Deck 9: Reporting and Analyzing Long-Lived Assets

Question 1

Recording depreciation on plant assets affects the balance sheet and the income statement.

Answer 1

True

Question 2

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

Answer 2

False

Question 3

Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

Answer 3

False

Question 4

When a change in estimate is made, there is no correction of previously recorded depreciation expense.

Question 5

The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

Question 6

Under an operating lease, both the leased asset and the liability are shown on the balance sheet.

Question 7

A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not in prior periods.

Question 8

When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Equipment.

Question 9

The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.

Question 10

Certain types of leases, called capital leases, allow the lessee to account for the transaction as a rental.

Question 11

Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

Question 12

A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.

Question 13

The depreciable cost of a plant asset is its original cost minus obsolescence.

Question 14

Land improvements are generally charged to the Land account.

Question 15

Recording depreciation each period is an application of the matching principle.

Question 16

The book value of a plant asset is always equal to its fair market value.

Question 17

All plant assets (fixed assets) must be depreciated for accounting purposes.

Question 18

The Accumulated Depreciation account represents a cash fund available to replace plant assets.

Question 19

Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

Question 20

In calculating depreciation, both plant asset cost and useful life are based on estimates.

Question 21

Companies only dispose of plant assets by either sale or exchange.

Question 22

A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

Question 23

If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

Question 24

The return on assets ratio indicates how efficiently a company uses its assets.

Question 25

Research and development costs that result in a successful product that is patentable are charged to the Patent account.

Question 26

Ordinary repairs should be recognized when incurred as revenue expenditures.

Question 27

Capital expenditures are expenditures that increase the company's investment in productive facilities.

Question 28

A plant asset must be fully depreciated before it can be removed from the books.

Question 29

The return on assets ratio can be computed from the profit margin ratio and the asset turnover ratio.

Question 30

When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

Question 31

If an acquired franchise or license is for an indefinite time period, then the cost of the asset should not be amortized.

Question 32

The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

Question 33

The cost of an intangible asset must be amortized over a 20-year period.

Question 34

If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

Question 35

Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance.

Question 36

A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.

Question 37

A permanent decline in the market value of an asset is referred to as an impairment.

Question 38

The asset turnover ratio is calculated as net sales divided by ending total assets.

Question 39

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 40

The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

Question 41

The Land account would include all of the following costs except

A) drainage costs.
B) the cost of building a fence.
C) commissions paid to real estate agents.
D) the cost of tearing down a building.

Question 42

In the notes to the financial statements, the depreciation and amortization methods used should be described.

Question 43

The four subdivisions for plant assets are

A) land, land improvements, buildings, and equipment.
B) intangibles, land, buildings, and equipment.
C) furnishings and fixtures, land, buildings, and equipment.
D) property, plant, equipment, and land.

Question 44

Under the double-declining-balance method, the depreciation rate used each year remains constant.

Question 45

The cost of land does not include

A) real estate brokers' commission.
B) annual property taxes.
C) accrued property taxes assumed by the purchaser.
D) title fees.

Question 46

A company purchased land for $84,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $1,200. Under the historical cost principle, the cost of land would be recorded at

A) $94,800.
B) $84,000.
C) $89,800.
D) $96,000.

Question 47

Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

Question 48

Which of the following would not be included in the Equipment account?

A) Installation costs.
B) Freight costs.
C) Cost of trial runs.
D) Electricity used by the machine.

Question 49

Franchises are classified as a plant asset.

Question 50

Which of the following assets does not decline in service potential over the course of its useful life?

A) Equipment.
B) Furnishings.
C) Land.
D) Fixtures.

Question 51

Which one of the following items is not considered a part of the cost of a truck purchased for business use?

A) Sales tax.
B) Truck license.
C) Freight charges.
D) Cost of lettering on side of truck.

Question 52

Whyte Clinic purchases land for $280,000 cash. The clinic assumes $3,000 in property taxes due on the land. The title and attorney fees totaled $2,000. The clinic had the land graded for $4,400. What amount does Whyte Clinic record as the cost for the land?

A) $284,400.
B) $280,000.
C) $289,400.
D) $285,000.

Question 53

Aber Company buys land for $145,000 on 12/31/13. As of 3/31/14, the land has appreciated in value to $152,000. On 12/31/14, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2014?

A) $0.
B) $7,000.
C) $3,400.
D) $10,400.

Question 54

A characteristic of a plant asset is that it is

A) intangible.
B) used in the operations of a business.
C) held for sale in the ordinary course of the business.
D) not currently used in the business but held for future use.

Question 55

Which of the following is not properly classified as property, plant, and equipment?

A) Building used as a factory.
B) Land used in ordinary business operations.
C) A truck held for resale by an automobile dealership.
D) Land improvement, such as parking lots and fences.

Question 56

Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.

Question 57

A company purchased land for $350,000 cash. Real estate brokers' commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at

A) $385,000.
B) $350,000.
C) $375,000.
D) $410,000.

Question 58

Givens Retail purchased land for a new parking lot for $75,000. The paving cost $105,000 and the lights to illuminate the new parking area cost $36,000. Which of the following statements is true with respect to these additions?

A) $180,000 should be debited to the Land account.
B) $141,000 should be debited to Land Improvements.
C) $216,000 should be debited to the Land account.
D) $216,000 should be debited to Land Improvements.

Question 59

Burke Company purchases land for $90,000 cash. Burke assumes $2,500 in property taxes due on the land. The title and attorney fees totaled $1,000. Burke has the land graded for $2,200. They paid $10,000 for paving of a parking lot. What amount does Burke record as the cost for the land?

A) $93,200.
B) $105,700.
C) $95,700.
D) $90,000.

Question 60

Shaffer Company acquires land for $62,000 cash. Additional costs are as follows. $$\begin{array} { l r } \text { Removal of shed } & \$ 300 \\\text { Filling and grading } & 1,500 \\\text { Salvage value of lumber of shed } & 120 \\\text { Broker commission } & 1,130 \\\text { Paving of parking lot } & 10,000 \\\text { Closing costs } & 560\end{array}$$ Shaffer will record the acquisition cost of the land as

A) $62,000.
B) $63,690.
C) $65,610.
D) $65,370.

Question 61

Arnold Company purchases a new delivery truck for $40,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck's annual license is $120. The truck undergoes safety testing for $220. What does Arnold record as the cost of the new truck?

A) $44,040.
B) $43,920.
C) $42,500.
D) $41,920.

Question 62

Kathy's Blooms purchased a delivery van with a $50,000 list price. The company was given a $5,000 cash discount by the dealer, and paid $2,500 sales tax. Annual insurance on the van is $1,250. As a result of the purchase, by how much will Kathy's Blooms increase its van account?

A) $50,000.
B) $45,000.
C) $48,750.
D) $47,500.

Question 63

Runge Company purchased machinery on January 1 at a list price of $250,000, with credit terms 2/10, n/30. Payment was made within the discount period. Runge paid $12,500 sales tax on the machinery, and paid installation charges of $4,400. Prior to installation, Runge paid $10,000 to pour a concrete slab on which to place the machinery. What is the total cost of the new machinery?

A) $261,900.
B) $271,900.
C) $276,900.
D) $252,500.

Question 64

A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?

A) The cost of the building will not include the repainting and recarpeting costs.
B) The cost of the building will include the cost of replacing the roof.
C) The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
D) The wiring is part of the computer costs, not the building cost.

Question 65

Which of the following is included in the cost of constructing a building?

A) Cost of paving a parking lot.
B) Cost of repairing vandalism damage incurred shortly after construction is complete.
C) Interest incurred during construction.
D) Cost of removing the demolished building existing on the land when it was purchased.

Question 66

Rains Company purchased equipment on January 1 at a list price of $75,000, with credit terms 2/10, n/30. Payment was made within the discount period. Rains paid $3,750 sales tax on the equipment, and paid installation charges of $1,320. Prior to installation, Rains paid $3,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?

A) $78,750.
B) $81,570.
C) $83,070.
D) $75,750.

Question 67

All leases are classified as either

A) capital leases or long-term leases.
B) capital leases or operating leases.
C) operating leases or current leases,
D) long-term leases or current leases.

Question 68

National Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?

A) Excavation fees are capitalized but building permit fees are not.
B) Architect fees are capitalized but building permit fees are not.
C) Interest is capitalized during the construction as part of the cost of the building.
D) The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

Question 69

Ramirez Company acquires land for $210,000 cash. Additional costs are as follow. $$\begin{array} { l r } \text { Removal of shed } & \$ 2,000 \\\text { Filling and grading } & 6,000 \\\text { Salvage value of lumber of shed } & 1,280 \\\text { Broker commission } & 4,520 \\\text { Paving of parking lot } & 40,000 \\\text { Closing costs } & 3,400\end{array}$$ Ramirez will record the acquisition cost of the land as

A) $224,640.
B) $227,200.
C) $225,920.
D) $210,000.

Question 70

Carpino Company purchased equipment and these costs were incurred: $\begin{array}{lr}\text { Cash price } & \$ 70,000 \\\text { Sales taxes } & 3,500 \\\text { Insurance during transit } & 750 \\\text { Installation and testing } & \underline{\text{ 1,500 }}\\\text { Total costs } & \$ 75,750\end{array}$ What amount should be recorded as the cost of the equipment?

A) $70,000.
B) $73,500.
C) $74,250.
D) $75,750.

Question 71

The balance in the Accumulated Depreciation account represents the

A) cash fund to be used to replace plant assets.
B) amount to be deducted from the cost of the plant asset to arrive at its fair market value.
C) amount charged to expense in the current period.
D) amount charged to expense since the acquisition of the plant asset.

Question 72

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?

A) Salvage value.
B) Estimated useful life.
C) Cash needed to replace the plant asset.
D) Cost.

Question 73

Rodgers Company purchased equipment and these costs were incurred: $\begin{array}{lr}\text { Cash price } & \$ 45,000 \\\text { Sales taxes } & 3,600 \\\text { Insurance during transit } & 640 \\\text { Installation and testing } & \underline{\text{ 860 }} \\\text { Total costs } & \$ 50,100\end{array}$ Rodgers will record the acquisition cost of the equipment as

A) $45,000.
B) $48,600.
C) $49,240.
D) $50,100.

Question 74

Land improvements should be depreciated over the useful life of the

A) land.
B) buildings on the land.
C) land or land improvements, whichever is longer.
D) land improvements.

Question 75

The term applied to the periodic expiration of a plant asset's cost is

A) amortization.
B) depletion.
C) depreciation.
D) cost expiration.

Question 76

Wesley Hospital installs a new parking lot. The paving cost $45,000 and the lights to illuminate the new parking area cost $18,000. Which of the following statements is true with respect to these additions?

A) $45,000 should be debited to the Land account.
B) $18,000 should be debited to Land Improvements.
C) $63,000 should be debited to the Land account.
D) $63,000 should be debited to Land Improvements.

Question 77

Ryan, Inc. purchased a delivery truck with a $42,000 list price. The company was given a $4,200 cash discount by the dealer, and paid $2,100 sales tax. Annual insurance on the truck is $1,050. As a result of the purchase, by how much will Ryan, Inc. increase its truck account?

A) $42,000.
B) $37,800.
C) $40,950.
D) $39,900.

Question 78

Interest may be included in the acquisition cost of a plant asset

A) during the construction period of a self-constructed asset.
B) if the asset is purchased on credit.
C) if the asset acquisition is financed by a long-term note payable.
D) if it is a part of a lump-sum purchase.

Question 79

Schrock Company purchases a new delivery van for $60,000. The sales taxes are $4,500. The logo of the company is painted on the side of the van for $1,200. The van's annual license is $120. The van undergoes safety testing for $220. What does Schrock record as the cost of the new van?

A) $66,040.
B) $65,920.
C) $64,500.
D) $63,920.

Question 80

Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n)

A) equal and equitable manner.
B) accelerated and accurate manner.
C) systematic and rational manner.
D) conservative market-based manner.