Unit 2 Questions Flashcards
Acquisition and Disposition of Property, Plant, and Equipment
How does GAAP recommend accounting for interest costs incurred during construction?
Capitalize the actual interest cost for the period incurred during the period
Note: Correct. Using this approach ignores the implicit interest cost associated with the use of the cash. GAAP requires only the actual interest costs incurred during construction be capitalized. This method follows the historical cost principle.
What assets qualify for interest cost capitalization?
Assets that are under construction for a company’s own use
Note: Correct. For the purposes of interest cost capitalization, qualifying assets must require a period of time to get the asset ready for their intended purposes. Assets that do not qualify include assets that are currently in use, assets that are ready for their intended use, or assets that are not in use due to excess capacity or obsolescence.
When computing the amount of interest cost to be capitalized, What does the concept of “avoidable interest” refer to?
That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made
Note: Correct. Avoidable interest is the amount of interest cost during the period that a company could theoretically avoid if it had not made the decision to purchase the asset in the first place.
What best describes the correct treatment of the interest costs capitalized during the period of construction when a company purchases land as a site for a plant?
Regard as a cost of the plant
Note: Correct. Interest costs may only be included in the cost of qualifying assets, or assets that are constructed for the company’s own use and those assets intended to be sold/leased. Interest costs are not allocated to assets that are ready for their intended use already or assets that are not used in the company’s earnings activities, such as land or assets otherwise not in use.
On January 2, 2020, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2021. Expenditures for the construction were as follows:
January 2, 2020 $ 600,000
September 1, 2020 $1,800,000
December 31, 2020 $1,800,000
March 31, 2021 $1,800,000
September 30, 2021 $1,200,000
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest on January 2, 2020. This loan was outstanding during the construction period.
$1,200,000
Note: calculated as: ($600,000 × 12/12) + ($1,800,000 × 4/12) + ($1,800,000 × 0/12) = $1,200,000.
On January 2, 2020, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2021. Expenditures for the construction were as follows:
January 2, 2020 $ 600,000
September 1, 2020 $1,800,000
December 31, 2020 $1,800,000
March 31, 2021 $1,800,000
September 30, 2021 $1,200,000
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest on January 2, 2020. This loan was outstanding during the construction period.
What was the capitalized interest for 2020?
$144,000
Note: Correct. The amount of interest to capitalize is based on the weighted-average of the accumulated expenditures. The weighted-average accumulated expenditures for 2020 is calculated as: ($600,000 × 12/12) + ($1,800,000 × 4/12) + ($1,800,000 × 0/12) = $1,200,000. Capitalized interest is calculated as: $1,200,000 × 12% = $144,000.”
Watauga Company had the following events:
Purchase of equipment on July 1, 2017 for $70,000
Sales tax on the purchase was $700
Other costs of freight charges of $800
Insurance during shipping of $ 150
Repairs of $1,300 for damage during installation
Installation costs of $1, 050
What is the cost of the equipment?
$72,700
Note: Correct. The cost of a piece of equipment includes all expenditures incurred in acquiring the equipment and preparing it for use. Therefore the cost includes the cost of $70,000, sales tax of $700, freight charges of $800, insurance of $ 150, and installation costs of $1,050. The repair costs of $1,300 are expensed and not included in the capitalized cost of the equipment.
Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site.
How should the cost of the Emporia Hotel be treated?
Capitalized as part of the cost of the land
Note: Correct. If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. Therefore, the cost of the Emporia hotel is capitalized as part of the cost of the land.
How are fences and parking lots reported on the balance sheet?
Land improvements
Note: Correct. Improvements with limited lives, such as driveways, walks, fences, and parking lots are classified on the balance sheet as Land Improvements and depreciated over their estimated lives.
Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.
‘How should the proceeds from the sale of the building be treated?
Deducted from the cost of the land
Note: Correct. If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. Therefore, the proceeds from the sale of the old building is deducted from the cost of the land.
Wilson Co. purchased land as a factory site for $1,350,000.
Wilson paid $120,000 to tear down two buildings on the land.
Salvage was sold for $8,100.
Legal fees of $5,220 were paid for title investigation and making the purchase.
Architect’s fees were $46,800. Title insurance cost $3,600, and liability insurance during construction cost $3,900.
Excavation cost $15,660.
The contractor was paid $4,200,000.
An assessment made by the city for pavement was $9,600.
At what cost should Wilson Co record the land?
$1,480,320
Note: Correct. Removal of old buildings—clearing, grading, and filling—is a land cost because this activity is necessary to get the land in condition for its intended purpose. Architect Fees, liability insurance, and excavation are included in the cost of the building. Therefore, the cost of the land is calculated as: $1,350,000 + $120,000 – $8,100 + $5,220 + $3,600 + $9,600 = $1,480,320. The excavation cost of $15,660 is a cost related to the building, not to the acquisition of the land, as the excavation cost is directly related to building the building on the land.
How does GAAP recommend accounting for interest costs incurred during construction?
Capitalize the actual interest cost for the period incurred during the period
Correct: Using this approach ignores the implicit interest cost associated with the use of the cash. GAAP requires only the actual interest costs incurred during construction be capitalized. This method follows the historical cost principle.
What assets qualify for interest cost capitalization
Assets that are under construction for a company’s own use
Correct. For the purposes of interest cost capitalization, qualifying assets must require a period of time to get the asset ready for their intended purposes. Assets that do not qualify include assets that are currently in use, assets that are ready for their intended use, or assets that are not in use due to excess capacity or obsolescence.
When computing the amount of interest cost to be capitalized, What does the concept of “avoidable interest” refer to?
That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made
Correct. Avoidable interest is the amount of interest cost during the period that a company could theoretically avoid if it had not made the decision to purchase the asset in the first place.
On January 2, 2020, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2021. Expenditures for the construction were as follows:
January 2, 2020 $ 600,000
September 1, 2020 $1,800,000
December 31, 2020 $1,800,000
March 31, 2021 $1,800,000
September 30, 2021 $1,200,000
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest on January 2, 2020. This loan was outstanding during the construction period.
What were the weighted-average accumulated expenditures for 2020?
$1,200,000
Correct. The weighted-average accumulated expenditures for 2020 is calculated as: ($600,000 × 12/12) + ($1,800,000 × 4/12) + ($1,800,000 × 0/12) = $1,200,000.
0 / 1
On January 2, 2020, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2021. Expenditures for the construction were as follows:
January 2, 2020 $ 600,000
September 1, 2020 $1,800,000
December 31, 2020 $1,800,000
March 31, 2021 $1,800,000
September 30, 2021 $1,200,000
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest on January 2, 2020. This loan was outstanding during the construction period.
What was the capitalized interest for 2020?
$144,000
Correct. The amount of interest to capitalize is based on the weighted-average of the accumulated expenditures. The weighted-average accumulated expenditures for 2020 is calculated as: ($600,000 × 12/12) + ($1,800,000 × 4/12) + ($1,800,000 × 0/12) = $1,200,000. Capitalized interest is calculated as: $1,200,000 × 12% = $144,000.”
What is the cost of property acquired by the issuance of securities, which are actively traded on an organized exchange, equal to?
The market value of the securities
Correct. The market value of the securities is used to determine the fair market value of the property.
Burchell Company 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?
$140,000
Correct. 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 33.3333333% or $140,000.
At what value should assets acquired in a lump sum purchase be recorded?
Relative fair market values
Correct. When a purchase is made at a lump-sum price, the company allocates the cost based on the relative fair values of the assets.
How are expenditures that extend the useful life of a plant asset without improving its quantity or quality accounted for?
By debiting accumulated depreciation
Correct. If an expenditure increases the life of an asset, but does not increase the quality nor quantity, a debit to the accumulated deprecation account is needed as the useful life of the asset has been extended.
1 / 1
On January 2, 2020, York Corp. replaced its boiler with a more efficient one. The following information was available on that date:
Purchase price of new boiler $150,000
Carrying amount of old boiler $10,000
Fair value of old boiler $4,000
Installation cost of new boiler $20,000
The old boiler was sold for $4,000.
What amount should York capitalize as the cost of the new boiler?
$170,000
Correct. When an asset is replaced, the cost and accumulated depreciation of the old asset is removed and any gain or loss is recognized. The new piece of equipment is recorded as a new asset. The cost of the new boiler is $150,000 + $20,000 Installation = $170,000.
Delta River Company sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000.
What should be included in the journal entry to record this transaction?
A debit to a loss account for $3,000
Correct. When an asset is sold, the asset account and the accumulated depreciation (contra-asset) account are “zeroed-out” and the resulting difference is the cost basis of the asset to determine if the asset was sold at a gain or a loss. In this example, the book basis was $44,000 (original value) less $32,000 (accumulated depreciation = $12,000. Since the asset was sold for $9,000, the journal entry must include a debit to the loss on the sale of asset account. The complete journal entry would be: Debit Cash $9,000, Debit Accumulated Depreciation $32,000, Debit Loss $3,000, Credit Equipment $44,000.
1 / 1
Bogle Company purchased machinery for $320,000 on January 1, 2014. Straight-line depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2018 at a gain of $6,000.
How much cash did Bogle receive from the sale of the machinery?
$66,000
Correct. Typically a company will record depreciation for the period of time in the current year prior the date of sale.The depreciable basis of the asset is $320,000 less the $20,000 salvage value, or $300,000. Annual depreciation expense is $300,000 / 5 years = $60,000 / year. Accumulated Depreciation = $60,000 (2014) + $60,000 (2015) + $60,000 (2016) + $60,000 (2017) + $20,000 [60,000 x (4 month / 12 month)] = $260,000 Book Value = $320,000 (original cost) - $260,000 (accumulated depreciation) = $60,000. Sales Price - Book Value = Gain/Loss Sales Price - $60,000 = $6,000; Sales Price = $66,000”
Which term is used to describe the termination of an asset’s service due to theft, fire, etc.?
Involuntary conversion
Correct. The term involuntary conversion is used to describe the loss of an asset due to theft, fire, natural disaster, etc.
How are costs incurred internally to create intangibles treated?
They are expensed as incurred.
Correct. Because costs of creating intangibles internally cannot easily be associated with a specific intangible, these costs are expensed as incurred.
Tiburon Corporation purchased a patent for $1,850,000 on November 30, 2018. It has a remaining legal life of 18 years. Tiburon estimates that the remaining useful life of the patent is 15 years. What balance will be reported on the December 31, 2020 balance sheet for the patent (if necessary, round your answer to the nearest dollar)?
$1,593,056
Correct. Patents are amortized using the straight-line method over the shorter of the useful life and the legal life of the asset. On December 31, 2020, the asset would be amortized for 25 months [1 month in 2018 + 12 months in 2019 + 12 months in 2020]. $1,850,000 / 180 months = monthly amortization of $10,277.78 x 25 months = $256,944.50 total amortization expense. The book value at December 31, 2020 is $1,593,056 ($1,850,000 - $256,944.50).
On July 1, 2020, Adele Company bought a patent from Robert, Inc. for $2,750,000. An independent research company estimated that the remaining useful life of the patent was 10 years. Its unamortized cost on Robert’s books was $1,600,000. In Adele’s 2020 income statement, what amount should be reported as amortization expense?
$137,500
Correct. The seller’s book value is not relevant and is ignored. Intangible assets like patents are amortized generally using the straight-line method over the the useful life or the legal life of the patent, whichever is shorter. $2,750,000 / 10 years = $275,000 per year X 1/2 a year = $137,500.
St. Sebastian Company and A. Jamison Company were combined in a purchase transaction. St. Sebastian was able to acquire Jamison at a bargain price. The fair market value of Jamison’s net assets exceeded the price paid by St. Sebastian to acquire the company.
How would St. Sebastian report the excess fair value over purchase price?
As a gain
Correct. When a company purchases another company and the fair value of the assets is lower than the purchase price, Goodwill is created and recorded on the purchaser’s balance sheet. However, when a company receives assets that have a greater value than the amount paid for those assets, a gain is recognized and recorded on the purchaser’s income statement. In this case, St. Sebastian acquired the assets of Jamison at a bargain price. (The value of the assets exceeds the price paid). Therefore, the excess amount is recorded as a gain by St. Sebastian.
In a business combination, companies record identifiable intangible assets that they can reliably measure. What are all other intangible assets, too difficult to identify or measure, recorded as?
Goodwill
Correct. When a company purchases another company and the fair value of the assets is lower than the purchase price, Goodwill is created and recorded on the purchaser’s balance sheet
Which intangible asset cannot be sold by a business to raise needed cash for a capital project?
Goodwill
Correct. Goodwill is a “plug” or “gap filler” between the purchase price of a business and the fair value of the assets purchased. Goodwill is not an individually identifiable asset.
When can Goodwill be Capitalized?
When it is purchased
j
