized? a. There is no increase in the useful life of an asset. b. The expenditure is necessary to maintain the working order of the asset. c. The amount of the expenditure must be immaterial. d. The useful life of the asset is increased.

d. The useful life of the asset is increased.

In a nonmonetary exchange of plant assets, accounting recognition should not be given to a. a loss when the exchange has no commercial substance. b. a gain when the exchange has commercial substance. c. a portion of the gain when the exchange has no commercial substance and cash is paid (when the cash paid is less than 25% of the fair value of the exchange). d. a portion of the gain when the exchange has no commercial substance and cash is received (when the cash received is less than 25% of the fair value of the exchange).

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

To be consistent with the historical cost principle, fixed overhead costs incurred by an enterprise constructing its own building should be a. allocated between the building and operating expense based on lost production. b. are not included in the cost of the asset. c. allocated between the building and operating expense on an opportunity cost basis. d. allocated on a pro-rata basis between the building and normal operations.

d. allocated on a pro-rata basis between the building and normal operations

Which of the following would not be considered property, plant, and equipment? a. an asset that will provide services over a number of years b. a tangible piece of equipment c. a warehouse used to store inventory available for sale d. an idle building

d. an idle building

An expenditure made in connection with production equipment is a. expensed immediately if it extends the useful life but does not improve the quality. b. expensed immediately if it improves the quality of production but does not extend the useful life. c. capitalized if it maintains the machine in normal operating condition. d. capitalized if it increases the quantity of units produced by the machine.

d. capitalized if it increases the quantity of units produced by the machine.

Termination of an asset's service due to theft or fire is referred to as a. special assessment. b. nonreciprocal transfers. c. speculation. d. involuntary conversion.

d. involuntary conversion.

When a plant asset is acquired by the issuance of common stock and the fair value of the plant asset is not clearly determinable, the cost of the plant asset is properly measured by the a. par value of the stock. b. stated value of the stock. c. book value of the stock. d. market price of the stock.

d. market price of the stock.

Which of the following costs are capitalized for self-constructed assets? a. materials and labor directly related to construction only b. labor and overhead directly related to construction only c. materials and overhead directly related to construction only d. materials, labor, and overhead directly related to construction only

d. materials, labor, and overhead directly related to construction only

Which of the following is not a capital expenditure for a warehouse building? a. addition of 2,500 square feet b. replacement of window units with central air conditioning c. addition of solar panels d. painting of the building's exterior

d. painting of the building's exterior

When funds are borrowed to pay for the construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest revenue earned on these temporary investments is a. offset against interest cost incurred during construction. b. used to reduce the cost of assets being constructed. c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized. d. recognized as revenue of the period.

d. recognized as revenue of the period.

Interest cost incurred in purchasing an asset that is ready for its intended use is a. written off over the remaining term of the debt. b. accumulated in a separate deferred charge account and written off over the useful life of the asset. c. not written off until the related asset is fully depreciated or disposed of. d. recorded as an expense.

d. recorded as an expense.

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 a. the significance of the cost allocated to the building relative to the combined cost of the land and building. b. the length of time for which the building was held before its demolition. c. the contemplated future use of the parking lot. d. the intention of management for the property when the building was acquired.

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

Which of these is not part of the historical cost of an asset? a. acquisition price b. sales tax on acquisition price c. freight and shipping costs to bring the asset to the location where it will be used d. training costs

d. training costs