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Initial Cost of Long Lived Assets quiz

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  • What are the four main categories of long-lived (plant) assets?
    The four main categories are land, land improvements, buildings, and machinery (or equipment).
  • What does the historical cost principle require for recording plant assets?
    It requires recording plant assets at their purchase price plus all necessary expenditures to make them ready for use, and not adjusting this value over time.
  • Which plant asset is not depreciated and why?
    Land is not depreciated because it does not have a limited useful life and does not deteriorate like other assets.
  • What types of costs are included in the initial cost of land?
    The initial cost of land includes the purchase price, closing costs, attorney fees, broker commissions, costs to remove old structures (minus salvage value), and any assumed property taxes or liens.
  • How are land improvements different from land in terms of accounting treatment?
    Land improvements, such as fences and parking lots, are depreciated over their useful lives, while land itself is not depreciated.
  • What is a leasehold improvement and how is it depreciated?
    A leasehold improvement is an asset created by making improvements to leased property, and it is depreciated over the term of the lease.
  • When constructing a building, what additional cost can be included in its initial cost?
    Interest on borrowings used to finance the construction can be included in the initial cost of the building.
  • What costs are included in the initial cost of equipment?
    The initial cost of equipment includes the purchase price and all necessary expenditures to make it ready for use, such as delivery and installation costs.
  • Are ongoing maintenance costs for equipment included in its initial cost?
    No, ongoing maintenance costs are expensed as incurred and are not included in the initial cost of equipment.
  • What is the purpose of accumulated depreciation on the balance sheet?
    Accumulated depreciation is a contra asset account that reduces the net book value of a depreciable asset over time.
  • How is the initial cost of land calculated if an old structure is removed and salvage value is received?
    The cost to remove the old structure is added to the land's cost, and any salvage value received is subtracted from the total.
  • If a company builds a parking lot after purchasing land, is this cost included in the land account?
    No, the cost of building a parking lot is recorded as a land improvement, not as part of the land account.
  • Over what period is a leasehold improvement depreciated if its useful life exceeds the lease term?
    It is depreciated over the term of the lease, not the asset's useful life.
  • What journal entry is made when purchasing a machine for cash?
    Debit machinery (asset) and credit cash for the purchase amount.
  • Why are plant assets recorded at historical cost rather than fair value?
    Because plant assets are used over many years and not intended for immediate sale, so their value is not adjusted for market fluctuations.