Deck 9: Plant Assets, Natural Resources, and Intangible Assets

Question 1

Recording depreciation each period is an application of the expense recognition principle.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Accumulated depreciation is reported on the statement of financial position as a deduction from plant assets.

Question 8

Tax laws often do not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Depending on whether a company uses the straight-line or declining-balance method, annual depreciation expense varies, but total depreciation is the same.

Question 14

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.

Question 15

Land improvements are reported on the statement of financial position at their cost less accumulated depreciation.

Question 16

Land is reported on the statement of financial position at its cost less accumulated depletion, or at its fair value, whichever is higher.

Question 17

Component depreciation is a method used to ensure that the depreciation rate remains constant from year to year.

Question 18

Recording depreciation on plant assets affects the statement of financial position and the income statement.

Question 19

A corporation may use straight-line depreciation in the financial statements to maximize net income, and at the same time, use an accelerated-depreciation method on the tax return to minimize income taxes.

Question 20

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, fair value becomes the basis for accountability.

Question 21

Revenue expenditures are reported on the statement of financial position and would include the cost to paint a building.

Question 22

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

Question 23

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

Question 24

Ordinary repairs should be recognized when incurred as revenue expenditures.

Question 25

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

Question 26

Component depreciation is the method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.

Question 27

The fair value of a plant asset is always the same as its book value.

Question 28

The journal entry to record a revaluation when the asset's price has increased includes a credit to the account Revaluation Surplus.

Question 29

A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset's book value.

Question 30

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 to prior periods.

Question 31

IFRS allows companies to revalue plant assets to fair value at the reporting date.

Question 32

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

Question 33

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

Question 34

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 35

The "Revaluation Surplus" account that results from a revaluation of plant assets to fair value is reported on the statement of financial position as a contra account to the plant asset that was revalued.

Question 36

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

Question 37

To determine a new depreciation amount after a change in estimate of a plant asset's useful life, the asset's remaining depreciable cost is divided by its remaining useful life.

Question 38

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

Question 39

Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.

Question 40

Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

Question 41

Costs incurred in the development phase after technological feasibility has been achieved are expensed as incurred.

Question 42

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

Question 43

Gains on exchanges of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP.

Question 44

Changes in depreciation method under IFRS are reported in current and future periods, but under U.S. GAAP such changes are treated as prior period adjustments.

Question 45

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 46

The Accumulated Depletion account is deducted from the cost of the natural resource in the statement of financial position.

Question 47

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

Question 48

Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.

Question 49

The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the statement of financial position or notes.

Question 50

Costs incurred during the research phase are reported as an intangible asset on the statement of financial position.

Question 51

The depletion associated with extracting copper from a mine will be reported on the statement of financial position if the company has not yet sold the copper.

Question 52

U.S. GAAP requires companies to use component depreciation for assets which qualify for the treatment.

Question 53

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

Question 54

Franchises can be classified as a property, plant, and equipment item or as an intangible asset.

Question 55

The cost of natural resources is not allocated to expense because the natural resources are not replaceable.

Question 56

Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.

Question 57

U.S. GAAP requires companies to expense all research and development costs as incurred.

Question 58

Natural resources include standing timber and resources extracted from the ground, such as oil, gas, and minerals.

Question 59

Development costs incurred after technological feasibility has been achieved are charged to an expense account.

Question 60

If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.

Question 61

When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.

Question 62

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 63

Wesley Hospital installs a new parking lot. The paving cost ₤40,000 and the lights to illuminate the new parking area cost ₤20,000. Which of the following statements is true with respect to these additions?

A) ₤40,000 should be debited to the Land account.
B) ₤20,000 should be debited to Land Improvements.
C) ₤60,000 should be debited to the Land account.
D) ₤60,000 should be debited to Land Improvements.

Question 64

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 65

A loss on the exchange of plant assets occurs when the fair value of the old asset is less than its book value.

Question 66

Carey Company buys land for €50,000 on 12/31/13. As of 3/31/14, the land has appreciated in value to €50,700. On 12/31/14, the land has an appraised value of €51,600. By what amount should the Land account be increased in 2014?

A) €0
B) €700
C) €900
D) €1,600

Question 67

Recognition of depreciation permits the accumulation of cash for the replacement of the asset.

Question 68

When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.

Question 69

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) Accident insurance
C) Freight charges
D) Cost of lettering on side of truck

Question 70

Depletion expense is reported in the income statement as an operating expense.

Question 71

When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.

Question 72

IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets.

Question 73

A company purchased land for $80,000 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. Under the historical cost principle, the cost of land would be recorded at

A) $87,000.
B) $80,000.
C) $85,000.
D) $92,000.

Question 74

Hull Company acquires land for $92,000 cash. Additional costs are as follows: $\begin{array}{lr}\text { Removal of shed } & 300 \\\text { Filling and grading } & 1,500 \\\text { Salvage value of lumber of shed } & 120 \\\text { Broker commission } & 1,530 \\\text { Paving of parking lot } & 10,000 \\\text { Closing costs } & 560\end{array}$ Hull will record the acquisition cost of the land as

A) $92,000.
B) $94,090.
C) $95,990.
D) $95,770.

Question 75

Gagner Clinic purchases land for $115,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land?

A) $117,200
B) $115,000
C) $119,700
D) $117,500

Question 76

Goodwill is not recognized in accounting unless it is acquired from another business enterprise.

Question 77

An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.

Question 78

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 79

The cost of a purchased building includes all of the following except

A) closing costs.
B) real estate broker's commission.
C) remodeling costs.
D) All of these answer choices are correct.

Question 80

Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.