Financial and Managerial Accounting, 8e (Wild)
Chapter 8 Accounting for Long-Term Assets
1) Plant assets refer to nonphysical 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) Land improvements include parking lots and walkways.
5) The process of allocating the cost of a plant asset to expense in the accounting periods
benefiting from its use is called depletion.
6) Salvage value is an estimate of an asset’s value at the end of its useful life.
7) When plant assets are purchased as a group in a single transaction for a lump-sum price, the
cost of the purchase is allocated among the different types of assets acquired based on their
relative market values.
8) Obsolescence refers to plant assets that typically have longer useful lives and higher salvage
values.
9) Depreciation does not measure the decline in market value of an asset each period.
10) A plant asset’s useful life is the length of time it is productively used in a company’s
operations.
11) It is necessary to report both the cost and the accumulated depreciation of plant assets in the
financial statements.
12) Depreciation expense is calculated using its cost, estimates of an asset’s salvage value, and an
estimated useful life.
13) Once an asset’s book value equals its salvage value, depreciation stops.
14) 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.
15) 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 current, and future financial statements.
16) Plant assets are reported on a balance sheet at their book value (acquisition costs less
accumulated depreciation), and not necessarily at fair (market) value.
17) Total depreciation expense over an asset’s useful life will be identical under all methods of
depreciation.
18) Financial accounting and tax accounting require the same recordkeeping and there should be
no difference in results between the two accounting systems.
19) Depreciation is higher in earlier years and income is lower in the later years when using
straight-line versus accelerated methods.
20) 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.
21) The straight-line depreciation method results in consistent depreciation expense.
22) The Modified Accelerated Cost Recovery System (MACRS) is part of the U.S. federal
income tax laws and may be used for financial reporting.
23) Decision makers and other users of financial statements are especially interested in
evaluating a company’s ability to use its assets in generating sales.
24) Asset turnover is computed by dividing net sales by average total assets.
25) Companies that have a relatively large amount invested in assets to generate a given level of
sales are considered capital-intensive.
26) Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its
total asset turnover equals 1.71.
27) Total asset turnover is calculated by dividing net sales by average total assets.
28) Total asset turnover is calculated by dividing average total assets by net sales.
29) Edmond reported average total assets of $9,965 million and net sales of $10,430 million. Its
total asset turnover equals .96.
30) An asset’s cost includes all normal and reasonable expenditures necessary to get the asset in
place and ready for its intended use.
31) If a machine is damaged during unpacking, the repairs are added to its cost.
32) The purchase of a property that included land, building, and related improvements is called a
lump-sum or basket purchase.
33) When a company constructs a building, the cost of the building includes materials and labor
but not design fees, building permits, or insurance during construction.
34) Additions to land that increase the usefulness of the land such as parking lots, fences, and
lighting are not depreciated.
35) The cost of fees for insuring the title and any accrued property taxes are included in the cost
of land.
36) Total asset cost plus depreciation expense equals book value.
37) 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.
38) An accelerated depreciation method yields larger depreciation expense in the early years of
an asset’s life and less depreciation expense in later years.
39) 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.
40) A company purchased a plant asset for $60,000. The asset has an estimated salvage value of
$4,000, and an estimated useful life of 7 years. The annual depreciation expense using the
straight-line method is $4,000 per year.
41) Revenue expenditures, also called income statement expenditures, are additional costs of
plant assets that do not materially increase the assets’ life or productive capabilities.
42) Capital expenditures, also called balance sheet expenditures, are additional costs of plant
assets that provide benefits extending beyond the current period.
43) Extraordinary repairs are expenditures extending the asset’s useful life beyond its original
estimate, and are capital expenditures because they benefit future periods.
44) Revenue expenditures are also called balance sheet expenditures.
45) Betterments are a type of capital expenditure.
46) Plant assets can be disposed of by discarding, selling, or exchanging them.
47) The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.
48) 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.
49) A gain or loss is recorded for exchanges of plant assets with commercial substance.
50) If an asset is sold above its book value, the selling company records a loss.
51) Gain or loss on the disposal of assets is determined by comparing the disposed asset’s book
value to the market value of any assets received.
52) 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.
53) Natural resources are assets that include standing timber, mineral deposits, and oil and gas
fields.
54) Amortization is the process of allocating the cost of natural resources to periods when they
are consumed.
55) Depletion is the process of allocating the cost of natural resources to periods when they are
consumed.
56) Natural resources may be reported under either plant assets or their own separate category on
the balance sheet.
57) 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.
58) The cost of an intangible asset is systematically allocated to depreciation expense over its
estimated useful life.
59) A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.
60) Intangible assets are nonphysical assets used in operations that give owners’ long-term rights
or competitive advantages.
61) Since goodwill is an intangible asset, it is amortized each year using the straight-line method.
62) A patent is an exclusive right granted to its owner to manufacture and sell a patented item or
to use a process for 20 years.
63) 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.
64) A trademark is an exclusive right granted to its owner to publish and sell a musical, literary,
or artistic work during the life of the creator plus 70 years.
65) Plant assets are defined as:
A) Tangible assets that have a useful life of more than one accounting period and are used in the
operation of a business.
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.
66) One characteristic of plant assets is that they are:
A) Current assets.
B) Used in operations.
C) Natural resources.
D) Long-term investments.
E) Intangible.
67) The relevant factors in computing depreciation do not include:
A) Cost.
B) Salvage value.
C) Useful life.
D) Depreciation method.
E) Market value.
68) Salvage value is:
A) Not a factor relevant to determining depletion.
B) A factor relevant to amortizing an intangible asset with an indefinite life.
C) An estimate of the asset’s value at the end of its benefit period.
D) A factor relevant to determining depreciation under MACRS.
E) A factor relevant to determining an asset’s useful life.
69) Depreciation:
A) Measures the decline in market value of an asset.
B) Measures physical deterioration of an asset.
C) Is the process of allocating the cost of a plant asset to expense.
D) Is an outflow of cash from the use of a plant asset.
E) Is applied to land.
70) 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.
71) The term inadequacy, as it relates to the useful life of an asset, refers to:
A) The inability of plant assets to meet growing production demands.
B) An asset that is worn out.
C) An asset that is no longer functional.
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.