Correct Answer: D

Explanation: A donation of stock to the corporation causes no reduction of assets and therefore does not affect total stockholders' equity. Under the cost method, there would be only a memorandum entry in the treasury stock account. When reissued, the proceeds would be credited to APIC: Donated Capital. Under the par value method, Treasury Stock would be debited and APIC: Donated Capital would be credited for the par value. When reissued, proceeds in excess of par would be credited to APIC: Donated Capital.

Today's question: BEC

At December 31, 2010, Zar Co. had a machine with an original cost of $84,000, accumulated depreciation of $60,000, and an estimated salvage value of zero. On December 31, 2010, Zar was considering the purchase of a new machine having a five-year life, costing $120,000, and having an estimated salvage value of $20,000 at the end of five years. In its decision concerning the possible purchase of the new machine, how much should Zar consider as sunk cost at December 31, 2010?

A)   $120,000

B)   $100,000

C)   $24,000

D)   $4,000

Answer C) $24,000. However, the book value of the present machine, however, is a sunk cost and is irrelevant in decision to buy the new machine.

Correct Answer: C

Explanation: A "sunk cost" is a cost which has been incurred and will not be changed by any future decision; it is therefore irrelevant to a decision and excluded in its analysis. The original cost of an asset less its accumulated depreciation (book value) is a sunk cost for replacement decisions as the replacement would not affect these amounts.