Deck 15: Property, Plant, and Equipment

Question 1

Which of the following does IAS 16, which prescribes accounting treatment and related disclosures for PP&E, not apply to?

A) A truck that Dundee is done using and plans to sell
B) An oil rig that Nordic Entity owns
C) The land on which Shrute Farms plants beets
D) IAS 16 applies to all of the above

Answer 1

An oil rig that Nordic Entity owns

Question 2

Which of these items is considered PP&E for Sears Entity?

A) A license to produce a proprietary tool
B) A patent on the results of extensive R&D
C) Fully depreciated power tools still used in production
D) The Sears Tower being rented to Willis Entity

Answer 2

Fully depreciated power tools still used in production

Question 3

Rio Verde Mining has large dump trucks to haul tailings and ore. Every quarter, the oil is changed for each of these trucks. Once a year, the valves and timing are both adjusted. Once every five years, the engine is completely rebuilt and is reinstalled. Which of these activities affects PP&E?

A) Oil changes
B) valves and timing
C) Engine rebuild
D) More than one of the above
E) None of the above

Answer 3

Engine rebuild

Question 4

Which of these transactions has commercial substance?

A) Woodworking tool for another woodworking tool
B) Woodworking tool for another less valuable woodworking tool and a little cash
C) Woodworking tool for another less valuable woodworking tool and cash
D) Woodworking tool for cash
E) More than one of the above
F) None of the above

Question 5

The general recognition principle is that the cost of an item of PP&E is recognized as an asset if, and only if:

A) it is probable that future economic benefits associated with the item will flow to the entity.
B) it is capable of operating in the manner intended by management.
C) the cost of the item can be reliably measured.
D) a and b
E) a and c
F) b and c

Question 6

A change in the useful life or residual value is accounted for

A) prospectively as a change in accounting estimate.
B) retrospectively as a prior period correction.
C) as a gain or a loss in P&L
D) useful lives and residual values cannot be change once determined.

Question 7

The depreciation method an entity selects should reflect the pattern in which the entity expects to consume the future economic benefits embodied in the asset. The available depreciation methods include all of the following except

A) the straight-line method
B) units of production
C) amortization
D) diminishing balance

Question 8

Using the revaluation model, an increase in an asset's carrying amount is credited to

A) other comprehensive income.
B) gain on asset revaluation.
C) accumulated depreciation.
D) depreciation expense.

Question 9

The loss or impairment of the asset is recognized in

A) other comprehensive income with the impair is measured.
B) accumulated depreciation to decrease the net asset balance.
C) profit or loss as an expense when it occurs.
D) all of the above are acceptable ways to recognize impairment losses.

Question 10

Replacement parts require replacement at regular intervals. How is the cost of replacement parts recognized?

A) As an item of PP&E and is subject to depreciation.
B) Replace parts are expensed and recognized in P&L.
C) In other accumulated income with the revaluation reserve.
D) All of the above are acceptable ways management can elect to account for replacement costs.

Question 11

Saginaw entity recently ordered a brand-new HVAC system which will last ten years. Saginaw entity has been using the same building for 40 years. Saginaw estimates that the building will last an additional ten years from the date that the HVAC system was installed. The HVAC system should be depreciated jointly with the building.

Question 12

Krogue Entity saw some land on the edge of town that was a really good deal. Because it was such a good deal, Krogue decided to snap it up without much thought of what it would do with the land. The cannot be classified as PP&E.

Question 13

Dover Airlines is a safety-conscious entity. In addition to government mandated safety assets such as drop-down masks and seat belts, Dover employs parachute technology. In case of disaster, the plane can deploy large parachutes from the rear of the plane, and the impact will be softened. These parachutes are expensive, but have already saved hundreds of lives over the years. The parachutes can be considered PP&E even though they are not mandated or vital to the wellbeing of the company.

Question 14

Dover Airlines must submit to an annual safety inspection by the Federal Aviation Administration of all of its passenger airplanes that fly to the United States. These inspections are lengthy and costly, but necessary. The inspection costs should be capitalized and depreciated over the next year.

Question 15

Porter Entity is building a new office building. After building the infrastructure for first floor, the plans were amended to include underground parking. In order to extend the foundation to create the garage, the first floor infrastructure had to be torn out. This set back the project by three months which resulted in an additional $4 million in labor costs and raised the material cost of the project by $700,000. These costs should be capitalized.

Question 16

After initial recognition, an entity has a choice of applying either the cost model or the revaluation model to an entire class of property, plant and equipment.

Question 17

After initial recognition, PP&E is depreciated on a systematic basis over its useful life, which should be reviewed at least at each reporting date.

Question 18

Component depreciation means that each part of an item of PP&E with a cost that is significant in relation to the total cost of the item should be depreciated separately.

Question 19

The depreciation charge for each period is recognized as an expense in profit or loss, unless it is included in the carrying amount of another asset.

Question 20

After initial recognition, an item of PP&E whose fair value can be measured reliably should be carried at a revalued amount.

Question 21

Lethbridge purchased a new smelting plant. The building cost Lethbridge $8 million. Legal and brokerage fees totaled 5 percent of the purchase price. In order to get the building ready, Lethbridge altered the building to suit its needs at a cost of $1 million. Purchasing, installing, and calibrating the machinery for smelting cost an additional $1.2 million. the Lethbridge is obligated by the government to remove slag and other waste and to restore the any affected land to its original state. These costs will be incurred at the end of Lethbridge's tenancy and are estimated to be about $800,000. Training new labor costs an additional $350,000. Determine the total capital costs for Lethbridge's new warehouse.

Question 22

Schumer and Associates want to buy a new building. In order to pay for their building, Schumer and Associates decide to pay the down payment with 50,000 convertible preferred shares at a price of $5 each. Additionally, Schumer and Associates will make payments of $500,000 per year for 20 years. The appropriate discount rate is 4.5 percent. What is the capitalized cost of this building assuming that the fair value of the building can't be reliably determined?

Question 23

Explain when the carrying amount of an item of PP&E should be derecognized.

Question 24

After initial recognition, an item of PP&E whose fair value can be measured reliably should be carried at a revalued amount. Explain "revalued amount."

Question 25

You are the CFO of Taylorbilt, a manufacturer of farm implements. You purchase a new robotic machine to aid in production of the legendary Taylorbilt combine. In exchange for the robotic machines, Taylorbilt agrees to pay in mineral, water, and oil rights to a large plot of land that it owns. These rights are not able to be appraised, but the other party believes that there may be oil there, and they want to drill for it. The rights were purchased 15 years ago by Taylorbilt at a price of $40 million. Taylorbilt mined ore from the land for a number of years and the mineral, water, and oil rights are considered to be 40 percent depleted. As an incentive for the robotic company to trade, Taylorbilt also agrees to give drilling equipment with a carrying value of $30,000 and a fair value of $50,000. The fair value of the robotic machinery is not known because it is custom built and is relatively new technology. Your new accountant is confused by this transaction.
-Explain to him the concept of commercial substance. Does this transaction have commercial substance?

Question 26

Determine the value of the new robotic equipment that Taylorbilt should capitalize. What is the journal entry?

Question 27

On January 1, 20X7 Deigham Entity (DE) acquired an item of equipment for $780,000, inclusive of $40,000 non-refundable purchase taxes. In addition, the DE incurred the following costs: transportation costs of $15,000; installation costs of $24,000; modification costs to the item to be capable of operating as intended by management-$10,000; training costs of $35,000 (including the cost of external expert-$10,000); testing costs (materials-$6,000, cost of materials recovered from the sale of the scrapped output-$2,000; labor-$7,000; depreciation of plant and equipment used in making modifications-$3,000); and the cost of administrative personnel involved in the acquisition-$10,000. At the end of the equipment's 10-year useful life the entity is required to dismantle the equipment and restore the environment. The present value of the cost of environmental restoration is estimated at $80,000.

-What is the cost of the equipment at initial recognition?