Question

You have been provided with accounting research tools. Use them to answer the following multiple choice questions. After you make your choice, tell me what theory you are basing your answer on, or what part of the codification applies to the question.

2. During the year just ended, Lawrence Co. incurred $20,000 of costs to repair Machine A. These expenditures improved the quality and quantity of output but did not extend the useful life. Lawrence also spent $1,000 to replace a small part on Machine B and $12,000 for regular monthly repairs of all the machines in the plant. The amount of the foregoing expenditures that should be reported as repair and maintenance expense is

A) $33,000

B) $21,000

C) $13,000

D) $12,000

3. Testing for possible impairment of a long-lived asset (asset group) that an entity expects to hold and use is required

A) At each interim and annual balance sheet date.

B) At annual balance sheet dates only.

C) Periodically.

D) Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

4. On January 2 of the current year, BC Co. acquired 1,000 shares of its $10 par value common stock for $20,000. On July 1, BC exchanged this stock for land to be held for use as the site of the corporate headquarters. The stock had a fair value of $25 per share on that date. The building on the site was razed, and BC sold the scrap for $2,000. At what amount should the land be capitalized?

A) $25,000

B) $23,000

C) $20,000

D) $18,000

5. SPUR Co. is constructing a supertanker for sale to a foreign country as a discrete project. In which case should the company cease capitalizing interest on the project?

A) Expenditures have exceeded the budgeted costs.

B) Construction has been completed.

C) Construction on the project has been temporarily suspended.

D) The construction loan will be paid with proceeds of a working capital loan.

Answer 1

Ans:

2. Option C

Amount spent of $20,000 doesn't improve asset life but it improves the quality and quantity of output so thsi amount should be capitalised.

Small part of $1,000 does not add value to machine and also does not improve its performance. Hence to charged to repair and maintainence.

Normal repair of $12,000 should also be charged to repair and maintainence.

3. Option D.

Impairment of a long-lived asset (asset group) that an entity expects to hold and use is required Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable because it is impractical to test every single asset in every accounting period. So businesses wait until an event or circumstances changes that signals a particular amount is not recoverable.

4. Option B

Asset should be capitalised at purchase price less scrap or any other recoverable amount related to that purchase.

So Fair value of shares on the date of Transfer $25,000 less recovered from Scrap $2,000 so net amount to be capitalised is $23,000.

5. Option B

As per accounting standards a company can capitalize its interest on the project till completion of construction on the project. After completion of construction interest expense to be charged to Profit and loss account.