Chapter 7—Operating Assets Key
1. If new equipment purchased in 2012 is reported on the balance sheet at December 31, 2012 as a long-term
asset, there will be no related item on the 2012 income statement.
2. All intangible assets are subject to amortization.
3. A company determined that it had incorrectly estimated the useful life of equipment that it had purchased two
years ago. It must now depreciate the asset’s remaining book value over the current and future accounting
periods.
4. Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost
increases the useful life or the asset’s productivity.
5. Costs incurred to keep plant assets in normal operating condition are called revenue expenditures.
6. If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation
method to accomplish this objective.
7. Double-declining-balance depreciation is most commonly used by businesses for financial reporting
purposes.
8. When making lending decisions, lenders generally are not interested in the company’s operating assets.
9. When plant assets are reported, the current period’s depreciation expense is subtracted from the original cost
on the balance sheet.
10. Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset
over its useful life.
11. On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of
the plant asset.
12. Depreciation has an effect on the company’s income taxes.
13. One reason management may choose the straight-line method of depreciation is because it is easy to
compute.
14. If a company uses the same depreciation method as other firms in the same industry, investors will have
enhanced comparability of the financial reporting results.
15. When plant assets are purchased in a group, each asset is debited to the respective plant asset account for its
fair market value at the time of acquisition.
16. Plant assets, current assets, property, plant and equipment, and fixed assets are all tangible assets.
17. FASB allows companies to use different depreciation methods so they can capture declining service
potential of an operating asset.
18. The reason some major intangible assets are not in the financial statements is because they cannot be
measured.
19. Research and Development costs should be added to the cost of patents.
20. An impairment is a temporary decline in the future benefit or service potential of an asset.
21. Natural resources can be replaced or restored only by an act of nature.
22. The more efficiently a company uses its fixed assets the lower will be the fixed asset turnover ratio.
23. To revise depreciation expense, the accountant should compute depreciation expense using the asset’s
remaining book value and useful life and its new residual value.
24. An expenditure that does not increase the future economic benefits of the asset is referred to as a capital
expenditure.
25. A ____________________ is a cost that improves an operating asset and is therefore added to the asset
account.
26. The two items that must be estimated with respect to a plant asset in order to properly allocate cost to the
affected accounting periods are ____________________ and ____________________.
27. The ______________ depreciation method is the GAAP depreciation method used most frequently.
28. Two reasons why a company might choose an accelerated depreciation method are _______________, and
______________.
29. An accumulated ________ account is used when writing off natural resources.
30. ____________ costs are expenditures incurred in the discovery of new knowledge and the translation of
research into a design or plan for a new product.
31. A contra account called ____________________ is used to depreciate property, plant, and equipment.
32.
The ________________ method of depreciation method is referred to as an “accelerated” method.
33. The intangible asset called ____________________ can only exist if one company purchases another
business and the cost exceeds the fair market values of the identifiable net assets at the time acquired.
34. A _________________ is the right to produce or sell a published work.
35. Match these terms with their correct definition.
4. Situation where an asset is lost or destroyed through theft, acts of nature,
5. The process of allocating the cost of a natural resource to each period in
7. The process of allocating the cost of a tangible fixed asset to expense
Involuntary
8. The amount of cash or trade-in consideration that is expected when an
36. Match these terms with their correct definition.
1. Occurs when a company determines that an asset is no longer
Intangible operating
4. Exclusive right to conduct a certain type of business in some
6. Represent future economic benefit to the company but they lack
Property, plant, and
7. Tangible operating assets used in the normal operations of a
8. Include costs such as legal fees, stock issue costs, accounting and
37. Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to
building. Normally the company depreciates buildings over 40 years using the straight-line method with zero
residual value and does not depreciate land. Because of the improper accounting treatment of the purchase, the
company’s income for the next 20 years will be
38. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. Based on the information presented above, what method of depreciation will
maximize depreciation expense in 2012?
39. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. Based on the information presented above, what method of depreciation will
maximize depreciation expense in 2013?
40. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. What amount will be reported as depreciation expense over the 5-year life of the
equipment?
41. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. If the company uses the straight-line method of depreciation, what is the book
value at December 31, 2014?
42. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. If the company uses the units-of-production method, what is the depreciation rate
per hour for the equipment?
43. Fabian Woodworks
This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and
an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and
was used 27,000 hours in 2012 and 26,000 hours in 2013.
Refer to Fabian Woodworks. If the company uses the double-declining-balance depreciation method, what
amount is the depreciation expense for 2013?
44. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a
balance sheet?
45. On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an
account called
46. Operating assets with no physical properties are called
47. The accounting life of intangible assets is determined by
48. How should intangible assets be disclosed on the balance sheet?
49. Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and
zero residual value. The CEO points out that the equipment will last much shorter than 10 years, perhaps 5
years. What is the impact on earnings per share and net income of depreciating equipment over 5 years rather
than 10 years?
50. Floors 4 U uses straight-line depreciation for its equipment. The company purchased equipment for
$250,000 and estimated its useful life at 8 years. The bookkeeper failed to consider the residual value of
$25,000. What is the impact on earnings per share and operating income of failing to consider the residual
value?
51. A company purchased land and incurred the following costs:
Purchase Price
$500,000
Excavation Costs
50,000
Razing Old Building
12,500
Broker Fees
10,000
Cost of a Parking Lot
25,000
What is the cost of the land?
52. Which of the following costs related to the purchase of production equipment would be considered a
revenue expenditure?
53. Falling Leaves Lawn Care
This company purchased new excavating equipment at the beginning of 2012. The equipment has a cost of
$37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year’s depreciation
expense is to be recorded in 2012. The equipment was used 20,000 hours during 2012 and 24,000 hours during
2013. The number of expected hours over five years is 100,000.
Refer to Falling Leaves Lawn Care. The company is comparing the straight-line and double-declining-balance
depreciation methods. Of these two methods, which method creates the larger expense and larger tax savings in
2012?
54. Falling Leaves Lawn Care
This company purchased new excavating equipment at the beginning of 2012. The equipment has a cost of
$37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year’s depreciation
expense is to be recorded in 2012. The equipment was used 20,000 hours during 2012 and 24,000 hours during
2013. The number of expected hours over five years is 100,000.
Refer to Falling Leaves Lawn Care. By what amount would double-declining-balance depreciation exceed
straight-line depreciation over the 5-year life of the equipment?
55. Falling Leaves Lawn Care
This company purchased new excavating equipment at the beginning of 2012. The equipment has a cost of
$37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year’s depreciation
expense is to be recorded in 2012. The equipment was used 20,000 hours during 2012 and 24,000 hours during
2013. The number of expected hours over five years is 100,000.
Refer to Falling Leaves Lawn Care. What is the amount by which double-declining-balance depreciation
exceeds straight-line depreciation over the 5-year life of the equipment?
56. Falling Leaves Lawn Care
This company purchased new excavating equipment at the beginning of 2012. The equipment has a cost of
$37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year’s depreciation
expense is to be recorded in 2012. The equipment was used 20,000 hours during 2012 and 24,000 hours during
2013. The number of expected hours over five years is 100,000.
Refer to Falling Leaves Lawn Care. The company wants to use the depreciation method that will result in the
highest depreciation expense for 2012. Which method should be used?
57. On January 1, 2012, a company sold a machine for $5,000 that it had used for several years. The machine
cost $11,000, and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported
on the income statement for the sale of the machine?
58. A company purchased a patent for $100,000 at the beginning of 2012 which it believes has an expected
useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense
should be recorded in 2012?
59. Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as
goodwill, should
60. Generally accepted accounting principles (GAAP) require that research and development costs to develop a
new product be
61. Goodwill can be recorded as an asset when a(n)
62. The following costs were incurred to acquire and prepare land for a new parking lot: purchase price for land,
cost to clear the land, cost of paving, cost of lighting for the parking lot, and cost of landscaping for the parking
lot. How should the company determine which costs should be recorded as Land Improvements and which costs
should be recorded as Land?
63. The following costs were incurred to acquire and prepare land for a new parking lot: purchase price of land,
$900,000; cost to clear the land, $40,000; cost of paving, $35,000; and cost of lighting for the parking lot,
$20,000. How much should be recorded in the Land Improvements account?
64. Depreciation is a process by which
65. Fireworks City
Information for 2012 and 2011 is presented below for this company which uses the straight-line depreciation
method.
2012
2011
Property, plant and equipment
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Net sales
1,000,000
900,000
Total assets
625,000
475,000
Refer to Fireworks City. Using the data for 2012, determine the average life of the company’s property, plant, and equipment rounded to one
decimal place.
66. Fireworks City
Information for 2012 and 2011 is presented below for this company which uses the straight-line depreciation
method.
2012
2011
Property, plant and equipment
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Net sales
1,000,000
900,000
Total assets
625,000
475,000
Refer to Fireworks City. Using the data for 2012, determine the average age of the company’s property, plant, and equipment.
67. Fireworks City
Information for 2012 and 2011 is presented below for this company which uses the straight-line depreciation
method.
2012
2011
Property, plant and equipment
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Net sales
1,000,000
900,000
Total assets
625,000
475,000
Refer to Fireworks City. Determine the asset turnover ratio for 2012.
68. Fireworks City
Information for 2012 and 2011 is presented below for this company which uses the straight-line depreciation
method.
2012
2011
Property, plant and equipment
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Net sales
1,000,000
900,000
Total assets
625,000
475,000
Refer to Fireworks City. During the year, the company sold some equipment that had an original cost of $60,000. Which statement is true
concerning transactions that must have occurred during the period?
69. On January 1, 2012, a company sold a piece of equipment for $30,000 which it had used for several years.
The equipment had cost $45,000, and its accumulated depreciation amounted to $20,000 at the time of the sale.
What are the net effects on the accounting equation of selling the equipment?
70. If a company’s asset turnover ratio decreased from 2011 to 2012, which of the following conclusions can be
made?
71. Which of the following factors is not related to the decline in the usefulness of plant and equipment assets,
and therefore does not need to be considered in selecting an appropriate depreciation method?
72. Which of the following sets of factors is needed to calculate depreciation on plant and equipment?
73. Fernbank Farms
This company purchased a semi truck at the beginning of 2011 at a cost of $100,000. The truck had an
estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line
method. On January 1, 2013, the company made major repairs of $30,000 to the truck that extended the life 3
years. Thus, starting with 2013, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. What is the truck’s book value at December 31, 2013?
74. Fernbank Farms
This company purchased a semi truck at the beginning of 2011 at a cost of $100,000. The truck had an
estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line
method. On January 1, 2013, the company made major repairs of $30,000 to the truck that extended the life 3
years. Thus, starting with 2013, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. What amount should be recorded as depreciation expense each year starting in
2013?
75. Fernbank Farms
This company purchased a semi truck at the beginning of 2011 at a cost of $100,000. The truck had an
estimated life of 5 years, an estimated residual value of $20,000, and will be depreciated using the straight-line
method. On January 1, 2013, the company made major repairs of $30,000 to the truck that extended the life 3
years. Thus, starting with 2013, the truck has a remaining life of 5 years and a new salvage value of $8,000.
Refer to Fernbank Farms. When calculating depreciation for 2013, the company’s accountant should
76. A company uses plant assets that are subject to rapid decreases in value due to obsolescence and physical
deterioration. Which of the following depreciation methods is most appropriate to measure the decline in the
usefulness of this company’s assets?
77. Flying High Air acquires a new aircraft. It has an estimated life of 10 years and should last for at least
20,000 hours of flight. What is the most appropriate method of depreciation to properly match revenues and
expenses?
78. Land is not depreciated because it
79. Which statement is true concerning operating assets?
80. Research and development costs are
81. Assets classified as property, plant, and equipment are reported at
82. Depreciation is
83. A company should choose a depreciation method that
84. If technology changes rapidly, a firm should
85. Capitalizing an expenditure rather than recording it as a revenue expenditure
86. A company purchased equipment at the beginning of 2012 for $21,000 and decided to depreciate it over a 5-
year period using the straight-line method. The equipment’s residual value was estimated at $1,000. The
estimated fair market value at the end of 2012 was $20,000. Which of the following statements is correct at
December 31, 2012?
87. Equipment purchased at the beginning of 2012 for $200,000 with residual value of $20,000 is being
depreciated over a 5-year period using the double-declining-balance method. Which of the following statements
is correct concerning the financial statements at December 31, 2012?
88. Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for
89. Using different depreciation methods for book purposes versus tax purposes for the same asset is
90. Equipment with a residual value of $50,000 at the end of 10 years was acquired at the beginning of 2011 for
$500,000. Assuming the use of the straight-line depreciation method, the journal entry to record depreciation
expense for 2012 will have a debit to
91. On January 1, 2012, a machine with an estimated life of 5 years and an estimated residual value of $5,000
was acquired for $40,000. On July 1, 2014, the machine was sold for $7,000 cash. The journal entry to record
the sale
92. Focal Point Engineering purchased a trademark at the beginning of 2012 for $200,000. Although the
trademark’s legal life is 20 years, economic benefits were expected for only 10 years. Also, during 2012, the
company incurred research and development costs of $200,000. The book value of the trademarks at December
31, 2012, is
93. For Heaven Scapes purchased a trademark at the beginning of 2012 for $200,000. The trademark’s legal life
is 10 years. How much total amortization expense would have been recorded by January 2013?
94. The effect of recording depreciation for the year is a(n)
95. Plant assets are depreciated because
96. Fresh n’ Fit Cuisine purchased land and a building for $320,000 so that it could open a new restaurant. The
building’s fair market value at the time of purchase was $220,000. In addition, the following costs were
incurred prior to the restaurant’s opening:
Transfer taxes
$10,000
Interest incurred on the mortgage loan taken out to make the purchase
4,000
Attorney and real estate agent’s fees
15,000
Repave the parking lot
6,000
How much will be recorded as land improvements?
97. In 2012, Fisher Apartments purchased an apartment building to rent to university students. It cost the
company $250 to repair damage done by a tenant to one of its units. How should this cost be recorded?