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

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Question 21

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Average accumulated expenditures:

A) Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
B) Is computed as a simple average if all construction expenditures are made at the end of the period.
C) Are irrelevant if the company's total outstanding debt is less than total costs of construction.
D) All of the above are true statements.

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

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Question 22

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Cool Globe Inc. entered into two transactions, as follows: 1. Purchased equipment paying $20,000 down and signed a noninterest-bearing note requiring the balance to be paid in four annual installments of $20,000 on the anniversary date of the contract. Based on Cool Globe's 12% borrowing rate for such transactions, the implicit interest cost is $19,253. 2. Purchased a tract of land in exchange for $10,000 cash down payment and a noninterest-bearing note requiring five $10,000 annual payments, with the first annual payment in one year. The fair value of the land is $46,000. Required: Prepare the journal entries for these transactions.

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Question 23

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Asset retirement obligations:

Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?

When is interest capitalized? Briefly describe how the amount to be capitalized is computed.

When selling property, plant, and equipment for cash:

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

Cantor Corporation acquired a manufacturing facility on four acres of land for a lump-sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be:

Why are software development costs treated differently than other types of R&D?

Goodwill is:

Sales tax paid on equipment acquired for use in the business is not capitalized.

In accounting for oil and gas exploration costs, companies:

Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point. Other costs connected with the purchase were as follows: Required: Determine the capitalized cost of the equipment.

Interest is not capitalized for:

Kellogg Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kellogg disclosed the following: DISPOSITIONS Last year, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense), net during the current year. Required: Explain how the Kellogg transactions described could be interpreted as an example of earnings management.

In its 2013 annual report to shareholders, Custard Cup Inc. disclosed the following footnote: Note 4 Property, Plant, and Equipment Property, plant, and equipment (PPE) at December 31, 2013, and December 31, 2012, consisted of the following: Depreciation expense for property, plant and equipment was $26 million in 2013. Required: Compute the Accumulated depreciation on PPE disposed of by Custard Cup during 2013.

The interest capitalization period for a self-constructed asset ends either when the asset is substantially complete and ready for use or when interest costs no longer are being incurred.

Walker Corporation exchanged land and $4,500 cash for material handling equipment. The land had a book value of $45,000 and a fair value of $58,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

Interest capitalized for 2013 was:

A company that prepares its financial statements according to International Financial Reporting Standards accounts for a government grant by recognizing revenue for the amount of the grant.