Financial Accounting, 10e (Libby)
Chapter 8 Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and
Natural Resources
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.
4) The equipment cost initially reported on the balance sheet includes the equipment-related
installation and transportation 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 may include legal fees and title insurance.
7) The cash-equivalent price of an asset received is measured as the fair value of the
consideration given including cash, or the fair value of the asset received, whichever is more
determinable.
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 part of the asset’s cost on the balance sheet.
9) Ordinary repairs and maintenance costs are incurred to maintain a long-lived productive asset
and are expensed as incurred.
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.
13) If depreciation expense is calculated without taking into account the asset’s residual value,
depreciation expense will be overstated.
14) The book value of a depreciable asset equals its acquisition cost minus the depreciation
expense recorded since the acquisition date.
15) On January 1, 2019, equipment was purchased for $80,000; the equipment’s estimated
residual value is $15,000, and its estimated useful life is 10 years. For 2019, the depreciation
expense under the double-declining balance method is $13,000.
16) On January 1, 2019, 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, 2019, 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.
18) Use of the double-declining-balance method of depreciation results in increasing 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) In most cases, the depreciation method chosen for financial reporting purposes (GAAP) must
also be utilized for income tax reporting (IRS).
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.
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 disposal of a long-lived asset are determined by comparing the asset’s
cost to its book value.
25) Selling a depreciable asset for a gain results in an increase in both net income and assets.
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 is recognized on the income statement for all resources removed
during the period whether they are sold or not.
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) Under GAAP, research and development costs are capitalized once a product or process has
been developed.
31) When determining cash flow from operating activities using the indirect method,
depreciation and amortization expense are deducted from net income.
32) Which of the following would not be classified as property, plant and equipment on a
balance sheet?
A) Land held for investment.
B) Equipment used in the manufacturing process.
C) A building used as corporate headquarters.
D) A natural resource being mined.
33) Which of the following accounts would not be considered a tangible asset?
A) Buildings
B) Land
C) Equipment
D) Copyright
34) Which of the following would not be considered an intangible asset?
A) Goodwill
B) Patents
C) Research and development costs
D) Trademarks
35) Which of the following transactions would not increase the fixed asset turnover ratio?
A) An increase in sales revenue.
B) A profitable sale of fixed assets for cash.
C) Selling manufacturing equipment for a loss.
D) A decrease in operating expenses.
36) Which of the following includes only tangible assets?
A) Land, buildings, and natural resources.
B) Land, buildings, and licenses and operating rights.
C) Natural resources, buildings, and franchises.
D) Licenses, trademarks, and land.
37) Which of the following includes only intangible assets?
A) Natural resources, patents, and trademarks.
B) Research and development costs, franchises, and trademarks.
C) Copyrights, licenses, and land.
D) Trademarks, patents, and copyrights.
38) Which of the following statements regarding the fixed asset turnover ratio is incorrect?
A) The numerator is net operating income.
B) The denominator is average net fixed assets.
C) The ratio is used to assess a company’s effectiveness in generating sales from its fixed assets.
D) The ratio increases when a company sells a factory building for a gain.
39) The Wilson Company has provided the following information:
• Net sales, $200,000
• Net operating income, $40,000
• Net income, $20,000
• Average total assets, $125,000
• Average net fixed assets; $80,000
What is Wilson’s fixed asset turnover ratio?
A) 1.60
B) 2.50
C) 0.25
D) 0.50
40) Which statement is false?
A) Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset
turnover.
B) Using an accelerated depreciation method instead of the straight-line depreciation method will
lead to reporting a higher fixed asset turnover during the earlier years of an asset’s life.
C) Acquiring more long-lived, productive assets when a company is growing will lead to a lower
fixed asset turnover.
D) Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed
asset turnover.
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 $4,000; and
installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?
A) $57,500.
B) $54,000.
C) $51,000.
D) $53,500.
42) On August 1, Red Company purchased computer equipment for $10,000 cash and also gave
100 shares of White common stock that Red Company held as an investment. The White
common stock cost Red Company $5,000 and on August 1 had a fair value of $4,200. The
installation costs for the computer equipment were $700 and shipping costs were $500. What
amount should be the total amount debited to the computer equipment account?
A) $14,200.
B) $15,000.
C) $15,400.
D) $16,200.
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?
A) $40,000.
B) $42,000.
C) $43,000.
D) $45,000.
44) Which of the following equipment related costs is not capitalized on a balance sheet?
A) Equipment installation costs.
B) Transportation costs associated with the equipment purchase.
C) Equipment maintenance costs.
D) The equipment’s purchase price.
45) Operating leases
A) are reported on the balance sheet as an intangible asset.
B) are, in essence, the acquisition of an asset using debt.
C) allow companies to take advantage of various tax benefits
D) have a lease term of one year or less.
46) Smith Company exchanges assets to acquire 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 $250,000.
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 the building?
A) Total assets increase $350,000.
B) Stockholders’ equity increases $250,000.
C) Stockholders’ equity increases $330,000.
D) Total assets increase $330,000.
47) Smith Company exchanges assets to acquire 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 $250,000.
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 the building?
A) The common stock account increases by $100,000.
B) The building account increases by $370,000.
C) Stockholders’ equity increases $350,000.
D) The additional paid-in capital account increases by $100,000.
48) Smith Company exchanges assets to acquire 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 $250,000.
Which of the following journal entries 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 the building?
A)
Building
270,000
Cash
20,000
Common stock
100,000
Additional paid-in capital
150,000
B)
Building
370,000
Cash
20,000
Common stock
350,000
C)
Building
370,000
Cash
20,000
Common stock
100,000
Additional paid-in capital
250,000
D)
Building
370,000
Common stock
370,000