Deck 8: Accounting for Long-Term Assets

Question 1

Salvage value is an estimate of an asset's value at the end of its benefit period.

Answer 1

True

Question 2

Financial accounting and tax accounting require the same recordkeeping and there should be no difference in results between the two accounting systems.

Answer 2

False

Question 3

The book value of an asset when using double-declining-balance depreciation is always greater than the book value from using straight-line depreciation, except at the beginning and the end of the asset's useful life, when it is the same.

Answer 3

False

Question 4

Decision makers and other users of financial statements are especially interested in evaluating a company's ability to use its assets in generating sales.

Question 5

Plant assets are used in operations and have useful lives that extend over more than one accounting period.

Question 6

Revising an estimate of the useful life or salvage value of a plant asset is referred to as a change in accounting estimate and is reflected in the current, and future financial statements.

Question 7

Depreciation is higher in earlier years and income is lower in the later years when using straight-line versus accelerated methods.

Question 8

A plant asset's useful life is the length of time it is productively used in a company's operations.

Question 9

Total depreciation expense over an asset's useful life will be identical under all methods of depreciation.

Question 10

Plant assets refer to nonphysical assets that are used in the operations of a business.

Question 11

When an asset is purchased (or disposed of) at a time other than the beginning or the end of an accounting period, depreciation is recorded for part of a year so that the year of purchase or the year of disposal is charged with its share of the asset's depreciation.

Question 12

The process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use is called depletion.

Question 13

The Modified Accelerated Cost Recovery System (MACRS) is part of the U.S. federal income tax laws and may be used for financial reporting.

Question 14

Obsolescence refers to the insufficient capacity of a company's plant assets to meet the company's growing productive demands.

Question 15

If land is purchased as a building site, the cost of removing existing structures is not charged to the Land account.

Question 16

Depreciation does not measure the decline in market value of an asset each period.

Question 17

The going concern assumption supports the reporting of plant assets at undepreciated cost (book value) rather than market value.

Question 18

Depreciation expense is calculated using its cost, estimates of an asset's salvage value, and an estimated useful life.

Question 19

Asset turnover is computed by dividing net sales by average total assets.

Question 20

It is necessary to report both the cost and the accumulated depreciation of plant assets in the financial statements.

Question 21

The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.

Question 22

If a machine is damaged during unpacking, the repairs are added to its cost.

Question 23

The units-of-production method of depreciation charges a varying amount of expense for each period of an asset's useful life depending on its usage.

Question 24

The purchase of a property that included land, building, and related improvements is called a lump-sum or basket purchase.

Question 25

Revenue expenditures are also called balance sheet expenditures.

Question 26

Accounting for the exchange of assets depends on whether the transaction has commercial substance; commercial substance implies that it alters the company's future cash flows.

Question 27

Revenue expenditures are additional costs of plant assets that do not materially increase the assets' life or productive capabilities.

Question 28

Companies that have a relatively large amount invested in assets to generate a given level of sales are considered capital-intensive.

Question 29

Additions to land that increase the usefulness of the land such as parking lots, fences, and lighting are not depreciated.

Question 30

The cost of fees for insuring the title and any accrued property taxes are included in the cost of land.

Question 31

Capital expenditures are expenditures that keep assets in normal, good operating condition.

Question 32

The double-declining balance method is applied by (1) computing the asset's straight-line depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying the rate times the net value.

Question 33

An asset's cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

Question 34

An accelerated depreciation method yields larger depreciation expense in the early years of an asset's life and less depreciation expense in later years.

Question 35

If an asset is sold above its book value, the selling company records a loss.

Question 36

Betterments are a type of capital expenditure.

Question 37

Extraordinary repairs are expenditures extending the asset's useful life beyond its original estimate, and are capital expenditures because they benefit future periods.

Question 38

Total asset cost plus depreciation expense equals book value.

Question 39

Plant assets can be disposed of by discarding, selling, or exchanging them.

Question 40

When a company constructs a building, the cost of the building includes materials and labor but not design fees, building permits, or insurance during construction.

Question 41

Natural resources are assets that include standing timber, mineral deposits, and oil and gas fields.

Question 42

A change in an accounting estimate is:

A)Reflected in past financial statements.
B)Reflected in future financial statements and also requires modification of past statements.
C)Reflected in current and future years' financial statements, not in prior statements.
D)Not allowed under current accounting rules.
E)Considered an error in the financial statements.

Question 43

A machine originally had an estimated useful life of 6 years, but after 4 complete years, it was decided that the original estimate of useful life should have been 10 years. At that point the remaining cost to be depreciated should be allocated over the remaining:

A)2 years.
B)4 years.
C)6 years.
D)16 years.
E)10 years.

Question 44

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.

Question 45

A patent is an exclusive right granted to its owner to manufacture and sell a patented device or to use a process for 20 years.

Question 46

Natural resources may be reported under either plant assets or their own separate category on the balance sheet.

Question 47

Intangible assets are nonphysical assets used in operations that confer on their owners' long-term rights, privileges, or competitive advantages.

Question 48

The relevant factors in computing depreciation do not include:

A)Cost.
B)Salvage value.
C)Useful life.
D)Depreciation method.
E)Market value.

Question 49

A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.

Question 50

A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 17 years.

Question 51

Gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the value of any assets received.

Question 52

When the usefulness of plant assets used to extract natural resources is directly related to the depletion of a natural resource, their costs are depreciated using the units-of-production method of depreciation, as long as the assets will not be moved to and used at another site when extraction of the natural resources is complete.

Question 53

The term, obsolescence, as it relates to the useful life of an asset, refers to:

A)The end of an asset's useful life.
B)A plant asset that is no longer useful in producing goods and services with a competitive advantage.
C)The insufficient capacity of a company's plant assets to meet the company's productive demands.
D)An asset's salvage value becoming less than its replacement cost.
E)Intangible assets that have been fully amortized.

Question 54

One characteristic of plant assets is that they are:

A)Current assets.
B)Used in operations.
C)Natural resources.
D)Long-term investments.
E)Intangible.

Question 55

Amortization is the process of allocating the cost of natural resources to periods when they are consumed.

Question 56

Once the estimated depreciation expense for an asset is calculated:

A)It cannot be changed, based on the historical cost principle.
B)It may be revised based on new information.
C)Any changes are accumulated and recognized when the asset is sold.
D)The estimate itself cannot be changed; however, new information should be disclosed in financial statement footnotes.
E)It cannot be changed, based on the consistency principle.

Question 57

Depreciation:

A)Measures the decline in market value of an asset.
B)Measures physical deterioration of an asset.
C)Is the process of allocating the cost of a plant asset to expense.
D)Is an outflow of cash from the use of a plant asset.
E)Is applied to land.

Question 58

Since goodwill is an intangible, it is amortized each year using the straight-line method, the same as other intangibles are amortized.

Question 59

A trademark is an exclusive right granted to its owner to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years.

Question 60

The cost of an intangible asset is systematically allocated to depreciation expense over its estimated useful life.

Question 61

The formula to compute annual straight-line depreciation is:

A)Depreciable cost divided by useful life in units.
B)(Cost plus salvage value) divided by the useful life in years.
C)(Cost minus salvage value) divided by the useful life in years.
D)Cost multiplied by useful life in years.
E)Cost divided by useful life in units.

Question 62

The calculation of total asset turnover is:

A)Gross profit divided by average total assets.
B)Average total assets divided by gross profit.
C)Net sales divided by average total assets.
D)Average total assets multiplied by net sales.
E)Net assets multiplied by total assets.

Question 63

Land improvements are:

A)Assets that increase the usefulness of land, and like land, are not depreciated.
B)Assets that increase the usefulness of land, but that have a limited useful life and are subject to depreciation.
C)Included in the cost of the land account.
D)Expensed in the period incurred.
E)Also called basket purchases.

Question 64

Merchant Company purchased property for a building site. The costs associated with the property were: $$\begin{array} { | l | r | } \hline \text { Purchase price } & \$ 185,000 \\\hline \text { Real estate commissions } & 15,000 \\\hline \text { Legal fees } & 700 \\\hline \text { Expenses of clearing the land } & 2,000 \\\hline \text { Expenses to remove old building } & 4,000 \\\hline\end{array}$$ What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?

A)$187,700 to Land; $19,000 to Building.
B)$200,700 to Land; $6,000 to Building.
C)$200,000 to Land; $6,700 to Building.
D)$185,000 to Land; $21,700 to Building.
E)$206,700 to Land; $0 to Building.

Question 65

A total asset turnover ratio of 3.5 indicates that:

A)For every $1 in sales, the firm acquired $3.50 in assets during the period.
B)For every $1 in assets, the firm produced $3.50 in net sales during the period.
C)For every $1 in assets, the firm earned gross profit of $3.50 during the period.
D)For every $1 in assets, the firm earned $3.50 in net income.
E)For every $1 in assets, the firm paid $3.50 in expenses during the period.

Question 66

A company used straight-line depreciation for an item of equipment that cost $12,000, had a salvage value of $2,000 and a five-year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1,200 but its total useful life remained the same. Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life:

A)$1,000.
B)$1,800.
C)$5,400.
D)$2,400.
E)$2,000.

Question 67

A company had average total assets of $887,000. Its gross sales were $1,090,000 and its net sales were $1,000,000. The company's total asset turnover equals:

A)0.81.
B)0.89.
C)1.09.
D)1.13.
E)1.23.

Question 68

A company purchased property for $100,000. The property included a building, a parking lot, and land. The building was appraised at $62,000; the land at $35,000, and the parking lot at $18,000. Land should be recorded in the accounting records with an allocated cost of:

A)$0.
B)$30,435.
C)$35,000.
D)$46,087.
E)$100,000.

Question 69

The total cost of an asset less its accumulated depreciation is called:

A)Historical cost.
B)Book value.
C)Present value.
D)Current (market) value.
E)Replacement cost.

Question 70

The depreciation method that charges the same amount of expense to each period of the asset's useful life is called:

A)Accelerated depreciation.
B)Declining-balance depreciation.
C)Straight-line depreciation.
D)Units-of-production depreciation.
E)Modified accelerated cost recovery system (MACRS) depreciation.

Question 71

A company paid $150,000, plus a 7% commission and $5,000 in closing costs for a property. The property included land appraised at $87,500, land improvements appraised at $35,000, and a building appraised at $52,500. What should be the allocation of this property's costs in the company's accounting records?

A)Land $75,000; Land Improvements, $30,000; Building, $45,000.
B)Land $75,000; Land Improvements, $30,800; Building, $46,200.
C)Land $82,750; Land Improvements, $33,100; Building, $49,650.
D)Land $80,250; Land Improvements, $32,100; Building, $48,150.
E)Land $77,500; Land Improvements, $31,000; Building, $46,500.

Question 72

The following information is available on a depreciable asset owned by Mutual Savings Bank: $\begin{array}{|l|r|}\hline \text { Purchase date } & \text { June 1, Year } \\\hline \text { Purchase price } & \$ 85,000 \\\hline \text { Salvage value } & \$ 10,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Depredation method } & \text { straight-line } \\\hline\end{array}$ The asset's book value is $70,000 on June 1, Year 3. On that date, management determines that the asset's salvage value should be $5,000 rather than the original estimate of $10,000. Based on this information, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be:

A)$8,125.00
B)$7,375.00
C)$4,062.50
D)$3,750.00
E)$7,812.50

Question 73

Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of $100,000. The asset is expected to have a salvage value of $20,000 at the end of its five-year useful life. If the asset is depreciated on the double-declining-balance method, the asset's book value on December 31, Year 2 will be:

A)$36,000
B)$42,000
C)$54,000
D)$16,000
E)$90,000

Question 74

The depreciation method that allocates an equal portion of the total depreciable cost for a plant asset to each unit produced is called:

A)Accelerated depreciation.
B)Declining-balance depreciation.
C)Straight-line depreciation.
D)Units-of-production depreciation.
E)Modified accelerated cost recovery system (MACRS) depreciation.

Question 75

Which of the following are not classified as plant assets?

A)Land.
B)Land improvements.
C)Buildings.
D)Machinery and equipment.
E)Patent.

Question 76

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $2,000, Peavey Enterprises should recognize depreciation expense in Year 2 in the amount of:

A)$10,000
B)$5,000
C)$5,500
D)$20,000
E)$9,250

Question 77

The cost of land would not include:

A)Purchase price.
B)Cost of parking lot lighting.
C)Costs of removing existing structures.
D)Fees for insuring the title.
E)Government assessments.

Question 78

Spears Co. had net sales of $35,400 million. Its average total assets for the period were $14,700 million. Spears' total asset turnover equals:

A)0.42.
B)0.35.
C)1.48.
D)2.41.
E)3.54.

Question 79

A benefit of using an accelerated depreciation method is that:

A)It is preferred by the tax code.
B)It is the simplest method to calculate.
C)It yields larger depreciation expense in the early years of an asset's life.
D)It yields a higher income in the early years of the asset's useful life.
E)The results are identical to straight-line depreciation.

Question 80

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $2,000, what will be the amount of accumulated depreciation on this asset on December 31, Year 3?

A)$5,000
B)$15,000
C)$15,125
D)$20,000
E)$13,750