Chapter 9 1 Explain How Account For The Disposal Plant

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
FOR INSTRUCTOR USE ONLY
CHAPTER 9
REPORTING AND ANALYZING LONG-LIVED ASSETS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXOMONY
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-2
Brief Exercises
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* This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
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Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-3
Learning Objective 2
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Learning Objective 3
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Learning Objective 4
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-4
Learning Objective 5
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Learning Objective 6
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Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Explain the accounting for plant asset expenditures. The cost of plant assets includes all
expenditures necessary to acquire the asset and make it ready for its intended use. Once
cost is established, a company uses that amount as the basis of accounting for the plant
asset over its useful life.
2. Apply depreciation methods to plant assets. Depreciation is the process of allocating to
expense the cost of a plant asset over its useful (service) life in a rational and systematic
manner. Depreciation is not a process of valuation, and it is not a process that results in an
accumulation of cash. Depreciation reflects an asset’s decreasing usefulness and revenue-
producing ability, resulting from wear and tear and from obsolescence.
The formula for straight-line depreciation is:
Cost Salvage value
Useful life (in years)
The expense patterns of the three depreciation methods are as follows:
Method Annual Depreciation Pattern
Straight-line Constant amount
Declining-balance Decreasing amount
Units-of-activity Varying amount
Companies make revisions of periodic depreciation in present and future periods, not
retroactively.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-5
3. Explain how to account for the disposal of plant assets. The procedure for accounting for
the disposal of a plant asset through sale or retirement is (a) eliminate the book value of the
plant asset at the date of disposal; (b) record cash proceeds, if any; and. (c) account for the
difference between the book value and the cash proceeds as a gain or a loss on disposal.
4. Identify the basic issues related to reporting intangible assets. Companies report
intangible assets at their cost less any amounts amortized. If an intangible asset has a limited
life, its cost should be allocated (amortized) over its useful life. Intangible assets with
indefinite lives should not be amortized.
5. Discuss how long-lived assets are reported and analyzed. Companies usually show plant
assets under “Property, plant, and equipment”; they show intangibles separately under
“Intangible assets”. Either within the balance sheet or in the notes, companies disclose the
balances of the major classes of assets, such as land, buildings, and equipment, and
accumulated depreciation by major classes or in total. They describe the depreciation and
amortization methods used, and disclose the amount of depreciation and amortization
expense for the period. In the statement of cash flows, depreciation and amortization expense
are added back to net income to determine net cash provided by operating activities. The
investing section reports cash paid or received to purchase or sell property, plant, and
equipment.
Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio.
The return on assets ratio consists of two components: the asset turnover ratio and the profit
margin ratio.
*6. Compute periodic depreciation using the declining-balance method and the units-of-
activity method. The depreciation expense calculation for each of these methods is:
Declining balance: =
Book value at beginning
of year
X
Declining-
balance rate
=
Depreciation
Expense
Units-of-activity: =
Depreciation cost per
unit
X
Units of activity
during year
=
Depreciation
Expense
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-6
TRUE-FALSE STATEMENTS
1. All plant assets (fixed assets) must be depreciated for accounting purposes.
2. When purchasing land, the costs for clearing, draining, filling, and grading should be
charged to a Land Improvements account.
3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be
charged to Equipment.
4. Land improvements are generally charged to the Land account.
5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset
unless the asset appreciates in value, in which case, market value becomes the basis for
accountability.
6. Under an operating lease, both the leased asset and the liability are shown on the balance
sheet.
7. Certain types of leases, called capital leases, allow the lessee to account for the
transaction as a rental.
8. The book value of a plant asset is always equal to its fair market value.
9. Recording depreciation on plant assets affects the balance sheet and the income
statement.
10. The depreciable cost of a plant asset is its original cost minus obsolescence.
11. Recording depreciation each period is an application of the matching principle.
12. The Accumulated Depreciation account represents a cash fund available to replace plant
assets.
Reporting and Analyzing Long-Lived Assets
9-7
13. In calculating depreciation, both plant asset cost and useful life are based on estimates.
14. The declining-balance method of depreciation is called an accelerated depreciation
method because it depreciates an asset in a shorter period of time than the asset's useful
life.
15. Using the units-of-activity method of depreciating factory equipment will generally result in
more depreciation expense being recorded over the life of the asset than if the straight-
line method had been used.
16. The IRS does not require the taxpayer to use the same depreciation method on the tax
return that is used in preparing financial statements.
17. A change in the estimated useful life of a plant asset may cause a change in the amount
of depreciation recognized in the current and future periods, but not in prior periods.
18. A change in the estimated salvage value of a plant asset requires a restatement of prior
years' depreciation.
19. When a change in estimate is made, there is no correction of previously recorded
depreciation expense.
20. Additions and improvements to a plant asset that increase the asset's operating efficiency,
productive capacity, or expected useful life are generally expensed in the period incurred.
21. Capital expenditures are expenditures that increase the company's investment in
productive facilities.
22. Ordinary repairs should be recognized when incurred as revenue expenditures.
23. A characteristic of capital expenditures is that the expenditures occur frequently during the
period of ownership.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-8
24. A permanent decline in the market value of an asset is referred to as an impairment.
25. Companies only dispose of plant assets by either sale or exchange.
26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal
occurs.
27. The book value of a plant asset is the amount originally paid for the asset less anticipated
salvage value.
28. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the
same way as a gain on disposal.
29. A plant asset must be fully depreciated before it can be removed from the books.
30. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold
section of the income statement.
31. A loss on disposal of a plant asset occurs if the cash proceeds received from the asset
sale is less than the asset's book value.
32. Research and development costs that result in a successful product that is patentable are
charged to the Patent account.
33. Franchises are classified as a plant asset.
34. Goodwill is recorded only when there is an exchange transaction that involves the
purchase of an entire business.
35. Intangible assets are rights, privileges, and competitive advantages that result from
ownership of long-lived assets without physical substance.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-9
36. The cost of an intangible asset must be amortized over a 20-year period.
37. The cost of a patent should be amortized over its legal life or useful life, whichever is
shorter.
38. If an acquired franchise or license is for an indefinite time period, then the cost of the
asset should not be amortized.
39. When an entire business is purchased, goodwill is the excess of cost over the book value
of the net assets acquired.
40. The return on assets ratio indicates how efficiently a company uses its assets.
41. The return on assets ratio can be computed from the profit margin ratio and the asset
turnover ratio.
42. The asset turnover is calculated as net sales divided by ending total assets.
43. In the notes to the financial statements, the depreciation and amortization methods used
should be described.
*44. Salvage value is not subtracted from plant asset cost in determining depreciation expense
under the declining-balance method of depreciation.
*45. Under the double-declining-balance method, the depreciation rate used each year
remains constant.
Answers to True-False Statements
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-10
MULTIPLE CHOICE QUESTIONS
46. A company purchased land for $350,000 cash. Real estate brokers' commission was
$25,000 and $35,000 was spent for demolishing an old building on the land before
construction of a new building could start. Under the historical cost principle, the cost of
land would be recorded at
a. $385,000.
b. $350,000.
c. $375,000.
d. $410,000.
47. A company purchased land for $94,000 cash. Real estate brokers' commission was
$5,000 and $7,000 was spent for demolishing an old building on the land before
construction of a new building could start. Proceeds from salvage of the demolished
building was $1,200. Under the historical cost principle, the cost of land would be
recorded at
a. $104,800.
b. $94,000.
c. $99,800.
d. $106,000.
48. Which of the following is not properly classified as property, plant, and equipment?
a. Building used as a factory.
b. Land used in ordinary business operations.
c. A truck held for resale by an automobile dealership.
d. Land improvement, such as parking lots and fences.
49. A characteristic of a plant asset is that it is
a. intangible.
b. used in the operations of a business.
c. held for sale in the ordinary course of the business.
d. not currently used in the business but held for future use.
50. Which one of the following items is not considered a part of the cost of a truck purchased
for business use?
a. Sales tax.
b. Truck license.
c. Freight charges.
d. Cost of lettering on side of truck.
Reporting and Analyzing Long-Lived Assets
9-11
51. Which of the following would not be included in the Equipment account?
a. Installation costs.
b. Freight costs.
c. Cost of trial runs.
d. Electricity used by the machine.
52. Which of the following assets does not decline in service potential over the course of its
useful life?
a. Equipment.
b. Furnishings.
c. Land.
d. Fixtures.
53. The four subdivisions for plant assets are
a. land, land improvements, buildings, and equipment.
b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment.
d. property, plant, equipment, and land.
54. The cost of land does not include
a. real estate brokers' commission.
b. annual property taxes.
c. accrued property taxes assumed by the purchaser.
d. title fees.
55. The Land account would include all of the following costs except
a. drainage costs.
b. the cost of building a fence.
c. commissions paid to real estate agents.
d. the cost of tearing down a building.
56. Whyte Clinic purchases land for $420,000 cash. The clinic assumes $4,500 in property
taxes due on the land. The title and attorney fees totaled $3,000. The clinic had the land
graded for $6,600. What amount does Whyte Clinic record as the cost for the land?
a. $426,600.
b. $420,000.
c. $434,100.
d. $427,500.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-12
57. Burke Company purchases land for $180,000 cash. Burke assumes $5,000 in property
taxes due on the land. The title and attorney fees totaled $2,000. Burke has the land
graded for $4,400. They paid $20,000 for paving of a parking lot. What amount does
Burke record as the cost for the land?
a. $186,400.
b. $211,400.
c. $191,400.
d. $180,000.
58. Aber Company buys land for $145,000 on 12/31/16. As of 3/31/17, the land has
appreciated in value to $151,000. On 12/31/17, the land has an appraised value of
$155,400. By what amount should the Land account be increased in 2017?
a. $0.
b. $6,000.
c. $4,400.
d. $10,400.
59. Givens Retail purchased land for a new parking lot for $125,000. The paving cost
$175,000 and the lights to illuminate the new parking area cost $60,000. Which of the
following statements is true with respect to these additions?
a. $300,000 should be debited to the Land account.
b. $235,000 should be debited to Land Improvements.
c. $360,000 should be debited to the Land account.
d. $360,000 should be debited to Land Improvements.
60. Shaffer Company acquires land for $77,000 cash. Additional costs are as follows.
Removal of shed $ 300
Filling and grading 1,500
Salvage value of lumber of shed 120
Broker commission 1,130
Paving of parking lot 10,000
Closing costs 560
Shaffer will record the acquisition cost of the land as
a. $77,000.
b. $78,690.
c. $80,610.
d. $80,370.
Reporting and Analyzing Long-Lived Assets
9-13
61. Ramirez Company acquires land for $240,000 cash. Additional costs are as follow.
Removal of shed $ 2,000
Filling and grading 6,000
Salvage value of lumber of shed 1,280
Broker commission 4,520
Paving of parking lot 40,000
Closing costs 3,400
Ramirez will record the acquisition cost of the land as
a. $254,640.
b. $257,200.
c. $255,920.
d. $240,000.
62. Wesley Hospital installs a new parking lot. The paving cost $60,000 and the lights to
illuminate the new parking area cost $24,000. Which of the following statements is true
with respect to these additions?
a. $60,000 should be debited to the Land account.
b. $24,000 should be debited to Land Improvements.
c. $84,000 should be debited to the Land account.
d. $84,000 should be debited to Land Improvements.
63. Land improvements should be depreciated over the useful life of the
a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer.
d. land improvements.
64. National Molding is building a new plant that will take three years to construct. The
construction will be financed in part by funds borrowed during the construction period.
There are significant architect fees, excavation fees, and building permit fees. Which of
the following statements is true?
a. Excavation fees are capitalized but building permit fees are not.
b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on
borrowed funds.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-14
65. A company purchases a remote building site for computer operations. The building will be
suitable for operations after some expenditures. The wiring must be replaced to computer
specifications. The roof is leaky and must be replaced. All rooms must be repainted and
recarpeted and there will also be some plumbing work done. Which of the following
statements is true?
a. The cost of the building will not include the repainting and recarpeting costs.
b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional
expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.
66. Arnold Company purchases a new delivery truck for $45,000. The sales taxes are $2,500.
The logo of the company is painted on the side of the truck for $1,200. The truck’s annual
license is $120. The truck undergoes safety testing for $220. What does Arnold record as
the cost of the new truck?
a. $49,040.
b. $48,920.
c. $47,500.
d. $46,920.
67. Rodgers Company purchased equipment and these costs were incurred:
Cash price $55,000
Sales taxes 3,600
Insurance during transit 640
Installation and testing 860
Total costs $60,100
Rodgers will record the acquisition cost of the equipment as
a. $55,000.
b. $58,600.
c. $59,240.
d. $60,100.
68. Kathy’s Blooms purchased a delivery van with a $60,000 list price. The company was
given a $6,000 cash discount by the dealer, and paid $3,000 sales tax. Annual insurance
on the van is $1,500. As a result of the purchase, by how much will Kathy’s Blooms
increase its van account?
a. $60,000.
b. $54,000.
c. $58,500.
d. $57,000.
Reporting and Analyzing Long-Lived Assets
9-15
69. Rains Company purchased equipment on January 1 at a list price of $125,000, with credit
terms 2/10, n/30. Payment was made within the discount period. Rains paid $6,250 sales
tax on the equipment, and paid installation charges of $2,200. Prior to installation, Rains
paid $5,000 to pour a concrete slab on which to place the equipment. What is the total
cost of the new equipment?
a. $131,250.
b. $135,950.
c. $138,450.
d. $126,250.
70. Carpino Company purchased equipment and these costs were incurred:
Cash price $75,000
Sales taxes 3,500
Insurance during transit 750
Installation and testing 1,500
Total costs $80,750
What amount should be recorded as the cost of the equipment?
a. $75,000.
b. $78,500.
c. $79,250.
d. $80,750.
71. Ryan, Inc. purchased a delivery truck with a $48,000 list price. The company was given a
$4,800 cash discount by the dealer, and paid $2,400 sales tax. Annual insurance on the
truck is $1,200. As a result of the purchase, by how much will Ryan, Inc. increase its truck
account?
a. $48,000.
b. $43,200.
c. $46,800.
d. $45,600.
72. Runge Company purchased machinery on January 1 at a list price of $300,000, with credit
terms 2/10, n/30. Payment was made within the discount period. Runge paid $15,000
sales tax on the machinery, and paid installation charges of $5,300. Prior to installation,
Runge paid $12,000 to pour a concrete slab on which to place the machinery. What is the
total cost of the new machinery?
a. $314,300.
b. $326,300.
c. $332,300.
d. $309,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-16
73. Schrock Company purchases a new delivery van for $70,000. The sales taxes are $5,250.
The logo of the company is painted on the side of the van for $1,400. The van’s annual
license is $140. The van undergoes safety testing for $250. What does Schrock record as
the cost of the new van?
a. $77,040.
b. $76,900.
c. $75,250.
d. $76,650.
74. All leases are classified as either
a. capital leases or long-term leases.
b. capital leases or operating leases.
c. operating leases or current leases,
d. long-term leases or current leases.
75. Interest may be included in the acquisition cost of a plant asset
a. during the construction period of a self-constructed asset.
b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable.
d. if it is a part of a lump-sum purchase.
76. Which of the following is included in the cost of constructing a building?
a. Cost of paving a parking lot.
b. Cost of repairing vandalism damage incurred shortly after construction is complete.
c. Interest incurred during construction.
d. Cost of removing the demolished building existing on the land when it was purchased.
77. The balance in the Accumulated Depreciation account represents the
a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market
value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.
78. The term applied to the periodic expiration of a plant asset’s cost is
a. amortization.
b. depletion.
c. depreciation.
d. cost expiration.
Reporting and Analyzing Long-Lived Assets
9-17
79. Which one of the following items is not a consideration when recording periodic
depreciation expense on plant assets?
a. Salvage value.
b. Estimated useful life.
c. Cash needed to replace the plant asset.
d. Cost.
80. Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n)
a. equal and equitable manner.
b. accelerated and accurate manner.
c. systematic and rational manner.
d. conservative market-based manner.
81. The cost of a long-term asset is expensed
a. when it is paid for.
b. as the asset benefits the company.
c. in the period in which it is acquired.
d. in the period in which it is disposed of.
82. The book value of an asset is equal to the
a. asset's fair value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset's cost less accumulated depreciation.
83. Accountants do not attempt to measure the change in a plant asset's market value during
ownership because
a. the assets are not held for resale.
b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management's responsibility to determine fair values.
FSA
84. Depreciation is a process of
a. asset devaluation.
b. cost accumulation.
c. cost allocation.
d. asset valuation.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-18
85. Recording depreciation each period is necessary in accordance with the
a. going concern principle.
b. historical cost principle.
c. expense recognition principle.
d. asset valuation principle.
86. In computing depreciation, salvage value is
a. the fair value of a plant asset on the date of acquisition.
b. subtracted from accumulated depreciation to determine the plant asset's depreciable
cost.
c. an estimate of a plant asset's value at the end of its useful life.
d. ignored in all the depreciation methods.
87. When estimating the useful life of an asset, accountants do not consider
a. the cost to replace the asset at the end of its useful life.
b. vulnerability to obsolescence.
c. expected repairs and maintenance.
d. the intended use of the asset.
88. All the following are needed for the computation of depreciation except
a. training costs of manufacturing personnel.
b. cost.
c. salvage value.
d. estimated useful life.
89. All of the following statements are false regarding depreciation except
a. depreciation is an asset valuation process.
b. depreciation does not apply to land improvements.
c. recognizing depreciation results in the accumulation of cash for asset replacement.
d. depreciation does not apply to land.
90. All of the following statements about the useful life factor associated with depreciation are
true except
a. useful life is also called service life.
b. useful life is an estimate of productive life.
c. past experience with similar assets is helpful in establishing useful life.
d. useful life is also called expected trade-in value.
Reporting and Analyzing Long-Lived Assets
9-19
91. Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there
was a cost of $20,000 for building a foundation and installing the equipment. It is
estimated that the equipment will have a $30,000 salvage value at the end of its 5-year
useful life. Depreciation expense each year using the straight-line method will be
a. $35,400.
b. $29,400.
c. $24,600.
d. $24,000.
92. Equipment was purchased for $85,000 on January 1, 2016. Freight charges amounted to
$3,500 and there was a cost of $10,000 for building a foundation and installing the
equipment. It is estimated that the equipment will have a $15,000 salvage value at the end
of its 5-year useful life. What is the amount of accumulated depreciation at December 31,
2017, if the straight-line method of depreciation is used?
a. $33,400.
b. $16,700.
c. $14,300.
d. $28,600.
93. Equipment with a cost of $640,000 has an estimated salvage value of $60,000 and an
estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line
method. What is the amount of depreciation for the first full year, during which the
equipment was used 3,000 hours?
a. $160,000.
b. $175,000.
c. $165,000.
d. $145,000.
94. Equipment with a cost of $300,000 has an estimated salvage value of $20,000 and an
estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line
method. What is the amount of depreciation for the first full year, during which the
equipment was used 2,700 hours?
a. $75,000.
b. $70,000.
c. $75,600.
d. $72,500.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-20
95. A machine was purchased for $180,000 and it was estimated to have an $12,000 salvage
value at the end of its useful life. Monthly depreciation expense of $1,750 was recorded
using the straight-line method. The annual depreciation rate is
a. 15.0%.
b. 2.5%.
c. 10.0%.
d. 12.5%.
96. A machine was purchased for $54,000 and it was estimated to have a $9,000 salvage
value at the end of its useful life. Monthly depreciation expense of $600 was recorded
using the straight-line method. The annual depreciation rate is
a. 20%.
b. 1.6%.
c. 12.8%.
d. 16.0%.
97. A company purchased factory equipment on April 1, 2017, for $128,000. It is estimated
that the equipment will have a $16,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2017, is
a. $12,800.
b. $11,200.
c. $8,400.
d. $9,600.
98. A company purchased factory equipment on June 1, 2017, for $128,000. It is estimated
that the equipment will have a $8,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2017, is
a. $12,000.
b. $7,000.
c. $6,000.
d. $5,000.

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