Question 1

A building owned by a corporation is always classified as property, plant and equipment.

Accepted Answer

A building owned by a corporation can also be classified as an investment property if it is held to earn rental income or for capital appreciation, rather than for use in the production or supply of goods or services, or for administrative purposes.

Question 2

The cash or cash equivalent price of items classified as property, plant and equipment best measures the value of the asset on the date of acquisition.

Accepted Answer

The cash or cash equivalent price paid for an asset reflects its fair value at the acquisition date, providing a reliable measure of the asset's value for accounting purposes in the property, plant, and equipment category.

Question 3

When land has been purchased for the purpose of constructing a new building, all costs incurred in connection with preparing the land for excavation are considered building costs.

Accepted Answer

Costs incurred in preparing land for excavation, such as clearing, grading, and demolishing old structures, are considered land costs, not building costs, because they are necessary to get the land ready for construction and are not part of the physical structure of the building.

Question 4

The interest costs on funds used to acquire an asset should not be capitalized even if a significant period of time is required to bring the asset to a condition or location necessary for its intended use.

Accepted Answer

Interest costs on funds used to acquire an asset can be capitalized during the period of time required to bring the asset to a condition and location necessary for its intended use, according to accounting standards such as GAAP and IFRS.

Question 5

An asset should be recorded at the fair market value of the consideration given up to acquire it or at its fair market value, whichever is higher.

Accepted Answer

An asset should be recorded at the fair market value of the consideration given up to acquire it or at its fair market value, whichever is more clearly evident, not necessarily higher.

Question 6

If a capital expenditure related to a machine increases the useful life but does not improve its quality, the expenditure may be debited to accumulated depreciation rather than to the asset account.

Accepted Answer

Capital expenditures that extend the useful life of an asset can be debited to accumulated depreciation to adjust the asset's book value without altering the original cost recorded in the asset account.

Question 7

An asset's cost less its salvage value is referred to as the depreciable base.

Accepted Answer

The depreciable base of an asset is calculated by subtracting the salvage value of the asset from its original cost. This represents the total amount that will be depreciated over the asset's useful life.

Question 8

Physical factors such as wear and tear set the outside limit for the service life of an asset.

Accepted Answer

Physical factors such as wear and tear indeed set the outside limit for the service life of an asset, as they directly impact the asset's ability to function effectively over time.

Question 9

Whenever the economic nature of the asset is the primary determinant of service life, maintenance plays an extremely vital role in prolonging service life.

Accepted Answer

The answer of Whenever the economic nature of the asset...

Question 10

Companies that desire low depreciation during periods of low productivity and high depreciation during high productivity either adopt or switch to a declining-balance method.

Accepted Answer

The declining-balance method results in higher depreciation in the earlier years and lower depreciation in the later years, regardless of productivity levels.

Question 11

The straight-line depreciation method is used most often in actual practice because the assumptions upon which it is based apply to most plant assets.

Accepted Answer

The answer of The straight-line depreciation method is used most...

Question 12

Under the declining-balance depreciation method, salvage value is considered only in computing the amount of depreciation for the final year(s) of an asset's service life.

Accepted Answer

Under the declining-balance method, depreciation is calculated without considering the salvage value until the final year(s), where it is taken into account to ensure the asset's book value does not fall below its salvage value.

Question 13

If one of the estimates used in computing depreciation is subsequently found to require adjustments, no change in prior years' financial statements is required.

Accepted Answer

Changes in depreciation estimates are accounted for prospectively, meaning they affect the depreciation expense in the current and future periods only, without the need to adjust prior years' financial statements.

Question 14

If an exchange of nonmonetary assets occurs and the exchange has commercial substance, it is presumed that the earnings process related to these assets is completed.

Accepted Answer

When an exchange of nonmonetary assets has commercial substance, it indicates that the future cash flows of the entity are expected to change significantly as a result of the transaction. This change in future cash flows is an indication that the earnings process is considered completed for the assets given up, allowing for the recognition of gains or losses on the exchange.

Question 15

When an exchange of nonmonetary assets with no commercial substance results in a gain and insignificant boot is included as a part of the transaction, the gain to be recognized is limited to the amount of the boot received.

Accepted Answer

The answer of When an exchange of nonmonetary assets with...

Question 16

The amount of interest to be capitalized is the higher of actual interest cost incurred during the period or avoidable interest.

Accepted Answer

The amount of interest to be capitalized is the lower of actual interest cost incurred during the period or avoidable interest.

Question 17

Plant assets may properly include

Accepted Answer

Plant assets are tangible assets used in operations, so none of the options listed qualify as plant assets.

Question 18

Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with a plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be

Accepted Answer

The cost of the Holiday Hotel should be capitalized as part of the cost of the land because the existing structure (Holiday Hotel) will be torn down, and the land will be used for a new purpose (building a new luxury hotel). The demolition of the old hotel and the preparation of the land for new construction are considered part of the land cost, not a separate depreciable asset or an extraordinary loss.

Question 19

If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on the

Accepted Answer

The proper accounting treatment of the cost of the building depends on the intention of management for the property when the building was acquired. If the intention was to demolish the building and use the land for another purpose (like a parking lot), the cost of the building could be considered part of the cost of preparing the land for its intended use.

Question 20

Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except

Accepted Answer

Property, plant, and equipment items are not always acquired at their original historical cost; they can be acquired through various means such as exchange, donation, or at a discounted price, which may not reflect the original cost of production or purchase.

Quiz 10: Accounting for Property, Plant, and Equipment