Multiple Choice Questions

1. The Hickory Company made a lump-sum purchase of three pieces of machinery for $115,000 from an unaffiliated company. At the time of acquisition Hickory paid $5,000 to determine the appraised value of the machinery. The appraisal disclosed the following values:

Machine A $70,000

Machine B $42,000

Machine C $28,000

What cost should be assigned to machines A, B, and C, respectively?

A B C

a. $40,000 $40,000 $40,000

b. $57,500 $34,500 $23,000

c. $60,000 $36,000 $24,000

d. $70,000 $42,000 $28,000

2. A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its

a. Incidental costs incurred

b. Fair value and incidental costs incurred

c. Book value on books of donor and incidental costs incurred

d. Book value on books of donor

3. The following expenditures were among those incurred by Jensen Corporation during the year ended December 31, 2007:

Replacement of tiles on portion of roof

that had been leaking ...........$4,000

Overhaul of machinery that is expected

to extend its useful life for another

two years ............... 6,000

How much should be charged to repairs and maintenance in 2007?

a. $0

b. $4,000

c. $6,000

d. $10,000

4. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were

a. Less than current market value

b. Greater than cost

c. Greater than book value

d. Less than book value

5. Electro Corporation bought a new machine and agreed to pay for it in equal annual installments of $5,000 at the end of each of the next five years. Assume a prevailing interest rate of 15%. The present value of an ordinary annuity of $1 at 15% for five periods is 3.35. The future amount of an ordinary annuity of $1 at 15% for five periods is 6.74. The present value of $1 at 15% for five periods is 0.5. How much should Electro record as the cost of the machine?

a. $12,500

b. $16,750

c. $25,000

d. $33,700

6. When a company purchases 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 costs incurred to tear down the building should be

a. Expensed as incurred

b. Added to the cost of the plant

c. Added to the cost of the land

d. Amortized over the estimated time period between the tearing down of the building and the completion of the plant

7. When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure occurs?

a. Ordinary repair and

b. Addition

c. Rearrangement maintenance

d. Betterment

8. On January 2, 2007 Yuki Yogurt Company decided to replace its obsolete refrigeration system with a more efficient one. The old system had a book value of $9,000 and a fair value of $1,000. Yuki’s new refrigeration system has a fair value of $190,000, for which Yuki paid $189,000 after permitting the contractor to keep the old refrigeration equipment. How much should Yuki capitalize as the cost of the new refrigeration system?

a. $189,000

b. $190,000

c. $197,000

d. $198,000

9. During 2007, Belardo Corporation constructed and manufactured certain assets, and incurred the following interest costs in connection with those activities:

Interest Costs Incurred

Warehouse constructed for

Belardo’s own use ............$20,000

Special-order machine for sale

to unrelated customer,

produced according to

customer’s specifications ........ 9,000

Inventories routinely manufactured,

produced on a repetitive basis ....... 7,000

All of these assets required an extended period of time for completion. Assuming that the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

a. $0

b. $20,000

c. $29,000

d. $36,000

10. Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2007. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at

a. The present value of a $20,000 ordinary annuity for five years

b. $120,000

c. $120,000 less imputed interest

d. $120,000 plus imputed interest