‘Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment 10-13 DEMONSTRATION PROBLEM (1.0. 5) Fapillo Co. trades a used printing machine for a new model. The old machine haz a hook value of] F'2,000 (original cost $30,000 less $18,000 accumplated depreciation) and a fair value of $8,000. The Rew printing machine has a list price of $42,000, and Rabillo Co. receives a $14,000 trade-in allowance E the old machine. The transaction has commercial substance. Compute (a) the cost to be recorded in Fe books of Rabillo Co. for the new machine and (b) the amount of any gain or loss as a result of this Cost of new printing machine List price of new machine $42,000 Less trade-in allowance. 4, Cash payment due 28,000 Fair value of old machine 8.000 Cost of new machine $39.000* #336,000 represents the value given up by Rabillo Co, to acquire the new mache. Computation of loss Book value of old machine $12,000 Fair value of the old machine * 8,000 Loss on trade of old machine $4,000 1. (0.2) A building owned by a corporation is always classified as property, plant and equipment. 2. (L.0.2) The cash or cash equivalent price of items classified as property, plant and equipment best ‘measures the value of the asset on the date of acquisition. 3. (LO. 2) Use of the current replacement cost method to account for property, plant and equipment ‘would most likely result ia the recognition of gains and losses prior tothe time the asset is sold. 4. (L.O. 2) ‘The cost of items classified as property, plant, and equipment should include all expenditures related to the asset incurred during the first three months ofthe asset's useful fife. 5. (L.0. 2) When lend has been purchased for the purpose of constructing a new building, all costs incurred in connection with preparing the land for excavation are considered building costs.10-14 ‘Student Sty Gaide for Kieso Intermediate Acconsting: ERS Ea, Volume @ 9. 10. u 2 13, 14 15, 16. 7 18. 19, 20. a1. (LO. 3) IF the allocation of overhead to self-constructed assets results in an asset cost that is grea ihan the cost thet would be charged by an independent producer, the excess overhead should recorded asa period Toss. (L.O, 4) The interest costs on funds used to construct an asset should not be capitalized even i significant period of time is required to bring the asset to a condition necessary for its intended use. (L.0. 4) Land that is not being developed qualifies for interest capitalization. (L.0. 4) The amount of interest to be capitalized is the higher of actual interest cost incurred dur the period or avoidable interest. (L.0, 4) The interest incurred on the specific borrowings is used for the portion of weighted-aver Accumulated expenditures that is less than or equal to any amounts borrowed specifically to fina construction of the assets. (L.0. 5) An asset should be recorded atthe fair value of the consideration given up to acquire it 0 its fair market value, whichever is higher. (L.0. 5) Equipment purchased through the use of deferred payment contrasts should be accounted at the present value of the contract. (L.O. 5) The purpose of imputed interest is to approximate the interest rate of a deferred puret ‘contract when one is not expressly stated. (L.O. 5) In general, because the exchange of nonmonetary assets does not constitute a sale by et party involved in the transaction, the accounting should be based on the book value of the as involved. (0. 5) If an exchange of nonmonetary assets occurs and the exchange bas commercial substane is presumed that the earnings process related to these assets is complete. (L.0. 5) Ifan exchange transaction involving no commercial substance of nonmonetary assets ret fn a loss, the loss is recognized immediately, cven when cash is included as a part of the transaction (LO. 5) Gains and losses on the exchange of nonmonetary assets are computed by comparing ‘book value of the asset given up with the fair value of the asset given up. ‘LO. 5) When an exchange of no commercial substance of nonmonetary assets results in a gain insignificant cash is included as a part of the transaction, the gain to be recognized is listed te amount ofthe eash received. (LO. 5) IFRS requires that grants be recognized using the iname approach, with the grant b recognized in income on a systematic basis, (LO. 5) The recommended accounting teatment for donated property, plant, end equip: represents a departure from the cost principle (L.0, 6 Once as asset has been placed into productive use, the major erterion used vo deten ‘whether an expenditure should be capitalized or expensed is the significance of that expenditu selation tothe original cost.‘Chapter 10: Acquistion and Dispestion of Property, Plant and Equipment — 1015, 2 23. 24, (0. 6) By definition, any eddition to a building or machine is capitalized booause a new asset has ‘been created. 0. 6) IFRS requires each significant component of an asset be identified and depreciated separately. (L.0. 7) Gains and losses on the retirement of property, plant, and equipment should be shown in the income statement below net income, net of tax, (L.0. 6) The costs of reorgani or rearranging existing plant assets are expensed as incurred. MULTIPLE CHOICE Select the best answer for each of the following items and enter the comesponding letter in the space provided. (LO. 2) Historical cost is the basis advocated for recording the aequisition of property, lan, and equipment for all of the following, reasons except: atthe date of acquisition, cost reflects ftir value. property, plant, and equipment items are always acquired at their original historical cost. torical cost involves actual transactions and, as such, isthe most reliable basis. gains and losses should not be anticipated but should be recognized when the asset is sold. pomp (L.0. 2) Which of the following is not arnecessary characteristic for an item to be classified as property, plant, and equipment? A. Usually subject to depreciation, B. Characterized by physical substance. C. Can be used in operations for atleast $ years, D. Not acquired for resal (L.0. 2) Stacia Theater Corporation recently purchased the Robinson Theater and the land on which it is focated. Stacia plans to raze the building immediately and build a new modem theater on the site, ‘The cost to raze the Robinson Theater should be: A. written offs a loss in the year the theater is razed. B, capitalized as part of the cost of land. C, depreciated over the period from the date of acquisition to the date the theater is to be razed. D. capitalized as part ofthe cost of the new theater, i. Cee.10-16 Student Study Guide for Kies Iuemmedinte Accounting: IFRS Edita, Volume] %, (LO. 2) On January 15, 2012, Thome Corporation porchased a parcel of land as a factory site for 310,000. An old building on the property was demolished, and construction began on a new building ‘which was completed on October 18, 2022. Costs incurred during his period are listed betow! Demolition of old building 3 6,000 Architect's fees 15,000 Legal fees for title investigation ond purchase contract 5,000 Construction costs 600,000 Salvaged materials resulting from demolition were sold for $3,000. ‘Thorne should record the cost of the land and new building respectively as: ‘A. $100,000 and $623,000 B. $105,000 and $618,000 C.—$108,000 and $615,000 D. $111,000 and $615,000 5. (LO. 3) To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be: allocated on the basis of lst production OD Wy UL BR QU I EI IS be(Chapter 10: Acquis and Disposition of Property, Plant,and Equipment 10-28 5. _ (L.0.6) With respect to each of the following plant asset expenditures, indicate whether the sm should be expensed or capitalized. Also, indicate whether the item is best classified as: (1) an ition, (2) an improvement, (3) a replacement, (4) a rearrangement and reinstallation, ot (5) on ordinary pat Expense Capitalize Classification Anew wing on a factory building. ‘Steel beams in an old factory building substituted for wooden beams. ‘New tires placed on a delivery truck. Fee of consulting firm for improvement of production flow by changing the placement of machinery in the factory. Anew tile floor in the office building substituted for an old tile floor. Repainting the interior of the entire factory building. ‘New device attached to machinery ‘that automatically sorts production. Such a device has not previously been available. ‘New motor installed in a machine, The old motor burned out unexpectedly.we! Na > 2 2 5 5 5 5 a g i 2 4 3 3 a ; zt ‘Chapter 11: Deprectaion, Impairments, and Depletion Melt REVIEW QUESTIONS AND EXERCISES TRUE-FALSE Indicate whether each of the following is true (T) or false (F) in the space provided. 6 10. 12, 13, 4 15. 16. re 18, (L.0. 1) The accounting concept of depreciation reflects the decline in value associated with a plant asset. (€.0.2) Anasset’s cost less its salvage value is referred to as the depreciable base. (L.0. 2) Physical factors such as wear ond tear set the outside limit for the service life of an asset. (LO. 2) Whenever the economic nature of the asset is the primary determinant of service life, maintenance plays an extremely vital role in protonging service life. i @ black and white monitor with a color monitor for a computer is an example of (L.O. 2) Estimation and judgment are the primary means through which the service life of an asset is determined. {L.0. 3) One probiem associated with the activity method of depreciation concerns’ estimating the ‘otal units of output an asset will produce. (L.0. 3) Companies that desire low depreciation during periods of low productivity and high depreciation during high productivity either adopt or switch to a dectining-balance method. (L.O. 3) The straight-line mcthod considers depreciation a function of time rather than a function of usage. (LO. 3) The straight-line depreciation method is used mast often in actual practice. This is because the assumptions upon which it is based apply to most plant assets. (L.O. 3) Accelerated depreciation methods accomplish the objective of writing an asset off over 2 shorter period of time than its useful life. (L.0. 3) Under the dectining-balance depreciation method, salvage value is considered only in ‘computing the amount of depreciation for the final year(s) of an asset's service life, (L.0, 4) IFRS requires that each part of an item of property, plant, and equipment that is significant to the total cost of the asset must be depreciated separately. (L.0. 4) When using component depreciation, the cost of individual components may be estimated based on reference to current market prices (if available), discussion with experts in valuation, or use of other reasonable approaches, (L.O. 4) If one of the estimates used in computing depreciation is subsequently found to require adjustments, no change in prior years’ financial statements is required. (LO. 5) An asset impairment test must be conducted on an annual basis by comparing the asset's recoverable amount with its carrying amount. , (L.O. 5) If the carrying amount is less than the recoverable amount, the difference is an impairment Joss. . (L.O. 5) Losses or gains relating to impaired assets intended to be disposed of should be reported as par of other comprehensive income.L112 Studeat Study Guide for Kies Intermatate Accounting: IFRS Edition, Volume 19. (LO. 6) Depletion is the systematic allocation ofthe cost of mineral resources. 20, (LO. 6) The depletion base includes dovelopment cosis such ax tangibte equipment used for | transportation and other heavy equipment necessary to extract a mineral resource and get it roady for production or shipment, 21. (10.6) The full costing approach, related to accounting for exploratory and evaluation (ERE) costs, requires that the full cost of exploration be charged against income in the year itis incurred, 22, (1.0.6) The computation of depletion is essentially the same as the activity method of depreciation, 23. (6.0.6) Liquidating dividends are dividends greater than the amount of accumulated net income. #24, (L.O. 8) Companies account for a change in the fait value of property, plant, and equipment by ‘adjusting the appropriate asset account ond recording an unrealized gain on the revalued long-lived tangible asset 425, (L.0. 8) Ifa company experiences a loss on impairment (decrease in value below historical cost), the Joss reduces comprehensive income and is reported a5 par: of accumulated other comprehensive income in the statement of financial position. ‘MULTIPLE CHOICE Select the best answer for each of the following items and enter the corresponding letter in the space provided, 1. (LO. 1) Which of the following most accurately reflects the concopt of depreciation as used in accounting? A. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use ofthe asset. ©. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration ofthe tangible asset involved. 1D. Am accounting coucept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible asses. 2. (L:0.2) The major difference between the service life of an asset and its physical life is that: ‘A. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last B. physical life is che life of an asset without consideration of salvege value and service life requires the use of salvage value. ©. _ physical life is always longer than service ie D. service life refers to the length of time an asset is of use to its original owner, while ‘physical life refers to how long the asset will be used by all owners, 3. (L.0.2) The economic factors related to an asset's service life inohude: ‘A, obsolescence, B.— wearand tear. c 1D. unexpected casualties,