Fixed Assets Paper 5

1

Miller Company acquired a machine for $420,000 on June 30, year 2. The machine has a seven-year life, no salvage value, and was depreciated using the straight-line method. On August 31, year 4, a test for recoverability reveals that the expected net future undiscounted cash inflows related to the continued use and eventual disposal of the machine total $275,000. The machine’s actual fair value on August 31, year 4, is $261,000. Assuming a loss on impairment is recognized August 31, year 4, what is Miller’s depreciation expense for September year 4?






2

In January year 4, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law to restore the land to its original condition at an estimated cost of $220,000. The present value of the estimated restoration costs is $180,000. Vorst believes it will be able to sell the property afterwards for $300,000. During year 4, Vorst incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its year 4 income statement, what amount should Vorst report as depletion?






3

Brunson Corp., a major US winery, begins construction of a new facility in Italy. Following are some of the costs incurred in conjunction with the start-up activities of the new facility:
Production equipment $815,000
Travel costs of salaried employees 40,000
License fees 14,000
Training of local employees for production and maintenance operations 120,000
Advertising costs 85,200
What portion of the organizational costs will be expensed?






4

On January 1, year 4, Kew Corp. incurred organization costs of $24,000. What portion of the organization costs will Kew defer to years subsequent to year 4?






5

Which of the following statements is(are) correct regarding the treatment of start-up activities related to the opening of a new facility?
I. Costs of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their intended use should be expensed as incurred.
III. Cost of research and development should be expensed as incurred.






6

Cody Corp. incurred the following costs during year 4: Design of tools, jigs, molds, and dies involving
new technology $125,000
Modification of the formulation of a process 160,000
Troubleshooting in connection with breakdowns during commercial production 100,000
Adaptation of an existing capability to a particular customer’s need as part of a continuing commercial activity 110,000
In its year 4 income statement, Cody should report research and development expense of






7

In year 4, Ball Labs incurred the following costs:
Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit $400,000
Research and development costs not included above were
Depreciation $300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials 180,000
What was Ball’s total research and development expense in year 4?






8

West, Inc. made the following expenditures relating to Product Y:
• Legal costs to file a patent on Product Y—$10,000. Production of the finished product would not have been undertaken without the patent.
• Special equipment to be used solely for development of Product Y—$60,000. The equipment has no other use and has an estimated useful life of four years.
• Labor and material costs incurred in producing a prototype model—$200,000.
• Cost of testing the prototype—$80,000.
What is the total amount of costs that will be expensed when incurred?






9

Brill Co. made the following expenditures during year 4:
Costs to develop computer software for internal use in Brill’s general management information system $100,000
Costs of market research activities 75,000
What amount of these expenditures should Brill report in its year 4 income statement as research and development expenses?






10

On January 1, year 4, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a ten-year period. However, the new product development is expected to take five years, and the equipment can be used only for this project. Jambon’s year 4 expense equals






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