Chapter 10

True or False: 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

True or False: If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred.

False

True or False: Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated.

False

True or False: The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation.

False

True or False: The receipt of an asset from a contribution should be recorded as additional paid-in capital.

False

True or False: A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land.

True

Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a: Contribution Revenue account. Miscellaneous Gain account. Paid-in Capital account. Additional Paid-in Capital account.

Contribution Revenue account.

True or False: Cash or other assets received in an exchange are referred to as "boot."

False (only cash)

Which of the following statements is true regarding capitalization of interest? 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. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. 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. 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.

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? They are acquired for use in operations. They are long-term in nature and are always subject to depreciation. They possess physical substance. All of these answer choices are characteristics of property, plant, and equipment.

They are long-term in nature and are always subject to depreciation.

The most extensively used method of accounting for overhead costs related to self-constructed assets implies:allocating overhead on the basis of lost production.assigning no fixed overhead to the asset. assigning a pro rata portion of fixed overhead to the asset. assigning a portion of all overhead to the asset.

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: by debiting the asset account. by debiting Accumulated Depreciation. as improvements. as additions.

by debiting Accumulated Depreciation.

The accounting for interest costs incurred during construction recommended under GAAP is to: capitalize a pro rata portion of all costs of funds employed. 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. charge construction with all costs of funds employed, whether identifiable or not. capitalize no interest charges during construction.

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: cash paid divided by the total of cash paid plus fair value of the asset given up. cash received divided by the total of cash received plus fair value of the asset given up. cash paid divided by the total of cash paid plus fair value of the asset received. cash received divided by the total of cash received plus fair value of the asset received.

cash received divided by the total of cash received plus fair value of the asset received.

The cost of manufacturing equipment would include all of the following except: purchase price reduced by any discount taken. cost of training the equipment operator. installation costs. freight costs.

cost of training the equipment operator.

In an exchange that lacks commercial substance in which a gain exists and cash is received, the asset received is recorded at the: fair value of the asset given up less cash received. fair value of the asset received less the deferred portion of the gain. book value of the asset given up less cash received. book value of the asset given up less the deferred portion of the gain.

fair value of the asset received less the deferred portion of the gain.

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: fair value of the asset received less the gain deferred. book value of the asset given up plus the deferred gain. book value of the asset received less the gain deferred. fair value of the asset given up less the deferred gain.

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 its fair value. the value assigned to it by the company's directors. one dollar (since the site cost nothing but should be included in the balance sheet). the nominal cost of taking title to it.

its fair value.

Property, plant, and equipment includes deposits on machinery not yet received. idle equipment awaiting sale. land held for possible use as a future plant site. none of these answer choices would be classified as Property, plant, and equipment.

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: face value of the note. book value of the asset received. present value of the note. fair value of the asset received.

present value of the note.

The interest rate(s) used in computing avoidable interest is the: rate incurred on specific borrowings. lower of the rate incurred on specific borrowings or the weighted average rate. 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. weighted average rate incurred on all other outstanding debt.

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.

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 recognized as revenue in the period of the sale. recorded as a reduction of the cost of the land. recorded as a reduction of the cost of the new hotel. recognized as an extraordinary gain in the year the hotel is torn down.

recorded as a reduction of the cost of the land.

Assets acquired in a lump sum purchase should be recorded at: fair market value. relative book value. appraised value. relative fair market values.

relative fair market values.

The period of time during which interest must be capitalized ends when the asset is substantially complete and ready for its intended use. the asset is abandoned, sold, or fully depreciated. no further interest cost is being incurred. the activities that are necessary to get the asset ready for its intended use have begun.

the asset is substantially complete and ready for its intended use.

In an exchange of nonmonetary assets that has commercial substance, when no cash is involved, the new asset is valued at: the book value of the old asset plus the gain deferred. the book value of the old asset. the fair value of the new asset plus the gain deferred. the fair value of the new asset.

the fair value of the new asset

The cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, is equal to: the original cost of the securities. the par value of the securities. the book value of the property acquired. the market value of the securities.

the market value of the securities.