Test Bank Financial Accounting 6E by Libby Chapter 08

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Chapter 008: Plant and Equipment
True / False Questions

1. Tangible long-lived, productive assets differ from intangible long-lived, productive assets
in that intangible assets have physical substance whereas tangible assets have no physical
substance.
FALSE
AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 1
2. Patents and trademarks are examples of tangible assets.

FALSE

Difficulty: Easy
L.O.: 1
3. Because of its large investment in equipment, Southwest Air Lines closely monitors the
unused seats on flights since it may be more profitable to reduce fares to fill more seats
thereby using more of the capacity.
TRUE

Difficulty: Medium
L.O.: 1
4. Building and equipment are recorded at their cost at acquisition and are subsequently
reported at cost plus accumulated depreciation.
FALSE

Difficulty: Medium
L.O.: 2
8-1
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e
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5. The cash-equivalent cost of an asset received is measured as any cash given plus the current
market value of the non-cash consideration given up. If this value is not determinable, the
current market value of what is received should be used instead.
TRUE

Difficulty: Hard
L.O.: 2
6. If a second-hand machine is purchased for productive use in a business, all renovation and
repair costs on the used machine incurred by the purchaser prior to its productive use should
be excluded from the cost of the asset.
FALSE

Difficulty: Medium
L.O.: 2
7. In accounting for depreciation, acquisition cost and useful life usually are known quantities,
whereas residual value is an estimate because it relates to an amount in the future.
FALSE

Difficulty: Medium
L.O.: 3
8. If an accountant calculates depreciation expense on an asset without taking into account the
asset's residual value of $10,000, depreciation expense for the periods will be higher than it
should have been.
TRUE

Difficulty: Easy
L.O.: 3
8-2
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9. On January 1, 2009 equipment was purchased for $80,000 and its estimated residual value
is $15,000 with an 8 year useful life. In the first year, the depreciation expense under the
double declining-balance method is $16,250.
FALSE
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
10. If a long-lived asset has been impaired, then the entry will require a debit to a loss account
and a credit to the long-lived asset account.
TRUE

Difficulty: Medium
L.O.: 4
11. If a company has an asset with a book value of $5.0 million and estimates the future cash
flows to be received over the asset's remaining life equal to $5.5 million, no impairment has
occurred and no loss would be recognized.
TRUE

Difficulty: Medium
L.O.: 4
12. The first step in recording the disposal of a long-lived asset is to recognize depreciation
expense for the period of time since the last depreciation adjustment was made.
TRUE

Difficulty: Medium
L.O.: 5
8-3
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13. Using a shorter estimated useful life for their fixed assets allows a company to reduce
reported net income over the fixed assets' useful lives. However, early disposal of these assets
could create reported gains thereby boosting income upon their disposal.
TRUE

Difficulty: Hard
L.O.: 5
14. The systematic and rational allocation of the acquisition cost of natural resources to those
periods in which the resources contribute to revenue is called depletion.
TRUE

Difficulty: Easy
L.O.: 6
15. Goodwill is the most commonly reported intangible asset and is recorded only when an
existing company is bought by another company and the purchase price exceeds the book
value of the purchased company's net assets.
FALSE

Difficulty: Hard
L.O.: 6
16. Research and development costs are most commonly expensed as incurred and not
capitalized.
TRUE

Difficulty: Easy
L.O.: 6
8-4
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17. Depreciation expense, as computed for financial reporting, has a direct effect on a
corporation's cash flow.
FALSE

Difficulty: Medium
L.O.: 7
18. For capital intensive companies like US Steel, depreciation is a significant non-cash
expense included in deriving net income.
TRUE

Difficulty: Easy
L.O.: 7
19. Depreciation expense is added to net income under the indirect method when computing
cash flow from investing activities.
FALSE

Difficulty: Medium
L.O.: 7
20. When either the estimated useful life or estimated residual value (or both) of a long-lived,
productive asset are changed, all prior financial statements are reissued reflecting the
correction retroactively.
FALSE

Difficulty: Medium
L.O.: Sup A
8-5
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Multiple Choice Questions

21. Long-lived, productive assets do not include the following kind of assets
A. land held for resale.
B. plant and equipment in use.
C. patents in use.
D. mineral deposits being mined.

Difficulty: Medium
L.O.: 1
22. Rockwell, Inc., a manufacturing company, is preparing their annual financial statements.
Which of the following accounts would not be grouped under long-lived, productive assets?
A. Buildings.
B. Land on which the building is located.
C. Equipment.
D. Finished goods inventory.

Difficulty: Easy
L.O.: 1
23. Long-lived, productive assets that have physical substance are

A. Long-term investments.
B. Intangible assets.
C. Tangible assets.
D. Current assets.

Difficulty: Easy
L.O.: 1
8-6
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24. Tangible assets include

A. Land, buildings and natural resources.
B. Land, buildings and leaseholds.
C. Natural resources, buildings, and franchises.
D. Licenses, trademarks, and land.

Difficulty: Medium
L.O.: 1
25. Intangible assets include

A. Natural resources, patents, and trademarks.
B. Accounts receivable, franchises, and trademarks.
C. Copyrights, licenses, and land.
D. Leaseholds, patents and copyrights.

Difficulty: Medium
L.O.: 1
26. Which statement is false?

A. Shortening the estimated useful lives of operational assets will lead to a higher fixed asset
turnover.
B. Using an accelerated depreciation method instead of straight-line will lead to reporting a
higher fixed asset turnover.
C. Acquiring more long-lived, productive assets when a company is growing will lead to a
lower fixed asset turnover.
D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed
asset turnover.

Difficulty: Hard
L.O.: 1
8-7
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27. On March 1, Wright Company purchased new equipment for $50,000. Wright paid cash
for the equipment. Other costs associated with the equipment were: transportation costs,
$1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the
equipment was
A. $56,500.
B. $54,000.
C. $51,000.
D. $50,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
28. The amount of sales tax paid on the purchase of new machinery should be debited to
A. the machinery account.
B. a separate deferred charge account.
C. a sales tax expense account.
D. accumulated depreciation for machinery.

Difficulty: Easy
L.O.: 2
29. On August 1, Red Company purchased computer equipment for $10,000 cash and also
gave 100 shares of White common stock held by Red Company as an investment. The White
common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. The
installation cost was $700 and the shipping cost was $500. What amount should be the total
amount debited to the computer equipment account?
A. $14,200.
B. $15,000.
C. $15,400.
D. $16,200.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
8-8
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30. Salvia Company recently purchased a truck. The price negotiated with the dealer was
$40,000. Salvia Company also paid sales tax of $2,000 on the purchase, shipping and
preparation costs of $3,000, and insurance for the first year of operation of $4,000. For the
truck, what amount should be debited to the asset account Vehicles?
A. $40,000.
B. $42,000.
C. $43,000.
D. $45,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
31. The book value of a tangible long-lived, productive asset is the

A. acquisition cost.
B. current estimated market value.
C. acquisition cost minus the balance in accumulated depreciation.
D. total depreciation that has been recorded on the asset to date.

Difficulty: Easy
L.O.: 2
32. Which of the following costs would be subtracted from the acquisition cost of equipment
purchased from a supplier?
A. Cost to install the equipment.
B. A purchase discount offered by the supplier.
C. The cost to widen an entrance in the building to bring the equipment into the facilities.
D. The cost of freight paid to get the equipment into the facilities.

Difficulty: Medium
L.O.: 2
8-9
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33. If an expenditure is treated as a capital expenditure, instead of as a revenue expenditure,

which of the following statements is true?
A. The current year's net income will be lower and future depreciation expense will be higher.
B. The current year's net income will be higher and future depreciation expense will be lower.
C. The current year's net income will be higher and future depreciation expense will be
higher.
D. The current year's net income will be lower and future depreciation expense will be lower.

Difficulty: Hard
L.O.: 2
34. Which of the following would not be included in the acquisition cost of a building?
A. The purchase price of a building including title transfer fees.
B. The cost of putting new windows and doors in the building before it opens for operations.
C. The cost of paving the parking lot and outdoor lighting in the lot.
D. The cost of paying an architect to design the remodeling modifications of the building
before the store opens.

Difficulty: Medium
L.O.: 2
35. A company acquires land by issuing 10,000 shares of its $10 par value common stock
currently trading at $20 per share and the appraised value of the land is $250,000. We would
record the land by
A. Using its appraised value of $250,000 and recognize a gain of $50,000 since we are issuing
stock only currently worth $200,000.
B. Record the land at the value of the consideration given up, $200,000.
C. Record the land at the average of its appraised value of $250,000 and the $200,000 value
of the stock issued, thereby recognizing a $25,000 gain.
D. Record the land at the par value of the stock given up, $100,000.

Difficulty: Medium
L.O.: 2
8-10
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36. A company may include interest cost as part of the cost of the asset
A. when they buy a piece of equipment and finance its acquisition by a bank loan.
B. when they must borrow money to finance the manufacture of their inventory items.
C. when they are self-constructing a piece of equipment they will use to manufacture their
products but only during the period of construction.
D. under no circumstances as interest is never capitalized.

Difficulty: Medium
L.O.: 2
37. Which of the following is false?

A. Replacement of a truck's tires would be treated as a capital expenditure.
B. The cost of replacing carpet in a building would be a revenue expenditure.
C. Cost of replacing a roof on a newly purchased building before using it as a store would be
a capital expenditure.
D. The cost of repainting a hallway would be a revenue expenditure.

Difficulty: Medium
L.O.: 2
38. In 2010, Gilbert Company made an ordinary repair to a delivery truck at a cost of $500.
Gilbert Company's accountant debited the asset account, Delivery Vehicles. Was this
treatment an error, and if so, what will be the effect on the financial statements of Gilbert
Company?
A. The repair was accounted for correctly.
B. The error increased assets and net income in 2010.
C. In the years following 2010, net income will be too high.
D. The error decreased net income in 2010.

Difficulty: Medium
L.O.: 2
8-11
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39. Which of the following would most likely not be a revenue expenditure?
A. Replacing carpet in the sales department's offices.
B. Repairing a leaky roof.
C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver
appliances.
D. Painting the exterior of a store.

Difficulty: Hard
L.O.: 2
40. The main purpose of recording depreciation is to

A. allocate the cost of a tangible asset to the periods in which its use contributes to generating
revenue.
B. estimate the remaining useful life of the asset.
C. report the asset on the balance sheet at the estimated amount for which the asset could be
sold on the balance sheet date.
D. estimate the current replacement cost of the asset.

Difficulty: Easy
L.O.: 3
41. Residual value is

A. equal to the acquisition cost of a tangible long-lived, productive asset.
B. the same as book value of an asset.
C. the amount expected to be recovered when an asset is disposed of at the end of its
estimated useful life.
D. the current value of an asset as of the balance sheet date.

Difficulty: Easy
L.O.: 3
8-12
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42. In accounting for tangible long-lived, productive assets, the continuity assumption is
important
because it
A. helps a company decide whether to use straight-line depreciation or an accelerated
depreciation method.
B. justifies depreciating the asset over its expected useful life, without anticipating that the
business will liquidate in the near future.
C. provides justification for including residual values in calculating depreciation.
D. is consistent with maintaining assets in the accounting records at market value rather than
acquisition cost.

Difficulty: Medium
L.O.: 3
43. On January 1, 2009, Woodstock, Inc. purchased a machine with a cash price of $40,000.
Woodstock, Inc., also paid $1,000 for transportation and installation. The expected useful life
of the machine is 6 years and the residual value is $5,000. Assuming straight-line
depreciation, the annual depreciation expense would be
A. $6,100.
B. $6,000.
C. $5,950.
D. $5,750.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
44. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line
basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated
useful life is
A. 3 years.
B. 4 years.
C. 5 years.
D. 6 years.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
8-13
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45. Warren Company plans to depreciate a new building using double declining-balance
depreciation. The building cost $800,000. The estimated residual value of the building is
$50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation
expense was recorded properly, what would be the amount of depreciation expense for the
second year?
A. $30,720.
B. $32,000.
C. $58,880.
D. $64,000.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 3
46. Which method of depreciation results in periodic depreciation expense that fluctuates
from one period to the next, not necessarily in a steadily upward or downward direction?
A. Straight-line.
B. Units-of-production.
C. Amortization.
D. Declining balance.

Difficulty: Easy
L.O.: 3
47. In which depreciation method is the first year's depreciation computed by applying the
depreciation rate to the total cost of the asset (without reducing it for residual value)?
A. Straight-line.
B. Units-of-production.
C. Amortization.
D. Declining-balance.

Difficulty: Easy
L.O.: 3
8-14
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48. Hill Inc. purchased an asset on January 1, 2009. Hill Inc., chose the accelerated
depreciation method to depreciate the asset. Had Hill Inc., chosen the straight-line method
A. depreciation expense would be smaller in 2009.
B. the book value of the asset would be less at the end of 2009.
C. net income would be less in 2009.
D. the book value of the asset would be less at the end of the asset's life.

Difficulty: Medium
L.O.: 3
49. On January 1, 2009, Pyle Company purchased an asset that cost $50,000 (no estimated
residual value, estimated useful life 8 years, straight-line depreciation is used). An error was
made because the total cost amount was debited to an expense account for 2009 and no
depreciation on it was recorded. Pretax income for 2009 was $42,000. The correct pretax
income for 2009 was
A. $35,750.
B. $48,250.
C. $85,750.
D. $92,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
50. Schager Company purchased a computer system on January 1, 2009, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance method. Depreciation expense for the second
year will be
A. $5,000.
B. $4,000.
C. $3,800.
D. $2,200.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 3
8-15
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51. A company decided to use the units of production method to calculate depreciation on a
car to be driven by the sales manager. The amount of annual depreciation will most likely
vary with the
A. age of the car.
B. balance in accumulated depreciation.
C. number of miles the car is driven.
D. amount of maintenance expense incurred on the car.

Difficulty: Easy
L.O.: 3
52. How is the matching principle related to the recording of depreciation on tangible longlived, productive assets?
A. The matching principle requires a company to use the same depreciation.
B. Once a particular depreciation method is adopted for a particular asset, the owner must
continue to use the same method.
C. The accountant who calculates the depreciation may assume that the company will
continue in business as long as the estimated useful life of the asset.
D. A portion of the cost of the asset should be allocated as an expense to the periods in which
the asset helps the business to generate revenue.

Difficulty: Easy
L.O.: 3
53. Which of the following is false?

A. The book value at the end of an asset's useful life will be the same under all the
depreciation methods allowed under GAAP.
B. The total depreciation in the accumulated depreciation account will be the same at the end
of the asset's useful life under all the methods allowed under GAAP.
C. Once you select a depreciation method, then you must use this method for all depreciable
assets.
D. The annual depreciation expense will differ under the various depreciation methods.

Difficulty: Medium
L.O.: 3
8-16
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54. Under what conditions would a company most likely adopt the double declining-balance
method for financial reporting?
A. They have high technology, robotic equipment in their plant that becomes obsolete quickly
and declines in utility to the company more rapidly in the early years of the assets' lives.
B. They have a fleet of trucks where repair costs are minimal as the fleet ages.
C. They expect the asset to lose its market value more rapidly in the first few years of its life.
D. They have a building that has an estimated useful life of 50 years.

Difficulty: Hard
L.O.: 3
55. Which of the following is a true statement?

A. Companies can change the method of depreciating assets from one year to the next.
B. Companies can affect the book value at the end of an asset's life by choosing one method
of depreciation over another.
C. Companies can use one method of depreciation for some of their long-lived, productive
assets but then use a different method for another group or type of long-lived, productive
assets.
D. Companies can minimize an asset's book value in the first year of use by selecting the
straight line method.

Difficulty: Medium
L.O.: 3
56. Which of the following is true?

A. Using straight-line depreciation in comparison to an accelerated method will lead to a
lower earnings per share in the first year of an asset's life.
B. Using accelerated depreciation in the first year of an asset's life will report a higher net
profit margin compared to using straight-line.
C. Using accelerated depreciation will lead to a higher total asset turnover in the first year.
D. Using straight-line depreciation in comparison to an accelerated method will lead to a
higher current ratio in the first year of an asset's life.

Difficulty: Hard
L.O.: 3
8-17
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57. Which of the following statements about the Modified Accelerated Cost Recovery System
(MACRS) is true?
A. It is similar to the double declining-balance method.
B. It is applied using longer asset lives than the estimated useful lives required by GAAP.
C. It provides a tax benefit because of the higher depreciation expense reported in the early
years of the asset's life.
D. It is acceptable for use when preparing your financial statements.

Difficulty: Medium
L.O.: 3
58. Which of the following statements about asset impairment is false?

A. Asset impairment is caused by events or circumstances where the estimated future cash
flows are greater than the asset's net book value.
B. If an asset is impaired, a loss would be recognized in the period it can be estimated.
C. Impairment will lead to writing down the asset's cost.
D. Asset impairment is caused by events or circumstances where the estimated future cash
flows are less than the asset's net book value.

Difficulty: Hard
L.O.: 4
59. Coca Cola has some bottling equipment which cost $8.5 million, has a book value of $4.1
million, and has estimated future cash flows of $3.7 million expected over its remaining life.
The amount to be recorded as a loss equals
A. the $8.5 million cost.
B. the $4.1 million book value.
C. the $.4 million difference between the book value and its future cash flows.
D. the $4.8 million difference between the asset's cost and its future cash flows.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 4
8-18
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60. If Southwest Airlines determines that an asset has been impaired by $2 million then which
of the following will occur at the end of the current accounting period?
A. No action will be taken to recognize its impairment until the asset is sold.
B. The impairment will not affect the accounts but will be disclosed in the footnotes.
C. A debit to retained earnings will be recorded for the effect of the loss thereby bypassing the
income statement.
D. A credit to the asset's account will be recorded for the amount of the loss.

Difficulty: Hard
L.O.: 4
61. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The
original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2
million on December 31, 2010; they had been using the straight-line depreciation method. The
estimated residual value was zero and its useful life was 25 years. What is the gain or loss on
the equipment on December 31, 2010?
A. $250,000 loss
B. $400,000 gain
C. $200,000 loss
D. $200,000 gain
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
62. If a company sold a long-lived, productive asset at a price equal to its book value, the
selling company would record
A. no gain or loss.
B. a gain.
C. a loss.
D. an extraordinary item.

Difficulty: Easy
L.O.: 5
8-19
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63. Which of the following is correct when recording the disposal of equipment for a gain?
A. A debit to a gain account.
B. A credit to the equipment account for the asset's book value.
C. A debit to accumulated depreciation for the depreciation accumulated to the time of
disposal.
D. A debit to the asset account.

Difficulty: Medium
L.O.: 5
64. Carter Co. disposed of an asset at the end of year 8 of the asset's life originally estimated
to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000 and
it was being depreciated under the straight-line method. It was sold for $10,000 cash. What
was the gain or loss on the disposal at the end of year 8?
A. $1,000 gain
B. $4,000 loss
C. No gain or loss
D. $10,000 gain
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 5
65. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life
of five years and residual value of $0. The computer was depreciated by the straight-line
method and was sold at the end of the fourth year of use for $3,000 cash. Amanda Company
should record
A. a gain of $1,000.
B. a loss of $1,000.
C. neither a gain nor a loss the computer was sold at its book value.
D. neither a gain nor a loss the gain that occurred in this case would not be recognized.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
8-20
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66. On March 1, 2009, Anniston Company purchased a producing oil well at a cash cost of
$1,000,000. It is estimated that 1,500,000 barrels of oil can be produced over the remaining
life of the well. By December 31, 2009 (end of the accounting period), 150,000 barrels of oil
were produced and sold. The amount of depletion for 2009 on this well that should be added
to oil inventory would be
A. $100,000.
B. $125,000.
C. $ 90,000.
D. $ 85,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
67. Which of the following is most likely to be an intangible asset with an indefinite life?
A. Leasehold rights
B. Franchise
C. Patent
D. Goodwill

Difficulty: Medium
L.O.: 6
68. Which one of the following would not be recorded as an intangible long-lived, productive
asset?
A. Leasehold rights
B. Copyright
C. Internally generated goodwill
D. Franchise

Difficulty: Easy
L.O.: 6
8-21
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69. Which of the following methods ordinarily would be the most appropriate to determine
depletion of natural resources for financial reporting purposes?
A. Straight-line.
B. Double declining-balance.
C. Specific identification.
D. Units of production.

Difficulty: Easy
L.O.: 6
70. The term used for matching the cost of an intangible asset with the revenues generated
through the use of the asset is
A. depreciation.
B. depletion.
C. amortization.
D. appraisal.

Difficulty: Easy
L.O.: 6
71. Failure to record amortization expense on a patent during the current year
A. would cause net income to be overstated for the year but would have no effect on total
assets.
B. would cause both net income for the year and total assets to be overstated.
C. would cause total assets to be overstated but would have no effect on net income for the
year.
D. is allowed under Generally Accepted Accounting Principles.

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72. Depletion is recorded for natural resources

A. to recognize increases in market value with the passage of time.
B. to match the cost of resources used up with the revenues that are earned.
C. and for buildings and equipment used in extracting the resource.
D. by a method similar to declining balance depreciation.

Difficulty: Easy
L.O.: 6
73. In accounting, goodwill

A. may be recorded whenever a company achieves a level of net income that exceeds the
industry average.
B. does not need to be amortized its value never decreases.
C. may be recorded when a company purchases another business.
D. must be expended in the period it is recorded because benefits from goodwill are difficult
to identify.

Difficulty: Medium
L.O.: 6
74. The Bowtie Company reported net income of $1,872 million in 2009 along with
depreciation expense of $1,412 million and $978 million paid for purchases of property, plant
and equipment. What would be the effect on cash flows from operating activities?
A. Depreciation would increase and the property, plant and equipment purchases would
decrease cash flow from operations.
B. Depreciation would increase and property, plant and equipment purchases would increase
cash flows from operations.
C. Depreciation would increase cash flow from operations but the property, plant and
equipment purchases would have no effect on cash flow from operations.
D. Depreciation is a non-cash expense and would not be used to calculate cash flow from
operating activities.

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75. Landmark Restaurants reported net income in 2008 of 45.9 million and depreciation
expense of $48.8 million. They also report additions to property and equipment of $162.9
million. Which of the following disclosures would appear on the 2008 statement of cash
flows?
A. Depreciation of $48.8 million would be deducted from net income under operating
activities and the additions $162.9 million would be added under investing activities.
B. Depreciation of $48.8 million would be added to net income under operating activities and
the additions $162.9 million would be added under investing activities.
C. Depreciation of $48.8 million would be added to net income under operating activities and
the additions $162.9 million would be deducted under investing activities.
D. Depreciation of $48.8 million would be deducted from net income under operating
activities and the additions $162.9 million would be deducted under investing activities.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
76. Williams Company purchased a machine at a cash cost of $25,000 and is depreciating it
over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the
eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated
useful life was changed from 10 to 12 years with the residual value unchanged. Depreciation
expense for year 8 would be (assuming straight-line) depreciation
A. $2,200.
B. $2,920.
C. $3,100.
D. $8,800.
AACSB Tag: Analytic

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L.O.: Sup A
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77. Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of
five years and estimated residual value of $5,000. At the beginning of year three, Augie's
managers concluded that the total useful life would be four years, rather than five. There was
no change in the estimated residual value. What is the amount of depreciation that Augie
Corporation should record for year 3 under the straight-line method?
A. $15,500.
B. $ 8,250.
C. $11,000.
D. $16,500.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup A
78. Pearson Corporation purchased a machine with an initial cost of $80,000, a residual value
of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Pearson
Corporation spent $10,000 for an extraordinary repair. Following the repair, Pearson
Corporation estimated that the machine had a remaining useful life of 8 years, and that the
residual value was unchanged. Calculate depreciation expense on the machine for the fifth
year, assuming that Pearson Corporation uses the straight-line method.
A. $5,625.
B. $7,250.
C. $7,500.
D. $6,875.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: Sup A
79. A revision of an asset's estimated useful life from 20 to 25 years after the asset has been
depreciated for 10 years would result in
A. reporting a lower fixed asset turnover ratio for year 11.
B. a lower earnings per share reported in year 11.
C. a lower return on equity for year 11.
D. a lower net income for year 11.

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L.O.: Sup A
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80. An extraordinary repair to a building

A. is a revenue expenditure and is debited to an expense account.
B. is a capital expenditure and is debited to an expense account.
C. is a capital expenditure and is debited to an asset account.
D. is a revenue expenditure and may be debited to accumulated depreciation.

Difficulty: Medium
L.O.: Sup A
Essay Questions
81. The following information is available for Coca-Cola and PepsiCo:
Compute the fixed asset turnover ratio for both Coca Cola and PepsiCo.
Coca-Cola 4.61 ($19,889/ [$4,168 + $4,453]/2)
PepsiCo 3.82 ($20,438/ [$5,266 + $5,438]/2)
AACSB Tag: Analytic

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82. The following information was available for Landmark Restaurants for the past three
years. Using this information to compute the fixed asset turnover ratio for 2008 and 2007.
2008 = 1.23 ($1,105,755 / [$965,575 + $830,930 / 2])

2007 = 1.26 ($894,795 / [$830,795 + $587,829 / 2])
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
83. On January 1, 2009, Trenton Company purchased a machine. The price quoted by the
seller was $50,000. Paid with cash were: transportation, $1,000 installation, $2,000; and sales
tax, $3,000. Give the entry to record the acquisition.
AACSB Tag: Analytic

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84. Waterloo Corporation purchased factory equipment for a cost of $1,800,000. It cost
$100,000 for its delivery, $220,000 for its installation and modifications to the production
building, and cost $60,000 in interest costs on borrowed funds used to acquire the equipment.
What is the acquisition cost of the new equipment?
$2,120,000 ($1,800,000 + 100,000 + 220,000). Interest is not capitalized because the
equipment was purchased and not self-constructed.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
85. In 2008, Landmark Restaurants reported the cost of fixed assets at $1,189.8 million and
the accumulated depreciation at $224.2 million. In that same year, Coca Cola reported
$10,149 million in fixed assets and accumulated depreciation on them of $4,058.
A. Estimate the approximate remaining percentage life of the assets for Landmark Restaurants
and Coca Cola
B. Which company appears to have newer assets with longer remaining lives?
A. Landmark's 81.2% ($1,189.8
$224.2)/$1,189.8, Coca Cola 60.0% ($10,149
$4,058)/$10,149
B. Landmark's appears to have "newer" assets than Coca-Cola because 81.2% of their assets'
value remains in book value while Coca-Cola has 60.0% remaining in book value.
AACSB Tag: Analytic

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86. Hi-Crest Company purchased a machine on January 1, 2009, for $300,000. The machine
has an estimated useful life of 5 years and a $10,000 residual value. It is now December 31,
2010 and Hi-Crest Company is in the process of preparing financial statements. Calculate
depreciation expense and book value for 2009 and 2010, using the double declining-balance
method of depreciation.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
87. The financial statements of Franklin Company contained the following errors:
Respond to each of the following (disregard income taxes):

A. Was net income for 2009 understated or overstated?
B. Was total combined net income for the two-year period ended December 31, 2010
overstated or understated?
A. Overstated (If depreciation expense is understated, then income is overstated.)
B. Overstated (2009's income was overstated by $1,000. 2010's income was understated by
$900. The net is an overstatement of $100.)
AACSB Tag: Analytic

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88. On January 1, 2009, Boston Company purchased a heavy duty machine having an invoice
price of $13,000 plus transportation and installation costs of $3,000. The machine is estimated
to have a 4-year useful life and a $1,000 residual value. Calculate depreciation expense and
book value for 2009-2012, assuming 150% declining-balance method of depreciation. (Round
to the nearest dollar.)
* Straight-line rate: 1
4 years = .25
Declining-balance rate: .25
1.50 = .375
** Even though $3,906
.375 = $1,465, the depreciation expense the last year (the fourth
year) is the amount necessary to leave book value equal to the residual value of $1,000.
AACSB Tag: Analytic

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89. Cherokee Company acquired a machine on January 1, 2009, that cost $2,700 and had an
estimated residual value of $200. Complete the following schedule using the three methods of
depreciation: A. straight-line, B. units-of-production, C. 150% declining-balance.
AACSB Tag: Analytic

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90. Covey Company purchased a machine on January 2, 2008, by paying cash of $250,000.
The machine has an estimated useful life of five years (or the production of 500,000 units)
and an estimated residual value of $25,000.
Required:
A. Determine depreciation expense (to the nearest dollar) for each year of the machine's
useful life under (1.) straight-line depreciation; and (2.) the 200% declining balance method.
B. What is the book value of the machine after three years using the 200% declining- balance
method?
C. What is the book value of the machinery after three years with straight-line depreciation?
D. If the machine was used to produce and sell 120,000 units in 2008, what would the
depreciation expense be under the units of production method?
A. 1. Straight-line depreciation for years 1 through 5 = ($250,000
$45,000
2. Declining balance method
200% acceleration rate
$25,000/5 years) =
*Amount to reduce book value to $5,000

B. $250,000
100,000
60,000
36,000 = $54,000
C. $250,000
($45,000
3) = $115,000
D. (250,000
25,000)/500,000 = $.45/unit
$.45
120,000 = $54,000
AACSB Tag: Analytic

Difficulty: Hard
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91. Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The
company estimated that the truck would have a useful life of 4 years and a residual value of
$4,000.
Required:
A. Calculate depreciation expense under straight line and double declining balance for 20092012.
B. Which of the two methods in part 1 would result in: (1.) Lower net income in 2010? (2.)
Lower net income in 2012?
A.
Straight-line: ($34,000
4,000)/4 years = $7,500
Declining-balance:
2009
200%
$34,000 = $17,000
2010
200%
($34,000
$17,000) = $8,500
2011
200%
($34,000
$25,500) = $4,250
2012 Book value $4,250
$4,000 target book value = $250
B. Lower net income: (1.) 2010 Double declining-balance; (2.) 2012 Straight-line.
AACSB Tag: Analytic

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92. Allison Company purchased a machine for $1,200,000 on January 1, 2009. It was using
the double declining-balance (200%) method to depreciate the asset and its useful life was
estimated to be 5 years with a residual value of $200,000. At December 31, 2010 (year 2),
Allison Company estimates the future cash flows from the asset to be equal to $500,000.
What is the amount of the impairment loss?
Zero. At the end of year two, the machine's book value would be $432,000 (year 1
depreciation $480,000 plus year 2 depreciation of $288,000 would be deducted from the
asset's cost of $1,200,000). Since the future cash flows are not below the asset's book value,
there is no impairment loss.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
93. A company purchased equipment for $800,000 and has depreciated it using the straightline method for the past 5 years when its original life was estimated to be 10 years with a
$200,000 residual value. The equipment's utility to the company has declined because they
expect it to generate a net cash flow over the remaining years of $200,000 from its operation.
If the asset has been impaired, record the journal entry to recognize the loss.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
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94. Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600. The
estimated residual value was $400 and the estimated useful life was 4 years. The company
uses straight-line depreciation computed monthly. On July 1, 2012, the company sold the
truck for $1,700 cash.
A. What was the depreciation expense amount per month?
B. What was the amount of accumulated depreciation at July 1, 2012?
C. Give the required journal entries on the date of disposal, July 1, 2012. (Assume no 2012
depreciation had yet been recorded)
A. ($10,600
$400)
48 = $212.50 per month
B. 212.50
6 months = $1,275
C.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3, 5
95. Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5
years ago for a cost of $800,000. It has been depreciated using the straight-line method over
an estimated useful life of 10 years with an estimated residual value of $50,000. Record the
journal entry at the end of year five for the asset's disposal assuming the fifth year's
depreciation had been recorded.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
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96. Bennett Corporation sold a piece of equipment on June 30, 2012 for $50,000 cash. The
equipment had been purchased on January 1, 2008 for $150,000. It had an estimated useful
life of 6 years and a $30,000 residual value. Bennett Corporation has been using the straightline method of depreciation and has a year-end of December 31st. Give any journal entry (ies)
required at the time of disposal. Round final calculations to nearest whole dollar.
AACSB Tag: Analytic

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L.O.: 5
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97. Spa Sources Corporation purchased a machine that had an original cost of $60,000 and an
estimated residual value of $10,000. The useful life was expected to be 8 years and straightline depreciation is used. At the end of 2010, the book value of the machine was $35,000. Spa
Sources Corporation sold the machine for $32,000 cash on October 1, 2011.
Required:
A. Prepare the journal entry to record depreciation for 2011 up to the date of sale. Round the
amount to the nearest dollar.
B. Prepare the journal entry to record the sale of the machine.
AACSB Tag: Analytic

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98. Give the required adjusting entry at December 31, 2011, the end of the annual accounting
period for the three items below. If no entry is required, explain why.
A. Polk Company acquired a patent that cost $6,000 on January 1, 2011. The patent was
registered on January 1, 2006. The legal life of a patent is 20 years from registration. Polk
expects to use the patent the remaining legal life.
B. Polk Company acquired a gravel pit on January 1, 2011, that cost $24,000. The company
estimates that 30,000 tons of gravel can be extracted economically. During 2011 4,000 tons
were extracted and sold.
C. On January 1, 2011, Polk Company acquired a dump truck that cost $6,000 to use hauling
gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The
company uses straight-line depreciation.
AACSB Tag: Analytic

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99. Benson Mining Company purchased a site containing a mineral ore deposit in 2008. The
purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable
ore. Benson Mining Company constructed a building at the site, at a cost of $500,000, to be
used while the ore is being extracted. When the ore reserves are gone, the building will have
no further value.
Required:
A. Explain the purpose for recording depletion on natural resources.
B. Calculate Benson Mining Company depreciation rate per ton of ore for this deposit.
C. Make the journal entry to record depletion for the year 2008, when Benson mined and sold
150,000 tons of ore.
D. Make the journal entry to record depreciation on the building for 2008. Benson Mining
Company calculates depreciation on the building using the units of production method based
on the amount of ore extracted (150,000 tons in 2008).
A. The purpose of recording depletion is to match the cost of a natural resource with revenues
earned from extracting and selling the resource.
B. $820,000/400,000 tons = $2.05/ton
AACSB Tag: Analytic

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100. On January 1, 2009 Gordon Company purchased a patent for $420,000 from an inventor
who had developed a new manufacturing process. At the time of the purchase, the patent had
a remaining legal life of 10 years.
Required:
A. Prepare the journal entry to record Gordon Company's purchase of the patent.
B. Prepare the journal entry to record amortization of the patent on December 31, 2009
assuming that no contra account is used.
C. At the end of 2012 after amortization had been recorded through December 31, 2011,
Gordon Company concluded that the estimated future cash flows from the patent to be
$200,000 as required to test for impairment. Record the impairment if necessary.
Computations: [420,000
(42,000
4) = 252,000
200,000]
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
101. Pier 5 has been in business 8 years with 4 stores in the San Francisco Bay Area. Their
local reputation for making savory pies such as curried potatoes is well recognized. A national
food distributor has offered to purchase the company. Pier 5 has $1.2 million of assets on their
books but those assets have a fair market value of $1.5 million and $.3 million of liabilities. If
the distributor offers to buy Pier 5 for $3.5 million and assume the liabilities of Pier 5, how
much will be recorded as goodwill based on the offered purchase price?
$2.3 million ($3.5 million minus {$1.5 million minus $.3 million})
AACSB Tag: Analytic

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102. Landmark Restaurants reported net income of $45.9 million in 2008. They reported
depreciation and amortization of plant and equipment of $48.8 million and cash paid for
additions to property, plant and equipment of $162.9 million in 2008. Explain where each of
these items would be reported and their impact on cash flows on the statement of cash flows.
The net income would be reported as the first item in the operating activities section and
would have a positive impact on cash flow. The depreciation and amortization would be
added to net income in the operating activities section and would have a positive effect on
cash flow. Finally the cash paid for new property, plant and equipment would be in the
investing activities section and would have a negative cash flow effect.

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103. Frankel Feed purchased a new machine on January 1, 2009:
It is now the beginning of year 6 and the management reevaluated the estimates related to the
machine. Compute the depreciation expense for year 6 under each of the following
independent cases:
A. (26,000
B. (26,000
C. (26,000
12,000
12,000
12,000
2,000)
1,000)
3,000)
(15 years
(10 years
(7 years
5 years) = $1,200 Depreciation expense

AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup. A
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104. Sadler Corporation purchased equipment to be used in manufacturing. The purchase was
made at January 1, 2009 by paying cash of $150,000. The equipment has an estimated
residual value of 10,000 and an expected useful life of 10 years. At January 1, 2011, Sadler
Corporation concluded that the total useful life of the equipment will be 8 years rather than
10, and that the residual value will be zero. Sadler uses the straight-line method for
depreciation.
Required:
A. Make the journal entry to record depreciation on the equipment for 2010.
B. Make the journal entry to record depreciation on the equipment for 2011, including the
effect of the changes in estimates.
C. Describe how a business should account for a change in the estimated useful life and/or
residual value of a depreciable asset.
Computations: $150,000
$28,000 (14,000 depreciation/year
2 years) = $122,000
remaining depreciable value $122,000/6 year remaining useful life = $20,333
C. A change in estimate of residual value or useful life requires the company to calculate a
new annual depreciation amount. The change in estimates affects the amount of depreciation
for current and future years. There is no restatement of financial statements for prior years.
AACSB Tag: Analytic

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L.O.: Sup A
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Matching Questions
105. Match the assets with the cost allocation method.
1. Long-term investment in stock of Swift Tea, Inc.
2. Tex-Mex Chile Franchise (in use)
3. Building
4. Uranium reserves (being exploited)
Depletion
Depreciation
Amortization
None
4
3
2
1

Difficulty: Easy
L.O.: 1
106. Match each type of asset category with the appropriate allocation method.
1. Property, plant, and equipment
2. Natural resources
3. Intangible assets
Amortization 3
Depletion 2
Depreciation 1

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107. Match the definition with the term.

Causes the depreciation expense for an asset to vary with the use of the asset: units-ofproduction depreciation
1. Expenditure for an asset that is debited to an
asset account
2. An ordinary repair
3. Cost minus accumulated depreciation of a
tangible long-lived, productive asset
4. Causes the depreciation expense for an asset to
vary with the use of the asset
5. Estimated amount to be recovered at the end of
the useful life of an long-lived, productive asset
6. Causes the depreciation expense for an asset to
decrease with passage of time
7. Rights granted to a lessee under the terms of a
contract
8. Allocation of the cost of a natural resource to
the periods in which revenues are generated
9. A heading used on the balance sheet for
tangible long-lived, productive assets
10. An asset that confers rights upon the owner
and that lacks physical substance
11. An exclusive right to make a product or use a
particular process
12. Allocation of the cost of an intangible asset to
the periods when it is used
capital expenditure 1
patent 11
property, plant and
equipment 9
depletion
leasehold
residual value
intangible asset
10
book value 3
units-of-production
depreciation 4
declining-balance
depreciation 6
revenue expenditure
amortization
2
12

Difficulty: Medium
L.O.: 1
8-45

Test Bank Financial Accounting 6E by Libby Chapter 08

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Test Bank Financial Accounting 6E by Libby Chapter 08

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Chapter 008: Plant and Equipment

True / False Questions

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2. Patents and trademarks are examples of tangible assets.

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AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

AACSB Tag: Analytic

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

Multiple Choice Questions

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AACSB Tag: Relative Thinking

23. Long-lived, productive assets that have physical substance are

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Chapter 008: Plant and Equipment

24. Tangible assets include

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25. Intangible assets include

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26. Which statement is false?

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Chapter 008: Plant and Equipment

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AACSB Tag: Relative Thinking

AACSB Tag: Analytic

Chapter 008: Plant and Equipment

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31. The book value of a tangible long-lived, productive asset is the

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AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

33. If an expenditure is treated as a capital expenditure, instead of as a revenue expenditure,

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AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

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37. Which of the following is false?

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AACSB Tag: Relative Thinking

Chapter 008: Plant and Equipment

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40. The main purpose of recording depreciation is to

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