Unit 8

Company X purchased the assets of Company Y at an auction for $5,600,000. An independent appraisal of the fair value of the assets is listed below: Land:$1,900,000Building:2,800,000Equipment:2,100,000Trucks:3,400,000 Company X allocates the purchase price on the basis of the relative fair values.Which amount will be allocated to the land? $1,900,000 $1,537,255 $2,550,000 $1,043,137

$1,043,137 The relative fair value of the land is $1,043,137. The relative fair value is found by dividing the appraised fair value of the land divided by the sum of all of the appraised values of all the assets multiplied by the lump sum purchase price at the auction. (($1,900,000 / $10,200,000) × $5,600,000)) = $1,043,137

amison 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$1,900,000Building$2,800,000Equipment$2,100,000Trucks$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? $2,800,000 $3,400,000 $3,360,000 $1,866,667

$1,866,667 When a purchase is made at a lump-sum price, the company allocates the cost based on the relative fair values of the assets. Therefore, the value allocated to the trucks is: $5,600,000 x [ $3,400,000 / ($1,900,000 + $2,800,000 + $2,100,000 + $3,400,000)] = $1,866,667.

Ecker Company purchased a new machine on May 1, 2012 for $528,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $24,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2021, the machine was sold for $72,000.What should be the loss recognized from the sale of the machine? $10,800 $34,800 $24,000 $0

$10,800 Depreciable Basis = $528,000 less $24,000 (salvage value) = $504,000

On January 1, a company began construction on a new building. The company made a payment of $8,000,000 on January 1 and another payment for $14,000,000 on August 1. Construction was finished on December 31. The company had an outstanding loan with a 6% interest rate.What were the weighted-average accumulated expenditures for the year? $13,833,333 $22,000,000 $17,333,333 $8,000,000

$13,833,333 (5/12 × $14,000,000) + ($8,000,000)

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.What is the cost assigned to the land? $210,000 $0 $140,000 $160,000

$140,000 When a purchase is made at a lump-sum price, the company allocates the cost based on the relative fair values of the assets. The land has a fair value of $160,000 / ($160,000 + $320,000) or 33.333333%. The cost allocated to the land is $420,000 × 33.3333333% or $140,000.

On September 10, Year 5, Company X incurred the following costs for one of its printing presses:Purchase of attachment: $55,000Installation of attachment: $5,000Replacement parts for renovation of press: $18,000Labor and overhead in connection with renovation of press: $7,000Training costs for operators to learn how to use new attachment: $2,000Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity.Which amount of costs should be expensed in the month of September, excluding any changes in depreciation or amortization? $7,000 $2,000 $5,000 $9,000

$2,000 training costs are expensed in the month that they occur.

A company recently constructed a building that cost $8,000,000. Weighted average accumulated expenditures were $2,500,000; actual interest was $300,000; and avoidable interest was $150,000. The salvage value is $600,000, and the useful life is 25 years. The company is using the straight-line method.What is the depreciation expense for the first full year? $396,000 $308,000 $296,000 $302,000

$302,000 The depreciable base is the cost + avoidable interest less salvage value. ($8,000,000 - $600,000 + $150,000) / 25 = $302,000

Mendenhall Corporation constructed a building at a cost of $14,000,000.Weighted-average accumulated expenditures were $5,600,000.Actual interest was $560,000.Avoidable interest was $280,000. If the salvage value is $1,120,000, and the useful life is 40 years, what is the depreciation expense for the first full year using the straight-line method? $469,000 $357,000 $336,000 $329,000

$329,000 The cost of the building includes the historical cost and the lower of the actual or avoidable interest less any salvage value. Therefore, the cost of the building is calculated as: $14,000,000 + $280,000 - $1,120,000 = $13,160,000. The straight-line depreciation expense is calculated as: $13,160,000 / 40 years = $329,000 per year.

On February 1, 2020, Nelson Corporation purchased a parcel of land as a factory site for $320,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2020. Costs incurred during this period are listed below: Demolition of old building$20,000Architect's fees$35,000Legal fees for title investigation and purchase contract$5,000Construction costs$1,390,000 (Salvaged materials resulting from demolition were sold for $10,000.)How should Nelson record the costs of the land and building, respectively? $330,000 and $1,425,000 $335,000 and $1,425,000 $330,000 and $1,430,000 $345,000 and $1,415,000

$335,000 and $1,425,000

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? $54,000 $46,000 $66,000 $86,000

$66,000 Typically a company will record depreciation for the period of time in the current year prior the date of sale.The depreciable basis of the asset is $320,000 less the $20,000 salvage value, or $300,000.Annual depreciation expense is $300,000 / 5 years = $60,000 / year.Accumulated Depreciation = $60,000 (2014) + $60,000 (2015) + $60,000 (2016) + $60,000 (2017) + $20,000 [60,000 × (4 month / 12 month)] = $260,000Book Value = $320,000 (original cost) - $260,000 (accumulated depreciation) = $60,000.Sales Price - Book Value = Gain/LossSales Price - $60,000 = $6,000; Sales Price = $66,000

On September 10, 2020, Jenks Co. incurred the following costs for one of its printing presses: Purchase of attachment$55,000Installation of attachment$5,000Replacement parts for renovation of press$18,000Labor and overhead in connection with renovation of press$7,000 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? $67,000 $85,000 $0 $78,000

$85,000 If an improvement, or renovation, increases the the output or quality of an asset, all of the costs associated with the addition or improvement should be capitalized. Therefore, the costs that should be capitalized is: $55,000 + $5,000 + $18,000 + $7,000 = $85,000

Delta River Company sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000.What should be included in the journal entry to record this transaction? A credit to Accumulated Depreciation - Equipment for $32,000 A credit to the Equipment account for $12,000 A debit to a loss account for $3,000 A credit to a gain account for $8,000

A debit to a loss account for $3,000 When an asset is sold, the asset account and the accumulated depreciation (contra-asset) account are "zeroed-out" and the resulting difference is the cost basis of the asset to determine if the asset was sold at a gain or a loss. In this example, the book basis was $44,000 (original value) less $32,000 (accumulated depreciation = $12,000. Since the asset was sold for $9,000, the journal entry must include a debit to the loss on the sale of asset account. The complete journal entry would be: Debit Cash $9,000, Debit Accumulated Depreciation $32,000, Debit Loss $3,000, Credit Equipment $44,000.

What assets qualify for interest cost capitalization? Assets that had repair costs used to return the asset to its intended purpose Assets that are under construction for a company's own use Assets that are ready for their intended use in the earnings of the company Assets that are not currently being used because of excess capacity

Assets that are under construction for a company's own use For the purposes of interest cost capitalization, qualifying assets must require a period of time to get the asset ready for their intended purposes. Assets that do not qualify include assets that are currently in use, assets that are ready for their intended use, or assets that are not in use due to excess capacity or obsolescence.

How are expenditures that extend the useful life of a plant asset without improving its quantity or quality accounted for? As additions By debiting the asset account As improvements By debiting accumulated depreciation

By debiting accumulated depreciation . If an expenditure increases the life of an asset, but does not increase the quality nor quantity, a debit to the accumulated deprecation account is needed as the useful life of the asset has been extended.

How does GAAP recommend accounting for interest costs incurred during construction? Capitalize a pro rata portion of all costs of funds employed Charge construction with all costs of funds employed, whether identifiable or not Capitalize no interest charges during construction Capitalize the lower of actual interest cost incurred or avoidable interest.

Capitalize the lower of actual interest cost incurred or avoidable interest. GAAP requires capitalizing actual interest (with modification) incurred during construction.

Which approach should be used to treat interest costs that are incurred before construction is completed? Capitalize the lower of the actual or avoidable interest during construction. Capitalize interest for land investment that is not part of the construction. Capitalize the cost of interest as soon as the firm receives the funds. Capitalize interest after completion of the project.

Capitalize the lower of the actual or avoidable interest during construction. The interest cost will be capitalized during construction at the lower actual or avoidable interest.

Which method should be used to handle the interest incurred during financing the construction of property, plant, and equipment? Capitalize the actual interest costs that exceed the prime rate of interest Capitalize the interest costs related to variable rate debts Capitalize the interest costs for the assets with an expected life of less than one year Capitalize the lower of the amount of actual interest incurred or the avoidable interest during construction

Capitalize the lower of the amount of actual interest incurred or the avoidable interest during construction

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.How shoud the cost of the Emporia Hotel be treated? Depreciated over the period from acquisition to scheduled tear down date Capitalized as part of the cost of the new hotel Capitalized as part of the cost of the land Written off as a loss in the year the hotel is torn down

Capitalized as part of the cost of the land If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. Therefore, the cost of the Emporia hotel is capitalized as part of the cost of the land.

Company X sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000.Which part of the journal entry should record the sale of the equipment? Debit to a gain account for $9,000 Credit Equipment for $9,000 Credit to a loss account for $3,000 Debit Accumulated Depreciation - Equipment for $32,000

Debit Accumulated Depreciation - Equipment for $32,000 The accumulated depreciation - equipment account would need to be reduced by $32,000 because the equipment had been sold.

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.How should the proceeds from the sale of the building be treated? Netted against the costs to clear the land and expensed as incurred Netted against the costs to clear the land and amortized over the life of the plant Deducted from the cost of the land Classified as other income

Deducted from the cost of the land If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. Therefore, the proceeds from the sale of the old building is deducted from the cost of the land.

In accounting for plant assets, what outlay, made subsequent to acquisition, should be fully expensed in the period the expenditure is made? Expenditures made to add new asset services Expenditures made to extend the useful life of an existing asset Expenditures made to increase the efficiency/effectiveness of an existing asset Expenditures made to maintain an existing asset

Expenditures made to maintain an existing asset Repairs, ordinary costs to maintain or return an asset to its existing level of service, however, are expensed.

Which costs should be expensed for plant assets? Upgrades to the asset that will extend the useful life of the asset Upgrades that improve the efficiency of the asset Expenses that result in changing the original function of the asset Expenses that are used to maintain the asset

Expenses that are used to maintain the asset Expenses for maintenance are expensed in the period in which they occur.

Which cost should be capitalized for constructing a building? Depreciation expense during construction Landscaping around the building Cost of the land associated with the building site Interest cost during construction

Interest cost during construction

Which statement describes an involuntary conversion? It may result when a company sells assets that are not fully depreciated. It occurs when a company files for bankruptcy and needs to protect its assets. It occurs when a company replaces an asset before its useful life has ended. It may result from destruction caused by fire.

It may result from destruction caused by fire.

Which item is considered a research and development (R&D) activity? Laboratory research aimed at discovery of new knowledge Alteration to an existing product that improves the product Purchase of testing equipment for a research facility Investment in manufacturing processes that increase efficiency

Laboratory research aimed at discovery of new knowledge Research and development are expensed because it is required by GAAP.

How are fences and parking lots reported on the balance sheet? Current assets Property and equipment Land Land improvements

Land improvements Improvements with limited lives, such as driveways, walks, fences, and parking lots are classified on the balance sheet as Land Improvements and depreciated over their estimated lives.

What best describes the correct treatment of the interest costs capitalized during the period of construction when a company purchases land as a site for a plant? Regard as a cost of the plant Disregard the interest cost Regard as a cost of the land Regard as a period cost

Regard as a cost of the plant Interest costs may only be included in the cost of qualifying assets, or assets that are constructed for the company's own use and those assets intended to be sold/leased. Interest costs are not allocated to assets that are ready for their intended use already or assets that are not used in the company's earnings activities, such as land or assets otherwise not in use.

At what value should assets acquired in a lump sum purchase be recorded? Appraised value Relative fair market values Fair market value Relative book value

Relative fair market values When a purchase is made at a lump-sum price, the company allocates the cost based on the relative fair values of the assets.

When computing the amount of interest cost to be capitalized, What does the concept of "avoidable interest" refer to? That portion of weighted-average accumulated expenditures on which no interest cost was incurred The total interest cost actually incurred A cost of capital charge for stockholders' equity That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made Avoidable interest is the amount of interest cost during the period that a company could theoretically avoid if it had not made the decision to purchase the asset in the first place.

What is the cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, equal to? The book value of the property acquired The original cost of the securities The market value of the securities The par value of the securities

The market value of the securities . The market value of the securities is used to determine the fair market value of the property.

Which term is used to describe the termination of an asset's service due to theft, fire, etc.? Special assessment Nonreciprocal transfers Involuntary conversion Speculation

The term involuntary conversion is used to describe the loss of an asset due to theft, fire, natural disaster, etc

A company began constructing an asset at the beginning of Year 1, and it is being entirely financed with specific new borrowing. Construction expenditures were made in Years 1, 2, and 3.What is the basis for calculating the interest cost to be capitalized for Year 3? The weighted-average expenditures for the asset in Year 3 The total accumulated expenditures for the asset in Year 2 The weighted-average accumulated expenditures for all three years The total accumulated expenditures for all three years

The weighted-average accumulated expenditures for all three years The weighted average accumulated expenditures for all three years will be used to determine the interest cost to capitalize.