The cost of land includes the original purchase price; brokers’ commissions; legal fees; title, recording, and escrow fees; surveying costs; local government special assessment taxes
Trang 1CHAPTER 10 QUESTIONS
1 a The cost of land includes the original
purchase price; brokers’ commissions;
legal fees; title, recording, and escrow
fees; surveying costs; local government
special assessment taxes; cost of
clearing or grading; and other costs
that permanently improve the land or
prepare it for use Expenditures for land
improvements that have a limited life,
such as paving, fencing, and
landscap-ing, may be separately summarized as
land improvements and depreciated
over their estimated useful lives
b The cost of buildings includes the
origi-nal purchase price, brokers’
commis-sions, legal fees, title and escrow fees,
reconditioning costs, alteration and
im-provement costs, and any other costs
that improve the buildings and hence
benefit future periods
c The cost of equipment includes the
original purchase price, taxes and
du-ties on purchases, freight charges,
in-surance while in transit, installation
charges and other costs in preparing
the asset for use, subsequent
im-provements or additions, and any other
expenditures that will improve the
equipment and thus benefit more than
one period
2 a A copyright, when purchased, is
re-corded at its purchase price When
in-ternally developed, all costs of legally
establishing the copyright are included
as costs of the copyright
b The cost of purchasing a franchise and
all other sums paid specifically for a
franchise including legal fees are
con-sidered the franchise cost Property
improvements required under the
fran-chise also are recorded as part of the
franchise cost
c The cost of a trademark includes all
expenditures required to establish the
chased trademarks are recorded at the purchase price
3 Accountants frequently are required to
allo-cate costs among two or more accounts The principal method of allocation is based
on relative fair values of the individual sets, if they can be determined A ratio of each individual asset’s fair value to the sum
as-of the fair values for all assets involved in the purchase is used to determine cost for each individual asset If fair values, or some approximation of fair values, cannot
be obtained for all assets in the basket chase, allocation can be made to those as- sets where fair values are available, and any remaining balance can be allocated, on some systematic basis, to remaining as- sets
pur-4 When equipment is purchased on a
de-ferred payment contract, care must be taken to exclude the stated or implicit inter- est from the purchase price The asset should be recorded at its equivalent cash price Interest on the unpaid contract bal- ance should be recognized as interest ex- pense over the life of the contract
5 a Sales practice for some products
con-sistently inflates the list price that is tially assigned Because most buyers are aware of this practice, considerable negotiations take place between buyers and sellers before a market price is es- tablished If accountants use the list price without careful evaluation, values could be inflated
b The goal of accounting for the
acquisi-tion of property and equipment is to cord the acquisition at the equivalent cash price or the closest approximation
re-to cash that can be obtained This is especially important when trade-ins are involved
6 a In constructing a new building for its
own use, Gaylen Corp will charge the
Trang 2rials, factory overhead, and any other
expenditures that can be identified with
the construction of the asset
b When a company constructs its own
as-sets, there are two positions that may be
taken in assigning general overhead to
the cost of the asset: (1) Overhead may
be assigned to special construction just
as it is assigned to normal activities on
the grounds that both activities benefit
from the overhead; this would mean that
construction would be charged with the
increase in overhead arising from
con-struction activities as well as a pro rata
share of the company’s fixed overhead
(2) Only the increase in overhead may
be charged to construction on the
grounds that management decides to
construct its own assets after giving due
consideration to the differential or
addi-tional costs involved An equitable
allo-cation of the fixed overhead between
regular operations and construction
af-fords no special favor to construction
ac-tivities; on the other hand, a charge to
construction for only the increase in total
overhead grants no special concessions
to regular activities during the
construc-tion period
7 Before interest charges are capitalized, a
construction project should be a discrete
project Interest should not be capitalized
for inventories manufactured or produced
on a repetitive basis, for assets that are
currently being used, or for assets that are
idle and not undergoing activities to
pre-pare them for use
8 Under IAS 23, a company capitalizes the
net amount of interest which is the gross
amount of interest, computed as under U.S
GAAP, less the amount of investment
in-come generated by borrowed construction
funds that are temporarily invested before
they are needed to pay for construction
ex-penditures Accordingly, the amount of
in-terest capitalized under the international
standard is generally less than the amount
that would be capitalized under the U.S
standard
9 a If the donation of the property by the
philanthropist is unconditional, the
president’s position cannot be
de-fended If the donation is not
recog-nized, both assets and income will be
understated Furthermore, subsequent income will be overstated through the failure to recognize depreciation, and this misstatement will be accompanied
by misrepresentations of assets and earnings-to-owners’-equity relationships reflected on the financial statements Properties unconditionally transferred should be recognized by debits to asset accounts and a credit to
earnings-to-a revenue earnings-to-account in terms of the fearnings-to-air market values of the properties ac- quired, and depreciation should be rec- ognized in using such properties
b If the donation of the property is
contin-gent upon certain conditions, the dent’s position relative to the nonrec- ognition of the asset is proper until the time the conditions are met Until the conditions are met, the fair value of the conditional gift, along with a description
presi-of the conditions, should be disclosed
in the notes to the financial statements
10 Under IAS 41, biological assets, such as
cattle, fruit trees, and lumber forests, are recorded in the balance sheet at their fair value (less estimated selling costs) as of the balance sheet date Increases in this fair value are recognized as gains, and de- creases are recognized as losses
11 An asset retirement obligation is a legal
obligation a company has to restore the site
of a piece of property or equipment when the asset is retired The estimated fair value of the asset retirement obligation is recognized as a liability and is added to the cost of the asset when it is acquired
12 Many companies establish a minimum
monetary amount for recording tures as assets, even though the item pur- chased meets the definition of an asset
expendi-The principal reasons for this are ity and the cost involved in recording an asset and depreciating it over its estimated life It is more expedient to expense these smaller capital expenditures immediately, thus avoiding the recordkeeping associated with assets
13 a The cost of a depreciable asset
incor-rectly recorded as an expense will derstate assets and owners’ equity for the current year and for succeeding years, but by successively decreasing amounts until the asset no longer
Trang 3un-makes a contribution to periodic
reve-nue Net income will be understated in
the first year by the excess of the
ex-penditure over depreciation for the
cur-rent period; net income in succeeding
years will be overstated by the amount
of depreciation charges applicable to
the asset that should be charged off as
expense
b An expense expenditure incorrectly
recorded as an addition to the cost of a
depreciable asset will overstate assets
and owners’ equity for the first year and for succeeding years, but by succes- sively decreasing amounts until the charge has been fully written off Net income will be overstated for the first year by the difference between the rec- ognized depreciation for the current pe- riod and the amount of the expenditure; net income for succeeding years will be understated by the depreciation charges recognized in such periods
a Cost of installing machinery Asset
b Cost of unsuccessful litigation to protect patent Expense
c Extensive repairs as a result of a fire Expense
d Cost of grading land Asset
e Insurance on machinery in transit Asset
f Interest incurred during construction period Asset (if interest added to construction
cost) Expense (if interest charged to expense)
g Cost of replacing a major machinery component Asset
h New safety guards on machinery Asset
i Commission on purchase of real estate Asset
j Special tax assessment for street improvements Asset
k Cost of repainting offices Expense
15 The remaining net book value of a
compo-nent that is replaced is added to
deprecia-tion expense for the period
16 a Research activities are those used to
discover new knowledge that will be
useful in developing new products,
ser-vices, or processes, or significantly
im-prove an existing product or process
Development activities seek to apply
research findings to develop a plan or
design for new or improved products
and processes Development activities
include the formulation, design, and
testing of products, construction of
pro-totypes, and operation of pilot plants
b Research and development costs are
generally expensed in the period
in-curred An exception is when the
ex-penditure is for equipment and facilities
that have alternate future uses beyond
the specific current research project
This exception permits the deferral of
costs incurred for materials, equipment,
talized if they are incurred after logical feasibility has been established
techno-17 With the full cost method of accounting for
oil and gas exploration costs, the cost of
drilling dry holes is capitalized and
amor-tized With the successful efforts method,
only the exploratory costs associated with successful wells are capitalized; the cost of dry holes is expensed as incurred
18 In general, the cost of internally generated
intangibles is expensed as incurred
19 The five general categories of intangible
assets are as follows:
20 The two approaches used in estimating fair
values using present value computations
are the traditional approach and the pected cash flow approach In the tradi-
Trang 4ex-using a risk-adjusted interest rate that
in-corporates expectations about the
uncer-tainty of receipt of the future contractual
cash flows
In the expected cash flow approach, a
range of possible outcomes is identified,
the present value of the cash flows in each
possible outcome is computed (using the
risk-free interest rate), and a
weighted-average present value is computed by
summing the present value of the cash
flows in each outcome, multiplied by the
es-timated probability of that outcome
21 a Goodwill may be reported properly as
an asset only when it is purchased or
otherwise established by a transaction
between independent parties
b Expenditures for advertising should not
be capitalized as goodwill Some
ad-vertising expenditures may be deferred
if the costs applicable to future benefits
from such advertising can be
deter-mined objectively Normally, however, it
is advisable to expense such
expendi-tures because of the short-lived nature
of the benefits and because future
benefits may be difficult to estimate
22 The fair value of acquired in-process
re-search and development is recognized as
an asset when acquired as part of a
busi-ness combination but as an expense when
acquired as a basket purchase outside a
business combination
23 Recording noncurrent operating assets at
their current values represents a trade-off
between relevance and reliability In the
United States, reliability concerns have
re-sulted in the prohibition of asset write-ups In
many countries around the world,
account-ants have learned to rely on the judgment of
professional appraisers who estimate the
current value of long-term assets
24 Under the provisions of IAS 16, the credit
entry is to a revaluation equity account when noncurrent operating assets are written up
to reflect an increase in market value (The important point is that the revaluation amount is not to be reported as a gain in the income statement.)
25 Under the provisions of IAS 40, a company
can elect to use a fair value approach in which the investment property is reported in the balance sheet at its fair value, and any resulting gains or losses are reported in the income statement
26 The fixed asset turnover ratio is computed
as sales divided by average property, plant, and equipment (fixed assets); it is inter- preted as the number of dollars in sales generated by each dollar of fixed assets
27 As with all ratios, the fixed asset turnover
ratio must be used carefully to ensure that erroneous conclusions are not made For example, fixed asset turnover ratio values for two companies in different industries cannot be meaningfully compared Another difficulty in comparing values for the fixed asset turnover ratio among different compa- nies is that the reported amount for property, plant, and equipment can be a poor indicator
of the actual fair value of the fixed assets being used by a company Another compli- cation with the fixed asset turnover ratio is caused by leasing Many companies lease the bulk of their fixed assets in such a way that the assets are not included in the bal- ance sheet This practice biases the fixed asset turnover ratio for these companies upward because the sales generated by the leased assets are included in the numerator
of the ratio but the leased assets generating the sales are not included in the denomina- tor
Trang 5PRACTICE EXERCISES
PRACTICE 10–1 CATEGORIES OF TANGIBLE NONCURRENT OPERATING ASSETS
1 Land
Cost to purchase land $ 85,000
Cost to purchase land 50,000
Cost to prepare land for use 10,000
Total $ 145,000
2 Buildings
Cost to construct building $ 132,000
3 Equipment
Cost to purchase equipment $ 30,000
Cost to ship and install equipment 1,000
Cost of testing 1,750
Total $ 32,750
4 Land Improvements
Cost to construct parking lot and sidewalks $ 10,000
PRACTICE 10–2 BASKET PURCHASE
Trang 6PRACTICE 10–3 DEFERRED PAYMENT
Trang 7PRACTICE 10–6 CAPITALIZED INTEREST: SINGLE-YEAR COMPUTATION
Amount Rate Interest Interest
Amount Rate Interest Interest
Trang 8PRACTICE 10–10 ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION
Mining Site 800,000
Cash 800,000
Mining Site 72,489
Asset Retirement Obligation 72,489
Business Calculator Keystrokes:
PRACTICE 10–12 RESEARCH AND DEVELOPMENT
(1) Normal: Expense all—$120,000 + $100,000 = $220,000
(2) Software: Expense amounts before technological feasibility: $120,000
(3) International: Expense amounts before technological feasibility: $120,000
PRACTICE 10–13 OIL AND GAS EXPLORATION COSTS
(1) Successful efforts: Expense all costs of dry holes = $400,000
(2) Full cost: Capitalize all costs, and amortize the amount to expense in
subse-quent years Accordingly, expense for this year is $0 (Note: Because all costs
were incurred on the last day of the year, there is no amortization this year.)
PRACTICE 10–14 ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY
Trang 9PRACTICE 10–15 ACCOUNTING FOR A BARGAIN PURCHASE
Cash price $ 720,000
Market value of net assets ($1,360,000 – $500,000) 860,000
Bargain purchase amount $(140,000)
PRACTICE 10–16 INTANGIBLES AND A BASKET PURCHASE
Estimated According to Assigned to Fair Values Relative Estimated Values Individual Items
*The acquired in-process R&D is recognized as an expense because it has been
ac-quired in a basket purchase outside a business combination
PRACTICE 10–17 INTANGIBLES AND A BUSINESS ACQUISITION
Trang 10PRACTICE 10–18 FIXED ASSET TURNOVER RATIO
Fixed asset turnover ratio = Sales/Average net property, plant, and equipment
Company A ⎯using historical cost of fixed assets
Fixed asset turnover ratio = Sales/Average net property, plant, and equipment
= $480,000/[($160,000 + $200,000)/2]
Company A ⎯using market value of fixed assets
Fixed asset turnover ratio = Sales/Average net property, plant, and equipment
= $480,000/[($290,000 + $310,000)/2]
Company A is more efficient (i.e., has a higher fixed asset turnover ratio) if one uses
historical cost of fixed assets (2.67 compared to 1.71) However, Company B’s fixed
assets are younger and are therefore reported at amounts close to their market
values If we assume that the reported amounts of Company B’s fixed asset are a fair
approximation of their market values, then it appears that Company B is more
effi-cient than is Company A (1.71 compared to 1.60)
Trang 11building $55,000
Cost of shrubs, trees, and other
landscaping 36,000
Total $335,150 $91,000 $2,423,200
Dividends, $4,000, should be closed to Retained Earnings Damages
awarded for injuries sustained in construction, $8,750, are charged to a
loss account
10–21 Patents 19,100*
Cash 19,100
*$13,400 legal expenses + $2,500 drawings + $3,200 fees = $19,100
Research and Development Expense 50,800*
Machinery 33,800 †
Cash (or other credits) 84,600
*$34,000 lab expenses + $16,800 wages (40% of $42,000) = $50,800
Trang 12*Franchise: $1,450,000 – $1,237,000 (sum of patent,
building, and land) = $213,000
Trang 1310–25 Value of the equipment considering interest at 9%
Discount on Notes Payable 30,808 Equipment 30,808
Paid-ln Capital in Excess of Par 1,040,000
*Market value of stock $1,060,000 Amount assigned on basis of known market
Paid-ln Capital in Excess of Par 219,000* *$680,000 (cost of building) – $371,000 (market value of
bonds) = $309,000 (value assigned to common stock);
$309,000 – $90,000 (par value) = $219,000 paid-in capital
in excess of par
Trang 1410–28 Land 885,000*
Common Stock (50,000 × $0.50) 25,000 Paid-ln Capital in Excess of Par 725,000 Cash 135,000
*Market value of stock: 50,000 shares × $15 $ 750,000 Cash paid:
Purchase price (partial) $80,000 Legal cost 10,000 Property tax—previous year 30,000 Building demolition $21,000
Less: Salvage 6,000 15,000 135,000 Total $ 885,000
10–29 Cost to construct special equipment:
Total cost of self-constructed equipment $1,070,000
*Interest charge: $1,045,000 × 10% × 3/12 year = $26,125
Limited to amount of interest paid: $500,000 × 10% × 6/12 = $25,000
10–30 (1) Computation of the amount of interest to be capitalized for 2013 is as
Total capitalized interest for 2013 $ 92,267
*Weighted-average interest rate on general bond liabilities:
Trang 15Total capitalized interest for 2014 $ 317,475
Interest capitalized in 2014 is restricted to the total interest incurred of $311,000*
because this amount is less than the indicated amount to be capitalized of
$317,475
*($1,500,000 x 0.10) + ($500,000 x 0.13) + ($800,000 x 0.12) = $311,000
10–31 (a) NC The construction does not cover an extended period of time
(b) C
(c) NC The construction costs are not separately accumulated
(d) NC The construction costs are not substantial
(e) NC The equipment is produced on a repetitive basis
(f) NC The building is in use throughout the construction
(g) NC The land is idle
FV = $1,300,000; I = 7%; N = 20 years → $335,945
After 1 Year
Detoxification Facility 27,651 Asset Retirement Obligation 27,651 Business Calculator Keystrokes:
FV = $100,000; I = 7%; N = 19 years → $27,651
Trang 1610–34 1 All $325,000 should be charged to research and development expenses
Only expenditures for equipment that can be used on other projects can
be deferred No such alternative uses are identified in the problem
2 Materials and equipment, exclusive of equipment useful
on other projects $ 80,000 Personnel 105,000
Indirect costs 60,000
Equipment depreciation ($80,000 ÷ 5)* 16,000 Total $261,000
*The equipment’s useful life on other projects would be the basis for the cost allocation to research and development expense for 2013
Trang 1710–36 1 Successful efforts method:
Exploration expense $18.4 million
Capitalized exploration cost $5.6 million
2 Full cost method:
Exploration expense 0
Capitalized exploration cost $24 million
10–37 (a) Record painting of partitions as an asset Original painting is
consid-ered an asset expenditure Repainting is an expense
(b) Normally record cost of tearing down the wall as a loss The old wall will
not benefit future periods Some accountants justify capitalization cause all incremental costs to construct extension should be consid- ered cost of extension
be-(c) Separate asset accounts should be maintained for the machine and the
motor because they have substantially different useful lives When the old motor is replaced, any remaining book value should be added to depreciation expense for the year The cost of the new motor is re- corded in a separate asset account
(d) Record the cost of grading land as an asset It is a proper addition to
land
(e) Record the assessment for street paving as an asset It is a proper
addi-tion to land
(f) Record cost of tearing down the previously occupied old building in
preparation for a new one as an expense Expense relates to the old building, not to new construction As in (b), some accountants justify capitalization because cost of tearing down is necessary for new con- struction
*Balance of purchase price not allocated to identifiable assets
Trang 18Estimated According to Assigned to Fair Values Relative Estimated Values Individual Items
Internet domain name $150,000 150,000/530,000 × $500,000 $141,509
*The acquired in-process R&D is recognized as an expense because it has been
ac-quired in a basket purchase outside a business combination
Advertising Expense 300,000
Cash 300,000
Trang 19Total fixed assets $910,000 $825,000
Fixed asset turnover ratio = Sales/Average fixed assets
$3,500,000/[($825,000 + $910,000)/2] = 4.03
Trang 20*Raw materials: $83,400 – $4,500 discount = $78,900
Machine tools balance $ 15,200
2 Correcting Entries
(a) Loss on Sale of Machinery 4,860*
Machinery (Job Order No 1329) 4,860
*Loss: $18,760 cost of dismantling old machine – $13,900 proceeds = $4,860
(b) Purchase Discounts 4,500
Machinery (Job Order No 1329) 4,500
To report cash discounts as a reduction in
machine cost
(c) Machinery (Job Order No 1329) 22,700
Factory Overhead 22,700
To report excess overhead as cost of machine
(d) Profit on Construction of Machinery 22,500
Machinery (Job Order No 1329) 22,500
To cancel profit on self-construction; savings
were improperly recognized as profit
(e) Machine Tools 15,200
Machinery (Job Order No 1329) 15,200
To report machine tools separately
10–44
The solution to this problem is adapted from “Qs & As: Technical Hotline,” Journal of
Accountancy, February 1989, p 31
(a) and (b) CN—Capitalize and don’t depreciate
Costs of changing the land itself should be viewed as permanent provements to the land and are not depreciable These costs include clearing away unwanted trees and shrubs, shaping the land for the tees and greens, building sand traps, and constructing artificial lakes
Trang 21im-10–44 (Concluded)
(c) and (d) CD—Capitalize and depreciate
If the lives of the plants can be reasonably estimated, the cost of the plants should be depreciated over those lives However, if no reason- able estimates exist, the cost should be capitalized but not depreciated (e) and (f) CD—Capitalize and depreciate
Land improvements that wear out over time should be capitalized and depreciated
(g) E—Expense
The $50 cost of rakes is immaterial in relation to the other golf course expenditures The costs of estimating the life of the rakes and maintain- ing a rake account in the financial records would far exceed the value of the theoretical improvement in the records The best approach is to ex- pense the cost of the rakes
(h) and (i) CN—Capitalize and don’t depreciate
All costs of getting the land ready for its intended use should be cluded as part of the land cost
in-10–45
1 Cost of land:
Purchase price $ 140,000 Delinquent property taxes 22,000 Title search and insurance 7,000 City improvements 19,500 Cost of destroying buildings, net of salvage used in new building 19,000 Total cost of land $ 207,500 Cost of land improvements:
Landscaping $ 81,600 Sidewalks and parking lot 41,000 Total cost of land improvements $ 122,600
2 Cost of building:
Building permit $ 6,000 Salvage material from old building 5,000 Contract cost 1,800,000 Total cost of buildings $1,811,000 Fire insurance premium on building is charged to expense
Trang 22*Alternatively, this could be debited to Prepaid
Property Taxes and adjusted at June 30