Question 1

At the end of the year, any balance in Allowance for Repairs should be

Accepted Answer

Allowance for Repairs is a contra account to the asset account Repairs and Maintenance. At the end of the year, any balance in Allowance for Repairs should be closed to Repairs Expense to match the cost of repairs incurred during the year with the revenue earned. This will ensure that the balance sheet accurately reflects the true value of the asset. Therefore, the best choice is A, which states that the balance should be closed to Repairs Expense.

Question 2

Which of the following events is most appropriately recorded as a reduction to accumulated depreciation?

Accepted Answer

A reduction to accumulated depreciation is appropriate when an improvement is made to an asset that extends its useful life. This is because the amount of depreciation recorded for an asset is based on its useful life. By extending its useful life, the amount of depreciation recognized over time will be reduced. The other options listed may result in an adjustment to the asset's carrying value, but not a reduction to accumulated depreciation.

Question 3

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

Accepted Answer

The improvement made to the machine increased its production capacity permanently, which is a betterment to the machine itself. Therefore, the cost of the improvement should be capitalized and added to the machine account as it enhances the machine's usefulness and increases its service potential. It should not be expensed, debited to Accumulated Depreciation or allocated between Accumulated Depreciation and the machine account.

Question 4

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:
$\begin{array}{lll}
&\text {Fargo's}&\text { Rambam's}\
&\text {Land}&\text {Land}\
\text { Cost and book value } & \$ 400,000 & \$ 250,000 \
\text { Fair value based upon appraisal } & \$ 500,000 & \$ 450,000
\end{array}$ 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

Accepted Answer

Fargo's land had a book value of $400,000 and a fair value of $500,000. The exchange was made with Rambam, where Rambam also paid $50,000 cash to equalize the fair value difference. Therefore, Fargo should recognize a gain of $100,000 ($500,000 fair value - $400,000 book value).

Question 5

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

Accepted Answer

The delivery truck should be recorded at the fair value of the asset given up, which is the normal selling price of the inventory ($65,000), assuming the fair value is more clearly evident than the fair value of the truck received. This follows the accounting principle of recording assets at their fair value at the time of exchange.

Question 6

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?

Accepted Answer

The answer of Rebby Company received $60, 000 in cash...

Question 7

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

Accepted Answer

The equipment's book value at the time of sale was $38,000, calculated as the original cost ($100,000) minus accumulated depreciation over 5 years and 2 months. The sale price was $46,000, resulting in an $8,000 gain.

Question 8

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:  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?

Accepted Answer

The answer of On August 1, 2010, Robbins traded in...

Question 9

Which one of the following statements is true?

Accepted Answer

According to generally accepted accounting principles (GAAP), interest can be capitalized when it is incurred during the construction of a qualifying asset. However, once the asset is substantially complete and ready for its intended use, no further interest can be capitalized. Therefore, option D is the only true statement. Option A is false because constructing an asset for less than its purchase price does not necessarily result in a profit. Option B is false because a donation of property, plant, or equipment is typically recorded at its fair value, which may result in either a gain or a loss. Option C is false because development stage enterprises must report all losses, regardless of whether sales have been made.

Question 10

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?

Accepted Answer

The cost of replacing a component of a machine (like a motor) when the original cost is not known is accounted for by debiting the accumulated depreciation account. This approach removes the depreciated cost of the old component and recognizes the expenditure on the new component, effectively updating the asset's book value.

Question 11

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?

Accepted Answer

Rong should capitalize the lesser of actual interest or avoidable interest. Avoidable interest is the amount of interest costs that could have been avoided if the funds had not been borrowed. In this case, avoidable interest is $3,000,000 x 9% = $270,000. The actual interest paid in 2010 is $2,000,000 x 9% = $180,000. Therefore, Rong should capitalize $180,000 as interest cost for the year. The investment income earned on the excess borrowed funds is irrelevant in calculating capitalized interest.

Question 12

Under GAAP, which one of the following types of costs should not be capitalized?

Accepted Answer

GAAP states that only costs that add future economic benefits to an organization should be capitalized. Routine maintenance costs are simply maintaining the asset's current economic benefits and do not create any future benefit, so they should not be capitalized.

Question 13

According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which of the following situations?

Accepted Answer

Interest cost incurred during the construction period of an asset that is intended for a firm's own use should be capitalized according to GAAP. This allows the firm to spread the cost of financing over the useful life of the asset, rather than expensing it immediately, which would not accurately reflect the economic use of the asset.

Question 14

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

Accepted Answer

Under the successful-efforts method, only the costs associated with successful drilling are capitalized. Since 30% of the drilling was successful, the capitalized cost is 30% of $7 million, which is $2.1 million.

Question 15

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:
$\begin{array}{lll}
&\text {Fargo's}&\text { Rambam's}\
&\text {Land}&\text {Land}\
\text { Cost and book value } & \$ 400,000 & \$ 250,000 \
\text { Fair value based upon appraisal } & \$ 500,000 & \$ 450,000
\end{array}$ 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

Accepted Answer

Fargo should record the newly acquired land at its fair value, which is $450,000. The cash received does not affect the recorded value of the land acquired.

Question 16

Required disclosure for property, plant, and equipment in the financial statements is based upon

Accepted Answer

The required disclosure for property, plant, and equipment in the financial statements is based upon the nature and function of the assets, rather than their age or depreciation method. This includes disclosure of the type of asset, its use in the business, and any restrictions or encumbrances on the asset. Age and depreciation method are important factors, but they are not the sole basis for disclosure requirements.

Question 17

The sale of a depreciable asset resulting in a gain indicates that the proceeds from the sale were

Accepted Answer

A gain on the sale of a depreciable asset indicates that the proceeds from the sale were greater than the asset's book value. Book value is the net value of the asset on the company's balance sheet after accounting for depreciation.

Question 18

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?

Accepted Answer

Depreciation expense per month = (Cost - Salvage value) / Useful life in months
= ($80,000 - $5,000) / (5 x 12) = $1,250

As the machine was sold on April 1, 2012, it was in use for 18 months [from October 1, 2010, to March 31, 2012].
Total depreciation charged = 18 x $1,250 = $22,500

Book value of the machine on April 1, 2012, = Cost - Depreciation charged = $80,000 - $22,500 = $57,500
Loss on sale = Book value - Sales price = $57,500 - $50,000 = $7,500

Question 19

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

Accepted Answer

Including only incremental fixed overhead costs does not ensure that the asset cost will approximate the cost of a purchased asset, as purchased assets may include allocated fixed overhead costs.

Question 20

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:
$\begin{array}{lll}
&\text {Fargo's}&\text { Rambam's}\
&\text {Land}&\text {Land}\
\text { Cost and book value } & \$ 400,000 & \$ 250,000 \
\text { Fair value based upon appraisal } & \$ 500,000 & \$ 450,000
\end{array}$ 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

Accepted Answer

The answer of Exhibit 10-1 Two construction companies, Fargo and...

Quiz 10: Property, Plant, and Equipment: Acquisition and Disposal