Test Bank Docx Ch.10 PPE & Intangible Acquisition

Intermediate Accounting, 10e (Spiceland)

Chapter 10 Property, Plant, and Equipment and Intangible Assets: Acquisition

1) Property, plant, and equipment and intangible assets are long-term, revenue-producing assets.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

2) Sales tax paid on equipment acquired for use in the business is not capitalized.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

3) Demolition costs to remove an old building from land purchased as a site for a new building are considered part of the cost of the new building.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

4) The initial cost of property, plant, and equipment includes all the identifiable expenditures necessary to bring the asset to its desired condition and location for use.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

5) Both land and land improvements are considered to have an indefinite life.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

6) The initial valuation of natural resources can include (a) acquisition costs, (b) exploration costs, (c) development costs, and (d) restoration costs.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

7) The initial valuation of a natural resource can include the expected cost of an asset retirement obligation to be settled at the end of the natural resource's useful life to the company.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

8) An asset retirement obligation associated with a natural resource is recorded with a debit to the related asset and a credit to a liability for an amount equal to the undiscounted sum of expected cash outflows.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

9) Costs incurred after discovery of a natural resource but before production begins are reported as expenses of the period in which the expenditures are made.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

10) A distinguishing characteristic of intangible assets is that the extent and timing of their future benefits typically are highly uncertain.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

11) Intangible assets generally represent exclusive rights that provide benefits to the owner.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

12) The cost to purchase a patent is expensed in the period incurred.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

13) Both patents and copyrights have legal lives of 20 years.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

14) Trademarks can have either definite or indefinite useful lives.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

15) The initial franchise fee plus the present value of estimated future fees paid to the franchisor for future services are capitalized at the beginning of the franchise period.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

16) Goodwill represents the unique value of a company as a whole over and above its identifiable tangible and intangible assets, and can be recorded only when acquiring another company.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

17) The amount of goodwill to record in a business acquisition is the excess of the fair value of the identifiable net assets acquired over the consideration given.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

18) A company can develop and record as an intangible asset any goodwill created through advertising and employee training.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

19) The relative fair values of individual assets acquired in a lump-sum purchase are used to determine the valuation of each of those assets.

Difficulty: 1 Easy

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) If the sum of the fair values of the assets acquired in a lump-sum purchase is greater than the consideration given, a gain is recorded.

Difficulty: 1 Easy

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

21) If land, building, and equipment are acquired in a lump-sum purchase, the purchase price is allocated first based on the fair value of the building and then the fair value of the equipment, with any residual allocated to the land.

Difficulty: 1 Easy

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

22) If an asset is acquired by issuing a note payable with a realistic stated interest rate, the asset's initial valuation equals the amount of the note.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

23) If an asset is acquired by issuing a note payable with a realistic stated interest rate, the asset's initial valuation equals the amount of the note plus the present value of the future interest payments.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

24) The initial valuation of an asset acquired with a $40,000 noninterest-bearing note that is payable in two years is $40,000.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

25) The difference between the face amount of a noninterest-bearing note payable used to acquire an asset and the note's present value is initially recorded as a contra asset.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) The difference between the face amount of a noninterest-bearing note payable used to acquire an asset and the note's present value represents interest expense over the life of the note.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

27) The fair value of the asset, debt, or equity securities given in a noncash acquisition should determine the value of the consideration received.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments; Noncash acquisitions—Issuance of equity securities

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

28) The fixed-asset turnover ratio measures a company's effectiveness in managing property, plant, and equipment.

Difficulty: 1 Easy

Topic: Fixed—asset turnover ratio

Learning Objective: 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

29) The fixed-asset turnover ratio equals net property, plant, and equipment divided by net sales.

Difficulty: 1 Easy

Topic: Fixed—asset turnover ratio

Learning Objective: 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

30) A higher fixed-asset turnover ratio indicates management is more effective in managing its company's property, plant, and equipment.

Difficulty: 1 Easy

Topic: Fixed—asset turnover ratio

Learning Objective: 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

31) Under current GAAP, fair value is used to measure the components of all nonmonetary exchanges.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) The gain or loss on a normal exchange of nonmonetary assets equals the difference between fair value and book value of the asset given up.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

33) In a normal nonmonetary exchange of assets, a gain is recorded if the book value of the asset given is greater than its fair value.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

34) If the fair values of the assets in a nonmonetary exchange cannot be determined, the asset received is valued at the book value of the asset given.

Difficulty: 2 Medium

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

35) An exchange of nonmonetary assets that lacks commercial substance occurs when the assets being exchanged have different expected service lives.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

36) If an exchange of nonmonetary assets lacks commercial substance, a loss can never be recorded.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

37) Assets that qualify for interest capitalization during construction include (a) assets built for a company's own use as well as for (b) assets constructed as discrete projects for sale or lease.

Difficulty: 1 Easy

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

38) The interest capitalization period for a self-constructed asset ends either when the asset is substantially complete and ready for use or when interest costs no longer are being incurred.

Difficulty: 1 Easy

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

39) The amount of interest to capitalize for self-constructed assets includes interest on borrowed amounts since inception of the loan, regardless of when construction expenditures are made.

Difficulty: 1 Easy

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

40) The FASB's required accounting treatment for research and development costs often understates both net income and assets.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

41) Most companies are allowed to capitalize developments costs but must expense research costs.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

42) Research and development costs can include salaries, materials, and utilities but not depreciation on buildings.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

43) The cost of research and development performed for others is expensed as incurred.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

44) GAAP requires the capitalization of software development costs incurred after technological feasibility is established.

Difficulty: 1 Easy

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

45) Costs incurred after technological feasibility but before the software is available for general release to customers are expensed as incurred.

Difficulty: 1 Easy

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

46) The costs of cloud computing arrangements are capitalized if the customer has the right to take possession of the software and the customer could run the software on its own.

Difficulty: 1 Easy

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

47) According to International Financial Reporting Standards (IFRS), all research and development expenditures are expensed in the period incurred.

Difficulty: 1 Easy

Topic: IFRS—Research and development

Learning Objective: 10-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

48) A company that prepares its financial statements according to International Financial Reporting Standards (IFRS) accounts for a government grant by recognizing revenue for the amount of the grant.

Difficulty: 1 Easy

Topic: IFRS—Government grants

Learning Objective: 10-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

49) The successful efforts method of accounting for oil and gas exploration costs allows costs incurred in searching for oil and gas within a large geographical area to be capitalized.

Difficulty: 1 Easy

Topic: Oil and gas accounting—Appendix

Learning Objective: Appendix 10 Oil and Gas Accounting.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) Property, plant, and equipment and intangible assets are:

A) Created by the normal operation of the business and include accounts receivable.

B) All assets except cash and cash equivalents.

C) Current and long-term assets used in the production of either goods or services.

D) Long-term revenue-producing assets.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

51) The acquisition costs of property, plant, and equipment do not include:

A) The ordinary and necessary costs to bring the asset to its desired condition and location for use.

B) The net invoice price.

C) Legal fees, delivery charges, installation, and any applicable sales tax.

D) Maintenance costs during the first 30 days of use.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Goodwill is:

A) Amortized over the greater of its estimated life or 40 years.

B) Only recorded by the seller of a business.

C) The excess of the fair value of a business over the fair value of all net identifiable assets.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

53) For financial reporting purposes, goodwill:

A) May be recorded whenever a company achieves a level of net income that exceeds the industry average.

B) Is amortized over its useful life.

C) May be recorded when a company purchases another business.

D) Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

54) Which of the following is true concerning goodwill?

A) Goodwill is recorded when the market value of a company exceeds the fair value of its identifiable net assets.

B) Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets.

C) Goodwill is recorded as a revenue in the income statement.

D) Two of the other answers are correct.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

55) Productive assets that are physically consumed in operations are:

A) Equipment.

B) Land.

C) Land improvements.

D) Natural resources.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

56) An exclusive 20-year right to manufacture a product or use a process is a:

A) Patent.

B) Copyright.

C) Trademark.

D) Franchise.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

57) A contractual arrangement under which one party grants another party the exclusive right to use a trademark or tradename is a:

A) Patent.

B) Copyright.

C) Trademark.

D) Franchise.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

58) The exclusive right to benefit from a creative work, such as a film, is a:

A) Patent.

B) Copyright.

C) Trademark.

D) Franchise.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

59) The exclusive right to display a symbol of product identification is a:

A) Patent.

B) Copyright.

C) Trademark.

D) Franchise.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

60) The capitalized cost of equipment excludes:

A) Maintenance.

B) Sales tax.

C) Shipping.

D) Installation.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

61) The capitalized cost of land excludes:

A) The purchase price of the land.

B) Title insurance paid at the time of purchase.

C) Real estate commissions associated with the sale.

D) Property taxes for the first year owned.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

62) The cost of constructing a new parking lot at the company's office building would be recorded as:

A) Land.

B) Land improvement.

C) Building.

D) Equipment.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

63) Asset retirement obligations:

A) Increase the balance in the related asset account.

B) Are measured at fair value in the balance sheet.

C) Are liabilities associated with the restoration of a long-term asset.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

64) If a company incurs legal obligations associated with the retirement of a tangible long-lived asset as a result of acquiring the asset:

A) The company recognizes the obligation at fair value when the asset is acquired.

B) The company recognizes the obligation at fair value when the asset is retired.

C) The company records the difference between the fair value of the asset and the obligation when the asset is acquired.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

65) Which of the following does not pertain to accounting for asset retirement obligations?

A) They accrete (increase over time) at the company's credit-adjusted risk-free rate.

B) They must be recognized according to GAAP.

C) Statement of Financial Accounting Concepts No. 7 is applied when adjusting cash flow obligations for uncertainty.

D) All of these answer choices pertain to accounting for asset retirement obligations.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

66) Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project.

MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:

A) $8.2 million.

B) $14.7 million.

C) $18 million.

D) $30 million.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

67) Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project.

MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

The asset retirement obligation (rounded) that should be reported on MMC's balance sheet one year after the extraction activities begin is: (Round intermediate calculations to one decimal place. Enter your answers in millions rounded to 1 decimal place.)

A) $0.

B) $14.7 million.

C) $15.7 million.

D) $19.3 million.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

68) On March 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $6 million. The mine is expected to produce 100,000 tons of mineral. As part of the agreement, Shipley agrees to restore the land to its original condition after mining operations are completed in approximately five years. Management has provided the following possible outflows for the restoration costs that will occur five years from now: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

Shipley's credit-adjusted risk-free interest rate is 10%. During 2021, Shipley extracted 18,000 tons of ore from the mine. How much accretion expense will the company record in its income statement for the 2021 fiscal year?

A) $30,326.

B) $20,697.

C) $24,837.

D) $27,294.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

69) A company purchased land for $75,000 cash. Commissions of $4,500, property taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in back taxes paid by the company on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should the company record the land?

A) $83,500.

B) $84,300.

C) $85,300.

D) $75,000.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

70) A company purchased a piece of equipment by paying $5,000 cash. A shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of the equipment was $7,000 at the time of the purchase. For what amount should the company record the equipment?

A) $5,000.

B) $5,400.

C) $7,000.

D) $7,400.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

71) A company purchased new equipment for $60,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:

A) $60,000.

B) $61,000.

C) $64,000.

D) $66,500.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

72) A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:

What amount should be recorded for the purchase of the land?

A) $437,500.

B) $417,500.

C) $439,000.

D) $419,000.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

73) A company purchased a commercial dishwasher by paying cash of $8,000. The company incurred $600 transportation costs, $500 installation fees, and $300 annual insurance on the equipment. For what amount will the company record the dishwasher?

A) $8,600.

B) $8,000.

C) $9,100.

D) $9,400.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

74) A company purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title transfer was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:

A) $366,400.

B) $366,150.

C) $364,650.

D) $231,150.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

75) Grab Manufacturing Co. purchased a 10-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the 10-ton draw press is:

A) $171,000.

B) $183,600.

C) $187,600.

D) $185,760.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

76) Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:

A) $455,000.

B) $446,000.

C) $437,000.

D) $435,000.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

77) Vijay Inc. purchased a three-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract were $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase date. The capitalized cost of the land is:

A) $336,400.

B) $336,150.

C) $334,650.

D) $201,150.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire all of its assets and liabilities. Longhorn should record goodwill on this purchase of:

A) $3,600.

B) $5,000.

C) $20,000.

D) $23,600.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

79) Northern purchased the entire business of Southern including all its assets and liabilities for $600,000 on December 31, 2021. Below is information related to the two companies at that date:

How much goodwill did Northern pay for acquiring Southern?

A) $100,000.

B) $300,000.

C) $200,000.

D) $150,000.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

80) Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were:

Juliana would record goodwill of:

A) $1,180,000.

B) $600,000.

C) $880,000.

D) $100,000.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

81) Lake Incorporated purchased all of the outstanding stock of Huron Company paying $950,000 cash. Lake assumed all of the liabilities of Huron. Book values and fair values of acquired assets and liabilities were:

Lake would record goodwill of:

A) $0.

B) $75,000.

C) $445,000.

D) $250,000.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) A company has the following expenditures during the year.

The company believes that these efforts have increased the fair value of the entire company by $325,000. How much goodwill can the company recognize at the end of the year associated with these expenditures?

A) $0.

B) $80,000.

C) $230,000.

D) $325,000.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

83) On July 1, 2021, Larkin Co. purchased a $400,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2021 as follows:

What would be the balance in the land account as of December 31, 2021?

A) $400,000.

B) $475,000.

C) $477,000.

D) $487,000.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

84) Assets acquired in a lump-sum purchase are valued based on:

A) Their assessed valuation.

B) Their relative fair values.

C) The present value of their future cash flows.

D) Their cost plus the difference between their cost and fair values.

Difficulty: 1 Easy

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

85) A company purchased land, a building, and equipment for one price of $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?

A) $80,000

B) $90,000

C) $100,000

D) $800,000

Difficulty: 2 Medium

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

86) A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building?

A) $720,000.

B) $1,320,000.

C) $1,200,000.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

87) A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment, respectively. The company recorded the building for $1,080,000. What was the total purchase cost for all three assets?

A) $1,600,000.

B) $1,500,000.

C) $2,000,000.

D) $1,800,000.

Difficulty: 3 Hard

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

88) Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) Cantor Corporation acquired a manufacturing facility on four acres of land for a lump-sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) Braxwell Corporation acquired the following assets associated with a manufacturing facility for a lump-sum price of $9,000,000. According to independent appraisals, the fair values were $4,000,000, $2,000,000, $3,000,000, and $1,000,000 for the building, patent, land, and equipment, respectively. The initial value of the patent would be:

A) $2,000,000.

B) $2,250,000.

C) $1,800,000.

D) $0.

Difficulty: 2 Medium

Topic: Lump-sum purchases

Learning Objective: 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) Assets acquired under multi-year deferred payment contracts are:

A) Valued at their fair value on the date of the final payment.

B) Valued at the present value of the payments required by the contract.

C) Valued at the sum of the payments required by the contract.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

92) An asset acquired using a long-term note payable always will be recorded at the face amount of the note under which scenario?

A) The note payable explicitly requires the payment of interest at a realistic interest rate.

B) The note is a noninterest-bearing note.

C) The company expects to use the asset for its entire physical life.

D) Interest on the note is not payable until the note is due.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

93) An asset is acquired using a noninterest-bearing note payable for $100,000 due in two years. Management records the purchase with a debit to the asset for $100,000 and a credit to notes payable for $100,000. Which of the following statements is correct?

A) Management has properly recorded the transaction.

B) Management has not considered the present value of the note in recording the asset.

C) Management should not record the asset until the note has been paid.

D) Management should record the note for more than $100,000 to account for the underlying interest.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

94) An asset is acquired using a noninterest-bearing note payable for $225,000 due in three years. Which of the following statements most likely is correct?

A) The fair value of the asset is less than $225,000.

B) No interest expense will be reported over the three-year note.

C) The total amount paid for the asset will be less than $225,000.

D) All of the other answer choices are correct.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

95) On January 1, 2021, Laramie Inc. acquired land for $6.2 million. Laramie paid $1.2 in cash and signed a 6% note requiring the company to pay the remaining $5 million plus interest on December 31, 2022. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?

A) $6.8 million.

B) $5.0 million.

C) $5.6 million.

D) $6.2 million.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

96) On July 1, 2021, Markwell Company acquired equipment. Markwell paid $160,000 in cash on July 1, 2021, and signed a $640,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 5% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 

For what amount will Markwell record the purchase of equipment?

A) $761,905.

B) $769,523.

C) $609,523.

D) $800,000.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

97) On July 1, 2021, Markwell Company acquired equipment. Markwell paid $160,000 in cash on July 1, 2021, and signed a $640,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 5% reflects the time value of money for this type of loan agreement.  (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

Which of the following should be included in the journal entry on July 1, 2021? (Round intermediate and final answer to nearest whole dollar amount.)

A) Credit: Notes payable, $609,523.

B) Debit: Equipment, $800,000.

C) Debit: Discount on notes payable, $30,477.

D) Credit: Notes payable, $609,523 and Debit: Discount on notes payable, $30,477.

Difficulty: 3 Hard

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

98) On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

Corso should record the acquisition of the patent on September 30, 2021, for what amount?

A) $2,000,000.

B) $1,912,385.

C) $1,857,340.

D) $1,714,678.

Difficulty: 2 Medium

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

99) On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 

What amount of interest expense, if any, would Corso record on December 31, 2021, the company's fiscal year end? (Round your answer to nearest whole dollar amount.)

A) $17,147.

B) $20,000.

C) $68,687.

D) $80,000.

Difficulty: 3 Hard

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

100) On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 

What amount of interest expense, if any, would Corso record on December 31, 2022, the company's fiscal year end? (Round intermediate and final answer to nearest whole dollar amount.)

A) $68,687.

B) $60,000.

C) $80,000.

D) $69,959.

Difficulty: 3 Hard

Topic: Noncash acquisitions—Deferred payments

Learning Objective: 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

101) Assets acquired by the issuance of equity securities are valued based on:

A) Their fair values.

B) The fair value of the equity securities.

C) The fair value of the assets acquired or the fair value of the equity securities, whichever is more reasonably determinable.

D) The fair value of the assets acquired or the fair value of the equity securities, whichever is smaller.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Issuance of equity securities

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

102) On June 17, the Lattern Company issued 120,000 shares of its $0.10 par value common stock in exchange for land. On the date of the transaction, the fair value of the common stock, evidenced by its market price, was $10 per share. The journal entry to record this transaction includes:

A) Debit: Land, $1,200,000.

B) Credit: Cash, $1,200,000.

C) Debit: Land, $12,000.

D) No entry for this exchange.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Issuance of equity securities

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) Maltese is a privately-owned company. On September 3, Maltese exchanged 2,000 shares of its private common stock for equipment. There is no readily available estimate of the stock's fair value. The equipment currently is selling for $80,000. The journal entry to record this transaction includes:

A) Credit: Stock revenue, $80,000.

B) Credit: Cash, $80,000.

C) Debit: Equipment, $80,000.

D) No entry is recorded for this exchange.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Issuance of equity securities

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) Donated assets are recorded at:

A) Zero (memo entry only).

B) The donor's book value.

C) The donee's stated value.

D) Fair value.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Donated assets

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

105) A company receiving a donated asset will record:

A) An increase in revenue.

B) An increase in liabilities.

C) A decrease in liabilities.

D) An increase in revenue and a decrease in liabilities.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Donated assets

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) Savings Mart is a national retail chain. To entice the company to open a mega store in its jurisdiction, the city of Populationville donated a 20-acre tract of land to be used for construction. The land was originally purchased by the city for $250,000 three years ago. The appraisal value at the time of the donation was $300,000. For what amount should Savings Mart record the donated land?

A) $250,000.

B) $275,000.

C) $300,000.

D) $0; Donated assets are not recorded.

Difficulty: 1 Easy

Topic: Noncash acquisitions—Donated assets

Learning Objective: 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

107) The fixed-asset turnover ratio provides:

A) The rate of decline in asset lives.

B) The rate of replacement of fixed assets.

C) The amount of sales generated per dollar of fixed assets.

D) The decline in book value of fixed assets compared to capital expenditures.

Difficulty: 2 Medium

Topic: Fixed—asset turnover ratio

Learning Objective: 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

108) The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2021. The fixed-asset turnover ratio for 2021 was 4.0, and sales for the year totaled $1,480,000. Net fixed assets at the end of 2020 were:

A) $470,000.

B) $370,000.

C) $420,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Fixed—asset turnover ratio

Learning Objective: 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

109) The basic principle used to value an asset acquired in a nonmonetary exchange is to value it at:

A) Fair value of the asset(s) given up.

B) The book value of the asset given plus any cash or other monetary consideration received.

C) Fair value or book value, whichever is smaller.

D) Book value of the asset given.

Difficulty: 1 Easy

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

110) In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:

A) The fair value of the equipment received exceeds the book value of the equipment received.

B) The book value of the equipment received exceeds the fair value of the equipment given up.

C) The fair value of the equipment surrendered exceeds the book value of the equipment given up.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

111) Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.

Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:

A) $26,000.

B) $8,000.

C) ($8,000).

D) $0.

Difficulty: 2 Medium

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

112) Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.

Assuming that the exchange lacks commercial substance, Alamos would record a gain/(loss) on exchange of assets in the amount of:

A) $26,000.

B) $8,000.

C) ($8,000).

D) $0.

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

113) Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively.

Assuming that the exchange has commercial substance, Horton would record land—new and a gain/(loss) on exchange of assets in the amounts of:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

114) Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively.

Assuming that the exchange lacks commercial substance, Horton would record land—new and a gain/(loss) on exchange of assets in the amounts of:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

115) Bloomington Inc. exchanged land for equipment and $3,000 in cash. The book value and the fair value of the land were $104,000 and $90,000, respectively.

Assuming that the exchange has commercial substance, Bloomington would record equipment and a gain/(loss) on exchange of assets in the amounts of:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

116) P. Chang & Co. exchanged land and $9,000 cash for equipment. The book value and the fair value of the land were $106,000 and $90,000, respectively.

Assuming that the exchange has commercial substance, Chang would record equipment and a gain/(loss) on exchange of assets in the amounts of:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

117) Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.

In Case A, Grand Forks would record the new equipment at:

A) $65,000.

B) $75,000.

C) $50,000.

D) $60,000.

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

118) Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.

In Case B, Grand Forks would record a gain/(loss) on exchange of assets in the amount of:

A) $5,000.

B) $3,000.

C) ($5,000).

D) ($3,000).

Difficulty: 2 Medium

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

119) Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance.

For Equipment A, Pensacola would record the new equipment at:

A) $68,000.

B) $63,750.

C) $67,250.

D) $80,000.

Difficulty: 3 Hard

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

120) Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance.

For Equipment B, Pensacola would record a gain/(loss) of:

A) $4,000.

B) ($4,000).

C) ($10,000).

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Exchanges

Learning Objective: 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

121) Interest may be capitalized:

A) On routinely manufactured goods as well as self-constructed assets.

B) On self-constructed assets from the date an entity formally adopts a plan to build a discrete project.

C) Whether or not there is specific borrowing for the construction.

D) Whether or not there are actual interest costs incurred.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

122) Interest is eligible to be capitalized as part of an asset's cost, rather than being expensed immediately, when:

A) The interest is incurred during the construction period of the asset.

B) The asset is a discrete construction project for sale or lease.

C) The asset is self-constructed, rather than acquired.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

123) In computing capitalized interest, average accumulated expenditures:

A) Is the arithmetic mean of all construction expenditures.

B) Is determined by time-weighting individual expenditures made during the asset construction period.

C) Is multiplied by the company's most recent financing rates.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

124) Interest is not capitalized for:

A) Assets that are constructed as discrete projects for sale or lease.

B) Assets constructed for a company's own use.

C) Inventories routinely and repetitively produced in large quantities.

D) Interest is capitalized for all of these items.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

125) Average accumulated expenditures:

A) Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.

B) Is computed as a simple average if all construction expenditures are made at the end of the period.

C) Are irrelevant if the company's total outstanding debt is less than total costs of construction.

D) All of these answer choices are true statements.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

126) The cost of self-constructed fixed assets should:

A) Include allocated indirect costs just as they are for production of products.

B) Include only incremental indirect costs.

C) Include only specifically identifiable indirect costs.

D) Not include indirect costs.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

127) On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):

On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31.

What is the amount of interest that Crocus should capitalize in 2020, using the specific interest method?

A) $1.90 million.

B) $1.95 million.

C) $2.96 million.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

128) On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):

On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31.

In computing the capitalized interest for 2021, Crocus' average accumulated expenditures are:

A) $46.30 million.

B) $103.54 million.

C) $122.30 million.

D) $124.25 million.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

129) On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):

On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31.

What is the amount of interest that Crocus should capitalize in 2021, using the specific interest method? (Enter your answers to nearest whole dollar amount.)

A) $7,248,000.

B) $7,283,000.

C) $8,740,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

130) On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022.

Average accumulated expenditures for 2021 was:

A) $300,000.

B) $350,000.

C) $500,000.

D) $400,000.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

131) On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022.

Interest capitalized for 2021 was:

A) $48,000.

B) $42,000.

C) $60,000.

D) $36,000.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

132) On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022.

Average accumulated expenditures for 2022 was:

A) $536,000.

B) $1,236,000.

C) $1,200,000.

D) $1,036,000.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

133) On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022.

Interest capitalized for 2022 was:

A) $104,625.

B) $86,805.

C) $87,875.

D) $67,500.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

134) On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Dreamworld had $5,000,000 in 12% bonds outstanding through both years.

Dreamworld's average accumulated expenditures for 2021 was:

A) $300,000.

B) $450,000.

C) $525,000.

D) $600,000.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

135) On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Dreamworld had $5,000,000 in 12% bonds outstanding through both years.

Dreamworld's capitalized interest in 2021 was:

A) $72,000.

B) $63,000.

C) $54,000.

D) $36,000.

Difficulty: 2 Medium

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

136) On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Dreamworld had $5,000,000 in 12% bonds outstanding through both years.

The average accumulated expenditures for 2022 by the end of the construction period was:

A) $1,950,000.

B) $1,554,000.

C) $1,254,000.

D) $975,000.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

137) On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

Dreamworld had $5,000,000 in 12% bonds outstanding through both years.

What was the final cost of Dreamworld's warehouse?

A) $2,154,480.

B) $2,143,860.

C) $1,950,000.

D) $1,254,000.

Difficulty: 3 Hard

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

138) Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?

A) $30,000.

B) $40,000.

C) $90,000.

D) $140,000.

Difficulty: 1 Easy

Topic: Self-constructed assets

Learning Objective: 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

139) Research and development costs for projects other than software development should be:

A) Expensed in the period incurred.

B) Expensed in the period they are determined to be unsuccessful.

C) Deferred pending determination of success.

D) Expensed if unsuccessful, capitalized if successful.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

140) Research and development costs should be:

A) Expensed in the period incurred.

B) Expensed in the period they are determined to be unsuccessful.

C) Deferred pending determination of success.

D) Expensed if unsuccessful, capitalized if successful.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

141) Research and development (R&D) costs:

A) Generally pertain to activities that occur prior to the start of production.

B) May be expensed or capitalized, at the option of the reporting entity.

C) Must be capitalized and amortized.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

142) Research and development expense for a given period includes:

A) The full cost of newly acquired equipment that has an alternative future use.

B) Depreciation on a research and development facility.

C) Research and development conducted on a contract basis for another entity.

D) Patent filing and legal costs.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

143) A company spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

A) Increase assets.

B) Decrease revenues.

C) Increase expenses.

D) Increase revenues.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: Keyboard Navigation

144) Suppose a company spends $100,000 on research and development in 2021. As a result of the products developed, additional revenue is generated over the next five years totaling $600,000. When is the cost of the research and development in 2021 recognized as an expense?

A) Evenly over the period 2022-2026.

B) Full amount in 2026.

C) Evenly over the period 2021-2025.

D) Full amount in 2021.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

145) Aspen, Inc. attempted to create a new horse transport device and incurred research and development costs of $250,000 in the first half of the current year. Rather than continue with its own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. and purchased the patent for $350,000 on October 1 of the current year. What are the total assets and expenses recorded for these costs with regard to the new transport device?

A) Assets $600,000; Expenses $0.

B) Assets $250,000; Expenses $350,000.

C) Assets $350,000; Expenses $250,000.

D) Assets $0; Expenses $600,000.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: Keyboard Navigation

146) A company incurred the following costs related to research and development (R&D) for the current year:

The equipment will be used in other projects. Depreciation in the current year is $70,000. For what amount should the company report research and development expense?

A) $430,000.

B) $670,000.

C) $1,200,000.

D) $590,000.

Difficulty: 3 Hard

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

147) A company incurred the follow costs related to research and development for the current year:

The equipment will be used in other projects. Depreciation in the current year is $90,000. For what amount should the company report research and development expense?

A) $500,000.

B) $620,000.

C) $650,000.

D) $470,000.

Difficulty: 3 Hard

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

148) Software development costs are capitalized if they are incurred:

A) Prior to the point at which technological feasibility has been established.

B) After commercial production has begun.

C) After technological feasibility has been established but prior to the product availability date.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

149) Which of the costs related to research and development would be capitalized?

A) Development costs for software that has reached the point of technological feasibility.

B) R&D performed by the company for sale to others.

C) R&D purchased in a business acquisition.

D) All of the other answers are costs to be capitalized.

Difficulty: 2 Medium

Topic: Research and development; Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

150) Cebrex Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. The economic life of the software is estimated at four years. For what amount will software be capitalized in 2021?

A) $0.

B) $5,600,000.

C) $1,400,000.

D) $3,200,000.

Difficulty: 2 Medium

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

151) A cloud computing arrangement involves:

A) A company's internal development of software used to increase its operating efficiency.

B) A company purchasing computer hardware for maintaining its own software.

C) A company using software by accessing a vendor's or a third party's hardware.

D) A company hiring a vendor or third-party to maintain its computerized recordkeeping.

Difficulty: 1 Easy

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

152) Which of the following conditions must exist for a company to capitalize the cost of a cloud computing arrangement?

A) The company has a contractual right to take possession of the software without significant penalty.

B) The company agrees to a contract of at least five years and cannot cancel without significant penalty.

C) The company does not have the ability to run the software on its own.

D) Two of the other answers are correct.

Difficulty: 2 Medium

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

153) Which of the following costs would not be capitalized in a cloud computing arrangement?

A) Initial arrangement fee paid by the company to a vendor.

B) Coding and integration with the company's own software.

C) Customization of the software during implementation to fit the company's needs.

D) Post-implementation operation.

Difficulty: 2 Medium

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: Keyboard Navigation

154) A company entered into a two-year cloud computing arrangement by paying $50,000 immediately to a vendor and also incurring the following costs:

Determine the amount the company should capitalize at the beginning of the arrangement.

A) $50,000.

B) $175,000.

C) $185,000.

D) $210,000.

Difficulty: 2 Medium

Topic: Software development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

155) The costs of research and development performed by the company for sale to others (but not yet sold) would be included in which of the following accounts?

A) Research and development expense.

B) Sales revenue.

C) Inventory.

D) Cost of goods sold.

Difficulty: 1 Easy

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

156) When one company acquires another company, any acquired "developed technology" is recorded as:

A) Finite-life intangible asset.

B) Property, plant, and equipment.

C) Research and development expense.

D) Indefinite-life intangible asset.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

157) When one company acquires another company, any acquired "in-process research and development" is recorded as:

A) Finite-life intangible asset.

B) Property, plant, and equipment.

C) Research and development expense.

D) Indefinite-life intangible asset.

Difficulty: 2 Medium

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

158) Consider the following scenarios:

Under which scenario would the company report greater research and development expense in the current year?

A) Scenario 1.

B) Scenario 2.

C) The expense would be the same under each scenario.

D) An expense is not recorded under either scenario.

Difficulty: 3 Hard

Topic: Research and development

Learning Objective: 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

159) Under International Financial Reporting Standards, research expenditures are:

A) Expensed in the period incurred.

B) Expensed in the period they are determined to be unsuccessful.

C) Capitalized if certain criteria are met.

D) Expensed if unsuccessful, capitalized if successful.

Difficulty: 1 Easy

Topic: IFRS—Research and development

Learning Objective: 10-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

160) Under International Financial Reporting Standards (IFRS), development expenditures are:

A) Expensed in the period incurred.

B) Expensed in the period they are determined to be unsuccessful.

C) Capitalized if certain criteria are met.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: IFRS—Research and development

Learning Objective: 10-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

161) Cromartie Ltd. prepares its financial statements according to International Financial Reporting Standards. During 2021 the company incurred $1,245,000 in research expenditures to develop a new product. An additional $756,000 in development expenditures were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new product was patented before the end of the 2021 fiscal year. Sale of the product began in 2020. What amount of the above expenditures would Cromartie expense in its 2021 income statement?

A) $2,001,000.

B) $756,000.

C) $1,245,000.

D) $0.

Difficulty: 2 Medium

Topic: IFRS—Research and development

Learning Objective: 10-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the acquisition of property, plant, and equipment and intangible assets.

Bloom's: Analyze

AACSB: Diversity; Knowledge Application

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

162) In accounting for oil and gas exploration costs, companies:

A) May not use the full-cost method.

B) May use the successful efforts method.

C) May use the slippery slope method.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Oil and gas accounting—Appendix

Learning Objective: Appendix 10 Oil and Gas Accounting.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

163) During 2021, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2021 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2021, what oil exploration expense would Longhorn charge for this activity in its 2021 income statement?

A) $0.

B) $30 million.

C) $70 million.

D) $100 million.

Difficulty: 2 Medium

Topic: Oil and gas accounting—Appendix

Learning Objective: Appendix 10 Oil and Gas Accounting.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

164) During 2021, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2021. Of the 15 wells drilled, 10 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2021, what amount of these exploration costs would remain in its 12/31/2021 balance sheet?

A) $6 million.

B) $14 million.

C) $20 million.

D) $42 million.

Difficulty: 3 Hard

Topic: Oil and gas accounting—Appendix

Learning Objective: Appendix 10 Oil and Gas Accounting.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

165) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Noncash acquisitions—Donated assets; Exchanges; Self-constructed assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.; 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.; 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

166) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

167) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Asset categories and types of assets; Noncash acquisitions—Deferred payments; Exchanges; Research and development

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.; 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.; 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

168) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Costs to be capitalized; Exchanges; Research and development; Software development

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.; 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

169) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Costs to be capitalized; Fixed-asset turnover ratio; Exchanges

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-05 Calculate the fixed-asset turnover ratio used by analysts to measure how effectively managers use property, plant, and equipment.; 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

170) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

171) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Costs to be capitalized; Lump-sum purchases; Noncash acquisitions—Donated assets; Software development

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.; 10-04 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for equity securities or through donation.; 10-08 Explain the difference in the accounting treatment of costs incurred to purchase intangible assets versus the costs incurred to internally develop intangible assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

172) Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Asset categories and types of assets; Costs to be capitalized; Noncash acquisitions—Deferred payments; Exchanges; Self-constructed assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.; 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.; 10-06 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.; 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

173) Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale made the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse.

Required:

Determine the amount Soccer Wholesale should record as the cost of the land.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

174) On July 1, 2021, Jekel & Hyde Inc. purchased land and incurred other costs relative to the construction of a new warehouse. A summary of economic activities is listed below:

Required:

Indicate the accounts that would be affected by the above transactions and the resulting balance in each account. Apply the interest on the construction loan to the cost of the building only.

Difficulty: 3 Hard

Topic: Costs to be capitalized; Self-constructed assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

175) Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point. Other costs connected with the purchase were as follows:

Required:

Determine the capitalized cost of the equipment.

Difficulty: 2 Medium

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

176) Rockport Refinery acquired all the outstanding common stock of Stellman Corporation for $68,000 in cash. The book values and fair values of Stellman's assets and liabilities were as follows:

Required:

Calculate the amount Rockport would record for goodwill.

Difficulty: 1 Easy

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

177) During the current year, Brewer Company acquired all of the outstanding common stock of Miller Inc. paying $12,000,000 cash. The book values and fair values of Miller's assets and liabilities acquired are listed below:

Book Value Fair Value

Accounts receivable $1,800,000 $ 1,625,000

Inventories 2,700,000 4,000,000

Property, plant, and equipment 9,000,000 11,625,000

Accounts payable 3,000,000 3,000,000

Bonds payable 4,500,000 4,125,000

Required:

Prepare the journal entry to record the acquisition by Brewer Company.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

178) On August 15, 2021, Willis Inc. acquired all of the outstanding common stock of Bork Inc. paying $7,400,000 cash. The book values and fair values of Willis' assets and liabilities are listed below:

Book Value Fair Value

Accounts receivable $1,080,000 $ 975,000

Inventories 1,620,000 2,400,000

Property, plant, and equipment 5,400,000 6,975,000

Accounts payable 1,800,000 1,800,000

Bonds payable 2,700,000 2,475,000

Required:

Prepare the journal entry to record the acquisition by Willis Inc.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

179) Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and development costs totaled $8.2 million. Extraction activities began on July 1, 2021. After the copper is extracted in approximately six years, Schefter is obligated to restore the land to its original condition, including constructing a park. The company's controller has provided the following three cash flow possibilities for the restoration costs:

Cash Flow Probability

1. $700,000 30%

2. 800,000 25%

3. 900,000 45%

The company's credit-adjusted, risk-free rate of interest is 5%, and its fiscal year ends on December 31.

Required:

1. What is the initial cost of the copper mine? (Round computations to nearest whole dollar.)

2. How much accretion expense will Schefter report in its 2021 income statement?

3. What is the book value of the asset retirement obligation that Schefter will report in its 2021 balance sheet?

4. Assume that actual restoration costs incurred in 2027 totaled $860,000. What amount of gain or loss will Schefter recognize on retirement of the liability?

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

180) Calegari Mining paid $2 million to obtain the rights to operate a coal mine in Tennessee. Costs of exploring for the coal deposit totaled $1,500,000, and development costs of $5 million were incurred in preparing the mine for extraction, which began on January 2, 2021. After the coal is extracted in approximately five years, Calegari is obligated to restore the land to its original condition. The company's controller has provided the following three cash flow possibilities for the restoration costs:

Cash Flow Probability

1. $1,000,000 10%

2. 1,400,000 60%

3. 1,800,000 30%

The company's credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on December 31.

Required:

1. What is the initial cost of the coal mine? (Round computations to nearest whole dollar.)

2. How much accretion expense will Calegari report in its 2021 and 2022 income statements?

3. What is the book value of the asset retirement obligation that Calegari will report in its 2021 and 2022 balance sheets?

4. Assume that actual restoration costs incurred in 2026 totaled $1,370,000. What amount of gain or loss will Calegari recognize on retirement of the liability?

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

181) During the current year, Peterson Data Corporation acquired all of the outstanding common stock of Junior Jackson Inc. (JJI), paying $36 million in cash. Peterson recorded the assets acquired as follows:

Accounts receivable $2,500,000

Inventory 9,000,000

Property, plant, and equipment 25,500,000

Goodwill 6,000,000

The book value of JJI's assets and owners' equity before the acquisition were $22 million and $18 million, respectively.

Required: Compute the fair value of JJI's liabilities that Peterson assumed in the acquisition.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

182) During the current year, Compton Crate Corporation acquired all of the outstanding common stock of Little Lacy Ltd. (LLL), paying $60 million in cash. Compton recorded the assets acquired as follows:

Accounts receivable $5,500,000

Inventory 18,000,000

Property, plant, and equipment 45,500,000

Goodwill 22,000,000

The book value of LLL's assets and owners' equity before the acquisition were $50 million and $30 million, respectively.

Required: Compute the fair value of LLL's liabilities that Compton assumed in the acquisition.

Difficulty: 3 Hard

Topic: Costs to be capitalized

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

183) On January 3, 2021, Michelson & Sons acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. Michelson paid $400,000 and signed a noninterest-bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2022. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and other costs totaling $24,000 were paid at closing.

During February, the old building was demolished at a cost of $120,000, and an additional $100,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows:

March 30 $ 800,000

June 30 1,200,000

July 30 1,200,000

September 1 600,000

Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2021:

$6,000,000, 8% long-term note payable

$2,000,000, 5% long-term note payable

In December, the company purchased equipment and office furniture and fixtures for a lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures were $540,000 and $360,000, respectively. In December, Michelson paid $340,000 for the construction of parking lots and landscaping.

Required:

1. Determine the initial values of the various assets that Michelson acquired or constructed during 2021.

2. How much interest expense will Michelson report in its 2021 income statement?

Difficulty: 3 Hard

Topic: Costs to be capitalized; Lump-sum purchases; Noncash acquisitions—Deferred payments; Self-constructed assets

Learning Objective: 10-01 Identify the various costs included in the initial cost of property, plant, and equipment, natural resources, and intangible assets.; 10-02 Determine the initial cost of individual property, plant, and equipment and intangible assets acquired as a group for a lump-sum purchase price.; 10-03 Determine the initial cost of property, plant, and equipment and intangible assets acquired in exchange for a deferred payment contract.; 10-07 Identify the items included in the cost of a self-constructed asset and determine the amount of capitalized interest.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

184) Watson Company purchased assets of Holmes Ltd. at auction for $1,300,000. An independent appraisal of the fair value of the assets acquired is listed below:

Required:

Prepare the journal entry to record the purchase of the assets.