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Chapters 10 Through 13
CHAPTER10
PLANTASSETS,NATURALRESOURCES,ANDINTANGIBLEASSETS
CHAPTERSTUDYOBJECTIVES
1.Describehowthecostprincipleappliestoplantassets.
2.Explaintheconceptofdepreciation..
3.Computeperiodicdepreciationusingdifferentmethods.
4.Describetheprocedureforrevisingperiodicdepreciation.
5.Distinguishbetweenrevenueandcapitalexpenditures,andexplaintheentriesforeach.
6.Explainhowtoaccountforthedisposalofaplantasset.
7.Computeperiodicdepletionofnaturalresources.
8.Explainthebasicissuesrelatedtoaccountingforintangibleassets.
9.Indicatehowplantassets,naturalresources,andintangibleassetsarereported.
10.Explainhowtoaccountfortheexchangeofplantassets.
TRUE-FALSESTATEMENTS
1. Allplantassets(fixedassets)mustbedepreciatedfor accountingpurposes.
2. Whenpurchasingland,thecostsforclearing,draining,filling,andgradingshouldbe chargedto aLandImprovementsaccount.
3. Whenpurchasingdeliveryequipment,salestaxesandmotorvehiclelicensesshouldbe
chargedto DeliveryEquipment.
4. Landimprovementsaregenerallychargedto
theLandaccount.
5. Oncecostisestablishedforaplantasset,itbecomes thebasis
ofaccounting fortheasset
unlesstheassetappreciatesinvalue,inwhichcase,marketvaluebecomesthebasisfor accountability.
6. Thebookvalueof
aplantassetisalwaysequaltoitsfairmarketvalue.
7. Recordingdepreciationonplantassetsaffectsthebalancesheetandtheincome statement.
8. Thedepreciablecostof
aplant asset is itsoriginalcostminusobsolescence.
9. Recordingdepreciationeachperiodisanapplicationof
thematchingprinciple.
10. TheAccumulatedDepreciationaccountrepresentsacashfundavailabletoreplaceplant assets.
11. Incalculatingdepreciation,bothplantassetcost andusefullifearebasedonestimates.
12. Usingtheunits-of-activitymethodofdepreciatingfactoryequipmentwillgenerallyresultin
moredepreciationexpensebeingrecordedoverthelifeoftheassetthanifthestraight-line
method hadbeenused.
13. Salvagevalueisnotsubtractedfromplantassetcostindeterminingdepreciationexpense
underthedeclining-balancemethodofdepreciation.
14. Thedeclining-balancemethodofdepreciationiscalledanaccelerateddepreciation methodbecauseitdepreciatesanassetinashorterperiodoftimethantheasset'suseful life.
15. Underthedouble-declining-balancemethod,thedepreciationrateusedeachyear remainsconstant.
16. TheIRSdoesnotrequirethetaxpayertousethesamedepreciationmethodonthetax returnthatisusedinpreparingfinancialstatements.
17. Achangeintheestimatedusefullifeofaplantassetmaycauseachangeintheamount ofdepreciationrecognizedinthecurrentandfutureperiods,but
nottopriorperiods.
18. Achangeintheestimatedsalvagevalueofaplantassetrequiresarestatementofprior years'depreciation.
19. Todetermineanewdepreciationamountafterachangeinestimateofaplantasset's useful life, the asset'sremaining depreciablecost isdividedbyits remainingusefullife.
20. Additionsand improvementstoaplantassetthatincreasethe
asset'soperatingefficiency, productive capacity,or expectedusefullife
aregenerallyexpensed intheperiodincurred.
21. Capitalexpendituresareexpendituresthatincreasethecompany'sinvestmentin
productive facilities.
22. Ordinaryrepairs
shouldberecognizedwhenincurredas revenueexpenditures.
23. A characteristicofcapitalexpendituresis that theexpendituresoccurfrequently
duringthe period ofownership.
24. Onceanassetisfullydepreciated,noadditionaldepreciationcanbetakeneventhough theasset
is still beingusedbythebusiness.
25. Thefairmarketvalueof a plantasset
isalwaysthesameasits bookvalue.
26. Iftheproceedsfromthesaleofaplantassetexceeditsbookvalue,againondisposal occurs.
27. Alossondisposalofaplantassetcanonlyoccurifthecashproceeds received fromthe assetsaleis
lessthanthe asset'sbook value.
28. Thebookvalueofaplantassetistheamount originallypaid
fortheassetlessanticipated salvagevalue.
29. Alossondisposal ofaplantasset
asaresult ofasaleoraretirementiscalculated inthe sameway.
30. A plantassetmustbefullydepreciatedbeforeit canberemovedfromthe books.
31. Ifaplantasset issoldata gain,thegain
ondisposal shouldreducethecost ofgoodssold section of the incomestatement.
32. Depletioncostperunitiscomputedbydividingthetotalcostofanaturalresourcebythe
estimatednumberof unitsintheresource.
33. TheAccumulatedDepletionaccountisdeductedfromthecostofthenaturalresourcein thebalancesheet.
34. Depletionexpenseforaperiodisonlyrecognizedonnaturalresourcesthathavebeen extractedandsoldduringtheperiod.
35. Naturalresourcesarelong-livedproductiveassetsthatareextractedinoperationsand arereplaceableonlybyanactof
nature.
36. Thecostofnaturalresourcesisnotallocatedtoexpensebecausethenaturalresources
arereplaceableonlybyanactof nature.
37. Conceptually,thecostallocationproceduresfornaturalresourcesparallelsthatofplant
assets.
38. Naturalresourcesincludestandingtimberandundergrounddepositsofoil,gas,and
minerals.
39. Ifanacquiredfranchiseorlicensehasanindefinitelife,thecostoftheassetisnot
amortized.
40. Whenanentirebusinessispurchased,goodwillistheexcessofcostoverthebookvalue
of
thenet assetsacquired.
41. Researchand
development
costswhich result
in asuccessful product which ispatentable arechargedtothePatentaccount.
42. Thecostof
apatentmustbeamortizedovera 20-yearperiod.
43. Thecostofapatentshouldbeamortizedoveritslegallifeorusefullife,whicheveris shorter.
44. The
balancesofthe majorclassesofplantassetsand
accumulated depreciationby major
classes shouldbedisclosedinthebalance sheetornotes.
45. Theassetturnover ratioiscalculated
astotalsales
dividedbyendingtotalassets.
46. Researchanddevelopmentcostscanbeclassifiedasaproperty,plant,andequipment itemoras
an
intangibleasset.
a47. An exchangeofplantassetshas commercial substanceifthe futurecashflows
change as a resultofthe
exchange.
a48. Companiesrecordagainorlossontheexchangeofplantassetsbecausemost
exchangeshavecommercialsubstance.
a49. Whenplantassetsareexchanged,thecostofthenewassetisthebookvalueoftheold
assetplus anycashpaid.
Additional
True-FalseQuestions
50. Whenconstructingabuilding,acompanyispermittedtoincludetheacquisitioncostand certaininterest
costs incurredinfinancingtheproject.
51. Recognitionofdepreciationpermitstheaccumulationofcashforthereplacementofthe asset.
52. Whenanassetispurchasedduringtheyear,itisnotnecessarytorecorddepreciation
expense
inthefirst yearunderthedeclining-balancedepreciationmethod.
53. Depletionexpenseisreported intheincomestatementas anoperatingexpense.
54. Goodwillisnotrecognizedinaccountingunlessitisacquiredfromanotherbusiness
enterprise.
55. Researchanddevelopmentcostsshouldbechargedtoexpensewhenincurred.
56. Alossontheexchangeofplantassetsoccurswhenthefairmarketvalueoftheoldasset islessthanitsbookvalue.
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