Question 1

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

Accepted Answer

Additions to land, known as land improvements, are depreciated because they have a limited useful life, unlike the land itself which is not depreciated.

Question 2

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.

Accepted Answer

The statement is correct. The units-of-production method of depreciation is based on the usage or output of the asset, and therefore the expense charged varies from period to period based on how much the asset was used.

Question 3

Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its total asset turnover equals 1.71.

Accepted Answer

Total Asset Turnover = Net Sales / Average Total Assets 
1.71 = $2,523 million / $1,476 million

Question 4

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

Accepted Answer

This statement is true. Capital-intensive companies require significant investment in assets, such as equipment and property, to generate a given level of sales. This is in contrast to labor-intensive companies, which require a larger workforce to generate the same level of sales.

Question 5

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

Accepted Answer

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

Question 6

Total asset cost plus depreciation expense equals book value.

Accepted Answer

Book value is calculated as the total asset cost minus accumulated depreciation, not plus depreciation expense.

Question 7

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

Accepted Answer

This is true because accelerated depreciation methods like the double-declining balance method and sum-of-the-years'-digits method allocate more of an asset's cost to the early years of its life, resulting in larger depreciation expenses during those years. As the asset gets older, the amount of depreciation expense decreases because less of the asset's cost remains to be depreciated.

Question 8

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 net value.

Accepted Answer

The statement is partially correct but incomplete. Step (1) and (2) are accurate, but step (3) should be multiplying the straight-line depreciation rate by 2 instead of doubling it, and step (4) should be multiplying the rate times the book value (cost minus accumulated depreciation) instead of the net value.

Question 9

Total asset turnover is calculated by dividing net sales by average total assets.

Accepted Answer

Total asset turnover is calculated by dividing net sales (top-line revenue) by average total assets (all assets on the balance sheet averaged over a period).

Question 10

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

Accepted Answer

A lump-sum or basket purchase is a type of transaction in which a buyer purchases multiple assets together in one transaction. This can include land, buildings, and other related improvements as a package deal.

Question 11

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

Accepted Answer

MACRS is used for tax purposes to calculate depreciation, not for financial reporting, which typically uses methods like straight-line depreciation.

Question 12

Decision makers and other users of financial statements are especially interested in evaluating a company's ability to use its assets in generating sales.

Accepted Answer

This statement is true. Decision makers and users of financial statements are interested in a company's ability to efficiently utilize their assets to generate revenue and profits. This ability is usually measured through various financial ratios, such as asset turnover ratio and return on assets ratio.

Question 13

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.

Accepted Answer

The cost of the building typically includes not only materials and labor, but also design fees, building permits, and insurance during construction. These additional costs can add up significantly and should be factored into the overall cost of the project.

Question 14

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

Accepted Answer

This is in accordance with the generally accepted accounting principles (GAAP). The cost of an asset includes all direct and indirect costs required to get the asset in place and ready for use. These costs can include purchase price, delivery, installation, testing, and any other costs necessary to make the asset ready for its intended use.

Question 15

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

Accepted Answer

The answer of If a machine is damaged during unpacking,...

Question 16

Total asset turnover is calculated by dividing average total assets by net sales.

Accepted Answer

Total asset turnover is calculated by dividing net sales by average total assets, not the other way around.

Question 17

Edmond reported average total assets of $9,965 million and net sales of $10,430 million. Its total asset turnover equals .96.

Accepted Answer

Total asset turnover is calculated by dividing net sales by average total assets. Therefore, if the total asset turnover is .96, we can set up the equation as follows: 
.96 = 10,430 / 9,965 
However, when we solve for this equation, we get a total asset turnover of 1.05, not .96. Therefore, the statement is false.

Question 18

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

Accepted Answer

The cost of land includes all expenditures necessary to acquire the land and prepare it for its intended use, which can include title insurance and accrued property taxes.

Question 19

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.

Accepted Answer

The annual depreciation expense using the straight-line method is calculated as (Cost - Salvage Value) / Useful Life, which is ($60,000 - $4,000) / 7 = $8,000 per year.

Question 20

The straight-line depreciation method yields a steady pattern of depreciation expense.

Accepted Answer

The straight-line depreciation method allocates the cost of an asset evenly over its useful life, resulting in a steady pattern of depreciation expense.

Quiz 10: Plant Assets Natural Resoures and Intangibles