Deck 8: Reporting and Analyzing Long-Term Assets

Question 1

The book value of an asset when using double-declining-balance depreciation is always greater than the book value from using straight-line depreciation, except at the beginning and the end of the asset's useful life, when it is the same.

Answer 1

False

Question 2

Depreciation does not measure the decline in market value of an asset each period.

Answer 2

True

Question 3

Plant assets are used in operations and have useful lives of more than one accounting period.

Answer 3

True

Question 4

Asset turnover is computed by dividing net sales by average total assets.

Question 5

Revising an estimate of the useful life or salvage value of a plant asset is referred to as a change in accounting estimate and is reflected in the current, and future financial statements.

Question 6

A plant asset's useful life is the length of time it is productively used in a company's operations.

Question 7

Financial accounting and tax accounting require the same recordkeeping and there should be no difference in results between the two accounting systems.

Question 8

If land is purchased as a building site, the cost of removing existing structures is not charged to the Land account.

Question 9

Decision makers and other users of financial statements use the total asset turnover ratio in determining a company's ability to use its assets in generating sales.

Question 10

Total depreciation expense over an asset's useful life will be identical under all methods of depreciation.

Question 11

Salvage value is an estimate of an asset's value at the end of its benefit period.

Question 12

Depreciation is higher in earlier years and income is lower in the later years when using straight-line versus accelerated methods.

Question 13

The going concern assumption supports the reporting of plant assets at undepreciated cost (book value) rather than market value.

Question 14

Factors that determine depreciation are cost, salvage value, and useful life.

Question 15

The process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use is called depletion.

Question 16

Obsolescence refers to the insufficient capacity of a company's plant assets to meet the company's growing productive demands.

Question 17

Plant assets refer to intangible assets that are used in the operations of a business.

Question 18

The Modified Accelerated Cost Recovery System (MACRS), which is part of the U.S. federal income tax laws, may also be used for financial reporting.

Question 19

It is necessary to report both the cost and the accumulated depreciation of plant assets in the financial statements.

Question 20

When an asset is purchased (or disposed of) at a time other than the beginning or the end of an accounting period, depreciation is recorded for part of a year so that the year of purchase or the year of disposal is charged with its share of the asset's depreciation.

Question 21

Betterments are a type of capital expenditure.

Question 22

The purchase of a property that included land, building, and related improvements is called a lump-sum or basket purchase.

Question 23

Additions to land that increase the usefulness of the land such as parking lots, fences, and lighting are not depreciated.

Question 24

The cost of fees for insuring the title and any accrued property taxes are included in the cost of land.

Question 25

The units-of-production method of depreciation charges a varying amount of expense for each period of an asset's useful life depending on its usage.

Question 26

Companies that have a relatively large amount invested in assets to generate a given level of sales are considered capital-intensive.

Question 27

If a machine is damaged during unpacking, the repairs are added to its cost.

Question 28

Revenue expenditures are additional costs of plant assets that do not materially increase the assets' life or productive capabilities.

Question 29

An asset's cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

Question 30

When a company constructs a building, the cost of the building includes materials and labor but not design fees, building permits, or insurance during construction.

Question 31

A company purchased a plant asset for $60,000. The asset has an estimated salvage value of $4,000, and an estimated useful life of 7 years. The annual depreciation expense using the straight-line method is $4,000 per year.
Depreciation Expense = (Cost - Salvage Value)/Estimated Useful Life
Depreciation Expense = ($60,000 - $4,000)/7; Depreciation Expense = $8,000

Question 32

The double-declining balance method is applied by (1) computing the asset's straight-line depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying the rate times the book value.

Question 33

Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its total asset turnover equals 1.71.
Total Asset Turnover = Net Sales/Average Total Assets
Total Asset Turnover = $2,523/$1,476 = 1.71

Question 34

Extraordinary repairs are expenditures extending the asset's useful life beyond its original estimate, and are capital expenditures because they benefit future periods.

Question 35

An accelerated depreciation method yields larger depreciation expense in the early years of an asset's life and less depreciation expense in later years.

Question 36

Total asset cost plus depreciation expense equals book value.

Question 37

Capital expenditures are expenditures that keep assets in normal, good operating condition.

Question 38

Revenue expenditures are also called balance sheet expenditures.

Question 39

Plant assets can be disposed of by discarding, selling, or exchanging them.

Question 40

Edmond reported average total assets of $9,965 million and net sales of $10,430 million. Its total asset turnover equals .96.
Total Asset Turnover = Net Sales/Average Total Assets
Total Asset Turnover = $10,430/$9,965 = 1.05

Question 41

Natural resources may be reported under either plant assets or their own separate category on the balance sheet.

Question 42

Gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the market value of any assets received.

Question 43

Since goodwill is an intangible, it is amortized each year using the straight-line method, the same as other intangibles are amortized.

Question 44

Amortization is the process of allocating the cost of natural resources to periods when they are consumed.

Question 45

Intangible assets are nonphysical assets used in operations that confer on their owners' long-term rights, privileges, or competitive advantages.

Question 46

Morgan Industries purchases land for a building site for $500,000, payed $20,000 to have an existing structure removed and recovered $4,000 from the sale of salvaged materials. The cost charge to the land account is $524,000.
$500,000 + 20,000 - 4,000 = $516,000

Question 47

A trademark is an exclusive right granted to its owner to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years.

Question 48

Accounting for the exchange of assets depends on whether the transaction has commercial substance; commercial substance implies that it alters the company's future cash flows.

Question 49

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale are less than the asset's book value.

Question 50

The cost of an intangible asset is systematically allocated to depreciation expense over its estimated useful life.

Question 51

Intangible assets, such as goodwill, that are not amortized are tested annually for impairment.

Question 52

If an asset is sold above its book value, the selling company records a loss.

Question 53

If Clark Corp. purchased machinery for $10,000 with no salvage value and a 5 year life on July 1, the depreciation expense in the first year is $1,000.
$10,000/5 × 6/12 = $1,000

Question 54

A leasehold refers to the rights the lessor grants to the lessee under the terms of a lease.

Question 55

A patent is an exclusive right granted to its owner to manufacture and sell a patented device or to use a process for 20 years.

Question 56

When the usefulness of plant assets used to extract natural resources is directly related to the depletion of a natural resource, their costs are depreciated using the units-of-production method of depreciation, as long as the assets will not be moved to and used at another site when extraction of the natural resources is complete.

Question 57

Natural resources include standing timber, mineral deposits, and oil and gas fields.

Question 58

The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.

Question 59

A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 17 years.

Question 60

Plant assets are defined as:

A)Tangible assets that have a useful life of more than one accounting period and are used in the operation of a business.
B)Current assets.
C)Assets held for sale.
D)Intangible assets used in the operations of a business that have a useful life of more than one accounting period.
E)Tangible assets used in the operation of business that have a useful life of less than one accounting period.

Question 61

A machine originally had an estimated useful life of 6 years, but after 4 complete years, it was decided that the original estimate of useful life should have been 10 years. At that point the remaining cost to be depreciated should be allocated over the remaining:

A)2 years.
B)4 years.
C)6 years.
D)16 years.
E)10 years.

Question 62

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $2,000, Peavey Enterprises should recognize depreciation expense in Year 2 in the amount of:

A)$10,000
B)$5,000
C)$5,500
D)$20,000
E)$9,250

Question 63

The straight-line depreciation method and the double-declining-balance depreciation method:

A)Produce the same total depreciation over an asset's useful life.
B)Produce the same depreciation expense each year.
C)Produce the same book value each year.
D)Are acceptable for tax purposes only.
E)Are the only acceptable methods of depreciation for financial reporting.

Question 64

The following information is available on a depreciable asset owned by Mutual Savings Bank: The asset's book value is $70,000 on June 1, Year 3. On that date, management determines that the asset's salvage value should be $5,000 rather than the original estimate of $10,000. Based on this information, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be:

A)$8,125.00
B)$7,375.00
C)$4,062.50
D)$3,750.00
E)$7,812.50

Question 65

The modified accelerated cost recovery system (MACRS):

A)Is included in the U.S.federal income tax rules for depreciating assets.
B)Is an outdated system that is no longer used by companies.
C)Is required for financial reporting.
D)Is identical to units-of-production depreciation.
E)Does not allow partial year depreciation.

Question 66

The useful life of a plant asset is:

A)The length of time it is productively used in a company's operations.
B)Never related to its physical life.
C)Its productive life, but not to exceed one year.
D)Determined by the FASB.
E)Determined by law.

Question 67

The term inadequacy, as it relates to the useful life of an asset, refers to:

A)The insufficient capacity of a company's plant assets to meet the company's growing production demands.
B)An asset that is worn out.
C)An asset that is no longer useful in producing goods and services.
D)The condition where the salvage value is too small to replace the asset.
E)The condition where the asset's salvage value is less than its cost.

Question 68

One characteristic of plant assets is that they are:

A)Current assets.
B)Used in operations.
C)Natural resources.
D)Long-term investments.
E)Intangible.

Question 69

Salvage value is:

A)Not a factor relevant to determining depletion.
B)A factor relevant to amortizing an intangible asset with an indefinite life.
C)An estimate of the asset's value at the end of its benefit period.
D)A factor relevant to determining depreciation under MACRS.
E)A factor relevant to determining depreciation that cannot be revised during an asset's useful life.

Question 70

When originally purchased, a vehicle costing $23,000 had an estimated useful life of 8 and an estimated salvage value of $1,500. After 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5: equals:

A)$5,375.00.
B)$2,687.50.
C)$5,543.75.
D)$10,750.00.
E)$2,856.25.

Question 71

The relevant factors in computing depreciation do not include:

A)Cost.
B)Salvage value.
C)Useful life.
D)Depreciation method.
E)Market value.

Question 72

The term, obsolescence, as it relates to the useful life of an asset, refers to:

A)The end of an asset's useful life.
B)A plant asset that is no longer useful in producing goods and services with a competitive advantage.
C)The insufficient capacity of a company's plant assets to meet the company's productive demands.
D)An asset's salvage value becoming less than its replacement cost.
E)Intangible assets that have been fully amortized.

Question 73

A company used straight-line depreciation for equipment that cost $12,000, had a salvage value of $2,000 and a five-year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1,200 but its total useful life remained the same. Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life:

A)$1,000.
B)$1,800.
C)$5,400.
D)$2,400.
E)$2,000.

Question 74

Depreciation:

A)Measures the decline in market value of an asset.
B)Measures physical deterioration of an asset.
C)Is the process of allocating the cost of a plant asset to expense.
D)Is an outflow of cash from the use of a plant asset.
E)Is applied to land.

Question 75

A benefit of using an accelerated depreciation method is that:

A)It is preferred by the tax code.
B)It is the simplest method to calculate.
C)It yields larger depreciation expense in the early years of an asset's life.
D)It yields a higher income in the early years of the asset's useful life.
E)The results are identical to straight-line depreciation.

Question 76

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $2,000, what will be the amount of accumulated depreciation on this asset on December 31, Year 3?

A)$5,000
B)$15,000
C)$15,125
D)$20,000
E)$13,750

Question 77

Total asset turnover is used to evaluate:

A)The efficient use of assets to generate sales.
B)The necessity for asset replacement.
C)The number of times operating assets were sold during the year.
D)The cash flows used to acquire assets.
E)The relation between asset cost and book value.

Question 78

A change in an accounting estimate is:

A)Reflected in past financial statements.
B)Reflected in future financial statements and also requires modification of past statements.
C)Reflected in current and future years' financial statements, not in prior statements.
D)Not allowed under current accounting rules.
E)Considered an error in the financial statements.

Question 79

Once the estimated depreciation expense for an asset is calculated:

A)It cannot be changed, based on the historical cost principle.
B)It may be revised based on new information.
C)Any changes are accumulated and recognized when the asset is sold.
D)The estimate itself cannot be changed; however, new information should be disclosed in financial statement footnotes.
E)It cannot be changed, based on the consistency principle.

Question 80

Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of $100,000. The asset is expected to have a salvage value of $20,000 at the end of its five-year useful life. If the asset is depreciated on the double-declining-balance method, the asset's book value on December 31, Year 2 will be:

A)$36,000
B)$42,000
C)$54,000
D)$16,000
E)$90,000