Audit Program for Fixed Assets UPDATED
ACTUAL Questions and CORRECT
Answers
1. Merry Co. purchased a machine costing $125,000 for its manufacturing operations and
paid shipping costs of $20,000. Merry spent an additional $10,000 testing and preparing the
machine for use. What amount should Merry record as the cost of the machine?
a. $155,000
b. $145,000
c. $135,000
d. $125,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $155,000
Notes
(a) The cost of machinery includes all expenditures incurred in acquiring the asset and
preparing it for use. Cost includes the purchase price, freight and handling charges, insurance
on the machine while in transit, cost of special foundations, and costs of assembling,
installation, and testing. All of the costs given in this problem are properly recorded as the
cost of the machine. Therefore the cost to be recorded is $155,000 ($125,000 + $20,000 +
$10,000).
2. On December 1, year 4, Boyd Co. purchased a $400,000 tract of land for a factory site.
Boyd razed an old building on the property and sold the materials it salvaged from the
demolition. Boyd incurred additional costs and realized salvage proceeds during December
year 4 as follows:
Demolition of old building: $50,000
Legal fees for purchase contract & recording ownership: $10,000
Title guarantee insurance: $12,000
Proceeds from sale of salvaged materials: $8,000
In its December 31, year 4 balance sheet, Boyd should report a balance in the land account of
,a. $464,000
b. $460,000
c. $442,000
d. $422,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $464,000
3. Cole Co. began constructing a building for its own use in January year 4. During year 4,
Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other
borrowings. Interest computed on the weighted-average amount of accumulated expenditures
for the building during year 4 was $40,000. What amount of interest cost should Cole
capitalize?
a. $20,000
b. $40,000
c. $50,000
d. $70,000 - CORRECT ANSWER- ✔✔Correct Answer: B) $40,000
Notes
(b) The amount of interest cost which should be capitalized during building construction is
the lower of avoidable interest or actual interest. Avoidable interest equals the interest
computed on the weighted-average amount of accumulated expenditures on the building
($40,000). Since actual interest is $70,000 ($50,000 + $20,000), the amount capitalized
should be $40,000.
4. Clay Company started construction of a new office building on January 1, year 4, and
moved into the finished building on July 1, year 5. Of the building's $2,500,000 total cost,
$2,000,000 was incurred in year 4 evenly throughout the year. Clay's incremental borrowing
rate was 12% throughout year 4, and the total amount of interest incurred by Clay during year
4 was $102,000. What amount should Clay report as capitalized interest at December 31, year
4?
a. $102,000
b. $120,000
c. $150,000
d. $240,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $102,000
,Notes
(a) The requirement is to calculate the amount of capitalized interest at 12/31/Y4. The
requirements for capitalization of interest are met if: (1) expenditures for the asset have been
made, (2) activities that are necessary to get the asset ready for its intended use are in
progress, and (3) interest cost is being incurred. The amount to be capitalized is the lower of
avoidable interest or actual interest. Avoidable interest is the average accumulated
expenditures multiplied by the appropriate interest rate or rates. Since $2,000,000 was spent
on the building evenly throughout the year, the average accumulated expenditures were
$1,000,000 ($2,000,000 ÷ 2) and the avoidable interest was $120,000 ($1,000,000 × 12%).
Since actual interest ($102,000) is less than avoidable interest, the actual interest cost is
capitalized.
5. During year 4, Bay Co. constructed machinery for its own use and for sale to customers.
Bank loans financed these assets both during construction and after construction was
complete. How much of the interest incurred should be reported as interest expense in the
year 4 income statement?
I. Interest incurred for machinery for own use
II. Interest incurred for machinery held for sale
a. I. All interest incurred ; II. All interest incurred
b. I. All interest incurred ; II. Interest incurred after completion
c. I. Interest incurred after completion ; II. Interest incurred after completion
d. I. Interest incurred after completion ; II. All interest incurred - CORRECT ANSWER-
✔✔Correct Answer: D) I. Interest incurred after completion ; II. All interest incurred
Notes
(d) Certain assets for which interest costs incurred in their production should be capitalized
rather than expensed. Assets which "qualify" for interest capitalization are those constructed
or otherwise produced for an enterprise's own use and those intended for sale or lease that are
constructed or otherwise produced as discrete projects. The capitalization period shall end
when the asset is substantially complete and ready for its intended use. Based upon these
criteria, the interest costs associated with the machinery for Bay's own use should be
capitalized during the construction period and expensed after completion. Additionally, all
, costs associated with the machinery held for sale should be expensed because the machinery
does not meet the "discrete project" criterion.
7. A nonmonetary exchange is recognized at fair value of the assets exchanged unless
a. Exchange has commercial substance.
b. Fair value is not determinable.
c. The assets are similar in nature.
d. The assets are dissimilar. - CORRECT ANSWER- ✔✔Correct Answer: B) Fair value is not
determinable.
Notes
(b) A nonmonetary exchange is recognized at fair value unless the fair value is not
determinable, the exchange transaction is to facilitate sales to customers, or the exchange
transactions lacks commercial substance. Answer (a) is incorrect, because the exchange must
lack commercial substance. Answers (c) and (d) are incorrect because there is no longer the
distinction of similar or dissimilar assets in nonmonetary exchanges.
9. For purposes of nonmonetary exchanges, the configuration of cash flows includes which of
the following?
a. The implicit rate, maturity date of loan, and amount of loan.
b. The risk, timing, and amount of cash flows of the assets.
c. The entity-specific value of the asset which is equal to the fair value of the asset
exchanged.
d. The estimated present value of the assets exchanged. - CORRECT ANSWER- ✔✔Correct
Answer: B) The risk, timing, and amount of cash flows of the assets.
Notes
(b) An entity's cash flows are expected to change significantly if the configuration of the cash
flows of the asset received differs significantly from the configuration of the cash flows of
ACTUAL Questions and CORRECT
Answers
1. Merry Co. purchased a machine costing $125,000 for its manufacturing operations and
paid shipping costs of $20,000. Merry spent an additional $10,000 testing and preparing the
machine for use. What amount should Merry record as the cost of the machine?
a. $155,000
b. $145,000
c. $135,000
d. $125,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $155,000
Notes
(a) The cost of machinery includes all expenditures incurred in acquiring the asset and
preparing it for use. Cost includes the purchase price, freight and handling charges, insurance
on the machine while in transit, cost of special foundations, and costs of assembling,
installation, and testing. All of the costs given in this problem are properly recorded as the
cost of the machine. Therefore the cost to be recorded is $155,000 ($125,000 + $20,000 +
$10,000).
2. On December 1, year 4, Boyd Co. purchased a $400,000 tract of land for a factory site.
Boyd razed an old building on the property and sold the materials it salvaged from the
demolition. Boyd incurred additional costs and realized salvage proceeds during December
year 4 as follows:
Demolition of old building: $50,000
Legal fees for purchase contract & recording ownership: $10,000
Title guarantee insurance: $12,000
Proceeds from sale of salvaged materials: $8,000
In its December 31, year 4 balance sheet, Boyd should report a balance in the land account of
,a. $464,000
b. $460,000
c. $442,000
d. $422,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $464,000
3. Cole Co. began constructing a building for its own use in January year 4. During year 4,
Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other
borrowings. Interest computed on the weighted-average amount of accumulated expenditures
for the building during year 4 was $40,000. What amount of interest cost should Cole
capitalize?
a. $20,000
b. $40,000
c. $50,000
d. $70,000 - CORRECT ANSWER- ✔✔Correct Answer: B) $40,000
Notes
(b) The amount of interest cost which should be capitalized during building construction is
the lower of avoidable interest or actual interest. Avoidable interest equals the interest
computed on the weighted-average amount of accumulated expenditures on the building
($40,000). Since actual interest is $70,000 ($50,000 + $20,000), the amount capitalized
should be $40,000.
4. Clay Company started construction of a new office building on January 1, year 4, and
moved into the finished building on July 1, year 5. Of the building's $2,500,000 total cost,
$2,000,000 was incurred in year 4 evenly throughout the year. Clay's incremental borrowing
rate was 12% throughout year 4, and the total amount of interest incurred by Clay during year
4 was $102,000. What amount should Clay report as capitalized interest at December 31, year
4?
a. $102,000
b. $120,000
c. $150,000
d. $240,000 - CORRECT ANSWER- ✔✔Correct Answer: A) $102,000
,Notes
(a) The requirement is to calculate the amount of capitalized interest at 12/31/Y4. The
requirements for capitalization of interest are met if: (1) expenditures for the asset have been
made, (2) activities that are necessary to get the asset ready for its intended use are in
progress, and (3) interest cost is being incurred. The amount to be capitalized is the lower of
avoidable interest or actual interest. Avoidable interest is the average accumulated
expenditures multiplied by the appropriate interest rate or rates. Since $2,000,000 was spent
on the building evenly throughout the year, the average accumulated expenditures were
$1,000,000 ($2,000,000 ÷ 2) and the avoidable interest was $120,000 ($1,000,000 × 12%).
Since actual interest ($102,000) is less than avoidable interest, the actual interest cost is
capitalized.
5. During year 4, Bay Co. constructed machinery for its own use and for sale to customers.
Bank loans financed these assets both during construction and after construction was
complete. How much of the interest incurred should be reported as interest expense in the
year 4 income statement?
I. Interest incurred for machinery for own use
II. Interest incurred for machinery held for sale
a. I. All interest incurred ; II. All interest incurred
b. I. All interest incurred ; II. Interest incurred after completion
c. I. Interest incurred after completion ; II. Interest incurred after completion
d. I. Interest incurred after completion ; II. All interest incurred - CORRECT ANSWER-
✔✔Correct Answer: D) I. Interest incurred after completion ; II. All interest incurred
Notes
(d) Certain assets for which interest costs incurred in their production should be capitalized
rather than expensed. Assets which "qualify" for interest capitalization are those constructed
or otherwise produced for an enterprise's own use and those intended for sale or lease that are
constructed or otherwise produced as discrete projects. The capitalization period shall end
when the asset is substantially complete and ready for its intended use. Based upon these
criteria, the interest costs associated with the machinery for Bay's own use should be
capitalized during the construction period and expensed after completion. Additionally, all
, costs associated with the machinery held for sale should be expensed because the machinery
does not meet the "discrete project" criterion.
7. A nonmonetary exchange is recognized at fair value of the assets exchanged unless
a. Exchange has commercial substance.
b. Fair value is not determinable.
c. The assets are similar in nature.
d. The assets are dissimilar. - CORRECT ANSWER- ✔✔Correct Answer: B) Fair value is not
determinable.
Notes
(b) A nonmonetary exchange is recognized at fair value unless the fair value is not
determinable, the exchange transaction is to facilitate sales to customers, or the exchange
transactions lacks commercial substance. Answer (a) is incorrect, because the exchange must
lack commercial substance. Answers (c) and (d) are incorrect because there is no longer the
distinction of similar or dissimilar assets in nonmonetary exchanges.
9. For purposes of nonmonetary exchanges, the configuration of cash flows includes which of
the following?
a. The implicit rate, maturity date of loan, and amount of loan.
b. The risk, timing, and amount of cash flows of the assets.
c. The entity-specific value of the asset which is equal to the fair value of the asset
exchanged.
d. The estimated present value of the assets exchanged. - CORRECT ANSWER- ✔✔Correct
Answer: B) The risk, timing, and amount of cash flows of the assets.
Notes
(b) An entity's cash flows are expected to change significantly if the configuration of the cash
flows of the asset received differs significantly from the configuration of the cash flows of
