CHAPTER 12

Investments in Noncurrent
Operating AssetsAcquisition
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Qe!tion!
1 Items included as part of land costs
2 Definition of intangible asset
3 Goodwillno c!aracteristic of e"c!angeabilit#
$ Definition of goodwill in business combination
% &!en goodwill s!ould be recorded
' (reatment of donated equipment
) (reatment of a donated asset
* +aluation of plant assets under deferred pa#ment contract
, -apitali.ation of interest
1/ -apitali.ation of ordinar# repairseffect on balance s!eet accounts
11 Items deducted from land costs
12 Items added to land cost
13 (reatment of donated asset
1$ 01A0 No2 3$capitali.ation of interest
1% -apitali.ation of interest
1' -apitali.ation of researc! and development costs
1) (reatment of researc! and development costsimmediate e"pense
1* Inclusion of lab building costs as researc! and development to be
capitali.ed
1, 3"ample of betterment e"penditure
2/ (reatment of mac!ine improvementincreases capacit# 2% percent
21 (reatment of reinstallation costs
22 -apitali.ation of betterment and rearrangement e"penditures
23 4ecording noncurrent operating assets at fair value
2$ 4ecording noncurrent operating assets at fair value
Co"#tational Qe!tion!
2% -omputation of recorded costs of factor# building
2' -omputation of costs assigned to land5 buildings5 and equipment
2) -omputation of costs of t!ree mac!ines
2/1
2$2 -!apter 12 Investments in Noncurrent Operating
Assets
6 2* -omputation of purc!ase price under deferred pa#ment contract
2, -omputation of carr#ing value of land
3/ -omputation of acquisition cost of mac!ine
31 -omputation of total intangible assets to be recorded on balance s!eet
32 -omputation of goodwill amount
33 -omputation of goodwill amount
3$ -omputation of amount of capitali.ed interest
3% -omputation of amount of capitali.ed interest
3' -omputation of cost of assets not acquired for cas!
3) -omputation of cost of assets not acquired for cas!
3* -omputation of capitali.ed interest
3, -omputation of capitali.ed interest
$/ -omputation of accumulated e"penditures to capitali.e interest
$1 -omputation of researc! and development e"pense
$2 -omputation of researc! and development e"pense
$3 -omputation of repair7maintenance e"pense
$$ -omputation of amount of improvements to be capitali.ed
$% -omputation of goodwill amount
$' -omputation of fi"ed asset turnover ratio
PRO%LEMS
1 Determine cost of land and buildings
2 Determine appropriate amounts for land5 ware!ouse5 and office building
3 4ecord e"c!ange of stoc8 for mac!ine
6 $ Determine acquisition costs of assets
% Determine amount of capitali.ed interest
' 4ecord transactions for researc! and development5 patents5 etc2
) Determine amount of goodwill to be reported
* 4ecord purc!ase of compan#negative goodwill
, -ompute transaction effects on indirect cas! flow statement
1/ 4ecord e"penditures under successful efforts5 full cost met!od
11 Interest capitali.ationavoidable interest met!od
12 Interest capitali.ationaverage accumulated e"penditure met!od
13 Interest capitali.ationavoidable interest met!od
1$ 3valuating interest capitali.ation standards
1% Assets acquired b# issuing stoc8 to a related part#
1' -omparing current assets and propert# accounts
6These questions and problems require the use of present value tables to solve.
MULTIPLE CHOICE QUESTIONS
a 12 9ramer 0ervice -orporation boug!t a building lot to construct a new
corporate
:O1 office building2 An older !ome on t!e building lot was ra.ed immediatel# so
t!at t!e office building could be constructed2 (!e cost of purc!asing t!e
older !ome s!ould be
a2 recorded as part of t!e cost of t!e land2
b2 written off as a loss in t!e #ear of purc!ase2
c2 written off as an e"traordinar# item in t!e #ear of purc!ase2
d2 recorded as part of t!e cost of t!e new building2
c 22 (!e term ;intangible assets< is used in accounting to denote
:O1 a2 current or noncurrent propert# items wit!out p!#sical c!aracteristics2
b2 assets wit! lesser economic significance because of t!e nature of suc!
assets2
c2 properties wit!out p!#sical c!aracteristics t!at !ave longterm effects on
a business enterprise2
d2 suc! items as patents5 cop#rig!ts5 and claims against customers w!ic!
can be valued on a monetar# basis2
c 32 &!ic! of t!e following intangible assets does not !ave t!e c!aracteristic of
:O1 e"c!angeabilit#=
a2 >atent
b2 -op#rig!t
c2 Goodwill
d2 1ranc!ise
b $2 In a business combination5 goodwill is defined as t!e e"cess of cost over
t!e
:O1 a2 fair value of assets acquired2
b2 fair value of assets acquired less t!e liabilities assumed2
c2 boo8 value of assets acquired less t!e liabilities assumed2
d2 net boo8 value of assets acquired2
c %2 Goodwill s!ould be recorded in t!e accounting records onl# w!en
:O1 a2 it is purc!ased from anot!er compan#2
b2 it can be establis!ed t!at a definite benefit or advantage !as resulted to
a firm from some item suc! as a good name5 capable staff5 or reputation2
c2 it is acquired t!roug! t!e purc!ase of anot!er business entit#2
d2 a firm reports above normal earnings for five or more consecutive #ears2
2/3
d '2 Donated equipment for w!ic! t!e fair value !as been determined s!ould be
:O2 recorded as a debit to t!e appropriate equipment account and a credit to
a2 Ot!er Income2
b2 4etained 3arnings2
c2 -apital 0toc82
d2 4evenue or gain2
b )2 :a8epoint -ompan# recentl# accepted a donation of land wit! a fair value
of
:O2 ?2//5/// from t!e cit# of Dale in return for a promise to build a plant in
Dale2
(!e entr# t!at :a8epoint s!ould use to record t!is land is@
a2 :and22222222222222222222222222222222222222222222222222222222222222222222222222222//5///
Gain from 4eceipt of
Donated :and22222222222222222222222222222222222222222222222222222
2//5///
b2 :and22222222222222222222222222222222222222222222222222222222222222222222222222222//5///
Gain from 4eceipt of
Donated :and22222222222222222222222222222222222222222222222222222
2//5///
c2 :and22222222222222222222222222222222222222222222222222222222222222222222222222222//5///
Anreali.ed Gain from 4eceipt
of Donated :and2222222222222222222222222222222222222222222222222
2//5///
d2 :and22222222222222222222222222222222222222222222222222222222222222222222222222222//5///
4etained 3arnings2222222222222222222222222222222222222222222222
2//5///
c *2 Nimbus Inc2 purc!ased certain plant assets under a deferred pa#ment
contract2
:O2 (!e agreement was to pa# ?3/5/// per #ear for ten #ears2 (!e plant
assets s!ould be valued at
a2 ?3//5///2
b2 ?3//5/// plus imputed interest2
c2 present value of ?3/5/// annuit# for ten #ears at an imputed interest
rate2
d2 future value of ?3/5/// annuit# for ten #ears at an imputed interest rate2
a ,2 An asset is being constructed for an enterpriseBs own use2 (!e asset !as
been
:O2 financed wit! a specific new borrowing2 (!e interest cost incurred during
t!e construction period as a result of e"penditures for t!e asset is
a2 a part of t!e !istorical cost of acquiring t!e asset to be written off over
t!e estimated useful life of t!e asset2
b2 interest e"pense in t!e construction period2
c2 recorded as a deferred c!arge and amorti.ed over t!e term of t!e
borrowing2
d2 a part of t!e !istorical cost of acquiring t!e asset to be written off over
t!e term of t!e borrowing used to finance t!e construction of t!e asset2
d 1/2 If t!e cost of ordinar# repairs is capitali.ed as an addition to t!e building
:O3 account during t!e current #ear5
a2 net income for t!e current #ear will be understated2
b2 stoc8!oldersB equit# at t!e end of t!e current #ear will be understated2
c2 total assets at t!e end of t!e current #ear will not be affected2
d2 total liabilities at t!e end of t!e current #ear will not be affected2
d 112 A compan# purc!ased land to be used as t!e site for t!e construction of a
:O1 plant2 (imber was cut from t!e building site so t!at construction of t!e plant
could begin2 (!e proceeds from t!e sale of t!e timber s!ould be
a2 classified as ot!er income2
b2 netted against t!e costs to clear t!e land and e"pensed as incurred2
c2 deducted from t!e cost of t!e plant2
d2 deducted from t!e cost of t!e land2
d 122 &!en a compan# purc!ases land wit! a building on it and immediatel#
tears
:O1 down t!e building so t!at t!e land can be used for t!e construction of a
plant5 t!e costs incurred to tear down t!e building s!ould be
a2 amorti.ed over t!e estimated time period between t!e tearing down of
t!e building and t!e completion of t!e plant2
b2 e"pensed as incurred2
c2 added to t!e cost of t!e plant2
d2 added to t!e cost of t!e land2
b 132 A donated plant asset for w!ic! t!e fair value !as been determined5 and for
:O2 w!ic! incidental costs were incurred in acceptance of t!e asset5 s!ould be
recorded at an amount equal to its
a2 incidental costs incurred2
b2 fair value and incidental costs incurred2
c2 boo8 value on boo8s of donor and incidental costs incurred2
d2 boo8 value on boo8s of donor2
b 1$2 According to 01A0 No2 3$5 ;-apitali.ation of Interest -ost5< interest s!ould
be
:O2 capitali.ed for assets t!at are
a2 in use or read# for t!eir intended use in t!e earnings activities of t!e
enterprise2
b2 being constructed or ot!erwise being produced as discrete proCects for
an enterpriseBs own use2
c2 not being used in t!e earnings activities of t!e enterprise and t!at are
not undergoing t!e activities necessar# to get t!em read# for use2
d2 routinel# produced but require an e"tended period of time and are used
in t!e earnings activities of t!e enterprise2
b 1%2 A compan# is constructing an asset for its own use2 -onstruction began in
:O2 2//12 (!e asset is being financed entirel# wit! a specific new borrowing2
-onstruction e"penditures were made in 2//1 and 2//2 at t!e end of eac!
quarter2 (!e total amount of interest cost capitali.ed in 2//2 s!ould be
determined b# appl#ing t!e interest rate on t!e specific new borrowing to
t!e
a2 total accumulated e"penditures for t!e asset in 2//22
b2 average accumulated e"penditures for t!e asset in 2//22
c2 average e"penditures for t!e asset in 2//22
d2 total e"penditures for t!e asset in 2//22
b 1'2 &!ic! of t!e following researc! and development related costs s!ould be
:O3 capitali.ed and amorti.ed over current and future periods=
a2 :abor and material costs incurred in building a protot#pe model2
b2 -ost of testing equipment t!at will also be used in anot!er separate
researc! and development proCect sc!eduled to begin ne"t #ear2
c2 Administrative salaries allocated to researc! and development2
d2 4esearc! findings purc!ased from anot!er compan# to aid a particular
researc! proCect currentl# in process2
d 1)2 &!ic! of t!e following principles best describes t!e current met!od of
:O3 accounting for researc! and development costs=
a2 Associating cause and effect
b2 0#stematic and rational allocation
c2 Income ta" minimi.ation
d2 Immediate recognition as an e"pense
b 1*2 If a compan# constructs a laborator# building to be used as a researc! and
:O3 development facilit#5 t!e cost of t!e laborator# building is matc!ed against
earnings as
a2 researc! and development e"pense in t!e periodDsE of construction2
b2 depreciation deducted as part of researc! and development costs2
c2 depreciation or immediate writeoff depending on compan# polic#2
d2 an e"pense at suc! time as productive researc! and development !as
been obtained from t!e facilit#2
d 1,2 &!en a compan# replaces an old asp!alt roof on its plant wit! a new
:O3 fiberglass insulated roof5 w!ic! of t!e following t#pes of e"penditure !as
occurred=
a2 Ordinar# repairs and maintenance
b2 Addition
c2 4earrangement
d2 Fetterment
c 2/2 An improvement made to a mac!ine increased its fair mar8et value and its
:O3 production capacit# b# 2% percent wit!out e"tending t!e mac!ineBs useful
life2 (!e cost of t!e improvement s!ould be
a2 e"pensed2
b2 debited to Accumulated Depreciation2
c2 capitali.ed in t!e mac!ine account2
d2 allocated between Accumulated Depreciation and t!e mac!ine account2
d 212 A mac!ine wit! an original estimated useful life of ten #ears is moved to
:O3 anot!er location in t!e factor# after it !ad been in service for t!ree #ears2
(!e efficienc# of t!e mac!ine is increased for its remaining useful life2 (!e
reinstallation costs s!ould be capitali.ed if t!e remaining useful life of t!e
mac!ine is
1ive Gears (en Gears
a2 No No
b2 No Ges
c2 Ges No
d2 Ges Ges
a 222 An e"penditure subsequent to acquisition of assembl#line manufacturing
:O3 equipment benefits future periods2 (!e e"penditure s!ould be capitali.ed if
it is a
Fetterment 4earrangement
a2 Ges Ges
b2 Ges No
c2 No Ges
d2 No No
b 232 &!ic! of t!e following concepts is often given as Custification not to value
:O$ noncurrent operating assets at t!eir current values=
a2 (!e revenue principle
b2 +erifiabilit#
c2 4elevance
d2 >redictive value


d 2$2 &!ic! of t!e following is true=
:O$ a2 (!e 1inancial Accounting 0tandards Foard !as never permitted t!e
disclosure of t!e fair values of noncurrent operating assets in t!e notes
to financial statements2
b2 (!e 03- currentl# requires t!e disclosure of t!e fair values of
noncurrent operating assets in t!e notes to financial statements of
companies t!at are registered wit! t!e 03-2
c2 (!e 1inancial Accounting 0tandards Foard currentl# requires t!e
disclosure of t!e fair values of noncurrent operating assets in t!e notes
to t!e financial statements2
d2 Disclosure of t!e fair values of noncurrent operating assets in t!e notes
to t!e financial statements is currentl# encouraged but not required b#
t!e 1inancial Accounting 0tandards Foard2
b 2%2 On 1ebruar# 125 :a8er -ompan# purc!ased a tract of land as a factor# site
for
:O1 ?1)%5///2 An e"isting building on t!e propert# was ra.ed and construction
was begun on a new factor# building in Harc! of t!e same #ear2 Additional
data are available as follows@
-ost of ra.ing old building22222222222222222222222222222222222222222222222222222 ? 3%5///
(itle insurance and legal fees to purc!ase land2222222222222222222 125%//
Arc!itectBs fees2222222222222222222222222222222222222222222222222222222222222222222222 $25%//
New building construction cost222222222222222222222222222222222222222222222 *)%5///
(!e recorded cost of t!e completed factor# building s!ould be
a2 ?,1/5///2
b2 ?,1)5%//2
c2 ?,3/5///2
d2 ?,%25%//2
c 2'2 (!e Oscar -orporation acquired land5 buildings5 and equipment from a
:O2 ban8rupt compan# at a lumpsum price of ?1*/5///2 At t!e time of
acquisition5 Oscar paid ?125/// to !ave t!e assets appraised2 (!e
appraisal disclosed t!e following values@
:and222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 ?12/5///
Fuildings22222222222222222222222222222222222222222222222222222222222222222222222222222222 */5///
3quipment222222222222222222222222222222222222222222222222222222222222222222222222222222 $/5///
&!at cost s!ould be assigned to t!e land5 buildings5 and equipment5
respectivel#=
a2 ?'$5///5 ?'$5///5 and ?'$5///
b2 ?,/5///5 ?'/5///5 and ?3/5///
c2 ?,'5///5 ?'$5///5 and ?325///
d2 ?12/5///5 ?*/5///5 and ?$/5///
d 2)2 -arter -ompan# acquired t!ree mac!ines for ?2//5/// in a pac8age deal2
:O2 (!e t!ree assets toget!er !ad a boo8 value of ?1'/5/// on t!e sellerBs
boo8s2 An appraisal costing t!e purc!aser ?25/// indicated t!at t!e t!ree
mac!ines !ad t!e following mar8et values Dboo8 values are given in
parent!esesE@
Hac!ine 1@ ?'/5/// D?$/5///E
Hac!ine 2@ ?*/5/// D?%/5///E
Hac!ine 3@ ?1//5/// D?)/5///E
(!e t!ree assets s!ould be individuall# recorded at a cost of Drounded to
t!e nearest dollarE
Hac!ine 1 Hac!ine 2 Hac!ine 3
a2 ?$/5/// ?%35333 ?''5'')
b2 ?%/5/// ?'25%// ?*)5%//
c2 ?$/5/// ?%/5/// ?)/5///
d2 ?%/5%// ?')5333 ?*$51')
d 2*2 >eterson5 Inc2 purc!ased a mac!ine under a deferred pa#ment contract on
:O2 December 315 2//12 Ander t!e terms of t!e contract5 >eterson is required
to ma8e eig!t annual pa#ments of ?1$/5/// eac! beginning December 315
2//22 (!e appropriate interest rate is * percent2 (!e purc!ase price of t!e
mac!ine is
a2 ?153*,51,/2
b2 ?1512/5///2
c2 ?*'*5,//2
d2 ?*/$5%2/2
c 2,2 On October 15 (a8ei5 Inc2 e"c!anged *5/// s!ares of its ?2% par value
:O2 common stoc8 for a parcel of land to be !eld for a future plant site2 (a8eiBs
common stoc8 !ad a fair mar8et value of ?*/ per s!are on t!e e"c!ange
date2 (a8ei received ?3'5/// from t!e sale of scrap w!en an e"isting
building on t!e site was ra.ed2 (!e land s!ould be carried at
a2 ?2//5///2
b2 ?23'5///2
c2 ?'/$5///2
d2 ?'$/5///2
a 3/2 Harburg Hanufacturing -ompan# purc!ased a mac!ine on Ianuar# 25
2//22
:O1 (!e invoice price of t!e mac!ine was ?$/5///5 and t!e vendor offered a 2
percent discount for pa#ment wit!in ten da#s2 (!e following additional costs
were incurred in connection wit! t!e mac!ine@
(ransportationin2222222222222222222222222222222222222222222222222222222222222222222 ?152//
Installation cost2222222222222222222222222222222222222222222222222222222222222222222222 )//
(esting costs prior to regular operation22222222222222222222222222222222 %%/
If t!e invoice is paid wit!in t!e discount period5 Harburg s!ould record t!e
acquisition cost of t!e mac!ine at
a2 ?$15'%/2
b2 ?$151//2
c2 ?$/5$//2
d2 ?3,52//2
b 312 (!e general ledger of t!e 1la#le -orporation as of December 31 includes
t!e
:O1 following accounts@
Organi.ation costs22222222222222222222222222222222222222222222222222222222222222222 ? 2/5///
Deposits wit! advertising agenc# Dwill be used to promote
goodwillE22222222222222222222222222222222222222222222222222222222222222222222222222222222 325///
Discount on bonds pa#able222222222222222222222222222222222222222222222222222 '/5///
3"cess of cost over boo8 value of net assets of acquired
subsidiar#222222222222222222222222222222222222222222222222222222222222222222222222222222 2*/5///
(rademar8s2222222222222222222222222222222222222222222222222222222222222222222222222222 $*5///
In t!e preparation of 1la#leBs balance s!eet as of December 315 w!at
s!ould be reported as total intangible assets=
a2 ?'*5///
b2 ?32*5///
c2 ?3'*5///
d2 ?3*/5///
b 322 On Iune 3/5 2//25 Ji(ec! Inc2 purc!ased for cas! at ?%/ per s!are all
:O1 1%/5/// s!ares of outstanding common stoc8 of 08icraft -ompan#2
08icraftBs balance s!eet at Iune 3/5 2//25 s!owed net assets wit! a boo8
value of ?'5///5///2 (!e fair value of 08icraftBs propert#5 plant5 and
equipment on Iune 3/5 2//25 was ?*//5/// in e"cess of its boo8 value2
&!at amount5 if an#5 will be recorded b# Ji(ec! as goodwill on t!e date of
purc!ase=
a2 ?/
b2 ?)//5///
c2 ?*//5///
d2 ?15%//5///
a 332 On Iul# 315 2//25 -leveland -ompan# purc!ased for ?$5///5/// cas! all
of
:O1 t!e outstanding common stoc8 of Gem -ompan# w!en GemBs balance
s!eet s!owed net assets of ?352//5///2 GemBs assets and liabilities !ad
fair values different from t!e boo8 values as follows@
Foo8 +alue 1air +alue
>ropert#5 plant5 and equipment5 net2222222222222222 ?%5///5/// ?%5)%/5///
Ot!er assets2222222222222222222222222222222222222222222222222222 %//5/// /
:ongterm debt222222222222222222222222222222222222222222222222 35///5/// 25*//5///
As a result of t!e transaction5 w!at amount will be s!own as goodwill in t!e
Iul# 315 2//25 consolidated balance s!eet of -leveland -ompan# and its
w!oll# owned subsidiar#5 Gem -ompan#=
a2 ?3%/5///
b2 ?2%/5///
c2 ?)%/5///
d2 ?*//5///
d 3$2 >e#ton -ompan# started construction of a new office building on Ianuar# 15
:O2 2//15 and moved into t!e finis!ed building on Iul# 15 2//22 Of t!e
buildingBs
?%5///5/// total cost5 ?$5///5/// was incurred in 2//1 evenl# t!roug!out
t!e #ear2 >e#tonBs incremental borrowing rate was 12 percent t!roug!out
2//15 and t!e total amount of interest incurred b# >e#ton during 2//1 was
?2/$5///2 &!at amount s!ould >e#ton report as capitali.ed interest at
December 315 2//1=
a2 ?$*/5///
b2 ?3//5///
c2 ?2$/5///
d2 ?2/$5///
c 3%2 Ho.el# -ompan# borrowed ?$//5/// on a 1/ percent note pa#able to
finance
:O2 a new ware!ouse Ho.el# is constructing for its own use2 (!e onl# ot!er
debt on Ho.el#Bs boo8s is a ?'//5///5 12 percent mortgage pa#able on an
office building2 At t!e end of t!e current #ear5 average accumulated
e"penditures on t!e new ware!ouse totaled ?$)%5///2 Ho.el# s!ould
capitali.e interest for t!e current #ear in t!e amount of
a2 ?$/5///2
b2 ?$)5%//2
c2 ?$,5///2
d2 ?%252%/2
c 3'2 Ia.. -ompan# acquired land and paid for it in full b# issuing ?'//5/// of its
:O2 1/ percent bonds pa#able and $/5/// s!ares of its common stoc85 par ?1/2
(!e stoc8 was selling at ?1, per s!are and t!e bonds were trading at 1/22
&!at amount s!ould Ia.. record as t!e cost of t!e land=
a2 ?,**5///
b2 ?15///5///
c2 ?153)25///
d2 ?153*)52//
c 3)2 Ia.. -ompan# purc!ased land wit! a current mar8et value of ?2$/5///2 Its
:O2 boo8 value in t!e accounts of t!e seller was ?13/5%//2 In e"c!ange for t!e
land5 Ia.. issued 2/5/// s!ares of its common stoc85 par ?1/5 wit! an
estimated mar8et value of ?1$ per s!are2 Ia.. stoc8 is not traded on an
establis!ed stoc8 e"c!ange2 &!at amount s!ould Ia.. record as t!e cost
of t!e land=
a2 ?13/5%//
b2 ?2//5///
c2 ?2$/5///
d2 ?2*/5///
b 3*2 (!e t!ird #ear of a construction proCect began wit! a ?3/5/// balance in
:O2 -onstruction in >rogress2 Included in t!at figure is ?'5/// of interest
capitali.ed in t!e first two #ears2 -onstruction e"penditures during t!e t!ird
#ear were ?*/5/// w!ic! were incurred evenl# t!roug!out t!e entire #ear2
(!e compan# !as !ad over ?3//5/// in interestbearing debt outstanding
t!e t!ird #ear5 at a weig!ted average rate of , percent2 Jow muc! interest
for t!e t!ird #ear is capitali.ed=
a2 ?35'//
b2 ?'53//
c2 ?,53'/
d2 ?,5,//
b 3,2 Ia.. compan# started construction on a building on Ianuar# 1 of t!is #ear
and
:O2 completed construction on December 31 of t!e same #ear2 Ia.. !ad onl#
two interest notes outstanding during t!e #ear5 and bot! of t!ese notes
were outstanding for all 12 mont!s of t!e #ear2 (!e following information is
available@
Average accumulated e"penditures22222222222222222222222222222222 ?2%/5///
3nding balance in construction in progress
before capitali.ation of interest2222222222222222222222222222222222222222 3'/5///
' percent note incurred specificall# for t!e proCect2222222222 1%/5///
, percent longterm note22222222222222222222222222222222222222222222222222 %//5///
&!at amount of interest s!ould Ia.. capitali.e for t!e current #ear=
a2 ?1%5///
b2 ?1*5///
c2 ?225%//
d2 ?2)5,//
b $/2 A compan# made t!e following cas! e"penditures on a selfconstructed
:O2 building begun Ianuar# 1 of t!e current #ear@
Ianuar# 12222222222222222222222222222222222222222222222222222222222222222222222222 ?%/5///
Iune 12222222222222222222222222222222222222222222222222222222222222222222222222222222 '/5///
December 12222222222222222222222222222222222222222222222222222222222222222222222 ,/5///
(!e building is still under construction at #earend2 &!at is t!e average
accumulated e"penditures for t!e purpose of capitali.ing interest=
a2 ?*)5%//
b2 ?,25%//
c2 ?1//5///
d2 ?2//5///
a $12 During 2//25 9rieger5 Inc2 incurred t!e following costs@
:O3 4esearc! and development services performed b# Dell
-ompan# for 9rieger2222222222222222222222222222222222222222222222222222222222222 ?12%5///
(esting for evaluation of new products222222222222222222222222222222222 1%/5///
:aborator# researc! aimed at discover# of new 8nowledge 1*)5%//
In its income statement for t!e #ear ended December 315 2//25 9rieger
s!ould report researc! and development e"pense of
a2 ?$'25%//2
b2 ?3125%//2
c2 ?1%/5///2
d2 ?12%5///2
c $22 4ic!ard -o2 incurred researc! and development costs in 2//2 as follows@
:O3 3quipment acquired for use in various researc! and
development proCects222222222222222222222222222222222222222222222222222222222222 ?%//5///
Depreciation on t!e above equipment2222222222222222222222222222222222 ')5%//
Haterials used22222222222222222222222222222222222222222222222222222222222222222222222 1//5///
-ompensation costs of personnel22222222222222222222222222222222222222222 2%/5///
Outside consulting fees222222222222222222222222222222222222222222222222222222222 )%5///
Indirect costs appropriatel# allocated22222222222222222222222222222222222 12%5///
(!e total researc! and development costs c!arged in 4ic!ardBs 2//2
income statement s!ould be
a2 ?$2%5///2
b2 ?%$25%//2
c2 ?'1)5%//2
d2 ?,2%5///2
c $32 During t!e #ear Cust ended5 Horton -ompan# made t!e following
e"penditures
:O3 relating to its plant building@
-ontinuing and frequent repairs2222222222222222222222222222222222222222222 ?1'/5///
4epainted t!e plant building2222222222222222222222222222222222222222222222222 $/5///
HaCor improvements to t!e electrical wiring s#stem2222222222222 12*5///
>artial replacement of roof tiles22222222222222222222222222222222222222222222 %'5///
Jow muc! s!ould be c!arged to repair and maintenance e"pense during
t!e #ear Cust ended=
a2 ?1'/5///
b2 ?21'5///
c2 ?2%'5///
d2 ?32*5///
a $$2 On 0eptember 1/5 0and# -ompan# incurred t!e following costs for one of
its
:O3 printing presses@
>urc!ase of stapling attac!ment2222222222222222222222222222222222222222222 ?,/5///
Installation of attac!ment222222222222222222222222222222222222222222222222222222 2/5///
4eplacement parts for renovation of press222222222222222222222222222 '/5///
:abor and over!ead in connection wit! renovation of press 2*5///
Neit!er t!e attac!ment nor t!e renovation increased t!e estimated useful
life of t!e press2 Jowever5 t!e renovation resulted in significantl# increased
productivit#2 &!at amount of t!e costs s!ould be capitali.ed=
a2 ?1,*5///
b2 ?11/5///
c2 ?,/5///
d2 ?**5///
c $%2 On April 3/5 2//25 0istar5 Inc2 purc!ased for ?3/ per s!are all 2//5/// of
&ren
:O2 -orp2Bs outstanding common stoc82 On t!is date &renBs balance s!eet
s!owed net assets of ?%5///5///2 Additionall#5 t!e fair value of &renBs
identifiable assets on t!is date was ?$//5/// in e"cess of t!eir carr#ing
amount2 On 0istarBs April 3/5 2//25 consolidated balance s!eet5 w!at
amount s!ould be reported as goodwill=
a2 ?3%/5///
b2 ?$//5///
c2 ?'//5///
d2 ?15///5///
b $'2 0elected information from t!e 2//2 and 2//1 financial statements of Fowen
:O% -orporation is presented below2
Din
t!ousandsE
As of Dec231
2//2
2//1
-as!22222222222222222222222222222222222222222222222222222222222222222222222222222222222222? 21 ? 3%
Har8etable 0ecurities222222222222222222222222222222222222222222222222222222222222 2) 22
Accounts 4eceivable DnetE2222222222222222222222222222222222222222222222222222 '/ ,*
Inventor#22222222222222222222222222222222222222222222222222222222222222222222222222222222 1/% 1$2
>repaid 3"penses22222222222222222222222222222222222222222222222222222222222222222 % 3
:and and Fuilding DnetE222222222222222222222222222222222222222222222222222222222 2$) 31%
Accounts >a#able222222222222222222222222222222222222222222222222222222222222222222 %) )%
Accrued 3"penses22222222222222222222222222222222222222222222222222222222222222222 1/ 1$
Notes >a#able Ds!orttermE222222222222222222222222222222222222222222222222222 * $
Fond >a#able222222222222222222222222222222222222222222222222222222222222222222222222 %2 ''
Fowen !ad cas! sales of ?)%/ and credit sales of ?'1% during 2//22 -ost
of
goods sold for 2//2 was ?*1,2 FowenBs fi"ed asset turnover for 2//2 is
a2 22,)2
b2 $2*'2
c2 22%32
d2 %2%32
PRO%LEMS
Problem 1
On 1ebruar# 15 2//15 4eardon -orporation purc!ased a parcel of land as a factor#
site for ?32/5///2 An old building on t!e propert# was demolis!ed and
construction begun on a new ware!ouse t!at was completed April 1%5 2//22 -osts
incurred on t!e construction proCect are listed below2
Demolition of old building222222222222222222222222222222222222222222222222222222222 ? 215///
Arc!itectBs fees2222222222222222222222222222222222222222222222222222222222222222222222222 315)//
:egal feestitle investigation222222222222222222222222222222222222222222222222222 $51//
-onstruction costs22222222222222222222222222222222222222222222222222222222222222222222 ,%/5///
Imputed interest based on stoc8 financing222222222222222222222222222222 1$5///
:andfill for building site222222222222222222222222222222222222222222222222222222222222 1,53//
-learing of trees from building site222222222222222222222222222222222222222222 ,5'//
(emporar# buildings used for construction activities222222222222222 2,5///
:and surve#222222222222222222222222222222222222222222222222222222222222222222222222222222 $5///
3"cavation for basement2222222222222222222222222222222222222222222222222222222222 1352//
D0alvage materials from demolition sold for ?15*//E
D(imber sold for ?353//E
Determine t!e cost of t!e land and new building2
Solution 1
:O1
:and
-ost 222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 ? 32/5///
Demolition22222222222222222222222222222222222222222222222222222222222222222222222222222222 215///
:egal feestitle investigation222222222222222222222222222222222222222222222222222 $51//
:andfill22222222222222222222222222222222222222222222222222222222222222222222222222222222222222 1,53//
-learing of trees22222222222222222222222222222222222222222222222222222222222222222222222 ,5'//
:and surve#222222222222222222222222222222222222222222222222222222222222222222222222222222 $5///
0alvage222222222222222222222222222222222222222222222222222222222222222222222222222222222222 D15*//E
0ale of timber222222222222222222222222222222222222222222222222222222222222222222222222222 D353//E
(otal2222222222222222222222222222222222222222222222222222222222222222222222222222222222 ? 3)25,//
Fuilding
-onstruction costs22222222222222222222222222222222222222222222222222222222222222222222 ? ,%/5///
Arc!itectBs fees2222222222222222222222222222222222222222222222222222222222222222222222222 315)//
(emporar# buildings22222222222222222222222222222222222222222222222222222222222222222 2,5///
3"cavation22222222222222222222222222222222222222222222222222222222222222222222222222222222 1352//
(otal2222222222222222222222222222222222222222222222222222222222222222222222222222222222 ?15/235,//
Note@ Interest c!arges would not be recorded2 Ander 1A0F 0tatement No2 3$5
onl# interest c!arges incurred ma# be recogni.ed2
Problem 2
On Ha# 15 2//15 :enn# -orporation purc!ased for ?',/5/// a tract of land on
w!ic! a ware!ouse and office building were located2 (!e following data were
collected concerning t!e propert#@
-urrent Assessed +endorBs
+aluation Original -ost
:and22222222222222222222222222222222222222222222222?2*/5/// ?1*/5///
&are!ouse2222222222222222222222222222222222222222222222222222 32/5/// 31%5///
Office Fuilding22222222222222222222222222222222222222222222222 2//5/// 12,5///
?*//5/// ?'2$5///
Determine t!e appropriate amounts t!at :enn# s!ould record for t!e land5
ware!ouse5 and office building2
Solution 2
:O2
:and222222222222222222222222222222?2*/5///7?*//5/// K 3%L
&are!ouse222222222222222222222222222222222222222222222222222222 ?32/5///7?*//5/// K $/L
Office Fuilding22222222222222222222222222222222222222222222222222 ?2//5///7?*//5/// K 2%L
?*//5/// 1//L
Allocation@
23% " ?',/5/// K ?2$15%// :and
2$/ " ?',/5/// K 2)'5/// &are!ouse
22% " ?',/5/// K 1)25%// Office Fuilding
?',/5///
Problem 3
(!e -allister -ompan# e"c!anged 2%5/// s!ares of its own ?%/ par value common
stoc8 for a turret lat!e from >a#ne -ompan#2 (!e mar8et value of t!e -allister
-ompan# stoc8 was ?'* per s!are at t!e date of e"c!ange2 (!e equipment !ad a
carr#ing value of ?15'2%5///2
4ecord t!e e"c!ange on t!e boo8s of -allister -ompan# in general Cournal form2
Solution 3
:O2
Hac!iner#2222222222222222222222222222222222222222222222222222222222222222222 15)//5///
-ommon 0toc8 D2%5/// " ?%/E22222222222222222222222222222222 152%/5///
>aidIn -apital in 3"cess of >ar222222222222222222222222 $%/5///
Problem 4
One of t!e most critical steps in recording t!e acquisition of assets is t!e
determination of t!e cost assigned to t!e asset2 Data related to assets acquired b#
Hentor Hanufacturing -ompan# are as follows@
D1E Hac!ine A was purc!ased at a list price of ?,25///M terms 171/5 net 3/2 (!e
mac!ine invoice was paid after t!e discount period2 (ransportation c!arges
were ?152)/M installation costs were ?,2/M and t!e cost of a trial run was ?,'/2
Normal repairs and maintenance for t!e first #ear were ?$1/2
D2E Hac!ine F could be purc!ased for five annual pa#ments of ?'5332 or ?2,5$//
in cas!2 Hentor elected to purc!ase Hac!ine F under t!e installment plan2
Ot!er related acquisition costs totaled ?1)%2
D3E On Ha# 125 2//15 Alabama -ompan# offered to sell land to Hentor for
?'25///M t!e offer was reCected2 On Iune 2,5 2512% s!ares of Hentor common
stoc8 were issued in e"c!ange for t!e land2 (!e par value of t!e stoc8 was
?2/ per s!areM t!e mar8et value of t!e stoc8 was ?32 per s!are at t!e time of
purc!ase2 HentorBs management was confident t!e land would be wort! at
least ?'$5/// to t!e compan#2
D$E (!e compan# purc!ased equipment under a deferred pa#ment contract
?$/5/// down pa#ment and 3/ semiannual pa#ments of ?%5///2 DAssume a
12 percent interest rate2E
Determine t!e acquisition cost for eac! of t!e assets2
Solution 4
:O2
D1E -ost of mac!ine D?,25/// " 2,,E22222222222222222222222222222222222222 ?,15/*/
(ransportation costs222222222222222222222222222222222222222222222222222 152)/
Installation costs222222222222222222222222222222222222222222222222222222222 ,2/
(rial run22222222222222222222222222222222222222222222222222222222222222222222222 ,'/
-ost basis for Hac!ine A22222222222222222222222222222222222222222222 ?,$523/
(!e ?$1/ for normal repairs and maintenance is a period costM t!e ?,2/
D?,25/// ?,15/*/E is recorded as Discounts :ost or Interest 3"pense2
D2E -as! price of mac!ine222222222222222222222222222222222222222222222222 ?2,5$//
Ot!er acquisition costs22222222222222222222222222222222222222222222222 1)%
-ost basis for Hac!ine F2222222222222222222222222222222222222222222 ?2,5%)%
(!e interest of D?315''/ ?2,5$//E K ?252'/ is not included in t!e asset cost2
D3E -ost basis for land@
2512% s!ares N ?32 Dmar8etE K ?'*5///
D$E Down pa#ment222222222222222222222222222222222222222222222222222222222222 ? $/5///
0emiannual pa#ments D?%5/// " 132)'$*E62222222222222222222222 '*5*2$
?1/*5*2$
6 n K 3/ i K 'L D(able $>resent value of an ordinar# annuit#E
Problem 5
During 2//25 Grant Industries5 Inc2 constructed a new manufacturing facilit# at a
cost of ?125///5///2 (!e weig!ted average accumulated e"penditures for 2//2
were calculated to be ?%5$//5///2 (!e compan# !ad t!e following debt
outstanding at December 315 2//2@
DaE 1/ percent5 five#ear note to finance construction of t!e manufacturing
facilit#5 dated Ianuar# 15 2//25 ?35'//5///2
DbE 12 percent5 2/#ear bonds issued at par on April 3/5 1,,*5 ?*5$//5///2
DcE * percent5 si"#ear note pa#able5 dated Harc! 15 2//15 ?15*//5///2
Determine t!e amount of interest to be capitali.ed b# Grant Industries for 2//22
Solution 5
:O2
Average Applicable
Accumulated Interest Avoidable
3"penditures 4ate Interest
?35'//5/// 1/L ?3'/5///
15*//5/// 1122,L 6 2/3522/
?%5$//5/// ?%'3522/
6 -alculation of weig!ted average interest rate@
>rincipal Interest
12L bonds222222222222222222222222? *5$//5/// ?15//*5///
*L note pa#able2222222222222 15*//5/// 1$$5///
?1/52//5/// ?151%25///
?151%25///7?1/52//5/// K 1122,L DroundedE
Actual interest cost incurred during 2//2@
-onstruction loan D?35'//5/// " 1/LE222222222222222222222222222222222222 ? 3'/5///
12L bonds D?*5$//5/// " 12LE22222222222222222222222222222222222222222222222 15//*5///
*L notes D?15*//5/// " *LE222222222222222222222222222222222222222222222222222 1$$5///
?15%125///
(!e interest t!at s!ould be capitali.ed for 2//2 b# Grant Industries5 Inc2 is
?%'3522/ Dt!e lesser of t!e avoidable interest of ?%'3522/ and t!e actual interest
cost incurred of ?15%125///E2
Problem 6
Gooden 3nterprises Inc2 developed a new mac!ine for manufacturing baseballs2
Fecause t!e mac!ine is considered ver# valuable5 t!e compan# !ad it patented2
(!e following e"penditures were incurred in developing and patenting t!e mac!ine2
DaE >urc!ases of special equipment to be used solel# for
development of t!e new mac!ine22222222222222222222222222222222222222222222222 ?1*25///
DbE 4esearc! salaries and fringe benefits for engineers
and scientists222222222222222222222222222222222222222222222222222222222222222222222222222222 1)51//
DcE -ost of testing protot#pe2222222222222222222222222222222222222222222222222222222222222 235'//
DdE :egal costs for filing for patent222222222222222222222222222222222222222222222222222 125)//
DeE 1ees paid to government patent office222222222222222222222222222222222222222 25%//
DfE Drawings required b# patent office to be filed wit!
patent application222222222222222222222222222222222222222222222222222222222222222222222222 $5)//
Gooden elected to amorti.e t!e patent over its legal life2 At t!e beginning of t!e
second #ear5 Gooden 3nterprises paid ?2$5/// to successfull# defend t!e patent in
an infringement suit2 At t!e beginning of t!e fourt! #ear Gooden determined t!at
t!e remaining estimated useful life of t!e patent was five #ears2
4ecord t!e above transactions in general Cournal form for Gooden 3nterprises Inc2
for t!e first five #ears of t!e life of t!e patent2 Include an# amorti.ation or
depreciation for eac! period2
Solution 6
:O3
Gear 1 4esearc! and Development 3"pense O?1*25/// P
?1)51// P ?235'// K ?2225)//Q22222222222222222222222222222222222222 2225)//
>atents O?125)// P ?25%// P ?$5)// K ?1,5,//Q222222222222222 1,5,//
-as!22222222222222222222222222222222222222222222222222222222222222222 2$25'//
Gear 1 Amorti.ation of >atents O?1,5,//71) K ?151)1Q222222222222 151)1
>atents2222222222222222222222222222222222222222222222222222222222222 151)1
Gear 2 >atents222222222222222222222222222222222222222222222222222222222222222222 2$5///
-as!22222222222222222222222222222222222222222222222222222222222222222 2$5///
Gear 2 Amorti.ation of >atents OD?1,5,// P ?2$5///
?151)1E71'Q222222222222222222222222222222222222222222222222222222222222222222222222222222222 25')1
>atents2222222222222222222222222222222222222222222222222222222222222 25')1
Gear 3 Amorti.ation of >atents22222222222222222222222222222222222222222 25')1
>atents2222222222222222222222222222222222222222222222222222222222222 25')1
Gear $ Amorti.ation of >atents OD?1,5,// P ?2$5///
?151)1 ?25')1 ?25')1E7%Q2222222222222222222222222222222222222222222 )5$))
>atents2222222222222222222222222222222222222222222222222222222222222 )5$))
Gear % Amorti.ation of >atents22222222222222222222222222222222222222222 )5$))
>atents2222222222222222222222222222222222222222222222222222222222222 )5$))
Problem 7
On Iune 15 2//25 t!e Otis -ompan# paid ?152//5/// for all t!e issued and
outstanding stoc8 of Fillups -orporation in a transaction properl# accounted for as
a purc!ase2 (!e recorded assets and liabilities of Fillups -orporation on Iune 15
2//25 are as follows@
-as!2 222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 ? 2//5///
Inventor#2222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 %$/5///
>ropert# and equipment Dnet of accumulated depreciation of ?%2%5///E2222222 '3/5///
:iabilities2222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222
D$2/5///E
On Iune 15 2//25 it was determined t!at t!e inventor# of Fillups !ad a fair value of
?%)%5///5 and t!e propert# and equipment !ad a fair value of ?)2/5///2
Determine t!e goodwill resulting from t!e business combination2
Solution 7
:O2
-as! purc!ase price222222222222222222222222222222222222222222222222222222222222 ?152//5///
4ecorded cost of net assets purc!ased222222222222222222222222222222 ?,%/5///
Difference between cost and mar8et value of specific assets@
Inventor#222222222222222222222222222222222222222222222222222222222222222222222222 3%5///
>ropert# and equipment222222222222222222222222222222222222222222222222 ,/5///
1air value of net assets22222222222222222222222222222222222222222222222222222222 15/)%5///
Goodwill purc!ased2222222222222222222222222222222222222222222222222222222222222 ? 12%5///
Problem 8
On Harc! 15 2//25 t!e 0ef8wa8 -ompan# paid ?$//5/// for all t!e issued and
outstanding stoc8 of Fodo -orporation in a transaction properl# accounted for as a
purc!ase2 (!e mar8et values of t!e assets and liabilities of Fodo -orporation on
Harc! 15 2//25 are as follows@
-as!2 22222222222222222222222222222222222222222222222222222222222222222222222222222 ? 1/5///
Accounts receivable222222222222222222222222222222222222222222222222222222 12/5///
Inventor#222222222222222222222222222222222222222222222222222222222222222222222222 33/5///
>ropert# and equipment222222222222222222222222222222222222222222222222 */5///
:iabilities22222222222222222222222222222222222222222222222222222222222222222222222 D2/5///E
Ha8e t!e Cournal entr# necessar# for 0ef8wa8 to record t!e purc!ase2
Solution 8
:O2
-as!2 2R222222222222222222222222222222222222222222222222222222222222222222222222 1/5///
Accounts 4eceivable22222222222222222222222222222222222222222222222222222 12/5///
Inventor#222222222222222222222222222222222222222222222222222222222222222222222222 33/5///
:iabilities222222222222222222222222222222222222222222222222222222222222222222 2/5///
Negative Goodwill2222222222222222222222222222222222222222222222222222 $/5///
-as!2222222222222222222222222222222222222222222222222222222222222222222222222 $//5///
-as! purc!ase price222222222222222222222222222222222222222222222222222222222222 ?$//5///
Har8et value of net assets222222222222222222222222222222222222222222222222222 %2/5///
3"cess of mar8et value over purc!ase price22222222222222222222222 ?12/5///
4eduction of propert# and equipment Dnoncurrent assetsE2 */5///
4emainder Dnegative goodwillE22222222222222222222222222222222222222222222 ? $/5///
Problem 9
:urie -ompan# made t!e following cas! e"penditures during t!e #ear@
DaE >aid ?1//5/// for interest capitali.ed as part of a selfconstruction
proCect2
DbE >aid ?22%5/// for interest t!at was e"pensed during t!e #ear2
DcE >aid ?3//5/// for 4SD e"penditures t!at were immediatel# e"pensed2
DdE >aid ?$//5/// to acquire new mac!iner#2
Indicate w!ere in t!e statement of cas! flows eac! of t!e preceding items would be
reflected2 :urie uses t!e indirect met!od of reporting cas! flow from operations2
Solution 9
:O25 :O3
DaE ?1//5/// cas! outflow in t!e investing activities section2
DbE Now!ere2 Interest e"pense would be included in t!e computation of net
income and would not be s!own separatel# in t!e operating activities
section of t!e statement of cas! flows2 Jowever5 t!e amount of cas! paid
for interest must be disclosed separatel#5 as a supplemental part of t!e
statement of cas! flows or in t!e notes2
DcE Now!ere2 Again5 researc! and development e"pense would be included
in t!e computation of net income2 Net income is t!e basis for computing
cas! from operations w!en t!e indirect met!od is used2
DdE ?$//5/// cas! outflow in t!e investing activities section2
Problem 10
Delb -ompan# is an oil and gas e"ploration firm2 During 2//25 Delb engaged in
five different e"ploration proCects2 (!e costs associated wit! t!ese proCects are as
follows@
>roCect 12222222222222222222222222222222222222222222222222222222222222222 ? 32%5///
>roCect 22222222222222222222222222222222222222222222222222222222222222222 1)*5///
>roCect 32222222222222222222222222222222222222222222222222222222222222222 $235///
>roCect $2222222222222222222222222222222222222222222222222222222222222222 2$/5///
>roCect %2222222222222222222222222222222222222222222222222222222222222222 ,'5///
(otal22222222222222222222222222222222222222222222222222222222222222222 ?152'25///
Onl# >roCects 2 and % were successful2 As of t!e end of t!e #ear5 production !ad
not #et started at eit!er of t!ese two sites2
Assuming t!at all e"ploration costs were paid for in cas!5 ma8e t!e Cournal entr# to
record t!e e"penditures for t!e #ear using
D1E t!e successful efforts met!od2
D2E t!e full cost met!od2
Solution 10
:O3
D1E 3"ploration 3"pense22222222222222222222222222222222222222222222222222222 ,**5///
-apitali.ed 3"ploration -ost22222222222222222222222222222222222222222 2)$5///
-as!2222222222222222222222222222222222222222222222222222222222222222222222 152'25///
D2E -apitali.ed 3"ploration -ost22222222222222222222222222222222222222222 152'25///
-as!2222222222222222222222222222222222222222222222222222222222222222222222 152'25///
Problem 11
Arrow -onstruction -ompan#5 Inc25 is constructing an office building for its own use2
(!e following e"penditures relating to t!e construction of t!e office building were
made during t!e 2//2@
(otal construction e"penditures@
Ianuar# 25 2//22222222222222222222222222222222222222222222222222222222222222?%//5///
Ha# 15 2//22222222222222222222222222222222222222222222222222222222222222222222 %//5///
November 15 2//2222222222222222222222222222222222222222222222222222222222 $//5///
Outstanding compan# debt@
Fond issue directl# related to t!e new office buildingM interest rate5 12LM
term5 % #ears from beginning of construction222222222222222 ?*//5///
General bond liabilit#@
Fonds issued Cust prior to construction of buildingM interest rate5 1/L
for 1/ #ears2222222222222222222222222222222222222222222222222222222222222222222 ?$//5///
Fonds issue prior to constructionM interest rate *L for * #ears
?,//5///
3stimated cost of equit# capital2222222222222222222222222222222222222222222
13L
Determine t!e amount of interest to be capitali.ed during 2//2 using t!e avoidable
interest met!od2
Solution 11
:O'
Avoidable Interest Het!od@
Interest 1raction
-apitali.ation of t!e Gear -apitali.ed
3"penditure Date Amount 4ate Outstanding Interest
Ianuar# 25 2//2 ?%//5/// 12L 12712 ? '/5///
Ha# 15 2//2 3//5/// 12L *712 2$5///
2//5/// ,2$L *712 125%33
November 15 2//2 $//5/// ,2$L 2712 '52')
(otal capitali.ed interest for 2//222222222222222222222222222222222222222222222222222222222?1/25*//
Problem 12
Arrow -onstruction -ompan#5 Inc25 is constructing an office building for its own use2
(!e following e"penditures relating to t!e construction of t!e office building were
made during t!e 2//2@
(otal construction e"penditures@
Ianuar# 25 2//22222222222222222222222222222222222222222222222222222222222222?%//5///
Ha# 15 2//22222222222222222222222222222222222222222222222222222222222222222222 %//5///
November 15 2//2222222222222222222222222222222222222222222222222222222222 $//5///
Outstanding compan# debt@
Fond issue directl# related to t!e new office buildingM interest rate5 12LM
term5 % #ears from beginning of construction222222222222222 ?*//5///
General bond liabilit#@
Fonds issued Cust prior to construction of buildingM interest rate5 1/L
for 1/ #ears2222222222222222222222222222222222222222222222222222222222222222222 ?$//5///
Fonds issue prior to constructionM interest rate *L for * #ears
?,//5///
3stimated cost of equit# capital2222222222222222222222222222222222222222222
13L
Determine t!e amount of interest to be capitali.ed during 2//2 using t!e average
accumulated e"penditure met!od2
Solution 12
:O'
Average accumulated e"penditure met!od@
1raction
of t!e Gear -apitali.ed
3"penditure Date Amount Outstanding Interest
Ianuar# 25 2//2 ?%//5/// 12712 ?%//5///
Ha# 15 2//2 %//5/// *712 3335333
November 15 2//2 $//5/// 2712 ''5'')
(otal weig!ted average e"penditures
for 2//222222222222222222222222222222222222222222222222222222222?,//5///
&eig!ted Interest
3"penditure -apitali.ation -apitali.ed
Amount 4ate Interest
?*//5/// 12L ? ,'5///
?1//5/// ,2$L ,5$//
(otal capitali.ed interest for 2//2 ?1/%5$//
Problem 13
Arrow -onstruction -ompan#5 Inc25 is constructing an office building for its own use2
(!e following e"penditures relating to t!e construction of t!e office building were
made during t!e 2//2@
(otal construction e"penditures@
Ianuar# 25 2//22222222222222222222222222222222222222222222222222222222222222?%//5///
Ha# 15 2//22222222222222222222222222222222222222222222222222222222222222222222 %//5///
November 15 2//2222222222222222222222222222222222222222222222222222222222 $//5///
Outstanding compan# debt@
Fond issue directl# related to t!e new office buildingM interest rate5 12LM
term5 % #ears from Iul# 15 2//22222222222222222222222222222222222222
?*//5///
General bond liabilit#@
Fonds issued Cust prior to construction of buildingM interest rate5 1/L
for 1/ #ears2222222222222222222222222222222222222222222222222222222222222222222 ?$//5///
Fonds issue prior to constructionM interest rate *L for * #ears
?,//5///
3stimated cost of equit# capital2222222222222222222222222222222222222222222
13L
Determine t!e amount of interest to be capitali.ed during 2//2 using t!e avoidable
interest met!od2
Solution 13
:O'
Interest 1raction
-apitali.ation of t!e Gear -apitali.ed
3"penditure Date Amount 4ate Outstanding Interest
Ianuar# 25 2//2@
Ian2Iune ?%//5/// ,2$L '712 ? 235%//
Iul#Dec2 %//5/// 12L '712 3/5///
Ha# 15 2//2@
Ha#Iune 3//5/// ,2$L 2712 $5)//
Iul#Dec 3//5/// 12L '712 1*5///
Ha#Dec 2//5/// ,2$L *712 125%33
November 15 2//2 $//5/// ,2$L 2712 '52')
(otal capitali.ed interest for 2//2RRRRRRRRRRRRRR2 ? ,%5///
Problem 14
Assets constructed for a firmBs own use present t!e problem of w!et!er to
capitali.e
interest on t!e funds invested during t!e time required to prepare t!e assets for
t!eir intended use2 -urrent generall# accepted accounting principles as specified
b# t!e 1A0F in Statement No. 34 require t!e capitali.ation of interest on borrowed
capital5 but not to e"ceed t!e total interest paid b# t!e firm2
3valuate t!e appropriateness of t!e approac! currentl# required in t!e
professional pronouncements now in effect2
Solution 14
:O2
-apitali.ation of interest on borrowed capital Dbut not in e"cess of total interest
paid b# t!e enterpriseE avoids t!e difficult# of determining !ow muc! of an
investment is financed b# debt and !ow muc! b# equit#2 (!e entire investment is
assumed to be financed b# debt2 Interest capitali.ed5 !owever5 is limited to t!e
total interest incurred b# t!e enterprise during t!e period2 Interest t!us represents
an opportunit# cost in t!e amount t!at could !ave been avoided b# not borrowing
or b# using t!e funds to reduce outstanding debt2 :imiting t!e amount
capitali.ed to t!e total interest cost incurred during t!e period is consistent wit!
t!e !istorical cost principle since onl# t!e
actual interest e"pense incurred is capitali.ed2
(!e current approac! is deficient because it fails to recogni.e t!e portion of t!e
investment financed b# equit# sources2 An opportunit# cost e"ists for using funds
obtained from equit# sources Cust as surel# as for using funds obtained from debt
sources2 Ignoring t!e opportunit# cost associated wit! equit# sources results in
inconsistent and incomparable valuations2 (!e approac! does not lead to comparable
results for different firms producing similar assets but wit! different capital structures2
Additionall#5 t!e limitation on t!e capitali.ation of interest associated wit! debt to
t!e amount of interest actuall# incurred b# an enterprise fails to recogni.e t!e total
cost of using mone# associated wit! an investment2
Problem 15
Gou are t!e auditor of Don -orporation5 a newl# organi.ed compan# t!at
manufactures plastic cups using an e"trusion process2 One of t!e promoters of t!e
compan# was formerl# involved in an enterprise t!at used t!e e"trusion process and
!as agreed to contribute an e"trusion mac!ine to t!e new compan# in return for
s!ares of stoc8 of Don -orporation2 &!at concerns would #ou !ave as t!e auditor of
Don -orporation regarding t!is transaction=
Solution 15
:O2
(!is transaction represents a related part# transaction2 Accordingl#5 #ou s!ould be
concerned about t!e amount recorded on t!e records of t!e compan#2 Gou s!ould
determine w!at met!ods were used to establis! t!e value on t!e boo8s of t!e
compan# of t!e asset contributed as well as t!e cost of t!e mac!ine to t!e
promoter and t!e lengt! of owners!ip b# t!e promoter2 Gou s!ould be concerned
not onl# about t!e value of t!e asset for purposes of recording t!e asset in t!e
propert# accounts5 but also about attempts b# t!e promoter and management to
defraud investors in t!e compan# t!roug! attempts to inflate t!e value of t!e
s!ares of stoc8 b# overvaluing t!e asset2

Problem 16
Gou !ave Cust been promoted to t!e position of senior accountant wit! t!e public
accounting firm of &atts and Timmerman2 Gour first audit client as senior accountant
is to be t!e Delta Hanufacturing -ompan#2 Gou !ave !ad a considerable amount
of e"perience bot! in planning and conducting t!e audit procedures for current
asset
accounts suc! as cas!5 receivables5 and inventor#2 (!is is #our first e"perience5
!owever5 in planning t!e audit of t!e propert#5 plant5 and equipment accounts2
-ompare t!e nature of current assets wit! propert#5 plant5 and equipment5 and
describe !ow an# differences mig!t affect #our audit generall#2

Solution 16
:O1
(!e audit wor8 required to verif# t!e propert#5 plant5 and equipment accounts
generall# is substantiall# less t!an t!at required for current assets2 (!is is due to
t!e nature of t!e assets included in t!e propert# accounts2
A t#pical unit of propert# or equipment usuall# !as a !ig! dollar value5 and
relativel#
few transactions ma# support one large amount on t!e balance s!eet2 -urrent
asset accounts suc! as cas!5 receivables5 and inventor#5 on t!e ot!er !and5
generall# !ave a large volume of transactions5 man# of w!ic! ma# be of lower
dollar values2

(!e propert# accounts t#picall# do not s!ow large c!anges in t!e balances of
t!ese accounts from #ear to #ear2 -urrent asset accounts often c!ange
dramaticall# from #ear to #ear5 again as a result of a large volume of transactions2
(!e cas!5 receivables5 and inventor# accounts of t!e current asset section all
pose significant problems in terms of ensuring t!at a proper cutoff of transactions
is made at t!e end of t!e accounting period2 3rrors in recording purc!ases or
sales can affect net income2 (!e potential for suc! errors is significant for t!e
current asset accounts due to t!e large volume of transactions2 An error in
recording t!e acquisition or retirement of a plant asset at #earend li8el#
will not affect net income for t!e period nearl# to t!e e"tent a cutoff error in t!e
current asset accounts2


CHAPTER 12 && QUI' A
Name UUUUUUUUUUUUUUUUUUUUUUUUU
0ection UUUUUUUUUUUUUUUUUUUUUUUU
( 1 12 (!e acquisition cost of propert# includes onl# t!e original purc!ase price or
equivalent value2
( 1 22 An# ta"es5 freig!t5 installation5 and ot!er e"penditures related to t!e
acquisition of assets s!ould be e"pensed as incurred2
( 1 32 Fro8ersB commissions5 legal fees5 and escrow fees are included in t!e
acquisition cost of land2
( 1 $2 Ander current accounting rules5 goodwill is recogni.ed onl# w!en an entit# is
purc!ased in its entiret#2
( 1 %2 Generall#5 e"penditures to repair5 recondition5 or improve a used asset before
it is placed in service s!ould be recorded as part of t!e assetBs acquisition
cost2
( 1 '2 :and !eld for future use or speculation s!ould be reported in t!e propert#5
plant5 and equipment section of t!e balance s!eet2
( 1 )2 0pecial assessments b# local governments for streets5 sidewal8s5 lig!ting5
and sewers t!at will be maintained b# t!e government are included in t!e
land account2
( 1 *2 Goodwill is t!e most frequentl# reported intangible asset2
( 1 ,2 Goodwill is recorded b# companies t!at !ave consistentl# ac!ieved a level of
income t!at is above average for t!eir respective industries2
( 1 1/2 &!en propert# is acquired b# issuing securities5 t!e transaction is alwa#s
recorded at t!e fair mar8et value of t!e asset acquired2
23/
CHAPTER 12 && QUI' %
Name UUUUUUUUUUUUUUUUUUUUUUUUU
0ection UUUUUUUUUUUUUUUUUUUUUUUU
( 1 12 &!en t!e cost of selfconstruction of an asset is less t!an t!e cost to acquire
it t!roug! purc!ase or construction b# outsiders5 t!e difference is reported
currentl# as a gain from selfconstructed assets2
( 1 22 -!arges directl# related to construction of an asset ma# be c!arged in full to
t!e cost of t!e asset or allocated in part to normal operations2
( 1 32 >ropert# acquired t!roug! donation s!ould be recorded at its fair mar8et
value2
( 1 $2 &!en t!e cost of a selfconstructed asset is greater t!an t!e cost to acquire
it from outside sources5 t!e difference for accounting purposes s!ould be
reported as a loss in t!e period construction is completed5 if t!ere is
evidence indicating t!e cost is materiall# e"cessive because of construction
inefficiencies or failures2
( 1 %2 (!e practice of capitali.ing construction period interest is supported b# t!e
concept of t!e proper matc!ing of revenues and e"penses2
( 1 '2 4esearc! activities include t!e formulation5 design5 and testing of products5
and t!e construction of protot#pes2
( 1 )2 In general5 researc! and development e"penditures s!ould be e"pensed in
t!e period incurred2
( 1 *2 All costs incurred in t!e development of computer software5 up to t!e point
w!ere tec!nological feasibilit# is establis!ed5 are to be recorded as an
intangible asset2
( 1 ,2 Additions and betterments t!at add to asset usefulness b# eit!er e"tending
its life or increasing future cas! flows are recorded b# adding t!e
e"penditures to t!e cost of t!e asset2
( 1 1/2 Incorrectl# recording an e"pense as an asset overstates current earnings5
assets5 and ownersB equit#2
231
CHAPTER 12 && QUI' C
Name UUUUUUUUUUUUUUUUUUUUUUUUU
0ection UUUUUUUUUUUUUUUUUUUUUUUU
A2 >atent
F2 Development activities
-2 -apital lease
D2 Organi.ation costs
32 :and improvements
12 -op#rig!t
G2 Intangible noncurrent operating assets
J2 (ec!nological feasibilit#
I2 -apitali.ed interest
I2 Goodwill
92 (angible noncurrent operating assets
:2 Haintenance and repairs
H2 :and
N2 1ranc!ise
O2 4esearc! activities
>2 Nonreciprocal transfer of a
nonmonetar# asset
V2 Negative goodwill
42 Additions and betterments
02 (rademar8s and trade names
0elect t!e term t!at best fits eac! of t!e following definitions and descriptions2
UUUUU 12 (!e amount of interest included as part of t!e cost of a selfconstructed
asset2
UUUUU 22 Activit# underta8en to discover new 8nowledge t!at ma# be used in
developing new products5 services5 or processes2
UUUUU 32 (!e e"cess of fair mar8et values of purc!ased net assets over t!e price
paid to purc!ase a business entit#2
UUUUU $2 3conomic resources wit! future benefit t!at are used in t!e normal
operating activit# of t!e organi.ation t!at cannot be p!#sicall# observed2
UUUUU %2 -osts incurred in forming a corporation2
UUUUU '2 Items suc! as landscaping5 paving5 and fencing t!at improve t!e usefulness
of propert#2
UUUUU )2 An asset t!at is recorded in t!e financial statements onl# w!en a business
entit# is acquired b# a purc!ase2
UUUUU *2 3"penditures t!at add to t!e usefulness of an asset b# eit!er e"tending its
life or increasing future cas! flows5 wit!out component replacement2
UUUUU ,2 (!e attainment of a detailed program design and wor8ing model for
computer software2
UUUUU1/2 3"clusive rig!t or privilege received b# a business or individual to perform
certain functions or use certain products or services2
UUUUU112 Normal costs of 8eeping propert# in operating condition2
UUUUU122 Distinctive s#mbols5 labels5 and designs2
UUUUU132 Assets used to produce products or provide services2
UUUUU1$2 A transfer of a nonmonetar# asset wit! no sacrifice incurred b# t!e
organi.ation receiving t!e asset2
UUUUU1%2 An e"clusive rig!t granted b# t!e government to an inventor enabling t!e
inventor to control t!e manufacture5 sale5 or ot!er use of t!e invention2
232
CHAPTER 12 && QUI' D
Name UUUUUUUUUUUUUUUUUUUUUUUUU
0ection UUUUUUUUUUUUUUUUUUUUUUUU
A2 :and
F2 :and Improvements
-2 Fuildings
D2 Hac!iner# and 3quipment
32 Ot!er Accounts
0elect t!e appropriate account for eac! of t!e following e"penditures2
UUUUU 12 Installation c!arges for mac!iner# purc!ased
UUUUU 22 4econditioning costs of used equipment acquired
UUUUU 32 0urve#ing fees
UUUUU $2 :andscapingtrees and s!rubs
UUUUU %2 (ransportation c!arges on equipment purc!ased
UUUUU '2 0pecial assessment b# electrical compan# to e"tend lines to propert#
UUUUU )2 Fuilding permits and fees
UUUUU *2 Attorne#Bs fees for title searc! for land
UUUUU ,2 1ence around t!e par8ing areas
UUUUU1/2 -ost of removing trees from a building site
UUUUU112 0idewal8s
UUUUU122 -ost of paving par8ing lots
UUUUU132 >atterns used for a single Cob
UUUUU1$2 -onstruction period interest
UUUUU1%2 0pecial foundation for newl# acquired equipment
UUUUU1'2 Arc!itectBs fees
UUUUU1)2 Delinquent real estate ta"es assumed b# purc!aser on land acquired for a
building site
UUUUU1*2 1ees paid to t!e general contractor for construction supervision
UUUUU1,2 4o#alties paid for mac!ine use
UUUUU2/2 -onstruction period insurancebuilding
UUUUU212 3quipment test runs
UUUUU222 -urrent period real estate ta"es
UUUUU232 >roceeds from sale of trees removed from building site
UUUUU2$2 4eal estate commissions paid for land purc!ase
UUUUU2%2 Insurance on mac!iner# in transit
2() -!apter 12 Investments in Noncurrent Operating AssetsAcquisition
CHAPTER 12 && QUI' SOLUTIONS
Vui. A
12 1
22 1
32 (
$2 (
%2 (
'2 1
)2 (
*2 (
,2 1
1/2 1
Vui. F
12 1
22 1
32 (
$2 (
%2 (
'2 1
)2 (
*2 1
,2 (
1/2 (
Vui. -
12 I
22 O
32 V
$2 G
%2 D
'2 3
)2 I
*2 4
,2 J
1/2 N
112 :
122 0
132 9
1$2 >
1%2 A
Vui. D
12 D
22 D
32 A
$2 F
%2 D
'2 A
)2 -
*2 A
,2 F
1/2 A
112 F
122 F
132 3
1$2 -
1%2 D
1'2 -
1)2 A
1*2 -
1,2 3
2/2 -
212 D
222 3
232 A
2$2 A
2%2 D