101. Which of the following should be the main determinant for selection of the allocation method for long-term operational assets?
A. The method that is most convenient to compute.
B. The method that best matches the pattern of asset use.
C. The method that provides the greatest return to the stockholders.
D. The method that provides the best tax advantage.
102. Which of the following industries would most likely have the highest value for the ratio of sales to property, plant, and equipment?
A. Airline
B. Consumer product manufacturing company
C. Electric utility
D. Stock brokerage
103. The Pierce Corporation, a U.S. business, is a direct competitor of the Zeiss Company, a German firm. The two firms not only compete for customers, but also for investment capital. In 2016, each company spent about $35,000 U.S. dollars or the equivalent on research and development. U.S. GAAP requires the entire amount to be expensed, while Germany requires its businesses to record R&D expenditures as an asset and then to expense it over its useful life. Assuming the treatment of R&D is the only difference between the two firms, which of the following is correct?
A. Pierce will have higher total assets than Zeiss in 2016.
B. Pierce will have a higher debt-to-assets ratio than Zeiss in 2016.
C. Zeiss will have a lower net income for 2016.
D. This difference in accounting principles does not affect the total amount of assets reported by the two companies.
Multiple True/False Questions
104. Indicate whether each of the following statements is true or false.
_____ a) Plant assets are classified as long-term assets, while intangible assets are treated as current assets.
_____ b) Intangible assets include patents, copyrights, and natural resources.
_____ c) Intangible assets with indefinite useful lives will be not be amortized.
_____ d) The cost of land should be depleted over its useful life.
_____ e) The cost of a natural resource should be expensed (depleted) over its useful life.
a) This is false. Intangible assets are long-term assets.
b) This is false. Natural resources are not intangible assets..
c) This is true. Only intangible assets that have identifiable lives would be amortized.
d) This is false. Land is not depleted or expensed in any way.
e) This is true. Natural resources are depleted in order to match their expense with the revenue they produce.
105. Indicate whether each of the following statements is true or false.
_____ a) Long-term assets having no physical substance are called intangible assets.
_____ b) Trademarks are examples of an intangible asset.
_____ c) Natural resources are examples of tangible long-term assets.
_____ d) The reason that land is classified separately from other tangible assets is because the cost is normally much higher.
_____ e) Goodwill is classified as Plant, Property and Equipment.
a) This is true. Intangible assets derive their value from rights and privileges.
b) This is true.
c) This is true. Natural resources are tangible assets.
d) This is false. Land is classified separately because it is neither depreciated, amortized, nor depleted.
e) This is false. Goodwill is an intangible asset because it does not have physical substance.
106. Indicate whether each of the following statements is true or false.
_____ a) Sales taxes paid on the purchase of equipment would be expensed in the year of the purchase.
_____ b) Real estate fees and attorney's fees related to the purchase of a building would be added to the cost of the building.
_____ c) Payment of a fine for improper burning of a demolished building would be added to the land account.
_____ d) Delivery charges on equipment would be expensed in the year of the purchase.
_____ e) The matching concept requires that plant assets be recorded at the amount paid for the assets.
a) This is false. Sales tax is included in the cost of the asset purchased.
b) This is true. The cost of a building includes any one-time fee related to the purchase.
c) This is false. The fine would be expensed because it was not necessary to use the land. It was because of the company’s own negligence.
d) This is false. The delivery charges are a necessary cost to obtain the equipment and prepare it for its initial use, so they would be added to the cost of the equipment.
e) This is false. That is a description of the historic cost concept.
107. On January 1, 2016, Warren Co. purchased a machine for $120,000. Warren estimated the useful life of the machine to be 10 years and the salvage value to be $20,000. Indicate whether each of the following statements is true or false.
_____ a) Depreciation expense for 2016 under the straight-line method would be $12,000.
_____ b) Depreciation expense for 2016 under the double declining method would be $24,000.
_____ c) The accumulated depreciation at the end of 2017 under the straight-line method would be $20,000.
_____ d) The accumulated depreciation at the end of 2017 under the double declining method would be $48,000.
_____ e) The book value of the machine under both the double declining method and the straight-line method at the end of 10 years would be $20,000.
a) This is false. ($120,000 - $20,000)/10 years = $10,000 annual depreciation expense
b) This is true. $120,000 x (2 x 10%) = $24,000 depreciation expense in 2016
c) This is true. 2 years x $10,000 annual depreciation = $20,000 accumulated depreciation at the end of 2017
d) This is false. $120,000 x (2 x 10%) = $24,000 depreciation expense in 2016; ($120,000 - $24,000) x (2 x 10%) = $19,200 depreciation expense in 2017. $24,000 + $19,200 = $43,200 accumulated depreciation at the end of 2017
e) This is true. Regardless of depreciation method, the book value of an asset will be equal to its salvage value at the end of its useful life.
108. Indicate whether each of the following statements regarding accounting for long-term assets is true or false.
_____ a) Other things being equal, the lower a company estimates the salvage value of a plant asset to be, the higher the company's net income will be.
_____ b) Depreciation expense is an example of a "non-cash" expense.
_____ c) For tax purposes the most desirable depreciation method is the one that produces the lowest amount of depreciation expense.
_____ d) The book value of an asset is the amount a company believes it is worth (its fair value) as of the date of the balance sheet.
_____ e) A company that uses straight-line depreciation for financial statement reporting and MACRS for tax reporting will show a deferred tax liability in an asset’s early life.
a) This is false. A lower salvage value will produce greater depreciation expense, and lower, not higher, net income.
b) This is true. Depreciation does not affect cash.
c) This is false. For tax purposes, greater depreciation expense produces lower income tax expense.
d) This is false. The book value of an asset is equal to the asset’s historic cost minus its accumulated depreciation.
e) This is true. Using the MACRS depreciation method delays taxes, resulting in a deferred tax liability.
109. Indicate whether each of the following statements is true or false.
_____ a) Straight-line depreciation is the most widely used method in the U.S.
_____ b) An accelerated depreciation method provides a lower depreciation charge in the early years of an asset's life cycle than does the straight-line method.
_____ c) The units-of-production depreciation method allocates the cost of a plant asset in proportion to the asset's usage.
_____ d) Total depreciation expense recognized over the asset's life is not affected by the choice of depreciation methods.
_____ e) The entry to record depreciation affects the income statement and the statement of cash flows but not the balance sheet or statement of changes in stockholders' equity.
a) This is true. Most U.S. companies use straight-line depreciation for financial reporting.
b) This is false. An accelerated depreciation method provides a greater depreciation charge in an asset’s early years of useful life than does straight-line.
c) This is true. Using units-of-production depreciation ties depreciation expense to use or output of an asset.
d) This is true. All depreciation methods produce the same total depreciation expense over an asset’s useful life.
e) This is false. The entry to record depreciation affects the income statement and the balance sheet, but does not affect the statement of cash flows.
110. Schubert Co. owned equipment that originally cost $48,000. The company sold the equipment on January 1, 2016 for $16,000 cash. Accumulated depreciation on the day of sale amounted to $34,000. Based on this information, indicate whether each of the following statements is true or false.
_____ a) The sale will increase Schubert’s net income, but it will not affect the company’s operating income.
_____ b) Schubert would show a $16,000 cash inflow in the operating activities section of the cash flow statement.
_____ c) The sale would result in a decrease in total assets.
_____ d) The sale would increase Schubert’s equity by $2,000.
_____ e) The sale would be recorded as a debit to cash for $16,000, a credit to equipment for $14,000, and a credit to gain on sale of equipment for $2,000.
a) This is true. The $2,000 gain on the sale is reported on the income statement below operating income.
b) This is false. The $16,000 cash inflow is reported as an investing activity, not an operating activity.
c) This is false. The sale will result in an increase in total assets because the cash received is greater than the book value of the asset.
d) This is true. The $2,000 gain on the sale will increase retained earnings.
e) This is false. The sale would be recorded as a debit to cash for $16,000, a debit to accumulated depreciation for $34,000, a credit to equipment for $48,000, and a credit to gain on sale of equipment for $2,000.