Exam 10: Property, Plant, and Equipment: Acquisition and Subsequent Investments

Under the Full-cost method only the costs associated with the exploration that resulted in the discovery of oil and gas can be capitalized.

An improvement made to a machine increased its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be

In 2014, Go Oil Company incurred costs of $8 million drilling oil wells. Thirty percent of the drilling resulted in oil being found. The rest of the drilling was unsuccessful. If Go uses the successful-efforts method of accounting, the oil and gas properties will be valued on the December 31, 2014 balance sheet at

Exhibit 10-1 Two construction companies, Dakota and Carolina, are in the construction business. Each owns a tract of land being held for development, but each company believes that the other's land is better suited to enhance the success of each planned development. Accordingly, they agree to exchange their land and have the following information: The exchange of land was made, and based on the difference in appraised fair value, Carolina paid $50,000 cash to Dakota. -Refer to Exhibit 10-1. For financial reporting purposes, Dakota should recognize a gain on this exchange in the amount of

Required: Prepare the journal entries for the preceding transactions.

Sarah Company is exchanging a unique machine for a similar machine from Wilhelm, Inc. Sarah's equipment originally cost $300,000 and has a book value of $175,000. Wilhelm's machine cost $250,000 and has a book value of $150,000. No cash will be exchanged, and the two machines will continue to perform the same functions for each company. Required: Prepare the journal entry for each company.

Describe the IFRS treatment of increases in the market value of property, plant, and equipment held during the year. Compare that treatment to U.S. GAAP requirements.

When a company constructs an asset for use in its operations there are two alternatives for a company to include overhead costs in the cost of the asset. What are the two alternatives?

To be included in property, plant, and equipment, an asset must have all of the following EXCEPT

Which one of the following statements is true?

The Roger's Company incurred the following costs in the acquisition of a plant asset: What is the cost of the plant asset?

Several expenditures are listed below: Required: Indicate whether or not each expenditure would be included in the cost of property, plant, and equipment.

On February 1, 2014, Rumor Corporation purchased a parcel of land as a factory site for $50,000. An old building on the property was demolished, and construction began on a new building that was completed on December 12, 2014. Costs incurred during this period are listed below: (Salvaged materials resulting from demolition were sold for $13,000.) Rumor should record the cost of the land and the cost of the new building, respectively, as

During 2014, Red Company acquired a new piece of equipment for its manufacturing process. In order to purchase the equipment, Red made a down payment of $50,000 and issued a $200,000 five-year, 7% note. The annual payment of principal and interest was to be $48,778. The market rate of interest for obligations of this kind is 12%. The present value factor for an ordinary annuity of 5 years at 12% is 3.604776. Required: a.Prepare the journal entry to record the acquisition. b.Assume that the equipment had an established cash price of $220,000. Prepare the journal entry to record the transaction under this additional assumption.

Which one of the following types of assets should not be classified as property, plant, and equipment?

Costs that are incurred after acquiring a piece of property, plant, or equipment are for a variety of reasons, ranging from routine repairs to major overhauls and improvements. The accountant's problem is to determine how these costs should be recorded. Required: Identify the two categories of expenditures in which these costs can be classified, and explain how the accountant determines which classification is appropriate.

What is the full-cost method of capitalization?

Mathison Company exchanged a worn-out tractor that had cost $30,000 and was half depreciated for a new tractor with a fair value of $12,000. Mathison paid an additional $4,500 cash. The transaction lacked commercial substance. Required: Compute the amount at which Mathison should record the new tractor.

Companies borrow large amounts for use in construction projects, any idle funds are usually invested, GAAP allows the interest revenue earned from the excess to offset against the interest cost when determining the capitalization of interest.

Assuming that the effects of interest capitalization are material, calculate the amount of interest costs to be capitalized by Matthew Corporation in 2014 in relation to the following events: a.On January 1, Matthew began construction for a new storage building for its own use. Expenditures incurred evenly throughout the year totaled $900,000. Matthew borrowed $1,000,000 specifically for construction of the storage building at an annual interest rate of 6%. b.Inventories costing $200,000 were routinely manufactured during the year. Matthew borrowed $200,000 at 8% to finance inventory-related costs. c.On September 1, Matthew began construction of a custom-designed machine to the specifications of a customer. As of December 31, $200,000 of materials, labor, and overhead have been assigned to the machine. Those costs were incurred evenly throughout the period September 1 through December 31. To finance construction, $230,000 was borrowed at a 9% interest rate.