Capitalization of land, building and machinery acquired, capitalization of installation, improvement (demolition of existing structures included) and interest expense.
1. On August 1, 2007, Jorden Corporation purchased a new machine on a deferred payment basis. A down payment of $1,500 was made and 4 monthly installment of $2,000 each are to be made beginning on September 1, 2007. The cash equivalent price of the machine was $8,000. Jorden incurred and paid installation costs amounting to $250. The amount to be capitalized as the cost of the machine is
a. $8,000.
b. $8,250.
c. $9,500.
d. $9,750.
2. On December 1, 2007, Neely Co. purchased a tract of land as a factory site for $700,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December 2007 were as follows:
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Cost to raze old building
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$25,000
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Legal fees for purchase contract and to record ownership
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5,000
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Title guarantee insurance
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8,000
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Proceeds from sale of salvaged materials
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4,000
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In Neely's December 31, 2007 balance sheet, what amount should be reported as land?
a. $713,000.
b. $721,000.
c. $734,000.
d. $738,000
3. Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be
a. classified as other income.
b. deducted from the cost of the land
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the plant.
4. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.
5. During 2007, Gannon Co. incurred average accumulated expenditures of $400,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2007 was a $500,000, 10%, 5-year note payable dated January 1, 2005. What is the amount of interest that should be capitalized by Gannon during 2007?
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.
6. A company is constructing an asset for its own use. Construction began in 2006. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2006 and 2007 at the end of each quarter. The total amount of interest cost capitalized in 2007 should be determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 2006 and 2007.
b. average accumulated expenditures for the asset in 2006 and 2007.
c. average expenditures for the asset in 2007.
d. total expenditures for the asset in 2007.
7. Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average accumulated expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was $300,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is
a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.