ACQUISITION AND DISPOSITION
OF
PROPERTY, PLANT, AND
EQUIPMENT
1. Assets classified as property, plant, and equipment
can be either acquired for use in operations, or acquired for resale.
2. Assets classified as property, plant, and equipment
must be both long-term in nature and possess physical substance.
3. When land with an old building is purchased
as a future building site, the cost of removing the old building is part of the
cost of the new building.
4. Insurance on equipment purchased, while the
equipment is in transit, is part of the cost of the equipment.
5. Special assessments for local improvements
such as street lights and sewers should be accounted for as land improvements.
6. Variable overhead costs incurred to
self-construct an asset should be included in the cost of the asset.
7. Companies should assign no portion of fixed
overhead to self-constructed assets.
8. When capitalizing interest during
construction of an asset, an imputed interest cost on stock financing must be
included.
9. Assets under construction for a company’s
own use do not qualify for interest cost capitalization.
10. Avoidable interest is the amount of interest
cost that a company could theoretically avoid if it had not made expenditures
for the asset.
11. When a company purchases land with the
intention of developing it for a particular use, interest costs associated with
those expenditures qualify for interest capitalization.
12. Assets purchased on long-term credit
contracts should be recorded at the present value of the consideration
exchanged.
13. Companies account for the exchange of non-monetary
assets on the basis of the fair value of the asset given up or the fair value
of the asset received.
14. When a company exchanges non-monetary assets
and a loss results, the company recognizes the loss only if the exchange has
commercial substance.
15. A government grant generally subsidizes a
company by transferring resources to that company.
16. When a company acquires an asset through a
government grant, the asset's cost is zero so the cost recorded is the direct cost,
such as legal fees, incurred.
17. Assets acquired through government grants
are generally recorded at fair value.
18. When an asset acquired through a government
grant is recorded on the books, equity will increase by the cost of the asset.
19. IFRS
requires the income approach to account for assets received through government
grants.
20. Under IFRS ,
all gains on non-monetary exchanges are recognized, regardless of whether the
transaction has commercial substance or not.
21. The fair value of an asset acquired through
a government grant can be recorded as deferred revenue and recognized as income
over the life of the asset.
22. One way of recognizing a government grant is
to deduct the grant from the carrying amount of the assets received from the
grant.
23. Costs incurred subsequent to the acquisition
of an asset are capitalized if it is probable that the company will obtain
future economic benefits.
24. Improvements are often referred to as
betterments and involve the substitution of a better asset for the one
currently used.
25. Companies always treat gains or losses from
an involuntary conversion as part of discontinued operations.
True
False Answers—Conceptual
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MULTIPLE CHOICE—Conceptual
26. Plant
assets may properly include
a. deposits on
machinery not yet received.
b. idle equipment
awaiting sale.
c. land held for
possible use as a future plant site.
d. none of these.
27. Which
of the following is not a major
characteristic of a plant asset?
a. Possesses physical
substance
b. Acquired for resale
c. Acquired for use
d. Long-term in nature
28. Which
of these is not a major
characteristic of a plant asset?
a. Possesses physical
substance
b. Acquired for use in
operations
c. Long-term in nature
d. All of these are
major characteristics of a plant asset.
29. Cotton
Hotel Corporation recently purchased Emporia Hotel and the land on which it is
located with the plan to tear down the Emporia Hotel and build a new luxury
hotel on the site. The cost of the Emporia Hotel should be
a. depreciated over
the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as loss
in the year the hotel is torn down.
c. capitalized as part
of the cost of the land.
d. capitalized as part
of the cost of the new hotel.
30. The
cost of land does not include
a. costs of grading,
filling, draining, and clearing.
b. costs of removing
old buildings.
c. costs of
improvements with limited lives.
d. special
assessments.
31. The
cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling,
draining, and clearing costs.
b. street lights,
sewers, and drainage systems cost.
c. private driveways
and parking lots.
d. assumption of any
liens or mortgages on the property.
32. If
a corporation purchases a lot and building and subsequently tears down the
building and uses the property as a parking lot, the proper accounting
treatment of the cost of the building would depend on
a. the significance of
the cost allocated to the building in relation to the combined cost of the lot
and building.
b. the length of time
for which the building was held prior to its demolition.
c. the contemplated
future use of the parking lot.
d. the intention of
management for the property when the building was acquired.
33. The
debit for a sales tax properly levied and paid on the purchase of machinery
preferably would be a charge to
a. the machinery
account.
b. a separate deferred
charge account.
c. miscellaneous tax
expense (which includes all taxes other than those on income).
d. accumulated
depreciation--machinery.
34. Fences
and parking lots are reported on the statement of financial position as
a. current assets.
b. land improvements.
c. land.
d. property and
equipment.
S35. To
be consistent with the historical cost principle, overhead costs incurred by an
enterprise constructing its own building should be
a. allocated on the
basis of lost production.
b. eliminated
completely from the cost of the asset.
c. allocated on an
opportunity cost basis.
d. allocated on a pro
rata basis between the asset and normal operations.
36. Which
of the following costs are capitalized for self-constructed assets?
a. Materials and labor
only
b. Labor and overhead
only
c. Materials and
overhead only
d. Materials, labor,
and overhead
37. Which
of the following assets do not qualify
for capitalization of interest costs incurred during construction of the
assets?
a. Assets under
construction for a company's own use.
b. Assets intended for
sale or lease that are produced as discrete projects.
c. Assets financed
through the issuance of long-term debt.
d. Assets not
currently undergoing the activities necessary to prepare them for their
intended use.
38. Assets
that qualify for interest cost capitalization include
a. assets under
construction for a company's own use.
b. assets that are
ready for their intended use in the earnings of the company.
c. assets that are not
currently being used because of excess capacity.
d. All of these assets
qualify for interest cost capitalization.
39. When
computing the amount of interest cost to be capitalized, the concept of
"avoidable interest" refers to
a. the total interest
cost actually incurred.
b. a cost of capital
charge for equity.
c. that portion of
total interest cost which would not have been incurred if expenditures for
asset construction had not been made.
d. that portion of
average accumulated expenditures on which no interest cost was incurred.
40. The
period of time during which interest must be capitalized ends when
a. the asset is
substantially complete and ready for its intended use.
b. no further interest
cost is being incurred.
c. the asset is
abandoned, sold, or fully depreciated.
d. the activities that
are necessary to get the asset ready for its intended use have begun.
41. Which
of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in
connection with the purchase of land to be used as a building site should be
debited to the land account and not to the building account.
b. The amount of interest cost
capitalized during the period should not exceed the actual interest cost
incurred.
c. When excess borrowed funds not
immediately needed for construction are temporarily invested, any interest
earned should be recorded as interest revenue.
d. The minimum amount of interest
to be capitalized is determined by multiplying a weighted average interest rate
by the amount of average accumulated expenditures on qualifying assets during
the period.
42. Construction
of a qualifying asset is started on April 1 and finished on December 1. The
fraction used to multiply an expenditure made on April 1 to find
weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
43. When
funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed to pay for construction
may be temporarily invested in interest-bearing securities. Interest earned on
these temporary investments should be
a. offset against
interest cost incurred during construction.
b. used to increase the
cost of assets being constructed.
c. multiplied by an
appropriate interest rate to determine the amount of interest to be
capitalized.
d. recognized as
revenue of the period.
44. Interest
cost that is capitalized should
a. be written off over
the remaining term of the debt.
b. be accumulated in a
separate deferred charge account and written off equally over a 40-year period.
c. not be written off
until the related asset is fully depreciated or disposed of.
d. none of these.
S45. Which
of the following is not a condition that must be satisfied before interest
capitalization can begin on a qualifying asset?
a. Interest cost is
being incurred.
b. Expenditures for
the assets have been made.
c. The interest rate
is equal to or greater than the company's cost of capital.
d. Activities that are
necessary to get the asset ready for its intended use are in progress.
S46. Which
of the following is the recommended approach to handling interest incurred in
financing the construction of property, plant and equipment?
a. Capitalize
only the actual interest costs incurred during construction.
b. Charge
construction with all costs of funds employed, whether identifiable or not.
c. Capitalize
no interest during construction.
d. Capitalize
interest costs equal to the prime interest rate times the estimated cost of the
asset being constructed.
47. Interest revenue earned on specific
borrowings for qualifying assets
a. reduces
the cost of the qualifying asset.
b. reduces
interest expense reported on the income statement.
c. increases
equity in the period earned.
d. none
of these.
48. If a government entity provides an interest
free loan to a company and the company accounts for the grant using the
deferred revenue approach,
a. no
interest expense will be recorded.
b. the
interest element is initially recorded as Discount on Noted Payable.
c. the
interest element is amortized to Deferred Grant Revenue over the term of the loan.
d. all
of these.
49. Which of the following is not true with
regard to the accounting for government grants?
a. Assets
may be recorded at fair value or nominal cost.
b. Companies
may use either the capital or income approach to account for the asset and the
grant.
c. Companies
may apply the income approach either by recording the grant as deferred revenue
or as an adjustment to the asset.
d. Both
a and c.
50. The account Deferred Grant Revenue is
classified as
a. a
separate component of shareholders' equity.
b. a
non-current liability.
c. Other
income and expense.
d. Revenue.
51. When an asset acquired through government
grants is recorded using the capital approach,
a. assets
and equity increase by the fair value of the asset.
b. assets
and liabilities increase by the fair value of the asset.
c. assets
and equity increase by the cost of the asset.
d. assets
and liabilities increase by the cost of the asset.
52. Which of the following is required by IFRS ?
a. Resources
acquired through government grants must be recorded at cost.
b. Resources
acquired through government grants must be recorded at fair value.
c. Resources
acquired through government grants must be accounted for using the capital
approach.
d. Resources
acquired through government grants must be accounted for using the income
approach.
53. If the cost of the asset is recorded net of
the government grant,
a. equity
will likely be overstated.
b. liabilities
will likely be overstated.
c. assets
will likely be understated.
d. revenues
will likely be understated.
54. Which of the following is true regarding
the alternative ways to apply the income approach to accounting of resources
acquired through government grants?
a. expenses
will be higher and net income lower if the grant is recorded as deferred
revenue.
b. expenses
will be higher and net income lower if the grant is accounted for as an
adjustment to the asset.
c. depreciation
expense will be higher if the grant is recorded as deferred revenue, but net
income will be the same under the two alternatives.
d. depreciation
expense will be higher if the grant is recorded as an adjustment to the asset,
but net income will be the same under the two alternatives.
S55. Which
of the following non-monetary exchange transactions has commercial substance?
a. Exchange
of assets with no difference in future cash flows.
b. Exchange
of products by companies in the same line of business with no difference in
future cash flows.
c. Exchange
of assets with a difference in future cash flows.
d. Exchange
of an equivalent interest in similar productive assets that causes the
companies involved to remain in essentially the same economic position.
S56. When
cash is involved in an exchange having commercial substance.
a. gains
or losses are recognized in their entirety.
b. a
gain or loss is computed by comparing the fair value of the asset received with
the fair value of the asset given up.
c. only
gains should be recognized.
d. only
losses should be recognized.
S57. The
cost of a non-monetary asset acquired in exchange for another non-monetary
asset and the exchange has commercial substance is usually recorded at
a. the fair value of
the asset given up, and a gain or loss is recognized.
b. the fair value of
the asset given up, and a gain but not a loss may be recognized.
c. the fair value of
the asset received if it is equally reliable as the fair value of the asset
given up.
d. either the fair
value of the asset given up or the asset received, whichever one results in the
largest gain (smallest loss) to the company.
P58. Ringler Corporation exchanges one plant
asset for a similar plant asset and gives cash in the exchange. The exchange is
not expected to cause a material change in the future cash flows for either
entity. If a gain on the disposal of the old asset is indicated, the gain will
a. be reported in the
Other income and expense section of the income statement.
b. effectively reduce
the amount to be recorded as the cost of the new asset.
c. effectively
increase the amount to be recorded as the cost of the new asset.
d. be credited
directly to the retained earnings account.
59. Plant
assets purchased on long-term credit contracts should be accounted for at
a. the total value of
the future payments.
b. the future amount
of the future payments.
c. the present value
of the future payments.
d. none of these.
60. When
a plant asset is acquired by issuance of ordinary shares, the cost of the plant
asset is properly measured by the
a. par value of the shares.
b. stated value of the
shares.
c. book value of the shares.
d. fair value of the shares.
61. When
a closely held corporation issues preference shares for land, the land should
be recorded at the
a. total par value of
the shares issued.
b. total book value of
the shares issued.
c. total liquidating
value of the shares issued.
d. fair value of the
land.
62. Accounting
recognition should be given to the gain realized on a non-monetary exchange of
plant assets except when the exchange
has
a. no commercial
substance and additional cash is paid.
b. commercial
substance and additional cash is received.
c. commercial
substance and additional cash is paid.
d. All of these cause
recognition of a gain.
63. For a non-monetary exchange of plant assets,
accounting recognition should not be
given to
a. a loss when the
exchange has no commercial substance.
b. a gain when the
exchange has commercial substance.
c. a gain when the
exchange has no commercial substance.
d. a loss when the
exchange has commercial substance.
64. An
improvement made to a machine increased its fair value and its production
capacity by 25% without extending the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to
accumulated depreciation.
c. capitalized in the
machine account.
d. allocated between
accumulated depreciation and the machine account.
65. Which
of the following is a capital expenditure?
a. Payment of an
account payable
b. Retirement of bonds
payable
c. Payment of income
taxes
d. None of these
66. Which
of the following is not a capital
expenditure?
a. Repairs that
maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
P67. In accounting for plant assets, which of
the following outlays made subsequent to acquisition should be fully expensed
in the period the expenditure is made?
a. Expenditure made to
increase the efficiency or effectiveness of an existing asset
b. Expenditure made to
extend the useful life of an existing asset beyond the time frame originally
anticipated
c. Expenditure made to
maintain an existing asset so that it can function in the manner intended
d. Expenditure made to
add new asset services
S68. An
expenditure made in connection with a machine being used by a company should be
a. expensed
immediately if it merely extends the useful life but does not improve the
quality.
b. expensed
immediately if it merely improves the quality but does not extend the useful
life.
c. capitalized if it
maintains the machine in normal operating condition.
d. capitalized if it
increases the quantity of units produced by the machine.
69. The
sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current fair
value.
b. greater than cost.
c. greater than book
value.
d. less than book
value.
70. Which
of the following statements about involuntary conversions is false?
a. An involuntary
conversion may result from condemnation or fire.
b. The gain or loss
from an involuntary conversion is reported in other income and expense on the
income statement.
c. The gain or loss
from an involuntary conversion should not be recognized when the company
reinvests in replacement assets.
d. All of these.
Multiple
Choice Answers—Conceptual
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26.
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d
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33.
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a
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40.
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a
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47.
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a
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54.
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c
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61.
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d
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68.
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d
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27.
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b
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34.
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b
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41.
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b
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48.
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d
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55.
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c
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62.
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a
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69.
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d
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28.
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d
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35.
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d
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42.
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b
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49.
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b
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56.
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a
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63.
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c
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70.
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c
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29.
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c
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36.
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d
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43.
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a
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50.
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b
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57.
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64.
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c
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30.
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c
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37.
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d
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44.
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d
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51.
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a
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58.
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31.
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c
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38.
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a
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45.
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c
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52.
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d
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59.
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32.
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d
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39.
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c
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46.
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a
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53.
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c
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60.
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d
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67.
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c
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Solutions
to those Multiple Choice questions for which the answer is “none of these.”
26. Assets
used in normal business operations.
44. Capitalized
interest is depreciated over the related asset’s useful life.
65. Capital
expenditures include additions, betterments, improvements, and major repairs.
Multiple
Choice—Computational
Use the following information for questions 71
and 72.
Wilson Co. purchased land as a factory site for $600,000.
Wilson
71. The
cost of the land that should be recorded by Wilson Co. is
a. $660,480.
b. $666,880.
c. $669,880.
d. $676,280.
72. The
cost of the building that should be recorded by Wilson Co. is
a. $2,403,800.
b. $2,404,840.
c. $2,413,200.
d. $2,414,240.
73. On
February 1, 2010 ,
Nelson Corporation purchased a parcel of land as a factory site for $200,000.
An old building on the property was demolished, and construction began on a new
building which was completed on November 1, 2010 . Costs incurred during this
period are listed below:
Demolition of old building $ 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase
contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition
were sold for $10,000.)
Nelson should record the cost of the land and new
building, respectively, as
a. $225,000 and $1,115,000.
b. $210,000 and $1,130,000.
c. $210,000 and $1,125,000.
d. $215,000 and $1,125,000.
74. Worthington Chandler Company purchased
equipment for $10,000. Sales tax on the purchase was $500. Other costs incurred
were freight charges of $200, repairs of $350 for damage during installation,
and installation costs of $225. What is the cost of the equipment?
a. $10,000
b. $10,500
c. $10,925
d. $11,275
75. Fogelberg Company purchased equipment for
$12,000. Sales tax on the purchase was $600. Other costs incurred were freight
charges of $240, repairs of $420 for damage during installation, and
installation costs of $270. What is the cost of the equipment?
a. $12,000.
b. $12,600.
c. $13,110.
d. $13,530.
Use the
following information for questions 76–78.
La Bianco
Company purchased land for a manufacturing facility for €1,100,000. The company paid €70,000 to tear down a building on the land. Salvage was sold for
€10,500. Legal fees of €6,500 were paid for title
investigation and making the purchase. Architect's fees were €40,500. Title insurance cost €4,500, and liability insurance during
construction cost €13,500.
Excavation cost €12,000. The contractor
was paid €1,357,000. A one
-time assessment made by the city for sidewalks was €7,500. La Bianca installed lighting and signage at a cost of €11,000.
76. The cost of the land that should be
recorded by La Bianca is
a. €1,195,000.
b. €1,178,000.
c. €1,103,500.
d. €1,006,500.
77. The cost of the building that should be
recorded by La Bianca is
a. €1,505,500.
b. €1,432,000.
c. €1,423,000.
d. €1,357,500.
78. La Bianca should record land improvements
of
a. €-0-.
b. €11,000.
c. €18,500.
d. €23,000.
79. Istandul Enterprise constructed a building
at a cost of TL24,000,000. Average accumulated expenditures were TL17,000,000,
actual interest was TL2,120,000, and avoidable interest was TL1,600,000. If the
salvage value is TL4,600,000, and the useful life is 30 years, depreciation
expense for the first full year using the straight-line method is
a. TL700,000.
b. TL717,733.
c. TL800,000.
d. TL870,667.
80. During self-construction of an asset by Samuelson
Company, the following were among the costs incurred:
Fixed
overhead for the year $1,000,000
Portion
of $1,000,000 fixed overhead that would
be allocated to asset if it were normal
production 40,000
Variable
overhead attributable to self-construction 35,000
What amount of overhead should be included in
the cost of the self-constructed asset?
a. $ -0-
b. $35,000
c. $40,000
d. $75,000
81. During self-construction of an asset by Richardson
Company, the following were among the costs incurred:
Fixed
overhead for the year $1,000,000
Portion
of $1,000,000 fixed overhead that would
be allocated to asset if it were normal
production 60,000
Variable
overhead attributable to self-construction 55,000
What amount of overhead should be included in
the cost of the self-constructed asset?
a. $ -0-
b. $ 55,000
c. $ 60,000
d. $115,000
82. Mendenhall Corporation constructed a
building at a cost of $10,000,000. Average accumulated expenditures were
$4,000,000, actual interest was $600,000, and avoidable interest was $300,000.
If the salvage value is $800,000, and the useful life is 40 years, depreciation
expense for the first full year using the straight-line method is
a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.
83. Messersmith Company is constructing a
building. Construction began in 2010 and the building was completed 12/31/10 . Messersmith
made payments to the construction company of $1,000,000 on 7/1, $2,100,000 on
9/1, and $2,000,000 on 12/31. Average accumulated expenditures were
a. $1,025,000.
b. $1,200,000.
c. $3,100,000.
d. $5,100,000.
84. Huffman Corporation constructed a building
at a cost of $20,000,000. Average accumulated expenditures were $8,000,000,
actual interest was $1,200,000, and avoidable interest was $600,000. If the
salvage value is $1,600,000, and the useful life is 40 years, depreciation
expense for the first full year using the straight-line method is
a. $475,000.
b. $490,000.
c. $515,000.
d. $675,000.
85. Gutierrez Company is constructing a
building. Construction began in 2010 and the building was completed 12/31/10 . Gutierrez
made payments to the construction company of $1,500,000 on 7/1, $3,300,000 on
9/1, and $3,000,000 on 12/31. Average accumulated expenditures were
a. $1,575,000.
b. $1,850,000.
c. $4,800,000.
d. $7,800,000.
86. On
May 1, 2010 ,
Goodman Company began construction of a building. Expenditures of $120,000 were
incurred monthly for 5 months beginning on May 1. The building was completed
and ready for occupancy on September 1, 2010 . For the purpose of determining the
amount of interest cost to be capitalized, the average accumulated expenditures
on the building during 2010 were
a. $100,000.
b. $120,000.
c. $480,000.
d. $600,000.
87. During
2010, Kimmel Co. incurred average accumulated expenditures of $400,000 during
construction of assets that qualified for capitalization of interest. The only
debt outstanding during 2010 was a $500,000, 10%, 5-year note payable dated January 1, 2008 .
What is the amount of interest that should be capitalized by Kimmel during 2010?
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.
88. On
March 1, Felt Co. began construction of a small building. Payments of $120,000
were made monthly for three months beginning March 1. The building was
completed and ready for occupancy on June 1. In determining the amount of
interest cost to be capitalized, the weighted-average accumulated expenditures
are
a. $30,000.
b. $60,000.
c. $120,000.
d. $240,000.
89. On
March 1, Imhoff Co. began construction of a small building. Payments of $180,000
were made monthly for four months beginning March 1. The building was completed
and ready for occupancy on June 1. In determining the amount of interest cost
to be capitalized, the weighted-average accumulated expenditures are
a. $90,000.
b. $180,000.
c. $360,000.
d. $720,000.
Use the following information for questions 90
through 92.
On March 1, 2010 , Newton
Company purchased land for an office site by paying $540,000 cash. Newton
Date Expenditures
The office was completed and ready for occupancy
on July 1. To help pay for construction, $720,000 was borrowed on March 1, 2010 on
a 9%, 3-year note payable. Other than the construction note, the only debt
outstanding during 2010 was a $300,000, 12%, 6-year note payable dated January 1, 2010 .
90. The weighted-average accumulated expenditures
on the construction project during 2010 were
a. $384,000.
b. $2,934,000.
c. $312,000.
d. $696,000.
91. The actual interest cost incurred during 2010
was
a. $90,000.
b. $100,800.
c. $50,400.
d. $84,000.
92. Assume the weighted-average accumulated expenditures
for the construction project are $870,000. The amount of interest cost to be
capitalized during 2010 is
a. $78,300.
b. $82,800.
c. $90,000.
d. $100,800.
93. During 2010, Bass Corporation constructed
assets costing $1,000,000. The weighted-average accumulated expenditures on
these assets during 2010 was $600,000. To help pay for construction, $440,000
was borrowed at 10% on January 1, 2010 , and funds not needed for construction
were temporarily invested in short-term securities, yielding $9,000 in interest
revenue. Other than the construction funds borrowed, the only other debt
outstanding during the year was a $500,000, 10-year, 9% note payable dated January 1, 2004 .
What is the amount of interest that should be capitalized by Bass during 2010?
a. $60,000.
b. $30,000.
c. $58,400.
d. $94,400.
Use the following information for questions 94
through 97.
On January 2, 2010 , Indian River Groves
began construction of a new citrus processing plant. The automated plant was
finished and ready for use on September 30, 2011 . Expenditures for the
construction were as follows:
$200,000
|
|
600,000
|
|
600,000
|
|
600,000
|
|
400,000
|
Indian River
Groves borrowed $1,100,000 on a construction loan at 12% interest on January 2, 2010 .
This loan was outstanding during the construction period. The company also had
$4,000,000 in 9% bonds outstanding in 2010 and 2011.
94. What
were the weighted-average accumulated expenditures for 2010?
a. $533,333
b. $500,000
c. $400,000
d. $1,000,000
95. The interest capitalized for 2010 was:
a. $180,000
b. $48,000
c. $192,000
d. $60,000
96. What were the weighted-average accumulated
expenditures for 2011 by the end of the construction period?
a. $390,000
b. $1,635,000
c. $1,986,000
d. $1,386,000
97. The interest capitalized for 2011 was:
a. $124,740
b. $118,305
c. $ 25,740
d. $ 99,000
Use the
following information to answer questions 98 - 102.
Arlington Company is constructing
a building. Construction began on January 1 and was completed on December 31.
Expenditures were $2,400,000 on March 1, $1,980,000 on June 1, and $3,000,000
on December 31. Arlington Company borrowed $1,200,000 on January 1 on a 5-year,
12% note to help finance construction of the building. In addition, the company
had outstanding all year a 10%, 3-year, $2,400,000 note payable and an 11%,
4-year, $4,500,000 note payable.
98. What are the weighted-average accumulated
expenditures?
a. $4,380,000
b. $3,155,000
c. $7,380,000
d. $3,690,000
99. What is the weighted-average interest rate
used for interest capitalization purposes?
a. 11%
b. 10.85%
c. 10.5%
d. 10.65%
100. What is the avoidable interest for
Arlington Company?
a. $144,000
b. $463,808
c. $164,281
d. $352,208
101. What is the actual interest for Arlington
Company?
a. $879,000
b. $891,000
c. $735,000
d. $352,208
102. What amount of interest should be charged
to expense?
a. $382,792
b. $735,000
c. $526,792
d. $415,192
103. During
2011, Chan Company incurred average accumulated expenditures of HK$3,200,000
during construction of assets that qualified for capitalization of interest.
The only debt outstanding during 2011 was a HK$5,000,000, 7.5%, 6-year note
payable dated July
1, 2010 . What is the amount of interest that should be capitalized
by Chan during 2011?
a. HK$0.
b. HK$120,000.
c. HK$240,000.
d. HK$375,000.
10 4. During 2011, Churchill Inc. constructed
assets costing £4,200,000. The
weighted-average accumulated expenditures on these assets during the year was £2,600,000. Churchill took out a construction loan
of £4,000,000 was borrowed at 7% on January 1, 2011 ,
and funds not needed for construction were temporarily invested in short-term
securities, yielding £30,000 in interest revenue. Other
than the construction loan, the only other debt outstanding during the year was
a £2,000,000, 5-year, 9% note payable dated January 1, 2007 .
What is the amount of interest that should be capitalized by Churchill during
2011?
a. £152,000.
b. £182,000.
c. £280,000.
d. £330,000.
105. On January 1, 2011 , Le
Pavillion Co began construction on assets which cost CHF2,900,000. The
weighted-average accumulated expenditures on these assets during 2011 was CHF1,900,000.
To help pay for construction, CHF1,500,000 was borrowed at 9.5% on January 1, 2011 .
Funds not needed for construction were temporarily invested in short-term
securities, earning CHF79,000 in interest revenue during the year. Other than
the construction loan, the only other debt outstanding during the year was a CHF2,750,000,
10-year, 12% note payable dated May 1, 2008. What is the amount of interest
that should be capitalized by Le Pavillion during 2011?
a. CHF101,500.
b. CHF111,500.
c. CHF180,500.
d. CHF190,500.
10 6. During 2011, Bella Corporation constructed assets
costing CHF4,215,000. The weighted-average accumulated expenditures on these
assets during 2011 was CHF3,900,000. Bella borrowed CHF2,000,000 at 7.5% on January 1, 2011 .
Funds not needed for construction were temporarily invested in short-term securities,
and earned CHF59,000 in interest revenue. In addition to the construction loan,
Bella had two other notes outstanding during the year: (1) a CHF1,500,000,
10-year, 10% note payable dated October 1, 2009 , and (2) a CHF1,000,000, 8%
note payable dated November
2, 2010 . What is the amount of interest that should be capitalized
by Bella during 2011?
a. CHF328,800.
b. CHF297,500.
c. CHF273,000.
d. CHF265,800.
107. In
an exchange with commercial substance, Huang Company traded equipment with a
cost of ¥8,200,000 and book value of ¥3,120,000 and gave ¥4,698,000 cash. The old machine had a fair value
of ¥2,960,000. Which of the
following journal entries would Huang make to record the exchange?
a. Equipment 7,658,000
Loss
on Exchange 160,000
Accumulated
Depreciation 5,080,000
Equipment 8,200,000
Cash 4,698,000
b. Equipment 8,208,000
Equipment 8,200,000
Cash 8,000
c. Accumulated
Depreciation 5,080,000
Equipment 7,398,000
Equipment 8,200,000
Cash 4,698,000
d. Equipment 7,658,000
Accumulated
Depreciation 542,000
Equipment 8,200,000
Use the
following information for questions 108 and 109.
Gabrielle Inc. and Lucci Company
have an exchange with no commercial substance. The asset given up by Gabrielle
has a book value of €120,000 and a fair value of €135,000. The asset given up by Lucci has a book
value of €220,000 and a fair value of €200,000. Boot of €65,000
is received by Lucci.
108. What
amount should Gabrielle record for the asset received?
a. €110,000
b. €135,000
c. €185,000
d. €200,000
109. The
journal entry made by Lucci to record the exchange will include
a. a debit to Gain on Exchange for
€20,000.
b. a credit to Cash for €65,000.
c. a credit to Equipment for €200,000.
d. a debit to Loss Exchange for €20,000.
Use the
following information for questions 110–114.
Lee Company
received an HK$1,800,000 subsidy from the government to purchase manufacturing
equipment on January, 2, 2011. The equipment has a cost of HK$3,000,000, a
useful life a six years, and no salvage value. Lee depreciates the equipment on
a straight-line basis.
110. If
Lee chooses to account for the grant as deferred revenue, the grant revenue recognized
will be:
a. Zero in the first year of the
grant's life.
b. HK$300,000 per year for the
years 2011-2016.
c. HK$500,000 per year for the
years 2011-2016.
d. $HK1,800,000 in 2011.
111. If
Lee chooses to account for the grant as deferred revenue, the amount of
depreciation expense recorded in 2011 will be:
a. HK$0.
b. HK$200,000.
c. HK$300,000.
d. $HK500,000.
112. If
Lee chooses to account for the grant as an adjustment to the asset, the amount
of depreciation expense recorded in 2011 will be:
a. HK$0.
b. HK$200,000.
c. HK$300,000.
d. $HK500,000.
113. If
Lee chooses to account for the grant as an adjustment to the asset, the book
value of the asset on the 2012 statement of financial position will be:
a. HK$800,000.
b. HK$1,200,000.
c. HK$2,800,000.
d. $HK2,400,000.
114. Whether
Lee chooses to account for the grant as deferred revenue or as an adjustment to
the asset, the combined impact of deferred grant revenue recognition and/ or
depreciation expense recorded per year will be:
a. decrease to net income of
HK$200,000.
b. decrease to net income of HK$300,000.
c. increase to net income of HK$500,000.
d. increase to net income of HK$100,000.
Use the
following information for questions 115–117.
On January 1, 2011 ,
in an effort to lure Tar-Mart, a major discount retail chain to the area, the
city of Bordeaux agreed to provide the company with a €6,000,000 three-year,
Zero-interest bearing note. The prevailing rate of interest for a loan of this
type is 10% and the present value of €6,000,000 at 10% for three years is €4,507,800.
115. In
recording the loan and grant, Tar-Mart will
a. debit Discount on Notes Payable
of €1,492,200.
b. credit Deferred Grant Revenue €1,492,200.
c. credit Note Payable €6,000,000.
d. all of these.
116. At
the end of 2011, Tar-Mart will recognize
a. interest expense of €450,780.
b. grant revenue of €450,780.
c. interest revenue of €149,220.
d. none of these.
117. At December 13, 2011 ,
Tar-Mart will report Deferred Grant Revenue of
a. €1,492,400.
b. €1,342,980.
c. €0.
d. none of these.
118. Dodson
Company traded in a manual pressing machine for an automated pressing machine
and gave $8,000 cash. The old machine cost $93,000 and had a book value of $71,000.
The old machine had a fair value of $60,000.
Which
of the following is the correct journal entry to record the exchange?
a. Equipment 68,000
Loss
on Exchange 11,000
Accumulated
Depreciation 22,000
Equipment 93,000
Cash 8,000
b. Equipment 68,000
Equipment 60,000
Cash 8,000
c. Cash 8,000
Equipment 60,000
Loss
on Exchange 11,000
Accumulated
Depreciation 22,000
Equipment 101,000
d. Equipment 123,000
Accumulated Depreciation 22,000
Equipment 93,000
Cash 8,000
Use the
following information to answer questions 119 and 120.
Below is the information relative to an exchange
of assets by Stanton Company. The exchange lacks commercial substance.
Old Equipment
|
|||
Book Value
|
Fair Value
|
Cash Paid
|
|
Case I
|
$75,000
|
$85,000
|
$15,000
|
Case II
|
$50,000
|
$45,000
|
$7,000
|
119. Which of the following would be correct for
Stanton
Record Equipment at:
|
Record a gain of (loss) of:
|
|
a.
|
$90,000
|
$0
|
b.
|
$100,000
|
$10,000
|
c.
|
$75,000
|
$(5,000)
|
d.
|
$90,000
|
$10,000
|
120. Which of the following would be correct for
Stanton
Record Equipment at:
|
Record a gain of (loss) of:
|
|
a.
|
$57,000
|
$5,000
|
b.
|
$50,000
|
$2,000
|
c.
|
$52,000
|
$(5,000)
|
d.
|
$50,000
|
$(2,000)
|
Use the
following information for questions 121 and 122.
Glen Inc. and Armstrong Co. have an exchange with no commercial
substance. The asset given up by Glen Inc. has a book value of $12,000 and a
fair value of $15,000. The asset given up by Armstrong Co. has a book value of
$20,000 and a fair value of $19,000. Boot of $4,000 is received by Armstrong
Co.
121. What amount should Glen Inc. record for the
asset received?
a. $15,000
b. $16,000
c. $19,000
d. $20,000
122. What
amount should Armstrong Co. record for the asset received?
a. $15,000
b. $16,000
c. $19,000
d. $20,000
123. Hardin Company received $40,000 in cash and
a used computer with a fair value of $120,000 from Page Corporation for Hardin
Company's existing computer having a fair value of $160,000 and an undepreciated
cost of $150,000 recorded on its books. The transaction has no commercial
substance. How much gain should Hardin recognize on this exchange, and at what
amount should the acquired computer be recorded, respectively?
a. $0 and $110,000
b. $769 and $110,769
c. $10,000 and $120,000
d. $40,000 and $150,000
Use the following information to answer questions
124 and 125.
Jamison Company purchased the assets of Booker
Company at an auction for $1,400,000. An independent appraisal of the fair
value of the assets is listed below:
Land $475,000
Building 700,000
Equipment 525,000
Trucks 850,000
124. Assuming that specific identification costs
are impracticable and that Jamison allocates the purchase price on the basis of
the relative fair values, what amount would be allocated to the Trucks?
a. $466,667
b. $700,000
c. $840,000
d. $850,000
125. Assuming
that specific identification costs are impracticable and that Jamison allocates
the purchase price on the basis of the relative fair values, what amount would
be allocated to the Building?
a. $529,730
b. $700,000
c. $1,275,000
d. $384,314
126. On
December 1, Miser Corporation exchanged 2,000 shares of its $25 par value ordinary
shares held in treasury for a parcel of land to be held for a future plant
site. The treasury shares were acquired by Miser at a cost of $40 per share,
and on the exchange date the ordinary shares of Miser had a fair value of $50
per share. Miser received $6,000 for selling scrap when an existing building on
the property was removed from the site. Based on these facts, the land should
be capitalized at
a. $74,000.
b. $80,000.
c. $94,000.
d. $100,000.
127. Storm
Corporation purchased a new machine on October 31, 2010 . A $1,200 down payment was
made and three monthly installments of $3,600 each are to be made beginning on November 30, 2010 .
The cash price would have been $11,600. Storm paid no installation charges
under the monthly payment plan but a $200 installation charge would have been
incurred with a cash purchase. The amount to be capitalized as the cost of the
machine on October
31, 2010 would be
a. $12,200.
b. $12,000.
c. $11,800.
d. $11,600.
128. Horner
Company buys a delivery van with a list price of $30,000. The dealer grants a
15% reduction in list price and an additional 2% cash discount on the net price
if payment is made in 30 days. Sales taxes amount to $400 and the company paid
an extra $300 to have a special horn installed. What should be the recorded
cost of the van?
a. $24,990.
b. $25,645.
c. $25,690.
d. $25,390.
129. On August 1, 2010 , Hayes Corporation purchased a
new machine on a deferred payment basis. A down payment of $3,000 was made and
4 monthly installments of $2,500 each are to be made beginning on September 1, 2010 .
The cash equivalent price of the machine was $12,000. Hayes incurred and paid
installation costs amounting to $500. The amount to be capitalized as the cost
of the machine is
a. $12,000.
b. $12,500.
c. $13,000.
d. $13,500.
130. On
April 1, Mooney Corporation purchased for $855,000 a tract of land on which was
located a warehouse and office building. The following data were collected
concerning the property:
Current
Assessed Valuation Vendor’s
Original Cost
Land $300,000 $280,000
Warehouse 200,000 180,000
Office building
400,000
340,000
$900,000 $800,000
What are the
appropriate amounts that Mooney
should record for the land, warehouse, and office building, respectively?
a. Land, $280,000;
warehouse, $180,000; office building, $340,000.
b. Land, $300,000;
warehouse, $200,000; office building, $400,000.
c. Land, $299,250;
warehouse, $192,375; office building, $363,375.
d. Land, $285,000;
warehouse, $190,000; office building, $380,000.
131. On August 1, 2010 , Mendez Corporation purchased a
new machine on a deferred payment basis. A down payment of $2,000 was made and
4 annual installments of $6,000 each are to be made beginning on September 1, 2010 .
The cash equivalent price of the machine was $23,000. Due to an employee
strike, Mendez could not install the machine immediately, and thus incurred $300
of storage costs. Costs of installation (excluding the storage costs) amounted
to $800. The amount to be capitalized as the cost of the machine is
a. $23,000.
b. $23,800.
c. $24,100.
d. $26,000.
132. Siegle Company exchanged 400 shares of Guinn
Company ordinary shares, which Siegle was holding as an investment, for
equipment from Mayo Company. The Guinn Company ordinary shares, which had been
purchased by Siegle for $50 per share, had a quoted market value of $58 per
share at the date of exchange. The equipment had a recorded amount on Mayo's
books of $21,000. What journal entry should Siegle make to record this
exchange?
a. Equipment ............................................................................. 20,000
Investment
in Guinn Co. Ordinary Shares .................. 20,000
b. Equipment ............................................................................. 21,000
Investment
in Guinn Co. Ordinary Shares .................. 20,000
Gain
on Disposal of Investment .................................. 1,000
c. Equipment ............................................................................. 21,000
Loss
on Disposal of Investment ............................................ 2,200
Investment
in Guinn Co. Ordinary Shares .................. 23,200
d. Equipment ............................................................................. 23,200
Investment
in Guinn Co. Ordinary Shares .................. 20,000
Gain
on Disposal of Investment .................................. 3,200
133. On
January 2, 2010 ,
Rapid Delivery Company traded in an old delivery truck for a newer model. The
exchange lacked commercial substance. Data relative to the old and new trucks
follow:
Old Truck
Original cost $24,000
Accumulated depreciation as of January 2, 2010 16,000
Average published retail value 7,000
New Truck
List price $40,000
Cash price without trade-in 36,000
Cash paid with trade-in 30,000
What should be the cost of the new
truck for financial accounting purposes?
a. $30,000.
b. $36,000.
c. $38,000.
d. $40,000.
134. On
December 1, 2010 ,
Kelso Company acquired a new delivery truck in exchange for an old delivery
truck that it had acquired in 2007. The old truck was purchased for $35,000 and
had a book value of $13,300. On the date of the exchange, the old truck had a fair
value of $14,000. In addition, Kelso paid $45,500 cash for the new truck, which
had a list price of $63,000. The exchange lacked commercial substance. At what
amount should Kelso record the new truck for financial accounting purposes?
a. $45,500.
b. $58,800.
c. $59,500.
d. $63,000.
Use the following information for questions 135
and 136.
A machine cost $120,000, has annual depreciation
of $20,000, and has accumulated depreciation of $90,000 on December 31, 2010 . On April 1, 2011 ,
when the machine has a fair value of $27,500, it is exchanged for a machine
with a fair value of $135,000 and the proper amount of cash is paid. The
exchange has commercial substance.
135. The gain to be recorded on the exchange is
a. $0.
b. $2,500.
c. $5,000.
d. $15,000.
136. The
new machine should be recorded at
a. $107,500.
b. $122,500.
c. $132,500.
d. $135,000.
Use the following information for questions 137
and 138.
Equipment that cost $81,000 and has accumulated
depreciation of $30,000 is exchanged for equipment with a fair value of $48,000
and $12,000 cash is received. The exchange has commercial substance.
137. The
gain to be recognized from the exchange is
a. $9,000 gain.
b. $6,000 gain.
c. $12,000 gain.
d. $21,000 gain.
138. The
new equipment should be recorded at
a. $28,800.
b. $51,000.
c. $30,000.
d. $48,000.
Use the following information for questions 139
through 141.
Two independent companies, Hager Co. and Shaw
Co., are in the home building business. Each owns a tract of land held for
development, but each would prefer to build on the other's land. They agree to
exchange their land. An appraiser was hired, and from her report and the
companies' records, the following information was obtained:
Hager's
Land Shaw's Land
Cost and book value $192,000 $120,000
Fair value based upon
appraisal 220,000 210,000
The
exchange was made, and based on the difference in appraised fair values, Shaw
paid $10,000 to Hager. The exchange has commercial substance.
139. For financial reporting purposes, Hager
should recognize a gain on this exchange of
a. $0.
b. $28,000.
c. $10,000.
d. $90,000.
140. The new land should be recorded on Hager's
books at
a. $210,000.
b. $192,000.
c. $240,000.
d. $168,000.
141. The new land should be recorded on Shaw's
books at
a. $120,000.
b. $220,000.
c. $150,000.
d. $210,000.
142. Timmons Company traded machinery with a
book value of $185,000 and a fair value of $200,000. It received in exchange
from Lewis Company a machine with a fair value of $180,000 and cash of $20,000.
Lewis’s machine has a book value of $190,000. What amount of gain should Timmons
recognize on the exchange?
a. $ -0-
b. $15,000
c. $20,000
d. $5,000
143. Lewis Company traded machinery with a book
value of $190,000 and a fair value of $180,000. It received in exchange from Timmons
Company a machine with a fair value of $200,000. Lewis also paid cash of
$20,000 in the exchange. Timmons’s machine has a book value of $190,000. What
amount of gain or loss should Lewis recognize on the exchange?
a. $20,000 gain
b. $ -0-.
c. $1,000 loss
d. $10,000 loss
144. Durler Company traded machinery with a book
value of $280,000 and a fair value of $300,000. It received in exchange from Hoyle
Company a machine with a fair value of $270,000 and cash of $30,000. Hoyle’s
machine has a book value of $285,000. What amount of gain should Durler
recognize on the exchange?
a. $ -0-
b. $20,000
c. $30,000
d. $10,000
145. Hoyle
Company traded machinery with a book value of $285,000 and a fair value of
$270,000. It received in exchange from Durler Company a machine with a fair
value of $300,000. Hoyle also paid cash of $30,000 in the exchange. Durler’s
machine has a book value of $285,000. What amount of gain or loss should Hoyle
recognize on the exchange?
a. $30,000 gain
b. $ -0-
c. $1,500 loss
d. $15,000 loss
146. Peterson
Company purchased machinery for $160,000 on January 1, 2007 . Straight-line
depreciation has been recorded based on a $10,000 salvage value and a 5-year
useful life. The machinery was sold on May 1, 2011 at a gain of $3,000. How much cash
did Peterson receive from the sale of the machinery?
a. $23,000
b. $27,000
c. $33,000
d. $43,000
147. Sutherland Company purchased machinery for
$320,000 on January
1, 2007 . Straight-line depreciation has been recorded based on a
$20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2011 at a
gain of $6,000. How much cash did Sutherland receive from the sale of the
machinery?
a. $46,000.
b. $54,000.
c. $66,000.
d. $86,000.
148. Ecker
Company purchased a new machine on May 1, 2002 for $176,000. At the time of
acquisition, the machine was estimated to have a useful life of ten years and
an estimated salvage value of $8,000. The company has recorded monthly
depreciation using the straight-line method. On March 1, 2011 , the machine was sold
for $24,000. What should be the loss recognized from the sale of the machine?
a. $0.
b. $3,600.
c. $8,000.
d. $11,600.
149. On January 1, 2002 , Mill Corporation purchased
for $152,000, equipment having a useful life of ten years and an estimated
salvage value of $8,000. Mill has recorded monthly depreciation of the
equipment on the straight-line method. On December 31, 2010 , the equipment was
sold for $28,000. As a result of this sale, Mill should recognize a gain of
a. $0.
b. $5,600.
c. $13,600.
d. $28,000.
Multiple
Choice Answers—Computational
Item
|
Ans.
|
Item
|
Ans.
|
Item
|
Ans.
|
Item
|
Ans.
|
Item
|
Ans.
|
Item
|
Ans.
|
Item
|
Ans.
|
71.
|
b
|
86.
|
a
|
97.
|
b
|
108.
|
c
|
119.
|
a
|
130.
|
D
|
141.
|
b
|
72.
|
d
|
87.
|
c
|
98.
|
b
|
109.
|
d
|
120.
|
c
|
131.
|
B
|
142.
|
b
|
73.
|
d
|
88.
|
b
|
99.
|
d
|
110.
|
b
|
121.
|
b
|
132.
|
D
|
143.
|
d
|
74.
|
c
|
89.
|
a
|
100.
|
d
|
111.
|
d
|
122.
|
a
|
133.
|
B
|
144.
|
b
|
75.
|
c
|
90.
|
d
|
101.
|
a
|
112.
|
b
|
123.
|
c
|
134.
|
B
|
145.
|
d
|
80.
|
d
|
91.
|
a
|
102.
|
c
|
113.
|
a
|
124.
|
a
|
135.
|
B
|
146.
|
c
|
81.
|
d
|
92.
|
b
|
103.
|
c
|
114.
|
a
|
125.
|
d
|
136.
|
D
|
147.
|
c
|
82.
|
a
|
93.
|
c
|
104.
|
a
|
115.
|
d
|
126.
|
c
|
137.
|
A
|
148.
|
b
|
83.
|
b
|
94.
|
c
|
105.
|
b
|
116.
|
b
|
127.
|
c
|
138.
|
D
|
149.
|
B
|
84.
|
a
|
95.
|
b
|
106.
|
d
|
117.
|
b
|
128.
|
c
|
139.
|
B
|
||
85.
|
b
|
96.
|
d
|
107.
|
a
|
118.
|
a
|
129.
|
b
|
140.
|
A
|
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