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Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
55. In Case B, Pensacola would record a gain/(loss) of:
a. $ 4,000.
b. $ (4,000).
c. $ (10,000).
d. None of these answer choices are correct.
56. Interest may be capitalized:
a. On routinely manufactured goods as well as self-constructed assets.
b. On self-constructed assets from the date an entity formally adopts a plan to build a
discrete project.
c. Whether or not there is specific borrowing for the construction.
d. Whether or not there are actual interest costs incurred.
57. Interest is eligible to be capitalized as part of an asset's cost, rather than being expensed
immediately, when:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
a. The interest is incurred during the construction period of the asset.
b. The asset is a discrete construction project for sale or lease.
c. The asset is self-constructed, rather than acquired.
d. All of these answer choices are correct.
58. In computing capitalized interest, average accumulated expenditures:
a. Is the arithmetic mean of all construction expenditures.
b. Is determined by time-weighting individual expenditures made during the asset
construction period.
c. Is multiplied by the company's most recent financing rates.
d. All of these answer choices are correct.
59. Interest is not capitalized for:
a. Assets that are constructed as discrete projects for sale or lease.
b. Assets constructed for a company’s own use.
c. Inventories routinely and repetitively produced in large quantities.
d. Interest is capitalized for all of these items.
60. Average accumulated expenditures:
a. Is an approximation of the average debt a firm would have outstanding if it financed all
construction through debt.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
b. Is computed as a simple average if all construction expenditures are made at the end of
the period.
c. Are irrelevant if the company's total outstanding debt is less than total costs of
construction.
d. All of these answer choices are true statements.
61. The cost of self-constructed fixed assets should:
a. Include allocated indirect costs just as they are for production of products.
b. Include only incremental indirect costs.
c. Include only specifically identifiable indirect costs.
d. Not include indirect costs.
Use the following to answer questions 62–64:
On June 1, 2015, the Crocus Company began construction of a new manufacturing plant. The plant
was completed on October 31, 2016. Expenditures on the project were as follows ($ in millions):
July 1, 2015
54
October 1, 2015
22
February 1, 2016
30
April 1, 2016
21
September 1, 2016
20
October 1, 2016
6
On July 1, 2015, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan
was outstanding through the end of October, 2016. The company's only other interest-bearing debt was
a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of
2015 and 2016. The company's fiscal year-end is December 31.
62. What is the amount of interest that Crocus should capitalize in 2015, using the specific interest
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
method?
a. $1.90 million.
b. $1.95 million.
c. $2.96 million.
d. None of these answer choices are correct.
63. In computing the capitalized interest for 2016, Crocus' average accumulated expenditures are:
a. $ 46.30 million.
b. $103.54 million.
c. $122.30 million.
d. $124.25 million.
64. What is the amount of interest that Crocus should capitalize in 2016, using the specific interest
method (rounded to the nearest thousand dollars)?
a. $7,248,000 (rounded).
b. $7,283,000 (rounded).
c. $8,740,000 (rounded).
d. None of these answer choices are correct.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Use the following to answer questions 65–68:
On January 1, 2016, Kendall Inc. began construction of an automated cattle feeder system. The system
was finished and ready for use on September 30, 2017. Expenditures on the project were as follows:
January 1, 2016
$200,000
September 1, 2016
$300,000
December 31, 2016
$300,000
March 31, 2017
$300,000
September 30, 2017
$200,000
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2016. This loan was
outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable
outstanding in 2016 and 2017.
65. Average accumulated expenditures for 2016 was:
a. $300,000.
b. $350,000.
c. $500,000.
d. $400,000.
66. Interest capitalized for 2016 was:
a. $48,000.
b. $42,000.
c. $60,000.
d. $36,000.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
67. Average accumulated expenditures for 2017 was:
a. $ 536,000.
b. $1,236,000.
c. $1,200,000.
d. $1,036,000.
68. Interest capitalized for 2017 was:
a. $104,625.
b. $ 86,805
c. $ 87,875.
d. $ 67,500.
Use the following to answer questions 69–72:
On January 1, 2016, Dreamworld Co. began construction of a new warehouse. The building was
finished and ready for use on September 30, 2017. Expenditures on the project were as follows:
January 1, 2016
$300,000
September 1, 2016
$450,000
December 31, 2016
$450,000
March 31, 2017
$450,000
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
September 30, 2017
$300,000
Dreamworld had $5,000,000 in 12% bonds outstanding through both years.
69. Dreamworld's average accumulated expenditures for 2016 was:
a. $300,000.
b. $450,000.
c. $525,000.
d. $600,000.
70. Dreamworld's capitalized interest in 2016 was:
a. $72,000.
b. $63,000.
c. $54,000.
d. $36,000.
71. The average accumulated expenditures for 2017 by the end of the construction period was:
a. $1,950,000.
b. $1,554,000.
c. $1,254,000.
d. $ 975,000.
72. What was the final cost of Dreamworld's warehouse?
a. $2,154,480.
b. $2,143,860.
c. $1,950,000.
d. $1,254,000.
73. Liddy Corp. began constructing a new warehouse for its operations during the current year. In
the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a
construction loan for the warehouse of $60,000. Interest computed on the average
accumulated expenditures for the warehouse construction was $50,000. What amount of
interest should Liddy expense for the year?
a. $ 30,000.
b. $ 40,000.
c. $ 90,000.
d. $140,000.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
74. Research and development costs for projects other than software development should be:
a. Expensed in the period incurred.
b. Expensed in the period they are determined to be unsuccessful.
c. Deferred pending determination of success.
d. Expensed if unsuccessful, capitalized if successful.
75. Software development costs are capitalized if they are incurred:
a. Prior to the point at which technological feasibility has been established.
b. After commercial production has begun.
c. After technological feasibility has been established but prior to the product availability
date.
d. None of these answer choices are correct.
76. Research and development (R&D) costs:
a. Generally pertain to activities that occur prior to the start of production.
b. May be expensed or capitalized, at the option of the reporting entity.
c. Must be capitalized and amortized.
d. None of these answer choices are correct.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
77. Research and development expense for a given period includes:
a. The full cost of newly acquired equipment that has an alternative future use.
b. Depreciation on a research and development facility.
c. Research and development conducted on a contract basis for another entity.
d. Patent filing and legal costs.
78. Amortization of capitalized computer software costs is:
a. Either the percentage-of-revenue method or the straight-line method at the company's
option.
b. The greater of the percentage-of-revenue method or the straight-line method.
c. The lesser of the percentage-of-revenue method or the straight-line method.
d. Based on neither the percentage-of-revenue nor the straight-line method.
79. Axcel Software began a new development project in 2015. The project reached technological
feasibility on June 30, 2016, and was available for release to customers at the beginning of
2017. Development costs incurred prior to June 30, 2016, were $3,200,000 and costs incurred
from June 30 to the product release date were $1,400,000. The 2017 revenues from the sale of
the new software were $4,000,000, and the company anticipates additional revenues of
$6,000,000. The economic life of the software is estimated at four years. 2017 amortization
of the software development costs would be:
a. $0.
b. $ 350,000.
c. $1,840,000.
d. $ 560,000.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
80. Under International Financial Reporting Standards, research expenditures are:
a. Expensed in the period incurred.
b. Expensed in the period they are determined to be unsuccessful.
c. Capitalized if certain criteria are met.
d. Expensed if unsuccessful, capitalized if successful.
81. Under International Financial Reporting Standards, development expenditures are:
a. Expensed in the period incurred.
b. Expensed in the period they are determined to be unsuccessful.
c. Capitalized if certain criteria are met.
d. All of these answer choices are incorrect.
82. Cromartie Ltd. prepares its financial statements according to International Financial Reporting
Standards. During 2016 the company incurred $1,245,000 in research expenditures to develop
a new product. An additional $756,000 in development expenditures were incurred after
technological and commercial feasibility was established and after the future economic
benefits were deemed probable. The project was successfully completed and the new product
was patented before the end of the 2016 fiscal year. Sale of the product began in 2015. What
amount of the above expenditures would Cromartie expense in its 2016 income statement?
a. $2,001,000.
b. $ 756,000.
c. $1,245,000.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
d. $0.
83. In accounting for oil and gas exploration costs, companies:
a. May not use the full-cost method.
b. May use the successful efforts method.
c. May use the slippery slope method.
d. All of these answer choices are correct.
84. During 2016, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of
20 oil wells drilled in 2016 in west Texas. Of the 20 wells drilled, 14 were dry holes.
Longhorn uses the successful efforts method of accounting. Assuming that none of the oil
found is depleted in 2016, what oil exploration expense would Longhorn charge for this
activity in its 2016 income statement?
a. $0.
b. $ 30 million.
c. $ 70 million.
d. $100 million.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
85. During 2016, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15
oil wells drilled in 2016. Of the 15 wells drilled, 10 were dry holes. Prospect uses the
successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil
discovered in 2016, what amount of these exploration costs would remain in its 12/31/16
balance sheet?
a. $ 6 million.
b. $14 million.
c. $20 million.
d. $42 million.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Matching Pair Questions
86. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Average accumulated
expenditures
Account credited when assets are donated to
a corporation.
____
2. Revenue-donation of asset
Approximation of average outstanding debt if
all construction funds were borrowed.
____
3. Exchange of nonmonetary
assets
Both the total amount and the amount
capitalized should be disclosed.
____
4. Interest cost
Asset received is measured at fair value.
____
5. Franchise
Right granted to use a trademark or
tradename within a geographic area.
____
Answer:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
87. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBE
R
1. Trademark
Exclusive right to display a word, symbol, or
emblem.
____
2. Noninterest-bearing note
Generates inventoriable costs.
____
3. Expected cash flow
approach
Incorporates specific probabilities of cash
flows.
____
4. R&D performed for others
Its cost includes filling, draining, and removal
of old structures.
____
5. Land
Valued at the fair value of the note or fair
value of the asset received in exchange.
____
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
88. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
NUMBE
R
1. Amortization
Point in time to begin capitalization of software
development costs.
____
2. Research and development
costs
Expensed in the period incurred.
____
3. Natural resources
The allocation of cost for intangible assets.
____
4. Technological feasibility
The basic principle is to value assets acquired
using fair value of consideration given.
____
5. Nonmonetary exchange
Wasting assets.
____
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
89. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Copyright
A measurement of efficiency in using depreciable
assets.
____
2. Asset retirement
obligations
Exclusive right of protection given to the creator
of a published work.
____
3. Land improvements
Measured at fair value and recognized as a
liability.
____
4. Fixed asset turnover
ratio
The basic principle is to value assets acquired
using fair value of consideration given.
____
5. Nonmonetary exchange
Includes parking lots, fences, and driveways,
lighting and sprinkler systems.
____
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
90. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Goodwill
Long-term assets that generally represent various types of
rights.
____
2. Depreciation
Consideration given less fair value of net identifiable
assets.
____
3. Depletion
The cost allocation of equipment.
____
4. Patents
The allocation of cost of natural resources.
____
5. Intangible
assets
Protects against infringements on manufactured products.
____
Answer:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
91. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Software development
costs
Costs to bring back an asset to its original
condition.
____
2. Donated assets
Revenue recorded upon receipt.
____
3. Lump-sum purchase
Exclusive right of protection given to the creator of
a published work.
____
4. Copyright
Capitalized between points of technological
feasibility and date of product release.
____
5. Restoration costs
Price allocated in proportion to relative fair values.
____
Answer:
92. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms.
Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Nonmonetary exchange
Expensed in the period incurred.
____
2. Copyright
Exclusive right of protection given to the creator
of a published work.
____
3. Average accumulated
expenditures
Incorporates cash flow probabilities into
analysis.
____
4. Disposition
The basic principle is to value assets acquired
using fair value of consideration given.
____
5. Goodwill
Includes parking lots, fences, and driveways,
lighting and sprinkler systems.
____
6. Start-up costs
A unique intangible asset that is not separable
from the company.
____
7. Trademark
Weighted average of construction expenditures.
____
8. Lump-sum purchases
An exclusive right to display a word, slogan,
symbol or emblem.
____
9. Expected cash flow
approach
Sale or retirement of assets.
____
10. Land improvements
Purchase price is allocated based on relative fair
values.
____
Answer:
