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Exam 10: Property, Plant, and Equipment and Intangible Assets: Acquisition

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Question 21

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On July 1, 2018, Markwell Company acquired equipment. Markwell paid $160,000 in cash on July 1, 2018, and signed a $640,000 noninterest-bearing note for the remaining balance which is due on July 1, 2019. An interest rate of 5% reflects the time value of money for this type of loan agreement. -For what amount will Markwell record the purchase of equipment?

A) $761,905.
B) $769,523.
C) $609,523.
D) $800,000.

E) All of the above
F) A) and C)

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Question 22

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Casper Chemical recently acquired a building located on two acres of land for a lump-sum price of $3.2 million. In your job as assistant controller, you determined the allocation of the price using the relative fair values to be $1 million and $2.2 million for the land and building, respectively. When you reported these initial values to Jake Reese, the company's controller, he told you to change the allocation to $1.5 million for the land and $1.7 million for the building. When you asked him why the change, he explained that the company is having a difficult time meeting profitability goals and that his proposed allocation will help the bottom line for future years. Required: 1. How will the controller's proposed allocation help the bottom line in future years? 2. Discuss the ethical dilemma faced by the assistant controller.

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1. The proposed allocation will increase...

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Question 23

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Which of the costs related to research and development would be capitalized?

Sales tax paid on equipment acquired for use in the business is not capitalized.

On January 3, 2018, Michelson & Sons acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. Michelson paid $400,000 and signed a noninterest-bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2019. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and other costs totaling $24,000 were paid at closing. During February, the old building was demolished at a cost of $120,000, and an additional $100,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows: $\begin{array} { l r } \text { March 30 } & \$ 800,000 \\\text { June 30 } & 1,200,000 \\\text { July 30 } & 1,200,000 \\\text { September 1 } & 600,000\end{array}$ Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2018: $6,000,000, 8% long-term note payable $2,000,000, 5% long-term note payable In December, the company purchased equipment and office furniture and fixtures for a lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures were $540,000 and $360,000, respectively. In December, Michelson paid $340,000 for the construction of parking lots and landscaping. Required: 1. Determine the initial values of the various assets that Michelson acquired or constructed during 2018. 2. How much interest expense will Michelson report in its 2018 income statement?

Software development costs are capitalized if they are incurred:

Peanut Corporation exchanged land and cash of $6,500 for equipment. The land had a book value of $45,000 and a fair value of $34,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively. -Assuming that the exchange lacks commercial substance, Alamos would record a gain/(loss) of:

Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) in accounting for government grants for the purchase of assets.

A company incurred the following costs related to research and development for the current year: The equipment will be used in other projects. Depreciation in the current year is $70,000. For what amount should the company report research and development expense?

Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be:

On June 1, 2017, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2018. Expenditures on the project were as follows ($ in millions) : $\begin{array}{|l|r|}\hline \text { July } 1,2017 & 54 \\\hline \text { October } 1,2017 & 22 \\\hline \text { February } 1,2018 & 30 \\\hline \text { April } 1,2018 & 21 \\\hline \text { September } 1,2018 & 20 \\\hline \text { October } 1,2018 & 6 \\\hline\end{array}$ On July 1, 2017, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2018. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2017 and 2018. The company's fiscal year-end is December 31. -What is the amount of interest that Crocus should capitalize in 2018, using the specific interest method (rounded to the nearest thousand dollars) ?

Calegari Mining paid $2 million to obtain the rights to operate a coal mine in Tennessee. Costs of exploring for the coal deposit totaled $1,500,000, and development costs of $5 million were incurred in preparing the mine for extraction, which began on January 2, 2018. After the coal is extracted in approximately five years, Calegari is obligated to restore the land to its original condition. The company's controller has provided the following three cash flow possibilities for the restoration costs: The company's credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on December 31. Required: 1. What is the initial cost of the coal mine? (Round computations to nearest whole dollar.) 2. How much accretion expense will Calegari report in its 2018 and 2019 income statements? 3. What is the book value of the asset retirement obligation that Calegari will report in its 2018 and 2019 balance sheets? 4. Assume that actual restoration costs incurred in 2023 totaled $1,370,000. What amount of gain or loss will Calegari recognize on retirement of the liability?

The relative fair values are used to determine the valuation of individual assets acquired in a lump-sum purchase.

Research and development (R&D) costs:

Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and development costs totaled $8.2 million. Extraction activities began on July 1, 2018. After the copper is extracted in approximately six years, Schefter is obligated to restore the land to its original condition, including constructing a park. The company's controller has provided the following three cash flow possibilities for the restoration costs: $\begin{array}{rrr}&\text { Cash Flow } & \text { Probability }\\\text { 1. } & \$ 700,000 & 30 \% \\\text { 2. } & 800,000 & 25 \% \\\text { 3. } & 900,000 & 45 \%\end{array}$ The company's credit-adjusted, risk-free rate of interest is 5%, and its fiscal year ends on December 31. Required: 1. What is the initial cost of the copper mine? (Round computations to nearest whole dollar.) 2. How much accretion expense will Schefter report in its 2018 income statement? 3. What is the book value of the asset retirement obligation that Schefter will report in its 2018 balance sheet? 4. Assume that actual restoration costs incurred in 2024 totaled $860,000. What amount of gain or loss will Schefter recognize on retirement of the liability?

When is interest capitalized? Briefly describe how the amount to be capitalized is computed.

Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively. Assuming that the exchange has commercial substance, Horton would record land-new and a gain/(loss) of:

On June 1, 2017, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2018. Expenditures on the project were as follows ($ in millions) : $\begin{array}{|l|r|}\hline \text { July } 1,2017 & 54 \\\hline \text { October } 1,2017 & 22 \\\hline \text { February } 1,2018 & 30 \\\hline \text { April } 1,2018 & 21 \\\hline \text { September } 1,2018 & 20 \\\hline \text { October } 1,2018 & 6 \\\hline\end{array}$ On July 1, 2017, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2018. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2017 and 2018. The company's fiscal year-end is December 31. -In computing the capitalized interest for 2018, Crocus' average accumulated expenditures are:

The capitalized cost of equipment excludes: