Question 1

The Property,Plant,and Equipment category includes long-term investments.

Accepted Answer

The Property, Plant, and Equipment category includes tangible assets that are expected to be used for more than one accounting period, such as land, buildings, machinery, and equipment. Long-term investments are typically classified as a separate category on the balance sheet.

Question 2

Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.

Accepted Answer

The most commonly used method for financial reporting purposes is the straight-line depreciation method because it allocates the cost of an asset evenly over its useful life, providing a consistent expense charge each year.

Question 3

Lenders are interested in the value of operating assets as collateral when making lending decisions.

Accepted Answer

Lenders often use operating assets such as machinery, equipment, inventory and accounts receivable as collateral to secure loans as they can be easily liquidated to recover their investment in case of default by the borrower. Hence, the value of operating assets is an important factor in lending decisions.

Question 4

Depreciation does not describe the increase or decrease in the market value of the asset.

Accepted Answer

Depreciation is the decrease in the value of an asset over its useful life due to wear and tear, obsolescence, or other factors. It is not related to the current market value of the asset, which can be influenced by various other factors such as supply and demand, economic conditions, and market trends.

Question 5

Fortune Company has ten delivery trucks that became fully depreciated in the prior year.Fortune will continue charging the same amount of depreciation as before so that there will be no decrease in expenses.

Accepted Answer

If the delivery trucks have already become fully depreciated, continuing to charge the same amount of depreciation would result in overestimation of expenses and an inaccurate representation of the true value of the trucks on the company's financial statements. Therefore, Fortune Company should stop charging depreciation for these fully depreciated trucks.

Question 6

Acquisition cost should not include expenditures unrelated to the acquisition,like repair costs for damages incurred during installation,or costs incurred after the asset was installed and use begun.

Accepted Answer

Acquisition cost only refers to the costs incurred during the acquisition of an asset, including purchase price and any directly related expenses such as delivery or installation costs. Any costs incurred after the asset has been installed and put into use, such as repair costs, should not be included in the acquisition cost.

Question 7

A change in estimate of an asset's residual value involves restating the income statements of past periods for the estimate change.

Accepted Answer

A change in estimate, such as a change in an asset's residual value, is accounted for prospectively, meaning it affects the depreciation calculation from the point of the change forward and does not require restating past financial statements.

Question 8

All operating assets,except land,are subject to depreciation,amortization,or depletion.

Accepted Answer

This statement is true. Depreciation is applied to tangible assets, such as buildings and equipment, while amortization is applied to intangible assets, such as patents and trademarks. Depletion is applied to natural resources, such as oil or timber. All of these methods help to allocate the cost of the asset over its useful life. Land, on the other hand, is not subject to depreciation, amortization, or depletion, as it is considered to have an indefinite life.

Question 9

When land and building are acquired for a lump sum,the purchase amount should be allocated on the basis of the market values of the two assets.

Accepted Answer

Allocating the purchase amount of land and building on the basis of their market values is considered an appropriate method for accounting purposes. This is because the market values of land and building are usually different, and allocating the purchase amount based on their respective market values provides a more accurate representation of the relative values of the assets acquired.

Question 10

Acquisition costs are also known as replacement costs.

Accepted Answer

Acquisition costs refer to the cost of acquiring a new asset, whereas replacement costs refer to the cost of replacing an existing asset. They are two different concepts.

Question 11

Interest is capitalized on all purchased assets.

Accepted Answer

Interest is typically capitalized on assets that are constructed or produced over a period of time, not on all purchased assets. For most purchased assets, interest cost is not capitalized.

Question 12

One reason management may choose the straight-line method of depreciation is because it is easy to compute.

Accepted Answer

The straight-line method of depreciation is considered to be the simplest and most popular method of depreciation, as it allocates the cost of an asset evenly over its useful life. This makes it easy to calculate and apply in financial statements.

Question 13

On the balance sheet,a company reports plant assets by subtracting residual value from the original cost of the plant asset.

Accepted Answer

On the balance sheet, a company reports plant assets at their historical cost less accumulated depreciation, not by subtracting the residual value from the original cost.

Question 14

When plant assets are reported,the current period's depreciation expense is subtracted from the original cost on the balance sheet.

Accepted Answer

When plant assets are reported on the balance sheet, the original cost is shown along with the accumulated depreciation. The current period's depreciation expense is added to the accumulated depreciation, not subtracted from the original cost.

Question 15

Depreciation has no effect on income taxes,since it only reduces a plant asset's book value.

Accepted Answer

Depreciation is a tax-deductible expense that can reduce the taxable income of a business. So, it does have an effect on income taxes.

Question 16

When plant assets are purchased in a group,each asset increases the respective plant asset account for its fair market value at the time of acquisition.

Accepted Answer

When plant assets are purchased in a group, their total cost is allocated among the assets based on their relative fair market values, but the individual assets do not directly increase the plant asset account by their fair market value at the time of acquisition. The allocation is based on their proportionate values, not a direct increase by the fair market value.

Question 17

Capitalizing interest does not increase the recorded cost of a plant asset.

Accepted Answer

Capitalizing interest involves adding interest costs to the recorded cost of a plant asset, which does increase the recorded cost.

Question 18

Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over its useful life.

Accepted Answer

Acquisition cost refers to the costs incurred to acquire a plant asset and prepare it for its intended use, not the costs to maintain it over its useful life. Maintenance costs are considered operating expenses, not part of the acquisition cost.

Question 19

If a company is concerned about minimizing its income tax burden,it would use the straight-line depreciation method to accomplish this objective.

Accepted Answer

The straight-line depreciation method spreads the cost of an asset evenly over its useful life, resulting in smaller depreciation expenses compared to accelerated depreciation methods, which would result in higher upfront depreciation expenses and thus lower taxable income in the early years.

Question 20

A company uses the same depreciation method as other firms in the same industry.Because of this,investors will have enhanced comparability of the financial reporting results.

Accepted Answer

Depreciation is a significant accounting factor that affects a company's financial statements, and using the same depreciation method as other firms in the industry enhances comparability of financial reporting results. This makes it easier for investors to analyze and compare financial information across companies in the same industry.

Quiz 8: Operating Assets: Property, Plant, and Equipment, and Intangibles