Questions and Answers
A change in the estimated useful life of a plant asset requires a restatement of prior years' depreciation.
False
Additions and improvements to a plant asset that increase the asset's operating efficiency are generally capitalized.
True
Ordinary repairs should be capitalized as assets.
False
A characteristic of capital expenditures is that the expenditures occur infrequently during the period of ownership.
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Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.
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The book value of a plant asset is the amount originally paid for the asset less depreciation.
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A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset's book value.
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All plant assets must be depreciated for accounting purposes.
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A plant asset can be removed from the books at any time regardless of its depreciation status.
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Land improvements are generally charged to the Land account.
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Recording depreciation on plant assets affects only the income statement.
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The depreciable cost of a plant asset is its original cost minus obsolescence.
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The Accumulated Depreciation account represents a cash fund available to replace plant assets.
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Using the units-of-activity method of depreciating factory equipment will always result in less depreciation expense being recorded over the life of the asset.
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Salvage value is always subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.
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Under the double-declining-balance method, the depreciation rate used each year decreases over time.
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Study Notes
Plant Assets
- All plant assets must be depreciated for accounting purposes.
- Costs for clearing, draining, filling, and grading land should be charged to a Land Improvements account.
Depreciation
- Recording depreciation on plant assets affects the balance sheet and the income statement.
- Depreciation is an application of the matching principle.
- Plant asset cost and useful life are based on estimates when calculating depreciation.
- Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method.
- The declining-balance method is an accelerated depreciation method that depreciates an asset in a shorter period of time than its useful life.
Depreciation Methods
- The units-of-activity method generally results in more depreciation expense being recorded over the life of the asset than the straight-line method.
- Under the double-declining-balance method, the depreciation rate used each year remains constant.
Changes in Estimates
- A change in the estimated useful life of a plant asset may cause a change in depreciation recognized in current and future periods, but not to prior periods.
- A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.
- To determine a new depreciation amount after a change in estimate, the asset's remaining depreciable cost is divided by its remaining useful life.
Expenditures and Capitalization
- Additions and improvements to a plant asset that increase its operating efficiency, productive capacity, or expected useful life are generally capitalized.
- Capital expenditures are investments in productive facilities.
- Ordinary repairs should be recognized as revenue expenditures when incurred.
Asset Disposal
- If proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
- A loss on disposal of a plant asset can only occur if the cash proceeds received are less than the asset's book value.
- A loss on disposal is calculated in the same way as a result of a sale or retirement.
- A plant asset does not need to be fully depreciated before it can be removed from the books.
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Description
This quiz covers the accounting principles for plant assets, including depreciation, and how it affects financial statements. It also touches on the estimation of useful life and salvage value.