Deck 9: Long-Term Assets I: Property, Plant, and Equipment

Question 1

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at

A) The fair value of the asset given up, and a gain but not a loss may be recognized
B) The fair value of the asset given up, and a gain or loss is recognized
C) The fair value of the asset received if it is equally reliable as the fair value of the asset given up
D) Either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company

Answer 1

B

Question 2

A principal objection to the straight-line method of depreciation is that it

A) Provides for the declining productivity of an aging asset
B) Ignores variations in the rate of asset use
C) Tends to result in a constant rate of return on a diminishing investment base
D) Gives smaller periodic write-offs than decreasing charge methods

Answer 2

B

Question 3

A method that excludes salvage value from the base for the depreciation calculation is

A) Straight line
B) Sum-of-the-year's digits
C) Double-declining balance
D) Productive output

Answer 3

C

Question 4

When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should be

A) Expensed as incurred
B) Added to the cost of the plant
C) Added to the cost of the land
D) Amortized over the estimated time period between the tearing down of the building and the completion of the plant

Question 5

The rate of return on total assets is computed by dividing

A) Net sales by ending total assets
B) Net income by ending total assets
C) Net income by average total assets
D) Net sales by average total assets

Question 6

A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2019. On December 31, 2021, the accumulated depreciation using the sum-of-year's digits method would be

A) (Original cost less salvage value) multiplied by 9/10
B) Original cost multiplied by 9/10
C) Original cost multiplied by 9/10 less total salvage value
D) (Original cost less salvage value) multiplied by 1/10

Question 7

For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is

A) Units of production
B) Straight line
C) Sum-of-the-year's-digits
D) Declining balance

Question 8

As generally used in accounting, depreciation

A) Is a process of asset valuation for balance sheet purposes
B) Applies only to long-lived intangible assets
C) Is used to indicate a decline in market value of a long-lived asset
D) Is an accounting process that allocates long-lived asset cost to accounting periods

Question 9

A plant site donated by a city to a company that plans to open a new factory should be recorded on the company's books at

A) The value assigned to it by the company's directors
B) One dollar (since the site cost nothing but should be included in the balance sheet)
C) The cost of taking title to it
D) Its fair value

Question 10

When boot is involved in an exchange having commercial substance

A) Only losses should be recognized
B) Only gains should be recognized
C) Gains or losses are recognized in their entirely
D) A gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up

Question 11

An impairment of property, plant, or equipment has occurred if

A) The estimated salvage value is less than the actual proceeds received on disposal
B) The revised estimated useful life is less than the original estimated useful life
C) The expected future cash outflows exceed the asset's carrying value
D) The sum of the expected future net cash flows is less than the asset's carrying value

Question 12

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

A) Systematic and rational allocation
B) Immediate recognition
C) The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
D) The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Question 13

The asset turnover ratio is computed by dividing

A) Net sales by average total assets
B) Net sales by ending total assets
C) Net income by ending total assets
D) Net income by average total assets

Question 14

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

A) A cost of capital charge for stockholders' equity
B) That portion of weighted-average accumulated expenditures on which no interest cost was incurred
C) The total interest cost actually incurred
D) That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

Question 15

Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2020. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at

A) The present value of a $20,000 ordinary annuity for five years
B) $120,000
C) $120,000 less imputed interest
D) $120,000 plus imputed interest

Question 16

When should a long-lived asset be tested for recoverability?

A) When external financial statements are being prepared
B) When the asset's fair value has decreased, and the decrease is judged to be permanent
C) When events or changes in circumstances indicate that its carrying amount may not be recoverable
D) When the asset's carrying amount is less than its fair value

Question 17

The theoretical justification for reporting depreciation expense is

A) Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period.
B) Depreciation expense represents the impairment of the asset that has occurred during the accounting period.
C) Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.
D) Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period

Question 18

Assets that qualify for interest cost capitalization include

A) Assets under construction for a company's own use
B) Assets that are ready for their intended use in the earnings of the company
C) Assets that are not currently being used because of excess capacity
D) All of these assets qualify for interest cost capitalization

Question 19

When a closely held corporation issues preferred stock for land, the land should be recorded at the

A) Total par value of the stock issued
B) Total book value of the stock issued
C) Appraised value of the land
D) Total liquidating value of the stock issued

Question 20

Property, plant, and equipment are conventionally presented n the balance sheet at

A) Replacement cost less accumulated depreciation
B) Historical cost less salvage value
C) Original cost adjusted for general price level changes
D) Acquisition cost less depreciated portion thereof

Question 21

Discuss the guidelines for accounting for property, plant and equipment outlined in IAS No. 16.

Question 22

Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed?

A) What is the asset's useful life?
E) What method of cost apportionment is best for this asset?
F) What product or service is the asset related to?
G) What is the depreciation base to use for the asset?

Question 23

Discuss accounting for the impairment of assets as outlined in IAS No. 36.

Question 24

Explain the concept of commercial substance originally outlined in SFAS No. 158.

Question 25

How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for donated assets?

Question 26

What three questions must be answered before the amount of the depreciation charge can be computed?

Question 27

List the objectives of accounting for property, plant and equipment.

Question 28

Discuss the three approaches to allocating fixed overhead to a self-construction project.
a. Allocate no fixed overhead to the self-construction project. Some accountants favor the first approach. They argue that the allocation of fixed overhead is arbitrary and therefore only direct costs should be considered.
b. Allocate only incremental fixed overhead to the project. When operations are at less than full capacity, this approach is the most logical. The decision to build the asset was probably connected with the availability of idle facilities. Increasing the profit margin on existing products by allocating a portion of the fixed overhead to the self-construction project will distort reported profits.
c. Allocate fixed overhead to the project on the same basis as it is allocated to other products. When the production of other products has been discontinued to produce a self-constructed asset, allocation of the entire amount of fixed overhead to the remaining products will cause reported profits on these products to decrease. (The same amount of overhead is allocated to fewer products.)

Question 29

Discuss the distinction between capital and revenue expenditures for long-term assets.

Question 30

Discuss the issue of allocating interest to self-construction projects. That is, when should interest be allocated and how much interest should be allocated?

Question 31

The most common method of recording depletion for accounting purposes is the

A) Straight-line method
B) Units-of-production method
C) Percentage depletion method
D) Decreasing charge method

Question 32

Discuss accounting for asset impairments originally outlined in SFAS No's 121 and 144.

Question 33

Define and discuss accounting for asset retirement obligations under SFAS No. 143 (FASB ASC 410-20)

Question 34

Describe how cost is assigned to individual assets when they are acquired in a lump-sum group purchase.

Question 35

How does IAS no. 23 define borrowing costs?

Question 36

A principal objection to the straight-line method of depreciation is that it
E) Provides for the declining productivity of an aging asset
F) Ignores variations in the rate of asset use
G) Tends to result in a constant rate of return on a diminishing investment base h. Gives smaller periodic write-offs than decreasing charge methods