Property, Plant and Equipment Flashcards
- A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:
Materials $60,000
Labor 30,000
Incremental overhead 10,000
Capitalized interest 20,000
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?
A: 95,000
explanation: The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost-the total depreciation over the life of the asset.
- Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.
- If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt.
- If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.
- If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm.
- If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.
A: -If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.
explanation: The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.
- 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?
$105,000
$110,000
$120,000
$125,000
A: 120,000 (135,000 (price paid) - 15,000 (salvage value)
Note: The amounts used by the previous owner are not relevant to the new owner. When an asset is purchased, the amount paid is the appropriate capitalized value ($135,000).
- What factor must be present to use the units of production (activity) method of depreciation?
- Total units to be produced can be estimated.
- Production is constant over the life of the asset.
- Repair costs increase with use.
- Obsolescence is expected.
A: Total units to be produced can be estimated.
- On January 1, 20X5, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for five years.
Brecon’s 20X5 multi-step Income Statement should include:
- One-fifth of the cabinet costs in cost of goods sold.
- One-fifth of the cabinet costs in selling, general, and administrative expenses.
- All of the cabinet costs in cost of goods sold.
- All of the cabinet costs in selling, general, and administrative expenses.
A: One-fifth of the cabinet costs in selling, general, and administrative expenses.
Note: many firms include depreciation expense in “Selling, General and Admin expense” and report components in a footnote.
- In which of the following situations is the units of production method of depreciation most appropriate?
- An asset’s service potential declines with use.
- An asset’s service potential declines with the passage of time.
- An asset is subject to rapid obsolescence.
- An asset incurs increasing repairs and maintenance with use.
A: An asset’s service potential declines with use.
explanation: This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.
Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.
- Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 20X4.
During 20X5, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.
What amount should Ichor report as depreciation expense for 20X5?
$19,000
$25,000
$31,000
$34,000
A; 31,000
Net equipment at end of 20X4: $344,000-$128,000 = $216,000
Equipment purchase 50,000
Book value of equipment sold (9,000)
Depreciation in 20X5 ?
Equals net equipment at end of 20X5: $379,000-$153,000 = $226,000
Solving for depreciation yields $31,000 depreciation for 20X5.
- Spiro Corp. uses the sum-of-the-years’ digits method to depreciate equipment purchased in January 20X3 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, 20X5?
$1,800
$2,000
$3,800
$4,500
A: 3,800
Note: The carrying amount (book value) of a depreciable asset is its original cost less accumulated depreciation.
Thus once you figure out accum’d depr, you also have to remember to add back in salvage value….
Cost 20,000 - 2,000 SV = 18,000 Less Accum Depr = 16,200 Remaining Depreciable base = $1800 \+Salvage Value 2,000 BV = 3800
