Property, Plant and Equipment
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CPA Financial Accounting and Reporting (FAR) › Property, Plant and Equipment
Which of the following would be included in the journal entry to retire a fixed asset?
A debit to accumulated depreciation
A debit to depreciation expense
A credit to sales revenue
A credit to accumulated depreciation
Explanation
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
On January 2, Year 1, a company borrows \$1.2 million on a note due in 10 years. Each year interest of 9% of the principal must be paid. Proceeds from the loan are used to finance the construction of a building. All proceeds are spent evenly throughout the year and the building is complete at the end of Year 1. At what amount is the building capitalized?
\$1,218,000
\$1,308,000
\$1,254,000
\$1,200,000
Explanation
The capitalized cost of the building will include the principled borrowed as well as the average interest cost for the year. Total interest paid for the year is equal to $1.2M x 9% = $108K. Because the funds were spent evenly throughout the year, interest is averaged to best capture the cost of the building (\$0 interest at the start of the year + $108K interest at the end of the year divided by 2 = $54K.) Therefore, the total capitalized cost is equal to \$1.2M + $54K.
Proceeds received on the sale of a facility used to purchase a new facility should be reported as a gain from:
Continuing operations
Discontinued operations
Other comprehensive income
Reduction of facility cost
Explanation
A net gain from selling one asset to acquire another is part of continuing operations as other revenues and gains.
A mining company uses the depletion method to allocate the cost of removing natural resources from its mine. Which of the following statements is correct?
The depletion base equals the cost to purchase the mine minus the mine's estimated residual value
If the number of units mined equaled the number of units sold, the depletion expense would be equal to the number of units mined
Both of the above
Neither of the above
Explanation
The depletion base will be equal to the cost to purchase the mine minus the mine's estimated residual value.
On January 2, Year 1, a company borrows \$1.2 million on a note due in 10 years. Each year interest of 9% of the principal must be paid. Proceeds from the loan are used to finance the construction of a building. All proceeds are spent evenly throughout the year and the building is complete at the end of Year 1. At what amount is the building capitalized?
\$1,218,000
\$1,308,000
\$1,254,000
\$1,200,000
Explanation
The capitalized cost of the building will include the principled borrowed as well as the average interest cost for the year. Total interest paid for the year is equal to $1.2M x 9% = $108K. Because the funds were spent evenly throughout the year, interest is averaged to best capture the cost of the building (\$0 interest at the start of the year + $108K interest at the end of the year divided by 2 = $54K.) Therefore, the total capitalized cost is equal to \$1.2M + $54K.
Proceeds received on the sale of a facility used to purchase a new facility should be reported as a gain from:
Continuing operations
Discontinued operations
Other comprehensive income
Reduction of facility cost
Explanation
A net gain from selling one asset to acquire another is part of continuing operations as other revenues and gains.
A mining company uses the depletion method to allocate the cost of removing natural resources from its mine. Which of the following statements is correct?
The depletion base equals the cost to purchase the mine minus the mine's estimated residual value
If the number of units mined equaled the number of units sold, the depletion expense would be equal to the number of units mined
Both of the above
Neither of the above
Explanation
The depletion base will be equal to the cost to purchase the mine minus the mine's estimated residual value.
Which of the following would be included in the journal entry to retire a fixed asset?
A debit to accumulated depreciation
A debit to depreciation expense
A credit to sales revenue
A credit to accumulated depreciation
Explanation
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
Nico, Inc purchased equipment by making a down payment of \$3,000 and issuing a note payable for \$20,000. A payment of \$5,000 is to be made at the end of each year for 4 years. The applicable rate of interest is 7%. The present value of an ordinary annuity factor for 4 years at 7% is 4.18, and the present value for the future amount of a single sum of 1 dollar for 4 years at 7% is 0.645. Installation charges were \$1,500. What is the capitalized cost of the equipment?
\$20,900
\$25,400
\$23,900
\$20,000
Explanation
The capitalized cost of the equipment will include the down payment of $3K, the installment charges of \$1,500, and the PV of the note payable. The note payable will be paid annually in 4 installments so the PV factor for an annuity should be used. The PV will be calculated as $5K annual payment x 4.18 = \$20,900. Therefore, the capitalized cost of the equipment will be $3K + $1,500 + \$20,900.
Of the following assets, which would be typically reported on a balance sheet as an intangible?
Derivatives
R&D costs
Patent registrations
Leasehold improvements
Explanation
Patents are intangible assets and their fees are capitalized.