41. When a firm constructs its own buildings or equipment,
A. it recognizes the labor, material, and overhead costs incurred as an asset.
B. U.S. GAAP and IFRS require firms to include, or capitalize, interest costs during construction in the cost of a self-constructed asset.
C. it recognizes the labor, material, and overhead costs incurred as a period expense.
D. U.S. GAAP and IFRS require firms to expense interest costs incurred during construction of a self-constructed asset.
E. choices a and b
42. The capitalization of interest in the acquisition cost of assets during construction
A. reduces otherwise reportable interest expense
B. increases net income during periods of construction
C. results in higher depreciation charges, reducing net income.
D. delays expense recognition from the times of borrowing to the times of using the asset.
E. all of the above
43. Assume the following long-term debt structure for Smith Stores:
Construction Loan at 5% on Building Under Construction . . . . . . . ..$2,000,000
Other Borrowings at 6% Average Rate . . . . . . . . . . . . . . . . . . . . . . . . .7,200,000
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,200,000
The account Building Under Construction has an average balance during the year of $6,000,000. Smith Stores bases the amount of interest capitalized on the new construction-related borrowing, $2,000,000, and enough of the other borrowing to bring the total to $6,000,000.
How much does Smith Stores capitalize interest on the new construction?
A. $240,000
B. $300,000
C. $320,000
D. $340,000
E. $360,000
44. Which of the following is not true regarding long-lived assets with a finite life?
A. The firm consumes the asset’s services over time in generating revenues,
B. The balance sheet carrying value decreases over time as the firm recognizes the cost of the asset as an expense.
C. A portion of the acquisition cost is recognized as an expense each period.
D. Management must estimate the asset’s finite life.
E. Remains on the balance sheet at net realizable value (unless an asset impairment occurs).
45. Which of the following is true regarding long-lived assets with a finite life?
A. The firm consumes the asset’s services over time in generating revenues,
B. The balance sheet carrying value decreases over time as the firm recognizes the cost of the asset as an expense.
C. A portion of the acquisition cost is recognized as an expense each period.
D. Management must estimate the asset’s finite life.
E. all of the above
46. The cost of long-lived assets with an indefinite life
A. is not recognized as an expense each period.
B. remains on the balance sheet at acquisition cost (unless an asset impairment occurs).
C. recognized as an expense each period.
D. balance sheet carrying value decreases over time as the firm recognizes the cost of the asset as an expense.
E. choices a and b
47. Long-lived assets with an indefinite life include
A. trade names
B. trademarks
C. certain renewable licenses
D. goodwill arising from a business combination
E. all of the above
48. Depreciation is the accounting term used to refer to
A. the periodic write-off of the acquisition cost of a tangible long-lived asset with a finite service life
B. the periodic write-off of the current fair market value of a tangible long-lived asset with a finite service life
C. the periodic write-off of the acquisition cost of an intangible long-lived asset with a finite service life
D. the periodic write-off of the current fair market value of a intangible long-lived asset with a finite service life
E. the periodic write-off of intangible assets.
49. Acme Drug Company purchases a patent from its creator. Which of the following is/are true?
A. A patent has a legal life of up to 40 years.
B. Management’s expectations of technological change may lead to a higher economic life than the legal life.
C. Acme should amortize the acquisition cost of the patent over its expected useful life, equal to the shorter of the economic life and the legal life.
D. Acme should amortize the acquisition cost of the patent over its legal life.
E. Acme should amortize the acquisition cost of the patent over its economic life.
50. Which of the following is/are true about goodwill?
A. Goodwill reflects the value of knowledgeable employees.
B. Goodwill reflects the value of a reputation for quality products.
C. Under both U.S. GAAP and IFRS, goodwill has an indefinite life, and firms do not amortize the amount recognized as goodwill.
D. Firms must test goodwill annually for a loss in value.
E. all of the above
