Deck 10: Long-Term Assets

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

An item of property, plant and equipment's useful life might not be the same as its productive life.

Question 5

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

Question 6

Depreciation is the process of allocating the cost of an item of property, plant and equipment to expense in the accounting periods benefiting from its use.

Question 7

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 8

Property, plant and equipment are used in operations and have useful lives that extend over more than one accounting 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

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

Question 11

Inadequacy refers to the insufficient capacity of a company's property, plant and equipment to meet the company's growing productive demands.

Question 12

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

Question 13

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

Question 14

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

Question 15

Property, plant and equipment refer to intangible assets that are used in the operations of a business.

Question 16

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

Question 17

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

Question 18

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

Question 19

Revising an estimate of the useful life or residual value of an item of property, plant and equipment is referred to as a change in accounting estimate, and is reflected in the past, current, and future financial statements.

Question 20

The going concern assumption supports the reporting of property, plant and equipment at carrying amount rather than market value.

Question 21

An expenditure that improves the type or amount of service an asset provides is a type of capital expenditure.

Question 22

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

Question 23

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

Question 24

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 25

Property, plant and equipment can be disposed of by discarding, selling, or exchanging them.

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

Total asset cost plus depreciation expense equals carrying amount.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

Capital expenditures are also called balance sheet expenditures.

Question 38

A company purchased an item of property, plant and equipment for $45,000. The asset has an estimated residual value of $6,000, and an estimated useful life of 10 years.

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

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

Question 41

Property, plant and equipment 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 42

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

Question 43

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

Question 44

Residual 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 45

A loss on disposal of an item of property, plant and equipment occurs if the cash proceeds received from the asset sale is less than the asset's carrying amount.

Question 46

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

Question 47

The useful life of an item of property, plant and equipment 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 48

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

Question 49

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

Question 50

Inadequacy refers to:

A) The insufficient capacity of a company's property, plant and equipment 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 residual value is too small to replace the asset.
E) The condition where the asset's residual value is less than its cost.

Question 51

When the usefulness of property, plant and equipment 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 52

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 an item of property, plant and equipment.
D) Is an outflow of cash from the use of an item of property, plant and equipment.
E) Is applied to land.

Question 53

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

Question 54

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 55

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 56

Property, plant and equipment are:

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

Question 57

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 58

The relevant factor(s) in computing depreciation include:

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

Question 59

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

Question 60

If an asset is sold above its carrying amount, the selling company records a loss.

Question 61

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 carrying amount each year.
D) Are acceptable for tax purposes only.
E) Are the only acceptable methods of depreciation for financial reporting.

Question 62

Thomas Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of $100,000. The asset is expected to have a residual 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 carrying amount on December 31, Year 3 will be:

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

Question 63

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 64

The cost of land can include:

A) Purchase price.
B) Assessments by local governments.
C) Costs of removing existing structures.
D) Fees for insuring the title.
E) All of these.

Question 65

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 66

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 67

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 68

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 residual 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 69

When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost $23,000 and its estimated residual 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 residual 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 70

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 71

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 72

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 73

Property, plant and equipment include:

A) Land.
B) Land improvements.
C) Buildings.
D) Machinery and equipment.
E) All of these.

Question 74

A company used straight-line depreciation for an item of equipment that cost $12,000, had a residual value of $2,000, and had a five-year useful life. After depreciating the asset for three complete years, the residual 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

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 76

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 residual 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 77

The following information is available on a depreciable asset owned by First Bank & Trust: The asset's carrying amount is $70,000 on October 1, Year 3. On that date, management determines that the asset's residual 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 78

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.

Question 79

Obsolescence:

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

Question 80

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 carrying amount.