Unit 8 - Property, Plant, and Equipment

Question 1

Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except:

A. at the date of acquisition, cost reflects fair value.
B. property, plant, and equipment items are always acquired at their original historical cost.
C. historical cost involves actual transactions and, as such, is the most reliable basis.
D. gains and losses should not be anticipated but should be recognized when the asset is sold.

Answer 1

B. property, plant, and equipment items are always acquired at their original historical cost.

Property, plant, and equipment items are acquired at various times during their useful life. Thus, the original historical cost may be appropriate when the asset is originally acquired by a purchaser. However, if the asset is subsequently acquired by a different purchaser, the cost basis would most likely be something other than its original historical cost. The other alternatives represent reasons the historical cost basis is advocated for recording property, plant, and equipment purchases.

Question 2

Which of the following is not a necessary characteristic for an item to be classified as property, plant, and equipment?

A. Usually subject to depreciation.
B. Characterized by physical substance.
C. Can be used in operations for at least 5 years.
D. Not acquired for resale.

Answer 2

C. Can be used in operations for at least 5 years.

Items classified as property, plant, and equipment are characterized as items that are long-term in nature. The concept of long-term is generally considered to be in excess of one year, but no minimum number of years is required for this classification. Alternatives (A), (B), and (D) are appropriate characteristics for an item classified as property, plant, and equipment.

Question 3

Stacia Theater Corporation recently purchased the Robinson Theater and the land on which it is located. Stacia plans to raze the building immediately and build a new modern theater on the site. The cost to raze the Robinson Theater should be:

A. written off as an extraordinary loss in the year the theater is razed.
B. capitalized as part of the cost of land.
C. depreciated over the period from the date of acquisition to the date the theater is to be razed.
D. capitalized as part of the cost of the new theater.

Answer 3

B. capitalized as part of the cost of land.

All expenditures made to acquire land and to ready it for use should be considered as part of the land cost. The purpose of the purchase was to acquire the land so a new theater could be constructed. The old theater has no economic use so that any portion of the purchase price attributable to the old theater is merely considered cost of the land acquired.

Question 4

Stacia Theater Corporation recently purchased the Robinson Theater and the land on which it is located. Stacia plans to raze the building immediately and build a new modern theater on the site. The cost to raze the Robinson Theater should be:

A. written off as an extraordinary loss in the year the theater is razed.
B. capitalized as part of the cost of land.
C. depreciated over the period from the date of acquisition to the date the theater is to be razed.
D. capitalized as part of the cost of the new theater.

Answer 4

B. capitalized as part of the cost of land.

All expenditures made to acquire land and to ready it for use should be considered as part of the land cost. The purpose of the purchase was to acquire the land so a new theater could be constructed. The old theater has no economic use so that any portion of the purchase price attributable to the old theater is merely considered cost of the land acquired.

Question 5

On January 15, 2014, Thorne Corporation purchased a parcel of land as a factory site for $100,000. An old building on the property was demolished, and construction began on a new building which was completed on October 18, 2014. Costs incurred during this period are listed below:

Demolition of old building $ 6,000
Architect’s fees 15,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 600,000

(Salvaged materials resulting from demolition were sold for $3,000.) Thorne should record the cost of the land and new building respectively as:

A. $100,000 and $623,000
B. $105,000 and $618,000
C. $108,000 and $615,000
D. $111,000 and $615,000

Answer 5

C. $108,000 and $615,000

Thorne should allocate the costs to land and building as follows:

Question 6

To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be:

A. allocated on the basis of lost production.
B. eliminated completely from the cost of the asset.
C. allocated on an opportunity cost basis.
D. allocated on a pro rata basis between the asset and normal operations.

Answer 6

D. allocated on a pro rata basis between the asset and normal operations.

Based upon the historical cost principle, a portion of overhead cost should be assigned to a constructed asset to obtain that asset’s total cost. The amount charged should be based upon a pro rata allocation between the asset and normal operations. The other allocation methods mentioned in alternatives A and C are difficult to measure and are not consistent with the historical cost principle. Alternative B is not consistent with the historical cost principle.

Question 7

Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant, and equipment?

A. Capitalize only the actual interest costs incurred during construction.
B. Charge construction with all costs of funds employed, whether identifiable or not.
C. Capitalize no interest during construction.
D. Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being constructed.

Answer 7

A. Capitalize only the actual interest costs incurred during construction.

This recommended approach is based on the historical cost principle stating that only actual transactions are recorded. It is argued that interest incurred is as much a cost of acquiring the asset as the cost of the materials, labor, and other resources used. The approaches referred to in alternatives B & C have some support but are not the recommended methods. Alternative D is not an approach to handling interest incurred during construction that has any support.

Question 8

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

A. Interest cost is being incurred.
B. Expenditures for the assets have been made.
C. The interest rate is equal to or greater than the company’s cost of capital.
D. Activities that are necessary to get the asset ready for its intended use are in progress.

Answer 8

C. The interest rate is equal to or greater than the company’s cost of capital.

Alternatives A, B, and D reflect the conditions that must exist before the interest capitalization can begin on a qualifying asset.

Question 9

If land is purchased as a site for a structure (such as a plant site), interest costs capitalized during the period of construction are part of the cost of the:

Plant Land

A. Yes Yes
B . Yes No
C. No No
D. No Yes

Answer 9

B . Yes No

When land is purchased with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization. In the situation cited in the question, the interest cost is capitalized as part of the plant, not the land. The purchase of the land was for the purpose of constructing a plant. If the land had been purchased for development in terms of lot sales, then the interest would be capitalized as part of the land.

Question 10

The capitalization of interest costs is justified as being necessary in order to fulfill the:

A. Conservatism concept.
B. Economic entity assumption.
C. Revenue recognition principle.
D. Historical cost principle.

Answer 10

D. Historical cost principle.

FASB No. 34 states: “The historical cost of acquiring an asset includes the cost necessarily incurred to bring it to the condition and location necessary for its intended use. If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset.”

Question 11

On January 1, 2014, Probst, Inc. signed a contract to have MCL construct a major plant facility at a cost of $5,000,000. It was estimated that it would take two years to complete the project. In addition, Probst financed the construction costs on January 1, 2014 by borrowing $5,000,000 at an interest rate of 9%. During 2014 Probst made deposit and progress payments totaling $2,000,000 under the contract; the average amount of accumulated expenditures was $750,000 for the year. The excess borrowed funds were invested in short-term securities, from which Probst realized investment income of $300,000. What amount should Probst report as capitalized interest at December 31, 2014?

A. $ 40,500
B. $ 67,500
C. $180,000
D. $450,000

Answer 11

B. $ 67,500

Probst should report $67,500 as its capitalized interest at December 31, 2014. Its capitalized interest can be calculated as follows:

Average amount of accumulated expenditures $750,000
Interest rate on specific borrowing x .09
Interest to be capitalized $ 67,500

Note: The investment transaction and the asset acquisition transaction are viewed as separate transactions. Therefore, interest income on excess borrowings should not be offset against the interest to be capitalized.

Question 12

How should assets purchased on long-term credit contracts be accounted for?
A. At net realizable value, less an allowance for any potential increase in interest rates prior to the date of final payment.
B. Present value of the estimated valuation of the assets on the scheduled date of complete payment.
C. Present value of the consideration exchanged between the contracting parties or the future value of the asset when final payment is made, whichever is more readily determinable.
D. Present value of the consideration exchanged between the contracting parties at the date of the transaction.

Answer 12

D. Present value of the consideration exchanged between the contracting parties at the date of the transaction.

To properly reflect cost, assets purchased on long-term credit contracts should be accounted for at the present value of the consideration exchanged between the contracting parties at the date of the transaction. Use of any net realizable value concepts or a valuation based on the date of final payment are inappropriate.

Question 13

When a group of plant assets are purchased for a lump sum purchase price, it would be appropriate to determine fair value using:

An Assessed
Insurance Valuation for Independent
Appraisal Property Taxes Appraisal

A. Yes No Yes
B. No Yes Yes
C. Yes Yes Yes
D. Yes Yes No

Answer 13

C. Yes Yes Yes

To determine fair value of the individual items in a lump sum purchase of plant assets, an appraisal for insurance purposes, the assessed valuation for property taxes, or simply an independent appraisal by an engineer or other appraiser might be used.

Question 14

When a property is acquired by a company by issuance of its actively traded common stock, the cost of the property is properly measured by the:

A. par value of the stock.
B. stated value of the stock if it is in excess of the par value.
C. par value or stated value of the stock whichever is more readily determinable.
D. market value of the stock.

Answer 14

D. market value of the stock.

When property is acquired by the issuance of common stock, the cost of the property is not properly measured by the par or stated value of such stock. If the stock is actively traded, the market value of the stock issued is a fair indication of the cost of the property acquired because stock is a good measure of the current cash equivalent price.

Question 15

Which of the following nonmonetary exchange transactions represents a culmination of the earning process?

A. Exchange of assets with no difference in future cash flows.
B. Exchange of products by companies in the same line of business with no difference in future cash flows.
C. Exchange of assets with a difference in future cash flows.
D. Exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position.

Answer 15

C. Exchange of assets with a difference in future cash flows.

An exchange has commercial substance if the future cash flows change as a result of the transaction. If two entities exchange assets and the exchange has no commercial substance, the earnings process is not considered complete. Alternatives (A), (B), and (D) all represent exchanges having no commercial substance.

Question 16

When boot is involved in an exchange having commercial substance:

A. gains or losses are recognized in their entirety.
B. gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up.
C. only gains should be recognized.
D. only losses should be recognized.

Answer 16

A. gains or losses are recognized in their entirety.

A nonmonetary asset acquired in an exchange having commercial substance is usually recorded at the fair value of the asset given up, and a gain or loss is recognized.

Question 17

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at:

A. the fair value of the asset given up, and a gain or loss is recognized.
B. the fair value of the asset given up, and a gain but not a loss may be recognized.
C. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
D. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.

Answer 17

A. the fair value of the asset given up, and a gain or loss is recognized.

The cost of a nonmonetary asset acquired in an exchange having commercial substance is usually recorded at the fair value of the asset given up, and a gain or loss is recognized. The fair value of the asset received should be used only if it is more clearly evident than the fair value of the asset given up.

Question 18

In an exchange of no commercial substance of nonmonetary assets that results in a gain, the gain is totally deferred when
Cash No Cash
Is Received Is Received

A. Yes Yes
B. No Yes
C. Yes No
D. No No

Answer 18

B. No Yes

If an exchange of assets having no commercial substance results in a gain, and the exchange does not include the receipt of cash, the gain should be totally deferred. In such a situation, it is assumed that the earnings process is not complete. When cash is received, part of the nonmonetary asset is considered sold and part exchanged; therefore, only a portion of the gain is deferred.

Question 19

The Chicago Cubs had a player contract with Ryan Dempster that was recorded in its accounting records at $7,450,000. The Chicago White Sox had a player contract with Mark Buehrle that was recorded in its accounting records at $7,600,000. The Cubs traded Dempster to the Sox for Buehrle by exchanging each player’s contract. The fair value of each contract was $8,000,000 and the exchange is deemed to have no commercial substance. What amount should be shown in the accounting records after the exchange of player contracts?

            Cubs 	       Sox 

A. $7,450,000 $7,450,000
B. $7,450,000 $7,600,000
C. $7,600,000 $7,600,000
D. $8,000,000 $8,000,000

Answer 19

B. $7,450,000 $7,600,000

This is an exchange with gains having no commercial substance. The Cubs’ and Sox’s gains which will be deferred can be computed as follows:
Cubs Sox
Fair value of contract given up $8,000,000 $8,000,000
Less: Book value of Dempster’s contract 7,450,000
Book value of Buehrle’s contract 7,600,000
Gain on exchange to be deferred $ 550,000 $ 400,000

The Cubs and Sox would determine the cost of their new player contracts as follows:

Cost (fair value) of new player’s contract $8,000,000 $8,000,000
Less: Deferred exchange gain (550,000) (400,000)
Cost to be recorded for new player’s contract $7,450,000 $7,600,00

Question 20

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $12,000 and a fair market value of $15,000. The asset given up by Armstrong Co. has a book value of $20,000 and a fair market value of $19,000. Boot of $4,000 is received by Armstrong Co.
On the basis of the foregoing facts, what amount should Glen Inc. record for the asset received?

A. $15,000.
B. $16,000.
C. $19,000.
D. $20,000.

Answer 20

B. $16,000.

Answer: B
Fair market value of Glen Inc. asset …………………………………………………. $15,000
Book value of Glen Inc. asset ………………………………………………………….. 12,000
Total gain (unrecognized) ……………………………………………………………….. $ 3,000

Fair market value of Armstrong Co. asset ……………………………………….. $19,000
Less gain deferred ………………………………………………………………………… 3,000
Basis of acquired asset to Glen Inc. ………………………………………………….. $16,000

Question 21

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $12,000 and a fair market value of $15,000. The asset given up by Armstrong Co. has a book value of $20,000 and a fair market value of $19,000. Boot of $4,000 is received by Armstrong Co.

What amount should Armstrong Co. record for the asset received?

A. $15,000.
B. $16,000.
C. $19,000.
D. $20,000.

Answer 21

A. $15,000.

When nonmonetary assets are exchanged and a loss results, the loss should be recognized immediately.
Book value of Armstrong Co. asset ………………………………………………….. $20,000
Fair market value of Armstrong Co. asset …………………………………………. 19,000
Loss on trade ………………………………………………………………………………… $ 1,000

Armstrong Co.–Journal Entry
New asset 15,000
Cash 4,000
Loss on trade 1,000
Old asset 20,000

Question 22

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $12,000 and a fair market value of $15,000. The asset given up by Armstrong Co. has a book value of $20,000 and a fair market value of $19,000. Boot of $4,000 is received by Armstrong Co.

Would either company record a loss on the transaction?

A. Glen Inc. would record a loss.
B. Armstrong Co. would record a loss.
C. Both companies would record a loss.
D. Neither company would record a loss.

Answer 22

B. Armstrong Co. would record a loss.

When nonmonetary assets are exchanged and a loss results, the loss should be recognized immediately.
Book value of Armstrong Co. asset ………………………………………………….. $20,000
Fair market value of Armstrong Co. asset …………………………………………. 19,000
Loss on trade ………………………………………………………………………………… $ 1,000

Armstrong Co.–Journal Entry
New asset 15,000
Cash 4,000
Loss on trade 1,000
Old asset 20,000

Question 23

Hardin Company received $40,000 in cash and a used computer with a fair value of $120,000 from Page Corporation for Hardin Company’s existing computer having a fair value of $160,000 and an undepreciated cost of $150,000 recorded on its books. The transaction has no commercial substance. How much gain should Hardin recognize on this exchange, and at what amount should the acquired computer be recorded, respectively?

A. $0 and $110,000.
B. $769 and $110,769.
C. $10,000 and $120,000.
D. $40,000 and $150,000.

Answer 23

C. $10,000 and $120,000.

This is an exchange having no commercial substance of property at a gain with boot received. The boot received, however, is significant because it is 25% or more of the fair value of the exchange ($40,000/$160,000 = .25). When the boot received is significant, the exchange should be considered a monetary exchange with the fair values used to measure the gain which is then recognized in its entirety. The following entry would therefore be made:

Computer (new) 120,000
Cash 40,000
Computer (old), net 150,000
Gain on disposal of computer 10,000

Question 24

Elizabeth Company recently accepted a donation of land with a cost to the donor of $200,000 and a fair market value of $250,000. Which of the following journal entries would Elizabeth Company most likely make to record the receipt of the land?

A. Land 200,000
Donated Capital 200,000
B. Land 200,000
Revenue from Donation 200,000
C. Land 250,000
Donated Capital 250,000
D. Land 250,000
Revenue from Donation 250,000

Answer 24

D. Land 250,000
Revenue from Donation 250,000

The recording of a donated asset by a credit to a revenue account is required. The amount of the revenue is measured by the fair value of the asset when the donation is received.

Question 25

An expenditure made in connection with a machine being used by an enterprise should be:

A. expensed immediately if it merely extends the useful life but does not improve the quality.
B. expensed immediately if it merely improves the quality but does not extend the useful life.
C. capitalized if it maintains the machine in normal operating condition.
D. capitalized if it increases the quantity of units produced by the machine.

Answer 25

D. capitalized if it increases the quantity of units produced by the machine.

Expenditures made in connection with assets being used by an entity should be capitalized if (a) the useful life of the asset is increased, (b) the quantity of units produced by the assets is increased, or (c) the quality of the units produced by the asset is enhanced. All other expenditures of this nature should be expensed when incurred. The only alternative that correctly completes the question is (D).

Question 26

Cayo Casta Cabins Corporation recently purchased Ship Island Resort and Casino and the land on which it is located with the plan to tear down the resort and build a new luxury hotel on the site. Cayo Casta Cabin Corporation salvaged fixtures and wood flooring from Ship Island prior to demolishing the building. The proceeds from the sale of the salvaged materials should be

a. recorded as a reduction of the cost of the land.
b. recognized as an extraordinary gain in the year the hotel is torn down.
c. recorded as a reduction of the cost of the new hotel.
d. recognized as revenue in the period of the sale.

Answer 26

a. recorded as a reduction of the cost of the land.

Question 27

The cost of property acquired by the issuance of securities which are actively traded on an organized exchange is equal to:
a. the book value of the property acquired.
b. the market value of the securities.
c. the original cost of the securities.
d. the par value of the securities.

Answer 27

b. the market value of the securities.

Question 28

The most extensively used method of accounting for overhead costs related to self-constructed assets implies:
a. assigning a pro rata portion of fixed overhead to the asset.
b. allocating overhead on the basis of lost production.
c. assigning a portion of all overhead to the asset.
d. assigning no fixed overhead to the asset.

Answer 28

a. assigning a pro rata portion of fixed overhead to the asset.

Question 29

The accounting for interest costs incurred during construction recommended under GAAP is to:
a. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made.
b. capitalize a pro rata portion of all costs of funds employed.
c. capitalize no interest charges during construction.
d. charge construction with all costs of funds employed, whether identifiable or not.

Answer 29

a. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made.

Question 30

The period of time during which interest must be capitalized ends when
a. no further interest cost is being incurred.
b. the activities that are necessary to get the asset ready for its intended use have begun.
c. the asset is substantially complete and ready for its intended use.
d. the asset is abandoned, sold, or fully depreciated.

Answer 30

c. the asset is substantially complete and ready for its intended use.

Question 31

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. The cost assigned to the land is
a. $140,000.
b. $160,000.
c. $0.
d. $210,000.

Answer 31

a. $140,000.

Question 32

Delta River Company sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000. The journal entry to record this transaction will include:
a. a credit to Accumulated Depreciation – Equipment for $32,000.
b. a credit to a gain account for $8,000.
c. a credit to the Equipment account for $12,000.
d. a debit to a loss account for $3,000.

Answer 32

d. a debit to a loss account for $3,000.

Question 33

Plant assets purchased in exchange for a zero-interest-bearing note should be accounted for at the:
a. book value of the asset received.
b. fair value of the asset received.
c. present value of the note.
d. face value of the note.

Answer 33

c. present value of the note.

Question 34

Expenditures that extend the useful life of a plant asset without improving its quantity or quality are accounted for:
a. by debiting Accumulated Depreciation.
b. as improvements.
c. by debiting the asset account.
d. as additions.

Answer 34

a. by debiting Accumulated Depreciation.

Question 35

Which one of the following is not a characteristic of property, plant, and equipment?
a. They possess physical substance.
b. All of these answer choices are characteristics of property, plant, and equipment.
c. They are acquired for use in operations.
d. They are long-term in nature and are always subject to depreciation.

Answer 35

d. They are long-term in nature and are always subject to depreciation.

Question 36

Property, plant, and equipment includes
a. none of these answer choices would be classified as property, plant, and equipment.
b. deposits on machinery not yet received.
c. land held for possible use as a future plant site.
d. idle equipment awaiting sale.

Answer 36

a. none of these answer choices would be classified as property, plant, and equipment.

Question 37

The cost of manufacturing equipment would include all of the following except:
a. purchase price reduced by any discount taken.
b. freight costs.
c. cost of training the equipment operator.
d. installation costs.

Answer 37

c. cost of training the equipment operator.

Question 38

Watauga Company purchased equipment on July 1, 2021 for $70,000. Sales tax on the purchase was $700. Other costs incurred were freight charges of $800, insurance during shipping of $150, repairs of $1,300 for damage during installation, and installation costs of $1, 050. What is the cost of the equipment?
a. $71,500
b. $74,000
c. $70,000
d. $72,700

Answer 38

d. $72,700

Question 39

During self-construction of an asset by Gambino Company, the following were among the costs incurred:
Fixed overhead for the year $1,210,000

Portion of $1,000,000 fixed overhead that would be allocated to
asset if it were normal production 35,000

Variable overhead attributable to self-construction 25,000

What amount of overhead should Gambino include in the cost of the self-constructed asset?
a. $60,000
b. $35,000
c. $ -0-
d. $25,000

Answer 39

a. $60,000

Question 40

Which of the following statements is true regarding capitalization of interest?

a. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized.
b. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.
c. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account.
d. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

Answer 40

d. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

Question 41

The interest rate(s) used in computing avoidable interest is the:
a. rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures.
b. rate incurred on specific borrowings.
c. weighted average rate incurred on all other outstanding debt.
d. lower of the rate incurred on specific borrowings or the weighted average rate.

Answer 41

a. rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures.

Question 42

Assets acquired in a lump sum purchase should be recorded at:
a. appraised value.
b. relative book value.
c. relative fair market values.
d. fair market value.

Answer 42

c. relative fair market values.

Question 43

On September 1, 2021, Alpha Graphics Printing Co. incurred the following costs for one of its printing presses:
Purchase of attachment $35,000
Installation of attachment 3,000
Replacement parts for renovation of press 12,000
Labor and overhead in connection with renovation of press 1,000

Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?
a. $0.
b. $38,000.
c. $47,000.
d. $51,000.

Answer 43

d. $51,000.

Question 44

Bogle Company purchased machinery for $320,000 on January 1, 2017. 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, 2021 at a gain of $6,000. How much cash did Bogle receive from the sale of the machinery?
a. $54,000.
b. $46,000.
c. $86,000.
d. $66,000.

Answer 44

d. $66,000.

Question 45

Ridge Company sold equipment with a cost of $75,000 and accumulated depreciation of $40,000 for $37,000. The journal entry to record this transaction will include:
a. a credit to a gain account for $38,000.
b. a credit to the Equipment account for $35,000.
c. a debit to a loss account for $2,000.
d. a debit to Accumulated Depreciation – Equipment for $40,000.

Answer 45

d. a debit to Accumulated Depreciation – Equipment for $40,000.

Question 46

Which of the following is not a major characteristic of a plant asset?
a. Acquired for use
b. Acquired for resale
c. Yields services over a number of years
d. Possesses physical substance

Answer 46

b. Acquired for resale

Question 47

The cost of land includes all of the following except:
a. payments to clear liens.
b. cost of leveling and grading.
c. purchase price.
d. cost of fencing and lighting.

Answer 47

d. cost of fencing and lighting.

Question 48

The cost of a building should include all of the following except:
a. building permits.
b. excavation costs.
c. overhead costs incurred during construction.
d. costs of removing an old building on the new building site.

Answer 48

d. costs of removing an old building on the new building site.

Question 49

Which of the following is not a capital expenditure with regard to a manufacturing facility?
a. Expanding the building by adding a new wing
b. Replacing the air conditioning system with a similar unit
c. Replacing the heating system with a more energy efficient model
d. Painting the exterior of the building

Answer 49

d. Painting the exterior of the building

Question 50

If an asset is sold at a gain,
a. the proceeds from the sale are greater than the asset’s cost.
b. the book value of the asset is less than the proceeds received from the sale.
c. the fair value of the asset is greater than the proceeds received from the sale.
d. the cost of the asset is greater than its book value.

Answer 50

b. the book value of the asset is less than the proceeds received from the sale.

Question 51

The only major characteristic of property, plant and equipment shown below is:
a. they are acquired for resale.
b. they are long-term in nature.
c. they lack physical substance.
d. they are always subject to depreciation.

Answer 51

b. they are long-term in nature.

Question 52

Special assessments for local improvements, such as pavements, streetlights, sewers, and drainage systems, are usually charged to what account?
a. Land Improvements.
b. Land.
c. Betterments.
d. Building Improvements.

Answer 52

b. Land.

Question 53

Which of the following costs are capitalized for self-constructed assets?
a. Labor and overhead only
b. Materials, labor, and overhead
c. Materials and labor only
d. Materials and overhead only

Answer 53

b. Materials, labor, and overhead

Question 54

Which of the following is one of the conditions that must be present for the capitalization period of interest to begin?
a. Activities necessary to get the asset ready for its intended use must be known.
b. Interest costs are being incurred.
c. The construction period must occur in the current accounting period.
d. Expenditures for the asset must be budgeted.

Answer 54

b. Interest costs are being incurred.

Question 55

The interest capitalization period ends when:
a. activities to get the asset ready for its intended use are in progress.
b. the asset is substantially complete and ready for its intended use.
c. expenditures for the asset are being made.
d. interest cost is no longer being incurred.

Answer 55

b. the asset is substantially complete and ready for its intended use.

Question 56

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a. less than book value.
b. greater than book value.
c. greater than cost.
d. less than current market value.

Answer 56

a. less than book value.

Question 57

Cotton Hotel Corporation recently purchased the Emporia Hotel (that closed years ago) 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?
A. Written Off as a loss in the year the hotel is torn down.
B. Capitalized as part of the cost of the new hotel.
C. Depreciated over the period from acquisition to scheduled tear down date.
D. Capitalized as part of the cost of the land.

Answer 57

D. Capitalized as part of the cost of the land.

Question 58

How are fences and parking lots reported on the balance sheet?
A. Property and equipment
B. Land
C. Current assets
D. Land improvements

Answer 58

D. Land improvements

Question 59

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?
A. Netted against the costs to clear the land and expensed as incurred
B. Deducted from the cost of the land
C. Netted against the costs to clear the land and amortized over the life of the plant
D. Classified as other income

Answer 59

B. Deducted from the cost of the land

Question 60

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?
A. $1,484,820
B. $1,494,420
C. $1,480,320
D. $1,470,720

Answer 60

C. $1,480,320

Question 61

How does GAAP recommend accounting for interest costs incurred during construction?
A. Capitalize no interest charges during construction
B. Capitalize the actual interest cost for the period incurred during the period
C. Capitalize a pro rata portion of all costs of funds employed
D. Charge construction with all costs of funds employed, whether identifiable or not

Answer 61

C. Capitalize a pro rata portion of all costs of funds employed

Question 62

What assets qualify for interest cost capitalization?
A. Assets that are not currently being used because of excess capacity
B. Assets that had repair costs used to return the asset to its intended purpose.
C. Assets that are ready for their intended use in the earnings of the company
D. Assets that are under construction for a company’s own use

Answer 62

D. Assets that are under construction for a company’s own use

Question 63

When computing the amount of interest cost to be capitalized, what does the concept of “avoidable interest” refer to?
A. That portion of weighted-average accumulated expenditures on which no interest cost was incurred
B. That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made
C. The total interest cost actually incurred
D. A cost of capital charge for stockholders’ equity

Answer 63

B. That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

Question 64

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?
A. Regard as a cost of the land
B. Regard as a cost of the plant
C. Disregard the interest cost
D. Regard as a period cost

Answer 64

B. Regard as a cost of the plant

Question 65

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?
A. $1,500,000
B. $1,600,000
C. $3,000,000
D. $1,200,000

Answer 65

D. $1,200,000

Question 66

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?
A. $456,000
B. $144,000
C. $540,000
D. $180,000

Answer 66

B. $144,000

Question 67

In accounting for plant assets, what outlay, made subsequently to acquisition, should be fully expensed in the period the expenditure is made?
A. Expenditures made to add new asset services
B. Expenditures made to increase the efficiency/effectiveness of an existing asset
C. Expenditures made to maintain an existing asset
D. Expenditures made to extend the useful life of an existing asset

Answer 67

C. Expenditures made to maintain an existing asset

Question 68

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?
A. $150,000
B. $160,000
C. $164,000
D. $170,000

Answer 68

D. $170,000

Question 69

Which term is used to describe the termination of an asset’s service due to theft, fire, etc.?
A. Involuntary conversion
B. Nonreciprocal transfers
C. Special assessment
D. Speculation

Answer 69

A. Involuntary conversion