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Chapter 08 Reporting and Analyzing Long-Term Assets Answer Key
True / False Questions
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 of more than one accounting
period.
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3.
If land is purchased as a building site, the cost of removing existing structures is not
charged to the Land account.
4.
The process of allocating the cost of a plant asset to expense in the accounting periods
benefiting from its use is called depletion.
5.
Salvage value is an estimate of an asset’s value at the end of its benefit period.
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6.
Obsolescence refers to the insufficient capacity of a company’s plant assets to meet the
company’s growing productive demands.
7.
Depreciation does not measure the decline in market value of an asset each period.
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8.
A plant asset’s useful life is the length of time it is productively used in a company’s
operations.
9.
It is necessary to report both the cost and the accumulated depreciation of plant assets in
the financial statements.
10.
Factors that determine depreciation are cost, salvage value, and useful life.
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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 current, and future financial
statements.
13.
The going concern assumption supports the reporting of plant assets at undepreciated
cost (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.
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16.
Depreciation is higher in earlier years and income is lower in the later years when using
straight-line versus accelerated 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.
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18.
The Modified Accelerated Cost Recovery System (MACRS), which is part of the U.S.
federal income tax laws, may also be used for financial reporting.
19.
Decision makers and other users of financial statements use the total asset turnover ratio
in determining a company’s ability to use its assets in generating sales.
20.
Asset turnover is computed by dividing net sales by average total assets.
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21.
Companies that have a relatively large amount invested in assets to generate a given level
of sales are considered capital-intensive.
22.
Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its
total asset turnover equals 1.71.
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23.
Edmond reported average total assets of $9,965 million and net sales of $10,430 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.
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26.
The purchase of a property that included land, building, and related improvements is
called a lump-sum or basket purchase.
27.
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.
28.
Additions to land that increase the usefulness of the land such as parking lots, fences, and
lighting 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.
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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 larger depreciation expense in the early years
of an asset’s life and less depreciation expense in later years.
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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 book value.
34.
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.
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35.
Revenue expenditures are additional costs of plant assets that do not materially increase
the assets’ life or productive capabilities.
36.
Capital expenditures 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.
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38.
Revenue 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.
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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.
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44.
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.
45.
A loss on disposal of a plant asset occurs if the cash proceeds received from the asset
sale are less than the asset’s book value.
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46.
Natural resources 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 may be reported under either plant assets or their own separate
category on the balance sheet.
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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.
A leasehold refers to the rights the lessor grants to the lessee under the terms of a lease.