Question 1

The following financial information is from Cook Company: $$\begin{array} { | l | r | } 
\hline \text { Accounts Payable } & \$ 55,000 \
\hline \text { Land } & \$ 90,000 \
\hline \text { Inventory } & \$ 10,500 \
\hline \text { Accounts Receivable } & \$ 7,500 \
\hline \text { Equipment } & \$ 8,000 \
\hline \text { Unearned Revenue } & \$ 58,500 \
\hline \text { Short-term Investments } & \$ 20,000 \
\hline \text { Notes Receivable (due in 8 months) } & \$ 45,500 \
\hline \text { Interest Payable } & \$ 2,000 \
\hline \text { Patents } & \$ 75,000 \
\hline
\end{array}$$ What is the amount of long-term assets assuming the accounts above reflect normal activity?

Accepted Answer

Long-term assets include Land ($90,000), Equipment ($8,000), and Patents ($75,000), totaling $173,000.

Question 2

A word, slogan, or symbol that distinctively identifies a company, product, or service is a:

Accepted Answer

A trademark is a legally registered word, symbol, or slogan that distinguishes a company's products or services from others. Patents and copyrights protect inventions and creative works respectively, while a franchise is a contractual agreement between a franchisor and a franchisee.

Question 3

Bad Brads BBQ purchased a piece of equipment by paying $5,000 cash. They also incurred a shipping cost of $400 to get the equipment to its factory. The fair value of this equipment is $7,000. For what amount should Bad Brads BBQ record the equipment?

Accepted Answer

$5,000 + $400 = $5,400.

Question 4

An exclusive 20-year right to manufacture a product or to use a process is a:

Accepted Answer

A patent provides the exclusive right to manufacture a product or use a process for a period of 20 years. Copyright protects literary or artistic works, while a trademark protects logos or brand names. A franchise is a business model where an individual operates under the name and business model of a larger company.

Question 5

The legal life of a patent is:

Accepted Answer

The legal life of a utility patent is 20 years from the application filing date. After that, the invention becomes part of the public domain and can be freely used by anyone.

Question 6

Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

Accepted Answer

The $50,000 spending on research and development is an expense and will therefore increase the expenses on the income statement. It will not impact assets or revenues until the drug is approved and sales are generated in the future.

Question 7

Research and development costs should be capitalized when the:

Accepted Answer

Under U.S. GAAP, research and development costs are generally expensed as incurred and not capitalized.

Question 8

Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?

Accepted Answer

$800,000 x ($100,000/$100,000 + $700,000 + $200,000) = $80,000.

Question 9

The exclusive right to benefit from a creative work, such as a film, is a:

Accepted Answer

The exclusive right to benefit from a creative work, such as a film, is protected by copyright law, which grants the creator certain exclusive rights to the use and distribution of their work. Patents protect inventions and processes, trademarks protect brands and logos, and franchises are a legal agreement between two parties.

Question 10

On July 1, 2012, Landon Co. purchased a $500,000 tract of land that is intended to be the site of a new office complex. Landon incurred additional costs and realized salvage proceeds during 2012 as follows: $$\begin{array} { l r } 
\text { Demolition of existing building on site } & \$ 75,000 \
\text { Legal and other fees to close escrow } & 15,000 \
\text { Proceeds from sale of demolition scrap } & 10,000
\end{array}$$ What would be the capitalized cost of the land?

Accepted Answer

The capitalized cost of the land includes the purchase price, demolition costs, and legal fees, minus any proceeds from the sale of scrap. Therefore, $500,000 + $75,000 + $15,000 - $10,000 = $580,000.

Question 11

Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:

Accepted Answer

$60,000 + $1,000 + $3,000 + $2,500 = $66,500.

Question 12

Aspen, Inc. developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with their own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments?

Accepted Answer

The purchase of the patent for $350,000 is recorded as an asset, as it provides a future economic benefit to the company. Therefore, the total assets will be $350,000. The previous research and development costs of $250,000 are expensed and are not considered an asset since they did not result in a patent or other identifiable and separable asset. Therefore, the total expenses will be $250,000.

Question 13

Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?

Accepted Answer

The $150,000 spent on the first project that was abandoned and the $300,000 spent on the second project are both considered expenses, totaling $450,000.

Question 14

Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?

Accepted Answer

$75,000 + $4,500 + $4,000 + $800 = $84,300.

Question 15

Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher?

Accepted Answer

$5,000 + $400 + $300 = $5,700. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use.

Question 16

Productive assets that are physically used up, or depleted are:

Accepted Answer

Natural resources are productive assets that can be physically used up or depleted over time, such as oil, timber, or minerals. Equipment, land, and land improvements may require maintenance or replacement, but they do not necessarily deplete.

Question 17

Research and development costs should be:

Accepted Answer

Research and development costs should be expensed in the period incurred. This is in accordance with the matching principle, which requires expenses to be recognized in the same period as the related revenues. R&D costs do not meet the criteria for capitalization as they are uncertain in their future benefits, and therefore should be expensed as incurred.

Question 18

Cowboy Development incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Sale price of the land$\quad 400,000$
Sale of salvaged parts already on land$\quad 20,000$
Demolition of the old building $\quad \$ 30,000$
Ground breaking ceremony (food and supplies) $\quad \$ 1,500$
Land preparation and leveling $\quad \$ 7,500$ What amount should be recorded for the purchase of the land?

Accepted Answer

The cost of the land includes the sale price, demolition costs, and land preparation costs, minus the sale of salvaged parts. Thus, $400,000 + $30,000 + $7,500 - $20,000 = $417,500. The groundbreaking ceremony cost is not included.

Question 19

Which of the following would be recorded as land improvements?

Accepted Answer

Land improvements refer to any enhancements made to the actual land, such as landscaping, adding parking lots, or constructing sidewalks. Property taxes, title insurance, and real estate commissions are all expenses related to the purchase and ownership of the land but do not qualify as land improvements.

Question 20

Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:

Accepted Answer

The answer of Capital Construction purchased a 3-acre tract of...

Quiz 7: Long-Term Assets