Chapter 09 – Long Term Assets
TRUE/FALSE
1. Asset impairment occurs when the fair value of a long-term asset falls below its carrying value.
2. Fair value is the amount for which an asset could be bought or sold in a current transaction.
3. Book value refers to unexpired portion of an asset’s cost.
4. A natural resource is subject to a process called depletion.
5. A reduction in carrying value as a result of impairment is recorded as a gain.
6. Depreciation refers to the periodic allocation of the cost of a tangible long-lived asset over its
estimated useful life.
7. Intangible assets are subject to a process called depletion.
8. Mineral deposits are subject to a process called amortization.
9. An older term for long-term assets is variable assets.
10. Land held for speculative purposes should be classified as a long-term investment.
11. Inventory is not classified as a long-term asset.
12. Free cash flow is a good measure of a company’s ability to finance long-term assets.
13. In the calculation of free cash flow, dividends and purchases of plant assets are both deducted.
14. If the net present value of a long-term asset under consideration for purchase is negative, then the asset
should not be purchased.
15. A positive net present value of a long-term asset under consideration for purchase indicates that the
asset should not be purchased.
16. A tractor held by a farm equipment company for sale to farmers is classified as a long-term asset.
17. A building not currently used because economic conditions have limited a company’s expansion
should not be classified as property, plant, and equipment.
18. Leasehold improvements become the property of the lessor at the end of the lease.
19. A betterment adds to the physical layout of an asset.
20. The replacement of tires on a truck is considered an ordinary repair.
21. Small expenditures for what ordinarily are considered revenue expenditures are expensed as incurred.
22. Additions and betterments are examples of revenue expenditures.
23. The cost of land would not include the cost of a building purchased with the land and torn down
because it was not needed.
24. The cost of equipment would include the cost of test runs to see that the equipment is operating
properly.
25. Driveways and parking lots are properly included in the Land Improvements account because they are
subject to depreciation.
26. The cost of land should include accrued property taxes paid by the purchaser.
27. The cost of repairing a machine damaged during installation should be charged to the cost of the
equipment.
28. The cost of a sewage system should be included in the Land Improvements account.
29. A capital expenditure is an expenditure that benefits several future accounting periods.
30. Leasehold improvements are subject to depreciation because they have a limited life.
31. Ordinary repairs usually result in a debit to the appropriate Accumulated Depreciation account.
32. Extraordinary repairs are recorded with a debit to Accumulated Depreciation.
33. Installation of an air-conditioning system is considered a betterment.
34. A debit to Accumulated Depreciation will increase the carrying value of an asset.
35. The routine overhaul of the engine of a company vehicle is an example of an ordinary repair.
36. A capital expenditure will result in an immediate increase in long-term assets.
37. The cost of assets acquired for a lump sum should be apportioned between the acquired assets.
38. A revenue expenditure results in the immediate recognition of an expense.
39. A capital expenditure results in the recognition of an asset.
40. In accounting, depreciation means the decline in value of an asset.
41. One reason for an asset’s limited useful life is physical deterioration.
42. Depreciation is a process of allocation, not of valuation.
43. The straight-line method is an accelerated method of depreciation.
44. Residual value is not relevant when calculating double-declining-balance depreciation.
45. Federal tax law does not allow the rapid write-off of plant assets.
46. Depreciation for tax purposes is identical to depreciation for financial reporting purposes.
47. For tax purposes, small businesses may expense the first $500,000 of equipment expenditures, rather
than having to allocate their costs over a number of years.
48. Typically, depreciation calculations are rounded to the nearest whole month.
49. One argument in favor of accelerated depreciation is that repair expense is likely to be smaller in later
years.
50. One argument in favor of accelerated depreciation is that the assets benefit is greater in the earlier
years.
51. When depreciation rates are revised, only the remaining years of the asset’s life are affected by the new
computation.
52. Depreciation should not be recorded for a depreciable asset that is increasing in value.
53. Accelerated methods of depreciation result in higher net income in the last years of an asset’s life
compared to the straight-line method.
54. Computation of a partial year’s depreciation is often required for the proper determination of net
income.
55. Group depreciation is not an appropriate method for a large company calculating depreciation on
office equipment.
56. Prior to the disposal of an asset, depreciation should be updated and recorded.
57. Gain on Sale of Machinery is recorded as a credit.
58. When the trade-in allowance exceeds the carrying value of an asset exchanged, a loss has occurred.
59. Plant asset exchanges can only be categorized as the exchange of similar assets.
60. When disposing of equipment, the Equipment account is credited for the existing carrying value.
61. When disposing of equipment, Accumulated Depreciation is debited for the existing accumulated
depreciation on the equipment.
62. When an asset lasts longer than its estimated useful life, depreciation no longer should be recorded
past the point at which its carrying value equals its residual value.
63. A $2,000 gain on the sale of an asset means that $2,000 in cash was received.
64. In calculating the depletion of a natural resource, its useful life in years is irrelevant.
65. Natural resources are classified as long-term assets on the balance sheet.
66. Under the successful efforts method, the costs of both successful and unsuccessful exploration for oil
and gas are recorded as assets.
67. An on-site building with a twelve-year life will be abandoned after the associated timber tract with a
nine-year life is depleted. The building should be depreciated over twelve years.
68. Drilling equipment with a five-year useful life is used solely in conjunction with an oil well that has an
eight-year life. The equipment should be depreciated over eight years.
69. Goodwill equals the excess paid for a business over the fair market value of the net assets purchased.
70. According to generally accepted accounting principles, most expenditures for intangible assets
acquired from others should be treated as revenue expenditures when incurred.
71. A patent has a legal life of 30 years.
72. The exclusive right to sell a computer program is called a copyright.
73. The exclusive right to use an identifying symbol is called a trademark.
74. Customer lists are classified as intangible assets.
75. Noncompete covenants should be amortized over the specified life of the contract.
76. If the fair value of goodwill is less than its carrying value, an impairment loss must be recorded.
77. Licenses are properly classified as intangible assets.
78. An intangible asset with a determinable useful life should be amortized over the legal life of the asset.
79. Estimated useful life and legal life are synonymous terms when dealing with intangible assets.
81. Research and development costs normally are capitalized and amortized over the estimated sales life of
the product developed.
82. The cost of developing computer software should be capitalized and amortized over the software’s
useful life after it has been proved technologically feasible.
83. When a company can prove it is worth more than its balance sheet indicates, it may record some
goodwill.
84. The cost to defend a patent successfully should be added to the acquisition cost of the patent.
MULTIPLE CHOICE
1. Which of the following is not a component of free cash flow?
a.
Sales of plant assets
b.
Gross profit
c.
Dividends
d.
Net cash flows from operating activities
2. Which of the following assets is not subject to depreciation, depletion, or amortization?
a.
Buildings
b.
Oil Fields
c.
Land
d.
Copyrights
3. The term used to describe the allocation of the cost of an intangible asset to the periods it benefits is
a.
depletion.
b.
apportionment.
c.
amortization.
d.
depreciation.
4. Which of the following is not classified properly as property, plant, and equipment?
a.
Land improvements, such as parking lots and fences
b.
Natural resources
c.
Land used in ordinary business operations
d.
A truck held for resale by an automobile dealership
5. The unexpired cost of a plant asset is referred to as its
a.
depreciable cost.
b.
carrying value.
c.
fair value.
d.
impairment value.
6. Which of the following is not a characteristic of all long-term assets?
a.
Possess physical substance
b.
Not for resale
c.
Used in operations of business
d.
Useful life of more than a year
7. Which of the following is not considered an intangible asset?
a.
Software
b.
Mines
c.
A franchise
d.
Goodwill
8. Which of the following is subject to depletion?
a.
A coal mine
b.
Plant machinery
c.
A copyright
d.
Land
9. Carrying value
a.
equals cost minus accumulated depreciation.
b.
equals cost minus residual value.
c.
is the expired cost of an asset.
d.
is the same as residual value.
10. The cost of a long-term asset is expensed
a.
in the period in which it is sold.
b.
in the period in which it is acquired.
c.
as the asset benefits the company.
d.
when it is paid for.
11. If net cash flows from operating activities total $208,000, purchases of plant assets total $60,000,
dividends total $24,000, and sales of plant assets total $34,000, the free cash flow equals
a.
$158,000.
b.
$326,000.
c.
$210,000.
d.
$90,000.
12. Which of the following would not be included in the cost of land?
a.
Grading the land
b.
Sewer assessment from local government
c.
Cost of making a driveway
d.
Commission to real estate agent
13. Which of the following would not be debited to the Machinery account?
a.
Installation costs
b.
Electricity used by the machine
c.
Freight charges
d.
Cost of trial runs
14. Interest costs are included in the cost of an asset in conjunction with
a.
long-term assets being purchased.
b.
long-term assets acquired for speculative purposes.
c.
long-term assets being constructed.
d.
natural resources and intangible assets.
15. The construction of a new wing on an existing building is best described as a(n)
a.
addition.
b.
ordinary repair.
c.
revenue expenditure.
d.
leasehold expenditure.
16. The Land account would include all of the following costs except
a.
lawyers’ fees.
b.
accrued taxes paid by the purchaser.
c.
the cost of building a fence.
d.
the cost of tearing down a building.
17. The Equipment account would include all of the following costs except
a.
buying expenses.
b.
maintenance costs.
c.
equipment test runs.
d.
excise taxes and tariffs.
18. The cost of tearing down a building on land just purchased should be
a.
debited to the Land account.
b.
debited to the Land Improvements account.
c.
debited to the Buildings account.
d.
expensed immediately.
19. A capital expenditure results in a debit to a(n)
a.
expense account.
b.
revenue account.
c.
asset account.
d.
stockholders’ equity account.
20. An expenditure for which of the following items would be considered a revenue expenditure?
a.
Plant assets
b.
Ordinary repair
c.
Addition
d.
Betterment
21. Which of the following is not a characteristic of an ordinary repair?
a.
An expense of the current period.
b.
Periodic in nature.
c.
Necessary to maintain the asset in good operational condition.
d.
Extends the useful life or increases the residual value of the asset.
22. Extraordinary repairs usually are recorded by making a debit to
a.
a capital account.
b.
Repair Expense.
c.
a contra-asset account.
d.
an asset account.
23. Which of the following would be considered a capital expenditure?
a.
A truck tune-up
b.
Machine maintenance
c.
Installation of a solar heating system
d.
Painting a room
24. Which of the following would be considered a revenue expenditure?
a.
Cleaning the ink from a printing press
b.
Addition of a storeroom
c.
Purchase of office furniture
d.
Installation of audiovisual equipment in a classroom
25. A revenue expenditure results in a
a.
debit to an expense account.
b.
credit to an expense account.
c.
debit to an asset account.
d.
credit to an asset account.
26. The Accumulated Depreciation account typically is debited when a(n)
a.
betterment has been made.
b.
ordinary repair has been made.
c.
extraordinary repair has been made.
d.
addition has been made.
27. Which of the following would be considered a revenue expenditure?
a.
Purchase of a microcomputer
b.
Installation of a heating system
c.
Addition of a building wing
d.
Replacement of a truck’s battery
28. Which of the following would be considered a capital expenditure?
a.
Cost to acquire a printing press
b.
Cost to lubricate a machine
c.
Cost to replace some light bulbs
d.
Cost to paint the factory wall
29. An expenditure to lengthen the useful life of a company vehicle would require a
a.
credit to Company Vehicles.
b.
debit to Vehicle Maintenance Expense.
c.
credit to Depreciation Expense.
d.
debit to Accumulated Depreciation.
30. Which of the following would not be considered a capital expenditure?
a.
The addition of a building wing
b.
A tune-up of a company vehicle
c.
A complete overhaul of an air-conditioning system
d.
The cost of installing a piece of equipment
31. In general, a cost incurred in conjunction with a long-term asset is included in the long-term asset
account when the cost
a.
is incurred subsequent to asset use.
b.
exceeds a certain dollar amount.
c.
is incurred prior to asset use.
d.
will expire in less than one year.
32. It is necessary to distinguish between capital and revenue expenditures because of which of the
following accounting rules or principles?
a.
Matching
b.
Conservatism
c.
Cost-benefit
d.
Consistency
33. The expensing of a long-lived asset such as a wastebasket is justified by which of the following
accounting rules or principles?
a.
Matching
b.
Materiality
c.
Cost-benefit
d.
Conservatism
34. Land and a building on the land are purchased for $1,296,000. The appraised values of the land and
building are $340,000 and $1,020,000, respectively. The cost allocated to the land should be
a.
$992,000.
b.
$324,000.
c.
$344,000.
d.
$972,000.
35. Land and a building on the land are purchased for $672,000. The appraised values of the land and
building are $120,000 and $600,000, respectively. The cost allocated to the building should be
a.
$56,000.
b.
$244,000.
c.
$300,000.
d.
$560,000.
36. A company purchases land and a building on the land. The land is appraised at $160,000 and the
building at $640,000. If the Land account is debited for $208,000, then the total purchase price for the
land and building must have been
a.
$800,000.
b.
$832,000.
c.
$1,040,000.
d.
$848,000.
37. If a capital expenditure is incorrectly recorded on a company’s books as a revenue expenditure, which
of the following statements will be true?
a.
Net income will be overstated for the year.
b.
Stockholders’ equity will be overstated at year end.
c.
Total assets will be understated at year end.
d.
Net income in the following year will be understated.
38. If a revenue expenditure is incorrectly recorded on a company’s books as a capital expenditure, which
of the following statements will be true?
a.
Stockholders’ equity will be understated at year end.
b.
Net income in the following year will be unaffected.
c.
Total assets will be understated at year end.
d.
Net income will be overstated for the year.
39. Which of the following most appropriately describes depreciation?
a.
Decline in value of plant asset
b.
Allocation of cost of plant asset
c.
Physical deterioration of plant asset
d.
Gradual obsolescence of plant asset
40. All of the following are needed for the computation of depreciation except
a.
residual value.
b.
estimated useful life.
c.
cost.
d.
current market value.
41. The depreciable cost of an asset is
a.
the unexpired cost of the asset.
b.
original cost minus residual value.
c.
the expired cost of the asset.
d.
original cost minus accumulated depreciation.
42. Salvage value is not the same as
a.
carrying value.
b.
residual value.
c.
disposal value.
d.
scrap value.
43. Which of the following methods ignores residual value initially but eventually considers it in the
calculation of depreciation?
a.
Straight-line
b.
Double-declining-balance
c.
Group
d.
Production
44. Which of the following would not be a basis for estimating the useful life of a piece of equipment?
a.
Potential production in units
b.
Potential miles of service
c.
Salvage value
d.
Years of service
45. Which of the following depreciation methods is the most logical for a machine that produces discrete
(i.e., separate) units?
a.
Double-declining-balance
b.
Straight-line
c.
Group
d.
Production
46. All of the following are possible reasons for using accelerated depreciation except
a.
greater efficiency of assets when new.
b.
increasing repair costs in later years.
c.
rapid changes in technology.
d.
increasing use of an asset over the years.
47. Which of the following accounting principles best justifies accelerated depreciation accounting?
a.
Materiality
b.
Matching
c.
Cost-benefit
d.
Conservatism
48. A graph depicting yearly depreciation expense under an accelerated depreciation method will contain a
line that goes
a.
vertically straight down.