Which of the following is not an appropriate basis for measuring the cost of property, plant, and equipment?
Answer (B) is correct. Accordingly, items of property, plant, and equipment (PPE) that meet the recognition criterion are initially measured at cost. The cost includes the purchase price (minus trade discounts and rebates, plus purchase taxes) and the directly attributable costs of bringing the assets to working condition for their intended use. Directly attributable costs include site preparation, installation, initial delivery and handling, architect and equipment fees, costs of removing the assets and restoring the site, etc. Accordingly, the cost of land includes the cost of obtaining the land and readying it for its intended uses, but it is inappropriate to recognize the proceeds related to site preparation immediately in profit or loss. They should be treated as reductions in the price of the land.
An entity installed an assembly line in Year 1. Four years later, $100,000 was invested to automate the line. The automation increased the market value and productive capacity of the assembly line but did not affect its useful life. Proper accounting for the cost of the automation should be to
Answer (D) is correct. Subsequent costs are added to the carrying amount of an item of PPE if it is probable that, as a result, future economic benefits will be received, and the costs are reliably measurable. An extended useful life, improved output quantity or quality, and reduced operating costs are all future economic benefits.
"A theme park purchased a new, exciting ride and financed it through the manufacturer. The
following facts pertain:"
Cost of trial runs
Interest charges for first year
"The straight-line method is to be used. Compute the depreciation on the equipment for the
first year assuming an estimated service life of 5 years."
Answer (C) is correct. Under the straight-line method, the annual depreciation expense for an asset equals the asset’s amount (cost – residual value) divided by the asset’s estimated useful life. The cost of the asset includes its price and the directly attributable costs of bringing it to working condition for intended use. Thus, the depreciation expense is $192,000 [($800,000 purchase price + $50,000 delivery cost + $70,000 installation cost + $40,000 trial-run cost) ÷ 5-year estimated service life]. Borrowing costs incurred after the asset is prepared for its intended use are expensed even if the allowed alternative treatment of such costs is followed, and the asset otherwise satisfies the criteria for capitalization of such expenses.
Which of the following is not an appropriate basis for measuring the historical cost of property, plant, and equipment?
Answer (B) is correct. An asset classified under property, plant, and equipment is measured initially at cost. This amount includes the purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. Directly attributable costs include costs of, for example, site preparation, initial delivery and handling, installation, professional fees (e.g., those of architects and engineers), and dismantling and removing the asset and restoring the site. The purchase price is determined by adding any import fees and nonrefundable purchase taxes and subtracting any trade discounts and rebates.
In making a cash flow analysis of property, plant, and equipment (PPE), the internal auditor discovered that depreciation expense for the period was $10,000. PPE with a cost of $50,000 and related accumulated depreciation of $30,000 was sold for a gain of $1,000. If the carrying amount of PPE increased by $80,000 during the period, how much PPE was purchased this period?
Answer (C) is correct. The carrying amount of the PPE account, net of accumulated depreciation, is increased by the cost of purchases and decreased by the carrying amount of items of PPE sold and depreciation. The net PPE decreased by the carrying amount of items sold, or $20,000 ($50,000 cost – $30,000 accumulated depreciation), and by the $10,000 of depreciation. If PPE still increased by $80,000, $110,000 ($30,000 total decrease + $80,000 increase) of equipment must have been purchased.
On January 1, Year 1, an entity purchased an abandoned quarry for $1,200,000 to be used as a landfill to service its trash collection contracts with nearby cities for the next 20 years. The entity depletes the quarry using the units-of-production method based on a surveyor’s measurements of volume of the quarry’s pit. This amount was 500,000 cubic yards when purchased and 350,000 cubic yards at year-end Year 5. What is the net amount that should be shown on the entity’s December 31, Year 5, statement of financial position for the quarry?
Answer (C) is correct. The units-of-production method allocates cost based on output. The net amount reported as an asset for the quarry using this method is $840,000 [(350,000 cubic yards ÷ 500,000 total cubic yards) × $1,200,000].
A new machine has an initial cost of $300,000, an estimated useful life of 2,000 hours of use over a 3-year period, and an estimated residual value of $70,000. Usage rates are estimated as 500 hours in the first year, 700 hours in the second year, and 800 hours in the third year. Depreciation expense in Year 2 under the units-of-production method of depreciation will be
Answer (C) is correct. Depreciation expense equals cost minus residual value, times the estimated hours of use in Year 2 divided by the total estimated hours of use. Thus, depreciation expense is $80,500 [($300,000 – $70,000) × (700 hours ÷ 2,000 hours)].
A company uses straight-line depre accelerated depreciation for tax purposes. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements?
Answer (C) is correct. Because the tax basis uses an accelerated method, depreciation expense and accumulated depreciation will be greater. Moreover, taxable income will be lower than financial net income. Consequently, tax-basis retained earnings will be less than that in the general purpose financial statements.
All of the following would be included as part of the cost of a depreciable asset except the
Answer (A) is . Site preparation costs [clearing, draining, filling, leveling the property, and razing existing buildings, minus any proceeds (such as timber sales)] are costs of the land, not of the building to be constructed on the land.
The board of directors of Ingold Industries, Inc., authorized Don Burger, president of Ingold, to pay as much as $90,000 to purchase a tract of land adjacent to the main factory. Burger negotiated a price of $75,800 for the land, and legal fees for closing costs amounted to $820. A contractor cleared, filled, and graded the land for $6,800, and dug the foundation for a new building for $4,300. A prefabricated building was erected at a cost of $181,000. The building has an estimated useful life of 20 years with no residual value. The contractor’s bill indicated that the cost of the parking lot and driveways was $7,060. The parking lot and the driveways will need to be replaced in 15 years. The proper amount to be recorded in Ingold’s land account is
Answer (B) is correct The cost of acquiring and preparing land for its expected use is capitalized. The amount to be recorded in the land account is $83,420, consisting of the $75,800 purchase price, the $820 closing costs, and the $6,800 site preparation costs