Question

1.      Washington Co. exchanged nonmonetary assets with Stranger Co. No cash was exchanged and the exchange had no commercial substance. The carrying amount of the asset surrendered by Washington exceeded. Both the fair value of the asset received and Stranger’s carrying amount of that asset. Washington should recognize the difference between the carrying amount of the asset it surrendered and

a.       The fair value of the asset it received as a loss.

b.      The fair value of the asset it received as a gain.

c.       Stranger’s carrying amount of the asset it received as a loss.

d.      Stranger’s carrying amount of the asset it received as a gain.

2.      Charles County owned an idle parcel of real estate consisting of land and a factory building. Charles gave title to this realty to Parson Co. as an incentive for Parson to establish manufacturing operations in the county. Parson paid nothing for this realty, which had a fair value of $250,000 at the date of the grant. Parson should record this nonmonetary transaction as a

a.       Memo entry only

b.      Credit to Contribution Revenue for $250,000

c.       Credit to Comprehensive Income for $250,000

d.      Credit to Donated Capital for $250,000

3.      On September 10, 2015, Jenks Co. incurred the following costs for one of its printing presses:

Purchase of attachment                                                           $55,000

Installation of attachment                                                       $5,000

Replacement parts for renovation of press                             $18,000

Labor and overhead in connection with renovation of press   $7,000

     Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?

a.       $0

b.      $67,000

c.       $78,000

d.      $85,000

4.      On February 2, 2016, Yarley Corp. replaced its boiler with a more efficient one. The following information was available on that date:

Purchase price of new boiler                                                   $150,000

Carrying amount of old boiler                                                $10,000

Fair value of old boiler                                                                $4,000        

Installation cost of new boiler                                                $20,000

The old boiler was sold for $4,000. What amount should Yarley capitalize as the cost of the new boiler?

a.       $170,000

b.      $164,000

c.       $160,000

d.      $150,000

Answer 1

1) the correct option is a)The fair value of the asset it received as a loss.

The implied fair values of the assets exchanged are equal because no cash was exchanged. As the book value of the asset exchanged exceeds the fair value of the asset received, the book value of asset exchanged also exceeds its own fair value. A loss is therefore implied and is recognized. The amount of the loss is the difference between the carrying value of Washington's asset and the fair value of Washington's asset (which equals the fair value of the asset received).

2) The correct option is b) Credit to Contribution revenue for $250,000. As the fair value of the realty is $250,000 it should be recorded at $250,000 and for double entry correspondingly CContribution revenue will be credited with the fair value of realty (i.e. $250,000).

3) The correct option is d)$85,000. As it result in significantly increased productivity all the costs should be capitalized.

Total Costs = $55,000+$5,000+$18,000+$7,000 = $85,000

4) The correct option is a)$170,000.

The cost of new boiler should include the purchase price of new boiler and installation cost of new boiler. The carrying amount and fair value of old boiler is irrelevant in calculating cost of new boiler.

Cost of new boiler = $150,000+$20,000 = $170,000

Hence the cost of boiler to be capitalized is $170,000.