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Unformatted text preview: CHAPTER 10 QUESTIONS 1. a. The cost of land includes the original purchase price; brokers’ commissions; legal fees; title, recording, and escrow fees; surveying costs; local government special assessment taxes; cost of clearing or grading; and other costs that permanently improve the land or prepare it for use. Expenditures for land improvements that have a limited life, such as paving, fencing, and land- scaping, may be separately summar- ized as land improvements and depre- ciated over their estimated useful lives. b. The cost of buildings includes the original purchase price, brokers’ com- missions, legal fees, title and escrow fees, reconditioning costs, alteration and improvement costs, and any other costs that improve the buildings and hence benefit future periods. c. The cost of equipment includes the ori- ginal purchase price, taxes and duties on purchases, freight charges, insurance while in transit, installation charges and other costs in preparing the asset for use, subsequent improve- ments or additions, and any other ex- penditures that will improve the equip- ment and thus benefit more than one period. 2. a. A copyright, when purchased, is recor- ded at its purchase price. When intern- ally developed, all costs of legally es- tablishing the copyright are included as costs of the copyright. b. The cost of purchasing a franchise and all other sums paid specifically for a franchise including legal fees are considered the franchise cost. Property improvements required under the fran- chise also are recorded as part of the franchise cost. c. The cost of a trademark includes all ex- penditures required to establish the trademark, such as filing and registra- tion fees, as well as legal expenses for the defense of the trademark. Purchased trademarks are recorded at the purchase price. 3. Accountants frequently are required to al- locate costs among two or more accounts. The principal method of allocation is based on relative market values of the individual assets, if they can be determined. A ratio of each individual asset’s market value to the sum of the market values for all assets involved in the purchase is used to determ- ine cost for each individual asset. If market values, or some approximation of market values, cannot be obtained for all assets in the basket purchase, allocation can be made to those assets where market values are available, and any remaining balance can be allocated, on some system- atic basis, to remaining assets. 4. When equipment is purchased on a deferred payment contract, care must be taken to exclude the stated or implicit in- terest from the purchase price. The asset should be recorded at its equivalent cash price. Interest on the unpaid contract balance should be recognized as interest expense over the life of the contract....
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