25. Coors reported net sales of $2,463 million and average total assets of $1,546 million. Its total asset turnover equals 1.59.
26. Anheiser-Busch reported average total assets of $10,965 million and net sales of $11,430 million. Its total asset turnover equals .96.
27. An asset’s cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
28. If a machine is damaged during unpacking, the repairs are added to its cost.
29. An expenditure must be normal, reasonable, and necessary in preparing an asset for its intended use to be charged to and reported as part of the cost of a plant asset.
30. The purchase of a property that included land, building, and improvements is called a lump-sum purchase.
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.
61. The cost of an intangible is systematically allocated to expense over its estimated useful life through the process of depletion.
62. Since goodwill is an intangible, it is amortized each year using the straight-line method, the same as other intangibles are amortized.
63. A patent is an exclusive right granted to its owner to manufacture and sell a patented device or to use a process for 20 years.
64. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 17 years.
65. The cost of developing, maintaining, or enhancing the value of a trademark is always added to the value of the asset when incurred.
Multiple Choice Questions
66. Plant assets are:
A. Tangible assets used in the operation of a business that have a useful life of more than one accounting period.
B. Current assets.
C. Held for sale.
D. Intangible assets used in the operations of a business that have a useful life of more than one accounting period.
E. Tangible assets used in the operation of business that have a useful life of less than one accounting period.
67. A main accounting issue for plant assets is:
A. Computing the cost of the plant assets.
B. Matching the costs of plant assets against revenues for the periods they benefit.
C. Accounting for repairs and improvements to plant assets.
D. The disposal of plant assets.
E. All of these.
68. Plant assets are:
A. Current assets.
B. Used in operations.
C. Natural resources.
D. Long-term investments.
69. The relevant factor(s) in computing depreciation include:
B. Salvage value.
C. Useful life.
D. Depreciation method.
E. All of these.
70. Salvage value is:
A. Also called residual value.
B. Also called scrap value.
C. An estimate of the asset’s value at the end of its benefit period.
D. A factor relevant to determining depreciation.
E. All of these.
A. Measures the decline in market value of an asset.
B. Measures physical deterioration of an asset.
C. Is the process of allocating to expense the cost of a plant asset.
D. Is an outflow of cash from the use of a plant asset.
E. Is applied to land.
72. The useful life of a plant asset is:
A. The length of time it is productively used in a company’s operations.
B. Never related to its physical life.
C. Its productive life, but not to exceed one year.
D. Determined by the FASB.
E. Determined by law.