QUESTION 39-9 Multiple choice (AICPA Adapted)

1) The cost of land usually includes all, except

a. Commission related to acquisition
b. Property tax after date of acquisition
c. Property tax to date of acquisition
d. Cost of survey
Answer B
2) The cost of land typically includes all, except
a. Grading, filling, draining and cleaning cost
b. Special assessment for drainage system
c. Private driveway and parking lot
d. Assumption of any lien on the property
Answer C
3) Fence and parking lot are reported as
a. Building
b. Land improvement
c. Land
d. Expense
Answer B
4) Which should be capitalized as cost of land?
a. Filling in dirt to level the property prior to excavation
b. Excavation cost
c. Cost incurred to construct sidewalk and fence
d. All of these are capitalized as cost of land
Answer A
5) Which cost should be charged to land improvement?
a. Clearing of trees and grading
b. Architect fee
c. Installation of a septic system
d. Cost of demolishing an old building
Answer C
QUESTION 39-10 Multiple choices (PIC Interpretation)
1. The single cost of acquiring land and usable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount
Answer C
2. The single cost of acquiring land and an unusable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount
Answer A
3. The cost of demolishing an old building to make room for make room for construction
for a new building should be
a. Expensed immediately
b. Charged to the land
c. Charged to the new building
d. Allocated between land and building based on relative fair value
Answer C
4. When land and old building are acquired, the cost of immediately demolishing the old
building to prepare the land for the intended use as investment property should be
a. Expensed immediately
b. Charged to the land
c. Accounted for as deferred charge
d. Charged to retained earnings
Answer B
5. The carrying amount of an existing old building demolished to make room for the
construction of a new building should be
a. Accounted for as loss
b. Capitalized as cost of the new building
c. Charged to the land
d. Charged to the new building if accounted for as inventory
Answer A
QUESTION 39-11 Multiple choice (AICPA Adapted)
1. When an entity acquired land with an old building and immediately demolished the old
building so that the land can be used for the construction of a plant, the cost incurred to
demolish the old building should be
a. Expensed as incurred
b. Added to the cost of plant
c. Added to the cost of land
d. Amortized over the estimated time period between the demolition of the building
and the completion of the plant
Answer B
2. If an entity purchased a lot and an old building and demolished the old building to make
room for the construction of a new building, the proper accounting treatment of the
allocated carrying amount of the old building would depend on
a. The significance of the cost allocated to the building in relation to the combined
cost of the lot and building
b. The length of tine for which the building was held prior to demolition
c. The contemplated future use for the old building
d. The intention of the management for the property when the new building was
constructed
Answer D
3. An entity purchased land to be used as investment property. Timber was cut from the
site so development of the land could begin. The proceeds from the sale of the timber
should be
a. Classified ad other income
b. Credited to retained earnings
c. Deducted from the cost of land
d. Classified as deferred income and amortized over five years
Answer C
4. An entity purchased land and hotel with the plan to tear down the hotel and build a new
hotel. The allocated cost of the old hotel should be
a. Depreciated over the remaining life of the old hotel
b. Written off as loss in the year the hotel is torn downs
c. Capitalized as part of the cost of the land
d. Capitalized as parts of the cost of the new hotel
Answer B
 5. An entity’s forest land was condemned for use as a national park. Compensation for the
condemnation exceeded the forest land’s carrying amount. The entity purchased similar,
but larger, replacement forest land for an amount greater than condemnation award. As a
result of the condemnation and replacement, what us the net effect on the carrying
amount of forest land reported in the statement of financial position?
a. The amount is increased by the excess of the replacement forest land’s cost over
the condemned land’s carrying amount
b. The amount is increased by the excess of the replacement forest land’s cost over
the condemnation award
c. The amount is increased by the excess of the condemnation award over the
condemned forest land’s carrying amount
d. No effect, because the condemned forest land’s carrying amount is used as the
replacement forest land’s carrying amount
Answer A
QUESTION 39-12 Multiple choice (AICPA Adapted)
1. The term betterment refers to
a. An expenditure made for the new facilities which increase capacity.
b. An expenditure made to restore capacity after abandonment or retirement.
c. An expenditure made to improve existing facilities by increasing capacity.
d. An expenditure made to help insure continuity of service capacity.
Answer C
2. Which type of expenditure occurs when an entity installs a higher capacity boiler to heat
the plant?
a. Rearrangement
b. Ordinary repair and maintenance
c. Addition
d. Betterment
Answer D
3. An improvement made to a machine which increased the fair value and production
capacity without extending the useful life of the machine should be
a. Expensed immediately
b. Debited to accumulated depreciation
c. Capitalized in the machine account
d. Allocated between accumulated depreciation and the machine account
Answer C
4. Which of the following would ordinarily be treated as a revenue expenditure rather than a
capital expenditure?
a. Cost of servicing and overhaul to restore or maintain the originally assessed
standard of performance.
b. The replacement of a major component of building
c. An addition to an existing building
d. Cost of improvement that us expected to provide discernible future benefit
Answer A
5. A building suffered uninsured fire damages. The damaged portion of the building was
refurbished with higher quality materials. The cost and related accumulated depreciation
of the damaged portion are identifiable. What is the accounting for these events?
a. Capitalize the cost of republishing and record a lose in the current period equal to
the carrying amount of the damaged portion of the building
b. Capitalize the cost of refurbishing by adding the cost to the carrying amount of
the building
c. Record a loss in the current period equal to the cost of refurbishing and continue
to depreciate the original cost of the building
 d. Record a loss in the current period equal to the sum of the cost of refurbishing and
the carrying amount of the damaged portion of the building
Answer A
6. An entity incurred cost to modify a building and to rearrange a production line. As a
result, an overall reduction in production cost is expected. However, the modification did
not increase the fair value of the building and the rearrangement did not extend the life of
the production line. Should the building modification cost and the production line
rearrangement cost be capitalized?
a. Only the building modification cost should be capitalized.
b. Only the production line rearrangement cost should be capitalized.
c. Both the building modification cost and production line rearrangement cost
should be capitalized.
d. The building modification cost and production line rearrangement cost should be
expensed.
Answer C
7. Which of the following costs should not be capitalized?
a. Replacement of roof of building every 15 years
b. Cost of site preparation
c. Installation and assembly cost
d. Replacement of small spare parts annually
Answer D
8. Which of the following expenditure may properly be capitalized?
a. Expenditure for massive advertising campaign
b. Insurance on plant during construction
c. Research and development related to a long-term asset giving the entity a
competitive market advantage
d. Title search and other legal cost related t9 a piece of property which was not
acquired
Answer B
9. Which of the following subsequent expenditures should be expensed immediately?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset
c. Expenditure made to maintain an existing asset in operating condition
d. Expenditure made to add new asset
Answer C
10. An expenditure made in connection with a machine being used by an entity should be
a. Expensed if it merely extends the useful life but does not improve the quality.
b. Expensed if it merely improves the quality but does not extend the useful life.
 c. Capitalized if it maintains the machine in normal operating condition.
d. Capitalized if it is increases the quantity of units produces by a machine.
Answer D