Chapter 10
PLANT ASSETS, NATURAL RESOURCES AND INTANGIBLES
1. Plant assets refer to intangible assets that are used in the operations of a business.
2. Plant assets are used in operations and have useful lives that extend over more than one
accounting period.
3. If land is purchased as a building site, the cost of removing existing structures is not
charged to the Land account.
4. Depreciation is the process of allocating the cost of a plant asset to expense in the
accounting periods benefiting from its use.
5. Salvage value is an estimate of an asset’s value at the end of its benefit period.
6. Inadequacy refers to the insufficient capacity of a company’s plant assets to meet the
company’s growing productive demands.
7. Depreciation measures the actual decline in market value of an asset.
8. A plant asset’s useful life might not be the same as its productive life.
9. It is not necessary to report both the cost and the accumulated depreciation of plant assets
in the financial statements.
10. Depreciation expense is calculated using estimates of an asset’s salvage value and useful
life.
11. When an asset is purchased (or disposed of) at a time other than the beginning or the end
of an accounting period, depreciation is recorded for part of a year so that the year of purchase
or the year of disposal is charged with its share of the asset’s depreciation.
12. Revising an estimate of the useful life or salvage value of a plant asset is referred to as a
change in accounting estimate, and is reflected in the past, current, and future financial
statements.
13. The going concern assumption supports the reporting of plant assets at book value rather
than market value.
14. Total depreciation expense over an asset’s useful life will be identical under all methods of
depreciation.
15. Financial accounting and tax accounting require the same recordkeeping and there should
be no difference in results between the two accounting systems.
16. Depreciation is higher in earlier years and income is lower in the later years when using
accelerated versus straight-line methods.
17. The book value of an asset when using double-declining-balance depreciation is always
greater than the book value from using straight-line depreciation, except at the beginning and
the end of the asset’s useful life, when it is the same.
18. The Modified Accelerated Cost Recovery System (MACRS) is part of the U.S. federal
income tax laws and is used for tax reporting.
19. Decision makers and other users of financial statements are especially interested in
evaluating a company’s ability to use its assets in generating sales.
20. Asset turnover is computed by dividing average total assets by cost of sales.
21. Capital intensive companies have a relatively large amount invested in assets to generate a
given level of sales.
22. Cowers reported net sales of $2,463 million and average total assets of $1,546 million. Its
total asset turnover equals 1.59.
23. Abers reported average total assets of $10,965 million and net sales of $11,430 million. Its
total asset turnover equals .96.
24. An asset’s cost includes all normal and reasonable expenditures necessary to get the asset
in place and ready for its intended use.
25. If a machine is damaged during unpacking, the repairs are added to its cost.
26. The purchase of a property that included land, building, and related improvements is
called a lump-sum purchase.
27. When a company constructs a building, the cost of the building includes materials and
labor, design fees, building permits, and insurance during construction.
28. Land is not subject to depreciation because it has an unlimited life. This means that items
which increase the usefulness of the land such as parking lots are not depreciated.
29. The cost of fees for insuring the title and any accrued property taxes are included in the
cost of land.
30. Total asset cost plus depreciation expense equals book value.
31. The units-of-production method of depreciation charges a varying amount of expense for
each period of an asset’s useful life depending on its usage.
32. An accelerated depreciation method yields smaller depreciation expense in the early years
of an asset’s life and larger depreciation expense in later years.
33. The double-declining balance method is applied by (1) computing the asset’s straight-line
depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying
the rate times the net value.
34. A company purchased a plant asset for $45,000. The asset has an estimated salvage value
of $6,000, and an estimated useful life of 10 years. The annual depreciation expense using the
straight-line method is $3,900 per year.
35. Revenue expenditures are additional costs of plant assets that materially increase the
assets’ life or productive capabilities.
36. Ordinary repairs are expenditures that keep assets in normal, good operating condition.
37. Extraordinary repairs are expenditures extending the asset’s useful life beyond its original
estimate, and are capital expenditures because they benefit future periods.
38. Capital expenditures are also called balance sheet expenditures.
39. Betterments are a type of capital expenditure.
40. Plant assets can be disposed of by discarding, selling, or exchanging them.
41. The first step in accounting for an asset disposal is to calculate the gain or loss on
disposal.
42. Accounting for the exchange of assets depends on whether the transaction has commercial
substance; commercial substance implies that it alters the company’s future cash flows.
43. If an asset is sold above its book value, the selling company records a loss.
44. Gain or loss on the disposal of assets is determined by comparing the disposed asset’s
book value to the value of any assets received.
45. A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale
is less than the asset’s book value.
46. Natural resources are assets that include standing timber, mineral deposits, and oil and gas
fields.
47. Amortization is the process of allocating the cost of natural resources to periods when
they are consumed.
48. Natural resources are often called wasting assets because they are physically consumed
when used.
49. When the usefulness of plant assets used to extract natural resources is directly related to
the depletion of a natural resource, their costs are depreciated using the units-of-production
method of depreciation, as long as the assets will not be moved to and used at another site
when extraction of the natural resources is complete.
50. The cost of an intangible asset is systematically allocated to depreciation expense over its
estimated useful life.
51. Intangible assets are nonphysical assets used in operations that confer on their owners’
long-term rights, privileges, or competitive advantages.
52. A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.
53. Since goodwill is an intangible, it is amortized each year using the straight-line method,
the same as other intangibles are amortized.
54. A patent is an exclusive right granted to its owner to manufacture and sell a patented
device or to use a process for 20 years.
55. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or
artistic work during the life of the creator plus 17 years.
56. Plant assets are:
A. Tangible assets used in the operation of a business that have a useful life of more than one
accounting period.
B. Current assets.
C. Held for sale.
D. Intangible assets used in the operations of a business that have a useful life of more than
one accounting period.
E. Tangible assets used in the operation of business that have a useful life of less than one
accounting period.
57. Plant assets are:
A. Current assets.
B. Used in operations.
C. Natural resources.
D. Long-term investments.
E. Intangible.
58. The relevant factor(s) in computing depreciation include:
A. Cost.
B. Salvage value.
C. Useful life.
D. Depreciation method.
E. All of the choices are needed to compute depreciation.
59. Salvage value is:
A. Also called residual value.
B. Also called scrap value.
C. An estimate of the asset’s value at the end of its benefit period.
D. A factor relevant to determining depreciation.
E. All of the choices are correct.
60. Depreciation:
A. Measures the decline in market value of an asset.
B. Measures physical deterioration of an asset.
C. Is the process of allocating to expense the cost of a plant asset.
D. Is an outflow of cash from the use of a plant asset.
E. Is applied to land.
61. The useful life of a plant asset is:
A. The length of time it is productively used in a company’s operations.
B. Never related to its physical life.
C. Its productive life, but not to exceed one year.
D. Determined by the FASB.
E. Determined by law.
62. Inadequacy refers to:
A. The insufficient capacity of a company’s plant assets to meet the company’s growing
production demands.
B. An asset that is worn out.
C. An asset that is no longer useful in producing goods and services.
D. The condition where the salvage value is too small to replace the asset.
E. The condition where the asset’s salvage value is less than its cost.
63. Obsolescence:
A. Occurs when an asset is at the end of its useful life.
B. Refers to a plant asset that is no longer useful in producing goods and services with a
competitive advantage.
C. Refers to the insufficient capacity of a company’s plant assets to meet the company’s
productive demands.
D. Occurs when an asset’s salvage value is less than its replacement cost.
E. Does not affect plant assets.
64. Once the estimated depreciation expense for an asset is calculated:
A. It cannot be changed due to the historical cost principle.
B. It may be revised based on new information.
C. Any changes are accumulated and recognized when the asset is sold.
D. The estimate itself cannot be changed; however, new information should be disclosed in
financial statement footnotes.
E. It cannot be changed due to the consistency principle.
65. A machine originally had an estimated useful life of 5 years, but after 3 complete years, it
was decided that the original estimate of useful life should have been 10 years. At that point
the remaining cost to be depreciated should be allocated over the remaining:
A. 2 years.
B. 5 years.
C. 7 years.
D. 8 years.
E. 10 years.
66. A change in an accounting estimate is:
A. Reflected in past financial statements.
B. Reflected in future financial statements and also requires modification of past statements.
C. Reflected in current and future years’ financial statements, not in prior statements.
D. Not allowed under current accounting rules.
E. Considered an error in the financial statements.