Name: _______________________________

Acct 304.902

1/28/13

Chapter 10 Quiz - Solutions 1. Briefly explain: When should an expenditure be capitalized, and when should an expenditure be expensed? Expenditures should be capitalized if material future economic benefits result from the expenditure. Expenditures should be capitalized if they do not result in material future economic benefits.

2. Note: Some versions had slightly different numbers for this problem On January1, 2012 Mock Co. began construction of a small building, which was completed and occupied on January 1, 2013. The weighted average expenditures for 2012 associated with construction were $300,000. To help pay for construction, $100,000 was borrowed on January1, 2012 on a 12%, three-year note payable. Other debt outstanding during the year: $400,000, 8% note payable $100,000, 10% bonds payable. a. Calculate avoidable interest for 2012 (show your work and place your answer in the box below). Weighted Average interest rate: $400,000 * 8% = $32,000 $100,000 * 10% =$10,000 $500,000 $42,000 $42,000 / $500,000 = 8.4% $100,000 * 12% = $12,000 $200,000 * 8.4% = $16,800 $28,800 Avoidable Interest = $28,800

b. Calculate actual interest for 2012 (show your work and place your answer in the box below). $100,000 * 12% =$12,000 $400,000 * 8% = $32,000 $100,000 * 10% =$10,000 $600,000 $54,000

Actual Interest =

$54,000

Name: _______________________________

Acct 304.902

1/28/13

Indicate the appropriate recognition for gains and loss recognition in nonmonetary exchanges for the situations below: Cash Received? Yes or No Loss Recognition? Entire loss recognized immediately Entire loss recognized immediately Entire loss recognized immediately Entire loss recognized immediately Gain Recognition? Entire gain recognized immediately Entire gain recognized immediately Partial gain recognized

Commercial Substance No Commercial Substance No Commercial Substance No Commercial Substance

Cash Received > 25%

Cash Received < 25%

No Cash Received

Gain deferred (not recognized)

3. Consider each of the expenditures made for costs subsequent to acquisition below. Indicate whether the expenditure should be capitalized or expensed. Capitalize or Expense? Check one. 1. Parra Company incurred $480 of wages payable to workers who spent five days in unloading and setting up a machine that had been relocated from another one of Parra's factories. This relocation was necessary to meet future production orders. Check the box indicating the most appropriate cost category:

Capitalize Expense

2.

Computer equipment in an office building received upgraded software and RAM, which improved data processing capacity.

Capitalize Expense

Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance

Name: _______________________________ 3. A motor in one of North Company's fabriccutting machines broke down and was subsequently overhauled at a cost of $600. This overhaul corrected the issue and restored the machine to its standard of performance prior to the break-down.

Acct 304.902

1/28/13

Capitalize Expense

Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance Addition Improvement/Replacement Rearrangement/Reinstallation Ordinary Repair/Maintenance Major Repair/Maintenance

1.

BugOut Company spent $1,000 to repaint their work vans.

Capitalize Expense

2.

The attic of a company's administration building was finished at a cost of $3,000 to provide an additional office.

Capitalize Expense

3.

A motor in one of North Company's fabriccutting machines broke down and was subsequently overhauled at a cost of $600. This overhaul corrected the issue and it is also expected that the overhaul will result in fewer bolts of irregularly cut fabric as compared to production prior to the break-down.

Capitalize Expense