Fixed Assets COPY Flashcards

Question

Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the * **Straight-line method** * **Production or use method**

Answer 1

* **Straight-line method - YES** * **Production or use method - YES** When salvage value is excluded from the computation of depreciation, excessive depreciation is recognized each year under BOTH methods. Therefore, income is understated for both methods. Annual depreciation under straight-line is: (1/n)(cost-salvage) where n is the number of years in the useful life. Annual depreciation under the production method is: (current year production/tot.est.production)(cost-salvage)

Answer 2

**$10,500** The capitalized cost of the equipment is $110,000, not the total of the cash payments to be made. The latter amount includes interest. Thus, annual depreciation is $10,500: ($110,000-$5,000)/10.

Answer 3

**$120,000** The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

Answer 4

**An asset's service potential declines with use.** This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset. Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

Answer 5

**One-fifth of the cabinet costs in selling, general, and administrative expenses.** With a five year life, 1/5 of the cost of the cabinets is expensed as depreciation. The cabinets are not involved in the manufacturing of the goods. Rather, they are used to help sell the merchandise. Thus, the depreciation is not included in cost of goods sold; rather, it is included in selling, general, and administrative expenses.

Answer 6

**Total units to be produced can be estimated.** Without an estimate for total units to be produced, depreciation could not be computed. Annual depreciation under this method is: [(Cost-salvage value)/(Total estimated production)](units produced year). The quantity in square brackets is the rate of depreciation per unit.

Answer 7

**$210,000** The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts. Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).

Answer 8

**$16,000** The 200% declining balance depreciation method is also called the double declining balance method or DDB. Because this is a declining balance method, the book value at the beginning of 2003 must be computed, and that is affected by depreciation in 2002. For 2002, depreciation under DDB is 2/10 x $100,000 or $20,000. Note that salvage value is not subtracted when computing depreciation because the "declining balance" is book value. For 2003, depreciation is 2/10 x ($100,000-$20,000) = $16,000 because the book value at the beginning of 2003 is reduced by 2002 depreciation.

Answer 9

**$1,500** The two depreciation amounts for 2000, the first service year of the asset, are: SL, $10,000 ($100,000/10); and 150% DB, $15,000 (1.5 x SL amount or 1.50/10 x $100,000). The difference, $5,000 is the excess of the 150% DB deduction over the SL deduction. The tax benefit of the $5,000 excess is $1,500 ($5,000 x .30). The firm will pay $1,500 less in taxes if it uses the 150% DB method compared with the SL method.

Answer 10

**Straight-line.** The asset was sold when 1/2 of its useful life was expired. (The asset was used 5 years and had an original useful life of 10 years.) If an asset is sold at a loss, then the book value at the date of sale exceeds the proceeds from sale by the amount of the loss. Let C = original cost, and BV = book value at date of sale. Then BV-proceeds = loss Proceeds = .50C according to the question data. Thus, BV-.50C = loss. Thus, BV must exceed 50% of the original cost because BV-.50C is a positive number. The only method from among those listed in the answer alternatives that leaves a BV greater than 50% of original cost after 50% of the useful life has expired is the SL method. The book value after the fifth year under SL is C-(C-.2C)(5/10) = .6C. DDB's book value after five years is much less than 50% of original cost because it is an accelerated method. The same holds for SYD. And under composite methods of depreciation, individual assets do not have a separately recorded book value. When sold, accumulated depreciation is debited for the difference between original cost and proceeds. No gain or loss is recognized. Thus, the composite method could not apply in this question.

Answer 11

* **Straight-line - NO** * **Double-declining balance - NO** Salvage value is the portion of the asset's cost not subject to depreciation. Total depreciation, under any method, is limited to depreciable cost (cost less salvage value). The declining balance methods do not subtract salvage when computing depreciation. Care must be taken to avoid depreciating an asset beyond salvage value.

Answer 12

**$3.20** The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site. The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period. As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed.

Answer 13

**Successful efforts method-definition of asset.** The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

Answer 14

**$120,000** The depreciable base is calculated as **_historical cost to the new owners less the estimated salvage value determined by the new owners_**. Therefore, this answer is correct, because the depreciable base is equal to $120,000 ($135,000 – $15,000). The carrying value and estimated residual value to the previous owner are ignored.

Answer 15

**$1,000,000** The cost principle requires that assets be recorded at historical cost. The purchased cost is deemed to be an objective measure of fair market value. Therefore, the assessed valuation has no impact on the recorded cost. Historical cost includes all costs incident to the acquisition of the asset. In this case, Saba Co. gave up $800,000 of cash and assumed liabilities of $200,000. The assumption of a liability is the equivalent of a payment of cash. The total amount incurred in acquiring the land was $1,000,000 ($800,000 + $200,000).

Answer 16

**Fair value.** ASC Topic 360 explains that an impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of an asset is determined by the guidelines set in ASC Topic 820. Fair value is determined by using the principal or most advantageous market and assumes the asset is used in its highest and best use.

Answer 17

**$520,000** Research and development costs (R&D costs) are defined in ASC Topic 730. It goes on to provide detailed lists of examples of activities that typically would be included in R&D costs and expensed and excluded from R&D costs and possibly capitalized. Among those items listed in ASC Topic 730 as being part of R&D costs are modification of the design of a product or process ($135,000), design of tools, jigs, molds, and dies involving new technology ($170,000) and laboratory research aimed at discovery of a new knowledge ($215,000). These three R&D expenses total $520,000. Included in the items listed in ASC Topic 730 as not being part of R&D costs are troubleshooting breakdowns during production ($150,000) and periodic design changes to existing products ($185,000). ASC Topic 730 requires **_R&D costs to be expensed as incurred_** ***_except_*** ***_for intangibles or fixed assets purchased from others having alternative future uses_***. These should be capitalized and amortized over their useful life. Thus, the cost of patents and R&D equipment purchased from third parties may be deferred and amortized over the asset’s useful life. Internally developed R&D may not be deferred. Finally, R&D done under contract for others is not required to be expensed per ASC Topic 730. The costs incurred would be matched with revenue using the completed-contract or percentage-of-completion method.

Answer 18

**$68,000** Generally, fixed assets are recorded at the cost of acquiring the asset and getting it ready for its intended use. In this case, the total cost of the new boiler is $68,000 ($60,000 purchase price + $8,000 installation costs). The information concerning the old boiler does not affect the cost of the new boiler. The only situation where information concerning the old boiler would affect the amount recorded for the new boiler would be if an exchange had taken place. The journal entries are * Cash 2,000 * Loss on sale 3,000 * Old boiler (net) 5,000 * New boiler 68,000 * Cash 68,000

Answer 19

**$25,000 gain.** Per ASC 605-40-45-1, a gain (loss) on such conversions should be recognized as the difference between the proceeds and the book value of the converted asset, regardless of whether or not the proceeds are reinvested. * **Proceeds $100,000** * **Book value ($80,000 -$5,000)75,000** * **Gain $25,000** The book value of $80,000 is decreased by a half-year’s depreciation (1/2 × $10,000 = $5,000) for 12/31/Y1 to 6/30/Y2.

Answer 20

**Betterment** (improvement) is the replacement of a major part or component of an existing asset with a significantly better or improved part or component. An **addition** is an extension, enlargement, or expansion made to an existing asset.

Answer 21

$1.90 The depletion computation is * **Net cost of resource / Units of resource = Depletion charge per unit** The estimated net cost is the cost of the land ($9,000,000) and the related restoration costs ($1,500,000), less the salvage value of the land ($1,000,000). This results in a net cost of $9,500,000. The estimated recoverable reserves total 5,000,000 tons. Therefore, the depletion charge is $1.90 per ton ($9,500,000/5,000,000). * **$9,500,000 / 5,000,000 = $1.90**

Answer 22

* **Customer Names - YES** * **Noncompetition Agreement - YES** ASU 2014-18 allows private firms, in a business combination, to measure customer-related intangible assets and noncompetition agreements as part of goodwill.

Answer 23

**It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur.** ***_Impairment of goodwill._*** The goodwill assigned to a reporting unit should be tested for impairment on an annual basis and between annual tests in certain circumstances. These circumstances are listed in the outline of ASC 350-20-35-30. The annual test may be performed any time during the company’s fiscal year as long as it is done at the same time every year. Different reporting units may be tested at different times during the year. The test of impairment is a two-step process as described below. 1. Compare the fair value of the reporting unit with its carrying amount. If the carrying amount of the unit exceeds its fair value, the second step is performed. ASC Topic 820 requires that in determining fair value, a valuation premise should be used that is consistent with the asset’s highest and best use. The valuation premise can either be an in-use or an in-exchange premise. An in-use premise is used if the asset is used in a business in combination with other assets, such as a reporting unit. 2. Compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, all assets in the segment are valued in accordance with ASC Topic 805, and the excess of the fair value of the reporting unit as a whole over the amounts assigned to its assets and liabilities is the implied goodwill. If the implied value of goodwill is less than its carrying amount, goodwill is written down to its implied value and an impairment loss is recognized.

Answer 24

**$40,000** Generally, a cost should be capitalized if it improves the efficiency of the asset or extends its useful life, and expensed if it merely maintains the asset at its current level. The renovation cost ($50,000) improves the production efficiency of the machines and therefore should be capitalized. However, the continuing, frequent, and low-cost repairs ($35,000) and the replacement of a broken gear ($5,000) merely maintain the assets at their current level, and therefore $40,000 should be charged to repairs and maintenance expense.

Answer 25

**$600** According to ASC Topic 250, a change in the estimated life of an asset is accounted for on a prospective basis. Depreciation expense in years 1 through 4 is calculated as $12,000 ÷ 5 years = $2,400 per year. At the end of year 4, the book value of the asset is $2,400 and this amount is depreciated over the newly estimated remaining life of 4 years. Therefore, the depreciation expense in year 5 would be $2,400 ÷ 4 remaining years = $600. Therefore, this answer is correct.

Answer 26

**Expense all costs in the year incurred.** Research and Development Costs 1. R&D costs are expensed as incurred ***_except for intangibles or fixed assets purchased from others having alternative future uses_***. These should be capitalized and amortized over their useful life. Thus, the cost of patents and R&D equipment purchased from third parties may be deferred and amortized over the asset's useful life. Internally developed R&D may not be deferred. 2. Finally, R&D done under contract for others is not required to be expensed. The costs incurred would be matched with revenue using the completed-contract or percentage-of-completion method.

Answer 27

* **Held for use - NO** * **Held for disposal - YES** If an asset is held for disposal, previous losses can be recovered. The logic is that the recovery will be realized in the near future if the asset is in the process of being disposed. In contrast, an asset held for use CANNOT recover previous impairment because there is no certainty regarding the ultimate realization of those losses.

Answer 28

**$0** The recoverable cost (expected future cash flows) of $130,000 exceeds the $120,000 book value. Therefore, the asset is not impaired, and no loss is recorded. Although both the market value and present value of the future cash flows are less than book value, as long as the nominal sum of future cash flows ($130,000) exceeds book value, no impairment is recorded. The firm is expected to recover its book value.

Answer 29

**$581,000** The total value to be compared to the amount received from the government in computing the gain: * Carrying amount $575,000 * Plus appraisal fees to support a $750,000 value $2,500 * Plus attorney fees for the closing with the state $3,500 * Equals total cost to compare to $750,000 received from state **$581,000** The second and third items in the above list essentially reduce the net proceeds from the state and thus decrease the gain. The $3,000 and $4,000 amounts pertaining to the replacement property are not associated with the existing property and do not affect the gain on its condemnation.

Answer 30

**II ONLY.** The test for impairment for an asset in use is whether the carrying value (book value) is less than its recoverable cost. An asset's recoverable cost is the sum of its estimated net cash inflows projected for its remaining life. When book value \> recoverable cost, the carrying value is not recoverable. In other words, the asset is booked at more than the sum of its future net cash inflows. For example, if an asset's carrying value is $100 and its recoverable cost is $80, then its carrying value is not recoverable (only $80 is recoverable). The AMOUNT of the loss recognized is the difference between carrying value and fair value, but that difference is not used for TESTING whether an asset is impaired. That difference is not the condition leading to the impairment loss.

Answer 31

**4/15** the equation for calculating the sum-of-the-years’ digits depreciation is **Remaining useful life at the beginning of the year for which depreciation is to be taken / SYD = (Cost – Salvage value)** The machine has 4 years of useful life remaining at the beginning of the second year; therefore, the fraction to be applied is 4/15.

Answer 32

**$9,000** Organizational costs include the attorney’s fees and meetings of incorporators, state filing fees, and other organizational expenses. Under generally accepted accounting principles, per ASC Subtopic 720-15, they should be expensed immediately. Leasehold improvements are amortizable assets but do not qualify as organization costs. * Attorney’s fees $4,000 * Meetings, etc. $5,000 * = $9,000

Answer 33

**Undiscounted cash inflows less related outflows.** If circumstances indicate that the carrying amount of an asset may not be recoverable, an entity shall estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are defined as the undiscounted future cash inflows less the undiscounted future cash outflows necessary to obtain those inflows. Note that the use of undiscounted cash flows in the recoverability test is consistent with the measurement of property, plant, and equipment at historical cost which is an undiscounted amount.

Answer 34

**$147,000** The key factor in determining what costs Yvo should capitalize in connection with their assembly line project is whether the expenditures provide future benefit. In this case, all expenditures meet this criterion, and should therefore be capitalized for a total of $147,000 ($75,000 + $14,000 + $40,000 + $18,000). The cost of the machine and the labor to install it are proper additions to the equipment account. The labor costs are capitalized because they are necessary to ready the machine for its intended use. The parts added in rearranging the assembly line are expected to provide future benefits (as stated in the problem), and should therefore also be capitalized. The cost of labor and overhead to rearrange the assembly line is also capitalized, because the problem indicates that the rearrangement resulted in significantly more efficient production.

Answer 35

**$13,000** Since the common stock is listed on the NYSE, its valuation appears to be more clearly determinable than the appraised valuation of the land. Therefore, the value of the common stock (1,000 shares × $21 = $21,000) should be used to measure the transaction. The increase in additional paid-in capital is $21,000 less $8,000 par value of stock, or $13,000. Note that if fair values of the stock and land are considered equally determinable, fair value of the stock is still used as the measurement basis because it is the consideration given in the transaction.

Answer 36

**$1,000,000** The cost principle requires that assets be recorded at historical cost. The purchased cost is deemed to be an objective measure of fair market value. Therefore, the assessed valuation has no impact on the recorded cost. Historical cost includes all costs incident to the acquisition of the asset. In this case, Saba Co. gave up $800,000 of cash and assumed liabilities of $200,000. The assumption of a liability is the equivalent of a payment of cash. The total amount incurred in acquiring the land was $1,000,000 ($800,000 + $200,000).

Answer 37

**Amortized over its useful life if less than 15 years.** Per ASC Topic 350, a patent is to be amortized over its useful life, not to exceed its legal life of 17 years. The remaining legal life of this patent is 15 years. Thus, it should be amortized over 15 years or its useful life, whichever is shorter.

Answer 38

**Testing in search for or evaluation of product or process alternatives.** Per ASC Topic 730, testing in search for or evaluation of product or process alternatives is an example of research and development, and should be expensed as incurred. ASC Topic 730 requires R&D costs to be ***_expensed_*** as incurred **_except for intangibles or fixed assets purchased from others having alternative future uses._** These should be capitalized and amortized over their useful life. Thus, the cost of patents and R&D equipment purchased from third parties may be deferred and amortized over the asset’s useful life. Internally developed R&D may not be deferred. Finally, R&D done under contract for others is not required to be expensed per ASC Topic 730. The costs incurred would be matched with revenue using the completed-contract or percentage-of-completion method.

Answer 39

* **Gain - YES** * **Loss - YES** ASC Topic 958 states that both gains and losses on nonmonetary, nonreciprocal transfers (donations) are to be recorded. The gain or loss is calculated as the difference between the fair value of the nonmonetary asset transferred and its recorded amount at the date of donation. Gains or losses related to the nonreciprocal transfer of nonmonetary assets are recognized because they have been earned or incurred by the entity at the date of transfer.

Answer 40

**II ONLY.** Per ASC Topic 360, the reduced carrying amount of an asset shall be accounted for as its new cost. Depreciation will reduce the new carrying value over the asset’s remaining useful life.

Answer 41

**$11,000** Per ASC Topic 845, when the cash flows are significantly different, the transaction has commercial substance and is recorded at fair value. Both gains and losses are recognized in the exchange. The solutions approach is to prepare the journal entry to record the trade of the delivery truck for the land. * **Land 11,000** * **Accumulated depreciation 3,500** * **Loss on exchange 1,500** * **Delivery truck 10,000** * **Cash 6,000** The loss on the exchange of the delivery truck for the land is $1,500 ($6,500 book value − $5,000 fair market value). The value assigned to the land is the fair value of the asset(s) given up (i.e., the delivery truck [$5,000] plus cash paid [$6,000], or $11,000).

Answer 42

**Added to the cost of the land.** In general, an asset should be recorded at the cost of getting it ready for its intended use. If land is purchased with the intention of constructing a building on it, the cost of tearing down an old building on that land is part of the cost of getting the land ready for its intended use and should be added to the cost of that land. This cost attaches to the land and, therefore, should not be depreciated.

Answer 43

**Deducted from the cost of the land.** Generally, any cost involved in preparing land for its ultimate use is considered a cost of the land. In this case, the cost assigned to the land **should be the purchase price plus any costs associated with clearing the land and removal of the building (if any) less the proceeds from the sale of the building.**

Answer 44

* **Internally developed - YES** * **Purchased from an inventor - YES** Legal fees from a successful defense of a patent suit may be capitalized in the patent account because such a suit establishes the legal rights of the holder. It is irrelevant how the patent was acquired as long as there is ownership.

Answer 45

**$400,000** The solutions approach is to determine the depletion cost per ton as illustrated below. The $4,000,000 estimated net cost of the mine divided by the 4,000,000 estimated removable tons results in a depletion rate of $1 per ton. Since 400,000 tons were removed, the total depletion cost would be $400,000. Note that depletion cost does not become an expense until the minerals are sold. Since 375,000 tons were sold, there would be an inventory of $25,000 at $1 per ton. * Mine cost $3,400,000 * Development cost + $800,000 * Salvage value – $200,000 * Cost to be depleted $4,000,000 Depletion rate = $4,000,000 tons/4,000,000 = $1/ton

Answer 46

**Development or improvement of techniques and processes.** ASC Topic 730 identifies specific items which are considered research and development costs. This answer is correct because development or improvement of techniques and processes is included in research and development cost.

Answer 47

**Component of income from continuing operations before income taxes.** Per ASC Topic 360, an impairment loss for assets which are to be held and used should be reported as a component of income from continuing operations before income taxes for entities presenting an income statement.

Answer 48

**$190,000** Since the rearrangement costs increased efficiency they should be capitalized along with the cost of the new equipment. $190,000 ($175,000 + $12,000 + $3,000).

Answer 49

**$100,000** Only legal costs associated with successful outcomes may be capitalized. Therefore, of the $500,000 in legal costs, $400,000 may be capitalized and $100,000 must be expensed.

Answer 50

**$650,000** Research and development expenses include the salaries of laboratory employees researching how to build the new car (research), and the design, testing, and construction of a prototype (development). The Codification specifically excludes certain items from research and development, such as legal fees for the patent application and engineering follow-up during the early stages of commercial production. The cost of marketing research to promote the new car is a part of advertising expenses. Therefore, this answer is correct because the amount of research and development is $650,000 ($250,000 + $400,000).

Answer 51

**The recommendation of the auditor, signed and dated as of the date of discovery.** Financial statements and the accompanying footnotes are the responsibility of management. Auditors may offer a recommendation, but it would not be required to be disclosed in the footnotes.

Answer 52

**$6,050,000** Per ASC Subtopic 350-4, software costs of $4,000,000 are considered to be at the preliminary project stage and should be expensed as incurred in the current year. The remaining $8,000,000 is capitalized and amortized over its four-year life ($8,000,000/4 years = $2,000,000 per year). The $50,000 spent on training employees is expensed during the current year. Therefore, the total amount expensed in the current year is $4,000,000 + $2,000,000 + $50,000 = $6,050,000, and this answer is correct.

Answer 53

* **Building - YES** * **Production line rearrangement costs - YES** A cost should be capitalized if it improves the efficiency of the asset or extends its useful life. An overall reduction in production costs is expected, so it appears that both the building modification and the production line rearrangement contributed to improved efficiency in the production process.

Answer 54

**The fair value of the asset it received as a loss.** Per ASC Topic 845, exchanges that lack commercial substance are accounted for at book value. Although ASC Topic 845 prohibits recognition of a gain on these exchanges, it requires the recognition of any loss. Since the carrying value of the asset surrendered by Scott exceeds the fair market value of the asset received, Scott realized a loss on this exchange. Scott should value the asset received at its fair market value. The difference between the carrying amount of the asset surrendered and its fair market value (measured by the fair market value of the asset received in this case) should be recognized as a loss.

Answer 55

**$80,000.** The patent is valued at the market value of the stock exchanged, which is $80,000 ($40 x 2,000 shares). In general, the recorded value of purchased intangibles is the value of the consideration given or the value of the intangible, **_whichever is more reliable_**. The book value of the seller is not a reliable substitute for market value. There is no reliable amount given for the market value of the patent.

Answer 56

**A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.** The loss recognized on the exchange equals the book value of the asset transferred less its fair value at the time of the exchange. The fair value is less than book value. The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.

Answer 57

**It recognizes gains and losses immediately.** Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.

Answer 58

**A gain equal to the difference between the fair value and carrying amount of the truck given up.** With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value. For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is: dr. New Truck 20; dr. Accumulated Depreciation 9; dr. Cash 6; cr. Old Truck 30; cr. Gain 5. The gain equals the old asset's fair value of 26 and its book value of 21 (30 - 9).

Answer 59

**$0** There is a $1,000 gain inherent in the transfer of the old (Beam's) inventory item (fair value of $21,000 - carrying amount of $20,000). If Beam's item were sold, gross profit of $1,000 would result. However, under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. Therefore, no gain or loss is recognized and the inventory received is valued at the book value of the inventory given up plus cash paid, for a total of $21,000. This amount is $1,000 less than the new inventory's fair value because the $1,000 gain is disallowed.

Answer 60

**A profit equal to the difference between the fair value and the cost of the car.** The profit (a gain) to Vik is the difference between its fair value and its cost or carrying value. This exchange has commercial substance and was not made solely to facilitate sales. Rather, the exchange was made for promotional purposes.

Answer 61

**$60,000** When there is commercial substance to the exchange, the acquired asset is measured at fair value. In this case, the value is $60,000 as given in the problem. This amount also equals the fair value of assets given up in the exchange. The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000. The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000. The full journal entry for the exchange is: * **dr. plant asset 60,000;** * **dr. accumulated depreciation, 40,000;** * **debit cash 30,000;** * **credit plant asset 100,000;** * **credit gain, 30,000.** The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000).

Answer 62

**$30,000** The gain on an exchange of nonmonetary assets is based on the fair value and book value of the asset exchanged. The land with a fair value of $50,000 is given for machinery. The company is using the land as legal tender. The gain will be the difference between the book value and the fair value of the asset given or $50,000 - $20,000 = $30,000.

Answer 63

**Are the future cash flows expected to change significantly as a result of the exchange?** The critical factor as to whether there is commercial substance in an exchange is when there is a significant change in the cash flows related to the asset exchanged.

Answer 64

* **May - YES** * **Sty - YES** The fair value of each asset is less than book value implying that both firms have a loss. Losses are recognized in full regardless of whether there is commercial exchange.

Answer 65

**$3,700** When a transaction lacks commercial substance and cash is paid, the new asset is recorded at the book value of the old asset plus any cash given. Campbell has the same economic position as before the exchange - a different truck used in the same manner and $700 less cash. The new truck is the BV of the old asset ($3,000) plus the cash paid ($700) or $3,700.

Answer 66

**Neither a gain nor a loss.** Solen has an implied gain given that the fair value of its asset exceeds its book value. But when there is no commercial substance, such gains are recognized only when cash is received. Solen paid cash on the exchange.

Answer 67

**$15,000** There is an implied gain of $8,000, the difference between the $20,000 fair value of the old asset and its $12,000 book value. Because the proportion of cash received is ***_25%_*** ($5,000/$20,000), **_the entire gain is recognized and the acquired asset is recognized at fair value ($15,000)._** Note that the answer would be the same had there been commercial substance.

Answer 68

**$35 million** Impairment occurs when the carrying amount of a long-lived asset or asset group exceeds its fair value. An impairment loss is recorded on that difference if the carrying value of the asset is not recoverable. The carrying value is not recoverable if its carrying value exceeds the sum of the expected value of undiscounted cash flows from use of the asset. This answer is correct because it compares the carrying amount of the equipment to its fair value ($170 m − $135 m = $35 m) and the carrying value is not recoverable ($170m \>$150m).

Answer 69

* **Land - $64,000** * **Building - $358,000** Any cost involved in preparing land for its ultimate use (such as an office building site) is considered part of the cost of the land. Before the land can be used as a building site, it must be purchased and the old building must be razed. Therefore, the cost of the land is $64,000. * Purchase price $60,000 * Legal fees $2,000 * Demolition of old building $5,000 * Sale of scrap ($3,000) * Cost of land $64,000 Note that the proceeds from the sale of scrap is a reduction of the cost of the land, because it reduces the net cost of razing the old building. The other costs given in the problem are properly considered costs of completing the factory building. * Architects’ fees $8,000 * Construction cost $350,000 * Cost of building $358,000

Answer 70

**75% of capitalized cost.** Per ASC 985, the annual amortization of capitalized software costs shall be the greater of 1. The ratio of the software’s current sales to its expected total sales, 2. The straight-line method over the economic life of the product. In this case, the ratio of current to expected total sales is 10% (given). The annual straight-line rate is 25% per year (1/economic life of 4 years). The straight-line amortization should be used in year 2, since it is the higher of the two. The unamortized cost on the 12/31/Y2 balance sheet should, therefore, be 75% (100% − 25% amortization).

Answer 71

**$24,980** Young should capitalize all costs to place the asset in its intended and useful state. The fair value of the equipment is calculated by adding the down payment to the present value of the note payable. The fair value of the equipment is $4,000 + (2.58 × $6,000) = $19,480. The shipping charges and installation charges should also be capitalized. Therefore, the total capitalized cost of the equipment is $24,980 ($19,480 + $2,000 + $3,500).

Answer 72

**$325,000** The expected cash flows from Ball’s machinery are computed in the following way: * Expected future cash inflows from use of the machinery $350,000 * Expected proceeds from disposal of the machinery $50,000 * Less the expected cash outflows from use of the machinery ($75,000) * = Expected cash flows for determining impairment loss $325,000

Answer 73

**Recorded amount of the asset relinquished.** When nonmonetary assets are exchanged with no monetary consideration involved, no gain is recognized if the transaction lacks commercial substance. When the cash flows are not significantly different, the transaction is deemed to lack commercial substance. Therefore, the accounting for such an exchange must be based on the recorded amount of the asset relinquished (ASC Topic 845).

Answer 74

**Capitalized as leasehold improvements and depreciated over 15 years.** Leasehold improvements are properly capitalized and amortized over the remaining life of the lease, or the useful life of the improvements, whichever is shorter. Since the useful life of the walkways is only 15 years and the remaining term of the lease is 20 years, the cost should be depreciated over the 15-year period.

Answer 75

**$0** An impairment occurs when the carrying amount of a long-lived asset exceeds its fair value. However, an impairment loss is only recognized if the carrying amount of the asset is not recoverable. The carrying value is considered not recoverable if it exceeds the sum of the expected value of the undiscounted cash flows of the asset. Since the undiscounted expected future cash flows are $130,000, and the carrying value is $120,000, the company will not report an impairment loss.

Answer 76

**$110,000** Generally, an expenditure should be capitalized if it increases the original useful life of an asset or increases either the quantity or quality of services. If none of these three criteria are met, the expenditure shall be expensed because it merely maintains the asset at its current level. The old shingle roof was replaced with a fireproof tile roof; thus, the $75,000 should be capitalized. Similarly, the $35,000 cost of major improvements to the electrical wiring system should be capitalized. However, the cost of repainting the plant building ($5,000) should be expensed since it is an ordinary, regularly occurring expenditure which maintains the plant, rather than increasing either the quantity or quality of service to be provided by the plant. Therefore, the total cost capitalized is $110,000 ($75,000 + $35,000).

Answer 77

**An approach where the private company uses a hypothetical application of the acquisition method.** Although private companies may choose to use the same approach required for public companies (two-step approach), if private company guidance is adopted, the private company will examine goodwill for impairment using an approach where the private company uses a hypothetical application of the acquisition method.

Answer 78

**$3,333,333** According to ASC Subtopic 350-40, costs of internally developed software after the development stage may be capitalized and amortized over the asset’s economic life. The software should be recorded at cost and amortized over its useful life of three years. Therefore, the amount of expense for the first full year would be $10,000,000 ÷ 3 years = $3,333,333. Therefore, this answer is correct.

Answer 79

**$126,000** The double-declining balance (DDB) method depreciates assets at twice the straight-line rate. The straight-line rate is 20% (100%/5 years). Thus, the DDB rate is 40% (20% × 2). The salvage value is not relevant when using DDB. Under this method the applicable percentage is applied to the asset’s beginning-of-the-year book value (cost-accumulated depreciation). Depreciation expense for the first 2 years is * **Year 1: ($350,000) × (40%) $140,000** * **Year 2: ($350,000 -$140,000) $84,000** Thus, the net book value at 12/31/Y2 is the cost ($350,000) less the accumulated depreciation at 12/31/Y2 ($140,000 + $84,000) = $126,000.

Answer 80

**Unrealized gain in other comprehensive income of $7,000.** The revaluation model recognizes gains and losses in other comprehensive income for the period.

Answer 81

**$255,000** Salvage value is ignored when using a DB approach. The formula for 150% DB depreciation is 150% of the straight-line rate multiplied by the beginning-of-the-year book value. Since the straight-line rate is 20% (100%/5 years), the DB rate is 30% (150% × 20%). The book value for the first year is $500,000 (original cost). Therefore, year 1 depreciation is $150,000 ($500,000 cost × 30%). The book value for the second year is $350,000 ($500,000 original cost – $150,000 accumulated depreciation). Therefore, year 2 depreciation is $105,000 ($350,000 × 30%). The total accumulated depreciation at 12/31/Y2 is $255,000 ($150,000 + $105,000).

Answer 82

**(Original cost less salvage value) multiplied by 9/10.** When using sum-of-the-years’ digits depreciation, the amount of depreciation taken over the life of the asset is determined by multiplying original cost less salvage value by the following fraction: * **SYD depr. = Number of years of remaining asset life / n(n + 1)/2** (Where n = original years of useful life of the asset) For an asset with a 4-year life (n = 4), the denominator is 10. Therefore, in the first 3 years of the asset’s life (January 1, year 1 through December 31, year 3), depreciation of 4/10, 3/10, and 2/10 of the original cost of the machine less its salvage value will be accumulated for a total of 9/10.

Answer 83

**$9,800** The total of the payments made by Bamco for the machine was $11,000 (4 payments of $2,500 + $1,000 down payment). However, the cash equivalent price of the machine was $9,500. The difference of $1,500 ($11,000 – $9,500) is considered interest and is not capitalized because it is ready for use when acquired. In addition, the $300 installation cost is capitalized, as all costs required to get goods in their operating condition and location should be capitalized. Thus the total cost of the machine is $9,800 ($9,500 + $300).

Answer 84

**$32,300** Per ASC Topic 730, all research and development (R&D) costs must be expensed in the period in which they are incurred, because it is difficult to associate these costs with particular achievements and to identify the amount of future benefits and the time period over which those benefits will be realized. Therefore, the R&D costs of $136,000 would be expensed, and the patent would be recorded at the direct cost of acquiring it ($34,000) on 7/1/Y1. At 12/31/Y1, amortization would be recorded for 6 months (7/1 to 12/31) based on the estimated economic life of 10 years. The legal life of 17 years is not used because the patent will provide future benefits to Jase for only 10 years. Therefore, year 1 amortization is $1,700 ($34,000 × 1/10 × 6/12) and the 12/31/Y1 net book value of the patent is $32,300 ($34,000 – $1,700).

Answer 85

**$1,220,000** ASC Topic 730 requires equipment purchased for current and future periods to be allocated to the periods in which the assets are used. Therefore, $20,000 ($100,000/5) would be allocated to the current year. Equipment purchased for current research and development projects should be expensed as R&D. Research and development salaries, and material and labor costs for prototype products are also classified as R&D and expensed. Legal fees to obtain a patent are not considered part of R&D. Therefore, the total R&D at year-end is equal to $1,220,000 ($20,000 + $200,000 + $400,000 + $600,000).

Answer 86

**Fair value of the asset surrendered.** An exchange of nonmonetary assets that has commercial substance is recorded at the fair value of the asset surrendered (ASC 845).

Answer 87

**$120,000** The depreciable base is calculated as historical cost to the new owners less the estimated salvage value determined by the new owners. Therefore, this answer is correct, because the depreciable base is equal to $120,000 ($135,000 – $15,000). The carrying value and estimated residual value to the previous owner are ignored.

Answer 88

**$80,000** Generally, noncurrent assets acquired in a noncash transaction should be recorded at fair value of the consideration given (common stock), unless fair value of the asset acquired (patent) is more clearly determinable. Fair value of the stock given is therefore the correct value to assign to the patent received (2,000 shares × $40 per share = $80,000).

Answer 89

**Research and development general laboratory building.** Per ASC Topic 730 all R&D costs are expensed except equipment or facilities that are acquired for R&D and have alternative future uses. Such costs would be capitalized and amortized. Presumably a general laboratory building would have alternative future uses and should be capitalized and amortized.

Answer 90

**$600,000** The office building and the land are a lump-sum purchase. The acquisition cost of both the land and the building is equal to the cash paid plus the mortgage assumed, $750,000 + $250,000 = $1,000,000. Since 60% of the assessed value can be allocated to the building, 60% of the amount paid ($1,000,000 × 60% = $600,000) should be allocated to the building account. Therefore, this answer is correct.

Answer 91

**$30,000** The fair value of the delivery truck, $90,000, less the book value of the truck, $60,000 on the date of disposition, equals the gain on disposition of the delivery truck of $30,000. The requirement is to determine the amount of gain that should be recognized. If a nonmonetary transaction has commercial substance, a gain or loss should be recognized on the exchanged asset. The delivery truck had an original cost of $140,000 and accumulated depreciation of $80,000. The book value of the delivery truck is calculated as original cost less accumulated depreciation, or $60,000 ($140,000 − $80,000).

Answer 92

**May be measured and included within goodwill.** ASU 2014-18 allows (not requires) private firms, in a business combination, to measure noncompetition agreements as part of goodwill.

Answer 93

* **May - NO** * **Sty - YES** Per ASC Topic 845, when a nonmonetary exchange transaction does not result in a significant difference in cash flows, the book value is used to record the transaction. However, when the exchange of nonmonetary assets includes an amount of monetary consideration, the receiver of monetary consideration has realized a partial gain on the exchange. To determine the partial gain to be recognized, first compute the total gain which is the difference between the fair market value of the nonmonetary asset given up and its book value. Then multiply the ratio of the monetary consideration received to the total consideration received (i.e., monetary consideration plus the estimated fair market value of the asset received) times the total gain. The result is the realized gain to be recognized. The entity paying the monetary consideration should not recognize any gain. Note, however, that all losses on sales or exchanges are recognized immediately.

Answer 94

**A gain in an amount determined by the ratio of cash received to total consideration.** ASC 845 states that when the exchange of nonmonetary assets lacks commercial substance and includes a cash payment (boot), the entity which received cash has realized a partial gain on the exchange. To compute the partial gain to be recognized, first the total gain is computed by subtracting the book value of the nonmonetary asset given up from its fair value. This total gain is then multiplied by the ratio of the cash received to the total consideration received (Cash + FMV of nonmonetary asset received). In this case, since Slate received cash, it would recognize a partial gain as described above.

Answer 95

**$480,000** The depletion charge per unit is the net cost of the resource divided by the estimated units of the resource. The net cost of the resource is $4,320,000. * Cost of mine$3,600,000 * Development costs1,080,000 * Residual value(360,000) * Net Cost$4,320,000 Therefore the depletion charge is $2.00 per ton ($4,320,000 ÷ 2,160,000 tons). Since 240,000 tons were sold, $480,000 of depletion (240,000 × $2.00) is included in cost of goods sold. Note that $60,000 [(270,000 tons – 240,000 tons) × $2.00] of depletion would be included in inventory. Total depletion on both the cost of goods sold and inventory would be $540,000.

Answer 96

**$3.20** Cantor should capitalize all costs to prepare the mine for extraction. Cantor would then calculate the depletion rate as the cost minus residual value divided by the estimated units of output. Therefore, the depletion amount per ton would be ($2,000,000 + $500,000 – $100,000)/$750,000 tons = $3.20 per ton.

Answer 97

**$4,080** Mark Co. would record the franchise at its cost of $204,000. The unamortized cost on the seller’s books ($68,000) is irrelevant to the buyer. The franchise is amortized over 50 years ($4,080 [$4,080 ÷ 50]).

Answer 98

**Fair value.** ASC Topic 360 explains that an impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of an asset is determined by the guidelines set in ASC Topic 820. Fair value is determined by using the principal or most advantageous market and assumes the asset is used in its highest and best use.

Answer 99

**$10,000 gain.** Per ASC Topic 845, when the cash flows of the assets are expected to be significantly different, the transaction has commercial substance and is recorded at fair value. In this transaction, an asset with a book value of $60,000 (50% × $120,000) is exchanged when it has a fair market value of $70,000. Therefore, a $10,000 gain ($70,000 – $60,000) is recognized. The new asset acquired is recorded at the fair value of the assets surrendered ($16,000 cash and $70,000 machine, or $86,000). * **New machine 86,000 ($70,000 + $16,000)** * **Accum. depr.60,000 (50% × $120,000)** * **Old machine 120,000** * **Cash 16,000** * **Gain on exchange 10,000 ($70,000 – $60,000)**

Answer 100

**A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price.** When nonmonetary assets are exchanged for other nonmonetary assets, a loss is recognized immediately and the asset is valued at its fair value.

Answer 101

**$205,000** According to ASC Topic 360, “A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group. A gain or loss not previously recognized that results from the sale of a long-lived asset (disposal group) shall be recognized at the date of sale.” In Darnell’s case, the estimate of fair value less cost to sell at December 31, year 2, was $205,000. This amount represents a revision of the estimate of fair value less cost to sell of $200,000 at December 31, year 1. The carrying amount of Darnell’s long-lived assets should be increased from $200,000 to $205,000 at December 31, year 2. Note that the carrying amount of the long-lived assets on December 31, year 1, before recognition of the loss of $40,000, was $240,000. The increase in the carrying amount from $200,000 to $205,000 is, therefore, within the boundaries specified in the standard.

Answer 102

**$125,000** The undiscounted expected net future cash inflows ($450,000) are less than the carrying amount of the equipment ($500,000). Therefore, the equipment is deemed impaired. The impairment loss is calculated by subtracting the fair value of the equipment ($375,000) from its carrying value ($500,000). (Note: Both values are at the impairment date, June 30, year 1.) The impairment loss that should be reported on Maxwell’s June 30, year 1 income statement is $125,000.

Answer 103

**Original cost × 50% × 50%.** * In year 1: Original cost × 50%(200%/4 = 50%) * **_In year 2_**: (Original cost × 50%) × 50%

Answer 104

**$1,200,000** Per ASC Topic 730, R&D costs are charged to expense when incurred. Expenditures for items such as materials, equipment, and purchased intangibles may be capitalized if they have alternative future uses in R&D projects or other areas. The cost of the equipment acquired for use in R&D projects ($1,000,000) is capitalized, but the depreciation ($150,000) on the equipment would be expensed along with the other R&D costs incurred. The equipment has alternative future uses because the word “projects” is plural. * Depreciation $150,000 * Materials $200,000 * Compensation $500,000 * Consulting fees $100,000 * Indirect costs $250,000 * R&D expense $1,200,000

Answer 105

**$0** For US GAAP purposes, assets with indefinite lives are not amortized but tested for impairment instead. Because the trademark is expected to be renewed indefinitely, it is treated as an asset with an indefinite life and is not amortized.

Answer 106

**$154,125** Oak should capitalize all costs to place the land in its intended and useful state. The costs for the sewer lines, title search fee, land, and removal of the old building (less salvage) should all be included in the cost of the land. Therefore, the land should be recorded at $2,500 + $625 + $135,000 + $16,000 = $154,125.

Answer 107

**$0** ASC Topic 350 states that intangibles with indefinite useful lives should not be amortized; they should be examined periodically for impairment. Therefore, the correct answer is that amortization expense should be $0.

Answer 108

**$10,000** Salvage value is ignored when using DDB depreciation (except that the asset cannot be depreciated below salvage value) The DDB rate is twice the straight-line rate (1/4 × 2 = 2/4 = 50%). Note that in year 4, enough depreciation would be recorded to depreciate the asset from its beginning-of-year book value ($10,000) down to its salvage value (10% × $80,000 = $8,000), or $2,000 of depreciation.

Answer 109

**$0** interest cost on debt used to finance the construction of fixed assets should be capitalized. ASC Topic 835 requires the capitalization of interest as part of the cost of certain assets. Only assets which require a period of time to be prepared for use qualify for interest capitalization. These include assets constructed for sale produced as discrete projects (e.g., ships) and assets constructed for a firm’s own use, whether by the entity itself or by an outsider. For example, a building purchased by an entity would not qualify, but one constructed over a period of time would. Other assets that do notqualify include those in use or ready for use and ones not being used in the earnings activities of a firm (e.g., idle land). The amount of interest to be capitalized is the amount which could have been avoided if the project had not been undertaken. This amount includes amortization of any discount, premium, or issue costs; but, it shall not exceed the actual interest incurred during the period. The amount of “avoidable” interest is computed as Average accumulated expenditures during construction × Interest rate × Construction period

Answer 110

**A part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.** Per ASC Topic 835, the interest costs incurred during the period as a result of expenditures for the asset are a part of the historical cost of the asset. Furthermore, because such interest cost is an integral part of the total cost of acquiring an asset, its disposition should be the same as other components of asset cost. This means the capitalized interest cost should be written off over the life of the asset.

Answer 111

* **Gain - Decrease** * **Loss - Increase** Under the straight-line method, a smaller portion of the asset’s cost is charged against income in the early years than would occur using DDB. Therefore, at the date of sale, the book value using SL will be higher than the DDB book value. If the proceeds from the sale are higher than both book values, the one with the higher book value (SL method) will show a smaller gain. If the proceeds are less than both book values, the one with the higher book value (SL method) will show a larger loss.

Answer 112

**Other income.** Per ASC Topic 958, income is earned as a result of a donation. Fixed assets represent the capitalized amount of expenditures made to acquire tangible property which will be used for a period of more than one year. Their cost, therefore, is deferred to future periods in compliance with the matching principle. Tangible property includes land, buildings, equipment, or any other property that physically exists. All of the costs necessary to get the asset to the work site and to prepare it for use are capitalized, including the cost of negotiations, sales taxes, finders’ fees, razing an old building, shipment, installation, preliminary testing, and so forth. When capitalizing such costs it is necessary to associate them with the asset which is being prepared for use. Thus, the cost of razing an old building is added to the cost of acquiring the land on which the building stood. Charges for self-constructed fixed assets include direct materials, direct construction labor, variable overhead, and a fair share of fixed overhead. Assets received through donation should be recorded at fair value with a corresponding credit to revenue; if fair value is not determinable, book value should be used (ASC Topic 958). If the entity incurs a liability associated with future retirement of the asset, the fair value (present value) of that obligation should be added to the carrying value of the asset (ASC 410-20-25-5).

Answer 113

**Milgram does not record depreciation on the investment property.** When investment property is recorded using the fair value model, depreciation is not recorded.

Fixed Assets COPY Flashcards

(137 cards)