Question 1

Cirrus Inc.purchased certain plant assets under a deferred payment contract.The agreement was to pay $40,000 per year for ten years.The plant assets should be valued at
A) $400,000.
B) $400,000 plus imputed interest.
C) present value of $40,000 annuity for ten years at an imputed interest rate.
D) future value of $40,000 annuity for ten years at an imputed interest rate.

Accepted Answer

The plant assets should be valued at the present value of $40,000 annuity for ten years at an imputed interest rate, as this represents the fair market value of the assets at the time of purchase. The imputed interest rate represents the cost of financing for the buyer, and reflects the time value of money. The other answer choices (A, B, and D) do not take into account the time value of money or the terms of the deferred payment contract.

Question 2

A company is constructing an asset for its own use.Construction began in 2013.The asset is being financed entirely with a specific new borrowing.Construction expenditures were made in 2013 and 2014 at the end of each quarter.The total amount of interest cost capitalized in 2014 should be determined by applying the interest rate on the specific new borrowing to the
A) total accumulated expenditures for the asset in 2014.
B) average accumulated expenditures for the asset in 2014.
C) average expenditures for the asset in 2014.
D) total expenditures for the asset in 2014.

Accepted Answer

Interest cost should be capitalized during the period of construction. To determine the total amount of interest cost capitalized in 2014, we need to calculate the average accumulated expenditures for the asset in 2014. This is because interest cost should be capitalized based on the average amount of funds used to finance the construction. Therefore, the answer is B, average accumulated expenditures for the asset in 2014.

Question 3

Which of the following intangible assets does NOT have the characteristic of exchangeability?
A) Patent
B) Copyright
C) Goodwill
D) Franchise

Accepted Answer

Goodwill is an intangible asset that cannot be easily exchanged or sold because it represents the reputation and customer loyalty of a business, which is unique to that specific entity. Patents, copyrights, and franchises can all be bought or sold on the open market.

Question 4

Shorecrest Company recently accepted a donation of land with a fair value of $250,000 from the city of Sutton in return for a promise to build a plant in Sutton. The entry that Shorecrest should use to record this land is:
A) Land..............................250,000
Donated Capital-Land 250,000
B) Land..............................250,000
Gain from Receipt of Donated Land 250,000
C) Land..............................250,000
Unrealized Gain from Receipt of
Donated Land..................250,000
D) Land..............................250,000
Retained Earnings................250,000

Accepted Answer

When a company receives a donation of land, it should record it at its fair value at the time of donation. In this case, the fair value of the land is $250,000. The journal entry to record the land should be a debit to Land for $250,000 and a credit to Donated Capital-Land for $250,000. This is because the land is not revenue and should not be recognized as a gain. Donated capital represents the amount of contributed capital a company receives from nonstock transactions. This transaction is also not related to the company's earnings or retained earnings, so options B, C, and D are not appropriate.

Question 5

The term "intangible assets" is used in accounting to denote
A) current or noncurrent property items without physical characteristics.
B) assets with lesser economic significance because of the nature of such assets.
C) such items as patents,copyrights,and claims against customers which can be valued on a monetary basis.
D) properties without physical characteristics that have long-term effects on a business enterprise.

Accepted Answer

The term "intangible assets" refers to assets that do not have a physical presence but have long-term effects on a business. This includes assets such as patents, trademarks, copyrights, and goodwill. Option A is incorrect because not all intangible assets are property items. Option B is incorrect because the economic significance of an asset is not determined by its nature but by its value to the business. Option C is partially correct, but not all intangible assets can be valued on a monetary basis.

Question 6

In a business combination,goodwill is defined as the excess of cost over the
A) net book value of assets acquired.
B) fair value of assets acquired.
C) book value of assets acquired less the liabilities assumed.
D) fair value of assets acquired less the liabilities assumed.

Accepted Answer

Goodwill is the excess of the cost of a business combination over the fair value of assets acquired less the liabilities assumed. This represents the value of intangible assets such as brand recognition, customer relationships, and intellectual property that are not separately identifiable and cannot be valued independently of the business as a whole.

Question 7

An asset is being constructed for an enterprise's own use.The asset has been financed with a specific new borrowing.The interest cost incurred during the construction period as a result of expenditures for the asset is
A) a part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.
B) interest expense in the construction period.
C) recorded as a deferred charge and amortized over the term of the borrowing.
D) a part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to finance the construction of the asset.

Accepted Answer

Interest cost incurred during the construction period for an asset being constructed for an enterprise's own use is capitalized as part of the historical cost of the asset. This cost is then depreciated or amortized over the estimated useful life of the asset, reflecting its consumption or use over time.

Question 8

An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine's useful life.The cost of the improvement should be
A) expensed.
B) debited to Accumulated Depreciation.
C) capitalized in the machine account.
D) allocated between Accumulated Depreciation and the machine account.

Accepted Answer

The improvement made to the machine has increased its fair market value and production capacity, which means that it has extended the useful life of the machine. Therefore, the cost of the improvement should be capitalized in the machine account, which means that the cost will be added to the cost of the machine and depreciated over the remaining useful life of the machine.

Question 9

If the cost of ordinary repairs is capitalized as an addition to the building account during the current year,
A) net income for the current year will be understated.
B) stockholders' equity at the end of the current year will be understated.
C) total assets at the end of the current year will not be affected.
D) total liabilities at the end of the current year will not be affected.

Accepted Answer

Capitalizing ordinary repairs as an addition to the building account increases the asset's recorded value, thus not directly affecting liabilities. It does not change the total amount of liabilities on the balance sheet.

Question 10

Donated equipment for which the fair value has been determined should be recorded as a debit to the appropriate equipment account and a credit to
A) Other Income.
B) Retained Earnings.
C) Capital Stock.
D) Revenue or Gain.

Accepted Answer

Donated equipment should be recorded as a revenue or gain on the income statement. Therefore, it should be credited to either a Revenue or Gain account. Options A, B, and C are incorrect because they are not typically used to record donated equipment.

Question 11

Which of the following research and development related costs should be capitalized and amortized over current and future periods?
A) Labor and material costs incurred in building a prototype model.
B) Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year.
C) Administrative salaries allocated to research and development.
D) Research findings purchased from another company to aid a particular research project currently in process.

Accepted Answer

The answer of Which of the following research and development...

Question 12

When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof,which of the following types of expenditure has occurred?
A) Ordinary repairs and maintenance
B) Addition
C) Rearrangement
D) Betterment

Accepted Answer

The replacement of an old asphalt roof with a new fiberglass insulated roof would be considered a betterment expenditure as it improves the quality and function of the roof beyond its original state.

Question 13

A company purchased land to be used as the site for the construction of a plant.Timber was cut from the building site so that construction of the plant could begin.The proceeds from the sale of the timber should be
A) classified as other income.
B) deducted from the cost of the land.
C) deducted from the cost of the plant.
D) netted against the costs to clear the land and expensed as incurred.

Accepted Answer

The cost of the land should be reduced by the proceeds from the sale of the timber, since the company is effectively reducing the cost of the land by selling a portion of its natural resources. The cost of the plant should not be reduced by the proceeds from the sale of the timber, as construction of the plant is a separate cost from clearing the land. The timber sale is not considered other income as it is directly related to the company's acquisition and preparation of the land for the plant. Netting the costs to clear the land against the timber sale proceeds and expensing as incurred would not properly reflect the costs and revenues associated with the acquisition and preparation of the land.

Question 14

Goodwill should be recorded in the accounting records only when
A) it is purchased from another company.
B) it can be established that a definite benefit or advantage has resulted to a firm from some item such as a good name,capable staff,or reputation.
C) it is acquired through the purchase of another business entity.
D) a firm reports above normal earnings for five or more consecutive years.

Accepted Answer

The answer of Goodwill should be recorded in the accounting...

Question 15

According to SFAS No.34,"Capitalization of Interest Cost," interest should be capitalized for assets that are
A) in use or ready for their intended use in the earnings activities of the enterprise.
B) being constructed or otherwise being produced as discrete projects for an enterprise's own use.
C) not being used in the earnings activities of the enterprise and that are not undergoing the activities necessary to get them ready for use.
D) routinely produced on a repetitive basis for inventory but require an extended period of time for completion.

Accepted Answer

SFAS No. 34 specifies that interest should be capitalized for assets that are being constructed or otherwise produced as discrete projects for an enterprise's own use. This is because the construction phase often involves significant expenditures and borrowing, and capitalizing interest during this period matches the costs of financing the asset with its future benefits.

Question 16

A donated plant asset for which the fair value has been determined,and for which incidental costs were incurred in acceptance of the asset,should be recorded at an amount equal to its
A) incidental costs incurred.
B) fair value and incidental costs incurred.
C) book value on books of donor and incidental costs incurred.
D) book value on books of donor.

Accepted Answer

A donated plant asset should be recorded at its fair value, and if any incidental costs were incurred in acceptance of the asset, they should be added to the recorded amount. This ensures that the asset is recorded at its true economic value on the books of the organization. The book value on the books of the donor is irrelevant for accounting purposes.

Question 17

If a company constructs a laboratory building to be used as a research and development facility,the cost of the laboratory building is matched against earnings as
A) research and development expense in the period(s)of construction.
B) depreciation deducted as part of research and development costs.
C) depreciation or immediate write-off depending on company policy.
D) an expense at such time as productive research and development has been obtained from the facility.

Accepted Answer

The cost of the laboratory building is capitalized as an asset and then matched against earnings through depreciation. This depreciation is considered part of the research and development costs, reflecting the usage of the building for R&D purposes over its useful life.

Question 18

On-Call Service Corporation bought a building lot to construct a new corporate office building.An older home on the building lot was razed immediately so that the office building could be constructed.The cost of purchasing the older home should be
A) recorded as part of the cost of the land.
B) written off as a loss in the year of purchase.
C) written off as an extraordinary item in the year of purchase.
D) recorded as part of the cost of the new building.

Accepted Answer

The cost of purchasing the older home is a part of the cost of the land, as it was necessary to acquire the land for the construction of the new corporate office building. Therefore, it should be recorded as a part of the cost of the land, which will be capitalized and included in the cost of the office building.

Question 19

When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant,the costs incurred to tear down the building should be
A) amortized over the estimated time period between the tearing down of the building and the completion of the plant.
B) expensed as incurred.
C) added to the cost of the plant.
D) added to the cost of the land.

Accepted Answer

The costs incurred to tear down the building are considered part of the land preparation costs and should be capitalized as part of the land's cost. This is because the land is being prepared for its intended use, and these costs are necessary to get the land in the condition for its intended use.

Question 20

Which of the following principles best describes the current method of accounting for research and development costs?
A) Immediate recognition as an expense
B) Systematic and rational allocation
C) Income tax minimization
D) Associating cause and effect

Accepted Answer

Research and development costs are expensed as incurred under most accounting frameworks, including International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in the United States. This approach reflects the principle of immediate recognition as an expense, due to the uncertainty of future economic benefits from these activities.

Quiz 10: Investments in Noncurrent Operating Assets-Acquisition

Cirrus Inc.purchased certain plant assets under a deferred payment contract.The agreement was to pay $40,000 per year for ten years.The plant assets should be valued at

Which of the following intangible assets does NOT have the characteristic of exchangeability?

Shorecrest Company recently accepted a donation of land with a fair value of $250,000 from the city of Sutton in return for a promise to build a plant in Sutton. The entry that Shorecrest should use to record this land is:

The term "intangible assets" is used in accounting to denote

In a business combination,goodwill is defined as the excess of cost over the

An asset is being constructed for an enterprise's own use.The asset has been financed with a specific new borrowing.The interest cost incurred during the construction period as a result of expenditures for the asset is

An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine's useful life.The cost of the improvement should be

If the cost of ordinary repairs is capitalized as an addition to the building account during the current year,

Donated equipment for which the fair value has been determined should be recorded as a debit to the appropriate equipment account and a credit to

Which of the following research and development related costs should be capitalized and amortized over current and future periods?

When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof,which of the following types of expenditure has occurred?

A company purchased land to be used as the site for the construction of a plant.Timber was cut from the building site so that construction of the plant could begin.The proceeds from the sale of the timber should be

Goodwill should be recorded in the accounting records only when

According to SFAS No.34,"Capitalization of Interest Cost," interest should be capitalized for assets that are

A donated plant asset for which the fair value has been determined,and for which incidental costs were incurred in acceptance of the asset,should be recorded at an amount equal to its

If a company constructs a laboratory building to be used as a research and development facility,the cost of the laboratory building is matched against earnings as

On-Call Service Corporation bought a building lot to construct a new corporate office building.An older home on the building lot was razed immediately so that the office building could be constructed.The cost of purchasing the older home should be

When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant,the costs incurred to tear down the building should be

Which of the following principles best describes the current method of accounting for research and development costs?