CHAPTER 33 LAND, BUILDING AND MACHINERY QUESTION 33-1 Explain the classification of land in the statement of financial position. ANSWER 33-1 1. Land used as a plant site is classified as property, plant and equipment. 2. Land held for currently undetermined use is treated as an investment property. However, if the land is held definitely as a future plant site, it is classified as owner-occupied property and not an investment property and therefore may be included under property, plant and equipment. Such treatment is in accordance with PAS 40. 3. Land held for long-term capital appreciation is also treated as an investment property. 4, Land held for current sale by a real estate developer as in the case of subdivided lots is treated as current asset as part of inventory. 778QUESTION 33-20 Multiple choice (AICPA Adapted) 1. When an entity acquires land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building shall be Expensed as incurred Added to the cost of the plant Added to the cost of the land - Amortized over the estimated time period between the tearing down of the building and the completion of the plant Boop . An entity purchased land to be used as the site for the construction of a plant. Timber was cut from the building site so that construction of the plant could begin. The proceeds from the sale of the timber shall be a. Classified as other income b. Netted against the cost to clear the land and expensed as incurred c. Deducted from the cost of the plant d. Deducted from the cost of land . Land was purchased to be used as the site for the construction of plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building shall be a. Netted against the cost. to clear the land and expensed as incurred b. Netted against the cost to clear the land and amortized over the life of the plant ¢. Deducted from the cost of the land d. Classified as other income 7894. If an entity purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on a. The significance of the cost allocated to the building in relation to the combined cost of the lot and building b. The length of time for which the pbuilding was held prior to its demolition c. The contemplated future use of the parking lot d. The intention of management for the property when the pbuilding was acquired 5. An entity’s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land’s carrying amount. The entity purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in the entity's statement of financial position? a. The amountis increased by the excess of the replacement forest land’s cost over the condemned land’s carrying amount b. The amount is increased by the excess of the replacement forest land’s cost over the condemnation award c. The amount is increased by the excess of the condemnation award over the condemned forest land’s carrying amount d. No effect, because the condemned forest land’s carrying amount is used as the replacement forest land’s carrying amount ANSWER 33-20 aperpe pao Ae 790QUESTION 33-21 Multiple choice (AICPA Adapted) 1. The term “betterment” refers to a. An expenditure made for new facilities which increase “capacity”. b. An expenditure made to restore “capacity” after abandonment or retirement. c. An expenditure made to improve existing facilities by increasing “capacity”. d. An expenditure made to help insure continuity of service capacity. 2. Which type of expenditure occurs when an entity installs a higher capacity boiler to heat its plant? Rearrangement Ordinary repair and maintenance Addition Betterment aoe 3. An improvement made to a machine which increased the fair value and production capacity without extending the machine's useful life should be Expensed immediately Debited to accumulated depreciation Capitalized in the machine account Allocated between accumulated depreciation and the machine account Be op . Which of the following would ordinarily be treated as a revenue expenditure rather than a capital expenditure? a. Cost of servicing and overhaul to restore or maintain the originally assessed standard of performance. b. The replacement of a major component of building e. An addition to an existing building d. Cost of improvement that is expected to provide discernible futuie benefit 7915. A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. What is the accounting for these events? a. Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building b. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building c. Record a loss in the current period equal to the cost of refurbishing and continue to depreciate the original cost of the building d. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building 6. Anentity incurred cost to modify a building and to rearrange a production line. As a result, an overall reduction in production cost is expected. However, the modification did not increase the building’s fair value and the rearrangement did not extend the production line’s life. Should the building modification cost and the production line rearrangement cost be capitalized? a. Only the building modification cost should be capitalized. b. Only the production line rearrangement cost should be capitalized. c. Both the building modification cost and production line rearrangement cost should be capitalized. d. The building modification cost and production line rearrangement cost should be expensed. 7. Which of the following costs should not be capitalized? a. Replacement of a building’s roof every 15 years b. Cost of site preparation c. Installation and assembly cost d. Replacement of small spare parts annually 7928. The cost of building shall include all of the following, except a. Any renovating or remodeling cost incurred to put the building purchased in a condition for its intended use b. Cost of excavation c. Expenditure for service equipment and fixture made a permanent part of the structure d. Cost incurred to have existing building removed to make room for construction of new building 9. The cost of land shall include all of the following, except a. Commission related to acquisition b. Property tax after date of acquisition assumed by the purchaser c. Property tax to date of acquisition assumed by the purchaser d. Cost of survey 10. Which of the following expenditures may properly be capitalized? a. Expenditure for massive advertising campaign b. Insurance on plant during construction c. Research and development related to a long-term asset which is giving the entity a competitive market advantage d. Title search and other legal cost related to a piece of property which was not acquired ANSWER 33-21 prpama Sears vrraad