Chapter 10
On January 1, 2017, Wells Tech signed a $950,000 two-year construction contract. Wells secured $950,000 financing at 7%. In 2017, Wells paid out $650,000; average accumulated expenditures was $375,000. Excess borrowed funds were invested, yielding $120,000 income. What should Wells report as capitalized interest at December 31, 2017?
$26,250 Capitalized interest is the lesser of avoidable or actual interest. To determine avoidable interest, accumulated expenditures are multiplied by the interest rate, or $375,000 * .07 = $26,250. To determine actual interest, amount borrowed is multiplied by the interest rate, or $950,000 * .07 = $66,500. Avoidable interest is the lower of the two amounts, so capitalized interest is $26,250.
Rhett Company exchanged equipment that cost $66,000 and has accumulated depreciation of $30,000 for equipment with a fair value of $48,000 and received $12,000 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is (LO 4) (a)$4,800 gain. (b)$6,000 gain. (c)$18,000 gain. (d)$24,000 gain.
(a)$4,800 gain. The formula is [($12,000 / {$12,000 + $48,000}) × {($48,000 + $12,000 − ($66,000 - $30,000)}], or $4,800.
Fielder 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. The cost assigned to the land is (LO 4) (a)$0. (b)$140,000. (c)$160,000. (d)$210,000.
(b)$140,000. The lump sum price incurred to acquire more than one asset is allocated among them based on their relative fair market values: ($160,000/ $480,000) ($420,000) = $140,000.
The accounting for interest costs incurred during construction recommended under GAAP is to: (LO 3)
(b)charge construction with all costs of funds employed, whether identifiable or not. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
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 (LO 4) (a)the nominal cost of taking title to it. (b)its market 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 market value. The donated asset should be recorded at its market value.
The cost of property acquired by the issuance of securities which are actively traded on an organized exchange is equal to: (LO 1) (a)the original cost of the securities. (b)the market value of the securities. (c)the par value of the securities. (d)the book value of the property acquired.
(b)the market value of the securities. Property acquired in a non-cash transaction is recorded at the market value of the item given up or the market value of the property received, whichever is more readily determinable.
Silver Oak Company purchased machinery for $320,000 on January 1, 2013. 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, 2017 at a gain of $6,000. How much cash did Silver Oak receive from the sale of the machinery? (LO 6) (a)$46,000. (b)$54,000. (c)$66,000. (d)$86,000.
(c)$66,000. A cost of $320,000 − $260,000 in accumulated depreciation results in a book value of $60,000. Adding the $6,000 gain indicates sale price was $66,000.
Watauga Company purchased equipment on July 1, 2017 for $70,000. Sales tax on the purchase was $700. Other costs incurred were freight charges of $800, insurance during shipping of $ 150, repairs of $1,300 for damage during installation, and installation costs of $1, 050. What is the cost of the equipment? (LO 1) (a)$70,000 (b)$71,500 (c)$72,700 (d)$74,000
(c)$72,700 The cost is $70,000 + $700 + $800 + $150 + $1,050 = $72,700. Repair costs are not capitalized.
Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a: (LO 4) (a)Miscellaneous Gain account. (b)Paid-in Capital account. (c)Contribution Revenue account. (d)Additional Paid-in Capital account.
(c)Contribution Revenue account. FASB requires that such contributions be recognized as revenues in the period received.
Which of the following statements is true regarding capitalization of interest? (LO 3) (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.
(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. Capitalizing the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made is the approach recommended under GAAP.
Delta River Company sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000. The journal entry to record this transaction will include: (LO 6) (a)a credit to the Equipment account for $12,000. (b)a credit to a gain account for $8,000. (c)a debit to a loss account for $3,000. (d)a credit to Accumulated Depreciation — Equipment for $32,000.
(c)a debit to a loss account for $3,000. The journal entry to record the sale would include debits to Cash ($9,000), Accumulated Depreciation — Equipment ($32,000) and a loss account ($3,000). Equipment would be credited for $44,000.
Cayo Casta Cabins Corporation recently purchased Ship Island Resort and Casino and the land on which it is located with the plan to tear down the resort and build a new luxury hotel on the site. Cayo Casta Cabin Corporation salvaged fixtures and wood flooring from Ship Island prior to demolishing the building. The proceeds from the sale of the salvaged materials should be (LO 1) (a)recognized as revenue in the period of the sale. (b)recognized as an extraordinary gain in the year the hotel is torn down. (c)recorded as a reduction of the cost of the land. (d)recorded as a reduction of the cost of the new hotel.
(c)recorded as a reduction of the cost of the land. Proceeds from the sale of the salvaged materials should reduce the cost of the land.
Lacks commercial substance recognizes gain formula
(cash recevied/cash recieved+fair value of total assets) * total gain =regonized gain
On September 1, 2017, Alpha Graphics Printing Co. incurred the following costs for one of its printing presses: (LO 5) Purchase of attachment- $35,000 Installation of attachment- 3,000 Replacement parts for renovation of press-12,000 Labor and overhead in connection with renovation of press-1,000 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? (a)$0. (b)$38,000. (c)$47,000. (d)$51,000.
(d)$51,000. Since the renovation significantly increased productivity, all $51,000 should be capitalized.
During self-construction of an asset by Gambino Company, the following were among the costs incurred: (LO 2) Fixed overhead for the year-$1,210,000 Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production- 35,000 Variable overhead attributable to self-construction-25,000 What amount of overhead should Gambino include in the cost of the self-constructed asset? (a)$0 (b)$25,000 (c)$35,000 (d)$60,000
(d)$60,000 The amount is $35,000 + $25,000, or $60,000.
Timber Ridge Company sold equipment with a cost of $75,000 and accumulated depreciation of $40,000 for $37,000. The journal entry to record this transaction will include: (LO 6) (a)a credit to the Equipment account for $35,000. (b)a credit to a gain account for $38,000. (c)a debit to a loss account for $2,000. (d)a debit to Accumulated Depreciation — Equipment for $40,000.
(d)a debit to Accumulated Depreciation — Equipment for $40,000. When plant assets are sold for an amount greater than their book value, a gain is recorded. The journal entry would include debits to Cash ($37,000) and Accumulated Depreciation ($40,000) and credits to Equipment ($75,000) and a gain account ($2,000).
7. Overhead costs related to self-constructed assets are accounted for by: (LO 2) (a)allocating overhead on the basis of lost production. (b)assigning a portion of all overhead to the asset, even if the total cost exceeds the normal purchase. (c)assigning no fixed overhead to the asset. (d)assigning a pro rata portion of fixed overhead to the asset.
(d)assigning a pro rata portion of fixed overhead to the asset. A pro rata portion of fixed overhead should be assigned to the self-constructed asset because a better matching of costs and revenues results.
The cost of equipment would include all of the following except: (LO 1) (a)purchase price reduced by any discount taken. (b)freight costs. (c)installation costs. (d)cost of training the equipment operator.
(d)cost of training the equipment operator. The cost of training the equipment operator would not be capitalized as part of the cost of the equipment.
Property, plant, and equipment includes (LO 1) (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 answer choices would be classified as property, plant, and equipment.
(d)none of these answer choices would be classified as property, plant, and equipment.
The interest rate(s) used in computing avoidable interest is the: (LO 3) (a)rate incurred on specific borrowings. (b)weighted average rate incurred on all other outstanding debt. (c)lower of the rate incurred on specific borrowings or the weighted average rate. (d)rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures.
(d)rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures. The interest rates used in computing avoidable interest are the specific interest rate and the weighted average rate.
In an exchange of nonmonetary assets that has commercial substance, when no cash is involved, the new asset is valued at: (LO 4) (a)the fair value of the new asset plus the gain deferred. (b)the book value of the old asset. (c)the book value of the old asset plus the gain deferred. (d)the fair value of the new asset.
(d)the fair value of the new asset. In an exchange of nonmonetary assets that has commercial substance, the earnings process of the old asset is completed and any gain or loss is recognized. When no cash is exchanged, the new asset will be valued at the fair market value of either the old asset or the new asset, as they will be equal.
RP Tech received $70,000 in cash and a used grinder with a fair value of $210,000 from AE Inc., in exchange for RP's grinder. RP's grinder has a fair value of $280,000 and an undepreciated cost of $265,000. If the transaction has commercial substance, how much gain should RP recognize on the exchange and what value should it record for the acquired grinder? A. $15,000 and $210,000. B. $45,000 and $55,000. C. $60,000 and $265,000. D. $60,000 and $0.
A. $15,000 and $210,000.
In which of the following instances should the firm's expenditure be categorized as an addition? A. A firm opts to buy a new piece of machinery that will automate a process previously carried out by hand. B.A firm opts to replace an existing piece of machinery with a similar piece of machinery made by a different manufacturer. C. A firm opts to move a piece of machinery to a different part of the factory floor and reinstall it there. D. A firm opts to replace an existing piece of machinery with a new model that is 25% more efficient.
A. A firm opts to buy a new piece of machinery that will automate a process previously carried out by hand.
RL Enterprises originally paid $16,000 for a machine and recorded depreciation at a rate of $1,200 per year for eight years. It sold the machine at the end of the first quarter of the ninth year for $6,000. What is RL's amount of loss or gain on the sale? A.$100 loss B. $100 gain C. $400 gain D. $400 loss
A.$100 loss
On August 1, 2017, Liggett Enterprises purchased a new truck on a deferred payment basis. A $12,000 down payment was made and 4 monthly installments of $10,000 each are to be made starting September 1, 2017. The cash equivalent price of the truck was $48,000. Liggett incurred and paid delivery costs of $2,000. What is the amount to be capitalized as the cost of the truck? A$48,000. B$54,000. C$52,000. D$50,000.
Amount to be capitalized is equal to the cash purchase amount, which was the price + the delivery charge ($48,000 + $2,000 = $50,000).
Bonnie is the CFO of a small printing company that has decided to replace its old printing press with a newer, more efficient model. Bonnie knows the cost of purchasing and installing the new press, as well as total accumulated depreciation on the old press. Bonnie wants to capitalize the cost of the new press using the substitution approach. Given this information, which of the following statement is true?
Before proceeding with the substitution approach, Bonnie must determine the original cost of the old press, as well as what (if any) salvage value the old press has. In order to use the substitution approach, Bonnie must know the carrying amount of the old press. In order to determine this amount, she must first determine the original cost of the old press because the press's carrying amount is equal to the difference between its initial cost and its accumulated depreciation. Bonnie should also determine what, if any, salvage value the old press has, because any money the firm makes from selling the machine will affect the gain or loss on disposal.
Payment for construction from note proceeds Premium on 6-month insurance policy during construction Refund of 1-month insurance premium because construction completed early Architect's fee on building Interest paid during construction on money borrowed for construction Excavation costs for new building
Building
In which of the following circumstances should a company add additional costs to an asset's original cost after that asset's acquisition? A.if such costs are part of the regular maintenance of the asset B. if such costs are associated with bringing the asset to the location for its intended use C. if such costs provide future service potential to the asset D. if such costs prevent further depreciation of the asset
C. if such costs provide future service potential to the asset
Putnam County owned an idle parcel of real estate consisting of land and a factory. Putnam gave title to this realty to Lucas Company as an incentive for Lucas to establish manufacturing operations in the county. Lucas paid nothing for the realty, which had a fair market value of $250,000 at the date of the exchange. How should Lucas record this nonmonetary transaction? A. As a credit to Unearned Revenue for $250,000 B. As a memo entry only C. As a debit to Donated Capital for $250,000 D. As a credit to Contribution Revenue for $250,000
D. As a credit to Contribution Revenue for $250,000
Which of the following describes one of the conditions that must be satisfied before interest capitalization on a qualifying asset can begin?
Expenditures for the assets have been made.
Which of the following is a reason why companies should not write up property, plant, and equipment to reflect fair value when it is above cost?
Gains and losses should not be anticipated but should be recognized when the asset is sold.
When a plant asset is disposed of, a gain or loss may result. Under which of the following circumstances would the gain or loss be classified under Discontinued Operations, as an extraordinary item, on the income statement?
If it resulted from an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature in the sale of a component of a business.
A firm is constructing a new facility for its own use, and it decides to finance the project entirely through a specific new borrowing. The financing was obtained in the first year of the project, and construction expenditures were made at the end of each quarter for the two consecutive years. How should the firm determine the total amount of interest cost to be capitalized for the project?
It should multiply the interest rate on the borrowing by the weighted-average accumulated expenditures for the facility during the two-year construction period.
Cost of land fill and clearing Delinquent real estate taxes on property assumed by purchaser Cost of real estate purchased as a plant site (land $200,000 and building $50,000) Commission fee paid to real estate agency Cost of razing and removing building Proceeds from salvage of demolished building Cost of trees and shrubbery planted (permanent in nature)
Land
Installation of fences around property Cost of parking lots and driveways
Land Improvements
Money borrowed to pay building contractor (signed a note)
Note Payable
If assets are purchased on long-term credit contracts, they should be accounted for using the
Present value of the consideration exchanged between the contracting parties at the date of the transaction.
John dies and leaves property to his sons Bob, Tom, Ron, and Joe. Bob farms the land he inherits. Tom builds a new factory for the company he owns on his land. Ron subdivides and develops his property. Joe's property abuts the store he owns, and he turns it into a parking lot. Which son should classify his land as inventory rather than as a fixed asset?
Ron
Which of the following provides the justification for the capitalization of interest costs?
The historical cost principle
A repair that maintains an asset in normal operating condition would not be classified as a capital expenditure.
True , would be an expense
An expenditure made in connection with a machine being used by an enterprise should not be capitalized
if it maintains the machine in normal operating condition.
A firm recently replaced one of several indicator lights on a large piece of manufacturing equipment. The cost of this repair should be
immediately expensed.