ACC 557 Final Exam - Strayer
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Chapter 9 Through 14
PLANT ASSETS,
NATURAL RESOURCES, AND INTANGIBLE ASSETS
CHAPTER LEARNING OBJECTIVES
1. Describe how the historical cost principle
applies to plant assets.
2. Explain
the concept of depreciation and how to compute it.
3. Distinguish between revenue and capital
expenditures, and explain the entries for each.
4. Explain how to account for the disposal of a
plant asset.
5. Compute periodic depletion of natural
resources.
6. Explain the basic issues related to
accounting for intangible assets.
7. Indicate how plant assets, natural
resources, and intangible assets are reported.
8. Explain how to account for the exchange of plant assets.
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 Delivery 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. The book value of a plant asset is always
equal to its fair market value.
7. Recording depreciation on plant assets
affects the balance sheet and the income statement.
8. The depreciable cost of a plant asset is
its original cost minus obsolescence.
9. Recording depreciation each period is an
application of the expense recognition principle.
10. The
Accumulated Depreciation account represents a cash fund available to replace
plant assets.
11. In calculating depreciation, both plant
asset cost and useful life are based on estimates.
12. 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.
13. Salvage value is not subtracted from
plant asset cost in determining depreciation expense under the
declining-balance method of depreciation.
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. Under the double-declining-balance method,
the depreciation rate used each year remains constant.
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 to prior periods.
18. A change in the estimated salvage value of
a plant asset requires a restatement of prior years' depreciation.
19. To determine a new depreciation amount
after a change in estimate of a plant asset's useful life, the asset's
remaining depreciable cost is divided by its remaining useful life.
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.
24. Once an asset is fully depreciated, no
additional depreciation can be taken even though the asset is still being used
by the business.
25. The fair value of a plant asset is always
the same as its book value.
26. If the proceeds from the sale of a plant
asset exceed its book value, a gain on disposal occurs.
27. A loss on disposal of a plant asset can
only occur if the cash proceeds received from the asset sale are less than the
asset's book value.
28. The book value of a plant asset is the
amount originally paid for the asset less anticipated salvage value.
29. A loss on disposal of a plant asset as a
result of a sale or a retirement is calculated in the same way.
30. A plant asset must be fully depreciated
before it can be removed from the books.
31. 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.
32. Depletion cost per unit is computed by
dividing the total cost of a natural resource by the estimated number of units
in the resource.
33. The Accumulated Depletion account is
deducted from the cost of the natural resource in the balance sheet.
34. Depletion expense for a period is only
recognized on natural resources that have been extracted and sold during the
period.
35. Natural resources are long-lived productive
assets that are extracted in operations and are replaceable only by an act of
nature.
36. The cost of natural resources is not
allocated to expense because the natural resources are replaceable only by an
act of nature.
37. Conceptually, the cost allocation
procedures for natural resources parallels that of plant assets.
38. Natural resources include standing timber
and underground deposits of oil, gas, and minerals.
39. If an acquired franchise or license has an
indefinite life, the cost of the asset is not amortized.
40. When an entire business is purchased,
goodwill is the excess of cost over the book value of the net assets acquired.
41. Research and development costs which result
in a successful product which is patentable are charged to the Patent account.
42. The cost of a patent must be amortized over
a 20-year period.
43. The cost of a patent should be amortized
over its legal life or useful life, whichever is shorter.
44. The balances of the major classes of plant
assets and accumulated depreciation by major classes should be disclosed in the
balance sheet or notes.
45. The asset turnover is calculated as total
sales divided by ending total assets.
46. Research and development costs can be
classified as a property, plant, and equipment item or as an intangible asset.
a47. An
exchange of plant assets has commercial substance if the future cash flows
change as a result of the exchange.
a48. Companies
record a gain or loss on the exchange of plant assets because most exchanges
have commercial substance.
a49. When
plant assets are exchanged, the cost of the new asset is the book value of the
old asset plus any cash paid.
50. When constructing a building, a company is
permitted to include the acquisition cost and certain interest costs incurred
in financing the project.
51. Recognition of depreciation permits the
accumulation of cash for the replacement of the asset.
52. When an asset is purchased during the year,
it is not necessary to record depreciation expense in the first year under the
declining-balance depreciation method.
53. Depletion expense is reported in the income
statement as an operating expense.
54. Goodwill is not recognized in accounting
unless it is acquired from purchasing another business enterprise.
55. Research and development costs should be
charged to expense when incurred.
a56. A loss on the exchange of plant assets occurs when the fair
market value of the old asset is less than its book value.
MULTIPLE CHOICE QUESTIONS
57. The cost of a purchased building includes
all of the following except
a. closing costs.
b. real estate broker's commission.
c. remodeling costs.
d. All of these answers are correct.
58. A company purchased land for $90,000 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.
Under the historical cost principle, the cost of land would be recorded at
a. $107,000.
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