Question

Chapter 9 1) Which of the following is NOT a characteristic of a plant asset? A) The asset is used in the production of income for the business By The asset is available for sale to customers in the ordinary course of business. The asset has physical for Dj The asset has future usefulness and value. 2) Which of the following would be experised, rather than capitalized? Oil change and lubrication 3) Major engine overhaul Modification for new use ) Addition to storage capacity A company's accountant capitalizes a payment that should be recorded as an expense. Which of the ollowing is TRUE?" :) Net income is overstated 5) Revenues are understated Assets are understated -> Liabilities are overstated. Acme Investment plans to develop a shopping center. In the first quarter, they spent the following amount $100,000 1.200 urchase Land neys and legal foss ind Clearing wall fences around the property stall lighting & signage . DU 2.600 at amount should be recorded as the land cost? $7.200 3101 200 546,200 $106,200

Answer 1

1. Option (B) is the answer.

Plant assets are not available for sale to customers in the ordinary course of business. Rather they are held for use the business.

Options A,C and D are characteristics of plant assets.

2. Option (A) is the answer.

Oil change and lubrication is a normal expense / repair expense, so it is expensed.

Options B is incorrect as major engine overhaul increases the life or earnings capacity of the machine, so it is capitalised.

Options C is incorrect as modification for new use is a capital expenditure that will benefit for more than one accounting year, so it is capitalised.

Option (D) is incorrect as addition to storage capacity is a capital expenditure that will benefit for more than one accounting year, so it is capitalised.

3. Option (A) is correct

If a payment is capitalized that should be recorded as an expense, then expenses are understated resulting in the overstatement of net income.

4. Option (D) is correct

Land cost = Purchase price + Conveyance & legal fees + Clearing

Land cost = $100000 + $1200 + $5000

Land cost = $106200

(Fences and lighting are not land costs rather they are land improvements.)