Deck 7: Operating Assets

Question 1

A company determined that it had incorrectly estimated the useful life of equipment that it had purchased two years ago. It must now depreciate the asset's remaining book value over the current and future accounting periods.

Answer 1

True

Question 2

All intangible assets are subject to amortization.

Answer 2

False

Question 3

The reason some major intangible assets are not in the financial statements is because they cannot be measured.

Answer 3

True

Question 4

Research and Development costs should be added to the cost of patents.

Question 5

If new equipment purchased during the year is reported on the balance sheet at December 31 as a long-term asset, there will be no related item on the income statement for the year ended December 31.

Question 6

FASB allows companies to use different depreciation methods so they can capture declining service potential of an operating asset.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the useful life or the asset's productivity.

Question 13

Depreciation has an effect on the company's income taxes.

Question 14

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

Question 15

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

Question 16

Plant assets, current assets, property, plant and equipment, and fixed assets are all tangible assets.

Question 17

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

Question 18

An impairment is a temporary decline in the future benefit or service potential of an asset.

Question 19

When making lending decisions, lenders generally are not interested in the company's operating assets.

Question 20

Costs incurred to keep plant assets in normal operating condition are called revenue expenditures.

Question 21

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. Based on the information presented above, what method of depreciation will maximize depreciation expense in 2020?

A)straight-line
B)double-declining-balance
C)units-of-production
D)All methods produce the same expense in 2020.

Question 22

Natural resources can be replaced or restored only by an act of nature.

Question 23

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. Based on the information presented above, what method of depreciation will maximize depreciation expense in 2019?

A)straight-line
B)double-declining-balance
C)units-of-production
D)All methods produce the same expense in 2019.

Question 24

To revise depreciation expense, the accountant should compute depreciation expense using the asset's remaining book value and useful life and its new residual value.

Question 25

The intangible asset called ____________________ can only exist if one company purchases another business and the cost exceeds the fair market values of the identifiable net assets at the time acquired.

Question 26

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. What amount will be reported as depreciation expense over the 5-year life of the equipment?

A)$12,000
B)$ 8,000
C)$10,000
D)$ 4,000

Question 27

An expenditure that does not increase the future economic benefits of the asset is referred to as a capital expenditure.

Question 28

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. If the company uses the straight-line method of depreciation, what is the book value at December 31, 2021?

A)$ 8,000
B)$ 6,000
C)$10,000
D)$ 4,000

Question 29

A ____________________ is a cost that improves an operating asset and is therefore added to the asset account.

Question 30

An accumulated ________ account is used when writing off natural resources.

Question 31

Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to building. Normally the company depreciates buildings over 40 years using the straight-line method with zero residual value and does not depreciate land. Because of the improper accounting treatment of the purchase, the company's income for the next 20 years will be

A)overstated.
B)understated.
C)unaffected.
D)cannot be determined from the information provided.

Question 32

The two items that must be estimated with respect to a plant asset in order to properly allocate cost to the affected accounting periods are ____________________ and ____________________.

Question 33

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. If the company uses the units-of-production method, what is the depreciation rate per hour for the equipment?

A)$1.00
B)$1.10
C)$0.10
D)$0.12

Question 34

The more efficiently a company uses its fixed assets the lower will be the fixed asset turnover ratio.

Question 35

Two reasons why a company might choose an accelerated depreciation method are _______________, and ______________.

Question 36

Fabian Woodworks
​
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2019, and was used 27,000 hours in 2019 and 26,000 hours in 2020.
Refer to Fabian Woodworks. If the company uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2020?

A)$4,800
B)$2,880
C)$1,728
D)$2,000

Question 37

A _________________ is the right to produce or sell a published work.

Question 38

A contra account called ____________________ is used to depreciate property, plant, and equipment.

Question 39

The ______________ depreciation method is the GAAP depreciation method used most frequently.

Question 40

____________ costs are expenditures incurred in the discovery of new knowledge and the translation of research into a design or plan for a new product.

Question 41

The accounting life of intangible assets is determined by

A)their legal lives.
B)their useful lives.
C)their legal lives or useful lives, whichever is shorter.
D)the tax life mandated by the IRS.

Question 42

On January 1, a company sold a machine for $5,000 that it had used for several years. The machine cost $11,000, and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine for the year ended December 31?

A)gain of $5,000
B)loss of $6,500
C)loss of $1,500
D)gain of $1,500

Question 43

Which of the following costs related to the purchase of production equipment would be considered a revenue expenditure?

A)Installation costs for equipment
B)Purchase price of the equipment less the cash discount
C)Repair and maintenance costs during the equipment's first year of service
D)Transportation charges for getting the equipment delivered to the business

Question 44

A company purchased land and incurred the following costs: What is the cost of the land?

A)$550,000
B)$597,500
C)$572,500
D)$562,500

Question 45

Operating assets with no physical properties are called

A)current assets.
B)intangible assets.
C)plant assets.
D)property, plant, and equipment.

Question 46

Falling Leaves Lawn Care
​
This company purchased new excavating equipment at the beginning of 2019. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2019. The equipment was used 20,000 hours during 2019 and 24,000 hours during 2020. The number of expected hours over 5 years is 100,000.
Refer to Falling Leaves Lawn Care. The company wants to use the depreciation method that will result in the highest depreciation expense for 2019. Which method should be used?

A)straight-line
B)units-of-production
C)double-declining-balance
D)All methods create the same income in 2019.

Question 47

Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should

A)not be amortized, but should be reviewed annually for impairment.
B)be reported on the statement of retained earnings in the year in which acquired.
C)be amortized over a reasonable period of time not to exceed 40 years.
D)be debited to an expense account entirely in the year in which acquired.

Question 48

Goodwill can be recorded as an asset when a(n)

A)business has above normal profitability compared to other businesses in its industry.
B)business can determine that it has created customer goodwill and name recognition.
C)offer is received to purchase the business at a price in excess of the value of the assets.
D)business is purchased and payment is made in excess of the value of the net assets.

Question 49

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, cost of lighting for the parking lot, and cost of landscaping for the parking lot. How should the company determine which costs should be recorded as Land Improvements and which costs should be recorded as Land?

A)The costs with an unlimited life are debited to Land, and the costs with a limited useful life are debited to Land Improvements.
B)The costs with a limited life are debited to Land, and the costs with an unlimited useful life are debited to Land Improvements.
C)The costs to be depreciated are debited to Land, and the costs that will not be depreciated are debited to Land Improvements
D)Costs that are depreciable are debited to Land Improvements, while other costs are expensed immediately because of a lack of definite life.

Question 50

Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value. The CEO points out that the equipment will last much shorter than 10 years, perhaps 5 years. What is the impact on earnings per share and net income of depreciating equipment over 5 years rather than 10 years?

A)Both earnings per share and net income will decrease.
B)Both earnings per share and net income will increase.
C)Earnings per share will decrease and net income will increase.
D)Earnings per share will increase and net income will decrease.

Question 51

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price of land, $900,000; cost to clear the land, $40,000; cost of paving, $35,000; and cost of lighting for the parking lot, $20,000. How much should be recorded in the Land Improvements account?

A)$20,000
B)$35,000
C)$55,000
D)$40,000

Question 52

Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance sheet?

A)accumulated depreciation--buildings
B)buildings
C)depreciation expense--buildings
D)land

Question 53

Falling Leaves Lawn Care
​
This company purchased new excavating equipment at the beginning of 2019. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2019. The equipment was used 20,000 hours during 2019 and 24,000 hours during 2020. The number of expected hours over 5 years is 100,000.
Refer to Falling Leaves Lawn Care. The company is comparing the straight-line and double-declining-balance depreciation methods. Of these two methods, which method creates the larger expense and larger tax savings in 2019?

A)Straight-line depreciation creates the larger expense, while double-declining-balance depreciation creates the larger tax savings.
B)Straight-line depreciation creates both the larger expense and the larger tax savings.
C)Double-declining-balance depreciation creates both the larger expense and the larger tax savings.
D)Double-declining-balance depreciation creates the larger expense, while straight-line depreciation creates the larger tax savings.

Question 54

A company purchased a patent for $100,000 at the beginning of the current year which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year?

A)$0
B)$5,000
C)$20,000
D)$100,000

Question 55

On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called

A)accumulated amortization.
B)accumulated depreciation.
C)amortization expense.
D)depreciation expense.

Question 56

How should intangible assets be disclosed on the balance sheet?

A)as a reduction of stockholders' equity
B)at cost in the current assets section
C)at the estimated market value at the balance sheet date
D)net of the costs already amortized

Question 57

Falling Leaves Lawn Care
​
This company purchased new excavating equipment at the beginning of 2019. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2019. The equipment was used 20,000 hours during 2019 and 24,000 hours during 2020. The number of expected hours over 5 years is 100,000.
Refer to Falling Leaves Lawn Care. What is the amount by which double-declining-balance depreciation exceeds straight-line depreciation over the 5-year life of the equipment?

A)$ -0-
B)$ 7,000
C)$37,000
D)$ 6,000

Question 58

Generally accepted accounting principles (GAAP) require that research and development costs to develop a new product be

A)capitalized in the patents account.
B)expensed in the period incurred.
C)capitalized in the research and development costs account.
D)amortized over the expected economic life of the new product.

Question 59

Floors 4 U uses straight-line depreciation for its equipment. The company purchased equipment for $250,000 and estimated its useful life at 8 years. The bookkeeper failed to consider the residual value of $25,000. What is the impact on earnings per share and operating income of failing to consider the residual value?

A)Earnings per share will be overstated and operating income will be understated.
B)Earnings per share will be understated and operating income will be overstated.
C)Both earnings per share and operating income will be overstated.
D)Both earnings per share and operating income will be understated.

Question 60

Falling Leaves Lawn Care
​
This company purchased new excavating equipment at the beginning of 2019. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2019. The equipment was used 20,000 hours during 2019 and 24,000 hours during 2020. The number of expected hours over 5 years is 100,000.
Refer to Falling Leaves Lawn Care. By what amount would double-declining-balance depreciation exceed straight-line depreciation over the 5-year life of the equipment?

A)the salvage value of $7,000
B)cost less total depreciation.
C)cost plus total depreciation
D)total depreciation expenses under double-declining-balance and straight-line depreciation are equal

Question 61

Fireworks City
Information for 2020 and 2019 is presented below for this company which uses the straight-line depreciation method.
Refer to Fireworks City. Determine the asset turnover ratio for 2020.

A)7.84 times
B)1.60 times
C)4.00 times
D)4.55 times

Question 62

Depreciation is

A)an effort to achieve proper matching of the cost of operating assets with related revenues.
B)an accumulation of funds to replace the related plant asset.
C)the difference between the original cost and salvage value of an asset.
D)the cash allocated each period to maintain a plant asset.

Question 63

Fireworks City
Information for 2020 and 2019 is presented below for this company which uses the straight-line depreciation method.
Refer to Fireworks City. Using the data for 2020, determine the average life of the company's property, plant, and equipment rounded to one decimal place.

A)1.6 years
B)2.5 years
C)4.0 years
D)10.0 years

Question 64

Land is not depreciated because it

A)appreciates in value.
B)does not have an established depreciable life.
C)has a useful life that is limited to the period of time a company is in business
D)will provide future benefits for a company for an unlimited period of time.

Question 65

A company uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration. Which of the following depreciation methods is most appropriate to measure the decline in the usefulness of this company's assets?

A)double-declining-balance
B)revenue expenditure method
C)straight-line
D)units-of-production

Question 66

Fireworks City
Information for 2020 and 2019 is presented below for this company which uses the straight-line depreciation method.
Refer to Fireworks City. Using the data for 2020, determine the average age of the company's property, plant, and equipment.

A)1.60 years
B)2.50 years
C)4.00 years
D)10.00 years

Question 67

Fernbank Farms
​
This company purchased a semi truck at the beginning of 2019 at a cost of $100,000. The truck had an estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line method. On January 1, 2021, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2021, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. When calculating depreciation for 2021, the company's accountant should

A)add the $30,000 to the book value at December 31, 2020, and then allocate the revised depreciation basis over the remaining adjusted useful life of 5 years.
B)report the effect of the change in life as an expense on the income statement in 2019.
C)ignore the change in life on the original cost of $100,000 and depreciate the additional $30,000 cost separately over its useful life.
D)expense the $30,000 and depreciate the original cost of $100,000 over its revised estimated total live of 7 years.

Question 68

Fernbank Farms
​
This company purchased a semi truck at the beginning of 2019 at a cost of $100,000. The truck had an estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line method. On January 1, 2021, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2021, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. What is the truck's book value at December 31, 2021?

A)$68,000
B)$98,000
C)$80,000
D)$62,000

Question 69

Depreciation is a process by which

A)replacement funds are accumulated for plant and equipment.
B)the decline in market value of plant and equipment is determined and recorded.
C)the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.
D)the difference between current market value and historical cost of plant and equipment.

Question 70

Fireworks City
Information for 2020 and 2019 is presented below for this company which uses the straight-line depreciation method.
Refer to Fireworks City. During the year, the company sold some equipment that had an original cost of $60,000. Which statement is true concerning transactions that must have occurred during the period?

A)The company purchased additional equipment during the year.
B)The selling price of the equipment sold was reported with net sales.
C)The company did not purchase additional equipment during the year.
D)The equipment sold had not been reported with the company's property, plant and equipment.

Question 71

Fernbank Farms
​
This company purchased a semi truck at the beginning of 2019 at a cost of $100,000. The truck had an estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line method. On January 1, 2021, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2021, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. What amount should be recorded as depreciation expense each year starting in 2021?

A)$16,000
B)$18,000
C)$13,600
D)$12,400

Question 72

Which of the following sets of factors is needed to calculate depreciation on plant and equipment?

A)the asset's acquisition cost, replacement cost, and its estimated residual value
B)the estimated residual value of the asset, its replacement cost, and its market value
C)the asset's replacement cost, its estimated life, and its estimated residual value
D)the estimated life of the asset, its acquisition cost, and its estimated residual value

Question 73

Which statement is true concerning operating assets?

A)Operating assets have no physical properties.
B)A company's operating assets are important to its short-term liquidity.
C)Operating assets are used over two or more periods to generate revenues.
D)All operating assets are reported on the income statement

Question 74

Research and development costs are

A)treated as an expense when incurred.
B)capitalized but not amortized.
C)capitalized and amortized over the periods that will probably benefit from the research and development.
D)included with the cost of the patent resulting from the research and development.

Question 75

If a company's asset turnover ratio decreased from 2019 to 2020, which of the following conclusions can be made?

A)The company was more efficient during 2020 in using its assets to produce profits.
B)The company produced less sales in 2020 for each dollar invested in assets.
C)The company was less profitable in 2019.
D)The company over invested in assets in 2020.

Question 76

On January 1 (the beginning of the year), a company sold a piece of equipment for $30,000 which it had used for several years. The equipment had cost $45,000, and its accumulated depreciation amounted to $20,000 at the time of the sale. What are the net effects on the accounting equation of selling the equipment for the year?

A)Assets and Shareholders' Equity increase $30,000
B)Assets decrease and Shareholders' Equity increases $5,000.
C)Assets and Shareholders' Equity increase $5,000.
D)Assets and Shareholders' Equity decrease $5,000.

Question 77

Which of the following factors is not related to the decline in the usefulness of plant and equipment assets, and therefore does not need to be considered in selecting an appropriate depreciation method?

A)physical deterioration
B)obsolescence
C)repair and maintenance policies
D)current replacement cost

Question 78

Flying High Air acquires a new aircraft. It has an estimated life of 10 years and should last for at least 20,000 hours of flight. What is the most appropriate method of depreciation to properly match revenues and expenses?

A)double-declining-balance
B)revenue expenditure method
C)straight-line
D)units-of-production

Question 79

Assets classified as property, plant, and equipment are reported at

A)each asset's estimated market value at the balance sheet date less depreciation.
B)each asset's estimated market value at the balance sheet date.
C)the estimated salvage value at the balance sheet date.
D)each asset's original cost less depreciation since acquisition.

Question 80

A company should choose a depreciation method that

A)best allocates the original cost of the asset to the periods benefited by the use of the asset.
B)saves the most taxes.
C)minimizes net income
D)shows the highest amount of net income.