19 Jan Retroactive changes

ACC556 Financial Accounting for Managers

CHAPTER 9 EXERCISE

Question 1 Recording depreciation on plant assets affects the balance sheet and the income statement.

Answers:

True

False

Question 2 The book value of an asset will equal its fair value at the date of sale if

Answers:

a gain on disposal is recorded.

no gain or loss on disposal is recorded.

the plant asset is fully depreciated.

a loss on disposal is recorded.

Question 3 Which of the following statements concerning financial statement presentation is false?

Answers:

Intangibles are reported separately under Intangible Assets.

The balances of major classes of assets may be disclosed in the footnotes.

The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.

The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

Question 4 A plant asset was purchased on January 1 for $45,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year’s Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is

Answers:

10 years.

8 years.

5 years.

3 years.

Question 5 The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that

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is used for tax purposes.

must be used for financial statement purposes.

is required by the SEC.

expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

Question 6 Accountants do not attempt to measure the change in a plant asset’s market value during ownership because

Answers:

the assets are not held for resale.

plant assets cannot be sold.

losses would have to be recognized.

it is management’s responsibility to determine fair values.

Question 7 The following information is provided for Nguyen Company and Northwest Corporation.

(in $ millions) Nguyen Company Northwest Corporation

Net income 2014 $275 $390

Net sales 2014 1,500 4,100

Total assets 12/31/12 1,000 2,400

Total assets 12/31/13 1,050 3,000

Total assets 12/31/14 1,150 4,000

What is Northwest’s asset turnover ratio for 2014?

Answers:

1.17 times

1.05 times

1.52 times

1.03 times

Question 8 A company sells a plant asset that originally cost $240,000 for $80,000 on December 31, 2014. The accumulated depreciation account had a balance of $120,000 after the current year’s depreciation of $20,000 had been recorded. The company should recognize a

Answers:

$40,000 loss on disposal.

$40,000 gain on disposal.

$80,000 loss on disposal.

$80,000 gain on disposal.

Question 9 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X).

Question

Parking lots

Land Improvements (LI)

Electricity used by a machine

None of these (X)

Excavation costs

Buildings (B)

Interest on building construction loan

Buildings (B)

Cost of trial runs for machinery

Equipment (E)

Drainage costs

Land (L)

Cost to install a machine

Equipment (E)

Fences

Land Improvements (LI)

Unpaid (past) property taxes assumed

Land (L)

Cost of tearing down a building when land and a building on it are purchased

Land (L)

Question 10 Equipment was purchased for $68,000 on January 1, 2013. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used?

Answers:

$26,720.

$13,360.

$11,440.

$22,880.

Question 11 Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

Answers:

True

False

Question 12 Intangible assets are the rights and privileges that result from ownership of long-lived assets that

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must be generated internally.

are depreciated over their useful life.

have been exchanged at a gain.

do not have physical substance.

Question 13 Research and development costs that result in a successful product that is patentable are charged to the Patent account.

Answers:

True

False

Question 14 A company purchased land for $350,000 cash. Real estate brokers’ commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at

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$385,000.

$350,000.

$375,000.

$410,000.

Question 15 Intangible assets

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should be reported under the heading Property, Plant, and Equipment.

are not reported on the balance sheet because they lack physical substance.

should be reported as Current Assets on the balance sheet.

should be reported as a separate classification on the balance sheet.

Question 16 Which of the following is included in the cost of constructing a building?

Answers:

Cost of paving a parking lot.

Cost of repairing vandalism damage incurred shortly after construction is complete.

Interest incurred during construction.

Cost of removing the demolished building existing on the land when it was purchased.

Question 17 Grant Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?

Answers:

Revisions in useful life are permitted if approved by the IRS.

Retroactive changes must be made to previously recorded depreciation.

Only future years will be affected by the revision.

Both current and future years will be affected by the revision.

Question 18 If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

Answers:

True

False