Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
1. Tangible long-lived productive assets differ from intangible long-lived productive assets in
that tangible assets have physical substance whereas intangible assets have no physical
substance.
2. Patents, trademarks, and franchises are examples of tangible assets.
3. The fixed asset turnover ratio measures the amount of operating income generated per
dollar of average fixed assets.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
4. The equipment cost initially reported on the balance sheet includes the equipment related
installation costs.
5. An expenditure is capitalized when it is reported as an expense on the income statement.
6. The land cost initially reported on the balance sheet includes legal fees and title insurance.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
7. The cash-equivalent cost of an asset received is measured as any cash paid plus the current
market value of the non-cash consideration given up. If this value is not determinable, the
current market value of what is received should be used instead.
8. If a second-hand machine is purchased for productive use in a business, all renovation and
repair costs on the used machine incurred by the purchaser prior to its productive use should
be reported as an expense on the income statement.
9. Ordinary repairs and maintenance costs are incurred to maintain a long-lived asset and are
expensed as incurred.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
10. In accounting for depreciation, acquisition cost and useful life usually are known
quantities, whereas residual value is an estimate because it relates to an amount in the future.
11. Depreciation is the process of allocating a long-lived asset’s cost over its productive life.
12. Depreciation is the process of estimating a long-lived asset’s current market value.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
13. If depreciation expense is calculated without taking into account the asset’s residual value,
depreciation expense will be higher than it should have been.
14. The book value of a depreciable asset equals its acquisition cost minus the depreciation
expense recorded to date.
15. On January 1, 2010 equipment was purchased for $80,000; the equipment’s estimated
residual value is $15,000 and its estimated useful life is 8 years. During 2010, the depreciation
expense under the double-declining balance method is $16,250.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
16. On January 1, 2010 equipment was purchased for $100,000; the equipment’s estimated
residual value is $20,000 and its estimated useful life is 8 years. On December 31, 2010, the
book value using the straight-line method of depreciation is $90,000.
17. Use of the double-declining-balance method of depreciation results in higher depreciation
expense during the first year of an asset’s life relative to use of the straight-line depreciation
method.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
18. Use of the double-declining-balance method of depreciation results in decreasing amounts
of depreciation expense over an asset’s life.
19. The units-of-production method of depreciation allocates an asset’s cost over its useful life
based on the current period’s production relative to its total estimated production.
20. The depreciation method chosen for financial reporting purposes (GAAP) must also be
utilized for income tax reporting (IRS).
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
21. If a long-lived asset has been impaired, the journal entry will require a debit to a loss
account and a credit to the long-lived asset account.
22. If a company has an asset with a book value of $5.0 million and estimates the future cash
flows to be received over the asset’s remaining life to be $5.5 million, no impairment has
occurred and no loss would be recognized.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
23. The first step in recording the disposal of a long-lived asset is to update its book value by
recognizing depreciation expense for the period of time since the last depreciation adjustment
was made.
24. Gains and losses on a long-lived asset disposal are determined by comparing the asset’s
cost to its selling price.
25. Selling a depreciable asset for a gain results in an increase in both stockholders’ equity and
assets.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
26. The systematic and rational allocation of the acquisition cost of natural resources to those
periods in which the resources contribute to revenue is called depletion.
27. The method of depletion used to allocate the cost of natural resources to future periods is
most similar to the straight-line depreciation method.
28. Natural resource depletion expense is recognized on the income statement for all
resources removed during the period whether they are sold or not.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
29. Goodwill is recorded only when an existing company is bought by another company and
the purchase price exceeds the fair value of the purchased company’s net assets.
30. Research and development costs are capitalized under GAAP once a product or process
has been developed.
31. When determining cash flow from operations using the direct method, depreciation and
amortization expense are deducted from net income.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
32. Which of the following would not be classified as property, plant and equipment on a
balance sheet?
33. Which of the following accounts would not be considered a tangible asset?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
34. Which of the following accounts would not be considered an intangible asset?
35. Which of the following transactions would not increase the fixed asset turnover ratio?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
36. Which of the following includes only tangible assets?
37. Which of the following includes only intangible assets?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
38. Which of the following statements regarding the fixed asset turnover ratio is incorrect?
39. The Wilson Company has provided the following information:
• Net sales, $100,000;
• Net operating income, $40,000;
• Net income, $20,000;
• Average total assets, $120,000;
• Average net fixed assets; $80,000.
What is Wilson’s fixed asset turnover ratio?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
40. Which statement is false?
41. On March 1, Wright Company purchased new equipment for $50,000 by paying cash.
Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid
$3,000; and installation cost, $2,500. At what amount will the equipment be recorded at on a
balance sheet?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
42. On August 1, Red Company purchased computer equipment for $10,000 cash and also
gave 100 shares of White common stock held by Red Company as an investment. The White
common stock cost Red Company $5,000 and on August 1 had a market value of $4,200.
Installation costs were $700 and shipping costs were $500. What amount should be the total
amount debited to the computer equipment account?
43. Salvia Company recently purchased a truck. The price negotiated with the dealer was
$40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs
of $3,000, and insurance for the first year of operation of $4,000. At what amount should the
truck be recorded on the balance sheet prior to recording depreciation expense?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
44. Which of the following equipment related costs is not capitalized on a balance sheet?
45. Which of the following costs associated with a land purchase is not a component of the
land cost reported on a balance sheet?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
46. Which of the following is correct for Smith Company when Smith issues 10,000 shares of
$10 par value common stock and pays $20,000 cash in exchange for a building? The market
price of the Smith stock on the exchange date was $35 per share and the building’s book value
on the books of the seller was $200,000.
47. Which of the following is incorrect for Smith Company when Smith issues 10,000 shares
of $10 par value common stock and pays $20,000 cash in exchange for a building? The
market price of the Smith stock on the exchange date was $35 per share and the building’s
book value on the books of the seller was $200,000.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
48. Which of the following journal entries is correct for Smith Company when Smith issues
10,000 shares of $20 par value common stock and pays $20,000 cash in exchange for a
building? The market price of the Smith stock on the exchange date was $35 per share and the
building’s book value on the books of the seller was $200,000.