Question 1

Which of the following includes only tangible assets?

Accepted Answer

Tangible assets have physical substance, and land, buildings, and natural resources are assets that have physical substance. Therefore, Choice A includes only tangible assets.

Question 2

Research and development costs are capitalized under GAAP once a product or process has been developed.

Accepted Answer

Research and development costs are expensed as incurred under GAAP, unless they are directly related to the development of a specific identifiable asset with future economic benefits, in which case they may be capitalized.

Question 3

The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight-line depreciation method.

Accepted Answer

The depletion method allocates the cost of natural resources based on the quantity extracted, making it more similar to the units-of-production depreciation method rather than the straight-line method, which allocates cost evenly over time.

Question 4

Goodwill is recorded only when an existing company is bought by another company and the purchase price exceeds the fair value of the purchased company's net assets.

Accepted Answer

Goodwill is recorded when the purchase price exceeds the fair value of the net assets acquired in a business combination, whether it is an acquisition of an existing company or not.

Question 5

Which of the following accounts would not be considered a tangible asset?

Accepted Answer

Copyright is an intangible asset, as it is a legal right rather than a physical asset. Buildings, land, and equipment are all tangible assets.

Question 6

Which statement is false?

Accepted Answer

Selling off long-lived, productive assets while maintaining sales will actually lead to a higher fixed asset turnover because the denominator of the turnover ratio (average fixed assets) decreases, assuming sales remain constant. This increases the turnover ratio, contrary to what option D suggests.

Question 7

The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion.

Accepted Answer

This is the correct definition of depletion.

Question 8

Which of the following statements regarding the fixed asset turnover ratio is incorrect?

Accepted Answer

The numerator is typically either net sales or gross profit, not net operating income.

Question 9

The Wilson Company has provided the following information: • Net sales, $200,000
• Net operating income, $40,000
• Net income, $20,000
• Average total assets, $125,000
• Average net fixed assets; $80,000
What is Wilson's fixed asset turnover ratio?

Accepted Answer

Fixed asset turnover ratio = Net sales / Average net fixed assets
Fixed asset turnover ratio = $200,000 / $80,000 = 2.50

Question 10

When determining cash flow from operating activities using the indirect method, depreciation and amortization expense are deducted from net income.

Accepted Answer

When using the indirect method to determine cash flow from operating activities, depreciation and amortization expenses are added back to net income because they are non-cash expenses that were subtracted to calculate net income.

Question 11

If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million, no impairment has occurred and no loss would be recognized.

Accepted Answer

If the estimated future cash flows are greater than the book value, no impairment has occurred and no loss would be recognized.

Question 12

Which of the following accounts would not be considered an intangible asset?

Accepted Answer

Intangible assets are assets without physical substance, such as goodwill, patents, and trademarks. Research and development costs, however, are considered expenses and are not classified as intangible assets.

Question 13

Natural resource depletion is recognized on the income statement for all resources removed during the period whether they are sold or not.

Accepted Answer

The answer of Natural resource depletion is recognized on the...

Question 14

If a long-lived asset has been impaired, the journal entry will require a debit to a loss account and a credit to the long-lived asset account.

Accepted Answer

This is the correct journal entry for an impaired asset. The loss account represents the decrease in value of the asset, while the long-lived asset account is decreased to reflect the impairment.

Question 15

Selling a depreciable asset for a gain results in an increase in both net income and assets.

Accepted Answer

This is because the sale of a depreciable asset for a gain results in a gain on the income statement, which increases net income, and the cash or other asset received from the sale increases assets on the balance sheet.

Question 16

Gains and losses on disposal of a long-lived asset are determined by comparing the asset's cost to its book value.

Accepted Answer

Gains and losses on disposal of a long-lived asset are determined by comparing the asset's selling price to its book value, not its cost. The book value is calculated as the asset's cost minus accumulated depreciation.

Question 17

Which of the following includes only intangible assets?

Accepted Answer

Intangible assets are non-physical assets. Leaseholds, patents, and copyrights are all intangible assets.

Question 18

The first step in recording the disposal of a long-lived asset is to update its book value by recognizing depreciation expense for the period of time since the last depreciation adjustment was made.

Accepted Answer

This statement is true. Before recording the disposal of a long-lived asset, the book value of the asset must be updated to reflect any depreciation expense that has been recognized since the last depreciation adjustment was made. This adjustment ensures that the asset's book value is accurate and up-to-date before it is disposed of.

Question 19

Which of the following would not be classified as property, plant and equipment on a balance sheet?

Accepted Answer

Land held for investment would be reported as an investment, not as property, plant, and equipment on a balance sheet.

Question 20

Which of the following transactions would not increase the fixed asset turnover ratio?

Accepted Answer

The answer of Which of the following transactions would not...

Quiz 8: Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources