Chapter 10--Property, Plant, and Equipment: Acquisition and Disposal

Chapter 10--Property, Plant, and Equipment: Acquisition and
Disposal
Student: ___________________________________________________________________________
1. Alternative terms for property, plant, and equipment include all of the following except
A. plant assets
B. fixed assets
C. long-term assets
D. operational assets

. All of the following would !e classified as property, plant, and equipment except
A. office !uildings
B. machinery owned for stand!y purposes
C. equipment held for resale
D. equipment used in the operation of the !usiness

". Advantages of using historical cost as the !asis of valuation of property, plant, and equipment include all of
the following except
A. it is a very relia!le valuation
B. gains and losses from holding the asset are recogni#ed in the period of value change
C. cost equals the fair mar$et value at the date of acquisition
D. it is consistent with the valuation of other assets, lia!ilities, and stoc$holders% equity

&. 'hich one of the following types of assets should not !e classified as property, plant, and equipment(
A. leasehold improvements
B. fully-depreciated !uilding )still in use*
C. idle land and !uildings
D. long-lived tangi!le assets

+. ,he -oth Company incurred the following costs in the acquisition of a plant asset.
/nvoice price 0,111
2urchase discount lost &1
3reight-in "+1
/nstallation 111
Cost of trial runs 1+1
'hat is the cost of the plant asset(
A. 0,411
B. 0,551
C. 0,++1
D. 0,111

5. -odrigue# Company made the following payments related to a land acquisition.
2urchase price 05,111
2ast due taxes +11
,itle search 1+1
Cost of ra#ing old !uilding "11
/nterest )incurred after productive operations had !egun* 151
2roceeds from salvage of old !uilding 6+
,he recorded cost of the land should !e
A. 05,&+1
B. 05,+6+
C. 05,4&+
D. 05,65+

4. 'hich one of the following types of costs should not !e included in the cost of a !uilding(
A. costs of remodeling and reconditioning
B. excavation costs
C. unanticipated costs resulting from the condition of the land
D. unanticipated construction costs, such as stri$e or fire losses

6. -ichards Corporation purchased some equipment !y issuing a 01,111 non-interest-!earing, four-year note
when interest rates were 67. Actuarial information for 67 and four periods follows.
3uture amount of 1 1."51
2resent value of 1 1.4"+
/n the entry to record this purchase, there would !e a
A. 01,111 de!it to 8quipment
B. 0+,99.&1 credit to Discount on :otes 2aya!le
C. 04,19.46 credit to :otes 2aya!le
D. 01&,411.51 de!it to 8quipment

9. -andal%s -ifles purchased some equipment !y issuing a three-year 57 note for 06,111 when the mar$et rate
for an o!ligation of this nature was 67. ,he interest is paya!le annually. Actuarial information for three periods
follows.
57 67
3uture amount of 1 1.191115 1.+941
3uture amount of annuity of 1 ".16"511 ".&5&11
2resent value of 1 1.6"9519 1.49"6"
2resent value of annuity of 1 .54"11 .+44194
At the date of purchase, what amount should !e de!ited to 8quipment(
A. 04,+64.55
B. 05,415.95
C. 05,"+1.55
D. 05,5"".41

11. According to ;AA2, interest must !e capitali#ed for
A. assets that are ready for use
B. assets constructed for a firm%s own use
C. assets that are not !eing used in the earning activities of the company
D. inventories that are produced in large quantities on a repetitive !asis

11. All of the following ma<or types of assets would !e included in the general category of property, plant, and
equipment on the !alance sheet except
A. wasting assets
B. furniture and fixtures
C. land purchased for future use
D. leasehold improvements

1. An asset classified as property, plant, and equipment on the !alance sheet must have which one of the
following characteristics(
A. an expected life of more than one year
B. used in the normal course of !usiness
C. tangi!le in nature
D. all of these

1". All of the following costs associated with acquiring a !uilding should !e capitali#ed except
A. the costs of !uilding permits
B. the cost of a stri$e associated with the construction of the !uilding
C. the contract price
D. the costs of excavation for the !uilding

1&. -emy purchases a new machine !y issuing an 016,111 three-year note. ,he company will pay off the
o!ligation !y paying 05,111 at the end of each year. ,he mar$et rate for o!ligations of this type is 67. ,he
present value of an annuity at 67 for three periods is .+44194. ,he machine will !e recorded at a cost of
A. 0 5,111.11
B. 0 9,&5.+6
C. 01+,&5.+6
D. 016,111.11

1+. ,he president of -eindeer Corporation donated a !uilding to =onday Corporation. ,he !uilding had an
original cost of 0+11,111, a !oo$ value of 014+,111, and a fair mar$et value of 0+1,111. ,o record this
donation, =onday will
A. ma$e a memorandum entry
B. de!it Building for 014+,111 and credit ;ain for 014+,111
C. de!it Building for 0+1,111 and credit ;ain for 0+1,111
D. de!it Building for 0+11,111 and credit ;ain for 0+11,111

15. During 111, -u!y Corporation purchased three pieces of equipment at an auction for the lump sum of
011,111. /t cost -u!y 01,111 to have the equipment delivered and installed. ,he equipment was appraised at
the following values.
=achine 1 011,111
=achine 11+,111
=achine " 4+,111
=achine should !e recorded on -u!y%s !oo$s at
A. 011+,111
B. 011,111
C. 0 44,111
D. 0 41,111

14. -egal recently purchased a !uilding and the tract of land on which it is located. -egal plans to ra#e the
!uilding immediately and to erect a new !uilding on the site. ,he value of the original !uilding should !e
A. written off as an extraordinary loss in the year the !uilding is ra#ed
B. capitali#ed as part of the cost of the land
C. depreciated over the period from the date of acquisition to the date that the !uilding is to !e ra#ed
D. capitali#ed as part of the cost of the new !uilding

16. ,he de!it for a sales tax paid on the purchase of a plant asset would !e included in
A. the plant asset account
B. a separate deferred charge account
C. =iscellaneous ,ax 8xpense
D. Accumulated Depreciation-=achinery

19. >n 3e!ruary 1, 111, -ummel Corporation purchased a parcel of land as a factory site for 0+1,111. An old
!uilding on the property was demolished, and construction !egan on a new !uilding that was completed on
Decem!er 1, 111. Costs incurred during this period are listed !elow.
Demolition of old !uilding 0 11,111
Architect%s fees ,111
?egal fees for title investigation and purchase contract ",111
Construction costs 1,111,111
)@alvaged materials resulting from demolition were sold for 01+,111.*
-ummel should record the cost of the land and the cost of the new !uilding, respectively, as
A. 0&6,111 and 01,1,111
B. 0+1,111 and 01,1,111
C. 05",111 and 01,1",111
D. 05",111 and 01,114,111

1. ,he -ipple Corporation acquired land, !uildings, and equipment from a !an$rupt company at a lump-sum
price of 0+11,111. At the time of acquisition, -ipple paid 01,111 to have the assets appraised. ,he appraisal
disclosed the following values.
?and 0111,111
Buildings 11,111
8quipment "11,111
'hat costs should !e assigned to the !uildings(
A. 0155,554
B. 014","""
C. 011,111
D. 051,111

1. >n =ay 4, 111, -a!ie Corporation purchased for 0&+1,111 a tract of land on which was located a
warehouse and an office !uilding. ,he following data were collected concerning the property.
Current Aendor%s
Assessed >riginal
Aaluation Cost
?and 0111,111 0 41,111
'arehouse 61,111 61,111
>ffice !uilding 1,111 1+1,111
0&11,111 0"11,111
'hat are the appropriate amounts that -a!ie should record for the land, warehouse, and office !uilding, respectively(
A. land, 0 41,111B warehouse, 061,111B office !uilding, 01+1,111
B. land, 0111,111B warehouse, 061,111B office !uilding, 01,111
C. land, 0111,111B warehouse, 061,111B office !uilding, 041,111
D. land, 011,+11B warehouse, 091,111B office !uilding, 0&4,+11

. >n April 1, 111, -icher Corporation purchased a new machine on a deferred payment !asis. A down
payment of 0+,111 was made and 11 monthly installments of 01&,111 each are to !e made !eginning on =ay 1,
111. ,he cash equivalent price of the machine was 01"1,111. -icher incurred and paid installation costs
amounting to 05,111. ,he amount to !e capitali#ed as the cost of the machine is
A. 01"1,111
B. 01"5,111
C. 01&1,111
D. 01&+,111

". 8arly in 111, -oper, /nc. purchased certain plant assets under a deferred payment contract. ,he agreement
was to pay 0+1,111 at year-end for each of the next three years. ,he plant assets should !e valued at
A. present value of a 0+1,111 annuity for three years discounted at the !an$ prime interest rate
B. 01+1,111
C. present value of a 0+1,111 annuity for three years discounted at the mar$et interest rate
D. 01+1,111 plus imputed interest

&. A plant site donated !y a city to -upp Company, which plans to open a new factory, should !e recorded on
-upp%s !oo$s at
A. the nominal cost of ta$ing title to it
B. its fair mar$et value
C. #ero value, !ut footnoted
D. the value assigned to it !y the company%s directors

+. >n August 6, 111, -uggle Drilling @ervices purchased a machine with a contract price of 0&11,111 and
cash terms of C11, nC"1. ,he company paid 06,111 in transportation costs and 06,111 for installation. @ales
taxes of 0,111 were paid on the invoice amount. ,he machine should !e recorded as a plant asset in the
amount of
A. 0&11,111
B. 0&,111
C. 0&6,111
D. 0&"1,111

5. 'hich is the !est definition of start-up costs(
A. all activities associated with organi#ing a new entity
B. organi#ation costs
C. one-time activities for opening a new facility, introducing a new product or service, conducting !usiness in a
new territory, conducting !usiness with a new class of customer, initiating a new process in an existing facility,
or starting some new operation
D. activities related to routine ongoing efforts to refine or otherwise improve the qualities of an existing
product, service, process, or facility

4. 2roperty acquired through donation is recorded at
A. its !oo$ value
B. its fair mar$et value
C. its cost
D. #ero

6. 'hen exchanging nonmonetary assets with another company, the preferred approach is to value the
transaction !ased upon fair value of
A. the asset surrendered or asset received whichever is most evident
B. the asset surrendered unless the fair value of the asset received is easier to determine
C. the asset surrendered except for certain conditions
D. the asset surrendered

9. -o!ards @ervices exchanged an asset with a cost of 0&,111 )now &17 depreciated* for a nonmonetary asset
worth 01,111. -o!ards received 0,111 !oot. /n the entry to record this exchange, -o!ards should record
A. a 011,111 loss
B. a 0&11 gain
C. no gain or loss
D. a 0&11 loss

"1. -enault =arina exchanged a !oat with a cost of 061,111 )now 4+7 depreciated* for another !oat with a
current fair value of 04,111. :o !oot was paid or received. ,he new !oat will perform the exact same function
as the old !oat. -enault should record the new !oat at
A. 01,111
B. 04,111
C. 0 4,111
D. 0 1

"1. -ust, /nc. exchanged a truc$ that cost 0"1,111 )now +17 depreciated* for equipment with an appraised
value of 0+,111. -ust paid !oot of 05,111. -ust should record the equipment at
A. 0+,111
B. 0"1,111
C. 01,111
D. 0"1,111

". =acey Co. exchanged a piece of equipment that had cost 0&1,111 )now 4+7 depreciated* for a truc$ with a
current appraised value of 01",111. =acey Co. gave the other company the piece of equipment and 06,111.
=acey Co. should record
A. a 0+,111 loss
B. the truc$ at 016,111
C. a gain of 011,111
D. the truc$ at 01,111

"". 'hen exchanging nonmonetary assets
A. !oot must !e associated with the transaction in order to recogni#e a gain or loss
B. recogni#ed gain or loss can occur depending on the fair value of the asset surrendered and the fair value of
the asset received
C. a loss can !e recogni#ed only when the fair value of the asset received plus !oot is greater than the !oo$
value of the asset surrendered
D. recogni#ed gain or loss can occur depending on the !oo$ value of the asset surrendered and the fair value of
the asset surrendered

"&. 'hen !oot is involved in the exchange of nonmonetary productive assets, normally
A. the entire gain or loss on the exchange should !e recogni#ed
B. no gain or loss on the exchange may !e recogni#ed
C. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is received
D. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is given

"+. -alley Company exchanged a piece of equipment with a fair mar$et value of 01,111 and a !oo$ value of
0+,111 for a truc$ with a fair mar$et value of 015,111 and !oot of 0&,111. -alley Company should record the
truc$ at a cost of
A. 01+,111 and a recogni#ed loss of 0+,111
B. 015,111 and a recogni#ed loss of 0+,111
C. 01,111 and a recogni#ed loss of 0+,111
D. 01,111 and a recogni#ed loss of 01,111

"5. -ichmond, /nc. exchanged a piece of equipment with an original cost of 06,111, accumulated depreciation
to date of 0&1,111, and a fair value of 0&5,111 for a similar piece of equipment. ,he newly acquired equipment
had a !oo$ value of 0&1,111 and a fair mar$et value of 0&5,111. -ichmond should record the equipment
acquired at
A. 0 1
B. 0&1,111
C. 0&,111
D. 0&5,111

"4. >n Danuary &, 111, -ac$ Company traded in a used !ulldo#er with a carrying amount of 05+,111 for a new
!ulldo#er having a list price of 011,111 and paid cash difference of 0&1,111 to the dealer. ,he used !ulldo#er
had a fair value of 04+,111 on the date of exchange. At what amount should the new !ulldo#er !e recorded on
-ac$%s !oo$s(
A. 0 &1,111
B. 011+,111
C. 011+,111
D. 011,111

"6. >n =ay 1+, 111, -etread Company acquired a new for$lift in exchange for an old for$lift that it had
acquired in 111. ,he old for$lift was purchased for 01,111 and had a !oo$ value of 0+,111. >n the date of the
exchange, the old for$lift had a mar$et value of 05,111. /n addition, -etread paid 016,111 cash for the new
for$lift, which had a list price of 0+,111. At what amount should -etread record the new for$lift for financial
accounting purposes(
A. 0",111
B. 0&,111
C. 01,111
D. 0+,111

"9. 2erformance @tage Company had a professional contract with Actor E1 that was recorded in its accounting
records at 0"11,111. Dohnson Company had a contract with Actor E that was recorded in its accounting records
at 061,111. 2erformance traded Actor E1 to Dohnson for Actor E !y exchanging the actors% contracts. ,he fair
value of each contract was 0"1,111. 'hat amount should !e shown in the accounting records after the
exchange of actor contracts(
2erformance Dohnson
/. 061,111 061,111
//. 061,111 0"11,111
///. 0"11,111 061,111
/A. 0"1,111 0"1,111

A. /
B. //
C. ///
D. /A

&1. -upert Company exchanged one !usiness automo!ile for another !usiness automo!ile. ,he old automo!ile
had an original cost of 0&1,111, an undepreciated cost of 015,111, and a mar$et value of 01,111 when
exchanged. /n addition, -upert paid 09,111 cash for the replacement automo!ile. ,he list price of the
replacement automo!ile was 0"+,111. ,he replacement will help generate significantly greater cash flows in the
!usiness. At what amount should the replacement automo!ile !e recorded for financial accounting purposes(
A. 0&,111
B. 0"1,111
C. 0"",111
D. 0"+,111

&1. -e!!y Company received 051,111 in cash and used equipment with a fair value of 01&1,111 from 3arley
Corporation for -e!!y%s existing equipment, which had a fair value of 011,111 and an undepreciated cost of
0141,111 recorded on its !oo$s. ,he transaction was underta$en !ecause -e!!y was revising its mar$et strategy
and planned to reduce the use of this type of equipment in its production. Fow much gain should -e!!y
recogni#e on this exchange, and at what amount should the acquired equipment !e recorded, respectively(
A. 1 and 01+1,111
B. 0 ",111 and 01&",111
C. 01,111 and 0141,111
D. 0"1,111 and 01&1,111

&. >n August 1, 111, -o!!ins traded in an old plant asset for a newer model that would !e more productive
and efficient. Data relative to the old and new plant assets follow.
>ld 2lant Asset
>riginal cost 011,111
Accumulated depreciation of August 1, 111 4,111
3air value ,111

:ew 2lant Asset
?ist price 1",111
A total of 011,+11 cash was given in the trade. 'hat should !e the cost of the new plant asset for financial accounting purposes(
A. 01,111
B. 01,+11
C. 01",+11
D. 01",111

&". -ogaine Company exchanged inventory items that cost 0&4,111 and normally sold for 05+,111 for a new
delivery truc$ with a list price of 054,111. ,he delivery truc$ should !e recorded on -ogaine%s !oo$s at
A. 0&4,111
B. 05+,111
C. 054,111
D. 06,111

&&. Exhibit 10-1
,wo construction companies, 3argo and -am!am, are in the construction !usiness. 8ach owns a tract of land
!eing held for development, !ut each company !elieves that the other%s land is !etter suited to enhance the
success of each planned development. Accordingly, they agree to exchange their land and have the following
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
3air value !ased upon appraisal 0+11,111 0&+1,111
,he exchange of land was made, and !ased on the difference in appraised fair value, -am!am paid 0+1,111 cash to 3argo.
-efer to 8xhi!it 11-1. 3or financial reporting purposes, 3argo should recogni#e a gain on this exchange in the amount of
A. 0 1
B. 0 +1,111
C. 0111,111
D. 011,111

&+. Exhibit 10-1
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
-efer to 8xhi!it 11-1. 3or financial reporting purposes, -am!am should recogni#e a gain on this exchange in the amount of
A. 0 1
B. 0 +1,111
C. 0111,111
D. 011,111

&5. Exhibit 10-1
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
-efer to 8xhi!it 11-1. After the exchange, 3argo should record its newly acquired land on its !oo$s at
A. 0"11,111
B. 0&11,111
C. 0&+1,111
D. 0+11,111

&4. 'hich one of the following statements is true(
A. /f a plant asset is self-constructed for less than it would cost to purchase, a profit should !e recorded upon the
completion of the construction.
B. 'hen property, plant, or equipment is acquired through donation, a gain is credited.
C. Development stage enterprises need not report losses !efore sales are made.
D. /nterest cannot !e capitali#ed when an asset is su!stantially complete and ready for its intended use.

&6. 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
A. cost of the asset is the additional cost incurred to produce it
B. overhead would !e incurred whether or not the construction too$ place
C. asset cost will more closely approximate the cost of a purchased asset
D. decision to construct the asset should !e !ased on the total incremental cost and not include allocated fixed
overhead

&9. According to ;AA2, interest cost incurred to finance construction of an asset must !e capitali#ed in which
of the following situations(
A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive !asis
B. when an asset is used in other than the earning activities of the firm
C. when an asset is ready for its intended use
D. when an asset is !eing constructed for a firm%s own use

+1. >n Danuary 1, 111, -ong Company signed a contract to have -o#y Associates construct a manufacturing
facility at a cost of 01&,111,111. /t was estimated that it would ta$e three years to complete the pro<ect. Also on
Danuary 1, 111, to finance the construction cost, -ong !orrowed 01&,111,111 paya!le in seven annual
installments of 0,111,111 plus interest at the rate of 97. During 111, -ong made progress payments totaling
0+,111,111 under the contract, and the average amount of accumulated expenditures was 0",111,111 for the
year. ,he excess !orrowed funds were invested in short-term securities, from which -ong reali#ed investment
income of 0""1,111. 'hat amount should -ong report as capitali#ed interest at Decem!er "1, 111(
A. 0 1
B. 0 41,111
C. 0 +11,111
D. 01,51,111

+1. 'hich of the following costs incurred su!sequent to the acquisition of a machine would !e appropriately
accounted for !y de!iting the accumulated depreciation account related to the machine(
A. the cost of cleaning and lu!ricating the machine
B. the cost of replacing the motor on the machine when the cost of the original motor is not $nown
C. the cost of moving the machine to another manufacturing plant
D. the cost of a new attachment to the machine that provides for more output per unit of time

+. At the end of the year, any !alance in Allowance for -epairs should !e
A. closed to -epairs 8xpense
B. reported as a deferred credit
C. closed to -etained 8arnings
D. reported as a contra account to the asset

+". Gnder ;AA2, which one of the following types of costs should not !e capitali#ed(
A. rearrangements
B. routine maintenance
C. replacements
D. additions

+&. An improvement made to a machine increased its production capacity !y +7 without extending the
machine%s useful life. ,he cost of the improvement should !e
A. recorded as an expense
B. de!ited to Accumulated Depreciation
C. capitali#ed in the machine account
D. allocated !etween Accumulated Depreciation and the machine account

++. 'hich of the following events is most appropriately recorded as a reduction to accumulated depreciation(
A. an addition that increases the anticipated !enefits of the old asset
B. an improvement that extends an asset%s useful life
C. an improvement that increases the asset%s expected !enefits !eyond that originally expected
D. a replacement of a !etter asset for the one currently used

+5. ,he sale of a deprecia!le asset resulting in a gain indicates that the proceeds from the sale were
A. less than current mar$et value
B. greater than cost
C. greater than !oo$ value
D. less than !oo$ value

+4. >n Danuary 1, 111, -ingo purchased, for 0111,111, equipment having a useful life of eight years and an
estimated salvage value of 0&,111. -ingo has recorded monthly depreciation on the equipment using the
straight-line method. >n =arch 1, 11+, the equipment was sold for 0&5,111. As a result of this sale, -ingo
should recogni#e
A. no gain or loss
B. an 06,111 gain
C. an 06,111 loss
D. a 01,111 gain

+6. ,he -othchild Company purchased a machine on >cto!er 1, 111, for 061,111. At the time of acquisition,
the machine was estimated to have a useful life of five years and an estimated salvage value of 0+,111.
-othchild has recorded monthly depreciation using the straight-line method. >n April 1, 11, the machine was
sold for 0+1,111. 'hat should !e the loss recogni#ed from the sale of the machine(
A. 0 1
B. 0,+11
C. 0+,111
D. 04,+11

+9. -equired disclosure for property, plant, and equipment in the financial statements is !ased upon
A. age and depreciation method
B. age and nature
C. nature and function
D. function and depreciation method

51. /n 111, ;olf >il Company incurred costs of 04 million drilling oil wells. ,hirty percent of the drilling
resulted in oil !eing found. ,he rest of the drilling was unsuccessful. /f ;olf uses the successful-efforts method
of accounting, the oil and gas properties will !e valued on the Decem!er "1, 111 !alance sheet at
A. 04,111,111
B. 0&,911,111
C. 0&,11,111
D. 0,111,111

51. ,wo alternative methods of accounting for the cost of oil and gas properties have !een widely used. ,he
method that capitali#es all costs associated with all wells is the
A. successful-efforts method
B. full-cost method
C. varia!le-cost method
D. specific-cost method

5. Concerning current accounting for oil and gas properties, which statement is true(
A. ,he successful-efforts method must !e used.
B. ,he reserve-recognition method must !e used.
C. 8ither the successful-efforts method or the full-cost method may !e used.
D. ,he full-cost method must !e used.

5". ,he costs of drilling an unsuccessful well are expensed under
A. the successful-efforts method
B. the full-cost method
C. !oth the successful-efforts method and the full-cost method
D. neither the successful-efforts method nor the full-cost method

5&. Gnder /3-@, which of the following must !e expensed(
A. maintenance only
B. repairs only
C. rearrangements only
D. maintenance, repairs, and rearrangements

5+. A ma<or difference !etween /3-@ and ;AA2 regarding valuation of property, plant, and equipment is that
A. /3-@ allow valuation increases to !e recorded in certain circumstances, !ut ;AA2 does not permit increases
B. /3-@ and ;AA2 differ greatly on accounting for nonmonetary exchanges
C. /3-@ require capitali#ation of all repairs and maintenance while ;AA2 does not
D. /3-@ allocate lump-sum purchase costs !ased on relative !oo$ values rather than relative mar$et values

55. 'hen an operating asset is made up of significant individual components, /3-@ require the company to
A. group those components into no more than three groups for depreciation
B. com!ine the components into one unit and use a weighted average useful life
C. ignore the components for accounting purposes
D. account for each component individually

54. Costs incurred !y =ills Company that relate to its property, plant, and equipment assets might !e recorded
in one of the five following classes of accounts.
a. an expense account
!. an accumulated depreciation account
c. a land account
d. a !uilding account
e. an equipment account
Required:
3or each of the costs identified !elow, indicate the type of account in which the cost should !e recorded !y placing the appropriate letter in the space
provided.
HHHH 1. ,he legal fees associated with the acquisition of land.

HHHH . ,he cost of replacing the engine in a truc$ when the cost of the old engine is not $nown.

HHHH ". ,he cost of replacing an oil furnace with an electric furnace.

HHHH &. ,he cost of a new addition to a warehouse that will !e used to store inventory.

HHHH +. ,he cost of renovating a recently purchased ten-year-old office !uilding.

HHHH 5. ,he materials and la!or costs incurred in testing a new piece of equipment.

HHHH 4. ,he costs of tuning, lu!ricating, and tire rotation on a fleet of delivery truc$s.

HHHH 6. ,he additional costs in the construction of a !uilding due to a small fire that occurred during the construction period.

56. During 111, the ,insle Company completed the following transactions related to its property, plant, and
equipment accounts.
a. >n =arch 16, ,insle paid 0&61,111 for land, !uildings, and equipment in a lump-sum purchase. An appraisal that cost ,insle 011,111
revealed fair mar$et values of 011,111 for the land, 01+1,111 for the !uildings, and 01+1,111 for the equipment.
!. >n August 11, ,insle issued 1,111 shares of its 011 par value common stoc$ in exchange for some equipment. ,he equipment%s fair
mar$et value is estimated at 0"51,111 !y an outside appraisal. >n the date of the exchange, the stoc$ was !eing actively traded at 014
per share on a ma<or stoc$ exchange.
Required:
2repare the necessary <ournal entry to properly record each transaction.

59. During 111, -edford Company acquired a new piece of equipment for its manufacturing process. /n order
to purchase the equipment, -edford made a down payment of 0+1,111 and issued a 011,111 five-year, 47
note. ,he annual payment of principal and interest was to !e 0&6,446. ,he mar$et rate of interest for o!ligations
of this $ind is 17. ,he present value factor for an ordinary annuity of + years at 17 is ".51&445.
Required:
a. 2repare the <ournal entry to record the acquisition.
!. Assume that the equipment had an esta!lished cash price of 01,111. 2repare the <ournal entry to record the transaction under this
additional assumption.

41. @everal expenditures are listed !elow.
Ies :o

a. ?andscaping HHHHHH HHHHHH

!. Compensation for in<ury to construction wor$er HHHHHH HHHHHH

c. Cost of overhaul !efore initial use HHHHHH HHHHHH

d. Cost of tearing down a !uilding on newly acquired land HHHHHH HHHHHH

e. ?and held as a plant site for future use HHHHHH HHHHHH

f. 3ully depreciated assets still !eing used HHHHHH HHHHHH

g. ?easehold improvements HHHHHH HHHHHH

h. Deposits on machinery not yet received HHHHHH HHHHHH
Required:
/ndicate whether or not each expenditure would !e included in the cost of property, plant, and equipment.

?and Building 8quipment >ther

a. Construction costs on !uilding HHHHHH J HHHHHH HHHHHH

!. Compensation for in<ury to
construction wor$er
HHHHHH HHHHHH HHHHHH HHHHHH

c. 8quipment purchased for
!uilding excavation

d. /nterest on construction loan

e. 8quipment testing costs HHHHHH HHHHHH HHHHHH HHHHHH

f. Costs of tearing down a
!uilding on newly acquired
land

g. Delinquent property taxes on
acquired property

h. Cost of ma<or overhaul HHHHHH HHHHHH HHHHHH HHHHHH

i. ,itle search fees HHHHHH HHHHHH HHHHHH HHHHHH
Required:
/f the expenditure would !e capitali#ed to land, !uildings, equipment, or other, so indicate with an KJ.K An example is given.

4. @mith Delivery @ervices !ought a truc$ !y paying 0&&,111 cash down and signing a 01&6,111 non-interest-
!earing note due in five years for the !alance. Current interest rates were 67. Actuarial information for five
periods at 67 follows.
Amount of 1 1.&59
2resent value of 1 1.561
Amount of annuity of 1 +.654
2resent value of annuity of 1 ".99"
Required:
Compute the amount that should !e charged to the asset account.

4". =irror Corp. has agreed to expand its operations !y opening a manufacturing plant in Burns, ,exas. /n
return, Burns will donate an a!andoned !uilding and the + acres on which it sits to =irror. ,he land originally
cost 01,111,111 and the !uilding 0",111,111. ,he !uilding%s current !oo$ value is 0"61,111, and current
appraisals are. land 05,111,111 and !uilding 0,511,111. =irror has also agreed to provide 111 <o!s for the next
+ years to Burns% city residents. =irror estimates that the wages to these residents will amount to 0&,111,111.
Required:
2repare the <ournal entry to record this acquisition on =irror%s !oo$s.

4&. >n August 1, @ilver Company exchanged a machine for a similar machine owned !y 'rangler Company
and also received 04,111 cash from 'rangler Company. @ilver%s machine had an original cost of 041,111,
accumulated depreciation to date of 0"&,+11, and a fair mar$et value of 051,111. 'rangler%s machine had a
!oo$ value of 0&+,111 and a fair value of 0+",111.
Required:
2repare the necessary <ournal entry !y @ilver Company to record this transaction assuming
a. @ilver will use the newly acquired machine in the same manner as the old one.
!. @ilver%s use of the new machine will !e su!stantially different from the old one.

4+. 2ops Corp. has agreed to exchange an old computer system for a van from /ncline, /nc. /n addition, /ncline
will pay 2ops 0,111. ,he computer originally cost 2ops 0+,111 and its current !oo$ value is 01&,111. ,he
van%s original cost was 0"1,111 and its accumulated depreciation is 01,111. ,he appraised value of the
computer is 01+,111, and the appraised value of the van is 01",111.
Required:
2repare the <ournal entries to record the exchange on !oth companies% !oo$s.

45. 'histler Company exchanged a piece of equipment with a cost of 0"11,111 and accumulated depreciation
of 0&1,111 for land owned !y Doseph Corporation. :o cash was exchanged. Doseph%s land had an original cost
of 091,111. At the date of exchange, !oth assets had a fair mar$et value of 061,111.
Required:
2repare the <ournal entry that each company should record.

44. @ally Company is exchanging a unique machine for a similar machine from 'illiam, /nc. @ally%s equipment
originally cost 0"11,111 and has a !oo$ value of 014+,111. 'illiam%s machine cost 0+1,111 and has a !oo$
value of 01+1,111. :o cash will !e exchanged, and the two machines will continue to perform the same
functions for each company.
Required:
2repare the <ournal entry for each company.

46. -alph Company exchanged a machine for some land. ,he machine had cost 01+,111, was 417 depreciated,
and could !e sold for 0&,111. Calvin paid 0511 in addition to giving up the machine.
Required:
a. Compute the amount at which the land should !e recorded.
!. Assume, instead, that -alph exchanged the machine for a new, more efficient machine with a fair value of 0&,411, while still paying
0511 as !efore. Compute the gain or loss that would !e recorded on the sale of the old machine !y -alph.

49. =ar$ Company exchanged a worn-out tractor that had cost 01,111 and was half depreciated for a new
tractor with a fair value of 01,111. =ar$ paid an additional 0,+11 cash. ,he transaction lac$ed commercial
su!stance.
Required:
Compute the amount at which =ar$ should record the new tractor.

61. Assuming that the effects of interest capitali#ation are material, calculate the amount of interest costs to !e
capitali#ed !y =arcus Corporation in 111 in relation to the following events.
a. >n Danuary 1, =arcus !egan construction for a new storage !uilding for its own use. 8xpenditures incurred evenly throughout the year
totaled 0911,111. =arcus !orrowed 01,111,111 specifically for construction of the storage !uilding at an annual interest rate of 57.
!. /nventories costing 011,111 were routinely manufactured during the year. =arcus !orrowed 011,111 at 67 to finance inventory-
related costs.
c. >n @eptem!er 1, =arcus !egan construction of a custom-designed machine to the specifications of a customer. As of Decem!er "1,
011,111 of materials, la!or, and overhead have !een assigned to the machine. ,hose costs were incurred evenly throughout the period
@eptem!er 1 through Decem!er "1. ,o finance construction, 0"1,111 was !orrowed at a 97 interest rate.

61. >n Danuary ", 111, =ercury Company !egan self-constructing an asset that qualified for interest
capitali#ation. >n Danuary +, =ercury !orrowed 0"11,111 on an 67 construction loan. /n addition, =ercury had
0&11,111 of 57 notes paya!le and 0411,111 of 97 !onds paya!le outstanding. By Decem!er "1, expenditures
)occurring evenly throughout the year* of 0611,111 had !een made on the asset. /nvestment of unused funds
during the year yielded 01,11 of interest revenue.
Required:
Compute the amount of interest that should !e capitali#ed during 111.

6. Cooper, /nc. is constructing a !uilding that qualifies for interest capitali#ation. ,he following information is
availa!le.
Capitali#ation period. Danuary 1, 111-Decem!er "1, 111 8xpenditures on pro<ect )incurred evenly*.
111 01,111
111 051,111
Amounts !orrowed and outstanding )all de!t incurred Danuary 1, 111*.
011,111 at 117 )specifically for the construction pro<ect*
016,111 at 17 )general de!t*
0"1,111 at 1&7 )general de!t*
Required:
a. Compute the amount of interest that should !e capitali#ed in 111 and 111. )-ound interest rates to the nearest hundredths, e.g.,
14.57.*
!. Assume that in 111 unused !orrowed funds were invested and earned interest revenue amounting to 0511. Fow much interest should
!e capitali#ed to the asset account in 111(

6". ,he Feavy 8quipment Company decided to replace a gasoline engine with a diesel engine in one of its
cranes. ,he new engine cost 06,111, which Feavy paid in cash. ,he old engine is discarded at no cost to Feavy
8quipment.
Required:
a. 2repare the required <ournal entry for Feavy 8quipment Company, assuming the old gasoline engine is carried on the !oo$s at a cost of
0&,111 with accumulated depreciation of 0",111.
!. 2repare the required <ournal entry for Feavy 8quipment Company, assuming the !oo$ value of the old engine is not $nown.

6&. -o!ertson Company is ma$ing significant improvements to some of its assets, as follows.
1. /t is replacing the old furnace that cost 0&1,111 and has a 01+,111 !oo$ value with a new furnaceCair conditioner com!ination.
-o!ertson spent 051,111 in cash and was given a 0",111 trade-in on the old furnace.
. ,he delivery van is !eing updated with a new 04,111 engine that will increase the useful life of the van !y years. ,he van originally
cost 0"+,111 and has accumulated depreciation of 0+,111.
Required:
a. -ecord the appropriate <ournal entry for replacing the furnace.
!. 'hen recording the transaction associated with the van there is a choice !etween two methods. 2rovide the <ournal entries for each
method.

6+. >n =ay 1, 111, Argus =anufacturing Co. acquired a machine for 0161,111. ,he machine was depreciated
monthly using the straight-line method with an estimated life of ten years and no salvage value. >n Decem!er
1, 114, the machine was sold for 0&1,111.
Required:
Compute the amount of gain or loss on the sale of the machine, and prepare the <ournal entry to record the sale.
)Calculate depreciation to the nearest whole month.*

65. /n 111, Fart Co. invested 0&,111,111 in oil well exploration activities. @eventy percent of the drilling was
successful and resulted in commercial quantities of oil !eing found.
Required:
a. /ndicate the amount of drilling expense Fart Co. would recogni#e in 111 if the full-cost method is in use.
!. /ndicate the cost that would !e reported on the !alance sheet as oil and gas properties if the successful-efforts method is in use.

64. 'hy is it important to allocate a lump-sum purchase amount among the individual assets acquired(

66. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,
ranging from routine repairs to ma<or overhauls and improvements. ,he accountant%s pro!lem is to determine
how these costs should !e recorded.
Required:
/dentify the two categories of expenditures in which these costs can !e classified, and explain how the
accountant determines which classification is appropriate.

69. ?ist and descri!e four specific examples of start-up costs. Discuss the ;AA2 rules for recording start-up
costs.

91. Current ;AA2 descri!es three exceptions to the general rule of using fair value when exchanging
nonmonetary assets.
Required:
?ist the three exceptions and provide an example of each.

91. Discuss when the interest capitali#ation period !egins and ends for assets constructed for a company%s own
use.

9. Descri!e the /3-@ treatment of increases in the mar$et value of property, plant, and equipment held during
the year. Compare that treatment to G.@. ;AA2 requirements.

Chapter 11--2roperty, 2lant, and 8quipment. Acquisition and
Disposal Ley

1. Alternative terms for property, plant, and equipment include all of the following except
A. plant assets
B. fixed assets
C long-term assets
D. operational assets

. All of the following would !e classified as property, plant, and equipment except
A. office !uildings
B. machinery owned for stand!y purposes
C equipment held for resale
D. equipment used in the operation of the !usiness

". Advantages of using historical cost as the !asis of valuation of property, plant, and equipment include all of
the following except
A. it is a very relia!le valuation
! gains and losses from holding the asset are recogni#ed in the period of value change
C. cost equals the fair mar$et value at the date of acquisition
D. it is consistent with the valuation of other assets, lia!ilities, and stoc$holders% equity

&. 'hich one of the following types of assets should not !e classified as property, plant, and equipment(
A. leasehold improvements
B. fully-depreciated !uilding )still in use*
C idle land and !uildings
D. long-lived tangi!le assets

+. ,he -oth Company incurred the following costs in the acquisition of a plant asset.
/nvoice price 0,111
2urchase discount lost &1
3reight-in "+1
/nstallation 111
Cost of trial runs 1+1
'hat is the cost of the plant asset(
A. 0,411
! 0,551
C. 0,++1
D. 0,111

5. -odrigue# Company made the following payments related to a land acquisition.
2urchase price 05,111
2ast due taxes +11
,itle search 1+1
Cost of ra#ing old !uilding "11
/nterest )incurred after productive operations had !egun* 151
2roceeds from salvage of old !uilding 6+
,he recorded cost of the land should !e
A. 05,&+1
B. 05,+6+
C. 05,4&+
D 05,65+

4. 'hich one of the following types of costs should not !e included in the cost of a !uilding(
A. costs of remodeling and reconditioning
B. excavation costs
C. unanticipated costs resulting from the condition of the land
D unanticipated construction costs, such as stri$e or fire losses

6. -ichards Corporation purchased some equipment !y issuing a 01,111 non-interest-!earing, four-year note
when interest rates were 67. Actuarial information for 67 and four periods follows.
3uture amount of 1 1."51
2resent value of 1 1.4"+
/n the entry to record this purchase, there would !e a
A. 01,111 de!it to 8quipment
B. 0+,99.&1 credit to Discount on :otes 2aya!le
C. 04,19.46 credit to :otes 2aya!le
D 01&,411.51 de!it to 8quipment

9. -andal%s -ifles purchased some equipment !y issuing a three-year 57 note for 06,111 when the mar$et rate
for an o!ligation of this nature was 67. ,he interest is paya!le annually. Actuarial information for three periods
follows.
57 67
3uture amount of 1 1.191115 1.+941
3uture amount of annuity of 1 ".16"511 ".&5&11
2resent value of 1 1.6"9519 1.49"6"
2resent value of annuity of 1 .54"11 .+44194
At the date of purchase, what amount should !e de!ited to 8quipment(
A 04,+64.55
B. 05,415.95
C. 05,"+1.55
D. 05,5"".41

11. According to ;AA2, interest must !e capitali#ed for
A. assets that are ready for use
! assets constructed for a firm%s own use
C. assets that are not !eing used in the earning activities of the company
D. inventories that are produced in large quantities on a repetitive !asis

11. All of the following ma<or types of assets would !e included in the general category of property, plant, and
equipment on the !alance sheet except
A. wasting assets
B. furniture and fixtures
C land purchased for future use
D. leasehold improvements

1. An asset classified as property, plant, and equipment on the !alance sheet must have which one of the
following characteristics(
A. an expected life of more than one year
B. used in the normal course of !usiness
C. tangi!le in nature
D all of these

1". All of the following costs associated with acquiring a !uilding should !e capitali#ed except
A. the costs of !uilding permits
! the cost of a stri$e associated with the construction of the !uilding
C. the contract price
D. the costs of excavation for the !uilding

1&. -emy purchases a new machine !y issuing an 016,111 three-year note. ,he company will pay off the
o!ligation !y paying 05,111 at the end of each year. ,he mar$et rate for o!ligations of this type is 67. ,he
present value of an annuity at 67 for three periods is .+44194. ,he machine will !e recorded at a cost of
A. 0 5,111.11
B. 0 9,&5.+6
C 01+,&5.+6
D. 016,111.11

1+. ,he president of -eindeer Corporation donated a !uilding to =onday Corporation. ,he !uilding had an
original cost of 0+11,111, a !oo$ value of 014+,111, and a fair mar$et value of 0+1,111. ,o record this
donation, =onday will
A. ma$e a memorandum entry
B. de!it Building for 014+,111 and credit ;ain for 014+,111
C de!it Building for 0+1,111 and credit ;ain for 0+1,111
D. de!it Building for 0+11,111 and credit ;ain for 0+11,111

15. During 111, -u!y Corporation purchased three pieces of equipment at an auction for the lump sum of
011,111. /t cost -u!y 01,111 to have the equipment delivered and installed. ,he equipment was appraised at
the following values.
=achine 1 011,111
=achine 11+,111
=achine " 4+,111
=achine should !e recorded on -u!y%s !oo$s at
A. 011+,111
B. 011,111
C 0 44,111
D. 0 41,111

14. -egal recently purchased a !uilding and the tract of land on which it is located. -egal plans to ra#e the
!uilding immediately and to erect a new !uilding on the site. ,he value of the original !uilding should !e
A. written off as an extraordinary loss in the year the !uilding is ra#ed
! capitali#ed as part of the cost of the land
C. depreciated over the period from the date of acquisition to the date that the !uilding is to !e ra#ed
D. capitali#ed as part of the cost of the new !uilding

16. ,he de!it for a sales tax paid on the purchase of a plant asset would !e included in
A the plant asset account
B. a separate deferred charge account
C. =iscellaneous ,ax 8xpense
D. Accumulated Depreciation-=achinery

19. >n 3e!ruary 1, 111, -ummel Corporation purchased a parcel of land as a factory site for 0+1,111. An old
!uilding on the property was demolished, and construction !egan on a new !uilding that was completed on
Decem!er 1, 111. Costs incurred during this period are listed !elow.
Demolition of old !uilding 0 11,111
Architect%s fees ,111
?egal fees for title investigation and purchase contract ",111
Construction costs 1,111,111
)@alvaged materials resulting from demolition were sold for 01+,111.*
-ummel should record the cost of the land and the cost of the new !uilding, respectively, as
A 0&6,111 and 01,1,111
B. 0+1,111 and 01,1,111
C. 05",111 and 01,1",111
D. 05",111 and 01,114,111

1. ,he -ipple Corporation acquired land, !uildings, and equipment from a !an$rupt company at a lump-sum
price of 0+11,111. At the time of acquisition, -ipple paid 01,111 to have the assets appraised. ,he appraisal
disclosed the following values.
?and 0111,111
Buildings 11,111
8quipment "11,111
'hat costs should !e assigned to the !uildings(
A. 0155,554
! 014","""
C. 011,111
D. 051,111

1. >n =ay 4, 111, -a!ie Corporation purchased for 0&+1,111 a tract of land on which was located a
warehouse and an office !uilding. ,he following data were collected concerning the property.
Current Aendor%s
Assessed >riginal
Aaluation Cost
?and 0111,111 0 41,111
'arehouse 61,111 61,111
>ffice !uilding 1,111 1+1,111
0&11,111 0"11,111
'hat are the appropriate amounts that -a!ie should record for the land, warehouse, and office !uilding, respectively(
A. land, 0 41,111B warehouse, 061,111B office !uilding, 01+1,111
B. land, 0111,111B warehouse, 061,111B office !uilding, 01,111
C. land, 0111,111B warehouse, 061,111B office !uilding, 041,111
D land, 011,+11B warehouse, 091,111B office !uilding, 0&4,+11

. >n April 1, 111, -icher Corporation purchased a new machine on a deferred payment !asis. A down
payment of 0+,111 was made and 11 monthly installments of 01&,111 each are to !e made !eginning on =ay 1,
111. ,he cash equivalent price of the machine was 01"1,111. -icher incurred and paid installation costs
amounting to 05,111. ,he amount to !e capitali#ed as the cost of the machine is
A. 01"1,111
! 01"5,111
C. 01&1,111
D. 01&+,111

". 8arly in 111, -oper, /nc. purchased certain plant assets under a deferred payment contract. ,he agreement
was to pay 0+1,111 at year-end for each of the next three years. ,he plant assets should !e valued at
A present value of a 0+1,111 annuity for three years discounted at the !an$ prime interest rate
B. 01+1,111
C. present value of a 0+1,111 annuity for three years discounted at the mar$et interest rate
D. 01+1,111 plus imputed interest

&. A plant site donated !y a city to -upp Company, which plans to open a new factory, should !e recorded on
-upp%s !oo$s at
A. the nominal cost of ta$ing title to it
! its fair mar$et value
C. #ero value, !ut footnoted
D. the value assigned to it !y the company%s directors

+. >n August 6, 111, -uggle Drilling @ervices purchased a machine with a contract price of 0&11,111 and
cash terms of C11, nC"1. ,he company paid 06,111 in transportation costs and 06,111 for installation. @ales
taxes of 0,111 were paid on the invoice amount. ,he machine should !e recorded as a plant asset in the
amount of
A. 0&11,111
B. 0&,111
C. 0&6,111
D 0&"1,111

5. 'hich is the !est definition of start-up costs(
A. all activities associated with organi#ing a new entity
B. organi#ation costs
C one-time activities for opening a new facility, introducing a new product or service, conducting !usiness in a
new territory, conducting !usiness with a new class of customer, initiating a new process in an existing facility,
or starting some new operation
D. activities related to routine ongoing efforts to refine or otherwise improve the qualities of an existing
product, service, process, or facility

4. 2roperty acquired through donation is recorded at
A. its !oo$ value
! its fair mar$et value
C. its cost
D. #ero

6. 'hen exchanging nonmonetary assets with another company, the preferred approach is to value the
transaction !ased upon fair value of
A. the asset surrendered or asset received whichever is most evident
B. the asset surrendered unless the fair value of the asset received is easier to determine
C. the asset surrendered except for certain conditions
D the asset surrendered

9. -o!ards @ervices exchanged an asset with a cost of 0&,111 )now &17 depreciated* for a nonmonetary asset
worth 01,111. -o!ards received 0,111 !oot. /n the entry to record this exchange, -o!ards should record
A. a 011,111 loss
B. a 0&11 gain
C. no gain or loss
D a 0&11 loss

"1. -enault =arina exchanged a !oat with a cost of 061,111 )now 4+7 depreciated* for another !oat with a
current fair value of 04,111. :o !oot was paid or received. ,he new !oat will perform the exact same function
as the old !oat. -enault should record the new !oat at
A. 01,111
! 04,111
C. 0 4,111
D. 0 1

"1. -ust, /nc. exchanged a truc$ that cost 0"1,111 )now +17 depreciated* for equipment with an appraised
value of 0+,111. -ust paid !oot of 05,111. -ust should record the equipment at
A 0+,111
B. 0"1,111
C. 01,111
D. 0"1,111

". =acey Co. exchanged a piece of equipment that had cost 0&1,111 )now 4+7 depreciated* for a truc$ with a
current appraised value of 01",111. =acey Co. gave the other company the piece of equipment and 06,111.
=acey Co. should record
A a 0+,111 loss
B. the truc$ at 016,111
C. a gain of 011,111
D. the truc$ at 01,111

"". 'hen exchanging nonmonetary assets
A. !oot must !e associated with the transaction in order to recogni#e a gain or loss
B. recogni#ed gain or loss can occur depending on the fair value of the asset surrendered and the fair value of
the asset received
C. a loss can !e recogni#ed only when the fair value of the asset received plus !oot is greater than the !oo$
value of the asset surrendered
D recogni#ed gain or loss can occur depending on the !oo$ value of the asset surrendered and the fair value of
the asset surrendered

"&. 'hen !oot is involved in the exchange of nonmonetary productive assets, normally
A the entire gain or loss on the exchange should !e recogni#ed
B. no gain or loss on the exchange may !e recogni#ed
C. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is received
D. no gain is recogni#ed, !ut a loss may !e recogni#ed to the extent that !oot is given

"+. -alley Company exchanged a piece of equipment with a fair mar$et value of 01,111 and a !oo$ value of
0+,111 for a truc$ with a fair mar$et value of 015,111 and !oot of 0&,111. -alley Company should record the
truc$ at a cost of
A. 01+,111 and a recogni#ed loss of 0+,111
! 015,111 and a recogni#ed loss of 0+,111
C. 01,111 and a recogni#ed loss of 0+,111
D. 01,111 and a recogni#ed loss of 01,111

"5. -ichmond, /nc. exchanged a piece of equipment with an original cost of 06,111, accumulated depreciation
to date of 0&1,111, and a fair value of 0&5,111 for a similar piece of equipment. ,he newly acquired equipment
had a !oo$ value of 0&1,111 and a fair mar$et value of 0&5,111. -ichmond should record the equipment
acquired at
A. 0 1
B. 0&1,111
C 0&,111
D. 0&5,111

"4. >n Danuary &, 111, -ac$ Company traded in a used !ulldo#er with a carrying amount of 05+,111 for a new
!ulldo#er having a list price of 011,111 and paid cash difference of 0&1,111 to the dealer. ,he used !ulldo#er
had a fair value of 04+,111 on the date of exchange. At what amount should the new !ulldo#er !e recorded on
-ac$%s !oo$s(
A. 0 &1,111
! 011+,111
C. 011+,111
D. 011,111

"6. >n =ay 1+, 111, -etread Company acquired a new for$lift in exchange for an old for$lift that it had
acquired in 111. ,he old for$lift was purchased for 01,111 and had a !oo$ value of 0+,111. >n the date of the
exchange, the old for$lift had a mar$et value of 05,111. /n addition, -etread paid 016,111 cash for the new
for$lift, which had a list price of 0+,111. At what amount should -etread record the new for$lift for financial
accounting purposes(
A 0",111
B. 0&,111
C. 01,111
D. 0+,111

"9. 2erformance @tage Company had a professional contract with Actor E1 that was recorded in its accounting
records at 0"11,111. Dohnson Company had a contract with Actor E that was recorded in its accounting records
at 061,111. 2erformance traded Actor E1 to Dohnson for Actor E !y exchanging the actors% contracts. ,he fair
value of each contract was 0"1,111. 'hat amount should !e shown in the accounting records after the
exchange of actor contracts(
2erformance Dohnson
/. 061,111 061,111
//. 061,111 0"11,111
///. 0"11,111 061,111
/A. 0"1,111 0"1,111

A. /
B. //
C. ///
D /A

&1. -upert Company exchanged one !usiness automo!ile for another !usiness automo!ile. ,he old automo!ile
had an original cost of 0&1,111, an undepreciated cost of 015,111, and a mar$et value of 01,111 when
exchanged. /n addition, -upert paid 09,111 cash for the replacement automo!ile. ,he list price of the
replacement automo!ile was 0"+,111. ,he replacement will help generate significantly greater cash flows in the
!usiness. At what amount should the replacement automo!ile !e recorded for financial accounting purposes(
A. 0&,111
B. 0"1,111
C 0"",111
D. 0"+,111

&1. -e!!y Company received 051,111 in cash and used equipment with a fair value of 01&1,111 from 3arley
Corporation for -e!!y%s existing equipment, which had a fair value of 011,111 and an undepreciated cost of
0141,111 recorded on its !oo$s. ,he transaction was underta$en !ecause -e!!y was revising its mar$et strategy
and planned to reduce the use of this type of equipment in its production. Fow much gain should -e!!y
recogni#e on this exchange, and at what amount should the acquired equipment !e recorded, respectively(
A. 1 and 01+1,111
B. 0 ",111 and 01&",111
C. 01,111 and 0141,111
D 0"1,111 and 01&1,111

&. >n August 1, 111, -o!!ins traded in an old plant asset for a newer model that would !e more productive
and efficient. Data relative to the old and new plant assets follow.
>ld 2lant Asset
>riginal cost 011,111
Accumulated depreciation of August 1, 111 4,111
3air value ,111

:ew 2lant Asset
?ist price 1",111
A total of 011,+11 cash was given in the trade. 'hat should !e the cost of the new plant asset for financial accounting purposes(
A 01,111
B. 01,+11
C. 01",+11
D. 01",111

&". -ogaine Company exchanged inventory items that cost 0&4,111 and normally sold for 05+,111 for a new
delivery truc$ with a list price of 054,111. ,he delivery truc$ should !e recorded on -ogaine%s !oo$s at
A. 0&4,111
! 05+,111
C. 054,111
D. 06,111

&&. Exhibit 10-1
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
-efer to 8xhi!it 11-1. 3or financial reporting purposes, 3argo should recogni#e a gain on this exchange in the amount of
A. 0 1
B. 0 +1,111
C 0111,111
D. 011,111

&+. Exhibit 10-1
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
-efer to 8xhi!it 11-1. 3or financial reporting purposes, -am!am should recogni#e a gain on this exchange in the amount of
A. 0 1
B. 0 +1,111
C. 0111,111
D 011,111

&5. Exhibit 10-1
information.
3argo%s -am!am%s
?and ?and
Cost and !oo$ value 0&11,111 0+1,111
-efer to 8xhi!it 11-1. After the exchange, 3argo should record its newly acquired land on its !oo$s at
A. 0"11,111
B. 0&11,111
C 0&+1,111
D. 0+11,111

&4. 'hich one of the following statements is true(
A. /f a plant asset is self-constructed for less than it would cost to purchase, a profit should !e recorded upon the
completion of the construction.
B. 'hen property, plant, or equipment is acquired through donation, a gain is credited.
C. Development stage enterprises need not report losses !efore sales are made.
D /nterest cannot !e capitali#ed when an asset is su!stantially complete and ready for its intended use.

&6. 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
A. cost of the asset is the additional cost incurred to produce it
B. overhead would !e incurred whether or not the construction too$ place
C asset cost will more closely approximate the cost of a purchased asset
D. decision to construct the asset should !e !ased on the total incremental cost and not include allocated fixed
overhead

&9. According to ;AA2, interest cost incurred to finance construction of an asset must !e capitali#ed in which
of the following situations(
A. when the asset is inventory that is routinely manufactured in large quantities on a repetitive !asis
B. when an asset is used in other than the earning activities of the firm
C. when an asset is ready for its intended use
D when an asset is !eing constructed for a firm%s own use

+1. >n Danuary 1, 111, -ong Company signed a contract to have -o#y Associates construct a manufacturing
facility at a cost of 01&,111,111. /t was estimated that it would ta$e three years to complete the pro<ect. Also on
Danuary 1, 111, to finance the construction cost, -ong !orrowed 01&,111,111 paya!le in seven annual
installments of 0,111,111 plus interest at the rate of 97. During 111, -ong made progress payments totaling
0+,111,111 under the contract, and the average amount of accumulated expenditures was 0",111,111 for the
year. ,he excess !orrowed funds were invested in short-term securities, from which -ong reali#ed investment
income of 0""1,111. 'hat amount should -ong report as capitali#ed interest at Decem!er "1, 111(
A. 0 1
! 0 41,111
C. 0 +11,111
D. 01,51,111

+1. 'hich of the following costs incurred su!sequent to the acquisition of a machine would !e appropriately
accounted for !y de!iting the accumulated depreciation account related to the machine(
A. the cost of cleaning and lu!ricating the machine
! the cost of replacing the motor on the machine when the cost of the original motor is not $nown
C. the cost of moving the machine to another manufacturing plant
D. the cost of a new attachment to the machine that provides for more output per unit of time

+. At the end of the year, any !alance in Allowance for -epairs should !e
A closed to -epairs 8xpense
B. reported as a deferred credit
C. closed to -etained 8arnings
D. reported as a contra account to the asset

+". Gnder ;AA2, which one of the following types of costs should not !e capitali#ed(
A. rearrangements
! routine maintenance
C. replacements
D. additions

+&. An improvement made to a machine increased its production capacity !y +7 without extending the
machine%s useful life. ,he cost of the improvement should !e
A. recorded as an expense
B. de!ited to Accumulated Depreciation
C capitali#ed in the machine account
D. allocated !etween Accumulated Depreciation and the machine account

++. 'hich of the following events is most appropriately recorded as a reduction to accumulated depreciation(
A. an addition that increases the anticipated !enefits of the old asset
! an improvement that extends an asset%s useful life
C. an improvement that increases the asset%s expected !enefits !eyond that originally expected
D. a replacement of a !etter asset for the one currently used

+5. ,he sale of a deprecia!le asset resulting in a gain indicates that the proceeds from the sale were
A. less than current mar$et value
B. greater than cost
C greater than !oo$ value
D. less than !oo$ value

+4. >n Danuary 1, 111, -ingo purchased, for 0111,111, equipment having a useful life of eight years and an
estimated salvage value of 0&,111. -ingo has recorded monthly depreciation on the equipment using the
straight-line method. >n =arch 1, 11+, the equipment was sold for 0&5,111. As a result of this sale, -ingo
should recogni#e
A. no gain or loss
! an 06,111 gain
C. an 06,111 loss
D. a 01,111 gain

+6. ,he -othchild Company purchased a machine on >cto!er 1, 111, for 061,111. At the time of acquisition,
the machine was estimated to have a useful life of five years and an estimated salvage value of 0+,111.
-othchild has recorded monthly depreciation using the straight-line method. >n April 1, 11, the machine was
sold for 0+1,111. 'hat should !e the loss recogni#ed from the sale of the machine(
A. 0 1
B. 0,+11
C. 0+,111
D 04,+11

+9. -equired disclosure for property, plant, and equipment in the financial statements is !ased upon
A. age and depreciation method
B. age and nature
C nature and function
D. function and depreciation method

51. /n 111, ;olf >il Company incurred costs of 04 million drilling oil wells. ,hirty percent of the drilling
resulted in oil !eing found. ,he rest of the drilling was unsuccessful. /f ;olf uses the successful-efforts method
of accounting, the oil and gas properties will !e valued on the Decem!er "1, 111 !alance sheet at
A. 04,111,111
B. 0&,911,111
C. 0&,11,111
D 0,111,111

51. ,wo alternative methods of accounting for the cost of oil and gas properties have !een widely used. ,he
method that capitali#es all costs associated with all wells is the
A. successful-efforts method
! full-cost method
C. varia!le-cost method
D. specific-cost method

5. Concerning current accounting for oil and gas properties, which statement is true(
A. ,he successful-efforts method must !e used.
B. ,he reserve-recognition method must !e used.
C 8ither the successful-efforts method or the full-cost method may !e used.
D. ,he full-cost method must !e used.

5". ,he costs of drilling an unsuccessful well are expensed under
A the successful-efforts method
B. the full-cost method
C. !oth the successful-efforts method and the full-cost method
D. neither the successful-efforts method nor the full-cost method

5&. Gnder /3-@, which of the following must !e expensed(
A. maintenance only
B. repairs only
C. rearrangements only
D maintenance, repairs, and rearrangements

5+. A ma<or difference !etween /3-@ and ;AA2 regarding valuation of property, plant, and equipment is that
A /3-@ allow valuation increases to !e recorded in certain circumstances, !ut ;AA2 does not permit increases
B. /3-@ and ;AA2 differ greatly on accounting for nonmonetary exchanges
C. /3-@ require capitali#ation of all repairs and maintenance while ;AA2 does not
D. /3-@ allocate lump-sum purchase costs !ased on relative !oo$ values rather than relative mar$et values

55. 'hen an operating asset is made up of significant individual components, /3-@ require the company to
A. group those components into no more than three groups for depreciation
B. com!ine the components into one unit and use a weighted average useful life
C. ignore the components for accounting purposes
D account for each component individually

54. Costs incurred !y =ills Company that relate to its property, plant, and equipment assets might !e recorded
in one of the five following classes of accounts.
a. an expense account
!. an accumulated depreciation account
c. a land account
d. a !uilding account
e. an equipment account
Required:
3or each of the costs identified !elow, indicate the type of account in which the cost should !e recorded !y placing the appropriate letter in the space
provided.
HHHH 1. ,he legal fees associated with the acquisition of land.

HHHH . ,he cost of replacing the engine in a truc$ when the cost of the old engine is not $nown.

HHHH ". ,he cost of replacing an oil furnace with an electric furnace.

HHHH &. ,he cost of a new addition to a warehouse that will !e used to store inventory.

HHHH +. ,he cost of renovating a recently purchased ten-year-old office !uilding.

HHHH 5. ,he materials and la!or costs incurred in testing a new piece of equipment.

HHHH 4. ,he costs of tuning, lu!ricating, and tire rotation on a fleet of delivery truc$s.

HHHH 6. ,he additional costs in the construction of a !uilding due to a small fire that occurred during the construction period.

1. c +. d
. ! 5. e
". e 4. a
&. d 6. a

56. During 111, the ,insle Company completed the following transactions related to its property, plant, and
equipment accounts.
a. >n =arch 16, ,insle paid 0&61,111 for land, !uildings, and equipment in a lump-sum purchase. An appraisal that cost ,insle 011,111
revealed fair mar$et values of 011,111 for the land, 01+1,111 for the !uildings, and 01+1,111 for the equipment.
!. >n August 11, ,insle issued 1,111 shares of its 011 par value common stoc$ in exchange for some equipment. ,he equipment%s fair
mar$et value is estimated at 0"51,111 !y an outside appraisal. >n the date of the exchange, the stoc$ was !eing actively traded at 014
per share on a ma<or stoc$ exchange.
Required:
2repare the necessary <ournal entry to properly record each transaction.
a. ?and
M)011,111
C0+11,111*
N
0&91,111O
195,111
Building
M)01+1,111
C0+11,111*
N
0&91,111O
1&4,111
8quipment
M)01+1,111
C0+11,111*
N
0&91,111O
1&4,111
Cash &91,111

!. 8quipment )1,111 N 014* "&1,111
Common @toc$, 011 par 11,111
Additional 2aid-/n Capital on Common @toc$ 1&1,111

59. During 111, -edford Company acquired a new piece of equipment for its manufacturing process. /n order
to purchase the equipment, -edford made a down payment of 0+1,111 and issued a 011,111 five-year, 47
note. ,he annual payment of principal and interest was to !e 0&6,446. ,he mar$et rate of interest for o!ligations
of this $ind is 17. ,he present value factor for an ordinary annuity of + years at 17 is ".51&445.
Required:
a. 2repare the <ournal entry to record the acquisition.
!. Assume that the equipment had an esta!lished cash price of 01,111. 2repare the <ournal entry to record the transaction under this
additional assumption.

a. 8quipment
M)0&6,446
N
".51&445*
P 0+1,111O
+,6"&
Discount
on :otes
2aya!le
&,155
:otes 2aya!le 11,111
Cash +1,111

!. 8quipment 1,111
Discount on :otes 2aya!le "1,111
:otes 2aya!le 11,111
Cash +1,111

Ies :o

a. ?andscaping HHHHHH HHHHHH

!. Compensation for in<ury to construction wor$er HHHHHH HHHHHH

c. Cost of overhaul !efore initial use HHHHHH HHHHHH

d. Cost of tearing down a !uilding on newly acquired land HHHHHH HHHHHH

e. ?and held as a plant site for future use HHHHHH HHHHHH

f. 3ully depreciated assets still !eing used HHHHHH HHHHHH

g. ?easehold improvements HHHHHH HHHHHH

h. Deposits on machinery not yet received HHHHHH HHHHHH
Required:
/ndicate whether or not each expenditure would !e included in the cost of property, plant, and equipment.
Ies :o
a. J
! J
c. J
d. J
e J
f. J
g. J
h J


a. Construction costs on !uilding HHHHHH J HHHHHH HHHHHH

construction wor$er

!uilding excavation


e. 8quipment testing costs HHHHHH HHHHHH HHHHHH HHHHHH

land

acquired property

h. Cost of ma<or overhaul HHHHHH HHHHHH HHHHHH HHHHHH

i. ,itle search fees HHHHHH HHHHHH HHHHHH HHHHHH
Required:
/f the expenditure would !e capitali#ed to land, !uildings, equipment, or other, so indicate with an KJ.K An example is given.

a. Construction costs on !uilding HHHHH J HHHHH HHHHH
construction wor$er
HHHHH HHHHH HHHHH J
!uilding excavation
HHHHH HHHHH J HHHHH
HHHHH J HHHHH HHHHH
e. 8quipment testing costs HHHHH HHHHH J HHHHH
land
J HHHHH HHHHH HHHHH
acquired property
J HHHHH HHHHH HHHHH
h. Cost of ma<or overhaul HHHHH HHHHH HHHHH J
i. ,itle search fees J HHHHH HHHHH HHHHH

4. @mith Delivery @ervices !ought a truc$ !y paying 0&&,111 cash down and signing a 01&6,111 non-interest-
!earing note due in five years for the !alance. Current interest rates were 67. Actuarial information for five
periods at 67 follows.
Amount of 1 1.&59
2resent value of 1 1.561
Amount of annuity of 1 +.654
2resent value of annuity of 1 ".99"
Required:
Compute the amount that should !e charged to the asset account.
01&6,111 N 1.56 Q 0111,5&1B 0111,5&1 P 0&&,111 Q 01&&,5&1

4". =irror Corp. has agreed to expand its operations !y opening a manufacturing plant in Burns, ,exas. /n
return, Burns will donate an a!andoned !uilding and the + acres on which it sits to =irror. ,he land originally
cost 01,111,111 and the !uilding 0",111,111. ,he !uilding%s current !oo$ value is 0"61,111, and current
appraisals are. land 05,111,111 and !uilding 0,511,111. =irror has also agreed to provide 111 <o!s for the next
+ years to Burns% city residents. =irror estimates that the wages to these residents will amount to 0&,111,111.
Required:
2repare the <ournal entry to record this acquisition on =irror%s !oo$s.
?and 5,111,111
Building ,511,111
Donated Capital 6,511,111

4&. >n August 1, @ilver Company exchanged a machine for a similar machine owned !y 'rangler Company
and also received 04,111 cash from 'rangler Company. @ilver%s machine had an original cost of 041,111,
accumulated depreciation to date of 0"&,+11, and a fair mar$et value of 051,111. 'rangler%s machine had a
!oo$ value of 0&+,111 and a fair value of 0+",111.
Required:
2repare the necessary <ournal entry !y @ilver Company to record this transaction assuming
a. @ilver will use the newly acquired machine in the same manner as the old one.
!. @ilver%s use of the new machine will !e su!stantially different from the old one.

a. Cash 4,111
8quipment
)0"+,+11 -
04,111*
6,+11
Accumulat
ed
Depreciati
on-
8quipment
"&,+11
8quipment 41,111

!. Cash 4,111
8quipment )051,111 -
04,111*
+",111
Accumulated Depreciation-
8quipment
"&,+11
8quipment 41,111
;ain M051,111 - )041,111 - 0"&,+11*O &,+11

4+. 2ops Corp. has agreed to exchange an old computer system for a van from /ncline, /nc. /n addition, /ncline
will pay 2ops 0,111. ,he computer originally cost 2ops 0+,111 and its current !oo$ value is 01&,111. ,he
van%s original cost was 0"1,111 and its accumulated depreciation is 01,111. ,he appraised value of the
computer is 01+,111, and the appraised value of the van is 01",111.
Required:
2repare the <ournal entries to record the exchange on !oth companies% !oo$s.
2ops
Corp.

Aan 1",111
Accum.
Depr.-
Computer
11,111
Cash ,111
Computer +,111
;ain on 8xchange 1,111
/ncline,
/nc.

Computer 1+,111
Accum.
Depr.-Aan
1,111
?oss on
8xchange
+,111
Cash ,111
Aan "1,111

45. 'histler Company exchanged a piece of equipment with a cost of 0"11,111 and accumulated depreciation
of 0&1,111 for land owned !y Doseph Corporation. :o cash was exchanged. Doseph%s land had an original cost
of 091,111. At the date of exchange, !oth assets had a fair mar$et value of 061,111.
Required:
2repare the <ournal entry that each company should record.
'histler
Company

?and 61,111
Accumulat
ed
Depreciati
on-
8quipment
&1,111
8quipment "11,111
;ain on 8xchange of Assets 1,111

Doseph Corporation
?oss on 8xchange of Assets 11,111
8quipment 61,111
?and 91,111

44. @ally Company is exchanging a unique machine for a similar machine from 'illiam, /nc. @ally%s equipment
originally cost 0"11,111 and has a !oo$ value of 014+,111. 'illiam%s machine cost 0+1,111 and has a !oo$
value of 01+1,111. :o cash will !e exchanged, and the two machines will continue to perform the same
functions for each company.
Required:
2repare the <ournal entry for each company.
@ally
Company

=achine 14+,111
Accumulat
ed
Depreciati
on
1+,111
8quipment "11,111
'illiam,
/nc.

=achine 1+1,111
Accumulat
ed
Depreciati
on
111,111
=achine +1,111
;AA2 requires recording the exchange at !oo$ value if fair value is not reasona!ly determina!le or if there is no commercial su!stance )i.e., the
future cash flows are not expected to change as a result of the trade*.

46. -alph Company exchanged a machine for some land. ,he machine had cost 01+,111, was 417 depreciated,
and could !e sold for 0&,111. Calvin paid 0511 in addition to giving up the machine.
Required:
a. Compute the amount at which the land should !e recorded.
!. Assume, instead, that -alph exchanged the machine for a new, more efficient machine with a fair value of 0&,411, while still paying
0511 as !efore. Compute the gain or loss that would !e recorded on the sale of the old machine !y -alph.

a. 0&,111 P 0511 Q 0&,411

!. 1."1 N 01+,111 Q 0&,+11 !oo$ valueB 0&,+11 - 0&,111 mar$et value Q 0&11 loss

49. =ar$ Company exchanged a worn-out tractor that had cost 01,111 and was half depreciated for a new
tractor with a fair value of 01,111. =ar$ paid an additional 0,+11 cash. ,he transaction lac$ed commercial
su!stance.
Required:
Compute the amount at which =ar$ should record the new tractor.
)01,111 - 011,111* P 0,+11 Q 01,+11

61. Assuming that the effects of interest capitali#ation are material, calculate the amount of interest costs to !e
capitali#ed !y =arcus Corporation in 111 in relation to the following events.
a. >n Danuary 1, =arcus !egan construction for a new storage !uilding for its own use. 8xpenditures incurred evenly throughout the year
totaled 0911,111. =arcus !orrowed 01,111,111 specifically for construction of the storage !uilding at an annual interest rate of 57.
!. /nventories costing 011,111 were routinely manufactured during the year. =arcus !orrowed 011,111 at 67 to finance inventory-
related costs.
c. >n @eptem!er 1, =arcus !egan construction of a custom-designed machine to the specifications of a customer. As of Decem!er "1,
011,111 of materials, la!or, and overhead have !een assigned to the machine. ,hose costs were incurred evenly throughout the period
@eptem!er 1 through Decem!er "1. ,o finance construction, 0"1,111 was !orrowed at a 97 interest rate.

a. )1 P 0911,111*C Q 0&+1,111B 0&+1,111 N .15 Q 04,111

!. 01

c. )1 P 011,111*C Q 0111,111B 0111,111 N &C1 N .19 Q 0",111

61. >n Danuary ", 111, =ercury Company !egan self-constructing an asset that qualified for interest
capitali#ation. >n Danuary +, =ercury !orrowed 0"11,111 on an 67 construction loan. /n addition, =ercury had
0&11,111 of 57 notes paya!le and 0411,111 of 97 !onds paya!le outstanding. By Decem!er "1, expenditures
)occurring evenly throughout the year* of 0611,111 had !een made on the asset. /nvestment of unused funds
during the year yielded 01,11 of interest revenue.
Required:
Compute the amount of interest that should !e capitali#ed during 111.
0"1,911, computed as follows.
)1 P 0611,111*C Q 0&11,111

0&11,111 N .15 Q 0&,111
0411,111 N .19 Q 5",111
064,111

064,111C01,111,111 Q 4.917

0"11,111 N .16 Q 0&,111
0111,111 N .1491 Q 4,911
0"1,911

6. Cooper, /nc. is constructing a !uilding that qualifies for interest capitali#ation. ,he following information is
availa!le.
Capitali#ation period. Danuary 1, 111-Decem!er "1, 111 8xpenditures on pro<ect )incurred evenly*.
111 01,111
111 051,111
Amounts !orrowed and outstanding )all de!t incurred Danuary 1, 111*.
011,111 at 117 )specifically for the construction pro<ect*
016,111 at 17 )general de!t*
0"1,111 at 1&7 )general de!t*
Required:
a. Compute the amount of interest that should !e capitali#ed in 111 and 111. )-ound interest rates to the nearest hundredths, e.g.,
14.57.*
!. Assume that in 111 unused !orrowed funds were invested and earned interest revenue amounting to 0511. Fow much interest should
!e capitali#ed to the asset account in 111(

a. 111. 01,111, as computed !elow.
111. 05,&"", as computed !elow.

111
)01 P 01,111*C Q 011,111
011,111 N 1.11 Q 01,111

111
)01,111 P 061,111*C Q 0+1,111

016,111 N 1.1 Q 0,151
"1,111 N 1.1& Q &,11
0&6,111 05,"51

05,"51C0&6,111 Q .1"+

011,111 N 1.11 Q 01,111
&1,111 N .1"+ Q +,&""
0+1,111 05,&""

!. 01,111

6". ,he Feavy 8quipment Company decided to replace a gasoline engine with a diesel engine in one of its
cranes. ,he new engine cost 06,111, which Feavy paid in cash. ,he old engine is discarded at no cost to Feavy
8quipment.
Required:
a. 2repare the required <ournal entry for Feavy 8quipment Company, assuming the old gasoline engine is carried on the !oo$s at a cost of
0&,111 with accumulated depreciation of 0",111.
!. 2repare the required <ournal entry for Feavy 8quipment Company, assuming the !oo$ value of the old engine is not $nown.

a. 8ngine
)new*
6,111
Accumulat
ed
Depreciati
on-8ngine
",111
?oss on
Disposal
1,111
8ngine )old* &,111
Cash 6,111

!. Accumulated Depreciation-
8ngine )or 8ngine*
6,111
Cash 6,111

6&. -o!ertson Company is ma$ing significant improvements to some of its assets, as follows.
1. /t is replacing the old furnace that cost 0&1,111 and has a 01+,111 !oo$ value with a new furnaceCair conditioner com!ination.
-o!ertson spent 051,111 in cash and was given a 0",111 trade-in on the old furnace.
. ,he delivery van is !eing updated with a new 04,111 engine that will increase the useful life of the van !y years. ,he van originally
cost 0"+,111 and has accumulated depreciation of 0+,111.
Required:
a. -ecord the appropriate <ournal entry for replacing the furnace.
!. 'hen recording the transaction associated with the van there is a choice !etween two methods. 2rovide the <ournal entries for each
method.

a. 3urnaceCA
ir
Conditione
r
5",111
Accumulat
ed
Depreciati
on
+,111
?oss 1,111
3urnace &1,111
Cash 51,111

!. Accumulated Depreciation 4,111
Cash 4,111

Aan 4,111
Cash 4,111

6+. >n =ay 1, 111, Argus =anufacturing Co. acquired a machine for 0161,111. ,he machine was depreciated
monthly using the straight-line method with an estimated life of ten years and no salvage value. >n Decem!er
1, 114, the machine was sold for 0&1,111.
Required:
Compute the amount of gain or loss on the sale of the machine, and prepare the <ournal entry to record the sale.
)Calculate depreciation to the nearest whole month.*
0&1,111 - M0161,111 - )0161,111 N 91C11*O Q 0",+11 loss
8ntry.
Cash &1,111
Accumula
ted
Depreciati
on
)91C11 N
0161,111*
1"5,+11
?oss on
Disposal
",+11
=achine 161,111

65. /n 111, Fart Co. invested 0&,111,111 in oil well exploration activities. @eventy percent of the drilling was
successful and resulted in commercial quantities of oil !eing found.
Required:
a. /ndicate the amount of drilling expense Fart Co. would recogni#e in 111 if the full-cost method is in use.
!. /ndicate the cost that would !e reported on the !alance sheet as oil and gas properties if the successful-efforts method is in use.

a. 01

!. 1.41 N 0&,111,111 Q 0,611,111

64. 'hy is it important to allocate a lump-sum purchase amount among the individual assets acquired(
,he allocation of a lump-sum purchase cost among the individual assets acquired is important for several
reasons. 3irst, some of the assets may require depreciation while others )land* may not. @econd, the economic
lives of those assets may vary. And, finally, those assets may !e depreciated !y different depreciation methods.

66. Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons,
ranging from routine repairs to ma<or overhauls and improvements. ,he accountant%s pro!lem is to determine
how these costs should !e recorded.
Required:
/dentify the two categories of expenditures in which these costs can !e classified, and explain how the
accountant determines which classification is appropriate.
,hese costs can !e classified as either capital or revenue )operating* expenditures. Capital expenditures are
costs that increase the future economic !enefits of an asset a!ove those originally expected. ,he future
economic !enefits can !e increased !y )1* extending the asset%s life, )* improving productivity, )"* producing
the same product at a lower cost, or )&* increasing the quality of the product.
-evenue )operating* expenditures are costs that do not increase the economic !enefits of an asset !ut are
incurred to maintain the asset%s existing !enefits.

69. ?ist and descri!e four specific examples of start-up costs. Discuss the ;AA2 rules for recording start-up
costs.
8xamples of start up costs include.
Costs associated with organi#ing a new entity.
?egal fees associated with startup
2reparation of a charter
2reparation of !y-laws
Costs of preparing and copying minutes of organi#ational meetings
>rgani#ation meeting costs
>riginal stoc$ certificates

Costs associated with opening a new facility.
2ermits to operate the !usiness
Costs of hiring and training new employees
2re-opening advertising

Costs associated with introducing a new product line or service.
Costs of hiringCretraining new employees

Costs associated with conducting !usiness in a new territory.
Costs of hiringCrelocating employees
2re-opening advertising

Costs associated with commencing a new operation in an existing facility.
Costs associated with reorgani#ing the facility
Costs associated with hiringCretraining
Gnder current ;AA2, companies must expense such costs as incurred.

91. Current ;AA2 descri!es three exceptions to the general rule of using fair value when exchanging
nonmonetary assets.
Required:
?ist the three exceptions and provide an example of each.
1. :either the fair value of the asset received or given up is reasona!ly determina!le.
8xample. A unique or one-of-a-$ind productive asset is involved.

. ,he transaction is an exchange of inventory to facilitate sales to a third party.
8xample. Company A exchanges inventory with Company B so Company A can sell the new inventory to Company C.

". ,he transaction lac$s commercial su!stance such that the future cash flows of the company are not expected to change significantly.
8xample. Company A exchanges equipment with a !oo$ value of 0"1,111 for a new truc$ costing 0+1,111 that will not significantly
improve production, so the cash flow won%t significantly change.

91. Discuss when the interest capitali#ation period !egins and ends for assets constructed for a company%s own
use.
,he interest capitali#ation period !egins when )a* expenditures for the asset have !een made, )!* activities that
are necessary to get the asset ready for its intended use are in progress, and )c* interest cost is !eing incurred.
/nterest capitali#ation should continue as long as the three conditions are met. ,he capitali#ation period should
end when the asset is )a* su!stantially complete and )!* ready for its intended use.

9. Descri!e the /3-@ treatment of increases in the mar$et value of property, plant, and equipment held during
the year. Compare that treatment to G.@. ;AA2 requirements.
/3-@ allow companies to revalue property, plant, and equipment up to fair mar$et value when it can !e relia!ly
estimated. A revaluation surplus is recorded in stoc$holders% equity for the unreali#ed holding gain. ;AA2 has
no similar provision for mar$ing up assets to mar$et. Any holding gains are recogni#ed only if the asset is sold.

Chapter 10--Property, Plant, and Equipment: Acquisition and Disposal

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