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10 ACQUISITION CHAPTER AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT TRUE-FALSEConceptual Answer F T F T F T F F F T T T T F F T T F F T No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20 Description Nature of property, plant, and equipment. Nature of property, plant, and equipment. Cost of removing old building. Insurance on equipment purchased. Accounting for special assessments. Overhead costs in self-constructed assets. Overhead costs in self-constructed assets. Interest capitalization. Qualifying assets for interest capitalization. Avoidable interest. Interest capitalization on land purchase. Deferred-payment contracts. Accounting for nonmonetary exchanges. Nonmonetary exchanges. Recognizing losses on nonmonetary exchanges. Costs subsequent to acquisition. Definition of improvements. Ordinary repairs benefit period. Involuntary conversion gains/losses. Loss from scrapped asset. MULTIPLE CHOICEConceptual Answer d b d c c c d a b b d d d a c a b No. 21. 22. 23. 24. 25. 26. 27. 28. 29. S 30. S 31. 32. 33. 34. 35. 36. 37. Description Definition of plant assets. Characteristics of plant assets. Characteristics of plant assets. Composition of land cost. Composition of land cost. Determination of land cost. Determine cost of land used as a parking lot. Determine cost of machinery. Classification of fences and parking lots. Recording plant assets at historical cost. Accounting for overhead costs. Determine costs capitalized for self-constructed assets. Assets which qualify for interest capitalization. Assets which qualify for interest capitalization. Definition of "avoidable interest." Period of time over which interest may be capitalized. Maximum amount of annual interest that may be capitalized. 10 - 2 Test Bank for Intermediate Accounting,Twelfth Edition MULTIPLE CHOICEConceptual (cont.) Answer b d d c a b c d d a c b b d c d a c d a d c P S No. 38. 39. 40. S 41. S 42. P 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. P 55. S 56. S 57. 58. 59. Description Interest capitalizationweighted-average factor. Classification of interest earned on securities purchased with borrowed funds. Write-off of capitalized interest costs. Conditions for interest capitalization. Valuation of nonmonetary asset. Gain recognition on plant asset exchange. Valuation of plant assets. Plant asset acquired by issuance of stock. Valuation of nonmonetary exchanges. Gain recognition on a nonmonetary exchange. Gain recognition on a nonmonetary exchange. Accounting for donated assets. Valuation of donated assets. Identify conditions for capital expenditures. Capital expenditure. Identification of a capital expenditure. Identification of a capital expenditure. Accounting for revenue expenditures. Accounting for capital expenditures. Gain or loss on plant asset disposal. Determine loss on sale of depreciable asset. Knowledge of involuntary conversions. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. MULTIPLE CHOICEComputational Answer b d d c c d d a b a b a c b a d a b c c No. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. Description Determine cost of land. Determine cost of building. Calculate cost of land and building. Calculate cost of equipment. Calculate cost of equipment. Overhead included in self-constructed asset. Overhead included in self-constructed asset. Calculate interest to be capitalized. Calculate average accumulated expenditures. Calculate interest to be capitalized. Calculate average accumulated expenditures. Calculate average accumulated expenditures. Calculate amount of interest to be capitalized. Calculate weighted-average accumulated expenditures. Calculate weighted-average accumulated expenditures. Calculate weighted-average accumulated expenditures. Calculate actual interest cost incurred during year. Calculate amount of interest to be capitalized. Calculate amount of interest to be capitalized. Calculate cost of land acquired. Acquisition and Disposition of Property, Plant, and Equipment 10 - 3 MULTIPLE CHOICEComputational (cont.) Answer c c b d b d b b a c a d b a b b d b d c c b b No. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. Description Determine cost of purchased machine. Calculate cost of truck purchased. Calculate cost of machine purchased. Allocation of cost of a lump sum purchase. Calculate cost of equipment. Acquisition of equipment by exchange of stock held as an investment. Exchange lacking commercial substance. Exchange lacking commercial substance /gain. Exchange lacking commercial substance /gain. Valuation of a nonmonetary exchange. Exchange lacking commercial substance/gain. Valuation of a nonmonetary exchange. Gain recognition of a nonmonetary exchange. Valuation of a nonmonetary exchange. Valuation of a nonmonetary exchange. Calculate gain on nonmonetary exchange. Calculate loss on nonmonetary exchange. Calculate gain on nonmonetary exchange. Calculate loss on nonmonetary exchange. Calculate cash received from sale of machinery. Calculate cash received from sale of machinery. Calculate loss on sale of machine. Calculate gain on sale of equipment. MULTIPLE CHOICECPA Adapted Answer c b b a a b d a No. 103. 104. 105. 106. 107. 108. 109. 110. Description Determine cost of land. Classification of sale of building. Determine interest cost to be capitalized. Valuation of a nonmonetary exchange. Exchange lacking commercial sunstance. Accounting for donated assets. Costs subsequent to acquisition. Valuation of replacement equipment. EXERCISES Item E10-111 E10-112 E10-113 E10-114 E10-115 E10-116 E10-117 Description Plant asset accounting. Weighted-average accumulated expenditures. Capitalization of interest. Nonmonetary exchange. Nonmonetary exchange. Donated assets. Capitalizing vs. expensing. 10 - 4 Test Bank for Intermediate Accounting,Twelfth Edition PROBLEMS Item P10-118 P10-119 P10-120 P10-121 P10-122 P10-123 P10-124 P10-125 P10-126 Description Capitalizing acquisition costs. Capitalization of interest. Capitalization of interest. Asset acquisition Nonmonetary exchange. Nonmonetary exchange. Nonmonetary exchange. Nonmonetary exchange. Nonmonetary exchange. CHAPTER LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. Describe property, plant, and equipment. Identify the costs to include in the initial valuation of property, plant, and equipment. Describe the accounting problems associated with self-constructed assets. Describe the accounting problems associated with interest capitalization. Understand accounting issues related to acquiring and valuing plant assets. Describe the accounting treatment for costs subsequent to acquisition. Describe the accounting treatment for the disposal of property, plant, and equipment. Acquisition and Disposition of Property, Plant, and Equipment 10 - 5 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item 1. 3. 4. 5. 6. 7. 8. 9. 10. 11. 33. 12. 13. 14. 15. S 42. P 43. 44. 16. 17. 19. 20. Note: Type TF TF TF TF TF TF TF TF TF TF MC TF TF TF TF MC MC MC TF TF TF TF Item 2. 24. 25. 26. S S Type TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC TF MC MC MC Item 21. 27. 28. 29. 65. 66. 39. 40. S 41. 67. 68. 80. 81. 82. 83. 84. 85. 86. 52. 53. 59. 99. Type Item Type Item Type MC MC MC MC Item Type Item Type 31. 32. 34. 35. 36. 37. 38. 45. 46. 47. 48. 49. 50. 79. 18. 51. S 57. 58. Learning Objective 1 MC 22. MC 23. Learning Objective 2 MC 30. MC 62. MC 60. MC 63. MC 61. MC 64. Learning Objective 3 MC 112. E MC 113. E Learning Objective 4 MC 69. MC 74. MC 70. MC 75. MC 71. MC 76. MC 72. MC 77. MC 73. MC 78. Learning Objective 5 MC 87. MC 94. MC 88. MC 95. MC 89. MC 96. MC 90. MC 97. MC 91. MC 98. MC 92. MC 106. MC 93. MC 107. Learning Objective 6 S MC 54. MC 56. P MC 55. MC 109. Learning Objective 7 MC 100. MC 102. MC 101. MC 103. 104. 111. MC MC E 117. 118. E P MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC 105. 111. 113. 117. 119. 108. 111. 114. 115. 116. 117. 121. 110. 111. MC E E E P MC E E E E E P MC E 120. P 122. 123. 124. 125. 126. P P P P P 117. E TF = True-False MC = Multiple Choice P = Problem E = Exercise 10 - 6 Test Bank for Intermediate Accounting,Twelfth Edition TRUE-FALSEConceptual 1. Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale. 2. Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance. 3. When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building. 4. Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment. 5. Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements. 6. Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset. 7. Companies should assign no portion of fixed overhead to self-constructed assets. 8. When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included. 9. Assets under construction for a companys own use do not qualify for interest cost capitalization. 10. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset. 11. When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization. 12. Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged. 13. Companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received. 14. If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized. 15. When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance. 16. Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits. 17. Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used. Acquisition and Disposition of Property, Plant, and Equipment 18. When an ordinary repair occurs, several periods will usually benefit. 10 - 7 19. Companies always treat gains or losses from an involuntary conversion as extraordinary items. 20. If a company scraps an asset without any cash recovery, it recognizes a loss equal to the assets book value. True-False AnswersConceptual Item 1. 2. 3. 4. 5. Register to View AnswerT F T F Item 6. 7. 8. 9. 10. Register to View AnswerF F F T Item 11. 12. 13. 14. 15. Register to View AnswerT T F F Item 16. 17. 18. 19. 20. Register to View AnswerT F F T MULTIPLE CHOICEConceptual 21. 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. Which of the following is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years Which of these is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday 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 an extraordinary 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. 22. 23. 24. 10 - 8 25. Test Bank for Intermediate Accounting,Twelfth Edition The cost of land does not include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments. The cost of land typically includes the purchase price and all of the following costs except a. grading, filling, draining, and clearing costs. b. street lights, sewers, and drainage systems cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property. If a corporation purchases a lot 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 lot 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. 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. Fences and parking lots are reported on the balance sheet as a. current assets. b. land improvements. c. land. d. property and equipment. 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 market value. b. property, plant, and equipment items are always acquired at their original historical cost. c. historical cost involves actual transactions 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. 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. 26. 27. 28. 29. S 30. S 31. Acquisition and Disposition of Property, Plant, and Equipment 32. 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 10 - 9 33. 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 prepare them for their intended use. 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. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made. d. that portion of average accumulated expenditures on which no interest cost was incurred. 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. 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. 34. 35. 36. 37. 10 - 10 Test Bank for Intermediate Accounting,Twelfth Edition 38. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a. 8/8. b. 8/12. c. 9/12. d. 11/12. 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. Interest cost that is capitalized 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. 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. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and 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. The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will a. be reported in the Other Revenues and Gains section of the income statement. b. effectively reduce the amount to be recorded as the cost of the new asset. c. effectively increase the amount to be recorded as the cost of the new asset. d. be credited directly to the owner's capital account. 39. 40. S 41. S 42. P 43. Acquisition and Disposition of Property, Plant, and Equipment 44. Plant assets purchased on long-term credit contracts should be accounted for at a. the total value of the future payments. b. the future amount of the future payments. c. the present value of the future payments. d. none of these. 10 - 11 45. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the a. par value of the stock. b. stated value of the stock. c. book value of the stock. d. market value of the stock. When a closely held corporation issues preferred stock for land, the land should be recorded at the a. total par value of the stock issued. b. total book value of the stock issued. c. total liquidating value of the stock issued. d. fair market value of the 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. 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. d. part of a gain when the exchange has no commercial substance and cash is received. When an enterprise is the recipient of a donated asset, the account credited may be a a. paid-in capital account. b. revenue account. c. deferred revenue account. d. all of these. 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. In order for a cost to be capitalized (capital expenditure), the following must be present: a. The useful life of an asset must be increased. b. The quantity of assets must be increased. c. The quality of assets must be increased. d. Any one of these. 46. 47. 48. 49. 50. 51. 10 - 12 Test Bank for Intermediate Accounting,Twelfth Edition 52. An improvement made to a machine increased its fair market 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. Which of the following is a capital expenditure? a. Payment of an account payable b. Retirement of bonds payable c. Payment of Federal income taxes d. None of these Which of the following is not a capital expenditure? a. Repairs that maintain an asset in operating condition b. An addition c. A betterment d. A replacement In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made? a. Expenditure made to increase the efficiency or effectiveness of an existing asset b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated c. Expenditure made to maintain an existing asset so that it can function in the manner intended d. Expenditure made to add new asset services An expenditure made in connection with a machine being used by an enterprise should be a. expensed immediately if it merely extends the useful life but does not improve the quality. b. expensed immediately if it merely improves the quality but does not extend the useful life. c. capitalized if it maintains the machine in normal operating condition. d. capitalized if it increases the quantity of units produced by the machine. When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature. b. a sale prior to the completion of the estimated useful life of the asset. c. the sale of a fully depreciated asset. d. an abandonment of the asset. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were a. less than current market value. b. greater than cost. c. greater than book value. d. less than book value. 53. 54. P 55. S 56. S 57. 58. Acquisition and Disposition of Property, Plant, and Equipment 59. 10 - 13 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 an extraordinary item. c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets. d. All of these. Multiple Choice AnswersConceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. 22. 23. 24. 25. 26. d b d c c c 27. 28. 29. 30. 31. 32. d a b b d d 33. 34. 35. 36. 37. 38. d a c a b b 39. 40. 41. 42. 43. 44. d d c a b c 45. 46. 47. 48. 49. 50. d d a c b b 51. 52. 53. 54. 55. 56. d c d a c d 57. 58. 59. a d c Solutions to those Multiple Choice questions for which the answer is none of these. 21. 40. 53. Long-lived tangible assets used in the enterprises operations. Capitalized interest is depreciated over the related assets useful life. Capital expenditures include additions, betterments, improvements, and extraordinary repairs. MULTIPLE CHOICEComputational Use the following information for questions 60 and 61. Seiler Co. purchased land as a factory site for $600,000. Seiler paid $60,000 to tear down two buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title investigation and making the purchase. Architect's fees were $31,200. Title insurance cost $2,400, and liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was paid $2,200,000. An assessment made by the city for pavement was $6,400. Interest costs during construction were $170,000. 60. The cost of the land that should be recorded by Seiler Co. is a. $660,480. b. $666,880. c. $669,880. d. $676,280. The cost of the building that should be recorded by Seiler Co. is a. $2,403,800. b. $2,404,840. c. $2,413,200. d. $2,414,240. 61. 10 - 14 Test Bank for Intermediate Accounting,Twelfth Edition 62. On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site for $200,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2007. 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 1,090,000 (Salvaged materials resulting from demolition were sold for $10,000.) Morgan should record the cost of the land and new building, respectively, as a. $225,000 and $1,115,000. b. $210,000 and $1,130,000. c. $210,000 and $1,125,000. d. $215,000 and $1,125,000. 63. Tyson Chandler Company purchased equipment for $10,000. Sales tax on the purchase was $500. Other costs incurred were freight charges of $200, repairs of $350 for damage during installation, and installation costs of $225. What is the cost of the equipment? a. $10,000 b. $10,500 c. $10,925 d. $11,275 Carpenter Company purchased equipment for $12,000. Sales tax on the purchase was $600. Other costs incurred were freight charges of $240, repairs of $420 for damage during installation, and installation costs of $270. What is the cost of the equipment? a. $12,000. b. $12,600. c. $13,110. d. $13,530. During self-construction of an asset by Jannero Pargo Company, the following were among the costs incurred: Fixed overhead for the year Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production Variable overhead attributable to self-construction $1,000,000 40,000 35,000 64. 65. What amount of overhead should be included in the cost of the self-constructed asset? a. $ -0b. $35,000 c. $40,000 d. $75,000 66. During self-construction of an asset by Mitchellson Company, the following were among the costs incurred: Fixed overhead for the year Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production Variable overhead attributable to self-construction $1,000,000 60,000 55,000 Acquisition and Disposition of Property, Plant, and Equipment 10 - 15 What amount of overhead should be included in the cost of the self-constructed asset? a. $ -0b. $ 55,000 c. $ 60,000 d. $115,000 67. Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average accumulated expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was $300,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is a. $237,500. b. $245,000. c. $257,500. d. $337,500. Sweet Knee Company is constructing a building. Construction began in 2008 and the building was completed 12/31/08. Sweet Knee made payments to the construction company of $1,000,000 on 7/1, $2,100,000 on 9/1, and $2,000,000 on 12/31. Average accumulated expenditures were a. $1,025,000. b. $1,200,000. c. $3,100,000. d. $5,100,000. Wheeler Corporation constructed a building at a cost of $20,000,000. Average accumulated expenditures were $8,000,000, actual interest was $1,200,000, and avoidable interest was $600,000. If the salvage value is $1,600,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is a. $475,000. b. $490,000. c. $515,000. d. $675,000. Hackleman Company is constructing a building. Construction began in 2008 and the building was completed 12/31/08. Hackleman made payments to the construction company of $1,500,000 on 7/1, $3,300,000 on 9/1, and $3,000,000 on 12/31. Average accumulated expenditures were a. $1,575,000. b. $1,850,000. c. $4,800,000. d. $7,800,000. On May 1, 2007, Royster Company began construction of a building. Expenditures of $120,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2007. For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2007 were a. $100,000. b. $120,000. c. $480,000. d. $600,000. 68. 69. 70. 71. 10 - 16 Test Bank for Intermediate Accounting,Twelfth Edition 72. During 2007, Gannon Co. incurred average accumulated expenditures of $400,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2007 was a $500,000, 10%, 5-year note payable dated January 1, 2005. What is the amount of interest that should be capitalized by Gannon during 2007? a. $0. b. $10,000. c. $40,000. d. $50,000. On March 1, Carr Co. began construction of a small building. Payments of $120,000 were made monthly for three months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are a. $30,000. b. $60,000. c. $120,000. d. $240,000. On March 1, Bakken Co. began construction of a small building. Payments of $180,000 were made monthly for four months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are a. $90,000. b. $180,000. c. $360,000. d. $720,000. 73. 74. Use the following information for questions 75 through 77. On March 1, 2007, Dennis Company purchased land for an office site by paying $540,000 cash. Dennis began construction on the office building on March 1. The following expenditures were incurred for construction: Date Expenditures March 1, 2007 $ 360,000 April 1, 2007 504,000 May 1, 2007 900,000 June 1, 2007 1,440,000 The office was completed and ready for occupancy on July 1. To help pay for construction, $720,000 was borrowed on March 1, 2007 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2007 was a $300,000, 12%, 6-year note payable dated January 1, 2007. 75. The weighted-average accumulated expenditures on the construction project during 2007 were a. $384,000. b. $2,934,000. c. $312,000. d. $696,000. Acquisition and Disposition of Property, Plant, and Equipment 76. The actual interest cost incurred during 2007 was a. $90,000. b. $100,800. c. $50,400. d. $84,000. 10 - 17 77. Assume the weighted-average accumulated expenditures for the construction project are $870,000. The amount of interest cost to be capitalized during 2007 is a. $78,300. b. $82,800. c. $90,000. d. $100,800. During 2007, Aber Corporation constructed assets costing $1,000,000. The weightedaverage accumulated expenditures on these assets during 2007 was $600,000. To help pay for construction, $440,000 was borrowed at 10% on January 1, 2007, and funds not needed for construction were temporarily invested in short-term securities, yielding $9,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $500,000, 10-year, 9% note payable dated January 1, 2001. What is the amount of interest that should be capitalized by Aber during 2007? a. $60,000. b. $30,000. c. $58,400. d. $94,400. On December 1, Wynne Corporation exchanged 2,000 shares of its $25 par value common stock held in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by Wynne at a cost of $40 per share, and on the exchange date the common shares of Wynne had a fair market value of $50 per share. Wynne received $6,000 for selling scrap when an existing building on the property was removed from the site. Based on these facts, the land should be capitalized at a. $74,000. b. $80,000. c. $94,000. d. $100,000. Carly Corporation purchased a new machine on October 31, 2007. A $1,200 down payment was made and three monthly installments of $3,600 each are to be made beginning on November 30, 2007. The cash price would have been $11,600. Carly paid no installation charges under the monthly payment plan but a $200 installation charge would have been incurred with a cash purchase. The amount to be capitalized as the cost of the machine on October 31, 2007 would be a. $12,200. b. $12,000. c. $11,800. d. $11,600. Taylor Company buys a delivery van with a list price of $30,000. The dealer grants a 15% reduction in list price and an additional 2% cash discount on the net price if payment is made in 30 days. Sales taxes amount to $400 and the company paid an extra $300 to have a special horn installed. What should be the recorded cost of the van? 78. 79. 80. 81. 10 - 18 Test Bank for Intermediate Accounting,Twelfth Edition a. b. c. d. 82. $24,990. $25,645. $25,690. $25,390. On August 1, 2007, Limon Corporation purchased a new machine on a deferred payment basis. A down payment of $3,000 was made and 4 monthly installments of $2,500 each are to be made beginning on September 1, 2007. The cash equivalent price of the machine was $12,000. Limon incurred and paid installation costs amounting to $500. The amount to be capitalized as the cost of the machine is a. $12,000. b. $12,500. c. $13,000. d. $13,500. On April 1, Renner Corporation purchased for $855,000 a tract of land on which was located a warehouse and office building. The following data were collected concerning the property: Current Assessed Valuation Vendors Original Cost Land $300,000 $280,000 Warehouse 200,000 180,000 Office building 400,000 340,000 $900,000 $800,000 What are the appropriate amounts that Renner should record for the land, warehouse, and office building, respectively? a. Land, $280,000; warehouse, $180,000; office building, $340,000. b. Land, $300,000; warehouse, $200,000; office building, $400,000. c. Land, $299,250; warehouse, $192,375; office building, $363,375. d. Land, $285,000; warehouse, $190,000; office building, $380,000. 83. 84. On August 1, 2007, Tanner Corporation purchased a new machine on a deferred payment basis. A down payment of $2,000 was made and 4 annual installments of $6,000 each are to be made beginning on September 1, 2007. The cash equivalent price of the machine was $23,000. Due to an employee strike, Tanner could not install the machine immediately, and thus incurred $300 of storage costs. Costs of installation (excluding the storage costs) amounted to $800. The amount to be capitalized as the cost of the machine is a. $23,000. b. $23,800. c. $24,100. d. $26,000. Herman Company exchanged 400 shares of Daily Company common stock, which Herman was holding as an investment, for equipment from West Company. The Daily Company common stock, which had been purchased by Herman for $50 per share, had a quoted market value of $58 per share at the date of exchange. The equipment had a recorded amount on West's books of $21,000. What journal entry should Herman make to record this exchange? 85. Acquisition and Disposition of Property, Plant, and Equipment a. Equipment ........................................................................... Investment in Daily Co. Common Stock ..................... b. Equipment ........................................................................... Investment in Daily Co. Common Stock ..................... Gain on Disposal of Investment .................................. c. Equipment ........................................................................... Loss on Disposal of Investment .......................................... Investment in Daily Co. Common Stock ..................... d. Equipment ........................................................................... Investment in Daily Co. Common Stock ..................... Gain on Disposal of Investment .................................. 86. 20,000 10 - 19 20,000 21,000 20,000 1,000 21,000 2,200 23,200 23,200 20,000 3,200 On January 2, 2007, Quick Delivery Company traded in an old delivery truck for a newer model. The exchange lacked commercial substance. Data relative to the old and new trucks follow: Old Truck Original cost $24,000 Accumulated depreciation as of January 2, 2007 16,000 Average published retail value 7,000 New Truck List price $40,000 Cash price without trade-in 36,000 Cash paid with trade-in 30,000 What should be the cost of the new truck for financial accounting purposes? a. $30,000. b. $36,000. c. $38,000. d. $40,000. 87. On December 1, 2007, Fiene Company acquired a new delivery truck in exchange for an old delivery truck that it had acquired in 2004. The old truck was purchased for $35,000 and had a book value of $13,300. On the date of the exchange, the old truck had a market value of $14,000. In addition, Fiene paid $45,500 cash for the new truck, which had a list price of $63,000. The exchange lacked commercial sunstance. At what amount should Fiene record the new truck for financial accounting purposes? a. $45,500. b. $58,800. c. $59,500. d. $63,000. Use the following information for questions 88 and 89. A machine cost $120,000, has annual depreciation of $20,000, and has accumulated depreciation of $90,000 on December 31, 2006. On April 1, 2007, when the machine has a market value of $27,500, it is exchanged for a machine with a fair value of $135,000 and the proper amount of cash is paid. The exchange lacked commercial substance. 88. The gain to be recorded on the exchange is a. $0. b. $2,500 gain. c. $5,000 gain. d. $15,000 gain. 10 - 20 Test Bank for Intermediate Accounting,Twelfth Edition 89. The new machine should be recorded at a. $107,500. b. $122,500. c. $132,500. d. $135,000. Use the following information for questions 90 and 91. Equipment that $66,000 cost and has accumulated depreciation of $30,000 is exchanged for equipment with a fair value of $48,000 and $12,000 cash is received. The exchange lacked commercial substance. 90. The gain to be recognized from the exchange is a. $4,800 gain. b. $6,000 gain. c. $18,000 gain. d. $24,000 gain. The new equipment should be recorded at a. $48,000. b. $36,000. c. $30,000. d. $28,800. 91. Use the following information for questions 92 through 94. Two independent companies, Mintz Co. and Pine Co., are in the home building business. Each owns a tract of land held for development, but each would prefer to build on the other's land. They agree to exchange their land. An appraiser was hired, and from her report and the companies' records, the following information was obtained: Mintz's Land Pine's Land Cost and book value $192,000 $120,000 Fair value based upon appraisal 240,000 210,000 The exchange was made, and based on the difference in appraised fair values, Pine paid $30,000 to Mintz. The exchange lacked commercial substance. 92. For financial reporting purposes, Mintz should recognize a pre-tax gain on this exchange of a. $0. b. $6,000. c. $30,000. d. $48,000. The new land should be recorded on Mintz's books at a. $168,000. b. $192,000. c. $210,000. d. $240,000. 93. Acquisition and Disposition of Property, Plant, and Equipment 94. The new land should be recorded on Pine's books at a. $120,000. b. $150,000. c. $210,000. d. $240,000. 10 - 21 95. Hinrich Company traded machinery with a book value of $120,000 and a fair value of $200,000. It received in exchange from Noach Company a machine with a fair value of $180,000 and cash of $20,000. Noachs machine has a book value of $190,000. What amount of gain should Hinrich recognize on the exchange? a. $ -0b. $8,000 c. $20,000 d. $80,000 Noach Company traded machinery with a book value of $190,000 and a fair value of $180,000. It received in exchange from Hinrich Company a machine with a fair value of $200,000. Noach also paid cash of $20,000 in the exchange. Hinrichs machine has a book value of $190,000. What amount of gain or loss should Noach recognize on the exchange? a. $20,000 gain b. $ -0-. c. $1,000 loss d. $10,000 loss Marlin Company traded machinery with a book value of $180,000 and a fair value of $300,000. It received in exchange from Keach Company a machine with a fair value of $270,000 and cash of $30,000. Keachs machine has a book value of $285,000. What amount of gain should Marlin recognize on the exchange? a. $ -0b. $12,000 c. $30,000 d. $120,000 Keach Company traded machinery with a book value of $285,000 and a fair value of $270,000. It received in exchange from Marlin Company a machine with a fair value of $300,000. Keach also paid cash of $30,000 in the exchange. Marlins machine has a book value of $285,000. What amount of gain or loss should Keach recognize on the exchange? a. $30,000 gain b. $ -0c. $1,500 loss d. $15,000 loss Bobby Jenks Company purchased machinery for $160,000 on January 1, 2004. Straightline depreciation has been recorded based on a $10,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2008 at a gain of $3,000. How much cash did Bobby Jenks receive from the sale of the machinery? a. $23,000 b. $27,000 c. $33,000 d. $43,000 96. 97. 98. 99. 10 - 22 Test Bank for Intermediate Accounting,Twelfth Edition 100. Morganstern Company purchased machinery for $320,000 on January 1, 2004. Straightline depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2008 at a gain of $6,000. How much cash did Morganstern receive from the sale of the machinery? a. $46,000. b. $54,000. c. $66,000. d. $86,000. Jeter Company purchased a new machine on May 1, 1998 for $176,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $8,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2007, the machine was sold for $24,000. What should be the loss recognized from the sale of the machine? a. $0. b. $3,600. c. $8,000. d. $11,600. On January 1, 1999, Hite Corporation purchased for $152,000, equipment having a useful life of ten years and an estimated salvage value of $8,000. Hite has recorded monthly depreciation of the equipment on the straight-line method. On December 31, 2007, the equipment was sold for $28,000. As a result of this sale, Hite should recognize a gain of a. $0. b. $5,600. c. $13,600. d. $28,000. 101. 102. Multiple Choice AnswersComputational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 60. 61. 62. 63. 64. 65. 66. b d d c c d d 67. 68. 69. 70. 71. 72. 73. a b a b a c b 74. 75. 76. 77. 78. 79. 80. a d a b c c c 81. 82. 83. 84. 85. 86. 87. c b d b d b b 88. 89. 90. 91. 92. 93. 94. a c a d b a b 95. 96. 97. 98. 99. 100. 101. b d b d c c b 102. b Acquisition and Disposition of Property, Plant, and Equipment 10 - 23 MULTIPLE CHOICECPA Adapted 103. On December 1, 2007, Logan Co. purchased a tract of land as a factory site for $800,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December 2007 were as follows: Cost to raze old building Legal fees for purchase contract and to record ownership Title guarantee insurance Proceeds from sale of salvaged materials $70,000 10,000 16,000 8,000 In Logan 's December 31, 2007 balance sheet, what amount should be reported as land? a. $826,000. b. $862,000. c. $888,000. d. $896,000. 104. Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be a. classified as other income. b. deducted from the cost of the land. c. netted against the costs to clear the land and expensed as incurred. d. netted against the costs to clear the land and amortized over the life of the plant. A company is constructing an asset for its own use. Construction began in 2006. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2006 and 2007 at the end of each quarter. The total amount of interest cost capitalized in 2007 should be determined by applying the interest rate on the specific new borrowing to the a. total accumulated expenditures for the asset in 2006 and 2007. b. average accumulated expenditures for the asset in 2006 and 2007. c. average expenditures for the asset in 2007. d. total expenditures for the asset in 2007. Gray Football Co. had a player contract with Vance that is recorded in its books at $3,600,000 on July 1, 2007. Day Football Co. had a player contract with Simms that is recorded in its books at $4,500,000 on July 1, 2007. On this date, Gray traded Vance to Day for Simms and paid a cash difference of $450,000. The fair value of the Simms contract was $5,400,000 on the exchange date. The exchange had no commercial substance. After the exchange, the Simms contract should be recorded in Gray's books at a. $4,050,000. b. $4,500,000. c. $4,950,000. d. $5,400,000. Reed Co. exchanged nonmonetary assets with Wilton Co. No cash was exchanged and the exchange had no commercial substance. The carrying amount of the asset surrendered by Reed exceeded both the fair value of the asset received and Wilton's carrying amount of that asset. Reed should recognize the difference between the carrying amount of the asset it surrendered and 105. 106. 107. 10 - 24 Test Bank for Intermediate Accounting,Twelfth Edition a. b. c. d. 108. the fair value of the asset it received as a loss. the fair value of the asset it received as a gain. Wilton's carrying amount of the asset it received as a loss. Wilton's carrying amount of the asset it received as a gain. Petty County owned an idle parcel of real estate consisting of land and a factory building. Petty gave title to this realty to Larson Co. as an incentive for Larson to establish manufacturing operations in the County. Larson paid nothing for this realty, which had a fair market value of $250,000 at the date of the grant. Larson should record this nonmonetary transaction as a a. memo entry only. b. credit to Contribution Revenue for $250,000. c. credit to extraordinary income for $250,000. d. credit to Donated Capital for $250,000. On September 10, 2007, Flint Co. incurred the following costs for one of its printing presses: Purchase of attachment $55,000 Installation of attachment 5,000 Replacement parts for renovation of press 18,000 Labor and overhead in connection with renovation of press 7,000 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? a. $0. b. $67,000. c. $78,000. d. $85,000. 109. 110. On January 2, 2007, Renn Corp. replaced its boiler with a more efficient one. The following information was available on that date: Purchase price of new boiler Carrying amount of old boiler Fair value of old boiler Installation cost of new boiler $150,000 10,000 4,000 20,000 The old boiler was sold for $4,000. What amount should Renn capitalize as the cost of the new boiler? a. $170,000. b. $166,000. c. $160,000. d. $150,000. Multiple Choice AnswersCPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. 103. 104. c b 105. 106. b a 107. 108. a b 109. 110. d a Acquisition and Disposition of Property, Plant, and Equipment 10 - 25 DERIVATIONS Computational No. 60. 61. 62. Answer Derivation b d d $600,000 + $60,000 $5,400 + $3,480 + $2,400 + $6,400 = $666,880. $31,200 + $2,600 + $10,440 + $2,200,000 + $170,000 = $2,414,240. Land: $200,000 + $20,000 + $5,000 $10,000 = $215,000. Building: $35,000 + $1,090,000 = $1,125,000. $10,000 + $500 + $200 + $225 = $10,925. $12,000 + $600 + $240 + $270 = $13,110. $40,000 + $35,000 = $75,000. $60,000 + $55,000 = $115,000. [($10,000,000 + $300,000) $800,000] 40 = $237,500. ($1,000,000 6/12) + ($2,100,000 4/12) = $1,200,000. [($20,000,000 + $600,000) $1,600,000] 40 = $475,000. ($1,500,000 6/12) + ($3,300,000 4/12) = $1,850,000. ($120,000 4/12) + ($120,000 3/12) + ($120,000 2/12) + ($120,000 1/12) = $100,000. $400,000 .10 = $40,000. $120,000 (3/12 + 2/12 + 1/12) = $60,000. $180,000 (3/12 + 2/12 + 1/12) = $90,000. ($900,000 4/12) + ($504,000 3/12) + ($900,000 2/12) + ($1,440,000 1/12) = $696,000. ($720,000 9% 10/12) + ($300,000 12%) = $90,000. ($720,000 .09) + ($150,000 .12) = $82,800. ($440,000 .1) + ($160,000 .09) = $58,400. (2,000 $50) $6,000 = $94,000. $11,600 + $200 = $11,800. ($30,000 .85 .98) + $400 + $300 = $25,690. $12,000 + $500 = $12,500. 63. 64. 65. 66. 67. 68. 69. 70. 71. c c d d a b a b a 72. 73. 74. 75. c b a d 76. 77. 78. 79. 80. 81. 82. a b c c c c b 10 - 26 Test Bank for Intermediate Accounting,Twelfth Edition DERIVATIONS Computational (cont.) No. 83. Answer Derivation d Land: 30/90 $855,000 = $285,000. Warehouse: 20/90 $855,000 = $190,000. Office Building: 40/90 $855,000 = $380,000. $23,000 + $800 = $23,800. $23,200 $20,000 = $3,200 (gain). Fair market value of new truck = $36,000. Loss: ($36,000 $30,000) $4,000 = $2,000. New Machine: $8,000 + $30,000 $2,000 = $36,000. $13,300 + $45,500 = $58,800. $0, gain on exchange of similar asset when cash is paid. $120,000 $95,000 = $25,000; $27,500 $25,000 = $2,500 $135,000 $2,500 = $132,500. $12,000 $24,000 = $4,800. $12,000 + $48,000 $48,000 ($24,000 $4,800) = $28,800. $30,000 $48,000 = $6,000. $30,000 + $210,000 $210,000 ($48,000 $6,000) = $168,000 or $192,000 $30,000 ( $192,000) = $168,000. $240,000 84. 85. 86. b d b 87. 88. 89. b a c 90. 91. 92. 93. a d b a 94. b $120,000 + $30,000 = $150,000 or $240,000 ($210,000 $120,000) = $150,000. ($200,000 $120,000) [$20,000 ($20,000 + $180,000)] = $8,000. $180,000 $190,000 = ($10,000). ($300,000 $180,000) [$30,000 ($30,000 + $270,000)] = $12,000. $270,000 $285,000 = ($15,000). [($160,000 $10,000) 5] 4 1/3 = $130,000 ($160,000 $130,000) + $3,000 = $33,000. 95. 96. 97. 98. 99. b d b d c Acquisition and Disposition of Property, Plant, and Equipment 10 - 27 DERIVATIONS Computational (cont.) No. 100. Answer Derivation c [($320,000 $20,000) 5] 4 1/3 = $260,000 ($320,000 $260,000) + $6,000 = $66,000. ($176,000 $8,000) (10 12) = $1,400 per month $24,000 [$176,000 ($1,400 106 mo.)] = $3,600. ($152,000 $8,000) (10 12) = $1,200/mo.; $28,000 [$152,000 ($1,200 108)] = $5,600. 101. b 102. b DERIVATIONS CPA Adapted No. 103. 104. 105. 106. Answer Derivation c b b a $800,000 + $70,000 + $10,000 + $16,000 $8,000 = $888,000. Conceptual. Conceptual. ($5,400,000 $450,000) $3,600,000 = $1,350,000 (deferred gain) $5,400,000 $1,350,000 = $4,050,000 (Basis). Conceptual. Conceptual. $55,000 + $5,000 + $18,000 + $7,000 = $85,000. $150,000 + $20,000 = $170,000. 107. 108. 109. 110. a b d a 10 - 28 Test Bank for Intermediate Accounting,Twelfth Edition EXERCISES Ex. 10-111Plant asset accounting. During 2006 and 2007, Gorman Corporation experienced several transactions involving plant assets. A number of errors were made in recording some of these transactions. For each item listed below, indicate the effect of the error (if any) in the blanks provided by using the following codes: O = Overstate; U = Understate; NE = No Effect If no error was made, write NE in each of the four columns. 2006 Net Book Value of Plant 2006 Assets at Net 12/31/06 Income 2007 Net Book Value of Plant 2007 Assets at Net 12/31/07 Income Transaction 1. The cost of installing a new computer system in 2006 was not recorded in 2006. _______ It was charged to expense in 2007. 2. In 2007 clerical workers were trained to use the new computer system at a cost of $15,000, which was erroneously capitalized. The cost is to be written off over the expected life of the new computer system. _______ 3. A major overhaul of factory machinery in 2006, which extended its useful life by 5 years, was charged to accumulated depreciation in 2006. _______ 4. Interest cost qualifying for capitalization in 2006 was charged to interest expense in 2006. _______ 5. In 2006 land was bought for an employee parking lot. The $2,000 title search fee was charged to expense in 2006. _______ 6. The cost of moving several manufacturing facilities from metropolitan locations to suburban areas in 2006 was capitalized. The cost was written off over a 10-year period beginning in 2006. _______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ Acquisition and Disposition of Property, Plant, and Equipment Solution 10-111 Net Book Value of Plant Assets at 12/31/06 U NE NE U U NE Net Book Value of Plant Assets at 12/31/07 U O NE U U NE 10 - 29 1. 2. 3. 4. 5. 6. 2006 Net Income O NE NE U U NE 2007 Net Income U O NE O NE NE Ex. 10-112Weighted-Average Accumulated Expenditures. On April 1, Tyler Co. began construction of a small building. Payments of $120,000 were made monthly for four months beginning on April 1. The building was completed and ready for occupancy on August 1. For the purpose of determining the amount of interest cost to be capitalized, calculate the weighted-average accumulated expenditures on the building by completing the schedule below: Date Expenditures Capitalization Period Weighted-Average Expenditures Solution 10-112 Date April 1 May 1 June 1 July 1 Expenditures $120,000 120,000 120,000 120,000 Capitalization Period 4/12 3/12 2/12 1/12 Weighted-Average Expenditures $ 40,000 30,000 20,000 10,000 $100,000 Ex. 10-113Capitalization of interest. On March 1, Gatt Co. began construction of a small building. The following expenditures were incurred for construction: March 1 May 1 July 1 $ 75,000 180,000 100,000 April 1 June 1 $ 74,000 270,000 The building was completed and occupied on July 1. To help pay for construction $50,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $500,000, 10% note issued two years ago. Instructions (a) Calculate the weighted-average accumulated expenditures. (b) Calculate avoidable interest. 10 - 30 Test Bank for Intermediate Accounting,Twelfth Edition Solution 10-113 (a) Date March 1 April 1 May 1 June 1 July 1 Expenditures $ 75,000 74,000 180,000 270,000 100,000 Capitalization Period 4/12 3/12 2/12 1/12 0 Weighted-Average Accum. Expend. $25,000 18,500 30,000 22,500 0 $96,000 (b) Weighted-Average Accum. Expend. $50,000 46,000 $96,000 Rate .12 .10 Avoidable Interest $ 6,000 4,600 $10,600 Ex. 10-114Nonmonetary exchange. A machine cost $80,000, has annual depreciation expense of $16,000, and has accumulated depreciation of $40,000 on December 31, 2006. On April 1, 2007, when the machine has a fair value of $32,000, it is exchanged for a similar machine with a fair value of $96,000 and the proper amount of cash is paid. The exchange lacked commercial substance. Instructions Prepare all entries that are necessary at April 1, 2007. Solution 10-114 Depreciation Expense ($16,000 3/12)........................................... Accumulated Depreciation ................................................... Accumulated Depreciation .............................................................. Machinery ........................................................................................ Loss on Disposal .............................................................................. Machinery ............................................................................ Cash ($96,000 $32,000) ................................................... 4,000 4,000 44,000 96,000 4,000 80,000 64,000 Ex. 10-115Nonmonetary exchange. Equipment that cost $80,000 and has accumulated depreciation of $63,000 is exchanged for similar equipment with a fair value of $35,000 and $15,000 cash is received. The exchange lacked commercial substance. Instructions (a) Show the calculation of the gain to be recognized from the exchange. (b) Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment. Acquisition and Disposition of Property, Plant, and Equipment Solution 10-115 (a) Cost Accumulated depreciation Book value Fair value ($35,000 + $15,000) Gain Gain recognized (15/50 $33,000) $80,000 (63,000) 17,000 50,000 $33,000 $ 9,900 63,000 11,900 15,000 10 - 31 (b) Accumulated Depreciation........................................................ Equipment ................................................................................ Cash ......................................................................................... Equipment..................................................................... Gain on Disposal .......................................................... Check: Fair value Less deferred gain Basis of new equipment 80,000 9,900 $35,000 (23,100) $11,900 Ex. 10-116Donated assets. Perez Company has recently decided to accept a proposal from the City of Bel Aire that publicly owned property with a large warehouse located on it will be donated to Perez if Perez will build a branch plant in Bel Aire. The appraised value of the property is $490,000 and of the warehouse is $980,000. Instructions Prepare the entry by Perez for the receipt of the properties. Solution 10-116 Building (Warehouse) ...................................................................... Land ................................................................................................. Contribution Revenue .......................................................... 980,000 490,000 1,470,000 10 - 32 Test Bank for Intermediate Accounting,Twelfth Edition Ex. 10-117Capitalizing vs. Expensing. Consider each of the items below. Place the proper letter in the blank space provided to indicate the nature of the account or accounts to be debited when recording each transaction using the preferred accounting treatment. Prepayments should be recorded in balance sheet accounts. Disregard income tax considerations unless instructed otherwise. a. b. c. d. e. asset(s) only accumulated amortization, depletion, or depreciation only expense only asset(s) and expense some other account or combination of accounts ____ 1. A motor in one of Grant Companys trucks was overhauled at a cost of $600. It is expected that this will extend the life of the truck for two years. ____ 2. Machinery which had originally cost $130,000 was rearranged at a cost of $450, including installation, in order to improve production. ____ 3. Long Bike Company recently purchased land and two buildings for a total cost of $35,000, and entered the purchase on the books. The $1,200 cost of razing the smaller building, which has an appraisal value of $6,200, is recorded. ____ 4. Sanders Company traded its old machine with a net book value of $3,000 plus cash of $7,000 for a new one which had a fair market value of $9,000. ____ 5. Ken Ellis and Barb Potter, maintenance repair workers, spent five days in unloading and setting up a new $6,000 precision machine in the plant. The wages earned in this five-day period, $480, are recorded. ____ 6. On June 1, the Colter Hotel installed a sprinkler system throughout the building at a cost of $13,000. As a result the insurance rate was decreased by 40%. ____ 7. An improvement, which extended the life but not the usefulness of the asset, cost $6,000. ____ 8. The attic of the administration building was finished at a cost of $3,000 to provide an additional office. ____ 9. In March, the Iola Theatre bought projection equipment on the installment basis. The contract price was $23,610, payable $5,610 down, and $2,250 a month for the next eight months. The cash price for this equipment was $22,530. ____ 10. Tinsley Company recorded the first years interest on 6% $100,000 ten-year bonds sold a year ago at 94. The bonds were sold in order to finance the construction of a hydroelectric plant. Six months after the sale of the bonds, the construction of the hydroelectric plant was completed and operations were begun. (Only cash interest, and not discount amortization, is to be considered.) Acquisition and Disposition of Property, Plant, and Equipment Solution 10-117 1. 2. 3. 4. 5. b a or c a e a 6. 7. 8. 9. 10. a b a e d 10 - 33 PROBLEMS Pr. 10-118Capitalizing acquisition costs. Myers Manufacturing Co. was incorporated on 1/2/07 but was unable to begin manufacturing activities until 8/1/07 because new factory facilities were not completed until that date. The Land and Building account at 12/31/07 per the books was as follows: Date 1/31/07 2/28/07 4/1/07 5/1/07 5/1/07 5/1/07 8/1/07 8/1/07 12/31/07 Item Land and dilapidated building Cost of removing building Legal fees Fire insurance premium payment Special tax assessment for streets Partial payment of new building construction Final payment on building construction General expenses Asset write-up Amount $200,000 4,000 6,000 5,400 4,500 150,000 150,000 30,000 75,000 $624,900 Additional information: 1. To acquire the land and building on 1/31/07, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a market value per share of $170. 2. When the old building was removed, Myers paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material. 3. Legal fees covered the following: Cost of organization Examination of title covering purchase of land Legal work in connection with the building construction $2,500 2,000 1,500 $6,000 4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2007. 5. General expenses covered the following for the period 1/2/07 to 8/1/07. President's salary Plant superintendent covering supervision of new building $20,000 10,000 $30,000 6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company. Instructions Determine the proper balances as of 12/31/07 for a separate land account and a separate building account. Use separate T-accounts (one for land and one for building) labeling all the relevant amounts and disclosing all computations. 10 - 34 Test Bank for Intermediate Accounting,Twelfth Edition Solution 10-118 Land Land and old building ($100,000 plus $170,000) Removal of old building ($4,000 $1,500) Legal fees Special assessment Balance 270,000 2,500 2,000 4,500 279,000 Building Legal Fees Partial payment Insurance (3 months) Final payment Superintendent's salary Balance 1,500 150,000 450 150,000 10,000 311,950 Pr. 10-119Capitalization of interest. During 2007, Naylor Building Company constructed various assets at a total cost of $8,400,000. The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2007 were $5,600,000. The company had the following debt outstanding at December 31, 2007: 1. 10%, 5-year note to finance construction of various assets, dated January 1, 2007, with interest payable annually on January 1 2. 12%, ten-year bonds issued at par on December 31, 2001, with interest payable annually on December 31 3. 9%, 3-year note payable, dated January 1, 2006, with interest payable annually on January 1 Instructions Compute the amounts of each of the following (show computations). 1. Avoidable interest. 2. Total interest to be capitalized during 2007. $3,600,000 4,000,000 2,000,000 Acquisition and Disposition of Property, Plant, and Equipment Solution 10-119 1. Weighted Average Accumulated Expenditures $3,600,000 2,000,000 $5,600,000 Applicable Interest Rate .10 .11* Avoidable Interest $360,000 220,000 $580,000 = Avoidable Interest 10 - 35 *Computation of weighted average interest rate: Principal 12% ten-year bonds $4,000,000 9% 3-year note 2,000,000 $6,000,000 Interest $480,000 180,000 $660,000 Weighted average interest rate = $660,000 $6,000,000 = 11%. 2. Actual interest cost during 2007: Construction note, $3,600,000 .10 12% ten-year bonds, $4,000,000 .12 9% three-year note, $2,000,000 .09 $ 360,000 480,000 180,000 $1,020,000 The interest cost to be capitalized is $580,000 (the lesser of the $580,000 avoidable interest and the $1,020,000 actual interest). Pr. 10-120Capitalization of interest. Early in 2007, Maley Corporation engaged Reese, Inc. to design and construct a complete modernization of Maley's manufacturing facility. Construction was begun on June 1, 2007 and was completed on December 31, 2007. Maley made the following payments to Reese, Inc. during 2007: Date Payment June 1, 2007 $3,600,000 August 31, 2007 5,400,000 December 31, 2007 4,500,000 In order to help finance the construction, Maley issued the following during 2007: 1. $3,200,000 of 10-year, 9% bonds payable, issued at par on May 31, 2007, with interest payable annually on May 31. 2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2007. In addition to the 9% bonds payable, the only debt outstanding during 2007 was a $750,000, 12% note payable dated January 1, 2003 and due January 1, 2013, with interest payable annually on January 1. Instructions Compute the amounts of each of the following (show computations): 1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost. 2. Avoidable interest incurred during 2007. 3. Total amount of interest cost to be capitalized during 2007. 10 - 36 Test Bank for Intermediate Accounting,Twelfth Edition Solution 10-120 1. Date June 1 August 31 December 31 Capitalization Expenditures $3,600,000 5,400,000 4,500,000 Period 7/12 4/12 0 Weighted-Average Accumulated Expenditures $2,100,000 1,800,000 0 $3,900,000 2. Weighted-Average Accumulated Expenditures $3,000,000 900,000 $3,900,000 Appropriate Interest Rate .09 .12 Avoidable Interest $270,000 108,000 $378,000 3. Actual interest incurred during 2007: 9% bonds payable, $3,200,000 .09 7/12 12% note payable, $750,000 .12 $168,000 90,000 $258,000 The interest cost to be capitalized is $258,000 (the lesser of the $378,000 avoidable interest and the $258,000 actual interest cost). Pr. 10-121Asset acquisition. Kerr Inc. plans to acquire an additional machine on January 1, 2007 to meet the growing demand for its product. OHara Company offers to provide the machine to Kerr using either of the options listed below (each option gives Kerr exactly the same machine and gives OHara Company approximately the same net present value cash equivalent at 10%). Option 1 Cash purchase $800,000. Option 2 Installment purchase requiring 15 annual payments of $105,179 due December 31 each year. The expected economic life of this machine to Kerr is 15 years. Salvage value at that time is estimated to be $50,000. Straight-line depreciation is used. Interest expense under Option 2 is computed using the effective interest method. Instructions Based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the obligation should appear on the December 31, 2007 balance sheet of Kerr Inc., for each option. Present your answer on an answer sheet in the following format. If an item should not appear in the balance sheet, write "not shown" opposite the option. Assets Account Name Option 1 Amount Liabilities Account Name Amount Option 2 Acquisition and Disposition of Property, Plant, and Equipment Solution 10-121 Assets Account Name Machinery Accum. Depr. Machinery Accum. Depr. Amount $800,000 50,000 $800,000 50,000 10 - 37 Option 1 Liabilities Account Name Amount "not shown" Option 2 747,122 Computations: At January 1, 2007, the note payable is $800,000. At December 31, 2007, after the first payment of $105,179 has been made ($80,000 interest) $774,821 principal remains, of which $747,124 is long-term and $27,697 is current [$105,179 (10% $774,821)]. Note: $105,179 7.60608 (Table 6-4) = $800,000, the present value of the obligation on January 1, 2007. Notes Payable Current Notes Payable Long-term $ 27,697 Pr. 10-122Nonmonetary exchanges. Ferry Corporation follows a policy of a 10% depreciation charge per year on all machinery and a 5% depreciation charge per year on buildings. The following transactions occurred in 2007: March 31, 2007 Negotiations which began in 2006 were completed and a warehouse purchased 1/1/98 (depreciation has been properly charged through December 31, 2006) at a cost of $3,200,000 with a fair market value of $2,000,000 was exchanged for a second warehouse which also had a fair market value of $2,000,000. The exchange had no commercial substance. Both parcels of land on which the warehouses were located were equal in value, and had a fair value equal to book value. June 30, 2007 Machinery with a cost of $240,000 and accumulated depreciation through January 1 of $180,000 was exchanged with $150,000 cash for a parcel of land with a fair market value of $230,000. Instructions Prepare all appropriate journal entries for Ferry Corporation for the above dates. Solution 10-122 3/31/07 Depreciation Expense ...................................................... Accumulated DepreciationWarehouse ........... ($3,200,000 5% 1/4) 40,000 40,000 Warehouse ...................................................................... 1,720,000 Accumulated DepreciationWarehouse .......................... 1,480,000 Warehouse ......................................................... ($3,200,000 5% 9 1/4 = $1,480,000) 3,200,000 10 - 38 Test Bank for Intermediate Accounting,Twelfth Edition Solution 10-122 (cont.) 6/30/07 Depreciation Expense. ...................................................... Accumulated DepreciationMachinery.............. ($240,000 10% 1/2) 12,000 12,000 Land ................................................................................ 230,000 Accumulated DepreciationMachinery ............................ 192,000 Gain on Exchange .............................................. Machinery ........................................................... Cash.................................................................... [$80,000 ($240,000 $192,000)] = $32,000 32,000 240,000 150,000 Pr. 10-123Nonmonetary exchange. Gorman Co. had a sheet metal cutter that cost $96,000 on January 5, 2002. This old cutter had an estimated life of ten years and a salvage value of $16,000. On April 3, 2007, the old cutter is exchanged for a new cutter with a market value of $48,000. The exchange lacked commercial substance. Gorman also received $12,000 cash. Assume that the last fiscal period ended on December 31, 2006, and that straight-line depreciation is used. Instructions (a) Show the calculation of the amount of the gain or loss to be recognized by Gorman Co. (b) Prepare all entries that are necessary on April 3, 2007. Show a check of the amount recorded for the new cutter. Solution 10-123 (a) Cost Accumulated depreciation (5 1/4 $8,000) Book value Fair value ($48,000 + $12,000) Gain Gain recognized (12/60 $6,000) (b) $96,000 (42,000) 54,000 60,000 $ 6,000 $ 1,200 2,000 2,000 42,000 43,200 12,000 96,000 1,200 Depreciation Expense .......................................................... Accumulated Depreciation........................................ Accumulated Depreciation.................................................... Machinery ............................................................................. Cash ..................................................................................... Machinery ................................................................ Gain on Disposal ..................................................... Check: Fair value $48,000 Less deferred gain (4,800) Basis of new machinery $43,200 Acquisition and Disposition of Property, Plant, and Equipment Pr. 10-124Nonmonetary exchange. 10 - 39 Pratt Co. has a machine that cost $255,000 on March 20, 2003. This old machine had an estimated life of ten years and a salvage value of $15,000. On December 23, 2007, the old machine is exchanged for a new machine with a market value of $162,000. The exchange lacked commercial substance. Pratt also received $18,000 cash. Assume that the last fiscal period ended on December 31, 2006, and that straight-line depreciation is used. Instructions (a) Show the calculation of the amount of gain or loss to be recognized by Pratt Co. from the exchange. (Round to the nearest dollar.) (b) Prepare all entries that are necessary on December 23, 2007. Show a check of the amount recorded for the new machine. Solution 10-124 (a) Cost Accumulated depreciation (4 3/4 $24,000) Book value Fair value ($162,000 + $18,000) Gain Gain recognized (18/180 $39,000) (b) $255,000 (114,000) 141,000 180,000 $ 39,000 $ 3,900 24,000 24,000 Depreciation Expense .......................................................... Accumulated Depreciation ....................................... Accumulated Depreciation ................................................... 114,000 Machine................................................................................ 126,900 Cash..................................................................................... 18,000 Machine.................................................................... Gain on Disposal ...................................................... Check: Fair value $162,000 Deferred gain (35,100) Basis of new machine $126,900 255,000 3,900 Pr. 10-125Nonmonetary exchange. Silas Co. exchanged Building 24 which has an appraised value of $3,200,000, a cost of $5,060,000, and accumulated depreciation of $2,400,000 for Building M belonging to Mock Co. Building M has an appraised value of $3,008,000, a cost of $6,020,000, and accumulated depreciation of $3,168,000. The correct amount of cash was also paid. Assume depreciation has already been updated. Instructions Prepare the entries on both companies' books assuming the exchange had no commercial substance. Show a check of the amount recorded for Building M on Silas's books. (Round to the nearest dollar.) 10 - 40 Test Bank for Intermediate Accounting,Twelfth Edition Solution 10-125 Silas Co.: Cost Accumulated depreciation Book value Fair value Gain $5,060,000 2,400,000 2,660,000 3,200,000 $ 540,000 $32,400 Gain recognized (192/3,200 $540,000) Accumulated Depreciation.................................................... 2,400,000 Building M............................................................................. 2,500,400 Cash ..................................................................................... 192,000 Building 24 ................................................................ Gain on Disposal ...................................................... Check: Fair value $3,008,000 Deferred gain (507,600) Basis for Building M $2,500,400 Mock Co.: Cost Accumulated Depreciation Book value Fair value Gain 5,060,000 32,400 $6,020,000 3,168,000 2,852,000 3,008,000 $ 156,000 Accumulated Depreciation.................................................... 3,168,000 Building 24............................................................................ 3,044,000 Building M ................................................................. Cash ......................................................................... 6,020,000 192,000 Pr. 10-126Nonmonetary exchange. Edmond Company exchanged machinery with an appraised value of $1,755,000, a recorded cost of $2,700,000 and Accumulated Depreciation of $1,350,000 with Rosen Corporation for machinery Rosen owns. The machinery has an appraised value of $1,695,000, a recorded cost of $3,240,000, and Accumulated Depreciation of $1,782,000. Rosen also gave Edmond $60,000 in the exchange. Assume depreciation has already been updated. Instructions (a) Prepare the entries on both companies' books assuming that the exchange had commercial substance. (Round all computations to the nearest dollar.) (b) Prepare the entries on both companies' books assuming that the exchange lacked commercial substance. (Round all computations to the nearest dollar.) Acquisition and Disposition of Property, Plant, and Equipment Solution 10-126 (a) Dissimilar Assets Edmond Machinery....................................... 1,695,000 Cash............................................... 60,000 Accum. Depreciation Machinery .................................. 1,350,000 Gain on Exchange of Plant Assets.................. 405,000 Machinery ........................ 2,700,000 Rosen Machinery....................................... 1,755,000 Accum. Depreciation Machinery .................................. 1,782,000 Gain on Exchange of Plant Assets.................. 237,000 Machinery ........................ 3,240,000 Cash ................................ 60,000 (b) 10 - 41 Cost A/D BV FV Gain $2,700,000 1,350,000 1,350,000 1,755,000 $ 405,000 Cost A/D BV FV Gain $3,240,000 1,782,000 1,458,000 1,695,000 $ 237,000 Similar Assets Edmond Machinery.................................................................................... 1,303,846 Cash............................................................................................ 60,000 Accumulated DeprecationMachinery....................................... 1,350,000 Gain on Exchange........................................................ Machinery ..................................................................... $60,000 ($60,000 + $1,695,000) $405,000 = $13,846 Rosen Machinery.................................................................................... 1,518,000 Accumulated DepreciationMachinery ...................................... 1,782,000 Machinery ..................................................................... Cash ............................................................................. 13,846 2,700,000 3,240,000 60,000 ... View Full Document

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