Question 1

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at

Accepted Answer

According to the accounting standards, when a nonmonetary asset is acquired in exchange for another nonmonetary asset and the exchange has commercial substance, the cost of the asset received should be recorded at the fair value of the asset given up. Furthermore, a gain or loss is recognized in the financial statements. Therefore, option B is the best choice. Options A, C, and D are incorrect because they do not fully reflect the accounting treatment required by the standards.

Question 2

A principal objection to the straight-line method of depreciation is that it

Accepted Answer

The straight-line method of depreciation allocates an equal amount of depreciation expense each year, ignoring variations in how much the asset is actually used over time.

Question 3

A method that excludes salvage value from the base for the depreciation calculation is

Accepted Answer

The double-declining balance method of depreciation does not consider the salvage value in calculating the annual depreciation expense. Instead, it applies a constant rate to the depreciable base (cost minus accumulated depreciation) of the asset each year.

Question 4

When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should be

Accepted Answer

The cost incurred to tear down the building is added to the cost of the land because it is necessary to prepare the land for its intended use. These costs are considered part of the land acquisition cost.

Question 5

The rate of return on total assets is computed by dividing

Accepted Answer

The rate of return on total assets is calculated by dividing the net income by the average total assets, as it shows how efficiently a company is utilizing its assets to generate profits. Dividing net sales by ending total assets or net income by ending total assets doesn't take into account the fluctuation in assets throughout the year, while using average total assets gives a more accurate picture of asset utilization over the entire year.

Question 6

A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2019. On December 31, 2021, the accumulated depreciation using the sum-of-year's digits method would be

Accepted Answer

The sum-of-the-years'-digits method accelerates depreciation, with the fraction for each year being the remaining life divided by the sum of the years' digits. Over four years, the sum is 1+2+3+4=10. For the first three years, the fractions are 4/10, 3/10, and 2/10, totaling 9/10 of the depreciable base (original cost less salvage value).

Question 7

For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is

Accepted Answer

Depreciation is considered a variable expense when it is directly tied to the level of activity or production, which is the case with the units of production method. This method calculates depreciation based on the actual usage or production levels of the asset, making it variable as it fluctuates with the level of production.

Question 8

As generally used in accounting, depreciation

Accepted Answer

Depreciation is the accounting process of allocating the cost of a long-lived tangible asset over its useful life to match the revenue it generates in each accounting period. It is not related to market value or intangible assets, and it is necessary for accurate financial reporting and tax purposes. Choice A is partially correct but too narrow, and choice C is incorrect.

Question 9

A plant site donated by a city to a company that plans to open a new factory should be recorded on the company's books at

Accepted Answer

The plant site should be recorded on the company's books at its fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. This ensures that the company's balance sheet reflects the economic value of the asset. Additionally, recording the site at its fair value ensures compliance with accounting standards such as IFRS 13, which require fair value measurement for certain types of assets.

Question 10

When boot is involved in an exchange having commercial substance

Accepted Answer

Gains or losses are recognized in their entirety in exchanges involving boot with commercial substance, as the transaction reflects a real change in the economic circumstances of the entity.

Question 11

An impairment of property, plant, or equipment has occurred if

Accepted Answer

An impairment of property, plant, or equipment occurs when the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying value of the asset. This means that the asset is not expected to generate sufficient cash flows in the future to cover its carrying value. Therefore, the carrying value of the asset needs to be reduced to its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Choices A, B, and C do not accurately describe an impairment of property, plant, or equipment.

Question 12

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Accepted Answer

The answer of Which of the following principles best describes...

Question 13

The asset turnover ratio is computed by dividing

Accepted Answer

The answer of The asset turnover ratio is computed by...

Question 14

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

Accepted Answer

Avoidable interest refers to the portion of the total interest cost that would not have been incurred if the expenditure for asset construction had not been made. This concept is used to determine how much interest cost can be capitalized as part of the cost of the fixed asset. It represents the interest that could have been avoided if the asset had not been constructed or if the construction had been completed earlier.

Question 15

Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2020. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at

Accepted Answer

The plant assets should be valued at the present value of the deferred payments, which is $120,000 less imputed interest. This reflects the cost of the asset at the time of purchase.

Question 16

When should a long-lived asset be tested for recoverability?

Accepted Answer

According to GAAP, long-lived assets should be tested for recoverability when events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. This is known as an impairment test and is required when there is a reasonable likelihood that the carrying value of the asset is no longer recoverable. The other options listed are not necessarily triggers for impairment testing.

Question 17

The theoretical justification for reporting depreciation expense is

Accepted Answer

Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period. This is based on the matching principle, which requires that expenses be matched with the revenues they help generate. By reporting depreciation expense, a company is properly matching the cost of using the asset with the revenue it helps generate, and providing an accurate picture of the company's financial performance.

Question 18

Assets that qualify for interest cost capitalization include

Accepted Answer

Only assets under construction for a company's own use qualify for interest cost capitalization. Assets that are ready for their intended use and assets that are not currently being used because of excess capacity do not qualify.

Question 19

When a closely held corporation issues preferred stock for land, the land should be recorded at the

Accepted Answer

The land should be recorded at its appraised value because it is being exchanged for preferred stock, not for par or book value. The appraised value reflects the fair market value of the land and is therefore the most accurate measurement of value.

Question 20

Property, plant, and equipment are conventionally presented n the balance sheet at

Accepted Answer

Property, plant, and equipment are conventionally presented on the balance sheet at acquisition cost less the depreciated portion thereof. This means that the cost of acquiring the asset is reduced by the amount of cumulative depreciation charged against it, resulting in its net book value. This convention provides a more accurate representation of the asset's current value on the balance sheet than using its original or replacement cost.

Quiz 9: Long-Term Assets I: Property, Plant, and Equipment