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

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Companies should always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets.

Answer 3

False

Question 4

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

Question 5

When a company makes an unconditional promise to pledge an asset in the future, the company should report the contribution expense and related payable immediately.

Question 6

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

Question 7

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

Question 8

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

Question 9

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 answers are correct.

Question 23

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. The cost of the Emporia 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 24

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 25

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 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 26

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 answers are correct.

Question 27

When a company purchases land as a site for a plant, interest costs capitalized during the period of construction are part of the:

A) period cost.
B) cost of acquisition.
C) cost of the plant.
D) cost of the land.

Question 28

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 weighted-average accumulated expenditures on which no interest cost was incurred.

Question 29

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 30

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 31

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 fully depreciated.
D) the activities that are necessary to get the asset ready for its intended use have begun.

Question 32

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 33

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 34

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 get them ready for use.

Question 35

If a corporation purchases land 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 land 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 36

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 37

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 38

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 39

Fences and parking lots are reported on the balance sheet as

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

Question 40

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 41

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 42

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 (cash paid/received is less than 25% of the fair value of the exchange).
D) part of a gain when the exchange has no commercial substance and cash is received (cash paid or received is less than 25% of the fair value of the exchange).

Question 43

Ringler 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 44

An improvement made to a machine increased its fair 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

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 fair 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 46

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 of these answers are correct.

Question 47

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 48

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 49

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 50

A company should immediately recognize:

A) any gain when it makes a bargain purchase.
B) any loss when it ignorantly pays too much for an asset originally.
C) any gain when it constructs a piece of equipment at a cost savings.
D) any loss when it receives any asset lower than its book value.

Question 51

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.

Question 52

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 answers are correct.

Question 53

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.

Question 54

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 55

When a company 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 answers are correct.

Question 56

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.

Question 57

When boot is involved in an exchange having commercial substance

A) gains or losses are recognized in their entirely.
B) a 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.

Question 58

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 59

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) fair value of the stock.

Question 60

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 answers are correct.

Question 61

Use the following information for questions 78 through 80.
On March 1, 2014, Newton Company purchased land for an office site by paying $1,800,000 cash. Newton began construction on the office building on March 1. The following expenditures were incurred for construction: The office was completed and ready for occupancy on July 1. To help pay for construction, and purchase of land $2,400,000 was borrowed on March 1, 2014 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2014 was a $1,000,000, 12%, 6-year note payable dated January 1, 2014.
The actual interest cost incurred during 2014 was

A) $300,000.
B) $336,000.
C) $168,000.
D) $280,000.

Question 62

Which of the following statements about involuntary conversions is false?

A) An involuntary conversion may result from condemnation or fire.
B) The gain or loss from an involuntary conversion may be reported as an extraordinary item.
C) The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets.
D) All of these answers are correct.

Question 63

Worthington Chandler Company purchased equipment for $36,000. Sales tax on the purchase was $2,400. Other costs incurred were freight charges of $600, repairs of $350 for damage during installation, and installation costs of $675. What is the cost of the equipment?

A) $36,000
B) $38,400
C) $39,675
D) $40,725

Question 64

Gutierrez Company is constructing a building. Construction began in 2014 and the building was completed 12/31/14. Gutierrez made payments to the construction company of $2,500,000 on 7/1, $5,500,000 on 9/1, and $5,000,000 on 12/31. Weighted-average accumulated expenditures were

A) $2,625,000.
B) $3,083,333.
C) $8,000,000.
D) $13,000,000.

Question 65

Assume the weighted-average accumulated expenditures for the construction project are $2,900,000. The amount of interest cost to be capitalized during 2014 is

A) $261,000.
B) $276,000.
C) $300,000.
D) $336,000.

Question 66

Messersmith Company is constructing a building. Construction began in 2014 and the building was completed 12/31/14. Messersmith made payments to the construction company of $2,000,000 on 7/1, $4,200,000 on 9/1, and $4,000,000 on 12/31. Weighted-average accumulated expenditures were

A) $2,050,000.
B) $2,400,000.
C) $6,200,000.
D) $10,200,000.

Question 67

Huffman Corporation constructed a building at a cost of $20,000,000. Weighted-average accumulated expenditures were $8,000,000, actual interest was $800,000, and avoidable interest was $400,000. 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) $470,000.
B) $490,000.
C) $510,000.
D) $670,000.

Question 68

During self-construction of an asset by Samuelson Company, the following were among the costs incurred: What amount of overhead should be included in the cost of the self-constructed asset?

A) $ -0-
B) $50,000
C) $70,000
D) $120,000

Question 69

Mendenhall Corporation constructed a building at a cost of $10,000,000. Weighted-average accumulated expenditures were $4,000,000, actual interest was $400,000, and avoidable interest was $200,000. 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) $235,000.
B) $240,000.
C) $255,000.
D) $335,000.

Question 70

On March 1, Felt Co. began construction of a small building. Payments of $320,000 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) $80,000.
B) $160,000.
C) $320,000.
D) $640,000.

Question 71

During 2014, Kimmel Co. incurred weighted-average accumulated expenditures of $800,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2014 was a $1,000,000, 10%, 5-year note payable dated January 1, 2012. What is the amount of interest that should be capitalized by Kimmel during 2014?

A) $0.
B) $20,000.
C) $80,000.
D) $100,000.

Question 72

Fogelberg Company purchased equipment for $25,000. Sales tax on the purchase was $1,500. Other costs incurred were freight charges of $400, repairs of $700 for damage during installation, and installation costs of $450. What is the cost of the equipment?

A) $25,000.
B) $26,500.
C) $27,350.
D) $28,050.

Question 73

On February 1, 2014, Nelson Corporation purchased a parcel of land as a factory site for $280,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2014. Costs incurred during this period are listed below: Nelson should record the cost of the land and new building, respectively, as

A) $305,000 and $1,365,000.
B) $290,000 and $1,380,000.
C) $290,000 and $1,375,000.
D) $295,000 and $1,375,000.

Question 74

Use the following information for questions 63 and 64.
Wilson Co. purchased land as a factory site for $900,000. Wilson paid $80,000 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 $2,800,000. 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 Wilson Co. is

A) $2,803,800.
B) $2, 804,840.
C) $2, 813,200.
D) $3,014,240.

Question 75

Termination of an asset's service due to theft, fire, etc, is called:

A) special assessment.
B) nonreciprocal transfers.
C) speculation.
D) involuntary conversion.

Question 76

Use the following information for questions 63 and 64.
Wilson Co. purchased land as a factory site for $900,000. Wilson paid $80,000 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 $2,800,000. 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 Wilson Co. is

A) $980,480.
B) $986,880.
C) $989,880.
D) $996,280.

Question 77

During self-construction of an asset by Richardson Company, the following were among the costs incurred: What amount of overhead should be included in the cost of the self-constructed asset?

A) $ -0-
B) $ 80,000
C) $100,000
D) $180,000

Question 78

On May 1, 2014, Goodman Company began construction of a building. Expenditures of $360,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2014. For the purpose of determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures on the building during 2014 were

A) $300,000.
B) $360,000.
C) $1,440,000.
D) $1,800,000.

Question 79

Use the following information for questions 78 through 80.
On March 1, 2014, Newton Company purchased land for an office site by paying $1,800,000 cash. Newton began construction on the office building on March 1. The following expenditures were incurred for construction: The office was completed and ready for occupancy on July 1. To help pay for construction, and purchase of land $2,400,000 was borrowed on March 1, 2014 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2014 was a $1,000,000, 12%, 6-year note payable dated January 1, 2014.
The weighted-average accumulated expenditures on the construction project during 2014 were

A) $1,280,000.
B) $9,780,000.
C) $1,040,000.
D) $2,320,000.

Question 80

On March 1, Imhoff Co. began construction of a small building. Payments of $400,000 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) $200,000.
B) $400,000.
C) $800,000.
D) $1,600,000.