Question 1

Non-monetary transaction without commercial substance
Malawi Auto traded one of its used trailers (cost $ 40,000, accumulated depreciation $ 36,000) for another used trailer with a fair value of $ 6,400. Malawi also paid $ 600 to complete the transaction.
Instructions
Assuming the transaction lacks commercial substance, prepare the journal entry to record the exchange.

Accepted Answer

The answer of Non-monetary transaction without commercial substance
Malawi Auto traded...

Question 2

On May 1, 2020, Ethiopia Ltd. began construction of a new building for its own use. Expenditures of $ 75,000 were incurred monthly for five months beginning on May 1. The building was completed and ready for occupancy on September 1, 2020. For the purpose of determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures on the building during 2020 were

Accepted Answer

The weighted-average accumulated expenditures are calculated by considering the amount of time each expenditure amount was outstanding during the construction period. Since $75,000 was spent each month for five months, the total expenditure is $375,000. However, to find the weighted-average, we need to consider the timing. The first month's expenditure (May) was outstanding for the entire construction period (5 months), the second month's expenditure (June) for 4 months, and so on, until the last month's expenditure (September) which was not outstanding since the building was completed at the start of September. The calculation is as follows: [(75,000 * 5) + (75,000 * 4) + (75,000 * 3) + (75,000 * 2) + (75,000 * 1)] / 5 = 375,000 / 5 = $75,000. However, this calculation mistake leads to the incorrect interpretation of how weighted-average accumulated expenditures are typically calculated in this context. The correct approach involves calculating the average of expenditures over the period they were incurred, considering the time value. Given the error in the calculation explanation, the correct answer should reflect the total expenditures made over the period, adjusted for the time value of money. However, without applying a specific interest rate or more detailed timing, the straightforward total of expenditures ($375,000) divided by the number of payments (5) does not accurately reflect the concept of "weighted-average accumulated expenditures" as typically intended in accounting for interest capitalization purposes. The correct approach would involve more detailed timing and interest rate information. Therefore, the explanation provided does not accurately calculate a weighted average based on the typical accounting principles for capitalizing interest, which involves the actual expenditures times the time they were outstanding. The correct answer should reflect an understanding of how expenditures contribute to interest capitalization, which is not accurately captured in the provided choices or explanation.

Question 3

Costs included in assets
Eritrea Ltd. is expanding its operations. Due to the expansion, they incurred the following costs during the fiscal period when they constructed a new factory:

$\begin{array}{llcc}
  \text { Direct labour } & 70,000 \
 \text {Loan interest to finance expansion.  } &3,000\
 \text {Architectural drawings  } &15,000\
 \text {  Purchase of company car for the new plant manager.} &44,000\
 \text { Direct material for factory } &81,000\
 \text { Allocation of overhead based on labour } &\
 \text { hours worked on factory } &58,000\
 \text {  Imputed interest on lost opportunity costs} &9,000\
\end{array}$

Instructions
Which of these costs should be included in the cost of the new factory?

Accepted Answer

The answer of Costs included in assets
Eritrea Ltd. is expanding...

Question 4

Which of the following statements is correct?

Accepted Answer

ASPE (Accounting Standards for Private Enterprises) in Canada groups investment, mining, and oil and gas properties under property, plant, and equipment, treating them similarly for accounting purposes. In contrast, IFRS (International Financial Reporting Standards) provides specific guidance for each of these assets, recognizing their unique nature and the industries they belong to.

Question 5

During calendar 2020, Somalia Corp. incurred weighted-average accumulated expenditures of $ 800,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2020 was a $ 900,000, 8%, five-year note payable dated January 1, 2018. The amount of interest that should be capitalized during calendar 2020 is

Accepted Answer

To determine the amount of interest that should be capitalized, we need to calculate the weighted-average accumulated expenditures during the construction period and then multiply it by the interest rate of the outstanding debt.

Weighted-average accumulated expenditures = $800,000

Interest rate of the note payable = 8%

Therefore, the amount of interest that should be capitalized = $800,000 x 8% = $64,000

So, the correct answer is C, $64,000.

Question 6

Use the following information to solve the following questions: 
On March 1, 2020, Mauritania Ltd. purchased land for $ 270,000 cash, which they intend to use for their new head office. Construction on the office building began on March 1. The following expenditures were incurred for construction:
 $$\begin{array} { l l } 
\text { Date } & \text { Expenditures } \
\text { March } 1,2020 &\$450,000\
\text { April } 1,2020 & \mathbf { 2 5 2 , 0 0 0 } \
\text { May } 1,2020 & 450,000 \
\text { June } 1,2020 & 720,000
\end{array}$$ The office building was completed and ready for occupancy on July 1. To help pay for construction, Mauritania borrowed $ 360,000 on March 1, 2020, on a 9%, three-year note payable. Other than this note, the only other debt outstanding during 2020 was a $ 150,000, 10%, six-year note payable dated January 1, 2019.
-The actual interest cost incurred during 2020 was

Accepted Answer

To find the actual interest cost incurred during 2020, we need to find the weighted average interest rate of the two notes payable and then multiply it by the average amount of funds borrowed during the year.

Weighted average interest rate:
For the $360,000 note payable:
Principal = $360,000
Interest rate = 9%
Time = 10/12 (since the note was issued on March 1 and interest accrues for 10 months in 2020)

Interest on this note payable = $360,000 × 9% × 10/12 = $27,000

For the $150,000 note payable:
Principal = $150,000
Interest rate = 10%
Time = 12/12 (since the note has been outstanding since January 1, 2020, and interest accrues for the whole year)

Interest on this note payable = $150,000 × 10% = $15,000

Total interest cost = $27,000 + $15,000 = $42,000

Average amount of funds borrowed during the year:
To find the average amount of funds borrowed during the year, we need to take the sum of the funds borrowed and divide it by the number of borrowing periods.

Sum of funds borrowed = $360,000 (from the note payable)
Average amount of funds borrowed = ($360,000 + $252,000 + $450,000 + $720,000) ÷ 4 = $445,500

Therefore, the actual interest cost incurred during 2020 is $42,000, which is the correct answer.

Question 7

Use the following information to solve the following questions: 
On March 1, 2020, Mauritania Ltd. purchased land for $ 270,000 cash, which they intend to use for their new head office. Construction on the office building began on March 1. The following expenditures were incurred for construction:
 $$\begin{array} { l l } 
\text { Date } & \text { Expenditures } \
\text { March } 1,2020 &\$450,000\
\text { April } 1,2020 & \mathbf { 2 5 2 , 0 0 0 } \
\text { May } 1,2020 & 450,000 \
\text { June } 1,2020 & 720,000
\end{array}$$ The office building was completed and ready for occupancy on July 1. To help pay for construction, Mauritania borrowed $ 360,000 on March 1, 2020, on a 9%, three-year note payable. Other than this note, the only other debt outstanding during 2020 was a $ 150,000, 10%, six-year note payable dated January 1, 2019.
-The weighted-average accumulated expenditures on the construction project during 2020 were

Accepted Answer

To calculate the weighted-average accumulated expenditures, we need to add the total expenditures incurred during the construction ($ 450,000 + $ 252,000 + $ 450,000 + $ 720,000 = $ 1,872,000) and divide it by the number of months the construction was ongoing during 2020. The construction was ongoing during March, April, May, and June, so it was ongoing for four months. Therefore, the weighted-average accumulated expenditures were:

$ 1,872,000 / 4 = $ 468,000

We need to subtract the cost of the land from this amount to get the accumulated expenditures for construction. Therefore,

Accumulated expenditures for construction = $ 468,000 - $ 270,000 = $ 198,000

Therefore, the correct answer is B) $ 348,000.

Question 8

Acquisition Cost
Rwanda Corporation purchased land at a cost of $ 100,000. Closing costs were $ 3,800, plus Rwanda paid $ 48,000 for site preparation so they could construct a building on the site.
Instructions
Calculate the amount that should be recorded as the cost of the land.

Accepted Answer

The answer of Acquisition Cost
Rwanda Corporation purchased land at a...

Question 9

Explain the concept of componentization as it applies to the recognition of PP&E assets.

Accepted Answer

The answer of Explain the concept of componentization as it...

Question 10

Borrowing costs that are capitalized should

Accepted Answer

Borrowing costs that are capitalized should be amortized over the related asset's useful life. This is in accordance with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Question 11

Use the following information to solve the following questions:
Egypt Corp. owns equipment that originally cost $ 100,000. At December 31, 2020, the equipment's book value (after 2020 depreciation was booked) is $ 60,000. It is determined that the fair value of the equipment at this date is $ 90,000. Although Egypt's policy is to apply the revaluation model using the proportionate method, this is the first time the company has done it.
-The adjusting entry to record the revaluation will include a

Accepted Answer

The revaluation model using the proportionate method requires the following steps:
1. Determine the fair value of the asset.
2. Compare the fair value to the book value.
3. If the fair value exceeds the book value, record the difference as a credit to Revaluation Surplus (OCI) and increase the carrying amount of the asset.
Therefore, in this case, the adjusting entry should include crediting Revaluation Surplus (OCI) for the difference between fair value and book value, which is $30,000. There is no need to debit Accumulated Depreciation, as it does not change with the revaluation. Equipment should not be credited, as it is a fixed asset and should not be increased by the revaluation.

Question 12

Asset exchange
Arabia Inc. traded its fleet of rental cars for a new fleet. Two-thirds of the old fleet's original cost of $ 375,000 had been depreciated. The new fleet is valued at $ 500,000 and Arabia was required to make a cash payment of $ 400,000.
Instructions
Prepare the required entr(ies) to record the exchange.

Accepted Answer

The answer of Asset exchange
Arabia Inc. traded its fleet of...

Question 13

When using the revaluation model of accounting for PP&E assets (proportionate method),

Accepted Answer

In the revaluation model, both the asset account and its related accumulated depreciation (contra-asset) are adjusted to reflect the new revalued amount.

Question 14

Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is

Accepted Answer

The fraction represents the portion of the year that the expenditure has had an impact on the construction project. Since the project started on April 1 and ended on December 1, it lasted for 8 months out of the 12-month year, hence 8 ÷ 12.

Question 15

Asset exchange with commercial substance
In 2021, Malawi Inc. exchanged equipment for two delivery trucks. The equipment had been purchased for $ 95,000 ten years ago and has since been fully depreciated. While the equipment was recently appraised at $ 22,000, a reliable valuation for the trucks was not available. This transaction has commercial substance.
Instructions
Prepare the journal entry to record the exchange.

Accepted Answer

The answer of Asset exchange with commercial substance
In 2021, Malawi...

Question 16

Use the following information to solve the following questions:
Egypt Corp. owns equipment that originally cost $ 100,000. At December 31, 2020, the equipment's book value (after 2020 depreciation was booked) is $ 60,000. It is determined that the fair value of the equipment at this date is $ 90,000. Although Egypt's policy is to apply the revaluation model using the proportionate method, this is the first time the company has done it.
-By how much must the accumulated depreciation account be increased (decreased) at December 31, 2020?

Accepted Answer

The proportionate method of revaluation is used to increase (or decrease) the carrying amount of an asset to its fair value. The increase (or decrease) is recognized in the income statement over the remaining useful life of the asset. In this case, the equipment's book value is $60,000 and its fair value is $90,000. The increase in the carrying amount is $30,000 ($90,000 - $60,000). This increase is recognized in the income statement over the remaining useful life of the equipment, which is not provided in the question. However, the question asks for the amount by which the accumulated depreciation account must be increased (decreased). The accumulated depreciation account is increased by the amount of the increase in the carrying amount, which is $30,000.

Question 17

Borrowing costs incurred for the acquisition of assets may be capitalized if certain conditions are met. Which of the following issues is irrelevant in making that determination?

Accepted Answer

The depreciation period is irrelevant in determining whether borrowing costs can be capitalized. The other three factors are important in making that determination.

Question 18

On March 1, Senegal Inc. began construction of a small building for its own use. Payments of $ 150,000 were made monthly for three months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are

Accepted Answer

To calculate the weighted-average accumulated expenditures, we need to multiply each payment by the number of months it was outstanding, and then divide the total by the number of months in the project.
In this case, the payments were outstanding for 3 months (March, April, and May) and the project was a 3-month project (March, April, and May).
So the calculation would be: 
((150,000 x 3 months) + (0 x 0 months)) / 3 months = $ 75,000

Therefore, option B is the correct answer.

Question 19

Non-interest-bearing note
Togo Auto purchased several trucks by issuing a $ 40,000, 4-year, non-interest-bearing note to Rabat Motors. The market interest rate for this type of transaction is 8%.
Instructions
Prepare the journal entry to record the purchase of these trucks.

Accepted Answer

The answer of Non-interest-bearing note
Togo Auto purchased several trucks by...

Question 20

A company is constructing an asset for its own use. Construction began in 2020. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2020 and 2021 at the end of each quarter. The total amount of interest cost capitalized in 2021 should be determined by applying the interest rate on the specific new borrowing to the

Accepted Answer

The most appropriate method to determine the amount of interest cost capitalized for a self-constructed asset is to use the weighted-average accumulated expenditures. This method takes into account the fact that expenditures are made at different points in time and the construction period may span over more than one accounting period. The weighted-average accumulated expenditures are calculated by multiplying the amount spent during each period with the time-weighted fraction of the period during which the expenditure was made. By applying the interest rate on the specific new borrowing to the weighted-average accumulated expenditures, the amount of interest cost capitalized in 2021 can be determined.

Quiz 10: Property, Plant, and Equipment: Accounting Model Basics

Which of the following statements is correct?

Acquisition Cost Rwanda Corporation purchased land at a cost of $ 100,000. Closing costs were $ 3,800, plus Rwanda paid $ 48,000 for site preparation so they could construct a building on the site. Instructions Calculate the amount that should be recorded as the cost of the land.

Explain the concept of componentization as it applies to the recognition of PP&E assets.

Borrowing costs that are capitalized should

When using the revaluation model of accounting for PP&E assets (proportionate method) ,

Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is

Borrowing costs incurred for the acquisition of assets may be capitalized if certain conditions are met. Which of the following issues is irrelevant in making that determination?

Non-interest-bearing note Togo Auto purchased several trucks by issuing a $ 40,000, 4-year, non-interest-bearing note to Rabat Motors. The market interest rate for this type of transaction is 8%. Instructions Prepare the journal entry to record the purchase of these trucks.