Question 1

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

Accepted Answer

The answer of The first step in accounting for an...

Question 2

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

Accepted Answer

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Question 3

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.

Accepted Answer

The units-of-production method bases depreciation on the amount of usage or output, thus resulting in varying depreciation expenses each period.

Question 4

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

Accepted Answer

A lump-sum or basket purchase includes the purchase of all the components of the property, including land, building, and related improvements, as one package.

Question 5

Revenue expenditures are also called balance sheet expenditures.

Accepted Answer

Revenue expenditures are expenses that are incurred in normal business operations and are deducted from the current year's income statement. They do not appear on the balance sheet as an asset or liability. Capital expenditures, on the other hand, are long-term expenses that are capitalized and recorded as an asset on the balance sheet.

Question 6

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 does depend on whether the transaction has commercial substance, which means it will affect the company's future cash flows. If the transaction has commercial substance, the assets will be recorded at their fair values. If not, the assets will be recorded at their carrying amounts.

Question 7

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

Accepted Answer

Revenue expenditures are expenses that are incurred in the regular course of a business to maintain or simply “keep running” the business. These expenditures are not intended to materially increase the life or productive capabilities of plant assets. Examples may include regular maintenance, repairs, and operating expenses.

Question 8

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

Accepted Answer

Capital-intensive companies require significant investment in assets, such as property, equipment, and machinery, to generate sales. These assets may include manufacturing plants, warehouses, and heavy machinery. As a result, these companies tend to have higher fixed costs and require more significant investments to maintain and grow their operations.

Question 9

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

Accepted Answer

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Question 10

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

Accepted Answer

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Question 11

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

Accepted Answer

Capital expenditures are expenditures made to acquire, improve or maintain fixed assets such as buildings, machinery, or equipment. They are not just to keep assets in normal, good operating condition, but to enhance their value or extend their useful life.

Question 12

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 listed are accurate, but the last step should be multiplying the rate times twice the straight-line rate, not the net value.

Question 13

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

Accepted Answer

This is the definition of an asset's cost according to generally accepted accounting principles.

Question 14

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

This is because the accelerated depreciation method allocates a higher percentage of the asset's cost to depreciation in the earlier years, which gradually decreases over the life of the asset. This method is used to reflect the reality that many assets are more productive in their early years, and lose value and efficiency over time.

Question 15

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. If it is sold below its book value, then a loss is recorded.

Question 16

Betterments are a type of capital expenditure.

Accepted Answer

Betterments refer to improvements made to existing fixed assets or properties, which fall under the category of capital expenditures.

Question 17

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 are considered capital expenditures because they increase the asset's useful life and benefit future periods, which is the definition of a capital expenditure.

Question 18

Total asset cost plus depreciation expense equals book value.

Accepted Answer

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Question 19

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

Accepted Answer

This statement is true. Plant assets can be disposed of by discarding, selling, or exchanging them.

Question 20

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.

Accepted Answer

The cost of the building includes materials, labor, design fees, building permits, and insurance during construction.

Quiz 8: Accounting for Long-Term Assets