Plant Assets And Depreciation Chap 10
This Exam review covers Plant Assets and Depreciation
Questions and Answers
- 1.
Which of the following assets does not decline in service potential over the course of its useful life?
- A.
Equipment
- B.
Furnishings
- C.
Land
- D.
Fixtures
Correct Answer
C. LandExplanation
Land does not decline in service potential over the course of its useful life because it is a fixed asset that is not subject to wear and tear or obsolescence. Unlike equipment, furnishings, and fixtures, which may deteriorate or become outdated over time, land retains its value and can continue to be used for various purposes indefinitely. Therefore, land is considered a non-depreciable asset.Rate this question:
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- 2.
The four subdivisions for plant assets are
- A.
land, land improvements, buildings, and equipment.
- B.
Intangibles, land, buildings, and equipment
- C.
Furnishings and fixtures, land, buildings, and equipment
- D.
Property, plant, equipment, and land
Correct Answer
D. Property, plant, equipment, and landExplanation
The correct answer is "property, plant, equipment, and land." This answer includes all the necessary subdivisions for plant assets, which are property, plant, equipment, and land. It covers all the different types of assets that fall under the category of plant assets, including both tangible assets like buildings and equipment, as well as land.Rate this question:
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- 3.
The cost of land does not include
- A.
Real estate brokers' commission.
- B.
Annual property taxes
- C.
Accrued property taxes assumed by the purchaser
- D.
Title fees
Correct Answer
B. Annual property taxesExplanation
The cost of land does not include annual property taxes. This means that when purchasing land, the buyer would need to consider and budget for these taxes separately. The cost of land typically refers to the purchase price of the land itself, excluding any ongoing expenses such as property taxes.Rate this question:
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- 4.
Gagner Clinic purchases land for $110,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land?
- A.
$112,200
- B.
$110,000
- C.
$114,700
- D.
$112,500
Correct Answer
C. $114,700Explanation
The cost of the land includes the purchase price of $110,000, the property taxes of $1,500, the title and attorney fees of $1,000, and the grading expenses of $2,200. Adding all these amounts together, the total cost of the land is $114,700.Rate this question:
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- 5.
Carey Company buys land for $50,000 on 12/31/10. As of 3/31/11, the land has appreciated in value to $50,700. On 12/31/11, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2011?
- A.
$0
- B.
$700
- C.
. $1,100
- D.
$1,800
Correct Answer
A. $0Explanation
In 2011, the land account should be increased by $0. This is because although the land has appreciated in value from $50,000 to $51,800, the increase in value has not been realized or recognized by the company. The land is still owned by the company and has not been sold or otherwise disposed of, so the increase in value is considered unrealized and should not be recorded as an increase in the land account.Rate this question:
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- 6.
Hull Company acquires land for $96,000 cash. Additional costs are as follows: Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,530 Paving of parking lot 10,000 Closing costs 560 Hull will record the acquisition cost of the land as
- A.
$96,000
- B.
$98,090
- C.
. $99,990
- D.
$99,770.
Correct Answer
D. $99,770.Explanation
The acquisition cost of the land is recorded as $99,770. This is calculated by adding the cash paid for the land ($96,000) to the additional costs incurred for the removal of shed ($300), filling and grading ($1,500), salvage value of lumber of shed ($120), broker commission ($1,530), paving of parking lot ($10,000), and closing costs ($560).Rate this question:
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- 7.
Wesley Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $15,000. Which of the following statements is true with respect to these additions
- A.
$30,000 should be debited to the Land account.
- B.
$15,000 should be debited to Land Improvements.
- C.
$45,000 should be debited to the Land account.
- D.
$45,000 should be debited to Land Improvements
Correct Answer
D. $45,000 should be debited to Land ImprovementsExplanation
The correct answer is $45,000 should be debited to Land Improvements. This is because the cost of both the paving and the lights should be recorded as improvements to the land, rather than directly debiting the Land account. The Land Improvements account is used to track the costs associated with enhancing the land's value or usefulness, such as adding parking lots or landscaping. Therefore, the total cost of $45,000 should be debited to the Land Improvements account.Rate this question:
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- 8.
Land improvements should be depreciated over the useful life of the
- A.
Land.
- B.
Buildings on the land.
- C.
Land or land improvements, whichever is longer.
- D.
Land improvements.
Correct Answer
D. Land improvements.Explanation
Land improvements should be depreciated over their useful life. This is because land improvements, such as driveways, fences, and landscaping, are considered separate from the land itself and have a limited useful life. Depreciating them over their useful life allows for the allocation of the cost of these improvements over time, reflecting their gradual wear and tear and obsolescence.Rate this question:
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- 9.
Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
- A.
Excavation fees are capitalized but building permit fees are not.
- B.
Architect fees are capitalized but building permit fees are not.
- C.
Interest is capitalized during the construction as part of the cost of the building.
- D.
The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.
Correct Answer
A. Excavation fees are capitalized but building permit fees are not.Explanation
During the construction period, certain costs can be capitalized, meaning they are treated as an asset rather than an expense. Excavation fees are typically considered a direct cost of constructing the plant and are therefore capitalized. On the other hand, building permit fees are generally considered an administrative expense and are not capitalized. Capitalizing means adding the cost to the value of the asset being constructed. Therefore, the correct statement is that excavation fees are capitalized but building permit fees are not.Rate this question:
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- 10.
If a plant asset is sold before it is fully depreciated,
- A.
Only a gain on disposal can occur.
- B.
Only a loss on disposal can occur.
- C.
Either a gain or a loss can occur.
- D.
Neither a gain nor a loss can occur.
Correct Answer
C. Either a gain or a loss can occur.Explanation
When a plant asset is sold before it is fully depreciated, it can result in either a gain or a loss on disposal. The gain or loss is calculated by comparing the selling price of the asset with its book value (cost minus accumulated depreciation). If the selling price is higher than the book value, a gain occurs. Conversely, if the selling price is lower than the book value, a loss occurs. Therefore, depending on the circumstances, either a gain or a loss can occur when a plant asset is sold before it is fully depreciated.Rate this question:
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- 11.
Depletion is
- A.
A decrease in market value of natural resources.
- B.
The amount of spoilage that occurs when natural resources are extracted.
- C.
The allocation of the cost of natural resources to expense.
- D.
The method used to record unsuccessful patents.
Correct Answer
C. The allocation of the cost of natural resources to expense.Explanation
Depletion refers to the process of allocating the cost of natural resources to expense. This is done to reflect the gradual reduction in the value of these resources as they are extracted and used. Depletion is a common accounting practice used in industries such as mining, oil and gas, and timber, where the value of the natural resources being extracted decreases over time. By allocating the cost of these resources to expense, companies can accurately reflect the decrease in their value and account for the depletion of their natural resources.Rate this question:
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- 12.
Identify the item below where the terms are not related.
- A.
Equipment—depreciation
- B.
Franchise—depreciation
- C.
Copyright—amortization
- D.
Oil well—depletion
Correct Answer
B. Franchise—depreciationExplanation
The terms "franchise" and "depreciation" are not related because depreciation is the allocation of the cost of a tangible asset over its useful life, while a franchise is an intangible asset that represents a legal agreement between a franchisor and a franchisee. Depreciation is not applicable to intangible assets like franchises, so the two terms are not related.Rate this question:
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- 13.
A patent
- A.
Has a legal life of 40 years
- B.
Is nonrenewable
- C.
Can be renewed indefinitely
- D.
Is rarely subjected to litigation because it is an exclusive right
Correct Answer
B. Is nonrenewableExplanation
A patent is a legal protection granted to an inventor or creator of a new invention or innovation. It gives them exclusive rights to their invention for a certain period of time. However, the correct answer is that a patent is nonrenewable. This means that once the patent expires, usually after 20 years from the filing date, the inventor no longer has exclusive rights to their invention and it becomes available for others to use and reproduce. Therefore, the inventor cannot renew the patent and retain exclusive rights beyond the initial 20-year period.Rate this question:
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- 14.
Erin Danielle Company purchased equipment and incurred the following costs. Cash price $24,000 Sales taxes 1,200 Insurance during transit 200 Installation and testing 400 Total costs $25,800 What amount should be recorded as the cost of the equipment?
- A.
$24,000
- B.
$25,200
- C.
$25,400
- D.
$25,800
Correct Answer
D. $25,800Explanation
The cost of the equipment should be recorded as $25,800 because it includes the cash price of $24,000, sales taxes of $1,200, insurance during transit of $200, and installation and testing costs of $400. This total cost represents the actual amount that the company paid for the equipment, including all associated expenses.Rate this question:
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- 15.
Depreciation is a process of:
- A.
Valuation
- B.
Cost allocation
- C.
Cash accumulation
- D.
Appraisal
Correct Answer
B. Cost allocationExplanation
Depreciation is a process of cost allocation. It involves spreading the cost of an asset over its useful life, reflecting the decrease in its value over time. This allows businesses to match the expense of using the asset with the revenue it generates. By allocating the cost of the asset over its useful life, depreciation helps in accurately determining the financial performance and profitability of a company. It is an important accounting concept that ensures the proper recognition of expenses and the accurate reporting of financial statements.Rate this question:
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- 16.
Micah Bartlett Company purchased equipment on January 1, 2013, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used, is
- A.
$80,000.
- B.
$160,000.
- C.
$78,000
- D.
$156,000
Correct Answer
D. $156,000Explanation
The straight-line method of depreciation calculates an equal amount of depreciation expense each year over the useful life of the asset. In this case, the equipment has a total cost of $400,000 and a salvage value of $10,000. The difference between the cost and salvage value is $390,000, which is the total amount to be depreciated over 5 years. Dividing $390,000 by 5 gives an annual depreciation expense of $78,000. Since the question asks for the accumulated depreciation at the end of 2014, we need to calculate the depreciation expense for 2013 and 2014. The accumulated depreciation at the end of 2014 would be $78,000 (depreciation expense for 2013) + $78,000 (depreciation expense for 2014) = $156,000.Rate this question:
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- 17.
Ann Torbert purchased a truck for $11,000 on January 1, 2013. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2014, can be computed by the following formula:
- A.
( $11,000/ total estimated activity) x units of activities for 2014
- B.
( $10,000/ total estimated activity) x units of activities for 2014
- C.
( $11,000/ total estimated activity) x units of activities for 2013 and 2014
- D.
( $10,000/ total estimated activity) x units of activities for 2013 and 2014
Correct Answer
D. ( $10,000/ total estimated activity) x units of activities for 2013 and 2014Explanation
The correct answer is ( $10,000/ total estimated activity) x units of activities for 2013 and 2014. This is because the balance in accumulated depreciation at December 31, 2014, is being computed, so it should include the units of activity for both 2013 and 2014. The formula uses the cost of the truck ($10,000) divided by the total estimated activity to determine the depreciation per unit of activity, which is then multiplied by the units of activity for 2013 and 2014 to calculate the balance in accumulated depreciation.Rate this question:
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- 18.
Jefferson Company purchased a piece of equipment on January 1, 2014. The equipment cost $60,000 and has an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2015 under the double-declining-balance method
- A.
$6,500.
- B.
$11,250.
- C.
$15,000.
- D.
$6,562
Correct Answer
B. $11,250.Explanation
Under the double-declining-balance method, the depreciation expense for an asset is calculated by multiplying the straight-line depreciation rate (2 divided by the useful life) by the book value of the asset at the beginning of the period. In this case, the straight-line depreciation rate is 2/8 = 0.25, and the book value at the beginning of 2015 is $60,000 - $6,500 (depreciation expense for 2014) = $53,500. Therefore, the depreciation expense for 2015 is $53,500 * 0.25 = $13,375. However, the double-declining-balance method requires that the depreciation expense be reduced to the salvage value in the final year. Since the salvage value is $8,000 and the asset has a useful life of 8 years, the depreciation expense for 2015 is reduced to $8,000 - $6,500 (depreciation expense for 2014) = $1,500. Therefore, the correct answer is $11,250 ($13,375 - $1,500).Rate this question:
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- 19.
When there is a change in estimated depreciation:
- A.
Previous depreciation should be corrected.
- B.
Current and future years' depreciation should be revised.
- C.
Only future years' depreciation should be revised
- D.
None of the above.
Correct Answer
B. Current and future years' depreciation should be revised.Explanation
When there is a change in estimated depreciation, it is necessary to revise both the current and future years' depreciation. This is because the change in estimated depreciation affects the overall depreciation expense for the asset, which should be reflected in both the current and future periods. By revising both the current and future years' depreciation, the financial statements will accurately represent the impact of the change in estimated depreciation on the company's financial performance.Rate this question:
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- 20.
Able Towing Company purchased a tow truck for $60,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,000. What was the depreciation expense for 2014?
- A.
$6,000.
- B.
$4,800
- C.
$15,000
- D.
$12,100
Correct Answer
D. $12,100Explanation
The depreciation expense for 2014 is $12,100. This can be calculated by subtracting the new salvage value of $2,000 from the original cost of the tow truck ($60,000 - $2,000 = $58,000), and then dividing that amount by the remaining estimated life of 4 years (including 2014) ($58,000 / 4 = $14,500). Since the adjustment was made on December 31, 2014, the depreciation expense for 2014 would be half of the annual depreciation, which is $14,500 / 2 = $7,250. However, since the adjusting entries had not been made yet, the depreciation expense for 2014 would be the difference between the original depreciation expense for 2014 ($7,500) and the new depreciation expense ($7,250), which is $7,500 - $7,250 = $12,100.Rate this question:
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- 21.
Additions to plant assets are:
- A.
Revenue expenditures.
- B.
Debited to the Maintenance and Repairs Expense account.
- C.
Debited to the Purchases account.
- D.
Capital expenditures.
Correct Answer
D. Capital expenditures.Explanation
Additions to plant assets are considered capital expenditures because they involve the acquisition or improvement of long-term assets that will benefit the company for an extended period of time. These additions are not considered regular expenses and are not immediately expensed on the income statement. Instead, they are recorded as an increase in the value of the plant assets on the balance sheet, which helps to accurately reflect the company's investment in its long-term productive assets.Rate this question:
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- 22.
Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2014. The machine was purchased for $80,000 on January 1, 2010, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?
- A.
$18,000
- B.
$54,000
- C.
$22,000
- D.
$46,000
Correct Answer
A. $18,000Explanation
The amount of gain or loss recorded at the time of the sale can be calculated by subtracting the machine's book value from the sale price. The book value of the machine can be calculated by dividing the original cost by the number of years of depreciation. In this case, the machine was depreciated for 4.5 years (from January 1, 2010, to June 30, 2014). Therefore, the book value of the machine would be $80,000 divided by 10 years, multiplied by 4.5 years, which equals $36,000. Subtracting the book value from the sale price of $26,000 would result in a loss of $18,000.Rate this question:
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- 23.
Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million. If no salvage value is expected and 2 million tons are mined and sold in the first year, the entry to record depletion will include a:
- A.
Debit to Accumulated Depletion of $2,000,000.
- B.
Credit to Depletion Expense of $1,200,000.
- C.
Debit to Depletion Expense of $1,200,000
- D.
Credit to Accumulated Depletion of $2,000,000
Correct Answer
C. Debit to Depletion Expense of $1,200,000Explanation
The entry to record depletion includes a debit to Depletion Expense of $1,200,000 because depletion is the process of allocating the cost of a natural resource over its estimated useful life. In this case, 2 million tons of coal were mined and sold in the first year, which represents 10% of the total estimated coal to be extracted. Therefore, the depletion expense for the first year would be 10% of the total cost, which is $1,200,000.Rate this question:
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- 24.
Which of the following statements is false?
- A.
If an intangible asset has a finite life, it should be amortized.
- B.
The amortization period of an intangible asset can exceed 20 years.
- C.
Goodwill is recorded only when a business is purchased.
- D.
Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.
Correct Answer
D. Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.Explanation
Research and development costs are typically expensed when incurred, regardless of whether they result in a successful patent. This is because research and development costs are considered to be uncertain and speculative in nature, and therefore cannot be reliably measured or matched to future benefits. However, if a successful patent is obtained as a result of the research and development expenditures, the costs associated with obtaining and defending the patent can be capitalized and amortized over the useful life of the patent.Rate this question:
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- 25.
Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2014. On July 31, 2014, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2014, should be:
- A.
$150,000.
- B.
$35,000
- C.
$185,000
- D.
$170,000
Correct Answer
B. $35,000Explanation
The correct answer is $185,000. The total amount debited to Patents through July 31, 2014, should include both the research and development costs of $150,000 and the legal fees of $35,000. Therefore, the total amount debited to Patents is $150,000 + $35,000 = $185,000.Rate this question:
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- 26.
Indicate which of the following statements is true
- A.
Since intangible assets lack physical substance, they need be disclosed only in the notes to the financial statements.
- B.
Goodwill should be reported as a contra account in the owner's equity section.
- C.
Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.
- D.
Intangible assets are typically combined with plant assets and natural resources and shown in the property, plant, and equipment section.
Correct Answer
C. Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.Explanation
This statement is true because the balance sheet is a financial statement that provides an overview of a company's financial position, including its assets. The totals of major classes of assets, such as current assets, property, plant, and equipment, and intangible assets, can be shown in the balance sheet. However, the specific details of these assets, including any intangible assets, are typically disclosed in the notes to the financial statements. This allows for a more detailed understanding of the company's assets and their value.Rate this question:
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- 27.
Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company's asset turnover?
- A.
0.90
- B.
0.20
- C.
0.72
- D.
1.39
Correct Answer
C. 0.72Explanation
The company's asset turnover can be calculated by dividing the net sales by the average total assets. In this case, the net sales are $180,000 and the average total assets can be calculated by adding the beginning total assets ($200,000) and the ending total assets ($300,000) and dividing by 2, resulting in $250,000. Dividing the net sales by the average total assets gives us $180,000/$250,000 = 0.72. Therefore, the company's asset turnover is 0.72.Rate this question:
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- 28.
Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial substance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer's books?
- A.
$45,000
- B.
$46,000
- C.
$49,000
- D.
$50,000
Correct Answer
A. $45,000Explanation
The machine acquired in the exchange should be recorded on Schopenhauer's books at $45,000. This is because the fair value of the old machine is lower than its book value, indicating a loss on the exchange. The fair value of the new machine is not relevant in this case, as the transaction has commercial substance. Therefore, the machine should be recorded at its fair value of $35,000, and the loss of $4,000 ($39,000 - $35,000) should be recognized. Adding the $10,000 cash paid, the total cost of the new machine is $45,000.Rate this question:
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- 29.
In exchanges of assets in which the exchange has commercial substance:
- A.
Neither gains nor losses are recognized immediately.
- B.
Gains, but not losses, are recognized immediately.
- C.
Losses, but not gains, are recognized immediately.
- D.
Both gains and losses are recognized immediately.
Correct Answer
D. Both gains and losses are recognized immediately.Explanation
In exchanges of assets that have commercial substance, both gains and losses are recognized immediately. This means that any increase or decrease in the value of the assets being exchanged is accounted for and reflected in the financial statements at the time of the exchange. This recognition allows for a more accurate representation of the financial position and performance of the entity involved in the exchange. It also ensures that the financial statements provide relevant and reliable information to users.Rate this question:
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Mar 22, 2023Quiz Edited by
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