Deck 8: Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Question 1

Ordinary repairs and maintenance costs are incurred to maintain a long-lived productive asset and are expensed as incurred.

Answer 1

True

Question 2

Tangible long-lived productive assets differ from intangible long-lived productive assets in that tangible assets have physical substance whereas intangible assets have no physical substance.

Answer 2

True

Question 3

On January 1, 2014, equipment was purchased for $100,000. The equipment's estimated residual value is $20,000, and its estimated useful life is 8 years. On December 31, 2014, the book value using the straight-line method of depreciation is $90,000.

Answer 3

True

Question 4

Depreciation is the process of allocating a long-lived asset's cost over its productive life.

Question 5

If a second-hand machine is purchased for productive use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its productive use should be reported as part of the asset's cost on the balance sheet.

Question 6

Patents, trademarks, and franchises are examples of tangible assets.

Question 7

An expenditure is capitalized when it is reported as an expense on the income statement.

Question 8

On January 1, 2014, equipment was purchased for $80,000; the equipment's estimated residual value is $15,000, and its estimated useful life is 10 years. For 2014, the depreciation expense under the double-declining balance method is $13,000.

Question 9

The equipment cost initially reported on the balance sheet includes the equipment-related installation and transportation costs.

Question 10

If depreciation expense is calculated without taking into account the asset's residual value, depreciation expense will be overstated.

Question 11

The cash-equivalent price of an asset received is measured as the fair value of the consideration given including cash, or the fair value of the asset received, whichever is more determinable.

Question 12

Depreciation is the process of estimating a long-lived asset's current market value.

Question 13

In most cases, the depreciation method chosen for financial reporting purposes (GAAP) must also be utilized for income tax reporting (IRS).

Question 14

The units-of-production method of depreciation allocates an asset's cost over its useful life based on the current period's production relative to its total estimated production.

Question 15

The fixed asset turnover ratio measures the amount of operating income generated per dollar of average fixed assets.

Question 16

The book value of a depreciable asset equals its acquisition cost minus the depreciation expense recorded since the acquisition date.

Question 17

Use of the double-declining-balance method of depreciation results in higher depreciation expense during the first year of an asset's life relative to use of the straight-line depreciation method.

Question 18

In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future.

Question 19

The land cost initially reported on the balance sheet may include legal fees and title insurance.

Question 20

Use of the double-declining-balance method of depreciation results in increasing amounts of depreciation expense over an asset's life.

Question 21

Which of the following includes only intangible assets?

A) Natural resources, patents, and trademarks.
B) Research and development costs, franchises, and trademarks.
C)Copyrights, licenses, and land.
D)Leaseholds, patents, and copyrights.

Question 22

Which of the following accounts would not be considered a tangible asset?

A) Buildings
B) Land
C)Equipment
D)Copyright

Question 23

The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion.

Question 24

Which of the following would not be classified as property, plant and equipment on a balance sheet?

A) Land held for investment.
B) Equipment used in the manufacturing process.
C)A building used as corporate headquarters.
D)A natural resource being mineD.Land held as an investment would be reported on a balance sheet as an investment.

Question 25

Goodwill is recorded only when an existing company is bought by another company and the purchase price exceeds the fair value of the purchased company's net assets.

Question 26

Which of the following includes only tangible assets?

A) Land, buildings, and natural resources.
B) Land, buildings, and leasehold rights.
C)Natural resources, buildings, and franchises.
D)Licenses, trademarks, and lanD.Tangible assets have physical substance. Land, buildings, and natural resources are assets that have physical substance.

Question 27

Gains and losses on disposal of a long-lived asset are determined by comparing the asset's cost to its book value.

Question 28

Which of the following accounts would not be considered an intangible asset?

A) Goodwill
B) Patents
C)Research and development costs
D)Trademarks

Question 29

Which of the following statements regarding the fixed asset turnover ratio is incorrect?

A) The numerator is net operating income.
B) The denominator is average net fixed assets.
C)The ratio is used to assess a company's effectiveness in generating sales from its fixed assets.
D)The ratio increases when a company sells a factory building for a gain.

Question 30

Which of the following transactions would not increase the fixed asset turnover ratio?

A) A decrease in sales revenue.
B) A profitable sale of fixed assets for cash.
C)Selling manufacturing equipment for a loss.
D)A decrease in operating expenses.

Question 31

When determining cash flow from operating activities using the indirect method, depreciation and amortization expense are deducted from net income.

Question 32

The first step in recording the disposal of a long-lived asset is to update its book value by recognizing depreciation expense for the period of time since the last depreciation adjustment was made.

Question 33

The Wilson Company has provided the following information: • Net sales, $200,000
• Net operating income, $40,000
• Net income, $20,000
• Average total assets, $125,000
• Average net fixed assets; $80,000
What is Wilson's fixed asset turnover ratio?

A) 1.60
B) 2.50
C)0.25
D)0.50

Question 34

Selling a depreciable asset for a gain results in an increase in both net income and assets.

Question 35

Which statement is false?

A) Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover.
B) Using an accelerated depreciation method instead of the straight-line depreciation method will lead to reporting a higher fixed asset turnover during the earlier years of an asset's life.
C)Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover.
D)Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.

Question 36

If a long-lived asset has been impaired, the journal entry will require a debit to a loss account and a credit to the long-lived asset account.

Question 37

If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million, no impairment has occurred and no loss would be recognized.

Question 38

Research and development costs are capitalized under GAAP once a product or process has been developed.

Question 39

Natural resource depletion is recognized on the income statement for all resources removed during the period whether they are sold or not.

Question 40

The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight-line depreciation method.

Question 41

Which of the following does not properly describe the depreciation process?

A) It is an allocation process.
B) It is consistent with the matching principle.
C)It involves the use of estimates.
D)It attempts to determine an asset's market value.

Question 42

Which of the following costs associated with a land purchase is not a component of the land cost reported on a balance sheet?

A) The payment of delinquent property taxes.
B) The incurrence of legal fees.
C)The cost of title insurance.
D)The land's appraised value.

Question 43

On January 1, 2014, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. How much is the annual depreciation expense assuming use of the straight-line depreciation method?

A) $6,100.
B) $6,000.
C)$5,950.
D)$5,750.

Question 44

Gilbert Company made an ordinary repair to a delivery truck during 2014 at a cost of $500 and capitalized the repair cost. What is the effect on the 2014 financial statements as a result of the capitalization?

A) The financial statements are not affected.
B) Assets are understated and net income is overstated.
C)Assets are overstated and net income is overstated.
D)Assets and stockholders' equity are both understateD.The repair should be expensed during 2014 rather than be capitalized. As a result, net income is overstated because expenses are understated. Assets are overstated because of the capitalization.

Question 45

On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $4,000; and installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?

A) $57,500.
B) $54,000.
C)$51,000.
D)$53,500.

Question 46

Which of the following best describes the objective of depreciation?

A) To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue.
B) To estimate the remaining useful life of the asset.
C)To report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date.
D)To estimate the current market value of the asset.

Question 47

Which of the following statements is incorrect?

A) Ordinary repairs and maintenance decrease net income.
B) Capital expenditures decrease assets.
C)Ordinary repairs and maintenance are recurring in nature.
D)Additions and improvements to a depreciable asset occur infrequently.

Question 48

Which of the following is correct?

A) If a company fails to record depreciation expense, net income and expenses are overstated.
B) If a company fails to record depreciation expense, net income and assets are overstated.
C)If a company overstates depreciation expense, net income is overstated and assets are understated.
D)If a company fails to record depreciation expense, stockholders' equity, net income, and assets are understateD.If depreciation expense is not recorded, expenses are understated, and net income is overstated. Also, accumulated depreciation is understated because depreciation has not been added to it. Since accumulated depreciation reduces assets, understating accumulated depreciation will overstate assets.

Question 49

If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead of as repairs and maintenance expense, which of the following statements is true?

A) The current year's net income will be lower and future depreciation expense will be higher.
B) The current year's net income will be higher and future depreciation expense will be lower.
C)The current year's net income will be higher and future depreciation expense will be higher.
D)The current year's net income will be lower and future depreciation expense will be lower.

Question 50

Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. At what amount should the truck be recorded on the balance sheet prior to recording depreciation expense?

A) $40,000.
B) $42,000.
C)$43,000.
D)$45,000.

Question 51

Which of the following statements is incorrect?

A) Replacement of a truck's tires would be a capital expenditure.
B) Replacement of carpet in an office, damaged by a coffee spill, would be a repairs expense.
C)Replacement of a roof on a newly purchased building before using it as a store would be a capital expenditure.
D)The cost of repainting a hallway would be maintenance expense.

Question 52

Which of the following journal entries is correct for Smith Company when Smith issues 10,000 shares of $20 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. a. $\begin{array}{lr}\text { Building } & 220,000 \\\text { Cash } && 20,000 \\\text { Common stock } \quad\quad\quad\quad&& 200,000\end{array}$

b. $\begin{array}{lr}\text { Building } \quad\quad\quad\quad\quad\quad\quad& 370,000 \\\quad \text { Cash } && 20,000 \\\text { Common Stock } && 350,000\end{array}$

c. $\begin{array}{lr}\text { Building } & 370,000 \\\text { Cash } &&200,000 \\\text { Common stock } && 20,000 \\\text { Additional paid-in capital }&&150,000\end{array}$

d. $\begin{array}{lr}\text {Building }&370,000\\\text { Common stock }\quad\quad\quad\quad\quad&&370,000\\\end{array}$

A) Option A
B) Option B
C)Option C
D)Option D

Question 53

On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock that Red Company held as an investment. The White common stock cost Red Company $5,000 and on August 1 had a fair value of $4,200. The installation costs for the computer equipment were $700 and shipping costs were $500. What amount should be the total amount debited to the computer equipment account?

A) $14,200.
B) $15,000.
C)$15,400.
D)$16,200.

Question 54

Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $250,000.

A) Total assets increase $350,000.
B) Stockholders' equity increases $250,000.
C)Stockholders' equity increases $330,000.
D)Total assets increase $330,000.

Question 55

Which of the following describes the effect of recording depreciation expense at year-end?

A) Net income decreases and total assets decrease.
B) Total assets decrease and stockholders' equity is not affected.
C)Net income decreases and total assets increase.
D)Stockholders' equity is not affected and net income decreases.

Question 56

Which of the following equipment related costs is not capitalized on a balance sheet?

A) Equipment installation costs.
B) Transportation costs associated with the equipment purchase.
C)Equipment maintenance costs.
D)The equipment's purchase price.

Question 57

A company acquires land by issuing 10,000 shares of its $10 par value common stock currently trading at $20 per share and the appraised value of the land is $250,000. Which of the following statements correctly describes the recording of the land?

A) Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the issued stock is currently worth $200,000.
B) Record the land at the $200,000 value of the consideration given up.
C)Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain.
D)Record the land at the par value of the stock given up, $100,000.

Question 58

Which of the following would most likely not be a revenue expenditure?

A) Repairing the carpet in the sales department offices.
B) Repairing a leaky roof.
C)Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances.
D)Painting the exterior of the factory building.

Question 59

Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000.

A) The common stock account increases by $100,000.
B) The building account increases by $370,000.
C)Stockholders' equity increases $350,000.
D)The additional paid-in capital account increases by $100,000.

Question 60

What is the effect on the 2014 financial statements when a capital expenditure during 2014 was incorrectly recorded as a repairs and maintenance expense?

A) The financial statements are not affected.
B) Assets and net income are both overstated.
C)Assets are overstated and net income was understated.
D)Assets and stockholders' equity are both understateD.Assets are understated because the expenditure should have been capitalized. Stockholders' equity is understated because net income is understated due to the expense overstatement.

Question 61

A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life is

A) 3 years.
B) 4 years.
C)5 years.
D)6 years.

Question 62

On January 1, 2014, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December 31, 2015, assuming Wasson uses the straight-line depreciation method?

A) $12,000.
B) $24,000.
C)$30,000.
D)$28,000.

Question 63

Which of the following statements is correct?

A) Using straight-line depreciation in comparison to an accelerated depreciation method will result in a lower reported amount of total assets at end of the first year of an asset's life.
B) Using accelerated depreciation in the first year of an asset's life will result in a higher net income during the first year compared to using the straight-line depreciation method.
C)Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for the first year.
D)Using straight-line depreciation in comparison to an accelerated depreciation method will lead to a higher book value at the end of an asset's life.

Question 64

Which of the following statements about asset impairment is false?

A) Asset impairment loss is the difference between an asset's net book value and its estimated future cash flows.
B) If an asset is impaired, a loss would be recognized in the period it can be estimated.
C)Impairment will lead to writing down the asset's net book value.
D)Asset impairment occurs when the estimated future cash flows are less than the asset's net book value.

Question 65

Warren Company plans to depreciate a new building using the double declining-balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. What is the building's book value at the end of the first year?

A) $736,000.
B) $768,000.
C)$686,000.
D)$690,000.

Question 66

Which of the following statements is correct?

A) Companies will change the method of depreciating assets from one year to the next to reflect usage of an asset.
B) Companies can affect the book value at the end of an asset's life by choosing one method of depreciation over another.
C)Companies can use one method of depreciation for some of their long-lived productive assets but then use a different method for another group or type of long-lived productive assets.
D)Companies can minimize an asset's book value in the first year of use by selecting the straight-line depreciation method rather than the double-declining-balance methoD.Different depreciation methods can be chosen for various assets.

Question 67

On January 1, 2014, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. Wasson estimates that the vehicle will be driven 100,000 miles. What is the vehicle's book value as of December 31, 2015 assuming Wasson uses the units-of-production depreciation method and the vehicle was driven 10,000 miles during 2014 and 18,000 miles during 2015?

A) $29,920.
B) $28,800.
C)$24,800.
D)$25,920.

Question 68

Hill Inc. purchased an asset on January 1, 2014. Hill chose an accelerated depreciation method to depreciate the asset. Which of the following is correct if Hill would have chosen the straight-line depreciation method instead?

A) Depreciation expense would have been lower in 2014.
B) The book value of the asset would have been lower at the end of 2014.
C)The net income would have been lower during 2014.
D)The accumulated depreciation balance would have been higher at the end of 2014.

Question 69

Which of the following statements is false?

A) The book value at the end of an asset's useful life will be the same under all the depreciation methods allowed under GAAP.
B) The balance in the accumulated depreciation account will be the same at the end of an asset's useful life under all the methods allowed under GAAP.
C)Once you select a depreciation method, then you must use this method for all depreciable assets.
D)The annual depreciation expense and year-end book values will differ under the various depreciation methods over the life of the asset.

Question 70

Schager Company purchased a computer system on January 1, 2014, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. How much is the 2015 depreciation expense?

A) $5,000.
B) $4,120.
C)$4,000.
D)$3,520.

Question 71

Warren Company plans to depreciate a new building using the double declining-balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation expense was recorded properly, what would be the amount of depreciation expense for the second year?

A) $30,720.
B) $32,000.
C)$58,880.
D)$64,000.

Question 72

On January 1, 2014, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. If Woodstock uses the straight-line depreciation method, which of the following statements is incorrect?

A) The annual depreciation expense is $6,000.
B) The December 31, 2014 book value was $35,000.
C)The December 31, 2016 accumulated depreciation balance was $18,000.
D)The December 31, 2015 book value was $24,000.

Question 73

A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million. Which of the following correctly describes the recording of the asset impairment loss?

A) The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.
B) The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.
C)The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.
D)The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.

Question 74

A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million. How much is the asset impairment loss?

A) $5.4 million.
B) $4.1 million.
C)$0.4 million.
D)$1.0 million.

Question 75

Which method of depreciation results in periodic depreciation expense that fluctuates from one period to the next, not necessarily in a steadily upward or downward direction?

A) Straight-line.
B) Units-of-production.
C)Modified accelerated cost recovery system.
D)Declining balance.

Question 76

Which of the following statements about the Modified Accelerated Cost Recovery System (MACRS) is correct?

A) It is similar to the units-of-production depreciation method.
B) It is applied using longer asset lives than the estimated useful lives required by GAAP.
C)It provides a short-term tax benefit because of the higher depreciation expense reported in the early years of an asset's life.
D)It is acceptable for use when preparing financial statements.

Question 77

Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting?

A) The company has high technology, robotic equipment in its plant that becomes obsolete quickly and declines in utility to the company more rapidly in the early years of the assets' lives.
B) The company wants to maximize its net income during the earlier years of the asset's life.
C)The company wants to maximize the asset's book value in the earlier years of the asset's life.
D)The company wants to maximize the total depreciation expense over the life of the asset.

Question 78

Schager Company purchased a computer system on January 1, 2014, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. What is the accumulated depreciation balance as of December 31, 2015?

A) $9,000.
B) $4,000.
C)$7,920.
D)$8,520.

Question 79

On December 31, 2014, Hamilton Inc. sold a used industrial crane for $600,000 cash. The original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million on December 31, 2014. What is the gain or loss from the December 31, 2014 equipment sale?

A) $600,000 gain.
B) $600,000 loss.
C)$200,000 loss.
D)$200,000 gain.

Question 80

On January 1, 2014, Pyle Company purchased an asset that cost $50,000 and had no estimated residual value. The estimated useful life of the asset is 8 years and straight-line depreciation is used. An error was made in 2014 because the total amount of the asset's cost was debited to an expense account for 2014 and no depreciation was recorded. Pretax income for 2014 was $42,000. How much is the correct 2014 pretax income?

A) $35,750.
B) $48,250.
C)$85,750.
D)$92,000.