ACC311 Chapter 10-MC
Texarkana 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
$4,800 gain. [($12,000 / { $12,000 + $48,000}) X {($48,000 + $12,000 - ($66,000 - $30,000)}], or $4,800.
On September 1, 2014, Alpha Graphics Printing Co. incurred the following costs for one of its printing presses: 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?
$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: 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?
$60,000 The amount is $35,000 + $25,000, or $60,000.
Bogle Company purchased machinery for $320,000 on January 1, 2010. 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, 2014 at a gain of $6,000. How much cash did Bogle receive from the sale of the machinery?
$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, 2014 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?
$72,700 The cost is $70,000 + $700 + $800 + $150 + $1,050 = $72,700. Repair costs are not capitalized.
A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land. (T or F)
True. This type of one-time special assessment would be included in the cost of the land.
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. The cost assigned to the land is
$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 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 abandoned, sold, or fully depreciated. D. the activities that are necessary to get the asset ready for its intended use have begun.
A. the asset is substantially complete and ready for its intended use. The period of time during which interest must be capitalized ends when the asset is substantially complete and ready for its intended use.
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. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
Which one of the following is not a characteristic of property, plant, and equipment? A. They are acquired for use in operations. B. They are long-term in nature and are always subject to depreciation. C. They possess physical substance. D. All of these answer choices are characteristics of property, plant, and equipment.
B. They are long-term in nature and are always subject to depreciation. Land, which is part of property, plant, and equipment, is not depreciated.
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 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: 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.
Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a: 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.
The accounting for interest costs incurred during construction recommended under GAAP is to: A. capitalize no interest charges during construction. B. charge construction with all costs of funds employed, whether identifiable or not. C. capitalize 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. D. capitalize a pro rata portion of all costs of funds employed.
C. capitalize 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. 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.
The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula of: A. cash paid divided by the total of cash paid plus fair value of the asset received. B. cash paid divided by the total of cash paid plus fair value of the asset given up. C. cash received divided by the total of cash received plus fair value of the asset received. D. cash received divided by the total of cash received plus fair value of the asset given up.
C. cash received divided by the total of cash received plus fair value of the asset received. The gain recognized in an exchange is computed by multiplying the total gain by the cash received divided by the total of cash received plus the fair value of the asset received.
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: 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 $5,000. D. a credit to Accumulated Depreciation - Equipment for $32,000.
C. one dollar (since the site cost nothing but should be included in the balance sheet). When book value exceeds disposal price, a loss has occurred. 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 Corp 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 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.
Assets acquired in a lump sum purchase should be recorded at: A. appraised value. B. relative book value. C. relative fair market values. D. fair market value.
C. relative fair market values. Assets acquired in a lump sum purchase are recorded on the basis of their relative fair market values.
Overhead costs related to self-constructed assets are accounted for by: A. allocating overhead on the basis of lost production. B. assigning a portion of all overhead to the asset. 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.
Expenditures that extend the useful life of a plant asset without improving its quantity or quality are accounted for: A. as additions. B. as improvements. C. by debiting the asset account. D. by debiting Accumulated Depreciation.
D. by debiting Accumulated Depreciation. Expenditures that extend the useful life of a plant asset are accounted for by debiting Accumulated Depreciation.
The cost of manufacturing equipment would include all of the following except: 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.
In an exchange of nonmonetary assets that lacks commercial substance in which a gain exists and no cash is paid or received, the asset received is recorded at: A. book value of the asset received less the gain deferred. B. fair value of the asset received up less the gain deferred. C. book value of the asset given up plus the deferred gain. D. fair value of the asset given up less the deferred gain.
D. fair value of the asset given up less the deferred gain. In exchanges of nonmonetary assets that lack commercial substance not involving cash received where gains exist, the asset received is recorded at the fair value of the asset given up less the deferred gain.
In an exchange that lacks commercial substance in which a gain exists and cash is received, the asset received is recorded at the: A. book value of the asset given up less cash received. B. fair value of the asset given up less cash received. C. book value of the asset given up less the deferred portion of the gain. D. fair value of the asset received less the deferred portion of the gain.
D. fair value of the asset received less the deferred portion of the gain. When cash is received in an exchange that lacks commercial substance and a gain exists, the asset received is recorded at the fair value of the asset received less the deferred portion of the gain.
Property, plant, and equipment includes 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. None of these items is properly classified as a plant asset.
Plant assets purchased in exchange for a zero-interest-bearing note should be accounted for at the: A. face value of the note. B. fair value of the asset received. C. book value of the asset received. D. present value of the note.
D. present value of the note. Plant assets purchased in exchange for a zero-interest-bearing note are recorded at the present value of the note.
The interest rate(s) used in computing avoidable interest is the: 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: 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.
The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation. (T or F)
False. Accumulated depreciation is a contra account with a credit balance. The entry to record the sale of a plant asset at either a gain or a loss will include a debit to Accumulated Depreciation.
Cash or other assets received in an exchange are referred to as "boot." (T or F)
False. Cash received in an exchange is referred to as "boot."
The receipt of an asset from a contribution should be recorded as additional paid-in capital. (T or F)
False. Contributions received should be recorded as revenue in the period received.
If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred. (T or F)
False. If an exchange has commercial substance, both gains and losses should be recognized immediately.
Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated. (T or F)
False. Land held for speculative purposes is classified as an Investment.
Avoidable interest is the lesser of actual interest cost incurred during a fiscal period or the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset. (T or F)
False. The company can capitalize the lesser of the actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset.
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: 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 credit to Accumulated Depreciation - Equipment for $40,000.
a credit 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).
