Ch.10

1. 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 andinfrequent in nature.

A sale prior to the completion of the estimated useful life of the asset

The sale of a fully depreciated asset

An abandonment of the asset

2. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

The total interest cost actually incurred.

A cost of capital charge for stockholders' equity

That portion of total interest cost which would not have been incurred if expendituresfor asset construction had not been made.

That portion of average accumulated expenditures on which no interest cost wasincurred.

3. 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

The nominal cost of taking title to it.

Its market value.

One dollar (since the site cost nothing but should be included in the balance sheet).

The value assigned to it by the company's directors

4. The cost of land does not include

Costs of grading, filling, draining, and clearing

Costs of removing old buildings.

Costs of improvements with limited lives

Special assessments

5. Which of these is not a major characteristic of a plant asset?

Possesses physical substance

Acquired for use in operations

Yields services over a number of years

All of these are major characteristics of a plant asset

6. Fences and parking lots are reported on the balance sheet as

Current assets

Land improvements

Land

Property and equipment

7. Which of the following costs are capitalized for self-constructed assets?

Materials and labor only

Labor and overhead only

Materials and overhead only

Materials, labor, and overhead

8. 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

The fair value of the asset given up, and a gain but not a loss may be recognized.

The fair value of the asset received if it is equally reliable as the fair value of the assetgiven up.

9. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is

8/8

8/12

9/12

11/12

10. Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except

At the date of acquisition, cost reflects fair market value

Property, plant, and equipment items are always acquired at their original historicalcost

Historical cost involves actual transactions and, as such, is the most reliable basis

Gains and losses should not be anticipated but should be recognized when the assetis sold.

11. Which of the following is not a major characteristic of a plant asset?

Possesses physical substance

Acquired for resale

Acquired for use

Yields services over a number of years

12. Which of the following is a capital expenditure?

Payment of an account payable

Retirement of bonds payable

Payment of Federal income taxes

None of these

13. 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.

Charge construction with all costs of funds employed, whether identifiable or not

Capitalize no interest during construction

Capitalize interest costs equal to the prime interest rate times the estimated cost of theasset being constructed

14. In order for a cost to be capitalized (capital expenditure), the following must be present:

The useful life of an asset must be increased

The quantity of assets must be increased

The quality of assets must be increased

Any one of these.

15. Plant assets may properly include

Deposits on machinery not yet received

Idle equipment awaiting sale

Land held for possible use as a future plant site

None of these.

16. For a nonmonetary exchange of plant assets, accounting recognition should not be given to

A loss when the exchange has no commercial substance.

A gain when the exchange has commercial substance.

17. 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.

No commercial substance and additional cash is received

Commercial substance and additional cash is paid

Commercial substance and additional cash is received

18. Which of the following nonmonetary exchange transactions represents a culmination of the earning process?

Exchange of assets with no difference in future cash flows.

Exchange of products by companies in the same line of business with no difference infuture cash flows

Exchange of assets with a difference in future cash flows.

19. Which of the following is not a capital expenditure?

Repairs that maintain an asset in operating condition

An addition

A betterment

A replacement

20. The cost of land typically includes the purchase price and all of the following costs except

Grading, filling, draining, and clearing costs.

Street lights, sewers, and drainage systems cost

Private driveways and parking lots.

Assumption of any liens or mortgages on the property

21. Plant assets purchased on long-term credit contracts should be accounted for at

The total value of the future payments

The future amount of the future payments

The present value of the future payments

None of these

22. When boot is involved in an exchange having commercial substance

Gains or losses are recognized in their entirely.

Only gains should be recognized

Only losses should be recognized

23. 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

Depreciated over the period from acquisition to the date the hotel is scheduled to betorn down

Written off as an extraordinary loss in the year the hotel is torn down.

Capitalized as part of the cost of the land

Capitalized as part of the cost of the new hotel

24. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the

Par value of the stock

Stated value of the stock

Book value of the stock

Market value of the stock

25. 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

Be reported in the Other Revenues and Gains section of the income statement.

Effectively reduce the amount to be recorded as the cost of the new asset

Effectively increase the amount to be recorded as the cost of the new asset.

Be credited directly to the owner's capital account

26. Assets that qualify for interest cost capitalization include

Assets under construction for a company's own use

Assets that are ready for their intended use in the earnings of the company

Assets that are not currently being used because of excess capacity.

All of these assets qualify for interest cost capitalization

27. When a closely held corporation issues preferred stock for land, the land should be recorded at the

Total par value of the stock issued.

Total book value of the stock issued

Total liquidating value of the stock issued.

Fair market value of the land

28. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

Interest cost is being incurred.

Expenditures for the assets have been made

The interest rate is equal to or greater than the company's cost of capital.

Activities that are necessary to get the asset ready for its intended use are in progress

29. Interest cost that is capitalized should

Be written off over the remaining term of the debt

Be accumulated in a separate deferred charge account and written off equally over a40-year period

Not be written off until the related asset is fully depreciated or disposed of.

None of these.

30. The period of time during which interest must be capitalized ends when

The asset is substantially complete and ready for its intended use.

No further interest cost is being incurred

The asset is abandoned, sold, or fully depreciated

The activities that are necessary to get the asset ready for its intended use have begun

31. 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 significance of the cost allocated to the building in relation to the combined cost ofthe lot and building

The length of time for which the building was held prior to its demolition

The contemplated future use of the parking lot.

The intention of management for the property when the building was acquired

32. The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to

The machinery account

A separate deferred charge account

Miscellaneous tax expense (which includes all taxes other than those on income

Accumulated depreciation--machinery

33. 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

Offset against interest cost incurred during construction

Used to reduce the cost of assets being constructed

Multiplied by an appropriate interest rate to determine the amount of interest to becapitalized

Recognized as revenue of the period

34. 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 increase the efficiency or effectiveness of an existing asset

Expenditure made to extend the useful life of an existing asset beyond the time frameoriginally anticipated

Expenditure made to maintain an existing asset so that it can function in the mannerintended

Expenditure made to add new asset services

35. Which of the following statements is true regarding capitalization of interest?

The amount of interest cost capitalized during the period should not exceed the actualinterest cost incurred.

36. Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?

Assets under construction for an enterprise's own use

Assets intended for sale or lease that are produced as discrete projects

Assets financed through the issuance of long-term debt

Assets not currently undergoing the activities necessary to prepare them for theirintended use

37. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were

Less than current market value

Greater than cost.

Greater than book value

Less than book value

38. When an enterprise is the recipient of a donated asset, the account credited may be a

Paid-in capital account

Revenue account

Deferred revenue account

All of these.

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

Offset against interest cost incurred during construction

Used to reduce the cost of assets being constructed

Multiplied by an appropriate interest rate to determine the amount of interest to becapitalized

Recognized as revenue of the period

40. To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be

Allocated on the basis of lost production.

Eliminated completely from the cost of the asset

Allocated on an opportunity cost basis

Allocated on a pro rata basis between the asset and normal operations.

41. 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

Expensed.

Debited to accumulated depreciation

Capitalized in the machine account

Allocated between accumulated depreciation and the machine account.

42. An expenditure made in connection with a machine being used by an enterprise should be

Expensed immediately if it merely extends the useful life but does not improve thequality.

Expensed immediately if it merely improves the quality but does not extend the usefullife.

Capitalized if it maintains the machine in normal operating condition

Capitalized if it increases the quantity of units produced by the machine.

43. Which of the following statements about involuntary conversions is false?

An involuntary conversion may result from condemnation or fire

The gain or loss from an involuntary conversion may be reported as an extraordinaryitem.

The gain or loss from an involuntary conversion should not be recognized when theenterprise reinvests in replacement assets.

All of these

44. Assets that qualify for interest cost capitalization include

Assets under construction for a company's own use.