Question 1

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

The cost of the equipment should include not only the purchase price but also any necessary expenses incurred to bring the asset to its intended location and condition for use. Therefore, the equipment should be recorded at its cost of $5,000 cash plus $400 for shipping, totaling $5,400. The fair value is only relevant if the company were to sell the equipment, but it is not a determining factor in the initial recording of the asset.

Question 2

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...

Question 3

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

The cost recorded for the equipment would include the purchase price of $60,000 plus the additional costs of transportation ($1,000), sales tax ($3,000), and installation ($2,500), which total $6,500. Therefore, the cost recorded for the equipment would be $60,000 + $6,500 = $66,500.

Question 4

A more comparable measure of profitability than income is return on assets,which equals net income divided by average total assets.

Accepted Answer

Return on assets provides a better measure of profitability as it takes into consideration the assets required to generate the income.

Question 5

We record a loss if we sell an asset for less than book value.

Accepted Answer

This statement is true. If we sell an asset for less than its book value, it means that the asset is worth less than what we have recorded in our accounting records, resulting in a loss.

Question 6

Which of the following would be recorded as land improvements?

Accepted Answer

Land improvements are physical additions or enhancements to land that increase its value, such as adding a parking lot. Property taxes, title insurance, and real estate commissions are all expenses associated with purchasing and owning the land but do not physically improve the land itself.

Question 7

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

Accepted Answer

The total amount of property, plant, and equipment (PPE) is the sum of the values of land and equipment, which is $90,000 + $8,000 = $98,000.

Question 8

Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value.Impairment occurs when the future cash flows generated for a long-term asset fall below its book value (cost minus accumulated depreciation).

Accepted Answer

Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value, not its book value.

Question 9

Profit margin is net income divided by net sales.

Accepted Answer

This definition is correct. Profit margin is calculated by dividing net income (total revenue minus total expenses) by net sales (total amount of sales revenue).

Question 10

Intangible assets with an indefinite useful life (goodwill and most trademarks)are not amortized.

Accepted Answer

Intangible assets with an indefinite useful life, such as goodwill and most trademarks, are not amortized. Instead, they are subject to an annual impairment test to ensure that their carrying value is not more than their recoverable amount.

Question 11

Management must review long-term assets for impairment when events or changes in circumstances indicate that book value might not be recoverable.

Accepted Answer

Management is required to conduct impairment testing whenever an event or change in circumstances indicates that the carrying value of a long-term asset may not be recoverable. This is in accordance with generally accepted accounting principles (GAAP) which require companies to recognize and disclose impaired assets in their financial statements.

Question 12

Which of the following would not be recorded as land improvements?

Accepted Answer

Closing costs on purchasing the land are not considered land improvements because they are not physical changes made to the land.

Question 13

An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset.

Accepted Answer

This statement is true. An impairment loss is recognized when the carrying value of a long-term asset exceeds its fair value, which represents the amount the asset could be sold for in an arm's length transaction. The impairment loss is equal to the difference between the book value (i.e. carrying value) of the asset and its fair value.

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

Real Angus Steakhouse should record the land at its cost, which includes the purchase price, commissions, property taxes, and title insurance.

Purchase price: $75,000 
Commissions: + $4,500 
Title insurance: + $800

Total cost before property taxes: $80,300

However, out of the $5,000 in property taxes paid, $4,000 were for back taxes paid by Real Angus on behalf of the seller and should not be included in the cost of the land. The remaining $1,000 was due for the current year after the purchase date and is included in the cost of the land.

Total cost including property taxes: $81,300

Therefore, Real Angus Steakhouse should record the land for $84,300 ($80,300 + $1,000 + $3,000).

Question 15

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: What amount should be recorded for the purchase of the land?
$$\begin{array} { | l | r | } 
\hline \text { Sale price of the land } & \$ 400,000 \
\hline \text { Sale of salwaged parts already on land } & \$ 20,000 \
\hline \text { Demolition of the old building } & \$ 30,000 \
\hline \text { Ground breaking ceremony (food and supplies) } & \$ 1,500 \
\hline \text { Land preparation and leveling } & \$ 7,500 \
\hline
\end{array}$$

Accepted Answer

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

Question 16

We record a gain if we sell an asset for less than book value.We record a gain if we sell an asset for more than book value.

Accepted Answer

We record a gain if we sell an asset for more than book value, and record a loss if we sell an asset for less than book value.

Question 17

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

The cost of the dishwasher should include the cash payment plus all additional costs necessary to get the equipment up and running. Therefore, the cost of the dishwasher should be $5,000 + $400 + $300 + $200 = $5,900.

Question 18

Asset turnover is net sales divided by ending total assets.Asset turnover is net sales divided by average total assets.

Accepted Answer

Asset turnover is calculated by dividing net sales by average total assets, not ending total assets.

Question 19

Taking a "big bath" is recording all losses in one year to make a bad year even worse.

Accepted Answer

Taking a "big bath" is a common accounting practice where a company records all of its losses in one year to make that year look worse than it actually was. This can be done in order to make future performance look better in comparison or to get a tax benefit from the losses.

Question 20

Bahama Catering purchased a commercial dishwasher by paying cash of $8,000.The dishwasher's fair value on the date of the purchase was $10,000.The company incurred $600 in transportation costs,$500 installation fees,and paid $300 annual insurance of the equipment.For what amount will Bahama record the dishwasher?

Accepted Answer

The cost of the dishwasher for Bahama Catering would be $8,000 (cash paid), plus transportation costs of $600 and installation fees of $500, totaling $9,100. The annual insurance of $300 would be considered as an expense and would not affect the cost of the dishwasher. Therefore, the correct amount to record for the dishwasher would be $9,100.

Quiz 7: Long-Term Assets