ACC 557 Final Exam - Strayer
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Chapter 9 Through 14
PLANT ASSETS,
NATURAL RESOURCES, AND INTANGIBLE ASSETS
CHAPTER LEARNING OBJECTIVES
1. Describe how the historical cost principle
applies to plant assets.
2. Explain
the concept of depreciation and how to compute it.
3. Distinguish between revenue and capital
expenditures, and explain the entries for each.
4. Explain how to account for the disposal of a
plant asset.
5. Compute periodic depletion of natural
resources.
6. Explain the basic issues related to
accounting for intangible assets.
7. Indicate how plant assets, natural
resources, and intangible assets are reported.
8. Explain how to account for the exchange of plant assets.
TRUE-FALSE STATEMENTS
1. All plant assets (fixed assets) must be
depreciated for accounting purposes.
2. When purchasing land, the costs for
clearing, draining, filling, and grading should be charged to a Land
Improvements account.
3. When purchasing delivery equipment, sales
taxes and motor vehicle licenses should be charged to Delivery Equipment.
4. Land improvements are generally charged to
the Land account.
5. Once cost is established for a plant asset,
it becomes the basis of accounting for the asset unless the asset appreciates
in value, in which case, market value becomes the basis for accountability.
6. The book value of a plant asset is always
equal to its fair market value.
7. Recording depreciation on plant assets
affects the balance sheet and the income statement.
8. The depreciable cost of a plant asset is
its original cost minus obsolescence.
9. Recording depreciation each period is an
application of the expense recognition principle.
10. The
Accumulated Depreciation account represents a cash fund available to replace
plant assets.
11. In calculating depreciation, both plant
asset cost and useful life are based on estimates.
12. Using the units-of-activity method of
depreciating factory equipment will generally result in more depreciation
expense being recorded over the life of the asset than if the straight-line
method had been used.
13. Salvage value is not subtracted from
plant asset cost in determining depreciation expense under the
declining-balance method of depreciation.
14. The declining-balance method of
depreciation is called an accelerated depreciation method because it depreciates
an asset in a shorter period of time than the asset's useful life.
15. Under the double-declining-balance method,
the depreciation rate used each year remains constant.
16. The IRS does not require the taxpayer to
use the same depreciation method on the tax return that is used in preparing
financial statements.
17. A change in the estimated useful life of a
plant asset may cause a change in the amount of depreciation recognized in the
current and future periods, but not to prior periods.
18. A change in the estimated salvage value of
a plant asset requires a restatement of prior years' depreciation.
19. To determine a new depreciation amount
after a change in estimate of a plant asset's useful life, the asset's
remaining depreciable cost is divided by its remaining useful life.
20. Additions and improvements to a plant asset
that increase the asset's operating efficiency, productive capacity, or
expected useful life are generally expensed in the period incurred.
21. Capital expenditures are expenditures that
increase the company's investment in productive facilities.
22. Ordinary repairs should be recognized when
incurred as revenue expenditures.
23. A characteristic of capital expenditures is
that the expenditures occur frequently during the period of ownership.
24. Once an asset is fully depreciated, no
additional depreciation can be taken even though the asset is still being used
by the business.
25. The fair value of a plant asset is always
the same as its book value.
26. If the proceeds from the sale of a plant
asset exceed its book value, a gain on disposal occurs.
27. A loss on disposal of a plant asset can
only occur if the cash proceeds received from the asset sale are less than the
asset's book value.
28. The book value of a plant asset is the
amount originally paid for the asset less anticipated salvage value.
29. A loss on disposal of a plant asset as a
result of a sale or a retirement is calculated in the same way.
30. A plant asset must be fully depreciated
before it can be removed from the books.
31. If a plant asset is sold at a gain, the
gain on disposal should reduce the cost of goods sold section of the income
statement.
32. Depletion cost per unit is computed by
dividing the total cost of a natural resource by the estimated number of units
in the resource.
33. The Accumulated Depletion account is
deducted from the cost of the natural resource in the balance sheet.
34. Depletion expense for a period is only
recognized on natural resources that have been extracted and sold during the
period.
35. Natural resources are long-lived productive
assets that are extracted in operations and are replaceable only by an act of
nature.
36. The cost of natural resources is not
allocated to expense because the natural resources are replaceable only by an
act of nature.
37. Conceptually, the cost allocation
procedures for natural resources parallels that of plant assets.
38. Natural resources include standing timber
and underground deposits of oil, gas, and minerals.
39. If an acquired franchise or license has an
indefinite life, the cost of the asset is not amortized.
40. When an entire business is purchased,
goodwill is the excess of cost over the book value of the net assets acquired.
41. Research and development costs which result
in a successful product which is patentable are charged to the Patent account.
42. The cost of a patent must be amortized over
a 20-year period.
43. The cost of a patent should be amortized
over its legal life or useful life, whichever is shorter.
44. The balances of the major classes of plant
assets and accumulated depreciation by major classes should be disclosed in the
balance sheet or notes.
45. The asset turnover is calculated as total
sales divided by ending total assets.
46. Research and development costs can be
classified as a property, plant, and equipment item or as an intangible asset.
a47. An
exchange of plant assets has commercial substance if the future cash flows
change as a result of the exchange.
a48. Companies
record a gain or loss on the exchange of plant assets because most exchanges
have commercial substance.
a49. When
plant assets are exchanged, the cost of the new asset is the book value of the
old asset plus any cash paid.
50. When constructing a building, a company is
permitted to include the acquisition cost and certain interest costs incurred
in financing the project.
51. Recognition of depreciation permits the
accumulation of cash for the replacement of the asset.
52. When an asset is purchased during the year,
it is not necessary to record depreciation expense in the first year under the
declining-balance depreciation method.
53. Depletion expense is reported in the income
statement as an operating expense.
54. Goodwill is not recognized in accounting
unless it is acquired from purchasing another business enterprise.
55. Research and development costs should be
charged to expense when incurred.
a56. A loss on the exchange of plant assets occurs when the fair
market value of the old asset is less than its book value.
MULTIPLE CHOICE QUESTIONS
57. The cost of a purchased building includes
all of the following except
a. closing costs.
b. real estate broker's commission.
c. remodeling costs.
d. All of these answers are correct.
58. A company purchased land for $90,000 cash.
Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing
an old building on the land before construction of a new building could start.
Under the historical cost principle, the cost of land would be recorded at
a. $107,000.
b. $90,000.
c. $70,000.
d. $102,000.
59. Which one of the following items is notconsidered
a part of the cost of a truck purchased for business use?
a. Sales tax
b. Truck license
c. Freight charges
d. Cost of lettering on side of truck
60. Which of the following assets does not
decline in service potential over the course of its useful life?
a. Equipment
b. Furnishings
c. Land
d. Fixtures
61. The four subdivisions for plant assets are
a. land, land improvements, buildings, and
equipment.
b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings,
and equipment.
d. property, plant, equipment, and land.
62. The cost of land does notinclude
a. real estate brokers' commission.
b. annual property taxes.
c. accrued property taxes assumed by the
purchaser.
d. title fees.
63. Gagner Clinic purchases land for $175,000
cash. The clinic assumes $1,500 in property taxes due on the land. The title
and attorney fees totaled $1,000. The clinic has the land graded for $2,200.
What amount does Gagner Clinic record as the cost for the land?
a. $157,200
b. $175,000
c. $179,700
d. $157,500
64. Carey Company buys land for $50,000 on
12/31/14. As of 3/31/15, the land has appreciated in value to $50,700. On
12/31/15, the land has an appraised value of $51,800. By what amount should the
Land account be increased in 2015?
a. $0
b. $700
c. $1,100
d. $1,800
65. Hull
Company acquires land for $86,000 cash. Additional costs are as follows:
Removal of shed $ 300
Filling
and grading 1,500
Salvage
value of lumber of shed 120
Broker
commission 1,130
Paving
of parking lot 10,000
Closing
costs 560
Hull will record the acquisition cost of the land as
a. $96,000.
b. $87,690.
c. $89,610.
d. $89,370.
66. Wesley Hospital installs a new parking lot.
The paving cost $40,000 and the lights to illuminate the new parking area cost
$25,000. Which of the following statements is true with respect to these
additions?
a. $40,000 should be debited to the Land
account.
b. $25,000 should be debited to Land
Improvements.
c. $65,000 should be debited to the Land
account.
d. $65,000 should be debited to Land
Improvements.
67. Land improvements should be depreciated
over the useful life of the
a. land.
b. buildings on the land.
c. land or land improvements, whichever is
longer.
d. land improvements.
68. Mattox Company is building a new plant that
will take three years to construct. The construction will be financed in part
by funds borrowed during the construction period. There are significant
architect fees, excavation fees, and building permit fees. Which of the
following statements is true?
a. Excavation fees are capitalized but building
permit fees are not.
b. Architect fees are capitalized but building
permit fees are not.
c. Interest is capitalized during the
construction as part of the cost of the building.
d. The capitalized cost is equal to the contract
price to build the plant less any interest on borrowed funds.
69. A company purchases a remote site building
for computer operations. The building will be suitable for operations after
some expenditures. The wiring must be replaced to computer specifications. The
roof is leaky and must be replaced. All rooms must be repainted and recarpeted
and there will also be some plumbing work done. Which of the following
statements is true?
a. The cost of the building will not include the
repainting and recarpeting costs.
b. The cost of the building will include the
cost of replacing the roof.
c. The cost of the building is the purchase
price of the building, while the additional expenditures are all capitalized as
Building Improvements.
d. The wiring is part of the computer costs, not
the building cost.
70. Engler Company purchases a new delivery
truck for $55,000. The sales taxes are $4,000. The logo of the company is
painted on the side of the truck for $1,600. The truck license is $160. The
truck undergoes safety testing for $290. What does Engler record as the cost of
the new truck?
a. $61,050
b. $60,890
c. $59,000
d. $60,600
71. All of the following factors in computing
depreciation are estimates except
a. cost.
b. residual value.
c. salvage value.
d. useful life.
72. Presto Company purchased equipment and
these costs were incurred:
Cash price $65,000
Sales
taxes 3,600
Insurance
during transit 640
Installation
and testing 860
Total
costs $70,100
Presto will record the acquisition cost of the
equipment as
a. $65,000.
b. $68,600.
c. $69,240.
d. $70,100.
73. Angie’s Blooms purchased a delivery van for
$40,000. The company was given a $4,000 cash discount by the dealer, and paid
$2,000 sales tax. Annual insurance on the van is $1,000. As a result of the
purchase, by how much will Angie’s Blooms increase its van account?
a. $40,000
b. $36,000
c. $39,000
d. $38,000
74. Yocum Company purchased equipment on
January 1 at a list price of $120,000, with credit terms 2/10, n/30. Payment
was made within the discount period and Yocum was given a $2,400 cash discount.
Yocum paid $6,000 sales tax on the equipment, and paid installation charges of
$1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on
which to place the equipment. What is the total cost of the new equipment?
a. $125,360
b. $129,360
c. $131,760
d. $123,600
75. Interest may be included in the acquisition
cost of a plant asset
a. during the construction period of a
self-constructed asset.
b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a
long-term note payable.
d. if it is a part of a lump-sum purchase.
76. The balance in the Accumulated Depreciation
account represents the
a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the
plant asset to arrive at its fair market value.
c. amount charged to expense in the current
period.
d. amount charged to expense since the
acquisition of the plant asset.
77. Which one of the following items is not
a consideration when recording periodic depreciation expense on plant assets?
a. Salvage value
b. Estimated useful life
c. Cash needed to replace the plant asset
d. Cost
78. Depreciation is the process of allocating
the cost of a plant asset over its service life in
a. an equal and equitable manner.
b. an accelerated and accurate manner.
c. a systematic and rational manner.
d. a conservative market-based manner.
79. The book value of an asset is equal to the
a. asset's fair value less its historical cost.
b. blue book value relied on by secondary
markets.
c. replacement cost of the asset.
d. asset's cost less accumulated depreciation.
80. Accountants do not attempt to measure the change in a plant asset's fair value
during ownership because
a. the assets are not held for resale.
b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management's responsibility to
determine fair values.
81. Depreciation is a process of
a. asset devaluation.
b. cost accumulation.
c. cost allocation.
d. asset valuation.
82. Recording depreciation each period is
necessary in accordance with the
a. going concern principle.
b. historical cost principle.
c. expense recognition principle.
d. asset valuation principle.
83. In computing depreciation, salvage value is
a. the fair value of a plant asset on the date
of acquisition.
b. subtracted from accumulated depreciation to
determine the plant asset's depreciable cost.
c. an estimate of a plant asset's value at the
end of its useful life.
d. ignored in all the depreciation methods.
84. When estimating the useful life of an
asset, accountants do not consider
a. the cost to replace the asset at the end of
its useful life.
b. obsolescence factors.
c. expected repairs and maintenance.
d. the intended use of the asset.
85. Useful life is expressed in terms of use
expected from the asset under the
a. declining-balance method.
b. straight-line method.
c. units-of-activity method.
d. none of these answer choices are correct.
86. Equipment was purchased for $300,000.
Freight charges amounted to $14,000 and there was a cost of $40,000 for
building a foundation and installing the equipment. It is estimated that the
equipment will have a $60,000 salvage value at the end of its 5-year useful
life. Depreciation expense each year using the straight-line method will be
a. $70,800.
b. $58,800.
c. $49,200.
d. $48,000.
87. A truck was purchased for $180,000 and it
was estimated to have a $36,000 salvage value at the end of its useful life.
Monthly depreciation expense of $3,000 was recorded using the straight-line
method. The annual depreciation rate is
a. 20%.
b. 2%.
c. 8%.
d. 25%.
88. A company purchased factory equipment on
April 1, 2015 for $160,000. It is estimated that the equipment will have a
$20,000 salvage value at the end of its 10-year useful life. Using the
straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2015 is
a. $16,000.
b. $14,000.
c. $10,500.
d. $12,000.
89. A company purchased office equipment for
$40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful
life. The constant percentage to be applied against book value each year if the
double-declining-balance method is used is
a. 20%.
b. 25%.
c. 40%.
d. 5%.
90. The declining-balance method of
depreciation produces
a. a decreasing depreciation expense each
period.
b. an increasing depreciation expense each
period.
c. a declining percentage rate each period.
d. a constant amount of depreciation expense
each period.
91. A company purchased factory equipment for
$700,000. It is estimated that the equipment will have a $70,000 salvage value
at the end of its estimated 5-year useful life. If the company uses the
double-declining-balance method of depreciation, the amount of annual
depreciation recorded for the second year after purchase would be
a. $280,000.
b. $168,000.
c. $252,000.
d. $120,960.
92. The units-of-activity method is generally
not suitable for
a. airplanes.
b. buildings.
c. delivery equipment.
d. factory machinery.
93. A plant asset cost $288,000 and is
estimated to have a $36,000 salvage value at the end of its 8-year useful life.
The annual depreciation expense recorded for the third year using the
double-declining-balance method would be
a. $24,120.
b. $40,500.
c. $35,436.
d. $27,570.
94. A factory machine was purchased for
$375,000 on January 1, 2015. It was estimated that it would have a $75,000
salvage value at the end of its 5-year useful life. It was also estimated that
the machine would be run 40,000 hours in the 5 years. The company ran the
machine for 4,000 actual hours in 2015. If the company uses the
units-of-activity method of depreciation, the amount of depreciation expense
for 2015 would be
a. $37,500.
b. $60,000.
c. $75,000.
d. $30,000.
95. The Modified Accelerated Cost Recovery
System (MACRS) is a depreciation method which
a. is used for tax purposes.
b. must be used for financial statement
purposes.
c. is required by the SEC.
d. expenses an asset over a single year because
capital acquisitions must be expensed in the year purchased.
96. Which of the following methods of computing
depreciation is production based?
a. Straight-line
b. Declining-balance
c. Units-of-activity
d. None of these answer choices are correct.
97. Management should select the depreciation
method that
a. is easiest to apply.
b. best measures the plant asset's market value
over its useful life.
c. best measures the plant asset's contribution
to revenue over its useful life.
d. has been used most often in the past by the
company.
98. The depreciation method that applies a
constant percentage to depreciable cost in calculating depreciation is
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. None of these answers are correct.
99. On O
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