ACCOUNTING

31. When a company constructs a building, the cost of the building includes materials and labor, design fees, building permits, and insurance during construction.

32. Land is not subject to depreciation because it has an unlimited life. This means that items which increase the usefulness of the land such as parking lots are not depreciated.

 

33. The cost of fees for insuring the title and any accrued property taxes are included in the cost of land.

34. The most frequently used method of depreciation is the straight-line method.

35. Total asset cost plus depreciation expense equals book value.

36. The units-of-production method of depreciation charges a varying amount of expense for each period of an asset’s useful life depending on its usage.

37. An accelerated depreciation method yields smaller depreciation expense in the early years of an asset’s life and larger depreciation expense in later years.
38. The double-declining balance method is applied by (1) computing the asset’s straight-line depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying the rate times the net value.

 

39. A company purchased a plant asset for $45,000. The asset has an estimated salvage value of $6,000, and an estimated useful life of 10 years. The annual depreciation expense using the straight-line method is $3,900 per year.

40. Revenue expenditures are additional costs of plant assets that materially increase the assets’ life or productive capabilities.

 

41. Ordinary repairs are expenditures that keep assets in normal, good operating condition.

 

42. Extraordinary repairs are expenditures extending the asset’s useful life beyond its original estimate, and are capital expenditures because they benefit future periods.

43. Capital expenditures are also called balance sheet expenditures.

44. Betterments are a type of capital expenditure.
45. Treating capital expenditures of a small dollar amount as revenue expenditures is likely to mislead users of financial statements.          FALSE

 

46. Plant assets can be disposed of by discarding, selling, or exchanging them.
47. The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.

 

48. Accounting for the exchange of assets depends on whether the transaction has commercial substance; commercial substance implies that it alters the company’s future cash flows.

49. If an asset is sold above its book value, the selling company records a loss.
 

50. Gain or loss on the disposal of assets is determined by comparing the disposed asset’s book value to the market value of any assets received.
51. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset’s book value.
52. Natural resources are assets that include standing timber, mineral deposits, and oil and gas fields.

53. Amortization is the process of allocating the cost of natural resources to periods when they are consumed.

 

54. Natural resources are often called wasting assets because they are physically consumed when used.

55. Natural resources are reported on the balance sheet at cost plus accumulated depletion.

 

56. When the usefulness of plant assets used to extract natural resources is directly related to the depletion of a natural resource, their costs are depreciated using the units-of-production method of depreciation, as long as the assets will not be moved to and used at another site when extraction of the natural resources is complete.

 

57. An ore deposit costing $800,000 is expected to produce 1,600,000 tons of ore. A total of 70,000 tons are mined and sold in the current year. The depletion expense for the current year is $35,000.

 

58. The cost of an intangible asset must be systematically allocated to depreciation expense over its estimated useful life.

 

 

59. Intangible assets are certain nonphysical assets used in operations that confer on their owners long-term rights, privileges, or competitive advantage.
 

 60. Goodwill is the amount by which a company’s value exceeds the value of its individual assets and liabilities.

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