Question 1

Which of the following costs associated with a delivery van should be capitalized? I. The van is repainted.
II. The van's transmission is completely overhauled to extend useful life for two years.
III. The van is modified for a specific use.

Accepted Answer

Capitalized costs are costs that increase the useful life or efficiency of an asset. Repainting the van is a maintenance expense and does not increase the useful life or efficiency of the asset, so it should not be capitalized. However, overhauling the transmission and modifying the van for a specific use are both examples of costs that increase the useful life or efficiency of the asset, and as such, should be capitalized. Therefore, the correct option is C) II and III.

Question 2

Which of the following should be included in the Machinery account?

Accepted Answer

The cost of transporting the machinery to its setup location should be included in the Machinery account as part of the cost of acquiring the machinery.

Question 3

Which of the following should be included in the cost of land?

Accepted Answer

The costs of grading and clearing the land and the costs of removing an unwanted building should be included in the cost of land. These costs are directly related to the development of the land and help to establish the initial value of the property. The cost of fencing could be considered a separate improvement to the land and not necessarily included in the cost of the land itself.

Question 4

A capital expenditure is:

Accepted Answer

A capital expenditure is an expense incurred to acquire, improve, or extend the life of an asset. Therefore, it is debited to an asset account because it increases the value of an asset.

Question 5

In a lump-sum purchase of assets, the relative-sales-value is defined as the:

Accepted Answer

The relative-sales-value in a lump-sum purchase of assets is defined as the ratio of each asset's market value to the total market value. This helps to allocate the purchase price among the different assets acquired. Option A is incorrect as it only subtracts the value of the most valuable asset from the total price paid, which does not give the relative-sales-value of other assets. Option B is also incorrect as it compares the total price paid to the total market value rather than the individual assets' market value. Option D is incorrect as it compares the market value of the individual assets to the total book value, which is irrelevant in a lump-sum purchase.

Question 6

Morton Corporation purchased equipment for $46,000. Morton also paid $1,200 for freight and insurance while the equipment was in transit. Sales tax amounted to $850. Insurance, taxes and maintenance for the first year of use was $1,000. How much should Morton Corporation capitalize as the cost of the equipment?

Accepted Answer

To determine the cost of the equipment, we need to add the purchase price, freight and insurance, and sales tax:
$46,000 + $1,200 + $850 = $48,050
We also need to add the insurance, taxes, and maintenance for the first year of use to this cost:
$48,050 + $1,000 = $49,050
Therefore, choice C is correct.

Question 7

Costs that do not extend the asset's capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as:

Accepted Answer

Costs that maintain or restore an asset to working order are considered expenses and are not capitalized as capital expenditures. Capital expenditures are costs that extend an asset's capacity or useful life, while expenses are costs incurred to maintain the asset's normal operating condition. Additions and improvements are forms of capital expenditures that improve an asset or add to its capacity and useful life.

Question 8

The Augusta Health Company purchased land, buildings and equipment for $2,400,000. The land has been appraised at $915,000, the buildings at $1,125,000 and the equipment at $510,000. The equipment account will be debited for:

Accepted Answer

The total appraised value of the land and buildings is $2,040,000 ($915,000 + $1,125,000). To determine the value of the equipment, you need to subtract this total from the total purchase price: $2,400,000 - $2,040,000 = $360,000. Therefore, the equipment account will be debited for $360,000.

Question 9

Land, buildings and equipment are acquired for a lump sum of $875,000. The market values of the three assets are, respectively, $200,000, $500,000 and $300,000. What is the cost assigned to the equipment?

Accepted Answer

We need to allocate the cost based on the market values, so we can use proportions.

Total market value = $1,000,000 
Equipment market value = $300,000

Proportion of equipment market value = $300,000 / $1,000,000 = 0.3

Cost of equipment = Proportion of equipment market value * Total cost 
Cost of equipment = 0.3 * $875,000 = $262,500

Therefore, the cost assigned to the equipment is $262,500, which corresponds to choice (B).

Question 10

Land is purchased for $62,500. Back taxes paid by the purchaser were $7,500; total costs to demolish an existing building were $11,000; fencing costs were $12,500; and lighting costs were $1,500. What is the cost of the land?

Accepted Answer

The answer of Land is purchased for $62,500. Back taxes...

Question 11

The cost of installing shrubbery should be recorded as:

Accepted Answer

The cost of installing shrubbery should be recorded as land improvements because it is an addition or improvement that enhances the value of the land.

Question 12

Although located on the land, they are subject to decay and their cost is depreciated. This is the definition of:

Accepted Answer

Land improvements are enhancements made to a plot of land that are subject to decay and depreciation, unlike land itself which is not depreciated.

Question 13

Which of the following is NOT an intangible asset?

Accepted Answer

Mineral rights are a tangible asset as they are physical resources found in the ground. Copyright, goodwill, and patents are all examples of intangible assets.

Question 14

Bixby Corporation purchased land and a building for $800,000. An appraisal indicates that the land's value is $400,000 and the building's value is $500,000. When recording this transaction Galaxy should debit:

Accepted Answer

When a company purchases land and a building together, they must allocate the purchase price between the separate assets. One way to determine the allocation is to use the relative fair market values of the land and building, which in this case are $400,000 for the land and $500,000 for the building. Therefore, Bixby Corporation should debit the Building account for $500,000 and the remaining $300,000 ($800,000 - $500,000) should be debited to the Land account.

Option A is incorrect because it would debit the entire purchase price to the Land account, which is incorrect. Option B is incorrect because it does not reflect the fair market value allocation of the purchase price. Option C is incorrect because it does not reflect the separate values of the land and the building.

Question 15

Maxco Company acquired land and buildings for $1,000,000. The land is appraised at $450,000 and the buildings are appraised at $800,000. The debits to the Land and Buildings accounts will be:

Accepted Answer

The total appraised value is $1,250,000 ($450,000 for land + $800,000 for buildings). The cost is allocated based on the proportion of each appraised value to the total appraised value. Land: ($450,000/$1,250,000) * $1,000,000 = $360,000. Building: ($800,000/$1,250,000) * $1,000,000 = $640,000.

Question 16

The journal entry to record a major expenditure to upgrade equipment that extends its useful life beyond the original estimate would include a:

Accepted Answer

A major expenditure to upgrade equipment would increase its useful life beyond the original estimate. Therefore, it would be recorded as a capital expenditure and debited to the Equipment account. There is no need to credit the Depreciation Expense account since the upgrade will extend the useful life and therefore decrease the yearly depreciation expense. Likewise, there is no need to debit the Depreciation Expense account since it is not an expense incurred to maintain or repair the equipment, but rather a capital expenditure to improve it. Lastly, a Repair Expense account would only be used for minor repairs, not major upgrades.

Question 17

A company recently purchased a building that it plans to renovate to get ready for use in its operations. All expenditures to repair and renovate the existing building for its intended use are charged to:

Accepted Answer

All expenditures related to repairing and renovating an existing building for its intended use should be charged to the "building" account. This includes costs such as repairs, painting, electrical work, plumbing, and any other necessary improvements to the existing building. Land improvements are for enhancements made directly to the land, such as landscaping or paving.

Question 18

Pat's Pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of the van was originally estimated to be 7 years. The overhaul is expected to extend the useful life of the van to 9 years. The overhaul is regarded as a(n):

Accepted Answer

The overhaul of the engine in the delivery van is a capital expenditure because it has increased the useful life of the van from 7 to 9 years. This means that the overhaul has provided an economic benefit beyond the current accounting period and has improved the company's ability to generate revenue over a longer period of time.

Question 19

The cost of assets acquired in a lump-sum purchase must be allocated using which method?

Accepted Answer

The Relative-sales-value method is the most appropriate method for allocating the cost of assets acquired in a lump-sum purchase. This method allocates the cost according to the relative sales value of each asset acquired. It provides a fair and rational allocation of the total cost of the purchased assets based on their respective fair market values.

Question 20

An expenditure that increases an asset's capacity or efficiency or extends its useful life is a(n):

Accepted Answer

Capital expenditures are costs incurred to increase the capacity or efficiency of an asset or extend its useful life, thus adding value to the asset.

Quiz 7: Plant Assets Intangibles

Which of the following costs associated with a delivery van should be capitalized? I. The van is repainted. II. The van's transmission is completely overhauled to extend useful life for two years. III. The van is modified for a specific use.