WGU D104 OA 1 LQT Intermediate Accounting II Practice Exam
100 Questions with Answers and Detailed Rationales
PPE Acquisition Improvements and Disposal
1. What costs are included in the initial cost of purchased equipment?
Answer The purchase price and qualifying costs necessary to bring the
equipment to its intended location and condition for use.
Rationale Examples include nonrefundable sales tax, freight, transit insurance,
and necessary installation. Ordinary operating expenses and abnormal waste or
damage are excluded. Capitalization concerns preparing the asset for use; it is not
a rule that every payment associated with the purchase becomes part of the asset.
2. Watauga buys equipment for $70,000 and pays sales tax $700, freight
$800, transit insurance $150, installation $1,050, and $1,300 to repair
abnormal installation damage. Compute equipment cost.
Answer $72,700.
Rationale Add qualifying acquisition and preparation amounts: $70,000 + $700
+ $800 + $150 + $1,050 = $72,700. Expense the $1,300 abnormal damage repair
separately. The exclusion follows the nature of abnormal costs; a possible
insurance recovery is a separate accounting issue rather than the reason all
damage repairs are automatically capitalized or excluded.
3. Record the acquisition and abnormal repair costs in Question 2,
assuming all amounts are paid in cash.
Answer Dr Equipment $72,700; Dr Repair expense $1,300; Cr Cash $74,000.
Rationale The debit to equipment includes only qualifying capitalized cost. The
abnormal repair is a current expense, while the credit records total cash paid.
Keeping the two debits separate prevents the repair from being depreciated over
future years and makes the initial asset balance agree with its proper cost basis.
D104 OA 1 LQT Practice Exam | 1
,4. Should ordinary costs that maintain an asset at its existing service level
be expensed or capitalized?
Answer Generally expensed when incurred, subject to appropriate production-
cost allocation.
Rationale Routine maintenance does not create the additional future benefits
associated with an improvement. Record the expense in the appropriate period
rather than increase the asset’s depreciable basis. Manufacturing maintenance
can be included in production overhead before reaching cost of goods sold; that
does not turn it into a PPE improvement.
5. Can an improvement be capitalized even if it does not extend the asset’s
useful life?
Answer Yes, if it creates qualifying additional benefits such as greater output,
better quality, or lower operating cost.
Rationale Longer life is one possible benefit, not the only one. Evaluate the
expenditure’s substance and materiality. Necessary costs of a qualifying
improvement are capitalized, but training, ordinary repairs, and other unrelated
expenses should not be added merely because they occur at the same time as the
improvement.
6. Jenks pays $55,000 for a press attachment, $5,000 to install it, $18,000
for productivity-enhancing renovation parts, and $7,000 for related labor
and overhead. Life is unchanged. How much is capitalized?
Answer $85,000.
Rationale The attachment and renovation increase productive benefits. Sum
$55,000 + $5,000 + $18,000 + $7,000 = $85,000. An unchanged useful life does
not require expensing a genuine improvement. The result assumes all listed
renovation labor and overhead are properly attributable and do not include
abnormal or unrelated spending.
D104 OA 1 LQT Practice Exam | 2
, 7. Jenks also pays $2,000 to train operators to use the new attachment.
How much of that training is added to PPE under the ordinary treatment
assumed here?
Answer None; expense $2,000.
Rationale Training develops employee capabilities rather than the machine’s
physical condition. It is normally expensed even though the attachment itself is
capitalized and the training may benefit future operations. The total
improvement remains $85,000, while the $2,000 training is recognized
separately, excluding any subsequent depreciation effects.
8. York purchases a replacement boiler for $150,000 and pays $20,000
installation. The old boiler is sold separately. What is the new boiler’s
capitalized cost?
Answer $170,000.
Rationale Add the new equipment’s price and necessary installation: $150,000 +
$20,000. The old boiler’s carrying amount and sale proceeds belong in a separate
disposal calculation. Netting the old sale proceeds against the new boiler would
obscure both the new asset’s cost and any disposal gain or loss.
9. York’s old boiler has a $10,000 carrying amount and is sold for $4,000.
What gain or loss is recognized?
Answer $6,000 loss.
Rationale Compare proceeds with the old asset’s carrying amount: $4,000 −
$10,000 = negative $6,000. Remove the old cost and accumulated depreciation
when recording the disposal. The loss does not increase the replacement boiler’s
cost; new-asset capitalization and old-asset derecognition are separate events.
10. How are fences, parking lots, and similar improvements with finite
useful lives usually classified?
Answer As land improvements, depreciated over their estimated useful lives.
Rationale These assets wear out or provide benefits for a limited period, unlike
land itself, which usually has an indefinite life. Separate classification prevents
nondepreciable land from absorbing costs that should be allocated to expense.
Permanent assessments with indefinite benefits may instead become part of land
cost, depending on the facts.
D104 OA 1 LQT Practice Exam | 3
100 Questions with Answers and Detailed Rationales
PPE Acquisition Improvements and Disposal
1. What costs are included in the initial cost of purchased equipment?
Answer The purchase price and qualifying costs necessary to bring the
equipment to its intended location and condition for use.
Rationale Examples include nonrefundable sales tax, freight, transit insurance,
and necessary installation. Ordinary operating expenses and abnormal waste or
damage are excluded. Capitalization concerns preparing the asset for use; it is not
a rule that every payment associated with the purchase becomes part of the asset.
2. Watauga buys equipment for $70,000 and pays sales tax $700, freight
$800, transit insurance $150, installation $1,050, and $1,300 to repair
abnormal installation damage. Compute equipment cost.
Answer $72,700.
Rationale Add qualifying acquisition and preparation amounts: $70,000 + $700
+ $800 + $150 + $1,050 = $72,700. Expense the $1,300 abnormal damage repair
separately. The exclusion follows the nature of abnormal costs; a possible
insurance recovery is a separate accounting issue rather than the reason all
damage repairs are automatically capitalized or excluded.
3. Record the acquisition and abnormal repair costs in Question 2,
assuming all amounts are paid in cash.
Answer Dr Equipment $72,700; Dr Repair expense $1,300; Cr Cash $74,000.
Rationale The debit to equipment includes only qualifying capitalized cost. The
abnormal repair is a current expense, while the credit records total cash paid.
Keeping the two debits separate prevents the repair from being depreciated over
future years and makes the initial asset balance agree with its proper cost basis.
D104 OA 1 LQT Practice Exam | 1
,4. Should ordinary costs that maintain an asset at its existing service level
be expensed or capitalized?
Answer Generally expensed when incurred, subject to appropriate production-
cost allocation.
Rationale Routine maintenance does not create the additional future benefits
associated with an improvement. Record the expense in the appropriate period
rather than increase the asset’s depreciable basis. Manufacturing maintenance
can be included in production overhead before reaching cost of goods sold; that
does not turn it into a PPE improvement.
5. Can an improvement be capitalized even if it does not extend the asset’s
useful life?
Answer Yes, if it creates qualifying additional benefits such as greater output,
better quality, or lower operating cost.
Rationale Longer life is one possible benefit, not the only one. Evaluate the
expenditure’s substance and materiality. Necessary costs of a qualifying
improvement are capitalized, but training, ordinary repairs, and other unrelated
expenses should not be added merely because they occur at the same time as the
improvement.
6. Jenks pays $55,000 for a press attachment, $5,000 to install it, $18,000
for productivity-enhancing renovation parts, and $7,000 for related labor
and overhead. Life is unchanged. How much is capitalized?
Answer $85,000.
Rationale The attachment and renovation increase productive benefits. Sum
$55,000 + $5,000 + $18,000 + $7,000 = $85,000. An unchanged useful life does
not require expensing a genuine improvement. The result assumes all listed
renovation labor and overhead are properly attributable and do not include
abnormal or unrelated spending.
D104 OA 1 LQT Practice Exam | 2
, 7. Jenks also pays $2,000 to train operators to use the new attachment.
How much of that training is added to PPE under the ordinary treatment
assumed here?
Answer None; expense $2,000.
Rationale Training develops employee capabilities rather than the machine’s
physical condition. It is normally expensed even though the attachment itself is
capitalized and the training may benefit future operations. The total
improvement remains $85,000, while the $2,000 training is recognized
separately, excluding any subsequent depreciation effects.
8. York purchases a replacement boiler for $150,000 and pays $20,000
installation. The old boiler is sold separately. What is the new boiler’s
capitalized cost?
Answer $170,000.
Rationale Add the new equipment’s price and necessary installation: $150,000 +
$20,000. The old boiler’s carrying amount and sale proceeds belong in a separate
disposal calculation. Netting the old sale proceeds against the new boiler would
obscure both the new asset’s cost and any disposal gain or loss.
9. York’s old boiler has a $10,000 carrying amount and is sold for $4,000.
What gain or loss is recognized?
Answer $6,000 loss.
Rationale Compare proceeds with the old asset’s carrying amount: $4,000 −
$10,000 = negative $6,000. Remove the old cost and accumulated depreciation
when recording the disposal. The loss does not increase the replacement boiler’s
cost; new-asset capitalization and old-asset derecognition are separate events.
10. How are fences, parking lots, and similar improvements with finite
useful lives usually classified?
Answer As land improvements, depreciated over their estimated useful lives.
Rationale These assets wear out or provide benefits for a limited period, unlike
land itself, which usually has an indefinite life. Separate classification prevents
nondepreciable land from absorbing costs that should be allocated to expense.
Permanent assessments with indefinite benefits may instead become part of land
cost, depending on the facts.
D104 OA 1 LQT Practice Exam | 3
