Regular repair and maintenance expenditures will not be capitalized. They are recorded as term expenses. The correct answer is B.

Goodwill is the value paid above the net worth of the company’s assets and liabilities.

If the price paid for security is equal to the face value, then the security is told to be sold at par. However, the purchase price generally differs from face value. If the security is sold at a price below the face value, it is sold at a discount. On the other hand, if the price exceeds the face value, security is sold at a premium. The correct answer is A.

Matching principle requires the recognition of expenses in the period in which they incur to generate revenues. Therefore, as of the end of period, all expenses should be recorded independent from whether they are paid or not. When an expense incurs but is not paid yet, it should be recorded as accrued expense. In other words, accruals can be defined as liabilities for unpaid expenses. The most common examples of accrued expenses are interest payable, salaries payable, income taxes payable etc. The correct answer is A.

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.

If a present obligation exists but the amount to settle the obligation cannot be estimated reliably, the obligation is a contingent liability. The correct answer is E.

Depletion is to natural resources as depreciation is to plant assets and amortization to intangible assets. The correct answer is E.

Intangible assets are usually reported in the balance sheet in a separate section following Property, Plant and Equipment assets. The correct answer is B.

When a company purchases a debt security with the aim of reselling for a higher price, this security is classified as trading security. The correct answer is D.

Example: Heat Corporation is a construction company that builds apartments. On June 25, after the end of working day, workers forgot to lock the entrance to the construction area. The children in the neighborhood entered the area and started to play with hoist. One of the children felt down and broke his arm. His parents filed a lawsuit against the company for damages claiming an indemnity of 100,000 TL.

In this case, Heat Corporation should, at first, examine the probability of losing the lawsuit. If it is probable, then the second criteria of measurement reliability is considered. There are three possible cases and three treatments by Heat Corporation;

a. Almost impossible to lose the lawsuit; so does not pay any indemnity – No Liability Reported

b. Probably will lose the lawsuit, however the amount of indemnity cannot be estimated reliably – Liability Disclosed in Footnotes

c. Probably will lose the lawsuit and the amount of indemnity can be estimated reliably – Journalized and Reported in Financial Statements

Suppose that the third option occurs and the experiences from other cases signals that company will pay approximately 30,000 TL as indemnity. Then company must record a liability of 30,000 TL in its balance sheet as well as an expense (for probable loss) in income statement.

The correct answer is D.

Depreciable Cost = Cost of the asset – Residual value

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

Liability” is defined as the present obligation of a company arising from past events and fulfillment of which causes outflow of economic benefits in terms of payments of cash, transfer of assets or rendering of services. From another perspective, with a very basic level definition, liability represents the part of financing that a company provides from resources other than claims of its equity owners. Depending on their maturities, liabilities are classified as “current liabilities” and “non-current liabilities”. The term “current” means “in the same period”, which stands for either “the same 12-months period” or “the same operating cycle”, whichever is longer. If it takes more than 12-months after the purchase of raw materials to produce and sell products and collect the receivables in return, this means that the operating cycle is more than 12 months for that company. In other words, the time needed by the company to provide funds from its operations and fulfill its liabilities is more than 12 months; thus, the term “current” proxies for the operating cycle. All expenses should be recorded in the periods they incur; so that the performance of the company can be assessed accurately, as its income statement covers all revenues and expenses for that period. Recognition of expenses do not require a cash outflow. Therefore, expenses are recognized in income statement even if they are not paid yet. When an expense incurs but the payment will be made in other periods, companies should also record a liability to be settled in future periods. That liability is called “accrued expenses”. Completely opposite situation, in which the company collects cash in advance but the goods or service will be delivered in other periods, also required the company to recognize a liability. However, this time the name of liability is “unearned revenue”. In short, the term “accrual” refers to expenses that are incurred but unpaid, while “unearned revenue” refers to future revenues that are collected but not delivered yet.The correct answer is D.

Capitalization means recording the expenditure as an asset.

All assets, except land, lose their ability to provide services and wear out as they are used. The correct answer is C.

Accelerated depreciation generates higher depreciation expense immediately, and therefore lowers tax payments in the early years of the asset’s life.

However, a company may also invest in the other companies for the purpose of partnering with or controlling them in the long-term. Longterm investments often involve the purchase of a significant portion of the equity securities of another company. Such investments usually have a strategic purpose, such as reduction of costs, expansion, or integration etc.. The correct answer is E.

A contingent liability is a potential liability because it depends on a future event. If a possible obligation arises from past events but its existence can only be confirmed depending on the occurrence of one or more future events, the obligation under question is a contingent liability. Alternatively, if a present obligation exists but it is not probable that an outflow of economic benefits will be required or even if it is probable, the amount to settle the obligation cannot be measured reliably, the obligation is disclosed as contingent liability. The correct answer is B.

When a company develops its own intangible assets, it should record those types of costs as period expenses. The correct answer is C.

Debt financing is represented on “Liabilities” section whereas equity financing is represented on the “Equity” section of a balance sheet. As you have learned, equity is the “owners’ claims in business”. Liabilities are “creditors’ claims on total assets” and as “existing debts and obligations of company.” Companies must settle or pay these claims, debts, and obligations at some time in the future by transferring assets or services.

Liabilities have three main characteristics:

• They occur because of a past transaction or event.

• They create a present obligation for future payment of cash or services.

• They are an unavoidable obligation.

The correct answer is B.

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.