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CHAPTER 10

ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT
IFRS questions a e a!ai"a#"e at t$e en% o& t$is '$a(te )

TRUE*FALSE+Con'e(tua"
Ans,e
F T F T F T F F F T T T T F F T T F F T

No)
1. 2. 3. 4. ". $. '. (. *. 1,. 11. 12. 13. 14. 1". 1$. 1'. 1(. 1*. 2,

Des' i(tion
Nature of property, plant, and equipment. Nature of property, plant, and equipment. Cost of removing old building. Insuran e on equipment pur !ased. # ounting for spe ial assessments. %ver!ead osts in self& onstru ted assets. %ver!ead osts in self& onstru ted assets. Interest apitali)ation. +ualifying assets for interest apitali)ation. #voidable interest. Interest apitali)ation on land pur !ase. -eferred&payment ontra ts. # ounting for nonmonetary e. !anges. Nonmonetary e. !anges. /e ogni)ing losses on nonmonetary e. !anges. Costs subsequent to a quisition. -efinition of improvements. %rdinary repairs benefit period. Involuntary onversion gains0losses. 1oss from s rapped asset.

MULTIPLE CHOICE+Con'e(tua"
Ans,e
d b d

No)
21. 22. 23. 24. 2". 2$. 2'. 2(. 2*. 3 3,. 3 31. 32. 33. 34. 3". 3$.

Des' i(tion
-efinition of plant assets. C!ara teristi s of plant assets. C!ara teristi s of plant assets. Composition of land ost. Composition of land ost. -etermination of land ost. -etermine ost of land used as a par2ing lot. -etermine ost of ma !inery. Classifi ation of fen es and par2ing lots. /e ording plant assets at !istori al ost. # ounting for over!ead osts. -etermine osts apitali)ed for self& onstru ted assets. #ssets 4!i ! qualify for interest apitali)ation. #ssets 4!i ! qualify for interest apitali)ation. -efinition of 5avoidable interest.5 6eriod of time over 4!i ! interest may be apitali)ed.

d a b b d d d a a

10 * 3 b

Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition 3'. 7a.imum amount of annual interest t!at may be apitali)ed.

MULTIPLE CHOICE+Con'e(tua" 1'ont)2
Ans,e
b d d a a a b d d a b b d d a d a d
6 3

No)
3(. 3*. 4,. 3 41. 3 42. 3 43. 3 44. 3 4". 6 4$. 4'. 4(. 4*. ",. "1. "2. "3. "4. "". "$. "'. 6 "(. 3 "*. 3 $,. $1. $2.

Des' i(tion
Interest apitali)ation84eig!ted&average fa tor. Classifi ation of interest earned on se urities pur !ased 4it! borro4ed funds. 9rite&off of apitali)ed interest osts. Conditions for interest apitali)ation. Capitali)ation of interest on onstru ted assets. Nonmonetary e. !anges and ulmination of earning pro ess. /e ogni)ing gains0losses in e. !ange !aving ommer ial substan e. :aluation of nonmonetary asset. ;ain re ognition on plant asset e. !ange. :aluation of plant assets. 6lant asset a quired by issuan e of sto 2. :aluation of nonmonetary e. !anges. ;ain re ognition on a nonmonetary e. !ange. ;ain re ognition on a nonmonetary e. !ange. # ounting for donated assets. :aluation of donated assets. Identify onditions for apital e.penditures. Capital e.penditure. Identifi ation of a apital e.penditure. Identifi ation of a apital e.penditure. # ounting for revenue e.penditures. # ounting for apital e.penditures. ;ain or loss on plant asset disposal. -etermine loss on sale of depre iable asset. <no4ledge of involuntary onversions.

T!ese questions also appear in t!e 6roblem&3olving 3urvival ;uide. T!ese questions also appear in t!e 3tudy ;uide.

MULTIPLE CHOICE+Co/(utationa"
Ans,e
b d d d d a b a b a b a d

No)
$3. $4. $". $$. $'. $(. $*. ',. '1. '2. '3. '4. '". '$. ''. '(.

Des' i(tion
-etermine ost of land. -etermine ost of building. Cal ulate ost of land and building. Cal ulate ost of equipment. Cal ulate ost of equipment. %ver!ead in luded in self& onstru ted asset. %ver!ead in luded in self& onstru ted asset. Cal ulate interest to be apitali)ed. Cal ulate average a umulated e.penditures. Cal ulate interest to be apitali)ed. Cal ulate average a umulated e.penditures. Cal ulate average a umulated e.penditures. Cal ulate amount of interest to be apitali)ed. Cal ulate 4eig!ted&average a umulated e.penditures. Cal ulate 4eig!ted&average a umulated e.penditures. Cal ulate 4eig!ted&average a umulated e.penditures.

# quisition and -isposition of 6roperty, 6lant, and =quipment a '*. Cal ulate a tual interest ost in urred during year.

10 * 4

MULTIPLE CHOICE+Co/(utationa" 1'ont)2
Ans,e
b b d b b d d a a a b a a d

No)
(,. (1. (2. (3. (4. (". ($. ('. ((. (*. *,. *1. *2. *3. *4. *". *$. *'. *(. **. 1,,. 1,1. 1,2. 1,3. 1,4. 1,". 1,$. 1,'. 1,(. 1,*. 11,. 111. 112. 113. 114. 11". 11$. 11'. 11(. 11*. 12,. 121. 122.

Des' i(tion
Cal ulate amount of interest to be apitali)ed. Cal ulate amount of interest to be apitali)ed. Cal ulate 4eig!ted&average a umulated e.penditures. Cal ulate interest to be apitali)ed. Cal ulate 4eig!ted&average a umulated e.penditures. Cal ulate interest to be apitali)ed. Cal ulate 4eig!ted&average a umulated e.penditures. Cal ulate 4eig!ted&average interest rate. Cal ulate amount of avoidable interest. Cal ulate amount of a tual interest. Cal ulate amount of interest e.pense. =. !ange of nonmonetary assets. =. !ange la 2ing ommer ial substan e. =. !ange la 2ing ommer ial substan e. :aluation of a nonmonetary e. !ange. :aluation of a nonmonetary e. !ange. Cal ulate gain on e. !ange la 2ing ommer ial substan e. #llo ation of ost in a lump sum pur !ase. #llo ation of ost in a lump sum pur !ase. Cal ulate ost of land a quired. -etermine ost of pur !ased ma !ine. Cal ulate ost of tru 2 pur !ased. Cal ulate ost of ma !ine pur !ased. #llo ation of ost of a lump sum pur !ase. Cal ulate ost of equipment. # quisition of equipment by e. !ange of sto 2 !eld as an investment. =. !ange la 2ing ommer ial substan e. =. !ange la 2ing ommer ial substan e 0gain. =. !ange la 2ing ommer ial substan e 0gain. :aluation of a nonmonetary e. !ange. =. !ange la 2ing ommer ial substan e0gain. :aluation of a nonmonetary e. !ange. ;ain re ognition of a nonmonetary e. !ange. :aluation of a nonmonetary e. !ange. :aluation of a nonmonetary e. !ange. Cal ulate gain on nonmonetary e. !ange. Cal ulate loss on nonmonetary e. !ange. Cal ulate gain on nonmonetary e. !ange. Cal ulate loss on nonmonetary e. !ange. Cal ulate as! re eived from sale of ma !inery. Cal ulate as! re eived from sale of ma !inery. Cal ulate loss on sale of ma !ine. Cal ulate gain on sale of equipment.

b d b d b b d a d b a b b d b d b b

10 * 9

Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

MULTIPLE CHOICE+CPA A%a(te%
Ans,e
b b a a b d a

No)
123. 124. 12". 12$. 12'. 12(. 12*. 13,.

Des' i(tion
-etermine ost of land. Classifi ation of sale of building. -etermine interest ost to be apitali)ed. :aluation of a nonmonetary e. !ange. =. !ange la 2ing ommer ial substan e. # ounting for donated assets. Costs subsequent to a quisition. :aluation of repla ement equipment.

E5ERCISES
Ite/
=1,&131 =1,&132 =1,&133 =1,&134 =1,&13" =1,&13$ =1,&13'

Des' i(tion
6lant asset a ounting. 9eig!ted&average a umulated e.penditures. Capitali)ation of interest. Nonmonetary e. !ange. Nonmonetary e. !ange. -onated assets. Capitali)ing vs. e.pensing.

PRO-LEMS
Ite/
61,&13( 61,&13* 61,&14, 61,&141 61,&142 61,&143 61,&144 61,&14" 61,&14$

Des' i(tion
Capitali)ing a quisition osts. Capitali)ation of interest. Capitali)ation of interest. #sset a quisition Nonmonetary e. !ange. Nonmonetary e. !ange. Nonmonetary e. !ange. Nonmonetary e. !ange. Nonmonetary e. !ange.

CHAPTER LEARNIN6 O-7ECTI8ES
1. 2. 3. 4. ". $. '. -es ribe property, plant, and equipment. Identify t!e osts to in lude in t!e initial valuation of property, plant, and equipment. -es ribe t!e a ounting problems asso iated 4it! self& onstru ted assets. -es ribe t!e a ounting problems asso iated 4it! interest apitali)ation. >nderstand a ounting issues related to a quiring and valuing plant assets. -es ribe t!e a ounting treatment for osts subsequent to a quisition. -es ribe t!e a ounting treatment for t!e disposal of property, plant, and equipment.

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * ;

SUMMARY OF LEARNIN6 O-7ECTI8ES -Y QUESTIONS
Ite Ty Ite Ty Ite Ty Lea 7C Lea 7C 7C 7C Lea 7C 7C Lea 7C 7C 7C 7C 7C 7C Lea 7C 7C 7C 7C 7C 7C 7C 7C 7C Lea 7C 7C Lea 7C 7C Ite Ty Ite Ty Ite Ty Ite Typ

1. 3. 4. ". $. '. (. *. 1,. 11. 33. 34. 12. 13. 14. 1". 3 43. 3 44. 3 4". 6 4$. 4'. 1$. 1'. 1*. 2,. Note?

TF TF TF TF TF TF TF TF TF TF 7C 7C TF TF TF TF 7C 7C 7C 7C 7C TF TF TF TF

2. 24. 2". 2$.
3 3

TF 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C TF 7C 7C 7C

21. 2'. 2(. 2*. $(. $*.
3 3

31. 32. 3". 3$. 3'. 3(. 3*. 4,. 4(. 4*. ",. "1. "2. "3. *1. *2. *3. 1(. "4.

41. 42. ',. '1. '2. '3.

*4. *". *$. *'. *(. **. 1,,. 1,1. 1,2. "". "$. $2. 11*.

3

$,. $1.

nin0 O#:e'ti!e 1 22. 7C 23. nin0 O#:e'ti!e 3 3,. 7C $". $3. 7C $$. $4. 7C $'. nin0 O#:e'ti!e 4 132. = 133. = nin0 O#:e'ti!e 9 '4. 7C (,. '". 7C (1. '$. 7C (2. ''. 7C (3. '(. 7C (4. '*. 7C (". nin0 O#:e'ti!e ; 1,3. 7C 112. 1,4. 7C 113. 1,". 7C 114. 1,$. 7C 11". 1,'. 7C 11$. 1,(. 7C 11'. 1,*. 7C 11(. 11,. 7C 12$. 111. 7C 12'. nin0 O#:e'ti!e < 3 "'. 7C "*. 6 "(. 7C 12*. nin0 O#:e'ti!e = 12,. 7C 122. 121. 7C

7C 7C 7C 7C 123. 124. 131. 7C 7C = 13'. 13(. = 6

7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C 7C

($. ('. ((. (*. *,. 12". 12(. 131. 134. 13". 13$. 13'. 141. 142. 143. 13,. 131.

7C 7C 7C 7C 7C 7C 7C = = = = = 6 6 6 7C =

131. 133. 13'. 13*. 14,.

= = = 6 6

144. 14". 14$.

6 6 6

13'.

=

TF @ True&False 7C @ 7ultiple C!oi e 6 @ 6roblem = @ =.er ise

10 * <

Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

TRUE*FALSE+Con'e(tua"
1. #ssets lassified as 6roperty, 6lant, and =quipment an be eit!er a quired for use in operations, or a quired for resale. 2. #ssets lassified as 6roperty, 6lant, and =quipment must be bot! long&term in nature and possess p!ysi al substan e. 3. 9!en land 4it! an old building is pur !ased as a future building site, t!e ost of removing t!e old building is part of t!e ost of t!e ne4 building. 4. Insuran e on equipment pur !ased, 4!ile t!e equipment is in transit, is part of t!e ost of t!e equipment. ". 3pe ial assessments for lo al improvements su ! as street lig!ts and se4ers s!ould be a ounted for as land improvements. $. :ariable over!ead osts in urred to self& onstru t an asset s!ould be in luded in t!e ost of t!e asset. '. Companies s!ould assign no portion of fi.ed over!ead to self& onstru ted assets. (. 9!en apitali)ing interest during onstru tion of an asset, an imputed interest ost on sto 2 finan ing must be in luded. *. #ssets under apitali)ation. onstru tion for a ompanyAs o4n use do not qualify for interest ost

1,. #voidable interest is t!e amount of interest ost t!at a ompany ould t!eoreti ally avoid if it !ad not made e.penditures for t!e asset. 11. 9!en a ompany pur !ases land 4it! t!e intention of developing it for a parti ular use, interest osts asso iated 4it! t!ose e.penditures qualify for interest apitali)ation. 12. #ssets pur !ased on long&term redit ontra ts s!ould be re orded at t!e present value of t!e onsideration e. !anged. 13. Companies a ount for t!e e. !ange of nonmonetary assets on t!e basis of t!e fair value of t!e asset given up or t!e fair value of t!e asset re eived. 14. If a nonmonetary e. !ange la 2s ommer ial substan e, and as! is re eived, a partial gain or loss is re ogni)ed. 1". 9!en a ompany e. !anges nonmonetary assets and a loss results, t!e re ogni)es t!e loss only if t!e e. !ange !as ommer ial substan e. ompany

1$. Costs in urred subsequent to t!e a quisition of an asset are apitali)ed if t!ey provide future benefits. 1'. Improvements are often referred to as betterments and involve t!e substitution of a better asset for t!e one urrently used.

# quisition and -isposition of 6roperty, 6lant, and =quipment 1(. 9!en an ordinary repair o urs, several periods 4ill usually benefit.

10 * =

1*. Companies al4ays treat gains or losses from an involuntary onversion as e.traordinary items. 2,. If a ompany s raps an asset 4it!out any as! re overy, it re ogni)es a loss equal to t!e assetAs boo2 value.

T ue Fa"se Ans,e s+Con'e(tua"
Ite/ 1. 2. 3. 4. ". Ans) F T F T F Ite/ $. '. (. *. 1,. Ans) T F F F T Ite/ 11. 12. 13. 14. 1". Ans) T T T F F Ite/ 1$. 1'. 1(. 1*. 2,. Ans) T T F F T

MULTIPLE CHOICE+Con'e(tua"
21. 6lant assets may properly in lude a. deposits on ma !inery not yet re eived. b. idle equipment a4aiting sale. . land !eld for possible use as a future plant site. d. none of t!ese. 9!i ! of t!e follo4ing is not a maBor !ara teristi of a plant assetC a. 6ossesses p!ysi al substan e b. # quired for resale . # quired for use d. Dields servi es over a number of years 9!i ! of t!ese is not a maBor !ara teristi of a plant assetC a. 6ossesses p!ysi al substan e b. # quired for use in operations . Dields servi es over a number of years d. #ll of t!ese are maBor !ara teristi s of a plant asset. Cotton Eotel Corporation re ently pur !ased =mporia Eotel and t!e land on 4!i ! it is lo ated 4it! t!e plan to tear do4n t!e =mporia Eotel and build a ne4 lu.ury !otel on t!e site. T!e ost of t!e =mporia Eotel s!ould be a. depre iated over t!e period from a quisition to t!e date t!e !otel is s !eduled to be torn do4n. b. 4ritten off as an e.traordinary loss in t!e year t!e !otel is torn do4n. . apitali)ed as part of t!e ost of t!e land. d. apitali)ed as part of t!e ost of t!e ne4 !otel.

22.

23.

24.

10 * > 2".

Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition T!e ost of land does not in lude a. osts of grading, filling, draining, and learing. b. osts of removing old buildings. . osts of improvements 4it! limited lives. d. spe ial assessments. T!e ost of land typi ally in ludes t!e pur !ase pri e and all of t!e follo4ing osts e. ept a. grading, filling, draining, and learing osts. b. street lig!ts, se4ers, and drainage systems ost. . private drive4ays and par2ing lots. d. assumption of any liens or mortgages on t!e property. If a orporation pur !ases a lot and building and subsequently tears do4n t!e building and uses t!e property as a par2ing lot, t!e proper a ounting treatment of t!e ost of t!e building 4ould depend on a. t!e signifi an e of t!e ost allo ated to t!e building in relation to t!e ombined ost of t!e lot and building. b. t!e lengt! of time for 4!i ! t!e building 4as !eld prior to its demolition. . t!e ontemplated future use of t!e par2ing lot. d. t!e intention of management for t!e property 4!en t!e building 4as a quired. T!e debit for a sales ta. properly levied and paid on t!e pur !ase of ma !inery preferably 4ould be a !arge to a. t!e ma !inery a ount. b. a separate deferred !arge a ount. . mis ellaneous ta. e.pense F4!i ! in ludes all ta.es ot!er t!an t!ose on in omeG. d. a umulated depre iation&&ma !inery. Fen es and par2ing lots are reported on t!e balan e s!eet as a. urrent assets. b. land improvements. . land. d. property and equipment. Eistori al ost is t!e basis advo ated for re ording t!e a quisition of property, plant, and equipment for all of t!e follo4ing reasons except a. at t!e date of a quisition, ost refle ts fair mar2et value. b. property, plant, and equipment items are al4ays a quired at t!eir original !istori al ost. . !istori al ost involves a tual transa tions and, as su !, is t!e most reliable basis. d. gains and losses s!ould not be anti ipated but s!ould be re ogni)ed 4!en t!e asset is sold. To be onsistent 4it! t!e !istori al ost prin iple, over!ead osts in urred by an enterprise onstru ting its o4n building s!ould be a. allo ated on t!e basis of lost produ tion. b. eliminated ompletely from t!e ost of t!e asset. . allo ated on an opportunity ost basis. d. allo ated on a pro rata basis bet4een t!e asset and normal operations.

2$.

2'.

2(.

2*.

3

3,.

3

31.

# quisition and -isposition of 6roperty, 6lant, and =quipment 32. 9!i ! of t!e follo4ing osts are apitali)ed for self& onstru ted assetsC a. 7aterials and labor only b. 1abor and over!ead only . 7aterials and over!ead only d. 7aterials, labor, and over!ead

10 * ?

33.

9!i ! of t!e follo4ing assets do not qualify for apitali)ation of interest osts in urred during onstru tion of t!e assetsC a. #ssets under onstru tion for an enterpriseHs o4n use. b. #ssets intended for sale or lease t!at are produ ed as dis rete proBe ts. . #ssets finan ed t!roug! t!e issuan e of long&term debt. d. #ssets not urrently undergoing t!e a tivities ne essary to prepare t!em for t!eir intended use. #ssets t!at qualify for interest ost apitali)ation in lude a. assets under onstru tion for a ompanyHs o4n use. b. assets t!at are ready for t!eir intended use in t!e earnings of t!e ompany. . assets t!at are not urrently being used be ause of e. ess apa ity. d. #ll of t!ese assets qualify for interest ost apitali)ation. 9!en omputing t!e amount of interest ost to be apitali)ed, t!e on ept of 5avoidable interest5 refers to a. t!e total interest ost a tually in urred. b. a ost of apital !arge for sto 2!oldersH equity. . t!at portion of total interest ost 4!i ! 4ould not !ave been in urred if e.penditures for asset onstru tion !ad not been made. d. t!at portion of average a umulated e.penditures on 4!i ! no interest ost 4as in urred. T!e period of time during 4!i ! interest must be apitali)ed ends 4!en a. t!e asset is substantially omplete and ready for its intended use. b. no furt!er interest ost is being in urred. . t!e asset is abandoned, sold, or fully depre iated. d. t!e a tivities t!at are ne essary to get t!e asset ready for its intended use !ave begun. 9!i ! of t!e follo4ing statements is true regarding apitali)ation of interestC a. Interest ost apitali)ed in onne tion 4it! t!e pur !ase of land to be used as a building site s!ould be debited to t!e land a ount and not to t!e building a ount. b. T!e amount of interest ost apitali)ed during t!e period s!ould not e. eed t!e a tual interest ost in urred. . 9!en e. ess borro4ed funds not immediately needed for onstru tion are temporarily invested, any interest earned s!ould be offset against interest ost in urred 4!en determining t!e amount of interest ost to be apitali)ed. d. T!e minimum amount of interest to be apitali)ed is determined by multiplying a 4eig!ted average interest rate by t!e amount of average a umulated e.penditures on qualifying assets during t!e period.

34.

3".

3$.

3'.

10 * 10 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition 3(. Constru tion of a qualifying asset is started on #pril 1 and finis!ed on -e ember 1. T!e fra tion used to multiply an e.penditure made on #pril 1 to find 4eig!ted&average a umulated e.penditures is a. (0(. b. (012. . *012. d. 11012. 9!en funds are borro4ed to pay for onstru tion of assets t!at qualify for apitali)ation of interest, t!e e. ess funds not needed to pay for onstru tion may be temporarily invested in interest&bearing se urities. Interest earned on t!ese temporary investments s!ould be a. offset against interest ost in urred during onstru tion. b. used to redu e t!e ost of assets being onstru ted. . multiplied by an appropriate interest rate to determine t!e amount of interest to be apitali)ed. d. re ogni)ed as revenue of t!e period. Interest ost t!at is apitali)ed s!ould a. be 4ritten off over t!e remaining term of t!e debt. b. be a umulated in a separate deferred !arge a ount and 4ritten off equally over a 4,&year period. . not be 4ritten off until t!e related asset is fully depre iated or disposed of. d. none of t!ese. 9!i ! of t!e follo4ing is not a ondition t!at must be satisfied before interest apitali)ation an begin on a qualifying assetC a. Interest ost is being in urred. b. =.penditures for t!e assets !ave been made. . T!e interest rate is equal to or greater t!an t!e ompanyHs ost of apital. d. # tivities t!at are ne essary to get t!e asset ready for its intended use are in progress. 9!i ! of t!e follo4ing is t!e re ommended approa ! to !andling interest in urred in finan ing t!e onstru tion of property, plant and equipmentC a. Capitali)e only t!e a tual interest osts in urred during onstru tion. b. C!arge onstru tion 4it! all osts of funds employed, 4!et!er identifiable or not. . Capitali)e no interest during onstru tion. d. Capitali)e interest osts equal to t!e prime interest rate times t!e estimated ost of t!e asset being onstru ted. 9!i ! of t!e follo4ing nonmonetary e. !ange transa tions represents a ulmination of t!e earning pro essC a. =. !ange of assets 4it! no differen e in future as! flo4s. b. =. !ange of produ ts by ompanies in t!e same line of business 4it! no differen e in future as! flo4s. . =. !ange of assets 4it! a differen e in future as! flo4s. d. =. !ange of an equivalent interest in similar produ tive assets t!at auses t!e ompanies involved to remain in essentially t!e same e onomi position.

3*.

4,.

3

41.

3

42.

3

43.

# quisition and -isposition of 6roperty, 6lant, and =quipment
3

10 * 11

44.

9!en boot is involved in an e. !ange !aving ommer ial substan e. a. gains or losses are re ogni)ed in t!eir entirely. b. a gain or loss is omputed by omparing t!e fair value of t!e asset re eived 4it! t!e fair value of t!e asset given up. . only gains s!ould be re ogni)ed. d. only losses s!ould be re ogni)ed. T!e ost of a nonmonetary asset a quired in e. !ange for anot!er nonmonetary asset and t!e e. !ange !as ommer ial substan e is usually re orded at a. t!e fair value of t!e asset given up, and a gain or loss is re ogni)ed. b. t!e fair value of t!e asset given up, and a gain but not a loss may be re ogni)ed. . t!e fair value of t!e asset re eived if it is equally reliable as t!e fair value of t!e asset given up. d. eit!er t!e fair value of t!e asset given up or t!e asset re eived, 4!i !ever one results in t!e largest gain Fsmallest lossG to t!e ompany. /ingler Corporation e. !anges one plant asset for a similar plant asset and gives as! in t!e e. !ange. T!e e. !ange is not e.pe ted to ause a material !ange in t!e future as! flo4s for eit!er entity. If a gain on t!e disposal of t!e old asset is indi ated, t!e gain 4ill a. be reported in t!e %t!er /evenues and ;ains se tion of t!e in ome statement. b. effe tively redu e t!e amount to be re orded as t!e ost of t!e ne4 asset. . effe tively in rease t!e amount to be re orded as t!e ost of t!e ne4 asset. d. be redited dire tly to t!e o4nerHs apital a ount. 6lant assets pur !ased on long&term redit ontra ts s!ould be a ounted for at a. t!e total value of t!e future payments. b. t!e future amount of t!e future payments. . t!e present value of t!e future payments. d. none of t!ese. 9!en a plant asset is a quired by issuan e of ommon sto 2, t!e ost of t!e plant asset is properly measured by t!e a. par value of t!e sto 2. b. stated value of t!e sto 2. . boo2 value of t!e sto 2. d. fair value of t!e sto 2. 9!en a losely !eld orporation issues preferred sto 2 for land, t!e land s!ould be re orded at t!e a. total par value of t!e sto 2 issued. b. total boo2 value of t!e sto 2 issued. . total liquidating value of t!e sto 2 issued. d. fair value of t!e land. # ounting re ognition s!ould be given to some or all of t!e gain reali)ed on a nonmonetary e. !ange of plant assets except 4!en t!e e. !ange !as a. no ommer ial substan e and additional as! is paid. b. no ommer ial substan e and additional as! is re eived. . ommer ial substan e and additional as! is paid. d. ommer ial substan e and additional as! is re eived.

3

4".

6

4$.

4'.

4(.

4*.

",.

10 * 13 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition "1. For a nonmonetary e. !ange of plant assets, a ounting re ognition s!ould not be given to a. a loss 4!en t!e e. !ange !as no ommer ial substan e. b. a gain 4!en t!e e. !ange !as ommer ial substan e. . part of a gain 4!en t!e e. !ange !as no ommer ial substan e and as! is paid F as! paid0re eived is less t!an 2"I of t!e fair value of t!e e. !angeG. d. part of a gain 4!en t!e e. !ange !as no ommer ial substan e and as! is re eived F as! paid or re eived is less t!an 2"I of t!e fair value of t!e e. !angeG. 9!en an enterprise is t!e re ipient of a donated asset, t!e a ount redited may be a a. paid&in apital a ount. b. revenue a ount. . deferred revenue a ount. d. all of t!ese. # plant site donated by a to4ns!ip to a manufa turer t!at plans to open a ne4 fa tory s!ould be re orded on t!e manufa turerHs boo2s at a. t!e nominal ost of ta2ing title to it. b. its fair value. . one dollar Fsin e t!e site ost not!ing but s!ould be in luded in t!e balan e s!eetG. d. t!e value assigned to it by t!e ompanyHs dire tors. In order for a ost to be apitali)ed F apital e.penditureG, t!e follo4ing must be present? a. T!e useful life of an asset must be in reased. b. T!e quantity of assets must be in reased. . T!e quality of assets must be in reased. d. #ny one of t!ese. #n improvement made to a ma !ine in reased its fair value and its produ tion apa ity by 2"I 4it!out e.tending t!e ma !ineHs useful life. T!e ost of t!e improvement s!ould be a. e.pensed. b. debited to a umulated depre iation. . apitali)ed in t!e ma !ine a ount. d. allo ated bet4een a umulated depre iation and t!e ma !ine a ount. 9!i ! of t!e follo4ing is a apital e.penditureC a. 6ayment of an a ount payable b. /etirement of bonds payable . 6ayment of Federal in ome ta.es d. None of t!ese 9!i ! of t!e follo4ing is not a apital e.penditureC a. /epairs t!at maintain an asset in operating ondition b. #n addition . # betterment d. # repla ement

"2.

"3.

"4.

"".

"$.

"'.

# quisition and -isposition of 6roperty, 6lant, and =quipment
6

10 * 14

"(.

In a ounting for plant assets, 4!i ! of t!e follo4ing outlays made subsequent to a quisition s!ould be fully e.pensed in t!e period t!e e.penditure is madeC a. =.penditure made to in rease t!e effi ien y or effe tiveness of an e.isting asset b. =.penditure made to e.tend t!e useful life of an e.isting asset beyond t!e time frame originally anti ipated . =.penditure made to maintain an e.isting asset so t!at it an fun tion in t!e manner intended d. =.penditure made to add ne4 asset servi es #n e.penditure made in onne tion 4it! a ma !ine being used by an enterprise s!ould be a. e.pensed immediately if it merely e.tends t!e useful life but does not improve t!e quality. b. e.pensed immediately if it merely improves t!e quality but does not e.tend t!e useful life. . apitali)ed if it maintains t!e ma !ine in normal operating ondition. d. apitali)ed if it in reases t!e quantity of units produ ed by t!e ma !ine. 9!en a plant asset is disposed of, a gain or loss may result. T!e gain or loss 4ould be lassified as an e.traordinary item on t!e in ome statement if it resulted from a. an involuntary onversion and t!e onditions of t!e disposition are unusual and infrequent in nature. b. a sale prior to t!e ompletion of t!e estimated useful life of t!e asset. . t!e sale of a fully depre iated asset. d. an abandonment of t!e asset. T!e sale of a depre iable asset resulting in a loss indi ates t!at t!e pro eeds from t!e sale 4ere a. less t!an urrent fair value. b. greater t!an ost. . greater t!an boo2 value. d. less t!an boo2 value. 9!i ! of t!e follo4ing statements about involuntary onversions is false? a. #n involuntary onversion may result from ondemnation or fire. b. T!e gain or loss from an involuntary onversion may be reported as an e.traordinary item. . T!e gain or loss from an involuntary onversion s!ould not be re ogni)ed 4!en t!e enterprise reinvests in repla ement assets. d. #ll of t!ese.

3

"*.

3

$,.

$1.

$2.

10 * 19 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

Mu"ti("e C$oi'e Ans,e s+Con'e(tua"
Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans)

21. 22. 23. 24. 2". 2$. 21. 4,. "$.

d b d

2'. 2(. 2*. 3,. 31. 32.

d a b b d d

33. 34. 3". 3$. 3'. 3(.

d a a b b

3*. 4,. 41. 42. 43. 44.

d d a a

4". 4$. 4'. 4(. 4*. ",.

a b d d a

"1. "2. "3. "4. "". "$.

b b d d

"'. "(. "*. $,. $1. $2.

a d a d

3olutions to t!ose 7ultiple C!oi e questions for 4!i ! t!e ans4er is Jnone of t!ese.K 1ong&lived tangible assets used in t!e enterpriseAs operations. Capitali)ed interest is depre iated over t!e related assetAs useful life. Capital e.penditures in lude additions, betterments, improvements, and e.traordinary repairs.

MULTIPLE CHOICE+Co/(utationa"
Use t$e &o""o,in0 in&o /ation &o questions <4 an% <9) 9ilson Co. pur !ased land as a fa tory site for L(,,,,,,. 9ilson paid L(,,,,, to tear do4n t4o buildings on t!e land. 3alvage 4as sold for L",4,,. 1egal fees of L3,4(, 4ere paid for title investigation and ma2ing t!e pur !ase. #r !ite tHs fees 4ere L31,2,,. Title insuran e ost L2,4,,, and liability insuran e during onstru tion ost L2,$,,. =. avation ost L1,,44,. T!e ontra tor 4as paid L2,",,,,,,. #n assessment made by t!e ity for pavement 4as L$,4,,. Interest osts during onstru tion 4ere L1',,,,,. $3. T!e ost of t!e land t!at s!ould be re orded by 9ilson Co. is a. L((,,4(,. b. L(($,((,. . L((*,((,. d. L(*$,2(,. T!e ost of t!e building t!at s!ould be re orded by 9ilson Co. is a. L2,",3,(,,. b. L2,",4,(4,. . L2,"13,2,,. d. L2,"14,24,.

$4.

# quisition and -isposition of 6roperty, 6lant, and =quipment $".

10 * 1;

%n February 1, 2,12, Nelson Corporation pur !ased a par el of land as a fa tory site for L2",,,,,. #n old building on t!e property 4as demolis!ed, and onstru tion began on a ne4 building 4!i ! 4as ompleted on November 1, 2,12. Costs in urred during t!is period are listed belo4? -emolition of old building L 2,,,,, #r !ite tHs fees 3",,,, 1egal fees for title investigation and pur !ase ontra t ",,,, Constru tion osts 1,2*,,,,, F3alvaged materials resulting from demolition 4ere sold for L1,,,,,.G Nelson s!ould re ord t!e ost of t!e land and ne4 building, respe tively, as a. L2'",,,, and L1,31",,,,. b. L2$,,,,, and L1,33,,,,,. . L2$,,,,, and L1,32",,,,. d. L2$",,,, and L1,32",,,,.

$$.

9ort!ington C!andler Company pur !ased equipment for L12,,,,. 3ales ta. on t!e pur !ase 4as L(,,. %t!er osts in urred 4ere freig!t !arges of L2,,, repairs of L3", for damage during installation, and installation osts of L22". 9!at is t!e ost of t!e equipmentC a. L12,,,, b. L12,(,, . L13,22" d. L13,"'" Fogelberg Company pur !ased equipment for L1",,,,. 3ales ta. on t!e pur !ase 4as L*,,. %t!er osts in urred 4ere freig!t !arges of L24,, repairs of L42, for damage during installation, and installation osts of L2',. 9!at is t!e ost of t!e equipmentC a. L1",,,,. b. L1",*,,. . L1$,41,. d. L1$,(3,. -uring self& onstru tion of an asset by 3amuelson Company, t!e follo4ing 4ere among t!e osts in urred? Fi.ed over!ead for t!e year 6ortion of L1,,,,,,,, fi.ed over!ead t!at 4ould be allo ated to asset if it 4ere normal produ tion :ariable over!ead attributable to self& onstru tion L1,,,,,,,, ",,,,, 3",,,,

$'.

$(.

9!at amount of over!ead s!ould be in luded in t!e ost of t!e self& onstru ted assetC a. L &,& b. L3",,,, . L",,,,, d. L(",,,,

10 * 1< Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition $*. -uring self& onstru tion of an asset by /i !ardson Company, t!e follo4ing 4ere among t!e osts in urred? Fi.ed over!ead for t!e year 6ortion of L1,,,,,,,, fi.ed over!ead t!at 4ould be allo ated to asset if it 4ere normal produ tion :ariable over!ead attributable to self& onstru tion L1,,,,,,,, $,,,,, '",,,,

9!at amount of over!ead s!ould be in luded in t!e ost of t!e self& onstru ted assetC a. L &,& b. L $,,,,, . L '",,,, d. L13",,,, ',. 7enden!all Corporation onstru ted a building at a ost of L1,,,,,,,,,. #verage a umulated e.penditures 4ere L4,,,,,,,,, a tual interest 4as L$,,,,,,, and avoidable interest 4as L4,,,,,,. If t!e salvage value is L(,,,,,,, and t!e useful life is 4, years, depre iation e.pense for t!e first full year using t!e straig!t&line met!od is a. L24,,,,,. b. L24",,,,. . L2$,,,,,. d. L34,,,,,. 7essersmit! Company is onstru ting a building. Constru tion began in 2,12 and t!e building 4as ompleted 12031012. 7essersmit! made payments to t!e onstru tion ompany of L1,",,,,,, on '01, L3,1",,,,, on *01, and L3,,,,,,,, on 12031. #verage a umulated e.penditures 4ere a. L1,"3',",,. b. L1,(,,,,,,. . L4,$",,,,,. d. L',$",,,,,. Euffman Corporation onstru ted a building at a ost of L2,,,,,,,,,. #verage a umulated e.penditures 4ere L(,,,,,,,,, a tual interest 4as L1,2,,,,,,, and avoidable interest 4as L(,,,,,,. If t!e salvage value is L1,$,,,,,,, and t!e useful life is 4, years, depre iation e.pense for t!e first full year using t!e straig!t&line met!od is a. L4(,,,,,. b. L4*,,,,,. . L"2,,,,,. d. L$(,,,,,. ;utierre) Company is onstru ting a building. Constru tion began in 2,12 and t!e building 4as ompleted 12031012. ;utierre) made payments to t!e onstru tion ompany of L2,,,,,,,, on '01, L4,4,,,,,, on *01, and L4,,,,,,,, on 12031. #verage a umulated e.penditures 4ere a. L2,1,,,,,,. b. L2,4$$,$$'. . L$,4,,,,,,. d. L1,,4,,,,,,.

'1.

'2.

'3.

# quisition and -isposition of 6roperty, 6lant, and =quipment '4.

10 * 1=

%n 7ay 1, 2,12, ;oodman Company began onstru tion of a building. =.penditures of L24,,,,, 4ere in urred mont!ly for " mont!s beginning on 7ay 1. T!e building 4as ompleted and ready for o upan y on 3eptember 1, 2,12. For t!e purpose of determining t!e amount of interest ost to be apitali)ed, t!e average a umulated e.penditures on t!e building during 2,12 4ere a. L2,,,,,,. b. L24,,,,,. . L*$,,,,,. d. L1,2,,,,,,. -uring 2,12, <immel Co. in urred average a umulated e.penditures of L$,,,,,, during onstru tion of assets t!at qualified for apitali)ation of interest. T!e only debt outstanding during 2,12 4as a L'",,,,,, 1,I, "&year note payable dated Manuary 1, 2,1,. 9!at is t!e amount of interest t!at s!ould be apitali)ed by <immel during 2,12C a. L,. b. L1",,,,. . L$,,,,,. d. L'",,,,. %n 7ar ! 1, Felt Co. began onstru tion of a small building. 6ayments of L1$,,,,, 4ere made mont!ly for t!ree mont!s beginning 7ar ! 1. T!e building 4as ompleted and ready for o upan y on Mune 1. In determining t!e amount of interest ost to be apitali)ed, t!e 4eig!ted&average a umulated e.penditures are a. L4,,,,,. b. L(,,,,,. . L1$,,,,,. d. L32,,,,,. %n 7ar ! 1, Im!off Co. began onstru tion of a small building. 6ayments of L24,,,,, 4ere made mont!ly for four mont!s beginning 7ar ! 1. T!e building 4as ompleted and ready for o upan y on Mune 1. In determining t!e amount of interest ost to be apitali)ed, t!e 4eig!ted&average a umulated e.penditures are a. L12,,,,,. b. L24,,,,,. . L4(,,,,,. d. L*$,,,,,.

'".

'$.

''.

>se t!e follo4ing information for questions '( t!roug! (,. %n 7ar ! 1, 2,12, Ne4ton Company pur !ased land for an offi e site by paying L*,,,,,, as!. Ne4ton began onstru tion on t!e offi e building on 7ar ! 1. T!e follo4ing e.penditures 4ere in urred for onstru tion? -ate =.penditures 7ar ! 1, 2,12 L $,,,,,, #pril 1, 2,12 (4,,,,, 7ay 1, 2,12 1,",,,,,, Mune 1, 2,12 2,4,,,,,,

10 * 1> Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition T!e offi e 4as ompleted and ready for o upan y on Muly 1. To !elp pay for onstru tion, L1,2,,,,,, 4as borro4ed on 7ar ! 1, 2,12 on a *I, 3&year note payable. %t!er t!an t!e onstru tion note, t!e only debt outstanding during 2,12 4as a L",,,,,,, 12I, $&year note payable dated Manuary 1, 2,12. '(. T!e 4eig!ted&average a umulated e.penditures on t!e onstru tion proBe t during 2,12 4ere a. L$4,,,,,. b. L4,(*,,,,,. . L"2,,,,,. d. L1,1$,,,,,. T!e a tual interest ost in urred during 2,12 4as a. L1",,,,,. b. L1$(,,,,. . L(4,,,,. d. L14,,,,,. #ssume t!e 4eig!ted&average a umulated e.penditures for t!e onstru tion proBe t are L(',,,,,. T!e amount of interest ost to be apitali)ed during 2,12 is a. L13,,",,. b. L13(,,,,. . L1",,,,,. d. L1$(,,,,. -uring 2,12, Nass Corporation onstru ted assets osting L2,,,,,,,,. T!e 4eig!ted& average a umulated e.penditures on t!ese assets during 2,12 4as L$,,,,,,. To !elp pay for onstru tion, L((,,,,, 4as borro4ed at 1,I on Manuary 1, 2,12, and funds not needed for onstru tion 4ere temporarily invested in s!ort&term se urities, yielding L1(,,,, in interest revenue. %t!er t!an t!e onstru tion funds borro4ed, t!e only ot!er debt outstanding during t!e year 4as a L1,,,,,,,,, 1,&year, *I note payable dated Manuary 1, 2,,$. 9!at is t!e amount of interest t!at s!ould be apitali)ed by Nass during 2,12C a. L12,,,,,. b. L$,,,,,. . L11$,(,,. d. L1((,(,,.

'*.

(,.

(1.

>se t!e follo4ing information for questions (2 t!roug! (". %n Manuary 2, 2,12, Indian /iver ;roves began onstru tion of a ne4 itrus pro essing plant. T!e automated plant 4as finis!ed and ready for use on 3eptember 3,, 2,13. =.penditures for t!e onstru tion 4ere as follo4s? Manuary 2, 2,12 3eptember 1, 2,12 -e ember 31, 2,12 7ar ! 31, 2,13 3eptember 3,, 2,13 L3,,,,,, *,,,,,, *,,,,,, *,,,,,, $,,,,,,

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * 1?

Indian /iver ;roves borro4ed L1,$",,,,, on a onstru tion loan at 12I interest on Manuary 2, 2,12. T!is loan 4as outstanding during t!e onstru tion period. T!e ompany also !ad L$,,,,,,,, in *I bonds outstanding in 2,12 and 2,13. (2. 9!at 4ere t!e 4eig!ted&average a umulated e.penditures for 2,12C a. L(,,,,,, b. L'",,,,, . L$,,,,,, d. L1,",,,,,, T!e interest apitali)ed for 2,12 4as? a. L2',,,,, b. L'2,,,, . L22(,,,, d. L*,,,,, 9!at 4ere t!e 4eig!ted&average a umulated e.penditures for 2,13 by t!e end of t!e onstru tion periodC a. L"(",,,, b. L2,4"2,",, . L2,*'*,,,, d. L2,,'*,,,, T!e interest apitali)ed for 2,13 4as? a. L1(',11, b. L1'',4"( . L 3(,$1, d. L 14(,",,

(3.

(4.

(".

>se t!e follo4ing information to ans4er questions ($ & *,. #rlington Company is onstru ting a building. Constru tion began on Manuary 1 and 4as ompleted on -e ember 31. =.penditures 4ere L4,,,,,,,, on 7ar ! 1, L3,3,,,,,, on Mune 1, and L",,,,,,,, on -e ember 31. #rlington Company borro4ed L2,,,,,,,, on Manuary 1 on a "& year, 12I note to !elp finan e onstru tion of t!e building. In addition, t!e ompany !ad outstanding all year a 1,I, 3&year, L4,,,,,,,, note payable and an 11I, 4&year, L',",,,,,, note payable. ($. 9!at are t!e 4eig!ted&average a umulated e.pendituresC a. L',3,,,,,, b. L",2"(,333 . L12,3,,,,,, d. L$,1",,,,, 9!at is t!e 4eig!ted&average interest rate used for interest apitali)ation purposesC a. 11I b. 1,.("I . 1,."I d. 1,.$"I

('.

10 * 30 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition ((. 9!at is t!e avoidable interest for #rlington CompanyC a. L24,,,,, b. L''3,,13 . L2'3,(,2 d. L"(',,12 9!at is t!e a tual interest for #rlington CompanyC a. L1,4$",,,, b. L1,4(",,,, . L1,22",,,, d. L"(',,12 9!at amount of interest s!ould be !arged to e.penseC a. L$3',*(' b. L1,22" . L('',*(' d. L$*1,*(' -odson Company traded in a manual pressing ma !ine for an automated pressing ma !ine and gave L1$,,,, as!. T!e old ma !ine ost L1($,,,, and !ad a net boo2 value of L142,,,,. T!e old ma !ine !ad a fair value of L12,,,,,. 9!i ! of t!e follo4ing is t!e orre t Bournal entry to re ord t!e e. !angeC a. =quipment 1oss on -isposal # umulated -epre iation =quipment Cas! b. =quipment =quipment Cas! . Cas! =quipment 1oss on -isposal # umulated -epre iation =quipment 13$,,,, 22,,,, 44,,,, 1($,,,, 1$,,,, 13$,,,, 12,,,,, 1$,,,, 1$,,,, 12,,,,, 22,,,, 44,,,, 2,2,,,, 44,,,, 1($,,,, 1$,,,,

(*.

*,.

*1.

d. =quipment 24$,,,, # umulated -epre iation =quipment Cas!

Use t$e &o""o,in0 in&o /ation to ans,e questions ?3 @ ?4) Nelo4 is t!e information relative to an e. !ange of assets by 3tanton Company. T!e e. !ange la 2s ommer ial substan e. O"% Equi(/ent Noo2 :alue Fair :alue L22",,,, L22",,,, L1",,,,, L13",,,, Cas! 6aid L4",,,, L21,,,,

Case I Case II

# quisition and -isposition of 6roperty, 6lant, and =quipment *2. 9!i ! of t!e follo4ing 4ould be orre t for 3tanton to re ord in Case IC a. b. . d. *3. /e ord =quipment at? L2',,,,, L3,,,,,, L22",,,, L2',,,,, /e ord a gain of FlossG of? L, L3,,,,, LF1",,,,G L3,,,,,

10 * 31

9!i ! of t!e follo4ing 4ould be orre t for 3tanton to re ord in Case IIC a. b. . d. /e ord =quipment at? L1'1,,,, L1",,,,, L1"$,,,, L1",,,,, /e ord a gain of FlossG of? L1",,,, L$,,,, LF1",,,,G LF$,,,,G

Use t$e &o""o,in0 in&o /ation &o questions ?9 an% ?;) ;len In . and #rmstrong Co. !ave an e. !ange 4it! no ommer ial substan e. T!e asset given up by ;len In . !as a boo2 value of L4(,,,, and a fair value of L$,,,,,. T!e asset given up by #rmstrong Co. !as a boo2 value of L(,,,,, and a fair value of L'$,,,,. Noot of L1$,,,, is re eived by #rmstrong Co. *4. 9!at amount s!ould ;len In . re ord for t!e asset re eivedC a. L$,,,,, b. L$4,,,, . L'$,,,, d. L(,,,,, *". 9!at amount s!ould #rmstrong Co. re ord for t!e asset re eivedC a. L$,,,,, b. L$4,,,, . L'$,,,, d. L(,,,,, Eardin Company re eived L$,,,,, in as! and a used omputer 4it! a fair value of L1(,,,,, from 6age Corporation for Eardin CompanyHs e.isting omputer !aving a fair value of L24,,,,, and an undepre iated ost of L22",,,, re orded on its boo2s. T!e transa tion !as no ommer ial substan e. Eo4 mu ! gain s!ould Eardin re ogni)e on t!is e. !ange, and at 4!at amount s!ould t!e a quired omputer be re orded, respe tivelyC a. L, and L1$",,,, b. L1,1"3 and L1$$,1"3 . L1",,,, and L1(,,,,, d. L$,,,,, and L22",,,,

*$.

Use t$e &o""o,in0 in&o /ation to ans,e questions ?= @ ?>) Mamison Company pur !ased t!e assets of Noo2er Company at an au tion for L2,(,,,,,,. #n independent appraisal of t!e fair value of t!e assets is listed belo4? 1and L*",,,,, Nuilding 1,4,,,,,, =quipment 1,,",,,,, Tru 2s 1,',,,,,,

10 * 33 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition *'. #ssuming t!at spe ifi identifi ation osts are impra ti able and t!at Mamison allo ates t!e pur !ase pri e on t!e basis of t!e relative fair values, 4!at amount 4ould be allo ated to t!e Tru 2sC a. L*33,333 b. L1,4,,,,,, . L1,$(,,,,, d. L1,',,,,,, #ssuming t!at spe ifi identifi ation osts are impra ti able and t!at Mamison allo ates t!e pur !ase pri e on t!e basis of t!e relative fair values, 4!at amount 4ould be allo ated to t!e NuildingC a. L1,,"*,4$, b. L1,4,,,,,, . L2,"",,,,, d. L'$(,$2' %n -e ember 1, 7iser Corporation e. !anged 3,,,, s!ares of its L2" par value ommon sto 2 !eld in treasury for a par el of land to be !eld for a future plant site. T!e treasury s!ares 4ere a quired by 7iser at a ost of L4, per s!are, and on t!e e. !ange date t!e ommon s!ares of 7iser !ad a fair value of L", per s!are. 7iser re eived L*,,,, for selling s rap 4!en an e.isting building on t!e property 4as removed from t!e site. Nased on t!ese fa ts, t!e land s!ould be apitali)ed at a. L111,,,,. b. L12,,,,,. . L141,,,,. d. L1",,,,,. 3torm Corporation pur !ased a ne4 ma !ine on % tober 31, 2,12. # L3,$,, do4n payment 4as made and t!ree mont!ly installments of L1,,(,, ea ! are to be made beginning on November 3,, 2,12. T!e as! pri e 4ould !ave been L34,(,,. 3torm paid no installation !arges under t!e mont!ly payment plan but a L$,, installation !arge 4ould !ave been in urred 4it! a as! pur !ase. T!e amount to be apitali)ed as t!e ost of t!e ma !ine on % tober 31, 2,12 4ould be a. L3$,$,,. b. L3$,,,,. . L3",4,,. d. L34,(,,. Eorner Company buys a delivery van 4it! a list pri e of L4",,,,. T!e dealer grants a 1"I redu tion in list pri e and an additional 2I as! dis ount on t!e net pri e if payment is made in 3, days. 3ales ta.es amount to L$,, and t!e ompany paid an e.tra L4", to !ave a spe ial devi e installed. 9!at s!ould be t!e re orded ost of t!e vanC a. L3',4(". b. L3(,4$(. . L3(,"3". d. L3(,,(".

*(.

**.

1,,.

1,1.

# quisition and -isposition of 6roperty, 6lant, and =quipment 1,2.

10 * 34

%n #ugust 1, 2,12, Eayes Corporation pur !ased a ne4 ma !ine on a deferred payment basis. # do4n payment of L*,,,, 4as made and 4 mont!ly installments of L',",, ea ! are to be made beginning on 3eptember 1, 2,12. T!e as! equivalent pri e of t!e ma !ine 4as L3$,,,,. Eayes in urred and paid installation osts amounting to L1,",,. T!e amount to be apitali)ed as t!e ost of t!e ma !ine is a. L3$,,,,. b. L3',",,. . L3*,,,,. d. L4,,",,. %n #pril 1, 7ooney Corporation pur !ased for L1,'1,,,,, a tra t of land on 4!i ! 4as lo ated a 4are!ouse and offi e building. T!e follo4ing data 4ere olle ted on erning t!e property? Current #ssessed :aluation :endorAs %riginal Cost 1and L$,,,,,, L"$,,,,, 9are!ouse 4,,,,,, 3$,,,,, %ffi e building (,,,,,, $(,,,,, L1,(,,,,,, L1,$,,,,,, 9!at are t!e appropriate amounts t!at 7ooney s!ould re ord for t!e land, 4are!ouse, and offi e building, respe tivelyC a. 1and, L"$,,,,,O 4are!ouse, L3$,,,,,O offi e building, L$(,,,,,. b. 1and, L$,,,,,,O 4are!ouse, L4,,,,,,O offi e building, L(,,,,,,. . 1and, L"*(,",,O 4are!ouse, L3(4,'",O offi e building, L3$3,3'". d. 1and, L"',,,,,O 4are!ouse, L3(,,,,,O offi e building, L'$,,,,,.

1,3.

1,4.

%n #ugust 1, 2,12, 7ende) Corporation pur !ased a ne4 ma !ine on a deferred payment basis. # do4n payment of L2,,,, 4as made and 4 annual installments of L1(,,,, ea ! are to be made beginning on 3eptember 1, 2,12. T!e as! equivalent pri e of t!e ma !ine 4as L$*,,,,. -ue to an employee stri2e, 7ende) ould not install t!e ma !ine immediately, and t!us in urred L*,, of storage osts. Costs of installation Fe. luding t!e storage ostsG amounted to L2,4,,. T!e amount to be apitali)ed as t!e ost of t!e ma !ine is a. L$*,,,,. b. L'1,4,,. . L'2,3,,. d. L'(,,,,.

10 * 39 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition 1,". 3iegle Company e. !anged $,, s!ares of ;uinn Company ommon sto 2, 4!i ! 3iegle 4as !olding as an investment, for equipment from 7ayo Company. T!e ;uinn Company ommon sto 2, 4!i ! !ad been pur !ased by 3iegle for L", per s!are, !ad a quoted mar2et value of L"( per s!are at t!e date of e. !ange. T!e equipment !ad a re orded amount on 7ayoHs boo2s of L31,",,. 9!at Bournal entry s!ould 3iegle ma2e to re ord t!is e. !angeC a. =quipment .......................................................................... 3,,,,, Investment in ;uinn Co. Common 3to 2 ................... 3,,,,, b. =quipment .......................................................................... 31,",, Investment in ;uinn Co. Common 3to 2 ................... 3,,,,, ;ain on -isposal of Investment ................................. 1,",, . =quipment .......................................................................... 31,",, 1oss on -isposal of Investment .......................................... 3,3,, Investment in ;uinn Co. Common 3to 2 ................... 34,(,, d. =quipment .......................................................................... 34,(,, Investment in ;uinn Co. Common 3to 2 ................... 3,,,,, ;ain on -isposal of Investment ................................. 4,(,, %n Manuary 2, 2,12, /apid -elivery Company traded in an old delivery tru 2 for a ne4er model. T!e e. !ange la 2ed ommer ial substan e. -ata relative to t!e old and ne4 tru 2s follo4? %ld Tru 2 %riginal ost L3$,,,, # umulated depre iation as of Manuary 2, 2,12 24,,,, #verage publis!ed retail value 11,,,, Ne4 Tru 2 1ist pri e L$,,,,, Cas! pri e 4it!out trade&in "4,,,, Cas! paid 4it! trade&in 4",,,, 9!at s!ould be t!e ost of t!e ne4 tru 2 for finan ial a ounting purposesC a. L4",,,,. b. L"4,,,,. . L"',,,,. d. L$,,,,,. 1,'. %n -e ember 1, 2,12, <elso Company a quired ne4 equipment in e. !ange for old equipment t!at it !ad a quired in 2,,*. T!e old equipment 4as pur !ased for L',,,,, and !ad a boo2 value of L2$,$,,. %n t!e date of t!e e. !ange, t!e old equipment !ad a fair value of L2(,,,,. In addition, <elso paid L*1,,,, as! for t!e ne4 equipment, 4!i ! !ad a list pri e of L12$,,,,. T!e e. !ange la 2ed ommer ial substan e. #t 4!at amount s!ould <elso re ord t!e ne4 equipment for finan ial a ounting purposesC a. L*1,,,,. b. L11',$,,. . L11*,,,,. d. L12$,,,,.

1,$.

>se t!e follo4ing information for questions 1,( and 1,*. # ma !ine ost L3$,,,,,, !as annual depre iation of L$,,,,,, and !as a umulated depre iation of L2',,,,, on -e ember 31, 2,12. %n #pril 1, 2,13, 4!en t!e ma !ine !as a fair value of L(2,",,, it is e. !anged for a ma !ine 4it! a fair value of L4,",,,, and t!e proper amount of as! is paid. T!e e. !ange la 2ed ommer ial substan e.

# quisition and -isposition of 6roperty, 6lant, and =quipment 1,(. T!e gain to be re orded on t!e e. !ange is a. L,. b. L',",, loss. . L1",,,, gain. d. L4",,,, gain. T!e ne4 ma !ine s!ould be re orded at a. L322,",,. b. L3$',",,. . L3*',",,. d. L4,",,,,.

10 * 3;

1,*.

>se t!e follo4ing information for questions 11, and 111. =quipment t!at ost L((,,,, and !as a umulated depre iation of L4,,,,, is e. !anged for equipment 4it! a fair value of L$4,,,, and L1$,,,, as! is re eived. T!e e. !ange la 2ed ommer ial substan e. 11,. T!e gain to be re ogni)ed from t!e e. !ange is a. L$,4,, gain. b. L(,,,, gain. . L24,,,, gain. d. L32,,,, gain. T!e ne4 equipment s!ould be re orded at a. L$4,,,,. b. L4(,,,,. . L4,,,,,. d. L3(,4,,.

111.

>se t!e follo4ing information for questions 112 t!roug! 114. T4o independent ompanies, Eager Co. and 3!a4 Co., are in t!e !ome building business. =a ! o4ns a tra t of land !eld for development, but ea ! 4ould prefer to build on t!e ot!erHs land. T!ey agree to e. !ange t!eir land. #n appraiser 4as !ired, and from !er report and t!e ompaniesH re ords, t!e follo4ing information 4as obtained? EagerHs 1and 3!a4Hs 1and Cost and boo2 value L"'$,,,, L3$,,,,, Fair value based upon appraisal '2,,,,, $3,,,,, T!e e. !ange 4as made, and based on t!e differen e in appraised fair values, 3!a4 paid L*,,,,, to Eager. T!e e. !ange la 2ed ommer ial substan e. 112. For finan ial reporting purposes, Eager s!ould re ogni)e a pre&ta. gain on t!is e. !ange of a. L,. b. L1(,,,,. . L*,,,,,. d. L144,,,,.

10 * 3< Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition 113. T!e ne4 land s!ould be re orded on EagerHs boo2s at a. L",4,,,,. b. L"'$,,,,. . L$3,,,,,. d. L'2,,,,,. T!e ne4 land s!ould be re orded on 3!a4Hs boo2s at a. L3$,,,,,. b. L4",,,,,. . L$3,,,,,. d. L'2,,,,,. Timmons Company traded ma !inery 4it! a boo2 value of L24,,,,, and a fair value of L4,,,,,,. It re eived in e. !ange from 1e4is Company a ma !ine 4it! a fair value of L3$,,,,, and as! of L4,,,,,. 1e4isAs ma !ine !as a boo2 value of L3(,,,,,. 9!at amount of gain s!ould Timmons re ogni)e on t!e e. !angeC a. L &,& b. L1$,,,, . L4,,,,, d. L1$,,,,, 1e4is Company traded ma !inery 4it! a boo2 value of L"',,,,, and a fair value of L"4,,,,,. It re eived in e. !ange from Timmons Company a ma !ine 4it! a fair value of L$,,,,,,. 1e4is also paid as! of L$,,,,, in t!e e. !ange. TimmonsAs ma !ine !as a boo2 value of L"',,,,,. 9!at amount of gain or loss s!ould 1e4is re ogni)e on t!e e. !angeC a. L$,,,,, gain b. L &,&. . L3,,,, loss d. L3,,,,, loss -urler Company traded ma !inery 4it! a boo2 value of L"4,,,,, and a fair value of L*,,,,,,. It re eived in e. !ange from Eoyle Company a ma !ine 4it! a fair value of L(1,,,,, and as! of L*,,,,,. EoyleAs ma !ine !as a boo2 value of L("",,,,. 9!at amount of gain s!ould -urler re ogni)e on t!e e. !angeC a. L &,& b. L3$,,,, . L*,,,,, d. L3$,,,,, Eoyle Company traded ma !inery 4it! a boo2 value of L"',,,,, and a fair value of L"4,,,,,. It re eived in e. !ange from -urler Company a ma !ine 4it! a fair value of L$,,,,,,. Eoyle also paid as! of L$,,,,, in t!e e. !ange. -urlerAs ma !ine !as a boo2 value of L"',,,,,. 9!at amount of gain or loss s!ould Eoyle re ogni)e on t!e e. !angeC a. L$,,,,, gain b. L &,& . L3,,,, loss d. L3,,,,, loss

114.

11".

11$.

11'.

11(.

# quisition and -isposition of 6roperty, 6lant, and =quipment 11*.

10 * 3=

6eterson Company pur !ased ma !inery for L4(,,,,, on Manuary 1, 2,,*. 3traig!t&line depre iation !as been re orded based on a L3,,,,, salvage value and a "&year useful life. T!e ma !inery 4as sold on 7ay 1, 2,13 at a gain of L*,,,,. Eo4 mu ! as! did 6eterson re eive from t!e sale of t!e ma !ineryC a. L$*,,,, b. L(1,,,, . L**,,,, d. L12*,,,, 3ut!erland Company pur !ased ma !inery for L$4,,,,, on Manuary 1, 2,,*. 3traig!t&line depre iation !as been re orded based on a L4,,,,, salvage value and a "&year useful life. T!e ma !inery 4as sold on 7ay 1, 2,13 at a gain of L12,,,,. Eo4 mu ! as! did 3ut!erland re eive from t!e sale of t!e ma !ineryC a. L*2,,,,. b. L1,(,,,,. . L132,,,,. d. L1'2,,,,. = 2er Company pur !ased a ne4 ma !ine on 7ay 1, 2,,4 for L2$4,,,,. #t t!e time of a quisition, t!e ma !ine 4as estimated to !ave a useful life of ten years and an estimated salvage value of L12,,,,. T!e ompany !as re orded mont!ly depre iation using t!e straig!t&line met!od. %n 7ar ! 1, 2,13, t!e ma !ine 4as sold for L3$,,,,. 9!at s!ould be t!e loss re ogni)ed from t!e sale of t!e ma !ineC a. L,. b. L",4,,. . L12,,,,. d. L1',4,,. %n Manuary 1, 2,,4, 7ill Corporation pur !ased for L3,4,,,,, equipment !aving a useful life of ten years and an estimated salvage value of L1$,,,,. 7ill !as re orded mont!ly depre iation of t!e equipment on t!e straig!t&line met!od. %n -e ember 31, 2,12, t!e equipment 4as sold for L"$,,,,. #s a result of t!is sale, 7ill s!ould re ogni)e a gain of a. L,. b. L11,2,,. . L2',2,,. d. L"$,,,,.

12,.

121.

122.

Mu"ti("e C$oi'e Ans,e s+Co/(utationa"
Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans)

$3. $4. $". $$. $'. $(. $*. ',. '1.

b d d

d d a b

'2. '3. '4. '". '$. ''. '(. '*. (,.

a b a b a d a b

(1. (2. (3. (4. (". ($. ('. ((. (*.

b d b b d d a

*,. *1. *2. *3. *4. *". *$. *'. *(.

a a b a a d

**. 1,,. 1,1. 1,2. 1,3. 1,4. 1,". 1,$. 1,'.

b d b d b

1,(. 1,*. 11,. 111. 112. 113. 114. 11". 11$.

b d a d b a b b d

11'. 11(. 11*. 12,. 121. 122.

b d

b b

10 * 3> Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

MULTIPLE CHOICE+CPA A%a(te%
123. %n -e ember 1, 2,12, Eogan Co. pur !ased a tra t of land as a fa tory site for L*,,,,,,. T!e old building on t!e property 4as ra)ed, and salvaged materials resulting from demolition 4ere sold. #dditional osts in urred and salvage pro eeds reali)ed during -e ember 2,12 4ere as follo4s? Cost to ra)e old building 1egal fees for pur !ase ontra t and to re ord o4ners!ip Title guarantee insuran e 6ro eeds from sale of salvaged materials L',,,,, 1,,,,, 1$,,,, (,,,,

In Eogan Hs -e ember 31, 2,12 balan e s!eet, 4!at amount s!ould be reported as landC a. L*2$,,,,. b. L*$2,,,,. . L*((,,,,. d. L**$,,,,. 124. 1and 4as pur !ased to be used as t!e site for t!e onstru tion of a plant. # building on t!e property 4as sold and removed by t!e buyer so t!at onstru tion on t!e plant ould begin. T!e pro eeds from t!e sale of t!e building s!ould be a. lassified as ot!er in ome. b. dedu ted from t!e ost of t!e land. . netted against t!e osts to lear t!e land and e.pensed as in urred. d. netted against t!e osts to lear t!e land and amorti)ed over t!e life of t!e plant. # ompany is onstru ting an asset for its o4n use. Constru tion began in 2,12. T!e asset is being finan ed entirely 4it! a spe ifi ne4 borro4ing. Constru tion e.penditures 4ere made in 2,12 and 2,13 at t!e end of ea ! quarter. T!e total amount of interest ost apitali)ed in 2,13 s!ould be determined by applying t!e interest rate on t!e spe ifi ne4 borro4ing to t!e a. total a umulated e.penditures for t!e asset in 2,12 and 2,13. b. average a umulated e.penditures for t!e asset in 2,12 and 2,13. . average e.penditures for t!e asset in 2,13. d. total e.penditures for t!e asset in 2,13. Colt Football Co. !ad a player ontra t 4it! 9atts t!at is re orded in its boo2s at L4,(,,,,,, on Muly 1, 2,12. -ay Football Co. !ad a player ontra t 4it! <urt) t!at is re orded in its boo2s at L$,,,,,,,, on Muly 1, 2,12. %n t!is date, Colt traded 9atts to -ay for <urt) and paid a as! differen e of L$,,,,,,. T!e fair value of t!e <urt) ontra t 4as L',2,,,,,, on t!e e. !ange date. T!e e. !ange !ad no ommer ial substan e. #fter t!e e. !ange, t!e <urt) ontra t s!ould be re orded in ColtHs boo2s at a. L",4,,,,,,. b. L$,,,,,,,,. . L$,$,,,,,,. d. L',2,,,,,,.

12".

12$.

# quisition and -isposition of 6roperty, 6lant, and =quipment 12'.

10 * 3?

Euff Co. e. !anged nonmonetary assets 4it! 3ayler Co. No as! 4as e. !anged and t!e e. !ange !ad no ommer ial substan e. T!e arrying amount of t!e asset surrendered by Euff e. eeded bot! t!e fair value of t!e asset re eived and 3aylerHs arrying amount of t!at asset. Euff s!ould re ogni)e t!e differen e bet4een t!e arrying amount of t!e asset it surrendered and a. t!e fair value of t!e asset it re eived as a loss. b. t!e fair value of t!e asset it re eived as a gain. . 3aylerHs arrying amount of t!e asset it re eived as a loss. d. 3aylerHs arrying amount of t!e asset it re eived as a gain. C!ase County o4ned an idle par el of real estate onsisting of land and a fa tory building. C!ase gave title to t!is realty to 6atton Co. as an in entive for 6atton to establis! manufa turing operations in t!e County. 6atton paid not!ing for t!is realty, 4!i ! !ad a fair mar2et value of L2",,,,, at t!e date of t!e grant. 6atton s!ould re ord t!is nonmonetary transa tion as a a. memo entry only. b. redit to Contribution /evenue for L2",,,,,. . redit to =.traordinary In ome for L2",,,,,. d. redit to -onated Capital for L2",,,,,. %n 3eptember 1,, 2,12, Men2s Co. in urred t!e follo4ing osts for one of its printing presses? 6ur !ase of atta !ment L$",,,, Installation of atta !ment ",,,, /epla ement parts for renovation of press 1(,,,, 1abor and over!ead in onne tion 4it! renovation of press ',,,, Neit!er t!e atta !ment nor t!e renovation in reased t!e estimated useful life of t!e press. Eo4ever, t!e renovation resulted in signifi antly in reased produ tivity. 9!at amount of t!e osts s!ould be apitali)edC a. L,. b. L'',,,,. . L((,,,,. d. L*",,,,.

12(.

12*.

13,.

%n Manuary 2, 2,12, Dor2 Corp. repla ed its boiler 4it! a more effi ient one. T!e follo4ing information 4as available on t!at date? 6ur !ase pri e of ne4 boiler Carrying amount of old boiler Fair value of old boiler Installation ost of ne4 boiler L1',,,,, 1,,,,, 4,,,, 2,,,,,

T!e old boiler 4as sold for L4,,,,. 9!at amount s!ould Dor2 apitali)e as t!e ost of t!e ne4 boilerC a. L1*,,,,,. b. L1($,,,,. . L1(,,,,,. d. L1',,,,,.

10 * 40 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

Mu"ti("e C$oi'e Ans,e s+CPA A%a(te%
Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans)

123. 124.

b

12". 12$.

b a

12'. 12(.

a b

12*. 13,.

d a

DERI8ATIONS + Co/(utationa"
No) Ans,e
$3. $4. $". $$. $'. $(. $*. ',. '1. '2. '3. '4. '". '$. ''. '(. '*. (,. (1. b a d a b d d a b a b a b d d

De i!ation
L(,,,,,, P L(,,,,, Q L",4,, P L3,4(, P L2,4,, P L$,4,, @ L(($,((,. L31,2,, P L2,$,, P L1,,44, P L2,",,,,,, P L1',,,,, @ L2,'14,24,. 1and? L2",,,,, P L2,,,,, P L",,,, Q L1,,,,, @ L2$",,,,. Nuilding? L3",,,, P L1,2*,,,,, @ L1,32",,,,. L12,,,, P L(,, P L2,, P L22" @ L13,22". L1",,,, P L*,, P L24, P L2', @ L1$,41,. L",,,,, P L3",,,, @ L(",,,,. L$,,,,, P L'",,,, @ L13",,,,. RFL1,,,,,,,,, P L4,,,,,,G Q L(,,,,,,S T 4, @ L24,,,,,. FL1,",,,,,, U $012G P FL3,1",,,,, U 4012G @ L1,(,,,,,,. RFL2,,,,,,,,, P L(,,,,,,G Q L1,$,,,,,,S T 4, @ L4(,,,,,. FL2,,,,,,,, U $012G P FL4,4,,,,,, U 4012G @ L2,4$$,$$'. FL24,,,,, U 4012G P FL24,,,,, U 3012G P FL24,,,,, U 2012G P FL24,,,,, U 1012G @ L2,,,,,,. L$,,,,,, U .1, @ L$,,,,,. L1$,,,,, F3012 P 2012 P 1012G @ L(,,,,,. L24,,,,, F3012 P 2012 P 1012G @ L12,,,,,. FL1,",,,,,, U 4012G P FL(4,,,,, U 3012G P FL1,",,,,,, U 2012G P FL2,4,,,,,, U 1012G @ L1,1$,,,,,. FL1,2,,,,,, U *I U 1,012G P FL",,,,,, U 12IG @ L1",,,,,. FL1,2,,,,,, U .,*G P FL2",,,,, U .12G @ L13(,,,,. FL((,,,,, U .1G P FL32,,,,, U .,*G @ L11$,(,,.

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * 41

DERI8ATIONS + Co/(utationa" 1'ont)2
No) Ans,e
(2. (3. (4. (". b d b

De i!ation
FL3,,,,,, U 12012G P FL*,,,,,, U 4012G P FL*,,,,,, U ,012G @ L$,,,,,,. L$,,,,,, Ffrom V (2G U 12I @ L'2,,,,. RFL3,,,,,, P L*,,,,,, P L*,,,,,, P L'2,,,,G U *012S P FL*,,,,,, U $012G P FL$,,,,,, U ,012G @ L2,,'*,,,,. L1,$",,,,, U 12I U *012 @ L14(,",,O FL2,1'2,,,, U *012G P FL*,,,,,, U $012G @ L2,,'*,,,,O RFL2,,'*,,,, Q L1,$",,,,,G U *I U *012S P L14(,",, @ L1'',4"(. FL4,,,,,,,, U 1,012G P FL3,3,,,,,, U '012G P FL",,,,,,,, U ,012G @ L",2"(,333. RFL4,,,,,,,, U .1,G P FL',",,,,,, U .11GS T FL4,,,,,,,, P L',",,,,,,G @ 1,.$"I. L2,,,,,,,, U 12I @ L24,,,,,O FL4,,,,,,,, U 1,012G P FL3,3,,,,,, U '012G @ L",2"(,333O RFL",2"(,333 Q L2,,,,,,,,G U 1,.$"IS P L24,,,,, @ L"(',,12. FL2,,,,,,,, U .12G P FL4,,,,,,,, U .1,G P FL',",,,,,, U .11G @ L1,4$",,,,. FL2,,,,,,,, U .12G P FL4,,,,,,,, U .1,G P FL',",,,,,, U .11G @ L1,4$",,,,O RFL",2"(,333 Q L2,,,,,,,,G U 1,.$"IS P L2,,,,,,,, U .12 @ L"(',,12. L1,4$",,,, Q L"(',,12 @ L('',*('.

($. ('. ((.

b d d

(*. *,.

a

*1. *2. *3. *4. *". *$. *'. *(. **. 1,,. 1,1.

a a

=quipment @ L12,,,,, P L1$,,,,O 1oss? L142,,,, Q L12,,,,, @ 22,,,,. L22",,,, P L4",,,, @ L2',,,,,. L13",,,, P L21,,,, @ L1"$,,,,O L13",,,, Q L1",,,,, @ L1",,,,.

b a

L4(,,,, P L1$,,,, @ L$4,,,,. L$,,,,, Ffair valueG. L24,,,,, Q L22",,,, @ L1",,,,O L1(,,,,, Ffair valueG.

a d

RL1,',,,,,, T FL*",,,,, P L1,4,,,,,, P L1,,",,,,, P L1,',,,,,,GS U L2,(,,,,,, @ L*33,333. RL1,4,,,,,, T FL*",,,,, P L1,4,,,,,, P L1,,",,,,, P L1,',,,,,,GS U L2,(,,,,,, @ L'$(,$2'. F3,,,, U L",G Q L*,,,, @ L141,,,,. L34,(,, P L$,, @ L3",4,,. FL4",,,, U .(" U .*(G P L$,, P L4", @ L3(,"3".

10 * 43 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

DERI8ATIONS + Co/(utationa" 1'ont)2
No) Ans,e
1,2. 1,3. b d

De i!ation
L3$,,,, P L1,",, @ L3',",,. 1and? $,01(, U L1,'1,,,,, @ L"',,,,,. 9are!ouse? 4,01(, U L1,'1,,,,, @ L3(,,,,,. %ffi e Nuilding? (,01(, U L1,'1,,,,, @ L'$,,,,,. L$*,,,, P L2,4,, @ L'1,4,,. L34,(,, Q L3,,,,, @ L4,(,, FgainG. Fair value of ne4 tru 2 @ L"4,,,,. 1oss? FL"4,,,, Q L4",,,,G Q L12,,,, @ FL3,,,,G. Ne4 7a !ine? L12,,,, P L4",,,, Q L3,,,, @ L"4,,,,. L2(,,,, P L*1,,,, @ L11*,,,,.

1,4. 1,". 1,$.

b d b

1,'. 1,(. 1,*. 11,. 111. 112. 113. b d a d b a

L(2,",, Q FL3$,,,,, Q L2(",,,,G @ L',",,. L322,",, P L(2,",, @ L4,",,,,. L1$,,,, U L32,,,, @ L$,4,,. L1$,,,, + L$4,,,, L$4,,,, Q FL32,,,, Q L$,4,,G @ L3(,4,,. L*,,,,, U L144,,,, @ L1(,,,,. L*,,,,, + L$3,,,,, L$3,,,,, Q FL144,,,, Q L1(,,,,G @ L",4,,,, or  L*,,,,,  L"'$,,,, −  . L"'$,,,,  = L",4,,,,.  L'2,,,,,  L3$,,,,, P L*,,,,, @ L4",,,,, or L'2,,,,, Q FL$3,,,,, Q L3$,,,,,G @ L4",,,,,. FL4,,,,,, Q L24,,,,,G U RL4,,,,, T FL4,,,,, P L3$,,,,,GS @ L1$,,,,. L"4,,,,, Q L"',,,,, @ FL3,,,,,G. FL*,,,,,, Q L"4,,,,,G U RL*,,,,, T FL*,,,,, P L(1,,,,,GS @ L3$,,,,. L"4,,,,, Q L"',,,,, @ FL3,,,,,G. RFL4(,,,,, Q L3,,,,,G T "S U 4 103 @ L3*,,,,, FL4(,,,,, Q L3*,,,,,G P L*,,,, @ L**,,,,.

114. 11". 11$. 11'. 11(. 11*.

b b d b d

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * 44

DERI8ATIONS + Co/(utationa" 1'ont)2
No) Ans,e
12,. 121. 122. b b

De i!ation
RFL$4,,,,, Q L4,,,,,G T "S U 4 103 @ L"2,,,,, FL$4,,,,, Q L"2,,,,,G P L12,,,, @ L132,,,,. FL2$4,,,, Q L12,,,,G T F1, U 12G @ L2,1,, per mont! L3$,,,, Q RL2$4,,,, Q FL2,1,, U 1,$ mo.GS @ QL",4,,. FL3,4,,,, Q L1$,,,,G T F1, U 12G @ L2,4,,0mo.O L"$,,,, Q RL3,4,,,, Q FL2,4,, U 1,(GS @ L11,2,,.

DERI8ATIONS + CPA A%a(te%
No) Ans,e
123. 124. 12". 12$. 12'. 12(. 12*. 13,. b b a a b d a

De i!ation
L*,,,,,, P L',,,,, P L1,,,,, P L1$,,,, Q L(,,,, @ L*((,,,,. Con eptual. Con eptual. FL',2,,,,,, Q L$,,,,,,G Q L4,(,,,,,, @ L1,(,,,,,, Fdeferred gainG L',2,,,,,, Q L1,(,,,,,, @ L",4,,,,,, FNasisG. Con eptual. Con eptual. L$",,,, P L",,,, P L1(,,,, P L',,,, @ L*",,,,. L1',,,,, P L2,,,,, @ L1*,,,,,.

10 * 49 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition

E5ERCISES
EA) 10*14186lant asset a ounting. -uring 2,12 and 2,13, 3a4yer Corporation e.perien ed several transa tions involving plant assets. # number of errors 4ere made in re ording some of t!ese transa tions. For ea ! item listed belo4, indi ate t!e effe t of t!e error Fif anyG in t!e blan2s provided by using t!e follo4ing odes? % @ %verstateO > @ >nderstateO N= @ No =ffe t If no error 4as made, 4rite N= in ea ! of t!e four olumns. 2,12 Net Noo2 :alue of 6lant 2,12 #ssets at Net 12031012 In ome 2,13 Net Noo2 :alue of 6lant 2,13 #ssets at Net 12031013 In ome

Transa tion

1. T!e ost of installing a ne4 omputer system in 2,12 4as not re orded in 2,12. WWWWWWWW It 4as !arged to e.pense in 2,13. 2. In 2,13 leri al 4or2ers 4ere trained to use t!e ne4 omputer system at a ost of L1",,,,, 4!i ! 4as erroneously apital& i)ed. T!e ost is to be 4ritten off over t!e e.pe ted life of t!e ne4 omputer system. 3. # maBor over!aul of fa tory ma !inery in 2,12, 4!i ! e.tended its useful life by " years, 4as !arged to a umulated depre iation in 2,12. 4. Interest ost qualifying for apitali)ation in 2,12 4as !arged to interest e.pense in 2,12. ". In 2,12 land 4as boug!t for an employee par2ing lot. T!e L2,,,, title sear ! fee 4as !arged to e.pense in 2,12. $. T!e ost of moving several manufa turing fa ilities from metropolitan lo ations to suburban areas in 2,12 4as apitali)ed. T!e ost 4as 4ritten off over a 1,&year period beginning in 2,12.

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

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WWWWWWWW

WWWWWWWW

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WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

WWWWWWWW

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*141 Net Noo2 :alue of 6lant #ssets at 12031012 > N= N= > > N= Net Noo2 :alue of 6lant #ssets at 12031013 > % N= > > N=

10 * 4;

1. 2. 3. 4. ". $.

2,12 Net In ome % N= N= > > N=

2,13 Net In ome > % N= % N= N=

EA) 10*14389eig!ted&#verage # umulated =.penditures. %n #pril 1, 6aine Co. began onstru tion of a small building. 6ayments of L1(,,,,, 4ere made mont!ly for four mont!s beginning on #pril 1. T!e building 4as ompleted and ready for o upan y on #ugust 1. For t!e purpose of determining t!e amount of interest ost to be apitali)ed, al ulate t!e 4eig!ted&average a umulated e.penditures on t!e building by ompleting t!e s !edule belo4? -ate So"ution 10*143 -ate #pril 1 7ay 1 Mune 1 Muly 1 =.penditures L1(,,,,, 1(,,,,, 1(,,,,, 1(,,,,, Capitali)ation 6eriod 4012 3012 2012 1012 9eig!ted&#verage =.penditures L $,,,,, 4",,,, 3,,,,, 1",,,, L1",,,,, =.penditures Capitali)ation 6eriod 9eig!ted&#verage =.penditures

EA) 10*1448Capitali)ation of interest. %n 7ar ! 1, 7o l Co. began onstru tion of a small building. T!e follo4ing e.penditures 4ere in urred for onstru tion? 7ar ! 1 7ay 1 Muly 1 L 1",,,,, 3$,,,,, 2,,,,,, #pril 1 Mune 1 L 14(,,,, "4,,,,,

T!e building 4as ompleted and o upied on Muly 1. To !elp pay for onstru tion L1,,,,,, 4as borro4ed on 7ar ! 1 on a 12I, t!ree&year note payable. T!e only ot!er debt outstanding during t!e year 4as a L1,,,,,,,,, 1,I note issued t4o years ago. Inst u'tions FaG Cal ulate t!e 4eig!ted&average a umulated e.penditures. FbG Cal ulate avoidable interest.

10 * 4< Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition So"ution 10*144 FaG -ate 7ar ! 1 #pril 1 7ay 1 Mune 1 Muly 1 FbG =.penditures L 1",,,,, 14(,,,, 3$,,,,, "4,,,,, 2,,,,,, Capitali)ation 6eriod 4012 3012 2012 1012 , 9eig!ted&#verage # um. =.pend. L",,,,, 3',,,, $,,,,, 4",,,, , L1*2,,,,

9eig!ted&#verage # um. =.pend. L1,,,,,, *2,,,, L1*2,,,,

/ate .12 .1,

#voidable Interest L 12,,,, *,2,, L21,2,,

EA) 10*1498Nonmonetary e. !ange. # ma !ine ost L14,,,,,, !as annual depre iation e.pense of L2(,,,,, and !as a umulated depre iation of L',,,,, on -e ember 31, 2,12. %n #pril 1, 2,13, 4!en t!e ma !ine !as a fair value of L"$,,,,, it is e. !anged for a similar ma !ine 4it! a fair value of L1$(,,,, and t!e proper amount of as! is paid. T!e e. !ange la 2ed ommer ial substan e. Inst u'tions 6repare all entries t!at are ne essary at #pril 1, 2,13. So"ution 10*149 -epre iation =.pense FL2(,,,, U 3012G.......................................... # umulated -epre iation87a !inery............................... # umulated -epre iation87a !inery........................................... 7a !inery ....................................................................................... 1oss on -isposal of 7a !inery........................................................ 7a !inery ........................................................................... Cas! FL1$(,,,, Q L"$,,,,G ................................................ ',,,, ',,,, '',,,, 1$(,,,, ',,,, 14,,,,, 112,,,,

EA) 10*14;8Nonmonetary e. !ange. =quipment t!at ost L24,,,,, and !as a umulated depre iation of L1(*,,,, is e. !anged for equipment 4it! a fair value of L*$,,,, and L24,,,, as! is re eived. T!e e. !ange la 2ed ommer ial substan e. Inst u'tions FaG 3!o4 t!e al ulation of t!e gain to be re ogni)ed from t!e e. !ange. FbG 6repare t!e entry for t!e e. !ange. 3!o4 a !e 2 of t!e amount re orded for t!e ne4 equipment.

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*14; FaG Cost # umulated depre iation Noo2 value Fair value FL*$,,,, P L24,,,,G ;ain ;ain re ogni)ed F24012, U L$*,,,,G L24,,,,, F1(*,,,,G "1,,,, 12,,,,, L$*,,,, L 13,(,, 1(*,,,, 4,,(,, 24,,,,

10 * 4=

FbG # umulated -epre iation8=quipment................................... =quipment................................................................................ Cas!........................................................................................ =quipment.................................................................... ;ain on -isposal of =quipment.................................... C!e 2? Fair value 1ess deferred gain Nasis of ne4 equipment L*$,,,, F"",2,,G L4,,(,,

24,,,,, 13,(,,

EA) 10*14<8-onated assets. C!eng Company !as re ently de ided to a ept a proposal from t!e City of Nel #ire t!at publi ly o4ned property 4it! a large 4are!ouse lo ated on it 4ill be donated to C!eng if C!eng 4ill build a bran ! plant in Nel #ire. T!e appraised value of t!e property is L3",,,,, and of t!e 4are!ouse is L',,,,,,. Inst u'tions 6repare t!e entry by C!eng for t!e re eipt of t!e properties.

So"ution 10*14< Nuildings F9are!ouseG.................................................................... 1and................................................................................................ Contribution /evenue.......................................................... ',,,,,, 3",,,,, 1,,",,,,,

10 * 4> Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition EA) 10*14=8Capitali)ing vs. =.pensing. Consider ea ! of t!e items belo4. 6la e t!e proper letter in t!e blan2 spa e provided to indi ate t!e nature of t!e a ount or a ounts to be debited 4!en re ording ea ! transa tion using t!e preferred a ounting treatment. 6repayments s!ould be re orded in balan e s!eet a ounts. -isregard in ome ta. onsiderations unless instru ted ot!er4ise. a. b. . d. e. assetFsG only a umulated amorti)ation, depletion, or depre iation only e.pense only assetFsG and e.pense some ot!er a ount or ombination of a ounts

WWWWWW 1. # motor in one of Nort! CompanyAs tru 2s 4as over!auled at a ost of L$,,. It is e.pe ted t!at t!is 4ill e.tend t!e life of t!e tru 2 for t4o years. WWWWWW 2. 7a !inery 4!i ! !ad originally ost L13,,,,, 4as rearranged at a in luding installation, in order to improve produ tion. ost of L4",,

WWWWWW 3. %rlando Company re ently pur !ased land and t4o buildings for a total ost of L3",,,,, and entered t!e pur !ase on t!e boo2s. T!e L1,2,, ost of ra)ing t!e smaller building, 4!i ! !as an appraisal value of L$,2,,, is re orded. WWWWWW 4. Mant)en Company traded its old ma !ine 4it! a net boo2 value of L3,,,, plus as! of L',,,, for a ne4 one 4!i ! !ad a fair mar2et value of L*,,,,. WWWWWW ". Mim 6arra and 7ary 1a4son, maintenan e repair 4or2ers, spent five days in unloading and setting up a ne4 L$,,,, pre ision ma !ine in t!e plant. T!e 4ages earned in t!is five&day period, L4(,, are re orded. WWWWWW $. %n Mune 1, t!e 7ilton Eotel installed a sprin2ler system t!roug!out t!e building at a ost of L13,,,,. #s a result t!e insuran e rate 4as de reased by 4,I. WWWWWW '. #n improvement, 4!i ! e.tended t!e life but not t!e usefulness of t!e asset, ost L$,,,,. WWWWWW (. T!e atti of t!e administration building 4as finis!ed at a ost of L3,,,, to provide an additional offi e. WWWWWW *. In 7ar !, t!e 1yon T!eatre boug!t proBe tion equipment on t!e installment basis. T!e ontra t pri e 4as L23,$1,, payable L",$1, do4n, and L2,2", a mont! for t!e ne.t eig!t mont!s. T!e as! pri e for t!is equipment 4as L22,"3,. WWWWWW1,. 1ambert Company re orded t!e first yearAs interest on $I L1,,,,,, ten&year bonds sold a year ago at *4. T!e bonds 4ere sold in order to finan e t!e onstru tion of a !ydroele tri plant. 3i. mont!s after t!e sale of t!e bonds, t!e onstru tion of t!e !ydroele tri plant 4as ompleted and operations 4ere begun. F%nly as! interest, and not dis ount amorti)ation, is to be onsidered.G

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*14= 1. 2. 3. 4. ". b a or a e a $. '. (. *. 1,. a b a e d

10 * 4?

PRO-LEMS
P ) 10*14>8Capitali)ing a quisition osts. ;ibbs 7anufa turing Co. 4as in orporated on 102012 but 4as unable to begin manufa turing a tivities until (01012 be ause ne4 fa tory fa ilities 4ere not ompleted until t!at date. T!e 1and and Nuildings a ount at 12031012 per t!e boo2s 4as as follo4s? -ate 1031012 202(012 401012 "01012 "01012 "01012 (01012 (01012 12031012 Item 1and and dilapidated building Cost of removing building 1egal fees Fire insuran e premium payment 3pe ial ta. assessment for streets 6artial payment of ne4 building onstru tion Final payment on building onstru tion ;eneral e.penses #sset 4rite&up #mount L2,,,,,, 4,,,, $,,,, ",4,, 4,",, 1',,,,, 1',,,,, 3,,,,, '",,,, L$$4,*,,

#dditional information? 1. To a quire t!e land and building on 1031012, t!e ompany paid L1,,,,,, as! and 1,,,, s!ares of its ommon sto 2 Fpar value @ L1,,0s!areG 4!i ! is very a tively traded and !ad a fair value per s!are of L14,. 2. 9!en t!e old building 4as removed, ;ibbs paid <4i2 -emolition Co. L4,,,,, but also re eived L1,",, from t!e sale of salvaged material. 3. 1egal fees overed t!e follo4ing? Cost of organi)ation =.amination of title overing pur !ase of land 1egal 4or2 in onne tion 4it! t!e building onstru tion L2,",, 2,,,, 1,",, L$,,,,

4. T!e fire insuran e premium overed premiums for a t!ree&year term beginning 7ay 1, 2,12. ". ;eneral e.penses overed t!e follo4ing for t!e period 102012 to (01012. 6residentHs salary 6lant superintendent overing supervision of ne4 building L2,,,,, 1,,,,, L3,,,,,

$. Ne ause of t!e rising land osts, t!e president 4as sure t!at t!e land 4as 4ort! at least L'",,,, more t!an 4!at it ost t!e ompany. Inst u'tions -etermine t!e proper balan es as of 12031012 for a separate land a ount and a separate buildings a ount. >se separate T&a ounts Fone for land and one for buildingsG labeling all t!e relevant amounts and dis losing all omputations.

10 * 90 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition So"ution 10*14> 1and 1and and old building FL1,,,,,, plus L14,,,,,G /emoval of old building FL4,,,, Q L1,",,G 1egal fees 3pe ial assessment Nalan e 24,,,,, 2,",, 2,,,, 4,",, 24*,,,, Nuildings 1egal Fees 6artial payment Insuran e F3 mont!sG Final payment 3uperintendentHs salary Nalan e 1,",, 1',,,,, 4", 1',,,,, 1,,,,, 3"1,*",

P ) 10*14?8Capitali)ation of interest. -uring 2,12, Narden Nuilding Company onstru ted various assets at a total ost of L1,,",,,,,,. T!e 4eig!ted average a umulated e.penditures on assets qualifying for apitali)ation of interest during 2,12 4ere L',,,,,,,,. T!e ompany !ad t!e follo4ing debt outstanding at -e ember 31, 2,12? 1. 1,I, "&year note to finan e onstru tion of various assets, dated Manuary 1, 2,12, 4it! interest payable annually on Manuary 1 2. 12I, ten&year bonds issued at par on -e ember 31, 2,,$, 4it! interest payable annually on -e ember 31 3. *I, 3&year note payable, dated Manuary 1, 2,11, 4it! interest payable annually on Manuary 1 Inst u'tions Compute t!e amounts of ea ! of t!e follo4ing Fs!o4 omputationsG. 1. #voidable interest. 2. Total interest to be apitali)ed during 2,12. L4,",,,,,, ",,,,,,,, 2,",,,,,,

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*14? 1. 9eig!ted #verage # umulated =.penditures L4,",,,,,, 2,",,,,,, L',,,,,,,, #ppli able Interest /ate .1, .11X #voidable Interest L4",,,,, 2'",,,, L'2",,,, @ #voidable Interest

10 * 91

XComputation of 4eig!ted average interest rate? 6rin ipal 12I ten&year bonds L",,,,,,,, *I 3&year note 2,",,,,,, L',",,,,,,

Interest L$,,,,,, 22",,,, L(2",,,,

9eig!ted average interest rate @ L(2",,,, T L',",,,,,, @ 11I. 2. # tual interest ost during 2,12? Constru tion note, L4,",,,,,, U .1, 12I ten&year bonds, L",,,,,,,, U .12 *I t!ree&year note, L2,",,,,,, U .,* L 4",,,,, $,,,,,, 22",,,, L1,2'",,,,

T!e interest ost to be apitali)ed is L'2",,,, Ft!e lesser of t!e L'2",,,, avoidable interest and t!e L1,2'",,,, a tual interestG.

P ) 10*1908Capitali)ation of interest. =arly in 2,12, -obbs Corporation engaged <iner, In . to design and onstru t a omplete moderni)ation of -obbsHs manufa turing fa ility. Constru tion 4as begun on Mune 1, 2,12 and 4as ompleted on -e ember 31, 2,12. -obbs made t!e follo4ing payments to <iner, In . during 2,12? -ate 6ayment Mune 1, 2,12 L4,(,,,,,, #ugust 31, 2,12 ',2,,,,,, -e ember 31, 2,12 $,,,,,,,, In order to !elp finan e t!e onstru tion, -obbs issued t!e follo4ing during 2,12? 1. L4,,,,,,,, of 1,&year, *I bonds payable, issued at par on 7ay 31, 2,12, 4it! interest payable annually on 7ay 31. 2. 1,,,,,,,, s!ares of no&par ommon sto 2, issued at L1, per s!are on % tober 1, 2,12. In addition to t!e *I bonds payable, t!e only debt outstanding during 2,12 4as a L1,,,,,,,,, 12I note payable dated Manuary 1, 2,,( and due Manuary 1, 2,1(, 4it! interest payable annually on Manuary 1. Inst u'tions Compute t!e amounts of ea ! of t!e follo4ing Fs!o4 omputationsG? 1. 9eig!ted&average a umulated e.penditures qualifying for apitali)ation of interest ost. 2. #voidable interest in urred during 2,12. 3. Total amount of interest ost to be apitali)ed during 2,12.

10 * 93 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition So"ution 10*190 1. -ate Mune 1 #ugust 31 -e ember 31 2. 9eig!ted&#verage # umulated =.penditures L4,,,,,,,, 1,2,,,,,, L",2,,,,,, Capitali)ation =.penditures L4,(,,,,,, ',2,,,,,, $,,,,,,,, 6eriod '012 4012 , 9eig!ted&#verage # umulated =.penditures L2,(,,,,,, 2,4,,,,,, , L",2,,,,,, #voidable Interest L3$,,,,, 144,,,, L",4,,,, L21,,,,, 12,,,,, L33,,,,,

#ppropriate Interest /ate .,* .12

3.

# tual interest in urred during 2,12? *I bonds payable, L4,,,,,,,, U .,* U '012 12I note payable, L1,,,,,,,, U .12

T!e interest ost to be apitali)ed is L33,,,,, Ft!e lesser of t!e L",4,,,, avoidable interest and t!e L33,,,,, a tual interest ostG.

P ) 10*1918#sset a quisition. Ford In . plans to a quire an additional ma !ine on Manuary 1, 2,12 to meet t!e gro4ing demand for its produ t. 3tever Company offers to provide t!e ma !ine to Ford using eit!er of t!e options listed belo4 Fea ! option gives Ford e.a tly t!e same ma !ine and gives 3tever Company appro.imately t!e same net present value as! equivalent at 1,IG. %ption 1 8 Cas! pur !ase L1,$,,,,,,. %ption 2 8 Installment pur !ase requiring 1" annual payments of L21,,3"( due -e ember 31 ea ! year. T!e e.pe ted e onomi life of t!is ma !ine to Ford is 1" years. 3alvage value at t!at time is estimated to be L1,,,,,,. 3traig!t&line depre iation is used. Interest e.pense under %ption 2 is omputed using t!e effe tive interest met!od. Inst u'tions Nased upon urrent generally a epted a ounting prin iples, state !o4, if at all, t!e boo2 value of t!e ma !ine and t!e liability s!ould appear on t!e -e ember 31, 2,12 balan e s!eet of Ford In ., for ea ! option. 6resent your ans4er on an ans4er s!eet in t!e follo4ing format. If an item s!ould not appear in t!e balan e s!eet, 4rite 5not s!o4n5 opposite t!e option. #ssets # ount Name %ption 1 %ption 2 #mount 1iabilities # ount Name #mount

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*191 #ssets # ount Name #mount 7a !inery L1,$,,,,,, # um. -epr. 1,,,,,, 7a !inery # um. -epr. L1,$,,,,,, 1,,,,,,

10 * 94

%ption 1 %ption 2

1iabilities # ount Name #mount 5not s!o4n5 Notes 6ayable8 Current L "",3*4 Notes 6ayable8 1ong&term 1,4*4,24(

Computations? #t Manuary 1, 2,12, t!e note payable is L1,$,,,,,,. #t -e ember 31, 2,12, after t!e first payment of L21,,3"( !as been made FL1$,,,,, interestG L1,"4*,$42 prin ipal remains, of 4!i ! L1,4*4,24( is long&term and L"",3*4 is urrent RL21,,3"( Q F1,I U L1,"4*,$42GS. Note? L21,,3"( U '.$,$,( FTable $&4G @ L1,$,,,,,,, t!e present value of t!e liability on Manuary 1, 2,12.

P ) 10*1938Nonmonetary e. !anges. 7oore Corporation follo4s a poli y of a 1,I depre iation !arge per year on all ma !inery and a "I depre iation !arge per year on buildings. T!e follo4ing transa tions o urred in 2,13? 7ar ! 31, 2,138 Negotiations 4!i ! began in 2,12 4ere ompleted and a building pur !ased 1010,4 Fdepre iation !as been properly !arged t!roug! -e ember 31, 2,12G at a ost of L4,(,,,,,, 4it! a fair value of L3,,,,,,,, 4as e. !anged for a se ond building 4!i ! also !ad a fair value of L3,,,,,,,,. T!e e. !ange !ad no ommer ial substan e. Not! par els of land on 4!i ! t!e buildings 4ere lo ated 4ere equal in value, and !ad a fair value equal to boo2 value. Mune 3,, 2,138 7a !inery 4it! a ost of L4(,,,,, and a umulated depre iation t!roug! Manuary 1 of L3$,,,,, 4as e. !anged 4it! L3,,,,,, as! for a par el of land 4it! a fair value of L4$,,,,,. Inst u'tions 6repare all appropriate Bournal entries for 7oore Corporation for t!e above dates. So"ution 10*193 3031013 -epre iation =.pense ...................................................... # umulated -epre iation8Nuildings ............... FL4,(,,,,,, U "I U 104G $,,,,, $,,,,,

Nuildings ..................................................................... 2,"(,,,,, # umulated -epre iation8Nuildings.............................. 2,22,,,,, Nuildings............................................................. FL4,(,,,,,, U "I U * 104 @ L2,22,,,,,G

4,(,,,,,,

10 * 99 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition So"ution 10*193 F ont.G $03,011 -epre iation =.pense....................................................... # umulated -epre iation87a !inery.............. FL4(,,,,, U 1,I U 102G 24,,,, 24,,,,

1and ................................................................................. 4$,,,,, # umulated -epre iation87a !inery............................ 3(4,,,, ;ain on -isposal of 7a !inery........................... 7a !inery........................................................... Cas!................................................................... RL1$,,,,, Q FL4(,,,,, Q L3(4,,,,GS @ L$4,,,,

$4,,,, 4(,,,,, 3,,,,,,

P ) 10*1948Nonmonetary e. !ange. /ogers Co. !ad a s!eet metal utter t!at ost L144,,,, on Manuary ", 2,,(. T!is old utter !ad an estimated life of ten years and a salvage value of L24,,,,. %n #pril 3, 2,13, t!e old utter is e. !anged for a ne4 utter 4it! a fair value of L'2,,,,. T!e e. !ange la 2ed ommer ial substan e. /ogers also re eived L1(,,,, as!. #ssume t!at t!e last fis al period ended on -e ember 31, 2,12, and t!at straig!t&line depre iation is used. Inst u'tions FaG 3!o4 t!e al ulation of t!e amount of t!e gain or loss to be re ogni)ed by /ogers Co. FbG 6repare all entries t!at are ne essary on #pril 3, 2,13. 3!o4 a re orded for t!e ne4 utter. !e 2 of t!e amount

So"ution 10*194 FaG Cost # umulated depre iation F" 104 U L12,,,,G Noo2 value Fair value FL'2,,,, P L1(,,,,G ;ain ;ain re ogni)ed F1(0*, U L*,,,,G FbG L144,,,, F$3,,,,G (1,,,, *,,,,, L *,,,, L 1,(,, 3,,,, 3,,,, $3,,,, $4,(,, 1(,,,, 144,,,, 1,(,,

-epre iation =.pense.......................................................... # umulated -epre iation87a !inery................... # umulated -epre iation87a !inery............................... 7a !inery............................................................................ Cas!.................................................................................... 7a !inery ............................................................... ;ain on -isposal of 7a !inery............................... C!e 2? Fair value 1ess deferred gain Nasis of ne4 ma !inery L'2,,,, F',2,,G L$4,(,,

# quisition and -isposition of 6roperty, 6lant, and =quipment P ) 10*1998Nonmonetary e. !ange.

10 * 9;

1ayne Co. !as a ma !ine t!at ost L42",,,, on 7ar ! 2,, 2,,*. T!is old ma !ine !ad an estimated life of ten years and a salvage value of L2",,,,. %n -e ember 23, 2,13, t!e old ma !ine is e. !anged for a ne4 ma !ine 4it! a fair value of L2',,,,,. T!e e. !ange la 2ed ommer ial substan e. 1ayne also re eived L3,,,,, as!. #ssume t!at t!e last fis al period ended on -e ember 31, 2,12, and t!at straig!t&line depre iation is used. Inst u'tions FaG 3!o4 t!e al ulation of t!e amount of gain or loss to be re ogni)ed by 1ayne Co. from t!e e. !ange. F/ound to t!e nearest dollar.G FbG 6repare all entries t!at are ne essary on -e ember 23, 2,13. 3!o4 a !e 2 of t!e amount re orded for t!e ne4 ma !ine.

So"ution 10*199 FaG Cost # umulated depre iation F4 304 U L4,,,,,G Noo2 value Fair value FL2',,,,, P L3,,,,,G ;ain ;ain re ogni)ed F3,03,, U L$",,,,G FbG L42",,,, F1*,,,,,G 23",,,, 3,,,,,, L $",,,, L $,",, 4,,,,, 4,,,,, 1*,,,,, 211,",, 3,,,,, 42",,,, $,",,

-epre iation =.pense.......................................................... # umulated -epre iation 7a !inery...................... # umulated -epre iation 7a !inery.................................. 7a !inery............................................................................ Cas!.................................................................................... 7a !inery................................................................ ;ain on -isposal of 7a !inery................................ C!e 2? Fair value -eferred gain Nasis of ne4 ma !ine L2',,,,, F"(,",,G L211,",,

P ) 10*19;8Nonmonetary e. !ange. Eodge Co. e. !anged Nuilding 24 4!i ! !as an appraised value of L$,4,,,,,,, a ost of L1,,12,,,,,, and a umulated depre iation of L4,(,,,,,, for Nuilding 7 belonging to Fine Co. Nuilding 7 !as an appraised value of L$,,1$,,,,, a ost of L12,,4,,,,,, and a umulated depre iation of L$,33$,,,,. T!e orre t amount of as! 4as also paid. #ssume depre iation !as already been updated. Inst u'tions 6repare t!e entries on bot! ompaniesH boo2s assuming t!e e. !ange !ad no ommer ial substan e. 3!o4 a !e 2 of t!e amount re orded for Nuilding 7 on EodgeHs boo2s. F/ound to t!e nearest dollar.G

10 * 9< Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition So"ution 10*19; Eodge Co.? Cost # umulated depre iation Noo2 value Fair value ;ain L1,,12,,,,, 4,(,,,,,, ",32,,,,, $,4,,,,,, L 1,,(,,,,,

;ain re ogni)ed F3(40$,4,, U L1,,(,,,,,G L$4,(,, # umulated -epre iation8Nuildings................................. 4,(,,,,,, Nuilding 7............................................................................ ",,,,,(,, Cas!.................................................................................... 3(4,,,, Nuilding 24............................................................... ;ain on -isposal of 6lant #ssets............................. C!e 2? Fair value -eferred gain Nasis for Nuilding 7 Fine Co.? Cost # umulated depre iation Noo2 value Fair value ;ain L$,,1$,,,, F1,,1",2,,G L",,,,,(,,

1,,12,,,,, $4,(,,

L12,,4,,,,, $,33$,,,, ",',4,,,, $,,1$,,,, L 312,,,,

# umulated -epre iation8Nuildings................................. $,33$,,,, Nuilding 24........................................................................... $,,((,,,, Nuilding 7................................................................ Cas!.........................................................................

12,,4,,,,, 3(4,,,,

P ) 10*19<8Nonmonetary e. !ange. Neeman Company e. !anged ma !inery 4it! an appraised value of L2,*2",,,,, a re orded ost of L4,",,,,,, and a umulated depre iation of L2,2",,,,, 4it! 1a ey Corporation for ma !inery 1a ey o4ns. T!e ma !inery !as an appraised value of L2,(2",,,,, a re orded ost of L",4,,,,,,, and a umulated depre iation of L2,*',,,,,. 1a ey also gave Neeman L1,,,,,, in t!e e. !ange. #ssume depre iation !as already been updated. Inst u'tions FaG 6repare t!e entries on bot! ompaniesH boo2s assuming t!at t!e e. !ange !ad ommer ial substan e. F/ound all omputations to t!e nearest dollar.G FbG 6repare t!e entries on bot! ompaniesH boo2s assuming t!at t!e e. !ange la 2ed ommer ial substan e. F/ound all omputations to t!e nearest dollar.G

# quisition and -isposition of 6roperty, 6lant, and =quipment So"ution 10*19< FaG Commer ial 3ubstan e Neeman 7a !inery...................................... 2,(2",,,, Cas!.............................................. 1,,,,,, # um. -epre iation8 7a !inery.................................. 2,2",,,,, ;ain on -isposal of 7a !inery..................... $'",,,, 7a !inery........................ 4,",,,,,, 1a ey 7a !inery...................................... 2,*2",,,, # um. -epre iation8 7a !inery.................................. 2,*',,,,, ;ain on -isposal of 7a !inery..................... 3*",,,, 7a !inery........................ ",4,,,,,, Cas!................................ 1,,,,,, FbG

10 * 9=

Cost #0N: F: ;ain

L4,",,,,,, 2,2",,,,, 2,2",,,,, 2,*2",,,, L $'",,,,

Cost #0N: F: ;ain

L",4,,,,,, 2,*',,,,, 2,43,,,,, 2,(2",,,, L 3*",,,,

No Commer ial 3ubstan e Neeman 7a !inery................................................................................... 2,1'3,,'' Cas!........................................................................................... 1,,,,,, # umulated -epre ation87a !inery....................................... 2,2",,,,, ;ain on -isposal of 7a !inery..................................... 7a !inery..................................................................... L1,,,,,, T FL1,,,,,, P L2,(2",,,,G U L$'",,,, @ L23,,'' 1a ey 7a !inery................................................................................... 2,"3,,,,, # umulated -epre iation87a !inery...................................... 2,*',,,,, 7a !inery..................................................................... Cas!.............................................................................

23,,'' 4,",,,,,,

",4,,,,,, 1,,,,,,

10 * 9> Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition S$o t Ans,e B 1. 9!at are t!e maBor !ara teristi s of plant assetsC 1. T!e maBor !ara teristi s of plant assets are F1G t!at t!ey are a quired for use in operations and not for resale, F2G t!at t!ey are long&term in nature and usually subBe t to depre iation, and F3G t!at t!ey !ave p!ysi al substan e. 2. 9!at interest rates s!ould be used in determining t!e amount of interest to be apitali)edC Eo4 s!ould t!e amount of interest to be apitali)ed be determinedC 2. T!e avoidable interest is determined by multiplying FanG interest rateFsG by t!e 4eig!ted& average amount of a umulated e.penditures on qualifying assets. For t!e portion of 4eig!ted&average a umulated e.penditures 4!i ! is less t!an or equal to any amounts borro4ed spe ifi ally to finan e onstru tion of t!e assets, t!e apitali)ation rate is t!e spe ifi interest rate in urred. For t!e portion of 4eig!ted&average a umulated e.penditures 4!i ! is greater t!an spe ifi debt in urred, t!e interest rate is a 4eig!ted average of all ot!er interest rates in urred. T!e amount of interest to be apitali)ed is t!e avoidable interest, or t!e a tual interest in urred, 4!i !ever is lo4er.

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * 9?

IFRS QUESTIONS
T ueCFa"se 1. >nder international a ounting standards, !istori al ost is t!e preferred treatment for property, plant, and equipment. 2. /e ently !anges to IF/3 require ompanies to apitali)e borro4ing osts related to qualifying assets. 3. >nder IF/3, interest osts in urred during onstru tion of a plant asset annot be apitali)ed. 4. >nder IF/3, if a ompany uses t!e revaluation model for fi.ed assets, ompanies must revalue t!e lass of assets regularly. ". >nder IF/3, assets t!at qualify for interest apitali)ation are assets t!at are in use or ready for t!eir intended use. Ans,e s to T ueCFa"seB 1. True 2. True 3. False 4. True ". False Mu"ti("e C$oi'e 1. >nder IF/3, 3ampson Company, 4!o !as a non& urrent asset 4!i ! !as been lassified as !eld&for&sale, s!ould a. test t!e assetHs value mont!ly for impairment. b. value t!e asset at its depre iated !istori al ost. . depre iate t!e asset over its remaining life. d. not depre iate t!e asset. 2. 7iller Company, a ompany 4!o uses IF/3 reporting standards, sells a non& urrent asset lassified as !eld&for&sale. 9!i ! of t!e follo4ing statements is true regarding t!e treatment of a gain on a subsequent in rease in t!e fair value less ostC a. T!e gain s!ould not be re ogni)ed. b. T!e gain s!ould be re ogni)ed in full in t!e in ome statement. . T!e gain s!ould be re ogni)ed but only in retained earnings. d. T!e gain s!ould be re ogni)ed to t!e e.tent t!at it is not in e. ess of t!e umulative impairment loss t!at !as been re ogni)ed.

10 * ;0 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition 3. -anson Company, a ompany 4!o uses IF/3 reporting standards, !as a non& urrent asset t!at !as been lassified as !eld&for&sale. 9!en t!e asset no longer meets t!is definition, -anson s!ould a. remove t!e asset from t!e statement of finan ial position. b. remeasure t!e asset at fair value. . measure t!e asset at t!e lo4er of its arrying value before it 4as lassified as !eld&for& sale and its re overable amount at t!e date 4!en t!e ompany de ided not to sell it. d. leave t!e non& urrent asset on t!e finan ial statements at t!e urrent arrying value. 4. =lton Industries, a ompany 4!o uses IF/3 reporting standards, !as assets and liabilities of a disposal group lassified as !eld&for&sale s!o4n on its statement of finan ial position. 9!i ! of t!e follo4ing presents t!e best treatment for t!eseC a. T!ese assets and liabilities s!ould be netted and presented as a single amount & eit!er a urrent asset or a urrent liability on t!e statement of finan ial position. b. %n t!e balan e s!eet, t!e disposal group assets s!ould be s!o4n separately from ot!er assets, 4!ile t!e disposal group liabilities s!ould be s!o4n separately from ot!er liabilities. . T!e assets and liabilities s!ould be netted and presented as a dedu tion from equity on t!e statement of finan ial position. d. T!ere s!ould be no separate dis losure of t!ese assets and liabilities on t!e statement of finan ial position.

# quisition and -isposition of 6roperty, 6lant, and =quipment

10 * ;1

". 9oodson Company, a ompany 4!o uses IF/3 reporting standards, !as identified a group of plant assets for disposal. %n Manuary 1, 2,12, t!e arrying value of t!ese assets 4as L1'." million. T!e assets 4ere revalued to L1$." million on Manuary ", 2,12, 4!en t!ey 4ere identified as property for t!e disposal group. In addition, 9oodson t!in2s t!at it 4ill ost L1." million to sell t!ese assets. 9!at arrying amount s!ould t!ese assets refle t for year&end finan ial statements to be prepared on Manuary 1,, 2,12C a. L1'." million b. L1$." million . L1$., million d. L1"., million $. T!omas Company, a ompany 4!o uses IF/3 reporting standards, is disposing of a plant asset. T!e amount of gain or loss from t!is disposal is a. reported as t!e differen e bet4een t!e sales pro eeds and t!e arrying amount of t!e asset. b. not reported. . reported as t!e fair value less t!e re overable amount. d. reported as t!e differen e bet4een t!e net as! flo4s of t!e produ tive years of t!e asset and its arrying value. '. %n Manuary 1, 2,12, Ma 2son Company !as a building 4it! a arrying value of L",,,,, and a remaining useful life " years t!at 4as re ently valued at L1",,,,,. #ssuming t!at t!e ompany uses straig!t&line depre iation, IF/3 4ould s!o4 t!e depre iation as a. L1,,,,, b. L3,,,,, . L2,,,,, d. 7ore t!an one of t!ese ans4ers ould be orre t. (. Tram Industries, a ompany 4!o uses IF/3 reporting standards, is installing a ne4 plant. T!e ompany !as in urred t!e follo4ing osts 1. %perating losses before ommer ial produ tion L 2,,,,,, 2. Cost of t!e plant 1,",,,,,, 3. Initial delivery and !andling !arges 3,,,,,, 4. Cost of site preparation 1'",,,, 9!i ! of t!ese osts an Tram apitali)e in a ordan e 4it! IF/3C a. 1, 2, 3, Y 4 b. 2 Y 4 . 2, 3, Y 4 d. 1, 2, Y 4

10 * ;3 Test -an. &o Inte /e%iate A''ountin0, Fou teent$ E%ition *. I on Industries, a ompany 4!o uses IF/3 reporting standards, is installing a ne4 plant. T!e ompany !as in urred t!e follo4ing osts 1. Consultants used for advi e on t!e a quisition of t!e plant L24",,,, 2. Interest !arges paid to t!e supplier of plant for deferred redit L2'",,,, 3. =stimated dismantling ost to be in urred after ( years L4,,,,,, 4. Cost of t!e plant L2,3,,,,,, 9!i ! of t!ese osts an Tram apitali)e in a ordan e 4it! IF/3C a. 1, 2, 3, Y 4 b. 4 only . 1Y4 d. 1, 3, Y 4 1,. #ll of t!e follo4ing are true regarding t!e revaluation model allo4ed under IF/3 e. ept a. on e sele ted, t!e revaluation poli y applies to an entire lass of property, plant and equipment. b. revaluations must be made regularly to ensure t!at t!e arrying value is not materially different from fair value. . after initial re ognition, t!e revalued amount is fair value less subsequent depre iation and impairment losses. d. 4!en an asset is revalued, any in rease in arrying amount is reported as mis ellaneous revenue. Ans,e s to Mu"ti("e C$oi'eB 1. d 2. d 3. 4. b ". d $. a '. d (. *. d 1,. d