Intermediate Accounting 11th Edition

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

Student: ___________________________________________________________________________

1. Alternative terms for property, plant, and equipment include all of the following except
A. plant assets
B. fixed assets
C. long-term assets
D. operational assets

2. All of the following would be classified as property, plant, and equipment except
A. office buildings
B. machinery owned for standby purposes
C. equipment held for resale
D. equipment used in the operation of the business

3. Advantages of using historical cost as the basis of valuation of property, plant, and equipment include all of
the following except
A. it is a very reliable valuation
B. gains and losses from holding the asset are recognized in the period of value change
C. cost equals the fair market value at the date of acquisition
D. it is consistent with the valuation of other assets, liabilities, and stockholders' equity

4. Which one of the following types of assets should not be classified as property, plant, and equipment?
A. leasehold improvements
B. fully-depreciated building (still in use)
C. idle land and buildings
D. long-lived tangible assets

5. The Roth Company incurred the following costs in the acquisition of a plant asset:

Invoice price $2,100

Purchase discount lost 40
Freight-in 350
Installation 100
Cost of trial runs 150
What is the cost of the plant asset?
A. $2,700
B. $2,660
C. $2,550
D. $2,100

6. Rodriguez Company made the following payments related to a land acquisition:

Purchase price $6,000

Past due taxes 500
Title search 150
Cost of razing old building 300
Interest (incurred after productive operations had begun) 160
Proceeds from salvage of old building 85

The recorded cost of the land should be

A. $6,450
B. $6,585
C. $6,745
D. $6,865

7. Which one of the following types of costs should not be included in the cost of a building?
A. costs of remodeling and reconditioning
B. excavation costs
C. unanticipated costs resulting from the condition of the land
D. unanticipated construction costs, such as strike or fire losses

8. Richards Corporation purchased some equipment by issuing a $20,000 non-interest-bearing, four-year note
when interest rates were 8%. Actuarial information for 8% and four periods follows:

Future amount of 1 1.360

Present value of 1 0.735

In the entry to record this purchase, there would be a

A. $20,000 debit to Equipment
B. $5,299.40 credit to Discount on Notes Payable
C. $27,209.78 credit to Notes Payable
D. $14,700.60 debit to Equipment
9. Randal's Rifles purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate
for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods
follows:

6% 8%
Future amount of 1 1.191016 1.259712
Future amount of annuity of 1 3.183600 3.246400
Present value of 1 0.839619 0.793832
Present value of annuity of 1 2.673012 2.577097

At the date of purchase, what amount should be debited to Equipment?

A. $7,587.66
B. $6,716.96
C. $6,350.66
D. $6,633.70

10. According to GAAP, interest must be capitalized for

A. assets that are ready for use
B. assets constructed for a firm's own use
C. assets that are not being used in the earning activities of the company
D. inventories that are produced in large quantities on a repetitive basis

11. All of the following major types of assets would be included in the general category of property, plant, and
equipment on the balance sheet except
A. wasting assets
B. furniture and fixtures
C. land purchased for future use
D. leasehold improvements

12. An asset classified as property, plant, and equipment on the balance sheet must have which one of the
following characteristics?
A. an expected life of more than one year
B. used in the normal course of business
C. tangible in nature
D. all of these

13. All of the following costs associated with acquiring a building should be capitalized except
A. the costs of building permits
B. the cost of a strike associated with the construction of the building
C. the contract price
D. the costs of excavation for the building
14. Remy purchases a new machine by issuing an $18,000 three-year note. The company will pay off the
obligation by paying $6,000 at the end of each year. The market rate for obligations of this type is 8%. The
present value of an annuity at 8% for three periods is 2.577097. The machine will be recorded at a cost of
A. $ 6,000.00
B. $ 9,462.58
C. $15,462.58
D. $18,000.00

15. The president of Reindeer Corporation donated a building to Monday Corporation. The building had an
original cost of $500,000, a book value of $175,000, and a fair market value of $250,000. To record this
donation, Monday will
A. make a memorandum entry
B. debit Building for $175,000 and credit Gain for $175,000
C. debit Building for $250,000 and credit Gain for $250,000
D. debit Building for $500,000 and credit Gain for $500,000

16. During 2011, Ruby Corporation purchased three pieces of equipment at an auction for the lump sum of
$200,000. It cost Ruby $20,000 to have the equipment delivered and installed. The equipment was appraised at
the following values:

Machine 1 $120,000
Machine 2 105,000
Machine 3 75,000

Machine 2 should be recorded on Ruby's books at

A. $105,000
B. $120,000
C. $ 77,000
D. $ 70,000

17. Regal recently purchased a building and the tract of land on which it is located. Regal plans to raze the
building immediately and to erect a new building on the site. The value of the original building should be
A. written off as an extraordinary loss in the year the building is razed
B. capitalized as part of the cost of the land
C. depreciated over the period from the date of acquisition to the date that the building is to be razed
D. capitalized as part of the cost of the new building

18. The debit for a sales tax paid on the purchase of a plant asset would be included in
A. the plant asset account
B. a separate deferred charge account
C. Miscellaneous Tax Expense
D. Accumulated Depreciation-Machinery
19. On February 1, 2010, Rummel Corporation purchased a parcel of land as a factory site for $50,000. An old
building on the property was demolished, and construction began on a new building that was completed on
December 12, 2010. Costs incurred during this period are listed below:

Demolition of old building $ 10,000

Architect's fees 22,000
Legal fees for title investigation and purchase contract 3,000
Construction costs 1,000,000

(Salvaged materials resulting from demolition were sold for $15,000.)

Rummel should record the cost of the land and the cost of the new building, respectively, as
A. $48,000 and $1,022,000
B. $50,000 and $1,022,000
C. $63,000 and $1,032,000
D. $63,000 and $1,017,000

20. The Ripple Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum
price of $500,000. At the time of acquisition, Ripple paid $20,000 to have the assets appraised. The appraisal
disclosed the following values:

Land $100,000
Buildings 200,000
Equipment 300,000

What costs should be assigned to the buildings?

A. $166,667
B. $173,333
C. $200,000
D. $260,000

21. On May 7, 2010, Rabie Corporation purchased for $450,000 a tract of land on which was located a
warehouse and an office building. The following data were collected concerning the property:

Current Vendor's
Assessed Original
Valuation Cost
Land $100,000 $ 70,000
Warehouse 80,000 80,000
Office building 220,000 150,000
$400,000 $300,000

What are the appropriate amounts that Rabie should record for the land, warehouse, and office building, respectively?
A. land, $ 70,000; warehouse, $80,000; office building, $150,000
B. land, $100,000; warehouse, $80,000; office building, $220,000
C. land, $100,000; warehouse, $80,000; office building, $270,000
D. land, $112,500; warehouse, $90,000; office building, $247,500
22. On April 1, 2010, Richer Corporation purchased a new machine on a deferred payment basis. A down
payment of $5,000 was made and 10 monthly installments of $14,000 each are to be made beginning on May 1,
2010. The cash equivalent price of the machine was $130,000. Richer incurred and paid installation costs
amounting to $6,000. The amount to be capitalized as the cost of the machine is
A. $130,000
B. $136,000
C. $140,000
D. $145,000

23. Early in 2010, Roper, Inc. purchased certain plant assets under a deferred payment contract. The agreement
was to pay $50,000 at year-end for each of the next three years. The plant assets should be valued at
A. present value of a $50,000 annuity for three years discounted at the bank prime interest rate
B. $150,000
C. present value of a $50,000 annuity for three years discounted at the market interest rate
D. $150,000 plus imputed interest

24. A plant site donated by a city to Rupp Company, which plans to open a new factory, should be recorded on
Rupp's books at
A. the nominal cost of taking title to it
B. its fair market value
C. zero value, but footnoted
D. the value assigned to it by the company's directors

25. On August 28, 2010, Ruggle Drilling Services purchased a machine with a contract price of $400,000 and
cash terms of 2/10, n/30. The company paid $8,000 in transportation costs and $8,000 for installation. Sales
taxes of $22,000 were paid on the invoice amount. The machine should be recorded as a plant asset in the
amount of
A. $400,000
B. $422,000
C. $428,000
D. $430,000

26. Which is the best definition of start-up costs?

A. all activities associated with organizing a new entity
B. organization costs
C. one-time activities for opening a new facility, introducing a new product or service, conducting business in a
new territory, conducting business with a new class of customer, initiating a new process in an existing facility,
or starting some new operation
D. activities related to routine ongoing efforts to refine or otherwise improve the qualities of an existing
product, service, process, or facility
27. Property acquired through donation is recorded at
A. its book value
B. its fair market value
C. its cost
D. zero

28. When exchanging nonmonetary assets with another company, the preferred approach is to value the
transaction based upon fair value of
A. the asset surrendered or asset received whichever is most evident
B. the asset surrendered unless the fair value of the asset received is easier to determine
C. the asset surrendered except for certain conditions
D. the asset surrendered

29. Robards Services exchanged an asset with a cost of $24,000 (now 40% depreciated) for a nonmonetary asset
worth $12,000. Robards received $2,000 boot. In the entry to record this exchange, Robards should record
A. a $10,000 loss
B. a $400 gain
C. no gain or loss
D. a $400 loss

30. Renault Marina exchanged a boat with a cost of $80,000 (now 75% depreciated) for another boat with a
current fair value of $27,000. No boot was paid or received. The new boat will perform the exact same function
as the old boat. Renault should record the new boat at
A. $20,000
B. $27,000
C. $ 7,000
D. $ 0

31. Rust, Inc. exchanged a truck that cost $30,000 (now 50% depreciated) for equipment with an appraised
value of $25,000. Rust paid boot of $6,000. Rust should record the equipment at
A. $25,000
B. $30,000
C. $21,000
D. $31,000
32. Macey Co. exchanged a piece of equipment that had cost $40,000 (now 75% depreciated) for a truck with a
current appraised value of $13,000. Macey Co. gave the other company the piece of equipment and $8,000.
Macey Co. should record
A. a $5,000 loss
B. the truck at $18,000
C. a gain of $11,000
D. the truck at $21,000

33. When exchanging nonmonetary assets

A. boot must be associated with the transaction in order to recognize a gain or loss
B. recognized gain or loss can occur depending on the fair value of the asset surrendered and the fair value of
the asset received
C. a loss can be recognized only when the fair value of the asset received plus boot is greater than the book
value of the asset surrendered
D. recognized gain or loss can occur depending on the book value of the asset surrendered and the fair value of
the asset surrendered

34. When boot is involved in the exchange of nonmonetary productive assets, normally
A. the entire gain or loss on the exchange should be recognized
B. no gain or loss on the exchange may be recognized
C. no gain is recognized, but a loss may be recognized to the extent that boot is received
D. no gain is recognized, but a loss may be recognized to the extent that boot is given

35. Ralley Company exchanged a piece of equipment with a fair market value of $20,000 and a book value of
$25,000 for a truck with a fair market value of $16,000 and boot of $4,000. Ralley Company should record the
truck at a cost of
A. $15,000 and a recognized loss of $5,000
B. $16,000 and a recognized loss of $5,000
C. $20,000 and a recognized loss of $5,000
D. $20,000 and a recognized loss of $1,000

36. Richmond, Inc. exchanged a piece of equipment with an original cost of $82,000, accumulated depreciation
to date of $40,000, and a fair value of $46,000 for a similar piece of equipment. The newly acquired equipment
had a book value of $40,000 and a fair market value of $46,000. Richmond should record the equipment
acquired at
A. $ 0
B. $40,000
C. $42,000
D. $46,000
37. On January 4, 2010, Rack Company traded in a used bulldozer with a carrying amount of $65,000 for a new
bulldozer having a list price of $120,000 and paid cash difference of $40,000 to the dealer. The used bulldozer
had a fair value of $75,000 on the date of exchange. At what amount should the new bulldozer be recorded on
Rack's books?
A. $ 40,000
B. $105,000
C. $115,000
D. $120,000

38. On May 15, 2010, Retread Company acquired a new forklift in exchange for an old forklift that it had
acquired in 2000. The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the
exchange, the old forklift had a market value of $6,000. In addition, Retread paid $18,000 cash for the new
forklift, which had a list price of $25,000. At what amount should Retread record the new forklift for financial
accounting purposes?
A. $23,000
B. $24,000
C. $20,000
D. $25,000

39. Performance Stage Company had a professional contract with Actor #1 that was recorded in its accounting
records at $300,000. Johnson Company had a contract with Actor #2 that was recorded in its accounting records
at $280,000. Performance traded Actor #1 to Johnson for Actor #2 by exchanging the actors' contracts. The fair
value of each contract was $320,000. What amount should be shown in the accounting records after the
exchange of actor contracts?

Performance Johnson
I. $280,000 $280,000
II. $280,000 $300,000
III. $300,000 $280,000
IV. $320,000 $320,000

A. I
B. II
C. III
D. IV
40. Rupert Company exchanged one business automobile for another business automobile. The old automobile
had an original cost of $40,000, an undepreciated cost of $16,000, and a market value of $21,000 when
exchanged. In addition, Rupert paid $9,000 cash for the replacement automobile. The list price of the
replacement automobile was $35,000. The replacement will help generate significantly greater cash flows in the
business. At what amount should the replacement automobile be recorded for financial accounting purposes?
A. $24,000
B. $30,000
C. $33,000
D. $35,000

41. Rebby Company received $60,000 in cash and used equipment with a fair value of $140,000 from Farley
Corporation for Rebby's existing equipment, which had a fair value of $200,000 and an undepreciated cost of
$170,000 recorded on its books. The transaction was undertaken because Rebby was revising its market strategy
and planned to reduce the use of this type of equipment in its production. How much gain should Rebby
recognize on this exchange, and at what amount should the acquired equipment be recorded, respectively?
A. 0 and $150,000
B. $ 3,000 and $143,000
C. $20,000 and $170,000
D. $30,000 and $140,000

42. On August 1, 2010, Robbins traded in an old plant asset for a newer model that would be more productive
and efficient. Data relative to the old and new plant assets follow:

Old Plant Asset

Original cost $10,000
Accumulated depreciation of August 1, 2010 7,000
Fair value 2,000

New Plant Asset

List price 13,000

A total of $10,500 cash was given in the trade. What should be the cost of the new plant asset for financial accounting purposes?
A. $12,000
B. $12,500
C. $13,500
D. $13,000

43. Rogaine Company exchanged inventory items that cost $47,000 and normally sold for $65,000 for a new
delivery truck with a list price of $67,000. The delivery truck should be recorded on Rogaine's books at
A. $47,000
B. $65,000
C. $67,000
D. $82,000
44. Exhibit 10-1
Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000

The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. For financial reporting purposes, Fargo should recognize a gain on this exchange in the amount of
A. $ 0
B. $ 50,000
C. $100,000
D. $200,000

45. Exhibit 10-1

Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000

The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. For financial reporting purposes, Rambam should recognize a gain on this exchange in the amount of
A. $ 0
B. $ 50,000
C. $100,000
D. $200,000

46. Exhibit 10-1

Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000
The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. After the exchange, Fargo should record its newly acquired land on its books at
A. $300,000
B. $400,000
C. $450,000
D. $500,000

47. Which one of the following statements is true?

A. If a plant asset is self-constructed for less than it would cost to purchase, a profit should be recorded upon the
completion of the construction.
B. When property, plant, or equipment is acquired through donation, a gain is credited.
C. Development stage enterprises need not report losses before sales are made.
D. Interest cannot be capitalized when an asset is substantially complete and ready for its intended use.

48. All of the following are arguments in favor of including only the incremental fixed overhead costs in the
cost of a self-constructed asset, except that the
A. cost of the asset is the additional cost incurred to produce it
B. overhead would be incurred whether or not the construction took place
C. asset cost will more closely approximate the cost of a purchased asset
D. decision to construct the asset should be based on the total incremental cost and not include allocated fixed
overhead

49. According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which
of the following situations?
A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive basis
B. when an asset is used in other than the earning activities of the firm
C. when an asset is ready for its intended use
D. when an asset is being constructed for a firm's own use

50. On January 1, 2010, Rong Company signed a contract to have Rozy Associates construct a manufacturing
facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on
January 1, 2010, to finance the construction cost, Rong borrowed $14,000,000 payable in seven annual
installments of $2,000,000 plus interest at the rate of 9%. During 2010, Rong made progress payments totaling
$5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the
year. The excess borrowed funds were invested in short-term securities, from which Rong realized investment
income of $330,000. What amount should Rong report as capitalized interest at December 31, 2010?
A. $ 0
B. $ 270,000
C. $ 510,000
D. $1,260,000
51. Which of the following costs incurred subsequent to the acquisition of a machine would be appropriately
accounted for by debiting the accumulated depreciation account related to the machine?
A. the cost of cleaning and lubricating the machine
B. the cost of replacing the motor on the machine when the cost of the original motor is not known
C. the cost of moving the machine to another manufacturing plant
D. the cost of a new attachment to the machine that provides for more output per unit of time

52. At the end of the year, any balance in Allowance for Repairs should be
A. closed to Repairs Expense
B. reported as a deferred credit
C. closed to Retained Earnings
D. reported as a contra account to the asset

53. Under GAAP, which one of the following types of costs should not be capitalized?
A. rearrangements
B. routine maintenance
C. replacements
D. additions

54. An improvement made to a machine increased its production capacity by 25% without extending the
machine's useful life. The cost of the improvement should be
A. recorded as an expense
B. debited to Accumulated Depreciation
C. capitalized in the machine account
D. allocated between Accumulated Depreciation and the machine account

55. Which of the following events is most appropriately recorded as a reduction to accumulated depreciation?
A. an addition that increases the anticipated benefits of the old asset
B. an improvement that extends an asset's useful life
C. an improvement that increases the asset's expected benefits beyond that originally expected
D. a replacement of a better asset for the one currently used

56. The sale of a depreciable asset resulting in a gain indicates that the proceeds from the sale were
A. less than current market value
B. greater than cost
C. greater than book value
D. less than book value
57. On January 1, 2010, Ringo purchased, for $100,000, equipment having a useful life of eight years and an
estimated salvage value of $4,000. Ringo has recorded monthly depreciation on the equipment using the
straight-line method. On March 1, 2015, the equipment was sold for $46,000. As a result of this sale, Ringo
should recognize
A. no gain or loss
B. an $8,000 gain
C. an $8,000 loss
D. a $12,000 gain

58. The Rothchild Company purchased a machine on October 1, 2010, for $80,000. At the time of acquisition,
the machine was estimated to have a useful life of five years and an estimated salvage value of $5,000.
Rothchild has recorded monthly depreciation using the straight-line method. On April 1, 2012, the machine was
sold for $50,000. What should be the loss recognized from the sale of the machine?
A. $ 0
B. $2,500
C. $5,000
D. $7,500

59. Required disclosure for property, plant, and equipment in the financial statements is based upon
A. age and depreciation method
B. age and nature
C. nature and function
D. function and depreciation method

60. In 2010, Golf Oil Company incurred costs of $7 million drilling oil wells. Thirty percent of the drilling
resulted in oil being found. The rest of the drilling was unsuccessful. If Golf uses the successful-efforts method
of accounting, the oil and gas properties will be valued on the December 31, 2010 balance sheet at
A. $7,000,000
B. $4,900,000
C. $4,200,000
D. $2,100,000

61. Two alternative methods of accounting for the cost of oil and gas properties have been widely used. The
method that capitalizes all costs associated with all wells is the
A. successful-efforts method
B. full-cost method
C. variable-cost method
D. specific-cost method
62. Concerning current accounting for oil and gas properties, which statement is true?
A. The successful-efforts method must be used.
B. The reserve-recognition method must be used.
C. Either the successful-efforts method or the full-cost method may be used.
D. The full-cost method must be used.

63. The costs of drilling an unsuccessful well are expensed under

A. the successful-efforts method
B. the full-cost method
C. both the successful-efforts method and the full-cost method
D. neither the successful-efforts method nor the full-cost method

64. Under IFRS, which of the following must be expensed?

A. maintenance only
B. repairs only
C. rearrangements only
D. maintenance, repairs, and rearrangements

65. A major difference between IFRS and GAAP regarding valuation of property, plant, and equipment is that
A. IFRS allow valuation increases to be recorded in certain circumstances, but GAAP does not permit increases
B. IFRS and GAAP differ greatly on accounting for nonmonetary exchanges
C. IFRS require capitalization of all repairs and maintenance while GAAP does not
D. IFRS allocate lump-sum purchase costs based on relative book values rather than relative market values

66. When an operating asset is made up of significant individual components, IFRS require the company to
A. group those components into no more than three groups for depreciation
B. combine the components into one unit and use a weighted average useful life
C. ignore the components for accounting purposes
D. account for each component individually

67. Costs incurred by Mills Company that relate to its property, plant, and equipment assets might be recorded
in one of the five following classes of accounts:

a. an expense account
b. an accumulated depreciation account
c. a land account
d. a building account
e. an equipment account
Required:

For each of the costs identified below, indicate the type of account in which the cost should be recorded by placing the appropriate letter in the space
provided.

____ 1. The legal fees associated with the acquisition of land.

____ 2. The cost of replacing the engine in a truck when the cost of the old engine is not known.

____ 3. The cost of replacing an oil furnace with an electric furnace.

____ 4. The cost of a new addition to a warehouse that will be used to store inventory.

____ 5. The cost of renovating a recently purchased ten-year-old office building.

____ 6. The materials and labor costs incurred in testing a new piece of equipment.

____ 7. The costs of tuning, lubricating, and tire rotation on a fleet of delivery trucks.

____ 8. The additional costs in the construction of a building due to a small fire that occurred during the construction period.

68. During 2010, the Tinsle Company completed the following transactions related to its property, plant, and
equipment accounts:

a. On March 18, Tinsle paid $480,000 for land, buildings, and equipment in a lump-sum purchase. An appraisal that cost Tinsle $10,000
revealed fair market values of $200,000 for the land, $150,000 for the buildings, and $150,000 for the equipment.
b. On August 11, Tinsle issued 20,000 shares of its $10 par value common stock in exchange for some equipment. The equipment's fair
market value is estimated at $360,000 by an outside appraisal. On the date of the exchange, the stock was being actively traded at $17
per share on a major stock exchange.

Required:

Prepare the necessary journal entry to properly record each transaction.

69. During 2010, Redford Company acquired a new piece of equipment for its manufacturing process. In order
to purchase the equipment, Redford made a down payment of $50,000 and issued a $200,000 five-year, 7%
note. The annual payment of principal and interest was to be $48,778. The market rate of interest for obligations
of this kind is 12%. The present value factor for an ordinary annuity of 5 years at 12% is 3.604776.

Required:

a. Prepare the journal entry to record the acquisition.

b. Assume that the equipment had an established cash price of $220,000. Prepare the journal entry to record the transaction under this
additional assumption.

70. Several expenditures are listed below:

Yes No

a. Landscaping ______ ______

b. Compensation for injury to construction worker ______ ______

c. Cost of overhaul before initial use ______ ______

d. Cost of tearing down a building on newly acquired land ______ ______

e. Land held as a plant site for future use ______ ______

f. Fully depreciated assets still being used ______ ______

g. Leasehold improvements ______ ______

h. Deposits on machinery not yet received ______ ______

Required:

Indicate whether or not each expenditure would be included in the cost of property, plant, and equipment.
71. Several expenditures are listed below:

Land Building Equipment Other

a. Construction costs on building ______ X ______ ______

b. Compensation for injury to

construction worker ______ ______ ______ ______

c. Equipment purchased for

building excavation ______ ______ ______ ______

d. Interest on construction loan

______ ______ ______ ______

e. Equipment testing costs ______ ______ ______ ______

f. Costs of tearing down a

building on newly acquired
land ______ ______ ______ ______

g. Delinquent property taxes on

acquired property ______ ______ ______ ______

h. Cost of major overhaul ______ ______ ______ ______

i. Title search fees ______ ______ ______ ______

Required:

If the expenditure would be capitalized to land, buildings, equipment, or other, so indicate with an "X." An example is given.

72. Smith Delivery Services bought a truck by paying $44,000 cash down and signing a $148,000
non-interest-bearing note due in five years for the balance. Current interest rates were 8%. Actuarial
information for five periods at 8% follows:

Amount of 1 1.469
Present value of 1 0.680
Amount of annuity of 1 5.867
Present value of annuity of 1 3.993
Required:

Compute the amount that should be charged to the asset account.

73. Mirror Corp. has agreed to expand its operations by opening a manufacturing plant in Burns, Texas. In
return, Burns will donate an abandoned building and the 5 acres on which it sits to Mirror. The land originally
cost $1,000,000 and the building $3,000,000. The building's current book value is $380,000, and current
appraisals are: land $6,000,000 and building $2,600,000. Mirror has also agreed to provide 100 jobs for the next
5 years to Burns' city residents. Mirror estimates that the wages to these residents will amount to $4,000,000.

Required:

Prepare the journal entry to record this acquisition on Mirror's books.

74. On August 1, Silver Company exchanged a machine for a similar machine owned by Wrangler Company
and also received $7,000 cash from Wrangler Company. Silver's machine had an original cost of $70,000,
accumulated depreciation to date of $34,500, and a fair market value of $60,000. Wrangler's machine had a
book value of $45,000 and a fair value of $53,000.

Required:

Prepare the necessary journal entry by Silver Company to record this transaction assuming

a. Silver will use the newly acquired machine in the same manner as the old one.
b. Silver's use of the new machine will be substantially different from the old one.
75. Pops Corp. has agreed to exchange an old computer system for a van from Incline, Inc. In addition, Incline
will pay Pops $2,000. The computer originally cost Pops $25,000 and its current book value is $14,000. The
van's original cost was $30,000 and its accumulated depreciation is $12,000. The appraised value of the
computer is $15,000, and the appraised value of the van is $13,000.

Required:

Prepare the journal entries to record the exchange on both companies' books.

76. Whistler Company exchanged a piece of equipment with a cost of $300,000 and accumulated depreciation
of $240,000 for land owned by Joseph Corporation. No cash was exchanged. Joseph's land had an original cost
of $90,000. At the date of exchange, both assets had a fair market value of $80,000.

Required:

Prepare the journal entry that each company should record.

77. Sally Company is exchanging a unique machine for a similar machine from William, Inc. Sally's equipment
originally cost $300,000 and has a book value of $175,000. William's machine cost $250,000 and has a book
value of $150,000. No cash will be exchanged, and the two machines will continue to perform the same
functions for each company.

Required:

Prepare the journal entry for each company.

78. Ralph Company exchanged a machine for some land. The machine had cost $15,000, was 70% depreciated,
and could be sold for $4,100. Calvin paid $600 in addition to giving up the machine.

Required:

a. Compute the amount at which the land should be recorded.

b. Assume, instead, that Ralph exchanged the machine for a new, more efficient machine with a fair value of $4,700, while still paying
$600 as before. Compute the gain or loss that would be recorded on the sale of the old machine by Ralph.
79. Mark Company exchanged a worn-out tractor that had cost $20,000 and was half depreciated for a new
tractor with a fair value of $12,000. Mark paid an additional $2,500 cash. The transaction lacked commercial
substance.

Required:

Compute the amount at which Mark should record the new tractor.

80. Assuming that the effects of interest capitalization are material, calculate the amount of interest costs to be
capitalized by Marcus Corporation in 2010 in relation to the following events:

a. On January 1, Marcus began construction for a new storage building for its own use. Expenditures incurred evenly throughout the year
totaled $900,000. Marcus borrowed $1,000,000 specifically for construction of the storage building at an annual interest rate of 6%.
b. Inventories costing $200,000 were routinely manufactured during the year. Marcus borrowed $200,000 at 8% to finance
inventory-related costs.
c. On September 1, Marcus began construction of a custom-designed machine to the specifications of a customer. As of December 31,
$200,000 of materials, labor, and overhead have been assigned to the machine. Those costs were incurred evenly throughout the period
September 1 through December 31. To finance construction, $230,000 was borrowed at a 9% interest rate.
81. On January 3, 2010, Mercury Company began self-constructing an asset that qualified for interest
capitalization. On January 5, Mercury borrowed $300,000 on an 8% construction loan. In addition, Mercury had
$400,000 of 6% notes payable and $700,000 of 9% bonds payable outstanding. By December 31, expenditures
(occurring evenly throughout the year) of $800,000 had been made on the asset. Investment of unused funds
during the year yielded $1,200 of interest revenue.

Required:

Compute the amount of interest that should be capitalized during 2010.

82. Cooper, Inc. is constructing a building that qualifies for interest capitalization. The following information is
available:

Capitalization period: January 1, 2010-December 31, 2011 Expenditures on project (incurred evenly):

2010 $20,000
2011 $60,000

Amounts borrowed and outstanding (all debt incurred January 1, 2010):

$10,000 at 10% (specifically for the construction project)

$18,000 at 12% (general debt)
$30,000 at 14% (general debt)

Required:

a. Compute the amount of interest that should be capitalized in 2010 and 2011. (Round interest rates to the nearest hundredths, e.g.,
07.62%.)
b. Assume that in 2010 unused borrowed funds were invested and earned interest revenue amounting to $600. How much interest should
be capitalized to the asset account in 2011?
83. The Heavy Equipment Company decided to replace a gasoline engine with a diesel engine in one of its
cranes. The new engine cost $8,000, which Heavy paid in cash. The old engine is discarded at no cost to Heavy
Equipment.

Required:

a. Prepare the required journal entry for Heavy Equipment Company, assuming the old gasoline engine is carried on the books at a cost of
$4,000 with accumulated depreciation of $3,000.
b. Prepare the required journal entry for Heavy Equipment Company, assuming the book value of the old engine is not known.

84. Robertson Company is making significant improvements to some of its assets, as follows.

1. It is replacing the old furnace that cost $40,000 and has a $15,000 book value with a new furnace/air conditioner combination.
Robertson spent $60,000 in cash and was given a $3,000 trade-in on the old furnace.
2. The delivery van is being updated with a new $7,000 engine that will increase the useful life of the van by 2 years. The van originally
cost $35,000 and has accumulated depreciation of $25,000.

Required:

a. Record the appropriate journal entry for replacing the furnace.

b. When recording the transaction associated with the van there is a choice between two methods. Provide the journal entries for each
method.
85. On May 1, 2010, Argus Manufacturing Co. acquired a machine for $180,000. The machine was depreciated
monthly using the straight-line method with an estimated life of ten years and no salvage value. On December
1, 2017, the machine was sold for $40,000.

Required:

Compute the amount of gain or loss on the sale of the machine, and prepare the journal entry to record the sale.
(Calculate depreciation to the nearest whole month.)

86. In 2010, Hart Co. invested $4,000,000 in oil well exploration activities. Seventy percent of the drilling was
successful and resulted in commercial quantities of oil being found.

Required:

a. Indicate the amount of drilling expense Hart Co. would recognize in 2010 if the full-cost method is in use.
b. Indicate the cost that would be reported on the balance sheet as oil and gas properties if the successful-efforts method is in use.

87. Why is it important to allocate a lump-sum purchase amount among the individual assets acquired?
88. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,
ranging from routine repairs to major overhauls and improvements. The accountant's problem is to determine
how these costs should be recorded.

Required:

Identify the two categories of expenditures in which these costs can be classified, and explain how the
accountant determines which classification is appropriate.

89. List and describe four specific examples of start-up costs. Discuss the GAAP rules for recording start-up
costs.

90. Current GAAP describes three exceptions to the general rule of using fair value when exchanging
nonmonetary assets.

Required:

List the three exceptions and provide an example of each.

91. Discuss when the interest capitalization period begins and ends for assets constructed for a company's own
use.

92. Describe the IFRS treatment of increases in the market value of property, plant, and equipment held during
the year. Compare that treatment to U.S. GAAP requirements.
Chapter 10--Property, Plant, and Equipment: Acquisition and
Disposal Key

1. Alternative terms for property, plant, and equipment include all of the following except
A. plant assets
B. fixed assets
C. long-term assets
D. operational assets

2. All of the following would be classified as property, plant, and equipment except
A. office buildings
B. machinery owned for standby purposes
C. equipment held for resale
D. equipment used in the operation of the business

3. Advantages of using historical cost as the basis of valuation of property, plant, and equipment include all of
the following except
A. it is a very reliable valuation
B. gains and losses from holding the asset are recognized in the period of value change
C. cost equals the fair market value at the date of acquisition
D. it is consistent with the valuation of other assets, liabilities, and stockholders' equity

4. Which one of the following types of assets should not be classified as property, plant, and equipment?
A. leasehold improvements
B. fully-depreciated building (still in use)
C. idle land and buildings
D. long-lived tangible assets

5. The Roth Company incurred the following costs in the acquisition of a plant asset:

Invoice price $2,100

Purchase discount lost 40
Freight-in 350
Installation 100
Cost of trial runs 150
What is the cost of the plant asset?
A. $2,700
B. $2,660
C. $2,550
D. $2,100

6. Rodriguez Company made the following payments related to a land acquisition:

Purchase price $6,000

Past due taxes 500
Title search 150
Cost of razing old building 300
Interest (incurred after productive operations had begun) 160
Proceeds from salvage of old building 85

The recorded cost of the land should be

A. $6,450
B. $6,585
C. $6,745
D. $6,865

7. Which one of the following types of costs should not be included in the cost of a building?
A. costs of remodeling and reconditioning
B. excavation costs
C. unanticipated costs resulting from the condition of the land
D. unanticipated construction costs, such as strike or fire losses

8. Richards Corporation purchased some equipment by issuing a $20,000 non-interest-bearing, four-year note
when interest rates were 8%. Actuarial information for 8% and four periods follows:

Future amount of 1 1.360

Present value of 1 0.735

In the entry to record this purchase, there would be a

A. $20,000 debit to Equipment
B. $5,299.40 credit to Discount on Notes Payable
C. $27,209.78 credit to Notes Payable
D. $14,700.60 debit to Equipment
9. Randal's Rifles purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate
for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods
follows:

6% 8%
Future amount of 1 1.191016 1.259712
Future amount of annuity of 1 3.183600 3.246400
Present value of 1 0.839619 0.793832
Present value of annuity of 1 2.673012 2.577097

At the date of purchase, what amount should be debited to Equipment?

A. $7,587.66
B. $6,716.96
C. $6,350.66
D. $6,633.70

10. According to GAAP, interest must be capitalized for

A. assets that are ready for use
B. assets constructed for a firm's own use
C. assets that are not being used in the earning activities of the company
D. inventories that are produced in large quantities on a repetitive basis

11. All of the following major types of assets would be included in the general category of property, plant, and
equipment on the balance sheet except
A. wasting assets
B. furniture and fixtures
C. land purchased for future use
D. leasehold improvements

12. An asset classified as property, plant, and equipment on the balance sheet must have which one of the
following characteristics?
A. an expected life of more than one year
B. used in the normal course of business
C. tangible in nature
D. all of these

13. All of the following costs associated with acquiring a building should be capitalized except
A. the costs of building permits
B. the cost of a strike associated with the construction of the building
C. the contract price
D. the costs of excavation for the building
14. Remy purchases a new machine by issuing an $18,000 three-year note. The company will pay off the
obligation by paying $6,000 at the end of each year. The market rate for obligations of this type is 8%. The
present value of an annuity at 8% for three periods is 2.577097. The machine will be recorded at a cost of
A. $ 6,000.00
B. $ 9,462.58
C. $15,462.58
D. $18,000.00

15. The president of Reindeer Corporation donated a building to Monday Corporation. The building had an
original cost of $500,000, a book value of $175,000, and a fair market value of $250,000. To record this
donation, Monday will
A. make a memorandum entry
B. debit Building for $175,000 and credit Gain for $175,000
C. debit Building for $250,000 and credit Gain for $250,000
D. debit Building for $500,000 and credit Gain for $500,000

16. During 2011, Ruby Corporation purchased three pieces of equipment at an auction for the lump sum of
$200,000. It cost Ruby $20,000 to have the equipment delivered and installed. The equipment was appraised at
the following values:

Machine 1 $120,000
Machine 2 105,000
Machine 3 75,000

Machine 2 should be recorded on Ruby's books at

A. $105,000
B. $120,000
C. $ 77,000
D. $ 70,000

17. Regal recently purchased a building and the tract of land on which it is located. Regal plans to raze the
building immediately and to erect a new building on the site. The value of the original building should be
A. written off as an extraordinary loss in the year the building is razed
B. capitalized as part of the cost of the land
C. depreciated over the period from the date of acquisition to the date that the building is to be razed
D. capitalized as part of the cost of the new building

18. The debit for a sales tax paid on the purchase of a plant asset would be included in
A. the plant asset account
B. a separate deferred charge account
C. Miscellaneous Tax Expense
D. Accumulated Depreciation-Machinery
19. On February 1, 2010, Rummel Corporation purchased a parcel of land as a factory site for $50,000. An old
building on the property was demolished, and construction began on a new building that was completed on
December 12, 2010. Costs incurred during this period are listed below:

Demolition of old building $ 10,000

Architect's fees 22,000
Legal fees for title investigation and purchase contract 3,000
Construction costs 1,000,000

(Salvaged materials resulting from demolition were sold for $15,000.)

Rummel should record the cost of the land and the cost of the new building, respectively, as
A. $48,000 and $1,022,000
B. $50,000 and $1,022,000
C. $63,000 and $1,032,000
D. $63,000 and $1,017,000

20. The Ripple Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum
price of $500,000. At the time of acquisition, Ripple paid $20,000 to have the assets appraised. The appraisal
disclosed the following values:

Land $100,000
Buildings 200,000
Equipment 300,000

What costs should be assigned to the buildings?

A. $166,667
B. $173,333
C. $200,000
D. $260,000

21. On May 7, 2010, Rabie Corporation purchased for $450,000 a tract of land on which was located a
warehouse and an office building. The following data were collected concerning the property:

Current Vendor's
Assessed Original
Valuation Cost
Land $100,000 $ 70,000
Warehouse 80,000 80,000
Office building 220,000 150,000
$400,000 $300,000

What are the appropriate amounts that Rabie should record for the land, warehouse, and office building, respectively?
A. land, $ 70,000; warehouse, $80,000; office building, $150,000
B. land, $100,000; warehouse, $80,000; office building, $220,000
C. land, $100,000; warehouse, $80,000; office building, $270,000
D. land, $112,500; warehouse, $90,000; office building, $247,500
22. On April 1, 2010, Richer Corporation purchased a new machine on a deferred payment basis. A down
payment of $5,000 was made and 10 monthly installments of $14,000 each are to be made beginning on May 1,
2010. The cash equivalent price of the machine was $130,000. Richer incurred and paid installation costs
amounting to $6,000. The amount to be capitalized as the cost of the machine is
A. $130,000
B. $136,000
C. $140,000
D. $145,000

23. Early in 2010, Roper, Inc. purchased certain plant assets under a deferred payment contract. The agreement
was to pay $50,000 at year-end for each of the next three years. The plant assets should be valued at
A. present value of a $50,000 annuity for three years discounted at the bank prime interest rate
B. $150,000
C. present value of a $50,000 annuity for three years discounted at the market interest rate
D. $150,000 plus imputed interest

24. A plant site donated by a city to Rupp Company, which plans to open a new factory, should be recorded on
Rupp's books at
A. the nominal cost of taking title to it
B. its fair market value
C. zero value, but footnoted
D. the value assigned to it by the company's directors

25. On August 28, 2010, Ruggle Drilling Services purchased a machine with a contract price of $400,000 and
cash terms of 2/10, n/30. The company paid $8,000 in transportation costs and $8,000 for installation. Sales
taxes of $22,000 were paid on the invoice amount. The machine should be recorded as a plant asset in the
amount of
A. $400,000
B. $422,000
C. $428,000
D. $430,000

26. Which is the best definition of start-up costs?

A. all activities associated with organizing a new entity
B. organization costs
C. one-time activities for opening a new facility, introducing a new product or service, conducting business in a
new territory, conducting business with a new class of customer, initiating a new process in an existing facility,
or starting some new operation
D. activities related to routine ongoing efforts to refine or otherwise improve the qualities of an existing
product, service, process, or facility
27. Property acquired through donation is recorded at
A. its book value
B. its fair market value
C. its cost
D. zero

28. When exchanging nonmonetary assets with another company, the preferred approach is to value the
transaction based upon fair value of
A. the asset surrendered or asset received whichever is most evident
B. the asset surrendered unless the fair value of the asset received is easier to determine
C. the asset surrendered except for certain conditions
D. the asset surrendered

29. Robards Services exchanged an asset with a cost of $24,000 (now 40% depreciated) for a nonmonetary asset
worth $12,000. Robards received $2,000 boot. In the entry to record this exchange, Robards should record
A. a $10,000 loss
B. a $400 gain
C. no gain or loss
D. a $400 loss

30. Renault Marina exchanged a boat with a cost of $80,000 (now 75% depreciated) for another boat with a
current fair value of $27,000. No boot was paid or received. The new boat will perform the exact same function
as the old boat. Renault should record the new boat at
A. $20,000
B. $27,000
C. $ 7,000
D. $ 0

31. Rust, Inc. exchanged a truck that cost $30,000 (now 50% depreciated) for equipment with an appraised
value of $25,000. Rust paid boot of $6,000. Rust should record the equipment at
A. $25,000
B. $30,000
C. $21,000
D. $31,000
32. Macey Co. exchanged a piece of equipment that had cost $40,000 (now 75% depreciated) for a truck with a
current appraised value of $13,000. Macey Co. gave the other company the piece of equipment and $8,000.
Macey Co. should record
A. a $5,000 loss
B. the truck at $18,000
C. a gain of $11,000
D. the truck at $21,000

33. When exchanging nonmonetary assets

A. boot must be associated with the transaction in order to recognize a gain or loss
B. recognized gain or loss can occur depending on the fair value of the asset surrendered and the fair value of
the asset received
C. a loss can be recognized only when the fair value of the asset received plus boot is greater than the book
value of the asset surrendered
D. recognized gain or loss can occur depending on the book value of the asset surrendered and the fair value of
the asset surrendered

34. When boot is involved in the exchange of nonmonetary productive assets, normally
A. the entire gain or loss on the exchange should be recognized
B. no gain or loss on the exchange may be recognized
C. no gain is recognized, but a loss may be recognized to the extent that boot is received
D. no gain is recognized, but a loss may be recognized to the extent that boot is given

35. Ralley Company exchanged a piece of equipment with a fair market value of $20,000 and a book value of
$25,000 for a truck with a fair market value of $16,000 and boot of $4,000. Ralley Company should record the
truck at a cost of
A. $15,000 and a recognized loss of $5,000
B. $16,000 and a recognized loss of $5,000
C. $20,000 and a recognized loss of $5,000
D. $20,000 and a recognized loss of $1,000

36. Richmond, Inc. exchanged a piece of equipment with an original cost of $82,000, accumulated depreciation
to date of $40,000, and a fair value of $46,000 for a similar piece of equipment. The newly acquired equipment
had a book value of $40,000 and a fair market value of $46,000. Richmond should record the equipment
acquired at
A. $ 0
B. $40,000
C. $42,000
D. $46,000
37. On January 4, 2010, Rack Company traded in a used bulldozer with a carrying amount of $65,000 for a new
bulldozer having a list price of $120,000 and paid cash difference of $40,000 to the dealer. The used bulldozer
had a fair value of $75,000 on the date of exchange. At what amount should the new bulldozer be recorded on
Rack's books?
A. $ 40,000
B. $105,000
C. $115,000
D. $120,000

38. On May 15, 2010, Retread Company acquired a new forklift in exchange for an old forklift that it had
acquired in 2000. The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the
exchange, the old forklift had a market value of $6,000. In addition, Retread paid $18,000 cash for the new
forklift, which had a list price of $25,000. At what amount should Retread record the new forklift for financial
accounting purposes?
A. $23,000
B. $24,000
C. $20,000
D. $25,000

39. Performance Stage Company had a professional contract with Actor #1 that was recorded in its accounting
records at $300,000. Johnson Company had a contract with Actor #2 that was recorded in its accounting records
at $280,000. Performance traded Actor #1 to Johnson for Actor #2 by exchanging the actors' contracts. The fair
value of each contract was $320,000. What amount should be shown in the accounting records after the
exchange of actor contracts?

Performance Johnson
I. $280,000 $280,000
II. $280,000 $300,000
III. $300,000 $280,000
IV. $320,000 $320,000

A. I
B. II
C. III
D. IV
40. Rupert Company exchanged one business automobile for another business automobile. The old automobile
had an original cost of $40,000, an undepreciated cost of $16,000, and a market value of $21,000 when
exchanged. In addition, Rupert paid $9,000 cash for the replacement automobile. The list price of the
replacement automobile was $35,000. The replacement will help generate significantly greater cash flows in the
business. At what amount should the replacement automobile be recorded for financial accounting purposes?
A. $24,000
B. $30,000
C. $33,000
D. $35,000

41. Rebby Company received $60,000 in cash and used equipment with a fair value of $140,000 from Farley
Corporation for Rebby's existing equipment, which had a fair value of $200,000 and an undepreciated cost of
$170,000 recorded on its books. The transaction was undertaken because Rebby was revising its market strategy
and planned to reduce the use of this type of equipment in its production. How much gain should Rebby
recognize on this exchange, and at what amount should the acquired equipment be recorded, respectively?
A. 0 and $150,000
B. $ 3,000 and $143,000
C. $20,000 and $170,000
D. $30,000 and $140,000

42. On August 1, 2010, Robbins traded in an old plant asset for a newer model that would be more productive
and efficient. Data relative to the old and new plant assets follow:

Old Plant Asset

Original cost $10,000
Accumulated depreciation of August 1, 2010 7,000
Fair value 2,000

New Plant Asset

List price 13,000

A total of $10,500 cash was given in the trade. What should be the cost of the new plant asset for financial accounting purposes?
A. $12,000
B. $12,500
C. $13,500
D. $13,000

43. Rogaine Company exchanged inventory items that cost $47,000 and normally sold for $65,000 for a new
delivery truck with a list price of $67,000. The delivery truck should be recorded on Rogaine's books at
A. $47,000
B. $65,000
C. $67,000
D. $82,000
44. Exhibit 10-1
Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000

The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. For financial reporting purposes, Fargo should recognize a gain on this exchange in the amount of
A. $ 0
B. $ 50,000
C. $100,000
D. $200,000

45. Exhibit 10-1

Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000

The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. For financial reporting purposes, Rambam should recognize a gain on this exchange in the amount of
A. $ 0
B. $ 50,000
C. $100,000
D. $200,000

46. Exhibit 10-1

Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other's land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:

Fargo's Rambam's
Land Land
Cost and book value $400,000 $250,000
Fair value based upon appraisal $500,000 $450,000
The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.

Refer to Exhibit 10-1. After the exchange, Fargo should record its newly acquired land on its books at
A. $300,000
B. $400,000
C. $450,000
D. $500,000

47. Which one of the following statements is true?

A. If a plant asset is self-constructed for less than it would cost to purchase, a profit should be recorded upon the
completion of the construction.
B. When property, plant, or equipment is acquired through donation, a gain is credited.
C. Development stage enterprises need not report losses before sales are made.
D. Interest cannot be capitalized when an asset is substantially complete and ready for its intended use.

48. All of the following are arguments in favor of including only the incremental fixed overhead costs in the
cost of a self-constructed asset, except that the
A. cost of the asset is the additional cost incurred to produce it
B. overhead would be incurred whether or not the construction took place
C. asset cost will more closely approximate the cost of a purchased asset
D. decision to construct the asset should be based on the total incremental cost and not include allocated fixed
overhead

49. According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which
of the following situations?
A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive basis
B. when an asset is used in other than the earning activities of the firm
C. when an asset is ready for its intended use
D. when an asset is being constructed for a firm's own use

50. On January 1, 2010, Rong Company signed a contract to have Rozy Associates construct a manufacturing
facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on
January 1, 2010, to finance the construction cost, Rong borrowed $14,000,000 payable in seven annual
installments of $2,000,000 plus interest at the rate of 9%. During 2010, Rong made progress payments totaling
$5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the
year. The excess borrowed funds were invested in short-term securities, from which Rong realized investment
income of $330,000. What amount should Rong report as capitalized interest at December 31, 2010?
A. $ 0
B. $ 270,000
C. $ 510,000
D. $1,260,000
51. Which of the following costs incurred subsequent to the acquisition of a machine would be appropriately
accounted for by debiting the accumulated depreciation account related to the machine?
A. the cost of cleaning and lubricating the machine
B. the cost of replacing the motor on the machine when the cost of the original motor is not known
C. the cost of moving the machine to another manufacturing plant
D. the cost of a new attachment to the machine that provides for more output per unit of time

52. At the end of the year, any balance in Allowance for Repairs should be
A. closed to Repairs Expense
B. reported as a deferred credit
C. closed to Retained Earnings
D. reported as a contra account to the asset

53. Under GAAP, which one of the following types of costs should not be capitalized?
A. rearrangements
B. routine maintenance
C. replacements
D. additions

54. An improvement made to a machine increased its production capacity by 25% without extending the
machine's useful life. The cost of the improvement should be
A. recorded as an expense
B. debited to Accumulated Depreciation
C. capitalized in the machine account
D. allocated between Accumulated Depreciation and the machine account

55. Which of the following events is most appropriately recorded as a reduction to accumulated depreciation?
A. an addition that increases the anticipated benefits of the old asset
B. an improvement that extends an asset's useful life
C. an improvement that increases the asset's expected benefits beyond that originally expected
D. a replacement of a better asset for the one currently used

56. The sale of a depreciable asset resulting in a gain indicates that the proceeds from the sale were
A. less than current market value
B. greater than cost
C. greater than book value
D. less than book value
57. On January 1, 2010, Ringo purchased, for $100,000, equipment having a useful life of eight years and an
estimated salvage value of $4,000. Ringo has recorded monthly depreciation on the equipment using the
straight-line method. On March 1, 2015, the equipment was sold for $46,000. As a result of this sale, Ringo
should recognize
A. no gain or loss
B. an $8,000 gain
C. an $8,000 loss
D. a $12,000 gain

58. The Rothchild Company purchased a machine on October 1, 2010, for $80,000. At the time of acquisition,
the machine was estimated to have a useful life of five years and an estimated salvage value of $5,000.
Rothchild has recorded monthly depreciation using the straight-line method. On April 1, 2012, the machine was
sold for $50,000. What should be the loss recognized from the sale of the machine?
A. $ 0
B. $2,500
C. $5,000
D. $7,500

59. Required disclosure for property, plant, and equipment in the financial statements is based upon
A. age and depreciation method
B. age and nature
C. nature and function
D. function and depreciation method

60. In 2010, Golf Oil Company incurred costs of $7 million drilling oil wells. Thirty percent of the drilling
resulted in oil being found. The rest of the drilling was unsuccessful. If Golf uses the successful-efforts method
of accounting, the oil and gas properties will be valued on the December 31, 2010 balance sheet at
A. $7,000,000
B. $4,900,000
C. $4,200,000
D. $2,100,000

61. Two alternative methods of accounting for the cost of oil and gas properties have been widely used. The
method that capitalizes all costs associated with all wells is the
A. successful-efforts method
B. full-cost method
C. variable-cost method
D. specific-cost method
62. Concerning current accounting for oil and gas properties, which statement is true?
A. The successful-efforts method must be used.
B. The reserve-recognition method must be used.
C. Either the successful-efforts method or the full-cost method may be used.
D. The full-cost method must be used.

63. The costs of drilling an unsuccessful well are expensed under

A. the successful-efforts method
B. the full-cost method
C. both the successful-efforts method and the full-cost method
D. neither the successful-efforts method nor the full-cost method

64. Under IFRS, which of the following must be expensed?

A. maintenance only
B. repairs only
C. rearrangements only
D. maintenance, repairs, and rearrangements

65. A major difference between IFRS and GAAP regarding valuation of property, plant, and equipment is that
A. IFRS allow valuation increases to be recorded in certain circumstances, but GAAP does not permit increases
B. IFRS and GAAP differ greatly on accounting for nonmonetary exchanges
C. IFRS require capitalization of all repairs and maintenance while GAAP does not
D. IFRS allocate lump-sum purchase costs based on relative book values rather than relative market values

66. When an operating asset is made up of significant individual components, IFRS require the company to
A. group those components into no more than three groups for depreciation
B. combine the components into one unit and use a weighted average useful life
C. ignore the components for accounting purposes
D. account for each component individually

67. Costs incurred by Mills Company that relate to its property, plant, and equipment assets might be recorded
in one of the five following classes of accounts:

a. an expense account
b. an accumulated depreciation account
c. a land account
d. a building account
e. an equipment account
Required:

For each of the costs identified below, indicate the type of account in which the cost should be recorded by placing the appropriate letter in the space
provided.

____ 1. The legal fees associated with the acquisition of land.

____ 2. The cost of replacing the engine in a truck when the cost of the old engine is not known.

____ 3. The cost of replacing an oil furnace with an electric furnace.

____ 4. The cost of a new addition to a warehouse that will be used to store inventory.

____ 5. The cost of renovating a recently purchased ten-year-old office building.

____ 6. The materials and labor costs incurred in testing a new piece of equipment.

____ 7. The costs of tuning, lubricating, and tire rotation on a fleet of delivery trucks.

____ 8. The additional costs in the construction of a building due to a small fire that occurred during the construction period.

1. c 5. d
2. b 6. e
3. e 7. a
4. d 8. a

68. During 2010, the Tinsle Company completed the following transactions related to its property, plant, and
equipment accounts:

a. On March 18, Tinsle paid $480,000 for land, buildings, and equipment in a lump-sum purchase. An appraisal that cost Tinsle $10,000
revealed fair market values of $200,000 for the land, $150,000 for the buildings, and $150,000 for the equipment.
b. On August 11, Tinsle issued 20,000 shares of its $10 par value common stock in exchange for some equipment. The equipment's fair
market value is estimated at $360,000 by an outside appraisal. On the date of the exchange, the stock was being actively traded at $17
per share on a major stock exchange.
Required:

Prepare the necessary journal entry to properly record each transaction.

a. Land 196,000
[($200,0
00/$500,
000) ´
$490,00
0]
Building 147,000
[($150,0
00/$500,
000) ´
$490,00
0]
Equipme 147,000
nt
[($150,0
00/$500,
000) ´
$490,00
0]
Cash 490,000

b. Equipme 340,000
nt
(20,000 ´
$17)
Common Stock, $10 par 200,000
Additional Paid-In Capital on Common Stock 140,000

69. During 2010, Redford Company acquired a new piece of equipment for its manufacturing process. In order
to purchase the equipment, Redford made a down payment of $50,000 and issued a $200,000 five-year, 7%
note. The annual payment of principal and interest was to be $48,778. The market rate of interest for obligations
of this kind is 12%. The present value factor for an ordinary annuity of 5 years at 12% is 3.604776.

Required:

a. Prepare the journal entry to record the acquisition.

b. Assume that the equipment had an established cash price of $220,000. Prepare the journal entry to record the transaction under this
additional assumption.
a. Equipme 225,834
nt
[($48,77
8´
3.60477
6) +
$50,000]
Discount 24,166
on Notes
Payable
Notes Payable 200,000
Cash 50,000

b. Equipme 220,000
nt
Discount 30,000
on Notes
Payable
Notes Payable 200,000
Cash 50,000

70. Several expenditures are listed below:

Yes No

a. Landscaping ______ ______

b. Compensation for injury to construction worker ______ ______

c. Cost of overhaul before initial use ______ ______

d. Cost of tearing down a building on newly acquired land ______ ______

e. Land held as a plant site for future use ______ ______

f. Fully depreciated assets still being used ______ ______

g. Leasehold improvements ______ ______

h. Deposits on machinery not yet received ______ ______

Required:

Indicate whether or not each expenditure would be included in the cost of property, plant, and equipment.

Yes No
a. X
b X
c. X
d. X
e X
f. X
g. X
h X

71. Several expenditures are listed below:

Land Building Equipment Other

a. Construction costs on building ______ X ______ ______

b. Compensation for injury to

construction worker ______ ______ ______ ______

c. Equipment purchased for

building excavation ______ ______ ______ ______

d. Interest on construction loan

______ ______ ______ ______

e. Equipment testing costs ______ ______ ______ ______

f. Costs of tearing down a

building on newly acquired
land ______ ______ ______ ______

g. Delinquent property taxes on

acquired property ______ ______ ______ ______

h. Cost of major overhaul ______ ______ ______ ______

i. Title search fees ______ ______ ______ ______

Required:

If the expenditure would be capitalized to land, buildings, equipment, or other, so indicate with an "X." An example is given.

Land Building Equipment Other

a. Construction costs on building _____ X _____ _____

b. Compensation for injury to
construction worker _____ _____ _____ X
c. Equipment purchased for
building excavation _____ _____ X _____
d. Interest on construction loan
_____ X _____ _____
e. Equipment testing costs _____ _____ X _____
f. Costs of tearing down a
building on newly acquired
land X _____ _____ _____
g. Delinquent property taxes on
acquired property X _____ _____ _____
h. Cost of major overhaul _____ _____ _____ X
i. Title search fees X _____ _____ _____

72. Smith Delivery Services bought a truck by paying $44,000 cash down and signing a $148,000
non-interest-bearing note due in five years for the balance. Current interest rates were 8%. Actuarial
information for five periods at 8% follows:

Amount of 1 1.469
Present value of 1 0.680
Amount of annuity of 1 5.867
Present value of annuity of 1 3.993

Required:

Compute the amount that should be charged to the asset account.

$148,000 ´ 0.68 = $100,640; $100,640 + $44,000 = $144,640

73. Mirror Corp. has agreed to expand its operations by opening a manufacturing plant in Burns, Texas. In
return, Burns will donate an abandoned building and the 5 acres on which it sits to Mirror. The land originally
cost $1,000,000 and the building $3,000,000. The building's current book value is $380,000, and current
appraisals are: land $6,000,000 and building $2,600,000. Mirror has also agreed to provide 100 jobs for the next
5 years to Burns' city residents. Mirror estimates that the wages to these residents will amount to $4,000,000.

Required:

Prepare the journal entry to record this acquisition on Mirror's books.

Land 6,000,000
Buildin 2,600,000
g
Donated Capital 8,600,000

74. On August 1, Silver Company exchanged a machine for a similar machine owned by Wrangler Company
and also received $7,000 cash from Wrangler Company. Silver's machine had an original cost of $70,000,
accumulated depreciation to date of $34,500, and a fair market value of $60,000. Wrangler's machine had a
book value of $45,000 and a fair value of $53,000.

Required:

Prepare the necessary journal entry by Silver Company to record this transaction assuming

a. Silver will use the newly acquired machine in the same manner as the old one.
b. Silver's use of the new machine will be substantially different from the old one.
a. Cash 7,000
Equipme 28,500
nt
($35,500
- $7,000)
Accumul 34,500
ated
Deprecia
tion-Equ
ipment
Equipment 70,000

b. Cash 7,000
Equipme 53,000
nt
($60,000
- $7,000)
Accumul 34,500
ated
Deprecia
tion-Equ
ipment
Equipment 70,000
Gain [$60,000 - ($70,000 - $34,500)] 24,500

75. Pops Corp. has agreed to exchange an old computer system for a van from Incline, Inc. In addition, Incline
will pay Pops $2,000. The computer originally cost Pops $25,000 and its current book value is $14,000. The
van's original cost was $30,000 and its accumulated depreciation is $12,000. The appraised value of the
computer is $15,000, and the appraised value of the van is $13,000.

Required:

Prepare the journal entries to record the exchange on both companies' books.

Pops
Corp.
Van 13,000
Accum. 11,000
Depr.-C
omputer
Cash 2,000
Computer 25,000
Gain on Exchange 1,000
Incline,
Inc.
Compute 15,000
r
Accum. 12,000
Depr.-V
an
Loss on 5,000
Exchang
e
Cash 2,000
Van 30,000

76. Whistler Company exchanged a piece of equipment with a cost of $300,000 and accumulated depreciation
of $240,000 for land owned by Joseph Corporation. No cash was exchanged. Joseph's land had an original cost
of $90,000. At the date of exchange, both assets had a fair market value of $80,000.

Required:

Prepare the journal entry that each company should record.

Whistler
Compan
y
Land 80,000
Accumul 240,000
ated
Deprecia
tion-Equ
ipment
Equipment 300,000
Gain on Exchange of Assets 20,000

Joseph
Corporat
ion
Loss on 10,000
Exchang
e of
Assets
Equipme 80,000
nt
Land 90,000
77. Sally Company is exchanging a unique machine for a similar machine from William, Inc. Sally's equipment
originally cost $300,000 and has a book value of $175,000. William's machine cost $250,000 and has a book
value of $150,000. No cash will be exchanged, and the two machines will continue to perform the same
functions for each company.

Required:

Prepare the journal entry for each company.

Sally
Compan
y
Machine 175,000
Accumul 125,000
ated
Deprecia
tion
Equipment 300,000

William,
Inc.
Machine 150,000
Accumul 100,000
ated
Deprecia
tion
Machine 250,000

GAAP requires recording the exchange at book value if fair value is not reasonably determinable or if there is no commercial substance (i.e., the
future cash flows are not expected to change as a result of the trade).

78. Ralph Company exchanged a machine for some land. The machine had cost $15,000, was 70% depreciated,
and could be sold for $4,100. Calvin paid $600 in addition to giving up the machine.

Required:

a. Compute the amount at which the land should be recorded.

b. Assume, instead, that Ralph exchanged the machine for a new, more efficient machine with a fair value of $4,700, while still paying
$600 as before. Compute the gain or loss that would be recorded on the sale of the old machine by Ralph.

a. $4,100 + $600 = $4,700

b. 0.30 ´ $15,000 = $4,500 book value; $4,500 - $4,100 market value = $400 loss
79. Mark Company exchanged a worn-out tractor that had cost $20,000 and was half depreciated for a new
tractor with a fair value of $12,000. Mark paid an additional $2,500 cash. The transaction lacked commercial
substance.

Required:

Compute the amount at which Mark should record the new tractor.

($20,000 - $10,000) + $2,500 = $12,500

80. Assuming that the effects of interest capitalization are material, calculate the amount of interest costs to be
capitalized by Marcus Corporation in 2010 in relation to the following events:

a. On January 1, Marcus began construction for a new storage building for its own use. Expenditures incurred evenly throughout the year
totaled $900,000. Marcus borrowed $1,000,000 specifically for construction of the storage building at an annual interest rate of 6%.
b. Inventories costing $200,000 were routinely manufactured during the year. Marcus borrowed $200,000 at 8% to finance
inventory-related costs.
c. On September 1, Marcus began construction of a custom-designed machine to the specifications of a customer. As of December 31,
$200,000 of materials, labor, and overhead have been assigned to the machine. Those costs were incurred evenly throughout the period
September 1 through December 31. To finance construction, $230,000 was borrowed at a 9% interest rate.

a. (0 + $900,000)/2 = $450,000; $450,000 ´ .06 = $27,000

b. $0

c. (0 + $200,000)/2 = $100,000; $100,000 ´ 4/12 ´ .09 = $3,000

81. On January 3, 2010, Mercury Company began self-constructing an asset that qualified for interest
capitalization. On January 5, Mercury borrowed $300,000 on an 8% construction loan. In addition, Mercury had
$400,000 of 6% notes payable and $700,000 of 9% bonds payable outstanding. By December 31, expenditures
(occurring evenly throughout the year) of $800,000 had been made on the asset. Investment of unused funds
during the year yielded $1,200 of interest revenue.

Required:

Compute the amount of interest that should be capitalized during 2010.

$31,910, computed as follows:

(0 + $800,000)/2 = $400,000

$400,000 ´ .06 = $24,000

$700,000 ´ .09 = 63,000
$87,000

$87,000/$1,100,000 = 7.91%

$300,000 ´ .08 = $24,000

$100,000 ´ .0791 = 7,910
$31,910

82. Cooper, Inc. is constructing a building that qualifies for interest capitalization. The following information is
available:

Capitalization period: January 1, 2010-December 31, 2011 Expenditures on project (incurred evenly):

2010 $20,000
2011 $60,000

Amounts borrowed and outstanding (all debt incurred January 1, 2010):

$10,000 at 10% (specifically for the construction project)

$18,000 at 12% (general debt)
$30,000 at 14% (general debt)

Required:

a. Compute the amount of interest that should be capitalized in 2010 and 2011. (Round interest rates to the nearest hundredths, e.g.,
07.62%.)
b. Assume that in 2010 unused borrowed funds were invested and earned interest revenue amounting to $600. How much interest should
be capitalized to the asset account in 2011?
a. 2010: $1,000, as computed below.
2011: $6,433, as computed below.

2010
($0 + $20,000)/2 = $10,000
$10,000 ´ 0.10 = $1,000

2011
($21,000 + $81,000)/2 = $51,000

$18,000 ´ 0.12 = $2,160

30,000 ´ 0.14 = 4,200
$48,000 $6,360

$6,360/$48,000 = .1325

$10,000 ´ 0.10 = $1,000

41,000 ´ .1325 = 5,433
$51,000 $6,433

b. $1,000

83. The Heavy Equipment Company decided to replace a gasoline engine with a diesel engine in one of its
cranes. The new engine cost $8,000, which Heavy paid in cash. The old engine is discarded at no cost to Heavy
Equipment.

Required:

a. Prepare the required journal entry for Heavy Equipment Company, assuming the old gasoline engine is carried on the books at a cost of
$4,000 with accumulated depreciation of $3,000.
b. Prepare the required journal entry for Heavy Equipment Company, assuming the book value of the old engine is not known.
a. Engine 8,000
(new)
Accumul 3,000
ated
Deprecia
tion-Eng
ine
Loss on 1,000
Disposal
Engine (old) 4,000
Cash 8,000

b. Accumul 8,000
ated
Deprecia
tion-Eng
ine (or
Engine)
Cash 8,000

84. Robertson Company is making significant improvements to some of its assets, as follows.

1. It is replacing the old furnace that cost $40,000 and has a $15,000 book value with a new furnace/air conditioner combination.
Robertson spent $60,000 in cash and was given a $3,000 trade-in on the old furnace.
2. The delivery van is being updated with a new $7,000 engine that will increase the useful life of the van by 2 years. The van originally
cost $35,000 and has accumulated depreciation of $25,000.

Required:

a. Record the appropriate journal entry for replacing the furnace.

b. When recording the transaction associated with the van there is a choice between two methods. Provide the journal entries for each
method.
a. Furnace/ 63,000
Air
Conditio
ner
Accumul 25,000
ated
Deprecia
tion
Loss 12,000
Furnace 40,000
Cash 60,000

b. Accumul 7,000
ated
Deprecia
tion
Cash 7,000

Van 7,000
Cash 7,000

85. On May 1, 2010, Argus Manufacturing Co. acquired a machine for $180,000. The machine was depreciated
monthly using the straight-line method with an estimated life of ten years and no salvage value. On December
1, 2017, the machine was sold for $40,000.

Required:

Compute the amount of gain or loss on the sale of the machine, and prepare the journal entry to record the sale.
(Calculate depreciation to the nearest whole month.)

$40,000 - [$180,000 - ($180,000 ´ 91/120)] = $3,500 loss

Entry:

Cash 40,000
Accumu 136,500
lated
Depreci
ation
(91/120
´
$180,00
0)
Loss on 3,500
Disposa
l
Machine 180,000
86. In 2010, Hart Co. invested $4,000,000 in oil well exploration activities. Seventy percent of the drilling was
successful and resulted in commercial quantities of oil being found.

Required:

a. Indicate the amount of drilling expense Hart Co. would recognize in 2010 if the full-cost method is in use.
b. Indicate the cost that would be reported on the balance sheet as oil and gas properties if the successful-efforts method is in use.

a. $0

b. 0.70 ´ $4,000,000 = $2,800,000

87. Why is it important to allocate a lump-sum purchase amount among the individual assets acquired?

The allocation of a lump-sum purchase cost among the individual assets acquired is important for several
reasons. First, some of the assets may require depreciation while others (land) may not. Second, the economic
lives of those assets may vary. And, finally, those assets may be depreciated by different depreciation methods.

88. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,
ranging from routine repairs to major overhauls and improvements. The accountant's problem is to determine
how these costs should be recorded.

Required:

Identify the two categories of expenditures in which these costs can be classified, and explain how the
accountant determines which classification is appropriate.

These costs can be classified as either capital or revenue (operating) expenditures. Capital expenditures are
costs that increase the future economic benefits of an asset above those originally expected. The future
economic benefits can be increased by (1) extending the asset's life, (2) improving productivity, (3) producing
the same product at a lower cost, or (4) increasing the quality of the product.

Revenue (operating) expenditures are costs that do not increase the economic benefits of an asset but are
incurred to maintain the asset's existing benefits.
89. List and describe four specific examples of start-up costs. Discuss the GAAP rules for recording start-up
costs.

Examples of start up costs include:

Costs
associa
ted
with
organiz
ing a
new
entity:
Legal fees associated with startup
Preparation of a charter
Preparation of by-laws
Costs of preparing and copying minutes of organizational meetings
Organization meeting costs
Original stock certificates

Costs
associa
ted
with
openin
g a new
facility:
Permits to operate the business
Costs of hiring and training new employees
Pre-opening advertising

Costs
associa
ted
with
introdu
cing a
new
product
line or
service:
Costs of hiring/retraining new employees

Costs
associa
ted
with
conduc
ting
busines
s in a
new
territor
y:
Costs of hiring/relocating employees
Pre-opening advertising
Costs
associa
ted
with
comme
ncing a
new
operati
on in
an
existin
g
facility:
Costs associated with reorganizing the facility
Costs associated with hiring/retraining

Under current GAAP, companies must expense such costs as incurred.

90. Current GAAP describes three exceptions to the general rule of using fair value when exchanging
nonmonetary assets.

Required:

List the three exceptions and provide an example of each.

1. Neither the fair value of the asset received or given up is reasonably determinable.
Example: A unique or one-of-a-kind productive asset is involved.

2. The transaction is an exchange of inventory to facilitate sales to a third party.

Example: Company A exchanges inventory with Company B so Company A can sell the new inventory to Company C.

3. The transaction lacks commercial substance such that the future cash flows of the company are not expected to change significantly.
Example: Company A exchanges equipment with a book value of $30,000 for a new truck costing $50,000 that will not significantly
improve production, so the cash flow won't significantly change.

91. Discuss when the interest capitalization period begins and ends for assets constructed for a company's own
use.

The interest capitalization period begins when (a) expenditures for the asset have been made, (b) activities that
are necessary to get the asset ready for its intended use are in progress, and (c) interest cost is being incurred.
Interest capitalization should continue as long as the three conditions are met. The capitalization period should
end when the asset is (a) substantially complete and (b) ready for its intended use.
92. Describe the IFRS treatment of increases in the market value of property, plant, and equipment held during
the year. Compare that treatment to U.S. GAAP requirements.

IFRS allow companies to revalue property, plant, and equipment up to fair market value when it can be reliably
estimated. A revaluation surplus is recorded in stockholders' equity for the unrealized holding gain. GAAP has
no similar provision for marking up assets to market. Any holding gains are recognized only if the asset is sold.