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
