Long Term Operating Assets

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Key Things To Know

j

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b

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h

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Hard Test

Self Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

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

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.

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

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

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

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

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

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

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.

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

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

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. The cost of financing the construction of a building to be used for 20 years is
a. capitalized as part of the cost of the building
b. expensed in the period incurred before use of the building
c. capitalized and expensed over the period of construction
d. a subsequent expenditure
Answer
A. This cost is part of what it takes to get the asset to the point of using it to produce revenues. It is a real cost, just like any other costs of construction, and the amount incurred prior to using the asset is capitalized as part of the building account. It is expensed as part of the building over the life the building is subsequently used to produce revenues.
13. Costs related to research and development must be expensed when they are
a. incurred to support the modification of a product
b. incurred before technological feasibility
c. incurred in discovery of a new product
d. both b. and c.
Answer
C. Research and development costs are those incurred in the discovery or development of a new product. R & D costs must be expensed when incurred. Software costs must be expensed if they are incurred before technological feasibility. The technological feasibility rule does not apply to research and development unrelated to software development.
14. When a company buys a group of assets for one price, the assets are recorded
a. as the asset with the longest useful life
b. as each individual asset based on estimated fair market values
c. as each individual asset based on book values
d. as all cost to the primary asset purchased
Answer
B. This is called a lump sum purchase. Each asset purchased must be recorded individually with the total purchase cost allocated based on the fair market value of the individual assets. The individual assets are depreciated based on the useful life of each asset.
15. What is included in the cost of a self-constructed asset?
a. building materials and labor to construct the asset
b. building materials, labor to construct the asset and financing costs incurred
c. labor to construct the asset, overhead costs, and financing costs incurred
d. materials, labor, allocated overhead, and financing costs incurred
Answer
D. All costs that may be capitalized on a self constructed asset are described in D. Effectively, all costs incurred to construct the asset are capitalized.