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Chapter 7
1. The acquisition costs of property, plant, and equipment should include all costs necessary to get the asset in place and
ready for use.
a.
True
b.
False
2. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the
ordinary course of business are called fixed assets.
a.
True
b.
False
3. Expenditures made to extend an asset's life are called revenue expenditures.
a.
True
Chapter 7
b.
False
4. Amortization refers to systematic periodic transfer of the cost of a fixed asset to an expense account.
a.
True
b.
False
5. The estimated amount that an asset can be sold for at the end of its useful life is called its book value.
a.
True
b.
False
Chapter 7
6. Under the straight-line method, the amount of depreciation expense for the first full year of use of a fixed asset costing
$95,000, with an estimated residual value of $5,000, and a useful life of 5 years, will be $18,000.
a.
True
b.
False
7. Physical depreciation occurs when changes in customer needs causes a fixed asset to no longer provide services for
which it was intended.
a.
True
b.
False
Chapter 7
8. The straight-line method of depreciation is appropriate if usage of the asset varies considerably from year to year.
a.
True
b.
False
9. The total depreciation across the years of an asset's life is the same under the double-declining-balance method or the
straight-line method.
a.
True
b.
False
Chapter 7
10. The difference between a fixed asset's initial cost and its current market value is called the asset's depreciable cost.
a.
True
b.
False
11. The double-declining-balance method of depreciation is also referred to as an accelerated depreciation method.
a.
True
b.
False
Chapter 7
12. Companies usually compute depletion by using the double-declining-balance method.
a.
True
b.
False
13. A current asset account must be increased for revenue expenditures since they benefit only the current period.
a.
True
b.
False
Chapter 7
14. If the proceeds from a sale of equipment is greater than the book value of the equipment as on the date of sale, a loss is
recorded.
a.
True
b.
False
15. If an asset is discarded, a loss is recognized equal to its salvage value.
a.
True
b.
False
Chapter 7
16. If a company sells a fixed asset for an amount which is less than its book value, a gain must be recognized.
a.
True
b.
False
17. Depletion is the process of transferring the cost of intangible assets to an expense account.
a.
True
b.
False
Chapter 7
18. Intangible assets do not exist physically.
a.
True
b.
False
19. Goodwill refers to the excess of purchase price of a business over the fair value of its net assets.
a.
True
b.
False
20. The balance in Accumulated Depreciation account is deducted from the cost of fixed assets on the balance sheet.
Chapter 7
a.
True
b.
False
21. Fixed assets are reported at their book value on the balance sheet.
a.
True
b.
False
22. The inventory turnover measures how efficiently a company is using its operating assets to generate sales.
a.
True
b.
False
Chapter 7
23. Which of the following is a characteristic of fixed assets?
a.
Fixed assets are offered for sale as part of normal operations.
b.
Fixed assets do not exist physically.
c.
Fixed assets are long-term or relatively permanent assets.
d.
Fixed assets that are no longer used in operations are still classified as fixed assets.
24. Which of the following is the effect on a company's liquidity and profitability metrics when it purchases a piece of
equipment?
a.
Its free cash flow decreases.
b.
Its free cash flow increases.
c.
Its asset turnover increases.
Chapter 7
d.
Its asset turnover remains unaffected.
25. Which of the following expenditures would be included in the cost of a fixed asset?
a.
Uninsured theft
b.
Vandalism
c.
Sales taxes
d.
Mistakes in installation
26. A company acquired some land for $75,000 to construct a new office complex. Legal fees paid were $2,750,
delinquent taxes assumed were $3,250, and $6,350 was paid to remove an old building. Materials salvaged from the
demolition of the building were sold for $2,300. Determine the cost of the land to be reported on the balance sheet.
Chapter 7
a.
$85,050
b.
$89,650
c.
$84,100
d.
$87,350
27. A(n) _____ is a contract for the use of an asset for a period of time without having to buy the asset.
a.
indenture
b.
depreciation hedge
c.
revenue option
d.
lease
Chapter 7
28. The cost of removal of an old building to make the land ready for its intended use is charged to:
a.
land.
b.
land improvements.
c.
buildings.
d.
operating expenses.
29. Which of the following should be included in the acquisition cost of a piece of equipment?
a.
Uninsured theft
b.
Mistakes in installation
c.
Vandalism
d.
Installation costs
Chapter 7
30. _____ is an example of a fixed asset.
a.
A machine
b.
A prepaid expense
c.
Land held for investment
d.
An accrued revenue
31. Land improvements include:
a.
freight.
b.
surveying fees.
c.
sales tax.
d.
outdoor lighting.
Chapter 7
32. Capital expenditure is reported on the:
a.
income statement under operating expenses.
b.
balance sheet under fixed assets.
c.
statement of retained earnings under contributed capital.
d.
cash flow statement under cash flow from financing activities.
33. If a revenue expenditure is treated as a capital expenditure, then:
a.
expenses are overstated and owners' equity is understated.
b.
expenses are overstated and assets are overstated.
c.
expenses are understated and owners' equity is overstated.
d.
net income is overstated and owners' equity is understated.
34. The effect of recording a capital expenditure as a revenue expenditure is that:
a.
expenses are overstated, and owners' equity is understated.
b.
net profit is understated, and owners' equity is overstated.
c.
expenses are understated, and accumulated depreciation is overstated..
d.
assets are overstated, and expenses are understated.
35. The cost incurred to extend an asset's useful life is recorded as:
a.
accrued expenditures.
b.
maintenance expenditures.
c.
routine expenditures.
d.
capital expenditures.
Chapter 7
36. Which of the following is an example of a capital expenditure?
a.
Cleaning the carpet in the front-office room
b.
Regular tune-up for a company truck
c.
Replacing an engine in a company car
d.
Replacing all burned-out light bulbs in the factory
37. The book value of an asset is computed as the asset's:
a.
current market value less tax expense.
b.
fair value less residual value.
c.
discounted value plus accumulated depreciation.
d.
cost less accumulated depreciation.
Chapter 7
38. _____ occurs due to obsolescence that causes an asset to no longer provide services for which it was intended.
a.
Physical depreciation
b.
Effective depreciation
c.
Accelerated depreciation
d.
Functional depreciation
39. Which of the following is considered under the straight-line method but not under double-declining-balance method?
a.
The asset's book value
b.
The asset's salvage value
c.
The asset's expected useful life
d.
The asset's initial cost
Chapter 7
40. Depreciable cost is computed as:
a.
cost less accumulated depreciation.
b.
book value less residual value.
c.
cost less residual value.
d.
market value less residual value.
41. Which of the following is a characteristic of accumulated depreciation account?
a.
Accumulated depreciation represents cash reserved for asset replacement.
b.
Accumulated depreciation account is a contra-liability account.
c.
Accumulated depreciation may be disclosed in the notes to the income statement.
d.
Accumulated depreciation is reported on the balance sheet as a deduction from the cost of the asset.
