This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Question: FA-0001 Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company's manufacturing operations would be capitalized? Insurance on machine while in transit Testing and preparation of machine for use A. Yes Yes B. Yes No C. No Yes D. No No Answers A : A. B : B. C : C. D : D. Answer Explanations A. Answer A is correct. The cost of machinery includes all expenditures incurred in acquiring the asset and preparing it for use. Cost includes the purchase price, freight and handling charges, insurance on the machine while in transit, cost of special foundations, and costs of assembling, installation, and testing. Therefore, both costs given in this problem would be capitalized. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Question: FA-0002 Saba Co. bought a tract of land, paying $800,000 in cash and assuming an existing mortgage of $200,000. The municipal tax bill disclosed an assessed valuation of $700,000. How much should Saba record as an asset for this land acquisition? Answers A : $ 600,000 B : $ 700,000 C : $ 800,000 D : $1,000,000 Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. D. Answer D is correct. The cost principle requires that assets be recorded at historical cost. The purchased cost is deemed to be an objective measure of fair market value. Therefore, the assessed valuation has no impact on the recorded cost. Historical cost includes all costs incident to the acquisition of the asset. In this case, Saba Co. gave up $800,000 of cash and assumed liabilities of $200,000. The assumption of a liability is the equivalent of a payment of cash. The correct answer is D because the total amount incurred in acquiring the land was $1,000,000 ($800,000 + $200,000). Question: FA-0003 Tomson Co. installed new assembly line production equipment at a cost of $175,000. Tomson had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost $12,000 and the wall removal cost $3,000. The rearrangement did not increase the life of the assembly line but it did make it more efficient. What amount of these costs should be capitalized by Tomson? Answers A : $175,000 B : $178,000 C : $187,000 D : $190,000 Answer Explanations A. Answer A is incorrect because this situation does not involve capitalization of all costs. B. Answer B is incorrect because this situation does not involve capitalization of all costs....
View Full Document
- Spring '09