Ch9 Test Bank + Answers Long-Term Assets I Property, Plant,

Chapter 9

Multiple Choice

• • • 1. When a closely held corporation issues preferred stock for land, the land should be recorded at the

1. Total par value of the stock issued
2. Total book value of the stock issued
3. Appraised value of the land
4. Total liquidating value of the stock issued
   • • 1. A principal objection to the straight-line method of depreciation is that it
5. Provides for the declining productivity of an aging asset
6. Ignores variations in the rate of asset use
7. Tends to result in a constant rate of return on a diminishing investment base
8. Gives smaller periodic write-offs than decreasing charge methods
   • • 1. Property, plant, and equipment are conventionally presented n the balance sheet at
9. Replacement cost less accumulated depreciation
10. Historical cost less salvage value
11. Original cost adjusted for general price level changes
12. Acquisition cost less depreciated portion thereof
    • • 1. As generally used in accounting, depreciation
13. Is a process of asset valuation for balance sheet purposes
14. Applies only to long-lived intangible assets
15. Is used to indicate a decline in market value of a long-lived asset
16. Is an accounting process that allocates long-lived asset cost to accounting periods
    • • 1. Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2020. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at
17. The present value of a $20,000 ordinary annuity for five years
18. $120,000
19. $120,000 less imputed interest
20. $120,000 plus imputed interest
    • • 1. For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is
21. Units of production
22. Straight line
23. Sum-of-the-year’s-digits
24. Declining balance
    • • 1. A method that excludes salvage value from the base for the depreciation calculation is
25. Straight line
26. Sum-of-the-year’s digits
27. Double-declining balance
28. Productive output
    • • 1. When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should be
29. Expensed as incurred
30. Added to the cost of the plant
31. Added to the cost of the land
32. Amortized over the estimated time period between the tearing down of the building and the completion of the plant
    • • 1. A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2019. On December 31, 2021, the accumulated depreciation using the sum-of-year’s digits method would be
33. (Original cost less salvage value) multiplied by 9/10
34. Original cost multiplied by 9/10
35. Original cost multiplied by 9/10 less total salvage value
36. (Original cost less salvage value) multiplied by 1/10
37. Assets that qualify for interest cost capitalization include
    • • • 1. Assets under construction for a company's own use
          2. Assets that are ready for their intended use in the earnings of the company
          3. Assets that are not currently being used because of excess capacity
          4. All of these assets qualify for interest cost capitalization
38. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

A cost of capital charge for stockholders' equity

That portion of weighted-average accumulated expenditures on which no interest cost was incurred

The total interest cost actually incurred

That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

1. When boot is involved in an exchange having commercial substance

Only losses should be recognized

Only gains should be recognized

Gains or losses are recognized in their entirely

A gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up

1. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at

The fair value of the asset given up, and a gain but not a loss may be recognized

The fair value of the asset given up, and a gain or loss is recognized

The fair value of the asset received if it is equally reliable as the fair value of the asset given up

Either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company

1. A plant site donated by a city to a company that plans to open a new factory should be recorded on the company's books at
   • • • 1. The value assigned to it by the company's directors
         2. One dollar (since the site cost nothing but should be included in the balance sheet)
         3. The cost of taking title to it
         4. Its fair value
2. An impairment of property, plant, or equipment has occurred if

The estimated salvage value is less than the actual proceeds received on disposal

The revised estimated useful life is less than the original estimated useful life

The expected future cash outflows exceed the asset’s carrying value

The sum of the expected future net cash flows is less than the asset’s carrying value

1. When should a long-lived asset be tested for recoverability?
   • • • 1. When external financial statements are being prepared
         2. When the asset's fair value has decreased, and the decrease is judged to be permanent
         3. When events or changes in circumstances indicate that its carrying amount may not be recoverable
         4. When the asset's carrying amount is less than its fair value
2. The asset turnover ratio is computed by dividing
   1. Net sales by average total assets
   2. Net sales by ending total assets
   3. Net income by ending total assets
   4. Net income by average total assets
3. The rate of return on total assets is computed by dividing
   • • • 1. Net sales by ending total assets
         2. Net income by ending total assets
         3. Net income by average total assets
         4. Net sales by average total assets
4. The theoretical justification for reporting depreciation expense is
5. Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period.
6. Depreciation expense represents the impairment of the asset that has occurred during the accounting period.
7. Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.
8. Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period
9. Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Systematic and rational allocation

Immediate recognition

The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.

The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

• 1. What is the asset's useful life?
     • • 1. What method of cost apportionment is best for this asset?
         2. What product or service is the asset related to?
         3. What is the depreciation base to use for the asset?

1. A principal objection to the straight-line method of depreciation is that it

Provides for the declining productivity of an aging asset

Ignores variations in the rate of asset use

Tends to result in a constant rate of return on a diminishing investment base

Gives smaller periodic write-offs than decreasing charge methods

1. The most common method of recording depletion for accounting purposes is the
   • • • 1. Straight-line method
         2. Units-of-production method
         3. Percentage depletion method
         4. Decreasing charge method

Essay

1. List the objectives of accounting for property, plant and equipment.
2. Reporting to investors on stewardship.
3. Accounting for the use and deterioration of plant and equipment.
4. Planning for new acquisitions, through budgeting.
5. Supplying information for taxing authorities.
6. Supplying rate-making information for regulated industries
7. Describe how cost is assigned to individual assets when they are acquired in a lump-sum group purchase.
8. Discuss the three approaches to allocating fixed overhead to a self-construction project.
9. Allocate no fixed overhead to the self-construction project. Some accountants favor the first approach. They argue that the allocation of fixed overhead is arbitrary and therefore only direct costs should be considered.
10. Allocate only incremental fixed overhead to the project. When operations are at less than full capacity, this approach is the most logical. The decision to build the asset was probably connected with the availability of idle facilities. Increasing the profit margin on existing products by allocating a portion of the fixed overhead to the self-construction project will distort reported profits.
11. Allocate fixed overhead to the project on the same basis as it is allocated to other products. When the production of other products has been discontinued to produce a self-constructed asset, allocation of the entire amount of fixed overhead to the remaining products will cause reported profits on these products to decrease. (The same amount of overhead is allocated to fewer products.)
12. Discuss the issue of allocating interest to self-construction projects. That is, when should interest be allocated and how much interest should be allocated?
13. Explain the concept of commercial substance originally outlined in SFAS No. 158.
14. How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for donated assets?
15. Discuss the distinction between capital and revenue expenditures for long-term assets.
16. Discuss accounting for asset impairments originally outlined in SFAS No’s 121 and 144.
17. Long-term assets held and used.
18. Long-lived assets to be disposed of other than by sale.
19. Long-lived assets to be disposed of by sale.
20. Define and discuss accounting for asset retirement obligations under SFAS No. 143 (FASB ASC 410-20)
21. Asset retirement obligation. —the liability associated with the ultimate disposal of a long-term asset.
22. Asset retirement cost. —the increase in the capitalized cost of a long-term asset that occurs when the liability for an asset retirement obligation is recognized.
23. Retirement. —an other than temporary removal of a long-term asset from service by sale, abandonment, or other disposal.
24. Promissory estoppel. —a legal concept that holds that a promise made without consideration may be enforced to prevent injustice.
    • • 1. What is the depreciation base to be used for the asset?
        2. What is the asset’s useful life?
        3. What method of cost apportionment is best for this asset?
25. Discuss the guidelines for accounting for property, plant and equipment outlined in IAS No. 16.
26. How does IAS no. 23 define borrowing costs?
27. Discuss accounting for the impairment of assets as outlined in IAS No. 36.