Financial Accounting, 5e (Spiceland)
Chapter 7 Long-Term Assets
1) Property, plant, and equipment are types of tangible assets.
2) We record a long-term asset at its cost less all expenditures necessary to get the asset ready for
use.
3) We use the term capitalize to describe recording an expenditure as an expense.
4) Cash received from the sale of salvaged materials increases the total cost of land.
5) Land improvements are recorded separately from the land itself because, unlike land, these
assets have limited useful lives.
6) A basket purchase is the purchase of more than one asset at the same time for one purchase
price.
7) Natural resources are distinguished from other property, plant, and equipment by the fact that
they are depleted.
8) Many intangible assets are not recorded in the balance sheet at their estimated values.
9) We record purchased intangible assets at their original cost plus all other costs necessary to get
the asset ready for use.
10) Most of the costs associated with internally developed intangible assets are recorded as
intangible assets in the balance sheet.
11) Research and development costs incurred in developing a patent internally are not recorded as
an intangible asset in the balance sheet, but rather are expensed directly in the income statement.
12) International accounting standards allow firms to record development costs that benefit future
periods as an intangible asset.
13) A trademark can be registered with the U.S. Patent and Trademark Office for a maximum of 20
years.
14) We expense internally generated intangible assets, such as research and development, as we
incur them.
15) A patent is an exclusive right to a published work such as a song, film, or painting.
16) A copyright is an exclusive right of protection given to the creator of a published work such as
a song, film, painting, photograph, book, or computer software.
17) A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or
service.
18) When a firm develops a trademark internally through advertising, it does not record the
advertising costs as an intangible asset, but rather expenses them in the income statement.
19) The franchisee’s initial fee is recorded as an expense in the income statement.
20) We record goodwill as an intangible asset in the balance sheet only when we purchase it as part
of the acquisition of another company.
21) The acquiring company records goodwill equal to the purchase price less the book value of the
net assets acquired.
22) We capitalize repairs and maintenance expenditures because they maintain a given level of
benefits.
23) If a firm successfully defends an intangible right, it should expense the litigation costs as
incurred.
24) If the defense of an intangible right is unsuccessful, then the firm should expense the litigation
costs as incurred because they provide no future benefit.
25) Depreciation in accounting is the process of allocating to expense the cost of an asset over its
service life.
26) Depreciation in accounting records the decrease in value of an asset.
27) Accumulated Depreciation is a liability account that is increased by credits.
28) Book value is equal to the original cost of the asset minus the current balance in Accumulated
Depreciation.
29) The Accumulated Depreciation account allows us to reduce the carrying value of assets
through depreciation, while maintaining the original cost of each asset in the accounting records.
30) The service life of an asset is always equal to the full life of the asset.
31) Residual value, also referred to as salvage value, is the amount the company expects to receive
from selling the asset at the end of its service life.
32) With the straight-line depreciation method, we allocate an equal amount of the depreciable
cost to each year of the asset’s service life.
33) When a change in estimate is required, the company changes depreciation in prior, current, and
future years.
34) Straight-line depreciation assumes that the benefits we derive from the use of an asset are the
same each year.
35) Declining-balance depreciation will be lower than straight-line depreciation in earlier years,
but higher in later years.
36) In an activity-based depreciation method, we allocate an asset’s cost based on its use.
37) Straight-line produces a lower net income than accelerated methods in the earlier years of an
asset’s life.
38) Straight-line, declining-balance, and activity-based depreciation all are acceptable
depreciation methods for both financial reporting and tax reporting.
39) Most companies use straight-line amortization for intangibles and credit the amount of
amortization to the intangible asset account itself rather than to Accumulated Amortization.
40) Goodwill is amortized over its estimated useful life.
41) Intangible assets with an indefinite useful life (goodwill and most trademarks) are not
amortized.
42) We record a gain if we sell an asset for less than book value.
43) We record a loss if we sell an asset for less than book value.
44) A more comparable measure of profitability than income is return on assets, which equals net
income divided by average total assets.
45) Profit margin is net income divided by net sales.
46) Asset turnover is net sales divided by ending total assets.
47) Management must review long-term assets for impairment.
48) Impairment occurs when the future cash flows expected to be generated for a long-term asset
fall below its fair value.
49) An impairment loss is equal to the amount by which book value exceeds the fair value of a
long-term asset.
50) Taking a “big bath” is recording all losses in one year to make a bad year even worse.
51) Real Angus Steakhouse purchased land for $75,000 cash. Commissions of $4,500, property
taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes
includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the
current year after the purchase date. For what amount should Real Angus Steakhouse record the
land?
A) $83,500.
B) $84,300.
C) $85,300.
D) $75,000.
52) Which of the following would be recorded as land improvements?
A) Property taxes.
B) Title insurance.
C) Real estate commissions.
D) Adding a parking lot.
53) Which of the following would not be recorded as land improvements?
A) Adding a parking lot.
B) Landscaping.
C) Sidewalks.
D) Closing costs on purchasing the land.
54) A company purchased a piece of equipment by paying $5,000 cash. Shipping cost of $400 to
get the equipment to its factory was also incurred. The fair value of this equipment is $7,000. For
what amount should the company record the equipment?
A) $5,000.
B) $5,400.
C) $7,000.
D) $7,400.
55) A company purchased new equipment for $60,000. The company paid cash for the equipment.
Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid
$3,000; and installation cost, $2,500. The cost recorded for the equipment was:
A) $60,000.
B) $61,000.
C) $64,000.
D) $66,500.
56) A company incurred the following costs associated with the purchase of a piece of land that it
will use to re-build an office building:
Purchase price of the land
$
400,000
Sale of salvaged parts already on land
$
20,000
Demolition of the old building
$
30,000
Ground-breaking ceremony (food and supplies)
$
1,500
Land preparation and leveling
$
7,500
What amount should be recorded for the purchase of the land?
A) $437,500.
B) $417,500.
C) $439,000.
D) $419,000.
57) A company purchased a commercial dishwasher by paying cash of $8,000. The dishwasher’s
fair value on the date of the purchase was $10,000. The company incurred $600 in transportation
costs, $500 installation fees, and paid $300 annual insurance on the equipment. For what amount
will the company record the dishwasher?
A) $10,000.
B) $9,100.
C) $8,000.
D) $9,400.
58) A company purchased a commercial dishwasher by paying cash of $5,000. The dishwasher’s
fair value on the date of the purchase was $5,600. The company incurred $400 in transportation
costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was
being delivered. For what amount will the company record the dishwasher?
A) $5,600.
B) $5,700.
C) $5,900.
D) $6,300.
59) A company purchased a three-acre tract of land for a building site for $350,000. The company
demolished the old building at a cost of $12,000, but was able to sell scrap from the building for
$1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500.
Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The
capitalized cost of the land is:
A) $366,400.
B) $366,150.
C) $364,650.
D) $231,150.
60) A company purchased a $500,000 tract of land that is intended to be the site of a new office
complex. The company incurred additional costs and realized salvage proceeds as follows:
Demolition of existing building on site
$
75,000
Legal and other fees to close escrow
15,000
Proceeds from sale of demolition scrap
10,000
What would be the capitalized cost of the land?
A) $500,000.
B) $575,000.
C) $580,000.
D) $590,000.
Purchase price
$
Demolition costs
Legal fees
Sale of scrap
)
Total cost of land
$
61) Assets acquired in a lump-sum purchase are valued based on:
A) Their relative fair values.
B) Their assessed valuation.
C) The present value of their future cash flows.
D) Their cost plus the difference between their cost and fair values.
62) A company purchased land, a building, and equipment for one price of $800,000. The
estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000,
respectively. At what amount would the company record the land?
A) $80,000.
B) $90,000.
C) $100,000.
D) $800,000.
63) A company acquired an office building on three acres of land for a lump-sum price of
$2,400,000. The building was completely equipped. According to independent appraisals, the fair
values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment,
respectively. At what amount would the company record the building?
A) $720,000.
B) $1,300,000.
C) $1,200,000.
D) None of these answer choices are correct.
64) A company acquired an office building, land, and equipment in a single basket purchase. The
fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment,
respectively. The company recorded the building for $1,080,000. What was the total purchase cost
for all three assets?
A) $1,600,000.
B) $1,500,000.
C) $2,000,000.
D) $1,800,000.
65) Productive assets that are physically used up or depleted are:
A) Equipment.
B) Land.
C) Land improvements.
D) Natural resources.