Chapter 10

Question 1

Property, Plant, & Equipment

Answer 1

separate category on classified balance sheet
follows long term investments

physical assets deployed in the productive operation of the business, like land, buildings, and equipment

does not include idle facilities

listed according to expected life
land, buildings, equipment

Question 2

capital expenditures

Answer 2

Ordinary and necessary costs incurred to place an item of property, plant, or equipment in its condition for intended use; such amounts are included in the asset account

Question 3

expenditures may arise that are not “ordinary and necessary

Answer 3

they need to be expensed as incurred

ex: repair

Question 4

Interest paid to finance purchase of PPE

Answer 4

expensed

Question 5

Interest paid to finance construction

Answer 5

interest related to the period of time during which active construction is ongoing is capitalized

Question 6

Acquiring land

Answer 6

certain costs are ordinary and necessary and should be assigned to Land

include the cost of the land, title fees, legal fees, survey costs, and zoning fees. Also included are site preparation costs like grading and draining, or the cost to raze an old structure

Question 7

land improvements

Answer 7

asset category includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures

why separate? to account for deprecation

Question 8

lump-sum purchase

Answer 8

A single price paid for a package of assets; the purchase price must be allocated to each of the components

Question 9

Materiality

Answer 9

businesses simply choose to expense small costs as incurred - ex: trash can

Question 10

depreciation

Answer 10

process of “allocation” not “valuation

Question 11

service life

Answer 11

The period of time that a depreciable asset will be in use by an entity; the time interval over which the asset will be depreciated

Question 12

Physical deterioration

Answer 12

“Wear and tear” will eventually cause most assets to simply wear out and become useless. Thus, physical deterioration serves to establish an outer limit on the service life of an asset.

Question 13

Obsolescence

Answer 13

The shortening of service life due to technological advances that cause an asset to become out of date and less desirable

Question 14

Inadequacy

Answer 14

An economic determinant of service life which is relevant when an asset is no longer fast enough or large enough to fill the competitive and productive needs of a company

Question 15

depreciation method

Answer 15

straight-line
units-of-output, and
double-declining balance

simply the pattern by which the cost is allocated to each of the periods involved in the service life

Question 16

Cost

Answer 16

The dollar amount assigned to a particular asset, usually the ordinary and necessary amount expended to get an asset in place and in condition for its intended use.

Question 17

Service life

Answer 17

The useful life of an asset to an enterprise, usually relating to the anticipated period of productive use of the item.

Question 18

Salvage value

Answer 18

residual value

This is the amount expected to be realized at the end of an asset’s service life; for example, the anticipated future sales proceeds for used equipment.

Question 19

Depreciable base

Answer 19

cost - salvage value

amount of cost that will be allocated to the service life

Question 20

Book value

Answer 20

Net book value

refers to the balance sheet amount at a point in time that reveals the cost minus the amount of accumulated depreciation

Question 21

straight-line approach

Answer 21

annual depreciation is calculated by dividing the depreciable base by the service life

A simple depreciation method by which the depreciable base is spread uniformly over the service life

included in each years income statement

Question 22

Fractional period depreciation

Answer 22

method of straight line

record depreciation when items are purchased during the year

Question 23

units-of-output

Answer 23

allocates the depreciable base over the units of output rather than years of use

logical to use this approach in those situations where the life is best measured by identifiable units of machine “consumption.”

Question 24

double-declining balance

Answer 24

accelerated depreciation

results in relatively large amounts of depreciation in early years of asset life and smaller amounts in later years

if quality of service declines over time or if repair cost will rise over time to offset the declining depreciation amount

Question 25

Modified Accelerated Cost Recovery System

Answer 25

MACRS provides for a general depreciation system and an alternative system. Within those systems are generally provisions relating to the 200% declining balance, 150% declining balance, and straight-line techniques.