Property, plant, and equipment Flashcards
(14 cards)
Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000
At what amount should Oak record the land?
A. $138,125
B. $153,500
C. $154,125
D. $175,125
C. $154,125
County assessment
title search fees
cash paid for land
removal of old building
5 expenditures to make an asset ready for use (SPITT)
Shipping (freight-in)
Purchasing
Installation
Taxes
Test runs
A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:
January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, Year 1?
A. $13,500
B. $15,000
C. $17,000
D. $30,000
C. $17,000
Determine average accumulated expenditures (AAE), these are the payments with dates usually.
take the proportion of the expenditures by year, and add them together.
Take the construction debt rate and multiply it by the AAE. This is your avoidable interest
determine if actual interest or avoidable interest is lower, and use the lower of the two numbers
On July 1, Year 1, X Company purchased equipment by paying a $20,000 down payment and signing a noninterest-bearing note for $360,000, calling for payments of $6,000 per month for the next 5 years. X also paid an additional $10,000 for delivery and installation. The equipment could have been purchased for $310,000 on the date of acquisition. The equipment has a 10-year useful life with no salvage value and will be depreciated on a straight-line basis. What will be the amount of depreciation recognized in Year 2?
A. $31,000
B. $32,000
C. $38,000
D. $39,000
B. $32,000
Use purchase price of 310,000 because it is more reliable and represents fair value, and is lower than the loan amount. Then add in the installation costs.
Formula of depreciation using units of production
Depreciation expense per unit = Cost - Salvage value / Total units in asset’s life
Depreciation expense per year = depreciation expense per unit * units produced during the year
On June 30, Year 1, Castille Corp. purchased land for $600,000. A building and a dilapidated shed were situated on the land at the time of purchase. Castille plans to use the building as is for operations but immediately razed the shed at a cost of $5,000, minus scrap recovery of $1,000. A recent tax appraisal of the property allocated $100,000 to the land and $400,000 to the building. At what amount will Castille record the land on the June 30, Year 1, balance sheet?
A. $100,000
B. $120,000
C. $120,800
D. $124,000
C. $120,800
This is treated as a lump sum purchase or basket purchase for some reason. When this is the case you have to apply a percentage to the total amount.
The percentage is found by taking the allocation of land of 100,000 and dividing it by the total value per the appraisal (100,000*400,000) 500,000. Then you multiply that percentage by the total which is 604,000
Which of the following is reported as interest expense?
Imputed interest on / Interest incurred to finance construction
noninterest bearing note / of a building for company’s own use
A. Yes Yes
B. Yes No
C.No Yes
D. No No
B. Yes No
Interest for the building would be capitalized
During Year 1, Danner Company incurred the following costs related to its delivery truck:
Tire replacement $1,000
Engine replacement 10,000
Purchase and installation of rearview cameras 2,000
Oil changes 200
Tires are replaced every 50,000 miles. The engine replacement extended the life of the truck by 5 years. The truck did not have rearview cameras before the installation. What amount of the above costs should be capitalized?
A. $2,000
B. $12,000
C. $13,000
D. $13,200
B. $12,000
Tires would not be included.
A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset’s estimated useful life?
A. Both straight-line and double-declining balance.
B. Straight-line, not double-declining, balance.
C. Double-declining balance, not straight-line.
D. Neither straight-line nor double-declining balance.
D. Neither straight-line nor double-declining balance.
This depreciable base is the same amount for an asset regardless of which depreciation method is used. Therefore, neither straight-line nor double-declining balance would result in an accumulated depreciation value that equals cost because the calculation of depreciable base includes subtracting salvage value.
In Year 4, Senn Inc. purchased land at a cost of $600,000 for a new office building. The existing building on the site, which was valued at 10% of the purchase price, was demolished at a cost of $15,000. The new building was completed during Year 4. In addition, the following costs were incurred:
Debris removal and grading $8,000
Fine for failure to obtain a county permit for demolition 2,000
Surveying 12,000
Excavation of basement for new building 20,000
Building permits 10,000
In Senn’s December 31, Year 4, financial statements, what amount should be capitalized to its land account?
A. $575,000
B. $577,000
C. $635,000
D. $637,000
C. $635,000
The fine is expensed
When does an asset need to be tested for impairment?
When Adjusted cash flows are less than carrying amount
In January Year 3, Jost Co. purchased 50 acres of forest land for $800,000, with timber to be extracted estimated at 1,000,000 board feet. After all the timber has been cut, Jost will be required by law to plant tree seedlings to restore the land at an estimated cost of $200,000. Jost expects to sell the land for $80,000 after extracting the timber. During Year 3, Jost incurred $150,000 of development costs for logging roads and harvested 100,000 board feet of timber, 75,000 of which was sold. In its Year 3 income statement, what amount should Jost report as depletion expense?
A. $0
B. $26,750
C. $80,250
D. $107,000
C. $80,250
The depletion per unit only applies to the 75,000 since that is how much was sold.
A company classifies a piece of equipment as held for sale. Information related to the equipment is as follows:
Purchase price $ 305,000
Accumulated depreciation 59,400
Fair value 203,400
Costs to sell equipment 9,800
What amount, if any, should be recognized as a loss related to the equipment upon held for sale classification?
A. $0
B. $32,400
C. $42,200
D. $52,000
D. $52,000
Because the asset is classified as held for sale it needs to be marked down if NRV (FV less disposal costs) is lower than CV. In this case it is so you take the CV- NRV and that is your impairment loss.
The composite depreciation method
A. Is applied to a group of homogeneous assets.
B. Is an accelerated method of depreciation.
C. Does not recognize gain or loss on the retirement of single assets in the group.
D. Does not subtract salvage value from the base of the depreciation calculation.
C. Does not recognize gain or loss on the retirement of single assets in the group.
This answer is correct because under the composite and group methods, if an individual asset is retired before the average life of the group is reached, the resulting gain or loss is buried in the accumulated depreciation account. The composite and group depreciation are processes of averaging the service lives of a number of assets and taking depreciation on the entire group as if it were an operating unit.
