Intermediate Accounting II Chapter 10 - Acquisition and Disposition of Property, Plant & Equipment -

1. If an exchange has commercial substance all losses should be recognized immediately and all gains should be deferred. A. True B. False If an exchange has commercial substance, both gains and losses should be recognized immediately. 2. IFRS and GAAP both use a commercial substance test to determine whether gains on nonmonetary exchanges should be recognized. A. True B. False GAAP changed from a similar in nature criterion to the commercial substance test to converge with IFRS. 3. Cash or other assets received in an exchange are referred to as boot. A. True B. False Cash received in an exchange is referred to as boot. 4. When nonmonetary assets are traded in an exchange that lacks commercial substance and no cash is received, any loss is recognized immediately. A. True B. False Losses that arise in an exchange of nonmonetary assets that lacks commercial substance are not deferred but recognized. 5. The receipt of an asset from a contribution should be recorded as additional paid-in capital. A. True B. False

Contributions received should be recorded as revenue in the period received. 6. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at A. the nominal cost of taking title to it. B. its market value. C. one dollar (since the site cost nothing but should be included in the balance sheet). D. the value assigned to it by the company's directors. The donated asset should be recorded at its market value. 7. Losses on exchanges of nonmonetary assets are: A. never recognized. B. recognized only on exchanges that have commercial substance. C. recognized only on exchanges that lack commercial substance. D. recognized in the period of the exchange. All losses on exchanges of nonmonetary assets are recognized in the period when the exchange takes place. 8. Zoum Company sold manufacturing equipment with a cost of $88,000 and accumulated depreciation of $64,000 for $19,000. The journal entry to record this transaction will include: A. a credit to the Equipment account for $24,000. B. a credit to a gain account for $4,000. C. a debit to a loss account for $5,000. D. a credit to Accumulated Depreciation Equipment for $64,000. When book value exceeds disposal price, a loss has occurred. The journal entry to record the sale would include debits to Cash ($19,000), Accumulated Depreciation Equipment ($64,000) and a loss account ($5,000). Equipment would be credited for $88,000. 9. A nonmonetary asset acquired in an exchange that has commercial substance is usually recorded at the: A. book value of the asset given up. B. book value of the asset received. C. fair value of the asset given up, unless fair value of the asset received is more clearly evident. D. fair value of the asset received.

The cost of an asset acquired in an exchange that has commercial substance is usually recorded at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident. 10. Plant assets purchased in exchange for a zero-interest-bearing note should be accounted for at the: A. face value of the note. B. fair value of the asset received. C. book value of the asset received. D. present value of the note. Plant assets purchased in exchange for a zero-interest-bearing note are recorded at the present value of the note. 11. In an exchange that lacks commercial substance in which a gain exists and cash is received, the asset received is recorded at the: A. book value of the asset given up less cash received. B. fair value of the asset given up less cash received. C. book value of the asset given up less the deferred portion of the gain. D. fair value of the asset received less the deferred portion of the gain. When cash is received in an exchange that lacks commercial substance and a gain exists, the asset received is recorded at the fair value of the asset received less the deferred portion of the gain. 12. Crompton Company purchased land and a building for a lump sum cost of $210,000. The land has a fair market value of $80,000 and the building has a fair market value of $160,000. The cost assigned to the land is A. $0. B. $70,000. C. $80,000. D. $105,000. The lump sum price incurred to acquire more than one asset is allocated among them based on their relative fair market values: ($80,000/ $240,000) ($210,000) = $70,000. 13. In an exchange of nonmonetary assets that has commercial substance, when no cash is involved, the new asset is valued at: A. the fair value of the new asset plus the gain deferred. B. the book value of the old asset.

C. the book value of the old asset plus the gain deferred. D. the fair value of the new asset. In an exchange of nonmonetary assets that has commercial substance, the earnings process of the old asset is completed and any gain or loss is recognized. When no cash was exchanged, the new asset would be valued at the fair market value of either the old asset or the new asset, as they will be equal. 14. Property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a: A. Miscellaneous Gain account. B. Paid-in Capital account. C. Contribution Revenue account. D. Additional Paid-in Capital account. FASB requires that such contributions be recognized as revenues in the period received. 15. The gain recognized in an exchange that lacks commercial substance and in which cash is received is computed by multiplying the total gain by the formula of: A. cash paid divided by the total of cash paid plus fair value of the asset received. B. cash paid divided by the total of cash paid plus fair value of the asset given up. C. cash received divided by the total of cash received plus fair value of the asset received. D. cash received divided by the total of cash received plus fair value of the asset given up. The gain recognized in an exchange is computed by multiplying the total gain by the cash received divided by the total of cash received plus the fair value of the asset received. 16. In an exchange of nonmonetary assets that lacks commercial substance in which a gain exists and no cash is paid or received, the asset received is recorded at: A. book value of the asset received less the gain deferred. B. fair value of the asset received up less the gain deferred. C. book value of the asset given up plus the deferred gain. D. fair value of the asset given up less the deferred gain. In exchanges of nonmonetary assets that lack commercial substance not involving cash received where gains exist, the asset received is recorded at the fair value of the asset given up less the deferred gain. 17. Assets acquired in a lump sum purchase should be recorded at their:

A. appraised value. B. relative book value. C. relative fair market values. D. fair market value. Assets acquired in a lump sum purchase are recorded on the basis of their relative fair market values. 18. Grambling Company exchanged equipment that cost $66,000 and has accumulated depreciation of $30,000 for equipment with a fair value of $48,000 and received $12,000 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is A. $4,800 gain. B. $6,000 gain. C. $18,000 gain. D. $24,000 gain. The formula is [($12,000 / { $12,000 + $48,000}) X {($48,000 + $12,000 ($66,000 $30,000)}], or $4,800. 19. The cost of a replacement that extends the useful life of an asset should be debited to the asset account. A. True B. False When an asset's useful life is extended by a replacement, the cost of such replacement should be debited to the related Accumulated Depreciation account. 20. On September 10, 2012, AMX Printing Co. incurred the following costs for one of its printing presses: Purchase of attachment $55,000 Installation of attachment 5,000 Replacement parts for renovation of press 18,000 Labor and overhead in connection with renovation of press 7,000 Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized? A. $0. B. $67,000. C. $78,000. D. $85,000.

Since the renovation significantly increased productivity, all $85,000 should be capitalized. 21. Which of the following is not a capital expenditure with regard to a manufacturing facility? A. Painting the exterior of the building B. C. D. Expanding the building by adding a new wing Replacing the heating system with a more energy efficient model Replacing the air conditioning system with a similar unit

Repairs that maintain an asset in operating condition are not capital expenditures. 22. Expenditures that extend the useful life of a plant asset without improving its quantity or quality are accounted for: A. as additions. B. as improvements. C. by debiting the asset account. D. by debiting Accumulated Depreciation. Expenditures that extend the useful life of a plant asset are accounted for by debiting Accumulated Depreciation. 23. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were A. less than current market value. B. greater than cost. C. greater than book value. D. less than book value. If sale proceeds are less than book value, a loss occurs. 24. Brick Company purchased machinery for $320,000 on January 1, 2008. Straight-line depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2012 at a gain of $6,000. How much cash did Brick receive from the sale of the machinery? A. $46,000. B. $54,000. C. $66,000. D. $86,000.

A cost of $320,000 - $260,000 in accumulated depreciation results in a book value of $60,000. Adding the $6,000 gain indicates sale price was $66,000. 25. Burton Company sold equipment with a cost of $55,000 and accumulated depreciation of $32,000 for $27,000. The journal entry to record this transaction will include: A. a credit to the Equipment account for $23,000. B. a credit to a gain account for $4,000. C. a debit to a loss account for $28,000. D. a credit to Accumulated Depreciation Equipment for $32,000. When plant assets are sold for an amount greater than their book value, a gain is recorded. The journal entry would include debits to Cash ($27,000) and Accumulated Depreciation ($32,000) and credits to Equipment ($55,000) and a gain account ($4,000). 26. All of the following are true regarding the revaluation model allowed under IFRS except: A. after initial recognition, the revalued amount is fair value less subsequent depreciation and impairment losses. B. when an asset is revalued, any increase in carrying amount is reported as miscellaneous revenue. C. revaluations must be made regularly to ensure that the carrying value is not materially different from fair value. D. once selected, the revaluation policy applies to an entire class of property, plant, and equipment. Revalued assets cannot be written up above original cost. 27. Land held for speculative purposes is classified as Property, Plant and Equipment but is not depreciated. A. True B. False Land held for speculative purposes is classified as an Investment. 28. Which of the following is not a major characteristic of a plant asset? A. Possesses physical substance B. Acquired for resale C. Acquired for use D. Yields services over a number of years Plant assets are not acquired for resale as a normal course of business.

29. The only major characteristic of property, plant and equipment shown below is: A. they are acquired for resale. B. they are always subject to depreciation. C. they are long-term in nature. D. they lack physical substance. Property, plant and equipment are considered long-term assets and as such yield services over a number of years. 30. Which one of the following is not a characteristic of property, plant, and equipment? A. They are acquired for use in operations. B. They are long-term in nature and are always subject to depreciation. C. They possess physical substance. D. All of the options are characteristics. Land, which is part of property, plant, and equipment, is not depreciated. 31. Plant assets may properly include A. deposits on machinery not yet received. B. idle equipment awaiting sale. C. land held for possible use as a future plant site. D. none of these. None of these items is properly classified as a plant asset. 32. A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land. A. True B. False This type of one-time special assessment would be included in the cost of the Land. 33. Boutique Suites Hotel Corporation recently purchased Rodeo Resort and the land on which it is located with the plan to tear down the Rodeo Resort and build a new luxury hotel on the site. Boutique Suites Hotel Corporation salvaged fixtures and wood flooring from Rodeo Resort prior to demolishing the building. The proceeds from the sale of the salvaged materials should be A. recognized as revenue in the period of the sale. B. recognized as an extraordinary gain in the year the hotel is torn down.

C. recorded as a reduction of the cost of the land. D. recorded as a reduction of the cost of the new hotel. Proceeds from the sale of the salvaged materials should reduce the cost of the land. 34. The cost of buildings should include all of the following except: A. building permits. B. excavation costs. C. overhead costs incurred during construction. D. costs of removing an old building on the new building site. The cost of removing an old building is a cost of getting the land ready and relates to the land instead of the new building. 35. The cost of land includes all of the following except: A. purchase price. B. payments to clear liens. C. cost of fencing and lighting. D. cost of leveling and grading. The cost of fencing and lighting would be recorded as Land Improvements because these expenditures have limited lives. 36. Special assessments for local improvements, such as pavements, street lights, sewers, and drainage systems, are usually charged to what account? A. Land. B. Land Improvements. C. Building Improvements. D. Betterments. Such assessments are usually charged to Land as they are relatively permanent in nature and are maintained and replaced by the local governmental body. 37. The cost of property acquired by the issuance of securities is equal to: A. the original cost of the securities. B. the market value of the securities. C. the par value of the securities. D. the book value of the property acquired.

Property acquired in non-cash transactions is recorded at the market value of the item given up or the market value of the property received, whichever is more readily determinable. 38. The cost of manufacturing equipment would include all of the following except: A. purchase price reduced by any discount taken. B. freight costs. C. installation costs. D. cost of training the equipment operator. The cost of training the equipment operator would not be capitalized as part of the cost of the equipment. 39. Alix Company purchased equipment for $35,000. Sales tax on the purchase was $350. Other costs incurred were freight charges of $400, insurance during shipping of $ 75, repairs of $650 for damage during installation, and installation costs of $525. What is the cost of the equipment? A. $35,000 B. $35,750 C. $36,350 D. $37,000 The cost is $35,000 + $350 + $400 + $75 + $525 = $36,350. Repair costs are not capitalized. 40. Which of the following costs are capitalized for self-constructed assets? A. Materials and labor only B. Labor and overhead only C. Materials and overhead only D. Materials, labor, and overhead Materials, labor, and overhead can all be capitalized on self-constructed assets. 41. During self-construction of an asset by Francoise Company, the following were among the costs incurred: Fixed overhead for the year: $1,230,000 Portion of $1,000,000 fixed overhead that would be allocated to asset if it were normal production: 33,000 Variable overhead attributable to self-construction:29,000 What amount of overhead should be included in the cost of the self-constructed asset?

A. $-0B. $29,000 C. $33,000 D. $62,000 The amount is $33,000 + $29,000, or $62,000. 42. A portion of fixed overhead incurred during self-construction of an asset must be allocated to the construction process. A. True B. False A portion of fixed overhead incurred during self-construction of an asset may be allocated to the construction process. Alternatively, the company may assign no fixed overhead to the cost of the constructed asset. 43. Overhead costs related to self-constructed assets are accounted for by: A. allocating overhead on the basis of lost production. B. assigning a portion of all overhead to the asset. C. assigning no fixed overhead to the asset. D. assigning a pro rata portion of fixed overhead to the asset. A pro rata portion of fixed overhead should be assigned to the self-constructed asset because a better matching of costs and revenues results. 44. Avoidable interest is the lesser of actual interest cost incurred during a fiscal period or the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset. A. True B. False The company can capitalize the lesser of the actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset. 45. Interest revenue earned on borrowed funds during the construction of an asset to be used by a firm can be used to reduce the cost of interest to be capitalized. A. True B. False

Interest revenue should not be netted or offset against interest cost. 46. The period of time during which interest must be capitalized ends when A. the asset is substantially complete and ready for its intended use. B. no further interest cost is being incurred. C. the asset is abandoned, sold, or fully depreciated. D. the activities that are necessary to get the asset ready for its intended use have begun. The period of time during which interest must be capitalized ends when the asset is substantially complete and ready for its intended use. 47. The approach for interest costs incurred during construction recommended under GAAP is to: A. capitalize no interest charges during construction. B. charge construction with all costs of funds employed, whether identifiable or not. C. capitalize the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made. D. capitalize a pro rata portion of all costs of funds employed. Capitalizing the lesser of actual interest cost for the period or the amount of interest cost incurred during the period that the company could have avoided if expenditures for the asset had not been made is the approach recommended under GAAP. 48. Which of the following is one of the conditions that must be present for the capitalization period of interest to begin? A. Expenditures for the asset must be budgeted. B. Activities necessary to get the asset ready for its intended use must be known. C. Interest costs are being incurred. D. The construction period must occur in the current accounting period. Interest costs being incurred is one of the three conditions that must met in order for the capitalization period to begin and continue. 49. Which of the following statements is true regarding capitalization of interest? A. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. B. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

C. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. D. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. 50. The interest rate(s) used in computing avoidable interest is the: A. rate incurred on specific borrowings. B. weighted average rate incurred on all other outstanding debt. C. lower of the rate incurred on specific borrowings or the weighted average rate. D. rate incurred on specific borrowings for the weighted-average expenditures equal to the specific borrowings and the weighted average rate of other borrowings for the excess expenditures. The interest rates used in computing avoidable interest are the specific interest rate and the weighted average rate. 51. The interest capitalization period ends when: A. activities to get the asset ready for its intended use are in progress. B. expenditures for the asset are being made. C. interest cost is being incurred. D. the asset is substantially complete and ready for its intended use. The capitalization period ends when the asset is substantially complete and ready for its intended use.