Chapter 10 Flashcards
(20 cards)
RL Enterprises purchases a parcel of land. The previous owners of the land owe both back taxes and a lien on the property. When determining the cost of the land, what must RL include in its calculation?
A. The price paid for the land and the cost of the back taxes
B. The price paid for the land, the cost of the back taxes, and the cost of the lien
C. The price paid for the land
D. The cost of the back taxes and the cost of the lien
B
The price paid for the land, the cost of the back taxes, and the cost of the lien
Glendale Industries has a 10-year-old milling machine that has fully depreciated. In spite of this depreciation, the machine is still functional and Glendale still uses it on a daily basis. How should Glendale report the milling machine in the balance sheet?
A. Glendale should report its historical cost less depreciation as the machine’s value.
B. Glendale should report the value of products it produces annually as the machine’s value.
C. Glendale should report its salvage or scrap value as the machine’s value.
D. Glendale should exclude the machine from its financial statements.
A
Glendale should report its historical cost less depreciation as the machine’s value.
In which of the following exchange transactions would a company recognize losses immediately but defer any gains?
A. An exchange that lacks commercial substance and in which cash is received
B. An exchange that has commercial substance and in which cash is received
C. An exchange that has commercial substance and in which no cash is received
D. An exchange that lacks commercial substance and in which no cash is received
D
An exchange that lacks commercial substance and in which no cash is received
In which of the following cases should the firm capitalize interest costs related to its land purchase?
A. The firm plans to build a new corporate headquarters on the land.
B. The firm does not plan to build on the land but does intend to sell it in smaller pieces as part of a new housing development.
C. The firm plans to build a new warehouse facility on the land.
D. The firm does not plan on developing the land in any way before selling it to another party.
C
The firm plans to build a new warehouse facility on the land.
A firm recently had its manufacturing machinery rearranged and reinstalled to better facilitate future production. Ultimately, the firm opts to handle the rearrangement and reinstallation cost as a replacement, which tells us that the firm was
A. Able to estimate both the original installation cost and the accumulated depreciation to date.
B. Able to estimate the accumulated depreciation to date but not the original installation cost.
C. Unable to estimate either the original installation cost or the accumulated depreciation to date.
D. Able to estimate the original installation cost but not the accumulated depreciation to date.
A
Able to estimate both the original installation cost and the accumulated depreciation to date.
In which of the following circumstances would a parcel of land be least likely to experience depreciation?
A. Land management decisions by a farmer that result in inadequate crop rotation and fertilization
B. Subdivision of a large tract of land by a developer who plans to build a housing addition
C. Failure by members of a waterfront community to install structures to prevent soil erosion
D. Natural disasters such as fires or droughts that damage or destroy the land or its natural resources
B
Subdivision of a large tract of land by a developer who plans to build a housing addition
JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Title fees cost JT $4,320. Architect’s fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT’s cost of land?
A. $595,540
B. $549,800
C. $578,540
D. $593,940
C
$578,540
JT Engineering paid $520,000 for land. It paid $65,000 to tear down a building on the site and made $15,400 in salvage. Titles fees and insurance cost JT $4,320. Architect’s fees were $28,200. Construction liability insurance cost $1,600 and the contractor was paid $1,520,000. A $4,620 assessment made by the city for pavement. What is JT’s cost of the building?
A. $1,528,200
B. $1,548,200
C. $1,521,600
D. $1,549,800
D.
$1,549,800
Which of the following provides the justification for the capitalization of interest costs?
A. The revenue recognition principle
B. The historical cost principle
C. The economic entity assumption
D. The conservatism concept
B
The historical cost principle
If a firm purchases land on which it intends to build a new plant, any interest costs related to that land
A. Should be capitalized during the period of construction as part of the cost of the plant.
B. Should be capitalized prior to the period of construction as part of the cost of the land.
C. Should be capitalized prior to the period of construction as part of the cost of the plant.
D. Should be capitalized during the period of construction as part of the cost of the land.
A
Should be capitalized during the period of construction as part of the cost of the plant.
On January 1, 2020, Wells Tech signed a $950,000 two-year construction contract. Wells secured $950,000 financing at 7%. In 2020, Wells paid out $650,000; average accumulated expenditures were $375,000. Excess borrowed funds were invested, yielding $120,000 income. What should Wells report as capitalized interest at December 31, 2020?
A. $75,000
B. $26,250
C. $120,000
D. $66,500
B.
26,250
Which of the following should a company recognize immediately?
A. Any gain created when it constructs a piece of equipment at a cost savings.
B. Any gain created when it makes a bargain purchase.
C. Any loss incurred when it ignorantly pays too much for an asset originally.
D. Any loss incurred when it receives any asset lower than its book value on the other company’s books.
C
Any loss incurred when it ignorantly pays too much for an asset originally.
At what value should assets be accounted for when they are purchased in exchange for a zero-interest-bearing note?
A, At book value of the asset received
B. At present value of the note
C. At face value of the note
D. At fair value of the asset received
B
At present value of the note
On August 1, 2020, Liggett Enterprises purchased a new truck on a deferred payment basis. A $12,000 down payment was made and 4 monthly installments of $10,000 each are to be made starting September 1, 2020. The cash equivalent price of the truck was $48,000. Liggett incurred and paid delivery costs of $2,000. What is the amount to be capitalized as the cost of the truck?
A. $54,000.
B. $52,000.
C. $50,000.
D. $48,000.
C
$50,000.
When a loss is incurred as the result of a nonmonetary exchange of assets, what should a company do to prevent valuing the assets at more than their cash equivalent price?
A. It should recognize part of the loss immediately and defer part of the loss.
B. It should not recognize the loss.
C. It should defer the loss.
D. It should recognize the loss immediately.
D
It should recognize the loss immediately.
Charles is the CFO of a toy factory. The factory’s management has decided to rearrange and reinstall all of the facility’s manufacturing equipment in order to promote a faster, more efficient workflow. Charles knows the original cost for installing all of the facility’s machinery as well as the total cost for the rearrangement and reinstallation. If Charles wants to handle the rearrangement and reinstallation cost as a replacement, which of the following statements is accurate?
A. Charles can handle the rearrangement and reinstallation cost as a replacement only if he knows that these costs are immaterial in amount.
B. Charles can handle the rearrangement and reinstallation cost as a replacement only if he knows that this cost is material in amount and expected to benefit multiple periods.
C. Charles currently has all the information he needs to handle the rearrangement and reinstallation cost as a replacement.
D. Charles can handle the rearrangement and reinstallation cost as a replacement only if he is able to estimate the accumulated depreciation on the original installation costs to date.
D
Charles can handle the rearrangement and reinstallation cost as a replacement only if he is able to estimate the accumulated depreciation on the original installation costs to date.
Bonnie is the CFO of a small printing company that has decided to replace its old printing press with a newer, more efficient model. Bonnie knows the cost of purchasing and installing the new press, as well as total accumulated depreciation on the old press. Bonnie wants to capitalize the cost of the new press using the substitution approach. Given this information, which of the following statement is true?
A. Bonnie currently has all the information she needs to proceed with the substitution approach.
B. Before proceeding with the substitution approach, Bonnie must determine the original cost of the old press, as well as what (if any) salvage value the old press has.
C. Bonnie cannot use the substitution approach because the replacement does not extend the press’s useful life.
D. Bonnie must determine what (if any) salvage value the old press has before proceeding with the substitution approach.
B
Before proceeding with the substitution approach, Bonnie must determine the original cost of the old press, as well as what (if any) salvage value the old press has.
Maria is the manager of a facility that makes small appliances. The factory’s management has decided to rearrange and reinstall all of the facility’s manufacturing equipment in order to promote a faster, more efficient workflow. Maria knows the total cost for the rearrangement and reinstallation, but that is all the information she currently has available. Given this situation, which of the following statements is accurate?
A. Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is material in amount.
B. Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine the machinery’s original installation cost.
C. Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine both the machinery’s original installation cost and its accumulated depreciation to date.
D. Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is immaterial in amount.
A
Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is material in amount.
RL Enterprises originally paid $16,000 for a machine and recorded depreciation at a rate of $1,200 per year for eight years. It sold the machine at the end of the first quarter of the ninth year for $6,000. What is RL’s amount of loss or gain on the sale?
A. $400 loss
B. $100 gain
C. $100 loss
D. $400 gain
C
$100 loss
JT Engineering originally paid $10,000 for a machine and recorded depreciation at a rate of $1,000 per year for five years. They sold the machine in the middle of the sixth year for $6,000. What is JT’s amount of loss or gain on the sale?
A. $1,500 loss
B. $1,000 loss
C. $1,500 gain
D. $1,000 gain
C
$1,500 gain
