Fixed Assets Quiz: 50 True or False Questions with Answers and Detailed Explanations

Question 1

Fixed assets are purchased primarily for resale to customers.

Answer: ❌ False

Explanation

Fixed assets are acquired to support a company’s operations rather than to be sold in the ordinary course of business. Examples include buildings, machinery, vehicles, and office equipment. These assets help generate revenue over multiple accounting periods and are classified as non-current assets on the balance sheet. Items purchased specifically for resale are classified as inventory, which is a current asset and follows different accounting rules.

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Question 2

Land is generally not depreciated because it has an unlimited useful life.

Answer: ✅ True

Explanation

Land is the primary exception to the depreciation rule for fixed assets. Unlike buildings or machinery, land normally does not wear out or lose its ability to provide economic benefits through regular use. Therefore, accounting standards generally prohibit depreciation on land. However, land may still be subject to impairment if events significantly reduce its recoverable value, such as environmental contamination or legal restrictions.

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Question 3

Depreciation represents the current market value decline of a fixed asset.

Answer: ❌ False

Explanation

Depreciation is not intended to measure changes in an asset’s market value. Instead, it systematically allocates the historical cost of a fixed asset over its estimated useful life. An asset’s market value may increase or decrease independently of depreciation. The purpose of depreciation is to apply the matching principle by recognizing the cost of using the asset during the periods in which it generates revenue.

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Question 4

Buildings used in business operations are classified as fixed assets.

Answer: ✅ True

Explanation

Buildings owned and used by a company for production, administration, or service delivery are classified as fixed assets because they provide long-term economic benefits. These buildings are reported under Property, Plant, and Equipment (PPE) and are generally depreciated over their estimated useful lives. Buildings held for resale, however, would not be classified as fixed assets because they are intended for sale rather than operational use.

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Question 5

Routine maintenance costs should usually be capitalized as part of a fixed asset.

Answer: ❌ False

Explanation

Routine maintenance is recorded as an expense because it simply keeps a fixed asset in normal operating condition without extending its useful life or improving its performance. Examples include oil changes, cleaning, and minor repairs. Only expenditures that significantly enhance the asset’s future economic benefits, increase capacity, or extend useful life should be capitalized and added to the asset’s carrying amount.

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Question 6

Accumulated depreciation is a contra asset account.

Answer: ✅ True

Explanation

Accumulated depreciation is classified as a contra asset because it reduces the carrying amount of fixed assets on the balance sheet. Rather than decreasing the original asset account directly, accumulated depreciation separately records the total depreciation recognized since acquisition. This presentation allows financial statement users to see both the historical cost of the asset and the amount that has been depreciated over time.

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Question 7

A delivery truck purchased for company operations is considered inventory.

Answer: ❌ False

Explanation

A delivery truck used to transport goods is a fixed asset because it supports business operations over multiple years. Inventory consists of goods held for resale to customers, whereas a delivery truck is used internally to generate revenue. As a long-term tangible asset, the truck is capitalized at acquisition cost and depreciated over its estimated useful life.

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Question 8

Depreciation begins when a fixed asset is available for its intended use.

Answer: ✅ True

Explanation

Accounting standards require depreciation to begin when an asset is in the location and condition necessary for it to operate as intended by management. This may occur after installation and testing, even if the asset has not yet been actively used in production. Starting depreciation at this point ensures that cost allocation reflects the period during which the asset is capable of generating economic benefits.

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Question 9

The straight-line depreciation method produces the same depreciation expense every year if estimates remain unchanged.

Answer: ✅ True

Explanation

The straight-line method allocates an equal amount of depreciation expense during each accounting period throughout an asset’s useful life. This method assumes that the asset provides consistent economic benefits over time. The annual depreciation expense remains constant unless estimates such as useful life or residual value are revised. Because of its simplicity, it is one of the most widely used depreciation methods.

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Question 10

Fixed assets are reported as current assets on the balance sheet.

Answer: ❌ False

Explanation

Fixed assets are classified as non-current assets because they are expected to provide economic benefits for more than one accounting period. Current assets, such as cash, inventory, and accounts receivable, are generally expected to be converted into cash or consumed within one year or one operating cycle. Proper classification helps users of financial statements evaluate both short-term liquidity and long-term investment in productive resources.

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Question 11

The purchase price of a fixed asset is the only cost included in its initial measurement.

Answer: ❌ False

Explanation

The initial cost of a fixed asset includes more than just the purchase price. Companies also capitalize costs that are directly attributable to bringing the asset to the location and condition necessary for its intended use. These may include freight charges, installation costs, testing expenses, non-refundable taxes, and legal fees. Routine operating expenses incurred after the asset is ready for use are not capitalized and should be recognized as expenses.

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Question 12

A major renovation that significantly extends the useful life of a building should be capitalized.

Answer: ✅ True

Explanation

Expenditures that increase a fixed asset’s useful life, improve its efficiency, or expand its production capacity are considered capital expenditures. A major building renovation that extends the building’s service life provides future economic benefits over several accounting periods. Therefore, the cost should be added to the carrying amount of the building and depreciated over the revised remaining useful life rather than being expensed immediately.

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Question 13

The carrying amount of a fixed asset equals its historical cost minus accumulated depreciation.

Answer: ✅ True

Explanation

The carrying amount, also called the book value, represents the value of a fixed asset reported on the balance sheet. It is calculated by subtracting accumulated depreciation and any impairment losses from the asset’s historical cost. Carrying amount reflects the portion of the asset’s cost that has not yet been recognized as depreciation expense and should not be confused with the asset’s current market value.

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Question 14

Depreciation results in an immediate cash payment every accounting period.

Answer: ❌ False

Explanation

Depreciation is a non-cash expense because it does not require a cash outflow when it is recognized. The cash payment occurs when the asset is purchased. Depreciation simply allocates that historical cost over the asset’s useful life. Although depreciation reduces accounting profit, it does not directly reduce cash balances, making it an important adjustment in the operating section of the statement of cash flows.

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Question 15

Office furniture used by employees is an example of a fixed asset.

Answer: ✅ True

Explanation

Office furniture such as desks, chairs, filing cabinets, and conference tables is classified as a fixed asset because it is used in business operations for multiple accounting periods. These assets are capitalized when acquired and depreciated over their estimated useful lives. Since they are not intended for resale, they are reported as non-current assets under Property, Plant, and Equipment (PPE) on the balance sheet.

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Question 16

Residual value is deducted from the cost of an asset when calculating straight-line depreciation.

Answer: ✅ True

Explanation

Residual value, also called salvage value, represents the estimated amount a company expects to recover when disposing of an asset at the end of its useful life. Under the straight-line depreciation method, the depreciable amount equals the asset’s historical cost minus its residual value. Dividing this depreciable amount by the estimated useful life determines the annual depreciation expense, ensuring only the asset’s consumable cost is allocated.

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Question 17

A company should continue depreciating a machine even after it has been sold.

Answer: ❌ False

Explanation

Once a fixed asset is sold or otherwise disposed of, depreciation stops because the company no longer controls or uses the asset. At the disposal date, the asset’s historical cost and accumulated depreciation are removed from the accounting records. The proceeds received are compared with the carrying amount to determine whether a gain or loss on disposal should be recognized in the income statement.

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Question 18

Technological obsolescence may reduce the useful life of a fixed asset.

Answer: ✅ True

Explanation

Useful life depends on more than physical wear and tear. Advances in technology may cause equipment to become obsolete even though it is still functional. For example, newer machines may operate more efficiently, making older equipment less valuable. Companies should periodically review useful life estimates and revise them when circumstances change to ensure depreciation expense reflects the expected pattern of future economic benefits.

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Question 19

Land improvements such as parking lots and fences are generally depreciated.

Answer: ✅ True

Explanation

Although land itself is generally not depreciated, land improvements are depreciable because they have limited useful lives. Examples include parking lots, sidewalks, fences, landscaping systems, and outdoor lighting. These improvements gradually deteriorate through use and environmental exposure. Consequently, their costs are capitalized separately from land and depreciated over their estimated useful lives according to applicable accounting standards.

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Question 20

Fixed assets help companies generate revenue over multiple accounting periods.

Answer: ✅ True

Explanation

The primary purpose of fixed assets is to support long-term business operations and contribute to future revenue generation. Assets such as machinery, buildings, equipment, and vehicles are used repeatedly over many years rather than being sold to customers. Because they provide economic benefits beyond a single accounting period, their costs are allocated through depreciation to match the revenue they help generate, improving the accuracy of financial reporting.

Question 21

Fixed assets are classified as current assets because they can eventually be sold for cash.

Answer: ❌ False

Explanation

Although fixed assets may eventually be sold, they are classified as non-current assets because they are acquired for long-term operational use rather than short-term conversion into cash. Current assets are expected to be realized, sold, or consumed within one year or one operating cycle. Fixed assets, such as buildings and machinery, provide economic benefits over several years, making them an essential part of a company’s long-term investment strategy.

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Question 22

The cost of transporting new equipment to a company’s facility is normally capitalized.

Answer: ✅ True

Explanation

Transportation or freight costs incurred to bring equipment to its intended location are directly attributable to acquiring the asset. Therefore, these costs are included in the asset’s initial measurement and capitalized rather than expensed immediately. Capitalizing such expenditures ensures that the recorded cost reflects all necessary costs incurred before the asset becomes ready for its intended use, in accordance with generally accepted accounting principles and IFRS.

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Question 23

Depreciation reduces the historical cost recorded in the fixed asset account.

Answer: ❌ False

Explanation

Depreciation does not reduce the historical cost recorded in the fixed asset account. Instead, it is accumulated separately in the Accumulated Depreciation contra asset account. This approach allows financial statement users to see both the original acquisition cost and the total depreciation recognized since purchase. The carrying amount is calculated by subtracting accumulated depreciation from historical cost, providing greater transparency in financial reporting.

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Question 24

A company may choose different depreciation methods for different classes of fixed assets.

Answer: ✅ True

Explanation

Accounting standards permit companies to apply different depreciation methods to different categories of fixed assets when those methods better reflect each asset’s pattern of economic benefit. For example, office furniture may use the straight-line method, while manufacturing equipment may use the units-of-production method. However, once selected, the depreciation method should be applied consistently unless circumstances justify a change in accounting estimate.

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Question 25

Painting a company’s office building every year is generally considered a capital expenditure.

Answer: ❌ False

Explanation

Regular painting is considered routine maintenance because it preserves the building’s existing condition rather than improving its performance or extending its useful life. As a result, the cost is recognized as an operating expense when incurred. Only expenditures that substantially increase the building’s future economic benefits—such as adding a new floor or replacing the entire roof—should be capitalized as part of the fixed asset.

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Question 26

An impairment loss may be recognized if a fixed asset’s recoverable amount falls below its carrying amount.

Answer: ✅ True

Explanation

When events or circumstances indicate that a fixed asset may no longer recover its recorded value, an impairment assessment is required. If the recoverable amount is lower than the carrying amount, the difference is recognized as an impairment loss. This adjustment prevents assets from being reported at amounts exceeding the future economic benefits they are expected to generate, improving the reliability of financial statements.

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Question 27

Depreciation methods affect the timing of expense recognition but not the total depreciation over an asset’s life.

Answer: ✅ True

Explanation

Different depreciation methods allocate an asset’s cost in different patterns. Accelerated methods recognize more depreciation in earlier years, while the straight-line method spreads the cost evenly over the useful life. Regardless of the method used, the total depreciation recognized over the asset’s life is generally the same, assuming estimates remain unchanged. The difference lies only in when the expense is recognized in each accounting period.

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Question 28

If an asset’s useful life estimate changes, previously recorded depreciation must always be restated.

Answer: ❌ False

Explanation

Changes in the estimated useful life of a fixed asset are treated as changes in accounting estimates, not accounting errors. Therefore, previously recognized depreciation is not adjusted. Instead, the carrying amount remaining at the date of the revision is depreciated over the newly estimated remaining useful life. This prospective approach complies with accounting standards and avoids unnecessary revisions to prior-period financial statements.

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Question 29

A company vehicle used by the sales department is considered a fixed asset.

Answer: ✅ True

Explanation

Vehicles owned and used by a company for business purposes are classified as fixed assets because they provide long-term operational benefits. Sales vehicles help employees travel to customers, deliver products, or perform business activities over several years. Since they are not purchased for resale, they are capitalized as Property, Plant, and Equipment (PPE) and depreciated throughout their estimated useful lives.

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Question 30

Proper accounting for fixed assets improves the reliability of financial statements.

Answer: ✅ True

Explanation

Accurate fixed asset accounting ensures that long-term assets are measured, depreciated, impaired, and reported in accordance with accounting standards. This improves the reliability and comparability of financial statements by preventing the overstatement or understatement of assets and expenses. Investors, creditors, management, and other stakeholders rely on this information to evaluate a company’s financial position, operational efficiency, and long-term investment decisions.

Question 31

Fixed assets are sometimes referred to as Property, Plant, and Equipment (PPE).

Answer: ✅ True

Explanation

Property, Plant, and Equipment (PPE) is the accounting term commonly used to describe tangible fixed assets owned by a business. PPE includes land, buildings, machinery, vehicles, furniture, and equipment that are used in normal operations for more than one accounting period. These assets are initially recorded at cost and subsequently reported at carrying amount after deducting accumulated depreciation and any impairment losses. Understanding the term PPE is essential for interpreting financial statements.

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Question 32

The cost of employee training required to operate new equipment should normally be capitalized as part of the equipment’s cost.

Answer: ❌ False

Explanation

Although employee training may be necessary before new equipment can be operated efficiently, these costs are not directly attributable to preparing the asset itself for use. Therefore, accounting standards require training expenses to be recognized immediately as operating expenses. Only costs directly related to acquiring, transporting, installing, and testing the equipment before it becomes operational are capitalized as part of the fixed asset’s initial cost.

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Question 33

When a fixed asset is sold, both its historical cost and accumulated depreciation should be removed from the accounting records.

Answer: ✅ True

Explanation

The disposal of a fixed asset requires the company to remove the asset’s original cost and its related accumulated depreciation from the books. After these accounts are eliminated, the proceeds from the sale are compared with the asset’s carrying amount to determine whether a gain or loss has occurred. This process ensures that the balance sheet reflects only assets currently owned and that disposal results are reported accurately.

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Question 34

The useful life of a fixed asset is always equal to its physical life.

Answer: ❌ False

Explanation

Useful life refers to the period during which an asset is expected to provide economic benefits to a business, which may be much shorter than its physical life. Technological advances, changes in production methods, legal restrictions, or management decisions may cause an asset to be replaced long before it physically wears out. Therefore, depreciation is based on useful life rather than the asset’s maximum physical lifespan.

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Question 35

Installing a new production line that increases manufacturing capacity is generally treated as a capital expenditure.

Answer: ✅ True

Explanation

A new production line that significantly increases output or improves operating efficiency creates future economic benefits extending beyond the current accounting period. Consequently, its cost should be capitalized as part of Property, Plant, and Equipment rather than recognized immediately as an expense. The capitalized amount will then be depreciated over the production line’s estimated useful life, following the matching principle.

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Question 36

A fixed asset can continue to be used even after it has been fully depreciated.

Answer: ✅ True

Explanation

Full depreciation simply means that the asset’s entire depreciable cost has been allocated through depreciation expense. It does not necessarily indicate that the asset is no longer useful. Many companies continue using fully depreciated machinery, vehicles, or buildings for years after their carrying amount reaches zero. As long as the asset remains operational and provides economic benefits, it may continue to be used without recording additional depreciation.

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Question 37

The Double-Declining Balance method usually records lower depreciation expense in the early years than the Straight-Line method.

Answer: ❌ False

Explanation

The Double-Declining Balance method is an accelerated depreciation method designed to recognize higher depreciation expenses during the early years of an asset’s useful life. As the asset ages, depreciation expense gradually decreases. In contrast, the Straight-Line method records the same depreciation expense each year. Accelerated depreciation is appropriate for assets that generate greater benefits or lose value more rapidly during their early years of use.

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Question 38

The carrying amount of a fixed asset may change over time because of depreciation and impairment.

Answer: ✅ True

Explanation

A fixed asset’s carrying amount is not static after acquisition. It decreases over time as depreciation allocates the asset’s cost to expense. Additionally, if the asset suffers impairment due to physical damage, technological obsolescence, or declining recoverable value, its carrying amount is reduced further. These adjustments ensure that the asset is reported at an amount that reflects its remaining economic value to the business.

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Question 39

Routine repairs that simply maintain an asset’s normal operating condition should generally be expensed immediately.

Answer: ✅ True

Explanation

Routine repairs and maintenance are recognized as operating expenses because they preserve an asset’s existing condition without increasing its useful life, productive capacity, or efficiency. Examples include replacing worn belts, lubricating machinery, or repairing minor damage. Capitalizing these routine expenditures would overstate assets and understate current expenses. Only significant improvements that generate future economic benefits should be recorded as capital expenditures.

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Question 40

Companies should periodically review estimates such as useful life and residual value of fixed assets.

Answer: ✅ True

Explanation

Accounting standards require management to review important estimates relating to fixed assets on a regular basis. Useful life, residual value, and depreciation methods may need revision if circumstances change due to technological developments, operational changes, or market conditions. When estimates are updated, the remaining carrying amount is depreciated prospectively over the revised useful life. This approach ensures that depreciation continues to reflect the asset’s expected pattern of economic benefits.

Question 41

If a fixed asset is sold for more than its carrying amount, the company recognizes a gain on disposal.

Answer: ✅ True

Explanation

When a company disposes of a fixed asset, it compares the selling price with the asset’s carrying amount (historical cost less accumulated depreciation and impairment, if any). If the proceeds exceed the carrying amount, the difference is recognized as a gain on disposal in the income statement. This gain reflects the successful sale of the asset at a value higher than its recorded book value and should be reported separately from normal operating revenue.

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Question 42

Book value and market value of a fixed asset are always the same.

Answer: ❌ False

Explanation

Book value, or carrying amount, is calculated using historical cost minus accumulated depreciation and impairment losses. Market value, however, represents the amount the asset could be sold for in the current market. These two values often differ because market conditions, inflation, technological advances, and supply and demand can significantly affect selling prices. Financial statements generally report fixed assets at carrying amount rather than current market value.

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Question 43

The Fixed Asset Turnover Ratio measures how efficiently a company uses its fixed assets to generate sales.

Answer: ✅ True

Explanation

The Fixed Asset Turnover Ratio evaluates how effectively a company utilizes its investment in Property, Plant, and Equipment (PPE) to produce revenue. It is calculated by dividing net sales by average net fixed assets. A higher ratio generally indicates better asset utilization, although comparisons should be made within the same industry because capital intensity varies significantly between different types of businesses.

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Question 44

Depreciation stops once a fixed asset is classified as held for sale or is disposed of.

Answer: ✅ True

Explanation

Depreciation continues only while a company uses a fixed asset to generate economic benefits. Once the asset is sold, retired, or classified as held for sale under applicable accounting standards, depreciation generally ceases. At that point, the company measures the asset according to the relevant accounting guidance for disposal and records any resulting gain or loss. This ensures depreciation is recognized only during the asset’s period of operational use.

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Question 45

Insurance premiums paid after a machine has been placed into service are normally capitalized as part of the machine’s cost.

Answer: ❌ False

Explanation

Insurance premiums incurred after an asset is ready for use are recurring operating costs rather than acquisition costs. Because they do not improve the asset or prepare it for its intended use, they are recognized as expenses in the period incurred. Only expenditures directly attributable to acquiring and preparing the asset before it becomes operational are included in its initial capitalized cost.

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Question 46

A company should recognize an impairment loss when the recoverable amount of a fixed asset is lower than its carrying amount.

Answer: ✅ True

Explanation

Accounting standards require companies to ensure that fixed assets are not reported above the economic benefits they are expected to generate. If the recoverable amount falls below the carrying amount due to physical damage, technological obsolescence, or adverse market conditions, an impairment loss must be recognized. Recording impairment improves the reliability of financial statements by preventing the overstatement of long-term assets.

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Question 47

The historical cost of a fixed asset changes each year because depreciation is recorded annually.

Answer: ❌ False

Explanation

Historical cost remains unchanged after the asset is initially recognized unless adjustments are required under specific accounting standards, such as revaluation where permitted. Annual depreciation does not reduce the historical cost recorded in the asset account. Instead, depreciation accumulates in a separate contra asset account called Accumulated Depreciation. This approach allows users of financial statements to identify both the original acquisition cost and the total depreciation recognized.

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Question 48

Major improvements that significantly increase an asset’s efficiency should generally be capitalized.

Answer: ✅ True

Explanation

Expenditures that enhance an asset’s productivity, improve efficiency, increase capacity, or extend useful life generate future economic benefits beyond the current accounting period. Therefore, these costs qualify as capital expenditures and are added to the asset’s carrying amount. They are then depreciated over the remaining useful life. This treatment differs from routine maintenance, which is expensed immediately because it merely preserves existing operating conditions.

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Question 49

Proper accounting for fixed assets helps investors and creditors evaluate a company’s financial position.

Answer: ✅ True

Explanation

Accurate accounting for fixed assets provides stakeholders with reliable information about a company’s long-term investments, productive capacity, and financial stability. Correct measurement of acquisition costs, depreciation, impairment losses, and asset disposals improves the transparency of financial statements. Investors, lenders, and analysts use this information to assess profitability, operational efficiency, capital investment decisions, and the company’s ability to generate future cash flows.

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Question 50

Understanding fixed asset accounting is important for accountants, auditors, financial analysts, and business managers.

Answer: ✅ True

Explanation

Fixed asset accounting is a fundamental area of financial accounting because it affects the balance sheet, income statement, statement of cash flows, and numerous financial ratios. Professionals involved in accounting, auditing, financial analysis, taxation, and corporate management rely on accurate fixed asset information when preparing financial reports, evaluating investments, calculating depreciation, assessing impairment, and making strategic business decisions. Mastering these concepts is also essential for CPA, CMA, ACCA, and university accounting examinations.

Fixed Assets Quiz: True or False Challenge

Q1. Fixed assets are assets acquired primarily for the purpose of being resold to customers to generate immediate revenue.

• Answer: FALSE

• Explanation: Fixed assets, often classified as Property, Plant, and Equipment (PP&E), are long-term tangible assets acquired to be used actively in the production or supply of goods and services, for rental to others, or for administrative purposes. They are explicitly not held for sale in the ordinary course of business. Items bought with the intention of quick resale to customers are categorized as inventory, which is a current asset, rather than a fixed asset.

Q2. The historical cost of a fixed asset includes the cash paid plus any non-cash considerations given up to acquire it.

• Answer: TRUE

• Explanation: According to the historical cost principle, the initial recorded value of a fixed asset must reflect its total fair value at acquisition. If a company uses a combination of cash and non-cash assets (such as trading in an old machine or issuing shares) to buy a new asset, the value of those non-cash considerations must be measured and added to the cash paid to establish the asset’s true initial cost.

Q3. All fixed assets, without exception, must be systematically depreciated over their estimated useful lives.

• Answer: FALSE

• Explanation: While the vast majority of tangible fixed assets (like buildings, machinery, vehicles, and equipment) are subject to depreciation, land is a major exception. Land is considered to have an indefinite or unlimited useful life because it does not physically wear out, degrade, or become obsolete over time. Therefore, under both US GAAP and IFRS, land is never depreciated and remains on the balance sheet at cost unless impaired.

Q4. The straight-line depreciation method assumes that an asset’s economic usefulness declines more rapidly in the early years of its life.

• Answer: FALSE

• Explanation: The straight-line method assumes that the asset’s economic utility and physical wear occur at a uniform, steady rate over time. Consequently, it allocates an equal amount of depreciation expense to each full year of the asset’s useful life. The assumption that an asset is highly productive in its early years and loses value rapidly at the beginning belongs to accelerated depreciation methods, such as the double-declining balance method.

Q5. Accumulated Depreciation is a liability account because it carries a normal credit balance.

• Answer: FALSE

• Explanation: Although Accumulated Depreciation has a normal credit balance, it is absolutely not a liability. Instead, it is classified as a contra-asset account. It is specifically paired with its respective fixed asset account on the balance sheet to offset it, showing how much of the asset’s original cost has been expensed over time. This reduction allows users to quickly see both the gross cost and net book value.

Q6. A capital expenditure is recorded on the income statement as an operating expense in the period it occurs.

• Answer: FALSE

• Explanation: Capital expenditures (CapEx) represent outlays that provide long-term economic benefits, such as buying a new factory or upgrading machinery to extend its life. Therefore, they are capitalized, meaning they are recorded as assets on the balance sheet. They only impact the income statement gradually over future years through periodic depreciation. It is revenue expenditures (like routine repairs) that are expensed immediately on the income statement.

Q7. If a company changes its mind and reduces an asset’s useful life estimate, it must retroactively change depreciation for previous years.

• Answer: FALSE

• Explanation: A change in an asset’s estimated useful life or residual value is treated as a change in accounting estimate. Accounting standards dictate that changes in estimates must be accounted for prospectively, not retrospectively. This means prior years’ financial statements are left untouched, and the remaining net book value is simply spread out over the newly calculated remaining useful life for current and future periods.

Q8. Net book value can never be lower than the estimated salvage value of the fixed asset under normal depreciation methods.

• Answer: TRUE

• Explanation: Salvage value (or residual value) represents the estimated amount a company expects to recover when disposing of an asset at the end of its utility. Because depreciation is the process of allocating the asset’s cost down to this expected scrap value, an asset cannot be depreciated below its salvage value. Once the net book value drops to equal the salvage value, annual depreciation tracking must stop.

Q9. Under the units-of-production method, depreciation expense can be zero in a period if the asset was completely idle.

• Answer: TRUE

• Explanation: The units-of-production method bases its calculation on the physical activity or output of the asset (such as miles driven or hours run) rather than the simple passage of time. The formula multiplies the actual units produced in a period by a fixed rate per unit. If a machine is completely shut down and produces zero units during a specific quarter, the calculation results in zero depreciation expense.

Q10. A gain on the disposal of a fixed asset indicates that the asset was sold for more than its original historical cost.

• Answer: FALSE

• Explanation: A gain on disposal does not require the sale price to exceed the original historical cost; it only requires the sale price to be higher than the asset’s net book value at the time of sale. For example, if a machine bought for $10,000 has a book value of $3,000, selling it for $4,000 yields a $1,000 gain, even though the price is far below the original $10,000 cost.

Q11. Routine maintenance costs, like cleaning or replacing minor belts in a machine, should be added to the asset’s book value.

• Answer: FALSE

• Explanation: Routine maintenance, minor repairs, and ongoing servicing are classified as revenue expenditures. These activities are performed simply to keep an asset in its normal, expected operating condition. They do not increase the asset’s original capacity, efficiency, or total useful life. Therefore, they must be recognized as ordinary operating expenses on the income statement when incurred, rather than being capitalized.

Q12. Under the revaluation model allowed by IFRS, an increase in a fixed asset’s value is typically credited directly to Retained Earnings.

• Answer: FALSE

• Explanation: When a fixed asset is revalued upward under the IFRS revaluation model, the initial gain cannot be credited directly to net income or retained earnings. Instead, it must be recognized in Other Comprehensive Income (OCI) and accumulated in equity under a specific account called “Revaluation Surplus.” This prevents companies from artificially inflating their operational net profits using unrealized paper gains on long-term infrastructure.

Q13. The cost of a constructed fixed asset includes the wages paid to factory workers who physically built the asset.

• Answer: TRUE

• Explanation: When a company constructs its own fixed asset, all direct costs necessary to bring the asset into existence and make it ready for use must be capitalized. This directly includes the cost of materials used and the direct labor wages of employees who built it. Additionally, any directly attributable overhead costs and qualifying borrowing interest during construction are capitalized into the asset’s initial balance sheet cost.

Q14. The Fixed Asset Turnover Ratio measures a company’s liquidity and ability to pay short-term debts.

• Answer: FALSE

• Explanation: The Fixed Asset Turnover Ratio is an efficiency ratio, not a liquidity ratio. It is calculated by dividing net sales by average net fixed assets, measuring how effectively and productively a company utilizes its property, plant, and equipment investment to generate sales revenue. Liquidity and short-term debt-paying abilities are instead measured by metrics like the Current Ratio or the Quick Ratio.

Q15. An impairment loss must be recognized if a fixed asset’s carrying amount is higher than its recoverable amount.

• Answer: TRUE

• Explanation: An impairment occurs when an asset’s book value on the balance sheet is no longer supported by its future economic benefits. If events indicate that the asset’s recoverable amount (the higher of its fair value less costs to sell or its value in use) has fallen permanently below its carrying value, accounting standards require writing the asset down and recognizing an impairment loss immediately.

Q16. Land improvements, such as paving a parking lot or installing lighting, are depreciated over their own useful lives.

• Answer: TRUE

• Explanation: Although land improvements are physically attached to the land, they do not last forever. Concrete cracks, fences rot, and outdoor lighting fixtures eventually burn out or deteriorate due to weather exposure. Because these improvements have limited and estimable useful lives, they are recorded in a separate “Land Improvements” account and systematically depreciated, unlike the land itself.

Q17. Fully depreciated assets that are still actively used by a business must be removed from the balance sheet.

• Answer: FALSE

• Explanation: If a fixed asset is fully depreciated (meaning its book value equals its salvage value or zero) but remains actively operating in production, it must not be removed from the accounting records. Both its original historical cost and its total accumulated depreciation must remain on the balance sheet to accurately disclose that the company still owns and operates this fully allocated asset.

Q18. When an asset is discarded with no cash proceeds, a loss is always recognized if its net book value is greater than zero.

• Answer: TRUE

• Explanation: When an asset is scrapped or retired with absolutely zero cash proceeds, the transaction’s financial outcome is determined by comparing the proceeds ($0) with the remaining net book value. If the asset still has an unamortized book value (e.g., $500), that entire remaining value represents an unrecovered cost that must be written off completely as a “Loss on Disposal of Fixed Assets.”

Q19. The double-declining balance method applies a constant percentage rate to a declining book value each year.

• Answer: TRUE

• Explanation: The double-declining balance method is an accelerated system where a fixed percentage rate (exactly double the straight-line rate) is multiplied by the asset’s beginning book value each period. Because the book value declines every year as accumulated depreciation grows, applying the constant rate results in a rapidly decreasing depreciation expense amount over the asset’s consecutive operating years.

Q20. US GAAP allows companies to reverse an impairment loss on a fixed asset if its market value recovers in later years.

• Answer: FALSE

• Explanation: Under US GAAP, once a long-term operational fixed asset is written down due to an impairment, the new reduced book value becomes its permanent cost basis. Reversing a previously recorded impairment loss is strictly prohibited, even if the asset’s market value completely recovers later. This marks a major divergence from IFRS, which does allow reversals under specific recovery conditions.

Q21. Small, low-cost assets like a $15 office stapler must be capitalized and depreciated over their individual useful lives.

• Answer: FALSE

• Explanation: While a $15 stapler technically lasts for several years and fits the theoretical definition of a fixed asset, doing so violates the materiality concept. The administrative cost of tracking a few dollars of depreciation over five years outweighs any benefit to financial statement users. Therefore, companies establish materiality thresholds and immediately expense such cheap, low-value items as ordinary office supplies.

Q22. The cost of tearing down an old building to prepare newly purchased land for a factory should be capitalized into the Building account.

• Answer: FALSE

• Explanation: The cost of demolishing an old building to clear newly acquired land is necessary to get the land into its desired condition for its intended purpose. Therefore, this demolition expense, net of any salvaged materials sold, must be capitalized by debiting the Land account, not the building account. Because it goes into Land, it will not be depreciated.

Q23. Depreciation represents a method of accumulating a special cash fund dedicated to replacing the asset once it wears out.

• Answer: FALSE

• Explanation: This is a very common misconception. Depreciation is strictly a process of cost allocation, not cost accumulation. It involves shifting a portion of an asset’s historical cost to an expense account to match it with revenues. Recording a depreciation journal entry involves no cash transactions whatsoever and does not create, maintain, or deposit money into any real-world asset replacement fund.

Q24. When purchasing multiple assets for a lump-sum price, the cost is allocated based on the relative fair market values of the assets.

• Answer: TRUE

• Explanation: In a basket or lump-sum purchase, a company buys multiple distinct assets (such as land, buildings, and equipment) for a single combined price. To record them accurately, the total paid cost must be split proportionally among the individual items using their relative fair market values at purchase. This is crucial because some purchased items depreciate while others do not.

Q25. Depletion is the specific term used to describe the allocation of the cost of extracting natural resources.

• Answer: TRUE

• Explanation: While “depreciation” is used for manufactured physical fixed assets and “amortization” is used for intangible assets, “depletion” is the specialized accounting term reserved for natural resources or wasting assets (such as oil reserves, timberlands, or mineral mines). Depletion reflects the physical consumption and reduction of a natural resource as it is pulled from the earth.

Q26. If an asset is purchased on January 1st, its first-year depreciation expense will be identical under both the straight-line and double-declining balance methods.

• Answer: FALSE

• Explanation: The two methods use completely different calculation logic. Except in highly unusual cases involving zero depreciable bases, the first-year depreciation will always be significantly higher under the double-declining balance method because it is an accelerated technique designed to front-load expenses, whereas the straight-line method spreads costs evenly across all years.

Q27. A Fixed Asset Register serves as a detailed subsidiary ledger that supports the primary control accounts in the general ledger.

• Answer: TRUE

• Explanation: A Fixed Asset Register (FAR) is an internal database or subsidiary ledger that logs precise, individual specifications for every piece of property, plant, and equipment a company owns. It tracks acquisition dates, serial numbers, costs, depreciation history, and location. The total values inside the FAR must match the corresponding control balances on the company’s master general ledger.

Q28. Environmental costs required to safely retire or dismantle a fixed asset at the end of its life should be ignored during initial recognition.

• Answer: FALSE

• Explanation: Under modern accounting frameworks (both IFRS and US GAAP), the initial cost of a fixed asset must include the estimated present value of mandatory future costs related to dismantling, removing, or restoring the site on which the asset is located. This creates an Asset Retirement Obligation (ARO) on the liability side while increasing the capitalized cost of the fixed asset.

Q29. An asset exchange has “commercial substance” if the company’s future cash flows are expected to significantly change as a result of the transaction.

• Answer: TRUE

• Explanation: Commercial substance is a critical criteria in determining how to account for non-monetary asset exchanges. If exchanging an old asset for a new one significantly alters the configuration, risk, timing, or amount of the business’s future operational cash flows, the transaction possesses commercial substance, meaning all realized gains or losses must be fully recognized at the exchange date.

Q30. Liquid assets are alternative names used by accountants to describe long-term property, plant, and equipment.

• Answer: FALSE

• Explanation: Fixed assets are highly illiquid assets because they are held for long-term operational use and cannot be rapidly converted into cash without severely hurting daily business activities. “Liquid assets” refer to the exact opposite category, representing cash on hand, bank balances, short-term accounts receivable, and marketable securities that can be instantly converted to cash.

Q31. If an asset’s net book value is $5,000 and it is sold for $5,000 cash, the transaction results in neither a gain nor a loss.

• Answer: TRUE

• Explanation: Financial gains or losses on asset disposals are calculated by subtracting the asset’s net book value at the date of disposal from the net cash proceeds received from the sale. When the sale proceeds ($5,000) exactly equal the carrying book value ($5,000), the formula yields zero, meaning the business has broken even and records no gain or loss on the income statement.

Q32. Under the straight-line method, an asset’s annual depreciation rate is calculated as 1 divided by its estimated useful life in years.

• Answer: TRUE

• Explanation: The straight-line depreciation rate expresses the portion of the asset’s depreciable cost that is expensed annually as a percentage. For example, if a machine has an estimated useful life of 5 years, its annual straight-line rate is $1 / 5 = 0.20$, or 20%. This constant percentage is then multiplied by the depreciable base to find the annual expense.

Q33. If an expenditure increases the operating efficiency of a machine beyond its original factory specifications, it must be capitalized.

• Answer: TRUE

• Explanation: Expenditures that upgrade an asset’s original performance standards, significantly boost its production capacity, or cut its operating costs are classified as capital improvements. Because these enhancements alter the asset to deliver higher future economic benefits than originally anticipated, accounting standards require these costs to be capitalized by adding them to the asset’s balance sheet value.

Q34. The net book value of a fixed asset is calculated by subtracting annual depreciation expense from the asset’s historical cost.

• Answer: FALSE

• Explanation: Net book value is calculated by subtracting accumulated depreciation (the sum of all depreciation expenses recorded from the purchase date up to the present) from the asset’s original historical cost. Subtracting only a single year’s depreciation expense would yield an incorrect, overstated value for any asset that has been in use for more than one year.

Q35. Land is always recorded at its current assessed property tax value on a standard corporate balance sheet.

• Answer: FALSE

• Explanation: Under the historical cost principle, land is recorded and maintained at its original acquisition cost, which covers the purchase price plus closing costs, title fees, and clearing expenditures. It is not updated to match local tax assessments or short-term real estate fluctuations, unless the company uses the IFRS revaluation model, which requires structured fair market valuations rather than property tax figures.

Q36. If a company forgets to record annual depreciation, its total assets on the balance sheet will be understated.

• Answer: FALSE

• Explanation: If a company omits its year-end depreciation entry, it fails to increase the Accumulated Depreciation account. Because Accumulated Depreciation is a contra-account that reduces total assets, keeping it artificially low causes the net book value of fixed assets to remain too high. Therefore, total assets on the balance sheet will be overstated, not understated.

Q37. Salvage value is also known as residual value or scrap value.

• Answer: TRUE

• Explanation: These three terms are completely synonymous in accounting terminology. They all refer to the estimated residual value that an enterprise expects to realize from an asset’s ultimate disposal, sale, or scrapping at the conclusion of its useful service lifespan, after factoring in any expected removal or selling expenses.

Q38. The cost of a delivery truck includes the fee paid to paint the company’s custom logo and phone number onto the truck before its first use.

• Answer: TRUE

• Explanation: The initial cost of property, plant, and equipment includes all expenditures necessary to place the asset in its required location and condition for its intended business usage. Since custom company branding and logos are required before the truck joins the active fleet for operations, this initial painting cost is capitalized as part of the truck’s total cost.

Q39. Under IFRS, a company can freely switch between the cost model and the revaluation model for individual fixed assets every month.

• Answer: FALSE

• Explanation: Accounting standards require consistency. A company cannot arbitrarily switch accounting models back and forth to manipulate its financial appearance. Under IFRS, an entity can choose the revaluation model, but it must apply that model consistently to an entire class of fixed assets, and revaluations must be done regularly (usually annually or every few years) to ensure values don’t distort.

Q40. When an asset’s useful life finishes, its accumulated depreciation will equal its depreciable cost if no early write-offs occurred.

• Answer: TRUE

• Explanation: The objective of systematic depreciation is to fully allocate the asset’s “depreciable cost” (historical cost minus salvage value) over its useful life. At the final year of that lifespan, the accumulated depreciation account will have steadily grown to exactly equal that original depreciable cost figure, leaving the asset’s net book value precisely equal to its salvage value.

Q41. Intangible assets, like patents or software, are categorized on a balance sheet as part of Property, Plant, and Equipment.

• Answer: FALSE

• Explanation: While both are long-term non-current assets, Property, Plant, and Equipment (PP&E) is strictly reserved for tangible assets—items with physical substance that you can touch. Intangible assets completely lack physical substance and are therefore reported in a completely separate non-current asset section on the balance sheet titled “Intangible Assets.”

Q42. The sum-of-the-years’-digits method results in an increasing depreciation expense over the life of the asset.

• Answer: FALSE

• Explanation: The sum-of-the-years’-digits (SYD) method is an accelerated depreciation technique, meaning it results in a decreasing depreciation expense over time. It applies a declining fraction to a constant depreciable base every year, causing the highest depreciation expense to hit the income statement in year one, with smaller charges appearing in each subsequent year.

Q43. If a fixed asset is damaged in an accident, the repair cost to restore it to its previous working state should be capitalized.

• Answer: FALSE

• Explanation: Repairs resulting from accidents or breakdowns are classified as ordinary repairs. They do not enhance the asset’s original factory capacity or extend its lifespan beyond its original estimation; they merely fix damage to bring it back to its normal condition. Therefore, these costs are treated as revenue expenditures and are expensed immediately on the income statement.

Q44. Capitalizing an expenditure results in higher reported net income in the current period compared to expensing it.

• Answer: TRUE

• Explanation: If a company capitalizes an expenditure, it places the cost on the balance sheet as an asset, meaning $0 hits the current period’s income statement as an immediate expense (except for that year’s small portion of depreciation). If they expense it, the full cost instantly hits the income statement, reducing that year’s net income. Therefore, capitalization preserves higher short-term profits.

Q45. When a fixed asset is sold, its historical cost and accumulated depreciation must both be completely removed from the ledger.

• Answer: TRUE

• Explanation: Once an asset is sold or given away, the company no longer owns or controls it. To maintain accurate records, the accounting team must completely wipe out the asset’s presence by crediting the asset account for its original historical cost and debiting its related accumulated depreciation account to clear its specific balance to zero.

Q46. An asset’s useful life is always identical to its physical life.

• Answer: FALSE

• Explanation: An asset’s physical life is how long it can physically last before turning to scrap, whereas its useful life is the period the company expects to use it productively. A computer might physically function for 15 years, but its useful life to a tech company might only be 3 years before it becomes technologically obsolete and needs replacement.

Q47. Architectural fees paid for designing a new corporate headquarters building are capitalized as part of the building’s cost.

• Answer: TRUE

• Explanation: Architectural, engineering, and legal fees directly tied to designing and permitting a new structure are essential costs required to bring that specific fixed asset into existence and make it ready for use. Because the building cannot be constructed without these plans, these professional fees are capitalized by debiting the Building or Construction-in-Progress account.

Q48. Depreciation is a cash outflow that reduces the cash balance reported under operating activities in the cash flow statement.

• Answer: FALSE

• Explanation: Depreciation is entirely a non-cash expense. No cash leaves the company’s bank account when a depreciation entry is recorded. On the statement of cash flows prepared under the indirect method, depreciation expense is actually added back to net income because it reduced net profits without actually consuming any real physical cash.

Q49. Under IFRS, if an asset class is revalued downward, the loss is recognized immediately on the income statement unless it reverses a prior revaluation surplus.

• Answer: TRUE

• Explanation: According to IFRS revaluation rules, a downward revaluation represents an immediate decrease in economic value. This loss must be charged directly to the income statement as an expense. The only exception is if the same asset class had a previous “Revaluation Surplus” sitting in equity; in that case, the loss first reduces that surplus in equity before hitting profits.

Q50. Fixed assets are classified as current assets on a standard corporate balance sheet because they are used in current operations.

• Answer: FALSE

• Explanation: Current assets are cash and other resources expected to be sold, consumed, or converted to cash within one year or one operating cycle. Because fixed assets provide operational economic benefits that stretch across multiple years and are not meant for quick liquid conversion, they are strictly classified as non-current or long-term assets.

Fixed Assets Quiz: True or False