Question 1

If a second-hand machine is purchased for operational use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its operational use should be excluded from the cost of the asset.

Accepted Answer

Renovation and repair costs incurred to prepare a second-hand machine for its intended use should be included in the asset's cost, as they are necessary to bring the asset to the condition and location necessary for it to operate in the manner intended by management.

Question 2

In 2013, WD Company reported the cost of its theme parks, resorts, and other assets at $14,037 million and the accumulated depreciation at $5,382 million. In that same year, "Toys 4 U" reported
$5,610 million in operating assets and accumulated depreciation on them of $1,398 million.
1. Estimate the approximate remaining life of the assets for WD Company and "Toys 4 U"
  2. Which company appears to have newer assets with longer remaining lives?

Accepted Answer

The answer of In 2013, WD Company reported the cost...

Question 3

A corporation may choose to list its operational assets in the current assets section of the statement of financial position.

Accepted Answer

Operational assets are typically classified as fixed assets and are listed under the non-current assets section of the statement of financial position. Current assets generally include assets that are expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.

Question 4

When assets are disposed of through sale or abandonment, we record additional depreciation since the last adjustment was made.

Accepted Answer

When assets are disposed of through sale or abandonment, we need to record additional depreciation since the last adjustment was made. This is done to ensure that the asset's value has been fully accounted for up until the point of disposal.

Question 5

Natural resources should be depleted (usually by the units-of-production method) usually with the amount of the depletion expense capitalized to a revenue account.

Accepted Answer

Natural resources should be depleted (usually by the units-of-production method) and the amount of the depletion expense should be charged to an expense account, not capitalized to a revenue account.

Question 6

The book value of an operational asset initially declines less rapidly under the straight-line method than under the declining-balance method.

Accepted Answer

The straight-line method evenly spreads the depreciation over the asset's useful life, whereas the declining-balance method accelerates depreciation in the earlier years. Therefore, the book value declines more rapidly under the declining-balance method in the early years, and less rapidly in the later years.

Question 7

Only the actual acquisition cost, the estimated useful life, and the method of depreciation of an operational asset are required to compute the depreciation expense for a period.

Accepted Answer

Other factors such as salvage value and depreciation adjustments for partial years or improvements also affect the computation of depreciation expense for a period.

Question 8

The fixed asset turnover ratio is computed by dividing profit by the average fixed assets amount.

Accepted Answer

The fixed asset turnover ratio is computed by dividing revenue by the average fixed assets amount, not profit.

Question 9

Accelerated depreciation methods are not desirable from the income tax point of view because the asset will produce a greater profit when it is new (the early years) than when it is older (the later years).

Accepted Answer

Accelerated depreciation methods are actually desirable from the income tax point of view because they allow businesses to take larger deductions in the earlier years, reducing their taxable income and therefore their tax liability.

Question 10

Give the required adjusting entry at December 31, 20F, the end of the annual accounting period for the three items below. If no entry is required, explain why.
A. Web Company acquired a patent that cost $4,260 on January 1, 20F. The patent was registered on January 1, 20A. The legal life of a patent is 17 years from registration. Web expects to use the patent the remaining legal life.
B. Web Company acquired a gravel pit on January 1, 20F, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 20F 4,000 tons were extracted and sold.
C. On January 1, 20F, Web Company acquired a dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line depreciation.

Accepted Answer

The answer of Give the required adjusting entry at December...

Question 11

Raco Inc. purchased two used machines together to get a lower total cash price of $90,000. The machines were different, although of the same general type. They were designated as Machines A and B. New machines of the same type could be purchased as follows: Machine A, $25,000; Machine B, $75,000. Complete the following entry to record the purchase and show your computations.

Accepted Answer

The answer of Raco Inc. purchased two used machines together...

Question 12

The fixed asset turnover ratio measures how much profit is generated by use of operational (fixed) assets.

Accepted Answer

The fixed asset turnover ratio measures how efficiently a company uses its fixed assets to generate sales, not profit.

Question 13

On January 1, 20A, Reagan Company purchased a machine. The price quoted by the seller was
$10,000 less 2% if paid within 15 days of the invoice date. Paid with cash were: transportation,
$300; installation, $600; and sales tax, $200. Give the entry to record the acquisition assuming the discount was taken.

Accepted Answer

The answer of On January 1, 20A, Reagan Company purchased...

Question 14

Macon Assembly Company purchased a machine on January 2, 20C, by paying cash of $85,000. The machine has an estimated useful life of five years (or the production of 200,000 units) and an estimated residual value of $5,000.
Required:
1. Determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (a). straight-line depreciation; and (b). the declining-balance method with a 200% acceleration rate.
2. What is the book value of the machine after three years with the declining-balance method and a 200% acceleration rate?
3. What is the book value of the machinery after three years with straight-line depreciation.
4. If the machine was used to produce and sell 48,000 units in 20C, what would the depreciation expense be under the units of production method?

Accepted Answer

The answer of Macon Assembly Company purchased a machine on...

Question 15

If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is reported.

Accepted Answer

When the proceeds from the sale of equipment exceed its carrying amount (original cost minus accumulated depreciation), the difference is reported as a gain on disposal in the financial statements.

Question 16

On January 1, 20A, Stern Company (a calendar year corporation) purchased a heavy duty machine having an invoice price of $13,000 plus transportation and installation costs of $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Assuming the company uses the declining-balance method depreciation and a 150% acceleration rate, complete the following schedule (round to the nearest dollar).

Accepted Answer

The answer of On January 1, 20A, Stern Company (a...

Question 17

The cost principle should be applied in recording the acquisition of natural resources and intangible assets.

Accepted Answer

The cost principle requires that the cost of acquiring natural resources and intangible assets be recorded as the initial measurement of their value on the balance sheet. This ensures that financial statements accurately reflect the amount of resources invested in the acquisition of these assets.

Question 18

If an accountant calculates depreciation expense on an asset without taking into account the asset's residual value of $5,000, depreciation expense for the periods will be lower than it should have been.

Accepted Answer

Depreciation expense will be higher than it should have been because not accounting for the residual value means the entire cost of the asset is spread over its useful life, ignoring that a portion of its cost (the residual value) should not be depreciated.

Question 19

When an operational asset is acquired for non-cash consideration, the cost of the asset received always is measured as the book value of the non-cash consideration given up.

Accepted Answer

The cost of the asset received should be measured at fair value, not book value, when acquired for non-cash consideration.

Question 20

An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount.

Accepted Answer

This statement is true. According to accounting standards, if the carrying amount of a property, plant, or equipment exceeds its recoverable amount (the higher of its fair value less costs to sell and its value in use), then the asset is considered impaired and must be written down to its recoverable amount.

Quiz 9: Reporting and Interpreting Liabilities