978-1337276337 Test Bank Chapter 8 Part 1

Chapter 8

Page 1

1. The Property, Plant, and Equipment category includes long-term investments.

a. True

b. False

2. On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant

asset.

a. True

b. False

3. All operating assets, except land, are subject to depreciation, amortization, or depletion.

a. True

b. False

Page 2

4. Lenders are interested in the value of operating assets as collateral when making lending decisions.

a. True

b. False

5. A company uses the same depreciation method as other firms in the same industry. Because of this, investors will have

enhanced comparability of the financial reporting results.

a. True

b. False

6. When plant assets are purchased in a group, each asset increases the respective plant asset account for its fair market

value at the time of acquisition.

a. True

b. False

Page 3

7. Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over its

useful life.

a. True

b. False

8. Acquisition costs are also known as replacement costs.

a. True

b. False

9. Acquisition cost should not include expenditures unrelated to the acquisition, like repair costs for damages incurred

during installation, or costs incurred after the asset was installed and use begun.

a. True

b. False

Page 4

10. When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the

market values of the two assets.

a. True

b. False

11. Interest is capitalized on all purchased assets.

a. True

b. False

12. Capitalizing interest does not increase the recorded cost of a plant asset.

a. True

b. False

Page 5

13. Fortune Company has ten delivery trucks that became fully depreciated in the prior year. Fortune will continue

charging the same amount of depreciation as before so that there will be no decrease in expenses.

a. True

b. False

14. Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.

a. True

b. False

15. When plant assets are reported, the current period’s depreciation expense is subtracted from the original cost on the

balance sheet.

a. True

b. False

Page 6

16. If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation method

to accomplish this objective.

a. True

b. False

17. Depreciation has no effect on income taxes, since it only reduces a plant asset’s book value.

a. True

b. False

18. One reason management may choose the straight-line method of depreciation is because it is easy to compute.

a. True

b. False

Page 7

19. Depreciation does not describe the increase or decrease in the market value of the asset.

a. True

b. False

20. A change in estimate of an asset’s residual value involves restating the income statements of past periods for the

estimate change.

a. True

b. False

21. Garner, Inc. determined that it had incorrectly estimated both the estimated life and the estimated residual value of

equipment that it purchased two years ago. When Garner accounts for the change in accounting estimates, it must

depreciate the remaining book value of the asset over the current and future accounting periods.

a. True

b. False

Page 8

22. Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the

useful life or the asset’s productivity.

a. True

b. False

23. Costs incurred to keep assets in normal operating condition are called revenue expenditures.

a. True

b. False

24. If a company chooses to treat small plant asset expenditures as expenses, GAAP are being violated.

a. True

b. False

Page 9

25. A revenue expenditure is deducted from the cost of the asset.

a. True

b. False

26. Because plant and equipment are reported as long-term assets on the balance sheet, they have no impact on net income

for the period until they are sold.

a. True

b. False

27. The Loss on Sale of Asset indicates the amount by which the asset’s sales price is less than its book value.

a. True

b. False

Page 10

28. When Carson Real Estate Company sells equipment for a loss, the Loss on Sale of Asset is treated as accumulated

depreciation.

a. True

b. False

29. Plant assets, current assets, property, plant, and equipment, and fixed assets are all intangible assets.

a. True

b. False

30. Research and development costs should be presented as intangible assets.

a. True

b. False

Page 11

31. In general, FASB standards concerning property, plant, and equipment are similar to the international accounting

standards, with a few important differences.

a. True

b. False

32. The FASB standards do not have a specific rule that requires residual value and asset life to be reviewed annually for

property, plant, and equipment.

a. True

b. False

33. International accounting standards require companies to revalue their property, plant, and equipment to reflect fair

market values.

a. True

b. False

Page 12

34. Flexibility in valuation of property, plant, and equipment under IFRS may cause problems with comparability of one

company with another.

a. True

b. False

35. All intangible assets should be amortized.

a. True

b. False

36. Net income on a cash basis is arrived at by adding depreciation and amortization back to accrual net income.

a. True

b. False

Page 13

37. Asset turnover is calculated as Net Income divided by Average Total Assets.

a. True

b. False

38. Acquisition cost is also known as historical cost with respect to property, plant, and equipment.

a. True

b. False

39. Interest is never a part of the cost of property, plant, and equipment or intangible assets.

a. True

b. False

Page 14

40. Birken Co. purchased a building for $500,000 in 2012. At the end of 2017, when it had a book value of $450,000, it

was appraised for $1,000,000. A potential buyer offered $900,000. Birken rejected the offer. What amount is in Birken’s

records at the end of 2017 in the Building account?

a. $2,000,000

b. $800,000

c. $500,000

d. $350,000

41. Assets classified as property, plant, and equipment are reported at

a. each asset’s original cost less depreciation since acquisition.

b. each asset’s estimated salvage value at the balance sheet date.

c. the estimated depreciable cost at the balance sheet date.

d. each asset’s estimated market value at the balance sheet date.

42. Which statement is true concerning operating assets?

a. Operating assets have no physical properties.

b. A company’s operating assets are important to its short-term liquidity.

c. Operating assets are used over two or more periods to generate revenues.

d. All operating assets are reported on the balance sheet.

43. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance

sheet?

a. Accumulated Depreciation—Buildings

b. Buildings

c. Depreciation Expense—Buildings

d. Land

Chapter 8

Page 15

44. On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called

a. Accumulated Amortization.

b. Accumulated Depreciation.

c. Amortization Expense.

d. Depreciation Expense.

Page 16

45. Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for

land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the

company determine which costs should be recorded as Land Improvements and which cost should be recorded as Land?

a. The costs with an unlimited life will increase Land, and the costs with a limited useful life will increase Land

Improvements.

b. The costs with a limited life will increase Land, and the costs with an unlimited useful life will increase Land

Improvements.

c. The costs to be depreciated will increase Land, and the costs that will not be depreciated will increase Land

Improvements.

d. Costs that are depreciable will increase Land Improvements, while other costs are expensed immediately because

of a lack of definite life.

46. All of the following are included in the acquisition cost of property, plant, and equipment except

a. transportation costs.

b. taxes on the purchase.

c. installation costs.

d. maintenance costs.

Page 17

47. A building with an appraisal value of $250,000 is made available at an offer price of $180,000. The purchaser acquires

the property for $35,000 in cash, a 90-day note payable for $65,000, and a mortgage amounting to $63,000. The cost basis

recorded in the buyer’s accounting records to recognize this purchase is

a. $250,000.

b. $180,000.

c. $163,000.

d. $100,000.

48. Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of

$2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?

a. $256,000

b. $282,200

c. $284,600

d. $281,000

Page 18

49. Central National Bank recently acquired a new computer system. Which of the following costs associated with the

computer should not be recorded in the Equipment account?

a. Installation of a backup power source required for the computer

b. Replacement of several circuit boards damaged during installation

c. System programmer wages for personnel hired to install the system

d. Insurance coverage covering the transport period from the manufacturer

50. Shidan Apartments purchased an apartment building to rent to university students on November 18, 2017. The

following costs were incurred during 2017, before the tenants moved in:

Purchase price of the building $220,000

Purchase price of the land 100,000

Transfer taxes 10,000

Interest incurred on the mortgage loan to purchase 4,000

Attorney and real estate agent’s fees 15,000

Repave the parking lot 6,000

How much will Shidan Apartments record as an asset?

a. $320,000

b. $345,000

c. $351,000

d. $355,000

Page 19

51. McLaren Corp. incurred the following costs to acquire and prepare land during 2017 for a new parking lot: purchase

price for land, $800,000; cost of paving, $40,000; and lighting for the parking lot, $20,000. How much should McLaren

record in the Land Improvements account?

a. $30,000

b. $40,000

c. $60,000

d. $90,000

52. Which of the following costs related to the purchase of production equipment incurred by Newark Company during

2017 would be considered a revenue expenditure?

a. Installation costs for equipment

b. Purchase price of the equipment less the cash discount

c. Repair and maintenance costs during the equipment’s first year of service

d. Transportation charges to deliver the equipment to Newark Company

Page 20

53. Oakland Corp. purchased land and a building for a combined cost of $500,000. Oakland must

a. record the $500,000 acquisition cost in an account called Land and Buildings.

b. depreciate the $500,000 acquisition cost, less any residual value, over the expected useful life of the building.

c. record all of the cost in the Land account because part of the purchase involved land.

d. allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair

market values.

54. Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values:

land, $320,000; building, $370,000; and equipment, $60,000. What cost should be allocated to the building?

a. $370,000

b. $695,000

c. $342,867

d. $399,281