Intermediate Accounting 19th Edition Earl K Stice James D Stice

Intermediate Bookkeeping 19e Earl K Stice James D Stice

ISBN-10:1133957919 , ISBN-13:978-1133957911

Chapter Ten—Investments in Noncurrent Operational Assets-Acquisition

QUESTION TYPE

On-Name Service Organization purchased a building lot to construct a new corporate office building. An older dwelling on the building lot was demolished immediately to allow the office building to be constructed. The expense of acquiring the older dwelling should be
a.

documented as a component of the cost of the land.

b.

offset as a loss in the year of purchase.

c.

deducted as an extraordinary item in the year of purchase.

d.

logged as a part of the cost of the new building.

ANSWER: A POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

The term “intangible assets” is used in accounting to mean
a.

current or noncurrent asset items without physical characteristics.

b.

assets with lower economic significance due to the nature of such assets.

c.

such items as patents, copyrights, and claims against customers that may be assessed on a monetary basis.

d.

properties without physical characteristics that have long-term effects on a business enterprise.

ANSWER: D POINTS: 1 DIFFICULTY: Easy OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Which of the following intangible assets does NOT possess the attribute of exchangeability?
a.

Patent

b.

Copyright

c.

Goodwill

d.

Franchise

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Reflective Thinking

In a business merger, 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.

ANSWER: D POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Reflective Thinking

Goodwill should be registered in the accounting records only when
a.

it is bought from another company.

b.

it can be established that a specific benefit or advantage has resulted to a firm from certain items such as a good name, capable employees, or reputation.

c.

it is acquired through the purchase of another business entity.

d.

a firm reports above normal earnings for 5 or more consecutive years.

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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.

ANSWER: D POINTS: 1 DIFFICULTY: Easy OBJ: Learning Objective 2

MAIN: AICPA FN-Reporting MSC: AACSB Reflective Thinking

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

ANSWER: A POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Cirrus Inc. acquired 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.

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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 due to expenditures for the asset is
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.

logged as a deferred payment and amortized over the term of the borrowing.

d.

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.

ANSWER: A POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

If the cost of regular 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.

ANSWER: D POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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

classified as other income.

b.

subtracted from the cost of the land.

c.

subtracted from the cost of the plant.

d.

netted against the costs to clear the land and expensed as incurred.

ANSWER: B POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

When a company buys land with a building on it and immediately demolishes the building so that the land can be used for the construction of a plant, the costs incurred to demolish 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.

ANSWER: D POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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.

ANSWER: B POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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 revenue 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 revenue activities of the enterprise and that are not undergoing the activities necessary to get them ready for use.

d.

automatically produced on a repetitive basis for inventory but require an extended period of time for completion.

ANSWER: B POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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.

ANSWER: B POINTS: 1 DIFFICULTY: Challenging OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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 constructing a prototype model.

b.

Cost of testing equipment that will also be used in another separate research and development project scheduled to start next year.

c.

Administrative salaries allocated to research and development.

d.

Research findings purchased from another company to support a specific research project currently in progress.

ANSWER: B POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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.

Earnings tax minimization

d.

Associating cause and effect

ANSWER: A POINTS: 1 DIFFICULTY: Easy OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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.

ANSWER: B POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

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

ANSWER: D POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

An improvement made to a machine increased its fair market value and its production capacity by 25% 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.

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Which of the following is true?
a.

The Financial Accounting Standards Board has never approved the disclosure of the fair values of noncurrent operational assets in the notes to financial statements.

b.

The SEC currently mandates the disclosure of the fair values of noncurrent operational assets in the notes to financial statements of companies that are registered with the SEC.

c.

The Financial Accounting Standards Board currently mandates the disclosure of the fair values of noncurrent operational assets in the notes to the financial statements.

d.

Disclosure of the fair values of noncurrent operational assets in the notes to the financial statements is currently encouraged but not required by the Financial Accounting Standards Board.

ANSWER: D POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 5

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

A machine with an original estimated useful life of ten years is moved to another location in the factory after it had been in service for three years. The efficiency of the machine is enhanced for its remaining useful life. The reinstallation costs should be capitalized if the remaining useful life of the machine is
5 Years Ten Years

a.

No No

b.

No Yes

c.

Yes Yes

d.

Yes No

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

An expenditure subsequent to acquisition of assembly-line production equipment benefits future periods. The expenditure should be capitalized if it is a
Betterment Rearrangement

a.

Yes Yes

b.

Yes No

c.

No Yes

d.

No No

ANSWER: A POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 3

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Which of the following principles is often given as justification to not value noncurrent operational assets at their current values?
a.

The revenue principle

b.

Verifiability

c.

Relevance

d.

Predictive value

ANSWER: B POINTS: 1 DIFFICULTY: Easy OBJ: Learning Objective 5

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

On February 12, Oceans Company bought a tract of land as a factory site for $190,000. An existing building on the property was demolished and construction was started on a new factory building in March of the same year. Additional details are available as follows:
Cost of demolishing old building ……………………….

$ 55,000

Title insurance and legal fees to purchase land ………

7,500

Architect’s fees ………………………………

52,500

New building construction cost …………………..

975,000

The recorded cost of the completed factory building should be

a.

$1,165,000

b.

$1,220,000

c.

$1,027,500

d.

$1,082,500

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

The Morris Company acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $180,000. At the time of acquisition, Morris paid $12,000 to have the property appraised. The appraisal disclosed the following values:
Land …………………………………………..

$120,000

Buildings ………………………………………

80,000

Equipment ………………………………………

40,000

What price should be assigned to the land, buildings, and equipment, respectively?

a.

$64,000, $64,000, and $64,000

b.

$90,000, $60,000, and $30,000

c.

$96,000, $64,000, and $32,000

d.

$120,000, $80,000, and $40,000

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Osborne Company bought three machines for $200,000 in a package deal. The three assets together had a book value of $160,000 on the seller’s books. An appraisal costing the buyer $2,000 indicated that the three machines had the following market values (book values are given in parentheses):
Machine 1: $60,000 ($40,000)

Machine 2: $80,000 ($50,000)

Machine 3: $100,000 ($70,000)

The three assets should be individually recorded at a cost of (rounded to the nearest dollar)

Machine 1 Machine 2 Machine 3

a.

$40,000 $53,333 $66,667

b.

$50,000 $62,500 $87,500

c.

$40,000 $50,000 $70,000

d.

$50,500 $67,333 $84,167

ANSWER: D POINTS: 1 DIFFICULTY: Challenging OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Diamond, Inc. purchased a machine under a deferred payment contract on December 31, 2013. Under the terms of the contract, Diamond is required to make eight annual payments of $140,000 each beginning December 31, 2014. The appropriate interest rate is 8%. The purchase price of the machine is
a.

$1,389,190.

b.

$1,120,000.

c.

$868,900.

d.

$804,530.

ANSWER: D POINTS: 1 DIFFICULTY: Challenging OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

On October 1, Azuma, Inc. exchanged 8,000 shares of its $25 par value common stock for a parcel of land to be held for a future plant site. Azuma’s common stock had a fair market value of $80 per share on the exchange date. Azuma received $36,000 from the sale of scrap when an existing building on the site was demolished. The land should be carried at
a.

$200,000.

b.

$236,000.

c.

$604,000.

d.

$640,000.

ANSWER: C POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 2

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

Broham Manufacturing Company purchased a machine on January 2, 2014. The invoice price of the machine was $40,000, and the vendor offered a 2% discount for payment within ten days. The following additional costs were incurred in connection with the machine:
Transportation-in ……………………………

$1,200

Installation cost ……………………………..

700

Testing costs before regular operation …………….

550

If the invoice is paid within the discount period, Broham should record the purchase price of the machine at

a.

$41,650.

b.

$41,100.

c.

$40,400.

d.

$39,200.

ANSWER: A POINTS: 1 DIFFICULTY: Medium OBJ: Learning Objective 1

MAIN: AICPA FN-Measurement MSC: AACSB Analytical

The general ledger of the