Chapter 10—Property, Plant, and Equipment: Acquisition and
Disposal Key
1. Alternative terms for property, plant, and equipment include all of the following except
2. All of the following would be classified as property, plant, and equipment except
3. Advantages of using historical cost as the basis of valuation of property, plant, and equipment include all of
the following except
4. Which one of the following types of assets should not be classified as property, plant, and equipment?
5. The Roth Company incurred the following costs in the acquisition of a plant asset:
Invoice price
$2,100
Purchase discount lost
40
Freight-in
350
Installation
100
Cost of trial runs
150
What is the cost of the plant asset?
6. Rodriguez Company made the following payments related to a land acquisition:
Purchase price
$6,000
Past due taxes
500
Title search
150
Cost of razing old building
300
Interest (incurred after productive operations had begun)
160
Proceeds from salvage of old building
85
The recorded cost of the land should be
7. Which one of the following types of costs should not be included in the cost of a building?
8. Richards Corporation purchased some equipment by issuing a $20,000 non-interest-bearing, four-year note
when interest rates were 8%. Actuarial information for 8% and four periods follows:
Future amount of 1
1.360
Present value of 1
0.735
In the entry to record this purchase, there would be a
9. Randal’s Rifles purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate
for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods
follows:
6%
8%
Future amount of 1
1.191016
1.259712
Future amount of annuity of 1
3.183600
3.246400
Present value of 1
0.839619
0.793832
Present value of annuity of 1
2.673012
2.577097
At the date of purchase, what amount should be debited to Equipment?
10. According to GAAP, interest must be capitalized for
11. All of the following major types of assets would be included in the general category of property, plant, and
equipment on the balance sheet except
12. An asset classified as property, plant, and equipment on the balance sheet must have which one of the
following characteristics?
13. All of the following costs associated with acquiring a building should be capitalized except
14. Remy purchases a new machine by issuing an $18,000 three-year note. The company will pay off the
obligation by paying $6,000 at the end of each year. The market rate for obligations of this type is 8%. The
present value of an annuity at 8% for three periods is 2.577097. The machine will be recorded at a cost of
15. The president of Reindeer Corporation donated a building to Monday Corporation. The building had an
original cost of $500,000, a book value of $175,000, and a fair market value of $250,000. To record this
donation, Monday will
16. During 2011, Ruby Corporation purchased three pieces of equipment at an auction for the lump sum of
$200,000. It cost Ruby $20,000 to have the equipment delivered and installed. The equipment was appraised at
the following values:
Machine 1
$120,000
Machine 2
105,000
Machine 3
75,000
Machine 2 should be recorded on Ruby’s books at
17. Regal recently purchased a building and the tract of land on which it is located. Regal plans to raze the
building immediately and to erect a new building on the site. The value of the original building should be
18. The debit for a sales tax paid on the purchase of a plant asset would be included in
19. On February 1, 2010, Rummel Corporation purchased a parcel of land as a factory site for $50,000. An old
building on the property was demolished, and construction began on a new building that was completed on
December 12, 2010. Costs incurred during this period are listed below:
Demolition of old building
$ 10,000
Architect’s fees
22,000
Legal fees for title investigation and purchase contract
3,000
Construction costs
1,000,000
(Salvaged materials resulting from demolition were sold for $15,000.)
Rummel should record the cost of the land and the cost of the new building, respectively, as
20. The Ripple Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum
price of $500,000. At the time of acquisition, Ripple paid $20,000 to have the assets appraised. The appraisal
disclosed the following values:
Land
$100,000
Buildings
200,000
Equipment
300,000
What costs should be assigned to the buildings?
21. On May 7, 2010, Rabie Corporation purchased for $450,000 a tract of land on which was located a
warehouse and an office building. The following data were collected concerning the property:
Current
Vendor’s
Assessed
Original
Valuation
Cost
Land
$100,000
$ 70,000
Warehouse
80,000
80,000
Office building
220,000
150,000
$400,000
$300,000
What are the appropriate amounts that Rabie should record for the land, warehouse, and office building, respectively?
22. On April 1, 2010, Richer Corporation purchased a new machine on a deferred payment basis. A down
payment of $5,000 was made and 10 monthly installments of $14,000 each are to be made beginning on May 1,
2010. The cash equivalent price of the machine was $130,000. Richer incurred and paid installation costs
amounting to $6,000. The amount to be capitalized as the cost of the machine is
23. Early in 2010, Roper, Inc. purchased certain plant assets under a deferred payment contract. The agreement
was to pay $50,000 at year-end for each of the next three years. The plant assets should be valued at
24. A plant site donated by a city to Rupp Company, which plans to open a new factory, should be recorded on
Rupp’s books at
25. On August 28, 2010, Ruggle Drilling Services purchased a machine with a contract price of $400,000 and
cash terms of 2/10, n/30. The company paid $8,000 in transportation costs and $8,000 for installation. Sales
taxes of $22,000 were paid on the invoice amount. The machine should be recorded as a plant asset in the
amount of
26. Which is the best definition of start-up costs?
27. Property acquired through donation is recorded at
28. When exchanging nonmonetary assets with another company, the preferred approach is to value the
transaction based upon fair value of
29. Robards Services exchanged an asset with a cost of $24,000 (now 40% depreciated) for a nonmonetary asset
worth $12,000. Robards received $2,000 boot. In the entry to record this exchange, Robards should record
30. Renault Marina exchanged a boat with a cost of $80,000 (now 75% depreciated) for another boat with a
current fair value of $27,000. No boot was paid or received. The new boat will perform the exact same function
as the old boat. Renault should record the new boat at
31. Rust, Inc. exchanged a truck that cost $30,000 (now 50% depreciated) for equipment with an appraised
value of $25,000. Rust paid boot of $6,000. Rust should record the equipment at
32. Macey Co. exchanged a piece of equipment that had cost $40,000 (now 75% depreciated) for a truck with a
current appraised value of $13,000. Macey Co. gave the other company the piece of equipment and $8,000.
Macey Co. should record
33. When exchanging nonmonetary assets
34. When boot is involved in the exchange of nonmonetary productive assets, normally
35. Ralley Company exchanged a piece of equipment with a fair market value of $20,000 and a book value of
$25,000 for a truck with a fair market value of $16,000 and boot of $4,000. Ralley Company should record the
truck at a cost of
36. Richmond, Inc. exchanged a piece of equipment with an original cost of $82,000, accumulated depreciation
to date of $40,000, and a fair value of $46,000 for a similar piece of equipment. The newly acquired equipment
had a book value of $40,000 and a fair market value of $46,000. Richmond should record the equipment
acquired at
37. On January 4, 2010, Rack Company traded in a used bulldozer with a carrying amount of $65,000 for a new
bulldozer having a list price of $120,000 and paid cash difference of $40,000 to the dealer. The used bulldozer
had a fair value of $75,000 on the date of exchange. At what amount should the new bulldozer be recorded on
Rack’s books?
38. On May 15, 2010, Retread Company acquired a new forklift in exchange for an old forklift that it had
acquired in 2000. The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the
exchange, the old forklift had a market value of $6,000. In addition, Retread paid $18,000 cash for the new
forklift, which had a list price of $25,000. At what amount should Retread record the new forklift for financial
accounting purposes?
39. Performance Stage Company had a professional contract with Actor #1 that was recorded in its accounting
records at $300,000. Johnson Company had a contract with Actor #2 that was recorded in its accounting records
at $280,000. Performance traded Actor #1 to Johnson for Actor #2 by exchanging the actors’ contracts. The fair
value of each contract was $320,000. What amount should be shown in the accounting records after the
exchange of actor contracts?
Performance
Johnson
I.
$280,000
$280,000
II.
$280,000
$300,000
III.
$300,000
$280,000
IV.
$320,000
$320,000
40. Rupert Company exchanged one business automobile for another business automobile. The old automobile
had an original cost of $40,000, an undepreciated cost of $16,000, and a market value of $21,000 when
exchanged. In addition, Rupert paid $9,000 cash for the replacement automobile. The list price of the
replacement automobile was $35,000. The replacement will help generate significantly greater cash flows in the
business. At what amount should the replacement automobile be recorded for financial accounting purposes?
41. Rebby Company received $60,000 in cash and used equipment with a fair value of $140,000 from Farley
Corporation for Rebby’s existing equipment, which had a fair value of $200,000 and an undepreciated cost of
$170,000 recorded on its books. The transaction was undertaken because Rebby was revising its market strategy
and planned to reduce the use of this type of equipment in its production. How much gain should Rebby
recognize on this exchange, and at what amount should the acquired equipment be recorded, respectively?
42. On August 1, 2010, Robbins traded in an old plant asset for a newer model that would be more productive
and efficient. Data relative to the old and new plant assets follow:
Old Plant Asset
Original cost
$10,000
Accumulated depreciation of August 1, 2010
7,000
Fair value
2,000
New Plant Asset
List price
13,000
A total of $10,500 cash was given in the trade. What should be the cost of the new plant asset for financial accounting purposes?
43. Rogaine Company exchanged inventory items that cost $47,000 and normally sold for $65,000 for a new
delivery truck with a list price of $67,000. The delivery truck should be recorded on Rogaine’s books at
44. Exhibit 10-1
Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other‘s land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:
Fargo’s
Rambam’s
Land
Land
Cost and book value
$400,000
$250,000
Fair value based upon appraisal
$500,000
$450,000
The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.
Refer to Exhibit 10-1. For financial reporting purposes, Fargo should recognize a gain on this exchange in the amount of
45. Exhibit 10-1
Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other‘s land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:
Fargo’s
Rambam’s
Land
Land
Cost and book value
$400,000
$250,000
Fair value based upon appraisal
$500,000
$450,000
The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.
Refer to Exhibit 10-1. For financial reporting purposes, Rambam should recognize a gain on this exchange in the amount of
46. Exhibit 10-1
Two construction companies, Fargo and Rambam, are in the construction business. Each owns a tract of land
being held for development, but each company believes that the other‘s land is better suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information:
Fargo’s
Rambam’s
Land
Land
Cost and book value
$400,000
$250,000
Fair value based upon appraisal
$500,000
$450,000
The exchange of land was made, and based on the difference in appraised fair value, Rambam paid $50,000 cash to Fargo.
Refer to Exhibit 10-1. After the exchange, Fargo should record its newly acquired land on its books at
47. Which one of the following statements is true?
48. All of the following are arguments in favor of including only the incremental fixed overhead costs in the
cost of a self-constructed asset, except that the
49. According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which
of the following situations?
50. On January 1, 2010, Rong Company signed a contract to have Rozy Associates construct a manufacturing
facility at a cost of $14,000,000. It was estimated that it would take three years to complete the project. Also on
January 1, 2010, to finance the construction cost, Rong borrowed $14,000,000 payable in seven annual
installments of $2,000,000 plus interest at the rate of 9%. During 2010, Rong made progress payments totaling
$5,000,000 under the contract, and the average amount of accumulated expenditures was $3,000,000 for the
year. The excess borrowed funds were invested in short-term securities, from which Rong realized investment
income of $330,000. What amount should Rong report as capitalized interest at December 31, 2010?
51. Which of the following costs incurred subsequent to the acquisition of a machine would be appropriately
accounted for by debiting the accumulated depreciation account related to the machine?
52. At the end of the year, any balance in Allowance for Repairs should be
53. Under GAAP, which one of the following types of costs should not be capitalized?
54. An improvement made to a machine increased its production capacity by 25% without extending the
machine’s useful life. The cost of the improvement should be
55. Which of the following events is most appropriately recorded as a reduction to accumulated depreciation?
56. The sale of a depreciable asset resulting in a gain indicates that the proceeds from the sale were
57. On January 1, 2010, Ringo purchased, for $100,000, equipment having a useful life of eight years and an
estimated salvage value of $4,000. Ringo has recorded monthly depreciation on the equipment using the
straight-line method. On March 1, 2015, the equipment was sold for $46,000. As a result of this sale, Ringo
should recognize
58. The Rothchild Company purchased a machine on October 1, 2010, for $80,000. At the time of acquisition,
the machine was estimated to have a useful life of five years and an estimated salvage value of $5,000.
Rothchild has recorded monthly depreciation using the straight-line method. On April 1, 2012, the machine was
sold for $50,000. What should be the loss recognized from the sale of the machine?
59. Required disclosure for property, plant, and equipment in the financial statements is based upon
60. In 2010, Golf Oil Company incurred costs of $7 million drilling oil wells. Thirty percent of the drilling
resulted in oil being found. The rest of the drilling was unsuccessful. If Golf uses the successful-efforts method
of accounting, the oil and gas properties will be valued on the December 31, 2010 balance sheet at
61. Two alternative methods of accounting for the cost of oil and gas properties have been widely used. The
method that capitalizes all costs associated with all wells is the
62. Concerning current accounting for oil and gas properties, which statement is true?
63. The costs of drilling an unsuccessful well are expensed under
64. Under IFRS, which of the following must be expensed?
65. A major difference between IFRS and GAAP regarding valuation of property, plant, and equipment is that
66. When an operating asset is made up of significant individual components, IFRS require the company to
67. Costs incurred by Mills Company that relate to its property, plant, and equipment assets might be recorded
in one of the five following classes of accounts:
a.
an expense account
b.
an accumulated depreciation account
c.
a land account
d.
a building account
e.
an equipment account