Theme 4.

FIXED ASSETS AND ITS UTILIZATION

Seminar questions
1. What are the similarities and differences between tangible and intangible fixed assets?
2. What are the similarities and differences between productive and non-productive fixed
assets?
3. Your best friend, who knows very little about accounting, made the following statement
after purchasing a new car: ”I just bought this car for $8 500 and as soon as I drove it off
the lot of depreciated by one-third”. How would you respond?
4. What are the most important indicators of effective use of active fixed assets? Explain the
meaning of each indicator?
5. What is the productive capacity? How is it measured?
6. How to improve the effective use of fixed assets?

True/false questions

1. The estimated value of a fixed asset at the end of its useful life is called the historical cost.
2. The double-declining balance method is a method of depreciation that provides for
depreciation expense based on the expected productive capacity of a fixed asset.
3. The cost of a fixed asset minus accumulated depreciation on the asset is called the residual
value.
4. A useful life of 4 years is equivalent to a straight-line depreciation rate of 10%
5. Equipment acquired on the first day of the current fiscal year for $50,000 has an estimated
life of 5 years or 25,000 hours and a residual value of $5,000. Depreciation for the current year
using the straight-line method is $ 6,000
6. Equipment acquired on the first day of the current fiscal year for $50,000 has an estimated
life of 4 years or 25,000 hours and a residual value of $5,000. Depreciation for the current year
using the double-declining balance method is $3,000.
7. Equipment acquired on the first day of the current fiscal year for $50,000 has an estimated
life of 4 years and estimated output 25,000 units, and a residual value of $5,000. The equipment
was used for 7,000 units during the current year. Depreciation for the current year using the
units-of-production method is$ 2,000.
8. Good will is an intangible asset of a business that is created from such favorable factors as
location, product quality, reputation, and managerial skill.
9. The double-declining-balance method provides for a higher depreciation charge in the first
year of use of the asset, followed by a gradually declining periodic charge.

Multiple-choice questions

1. JK Builders Co purchases a new excavator, costing £40,000. Its expected useful life is 10
years, at which point it is anticipated that the excavator will have a residual value of £6,000.
If the straight-line method of depreciation is used, what is the annual depreciation charge?
a) £4,000

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 b) £2,800
c) £4,600
d) £3,400

2. If the straight line method of depreciation is used, what is the net book value of the
excavator at the end of four years?
a) £29,800
b) £26,400
c) £13,600
d) £24,000

3. f the reducing balance method of depreciation is used, applying an annual depreciation rate
of 15 per cent, what is the annual depreciation charge in year 2?
a) £5,100
b) £6,000
c) £3,400
d) £4,335

4. If the reducing balance method of depreciation is used, at a rate of 15% per annum, what is
the net book value of the excavator at the end of three years?
a) £24,565
b) £15,435
c) £20,880
d) £19,120

5. The accounting purpose of depreciation is that it:

(i) produces cash for non-current (fixed) asset replacements.
(ii) is an allocation of the cost of non-current (fixed) assets over their period of use.
(ii) is a part of the cost of financial charges.
(iii) is a measure of the consumption of a non-current (fixed) asset.

Which of the above statements is/are correct?

a) (ii) and (iii) only.
b) (ii) and (iv) only.
c) (i) and (ii) only.
d) (ii) and (iii) only.

6. Which of the following statement(s) is/are correct?

(i) An increase in the estimated useful life of a non-current (fixed) asset reduces
the annual depreciation charge.
(ii) A reduction in the estimated residual value of a non-current (fixed) asset
decreases the annual depreciation charge.
(iii) If the sales proceeds of a non-current (fixed) asset are greater than its net
book value, this indicates insufficient charge for depreciation in the income
statements (profit and loss accounts) of previous years.

Is it:
a) (i), (ii) and (iii).
b) (ii) only.
c) (i) only
d) (i) and (ii) only

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 7. Which of the following phrases best describes the purpose of the annual charge for
depreciation within the historic cost accounting method?
a) To allocate the cost of an asset over its useful life.
b) To measure the fall in the second-hand price of the asset.
c) To lower the reported profit on grounds of prudence.
d) To measure obsolescence as it arises.

8. Which of the following items would not be considered an intangible asset?

a). mineral ore deposits
b). patent
c). copyright
d). goodwill

9. Which of the following statement is/are likely to be correct?

(i) Land and buildings have a shorter useful life than plant and equipment.
(ii) Purchases of non-current (fixed) assets is greater than yearly depreciation for Year 2.
Is it:
a) (ii).
b) none of these.
c) (i).

10. Calculating depreciation, which of the following factor is known with greatest certainty?
a) Residual value.
b) Useful life of asset.
c) The accuracy of the depreciation method in reflecting the physical depreciation.
d) The value of acquired equipment.

11. An increase in the capital productivity basically depends on better use of;
a) Buildings
b) Tools
c) Working Machines
d) Vehicles

12. What is not included in the fixed assets of an enterprise?

a) Buildings
b) The equipment installed in the shop
c) The stock of finished goods
d) Vehicles

13. What is the residual cost of the equipment?

a) The cost of equipment after repairs
b) Cost of the equipment adjusted for depreciation
c) The value of acquired equipment in the existing current prices

14. Depreciation rate is of 2% of the historical cost of equipment. What is the useful life of
equipment?
a) it is impossible to calculate, not enough data
b) 50 years
c) 100 years
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 d) 200 years

PROBLEMS

The problem 1. Suppose a factory has 8 sewing lines and each line has 25 machines.
Working shift is 10 hours per day. Determine the production capacity in units, if factory is
producing only one style (Shirt) of SAM 25 minutes and used all machines daily production
capacity at 50%.
The problem 2. Determine the residual value of the equipment, if the historical cost of
equipment is 560000 m.u., and the useful life term is 5 years. Equipment used for 3 years.
The problem 3. Determine the progressive structure of fixed assets in the enterprise, if
the value of active part of fixed assets is 100 000 lei, and the value of passive one is 250 000
lei.
The problem 4. Determine the annual amount of depreciation expanses and annual rate
of depreciation, if the useful life of equipment is 10 years, the cost of acquisition is 110
thousand lei, the transportation cost is 2.5 thousand lei, installation costs are 0.5 thousand lei.
The problem 5. Determine the average annual value of fixed assets, if at the beginning of
the year they amounted to 8825 th. lei, the value of entering and leaving the production fixed
assets is respectively: March 1 - 75 th.,lei and 3 th. lei, May 1 - 50 th. Lei and 4 th. lei,
September 1 - 39 th.lei and 7 th. lei, December 1 - 18 th .lei and 15 th. lei. Determine the
capital productivity ratio and capital intensity ratio, if the annual output is 4384 un.
The problem 6. The shop factory has 200 machines. Mode of operation in the shop is
two shifts with the duration 8 hours shift. Annual output production is 300,000 products, the
production capacity of the plant is 360,000 products. In the first shift work all the machines,
and in the second only 60% of the machinery, working days a year - 260, while the actual time
of using of one machine for the year is 5000 hours. Determine the shift coefficient, coefficient
of extensive use, load factor of equipment in the shift and coefficient of intensive use of
machines in the shop factory.
The problem 7. Residual value of the equipment is 7.5 thousand lei. The historical cost
of the equipment is 58 thousand lei, and the equipment used for 8 years. Find the annual
amount of depreciation expanses.
The problem 8. Determine the capital-labor ratio on enterprise, if capital productivity
ratio is 1.32 lei and the annual sales value is 9126 th. lei. Average number of production
workers is 11 people. The useful life of equipment is 10 years, and the passive part of fixed
assets is 280 thousand lei.
The problem 9. Commute Air, a small commuter airline purchased an airplane for $ 6
million. The president of the company is trying to decide how to depreciate the plane. She asks
you to calculate the annual depreciation for each of the next three years under each of the
following methods:
1. Straight-line
2. Units-of-production
3. Double-declining balance
4. Sum-of-the-years-digits.
The asset has a-10 years life, or a 110 million-mile life. Miles flown are:
Year miles flown
1 8 800 000
2 10 000 000
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 3 15 000 000
The plane has an estimated residual value of $500 000.