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

36. Bluesy Company acquired land and paid for it in full by issuing $700,000 of its 10 percent bonds
payable and 40,000 shares of its common stock, par $10. The stock was selling at $21 per share and
the bonds were trading at 102. What amount should Bluesy record as the cost of the land?
a. $1,100,000
b. $1,540,000
c. $1,554,000
d. $1,604,000
ANS: C PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

37. Bluesy Company purchased land with a current market value of $240,000. Its book value in the
accounts of the seller was $130,500. In exchange for the land, Bluesy issued 20,000 shares of its
common stock, par $10, with an estimated market value of $14 per share. Bluesy stock is not traded on
an established stock exchange. What amount should Bluesy record as the cost of the land?
a. $130,500
b. $200,000
c. $240,000
d. $280,000
ANS: C PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

38. The third year of a construction project began with a $30,000 balance in Construction in Progress.
Included in that figure is $6,000 of interest capitalized in the first two years. Construction expenditures
during the third year were $80,000 which were incurred evenly throughout the entire year. The
company has had over $300,000 in interest-bearing debt outstanding the third year, at a weighted
average rate of 9 percent. How much interest for the third year is capitalized?
a. $3,600
b. $6,300
c. $9,360
d. $9,900
ANS: D PTS: 1 DIF: Challenging OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

39. Song Company started construction on a building on January 1 of this year and completed construction
on December 31 of the same year. Song had only two interest notes outstanding during the year, and
both of these notes were outstanding for all 12 months of the year. The following information is
available:

Average accumulated expenditures ..................... $250,000

 Ending balance in construction in progress
before capitalization of interest .................. 360,000
6 percent note incurred specifically for the project . 150,000
9 percent long-term note ............................. 500,000

What amount of interest should Song capitalize for the current year?
a. $15,000
b. $18,000
c. $22,500
d. $27,900
ANS: B PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

40. A company made the following cash expenditures on a self-constructed building begun January 1 of
the current year:

January 1 ............................................ $50,000

June 1 ............................................... 60,000
December 1 ........................................... 90,000

The building is still under construction at year-end. What is the amount of the average accumulated
expenditures for the purpose of capitalizing interest?
a. $87,500
b. $92,500
c. $100,000
d. $200,000
ANS: B PTS: 1 DIF: Challenging OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

41. During 2014, Robby, Inc. incurred the following costs:

Research and development services performed by Tronic

Company for Robby ................................ $125,000
Testing for evaluation of new products ............... 150,000
Laboratory research aimed at discovery of new knowledge 187,500

In its income statement for the year ended December 31, 2014, Robby should report research and
development expense of
a. $462,500.
b. $312,500.
c. $150,000.
d. $125,000.
ANS: A PTS: 1 DIF: Easy OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

42. Tundra Co. incurred research and development costs in 2014 as follows:

Equipment acquired for use in various research and

development projects ............................... $500,000
Depreciation on the above equipment .................. 67,500
Materials used ....................................... 100,000
Compensation costs of personnel ...................... 250,000
Outside consulting fees .............................. 75,000
 Indirect costs appropriately allocated ............... 125,000

The total research and development costs charged in Tundra's 2014 income statement should be
a. $425,000.
b. $542,500.
c. $617,500.
d. $925,000.
ANS: C PTS: 1 DIF: Medium OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

43. During the year just ended, Salt Company made the following expenditures relating to its plant
building:

Continuing and frequent repairs ..................... $160,000

Repainted the plant building ........................ 40,000
Major improvements to the electrical wiring system .. 128,000
Partial replacement of roof tiles ................... 56,000

How much should be charged to repair and maintenance expense during the year just ended?
a. $160,000
b. $216,000
c. $256,000
d. $328,000
ANS: C PTS: 1 DIF: Easy OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

44. On September 10, Gravelly Company incurred the following costs for one of its printing presses:

Purchase of stapling attachment ..................... $90,000

Installation of attachment .......................... 20,000
Replacement parts for renovation of press ........... 60,000
Labor and overhead in connection with renovation
of press .......................................... 28,000

Neither the attachment nor the renovation increased the estimated useful life of the press. However, the
renovation resulted in significantly increased productivity. What amount of the costs should be
capitalized?
a. $198,000
b. $110,000
c. $90,000
d. $88,000
ANS: A PTS: 1 DIF: Medium OBJ: LO 3
TOP: AICPA FN-Reporting MSC: AACSB Analytic

45. On April 30, 2014, Brother, Inc. purchased for $30 per share all 200,000 of Cousin Corp.'s outstanding
common stock. On this date Cousin's balance sheet showed net assets of $5,000,000. Additionally, the
fair value of Cousin's identifiable assets on this date was $400,000 in excess of their carrying amount.
On Brother's April 30, 2014, consolidated balance sheet, what amount should be reported as goodwill?
a. $350,000
b. $400,000
c. $600,000
d. $1,000,000
 ANS: C PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

46. Selected information from the 2014 and 2013 financial statements of Pitney Corporation is presented
below.
(in thousands)
As of Dec.31
2014 2013
Cash ...................................... $ 21 $ 35
Marketable Securities ..................... 27 22
Accounts Receivable (net) ................. 60 98
Inventory ................................. 105 142
Prepaid Expenses .......................... 5 3
Land and Building (net) ................... 247 315
Accounts Payable .......................... 57 75
Accrued Expenses .......................... 10 14
Notes Payable (short-term) ................ 8 4
Bond Payable .............................. 52 66

Pitney had cash sales of $750 and credit sales of $615 during 2014. Cost of goods sold for 2014 was
$819. Pitney's fixed asset turnover for 2014 is
a. 2.97.
b. 4.86.
c. 2.53.
d. 5.53.
ANS: B PTS: 1 DIF: Challenging OBJ: LO 6
TOP: AICPA FN-Measurement MSC: AACSB Analytic

47. According to the most current FASB standards, intangible assets acquired in a basket purchase that
does not represent the acquisition of an entire business should be
a. valued by allocating the total purchase price according to the relative fair values of all
assets acquired, regardless of whether the assets are separately tradable or contract based.
b. valued by allocating the total purchase price according to the relative fair values only of
intangible assets that are separately tradable or contract based.
c. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being recognized as goodwill.
d. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being expensed in the year of
acquisition.
ANS: A PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic

48. According to the most current FASB standards, intangible assets acquired in a basket purchase which
represents the acquisition of an entire business should be
a. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being recognized as goodwill.
b. valued by allocating the total purchase price according to the relative fair values only of
intangible assets that are separately tradable or contract based.
c. valued by allocating the total purchase price according to the relative fair values of all
assets acquired, regardless of whether the assets are separately tradable or contract based.
d. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being expensed in the year of
acquisition.
 ANS: A PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic

49. Which of the following is correct?

a. The fair value of internally generated intangible assets should be estimated and recorded
on the books of the entity that developed the assets even in the absence of a business
acquisition.
b. The fair value of internally generated intangible assets may be estimated but should not be
recorded on the books or displayed on the financial statements of the entity.
c. Managers may value their own companies and recognize goodwill in the company
accounts even though an entity has not been acquired in a business acquisition.
d. Goodwill should be recognized in the accounts whenever the value of the firm increases
based on current market prices of the firm's common stock.
ANS: B PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

50. Which of the following is true regarding the traditional approach to estimating the fair value of an
intangible asset?
a. The traditional approach requires the use of the risk-free rate of interest.
b. The traditional approach requires the use of various possible outcomes and their
probability of occurrence.
c. The traditional approach requires the use of judgment in determining a risk-adjusted rate
of interest.
d. The traditional approach requires the assumption that cash flows occur at the beginning of
each period (an annuity due).
ANS: C PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic

51. Acquired in-process research and development should be

a. capitalized when acquired but not amortized.
b. capitalized when acquired and amortized over a period not to exceed 40 years.
c. capitalized when acquired and amortized based on the number of units of product or
services sold each period.
d. expensed when acquired.
ANS: D PTS: 1 DIF: Easy OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

52. Which of the following most accurately describes the position taken by current generally accepted
accounting principles?
a. Both pooling of interests and the purchase method are still permitted under certain
circumstances.
b. The valuation basis to be applied is the acquisition method under which the fair value of
consideration transferred includes any contingent consideration, but excludes direct
combination costs..
c. The valuation basis to be applied is the cost method under which the valuation basis is the
fair value of the assets and liabilities acquired including direct combination costs, but
excluding contingent consideration.
d. The purchase method requires a business acquisition transaction to be structured to meet
twelve very specific criteria required by generally accepted accounting principles.
ANS: B PTS: 1 DIF: Challenging OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic
53. Which of the following most accurately describes the position taken by generally accepted accounting
principles regarding the accounting for the costs of drilling dry wells in the oil and gas industry?
a. Only the successful efforts method may be used.
b. Only the full cost method may be used.
c. Both the successful efforts and full-cost methods may be used.
d. Neither the successful efforts method nor the full cost method may be used pending the
development by the Securities and Exchange Commission of its own approach to
accounting for the costs of drilling dry wells.
ANS: C PTS: 1 DIF: Easy OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

54. A trademark is an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
a. Marketing-related
b. Customer-related
c. Artistic-related
d. Contract-based
ANS: A PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

55. A copyright is an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
a. Marketing-related
b. Customer-related
c. Artistic-related
d. Contract-based
ANS: C PTS: 1 DIF: Easy OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

56. Broadcast rights are an example of which general category of intangible asset that should be
recognized separately according to current generally accepted accounting principles?
a. Contract-based
b. Customer-related
c. Artistic-related
d. Marketing-related
ANS: A PTS: 1 DIF: Easy OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

57. Order backlogs are an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
a. Marketing-related
b. Customer-related
c. Artistic-related
d. Contract-based
ANS: B PTS: 1 DIF: Easy OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

58. Trade secrets are an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
 a. Marketing-related
b. Customer-related
c. Artistic-related
d. Technology-based
ANS: D PTS: 1 DIF: Easy OBJ: LO 4
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking

59. In a “basket” or “lump-sum” purchase of assets, which of the following best describes the process by
which the historical cost of the various assets acquired should be determined?
a. Allocation of the total cost to the individual assets on the basis of the historical cost of the
individual assets to their original owner.
b. Allocation of the total cost to the individual assets on the basis of the fair market value of
the individual assets at the time of the “basket” purchase.
c. Recording of the individual assets at their current value with recognition of a gain or loss
for the difference between the price paid for the assets and the current value of the
individual assets.
d. Recording of the individual assets at their original historical cost to the seller with a gain
or loss recognized as the difference between the total of the original historical cost figures
and the price paid in the basket purchase.
ANS: B PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

60. Which of the following ordinarily would be treated as a revenue expenditure rather than a capital
expenditure?
a. Repair and maintenance on buildings
b. The replacement of a major component of a building
c. An addition to an existing building
d. Rearrangement costs that are identifiable, material, and are expected to provide
discernable future benefits
ANS: A PTS: 1 DIF: Easy OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Analytic

61. Solara Company entered into a contract with Hammer Construction Company to construct a building.
Construction began in 2014 and was completed in 2015. As of January 1, 2015, Solara had made total
progress payments to Hammer of $50,000. In addition, interest capitalized on the building during 2014
was $2,500. Solara made additional payments on June 30, 2015, and December 31, 2015. Solara had
issued $80,000 of 9% bonds to finance part of the construction. The average interest on Solara’s
additional debt was 11% for 2015.

How much interest should be capitalized by Solara for 2015?

a. $6,750
b. $6,975
c. $13,500
d. $13,725
ANS: B PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Analytic

62. Dan Company recently acquired two items of equipment. The transactions are described below:

June 10:
 Acquired a press at an invoice price of $6,500, subject to a 2% cash discount which was taken. Costs
of freight and insurance during shipment were $205. Installation costs were $350.

November 12:
Acquired a welding machine at an invoice price of $4,000, subject to a 4% cash discount which was
NOT taken. Additional welding supplies were acquired at a total cost of $300.

The increase in the equipment account as a result of the above transactions would be
a. $10,525
b. $10,720
c. $10,925
d. $11,225
ANS: B PTS: 1 DIF: Medium OBJ: LO 1
TOP: AICPA FN-Measurement MSC: AACSB Analytic

63. Which of the following best describes the proper treatment of cash discounts on acquired machinery?
a. The historical cost of the machinery should be the invoice price; the discount should be
ignored.
b. The historical cost of the machinery should be the net-of-discount amount, regardless of
whether the discount is actually taken.
c. The historical cost of the machinery should be the net-of-discount amount only if the
discount is actually taken.
d. The historical cost of the machinery should be the invoice price plus the amount of the
discount which is treated a interest capitalized on the purchase.
ANS: B PTS: 1 DIF: Medium OBJ: LO 1
TOP: AICPA FN-Measurement MSC: AACSB Analytic

64. Which of the following is true regarding International Accounting Standard No. 23 (IAS 23),
“Borrowing Costs,” and FASB Statement of Financial Accounting Standards No. 34 (SFAS No. 34),
”Capitalization of Interest Cost”?
a. IAS 23 requires the capitalization of borrowing costs less the amount of investment income
generated by borrowed construction funds temporarily invested.
b. SFAS No.34 requires the capitalization of borrowing costs less the amount of investment
income generated by borrowed construction funds temporarily invested.
c. IAS 23 requires that all interest should be expensed.
d. Both IAS 23 and SFAS No. 34 require the capitalization of borrowing costs with no
adjustment for the amount of investment income generated by borrowed
ANS: A PTS: 1 DIF: Medium OBJ: LO 2
TOP: AICPA FN-Measurement MSC: AACSB Reflective Thinking

65. The cost of land to be used in the operations of a business should include all of the following except
a. commissions related to the acquisition of the land.
b. excavation in preparation for the construction of a new building on the land.
c. property taxes to the date of acquisition assumed by the purchaser.
d. the cost of surveys of the land.
ANS: B PTS: 1 DIF: Medium OBJ: LO 1
TOP: AICPA FN-Measurement MSC: AACSB Analytic

66. The cost of a building to be used in the operations of a business should usually include all of the
following except
a. cost of renovation to prepare the building for its intended use.
 b. costs of building permits related to expansion of the building begun after acquisition.
c. property taxes related to periods prior to acquisition that are assumed by the buyer.
d. costs incurred to have existing buildings removed to make room for the construction of
new buildings.
ANS: D PTS: 1 DIF: Medium OBJ: LO 1
TOP: AICPA FN-Measurement MSC: AACSB Analytic

67. Which of the following best describes the approach prescribed in IAS 38, “Intangible Assets”?

a. Expense all research and development costs.

b. Capitalize all research and development costs.
c. Expense all research costs and capitalize all development costs.
d. Capitalize all research costs and expense all development costs.
ANS: C PTS: 1 DIF: Medium OBJ: LO 3
TOP: AICPA FN-Measurement MSC: AACSB Reflective Thinking

PROBLEM

1. On February 1, 2013, Forwards Corporation purchased a parcel of land as a factory site for $455,000.
An old building on the property was demolished and construction begun on a new warehouse that was
completed April 15, 2014. Costs incurred on the construction project are listed below.

Demolition of old building ........................... $ 21,000

Architect's fees ..................................... 31,700
Legal fees--title investigation ...................... 4,100
Construction costs ................................... 950,000
Imputed interest based on stock financing ............ 14,000
Landfill for building site ........................... 19,300
Clearing of trees from building site ................. 9,600
Temporary buildings used for construction activities . 29,000
Land survey .......................................... 4,000
Excavation for basement .............................. 13,200
(Salvage materials from demolition sold for $1,800)
(Timber sold for $3,300)

Determine the cost of the land and new building.

ANS:
Land
Cost ................................................. $ 455,000
Demolition ........................................... 21,000
Legal fees--title investigation ...................... 4,100
Landfill ............................................. 19,300
Clearing of trees .................................... 9,600
Land survey .......................................... 4,000
Salvage .............................................. (1,800)
Sale of timber ....................................... (3,300)
Total ............................................. $ 507,900

Building
Construction costs ................................... $ 950,000
Architect's fees ..................................... 31,700
Temporary buildings .................................. 29,000
Excavation ........................................... 13,200
 Total.............................................. $1,023,900

Note: Interest charges would not be recorded. Under FASB Statement No. 34, only interest
charges incurred may be recognized.

PTS: 1 DIF: Medium OBJ: LO 1 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

2. On May 1, 2014, Abiuso Corporation purchased for $790,000 a tract of land on which a warehouse
and office building were located. The following data were collected concerning the property:

Current Assessed Vendor's

Valuation Original Cost
Land ............................. $225,000 $190,000
Warehouse ........................ 315,000 350,000
Office Building .................. 360,000 145,000
$900,000 $685,000

Determine the appropriate amounts that Abiuso should record for the land, warehouse, and office
building.

ANS:
Land .................... $225,000/$900,000 = 25%
Warehouse ............... $315,000/$900,000 = 35%
Office Building ......... $360,000/$900,000 = 40%
$900,000 100%
Allocation:
.25  $790,000 = $197,500 Land
.35  $790,000 = 276,500 Warehouse
.40  $790,000 = 316,500 Office Building
$790,000

PTS: 1 DIF: Easy OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

3. The Maker Company exchanged 25,000 shares of its own $50 par value common stock for a turret
lathe from Turner Company. The market value of the Maker Company stock was $68 per share at the
date of exchange. The equipment had a carrying value of $1,625,000.

Record the exchange on the books of Maker Company in general journal form.

ANS:
Machinery..................................... 1,700,000
Common Stock (25,000  $50)................. 1,250,000
Paid-In Capital in Excess of Par ........... 450,000

PTS: 1 DIF: Easy OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

4. One of the most critical steps in recording the acquisition of assets is the determination of the cost
assigned to the asset. Data related to assets acquired by Mindset Manufacturing Company are as
follows:

(1) Machine A was purchased at a list price of $102,000; terms 2/10, net 30. The
 machine invoice was paid after the discount period. Transportation charges were
$1,270; installation costs were $920; and the cost of a trial run was $960. Normal
repairs and maintenance for the first year were $410.

(2) Machine B could be purchased for five annual payments of $6,332 or $29,400 in
cash. Mindset elected to purchase Machine B under the installment plan. Other
related acquisition costs totaled $175.

(3) On May 12, 2014, Alberta Company offered to sell land to Mindset for $62,000;
the offer was rejected. On June 29, 2,125 shares of Mindset common stock were
issued in exchange for the land. The par value of the stock was $20 per share; the
market value of the stock was $32 per share at the time of purchase. Mindset's
management was confident the land would be worth at least $64,000 to the
company.

(4) The company purchased equipment under a deferred payment contract-- $40,000
down payment and 30 semiannual payments of $5,000. (Assume a 12 percent
interest rate.)

Determine the acquisition cost for each of the assets.

ANS:
(1)
Cost of machine ($102,000  .98) ....................... $99,960
Transportation costs .................................. 1,270
Installation costs .................................... 920
Trial run ............................................. 960
Cost basis for Machine A .............................. $103,110

The $410 for normal repairs and maintenance is a period cost; the $2,040 ($102,000 - $99,960) is
recorded as Discounts Lost or Interest Expense.

(2)
Cash price of machine ................................. $29,400
Other acquisition costs ............................... 175
Cost basis for Machine B .............................. $29,575

The interest of ($31,660 - $29,400) = $2,260 is not included in the asset

cost.

(3)
Cost basis for land:
2,125 shares @ $32 (market) = $68,000

(4)
Down payment .......................................... $ 40,000
Semiannual payments ($5,000  13.7648)* ............... 68,824
$108,824
* n = 30 i = 6% (Table 4--Present value of an ordinary annuity)

PTS: 1 DIF: Challenging OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
5. During 2014, Brent Industries, Inc. constructed a new manufacturing facility at a cost of $12,000,000.
The weighted average accumulated expenditures for 2014 were calculated to be $5,400,000. The
company had the following debt outstanding at December 31, 2014:

(a) 10 percent, five-year note to finance construction of the manufacturing facility,

dated January 1, 2014, $3,600,000.
(b) 12 percent, 20-year bonds issued at par on April 30, 2013, $8,400,000.
(c) 8 percent, six-year note payable, dated March 1, 2013, $1,800,000.

Determine the amount of interest to be capitalized by Brent Industries for 2014.

ANS:

Average Applicable
Accumulated Interest Avoidable
Expenditures Rate Interest
$3,600,000 10% $360,000
1,800,000 11.29% * 203,220
$5,400,000 $563,220

* Calculation of weighted average interest rate:

Principal Interest
12% bonds $ 8,400,000 $1,008,000
8% note payable 1,800,000 144,000
$10,200,000 $1,152,000

$1,152,000/$10,200,000 = 11.29% (rounded)

Actual interest cost incurred during 2014:

Construction loan ($3,600,000  10%)..... $ 360,000
12% bonds ($8,400,000  12%)............. 1,008,000
8% notes ($1,800,000  8%)............... 144,000
$1,512,000

The interest that should be capitalized for 2014 by Brent Industries, Inc. is $563,220 (the lesser of the
avoidable interest of $563,220 and the actual interest cost incurred of $1,512,000).

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

6. Ericton Enterprises Inc. developed a new machine for manufacturing baseballs. Because the machine
is considered very valuable, the company had it patented. The following expenditures were incurred in
developing and patenting the machine.

(a) Purchases of special equipment to be used solely for

development of the new machine ...................... $182,000
(b) Research salaries and fringe benefits for engineers and
scientists ...................................... 17,100
(c) Cost of testing prototype ........................... 23,600
(d) Legal costs for filing for patent ................... 12,700
(e) Fees paid to government patent office ............... 2,500
(f) Drawings required by patent office to be filed with
patent application .................................. 4,700
 Ericton elected to amortize the patent over its legal life. At the beginning of the second year, Ericton
Enterprises paid $24,000 to successfully defend the patent in an infringement suit. At the beginning of
the fourth year Ericton determined that the remaining estimated useful life of the patent was five years.

Record the above transactions in general journal form for Ericton Enterprises Inc. for the first five
years of the life of the patent. Include any amortization or depreciation for each period.

ANS:
Year 1 Research and Development Expense
[$182,000 + $17,100 + $23,600 =
$222,700] ........................... 222,700
Patents
[$12,700 + $2,500 + $4,700 = $19,900] 19,900
Cash ................................ 242,600

Year 1 Amortization of Patents

[$19,900/20 = $995] ............... 995
Patents ............................. 995

Year 2 Patents ............................... 24,000

Cash ................................ 24,000

Year 2 Amortization of Patents

[($19,900 + $24,000 - $995)/19] .... 2,258
Patents ............................. 2,258

Year 3 Amortization of Patents ............... 2,258

Patents ............................. 2,258

Year 4 Amortization of Patents [($19,900 + 7,678

$24,000 - $995 - $2,258 - $2,258)/5]
Patents ............................. 7,678

Year 5 Amortization of Patents ............... 7,678

Patents ............................. 7,678

PTS: 1 DIF: Medium OBJ: LO 3 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

7. On March 1, 2014, the Hauk Company paid $400,000 for all the issued and outstanding stock of Bodo
Corporation in a transaction properly accounted for as a purchase. The market values of the assets and
liabilities of Bodo Corporation on March 1, 2014, are as follows:

Accounts receivable ................................... 120,000

Inventory ............................................. 330,000
Property and equipment ................................ 80,000
Liabilities ........................................... (20,000)

Make the journal entry necessary for Hauk to record the purchase.

ANS:
Accounts Receivable ....................... 120,000
Inventory ................................. 330,000
Liabilities ............................. 20,000
Gain..................................... 30,000
Cash .................................... 400,000
 Cash purchase price ....................... $400,000
Market value of net assets ................ 510,000
Excess of market value over purchase price $110,000
Reduction of property and equipment 80,000
(noncurrent assets) .....................
Gain...................................... $ 30,000

PTS: 1 DIF: Easy OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

8. Allure Company made the following cash expenditures during the year:

(a) Paid $100,000 for interest capitalized as part of a self-construction project.

(b) Paid $225,000 for interest that was expensed during the year.

(c) Paid $300,000 for R&D expenditures that were immediately expensed.

(d) Paid $400,000 to acquire new machinery.

Indicate where in the statement of cash flows each of the preceding items would be reflected. Allure
uses the indirect method of reporting cash flow from operations.

ANS:
(a) $100,000 cash outflow in the investing activities section.

(b) Nowhere. Interest expense would be included in the computation of net income and
would not be shown separately in the operating activities section of the statement of
cash flows. However, the amount of cash paid for interest must be disclosed
separately, as a supplemental part of the statement of cash flows or in the notes.

(c) Nowhere. Again, research and development expense would be included in the
computation of net income. Net income is the basis for computing cash from
operations when the indirect method is used.

(d) $400,000 cash outflow in the investing activities section.

PTS: 1 DIF: Medium OBJ: LO 2 | LO 3 TOP: AICPA FN-Reporting

MSC: AACSB Reflective Thinking

9. Everheat Company is an oil and gas exploration firm. During 2014, Everheat engaged in five different
exploration projects. The costs associated with these projects are as follows:

Project 1 ............................................ $ 425,000

Project 2 ............................................ 178,000
Project 3 ............................................ 423,000
Project 4 ............................................ 240,000
Project 5 ............................................ 96,000
Total .............................................. $1,362,000

Only Projects 2 and 5 were successful. As of the end of the year, production had not yet started at
either of these two sites.

Assuming that all exploration costs were paid for in cash, make the journal entry to record the
expenditures for the year using
 (1) the successful efforts method.
(2) the full cost method.

ANS:
(1)

Exploration Expense .......................... 1,088,000

Capitalized Exploration Cost ................. 274,000
Cash ....................................... 1,362,000

(2)

Capitalized Exploration Cost .............. 1,362,000

Cash .................................... 1,362,000

PTS: 1 DIF: Easy OBJ: LO 3 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

10. Assets constructed for a firm's own use present the problem of whether to capitalize interest on the
funds invested during the time required to prepare the assets for their intended use. Current generally
accepted accounting principles as specified by the FASB in Statement No. 34 require the capitalization
of interest on borrowed capital, but not to exceed the total interest paid by the firm.

Evaluate the appropriateness of the approach currently required in the professional pronouncements
now in effect.

ANS:
Capitalization of interest on borrowed capital (but not in excess of total interest paid by the enterprise)
avoids the difficulty of determining how much of an investment is financed by debt and how much by
equity. The entire investment is assumed to be financed by debt. Interest capitalized, however, is
limited to the total interest incurred by the enterprise during the period. Interest thus represents an
opportunity cost in the amount that could have been avoided by not borrowing or by using the funds to
reduce outstanding debt. Limiting the amount capitalized to the total interest cost incurred during the
period is consistent with the historical cost principle since only the actual interest expense incurred is
capitalized.

The current approach is deficient because it fails to recognize the portion of the investment financed by
equity sources. An opportunity cost exists for using funds obtained from equity sources just as surely
as for using funds obtained from debt sources. Ignoring the opportunity cost associated with equity
sources results in inconsistent and incomparable valuations. The approach does not lead to comparable
results for different firms producing similar assets but with different capital structures. Additionally,
the limitation on the capitalization of interest associated with debt to the amount of interest actually
incurred by an enterprise fails to recognize the total cost of using money associated with an
investment.

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

11. You are the auditor of Donaldson Corporation, a newly organized company that manufactures plastic
cups using an extrusion process. One of the promoters of the company was formerly involved in an
enterprise that used the extrusion process and has agreed to contribute an extrusion machine to the new
company in return for shares of stock of Donaldson Corporation. What concerns would you have as
the auditor of Donaldson Corporation regarding this transaction?
 ANS:
This transaction represents a related party transaction. Accordingly, you should be concerned about the
amount recorded on the records of the company. You should determine what methods were used to
establish the value on the books of the company of the asset contributed as well as the cost of the
machine to the promoter and the length of ownership by the promoter. You should be concerned not
only about the value of the asset for purposes of recording the asset in the property accounts, but also
about attempts by the promoter and management to defraud investors in the company through attempts
to inflate the value of the shares of stock by overvaluing the asset.

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Reporting

MSC: AACSB Reflective Thinking

12. You have just been promoted to the position of senior accountant with the public accounting firm of
Ohm and Dylan. Your first audit client as senior accountant is to be the United Manufacturing
Company. You have had a considerable amount of experience both in planning and conducting the
audit procedures for current asset accounts such as cash, receivables, and inventory. This is your first
experience, however, in planning the audit of the property, plant, and equipment accounts. Compare
the nature of current assets with property, plant, and equipment, and describe how any differences
might affect your audit generally.

ANS:
The audit work required to verify the property, plant, and equipment accounts generally is
substantially less than that required for current assets. This is due to the nature of the assets included in
the property accounts.

A typical unit of property or equipment usually has a high dollar value, and relatively few transactions
may support one large amount on the balance sheet. Current asset accounts such as cash, receivables,
and inventory, on the other hand, generally have a large volume of transactions, many of which may
be of lower dollar values.

The property accounts typically do not show large changes in the balances of these accounts from year
to year. Current asset accounts often change dramatically from year to year, again as a result of a large
volume of transactions.

The cash, receivables, and inventory accounts of the current asset section all pose significant problems
in terms of ensuring that a proper cut-off of transactions is made at the end of the accounting period.
Errors in recording purchases or sales can affect net income. The potential for such errors is significant
for the current asset accounts due to the large volume of transactions. An error in recording the
acquisition or retirement of a plant asset at year-end likely will not affect net income for the period
nearly to the extent of a cut-off error in the current asset accounts.

PTS: 1 DIF: Medium OBJ: LO 1 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

13. Biotesting Company purchased a customer database and a formula for a new fuel substitute for diesel
fuel for a total of $100,000. Biotesting Company uses the expected cash flow approach for estimating
the fair value of these two intangibles. The appropriate interest rate is 5%. The potential future cash
flows from the two intangibles, and their associated probabilities, are as follows:

Customer Database:
Outcome 1 20% probability of cash flows of $10,000 at the end of each year for 5 years.
Outcome 2 30% probability of cash flows of $2,000 at the end of each year for 4 years.
Outcome 3 50% probability of cash flows of $200 at the end of each year for 3 years.
 Formula:
Outcome 1 10% probability of cash flows of $50,000 at the end of each year for 10 years.
Outcome 2 30% probability of cash flows of $30,000 at the end of each year for 4 years.
Outcome 3 60% probability of cash flows of $10,000 at the end of each year for 3 years.

Prepare the journal entry necessary to record the purchase of the two intangibles.

ANS:
Customer Database
Probability Weighted
Present Value Probability Present Value
Outcome 1 $43,295 0.20 $ 8,659
Outcome 2 7,092 0.30 2,128
Outcome 3 545 0.50 273
Total Estimated Fair
Value $11,060

Formula
Probability Weighted
Present Value Probability Present Value

Outcome 1 $386,087 0.10 $38,609

Outcome 2 106,379 0.30 31,914
Outcome 3 27,233 0.60 16,340
Total Estimated Fair
Value $86,863

Cost Allocation
Estimated Fair Value According to Cost Assigned to
Relative Estimated Individual Assets
Fair Values
Customer Database 11,060/97,923 
$11,060 $100,000 $ 11,295
Formula 86,863/97,923 
$86,863 $100,000 $ 88,705
$97,923 $ 100,000

Journal entry to record purchase:

Intangible Asset--Customer Database 11,295

Intangible Asset--Formula 88,705
Cash
100,000

PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

14. Addmachine Company purchased a customer database and in-process research and development for a
total of $100,000. Addmachine Company uses the expected cash flow approach for estimating the fair
value of these two intangibles. The appropriate interest rate is 5%. The potential future cash flows
from the two intangibles, and their associated probabilities, are as follows:
Customer Database:
Outcome 1 20% probability of cash flows of $10,000 at the end of each year for 5 years.
Outcome 2 30% probability of cash flows of $2,000 at the end of each year for 4 years.
Outcome 3 50% probability of cash flows of $200 at the end of each year for 3 years.

In-process Research and Development:

Outcome 1 10% probability of cash flows of $50,000 at the end of each year for 10 years.
Outcome 2 30% probability of cash flows of $30,000 at the end of each year for 4 years.
Outcome 3 60% probability of cash flows of $10,000 at the end of each year for 3 years.

Prepare the journal entry necessary to record the purchase of the two intangibles.

ANS:
Customer Database
Probability Weighted
Present Value Probability Present Value
Outcome 1 $43,295 0.20 $ 8,659
Outcome 2 7,092 0.30 2,128
Outcome 3 545 0.50 273
Total Estimated Fair
Value $11,060

In-process Research & Development

Probability Weighted
Present Value Probability Present Value
Outcome 1 $386,087 0.10 $38,609
Outcome 2 106,379 0.30 31,914
Outcome 3 27,233 0.60 16,340
Total Estimated Fair
Value $86,863

Cost Allocation
According to
Relative Estimated Cost Assigned to
Estimated Fair Value Fair Values Individual Assets
Customer Database 11,060/97,923 
$11,060 $100,000 $ 11,295
Formula 86,863/97,923 
$86,863 $100,000 $ 88,705
$97,923 $ 100,000

Journal entry to record purchase:

Intangible Asset--Customer Database 11,295

Research & Development Expense 88,705
Cash
100,000

PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
15. Grabber Industries purchased the net assets of Easy Company for $1,300,000, comprised of
$1,200,000 of cash and a contingent performance condition of $100,000. A schedule of the net assets
of Easy Company, as recorded on Easy Company's books at the time of the acquisition, is as follows:

Assets

Cash $ 31,000
Receivables 250,000
Inventory 302,000
Land, buildings, and equipment (net) 350,000
Total assets $ 933,000

Liabilities

Current liabilities $ 90,000

Long-term debt 185,000
Total liabilities $ 275,000
Net assets (book value) $ 658,000

The following schedule shows the differences between the recorded costs and market values of the
assets of Easy Company at the date of the acquisition:

Book Values Fair Values

Inventory $302,000 $400,000
Land, buildings, & 350,000 390,000
equipment
Patents -0- 40,000
Purchased in-process
research & development -0- 300,000
Licensing agreements -0- 90,000
Totals $652,000 $1,220,000
Liabilities $275,000 $275,000

Prepare the journal entry to record this acquisition using the acquisition method prescribed by SFAS
141R,, “Business Combinations.”

ANS:
The cost in excess of fair value is determined as follows:

Purchase price $1,300,000

Book value of net assets 658,000
Cost in excess of book value $ 642,000

The identifiable portion of the $642,000 difference is $568,000 ($1,220,000 – $652,000) and is
allocated to the appropriate assets. The remaining difference of $74,000 ($642,000 – $568,000) is
recorded as goodwill.

The entry to record the purchase is as follows:

Cash 31,000
Receivables 250,000
Inventory 400,000
Land, Buildings, & Equipment 390,000
 Patents 40,000
Research & Development Asset 300,000
Licensing Agreements
90,000
Goodwill 74,000
Current Liabilities 90,000
Long-term Liabilities 185,000
Contingent Performance Obligation
100,000
Cash 1,200,000

PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

16. The 2014 annual report of Stainless Steel disclosed the following information relating to the
company’s construction projects, debt, and interest cost (in thousands of dollars):

Construction in progress (relating to a component of property, plant, and equipment)

increased from $63,889 to $80,876 in 2014.

Interest capitalized in 2014 of $5,674 was disclosed in the footnotes of the company’s
financial statements.

Interest-bearing debt outstanding at the end of 2013: $190,000 of 9.5 percent notes,
$135,000 of 11.125 percent notes, and $32,350 relating to a line of credit with an
interest rate of 9%.

Required:

Based on the information provided in the annual report, estimate the amount of interest to be
capitalized in 2014. Give reasons why your estimate differs from the amount reported by the company.
Assume that the construction payments were made uniformly during the year.

ANS:
2014 interest cost, based on interest-bearing debt at end of 2013:

.095  $190,000 + .11125  $135,000 + .09  $32,350 = $35,980.

Average accumulated expenditures assuming uniform payments during the period:

($63,889 + $80,876)/2 = $72,383.

Weighted average interest rate on all interest-bearing debt:

$35,980/$357,350 = .10.

Interest potentially capitalizable = .10  $72,383 = $7,238.

Interest potentially capitalizable exceeds the amount of interest capitalized by Stainless by $1,564
($7,238 – $5,674). Reasons why reported capitalized interest does not agree with the calculation based
on summary data in the annual report include:

1. Total construction in progress at the end of 2014 may include significant

 noninterest-bearing construction payables. This would reduce the accumulated average
expenditures, the interest potentially capitalizable, and interest capitalized relative to the
amount computed above.
2. Debt may have been retired in 2014, reducing total interest expense below the interest
potentially capitalizable computed above.
3. Lengthy work stoppages may have occurred during which interest could not be
capitalized.
4. Stainless may have chosen not to use all interest-bearing debt when it capitalized
interest.
5. Construction may have been completed early in 2014, with new projects not resuming
until late in 2014. This would cause average accumulated expenditures to be less than
the amount calculated above.
6. The uniform expenditure assumption may not be appropriate. Stainless may have made
greater expenditures in the second half of 2014 than in the first causing average
accumulated expenditures to be less, and thus interest capitalized to be less than the
interest potentially capitalizable computed above.

PTS: 1 DIF: Challenging OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

17. Foodmark, Inc., is a large food-marketing company. Footnote information from the company’s 2014
annual report appears below. Independent retailers use funds loaned by Foodmark to finance the
acquisition of property used in retail food operations. Foodmark records these loans in its long-term
notes receivable account. The net balance of the long-term notes receivable account at the end of 2014
is (in thousands of dollars) $36,731. The following information is available from the company’s
footnotes:

The life of the notes range from 1 to 10 years, with the average being 6 years, and may be
non-interest bearing or bear interest at rates ranging primarily from 5 to 12 percent.

Assume the following for purposes of this case:

a. The notes receivable account is comprised of one 8-year, 10 percent note with seven
years remaining in its term at the end of 2014.
b. Foodmark financed 100 percent of the asset acquisitions for the retailer.
c. Annual payments on the note are received at the end of each year, include principal and
interest, and are a constant amount each year.

Required:

Determine the market value of the assets financed by Foodmark at the date of acquisition by the
retailer (debtor).

ANS:
The annual payment would be determined by taking the principal of the note ($36,731) and dividing
this amount by the interest table value for the present value of an ordinary annuity for seven periods at
10 percent. This would yield an annual payment of $7,545. The market value of the property acquired
at the date of acquisition would be:

$7,545  (Present Value of Annuity Factor, .10, 8) = $40,252.

PTS: 1 DIF: Challenging OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
18. On January 1, 2014, Mercury Airlines contracted with Dover Aircraft to construct an aircraft to
Mercury’s specifications at a cost of $2,000,000. During 2014, Mercury paid Dover $400,000 on
January 1, and another $250,000 on September 30. On January 1, Mercury borrowed $360,000 at 13%
to partially finance the construction, an obligation still outstanding at the end of 2014. The remaining
amount paid to Dover was financed from available working capital. Mercury has approximately
$1,600,000 of additional debt outstanding at an average interest cost of 12%.

Required:

What is the total capitalized cost of the aircraft under construction at the end of 2014?

ANS:

Weighted
Investment
January – September $400,000  12/12 $400,000
September payment 250,000  
62,500
October – December

Average expenditures: $462,500

Interest capitalization:
$360,000  13% = $ 46,800
102,500  12% = 12,300
$462,500 $ 59,100

Total cost of asset:

Progress payments $650,000
Interest capitalized 59,100
$709,100

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

19. On December 1, 2014, Gomer Corporation exchanged 5,000 shares of its $25 par value common stock
held in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired
by Gomer at a cost of $40 per share. Gomer’s common stock had a fair market value of $50 per share
on December 1, 2014. Gomer received $10,000 for scrap when an existing structure was removed
from the site.

Required:

1. Determine the appropriate cost of the land acquired.

2. Provide general guidelines for determining the amount to be recorded as the historical
cost for assets acquired by the issuance of securities.

ANS:
Fair value of the stock (5,000 shares at $50 per share) $250,000
Less: Proceeds from sale of scrap from existing building (10,000)
Total cost of land to be held as future plant site $240,000
 Since the market value of the stock can be determined, that value is assigned to the asset. In the
absence of a market value for the shares, the fair market value of the asset acquired would be used.
When securities do not have an established market value, appraisal of the acquired assets by an
independent authority may be required to arrive at an objective determination of their fair market
value. A recent publication by the American Institute of Certified Public Accountants also provides
guidance for independent appraisals of the fair value of the securities themselves.

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

20. The Final Word Company produces word processing software. The company recently purchased a
large tract of land on which will be constructed several buildings to house the production and
administrative personnel of the company. The following improvements are expected to be made to the
land as part of the construction of the complex:

1. The roads on all sides of the land will be graded and paved.
2. Street lights will be installed.
3. Sewer and drainage systems will be installed.
4. Several private roads will be constructed on the property.
5. Sidewalks will be constructed to connect the various buildings.
6. Parking lots will be constructed at selected places on the property for employee and
customer parking.
7. The property will be suitably landscaped.

Required:

Explain how each of the above items would be accounted for in the records of Final Word Company.

ANS:
Special assessments for local improvements usually are charged to the Land account due to their
relative permanence in nature and the fact that such improvements ordinarily are maintained by the
local governing body. Accordingly, the roads around the perimeter of the land, the street lights, and the
sewer and drainage systems would be charged to the Land account as would any other permanent
improvements made by the owner. The private roads, sidewalks, parking lots, and landscaping are
depreciable site enhancements that should be capitalized to the Land Improvements account and
depreciated over their estimated useful lives. Despite the fact that a parking lot or landscaping appear
to be permanent and not subject to depreciation, the elements gradually damage such improvements
requiring maintenance and eventual replacement.

PTS: 1 DIF: Medium OBJ: LO 1 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

21. Torrent Lumber shows the following balances in its financial records:

Millions
of Dollars
Value of time at cost, December 31, 2013 $
570
Fair valuation surplus on initial recognition at fair value, December 31, 2013
680
Change in fair value to December 31, 2014, due to growth and price fluctuations
100
 Decrease in fair value due to harvest
90

Prepare a partial balance sheet and income statement using the information provided above.

ANS:

Millions
of Dollars
Balance sheet at December 31, 2014:
Value of time at cost, December 31, 2013 $
570
Fair valuation surplus on initial recognition at fair value, December 31, 2013
(included in profit or loss year ended December 31, 2013
680
Carrying value, January 1, 2014 $
1,250
Change in fair value
100
Decrease due to harvest
(90)
Carrying value, December 31, 2014 $
1,260

Income statement for year ended December 31, 2014:

Change in fair value of timber $
100
Decrease due to harvest
(90)
Net gain $
10

PTS: 1 DIF: Challenging OBJ: LO 2 TOP: AICPA FN-Reporting

MSC: AACSB Reflective Thinking

22. Dupe Industries purchased the net assets of Sort Company for $1,100,000 cash . A schedule of the net
assets of Sort Company, as recorded on Sort Company's books at the time of the acquisition, is as
follows:

Assets

Cash $ 31,000
Receivables 250,000
Inventory 302,000
Land, buildings, and equipment (net) 350,000
Total assets $ 933,000

Liabilities

Current liabilities $ 90,000

Long-term debt 185,000
Total liabilities $ 275,000
 Net assets (book value) $ 658,000

The following schedule shows the differences between the recorded costs and market values of the
assets of Sort Company at the date of the acquisition:

Book Values Fair Values

Inventory $302,000 $400,000
Land, buildings, & 350,000 390,000
equipment
Patents -0- 40,000
Purchased in-process
research & development -0- 300,000
Licensing agreements -0- 90,000
Totals $652,000 $1,220,000
Liabilities $275,000 $275,000

Prepare the journal entry to record this acquisition using the acquisition method prescribed by SFAS
141R,, “Business Combinations.”

ANS:
The cost in excess of fair value is determined as follows:

Purchase price $1,100,000

Book value of net assets 658,000
Cost in excess of book value $ 442,000
Excess of fair value over book value
($1220,000 – $652,000) 568,000
Excess of fair value over cost ($ 126,000)

The entry to record the purchase is as follows:

Cash 31,000
Receivables 250,000
Inventory 400,000
Land, Buildings, & Equipment 390,000
Patents 40,000
Research & Development Asset 300,000
Licensing Agreements
90,000
Current Liabilities 90,000
Long-term Liabilities 185,000
Gain 126,000
Cash 1,100,000

PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic

23. The following balances are from the records of the Summertime Outdoor Equipment Company :

(in $millions)
Value of time at cost, December 31, 2014 $620
Fair valuation surplus on initial recognition at fair value, December 31, 2013 730
Change in fair value to December 31, 2014, due to growth and price fluctuations 150
Decrease in fair value due to economic conditions
140

Prepare a partial balance sheet and income statement using the information provided above.

ANS:
Balance sheet at December 31, 2014: (in $millions)

Value of time at cost, December 31, 2013 $ 620

Fair valuation surplus on initial recognition at fair value, December 31, 2013
(included in profit or loss year ended December 31, 2013 730

Carrying value, January 1, 2014 1,350

Change in fair value 150

Decrease due to economic conditions (140)

Carrying value, December 31, 2014 $1,360

Income statement for year ended December 31, 2014:

Change in fair value of equipment $150

Decrease due to economic conditions (140)

Net gain $ 10

PTS: 1 DIF: Easy OBJ: LO 2 TOP: AICPA FN-Reporting

MSC: AACSB