Deck 10: Plant Assets, Natural Resoures, and Intangibles

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Plant assets are reported on a balance sheet at their undepreciated costs (book value), not at fair (market)values.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

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

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

Question 12

The phrase capital-intensive refers to companies with large amounts invested in plant assets.

Question 13

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

Question 14

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 15

When plant assets are purchased as a group in a single transaction for a lump-sum price, the cost of the purchase is allocated among the different types of assets acquired based on their relative market values.

Question 16

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

Question 17

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 18

Once an asset's book value equals its salvage value, depreciation stops.

Question 19

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

Question 20

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 21

Total asset turnover is calculated by dividing average total assets by net sales.

Question 22

A company purchased a plant asset for $60,000. The asset has an estimated salvage value of
$4,000, and an estimated useful life of 7 years. The annual depreciation expense using the straight-line method is $4,000 per year.

Question 23

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

Question 24

The straight-line depreciation method yields a steady pattern of depreciation expense.

Question 25

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 26

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 27

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

Question 28

Edmond reported average total assets of $9,965 million and net sales of $10,430 million. Its total asset turnover equals .96.

Question 29

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 30

Total asset cost plus depreciation expense equals book value.

Question 31

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 32

Total asset turnover is calculated by dividing net sales by average total assets.

Question 33

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

Question 34

Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its total asset turnover equals 1.71.

Question 35

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 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Revenue expenditures are also called balance sheet expenditures.

Question 42

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

Question 43

Betterments are a type of capital expenditure.

Question 44

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

Question 45

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 46

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

Question 47

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

Question 48

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 49

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

Question 50

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

Question 51

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 52

Capital expenditures, also called balance sheet expenditures, are additional costs of plant assets that provide benefits extending beyond the current period.

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

No gain or loss is recorded for exchanges of plant assets without commercial substance.

Question 61

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 62

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 63

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

Question 64

Since goodwill is an intangible asset, it is amortized each year using the straight-line method.

Question 65

Plant assets are defined as:

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

Question 66

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 applied to land.
E)Is an outflow of cash from the use of a plant asset.

Question 67

When originally purchased, a vehicle costing $23,000 had an estimated useful life of 8 years and an estimated salvage value of $3,000. 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)$11,500.
B)$2,875.
C)$5,000.
D)$2,500.
E)$5,750.

Question 68

A change in an accounting estimate is:

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

Question 69

The useful life of a plant asset is:

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

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

Question 75

Salvage value is:

A)A factor relevant to amortizing an intangible asset with an indefinite life.
B)A factor relevant to determining depreciation under MACRS.
C)An estimate of the asset's value at the end of its benefit period.
D)A factor relevant to determining depreciation that cannot be revised during an asset's useful life.
E)Not a factor relevant to determining depletion.

Question 76

The relevant factors in computing depreciation do not include:

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

Question 77

One characteristic of plant assets is that they are:

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

Question 78

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 79

Once the estimated depreciation expense for an asset is calculated:

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

Question 80

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

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