Deck 10: Property, Plant, and Equipment: Acquisition and Subsequent Investments

Question 1

Improvements made to a leased property should be capitalized over the life of the lease or the life of the assets whichever is shorter.

Answer 1

True

Question 2

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the new asset acquired.

Answer 2

False

Question 3

If an exchange lacks commercial substance and results in a gain, the gain must be deferred by reducing the cost of the asset.

Answer 3

True

Question 4

Advantages of using historical cost as the basis of valuation of property, plant, and equipment include all of the following except

A) it is representationally faithful.
B) gains and losses from holding the asset are recognized in the period of value change.
C) cost equals the fair market value at the date of acquisition.
D) it is consistent with the valuation of many other assets and liabilities.

Question 5

The amount of interest that can be capitalized for a qualifying asset is the lesser of the amount considered as avoidable interest costs or actual interest cost.

Question 6

GAAP requires a company to report its property, plant, and equipment at fair value less accumulated depreciation.

Question 7

Capitalized interest for a constructed asset cannot exceed actual interest costs.

Question 8

Which one of the following types of assets should not be classified as property, plant, and equipment?

A) leasehold improvements
B) fully-depreciated building still in use)
C) idle land and buildings
D) long-lived tangible assets

Question 9

Under IFRS, the costs of relocating property, plant, and equipment can be capitalized as assets and depreciated over the period of expected benefit.

Question 10

One advantage of recording property, plant, and equipment at historical costs is that historical cost is equal to the fair value on the purchase date.

Question 11

Which of the following assets would be classified as property, plant, and equipment?

A) Office building to be demolished in nine months
B) Natural gas reserves expected to produce for more than a decade
C) Land held as a long-term investment
D) Financial securities expected to produce significant returns for the next seven years

Question 12

An expenditure to improve an asset can be added to the depreciable basis of that asset if the expenditure extends the life of the asset.

Question 13

To be included in property, plant, and equipment, an asset must have all of the following except

A) the asset must be held for use.
B) the asset must have an expected life of a normal operating cycle.
C) the asset must be tangible in nature.
D) the asset must have an expected life of more than one year.

Question 14

All interest paid on a construction loan should be capitalized as part of the cost of the constructed asset.

Question 15

Alternative terms for property, plant, and equipment include all of the following except

A) plant assets.
B) fixed assets.
C) long-term assets.
D) operational assets.

Question 16

Under the full-cost method, only the costs associated with the exploration that resulted in the successful discovery of oil and gas can be capitalized.

Question 17

Under the full-cost method, the costs associated with dry wells can be capitalized as part of the oil and gas reserves.

Question 18

All of the following would be classified as property, plant, and equipment except

A) office buildings.
B) machinery owned for standby purposes.
C) equipment held for resale.
D) equipment used in the operation of the business.

Question 19

Under IFRS a company is allowed to revalue its property, plant, and equipment up to fair value if the value can be reliably measured.

Question 20

Assets acquired by donation will have zero value for financial reporting purposes.

Question 21

Ramirez Company made the following payments related to a land acquisition:
Purchase price $\quad$ $\quad$ $\quad$ $\quad$ $7,500
Past due taxes $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 650
Title search $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 275
Cost of razing old building $\quad$ 1300
Interest incurred after productive operations had begun) $\quad$ 160
Proceeds from salvage of old building $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 1875
What is the capitalizable cost of the land?

A) $9,725
B) $8,010
C) $7,850
D) $7,500

Question 22

Billy's Builders purchased some equipment by issuing a five-year 5% note for $15,000 when the market rate for an obligation of this nature was 7%. The interest is payable annually. Actuarial information for five periods follows:

At the date of purchase, what amount should be debited to Equipment?

A) $10,694.79
B) $11,752.89
C) $13,769.94
D) $15,000.00

Question 23

Property, plant, and equipment are listed on the balance sheet at

A) expected future value.
B) fair value.
C) historical cost plus or minus holding gains or losses.
D) cost less accumulated depreciation.

Question 24

Under IFRS, which of the following must be expensed?

A) maintenance only
B) repairs only
C) rearrangements only
D) maintenance, repairs, and rearrangements

Question 25

Which of the following terms is not a common alternative for the term "property, plant, and equipment?"

A) fixed assets
B) operational assets
C) plant assets
D) capital investments

Question 26

Roberts Corporation purchased some equipment by issuing a $20,000 non-interest-bearing, four-year note when interest rates were 8%. Actuarial information for 8% and four periods follows:
Future amount of 1 $\quad$ $\quad$ 1.360
Present value of 1 $\quad$ $\quad$ $\quad$ 0.735
In the entry to record this purchase, there would be a

A) $20,000 debit to Equipment.
B) $5,300.00 credit to Discount on Notes Payable.
C) $27,210.88 credit to Notes Payable.
D) $14,700.00 debit to Equipment.

Question 27

Laramy purchases a new machine by issuing a $21,000 three-year note. The company will pay off the obligation by paying $7,000 at the end of each year. The market rate for obligations of this type is 8%. Actuarial information for three periods follows:

What is the capitalizable cost of the machine?

A) $54,119.04
B) $21,000.00
C) $18,039.68
D) $16,670.48

Question 28

Shane Corporation purchased for $450,000 a tract of land on which was located a warehouse and an office building. The following data were collected concerning the property:

What are the appropriate amounts that Shane should record for the land, warehouse, and office building, respectively?

A) land, $ 70,000? warehouse, $80,000? office building, $150,000
B) land, $100,000? warehouse, $80,000? office building, $220,000
C) land, $100,000? warehouse, $80,000? office building, $270,000
D) land, $112,500? warehouse, $90,000? office building, $247,500

Question 29

Which of the following is a major difference between IFRS and GAAP regarding valuation of property, plant, and equipment?

A) IFRS allow valuation increases to be recorded in certain circumstances, but GAAP does not permit increases.
B) IFRS and GAAP differ greatly on recognition of gains and losses from nonmonetary exchanges.
C) IFRS require capitalization of all repairs and maintenance while GAAP does not.
D) IFRS allocate lump-sum purchase costs based on relative book values rather than relative market values.

Question 30

The Roger's Company incurred the following costs in the acquisition factory production equipment: Invoice price $\quad$ $\quad$ $2,675
Purchase discount lost $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 75
Freight-in $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 400
Installation $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 750
Cost of trial runs $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 150
What is the capitalizable cost of the equipment?

A) $4,050
B) $3,900
C) $3,825
D) $2,675

Question 31

Excise taxes to be paid on the purchase of factory equipment would be included in which of the following accounts?

A) Equipment
B) Deferred Taxes
C) Excise Tax Expense
D) Accumulated Depreciation−Equipment

Question 32

The Jacob Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $500,000. At the time of acquisition, Jacob paid $20,000 to have the assets appraised. The appraisal disclosed the following values:
Land $\quad$ $\quad$ $100,000
Buildings $\quad$ 200,000
Equipment $\quad$ 300,000
What costs should be assigned to the buildings?

A) $166,667
B) $173,333
C) $200,000
D) $260,000

Question 33

The president of Christmas Corporation donated a building to Tuesday Corporation. The building had an original cost of $675,000, a book value of $255,000, and a fair market value of $475,000. The journal entry by Tuesday Corporation to record this donation will include a

A) debit Building for $255,000 and credit Gain for $255,000.
B) debit Building for $475,000 and credit Gain for $200,000.
C) debit Building for $475,000 and credit Gain for $475,000.
D) debit Building for $675,000 and credit Gain for $200,000.

Question 34

According to GAAP, interest must be capitalized for

A) assets that are ready for use.
B) assets constructed for a firm's own use.
C) assets that are not being used in the earning activities of the company.
D) inventories that are produced in large quantities on a repetitive basis.

Question 35

Galford Company purchased real estate for $480,000, plus closing costs and fees of $60,000. The property which included land, building, and land improvements was appraised for $600,000, as follows:
Building $\quad$ $\quad$ $\quad$ $300,000
Land $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 180,000
Land improvements $\quad$ 120,000
The asset Building should be reported on Galford's balance sheet at a value of

A) $300,000
B) $270,000
C) $240,000
D) $200,000

Question 36

Morris recently purchased a building and the tract of land on which it is located. Morris plans to raze the building immediately and to erect a new building on the site. The appraised value of the original building should be

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

Question 37

John's uncle donated a truck to his company, John's Corporation. The truck had an original cost of $95,000, a book value of $40,000, and a fair value of $60,000. The journal entry by John's Corporation to record this donated asset will include a

A) debit Truck for $60,000 and credit Gain for $20,000.
B) debit Truck for $60,000 and credit Gain for $60,000.
C) debit Truck for $95,000 and credit Gain for $35,000.
D) debit Truck for $95,000 and credit Gain for $95,000.

Question 38

Bob's Excavating purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods follows:


At the date of purchase, what amount should be debited to Equipment?

A) $8,000.00
B) $7,587.66
C) $6,716.96
D) $6,350.66

Question 39

During 2014, Garnet Corporation purchased three pieces of equipment at an auction for the lump sum of $200,000. It cost Garnet $40,000 to have the equipment delivered and installed. The equipment was appraised at the following fair values:
Machine 1 $\quad$ $120,000
Machine 2 $\quad$ 105,000
Machine 3 $\quad$ 75,000
Machine 2 should be recorded on Garnet's books at

A) $120,000
B) $105,000
C) $84,000
D) $70,000

Question 40

Costs incurred during this period are listed below: Legal fees for title investigation and purchase contract $\quad$ 5,000
Demolition of old building $\quad$ $\quad$ $\quad$ $ 15,000
Architect's fees $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 42,000
Construction costs $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 1,500,000
Rupport should record the cost of the land and the cost of the new building, respectively, as

A) $70,000 and $1,542,000
B) $50,000 and $1,562,000
C) $55,000 and $1,557,000
D) $65,000 and $1,547,000

Question 41

Exhibit 10-1
Two construction companies, Dakota and Carolina, are in the construction business. Each owns a tract of land being held for development, but each company believes that the other's land is better suited to enhance the success of each planned development. Accordingly, they agree to exchange their land and have the following information:


The exchange of land was made, and based on the difference in appraised fair value, Carolina paid $50,000 cash to
Dakota.

-Refer to Exhibit 10-1. For financial reporting purposes, Dakota should recognize a gain on this exchange in the amount of

A) $0
B) $50,000
C) $100,000
D) $200,000

Question 42

Property acquired through donation is recorded at

A) its book value.
B) its fair value.
C) its cost.
D) zero.

Question 43

Romney Company exchanged one business automobile for a replacement automobile. The old automobile had an original cost of $40,000, a book value of $16,000, and a fair value of $24,000 when exchanged. In addition, Romney paid $9,000 cash to acquire the replacement automobile. The list price of the replacement automobile was $45,000. The replacement will help generate significantly greater cash flows in the business. At what amount should the replacement automobile be recorded for financial accounting purposes?

A) $24,000
B) $30,000
C) $33,000
D) $35,000

Question 44

Samos, Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay $75,000 at year-end for each of the next three years. The plant assets should be valued at

A) present value of a $75,000 annuity for three years discounted at the bank prime interest rate.
B) $225,000.
C) present value of a $75,000 annuity for three years discounted at the market interest rate.
D) $225,000 plus imputed interest.

Question 45

A plant site donated by a city to Pluto Company, which plans to open a new factory, should be recorded on Pluto's books at

A) the out-of-pocket cost of taking title to it.
B) the fair value of the property.
C) zero value, but footnoted.
D) the value assigned to it by the company's directors.

Question 46

Mary Co. exchanged a piece of equipment that had cost $40,000 now 75% depreciated) for a truck with a current appraised value of $18,000. Mary Co. gave the other company the piece of equipment, which had a fair value of $12,000 at the time of the exchange, and $10,000 cash. Mary Co. should record

A) a $8,000 loss
B) a $4,000 loss
C) a $2,000 loss
D) a $2,000 gain

Question 47

When exchanging nonmonetary assets

A) boot must be associated with the transaction in order to recognize a gain or loss.
B) recognized gain or loss can occur depending on the fair value of the asset surrendered and the fair value of the asset received.
C) a loss can be recognized only when the fair value of the asset received plus boot is greater than the book value of the asset surrendered.
D) recognized gain or loss can occur depending on the book value of the asset surrendered and the fair value of the asset surrendered.

Question 48

Reba Company received $60,000 in cash and used equipment with a fair value of $160,000 from Fargo Corporation in exchange for Reba's existing equipment, which had a fair value of $210,000 and an undepreciated cost of $170,000 recorded on its books. The transaction was undertaken because Reba was revising its market strategy and planned to reduce the use of this type of equipment in its production. How much gain should Reba recognize on this exchange and at what value should the acquired equipment be recorded, respectively?

A) Gain - $10,000 and Equipment - $150,000
B) Gain - $10,000 and Equipment - $160,000
C) Gain - $40,000 and Equipment - $150,000
D) Gain - $40,000 and Equipment - $160,000

Question 49

Coco Services exchanged an asset with fair value of $12,000 and a cost of $24,000 now 40% depreciated) for a nonmonetary asset with a fair value of $12,000. In addition, Coco received $2,000 boot. In the entry to record this exchange, Coco should record

A) a $400 loss.
B) a $400 gain.
C) no gain or loss.
D) a $2,400 loss.

Question 50

The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the exchange, the old forklift had a market value of $6,000. In addition, Retread paid $18,000 cash for the new forklift, which had a list price of $25,000. It is expected that future cash flows will not change. At what amount should Retread record the new forklift for financial accounting purposes?

A) $23,000
B) $24,000
C) $20,000
D) $25,000

Question 51

Exhibit 10-1
Two construction companies, Dakota and Carolina, are in the construction business. Each owns a tract of land being held for development, but each company believes that the other's land is better suited to enhance the success of each planned development. Accordingly, they agree to exchange their land and have the following information:


The exchange of land was made, and based on the difference in appraised fair value, Carolina paid $50,000 cash to
Dakota.

-Refer to Exhibit 10-1. For financial reporting purposes, Carolina should recognize a gain on this exchange in the amount of

A) $ 0
B) $50,000
C) $100,000
D) $200,000

Question 52

On August 28, 2016, Saturn Drilling Services purchased a machine with a contract price of $400,000 and cash terms of 2/10, n/30. The company paid $8,000 in transportation costs and $8,000 for installation. Sales taxes of $22,000 were paid on the invoice amount. The machine should be recorded as a plant asset in the amount of

A) $400,000.
B) $422,000.
C) $428,000.
D) $430,000.

Question 53

Kelly Company exchanged inventory items that cost $47,000 and normally sold for $75,000 for a new delivery truck with a list price of $77,000. The delivery truck should be recorded on Kelly's books at

A) $47,000
B) $75,000
C) $77,000
D) $79,000

Question 54

On April 1, 2016, Bennett Corporation purchased a new machine on a deferred payment basis. A down payment of $5,000 was made and 10 monthly installments of $14,000 each are to be made beginning on May 1, 2016. The cash equivalent price of the machine was $130,000. Bennett incurred and paid installation costs amounting to $6,000. The amount to be capitalized as the cost of the machine is

A) $130,000
B) $136,000
C) $145,000
D) $151,000

Question 55

Exhibit 10-1
Two construction companies, Dakota and Carolina, are in the construction business. Each owns a tract of land being held for development, but each company believes that the other's land is better suited to enhance the success of each planned development. Accordingly, they agree to exchange their land and have the following information:


The exchange of land was made, and based on the difference in appraised fair value, Carolina paid $50,000 cash to
Dakota.

-Refer to Exhibit 10-1. After the exchange, Carolina should record its newly acquired land on its books at

A) $300,000
B) $400,000
C) $450,000
D) $500,000

Question 56

Camp, Inc. exchanged an old truck that cost $30,000 now 50% depreciated) with a current fair value of $18,000 for equipment with an appraised value of $25,000. In addition, Camp paid cash of $6,000. At what value should Camp record the new equipment?

A) $25,000
B) $24,000
C) $22,000
D) $21,000

Question 57

Robertson traded in an old plant asset for a newer model that would be more productive and efficient. Data relative to the old and new plant assets follow:
Old Plant Asset
Original cost $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $10,000
Accumulated depreciation of $\quad$ $\quad$ 7,000
Fair value $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 2,000

New Plant Asset
List price $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ 13,000

Robertson paid $10,500 cash in the trade. What should be the cost of the new plant asset for financial accounting purposes?

A) $12,000
B) $12,500
C) $13,500
D) $13,000

Question 58

Exhibit 10-1
Two construction companies, Dakota and Carolina, are in the construction business. Each owns a tract of land being held for development, but each company believes that the other's land is better suited to enhance the success of each planned development. Accordingly, they agree to exchange their land and have the following information:


The exchange of land was made, and based on the difference in appraised fair value, Carolina paid $50,000 cash to
Dakota.

-Refer to Exhibit 10-1. After the exchange, Dakota should record its newly acquired land on its books at

A) $300,000
B) $400,000
C) $450,000
D) $500,000

Question 59

Maxa Marina exchanged a boat with a cost of $80,000 now 75% depreciated) and fair value of $25,000 for another boat with a current fair value of $27,000. No cash was paid or received. The new boat will perform the same function as the old boat, but cash flows are expected to last for 5 years longer with the new boat. At what value should Maxa record the new boat?

A) $27,000
B) $25,000
C) $20,000
D) $2,000

Question 60

Richards, Inc. exchanged a piece of equipment with an original cost of $82,000, accumulated depreciation to date of $40,000, and a fair value of $46,000 for a similar piece of equipment. Cash flows are not expected to change significantly. The newly acquired equipment had a book value of $40,000 and a fair market value of $41,000. At what value should Richard record the newly-acquired equipment?

A) $40,000
B) 41,000
C) $42,000
D) $46,000

Question 61

The Nathan Jacob's Company paid $450,000 to acquire land, building, and equipment. At the time of the acquisition
Nathan paid $15,000 to have the property appraised. The following values were determined from the appraisal: land,
$125,000? building, $235,000? and equipment, $150,000.
Required:
1) What cost should Nathan Jacob's assign to the land, buildings, and equipment, respectively? round percentages to whole percents)
2) Provide the journal entry to record the acquisition on the books of Nathan Jacob's.

Question 62

According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which of the following situations?

A) when the asset is inventory that is routinely manufactured in large quantities on a repetitive basis
B) when an asset is used in other than the earning activities of the firm
C) when an asset is ready for its intended use
D) when an asset is being constructed for a firm's own use

Question 63

Two alternative methods of accounting for the cost of oil and gas properties have been widely used. The method that capitalizes all costs associated with all wells is the

A) successful-efforts method.
B) full-cost method.
C) variable-cost method.
D) specific-cost method.

Question 64

The costs of drilling an unsuccessful well are expensed under

A) the successful-efforts method.
B) the full-cost method.
C) both the successful-efforts method and the full-cost method.
D) neither the successful-efforts method nor the full-cost method.

Question 65

On January 1, 2016, Olvert Corp. signed a contract to have Bob's Builders construct a distribution center at a cost of $10,000,000. It was estimated that it would take two years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $10,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 6%. During 2017, Tolvin made the following construction-related expenditures:

What amount should Tolvin report as capitalized interest at December 31, 2017?

A) $621,000
B) $300,000
C) $207,000
D) $150,000

Question 66

Concerning current accounting for oil and gas properties, which statement is true?

A) The successful-efforts method must be used.
B) The reserve-recognition method must be used.
C) Either the successful-efforts method or the full-cost method may be used.
D) The full-cost method must be used.

Question 67

On January 1, 2011, Barton Sinks purchased a metal-bending machine for $4,000,000 with an expected useful life of 10 years with no residual value. The machine is depreciated on a straight-line basis. On January 1, 2016, the
Company overhauled the machine at a cost of $1,000,000. This extended the expected useful life by 3 years? What is depreciation expense on the machine for 2016, still assuming zero residual value?

A) $600,000
B) $525,000
C) $500,000
D) $375,000

Question 68

Which of the following events is most appropriately recorded as a reduction to accumulated depreciation?

A) an addition that increases the anticipated benefits of the old asset
B) an improvement that extends an asset's useful life
C) an improvement that increases the asset's expected benefits beyond that originally expected
D) a replacement of a better asset for the one currently used

Question 69

On January 1, 2017, Tolvin Company signed a contract to have Bob's Builders construct a office building at a cost of $30,000,000. It was estimated that it would take four years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $20,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 8%. During 2017, Tolvin made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $6,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Tolvin realized investment income of $650,000. What amount should Tolvin report as capitalized interest at December 31, 2017?

A) $ 400,000
B) $ 480,000
C) $ 650,000
D) $1,600,000

Question 70

In 2016, Go Oil Company incurred costs of $8 million drilling oil wells. Thirty percent of the drilling resulted in oil being found. The rest of the drilling was unsuccessful. If Go uses the successful-efforts method of accounting, the oil and gas properties will be valued on the December 31, 2016 balance sheet at

A) $8,000,000.
B) $4,900,000.
C) $4,200,000.
D) $2,400,000.

Question 71

On January 1, 2016, Basker Research signed a contract to have Bob's Builders construct a laboratory building at a cost of $20,000,000. It was estimated that it would take four years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $20,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 7%. During 2017, Tolvin made the following construction-related expenditures:


What amount should Tolvin report as capitalized interest at December 31, 2017?

A) $ 70,000
B) $ 84,000
C) $ 152,000
D) $1,400,000

Question 72

Under GAAP, which one of the following types of costs should not be capitalized?

A) rearrangements
B) routine maintenance
C) replacements
D) additions

Question 73

During 2014, the Tidel Company completed the following transactions related to its property, plant, and equipment accounts:
a. On March 18, Tidel paid $480,000 for land, buildings, and equipment in a lump-sum purchase. An appraisal that cost Tidel $10,000 revealed fair market values of $200,000 for the land, $150,000 for the buildings, and $150,000 for the equipment.
b. On August 11, Tidel issued 20,000 shares of its $10 par value common stock in exchange for some equipment. The equipment's fair market value is estimated at $360,000 by an outside appraisal. On the date of the exchange, the stock was being actively traded at $17 per share on a major stock exchange.
Required:
Prepare the necessary journal entry to properly record each transaction.

Question 74

Which one of the following statements is true?

A) If a plant asset is self-constructed for less than it would cost to purchase, a profit should be recorded upon the completion of the construction.
B) When property, plant, or equipment is acquired through donation, no entry is recorded.
C) Development stage enterprises need not report losses before sales are made.
D) Interest cannot be capitalized if a loan is taken when an asset is substantially complete and ready for its intended use.

Question 75

All of the following are arguments in favor of including only the incremental fixed overhead costs in the cost of a self-constructed asset, except that the

A) cost of the asset is the additional cost incurred to produce it.
B) overhead would be incurred whether or not the construction took place.
C) asset cost will more closely approximate the cost of a purchased asset.
D) decision to construct the asset should be based on the total incremental cost and not include allocated fixed overhead.

Question 76

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

A) recorded as an expense.
B) debited to Accumulated Depreciation.
C) capitalized in the machine account.
D) allocated between Accumulated Depreciation and the machine account.

Question 77

On January 1, 2016, Randolf Company signed a contract to have Rory Associates construct a manufacturing facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2016, to finance the construction cost, Randolf borrowed $14,000,000 payable in seven annual installments of
$2,000,000 plus interest at the rate of 9%. During 2016, Randolf made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Randolf realized investment income of $330,000. What amount should Randolf report as capitalized interest at December 31, 2016?

A) $ 0
B) $ 270,000
C) $ 510,000
D) $1,260,000

Question 78

Costs incurred by Mills Company that relate to its property, plant, and equipment assets might be recorded in one of the five following accounts:
a. an expense account
b. Accumulated Depreciation
c. Land
d. Building
e. Equipment
Required:
For each of the costs identified below, indicate the type of account in which the cost should be recorded by placing the appropriate letter in the space provided.
____ 1. The legal fees associated with the acquisition of land.
____ 2. The cost of replacing the engine in a truck when the cost of the old engine is not known.
____ 3. The cost of replacing an oil furnace with an electric furnace book value of the oil furnace is known).
____ 4. The cost of a new addition to a warehouse that will be used to store inventory.
____ 5. The cost of renovating a recently purchased ten-year-old office building.
____ 6. The materials and labor costs incurred in installing a new piece of equipment.
____ 7. The costs of tuning, lubricating, and tire rotation on a fleet of delivery trucks.
____ 8. The additional costs in the construction of a building due to a small fire that occurred during the construction period.

Question 79

During 2014, Red Company acquired a new piece of equipment for its manufacturing process. In order to purchase the equipment, Red made a down payment of $50,000 and issued a $200,000 five-year, 7% note. The annual payment of principal and interest was to be $48,778. The market rate of interest for obligations of this kind is 12%. The present value factor for an ordinary annuity of 5 years at 12% is 3.604776.
Required:
a. Prepare the journal entry to record the acquisition.
b. Assume that the equipment had an established cash price of $220,000. Prepare the journal entry to record the transaction under this additional assumption.

Question 80

Which of the following costs incurred subsequent to the acquisition of a machine would be appropriately accounted for by debiting the accumulated depreciation account related to the machine?

A) the cost of cleaning and lubricating the machine.
B) The cost of overhauling and extending the life of the machine.
C) the cost of moving the machine to another manufacturing plant.
D) the cost of a new attachment to the machine that provides for more output per unit of time.