I. Multiple Choice:

1. All of the following would be classified as property, plant, and equipment, except for
a. office buildings
b. machinery owned for standby purposes
c. equipment held for resale
d. equipment used in the operation of the business

2. The Hurlburt Company incurred the following costs in the acquisition of a plant asset:
Invoice price
$1,800
Purchase discount lost
50
Freight-in
200
Installation
150
Cost of trial runs
100

What is the cost of the plant asset?
a. $1,800
b. $2,150
c. $2,214
d. $2,200

3. In purchasing some land, the Maxim Company made payments for the following:
Purchase price
$4,000
Past due taxes
320
Title search
150
Cost of razing old building
200
Interest (incurred after productive operations had begun)
120
Proceeds from salvage of old building
75

The recorded cost of the land should be
a. $4,350
b. $4,595
c. $4,685
d. $4,760

4. McGill Corporation purchased some equipment by issuing a $20,000 non-interest-bearing, four-year note when interest rates were 8%. Actuarial information of 8% for four periods follows:
Future amount of 1
1.360489
Present value of 1
0.735030

In the entry to record this purchase, there would be a
a. $20,000 debit to Equipment
b. $5,299.40 debit to Discount on Notes Payable
c. $27,209.78 credit to Notes Payable
d. $14,700.60 credit to Equipment

5. Gilmores Clothes purchased some equipment by issuing a three-year 7% note for $7,000 when the interest rate for an obligation of this nature was 9%. The interest is payable annually. Actuarial information for three periods follows:
7%
9%
Future amount of 1
1.225043
1.295029
Future amount of annuity of 1
3.214900
3.278100
Present value of 1
0.816298
0.772183
Present value of annuity of 1
2.624316
2.531295
At the date of purchase, what amount should be debited to Equipment?
a. $7,587.66
b. $6,716.96
c. $6,350.66
d. $6,645.61

6. According to FASB Statement No. 34, interest must be capitalized for
a. assets that are ready for use
b. assets constructed for a firm's own use
c. assets that are not being used in the earning activities of the company
d. inventories that are produced in large quantities on a repetitive basis

7. All of the following costs associated with acquiring a building should be capitalized except
a. the costs of building permits
b. the cost of a strike associated with the construction of the building
c. the contract price
d. the costs of excavation for the building

8. A company purchases a new machine by issuing an $18,000 non-interest-bearing four-year note. The company expects to pay off the obligation by paying $4,500 at the end of each year. The market rate for obligations of this type is 8%. The present value of an annuity at 8% for four periods is 3.312127. The machine would be recorded at a cost of
a. $ 4,500.00
b. $ 14,904.57
c. $15,462.58
d. $18,000.00

9. The president of Dozier Corporation donated a building to Mandy Corporation. The building had an original cost of $200,000, a book value of $85,000, and a fair market value of $160,000. To record this donation, Mandy would
a. make a memorandum entry
b. debit Building for $85,000 and credit Gain for $85,000
c. debit Building for $200,000 and credit Gain for $200,000
d. debit Building for $160,000 and credit Gain for $160,000

10. During 2013, Seaborn Company purchased three pieces of equipment at an auction for the lump sum of $200,000. It cost Seaborn $20,000 to have the equipment delivered and installed. The equipment was appraised at the following values:
Machine 1
$120,000
Machine 2
105,000
Machine 3
75,000
Machine 3 should be recorded on Seaborn's books at
a. $ 75,000
b. $120,000
c. $ 55,000
d. $105,000

11. On April 1, 2013, Archer Corporation purchased a new machine on a deferred payment basis. A down payment of $6,000 was made and six monthly installments of $4,000 each are to be made beginning on May 1, 2013. The cash equivalent price of the machine was $28,000. Archer incurred and paid installation costs amounting to $500. The amount to be capitalized as the cost of the machine is
a. $28,000
b. $22,600
c. $28,500
d. $24,600

12. On February 1, 2012, Badger Corporation purchased a parcel of land as a factory site for $50,000. An old building on the property was demolished, and construction began on a new building that was completed on December 12, 2012. Costs incurred during this period are listed below:
Demolition of old building
$ 10,000
Architect's fees
26,000
Legal fees for title investigation

and purchase contract
3,000
Construction costs
1,000,000

(Salvaged materials resulting from demolition were sold for $18,000.)

Badger should record the cost of the land and the cost of the new building, respectively, as
a. $48,000 and $1,026,000
b. $45,000 and $1,026,000
c. $63,000 and $1,032,000
d. $63,000 and $1,017,000

13.The Wally Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $250,000. At the time of acquisition, Wally paid $10,000 to have the assets appraised. The appraisal disclosed the following values:
Land
$ 60,000
Buildings
200,000
Equipment
140,000

What costs should be assigned to the land, buildings, and equipment, respectively?
a. $100,000, $100,000, and $100,000
b. $103,333, $103,333, and $103,334
c. $39,000, $130,000, and $91,000
d. $46,500, $155,000, and $108,500

14. Markum Inc., purchased certain plant assets under a deferred payment contract. The agreement was to pay $40,000 per year for three years. The plant assets should be valued at
a. $120,000
b. $120,000 plus imputed interest
c. present value of a $40,000 annuity for three years at an imputed interest rate
d. present value of a $40,000 annuity for three years discounted at the bank prime interest rate

15. Major Manufacturing purchased a machine with a contract price of $300,000 and cash terms of 3/10, n/30, on August 28, 2013. The company paid $8,000 in transportation costs and $6,000 for installation. Sales taxes of $21,000 were paid on the invoice amount. The machine should be recorded as a plant asset in the amount of:
a. $300,000
b. $321,000
c. $329,000
d. $326,000
e. $332,000

16. Which is the best definition of start-up costs?
a. All activities associated with organizing a new entity.
b. Organization costs.
c. One-time activities for opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, initiating a new process in an existing facility, or 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.

17. Sansoni Services exchanged an asset with a cost of $20,000 (now 30% depreciated) for a nonmonetary asset worth $17,850. Sansoni received $3,150 boot. In the entry to record this exchange, Sansoni should record
a. a $1,050 gain
b. a $7,000 gain
c. no gain or loss
d. a $1,050 loss

18. Macey Co. exchanged a piece of equipment that had cost $40,000 (now 75% depreciated) for a truck with a current appraised value of $15,000. Macey Co. gave the other company the piece of equipment and $8,000. Macey Co. should record
a. a $3,000 loss
b. the truck at $18,000
c. a gain of $11,000
d. the truck at $23,000

19. Anoy, Inc., exchanged a truck that cost $30,000 (now 50% depreciated) for another truck with an appraised value of $25,000. Anoy paid boot of $4,000. Anoy should record the new truck at
a. $19,000
b. $30,000
c. $15,000
d. $21,000

20. Bailey Company exchanged a piece of equipment with a fair market value of $22,000 and a book value of $24,000 for a truck with a fair market value of $18,000 and boot of $4,000. Bailey Company would record the truck at a cost of
a. $15,000 and recognize a loss of $4,000
b. $18,000 and recognize a loss of $4,000
c. $22,000 and recognize a loss of $4,000
d. $18,000 and recognize a loss of $2,000

21. On November 7, 2013, Hillard Company acquired a new forklift in exchange for an old forklift that it had acquired in 2000. The old forklift was purchased for $20,000 and had a book value of $5,000. On the date of the exchange, the old forklift had a market value of $6,000. In addition, Hillard paid $16,000 cash for the new forklift, which had a list price of $25,000. At what amount should Hillard record the new forklift for financial accounting purposes?
a. $23,000
b. $24,000
c. $21,000
d. $25,000

22.Which of the following costs incurred subsequent to the acquisition of a machine would be appropriately accounted for by debiting the Accumulated Depreciation account related to this machine?
a. the cost of cleaning and lubricating the machine
b. the cost of replacing the motor on the machine when the cost of the original motor is not known
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

Please use the following information to answer questions 23-25.

Two construction companies, Harglo and Kalman, are in the construction business. Each owns a tract of land being held for development, but each company would prefer to build on the other's land. Accordingly, they agree to exchange their land, and have the following information:

Harglo's
Land
Kalman's
Land
Cost and book value
$150,000
$100,000
Fair value based upon appraisal
$200,000
$160,000

The exchange of land was made, and, based on the difference in appraised fair value, Kalman paid $40,000 cash to Harglo.

23. For financial reporting purposes, Harglo would recognize a gain on this exchange in the amount of
a. $0
b. $6,000
c. $10,000
d. $40,000

24. For financial reporting purposes, Kalman would recognize a gain on this exchange in the amount of
a. $0
b. $20,000
c. $30,000
d. $60,000

25. After the exchange, Harglo would record its newly acquired land on its books at
a. $120,000
b. $102,000
c. $136,000
d. $166,000

26. An improvement made to a machine increased its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be
a. recorded as an expense
b. debited to Accumulated Depreciation
c. capitalized in the machine account
d. allocated between Accumulated Depreciation and the machine account

27. On January 1, 2013, Right Company signed a contract to have Bozy Associates construct a manufacturing facility at a cost of $8,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2013, to finance the construction cost, Right borrowed $8,000,000 payable in ten annual installments of $800,000, plus interest at the rate of 12%. During 2013, Right made progress payments totaling $2,000,000 under the contract; the average amount of accumulated expenditures was $900,000 for the year. The excess borrowed funds were invested in short-term securities, from which Right realized investment income of $130,000. What amount should Right report as capitalized interest at December 31, 2013?
a. $ 88,000
b. $220,000
c. $108,000
d. $880,000

28. On January 1, 2008, Minco Corporation purchased, for $100,000, equipment having a useful life of eight years and an estimated salvage value of $4,000. Minco has recorded monthly depreciation of the equipment on the straight-line method. On January 1, 2013, the equipment was sold for $38,000. As a result of this sale, Minco should recognize
a. $0
b. a $1,500 gain
c. a $1,000 loss
d. a $2,000 loss

29. The Fisher Company purchased a machine on September 1, 2011, for $80,000. At the time of acquisition, the machine was estimated to have a useful life of eight years and an estimated salvage of $8,000. Fisher has recorded monthly depreciation using the straight-line method. On May 1, 2013, the machine was sold for $50,000. What should be the loss recognized from the sale of the machine?
a. $15,000
b. $2,500
c. $5,000
d. $7,500

30. Maxim Oil Company incurred costs of $7 million in 2013 drilling oil wells. Forty percent of the drilling resulted in oil being found. The rest of the drilling was unsuccessful. If Minco uses the successful-efforts method of accounting, the oil and gas properties will be valued on the 2013 balance sheet at
a. $7,000,000
b. $2,800,000
c. $4,200,000
d. $2,100,000

II. Problems

1. Cooper, Inc., is constructing a building that qualifies for interest capitalization. The following information is available:
Capitalization period: January 1, 2013-December 31, 2014
Expenditures on project (incurred evenly):
2013
$30,000
2014
$50,000
Amounts borrowed and outstanding (all debt incurred January 1, 2013)
$10,000 at 10% (specifically for the construction project)
$18,000 at 11% (general debt)
$30,000 at 13% (general debt)

Required:
a. Compute the amount of interest that should be capitalized in 2013 and 2014. (Round interest rates to the nearest hundredths, e.g., 07.62%.)
b. Assume that in 2013 unused borrowed funds were invested and earned interest revenue amounting to $800. How much interest now should be capitalized to the asset account in 2013?

2. Roberts Company is making significant improvements to some of its assets, as follows.

1. It is replacing the old furnace that cost $40,000 and has a $15,000 book value with a new furnace/air conditioner combination. Roberts spent $50,000 in cash and was given a $4,000 trade-in on the old furnace.
2. The delivery van is being updated with a new $8,000 engine that will increase the useful life of the van by 2 years. The van originally cost $36,000 and has accumulated depreciation of $26,000.

Required:
a. Record the appropriate journal entry for replacing the furnace.
b. When recording the transaction associated with the van there is a choice between two methods. Provide the journal entries for each method.

The following is a bonus problem

3. Assuming that the effects of interest capitalization are material, calculate the amount of interest costs to be capitalized by Matthew Corporation in 2014 in relation to the following events:
a. On January 1, Matthew began construction for a new storage building for its own use. Expenditures incurred evenly throughout the year totaled $900,000. Matthew borrowed $1,000,000 specifically for construction of the storage building at an annual interest rate of 7%.
b. Inventories costing $200,000 were routinely manufactured during the year. Matthew borrowed $200,000 at 8% to finance inventory-related costs.
c. On July 1, Matthew began construction of a custom-designed machine to the specifications of a customer. As of December 31, $200,000 of materials, labor, and overhead have been assigned to the machine. Those costs were incurred evenly throughout the period July 1 through December 31. To finance construction, $230,000 was borrowed at a 9% interest rate.

I. Multiple Choice: ​1. ​All of the following would be classif...

I. Multiple Choice: 1. All of the following would be classif...