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Purchase A+ Graded Course Material
CHAPTER10
PLANTASSETS,NATURALRESOURCES,ANDINTANGIBLEASSETS
CHAPTERSTUDYOBJECTIVES
1.Describehowthecostprincipleappliestoplantassets.
2.Explaintheconceptofdepreciation..
3.Computeperiodicdepreciationusingdifferentmethods.
4.Describetheprocedureforrevisingperiodicdepreciation.
5.Distinguishbetweenrevenueandcapitalexpenditures,andexplaintheentriesforeach.
6.Explainhowtoaccountforthedisposalofaplantasset.
7.Computeperiodicdepletionofnaturalresources.
8.Explainthebasicissuesrelatedtoaccountingforintangibleassets.
9.Indicatehowplantassets,naturalresources,andintangibleassetsarereported.
10.Explainhowtoaccountfortheexchangeofplantassets.
TRUE-FALSESTATEMENTS
1. Allplantassets(fixedassets)mustbedepreciatedfor accountingpurposes.
2. Whenpurchasingland,thecostsforclearing,draining,filling,andgradingshouldbe chargedto aLandImprovementsaccount.
3. Whenpurchasingdeliveryequipment,salestaxesandmotorvehiclelicensesshouldbe
chargedto DeliveryEquipment.
4. Landimprovementsaregenerallychargedto
theLandaccount.
5. Oncecostisestablishedforaplantasset,itbecomes thebasis
ofaccounting fortheasset
unlesstheassetappreciatesinvalue,inwhichcase,marketvaluebecomesthebasisfor accountability.
6. Thebookvalueof
aplantassetisalwaysequaltoitsfairmarketvalue.
7. Recordingdepreciationonplantassetsaffectsthebalancesheetandtheincome statement.
8. Thedepreciablecostof
aplant asset is itsoriginalcostminusobsolescence.
9. Recordingdepreciationeachperiodisanapplicationof
thematchingprinciple.
10. TheAccumulatedDepreciationaccountrepresentsacashfundavailabletoreplaceplant assets.
11. Incalculatingdepreciation,bothplantassetcost andusefullifearebasedonestimates.
12. Usingtheunits-of-activitymethodofdepreciatingfactoryequipmentwillgenerallyresultin
moredepreciationexpensebeingrecordedoverthelifeoftheassetthanifthestraight-line
method hadbeenused.
13. Salvagevalueisnotsubtractedfromplantassetcostindeterminingdepreciationexpense
underthedeclining-balancemethodofdepreciation.
14. Thedeclining-balancemethodofdepreciationiscalledanaccelerateddepreciation methodbecauseitdepreciatesanassetinashorterperiodoftimethantheasset'suseful life.
15. Underthedouble-declining-balancemethod,thedepreciationrateusedeachyear remainsconstant.
16. TheIRSdoesnotrequirethetaxpayertousethesamedepreciationmethodonthetax returnthatisusedinpreparingfinancialstatements.
17. Achangeintheestimatedusefullifeofaplantassetmaycauseachangeintheamount ofdepreciationrecognizedinthecurrentandfutureperiods,but
nottopriorperiods.
18. Achangeintheestimatedsalvagevalueofaplantassetrequiresarestatementofprior years'depreciation.
19. Todetermineanewdepreciationamountafterachangeinestimateofaplantasset's useful life, the asset'sremaining depreciablecost isdividedbyits remainingusefullife.
20. Additionsand improvementstoaplantassetthatincreasethe
asset'soperatingefficiency, productive capacity,or expectedusefullife
aregenerallyexpensed intheperiodincurred.
21. Capitalexpendituresareexpendituresthatincreasethecompany'sinvestmentin
productive facilities.
22. Ordinaryrepairs
shouldberecognizedwhenincurredas revenueexpenditures.
23. A characteristicofcapitalexpendituresis that theexpendituresoccurfrequently
duringthe period ofownership.
24. Onceanassetisfullydepreciated,noadditionaldepreciationcanbetakeneventhough theasset
is still beingusedbythebusiness.
25. Thefairmarketvalueof a plantasset
isalwaysthesameasits bookvalue.
26. Iftheproceedsfromthesaleofaplantassetexceeditsbookvalue,againondisposal occurs.
27. Alossondisposalofaplantassetcanonlyoccurifthecashproceeds received fromthe assetsaleis
lessthanthe asset'sbook value.
28. Thebookvalueofaplantassetistheamount originallypaid
fortheassetlessanticipated salvagevalue.
29. Alossondisposal ofaplantasset
asaresult ofasaleoraretirementiscalculated inthe sameway.
30. A plantassetmustbefullydepreciatedbeforeit canberemovedfromthe books.
31. Ifaplantasset issoldata gain,thegain
ondisposal shouldreducethecost ofgoodssold section of the incomestatement.
32. Depletioncostperunitiscomputedbydividingthetotalcostofanaturalresourcebythe
estimatednumberof unitsintheresource.
33. TheAccumulatedDepletionaccountisdeductedfromthecostofthenaturalresourcein thebalancesheet.
34. Depletionexpenseforaperiodisonlyrecognizedonnaturalresourcesthathavebeen extractedandsoldduringtheperiod.
35. Naturalresourcesarelong-livedproductiveassetsthatareextractedinoperationsand arereplaceableonlybyanactof
nature.
36. Thecostofnaturalresourcesisnotallocatedtoexpensebecausethenaturalresources
arereplaceableonlybyanactof nature.
37. Conceptually,thecostallocationproceduresfornaturalresourcesparallelsthatofplant
assets.
38. Naturalresourcesincludestandingtimberandundergrounddepositsofoil,gas,and
minerals.
39. Ifanacquiredfranchiseorlicensehasanindefinitelife,thecostoftheassetisnot
amortized.
40. Whenanentirebusinessispurchased,goodwillistheexcessofcostoverthebookvalue
of
thenet assetsacquired.
41. Researchand
development
costswhich result
in asuccessful product which ispatentable arechargedtothePatentaccount.
42. Thecostof
apatentmustbeamortizedovera 20-yearperiod.
43. Thecostofapatentshouldbeamortizedoveritslegallifeorusefullife,whicheveris shorter.
44. The
balancesofthe majorclassesofplantassetsand
accumulated depreciationby major
classes shouldbedisclosedinthebalance sheetornotes.
45. Theassetturnover ratioiscalculated
astotalsales
dividedbyendingtotalassets.
46. Researchanddevelopmentcostscanbeclassifiedasaproperty,plant,andequipment itemoras
an
intangibleasset.
a47. An exchangeofplantassetshas commercial substanceifthe futurecashflows
change as a resultofthe
exchange.
a48. Companiesrecordagainorlossontheexchangeofplantassetsbecausemost
exchangeshavecommercialsubstance.
a49. Whenplantassetsareexchanged,thecostofthenewassetisthebookvalueoftheold
assetplus anycashpaid.
Additional
True-FalseQuestions
50. Whenconstructingabuilding,acompanyispermittedtoincludetheacquisitioncostand certaininterest
costs incurredinfinancingtheproject.
51. Recognitionofdepreciationpermitstheaccumulationofcashforthereplacementofthe asset.
52. Whenanassetispurchasedduringtheyear,itisnotnecessarytorecorddepreciation
expense
inthefirst yearunderthedeclining-balancedepreciationmethod.
53. Depletionexpenseisreported intheincomestatementas anoperatingexpense.
54. Goodwillisnotrecognizedinaccountingunlessitisacquiredfromanotherbusiness
enterprise.
55. Researchanddevelopmentcostsshouldbechargedtoexpensewhenincurred.
56. Alossontheexchangeofplantassetsoccurswhenthefairmarketvalueoftheoldasset islessthanitsbookvalue.
MULTIPLECHOICEQUESTIONS
57. Thecostof apurchasedbuildingincludes
allofthefollowingexcept
a.closingcosts.
b.realestatebroker's
commission. c.remodeling costs.
d.Allof
theseareincluded.
58. Acompanypurchasedlandfor$90,000cash.Realestatebrokers'commissionwas
$5,000and$7,000wasspentfordemolishinganoldbuildingonthelandbefore
constructionofanewbuildingcouldstart.Underthecostprinciple,thecostoflandwould
be recordedat
a.$97,000. b.$90,000. c.$95,000. d.$102,000.
59. Whichoneofthefollowingitemsisnotconsideredapartofthecostofatruckpurchased for businessuse?
a.Salestax
b.Trucklicensec.Freightcharges
d.Costofletteringonsideoftruck
60. Whichofthefollowingassetsdoesnotdeclineinservicepotentialoverthecourseofits useful life?
a.Equipment b.Furnishings
c.Land
d.Fixtures
61. Thefoursubdivisions forplantassetsare
a.land,landimprovements,buildings,andequipment. b.intangibles,land,buildings,andequipment.
c.furnishingsandfixtures,land,buildings, andequipment.
d.property,plant,equipment,andland.
62. Thecostof
landdoesnotinclude
a.realestatebrokers' commission. b.annualpropertytaxes.
c.accruedpropertytaxesassumedbythepurchaser.
d.title fees.
63. FeeneyClinicpurchaseslandfor$130,000cash.Theclinicassumes$1,500inproperty taxesdueontheland.Thetitleandattorneyfeestotaled$1,000.Theclinichastheland
gradedfor
$2,200.WhatamountdoesFeeneyClinicrecordasthecostforthe land?
a.$132,200 b.$130,000 c.$134,700 d.$132,500
64. BelleCompanybuyslandfor$50,000on12/31/07.Asof3/31/08,thelandhas
appreciatedinvalueto$50,700.On12/31/08,thelandhasanappraisedvalueof
$51,800.Bywhatamountshouldthe Landaccount
beincreasedin 2008?
a.$0b.$700
c.$1,100
d.$1,800
65. PineCompanyacquireslandfor$86,000cash.Additional costsareasfollows:
Removalof shed $300 Fillingandgrading 1,500 Salvagevalue
oflumberofshed 120 Brokercommission 1,130 Pavingofparkinglot 10,000 Closingcosts
560
Pinewillrecordtheacquisitioncostof thelandas
a.$86,000.
b.$87,690.
c.$89,610. d.$89,370.
66. ShawneeHospitalinstallsanewparkinglot.Thepavingcost$30,000andthelightsto illuminatethenewparkingareacost$15,000.Whichofthefollowingstatementsistrue with
respecttotheseadditions?
a.$30,000shouldbedebitedtothe Landaccount.
b.$15,000shouldbedebitedtoLandImprovements.
c.$45,000shouldbedebitedtotheLandaccount.d.$45,000shouldbedebitedtoLandImprovements.
10-10
67. Landimprovementsshouldbedepreciatedovertheusefullife
of the a.land.
b.buildingsontheland.
c.land or landimprovements,whicheverislonger.
d.landimprovements.
68. GeneralMoldingisbuildinganewplantthatwilltakethreeyearstoconstruct.The constructionwillbefinancedinpartbyfundsborrowedduringtheconstructionperiod.
Therearesignificantarchitectfees,excavationfees,andbuildingpermitfees.Whichof
the followingstatementsis true?
a.Excavationfeesarecapitalizedbut building
permitfeesarenot.
b.Architectfeesarecapitalizedbut buildingpermitfeesarenot.
c.Interestiscapitalizedduring theconstructionas partof thecostofthebuilding.
d.The capitalizedcost
is equaltothecontractprice
tobuildthe
plant less any intereston borrowed funds.
69. Acompanypurchasesaremotesitebuildingforcomputeroperations.Thebuildingwillbe
suitableforoperationsaftersomeexpenditures.Thewiringmustbereplacedtocomputer specifications.Theroofisleakyandmustbereplaced.Allroomsmustberepaintedand recarpetedandtherewillalsobesomeplumbingworkdone.Whichofthefollowing
statements is true?
a.Thecost ofthebuildingwillnot includetherepaintingandrecarpeting costs.
b.Thecostofthebuildingwillincludethecostof
replacing theroof.
c.Thecostofthebuildingisthepurchasepriceofthebuilding,whiletheadditional expendituresareallcapitalizedas BuildingImprovements.
d.Thewiringis
partofthecomputercosts,notthebuildingcost.
70. CarleyCompany purchasesanewdeliverytruck
for$45,000.Thesalestaxesare$3,000.
Thelogo of thecompanyis painted
on thesideofthe truckfor$1,200.Thetrucklicenseis $120.Thetruckundergoessafetytestingfor$220.WhatdoesCarleyrecordasthecostof
thenewtruck?
a.$49,540
b.$49,420 c.$48,000 d.$47,420
71. Allof thefollowingfactorsincomputingdepreciationareestimatesexcept a.cost.
b.residualvalue. c.salvagevalue. d.usefullife.
72. StoriesCompanypurchasedequipmentandthesecostswereincurred:
Cashprice Salestaxes
Insuranceduringtransit
Installationandtesting Totalcosts
$22,500
1,800 320
430$25,050
PlantAssets,NaturalResources,andIntangibleAssets 10-11
Storieswillrecordtheacquisitioncostofthe equipmentas a.$22,500.
b.$24,300. c.$24,620. d.$25,050.
73. Becky’sBloomspurchasedadeliveryvanfor$20,000.Thecompany wasgivena$2,000
cashdiscountbythedealer,andpaid$1,000salestax.Annualinsuranceonthevanis
$500.Asaresultofthepurchase,byhowmuchwillBecky’sBloomsincreaseitsvan account?
a.$20,000
b.$18,000 c.$19,500 d.$19,000
74. UptonCompanypurchasedequipmentonJanuary1atalistpriceof$50,000,withcredit terms2/10,n/30.PaymentwasmadewithinthediscountperiodandUptonwasgivena
$1,000cashdiscount.Uptonpaid$2,500salestaxontheequipment,andpaidinstallation chargesof$880.Priortoinstallation,Uptonpaid$2,000topouraconcreteslabonwhich
toplacethe equipment.Whatisthetotalcostofthe newequipment?
a.$52,380
b.$54,380 c.$55,380 d.$50,500
75. Interestmaybe includedintheacquisitioncost ofa
plantasset a.duringtheconstructionperiodof aself-constructedasset.b.if theassetis
purchasedoncredit.
c.if theassetacquisitionisfinancedbyalong-termnotepayable.
d.ifit
isapart of a lump-sumpurchase.
76. ThebalanceintheAccumulatedDepreciationaccountrepresentsthe
a.cashfundtobeusedtoreplaceplantassets.
b.amounttobedeductedfromthecostoftheplantassettoarriveatitsfairmarket value.
c.amountchargedtoexpenseinthecurrentperiod.
d.amountchargedto
expensesincetheacquisitionof theplantasset.
77. Whichoneofthefollowingitemsisnotaconsiderationwhenrecordingperiodic
depreciationexpenseonplantassets?
a.Salvagevalue
b.Estimatedusefullife
c.Cashneededtoreplacethe plantasset
d.Cost
78. Depreciationisthe
processof allocating thecostof
aplantasset overits
servicelife
in a.anequaland equitablemanner.
b.an acceleratedand accuratemanner. c.asystematicandrationalmanner.
d.a conservativemarket-basedmanner.
10-12
79. Thebookvalueof anassetisequaltothe
a.asset'smarketvaluelessits
historicalcost.
b.bluebookvaluereliedonbysecondarymarkets.
c.replacementcostof theasset.
d.asset'scostlessaccumulateddepreciation.
80. Accountantsdonotattempttomeasurethechangeinaplantasset'smarketvalueduring ownership
because
a.theassetsare notheldfor
resale.
b.plantassetscannotbesold.
c.losseswouldhavetoberecognized.
d.itismanagement'sresponsibilityto determinefair values.
81. Depreciationis
aprocessof a.assetdevaluation.
b.costaccumulation.
c.cost allocation.
d.assetvaluation.
82. Recordingdepreciationeachperiodisnecessaryinaccordancewiththe
a.goingconcernprinciple.
b.costprinciple.
c.matchingprinciple.
d.assetvaluationprinciple.
83. Incomputingdepreciation,salvagevalueis
a.thefairmarketvalueofa plantassetonthedate of acquisition.
b.subtractedfromaccumulateddepreciationtodeterminetheplantasset'sdepreciable
cost.
c.anestimateof aplantasset'svalueattheendofitsusefullife.
d.ignoredinallthedepreciationmethods.
84. Whenestimatingtheusefullifeofanasset,accountantsdonotconsider a.thecosttoreplacetheassetat theendofits
usefullife.
b.obsolescencefactors.
c.expectedrepairsandmaintenance.
d.theintendeduse of theasset.
85. Usefullifeisexpressedintermsof
useexpectedfromtheassetunderthe a.declining-balancemethod.
b.straight-linemethod.
c.units-of-activitymethod.
d.noneof these.
86. Equipmentwaspurchasedfor$75,000.Freightchargesamountedto$3,500andthere wasacostof$10,000forbuildingafoundationandinstallingtheequipment.Itis estimatedthattheequipmentwillhavea$15,000salvagevalueattheendofits5-year useful life. Depreciationexpenseeachyearusingthe
straight-linemethodwillbe
a.$17,700. b.$14,700.
c.$12,300. d.$12,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-13
87. Atruckwaspurchasedfor$120,000anditwasestimatedtohavea$24,000salvage valueattheendofitsusefullife.Monthlydepreciationexpenseof$2,000wasrecorded using thestraight-linemethod.Theannualdepreciationrateis
a.20%. b.2%.c.8%. d.25%.
88. AcompanypurchasedfactoryequipmentonApril1,2008for$64,000.Itisestimatedthat theequipmentwillhavean$8,000salvagevalueattheendofits10-yearusefullife.
Usingthestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008is
a.$6,400. b.$5,600. c.$4,200. d.$4,800.
89. Acompanypurchasedofficeequipmentfor$40,000andestimatedasalvagevalueof
$8,000attheendofits5-yearusefullife.Theconstantpercentagetobeappliedagainst
book valueeachyearifthedouble-declining-balancemethodisusedis
a.20%. b.25%. c.40%. d.4%.
90. Thedeclining-balancemethodofdepreciationproduces a.adecreasingdepreciationexpenseeachperiod.
b.an increasingdepreciationexpenseeachperiod. c.a decliningpercentagerateeachperiod.
d.a constantamount
ofdepreciationexpenseeachperiod.
91. Acompanypurchasedfactoryequipmentfor$250,000.Itisestimatedthattheequipment willhavea$25,000salvagevalueattheendofitsestimated5-yearusefullife.Ifthe companyusesthedouble-declining-balancemethodofdepreciation,theamountofannual depreciationrecordedforthesecondyear afterpurchasewould be
a.$100,000. b.$60,000.
c.$90,000. d.$43,200.
92. Theunits-of-activitymethodisgenerallynot
suitablefor a.airplanes.
b.buildings.
c.deliveryequipment. d.factorymachinery.
93. Aplantassetcost$144,000andisestimatedtohavean$18,000salvagevalueattheend
ofits8-yearusefullife.Theannualdepreciation expenserecordedforthethirdyearusing
thedouble-declining-balancemethodwouldbe
a.$12,060. b.$20,250. c.$17,718. d.$13,785.
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