Deck 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition

Question 1

Any method of depreciation should be both systematic and rational.

Answer 1

True

Question 2

Biological assets are valued at fair value less estimated costs to sell under International Financial Reporting Standards (IFRS).

Answer 2

True

Question 3

According to International Financial Reporting Standards (IFRS), property, plant, and equipment must be valued at cost less accumulated depreciation.

Answer 3

False

Question 4

The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.

Question 5

Total depreciation is the same over the life of an asset regardless of the method of depreciation used.

Question 6

Component depreciation, required under International Financial Reporting Standards (IFRS), is allowed but rarely used by U.S. companies.

Question 7

International Financial Reporting Standards (IFRS) require goodwill to be tested for impairment at least annually.

Question 8

Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.

Question 9

According to International Financial Reporting Standards (IFRS), an impairment loss for property, plant, and equipment is required only when an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows.

Question 10

Property, plant, and equipment and finite-life intangible assets must be tested for impairment at least once a year.

Question 11

The physical life of a depreciable asset is bounded by its service life.

Question 12

Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time.

Question 13

According to International Financial Reporting Standards (IFRS), the impairment loss for an indefinite-life intangible asset other than goodwill is the difference between book value and the recoverable amount.

Question 14

Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.

Question 15

MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum-of-the-years' digits depreciation.

Question 16

According to International Financial Reporting Standards (IFRS), the costs to successfully defend an intangible right normally are capitalized and amortized.

Question 17

Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements.

Question 18

Once selected for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions.

Question 19

Under group and composite depreciation methods, gains and losses on the disposal of individual assets need not be computed.

Question 20

A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements.

Question 21

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

- Using the straight-line method, the book value at December 31, 2018, would be:

A) $57,600.
B) $51,600.
C) $58,800.
D) $52,800.

Question 22

Depreciation:

A) Is always considered a period cost.
B) Could be a product cost or a period cost depending on the use of the asset.
C) Is usually based on the declining-balance method.
D) Per books is usually higher than MACRS in the early years of an asset's life.

Question 23

An asset acquired January 1, 2018, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2019, for $6,000. The entry to record the sale would be:

A) $\begin{array}{|l|r|r|}\hline \text { Cash } & 6,000 & \\\hline \text { Loss on sale of equipment } & 9,000 & \\\hline \text { Equipment } & & 15,000 \\\hline\end{array}$
B) $\begin{array}{|l|r|r|}\hline \text { Cash } & 6,000 & \\\hline \text { Equipment } & & 6,000 \\\hline\end{array}$
C) $\begin{array}{|l|r|l|}\hline \text { Cash } & 6,000 & \\\hline \text { Accumulated depreciation } & 3,750 & \\\hline \text { Loss on sale of equipment } & 5,250 & \\\hline \text { Equipment } & & 15,000 \\\hline\end{array}$
D) $\begin{array}{|l|r|r|}\hline \text { Cash } & 6,000 & \\\hline \text { Accumulated depreciation } & 9,000 & \\\hline \text { Equipment } & & 15,000 \\\hline\end{array}$

Question 24

An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:

A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.

Question 25

The factors that need to be determined to compute depreciation are an asset's:

A) Cost, residual value, and physical life.
B) Cost, replacement value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, residual value, and service life.

Question 26

Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?

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

Question 27

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

- Using the straight-line method, depreciation for 2019 and the equipment's book value at December 31, 2019, would be:

A) $14,400 and $43,200 respectively.
B) $28,800 and $37,200 respectively.
C) $13,200 and $39,600 respectively.
D) $13,200 and $45,600 respectively.

Question 28

The allocation base of an asset refers to which of the following?

A) The asset's initial capitalized cost.
B) The number of years over which the asset's cost will be allocated.
C) The asset's initial capitalized cost minus residual value.
D) The method used to allocate the asset's cost across years.

Question 29

The overriding principle for all depreciation methods is that the method must be:

A) Conservative and economic.
B) Systematic and rational.
C) Consistent and conservative.
D) Significant and material.

Question 30

Which of the following typically would cause the service life of an asset to be less than its physical life?

A) The company no longer provides the products or services associated with the use of the asset.
B) Suppliers may develop new technologies that are more efficient.
C) The expected rate of technological change may shorten service life.
D) All of these answer choices are correct.

Question 31

Which of the following typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods?

A) Depreciation.
B) Amortization.
C) Depletion.
D) Impairment.

Question 32

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Question 33

Depreciation, depletion, and amortization:

A) All refer to the process of allocating the cost of long-term assets used in the business over future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.

Question 34

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

-Using the straight-line method, depreciation for 2018 would be:

A) $13,200.
B) $14,400.
C) $72,000.
D) None of these answer choices are correct.

Question 35

The allocation base for an asset is:

A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS.

Question 36

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

-Using the double-declining balance method, depreciation for 2019 would be:

A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.

Question 37

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

-Using the sum-of-the-years'-digits method, depreciation for 2018 and book value at December 31, 2018, would be:

A) $22,000 and $44,000 respectively.
B) $22,000 and $50,000 respectively.
C) $24,000 and $48,000 respectively.
D) $24,000 and $42,000 respectively.

Question 38

In the first year of an asset's life, which of the following methods has the smallest depreciation?

A) Straight-line.
B) Declining balance.
C) Sum-of-the-years' digits.
D) Composite or group.

Question 39

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

-Using the double-declining balance method, the book value at December 31, 2019, would be:

A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.

Question 40

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

- Using the double-declining balance method, depreciation for 2018 and the book value at December 31, 2018, would be:

A) $26,400 and $45,600 respectively.
B) $28,800 and $43,200 respectively.
C) $28,800 and $37,200 respectively.
D) $26,400 and $36,600 respectively.

Question 41

When selling property, plant, and equipment for cash:

A) The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.
B) The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
C) The seller recognizes losses, but not gains.
D) None of these answer choices are correct.

Question 42

On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

-Depreciation for 2018, using the double-declining balance method, would be:

A) $40,000.
B) $10,000.
C) $36,000.
D) $9,000.

Question 43

Gulf Consulting Co. reported the following on its December 31, 2018, balance sheet: Equipment (at cost) $700,000
In a disclosure note, Gulf indicates that it uses straight-line depreciation over five years and estimates salvage value as 10% of cost. Gulf's equipment averages 3.5 years at December 31, 2018. What is the book value of Gulf's equipment at December 31, 2018?

A) $490,000.
B) $441,000.
C) $259,000.
D) $210,000.

Question 44

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

-Using the double-declining balance method, depreciation for 2019 and book value at December 31, 2019, would be:

A) $10,000 and $5,000.
B) $10,000 and $10,000.
C) $11,250 and $6,250.
D) $11,250 and $11,250.

Question 45

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

-Using the sum-of-the years'-digits method, depreciation for 2019 and book value at December 31, 2019, would be:

A) $13,500 and $13,500.
B) $13,500 and $8,500.
C) $12,000 and $17,000.
D) $12,000 and $12,000.

Question 46

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

-Using the straight-line method, depreciation for 2018 and book value at December 31, 2018, would be:

A) $10,000 and $30,000.
B) $11,250 and $28,750.
C) $10,000 and $35,000.
D) $11,250 and $33,750.

Question 47

Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would the accumulated depreciation be at the end of year five under the sum-of-the-years' digits method?

A) $4.5 million.
B) $8.25 million.
C) $12 million.
D) None of these answer choices are correct.

Question 48

On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

-Depreciation (to the nearest dollar) for 2018, using sum-of-the-years' digits method, would be:

A) $9,091.
B) $24,545.
C) $27,273.
D) $8,182.

Question 49

Losses on the cash sales of property, plant, and equipment:

A) Are the excess of the book value over the cash proceeds.
B) Are part of cash flows from operations.
C) Are reported on a net-of-tax basis if material.
D) Are the excess of the cash proceeds over the book value of the assets sold.

Question 50

On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

-Depreciation for 2019, using the double-declining balance method, would be:

A) $32,000.
B) $34,000.
C) $38,000.
D) $40,000.

Question 51

On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

-Depreciation for 2018, using the straight-line method is:

A) $13,500.
B) $15,000.
C) $4,500.
D) $5,000.

Question 52

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

- Using the straight-line method, depreciation for 2019 and book value at December 31, 2019, would be:

A) $10,000 and $20,000.
B) $10,000 and $25,000.
C) $11,250 and $17,500.
D) $11,250 and $22,500.

Question 53

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

- Using the double-declining balance method, depreciation for 2018 and book value at December 31, 2018, would be:

A) $22,500 and $22,500.
B) $22,500 and $17,500.
C) $20,000 and $25,000.
D) $20,000 and $20,000.

Question 54

On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2019, 70,000 units were produced.

- Prego would report depreciation in 2019 of:

A) $135,230.
B) $126,000.
C) $108,000.
D) $105,000.

Question 55

Jennings Advertising Inc. reported the following in its December 31, 2018, balance sheet: $\begin{array}{lr}\text {Equipment }&\$500,000\\\text {Less: Accumulated depreciation- equipment }&\$135,000\\\end{array}$
In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 10% of cost. What is the average age of the equipment owned by Jennings?

A) 2.7 years.
B) 3 years.
C) 7 years.
D) 7.3 years.

Question 56

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

- Using the sum-of-the-years'-digits method, depreciation for 2019 and book value at December 31, 2019, would be:

A) $19,200 and $30,800 respectively.
B) $17,600 and $26,400 respectively.
C) $19,200 and $28,800 respectively.
D) $17,600 and $32,400 respectively.

Question 57

On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2019, 70,000 units were produced.

-Prego would report depreciation in 2018 of:

A) $36,000.
B) $43,900.
C) $18,000.
D) $21,950.

Question 58

Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

-Using the sum-of-the-years'-digits method, depreciation for 2018 and book value at December 31, 2018, would be:

A) $18,000 and $27,000.
B) $16,000 and $29,000.
C) $16,000 and $24,000.
D) $18,000 and $22,000.

Question 59

On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

-Depreciation (to the nearest dollar) for 2019, using sum-of-the-years' digits method, would be:

A) $31,909.
B) $29,455.
C) $35,456.
D) $54,000.

Question 60

Gains on the cash sales of property, plant, and equipment:

A) Are the excess of the book value over the cash proceeds.
B) Are part of cash flows from operations.
C) Are reported on a net-of-tax basis if material.
D) Are the excess of the cash proceeds over the book value of the assets sold.

Question 61

On March 31, 2018, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2018, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2018. At January 1, 2019, Belotti estimated that 20,000 tons still remained. During 2019, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.

- Belotti would record depletion in 2019 of:

A) $54,667.
B) $65,600.
C) $52,480.
D) $55,760.

Question 62

An asset was acquired on September 30, 2018, for $100,000 with an estimated 5-year life and $20,000 residual value. The company uses double-declining-depreciation. Calculate the gain or loss if the asset was sold on December 31, 2019, for $50,000. Partial-year depreciation is to be calculated.

A) $1,200 gain.
B) $14,000 gain.
C) $16,000 loss.
D) $4,000 loss.

Question 63

On April 23, 2018, Trevors Mining entered into an agreement with the state of California to obtain the rights to operate a mineral mine in California for $12 million. Additional costs and purchases included the following: $\begin{array}{lr}\text { Preparation of site for excavation } & \$ 4,800,000 \\\text { Mining equipment } & 360,000 \\\text { Construction of various structures on site } & 240,000\end{array}$ After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $60,000. The structures will be torn down. The mine is expected to produce 1,400,000 tons of ore. After the ore is removed, the land will revert back to the state of California. During 2018, Trevors extracted 210,000 tons of ore from the mine. What total amount would be charged to depletion of the mine and depreciation of the mining equipment and structures for 2018, assuming that Trevors uses the units-of-production method for both depletion and depreciation? (Round your final calculations to the nearest whole thousand dollars.)

A) $2,601,000.
B) $2,520,000.
C) $2,610,000.
D) $2,565,000.

Question 64

Short Corporation acquired Hathaway, Inc., for $52,000,000. The fair value of all Hathaway's identifiable tangible and intangible assets was $48,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?

A) $100,000.
B) $400,000.
C) $200,000.
D) $0.

Question 65

Granite Enterprises acquired a patent from Southern Research Corporation on January 1, 2018, for $4 million. The patent will be used for 5 years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2018, assuming the straight-line method is used.

A) $380,000.
B) $400,000.
C) $760,000.
D) $800,000.

Question 66

Natural resources that have been harvested but not yet sold are accounted for as:

A) Property, plant and equipment.
B) Cost of goods sold.
C) Operating expense.
D) Inventory.

Question 67

An asset was acquired on October 1, 2018, for $78,000 with an estimated 5-year life and $13,000 residual value. The company uses units-of-production depreciation and expects the asset to produce 20,000 units. Calculate the gain or loss if the asset was sold on March 31, 2021, for $58,000. Actual production was: 2018=500 units; 2019=3,000 units; 2020=3,500 units; 2021=1,000 units.

A) $11,200 gain.
B) $19,000 gain.
C) $6,000 gain.
D) $12,500 gain.

Question 68

Intangible assets that have an indefinite useful life:

A) Are those with no foreseeable limit on the period of time over which the asset is expected to contribute to the cash flows of the entity.
B) Are those with no legal, contractual, or economic factors that are expected to limit their useful life to a company.
C) Are those whose acquisition costs is not amortized over their useful life.
D) All of these answer choices are correct.

Question 69

Equipment was acquired on January 1, 2018, for $15,000 with an estimated 4-year life and $1,000 residual value. The company uses straight-line depreciation. Record the gain or loss if the equipment was sold on December 31, 2020, for $5,000.

A) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,000 & \\\hline \text { Accumulated Depreciation } & 10,500 & \\\hline \text { Equipment } & & 15,000 \\\hline \text { Gain } & & 500 \\\hline\end{array}$
B) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,000 & \\\hline \text { Equipment } & & 4,500 \\\hline \text { Gain } & & 500 \\\hline\end{array}$
C) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,000 & \\\hline \text { Equipment } & & 3,500 \\\hline \text { Gain } & & 1,500 \\\hline\end{array}$
D) $\begin{array}{|l|r|l|}\hline \text { Cash } & 5,000 & \\\hline \text { Accumulated Depreciation } & 7,000 & \\\hline \text { Loss } & 3,000 & \\\hline \text { Equipment } & & 15,000 \\\hline\end{array}$

Question 70

An asset was acquired on January 1, 2018, for $15,000 with an estimated 4-year life and $1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on December 31, 2020, for $5,000.

A) $500 gain.
B) $3,000 loss.
C) $1,500 gain.
D) $500 loss.

Question 71

Clark Oil and Gas incurred costs of $15.3 million for the rights to extract resources from a natural gas deposit. The company expects to extract 8 million cubic feet of natural gas during a six-year period. Natural gas extracted during years 1 and 2 were 800,000 and 1,600,000 cubic feet, respectively. What was total depletion for year 1 and year 2, assuming the company uses the units-of-production method?

A) $5.10 million.
B) $3.06 million.
C) $8.00 million.
D) $4.59 million.

Question 72

If an intangible asset has a legal life of eight years but contractually the usefulness is limited to six years, a company will amortize the cost over:

A) Eight years.
B) Six years.
C) Seven years.
D) Either six or eight years is allowed.

Question 73

An activity-based method is most often used to allocate the cost of natural resources over its useful life because:

A) This method generally results in the highest amount of assets in the earlier years.
B) This is the simplest method, and natural resource activity is hard to estimate.
C) The usefulness of natural resources generally is directly related to the amount of the resources extracted.
D) This method generally results in the highest amount of assets in the later years.

Question 74

Foreman Mining purchased land containing a copper deposit for $2,300,000 on January 7, 2018. The company expects to mine 600,000 tons of copper over the next 10 years, and the land is expected to have a residual value of $1,400,000. The company has also purchased mining equipment for $400,000 that will be used only at this site over the 10 years with an estimated residual value of $52,000. By the end of the first year, the company has mined and sold 50,000 tons of copper. What is the cost attributed to copper inventory for 2018, assuming the company uses the units-of-production method?

A) $109,800.
B) $124,800.
C) $104,000.
D) $75,000.

Question 75

The cost of natural resources is expensed in the period:

A) The resource is harvested and becomes ready for sale.
B) The resource is acquired.
C) The resource is sold.
D) The resource is paid for.

Question 76

On March 31, 2018, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2018, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2018. At January 1, 2019, Belotti estimated that 20,000 tons still remained. During 2019, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.

-Belotti would record depletion in 2018 of:

A) $41,000.
B) $32,800.
C) $30,750.
D) $24,600.

Question 77

The process of allocating the cost of natural resources over their useful life is known as:

A) Depreciation.
B) Depletion.
C) Amortization.
D) Consumption.

Question 78

On February 12, 2018, Forest Incorporated purchased the right to remove timber from a 10,000-acre tract of land over the next three years, and the company estimates no residual value. The timber is to be sold as lumber for new home construction. The cost of the timber rights was $240,000, with estimated salable timber feet of 750,000. During 2018 and 2019, Forest harvested and sold 600,000 feet of timber. What is the book value of the timber rights at the end of 2019, assuming the company uses the units-of-production method?

A) $48,000.
B) $80,000.
C) $160,000.
D) $192,000.

Question 79

An asset was acquired on August 1, 2018, for $22,000 with an estimated 5-year life and $2,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on April 30, 2020, for $13,000. Partial-year depreciation is calculated based on the number of months the asset is in service.

A) $3,000 gain.
B) $2,000 loss.
C) $6,000 gain.
D) $4,000 loss.

Question 80

The legal life of a patent is:

A) 40 years.
B) 20 years.
C) Life of the inventor plus 50 years.
D) Indefinite.