Need A Tutor?    |   Need Homework Help?                                                                             Help and Support     | Join or Cancel

Plant assets may properly include:
Long-lived tangible assets used in the enterprise's operations
 
Which of the following is not a major characteristic of a plant asset?
Possesses physical substance

Which of these is not a major characteristic of a plant asset?
All of these are major characteristics of a plant asset.
 
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
capitalized as part of the cost of the land.
 
The cost of land does not include
costs of improvements with limited lives.


The cost of land typically includes the purchase price and all of the following costs except
private driveways and parking lots.
 
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
the intention of management for the property when the building was acquired.
 
The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
the machinery account.
 
Fences and parking lots are reported on the balance sheet as
land improvements.
 
Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except
property, plant, and equipment items are always acquired at their original historical cost.
 
To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
allocated on a pro rata basis between the asset and normal operations.
 
Which of the following costs are capitalized for self-constructed assets?
Materials, labor, and overhead
 
Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?
Assets not currently undergoing the activities necessary to prepare them for their intended use.
 
Assets that qualify for interest cost capitalization include
assets under construction for a company's own use.
 
When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to
that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.


The period of time during which interest must be capitalized ends when
the asset is substantially complete and ready for its intended use.

Which of the following statements is true regarding capitalization of interest?
The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

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
8/12.

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
recognized as revenue of the period.

Interest cost that is capitalized should
none of these (answer: Capitalized interest is depreciated over the related asset's useful life)

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?
The interest rate is equal to or greater than the company's cost of capital.

Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment?
Capitalize only the actual interest costs incurred during construction.
 
Which of the following nonmonetary exchange transactions represents a culmination of the earning process?
Exchange of assets with a difference in future cash flows.
 
When boot is involved in an exchange having commercial substance.
gains or losses are recognized in their entirely.


The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
the fair value of the asset given up, and a gain or loss is recognized.

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
effectively reduce the amount to be recorded as the cost of the new asset.


Plant assets purchased on long-term credit contracts should be accounted for at
the present value of the future payments.


When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
market value of the stock.
 
When a closely held corporation issues preferred stock for land, the land should be recorded at the
fair market value of the land.
 
Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets
except when the exchange has
no commercial substance and additional cash is paid.
 
For a nonmonetary exchange of plant assets, accounting recognition should not be given to
part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).


When an enterprise is the recipient of a donated asset, the account credited may be a
revenue account.
 
A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the
manufacturer's books at
its market value.
 
In order for a cost to be capitalized (capital expenditure), the following must be present:
 - The useful life of an asset must be increased.
 - The quantity of assets must be increased.
 - The quality of assets must be increased.
    Any one of these.
 
An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be
capitalized in the machine account.


Which of the following is a capital expenditure?
 - Payment of an account payable
 - Retirement of bonds payable
 - Payment of Federal income taxes
   None of these
 
Which of the following is not a capital expenditure?
Repairs that maintain an asset in operating condition
 
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?
Expenditure made to maintain an existing asset so that it can function in the manner intended


An expenditure made in connection with a machine being used by an enterprise should be
capitalized if it increases the quantity of units produced by the machine.
 
When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary
 item on the income statement if it resulted from
an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
 
The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
less than book value.
 
Which of the following statements about involuntary conversions is false?
The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests
in replacement assets.


What is Depreciation?
The allocation of asset cost over time for plant and equipment
 
What is Amortization?
The allocation of asset cost over time for intangible assets
 
What is Depletion?
The allocation of asset cost over time for natural resources
 
What 2 categories are long-lived, revenue-producing assets typically classified under?
Property, Plant and Equipment
Intangible Assets
 
What is Property, Plant, and Equipment?
Include land, buildings, equipment, machinery, autos, and trucks. Natural resources such as oil and
gas deposits, timber tracts, and mineral deposits are also included
 
What are intangible assets?
Unlike property, plant and equipment and natural resources, these lack physical substance and the
extent and timing of their future benefits typically are highly uncertain.
They include patents, copyrights, trademarks, franchises and goodwill.
 
Where are companies required to report the intangibles in the balance sheet?
some companies report them as part of PPE, some include them in the other asset category and others show them as a separate balance sheet category
 
What does the initial cost of PPE and intangible assets include?
The purchase price and all expenditures necessary to bring the asset to its desired condition and location for use
 
How are costs of an asset that produce future benefits dealt with?
They are capitalized (they are recorded as an asset and expensed in future periods)
 
How are costs of an asset that only produce benefits in the current period dealt with?
They are recorded as expenses
 
What are asset retirement obligations (AROs)?
Obligations uncured by a company associated with the disposition if PPE and natural resources
 
What does GAAP now require with the AROs?
That an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized
asa liability and measure at fair value, if value can be reasonably estimated
 
What is the accretion expense?
An expense recognized when updating the present value of a balance sheet liability
 
What happens to the costs of a project if it is in the exploration and development stage and it becomes apparent that
continuing the project is economically indefeasible?
The costs incurred are expensed rather than capitalized
 
When are intangible assets amortized?
When they have finite useful lives
 
When are intangible assets not amortized?
When they have indefinite useful lives
 
What are purchased intangible assets valved at?
They are valued at their original costs
 
What is a patent?
An exclusive right to manufacture a product or to use a process. Granted by the u.s. patent office
for a period of 20 years
 
What is a copyright?
An exclusive right of protection given to a creator of a published work, such as a song, film, painting,
photograph, or book (good for the life of the creator plus 70 years)
 
What is a Trademark?
An exclusive right to display a word, a slogan, a symbol, or an emblem that distinctively identifies a company,
a product, or a service. (registered with the U.S. patent office for a period of 10 years at a time)
 
What is a Franchise?
A contractual arrangement under which the franchiser grants the franchise the exclusive right to use the
franchiser's trademark and many include product and formula rights. within a geographical area.
 
When can goodwill be purchased?
only through the acquisition of another company
 
When will goodwill appear as an asset in the balance sheet?
Only when it is purchased in connection with the acquisition of control over another company
 
What must be done if a lump-sum purchase includes different assets?
Must allocate the lump-sum acquisition price among the separate items.
 
How are assets acquired valued in non cash transactions?
They are valued at the fair value of the assets given or the fair value of the assets received,
whichever is more clearly evident
 
What is a deferred payment?
When a company makes a promise to make a payment in the future.
 
How are deferred payments dealt with for the buyer?
The buyer, makes a promise to make a payment and thus creating a liability, usually a note payable
 
What does the present value of a note payable equal if it explicitly contains a realistic interest rate?
The present value will equal the face value of the note
 
What does the present value of a note payable equal if the interest rate is not specified or is unrealistic?
In this case, you must look beyond the form of the transaction and record its substance (You need to record the at fair value, this could be the fair value of the time or the fair value of the note, whichever one can be determined)
 
What is a better indicator of a transaction's exchange value if the shares are not publicly traded?
The fair value of the assets received by the corporation is probably the better indicator of the transaction's
exchange value
 
What are assets acquired by issuing common stock valued at?
Their fair value of the securities or the fair value of the assets, whichever is more clearly evident
 
How are donated assets recorded?
They are recorded at their fair values based on either an available market price or an appraisal value
(GAAP requires donated assets be recorded as revenue)
 
What are capital budgeting decisions?
Decisions management makes about PPE and intangible assets
 
What is the net present value model
It compares the present value of future net cash flows with the required initial acquisition cost of the assets.
If the present value ii higher than the acquisition cost, the asset is acquired
 
What is the formula for the Fixed-Asset turnover ratio?
Net Sales/Average fixed assets
 
What does the fixed-asset turnover ratio indicate?
It indicates the level of sales generated by the company's investment in fixed assets
(it measures a company's effectiveness in managing PPE
 
What are PPE and intangible assets to be disposed of by sale classified as?
They are classified as held for sale and measured at the lower of the book value or fair value less cost to sell
 
What happens if a company is unable to reasonably determine fair value of either asset in an exchange?
They would simply use thew book value of the asset given up, plus (minus) any cash given
(received) to value the asset acquired (no gain or loss is recognized)
 
Why can fair value only be used in gain situations that have "commercial substance"?
To preclude the possibility of a company exchanging appreciated assets solely to recognize a gain
 
What should be done if the fair value of the asset given is less than its book value?
Always use fair value to record the exchange
 
What difficulties arise in connection with assigning costs to self-constructed assets?
Determining the amount of the company's indirect manufacturing costs (overhead) to be allocated to the construction
Deciding on the proper treatment of interest (actual or implicit) incurred during construction
 
What does the cost of a self-constructed asset include?
Identifiable materials and labor and a portion of the company's manufacturing overhead costs
 
What are the incremental overhead costs?
The asset's cost would include only those additional costs that are incurred because of the decision t
o construct the asset
 
What is the full-cost approach?
All overhead costs are allocated both to production and to self-constructed assets based on the relative a
mount of a chosen cost driver incurred
 
What qualifies for interest capitalization with self-constructed assets?
Only assets that are constructed as discrete projects
 
What types of assets is interest capitalized during the construction period with self-constructed assets?
Assets built for a company's own use
Assets constructed as discrete projects for sale or lease
 
When does the interest capitalization period begin and when is the first expenditure made with self-constructed assets?
When construction begins and as long as interest costs are actually being incurred
 
What approximates the average debt necessary for construction?
The average accumulated expenditures
 
When should interest be determined for the construction expenditures?
Only for construction expenditures actually incurred during the capitalization period
 
How is average accumulated expenditures determined?
By time weighting individual expenditures made during the construction period
 
What is the specific interest method?
The method of determining interest to capitalize
 
What is the weighted average method?
When the weighted-average rate is used on all interest bearing debt, including all construction loans
 
When is the weighted-average method used?
When is it difficult to associate specific borrowings with projects
 
What must be done if an item is considered material when dealing with disclosure?
The amount of interest capitalized during the period must be disclosed
 
When are most R&D costs expensed?
In the period incurred
 
Why are R&D costs difficult to match with future revenues?
They entail a high degree of uncertainty of future benefits
 
What is considered research?
Critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be
useful in developing a new product or service or a new process or technique or in bringing about a s
ignificant improvement to an existing product or process
 
What is considered development?
It is the translation of research findings or other knowledge into a plan or design for a new product or
process or for a significant improvement to an existing product or process whether intended for sale or use.
 
What does the R&D expense include?
the depreciation and amortization of assets used in R&D activities
 
How are filling and legal costs for patents, copyrights, and other developed intangibles dealt with?
They are capitalized and amortized in future periods
 
What should be done with R&D costs when they are preformed for other companies?
R&D costs are capitalized as inventory and carried forward into future years until the project is complete
 
How is income dealt with for contracts of R&D performed by other companies?
they are recognized using wither the percentage-of-completion or completed contract method
 
What must a company do with costs incurred with start-ups
A company must expense all the cots related to a company's start up activities in the period incurred,
rather than capitalize those costs as an asset
 
What does GAAP require with software development costs?
That companies record R&D as an expense, until technological feasibility of the software has been established,
for costs they incur to develop or purchase computer software to be sold, or other wise marketed
 
How are software development costs dealt with?
Any cost incurred during the preliminary project stage are expensed as R&D, after the application
development stage is reached, we capitalize any further costs
 
Why are R&D costs generally expensed in the period incurred?
They entail a high degree of uncertainty of future benefits
They are difficult to match with future benefits
 
When a company buys out another, what does it value the tangible and intangible assets at?
At fair value
 
The allocation of the cost of a tangible fixed asset is referred to as ________,
whereas the allocation of the cost of an intangible asset is referred to as ________.
depreciation; amortization
 
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as
the ________ life of the asset.
service
 
The depreciation method that allocates an equal amount of the depreciable base to each year of the
asset's service life is the straight-line method.
 
Which of the following is an activity-based depreciation method?
Units-of-production method
 
On October 1, year 1, Johnson Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Johnson uses the double-declining-balance method of depreciation. The partial year depreciation for year 1 is
$10,000

1/5 x 2 = 40%. $100,000 x 40% x 1/4 = $10,000
 
Match each term with its definition.
Depreciation <-> Allocation of the cost of a tangible fixed asset
Depletion <-> Allocation of the cost of natural resources
Amortization <-> Allocation of the cost of an intangible asset
 
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the ______ value of the asset sold.
book
 
Which of the following terms is equivalent to an asset's useful life to a particular company?
Service life
 
Group and composite depreciation commonly is used to
reduce costs of record-keeping.
 
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year of the asset's service life.
 
For natural resources the depletion base is
cost less any anticipated residual value.
 
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the
number of hours used during the year, it is using the ______ method of depreciation.
units-of-production
 
The two categories for intangible assets are
intangibles with finite lives.
intangibles with indefinite lives.
 
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years
with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000

$100,000/5 years = $20,000 per year x 1/4 year = $5,000
 
The useful life of an intangible asset may be limited by what type of provisions?
Contractual, legal, regulatory
 
What is the purpose of group or composite depreciation?
To reduce the record-keeping costs of determining depreciation.
 
Which items are considered changes in estimates that would be treated on a prospective basis in the
current period and future periods?
increasing the residual value of an asset
change in useful life of an asset
 
The cost of a natural resource less its anticipated residual value is called the _____ _____.
depletion base
 
Which of the following accounting changes must be justified in the notes to the financial statements?
Changes in depreciation methods
 
Allocation of the cost of an intangible asset is called
amortization
 
If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might
be _________ its legal life.
less than
 
What is the accounting treatment for the discovery of a material error in a previous year?
Previous years' financial statements are restated.
 
Which of the following intangible assets are usually considered to have indefinite lives?
Trademarks
 
When an asset has a significant decline in value and is written down, this is called ______.
impairment
 
If there is a change in an intangible asset's estimated useful life, the change is treated
on a prospective basis.
 
True or false: When accounting for impairments, the two categories for recognizing and measuring the
loss are tangible and intangible assets.
False


What are the issues when accounting for impairments?
When to recognize the impairment.


How to measure the impairment loss.
An impairment occurs when the undiscounted sum of estimated future cash flows is less than the asset's book value.
 
Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000.
An impairment loss was indicated, and the fair value of the assets was $48,000.
The journal entry to record the impairment loss will include
credit to assets of $52,000.
debit to loss on impairment of $12,000.
debit to accumulated depreciation of $40,000.
 
Match the timing of when to test for impairment with the type of asset.
Property to be held and used <> When events or circumstances indicate book value may not be recoverable
Indefinite life intangible assets other than goodwill <> At least annually, or more frequently if indicated
Assets to be sold <> When classified as held for sale
 
Which assets are required to be tested for impairment annually?
intangible assets with indefinite lives
 
The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.
one-step
 
A subsequent expenditure for an asset increases the future benefits of the asset if it
extends the asset's useful life.
increases the quality of the goods or services produced by the asset.
increases the operating efficiency of the asset.
 
A(n) _____ _____ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component.
reporting unit
 
True or false: Assets held for sale are not depreciated or amortized while classified as held for sale.
True
 
Match the measurement to each type of impairment.
Assets to be held and used             The excess of book value over the fair value
Goodwill                                             The excess of book value over implied fair value
Assets to be sold                              The excess of book value over fair value less costs to sell
 
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on
materiality.
 
Allocation of the cost of a tangible fixed asset
Depreciation
 
Allocation of the cost of natural resources
Depletion
 
Allocation of the cost of an intangible asset
Amortization
 
Which of the following terms is equivalent to an asset's useful life to a particular company?
service life
 
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as _______ the life of the asset.
service, useful, or depreciable
 
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method.
 
Declining balance depreciation methods multiply _____ by an annual rate that is a multiple of the straight-line rate.
cost less accumulated depreciation
 
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the ______ method of depreciation.
units-of-production
 
The allocation of the cost of a tangible fixed asset over a period of time is referred to as __________, whereas the allocation of the cost of an intangible asset is referred to as ________ .
depreciation; amortization
 
The gain or loss on disposal of an asset is calculated as
consideration received less the book value of asset sold.
 
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year of the asset's service life.
 
The cost of a natural resource less its anticipated residual value is called the _________ _________.
depletion base
 
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
 
Which of the following is an activity-based depreciation method?
Units-of-production method
 
Allocation of the cost of an intangible asset is called
amortization.
 
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the ______ value of the asset sold.
book
 
If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might
be _________ its legal life.
less than
 
An impairment occurs when the
undiscounted sum of estimated future cash flows is less than the asset's book value.
 
A subsequent expenditure for an asset increases the future benefits of the asset if it ________.
increases the quality of the goods or services produced by the asset.


When accounting for impairments, the two categories for recognizing and measuring the loss are
assets to be held and used and assets held for sale.
 
The measurement of an impairment loss in step 2 is the difference between
the asset's book value and its fair value.
 
True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are
tangible and intangible assets.
False