intermediate accounting study questions

8/16/2019 Intermediate Accounting Study Questions

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BUS320 – Intermediate Accounting IStudy Questions Chapter 10

TRUE-FALSE —Conceptual1. Assets classi ied as !roperty" !lant" and #$uipment can %e either ac$uired or use in

operations" or ac$uired or resale.

2. Assets classi ied as !roperty" !lant" and #$uipment must %e %oth long&term in nature andpossess physical su%stance.

3. 'hen land (ith an old %uilding is purchased as a uture %uilding site" the cost o remo)ingthe old %uilding is part o the cost o the ne( %uilding.

*. Insurance on e$uipment purchased" (hile the e$uipment is in transit" is part o the cost o the e$uipment.

+. Special assessments or local impro)ements such as street lights and se(ers should %eaccounted or as land impro)ements.

,. -aria%le o)erhead costs incurred to sel &construct an asset should %e included in the costo the asset.

. Companies should assign no portion o i/ed o)erhead to sel &constructed assets.

. 'hen capitali ing interest during construction o an asset" an imputed interest cost onstoc inancing must %e included.

. Assets under construction or a company4s o(n use do not $uali y or interest costcapitali ation.

10. A)oida%le interest is the amount o interest cost that a company could theoretically a)oid i it had not made e/penditures or the asset.

11. 'hen a company purchases land (ith the intention o de)eloping it or a particular use"interest costs associated (ith those e/penditures $uali y or interest capitali ation.

12. Assets purchased on long&term credit contracts should %e recorded at the present )alue o the consideration e/changed.

13. Companies account or the e/change o nonmonetary assets on the %asis o the air )alueo the asset gi)en up or the air )alue o the asset recei)ed.

1*. I a nonmonetary e/change lac s commercial su%stance" and cash is recei)ed" a partialgain or loss is recogni ed.

1+. 'hen a company e/changes nonmonetary assets and a loss results" the companyrecogni es the loss only i the e/change has commercial su%stance.

1,. Costs incurred su%se$uent to the ac$uisition o an asset are capitali ed i they pro)ideuture %ene its.

1 . Impro)ements are o ten re erred to as %etterments and in)ol)e the su%stitution o a %etterasset or the one currently used.

1 . 'hen an ordinary repair occurs" se)eral periods (ill usually %ene it.

1 . Companies al(ays treat gains or losses rom an in)oluntary con)ersion as e/traordinaryitems.



20. I a company scraps an asset (ithout any cash reco)ery" it recogni es a loss e$ual to theasset4s %oo )alue.

True False Answers— ConceptualItem Ans. Item Ans. Item Ans. Item Ans.

1. 5 ,. 6 11. 6 1,. 62. 6 . 5 12. 6 1 . 63. 5 . 5 13. 6 1 . 5*. 6 . 5 1*. 5 1 . 5+. 5 10. 6 1+. 5 20. 6

MULTIPLE CHOICE —Conceptual

21. !lant 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.

22. 'hich o the ollo(ing is not a ma7or characteristic o a plant asset8a. Possesses physical substanceb. Acquired for resalec. Acquired for used. Yields services over a number of years

23. 'hich o these is not a ma7or characteristic o a plant asset8a. Possesses physical substanceb. Acquired for use in operationsc. Yields services over a number of yearsd. All of these are major characteristics of a plant asset.

2*. Cotton 9otel Corporation recently purchased #mporia 9otel and the land on (hich it islocated (ith the plan to tear do(n the #mporia 9otel and %uild a ne( lu/ury hotel on thesite. 6he cost o the #mporia 9otel should %ea. depreciated over the period from acquisition to the date the hotel is scheduled to

be torn down.b. written off as an extraordinary loss in the year the hotel is torn down.c. capitalized as part of the cost of the land.d. capitalized as part of the cost of the new hotel.



2+. 6he cost o land does not includea. costs of grading, filling, draining, and clearing.b. costs of removing old buildings.c. costs of improvements with limited lives.d. special assessments.

2,. 6he cost o land typically includes the purchase price and all o the ollo(ing costs e/cepta. grading, filling, draining, and clearing costs.b. street lights, sewers, and drainage systems cost.c. private driveways and par ing lots.d. assumption of any liens or mortgages on the property.

2 . I a corporation purchases a lot and %uilding and su%se$uently tears do(n the %uilding anduses the property as a par ing lot" the proper accounting treatment o the cost o the%uilding (ould depend ona. the significance of the cost allocated to the building in relation to the combined

cost of the lot and building.b. the length of time for which the building was held prior to its demolition.

c. the contemplated future use of the par ing lot.d. the intention of management for the property when the building was acquired.

2 . 6he de%it or a sales ta/ properly le)ied and paid on the purchase o machinery pre era%ly(ould %e a charge toa. the machinery account.b. a separate deferred charge account.c. miscellaneous tax expense !which includes all taxes other than those on income".d. accumulated depreciation##machinery.

2 . 5ences and par ing lots are reported on the %alance sheet asa. current assets.b. land improvements.c. land.d. property and equipment.

S30. 9istorical cost is the %asis ad)ocated or recording the ac$uisition o property" plant" ande$uipment or all o the ollo(ing reasons except a. at the date of acquisition, cost reflects fair mar et value.b. property, plant, and equipment items are always acquired at their original

historical cost.c. historical cost involves actual transactions and, as such, is the most reliable

basis.d. gains and losses should not be anticipated but should be recognized when the

asset is sold.

S31. 6o %e consistent (ith the historical cost principle" o)erhead costs incurred %y an enterpriseconstructing its o(n %uilding should %ea. allocated on the basis of lost production.b. eliminated completely from the cost of the asset.c. allocated on an opportunity cost basis.d. allocated on a pro rata basis between the asset and normal operations.



32. 'hich o the ollo(ing costs are capitali ed or sel &constructed assets8a. $aterials and labor onlyb. %abor and overhead onlyc. $aterials and overhead onlyd. $aterials, labor, and overhead

33. 'hich o the ollo(ing assets do not $uali y or capitali ation o interest costs incurredduring construction o the assets8a. Assets under construction for an enterprise&s own use.b. Assets intended for sale or lease that are produced as discrete projects.c. Assets financed through the issuance of long#term debt.d. Assets not currently undergoing the activities necessary to prepare them for their

intended use.

3*. Assets that $uali y or interest cost capitali ation includea. assets under construction for a company&s own use.b. assets that are ready for their intended use in the earnings of the company.c. assets that are not currently being used because of excess capacity.

d. All of these assets qualify for interest cost capitalization.3+. 'hen computing the amount o interest cost to %e capitali ed" the concept o :a)oida%le

interest: re ers toa. the total interest cost actually incurred.b. a cost of capital charge for stoc holders& equity.c. that portion of total interest cost which would not have been incurred if

expenditures for asset construction had not been made.d. that portion of average accumulated expenditures on which no interest cost was

incurred.

3,. 6he period o time during (hich interest must %e capitali ed ends (hena. 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.

3 . 'hich o the ollo(ing statements is true regarding capitali ation o interest8a. Interest cost capitali ed in connection (ith the purchase o land to %e used as a

%uilding site should %e de%ited to the land account and not to the %uilding account.%. 6he amount o interest cost capitali ed during the period should not e/ceed the actual

interest cost incurred.c. 'hen e/cess %orro(ed unds not immediately needed or construction are temporarily

in)ested" any interest earned should %e o set against interest cost incurred (hen

determining the amount o interest cost to %e capitali ed.d. 6he minimum amount o interest to %e capitali ed is determined %y multiplying a(eighted a)erage interest rate %y the amount o a)erage accumulated e/penditures on$uali ying assets during the period.



3 . Construction o a $uali ying asset is started on April 1 and inished on ;ecem%er 1. 6heraction used to multiply an e/penditure made on April 1 to ind (eighted&a)erage

accumulated e/penditures isa. '('.b. '()*.c. +()*.d. ))()*.

3 . 'hen unds are %orro(ed to pay or construction o assets that $uali y or capitali ation o interest" the e/cess unds not needed to pay or construction may %e temporarily in)estedin interest&%earing securities. Interest earned on these temporary in)estments should %ea. offset against interest cost incurred during construction.b. used to reduce the cost of assets being constructed.c. multiplied by an appropriate interest rate to determine the amount of interest to

be capitalized.d. recognized as revenue of the period.

*0. Interest cost that is capitali ed shoulda. be written off over the remaining term of the debt.b. be accumulated in a separate deferred charge account and written off equally

over a -#year period.c. not be written off until the related asset is fully depreciated or disposed of.d. none of these.

S*1. 'hich o the ollo(ing is not a condition that must %e satis ied %e ore interestcapitali ation can %egin on a $uali ying asset8a. nterest cost is being incurred.b. /xpenditures for the assets have been made.c. 0he interest rate is equal to or greater than the company&s cost of capital.d. Activities that are necessary to get the asset ready for its intended use are in

progress.

S*2. 'hich o the ollo(ing is the recommended approach to handling interest incurred ininancing the construction o property" plant and e$uipment8

a. Capitali e only the actual interest costs incurred during construction.%. Charge construction (ith all costs o unds employed" (hether identi ia%le or not.c. Capitali e no interest during construction.d. Capitali e interest costs e$ual to the prime interest rate times the estimated cost o

the asset %eing constructed.

S*3. 'hich o the ollo(ing nonmonetary e/change transactions represents a culmination o theearning process8a. #/change o assets (ith no di erence in uture cash lo(s.%. #/change o products %y companies in the same line o %usiness (ith no di erence in

uture cash lo(s.c. #/change o assets (ith a di erence in uture cash lo(s.d. #/change o an e$ui)alent interest in similar producti)e assets that causes the

companies in)ol)ed to remain in essentially the same economic position.



S**. 'hen %oot is in)ol)ed in an e/change ha)ing commercial su%stance.a. gains or losses are recogni ed in their entirely.%. a gain or loss is computed %y comparing the air )alue o the asset recei)ed (ith the

air )alue o the asset gi)en up.c. only gains should %e recogni ed.d. only losses should %e recogni ed.

S*+. 6he cost o a nonmonetary asset ac$uired in e/change or another nonmonetary asset andthe e/change has commercial su%stance is usually recorded ata. the fair value of the asset given up, and a gain or loss is recognized.b. the fair value of the asset given up, and a gain but not a loss may be recognized.c. the fair value of the asset received if it is equally reliable as the fair value of the

asset given up.d. either the fair value of the asset given up or the asset received, whichever one

results in the largest gain !smallest loss" to the company.

! *,. <ingler Corporation e/changes one plant asset or a similar plant asset and gi)es cash inthe e/change. 6he e/change is not e/pected to cause a material change in the uture cash

lo(s or either entity. I a gain on the disposal o the old asset is indicated" the gain (ill

a. be reported in the 1ther 2evenues and 3ains section of the income statement.b. effectively reduce the amount to be recorded as the cost of the new asset.c. effectively increase the amount to be recorded as the cost of the new asset.d. be credited directly to the owner&s capital account.

* . !lant assets purchased on long&term credit contracts should %e accounted or ata. the total value of the future payments.b. the future amount of the future payments.c. the present value of the future payments.d. none of these.

* . 'hen a plant asset is ac$uired %y issuance o common stoc " the cost o the plant asset is

properly measured %y thea. par value of the stoc .b. stated value of the stoc .c. boo value of the stoc .d. mar et value of the stoc .

* . 'hen a closely held corporation issues pre erred stoc or land" the land should %erecorded at thea. total par value of the stoc issued.b. total boo value of the stoc issued.c. total liquidating value of the stoc issued.d. fair mar et value of the land.

+0. Accounting recognition should %e gi)en to some or all o the gain reali ed on anonmonetary e/change o plant assets except (hen the e/change hasa. no commercial substance and additional cash is paid.b. no commercial substance and additional cash is received.c. commercial substance and additional cash is paid.d. commercial substance and additional cash is received.

+1. 5or a nonmonetary e/change o plant assets" accounting recognition should not %e gi)en toa. a loss when the exchange has no commercial substance.b. a gain when the exchange has commercial substance.c. part of a gain when the exchange has no commercial substance and cash is paid

!cash paid(received is less than *45 of the fair value of the exchange".



d. part of a gain when the exchange has no commercial substance and cash isreceived !cash paid or received is less than *45 of the fair value of theexchange".

+2. 'hen an enterprise is the recipient o a donated asset" the account credited may %e aa. paid#in capital account.b. revenue account.c. deferred revenue account.d. all of these.

+3. A plant site donated %y a to(nship to a manu acturer that plans to open a ne( actoryshould %e recorded on the manu acturer=s %oo s ata. the nominal cost of ta ing title to it.b. its mar et 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.

+*. In order or a cost to %e capitali ed >capital e/penditure?" the ollo(ing must %e present@a. 0he useful life of an asset must be increased.b. 0he quantity of assets must be increased.c. 0he quality of assets must be increased.d. Any one of these.

++. An impro)ement made to a machine increased its air mar et )alue and its productioncapacity %y 2+ (ithout e/tending the machine=s use ul li e. 6he cost o the impro)ementshould %ea. expensed.b. debited to accumulated depreciation.c. capitalized in the machine account.d. allocated between accumulated depreciation and the machine account.

+,. 'hich o the ollo(ing is a capital e/penditure8a. Payment of an account payableb. 2etirement of bonds payablec. Payment of 6ederal income taxesd. 7one of these

+ . 'hich o the ollo(ing is not a capital e/penditure8a. 2epairs that maintain an asset in operating conditionb. An additionc. A bettermentd. A replacement



! + . In accounting or plant assets" (hich o the ollo(ing outlays made su%se$uent toac$uisition should %e ully e/pensed in the period the e/penditure is made8a. /xpenditure made to increase the efficiency or effectiveness of an existing assetb. /xpenditure made to extend the useful life of an existing asset beyond the time

frame originally anticipatedc. /xpenditure made to maintain an existing asset so that it can function in the

manner intendedd. /xpenditure made to add new asset services

S+ . An e/penditure made in connection (ith a machine %eing used %y an enterprise should %ea. expensed immediately if it merely extends the useful life but does not improve the

quality.b. expensed immediately if it merely improves the quality but does not extend the

useful life.c. capitalized if it maintains the machine in normal operating condition.d. capitalized if it increases the quantity of units produced by the machine.

S ,0. 'hen a plant asset is disposed o " a gain or loss may result. 6he gain or loss (ould %e

classi ied as an e/traordinary item on the income statement i it resulted roma. an involuntary conversion and the conditions of the disposition are unusual andinfrequent in nature.

b. a sale prior to the completion of the estimated useful life of the asset.c. the sale of a fully depreciated asset.d. an abandonment of the asset.

,1. 6he sale o a deprecia%le asset resulting in a loss indicates that the proceeds rom the sale(erea. less than current mar et value.b. greater than cost.c. greater than boo value.

d. less than boo value.,2. 'hich o the ollo(ing statements a%out in)oluntary con)ersions is false?

a. An involuntary conversion may result from condemnation or fire.b. 0he gain or loss from an involuntary conversion may be reported as an

extraordinary item.c. 0he gain or loss from an involuntary conversion should not be recognized when

the enterprise reinvests in replacement assets.d. All of these.



Mult ple C!o ce Answers —Conceptual

Ite Ans Ite Ans Ite Ans Ite Ans Ite Ans Ite Ans Ite Ans21. d 2 . d 33. d 3 . d *+. a +1. c + . a22. % 2 . a 3*. a *0. d *,. % +2. % + . c

23. d 2 . % 3+. c *1. c * . c +3. % + . d

2*. c 30. % 3,. a *2. a * . d +*. d ,0. a

2+. c 31. d 3 . % *3. c * . d ++. c ,1. d

2,. c 32. d 3 . % **. a +0. a +,. d ,2. c

Solutions to those ultiple Choice $uestions or (hich the ans(er is none o these.D

21. Eong&li)ed tangi%le assets used in the enterprise4s operations.

*0. Capitali ed interest is depreciated o)er the related asset4s use ul li e.

+,. Capital e/penditures include additions" %etterments" impro)ements" and e/traordinaryrepairs.

E"ERCISESE#. $%-$&$ F!lant asset accounting.

8uring *-)- and *-)), 9awyer :orporation experienced several transactions involving plantassets. A number of errors were made in recording some of these transactions. 6or eachitem listed below, indicate the effect of the error !if any" in the blan s provided by using thefollowing codes;

G H G)erstate U H Understate J# H Jo # ect

I no error (as made" (rite J# in each o the our columns.

2010 2011Jet Boo Jet Boo-alue o -alue o

!lant 2010 !lant 2011Assets at Jet Assets at Jet

6ransaction 12K31K10 Income 12K31K11 Income

1. 6he cost o installing a ne( computersystem in 2010 (as not recorded in2010. It (as charged to e/pense in2011.

2. In 2011 clerical (or ers (ere trained to

use the ne( computer system at a costo L1+"000" (hich (as erroneouslycapital&i ed. 6he cost is to %e (ritten o o)er the e/pected li e o the ne(computer system.

3. A ma7or o)erhaul o actory machineryin 2010" (hich e/tended its use ul li e%y + years" (as charged to accumulateddepreciation in 2010.

*. Interest cost $uali ying or capitali ationin 2010 (as charged to interest e/pensein 2010.

MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM








+. In 2010 land (as %ought or anemployee par ing lot. 6he L2"000 titlesearch ee (as charged to e/pense in2010.

,. 6he cost o mo)ing se)eral

manu acturing acilities rommetropolitan locations to su%ur%anareas in 2010 (as capitali ed. 6he cost(as (ritten o o)er a 10&year period%eginning in 2010.



Solut on $%-$&$

Jet Boo Jet Boo-alue o -alue o

!lant 2010 !lant 2011Assets at Jet Assets at Jet12K31K10 Income 12K31K11 Income

1. U G U U

2. J# J# G G

3. J# J# J# J#

*. U U U G

+. U U U J#

,. J# J# J# J#

E#. $%-$&' F'eighted&A)erage Accumulated #/penditures.

1n April ), Paine :o. began construction of a small building. Payments of <)*-,--- weremade monthly for four months beginning on April ). 0he building was completed and readyfor occupancy on August ). 6or the purpose of determining the amount of interest cost to becapitalized, calculate the weighted#average accumulated expenditures on the building bycompleting the schedule below;

;ate #/penditures Capitali ation !eriod 'eighted&A)erage #/penditures

Solution 10-132

;ate #/penditures Capitali ation !eriod 'eighted&A)erage #/pendituresApril 1 L120"000 *K12 L *0"000

ay 1 120"000 3K12 30"000Nune 1 120"000 2K12 20"000Nuly 1 120"000 1K12 10"000

L100"000

E#. $%-$&& FCapitali ation o interest.

1n $arch ), $ocl :o. began construction of a small building. 0he following expenditureswere incurred for construction;

arch 1 L +"000 April 1 L *"000ay 1 1 0"000 Nune 1 2 0"000

Nuly 1 100"0000he building was completed and occupied on =uly ). 0o help pay for construction <4-,---was borrowed on $arch ) on a )*5, three#year note payable. 0he only other debtoutstanding during the year was a <4--,---, )-5 note issued two years ago.

Instruct ons>a? Calculate the (eighted&a)erage accumulated e/penditures.>%? Calculate a)oida%le interest.

Solut on $%-$&&

>a? Capitali ation 'eighted&A)erage;ate #/penditures !eriod Accum. #/pend.

arch 1 L +"000 *K12 L2+"000April 1 *"000 3K12 1 "+00



ay 1 1 0"000 2K12 30"000Nune 1 2 0"000 1K12 22"+00Nuly 1 100"000 0 0

L ,"000

>%? 'eighted&A)erage A)oida%le

Accum. #/pend. <ate InterestL+0"000 .12 L ,"000 *,"000 .10 *",00L ,"000 L10",00

E#. $%-$&( FJonmonetary e/change.

A machine cost <'-,---, has annual depreciation expense of <)>,---, and has accumulateddepreciation of < -,--- on 8ecember ?), *-)-. 1n April ), *-)), when the machine has afair value of <?*,---, it is exchanged for a similar machine with a fair value of <+>,--- andthe proper amount of cash is paid. 0he exchange lac ed commercial substance.

Instruct ons!repare all entries that are necessary at April 1" 2011.

Solut on $%-$&(

;epreciation #/pense >L1,"000 O 3K12?........................................... *"000Accumulated ;epreciation .................................................. *"000

Accumulated ;epreciation ............................................................. **"000achinery ................................................................................... ,"000

Eoss on ;isposal........................................................................... *"000achinery ........................................................................ 0"000

Cash >L ,"000 – L32"000? ................................................. ,*"000

E#. $%-$&) FJonmonetary e/change.

/quipment that cost <'-,--- and has accumulated depreciation of <>?,--- is exchanged for equipment with a fair value of <?*,--- and <',--- cash is received. 0he exchange lac edcommercial substance.

Instruct ons>a? Sho( the calculation o the gain to %e recogni ed rom the e/change.>%? !repare the entry or the e/change. Sho( a chec o the amount recorded or the ne(

e$uipment.Solut on $%-$&)

>a? Cost L 0"000Accumulated depreciation >,3"000?Boo )alue 1 "0005air )alue >L32"000 P L "000? *0"000

ain L23"000

ain recogni ed > K*0 O L32"000? L *",00

>%? Accumulated ;epreciation....................................................... ,3"000#$uipment............................................................................ 13",00Cash.................................................................................... "000

#$uipment................................................................. 0"000



ain on ;isposal......................................................... *",00

Chec @5air )alue L32"000Eess de erred gain >1 "*00?Basis o ne( e$uipment L13",00

E#. $%-$&* F;onated assets.

:heng :ompany has recently decided to accept a proposal from the :ity of @el Aire thatpublicly owned property with a large warehouse located on it will be donated to :heng if :heng will build a branch plant in @el Aire. 0he appraised value of the property is < +-,---and of the warehouse is <+'-,---.

Instruct ons

!repare the entry %y Cheng or the receipt o the properties.

Solut on $%-$&*

Building >'arehouse?.................................................................... 0"000Eand........................................................................................... * 0"000

Contri%ution <e)enue......................................................... 1"* 0"000



E#. $%-$&+ FCapitali ing )s. #/pensing.

:onsider each of the items below. Place the proper letter in the blan space provided toindicate the nature of the account or accounts to be debited when recording each transactionusing the preferred accounting treatment. Prepayments should be recorded in balance sheetaccounts. 8isregard income tax considerations unless instructed otherwise.

a. asset>s? only%. accumulated amorti ation" depletion" or depreciation onlyc. e/pense onlyd. asset>s? and e/pensee. some other account or com%ination o accounts

MMMMMM 1. A motor in one o Jorth Company4s truc s (as o)erhauled at a cost o L,00. It ise/pected that this (ill e/tend the li e o the truc or t(o years.

MMMMMM 2. achinery (hich had originally cost L130"000 (as rearranged at a cost o L*+0"including installation" in order to impro)e production.

MMMMMM 3. Grlando Company recently purchased land and t(o %uildings or a total cost o L3+"000" and entered the purchase on the %oo s. 6he L1"200 cost o ra ing thesmaller %uilding" (hich has an appraisal )alue o L,"200" is recorded.

MMMMMM *. Nant en Company traded its old machine (ith a net %oo )alue o L3"000 plus cash o L "000 or a ne( one (hich had a air mar et )alue o L "000.

MMMMMM +. Nim !arra and ary Ea(son" maintenance repair (or ers" spent i)e days in unloadingand setting up a ne( L,"000 precision machine in the plant. 6he (ages earned in this

i)e&day period" L* 0" are recorded.

MMMMMM ,. Gn Nune 1" the ilton 9otel installed a sprin ler system throughout the %uilding at acost o L13"000. As a result the insurance rate (as decreased %y *0 .

MMMMMM . An impro)ement" (hich e/tended the li e %ut not the use ulness o the asset" costL,"000.

MMMMMM . 6he attic o the administration %uilding (as inished at a cost o L3"000 to pro)ide anadditional o ice.

MMMMMM . In arch" the Eyon 6heatre %ought pro7ection e$uipment on the installment %asis. 6hecontract price (as L23",10" paya%le L+",10 do(n" and L2"2+0 a month or the ne/teight months. 6he cash price or this e$uipment (as L22"+30.

MMMMMM10. Eam%ert Company recorded the irst year4s interest on , L100"000 ten&year %ondssold a year ago at *. 6he %onds (ere sold in order to inance the construction o ahydroelectric plant. Si/ months a ter the sale o the %onds" the construction o the

hydroelectric plant (as completed and operations (ere %egun. >Gnly cash interest" andnot discount amorti ation" is to %e considered.?



Solut on $%-$&+

1. % ,. a2. a or c . %3. a . a*. e . e+. a 10. d

PRO,LEMSPr. $%-$& FCapitali ing ac$uisition costs.

3ibbs $anufacturing :o. was incorporated on )(*()- but was unable to begin manufacturingactivities until '()()- because new factory facilities were not completed until that date. 0he%and and @uilding account at )*(?)()- per the boo s was as follows;

;ate Item Amount1K31K10 Eand and dilapidated %uilding L200"0002K2 K10 Cost o remo)ing %uilding *"000

*K1K10 Eegal ees ,"000+K1K10 5ire insurance premium payment +"*00+K1K10 Special ta/ assessment or streets *"+00+K1K10 !artial payment o ne( %uilding construction 1+0"000

K1K10 5inal payment on %uilding construction 1+0"000K1K10 eneral e/penses 30"000

12K31K10 Asset (rite&up +"000L,2*" 00

Additional in ormation@

1. 6o ac$uire the land and %uilding on 1K31K10" the company paid L100"000 cash and 1"000shares o its common stoc >par )alue H L100Kshare? (hich is )ery acti)ely traded and had amar et )alue per share o L1 0.

2. 'hen the old %uilding (as remo)ed" i%%s paid R(i ;emolition Co. L*"000" %ut also recei)edL1"+00 rom the sale o sal)aged material.

3. Eegal ees co)ered the ollo(ing@Cost o organi ation L2"+00#/amination o title co)ering purchase o land 2"000Eegal (or in connection (ith the %uilding construction 1"+00

L,"000

*. 6he ire insurance premium co)ered premiums or a three&year term %eginning ay 1" 2010.

+. eneral e/penses co)ered the ollo(ing or the period 1K2K10 to K1K10.!resident=s salary L20"000!lant superintendent co)ering super)ision o ne( %uilding 10"000

L30"000

,. Because o the rising land costs" the president (as sure that the land (as (orth at leastL +"000 more than (hat it cost the company.

Instruct ons;etermine the proper %alances as o 12K31K10 or a separate land account and a separate %uildingaccount. Use separate 6&accounts >one or land and one or %uilding? la%eling all the rele)antamounts and disclosing all computations.Solut on $%-$&

Eand

Eand and old %uilding>L100"000 plus L1 0"000? 2 0"000

<emo)al o old %uilding>L*"000 – L1"+00? 2"+00

Eegal ees 2"000Special assessment *"+00Balance 2 "000



Building

Eegal 5ees 1"+00!artial payment 1+0"000Insurance >3 months? *+05inal payment 1+0"000Superintendent=s salary 10"000Balance 311" +0

Pr. $%-$& FCapitali ation o interest.

8uring *-)-, @arden @uilding :ompany constructed various assets at a total cost of <', --,---. 0he weighted average accumulated expenditures on assets qualifying for capitalization of interest during *-)- were <4,>--,---. 0he company had the following debtoutstanding at

8ecember ?), *-)-;1. 10 " +&year note to inance construction o )arious assets"

dated Nanuary 1" 2010" (ith interest paya%le annually on Nanuary 1 L3",00"000

2. 12 " ten&year %onds issued at par on ;ecem%er 31" 200*" (ith interestpaya%le annually on ;ecem%er 31 *"000"000

3. " 3&year note paya%le" dated Nanuary 1" 200 " (ith interest paya%leannually on Nanuary 1 2"000"000

InstructionsCompute the amounts o each o the ollo(ing >sho( computations?.

1. A)oida%le interest.2. 6otal interest to %e capitali ed during 2010.



Solut on $%-$&

1. 'eighted A)erageAccumulated Applica%le A)oida%le#/penditures Interest <ate InterestL3",00"000 .10 L3,0"000 2"000"000 .11 220"000L+",00"000 L+ 0"000 H A)oida%le Interest

Computation o (eighted a)erage interest rate@

!rincipal Interest12 ten&year %onds L*"000"000 L* 0"000

3&year note 2"000"000 1 0"000L,"000"000 L,,0"000

'eighted a)erage interest rate H L,,0"000 T L,"000"000 H 11 .

2. Actual interest cost during 2010@Construction note" L3",00"000 O .10 L 3,0"00012 ten&year %onds" L*"000"000 O .12 * 0"000

three&year note" L2"000"000 O .0 1 0"000L1"020"000

6he interest cost to %e capitali ed is L+ 0"000 >the lesser o the L+ 0"000 a)oida%le interestand the L1"020"000 actual interest?.

Pr. $%-$(% FCapitali ation o interest.

/arly in *-)-, 8obbs :orporation engaged iner, nc. to design and construct a completemodernization of 8obbs&s manufacturing facility. :onstruction was begun on =une ), *-)-and was completed on 8ecember ?), *-)-. 8obbs made the following payments to iner,

nc. during *-)-;;ate !aymentNune 1" 2010 L3",00"000August 31" 2010 +"*00"000;ecem%er 31" 2010 *"+00"000

In order to help inance the construction" ;o%%s issued the ollo(ing during 2010@

1. L3"000"000 o 10&year" %onds paya%le" issued at par on ay 31" 2010" (ith interestpaya%le annually on ay 31.

2. 1"000"000 shares o no&par common stoc " issued at L10 per share on Gcto%er 1" 2010.

n addition to the +5 bonds payable, the only debt outstanding during *-)- was a <B4-,---,)*5 note payable dated =anuary ), *--> and due =anuary ), *-)>, with interest payableannually on =anuary ).

Instruct onsCompute the amounts o each o the ollo(ing >sho( computations?@1. 'eighted&a)erage accumulated e/penditures $uali ying or capitali ation o interest cost.2. A)oida%le interest incurred during 2010.3. 6otal amount o interest cost to %e capitali ed during 2010.Solut on $%-$(%

1. 'eighted&A)erageCapitali ation Accumulated

;ate #/penditures !eriod #/pendituresNune 1 L3",00"000 K12 L2"100"000

August 31 +"*00"000 *K12 1" 00"000;ecem%er 31 *"+00"000 0 0L3" 00"000



2. 'eighted&A)erageAccumulated Appropriate A)oida%le#/penditures Interest <ate InterestL3"000"000 .0 L2 0"000 00"000 .12 10 "000

L3" 00"000 L3 "0003. Actual interest incurred during 2010@

%onds paya%le" L3"000"000 O .0 O K12 L1+ "+0012 note paya%le" L +0"000 O .12 0"000

L2* "+00

6he interest cost to %e capitali ed is L2* "+00 >the lesser o the L3 "000 a)oida%le interestand the L2* "+00 actual interest cost?.

Pr. $%-$($ FAsset ac$uisition.

6ord nc. plans to acquire an additional machine on =anuary ), *-)- to meet the growingdemand for its product. 9tever :ompany offers to provide the machine to 6ord using either of the options listed below !each option gives 6ord exactly the same machine and gives9tever :ompany approximately the same net present value cash equivalent at )-5".

Gption 1 F Cash purchase L 00"000.Gption 2 F Installment purchase re$uiring 1+ annual payments o L10+"1 due

;ecem%er 31 each year.

6he e/pected economic li e o this machine to 5ord is 1+ years. Sal)age )alue at that time isestimated to %e L+0"000. Straight&line depreciation is used. Interest e/pense under Gption 2 iscomputed using the e ecti)e interest method.

Instruct onsBased upon current generally accepted accounting principles" state ho(" i at all" the %oo )alue o the machine and the o%ligation should appear on the ;ecem%er 31" 2010 %alance sheet o 5ordInc." or each option. !resent your ans(er on an ans(er sheet in the ollo(ing ormat. I an itemshould not appear in the %alance sheet" (rite :not sho(n: opposite the option.

Assets Eia%ilitiesAccount Jame Amount Account JameAmount

Gption 1

Gption 2Solut on $%-$($

Assets Eia%ilitiesAccount Jame Amount Account JameAmount

Gption 1 achinery L 00"000 :not sho(n:Accum. ;epr. +0"000

Gption 2 achinery L 00"000 Jotes !aya%leFAccum. ;epr. +0"000 Current L 2 ",

Jotes !aya%leFEong&term * "12*

Computations@At Nanuary 1" 2010" the note paya%le is L 00"000.At ;ecem%er 31" 2010" a ter the irst payment o L10+"1 has %een made >L 0"000 interest?

L *" 21 principal remains" o (hich L * "12* is long&term and L2 ", is current L10+"1 –>10 O L *" 21?V.



Jote@ L10+"1 O .,0,0 >6a%le ,&*? H L 00"000" the present )alue o the o%ligation onNanuary 1" 2010.

Pr. $%-$(' FJonmonetary e/changes.

$oore :orporation follows a policy of a )-5 depreciation charge per year on all machineryand a 45 depreciation charge per year on buildings. 0he following transactions occurred in*-));

arch 31" 2011F Jegotiations (hich %egan in 2010 (ere completed and a (arehouse purchased1K1K02 >depreciation has %een properly charged through ;ecem%er 31" 2010?at a cost o L3"200"000 (ith a air mar et )alue o L2"000"000 (as e/changed

or a second (arehouse (hich also had a air mar et )alue o L2"000"000. 6hee/change had no commercial su%stance. Both parcels o land on (hich the(arehouses (ere located (ere e$ual in )alue" and had a air )alue e$ual to%oo )alue.

Nune 30" 2011F achinery (ith a cost o L2*0"000 and accumulated depreciation throughNanuary 1 o L1 0"000 (as e/changed (ith L1+0"000 cash or a parcel o land(ith a air mar et )alue o L230"000.

Instruct ons!repare all appropriate 7ournal entries or oore Corporation or the a%o)e dates.

Solut on $%-$('

3K31K11 ;epreciation #/pense ..................................................... *0"000Accumulated ;epreciationF'arehouse ................ *0"000

>L3"200"000 O + O 1K*?

'arehouse ................................................................. 1" 20"000

Accumulated ;epreciationF'arehouse.............................. 1"* 0"000'arehouse....................................................... 3"200"000>L3"200"000 O + O 1K* H L1"* 0"000?

Solut on $%-$(' >cont.?

,K30K11 ;epreciation #/pense...................................................... 12"000Accumulated ;epreciationF achinery.................. 12"000

>L2*0"000 O 10 O 1K2?

Eand ........................................................................... 230"000Accumulated ;epreciationF achinery................................ 1 2"000

ain on #/change.............................................. 32"000achinery........................................................ 2*0"000

Cash................................................................ 1+0"000L 0"000 – >L2*0"000 – L1 2"000?V H L32"000

Pr. $%-$(& FJonmonetary e/change.

2ogers :o. had a sheet metal cutter that cost <+>,--- on =anuary 4, *-->. 0his old cutter had an estimated life of ten years and a salvage value of <)>,---. 1n April ?, *-)), the oldcutter is exchanged for a new cutter with a mar et value of < ',---. 0he exchange lac edcommercial substance. 2ogers also received <)*,--- cash. Assume that the last fiscalperiod ended on 8ecember ?), *-)-, and that straight#line depreciation is used.

Instruct ons>a? Sho( the calculation o the amount o the gain or loss to %e recogni ed %y <ogers Co.



>%? !repare all entries that are necessary on April 3" 2011. Sho( a chec o the amount recordedor the ne( cutter.

Solut on $%-$(&

>a? Cost L ,"000Accumulated depreciation >+ 1K* O L "000? >*2"000?Boo )alue +*"0005air )alue >L* "000 P L12"000? ,0"000

ain L ,"000

ain recogni ed >12K,0 O L,"000? L 1"200

>%? ;epreciation #/pense......................................................... 2"000Accumulated ;epreciation........................................ 2"000

Accumulated ;epreciation................................................... *2"000achinery......................................................................... *3"200

Cash................................................................................ 12"000achinery ............................................................. ,"000ain on ;isposal .................................................... 1"200

Chec @ 5air )alue L* "000Eess de erred gain >*" 00?Basis o ne( machinery L*3"200

Pr. $%-$(( FJonmonetary e/change.

%ayne :o. has a machine that cost <*44,--- on $arch *-, *--B. 0his old machine had anestimated life of ten years and a salvage value of <)4,---. 1n 8ecember *?, *-)), the oldmachine is exchanged for a new machine with a mar et value of <)>*,---. 0he exchangelac ed commercial substance. %ayne also received <)',--- cash. Assume that the last fiscalperiod ended on 8ecember ?), *-)-, and that straight#line depreciation is used.

Instruct ons>a? Sho( the calculation o the amount o gain or loss to %e recogni ed %y Eayne Co. rom the

e/change. ><ound to the nearest dollar.?

>%? !repare all entries that are necessary on ;ecem%er 23" 2011. Sho( a chec o the amountrecorded or the ne( machine.

Solut on $%-$((

>a? Cost L2++"000Accumulated depreciation >* 3K* O L2*"000? >11*"000?Boo )alue 1*1"0005air )alue >L1,2"000 P L1 "000? 1 0"000

ain L 3 "000

ain recogni ed >1 K1 0 O L3 "000? L 3" 00

>%? ;epreciation #/pense......................................................... 2*"000Accumulated ;epreciation........................................ 2*"000

Accumulated ;epreciation................................................... 11*"000achine............................................................................ 12," 00

Cash................................................................................ 1 "000

achine................................................................. 2++"000ain on ;isposal..................................................... 3" 00Chec @ 5air )alue L1,2"000



;e erred gain >3+"100?Basis o ne( machine L12," 00

Pr. $%-$() FJonmonetary e/change.

Codge :o. exchanged @uilding * which has an appraised value of <?,*--,---, a cost of <4,->-,---, and accumulated depreciation of <*, --,--- for @uilding $ belonging to 6ine:o. @uilding $ has an appraised value of <?,--',---, a cost of <>,-*-,---, andaccumulated depreciation of <?,)>',---. 0he correct amount of cash was also paid. Assumedepreciation has already been updated.

Instruct ons!repare the entries on %oth companies= %oo s assuming the e/change had no commercialsu%stance. Sho( a chec o the amount recorded or Building on 9odge=s %oo s. ><ound to thenearest dollar.?

Solut on $%-$()

9odge Co.@Cost L+"0,0"000Accumulated depreciation 2"*00"000Boo )alue 2",,0"0005air )alue 3"200"000

ain L +*0"000

ain recogni ed >1 2K3"200 O L+*0"000? L32"*00

Accumulated ;epreciation................................................... 2"*00"000Building ......................................................................... 2"+00"*00Cash................................................................................ 1 2"000

Building 2*............................................................ +"0,0"000ain on ;isposal..................................................... 32"*00

Chec @ 5air )alue L3"00 "000;e erred gain >+0 ",00?Basis or Building L2"+00"*00

5ine Co.@Cost L,"020"000Accumulated ;epreciation 3"1, "000Boo )alue 2" +2"0005air )alue 3"00 "000

ain L 1+,"000

Accumulated ;epreciation................................................... 3"1, "000

Building 2*....................................................................... 3"0**"000Building .............................................................. ,"020"000Cash..................................................................... 1 2"000

Pr. $%-$(* FJonmonetary e/change.

@eeman :ompany exchanged machinery with an appraised value of <),B44,---, a recordedcost of <*,B--,--- and Accumulated 8epreciation of <),?4-,--- with %acey :orporation for machinery %acey owns. 0he machinery has an appraised value of <),>+4,---, a recordedcost of <?,* -,---, and Accumulated 8epreciation of <),B'*,---. %acey also gave @eeman<>-,--- in the exchange. Assume depreciation has already been updated.

Instruct ons



>a? !repare the entries on %oth companies= %oo s assuming that the e/change had commercialsu%stance. ><ound all computations to the nearest dollar.?

>%? !repare the entries on %oth companies= %oo s assuming that the e/change lac ed commercialsu%stance. ><ound all computations to the nearest dollar.?



Solut on $%-$(*

>a? Commercial Su%stance

Beemanachinery..................................... 1", +"000 Cost L2" 00"000

Cash............................................. ,0"000 AK; 1"3+0"000Accum. ;epreciationF B- 1"3+0"000

achinery................................. 1"3+0"000 5- 1" ++"000ain on #/change o ain L *0+"000!lant Assets.................. *0+"000

achinery........................ 2" 00"000

Eaceyachinery..................................... 1" ++"000 Cost L3"2*0"000

Accum. ;epreciationF AK; 1" 2"000achinery................................. 1" 2"000 B- 1"*+ "000

ain on #/change o 5- 1", +"000!lant Assets.................. 23 "000 ain L 23 "000

achinery........................ 3"2*0"000Cash............................... ,0"000

>%? Jo Commercial Su%stance

Beemanachinery................................................................................ 1"303" *,

Cash....................................................................................... ,0"000Accumulated ;eprecationF achinery.......................................... 1"3+0"000

ain on #/change....................................................... 13" *,achinery.................................................................. 2" 00"000

L,0"000 T >L,0"000 P L1", +"000? O L*0+"000 H L13" *,

Eaceyachinery................................................................................ 1"+1 "000

Accumulated ;epreciationF achinery......................................... 1" 2"000achinery.................................................................. 3"2*0"000Cash......................................................................... ,0"000

S!ort Answer/

1. 'hat are the ma7or characteristics o plant assets8

1. 6he ma7or characteristics o plant assets are >1? that they are ac$uired or use inoperations and not or resale" >2? that they are long&term in nature and usually su%7ect todepreciation" and >3? that they ha)e physical su%stance.

2. 'hat interest rates should %e used in determining the amount o interest to %e capitali ed89o( should the amount o interest to %e capitali ed %e determined8



2. 6he a)oida%le interest is determined %y multiplying >an? interest rate>s? %y the (eighted&a)erage amount o accumulated e/penditures on $uali ying assets. 5or the portion o(eighted&a)erage accumulated e/penditures (hich is less than or e$ual to any amounts%orro(ed speci ically to inance construction o the assets" the capitali ation rate is thespeci ic interest rate incurred. 5or the portion o (eighted&a)erage accumulated e/penditures

(hich is greater than speci ic de%t incurred" the interest rate is a (eighted a)erage o allother interest rates incurred.

6he amount o interest to %e capitali ed is the a)oida%le interest" or the actual interestincurred" (hiche)er is lo(er.



IFRS 0UESTIO1STrue2False1. Under international accounting standards" historical cost is the pre erred treatment or

property" plant" and e$uipment.

2. <ecently changes to i AA! re$uire companies to capitali e %orro(ing costs related to$uali ying assets.

3. Under i AA!" interest costs incurred during construction o a plant asset cannot %e capitali ed.

*. Under i AA!" i a company uses the re)aluation model or i/ed assets" companies mustre)alue the class o assets regularly.

+. Under i AA!" assets that $uali y or interest capitali ation are assets that are in use or readyor their intended use.

Answers to True2False/1. 6rue

2. 6rue3. 5alse*. 6rue+. 5alse

Mult ple C!o ce

1. Under i AA!" Sampson Company" (ho has a non&current asset (hich has %een classi ied asheld& or&sale" shoulda. test the asset=s )alue monthly or impairment.%. )alue the asset at its depreciated historical cost.c. depreciate the asset o)er its remaining li e.d. not depreciate the asset.

2. iller Company" a company (ho uses i AA! reporting standards" sells a non&current assetclassi ied as held& or&sale. 'hich o the ollo(ing statements is true regarding the treatment o a gain on a su%se$uent increase in the air )alue less cost8a. 6he gain should not %e recogni ed.%. 6he gain should %e recogni ed in ull in the income statement.c. 6he gain should %e recogni ed %ut only in retained earnings.d. 6he gain should %e recogni ed to the e/tent that it is not in e/cess o the cumulati)e

impairment loss that has %een recogni ed.



3. ;anson Company" a company (ho uses i AA! reporting standards" has a non&current assetthat has %een classi ied as held& or&sale. 'hen the asset no longer meets this de inition";anson shoulda. <emo)e the asset rom the %alance sheet.%. <emeasure the asset at air )alue.c. easure the asset at the lo(er o its carrying )alue %e ore it (as classi ied as held& or&sale

and its reco)era%le amount at the date (hen the company decided not to sell it.d. Eea)e the non&current asset on the inancial statements at the current carrying )alue.

*. #lton Industries" a company (ho uses i AA! reporting standards" has assets and lia%ilities o adisposal group classi ied as held& or&sale sho(n on its %alance sheet. 'hich o the ollo(ingpresents the %est treatment or these8a. 6hese assets and lia%ilities should %e netted and presented as a single amount & either a

current asset or a current lia%ility on the %alance sheet.%. Gn the %alance sheet" the disposal group assets should %e sho(n separately rom other

assets" (hile the disposal group lia%ilities should %e sho(n separately rom other lia%ilities.c. 6he assets and lia%ilities should %e netted and presented as a deduction rom e$uity on the

%alance sheet.d. 6here should %e no separate disclosure o these assets and lia%ilities on the %alance sheet.



+. 'oodson Company" a company (ho uses i AA! reporting standards" has identi ied a group oplant assets or disposal. Gn Nanuary 1" 2010" the carrying )alue o these assets (asL1 .+ million. 6he assets (ere re)alued to L1,.+ million on Nanuary +" 2010" (hen they (ereidenti ied as property or the disposal group. In addition" 'oodson thin s that is (ill costL1.+ million to sell these assets. 'hat carrying amount should these assets re lect oryear&end inancial statements to %e prepared on Nanuary 10" 20108

a. L1 .+ million%. L1,.+ millionc. L1,.0 milliond. L1+.0 million

,. 6homas Company" a company (ho uses i AA! reporting standards" is disposing o a plantasset. 6he amount o gain or loss rom this disposal isa. reported as the di erence %et(een the sales proceeds and the carrying amount o the

asset.%. not reported.c. reported as the mar et )alue less the reco)era%le amount.d. reported as the di erence %et(een the net cash lo(s o the producti)e years o the asset

and its carrying )alue.

. Gn Nanuary 1" 2010" Nac son Company has a %uilding (ith a carrying )alue o L+0"000 and aremaining use ul li e + years that (as recently )alued at L1+0"000. Assuming that thecompany uses straight&line depreciation" i AA! (ould sho( the depreciation asa. L10"000%. L30"000c. L20"000d. ore than one o these ans(ers could %e correct.

. 6ram Industries" a company (ho uses i AA! reporting standards" is installing a ne( plant. 6hecompany has incurred the ollo(ing costs

1. Gperating losses %e ore commercial production L 200"0002. Cost o the plant 1"+00"0003. Initial deli)ery and handling charges 300"000*. Cost o site preparation 1 +"000

'hich o these costs can 6ram capitali e in accordance (ith i AA!8a. 1" 2" 3" W *%. 2 W *c. 2" 3" W *d. 1" 2" W *



. Icon Industries" a company (ho uses i AA! reporting standards" is installing a ne( plant. 6hecompany has incurred the ollo(ing costs1. Consultants used or ad)ice on the ac$uisition o the plant L2*+"0002. Interest charges paid to the supplier o plant or de erred credit L2 +"0003. #stimated dismantling cost to %e incurred a ter years L*00"000*. Cost o the plant L2"300"000

'hich o these costs can 6ram capitali e in accordance (ith i AA!8a. 1" 2" 3" W *%. * onlyc. 1 W *d. 1" 3" W *

10. All o the ollo(ing are true regarding the re)aluation model allo(ed under i AA! e/cepta. Gnce selected" the re)aluation policy applies to an entire class o property" plant and

e$uipment.%. <e)aluations must %e made regularly to ensure that the carrying )alue is not materially

di erent rom air )alue.c. A ter initial recognition" the re)alued amount is air )alue less su%se$uent depreciation and

impairment losses.

d. 'hen an asset is re)alued" any increase in carrying amount is reported as miscellaneousre)enue.

Answers to Mult ple C!o ce/1. d2. d3. c*. %+. d,. a

. d

. c

. d10. d

intermediate accounting study questions

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