A company purchases equipment for 3,000 in freight, 1,500 for a one-year insurance policy on the equipment. What is the capitalized cost of the equipment?
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CPA Financial Accounting and Reporting Far Quiz
Practice Capitalize And Depreciate Fixed Assets in CPA Financial Accounting and Reporting Far with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.
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A company purchases equipment for 80,000,pays3,000 in freight, 5,000forinstallation,and1,500 for a one-year insurance policy on the equipment. What is the capitalized cost of the equipment?
This quiz focuses on Capitalize And Depreciate Fixed Assets, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.
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A company purchases equipment for 80,000,pays3,000 in freight, 5,000forinstallation,and1,500 for a one-year insurance policy on the equipment. What is the capitalized cost of the equipment?
Explanation: Capitalized cost includes all costs necessary to bring the asset to its intended location and condition for use: purchase price 80,000+freight3,000 + 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,hasasalvagevalueof10,000, and a useful life of 5 years. Using the straight-line method, what is annual depreciation expense?
Explanation: Straight-line depreciation = (Cost - Salvage value) / Useful life = (120,000−10,000) / 5 = 22,000.AnswerCiscorrect.AnswerAusesanincorrectsalvagevalueof20,000 in the calculation ((120,000−20,000) / 5 = 20,000).AnswerBignoressalvagevalueentirely,dividingcostbyusefullife(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?
Explanation: DDB rate = 2/5 = 40%. Year 1 depreciation = 50,000x4020,000; book value at start of Year 2 = 30,000.Year2depreciation=30,000 x 40% = 12,000.AnswerBiscorrect.AnswerArepeatstheYear1depreciationamount,ignoringthatDDBisappliedtothedecliningbookvalueeachperiod.AnswerCresultsfromapplyingtheDDBratetoanincorrectintermediatebookvalue.AnswerDisthestraight−lineannualamount(50,000 / 5 = $10,000), not DDB.
Which of the following expenditures should be capitalized rather than expensed?
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,directlabor250,000, overhead allocated 120,000,andinterestonconstructionloan45,000. What is the total capitalized cost of the building?
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.AnswerBiscorrect.AnswerAomitscapitalizedinterest(970,000 = direct costs + overhead only). Answer C omits both overhead and interest (850,000=materials+laboronly).AnswerD(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?
Explanation: DDB rate = 40%. Y1: 40,000;BV=60,000. Y2: 24,000;BV=36,000. Y3: 14,400;BV=21,600. Y4 DDB = 21,600x408,640. SL remaining = 21,600/2=10,800. Since SL (10,800)exceedsDDB(8,640), the switch to straight-line occurs and Year 4 depreciation = 10,800.AnswerDiscorrect.AnswerAusestheoriginalstraight−lineamount(100,000 / 5 = 20,000).AnswerBistheYear3DDBamount.AnswerCistheYear4DDBamount(8,640) before the switch to straight-line.
A company acquires equipment with a fair value of 80,000bytradinginoldequipment(bookvalue15,000, fair value 20,000)andpaying60,000 cash. The exchange has commercial substance. What gain or loss is recognized on the exchange?
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?
Explanation: DDB rate = 40%. Y1 BV=60,000;Y2BV=36,000; Y3 BV=21,600.Y4DDB=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,accumulateddepreciationof90,000, 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?
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.Revisedannualdepreciation=(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?
Explanation: DDB rate = 50%. Year 1: 200,000x50100,000; BV = 100,000.Year2:100,000 x 50% = 50,000;BV=50,000. Year 3: 50,000x5025,000; 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.
A company purchases a building for 1,200,000withcomponents:structure800,000 (40-year life), roof 200,000(20−yearlife),HVAC150,000 (15-year life), elevators $50,000 (10-year life). Using straight-line component depreciation with no salvage values, what is total Year 1 depreciation?
Explanation: 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.AnswerDiscorrect.AnswerA(30,000) includes only the structure and roof components. Answer B (40,000)includesstructure,roof,andHVACbutomitstheelevatorcomponent.AnswerC(35,000) includes structure, roof, and elevators but omits the HVAC component.
A company incurs the following costs when purchasing a patent: purchase price 50,000,legalfeestosecurethepatent8,000, and research costs that led to the patent discovery $30,000. What amount should be capitalized as the cost of the patent?
Explanation: 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.
Under GAAP, which of the following costs incurred during the construction of a self-constructed asset is NOT eligible for capitalization?
Explanation: Selling and administrative expenses are period costs and are not eligible for capitalization even when they relate to a construction project. Only direct costs (materials, labor, overhead) and qualifying interest under ASC 835-20 may be capitalized. Answer C is correct. Direct materials (A), allocated overhead (B), and qualifying interest (D) are all capitalizable costs of self-constructed assets.
A company's fixed asset register shows equipment with a gross cost of 480,000andaccumulateddepreciationof180,000. During the year, the company purchased 60,000ofnewequipmentandrecorded45,000 in depreciation. What is ending accumulated depreciation?
Explanation: 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.
A company acquires a machine for 75,000cashandsignsa25,000 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?
Explanation: The machine is recorded at the fair value of consideration given. The note must be discounted to present value: 25,000x0.890=22,250. Total capitalized cost = 75,000cash+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 purchases equipment for 100,000andincurs5,000 in costs to dismantle and remove it at the end of its useful life. The present value of the dismantlement costs is $3,000. How should the company account for these dismantlement costs at acquisition?
Explanation: Under ASC 410, an asset retirement obligation (ARO) is recognized at fair value (present value) when the obligation is incurred. The ARO's present value ($3,000) is added to the carrying amount of the related asset and a corresponding liability is recorded. Answer D is correct. Answer A expenses the cost, ignoring the ARO standard. Answer B capitalizes the undiscounted future cost rather than the present value. Answer C defers recognition until costs are incurred, which violates ASC 410.
A company acquires equipment with a list price of 80,000bytradinginoldequipmentwithabookvalueof15,000 and a fair value of 20,000,pluspaying60,000 cash. The exchange has commercial substance. What cost is recorded for the new equipment?
Explanation: With commercial substance, new equipment is recorded at the fair value of assets surrendered: FV of old equipment (20,000)+cashpaid(60,000) = 80,000.Againof5,000 (FV 20,000−BV15,000) 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.
Which of the following is NOT a factor used to determine the useful life of a depreciable asset?
Explanation: 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.
Under GAAP, which of the following best describes when depreciation on a newly purchased asset should begin?
Explanation: Under GAAP, depreciation begins when the asset is placed in service - that is, when it is in the location and condition necessary for its intended use. Answer A is correct. Invoice receipt (B) precedes placement in service. Waiting until the following January (C) is a simplification sometimes used in practice but not GAAP's stated requirement. Full payment (D) may occur before or after placement in service and is not the trigger for depreciation.
A company uses the units-of-production depreciation method. A machine costs 90,000witha6,000 salvage value and an estimated productive capacity of 42,000 units. In Year 1, the machine produces 8,400 units. What is Year 1 depreciation?
Explanation: Depreciation per unit = (90,000−6,000) / 42,000 = 84,000/42,000=2.00 per unit. Year 1 depreciation = 8,400 x 2.00=16,800. Answer B is correct. Answer A applies 2.14perunit(ignoringsalvage).AnswerCuses90,000 / 42,000 x 8,400. Answer D uses an incorrect rate.