ACCT - 3311 Chapter 10

Gutierrez Company is constructing a building. Construction began in 2015 and the building was completed 12/31/15. Gutierrez made payments to the construction company of $2,500,000 on 7/1, $5,500,000 on 9/1, and $5,000,000 on 12/31. Weighted-average accumulated expenditures were.....

$3,083,333

Texarkana Company exchanged equipment that cost $66,000 (fair value of $60,000) 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

Teal Mountain Inc. is constructing a building. Construction began on March 1 and was completed on December 31. Expenditures were $696,000 on March 1, $928,000 on July 1, and $835,200 on December 1. Compute Teal Mountain's weighted-average accumulated expenditures for interest capitalization purposes.

1,113,600 (696,000 * 10/12 + 928,000*6/12 + 835,200*1/12)

cost of land includes

1. cash purchase price 2. closing costs, such as title to the land, attorney's fees, and recording fees; 3. real estate brokers' commissions, costs of grading, filling, draining, and clearing; 4. assumption of any liens, mortgages, or encumbrances on the property; and 5.additional land improvements having an indefinite life.

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: [Fair market value of land, $160,000/ (Fair market value of land, $160,000 + Fair market value of building, $320,000 = $480,000)] x (Lump sum cost, $420,000) = Cost assigned to the land, $140,000.)

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

4,800 (The formula is [(Cash received, $12,000 / {Cash received, $12,000 + Fair value, $48,000}) X {(Fair value, $48,000 + Cash received, $12,000 - (Exchanged equipment cost, $66,000 - Accumulated Depreciation, $30,000)}], or Gain, $4,800.)

On September 1, 2017, 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?

51000 (Since the renovation significantly increased productivity, all $51,000 (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) 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 (25,000 +35,000 = 60,000)

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?

66,000 (A cost of $320,000 - $260,000 in accumulated depreciation (Cost, $320,000 - Salvage value, $20,000 / 5 years = $60,000 annual depreciation x 4 years = $240,000 + 2014 Depreciation, $60,000 x 4/12 months, $20,000) results in a book value of $60,000. Adding the $6,000 gain indicates sale price was $66,000.)

Shamrock Inc. purchased land at a price of $58,320. Closing costs were $2,916. An old barn was removed at a cost of $6,048. What amount should be recorded as the cost of the land?

67,284 ($58,320 + $2,916 + $6,048 = $67,284_

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?

72,700 (Repair costs are not capitalized.)

Sandhill Company built a warehouse for $574,200. It could have purchased the building for $672,800. The controller made the following entry. Buildings 672,800 Cash, Materials, Other Accounts 574,200 Profit on Construction 98,600 Prepare the entry that should have been made to record the acquisition.

Building 574,200 Cash, Materials, Other Accounts 574,200

T/F The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation.

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, not a credit, to Accumulated Depreciation.)

T/F The receipt of an asset from a contribution should be recorded as additional paid-in capital.

False (Contributions received should be recorded as revenue, not additional paid-in-capital, in the period received.)

T/F If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred.

False (If an exchange has commercial substance, both gains and losses should be recognized immediately.)

T/F Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated.

False (Land held for speculative purposes is classified as an Investment, not as Property, Plant and Equipment.)

T/F Cash or other assets received in an exchange are referred to as "boot."

False (Only cash received in an exchange is referred to as "boot.")

T/F 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.

False (The interest to be capitalized for a self-constructed asset is 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.)

Texarkana Company exchanged equipment that cost $66,000 (fair value of $60,000) and has accumulated depreciation of $30,000 for equipment with a fair value of $62,000 and paid $2,000 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is

No gain recognized

T/F A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land.

True (This type of one-time special assessment for sidewalks and drainage system would be included in the cost of the land since it is relatively permanent in nature.)

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 interest costs actually 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-Capitalize only the interest costs actually incurred during construction

Determine how the following should be classified: a. Money borrowed to pay building contractor b. Payment for construction from note proceeds c. Cost of land fill and clearing d. Delinquent real estate taxes on property assumed e. Premium on 6-month insurance policy during construction f. Refund of 1-month insurance premium because construction completed early g. Cost of parking lots and driveways h. Commission fee paid to real estate agency i. Installation of fences around property j. Cost of razing and removing building k. Cost of real estate purchased as a plant site (land $200,000 and building $50,000) l. Proceeds from salvage of demolished building m. Architect's fee on building n. Cost of trees and shrubbery (permanent)

a-Notes Payable b-Building c-land d-land e-Building f-(Building) g-Land Improvements h-Land i-Land Improvements j-Land k-Land l-(Land) m-Building n-Land

Which one of the following is not a characteristic of property, plant, and equipment? a-They are acquired for resale. b-They are long-term in nature and usually depreciated. c-They possess physical substance. d-All of these answer choices are characteristics of property, plant, and equipment.

a-They are acquired for resale.

A nonmonetary asset acquired in an exchange that has commercial substance is usually recorded at the: a-fair value of the asset given up, unless fair value of the asset received is more clearly evident. b-fair value of the asset received. c-book value of the asset given up. d-book value of the asset received.

a-fair value of the asset given up, unless fair value of the asset received is more clearly evident.

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were a-less than book value. b-greater than cost. c-greater than book value. d-less than current market value.

a-less than book value.

The cost of land includes all of the following except: a-cost of leveling and grading. b-purchase price. c-cost of fencing and lighting. d-payments to clear liens.

c-cost of fencing and lighting.

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 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 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.

Which of the following is not a capital expenditure with regard to a manufacturing facility? a-Replacing the air conditioning system with a similar unit b-Painting the exterior of the building c-Expanding the building by adding a new wing d-Replacing the heating system with a more energy efficient model

b-Painting the exterior of the building

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.

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 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.

b-fair value of the asset received less the gain deferred.

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-its fair value. (The donated asset should be recorded at its fair 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.

Which of the following is not a major characteristic of a plant asset? a-Possesses physical substance b-Acquired for use c-Acquired for resale d-Yields services over a number of years

c-Acquired for resale

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. Thus, the correct credit entry should be made to the Contribution Revenue account.)

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 $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. The loss would be computed as follows: Cost, $44,000 - Accumulated Depreciation, $32,000 = Book value, $12,000 - Cost, $9,000 = Loss, $3,000.)

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.

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.

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 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

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.

Special assessments for local improvements, such as pavements, street lights, sewers, and drainage systems, are usually charged to what account? a-Betterments. b-Land Improvements. c-Building Improvements. d-Land.

d-Land.

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 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). The $2,000 Gain = Cost, $75,000 - Accumulated Depreciation, $40,000 or Book Value, $35,000 - Cash proceeds from sale, $37,000.)

The most extensively used method of accounting for overhead costs related to self-constructed assets implies: 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.

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.

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 a self-constructed building should include all of the following except: a-building permits. b-overhead costs incurred during construction. c-excavation costs. d-costs of removing an old building on the new building site.

d-costs of removing an old building on the new building site.

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.

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.

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.

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.

If an asset is sold at a gain, a-the fair value of the asset is greater than the proceeds received from the sale. b-the proceeds from the sale are greater than the asset's cost. c-the cost of the asset is greater than its book value. d-the book value of the asset is less than the proceeds received from the sale.

d-the book value of the asset is less than the proceeds received from the sale.

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.)

improvements with limited lives

such as private driveways, walks, fences, and parking lots

Self-Constructed Assets may be handled in one of two ways:

•Assign no fixed overhead •Assign a portion of all overhead to the construction process

Cost of buildings include

•materials, labor, and overhead costs incurred during construction and •professional fees and building permits

cost of equipment includes

•purchase price •freight and handling charges •insurance on the equipment while in transit •cost of special foundations if required •assembling and installation costs costs of conducting trial runs