b.Describe the nature of depreciation as the term is used
in accounting.- Name the three factors that need to be considered in
determining the amount of periodic depreciation. - Trigger Company purchased a machine that has a manu-
facturer’s suggested life of 15 years. The company plans to
use the machine on a special project that will last 11 years.
At the completion of the project, the machine will be sold.
Over how many years should the machine be depreciated? - Is it necessary for a business to use the same method of
computing depreciation (a) for all classes of its deprecia-
ble assets, (b) in the financial statements and in deter-
mining income taxes? - Of the three common depreciation methods, which is
most widely used? - a.Why is an accelerated depreciation method often used
for income tax purposes?
b.What is the Modified Accelerated Cost Recovery System
(MACRS), and under what conditions is it used? - A company revised the estimated useful lives of its fixed
assets, which resulted in an increase in the remaining
lives of several assets. Does GAAP permit the company
to include, as income of the current period, the cumula-
tive effect of the changes, which reduces the depreciation
expense of past periods? Discuss. - For some of the fixed assets of a business, the balance in
Accumulated Depreciation is exactly equal to the cost of
the asset. (a) Is it permissible to record additional depre-
ciation on the assets if they are still useful to the busi-
ness? Explain. (b) When should an entry be made to
remove the cost and the accumulated depreciation from
the accounts?
422 Chapter 9 Fixed Assets and Intangible Assets
SELF-STUDY QUESTIONS Answers at end of chapter
DISCUSSION QUESTIONS
- Which of the following expenditures incurred in
connection with acquiring machinery is a proper charge
to the asset account?
A. Freight C. Both A and B
B. Installation costs D. Neither A nor B - What is the amount of depreciation using the declining-
balance method (twice the straight-line rate) for the sec-
ond year of use for equipment costing $9,000, with an
estimated residual value of $600 and an estimated life
of three years?
A. $6,000 C. $2,000
B. $3,000 D. $400 - An example of an accelerated depreciation method is:
A. Straight-line C. Units-of-production
B. Declining-balance D. Depletion - Which of the following qualities are characteristics of
fixed assets? (a) tangible, (b) capable of repeated use in
the operations of the business, (c) held for sale in the nor-
mal course of business, (d) used continuously in the op-
erations of the business, (e) long-lived - Penguin Office Equipment Co. has a fleet of automobiles
and trucks for use by salespersons and for delivery of of-
fice supplies and equipment. Sioux City Auto Sales Co.
has automobiles and trucks for sale. Under what caption
would the automobiles and trucks be reported on the bal-
ance sheet of (a) Penguin Office Equipment Co., (b) Sioux
City Auto Sales Co.? - Spiral Co. acquired an adjacent vacant lot with the hope
of selling it in the future at a gain. The lot is not intended
to be used in Spiral’s business operations. Where should
such real estate be listed in the balance sheet? - Tensile Company solicited bids from several contractors
to construct an addition to its office building. The lowest
bid received was for $340,000. Tensile Company decided
to construct the addition itself at a cost of $325,000. What
amount should be recorded in the building account? - Are the amounts at which fixed assets are reported in the
balance sheet their approximate market values as of the
balance sheet date? Discuss. - Differentiate between the accounting for capital expendi-
tures and revenue expenditures. - Immediately after a used truck is acquired, a new motor
is installed at a total cost of $4,750. Is this a capital
expenditure or a revenue expenditure? - a.Does recognizing depreciation in the accounts pro-
vide a special cash fund for the replacement of fixed
assets? Explain. - A fixed asset with a book value of $5,000 has its life
extended at the beginning of the year with an overhaul
capitalized at a cost of $40,000. The overhaul extended
the life of the fixed asset by five years. How much
is accumulated depreciation decreased for the
year?
A. $8,000 C. $31,000
B. $9,000 D. $40,000 - A company shows the book value of fixed assets at the
beginning of the year of $80,000 and a balance at the
end of the year of $120,000. Total revenues were
$500,000 for the year. What is the fixed asset turnover
ratio?
A. 0.20 C. 5.0
B. 4.0 D. 6.0