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1
Q

On December 31, Year 1, a building owned by Pine Corp. was totally destroyed by fire. The building had fire insurance coverage up to $500,000. Other pertinent information as of December 31, Year 1, follows:

Building, carrying amount: $520,000
Building, fair market value: 550,000
Removal and clean-up cost: 10,000

During January Year 2, before the Year 1 financial statements were issued, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion?

A

$530,000.

Gain or loss must be recognized on an involuntary conversion. For Pine Corp. the determination of the loss on involuntary conversion is based on the $520,000 carrying amount of the building plus the $10,000 of removal and cleanup costs, a total of $530,000. Given $500,000 of insurance proceeds, Pine Corp. should recognize a loss of $30,000 on this involuntary conversion.

2
Q

An entity disposes of a nonmonetary asset in a nonreciprocal transfer. A gain or loss should be recognized on the disposition of the asset when the fair value of the asset transferred is determinable and the nonreciprocal transfer is to

Another entity:
A shareholder of the entity:

A

Yes
Yes

A nonreciprocal transfer is a transfer of assets or services in one direction. A nonreciprocal transfer of a nonmonetary asset to a shareholder or to another entity should be recorded at the fair value of the asset transferred. A gain or loss should be recognized on the transfer. However, an exception to this general rule is provided for distributions of nonmonetary assets to owners in (1) a spin-off or other form of reorganization or liquidation or (2) a plan that is in substance the rescission of a prior business combination.

3
Q

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows:

Purchase price: $1,000,000
Real estate taxes in arrears: 15,000
Debt issuance costs: 2,000
Attorney fee – title search on land: 5,000

The company should record its acquisition of the land in its financial statements at a value of

A

$1,020,000.

An item of property, plant, and equipment is measured initially at historical cost (the amount of cash paid to acquire the asset) plus the costs needed to bring the asset to the condition and location necessary for its intended use. The initial cost of the land consists of (1) the costs of acquiring and preparing the land for its expected use of $1,000,000; (2) transaction costs, such as attorney fees, of $5,000; and (3) any encumbrances assumed, such as mortgages or tax liens, of $15,000. Thus, the initial cost of the land is $1,020,000 ($1,000,000 + $5,000 + $15,000). Costs to issue debt securities of $2,000 must be reported in the balance sheet as a direct deduction from the face amount of the debt. These costs are not capitalized as part of the initial cost of the land.

4
Q

Silken, Inc., a distributor of silk goods, is in its first year of operation. The company has purchased ten computers at $3,500 each with an estimated life of 6 years; five desks at $500 each with an estimated life of 10 years; and two word processors at $300 each, with an estimated life of 4 years. No residual value is anticipated for any of these assets. Silken wants to adopt a depreciation method that will be easy to use and reflect an appropriate depreciation expense for the business each accounting period. The most appropriate method would be

A

Composite depreciation.

Group and composite depreciation methods use the straight-line technique for an aggregate of assets. The composite method is used for dissimilar assets.

5
Q

Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?

A

When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.

Under IFRS, measurement of PPE subsequent to initial recognition may be at fair value at the revaluation date (minus subsequent depreciation and impairment losses). The assumption is that the PPE can be reliably measured. If an item of PPE is revalued, every item in its class also should be revalued.

6
Q

Minor Baseball Company had a player contract with Doe that was recorded in its accounting records at $145,000. Better Baseball Company had a player contract with Smith that was recorded in its accounting records at $140,000. Minor traded Doe to Better for Smith by exchanging player contracts. The fair value of each contract was $150,000. Evidence suggested that the contract exchange lacked commercial substance. At what amount should the contracts be valued in accordance with generally accepted accounting principles at the time of the exchange of the player contracts?

Minor:
Better:

A

$140,000
$145,000

The accounting for a nonmonetary transaction should be based on the carrying amount of the asset(s) given up when the exchange lacks commercial substance. An exchange lacks commercial substance when an entity’s cash flows are not expected to change significantly. Thus, Minor should record its contract with Smith at $145,000, and Better should record its contract with Doe at $140,000.

7
Q

Essen Co. and Potsdam Co. are fuel oil distributors. To facilitate delivery of oil to their customers, Essen and Potsdam exchanged ownership of 1,200 barrels of oil without physically moving the oil. Essen paid Potsdam $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, costs and fair values of the oil were as follows:

Essen Co.
Cost: $100,000
Fair value: 120,000
Potsdam Co.
Cost: $126,000
Fair Value: 150,000

What amount of gain from the transaction should Potsdam report in its income statement?

A

$4,800.

Accounting for an exchange of nonmonetary assets should be based on the carrying amount of the assets given when the exchange involves inventory exchanged to facilitate sales to customers other than the parties to the exchange. In addition, when the transaction includes monetary consideration (boot), if the boot is less than 25% of the fair value of the exchange, the recipient (but not the payor) of the boot should adjust its carryover basis for the portion of the gain equal to the total gain times the ratio of the boot to the sum of the boot and the fair value of the asset received. The boot in this exchange is equal to 20% [$30,000 ÷ ($30,000 + $120,000)]. Thus, Potsdam should record a $4,800 proportionate gain equal to 20% of the $24,000 ($150,000 – $126,000) difference between the fair value of the exchange and the cost of the inventory relinquished. Moreover, it should debit inventory for $100,800 ($126,000 carrying amount – $30,000 cash received + $4,800 gain recognized). The journal entry is

8
Q

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?

A

$30,000.

As the transaction has commercial substance and the fair value of both assets in a nonmonetary exchange is determinable, the transaction is measured at the fair value of the asset(s) given up, and any gain or loss is recognized immediately (accounted for as a monetary exchange). The gain on the exchange is $30,000, which is the difference between the fair value of the land given up and its carrying value ($50,000 – $20,000). The company will record the following journal entry:
Machinery $50,000
Land $20,000
Gain on exchange 30,000

9
Q

On July 1, Casa Development Co. purchased a tract of land for $1.2 million. Casa incurred additional costs of $300,000 during the remainder of the year in preparing the land for sale. The tract was subdivided into residential lots as follows:

A
100
$24,000
B
100
16,000
C
200
10,000

Using the relative sales value method, what amount of costs should be allocated to the Class A lots?

A

$600,000.

The relative sales value method allocates cost based on the relative value of assets in a group. The total sales value of the lots is $6,000,000 [(100 × $24,000) + (100 × $16,000) + (200 × $10,000)]. Class A represents 40% of the total value ($2,400,000 ÷ $6,000,000). Total costs equal $1,500,000 ($1,200,000 + $300,000). Thus, the amount of costs allocated to Class A is $600,000 ($1,500,000 × .40).

10
Q

Cart Co. purchased an office building and the land on which it is located for $750,000 cash and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at $960,000, 60% of which is allocated to the building. At what amount should Cart record the building?

A

$600,000.

An item of property, plant, and equipment is initially recorded at its historical cost. The cost of a building includes its purchase price. An element of the price is any lien (e.g., a mortgage) assumed by the purchaser. When two or more assets (e.g., land and a building) with varying estimated useful lives are acquired for one price, the cost must be allocated. Given that 60% of the tax assessment is allocated to the building, it should be recorded at $600,000 [($750,000 cash + $250,000 mortgage assumed) × 60%].

11
Q

Which one of the following methods of depreciation will result in the lowest reported net income in the early life of a depreciable asset?

A

Sum-of-the-years’-digits depreciation method.

Sum-of-the-years’-digits depreciation has the highest depreciation expense in the early years of an asset’s life, resulting in lower net income.

12
Q

Star Co. leases a building for its product showroom. The 10-year nonrenewable lease will expire on December 31, Year 6. In January Year 1, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, Year 1, balance sheet?

A

$44,000..

General improvements to leased property should be capitalized as leasehold improvements and amortized in accordance with the straight-line method over the shorter of their expected useful life or the lease term. Because the remaining lease term is less than the estimated life of the improvements, the cost should be amortized equally over 6 years. On 6/30/Year 1, $44,000 {$48,000 – [($48,000 ÷ 6 years) × 1/2 year]} should be reported for net leasehold improvements.

13
Q

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker’s tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

A

$30,000.

The transaction had commercial substance. Thus, Feld should account for this exchange of nonmonetary assets at fair value. The asset received is measured at the total fair value of assets given up. The truck given up has a carrying amount of $60,000 ($140,000 cost – $80,000 acc. dep.). Thus, the recognized gain on the appreciation of the truck is $30,000 ($90,000 FV – $60,000 CA). Because the assets given up have a fair value of $100,000 ($90,000 FV of truck + $10,000 cash), the truck received is measured at $100,000. The entry is
Tow truck (fair value of assets given up) $100,000
Accumulated depreciation 80,000
Delivery truck $140,000
Cash 10,000
Gain 30,000

14
Q

On July 1, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying value was $2,500. On July 15, Rudd received and recorded a $700 invoice for a new engine installed in the van in May and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain (loss) on disposal of the van in its income statement for the year?

A

$300

Gain (loss) is recognized on an involuntary conversion equal to the difference between the proceeds and the carrying amount. The carrying amount includes the carrying value at July 1 ($2,500) plus the capitalizable cost ($700) of the engine installed in May. This cost increased the carrying amount because it improved the future service potential of the asset. Ordinary repairs, however, are expensed. Consequently, the gain is $300 [$3,500 – ($2,500 + $700)].

15
Q

On January 1, Year 5, Crater, Inc., purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31, Year 9, for 50% of its original cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation methods did Crater use?

A

Straight line.

The straight-line method of depreciation is the only one of the generally accepted methods that is not an accelerated method. It thus yields the lowest amount of depreciation for the early part of the depreciable life of the asset. Because only 50% of the original cost was received and straight-line accumulated depreciation equaled 40% of cost {[(100% – 20%) ÷ 10 years] × 5 years} at the time of sale, a 10% loss [50% – (100% – 40%)] results.

16
Q

A contributed plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its

A

fair costs and incidental costs incurred.

A contributed plant asset should be debited at its fair value plus any incidental costs necessary to make the asset ready for its intended use. Contributions received ordinarily should be credited as revenues or gains in the periods they are received. However, a credit to a revenue or gain is not required for contributions by governments to business enterprises.

17
Q

An entity purchased new machinery from a supplier before the entity’s year end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. What is the proper accounting treatment for the freight and interest costs related to the machinery purchase?

A

The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.

The costs needed to bring the asset to the condition and location necessary for its intended use must be capitalized to the initial cost of the asset. Therefore, freight-in cost associated with the purchase of machinery should be capitalized, and interest costs incurred from a loan taken to finance the purchase should be expensed as incurred.

18
Q

Depreciation is computed on the original cost less estimated salvage value under which of the following depreciation methods?

Double-declining balance:
Productive output:

A

No
Yes

Under the productive-output method, depreciation is determined by allocating the original cost less the estimated salvage value to the projected units of output during the expected life of the asset. Under the double-declining-balance method, depreciation is determined by multiplying the carrying amount at the beginning of each period by a constant rate that is equal to twice the straight-line rate of depreciation. Each year the carrying amount of the asset decreases by the depreciation expense recognized. The double-declining-balance calculation does not include salvage value in calculating depreciation. However, the asset may not be depreciated below the amount of the estimated salvage value.

19
Q

Under IFRS, according to the revaluation model, an item of property, plant, and equipment must be carried at

A

Fair value minus any subsequent accumulated depreciation and impairment losses.

Under the revaluation model, if the fair value of an item of property, plant, and equipment can be reliably measured, it must be carried subsequent to initial recognition at a revalued amount. This amount is fair value at the date of the revaluation minus any subsequent accumulated depreciation and impairment losses. The revaluation model is permitted by IFRS, not U.S. GAAP.

20
Q

A state government condemned Cory Co.’s parcel of real estate. Cory will receive $750,000 for this property, which has a carrying amount of $575,000. Cory incurred the following costs as a result of the condemnation:

Appraisal fees to support a $750,000 value: $2,500
Attorney fees for the closing with the state: 3,500
Attorney fees to review contract to acquire replacement property: 3,000
Title insurance on replacement property: 4,000

What amount of cost should Cory use to determine the gain on the condemnation?

A

$581,000

A gain or loss must be recognized on an involuntary conversion. The determination of the gain is based on the carrying amount ($575,000) and the costs incurred as a direct result of the condemnation ($2,500 appraisal fees and $3,500 attorney fees), a total of $581,000. Because the recipient is not obligated to reinvest the condemnation proceeds in other nonmonetary assets, the costs associated with the acquisition of the replacement property (attorney fees and title insurance) should be treated as part of the consideration paid for that property.