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Exam 8: Accounting for Long-Term Assets

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Question 31

True/False

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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.

A) True
B) False

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Question 32

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Which of the following statements regarding increases in the value of plant assets under U.S. GAAP and IFRS is true?

A) U.S. GAAP allows companies to record increases in the value of plant assets.
B) IFRS prohibits upward asset revaluations.
C) Under GAAP, a company can reverse an impairment and record that increase in income.
D) U.S. GAAP prohibits companies from recording increases in the value of plant assets.
E) Under IFRS, an impairment increase beyond as asset's original cost is not recorded.

F) A) and C)
G) A) and B)

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Question 33

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A plant asset's useful life is the length of time it is productively used in a company's operations.

Bering Rock acquires a granite quarry at a cost of $590,000, which is estimated to contain 200,000 tons of granite and is expected to take 6 years to remove. Compute the depletion expense for the first year assuming 38,000 tons were removed.

Total asset cost plus depreciation expense equals book value.

If a machine is damaged during unpacking, the repairs are added to its cost.

Financial accounting and tax accounting require the same recordkeeping and there should be no difference in results between the two accounting systems.

A machine costing $75,000 is purchased on September 1, Year 1. The machine is estimated to have a salvage value of $10,000 and an estimated useful life of 4 years. Double-declining-balance depreciation is used. If the machine is sold on December 31, Year 3 for $13,000, the journal entry to record the sale will include:

Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. Compute the depletion expense for the first year assuming 418,000 tons were mined.

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.

Companies that have a relatively large amount invested in assets to generate a given level of sales are considered capital-intensive.

A company purchased a tract of land for its natural resources at a cost of $1,000,000. It expects to harvest 5,000,000 board feet of timber from this land. The salvage value of the land is expected to be $200,000. The depletion expense per board foot of timber is:

Revenue expenditures are additional costs of plant assets that do not materially increase the assets' life or productive capabilities.

Additions to land that increase the usefulness of the land such as parking lots, fences, and lighting are not depreciated.

A patent is an exclusive right granted to its owner to manufacture and sell a patented device or to use a process for 20 years.

Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to extract. What journal entry would be needed to record the expense for the first year assuming 418,000 tons were mined?

A company paid $150,000, plus a 7% commission and $5,000 in closing costs for a property. The property included land appraised at $87,500, land improvements appraised at $35,000, and a building appraised at $52,500. What should be the allocation of this property's costs in the company's accounting records?

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.

What is depreciation of plant assets? What are the factors necessary in computing depreciation?

One characteristic of plant assets is that they are: