FAR 14 - PPE 1 - Categories/Capitalized Costs Flashcards Preview

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Flashcards in FAR 14 - PPE 1 - Categories/Capitalized Costs Deck (18):
1

T/F: Land is not a depreciable plant asset.

True

2

T/F: A firm owns a tract of land that it is holding for speculative purposes. This land should be classified as land for balance sheet purposes.

False

3

T/F: A firm owns a tract of land purchased for the purpose of mining its natural resources. This land should be classified as land for balance sheet purposes.

False

4

What are the two criteria for capitalizing post-acquisition costs of PPE?

1. increase in useful life
2. increase in productivity or efficiency including cost reduction.

If either criteria is met, the costs can be capitalized rather than immediately expensed.

5

T/F: When purchasing land, the net cost to demolish the old building is added to the new building cost.

True.
This net cost is properly allocated to the land because it is a cost necessary to place the land into its intended condition.

6

T/F: When purchasing land, any legal fees and title guarantee costs are not included in the capitalized cost of the land.

False.
The legal fees and title guarantee cost must be incurred to avoid future legal problems, and thus contribute to the value of the land - and are therefore capitalized.

7

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
A. Reduction of the cost of the new warehouse.
B. Gain from discontinued operations, net of income taxes.
C. Part of continuing operations.
D. Extraordinary gain, net of taxes.

C. The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

8

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.

The proceeds from the sale of the building should be:
A. Classified as other income.
B. Deducted from the cost of the land.
C. Netted against the costs to clear the land and expensed as incurred.
D. Netted against the costs to clear the land and amortized over the life of the plant.

B. The proceeds from the building removed and sold reduce the cost of the land to the buyer. Had the building been razed, the net razing cost would be added to the land. Compared to the latter situation, the case in the problem results in a cost savings.

9

T/F: The cost to excavate for the foundation of a building is debited to land.

False.
It would be capitalized

10

T/F: The cost of the foundation of a building is debited to building.

True

11

T/F:The cost of a building includes the amount financed by a mortgage loan.

True

12

Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.
A. If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt.
B. If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.
C. If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm.
D. If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.

B. The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.

13

Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?
A. $19,480
B. $21,480
C. $24,980
D. $27,500

The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000 $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.

14

T/F: If the fair value of a self-constructed asset is less than the total cost of construction, then interest cannot be capitalized on the asset.

False

15

T/F: The recorded cost of a plant asset that is 100% debt financed is the present value of all future payments to be made on the debt.

True

16

T/F: A firm issues a small number of its shares to purchase a unique piece of used equipment. The shares of the firm trade actively on a national stock exchange. Most likely, the value of the shares issued will be used as the recorded value of the equipment.

True

17

T/F: The total cost to self-construct an asset is $30,000. The fair value of the asset upon completion is $22,000. Therefore, a loss of $8,000 is recorded.

True

18

T/F: When the stated and market rates of interest on debt used to finance the purchase equipment are different, the stated rate is used to compute the present value of the debt payments for the purpose of recording the equipment.

False

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