Deck 10: Operational Assets: Acquisition and Disposition

Question 1

Costs incurred after discovery of a natural resource but before production begins are reported as expenses of the period in which the expenditures are made.

Answer 1

False

Question 2

Operational assets are:

A)Created by the normal operation of the business and include accounts receivable.
B)All assets except cash and cash equivalents.
C)Current and long-term assets used in the production of either goods or services.
D)Long-term revenue-producing assets.

Answer 2

D

Question 3

Under current GAAP, fair value is used to measure the components of all nonmonetary exchanges.

Answer 3

False

Question 4

The capitalized cost of equipment excludes:

A)Maintenance.
B)Sales tax.
C)Shipping.
D)Installation.

Question 5

A distinguishing characteristic of intangible assets is the degree of uncertainty about when or if they will provide future benefits.

Question 6

The exclusive right to benefit from a creative work, such as a film, is a:

A)Patent.
B)Copyright.
C)Trademark.
D)Franchise.

Question 7

The exclusive right to display a symbol of product identification is a:

A)Patent.
B)Copyright.
C)Trademark.
D)Franchise.

Question 8

Productive assets that are physically consumed in operations are:

A)Equipment.
B)Land.
C)Land improvements.
D)Natural resources.

Question 9

The fair value of the asset, debt or equity securities given in a noncash acquisition should determine the value of the consideration received.

Question 10

The FASB's required accounting treatment for research and development costs often understates both net income and assets.

Question 11

An exclusive 20-year right to manufacture a product or use a process is a:

A)Patent.
B)Copyright.
C)Trademark.
D)Franchise.

Question 12

Demolition costs to remove an old building from land purchased as a site for a new building are considered part of the cost of the new building.

Question 13

The initial cost of an operational asset includes all the identifiable expenditures necessary to bring the asset to its desired condition and location for use.

Question 14

The capitalization period for a self-constructed asset ends either when the asset is substantially complete and ready for use or when interest costs no longer are being incurred.

Question 15

The acquisition costs of tangible operational assets do not include:

A)The ordinary and necessary costs to bring the asset to its desired condition and location for use.
B)The net invoice price.
C)Legal fees, delivery charges, installation, and any applicable sales tax.
D)Maintenance costs during the first 30 days of use.

Question 16

Operational assets are long-term, revenue producing assets.

Question 17

The relative fair values are used to determine the valuation of individual assets acquired in a lump-sum purchase.

Question 18

The successful efforts method of accounting for oil and gas exploration costs allows costs incurred in searching for oil and gas within a large geographical area to be capitalized.

Question 19

Goodwill is:

A)Amortized over the greater of its estimated life or forty years.
B)Only recorded by the seller of a business.
C)The excess of the fair value of a business over the fair value of all net identifiable assets.
D)None of these.

Question 20

Sales tax paid on equipment acquired for use in the business is not capitalized.

Question 21

Vijay Inc. purchased a 3-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase date. The capitalized cost of the land is:

A)$336,400.
B)$336,150.
C)$334,650.
D)$201,150.

Question 22

The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:

A)$ 8.2 million
B)$14.7 million
C)$ 18 million
D)$ 30 million The present value of the expected cash flows, that is, 0.81630 [(.60 $10 million) + (.40 $30 million)], which is $14,693,400 or $14.7 million (rounded).

Question 23

The fixed-asset turnover ratio provides:

A)The rate of decline in asset lives.
B)The rate of replacement of fixed assets.
C)The amount of sales generated per dollar of fixed assets.
D)The decline in book value of fixed assets compared to capital expenditures.

Question 24

Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:

A)$455,000.
B)$446,000.
C)$437,000.
D)$435,000.

Question 25

Assets acquired in a lump-sum purchase are valued based on:

A)Their assessed valuation.
B)Their relative fair values.
C)The present value of their future cash flows.
D)Their cost plus the difference between their cost and fair values.

Question 26

The asset retirement obligation (rounded) that should be reported on MMC's balance sheet one year after the extraction activities begin is:

A)$0
B)$14.7 million
C)$15.7 million
D)$19.3 million $14.7 million 1.07 = $15.7 million (rounded).

Question 27

Lake Incorporated purchased all of the outstanding stock of Huron Company paying $950,000 cash. Lake assumed all of the liabilities of Huron. Book values and fair values of acquired assets and liabilities were: Lake would record goodwill of:

A)$ 0.
B)$ 75,000.
C)$445,000.
D)$250,000

Question 28

Donated assets are recorded at:

A)Zero (memo entry only).
B)The donor's book value.
C)The donee's stated value.
D)Fair value.

Question 29

Asset retirement obligations:

A)Increase the balance in the related asset account.
B)Are measured at fair value in the balance sheet.
C)Are liabilities associated with the restoration of an operational asset.
D)All of these are correct.

Question 30

Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were: Juliana would record goodwill of:

A)$1,180,000.
B)$ 600,000.
C)$ 880,000.
D)$ 100,000.

Question 31

The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2009. The fixed-asset turnover ratio for 2009 was 4.0 and sales for the year totaled $1,480,000. Net fixed assets at the end of 2008 were:

A)$470,000.
B)$370,000.
C)$420,000.
D)None of these.$1,480,000 Average fixed assets = 4.0 Average fixed assets = $370,000, therefore net fixed assets at the end of 2008 must be $420,000 [($320,000 + x) 2] = $370,000; $320,000 + x = $740,000; x = $420,000

Question 32

The basic principle used to value an asset acquired in a nonmonetary exchange is to value it at:

A)Fair value of the asset(s) given up.
B)The book value of the asset given plus any cash or other monetary consideration received.
C)Fair value or book value, whichever is smaller.
D)Book value of the asset given.

Question 33

If a company incurs disposition obligations as a result of acquiring an asset:

A)The company recognizes the obligation at fair value when the asset is acquired.
B)The company recognizes the obligation at fair value when the asset is disposed.
C)The company records the difference between the fair value of the asset and the obligation when the asset is acquired.
D)None of these.

Question 34

Cantor Corporation acquired a manufacturing facility on four acres of land for a lump-sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be:

A)$4,500,000, $3,000,000, $2,500,000.
B)$4,500,000, $3,000,000, $500,000.
C)$3,600,000, $2,400,000, $2,000,000.
D)None of these.

Question 35

Assets acquired under multi-year deferred payment contracts are:

A)Valued at their fair value on the date of the final payment.
B)Valued at the present value of the payments required by the contract.
C)Valued at the sum of the payments required by the contract.
D)None of these.

Question 36

On July 1, 2009, Larkin Co. purchased a $400,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2009 as follows: What would be the balance in the land account as of December 31, 2009?

A)$400,000.
B)$475,000.
C)$477,000.
D)$487,000.

Question 37

When selling operational assets for cash:

A)The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.
B)The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
C)The seller recognizes losses, but not gains.
D)None of these.

Question 38

Which of the following does not pertain to accounting for asset retirement obligations?

A)They accrete (increase over time) at the company's credit-adjusted risk-free rate.
B)They must be recognized according to SFAS 143.
C)Statement of Financial Accounting Concepts No.7 is applied when adjusting cash flow obligations for uncertainty.
D)All of these pertain to accounting for asset retirement obligations.

Question 39

Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be:

A)$1,300,000, $780,000, $520,000.
B)$1,200,000, $720,000, $480,000.
C)$720,000, $1,200,000, $480,000.
D)None of these.

Question 40

Grab Manufacturing Co. purchased a ten-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the ten-ton draw press is:

A)$171,000.
B)$183,600.
C)$187,600.
D)$185,760.

Question 41

Interest capitalized for 2009 was:

A)$48,000.
B)$42,000.
C)$60,000.
D)$36,000.$300,000 (determined above) 12% = $36,000

Question 42

In Case B, Pensacola would record a gain/(loss) of:

A)$ 4,000.
B)$ (4,000).
C)$ (10,000).
D)None of these is correct.

Question 43

Interest is eligible to be capitalized as part of an asset's cost, rather than being expensed immediately, when:

A)The interest is incurred during the construction period of the asset.
B)The asset is a discrete construction project for sale or lease.
C)The asset is self-constructed, rather than acquired.
D)All of these are correct.

Question 44

In Case A, Grand Forks would record the new equipment at:

A)$65,000.
B)$75,000.
C)$50,000.
D)$60,000.

Question 45

In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:

A)The fair value of the equipment received exceeds the book value of the equipment received.
B)The book value of the equipment received exceeds the fair value of the equipment surrendered.
C)The fair value of the equipment surrendered exceeds the book value of the equipment surrendered.
D)None of these is correct.

Question 46

Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:

A)$26,000.
B)$ 8,000.
C)$(8,000).
D)$ 0.

Question 47

Interest capitalized for 2010 was:

A)$104,625.
B)$ 86,805
C)$ 87,875.
D)$ 67,500.

Question 48

Assuming that the exchange lacks commercial substance, Alamos would record a gain/(loss) of:

A)$26,000.
B)$ 8,000.
C)$(8,000).
D)$ 0.

Question 49

Interest may be capitalized:

A)On routinely manufactured goods as well as self-constructed assets.
B)On self-constructed assets from the date an entity formally adopts a plan to build a discrete project.
C)Whether or not there is specific borrowing for the construction.
D)Whether or not there are actual interest costs incurred.

Question 50

Average accumulated expenditures for 2010 was:

A)$1,300,000.
B)$1,236,000.
C)$1,200,000.
D)$1,036,000.

Question 51

In computing capitalized interest, average accumulated expenditures:

A)Is the arithmetic mean of all construction expenditures.
B)Is determined by time-weighting individual expenditures made during the asset construction period.
C)Is multiplied by the company's most recent financing rates.
D)All of these are correct.

Question 52

In Case A, Pensacola would record the new equipment at:

A)$68,000.
B)$63,750.
C)$67,250.
D)$80,000.

Question 53

Interest is not capitalized for:

A)Assets that are constructed as discrete projects for sale or lease.
B)Assets constructed for a company's own use.
C)Inventories routinely and repetitively produced in large quantities.
D)Interest is capitalized for all of these items.

Question 54

In computing the capitalized interest for 2009, Crocus' average accumulated expenditures are:

A)$ 46.30 million
B)$103.54 million
C)$122.30 million
D)$124.25 million The correct answer is: [from 2008  ($77.95 million 10/10) + ($30 million 9/10) + ($21 million 7/10) + ($20 million 2/10) + ($6 million 1/10) = $124.25 million.

Question 55

Average accumulated expenditures for 2009 was:

A)$300,000.
B)$350,000.
C)$500,000.
D)$400,000.

Question 56

In Case B, Grand Forks would record a gain/(loss) of:

A)$ 5,000
B)$ 3,000
C)$(5,000)
D)$(3,000)

Question 57

The cost of self-constructed fixed assets should:

A)Include allocated indirect costs just as they are for production of products.
B)Include only incremental indirect costs.
C)Include only specifically identifiable indirect costs.
D)Not include indirect costs.

Question 58

What is the amount of interest that Crocus should capitalize in 2009, using the specific interest method (rounded to the nearest thousand dollars)?

A)$7,248,000 (rounded)
B)$7,283,000 (rounded)
C)$8,740,000 (rounded)
D)None of these is correct.Of the average accumulated expenditures ($124.25 million from question 100), $70 million was financed at 6% for 10 months in 2009, and the remainder of $54.25 million was financed at 8% for that period.The total interest cost was: ($70 million .06 10/12) + ($54.25 million .08 10/12) = $7, 117,000 (rounded)

Question 59

What is the amount of interest that Crocus should capitalize in 2008, using the specific interest method?

A)$1.90 million
B)$1.95 million
C)$2.96 million
D)None of these is correct.Average expenditures for 2008: ($54 million 6/6) + $22 million 3/6) = $65 million.The interest is: $65 million .06 6/12 = $1.95 million.

Question 60

Average accumulated expenditures:

A)Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
B)Is computed as a simple average if all construction expenditures are made at the end of the period.
C)Are irrelevant if the company's total outstanding debt is less than total costs of construction.
D)All of these are true statements.

Question 61

Research and development expense for a given period includes:

A)The full cost of a newly acquired operational asset that has an alternative future use.
B)Depreciation on a research and development facility.
C)Research and development conducted on a contract basis for another entity.
D)Patent filing and legal costs.

Question 62

During 2009, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2009 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2009, what oil exploration expense would Longhorn charge for this activity in its 2009 income statement?

A)$ 0
B)$ 30 million
C)$ 70 million
D)$100 million Expense the dry holes $100 million (14/20) = $70 million

Question 63

On July 1, 2009, Jekel & Hyde Inc. purchased land and incurred other costs relative to the construction of a new warehouse. A summary of economic activities is listed below:
Required:
Indicate the accounts that would be affected by the above transactions and the resulting balance in each account. Apply the interest on the construction loan to the cost of the building only.

Question 64

Research and development (R&D) costs:

A)Generally pertain to activities that occur prior to the start of production.
B)May be expensed or capitalized, at the option of the reporting entity.
C)Must be capitalized and amortized.
D)None of these is correct.

Question 65

Show the journal entry to record Boston Beer's sale of property, plant, and equipment during 2007.

Question 66

What was the final cost of Dreamworld's warehouse?

A)$2,154,480.
B)$2,143,860.
C)$1,950,000.
D)$1,254,000.

Question 67

Use a T- account to show the balances and changes during 2007 in Boston Beer's: Property, Plant, and Equipment account and its Accumulated depreciation-Property, Plant, & equipment account.
($ in thousands)

Question 68

Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?

A)$ 30,000.
B)$ 40,000.
C)$ 90,000.
D)$140,000.

Question 69

Research and development costs for projects other than software development should be:

A)Expensed in the period incurred.
B)Expensed in the period they are determined to be unsuccessful.
C)Deferred pending determination of success.
D)Expensed if unsuccessful, capitalized if successful.

Question 70

Dreamworld's average accumulated expenditures for 2009 was:

A)$300,000.
B)$450,000.
C)$525,000.
D)$600,000.

Question 71

During 2009, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2009. Of the 15 wells drilled, 10 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2009, what amount of these exploration costs would remain on its 12/31/09 balance sheet?

A)$ 6 million
B)$14 million
C)$20 million
D)$42 million Capitalize the wells that are not dry holes: 5 $4 million = $20 million.Of this, 30% is depleted in 2009 and the rest remains on the balance sheet.

Question 72

Amortization of capitalized computer software costs is:

A)Either the percentage-of-revenue method or the straight-line method at the company's option.
B)The greater of the percentage-of-revenue method or the straight-line method.
C)The lesser of the percentage-of-revenue method or the straight-line method.
D)Based on neither the percentage-of-revenue nor the straight-line method.

Question 73

On August 15, 2009, Willis Inc. purchased all of the outstanding common stock of Bork Inc. paying $7,400,000 cash. The book values and fair values of Willis' assets and liabilities are listed below:
Required:
Prepare the journal entry to record the acquisition by Willis Inc.

Question 74

The average accumulated expenditures for 2010 by the end of the construction period was:

A)$1,950,000.
B)$1,554,000.
C)$1,254,000.
D)$ 975,000.

Question 75

Axcel Software began a new development project in 2008. The project reached technological feasibility on June 30, 2009 and was available for release to customers at the beginning of 2010. Development costs incurred prior to June 30, 2009 were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. 2010 revenues from the sale of the new software were $4,000,000 and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. 2010 amortization of the software development costs would be:

A)$ 0.
B)$ 350,000.
C)$1,840,000.
D)$ 560,000.Percentage of-revenue method: $4,000,000 ($4,000,000 + 6,000,000) = 40 % Straight-line method: ¼ or 25%
Amortization = $1,400,000 40% = $560,000

Question 76

Dreamworld's capitalized interest in 2009 was:

A)$72,000.
B)$63,000.
C)$54,000.
D)$36,000.$450,000 (determined above) 12% = $54,000

Question 77

During the current year, Brewer Company purchased all of the outstanding common stock of Miller Inc. paying $12,000,000 cash. The book values and fair values of Miller's assets and liabilities acquired are listed below:
Required:
Prepare the journal entry to record the acquisition by Brewer Company.

Question 78

Software development costs are capitalized if they are incurred:

A)Prior to point at which technological feasibility has been established.
B)After commercial production has begun.
C)After technological feasibility has been established but prior to the product availability date.
D)None of these is correct.

Question 79

In accounting for oil and gas exploration costs, companies:

A)May not use the full-cost method.
B)May use the successful efforts method.
C)May use the slippery slope method.
D)All of these are correct.

Question 80

Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point. Other costs connected with the purchase were as follows:
Required:
Determine the capitalized cost of the equipment.