FAR 5 Flashcards
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 was $12,000 and the wall removal cost was $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?
$200,000
What criteria affect the capitalization of work done to a building to prepare for capital equipment?
The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction.
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(an):
Part of continuing operations. - The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.
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
$154,125 - Everything but the Excavation for construction of the new basement.
How do you determine the amount to capitalize on a newly constructed building?
Lower of FMV or Cost.
Two approaches are available for applying interest rates to average accumulated expenditures for the purpose of capitalizing interest. These approaches are called the specific method and the weighted average method. In some cases, these approaches yield the same results. What are these?
When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.
Interest on held-for-sale items is not capitalized, unless what?
Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments.
Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.
$280,000 - Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.
Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent’s debt-to-equity ratio?
B. 1.08
First, we must compute the amount of debt. Since Assets = Liabilities + Stockholders’ Equity, we have 760,000 = ? + (150,000 + 215,000). Thus, debt = $395,000. Debt to Equity is 395,000/(150,000 + 215,000) = 1.08
A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?
40 days.
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, 2004. Additional information is as follows:
Rents receivable - November 30, 2004
$1,060,000
Rents receivable - November 30, 2003
800,000
Uncollectible rents written off during the fiscal year
30,000
Under the accrual basis, Marr should report rental revenue of
$2,500,000
The cash basis revenue in the tax return is the amount of rent collected for tax purposes.
beg. rent receivable
+
accrual revenue
-
collections
-
write-offs
=
end. rent receivable
$800,000
+
accrual revenue
-
$2,210,000
-
$30,000
=
$1,060,000
accrual revenue
=
$2,500,000
Dollar Value Lifo is calculated how?
Using a conversion index to determine inventory value for the LIFO layer added in the current year. Ending Inv in Current Year dollars/Ending Inv in Base Year dollars. Use this multiplier to convert CY prices to BY prices.
How does the Credit Sales Method for Unallowable accounts different from the other methods?
Credit Sales simply takes the % of sales as the expense opposed to the adjustment needed to get the allowance to the correct amount.
To be classified as a plant asset, how long must the useful life be?
1 year past the balance sheet date.
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(an):
Part of continuing operations. It is expected that a firm will sell assets from time to time.
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 .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?
$24,980 - The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000 $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.
How is depreciation calculated using the Production (Use) Method?
Annual depreciation under the production method is:
current year production/tot.est.production)(cost-salvage
Zahn Corp.’s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005.
Depreciation charged to operations in 2005 was:
210,000
Is interest capitalized on the purchase of new equipment?
No.
Vore Corp. bought equipment on January 2, 2004 for $200,000. This equipment had an estimated useful life of five years and a salvage value of $20,000. Depreciation was computed by the 150% declining balance method.
The accumulated depreciation balance at December 31, 2005 should be:
Depreciation in 2004 = $200,000(1.50/5) = $ 60,000
Depreciation in 2005 = ($200,000-$60,000)(1.50/5) = 42,000
Accumulated depreciation balance at the end of 2005 $ 102,000
The declining balance class of depreciation method does not deduct salvage value when computing depreciation although care must be taken not to depreciate the asset below salvage value. Also, the rate of depreciation applied to book value is the percentage of the method (150% in this case) divided by the useful life of the asset. Double declining balance, for example, is 200%/n or 2/n where n = useful life.
