Lesson 3

Question 1

How should a company report a cash discount?

Answer 1

The company should consider the discount as a reduction in the purchase price of the asset.

Question 2

What value should companies record long term assets on credit?

Answer 2

Present value of the consideration exchanged on the date of the transaction. Example: 4 year note of $10,000 at 9% interest present value is $7,084.30

Question 3

What is the basis for recording the asset and measuring the interest element?

Answer 3

A company uses the cash exchange price of the asset acquired

Question 4

Lump-sum price

Answer 4

The aggregate price at which a group of assets is acquired.

Question 5

How to determine fair value of lump sum purchases?

Answer 5

A company should use valuation techniques that are appropriate in the circumstances.

Question 6

Prudent cost

Answer 6

The concept that states that if for some reason a company ignorantly paid too much for an asset originally; it is preferable to charge a loss immediately.

Question 7

What is the cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, equal to?

Answer 7

The market value of the securities.
The market value of securities is used to determine the fair market value of the property.

Question 8

Burchell Co purchased land and a building for a lump sum cost of $420,000. The land has a fair market value of $160,000 and the building has a fair market value of $320,000.
What is the cost assigned to the land?

Answer 8

$140,000
When a purchase is made at a lump sum price, the company allocates the cost based on the relative fair values of the assets. The land has a fair value of $160,000/($160,000 + $320,000) or 33.333333%. The cost allocated to the land is $420,000 X 33.33333% or $140,000.