Financial Accounting Chapter 10

What are the cost components for self-constructed assets?

(1) direct material (2) manufacturing overhead (3) direct labor

The costs included in the natural resource account includes

(1) exploration costs. (2) acquisition costs. (3)development costs. (4) restoration costs.

The two important accounting issues related to self-constructed assets are

(1) interest charges and (2) allocation of overhead.

If natural resources are developed by a company, the initial valuation should include

(1) restoration costs. (2) exploration costs. (3) development costs. (4) acquisition cost.

From a financial reporting perspective, property, plant, and equipment and intangible assets exhibit the following characteristics

(1) revenue-producing (2) long-lived

The interest capitalization period begins with the first expenditure and ends when which of the following occur?

(1) the asset is substantially complete and ready for use (2) interest costs are no longer being incurred

Which of the following are classified as natural resources?

(1) timber tracts (2) mineral deposits

Which of the following is true regarding a nonmonetary exchange of assets?

A gain or loss is recognized for the difference between the fair value and the book value of the asset given up.

An asset is exchanged for another asset and cash is received in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Book value of the asset given up less the cash received.

A company acquires a mine and incurs costs such as expenditures to build tunnels and shafts before production may begin. These expenditures are classified as

development costs.

U.S. GAAP and IFRS treat research costs as a(n) ______, whereas for IFRS, development costs are treated as a(n) ______.

expense; intangible asset

When assets are acquired in a noncash transaction, if the fair value of the noncash items given is not clearly evident, then the ______ value of the assets received is used to record the assets.

fair

Asset retirement obligations are recorded as a liability and measured at

fair value

Donated assets should be recorded on the balance sheet at what amount?

fair value

The basic principle for valuing assets in a nonmonetary exchange is to value the asset received at

fair value

The ___ approach for self-constructed assets advocates including only the additional overhead costs incurred in the construction of the asset, whereas the full-cost approach requires the allocation of overhead to self-constructed assets.

incremental

An asset, other than financial assets, that has no physical substance is called a(n) ____ asset

intangible

True or false: Start-up costs such as legal fees and state filings to incorporate should be expensed in the period incurred.

True

True or false: The formula for capitalizing interest is the interest rate times the weighted average accumulated expenditures.

True

True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

True

A company issues its equity securities to purchase land. The common stock is not publicly traded. The best indicator of fair value is the

appraised value of the land.

Obligations associated with the disposition of property, plant, equipment, and natural resources are called ____ ____ obligations.

asset retirement

The FASB requires research and development costs to be expensed because

it is difficult to objectively determine the future benefits.

What amount is used to measure the fair value of an asset retirement obligation?

present value of estimated future cash flows

A company acquires equipment by signing an interest-bearing note payable. If the interest rate is realistic, the company will record the equipment at the

present value of the note payable, which is the face amount of the note.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.

capitalized

Computer software purchased for internal use should be

capitalized and amortized over its useful life.

Costs incurred after technological feasibility is established but before the software is available to customers should be

capitalized as an intangible asset.

When a company receives an asset from an unrelated party by a donation, the assets are valued at ___ value

fair

When a company acquires assets by issuing debt or equity securities, the first indicator of fair value is the

fair value of the debt or equity securities given.

The costs incurred after a natural resource has been discovered but before production begins are referred to as

development costs.

Assets that do not qualify for interest capitalization are

inventories routinely manufactured.

James Company acquires Smith Corporation for $10 million. The book value of Smith Corporation's net assets is $7 million, while the fair value of the net assets is $9 million. Goodwill associated with the acquisition is:

$1 Million

On January 1, 2017, Sonic Corp. begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Sonic had the following expenditures on the project during 2017: January 1, 2017 $100,000 April 1, 2017 100,000 November 1, 2017 150,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017?

$200,000 Reason: $100,000 x 12/12 = $100,000 $100,000 x 9/12 = $75,000 $150,000 x 2/12 = $25,000 Total: $100,000 + 75,000 + 25,000 = 200,000

Polly Corporation purchases land for $200,000. Polly incurs the following costs associated with the land acquisition: Property taxes for current year $4,000 Delinquent property taxes 8,000 Commission to broker 14,000 Cost of grading 2,000 Cost of land improvements 12,000 What is the amount that Polly should capitalize in the land account?

$224,000 ($200,000 + 8,000 + 14,000 + 2,000)

Ayesha Corp. purchases equipment to be used in manufacturing. Given the following expenditures during the year, calculate the amount capitalized as the cost of equipment. Purchase price $50,000 Freight and handling 2,000 Concrete pad for equipment 5,000 Maintenance during year 3,000 Shipping insurance 400

$57,400 Reason: (Purchase price + Fright + Pad for equipment + insurance) ($50,000 + 2,000 + 5,000 + 400)

The cost of natural resources includes which of the following?

(1) Acquisition cost for the use of land. (2) Restoration costs at the end of extraction. (3) Exploration costs before production begins.

Marlin purchases land and the rights to explore for $200,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $40,000. The journal entry to record the acquisition of the mine will include which of the following entries?

Credit to asset retirement liability of $40,000.

When calculating the fair value of an asset retirement obligation, what rate is used to calculate the expected cash flows?

Credit-adjusted risk-free rate

True or false: If a company has no borrowings, interest costs can be imputed on self-constructed assets.

False

True or false: Internally developed goodwill should be capitalized as an asset.

False

Which of the following should be included in the cost of buildings?

Real estate commissions relating to purchase of building

Start-up costs such as legal fees and state filings to incorporate should be treated as

an expense in the period incurred.

How does a company measure an asset retirement obligation?

at fair value

When assets are exchanged and the transaction lacks commercial substance, the asset received is valued at the

book value of the asset given up.

A company acquires equipment by signing an interest-bearing note payable for $20,000. The interest rate is realistic so the company will record

debit machine $20,000; credit note payable $20,000

The allocation of the cost of natural resources to the periods extracted is referred to as __ expense.

depletion

The allocation of a natural resource to the periods extracted is referred to as

depletion expense

Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchase as a ______ purchase.

lump-sum

______ ______ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process, whereas equipment, land, and buildings have physical characteristics that remain unchanged.

natural resources

For capitalized interest on self-constructed assets, weighted-average expenditures is determined by weighting the individual expenditures by the

number of months from incurrence to the end of the construction period.

Manfred Mining Company is required to restore a piece of land to its original condition after it completes extraction of precious metals. From a financial reporting perspective, the related obligation is referred to as an asset

retirement obligation.

A company issues its equity securities to purchase land. The common stock is publicly traded, and both the value of the stock and the land is known. The best indicator of fair value is the value of the

stock

In a lump-sum purchase of assets, the cost must be allocated to the individual assets because

the assets have different useful lives.

When calculating the amount of interest to capitalize on a self-constructed asset, the critical inputs used are an interest rate and

weighted average accumulated expenditures.

Sherman Corporation purchases land for $100,000. Sherman incurs the following costs associated with the land acquisition: Property taxes for current year $3,000 Cost of removing old building 7,000 Title insurance 1,000 Cost of grading 4,000 Delinquent property taxes 2,000 What is the cost that Sherman should capitalize in the cost of land?

$114,000 Reason: (purchase price + cost of removing old building + title insurance + cost of grading + delinquent property taxes) $100,000 + $7,000 + $1,000 + $4,000 + $2,000 = $114,000

Western Company incurred the following costs during the year related to the creation of a new product: Salaries of researchers $100,000 Depreciation on R&D equipment $30,000 Utilities at R&D facility $5,000 Patent filing and legal costs $8,000 Payment for services in connection with R&D activities $10,000 Adaptation costs for specific needs of a customer $2,000 What amount should Western report as research and development expense in its income statement?

$145,000 ($100,000 + 30,000 + 5,000 + 8,000 + 2,000)

GeoMines Corp. has the following costs related to a mine it acquired this year. Cost of land and natural resource rights $100,000 Development cost before production begins 20,000 Future cost to restore land after mining 15,000 Equipment used for mining 80,000 Exploration and drilling costs 30,000 What amount should be included as an asset for natural resources?

$165,000 ($100,000 + 20,000 + 15,000 + 30,000)

Northern Company incurred the following costs during the year related to the creation of a new product: Salaries $200,000 Depreciation on R&D equipment $50,000 Quality control during commercial production $10,000 Patent filing and legal costs $8,000 Payment for services in connection with R&D activities $20,000 Testing of preproduction prototypes and models $5,000 What amount should Northern report as research and development expense in its income statement?

$275,000 ($200,000 + 50,000 + 20,000 + 5,000)

Quarry Corp. has the following costs related to a mine it acquired this year. Cost of land and natural resource rights $200,000 Asset retirement obligation to restore land 50,000 Costs of extraction during year 1 35,000 Equipment used for mining 100,000 Exploration and drilling costs to prepare quarry for extraction 40,000 What amount should be included as an asset for natural resources?

$290,000 ($200,000 + 50,000 + 40,000)

Which of the following are included in research and development costs

(1) Allocation of indirect costs related to research (2) Materials used in the lab (3) Salaries of researchers (4) equipment in the lab (5) labor costs of research personnel

Which items qualify for interest capitalization?

(1) Assets built as discrete projects for sale or lease (2) Assets built for a company's own use

Which of the following items are intangible assets?

(1) patent (2) copyright (3) trademark

An asset is exchanged for another asset and no cash is exchanged in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Book value of the asset given.

If a company generates its own goodwill through advertising or training, how should these costs be treated?

Expense the costs as incurred.

When assets are exchanged and the transaction lacks commercial substance, which of the following occurs?

The asset received is valued at the book value of the asset given.

True or false: U.S. GAAP does not distinguish between research activities and development costs; however, IFRS does make this distinction.

True

Because it is difficult to estimate the future value of research and development, FASB requires that research and development costs be treated as

an expense on the income statement.

Obligations associated with disposition of property, plant, equipment, or natural resources are called

asset retirement obligations.

The approach used for accounting for self-constructed assets where all overhead costs are allocated to production and to self-constructed assets is called the ______ approach.

full-cost

Which approach to accounting for self-constructed assets is required by U.S. GAAP?

full-cost approach

A company's reputation and clientele, its trained employees, and favorable business location may give rise to _____.

goodwill

An asset representing the value of a company over and above its identifiable tangible and intangible assets is referred to as ____

goodwill

The future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized are referred to as

goodwill

For self-constructed assets, the costs incurred include labor, materials, and

overhead

Interest capitalization on a self-constructed asset begins when

the first expenditure is made.

When an asset retirement obligation is recorded as a liability, the offsetting journal entry is a debit to

the related asset.

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a

trademark

Norbert Company has an exclusive right to display a specific symbol and routinely uses it on its promotional materials, company letterhead, and other media to distinguish its company from other firms. This right is referred to as a

trademark

For capitalization of interest on self-constructed assets, the average accumulated expenditures is the

weighted-average expenditures during the construction period.

South Company acquires North Corporation for $20 million. The book value of North Corporation's net assets is $15 million, while the fair value of the net assets is $18 million. The fair value of the liabilities assumed is $2 million. Goodwill associated with the acquisition is:

$2 milllion ($20 mil - 18 mil)

When is it appropriate to recognize a liability for an asset retirement obligation?

(1) At the inception of the asset's life if a legal obligation exists. (2) Over the asset's life as incurred.

Mining Ventures purchases land and the rights to explore for $100,000. Exploration costs are $20,000, and development costs are $30,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $50,000. The journal entry to record the acquisition of the mine will include which of the following entries?

(1) Credit to asset retirement liability of $50,000. (2) Credit to cash $150,000 (3) Debit to mining assets of $200,000.

On January 1, 2017, Plaid Corporation begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Plaid had the following expenditures on the project during 2017: January 1, 2017 $200,000 July 1, 2017 $600,000 December 1, 2017 $120,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017?

$510,000

Indicate which costs would be capitalized as part of the cost of manufacturing equipment.

(1) Freight-in (2) set-up cost (3) insurance during transit

Collin Corp. purchases equipment to be used in manufacturing. Given the following expenditures during the year, calculate the amount capitalized as the cost of equipment. Purchase price $100,000 Freight and handling 8,000 Trial runs 6,000 Maintenance during year 3,000 Employee training during year 4,000

$114,000 Reason: items only associated with getting the part up and running: Cost = Purchase Price + Freight + Trial Runs

Mega Mines acquires a new mine for $1,000,000. Mega Mines determines at the date of acquisition that it will cost $140,000 to restore the land when the mining process is complete in 5 years. Mega Mines has a legal obligation to remove the equipment upon completion of the mining activities. Which of the following are acceptable choices for determining when to recognize an asset retirement obligation?

(1) Over the asset's life as incurred. (2) At the inception of the asset's life.

Which of the following items should be capitalized as land improvements?

(1) cost of fences (2) cost of sidewalks (3) cost of parking lots

Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?

(1) cost of sidewalks (2) cost of lawn sprinkler system (3) cost of driveways

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

(1) costs to remove an old building (2) legal fees to secure title (3) title insurance (4) grading the land

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?

(1) costs to remove an old building (2) real estate agent commissions (3) legal fees to secure title

Which of the following items should be capitalized in the cost of equipment?

(1) insurance on equipment during shipping (2) Purchase price (3) freight to deliver the equipment to its location (4) installation and testing of equipment

Long-term assets are typically classified in one of these two categories:

(1) intangible assets (2) Property, plant, and equipment

The type of interest costs that can be treated as capitalized interest can pertain to borrowings that are

(1) other loans during the period of construction. (2) specifically for the construction project.

Which of the following costs should be capitalized in the costs of acquiring a building?

(1) remodeling building (2) legal fees to obtain title (3) realtor commissions (4) purchase price

Accounting for land improvements requires that the costs of land improvements are

(1) depreciated or amortized over the periods benefited. (2) capitalized.

When the expected cash flow approach is used to measure an asset retirement obligation at fair value, what assumptions or estimates must be made by the accountant?

(1) the probabilities of cash flows (2) the expected cash flows

Accounting for land improvements requires that the land improvements are capitalized and then ____ over periods benefited by their use.

expensed