FINANCIAL ACCOUNTING QUIZ 7
TRUE OR FALSE:
1. Assets under construction for a company’s own use do not qualify for interest cost capitalization. 2. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset. 3. When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization. 4. Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged. 5. Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits. 6. When an ordinary repair occurs, several periods will usually benefit. 7. If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset’s book value. 8. An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset. 9. The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition. 10. Normally, companies compute depletion on a straight-line basis.
1. Assets that qualify for interest cost capitalization include a.assets under construction for a company's own use.
b.assets that are ready for their intended use in the earnings of the company. c.assets that are not currently being used because of excess capacity. d.All of these assets qualify for interest cost capitalization. 2. The period of time during which interest must be capitalized ends when a.the asset is substantially complete and ready for its intended use. b.no further interest cost is being incurred.
c.the asset is abandoned, sold, or fully depreciated.
d.the activities that are necessary to get the asset ready for its intended use have begun. 3. Which of the following statements is true regarding capitalization of interest? a.Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. b.The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c.When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d.The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period. 4. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a.8/8.
5. In order for a cost to be capitalized (capital expenditure), the following must be present: a.The useful life of an asset must be increased.
b.The quantity of assets must be increased.
c.The quality of assets must be increased.
d.Any one of these.
6. An improvement made to a machine increased its fair value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be a. expensed.
b.debited to accumulated depreciation.
c.capitalized in the machine account.
d.allocated between accumulated depreciation and the machine account. 7. Which of the following is a capital expenditure?
a.Payment of an account payable
b.Retirement of bonds payable
c.Payment of Federal income taxes
d.None of these
8. Which of the following is not a capital expenditure?