CHAPTER 9

REPORTING AND ANALYZING LONG-LIVED ASSETS

CHAPTER LEARNING OBJECTIVES

1. Explain the accounting for plant asset expenditures. The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life.

2. Apply depreciation methods to plant assets. Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, and it is not a process that results in an accumulation of cash. Depreciation reflects an asset’s decreasing usefulness and revenue-producing ability, resulting from wear and tear and from obsolescence.

The formula for straight-line depreciation is:

Cost – Salvage value

Useful life (in years)

The expense patterns of the three depreciation methods are as follows:

Method Annual Depreciation Pattern

Straight-line Constant amount

Declining-balance Decreasing amount

Units-of-activity Varying amount

Companies make revisions of periodic depreciation in the present and future periods, not retroactively.

3. Explain how to account for the disposal of plant assets. The procedure for accounting for the disposal of a plant asset through sale or retirement is (a) eliminate the book value of the plant asset at the date of disposal; (b) record cash proceeds, if any; and (c) account for the difference between the book value and the cash proceeds as a gain or a loss on disposal.

4. Identify the basic issues related to reporting intangible assets. Companies report intangible assets at their cost less any amounts amortized. If an intangible asset has a limited life, its cost should be allocated (amortized) over its useful life. Intangible assets with indefinite lives should not be amortized.

5. Discuss how long-lived assets are reported and analyzed. Companies usually show plant assets under “Property, plant, and equipment”; they show intangibles separately under “Intangible assets.” Either within the balance sheet or in the notes, companies disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They describe the depreciation and amortization methods used and disclose the amount of depreciation and amortization expense for the period. In the statement of cash flows, depreciation and amortization expense are added back to net income to determine net cash provided by operating activities. The investing section reports cash paid or received to purchase or sell property, plant, and equipment.

Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio. The return on assets ratio consists of two components: the asset turnover ratio and the profit margin ratio.

*6. Compute periodic depreciation using the declining-balance method and the units-of-activity method. The depreciation expense calculation for each of these methods is:

Difficulties:

Easy: 158

Medium: 152

Hard: 1

Question List by Section

Plant Asset Expenditures: 1, 48, 49, 53, 278

Determining the Cost of Plant Assets: 5, 233, 234, 236, 240, 241, 247, 248, 249, 277, 302, 303

Land: 2, 46, 47, 52, 54, 55, 56, 57, 58, 60, 61, 80, 279, 280,

Land Improvements: 4, 59, 62, 63, 283

Buildings: 64, 65, 77, 78, 79, 81

Equipment: 3, 50, 51, 66, 67, 68, 71, 72, 73, 74, 75, 284

Expenditures During Useful Life: 7, 8, 9, 10, 69, 70, 82, 83, 84, 85, 86, 281, 282, 306

To Buy or Lease?: 6, 76

Depreciation Methods: 11, 12, 13, 14, 15, 16, 87, 88, 91, 92, 94, 95, 96, 97, 98, 99, 104, 106, 132, 285, 286, 300, 304

Factors in Computing Depreciation: 17, 93, 89, 100, 101, 102, 103, 105, 129, 287, 308

Depreciation Methods: 119

Straight-Line Method: 107, 108, 109, 110, 111, 112, 113, 114, 120, 121, 122, 123, 124, 125, 126, 127, 128, 130, 131, 133, 134, 135, 136, 137, 138, 139, 140, 235, 243, 250, 251, 252, 288

Declining-Balance Method: 18, 115, 289, 305

Units-of-Activity Method: 19, 118

Management’s Choice: Comparison of Methods: 116

Depreciation and Income Taxes: 20, 117

Revising Periodic Depreciation: 21, 22, 23, 141, 142, 143, 144, 145, 146, 147, 148, 151, 237, 238, 239, 251

Impairments: 24, 90, 149, 150, 290

Plant Asset Disposals: 25, 27, 28, 291, 155, 162

Sale of Plant Assets: 26, 153, 156, 253, 254, 255, 257, 258, 259, 293, 307

Gain on Sale: 30, 154, 159, 161, 165, 166, 167, 172, 173, 174, 292 Loss on Sale: 31, 157, 168, 169, 170, 171, 311

Retirement of Plant Assets: 29, 152, 158, 160, 163, 164, 256

Intangible Assets: 35, 36, 181, 183, 184, 185, 193,195, 242, 260, 261, 263, 264, 296, 301

Accounting for Intangible Assets:

Types of Intangible Assets: 192, 262

Patents: 37, 182, 186, 187, 196, 197, 294

Copyrights: 190, 191, 198

Trademarks and Trade Names:194

Franchises: 33, 38,

Goodwill: 34, 39, 175, 176, 180, 188, 189, 295, 309, 310

Research and Development Costs: 32, 177, 178, 179

Statement Presentation and Analysis:

Presentation: 43, 208, 209, 210, 211, 212, 214, 245, 267

Analysis: 244, 265, 266

Return on Assets: 40, 41, 199, 200, 204, 205, 213, 297

Asset Turnover: 42, 201, 202, 203, 206, 207, 298

Profit Margin Revisited:

Other Depreciation Methods: 268, 270

Declining-Balance Method: 44, 45, 215, 216, 217, 218, 223, 226, 227, 228, 229, 232, 246, 269, 271, 274, 275, 276, 299

Units-of-Activity Method: 219, 220, 221, 222, 224, 225, 230, 231, , 272, 273

TRUE-FALSE STATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Equipment.

4. Land improvements are generally charged to the Land account.

5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

6. One advantage of leasing a long-term asset is that it can reduce the risk of obsolescence.

7. Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

8. Capital expenditures are expenditures that increase the company's investment in productive facilities.

9. Ordinary repairs should be recognized when incurred as revenue expenditures.

10. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

11. The book value of a long-term asset is calculated by subtracting its salvage value from its cost.

12. The book value of a plant asset is always equal to its fair market value.

13. Recording depreciation on plant assets affects both the balance sheet and the income statement.

14. The depreciable cost of a plant asset is its original cost minus obsolescence.

15. Recording depreciation in each period is an application of the matching principle.

16. The Accumulated Depreciation account represents a cash fund available to replace plant assets.

17. In calculating depreciation, both plant asset cost and useful life are based on estimates.

18. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.

19. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

20. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

21. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not in prior periods.

22. A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.

23. When a change in estimate is made, there is no correction of previously recorded depreciation expense.

24. A permanent decline in the market value of an asset is referred to as an impairment.

25. Companies only dispose of plant assets by either sale or exchange.

26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

27. The book value of a plant asset is the amount originally paid for the asset, less anticipated salvage value.

28. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.

29. A plant asset must be fully depreciated before it can be removed from the books.

30. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

31. A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale are less than the asset's book value.

32. Research and development costs that result in a successful product that is patentable are charged to the Patent account.

33. Franchises are classified as plant assets.

34. Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.

35. Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance.

36. The cost of an intangible asset must be amortized over a 20-year period.

37. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

38. If an acquired franchise or license is for an indefinite time period, then the cost of the asset should not be amortized.

39. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

40. The return on assets ratio indicates how efficiently a company uses its assets.

41. The return on assets ratio can be computed from the profit margin ratio and the asset turnover ratio.

42. The asset turnover is calculated as net sales divided by ending total assets.

43. In the notes to the financial statements, the depreciation and amortization methods used should be described.

*44. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

*45. Under the double-declining-balance method, the depreciation rate used each year remains constant.

MULTIPLE CHOICE QUESTIONS

46. A company purchased land for $350,000 cash. The real estate broker's commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. The cost of land is

a. $385,000.

b. $350,000.

c. $375,000.

d. $410,000.

47. A company purchased land for $94,000 cash. The real estate broker's commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Salvaged proceeds from the demolished building were $1,200. Under the historical cost principle, the cost of land is

a. $104,800.

b. $94,000.

c. $99,800.

d. $106,000.

48. Which of the following assets is not properly classified as property, plant, and equipment?

a. A building used as a factory

b. Land used in ordinary business operations

c. A truck held for resale by an automobile dealership

d. Land improvements, such as parking lots and fences

49. One characteristic of a plant asset is that it is

a. intangible.

b. used in the operations of a business.

c. held for sale in the ordinary course of the business.

d. not currently used in the business but held for future use.

50. Which one of the following items is not considered a part of the cost of a truck purchased for business use?

a. Sales tax

b. Truck license

c. Freight charges

d. Cost of lettering on the side of the truck

51. Which of the following would not be charged to the Equipment account?

a. Installation costs

b. Freight costs

c. Cost of trial runs

d. Electricity used by the machine

52. Which of the following assets does not decline in service potential over the course of its useful life?

a. Equipment

b. Furnishings

c. Land

d. Fixtures

53. The four subdivisions of plant assets are

a. land, land improvements, buildings, and equipment.

b. intangibles, land, buildings, and equipment.

c. furnishings and fixtures, land, buildings, and equipment.

d. property, plant, equipment, and land.

54. The cost of land does not include

a. real estate broker's commission.

b. annual property taxes.

c. accrued property taxes assumed by the purchaser.

d. title fees.

55. The Land account would include all of the following costs except

a. drainage costs.

b. the cost of building a fence.

c. commissions paid to real estate agents.

d. the cost of tearing down a building.

56. A1 Care Clinic purchases land for $420,000 cash. The clinic assumes $4,500 in property taxes due on the land. The title and attorney fees totaled $3,000. The clinic had the land graded for $6,600. What amount does A1 Care Clinic record as the cost for the land?

a. $426,600

b. $420,000

c. $434,100

d. $427,500

57. Ace Wholesale Motor Company purchases land for $180,000 cash. Ace assumes $5,000 in property taxes due on the land. The title and attorney fees totaled $2,000. Ace has the land graded for $4,400. They paid $20,000 for paving of a parking lot. What amount does Ace record as the cost for the land?

a. $186,400

b. $211,400

c. $191,400

d. $180,000

58. Suppose that Target buys land for $145,000 in 2025. As of 3/31/2026, the land has appreciated in value to $151,000. On 12/31/26, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2026?

a. $0

b. $6,000

c. $4,400

d. $10,400

59. Suppose that Dollar General purchased land for a new parking lot for $125,000. The paving cost $175,000, and the lights to illuminate the new parking area cost $60,000. Which of the following statements is true with respect to these expenditures?

a. $300,000 should be debited to the Land account.

b. $235,000 should be debited to Land Improvements.

c. $360,000 should be debited to the Land account.

d. $360,000 should be debited to Land Improvements.

60. Suppose that Walmart acquires land for $77,000 cash. Additional costs are as follows.

Removal of shed $ 300

Filling and grading 1,500

Salvage value of lumber of shed 120

Broker commission 1,130

Paving of parking lot 10,000

Closing costs 560

Walmart will record the acquisition cost of the land as

a. $77,000.

b. $78,690.

c. $80,610.

d. $80,370.

61. A1 Wholesale Jewelry Company acquires land for $240,000 cash. Additional costs are as follows:

Removal of shed $ 2,000

Filling and grading 6,000

Salvage value of lumber of shed 1,280

Broker commission 4,520

Paving of parking lot 40,000

Closing costs 3,400

A1will record the acquisition cost of the land as

a. $254,640.

b. $257,200.

c. $255,920.

d. $240,000.

62. Ace Discount Manufacturing Company installs a new parking lot. The paving cost $60,000 and the lights to illuminate the new parking area cost $24,000. Which of the following statements is true with respect to these expenditures?

a. $60,000 should be debited to the Land account.

b. $24,000 should be debited to Land Improvements.

c. $84,000 should be debited to the Land account.

d. $84,000 should be debited to Land Improvements.

63. Land improvements should be depreciated over the useful life of the

a. land.

b. buildings on the land.

c. land or land improvements, whichever is longer.

d. land improvements.

64. Acme Molding Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?

a. Excavation fees are capitalized but building permit fees are not.

b. Architect fees are capitalized but building permit fees are not.

c. Interest is capitalized during the construction as part of the cost of the building.

d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

65. A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and carpeted, and there will also be some plumbing work done. Which of the following statements is true?

a. The cost of the building will not include the plumbing.

b. The cost of the building will include the cost of replacing the roof.

c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.

d. The wiring is part of the computer costs, not the building cost.

66. Company A purchases a new delivery truck for $45,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes safety testing for $220. What does Company A record as the cost of the new truck?

a. $49,040.

b. $48,920.

c. $47,500.

d. $46,920.

67. Suppose that Verizon purchased equipment and these costs were incurred:

Cash price $55,000

Sales taxes 3,600

Insurance during transit 640

Installation and testing 860

Total costs $60,100

Verizon will record the acquisition cost of the equipment as

a. $55,000.

b. $58,600.

c. $59,240.

d. $60,100.

68. A1 Flowers purchased a delivery van with a $60,000 list price. The company was given a $6,000 cash discount by the dealer and paid $3,000 sales tax. Annual insurance on the van is $1,500. As a result of the purchase, by how much will A1 increase its Equipment account?

a. $60,000

b. $54,000

c. $58,500

d. $57,000

69. Ace Concrete Inc. made a $500 ordinary repair to a piece of equipment. Ace's accountant debited this amount to the asset account, Equipment, and credited Cash. Was this the correct entry and if not, why not?

a. Yes, this was the correct entry.

b. No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash.

c. No, the correct entry would be a debit to Cash and a credit to Maintenance and Repairs Expense.

d. No, the correct entry would be a debit to Sales Revenue and a credit to Cash.

70. Acme Air, Inc. is a regional air cargo carrier. Acme made a $4,500 improvement to one of its airplanes. The amount is material. If Acme's accountant expensed this amount, which of the following statements is true?

a. The entry will improperly understate net income for the year.

b. The entry will improperly overstate net income for the year.

c. The entry is the correct treatment.

d. The entry will overstate the balance sheet for the year.

71. Acme Retail Company purchased equipment on January 1 at a list price of $125,000, with credit terms 2/10, n/30. Payment was made within the discount period. Acme paid $6,250 sales tax on the equipment and paid installation charges of $2,200. Prior to installation, Acme paid $5,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?

a. $131,250

b. $135,950

c. $138,450

d. $126,250

72. Suppose that Old Navy purchased equipment and these costs were incurred:

Cash price $75,000

Sales taxes 3,500

Insurance during transit 750

Installation and testing 1,500

Total costs $80,750

What amount should be recorded as the cost of the equipment?

a. $75,000

b. $78,500

c. $79,250

d. $80,750

73. A1 Delivery Service, Inc. purchased a truck with a $48,000 list price. The company was given a $4,800 cash discount by the dealer and paid $2,400 sales tax. Annual insurance on the truck is $1,200. As a result of the purchase, by what amount will the company increase its Equipment account?

a. $48,000

b. $43,200

c. $46,800

d. $45,600

74. Company A purchased machinery on January 1 at a list price of $300,000, with credit terms 2/10, n/30. Payment was made within the discount period. The company paid $15,000 sales tax on the machinery and paid installation charges of $5,300. Prior to installation, Company A paid $12,000 to pour a concrete slab on which to place the machinery. What is the total cost of the new machinery?

a. $314,300

b. $326,300

c. $332,300

d. $309,000

75. Suppose that FedEx Company purchases a new delivery van for $70,000. The sales taxes are $5,250. The logo of the company is painted on the side of the van for $1,400. The van’s annual license is $140. The van undergoes safety testing for $250. What does the company record as the cost of the new van?

a. $77,040

b. $76,900

c. $75,250

d. $76,650

76. Which of the following is not an advantage of leasing a long-term asset?

a. shared tax benefits

b. no depreciation

c. reduced risk of obsolescence

d. lower down payment

77. Interest may be included in the acquisition cost of a plant asset

a. during the construction period of a self-constructed asset.

b. if the asset is purchased on credit.

c. if the asset acquisition is financed by a long-term note payable.

d. if it is a part of a lump-sum purchase.

78. The cost of which of the following is included in the cost of constructing a building?

a. paving a parking lot

b. repairing vandalism damage incurred shortly after construction is complete

c. incurring interest during construction

d. removing the demolished building existing on the land when it was purchased

79. Which of the following is included as part of property, plant, and equipment but does not decline in service potential?

a. Land on which a company warehouse is built

b. Fixed assets used in production

c. A patent that provides a superior product compared to competitors

d. Parking lots and sidewalks providing access for a company’s employees

80. Ace Enterprises incurred the following costs related to the acquisition of plant assets:

Purchase price of land and dilapidated building $260,000

Real estate broker's commission 17,000

Demolition costs of dilapidated building 22,000

Architect's fees and building permits 24,000

Payments to contractor for building construction 870,000

Purchase of new furniture and equipment 74,000

Actual interest costs during building construction 135,000

Actual interest cost after completion of building construction 120,000

Costs of walks, driveways, and parking lot 55,000

At what amount should the land be recorded in Ace’s accounting records?

a. $299,000

b. $277,000

c. $354,000

d. $282,000

81. Ace Enterprises incurred the following costs related to the acquisition of plant assets:

Purchase price of land and dilapidated building $260,000

Real estate broker's commission 17,000

Demolition costs of dilapidated building 22,000

Architect's fees and building permits 24,000

Payments to contractor for building construction 870,000

Purchase of new furniture and equipment 74,000

Actual interest costs during building construction 135,000

Actual interest cost after completion of building construction 120,000

Costs of walks, driveways, and parking lot 55,000

At what amount should the building be recorded in Ace’s accounting records?

a. $1,051,000

b. $1,029,000

c. $870,000

d. $894,000

82. Expenditures that add to the utility of plant assets for more than one accounting period are

a. committed expenditures.

b. revenue expenditures.

c. current expenditures.

d. capital expenditures.

83. An expenditure for which of the following items would be considered a revenue expenditure?

a. Plant asset

b. Ordinary repair

c. Addition

d. Improvements

84. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally

a. expensed when incurred.

b. capitalized as a part of the cost of the asset.

c. debited to the Accumulated Depreciation account.

d. not recorded until they become material in amount.

85. Which of the following is not true of ordinary repairs?

a. They primarily benefit the current accounting period.

b. They can be referred to as revenue expenditures.

c. They maintain the expected productive life of the asset.

d. They increase the productive capacity of the asset.

86. Additions and improvements

a. occur frequently during the ownership of a plant asset.

b. normally involve immaterial expenditures.

c. increase the company’s investment in productive facilities.

d. typically only benefit the current accounting period.

87. What does the balance of the Accumulated Depreciation account represent?

1. The decline in value of plant assets
2. The accumulation of funds needed to replace the assets at the end of their useful life
3. The portion of the cost allocated as an expense since the asset was acquired
4. The fair value of the asset that is being depreciated

88. What is the goal when a company is selecting a depreciation method?

1. To select a method that best measures an asset’s contribution to revenue over its life
2. To select a method that allows the least amount of income taxes to be paid
3. To select the method that is required by GAAP for each particular asset
4. To select a method that measures the asset in units of output

89. When an asset is depreciated, to what amount will its book value at the end of its useful life be equal?

1. The cost of the asset being depreciated
2. Total accumulated depreciation
3. The salvage value of the asset
4. The annual cost allocation amount

90. Which of the following is a true statement as it relates to impairments of plant assets?

1. The assets are recorded at the book value of the asset.
2. The impairment amount is capitalized and depreciated along with the cost of the original asset.
3. The impairment amount is added to the plant asset account in the year the decline of value occurs.

They are written down to the new fair value during the year in which the decline in value occurs.

91. The balance in the Accumulated Depreciation account represents the

a. cash fund to be used to replace plant assets.

b. amount to be deducted from the cost of the plant asset to arrive at its fair market value.

c. amount charged to expense in the current period.

d. amount charged to expense since the acquisition of the plant asset.

92. The term applied to the periodic expiration of a plant asset’s cost is

a. amortization.

b. depletion.

c. depreciation.

d. cost expiration.

93. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?

a. Depreciation method

b. Estimated useful life.

c. Cash needed to replace the plant asset.

d. Cost.

94. Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n)

a. equal and equitable manner.

b. accelerated and accurate manner.

c. systematic and rational manner.

d. conservative market-based manner.

95. The cost of a long-term asset is expensed

a. when it is paid for.

b. as the asset benefits the company.

c. in the period in which it is acquired.

d. in the period in which it is disposed of.

96. The book value of an asset is equal to the

a. asset's fair value less its historical cost.

b. blue book value relied on by secondary markets.

c. replacement cost of the asset.

d. asset's cost less accumulated depreciation.

97. Accountants do not attempt to measure the change in a plant asset's market value during ownership because

a. the assets are not held for resale.

b. plant assets cannot be sold.

c. losses would have to be recognized.

d. it is management's responsibility to determine fair values.

98. Depreciation is a process of

a. asset devaluation.

b. cost accumulation.

c. cost allocation.

d. asset valuation.

99. Recording depreciation each period is necessary in accordance with the

a. going concern principle.

b. historical cost principle.

c. expense recognition principle.

d. asset valuation principle.

100. In computing depreciation, salvage value is

a. the fair value of a plant asset on the date of acquisition.

b. subtracted from accumulated depreciation to determine the plant asset's depreciable cost.

c. an estimate of a plant asset's value at the end of its useful life.

d. ignored in all the depreciation methods.

101. When estimating the useful life of an asset, accountants do not consider

a. the cost to replace the asset at the end of its useful life.

b. vulnerability to obsolescence.

c. expected repairs and maintenance.

d. the intended use of the asset.

102. All the following are needed for the computation of depreciation except

a. training costs.

b. acquisition cost.

c. depreciation method.

d. estimated useful life.

103. Which one of the following amounts is capitalized and depreciated?

a. $7,000 paid for closing costs on the acquisition of land on which an office building will be constructed

b. $4,200 mortgage payments on a warehouse built to store inventory

c. $65,000 paid to construct a parking lot adjacent to the company’s building

d. $40 paid for an oil change in one of the company’s delivery vehicles

104. Which of the following statements about depreciation is true?

a. Depreciation is an asset valuation process.

b. Depreciation does not apply to land improvements.

c. Recognizing depreciation results in the accumulation of cash for asset replacement.

d. Land is not depreciated.

105. All of the following statements about the useful life factor associated with depreciation are true except

a. useful life is also called service life.

b. useful life is an estimate of productive life.

c. past experience with similar assets is helpful in establishing useful life.

d. useful life is also called expected trade-in date.

106. What is the purpose of recording depreciation?

a. To allocate the cost of the assets to the accounting periods in which the assets are used to produce benefits

b. To reduce the value of the assets on the balance sheet to their fair values

c. To pay for possible future repairs and eventual replacement of the assets

d. To avoid overstating the book value of the assets

107. Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

a. $35,400.

b. $29,400.

c. $24,600.

d. $24,000.

108. Equipment was purchased for $85,000 on January 1, 2025. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used?

a. $33,400.

b. $16,700.

c. $14,300.

d. $28,600.

109. Equipment with a cost of $640,000 has an estimated salvage value of $60,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used for 3,000 hours?

a. $160,000.

b. $175,000.

c. $165,000.

d. $145,000.

110. Equipment with a cost of $300,000 has an estimated salvage value of $20,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used for 2,700 hours?

a. $75,000.

b. $70,000.

c. $75,600.

d. $72,500.

111. A machine was purchased for $180,000 and it was estimated to have a $12,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,750 was recorded using the straight-line method. The annual depreciation rate is

a. 15.0%.

b. 2.5%.

c. 10.0%.

d. 12.5%.

112. A machine was purchased for $54,000 and it was estimated to have a $9,000 salvage value at the end of its useful life. Monthly depreciation expense of $600 was recorded using the straight-line method. The annual depreciation rate is

a. 20.0%.

b. 1.6%.

c. 12.8%.

d. 16.0%.

113. A company purchased factory equipment on April 1, 2025 for $128,000. It is estimated that the equipment will have a $16,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2025 is

a. $12,800.

b. $11,200.

c. $8,400.

d. $9,600.

114. A company purchased factory equipment on June 1, 2025 for $128,000. It is estimated that the equipment will have an $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2025 is

a. $12,000.

b. $7,000.

c. $6,000.

d. $5,000.

115. The declining-balance method of depreciation produces a(n)

a. decreasing depreciation expense each period.

b. increasing depreciation expense each period.

c. declining percentage rate each period.

d. constant amount of depreciation expense each period.

116. Straight-line depreciation results in

a. the same amounts being reported for depreciation expense and accumulated depreciation for each year of the asset’s life.

b. an equal amount being charged to depreciation expense for each full year of the asset’s life.

c. a balance in depreciation expense that is equal to the salvage value of the asset at the end of its useful life.

d. larger amounts charged to depreciation expense in the first full year of the asset’s life when compared to depreciation expense under the declining-balance method.

117. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that

a. is used for tax purposes.

b. must be used for financial statement purposes.

c. is required by the SEC.

d. expenses an asset in a single year.

118. Which of the following methods of computing depreciation is production-based?

a. Straight-line

b. Declining-balance

c. Units-of-activity

119. Management should select the depreciation method that

a. is easiest to apply.

b. best measures the plant asset's market value over its useful life.

c. best measures the plant asset's contribution to revenue over its useful life.

d. has been used most often in the past by the company.

120. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is

a. straight-line.

b. units-of-activity.

c. sum-of-year’s-digits.

121. On November 1, 2024, Acme Marine places a new asset into service. The cost of the asset is $90,000 with an estimated 5-year life and $10,000 salvage value at the end of its useful life. What is the depreciation expense for 2025 if Acme Marine uses the straight- line method of depreciation?

a. $4,000

b. $16,000

c. $2,667

d. $9,000

122. On October 1, 2025, Ace Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for 2025 if accompany uses the straight-line method of depreciation?

a. $4,500

b. $24,000

c. $6,000

d. $12,000

123. On January 1, a machine with a useful life of five years and a salvage value of $25,000 was purchased for $125,000. What is the depreciation expense for year 2 under straight-line depreciation?

a. $15,000

b. $75,000

c. $20,000

d. $60,000

124. On January 1, a machine with a useful life of four years and a salvage value of $16,000 was purchased for $80,000. What is the depreciation expense for year 2 under straight-line depreciation?

a. $20,000

b. $32,000

c. $16,000

d. $40,000

125. On January 1, a machine with a useful life of four years and a salvage value of $15,000 was purchased for $95,000. What is the depreciation expense for year 2 under straight- line depreciation?

a. $10,000

b. $20,000

c. $40,000

d. $23,750

126. Which depreciation method is most frequently used in businesses today?

a. Straight-line

b. Declining-balance

c. Units-of-activity

d. Double-declining-balance

127. A plant asset was purchased on January 1 for $75,000 with an estimated salvage value of $15,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $35,000. The remaining useful life of the plant asset is

a. 15 years

b. 12 years

c. 7 years

d. 5 years

128. A plant asset was purchased on January 1 for $55,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is

a. 10 years.

b. 11 years.

c. 6 years.

d. 5 years.

129. Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is

a. $300,000.

b. $250,000.

c. $50,000.

d. $41,667.

130. Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The 2025 depreciation expense using the straight-line method of depreciation is

a. $58,333.

b. $60,000.

c. $41,667.

131. Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. If the straight-line depreciation method is used, the book value of the equipment at the beginning of the third year would be

a. $300,000.

b. $250,000.

c. $216,666.

d. $83,333.

132. A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The depreciable cost of the machine is

a. $180,000.

b. $150,000.

c. $50,000.

d. $30,000.

133. A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The 2025 depreciation expense using the straight-line method of depreciation is

a. $50,000.

b. $36,000.

c. $30,000.

134. A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. If the straight-line method is used, the book value of the machine at the beginning of the third year would be

a. $180,000.

b. $150,000.

c. $120,000.

d. $60,000.

135. Acme Lighting Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Acme estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Acme uses straight-line depreciation, annual depreciation will be

a. $6,150.

b. $6,108.

c. $9,150.

d. $5,640.

136. Company A purchased equipment on January 1, 2025 at a total invoice cost of $1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used?

a. $240,000.

b. $480,000.

c. $234,000.

d. $468,000.

137. Ace Manufacturing Company purchased a machine with a list price of $160,000. They were given a 10% discount by the manufacturer. They paid $1,000 for shipping and sales tax of $7,500. Ace estimates that the machine will have a useful life of 10 years and a salvage value of $50,000. If Ace uses straight-line depreciation, annual depreciation will be

a. $10,250.

b. $10,180.

c. $15,250.

d. $9,400.

138. Machinery was purchased for $340,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

a. $78,800.

b. $66,800.

c. $57,200.

d. $56,000.

139. Machinery was purchased for $340,000 on January 1, 2025. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used?

a. $133,600.

b. $66,800.

c. $57,200.

d. $114,400.

140. A machine that was purchased on January 1 for $60,000 has an estimated salvage value of $12,000. If the machine’s depreciation rate is 20%, its annual depreciation under the straight-line depreciation method is

a. $12,000.

b. $48,000.

c. $9,600.

d. $14,400.

141. A change in the estimated useful life of equipment requires

a. a retroactive change in the amount of periodic depreciation recognized in previous years.

b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.

c. that the amount of periodic depreciation be changed in the current year and in future years.

d. that income for the current year be increased.

142. Suppose that Target has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?

a. Revisions in useful life are permitted if approved by the IRS.

b. Retroactive changes must be made to correct previously recorded depreciation.

c. Only future years will be affected by the revision.

d. Both the current and future years will be affected by the revision.

143. Jack's Copy Shop bought equipment for $240,000 on January 1, 2025. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2026, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2026?

a. $80,000

b. $32,000

c. $40,000

d. $60,000

144. An asset was purchased for $400,000. It had an estimated salvage value of $80,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $64,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be

a. $48,000.

b. $35,200.

c. $24,000.

d. $33,600.

145. Equipment costing $60,000 with a salvage value of $12,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for Year 3 would be

a. $7,200.

b. $16,000.

c. $12,000.

d. $9,600.

146. Ron's Quik Shop bought equipment for $140,000 on January 1, 2025. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2026, Ron decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2026?

a. $22,400

b. $11,200

c. $18,666

d $28,000

147. An asset was purchased for $140,000. It had an estimated salvage value of $35,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $28,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be

a. $21,000.

b. $14,875.

c. $11,900.

d. $17,500.

148. Equipment costing $105,000 with a salvage value of $21,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years and no change in the salvage value, the depreciation expense for Year 3 would be

a. $15,750.

b. $14,000.

c. $21,000.

d. $10,500.

149. All of the following statements regarding impairments are true except

a. an impairment is a permanent decline in an asset's fair value.

b. after an impairment write-down, depreciation is generally lower in subsequent periods.

c. immediate recognition of impairment write-downs is now required.

d. impairments are generally recorded when the book value falls below the fair value.

150. All of the following are factors that a company should consider before an impairment write-down of an asset is recorded except

a. an appraisal of the asset.

b. market trends.

c. company profits.

d. obsolescence of the asset.

151. Acme Transportation Corporation purchased a van on January 1, 2025 for $34,000 to use for its shuttle business. The van is expected to have a five-year useful life and no salvage value. During 2026, it retouched the van's paint at a cost of $1,600, replaced the transmission for $4,000 (which extended its life by an additional 2 years), and tuned-up the engine for $200. If Acme uses straight-line depreciation, what amount of annual depreciation will the company report for 2026?

a. $6,800

b. $5,200

c. $5,500

d. $5,467

152. In 2025, A1 Manufacturing Corporation has plant equipment that originally cost $120,000 and has accumulated depreciation of $48,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should the company use to record the retirement of the equipment?

a. Loss on Disposal of Plant Assets 72,000

Equipment 72,000

b. Accumulated Depreciation—Equipment 48,000

Loss on Disposal of Plant Assets 72,000

Equipment 120,000

c. Loss on Disposal of Plant Assets 72,000

Accumulated Depreciation—Equipment 72,000

d. Equipment 120,000

Accumulated Depreciation—Equipment 48,000

Loss on Disposal of Plant Assets 72,000

153. A gain or loss on disposal of a plant asset is determined by comparing the

a. replacement cost of the asset with the asset's original cost.

b. book value of the asset with the asset's original cost.

c. original cost of the asset with the proceeds received from its sale.

d. book value of the asset with the proceeds received from its sale.

154. When an asset is sold, a gain is realized when the

a. sale price exceeds the book value of the asset sold.

b. sale price exceeds the original cost of the asset sold.

c. book value exceeds the sale price of the asset sold.

d. sale price exceeds the depreciable cost of the asset sold.

155. The book value of a plant asset is the difference between the

a. replacement cost of the asset and its historical cost.

b. cost of the asset and the amount of depreciation expense for the year.

c. cost of the asset and the accumulated depreciation to date.

d. proceeds received from the sale of the asset and its original cost.

156 A company sells a plant asset that originally cost $375,000 for $125,000 on December 31, 2025. The accumulated depreciation account had a balance of $150,000 after the current year's depreciation of $37,500 had been recorded. The company should recognize a

a. $250,000 loss on disposal.

b. $100,000 gain on disposal.

c. $100,000 loss on disposal.

d. $62,500 loss on disposal.

157. A company sells a plant asset that originally cost $360,000 for $120,000 on December 31, 2025. The accumulated depreciation account had a balance of $180,000 after the current year's depreciation of $30,000 had been recorded. The company should recognize a

a. $60,000 loss on disposal.

b. $40,000 gain on disposal.

c. $120,000 loss on disposal.

d. $120,000 gain on disposal.

158. A truck costing $72,000 on which $60,000 of accumulated depreciation has been recorded was discarded. The entry to record this event would include a

a. gain of $12,000.

b. loss of $12,000.

c. credit to Accumulated Depreciation for $60,000.

d. credit to Accumulated Depreciation for $72,000.

159. Equipment that cost $90,000 and on which $50,000 of accumulated depreciation has been recorded was disposed of for $45,000 cash. The entry to record this event would include a

a. gain of $5,000.

b. loss of $5,000.

c. credit to the Equipment account for $15,000.

d. credit to Accumulated Depreciation for $15,000.

160. A truck costing $75,000 and on which $65,000 of accumulated depreciation has been re-corded was discarded as having no value. The entry to record this event would include a

a. gain of $10,000.

b. loss of $10,000.

c. credit to Accumulated Depreciation for $65,000.

d. credit to Accumulated Depreciation for $75,000.

161. Equipment that cost $144,000 and on which $120,000 of accumulated depreciation has been recorded was disposed of for $36,000 cash. The entry to record this event would include a

a. gain of $12,000.

b. loss of $12,000.

c. credit to the Equipment account for $36,000.

d. credit to Accumulated Depreciation for $120,000.

162. If disposal of a plant asset occurs during the year, depreciation is

a. not recorded for the year.

b. recorded for the whole year.

c. recorded for the fraction of the year to the date of the disposal.

d. not recorded if the asset is scrapped.

163. If a plant asset is retired and is fully depreciated,

a. a gain on disposal will be recorded.

b. phantom depreciation must be taken as though the asset were still on the books.

c. a loss on disposal will be recorded.

d. no gain or loss on disposal will be recorded.

164. The book value of an asset will equal its fair value at the date of sale if

a. a gain on disposal is recorded.

b. no gain or loss on disposal is recorded.

c. the plant asset is fully depreciated.

d. a loss on disposal is recorded.

165. A machine costing $176,000 was destroyed when it caught fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $200,000 was received based on the replacement cost of the machine. The entry to record the insurance proceeds and the disposition of the machine will include a

a. gain on disposal of $24,000.

b. credit to the Equipment account for $120,000.

c. credit to the Accumulated Depreciation account for $80,000.

d. gain on disposal of $104,000.

166. On July 1, 2025, Ace Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The Accumulated Depreciation account had a balance of $175,000 on January 1, 2025 using the straight-line method. The gain or loss on disposal is

a. $15,000 gain.

b. $10,000 loss.

c. $15,000 loss.

d. $10,000 gain.

167. A plant asset with a cost of $300,000 and accumulated depreciation of $285,000 is sold for $35,000. What is the amount of the gain or loss on disposal of the plant asset?

a. $35,000 loss

b. $20,000 loss

c. $20,000 gain

d. $35,000 gain

168. A loss on disposal of a plant asset is reported in the financial statements

a. in the Other Revenues and Gains section of the income statement.

b. in the Other Expenses and Losses section of the income statement.

c. as a direct increase to the Common Stock account on the balance sheet.

d. as a direct decrease to the Common Stock account on the balance sheet.

169. A1 Wholesale Jewelry Company sold equipment for $48,000. The equipment had an original cost of $144,000 and accumulated depreciation of $72,000. Ignoring the tax effect, as a result of the sale

a. net income will increase $48,000.

b. net income will increase $24,000.

c. net income will decrease $24,000.

d. net income will decrease $48,000.

170. Acme Corporation sold equipment for $40,000. The equipment had an original cost of $120,000 and accumulated depreciation of $60,000. Ignoring the tax effect, as a result of the sale

a. net income will increase $40,000.

b. net income will increase $20,000.

c. net income will decrease $20,000.

d. net income will decrease $40,000.

171. A1 Courier Service recorded a loss of $7,500 when it sold a van that originally cost $70,000 for $12,500. Accumulated depreciation on the van must have been

a. $65,000.

b. $20,000.

c. $62,500.

d. $50,000.

172. Equipment costing $280,000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $112,000. An insurance check for $320,000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a

a. gain on disposal of $40,000.

b. credit to the Equipment account of $168,000.

c. credit to the Accumulated Depreciation account for $112,000.

d. gain on disposal of $152,000.

173. On July 1, 2025, Ace Production Company sells machinery for $240,000. The machinery originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. The Accumulated Depreciation account had a balance of $350,000 on January 1, 2025 using the straight-line method. The gain or loss on disposal is

a. $40,000 gain.

b. $10,000 loss.

c. $20,000 loss.

d. $10,000 gain.

174. A plant asset with a cost of $600,000 and accumulated depreciation of $570,000 is sold for $70,000. What is the amount of the gain or loss on disposal of the plant asset?

a. $70,000 loss

b. $40,000 loss

c. $40,000 gain

d. $70,000 gain

175. Goodwill

a. is only recorded when generated internally.

b. can be subdivided and sold in parts.

c. can only be identified with the business as a whole.

d. can be defined as normal earnings less accumulated amortization.

176. In recording the acquisition cost of an entire business,

a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets.

b. assets are recorded at the seller's book values.

c. goodwill, if it exists, is never recorded.

d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

177. Research and development costs

a. are classified as intangible assets.

b. must be expensed when incurred under generally accepted accounting principles.

c. should be included in the cost of the patent they relate to.

d. are capitalized and then amortized over a period not to exceed 20 years.

178. A computer company has $3,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for?

a. $700,000 loss

b. $2,800,000 net income

c. $0

d. Cannot be determined from the information provided

179. A computer company has $4,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $4,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for?

a. $800,000 loss

b. $4,000,000 net income

c. $800,000 net income

d. Cannot be determined from the information provided

180. Goodwill

a. may be expensed upon purchase if desired.

b. can be sold by itself to another company.

c. can be purchased and charged directly to stockholders’ equity.

d. is only recorded when the purchase of an entire business occurs.

181. Which of the following is not classified as an intangible asset on the balance sheet?

a. Goodwill

b. Trademark

c. Employees

d. Copyrights

182. Ace Technology Company incurred $900,000 of research and development costs in its laboratory to develop a new product. It spent $120,000 in legal fees for a patent granted on January 2, 2025. On July 31, 2025, Ace paid $90,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2025?

a. $900,000

b. $210,000

c. $1,110,000

d. $0

183. Given the following account balances at year-end, compute the total intangible assets on the balance sheet of Ace Electronic Enterprises.

Cash $1,500,000

Accounts Receivable 1,000,000

Trademarks 1,200,000

Goodwill 2,500,000

Research & Development Costs 2,000,000

a. $9,700,000

b. $5,700,000

c. $3,700,000

d. $7,700,000

184. Intangible assets are the rights and privileges that result from ownership of long-lived assets that

a. must be generated internally.

b. are depreciated over their useful life.

c. have been exchanged at a gain.

d. do not have physical substance.

185. For which of the following pairs of costs will a company record no amortization expense?

a. Research and development costs and goodwill

b. Copyrights and licenses

c. Franchises and patents

d. Goodwill and trade names

186. A patent should

a. be amortized over a period of 20 years.

b. not be amortized.

c. be amortized over its useful life or 20 years, whichever is longer.

d. be amortized over its useful life or 20 years, whichever is shorter.

187. The cost of successfully defending a patent in an infringement suit should be

a. charged to Legal Expenses.

b. deducted from the book value of the patent.

c. added to the patents account.

d. recognized as a loss in the current period.

188. An asset that cannot be sold individually in the marketplace is

a. a patent.

b. goodwill.

c. a copyright.

d. a trade name.

189. Goodwill can be recorded only when

a. customers keep returning because they are satisfied with the company's products.

b. the company acquires a good location for its business.

c. the company has exceptional management.

d. an entire business is purchased.

190. On July 1, 2025, Company A purchased the copyright to Ace Computer Tutorials for $210,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2025 would be

a. $42,000.

b. $19,687.

c. $38,850.

d. $21,000.

191. On May 1, 2025, Ace Company purchased the copyright to A1 Computer Tutorials for $120,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2025 would be

a. $24,000.

b. $16,000.

c. $12,000.

d. $12,800.

192. Which of the following is not an intangible asset arising from a government grant?

a. Goodwill

b. Patent

c. Trademark

d. Trade name

193. Which of the following is not considered an intangible asset?

a. Goodwill

b. An oil well

c. A franchise

d. A trade name

194. The cost of an intangible asset with an indefinite life, such as a trademark, should

a. be amortized over 20 years.

b. be amortized over the life of the creator plus 70 years.

c. not be amortized.

d. not be recorded.

195. Cost allocation of an intangible asset is referred to as

a. amortization.

b. depreciation.

c. accretion.

d. capitalization.

196. A patent

a. has a legal life of 20 years.

b. is not amortized.

c. can be renewed indefinitely.

d. is rarely subject to litigation because it is an exclusive right.

197. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting

a. Legal Expense.

b. the Intangible Loss account.

c. the Patent account.

d. a revenue expenditure account.

198. Copyrights are granted by the federal government

a. for the life of the creator or 70 years, whichever is longer.

b. for the life of the creator plus 70 years.

c. for the life of the creator or 70 years, whichever is shorter.

d. and therefore cannot be amortized.

199. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $165 $420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

What is Company A's return on assets for 2028?

a. 150.0%

b. 15.7%

c. 15.0%

d. 14.3%

200. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $ 165 $ 420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

What is Company B's return on assets for 2028?

a. 15.6%

b. 10.5%

c. 14.0%

d. 12.0%

201. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $ 165 $ 420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

What is Company A's asset turnover for 2028?

a. 4.00 times

b. 1.50 times

c. 0.25 times

d. 0.67 times

202. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $ 165 $ 420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

What is Company B's asset turnover for 2028?

a. 1.40 times

b. 1.63 times

c. 1.81 times

d. 1.23 times

203. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $ 165 $ 420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

If Company A and Company B are in the same industry and the industry average for asset turnover is equal to 1.20 times, which of the following statements is true for 2028?

a. Company A is operating less efficiently than the industry average.

b. Company B is operating more efficiently than Company A.

c. Both Company A and Company B are operating more efficiently than the average company in their industry.

d. The asset turnover does not address the question of efficient operations.

204. The following information is provided for Company A and Company B.

(in $ millions) Company A Company B

Net income 2028 $ 165 $ 420

Net sales 2028 1,650 4,900

Total assets 12/31/26 1,000 2,400

Total assets 12/31/27 1,050 3,000

Total assets 12/31/28 1,150 4,000

If Company A and Company B are in the same industry and the industry average for return on assets is equal to 30%, which of the following statements is true for 2028?

a. Company A is more profitable than the average company in its industry.

b. Company B is more profitable than Company A.

c. Both Company A and Company B are more profitable than the average company in their industry.

d. Company A is more profitable than Company B.

205. Using the following data for Acme Industries, compute the return on assets.

Net Income $ 180,000

Total Assets 12/31/26 2,410,000

Total Assets 12/3125 1,980,000

Net Sales 250,000

1. 7.5%

b. 10.4%

c. 8.2%

d. 11.4%

206. During 2025, A1 Marine Corporation reported net sales of $2,000,000, net income of $900,000, and depreciation expense of $100,000. A1 Marine also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. A1 Marine’s asset turnover is

a. 2.0 times.

b. 1.6 times.

c. 1.33 times.

d. 0.72 times.

207. During 2025, Acme Service Corporation reported net sales of $2,500,000, net income of $1,320,000, and depreciation expense of $80,000. Acme also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Acme’s asset turnover is

a. 1.3 times.

b. 1.1 times.

c. 1.7 times.

d. 2.0 times.

208. Trademarks are generally shown on the balance sheet under

a. Intangible Assets.

b. Investments.

c. Property, Plant, and Equipment.

d. Current Assets.

209. Which of the following statements concerning financial statement presentation is false?

a. Intangibles are reported separately under Intangible Assets.

b. The balances of major classes of assets may be disclosed in the footnotes.

c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.

d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

210. Intangible assets

a. should be reported under the heading Property, Plant, and Equipment.

b. are not reported on the balance sheet because they lack physical substance.

c. should be reported as Current Assets on the balance sheet.

d. should be reported as a separate classification on the balance sheet.

211. A company has the following assets:

Buildings and Equipment,

less accumulated depreciation of $5,000,000 $25,000,000

Copyrights 2,400,000

Patents 10,000,000

Land 12,000,000

The total amount reported under Property, Plant, and Equipment would be

a. $49,400,000.

b. $37,000,000.

c. $47,000,000.

d. $39,400,000.

212. Plant assets are ordinarily presented in the balance sheet

a. at current market values.

b. at replacement costs.

c. at cost less accumulated depreciation.

d. in a separate section along with intangible assets.

213. Which of the following ratios indicates how efficiently a company uses its assets to generate net income?

1. Profit margin
2. Asset turnover
3. Return on assets
4. Sustainability

214. A company has the following assets:

Buildings and Equipment,

less accumulated depreciation of $4,000,000 $23,000,000

Copyrights 1,500,000

Patents 3,000,000

Land 5,000,000

The total amount reported under Property, Plant, and Equipment would be

a. $32,500,000.

b. $27,000,000.

c. $29,500,000.

d. $28,000,000.

1. LI 6. L
2. X 7. E
3. B 8. LI
4. B 9. L
5. E 10. L

Be. 234

Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X).

_____ 1. Computer installation cost

_____ 2. Driveway cost

_____ 3. Architect’s fee

_____ 4. Surveying costs

_____ 5. Grading costs

_____ 6. Cost of lighting for the parking lot

_____ 7. Insurance while in transit and freight on a computer purchased

_____ 8. Material and labor costs incurred to construct a factory

_____ 9. Cost of tearing down a warehouse on land just purchased

_____10. Utility cost during the first year

Ex. 247

For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required."

(a) The $70 cost of repairing a printer was charged to Equipment.

(b) The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c) The $6,000 closing costs associated with the acquisition of land were debited to Operating Expenses.

(d) A $300 charge for transportation expenses on new equipment purchased was debited to Freight-In.

Ex. 248

Acme Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order.

Debits

1. Cost of real estate purchased as a plant site (land and building) $ 130,000

2. Accrued real estate taxes paid at the time of the purchase of the real estate 4,000

3. Cost of demolishing building to make land suitable for construction of a new

building 10,000

4. Architect's fees on building plans 14,000

5. Excavation costs for new building 30,000

6. Cost of filling and grading the land 5,000

7. Insurance and taxes during construction of building 6,000

8. Cost of repairs caused by a small fire shortly after completion of building 7,000

9. Interest paid during the year, of which $45,000 pertains to the construction

period 74,000

10. Full payment to building contractor 955,000

11. Cost of parking lots and driveways 36,000

12. Real estate taxes paid for the current year on the land 4,000

Total Debits $1,275,000

Credits

13. Proceeds from salvage of demolished building $3,500

Total Credits $3,500

Instructions

Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.

Item Land Buildings Other Account Title

Ex. 249

On March 1, 2025, A1 Supply Company acquired real estate, on which it planned to construct a small office building, by paying $85,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional expenditures before construction began included $1,500 attorney's fee for work concerning the land purchase, $5,500 real estate broker's fee, $9,100 architect's fee, and $16,000 to put in driveways and a parking lot.

Instructions

(a) Determine the amount to be recorded as the cost of the land.

(b) For each cost not used in part (a), indicate the account to be debited.

Ex. 250

A1 Repair Service uses the straight-line method of depreciation. The company's fiscal year-end is December 31. The following transactions and events occurred during the first three years.

2025 July 1 Purchased equipment from the Acme Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250.

Nov. 3 Paid for ordinary repairs on the equipment at a cost of $240.

Dec. 31 Recorded 2024 depreciation on the basis of a four-year life and estimated salvage value of $455.

2026 Dec. 31 Recorded 2026 depreciation.

2027 Jan. 1 Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment.

Instructions

Prepare the necessary entries. (Show computations.)

Ex. 251

Joe Smith, the controller of Acme Office Supply Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2028. Here are his findings:

All assets are depreciated by the straight-line method. Acme uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Joe's proposed changes. (The "Proposed" useful life is total life, not remaining life.)

Instructions

(a) Compute the revised annual depreciation on each asset in 2028. (Show computations.)

(b) Prepare the entry (or entries) to record depreciation on the building in 2028.

Ex. 252

On January 1, 2025, A1 Transportation Company purchased and installed an intercom system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2026, more equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years and no salvage value. Through an error, the new equipment was debited to Utilities Expense. The company uses the straight-line method of depreciation.

Instructions

Prepare a schedule showing the effects of the error on Utilities Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2026 through the useful life of the new equipment.

Utilities Expense Depreciation Expense Net Income

Overstated Overstated Overstated

Year (Understated) (Understated) (Understated)

——————————————————————————————————————————

2026

2027

2028

2029

Ex. 253

(a) Company A purchased equipment in 2026 for $104,000 and estimated an $8,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2027, there was $67,200 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2028, the equipment was sold for $21,000.

Prepare the appropriate journal entries to remove the equipment from the books of Company A on March 31, 2028.

(b) Company B sold equipment for $11,000. The equipment originally cost $25,000 in 2025 and $6,000 was spent on a major overhaul in 2028 (charged to the Equipment account). Accumulated Depreciation on the equipment to the date of disposal was $20,000.

Prepare the appropriate journal entry to record the disposition of the equipment.

(c) Company C sold equipment that had a book value of $13,500 for $15,000. The equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment.

Prepare the appropriate journal entries to record the dispositions of the equipment.

Ex. 254

Prepare the journal entries to record the following transactions for Acme Wholesale Company, which has a calendar year end and uses the straight-line method of depreciation.

(a) On September 30, 2028, the company sold old equipment for $46,000. The equipment was purchased on January 1, 2026 for $96,000 and was estimated to have a $16,000 salvage value at the end of its 5-year life. Depreciation on the equipment has been recorded through December 31, 2027.

(b) On June 30, 2028, the company sold old equipment for $24,000. The equipment originally cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.

Ex. 255

Instructions

Determine the gain or loss to be recognized for each scenario below.

1. A machine that cost $36,000 and on which $26,500 of depreciation had been recorded was disposed of for $10,200. Indicate whether a gain or loss should be recorded, and for what amount.
2. Assume that the machine of Part a, above, was instead discarded. Indicate whether a gain or loss should be recorded, and for what amount.
3. Assume that the machine of Part a, above, was instead sold for $9,400. Indicate whether a gain or loss should be recorded, and for what amount.

Ex. 256

Presented below are selected transactions for the A1 Transport Company for 2029.

Jan. 1 Retired a piece of equipment that was purchased on January 1, 2019. The equipment cost $75,000 on that date and had a useful life of 10 years with no salvage value.

April 30 Sold equipment for $38,000 that was purchased on January 1, 2026. The equipment cost $105,000 and had a useful life of 5 years with no salvage value.

Dec. 31 Discarded equipment that was purchased on June 30, 2025. The equipment cost $42,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Instructions

Journalize all entries required as a result of the above transactions. A1 Transport Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2028.

Ex. 257

Ace Restaurant Supply Company sold the following two pieces of equipment in 2028:

Equipment A Equipment B

Cost $116,000 $63,000

Purchase date 7/1/21 1/1/22

Useful life 8 years 5 years

Salvage value $4,000 $3,000

Depreciation method Straight-line Straight-line

Date sold 7/1/25 9/1/25

Sales price $49,000 $20,000

Instructions

Journalize all entries required to update depreciation and record the sales of the two assets in 2028. The company has recorded depreciation on the equipment through December 31, 2027.

Ex. 258

Suppose that Ulta, Inc. has equipment that cost $50,000 and has been depreciated $30,000.

Instructions

Record entries for the disposal under the following assumptions.

(a) It was scrapped as having no value.

(b) It was sold for $23,000.

(c) It was sold for $18,000.

Ex. 259

Here are selected 2028 transactions of Ace Car Rental Corporation.

Jan. 1 Retired a piece of equipment that was purchased on January 1, 2012. The equipment cost $55,000 and had a useful life of 10 years with no salvage value.

June 30 Sold equipment that was purchased on January 1, 2026. The equipment cost $78,000 and had a useful life of 3 years with no salvage value. The equipment was sold for $9,000 cash.

Dec. 31 Sold equipment for $12,500 cash. The equipment cost $43,000 when it was purchased on January 1, 2025 and was depreciated based on a 5-year useful life with a $3,000 salvage value.

Instructions

Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Ace Car Rental Corporation uses straight-line depreciation. Deprecation has been adjusted through December 31, 2027.

Ex. 260

(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.

(b) Purchased a trademark from another company. The trademark can be renewed indefinitely. The company expected the trademark to contribute to revenue indefinitely.

(c) The company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.

(d) The company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. The company is very confident they will obtain this patent in the next few years.

Ex. 261

Ace Equipment Company, organized in 2025, has these transactions related to intangible assets in that year:

Jan. 2 Purchased a patent (5-year life) $325,000.

Apr. 1 Trademark purchased (indefinite life) $360,000.

July 1 Acquired a 9-year franchise; expiration date July 1, 2034, $720,000.

Sept. 1 Research and development costs $185,000.

Instructions

(a) Prepare the necessary entries to record these intangibles. All costs incurred were for cash.

(b) Make the entries as of December 31, 2025, recording any necessary amortization.

(c) Indicate what the balance should be on December 31, 2025.

Ex. 262

(a) Company A purchased a patent on January 1, 2025 for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2025, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year-end on December 31, 2025.

(b) Company B purchased a franchise from the Tasty Food Company for $450,000 on January 1, 2025. The franchise is for an indefinite time period and gives Milner Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year-end on December 31, 2025.

(c) Company C incurred research and development costs of $500,000 in 2025 in developing a new product. Prepare the necessary journal entries during 2025 to record these events and any adjustments at year-end on December 31, 2025.

Ex. 263

a. A patent that was acquired for $800,000 at the beginning of the current year expires in 20 years and is expected to have a useful life of 5 years. Present the adjusting entry to amortize the patent for the current year.

b. Research and development costs of $300,000 were incurred during the current fiscal year. Determine the minimum amount to be expensed for the current fiscal year.

Ex. 264

For each of the following unrelated transactions, (a) determine the amount of the amortization for the current year, and (b) present the adjusting entries required to record amortization at year-end.

(1) Costs of $39,000 were incurred on January 1 to obtain a patent. On January 31, $38,610 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

(2) A company acquired a copyright for $160,000. The copyright has a useful life of 50 years.

Ex. 265

Company A reports the following information (in millions) during a recent year: net sales, $12,408.5; net income, $344.9; total assets, ending, $4,312.6; and total assets, beginning, $4,254.3.

Instructions

(a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios.

(b) Prove mathematically how the profit margin and asset turnover ratios work together to explain return on assets, by showing the appropriate calculations.

Ex. 266

The following information is available from the annual reports of Company A and Company B.

(Amounts in millions)

Company A _Company B

Net Income $ 965 $ 1,271

Net Sales 22,653 33,812

Total Assets (average) 21,188 36,167

Instructions

(a) Based on the preceding information, compute the following values for each company:

1. Asset turnover

2. Return on assets

(b) What conclusion concerning the management of assets can be drawn from these data?

Ex. 267

Presented below is information related to plant assets and intangible assets at year-end on December 31, 2025 for Company A:

Buildings $1,180,000

Goodwill 370,000

Patents 480,000

Land 390,000

Accumulated Depreciation 650,000

Instructions

Prepare a partial balance sheet for Company A that shows how the above-listed items would be presented.

*Ex. 268

Suppose that Verizon purchased a new machine on October 1, 2025 at a cost of $104,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 80,000 working hours during its 8-year life.

Instructions

Compute depreciation using the following methods in the year indicated.

(a) Straight-line for 2025 and 2026, assuming a December 31 year-end.

(b) Declining-balance using double the straight-line rate for 2025 and 2026.

(c) Units-of-activity for 2025, assuming machine usage was 2,900 hours. (Round depreciation per unit to the nearest cent.)

*Ex. 269

Company A purchased a new machine for $250,000. It is estimated that the machine will have a $25,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used.

Instructions

Prepare a depreciation schedule that shows the annual depreciation expense on the machine for its 5-year life.

*Ex. 270

Acme Bicycle Company purchased equipment on January 1, 2025 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life.

Instructions

1. Compute the amount of depreciation expense for the year ended December 31, 2025 using the straight-line method of depreciation.

2. If 16,000 units of product are produced in 2025 and 24,000 units are produced in 2026, what is the book value of the equipment at December 31, 2026? The company uses the units-of-activity depreciation method.

3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2027?

*Ex. 271

A plant asset acquired on October 1, 2025 at a cost of $800,000 has an estimated useful life of 10 years. The salvage value is estimated to be $50,000 at the end of the asset's useful life.

Instructions

Determine the depreciation expense for the first two years using the:

(a) straight-line method.

(b) double-declining-balance method.

*Ex. 272

Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’s has a fleet of three delivery automobiles. Tony's uses the units-of-activity method of calculating depreciation. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows:

Accumulated

Estimated Depr.—Beg. Miles Operated

Car Cost Salvage Value Life in Miles of the Year During Year

1 $35,000 $5,000 75,000 $2,100 20,000

2 25,000 4,000 60,000 1,890 22,000

3 23,500 2,500 70,000 2,000 19,000

Instructions

(a) Determine the depreciation rates per mile for each car.

(b) Determine the depreciation expense for each car for the current year.

(c) Make one compound journal entry to record the annual depreciation expense for the fleet.

*Ex. 273

Acme Medical Clinic purchased a new surgical laser for $84,000. The estimated salvage value is $4,000. The laser has a useful life of five years and the clinic expects to use it for 10,000 hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 2,400 hours in year 3; 1,900 hours in year 4; 2,000 hours in year 5.

Instructions

(a) Compute the annual depreciation for each of the five years under each of the following methods:

(1) straight-line.

(2) units-of-activity.

(c) Which method would result in the lower reported income in the first year? Which method would result in the lower total reported income over the five-year period?

*Ex. 274

Acme Airlines purchased a 777 aircraft on January 1, 2026 at a cost of $40,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $6,000,000.

Instructions

Compute the accumulated depreciation and book value at December 31, 2028, using the straight-line method and the double-declining-balance method.

*Ex. 275

Ace Office Supply Company purchased a machine on January 1, 2025 at a cost of $72,000. The machine is expected to have an estimated salvage value of $4,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2025 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2025 was $45,000 before taxes as the result of depreciating the machine incorrectly.

Instructions

Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the corrected net income for 2025. Assume the books have not yet been closed for 2025. (Show computations.)

*Ex. 276

Ace Computer Company sold two pieces of equipment in 2028. The following information pertains to the two pieces of equipment:

Purchase Useful Salvage Depreciation Sales

Machine Cost Date Life Value Method Date Sold Price

#1 $86,000 7/1/24 5 yrs. $6,000 Straight-line 7/1/25 $20,000

#2 $95,000 1/1/27 5 yrs. $5,000 Double-declining- 12/31/25 $37,000

balance

Instructions

(a) Compute the depreciation on each piece of equipment to the date of disposal.

(b) Prepare the journal entries in 2028 to record 2028 depreciation and the sale of each piece of equipment.