MUHASEBE II - Deneme Sınavı - 12

It was recorded as a period expense. The correct answer is A.

It is recorded as the renovation expense of minivan. The correct answer is B.

Depreciation is the allocation of long-term asset’s cost to expense over its useful life. The correct answer is C.

Purchase Price 200,000 TL
(+) Additional Costs 25,000 TL
Transportation & Ins. 20,000 TL
Assembly & Testing 5,000 TL
Cost of the machine 225,000 TL
(-) Residual Value (25,000) TL
Depreciable Cost 200,000 TL
Straight − linedepreciation = 200,000 x 1/5 years = 40,000 TL

The correct answer is C.

Purchase Price 200,000 TL
(+) Additional Costs 25,000 TL
Transportation & Ins. 20,000 TL
Assembly & Testing 5,000 TL
Cost of the machine 225,000 TL
Residual Value 45,000 TL

Double - Declining Balance Depreciation 1st Year=
(225,000−0)x2/5=90,000 TL

Double - Declining Balance Depreciation 2nd Year=
(225,000−90,000)x 2/5=54,000 TL

Double - Declining Balance Depreciation 3rd Year=
(225,000−144,000)x 2/5=32,400 TL

The correct answer is D.

Purchase Price: 10,000,000 TL

Double - Declining Balance Depreciation 1st Year=
(10,000,000 − 0)x 2/10=2,000,000 TL
Double - Declining Balance Depreciation 2nd Year=
(10,000,000 − 2,000,000)x 2/10=1,600,000 TL

The correct answer is B.

Anadolu Co. sells its machine for 150,000 TL. AnadoluCo. receives 150,000 TL cash and it exceeds the book value of 140,000 TL. Thus, a gain of 10,000 TL is recorded.

The ordinary repairs are called revenue expenditures (income statement expenditures). Revenue expenditures do not increase the capacity or efficiency of an asset or extend its useful life and are reported on the income statement as an expense in the period incurred. The correct answer is C.

Cost is the cash or cash equivalent price of obtaining the asset plus all necessary taxes,
purchase commissions and all other amounts paid to ready the asset for its intended use. The correct answer is E.

Depreciable Cost = Cost of the asset – Residual value

Capitalized cost minus estimated residual value is called depreciable cost. The correct answer is B.

Assets are defined as the economic resources acquired by the business in order to benefit from them in the future. In fact, there is an expectation for the businesses to use the assets in their operations. Some of these assets can be converted into cash, sold, collected and consumed within one year or operation cycle which is shorter but some of the assets will be used in operations for more than a year. The first group of assets are called current assets whereas the latter is called non-current assets (long-term assets). Non-current assets are the assets that are acquired to use in the operations of the business for several years. Besides these assets, receivables that have due dates of more than one year will also be reported under non-current assets. Property, Plant and Equipment generally hold the largest portion in noncurrent assets. As can also be understood from the information given, “The assets that will be used in operations for more than a year.” and  “Receivables that have due dates of more than one year” can be recognized as non-current assets, so the correct answer is C.

“The assets that can be converted into cash, sold, collected and consumed within one year or operation cycle which is shorter” are called currents assets. “A factory building rented to use in the operations.” can not be reported under assets. When the business rents a building to use in the operations, it cannot be recognized as an asset because the business doesn’t have full control on building. For example, the business cannot sell the building to anyone.. But there is one exception at this point. Leasing transactions provides companies use the property, plant and equipment assets within a rental agreement. At the end of the agreement the user company called as “lessee” takes over the property of the asset from the owner (lessor) company. During the rental period, lessee makes the rental payments. Though a leasing transaction seems as if it is a rental transaction, because the ownership of the asset is handed over to the user company, according to the substance over legal form concept of accounting. The legal form of this transaction is a rental transaction but as the asset is going to be taken over from the owner at the end of the rental agreement, economic substance of the transaction steps forward and the economic resource acquired by a leasing transaction recognized as an asset.

Property, plant and equipment assets are economic resources that have physical substance (tangible), are used in the operations of a business, and are not intended for sale to customers.

Property, plant and equipment assets have the following major characteristics:

As can also be understood from the information given, “They are acquired for use in operations and not for resale.”, “They possess physical substance.”,  “They are not intended for sale to customers.” and “They are economic resources that have physical substance (tangible)” are correct statements, so the correct answer is D.

The statement “They are in short-term in nature and usually depreciated.” is not correct. They are in long-term in nature and usually depreciated.

The decision to acquire a long-term asset is a complex process. The historical cost principle requires that companies record property, plant and equipment assets at their actual cost. So, what is cost? Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.4 According to the historical cost principle, cost is the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use5. So, pay attention to the expression “bringing it to the location and condition necessary for its intended use”. This means that the cost of the property, plant, and equipment assets does not only consist of the purchase price of the asset. Added to the purchase price cash or cash equivalent prices for transferring, installment, assembling, insurance during transfer, permits, etc. must be included. As can also be understood from the information given, the correct answer is D. The statements “Cost is the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.”, “The cost of the property, plant, and equipment assets does not only consist of the purchase price of the asset.” and  “Added to the purchase price cash or cash equivalent prices for transferring, installment, assembling, insurance during transfer, permits, etc. must be included.” are correct. The statement “Cost consists of some expenditures necessary to acquire the asset and make it ready for its intended use.” is not correct because cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

All expenditures made to acquire land and ready it for intended use are considered as the part of the land cost. The cost of the land includes the following items:

As can also understood from the list given, the correct answer is E. The cost of the land includes all the items in the options.

For example, Bar Co. purchases a land for constructing a warehouse. On the land, there is a ruined old mansion. In order to use the land for its intended use, the ruined old mansion must be removed and the land must be cleared for construction. The cost of removing and clearing operations must also be added to the cost of land. After the removal, the debris were sold. The receipt will be a reduction in the cost of the land. Bar Co. installs paving from and to the warehouse. Also, installs signs and street lights. These installments are not included in the cost of the land. These type of separate long-lived assets are called land improvements.

Land improvements are structural additions made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers.

As can also be understood from the information given, “The cost of clearing the land and removing unwanted buildings” must be added to the cost of land. The installments such as such as driveways, parking lots, fences, landscaping, and underground sprinklers.are not included in the cost of the land, so the correct answer is E.

The ordinary repairs are called revenue expenditures (income statement expenditures). Revenue expenditures do not increase the capacity or efficiency of an asset or extend its useful life and are reported on the income statement as an expense in the period incurred.

A capital expenditure (balance sheet expenditure) is debited to an asset account because it increases the asset’s capacity or efficiency or extends the asset’s useful life. A capital expenditure is reported on the balance sheet as an asset.

As can also be understood from the information given the statements “The ordinary repairs are called revenue expenditures (income statement expenditures).” and “A capital expenditure is reported on the balance sheet as an asset.” are correct, so the correct answer is B. The statement  “Revenue expenditures are debited to an asset account because they increase the asset’s capacity or efficiency or extend the asset’s useful life.” is not correct, because “Revenue expenditures do not increase the capacity or efficiency of an asset or extend its useful life and are reported on the income statement as an expense in the period incurred.”. The statement  “A capital expenditure (balance sheet expenditure) does not increase the capacity or efficiency of an asset or extend its useful life and is reported on the income statement as an expense in the period incurred.” is not correct, either. “A capital expenditure (balance sheet expenditure) is debited to an asset account because it increases the asset’s capacity or efficiency or extends the asset’s useful life.”

Company A makes some expenditures for the machine. Purchase price is included in the cost of machinery. Company B makes an expenditure for 25,000 TL for the machine in order to increase the production capacity of the machine. As you remember, if the expenditure increases the capacity or productivity of the asset and/or extends the useful life then this expenditure will be added to the cost of the asset. Therefore, Machinery and Equipment account is debited in this transaction. Company C pays 5,000 TL for the annual maintenance of the machine. In this transaction, the expenditure does neither extend the useful life of the machine nor increases the capacity or productivity. So, these kinds of expenditures will not be added to the cost of the machine. They will be recorded as period expense. To shorten the distance between suppliers, Company D decides to move the factory to Organized Industrial Zone and pays 150,000 TL for disassembling and reassembling of the machines and 100.000 TL. for the transportation. Even though the expenditures are made for the assets to bring them to their intended uses, they will be recorded as period expenses; because this criterion is applied just for the initial recognition of the assets. When the assets are ready to use, only the expenditure that will affect their useful lives and capacity will be added to the cost. Otherwise they will be recorded as a period expense.

As can also be understood from the information given the correct answer is B. Company A and Company B can include the expenditures mentioned in the cost of machinery and equipment, but Company C and Company D can record their expenditures as a period expense.

The cost of the vehicles include the purchase price and other necessary expenditures made to bring them to their intended uses. If the expenditure made for vehicles extends the useful life of the vehicle and/ or increases the capacity, like modification or engine renewal, then these expenditures will be capitalized. But the regular maintenance expenditures such as oil change or minor engine repairs will be recorded as period expenses. As can also be understood from the information given, the correct answer is C. Expenditures made for oil change and minor engine repairs will be recorded as period expenses. Expenditures made for modification and engine renewal extend the useful life of the vehicle and/ or increase the capacity, then these expenditures will be capitalized.

Straight-line depreciation method allocates the depreciable cost of the asset equally to its useful life.

Double-declining balance depreciation method produces a decreasing annual depreciation expense over the asset’s useful life. The statements in the options I and II are not correct. “Cost of the asset – Accumulated Depreciation” is called the “Book Value” of the asset. Units-of-production depreciation method depreciates by units rather than by years. As can also be understood from the information given, the correct answer is C.

Property, Plant and Equipment assets remain on the business’s accounting books until they are disposed of. Companies dispose of property, plant and equipment assets which are no longer useful for the company. Eventually, a long-lived asset wears out or becomes obsolete. When plant assets are no longer useful because they have physically deteriorated or become obsolete, a company can dispose them by discarding, selling them for cash, or exchanging them for a new long-lived asset. The disposal of property, plant and equipment assets can take one of three forms:

Discarding (retiring) of property, plant and equipment assets involve disposing of the asset for no cash. If an asset is disposed of when it is fully depreciated and has no residual value, then the original cost and accumulated depreciation of the long-lived asset are simply written off the accounting books. There is no need to bring the depreciation up to date because the asset is already fully depreciated. In addition, no gain or loss is recognized because no cash was received or paid. A loss is recognized if a company retires a long-lived asset before it is fully depreciated and no cash is received for residual or salvage value. If a long-lived asset is still being used, its cost and accumulated depreciation should remain in the ledger even if the asset is fully depreciated until the company discard the asset. The company may continue to report it on balance sheet even though no additional depreciation expense is recorded.

Accounting for the sale of a long-lived asset is essentially the same as accounting for its discarding except that cash is received in the exchange. In a disposal by sale for cash, the company compares the book value of the asset with the cash received from the sale. If the cash received from the sale exceed the book value of the long-lived asset, a gain on disposal occurs. If the cash received from the sale is less than the book value of the long-lived asset sold, a loss on disposal occurs.

If exchanges have commercial substance (which is when there is a change in cash flow resulting from the transaction), the parties should recognize a gain or loss on the exchange. The old asset will be removed from the accounting books, and the new asset will be recorded at its market value. Most of the exchanges have commercial substance (even when similar assets are exchanged).

As can also be understood from the information given, all the options are the forms of the disposal of property, plant and equipment assets, so the correct answer is E.