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Chapter 10 Property, Plant, and Equipment and Intangible Assets: Acquisition and Disposition – Flashcards

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8 July 2022

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

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: True Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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

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: False Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 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.

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: False Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 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.

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: True Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 5. A distinguishing characteristic of intangible assets is the degree of uncertainty about when or if they will provide future benefits.

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: True Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 6. 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.

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: False Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 7. The relative fair values are used to determine the valuation of individual assets acquired in a lump-sum purchase.

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: True Level of Learning: Easy Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 8. The fair value of the asset, debt, or equity securities given in a noncash acquisition should determine the value of the consideration received.

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: True Level of Learning: Easy Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Deferred payments Topic Area: Noncash acquisitions ? Issuance of equity securities Topic Area: Noncash acquisitions ? Donated assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 9. Under current GAAP, fair value is used to measure the components of all nonmonetary exchanges.

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: False Level of Learning: Easy Learning Objective: 10-06 Topic Area: Exchanges Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 10. 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.

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: True Level of Learning: Easy Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 11. The FASB's required accounting treatment for research and development costs often understates both net income and assets.

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: True Level of Learning: Easy Learning Objective: 10-08 Topic Area: Research and development Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 12. According to International Financial Reporting Standards, all research and development expenditures are expensed in the period incurred.

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: False Level of Learning: Easy Learning Objective: 10-09 Topic Area: IFRS ? Research and development Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 13. A company that prepares its financial statements according to International Financial Reporting Standards must calculate amortization of capitalized software development costs in the same way as under U.S. GAAP.

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: False Level of Learning: Easy Learning Objective: 10-09 Topic Area: IFRS ? Software development Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 14. A company that prepares its financial statements according to International Financial Reporting Standards accounts for a government grant by recognizing revenue for the amount of the grant.

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: False Level of Learning: Easy Learning Objective: 10-09 Topic Area: IFRS ? Government grants Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 15. 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.

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: False Level of Learning: Easy Learning Objective: Appendix 10 Topic Area: Oil and gas accounting Blooms: Remember AACSB: Reflective thinking

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: FN Measurement Multiple Choice Questions 16. 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.

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: d Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 17. 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.

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: d Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 18. 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.

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: c Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 19. Productive assets that are physically consumed in operations are: a. Equipment. b. Land. c. Land improvements. d. Natural resources.

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: d Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 20. An exclusive 20-year right to manufacture a product or use a process is a: a. Patent. b. Copyright. c. Trademark. d. Franchise.

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: a Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 21. The exclusive right to benefit from a creative work, such as a film, is a: a. Patent. b. Copyright. c. Trademark. d. Franchise.

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: b Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 22. The exclusive right to display a symbol of product identification is a: a. Patent. b. Copyright. c. Trademark. d. Franchise.

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: c Level of Learning: Easy Learning Objective: 10-01 Topic Area: Types of assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 23. The capitalized cost of equipment excludes: a. Maintenance. b. Sales tax. c. Shipping. d. Installation.

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: a Level of Learning: Easy Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 24. 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.

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: d Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 25. If a company incurs disposition obligations as a result of acquiring an 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 disposed. 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.

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: a Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 26. When selling property, plant, and equipment for cash: a. The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold. b. The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold. c. The seller recognizes losses, but not gains. d. None of these answer choices are correct.

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: b Level of Learning: Medium Learning Objective: 10-06 Topic Area: Dispositions Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 27. 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.

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: d Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Remember AACSB: Reflective thinking

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: FN Measurement Use the following to answer questions 28 and 29: 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: Cash Outflow Probability $10 million 60% $30 million 40% 28. 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.

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: b Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: The present value of the expected cash flows, that is, 0.81630 x [(.60 x $10 million) + (.40 x $30 million)], which is $14,693,400 or $14.7 million (rounded). 29. The asset retirement obligation (rounded) that should be reported on MMC's balance sheet one year after the extraction activities begin is: a. $0. b. $14.7 million. c. $15.7 million. d. $19.3 million.

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: c Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: $14.7 million x 1.07 = $15.7 million (rounded). 30. 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.

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: c Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Purchase price ($180,000 x 95%) $171,000 Shipping costs 4,600 Installation costs 12,000 Total cost of equipment $187,600 31. 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.

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: a Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Purchase price $420,000 Shipping costs 15,000 Foundation work 8,000 Water line 3,000 Labor and testing 6,000 Materials used in testing 3,000 Total cost of equipment $455,000 32. 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.

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: c Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Purchase price $320,000 Demolition costs 12,000 Scrap sold (1,500 ) Title insurance 900 Legal fees 500 Property taxes ($3,000 - 250) 2,750 Total cost of land $334,650 33. 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: Book Value Fair Value Current assets (net) $420,000 $450,000 Property, plant, & equip. (net) 1,600,000 2,250,000 Liabilities 500,000 600,000 Juliana would record goodwill of: a. $1,180,000. b. $ 600,000. c. $ 880,000. d. $ 100,000.

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: b Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Consideration given $2,700,000 Less: Fair value of net assets Assets ($450,000 + 2,250,000) $2,700,000 Less: Liabilities assumed (600,000 ) (2,100,000 ) Goodwill $ 600,000 34. 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: Book Value Fair Value Current assets (net) $130,000 $125,000 Property, plant, equip. (net) 600,000 750,000 Liabilities 150,000 175,000 Lake would record goodwill of: a. $ 0. b. $ 75,000. c. $445,000. d. $250,000.

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: d Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Consideration given $950,000 Less: Fair value of net assets Assets ($125,000 + 750,000) $875,000 Less: Liabilities assumed 175,000 (700,000 ) Goodwill $ 250,000 35. On July 1, 2016, 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 2016 as follows: Demolition of existing building on site $75,000 Legal and other fees to close escrow 12,000 Proceeds from sale of demolition scrap 10,000 What would be the balance in the land account as of December 31, 2016? a. $400,000. b. $475,000. c. $477,000. d. $487,000.

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: c Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Purchase price $400,000 Demolition costs 75,000 Legal fees 12,000 Sale of scrap (10,000 ) Total cost of land $477,000 36. 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.

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: b Level of Learning: Easy Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 37. 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: Building Land Fixtures a. $1,300,000 $ 780,000 $520,000 b. $1,200,000 $ 720,000 $480,000 c. $ 720,000 $1,200,000 $480,000 d. None of these answer choices are correct.

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: b Level of Learning: Hard Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Asset Fair Value Percent of Total Fair Value Initial Valuation (Percent x $2,400,000) Building $ 1,300,000 50% $1,200,000 Land 780,000 30 720,000 Furniture & fixtures 520,000 20 480,000 $2,600,000 100% $2,400,000 38. 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: Building Land Equipment a. $4,500,000 $3,000,000 $2,500,000 b. $4,500,000 $3,000,000 $ 500,000 c. $3,600,000 $2,400,000 $2,000,000 d. None of these answer choices are correct.

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: c Level of Learning: Hard Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Asset Fair Value Percent of Total Fair Value Initial Valuation (Percent x $8,000,000) Building $ 4,500,000 45% $3,600,000 Land 3,000,000 30 2,400,000 Equipment 2,500,000 25 2,000,000 $10,00,000 100% $8,000,000 39. 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.

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: b Level of Learning: Easy Learning Objective: 10-03 Topic Area: Noncash acquisitions ? Deferred payments Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 40. 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. A or B, whichever is more reasonably determinable. d. A or B, whichever is smaller.

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: c Level of Learning: Easy Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Issuance of equity securities Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 41. 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.

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: d Level of Learning: Easy Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Donated assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 42. 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.

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: c Level of Learning: Medium Learning Objective: 10-05 Topic Area: Fixed-asset turnover ratio Blooms: Understand AACSB: Reflective thinking

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: FN Risk Analysis 43. The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2016. The fixed-asset turnover ratio for 2016 was 4.0, and sales for the year totaled $1,480,000. Net fixed assets at the end of 2015 were: a. $470,000. b. $370,000. c. $420,000. d. None of these answer choices are correct.

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: c Level of Learning: Hard Learning Objective: 10-05 Topic Area: Fixed-asset turnover ratio Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: $1,480,000 Average fixed assets = 4.0 Average fixed assets = $370,000, therefore net fixed assets at the end of 2015 must be $420,000 [($320,000 + x) 2] = $370,000; $320,000 + x = $740,000; x = $420,000 44. 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.

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: a Level of Learning: Easy Learning Objective: 10-06 Topic Area: Exchanges Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 45. 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.

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: c Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Remember AACSB: Reflective thinking

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: FN Measurement Use the following to answer questions 46 and 47: 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. 46. 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.

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: b Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment-new (FV of old + $18,000) 108,000 Cash 18,000 Equipment-old (book value) 82,000 Gain ($90,000 - 82,000) 8,000 47. Assuming that the exchange lacks commercial substance, Alamos would record a gain/(loss) of: a. $26,000. b. $ 8,000. c. $(8,000). d. $ 0.

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: d Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment-new (BV of old + $18,000) 100,000 Cash 18,000 Equipment-old (book value) 82,000 Use the following to answer questions 48 and 49: 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. 48. Assuming that the exchange has commercial substance, Horton would record land-new and a gain/(loss) of: Land Gain/(loss) a. $105,000 $ 0. b. $105,000 $10,000. c. $ 95,000 $ 0. d. $ 95,000 $10,000.

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: b Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Land-new (FV of old land + $5,000) 105,000 Cash 5,000 Gain ($100,000 - 90,000) 10,000 Land-old (book value) 90,000 49. Assuming that the exchange lacks commercial substance, Horton would record land-new and a gain/(loss) of: Land Gain/(loss) a. $105,000 $ 0. b. $105,000 $10,000. c. $ 95,000 $ 0. d. $ 95,000 $10,000.

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: c Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Land-new (BV of old land +$5,000) 95,000 Cash 5,000 Land-old (book value) 90,000 50. 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. Bloomington would record equipment and a gain/(loss) of: Equipment Gain/(loss) a. $ 87,000 $ 3,000. b. $104,000 $ (5,000). c. $ 87,000 $(14,000). d. All of these answer choices are incorrect.

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: c Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment (FV of land - $3,000) 87,000 Cash 3,000 Loss ($104,000 - 90,000) 14,000 Land (book value) 104,000 51. 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. Chang would record equipment and a gain/(loss) of: Equipment Gain/(loss) a. $ 99,000 $ (16,000). b. $ 90,000 $ (25,000). c. $108,000 $ 16,000. d. $106,000 $ (9,000).

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: a Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment (FV of land + $9,000) 99,000 Loss ($106,000 - 90,000) 16,000 Cash 9,000 Land (book value) 106,000 Use the following to answer questions 52 and 53: Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance. Old Equipment Cash Book Value Fair Value Paid Case A $50,000 $60,000 $15,000 Case B $40,000 $35,000 $ 8,000 52. In Case A, Grand Forks would record the new equipment at: a. $65,000. b. $75,000. c. $50,000. d. $60,000.

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: b Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment ($60,000 + 15,000) 75,000 Cash 15,000 Equipment-old (book value) 50,000 Gain 10,000 53. In Case B, Grand Forks would record a gain/(loss) of: a. $ 5,000. b. $ 3,000. c. $(5,000). d. $(3,000).

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: c Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment ($35,000 + 8,000) 43,000 Loss ($40,000 - 35,000) 5,000 Cash 8,000 Equipment-old (book value) 40,000 Use the following to answer questions 54 and 55: Below is information relative to an exchange of equipment by Pensacola Inc. Assume the exchange has commercial substance. Old Equipment Cash Book Value Fair Value Received Case A $75,000 $80,000 $12,000 Case B $60,000 $56,000 $10,000 54. In Case A, Pensacola would record the new equipment at: a. $68,000. b. $63,750. c. $67,250. d. $80,000.

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: a Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment-new ($80,000 - 12,000) 68,000 Cash 12,000 Equipment-old (book value) 75,000 Gain 5,000 55. In Case 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.

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: b Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Equipment-new ($56,000 - 10,000) 46,000 Cash 10,000 Loss 4,000 Equipment-old (book value) 60,000 56. 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.

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: c Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 57. 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.

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: d Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 58. 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.

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: b Level of Learning: Easy Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 59. 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.

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: c Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 60. 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.

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: a Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 61. 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.

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: a Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement Use the following to answer questions 62-64: On June 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2016. Expenditures on the project were as follows ($ in millions): July 1, 2015 54 October 1, 2015 22 February 1, 2016 30 April 1, 2016 21 September 1, 2016 20 October 1, 2016 6 On July 1, 2015, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2016. 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 2015 and 2016. The company's fiscal year-end is December 31. 62. What is the amount of interest that Crocus should capitalize in 2015, 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.

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: b Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Average expenditures for 2015: ($54 million x 6/6) + $22 million x 3/6) = $65 million. The interest is: $65 million x .06 x 6/12 = $1.95 million. 63. In computing the capitalized interest for 2016, Crocus' average accumulated expenditures are: a. $ 46.30 million. b. $103.54 million. c. $122.30 million. d. $124.25 million.

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: d Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: The correct answer is: [from 2016 ? ($77.95 million x 10/10) + ($30 million x 9/10) + ($21 million x 7/10) + ($20 million x 2/10) + ($6 million x 1/10) = $124.25 million. 64. What is the amount of interest that Crocus should capitalize in 2016, using the specific interest method (rounded to the nearest thousand dollars)? a. $7,248,000 (rounded). b. $7,283,000 (rounded). c. $8,740,000 (rounded). d. None of these answer choices are correct.

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: d Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Of the average accumulated expenditures ($124.25 million from question 63), $70 million was financed at 6% for 10 months in 2016, and the remainder of $54.25 million was financed at 8% for that period. The total interest cost was: ($70 million x .06 x 10/12) + ($54.25 million x .08 x 10/12) = $7, 117,000 (rounded). Use the following to answer questions 65-68: On January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $200,000 September 1, 2016 $300,000 December 31, 2016 $300,000 March 31, 2017 $300,000 September 30, 2017 $200,000 Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2016 and 2017. 65. Average accumulated expenditures for 2016 was: a. $300,000. b. $350,000. c. $500,000. d. $400,000.

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: a Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: January 1, 2016 $200,000 x 12/12 = $200,000 September 1, 2016 300,000 x 4/12 = 100,000 December 31, 2016 300,000 x 0/12 = 0 $800,000 $300,000 66. Interest capitalized for 2016 was: a. $48,000. b. $42,000. c. $60,000. d. $36,000.

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: d Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: $300,000 (determined above) x 12% = $36,000 67. Average accumulated expenditures for 2017 was: a. $ 536,000. b. $1,236,000. c. $1,200,000. d. $1,036,000.

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: d Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Accumulated expenditures at 12/31/16 (determined above) $ 836,000 x 9/9 = $836,000 March 31, 2017 300,000 x 6/9 = 200,000 September 30, 2017 200,000 x 0/9 = 0 $1,336,000 $1,036,000 68. Interest capitalized for 2017 was: a. $104,625. b. $ 86,805 c. $ 87,875. d. $ 67,500.

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: b Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Total $1,036,000 (determined above) = Specific borrowing 750,000 x 12% x 9/12 = $67,500 Excess 286,000 x 9% x 9/12 = 19,305 Capitalized interest $86,805 Use the following to answer questions 69-72: On January 1, 2016, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $300,000 September 1, 2016 $450,000 December 31, 2016 $450,000 March 31, 2017 $450,000 September 30, 2017 $300,000 Dreamworld had $5,000,000 in 12% bonds outstanding through both years. 69. Dreamworld's average accumulated expenditures for 2016 was: a. $300,000. b. $450,000. c. $525,000. d. $600,000.

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: b Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: January 1, 2016 $300,000 x 12/12 = $300,000 September 1, 2016 450,000 x 4/12 = 150,000 December 31, 2016 450,000 x 0/12 = 0 $1,200,000 $450,000 70. Dreamworld's capitalized interest in 2016 was: a. $72,000. b. $63,000. c. $54,000. d. $36,000.

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: c Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: $450,000 (determined above) x 12% = $54,000 71. The average accumulated expenditures for 2017 by the end of the construction period was: a. $1,950,000. b. $1,554,000. c. $1,254,000. d. $ 975,000.

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: b Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Accumulated expenditures at 12/31/16 (determined above) $ 1,254,000 x 9/9 = $1,254,000 March 31, 2017 450,000 x 6/9 = 300,000 September 30, 2017 300,000 x 0/9 = 0 $2,004,000 $1,554,000 72. 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.

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: b Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Accumulated expenditures at 9/30/17 before 2017 interest (determined above) $ 2,004,000 2017 interest capitalized $1,554,000 x 12% x 9/12 139,860 Total capitalized cost $2,143,860 73. 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.

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: b Level of Learning: Easy Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Total interest cost incurred ($30,000 + 60,000) $90,000 Interest capitalized (50,000 ) Interest expense $40,000 74. 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.

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: a Level of Learning: Easy Learning Objective: 10-08 Topic Area: Research and development Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 75. 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.

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: c Level of Learning: Medium Learning Objective: 10-08 Topic Area: Software development Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 76. Research and development (R) 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.

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: a Level of Learning: Easy Learning Objective: 10-08 Topic Area: Research and development Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 77. 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.

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: b Level of Learning: Medium Learning Objective: 10-08 Topic Area: Research and development Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 78. Amortization of capitalized computer software costs is: a. Either the percentage-of-revenue method or the straight-line method at the company's option. b. The greater of the percentage-of-revenue method or the straight-line method. c. The lesser of the percentage-of-revenue method or the straight-line method. d. Based on neither the percentage-of-revenue nor the straight-line method.

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: b Level of Learning: Medium Learning Objective: 10-08 Topic Area: Software development Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 79. Axcel Software began a new development project in 2015. The project reached technological feasibility on June 30, 2016, and was available for release to customers at the beginning of 2017. Development costs incurred prior to June 30, 2016, were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. The 2017 revenues from the sale of the new software were $4,000,000, and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. 2017 amortization of the software development costs would be: a. $0. b. $ 350,000. c. $1,840,000. d. $ 560,000.

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: d Level of Learning: Hard Learning Objective: 10-08 Topic Area: Software development Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Percentage-of-revenue method: $4,000,000 ($4,000,000 + 6,000,000) = 40 % Straight-line method: ¼ or 25% Amortization = $1,400,000 x 40% = $560,000 80. 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.

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: a Level of Learning: Easy Learning Objective: 10-09 Topic Area: IFRS ? Research and development Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 81. Under International Financial Reporting Standards, 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. All of these answer choices are incorrect.

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: c Level of Learning: Easy Learning Objective: 10-09 Topic Area: IFRS ? Research and development Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 82. Cromartie Ltd. prepares its financial statements according to International Financial Reporting Standards. During 2016 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 2016 fiscal year. Sale of the product began in 2015. What amount of the above expenditures would Cromartie expense in its 2016 income statement? a. $2,001,000. b. $ 756,000. c. $1,245,000. d. $0.

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: c Level of Learning: Medium Learning Objective: 10-09 Topic Area: IFRS ? Research and development Blooms: Analyze AACSB: Knowledge Application AACSB: Diversity

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: FN Measurement Feedback: Under IFRS, only the $1,245,000 in research expenditures is expensed. The development costs are capitalized as an intangible asset. 83. 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.

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: b Level of Learning: Easy Learning Objective: Appendix 10 Topic Area: Oil and gas accounting Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 84. During 2016, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2016 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 2016, what oil exploration expense would Longhorn charge for this activity in its 2016 income statement? a. $0. b. $ 30 million. c. $ 70 million. d. $100 million.

answer

: c Level of Learning: Medium Learning Objective: Appendix 10 Topic Area: Oil and gas accounting Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Expense the dry holes -- $100 million x (14/20) = $70 million 85. During 2016, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2016. 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 2016, what amount of these exploration costs would remain in its 12/31/16 balance sheet? a. $ 6 million. b. $14 million. c. $20 million. d. $42 million.

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: b Level of Learning: Hard Learning Objective: Appendix 10 Topic Area: Oil and gas accounting Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Feedback: Capitalize the wells that are not dry holes: 5 x $4 million = $20 million. Of this, 30% is depleted in 2016 and the rest remains on the balance sheet. Therefore, 70% of $20 million remains = $14 million. Matching Pair Questions 86. 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. TERM PHRASE NUMBER 1. Average accumulated expenditures Account credited when assets are donated to a corporation. ____ 2. Revenue-donation of asset Approximation of average outstanding debt if all construction funds were borrowed. ____ 3. Exchange of nonmonetary assets Both the total amount and the amount capitalized should be disclosed. ____ 4. Interest cost Asset received is measured at fair value. ____ 5. Franchise Right granted to use a trademark or tradename within a geographic area. ____

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: TERM PHRASE NUMBER 1. Average accumulated expenditures Account credited when assets are donated to a corporation. 2 2. Revenue-donation of asset Approximation of average outstanding debt if all construction funds were borrowed. 1 3. Exchange of nonmonetary assets Both the total amount and the amount capitalized should be disclosed. 4 4. Interest cost Asset received is measured at fair value. 3 5. Franchise Right granted to use a trademark or tradename within a geographic area. 5 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-04 Learning Objective: 10-06 Learning Objective: 10-07 Topic Area: Types of assets Topic Area: Noncash acquisitions ? Donated assets Topic Area: Exchanges Topic Area: Self-constructed assets Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 87. 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. TERM PHRASE NUMBER 1. Trademark Exclusive right to display a word, symbol, or emblem. ____ 2. Noninterest-bearing note Generates inventoriable costs. ____ 3. Expected cash flow approach Incorporates specific probabilities of cash flows. ____ 4. R&D performed for others Its cost includes filling, draining, and removal of old structures. ____ 5. Land Valued at the fair value of the note or fair value of the asset received in exchange. ____

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: TERM PHRASE NUMBER 1. Trademark Exclusive right to display a word, symbol, or emblem. 1 2. Noninterest-bearing note Generates inventoriable costs. 4 3. Expected cash flow approach Incorporates specific probabilities of cash flows. 3 4. R&D performed for others Its cost includes filling, draining, and removal of old structures. 5 5. Land Valued at the fair value of the note or fair value of the asset received in exchange. 2 Level of Learning: Medium Learning Objective: 10-01 Learning Objective: 10-03 Learning Objective: 10-06 Learning Objective: 10-08 Topic Area: Types of assets Topic Area: Noncash acquisitions ? Deferred payments Topic Area: Exchanges Topic Area: Research and development Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 88. 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. TERM NUMBER 1. Amortization Point in time to begin capitalization of software development costs. ____ 2. Research and development costs Expensed in the period incurred. ____ 3. Natural resources The allocation of cost for intangible assets. ____ 4. Technological feasibility The basic principle is to value assets acquired using fair value of consideration given. ____ 5. Nonmonetary exchange Wasting assets. ____

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: TERM PHRASE NUMBER 1. Amortization Point in time to begin capitalization of software development costs. 4 2. Research and development costs Expensed in the period incurred. 2 3. Natural resources The allocation of cost for intangible assets. 1 4. Technological feasibility The basic principle is to value assets acquired using fair value of consideration given. 5 5. Nonmonetary exchange Wasting assets. 3 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-06 Learning Objective: 10-08 Topic Area: Types of assets Topic Area: Costs to be capitalized Topic Area: Exchanges Topic Area: Research and development Topic Area: Software development Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 89. 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. TERM PHRASE NUMBER 1. Copyright A measurement of efficiency in using depreciable assets. ____ 2. Asset retirement obligations Exclusive right of protection given to the creator of a published work. ____ 3. Land improvements Measured at fair value and recognized as a liability. ____ 4. Fixed asset turnover ratio The basic principle is to value assets acquired using fair value of consideration given. ____ 5. Nonmonetary exchange Includes parking lots, fences, and driveways, lighting and sprinkler systems. ____

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: TERM PHRASE NUMBER 1. Copyright A measurement of efficiency in using depreciable assets. 4 2. Asset retirement obligations Exclusive right of protection given to the creator of a published work. 1 3. Land improvements Measured at fair value and recognized as a liability. 2 4. Fixed asset turnover ratio The basic principle is to value assets acquired using fair value of consideration given. 5 5. Nonmonetary exchange Includes parking lots, fences, and driveways, lighting and sprinkler systems. 3 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Types of assets Topic Area: Costs to be capitalized Topic Area: Fixed-asset turnover ratio Topic Area: Exchanges Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 90. 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. TERM PHRASE NUMBER 1. Goodwill Long-term assets that generally represent various types of rights. ____ 2. Depreciation Consideration given less fair value of net identifiable assets. ____ 3. Depletion The cost allocation of equipment. ____ 4. Patents The allocation of cost of natural resources. ____ 5. Intangible assets Protects against infringements on manufactured products. ____

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: TERM PHRASE NUMBER 1. Goodwill Long-term assets that generally represent various types of rights. 5 2. Depreciation Consideration given less fair value of net identifiable assets. 1 3. Depletion The cost allocation of equipment. 2 4. Patents The allocation of cost of natural resources. 3 5. Intangible assets Protects against infringements on manufactured products. 4 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-02 Topic Area: Types of assets Topic Area: Costs to be capitalized Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 91. 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. TERM PHRASE NUMBER 1. Software development costs Costs to bring back an asset to its original condition. ____ 2. Donated assets Revenue recorded upon receipt. ____ 3. Lump-sum purchase Exclusive right of protection given to the creator of a published work. ____ 4. Copyright Capitalized between points of technological feasibility and date of product release. ____ 5. Restoration costs Price allocated in proportion to relative fair values. ____

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: TERM PHRASE NUMBER 1. Software development costs Costs to bring back an asset to its original condition. 5 2. Donated assets Revenue recorded upon receipt. 2 3. Lump-sum purchase Exclusive right of protection given to the creator of a published work. 4 4. Copyright Capitalized between points of technological feasibility and date of product release. 1 5. Restoration costs Price allocated in proportion to relative fair values. 3 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Learning Objective: 10-08 Topic Area: Types of assets Topic Area: Costs to be capitalized Topic Area: Lump-sum purchases Topic Area: Noncash acquisitions ? Donated assets Topic Area: Software development Blooms: Understand AACSB: Reflective thinking

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: FN Measurement 92. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term. TERM PHRASE NUMBER 1. Nonmonetary exchange Expensed in the period incurred. ____ 2. Copyright Exclusive right of protection given to the creator of a published work. ____ 3. Average accumulated expenditures Incorporates cash flow probabilities into analysis. ____ 4. Disposition The basic principle is to value assets acquired using fair value of consideration given. ____ 5. Goodwill Includes parking lots, fences, and driveways, lighting and sprinkler systems. ____ 6. Start-up costs A unique intangible asset that is not separable from the company. ____ 7. Trademark Weighted average of construction expenditures. ____ 8. Lump-sum purchases An exclusive right to display a word, slogan, symbol or emblem. ____ 9. Expected cash flow approach Sale or retirement of assets. ____ 10. Land improvements Purchase price is allocated based on relative fair values. ____

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: TERM PHRASE NUMBER 1. Nonmonetary exchange Expensed in the period incurred. 6 2. Copyright Exclusive right of protection given to the creator of a published work. 2 3. Average accumulated expenditures Incorporates cash flow probabilities into analysis. 9 4. Disposition The basic principle is to value assets acquired using fair value of consideration given. 1 5. Goodwill Includes parking lots, fences, and driveways, lighting and sprinkler systems. 10 6. Start-up costs A unique intangible asset that is not separable from the company. 5 7. Trademark Weighted average of construction expenditures. 3 8. Lump-sum purchases An exclusive right to display a word, slogan, symbol or emblem. 7 9. Expected cash flow approach Sale or retirement of assets. 4 10. Land improvements Purchase price is allocated based on relative fair values. 8 Level of Learning: Easy Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Learning Objective: 10-06 Learning Objective: 10-07 Topic Area: Types of assets Topic Area: Costs to be capitalized Topic Area: Noncash acquisitions ? Deferred payments Topic Area: Dispositions Topic Area: Exchanges Topic Area: Self-constructed assets Blooms: Understand AACSB: Reflective thinking

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: FN Measurement Problems 93. On July 1, 2016, 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: Purchase price $185,000 Title insurance $1,500 Legal fees to purchase land $1,000 Cost of razing old building on lot 8,500 Proceeds from sale of salvageable materials (1,200 ) Property taxes, January 1, 2016-June 30, 2016 3,000 Cost of grading and filling building site 9,000 Cost of building construction 620,000 Interest on construction loan 12,000 Cost of constructing driveway 8,000 Cost of parking lot and fencing 12,000 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.

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: Land: Purchase price $185,000 Title insurance 1,500 Legal fees 1,000 Cost of razing old building $8,500 Proceeds from sale of salvaged materials (1,200 ) 7,300 Property tax prior to June 30 3,000 Cost of grading and filling building site 9,000 Total $206,800 Building: Cost of building construction $620,000 Interest on construction loan 12,000 Total $632,000 Land improvements: Driveway $ 8,000 Parking lot and fencing 12,000 Total $20,000 Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-07 Topic Area: Costs to be capitalized Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 94. Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point. Other costs connected with the purchase were as follows: State sales tax 29,200 Freight costs 5,600 Insurance while in transit 800 Insurance after equipment placed in service 1,200 Installation costs 2,000 Insurance for the first year of operations 2,400 Testing 700 Required: Determine the capitalized cost of the equipment.

answer

: Purchase price $365,000 Sales tax 29,200 Freight 5,600 Insurance while in transit 800 Installation 2,000 Testing 700 Total cost of equipment $403,300 Level of Learning: Medium Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

question

: FN Measurement 95. 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.

answer

: Accounts receivable 1,625,000 Inventory 4,000,000 Property, plant, and equipment 11,625,000 Goodwill 1,875,000 Accounts payable 3,000,000 Bonds payable 4,125,000 Cash 12,000,000 Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

question

: FN Measurement 96. On August 15, 2016, 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.

answer

: Accounts receivable 975,000 Inventory 2,400,000 Property, plant, and equipment 6,975,000 Goodwill 1,325,000 Accounts payable 1,800,000 Bonds payable 2,475,000 Cash 7,400,000 Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

question

: FN Measurement Use the following to answer questions 97 and 98: In its 2013 annual report to shareholders, Boston Beer Company, Inc. included the following in a disclosure note: E. Property, Plant and Equipment Property, plant and equipment for the years ended December 28, 2013, and December 29, 2012, consisted of the following ($ in thousands): 2013 2012 Machinery and plant equipment $ 259,664 $183,828 Kegs 60,350 46,899 Land 23,260 24,515 Building and building improvements 44,234 36,667 Office equipment and furniture 14,581 12,580 Leasehold improvements 7,600 6,193 409,689 310,682 Less: accumulated depreciation 143,131 120,734 $266,558 $189,948 The Company recorded depreciation related to these assets of $23,565 thousand in the 2013 fiscal year. Also, Boston Beer reported the following information in the annual report ($ in thousands): Years ended 12/28/13 12/29/12 Cash flows for investing activities: Purchases of property, plant, and equipment (100,655) (66,010) Proceeds on disposal of property, plant, and equipment 18 41 97. Use a T- account to show the balances and changes during 2013 in Boston Beer's: Property, Plant and Equipment account and its Accumulated depreciation—Property, Plant & Equipment account.

answer

: ($ in thousands) Property Plant & Equipment Accumulated depreciation Beg. Balance 310,682 120,734 Beg. Balance Purchases 100,655 Disposals 1,648 Acc. Deprec. 1,168 23,565 Depreciation Exp. on disposals End. Balance 409,689 143,131 End. Balance Level of Learning: Hard Learning Objective: 10-01 Topic Area: Identify the various costs included in the initial cost of PP, natural resources, and intangible assets Blooms: Analyze AACSB: Analytical Thinking

question

: FN Measurement 98. Show the journal entry to record Boston Beer's sale of property, plant and equipment during 2013.

answer

: Cash 18 Accumulated Depreciation 1,168 Loss on disposal 462 Property, plant, and equipment 1,648 Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-06 Topic Area: Costs to be capitalized Topic Area: Dispositions Blooms: Apply AACSB: Knowledge Application

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: FN Measurement Use the following to answer questions 99 and 100: In its 2016 annual report to shareholders, Plank Breweries included the following note: Fixed Assets Fixed assets consist of the following (in $ thousands): December 31, 2016 2015 Brewery and retail $ 14,465 $ 14,246 Equipment Furniture and fixtures 918 772 Leasehold improvements 13,808 13,563 Construction in progress 584 165 Assets held for sale _______ 4 29,775 28,750 Less accumulated depreciation (9,555 ) (7,625 ) $ 20,220 $ 21,125 Total depreciation expense was approximately $2.121 million and $2.179 million for the years ended December 31, 2016 and 2015, respectively. Also, Plank Breweries reported the following information in its annual report (in $ thousands): Years Ended December 31, 2016 2015 Acquisition of fixed assets 1,279 808 Proceeds from sale of fixed assets 15 157 Required: 99. Use a T- account to show the balances and changes during 2016 in Plank Breweries: Fixed assets account and Accumulated depreciation—fixed assets account (in $ thousands).

answer

: Fixed assets Accum. dep. Beg. Balance 28,750 7,625 Beg. Balance Purchases 1,279 Disposals 254 Acc. Deprec. 2,121 Depreciation Exp. on disposals 191 End. Balance 29,775 9,555 End. Balance Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-06 Topic Area: Costs to be capitalized Topic Area: Dispositions Blooms: Analyze AACSB: Analytical Thinking

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: FN Measurement 100. Show the journal entry to record Plank's disposal of the fixed assets during 2016.

answer

: Cash 15 Acc. Depreciation 191 Loss on disposal 48 Fixed assets 254 Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-06 Topic Area: Identify the various costs included in the initial cost of PP, natural resources, and intangible assets Topic Area: Explain how to account for dispositions and exchanges for other nonmonetary assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 101. In its 2016 annual report to shareholders, Custard Cup Inc. included the following note: Note 4 Property, Plant, and Equipment Property, plant, and equipment (PPE) at December 31, 2016, and December 31, 2015, consisted of the following: 2016 2015 (In millions) Machinery and equipment $244 $237 Buildings and 90 89 improvements Office furniture and 6 6 fixtures _______ _______ 340 332 Less: Accumulated depreciation and 183 165 Amortization _______ _______ 157 167 Land 15 15 Construction in progress 24 6 $196 $188 Depreciation expense for property, plant and equipment was $26 million in 2016. Required: Compute the Accumulated depreciation on PPE disposed of by Custard Cup during 2016.

answer

: Acc. Deprec.-- Property, Plant, & Equipment (in millions) 165 Beg. Balance Acc. Deprec. 26 Depreciation Exp. on disposals 8 183 End. Balance Level of Learning: Medium Learning Objective: 10-01 Learning Objective: 10-06 Topic Area: Types of assets Topic Area: Dispositions Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 102. Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and development costs totaled $8.2 million. Extraction activities began on July 1, 2016. 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 2016 income statement? 3. What is the book value of the asset retirement obligation that Schefter will report in its 2016 balance sheet? 4. Assume that actual restoration costs incurred in 2022 totaled $860,000. What amount of gain or loss will Schefter recognize on retirement of the liability?

answer

: 1. Cost of copper mine: Acquisition, exploration, and development $8,200,000 Restoration costs 608,169 † $8,808,169 † $700,000 x 30% = $210,000 800,000 x 25% = 200,000 900,000 x 45% = 405,000 $815,000 x .74622* = $608,169 *Present value of $1, n = 6, i = 5% (from Table 2) 2. 2016: $608,169 x 5% x ½ year = $15,204 = accretion expense 3. $608,169 + 15,204 = $623,373 = asset retirement obligation at the end of 2016. 4. Schefter will recognize a loss of $45,000 ($860,000 - 815,000). Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 103. 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, 2016. 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 2016 and 2017 income statements? 3. What is the book value of the asset retirement obligation that Calegari will report in its 2016 and 2017 balance sheets? 4. Assume that actual restoration costs incurred in 2021 totaled $1,370,000. What amount of gain or loss will Calegari recognize on retirement of the liability?

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: 1. Cost of coal mine: Acquisition $2,000,000 Exploration 1,500,000 Development 5,000,000 Restoration costs 1,055,225 † $9,555,225 † $1.000,000 x 10% = $ 100,000 1,400,000 x 60% = 840,000 1,800,000 x 30% = 540,000 $1,480,000 x .71299* = $1,055,225 *Present value of $1, n = 5, i = 7% (from Table 2) 2. and 3. 2016: $1,055,225 x 7% = $73,866 = accretion expense $1,055,225 + 73,866 = $1,129,091 = asset retirement obligation at the end of 2016 2017: $1,129,091 x 7% = $79,036 = accretion expense $1,129,091 + 79,036 = $1,208,127 = asset retirement obligation at the end of 2017 4. Calegari will recognize a gain of $110,000 ($1,480,000 - 1,370,000). Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 104. 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.

answer

: Fair value of assets - Fair value of liabilities = Cash paid Therefore, Fair value of liabilities = Fair value of assets - Cash paid = $43 million - 36 million = $7 million. Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 105. 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.

answer

: Fair value of assets - Fair value of liabilities = Cash paid Therefore, Fair value of liabilities = Fair value of assets - Cash paid = $91 million - 60 million = $31 million. Level of Learning: Hard Learning Objective: 10-01 Topic Area: Costs to be capitalized Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 106. On January 3, 2016, 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, 2017. 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 2016: $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 2016. 2. How much interest expense will Michelson report in its 2016 income statement?

answer

: 1. Land: Purchase price (determined below) $2,146,880 Closing costs 24,000 Removal of old building 120,000 Clearing and grading 100,000 $2,390,880 Purchase price of land: Cash paid $ 400,000 Value of note† 1,746,880 $2,146,880 † Present value of note payment: PV = $2,000,000 (.87344* ) = $1,746,880 * Present value of $1: n = 2, i = 7% (from Table 2) Land improvements: Parking lot and landscaping $340,000 Building: Construction expenditures: March 30 $ 800,000 June 30 1,200,000 July 30 1,200,000 September 1 600,000 Total expenditures 3,800,000 Interest capitalized (determined below) 91,833 Total cost of building $3,891,833 Average accumulated expenditures: March 30, 2016 $ 800,000 x 7/8 = $ 700,000 June 30, 2016 1,200,000 x 4/8 = 600,000 July 30, 2016 1,200,000 x 3/8 = 450,000 September 1, 2016 600,000 x 2/8 = 150,000 $1,900,000 Interest capitalized: $1,900,000 x 7.25*% x 8/12 = $91,833 *Weighted-average interest rate: $6,000,000 x 8% = $480,000 2,000,000 x 5% = 100,000 $8,000,000 $580,000 $580,000 = 7.25% $8,000,000 Equipment and furniture and fixtures: Initial Percent of Total Valuation Fair Value Fair Value % x $800,000 Equipment $540,000 60% $480,000 Furniture & fixtures 360,000 40% 320,000 Totals $900,000 100% $800,000 Initial valuation: Equipment $480,000 Furniture & fixtures 320,000 2. Interest expense: Note issued to purchase land and building, $1,746,880 x 7% $ 122,282 Long-term note, $6,000,000 x 8% 480,000 Long-term note, $2,000,000 x 5% 100,000 Total 702,282 Less: Interest capitalized (determined above) (91,833) Interest expense $610,449 Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Learning Objective: 10-07 Topic Area: Costs to be capitalized Topic Area: Lump-sum purchases Topic Area: Noncash acquisitions ? Deferred payments Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 107. 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: Land $214,500 Building 357,500 Equipment 572,000 Inventories 286,000 Required: Prepare the journal entry to record the purchase of the assets.

answer

: Fair Allocated Values Percent Costs Land $ 214,500 15% $ 195,000 Building 357,500 25 325,000 Equipment 572,000 40 520,000 Inventory 286,000 20 260,000 $1,430,000 100% $1,300,000 Land 195,000 Building 325,000 Equipment 520,000 Inventory 260,000 Cash 1,300,000 Level of Learning: Hard Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 108. Eli Company purchased assets of Whitney Inc. at auction for $1,560,000. An independent appraisal of the fair value of the assets acquired is listed below: Land $171,600 Building 514,800 Equipment 600,600 Inventories 429,000 Required: Prepare the journal entry to record the purchase of the assets.

answer

: Fair Allocated Values Percent Costs Land $171,600 10% $156,000 Building 514,800 30 468,000 Equipment 600,600 35 546,000 Inventory 429,000 25 390,000 $1,716,000 100% $1,560,000 Land 156,000 Building 468,000 Equipment 546,000 Inventory 390,000 Cash 1,560,000 Level of Learning: Hard Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 109. Cool Globe Inc. entered into two transactions, as follows: 1. Purchased equipment paying $20,000 down and signed a noninterest-bearing note requiring the balance to be paid in four annual installments of $20,000 on the anniversary date of the contract. Based on Cool Globe's 12% borrowing rate for such transactions, the implicit interest cost is $19,253. 2. Purchased a tract of land in exchange for $10,000 cash down payment and a noninterest-bearing note requiring five $10,000 annual payments, with the first annual payment in one year. The fair value of the land is $46,000. Required: Prepare the journal entries for these transactions.

answer

: 2. Equipment 80,747 Discount on notes payable 19,253 Notes payable 80,000 Cash 20,000 2. Land 46,000 Discount on notes payable 14,000 Cash 10,000 Note payable 50,000 Level of Learning: Hard Learning Objective: 10-03 Topic Area: Noncash acquisitions ? Deferred payments Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 110. Beacon Inc. received a gift of land and building in Twin Pines Park as an inducement to relocate. The land and buildings have fair values of $45,000 and $455,000. Required: Prepare journal entries to record the above transactions.

answer

: Land 45,000 Buildings 455,000 Revenue-donation of assets 500,000 Level of Learning: Medium Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Donated assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 111. On March 15, 2016, Ellis Corporation issued 5,000 shares of its no-par common stock in exchange for a patent. On the date of the transaction, the market price of the common stock was $22 per share. Ellis also received a tract of land from the City of Montrose as an enticement to build a new office building on the site. The land had a fair value of $510,000 and Ellis was required to pay only $200,000 to secure title to the land. Required: 1. Prepare the journal entries to record the transactions under U.S. GAAP. 2. Prepare the entry to record the government grant assuming Ellis prepares its financial statements according to International Financial Reporting Standards. Prepare the entry according to each of the alternatives available under IFRS.

answer

: 1. Patent 110,000 Common stock (5,000 shares x $22) 110,000 Land 510,000 Revenue - donation of asset 310,000 Cash 200,000 2. Land 200,000 Cash 200,000 Or, Land 510,000 Cash 200,000 Deferred income 310,000 Level of Learning: Medium Learning Objective: 10-04 Learning Objective: 10-09 Topic Area: Noncash acquisitions ? Issuance of equity securities Topic Area: Noncash acquisitions ? Donated assets Topic Area: IFRS ? Government grants Blooms: Apply AACSB: Knowledge Application AACSB: Diversity

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: FN Measurement 112. Kerry, Inc., exchanged land and cash of $8,000 for equipment. The land had a book value of $55,000 and a fair value of $60,000. Required: Prepare the journal entry to record the exchange. Assume the exchange has commercial substance.

answer

: Equipment 68,000 Gain 5,000 Cash 8,000 Land 55,000 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 113. Peanut Corporation exchanged land and cash of $6,500 for equipment. The land had a book value of $45,000 and a fair value of $34,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

answer

: Equipment 40,500 Loss 11,000 Cash 6,500 Land 45,000 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 114. Ford Inc. exchanged land and $7,500 cash for material handling equipment. The land had a book value of $75,000 and a fair value of $105,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

answer

: Equipment 112,500 Gain 30,000 Cash 7,500 Land 75,000 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 115. Walker Corporation exchanged land and $4,500 cash for material handling equipment. The land had a book value of $45,000 and a fair value of $58,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

answer

: Equipment 62,500 Gain 13,000 Cash 4,500 Land 45,000 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 116. Cheney Company sold a 20-ton mechanical draw press for $60,000. The old draw press cost $77,000 and had a book value of $55,000. Required: Prepare the journal entry to record the disposition.

answer

: Cash 60,000 Accumulated depreciation 22,000 Equipment 77,000 Gain on disposal of equipment 5,000 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Dispositions Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 117. McLean Mfg. Company sold a three-speed lathe for $24,000 cash. The lathe cost $66,200 and had a book value of $23,200. Required: Prepare the journal entry to record the sale.

answer

: Cash 24,000 Accumulated depreciation 43,000 Equipment 66,200 Gain 800 Level of Learning: Medium Learning Objective: 10-06 Topic Area: Dispositions Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 118. Champion Industries exchanged a dust-scrubbing piece of equipment for another version of the same type of equipment and received $12,000 cash. The old dust scrubber cost $76,200 and had a book value of $54,500. The new dust scrubber had a fair value of $58,500. Required: Prepare the journal entry to record the exchange. Assume the exchange has commercial substance.

answer

: Equipment-new 58,500 Cash 12,000 Accumulated depreciation 21,700 Equipment-old 76,200 Gain 16,000 Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 119. Montgomery Industries spent $600,000 in 2015 on a construction project to build a library. Montgomery also capitalized $30,000 of interest on the project in 2015. Montgomery financed 100% of the construction with a 10% construction loan. The project was completed on September 30, 2016. Additional expenditures in 2016 were as follows: Feb. 28 $ 90,000 Apr. 30 180,000 Jul. 1 36,000 Sept. 30 64,000 Required: Determine the completed cost of the library. Show supporting computations.

answer

: Expenditures Accumulated expenditures Dec. 31, 2015 $630,000 x 9/9 = $630,000 Feb. 28, 2016 90,000 x 7/9 = 70,000 Apr. 30, 2016 180,000 x 5/9 = 100,000 Jul. 1, 2016 36,000 x 3/9 = 12,000 Sept. 30, 2016 64,000 x 0/9 = 0 Average accumulated expenditures for 2016 $812,000 Interest capitalized in 2016 ($812,000 x 10% x 9/12) 60,900 Completed cost of the library $1,060,900 Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets. Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 120. Wendell Corporation exchanged an old truck and $25,500 cash for a new truck. The old truck had a book value of $6,000 (original cost of $25,000 less $19,000 in accumulated depreciation) and a fair value of $7,700. Required: 1. Prepare the journal entry to record the exchange. Assume the exchange has commercial substance. 2. Prepare the journal entry to record the exchange assuming that the exchange lacks commercial substance.

answer

: 1. Truck (new) 33,200 Accumulated depreciation 19,000 Gain 1,700 Cash 25,500 Truck (old) 25,000 2. Truck (new) 31,500 Accumulated depreciation 19,000 Cash 25,500 Truck (old) 25,000 Level of Learning: Hard Learning Objective: 10-06 Topic Area: Exchanges Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 121. Agasse Industries began construction of a new facility and took out a $1,500,000, 8% construction loan on April 1, 2016. Agasse made payments to the general contractor of $400,000 on April 1, $900,000 on August 31, and $500,000 on December 31. Required: Compute the amount of interest that Agasse would capitalize in 2016.

answer

: Expenditures April 1 $400,000 x 9/9= $400,000 August 31 900,000 x 4/9= 400,000 December 31 500,000 x 0/9 = 0 Average accumulated expenditures for 2016 $800,000 Interest capitalized in 2016: $800,000 x 8% x 9/12 = $48,000 Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 122. Hawkins Corporation began construction of a motel on March 31, 2016. The project was completed on April 31, 2017. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period: $ 4,000,000, 6% note $16,000,000, 10% bonds Construction expenditures incurred were as follows: March 31, 2016 $4,000,000 June 30, 2016 6,000,000 November 30, 2016 1,800,000 February 28, 2017 3,000,000 The company's fiscal year-end is December 31. Required: Calculate the amount of interest capitalized for 2016 and 2017.

answer

: Average accumulated expenditures for 2016: March 31, 2016 $ 4,000,000 x 9/9 = $ 4,000,000 June 30, 2016 6,000,000 x 6/9 = 4,000,000 November 30, 2016 1,800,000 x 1/9 = 200,000 $11,800,000 $8,200,000 Interest capitalized in 2016: $8,200,000 x 9.2%* x 9/12 = $565,800 * Weighted-average rate of all debt: $ 4,000,000 x 6% = $ 240,000 16,000,000 x 10% = 1,600,000 $20,000,000 $1,840,000 $1,840,000 = 9.2% $20,000,000 Average accumulated expenditures for 2017: January 1, 2017 ($11,800,000 + 565,800) $12,365,800 x 4/4 = $12,365,800 February 28, 2017 3,000,000 x 2/4 = 1,500,000 $13,865,800 Interest capitalized in 2017: $13,865,800 x 9.2%* x 4/12 = $425,218 Level of Learning: Hard Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 123. On August 1, 2016, Reliable Software began developing a software program to allow individuals to customize their investment portfolios. Technological feasibility was established on January 31, 2017, and the program was available for release on March 31, 2017. Development costs were incurred as follows: August 1 through December 31, 2016 $6,300,000 January 1 through January 31, 2017 1,200,000 February 1 through March 31, 2017 1,600,000 Reliable expects a useful life of five years for the software and total revenues of $8,000,000 during that time. During 2017, revenue of $2,000,000 was recognized. Required: 1. Prepare the journal entries to record the development costs in 2016 and 2017. 2. Calculate the required amortization for 2017.

answer

: 1. 2016: Research and development expense 6,300,000 Cash 6,300,000 2017: Research and development expense 1,200,000 Software development costs 1,600,000 Cash 2,800,000 2. (1) Percentage-of-revenue method: $2,000,000 = 25% x $1,600,000 = $400,000 $8,000,000 (2) Straight-line method: 1/5 or 20 % x $1,600,000 = $320,000. The percentage-of-revenue method is used since it produces the greater amortization, $400,000. Level of Learning: Hard Learning Objective: 10-08 Topic Area: Software development Blooms: Apply AACSB: Knowledge Application

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: FN Measurement 124. AstroTech Semiconductor incurred the following costs in 2016 related to a new product design: Research for new semiconductor design $3,220,000 Development of the new product 856,000 Legal and filing fees for a patent for the new design 110,000 Total $4,186,000 The development costs 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 2016 fiscal year. Required: 1. Calculate the amount of research and development expense AstroTech should report in its 2016 U.S. GAAP income statement related to this project. 2. Repeat Requirement 1 assuming that AstroTech prepares its financial statements according to International Financial Reporting Standards (IFRS).

answer

: 1. According to U.S. GAAP, the following costs would be expensed as R: Research for new semiconductor design $3,220,000 Development of the new product 856,000 Total $4,076,000 The legal and filing fees are capitalized as an intangible asset. 2. According to IFRS, only the $3,220,000 in research costs would be expensed as R. Both the development costs incurred after feasibility is established and the legal and filing fees are capitalized as intangible assets. Level of Learning: Medium Learning Objective: 10-08 Learning Objective: 10-09 Topic Area: Research and development Topic Area: IFRS ? Research and development Blooms: Apply AACSB: Knowledge Application AACSB: Diversity

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: FN Measurement Essay Instructions: The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be. 125. Kellogg Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kellogg disclosed the following: DISPOSITIONS Last year, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense), net during the current year. Required: Explain how the Kellogg transactions described could be interpreted as an example of earnings management.

answer

: The disposal of assets required Kellogg to anticipate (and create an allowance for) a loss on the disposition. Last year, Kellogg's recorded loss was greater than ultimately required. As a result, it reversed the loss by increasing income in the current year. This is an example of a cookie jar reserve, much like that described for allowances for uncollectible accounts in Chapter 7. Level of Learning: Hard Learning Objective: 10-01 Learning Objective: 10-06 Topic Area: Costs to be capitalized Topic Area: Dispositions Blooms: Analyze AACSB: Knowledge Application

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: FN Measurement 126. Explain the appropriate accounting method used to account for lump-sum purchases of a group of long-term assets.

answer

: Such purchases require that the lump-sum price be allocated among the assets acquired so that each may be accounted for individually in subsequent periods. To do so, the relative values of the assets acquired form a prorated allocation of the lump sum cost. The rationale is that there is an implicit discount for the lump-sum purchase that is divided among the individual items as a proportion of their own values. Level of Learning: Medium Learning Objective: 10-02 Topic Area: Lump-sum purchases Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 127. Casper Chemical recently acquired a building located on two acres of land for a lump-sum price of $3.2 million. In your job as assistant controller, you determined the allocation of the price using the relative fair values to be $1 million and $2.2 million for the land and building, respectively. When you reported these initial values to Jake Reese, the company's controller, he told you to change the allocation to $1.5 million for the land and $1.7 million for the building. When you asked him why the change, he explained that the company is having a difficult time meeting profitability goals and that his proposed allocation will help the bottom line for future years. Required: 1. How will the controller's proposed allocation help the bottom line in future years? 2. Discuss the ethical dilemma faced by the assistant controller.

answer

: 1. The proposed allocation will increase future income because land is not a depreciable asset. Therefore, income before tax will be $500,000 higher over the estimated life of the building. 2. Is the assistant controller's responsibility to follow GAAP in allocating the lump-sum purchase price greater than the responsibility to assist the company in reported higher future profits? Level of Learning: Hard Learning Objective: 10-02 Topic Area: Determine the initial cost of individual PP&E and intangible assets acquired as a group for a lump-sum purchase price Blooms: Create AACSB: Analytical Thinking AACSB: Ethics

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: FN Decision Making 128. How are donated assets recorded?

answer

: Debit the asset account for value based on available market price data or appraisal. Credit revenue from donation. Level of Learning: Easy Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Donated assets Blooms: Remember AACSB: Reflective Thinking

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: FN Measurement 129. How are assets valued when they are acquired by issuing stock?

answer

: Record the asset at fair value of the asset or the security, whichever is more clearly evident. Level of Learning: Medium Learning Objective: 10-04 Topic Area: Noncash acquisitions ? Issuance of equity securities Blooms: Remember AACSB: Reflective Thinking

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: FN Measurement 130. What disclosures are required relative to interest costs incurred during the year?

answer

: Disclose the total amount of interest costs incurred and the amount of interest capitalized. Interest expense is reported in the income statement. Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective Thinking

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: FN Measurement 131. When is interest capitalized? Briefly describe how the amount to be capitalized is computed.

answer

: Interest is capitalized during the construction period for self-constructed assets and for assets constructed as discrete projects for sale or lease, but not for items that are routinely manufactured. The amount of interest capitalized is equal to the average accumulated expenditures multiplied by the appropriate interest rates, not to exceed the actual interest cost incurred. Level of Learning: Medium Learning Objective: 10-07 Topic Area: Self-constructed assets Blooms: Remember AACSB: Reflective thinking

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: FN Measurement 132. Why are software development costs treated differently than other types of R&D?

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: The problem with attempting to capitalize R&D in most situations is the determination of a future benefit. With software development, a point of technological feasibility can be determined and a reasonable future benefit estimated. Also, it is easier to estimate the useful life of software than most other R&D situations because the life of software is relatively short. Level of Learning: Medium Learning Objective: 10-08 Topic Area: Software development Blooms: Understand AACSB: Reflective thinking

question

: FN Measurement 133. Briefly explain how R&D is reported in financial statements.

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: Most R&D costs are expensed in the periods incurred, and GAAP requires that total R&D expense incurred must be disclosed in a note or as a separate line item. R&D performed for others would be recorded as inventory and eventually would be included in cost of goods sold. Level of Learning: Medium Learning Objective: 10-08 Topic Area: Research and development Blooms: Remember AACSB: Reflective thinking

question

: FN Measurement 134. It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing. Required: Explain the accounting treatment of purchased technology.

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: When technology is involved, we distinguish between developed technology and in-process research and development. To do that, we borrow a criterion used in accounting for software development costs and determine whether technological feasibility has been achieved. If so, the value of that technology is considered "developed," and we capitalize its fair value (record it as an asset) and amortize that amount over its useful life just like any other finite-life intangible asset. We treat in-process R differently. GAAP requires the capitalization of the fair value of in-process R. But, unlike developed technology, we view it as an indefinite-life intangible asset. As such, we monitor these assets and test them for impairment when required by GAAP. If the R project is completed successfully, we switch to the way we account for developed technology and amortize the capitalized amount over the estimated period the product or process developed will provide benefits. If the project instead is abandoned, we expense the entire balance immediately. Research and development costs incurred after the acquisition to complete the project are expensed as incurred, consistent with the treatment of any other R expenditure not acquired in an acquisition. Level of Learning: Hard Learning Objective: 10-08 Topic Area: Research and development Blooms: Remember AACSB: Communication AACSB: Reflective thinking

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: FN Measurement 135. Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards in accounting for research and development expenditures other than software development costs.

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: Other than software development costs incurred after technological feasibility has been established, U.S. GAAP requires all research and development expenditures to be expensed in the period incurred. IAS No. 38 draws a distinction between research activities and development activities. Research expenditures are expensed in the period incurred. However, development expenditures that meet specified criteria are capitalized as an intangible asset. Level of Learning: Medium Learning Objective: 10-08 Learning Objective: 10-09 Topic Area: Research and development Topic Area: IFRS ? Research and development Blooms: Understand AACSB: Reflective thinking AACSB: Diversity

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: FN Measurement 136. Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?

answer

: Under the full-cost method, oil and gas exploration costs are capitalized, whether or not the specific well explored is successful in finding reserves. The basis for this is that the exploration program is the unit of investment, a portfolio of exploration efforts, and the success of the program, not individual wells, is the relevant basis for developing assets (reserves). The full-cost method tends to be favored by smaller companies. A small company has smaller numbers of explorations that naturally give it less diversification than a large company can generate by its larger exploration program. These companies argue that they are disadvantaged in the capital market by having to use the same accounting as the larger, more diversified companies. Level of Learning: Hard Learning Objective: Appendix 10 Topic Area: Oil and Gas Accounting Blooms: Understand AACSB: Communication AACSB: Reflective thinking AACSB: Critical thinking

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: FN Decision Making 137. Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) in accounting for government grants for the purchase of assets.

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: Both U.S. GAAP and IFRS require that companies value donated assets at their fair values. For government grants, though, the way that value is recorded is different under the two sets of standards. Unlike U.S. GAAP, donated assets are not recorded as revenue under IFRS. IAS No. 20 requires that government grants be recognized in income over the periods necessary to match them on a systematic basis with the related costs that they are intended to compensate. For grants related to assets, companies can either (1) deduct the amount of the grant in determining the initial cost of the asset, or (2) record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the asset's useful life. Level of Learning: Medium Learning Objective: 10-04 Learning Objective: 10-09 Topic Area: Noncash acquisitions ? Donated assets Topic Area: IFRS ? Government grants Blooms: Remember AACSB: Reflective thinking AACSB: Diversity

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