Accounting Chapter 9

T/F: Expenditures for ordinary maintenance and repairs of plant assets are capital expenditures.

False, Expenditures for ordinary maintenance and repairs of plant assets are referred to as revenue expenditures and are charged to expense as they are incurred.

T/F: A sale of a plant asset at less than cost requires that a company recognize a loss in the income statement.

False, Gains and losses are determined based on the selling price compared to the book value, not the cost.

Which of the following is a term identifying the periodic expensing of a plant asset? A) Amortization B) Depletion C) Betterment D) Depreciation

(D) Depreciation refers to the process of allocating a portion of an asset's acquisition cost to expense on the income statement to reflect the consumption of the asset as it produces revenue for a business.

A revenue expenditure: A) Increases the book value of a long-term asset B) Decreases the book value of a long-term asset C) Increases a revenue account D) Increases an expense account

(D) Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. The following list identifies two common types of revenue expenditures: 1. Expenditures for ordinary maintenance and repairs of existing plant assets. 2. Expenditures to acquire low‐cost items that benefit the firm for several periods.

T/F: Periodic depreciation for accounting purposes is the decrease in a plant asset's fair market value from the beginning of the period to the end of the period.

False, Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset's acquisition cost and its estimated salvage value over the estimated useful life of the asset.

T/F: Depreciation is the recognition of the change in fair market value of a plant asset over time.

False, Depreciation is the process of allocating the cost of plant assets to the accounting periods in which the assets provide benefits. Depreciation does not parallel market value.

T/F: Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations.

True

T/F: The cost of repairing a new desk's leg--broken accidentally by an employee moving the desk into place--is expensed immediately.

True

T/F; In accounting, the terms "depreciation" and "amortization" both have basically the same meaning--that is, a periodic charging to expense.

True

T/F: The interest cost incurred to finance the acquisition of a delivery truck is part of the truck's initial cost.

False, If an asset's purchase price is not immediately paid in cash, the cash-equivalent purchase price at the date of acquisition is determined and recorded in the asset account. Because the truck is ready for immediate use, the interest cost is charged to interest expense and does not become part of its acquisition cost.

T/F: Over the life of a depreciable asset, its recorded cost decreases, the related accumulated depreciation increases, and its book value remains constant.

False, Over the life of a depreciable asset, its recorded cost remains the same, the related accumulated depreciation increases, and its book value (cost - accumulated depreciation) decreases.

T/F: Depreciation requires only two estimates—useful life and salvage value—both of which are specified by GAAP depending on the asset type.

False, GAAP does not specify useful life and salvage value amounts. Managers must estimate these amounts based upon the time period that the asset is expected to generate resources for the company and a reasonable amount for which the asset can be sold at the end of its estimated life.

T/F: Land used as a site for operating facilities is classified in the intangible assets category on the balance sheet.

False, Plant assets refer to a firm's long-lived property, plant and equipment. Intangible assets, on the other hand, refer to those economic resources that benefit a company's operations, but which lack the physical substance that characterizes plant assets.

T/F: If an uninsured asset is destroyed by fire before the end of its useful life, the firm suffers a loss measured by the asset's estimated salvage value.

False, Should the equipment be abandoned, stolen, or destroyed (with no insurance coverage) before the end of its expected useful life, a loss equal to its book value is recorded.

T/F: The amortization period for all intangible assets is 40 years.

False, The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset's cost over the term of its expected useful life (the period over which it will benefit the company).

T/F: One purpose of using accelerated depreciation for tax purposes is it reduces income taxes payable in the early years of life of a plant asset.

True, Both a reduction of income and the company's income tax liability are effects of accelerated depreciation in the early years of life.

R&D expense is treated as an operating expense and is not capitalized.

True, Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed.

At what point is an asset considered to be impaired? A) When the net book value is greater than the sum of expected cash flows B) When the net book value is less than the sum of expected cash flows C) When the net book value is less than the fair value D) When the net book value is greater than the fair value

(A) As asset is impaired if its net book value (purchase cost less accumulated depreciation) is greater than the sum of cash flows expected to flow from that asset.

Which of the following is a capital expenditure? A) Cost to add air conditioning to a company car B) Cost to purchase garbage cans for the company conference room C) Cost to replace spark plug on company lawnmower D) Cost to have store windows washed

(A) Capital expenditures increase the book value of long‐lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments.

Which of the following estimates are required when calculating depreciation expense? 1. Depreciation rate 2. Useful life 3. Expected maintenance costs 4. Salvage value A) 1,2,and4 B) 1,2,3,and4 C) 2 and 4 D) 2,3,and4

(A) Expected maintenance costs are not capitalized, nor do they impact the amount of depreciation per period.

Which statement is true concerning the straight-line method of depreciation? A) Depreciation is recognized evenly over the estimated useful life of the asset B) Purchase cost is expensed in the year of acquisition C) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset D) Depreciation does not take salvage value into consideration

(A) When using the straight-line method of depreciation, depreciation is recognized evenly over the estimated useful life of the asset.

A land site for a new office building is purchased for $360,000 by Texas Coast Company. A barn on the site will be razed at a net cost of $34,000. The $34,000 razing expenditure is properly debited to: A) Office Building B) Land C) Razing Expense D) Land Improvements

(B) A payment to remove a barn increases the land's acquisition cost, because removing the barn prepares the land for its intended use. The cost should be capitalized or added to the cost of the land.

Which depreciation method does not consider salvage value in its first year calculation? A) Straight line B) Double-declining balance C) Units of production D) None of the above

(B) An asset's salvage value is not considered in the calculation of declining-balance depreciation, except that the depreciation of an asset stops when the asset's book value equals its estimated salvage value.

Which of the following is not a balance sheet category for long-lived assets? A) Plant assets B) Revenue expenditures C) Intangible assets D) None of the above

(B) Revenue expenditures are reflected on the income statement.

What is the term identifying the expected net recovery from the disposal of a plant asset at the end of its useful life? A) Accumulated depreciation B) Salvage value C) Depreciation expense D) Fair value

(B) Salvage value (or residual value) is the expected net recovery (sales proceeds- disposal costs) when the asset is sold or removed from service.

Which of the following depreciation methods most closely relates periodic depreciation expense to the periodic use of the asset? A) Straight line. B) Units of production. C) Double-declining balance D) None of the above

(B) The units‐of‐production method allocates depreciation in proportion to an asset's use in operations. Under this method, the depreciation per unit of production is first calculated by dividing the total depreciable cost of the asset by the asset's projected units of production capacity.

An accelerated depreciation method recognizes: A) Equal amounts of depreciation for each year of an asset's useful life B) Larger amounts of depreciation in the later periods than are recognized in the early periods of an asset's useful life C) Larger amounts of depreciation in the early periods than are recognized in the later periods of an asset's useful life D) More total depreciation expense over an asset's useful life than is recognized by the straight-line method

(C) An accelerated depreciation method is a deprecation method in which amounts of depreciation expense taken in the early years of an asset's life are greater than the amounts expensed in later years.

The purpose of depreciation accounting is to: A) Reflect changes in the current value of a plant asset over its useful life B) Accumulate funds to replace a plant asset at the end of its useful life C) Allocate a plant asset's cost, less its salvage value, to expense over the asset's useful life D) Have a plant asset's book value equal its initial cost by the end of its useful life

(C) Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset's initial cost by the end of its useful life and salvage value over the estimated useful life of the asset.

Which of the following plant assets is not depreciated? A) Leasehold improvements B) Equipment C) Land for site use D) Furniture

(C) Land is not depreciated.

How should intangible assets be disclosed on the balance sheet? A) At the estimated fair value at the balance sheet date B) At cost in the current assets section C) Net of the costs already amortized D) As a reduction of stockholders' equity

(C) The cost of the intangible asset is presented in the balance sheet net of accumulated amortization.

How is the gain (loss) on a plant asset sale calculated? A) Asset sale price - Asset purchase cost B) Asset fair value - Asset sale price C) Asset sale price - Book value of the asset D) Asset sale price - Total accumulated depreciation

(C) The gain (loss) on the sale of a plant asset is computed as: Asset sale price - book value of the asset

Which of the following is a revenue expenditure? A) Adding air conditioning to a company car B) Adding a loading and unloading dock to the company's warehouse C) Purchasing a microcomputer for the marketing department D) Replacing the battery in a company truck

(D) Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. Two common types of revenue expenditures are: 1. Expenditures for ordinary maintenance and repairs of existing plant assets, and 2. Expenditures to acquire low‐cost items that benefit the firm for several periods.

T/F: Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with the asset's net book value.

True, Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with its net book value. If the asset is deemed to be impaired, it is written down to its fair market value and the write-down is recorded as a loss on the income statement.

T/F: The initial recorded cost of a plant asset should include both the cash and/or cash equivalent given up to acquire the asset and any costs of preparation for use.

True, Plant assets refer to a firm's long-lived property, plant and equipment. Long-lived assets are initially recorded on the balance sheet at their acquisition cost. This measure is also called the asset's historical cost because it represents the amount expended when the asset was originally acquired. In general, the acquisition cost of a long-lived asset equals the cash and/or cash equivalent given up to acquire the asset and to prepare it for its intended use.

T/F: Under IFRS, development costs can be capitalized as intangible assets when specific criteria are met.

True, Under IFRS, only development costs can be capitalized as intangible assets when specific criteria are met. U.S. GAAP requires both research and development costs be expensed when incurred.

T/F: A plant asset's useful life to an entity extends from its acquisition date to its disposal date.

True, Useful life is the expected period of economic usefulness to a business that is, the period from the date of acquisition to the expected date of disposal.