BUS103: Introduction to Financial Accounting

True-false

1. True. The cost of land includes all normal, reasonable, and necessary expenditures to obtain the land and get it ready for use.

2. False. Depreciation is a process of allocation, not valuation, and the book value of an asset has little to do with its market value.

3. False. Depreciation accounting does not provide funds required to replace plant assets. Instead, accumulated depreciation simply shows how much of an asset's cost has been charged to expense since the asset was acquired.

4. False. Expenditures that improve the quality of services are charged to the asset account.

5. True. Plant asset subsidiary ledgers provide detailed information that the general ledger account cannot provide and thus give better control over plant assets.

Multiple choice

1. b. The depreciation expense for 2010 using the straight-line method is computed as follows:

( USD 440,000-USD 40,000)10=USD40,000

2. d. Double-declining balance rate =2×(100 per cent 10)=20 per cent

Depreciation expense for 2010=(2 per cent ×USD440,000)×612=USD44,000

3. e. At the beginning of 2010 , the balance of accumulated depreciation is USD 2,800 (annual depreciation of USD 1,400 X 2) and book value is USD 7,200 , or (USD 10,000 - USD 2,800). The revised annual depreciation expense is USD 3,100 , or [( USD 7,200− USD 1,000)2¿.

4. a. The error in recording a capital expenditure as a revenue expenditure results in an overstatement of current year's expense, as well as an understatement of current year's net income.