Chapter 8

Question 1

_______ _______ are assets that depreciate over their useful life and are sometimes called ‘property, plant, and equipment’.

Answer 1

fixed assets

Question 2

When is expense recognized from using depreciation?

Answer 2

In the accounting period that the asset was used.

Question 3

T or F: Land is subject to depreciation.

Answer 3

False, it has an infinite life and is captured separate from fixed assets.

Question 4

What are the 4 continuous phases that are used for operational assets?

Answer 4

(1) Acquiring funding
(2) Buying the asset
(3) Using the asset
(4) Retiring the asset

Question 5

What items are not included in the cost of long-term assets?

Answer 5

Interest on notes payable or maintenance costs incurred while using the asset.

Question 6

What does the term capitalized mean?

Answer 6

Identifying a cost as an asset.

Question 7

When a cost is incurred, if it is ________ it is recorded as an asset.

Answer 7

capitalized.

Question 8

Depreciation is used to __________ the cost of an asset to expense during the periods it is used to generate revenue.

Answer 8

allocate

Question 9

How is the matching principle applied to depreciation?

Answer 9

You will only record expenses of depreciation when it is used to generate revenue.

Question 10

T or F: The purpose of depreciation is to determine the fair market value of an asset.

Answer 10

False, it rarely equals the asset’s fair market value.

Question 11

How is depreciation recorded?

Answer 11

Depreciation expense increases (decreases net income)

Accumulated depreciation increases (contra-asset account) and is subtracted from property, plant and equipment.

Question 12

How is net book value calculated?

Answer 12

Asset’s cost - accumulated depreciation = net book value

Question 13

When calculating net book value, when do you change the asset’s cost?

Answer 13

You never change the asset’s cost, you will only increase your contra-asset account (accumulated depreciation) which subtracts from equipment account.

Question 14

Under straight-line depreciation, the _____ ______ of depreciation is recorded each year.

Answer 14

same amount

Question 15

How is the depreciation per year calculated under straight line depreciation?

Answer 15

Depreciation per year = (Cost - residual value)/useful life

Question 16

______ ____ is the management’s estimate of the economic life to the company.

Answer 16

useful life

Question 17

_________ _______ (a.k.a. salvage value) is the estimate of the asset’s value to the company at the end of the useful life.

Answer 17

residual value

Question 18

T or F: Cost of an asset may also include taxes, delivery, or related fees to use the asset.

Answer 18

True

Question 19

What are some items that aren’t recorded to the equipment account when an asset is purchased?

Answer 19

Interest expense or repairs.

Question 20

Which value only represents how much depreciation was recorded in the most recent accounting period and which value represents the amount of depreciation over the asset’s life?

Answer 20

Depreciation expense is recorded for the accounting period

Accumulated depreciation is the amount for the asset’s entire life

Question 21

What kind of expense is depreciation expense?

Answer 21

An operating expense

Question 22

T or F: The cost of the asset changes on the balance sheet as the company uses it, year by year.

Answer 22

False, the cost will always remain the same. The accumulated depreciation, which is subtracted from the asset cost, is what changes.

Question 23

When equipment is sold for more than the net book value, it is considered a _____ and when it is sold for less, it is considered a _____.

Answer 23

Gain

Loss

Question 24

When deciding how much cost to record for the purchase of a building, what should be considered?

Answer 24

(1) Purchase price
(2) Sales tax
(3) Title search and transfer doc costs
(4) Realtor’s and attorney fees
(5) remodeling costs

Question 25

When deciding how much cost to allocate for the purchase of land, what should be included?

Answer 25

(1) Purchase price
(2) Sales tax
(3) Title search and transfer docs
(4) Realtor and attorney fees
(5) Costs for removal of old buildings
(6) Grading costs

Question 26

If a company purchases new equipment, what should be considered as part of the cost of the asset?

Answer 26

(1) Purchase price (less discounts)
(2) Sales tax
(3) Delivery costs
(4) Installation costs
(5) Costs to adapt for intended use