Question 1

Betterments are a type of capital expenditure.

Accepted Answer

Betterments are a type of capital expenditure that are intended to improve the value or usefulness of an asset, such as renovations to a building or upgrades to machinery.

Question 2

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

Accepted Answer

The first step in accounting for an asset disposal is to remove the asset's cost and its accumulated depreciation from the balance sheet, not to calculate the gain or loss on disposal.

Question 3

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

Accepted Answer

Plant assets can be disposed of by discarding them as they might become obsolete or non-operational. They can also be sold or exchanged for other assets.

Question 4

On January 1 of the current year,a company purchased a plant asset for $120,000.The asset has an estimated salvage value of $16,000,and an estimated useful life of 8 years.Depreciation expense in the first year using the double-declining-balance method is $30,000.

Accepted Answer

The double-declining-balance method of depreciation involves doubling the straight-line rate. The straight-line depreciation rate for an asset with a useful life of 8 years is 1/8 (or 12.5%). Doubling this rate gives 25%. Applying the 25% rate to the asset's beginning book value of $120,000 results in a depreciation expense of $30,000 for the first year.

Question 5

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

Accepted Answer

Depletion is a method of allocating the cost of natural resources to the periods when they are consumed or extracted. This process is used primarily in the mining, timber, and petroleum industries. Depletion is similar to depreciation, which allocates the cost of long-term assets over their useful lives.

Question 6

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.

Accepted Answer

This is the definition of a loss on disposal of a plant asset. The book value of an asset is its original cost minus its accumulated depreciation, and if the cash received from selling the asset is less than its book value, a loss is incurred.

Question 7

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

Accepted Answer

Revenue expenditures are expenses incurred in the ongoing operation of a business to generate revenue, and are reported on the income statement. They are not capitalized as they do not increase the life or productive capabilities of the plant asset. Examples include repairs, maintenance, and ordinary upkeep.

Question 8

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.

Accepted Answer

Accounting for the exchange of assets is influenced by whether there is commercial substance or not. If a transaction has commercial substance, it will have an impact on the company's future cash flows, and thus, it will affect how the assets are accounted for.

Question 9

Revenue expenditures are also called balance sheet expenditures.

Accepted Answer

Revenue expenditures are expenses incurred by a company to generate revenue in the current period and are shown on the income statement. They are not recorded on the balance sheet as assets or liabilities. Therefore, revenue expenditures are not considered balance sheet expenditures.

Question 10

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

Accepted Answer

Amortization is the process of gradually writing off the initial cost of intangible assets over a period of time, not natural resources. The allocation of the cost of natural resources is referred to as depletion.

Question 11

Depreciation expense under the double-declining-balance method is equal to the book value of the asset at the beginning of the period multiplied by twice the straight-line depreciation rate.

Accepted Answer

The double-declining-balance method doubles the straight-line depreciation rate and applies it to the book value of the asset at the beginning of the period. Therefore, the depreciation expense under this method is equal to the book value of the asset at the beginning of the period multiplied by twice the straight-line depreciation rate.

Question 12

The units-of-production method of depreciation charges a constant amount of expense for each unit produced during an asset's useful life.

Accepted Answer

The units-of-production method of depreciation charges a constant amount of expense for each unit produced during an asset's useful life, which makes it a variable depreciation method.

Question 13

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

Accepted Answer

Natural resources are defined as the naturally occurring materials that are used by humans or have a potential economic value, such as timber, water, oil, gas, minerals, and land.

Question 14

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.

Accepted Answer

The annual depreciation expense using the straight-line method is calculated as (Cost - Salvage Value) / Useful Life. Therefore, ($60,000 - $4,000) / 7 = $8,000 per year.

Question 15

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

Accepted Answer

Capital expenditures are costs of plant assets that are expected to benefit the company for more than one accounting period and therefore are recorded as assets on the balance sheet.

Question 16

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.

Accepted Answer

The steps described are correct for the double-declining-balance method, but the order is incorrect. The correct order is: (1) subtract salvage value from cost, (2) compute the asset's straight-line depreciation rate, (3) double it, and (4) multiply the rate times the net value.

Question 17

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.

Accepted Answer

The gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the net proceeds received from the sale of the asset. If assets are received in exchange, then the market value of those assets should be used in the comparison.

Question 18

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

Accepted Answer

Accelerated depreciation methods like double-declining balance or sum-of-the-years' digits result in higher depreciation expense in the earlier years of an asset's life, and a lower expense in subsequent years. This is because these methods assume that the asset's usefulness declines more quickly in the early years, and thus a higher proportion of the asset's cost should be expensed in those years.

Question 19

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

Accepted Answer

Extraordinary repairs result in extending the useful life of an asset, which provides future benefits and therefore qualifies as a capital expenditure.

Question 20

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

Accepted Answer

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

Quiz 8: Reporting and Analyzing Long-Term Assets