Deck 18: Accounting for Long-Term Assets

Question 1

The recognition of depreciation is not intended to make the assets reflect their market value on the balance sheet.

Answer 1

True

Question 2

The depreciation method using a fixed rate applied to the book value of the asset each year, resulting in successively smaller depreciation charges as the undepreciated cost diminishes year by year, is called the declining balance method.

Answer 2

True

Question 3

The purpose of depreciation is to match a plant asset's cost with the revenue it helps to produce.

Answer 3

True

Question 4

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
The write-off of the cost of an intangible long-term asset is called depreciation.

Question 5

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
All costs incurred to purchase land and prepare it for its intended use are credited to the land account.

Question 6

Physical depreciation refers to the loss of usefulness because of inadequacy or obsolescence.

Question 7

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
The consumption or exhaustion of wasting assets is called depletion.

Question 8

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
If money is borrowed for the purpose of constructing a building or other facility, the interest incurred during the period of construction should be added to the cost of such building or facility.

Question 9

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
Furniture and equipment are examples of tangible assets.

Question 10

The difference between the cost of an asset and its accumulated depreciation is its book value.

Question 11

The depreciation method in which the depreciable cost of an asset is apportioned equally over its estimated useful life in terms of months or years is called accelerated depreciation.

Question 12

An asset purchased on or before the fifteenth of the month is considered to have been owned for the full month.

Question 13

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
If there is an improvement to a building that extends the life of the building, the total cost incurred should be debited to the long-term asset.

Question 14

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
The allocation of the cost of a plant asset over the periods expected to benefit from its use is called depreciation.

Question 15

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
The write-off of the cost of a wasting asset is called amortization.

Question 16

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
Depreciation is a process of cost allocation, not a process of valuation.

Question 17

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
Assets such as patents, copyrights, and trademarks are intangible assets.

Question 18

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
The cost of planting trees and shrubs, installing fences, and paving parking areas are normally charged to the land improvements account and are later depreciated over their expected useful lives.

Question 19

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
Special tax assessments for streets, sewers, flood prevention, or parks are charged or added to the land account.

Question 20

Match the terms with the definitions.a.term of the note
b.accrued interest on notes receivable
c.bank discount (note payable)
d.bank discount (note receivable)
e.contingent liability
f.rate of interest
g.discounting (note payable)
h.payee
i.notes receivable register
j.non-interest-bearing note
k.interest-bearing note
Properties whose physical substance consists of natural resources that are consumed in the operation of a business are called wasting assets.

Question 21

All additions and some improvements increase the usefulness of buildings or equipment and will provide benefits in future periods.

Question 22

Transactions involving the purchase of long-term assets are entered by crediting the proper asset account and debiting the cash account or proper liability account.

Question 23

For plant assets acquired after 1986, either the double-declining-balance method or the Modified Accelerated Cost Recovery System (MACRS) must be used for tax purposes.

Question 24

When a long-term asset is sold for more than its book value, the difference represents a gain.

Question 25

Accumulated depletion should be reported as an operating expense on the income statement.

Question 26

Under the declining-balance method, salvage value is considered directly in the determination of the depreciation amount.

Question 27

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods.

Question 28

If a plant asset has been fully depreciated and it is discarded or retired, no gain or loss will be realized.

Question 29

An asset should not be depreciated below its estimated salvage value.

Question 30

Some improvements extend the useful life of an asset but do not increase its usefulness or efficiency.

Question 31

The Modified Accelerated Cost Recovery System method of depreciation subtracts salvage value before calculating the annual depreciation expense.

Question 32

In accounting for exchanges of similar assets considered to have "commercial substance," financial accounting recognizes all gains and losses.

Question 33

For tax purposes, both gains and losses are recognized on exchanges of similar assets.

Question 34

Gains are similar to revenue and increase net income, and losses are similar to expenses and decrease net income.

Question 35

Under the accrual basis of accounting, net income is determined by matching the revenues earned during a period with the expenses incurred as a result of the efforts made to produce the revenue.

Question 36

The depreciation method that estimates the number of units of service or output that can be provided by an asset and allocates the depreciable cost of the asset on the basis of the use or output during each period is called the units-of-output or units-of-production method.

Question 37

A patent is a grant by the federal government to an inventor giving the exclusive right to produce, to use, and to sell an invention for a period of seventeen years.

Question 38

A trade-in allowance cannot be greater than the book value of the asset traded.

Question 39

A business is not allowed to deduct depreciation expenses in calculating taxable income.

Question 40

Over the life of an asset, the total of the amounts of the calculated annual net income will be about the same, regardless of the method of depreciation.

Question 41

Which of the following is NOT a way of calculating the amount of depreciation for each period?

A) straight-line method
B) declining-balance method
C) sum-of-the-years'-digit method
D) weighted-average method

Question 42

Use the following data: $$\begin{array} { l r } \text { Asset cost } & \$ 120,000 \\\text { Expected life } & 3 \text { years } \\\text { Estimated salvage value } & \$ 15,000\end{array}$$ ? Using the straight-line method, the amount of depreciation each year would be

A) $35,000.
B) $40,000.
C) $45,000.
D) $15,000.

Question 43

The write-off of the cost of an intangible asset is called

A) physical depreciation.
B) functional depreciation.
C) amortization.
D) deterioration.

Question 44

Properties whose physical substance consists of natural resources that are consumed in the operation of the business are called

A) depreciable assets.
B) wasting assets.
C) amortizable assets.
D) intangible assets.

Question 45

The write-off of the cost of plant and equipment is called

A) depletion.
B) depreciation.
C) amortization.
D) deterioration.

Question 46

Salvage value is not considered directly in the determination of the deprecation amount with the

A) straight-line method.
B) declining-balance method.
C) sum-of-the-years'-digit method.
D) units-of-production method.

Question 47

The depreciation method in which the depreciable cost of an asset is apportioned equally over its estimated life in terms of months or years is called the

A) declining-balance method.
B) sum-of-the-years'-digit method.
C) units-of-production method.
D) straight-line method.

Question 48

The loss of usefulness because of deterioration from age and wear is called

A) functional depreciation.
B) physical depreciation.
C) technological depreciation.
D) amortization.

Question 49

The depreciation method that estimates the number of units of service or output that can be provided by an asset and allocates the depreciable cost of the asset on the basis of the use or output during each period is called the

A) declining-balance method.
B) sum-of-the-years'-digit method.
C) units-of-production method.
D) straight-line method.

Question 50

The loss of usefulness because of inadequacy or obsolescence is called

A) functional depreciation.
B) physical depreciation.
C) amortization.
D) cost allocation.

Question 51

The depreciation method using a steadily decreasing rate applied to the depreciable cost of the asset, resulting in successively smaller depreciation charges over the life of the asset is called the

A) declining-balance method.
B) sum-of-the-years'-digit method.
C) units-of-production method.
D) straight-line method.

Question 52

Use the following data: $$\begin{array} { l r } \text { Asset cost } & \$ 120,000 \\\text { Expected life } & 4 \text { years } \\\text { Estimated salvage value } & \$ 12,000\end{array}$$ ? Using the sum-of-the-years-digit method, the amount of depreciation for the third year would be

A) $28,000.
B) $21,600.
C) $30,000.
D) $48,600.

Question 53

Assets that are NOT expected to provide benefits for a number of accounting periods are called

A) property, plant, and equipment.
B) long-term assets.
C) fixed assets.
D) current assets.

Question 54

Use the following data: $$\begin{array} { l r } \text { Asset cost } & \$ 80,000 \\\text { Expected life } & 3 \text { years } \\\text { Estimated salvage value } & \$ 10,000\end{array}$$ ? Using the sum-of-the-year's-digits method, the amount of depreciation for the first year would be

A) $26,666.
B) $35,000.
C) $20,000.
D) $40,000.

Question 55

Costs and assessments that should NOT be charged to the land account include

A) streets.
B) parks.
C) installing fences.
D) flood prevention.

Question 56

Which of the following is an example of a wasting asset?

A) timber
B) land
C) equipment
D) building

Question 57

The depreciation method using a fixed rate applied to the undepreciated cost of the asset each year, resulting in successively smaller depreciation charges as the undepreciated cost diminishes year by year is called the

A) declining-balance method.
B) sum-of-the-years'-digit method.
C) units-of-production method.
D) straight-line method.

Question 58

A copyright is a federal grant of the exclusive right to the reproduction and sale of a literary, artistic, or musical composition for life plus 70 years after the death of the holder.

Question 59

Use the following data: $$\begin{array} { l c } \text { Asset cost } & \$ 80,000 \\\text { Expected life } & 3 \text { years } \\\text { Estimated salvage value } & \$ 7,000\end{array}$$ Using the declining-balance method, the amount of depreciation for the first year would be

A) $26,666.67.
B) $24,333.33.
C) $53,333.33.
D) $48,666.67.

Question 60

Tangible assets include

A) patents.
B) cash.
C) trademarks.
D) copyrights.

Question 61

Normal expenditures for repairs and maintenance to plant and equipment are accounted for by

A) debiting Equipment and crediting Cash and Supplies Inventory.
B) debiting Repairs Expense and crediting Cash and Supplies Inventory.
C) debiting Cash and Supplies Inventory and crediting Repairs Expense.
D) debiting Cash and Supplies Inventory and crediting Equipment.

Question 62

A printer that cost $600 and has been owned for 2 years is traded in for a new one. Depreciation in the amount of $120 had been taken each year. The new printer has a fair market value of $1,250. A trade-in allowance of $400 is granted, and the balance is paid in cash. The transaction to enter the exchanges of these two assets would result in the recognition of

A) a gain of $40.
B) a loss of $40.
C) a gain of $200.
D) neither a gain nor a loss.

Question 63

Prepare journal entries for the following transactions for Litton's Lilly PonD.Aug. 7
Replaced the engine in Tractor #1, paying cash, $7,200.
Sept. 17
Paid cash for a tune-up of the engine in Tractor #2, $630.
25
Paid cash to add a front-end loader to Tractor #2, $15,300.
​

Question 64

A farm tractor costing $80,000 is depreciated using the MACRS method. The tractor qualifies as a 3-year property, has a scrap value of $20,000, and is depreciated at the following rates: Year 1, 33.33%; Year 2, 44.45%; Year 3, 14.81%; and Year 4, 7.41%. The amount of depreciation to be entered for the second year would be

A) $20,000.
B) $26,670.
C) $35,560.
D) $44,450.

Question 65

A coal mine was acquired at a cost of $4,000,000. No salvage value was expected and the estimated number of units available for production was 4,000,000 tons. During the first year, 440,000 tons of coal was mined and sold. The depletion expense for the first year was

A) $44,200.
B) $440,000.
C) $4,000,000.
D) $4,400,000.

Question 66

The accounting entry for additions and improvements that increase the usefulness of equipment includes

A) debiting a liability account and crediting Building or Equipment.
B) debiting Cash and crediting Building or Equipment.
C) debiting Building or Equipment and crediting Cash or a liability account.
D) debiting Building Expense or Equipment Expense and crediting Cash or a liability account.

Question 67

Prepare journal entries for the following transactions for Sanchez Co. using the general journal.
Feb. 28
Machinery that cost $57,000 and had accumulated depreciation of $46,000 was sold for $2,500.
Apr. 10
A van that cost $23,700 and had accumulated depreciation of $21,000 was sold for $1,250.
July 16
Equipment that cost $120,000 and had accumulated depreciation of $112,000 was traded in for new equipment with a fair market value of $140,000. The old equipment and $135,000 in cash were given for the new equipment.
Aug. 11
Equipment that cost $50,000 and had accumulated depreciation of $43,000 was traded in for new equipment with a fair market value of $62,000. The old equipment and $55,000 in cash were given for the new equipment.
Nov. 10
A truck that cost $44,000 and had accumulated depreciation of $38,000 was traded in for a new truck with a fair market value of $58,000. The old truck and $50,000 cash were given for the new truck.
​

Question 68

Under the Modified Accelerated Cost Recovery System (MACRS) depreciation method, the salvage value is

A) added to the cost of the asset.
B) ignored.
C) subtracted from the cost of the asset.
D) added to the straight-line depreciation.

Question 69

An asset is purchased on January 1 at a cost of $78,000. It is expected to be used for five years and have a salvage value of $8,000. Calculate the depreciation expense for each year of the asset's useful life under each of the following methods:
a.
Straight-line method
b.
Double-declining-balance method
c.
Sum-of-the-years-digits' method

Question 70

An asset is purchased on January 1 at a cost of $25,000. It is expected to be used for four years and have a salvage value of $1,000. Calculate the depreciation expense for each year of the asset's useful life under each of the following methods:
a.
Straight-line method
b.
Double-declining-balance method
c.
Sum-of-the-years-digits' method

Question 71

A company purchased a van at a cost of $42,000 and expects it can be sold for $6,000 after 120,000 miles of service. Assuming the units-of-production method is used and the van is driven for 24,000 miles during the first year, the depreciation at the end of the first year would be

A) $4,200.
B) $1,200.
C) $7,200.
D) $12,000.

Question 72

A manufacturer or seller of a product may identify its merchandise and bar other manufacturers from using the same identification by obtaining

A) a patent.
B) a copyright.
C) a trademark.
D) letterhead stationery.

Question 73

A personal computer that originally cost $5,000 has no estimated salvage value and was depreciated at the rate of 20% a year. At the end of the third year, the computer was sold for $1,500 cash. The transaction would result in a

A) gain of $1,500.
B) loss of $1,500.
C) gain of $250.
D) loss of $250.

Question 74

A delivery truck that cost $26,000 has been owned for 3 years and is traded in for another delivery truck to be used for a similar purpose. Depreciation in the amount of $5,200 has been taken each year⎯a total of $15,600. If the trade-in value of the old truck is $12,000 and the new truck has a fair market value of $30,000, the new truck would be recorded at

A) $10,400.
B) $12,000.
C) $29,400.
D) $30,000.

Question 75

A truck was purchased on January 2 at a cost of $60,000. It is expected to be used for 5 years and to have a salvage value of $5,000 after 120,000 miles of service. The truck was driven 23,000 miles the first year and 25,000 miles the second year. Calculate the depreciation expense for the 1^st and 2^nd years.

Question 76

Assume that an asset costing $72,000 is expected to produce 500,000 units and have a salvage value of $6,000. The first year, 90,000 units are produced; the second year, 82,000 units are produced; the third year, 94,000 units are produced. Using the units-of-production method, complete the following:

Question 77

A plant asset is fully depreciated when the book value is

A) equal to the market value.
B) equal to the salvage value.
C) greater than the market value.
D) greater than the salvage value.

Question 78

If an asset is being sold or exchanged, the gain or loss is always computed by comparing the

A) market value and book value.
B) market value and salvage value.
C) book value and salvage value.
D) market value and cost.

Question 79

Equipment that has no exchange or sales value, originally cost $875, and has depreciation totaling $700. The transaction to discard the equipment would result in a

A) loss of $175.
B) gain of $175.
C) loss of $800.
D) loss of $875.

Question 80

Prepare the general journal entries for the following transactions.