Question 1

Assets classified as property,plant,and equipment are reported at

Accepted Answer

Assets classified as property, plant, and equipment are reported at their original cost less accumulated depreciation since acquisition. This is in accordance with the historical cost principle, which states that assets should be recorded at the amount paid to acquire them.

Question 2

Which of the following accounts would not be reported in the Property,Plant,and Equipment section of a balance sheet?

Accepted Answer

Depreciation Expense-Buildings is not a physical asset and therefore would not be reported in the Property, Plant, and Equipment section of a balance sheet. The other options (Accumulated Depreciation-Buildings, Buildings, and Land) are all physical assets and would be reported in this section.

Question 3

If a company constructs an asset over a period of time and borrows money,the amount of interest incurred during construction on the borrowed money is

Accepted Answer

According to the capitalization of interest cost principle, interest incurred during construction on the borrowed money is capitalized as a part of the cost of the plant asset. This helps to reflect the true cost of construction in the financial statements. Amortization or reporting as interest expense on the income statement is not appropriate in this scenario. Depletion is not relevant to the current query as it's related to natural resources.

Question 4

Which of the following costs related to the purchase of production equipment incurred by Newark Company during 2017 would be considered a revenue expenditure?

Accepted Answer

A revenue expenditure is an expense that is incurred to maintain or support the day-to-day running of the business and does not result in the creation of an asset that will benefit the company for a long period of time. The installation costs for equipment (A), purchase price of the equipment less the cash discount (B), and transportation charges to deliver the equipment (D) are all capital expenditures as they result in the creation of an asset that will benefit the company for a long period of time. Repair and maintenance costs during equipment's first year of service (C) are a revenue expenditure as they are incurred to maintain the equipment and keep it running efficiently during its first year of service.

Question 5

When constructing assets,capitalized interest is based on

Accepted Answer

Capitalized interest is based on the average accumulated expenditures during the period, as this represents the actual amount of money that was borrowed and used to fund the construction of the asset. This method ensures that the interest expense is tied directly to the asset being constructed, rather than being allocated arbitrarily based on auditors' allowances or the timing of expenditures.

Question 6

Which statement is true concerning operating assets?

Accepted Answer

Operating assets are assets that are used over a period of time to generate revenue for the company. These assets are not held for resale; instead, they are used in the normal course of business operations. Examples of operating assets include plant, property and equipment, inventory, and accounts receivable. They are vital to a company's ongoing business operations and are not reported on the balance sheet as inventory or a short-term asset.

Question 7

Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for land,cost to clear the land,cost of paving,lighting for the parking lot,and landscaping for the parking lot.How should the company determine which costs should be recorded as Land Improvements and which cost should be recorded as Land?

Accepted Answer

The costs with an unlimited life (such as the purchase price for land and cost to clear the land) are capitalized as Land, while costs with a limited useful life (such as cost of paving, lighting, and landscaping for the parking lot) are capitalized as Land Improvements because they are subject to depreciation.

Question 8

Darrin Brown bought a pub.The purchase price was $695,000.An appraiser provided the following appraisal values: land,$320,000;building,$370,000;and equipment,$60,000.What cost should be allocated to the building?

Accepted Answer

The cost allocated to the building should be based on the proportion of the building's appraised value to the total appraised value of all assets. The total appraised value is $320,000 (land) + $370,000 (building) + $60,000 (equipment) = $750,000. The proportion for the building is $370,000 / $750,000. Applying this proportion to the purchase price: $695,000 * ($370,000 / $750,000) = $342,867.

Question 9

On December 1,2017,Xeon Company bought land and an accompanying warehouse from Yen Company for $800,000.The fair market values of the land and the building at the time of purchase were $700,000 and $300,000,respectively.How much of the purchase price should Xeon Company allocate to the land,and how much should be allocated to the building?

Accepted Answer

To allocate the purchase price to the land and building, we need to use the relative fair market values of each. 
The total fair market value of the land and building is $1,000,000 ($700,000 + $300,000). 
Therefore, the percentage of the fair market value that the land represents is: 
$700,000 / $1,000,000 = 0.7, or 70%. 
Similarly, the percentage of the fair market value that the building represents is: 
$300,000 / $1,000,000 = 0.3, or 30%. 
To allocate the purchase price of $800,000, we multiply each percentage by the purchase price: 
Land: 0.7 x $800,000 = $560,000 
Building: 0.3 x $800,000 = $240,000 
Therefore, the allocation of the purchase price is $560,000 to the land and $240,000 to the building.

Question 10

Shidan Apartments purchased an apartment building to rent to university students on November 18,2017.The following costs were incurred during 2017,before the tenants moved in: ?
$$\begin{array} { l r } 
\text { Purchase price of the building } & \$ 220,000 \
\text { Purchase price of the land } & 100,000 \
\text { Transfer taxes } & 10,000 \
\text { Interest incurred on the mortgage loan to purchase } & 4,000 \
\text { Attorney and real estate agent's fees } & 15,000 \
\text { Repave the parking lot } & 6,000
\end{array}$$ How much will Shidan Apartments record as an asset?

Accepted Answer

Shidan Apartments will record the total cost incurred before the tenants moved in as an asset. This includes the purchase price of $300,000, real estate agent fees of $6,000, legal fees of $3,000 and renovation costs of $42,000, for a total of $351,000. Therefore, the correct answer is C.

Question 11

On the balance sheet,the cumulative amount of plant and equipment already expensed is reported in an account called

Accepted Answer

Accumulated Depreciation is the account on the balance sheet that represents the cumulative amount of plant and equipment already expensed. It is usually paired with the fixed assets account and is subtracted from the original cost of the assets to determine the net book value. Amortization Expense and Depreciation Expense are income statement accounts that represent the current period's depreciation or amortization expense. Accumulated Amortization is not used for plant and equipment but for intangible assets.

Question 12

A building with an appraisal value of $250,000 is made available at an offer price of $180,000.The purchaser acquires the property for $35,000 in cash,a 90-day note payable for $65,000,and a mortgage amounting to $63,000.The cost basis recorded in the buyer's accounting records to recognize this purchase is

Accepted Answer

The cost basis recorded in the buyer's accounting records is the total amount paid for the property. In this case, the purchaser paid $35,000 in cash, a 90-day note payable for $65,000, and a mortgage of $63,000 which totals to $163,000. Therefore, the cost basis recorded in the buyer's accounting records is $163,000, not the appraisal value ($250,000) or the offer price ($180,000).

Question 13

Central National Bank recently acquired a new computer system.Which of the following costs associated with the computer should not be recorded in the Equipment account? ​

Accepted Answer

The replacement of several circuit boards damaged during installation should be recorded as a maintenance expense, not as part of the cost of the equipment. The other options listed are costs associated with the acquisition and installation of the computer system and should be recorded as part of the Equipment account.

Question 14

​Cranberry Corp.constructed equipment to manufacture a new line of home products during 2017.The average balance of accumulated expenditures on the equipment during September through December 2017 was $500,000.Construction started on September 1,2017,and was still in progress at the end of 2017.If Cranberry borrowed $500,000 for one year on September 1,2017,to finance the construction,and the interest rate on the construction loan was 6%,how much interest can Cranberry capitalize as part of the equipment cost for 2017?

Accepted Answer

Cranberry can capitalize interest on the $500,000 loan at a 6% annual rate for 4 months (September through December), which equals $10,000 (500,000 * 0.06 * 4/12).

Question 15

Oakland Corp.purchased land and a building for a combined cost of $500,000.Oakland must

Accepted Answer

The best choice is to allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair market values. This is because the cost of the land and building are likely to differ, and it is important to accurately reflect their values in the accounts. Allocating the cost based on fair market value is also required under generally accepted accounting principles (GAAP).

Question 16

McLaren Corp.incurred the following costs to acquire and prepare land during 2017 for a new parking lot: purchase price for land,$800,000;cost of paving,$40,000;and lighting for the parking lot,$20,000.How much should McLaren record in the Land Improvements account?

Accepted Answer

The Land Improvements account should only include costs that improve the land and have a finite life. The cost of paving and lighting for the parking lot meet these criteria and should be included in the Land Improvements account. Therefore, the total amount to be recorded in the Land Improvements account is $60,000. The purchase price for land is not recorded in the Land Improvements account, as it is considered part of the cost of the land itself.

Question 17

Depreciation is a process by which

Accepted Answer

Depreciation is the allocation of the cost of a long-term asset over the time periods during which the asset is expected to provide benefits. It does not involve replacement funds, determining market values or calculating the difference between current market value and historical cost.

Question 18

Greer Company purchased land for $256,000.Additional costs include a $15,300 fee to a broker,a survey fee of $2,400,$1,750 to construct a fence,and a legal fee of $8,500.What is the cost of the land?

Accepted Answer

The cost of the land includes the purchase price and all expenses necessary to get the land ready for its intended use. This includes the broker's fee, survey fee, and legal fee, but not the cost to construct a fence, as it is not a necessary cost to prepare the land for use. Therefore, the total cost is $256,000 (purchase price) + $15,300 (broker's fee) + $2,400 (survey fee) + $8,500 (legal fee) = $282,200.

Question 19

All of the following are included in the acquisition cost of property,plant,and equipment except

Accepted Answer

Maintenance costs are not included in the acquisition cost of property, plant, and equipment. The acquisition cost consists of the purchase price, transportation costs, taxes on the purchase, and installation costs. Maintenance costs are incurred after the asset has been acquired and are expensed as they occur.

Question 20

Interest is capitalized when incurred in connection with the construction of plant assets because

Accepted Answer

Interest incurred in connection with the construction of plant assets is considered a cost necessary to bring the asset to its intended use. Therefore, it is capitalized as part of the acquisition cost of the related plant asset rather than expensed in the period in which it is incurred. This treatment is in line with the matching principle, which requires that costs be matched with the revenues they help to generate.

Quiz 8: Operating Assets: Property, Plant, and Equipment, and Intangibles