Chapter 10 Property, Plant

8/10/2019 Chapter 10 Property, Plant

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Chapter 10--Property, Plant, and Equipment: Acquisition andDisposal

Student: ___________________________________________________________________________

1. Alternative terms for property, plant, and equipment include all of the following except A. plant assetsB. fixed assetsC. long-term assetsD. operational assets

. All of the following would !e classified as property, plant, and equipment except A. office !uildingsB. machinery owned for stand!y purposesC. equipment held for resaleD. equipment used in the operation of the !usiness

". Advantages of using historical cost as the !asis of valuation of property, plant, and equipment include all ofthe following except A. it is a very relia!le valuationB. gains and losses from holding the asset are recogni#ed in the period of value changeC. cost equals the fair mar$et value at the date of acquisitionD. it is consistent with the valuation of other assets, lia!ilities, and stoc$holders% equity

&. 'hich one of the following types of assets should not !e classified as property, plant, and equipment(A. leasehold improvementsB. fully-depreciated !uilding )still in use*C. idle land and !uildingsD. long-lived tangi!le assets

+. he oth Company incurred the following costs in the acquisition of a plant asset

/nvoice price 0 ,12urchase discount lost &3reight-in "+/nstallation 1Cost of trial runs 1+


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9. andal%s ifles purchased some equipment !y issuing a three-year 57 note for 06, when the mar$et ratefor an o!ligation of this nature was 67. he interest is paya!le annually. Actuarial information for three periodsfollows

57 673uture amount of 1 1.191 15 1. +9413uture amount of annuity of 1 ".16"5 ". &5&2resent value of 1 .6"9519 .49"6"2resent value of annuity of 1 .54" 1 .+44 94

At the date of purchase, what amount should !e de!ited to 8quipment( A. 04,+64.55B. 05,415.95C. 05,"+ .55D. 05,5"".4

1 . According to ;AA2 , interest must !e capitali#ed for

A. assets that are ready for useB. assets constructed for a firm%s own useC. assets that are not !eing used in the earning activities of the companyD. inventories that are produced in large quantities on a repetitive !asis

11. All of the following ma


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1&. emy purchases a new machine !y issuing an 016, three-year note. he company will pay off theo!ligation !y paying 05, at the end of each year. he mar$et rate for o!ligations of this type is 67. hepresent value of an annuity at 67 for three periods is .+44 94. he machine will !e recorded at a cost ofA. 0 5, .B. 0 9,&5 .+6C. 01+,&5 .+6D. 016, .

1+. he president of eindeer Corporation donated a !uilding to =onday Corporation. he !uilding had anoriginal cost of 0+ , , a !oo$ value of 014+, , and a fair mar$et value of 0 + , . o record thisdonation, =onday willA. ma$e a memorandum entryB. de!it Building for 014+, and credit ;ain for 014+,C. de!it Building for 0 + , and credit ;ain for 0 + ,D. de!it Building for 0+ , and credit ;ain for 0+ ,

15. During 11, u!y Corporation purchased three pieces of equipment at an auction for the lump sum of0 , . /t cost u!y 0 , to have the equipment delivered and installed. he equipment was appraised atthe following values

=achine 1 01 ,=achine 1 +,=achine " 4+,

=achine should !e recorded on u!y%s !oo$s at A. 01 +,B. 01 ,C. 0 44,D. 0 4 ,

14. egal recently purchased a !uilding and the tract of land on which it is located. egal plans to ra#e the!uilding immediately and to erect a new !uilding on the site. he value of the original !uilding should !eA. written off as an extraordinary loss in the year the !uilding is ra#edB. capitali#ed as part of the cost of the landC. depreciated over the period from the date of acquisition to the date that the !uilding is to !e ra#edD. capitali#ed as part of the cost of the new !uilding


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16. he de!it for a sales tax paid on the purchase of a plant asset would !e included inA. the plant asset accountB. a separate deferred charge accountC. =iscellaneous ax 8xpenseD. Accumulated Depreciation-=achinery

19. >n 3e!ruary 1, 1 , ummel Corporation purchased a parcel of land as a factory site for 0+ , . An old!uilding on the property was demolished, and construction !egan on a new !uilding that was completed onDecem!er 1 , 1 . Costs incurred during this period are listed !elow

Demolition of old !uilding 0 1 ,Architect%s fees ,?egal fees for title investigation and purchase contract ",Construction costs 1, ,

)@alvaged materials resulting from demolition were sold for 01+, .*

ummel should record the cost of the land and the cost of the new !uilding, respectively, as A. 0&6, and 01, ,B. 0+ , and 01, ,C. 05", and 01, " ,D. 05", and 01, 14,

. he ipple Corporation acquired land, !uildings, and equipment from a !an$rupt company at a lump-sumprice of 0+ , . At the time of acquisition, ipple paid 0 , to have the assets appraised. he appraisaldisclosed the following values

?and 01 ,Buildings ,8quipment " ,

'hat costs should !e assigned to the !uildings( A. 0155,554B. 014","""C. 0 ,D. 0 5 ,

1. >n =ay 4, 1 , a!ie Corporation purchased for 0&+ , a tract of land on which was located awarehouse and an office !uilding. he following data were collected concerning the property

Current endor%s Assessed >riginal aluation Cost?and 01 , 0 4 ,'arehouse 6 , 6 ,>ffice !uilding , 1+ ,


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0& , 0" ,

'hat are the appropriate amounts that a!ie should record for the land, warehouse, and office !uilding, respectively( A. land, 0 4 , warehouse, 06 , office !uilding, 01+ ,B. land, 01 , warehouse, 06 , office !uilding, 0 ,C. land, 01 , warehouse, 06 , office !uilding, 0 4 ,D. land, 011 ,+ warehouse, 09 , office !uilding, 0 &4,+

. >n April 1, 1 , icher Corporation purchased a new machine on a deferred payment !asis. A downpayment of 0+, was made and 1 monthly installments of 01&, each are to !e made !eginning on =ay 1,1 . he cash equivalent price of the machine was 01" , . icher incurred and paid installation costs

amounting to 05, . he amount to !e capitali#ed as the cost of the machine isA. 01" ,B. 01"5,C. 01& ,D. 01&+,

". 8arly in 1 , oper, /nc. purchased certain plant assets under a deferred payment contract. he agreementwas to pay 0+ , at year-end for each of the next three years. he plant assets should !e valued atA. present value of a 0+ , annuity for three years discounted at the !an$ prime interest rateB. 01+ ,C. present value of a 0+ , annuity for three years discounted at the mar$et interest rateD. 01+ , plus imputed interest

&. A plant site donated !y a city to upp Company, which plans to open a new factory, should !e recorded onupp%s !oo$s atA. the nominal cost of ta$ing title to itB. its fair mar$et valueC. #ero value, !ut footnotedD. the value assigned to it !y the company%s directors

+. >n August 6, 1 , uggle Drilling @ervices purchased a machine with a contract price of 0& , andcash terms of 1 , n " . he company paid 06, in transportation costs and 06, for installation. @ales

taxes of 0 , were paid on the invoice amount. he machine should !e recorded as a plant asset in theamount ofA. 0& ,B. 0& ,C. 0& 6,D. 0&" ,


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"1. ust, /nc. exchanged a truc$ that cost 0" , )now + 7 depreciated* for equipment with an appraisedvalue of 0 +, . ust paid !oot of 05, . ust should record the equipment atA. 0 +,B. 0" ,C. 0 1,D. 0"1,

" . =acey Co. exchanged a piece of equipment that had cost 0& , )now 4+7 depreciated* for a truc$ with acurrent appraised value of 01", . =acey Co. gave the other company the piece of equipment and 06, .=acey Co. should recordA. a 0+, lossB. the truc$ at 016,C. a gain of 011,D. the truc$ at 0 1,

"". 'hen exchanging nonmonetary assetsA. !oot must !e associated with the transaction in order to recogni#e a gain or lossB. recogni#ed gain or loss can occur depending on the fair value of the asset surrendered and the fair value ofthe asset receivedC. a loss can !e recogni#ed only when the fair value of the asset received plus !oot is greater than the !oo$value of the asset surrenderedD. recogni#ed gain or loss can occur depending on the !oo$ value of the asset surrendered and the fair value ofthe asset surrendered

"&. 'hen !oot is involved in the exchange of nonmonetary productive assets, normallyA. the entire gain or loss on the exchange should !e recogni#edB. no gain or loss on the exchange may !e recogni#edC. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is receivedD. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is given

"+. alley Company exchanged a piece of equipment with a fair mar$et value of 0 , and a !oo$ value of0 +, for a truc$ with a fair mar$et value of 015, and !oot of 0&, . alley Company should record thetruc$ at a cost ofA. 01+, and a recogni#ed loss of 0+,B. 015, and a recogni#ed loss of 0+,C. 0 , and a recogni#ed loss of 0+,D. 0 , and a recogni#ed loss of 01,


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"5. ichmond, /nc. exchanged a piece of equipment with an original cost of 06 , , accumulated depreciationto date of 0& , , and a fair value of 0&5, for a similar piece of equipment. he newly acquired equipmenthad a !oo$ value of 0& , and a fair mar$et value of 0&5, . ichmond should record the equipmentacquired atA. 0 B. 0& ,C. 0& ,D. 0&5,

"4. >n anuary &, 1 , ac$ Company traded in a used !ulldo#er with a carrying amount of 05+, for a new!ulldo#er having a list price of 01 , and paid cash difference of 0& , to the dealer. he used !ulldo#erhad a fair value of 04+, on the date of exchange. At what amount should the new !ulldo#er !e recorded onac$%s !oo$s(A. 0 & ,B. 01 +,C. 011+,D. 01 ,

"6. >n =ay 1+, 1 , etread Company acquired a new for$lift in exchange for an old for$lift that it hadacquired in . he old for$lift was purchased for 0 , and had a !oo$ value of 0+, . >n the date of theexchange, the old for$lift had a mar$et value of 05, . /n addition, etread paid 016, cash for the newfor$lift, which had a list price of 0 +, . At what amount should etread record the new for$lift for financialaccounting purposes(A. 0 ",B. 0 &,C. 0 ,D. 0 +,

"9. 2erformance @tage Company had a professional contract with Actor E1 that was recorded in its accountingrecords at 0" , . ohnson Company had a contract with Actor E that was recorded in its accounting recordsat 0 6 , . 2erformance traded Actor E1 to ohnson for Actor E !y exchanging the actors% contracts. he fairvalue of each contract was 0" , . 'hat amount should !e shown in the accounting records after theexchange of actor contracts(

2erformance ohnson/. 0 6 , 0 6 ,//. 0 6 , 0" ,///. 0" , 0 6 ,/ . 0" , 0" ,

A. /B. //C. ///D. /


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he exchange of land was made, and !ased on the difference in appraised fair value, am!am paid 0+ , cash to 3argo.

efer to 8xhi!it 1 -1. After the exchange, 3argo should record its newly acquired land on its !oo$s at A. 0" ,B. 0& ,C. 0&+ ,

D. 0+ ,

&4. 'hich one of the following statements is true(A. /f a plant asset is self-constructed for less than it would cost to purchase, a profit should !e recorded upon thecompletion of the construction.B. 'hen property, plant, or equipment is acquired through donation, a gain is credited.C. Development stage enterprises need not report losses !efore sales are made.D. /nterest cannot !e capitali#ed when an asset is su!stantially complete and ready for its intended use.

&6. All of the following are arguments in favor of including only the incremental fixed overhead costs in thecost of a self-constructed asset, except that theA. cost of the asset is the additional cost incurred to produce itB. overhead would !e incurred whether or not the construction too$ placeC. asset cost will more closely approximate the cost of a purchased assetD. decision to construct the asset should !e !ased on the total incremental cost and not include allocated fixedoverhead

&9. According to ;AA2 , interest cost incurred to finance construction of an asset must !e capitali#ed in whichof the following situations(A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive !asisB. when an asset is used in other than the earning activities of the firmC. when an asset is ready for its intended useD. when an asset is !eing constructed for a firm%s own use

+ . >n anuary 1, 1 , ong Company signed a contract to have o#y Associates construct a manufacturingfacility at a cost of 01&, , . /t was estimated that it would ta$e three years to complete the pro


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+1. 'hich of the following costs incurred su!sequent to the acquisition of a machine would !e appropriatelyaccounted for !y de!iting the accumulated depreciation account related to the machine(A. the cost of cleaning and lu!ricating the machineB. the cost of replacing the motor on the machine when the cost of the original motor is not $nownC. the cost of moving the machine to another manufacturing plantD. the cost of a new attachment to the machine that provides for more output per unit of time

+ . At the end of the year, any !alance in Allowance for epairs should !eA. closed to epairs 8xpenseB. reported as a deferred creditC. closed to etained 8arningsD. reported as a contra account to the asset

+". Gnder ;AA2, which one of the following types of costs should not !e capitali#ed(A. rearrangementsB. routine maintenanceC. replacementsD. additions

+&. An improvement made to a machine increased its production capacity !y +7 without extending themachine%s useful life. he cost of the improvement should !eA. recorded as an expenseB. de!ited to Accumulated DepreciationC. capitali#ed in the machine accountD. allocated !etween Accumulated Depreciation and the machine account

++. 'hich of the following events is most appropriately recorded as a reduction to accumulated depreciation(A. an addition that increases the anticipated !enefits of the old assetB. an improvement that extends an asset%s useful lifeC. an improvement that increases the asset%s expected !enefits !eyond that originally expectedD. a replacement of a !etter asset for the one currently used

+5. he sale of a deprecia!le asset resulting in a gain indicates that the proceeds from the sale wereA. less than current mar$et valueB. greater than costC. greater than !oo$ valueD. less than !oo$ value


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+4. >n anuary 1, 1 , ingo purchased, for 01 , , equipment having a useful life of eight years and anestimated salvage value of 0&, . ingo has recorded monthly depreciation on the equipment using thestraight-line method. >n =arch 1, 1+, the equipment was sold for 0&5, . As a result of this sale, ingoshould recogni#eA. no gain or lossB. an 06, gainC. an 06, lossD. a 01 , gain

+6. he othchild Company purchased a machine on >cto!er 1, 1 , for 06 , . At the time of acquisition,the machine was estimated to have a useful life of five years and an estimated salvage value of 0+, .othchild has recorded monthly depreciation using the straight-line method. >n April 1, 1 , the machine wassold for 0+ , . 'hat should !e the loss recogni#ed from the sale of the machine(A. 0 B. 0 ,+C. 0+,D. 04,+

+9. equired disclosure for property, plant, and equipment in the financial statements is !ased uponA. age and depreciation methodB. age and natureC. nature and functionD. function and depreciation method

5 . /n 1 , ;olf >il Company incurred costs of 04 million drilling oil wells. hirty percent of the drillingresulted in oil !eing found. he rest of the drilling was unsuccessful. /f ;olf uses the successful-efforts methodof accounting, the oil and gas properties will !e valued on the Decem!er "1, 1 !alance sheet atA. 04, ,B. 0&,9 ,C. 0&, ,D. 0 ,1 ,

51. wo alternative methods of accounting for the cost of oil and gas properties have !een widely used. hemethod that capitali#es all costs associated with all wells is theA. successful-efforts methodB. full-cost methodC. varia!le-cost methodD. specific-cost method


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5 . Concerning current accounting for oil and gas properties, which statement is true(A. he successful-efforts method must !e used.B. he reserve-recognition method must !e used.C. 8ither the successful-efforts method or the full-cost method may !e used.D. he full-cost method must !e used.

5". he costs of drilling an unsuccessful well are expensed underA. the successful-efforts methodB. the full-cost methodC. !oth the successful-efforts method and the full-cost methodD. neither the successful-efforts method nor the full-cost method

5&. Gnder /3 @, which of the following must !e expensed(A. maintenance onlyB. repairs onlyC. rearrangements onlyD. maintenance, repairs, and rearrangements

5+. A ma


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59. During 1 , edford Company acquired a new piece of equipment for its manufacturing process. /n orderto purchase the equipment, edford made a down payment of 0+ , and issued a 0 , five-year, 47note. he annual payment of principal and interest was to !e 0&6,446. he mar$et rate of interest for o!ligationsof this $ind is 1 7. he present value factor for an ordinary annuity of + years at 1 7 is ".5 &445.

Required:

a. 2repare the


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41. @everal expenditures are listed !elow

?and Building 8quipment >ther a. Construction costs on !uilding HHHHHH J HHHHHH HHHHHH !. Compensation for in


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Required:

Compute the amount that should !e charged to the asset account.

4". =irror Corp. has agreed to expand its operations !y opening a manufacturing plant in Burns, exas. /nreturn, Burns will donate an a!andoned !uilding and the + acres on which it sits to =irror. he land originallycost 01, , and the !uilding 0", , . he !uilding%s current !oo$ value is 0"6 , , and currentappraisals are land 05, , and !uilding 0 ,5 , . =irror has also agreed to provide 1


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4+. 2ops Corp. has agreed to exchange an old computer system for a van from /ncline, /nc. /n addition, /nclinewill pay 2ops 0 , . he computer originally cost 2ops 0 +, and its current !oo$ value is 01&, . hevan%s original cost was 0" , and its accumulated depreciation is 01 , . he appraised value of thecomputer is 01+, , and the appraised value of the van is 01", .

Required:

2repare the


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44. @ally Company is exchanging a unique machine for a similar machine from 'illiam, /nc. @ally%s equipmentoriginally cost 0" , and has a !oo$ value of 014+, . 'illiam%s machine cost 0 + , and has a !oo$value of 01+ , . :o cash will !e exchanged, and the two machines will continue to perform the samefunctions for each company.

Required:

2repare the


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49. =ar$ Company exchanged a worn-out tractor that had cost 0 , and was half depreciated for a newtractor with a fair value of 01 , . =ar$ paid an additional 0 ,+ cash. he transaction lac$ed commercialsu!stance.

Required:

Compute the amount at which =ar$ should record the new tractor.

6 . Assuming that the effects of interest capitali#ation are material, calculate the amount of interest costs to !e

capitali#ed !y =arcus Corporation in 1 in relation to the following events

a. >n anuary 1, =arcus !egan construction for a new storage !uilding for its own use. 8xpenditures incurred evenly throughout the yeartotaled 09 , . =arcus !orrowed 01, , specifically for construction of the storage !uilding at an annual interest rate of 57.

!. /nventories costing 0 , were routinely manufactured during the year. =arcus !orrowed 0 , at 67 to finance inventory-related costs.

c. >n @eptem!er 1, =arcus !egan construction of a custom-designed machine to the specifications of a customer. As of Decem!er "1,0 , of materials, la!or, and overhead have !een assigned to the machine. hose costs were incurred evenly throughout the period@eptem!er 1 through Decem!er "1. o finance construction, 0 " , was !orrowed at a 97 interest rate.


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6". he Feavy 8quipment Company decided to replace a gasoline engine with a diesel engine in one of itscranes. he new engine cost 06, , which Feavy paid in cash. he old engine is discarded at no cost to Feavy8quipment.

Required:

a. 2repare the required


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6+. >n =ay 1, 1 , Argus =anufacturing Co. acquired a machine for 016 , . he machine was depreciatedmonthly using the straight-line method with an estimated life of ten years and no salvage value. >n Decem!er1, 14, the machine was sold for 0& , .

Required:

Compute the amount of gain or loss on the sale of the machine, and prepare the


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66. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,ranging from routine repairs to ma


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91. Discuss when the interest capitali#ation period !egins and ends for assets constructed for a company%s ownuse.

9 . Descri!e the /3 @ treatment of increases in the mar$et value of property, plant, and equipment held duringthe year. Compare that treatment to G.@. ;AA2 requirements.


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Chapter 1 --2roperty, 2lant, and 8quipment Acquisition andDisposal Ley

1. Alternative terms for property, plant, and equipment include all of the following except A. plant assetsB. fixed assetsC long-term assetsD. operational assets

. All of the following would !e classified as property, plant, and equipment except A. office !uildings

B. machinery owned for stand!y purposesC equipment held for resaleD. equipment used in the operation of the !usiness

". Advantages of using historical cost as the !asis of valuation of property, plant, and equipment include all ofthe following except A. it is a very relia!le valuation! gains and losses from holding the asset are recogni#ed in the period of value changeC. cost equals the fair mar$et value at the date of acquisition

D. it is consistent with the valuation of other assets, lia!ilities, and stoc$holders% equity

&. 'hich one of the following types of assets should not !e classified as property, plant, and equipment(A. leasehold improvementsB. fully-depreciated !uilding )still in use*C idle land and !uildingsD. long-lived tangi!le assets

+. he oth Company incurred the following costs in the acquisition of a plant asset

/nvoice price 0 ,12urchase discount lost &3reight-in "+/nstallation 1Cost of trial runs 1+


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'hat is the cost of the plant asset( A. 0 ,4! 0 ,55C. 0 ,++D. 0 ,1

5. odrigue# Company made the following payments related to a land acquisition

2urchase price 05,2ast due taxes +itle search 1+Cost of ra#ing old !uilding "/nterest )incurred after productive operations had !egun* 152roceeds from salvage of old !uilding 6+

he recorded cost of the land should !e

A. 05,&+B. 05,+6+C. 05,4&+D 05,65+

4. 'hich one of the following types of costs should not !e included in the cost of a !uilding(A. costs of remodeling and reconditioningB. excavation costsC. unanticipated costs resulting from the condition of the landD unanticipated construction costs, such as stri$e or fire losses

6. ichards Corporation purchased some equipment !y issuing a 0 , non-interest-!earing, four-year notewhen interest rates were 67. Actuarial information for 67 and four periods follows

3uture amount of 1 1."52resent value of 1 .4"+

/n the entry to record this purchase, there would !e a A. 0 , de!it to 8quipmentB. 0+, 99.& credit to Discount on :otes 2aya!leC. 0 4, 9.46 credit to :otes 2aya!leD 01&,4 .5 de!it to 8quipment


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9. andal%s ifles purchased some equipment !y issuing a three-year 57 note for 06, when the mar$et ratefor an o!ligation of this nature was 67. he interest is paya!le annually. Actuarial information for three periodsfollows

57 673uture amount of 1 1.191 15 1. +9413uture amount of annuity of 1 ".16"5 ". &5&2resent value of 1 .6"9519 .49"6"2resent value of annuity of 1 .54" 1 .+44 94

At the date of purchase, what amount should !e de!ited to 8quipment( A 04,+64.55B. 05,415.95C. 05,"+ .55D. 05,5"".4

1 . According to ;AA2 , interest must !e capitali#ed for

A. assets that are ready for use! assets constructed for a firm%s own useC. assets that are not !eing used in the earning activities of the companyD. inventories that are produced in large quantities on a repetitive !asis

11. All of the following ma


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0& , 0" ,

'hat are the appropriate amounts that a!ie should record for the land, warehouse, and office !uilding, respectively( A. land, 0 4 , warehouse, 06 , office !uilding, 01+ ,B. land, 01 , warehouse, 06 , office !uilding, 0 ,C. land, 01 , warehouse, 06 , office !uilding, 0 4 ,D land, 011 ,+ warehouse, 09 , office !uilding, 0 &4,+

. >n April 1, 1 , icher Corporation purchased a new machine on a deferred payment !asis. A downpayment of 0+, was made and 1 monthly installments of 01&, each are to !e made !eginning on =ay 1,1 . he cash equivalent price of the machine was 01" , . icher incurred and paid installation costs

amounting to 05, . he amount to !e capitali#ed as the cost of the machine isA. 01" ,! 01"5,C. 01& ,D. 01&+,

". 8arly in 1 , oper, /nc. purchased certain plant assets under a deferred payment contract. he agreementwas to pay 0+ , at year-end for each of the next three years. he plant assets should !e valued atA present value of a 0+ , annuity for three years discounted at the !an$ prime interest rateB. 01+ ,C. present value of a 0+ , annuity for three years discounted at the mar$et interest rateD. 01+ , plus imputed interest

&. A plant site donated !y a city to upp Company, which plans to open a new factory, should !e recorded onupp%s !oo$s atA. the nominal cost of ta$ing title to it! its fair mar$et valueC. #ero value, !ut footnotedD. the value assigned to it !y the company%s directors

+. >n August 6, 1 , uggle Drilling @ervices purchased a machine with a contract price of 0& , andcash terms of 1 , n " . he company paid 06, in transportation costs and 06, for installation. @ales

taxes of 0 , were paid on the invoice amount. he machine should !e recorded as a plant asset in theamount ofA. 0& ,B. 0& ,C. 0& 6,D 0&" ,


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5. 'hich is the !est definition of start-up costs(A. all activities associated with organi#ing a new entityB. organi#ation costsC one-time activities for opening a new facility, introducing a new product or service, conducting !usiness in anew territory, conducting !usiness with a new class of customer, initiating a new process in an existing facility,or starting some new operationD. activities related to routine ongoing efforts to refine or otherwise improve the qualities of an existingproduct, service, process, or facility

4. 2roperty acquired through donation is recorded atA. its !oo$ value! its fair mar$et valueC. its costD. #ero

6. 'hen exchanging nonmonetary assets with another company, the preferred approach is to value thetransaction !ased upon fair value ofA. the asset surrendered or asset received whichever is most evidentB. the asset surrendered unless the fair value of the asset received is easier to determineC. the asset surrendered except for certain conditionsD the asset surrendered

9. o!ards @ervices exchanged an asset with a cost of 0 &, )now & 7 depreciated* for a nonmonetary assetworth 01 , . o!ards received 0 , !oot. /n the entry to record this exchange, o!ards should recordA. a 01 , lossB. a 0& gainC. no gain or lossD a 0& loss

" . enault =arina exchanged a !oat with a cost of 06 , )now 4+7 depreciated* for another !oat with acurrent fair value of 0 4, . :o !oot was paid or received. he new !oat will perform the exact same functionas the old !oat. enault should record the new !oat atA. 0 ,! 0 4,C. 0 4,D. 0


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"5. ichmond, /nc. exchanged a piece of equipment with an original cost of 06 , , accumulated depreciationto date of 0& , , and a fair value of 0&5, for a similar piece of equipment. he newly acquired equipmenthad a !oo$ value of 0& , and a fair mar$et value of 0&5, . ichmond should record the equipmentacquired atA. 0 B. 0& ,C 0& ,D. 0&5,

"4. >n anuary &, 1 , ac$ Company traded in a used !ulldo#er with a carrying amount of 05+, for a new!ulldo#er having a list price of 01 , and paid cash difference of 0& , to the dealer. he used !ulldo#erhad a fair value of 04+, on the date of exchange. At what amount should the new !ulldo#er !e recorded onac$%s !oo$s(A. 0 & ,! 01 +,C. 011+,D. 01 ,

"6. >n =ay 1+, 1 , etread Company acquired a new for$lift in exchange for an old for$lift that it hadacquired in . he old for$lift was purchased for 0 , and had a !oo$ value of 0+, . >n the date of theexchange, the old for$lift had a mar$et value of 05, . /n addition, etread paid 016, cash for the newfor$lift, which had a list price of 0 +, . At what amount should etread record the new for$lift for financialaccounting purposes(A 0 ",B. 0 &,C. 0 ,D. 0 +,

"9. 2erformance @tage Company had a professional contract with Actor E1 that was recorded in its accountingrecords at 0" , . ohnson Company had a contract with Actor E that was recorded in its accounting recordsat 0 6 , . 2erformance traded Actor E1 to ohnson for Actor E !y exchanging the actors% contracts. he fairvalue of each contract was 0" , . 'hat amount should !e shown in the accounting records after theexchange of actor contracts(

2erformance ohnson/. 0 6 , 0 6 ,//. 0 6 , 0" ,///. 0" , 0 6 ,/ . 0" , 0" ,

A. /B. //C. ///D /


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& . upert Company exchanged one !usiness automo!ile for another !usiness automo!ile. he old automo!ilehad an original cost of 0& , , an undepreciated cost of 015, , and a mar$et value of 0 1, whenexchanged. /n addition, upert paid 09, cash for the replacement automo!ile. he list price of thereplacement automo!ile was 0"+, . he replacement will help generate significantly greater cash flows in the!usiness. At what amount should the replacement automo!ile !e recorded for financial accounting purposes(A. 0 &,B. 0" ,C 0"",D. 0"+,

&1. e!!y Company received 05 , in cash and used equipment with a fair value of 01& , from 3arleyCorporation for e!!y%s existing equipment, which had a fair value of 0 , and an undepreciated cost of014 , recorded on its !oo$s. he transaction was underta$en !ecause e!!y was revising its mar$et strategyand planned to reduce the use of this type of equipment in its production. Fow much gain should e!!yrecogni#e on this exchange, and at what amount should the acquired equipment !e recorded, respectively(A. and 01+ ,B. 0 ", and 01&",C. 0 , and 014 ,D 0" , and 01& ,

& . >n August 1, 1 , o!!ins traded in an old plant asset for a newer model that would !e more productiveand efficient. Data relative to the old and new plant assets follow

>ld 2lant Asset>riginal cost 01 ,Accumulated depreciation of August 1, 1 4,3air value , :ew 2lant Asset?ist price 1",

A total of 01 ,+ cash was given in the trade. 'hat should !e the cost of the new plant asset for financial accounting purposes( A 01 ,B. 01 ,+C. 01",+D. 01",

&". ogaine Company exchanged inventory items that cost 0&4, and normally sold for 05+, for a newdelivery truc$ with a list price of 054, . he delivery truc$ should !e recorded on ogaine%s !oo$s atA. 0&4,! 05+,C. 054,D. 06 ,


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&&.Exhibit 10-1wo construction companies, 3argo and am!am, are in the construction !usiness. 8ach owns a tract of land!eing held for development, !ut each company !elieves that the other%s land is !etter suited to enhance thesuccess of each planned development. Accordingly, they agree to exchange their land and have the followinginformation

3argo%s am!am%s

?and ?andCost and !oo$ value 0& , 0 + ,3air value !ased upon appraisal 0+ , 0&+ ,


efer to 8xhi!it 1 -1. 3or financial reporting purposes, 3argo should recogni#e a gain on this exchange in the amount of A. 0 B. 0 + ,C 01 ,D. 0 ,

&+.Exhibit 10-1wo construction companies, 3argo and am!am, are in the construction !usiness. 8ach owns a tract of land!eing held for development, !ut each company !elieves that the other%s land is !etter suited to enhance thesuccess of each planned development. Accordingly, they agree to exchange their land and have the followinginformation

3argo%s am!am%s ?and ?andCost and !oo$ value 0& , 0 + ,3air value !ased upon appraisal 0+ , 0&+ ,


efer to 8xhi!it 1 -1. 3or financial reporting purposes, am!am should recogni#e a gain on this exchange in the amount of A. 0 B. 0 + ,C. 01 ,D 0 ,

&5.Exhibit 10-1wo construction companies, 3argo and am!am, are in the construction !usiness. 8ach owns a tract of land!eing held for development, !ut each company !elieves that the other%s land is !etter suited to enhance thesuccess of each planned development. Accordingly, they agree to exchange their land and have the followinginformation

3argo%s am!am%s ?and ?andCost and !oo$ value 0& , 0 + ,3air value !ased upon appraisal 0+ , 0&+ ,


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efer to 8xhi!it 1 -1. After the exchange, 3argo should record its newly acquired land on its !oo$s at A. 0" ,B. 0& ,C 0&+ ,

D. 0+ ,

&4. 'hich one of the following statements is true(A. /f a plant asset is self-constructed for less than it would cost to purchase, a profit should !e recorded upon thecompletion of the construction.B. 'hen property, plant, or equipment is acquired through donation, a gain is credited.C. Development stage enterprises need not report losses !efore sales are made.D /nterest cannot !e capitali#ed when an asset is su!stantially complete and ready for its intended use.

&6. All of the following are arguments in favor of including only the incremental fixed overhead costs in thecost of a self-constructed asset, except that theA. cost of the asset is the additional cost incurred to produce itB. overhead would !e incurred whether or not the construction too$ placeC asset cost will more closely approximate the cost of a purchased assetD. decision to construct the asset should !e !ased on the total incremental cost and not include allocated fixedoverhead

&9. According to ;AA2 , interest cost incurred to finance construction of an asset must !e capitali#ed in whichof the following situations(A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive !asisB. when an asset is used in other than the earning activities of the firmC. when an asset is ready for its intended useD when an asset is !eing constructed for a firm%s own use

+ . >n anuary 1, 1 , ong Company signed a contract to have o#y Associates construct a manufacturingfacility at a cost of 01&, , . /t was estimated that it would ta$e three years to complete the pro


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+1. 'hich of the following costs incurred su!sequent to the acquisition of a machine would !e appropriatelyaccounted for !y de!iting the accumulated depreciation account related to the machine(A. the cost of cleaning and lu!ricating the machine! the cost of replacing the motor on the machine when the cost of the original motor is not $nownC. the cost of moving the machine to another manufacturing plantD. the cost of a new attachment to the machine that provides for more output per unit of time

+ . At the end of the year, any !alance in Allowance for epairs should !eA closed to epairs 8xpenseB. reported as a deferred creditC. closed to etained 8arningsD. reported as a contra account to the asset

+". Gnder ;AA2, which one of the following types of costs should not !e capitali#ed(A. rearrangements! routine maintenanceC. replacementsD. additions

+&. An improvement made to a machine increased its production capacity !y +7 without extending themachine%s useful life. he cost of the improvement should !eA. recorded as an expenseB. de!ited to Accumulated DepreciationC capitali#ed in the machine accountD. allocated !etween Accumulated Depreciation and the machine account

++. 'hich of the following events is most appropriately recorded as a reduction to accumulated depreciation(A. an addition that increases the anticipated !enefits of the old asset! an improvement that extends an asset%s useful lifeC. an improvement that increases the asset%s expected !enefits !eyond that originally expectedD. a replacement of a !etter asset for the one currently used

+5. he sale of a deprecia!le asset resulting in a gain indicates that the proceeds from the sale wereA. less than current mar$et valueB. greater than costC greater than !oo$ valueD. less than !oo$ value


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+4. >n anuary 1, 1 , ingo purchased, for 01 , , equipment having a useful life of eight years and anestimated salvage value of 0&, . ingo has recorded monthly depreciation on the equipment using thestraight-line method. >n =arch 1, 1+, the equipment was sold for 0&5, . As a result of this sale, ingoshould recogni#eA. no gain or loss! an 06, gainC. an 06, lossD. a 01 , gain

+6. he othchild Company purchased a machine on >cto!er 1, 1 , for 06 , . At the time of acquisition,the machine was estimated to have a useful life of five years and an estimated salvage value of 0+, .othchild has recorded monthly depreciation using the straight-line method. >n April 1, 1 , the machine wassold for 0+ , . 'hat should !e the loss recogni#ed from the sale of the machine(A. 0 B. 0 ,+C. 0+,D 04,+

+9. equired disclosure for property, plant, and equipment in the financial statements is !ased uponA. age and depreciation methodB. age and natureC nature and functionD. function and depreciation method

5 . /n 1 , ;olf >il Company incurred costs of 04 million drilling oil wells. hirty percent of the drillingresulted in oil !eing found. he rest of the drilling was unsuccessful. /f ;olf uses the successful-efforts methodof accounting, the oil and gas properties will !e valued on the Decem!er "1, 1 !alance sheet atA. 04, ,B. 0&,9 ,C. 0&, ,D 0 ,1 ,

51. wo alternative methods of accounting for the cost of oil and gas properties have !een widely used. hemethod that capitali#es all costs associated with all wells is theA. successful-efforts method! full-cost methodC. varia!le-cost methodD. specific-cost method


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Required:

3or each of the costs identified !elow, indicate the type of account in which the cost should !e recorded !y placing the appropriate letter in the spaceprovided.

HHHH 1. he legal fees associated with the acquisition of land.

HHHH . he cost of replacing the engine in a truc$ when the cost of the old engine is not $nown.

HHHH ". he cost of replacing an oil furnace with an electric furnace.

HHHH &. he cost of a new addition to a warehouse that will !e used to store inventory.

HHHH +. he cost of renovating a recently purchased ten-year-old office !uilding.

HHHH 5. he materials and la!or costs incurred in testing a new piece of equipment.

HHHH 4. he costs of tuning, lu!ricating, and tire rotation on a fleet of delivery truc$s.

HHHH 6. he additional costs in the construction of a !uilding due to a small fire that occurred during the construction period.

1. c +. d. ! 5. e". e 4. a&. d 6. a

56. During 1 , the insle Company completed the following transactions related to its property, plant, andequipment accounts

a. >n =arch 16, insle paid 0&6 , for land, !uildings, and equipment in a lump-sum purchase. An appraisal that cost insle 01 ,revealed fair mar$et values of 0 , for the land, 01+ , for the !uildings, and 01+ , for the equipment.

!. >n August 11, insle issued , shares of its 01 par value common stoc$ in exchange for some equipment. he equipment%s fairmar$et value is estimated at 0"5 , !y an outside appraisal. >n the date of the exchange, the stoc$ was !eing actively traded at 014per share on a ma


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8quipmentM)01+ ,0+ , *N0&9 , O

1&4,

Cash &9 , !. 8quipment ) , N 014* "& ,

Common @toc$, 01 par , Additional 2aid-/n Capital on Common @toc$ 1& ,

59. During 1 , edford Company acquired a new piece of equipment for its manufacturing process. /n orderto purchase the equipment, edford made a down payment of 0+ , and issued a 0 , five-year, 47note. he annual payment of principal and interest was to !e 0&6,446. he mar$et rate of interest for o!ligationsof this $ind is 1 7. he present value factor for an ordinary annuity of + years at 1 7 is ".5 &445.

Required:

a. 2repare the


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f. 3ully depreciated assets still !eing used HHHHHH HHHHHH g. ?easehold improvements HHHHHH HHHHHH h. Deposits on machinery not yet received HHHHHH HHHHHH

Required:

/ndicate whether or not each expenditure would !e included in the cost of property, plant, and equipment.

Ies :oa. J! Jc. Jd. Je Jf. Jg. Jh J

41. @everal expenditures are listed !elow

?and Building 8quipment >ther a. Construction costs on !uilding HHHHHH J HHHHHH HHHHHH !. Compensation for in


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Required:

/f the expenditure would !e capitali#ed to land, !uildings, equipment, or other, so indicate with an KJ.K An example is given.

?and Building 8quipment >ther

a. Construction costs on !uilding HHHHH J HHHHH HHHHH !. Compensation for in


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4". =irror Corp. has agreed to expand its operations !y opening a manufacturing plant in Burns, exas. /nreturn, Burns will donate an a!andoned !uilding and the + acres on which it sits to =irror. he land originallycost 01, , and the !uilding 0", , . he !uilding%s current !oo$ value is 0"6 , , and currentappraisals are land 05, , and !uilding 0 ,5 , . =irror has also agreed to provide 1


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44. @ally Company is exchanging a unique machine for a similar machine from 'illiam, /nc. @ally%s equipmentoriginally cost 0" , and has a !oo$ value of 014+, . 'illiam%s machine cost 0 + , and has a !oo$value of 01+ , . :o cash will !e exchanged, and the two machines will continue to perform the samefunctions for each company.

Required:

2repare the


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49. =ar$ Company exchanged a worn-out tractor that had cost 0 , and was half depreciated for a newtractor with a fair value of 01 , . =ar$ paid an additional 0 ,+ cash. he transaction lac$ed commercialsu!stance.

Required:

Compute the amount at which =ar$ should record the new tractor.

)0 , - 01 , * P 0 ,+ Q 01 ,+

6 . Assuming that the effects of interest capitali#ation are material, calculate the amount of interest costs to !ecapitali#ed !y =arcus Corporation in 1 in relation to the following events

a. >n anuary 1, =arcus !egan construction for a new storage !uilding for its own use. 8xpenditures incurred evenly throughout the yeartotaled 09 , . =arcus !orrowed 01, , specifically for construction of the storage !uilding at an annual interest rate of 57.

!. /nventories costing 0 , were routinely manufactured during the year. =arcus !orrowed 0 , at 67 to finance inventory-related costs.

c. >n @eptem!er 1, =arcus !egan construction of a custom-designed machine to the specifications of a customer. As of Decem!er "1,0 , of materials, la!or, and overhead have !een assigned to the machine. hose costs were incurred evenly throughout the period@eptem!er 1 through Decem!er "1. o finance construction, 0 " , was !orrowed at a 97 interest rate.

a. ) P 09 , * Q 0&+ , 0&+ , N . 5 Q 0 4, !. 0

c. ) P 0 , * Q 01 , 01 , N & 1 N . 9 Q 0",

61. >n anuary ", 1 , =ercury Company !egan self-constructing an asset that qualified for interestcapitali#ation. >n anuary +, =ercury !orrowed 0" , on an 67 construction loan. /n addition, =ercury had0& , of 57 notes paya!le and 04 , of 97 !onds paya!le outstanding. By Decem!er "1, expenditures)occurring evenly throughout the year* of 06 , had !een made on the asset. /nvestment of unused fundsduring the year yielded 01, of interest revenue.

Required:

Compute the amount of interest that should !e capitali#ed during 1 .

0"1,91 , computed as follows

) P 06 , * Q 0& , 0& , N . 5 Q 0 &,04 , N . 9 Q 5", 064,


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6". he Feavy 8quipment Company decided to replace a gasoline engine with a diesel engine in one of itscranes. he new engine cost 06, , which Feavy paid in cash. he old engine is discarded at no cost to Feavy8quipment.

Required:

a. 2repare the required


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?oss 1 ,3urnace & ,

Cash 5 , !. Accumulated Depreciation 4,

Cash 4,

an 4,Cash 4,

6+. >n =ay 1, 1 , Argus =anufacturing Co. acquired a machine for 016 , . he machine was depreciatedmonthly using the straight-line method with an estimated life of ten years and no salvage value. >n Decem!er1, 14, the machine was sold for 0& , .

Required:

Compute the amount of gain or loss on the sale of the machine, and prepare the


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64. 'hy is it important to allocate a lump-sum purchase amount among the individual assets acquired(

he allocation of a lump-sum purchase cost among the individual assets acquired is important for severalreasons. 3irst, some of the assets may require depreciation while others )land* may not. @econd, the economiclives of those assets may vary. And, finally, those assets may !e depreciated !y different depreciation methods.

66. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,ranging from routine repairs to ma


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Gnder current ;AA2, companies must expense such costs as incurred.

9 . Current ;AA2 descri!es three exceptions to the general rule of using fair value when exchangingnonmonetary assets.

Required:

?ist the three exceptions and provide an example of each.

1. :either the fair value of the asset received or given up is reasona!ly determina!le. 8xample A unique or one-of-a-$ind productive asset is involved. . he transaction is an exchange of inventory to facilitate sales to a third party.

8xample Company A exchanges inventory with Company B so Company A can sell the new inventory to Company C. ". he transaction lac$s commercial su!stance such that the future cash flows of the company are not expected to change significantly. 8xample Company A exchanges equipment with a !oo$ value of 0" , for a new truc$ costing 0+ , that will not significantly

improve production, so the cash flow won%t significantly change.

91. Discuss when the interest capitali#ation period !egins and ends for assets constructed for a company%s ownuse.

he interest capitali#ation period !egins when )a* expenditures for the asset have !een made, )!* activities thatare necessary to get the asset ready for its intended use are in progress, and )c* interest cost is !eing incurred./nterest capitali#ation should continue as long as the three conditions are met. he capitali#ation period shouldend when the asset is )a* su!stantially complete and )!* ready for its intended use.

9 . Descri!e the /3 @ treatment of increases in the mar$et value of property, plant, and equipment held duringthe year. Compare that treatment to G.@. ;AA2 requirements.

/3 @ allow companies to revalue property, plant, and equipment up to fair mar$et value when it can !e relia!lyestimated. A revaluation surplus is recorded in stoc$holders% equity for the unreali#ed holding gain. ;AA2 hasno similar provision for mar$ing up assets to mar$et. Any holding gains are recogni#ed only if the asset is sold.

Documents

Chapter 10 Property, Plant