Deck 11: Long-Term Operating Assets: Acquisition, Cost Allocation

Question 1

IFRS permits capitalization of interest on specific borrowings related to both constructed and purchased assets.

Answer 1

False

Question 2

When more than one different type of asset is acquired in one purchase transaction, the total purchase price is allocated among the assets in proportion to their fair values.

Answer 2

True

Question 3

The cost of land does not include ________.

A) costs of removing old buildings
B) costs of improvements with limited lives
C) costs of grading and clearing the land
D) legal fees and closing costs

Answer 3

B

Question 4

Capitalization is the process of recording an expenditure as an asset.

Question 5

When land is purchased and landscaping improvements are made, the total purchase price plus the improvement cost is the total capitalized value of the land.

Question 6

Which of the following is not a major characteristic of a fixed asset?

A) acquired for resale
B) tangible in nature
C) expected to be used for more than one year
D) used in the production and sale of other assets

Question 7

A cost that is recorded as an asset is ________.

A) an operating expenditure
B) a tangible expenditure
C) an intangible expenditure
D) a capital expenditure

Question 8

The debit for a sales tax paid on the purchase of machinery would be a charge to ________.

A) accumulated depreciation for machinery
B) a deferred liability account
C) the machinery account
D) miscellaneous tax expense

Question 9

The amount of capitalized interest for a constructed asset is the lesser of actual interest incurred and avoidable interest.

Question 10

To determine the amount of interest to capitalize, the interest rate on specific borrowings to finance construction of the asset is multiplied times the total weighted-average accumulated expenditures.

Question 11

IFRS permits the use of full-cost accounting to allocate a proportionate share of indirect costs to a constructed asset.

Question 12

Property, plant, and equipment include both tangible and intangible fixed assets.

Question 13

When land is purchased and an old building thereon is demolished, the total purchase price plus the demolition cost is the total capitalized value of the land.

Question 14

For constructed assets, the amount of capitalized interest is calculated as total construction costs times the applicable interest rate.

Question 15

Firms compute the amount of avoidable interest as the weighted-average accumulated expenditures times the appropriate interest rate.

Question 16

Construction costs for fences and driveways are reported on the statement of financial position as ________.

A) current assets
B) intangible assets
C) land
D) land improvements

Question 17

Firms capitalize interest costs from the time of the initial expenditure until the asset is actually put into service.

Question 18

Under IFRS, there is no need to use the weighted-average accumulated expenditures to determine capitalized interest.

Question 19

The cost of land includes the purchase price and land improvement costs.

Question 20

With basket purchases, the firm allocates one purchase price to specific assets based on fair values.

Question 21

Adding new offices to an existing office building would qualify as a capital expenditure.

Question 22

Ordinary repairs are expenditures to maintain the operating efficiency of an asset that do not extend its original useful life.

Question 23

Scrap value is also referred to as depreciable value.

Question 24

Assets that qualify for interest cost capitalization include ________.

A) assets under construction for a company's own use
B) assets not currently being used because of excess capacity
C) assets that are ready for their intended use and acquired through issuance of long-term debt
D) All of the above.

Question 25

Net book value is equal to the original cost of a plant asset minus accumulated depreciation for that asset.

Question 26

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to ________.

A) that portion of average accumulated expenditures on which no interest cost was incurred
B) that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made
C) the amount of interest cost actually incurred on financing undertaken specifically for the acquisition of the asset
D) a cost of capital charge for equity restricted to the acquisition of the specific asset

Question 27

Emerson Enterprises is constructing a building. Construction began in 2018 and the building was completed on December 31, 2018. Emerson made payments to the construction company of $600,000 on July 1, $1,800,000 on September 1, and $2,400,000 on December 31. What is the amount of weighted-average accumulated expenditures that provides the basis for determining capitalized interest?

A) $900,000
B) $1,100,000
C) $1,200,000
D) $1,600,000

Question 28

Depreciation is the systematic allocation of the cost of both tangible and intangible assets to expense over the assets' expected useful lives.

Question 29

Seeder Inc. made a lump-sum purchase of three pieces of machinery for $120,000 from an unaffiliated company. At the time of acquisition, Seeder paid $4,000 to determine the appraised value of the machinery. The appraisal disclosed the following values: Machine A $60,000
Machine B $36,000
Machine C $24,000
What cost should be assigned to Machines A, B, and C, respectively?

A) A: $60,000; B: $36,000; C: $24,000
B) A: $62,000; B: $37,200; C: $24,800
C) A: $64,000; B: $33,600; C: $22,400
D) A: $41,333; B: $41,333; C: $41,333

Question 30

During 2018, Dosekis Co. calculated weighted-average accumulated expenditures of $200,000 after construction of assets that qualified for capitalization of interest. The only debt outstanding during 2018 was a $300,000, 10%, 5-year note payable dated January 1, 2015. What is the amount of interest that should be capitalized by Dosekis during 2018?

A) $10,000
B) $20,000
C) $30,000
D) $40,000

Question 31

Double-declining balance method charges twice the amount of straight-line depreciation expense each period.

Question 32

Ballyhigh Company purchased equipment for $20,000. Sales tax on the purchase was $1,500. Other costs incurred were freight charges of $300, repairs of $350 for damage during installation, and installation costs of $450. What is the capitalized cost of the equipment?

A) $21,500
B) $21,850
C) $22,250
D) $22,600

Question 33

All fixed assets with a useful life of more than one year must be capitalized and depreciated.

Question 34

The period of time for which interest is to be capitalized ends when ________.

A) no additional interest cost is actually being incurred on direct financing for the acquisition of the asset
B) a constructed asset is substantially complete and put into use
C) a constructed asset is substantially complete and ready for its intended use
D) an acquired asset is received and ready for its intended use

Question 35

In the context of constructing a plant asset, the interest that the company would not have paid if it had not borrowed funds to construct the asset is referred to as ________.

A) avoidable interest
B) marginal interest
C) capital interest
D) financing interest

Question 36

Alzparker Company constructed a building at a total actual cost of $30,000,000. Weighted-average accumulated expenditures during the construction period amounted to $23,000,000. As a result of financing arrangements, actual interest was $1,820,000, and avoidable interest was $1,600,000. What is the capitalized cost of the building?

A) $24,820,000
B) $31,600,000
C) $31,820,000
D) $33,420,000

Question 37

Scrap value reduces the depreciable base of an asset.

Question 38

Accumulated depreciation is a contra-expense account that represents total depreciation taken over the life of an asset.

Question 39

Generally, 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

Question 40

What criteria does a company use to decide whether to include an expenditure in the cost of property, plant, and equipment rather than expensing it? Provide an example of a type of expenditure included in the cost of property, plant, and equipment as a result of applying these criteria.

Question 41

Which of the following is a realistic assumption of the straight-line method of depreciation?

A) Depreciation is a function of usage.
B) The rate of return analysis is enhanced using the straight-line method.
C) The repair and maintenance expense is higher at the end of the asset's life.
D) The asset's economic usefulness is the same each year.

Question 42

What type of account is Accumulated Depreciation?

A) contra-equity
B) contra-asset
C) expense
D) asset

Question 43

Presented below are the components related to an office building that Lorny Manufacturing Company purchased for $10,000,000 on January, 1, 2018.
$\begin{array}{lcr}\text { Component } & \text { Useful Life } &\text { Value } \\\hline \text { Building structure } & 50 \text { years } & \$ 6,400,000 \\\text { Building systems } & \text { 25 years } & 2,800,000 \\\text { Building interior } & 25 \text { years } & 800,000\end{array}$
a. Compute depreciation expense for 2018, assuming that Lorny uses component depreciation, uses the straight-line method of depreciation, and ignores scrap values.
b. Assume that the building systems (heating, plumbing, electrical) were replaced after 20 years at a cost of $2,500,000. The company paid cash. Prepare the journal entry to record the replacement of the old component with the new component.

Question 44

Companies derecognize tangible fixed assets from their accounts when they abandon the assets.

Question 45

Briefly explain the half-year convention for recognizing depreciation.

Question 46

Identify and briefly describe the four factors involved in determining the dollar amount of a firm's periodic charge to depreciation?

Question 47

Kaven Corporation purchased a truck at the beginning of 2018 for $85,000 which will be depreciated using the units-of-output method. The truck is estimated to have a residual value of $4,000 and a useful life of 4 years and 120,000 miles. It was driven 18,000 miles in 2018 and 32,000 miles in 2019. What is the depreciation expense for 2019? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)

A) $21,250
B) $21,760
C) $22,720
D) $32,000

Question 48

Use of the double-declining balance method ________.

A) ignores the scrap value of the asset for all purposes
B) results in twice the depreciation expense that would be recognized by the straight-line method each period
C) means that the amount of depreciation expense decreases year after year
D) All of the above are true.

Question 49

A production machine which cost $2,200,000 is acquired on October 1, 2018. Its estimated residual value is $200,000 and its expected life is 10 years or about 80,000 operating hours. During 2018, the machine was used to produce products for 3,000 operating hours during 2018 and 8,100 operating hours during 2019. Lorny does not use the half-year convention for depreciating any assets.
Calculate depreciation expense for 2018 and 2019 for each of the following methods:
(a) Straight-line method
(b) Double-declining balance method
(c) Units-of-output method

Question 50

a. What is the distinction between a capital and an operating expenditure? Give two examples of each.
b. Distinguish between ordinary repairs and maintenance and major repairs. How should a company account for each?

Question 51

The half-year convention is not applicable for the double-declining balance method of determining depreciation expense.

Question 52

Which of the following is not a method for determining depreciation expense for a specific asset?

A) net method
B) units-of-output method
C) double-declining-balance method
D) straight-line method

Question 53

Which of the following information is not used to determine the current period depreciation expense for a specific asset when using the straight-line method?

A) acquisition cost of the asset
B) useful life of the asset
C) residual value of the asset
D) current carrying value of the asset

Question 54

The purchase of a building would involve a number of different components, such as the foundation and frame, heating and air conditioning systems, and other non-weight-bearing parts. Which of the following statements concerning the components-based approach for determining depreciation is true?

A) Both U.S. GAAP and IFRS require the components-based approach.
B) Both U.S. GAAP and IFRS allow the components-based approach but do not require it.
C) IFRS allows the components-based approach but does not require it; U.S. GAAP requires the components-based approach.
D) U.S. GAAP allows the components-based approach but does not require it; IFRS requires the components-based approach.

Question 55

Briefly describe the accounting for the acquisition and use of equipment and indicate which accounts are involved in accounting for equipment and what types of accounts are these?

Question 56

An improvement made to a machine increased its fair value and its production capacity. The cost of the improvement should be debited to ________.

A) expense
B) accumulated depreciation
C) equipment
D) intangible assets

Question 57

Lunar Products purchased a computer for $13,000 on July 1, 2018. The company intends to depreciate it over 4 years using the double-declining balance method. Residual value is $4,000. What is depreciation for 2019?

A) $2,250
B) $3,250
C) $3,375
D) $4,875

Question 58

Which of the following statements about the double-declining-balance (DDB) method is true?

A) Companies that use the DDB method do not use partial-year depreciation.
B) Companies that use the DDB method generally do not use scrap value to calculate current-year depreciation expense, except in the last year of an asset's life.
C) Using the DDB method, the amount of depreciation expense varies from year to year depending on usage of the asset.
D) All of the above statements are true.

Question 59

For income statement purposes, when is depreciation expense considered to be a variable expense?

A) when units-of-output method is used
B) when double-declining-balance method is used
C) when straight-line method is used
D) Never

Question 60

U.S. GAAP allows a firm to record a half year of depreciation expense for any asset acquired at any time during the year.

Question 61

IFRS requires companies to reconcile the carrying value of property, plant and equipment at the beginning of the period with the carrying value at the end of the period.

Question 62

On June 30, 2018, F&R Company decided to scrap a piece of machinery with an original cost of $55,000 and accumulated depreciation (brought up to the date of the disposal) of $42,400. The company paid $750 to have the asset picked up and brought to a recycling facility for proper disposal. Record the journal entry for the disposal

Question 63

Which of the following situations always results in a loss on derecognition of an asset?

A) The asset is abandoned.
B) The cash proceeds from the sale are less than the book value of the asset.
C) The carrying value of the asset is less than its book value at the time of derecognition.
D) The cash proceeds from the sale (if any) are less than the acquisition cost of the asset.

Question 64

Which of the following is not a required disclosure for property, plant, and equipment under U.S. GAAP?

A) the amount of depreciation expense for the period
B) the accumulated depreciation at the end of the fiscal year by major class or in total
C) the balances of depreciable assets by major classes at the end of the fiscal year
D) the acquisition cost of each material asset acquired during the fiscal year

Question 65

U.S. GAAP requires companies to reconcile the historical cost and accumulated depreciation at the beginning of the period with amounts at the end of the period.

Question 66

A fixed asset with a five-year estimated useful life and no scrap value is sold at the end of the second year of its useful life. How would using the straight-line method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?

A) A gain would be greater or a loss would be less using straight-line depreciation.
B) A gain would be less or a loss would be greater using straight-line depreciation.
C) A gain would be less or a loss would be less using straight-line depreciation.
D) Neither the gain or loss would be different using straight-line depreciation instead of double-declining-balance method.

Question 67

A company sells one of its delivery trucks that had been used in the business for $25,000 cash. At the time of the sale, the accumulated depreciation on the truck was brought up to date and had a balance of $10,000. The original cost of the truck was $32,000. What would be the journal entry to record the disposal of the delivery truck?

Question 68

Under U.S. GAAP, companies are required to disclose the amount of accumulated depreciation either for each major class of fixed assets or in total for all fixed assets.

Question 69

The loss on abandonment of a plant asset is equal to its carrying value on the date of abandonment plus disposal costs.

Question 70

A company recognizes a gain on the income statement whenever it sells a fixed asset for more than the net book value of the asset.

Question 71

Under what circumstances does derecognition of an asset occur?

Question 72

On December 31, 2018, Franz Company sold a piece of machinery it purchased on January 1, 2011, with an original cost of $450,000. The asset had a useful life of 15 years and a scrap value of $50,000. It sold the asset for $200,000 in cash. Franz recorded depreciation through December 31, 2017, using the straight-line method. What was the carrying value of the asset on the date of sale? What is the gain or loss on disposal?

Question 73

A company will never recognize a gain on the abandonment of a fixed asset.

Question 74

Which of the following is a way that IFRS disclosure requirements of property, plant, and equipment differ from U.S. GAAP disclosure requirements?

A) Companies disclose the accumulated depreciation at the end of the fiscal year by major class or in total.
B) Companies provide a general description of the method(s) used in computing depreciation with respect to major classes of depreciable assets.
C) Companies provide a reconciliation of the carrying values at the beginning of the year to the end of the year.
D) Companies report the carrying value of property, plant, and equipment in total or by major class of long-term assets on the balance sheet.

Question 75

When a firm sells or abandons an asset, how is the gain or loss to be recognized on the income statement measured?

A) The difference between cash proceeds received and the carrying value of the asset.
B) The difference between cash proceeds received and the acquisition value of the asset.
C) The difference between cash proceeds received and the accumulated depreciation of the asset.
D) The difference between the book value of the asset and the carrying value of the asset.

Question 76

Following U.S. GAAP, companies commonly report the carrying value of property, plant, and equipment in total or by major class of long-term assets on the balance sheet.

Question 77

A company recognizes a loss on the income statement whenever it sells a fixed asset for less than its original cost.

Question 78

Following U.S. GAAP, companies are required to disclose the amount of depreciation expense for each major class of fixed assets.

Question 79

How is derecognition of an asset recognized in the financial statements?

Question 80

Which of the following statements about derecognition of an asset is true?

A) Derecognition requires that the firm remove the asset acquisition value from the balance sheet but not the related accumulated depreciation.
B) Derecognition increases or decreases the balance of the Allowance for Derecognition account.
C) Before a gain or loss on derecognition is recognized, the firm must always first recognize current period depreciation expense.
D) A loss on derecognition occurs when the amount of cash proceeds (if any) is less than the acquisition cost of the asset.