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ch8Student: ___________________________________________________________________________

1. Tangible long-lived productive assets differ from intangible long-lived productive assets in that tangible assets have physical substance whereas intangible assets have no physical substance. True False

2. Patents, trademarks, and franchises are examples of tangible assets.

True False

3. The fixed asset turnover ratio measures the amount of operating income generated per dollar of average

fixed assets. True False

4. The equipment cost initially reported on the balance sheet includes the equipment related installation costs.

True False

5. An expenditure is capitalized when it is reported as an expense on the income statement.

True False

6. The land cost initially reported on the balance sheet includes legal fees and title insurance.

True False

7. The cash-equivalent cost of an asset received is measured as any cash paid plus the current market value of

the non-cash consideration given up. If this value is not determinable, the current market value of what is received should be used instead. True False

8. If a second-hand machine is purchased for productive use in a business, all renovation and repair costs on

the used machine incurred by the purchaser prior to its productive use should be reported as an expense on the income statement. True False

9. Ordinary repairs and maintenance costs are incurred to maintain a long-lived asset and are expensed as

incurred. True False

10. In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereas

residual value is an estimate because it relates to an amount in the future. True False

11. Depreciation is the process of allocating a long-lived asset's cost over its productive life. True False

12. Depreciation is the process of estimating a long-lived asset's current market value.

True False

13. If depreciation expense is calculated without taking into account the asset's residual value, depreciation

expense will be higher than it should have been. True False

14. The book value of a depreciable asset equals its acquisition cost minus the depreciation expense recorded to

date. True False

15. On January 1, 2010 equipment was purchased for $80,000; the equipment's estimated residual value is

$15,000 and its estimated useful life is 8 years. During 2010, the depreciation expense under the double-declining balance method is $16,250. True False

16. On January 1, 2010 equipment was purchased for $100,000; the equipment's estimated residual value is

$20,000 and its estimated useful life is 8 years. On December 31, 2010, the book value using the straight-line method of depreciation is $90,000. True False

17. Use of the double-declining-balance method of depreciation results in higher depreciation expense during

the first year of an asset's life relative to use of the straight-line depreciation method. True False

18. Use of the double-declining-balance method of depreciation results in decreasing amounts of depreciation

expense over an asset's life. True False

19. The units-of-production method of depreciation allocates an asset's cost over its useful life based on the

current period's production relative to its total estimated production. True False

20. The depreciation method chosen for financial reporting purposes (GAAP) must also be utilized for income

tax reporting (IRS). True False

21. If a long-lived asset has been impaired, the journal entry will require a debit to a loss account and a credit

to the long-lived asset account. True False

22. If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million, no impairment has occurred and no loss would be recognized. True False

23. The first step in recording the disposal of a long-lived asset is to update its book value by recognizing

depreciation expense for the period of time since the last depreciation adjustment was made. True False

24. Gains and losses on a long-lived asset disposal are determined by comparing the asset's cost to its selling

price. True False

25. Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets.

True False

26. The systematic and rational allocation of the acquisition cost of natural resources to those periods in which

the resources contribute to revenue is called depletion. True False

27. The method of depletion used to allocate the cost of natural resources to future periods is most similar to

the straight-line depreciation method. True False

28. Natural resource depletion expense is recognized on the income statement for all resources removed during

the period whether they are sold or not. True False

29. Goodwill is recorded only when an existing company is bought by another company and the purchase price

exceeds the fair value of the purchased company's net assets. True False

30. Research and development costs are capitalized under GAAP once a product or process has been

developed. True False

31. When determining cash flow from operations using the direct method, depreciation and amortization

expense are deducted from net income. True False

32. Which of the following would not be classified as property, plant and equipment on a balance sheet? A. Land being held for resale.B. Equipment used in the manufacturing process.C. A building used as corporate headquarters.D. A natural resource being mined.

33. Which of the following accounts would not be considered a tangible asset?

A. BuildingsB. LandC. EquipmentD. Patents

34. Which of the following accounts would not be considered an intangible asset?

A. GoodwillB. PatentsC. Research and development costsD. Trademarks

35. Which of the following transactions would not increase the fixed asset turnover ratio?

A. A profitable sale of inventory on account.B. A profitable sale of inventory for cash.C. Selling equipment used in the manufacturing process for a loss.D. A decrease in cash-based operating expenses.

36. Which of the following includes only tangible assets?

A. Land, buildings and natural resources.B. Land, buildings and leaseholds.C. Natural resources, buildings, and franchises.D. Licenses, trademarks, and land.

37. Which of the following includes only intangible assets?

A. Natural resources, patents, and trademarks.B. Research and development costs, franchises, and trademarks.C. Copyrights, licenses, and land.D. Leaseholds, patents and copyrights.

38. Which of the following statements regarding the fixed asset turnover ratio is incorrect?

A. The numerator is net operating income.B. The denominator is average net fixed assets.C. It is used to assess a company's effectiveness in generating sales from its fixed assets.D. It increases when a company sells a factory building for its book value.

39. The Wilson Company has provided the following information: • Net sales, $100,000;• Net operating income, $40,000;• Net income, $20,000;• Average total assets, $120,000;• Average net fixed assets; $80,000.What is Wilson's fixed asset turnover ratio? A. 0.83B. 1.25C. 0.25D. 0.50.

40. Which statement is false?

A. Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover.B.

Using an accelerated depreciation method instead of the straight-line depreciation method will lead to reporting a higher fixed asset turnover during the earlier years of an asset's life.

C. Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover.

D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.

41. On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs

associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. At what amount will the equipment be recorded at on a balance sheet? A. $56,500B. $54,000C. $51,000D. $50,000

42. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares

of White common stock held by Red Company as an investment. The White common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. Installation costs were $700 and shipping costs were $500. What amount should be the total amount debited to the computer equipment account? A. $14,200B. $15,000C. $15,400D. $16,200

43. Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia also

paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. At what amount should the truck be recorded on the balance sheet prior to recording depreciation expense? A. $40,000B. $42,000C. $43,000D. $45,000

44. Which of the following equipment related costs is not capitalized on a balance sheet? A. Equipment installation costs.B. Transportation costs associated with the equipment purchase.C. Equipment maintenance costs.D. The equipment's purchase price.

45. Which of the following costs associated with a land purchase is not a component of the land cost reported

on a balance sheet? A. The payment of delinquent property taxes.B. The incurrence of legal fees.C. The cost of title insurance.D. The land's appraised value.

46. Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par value

common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. Total assets increase $350,000.B. Stockholders' equity increases $200,000.C. Stockholders' equity increases $330,000.D. Total assets increase $330,000.

47. Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10 par value

common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. The common stock account increases by $100,000.B. The building account increases by $350,000.C. Stockholders' equity increases $350,000.D. The additional paid-in capital account increases by $250,000.

48. Which of the following journal entries is correct for Smith Company when Smith issues 10,000 shares of

$20 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. Building 220,000

Cash 20,000 Common stock 200,000B. Building 370,000

Cash 20,000 Common Stock 350,000C. Building 370,000

Cash 20,000 Common stock 200,000 Additional paid-in capital 150,000D. Building 200,000

Common stock 200,000 49. If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead of as a

revenue expenditure, which of the following statements is true? A. The current year's net income will be lower and future depreciation expense will be higher.B. The current year's net income will be higher and future depreciation expense will be lower.C. The current year's net income will be higher and future depreciation expense will be higher.D. The current year's net income will be lower and future depreciation expense will be lower.

50. Which of the following statements is incorrect? A. Revenue expenditures decrease net income.B. Capital expenditures decrease assets.C. Ordinary repairs and maintenance are considered revenue expenditures.D. Additions and improvements are considered capital expenditures.

51. A company acquires land by issuing 10,000 shares of its $10 par value common stock currently trading at

$20 per share and the appraised value of the land is $250,000. Which of the following statements correctly describes the recording of the land? A.

Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the issued stock is currently worth $200,000.

B. Record the land at the value of the consideration given up, $200,000.C.

Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain.

D. Record the land at the par value of the stock given up, $100,000. 52. Which of the following statements is incorrect?

A. Replacement of a truck's tires would be treated as a capital expenditure.B. The cost of replacing carpet in a building would be a revenue expenditure.C. Cost of replacing a roof on a newly purchased building before using it as a store would be a capital

expenditure.D. The cost of repainting a hallway would be a revenue expenditure.

53. Gilbert Company made an ordinary repair to a delivery truck during 2010 at a cost of $500 and capitalized

the repair cost. What will be the effect on the 2010 financial statements as a result of the capitalization? A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.

54. Which of the following would most likely not be a revenue expenditure?

A. Repairing the carpet in the sales department offices.B. Repairing a leaky roof.C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances.D. Painting the exterior of the factory building.

55. What is the effect on the 2010 financial statements when a capital expenditure during 2010 was incorrectly

recorded as a revenue expenditure? A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.

56. Which of the following best describes the objective of depreciation? A. To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue.B. To estimate the remaining useful life of the asset.C. To report the asset on the balance sheet at the estimated amount for which the asset could be sold on the

balance sheet date.D. To estimate the current replacement cost of the asset.

57. Which of the following doesn't properly describe the depreciation process?

A. It is an allocation process.B. It is consistent with the matching principle.C. It involves the use of estimates.D. It attempts to determine an asset's market value.

58. Which of the following describes the effect of recording depreciation expense at year-end?

A. Net income decreases and total assets aren't affected.B. Total assets decrease and stockholders' equity is not affected.C. Net income decreases and total assets decrease.D. Stockholders' equity is not affected and net income decreases.

59. Why is the continuity assumption important with respect to the accounting for long-lived tangible assets?

A. It helps a company decide whether to use straight-line depreciation or an accelerated depreciation

method.B. It justifies depreciating the asset over its expected useful life, without anticipating that the business will

liquidate in the near future.C. It provides justification for including residual values in calculating depreciation.D. It is consistent with maintaining assets in the accounting records at market value rather than acquisition

cost. 60. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000

for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. How much is the annual depreciation expense assuming use of the straight-line depreciation method? A. $6,100B. $6,000C. $5,950D. $5,750

61. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000

for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. Which of the following statements is incorrect? A. The annual depreciation expense is $6,000.B. The December 31, 2010 book value was $35,000.C. The December 31, 2012 accumulated depreciation balance was $18,000.D. The December 31, 2011 book value was $24,000.

62. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life is A. 3 years.B. 4 years.C. 5 years.D. 6 years.

63. Warren Company plans to depreciate a new building using the double declining-balance depreciation

method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation expense was recorded properly, what would be the amount of depreciation expense for the second year? A. $30,720B. $32,000C. $58,880D. $64,000

64. Warren Company plans to depreciate a new building using the double declining-balance depreciation

method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. What is the building's book value at the end of the first year? A. $736,000B. $768,000C. $686,000D. $690,000

65. Which method of depreciation results in periodic depreciation expense that fluctuates from one period to

the next, not necessarily in a steadily upward or downward direction? A. Straight-lineB. Units-of-productionC. Modified accelerated cost recovery systemD. Declining balance

66. Hill Inc. purchased an asset on January 1, 2009. Hill chose an accelerated depreciation method to

depreciate the asset. Which of the following is correct if Hill would have chosen the straight-line depreciation method instead? A. Depreciation expense would have been lower in 2009.B. The book value of the asset would have been lower at the end of 2009.C. The net income would have been lower during 2009.D. The accumulated depreciation balance would have been higher at the end of 2009.

67. On January 1, 2010, Pyle Company purchased an asset that cost $50,000 (no estimated residual value,

estimated useful life 8 years, straight-line depreciation is used). An error was made because the total cost amount was debited to an expense account for 2010 and no depreciation on it was recorded. Pretax income for 2010 was $42,000. How much is the correct 2010 pretax income? A. $35,750B. $48,250C. $85,750D. $92,000

68. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. How much is the 2011 depreciation expense? A. $5,000B. $4,000C. $3,800D. $2,200

69. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. The

estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. What is the accumulated depreciation balance as of December 31, 2011? A. $9,000B. $4,000C. $5,000D. $10,920

70. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an

estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December 31, 2011 assuming Wasson uses the straight-line depreciation method? A. $12,000B. $24,000C. $30,000D. $28,000

71. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an

estimated 6-year life and a $4,000 residual value. Wasson estimates that the vehicle will be driven 100,000 miles. What is the vehicle's book value as of December 31, 2011 assuming Wasson uses the units-of-production depreciation method and the vehicle was driven 10,000 miles during 2010 and 18,000 miles during 2011? A. $29,920B. $28,800C. $24,800D. $25,920

72. Which of the following statements is false?

A. The book value at the end of an asset's useful life will be the same under all the depreciation methods

allowed under GAAP.B.

The balance in the accumulated depreciation account will be the same at the end of an asset's useful life under all the methods allowed under GAAP.

C. Once you select a depreciation method, then you must use this method for all depreciable assets.D.

The annual depreciation expense and year-end book values will differ under the various depreciation methods over the life of the asset.

73. Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting? A.

They have high technology, robotic equipment in their plant that becomes obsolete quickly and declines in utility to the company more rapidly in the early years of the assets' lives.

B. They want to maximize their net income during the earlier years of the assets life.C. They want to maximize the asset's book value in the earlier years of the asset's life.D. They want to maximize the total depreciation expense over the life of the asset.

74. Which of the following statements is correct?

A. Companies can change the method of depreciating assets from one year to the next.B. Companies can affect the book value at the end of an asset's life by choosing one method of depreciation

over another.C.

Companies can use one method of depreciation for some of their long-lived, productive assets but then use a different method for another group or type of long-lived, productive assets.

D.

Companies can minimize an asset's book value in the first year of use by selecting the straight-line depreciation method rather than the double-declining-balance method.


A.

Using straight-line depreciation in comparison to an accelerated depreciation method will result in a lower reported amount of total assets at end of the first year of an asset's life.

B.

Using accelerated depreciation in the first year of an asset's life will result in a higher net income during the first year compared to using the straight-line depreciation method.

C. Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for the first year.

D.

Using straight-line depreciation in comparison to an accelerated depreciation method will lead to a higher book value at the end of an asset's life.

76. Which of the following statements about the Modified Accelerated Cost Recovery System (MACRS) is

correct? A. It is similar to the units-of-production depreciation method.B. It is applied using longer asset lives than the estimated useful lives required by GAAP.C. It provides a short-term tax benefit because of the higher depreciation expense reported in the early years

of an asset's life.D. It is acceptable for use when preparing financial statements.

77. Which of the following statements about asset impairment is false?

A. Asset impairment loss is the difference between an asset's net book value and its estimated future cash

flows.B. If an asset is impaired, a loss would be recognized in the period it can be estimated.C. Impairment will lead to writing down the asset's net book value.D. Asset impairment occurs when the estimated future cash flows are less than the asset's net book value.

78. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million. How much is the asset impairment loss? A. $5.4 millionB. $4.1 millionC. $0.4 millionD. $1.0 million

79. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million,

estimated future cash flows of $3.7 million, and a fair value of $3.1 million. Which of the following correctly describes the recording of the asset impairment loss? A. The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.B. The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.C. The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.D. The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.

80. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The original cost of

the crane was $5.0 million and its accumulated depreciation equaled $4.2 million on December 31, 2010. What is the gain or loss from the December 31, 2010 equipment sale? A. $800,000 gainB. $800,000 lossC. $200,000 lossD. $200,000 gain

81. Which of the following is correct when recording the disposal of equipment for a gain?

A. A debit to a gain account.B. A credit to the equipment account for the asset's book value.C. A debit to accumulated depreciation for the depreciation accumulated to the date of disposal.D. A decrease in total assets occurs.

82. Which of the following statements is incorrect with respect to the sale of a depreciable asset?

A. A gain occurs when the selling price exceeds book value.B. A sale for a gain results in an increase in total assets.C. A sale for a loss results in an increase in total assets.D. A loss occurs when the selling price is less than book value.

83. Carter Company disposed of an asset at the end of the eighth year of its estimated life for $10,000 cash.

The asset's life was originally estimated to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000. The asset was being depreciated using the straight-line method. What was the gain or loss on the disposal? A. $1,000 lossB. $4,000 lossC. $5,500 gainD. $10,000 gain

84. Which of the following journal entries is correct when a depreciable asset (building) is sold for cash subsequent to acquisition? A.

B.

C.

D.

85. Which of the following statements is incorrect with respect to the sale of a depreciable asset for a loss?

A. Net income deceases and total assets decrease.B. Net income and stockholders' equity both decrease.C. Total assets and stockholders' equity both decrease.D. Total assets increase and stockholders' equity decreases.

86. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years and

a residual value of $1,000. The computer was depreciated by the straight-line method and was sold at the end of the third year of use for $5,000 cash. How much of a gain or loss should Amanda record? A. A gain of $1,000.B. A loss of $5,000.C. A gain of $400.D. A loss of $400.

87. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years

and a residual value of $1,000. The computer was depreciated by the straight-line method and was sold at the end of the third year of use for $5,000 cash. Which of the following statements correctly describes the computer sale? A. Assets and stockholders' equity both increase by $5,000.B. Assets decrease $5,000 and stockholders' equity is not affected.C. Assets and stockholders' equity both decrease by $400.D. Assets and stockholders' equity both increase by $400.

88. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that

150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2010, 15,000 barrels of oil were produced and sold. Which of the following statements is incorrect with respect to the accounting for the oil well? A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $90,000 during 2010.C. The inventory of oil increased $90,000 during 2010.D. The depletion rate is $6.00 per barrel of oil.

89. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2010, 15,000 barrels of oil were produced and 10,000 barrels were sold. Which of the following statements is correct with respect to the accounting for the oil well? A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $60,000 during 2010.C. The inventory of oil increased $30,000 during 2010.D. The 2010 cost of goods sold was $30,000.

90. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional

$600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can be removed from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold. Which of the following statements is correct with respect to the accounting for the mine? A. The 2010 net income decreased $450,000 as a result of the mining during the year.B. The book value of the mine decreased $350,000 during 2010.C. The inventory of minerals increased $450,000 during 2010.D. The 2010 cost of goods sold was $350,000.

91. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional

$600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can be removed from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold. Which of the following statements is incorrect with respect to the accounting for the mine? A. The book value of the mine on December 31, 2010 was $2,640,000.B. The book value of the mine decreased $450,000 during 2010.C. The inventory of minerals increased $100,000 during 2010.D. The 2010 cost of goods sold was $350,000.

92. Which of the following is most likely to be an intangible asset with an indefinite life?

A. LeaseholdB. FranchiseC. PatentD. Goodwill

93. Which one of the following would not be recorded as an intangible asset?

A. LeaseholdsB. CopyrightsC. Internally generated goodwillD. Franchises

94. Failure to record amortization expense on a patent during the current year will result in which of the

following? A. Net income will be overstated, but there would be no affect on total assets.B. Net income for the year and total assets would both be overstated.C. Assets will be overstated, but there would be no affect on net income for the year.D. Net income and assets will both be understated.

95. Which of the following properly describes the accounting for goodwill? A. Goodwill is created when it is internally generated.B. Goodwill is amortized over its useful life.C. Goodwill is the difference between the amounts paid for a company relative to the book value of the

company's net assets.D. Goodwill is written-down when it has been determined to be impaired.

96. Which of the following properly describes the accounting for a patent?

A. Research and development costs associated with a patent are capitalized.B. The patent will be amortized over its useful life.C. Patent amortization expense is accounted for within the accumulated depreciation account.D. Their legal life extends to 70 years after the death of the inventor.


A. A copyright has a legal life not exceeding 70 years.B. A trademark is recorded on the balance sheet at an amount equal to the related research and development

costs incurred.C. A patent's legal life is 20 years.D. A franchise's amortization is a function of the underlying contract.

98. During 2010, the Bowtie Company reported net income of $1,872 million, depreciation expense of $1,412

million and $978 million paid for purchases of property, plant and equipment. What would be the effect on cash flows from operating activities during 2010? A.

Depreciation expense would increase cash flows from operations and the property, plant and equipment purchases would decrease cash flow from operations.

B.

Depreciation would increase cash flow from operations and property, plant and equipment purchases would increase cash flows from operations.

C.

Depreciation would increase cash flow from operations but the property, plant and equipment purchases would have no effect on cash flow from operations.

D. Depreciation is a non-cash expense and would not be used to calculate cash flow from operations. 99. Landmark Restaurants reported net income in 2008 of $45.9 million and depreciation expense of $48.8

million. They also report additions to property and equipment of $162.9 million. Which of the following disclosures would appear on the 2008 statement of cash flows? A.

Depreciation of $48.8 million would be deducted from net income under operating activities and the $162.9 million would be added under investing activities.

B.

Depreciation of $48.8 million would be added to net income under operating activities and the $162.9 million would be added under investing activities.

C.

Depreciation of $48.8 million would be added to net income under operating activities and the $162.9 million would be deducted under investing activities.

D.

Depreciation of $48.8 million would be deducted from net income under operating activities and the $162.9 million would be deducted under investing activities.

100.Williams Company purchased a machine costing $25,000 and is depreciating it over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated useful life was changed to 12 years with the residual value unchanged. How much is the year 8 depreciation expense assuming use of the straight-line depreciation method? A. $2,200B. $2,920C. $3,100D. $8,800

101.Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and

estimated residual value of $5,000. At the beginning of year three, Augie's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Augie should record for year 3 under the straight-line depreciation method? A. $15,500B. $8,250C. $11,000D. $16,500

102.The following information is available for Coca-Cola and PepsiCo:

Compute the fixed asset turnover ratio for both Coca Cola and PepsiCo.

103.The following information was available for Landmark Restaurants for the past three years. Using this

information compute the fixed asset turnover ratio for 2010 and 2009.

104.On January 1, 2010, Trenton Company purchased a machine costing $50,000. Trenton also incurred the following costs: transportation, $1,000; installation, $2,000; and sales tax, $3,000. Prepare the journal entry to record the machine acquisition assuming cash was paid.

105.Waterloo Corporation purchased factory equipment for a cost of $1,800,000. It cost $100,000 for its

delivery, $220,000 for its installation and modifications to the production building, and $60,000 in interest costs on borrowed funds used to acquire the equipment. What is the acquisition cost of the new equipment?

106.In 2008, Landmark Restaurants reported the cost of property and equipment at $1,189.8 million and the

accumulated depreciation at $224.2 million. In that same year, Coca Cola reported $10,149 million in long-lived, productive assets and accumulated depreciation on them of $4,058.A. Estimate the approximate remaining life of the assets for Landmark and Coca ColaB. Which company appears to have newer assets with longer remaining lives?

107.Hi-Crest Company purchased a machine on January 1, 2010, for $300,000. The machine has an estimated

useful life of 5 years and a $10,000 residual value. Calculate depreciation expense and the year-end book value for 2010 and 2011 using the double declining-balance method of depreciation.

108.The financial statements of Franklin Company contained the following errors:

Requirements:A. Was net income for 2009 understated or overstated?B. Was total combined net income for the two-year period ended December 31, 2010 overstated or understated?

109.On January 1, 2009, Boston Company purchased a heavy duty machine having an invoice price of $13,000;

Boston paid transportation and installation costs totaling $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Calculate depreciation expense and book value for 2009 - 2012, assuming 150% declining-balance method of depreciation. (Round to the nearest dollar.)

110.Covey Company purchased a machine on January 1, 2010, by paying cash of $250,000. The machine has

an estimated useful life of five years, is expected to produce 500,000 units, and has an estimated residual value of $25,000.Requirements:A. Calculate determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (1.) straight-line depreciation; and (2.) the 200% declining balance method.B. What is the book value of the machine after three years using the 200% declining- balance method?C. What is the book value of the machinery after three years with straight-line depreciation?D. If the machine was used to produce and sell 120,000 units in 2010, what would the depreciation expense be under the units of production method?

111.Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The company estimated that the truck would have a useful life of 4 years and a residual value of $4,000.Requirements:A. Calculate depreciation expense under straight line and double declining balance for 2009-2012.B. Which of the two methods would result in lower net income in 2010 and 2012?

112.Allison Company purchased a machine for $1,200,000 at the beginning of 2009. Allison was using the

double-declining-balance (200%) method to depreciate the asset and its useful life was estimated to be 5 years with a residual value of $200,000. At the end of 2010, Allison Co. estimates the future cash flows from the asset to be equal to $500,000 and the fair value to be $450,000. What is the amount of the impairment loss?

113.A company purchased equipment for $800,000 and has depreciated it using the straight-line method for

the past 5 years when its original life was estimated to be 10 years with a $200,000 residual value. The equipment's utility to the company has declined because they expect it to generate net cash flows over the remaining years of $300,000. The asset's fair value at the end of the fifth year is $200,000. If the asset has been impaired, record the journal entry to record the impairment.

114.Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life 4 years. The company uses straight-line depreciation computed monthly. On July 1, 2012, the company sold the truck for $1,900 cash.A. What was the depreciation expense amount per month?B. What was the amount of accumulated depreciation at July 1, 2012? C. Give the required journal entries on the date of disposal, July 1, 2012. (Assume no 2012 depreciation had yet been recorded)

115.Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5 years ago for a cost

of $800,000. It has been depreciated using the straight-line method over an estimated useful life of 10 years with an estimated residual value of $50,000. Record the journal entry at the end of year five for the asset's disposal assuming the fifth year's depreciation had been recorded.

116.Bennett Corporation sold a piece of equipment on June 30, 2012 for $50,000 cash. The equipment had

been purchased on January 1, 2008 for $150,000. It had an estimated useful life of 6 years and a $30,000 residual value. Bennett Corp. has been using the straight-line method of depreciation and has a year-end of December 31st. Prepare any necessary journal entries on June 30, 2012 assuming that 2012 depreciation expense has not been recorded.

117.Spa Sources Corporation purchased a machine that had an original cost of $60,000 and an estimated residual value of $10,000. The useful life was expected to be 8 years and straight-line depreciation is used. At the end of 2010, the book value of the machine was $35,000. Spa Sources sold the machine for $32,000 cash on October 1, 2011.Requirements:A. Prepare the journal entry to record depreciation for 2011 up to the date of sale.B. Prepare the journal entry to record the sale of the machine.

118.Give the required adjusting journal entry at December 31, 2011, the end of the annual accounting period

for the three items below. Assume that no adjusting entries have been made during the year. If no entry is required, explain why.A. Polk Company acquired a patent that cost $6,000 on January 1, 2011. The patent was registered on January 1, 2006. The useful life of a patent is 20 years from registration.B. Polk Company acquired a gravel pit on January 1, 2011, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 2011 4,000 tons were extracted and sold.C. On January 1, 2011, Polk Company acquired a used dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line depreciation.

119.Benson Mining Company purchased a site containing a mineral deposit during 2010. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Benson constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value.Requirements:A. Explain the objective of recording depletion on natural resources.B. Determine Benson's depletion rate per ton of ore.C. Prepare the journal entry to record depletion for the year 2010, when Benson mined and sold 150,000 tons of ore.D. Prepare the journal entry to record depreciation on the building for 2010. Benson calculates depreciation on the building using the units-of-production method based on the amount of ore extracted (150,000 tons in 2010).

120.On January 1, 2010 Gordon Company purchased a patent for $420,000 from an inventor who had

developed a new manufacturing process. At the time of the purchase, the patent had a remaining useful life of 10 years.Requirements:A. Prepare the journal entry to record Gordon's purchase of the patent.B. Prepare the journal entry to record amortization of the patent on December 31, 2010.C. At the end of 2013, after amortization had been recorded through December 31, 2013, Gordon concluded that the estimated future cash flows from the patent to be $250,000. The patent's estimated fair value on December 31, 2011 was $200,000. Prepare the journal entry to record the patent impairment, if necessary.

121.Pier 5 has been in business 8 years with 4 stores in the San Francisco bay area. Their local reputation for making savory pies such as curried potatoes is well recognized. A national food distributor has offered to purchase the company. Pier 5 has $0.9 million of net assets at book value, but those net assets have a fair market value of $1.2 million. If the distributor offers to buy Pier 5 for $3.5 million, how much will be recorded as goodwill based on the offered purchase price?

122.Landmark Restaurants reported net income of $45.9 million during 2010. They reported depreciation and

amortization of plant and equipment of $48.8 million and cash paid for additions to property, plant and equipment of $162.9 million during 2010. Explain where each of these items would be reported and their impact on cash flows on the statement of cash flows.

123.Frankel Feed purchased a new machine on January 1, 2010, relevant information is as follows:

124.Sadler Corporation purchased equipment to be used in manufacturing. The purchase was made at the beginning of 2009 by paying cash of $150,000. The equipment has an estimated residual value of 10,000 and an expected useful life of 10 years. At the beginning of 2011, Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and that the residual value will be zero. Sadler uses the straight-line method for depreciation.Requirements:A. Make the journal entry to record depreciation on the equipment for 2010.B. Make the journal entry to record depreciation on the equipment for 2011, including the effect of the changes in estimates.C. Describe how a business should account for a change in the estimated useful life and/or residual value of a depreciable asset.

125.Determine the effect of the following transactions on the financial statement components identified. Code

your answers as follows: A. If the transaction results in an increase in the financial statement component.B. If the transaction results in a decrease in the financial statement component.C. If the transaction does not affect the financial statement component.

ch8 Key

1. Tangible long-lived productive assets differ from intangible long-lived productive assets in that tangible assets have physical substance whereas intangible assets have no physical substance. TRUETangible assets have physical substance, whereas intangible assets lack physical substance.

AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: RememberDifficulty: Easy

Learning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #1

Topic Area: Acquisition And Maintenance Of Plant And Equipment

2. Patents, trademarks, and franchises are examples of tangible assets. FALSEIntangible assets lack physical substance and include patents, copyrights, franchises, licenses, and trademarks.






3. The fixed asset turnover ratio measures the amount of operating income generated per dollar of average fixed assets. FALSEThe fixed asset turnover ratio measures the amount of sales dollars generated per dollar of average fixed assets.


AICPA BB: Critical ThinkingAICPA FN: Measurement




4. The equipment cost initially reported on the balance sheet includes the equipment related installation costs. TRUEThe equipment cost reported on the balance sheet includes the purchase price, transportation costs, installation costs, etc.




Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #4


5. An expenditure is capitalized when it is reported as an expense on the income statement. FALSEAn expenditure is capitalized when it is reported as an asset on the balance sheet.






6. The land cost initially reported on the balance sheet includes legal fees and title insurance. TRUEThe land cost reported on the balance sheet includes the purchase price, legal fees, title insurance, etc.






7. The cash-equivalent cost of an asset received is measured as any cash paid plus the current market value of the non-cash consideration given up. If this value is not determinable, the current market value of what is received should be used instead. TRUEThe market value of the asset received is used in situations where the market value of the asset given up is not known.



Bloom's: RememberDifficulty: Medium



8. If a second-hand machine is purchased for productive use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its productive use should be reported as an expense on the income statement. FALSECosts incurred to get an asset ready for its intended use are capitalized and are reported on the balance sheet as a component of the asset's cost.






9. Ordinary repairs and maintenance costs are incurred to maintain a long-lived asset and are expensed as incurred. TRUECosts incurred to maintain an asset are reported on the income statement as an expense as they are incurred.






10. In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future. FALSEThe useful life is an estimate.




Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #10

Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

11. Depreciation is the process of allocating a long-lived asset's cost over its productive life. TRUEDepreciation is an allocation process.


AICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Understand

Difficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.

Libby - Chapter 08 #11Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

12. Depreciation is the process of estimating a long-lived asset's current market value. FALSEDepreciation is an allocation process, not a valuation process.






13. If depreciation expense is calculated without taking into account the asset's residual value, depreciation expense will be higher than it should have been. TRUEAn asset's depreciable basis is equal to the cost of the asset minus residual value. Ignoring the residual value increases the depreciable basis and therefore depreciation expense.



Difficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.


14. The book value of a depreciable asset equals its acquisition cost minus the depreciation expense recorded to date. TRUEAn asset's book value equals the cost of the asset minus accumulated depreciation. Accumulated depreciation is the depreciation expense recorded to date.






15. On January 1, 2010 equipment was purchased for $80,000; the equipment's estimated residual value is $15,000 and its estimated useful life is 8 years. During 2010, the depreciation expense under the double-declining balance method is $16,250. FALSE2010 depreciation expense ($20,000) = $80,000 × 2/8

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: Medium



16. On January 1, 2010 equipment was purchased for $100,000; the equipment's estimated residual value is $20,000 and its estimated useful life is 8 years. On December 31, 2010, the book value using the straight-line method of depreciation is $90,000. TRUE2010 depreciation expense ($10,000) = ($100,000 - $20,000) ÷ 8 yearsDecember 31, 2010 book value ($90,000) = Cost ($100,000) - Accumulated depreciation ($10,000)

AACSB: Analytic





17. Use of the double-declining-balance method of depreciation results in higher depreciation expense during the first year of an asset's life relative to use of the straight-line depreciation method. TRUEThe double-declining-balance method is an accelerated depreciation method which results in higher amounts of depreciation expense in the earlier years of an asset's life.





18. Use of the double-declining-balance method of depreciation results in decreasing amounts of depreciation expense over an asset's life. TRUEThe double-declining-balance method is an accelerated depreciation method which results in decreasing amounts of depreciation expense due to the decrease in the underlying asset's book value.





19. The units-of-production method of depreciation allocates an asset's cost over its useful life based on the current period's production relative to its total estimated production. TRUEThe units-of-production method of depreciation calculates unit depreciation expense by dividing the depreciable basis (cost minus residual value) by estimated total production.





20. The depreciation method chosen for financial reporting purposes (GAAP) must also be utilized for income tax reporting (IRS). FALSEGAAP depreciation accounting differs from IRS depreciation accounting.






21. If a long-lived asset has been impaired, the journal entry will require a debit to a loss account and a credit to the long-lived asset account. TRUEAn asset impairment results in a loss and reduces the book value of the impaired asset.




Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #21


22. If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million, no impairment has occurred and no loss would be recognized. TRUEThe first step in the determination of asset impairment is to compare the asset's book value to its future estimated cash flows. If cash flows exceed book value, there isn't impairment.

AACSB: Analytic


Bloom's: ApplyDifficulty: Easy

Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #22


23. The first step in recording the disposal of a long-lived asset is to update its book value by recognizing depreciation expense for the period of time since the last depreciation adjustment was made. TRUEDepreciation expense has to be recorded up to the date of sale.



Difficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.


24. Gains and losses on a long-lived asset disposal are determined by comparing the asset's cost to its selling price. FALSEGains and losses on a long-lived asset disposal are determined by comparing the asset's book value to its selling price.




Learning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #24


25. Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets. TRUESelling a depreciable asset for a gain increases net income and therefore stockholders' equity; assets increase because the selling price exceeds book value.





26. The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion. TRUEThe allocation of a natural resource cost to future periods is referred to as depletion.




Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #26

Topic Area: Natural Resources And Intangible Assets

27. The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight-line depreciation method. FALSEThe method is most similar to the units-of-production method of depreciation.



Difficulty: EasyLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.

Libby - Chapter 08 #27Topic Area: Natural Resources And Intangible Assets

28. Natural resource depletion expense is recognized on the income statement for all resources removed during the period whether they are sold or not. FALSEIf the resources aren't sold, they are reported as inventory on the balance sheet.






29. Goodwill is recorded only when an existing company is bought by another company and the purchase price exceeds the fair value of the purchased company's net assets. TRUEGoodwill is recognized when the amount paid for an existing company exceeds the company's assets at fair value.






30. Research and development costs are capitalized under GAAP once a product or process has been developed. FALSEResearch and Development costs are expensed as incurred under GAAP.






31. When determining cash flow from operations using the direct method, depreciation and amortization expense are deducted from net income. FALSEDepreciation and amortization expense are added to net income.



Bloom's: UnderstandDifficulty: Medium

Learning Objective: 08-07 Explain how the acquisition; use; and disposal of long-lived assets impact cash flows.Libby - Chapter 08 #31

Topic Area: Focus On Cash Flows

32. Which of the following would not be classified as property, plant and equipment on a balance sheet? A. Land being held for resale.B. Equipment used in the manufacturing process.C. A building used as corporate headquarters.D. A natural resource being mined.

Land being held for resale would be reported on a balance sheet as either an investment or a current asset.






33. Which of the following accounts would not be considered a tangible asset? A. BuildingsB. LandC. EquipmentD. Patents

Tangible assets have physical substance, whereas intangible assets lack physical substance.






34. Which of the following accounts would not be considered an intangible asset? A. GoodwillB. PatentsC. Research and development costsD. Trademarks

Tangible assets have physical substance, whereas intangible assets lack physical substance. Research and development costs are expensed as incurred.






35. Which of the following transactions would not increase the fixed asset turnover ratio? A. A profitable sale of inventory on account.B. A profitable sale of inventory for cash.C. Selling equipment used in the manufacturing process for a loss.D. A decrease in cash-based operating expenses.

Fixed asset turnover is calculated by dividing net sales by average net fixed assets. A decrease in operating expenses does not affect net sales or average net fixed assets.






36. Which of the following includes only tangible assets? A. Land, buildings and natural resources.B. Land, buildings and leaseholds.C. Natural resources, buildings, and franchises.D. Licenses, trademarks, and land.

Tangible assets have physical substance; each of these assets has physical substance.






37. Which of the following includes only intangible assets? A. Natural resources, patents, and trademarks.B. Research and development costs, franchises, and trademarks.C. Copyrights, licenses, and land.D. Leaseholds, patents and copyrights.

Intangible assets have physical form; each of these assets lacks physical substance.






38. Which of the following statements regarding the fixed asset turnover ratio is incorrect? A. The numerator is net operating income.B. The denominator is average net fixed assets.C. It is used to assess a company's effectiveness in generating sales from its fixed assets.D. It increases when a company sells a factory building for its book value.

The numerator is net sales or operating revenues and the denominator is average net fixed assets.






39. The Wilson Company has provided the following information: • Net sales, $100,000;• Net operating income, $40,000;• Net income, $20,000;• Average total assets, $120,000;• Average net fixed assets; $80,000.What is Wilson's fixed asset turnover ratio? A. 0.83B. 1.25C. 0.25D. 0.50.

Fixed asset turnover ratio (1.25) = Net sales ($100,000) ÷ Average net fixed assets ($80,000)

AACSB: Analytic





40. Which statement is false? A. Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover.B.

Using an accelerated depreciation method instead of the straight-line depreciation method will lead to reporting a higher fixed asset turnover during the earlier years of an asset's life.

C. Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover.

D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.

Selling long-lived assets results in a decrease in the fixed asset turnover ratio denominator and therefore an increase in the fixed asset turnover ratio.

AACSB: Analyze


Bloom's: ApplyDifficulty: Hard



41. On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. At what amount will the equipment be recorded at on a balance sheet? A. $56,500B. $54,000C. $51,000D. $50,000

$56,500 = $50,000 + $1,000 + $3,000 + $2,500

AACSB: Analytic





42. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock held by Red Company as an investment. The White common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. Installation costs were $700 and shipping costs were $500. What amount should be the total amount debited to the computer equipment account? A. $14,200B. $15,000C. $15,400D. $16,200

$15,400 = $10,000 + $4,200 + $700 + $500

AACSB: Analytic





43. Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. At what amount should the truck be recorded on the balance sheet prior to recording depreciation expense? A. $40,000B. $42,000C. $43,000D. $45,000

$45,000 = $40,000 + $2,000 + $3,000

AACSB: Application





44. Which of the following equipment related costs is not capitalized on a balance sheet? A. Equipment installation costs.B. Transportation costs associated with the equipment purchase.C. Equipment maintenance costs.D. The equipment's purchase price.

Equipment maintenance costs are expensed as incurred.






45. Which of the following costs associated with a land purchase is not a component of the land cost reported on a balance sheet? A. The payment of delinquent property taxes.B. The incurrence of legal fees.C. The cost of title insurance.D. The land's appraised value.

The purchase price of the land is capitalized, not its appraised value.






46. Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. Total assets increase $350,000.B. Stockholders' equity increases $200,000.C. Stockholders' equity increases $330,000.D. Total assets increase $330,000.

The building account increases $370,000 {(10,000 × $35) + $20,000} and the cash account decreases $20,000.

AACSB: Analytic





47. Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. The common stock account increases by $100,000.B. The building account increases by $350,000.C. Stockholders' equity increases $350,000.D. The additional paid-in capital account increases by $250,000.

The building account increases $370,000 {(10,000 × $35) + $20,000}.

AACSB: Analytic





48. Which of the following journal entries is correct for Smith Company when Smith issues 10,000 shares of $20 par value common stock and pays $20,000 cash in exchange for a building? The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000. A. Building 220,000

Cash 20,000 Common stock 200,000B. Building 370,000

Cash 20,000 Common Stock 350,000C. Building 370,000

Cash 20,000 Common stock 200,000 Additional paid-in capital 150,000D. Building 200,000

Common stock 200,000

The building account is debited for $370,000 {(10,000 × $35) + $20,000}; the common stock is credited for the par value of the stock issued (10,000 × $20); additional paid-in capital is credited for the excess of the stock's market price over the par value {($35 - $20) × 10,000}, and cash is credited for $20,000.

AACSB: Analytic





49. If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead of as a revenue expenditure, which of the following statements is true? A. The current year's net income will be lower and future depreciation expense will be higher.B. The current year's net income will be higher and future depreciation expense will be lower.C. The current year's net income will be higher and future depreciation expense will be higher.D. The current year's net income will be lower and future depreciation expense will be lower.

Capitalizing an expenditure means that the expenditure in this case is added to the depreciable asset account rather than being immediately expensed.

AACSB: Analytic


Bloom's: AnalyzeDifficulty: Medium



50. Which of the following statements is incorrect? A. Revenue expenditures decrease net income.B. Capital expenditures decrease assets.C. Ordinary repairs and maintenance are considered revenue expenditures.D. Additions and improvements are considered capital expenditures.

Capital expenditures increase assets.






51. A company acquires land by issuing 10,000 shares of its $10 par value common stock currently trading at $20 per share and the appraised value of the land is $250,000. Which of the following statements correctly describes the recording of the land? A. Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the issued

stock is currently worth $200,000.B. Record the land at the value of the consideration given up, $200,000.C.

Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain.

D. Record the land at the par value of the stock given up, $100,000.

The land should be recorded at the market value of the stock issued (10,000 × $20).In addition, the appraised value doesn't necessarily indicate the land's market value.

AACSB: Analytic





52. Which of the following statements is incorrect? A. Replacement of a truck's tires would be treated as a capital expenditure.B. The cost of replacing carpet in a building would be a revenue expenditure.C. Cost of replacing a roof on a newly purchased building before using it as a store would be a capital

expenditure.D. The cost of repainting a hallway would be a revenue expenditure.

Replacing the tires would be considered ordinary maintenance and repairs and is considered to be a revenue expenditure.



Difficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.

Libby - Chapter 08 #52Topic Area: Acquisition And Maintenance Of Plant And Equipment

53. Gilbert Company made an ordinary repair to a delivery truck during 2010 at a cost of $500 and capitalized the repair cost. What will be the effect on the 2010 financial statements as a result of the capitalization? A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.

The repair should have been expensed during 2010 rather than be capitalized. As a result, net income is overstated because expenses are understated; assets are overstated because of the capitalization.

AACSB: Analytic


Bloom's: AnalyzeDifficulty: Hard



54. Which of the following would most likely not be a revenue expenditure? A. Repairing the carpet in the sales department offices.B. Repairing a leaky roof.C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances.D. Painting the exterior of the factory building.

The hydraulic lift would be considered a capital expenditure since the lift increases the truck's operating efficiency.






55. What is the effect on the 2010 financial statements when a capital expenditure during 2010 was incorrectly recorded as a revenue expenditure? A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.

Assets are understated because the expenditure should have been capitalized; stockholders' equity is understated because net income is understated due to the expense overstatement.

AACSB: Apply


Bloom's: AnalyzeDifficulty: Hard



56. Which of the following best describes the objective of depreciation? A. To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue.B. To estimate the remaining useful life of the asset.C. To report the asset on the balance sheet at the estimated amount for which the asset could be sold on

the balance sheet date.D. To estimate the current replacement cost of the asset.

Depreciation is an allocation process, not a valuation process.






57. Which of the following doesn't properly describe the depreciation process? A. It is an allocation process.B. It is consistent with the matching principle.C. It involves the use of estimates.D. It attempts to determine an asset's market value.

Depreciation is an allocation process, not a valuation process.






58. Which of the following describes the effect of recording depreciation expense at year-end? A. Net income decreases and total assets aren't affected.B. Total assets decrease and stockholders' equity is not affected.C. Net income decreases and total assets decrease.D. Stockholders' equity is not affected and net income decreases.

The journal entry increases expenses, which decreases both net income and total assets. Total assets decrease because the contra-account accumulated depreciation is increased.

AACSB: Analytic





59. Why is the continuity assumption important with respect to the accounting for long-lived tangible assets? A. It helps a company decide whether to use straight-line depreciation or an accelerated depreciation

method.B. It justifies depreciating the asset over its expected useful life, without anticipating that the business

will liquidate in the near future.C. It provides justification for including residual values in calculating depreciation.D. It is consistent with maintaining assets in the accounting records at market value rather than

acquisition cost.

The justification for allocating an asset's cost over its useful life is that the business entity is a going concern.






60. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. How much is the annual depreciation expense assuming use of the straight-line depreciation method? A. $6,100B. $6,000C. $5,950D. $5,750

Annual depreciation expense ($6,000) = ($40,000 + $1,000 - $5,000) ÷ 6

AACSB: Analytic





61. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. Which of the following statements is incorrect? A. The annual depreciation expense is $6,000.B. The December 31, 2010 book value was $35,000.C. The December 31, 2012 accumulated depreciation balance was $18,000.D. The December 31, 2011 book value was $24,000.

Annual depreciation expense ($6,000) = ($40,000 + $1,000 - $5,000) ÷ 6December 31, 2011 book value ($29,000) = $41,000 - ($6,000 × 2)

AACSB: Analytic





62. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life is A. 3 years.B. 4 years.C. 5 years.D. 6 years.

Annual depreciation expense ($2,700) = ($15,000 - $1,500) ÷ N, N = 5

AACSB: Analytic





63. Warren Company plans to depreciate a new building using the double declining-balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation expense was recorded properly, what would be the amount of depreciation expense for the second year? A. $30,720B. $32,000C. $58,880D. $64,000

Year 1 depreciation expense ($64,000) = $800,000 × 2/25Year 2 depreciation expense ($58,880) = ($800,000 - $64,000) × 2/25

AACSB: Analytic





64. Warren Company plans to depreciate a new building using the double declining-balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. What is the building's book value at the end of the first year? A. $736,000B. $768,000C. $686,000D. $690,000

Year 1 depreciation expense ($64,000) = $800,000 × 2/25End of the first year book value ($736,000) = $800,000 - $64,000

AACSB: Analytic





65. Which method of depreciation results in periodic depreciation expense that fluctuates from one period to the next, not necessarily in a steadily upward or downward direction? A. Straight-lineB. Units-of-productionC. Modified accelerated cost recovery systemD. Declining balance

Depreciation expense under the units-of-production method fluctuates directly with production levels.





66. Hill Inc. purchased an asset on January 1, 2009. Hill chose an accelerated depreciation method to depreciate the asset. Which of the following is correct if Hill would have chosen the straight-line depreciation method instead? A. Depreciation expense would have been lower in 2009.B. The book value of the asset would have been lower at the end of 2009.C. The net income would have been lower during 2009.D. The accumulated depreciation balance would have been higher at the end of 2009.

An accelerated depreciation method has higher amounts of depreciation expense in earlier years relative to the straight-line method.

AACSB: Analytic





67. On January 1, 2010, Pyle Company purchased an asset that cost $50,000 (no estimated residual value, estimated useful life 8 years, straight-line depreciation is used). An error was made because the total cost amount was debited to an expense account for 2010 and no depreciation on it was recorded. Pretax income for 2010 was $42,000. How much is the correct 2010 pretax income? A. $35,750B. $48,250C. $85,750D. $92,000

2010 pretax income ($85,750) = $42,000 + $50,000 - $6,250**Straight-line depreciation expense ($6,250) = $50,000 ÷ 8

AACSB: Analytic





68. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. How much is the 2011 depreciation expense? A. $5,000B. $4,000C. $3,800D. $2,200

2010 depreciation expense ($5,000) = $25,000 × 2/102011 depreciation expense ($4,000) = ($25,000 - $5,000) × 2/10

AACSB: Analytic





69. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance depreciation method. What is the accumulated depreciation balance as of December 31, 2011? A. $9,000B. $4,000C. $5,000D. $10,920

2010 depreciation expense ($5,000) = $25,000 × 2/102011 depreciation expense ($4,000) = ($25,000 - $5,000) × 2/10December 31, 2011 accumulated depreciation balance ($9,000) = $5,000 + $4,000

AACSB: Analytic





70. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December 31, 2011 assuming Wasson uses the straight-line depreciation method? A. $12,000B. $24,000C. $30,000D. $28,000

Annual straight-line depreciation expense ($6,000) = ($40,000 - $4,000) ÷ 6December 31, 2011 book value ($28,000) = $40,000 - ($6,000 × 2)

AACSB: Analytic





71. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. Wasson estimates that the vehicle will be driven 100,000 miles. What is the vehicle's book value as of December 31, 2011 assuming Wasson uses the units-of-production depreciation method and the vehicle was driven 10,000 miles during 2010 and 18,000 miles during 2011? A. $29,920B. $28,800C. $24,800D. $25,920

Depreciation expense per mile ($0.36) = ($40,000 - $4,000) ÷ 100,000December 31, 2011 accumulated depreciation balance ($10,080) = $0.36 × 28,000December 31, 2011 book value ($29,920) = $40,000 - $10,080

AACSB: Analytic





72. Which of the following statements is false? A. The book value at the end of an asset's useful life will be the same under all the depreciation methods

allowed under GAAP.B.

The balance in the accumulated depreciation account will be the same at the end of an asset's useful life under all the methods allowed under GAAP.

C. Once you select a depreciation method, then you must use this method for all depreciable assets.D. The annual depreciation expense and year-end book values will differ under the various depreciation

methods over the life of the asset.

A company can utilize different depreciation methods for various assets.





73. Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting? A.

They have high technology, robotic equipment in their plant that becomes obsolete quickly and declines in utility to the company more rapidly in the early years of the assets' lives.

B. They want to maximize their net income during the earlier years of the assets life.C. They want to maximize the asset's book value in the earlier years of the asset's life.D. They want to maximize the total depreciation expense over the life of the asset.

The double-declining-balance depreciation method results in more depreciation in the earlier years of an asset's life which will best fit the robotic equipment scenario.






74. Which of the following statements is correct? A. Companies can change the method of depreciating assets from one year to the next.B. Companies can affect the book value at the end of an asset's life by choosing one method of

depreciation over another.C.

Companies can use one method of depreciation for some of their long-lived, productive assets but then use a different method for another group or type of long-lived, productive assets.

D.

Companies can minimize an asset's book value in the first year of use by selecting the straight-line depreciation method rather than the double-declining-balance method.

Different depreciation methods can be chosen for various assets.






75. Which of the following statements is correct? A.

Using straight-line depreciation in comparison to an accelerated depreciation method will result in a lower reported amount of total assets at end of the first year of an asset's life.

B.

Using accelerated depreciation in the first year of an asset's life will result in a higher net income during the first year compared to using the straight-line depreciation method.

C. Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for the first year.

D.

Using straight-line depreciation in comparison to an accelerated depreciation method will lead to a higher book value at the end of an asset's life.

An accelerated depreciation method results in more depreciation expense during the first year and a lower book value at the end of the first year. The lower book value means that the fixed asset turnover ratio denominator is smaller; therefore the fixed asset turnover ratio is increased.

AACSB: Analytic





76. Which of the following statements about the Modified Accelerated Cost Recovery System (MACRS) is correct? A. It is similar to the units-of-production depreciation method.B. It is applied using longer asset lives than the estimated useful lives required by GAAP.C. It provides a short-term tax benefit because of the higher depreciation expense reported in the early

years of an asset's life.D. It is acceptable for use when preparing financial statements.

MACRS is an accelerated depreciation method, which results in higher amounts of depreciation expense and less taxable income during the earlier years of an asset's life.






77. Which of the following statements about asset impairment is false? A. Asset impairment loss is the difference between an asset's net book value and its estimated future

cash flows.B. If an asset is impaired, a loss would be recognized in the period it can be estimated.C. Impairment will lead to writing down the asset's net book value.D. Asset impairment occurs when the estimated future cash flows are less than the asset's net book

value.

An impairment is equal to an asset's net book value less its fair value.



Difficulty: MediumLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.


78. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million. How much is the asset impairment loss? A. $5.4 millionB. $4.1 millionC. $0.4 millionD. $1.0 million

An impairment loss occurs when the asset's net book value ($4.1 million) exceeds its fair value ($3.1 million).

AACSB: Analytic



Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #78


79. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million. Which of the following correctly describes the recording of the asset impairment loss? A. The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.B. The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.C. The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.D. The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.

An impairment loss occurs when the asset's net book value ($4.1 million) exceeds its fair value ($3.1 million). When an impairment loss is recorded, a loss account is debited and the asset account is credited.

AACSB: Analytic





80. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million on December 31, 2010. What is the gain or loss from the December 31, 2010 equipment sale? A. $800,000 gainB. $800,000 lossC. $200,000 lossD. $200,000 gain

A $200,000 loss occurs because the book value ($5.0 million - $4.2 million) exceeds the $600,000 selling price.

AACSB: Analytic





81. Which of the following is correct when recording the disposal of equipment for a gain? A. A debit to a gain account.B. A credit to the equipment account for the asset's book value.C. A debit to accumulated depreciation for the depreciation accumulated to the date of disposal.D. A decrease in total assets occurs.

The accumulated depreciation account normally has a credit balance and is therefore debited when an asset is disposed of.





82. Which of the following statements is incorrect with respect to the sale of a depreciable asset? A. A gain occurs when the selling price exceeds book value.B. A sale for a gain results in an increase in total assets.C. A sale for a loss results in an increase in total assets.D. A loss occurs when the selling price is less than book value.

Total assets decrease when an asset is sold at a loss because the proceeds (selling price) are less than book value.





83. Carter Company disposed of an asset at the end of the eighth year of its estimated life for $10,000 cash. The asset's life was originally estimated to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000. The asset was being depreciated using the straight-line method. What was the gain or loss on the disposal? A. $1,000 lossB. $4,000 lossC. $5,500 gainD. $10,000 gain

Annual straight-line depreciation expense ($4,500) = ($50,000 - $5,000) ÷ 10;End of year eight book value ($14,000) = $50,000 - ($4,500 × 8); A $4,000 loss occurs because the selling price ($10,000) is less than book value ($14,000).

AACSB: Analytic





84. Which of the following journal entries is correct when a depreciable asset (building) is sold for cash subsequent to acquisition? A.

B.

C.

D.

When the building is sold, the building account is credited, cash is debited, accumulated depreciation is debited, and a loss account is debited when the sale results in a loss.





85. Which of the following statements is incorrect with respect to the sale of a depreciable asset for a loss? A. Net income deceases and total assets decrease.B. Net income and stockholders' equity both decrease.C. Total assets and stockholders' equity both decrease.D. Total assets increase and stockholders' equity decreases.

Total assets decrease when an asset is sold at a loss because the proceeds (selling price) are less than book value. Stockholders' equity decreases because the decrease in net income reduces retained earnings.

AACSB: Apply


Bloom's: AnalyzeDifficulty: Easy



86. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years and a residual value of $1,000. The computer was depreciated by the straight-line method and was sold at the end of the third year of use for $5,000 cash. How much of a gain or loss should Amanda record? A. A gain of $1,000.B. A loss of $5,000.C. A gain of $400.D. A loss of $400.

Annual straight-line depreciation expense ($1,800) = ($10,000 - $1,000) ÷ 5;End of year three book value ($4,600) = $10,000 - ($1,800 × 3); A $400 gain occurs because the selling price ($5,000) is greater than book value ($4,600).

AACSB: Analytic





87. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years and a residual value of $1,000. The computer was depreciated by the straight-line method and was sold at the end of the third year of use for $5,000 cash. Which of the following statements correctly describes the computer sale? A. Assets and stockholders' equity both increase by $5,000.B. Assets decrease $5,000 and stockholders' equity is not affected.C. Assets and stockholders' equity both decrease by $400.D. Assets and stockholders' equity both increase by $400.

Annual straight-line depreciation expense ($1,800) = ($10,000 - $1,000) ÷ 5;End of year three book value ($4,600) = $10,000 - ($1,800 × 3); A $400 gain occurs because the selling price ($5,000) is greater than book value ($4,600). Assets increase because the cash received exceeds the book value by $400 and stockholders' equity increases because the gain increases net income and therefore retained earnings.

AACSB: Analytic





88. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2010, 15,000 barrels of oil were produced and sold. Which of the following statements is incorrect with respect to the accounting for the oil well? A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $90,000 during 2010.C. The inventory of oil increased $90,000 during 2010.D. The depletion rate is $6.00 per barrel of oil.

If the resources are sold, they are not reported as inventory on the balance sheet.

AACSB: Analytic





89. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be $100,000. During 2010, 15,000 barrels of oil were produced and 10,000 barrels were sold. Which of the following statements is correct with respect to the accounting for the oil well? A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $60,000 during 2010.C. The inventory of oil increased $30,000 during 2010.D. The 2010 cost of goods sold was $30,000.

If the resources are not sold, they are reported as inventory (5,000 × $6) on the balance sheet.

AACSB: Analytic





90. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional $600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can be removed from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold. Which of the following statements is correct with respect to the accounting for the mine? A. The 2010 net income decreased $450,000 as a result of the mining during the year.B. The book value of the mine decreased $350,000 during 2010.C. The inventory of minerals increased $450,000 during 2010.D. The 2010 cost of goods sold was $350,000.

Depletion rate per ton ($10) = ($3,000,000 + $600,000 - $600,000) ÷ 300,000Cost of goods sold ($350,000) = $10 × 35,000

AACSB: Analytic





91. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional $600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can be removed from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold. Which of the following statements is incorrect with respect to the accounting for the mine? A. The book value of the mine on December 31, 2010 was $2,640,000.B. The book value of the mine decreased $450,000 during 2010.C. The inventory of minerals increased $100,000 during 2010.D. The 2010 cost of goods sold was $350,000.

Depletion rate per ton ($10) = ($3,000,000 + $600,000 - $600,000) ÷ 300,000.The December 31, 2010 book value ($3,150,000) = ($3,000,000 + $600,000) - ($10 × 45,000).

AACSB: Analytic





92. Which of the following is most likely to be an intangible asset with an indefinite life? A. LeaseholdB. FranchiseC. PatentD. Goodwill

A successful business will theoretically create goodwill rather than deplete it. Therefore goodwill most likely has an indefinite life.






93. Which one of the following would not be recorded as an intangible asset? A. LeaseholdsB. CopyrightsC. Internally generated goodwillD. Franchises

Goodwill is only recorded when a business entity is acquired and goodwill is a component of the transaction cost.






94. Failure to record amortization expense on a patent during the current year will result in which of the following? A. Net income will be overstated, but there would be no affect on total assets.B. Net income for the year and total assets would both be overstated.C. Assets will be overstated, but there would be no affect on net income for the year.D. Net income and assets will both be understated.

Failure to record patent amortization results in an understatement of expenses and therefore an overstatement of net income. Assets are overstated because the patent account was not reduced by the amortization which was not recorded.

AACSB: Apply





95. Which of the following properly describes the accounting for goodwill? A. Goodwill is created when it is internally generated.B. Goodwill is amortized over its useful life.C. Goodwill is the difference between the amounts paid for a company relative to the book value of the

company's net assets.D. Goodwill is written-down when it has been determined to be impaired.

Goodwill is not amortized, but is written-down when it has been determined to be impaired.






96. Which of the following properly describes the accounting for a patent? A. Research and development costs associated with a patent are capitalized.B. The patent will be amortized over its useful life.C. Patent amortization expense is accounted for within the accumulated depreciation account.D. Their legal life extends to 70 years after the death of the inventor.

Patents are amortized over their useful life.






97. Which of the following statements is correct? A. A copyright has a legal life not exceeding 70 years.B. A trademark is recorded on the balance sheet at an amount equal to the related research and

development costs incurred.C. A patent's legal life is 20 years.D. A franchise's amortization is a function of the underlying contract.

Research and development costs are expensed as incurred rather than capitalized.






98. During 2010, the Bowtie Company reported net income of $1,872 million, depreciation expense of $1,412 million and $978 million paid for purchases of property, plant and equipment. What would be the effect on cash flows from operating activities during 2010? A.

Depreciation expense would increase cash flows from operations and the property, plant and equipment purchases would decrease cash flow from operations.

B.

Depreciation would increase cash flow from operations and property, plant and equipment purchases would increase cash flows from operations.

C.

Depreciation would increase cash flow from operations but the property, plant and equipment purchases would have no effect on cash flow from operations.

D. Depreciation is a non-cash expense and would not be used to calculate cash flow from operations.

Depreciation expense is a noncash expense and is therefore added back to net income in the determination of cash flows from operations. The property, plant and equipment purchases are reported as an investing cash flow.






99. Landmark Restaurants reported net income in 2008 of $45.9 million and depreciation expense of $48.8 million. They also report additions to property and equipment of $162.9 million. Which of the following disclosures would appear on the 2008 statement of cash flows? A.

Depreciation of $48.8 million would be deducted from net income under operating activities and the $162.9 million would be added under investing activities.

B.

Depreciation of $48.8 million would be added to net income under operating activities and the $162.9 million would be added under investing activities.

C.

Depreciation of $48.8 million would be added to net income under operating activities and the $162.9 million would be deducted under investing activities.

D.

Depreciation of $48.8 million would be deducted from net income under operating activities and the $162.9 million would be deducted under investing activities.

Depreciation expense is a noncash expense and is therefore added back to net income in the determination of cash flows from operations. The property, plant and equipment additions are reported as an investing cash flow.






100. Williams Company purchased a machine costing $25,000 and is depreciating it over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated useful life was changed to 12 years with the residual value unchanged. How much is the year 8 depreciation expense assuming use of the straight-line depreciation method? A. $2,200B. $2,920C. $3,100D. $8,800

Years 1 -7 annual depreciation expense ($2,200) = ($25,000 - $3,000) ÷ 10;Beginning of year 8 book value prior to overhaul ($9,600) = $25,000 - ($2,200 × 7);Year 8 depreciation expense ($2,920) = [Book value after overhaul ($9,600 + $8,000) minus residual value ($3,000)] ÷ 5 remaining years of life.

AACSB: Analytic



Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time. (S)Libby - Chapter 08 #100


101. Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Augie's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Augie should record for year 3 under the straight-line depreciation method? A. $15,500B. $8,250C. $11,000D. $16,500

Years 1 & 2 annual depreciation expense ($11,000) = ($60,000 - $5,000) ÷ 5;Beginning of year 3 book value ($38,000) = $60,000 - ($11,000 × 2);Year 3 depreciation expense ($16,500) = [Book value ($38,000) minus residual value ($5,000)] ÷ 2 remaining years of life.

AACSB: Analytic





102. The following information is available for Coca-Cola and PepsiCo:

Compute the fixed asset turnover ratio for both Coca Cola and PepsiCo. Answers will varyFeedback: Coca-Cola fixed asset turnover ratio (4.62) = ($19,889 ÷ [$4,168 + $4,435]/2)PepsiCo fixed asset turnover ratio (3.82) = ($20,438 ÷ [$5,266 + $5,438]/2)

AACSB: Analytic





103. The following information was available for Landmark Restaurants for the past three years. Using this information compute the fixed asset turnover ratio for 2010 and 2009.

Answers will varyFeedback: 2010 fixed asset turnover ratio (1.23) = ($1,105,755 ÷ [$965,575 + $830,930/ 2])2009 fixed asset turnover ratio (1.26) = ($894,795 ÷ [$830,930 + $587,829/ 2])

AACSB: Analytic





104. On January 1, 2010, Trenton Company purchased a machine costing $50,000. Trenton also incurred the following costs: transportation, $1,000; installation, $2,000; and sales tax, $3,000. Prepare the journal entry to record the machine acquisition assuming cash was paid. Answers will vary

Feedback:






105. Waterloo Corporation purchased factory equipment for a cost of $1,800,000. It cost $100,000 for its delivery, $220,000 for its installation and modifications to the production building, and $60,000 in interest costs on borrowed funds used to acquire the equipment. What is the acquisition cost of the new equipment? Answers will varyFeedback: Equipment cost ($2,120,000) = $1,800,000 + $100,000 + $220,000. Interest is not capitalized because the equipment was purchased and not self-constructed.

AACSB: Analytic





106. In 2008, Landmark Restaurants reported the cost of property and equipment at $1,189.8 million and the accumulated depreciation at $224.2 million. In that same year, Coca Cola reported $10,149 million in long-lived, productive assets and accumulated depreciation on them of $4,058.A. Estimate the approximate remaining life of the assets for Landmark and Coca ColaB. Which company appears to have newer assets with longer remaining lives? Answers will varyFeedback: A. Landmark: 81.2% = ($1,189.8-$224.2)/$1,189.8; Coca Cola: 60.0% = ($10,149-$4,058)/$10,149.B. Landmark's appears to have "newer" assets than Coca-Cola because 81.2% of their assets' value remains in book value while Coca-Cola has 60.0% remaining in book value.

AACSB: Analytic





107. Hi-Crest Company purchased a machine on January 1, 2010, for $300,000. The machine has an estimated useful life of 5 years and a $10,000 residual value. Calculate depreciation expense and the year-end book value for 2010 and 2011 using the double declining-balance method of depreciation. Answers will vary

Feedback: *$120,000 = $300,000 × 2/5**$72,000 = $180,000 × 2/5

AACSB: Analytic





108. The financial statements of Franklin Company contained the following errors:

Requirements:A. Was net income for 2009 understated or overstated?B. Was total combined net income for the two-year period ended December 31, 2010 overstated or understated? Answers will varyFeedback: A. Overstated (If depreciation expense is understated, then net income is overstated.)B. Overstated (2009's net income was overstated by $1,000. 2010's net income was understated by $900. The net is an overstatement of $100.)

AACSB: Analytic





109. On January 1, 2009, Boston Company purchased a heavy duty machine having an invoice price of $13,000; Boston paid transportation and installation costs totaling $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Calculate depreciation expense and book value for 2009 - 2012, assuming 150% declining-balance method of depreciation. (Round to the nearest dollar.) Answers will vary

Feedback:

AACSB: Analytic





110. Covey Company purchased a machine on January 1, 2010, by paying cash of $250,000. The machine has an estimated useful life of five years, is expected to produce 500,000 units, and has an estimated residual value of $25,000.Requirements:A. Calculate determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (1.) straight-line depreciation; and (2.) the 200% declining balance method.B. What is the book value of the machine after three years using the 200% declining- balance method?C. What is the book value of the machinery after three years with straight-line depreciation?D. If the machine was used to produce and sell 120,000 units in 2010, what would the depreciation expense be under the units of production method? Answers will vary

Feedback:

AACSB: Analytic





111. Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The company estimated that the truck would have a useful life of 4 years and a residual value of $4,000.Requirements:A. Calculate depreciation expense under straight line and double declining balance for 2009-2012.B. Which of the two methods would result in lower net income in 2010 and 2012? Answers will vary

Feedback: A. Straight-line: ($34,000 - 4,000)/4 years = $7,500Declining-balance:2009 ¼ x 200% x $34,000 = $17,0002010 ¼ x 200% x ($34,000 - $17,000) = $8,5002008 ¼ x 200% x ($34,000 - $25,500) = $4,2502009 Book value $4,250 - $4,000 target book value = $250B. Lower net income: 2010, double declining-balance; 2012, straight-line.

AACSB: Analytic





112. Allison Company purchased a machine for $1,200,000 at the beginning of 2009. Allison was using the double-declining-balance (200%) method to depreciate the asset and its useful life was estimated to be 5 years with a residual value of $200,000. At the end of 2010, Allison Co. estimates the future cash flows from the asset to be equal to $500,000 and the fair value to be $450,000. What is the amount of the impairment loss? Answers will varyFeedback: At the end of year two, the machine's book value would be $432,000 (year 1 depreciation $480,000 plus year 2 depreciation of $288,000 would be deducted from the asset's cost of $1,200,000). Since the future cash flows are not below the asset's book value, there is no impairment loss.

AACSB: Analytic





113. A company purchased equipment for $800,000 and has depreciated it using the straight-line method for the past 5 years when its original life was estimated to be 10 years with a $200,000 residual value. The equipment's utility to the company has declined because they expect it to generate net cash flows over the remaining years of $300,000. The asset's fair value at the end of the fifth year is $200,000. If the asset has been impaired, record the journal entry to record the impairment. Answers will varyFeedback: Annual straight-line depreciation expense ($60,000) = ($800,000 - $200,000) ÷ 10End of year 5 book value ($500,000) = $800,000 - ($60,000 × 5)There is an impairment because the net future cash flows ($300,000) are less than book value.The impairment loss ($300,000) is the difference between the asset's book value ($500,000) and fair value ($200,000).

AACSB: Analytic





114. Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life 4 years. The company uses straight-line depreciation computed monthly. On July 1, 2012, the company sold the truck for $1,900 cash.A. What was the depreciation expense amount per month?B. What was the amount of accumulated depreciation at July 1, 2012? C. Give the required journal entries on the date of disposal, July 1, 2012. (Assume no 2012 depreciation had yet been recorded) Answers will vary

Feedback:

AACSB: Analytic



Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Learning Objective: 08-05 Analyze the disposal of property; plant; and equipment.


115. Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5 years ago for a cost of $800,000. It has been depreciated using the straight-line method over an estimated useful life of 10 years with an estimated residual value of $50,000. Record the journal entry at the end of year five for the asset's disposal assuming the fifth year's depreciation had been recorded. Answers will vary

Feedback: *[($800,000 - $50,000) ÷ 10] × 5






116. Bennett Corporation sold a piece of equipment on June 30, 2012 for $50,000 cash. The equipment had been purchased on January 1, 2008 for $150,000. It had an estimated useful life of 6 years and a $30,000 residual value. Bennett Corp. has been using the straight-line method of depreciation and has a year-end of December 31st. Prepare any necessary journal entries on June 30, 2012 assuming that 2012 depreciation expense has not been recorded. Answers will vary

Feedback: *[($150,000 - $30,000) ÷ 6] × 6/12** [($150,000 - $30,000) ÷ 6] × 4.5 years

AACSB: Analytic





117. Spa Sources Corporation purchased a machine that had an original cost of $60,000 and an estimated residual value of $10,000. The useful life was expected to be 8 years and straight-line depreciation is used. At the end of 2010, the book value of the machine was $35,000. Spa Sources sold the machine for $32,000 cash on October 1, 2011.Requirements:A. Prepare the journal entry to record depreciation for 2011 up to the date of sale.B. Prepare the journal entry to record the sale of the machine. Answers will vary

Feedback: *The book value of $35,000 at the end of 2010 equals the asset cost ($60,000) less accumulated depreciation ($25,000) the end of 2010. The accumulated depreciation at the date of sale ($29,688) equals the accumulated depreciation at the end of 2010 ($25,000) plus the $4,688 from requirement A.

AACSB: Analytic





118. Give the required adjusting journal entry at December 31, 2011, the end of the annual accounting period for the three items below. Assume that no adjusting entries have been made during the year. If no entry is required, explain why.A. Polk Company acquired a patent that cost $6,000 on January 1, 2011. The patent was registered on January 1, 2006. The useful life of a patent is 20 years from registration.B. Polk Company acquired a gravel pit on January 1, 2011, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 2011 4,000 tons were extracted and sold.C. On January 1, 2011, Polk Company acquired a used dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line depreciation. Answers will vary

Feedback:

AACSB: Analytic



Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.

Libby - Chapter 08 #118Topic Area: Natural Resources And Intangible Assets

119. Benson Mining Company purchased a site containing a mineral deposit during 2010. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Benson constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value.Requirements:A. Explain the objective of recording depletion on natural resources.B. Determine Benson's depletion rate per ton of ore.C. Prepare the journal entry to record depletion for the year 2010, when Benson mined and sold 150,000 tons of ore.D. Prepare the journal entry to record depreciation on the building for 2010. Benson calculates depreciation on the building using the units-of-production method based on the amount of ore extracted (150,000 tons in 2010). Answers will vary

Feedback: *($500,000 ÷ 400,000 tons) × 150,000 tons

AACSB: Analytic





120. On January 1, 2010 Gordon Company purchased a patent for $420,000 from an inventor who had developed a new manufacturing process. At the time of the purchase, the patent had a remaining useful life of 10 years.Requirements:A. Prepare the journal entry to record Gordon's purchase of the patent.B. Prepare the journal entry to record amortization of the patent on December 31, 2010.C. At the end of 2013, after amortization had been recorded through December 31, 2013, Gordon concluded that the estimated future cash flows from the patent to be $250,000. The patent's estimated fair value on December 31, 2011 was $200,000. Prepare the journal entry to record the patent impairment, if necessary. Answers will vary

Feedback:

AACSB: Analytic





121. Pier 5 has been in business 8 years with 4 stores in the San Francisco bay area. Their local reputation for making savory pies such as curried potatoes is well recognized. A national food distributor has offered to purchase the company. Pier 5 has $0.9 million of net assets at book value, but those net assets have a fair market value of $1.2 million. If the distributor offers to buy Pier 5 for $3.5 million, how much will be recorded as goodwill based on the offered purchase price? Answers will varyFeedback: Goodwill ($2.3 million) = Amount paid ($3.5 million) minus fair value of net assets ($1.2 million).

AACSB: Analytic





122. Landmark Restaurants reported net income of $45.9 million during 2010. They reported depreciation and amortization of plant and equipment of $48.8 million and cash paid for additions to property, plant and equipment of $162.9 million during 2010. Explain where each of these items would be reported and their impact on cash flows on the statement of cash flows. Answers will varyFeedback: The net income would be reported as the first item in the operating activities section and would have a positive impact on cash flow. The depreciation and amortization would be added to net income in the operating activities section and would have a positive effect on cash flow. Finally the cash paid for new property, plant and equipment would be in the investing activities section and would have a negative cash flow effect.



Difficulty: MediumLearning Objective: 08-07 Explain how the acquisition; use; and disposal of long-lived assets impact cash flows.

Libby - Chapter 08 #122Topic Area: Focus On Cash Flows

123. Frankel Feed purchased a new machine on January 1, 2010, relevant information is as follows:

Annual straight-line depreciation expense ($2,400) = ($26,000 - $2,000) ÷ 10A. ($26,000 - $12,000* - $2,000) ÷ (15 years - 5 years) = $1,200 of depreciation expenseB. ($26,000 - $12,000* - $1,000) ÷ (10 years - 5 years) = $2,600 of depreciation expenseC. ($26,000 - $12,000* - $3,000) ÷ (7 years - 5 years) = $5,500 of depreciation expense* ($2,400 × 5 years)

AACSB: Analytic





124. Sadler Corporation purchased equipment to be used in manufacturing. The purchase was made at the beginning of 2009 by paying cash of $150,000. The equipment has an estimated residual value of 10,000 and an expected useful life of 10 years. At the beginning of 2011, Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and that the residual value will be zero. Sadler uses the straight-line method for depreciation.Requirements:A. Make the journal entry to record depreciation on the equipment for 2010.B. Make the journal entry to record depreciation on the equipment for 2011, including the effect of the changes in estimates.C. Describe how a business should account for a change in the estimated useful life and/or residual value of a depreciable asset.

AACSB: Analytic





125. Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component.B. If the transaction results in a decrease in the financial statement component.C. If the transaction does not affect the financial statement component. Transaction 1: The adjusting journal entry to record depreciation expense was made.Net income ______ Total assets ______ Stockholders' equity ______ Transaction 2: The adjusting journal entry to record patent amortization expense was made.Net income ______ Total assets ______ Stockholders' equity ______ Transaction 3: A depreciable asset was sold for a gain.Net income ______ Total assets ______ Stockholders' equity ______ Transaction 4: The adjusting journal entry to record an impairment loss was made.Net income ______ Total assets ______ Stockholders' equity ______

AACSB: Analytic



Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements.

Learning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.


ch8 Summary

Category # of Questions

AACSB: Analytic 58

AACSB: Analyze 1

AACSB: Application 1

AACSB: Apply 3

AACSB: Reflective Thinking 62

AICPA BB: Critical Thinking 125

AICPA FN: Measurement 8

AICPA FN: Reporting 49

AICPA FN: Reporting, Measurement 68

Bloom's: Analyze 7

Bloom's: Apply 56

Bloom's: Remember 36

Bloom's: Understand 26

Difficulty: Easy 32

Difficulty: Hard 8

Difficulty: Medium 85

Learning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.

14

Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.

23

Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time. 43

Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time. (S) 4

Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. 5

Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.

3

Learning Objective: 08-05 Analyze the disposal of property; plant; and equipment. 16

Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets. 20

Learning Objective: 08-07 Explain how the acquisition; use; and disposal of long-lived assets impact cash flows. 4

Libby - Chapter 08 125

Topic Area: Acquisition And Maintenance Of Plant And Equipment 37

Topic Area: Focus On Cash Flows 4

Topic Area: Natural Resources And Intangible Assets 19

Topic Area: Use, Impairment, And Disposal Of Plant And Equipment 65

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