Question 1

The Nathan Jacob's Company paid $450,000 to acquire land, building, and equipment. At the time of the acquisition
Nathan paid $15,000 to have the property appraised. The following values were determined from the appraisal: land,
$125,000? building, $235,000? and equipment, $150,000.
Required:
1) What cost should Nathan Jacob's assign to the land, buildings, and equipment, respectively? round percentages to whole percents)
2) Provide the journal entry to record the acquisition on the books of Nathan Jacob's.

Accepted Answer

The answer of The Nathan Jacob's Company paid $450,000 to...

Question 2

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 being constructed for a firm's own use should be capitalized according to GAAP. This allows the firm to include the interest cost as part of the asset's capitalized cost, rather than expensing it immediately, reflecting the asset's total cost more accurately.

Question 3

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

Accepted Answer

The full-cost method capitalizes all costs associated with all wells, including exploration, development, and production costs, which makes it more conservative than the successful-efforts method. The variable-cost method and specific-cost method are not widely used for accounting for the cost of oil and gas properties.

Question 4

The costs of drilling an unsuccessful well are expensed under

Accepted Answer

Under the successful-efforts method, costs related to unsuccessful wells are expensed immediately, while under the full-cost method, these costs can be capitalized and amortized over time. Therefore, drilling an unsuccessful well is expensed under the successful-efforts method.

Question 5

On January 1, 2016, Olvert Corp. signed a contract to have Bob's Builders construct a distribution center at a cost of $10,000,000. It was estimated that it would take two years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $10,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 6%. During 2017, Tolvin made the following construction-related expenditures:
  
What amount should Tolvin report as capitalized interest at December 31, 2017?

Accepted Answer

The answer of On January 1, 2016, Olvert Corp. signed...

Question 6

Concerning current accounting for oil and gas properties, which statement is true?

Accepted Answer

According to US GAAP, either the successful-efforts method or the full-cost method may be used for accounting for oil and gas properties. However, once a company adopts a method, it must consistently use that method throughout all reporting periods.

Question 7

On January 1, 2011, Barton Sinks purchased a metal-bending machine for $4,000,000 with an expected useful life of 10 years with no residual value. The machine is depreciated on a straight-line basis. On January 1, 2016, the
Company overhauled the machine at a cost of $1,000,000. This extended the expected useful life by 3 years? What is depreciation expense on the machine for 2016, still assuming zero residual value?

Accepted Answer

The answer of On January 1, 2011, Barton Sinks purchased...

Question 8

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

Accepted Answer

A reduction to accumulated depreciation occurs when the useful life of an asset is extended through improvements. This would result in a decrease in the amount of depreciation expense recognized each period and an increase in the carrying amount or book value of the asset. The other events listed may result in an increase to accumulated depreciation or a different accounting treatment altogether.

Question 9

On January 1, 2017, Tolvin Company signed a contract to have Bob's Builders construct a office building at a cost of $30,000,000. It was estimated that it would take four years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $20,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 8%. During 2017, Tolvin made progress payments totaling $5,000,000 under the contract, and the average amount of accumulated expenditures was $6,000,000 for the year. The excess borrowed funds were invested in short-term securities, from which Tolvin realized investment income of $650,000. What amount should Tolvin report as capitalized interest at December 31, 2017?

Accepted Answer

Capitalized interest is calculated based on the average accumulated expenditures related to the asset being constructed, not on the total loan amount. The average accumulated expenditures for the year were $6,000,000. The interest rate is 8%. Therefore, the capitalized interest is $6,000,000 * 8% = $480,000. Investment income does not affect the calculation of capitalized interest.

Question 10

In 2016, Go Oil Company incurred costs of $8 million drilling oil wells. Thirty percent of the drilling resulted in oil being found. The rest of the drilling was unsuccessful. If Go uses the successful-efforts method of accounting, the oil and gas properties will be valued on the December 31, 2016 balance sheet at

Accepted Answer

Under the successful-efforts method, only the costs of successful projects are capitalized. With 30% success, $8 million * 30% = $2.4 million is capitalized.

Question 11

On January 1, 2016, Basker Research signed a contract to have Bob's Builders construct a laboratory building at a cost of $20,000,000. It was estimated that it would take four years to complete the project. Also on January 1, 2017, to finance the construction cost, Tolvin borrowed $20,000,000 payable in five annual installments of $4,000,000 plus interest at the rate of 7%. During 2017, Tolvin made the following construction-related expenditures:

What amount should Tolvin report as capitalized interest at December 31, 2017?

Accepted Answer

The answer of On January 1, 2016, Basker Research signed...

Question 12

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

Accepted Answer

Under GAAP, routine maintenance costs are considered to be regular operating expenses and should not be capitalized. Capitalization is reserved for costs that improve or extend the useful life of an asset, such as rearrangements, replacements, and additions.

Question 13

During 2014, the Tidel Company completed the following transactions related to its property, plant, and equipment accounts:
a. On March 18, Tidel paid $480,000 for land, buildings, and equipment in a lump-sum purchase. An appraisal that cost Tidel $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, Tidel 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.

Accepted Answer

The answer of During 2014, the Tidel Company completed the...

Question 14

Which one of the following statements is true?

Accepted Answer

Interest can be capitalized during the period of time that is required to get the asset ready for its intended use. Once the asset is substantially complete and ready for its intended use, interest cannot be capitalized anymore. This is in accordance with the capitalization principles outlined in accounting standards such as the US GAAP and IFRS.

Question 15

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

The answer of All of the following are arguments in...

Question 16

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, which is a significant enhancement to its function and usefulness. As such, it meets the criteria for capitalization, and the cost of the improvement should be capitalized in the machine account. This will increase the cost basis of the machine and reflect the increased production capacity in the company's financial statements.

Question 17

On January 1, 2016, Randolf Company signed a contract to have Rory 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, 2016, to finance the construction cost, Randolf borrowed $14,000,000 payable in seven annual installments of
$2,000,000 plus interest at the rate of 9%. During 2016, Randolf 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 Randolf realized investment income of $330,000. What amount should Randolf report as capitalized interest at December 31, 2016?

Accepted Answer

Capitalized interest is calculated based on the average accumulated expenditures on the asset being constructed, not on the total loan amount. The interest rate is 9%, and the average accumulated expenditures were $3,000,000. Therefore, the capitalized interest is 9% of $3,000,000, which equals $270,000. Investment income from the excess funds does not affect the calculation of capitalized interest.

Question 18

Costs incurred by Mills Company that relate to its property, plant, and equipment assets might be recorded in one of the five following accounts:
a. an expense account
b. Accumulated Depreciation
c. Land
d. Building
e. Equipment
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 book value of the oil furnace is known).
____ 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 installing 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.

Accepted Answer

The answer of Costs incurred by Mills Company that relate...

Question 19

During 2014, Red Company acquired a new piece of equipment for its manufacturing process. In order to purchase the equipment, Red 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.

Accepted Answer

The answer of During 2014, Red Company acquired a new...

Question 20

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 overhauling and extending the life of the machine is appropriately accounted for by debiting the accumulated depreciation account because it is a capital expenditure that increases the future economic benefits of the asset beyond its originally assessed standard of performance.

Quiz 10: Property, Plant, and Equipment: Acquisition and Subsequent Investments