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

Question 1

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

Answer 1

True
Explanation: Depreciation is an allocation process.

Question 2

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 an expense on the income statement.

Answer 2

False
Explanation: Costs incurred to get an asset ready for its intended use are capitalized and are reported on the balance sheet as a component of the asset's cost.

Question 3

The depreciation method chosen for financial reporting purposes (GAAP)must also be utilized for income tax reporting (IRS).

Answer 3

False
Explanation: GAAP depreciation accounting differs from IRS depreciation accounting.

Question 4

On January 1,2010 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 31,2010,the book value using the straight-line method of depreciation is $90,000.

Question 5

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 6

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

Question 7

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

Question 8

On January 1,2010 equipment was purchased for $80,000; the equipment's estimated residual value is $15,000 and its estimated useful life is 8 years.During 2010,the depreciation expense under the double-declining balance method is $16,250.

Question 9

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

Question 10

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

Question 11

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

Question 12

The cash-equivalent cost of an asset received is measured as any cash paid plus the current market value of the non-cash consideration given up.If this value is not determinable,the current market value of what is received should be used instead.

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

If depreciation expense is calculated without taking into account the asset's residual value,depreciation expense will be higher than it should have been.

Question 19

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.

Question 20

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 21

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

Question 22

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

Question 23

The Wilson Company has provided the following information:
Net sales,$100,000;
Net operating income,$40,000;
Net income,$20,000;
Average total assets,$120,000;
Average net fixed assets; $80,000.
What is Wilson's fixed asset turnover ratio?

A)0.83
B)1.25
C)0.25
D)0.50.

Question 24

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

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

Question 25

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 26

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 27

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

A)Land being held for resale.
B)Equipment used in the manufacturing process.
C)A building used as corporate headquarters.
D)A natural resource being mined.

Question 28

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 29

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 30

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 31

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

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

Question 32

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

Question 33

Which of the following includes only tangible assets?

A)Land, buildings and natural resources.
B)Land, buildings and leaseholds.
C)Natural resources, buildings, and franchises.
D)Licenses, trademarks, and land.

Question 34

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)It is used to assess a company's effectiveness in generating sales from its fixed assets.
D)It increases when a company sells a factory building for its book value.

Question 35

Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets.

Question 36

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 37

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

A)A profitable sale of inventory on account.
B)A profitable sale of inventory for cash.
C)Selling equipment used in the manufacturing process for a loss.
D)A decrease in cash-based operating expenses.

Question 38

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 39

When determining cash flow from operations using the direct method,depreciation and amortization expense are deducted from net income.

Question 40

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 41

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 $3,000; and installation cost,$2,500.At what amount will the equipment be recorded at on a balance sheet?

A)$56,500
B)$54,000
C)$51,000
D)$50,000

Question 42

On August 1,Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock held by Red Company as an investment.The White common stock cost Red Company $5,000 and on August 1 had a market value of $4,200.Installation costs 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 43

Which of the following statements is incorrect?

A)Replacement of a truck's tires would be treated as a capital expenditure.
B)The cost of replacing carpet in a building would be a revenue expenditure.
C)Cost of replacing 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 a revenue expenditure.

Question 44

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) $\begin{array} { l r } \text { Building } & 220,000 \\\quad \text { Cash } && 20,000 \\\quad \text { Common stock } && 200,000\end{array}$
B) $\begin{array} { l r } \text { Building } & 370,000 \\\quad \text { Cash } && 20,000 \\\text { Common Stock } & &350,000\end{array}$
C) $\begin{array} { l r } \text { Building } & 370,000 \\\text { Cash } & 20,000 \\\text { Common stock } & 200,000 \\\text { Additional paid-in capital } & 150,000\end{array}$
D) $\begin{array} { l l } \text { Building } & 200,000 \\\quad\quad\text { Common stock } &\quad\quad\quad 200,000\end{array}$

Question 45

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 46

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 $200,000.

A)Total assets increase $350,000.
B)Stockholders' equity increases $200,000.
C)Stockholders' equity increases $330,000.
D)Total assets increase $330,000.

Question 47

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 replacement cost of the asset.

Question 48

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 value of the consideration given up, $200,000.
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 49

On January 1,2010,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 50

Gilbert Company made an ordinary repair to a delivery truck during 2010 at a cost of $500 and capitalized the repair cost.What will be the effect on the 2010 financial statements as a result of the capitalization?

A)The financial statements aren't 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.

Question 51

Why is the continuity assumption important with respect to the accounting for long-lived tangible assets?

A)It helps a company decide whether to use straight-line depreciation or an accelerated depreciation method.
B)It justifies depreciating the asset over its expected useful life, without anticipating that the business will liquidate in the near future.
C)It provides justification for including residual values in calculating depreciation.
D)It is consistent with maintaining assets in the accounting records at market value rather than acquisition cost.

Question 52

Which of the following doesn't 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 53

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

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

Question 54

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 55

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 56

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 57

Which of the following statements is incorrect?

A)Revenue expenditures decrease net income.
B)Capital expenditures decrease assets.
C)Ordinary repairs and maintenance are considered revenue expenditures.
D)Additions and improvements are considered capital expenditures.

Question 58

If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure,instead of as a revenue expenditure,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 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 $350,000.
C)Stockholders' equity increases $350,000.
D)The additional paid-in capital account increases by $250,000.

Question 60

What is the effect on the 2010 financial statements when a capital expenditure during 2010 was incorrectly recorded as a revenue expenditure?

A)The financial statements aren't 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.

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

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

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

Question 63

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 64

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 65

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 66

On January 1,2010,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 31,2011 assuming Wasson uses the straight-line depreciation method?

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

Question 67

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 68

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 69

Schager Company purchased a computer system on January 1,2010,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 2011 depreciation expense?

A)$5,000
B)$4,000
C)$3,800
D)$2,200

Question 70

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 71

On December 31,2010,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 31,2010.What is the gain or loss from the December 31,2010 equipment sale?

A)$800,000 gain
B)$800,000 loss
C)$200,000 loss
D)$200,000 gain

Question 72

Which of the following statements is correct?

A)Companies can change the method of depreciating assets from one year to the next.
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.

Question 73

On January 1,2010,Pyle Company purchased an asset that cost $50,000 (no estimated residual value,estimated useful life 8 years,straight-line depreciation is used).An error was made because the total cost amount was debited to an expense account for 2010 and no depreciation on it was recorded.Pretax income for 2010 was $42,000.How much is the correct 2010 pretax income?

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

Question 74

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 75

On January 1,2010,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.Which of the following statements is incorrect?

A)The annual depreciation expense is $6,000.
B)The December 31, 2010 book value was $35,000.
C)The December 31, 2012 accumulated depreciation balance was $18,000.
D)The December 31, 2011 book value was $24,000.

Question 76

Schager Company purchased a computer system on January 1,2010,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 31,2011?

A)$9,000
B)$4,000
C)$5,000
D)$10,920

Question 77

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 78

On January 1,2010,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 31,2011 assuming Wasson uses the units-of-production depreciation method and the vehicle was driven 10,000 miles during 2010 and 18,000 miles during 2011?

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

Question 79

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 80

Hill Inc.purchased an asset on January 1,2009.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 2009.
B)The book value of the asset would have been lower at the end of 2009.
C)The net income would have been lower during 2009.
D)The accumulated depreciation balance would have been higher at the end of 2009.