Question 1

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

Accepted Answer

FASB does allow companies to choose from different depreciation methods to reflect the declining service potential of an operating asset.

Question 2

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

Accepted Answer

False

Question 3

If new equipment purchased in 2013 is reported on the balance sheet at December 31, 2013 as a long-term asset, there will be no related item on the 2013 income statement.

Accepted Answer

The income statement for 2013 will include depreciation expense related to the new equipment, which is an expense reflecting the allocation of the equipment's cost over its useful life.

Question 4

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, the current period's depreciation expense is subtracted from the original cost to calculate the book value of the asset on the balance sheet. The original cost remains as a separate line item on the balance sheet.

Question 5

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

Accepted Answer

Lenders are interested in the company's operating assets as they provide collateral and a source of cash flow to repay the loan.

Question 6

All intangible assets are subject to amortization.

Accepted Answer

Not all intangible assets are subject to amortization. Some intangible assets, such as trademarks with indefinite useful lives, are not amortized but are subject to periodic impairment testing.

Question 7

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 8

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

Accepted Answer

Intangible assets such as brand value or reputation are difficult to measure and therefore not included in financial statements.

Question 9

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.

Accepted Answer

When plant assets are purchased in a group, the total cost is allocated among the assets based on their relative fair market values, but the individual assets are not directly debited for their fair market values at the time of acquisition. The allocation is based on their proportionate values, not the exact fair market value amounts.

Question 10

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.

Accepted Answer

Costs incurred related to plant assets that are already in use are called capital expenditures if the cost increases the useful life or the asset's productivity. Revenue expenditures are expenses incurred in the normal course of business to maintain plant assets and are expensed immediately.

Question 11

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

Accepted Answer

Plant assets, property, plant and equipment, and fixed assets are indeed tangible assets, but current assets include both tangible and intangible items (like cash, accounts receivable, and inventory).

Question 12

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

Accepted Answer

Depreciation is a non-cash expense that reduces a company's taxable income, hence reducing the amount of income tax the company has to pay.

Question 13

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

Accepted Answer

Revenue expenditures are costs incurred to maintain or improve the current operating efficiency and expected productive life of a plant asset. Examples include expenses for repairs, maintenance, and small upgrades. These costs are typically expensed in the period in which they are incurred and do not increase the value or extend the useful life of the asset.

Question 14

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.

Accepted Answer

If the useful life of equipment was estimated incorrectly, then the company must adjust its depreciation expense accordingly and spread the remaining book value of the asset over the revised useful life in the current and future accounting periods. This is done in order to accurately reflect the usage and wear and tear of the asset over time.

Question 15

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

Accepted Answer

An impairment is a permanent reduction in the value of an asset to less than its carrying amount on the balance sheet, reflecting a decline in the future benefits or service potential that the asset is expected to generate.

Question 16

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 a simple and straightforward method of calculating depreciation that involves dividing the asset's cost by its expected useful life. As a result, it is easy to calculate and a popular choice for many companies.

Question 17

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 18

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 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 is a commonly used method for calculating depreciation, but it does not necessarily minimize a company's income tax burden. Other methods, such as accelerated depreciation, may provide greater tax benefits in the short term.

Question 20

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.

Accepted Answer

If a company uses the same depreciation method as others in the same industry, investors can compare the financial results of different companies more accurately. Standardization in accounting practices helps to ensure that financial statements are comparable, which can aid investors in making informed investment decisions.

Quiz 7: Operating Assets