Chapter 10 Conceptual

Cost to repair & renovate

Bldg

Back property taxes

Land

Broker's commission on land

Land

Proceeds from salvage of demolished bldg

(Land)

Architect's fee

Bldg

Installation of equipment

Equipment

Land held for resale

Inventory

Legal fees

Land

Fee for title search

Land (closing costs)

Recording fees

Land (closing costs)

Street lights installed

Land Improvements

Parking lots

Land improvements

Assessment by city for drainage project / Draining

Land

Assumption of a lien on the property

Land

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

Refund of insurance premium because construction completed early

(Bldg)

Assets that qualify for interest cost capitalization include a. assets under construction for a company's own use. b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization.

A

Each of the following is an example of an assets 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 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 (smallest loss) to the company.

A

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

Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment? a. Capitalize only the actual interest costs incurred during construction. 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

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? What's part of Equip?

All BUT repairs

A company should immediately recognize: a. any gain when it makes a bargain purchase. b. any loss when it ignorantly pays too much for an asset originally. c. any gain when it constructs a piece of equipment at a cost savings. d. any loss when it receives any asset lower than its book value.

B

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

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 trans¬actions 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

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

Broker's commission on purchased bldg

Bldg

Contractor charges

Bldg

Excavation costs

Bldg

Interest paid on money borrowed for construction

Bldg

Permits

Bldg

Premium on insurance policy during construction

Bldg

Professional fees

Bldg

Taxes paid during construction

Bldg

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

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

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

C

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

C

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

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

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, and avoidable interest was $280,000. If the salvage value is $1,120,000, and the useful life is 40 years, What is the cost?

Cost + Avoidable interest

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 in relation to the combined cost of the land and building. b. the length of time for which the building was held prior to 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

Interest cost incurred in purchasing an asset that is ready for its intended use should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. None of these answers are correct.

D

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

Termination of an asset's service due to theft, fire, etc, is called: a. special assessment. b. nonreciprocal transfers. c. speculation. d. involuntary conversion.

D

To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be a. allocated on the basis of lost production. b. eliminated completely from the cost of the asset. c. allocated on an opportunity cost basis. d. allocated on a pro rata basis between the asset and normal operations.

D

When funds are borrowed to pay for 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 earned on these temporary investments should be 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

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

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

Freight on equipment purchased

Equipment

Insurance cost on equipment while in transit

Equipment

Interest on loans for equipment

Equipment

Sales tax on equipment

Equipment

Special plumbing fixtures required for the new equipment

Equipment

Wage costs for technicians to test equipment

Equipment

Hauling charges on equipment from storage to building

Expense

Repair cost on equipment

Expense

Storage charges on equipment bc late construction

Expense

During self-construction of an asset by Samuelson Company, the following were among the costs incurred: Fixed overhead for the year $1,000,000 Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production 90,000 Variable overhead attributable to self-construction 50,000 What's part of asset?

Fixed allocated Variable attributable

Assumption of a mortgage on the property

Land

Assumption of an encumbrance on the property

Land

Closing costs

Land

Commission fee paid to real estate agency

Land

Cost of razing and removing bldg

Land

Cost of real estate purchased as a plant site

Land

Delinquent real estate taxes on property

Land

Grading or filling costs

Land

Pavement

Land

Permanent landscaping/trees/shrubbery

Land

Survey fees

Land

Attorney's fees

Land (closing costs)

Fences

Land improvements

Private driveways

Land improvements

Security systems

Land improvements

Signage

Land improvements

Sprinkler systems

Land improvements

Walks

Land improvements

Land acquired for speculation

Long-Term Investment

Insurance premium paid during the first year of operation on this equipment

Prepaid insurance expense --> Insurance Expense

On February 1, 2017, Nelson Corporation purchased a parcel of land as a factory site for $320,000. Costs incurred during this period are listed below: Demolition of old building $ 20,000 Architect's fees 35,000 Legal fees for title investigation and purchase contract 5,000 Construction costs 1,390,000 (Salvaged materials resulting from demolition were sold for $10,000.) What's capitalized as land?

Purchase price Demolition old bldg Title investigation legal fees (Salvage)

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 What's capitalized as land?

Purchase price Tear down building (Salvage) Title investigation legal fees Title insurance cost Pavement

Allocated overhead during construction

self-constructed bldg

Labor during construction

self-constructed bldg

Materials used during construction

self-constructed bldg