Ch.10 – Full Test Bank – Property, Plant, and Equipment: - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 10
property, plant, and equipment: Accounting Model Basics
CHAPTER STUDY OBJECTIVES
1. Identify the business importance and characteristics of property, plant, and equipment assets and explain the recognition criteria. Almost every enterprise invests in long-lived assets. These long-term items include both physical assets—property, plant, and equipment—and intangible assets. Long-lived assets are particularly important for manufacturing companies because they provide the company with the capacity or infrastructure to produce goods and/or provide services.
Property, plant, and equipment assets are tangible assets held for use in the production of goods and services, for rental to others, or for administrative purposes, and have a useful life of more than one accounting period. This type of asset provides an entity with its operating capacity and infrastructure, but also adds to fixed costs. For this reason, it is important that a company invest enough in PP&E to meet its potential, but not so much that it has to bear the related costs of overcapacity.
PP&E costs that provide probable future economic benefits to the entity and that can be measured reliably are recognized as assets. Asset components should be recognized separately under IFRS to the extent their costs are significant and/or the related assets have different useful lives or patterns of depreciation.
2. Identify the costs to include in the measurement of property, plant, and equipment at acquisition. Asset costs used when measuring PP&E include all necessary costs directly attributed to acquiring the asset, bringing it to its location, and making it ready for use. These include direct material, direct labour, and variable overhead costs for self-constructed PP&E assets, borrowing costs for those taking substantial time to get ready for use, and dismantling and restoration costs required as a result of the asset’s acquisition. Once the asset is in place and ready for use, no additional costs are capitalized.
3. Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset. Cost means the asset’s cash equivalent cost. When payment is deferred beyond normal credit terms, the excess paid over cash cost is interest. When a number of assets are acquired in a basket purchase, the cost is allocated based on the relative fair value of each. When PP&E assets are acquired and paid for by issuing the entity’s shares, cost is usually determined as the fair value of the asset acquired. When acquired in an exchange of assets, cost is the fair value of the assets given up, unless the fair value of the assets received can be more reliably measured. However, if the transaction lacks commercial substance or fair values cannot be reliably determined, the assets acquired are measured at the book value of the assets given up. This amount cannot exceed the fair value of the assets acquired. Assets contributed to a company are measured at fair value and credited to Contributed Surplus if donated by a shareholder. This is rare. If contributed by government, the contribution is accounted for under the income approach: the amount credited flows through the income statement, usually as the asset is used by the entity.
4. Identify the costs included in specific types of property, plant, and equipment.
Land: Includes all expenditures made to acquire land and to make it ready for use. Land costs typically include the purchase price; closing costs, such as title to the land, legal fees, and registration fees; costs incurred to condition the land for its intended use, such as grading, filling, draining, and clearing; the assumption of any liens, mortgages, or encumbrances on the property; and any additional land improvements that have an indefinite life. Buildings, including investment property: Includes all expenditures related directly to their acquisition or construction. These costs include materials, labour, and direct overhead costs that are incurred during construction; professional fees; and building permits. Equipment: Includes the purchase price, freight, and handling charges that are incurred; insurance on the equipment while it is in transit; the cost of special foundations if they are required; assembling and installation costs; and the costs incurred in calibrating the equipment so that it can be used as intended. Mineral resource properties: Four types of costs may be included in establishing the cost of mineral resource assets: (1) acquisition (2) exploration and evaluation (3) development, and (4) site restoration and asset retirement costs. Two main methods of accounting for oil and gas properties are the full cost method and the successful efforts method. Biological assets: Separate standards are set out in IAS 16 for bearer plants and IAS 41 for other assets related to agricultural activity, and in Section 3041 under ASPE.
5. Understand and apply the cost model, and the revaluation model using the asset adjustment method and the fair value model. The cost model is appropriate for all classes of PP&E, including investment property. Under this model, the assets are carried at cost less accumulated depreciation and any accumulated impairment losses.
Under IFRS, the revaluation model may be applied to any class of PP&E except investment property, provided fair value can be measured reliably. Under this model, the assets are carried at their fair value at the revaluation date less any subsequent accumulated depreciation and accumulated impairment losses. While held, net increases in fair value are not reported in income, but are accumulated in a Revaluation Surplus (OCI) account in equity. Net losses are reported in income after any revaluation surplus has been eliminated. At the time of revaluation, under the asset adjustment method, the accumulated depreciation account is eliminated (written off against the asset itself). The asset is then adjusted to its new revalued amount.
The fair value model can be applied only to investment property under IFRS, and the choice between cost and fair value must be made for all investment property reported. Under this model, all changes in fair value are recognized in net income. No depreciation is recognized.
6. Explain and apply the accounting treatment for costs incurred after acquisition. Day-to-day servicing, repair, and maintenance costs, and costs of rearrangement and relocation, are expensed as incurred. PP&E expenditures that provide future economic benefits and whose costs can be reliably measured are capitalized. The cost of additions, replacements, and major overhauls and inspections are capitalized and the carrying amount of the replaced asset or the previous overhaul or inspection is removed.
7. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. In general, the accounting for PP&E assets is very similar under both IFRS and ASPE because the principles underlying both are very similar. However, under IFRS, rules are stricter regarding accounting for components and major overhauls and inspections, incidental revenues and expenses before asset use, and borrowing costs. IFRS permits application of a revaluation model and a fair value model, neither of which is acceptable under ASPE. The IASB continues to research extractive industry activities with the objective of developing accounting standards to cover the exploration for, and the development and extraction of, minerals and oil and gas resources and assets.
8. Calculate the amount of borrowing costs to capitalize for qualifying assets. The avoidable borrowing costs related to the financing of eligible expenditures on qualifying assets are capitalized under IFRS if they are less than the total borrowing costs incurred in the period.
9. Understand and apply the revaluation model using the proportionate method. The revaluation model may be applied using the proportionate method, provided fair value can be measured reliably. Similar to the asset adjustment method, the amounts debited or credited to the Revaluation Surplus (OCI) account are reported in the statement of comprehensive income as other comprehensive income (OCI) items. However, when revaluing an asset, the account is adjusted proportionately so that both the carrying amount of the asset and the accumulated depreciation are adjusted (upward if there has been an increase in fair value, or downward for a decrease in fair value). After adjustment, the net balance is the fair value of the asset at the revaluation date
Multiple Choice QUESTIONS
Answer No. Description
c 1. Definition of PPE
b 2. Examples of PPE
d 3. Recognition of PPE acquisitions
a 4. Depreciation terminology
c 5. Items included in cost of PPE
c 6. Capitalization of borrowing costs
b 7. Treatment of restoration costs
b 8. Accounting for PST
a 9. Self-constructed assets
c 10. Calculate cost of truck purchased
c 11. Use of land during construction
d 12. Avoidable borrowing costs
c 13. Purchase of PPE on long-term contract
a 14. PPE acquired by issuance of public company’s shares
d 15. PPE acquired by issuance of private company’s shares
b 16. Accounting for donated assets
b 17 Valuation of donated assets
b 18. Exchange of assets
b 19. Accounting for asset exchanges
b 20. Accounting for government grant – cost reduction method
d 21. Allocation of cost of a lump-sum purchase
d 22. Acquisition of equipment by exchange of shares held as an investment
c 23. Exchange of similar assets
c 24. Exchange of similar assets
c 25. Purchase of asset with long-term note
b 26. Purchase of asset with long-term note
d 27. Gain or loss with no commercial substance
b 28. Calculate cost of machine purchased
c 29. Calculate cost of machine purchased
a 30. Cash discounts
d 31. Valuation of a nonmonetary exchange
c 32. Exchange of similar assets
c 33. Valuation of replacement equipment
c 34. Accounting for a government grant – deferral method
b 35. Interest on non-interest-bearing notes
c 36. Calculate cost of land acquired
b 37. Calculate cost of land
a 38. Calculate cost of building
d 39. Calculate cost of land and building
Answer No. Description
c 40. Determine cost of land
a 41. Accounting for land costs
b 42. Inclusion of land in PPE
d 43. Costs of land improvements
d 44. Accounting for land and building purchase
d 45. Measurement of biological assets
b 46. Classification of sale of building
b 47. Natural resource properties
c 49. Features of the cost model
a 50. Features of the revaluation model (asset adjustment method)
d 51. Accounting with revaluation model
a 52. Revaluation surplus
b 53. Features of the fair value model
c 54. Application of the cost model
c 55. Components of PP&E assets
a 56. Application of the revaluation model
d 57. Application of the revaluation model
b 58. Application of the revaluation model
a 59. Application of the fair value model
d 60. Application of the revaluation model
b 61. Investment property gain
d 62. Revenue expenditures
c 63. Capital expenditures
a 64. Repairs
b 65. Components of PP&E assets
d 66. Costs subsequent to acquisition
b 67. Asset replacement
c 68. Asset replacement
a 69. Comparing IFRS to ASPE
a 70. Comparing IFRS to ASPE
a 71. Comparing IFRS to ASPE
a 72. Comparing IFRS to ASPE
d *73. Capitalization of borrowing costs
b *74. Weighted-average accumulated expenditures
d *75. Capitalization of borrowing costs
b *76. Calculate amount of interest to be capitalized
a *77. Calculate weighted-average accumulated expenditures
c *78. Calculate amount of interest to be capitalized
b *79. Calculate weighted-average accumulated expenditures
b *80. Calculate weighted-average accumulated expenditures
Answer No. Description
c *81. Calculate interest cost
c *82. Calculating the cost of borrowing
b *83. Calculating the capitalization rate
c *84. Features of the revaluation model (proportionate method)
a *85. Revaluation model (proportionate method)
c *86. Revaluation model (proportionate method
c *87. Revaluation model (proportionate method)
a *88. Revaluation model (proportionate method
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E10-89 Componentization
E10-90 Componentization
E10-91 Plant asset accounting
E10-92 Asset exchange with commercial substance
E10-93 Non-interest-bearing note
E10-94 Nonmonetary transaction without commercial substance
E10-95 Asset exchange
E10-96 Acquisition cost
E10-97 Asset retirement cost
E10-98 Costs included in assets
E10-99 Application of the revaluation model
E10-100 Measurement models
E10-101 Application of the fair value model
E10-102 Cost model versus revaluation model versus fair value model
E10-103 Trade-off with historical cost model
E10-104 Revaluation model
*E10-105 Difference between proportionate and asset adjustment methods
*E10-106 Capitalization of interest
*E10-107 Capitalization of interest
*E10-108 Revaluation model (proportionate method)
*This topic is dealt with in an Appendix to the chapter.
Item Description
P10-109 Asset exchanges
P10-110 Asset exchange – no commercial substance
P10-111 Asset exchange – no commercial substance
P10-112 Nonmonetary exchange
P10-113 Accounting for government grant
P10-114 Lump sum purchase
P10-115 Purchase of asset by non-interest-bearing note
P10-116 Costs included in assets
P10-117 Revaluation model
P10-118 Revaluation model
P10-119 Fair value model
P10-120 Asset overhaul
*P10-121 Capitalization of borrowing costs
*P10-122 Capitalization of borrowing costs
*P10-123 Revaluation model (proportionate method)
MULTIPLE CHOICE QUESTIONS
1. Which of the following is NOT included as part of the IAS16 definition of property, plant, and equipment (PPE)?
a) PPE will be used over more than one accounting period.
b) PPE is held for use in the production of goods and services.
c) PPE can be tangible or intangible.
d) PPE is tangible.
Difficulty: Easy
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Examples of property, plant, and equipment include
a) land, equipment, and vehicles.
b) equipment, apple orchard, and mineral resource property.
c) machinery, livestock, and patents.
d) computers, cherry orchards, and copyrights.
Difficulty: Easy
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. Which of the following statements applies to the recognition of property, plant, and equipment acquisitions?
a) It is certain that the item’s associated future benefits will flow to the entity.
b) It is probable that the item’s associated future benefits will flow to the entity.
c) The cost can be measured reliably.
d) It is probable that the item’s associated future benefits will flow to the entity and costs can be measured reliably.
Difficulty: Easy
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. Bronco Inc. is a publicly traded company. Bronco’s focus is on research and development activities related to the creation and sale of full-sized commercial trucks that are fully operational using only bio-fuels. Bronco’s plant would be subject to
a) depreciation.
b) amortization.
c) depletion.
d) both depreciation and amortization.
Difficulty: Easy
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
5. Which of the following would NOT be included in the cost of an item of property, plant, and equipment?
a) It does not include the purchase price net of any trade discounts and rebates.
b) Delivery costs are not included.
c) Costs of training employees to use the asset are not included.
d) It does not include the costs of obligations associated with the asset’s eventual disposal.
Difficulty: Easy
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. Which of the following statements does NOT apply to the capitalization of borrowing costs for the purchase of assets?
a) This can have a significant impact on a company's earnings.
b) This is allowed under both ASPE and IFRS.
c) This is not allowed under IFRS.
d) This must be disclosed in the notes to the financial statements.
Difficulty: Easy
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
7. Under ASPE, the costs for environmental clean-up at the end of an asset’s useful life
a) are always expensed as incurred.
b) are recognized only if they represent a legal obligation.
c) are capitalized once they have become apparent.
d) include only costs related to the acquisition of the asset.
Difficulty: Easy
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. The debit for non-refundable provincial sales tax correctly calculated and paid on the purchase of machinery should be included in
a) Provincial Sales Tax Expense.
b) Machinery.
c) Accumulated Depreciation—Machinery.
d) Prepaid Provincial Sales Tax.
Difficulty: Easy
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
9. How should variable overhead costs incurred to self-construct an asset be recorded?
a) They should be included in the cost of the asset.
b) They should be assigned to the cost of inventory production.
c) They should be written off as a loss for the period.
d) They should be recorded as a one-time special assessment in a separate asset account.
Difficulty: Easy
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. Upshaw Ltd. bought a lift truck with a list price of $30,000. The dealer granted a 10% reduction in the list price, and an additional 2% cash discount on the net price when payment was made in 30 days. Provincial sales tax was $1,785 and Upshaw paid an extra $350 to have a special horn installed. The recorded cost of the truck should be
a) $29,135.
b) $31,535.
c) $28,595.
d) $28,552.
Difficulty: Medium
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($30,000 ×.90 × .98) + $1,785 + $350 = $28,595
11. Brazen Ltd is a privately held company using ASPE. The company has recently purchased and cleared land that it is using for the construction of a new building. Brazen has temporarily rented out space in a completed wing of the building to a local Toast Master’s group for its weekly meetings for use until the remaining construction is completed. How should the $1,500 rental fee be treated?
a) dr. Rent Expense
b) cr. Depreciation—Buildings
c) cr. Buildings
d) cr. Rent Revenue
Difficulty: Medium
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
12. Patriots Inc. has just hired a new controller who has capitalized the avoidable interest costs related to the construction of a new building. As the business owner you disagree and believe the interest should be expensed and you can not find any information in the notes to the financials explaining this. Patriots Inc. follows IFRS. What is the correct treatment?
a) This is the correct treatment. The controller is correct in his approach.
b) The owner is correct; the interest costs should be recorded as interest expense.
c) Both the owner and the controller are correct, IFRS allows a choice of either method.
d) The controller is using the correct treatment; however, IFRS requires that the amount capitalized must also be disclosed.
Difficulty: Medium
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
13. Property, plant, and equipment purchased on long-term credit contracts should be accounted for using the
a) actual cash to be paid in the future.
b) future amount of the future payments.
c) present value of the future payments.
d) future value of the current payments.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
14. When a plant asset is acquired by the issuance of a public company’s common shares, the cost of the plant asset is properly measured by the
a) market value of the plant asset.
b) original cost of the plant asset.
c) book value of the plant asset.
d) book value of the shares.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. When a closely held corporation issues preferred shares for land, the land should be recorded at the
a) total value of the shares issued.
b) total book value of the shares issued.
c) total liquidating value of the shares issued.
d) fair market value of the land.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
16. When an enterprise is the recipient of a donated asset, the account credited is likely a(n)
a) equity account.
b) revenue account.
c) deferred revenue account.
d) asset account.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
17. A plant site donated by a city to a manufacturing firm 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 statement of financial position).
d) the value assigned to it by the company's directors.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
18. Spock Inc. exchanged merchandise that cost $19,000 and normally sold for $27,000 for a new delivery truck with a list price of $31,000. The delivery truck should be recorded on Spock's books at
a) $31,000.
b) $27,000.
c) $19,000.
d) $12,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
19. When accounting for asset exchanges,
a) if a transaction lacks commercial substance, it is not recorded.
b) an asset cannot be recognized at more than its fair value.
c) if the fair values of either the asset given up or the asset received cannot be ascertained, then the Board of Directors may assign an arbitrary value.
d) when an exchange lacks commercial substance, either a gain or loss may be recognized.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
20. Mozambique Ltd. received a $250,000 grant from the federal government to help buy equipment as an incentive for them to establish manufacturing operations in Ottawa. The company assumes the equipment has a 10-year useful life and uses straight-line depreciation. If Mozambique uses the cost reduction method for such transactions, it should record this transaction as a
a) memo entry only.
b) credit to Equipment for $250,000.
c) credit to Deferred Revenue for $250,000.
d) credit to Contribution Revenue for $250,000.
Difficulty: Easy
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
21. Chad Corporation purchased a tract of land for $765,000, which included a warehouse and office building. The following data were collected concerning the property:
Current Assessed Valuation Vendor’s Original Cost
Land $300,000 $250,000
Warehouse 200,000 150,000
Office building 400,000 300,000
$900,000 $700,000
What are the appropriate amounts that Chad should record for the land, warehouse, and office building, respectively?
a) land, $250,000; warehouse, $150,000; office building, $300,000
b) land, $300,000; warehouse, $200,000; office building, $400,000
c) land, $273,214; warehouse, $163,929; office building, $327,857
d) land, $255,000; warehouse, $170,000; office building, $340,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Land: 3/9 x $765,000= $255,000
Warehouse: 2/9 × $765,000 = $170,000
Office Building: 4/9 × $765,000 = $340,000
22. Frosty Ltd. exchanged 400 common shares of Grants Corp. for new equipment from Milliken Sales. Frosty was holding these shares as an investment and the shares were originally purchased for $80 / share. These shares had a quoted market value of $100 per share at the date of exchange. The equipment had a recorded amount on Milliken’s books of $37,000, but the fair value was not available. The journal entry that Frosty should make to record this exchange is
a) Equipment 32,000
Investment in Grants Corp. Common Shares 32,000
b) Equipment 37,000
Investment in Grants Corp. Common Shares 32,000
Gain on Disposal of Investment 5,000
c) Equipment 37,000
Loss on Disposal of Investment 3,000
Investment in Grants Corp. Common Shares 40,000
d) Equipment 40,000
Investment in Grants Corp. Common Shares 32,000
Gain on Disposal of Investment 8,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: Gain = 400 x ($100 – $80) = $8,000
23. On January 2, 2023, Neeson Delivery Company traded in an old delivery truck for a newer model. Data relative to the old and new trucks follows:
Old Truck
Original cost $9,000
Accumulated depreciation at January 2, 2023 6,000
Fair value 3,000
New Truck
List price $15,000
Cash price without trade-in 14,000
Cash paid with trade-in 11,000
The cost of the new truck for financial accounting purposes is
a) $9,000.
b) $11,000.
c) $14,000.
d) $15,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $14,000 (fair value of new truck, since this is known)
24. Soflo Inc. acquired a new delivery truck in exchange for an old delivery truck that it had acquired several years earlier for $50,000. On the date of the exchange, the old truck had a fair value of $20,000, and its net book value (carrying amount) was $19,000. In addition, Soflo paid $65,000 cash for the new truck, which had a list price of $90,000. At what amount should Soflo record the new truck for financial accounting purposes?
a) $65,000
b) $84,200
c) $85,000
d) $90,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $20,000 + $65,000 = $85,000
25. On January 2, 2023, Gabon Corp. purchases a new machine. The company makes a $2,000 cash down payment and agrees to pay four annual instalments of $4,000 each, starting December 31, 2023, signing a non-interest-bearing note to this effect. The cash equivalent price of the machine is not known, but the appropriate interest rate for this type of transaction is 9% p.a. Rounding to the nearest dollar (if necessary), Gabon should record the cost of the machine at
a) $18,000.
b) $16,000.
c) $14,959.
d) $12,959.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: PV of note: 4 N, 9 I, –4000 PMT, PV = $12,959 plus down payment of $2,000 = $14,959
26. On January 2, 2023, Zimbabwe Corp. purchases a new machine. The company makes a $3,000 cash down payment and agrees to pay eight semi-annual instalments of $2,000 each, starting July 1, 2023, signing a non-interest-bearing note to this effect. The cash equivalent price of the machine is not known, but the appropriate interest rate for this type of transaction is 8% p.a. Rounding to the nearest dollar (if necessary), Zimbabwe should record the cost of the machine at
a) $15,413.
b) $16,465.
c) $16,000.
d) $19,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: PV of note: 8 N, 4 I, –2000 PMT, PV = $13,465 plus down payment of $3,000 =
$16, 465
27. Bally Ho Inc. traded one of its used trailers (cost $15,000, accumulated depreciation $13,500) for another used trailer with a fair value of $2,400. Bally Ho also paid $300 to complete the transaction. Since the exchange will leave Bally Ho in the same economic position, this transaction lacks commercial substance. What is the gain or loss on the exchange?
a) $900 gain
b) $675 gain
c) $225 loss
d) $0 (no gain or loss)
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: No gain or loss. Asset is recorded at BV of old plus cash paid.
28. On August 1, 2023, Chapelle Corp. purchases a new machine. The company makes a $7,200 cash down payment and agrees to pay four monthly instalments of $10,800 each, starting September 1, 2023, signing a non-interest-bearing note to this effect. The cash equivalent price of the machine is $43,200. As well, Chapelle pays installation costs of $1,200. The recorded cost of the machine should be
a) $8,400.
b) $44,400.
c) $50,400.
d) $51,600.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $43,200 + $1,200 = $44,400
29. On August 1, 2023, Burkina Corp. purchases a new machine. The company makes a $2,000 cash down payment and agrees to pay four annual instalments of $3,000 each, starting August 1, 2024, signing a non-interest-bearing note to this effect. The cash equivalent price of the machine is $12,500. Due to an employee strike, Burkina could not install the machine immediately, and thus incurred $300 of storage costs. As well, Burkina pays installation costs of $400. The recorded cost of the machine should be
a) $14,000.
b) $13,200.
c) $12,900.
d) $12,500.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $12,500 + $400 = $12,900
30. Ben’s Delivery buys a van with a list price of $60,000. The dealer grants a 15% reduction in list price and an additional 2% cash discount on the net price if payment is made in 30 days, which Ben’s did. Non-refundable sales taxes are $800, and Ben’s paid an extra $600 to have a GPS device installed. What amount should Ben’s record as the cost of the van?
a) $51,380
b) $49,980
c) $51,290
d) $50,780
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($60,000 x.85 x.98) + $800 + $600 = $51,380
31. Ghana Football Club had a player contract with Mowgli that is recorded in its books at $300,000 on July 1, 2023. Ivory Coast Football Club had a player contract with Eeyore that is recorded in its books at $375,000 on July 1, 2023. On this date, Ghana traded Mowgli to Ivory Coast for Eeyore and paid a cash difference of $37,500. The fair value of the Eeyore contract was $450,000 on the exchange date. After the exchange, the Eeyore contract should be recorded in Ghana’s books at
a) $337,500.
b) $375,000.
c) $412,500.
d) $450,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $450,000 FV of asset received.
32. Dinga Corp. exchanged similar pieces of equipment with Elongo Corp. No cash was exchanged. Since this exchange will not significantly change the economic position of either company, this transaction lacks commercial substance. At this time, the carrying amount of Dinga's asset is $36,000, while the carrying amount of Elongo’s asset on their books is $33,300. However, it has been reliably determined that the fair value of Dinga’s asset is $36,900, while the fair value of Elongo’s asset is $34,200. Given these facts, at what amount should Dinga record the asset it receives from Elongo?
a) $36,900
b) $36,000
c) $34,200
d) $33,300
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $34,200 (FV of asset received). Record a loss of $1,800.
33. On January 2, 2023, Holliwell Inc. replaced its boiler with a more efficient one. The following information was available on that date:
Purchase price of new boiler $36,000
Carrying amount of old boiler 4,000
Fair value of old boiler 2,400
Installation cost of new boiler 3,200
The old boiler was sold for $2,400. At what amount should Holliwell capitalize the cost of the new boiler?
a) $42,300
b) $43,200
c) $39,200
d) $40,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $36,000 + $3,200 = $39,200
34. Bengals Ltd. received a $250,000 grant from the federal government to help buy equipment as an incentive for them to establish manufacturing operations in Ottawa. The company assumes equipment has a 10-year useful life and uses straight-line depreciation. If Bengals uses the deferral method for such transactions, entries in year one would include
a) credit to Accumulated Depreciation $25,000.
b) debit to Equipment $250,000.
c) debit to Deferred Revenue—Government Grants $25,000.
d) credit to Revenue—Government Grants $250,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,000 / 10 years = $25,000 reduction in the deferred revenue account
35. On January 2, 2023, Seahawks Corp. purchases a new machine. The company agrees to make a $3,000 cash down payment, plus $16,000 to be paid in eight semi-annual instalments of $2,000 each, starting July 1, 2023. The company signs a non-interest-bearing note to this effect. The cash equivalent price of the machine is not known, but the appropriate interest rate for this type of transaction is 8%. Rounding to the nearest dollar (if necessary), what is Seahawks’ recorded interest expense at the end of year one?
a) $1,520
b) $1,317
c) $1,800
d) $1,233
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: PV of note: 8 N, 4 I, –2000 PMT, PV = $13,465 plus down payment of $3,000 =
$16, 465. Interest expense in year one is: $16,465 x .08 = $1,317.
36. Liberia Corporation exchanged 2,000 shares of its common shares for a parcel of land to be held as a future plant site. The book value of the shares is currently $90 per share, and their current market value is $110 per share. Liberia received $30,000 from the sale of scrap when an existing building on the property was removed from the site. Based on these facts, the land should be capitalized at
a) $150,000.
b) $180,000.
c) $190,000.
d) $220,000.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Costs for Nonmonetary Exchange
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (2,000 × $110) – $30,000 = $190,000
Use the following information for questions 37–38.
Morocco Corp. purchased land as a factory site for $250,000. They paid $10,000 to tear down two buildings on the land, and the salvage from these old buildings was sold for $1,350. Legal fees of $870 were paid for title investigation and making the purchase. Architect's fees were $10,300. Title insurance cost $600, and liability insurance during construction cost $650. Excavation costs were $2,610. A contractor was paid $600,000 to construct the new building. An assessment made by the city for pavement was $1,600. Interest costs during construction were $42,500.
37. The cost of the land should be recorded at
a) $260,120.
b) $261,720.
c) $262,470.
d) $264,070.
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,000 + $10,000 – $1,350 + $870 + $600 + $1,600 = $261,720
38. The cost of the building should be recorded at
a) $656,060.
b) $655,800.
c) $653,710.
d) $653,450.
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $10,300 + $650 + $2,610 + $600,000 + $42,500 = $656,060
39. On February 1, 2023, Sudan Corp. purchased a parcel of land for $300,000 as a factory site. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2023. Costs incurred during this period are listed below:
Demolition of old building $ 25,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 990,000
(Salvaged materials resulting from demolition were sold for $10,000.)
Sudan should record the cost of the land and new building, respectively, at
a) $330,000 and $1,015,000.
b) $315,000 and $1,030,000.
c) $315,000 and $1,025,000.
d) $320,000 and $1,025,000.
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Land: $300,000 + $25,000 + $5,000 – $10,000 = $320,000
Building: $35,000 + $990,000 = $1,025,000
40. On December 1, 2023, Guinea Corp. purchased a tract of land as a factory site for $500,000. The old building on the property was torn down, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December 2023 were as follows:
Cost to tear down the old building $25,000
Legal fees for purchase contract and to record ownership 5,000
Property purchase tax 8,000
Proceeds from sale of salvaged materials 4,000
On Guinea’s December 31, 2023 balance sheet, what amount should be reported for the land?
a) $513,000
b) $521,000
c) $534,000
d) $538,000
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $500,000 + $25,000 + $5,000 + $8,000 – $4,000 = $534,000
41. Chiquita Corp. purchased a large area of land with the intention of transforming it into a banana plantation. Before the new seedlings can be planted, the site, which is prone to flooding, must be drained. The cost of the draining should be
a) capitalized as part of the cost of the land.
b) expensed only after the first crop of bananas has been harvested.
c) expensed immediately.
d) reported as loss from discontinued operations.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
42. Land is generally included in property, plant, and equipment, EXCEPT when
a) it is not yet ready for use.
b) it is held for resale by land developers.
c) it includes a building that must be demolished.
d) special amounts are assessed for local improvements such as sewers.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
43. The costs of land improvements with limited lives, such as a parking lot, are
a) added to the land account.
b) recorded in a separate account.
c) depreciated over their useful lives.
d) recorded in a separate account and depreciated over their useful lives.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
44. If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on
a) 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) management’s plans for the property when the building was acquired.
d) the planned future use of the parking lot.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
45. Under IFRS, biological assets should normally be measured at
a) cost.
b) cost less accumulated depreciation.
c) fair value.
d) fair value less costs to sell.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
46. Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be
a) classified as other income.
b) deducted from the cost of the land.
c) netted against the costs to clear the land and expensed as incurred.
d) netted against the costs to clear the land and amortized over the life of the plant.
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
47. BT Petroleum incurs the following costs to acquire a new property that the company believes has large oil reserves that will be extracted over the next 10 years:
Acquisition of property: $3,500,000
Exploration and Evaluation of Reserves: $750,000
Development Costs: $250,000
PV of Site Restoration costs: $1,500,000
The cost for the evaluation of the reserves includes 2 “dry holes” at a cost of $100,000 each. If BT is using the successful efforts method, what is the company’s depletion base?
a) $6,000,000
b) $5,800,000
c) $5,550,000
d) $4,500,000
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,500,000 + $750,000 – $200,000 + $250,000 + $1,500,000 = $5,800,000
48. Grappa Grapes is a privately held winery. The following is a partial list of the items Grappa has at its December 31 year end:
Grapes to be used for the production of wine: $150,000
Development costs related to the creation of a new vine hybrid: 75,000
Grapevines: 750,000
Building, at cost: 625,000
Winemaking equipment, at cost: 375,000
What value should be assigned to the productive biological assets on the balance sheet on December 31?
a) $750,000
b) $825,000
c) $975,000
d) $1,350,000
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $75,000 + $750,000 = $825,000
49. The cost model of accounting for PP&E assets
a) should be applied to investment property only.
b) should be applied to other PP&E assets only.
c) can be applied to all classes of PP&E including investment property.
d) is not appropriate under ASPE.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
50. The revaluation model of accounting for PP&E assets
a) uses a revaluation surplus account to hold net increases in the asset's fair value.
b) may be applied to all classes of PP&E including investment property.
c) may be applied to investment property under ASPE.
d) is not allowed under IFRS.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
51. When using the revaluation model of accounting for PP&E assets (asset-adjustment/elimination method),
a) the related Accumulated Depreciation account is closed to OCI.
b) depreciation continues to be charged in the original pattern.
c) the difference between fair value and carrying amount is always debited to Revaluation Surplus (OCI).
d) a new depreciation rate must be calculated.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
52. When can the balance in the Revaluation Surplus (OCI) account be transferred to retained earnings?
a) at the end of every year, or when the asset is sold
b) whenever a revaluation is performed
c) only when the revalued asset is sold
d) never
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
53. The fair value model of accounting for PP&E assets
a) recognizes changes in the asset's fair value in other comprehensive income.
b) should be applied to investment property only.
c) once chosen for one investment property does not have to be applied to all investment property.
d) is acceptable under both IFRS and ASPE.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
54. Round Up Corporation uses the cost model to account for its property, plant, and equipment, which were acquired on January 1, 2023, for $200,000. Round Up uses straight-line depreciation and estimates the assets will have an eight-year life with no residual value. Assuming Round Up did not experience any impairment losses, the December 31, 2024, carrying amount of the assets is
a) $200,000.
b) $175,000.
c) $150,000.
d) $125,000.
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $200,000 – ($200,000 x 2 ÷ 8) = $150,000
55. Nigeria Ltd. acquires a new machine. It is comprised of two different components (A and B) that are expected to be overhauled at different times.
The acquisition costs of the components are as follows:
Component A: $198,000
Component B: $240,000
Component A is expected to have a useful life of 5 years and a residual value of $20,000 before the first major overhaul is required. Component B is expected to have a useful life of 7 years and a residual value of $15,000 before its first overhaul. Nigeria uses straight-line depreciation for all its equipment. What is the net carrying amount of component A after 5 years?
a) $0
b) $19,000
c) $20,000
d) $55,600
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $20,000 (residual value)
Use the following information for questions 56–58.
Tunisia Inc. owns assets to which it applies the revaluation model (asset-adjustment method). The following additional information is available:
1. Accumulated Depreciation at December 31, 2024, (prior to any fair value adjustments) was $12,000.
2. Between December 31, 2023, and December 31, 2024, the property's fair value had increased by $30,000.
3. The December 31, 2024, balance in the revaluation surplus account (prior to any fair value adjustments) was $2,000.
56. The adjusted December 31, 2024, balance in the related contra-asset account will be
a) $0.
b) $10,000.
c) $12,000.
d) $14,000.
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $12,000 – $12,000 = 0 (Acc. Dep. is eliminated.)
57. The adjusted December 31, 2024, in the revaluation surplus account will be
a) $0.
b) $28,000.
c) $30,000.
d) $32,000.
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,000 + $30,000 = $32,000
58. Assume the same facts as indicated above, except that, between December 31, 2023, and December 31, 2024, the property's fair value had decreased by $10,000. As a result, Tunisia's 2024 income statement will include a
a) $10,000 loss.
b) $8,000 loss.
c) $8,000 gain.
d) $2,000 loss.
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $10,000 – $2,000 = $8,000 loss
59. Nickel Corporation is a publicly traded company that uses the fair value model of accounting for its investment property. The fair values of its property were: December 31, 2023, $180,000 and December 31, 2024, $195,000. At December 31, 2024, Nickel should
a) recognize a gain of $15,000 in income.
b) report a gain of $15,000 in other comprehensive income.
c) defer the gain until the property is sold.
d) do nothing (ignore it).
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $195,000 – $180,000 = $15,000
60. Falcon Inc. is a publicly traded company that uses straight-line depreciation and the re-valuation method. Falcon purchased a building on May 1, 2023 for $750,000. The building is expected to have a 25-year useful life with no residual value. Falcon applies the asset adjustment method to the building at the December 31, 2025 year end. The building’s fair value is $670,000. What is the revaluation surplus or loss?
a) $10,000 surplus
b) $80,000 loss
c) $2,500 loss
d) $0
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $750,000 – (($750,000 / 25 *8/12 + ($750,000/25 x 2)) = $670,000. No surplus or loss.
61. Baron Holdings purchased an investment property for $1,200,000 on July 1, 2023. The property has the following fair value assessments over the next several years: December 31, 2023 - $1,250,000, December 31, 2024 – $1,175,000 and December 31, 2025 – $1,180,000. Which of the following partial entries is correct at December 31, 2025?
a) dr. Loss in Value of Investment Property $20,000
b) dr. Investment Property $5,000
c) dr. Loss on Investment Property $5,000
d) dr. Investment Property $20,000
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,180,000 – $1,175,000 = $5,000 gain on investment property
62. Which of the following expenditures after acquisition would NOT be capitalized?
a) adding a new wing to a hospital
b) replacing the air conditioning system in an office building
c) major overhaul of a fleet of trucks
d) replacing all the tires on an 18-wheel semi-trailer
Difficulty: Easy
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
63. A major overhaul made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be
a) expensed.
b) debited to accumulated depreciation.
c) capitalized.
d) allocated between accumulated depreciation and the machine account.
Difficulty: Easy
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
64. An expenditure that maintains an existing asset so that it can function in the manner intended should be
a) fully expensed in the period in which it is made.
b) partially expensed in the period in which it is made.
c) fully capitalized in the period in which it is made.
d) partially capitalized in the period in which it is made.
Difficulty: Easy
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
65. Kenya Ltd. acquires a new machine. It is comprised of two different components (A and B) that are expected to be overhauled at different times.
The acquisition costs of the components are as follows:
Component A: $198,000
Component B: $240,000
Component A is expected to have a useful life of 5 years and a residual value of $20,000 before the first major overhaul is required. Component B is expected to have a useful life of 7 years and a residual value of $15,000 before its first overhaul. Kenya uses straight-line depreciation for all its equipment. At the beginning of year 6, component A undergoes a major overhaul at a cost of $100,000. The work is expected to extend its life by 3 years, but the residual value will then be zero. What is the carrying amount of component A one year after the overhaul?
a) $120,000
b) $80,000
c) $66,667
d) $40,000
Difficulty: Medium
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $20,000 + $100,000 = $120,000; $120,000 – ($120,000 ÷ 3) = $80,000
66. On September 10, 2023, Angola Printing incurred the following costs for one of its printing presses:
Purchase of stapling attachment $84,000
Installation of attachment 10,000
Replacement parts for renovation of press 36,000
Labour and overhead in connection with renovation of press 14,000
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) $108,000
c) $130,000
d) $144,000
Difficulty: Medium
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $84,000 + $10,000 + $36,000 + $14,000 = $144,000
Use the following information for questions 67–68.
Hawk Airlines purchased a Cessna as part of its fleet 3 years ago. The Cessna originally cost $1,000,000 and requires an engine replacement at an estimated cost of $150,000. Hawks uses IFRS.
67. Assume that the engine was originally depreciated as a subcomponent of the plane, had a value of $110,000 assigned to it and was depreciated on a straight-line basis over 5 years with no estimated salvage value. What is the gain or loss assigned to the disposal of the engine?
a) $0
b) $44,000 loss
c) $66,000 loss
d) $84,000 loss
Difficulty: Medium
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $110,000 – ($110,000 / 5 x 3) = $44,000 loss
68. Assume that the engine was not originally depreciated as a subcomponent. The plane is being depreciated on a straight-line basis over 10 years. The $150,000 cost for a new engine represents 10% of the total cost of a new Cessna. What is the gain or loss on the disposal of the engine?
a) $55,000 loss
b) $65,000 loss
c) $70,000 loss
d) $80,000 loss
Difficulty: Medium
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: The original cost of the engine can be estimated at $100,000 ($1,000,000 x 10%). Accumulated depreciation: $100,000 / 10 years x 3 years = $30,000. $100,000 – $30,000 = $70,000 loss on disposal.
69. Which of the following statements is correct?
a) IFRS treats major overhauls that allow the continued use of an asset, as replacements; ASPE usually treats them as expenses.
b) ASPE treats major overhauls that allow the continued use of an asset, as replacements; IFRS usually treats them as expenses.
c) Both IFRS and ASPE treat major overhauls that allow the continued use of an asset, as replacements.
d) Both IFRS and ASPE treat major overhauls that allow the continued use of an asset, as expenses.
Difficulty: Easy
Learning Objective: Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
70. Which of the following statements is correct?
a) IFRS allows the cost, revaluation, or fair value models; ASPE allows only the cost model.
b) ASPE allows the cost, revaluation, or fair value models; IFRS allows only the cost model.
c) Both IFRS and ASPE allow the cost, revaluation, or fair value models.
d) IFRS allows the cost, revaluation, or fair value models; ASPE allows only the cost and revaluation models.
Difficulty: Easy
Learning Objective: Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
71. Which of the following statements is correct?
a) IFRS requires that any net revenues or expenses derived from an asset before it is ready for use be included in income; ASPE requires that such revenues and expenses be included in the asset’s cost.
b) ASPE requires that any net revenues or expenses derived from an asset before it is ready for use be included in income; IFRS requires that such revenues and expenses be included in the asset’s cost.
c) Both IFRS and ASPE require that any net revenues or expenses derived from an asset before it is ready for use be included in income.
d) Both IFRS and ASPE require that any net revenues or expenses derived from an asset before it is ready for use be included in the asset’s cost.
Difficulty: Easy
Learning Objective: Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
72. Which of the following statements is correct?
a) ASPE considers investment, mining, and oil and gas properties to be part of property, plant, and equipment; IFRS has different standards for each of these.
b) IFRS considers investment, mining, and oil and gas properties to be part of property, plant, and equipment; ASPE has different standards for each of these.
c) Both ASPE and IFRS consider investment, mining, and oil and gas properties to be part of property, plant, and equipment.
d) Both ASPE and IFRS have different standards for investment, mining, and oil and gas properties; they do not consider them to be part of property, plant, and equipment.
Difficulty: Easy
Learning Objective: Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*73. Borrowing costs incurred for the acquisition of assets may be capitalized if certain conditions are met. Which of the following issues is NOT relevant in making that determination?
a) the capitalization period
b) the avoidable borrowing costs
c) whether the asset is a “qualifying asset”
d) the depreciation period
Difficulty: Easy
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*74. Construction of a qualifying asset is started on March 31 and finished on December 1. The percentage applied to an expenditure made on April 1 to find weighted-average accumulated expenditures is
a) 100%.
b) 66.7%.
c) 75%.
d) 91.7%.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 8/12 x 100 = 66.7%
*75. Borrowing costs that are capitalized should
a) be written off over the remaining term of the debt.
b) be accumulated in a separate deferred charge account and written off straight-line over a 40-year period.
c) not be written off until the related asset is fully depreciated or disposed of.
d) be amortized over the related asset’s useful life.
Difficulty: Easy
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*76. A company is constructing an asset for its own use. Construction began in 2023. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2023 and 2024 at the end of each quarter. The total amount of interest cost capitalized in 2024 should be determined by applying the interest rate on the specific new borrowing to the
a) total accumulated expenditures for the asset in 2023 and 2024.
b) weighted-average accumulated expenditures for the asset in 2023 and 2024.
c) weighted-average expenditures for the asset in 2024.
d) total expenditures for the asset in 2024.
Difficulty: Easy
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
*77. On May 1, 2023, Ethiopia Ltd. began construction of a new building for its own use. Expenditures of $75,000 were incurred monthly for five months beginning on May 1. The building was completed and ready for occupancy on September 1, 2023. For the purpose of determining the amount of interest cost to be capitalized, the weighted-average of the accumulated expenditures on the building during 2023 were
a) $62,500.
b) $75,000.
c) $187,500.
d) $375,000.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $75,000 x (4 + 3 + 2 + 1) = $75,000 x 10 ÷ 12 = $62,500
12
*78. During calendar 2023, Somalia Corp. incurred weighted-average accumulated expenditures of $800,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2023 was a $900,000, 8%, five-year note payable dated January 1, 2021. The amount of interest that should be capitalized during calendar 2023 is
a) $0.
b) $32,000.
c) $64,000.
d) $72,000.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $800,000 × .08 = $64,000
*79. On March 1, Senegal Inc. began construction of a small building for its own use. Payments of $150,000 were made monthly for three months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are
a) $0.
b) $75,000.
c) $150,000.
d) $450,000.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $150,000 x (3 + 2 + 1) = $150,000 x 6 ÷ 12 = $75,000
12
Use the following information for questions *80–*81.
On March 1, 2023, Mauritania Ltd. purchased land for $270,000 cash, which it intends to use for its new head office. Construction on the office building began on March 1. The following expenditures were incurred for construction:
Date Expenditures
March 1, 2023 $450,000
April 1, 2023 252,000
May 1, 2023 450,000
June 1, 2023 720,000
The office building was completed and ready for occupancy on July 1. To help pay for construction, Mauritania borrowed $360,000 on March 1, 2023, on a 9%, three-year note payable. Other than this note, the only other debt outstanding during 2023 was a $150,000, 10%, six-year note payable dated January 1, 2022.
*80. The weighted-average accumulated expenditures on the construction project during 2023 were
a) $1,467,000.
b) $348,000.
c) $258,000.
d) $156,000.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($450,000 × 4 ÷ 12) + ($252,000 × 3 ÷ 12) + ($450,000 × 2 ÷ 12) +
($720,000 × 1 ÷ 12) = $348,000
*81. The actual interest cost incurred during 2023 was
a) $27,000.
b) $39,500.
c) $42,000.
d) $47,400.
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($360,000 × 9% × 10 ÷ 12) + ($150,000 × 10%) = $42,000
Use the following information for questions *82 – *83.
Green Bay Inc. has the following general-purpose debt for the year ended December 31, 2023:
8%, 2-year note, issued January 1, 2023 for $300,000
7.5% 5-year note, issued March 31, 2023 for $750,000
9%, 20-year bond, issued October 1, 2023 for $1,000,000
*82. Calculate the borrowing cost for 2023.
a) $170,250
b) $90,000
c) $88,688
d) $85,875
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Total borrowing costs: ($300,000 x .08) + ($750,000 x .075 x 9/12) + ($1,000,000 x .09 x 3/12) = $88,687.50
*83. Calculate the capitalization interest rate.
a) 4.33%
b) 7.97%
c) 8.17%
d) 8.30%
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Total borrowing costs: ($300,000 x .08) + ($750,000 x .075 x 9/12) + ($1,000,000 x .09 x 3/12) = $88,687.50
Weighted average principal outstanding: ($300,000 x 12/12) + ($750,000 x 9/12) + ($1,000,000 x 3/12) = $1,112,500
Capitalization interest rate: $88,687.50 / $1,112,500 = 7.97%
*84. When using the revaluation model of accounting for PP&E assets (proportionate method),
a) a Revaluation Surplus account is not used.
b) depreciation continues to be charged in the original pattern.
c) the asset account and its related contra-asset are both adjusted.
d) over the life of the asset, it is possible that there can be a net increase in net income from revaluations.
Difficulty: Easy
Learning Objective: Understand and apply the revaluation model using the proportionate method.
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Use the following information for questions *85–*86.
Egypt Corp. owns equipment that originally cost $100,000. At December 31, 2023, the equipment’s carrying value (after 2023 depreciation was recorded) is $60,000. It is determined that the fair value of the equipment at this date is $90,000. Although Egypt’s policy is to apply the revaluation model using the proportionate method, this is the first time the company has done it.
*85. By how much must the accumulated depreciation account be increased (decreased) at December 31, 2023?
a) $20,000
b) $40,000
c) $60,000
d) $(60,000)
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method.
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Increase in fair value over carrying value – ($90,000 – $60,000) ÷ $60,000 = 50%
Accumulated Depreciation: $100,000 – $60,000 = $40,000; therefore, Accumulated Depreciation should be increased by $40,000 x 50% = $20,000
*86. The adjusting entry to record the revaluation will include a
a) debit to Accumulated Depreciation of $20,000.
b) credit to Equipment of $10,000.
c) credit to Revaluation Surplus (OCI) of $30,000.
d) debit to Revaluation Surplus (OCI) of $10,000.
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method.
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: AJE is Dr. Equipment $50,000, Cr. Acc. Dep $20,000, Cr. Revaluation $30,000
Use the following information for questions *87 –*88.
Viking Co has the following select information from its December 31, 2023 balance sheet:
Buildings $2,250,000
Accumulated Depreciation 270,000
Carrying Value 1,980,000
*87. The fair value of the building on December 31, 2023 is $2,079,000. Calculate the balance in the accumulated depreciation account for the building as a result of the revaluation assuming that Viking Inc. is using the proportionate method. This is the first time that Viking Co has applied the revaluation method to the building.
a) $171,000
b) $270,000, the balance is unchanged
c) $283,500
d) $369,000
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method.
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Accumulated depreciation: $270,000 x $2,079,000 / $1,980,000 = $283,500
*88. Assuming a fair value of the building on December 31, 2023 is $2,079,000, what would an adjusting entry include assuming that Viking uses the proportionate method for revaluing the building account? This is the first time that Viking Co has applied the revaluation method to the building.
a) debit to Buildings $112,500
b) credit to Accumulated Depreciation—Buildings $99,000
c) debit to Accumulated Depreciation—Buildings $283,500
d) credit to Revaluation Surplus—OCI $112,500
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method.
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Building Revaluation: $2,250,000 x $2,079,000 / $1,980,000 = $2,362,500; $2,362,500 – $2,250,000 = $112,500
Accumulated depreciation: $270,000 x $2,079,000 / $1,980,000 = $283,500
Revaluation Surplus: $2,079,000 – $1,980,000 = $99,000
Exercises
Ex. 10-89 Componentization
Explain the concept of componentization as it applies to the recognition of PP&E assets.
Solution 10-89
Componentization refers to recognizing major parts of an asset as separate assets for accounting purposes, such as the separate parts of a building (roof, heating system, flooring, elevators, foundation). Each part is then depreciated separately to reflect differing useful lives and different patterns of delivering economic benefits to the organization. The extent of componentization is left to professional judgement, with the primary consideration being the significance of the “parts” to the “whole.”
Difficulty: Easy
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex.10-90 Componentization
On July 1, 2023, Chargers Properties Ltd. purchased a recently built apartment complex for a total acquisition cost of $2,400,000, paid by cash. The building has an estimated useful life of 30 years and was constructed with a large efficient boiler that is expected to last for 15 years. Management believes that the quality of the shingles used on the roof was substandard and estimates that the roof will need to be replaced in 10 years. The fiscal year end for the company is December 31, 2023, and management prefers to breakout Property, Plant, and Equipment into components where possible.
Instructions
Assume the following is the breakdown of the acquisition price: boiler is 7% of the total, roof is 5% of the total and the remaining 88% is allocated to the building. What would be the journal entries to record the acquisition of the apartment complex on July 1st, 2023, and what would be any applicable entries at year end?
Solution 10-90
July 1, 2023
Buildings 2,112,000*
Buildings—Roof 120,000*
Buildings—Boiler 168,000*
Cash 2,400,000
*Building $2,400,000 x 88% = $2,112,000, Roof $2,400,000 x 5% = $120,000, Boiler $2,400,000 x 7% = $168,000
December 31, 2023
Depreciation Expense 46,800
Accumulated Depreciation—Buildings 35,200
Accumulated Depreciation—Buildings—Roof 6,000
Accumulated Depreciation—Buildings—Boiler 5,600
Buildings Depreciation: $2,112,000 / 30 x 6/12 = $35,200
Roof Depreciation: $120,000 / 10 x 6/12 = $6,000
Boiler Depreciation: $168,000 / 15 x 6/12 = $5,600
Difficulty: Medium
Learning Objective: Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria.
Section Reference: Definition and Recognition of Property, Plant, and Equipment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 10-91 Plant asset accounting
During 2023 and 2024, Mauritius Corporation experienced several transactions involving plant assets. A number of errors were made in recording some of these transactions. For each item listed below, indicate the effect of the error (if any) in the blanks provided by using the following codes:
O = Overstated; U = Understated; NE = No Effect
If no error was made, write NE in each of the four columns.
Net Book Net Book
Value of Value of
Plant 2023 Plant 2024
Assets at Net Assets at Net
Transaction Dec 31/2023 Income Dec 31/2024 Income
1. The cost of installing a new computer _____ _____ _____ _____
system in 2023 was not recorded in 2023.
It was charged to expense in 2024.
2. In 2024, clerical workers were trained to _____ _____ _____ _____
use the new computer system at a cost
of $15,000, which was incorrectly
capitalized. The cost is to be written
off over the expected life of the new
computer system.
3. A major overhaul of factory machinery _____ _____ _____ _____
in 2023, which extended its useful life
by five years, was charged to
accumulated depreciation in 2023.
4. Interest cost qualifying for capitalization _____ _____ _____ _____
in 2023 was charged to interest expense
in 2023.
5. In 2023, land was bought for an _____ _____ _____ _____
employee parking lot. The $2,000
title search fee was charged to expense
in 2023.
6. The cost of moving several _____ _____ _____ _____
manufacturing facilities from
metropolitan locations to suburban
areas in 2023 was capitalized.
The cost was written off over a
10-year period beginning in 2023.
Solution 10-91
Net Book Net Book
Value of Value of
Plant 2023 Plant 2024
Assets at Net Assets at Net
Dec 31/2023 Income Dec 31/2024 Income
1. U O U U
2. NE NE O O
3. NE NE NE NE
4. U U U O
5. U U U O
6. NE NE NE NE
Difficulty: Medium
Learning Objective: Identify the costs to include in the measurement of property, plant, and equipment at acquisition.
Section Reference: Cost Elements
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Ex. 10-92 Asset exchange with commercial substance
In 2024, Malawi Inc. exchanged equipment for two delivery trucks. The equipment had been purchased for $95,000 ten years ago and has since been fully depreciated. While the equipment was recently appraised at $22,000, a reliable valuation for the trucks was not available. This transaction has commercial substance.
Instructions
Prepare the journal entry to record the exchange.
Solution 10-92
Trucks 22,000
Accumulated depreciation—equipment 95,000
Equipment 95,000
Gain on disposal of equipment 22,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-93 Non-interest-bearing note
Togo Auto purchased several trucks by issuing a $40,000, 4-year, non-interest-bearing note to Rabat Motors. The market interest rate for this type of transaction is 8%.
Instructions
Prepare the journal entry to record the purchase of these trucks.
Solution 10-93
Truck ($40,000 x .0.73503)* 29,401
Notes Payable 29,401
*OR 4 N 8 I FV 40000 CPT PV = 29,401
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-94 Non-monetary transaction without commercial substance
Malawi Auto traded one of its used trailers (cost $40,000, accumulated depreciation $36,000) for another used trailer with a fair value of $6,400. Malawi also paid $600 to complete the transaction.
Instructions
Assuming the transaction lacks commercial substance, prepare the journal entry to record the exchange.
Solution 10-94
Trailer (new) 4,600
Accumulated Depreciation 36,000
Trailer (old) 40,000
Cash 600
Note: Since the transaction lacks commercial substance, no gain is recognized, and the new asset is recognized at the carrying amount of the old asset plus the cash paid.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-95 Asset exchange
Arabia Inc. traded its existing rental cars for a new fleet. Two-thirds of the old fleet's original cost of $375,000 had been depreciated. The new fleet is valued at $500,000 and Arabia was required to make a cash payment of $400,000.
Instructions
Prepare the required entries to record the exchange.
Solution 10-95
Vehicles (new) 500,000
Accumulated depreciation 250,000
Loss on disposal of vehicles 25,000
Vehicles (old) 375,000
Cash 400,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-96 Acquisition cost
Rwanda Corporation purchased land at a cost of $100,000. Closing costs were $3,800, plus Rwanda paid $48,000 for site preparation so they could construct a building on the site.
Instructions
Calculate the amount that should be recorded as the cost of the land.
Solution 10-96
$100,000 + $3,800 + $48,000 = $151,800
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex.10-97 Asset retirement cost
Buccaneer Farms Ltd. is a large grain farm operation on the prairies. In the last few years significant droughts have detrimentally affected crop yields. To mitigate the risk of future droughts, management has decided to install a large irrigation system. The company owns land that borders a water source. To install the irrigation system, a diversion must be built which will disturb the land’s natural state. The local government has advised Buccaneer Farms Ltd. that it is responsible to restore the land to its original state when the irrigation system is removed. The cost of the components for the system is $350,000, installation costs are $45,000, training for the labourers is $5,000, and a new truck for the business to transport labourers to where the system is located costs $40,000. Management hired an engineering firm that estimates the present value of the future dismantling costs to be $25,000, and the present value of the cost to restore the land to be $55,000.
Instructions
What is the total asset value of the irrigation system?
Solution 10-97
Components $350,000
Installation 45,000
Dismantling 25,000
Restoration 55,000
Total $475,000
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-98 Costs included in assets
Eritrea Ltd. is expanding its operations. Due to the expansion, they incurred the following costs during the fiscal period when they constructed a new factory:
Direct labour 70,000
Loan interest to finance expansion 3,000
Architectural drawings 15,000
Purchase of company car for the new plant manager 44,000
Direct material for factory 81,000
Allocation of overhead based on labour
hours worked on factory 58,000
Imputed interest on lost opportunity costs 9,000
Instructions
Which of these costs should be included in the cost of the new factory?
Solution 10-98
Direct labour $ 70,000
Loan interest to finance expansion 3,000
Architectural drawings 15,000
Direct material for factory 81,000
Allocation of overhead based on labour
hours worked on factory 58,000
Total $227,000
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-99 Application of the revaluation model
Aden Motels Inc. owns a motel that it had purchased on January 1, 2023, for $1.5 million cash and is accounted for in a separate account, classified as "Buildings." The company is using the revaluation model to account for its structures and revalues them annually. Aden uses straight-line depreciation over the asset's 15-year useful life with no residual value.
The asset's fair value was equal to its carrying amount on Dec. 31, 2023, and was $1,450,000 on Dec. 31, 2024.
Instructions
Assuming Aden uses the asset adjustment (elimination) method for revaluation, prepare all required journal entries for 2023 and 2024.
Solution 10-99
Journal Entries – 2023:
January 1:
Buildings 1,500,000
Cash 1,500,000
To account for acquisition
December 31
Depreciation Expense 100,000
Accumulated Depreciation—Buildings 100,000
To record 2023 depreciation ($1,500,000 – 0) ÷ 15 = $100,000
Journal Entries – 2024:
December 31:
Depreciation Expense 100,000
Accumulated Depreciation—Buildings 100,000
To record 2024 depreciation (prior to revaluation)
($1,500,000 – 0) ÷ 15 = $100,000
December 31:
Accumulated Depreciation—Buildings 200,000
Buildings 200,000
To eliminate accumulated depreciation
(as part of the revaluation process)
($100,000 x 2 = $200,000)
December 31:
Buildings 150,000
Revaluation Surplus (OCI) 150,000
To adjust the Buildings account to fair value
$1,450,000 – ($1,500,000 – $200,000) = $150,000
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-100 Measurement models
Identify and briefly describe the three main models to accounting for PP&E assets.
Solution 10-100
The following three models are available and may be used subject to the asset type and whether IFRS or ASPE is used:
1. The cost model: This model can be used for all types of PP&E assets, and is acceptable under both ASPE and IFRS. The assets, after acquisition, are measured at cost less accumulated depreciation and adjusted for impairment as necessary.
2. The revaluation model: This model can be used for all types of PP&E assets except for investment property, and is only used under IFRS. Net increases in fair value are accumulated in a separate account, Revaluation Surplus, and reported in other comprehensive income. There are two accounting methods allowed, the proportionate method and the asset-adjustment or elimination method.
3. The fair value model: This model can only be used for investment property, and again, is only used under IFRS. Assets are not depreciated and all changes in fair value are recognized in net income.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 10-101 Application of the fair value model
On January 20, 2024, Trail Corp. purchased a luxury apartment complex in British Columbia for $10 million cash. In addition to the purchase price, Trail paid transfer fees of $150,000 and legal fees of $20,000.
Salaries and wages were paid to maintenance staff during each of the following three years:
2024: $103,000
2025: $107,000
2026: $110,000
Fair value information:
Dec 31, 2024: $9.1 million
Dec 31, 2025: $10.9 million
Dec 31, 2026: $11.7 million
Other information:
The complex qualifies as investment property.
Trail applies the fair value model to all its investment property.
Instructions
Prepare all required journal entries for 2024, 2025, and 2026.
Solution 10-101
Journal Entries – 2024
Investment Property 10,170,000
Cash 10,170,000
To account for acquisition on January 20
($10,000,000 + $150,000 + $20,000 = $10,170,000)
Salaries and Wages Expense 103,000
Cash 103,000
To account for wages paid during 2024
Gain or Loss in Value of Investment Property 1,070,000
Investment Property 1,070,000
To adjust the value of the investment property to fair value at Dec 31, 2024
($10,170,000 – $9,100,000 = $1,070,000)
Journal Entries – 2025
Salaries and Wages Expense 107,000
Cash 107,000
To account for wages paid during 2025
Investment Property 1,800,000
Gain or Loss in Value of Investment Property 1,800,000
To adjust the value of the investment property
to fair value at Dec 31, 2025
($10,900,000 – $9,100,000 = $1,800,000)
Journal Entries – 2026
Salaries and Wages Expense 110,000
Cash 110,000
To account for wages paid during 2026
Investment Property 800,000
Gain or Loss in Value of Investment Property 800,000
To adjust the value of the investment property
to fair value at Dec 31, 2026
($11,700,000 – $10,900,000 = $800,000)
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-102 Cost model versus revaluation model versus fair value model
For each of the following types of assets, indicate with an “x” which of the three models: cost model (CM), revaluation model (RM), and/or fair value model (FVM) a company can choose, given international and private enterprise standards, to account for its property, plant, and equipment assets after acquisition.
ASPE | IFRS | |||||
ASSET TYPE | CM | RM | FVM | CM | RM | FVM |
Investment property | ||||||
Other property, plant, and equipment assets | ||||||
Solution 10-102
ASPE | IFRS | |||||
ASSET TYPE | CM | RM | FVM | CM | RM | FVM |
Investment property | √ | √ | √ | |||
Other property, plant, and equipment assets | √ | √ | √ | |||
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 10-103 Trade-off with historical cost model
Explain the qualitative characteristic trade-off related to the historical cost method.
Solution 10-103
Historical costs are verifiable and therefore are considered more reliable. On the other hand, they often do not faithfully represent the value of the asset to the business and therefore are considered a less relevant measure. This is an example of a qualitative characteristic trade-off.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 10-104 Revaluation model
How often should a company revalue its property, plant, and equipment when using the revaluation model?
Solution 10-104
A revaluation is not required at each reporting date but must be carried out often enough that the carrying amount reported is not materially different from the assets’ fair value. Some assets need to be remeasured only every three to five years, but for assets whose values change rapidly, an annual revaluation may be needed.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 10-105 Difference between proportionate and asset adjustment methods
Explain the difference between the proportionate and asset adjustment methods of accounting when revaluing an asset.
Solution 10-105
The proportionate approach adjusts both the asset’s carrying amount and its accumulated depreciation, so that the net balance is the fair value of the asset at the revaluation date. The asset adjustment (or elimination) method eliminates the balance in the Accumulated Depreciation account, writing it off against the asset itself. The asset is then adjusted to its new revalued amount.
Difficulty: Easy
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
*Ex. 10-106 Capitalization of interest
In February 2024, Quorum Corp. began the construction of a 10-storey building. The construction is expected to be completed by January 2025.
During 2024, the following payments were made:
Apr. 1: $1,000,000
Jun. 1: $1,500,000
Aug. 1: $900,000
Oct. 1: $950,000
No asset specific debt was incurred.
During 2024, Quorum's general debt consisted of the following:
$2 million, 5%, 2-year note,
$1.2 million, 4.5%, 2-year note,
$0.75 million, 3%, 5-year note.
Instructions
a) Calculate the weighted-average accumulated expenditures for the year ended December 31, 2024.
b) Calculate the weighted-average capitalization rate on Quorum's general-purpose debt for the year ended December 31, 2024.
c) Calculate the avoidable borrowing costs.
d) Calculate the amount of Quorum's borrowing costs that should be capitalized.
Solution 10-106
a) Weighted-average accumulated expenditures for the year ended December 31, 2024:
Weighted Average
Capitalization Accumulated
Date Amount Period Expenditures
Apr. 1 1,000,000 9 ÷ 12 750,000
Jun. 1 1,500,000 7 ÷ 12 875,000
Aug. 1 900,000 5 ÷ 12 375,000
Oct. 1 950,000 3 ÷ 12 237,500
Total 4,350,000 2,237,500
b) Weighted-average capitalization rate on Quorum's general-purpose debt for the year ended December 31, 2024:
Borrowing
Description Principal Costs
$2 mill. 5% 2-year note 2,000,000 100,000
$1.2 mill. 4.5% 2-year note 1,200,000 54,000
$0.75 mill. 3% 5-year note 750,000 22,500
Total 3,950,000 176,500
Weighted average rate = $176,500 ÷ $3,950,000 = 4.47%
c) Avoidable borrowing costs:
($2,237,500 – $0) x 4.47% = $100,016
d) Borrowing costs to be capitalized:
$0 + $100,016 = $100,016
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 10-107 Capitalization of interest
On March 1, Dubai Corp. began construction of a small building. The following expenditures were incurred for construction:
Mar. 1 $ 75,000 Jun. 1 $300,000
Apr. 1 84,000 Jul. 1 100,000
May 1 180,000
The building was completed and occupied on July 1. To help pay for construction, $60,000 was borrowed on March 1 on a 10%, three-year note payable. The only other debt outstanding during the year was a $500,000, 8% note issued two years ago.
Instructions
a) Calculate the weighted-average accumulated expenditures.
b) Calculate avoidable interest.
Solution 10-107
a) Capitalization Weighted-Average
Date Expenditures Period Accum. Expend.
March 1 $ 75,000 4 ÷ 12 $ 25,000
April 1 84,000 3 ÷ 12 21,000
May 1 180,000 2 ÷ 12 30,000
June 1 300,000 1 ÷ 12 25,000
July 1 100,000 0 0
$101,000
b) Weighted-Average Avoidable
Accum. Expend. Rate Interest
$ 60,000 .10 $6,000
41,000 .08 3,280
$101,000 $9,280
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 10-108 Revaluation model (proportionate method)
Aden Motels Inc. owns a motel that it had purchased on January 1, 2023, for $1.5 million cash and is accounted for in a separate account, classified as "Buildings." The company is using the revaluation model to account for its buildings and revalues them annually. Aden uses straight-line depreciation over the asset's 15-year useful life with no residual value.
The asset's fair value was equal to its carrying amount on Dec. 31, 2023, and was $1,450,000 on Dec. 31, 2024.
Instructions
Assuming Aden uses the proportionate method to adjust for revaluation, prepare all required journal entries for 2023 and 2024.
Solution 10-108
Journal Entries – 2023:
January 1:
Buildings 1,500,000
Cash 1,500,000
To account for acquisition
December 31
Depreciation Expense 100,000
Accumulated Depreciation—Buildings 100,000
To record 2023 depreciation ($1,500,000 – 0) ÷ 15 = $100,000
Journal Entries – 2024:
December 31:
Depreciation Expense 100,000
Accumulated Depreciation—Buildings 100,000
To record 2024 depreciation (prior to revaluation)
($1,500,000 – 0) ÷ 15 = $100,000
December 31:
Buildings 173,077
Accumulated Depreciation—Buildings 23,077
Revaluation Surplus (OCI) 150,000
To adjust the Buildings account to fair value
Before revaluation (A) | Proportionate amount after revaluation (B) |
| ||
Buildings | $1,500,000 | ×1,450/1,300 | $1,673,077 | $173,077 |
Accumulated depreciation | 200,000 | × 1,450/1,300 | 223,077 | 23,077 |
Carrying amount | $1,300,000 | × 1,450/1,300 | $1,450,000 | $150,000 |
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 10-109 Asset exchanges
Bahrain Corporation follows a policy of a 10% depreciation charge per year on machinery and a 5% depreciation charge per year on buildings.
The following transactions occurred in 2023:
1. March 31, 2023 A warehouse that Bahrain had purchased on January 1, 2014, for $1.7 million (with a current fair value of $1 million) was exchanged for another warehouse which also had a current fair value of $1 million. Depreciation has been properly charged from Jan. 1, 2014 through Dec. 31, 2022. Both parcels of land on which the warehouses were located were equal in value and had a fair value equal to carrying amount.
2. June 30, 2023 Machinery with a cost of $120,000 and accumulated depreciation through December 31, 2022, of $90,000 was exchanged, along with $75,000 cash, for a parcel of land with a fair market value of $115,000.
Instructions
Prepare all appropriate journal entries for Bahrain Corporation for the above dates.
Solution 10-109
Mar 31, 2023 Depreciation Expense 21,250
Accumulated Depreciation—Buildings 21,250
($1,700,000 × 5% × 3 ÷ 12)
Buildings (“new”) 913,750
Accumulated Depreciation—Buildings 786,250
Buildings (“old”) 1,700,000
($1,700,000 × 5% × 111 ÷ 12 = $786,250)
Note: Since this transaction would leave Bahrain in basically the same economic position as before, the transaction lacks commercial substance; therefore the “new” warehouse is recorded at the carrying amount of the old one. Recording it at its fair value would create a gain, which is not correct when there is no commercial substance.
June 30, 2023 Depreciation Expense 6,000
Accumulated Depreciation—Machinery 6,000
($120,000 × 10% × 1 ÷ 2)
Land 115,000
Accumulated Depreciation—Machinery 96,000
Gain on Disposal of Machinery 16,000
Machinery 120,000
Cash 75,000
[$40,000 – ($120,000 – $96,000)] = $16,000
Note: Since the assets involved are sufficiently dissimilar, this transaction will change Bahrain’s economic position, and the transaction has commercial substance. Therefore, a gain on disposal can be recorded. Note the new asset cannot be recorded at higher than fair value.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-110 Asset exchange – no commercial substance
Turkey Corp. has a computer that they purchased on March 30, 2019, for $106,000. This computer had an estimated life of ten years and a residual value of $6,000. On December 31, 2023, the old computer is exchanged for a similar computer with a fair value of $58,000. Turkey also received $2,000 cash. Assume that the last fiscal period ended on December 31, 2022, and that straight-line depreciation is used.
Instructions
Prepare all entries that are necessary on December 31, 2023.
Solution 10-110
Depreciation Expense ($106,000 – $6,000) ÷ 10 10,000
Accumulated Depreciation—Computer 10,000
Accumulated Depreciation—Computer ($10,000 x 4 ¾) 47,500
Computer (“new”) 56,500
Cash 2,000
Computer (“old”) 106,000
Note: Since this transaction would leave Turkey in basically the same economic position as before, the transaction lacks commercial substance; therefore the “new” computer is recorded at the carrying amount of the old one minus the cash received ($106,000 – $47,500 = $58,500 – $2,000 = $56,500). Recording it at the fair value of the new computer would create a gain, which is not correct when there is no commercial substance.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-111 Asset exchange – no commercial substance
Syria Corp. exchanged Building 24, which has an appraised value of $1,700,000, a cost of $2,800,000, and accumulated depreciation of $1,300,000, for Building M which belongs to Russia Ltd. Building M has an appraised value of $1,620,000, a cost of $3,100,000, and accumulated depreciation of $1,750,000. Russia paid Syria the difference between the appraised values of the two buildings. Assume depreciation has been updated to the date of exchange.
Instructions
Prepare the entries on both companies’ books, assuming the buildings are similar assets and there is no commercial substance for either company.
Solution 10-111
Syria Corp.:
Accumulated Depreciation—Buildings 1,300,000
Buildings 1,420,000
Cash 80,000
Buildings 2,800,000
($1,700,000 – $1,620,000 = $80,000 cash received)
Cost of Building M = carrying amount of Building 24 less cash received.
Russia Ltd.:
Accumulated Depreciation—Buildings 1,750,000
Buildings 1,430,000
Buildings 3,100,000
Cash 80,000
Cost of Building 24 = carrying amount of Building M plus cash paid.
Note: Since this transaction would leave both companies in basically the same economic position as before, the transaction lacks commercial substance; therefore the “new” buildings are recorded at the carrying amount of the old one, less cash received, or plus cash paid. Recording them at fair value would create a gain, which is not correct when there is no commercial substance.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-112 Nonmonetary exchange
Athens Inc. exchanged machinery with an appraised value of $1,170,000, a recorded cost of $1,800,000 and accumulated depreciation of $900,000, for machinery that Sparta Corp. owns. Sparta’s machinery has an appraised value of $1,140,000, a recorded cost of $2,160,000, and accumulated depreciation of $1,188,000. Sparta also gave Athens $30,000 in the exchange. Assume depreciation has been updated to the date of exchange.
Instructions
a) Prepare the entries on both companies’ books assuming that the transaction has commercial substance.
b) Prepare the entries on both companies’ books assuming that the transaction lacks commercial substance.
Solution 10-112
a) Commercial substance
Athens Inc.
Machinery 1,140,000 Cost $1,800,000
Cash 30,000 A/D 900,000 Accum. Depreciation— BV 900,000
Machinery 900,000 FV 1,170,000
Gain on Disposal Gain $ 270,000
of Machinery 270,000
Machinery 1,800,000
Sparta Corp.
Machinery 1,170,000 Cost $2,160,000
Accum. Depreciation— A/D 1,188,000
Machinery 1,188,000 BV 972,000
Gain on Disposal of FV 1,140,000
Machinery 168,000 Gain $ 168,000
Machinery 2,160,000
Cash 30,000
b) No commercial substance
Athens Inc.
Machinery 870,000
Cash 30,000
Accumulated Depreciation—Machinery 900,000
Machinery 1,800,000
Sparta Corp.
Machinery 1,002,000
Accumulated Depreciation—Machinery 1,188,000
Machinery 2,160,000
Cash 30,000
Note: When there is no commercial substance, no gain is recorded. Instead, the asset is recorded at its carrying amount plus any cash paid or less any cash received. For Athens, the value would be $900,000 – $30,000 cash received = $870,000. For Sparta, the value would be $972,000 + $30,000 cash paid = $1,002,000.
Note also that the “new” asset cannot be recorded at higher than fair value.
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-113 Accounting for government grant
Gorgen Corp. qualified for a 25% government grant that would assist the company in the purchase of machinery for its manufacturing operations. The cost of the machinery is $200,000 and the new asset has an estimated useful life of 16 years.
Instructions
- Assuming that Gorgen uses the cost reduction method, prepare the journal entries to record the purchase of the machinery and the receipt of the government grant.
- Assuming that Gorgen uses the deferral method, prepare the journal entries to record the purchase of the machinery, the receipt of the grant, and the adjusting entry required at the end of the first year (assuming the machinery was purchased on the first day of the fiscal year).
Solution 10-113
(a) Cost reduction method:
Machinery 200,000
Cash 200,000
Cash 50,000
Equipment 50,000
($200,000 x .25)
(b) Deferral method:
Machinery 200,000
Cash 200,000
Cash 50,000
Deferred Revenue—Government Grants 50,000
Deferred Revenue—Government Grants 3,125
Revenue—Government Grants 3,125
($50,000 ÷ 16 years)
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lumpsum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr.10-114 Lump sum purchase
Flash Labs Ltd. conducts experiments, analysis, and lab tech services in the agriculture industry for a wide variety of clients. Based on its business model, the company needs to continually refresh the equipment it uses to keep up with technology changes. On June 1st, 2023, the company was able to get a great deal on two pieces of equipment and supplies from a smaller lab that is going out of business. The following are the details of the deal:
Fair Value
Equipment A $96,000
Equipment B $75,000
Supplies $13,000
Flash Labs Ltd. paid $155,000 cash for all three items, plus the seller was able to transfer the remaining insurance coverage on both pieces of equipment (good for the next 7 months) as it was already paid for, and the provider would not issue a refund to the seller. This is valued at $4,000.
Instructions
Using the relative fair value approach (round to the nearest whole number), record the journal entry to account for this purchase transaction.
Solution 10-114
June 1, 2023:
Prepaid Insurance 3,100
Equipment 79,050
Equipment 62,000
Supplies 10,850
Cash 155,000
Fair Value
Equipment A $ 96,000 51% of total, 51% x $155,000 = $79,050
Equipment B 75,000 40% of total, 40% x $155,000 = $62,000
Supplies 13,000 7% of total, 7% x $155,000 = $10,850
Insurance 4,000 2% of total, 2% x $155,000 = $3,100
Total $188,000
Difficulty: Medium
Learning Objective: Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.
Section Reference: Measurement of Cost for Nonmonetary Exchange
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-115 Purchase of asset by non-interest-bearing note
Lebanon Corporation is a Calgary-based manufacturer of automobile parts. In early January 2023, the company acquired land and a building to be used as the company's new head office. Lebanon issued a $2,000,000, five-year non-interest-bearing note to the seller. Payment is to be made in five equal instalments of $400,000 at the end of each year. As a result of a depressed real estate market, the fair value of the building cannot be readily determined. However, it has been ascertained that, given Lebanon's credit rating and market conditions, an interest rate of 9% would reflect the substance and credit risk of the negotiated payment schedule.
Other information:
1. One-third of the total value of the acquisition is attributable to the land.
2. The building is expected to have a useful life of 25 years.
3. Throughout the year, Lebanon incurred repair costs of $87,000 and paid them in cash.
4. A parking lot was built at a cost of $100,000 cash. The work was completed on July 1 and is expected to have a useful life of 10 years.
Instructions
Prepare all journal entries that are required to record the above events and transactions. Round all values to the nearest dollar.
Solution 10-115
Land 518,620
Buildings 1,037,240
Notes Payable 1,555,860
To record the acquisition of land and building
$400,000 x 3.88965 = $1,555,860 OR 5 N 9 I 400000 PMT CPT PV = 1,555,861
Land: $1,555,860 x 1 ÷ 3 = $518,620
Building: $1,555,860 x 2 ÷ 3 = $1,037,240
Maintenance and Repairs Expense 87,000
Cash 87,000
To record repair costs
Land Improvements 100,000
Cash 100,000
To record creation of parking lot
Difficulty: Medium
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-116 Costs included in assets
Below is a list of various expenditures that an organization could make. In the columns marked Land, Building, Equipment, and Expensed, indicate by a “+” or “–“ which columns the expenditure would be added to or subtracted from. The first has been done for you as an example.
Item | Land | Buildings | Equipment | Expensed |
0. Construction costs | + | |||
1. Title search | ||||
2. Property transfer tax | ||||
3. Installation of equipment | ||||
4. Soil decontamination costs | ||||
5. Transportation costs of equipment | ||||
6. Labour to construct building | ||||
7. Special foundation for machinery | ||||
8. Damage to machinery while uncrating | ||||
9. Proceeds from salvage of old building on land purchased for factory site | ||||
10. Property taxes in arrears paid on purchase | ||||
11. Insurance on building after occupancy | ||||
12. Clearing land for factory site |
Solution 10-116
Item | Land | Buildings | Equipment | Expensed |
0. Construction costs | + | |||
1. Title search | + | |||
2. Property transfer tax | + | |||
3. Installation of equipment | + | |||
4. Soil decontamination costs | + | |||
5. Transportation costs of equipment | + | |||
6. Labour to construct building | + | |||
7. Special foundation for machinery | + | |||
8. Damage to machinery while uncrating | + | |||
9. Proceeds from salvage of old building on land purchased for factory site | - | |||
10. Property taxes in arrears paid on purchase | + | |||
11. Insurance on building after occupancy | + | |||
12. Clearing land for factory site | + |
Difficulty: Easy
Learning Objective: Identify the costs included in specific types of property, plant, and equipment.
Section Reference: Measurement of Costs Associated with Specific Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Pr. 10-117 Revaluation model
Mongolia Inc. owns equipment that it purchased on January 1, 2024, for $4 million.
The following additional information is available:
Dec. 31, 2024 – Carrying amount (after recording 2024 depreciation): $3,600,000
Dec. 31, 2024 – Fair value: $4,100,000
The company uses the revaluation model (asset adjustment method) to account for its property, plant, and equipment.
Instructions
Assuming the entry for the current year's depreciation has already been recorded, prepare the entry(ies) to adjust the asset's carrying amount to fair value.
Solution 10-117
Accumulated Depreciation—Equipment 400,000
Equipment 400,000
To eliminate accumulated depreciation
($4,000,000 – $3,600,000 = $400,000)
Equipment 500,000
Revaluation Surplus (OCI) 500,000
To adjust the equipment account to fair value
$4,100,000 – $3,600,000 = $500,000
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr.10-118 Revaluation model
Marshal Ltd. owns a building that it purchased on January 1, 2023, for $6,000,000 (excluding the land value). Management estimates the useful life to be 30 years, with no residual value. The following additional information is available:
Dec 31, 2023 – Fair value: $6,100,000
Dec 31, 2024 – Fair value: $6,200,000
Dec 31, 2025 – Fair value: $5,000,000*
*The local economy has gone into a significant recession and real estate values have declined.
Instructions
The company uses the revaluation model (asset adjustment method) to account for its property, plant, and equipment. Assuming a December 31st fiscal year end, prepare the year- end adjusting entries for 2023 to 2025 (Round to the nearest dollar).
Solution 10-118
Dec 31, 2023:
Depreciation Expense 200,000
Accumulated Depreciation—Buildings 200,000
To record depreciation for the year 6,000,000 / 30 = 200,000
Accumulated Depreciation—Buildings 200,000
Buildings 200,000
To eliminate accumulated depreciation
Buildings 300,000
Revaluation Surplus (OCI) 300,000
To adjust the Buildings account to fair value
$6,100,000 – $5,800,000 = $300,000
Dec 31, 2024
Depreciation Expense 210,345
Accumulated Depreciation—Buildings 210,345
To record depreciation for the year 6,100,000 / 29 = 210,345
Accumulated Depreciation—Buildings 210,345
Buildings 210,345
To eliminate accumulated depreciation
Buildings 310,345
Revaluation Surplus (OCI) 310,345
To adjust the Buildings account to fair value
$6,200,000 – $5,889,655 = $310,345
Dec 31, 2025
Depreciation Expense 221,429
Accumulated Depreciation—Buildings 221,429
To record depreciation for the year 6,200,000 / 28 = 221,429
Accumulated Depreciation—Buildings 221,429
Buildings 221,429
To eliminate accumulated depreciation
Revaluation Surplus (OCI) 610,345
Revaluation Gain or Loss 368,226
Buildings 978,571
To adjust the Buildings account to fair value
$5,978,571 – $5,000,000 = $978,571 loss, 610,345 from previous revaluations to
the OCI account, the remaining 368,226 to the income statement
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-119 Fair value model
In February 2023, Jordan Corp. purchased a vineyard in southern Ontario for $7.5 million cash. This amount included legal fees of $18,000 and property taxes of $40,000 (of that amount, $30,000 were in arrears). Based on appraisals, the property's year-end fair values were $8.2 million at the end of 2023, and $8 million at the end of 2024.
Other information:
1. The vineyard qualifies as investment property.
2. Jordan applies the fair value model to all its investment property.
Instructions
Prepare all required journal entry(ies) for 2023 and 2024.
Solution 10-119
Journal Entries – 2023
Investment Property 7,490,000
Property Tax Expense 10,000
Cash 7,500,000
To account for acquisition in February 2023
$7,500,000 – ($40,000 – $30,000) = $7,490,000
Investment Property 710,000
Gain or Loss in Value of Investment Property 710,000
To adjust the value of the investment property
to fair value at Dec 31, 2023
($8,200,000 – $7,490,000 = $710,000)
Journal Entry – 2024:
Gain or Loss in Value of Investment Property 200,000
Investment Property 200,000
To adjust the value of the investment property
to fair value at Dec 31, 2024
($8,200,000 – $8,000,000 = $200,000)
Difficulty: Medium
Learning Objective: Understand and apply the cost model, the revaluation model using the asset adjustment method, and the fair value model.
Section Reference: Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-120 Asset overhaul
Swift Corporation is an international provider of freight services that follows IFRS. Its fleet of vehicles includes a truck that is carried in its books as "VC1-016." This truck was purchased two years ago for $150,000 and has been depreciated on a straight-line basis. By December 31, 2023, its book value (carrying amount) is $97,000.
As part of its commitment to safety and as required by its insurer, the company has a policy to overhaul its trucks after every 50,000 km. The associated costs of the overhauls are tracked in separate accounts.
At December 31, 2023, the balances for VC1-016 are as follows:
Overhauls # 1 – 5:
Accumulated Depreciation: $0
Overhaul # 6:
Cost $20,000
Less accumulated depreciation: (16,400)
Carrying amount $3,600
On January 1, 2024, after the driver had reported problems with the truck's engine, a decision was made to do an early overhaul (i.e., 9,000 km prior to the next scheduled overhaul). The overhaul was completed on January 7, 2024, for $28,000 cash.
Because of a slowdown in the economy, the truck only operated for 21,000 km for the remainder of 2024.
Instructions
Prepare the appropriate journal entries for 2024 relating to the truck's overhaul.
Solution 10-120
Truck overhaul (VC1-016 #7) 28,000
Cash 28,000
To account for costs of January 2024 overhaul
Accumulated depreciation (VC1-016 #6) 16,400
Loss on overhaul 3,600
Truck overhaul (VC1-016 #6) 20,000
To remove costs relating to previous overhaul and recognize loss
Depreciation expense—overhauls 11,760
Accumulated depreciation (VC1-016 #7) 11,760
To record 2024 depreciation expense for current overhaul
$28,000 ÷ 50,000 km x 21,000 km = $11,760
Difficulty: Medium
Learning Objective: Explain and apply the accounting treatment for costs incurred after acquisition.
Section Reference: Costs Incurred after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Pr. 10-121 Capitalization of borrowing costs
During 2023, Tibet Building Company constructed various assets at a total cost of $4.2 million. The weighted-average accumulated expenditures on assets qualifying for capitalization of interest during 2023 were $2.8 million. The company had the following debts outstanding at December 31, 2023:
1. 8%, five-year note to finance construction of various assets,
dated January 1, 2023, with interest payable annually on January 1 $1,800,000
2. 10%, ten-year bonds issued at par on December 31, 2018, with interest
payable annually on December 31 2,000,000
3. 7%, three-year note payable, dated January 1, 2022, with interest payable
annually on January 1 1,000,000
Instructions
Calculate the amounts of the following for 2023 (show calculations):
a) avoidable interest,
b) total interest to be capitalized.
Solution 10-121
a) Weighted-Average
Accumulated Applicable Avoidable
Expenditures Interest Rate Interest
$1,800,000 .08 $144,000
1,000,000 .09* 90,000
$2,800,000 $234,000 = Avoidable Interest
*Calculation of weighted-average interest rate:
Principal Interest
10% ten-year bonds $2,000,000 $200,000
7% three-year note 1,000,000 70,000
$3,000,000 $270,000
Weighted-average interest rate = $270,000 ÷ $3,000,000 = 9%.
b) Actual interest cost during 2023:
Construction note, $1,800,000 × .08 $144,000
10% ten-year bonds, $2,000,000 × .10 200,000
7% three-year note, $1,000,000 × .07 70,000
$414,000
The interest cost to be capitalized is $234,000 (the lesser of the $234,000 avoidable interest and the $414,000 actual interest).
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Pr. 10-122 Capitalization of borrowing costs
Early in 2023, Qatar Corporation engaged Emirate Ltd. to design and construct a complete modernization of Qatar’s manufacturing facility. Construction began on June 1, 2023, and was completed on December 31, 2023. Qatar made the following payments to Emirate Ltd. during 2023:
Date Payment
June 1, 2023 $3,300,000
August 31, 2023 4,800,000
December 31, 2023 4,000,000
In order to help finance the construction, Qatar issued the following during 2023:
1. $2,000,000, ten-year, 9% bonds payable, issued at par on May 31, 2023, with interest payable annually on May 31,
2. 1,000,000 common shares, issued at $10 per share on October 1, 2023.
In addition to the 9% bonds payable, the only other debt outstanding during 2023 was a $700,000, 12% note payable dated January 1, 2022, and due January 1, 2025, with interest payable annually on January 1.
Instructions
Calculate the amounts of each of the following (show calculations):
a) weighted-average accumulated expenditures qualifying for capitalization of interest cost,
b) avoidable interest incurred during 2023,
c) total amount of interest cost to be capitalized during 2023.
Solution 10-122
a) Weighted-Average
Capitalization Accumulated
Date Expenditures Period Expenditures
June 1 $3,300,000 7 ÷ 12 $1,925,000
August 31 4,800,000 4 ÷ 12 1,600,000
December 31 4,000,000 0 0
$3,525,000
b) Weighted-Average
Accumulated Appropriate Avoidable
Expenditures Interest Rate Interest
$2,000,000 .09 $180,000
1,525,000 .12 183,000
$3,525,000 $363,000
c) Actual interest incurred during 2023:
9% bonds payable, $2,000,000 × .09 × 7 ÷ 12 $105,000
12% note payable, $700,000 × .12 84,000
$189,000
The interest cost to be capitalized is $189,000 (the lesser of the $363,000 avoidable interest and the $189,000 actual interest cost).
Difficulty: Medium
Learning Objective: Calculate the amount of borrowing costs to capitalize for qualifying assets.
Section Reference: Capitalization of Borrowing Costs (Appendix 10A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 10-123 Revaluation model (proportionate method)
Mongolia Inc. owns equipment that it purchased on January 1, 2024, for $4 million.
The following additional information is available:
Dec. 31, 2024 – Carrying amount (after recording 2024 depreciation): $3,600,000
Dec. 31, 2024 – Fair value: $4,100,000
The company uses the revaluation model (proportionate method) to account for its property, plant, and equipment.
Instructions
Assuming the entry for the current year's depreciation has already been recorded, prepare the entry(ies) to adjust the asset's carrying amount to fair value.
Solution 10-123
Equipment 555,556
Accumulated depreciation—Equipment 55,556
Revaluation Surplus (OCI) 500,000
To adjust the equipment account to fair value
Before revaluation (A) | Proportionate amount after revaluation (B) | (A) – (B) | ||
Equipment | $4,000,000 | ×4,100/3,600 | $4,555,556 | $555,556 |
Accumulated depreciation | 400,000 | × 4,100/3,600 | 455,556 | 55,556 |
Carrying amount | $3,600,000 | × 4,100/3,600 | $4,100,000 | $500,000 |
Difficulty: Medium
Learning Objective: Understand and apply the revaluation model using the proportionate method
Section Reference: Revaluation: The Proportionate Method (Appendix 10B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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Intermediate Accounting v1 13e | Canada | Test Bank
By Donald E. Kieso