Capitalize And Depreciate Fixed Assets
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CPA Financial Accounting and Reporting (FAR) › Capitalize And Depreciate Fixed Assets
A company purchases equipment for $80,000, pays $3,000 in freight, $5,000 for installation, and $1,500 for a one-year insurance policy on the equipment. What is the capitalized cost of the equipment?
$88,000
$85,000
$83,000
$89,500
Explanation
Capitalized cost includes all costs necessary to bring the asset to its intended location and condition for use: purchase price $80,000 + freight $3,000 + installation $5,000 = $88,000. The one-year insurance policy is a period cost (prepaid expense), not a capitalizable cost. Answer C is correct. Answer A includes insurance. Answer B omits installation. Answer D omits freight.
A machine costs $120,000, has a salvage value of $10,000, and a useful life of 5 years. Using the straight-line method, what is annual depreciation expense?
$20,000
$22,000
$24,000
$11,000
Explanation
Straight-line depreciation = (Cost - Salvage value) / Useful life = ($120,000 - $10,000) / 5 = $22,000. Answer C is correct. Answer A uses an incorrect salvage value of $20,000 in the calculation (($120,000 - $20,000) / 5 = $20,000). Answer B ignores salvage value entirely, dividing cost by useful life ($120,000 / 5 = $24,000). Answer D divides by 10 rather than the 5-year 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?
$20,000
$12,000
$10,000
$8,000
Explanation
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.
Which of the following expenditures should be capitalized rather than expensed?
Routine maintenance on manufacturing equipment costing $800.
Repainting the exterior of a building at the same color.
An engine overhaul that extends the useful life of a truck by 3 years.
Replacement of a furnace filter during scheduled preventive maintenance.
Explanation
Expenditures are capitalized when they extend useful life, increase capacity, or improve quality beyond the original specifications. An engine overhaul extending useful life by 3 years meets this threshold. Answer C is correct. Routine maintenance (A), filter replacement (B), and repainting (D) merely maintain the existing condition and are expensed as period costs.
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?
$970,000
$895,000
$850,000
$1,015,000
Explanation
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 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?
$8,640
$20,000
$10,800
$14,400
Explanation
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 acquires equipment with a fair value of $80,000 by trading in old equipment (book value $15,000, fair value $20,000) and paying $60,000 cash. The exchange has commercial substance. What gain or loss is recognized on the exchange?
$65,000 gain.
$5,000 loss.
$5,000 gain.
$0; no gain recognized on exchanges.
Explanation
With commercial substance, the old equipment is derecognized at its fair value. Gain = FV of old equipment - book value = $20,000 - $15,000 = $5,000. Answer B is correct. Answer A applies the no-commercial-substance rule. Answer C uses proceeds minus original cost. Answer D reverses the sign.
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?
Year 5
Year 3
Year 2
Year 4
Explanation
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 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?
$27,500
$25,000
$20,000
$30,000
Explanation
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.
An asset costs $200,000 with no salvage value, depreciated using double-declining balance over 4 years. What is book value at the end of Year 3?
$25,000
$50,000
$12,500
$100,000
Explanation
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 after Year 1. Answer B is BV after Year 2. Answer C would result from a fifth year of DDB.