True / False Questions
1. Plant assets are assets held for sale.
2. Plant assets refer to intangible assets that are used in the operations of a business.
3. Plant assets are used in operations and have useful lives that extend over more than one accounting period.
4. Land held for future expansion is an intangible asset.
5. Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
6. Salvage value is an estimate of an asset’s value at the end of its benefit period.
7. Inadequacy refers to the insufficient capacity of a company’s plant assets to meet the company’s growing productive demands.
8. Depreciation should be recorded on the date an asset is purchased.
9. Depreciation measures the actual decline in market value of an asset.
10. A plant asset’s useful life might not be the same as its productive life.
11. It is not necessary to report both the cost and the accumulated depreciation of plant assets in the financial statements.
12. Depreciation expense is calculated using estimates of an asset’s salvage value and useful life.
13. Accumulated depreciation represents funds set aside to buy new assets when the assets currently owned are replaced.
14. When an asset is purchased (or disposed of) at a time other than the beginning or the end of an accounting period, depreciation is recorded for part of a year so that the year of purchase or the year of disposal is charged with its share of the asset’s depreciation.
15. Revising an estimate of the useful life or salvage value of a plant asset is referred to as a change in accounting estimate, and is reflected in the past, current, and future financial statements.
16. The going concern assumption supports the reporting of plant assets at book value rather than market value.
17. Total depreciation expense over an asset’s useful life will be identical under all methods of depreciation.
18. Financial accounting and tax accounting require the same recordkeeping and there should be no difference in results between the two accounting system
19. Most companies use accelerated depreciation for tax purposes because it reduces taxable income due to higher depreciation expense in the early years of an asset’s life.
20. The book value of an asset when using double-declining-balance depreciation is always greater than the book value from using straight-line depreciation, except at the beginning and the end of the asset’s useful life, when it is the same.
21. The modified accelerated cost recovery system (MACRS) is a depreciation method used for tax reporting.
22. Decision makers and other users of financial statements are especially interested in evaluating a company’s ability to use its assets in generating sales.
23. Asset turnover is computed by dividing average total assets by cost of sales.
24. Capital intensive companies have a relatively large amount invested in assets to generate a given level of sales.
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.