- Meridian Corp constructed a warehouse for its own use. Direct costs included materials $800,000, labor $600,000, and allocated overhead $200,000. During construction, Meridian borrowed $1,000,000 specifically for this project at 8% annual interest. Construction began January 1 and was completed December 31. The company also has general debt of $2,000,000 at 6% that could have been avoided. What amount should be capitalized as the total cost of the warehouse?
Answer: $1,680,000
Self-constructed assets include direct costs plus capitalizable interest. Direct costs: $800,000 + $600,000 + $200,000 = $1,600,000. For interest capitalization, use the specific borrowing rate of 8% on the specific debt of $1,000,000 since the construction expenditures don't exceed the specific borrowing amount. Capitalizable interest = $1,000,000 × 8% = $80,000. Total capitalized cost = $1,600,000 + $80,000 = $1,680,000. Choice A omits interest capitalization. Choice C would result from using a blended rate incorrectly. Choice D would result from capitalizing interest on both specific and general debt, which is incorrect when specific borrowing covers the project costs.
- A company purchases a building for $1,200,000 with components: structure $800,000 (40-year life), roof $200,000 (20-year life), HVAC $150,000 (15-year life), elevators $50,000 (10-year life). Using straight-line component depreciation with no salvage values, what is total Year 1 depreciation?
Answer: $45,000
Structure: $800,000/40 = $20,000. Roof: $200,000/20 = $10,000. HVAC: $150,000/15 = $10,000. Elevators: $50,000/10 = $5,000. Total = $45,000. Answer D is correct. Answer A ($30,000) includes only the structure and roof components. Answer B ($40,000) includes structure, roof, and HVAC but omits the elevator component. Answer C ($35,000) includes structure, roof, and elevators but omits the HVAC component.
- A company acquires a machine for $75,000 cash and signs a $25,000 non-interest-bearing note due in 2 years. The market rate of interest is 6%. The present value factor for a lump sum at 6% for 2 years is 0.890. At what amount should the machine be capitalized?
Answer: $97,250
The machine is recorded at the fair value of consideration given. The note must be discounted to present value: $25,000 x 0.890 = $22,250. Total capitalized cost = $75,000 cash + $22,250 PV of note = $97,250. Answer C is correct. Answer A uses the face value of the note without discounting. Answer B uses a slightly different PV factor. Answer D records only the cash paid, ignoring the note.
- A company incurs the following costs related to a purchased patent: acquisition price $50,000 and legal fees to register and defend the patent $8,000. Separately, the company spent $30,000 on R&D that led to the patented invention. What amount is capitalized as the cost of the patent?
Answer: $58,000
Capitalizable patent cost includes the acquisition price ($50,000) and directly related legal costs ($8,000) = $58,000. R&D costs that led to the invention are expensed as incurred under ASC 730 and cannot be capitalized. Answer A is correct. Answer B includes R&D. Answer C omits legal fees. Answer D includes R&D with a different combination.
- An asset costs $200,000 with no salvage value, depreciated DDB over 4 years. What is book value at the end of Year 3?
Answer: $25,000
DDB rate = 50%. Year 1: $200,000 x 50% = $100,000; BV = $100,000. Year 2: $100,000 x 50% = $50,000; BV = $50,000. Year 3: $50,000 x 50% = $25,000; BV = $25,000. Answer D is correct. Answer A is BV at end of Year 1. Answer B is BV at end of Year 2. Answer C would result from applying DDB for a 4th year.
- What journal entry should Orion record for the impairment, if any?
Answer: Dr. Impairment Loss $30,000; Cr. Equipment $30,000
Under U.S. GAAP, an asset is impaired when its carrying amount exceeds its fair value. The equipment's carrying amount is $600,000 - $360,000 = $240,000. The fair value less costs to sell is $210,000 - $30,000 = $180,000. However, the impairment loss is measured as the difference between carrying amount and fair value: $240,000 - $210,000 = $30,000. The loss reduces the asset's cost basis directly. Choice A is incorrect because impairment exists. Choice B incorrectly credits accumulated depreciation. Choice D uses an incorrect impairment calculation.
- Titan Corp acquired a competitor's business for $2,000,000. The fair values of identifiable assets acquired were: inventory $300,000, equipment $800,000, and patent $400,000. Liabilities assumed had a fair value of $200,000. The patent has a remaining legal life of 12 years, but due to rapid technological changes, management estimates it will only be useful for 5 years. Two years after acquisition, what is the carrying amount of the patent?
Answer: $240,000
The patent should be amortized over the shorter of its legal life (12 years) or useful life (5 years). Annual amortization = $400,000 ÷ 5 years = $80,000. After 2 years, accumulated amortization = $80,000 × 2 = $160,000. Carrying amount = $400,000 - $160,000 = $240,000. Choice B would result from using 6.25 years (incorrectly calculated). Choice C would result from using the 12-year legal life ($400,000 - [$400,000 ÷ 12 × 2] = $333,333). Choice D would result from using 10 years as the amortization period.
- Land improvements such as paving, fencing, and landscaping are depreciated separately from land because:
Answer: They have a limited useful life and will eventually need to be replaced, unlike land itself.
Land has an indefinite useful life and is not depreciated. Land improvements (paving, fencing, landscaping) have finite lives - they wear out and must be replaced. Because they are exhausted over time, they are separately capitalized and depreciated. Answer A is correct. Answer B is incorrect; GAAP does not follow tax treatment in this area. Answer C is not always true - improvements may outlast buildings in some cases. Answer D is incorrect; land improvements are tangible assets, not intangibles.
- A machine with a cost of $150,000, accumulated depreciation of $90,000, and a remaining life of 3 years is revised to have only 2 remaining years and a new salvage value of $5,000. The company uses straight-line depreciation. What is the revised annual depreciation?
Answer: $27,500
A change in estimated useful life is a change in accounting estimate applied prospectively. Book value at revision = $150,000 - $90,000 = $60,000. Revised annual depreciation = ($60,000 - $5,000) / 2 = $55,000 / 2 = $27,500. Answer B is correct. Answer A uses the original cost divided by the remaining life. Answer C ignores the revised salvage value. Answer D divides remaining book value by 3 years instead of 2.
- A company acquires equipment with a list price of $80,000 by trading in old equipment with a book value of $15,000 and a fair value of $20,000, plus paying $60,000 cash. The exchange has commercial substance. What cost is recorded for the new equipment?
Answer: $80,000
With commercial substance, new equipment is recorded at the fair value of assets surrendered: FV of old equipment ($20,000) + cash paid ($60,000) = $80,000. A gain of $5,000 (FV $20,000 - BV $15,000) is also recognized. Answer A is correct. Answer B uses book value instead of fair value of old equipment. Answer C records only cash paid. Answer D uses an incorrect blended amount.
- Neptune Corp purchased a patent for $450,000 on January 1, 20X1. The patent has a legal life of 15 years but Neptune estimates it will be useful for only 10 years due to expected technological changes. On January 1, 20X4, a competitor developed similar technology, reducing Neptune's expected remaining useful life of the patent to 3 years from that date. What amortization expense should Neptune record for 20X4?
Answer: $105,000
Patents are amortized over the shorter of legal life or useful life. Original amortization: $450,000 ÷ 10 years = $45,000 per year. After 3 years (20X1-20X3), accumulated amortization = $45,000 × 3 = $135,000. Book value at start of 20X4: $450,000 - $135,000 = $315,000. Due to the change in estimate, the remaining useful life is now 3 years. New annual amortization: $315,000 ÷ 3 = $105,000. Choice A continues the original amortization rate. Choice C would result from dividing by 2.8 years instead of 3. Choice D would result from incorrect calculation of the remaining book value or useful life.
- A company uses the double-declining balance method. An asset costs $50,000, has a 5-year life, and no salvage value. What is depreciation expense in Year 2?
Answer: $12,000
DDB rate = 2/5 = 40%. Year 1 depreciation = $50,000 x 40% = $20,000; book value at start of Year 2 = $30,000. Year 2 depreciation = $30,000 x 40% = $12,000. Answer B is correct. Answer A repeats the Year 1 depreciation amount, ignoring that DDB is applied to the declining book value each period. Answer C results from applying the DDB rate to an incorrect intermediate book value. Answer D is the straight-line annual amount ($50,000 / 5 = $10,000), not DDB.
- An asset with a cost of $180,000 and no salvage value is depreciated using the double-declining balance method over 4 years. What is the book value at the end of Year 3?
Answer: $22,500
DDB rate = 2/4 = 50%. Year 1: $180,000 x 50% = $90,000; BV = $90,000. Year 2: $90,000 x 50% = $45,000; BV = $45,000. Year 3: $45,000 x 50% = $22,500; BV = $22,500. Answer D is correct. Answer A is book value at the end of Year 1. Answer B is book value at the end of Year 2. Answer C would result from applying DDB for a fourth year ($22,500 x 50% = $11,250).
- A building is purchased for $500,000. The land on which it sits is valued at $100,000 (included in the $500,000 purchase price). The building has a 40-year life and no salvage value. What is annual straight-line depreciation on the building?
Answer: $10,000
Land is not depreciated. Building cost = $500,000 - $100,000 = $400,000. Annual depreciation = $400,000 / 40 = $10,000. Answer A is correct. Answer B depreciated the full $500,000. Answer C uses a partial allocation. Answer D applies an incorrect rate.
- A company uses double-declining balance and switches to straight-line when straight-line produces a higher charge. An asset costs $100,000, has a 5-year life, and no salvage value. In which year does the switch to straight-line first occur?
Answer: Year 4
DDB rate = 40%. Y1 BV=$60,000; Y2 BV=$36,000; Y3 BV=$21,600. Y4 DDB=$8,640 vs SL remaining=$21,600/2=$10,800. Since SL ($10,800) > DDB ($8,640), the switch first occurs in Year 4. Answer C is correct. In Years 1-3, DDB always exceeds SL on the remaining balance.
- A company uses double-declining balance and switches to straight-line when SL yields a higher charge. An asset costs $100,000, has a 5-year life, and no salvage value. What is depreciation in Year 4?
Answer: $10,800
DDB rate = 40%. Y1: $40,000; BV = $60,000. Y2: $24,000; BV = $36,000. Y3: $14,400; BV = $21,600. Y4 DDB = $21,600 x 40% = $8,640. SL remaining = $21,600 / 2 = $10,800. Since SL ($10,800) exceeds DDB ($8,640), the switch to straight-line occurs and Year 4 depreciation = $10,800. Answer D is correct. Answer A uses the original straight-line amount ($100,000 / 5 = $20,000). Answer B is the Year 3 DDB amount. Answer C is the Year 4 DDB amount ($8,640) before the switch to straight-line.
- A company constructs its own building. Costs incurred include: direct materials $600,000, direct labor $250,000, overhead allocated $120,000, and interest on construction loan $45,000. What is the total capitalized cost of the building?
Answer: $1,015,000
Self-constructed assets capitalize all direct costs plus overhead and qualifying interest (ASC 835-20). Total = $600,000 + $250,000 + $120,000 + $45,000 = $1,015,000. Answer B is correct. Answer A omits capitalized interest ($970,000 = direct costs + overhead only). Answer C omits both overhead and interest ($850,000 = materials + labor only). Answer D ($895,000) capitalizes direct costs and interest but excludes allocated overhead, which is also a capitalizable cost of self-constructed assets.
- A company incurs the following costs when purchasing a patent: purchase price $50,000, legal fees to secure the patent $8,000, and research costs that led to the patent discovery $30,000. What amount should be capitalized as the cost of the patent?
Answer: $58,000
Under ASC 730, research and development costs are expensed as incurred and may not be capitalized as part of an internally developed or purchased patent. The capitalizable cost of a purchased patent includes the purchase price and directly related legal fees: $50,000 + $8,000 = $58,000. Answer A is correct. Answer B includes R&D costs, which must be expensed. Answer C omits legal fees. Answer D includes R&D costs with a different combination.
- A company's fixed asset register shows equipment with a gross cost of $480,000 and accumulated depreciation of $180,000. During the year, the company purchased $60,000 of new equipment and recorded $45,000 in depreciation. What is ending accumulated depreciation?
Answer: $225,000
Ending accumulated depreciation = beginning balance + current-year depreciation = $180,000 + $45,000 = $225,000. The new equipment purchase does not affect accumulated depreciation in the period of acquisition (no depreciation recorded until placed in service, or prorated). Answer B is correct. Answer A uses the opening balance only. Answer C adds the equipment purchase to accumulated depreciation. Answer D combines both incorrectly.
- Which of the following is NOT a factor used to determine the useful life of a depreciable asset?
Answer: The original purchase price of the asset.
Useful life is estimated based on factors including physical wear and tear (A), technological or economic obsolescence (B), and legal or contractual limitations (C). The original purchase price (D) is the cost basis for depreciation calculations but is not a factor in determining useful life. Answer D is correct.
