2D - Property, Plant, and Equipment

Question 1

Double-declining-balance method.

The results obtained by using the fixed-percentage method discussed can be approximated by using the double-declining-balance method.

The double-declining-balance method also applies a constant rate to the declining book value, but the rate is simply ___ the straight-line rate.

Answer 1

double

Question 2

On July 1, 20X1, Casa Development Co. purchased a tract of land for $1,200,000. Casa incurred additional costs of $300,000 during the remainder of 20X1 in preparing the land for sale. The tract was subdivided into residential lots as follows:

• *Lot Number Sales Price**
• *Class__of Lots Per Lot**
• *A 100 $24,000**
• *B 100 16,000**
• *C 200 10,000**

Using the relative sales value method, what amount of costs should be allocated to the Class A lots?

$300,000

$375,000

$600,000

$720,000

Answer 2

Question 3

When a long-lived asset is deemed to be impaired, the asset should be written down to a new carrying amount and the ___ ___ recognized in the income statement in the period of the impairment.

Long-lived assets other than goodwill, such as plant and equipment and other intangible assets, are initially recorded at __, which usually is the __ __ at the date of acquisition.

Answer 3

impairment loss

cost ; fair value

Question 4

The fair value of an impaired asset may be determined by all of the following except:

quoted market prices in active markets for the impaired asset.

market prices for similar assets.

the carrying amount of similar assets of competitors.

appropriate valuation techniques (e.g., present value of expected future cash flows).

Answer 4

the carrying amount of similar assets of competitors.

Quoted market prices in active markets and market prices for similar assets are methods of determining fair value. The carrying amount of similar assets would usually not be known and would not necessarily indicate an impairment loss, even if it were known. Appropriate valuation techniques can be used in determining the fair value of an impaired asset.

Examples of such techniques include present value of expected future cash flows, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.

Question 5

KLU Broadcast Co. entered into an agreement to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, travel and lodging services of $10,000 were used by KLU. However, the advertising service had not been provided. How should KLU account for travel and lodging in its June 30 financial statements?

Revenue and expense is recognized when the agreement is complete.

Not reported

An asset and revenue for $10,000 is recognized.

An expense and liability of $10,000 is recognized.

Answer 5

An expense and liability of $10,000 is recognized.

KLU has incurred expenses for travel and lodging and has a corresponding liability for unearned revenue.

The revenue from providing advertising time is not earned and cannot be recognized as revenue until the advertising time actually has been provided for Hotel Co.

Question 6

In general, the accounting for nonmonetary exchanges should be based on__ ___ , which is the same basis as that used in monetary transactions.

The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. T/F

The difference between this fair value and the book value of the asset surrendered should be recognized as a ___or ___at the time of the exchange

Answer 6

fair value

True

gain or loss

Question 7

Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year’s financial statements?

$0

$10,000

$30,000

$20,000

Answer 7

0

After an impairment loss is recognized, the reduced carrying amount of the asset should be treated as the new cost and the restoration of the impairment is not recognized. IFRS (International Financial Reporting Standards) will allow the restoration of an impairment loss, but U.S. GAAP will not allow the restoration.

Question 8

On January 1, 20X1, Dix Co. replaced its old boiler. The following information was available at that date:

Carrying amount of old boiler $ 8,000
Fair value of old boiler 2,000
Purchase and installation price of new boiler 100,000

The old boiler was sold for $2,000. What amount should Dix capitalize as the cost of the new boiler?

$92,000

$98,000

$94,000

$100,000

Answer 8

$100,000

Replacement of the boiler represents two transactions:

Debit Credit
(1) Sale of the old boiler:
Cash 2,000
Loss on sale 6,000
Old boiler (CV) 8,000

(2) Purchase of new boiler:
New boiler (cost) 100,000
Cash 100,000

Thus, the new boiler is capitalized at $100,000.

If the old boiler had been exchanged (i.e., traded in) for the new boiler, then this would have been a nonmonetary transaction in which similar assets are exchanged. In this transaction the new boiler would have been recorded at the fair market value of the assets surrendered in the trade (i.e., the market value of the old boiler plus any “boot” (cash paid)).

Question 9

When should a long-lived asset be tested for recoverability?

When the asset’s fair value has decreased, and the decrease is judged to be permanent

When the asset’s carrying amount is less than its fair value

When events or changes in circumstances indicate that its carrying amount may not be recoverable

When external financial statements are being prepared

Answer 9

When events or changes in circumstances indicate that its carrying amount may not be recoverable

FASB ASC 360-10-35-21 states that an entity must review long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Question 10

Long-Lived Assets to Be Held and Used

An entity must review long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be ___ .

Answer 10

recoverable

Question 11

Spiro Corp. uses the sum-of-the-years’-digits method to depreciate equipment purchased in January 20X1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset’s carrying amount as of December 31, 20X3?

$1,800

$4,500

$2,000

$3,800

Answer 11

$3,800

The sum-of-the-years’-digits depreciation method entails using a fraction with a numerator equal to the remaining useful life of the asset at the beginning of the year and a denominator equal to the sum of the years’ digits.

To calculate annual depreciation expense, this fraction is applied each year to the depreciable basis of the asset, which is the historical cost less any salvage value. For an asset with a 4-year estimated useful life, the denominator is 4 + 3 + 2 +1 = 10. The depreciable basis in Spiro’s equipment is $20,000 less an estimated salvage value of $2,000 = $18,000.

Depreciation expense for 20X1 through 20X3 is calculated as follows: 4/10 × $18,000 = $7,200; 3/10 × $18,000 = $5,400; 2/10 × $18,000 = 3,600.

At December 31, 20X3, accumulated depreciation is $16,200 and the cost is $20,000, resulting in a net book value of the equipment of $3,800.

Question 12

Sum-of-the-years’-digits method.

Under this method, the depreciable base is multiplied by a ___, the denominator of which is the sum of the years’ digits in the asset’s life, and the numerator is the remaining life at the beginning of the year.

Answer 12

fraction (attachment is an example)

Question 13

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes:

a gain equal to the difference between the fair value and carrying amount of the truck given up.

a loss determined by the proportion of cash received to the total consideration.

neither a gain nor a loss.

a gain determined by the proportion of cash received to the total consideration.

Answer 13

a gain determined by the proportion of cash received to the total consideration.

Sable will recognize a gain determined by the proportion of cash received to the total consideration. Similar trucks were exchanged in the transaction; therefore, there would be no gain. Very similar trucks would not significantly change cash flows—so the transaction would lack commercial substance.

Now, add in the fact that Bensol paid Sable money. Since Sable received money, Sable now has to record a gain.

Question 14

There are three exceptions cases in which a nonmonetary exchange should be recorded based on the recorded amount (carryover amount) rather than fair value:

1. Fair value is not ___.
2. Exchange transaction to ___ ___to customers
3. Exchange transaction that lacks ___ ___.

Answer 14

determinable

facilitate sales

commercial substance

Question 15

Commercial Substance

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future ___ __ .

Answer 15

cash flows

Question 16

Commercial Substance

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows.

The entity’s future cash flows are expected to significantly change if either of the following criteria is met:

a. The configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. (Example: The cash im giving is going to make me even more money. I’m buying a house to flip it – spending $100k to sell for $400k)
b. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. (I’m not giving cash to recieve cash. I am giving cash for a house)

Answer 16

Yep! Understand this.

Question 17

Pine City owned a vacant plot of land zoned for industrial use. Pine gave this land to Medi Corp. solely as an incentive for Medi to build a factory on the site. The land had a fair value of $300,000 at the date of the gift. This nonmonetary transaction should be reported by Medi as:

nonoperating income.

additional paid-in capital.

a credit to retained earnings.

a memorandum entry.

Answer 17

nonoperating income.

The land gifted to Medi as incentive must be recorded at its economic value to Medi, which is the fair market value. Medi would recognize an increase in its land account for $300,000 and recognize a gain from contributed property for the same amount.

The land is not related to stock, so APIC (additional paid-in capital) is incorrect. Retained earnings would be impacted only after the income is first recognized. The land has to be added to the assets, so a memo entry is not sufficient.

Question 18

Donated assets: Plant assets are occasionally donated to an enterprise by a city or other municipality as an inducement for the enterprise to locate a plant in the area.

If the donation is a nonreciprocal transfer; accordingly, the asset should be recorded at at the time of the transfer.

(Nonreciprocal means you dont give anything in return. You give me this, i give you nothing.)

(Reciprocal means i give you something in return. You give me this, I give you that)

Answer 18

fair value

Question 19

Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized?

Both insurance on the machine while in transit and testing and preparation of the machine for use

Testing and preparation of the machine for use

Insurance on the machine while in transit

Neither insurance on the machine while in transit nor testing and preparation of the machine for use

Answer 19

Both insurance on the machine while in transit and testing and preparation of the machine for use

The capitalized cost of a machine would include all costs of acquiring, transporting, installing, and testing of the machine for its intended use, up to the time the machine was placed in use.

This total acquisition cost would, therefore, include insurance during transit and testing and preparation of the machine for use.

Insurance and operating costs incurred subsequent to placing the machine in operation would be treated as product or period costs.

Question 20

Buildings, machinery, and equipment costs similarly (include/exclude) the expenditures necessary to purchase or construct the asset and prepare it for its intended use.

___ costs include those costs incurred in testing the asset (e.g., machinery) to ensure that it will operate as desired.

Answer 20

include

Preparation

Question 21

A transaction was reported as a nonmonetary exchange of assets. Under which of the following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered?

When the entity’s future cash flows are expected to change as a result of the exchange

When the timing of future cash flows of the asset received differs significantly from the configuration of the future cash flows of the asset transferred

When the transaction has commercial substance

When the transaction lacks commercial substance

Answer 21

When the transaction lacks commercial substance

A nonmonetary exchange is generally measured based on the fair market value of the assets exchanged. If the exchange lacks commercial substance, the asset is measured at its book value before the exchange.

Question 22

FASB ASC 805-20-55-4 requires long-term customer-relationship intangible assets to be:

not subject to impairment.

subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.

subject to the same impairment loss recognition as other long-lived intangibles to be disposed of other than by sale.

expensed when acquired.

Answer 22

subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.

FASB ASC 805-20-55-4 includes in its scope long-term customer-relationship intangible assets of financial institutions, such as depositor and borrower relationship intangible assets and credit cardholder intangible assets.

Those intangible assets are subject to the same tests and measurements as FASB ASC 360-10 requires for other long-lived assets to be held and used.

Question 23

Carr, Inc., purchased equipment for $100,000 on January 1, Year 1. The equipment had an estimated 10-year useful life and a $15,000 salvage value. Carr uses the 200% declining balance depreciation method.

In its Year 2 income statement, what amount should Carr report as depreciation expense for the equipment?

$17,000

$13,600

$16,000

$20,000

Answer 23

$16,000

• Year 1 depreciation = $100,000 × ((100% ÷ 10) × 2) = $20,000
• Year 2 depreciation = ($100,000 - $20,000) × 0.20 = $16,000

Question 24

On December 31, 20X1, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for similar productive equipment with a fair value (FV) of $60,000. In addition, Vey received $30,000 cash in connection with this exchange. What should be Vey’s carrying amount for the equipment received on December 31, 20X1, if the exchange has commercial substance?

$60,000

$40,000

$30,000

$80,000

Answer 24

$60,000

Question 25

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except it will:

no longer be depreciated.

be reclassified as an asset held for sale.

be classified as a current asset.

be valued at historical cost.

Answer 25

be valued at historical cost.

When you cease using a building in operations, you cease depreciating it. If it is to be sold soon, it will be reclassified as held for sale. However, it will still be carried at no more than its original cost less depreciation accumulated (which would be below historical cost).

Question 26

A long-lived asset to be sold should be classified as held for sale in the period in which all of the following criteria are met:

a. Management, having the authority to approve the action, commits to a plan to ___the asset.
b. The asset is available for ___sale in its present condition subject only to terms that are usual and customary for sales of such assets.
c. An active ___to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.
d. The sale of the asset is ___, and transfer of the asset is expected to qualify for recognition as a completed sale, except in certain limited specified situations.
e. The asset is being actively ___for sale at a price that is reasonable in relation to its current fair value.
f. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be ___.

Answer 26

sell

immediate

program

probable

marketed

withdrawn

Question 27

A long-lived asset classified as held for sale must be measured at the lower of its carrying amount or fair value (PLUS/LESS) the costs to sell

Answer 27

LESS

Example: FV is $100k and it’ll cost me $10k to sell. It is now worth $90k.

Question 28

Bayberry Co. has an asset with a cost of $200,000 and accumulated depreciation of $120,000. Driftwood Co. has an asset with a cost of $250,000 and accumulated depreciation of $160,000. Both assets have a fair value of $100,000. Bayberry and Driftwood find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bayberry’s gain on the exchange?

$20,000

$50,000

$10,000

$0

Answer 28

$20,000

Provided the exchange has commercial substance, it should be accounted for based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident.

The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange. The exchange has commercial substance as long as it is expected to significantly change the entity’s future cash flows. The journal entry for Bayberry is as follows:

New asset (fair value) 100,000
Accumulated depreciation 120,000
Old asset 200,000
Gain on exchange 20,000

Question 29

During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $186,000 on construction financing paid during construction?

Expense

Classify as building and depreciate

Classify as land and do not depreciate

None of the answer choices are correct.

Answer 29

Classify as building and depreciate

FASB ASC 360-10-30-1 provides: “If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset.”

The $186,000 should be classified as building cost and would be depreciated.

Question 30

If specified conditions are met, interest shall be capitalized for the following qualifying assets:

a. Assets that are constructed or otherwise produced for an enterprise’s ___ use (including assets constructed or produced for the enterprise by others for which deposits or progress payments have been made)
b. Assets intended for sale or lease that are constructed or otherwise produced as ___projects (e.g., ships or real estate developments)
c. Investments (equity, loans, and advances) accounted for by the equity method while the investee has activities in progress before the ___ stage

Answer 30

own

discrete (this means very specialized)

developmental

Question 31

Interest cost specifically shall not be capitalized for the following: a. Assets that are (in use/not in use) or (ready/not ready) for their intended use in the earning activities of the entity

b. Assets that (are/are not) being used in the earning activities of the entity and that are not undergoing the activities necessary to get them ready for use
c. Assets that are not included in the consolidated balance sheet of the parent entity and consolidated subsidiaries T/F
d. Investments accounted for by the equity method after the investee no longer qualifies as a ___ stage enterprise e. Investments in regulated investees that are capitalizing both the cost of the debt and equity capital (T/F)
f. Assets acquired with gifts and grants that are ___by the donor or grantor to acquisition of those assets to the extent that funds are available from such gifts and grants
g. Inventories that are ___ manufactured or otherwise produced in large quantities on a repetitive basis

Answer 31

in use; ready ( if its already in use & ready - dont capitalize)

are not ( if its not going to be used for business - fuck capitalizing it)

true

development

true

restricted

routinely

Question 32

Cart Co. purchased an office building and the land on which it is located for $750,000 cash and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at $960,000, 60% of which is allocated to the building. At what amount should Cart record the building?

$600,000

$500,000

$960,000

$576,000

Answer 32

$600,000

The cost of $1,000,000 should be assigned to the land and buildings based on their relative values. The value of the building is 60% of the total; therefore, $600,000 ($1,000,000 × .6) is assigned to the building.

Question 33

Lump-sum acquisitions: A group of assets may be acquired in a single transaction for a lump sum. (see flip for example)

Answer 33

Question 34

The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:

carrying amount exceeds undiscounted future cash flows.

carrying amount exceeds book value.

fair value exceeds carrying amount.

carrying amount exceeds the fair value.

Answer 34

carrying amount exceeds undiscounted future cash flows.

FASB ASC 360-10-35-17 indicates that an impairment loss exists when the asset’s carrying amount exceeds its undiscounted future cash flows. Carrying amount exceeding the fair value is used to measure the amount of the impairment loss, not to identify the existence of such a loss.

Assets subject to assessment for impairment under FASB ASC 805-20-55-4 are also subject to the same undiscounted cash flow recoverability test.

Question 35

FASB ASC 360-10-35-17 indicates that an impairment loss exists when the asset’s carrying amount exceeds its undiscounted future ___ ____.

Carrying amount exceeding the fair value is used to measure the ___ of the impairment loss, not to identify the existence of such a loss.

Answer 35

cash flows

amount

Question 36

On December 31 of the current year a building owned by Carr, Inc., was destroyed by fire. Carr paid $12,000 for removal and clean-up costs. The building had a book value of $250,000 and a fair value of $280,000 on December 31. What amount should Carr use to determine the gain or loss on this involun­tary conversion?

$280,000

$262,000

$250,000

$292,000

Answer 36

$262,000

When an asset is destroyed by an involuntary conversion, gain or loss is generally recognized, based on insurance or other proceeds less the carrying value of the asset.

The carrying value of the building was $250,000, and the $12,000 clean-up costs can be added to the overall loss computations, for a cost of $262,000.

Question 37

Property, plant, and equipment may be totally or partially destroyed by storm, fire, flood, or other similar causes. Damaged assets should be written down to their remaining value in use, if any, and a loss recognized in the ___ period.

Casualty losses

Property, plant, and equipment items are usually insured against casualty losses. A __ or __ should be recognized depending on whether the amount due from the insurer exceeds the carrying amount of the loss.

Answer 37

current

gain or loss

Question 38

Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle’s future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?

$1,000 gain in the income statement; $4,000 asset in the balance sheet

No gain or loss in the income statement; $4,000 asset in the balance sheet

No gain or loss in the income statement; $3,000 asset in the balance sheet

$1,000 gain in the income statement; $3,000 asset in the balance sheet

Answer 38

No gain or loss in the income statement; $3,000 asset in the balance sheet

Normally, in a nonmonetary exchange, the asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. However, there are three exceptions in which the exchange is recorded at the carryover amount, not fair value.

One of those exceptions is for exchange transactions that lack commercial substance, as does the exchange above. Isle should record the new copy machine at the carryover amount of $3,000 and not any gain or loss.

Question 39

On January 2, 20X1, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its 20X1 income statement, what amount should Lem report as depreciation for the machinery?

$13,000

$10,500

$11,000

$12,500

Answer 39

$10,500

The machinery is recorded at the cash equivalent price of the machinery, $110,000.

Straight-line depreciation for 20X1 = $(110,000 - $5,000) / 10 years
= $ 105,000 / 10 years
= $ 10,500

The total cash payment of $130,000 includes interest of $20,000.

Question 40

During the year, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year-end income statement?

Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: interest incurred after completion

Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: all interest incurred

Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: interest incurred after completion

Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: all interest incurred

Answer 40

Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: all interest incurred

Whether an asset is constructed for a company’s own use or constructed for resale, the interest incurred after the asset’s construction is completed is expensed as incurred.

Capitalization is not allowed once the asset is ready for use or sale. If that asset is constructed for a company’s own use, interest incurred until completion may be capitalized.

For a routinely produced asset to be held for sale, interest is expensed during construction and after completion. It is not capitalized.

Question 41

A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:

• *January 1 Purchased land for $120,000**
• *September 1 Progress payment to contractor for $150,000**

What amount of interest should be capitalized for the year ended December 31, Year 1?

$13,500

$15,000

$17,000

$30,000

Answer 41

$17,000

The capitalized interest is based on the payments made for the land and progress payments to the contractor based on the amount of the year that these payments were outstanding. The land payment of $120,000 was outstanding the entire year for an expenditure amount of $120,000 × 12/12, or $120,000.

The progress payment to the contractor was for $150,000 and was made in September, for only the last four months of the year, thus an expenditure of $150,000 × 4/12, or $50,000.

The total weighted-average expenditures was thus $120,000 and $50,000, for a total of $170,000. A larger ($300,000) specifically construction-related debt was outstanding all year, so there is enough principal to capitalize the interest at the 10% rate of the loan.

The capitalized interest is thus $170,000 × 0.10, or $17,000.

Question 42

In testing for impairment of long-lived assets, Nale Co. determined the following:

Cost of asset $100,000
Accumulated depreciation 60,000
Future cash flows 20,000
Fair value 30,000

The impairment loss is:

$10,000.

$70,000.

$20,000.

$30,000.

Answer 42

$10,000.

If the carrying amount exceeds the future cash flows, an impairment loss should be recognized. The loss is the excess of the asset’s carrying amount over its fair value.

Question 43

During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $147,000 on construction financing incurred after completion of construction?

Classify as land and do not depreciate

None of the answer choices are correct.

Classify as building and depreciate

Expense

Answer 43

Expense

FASB ASC 835-20-25-5 provides: “The capitalization period shall end when the asset is substantially complete and ready for its intended use.”

Therefore, the $147,000 in construction financing incurred after completion of construction should be expensed.

Question 44

Horatio Company owns an asset for which concern exists about impairment. Horatio’s analysis of the future cash flows related to the asset reveals that the future undiscounted cash flows are expected to be $254,000. The asset has a cost of $476,000 and has accumulated depreciation of $234,000. The fair value of the asset is $227,000. What amount, if any, should Horatio record as an impairment loss for this asset?

$12,000

$15,000

$0

$27,000

Answer 44

$0

Impairment testing for tangible assets is a two-step process. First, the recoverability test is performed. If the carrying value of the asset is not recoverable, the second part of the process, the determining of the amount of the loss, is performed.

Because the undiscounted cash flows of $254,000 are greater than the carrying amount of the asset of $242,000 ($476,000 – $234,000), the carrying value will be recovered and therefore the asset is not impaired.

The second part of the process is not needed and no impairment loss is recorded.

Question 45

Lano Corp.’s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land’s carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in Lano’s balance sheet?

The amount is increased by the excess of the replacement forest land’s cost over the condemnation award.

No effect, because the condemned forest land’s carrying amount is used as the replacement forest land’s carrying amount.

The amount is increased by the excess of the replacement forest land’s cost over the condemned forest land’s carrying amount.

The amount is increased by the excess of the condemnation award over the condemned forest land’s carrying amount.

Answer 45

The amount is increased by the excess of the replacement forest land’s cost over the condemned forest land’s carrying amount.

The receipt of a condemnation award is considered an involuntary conversion of a nonmonetary asset (the land) for monetary assets (cash). FASB Interpretation 30 requires that Lano Corp., as recipient of such an award, recognize a gain even though it reinvests the award in new land. The new land is then recorded at its acquisition cost.

Thus, the net effect on the carrying amount of forest land reported in Lano’s balance sheet is that the amount is increased by the excess of the replacement forest land’s cost over the condemned forest land’s carrying amount.

Question 46

Talton Co. installed new assembly-line production equipment at a cost of $185,000. Talton 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 Talton?

$188,000

$197,000

$200,000

$185,000

Answer 46

$200,000

The equipment account should be debited when the post-acquisition cost increases efficiency.

Cost $185,000
Rearrangement 12,000
Wall removal 3,000
Amount capitalized $200,000

Question 47

Examples of changes in circumstances or events that may warrant an assessment for impairment include all of the following except:

significant decrease in the market value of the asset.

completion of depreciation on the asset so that its carrying value is equal to its expected salvage value.

an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset.

significant adverse change in the business climate that could affect the asset’s value.

Answer 47

completion of depreciation on the asset so that its carrying value is equal to its expected salvage value.

A significant decrease in the market value of the asset, a significant adverse change in the business climate, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset are all factors listed in FASB ASC 360-10-35-21 as warranting an assessment for impairment.

Completion of the depreciation process, resulting in a carrying amount equal to estimated salvage value, does not indicate an impairment.

FASB ASC 805-20-55-4 adds long-term customer relationship assets of financial institutions, such as depositor—and borrower—relationship intangible assets and credit cardholder intangible assets to the list of assets requiring assessment for impairment.

Question 48

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as:

a gain from discontinued operations, net of income taxes.

a reduction of the cost of the new warehouse.

a component of other comprehensive income.

a part of continuing operations.

Answer 48

a part of continuing operations.

The sale and purchase should be recorded separately. The gain on the sale is reported as other income and is a component of income from continuing operations.

Question 49

Dell Printing Co. incurred the following costs for one of its printing presses:

Purchase of collating and stapling attachment $84,000
Installation of attachment 36,000
Replacement parts for overhaul of press 26,000
Labor and overhead in connection with overhaul 14,000

The overhaul resulted in a significant increase in production. Neither the attachment nor the overhaul increased the estimated useful life of the press. What amount of the above costs should be capitalized?

$0

$160,000

$84,000

$120,000

Answer 49

$160,000

Since the overhaul caused a significant increase in productivity, it would not be treated as an ordinary repair. The overhaul will add to the equipment use over its remaining useful life, and the overhaul cost should be capitalized into the equipment account.

• $84,000 + $36,000 + $26,000 + $14,000 = $160,000

Question 50

Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the company’s fiscal year, a change in business climate related to a competitor’s innovative products indicated to Hudson’s management that the $170 million carrying amount of the assets of one of Hudson’s factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted future cash flows over the remaining useful life of the factory would be $150 million.

The fair value of the factory’s assets is reliably estimated to be $135 million. The change in business climate requires investigation of possible impairment. Which of the following amounts is the impairment loss?

$15 million

$20 million

$35 million

$65 million

Answer 50

$35 million

Since the estimated future cash flow of the asset ($150 million) is less than the carrying value of the asset ($170 million), an impairment loss must be recognized.

The impairment loss for long-lived assets to be held and used is the excess of the asset’s carrying amount over its fair value.

Carrying amount $170 million
Fair value 135 million
Impairment loss $ 35 million

Question 51

Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance?

Are the future cash flows expected to change significantly as a result of the exchange?

Does the book value of the asset given up exceed the fair value of the asset received?

Is the gain on the exchange less than the increase in future cash flows?

Is the exchange nontaxable?

Answer 51

Are the future cash flows expected to change significantly as a result of the exchange?

Nonmonetary exchanges are generally recorded at fair value.

One of the exceptions to the exchange being recorded at fair value is an exchange transaction that lacks commercial substance. The main issue in determining commercial substance is whether the entity’s future cash flows are expected to significantly change.

Question 52

Vuitton Company acquired a tract of land containing an extractable natural resource. Vuitton is required by the purchase contract to restore the land to a suitable condition for recreational use after the extraction of the resource is completed.

Geological surveys estimate that the recoverable amount of the resource will be 5,800,000 tons and that the land will have a value of $612,000 after restoration. The land has a cost of $6,400,000 and the required restoration cost is $1,230,000. Assuming that all of the resource is sold upon extraction (Vuitton does not keep any inventory on hand), what is the amount of depletion per ton of the resource?

$1.10

$1.41

$1.32

$1.21

Answer 52

$1.21

.

The costs to be depleted include both the cost of the land ($6,400,000) and the cost to restore the land ($1,230,000). The total cost ($7,630,000) less the land value after restoration ($612,000) is the depletable basis.

The depletable basis is divided by the estimate of the number of tons of the resource: $7,630,000 – $612,000 = $7,018,000; $7,018,000 ÷ 5,800,000 tons = $1.21 of depletion per ton of resource.

Question 53

The allocation of the cost of the natural resource is known as ___.

Answer 53

depletion

Question 54

The depletion charge is usually determined by using the

___-__-__ method. The depletion charge per unit is computed as follows:

Capitalized natural resource costs = Depletion charge per unit
Total estimated units economically recoverable

Answer 54

The depletion charge is usually determined by using the unit-of-production method.

Question 55

The depletion charge is usually determined by using the unit-of-production method. The depletion charge per unit is computed as follows:

???? = Depletion charge per unit
???

Answer 55

Capitalized natural resource costs = Depletion charge per unit
Total estimated units economically recoverable

Question 56

A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:

reduce accumulated depreciation equal to the cost of refurbishing.

record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.

capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.

capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.

Answer 56

capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.

Since the cost and related accumulated depreciation of the damaged portion of the building are identifiable, the carrying value of the damaged portion of the building is known.

A loss equal to this carrying value should be recorded against removal of that cost and accumulated depreciation from the records. Then, the cost of refurbishing should be capitalized.

Question 57

Which of the following statements concerning the acquisition of assets is false?

Assets donated by entities other than governmental units are included in revenue in the period of receipt.

When an asset is received from a governmental entity, no income is recognized, and the offsetting credit is to an owners’ equity account, “Additional Paid-In Capital: Donated Assets.”

If several dissimilar assets are purchased for a lump sum, the total amount paid should be allocated to each individual asset on the basis of its relative fair value.

Donated assets should be recorded at book value along with any incidental costs incurred.

Answer 57

Donated assets should be recorded at book value along with any incidental costs incurred.

According to FASB ASC 845-10-30-1, donated assets should be valued at fair value, not book value, so “donated assets should be recorded at book value along with any incidental costs incurred” is false.

The other three answer choices are acceptable ways to account for donated assets

Question 58

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company’s next step in performing its impairment test is to:

perform a recoverability test on the carrying amount of the division’s assets.

reduce the carrying amount of the division’s assets to the amount of expected divisional cash flows.

adjust the carrying amount of the division’s assets to fair value.

adjust the carrying amount of the division’s assets to replacement value.

Answer 58

perform a recoverability test on the carrying amount of the division’s assets.

The company’s next step in performing its impairment test is to determine if the sum of the estimated future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset.

The impairment loss, if any, to be recognized is any excess of the asset’s carrying amount over its fair value.

Remember that no impairment loss is to be recognized unless the asset’s estimated future cash flows (ECF) are less than its carrying amount, even if the asset’s carrying amount (CA) exceeds its fair value (FV).

Question 59

Pine Co. purchased land for $450,000 as a factory site. An existing building on the site was razed before construction began. Additional information is as follows:

Cost of razing old building $ 60,000
Title insurance and legal fees to purchase land 30,000
Architect’s fees 95,000
New building construction cost 1,850,000

What amount should Pine capitalize as the cost of the completed factory building?

$1,945,000

$1,910,000

$1,975,000

$2,005,000

Answer 59

$1,945,000

When purchasing land intended for the addition of a new building that contains existing infrastructure, the cost of the land and new building must be allocated accordingly.

The cost of purchasing the land, razing the old building, and title insurance and legal fees would all be allocated to the land account and not depreciated because land has an indefinite life.

The architect’s fee to design the building and the new building construction would be capitalized to the building account in the amount of $1,945,000 ($95,000 + $1,850,000) and depreciated over the life of the new building.

Question 60

Which of the following uses the straight-line depreciation method?

Group depreciation

Neither group depreciation nor composite depreciation

Both group depreciation and composite depreciation

Composite depreciation

Answer 60

Both group depreciation and composite depreciation

Group depreciation applies an average (straight-line depreciation) rate to an entire group of similar assets, hence the term group depreciation.

Composite depreciation applies an average (straight-line depreciation) rate to an entire group of dissimilar assets.

Note: Both methods use the straight-line depreciation method.

Question 61

Group-or-composite depreciation:

Many companies compute depreciation by using the group-or-composite-depreciation method rather than calculating depreciation for each asset separately. The term “group” refers to a collection of ___ assets. The term “composite” refers to a collection of ___ assets.

Answer 61

Similar

dissimilar

Question 62

On January 1, 20X1, Crater, Inc., purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31, 20X5, for 50% of its original cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation methods did Crater use?

Sum-of-the-years’-digits

Straight-line

Composite

Double-declining balance

Answer 62

Straight-line

Question 63

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

It is prohibited.

It must be disclosed in the notes to the financial statements.

It is required when the reversal is considered permanent.

It is encouraged, but not required.

Answer 63

It is prohibited.

Subsequent reversal of a previously recognized impairment loss of goodwill or other intangible assets is prohibited in FASB ASC 350-30-35-14.

Question 64

After an impairment loss is recognized, the reduced carrying amount of the asset should be accounted for as its new cost basis. T/F

The (new/old) cost basis should be depreciated or amortized over the asset’s estimated remaining useful life if an impairment loss is recognized.

Restoration of previously recognized impairment losses is ___.

Answer 64

True

New

prohibited

Question 65

Quick Co. acquired the following assets from a liquidating competitor for a $200,000 lump-sum purchase price:

Competitor’s
Carrying Amount__Fair Value
Inventory $ 70,000 $ 50,000
Land 40,000 50,000
Building 110,000 150,000
$220,000 $250,000

What amount should Quick report as the cost of the building?

$120,000

$150,000

$100,000

$200,000

Answer 65

$120,000

GAAP requires that plant and equipment be recorded at historical cost, including the costs incurred necessary to bring them to the condition and location necessary for their intended use.

For lump-sum acquisitions, the cost is allocated to the individual assets based upon their relative fair values. The cost of the building is $120,000, computed as follows: $150,000 ÷ $250,000 = 60%; $200,000 purchase price × 60% = $120,000.

Question 66

Lump-sum acquisitions: A group of assets may be acquired in a single transaction for a lump sum.

The lump-sum cost should be allocated to the individual assets based on the best indicator of their relative fair values.

To illustrate, assume that land and a building were acquired for a lump-sum price of $100,000. Assuming that an independent appraisal showed the appraised values of the land and building to be $30,000 and $90,000, respectively, the $100,000 cost would be allocated as follows:

Asset Appraised Allocation of Cost
Value
Land $ 30,000 $ 30,000 x $100,000 = $ 25,000
$120,000

Building 90,000__$ 90,000 x $100,000 = $ 75,000
$120,000 $120,000 $100,000
======== ========

Answer 66

Yep. This isn’t tested too much.

Question 67

On January 1, Lyle Co. purchased a manufacturing facility. After remodeling was completed, the facility was ready for use on March 1. On April 1, production began. Interest costs were incurred as follows:

January 1 to March 1__March 1 to April 1
Building $10,000 $5,000
Remodeling 2,000 3,000

What amount of interest should Lyle capitalize during the current year?

$12,000

$20,000

$15,000

$10,000

Answer 67

$12,000

Lyle can capitalize the interest incurred on the project until the asset is ready for use. It does not matter when the actual production begins.

Because the building could not be utilized (e.g., not ready for use) until the remodeling is complete, both the building’s interest and the remodeling’s interest are capitalizable until March 1 for a total of $12,000 ($10,000 + $2,000).

Question 68

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows:

Description Amount
Purchase price $1,000,000
Real estate taxes in arrears 15,000
Debt issuance costs 2,000
Attorney fee - title search on land 5,000

The company should record its acquisition of the land in its financial statements at a value of:

$1,015,000.

$1,022,000.

$1,000,000.

$1,020,000.

Answer 68

$1,020,000.

Debt issue costs are considered part of the cost of issuing the bonds and are therefore included in the cost of the bonds and amortized over the life of the debt.

Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

Amortization of debt issuance costs is reported as interest expense. The remaining items are considered part of the cost of the land, totaling $1,020,000 ($1,000,000 + $15,000 + $5,000).

Question 69

Land costs include the following:

a. The purchase price
b. Costs incidental to acquisition, such as legal fees, commissions, and title insurance
c. Costs of preparing the land for use, such as the costs of surveying, grading, filling, draining, and clearing

Answer 69

Just get familiar with this. Read it in your head once or twice and repetition.

Question 70

Turtle Co. purchased equipment on January 2, 20X0, for $50,000. The equipment had an estimated 5-year service life. Turtle’s policy for 5-year assets is to use the 200% double-declining depreciation method for the first two years of the asset’s life, and then switch to the straight-line depreciation method. On its December 31, 20X2, balance sheet, what amount should Turtle report as accumulated depreciation for equipment?

$38,000

$30,000

$39,200

$42,000

Answer 70

38000

Question 71

Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize?

$50,000

$20,000

$70,000

$40,000

Answer 71

40000

For qualifying assets being constructed for an entity’s own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole’s avoidable interest is given to be $40,000.

Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.

Question 72

Charm Co. owns a delivery truck with an original cost of $10,000 and accumulated depreciation of $7,000. Charm acquired a new truck by exchanging the old truck and paying $2,000 in cash. The new truck has a fair value of $5,000 at the time of the exchange. What amount of gain or loss should Charm recognize?

$0

$2,000 gain

$2,000 loss

$3,000 loss

Answer 72

$0

An exchange is a reciprocal transfer between two entities. If the transferor retains a substantial continuing involvement in the transferred asset, then the transaction cannot be considered an exchange because the usual risks and rewards of ownership of the asset are still retained by the transferor.

In accounting for nonmonetary exchanges, the asset received is recorded at the fair value of the asset surrendered, or the fair value of the asset received, whichever is more clearly evident.

Any difference between this fair value and the book value of the asset surrendered is recognized as a gain or loss at the time of the exchange.

The journal entry for the exchange in this question is as follows (note that there is $0 gain):

New Truck (FMV) 5,000
Accumulated Depreciation (old truck) 7,000
Old truck (cost) 10,000
Cash 2,000

Question 73

In general, the accounting for nonmonetary exchanges should be based on ___ value

Answer 73

fair

Question 74

Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in three years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?

$110,000

$85,132

$100,000

$75,132

Answer 74

$85,132

The cost of equipment is the price paid to acquire it, or the value paid out (or liability taken on) in the purchase. In this case, the cost of the equipment is the $10,000 paid, plus the value of the note payable, which is the face value of $100,000, less the discount of $24,868. This gives a total cost of $10,000 + $100,000 – $24,868 = $85,132.

Question 75

Which of the following statements about group and composite depreciation is true?

When a company has a large number of the same kind of assets, it is appropriate to use the group depreciation method but not the composite depreciation method.

When a company has a large number of the same kind of assets, it is appropriate to use either the group or the composite depreciation method.

When a company has a large number of the same kind of assets, it is appropriate to use the composite depreciation method but not the group depreciation method.

When a company has a large number of the same kind of assets, it is not appropriate to use either the group or composite method of depreciation.

Answer 75

When a company has a large number of the same kind of assets, it is appropriate to use the group depreciation method but not the composite depreciation method.

Group depreciation is used when many of the same type of assets are used by a company (e.g., telephone poles). Composite depreciation is used for assets that are similar but not the same (e.g., cars and trucks).

Therefore, the only correct statement indicates that group depreciation will be used when there are many of the same type of asset.

Question 76

Sea Manufacturing Corp. is constructing a new factory building. During the current calendar year, Sea made the following payments to the construction company:

January 2 $1,000,000
December 31 1,000,000

Sea has an 8%, three-year construction loan of $3,000,000. What is the amount of interest costs that Sea may capitalize during the current year?

$80,000

$240,000

$0

$160,000

Answer 76

$80,000

Interest expense is capitalized for assets that are constructed or otherwise produced for an enterprise’s own use. The amount of interest to be capitalized during a given accounting period is determined by applying the appropriate capitalization rate to the average amount of accumulated expenditures for the asset during that period.

In general, the capitalization rate is a weighted average of the rates applicable to borrowings (debt) outstanding during the accounting period. Sea Manufacturing only had one borrowing, at a rate of 8%. Capitalized interest is computed as follows:

Average accumulated expenditures: $1,000,000 × 12/12 = $1,000,000
Capitalization rate 8%
Capitalized interest expense $ 80,000

Question 77

Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase?

$1,000

$5,000

$4,000

$6,000

Answer 77

$5,000

In general, accounting for nonmonetary exchanges is based on fair value. The asset received should be recorded at the fair value of the asset surrendered OR the fair value of the asset received, whichever is more clearly evident. Since Balm’s stock is not yet trading, the fair value of the services provided (48 hours × $125/hour = $6,000) is more readily determinable.

The common stock account will increase by its par value of $5,000; the remaining $1,000 will be an increase to Additional Paid-in Capital.

Question 78

Hall Co. purchased a machine on January 1 at a cost of $140,000. The machine had an estimated useful life of 8 years and a salvage value of $60,000. Hall chose to depreciate the machine using the double-declining balance method. What was the carrying amount of the machine in Hall’s balance sheet at the end of its second year of operations?

$80,000

$60,000

$61,250

$78,750

Answer 78

78,750

Question 79

Declining-balance methods (ignores/factors in) salvage costs when calculating depreciation expense and current book value

Answer 79

ignores

Question 80

Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would be Cantor’s depletion amount per ton for the current year?

$2.50

$3.20

$3.30

$2.60

Answer 80

$3.20

The costs of the natural resource to be depleted include the purchase price plus the cost incurred to prepare the coal mine for extraction of the coal. This amount, $2,500,000, must be reduced by the $100,000 expected sales price of the land that will be recovered after all the coal has been mined.

This difference divided by the 750,000 tons is the depletion charged for each ton of coal mined during the current year.

Question 81

Rye Co. purchased a machine with a 4-year estimated useful life and an estimated 10% salvage value for $80,000 on January 1, 20X0. In its income statement, what would Rye report as the depreciation expense for 20X2 using the double-declining-balance method?

$18,000

$20,000

$9,000

$10,000

Answer 81

Question 82

On July 1, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying amount was $2,500. On July 15, Rudd received and recorded a $700 invoice for a new engine installed in the van in May, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain (loss) on disposal of the van in its year-end income statement?

$300

$(200)

$0

$1,000

Answer 82

$300

The cost of the van prior to its destruction should include the carrying amount and the new engine installation cost of $3,200 ($2,500 + $700). The repairs should be expensed, not capitalized.

Thus, the gain on the destruction of the van should be the insurance proceeds of $3,500 less the carrying cost of $3,200 for a gain of $300 ($3,500 – $3,200).

Question 83

Smile, Inc. purchased a computer on May 1 for $12,000 with an estimated salvage value of $1,500 and a 3-year life. What is the depreciation expense for the year ended December 31, using the double-declining method of depreciation?

$7,000

$4,667

$5,333

$8,000

Answer 83

$5,333

Declining-balance methods ignore salvage costs when calculating depreciation expense. Year 1 depreciation would be calculated as follows:

Beginning book value $12,000
Double straight-line rate × 2/3
Months in Year 1 × 8/12
Year 1 depreciation $ 5,333 (rounded)

Question 84

Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?

$3,000

$3,700

$5,700

$5,000

Answer 84

$5,700

.

Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.

Exceptions to this treatment include the following:

• Fair value is not determinable
• Exchange transaction to facilitate sales to customers
• Exchange transaction that lacks commercial substance

Under these exceptions, no gains or losses are recognized.

Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange:

Original cost $23,000
Accumulated depreciation 20,000
Book value $ 3,000
Additional cash paid 700
New book value $ 3,700

Question 85

Jones Co. exchanged a machine with a fair value of $25,000 for a new machine with a fair value of $20,000, and received $5,000 in cash. The old machine cost $80,000 and had accumulated depreciation of $64,000. The exchange transaction lacked commercial substance. What amount of gain should Jones recognize on the exchange?

$7,200

$1,800

$0

$9,000

Answer 85

When a nonmonetary exchange occurs that lacks commercial substance, the typical accounting records the received asset at the book value of the old asset. However, if boot (typically cash) is received along with the new asset, the company will recognize a gain. If the boot is less than 25% of the total consideration (Asset + Boot) received, the gain will be recognized proportionally.

The boot represented 20% (($5,000 ÷ ($20,000 + $5,000)) of the total consideration. The old machine had a book value of $16,000 ($80,000 cost − $64,000 accumulated depreciation).

The total gain that would be recognized usually is $9,000 ($25,000 value received − $16,000 book value given up). Since boot is less than 25%, Jones gets a proportional recognition of $1,800 ($9,000 total gain × 20%).

Question 86

Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?

Both held for use and held for disposal

Held for disposal

Neither held for use nor held for disposal

Held for use

Answer 86

Held for disposal

A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.

A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.

Question 87

On January 2, 20X1, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31, 20X4. The estimated useful life of the asset at December 31, 20X4, did not change. What amount should Randall report as depreciation expense in its income statement for the next year, 20X5?

$20,000

$30,000

$25,000

$22,000

Answer 87

Depreciation should be modified when an asset has been determined to be impaired.

Cost $250,000
Accumulated depreciation (4 years at $25,000) 100,000
Book value before impairment $150,000
Impairment 30,000
Book value after impairment $120,000

 Remaining useful life 6 years
 Annual depreciation ($120,000 ÷ 6 years) $ 20,000

Question 88

Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. Assuming that the exchange does not meet the criteria for commercial substance, Slate should recognize:

a gain equal to the difference between the fair value and the carrying amount of the land given up.

a gain in an amount determined by the ratio of cash received to total consideration.

a loss in an amount determined by the ratio of cash received to total consideration.

neither a gain nor a loss.

Answer 88

a gain in an amount determined by the ratio of cash received to total consideration.

FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:

1. Fair value is not determinable.
2. Exchange transaction is to facilitate sales for customers.
3. Exchange transaction lacks commercial substance.

In Slate’s case, one of the “givens” is that the exchange does not meet the criteria for commercial substance. Therefore, the exchange should be accounted for based on the recorded amounts of the assets surrendered, except that Slate, as the recipient of cash, must recognize “partial” gain.

The gain to be recognized by Slate is an amount determined by the ratio of cash received to fair value of the total consideration received.

The “partial” gain would be computed by multiplying this ratio times the total implied gain, which is the difference between the carrying amount and the fair value of the land surrendered.

Question 89

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. The fair value of the land is more clearly evident than the fair value of the machine. Assuming that the transaction has commercial substance, what is the gain on the exchange?

$30,000

$35,000

$5,000

$0

Answer 89

$30,000

Nonmonetary exchanges are generally recorded at fair value.

Value of property exchanged $50,000
Original cost 20,000
Gain on exchange $30,000

Question 90

A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount of impairment loss should be reported?

$15,000

$5,000

$0

$20,000

Answer 90

$0

If the sum of the estimated future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the entity may have to recognize an impairment loss.

The impairment loss, if any, to be recognized is any excess of the asset’s carrying amount over its fair value.

Notice, however, that no impairment loss is to be recognized unless the asset’s estimated future cash flows (ECF) are less than its carrying amount, even if the asset’s carrying amount (CA) exceeds its fair value (FV).

Since the estimated future cash flows ($130,000) are not less than the carrying value ($120,000), no impairment loss must be recognized.

Question 91

A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?

$120,000

$105,000

$125,000

$110,000

Answer 91

$120,000

Depreciable base is Purchase price - Salvage value:

• $135,000 - $15,000 = $120,000

Question 92

Dahl Co. traded a delivery van and $5,000 cash for a newer van owned by West Corp. The following information relates to the values of the vans on the exchange date:

Carrying Value__Fair Value
Old van $30,000 $45,000
New van 40,000 50,000

Dahl’s income tax rate is 30%. What amounts should Dahl report as gain on exchange of the vans?

$0

$1,000

$15,000

$700

Answer 92

$15,000

. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:

1. Fair value is not determinable.
2. Exchange transaction is to facilitate sales for customers.
3. Exchange transaction lacks commercial substance.

In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows. FASB ASC 845-10-30-4 specifies that the entity’s future cash flows are expected to change significantly if either of the following criteria is met:

1. The configuration (risk, timing and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred.
2. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged.

In Dahl’s case, criterion (1) is met because the configuration of the future cash flows associated with the asset received (a new van) differs significantly from the future cash flows of the asset surrendered (the old van and cash). Therefore, the exchange has commercial substance and must be accounted for based on fair value.

Dahl should record the new van at the $50,000 fair value of the assets surrendered ($5,000 cash × $45,000 fair value of old van). The $15,000 difference between the $30,000 carrying amount of the old van and its fair value of $45,000 should be recognized as a gain. The entry is:

Van (new) 50,000
Van (old) 30,000
Cash 5,000
Gain 15,000

Question 93

On January 2 of the current year, Cruises, Inc. borrowed $3,000,000 at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1,300,000 are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?

$0

$900,000

$300,000

$600,000

Answer 93

$0

The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity’s own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).”

The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.

Question 94

Which of the following conditions must exist in order for an impairment loss to be recognized?

1. The carrying amount of the long-lived asset is less than its fair value.
2. The carrying amount of the long-lived asset is not recoverable.

I only

Both I and II

Neither I nor II

II only

Answer 94

II only

ASB ASC 360-10-35-17 establishes a recoverability test to determine when an impairment loss is to be recognized. If the undiscounted sum of estimated future cash flows from an asset or asset group is less that the asset’s or asset group’s book value, an impairment loss may need to be recognized.

The impairment loss is the difference between the book value of the asset(s) and its (their) fair value. Note that there is not an impairment loss if the fair value exceeds the carrying amount.

Question 95

On January 3, 20X1, Quarry Co. purchased a manufacturing machine for $864,000. The machine had an estimated 8-year useful life and a $72,000 estimated salvage value. Quarry expects to manufacture 1,800,000 units over the life of the machine. During 20X1, Quarry manufactured 300,000 units. Quarry uses the units-of-production depreciation method. In its December 31, 20X1, balance sheet, what amount of accumulated depreciation should Quarry report for the machine?

$99,000

$144,000

$108,000

$132,000

Answer 95

$132,000

The units of production method charges a fixed amount of depreciation expense per unit produced. The per-unit amount is computed as the depreciable cost of the assets (cost less salvage value) divided by the total expected units of production.

For Quarry Company’s machine, the per-unit amount is ($864,000 - $72,000) ÷ 1,800,000 units, or $0.44 per unit. For 20X1, the depreciation expense is 300,000 units manufactured × $0.44, or $132,000.

Because this is the first year in the machine’s life, the December 31, 20X1, accumulated depreciation also is $132,000.

Question 96

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker’s tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

$30,000

$3,000

$10,000

$0

Answer 96

$30,000

Feld should recognize $30,000 gain:

Value received ($100,000 value of
tow truck less $10,000) $90,000
Book value of delivery truck:
Cost $140,000
Accumulated depreciation 80,000 60,000
Gain $30,000

Question 97

Terri Co. recognized an impairment loss on long-lived assets to be held and used in the business. On the income statement, the loss should be shown in:

income from operations.

other comprehensive income.

discontinued operations.

change in accounting estimate.

Answer 97

income from operations.

FASB ASC 360-10-45-4 states: “An impairment loss recognized for a long-lived asset (asset group) to be held and used shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amount of that loss.”

Question 98

A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the:

cash proceeds received.

original cost of the truck less the cash proceeds.

original cost of the truck.

cash proceeds received and original cost of the truck.

Answer 98

cash proceeds received.

When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost.

When the asset cost and this accumulated depreciation amount are both removed, the carrying amount of the asset accounts is decreased by the cash proceeds exactly.
cash proceeds received.

Question 99

On March 1 of 20X6, Holly Co. began constructing a building it plans to use as its new headquarters office. On that same day, Holly borrowed $600,000 of specific construction debt at a rate of 8%. In addition to the construction-specific debt, Holly also incurred interest of $14,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X6 was $36,500. What amount of interest cost should Holly capitalize?

$40,000

$54,000

$36,500

$14,000

Answer 99

$36,500

For qualifying assets being constructed for an entity’s own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the lesser of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred.

Holly’s avoidable interest is given to be $36,500. Since the $54,000 actual interest cost incurred (($600,000 × .08 × 10/12) + $14,000) is greater than the avoidable interest of $36,500, the amount of interest that Holly can capitalize is $36,500.

Question 100

Jamison Company owns an asset for which concern exists about impairment. Jamison’s analysis of the future cash flows related to the asset reveal that the future undiscounted cash flows are expected to be $127,000. The asset has a cost of $238,000 and has accumulated depreciation of $101,000. The fair value of the asset is $121,000. What amount, if any, should Jamison record as an impairment loss for this asset?

$10,000

$20,000

$16,000

$26,000

Answer 100

$16,000

Impairment testing for tangible assets is a two-step process. First, the recoverability test is performed. If the carrying value of the asset is not recoverable, the second part of the process, the determining of the amount of the loss, is performed. Because the undiscounted cash flows of $127,000 are less than the carrying amount of the asset of $137,000 ($238,000 – $101,000), the carrying value will not be recovered and therefore the asset is impaired.

The second part of the process is to determine the amount of the impairment loss: this is the difference between the carrying value of the asset and its fair value. In this specific instance, because the asset is not recoverable, the impairment loss is equal to $16,000, the difference between the fair value ($121,000) and carrying value ($137,000).

Question 101

Impairment testing for tangible assets is a two-step process.

First, the ___test is performed. If the carrying value of the asset is not recoverable

Second part of the process, the determining of the amount of the ___, is performed.

Answer 101

recoverability

loss

Question 102

In January 20X1, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. Vorst believes it will be able to sell the property afterwards for $300,000. During 20X1, Vorst incurred $540,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 20X1 income statement, what amount should Vorst report as depletion?

$135,000

$150,000

$144,000

$159,000

Answer 102

$144,000

Question 103

Ott Co. purchased a machine at an original cost of $90,000 on January 2, year 1. The estimated useful life of the machine is 10 years, and the machine has no salvage value. Ott uses the straight-line method to calculate depreciation. On July 1, year 10, Ott sold the machine for $5,000. What is the amount of gain or loss on the disposal of the machine?

$4,500 loss

$500 loss

$500 gain

$4,500 gain

Answer 103

$500 gain

Accounting for the voluntary disposal of an asset usually involves crediting the asset account for the cost of the asset, removing the accumulated depreciation by a debit to that account, debiting the appropriate account for any proceeds received, and recognizing a gain or loss on disposal (balancing figure). The journal entry for the above disposal is as follows:

Cash 5,000
Accumulated Depreciation 85,500*
Machine 90,000
Gain (plug) 500

* Accumulated Depreciation was computed as $90,000 ÷ 120 months × 114 months = $85,500.

Question 104

Fountain Co. is constructing an office building for its own use. Fountain started the two-year construction project on April 1, year 1, at which point the interest capitalization period began. Fountain made the following payments in year 1 related to the construction of the building:

April 1 Payment to architect for building plans $ 30,000
July 1 Progress payment to contractor 60,000
October 1 Progress payment to contractor 150,000

For the purpose of capitalizing interest, what are Fountain’s weighted-average accumulated expenditures for the year ended December 31, year 1?

$90,000

$80,000

$240,000

$105,000

Answer 104

$90,000

Question 105

On January 1, Nick Co. purchased a delivery truck for $60,000. The truck’s salvage value is $2,000, and its estimated useful life is 10 years. The productive life of the truck is estimated to be 100,000 miles. During the first year, the truck was driven 19,000 miles. Nick uses the double-declining-balance method of depreciation. What amount of depreciation expense should Nick record for the first year?

$5,800

$11,600

$11,020

$12,000

Answer 105

$12,000

The double-declining-balance method applies a constant rate to the book value of the asset to determine depreciation expense. It ignores activity and salvage value in the calculation without allowing the asset to be depreciated below salvage value.

The company applies a rate of 2/n to the book value, where n is the number of periods, as follows:

• $60,000 × (2/10) = $60,000 ÷ 5 = $12,000 depreciation expense

Question 106

During the previous year, Yvo Corp. installed a production assembly line to manufacture furniture. In the current year, Yvo purchased a new machine and rearranged the assembly line to install this machine. The rearrangement did not increase the estimated useful life of the assembly line, but it did result in signif­icantly more efficient production. The following expenditures were incurred in connection with this project:

Machine $75,000
Labor to install machine 14,000
Parts added in rearranging the assembly line to
provide future benefits 40,000
Labor and overhead to rearrange the assembly line 18,000

What amount of the above expenditures should be capitalized in the current year?

$89,000

$75,000

$147,000

$107,000

Answer 106

$147,000

When a rearrangement adds to the overall efficiency of the production process for equipment, that is more than simply a repair. The rearrangement will benefit the machine over its remaining life and should be capitalized into the cost of the asset.

• $75,000 + $14,000 + $40,000 + $18,000 = $147,000

Question 107

A state government condemned Cory Co.’s parcel of real estate. Cory will receive $750,000 for this property, which has a carrying amount of $575,000. Cory incurred the following costs as a result of the condemnation.

Appraisal fees to support a $750,000 value $2,500
Attorney fees for the closing with the state 3,500
Attorney fees to review contract to acquire
replacement property 3,000
Title insurance on replacement property 4,000

What amount of cost should Cory use to determine the gain on the condemnation?

$588,000

$581,000

$582,000

$584,000

Answer 107

$581,000

Only the costs which are directly associated with the condemned property should be included in the determination of the gain on the condemnation (i.e., the appraisal fee and closing attorney fee: $2,500 + $3,500 = $6,000).

Thus, the gain is calculated on the following total:

$575,000 Carrying value
+ 6,000 Direct costs of condemnation
$581,000

The costs associated with acquiring the replacement property will apply to the new property.

Question 108

Samm Corp. purchased a plot of land for $100,000. The cost to raze a building on the property amounted to $50,000 and Samm received $10,000 from the sale of scrap materials. Samm built a new plant on the site at a total cost of $800,000 including excavation costs of $30,000. What amount should Samm capitalize in its land account?

$140,000

$150,000

$130,000

$100,000

Answer 108

140,000

The cost of land includes the cost to buy and also the cost to make it ready for its intended use, which in this case includes the cost of tearing down the old building. The cost to tear down the building (less the salvage revenue) is a cost to make the land ready for its intended use, which is to put up the new building on it.

Purchase price of land $100,000
Cost of razing building $50,000
Less proceeds from sale of scrap 10,000 40,000
Capitalized cost of land $140,000
========

Question 109

Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%.

The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is 0.79. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?

$27,500

$19,480

$21,480

$24,980

Answer 109

24.980

The capitalized cost of the equipment is $24,980:

Down payment $ 4,000
Present value of note
($6,000 × 2.58) 15,480
Shipping charges 2,000
Installation charges 3,500
Total $24,980

Question 110

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?

A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price.

A loss is deferred so that the asset received in the exchange is properly valued.

A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded.

A loss can occur only when assets are sold or disposed of in a monetary transaction.

Answer 110

A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price.

In general, the accounting for nonmonetary exchanges should be based on fair value, which is the same basis as that used in monetary transactions.

The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident.

The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange.

Question 111

A company issued a purchase order on December 15, year 1, for a piece of capital equipment that costs $100,000. The capital equipment was shipped from the vendor on December 31, year 1, and received by the company on January 5, year 2. The equipment was installed and placed in service on February 1, year 2. On what date should the depreciation expense begin?

January 5, year 2

December 15, year 1

December 31, year 1

February 1, year 2

Answer 111

February 1, year 2

Depreciation is the process of allocating the cost of plant and equipment to the accounting periods in which the operational benefits are received (also referred to as the estimated useful life). Therefore, depreciation should begin on the date the asset was placed into service, or February 1, year 2.

Question 112

Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:

County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000

At what amount should Oak record the land?

$154,125

$138,125

$175,625

$153,500

Answer 112

$154,125

The cost of plant assets includes all expenditures necessary to acquire the asset and prepare it for its intended use. The cost of land includes the purchase price, costs incidental to acquisition (such as legal fees, commissions, and title insurance), and the costs of preparing the land for use (such as the costs of surveying, grading, filling, draining, and clearing).

The cost of tearing down an existing building is included in the cost of the land.

All of the costs presented other than the excavation should be included in the cost of the land. The excavation for the basement will be included in the cost of the building

Question 113

Impaired long-lived assets to be disposed of by sale that are subject to the reporting requirements of FASB ASC 360-10-35 are measured at:

carrying amount.

fair value.

historical cost.

lower of the fair value less costs to sell or carrying amount.

Answer 113

lower of the fair value less costs to sell or carrying amount.

Lower of fair value, less costs to sell or carrying amount, is the proper measurement of an impaired asset held for sale.

Question 114

On March 31, 20X1, the Winn company traded in an old machine that had a carrying amount of $16,800, and a fair value of $14,500. Winn paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The exchange should include recording:

$2,300 loss on exchange.

$3,700.

$2,300 impairment loss.

no gain or loss.

Answer 114

2300 impairment loss

ccording to FASB ASC 360-10-40-4, an impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. For Winn, an impairment loss of $2,300 ($16,800 carrying amount less $14,500 fair value) should be recognized.

FASB ASC 845-10-30-1 specifies that if fair value is determinable nonmonetary exchanges be recorded based on fair value unless the exchange transaction lacks commercial substance. In that case, the entire amount of any implied gain or loss should be recognized at the time of exchange.

However, in Winn’s case, the $2,300 impairment loss should be recognized before the nonmonetary exchange is recorded. Thus, the $2,300 loss is an impairment loss rather than a loss on exchange.

Question 115

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:

Yola Co.__Zaro Co.
Cost $100,000 $126,000
Market values 120,000 150,000

In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?

$24,000

$4,800

$0

$30,000

Answer 115

$4,800

This is a nonmonetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized.

• $30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now.
• Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.

Question 116

When equipment is retired, accumulated depreciation is debited for the original cost less any residual recovery under which of the following depreciation methods?

Composite depreciation: no; Group depreciation: yes

Composite depreciation: no; Group depreciation: no

Composite depreciation: yes; Group depreciation: yes

Composite depreciation: yes; Group depreciation: no

Answer 116

Composite depreciation: yes; Group depreciation: yes

When applying either group or composite depreciation, when an asset is sold, the cost of the asset is credited, cash proceeds are debited, and accumulated depreciation is also debited as a plug figure to balance the entry.

Question 117

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?

$187,000

$178,000

$175,000

$190,000

Answer 117

$190,000

The rearrangement cost and wall removal cost were reasonable and necessary costs to put the equipment “in a location and condition” for its use. These costs benefit future periods and should be capitalized along with the equipment cost.

Question 118

During 20X1, Beam Co. paid $1,000 cash and traded inventory, which had a carrying amount of $20,000 and a fair value of $21,000, for other inventory in the same line of business with a fair value of $22,000. The exchange of the inventory is to facilitate sales to Beam’s customers. What amount of gain (loss) should Beam record related to the inventory exchange?

$1,000

$2,000

$(1,000)

$0

Answer 118

$0

FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted for based on fair values, which is the same basis as that used for monetary transactions. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:

1. Fair value is not determinable.
2. Exchange transaction is to facilitate sales for customers.
3. Exchange transaction lacks commercial substance.

In Beam’s case, exception 2 is met. The exchange of the inventory is to facilitate sales to Beam’s customers. The exchange should be recorded based on carrying amounts with no gain recognized.

If the inventory’s carrying amount had been in excess of the fair value of the inventory given up, the inventory given up should have been written down and the loss recognized before the exchange was recorded.