Deck 10: Plant Assets, Natural Resources, and Intangibles

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

It is not necessary to report both the cost and the accumulated depreciation of plant assets in the financial statements.

Question 5

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

Question 6

A plant asset's useful life might not be the same as its productive life.

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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.

Question 12

Depreciation is higher and income is lower in the short run when using accelerated versus straight-line methods.

Question 13

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

Question 14

Depreciation measures the actual decline in market value of an asset.

Question 15

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

Question 16

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

Question 17

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

Question 18

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 past, current, and future financial statements.

Question 19

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

Question 20

Asset turnover is computed by dividing average total assets by cost of sales.

Question 21

Capital intensive companies have a relatively large amount invested in assets to generate a given level of sales.

Question 22

Betterments are a type of capital expenditure.

Question 23

A company purchased a plant asset for $45,000. The asset has an estimated salvage value of $6,000, and an estimated useful life of 10 years. The annual depreciation expense using the straight-line method is $3,900 per year.
($45,000 - $6,000)/10 = $3,900

Question 24

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

Question 25

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

Question 26

Abers reported average total assets of $10,965 million and net sales of $11,430 million. Its total asset turnover equals .96.
$11,430/$10,965 = 1.04

Question 27

Capital expenditures are also called balance sheet expenditures.

Question 28

Total asset cost plus depreciation expense equals book value.

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Revenue expenditures are additional costs of plant assets that materially increase the assets' life or productive capabilities.

Question 37

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 38

Cowers reported net sales of $2,463 million and average total assets of $1,546 million. Its total asset turnover equals 1.59.
$2,463/$1,546 = 1.59

Question 39

Land is not subject to depreciation because it has an unlimited life. This means that items which increase the usefulness of the land such as parking lots are not depreciated.

Question 40

When a company constructs a building, the cost of the building includes materials and labor, design fees, building permits, and insurance during construction.

Question 41

The relevant factor(s) in computing depreciation include:

A) Cost.
B) Salvage value.
C) Useful life.
D) Depreciation method.
E) All of these.

Question 42

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

Question 43

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

Question 44

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 45

Salvage value is:

A) Also called residual value.
B) Also called scrap value.
C) An estimate of the asset's value at the end of its benefit period.
D) A factor relevant to determining depreciation.
E) All of these.

Question 46

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

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

Question 49

Plant assets are:

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

Question 50

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

Question 51

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

Question 52

Plant assets are:

A) Tangible assets used in the operation of a business that have a useful life of more than one accounting period.
B) Current assets.
C) Held for sale.
D) Intangible assets used in the operations of a business that have a useful life of more than one accounting period.
E) Tangible assets used in the operation of business that have a useful life of less than one accounting period.

Question 53

Depreciation:

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

Question 54

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

Question 55

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 56

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 57

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 58

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 59

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 60

Natural resources are often called wasting assets because they are physically consumed when used.

Question 61

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 62

Inadequacy refers to:

A) The insufficient capacity of a company's plant assets to meet the company's growing production demands.
B) An asset that is worn out.
C) An asset that is no longer useful in producing goods and services.
D) The condition where the salvage value is too small to replace the asset.
E) The condition where the asset's salvage value is less than its cost.

Question 63

Once the estimated depreciation expense for an asset is calculated:

A) It cannot be changed due to 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 due to the consistency principle.

Question 64

A machine originally had an estimated useful life of 5 years, but after 3 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) 5 years.
C) 7 years.
D) 8 years.
E) 10 years.

Question 65

Total asset turnover is used to evaluate:

A) The efficiency of management's use of assets to generate sales.
B) The necessity for asset replacement.
C) The number of times operating assets were sold during the year.
D) The cash flows used to acquire assets.
E) The relation between asset cost and book value.

Question 66

The useful life of a plant asset is:

A) The length of time it is productively used in a company's operations.
B) Never related to its physical life.
C) Its productive life, but not to exceed one year.
D) Determined by the FASB.
E) Determined by law.

Question 67

Lomax Enterprises purchased a depreciable asset for $22,000 on March 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, Lomax Enterprises should recognize depreciation expense in Year 2 in the amount of:

A) $19,166.67
B) $5,000.00
C) $5,500.00
D) $20,000.00
E) $4,166.67

Question 68

The following information is available on a depreciable asset owned by First Bank & Trust: The asset's book value is $70,000 on October 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 three months of Year 3 would be:

A) $2,187.50
B) $1,718.75
C) $2,031.25
D) $2,321.43
E) $1,964.29

Question 69

Lomax Enterprises purchased a depreciable asset for $22,000 on March 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 4?

A) $5,000.00
B) $4,166.67
C) $16,666.68
D) $20,000.00
E) $19,166.67

Question 70

Total asset turnover is calculated by dividing:

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

Question 71

When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost $23,000 and its estimated salvage value is $1,500. After 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5 equals:

A) $5,375.00.
B) $2,687.50.
C) $5,543.75.
D) $10,750.00.
E) $2,856.25.

Question 72

Thomas 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 $15,000 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 3 will be:

A) $27,540
B) $21,600
C) $32,400
D) $18,360
E) $90,000

Question 73

Dart had net sales of $35,404 million. Its average total assets for the period were $14,502 million. Dart's total asset turnover equals:

A) 0.40.
B) 0.35.
C) 1.45.
D) 2.44.
E) 3.50.

Question 74

A company used straight-line depreciation for an item of equipment that cost $12,000, had a salvage value of $2,000, and had a five-year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1,200 and its total useful life was increased from 5 years to 6 years. Determine the amount of depreciation to be charged against the machine during each of the remaining years of its useful life:

A) $1,000.
B) $1,800.
C) $1,467.
D) $1,600.
E) $2,160.

Question 75

Obsolescence:

A) Occurs when an asset is at the end of its useful life.
B) Refers to a plant asset that is no longer useful in producing goods and services with a competitive advantage.
C) Refers to the insufficient capacity of a company's plant assets to meet the company's productive demands.
D) Occurs when an asset's salvage value is less than its replacement cost.
E) Does not affect plant assets.

Question 76

The straight-line depreciation method and the double-declining-balance depreciation method:

A) Produce the same total depreciation over an asset's useful life.
B) Produce the same depreciation expense each year.
C) Produce the same book value each year.
D) Are acceptable for tax purposes only.
E) Are the only acceptable methods of depreciation for financial reporting.

Question 77

The modified accelerated cost recovery system (MACRS):

A) Is included in the U.S. federal income tax rules for depreciating assets.
B) Is an out-dated system that is no longer used by companies.
C) Is required for financial reporting.
D) Is identical to units of production depreciation.
E) All of these.

Question 78

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 79

A company had average total assets of $897,000. Its gross sales were $1,090,000 and its net sales were $1,000,000. The company's total asset turnover equals:

A) 0.82.
B) 0.90.
C) 1.09.
D) 1.11.
E) 1.26.

Question 80

Many companies use an accelerated depreciation method because:

A) It is required by the tax code.
B) It is required by financial reporting rules.
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.