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Organization and promotion expenses should be expensed. (b) Agree.

Architects fees for plans actually used in construction of the building should be charged to the building account as part Of the cost. (c) Agree. FAST Statement No. 34 recommends that avoidable interest or actual interest cost, whichever is lower, be capitalized as part of the cost of acquiring an asset if a significant period of time is required to bring the asset to a condition or location necessary for its intended use.Interest costs are capitalized starting with the first expenditure related to the asset and capitalization would continue until the asset is substantially completed and ready for its intended use, Property taxes during construction should also be charged to the building account. (d) Disagree. Interest revenue is not considered to be related to the interest received as part of the acquisition cost of the building, _ Since the land for the plant site will be used in the operations of the firm, it is classified as property, plant, and equipment.

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The other tract is being held for speculation It is classified as an investment. . A common accounting justification is that all costs associated with the construction of an asset, including interest, should be capitalized in order that the costs can be matched to the revenues which the new asset will help generate. 9. Assets that do not qualify for interest capitalization are (1) assets that are in use or ready for their intended use, and (2) assets that are not being used in the earnings activities of the firm.

10. The imitable interest is determined by multiplying (an) interest rate(s) by the weighted-average amount of accumulated expenditures on qualifying assets.For the portion of weighted-average accumulated expenditures which is less than or equal to any amounts borrowed specifically to finance construction of the assets, the capitalization rate is the specific interest rate incurred, For the portion of weighted-average accumulated expenditures which is greater than specific debt incurred, the interest rate is a weighted average of all other interest rates incurred. The amount of interest to be capitalized is the avoidable interest, or the actual interest incurred, whichever is lower. As indicated in the chapter, an alternative to the specific rate is to use an average borrowing rate. 1. The total interest cost incurred during the period should be disclosed, indicating the portion capitalized and the portion charged to expense.

Interest revenue from temporarily invested excess funds should not be Offset against interest cost when determining the amount of interest to be capitalized. The interest revenue would be reported in the same manner customarily used to port any other interest revenue. 12. (a) Assets acquired by issuance of capital stock-?when property is acquired by issuance of securities such as common stock, the cost of the property is not measured by par or stated value of such stock.If the stock is actively traded on the market, then the market value of the stock is a fair indication of the cost of the property because the market value of the stock is a good measure of the current cash equivalent price.

It the market value tooth common stock is not determinable, then the market value of the property should be established and seed as the basis tort recording the asset and issuance of common stock. Questions Chapter I C (Continued) (b) Assets acquired by gift or donation-?when assets are acquired in this manner a strict cost concept would dictate that the valuation of the asset be zero.However, in this situation, accountants record the asset at its fair market value. The credit would be made to Contribution Revenue or “donated capital. ” Contributions received should be credited to revenue unless the contribution is from a governmental unit Even in that case, we believe that the credit should be to contribution revenue. C) Cash discount-?when assets are purchased subject to a cash discount, the question of how the discount should be handled occurs.

Fifth discount is taken, it should be considered a reduction in the asset cost.Different viewpoints exist, however, if the discount is not taken. One approach is that the discount must be considered a reduction in the cost Of the asset.

The rationale for this approach is that the terms of these discounts are so attractive that failure to take the discount must be considered a loss because management is inefficient. The other view is that failure to take the discount should not be considered a loss, because he terms may be unfavorable or the company might not be prudent to take the discount. Presently both methods are employed in practice. The former approach is conceptually correct. D) Deterred payments-?assets should be recorded at the present value of the consideration exchanged between contracting parties at the date of the transaction.

In a deferred payment situation, there is an implicit (or explicit) interest cost involved, and the accountant should be careful not to include this amount in the cost of the asset. (e) Lump sum or basket purchase-?sometimes a group of assets are acquired for a single lump sum. When a situation such as this exists, the accountant must allocate the total cost among the various assets on the basis of their relative fair market value. O Trade or exchange Of assets-?when one asset is exchanged for another asset, the accountant is faced with several issues in determining the value of the new asset. The basic principle involved is to record the new asset at the fair market value of the new asset or the fair market value of what is given up to acquire the new asset, whichever is more clearly evident. However, the accountant must also be concerned with whether the exchange has commercial substance and whether monetary consideration is involved in the transaction.The commercial substance issue rests on whether the expected cash flows on the assets involved are signify-scantly different. In addition, monetary consideration may affect the amount of gain recognized on the exchange under consideration.

13, The cost of such assets includes the purchase price, freight and handling charges incurred, insurance on the equipment while in transit, cost to special foundations if required, assembly and installation costs, and costs of conducting trial runs. Costs thus include all expenditures incurred in acquiring the equipment and preparing it for use.When plant assets are purchased subject to cash discounts for prompt payment, the question of how the discount should be handled arises. The appropriate view is that the discount, whether taken or not, is considered a reduction in the cost of the asset The rationale for this approach is that the real cost of the asset is the cash or cash equivalent price of the asset. Similarly, assets purchased on long-term payment plans should be accounted for at the present value of the consideration exchanged between the contracting parties at the date of the transaction.Fair market value Of land X Cost = Cost allocated to land Fair market value of building and land $500,000 Zoos,oho $2 500,000 $2 500, coo $440,000 (Bldg. Cost allocated to the land is therefore $440,000.

Cost allocated to building is $1, 760,000 Chapter 10 (Continued) * 54,058 = 514,058 – $440,000). Questions 16. Ordinarily accounting for the exchange Of monetary assets should be based on the fair value of the asset given up or the fair value of the asset received, whichever is clearly more evident. Thus any gains and losses on the exchange should be recognized immediately.

If the fair value of either asset is not seasonably determinable, the book value of the asset given up is usually used as the basis for recording the monetary exchange. This approach is always employed when the exchange has commercial substance. The general rule is modified when exchanges lack commerce-cilia substance, In this case, the enterprise is not considered to have completed the earnings process and therefore a gain should not be recognized. However, a loss should be recognized immediately. In certain situations, gains on an exchange that lacks commercial substance may be recorded when monetary consideration is received.

When monetary consideration is received, it is assumed that a portion of the earnings process is completed, and therefore, a partial gain is recognized, 17. In accordance with SPAS No. 153 which requires losses to be recognized immediately, the entry should be: Heave.

W Duty Truck (new) 39,000 Accumulated Depreciation on Heavy Duty Truck Loss on Disposal of Heavy Duty Truck Heavy Duty Truck (old) 30,000 Cash 26, coo – $6,000) X 49 months/120 months = 59,800] value $20,200 – $13,000 trade-in = $7,200 loss) 18.Ordinarily such expenditures include (1) the recurring costs of servicing accessory to keep property in good operating condition, (2) cost of renewing structural parts of major plant units, and (3) costs of major overhauling operations which may or may not extend the life beyond original expectation. The first class of expenditures represents the service and in general in chargeable to operations as incurred. These expenditures should not be charged to the asset accounts.The second class of expenditures may or may not affect the recorded cost of property, If the asset is rigidly defined as a distinct unit, the renewal of parts does not usually disturb the asset accounts; however, these costs may be epitomized and apportioned over several fiscal periods on some equitable basis, It the property is conceived in terms of structural elements subject to separate replacement, such expenditures should be charged to the plant asset accounts. The third class Of expenditures, major overhauls, is usually entered through the asset accounts because replacement of important structural elements is usually involved.Other than maintenance charges mentioned above are those expenditures which add some physical aspect not a part of the asset at the time Of its original acquisition. These expenditures may be capitalized in the asset account.

An expenditure which extends the life but not the usefulness of the asset is often charged to the accumulated depreciation account. A more appropriate treatment requires retiring from the asset and accumulated depreciation accounts the appropriate amounts (original cost from the asset account ) and to capitalize in the asset account the new cost.Often it is difficult to determine the original cost of the item being replaced. For this reason the replacement or renewal is charged to the accumulated depreciation account. 19, (a) Additions, Additions represent entirely new units or extensions and enlargements of old units.

Expenditures for additions are capitalized by charging either old or new asset accounts depending on the nature of the addition. (b) Major Repairs. Expenditures to replace parts or otherwise to restore assets to their previously efficient operating condition are regarded as repairs. To be considered a major repair, several periods must benefit from the expenditure.The cost should be handled as an addition, improvement or replacement depending on the type Of major repair made. (c) Improvements.

An improvement does not add to existing plant. Expenditures for such better-meets represent increases in the quality of existing plant by arrangements in plant layout or the substitution Of improved components for old components so that the facilities have increased productivity, greater capacity, or longer life. The cost of improvement is accounted for by charges to the appropriate property accounts and the elimination of the cost and accumulated depreciation associated with the replaced components, if any.Replacements. Replacements involve an kind” substitution of a new asset or part for an old asset or part, Accounting for major replacements requires entries to retire the old asset or part and to record the cost of the new asset or part. Minor replacements are treated as period costs. 20, The cost of installing the machinery should be capitalized, but the extra month’s wages paid to the dismissed employees should not, as this payment did not add any value to the machinery, The extra wages should be charged off immediately as an expense; the wages could be shown as a separate item in the income statement for disclosure purposes.

1 . (a) Overhead Off business Which builds its own equipment. Some accountants have maintained that the equipment account should be charged only With the additional overhead caused by such construction. However, a more realistic figure for cost of equipment results if the plant asset account is charged for overhead applied on the same basis and at the same rate as used for production (see Question 5). (b) Cash discounts on purchases of equipment.

Some accountants treat all cash discounts as financial or other revenue, regardless of whether they arise from the payment of invoices for merchandise or plant assets, Others take the position that only the net amount paid tort plant assets should be capitalized on the basis that the discount represents a reduction of price and is not income, The latter session seems more logical in light of the tact that plant assets are purchased for use and not for sale and that they are written off to expense over a long period of time. (c) Interest paid during construction of a building. FAST Statement No.

4 recommends that avoidable or actual interest cost, whichever is lower, be capitalized as part of the cost of acquiring an asset if a significant period of time is required to bring the asset to a condition and location necessary for its intended use. (d) Cost of a safety device installed on a machine. This is an addition to the aching and should be capitalized in the machinery account if material. (e) Freight on equipment returned before installation, for replacement by Other equipment of greater capacity. If ordering the first equipment was an error, Whether due to judgment or Otherwise, the freight should be regarded as 3 loss.However, if information became available after the order was placed which indicated purchase of the new equipment was more advantageous, the cost of the return freight may be viewed as a necessary cost of the new equipment. (f) Cost of moving machinery to a new location.

Normally, only the cost of one installation should be capitalized tort any piece to equipment. Thus the original installation and any accumulated depreciation relating thereto should be removed from the accounts and the new installation costs (i. E. , cost of moving) should be capitalized.In cases where this is not possible and the cost of moving is substantial, it is capitalized and depreciated appropriately over the period during which it makes a contribution to operations. (8) Cost of plywood partitions erected in the remodeling of the office. This is a part of the remodeling cost and may be capitalized if the remodeling itself is of such a nature that it is an addition to the building and not merely a replacement or repair.

(h) Replanting of a section of the building. This seems more in the nature off repair than anything else and as such should be treated as expense. i) Cost of a new motor for one of the trucks.

This probably extends the useful life of the truck. As such it may be viewed as an extraordinary repair and charged against the accumulated depreciation on the truck. The remaining service life of the truck should be estimated and depreciation adjusted to write off the new book value, less salvage, over the remaining useful life.

A more appropriate treatment is to remove the cost of the old motor and related depreciation and add the cost to the new motor it possible. 22.The authors believe it is difficult to justify’ an Allowance for Repairs account under any circumstances, except possibly for interim statements. It is difficult to justify the “Allowance for Repairs” as a liability under any conditions because no past transaction has occurred which will result in future payments to satisfy an existing obligation. Furthermore, as a liability we might ask the question-?whom do you owe? Placement in the stockholders’ equity section is also illogical cause no addition to the stockholders’ investment has taken place.