Question

Some accounting questions I have on Capital Assets:

1. Rocky Company trades equipment with a book value of $24,970 for new equipment with a list price of $103,850. $77,880 cash is paid and there is a $25,970 trade-in allowance. There is a well established market for the old equipment traded in. The fair market value of the old equipment is $23,970. What amount of gain or loss will be recorded by Rocky?

$1,000 gain

$1,000 loss

$0 gain or loss

None of the other alternatives are correct

$25,970

2.

Tiki Company has a building that cost $2,000,000 new and is 50% depreciated. The market value of the building is $3,000,000 at year end. Tiki will show on its year end balance sheet

The building at cost

The building at net book value

None of the above

The building at market

The building at both cost and net book value

3.

A company buys land and building for $240,000. The market value of the land is $150,000 and the building is $30,000. What cost will be allocated to the building?

$240,000

$40,000

$192,000

None of the other alternatives are correct

$120,000

4. The Electric Company buys machinery for $500,000 and gives a promissory note to pay dated 2 years from the purchase date. Interest at 10% and principal are to be repaid at maturity. The life of the asset is also estimated to be two years with no salvage and straight line depreciation is used. We can say that on the purchase date:

The liability will be offset from the asset but the total asset amount will increase by the amount of the discount amortization each period.

None of the above

The amount shown for the asset on the balance sheet will differ than the amount shown for the liability

The amount shown for the asset on the balance sheet will be the same as the amount shown for the liability

The liability will be offset from the asset until paid so initially the transaction will have no effect on total assets

Answer 1

Question 1

The company received trade-in allowance of $25,970 against the equipment with book value of $24,970. The company received $1,000 extra for the old equipment than its book value. This is profit.

Correct answer: $1,000 gain

Question 2

The value of asset is shown at the net book value i.e., cost less accumulated depreciation. The building with cost of $2,000,000 is depreciated 50%. The accumulated depreciation is $1,000,000 and net book value is $1,000,000. The building will be shown at $1,000,000 in the balance sheet.

Correct answer: The building at net book value

Question 3

The cost of land and building is separated in proportion ot the market value of land and building. The cost of land and building of $240,000 is divided in proportion of market value of land ($150,000) and buidling ($30,000).

Cost allocated to buiding = 240,000/(150,000+30,000)*30,000 = $40,000

Correct answer: $40,000

Question 4

If the asset is purchased by issue of note, then Asset A/c will be debited with the cost of asset and Notes payable A/c is credited with the cost of asset. The interest is recorded as expenses whenever it is incurred.

Correct answer: The amount shown for the asset on the balance sheet will be the same as the amount shown for the liability.