Question

1. On October 1, 20X1, a company purchased a piece of land by agreeing to pay the seller $450,000 in two years. If the company had borrowed the money from a bank to pay the seller immediately, management estimates the bank would have required interest of 9%. For what amount should the company record the land on the date of purchase (rounded to the nearest dollar)?

Multiple Choice

• $450,000.

• $412,844.

• $378,756.

• $369,000.

2. Wolf Computer exchanged a machine with a book value of $40,000 and a fair value of $45,000 for a patent. In addition, Wolf paid $6,000 as part of the exchange. Wolf should recognize:

Multiple Choice

• A gain of $11,000.

• A loss of $1,000.

• A gain of $5,000.

• No gain or loss.

3. Which of the following situations would disqualify interest from being capitalized as part of an asset's cost?

Multiple Choice

• The asset is being constructed for the company’s own use.

• The asset is being constructed as a discrete project with the intent to be sold.

• The asset includes inventory that is routinely manufactured by the company.

• The interest is incurred during the construction period of the asset.

4. Wolf Computer exchanged a machine with a book value of $40,000 and a fair value of $45,000 for a very similar machine. In addition, Wolf paid $6,000 as part of the exchange. Wolf should recognize:

Multiple Choice

• A gain of $11,000.

• A loss of $1,000.

• A gain of $5,000.

• No gain or loss.

Answer 1

	1)	The company should record land at present value of future cash payment
		because $450000 contains some part of interest cost which should be recognised separately.
		=$450000/(1.09)^2
		=$378756
		Therefore third option is correct.
	2)	For machine the company exhange machine
		that means company has paid $45000 through machine
		which has book value $40000
		therefore company should record gain
		=$45000 -$40000	(Gain)
		=$5000
	3)	Correct Option
		The asset includes inventory that is routinely manufactured by the company.
	4)	2)	For machine the company exhange machine
			that means company has paid $45000 through machine
			which has book value $40000
			therefore company should record gain
			=$45000 -$40000	(Gain)
			=$5000