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Exam 10: Property, Plant, and Equipment and Intangible Assets: Acquisition

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Question 51

Multiple Choice

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Asset retirement obligations:

A) Increase the balance in the related asset account.
B) Are measured at fair value in the balance sheet.
C) Are liabilities associated with the restoration of a long-term asset.
D) All of these answer choices are correct.

E) B) and D)
F) A) and C)

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Question 52

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Property, plant, and equipment and intangible assets are:

A) Created by the normal operation of the business and include accounts receivable.
B) All assets except cash and cash equivalents.
C) Current and long-term assets used in the production of either goods or services.
D) Long-term revenue-producing assets.

E) B) and D)
F) A) and C)

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Question 53

Multiple Choice

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Interest is eligible to be capitalized as part of an asset's cost, rather than being expensed immediately, when:

On January 1, 2018, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2019. Expenditures on the project were as follows: Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2018. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2018 and 2019. - Interest capitalized for 2019 was:

The capitalized cost of land excludes:

Consider the following scenarios: Scenario 1: In the current year, a kitchen appliance manufacturer spends $450,000 on R&D costs to develop internally a new heating element for conventional ovens. By the end of the year, the design for the new heating element has been patented. Legal and filing fees associated with the patent are $50,000. The patent has a fair value $600,000 and an estimated useful life of 10 years. Scenario 2: In the current year, a kitchen appliance manufacturer purchases a patent for heating elements used in conventional ovens from a third-party for $600,000. The patent has an estimated useful life of 10 years. Under which scenario would the company report greater research and development expense in the current year?

Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance. $\begin{array} { l c c c } & { \text { Old Equipment } } && \text { Cash } \\& \text { Book Value } & \text { Fair Value } & \text { Received } \\\text { Equipment A } & \$ 75,000 & \$ 80,000 & \$ 12,000 \\\text { Equipment B } & \$ 60,000 & \$ 56,000 & \$ 10,000\end{array}$ - For Equipment A, Pensacola would record the new equipment at:

A company has the following expenditures during the year. The company believes that these efforts have increased the fair value of the entire company by $325,000. How much goodwill can the company recognize at the end of the year associated with these expenditures?

Hawkins Corporation began construction of a motel on March 31, 2018. The project was completed on April 31, 2019. No new loans were required to fund construction. Hawkins does have the following two interest-bearing liabilities that were outstanding throughout the construction period: $ 4,000,000, 6% note $16,000,000, 10% bonds Construction expenditures incurred were as follows: $\begin{array}{lr}\text { March } 31,2018 & \$ 4,000,000 \\\text { June 30, 2018 } & 6,000,000 \\\text { November 30,2018 } & 1,800,000 \\\text { February 28, 2019 } & 3,000,000\end{array}$ The company's fiscal year-end is December 31. Required: Calculate the amount of interest capitalized for 2018 and 2019.

If a company incurs legal obligations associated with the retirement of a tangible long-lived asset as a result of acquiring the asset:

On January 1, 2018, Laramie Inc. acquired land for $6.2 million. Laramie paid $1.2 in cash and signed a 6% note requiring the company to pay the remaining $5 million plus interest on December 31, 2019. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?

The fair value of the asset, debt, or equity securities given in a noncash acquisition should determine the value of the consideration received.

Research and development costs for projects other than software development should be:

Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale made the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Required: Determine the amount Soccer Wholesale should record as the cost of the land.

During 2018, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2018 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2018, what oil exploration expense would Longhorn charge for this activity in its 2018 income statement?

How are assets valued when they are acquired by issuing stock?

Maltese is a privately-owned company. On September 3, Maltese exchanged 2,000 shares of its private common stock for equipment. There is no readily available estimate of the stock's fair value. The equipment currently is selling for $80,000. The journal entry to record this transaction includes:

Assets acquired under multi-year deferred payment contracts are:

Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance. $\begin{array}{lccc} & {\text { Old Equipment }} && \text { Cash } \\& \text { Book Value } & \text { Fair Value } & \text { Received } \\\text { Equipment A } & \$ 75,000 & \$ 80,000 & \$ 12,000 \\\text { Equipment B } & 60,000 & \$ 56,000 & \$ 10,000\end{array}$ - For Equipment B, Pensacola would record a gain/(loss) of:

On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2019. Expenditures on the project were as follows: Dreamworld had $5,000,000 in 12% bonds outstanding through both years. - The average accumulated expenditures for 2019 by the end of the construction period was: