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

Question 1

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

Answer 1

False

Question 2

Assets acquired through government grants are generally recorded at fair value.

Answer 2

True

Question 3

When a company acquires an asset through a government grant, the asset's cost is zero so the cost recorded is the direct cost, such as legal fees, incurred.

Answer 3

False

Question 4

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

Question 5

IFRS requires the income approach to account for assets received through government grants.

Question 6

Assets classified as property, plant, and equipment must be both long-term in nature and possess physical substance.

Question 7

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

Question 8

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

Question 9

A government grant generally subsidizes a company by transferring resources to that company.

Question 10

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

Question 11

Assets classified as property, plant, and equipment can be either acquired for use in operations, or acquired for resale.

Question 12

When an asset acquired through a government grant is recorded on the books, equity will increase by the cost of the asset.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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 20

Under IFRS, all gains on non-monetary exchanges are recognized, regardless of whether the transaction has commercial substance or not.

Question 21

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

A)Assets under construction for a company'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 22

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 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 23

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 24

Fences and parking lots are reported on the statement of financial position as

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

Question 25

Companies always treat gains or losses from an involuntary conversion as part of discontinued operations.

Question 26

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 27

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 28

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

Question 29

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 30

One way of recognizing a government grant is to deduct the grant from the carrying amount of the assets received from the grant.

Question 31

The fair value of an asset acquired through a government grant can be recorded as deferred revenue and recognized as income over the life of the asset.

Question 32

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 33

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 34

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 35

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 36

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 answer choices are correct.

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)Long-term in nature

Question 38

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 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 39

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

A)Possesses physical substance
B)Acquired for use in operations
C)Long-term in nature
D)All of these are major characteristics of a plant asset.

Question 40

Costs incurred subsequent to the acquisition of an asset are capitalized if it is probable that the company will obtain future economic benefits.

Question 41

Which of the following non-monetary exchange transactions has commercial substance?

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 42

Interest revenue earned on specific borrowings for qualifying assets

A)reduces the cost of the qualifying asset.
B)reduces interest expense reported on the income statement.
C)increases equity in the period earned.
D)None of these answer choices are correct.

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 income and expense 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 retained earnings account.

Question 44

When a plant asset is acquired by issuance of ordinary shares, the cost of the plant asset is properly measured by the

A)par value of the shares.
B)stated value of the shares.
C)book value of the shares.
D)fair value of the shares.

Question 45

The cost of a non-monetary asset acquired in exchange for another non-monetary 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 46

When an asset acquired through government grants is recorded using the capital approach,

A)assets and equity increase by the fair value of the asset.
B)assets and liabilities increase by the fair value of the asset.
C)assets and equity increase by the cost of the asset.
D)assets and liabilities increase by the cost of the asset.

Question 47

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 recorded as interest revenue.
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 48

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 49

Which of the following is not true with regard to the accounting for government grants?

A)Assets may be recorded at fair value or nominal cost.
B)Companies may use either the capital or income approach to account for the asset and the grant.
C)Companies may apply the income approach either by recording the grant as deferred revenue or as an adjustment to the asset.
D)None of these answer choices are correct.

Question 50

The account Deferred Grant Revenue is classified as

A)a separate component of shareholders' equity.
B)a non-current liability.
C)Other income and expense.
D)Revenue.

Question 51

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 52

When cash is involved in an exchange having commercial substance.

A)gains or losses are recognized in their entirety.
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 53

If the cost of the asset is recorded net of the government grant,

A)equity will likely be overstated.
B)liabilities will likely be overstated.
C)assets will likely be understated.
D)revenues will likely be understated.

Question 54

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 answer choices are correct.

Question 55

Which of the following is required by IFRS?

A)Resources acquired through government grants must be recorded at cost.
B)Resources acquired through government grants must be recorded at fair value.
C)Resources acquired through government grants must be accounted for using the capital approach.
D)Resources acquired through government grants must be accounted for using the income approach.

Question 56

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 answer choices are correct.

Question 57

Which of the following is true regarding the alternative ways to apply the income approach to accounting of resources acquired through government grants?

A)expenses will be higher and net income lower if the grant is recorded as deferred revenue.
B)expenses will be higher and net income lower if the grant is accounted for as an adjustment to the asset.
C)depreciation expense will be higher if the grant is recorded as deferred revenue, but net income will be the same under the two alternatives.
D)depreciation expense will be higher if the grant is recorded as an adjustment to the asset, but net income will be the same under the two alternatives.

Question 58

If a government entity provides an interest free loan to a company and the company accounts for the grant using the deferred revenue approach,

A)no interest expense will be recorded.
B)the interest element is initially recorded as Discount on Notes Payable.
C)the interest element is amortized to Deferred Grant Revenue over the term of the loan.
D)All of these answer choices are correct.

Question 59

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 increase 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 60

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 61

When a closely held corporation issues preference shares for land, the land should be recorded at the

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

Question 62

Accounting recognition should be given to the gain realized on a non-monetary exchange of plant assets except when the exchange has

A)no commercial substance and additional cash is paid.
B)commercial substance and additional cash is received.
C)commercial substance and additional cash is paid.
D)All of these cause recognition of a gain.

Question 63

For a non-monetary 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)a gain when the exchange has no commercial substance.
D)a loss when the exchange has commercial substance.

Question 64

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 machinery account.
D)allocated between accumulated depreciation and the machinery account.

Question 65

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 is reported in other income and expense on the income statement.
C)The gain or loss from an involuntary conversion should not be recognized when the company reinvests in replacement assets.
D)None of these answer choices are false.

Question 66

An expenditure made in connection with a machine being used by a company 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 67

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

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

Question 68

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 69

Which of the following is a capital expenditure?

A)Payment of an account payable
B)Retirement of bonds payable
C)Payment of income taxes
D)None of these answer choices are correct

Question 70

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