Quiz #4 T/F
When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.
False
When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building.
False
Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance.
True
Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.
True
Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.
True
Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.
True
Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits.
True
Depreciation is a means of cost allocation, not a matter of valuation.
True
Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.
True
Gains or losses on disposals of assets do not distort periodic income when the group or composite method is used to compute depreciation.
True
If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset's book value.
True
Impaired assets held for disposal should be reported at the lower of cost or net realizable value.
True
Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used.
True
Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.
True
Intangible development costs and restoration costs are part of the depletion base.
True
The cost of an asset less its salvage value is its depreciation base.
True
The declining-balance method does not deduct the salvage value in computing the depreciation base.
True
The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.
True
The major objection to the straight-line method is that it assumes the asset's economic usefulness and maintenance repair expense are the same each year.
True
The profit margin on sales is a measure for analyzing the use of property, plant, and equipment.
True
Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.
True
When a company makes an unconditional promise to pledge an asset in the future, the company should report the contribution expense and related payable immediately.
True
When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.
True
When an ordinary repair occurs, several periods will usually benefit.
False
An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.
False
An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset.
False
Assets classified as Property, Plant, and Equipment can be either acquired for use in operations or acquired for resale.
False
Companies always treat gains or losses from an involuntary conversion as comprehensive income.
False
Companies frequently use the composite approach when the assets are similar in nature and have approximately the same useful lives.
False
Companies should always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets.
False
Companies should assign no portion of fixed overhead to self-constructed assets.
False
Depreciation is based on the decline in the fair market value of the asset.
False
If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized.
False
Inadequacy is the replacement of one asset with another more efficient and economical asset.
False
Normally, companies compute depletion on a straight-line basis.
False
Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements.
False
The asset turnover is computed by dividing net sales by ending total assets.
False
The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.
False
The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.
False
When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.
False