Capitalize And Depreciate Fixed Assets
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CPA Financial Accounting and Reporting (FAR) › Capitalize And Depreciate Fixed Assets
A company purchases equipment for $80,000, pays $3,000 in freight, $5,000 for installation, and $1,500 for a one-year insurance policy on the equipment. What is the capitalized cost of the equipment?
$83,000
$89,500
$85,000
$88,000
Explanation
Capitalized cost includes all costs necessary to bring the asset to its intended location and condition for use: purchase price $80,000 + freight $3,000 + installation $5,000 = $88,000. The one-year insurance policy is a period cost (prepaid expense), not a capitalizable cost. Answer C is correct. Answer A includes insurance. Answer B omits installation. Answer D omits freight.
A machine costs $120,000, has a salvage value of $10,000, and a useful life of 5 years. Using the straight-line method, what is annual depreciation expense?
$11,000
$22,000
$20,000
$24,000
Explanation
Straight-line depreciation = (Cost - Salvage value) / Useful life = ($120,000 - $10,000) / 5 = $22,000. Answer C is correct. Answer A uses an incorrect salvage value of $20,000 in the calculation (($120,000 - $20,000) / 5 = $20,000). Answer B ignores salvage value entirely, dividing cost by useful life ($120,000 / 5 = $24,000). Answer D divides by 10 rather than the 5-year useful life.
A company uses the double-declining balance method. An asset costs $50,000, has a 5-year life, and no salvage value. What is depreciation expense in Year 2?
$10,000
$20,000
$8,000
$12,000
Explanation
DDB rate = 2/5 = 40%. Year 1 depreciation = $50,000 x 40% = $20,000; book value at start of Year 2 = $30,000. Year 2 depreciation = $30,000 x 40% = $12,000. Answer B is correct. Answer A repeats the Year 1 depreciation amount, ignoring that DDB is applied to the declining book value each period. Answer C results from applying the DDB rate to an incorrect intermediate book value. Answer D is the straight-line annual amount ($50,000 / 5 = $10,000), not DDB.
Which of the following expenditures should be capitalized rather than expensed?
An engine overhaul that extends the useful life of a truck by 3 years.
Repainting the exterior of a building at the same color.
Replacement of a furnace filter during scheduled preventive maintenance.
Routine maintenance on manufacturing equipment costing $800.
Explanation
Expenditures are capitalized when they extend useful life, increase capacity, or improve quality beyond the original specifications. An engine overhaul extending useful life by 3 years meets this threshold. Answer C is correct. Routine maintenance (A), filter replacement (B), and repainting (D) merely maintain the existing condition and are expensed as period costs.
A company constructs its own building. Costs incurred include: direct materials $600,000, direct labor $250,000, overhead allocated $120,000, and interest on construction loan $45,000. What is the total capitalized cost of the building?
$850,000
$895,000
$970,000
$1,015,000
Explanation
Self-constructed assets capitalize all direct costs plus overhead and qualifying interest (ASC 835-20). Total = $600,000 + $250,000 + $120,000 + $45,000 = $1,015,000. Answer B is correct. Answer A omits capitalized interest ($970,000 = direct costs + overhead only). Answer C omits both overhead and interest ($850,000 = materials + labor only). Answer D ($895,000) capitalizes direct costs and interest but excludes allocated overhead, which is also a capitalizable cost of self-constructed assets.
A company uses double-declining balance and switches to straight-line when SL yields a higher charge. An asset costs $100,000, has a 5-year life, and no salvage value. What is depreciation in Year 4?
$8,640
$14,400
$10,800
$20,000
Explanation
DDB rate = 40%. Y1: $40,000; BV = $60,000. Y2: $24,000; BV = $36,000. Y3: $14,400; BV = $21,600. Y4 DDB = $21,600 x 40% = $8,640. SL remaining = $21,600 / 2 = $10,800. Since SL ($10,800) exceeds DDB ($8,640), the switch to straight-line occurs and Year 4 depreciation = $10,800. Answer D is correct. Answer A uses the original straight-line amount ($100,000 / 5 = $20,000). Answer B is the Year 3 DDB amount. Answer C is the Year 4 DDB amount ($8,640) before the switch to straight-line.
A company acquires equipment with a fair value of $80,000 by trading in old equipment (book value $15,000, fair value $20,000) and paying $60,000 cash. The exchange has commercial substance. What gain or loss is recognized on the exchange?
$65,000 gain.
$0; no gain recognized on exchanges.
$5,000 gain.
$5,000 loss.
Explanation
With commercial substance, the old equipment is derecognized at its fair value. Gain = FV of old equipment - book value = $20,000 - $15,000 = $5,000. Answer B is correct. Answer A applies the no-commercial-substance rule. Answer C uses proceeds minus original cost. Answer D reverses the sign.
A company uses double-declining balance and switches to straight-line when straight-line produces a higher charge. An asset costs $100,000, has a 5-year life, and no salvage value. In which year does the switch to straight-line first occur?
Year 2
Year 3
Year 4
Year 5
Explanation
DDB rate = 40%. Y1 BV=$60,000; Y2 BV=$36,000; Y3 BV=$21,600. Y4 DDB=$8,640 vs SL remaining=$21,600/2=$10,800. Since SL ($10,800) > DDB ($8,640), the switch first occurs in Year 4. Answer C is correct. In Years 1-3, DDB always exceeds SL on the remaining balance.
A machine with a cost of $150,000, accumulated depreciation of $90,000, and a remaining life of 3 years is revised to have only 2 remaining years and a new salvage value of $5,000. The company uses straight-line depreciation. What is the revised annual depreciation?
$27,500
$30,000
$25,000
$20,000
Explanation
A change in estimated useful life is a change in accounting estimate applied prospectively. Book value at revision = $150,000 - $90,000 = $60,000. Revised annual depreciation = ($60,000 - $5,000) / 2 = $55,000 / 2 = $27,500. Answer B is correct. Answer A uses the original cost divided by the remaining life. Answer C ignores the revised salvage value. Answer D divides remaining book value by 3 years instead of 2.
An asset costs $200,000 with no salvage value, depreciated using double-declining balance over 4 years. What is book value at the end of Year 3?
$25,000
$50,000
$100,000
$12,500
Explanation
DDB rate = 50%. Year 1: $200,000 x 50% = $100,000; BV = $100,000. Year 2: $100,000 x 50% = $50,000; BV = $50,000. Year 3: $50,000 x 50% = $25,000; BV = $25,000. Answer D is correct. Answer A is BV after Year 1. Answer B is BV after Year 2. Answer C would result from a fifth year of DDB.