Chapter 09 – Long Term Assets
TRUE/FALSE
1. Free cash flow is a good measure of a company’s ability to finance long-term assets.
2. In the calculation of free cash flow, dividends and sales of plant assets are both deducted.
3. Asset impairment occurs when the fair value of a long-term asset exceeds its carrying value.
4. Fair value is the amount for which an asset could be bought or sold in a current transaction.
5. Book value refers to the market value of a long-term asset.
6. If the net present value of a long-term asset under consideration for purchase is negative, then the asset
should not be purchased.
7. A positive net present value of a long-term asset under consideration for purchase indicates that the
asset should probably be purchased.
8. A tractor held by a farm equipment company for sale to farmers is classified as a long-term asset.
9. A building not currently used because economic conditions have limited a company’s expansion is
classified properly as property, plant, and equipment.
10. A natural resource is subject to a process called depletion.
11. A reduction in carrying value as a result of impairment is recorded as a loss.
12. Depreciation refers to the periodic allocation of the cost of a tangible long-lived asset over its
estimated useful life.
13. Intangible assets are subject to a process called depreciation.
14. The basic accounting problems associated with accounting for long-term assets are similar to those of
short-term assets.
15. Mineral deposits are subject to a process called amortization.
16. An older term for long-term assets is fixed assets.
17. Land held for speculative purposes should be classified as a long-term investment.
18. Inventory is classified as a long-term asset.
19. Leasehold improvements become the property of the lessor at the end of the lease.
20. Leasehold improvements are not subject to any form of cost allocation.
21. A betterment does not add to the physical layout of an asset.
22. The replacement of tires on a truck is considered an ordinary repair.
23. Ordinary repairs usually result in a debit to the appropriate Accumulated Depreciation account.
24. Small expenditures for what ordinarily are considered revenue expenditures frequently are treated as
capital expenditures.
25. Extraordinary repairs are recorded with a debit to Accumulated Depreciation.
26. Installation of an air-conditioning system is considered an addition.
27. A debit to Accumulated Depreciation will increase the carrying value of an asset.
28. Additions and betterments are examples of revenue expenditures.
29. Rebuilding the engine of a company vehicle is an example of an ordinary repair.
30. A capital expenditure will result in an immediate increase in long-term assets.
31. The cost of land would include the cost of a building purchased with the land and torn down because it
was not needed.
32. The cost of equipment would include the cost of test runs to see that the equipment is operating
properly.
33. Driveways and parking lots are properly included in the Land account because they are not subject to
depreciation.
34. The cost of assets acquired for a lump sum should be allocated equally among the acquired assets.
35. The cost of land should include accrued property taxes paid by the purchaser.
36. The cost of repairing a machine damaged during installation should be charged as an operating
expense.
37. The cost of a sewage system should be included in the Land Improvements account.
38. A revenue expenditure results in the immediate recognition of an expense.
39. A capital expenditure is an expenditure that benefits only the current accounting period.
40. A revenue expenditure results in the recognition of an asset.
41. In accounting, depreciation means the decline in value of an asset.
42. One reason for an asset’s limited useful life is obsolescence.
43. Depreciation should not be recorded for a depreciable asset that is increasing in value.
44. Depreciation is a process of allocation, not of valuation.
45. Accelerated methods of depreciation result in lower net income in the last years of an asset’s life
compared to the straight-line method.
46. One argument in favor of accelerated depreciation is that repair expense is likely to be greater in later
years.
47. One argument in favor of accelerated depreciation is that the assets benefit is greater in the earlier
years.
48. Residual value is not relevant when calculating double-declining-balance depreciation.
49. The production method is an accelerated method of depreciation.
50. Computation of a partial year’s depreciation is often required for the proper determination of net
income.
51. When depreciation rates are revised, all years of the asset’s life are affected by the new computation.
52. Group depreciation is an appropriate method for a large company calculating depreciation on office
equipment.
53. Depreciation for tax purposes is identical to depreciation for financial reporting purposes.
54. Federal tax law allows the rapid write-off of plant assets.
55. For tax purposes, small businesses may expense the first $250,000 of equipment expenditures, rather
than having to allocate their costs over a number of years.
56. All tangible assets including land have a limited useful life, and the costs of these assets must be
distributed as expenses over the years they benefit.
57. Normally, depreciation calculations are based on the exact number of days the asset is held during the
period.
58. Typically, depreciation calculations are rounded to the nearest whole month.
59. Prior to the disposal of an asset, depreciation should be updated and recorded.
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 carrying value.
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. Gain on Sale of Machinery is recorded as a debit.
64. A $750 gain on the sale of an asset means that $750 in cash was received.
65. When the trade-in allowance exceeds the carrying value of an asset exchanged, a loss has occurred.
66. Plant asset exchanges can be categorized as the exchange of similar assets and the exchange of
dissimilar assets.
67. Natural resources are classified as intangible assets on the balance sheet.
68. Intangible assets are also called wasting assets.
69. 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.
70. 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 nine years.
71. In calculating the depletion of a natural resource, its useful life in years is irrelevant.
72. Under the successful efforts method, the costs of both successful and unsuccessful exploration for oil
and gas are recorded as assets.
73. Licenses are properly classified as intangible assets.
74. An intangible asset with a determinable useful life should be amortized over that useful life.
75. According to generally accepted accounting principles, most expenditures for intangible assets
acquired from others should be treated as revenue expenditures when incurred.
76. Estimated useful life and legal life are synonymous terms when dealing with intangible assets.
77. The exclusive right to sell a computer program is called a copyright.
78. The exclusive right to use an identifying symbol is called a patent.
79. A patent has a legal life of 20 years.
80. Goodwill equals the excess paid for a business over the book value of the net assets purchased.
81. A copyright should be amortized over the life of the author, plus 70 years.
82. Research and development costs normally are capitalized and amortized over the estimated sales life of
the product developed.
83. The entire cost of developing computer software should be capitalized and amortized over the
software’s useful life.
84. When a company can prove it is worth more than its balance sheet indicates, it may record some
goodwill.
85. Above-average earnings is often the basis for the calculation of goodwill.
86. The cost to defend a patent successfully should be expensed in the period incurred.
87. Customer lists are classified as intangible assets.
88. The costs associated with the development of software, for sale or internal use, should be expensed in
the period incurred.
89. Noncompete covenants should be amortized over the specified life of the contract.
90. If the carrying value of goodwill is less than its fair value, an impairment loss must be recorded.
MULTIPLE CHOICE
1. Which of the following is not a component of free cash flow?
a.
Purchases of plant assets
b.
Net income
c.
Dividends
d.
Net cash flows from operating activities
2. If net cash flows from operating activities total $104,000, purchases of plant assets total $30,000,
dividends total $12,000, and sales of plant assets total $17,000, the free cash flow equals
a.
$79,000.
b.
$163,000.
c.
$105,000.
d.
$45,000.
3. Which of the following assets is not subject to depreciation, depletion, or amortization?
a.
Land improvements, such as parking lots and fences
b.
Gas fields
c.
Land
d.
Patents
4. 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.
5. 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
6. The unexpired cost of a plant asset is referred to as its
a.
depreciable cost.
b.
carrying value.
c.
accumulated depreciation.
d.
original cost.
7. 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
8. Which of the following is not considered an intangible asset?
a.
A leasehold
b.
An oil well
c.
A franchise
d.
Goodwill
9. Which of the following is subject to depletion?
a.
A timber tract
b.
Land improvements
c.
A copyright
d.
Land
10. 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.
11. 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.
12. A capital expenditure results in a debit to a(n)
a.
expense account.
b.
capital account.
c.
asset account.
d.
liability account.
13. An expenditure for which of the following items would be considered a revenue expenditure?
a.
Plant assets
b.
Ordinary repair
c.
Addition
d.
Betterment
14. The primary difference between ordinary and extraordinary repairs is that extraordinary repairs
a.
are an expense of the current period.
b.
are periodic in nature.
c.
are necessary to maintain the asset in good operational condition.
d.
extend the useful life or increase the residual value of the asset.
15. 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.
16. 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
17. 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
18. 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.
19. 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.
20. 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
21. 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
22. An expenditure to lengthen the useful life of a company vehicle would require a
a.
credit to Company Vehicles.
b.
debit to Cash.
c.
debit to Depreciation Expense.
d.
debit to Accumulated Depreciation.
23. 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
24. A company purchases for $24,000 an asset that has a useful life of six years and no salvage value.
After two years, the company spends $4,000 for a major overhaul that will extend the machine’s useful
life four years beyond the original six. Assuming straight-line depreciation, how much depreciation
should be taken in year 3?
a.
$2,800
b.
$2,500
c.
$2,000
d.
$4,000
25. Which of the following would not be included in the cost of land?
a.
Cost of clearing unneeded building from land
b.
Sewer assessment from local government
c.
Cost of paving land for parking
d.
Commission to real estate agent
26. The portion of a group purchase of land and a buildup for $648,000 allocated to land, when the land is
appraised at $170,000 and the building on the land is appraised at $510,000 is
a.
$496,000.
b.
$162,000.
c.
$172,000.
d.
$486,000.
27. 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
28. Land and a building on the land are purchased for $336,000. The appraised values of the land and
building are $60,000 and $300,000, respectively. The cost allocated to the building should be
a.
$28,000.
b.
$122,000.
c.
$150,000.
d.
$280,000.
29. 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.
30. 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.
31. The construction of a new wing on an existing building is described as a(n)
a.
addition.
b.
extraordinary repair.
c.
revenue expenditure.
d.
betterment.
32. The Land account would include all of the following costs except
a.
drainage costs.
b.
commissions paid to real estate agents.
c.
the cost of building a fence.
d.
the cost of tearing down a building.
33. The Equipment account would include all of the following costs except
a.
installation costs.
b.
maintenance costs.
c.
equipment test runs.
d.
freight charges.
34. A company purchases land and a building on the land. The land is appraised at $80,000 and the
building at $320,000. If the Land account is debited for $104,000, then the total purchase price for the
land and building must have been
a.
$400,000.
b.
$416,000.
c.
$520,000.
d.
$424,000.
35. 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.
36. It is necessary to distinguish between capital and revenue expenditures because of which of the
following accounting rules or principles?
a.
Matching
b.
Full disclosure
c.
Materiality
d.
Consistency
37. 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.
Full disclosure
d.
Consistency
38. 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 understated for the year.
b.
Stockholders’ equity will be overstated at year end.
c.
Total assets will be overstated at year end.
d.
Net income in the following year will be understated.
39. 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 overstated 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 understated for the year.
40. 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 hours of service
c.
Historical cost
d.
Years of service
41. 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
42. 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.
43. 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.
44. All of the following are used in estimating a depreciable asset’s useful life except
a.
the asset’s present condition.
b.
the useful life required by the government for tax purposes.
c.
experience with similar assets.
d.
current technology and industry trends.
45. Salvage value is not the same as
a.
carrying value.
b.
residual value.
c.
disposal value.
d.
scrap value.
46. Office furniture was purchased for $45,000. It had an estimated residual value of $7,000 and has a
current carrying value of $9,000. Its depreciable cost must have been
a.
$36,000.
b.
$38,000.
c.
$32,000.
d.
$29,000.
47. A machine was purchased for $39,000. It has a current carrying value of $18,000 and had a
depreciable cost of $25,000. Its estimated residual value must have been
a.
$18,000.
b.
$14,000.
c.
$11,000.
d.
$21,000.
48. Equipment was purchased for $78,000. It had an estimated residual value of $12,000 and has a current
carrying value of $50,000. Its depreciable cost must have been
a.
$62,000.
b.
$42,000.
c.
$66,000.
d.
$28,000.
49. Which of the following terms does not mean the same as the others?
a.
Book value
b.
Salvage value
c.
Scrap value
d.
Disposal value
50. Office furniture was purchased for $14,000. It had an estimated residual value of $2,000 and has a
current carrying value of $6,000. Its depreciable cost must have been
a.
$15,000.
b.
$9,000.
c.
$12,000.
d.
impossible to determine from the facts given.