Question 1

Interest is a capitalized cost in which of the following situations?

Accepted Answer

Interest is capitalized during the construction period of assets being constructed for a firm's own use, as it is considered part of the cost of constructing the asset.

Question 2

A machine was built for $125,500 during July, the cost included $750 in interest expense.The company had to pay $4,000 for shipping and another $2,000 for insuring the parts.The capitalized cost of the equipment was:

Accepted Answer

The capitalized cost of the equipment includes the purchase price, shipping, and insurance, but not the interest expense. Therefore, the total capitalized cost is $125,500 (purchase price) + $4,000 (shipping) + $2,000 (insurance) = $131,500.

Question 3

In 2011, as part of a property purchase Melrose Ltd.incurred and paid 2010 property taxes.These costs should be:

Accepted Answer

The 2010 property taxes paid by Melrose Ltd. as part of a property purchase in 2011 should be recognized as a capital cost. This is because such taxes are directly associated with the acquisition of the property and therefore should be added to the property's cost basis, enhancing its value on the balance sheet rather than being expensed in the income statement.

Question 4

Capitalized interest is based on the:

Accepted Answer

Capitalized interest refers to the costs incurred to borrow money used specifically to finance the construction of a project, including payments for materials, labor, and overhead. This does not typically include interest on money borrowed for other purposes, such as financing purchased assets.

Question 5

The amortization method that most closely resembles what is allowable for tax purposes under CRA is:

Accepted Answer

The Canada Revenue Agency (CRA) allows for the use of the declining balance method for calculating depreciation for tax purposes, which is a method where the depreciation expense decreases over time.

Question 6

Jerry Corp.purchased a piece of equipment on May 15 for $27,000.It cost $400 to ship the equipment to the company's facilities and another $1,000 to install the equipment.After the equipment was installed the company had to pay an additional $1,500 for increased insurance.The capitalized cost of the equipment was:

Accepted Answer

The answer of Jerry Corp.purchased a piece of equipment on...

Question 7

Assets that produce their greatest benefits to a firm early in their useful life should be amortized using the:

Accepted Answer

The declining-balance method of amortization accelerates the expense recognition into the earlier periods of an asset's life, which aligns with assets that deliver their greatest benefits early on. This method results in higher expenses in the initial years and lower expenses as the asset ages.

Question 8

According to accounting standards, the method of amortization chosen should:

Accepted Answer

The method of amortization should be systematic and rational, ensuring that the expense is allocated over the asset's useful life in a methodical way that makes sense given the asset's use and benefit to the company.

Question 9

The residual value is not directly used for the calculation of depreciation expense under which method:

Accepted Answer

The answer of The residual value is not directly used...

Question 10

The most commonly used method of amortization is:

Accepted Answer

Straight-line method is the most commonly used method of amortization as it is simple to calculate and provides equal deductions over the useful life of the asset. Capital cost allowance is a method used for tax purposes, declining-balance is a method that provides higher deductions in the early years of an asset's life, and units-of-activity method is used when an asset's usage can be tracked and measured.

Question 11

Which of the following statements is true with respect to capitalizing asset costs?

Accepted Answer

Some small expenses related to the purchase of an asset can be expensed for simplicity. However, larger costs related to acquiring and improving an asset should be capitalized and depreciated over the asset's useful life. Land cannot be depreciated or amortized, but any additional costs related to the land (such as site preparation) can be capitalized. Capitalizing asset costs does not result in an immediate tax deduction, but rather provides tax benefits over the asset's useful life through depreciation or amortization deductions.

Question 12

Assets acquired in a basket purchase are to be allocated a portion of the total price based on their respective:

Accepted Answer

Assets acquired in a basket purchase should generally be allocated a portion of the total price based on their respective fair market values. This method of allocation is considered to be the most reliable measure of the relative value of the different assets being acquired. Allocating the purchase price based on book values, present values, or assessed values is generally not considered to be as reliable or accurate.

Question 13

Which of the following would not be classified as property, plant, and equipment?

Accepted Answer

Land purchased for resale does not meet the criteria of being property, plant, and equipment as it is not held for use in operations but for eventual sale. Property, plant, and equipment are tangible assets used in business operations with a useful life of more than one year. Buildings, machinery, and tools all meet these criteria and would be classified as property, plant, and equipment.

Question 14

When capitalizing the cost of a purchased asset, all of the following cost should be included in capitalization except for:

Accepted Answer

The full purchase price should be capitalized, but any discounts received should actually reduce the capitalized cost, not increase it.

Question 15

A plot of land was purchased for $120,000 which had $10,000 of past due property taxes on it.Sales taxes on the purchase were $1,400 and the title search cost $500.The capitalized cost of the land was:

Accepted Answer

To calculate the capitalized cost of the land, we need to add up the purchase price, past due property taxes, sales taxes, and title search cost.
$120,000 (purchase price) + $10,000 (past due property taxes) + $1,400 (sales taxes) + $500 (title search cost) = $131,900
Therefore, the answer is D) $131,900.

Question 16

Which of the following would be an example of a land improvement?

Accepted Answer

Installing lighting would be considered a land improvement, as it adds value to the land and enhances its functionality. Grading the land before building and digging the hole for the foundation are considered part of the building process and not land improvements. Land transfer tax is a cost associated with the transfer of ownership of the land and not a land improvement.

Question 17

IFRS permits corporations to capitalize interest costs for:

Accepted Answer

IFRS allows the capitalization of interest costs for assets that are constructed or acquired over time, as these costs are directly attributable to the acquisition, construction, or production of a qualifying asset.

Question 18

When deciding whether to expense or capitalize the costs incurred when acquiring a capital asset, which one of the following is not relevant to the decision?

Accepted Answer

The revenue recognition principle is not relevant to the decision of whether to expense or capitalize costs incurred when acquiring a capital asset. The materiality criterion, matching principle, and income tax rules are all factors to consider when making this decision.

Question 19

Which of the following would not be capitalized as part of a purchased asset's cost?

Accepted Answer

Interest costs are not capitalized as part of a purchased asset's cost, as they are considered finance expenses rather than part of the asset's acquisition cost.

Question 20

Lewis-Bruno Co.purchased 12 acres of land with an office building and warehouse on it for $2,000,000.The assets were appraised at: land $1,000,000, building $600,000, and warehouse $900,000.The assets were carried on the seller's books at: land $800,000, building $500,000, and warehouse $700,000.At what cost should the purchasing company record each of the assets? $\begin{array}{rrrr}&\text { Land } & \text { Building } & \text { Warehouse } \
\text { a. } & \$ 1,000,000 & \$ 600,000 & \$ 900,000 \
\text { b. } & \$ 800,000 & \$ 480,000 & \$ 720,000 \
\text { c. } & \$ 800,000 & \$ 500,000 & \$ 700,000 \
\text { d. } & \$ 1,000,000 & \$ 500,000 & \$ 500,000
\end{array}$

Accepted Answer

The answer of Lewis-Bruno Co.purchased 12 acres of land with...

Quiz 8: Capital Assetstangible and Intangible