Unit 2 Flashcards
Which method should be used to handle the interest incurred during financing the construction of PPE?
Capitalize the lower of the amount of actual interest incurred or the avoidable interest during construction.
Company X purchased the assets of Company Y at an auction for $5,600,000. An independent appraisal of the fair value of the assets is listed below:
Land: $1,900,000
Building: 2,800,000
Equipment: 2,100,000
Trucks: 3,400,000
Company X allocates the purchase price on the basis of the relative fair values.
Which amount will be allocated to the land?
$1,043,137
The relative fair value of the land is $1,043,137. The relative fair value is found by dividing the appraised fair value of the land divided by the sum of all of the appraised values of all the assets multiplied by the lump sum purchase price at the auction. (($1,900,000/$10,200,000) x $5,600,000)) = $1,043,137
Company X sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000.
Which part of the journal entry should record the sale of the equipment?
Debit Accumulated Depreciation - Equipment for $32,000
The accumulated depreciation - equipment account would need to be reduced by $32,000 because the equipment had been sold.
On September 10, Year 5, Company X incurred the following costs for one of its printing presses:
Purchase of attachment: $55,000
Installation of attachment: $5,000
Replacement parts for renovation of press: $18,000
Labor and overhead in connection with renovation of press: $7,000
Training costs for operators to learn how to use new attachment: $2,000
Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity.
Which amount of costs should be expensed in the month of September, exclusing any changes in depreciation or amortization?
$2,000
Training costs are expensed in the month that they occur.
A company began constructing an asset at the beginning of Year 1, and it is being entirely financed with specific new borrowing. Construction expenditures were made in Years 1, 2, and 3.
What is the basis for calculating the interest cost to be capitalized for Year 3?
The weighted-average accumulated expenditures for all three years
Correct! The weighted average accumulated expenditures for all three years will be used to determine the interest cost to capitalize.
A company recently constructed a building that cost $8,000,000. Weighted average accumulated expenditures were $2,500,000; actual interest was $300,000; and avoidable interest was $150,000. The salvage value is $600,000, and the useful life is 25 years. The company is using the straight-line method.
What is the depreciation expense for the first full year?
$302,000
The depreciable base is the cost + avoidable interest less salvage value. ($8,000,000 - $600,000 + $150,000)/25 = $302,000
On January 1, a company began construction on a new building. The company made a payment of $8,000,000 on January 1 and another payment for $14,000,000 on August 1. Construction was finished on December 31. The company had an outstanding loan with a 6% interest rate.
What were the weighted-average accumulated expenditures for the year?
$13,833,333
(5/12 x $14,000,000) + ($8,000,000)
