Long Term Operating Assets

Hard Test

Hard Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Goodwill is

a. recorded by the company when profits are earned during this year
b. the difference in what was paid for the company and the fair market value of net assets purchased
c. the difference in what was paid for the company and the book value of net assets purchased
d. expensed annually as the company uses the benefits to produce revenues


B. The technical definition of goodwill is (b.). The reason the company is willing to pay more than the separate fair market value of each asset is they believe they are getting intangible assets, such as a good management team, name brand, good location, etc, which is the intangible asset goodwill. Goodwill has indefinite life and is not expensed annually (amortized).

2. Which of the following regarding long term asset impairment is true?

a. the impairment loss is always recorded in the period the asset is sold
b. impairment always increases the asset’s cost
c future cash flows are lower than historical cost when impairment occurs
d. future cash flows are lower than book value when impairment occurs


D. Impairment occurs when projected future cash flows are lower than book value. An asset can not be reported at higher than the expected future benefit. The loss is recorded at the time the impairment is determined (a.). Assets are never increased to the amount of future cash flows, only decreased.

3. The cost of developing computer software is most likely

a. expensed if it is not probable the software will be sold
b. capitalized if there is a market for the software and it works
c. always expensed
d. both a. and b.


D. Costs are capitalized (intangible asset) if there is probable future benefit and expensed if there is not. When there is a market for the product and it can be sold, there is probable future benefit. 

4. A productive asset that is typically consumed during operations is

a. an intangible asset
b. a natural resource
c. land
d. equipment


B. Natural resources are consumed when sold for revenue. Intangible assets have no physical substance and can not be consumed. Property, plant and equipment is not consumed, it is used and most often wears out.

5. The cost of using a long-term asset is always

a. expensed in the period incurred
b. a product cost
c. expensed in the period used or a cost of inventory depending on the type of asset
d. expensed for the amount computed for one year


C. Depreciation on assets used in support of selling or administrative are expensed in the period they are used. Depreciation on assets used to manufacture a product are capitalized as part of inventory and expensed when the inventory is sold.

6. The value of an asset acquired through a nonmonetary exchange is

a. the fair market value of the assets given up
b. the book value of the assets given up
c. the fair market value or book value, whichever is greater, of the assets given up
d. book value of the asset received


A. The cost recorded for the asset received is the fair market value of assets that were given to purchase the asset (unless FMV of what is received is clearly more readily determinable).

7. Interest expense is not included in the cost of the asset when the asset is

a. constructed in a separately distinguishable project
b. inventory produced in large quantities
c. constructed for sale or lease
d. both b. and c.


B. Interest cost incurred to finance inventory is not a capitalized cost, it is expensed in the period incurred. Construction on separately distinguishable assets under a long-term project may be capitalized whether it is held for use or to be sold later.

8. When one piece of equipment is exchanged for another piece of equipment and fair market value of the asset given up is not determinable, a gain is recorded when

a. cash is received
b. the fair market value of the equipment received is greater than the book value of the equipment that is given up
c. the fair market value of the equipment received is less than the book value of the equipment that is given up
d. both a. and b. occur together


B. The new equipment received is recorded at the fair market value of the equipment received because it is more readily determinable. A gain is recorded whenever more is received than the book value of what is given up. If the FMV for both assets can not be reliably determined than no gain or loss is recorded.

9. Research and development costs will be expensed when the cost is related to

a. an asset used in research that may also be used to produce revenues
b. research activity conducted on a long-term contract for another entity
c. legal costs for an outside law firm related to a trademark filing
d. depreciation on long term assets at the research facility


D. Depreciation expense must be recorded on any asset used long term. When used for research and development the cost is reported as research and development expense. All others describe costs that are capitalized.

10. Lump sum purchases must be recorded as separate assets because

a. assets have different fair market values
b. it is not reliable to assign the total value to one asset
c. both a. and b.
d. assets acquired have different useful lives


D. The expense of the assets acquired must be recorded over the time the assets are used. Assets acquired with different useful lives must be expensed over the time used to provide benefit. A cost must be estimated for each type of asset to properly estimate the cost of using each asset during each period.

11. A company is constructing a manufacturing facility. To finance the facility the company borrowed $800,000 from the bank at an annual interest rate of 9% on March 1st. Construction began on February 1st of the current year and ended on October 31st of the following year. Payments made to the contractor were as follows:

February 1st $   200,000
July 1st $   600,000
December 1st $   800,000
March 1st $   900,000
July 1st $   700,000
     Total Cost $3,200,000

The company has other long-term bank financing borrowed in prior years in the amount of $1,000,000 at an annual interest rate of 8% and $500,000 at an annual interest rate of 6%.

Make all the required entries related to the construction of the manufacturing facility for the year the construction of the facility was completed.


1st: Compute the average expenditures for the year the construction was completed:

February 1st $ 200,000    x 10/12   = 166,667
July 1st $ 600,000    x 10/12   = 500,000
December 1st $ 800,000    x 10/12  = 666,667
March 1st $ 900,000    x 8/12    = 600,000
July 1st $ 700,000    x 4/12    = 233,333
      Total Cost $3,200,000 2,166,667

2nd Compute the weighted average borrowing rate on nonspecific borrowings:

Borrowings Interest Expense
1,000,000 x 8% =   80,000
500,000 x 6% =   30,000
1,500,000 = 110,000
Interest Expense                 110,000         =      7.33%
Total Borrowings              1,500,000

3rd: Compute the interest expense related to weighted average expenditures:

Construction Loan $ 800,000      x     9% $ 72,000
Other borrowings $1,366,667    x    7.33% $100,177
Total expenditures $2,166,667 $172,177

Compare the computed amount to be capitalized to the actual interest expense.
Do not capitalize more than the actual interest expense.

Second Year – through 10/31 completion:

   800,000 x 9%     x     8/12      = 48,000
1,000,000 x 8%     x     9/12     = 60,000
   500,000 x 6%     x     9/12     = 22,500
     Total interest expense 130,500

4th: Record the payments to the contractor for each year and the interest expense:

2nd Year:

Manufacturing Plant                   1,600,000
             Cash                                              1,600,000

Manufacturing Plant                   130,500
              Interest Expense                        130,500

12. A company exchanged an old machine for a similar machine that was advertised at a price of $49,900. The company did not have the old machine appraised. The historical cost was $58,200 and accumulated depreciation at the time of the exchange was $8,600. The company received $7,000 as part of the exchange. The new machine is expected to be used for 8 years and have a residual value of $4,000.

Record the exchange of the machines.

Cash                                                        7,000
Machine (new)                                     42,900
Accumulated Depreciation                  8,600
             Machine (old)                                             58,200 
             Gain on Exchange                                           300

The new machine is recorded at the fair market value of the asset that has a more readily determinable fair market value.

Cash advertised price is readily determinable.
The amount is the fair market value less cash received.

13. A startup technology company is in business for the purpose of producing and selling hardware and software. During the current year, the company paid $56,000 related to coding software, $92,000 for planning and design of software, $45,000 for production of software master copies, $120,000 for materials related to discovery of new hardware, $200,000 for equipment to be used for research over a 5 year life, $20,000 for patent filing fees, $90,000 for testing software, $95,000 for salary to the patent attorney, $100,000 production costs related to software products, $25,000 to market the software, $250,000 for salaries working to develop the hardware, and $55,000 for research salaries working on a new improved version of a currently selling product.

Make the journal entry(ies) to record the above expenditures for the company.


1st Sort out the types of costs and apply the rules for those types of costs:


Before Technological Feasibility:

Coding                                                                      56,000
Planning & Design                                                  92,000
Testing                                                                      90,000
Expense before Technological Feasibility:        238,000

After Technological Feasibility:

Producing master copies (Asset)                        45,000

Production costs: (Inventory)                            100,000

Research & Development / Hardware:

Material used in R & D 120,000
R & D Salaries 250,000
Depreciation Expense on Equipment   40,000 (200,000 / 5 years)
       Total Research and Development Expense 410,000

Intangible Assets:

Patent Filing Fees –
Paid outside the company – capitalized                  20,000
R & D for product producing revenues –
“R & D Costs”                                                                55,000


Equipment – capitalized 200,000
Marketing Expense   25,000
Salary Expense   95,000

Record the Journal Entry:

Software Expense 238,000
Software Costs 45,000
R & D Expense 410,000
R & D Costs 55,000
Patent 20,000
Inventory 100,000
Equipment 200,000
Marketing Expense 25,000
Salary Expense 95,000
                            Cash 1,188,000