Chapter 08 Reporting and Interpreting Property, Plant, and Equipment;
Intangibles; and Natural Resources Answer Key
True / False Questions
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.
Topic Area: Classifying long-lived 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, 2016, equipment was purchased for $80,000; the equipment’s estimated
residual value is $15,000, and its estimated useful life is 10 years. For 2016, the depreciation
expense under the double-declining balance method is $13,000.
16.
On January 1, 2016, 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, 2016, 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.
Research and development costs are capitalized under GAAP 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.
Multiple Choice Questions
32.
Which of the following would not be classified as property, plant and equipment on a balance
sheet?
33.
Which of the following accounts would not be considered a tangible asset?
34.
Which of the following accounts would not be considered an intangible asset?
35.
Which of the following transactions would not increase the fixed asset turnover ratio?
turnover ratio.
Topic Area: Ratio analysis-Fixed asset turnover
36.
Which of the following includes only tangible assets?
37.
Which of the following includes only intangible assets?
38.
Which of the following statements regarding the fixed asset turnover ratio is incorrect?
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?