Create an account
major characteristic of a plant asset?
1. Possesses physical substance
2. Acquired for use
2. Yields services over a number of years
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
capitalized as part of the cost of the land.
The cost of land typically includes the purchase price and all of the following costs except
private driveways and parking lots.
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
the intention of management for the property when the building was acquired
The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
the machinery account.
Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons EXCEPT
property, plant, and equipment items are always acquired at their original historical cost.
To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
allocated on a pro rata basis between the asset and normal operations
Which of the following costs are capitalized for self-constructed assets?
Materials, labor, and overhead
Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets?
Assets not currently undergoing the activities necessary to prepare them for their intended use.
Assets that qualify for interest cost capitalization include
assets under construction for a company's own use
When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to
that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.
The period of time during which interest must be capitalized ends when
the asset is substantially complete and ready for its intended use.
Which of the following statements is true regarding capitalization of interest?
The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
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
recognized as revenue of the period
Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?
The interest rate is equal to or greater than the company's cost of capital.
Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment?
Capitalize only the actual interest costs incurred during construction.
Which of the following nonmonetary exchange transactions represents a culmination of the earning process?
Exchange of assets with a difference in future cash flows.
When boot is involved in an exchange having commercial substance.
gains or losses are recognized in their entirely.
The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
the fair value of the asset given up, and a gain or loss is recognized
Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will
effectively reduce the amount to be recorded as the cost of the new asset.
Plant assets purchased on long-term credit contracts should be accounted for at
the present value of the future payments.
When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
fair value of the stock.
When a closely held corporation issues preferred stock for land, the land should be recorded at the
fair value of the land.
Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has
no commercial substance and additional cash is paid
For a nonmonetary exchange of plant assets, accounting recognition should NOT be given to
part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).
When an enterprise is the recipient of a donated asset, the account credited may be a
A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at
its fair value
In order for a cost to be capitalized (capital expenditure), the following must be present
1. The useful life of an asset must be increased.
2. The quantity of assets must be increased.
3. The quality of assets must be increased
An improvement made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be
capitalized in the machine account.
Which of the following is NOT a capital expenditure?
Repairs that maintain an asset in operating condition
In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?
Expenditure made to maintain an existing asset so that it can function in the manner intended
An expenditure made in connection with a machine being used by an enterprise should be
capitalized if it increases the quantity of units produced by the machine.
When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from
an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
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