Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
Farley River Inc.
Use the information presented below for Farley River, Inc. for 2015 and 2014 to answer the questions that follow.
Farley River uses the straight-line depreciation method.
2015
2014
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
Average Total assets
625,000
475,000
93. Refer to the information for Farley River Inc.
Using the 2015 data, what is the average age of Farley River’s property, plant, and equipment?
a. 1.60 years
b. 2.50 years
c. 4.00 years
d. 10.00 years
94. Refer to the information for Farley River, Inc.
What is the asset turnover ratio for Farley River for 2015?
a. 1.60 times
b. 1.82 times
c. 4.00 times
d. 4.55 times
95. Refer to the information for Farley River, Inc.
Between 2014 and 2015, Farley River sold some equipment that had an original cost of $57,500. Which statement is
most likely true concerning transactions that must have occurred during the period?
a. Farley River also purchased additional equipment during the year.
b. The selling price of the equipment sold was reported with net sales.
c. The equipment that was sold had a book value of $12,500.
d. The equipment sold had not been reported with Farley River’s property, plant and equipment.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
96. Refer to the information for Farley River, Inc.
Using the 2015 data, what is the average life of Farley River’s property, plant, and equipment (rounded to one
decimal place)?
a. 1.6 years
b. 2.5 years
c. 4.0 years
d. 10.0 years
97. If a company’s asset turnover ratio decreased from 2014 to 2015, which of the following conclusions can be made?
a. The company was more efficient during 2015 in using its assets to produce profits.
b. The company produced less sales in 2015 for each dollar invested in assets.
c. The company was less profitable in 2014.
d. The company’s average total assets decreased for relatively stable sales in 2014 and 2015.
98. The Property, Plant, and Equipment category includes long-term investments.
a. True
b. False
99. On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the
plant asset.
a. True
b. False
100. All operating assets, except land, are subject to depreciation, amortization, or depletion.
a. True
b. False
101. Lenders are interested in the value of operating assets as collateral when making lending decisions.
a. True
b. False
102. A company uses the same depreciation method as other firms in the same industry. Because of this, investors will
have enhanced comparability of the financial reporting results.
a. True
b. False
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
103. When plant assets are purchased in a group, each asset increases the respective plant asset account for its fair
market value at the time of acquisition.
a. True
b. False
104. Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over
its useful life.
a. True
b. False
105. Acquisition costs are also known as replacement costs.
a. True
b. False
106. Acquisition cost should not include expenditures unrelated to the acquisition, like repair costs for damages incurred
during installation, or costs incurred after the asset was installed and use begun.
a. True
b. False
107. When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the
market values of the two assets.
a. True
b. False
108. Interest is capitalized on all purchased assets.
a. True
b. False
109. Capitalizing interest increases the recorded cost of a plant asset.
a. True
b. False
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
110. Fortune Company has 10 delivery trucks that became fully depreciated in the prior year. Fortune will continue
charging the same amount of depreciation as before so that there will be no decrease in expenses.
a. True
b. False
111. Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.
a. True
b. False
112. When plant assets are reported, the current period’s depreciation expense is subtracted from the original cost on the
balance sheet.
a. True
b. False
113. If a company is concerned about minimizing its income tax burden, it would use the straight-line
depreciation method to accomplish this objective.
a. True
b. False
114. Depreciation has no effect on income taxes, since it only reduces a plant asset’s book value.
a. True
b. False
115. One reason management may choose the straight-line method of depreciation is because it is easy to compute.
a. True
b. False
116. Depreciation does not describe the increase or decrease in the market value of the asset.
a. True
b. False
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
117. A change in estimate of an asset’s residual value involves restating the income statements of past periods for the
estimate change.
a. True
b. False
118. Garner, Inc. determined that it had incorrectly estimated both the estimated life and the estimated residual value of
equipment that it purchased two years ago. When Garner accounts for the change in accounting estimates, it must
depreciate the remaining book value of the asset over the current and future accounting periods.
a. True
b. False
119. 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.
a. True
b. False
120. Costs incurred to keep assets in normal operating condition are called revenue expenditures.
a. True
b. False
121. If a company chooses to treat small plant asset expenditures as expenses, GAAP are being violated.
a. True
b. False
122. A revenue expenditure is deducted from the cost of the asset.
a. True
b. False
123. Because plant and equipment are reported as long-term assets on the balance sheet, they have no impact on net
income for the period until they are sold.
a. True
b. False
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
124. The Loss on Sale of Asset indicates the amount by which the asset’s sales price is less than its book value.
a. True
b. False
125. When Carson Real Estate Company sells equipment for a loss, the Loss on Sale of Asset is treated as accumulated
depreciation.
a. True
b. False
126. Plant assets, current assets, property, plant and equipment, and fixed assets are all tangible assets.
a. True
b. False
127. Research and development costs should be presented as intangible assets.
a. True
b. False
128. In general, FASB standards concerning property, plant, and equipment are similar to the international accounting
standards, with two important differences.
a. True
b. False
129. The FASB standards do not have a specific rule that requires residual value and asset life to be reviewed annually
for property, plant, and equipment.
a. True
b. False
130. International accounting standards require companies to revalue their property, plant, and equipment to reflect fair
market values.
a. True
b. False
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
131. Flexibility in valuation of property, plant, and equipment under IFRS may cause problems with comparability of
one company with another.
a. True
b. False
132. All intangible assets should be amortized.
a. True
b. False
133. Net income on a cash basis is arrived at by adding depreciation and amortization back to accrual net income.
a. True
b. False
134. Asset turnover is calculated as Net income divided by Average Total Assets.
a. True
b. False
135. Please complete the following sentences:
a. Accumulated amortization is used with ______________________________________.
b. Accumulated depreciation is used with ______________________________________.
136. Acquisition cost is also referred to as: .
137. Land is not a depreciable asset, but the amount allocated to the building is subject to .
138. Interest included as part of the acquisition cost of the asset is referred to as of interest.
139. The three reasons why a company might choose an accelerated depreciation method are
__________________________________________________,
__________________________________________________, and
__________________________________________________.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
Please answer the following questions regarding depreciation:
140. depreciation is the GAAP depreciation method used most frequently.
141. depreciation is the GAAP depreciation method considered to be “accelerated”
in nature.
142. 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 ______________________________.
143. A change in estimate should be recorded .
For each of the following sentences 144–147, select the word or group of words that best completes the statement.
Patent Copyright
Goodwill Revenue expenditure
Natural resources Research and development costs
Trademark Capital expenditure
144. is (are) the expenditure(s) incurred in the discovery of new
knowledge and the translation of research into a design or plan for a new product.
145. is(are) a cost(s) that improves an operating asset and is (are) added to the
asset account.
146. is (are) the right to produce or sell a published work.
147. is an account that 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.
148. With respect to operating assets, the two different transactions that would appear in the investing activities category
of the statement of cash flows are __________________________________ and
__________________________________.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
149. Given the following list of methods of depreciation, select the method that is best for the situation or purpose
given. (Select all that apply.)
This method is used in situations where technological advances are rapid.
a. Straight-line
b. Units-of-production
c. Double-declining-balance
d. MACRS
150. Depreciation expense
a. Balance Sheet—Property, Plant, and Equipment
b. Balance Sheet—Intangible Assets
c. Balance Sheet—Current Assets
d. Balance Sheet—Other Assets
e. Income Statement—Operating Section
f. Income Statement—Other Revenue and Expense Section
g. Statement of Cash Flows
151. Gain on sale of plant asset
a. Balance Sheet—Property, Plant, and Equipment
b. Balance Sheet—Intangible Assets
c. Balance Sheet—Current Assets
d. Balance Sheet—Other Assets
e. Income Statement—Operating Section
f. Income Statement—Other Revenue and Expense Section
g. Statement of Cash Flows
152. Cash received from the sale of a plant asset
a. Balance Sheet—Property, Plant, and Equipment
b. Balance Sheet—Intangible Assets
c. Balance Sheet—Current Assets
d. Balance Sheet—Other Assets
e. Income Statement—Operating Section
f. Income Statement—Other Revenue and Expense Section
g. Statement of Cash Flows
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
153. Loss on sale of patent
a. Balance Sheet—Property, Plant, and Equipment
b. Balance Sheet—Intangible Assets
c. Balance Sheet—Current Assets
d. Balance Sheet—Other Assets
e. Income Statement—Operating Section
f. Income Statement—Other Revenue and Expense Section
g. Statement of Cash Flows
Select the financial statement on which the user would most likely find the answer to the question given. (Select all
that apply.)
154. How much depreciation expense did the company report during the year?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of retained earnings
155. Did the company sell any property, plant, and equipment during the year at a gain or loss?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of retained earnings
156. Did the company purchase any intangible assets during the year?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of retained earnings
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
157. Captain Lewis, Inc. purchased equipment at the beginning of 2014 for $60,000. In addition, Captain Lewis’ paid
$2,000 for delivery of the equipment to its plant and $1,000 for installation of the equipment. The equipment has an
estimated residual value of $7,000 and an estimated life of 7 years or 70,000 hours of operation. Captain Lewis’ is
looking at alternative depreciation methods for the equipment. Calculate the following:
A. The depreciation expense for the year 2014 using the straight-line depreciation method.
B. The total accumulated depreciation at December 31, 2015, using the units-of-production
depreciation method. Assume that the equipment is operated for 15,000 hours in 2014 and
12,000 hours in 2015.
C. The book value of the equipment at December 31, 2014, using the double-declining-balance
depreciation method.
D. Which of the above methods is considered accelerated?
E. What are the advantages of using an accelerated depreciation method as compared to the
straight-line method for lowering taxes early in the life of the equipment?
158. Gommert Co. purchased land and a building for $425,000. The appraised values of the land and the building were
$150,000 and $450,000, respectively. In addition, the attorney was paid $10,000 for handling the closing on the
property.
A. What amounts will be recorded as the costs of the land and building?
B. What is the accounting justification against increasing the land and building accounts for their
appraised values?
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
159. Florence, Inc. purchased equipment at the beginning of 2014 for $140,000. The company decided to depreciate the
equipment over a 10-year period using the double-declining-balance method. The company estimated the
equipment’s salvage value at $12,000. Show how the costs should be presented on Florence’s financial statements
at December 31, 2015. Label the statements properly.
160. Tasty Catering purchased a van on January 1, 2014 for $48,000. The company decided to depreciate the van over a
5-year period using the straight-line method. The company estimated its residual value at $3,000. Show how the
costs should be presented on Tasty’s balance sheet and income statement for the full year ended June 30, 2016.
Label the statements properly.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
161. Fulsom Co. began construction of a new factory at the beginning of 2015. At the end of the year, construction was
completed, and construction costs totaled $200,000. Fulsom borrowed $180,000 at the beginning of 2015 to
finance the construction and repaid the loan at the end of 2015. The interest rate on the loan was 9%. Determine
the following amounts.
A. The actual interest incurred on the construction loan during 2015.
B. The interest to be capitalized for 2015.
C. The total cost of the factory reported on the balance sheet.
D. What impact does capitalizing interest have on net income for 2015? Explain.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
162. Given below are several accounts and balances from Carrier Corporation’s 2015 financial statements. Prepare the
Property, Plant, and Equipment section of the balance sheet and a partial income statement in the space provided
below using the accounts provided.
Depreciation expense
$ 59,800
Accumulated depreciation
257,400
Gain on sale of plant asset
19,500
Building
585,000
Land
120,000
Cash received from sale of plant asset
52,000
BALANCE SHEET
INCOME STATEMENT
Land
$120,000
Building
585,000
$705,000
Less: Accumulated depreciation
(257,400)
Net property, plant, and equipment
$447,600
Operating expenses:
Depreciation expense
Other income and expenses:
Gain on sale of plant asset
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
163. On January 1, 2014, Humansville Company purchased a piece of equipment with a list price of $80,000. The
following amounts were related to the equipment purchase:
• Terms of the purchase were 2/10, net 30. Humansville paid for the purchase on January 8.
• Freight costs of $1,250 were incurred.
• A state agency required that a pollution control device be installed on the equipment at a cost of $3,300.
• During installation, the equipment was damaged and repair costs of $4,200 were incurred.
• Architect’s fees of $6,100 were paid to redesign the work space to accommodate the new equipment.
• Humansville purchased liability insurance to cover possible damage to the asset. The three-year policy cost
$8,700.
• Humansville financed the purchase with a bank loan. Interest of $4,600 was paid on the loan during 2014.
REQUIRED:
Determine the acquisition cost of the equipment.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
164. On January 1, 2014, Aaron Simpson bought a farm store of a small competitor for $620,000. An appraiser, hired to
assess the acquired assets’ value, determined that the land, building, and equipment had market values of $300,000,
$215,000, and $270,000, respectively.
REQUIRED:
1. What is the acquisition cost of each asset? Prepare a journal entry to record the acquisition (rounded to the
nearest dollar).
2. Simpson plans to depreciate the building on a straight-line basis for 30 years and the equipment over 16 years.
Determine the amount of depreciation expense for 2014 on these newly acquired assets (rounded to the nearest
dollar). You can assume zero residual value for all assets.
3. How would the assets appear on the balance sheet as of December 31, 2014?
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
165. A company begins construction of an asset on January 1, 2014, and completes construction on December 1, 2014.
The company pays the following amounts related to construction:
January 1: $1,000,000
July 1: $2,000,000
October 1: $1,000,000
Calculate the average accumulated expenditures for the purpose of capitalizing interest.
166. Boston Corp. purchased equipment with a cost of $70,000 at the beginning of 2015. The equipment has an
estimated life of 25 years or 25,000 units of product. The estimated residual value is $7,500. During 2015,
1,100 units of product were produced with this machinery. Determine the following:
A. Amount of total accumulated depreciation at December 31, 2015, using units-of-production depreciation
B. Book value at the end of 2015 using straight-line depreciation
C. Why would the company choose units-of-production depreciation instead of straight-line?
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
167. Why do many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for tax
purposes?
If a company uses MACRS for depreciation for tax purposes, can it use a different method for financial reporting?
Explain why or why not.
168. Daytona Beach Company purchased a car for a salesman for $23,500 at the beginning of 2015. The car had an
estimated life of 5 years, and an estimated residual value of $3,500. Daytona Beach used the straight-line
depreciation method. At the beginning of 2016, Daytona Beach incurred $2,500 to replace the car’s transmission.
This resulted in a 2-year extension of the car’s useful life, but no change in the residual value.
A. What type of cost is the $2,500? Explain.
B. Calculate the book value of the car at the end of 2015.
C. Find the depreciation expense on the car for 2016.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
169. Moore, Inc. purchased slot machines at the beginning of 2015 for $20,000. The machines have an estimated
residual value of $2,000 and an estimated life of 5 years or 20,000 hours of operation. Moore is looking at
alternative depreciation methods for the equipment. Calculate the following:
A. Accumulated depreciation at December 31, 2016, using the straight-line depreciation method.
B. Depreciation expense for 2015 using the units-of-production depreciation method. Assume that the
machines are operated for 5,000 hours in 2015 and 2,000 hours in 2016.
C. Book value of the equipment at December 31, 2016, using the double-declining-balance depreciation
method.
D. What are the advantages of using straight-line depreciation for financial reporting purposes?
170. Dayton Ridge Co. purchased new trucks at the beginning of 2015 for $600,000. The trucks had an estimated life of
4 years and an estimated residual value of $50,000. Dayton Ridge uses straight-line depreciation. At the beginning
of 2016, Dayton Ridge sold the trucks for $480,000 and purchased new trucks for $700,000. Determine the
following amounts:
A. Book value of the trucks at the end of 2015.
B. Gain (loss) on the sale of the trucks at the beginning of 2016 (Indicate the amount and
whether a gain or loss).
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
171. Foxrun, Inc. purchased a truck at the beginning of 2015 for $32,500. Foxrun decided to depreciate the truck over an
8-year period using the straight-line method, and estimated its residual value to be $4,500. At the beginning of
2016, Foxrun determined that a 5-year life should have been used to depreciate the truck. The estimated residual
value was not affected by the revision in the asset’s life.
A. Determine the amounts to be recorded as depreciation expense for 2015 and 2016.
B. What factors may have influenced Foxrun to change the useful life?
172. Craig Inc. purchased a truck on January 1, 2015 for $40,000. The truck had an estimated life of six years and an
estimated salvage value of $4,000. Craig uses the straight-line method to depreciate the asset. On July 1, 2017, the
truck was sold for $14,000 cash.
A. Determine the effect on the accounting equation upon recording the depreciation for 2015.
B. Show how the gain or loss on the sale of the asset would be reported on Craig Inc.’s income statement.