Long Term Assets

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Financial Accounting

Long Term Assets

Key Things To Know

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1. Long term operating assets are tangible which means

a. you can’t see or touch them
b. they have physical substance
c. they are used in peripheral activities of the business
d. the assets will be use more than one year

Check Your Answer
B. Tangible means it has physical substance and you can touch it and see it. Non current or long term means the asset will be used longer than one year (d.). Long Term operating assets are used in the day to day business of the company to produce revenues (c).
2. An intangible asset

a. is one that you can see or touch
b. is one that has physical substance
c. grants the owner the right to do something
d. both a. & c.

Check Your Answer
C. An intangible asset has no physical substance and you can not see it or touch it. It is an asset because it gives the owner the right to do something that will bring future benefit.
3. The term “capitalize” means to record it as

a. an asset and report it on the balance sheet
b. an expense and report it on the income statement
c. a long term and report it on the income statement
d. a physical asset and report it on the balance sheet

Check Your Answer
A. Capitalize means to record it as an asset and report it on the balance sheet. The capital asset can be tangible or intangible (d.). Both short term and long term assets are capitalized (c.). Money spent is either capitalized or expensed. Capitalized assets are expensed in later periods when they are used.
4. An expenditure that is expected to benefit future periods is

a. capitalized
b. expensed
c. always a current asset
d. reported on the income statement

Check Your Answer
A. Capitalize means it is an asset which provides probable benefit to future periods. The asset can be short term (inventory) or long term (P/P/E or Intangible). Capitalize means to record it as an asset now and expense it in future periods as the asset is used.
5. Which of the following is an intangible asset?

a. equipment
b. land
c. goodwill
d. supplies

Check Your Answer
C. Intangible assets have no physical substance. Goodwill is the benefit of a good management team, a good location, a good reputation, etc. This enables the company to increase future cash flow. Goodwill is recorded only when a company purchases another company and pays more than the fair market value of net assets. Internally generated goodwill is not recorded; a reliable amount can not be determined.
6. A general rule to follow is

a. capitalize all costs that are used up this period
b. capitalize all costs to get the asset to the point it can be used to produce revenue
c. expense all costs that give future benefit
d. expense all costs that do not have physical substance

Check Your Answer
B. All costs incurred to get the asset ready for use before an asset is used to produce revenue is added to the cost of the asset. Depreciation expense is then recorded as the asset is used to produce revenue (matching occurs). Costs incurred this period are expensed (a.) Expenses do not give future benefit (c.) Intangible assets are capitalized and they do not have physical substance (d.)
7. Subsequent expenditures are always

a. expensed when paid for
b. expensed in the period after the asset is purchased
c. expensed in the current period
d. expensed if there is no added probable future benefit

Check Your Answer
D. Subsequent expenditures occur after the asset is put into use. Expenditures that provide probable future benefit are capitalized and costs are expensed if there is no future benefit. Future benefit is defined as extends the life of the asset, improves efficiency or increases output.
8. Routine maintenance and repair costs are

a. always part of the asset’s cost
b. always capitalized
c. capitalized if it will occur 4 or 5 times during the year
d. always expensed

Check Your Answer
D. Routine maintenance and repairs occur over and over within a one year period. They do not provide future benefit and must always be expensed.
9. Subsequent expenditures are capitalized when

a. useful life is extended
b. efficiency is improved
c. either a. or b.
d. both a. and b.

Check Your Answer
C. Subsequent expenditures that provide future benefit are capitalized as an asset and expensed if there is no future benefit. Future benefit occurs with the following: extends the life of the asset, improves efficiency or increases output.
10. When purchasing a building, which cost will be expensed?

a. architecture fees prior to using the building
b. remodel prior to using the building
c. property tax for the current year
d. real estate commission on the purchase

Check Your Answer
C. Property tax for the current year is incurred this year and must be expensed. All other costs are part of purchasing the asset and getting the asset to the point it can be used to produce revenues and are capitalized (part of the cost of the asset).
11. Which cost will be expensed when purchasing equipment?

a. installation
b. training before use
c. the purchase price
d. damage that could have been avoided

Check Your Answer
D. Damage that could have been avoided does not provide future benefit. All other costs must be incurred to get the asset to the point it can produce revenue and are added to the cost of the asset.
12. Residual value, sometimes called salvage value, is

a. the current fair market value of the asset
b. the fair market value of the asset when purchased
c. the expected value of the equipment when the company is finished using it
d. subsequent amounts spent to use the asset

Check Your Answer
C. Residual value is the amount the asset is expected to be sold for (fair market value) when the company is done using the asset. (b.) is historical cost.
13. Depreciable cost (depreciable base) is the

a. net cost of the asset that is expensed over the useful life
b. cost of the asset less amounts currently depreciated
c. cost of the asset plus residual value
d. cost that will not be expensed over the life of the asset

Check Your Answer
A. The depreciable cost is the net amount that is expensed over the useful life. It is computed as historical cost less residual value. The original cost less the amount you expect to get back when you sell it is the maximum you can depreciate.
14. The useful life of an asset is

a. always the amount of years the asset is expected to last
b. always the amount of years the company intends to use the asset
c. not an estimate, the company knows exactly how long the asset will be used
d. none of the above

Check Your Answer
B. Estimated useful life is always the estimated amount of years the asset is expected to be used by the company to produce revenues. The asset may last longer than the company uses it. It is an estimate that is made at the time the asset is purchased.
15. Depreciation expense for the year using the straight-line method is computed by:

a. cost less accumulated depreciation divided by useful life
b. cost less residual value divided by useful life
c. cost plus residual value divided by the life the asset is expected to last
d. cost less residual value multiplied by useful life

Check Your Answer
B. Annual depreciation expense using the straight-line method is computed as historical cost less residual value divided by the useful life.
16. Depreciation expense for the year using the double declining balance method is computed by:

a. 100% multiplied by the useful life multiplied by book value
b. 100 % divided by the useful life multiplied by historical cost
c. 100% divided by useful life multiplied by 2 multiplied by book value
d. cost divided by useful life multiplied by 2

Check Your Answer
C. The formula for computing the annual expense using double declining balance is 100% divided by useful life = % x 2 = % x book value. Book value is cost less accumulated depreciation. Book value is lower each year since accumulated depreciation is higher each year.
17. Book value means

a. Historical cost divided by useful life
b. Historical cost less accumulated depreciation
c. Historical cost plus accumulated depreciation
d. Fair market value less historical cost

Check Your Answer
B. Book value is historical cost less accumulated depreciation. Book value is not an estimate of fair market value. Book value is the amount that will be expensed in the future as the asset is used. It is the cost of the asset not yet expensed.
18. The account that is always used when depreciation expense is incurred is

a. accumulated depreciation
b. book value
c. residual value
d. the asset account that is depreciated

Check Your Answer
A. Accumulated depreciation is always credited when depreciation expense is incurred (debit). The asset remains at historical cost and is not credited. Accumulated depreciation is a contra asset account that serves to reduce the asset’s book value.
19. The intangible asset that has a legal life of 17 or 20 years is a

a. trademark
b. copyright
c. patent
d. goodwill

Check Your Answer
C. A patent has a legal life of 17 or 20 years depending on when the patent is granted. Copyrights have a legal life of 50 years and Trademarks have a legal life of indefinite. Goodwill has no legal life and typically has an indefinite life.
20. Intangible assets are almost always expensed over the useful life of the asset using

a. the straight-line method
b. the double declining balance method
c. the equally declining method
d. most company’s use a different method and there is not one commonly used

Check Your Answer
A. Intangible assets are considered to give equal benefit over future years and the straight-line method is typically used to match the expense with the revenues produced.
21. The expense that is associated with natural resources is

a. depreciation
b. amortization
c. depletion
d. resource expense

Check Your Answer
C. Depletion expense is incurred when a natural asset is used. Depreciation is the expense incurred from using property, plant, & equipment. Amortization is the expense incurred from using an intangible asset. Resource expense is not an account.
22. The method that is most commonly used to record depletion expense is

a. the straight-line method
b. the double declining balance method
c. the equally declining method
d. the units of production method

Check Your Answer
D. Units of production is the most common method used to represent the cost of natural resources used. As more is produced and sold, more expense is recorded. This gives better matching.
23. When a company changes the estimated useful life of an asset

a. the annual depreciation expense will not change
b. prior year’s depreciation expense must be recomputed
c. future year’s depreciation expense will be different than the prior year
d. the cost of the asset increases

Check Your Answer
C. When the estimated life is changed, the amount that must be expensed each year to expense the cost over the total useful life also changes. You do not go back and recomputed prior year’s depreciation, you change the amount for each future year. The cost will only change when a subsequent expenditure is made.
24. When a long term asset is sold, the asset is credited (decreased) for historical cost
and

a. accumulated depreciation is credited (increase)
b. accumulated depreciation is debited (decrease)
c. depreciation expense is credited (decrease)
d. cash is credited (decrease)

Check Your Answer
B. When a long term asset is sold, the asset is decreased (credit) at historical cost, accumulated depreciation associated with the asset is removed (debit), cash is debited for the amount received and the difference is recorded as a realized gain (credit) or a loss (debit).
25. A gain on the sale of an asset will be recorded when

a. the asset is sold for less than book value
b. the asset is sold for more than book value
c. the asset is sold for more than fair market value
d. either b. or c.

Check Your Answer
B. A gain occurs when the cash received is more than the net amount given up. The net amount given up is the historical cost less accumulated depreciation, which is book value. Selling for more than fair market value can still produce a loss if book value is more than received (c).