Deck 10: Acquisition and Disposition of Property, Plant, and Equipment

Question 1

When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

Answer 1

True

Question 2

When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building.

Answer 2

False

Question 3

Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits.

Answer 3

True

Question 4

When an ordinary repair occurs, several periods will usually benefit.

Question 5

Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used.

Question 6

Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements.

Question 7

Assets under construction for a company's own use do not qualify for interest cost capitalization.

Question 8

Companies always treat gains or losses from an involuntary conversion as extraordinary items.

Question 9

Companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received.

Question 10

Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.

Question 11

Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.

Question 12

Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance.

Question 13

If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized.

Question 14

Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.

Question 15

If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset's book value.

Question 16

When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.

Question 17

When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

Question 18

Companies should assign no portion of fixed overhead to self-constructed assets.

Question 19

Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale.

Question 20

Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.

Question 21

Which of these is not a major characteristic of a plant asset?

A)Possesses physical substance
B)Acquired for use in operations
C)Yields services over a number of years
D)All of these are major characteristics of a plant asset.

Question 22

Which of the following is not a major characteristic of a plant asset?

A)Possesses physical substance
B)Acquired for resale
C)Acquired for use
D)Yields services over a number of years

Question 23

The period of time during which interest must be capitalized ends when

A)the asset is substantially complete and ready for its intended use.
B)no further interest cost is being incurred.
C)the asset is abandoned, sold, or fully depreciated.
D)the activities that are necessary to get the asset ready for its intended use have begun.

Question 24

The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to

A)the machinery account.
B)a separate deferred charge account.
C)miscellaneous tax expense (which includes all taxes other than those on income).
D)accumulated depreciation--machinery.

Question 25

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.

Question 26

The cost of land typically includes the purchase price and all of the following costs except

A)grading, filling, draining, and clearing costs.
B)street lights, sewers, and drainage systems cost.
C)private driveways and parking lots.
D)assumption of any liens or mortgages on the property.

Question 27

The cost of land does not include

A)costs of grading, filling, draining, and clearing.
B)costs of removing old buildings.
C)costs of improvements with limited lives.
D)special assessments.

Question 28

Construction of a qualifying asset is started on April 1 and finished on December 1.The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is

A)8/8.
B)8/12.
C)9/12.
D)11/12.

Question 29

Fences and parking lots are reported on the balance sheet as

A)current assets.
B)land improvements.
C)land.
D)property and equipment.

Question 30

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

A)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.
B)The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
C)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.
D)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.

Question 31

If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

A)the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
B)the length of time for which the building was held prior to its demolition.
C)the contemplated future use of the parking lot.
D)the intention of management for the property when the building was acquired.

Question 32

Interest cost that is capitalized should

A)be written off over the remaining term of the debt.
B)be accumulated in a separate deferred charge account and written off equally over a 40-year period.
C)not be written off until the related asset is fully depreciated or disposed of.
D)none of these.

Question 33

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?

A)Assets under construction for an enterprise's own use.
B)Assets intended for sale or lease that are produced as discrete projects.
C)Assets financed through the issuance of long-term debt.
D)Assets not currently undergoing the activities necessary to prepare them for their intended use.

Question 34

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

A)the total interest cost actually incurred.
B)a cost of capital charge for stockholders' equity.
C)that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.
D)that portion of average accumulated expenditures on which no interest cost was incurred.

Question 35

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 market value.
B)property, plant, and equipment items are always acquired at their original historical cost.
C)historical cost involves actual trans?actions 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.

Question 36

Which of the following costs are capitalized for self-constructed assets?

A)Materials and labor only
B)Labor and overhead only
C)Materials and overhead only
D)Materials, labor, and overhead

Question 37

Plant assets may properly include

A)deposits on machinery not yet received.
B)idle equipment awaiting sale.
C)land held for possible use as a future plant site.
D)none of these.

Question 38

Assets that qualify for interest cost capitalization include

A)assets under construction for a company's own use.
B)assets that are ready for their intended use in the earnings of the company.
C)assets that are not currently being used because of excess capacity.
D)All of these assets qualify for interest cost capitalization.

Question 39

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities.Interest earned on these temporary investments should be

A)offset against interest cost incurred during construction.
B)used to reduce the cost of assets being constructed.
C)multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
D)recognized as revenue of the period.

Question 40

Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site.The cost of the Holiday Hotel should be

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

Question 41

When an enterprise is the recipient of a donated asset, the account credited may be a

A)paid-in capital account.
B)revenue account.
C)deferred revenue account.
D)all of these.

Question 42

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.

Question 43

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has

A)no commercial substance and additional cash is paid.
B)no commercial substance and additional cash is received.
C)commercial substance and additional cash is paid.
D)commercial substance and additional cash is received.

Question 44

An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life.The cost of the improvement should be

A)expensed.
B)debited to accumulated depreciation.
C)capitalized in the machine account.
D)allocated between accumulated depreciation and the machine account.

Question 45

Use the following information for questions
Seiler Co.purchased land as a factory site for $600,000.Seiler paid $60,000 to tear down two buildings on the land.Salvage was sold for $5,400.Legal fees of $3,480 were paid for title investigation and making the purchase.Architect's fees were $31,200.Title insurance cost $2,400, and liability insurance during construction cost $2,600.Excavation cost $10,440.The contractor was paid $2,200,000.An assessment made by the city for pavement was $6,400.Interest costs during construction were $170,000.
The cost of the building that should be recorded by Seiler Co.is

A)$2,403,800.
B)$2,404,840.
C)$2,413,200.
D)$2,414,240.

Question 46

The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange.The exchange is not expected to cause a material change in the future cash flows for either entity.If a gain on the disposal of the old asset is indicated, the gain will

A)be reported in the Other Revenues and Gains section of the income statement.
B)effectively reduce the amount to be recorded as the cost of the new asset.
C)effectively increase the amount to be recorded as the cost of the new asset.
D)be credited directly to the owner's capital account.

Question 47

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and 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.

Question 48

Which of the following is a capital expenditure?

A)Payment of an account payable
B)Retirement of bonds payable
C)Payment of Federal income taxes
D)None of these

Question 49

When a closely held corporation issues preferred stock for land, the land should be recorded at the

A)total par value of the stock issued.
B)total book value of the stock issued.
C)total liquidating value of the stock issued.
D)fair market value of the land.

Question 50

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.

Question 51

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at

A)the nominal cost of taking title to it.
B)its market value.
C)one dollar (since the site cost nothing but should be included in the balance sheet).
D)the value assigned to it by the company's directors.

Question 52

Which of the following is not a capital expenditure?

A)Repairs that maintain an asset in operating condition
B)An addition
C)A betterment
D)A replacement

Question 53

Use the following information for questions
Seiler Co.purchased land as a factory site for $600,000.Seiler paid $60,000 to tear down two buildings on the land.Salvage was sold for $5,400.Legal fees of $3,480 were paid for title investigation and making the purchase.Architect's fees were $31,200.Title insurance cost $2,400, and liability insurance during construction cost $2,600.Excavation cost $10,440.The contractor was paid $2,200,000.An assessment made by the city for pavement was $6,400.Interest costs during construction were $170,000.
The cost of the land that should be recorded by Seiler Co.is

A)$660,480.
B)$666,880.
C)$669,880.
D)$676,280.

Question 54

In order for a cost to be capitalized (capital expenditure), the following must be present:

A)The useful life of an asset must be increased.
B)The quantity of assets must be increased.
C)The quality of assets must be increased.
D)Any one of these.

Question 55

When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the

A)par value of the stock.
B)stated value of the stock.
C)book value of the stock.
D)market value of the stock.

Question 56

When a plant asset is disposed of, a gain or loss may result.The gain or loss would be classified as an extraordinary item on the income statement if it resulted from

A)an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
B)a sale prior to the completion of the estimated useful life of the asset.
C)the sale of a fully depreciated asset.
D)an abandonment of the asset.

Question 57

Plant assets purchased on long-term credit contracts should be accounted for at

A)the total value of the future payments.
B)the future amount of the future payments.
C)the present value of the future payments.
D)none of these.

Question 58

For a nonmonetary exchange of plant assets, accounting recognition should not be given to

A)a loss when the exchange has no commercial substance.
B)a gain when the exchange has commercial substance.
C)part of a gain when the exchange has no commercial substance and cash is paid.
D)part of a gain when the exchange has no commercial substance and cash is received.

Question 59

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were

A)less than current market value.
B)greater than cost.
C)greater than book value.
D)less than book value.

Question 60

In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?

A)Expenditure made to increase the efficiency or effectiveness of an existing asset
B)Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated
C)Expenditure made to maintain an existing asset so that it can function in the manner intended
D)Expenditure made to add new asset services

Question 61

Use the following information for questions
On March 1, 2007, Dennis Company purchased land for an office site by paying $540,000 cash.Dennis began construction on the office building on March 1.The following expenditures were incurred for construction: $$\begin{array} { l r } \text { Date } & \text { Expenditures } \\\hline \text { March } 1,2007 & \$ 360,000 \\\text { April } 1,2007 & 504,000 \\\text { May 1, } 2007 & 900,000 \\\text { June } 1,2007 & 1,440,000\end{array}$$ The office was completed and ready for occupancy on July 1.To help pay for construction, $720,000 was borrowed on March 1, 2007 on a 9%, 3-year note payable.Other than the construction note, the only debt outstanding during 2007 was a $300,000, 12%, 6-year note payable dated January 1, 2007.

-The weighted-average accumulated expenditures on the construction project during 2007 were

A)$384,000.
B)$2,934,000.
C)$312,000.
D)$696,000.

Question 62

During self-construction of an asset by Mitchellson Company, the following were among the costs incurred: $\begin{array}{lr}\text { Fixed overhead for the year } & \$ 1,000,000 \\\text { Portion of } \$ 1,000,000 \text { fixed overhead that would } & \\\quad \text { be allocated to asset if it were normal production } & 60,000 \\\text { Variable overhead attributable to self-construction } & 55,000\end{array}$ What amount of overhead should be included in the cost of the self-constructed asset?

A)$ -0-
B)$ 55,000
C)$ 60,000
D)$115,000

Question 63

On May 1, 2007, Royster Company began construction of a building.Expenditures of $120,000 were incurred monthly for 5 months beginning on May 1.The building was completed and ready for occupancy on September 1, 2007.For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2007 were

A)$100,000.
B)$120,000.
C)$480,000.
D)$600,000.

Question 64

Wheeler Corporation constructed a building at a cost of $20,000,000.Average accumulated expenditures were $8,000,000, actual interest was $1,200,000, and avoidable interest was $600,000.If the salvage value is $1,600,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is

A)$475,000.
B)$490,000.
C)$515,000.
D)$675,000.

Question 65

On March 1, Carr Co.began construction of a small building.Payments of $120,000 were made monthly for three months beginning March 1.The building was completed and ready for occupancy on June 1.In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are

A)$30,000.
B)$60,000.
C)$120,000.
D)$240,000.

Question 66

Carly Corporation purchased a new machine on October 31, 2007.A $1,200 down payment was made and three monthly installments of $3,600 each are to be made beginning on November 30, 2007.The cash price would have been $11,600.Carly paid no installation charges under the monthly payment plan but a $200 installation charge would have been incurred with a cash purchase.The amount to be capitalized as the cost of the machine on October 31, 2007 would be

A)$12,200.
B)$12,000.
C)$11,800.
D)$11,600.

Question 67

Taylor Company buys a delivery van with a list price of $30,000.The dealer grants a 15% reduction in list price and an additional 2% cash discount on the net price if payment is made in 30 days.Sales taxes amount to $400 and the company paid an extra $300 to have a special horn installed.What should be the recorded cost of the van?

A)$24,990.
B)$25,645.
C)$25,690.
D)$25,390.

Question 68

Use the following information for questions
On March 1, 2007, Dennis Company purchased land for an office site by paying $540,000 cash.Dennis began construction on the office building on March 1.The following expenditures were incurred for construction: $$\begin{array} { l r } \text { Date } & \text { Expenditures } \\\hline \text { March } 1,2007 & \$ 360,000 \\\text { April } 1,2007 & 504,000 \\\text { May 1, } 2007 & 900,000 \\\text { June } 1,2007 & 1,440,000\end{array}$$ The office was completed and ready for occupancy on July 1.To help pay for construction, $720,000 was borrowed on March 1, 2007 on a 9%, 3-year note payable.Other than the construction note, the only debt outstanding during 2007 was a $300,000, 12%, 6-year note payable dated January 1, 2007.

-Assume the weighted-average accumulated expenditures for the construction project are $870,000.The amount of interest cost to be capitalized during 2007 is

A)$78,300.
B)$82,800.
C)$90,000.
D)$100,800.

Question 69

On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site for $200,000.An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2007.Costs incurred during this period are listed below: $$\begin{array} { l r } \text { Demolition of old building } & \$ 20,000 \\\text { Architect's fees } & 35,000 \\\text { Legal fees for title investigation and purchase contract } & 5,000 \\\text { Construction costs } & 1,090,000 \\\text { (Salvaged materials resulting from demolition were sold for } \$ 10,000 . )\end{array}$$ Morgan should record the cost of the land and new building, respectively, as

A)$225,000 and $1,115,000.
B)$210,000 and $1,130,000.
C)$210,000 and $1,125,000.
D)$215,000 and $1,125,000.

Question 70

On March 1, Bakken Co.began construction of a small building.Payments of $180,000 were made monthly for four months beginning March 1.The building was completed and ready for occupancy on June 1.In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are

A)$90,000.
B)$180,000.
C)$360,000.
D)$720,000.

Question 71

Hackleman Company is constructing a building.Construction began in 2008 and the building was completed 12/31/08.Hackleman made payments to the construction company of $1,500,000 on 7/1, $3,300,000 on 9/1, and $3,000,000 on 12/31.Average accumulated expenditures were

A)$1,575,000.
B)$1,850,000.
C)$4,800,000.
D)$7,800,000.

Question 72

Ben Gordon Corporation constructed a building at a cost of $10,000,000.Average accumulated expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was $300,000.If the salvage value is $800,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is

A)$237,500.
B)$245,000.
C)$257,500.
D)$337,500.

Question 73

Tyson Chandler Company purchased equipment for $10,000.Sales tax on the purchase was $500.Other costs incurred were freight charges of $200, repairs of $350 for damage during installation, and installation costs of $225.What is the cost of the equipment?

A)$10,000
B)$10,500
C)$10,925
D)$11,275

Question 74

During 2007, Aber Corporation constructed assets costing $1,000,000.The weighted-average accumulated expenditures on these assets during 2007 was $600,000.To help pay for construction, $440,000 was borrowed at 10% on January 1, 2007, and funds not needed for construction were temporarily invested in short-term securities, yielding $9,000 in interest revenue.Other than the construction funds borrowed, the only other debt outstanding during the year was a $500,000, 10-year, 9% note payable dated January 1, 2001.What is the amount of interest that should be capitalized by Aber during 2007?

A)$60,000.
B)$30,000.
C)$58,400.
D)$94,400.

Question 75

During self-construction of an asset by Jannero Pargo Company, the following were among the costs incurred: $\begin{array} { l } \text { Fixed overhead for the year}&\$1,000,000\\ \text {Portion of \( \$ 1,000,000 \) fixed overhead that would }\\ \text { be allocated to asset if it were normal production }&40,000\\ \text {Variable overhead attributable to self-construction }&35,000\\\end{array}$
What amount of overhead should be included in the cost of the self-constructed asset?

A)$ -0-
B)$35,000
C)$40,000
D)$75,000

Question 76

Sweet Knee Company is constructing a building.Construction began in 2008 and the building was completed 12/31/08.Sweet Knee made payments to the construction company of $1,000,000 on 7/1, $2,100,000 on 9/1, and $2,000,000 on 12/31.Average accumulated expenditures were

A)$1,025,000.
B)$1,200,000.
C)$3,100,000.
D)$5,100,000.

Question 77

On December 1, Wynne Corporation exchanged 2,000 shares of its $25 par value common stock held in treasury for a parcel of land to be held for a future plant site.The treasury shares were acquired by Wynne at a cost of $40 per share, and on the exchange date the common shares of Wynne had a fair market value of $50 per share.Wynne received $6,000 for selling scrap when an existing building on the property was removed from the site.Based on these facts, the land should be capitalized at

A)$74,000.
B)$80,000.
C)$94,000.
D)$100,000.

Question 78

During 2007, Gannon Co.incurred average accumulated expenditures of $400,000 during construction of assets that qualified for capitalization of interest.The only debt outstanding during 2007 was a $500,000, 10%, 5-year note payable dated January 1, 2005.What is the amount of interest that should be capitalized by Gannon during 2007?

A)$0.
B)$10,000.
C)$40,000.
D)$50,000.

Question 79

Carpenter Company purchased equipment for $12,000.Sales tax on the purchase was $600.Other costs incurred were freight charges of $240, repairs of $420 for damage during installation, and installation costs of $270.What is the cost of the equipment?

A)$12,000.
B)$12,600.
C)$13,110.
D)$13,530.

Question 80

Use the following information for questions
On March 1, 2007, Dennis Company purchased land for an office site by paying $540,000 cash.Dennis began construction on the office building on March 1.The following expenditures were incurred for construction: $$\begin{array} { l r } \text { Date } & \text { Expenditures } \\\hline \text { March } 1,2007 & \$ 360,000 \\\text { April } 1,2007 & 504,000 \\\text { May 1, } 2007 & 900,000 \\\text { June } 1,2007 & 1,440,000\end{array}$$ The office was completed and ready for occupancy on July 1.To help pay for construction, $720,000 was borrowed on March 1, 2007 on a 9%, 3-year note payable.Other than the construction note, the only debt outstanding during 2007 was a $300,000, 12%, 6-year note payable dated January 1, 2007.

-The actual interest cost incurred during 2007 was

A)$90,000.
B)$100,800.
C)$50,400.
D)$84,000.