Intermediate Accounting 19e Earl K Stice James D Stice

Intermediate Accounting 19e Earl K Stice James D Stice

Chapter 10—Investments in Noncurrent Operating Assets-Acquisition

MULTIPLE CHOICE

1. On-Call Service Corporation bought a building lot to construct a new corporate office building. An older home on the building lot was razed immediately so that the office building could be constructed. The cost of purchasing the older home should be

a.

recorded as part of the cost of the land.

b.

written off as a loss in the year of purchase.

c.

written off as an extraordinary item in the year of purchase.

d.

recorded as part of the cost of the new building.

ANS: A PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

2. The term “intangible assets” is used in accounting to denote

a.

current or noncurrent property items without physical characteristics.

b.

assets with lesser economic significance because of the nature of such assets.

c.

such items as patents, copyrights, and claims against customers which can be valued on a monetary basis.

d.

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

ANS: D PTS: 1 DIF: Easy OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

3. Which of the following intangible assets does NOT have the characteristic of exchangeability?

a.

Patent

b.

Copyright

c.

Goodwill

d.

Franchise

ANS: C PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Reflective Thinking

4. In a business combination, 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.

ANS: D PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Reflective Thinking

5. Goodwill should be recorded in the accounting records only when

a.

it is purchased from another company.

b.

it can be established that a definite benefit or advantage has resulted to a firm from some item such as a good name, capable staff, or reputation.

c.

it is acquired through the purchase of another business entity.

d.

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

ANS: C PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

6. 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.

ANS: D PTS: 1 DIF: Easy OBJ: LO 2

TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

7. 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

ANS: A PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

8. Cirrus Inc. purchased 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.

ANS: C PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

9. 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 as a result of expenditures for the asset is

a.

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.

recorded as a deferred charge and amortized over the term of the borrowing.

d.

a 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.

ANS: A PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

10. If the cost of ordinary 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.

ANS: D PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

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

a.

classified as other income.

b.

deducted from the cost of the land.

c.

deducted from the cost of the plant.

d.

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

ANS: B PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

12. When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the costs incurred to tear down 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.

ANS: D PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

13. 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.

ANS: B PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

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

d.

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

ANS: B PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

15. 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.

ANS: B PTS: 1 DIF: Challenging OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

16. 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 building a prototype model.

b.

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

c.

Administrative salaries allocated to research and development.

d.

Research findings purchased from another company to aid a particular research project currently in process.

ANS: B PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

17. 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.

Income tax minimization

d.

Associating cause and effect

ANS: A PTS: 1 DIF: Easy OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

18. 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.

ANS: B PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

19. 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

ANS: D PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

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

ANS: C PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

21. Which of the following is true?

a.

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

b.

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

c.

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

d.

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

ANS: D PTS: 1 DIF: Medium OBJ: LO 5

TOP: AICPA FN-Measurement MSC: AACSB Analytic

22. 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 increased for its remaining useful life. The reinstallation costs should be capitalized if the remaining useful life of the machine is

Five Years Ten Years

a.

No No

b.

No Yes

c.

Yes Yes

d.

Yes No

ANS: C PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

23. An expenditure subsequent to acquisition of assembly-line manufacturing 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

ANS: A PTS: 1 DIF: Medium OBJ: LO 3

TOP: AICPA FN-Measurement MSC: AACSB Analytic

24. Which of the following concepts is often given as justification not to value noncurrent operating assets at their current values?

a.

The revenue principle

b.

Verifiability

c.

Relevance

d.

Predictive value

ANS: B PTS: 1 DIF: Easy OBJ: LO 5

TOP: AICPA FN-Measurement MSC: AACSB Analytic

25. On February 12, Oceans Company purchased a tract of land as a factory site for $190,000. An existing building on the property was razed and construction was begun on a new factory building in March of the same year. Additional data are available as follows:

Cost of razing 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

ANS: C PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

26. The Morris Corporation 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 assets appraised. The appraisal disclosed the following values:

Land …………………………………………..

$120,000

Buildings ………………………………………

80,000

Equipment ………………………………………

40,000

What cost 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

ANS: C PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

27. Osborne Company acquired 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 purchaser $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

ANS: D PTS: 1 DIF: Challenging OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

28. 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 percent. The purchase price of the machine is

a.

$1,389,190.

b.

$1,120,000.

c.

$868,900.

d.

$804,530.

ANS: D PTS: 1 DIF: Challenging OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

29. 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 razed. The land should be carried at

a.

$200,000.

b.

$236,000.

c.

$604,000.

d.

$640,000.

ANS: C PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

30. 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 percent 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 prior to regular operation ………….

550

If the invoice is paid within the discount period, Broham should record the acquisition cost of the machine at

a.

$41,650.

b.

$41,100.

c.

$40,400.

d.

$39,200.

ANS: A PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

31. The general ledger of the Flybird Corporation as of December 31 includes the following accounts:

Organization costs ……………………………..

$ 20,000

Deposits with advertising agency (will be used to

promote goodwill) …………………………….

32,000

Discount on bonds payable ……………………….

60,000

Excess of cost over book value of net assets of

acquired subsidiary …………………………..

280,000

Trademarks …………………………………….

48,000

In the preparation of Flybird’s balance sheet as of December 31, what should be reported as total intangible assets?

a.

$68,000

b.

$328,000

c.

$368,000

d.

$380,000

ANS: B PTS: 1 DIF: Challenging OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

32. On June 30, 2014, Diode Inc. purchased for cash at $50 per share all 150,000 shares of outstanding common stock of Moore Company. Moore’s balance sheet at June 30, 2014, showed net assets with a book value of $6,000,000. The fair value of Moore’s property, plant, and equipment on June 30, 2014, was $800,000 in excess of its book value. What amount, if any, will be recorded by Diode as goodwill on the date of purchase?

a.

$0

b.

$700,000

c.

$800,000

d.

$1,500,000

ANS: B PTS: 1 DIF: Medium OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

33. On July 31, 2014, Mason Company purchased for $4,000,000 cash all of the outstanding common stock of Turquoise Company when Turquoise’s balance sheet showed net assets of $3,200,000. Turquoise’s assets and liabilities had fair values different from the book values as follows:

Book Value

Fair Value

Property, plant, and equipment,

net ………………………

$5,000,000

$5,750,000

Other assets ………………..

500,000

0

Long-term debt ………………

3,000,000

2,800,000

As a result of the transaction, what amount will be shown as goodwill in the July 31, 2014, consolidated balance sheet of Mason Company and its wholly owned subsidiary, Turquoise Company?

a.

$350,000

b.

$250,000

c.

$750,000

d.

$800,000

ANS: A PTS: 1 DIF: Challenging OBJ: LO 1

TOP: AICPA FN-Measurement MSC: AACSB Analytic

34. Place Company started construction of a new office building on January 1, 2014, and moved into the finished building on July 1, 2015. Of the building’s $5,000,000 total cost, $4,000,000 was incurred in 2014 evenly throughout the year. Place’s incremental borrowing rate was 12 percent throughout 2014, and the total amount of interest incurred by Place during 2014 was $204,000. What amount should Place report as capitalized interest at December 31, 2014?

a.

$480,000

b.

$300,000

c.

$240,000

d.

$204,000

ANS: D PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic

35. Sonora Company borrowed $400,000 on a 10 percent note payable to finance a new warehouse Sonora is constructing for its own use. The only other debt on Sonora’s books is a $600,000, 12 percent mortgage payable on an office building. At the end of the current year, average accumulated expenditures on the new warehouse totaled $475,000. Sonora should capitalize interest for the current year in the amount of

a.

$40,000.

b.

$47,500.

c.

$49,000.

d.

$52,250.

ANS: C PTS: 1 DIF: Medium OBJ: LO 2

TOP: AICPA FN-Measurement MSC: AACSB Analytic