CHAPTER 10 ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT IFRS questions are available at the end of this chapter TRUE-FALSE—Conceptual Answer F T F T F T F F F T T T T F F T T F F T No Description 10 11 12 13 14 15 16 17 18 19 20 Nature of property, plant, and equipment Nature of property, plant, and equipment Cost of removing old building Insurance on equipment purchased Accounting for special assessments Overhead costs in self-constructed assets Overhead costs in self-constructed assets Interest capitalization Qualifying assets for interest capitalization Avoidable interest Interest capitalization on land purchase Deferred-payment contracts Accounting for nonmonetary exchanges Nonmonetary exchanges Recognizing losses on nonmonetary exchanges Costs subsequent to acquisition Definition of improvements Ordinary repairs benefit period Involuntary conversion gains/losses Loss from scrapped asset MULTIPLE CHOICE—Conceptual Answer d b d c c c d a b b d d d a c a b No Description 21 22 23 24 25 26 27 28 29 S 30 S 31 32 33 34 35 36 37 Definition of plant assets Characteristics of plant assets Characteristics of plant assets Composition of land cost Composition of land cost Determination of land cost Determine cost of land used as a parking lot Determine cost of machinery Classification of fences and parking lots Recording plant assets at historical cost Accounting for overhead costs Determine costs capitalized for self-constructed assets Assets which qualify for interest capitalization Assets which qualify for interest capitalization Definition of "avoidable interest." Period of time over which interest may be capitalized Maximum amount of annual interest that may be capitalized 10 - Test Bank for Intermediate Accounting, Fourteenth Edition MULTIPLE CHOICE—Conceptual (cont.) Answer b d d c a c a a b c d d a c b b d c d a c d a d c P S No Description 38 39 40 S 41 S 42 S 43 S 44 S 45 P 46 47 48 49 50 51 52 53 54 55 56 57 P 58 S 59 S 60 61 62 Interest capitalization—weighted-average factor Classification of interest earned on securities purchased with borrowed funds Write-off of capitalized interest costs Conditions for interest capitalization Capitalization of interest on constructed assets Nonmonetary exchanges and culmination of earning process Recognizing gains/losses in exchange having commercial substance Valuation of nonmonetary asset Gain recognition on plant asset exchange Valuation of plant assets Plant asset acquired by issuance of stock Valuation of nonmonetary exchanges Gain recognition on a nonmonetary exchange Gain recognition on a nonmonetary exchange Accounting for donated assets Valuation of donated assets Identify conditions for capital expenditures Capital expenditure Identification of a capital expenditure Identification of a capital expenditure Accounting for revenue expenditures Accounting for capital expenditures Gain or loss on plant asset disposal Determine loss on sale of depreciable asset Knowledge of involuntary conversions These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide MULTIPLE CHOICE—Computational Answer b d d c c d d a b a b a c b a d a No 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 Description Determine cost of land Determine cost of building Calculate cost of land and building Calculate cost of equipment Calculate cost of equipment Overhead included in self-constructed asset Overhead included in self-constructed asset Calculate interest to be capitalized Calculate average accumulated expenditures Calculate interest to be capitalized Calculate average accumulated expenditures Calculate average accumulated expenditures Calculate amount of interest to be capitalized Calculate weighted-average accumulated expenditures Calculate weighted-average accumulated expenditures Calculate weighted-average accumulated expenditures Calculate actual interest cost incurred during year Acquisition and Disposition of Property, Plant, and Equipment MULTIPLE CHOICE—Computational (cont.) Answer b c c b d b b d d a c a a c b a c a d c c c b d b d b c b d a d b a b b d b d c c b b No 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 Description Calculate amount of interest to be capitalized Calculate amount of interest to be capitalized Calculate weighted-average accumulated expenditures Calculate interest to be capitalized Calculate weighted-average accumulated expenditures Calculate interest to be capitalized Calculate weighted-average accumulated expenditures Calculate weighted-average interest rate Calculate amount of avoidable interest Calculate amount of actual interest Calculate amount of interest expense Exchange of nonmonetary assets Exchange lacking commercial substance Exchange lacking commercial substance Valuation of a nonmonetary exchange Valuation of a nonmonetary exchange Calculate gain on exchange lacking commercial substance Allocation of cost in a lump sum purchase Allocation of cost in a lump sum purchase Calculate cost of land acquired Determine cost of purchased machine Calculate cost of truck purchased Calculate cost of machine purchased Allocation of cost of a lump sum purchase Calculate cost of equipment Acquisition of equipment by exchange of stock held as an investment Exchange lacking commercial substance Exchange lacking commercial substance /gain Exchange lacking commercial substance /gain Valuation of a nonmonetary exchange Exchange lacking commercial substance/gain Valuation of a nonmonetary exchange Gain recognition of a nonmonetary exchange Valuation of a nonmonetary exchange Valuation of a nonmonetary exchange Calculate gain on nonmonetary exchange Calculate loss on nonmonetary exchange Calculate gain on nonmonetary exchange Calculate loss on nonmonetary exchange Calculate cash received from sale of machinery Calculate cash received from sale of machinery Calculate loss on sale of machine Calculate gain on sale of equipment 10 - Test Bank for Intermediate Accounting, Fourteenth Edition 10 - MULTIPLE CHOICE—CPA Adapted Answer c b b a a b d a No 123 124 125 126 127 128 129 130 Description Determine cost of land Classification of sale of building Determine interest cost to be capitalized Valuation of a nonmonetary exchange Exchange lacking commercial substance Accounting for donated assets Costs subsequent to acquisition Valuation of replacement equipment EXERCISES Item E10-131 E10-132 E10-133 E10-134 E10-135 E10-136 E10-137 Description Plant asset accounting Weighted-average accumulated expenditures Capitalization of interest Nonmonetary exchange Nonmonetary exchange Donated assets Capitalizing vs expensing PROBLEMS Item P10-138 P10-139 P10-140 P10-141 P10-142 P10-143 P10-144 P10-145 P10-146 Description Capitalizing acquisition costs Capitalization of interest Capitalization of interest Asset acquisition Nonmonetary exchange Nonmonetary exchange Nonmonetary exchange Nonmonetary exchange Nonmonetary exchange CHAPTER LEARNING OBJECTIVES Describe property, plant, and equipment Identify the costs to include in the initial valuation of property, plant, and equipment Describe the accounting problems associated with self-constructed assets Describe the accounting problems associated with interest capitalization Understand accounting issues related to acquiring and valuing plant assets Describe the accounting treatment for costs subsequent to acquisition Describe the accounting treatment for the disposal of property, plant, and equipment Acquisition and Disposition of Property, Plant, and Equipment 10 - SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item TF TF 21 TF TF TF 24 25 26 MC MC MC 27 28 29 TF TF 31 32 MC MC 68 69 10 11 33 34 TF TF TF TF MC MC 35 36 37 38 39 40 MC MC MC MC MC MC S 12 13 14 15 S 43 S 44 S 45 P 46 47 TF TF TF TF MC MC MC MC MC 48 49 50 51 52 53 91 92 93 MC MC MC MC MC MC MC MC MC 94 95 96 97 98 99 100 101 102 16 17 TF TF 18 54 TF MC 55 56 19 20 TF TF MC MC 62 119 Note: S S S 60 61 41 42 70 71 72 73 S TF = True-False MC = Multiple Choice P = Problem E = Exercise Type Item Type Item Learning Objective MC 22 MC 23 Learning Objective MC 30 MC 65 MC 63 MC 66 MC 64 MC 67 Learning Objective MC 132 E MC 133 E Learning Objective MC 74 MC 80 MC 75 MC 81 MC 76 MC 82 MC 77 MC 83 MC 78 MC 84 MC 79 MC 85 Learning Objective MC 103 MC 112 MC 104 MC 113 MC 105 MC 114 MC 106 MC 115 MC 107 MC 116 MC 108 MC 117 MC 109 MC 118 MC 110 MC 126 MC 111 MC 127 Learning Objective S MC 57 MC 59 P MC 58 MC 129 Learning Objective MC 120 MC 122 MC 121 MC Type Item Type Item Type MC MC MC 123 124 131 MC MC E 137 138 E P MC MC MC MC MC MC 86 87 88 89 90 125 MC MC MC MC MC MC 131 133 137 139 140 E E E P P MC MC MC MC MC MC MC MC MC 128 131 134 135 136 137 141 142 143 MC E E E E E P P P 144 145 146 P P P MC MC 130 131 MC E 137 E MC MC 10 - Test Bank for Intermediate Accounting, Fourteenth Edition TRUE-FALSE—Conceptual Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset Companies should assign no portion of fixed overhead to self-constructed assets When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included Assets under construction for a company’s own use not qualify for interest cost capitalization 10 Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset 11 When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization 12 Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged 13 Companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received 14 If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized 15 When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance 16 Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits 17 Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used Acquisition and Disposition of Property, Plant, and Equipment 10 - 18 When an ordinary repair occurs, several periods will usually benefit 19 Companies always treat gains or losses from an involuntary conversion as extraordinary items 20 If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset’s book value True False Answers—Conceptual Item Ans F T F T F Item 10 Ans T F F F T Item 11 12 13 14 15 Ans T T T F F Item 16 17 18 19 20 Ans T T F F T MULTIPLE CHOICE—Conceptual 21 Plant assets may properly include a deposits on machinery not yet received b idle equipment awaiting sale c land held for possible use as a future plant site d none of these 22 Which of the following is not a major characteristic of a plant asset? a Possesses physical substance b Acquired for resale c Acquired for use d Yields services over a number of years 23 Which of these is not a major characteristic of a plant asset? a Possesses physical substance b Acquired for use in operations c Yields services over a number of years d All of these are major characteristics of a plant asset 24 Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site The cost of the Emporia Hotel should be a depreciated over the period from acquisition to the date the hotel is scheduled to be torn down b written off as an extraordinary loss in the year the hotel is torn down c capitalized as part of the cost of the land d capitalized as part of the cost of the new hotel 10 - Test Bank for Intermediate Accounting, Fourteenth Edition 25 The cost of land does not include a costs of grading, filling, draining, and clearing b costs of removing old buildings c costs of improvements with limited lives d special assessments 26 The cost of land typically includes the purchase price and all of the following costs except a grading, filling, draining, and clearing costs b street lights, sewers, and drainage systems cost c private driveways and parking lots d assumption of any liens or mortgages on the property 27 If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on a the significance of the cost allocated to the building in relation to the combined cost of the lot and building b the length of time for which the building was held prior to its demolition c the contemplated future use of the parking lot d the intention of management for the property when the building was acquired 28 The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to a the machinery account b a separate deferred charge account c miscellaneous tax expense (which includes all taxes other than those on income) d accumulated depreciation machinery 29 Fences and parking lots are reported on the balance sheet as a current assets b land improvements c land d property and equipment S 30 Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except a at the date of acquisition, cost reflects fair market value b property, plant, and equipment items are always acquired at their original historical cost c historical cost involves actual transactions and, as such, is the most reliable basis d gains and losses should not be anticipated but should be recognized when the asset is sold S 31 To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be a allocated on the basis of lost production b eliminated completely from the cost of the asset c allocated on an opportunity cost basis d allocated on a pro rata basis between the asset and normal operations Acquisition and Disposition of Property, Plant, and Equipment 10 - 32 Which of the following costs are capitalized for self-constructed assets? a Materials and labor only b Labor and overhead only c Materials and overhead only d Materials, labor, and overhead 33 Which of the following assets not qualify for capitalization of interest costs incurred during construction of the assets? a Assets under construction for an enterprise's own use b Assets intended for sale or lease that are produced as discrete projects c Assets financed through the issuance of long-term debt d Assets not currently undergoing the activities necessary to prepare them for their intended use 34 Assets that qualify for interest cost capitalization include a assets under construction for a company's own use b assets that are ready for their intended use in the earnings of the company c assets that are not currently being used because of excess capacity d All of these assets qualify for interest cost capitalization 35 When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a the total interest cost actually incurred b a cost of capital charge for stockholders' equity c that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made d that portion of average accumulated expenditures on which no interest cost was incurred 36 The period of time during which interest must be capitalized ends when a the asset is substantially complete and ready for its intended use b no further interest cost is being incurred c the asset is abandoned, sold, or fully depreciated d the activities that are necessary to get the asset ready for its intended use have begun 37 Which of the following statements is true regarding capitalization of interest? a Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account b The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred c When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized d The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period 10 - 10 Test Bank for Intermediate Accounting, Fourteenth Edition 38 Construction of a qualifying asset is started on April and finished on December The fraction used to multiply an expenditure made on April to find weighted-average accumulated expenditures is a 8/8 b 8/12 c 9/12 d 11/12 39 When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities Interest earned on these temporary investments should be a offset against interest cost incurred during construction b used to reduce the cost of assets being constructed c multiplied by an appropriate interest rate to determine the amount of interest to be capitalized d recognized as revenue of the period 40 Interest cost that is capitalized should a be written off over the remaining term of the debt b be accumulated in a separate deferred charge account and written off equally over a 40-year period c not be written off until the related asset is fully depreciated or disposed of d none of these S 41 Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? a Interest cost is being incurred b Expenditures for the assets have been made c The interest rate is equal to or greater than the company's cost of capital d Activities that are necessary to get the asset ready for its intended use are in progress S 42 Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment? a Capitalize only the actual interest costs incurred during construction b Charge construction with all costs of funds employed, whether identifiable or not c Capitalize no interest during construction d Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being constructed S 43 Which of the following nonmonetary exchange transactions represents a culmination of the earning process? a Exchange of assets with no difference in future cash flows b Exchange of products by companies in the same line of business with no difference in future cash flows c Exchange of assets with a difference in future cash flows d Exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position 10 - 38 Test Bank for Intermediate Accounting, Fourteenth Edition Ex 10-137—Capitalizing vs Expensing Consider each of the items below Place the proper letter in the blank space provided to indicate the nature of the account or accounts to be debited when recording each transaction using the preferred accounting treatment Prepayments should be recorded in balance sheet accounts Disregard income tax considerations unless instructed otherwise a b c d e asset(s) only accumulated amortization, depletion, or depreciation only expense only asset(s) and expense some other account or combination of accounts A motor in one of North Company’s trucks was overhauled at a cost of $600 It is expected that this will extend the life of the truck for two years Machinery which had originally cost $130,000 was rearranged at a cost of $450, including installation, in order to improve production Orlando Company recently purchased land and two buildings for a total cost of $35,000, and entered the purchase on the books The $1,200 cost of razing the smaller building, which has an appraisal value of $6,200, is recorded Jantzen Company traded its old machine with a net book value of $3,000 plus cash of $7,000 for a new one which had a fair market value of $9,000 Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading and setting up a new $6,000 precision machine in the plant The wages earned in this five-day period, $480, are recorded On June 1, the Milton Hotel installed a sprinkler system throughout the building at a cost of $13,000 As a result the insurance rate was decreased by 40% An improvement, which extended the life but not the usefulness of the asset, cost $6,000 The attic of the administration building was finished at a cost of $3,000 to provide an additional office In March, the Lyon Theatre bought projection equipment on the installment basis The contract price was $23,610, payable $5,610 down, and $2,250 a month for the next eight months The cash price for this equipment was $22,530 10 Lambert Company recorded the first year’s interest on 6% $100,000 ten-year bonds sold a year ago at 94 The bonds were sold in order to finance the construction of a hydroelectric plant Six months after the sale of the bonds, the construction of the hydroelectric plant was completed and operations were begun (Only cash interest, and not discount amortization, is to be considered.) Acquisition and Disposition of Property, Plant, and Equipment 10 - 39 Solution 10-137 b a or c a e a 10 a b a e d PROBLEMS Pr 10-138—Capitalizing acquisition costs Gibbs Manufacturing Co was incorporated on 1/2/12 but was unable to begin manufacturing activities until 8/1/12 because new factory facilities were not completed until that date The Land and Buildings account at 12/31/12 per the books was as follows: Date 1/31/12 2/28/12 4/1/12 5/1/12 5/1/12 5/1/12 8/1/12 8/1/12 12/31/12 Item Land and dilapidated building Cost of removing building Legal fees Fire insurance premium payment Special tax assessment for streets Partial payment of new building construction Final payment on building construction General expenses Asset write-up Amount $200,000 4,000 6,000 5,400 4,500 170,000 170,000 30,000 75,000 $664,900 Additional information: To acquire the land and building on 1/31/12, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a fair value per share of $140 When the old building was removed, Gibbs paid Kwik Demolition Co $4,000, but also received $1,500 from the sale of salvaged material Legal fees covered the following: Cost of organization Examination of title covering purchase of land Legal work in connection with the building construction $2,500 2,000 1,500 $6,000 The fire insurance premium covered premiums for a three-year term beginning May 1, 2012 General expenses covered the following for the period 1/2/12 to 8/1/12 President's salary Plant superintendent covering supervision of new building $20,000 10,000 $30,000 Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company Instructions Determine the proper balances as of 12/31/12 for a separate land account and a separate buildings account Use separate T-accounts (one for land and one for buildings) labeling all the relevant amounts and disclosing all computations 10 - 40 Test Bank for Intermediate Accounting, Fourteenth Edition Solution 10-138 Land Land and old building ($100,000 plus $140,000) Removal of old building ($4,000 – $1,500) Legal fees Special assessment Balance 240,000 2,500 2,000 4,500 249,000 Buildings Legal Fees Partial payment Insurance (3 months) Final payment Superintendent's salary Balance 1,500 170,000 450 170,000 10,000 351,950 Pr 10-139—Capitalization of interest During 2012, Barden Building Company constructed various assets at a total cost of $10,500,000 The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2012 were $7,000,000 The company had the following debt outstanding at December 31, 2012: 10%, 5-year note to finance construction of various assets, dated January 1, 2012, with interest payable annually on January $4,500,000 12%, ten-year bonds issued at par on December 31, 2006, with interest payable annually on December 31 5,000,000 9%, 3-year note payable, dated January 1, 2011, with interest payable annually on January 2,500,000 Instructions Compute the amounts of each of the following (show computations) Avoidable interest Total interest to be capitalized during 2012 Acquisition and Disposition of Property, Plant, and Equipment 10 - 41 Solution 10-139 Weighted Average Accumulated Expenditures $4,500,000 2,500,000 $7,000,000 Applicable Interest Rate 10 11* *Computation of weighted average interest rate: Principal 12% ten-year bonds $5,000,000 9% 3-year note 2,500,000 $7,500,000 Avoidable Interest $450,000 275,000 $725,000 = Avoidable Interest Interest $600,000 225,000 $825,000 Weighted average interest rate = $825,000 ÷ $7,500,000 = 11% Actual interest cost during 2012: Construction note, $4,500,000 × 10 12% ten-year bonds, $5,000,000 × 12 9% three-year note, $2,500,000 × 09 $ 450,000 600,000 225,000 $1,275,000 The interest cost to be capitalized is $725,000 (the lesser of the $725,000 avoidable interest and the $1,275,000 actual interest) Pr 10-140—Capitalization of interest Early in 2012, Dobbs Corporation engaged Kiner, Inc to design and construct a complete modernization of Dobbs's manufacturing facility Construction was begun on June 1, 2012 and was completed on December 31, 2012 Dobbs made the following payments to Kiner, Inc during 2012: Date Payment June 1, 2012 $4,800,000 August 31, 2012 7,200,000 December 31, 2012 6,000,000 In order to help finance the construction, Dobbs issued the following during 2012: $4,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2012, with interest payable annually on May 31 1,000,000 shares of no-par common stock, issued at $10 per share on October 1, 2012 In addition to the 9% bonds payable, the only debt outstanding during 2012 was a $1,000,000, 12% note payable dated January 1, 2008 and due January 1, 2018, with interest payable annually on January Instructions Compute the amounts of each of the following (show computations): Weighted-average accumulated expenditures qualifying for capitalization of interest cost Avoidable interest incurred during 2012 Total amount of interest cost to be capitalized during 2012 10 - 42 Test Bank for Intermediate Accounting, Fourteenth Edition Solution 10-140 Date June August 31 December 31 Capitalization Expenditures $4,800,000 7,200,000 6,000,000 Weighted-Average Accumulated Expenditures $4,000,000 1,200,000 $5,200,000 Weighted-Average Accumulated Expenditures $2,800,000 2,400,000 $5,200,000 Period 7/12 4/12 Appropriate Interest Rate 09 12 Avoidable Interest $360,000 144,000 $504,000 Actual interest incurred during 2012: 9% bonds payable, $4,000,000 × 09 × 7/12 12% note payable, $1,000,000 × 12 $210,000 120,000 $330,000 The interest cost to be capitalized is $330,000 (the lesser of the $504,000 avoidable interest and the $330,000 actual interest cost) Pr 10-141—Asset acquisition Ford Inc plans to acquire an additional machine on January 1, 2012 to meet the growing demand for its product Stever Company offers to provide the machine to Ford using either of the options listed below (each option gives Ford exactly the same machine and gives Stever Company approximately the same net present value cash equivalent at 10%) Option — Cash purchase $1,600,000 Option — Installment purchase requiring 15 annual payments of $210,358 due December 31 each year The expected economic life of this machine to Ford is 15 years Salvage value at that time is estimated to be $100,000 Straight-line depreciation is used Interest expense under Option is computed using the effective interest method Instructions Based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the liability should appear on the December 31, 2012 balance sheet of Ford Inc., for each option Present your answer on an answer sheet in the following format If an item should not appear in the balance sheet, write "not shown" opposite the option Assets Account Name Option Option Amount Liabilities Account Name Amount Acquisition and Disposition of Property, Plant, and Equipment 10 - 43 Solution 10-141 Option Option Assets Account Name Amount Machinery $1,600,000 Accum Depr 100,000 Liabilities Account Name Amount "not shown" Machinery Accum Depr Notes Payable— Current $ 55,394 Notes Payable— Long-term 1,494,248 $1,600,000 100,000 Computations: At January 1, 2012, the note payable is $1,600,000 At December 31, 2012, after the first payment of $210,358 has been made ($160,000 interest) $1,549,642 principal remains, of which $1,494,248 is long-term and $55,394 is current [$210,358 – (10% × $1,549,642)] Note: $210,358 × 7.60608 (Table 6-4) = $1,600,000, the present value of the liability on January 1, 2012 Pr 10-142—Nonmonetary exchanges Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a 5% depreciation charge per year on buildings The following transactions occurred in 2013: March 31, 2013— Negotiations which began in 2012 were completed and a building purchased 1/1/04 (depreciation has been properly charged through December 31, 2012) at a cost of $4,800,000 with a fair value of $3,000,000 was exchanged for a second building which also had a fair value of $3,000,000 The exchange had no commercial substance Both parcels of land on which the buildings were located were equal in value, and had a fair value equal to book value June 30, 2013— Machinery with a cost of $480,000 and accumulated depreciation through January of $360,000 was exchanged with $300,000 cash for a parcel of land with a fair value of $460,000 Instructions Prepare all appropriate journal entries for Moore Corporation for the above dates Solution 10-142 3/31/13 Depreciation Expense Accumulated Depreciation—Buildings ($4,800,000 × 5% × 1/4) 60,000 Buildings 2,580,000 Accumulated Depreciation—Buildings 2,220,000 Buildings ($4,800,000 × 5% × 1/4 = $2,220,000) 60,000 4,800,000 10 - 44 Test Bank for Intermediate Accounting, Fourteenth Edition Solution 10-142 (cont.) 6/30/11 Depreciation Expense Accumulated Depreciation—Machinery ($480,000 × 10% × 1/2) 24,000 24,000 Land 460,000 Accumulated Depreciation—Machinery 384,000 Gain on Disposal of Machinery Machinery Cash [$160,000 – ($480,000 – $384,000)] = $64,000 64,000 480,000 300,000 Pr 10-143—Nonmonetary exchange Rogers Co had a sheet metal cutter that cost $144,000 on January 5, 2008 This old cutter had an estimated life of ten years and a salvage value of $24,000 On April 3, 2013, the old cutter is exchanged for a new cutter with a fair value of $72,000 The exchange lacked commercial substance Rogers also received $18,000 cash Assume that the last fiscal period ended on December 31, 2012, and that straight-line depreciation is used Instructions (a) Show the calculation of the amount of the gain or loss to be recognized by Rogers Co (b) Prepare all entries that are necessary on April 3, 2013 Show a check of the amount recorded for the new cutter Solution 10-143 (a) Cost Accumulated depreciation (5 1/4 × $12,000) Book value Fair value ($72,000 + $18,000) Gain Gain recognized (18/90 × $9,000) (b) $144,000 (63,000) 81,000 90,000 $ 9,000 $ 1,800 Depreciation Expense Accumulated Depreciation—Machinery 3,000 Accumulated Depreciation—Machinery Machinery Cash Machinery Gain on Disposal of Machinery 63,000 64,800 18,000 Check: Fair value Less deferred gain Basis of new machinery $72,000 (7,200) $64,800 3,000 144,000 1,800 Acquisition and Disposition of Property, Plant, and Equipment 10 - 45 Pr 10-144—Nonmonetary exchange Layne Co has a machine that cost $425,000 on March 20, 2009 This old machine had an estimated life of ten years and a salvage value of $25,000 On December 23, 2013, the old machine is exchanged for a new machine with a fair value of $270,000 The exchange lacked commercial substance Layne also received $30,000 cash Assume that the last fiscal period ended on December 31, 2012, and that straight-line depreciation is used Instructions (a) Show the calculation of the amount of gain or loss to be recognized by Layne Co from the exchange (Round to the nearest dollar.) (b) Prepare all entries that are necessary on December 23, 2013 Show a check of the amount recorded for the new machine Solution 10-144 (a) (b) Cost Accumulated depreciation (4 3/4 × $40,000) Book value Fair value ($270,000 + $30,000) Gain $425,000 (190,000) 235,000 300,000 $ 65,000 Gain recognized (30/300 × $65,000) $ Depreciation Expense Accumulated Depreciation Machinery Accumulated Depreciation Machinery Machinery Cash Machinery Gain on Disposal of Machinery Check: Fair value Deferred gain Basis of new machine 6,500 40,000 40,000 190,000 211,500 30,000 425,000 6,500 $270,000 (58,500) $211,500 Pr 10-145—Nonmonetary exchange Hodge Co exchanged Building 24 which has an appraised value of $6,400,000, a cost of $10,120,000, and accumulated depreciation of $4,800,000 for Building M belonging to Fine Co Building M has an appraised value of $6,016,000, a cost of $12,040,000, and accumulated depreciation of $6,336,000 The correct amount of cash was also paid Assume depreciation has already been updated Instructions Prepare the entries on both companies' books assuming the exchange had no commercial substance Show a check of the amount recorded for Building M on Hodge's books (Round to the nearest dollar.) 10 - 46 Test Bank for Intermediate Accounting, Fourteenth Edition Solution 10-145 Hodge Co.: Cost Accumulated depreciation Book value Fair value Gain $10,120,000 4,800,000 5,320,000 6,400,000 $ 1,080,000 Gain recognized (384/6,400 × $1,080,000) $64,800 Accumulated Depreciation—Buildings 4,800,000 Building M 5,000,800 Cash 384,000 Building 24 Gain on Disposal of Plant Assets Check: Fair value Deferred gain Basis for Building M Fine Co.: Cost Accumulated depreciation Book value Fair value Gain 10,120,000 64,800 $6,016,000 (1,015,200) $5,000,800 $12,040,000 6,336,000 5,704,000 6,016,000 $ 312,000 Accumulated Depreciation—Buildings 6,336,000 Building 24 6,088,000 Building M Cash 12,040,000 384,000 Pr 10-146—Nonmonetary exchange Beeman Company exchanged machinery with an appraised value of $2,925,000, a recorded cost of $4,500,000 and accumulated depreciation of $2,250,000 with Lacey Corporation for machinery Lacey owns The machinery has an appraised value of $2,825,000, a recorded cost of $5,400,000, and accumulated depreciation of $2,970,000 Lacey also gave Beeman $100,000 in the exchange Assume depreciation has already been updated Instructions (a) Prepare the entries on both companies' books assuming that the exchange had commercial substance (Round all computations to the nearest dollar.) (b) Prepare the entries on both companies' books assuming that the exchange lacked commercial substance (Round all computations to the nearest dollar.) Acquisition and Disposition of Property, Plant, and Equipment 10 - 47 Solution 10-146 (a) Commercial Substance Beeman Machinery 2,825,000 Cash 100,000 Accum Depreciation— Machinery 2,250,000 Gain on Disposal of Machinery 675,000 Machinery 4,500,000 Lacey Machinery 2,925,000 Accum Depreciation— Machinery 2,970,000 Gain on Disposal of Machinery 395,000 Machinery 5,400,000 Cash 100,000 (b) Cost A/D BV FV Gain $4,500,000 2,250,000 2,250,000 2,925,000 $ 675,000 Cost A/D BV FV Gain $5,400,000 2,970,000 2,430,000 2,825,000 $ 395,000 No Commercial Substance Beeman Machinery 2,173,077 Cash 100,000 Accumulated Deprecation—Machinery 2,250,000 Gain on Disposal of Machinery Machinery 23,077 4,500,000 $100,000 ÷ ($100,000 + $2,825,000) × $675,000 = $23,077 Lacey Machinery 2,530,000 Accumulated Depreciation—Machinery 2,970,000 Machinery Cash 5,400,000 100,000 10 - 48 Test Bank for Intermediate Accounting, Fourteenth Edition Short Answer: What are the major characteristics of plant assets? The major characteristics of plant assets are (1) that they are acquired for use in operations and not for resale, (2) that they are long-term in nature and usually subject to depreciation, and (3) that they have physical substance What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined? The avoidable interest is determined by multiplying (an) interest rate(s) by the weightedaverage amount of accumulated expenditures on qualifying assets For the portion of weighted-average accumulated expenditures which is less than or equal to any amounts borrowed specifically to finance construction of the assets, the capitalization rate is the specific interest rate incurred For the portion of weighted-average accumulated expenditures which is greater than specific debt incurred, the interest rate is a weighted average of all other interest rates incurred The amount of interest to be capitalized is the avoidable interest, or the actual interest incurred, whichever is lower Acquisition and Disposition of Property, Plant, and Equipment 10 - 49 IFRS QUESTIONS True/False Under international accounting standards, historical cost is the preferred treatment for property, plant, and equipment Recently changes to IFRS require companies to capitalize borrowing costs related to qualifying assets Under IFRS, interest costs incurred during construction of a plant asset cannot be capitalized Under IFRS, if a company uses the revaluation model for fixed assets, companies must revalue the class of assets regularly Under IFRS, assets that qualify for interest capitalization are assets that are in use or ready for their intended use Answers to True/False: True True False True False Multiple Choice Under IFRS, Sampson Company, who has a non-current asset which has been classified as held-for-sale, should a test the asset's value monthly for impairment b value the asset at its depreciated historical cost c depreciate the asset over its remaining life d not depreciate the asset Miller Company, a company who uses IFRS reporting standards, sells a non-current asset classified as held-for-sale Which of the following statements is true regarding the treatment of a gain on a subsequent increase in the fair value less cost? a The gain should not be recognized b The gain should be recognized in full in the income statement c The gain should be recognized but only in retained earnings d The gain should be recognized to the extent that it is not in excess of the cumulative impairment loss that has been recognized 10 - 50 Test Bank for Intermediate Accounting, Fourteenth Edition Danson Company, a company who uses IFRS reporting standards, has a non-current asset that has been classified as held-for-sale When the asset no longer meets this definition, Danson should a remove the asset from the statement of financial position b remeasure the asset at fair value c measure the asset at the lower of its carrying value before it was classified as held-forsale and its recoverable amount at the date when the company decided not to sell it d leave the non-current asset on the financial statements at the current carrying value Elton Industries, a company who uses IFRS reporting standards, has assets and liabilities of a disposal group classified as held-for-sale shown on its statement of financial position Which of the following presents the best treatment for these? a These assets and liabilities should be netted and presented as a single amount - either a current asset or a current liability on the statement of financial position b On the balance sheet, the disposal group assets should be shown separately from other assets, while the disposal group liabilities should be shown separately from other liabilities c The assets and liabilities should be netted and presented as a deduction from equity on the statement of financial position d There should be no separate disclosure of these assets and liabilities on the statement of financial position Acquisition and Disposition of Property, Plant, and Equipment 10 - 51 Woodson Company, a company who uses IFRS reporting standards, has identified a group of plant assets for disposal On January 1, 2012, the carrying value of these assets was $17.5 million The assets were revalued to $16.5 million on January 5, 2012, when they were identified as property for the disposal group In addition, Woodson thinks that it will cost $1.5 million to sell these assets What carrying amount should these assets reflect for year-end financial statements to be prepared on January 10, 2012? a $17.5 million b $16.5 million c $16.0 million d $15.0 million Thomas Company, a company who uses IFRS reporting standards, is disposing of a plant asset The amount of gain or loss from this disposal is a reported as the difference between the sales proceeds and the carrying amount of the asset b not reported c reported as the fair value less the recoverable amount d reported as the difference between the net cash flows of the productive years of the asset and its carrying value On January 1, 2012, Jackson Company has a building with a carrying value of $50,000 and a remaining useful life years that was recently valued at $150,000 Assuming that the company uses straight-line depreciation, IFRS would show the depreciation as a $10,000 b $30,000 c $20,000 d More than one of these answers could be correct Tram Industries, a company who uses IFRS reporting standards, is installing a new plant The company has incurred the following costs Operating losses before commercial production $ 200,000 Cost of the plant 1,500,000 Initial delivery and handling charges 300,000 Cost of site preparation 175,000 Which of these costs can Tram capitalize in accordance with IFRS? a 1, 2, 3, & b & c 2, 3, & d 1, 2, & 10 - 52 Test Bank for Intermediate Accounting, Fourteenth Edition Icon Industries, a company who uses IFRS reporting standards, is installing a new plant The company has incurred the following costs Consultants used for advice on the acquisition of the plant $245,000 Interest charges paid to the supplier of plant for deferred credit $275,000 Estimated dismantling cost to be incurred after years $400,000 Cost of the plant $2,300,000 Which of these costs can Tram capitalize in accordance with IFRS? a 1, 2, 3, & b only c & d 1, 3, & 10 All of the following are true regarding the revaluation model allowed under IFRS except a once selected, the revaluation policy applies to an entire class of property, plant and equipment b revaluations must be made regularly to ensure that the carrying value is not materially different from fair value c after initial recognition, the revalued amount is fair value less subsequent depreciation and impairment losses d when an asset is revalued, any increase in carrying amount is reported as miscellaneous revenue Answers to Multiple Choice: d d c b d a d c d 10 d ... substance and additional cash is received 10 - 12 Test Bank for Intermediate Accounting, Fourteenth Edition 51 For a nonmonetary exchange of plant assets, accounting recognition should not be given... machinery Calculate loss on sale of machine Calculate gain on sale of equipment 10 - Test Bank for Intermediate Accounting, Fourteenth Edition 10 - MULTIPLE CHOICE—CPA Adapted Answer c b b a a b... 141 142 143 MC E E E E E P P P 144 145 146 P P P MC MC 130 131 MC E 137 E MC MC 10 - Test Bank for Intermediate Accounting, Fourteenth Edition TRUE-FALSE—Conceptual Assets classified as Property,