Finance Chapter 8 The Property, Plant, and Equipment category includes long-term investments

Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles

True / False

1. The Property, Plant, and Equipment category includes long-term investments.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

2. 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

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

3. All operating assets, except land, are subject to depreciation, amortization, or depletion.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

4. Lenders are interested in the value of operating assets as collateral when making lending decisions.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

5. 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

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

6. 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

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Remembering

7. 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

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Remembering

8. Acquisition costs are also known as replacement costs.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Remembering

9. 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

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Remembering

10. 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

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-03 – LO: 08-03

KEYWORDS:

Bloom’s: Remembering

11. Interest is capitalized on all purchased assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Remembering

12. Capitalizing interest does not increase the recorded cost of a plant asset.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Remembering

13. 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

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

14. Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

15. 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

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

16. 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

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

17. Depreciation has no effect on income taxes, since it only reduces a plant asset’s book value.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

18. One reason management may choose the straight-line method of depreciation is because it is easy to compute.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

19. Depreciation does not describe the increase or decrease in the market value of the asset.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Remembering

20. 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

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-06 – LO: 08-06

KEYWORDS:

Bloom’s: Remembering

21. 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

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-06 – LO: 08-06

KEYWORDS:

Bloom’s: Analyzing

22. 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

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-07 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

23. Costs incurred to keep assets in normal operating condition are called revenue expenditures.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-07 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

24. If a company chooses to treat small plant asset expenditures as expenses, GAAP are being violated.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-07 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

25. A revenue expenditure is deducted from the cost of the asset.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-07 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

26. 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

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-08 – LO: 08-08

KEYWORDS:

Bloom’s: Remembering

27. 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

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-08 – LO: 08-08

KEYWORDS:

Bloom’s: Analyzing

28. 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

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-08 – LO: 08-08

KEYWORDS:

Bloom’s: Remembering

29. Plant assets, current assets, property, plant and equipment, and fixed assets are all tangible assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

30. Research and development costs should be presented as intangible assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

31. In general, FASB standards concerning property, plant, and equipment are similar to the international accounting

standards, with two important differences.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

32. 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

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

33. International accounting standards require companies to revalue their property, plant, and equipment to reflect fair

market values.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

34. Flexibility in valuation of property, plant, and equipment under IFRS may cause problems with comparability of one

company with another.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-09 – LO: 08-09

KEYWORDS:

Bloom’s: Remembering

35. All intangible assets should be amortized.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-10 – LO: 08-10

KEYWORDS:

Bloom’s: Remembering

36. Net income on a cash basis is arrived at by adding depreciation and amortization back to accrual net income.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-11 – LO: 08-11

KEYWORDS:

Bloom’s: Remembering

37. Asset turnover is calculated as Net income divided by Average Total Assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-12 – LO: 08-12

KEYWORDS:

Bloom’s: Remembering

38. Acquisition cost is also known as historical cost with respect to property plant and equipment.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

39. Interest is never a part of the cost of property, plant, and equipment or intangible assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Remembering

Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles

Multiple Choice

40. Birken Co. purchased a building for $600,000 in 2004. At the end of 2016, when it had a book value of $450,000, it

was appraised for $1,000,000. A potential buyer offered $900,000. Birken rejected the offer. What amount should is

recorded on Birken’s records at the end of 2016 in the account called Buildings?

a.

$2,000,000

b.

$800,000

c.

$500,000

d.

$350,000

ANSWER:

c

RATIONALE:

The purchase price of $500,000 should be recorded.

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Analyzing

41. Assets classified as property, plant, and equipment are reported at

a.

each asset’s original cost less depreciation since acquisition.

b.

each asset’s estimated salvage value at the balance sheet date.

c.

the estimated depreciable cost at the balance sheet date.

d.

each asset’s estimated market value at the balance sheet date.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Understanding

42. Which statement is true concerning operating assets?

a.

Operating assets have no physical properties.

b.

A company’s operating assets are important to its short-term liquidity.

c.

Operating assets are used over two or more periods to generate revenues.

d.

All operating assets are reported on the balance sheet

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Understanding

43. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance

sheet?

a.

Accumulated Depreciation—Buildings

b.

Buildings

c.

Depreciation Expense—Buildings

d.

Land

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Understanding

44. On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called

a.

Accumulated Amortization

b.

Accumulated Depreciation

c.

Amortization Expense

d.

Depreciation Expense

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-071 – LO: 08-07

KEYWORDS:

Bloom’s: Understanding

45. Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for

land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the

company determine which costs should be recorded as Land Improvements and which cost should be recorded as Land?

a.

The costs with an unlimited life will increase Land, and the costs with a limited useful life will increase Land

Improvements.

b.

The costs with a limited life will increase Land, and the costs with an unlimited useful life will increase Land

Improvements.

c.

The costs to be depreciated will increase Land, and the costs that will not be depreciated will increase Land

Improvements

d.

Costs that are depreciable will increase Land Improvements, while other costs are expensed immediately

because of a lack of definite life.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Applying

46. All of the following are included in the acquisition cost of property, plant, and equipment except:

a.

transportation costs

b.

taxes on the purchase

c.

installation costs

d.

maintenance costs

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Understanding

47. A building with an appraisal value of $250,000 is made available at an offer price of $180,000. The purchaser acquires

the property for $35,000 in cash, a 90-day note payable for $65,000, and a mortgage amounting to $63,000. The cost basis

recorded in the buyer’s accounting records to recognize this purchase is

a.

$250,000

b.

$180,000

c.

$163,000

d.

$100,000

ANSWER:

c

RATIONALE:

$35,000 + $65,000 + $63,000 = $163,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Analyzing

48. Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of

$2,400, $1,750 to construct a fence and a legal fee of $8,500. What is the cost of the land?

a.

$256,000

b.

$282,200

c.

$284,600

d.

$281,000

ANSWER:

b

RATIONALE:

All costs except the fence construction are included in the cost of the land.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Analyzing

49. Central National Bank recently acquired a new computer system. Which of the following costs associated with the

computer should not be debited to the Equipment account?

a.

Installation of a backup power source required for the computer.

b.

Replacement of several circuit boards damaged during installation.

c.

System programmer wages for personnel hired to prepare the system for use.

d.

Insurance coverage covering the transport period from the manufacturer.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Applying

50. Shidan Apartments purchased an apartment building to rent to university students on November 18, 2016. The

following costs were incurred during 2016, before the tenants moved in:

Purchase price of the building

$220,000

Purchase price of the land

100,000

Transfer taxes

10,000

Interest incurred on the mortgage loan to purchase

4,000

Attorney and real estate agent’s fees

15,000

Repave the parking lot

6,000

How much will Shidan Apartments record as an asset?

a.

$320,000

b.

$345,000

c.

$351,000

d.

$355,000

ANSWER:

c

RATIONALE:

All amounts except the interest are recorded as an asset.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Analyzing

51. Mclaren Corp incurred the following costs to acquire and prepare land during 2016 for a new parking lot: purchase

price for land, $800,000; cost to clear the land, $30,000; cost of paving, $40,000; and lighting for the parking lot, $20,000.

How much should Halifax record in the Land Improvements account?

a.

$30,000

b.

$40,000

c.

$60,000

d.

$90,000

ANSWER:

c

RATIONALE:

$40,000 + $20,000 = $60,000

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

KEYWORDS:

Bloom’s: Analyzing

52. Which of the following costs related to the purchase of production equipment incurred by Newark Company during

2016 would be considered a revenue expenditure?

a.

Installation costs for equipment

b.

Purchase price of the equipment less the cash discount

c.

Repair and maintenance costs during the equipment’s first year of service

d.

Transportation charges to deliver the equipment to Newark Company

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-02 – LO: 08-02

FACC.PONO.13.08-07 – LO: 08-07

KEYWORDS:

Bloom’s: Applying

53. Oakland Corp. purchased land and a building for a combined cost of $500,000. Oakland must

a.

record the $500,000 acquisition cost in an account called Land and Buildings.

b.

depreciate the $500,000 acquisition cost, less any residual value, over the expected useful life of the building.

c.

because part of the purchase involved land, record all of the cost in the Land account.

d.

allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair

market values.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-03 – LO: 08-03

KEYWORDS:

Bloom’s: Analyzing

54. Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values:

land $320,000: building $370,000 and equipment $60,000. What cost should be allocated to the building?

a.

$370,000

b.

$695,000

c.

$342,867

d.

$399,281

ANSWER:

c

RATIONALE:

[$370,000 / ($320,000 + 370,000 + $60,000)] × $695,000 = $342,867

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-03 – LO: 08-03

KEYWORDS:

Bloom’s: Analyzing

55. On December 1, 2016, Xeon Company bought land and an accompanying warehouse from Yen Company for

$800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000,

respectively. How much of the purchase price should Xeon Company allocate to the land and how much should be

allocated to the building?

a.

$457,143 and $342,857, respectively.

b.

$700,000 and $300,000, respectively.

c.

$560,000 and $240,000, respectively.

d.

$500,000 and $300,000, respectively

ANSWER:

c

RATIONALE:

Land

$ 700,000

Building

300,000

Total

$1,000,000

Land: $800,000 × ($700,000/$1,000,000) = $560,000

Building: $800,000 × ($300,000/$1,000,000) = $240,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-03 – LO: 08-03

KEYWORDS:

Bloom’s: Analyzing

56. Interest is capitalized when incurred in connection with the construction of plant assets because

a.

interest is considered a part of the acquisition cost of the related plant asset.

b.

the decision to purchase a plant asset is a business decision separate from the financing decision.

c.

many plant assets last longer than 20 years.

d.

interest is considered an expense of the period.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Understanding

57. Cranberry Corp. constructed equipment to manufacture a new line of home products during 2016. The average

balance of accumulated expenditures on the equipment during September through December 2016 was $500,000.

Construction started on September 1, 2016 and was still in progress at the end of 2016. If Cranberry borrowed $500,000

for one year on September 1, 2016, to finance the construction, and the interest rate on the construction loan was 6%, how

much interest can Cranberry capitalize as part of the equipment cost for 2016?

a.

$ -0-

b.

$10,000

c.

$20,000

d.

$30,000

ANSWER:

b

RATIONALE:

($500,000 × 6%) × 4/12 = $10,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Analyzing

58. If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during

construction on the borrowed money is

a.

capitalized as part of the cost of the plant asset.

b.

amortized over the construction period.

c.

reported as interest expense on the income statement.

d.

reported as depletion on the income statement.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Understanding

59. When constructing assets, capitalized interest is based on

a.

the amount allowed by the company’s auditors.

b.

the expenditures at the end of the of the period.

c.

the expenditures at the beginning of the period.

d.

the average accumulated expenditures.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-04 – LO: 08-04

KEYWORDS:

Bloom’s: Understanding

60. Depreciation is a process by which

a.

replacement funds are accumulated for plant and equipment.

b.

the decline in market value of plant and equipment is determined and recorded.

c.

the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the

asset.

d.

the difference between current market value and historical cost of plant and equipment.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding

61. A company should choose a depreciation method that

a.

best allocates the original cost of the asset to the periods benefited by the use of the asset.

b.

saves the most taxes.

c.

minimizes net income

d.

shows the highest amount of net income.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding

62. Harkin Company purchased a building on a tract of land and allocated the entire cost of the purchase to building.

Normally it depreciates buildings over 20 years using the straight-line method with zero residual value and does not

depreciate land. Because of its accounting treatment of the purchase, Harkin’s income before taxes for the next 20 years

will be

a.

overstated.

b.

understated.

c.

unaffected.

d.

in conformance with GAAP.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles

Wexford Co.

Wexford Co. purchased a new delivery truck at the beginning of 2016. The truck 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 2016. The

truck was driven 20,000 miles during 2016 and 24,000 miles during 2017. The number of expected miles over five years

is 100,000.

63. Refer to information for Wexford Co.

Wexford’s 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 2016?

a.

Straight-line depreciation creates the larger expense, while double-declining-balance depreciation creates the

larger tax savings.

b.

Straight-line depreciation creates both the larger expense and the larger tax savings.

c.

Double-declining-balance depreciation creates both the larger expense and the larger tax savings.

d.

Double-declining-balance depreciation creates the larger expense, while straight-line depreciation creates the

larger tax savings.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

64. Refer to information for Wexford Co.

By what amount would double-declining-balance depreciation exceed straight-line depreciation over the 5-year life of the

truck?

a.

The salvage value of $7,000.

b.

Cost less total depreciation.

c.

Cost plus total depreciation.

d.

Total depreciation expenses under double-declining-balance and straight-line depreciation are equal.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

65. Refer to information for Wexford Co.

What is the amount by which double-declining-balance depreciation exceeds straight-line depreciation over the 5-year life

of the truck?

a.

$ -0-

b.

$ 7,000

c.

$37,000

d.

$ 6,000

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

66. Refer to information about Wexford Co.

Wexford Co. wants to use the depreciation method that will result in the highest depreciation expense for 2016. Which

method should be used?

a.

straight-line

b.

units-of-production

c.

double-declining-balance

d.

all methods create the same income in 2016

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

Norwood, Inc.

Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an

estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2016 and was used 2,700

hours in 2016 and 2,600 hours in 2017.

67. Refer to the information for Norwood, Inc.

Based on this information, what method of depreciation will produce the maximum depreciation expense in 2016?

a.

Straight-line

b.

Double-declining-balance

c.

Units-of-production

d.

All methods produce the same expense in 2016.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

68. Refer to the information for Norwood, Inc,

Based on this information, what method of depreciation will produce the maximum depreciation expense in 2017?

a.

Straight-line

b.

Double-declining-balance

c.

Units-of-production

d.

All methods produce the same expense in 2017.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

69. Refer to the information about Norwood, Inc.

What amount will Norwood, Inc. report as depreciation expense over the 8-year life of the equipment?

a.

$60,000

b.

$72,000

c.

$75,000

d.

$80,000

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

70. Refer to the information about Norwood, Inc.

If Norwood uses the straight-line method, what is the book value at December 31, 2018?

a.

$46,875

b.

$51,875

c.

$62,500

d.

$67,500

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

71. Refer to the information about Norwood, Inc.

If Norwood uses the units-of-production method, what is the depreciation rate per hour for the equipment?

a.

$4.00

b.

$5.00

c.

$6.00

d.

$7.50

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

72. Refer to the information about Norwood, Inc.

If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2017?

a.

$14,063

b.

$15,000

c.

$18,750

d.

$20,000

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

73. Arena, Inc. uses straight-line depreciation for its equipment. Arena purchased equipment for $300,000 and estimated

its useful life at 8 years. The bookkeeper failed to consider the residual value of $50,000. What is the impact on earnings

per share and operating income of failing to consider the residual value?

a.

Earnings per share will be overstated and operating income will be understated.

b.

Earnings per share will be understated and operating income will be overstated.

c.

Both earnings per share and operating income will be overstated.

d.

Both earnings per share and operating income will be understated.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Analyzing

74. Fall Corp. 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 the

company’s assets?

a.

Double-declining-balance

b.

Revenue expenditure method

c.

Straight-line

d.

Units-of-production

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

75. Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should be used for 15,000 hours of

flight. What is the most appropriate method of depreciation to properly match revenues and expenses?

a.

Double-declining-balance

b.

Revenue expenditure method

c.

Straight-line

d.

Units-of-production

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Applying

76. Land is not depreciated because it

a.

appreciates in value.

b.

does not have an established depreciable life.

c.

has a useful life that is limited to the period of time a company is in business.

d.

will provide future benefits for a company for an unlimited period of time.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding

77. 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?

a.

Physical deterioration

b.

Obsolescence

c.

Repair and maintenance policies

d.

Current replacement cost

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding

78. Depreciation is

a.

an effort to achieve proper matching of the cost of operating assets.

b.

an accumulation of funds to replace the related plant asset.

c.

the difference between the original cost and salvage value of an asset.

d.

the cash allocated each period to maintain a plant asset.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding

79. If technology changes rapidly, a firm should

a.

expense plant asset immediately because of the uncertainty of future benefits.

b.

depreciate plant assets over long periods of time.

c.

consider an accelerated rate of depreciation.

d.

use the straight-line method of depreciation as it is the easiest.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.08-05 – LO: 08-05

KEYWORDS:

Bloom’s: Understanding