Long-Lived Assets – Test Bank | Comprehensive 11th - Test Bank | Financial Accounting Enhanced eText 11e by Pratt Peters by Pratt Peters. DOCX document preview.
View Product website:
https://selldocx.com/docx/long-lived-assets-test-bank-comprehensive-11th-1118
Financial Accounting, 11th edition
Test Bank and Video Questions
By Pratt and Peters
Chapter 9: Long-Lived Assets
Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.
Table of Contents
Multiple Choice Questions
1) Which one of the following should be classified as land on the balance sheet?
A) A shed that houses the company's equipment
B) Mineral rights representing gold in the soil
C) Two tracts of property that house the company's backup computer site
D) Sidewalks and driveways which lead to the company's office building
Diff: Easy
Learning Objective: 9.1
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 1 / None
2) Which of the following long-lived assets is not amortized or depreciated to an expense?
A) Equipment used in production of inventory goods
B) Land improvements
C) Land
D) Company computers replaced every two years
Diff: Easy
Learning Objective: 9.2
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 2 / None
3) A company complaining that although its income is quite satisfactory, cash is not available for dividends due to the high cost of replacing fixed assets is operating in an economic environment where:
A) inflation is non-existent.
B) the balance sheet value of long-lived assets is more than their replacement value.
C) the prices of long-lived assets have been decreasing over an extended period of time.
D) expenditures required to replace long-lived assets are greater than depreciation expense.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 3 / None
4) Which one of the following actions will help solve a cash shortage problem?
A) Issue common stock in exchange for plant assets
B) Recognize depreciation expense
C) Purchase long-lived asset by issuing long-term debt
D) Retire plant assets at salvage value
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 4 / None
5) The purpose of recording depreciation expense is to:
A) provide cash necessary to replace plant assets when they are used up.
B) record the balance sheet amount of plant assets at replacement value.
C) match expenses with revenues using a reasonable systematic method.
D) gain a better understanding of the estimates required in preparing financial statements.
Diff: Easy
Learning Objective: 9.1
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 5 / None
6) Monroe Co. purchased a tract of land paying $100,000 in cash and assuming an existing mortgage of $60,000. The municipal tax bill disclosed an assessed valuation of $140,000. The amount Monroe should record as land connected with this acquisition is:
A) $100,000.
B) $160,000.
C) $180,000.
D) $200,000.
Rio Grande Company purchased equipment on January 1, 2017 for $75,000. $100,000 + $60,000 = $160,000
Diff: Medium
Learning Objective: 9.2
Bloom's: Analysis
AACSB/AICPA: Critical Thinking / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 6 / None
7) The process of allocating the cost of plant and equipment over the time period in which they are used is referred to as:
A) depreciation.
B) depletion.
C) amortization.
D) deferred costs.
Diff: Easy
Learning Objective: 9.1
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 7 / None
8) The process of expensing the cost of a gold mine as gold is removed from the ground is referred to as:
A) amortization.
B) depletion.
C) depreciation.
D) decomposition.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 8 / None
9) The process of expensing the cost of patents over an extended period of years is referred to as:
A) classification.
B) depletion.
C) depreciation.
D) amortization.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 9 / None
10) Accumulated depreciation is an account which:
A) adjusts plant and equipment so that its balance sheet value approximates its replacement cost.
B) is a long-term liability.
C) is equal to total depreciation expense recorded and is subtracted from the total plant and equipment account on the balance sheet.
D) reduces intangible assets.
Diff: Easy
Learning Objective: 9.1
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 10 / None
11) An increase in accumulated depreciation:
A) increases total assets.
B) decreases total assets.
C) decreases the current ratio.
D) increases the quick ratio.
Diff: Medium
Learning Objective: 9.1
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement, Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 11 / None
12) During extended periods of rising prices of plant and equipment, the amount required to replace long-lived assets is typically:
A) less than total accumulated depreciation of those assets.
B) equal to the sum of all the depreciation recognized on those assets.
C) less than the balance sheet value of those assets.
D) greater than the sum of total depreciation expense recognized on those assets.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement, Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 12 / None
13) On January 1, a company purchased land at a discount for $270,000. At the time of purchase, the fair market values of the land was $290,000. The gain from the purchase of the land is:
A) $0.
B) $20,000.
C) $270,000.
D) $290,000.
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 13 / None
14) Equipment with a cost of $22,000 and accumulated depreciation of $15,000 was sold at a gain of $1,000. The cash received from the disposition of equipment is:
A) $7,000.
B) $8,000.
C) $6,000.
D) $14,000.
Explanation: ($22,000 - $15,000) + $1,000 = $8,000
Diff: Medium
Learning Objective: 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 14 / None
15) Moss Company purchased a building costing $800,000 on January 1, 2020. Moss is depreciating the building over 80 years using the straight-line method with no salvage value. The economic life of the building is expected to be 40 years. As a result of Moss's accounting over-estimate of the building's life, its 2020:
A) earnings per share is understated and debt/equity ratio is overstated.
B) earnings per share is understated and debt/equity ratio is understated.
C) earnings per share is overstated and debt/equity ratio is overstated.
D) earnings per share is overstated and debt/equity ratio is understated.
Diff: Hard
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 15 / None
16) The Favre Company made the following expenditures related to its building:
Annual repainting of exterior | $ 1,700 |
Replacement of old fiberglass shingles with a fireproof tile roof | 33,000 |
Major improvements to electrical system required to run new machinery | 18,000 |
The amount of the preceding expenditures that should be immediately expensed is:
A) $0.
B) $1,700.
C) $34,700.
D) $19,700.
Diff: Medium
Learning Objective: 9.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 16 / None
17) Depreciation is an expense that does not use cash during the period in which it is recognized. When does the cash outflow associated with the asset occur?
A) When the asset is retired
B) There is no cash outflow associated with depreciation or the asset.
C) When the replacement cost of the asset increases
D) When the cash payments for the acquisition of the asset occur
Diff: Medium
Learning Objective: 9.1; 9.2
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 17 / None
18) The balance in accumulated depreciation on January 1 and December 31 is $15,000 and $19,000, respectively, during a year in which no assets were disposed. Depreciation expense during the year is:
A) $19,000.
B) $15,000.
C) $4,000.
D) $34,000.
Explanation: $19,000 - $15,000 = $4,000
Diff: Medium
Learning Objective: 9.1; 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 18 / None
19) On January 1, Comicon Corp. purchased land with a usable building on it for $300,000. The total purchase cost was allocated as $120,000 (land) and $180,000 (building). Comicon's depreciation method is straight-line and assumes a 20-year useful life with an expected $24,000 salvage value. The annual depreciation expense on the building is:
A) $0.
B) $5,000.
C) $7,800.
D) $10,800.
Explanation: ($180,000 - $24,000) / 20 = $7,800
Diff: Medium
Learning Objective: 9.2; 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 19 / None
20) On January 1, Scion Co. purchased land with a usable building on it for $210,000. The allocated cost of the land and building were $70,000 and $140,000, respectively. Scion erroneously assigned the entire purchase cost of $210,000 to land. Scion should depreciate the building using the straight-line method over 20 years with an expected zero salvage value. As a result of Scion's treatment of the purchase of land and building, its current net income is:
A) understated by $10,500.
B) understated by $7,000.
C) overstated by $7,000.
D) overstated by $10,500.
Explanation: Overstated by lack of depreciation expense ($140,000 / 20 = $7,000)
Diff: Hard
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 20 / None
21) The balance in accumulated depreciation on January 1 and December 31 is $12,000 and $9,000, respectively, during a year in which an asset with a cost of $4,000 and net book value of $0 was retired. Depreciation expense for the current year is:
A) $9,000.
B) $3,000.
C) $1,000.
D) $7,000.
Explanation: $9,000 - ($12,000 - $4,000) = $1,000
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 21 / None
22) Which one of the following depreciation methods will typically result in the smallest amount of current taxes paid during the early periods of an asset's life?
A) 150% declining balance method.
B) Units of production method.
C) Double-declining-balance method.
D) Straight-line method.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 22 / None
23) Which one of the following depreciation methods will typically result in the smallest earnings per share during the early periods of an asset's life?
A) 150% declining balance method.
B) Units of production method.
C) Double-declining-balance method.
D) Straight-line method.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 23 / None
24) Sandeep Inc. uses double-declining-balance depreciation for an asset with a 4-year life expectancy and no salvage value. Depreciation expense for the second year of the asset's life is calculated by:
A) [2 × Book Value]/4.
B) [2 × (Cost - Salvage Value]/4.
C) [(2 × Book Value)/4] - Accumulated Depreciation.
D) [2 × Cost]/4.
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 24 / None
25) Kristin, Inc. depreciates its plant assets over a 10-year life with a 10% salvage value. Using straight-line depreciation, which calculation will Kristin use during year 2 of the asset's life?
A) 10% × (Cost - Salvage Value)
B) (Cost - Salvage Value)/10 × 10%
C) Book Value × 10%
D) Book Value × [10% - Salvage Value]
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 25 / None
26) Forgetting to record depreciation expense:
A) understates the debt/equity ratio.
B) understates the current ratio.
C) overstates the debt/equity ratio.
D) overstates the current ratio.
Diff: Medium
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 26 / None
27) If the straight-line method of depreciation of an asset with a 5-year life expectancy and no salvage value is used, then the percentage of cost that is recognized as depreciation expense for the first two years of the asset's life is, respectively:
A) 25% and 25%.
B) 40% and 20%.
C) 40% and 40%.
D) 20% and 20%.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 27 / None
28) On January 1, 2020, Lane Company made a $12,000 expenditure on a fully depreciated machine. The expenditure increased the expected life of the new machine for two years until December 31, 2021. Lane uses straight-line depreciation with no salvage value. However, Lane erroneously expensed this capital expenditure. As a result of this error:
A) 2020 income is overstated by $3,000 and 2021 income is understated by $3,000.
B) 2020 income is understated by $6,000 and 2021 income is overstated by $6,000.
C) 2020 income is understated by $6,000 and 2021 income is overstated by $3,000.
D) 2020 income is understated by $6,000 and 2021 income is correctly stated.
Explanation: 2020 understatement and 2021 overstatement = $12,000 - ($12,000 / 2) = $6,000
Diff: Hard
Learning Objective: 9.3; 9.4
Bloom's: Analysis
AACSB/AICPA: None / BB: None; FC: Measurement, Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 28 / None
29) A machine was purchased on January 1 for $50,000. The machine has an estimated useful life of 10 years with a salvage value of $2,000. Under the double-declining-balance, depreciation expense for each of the first two years is, respectively:
A) $12,000 and $12,000.
B) $10,000 and $8,000.
C) $12,000 and $9,500.
D) $12,500 and $12,500.
Explanation: $10,000 = $50,000 × 2/10 and $8,000 = ($50,000 − $10,000) × 2/10
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 29 / None
30) A machine was purchased on January 1 for $100,000. The machine has an estimated useful life of 5 years with a salvage value of $10,000. Under the double-declining-balance method, depreciation expense for each of the first two years is, respectively:
A) $45,000 and $22,500.
B) $40,000 and $24,000.
C) $45,000 and $ 27,500.
D) $22,500 and $ 22,500.
Explanation: $40,000 = 2/5 × $100,000 and $24,000 = 2/5 × ($100,000 - $40,000)
Diff: Medium
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 30 / None
31) Failure to record depreciation expense during a year:
A) understates net income.
B) overstates total assets.
C) overstates total debt.
D) overstates contributed capital.
Diff: Hard
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 31 / None
32) A machine was purchased on January 1 for $100,000. The machine has an estimated useful life of 4 years with a salvage value of $20,000. Under the straight-line method, accumulated depreciation at the end of year 2 is:
A) $25,000
B) $22,500
C) $50,000
D) $40,000
Explanation: $40,000 = [($100,000 − $20,000)/4] × 2
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 32 / None
33) Natural resource costs:
A) include rights, privileges, and benefits of an economic resource that have no physical existence.
B) are depreciated.
C) include the cost of the equipment used to extract the natural resource.
D) include the cost of acquiring the rights to extract natural resources.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 33 / None
34) A machine was purchased on January 1 for $100,000. The machine has an estimated useful life of 5 years with a salvage value of $20,000. Under the straight-line method, the book value and the accumulated depreciation of the machine at the end of year two is respectively:
A) $60,000 and $40,000
B) $68,000 and $32,000
C) $40,000 and $60,000
D) $48,000 and $32,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement, Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 34 / None
35) Which one of the following will impact the amount of depreciation expensed throughout the life of plant assets?
A) The amount of capitalized cost.
B) Maintenance costs throughout the asset's useful life.
C) The expected cost of a replacement asset.
D) The current market value.
Diff: Easy
Learning Objective: 9.2; 9.3; 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 35 / None
36) Which one of the costs below should be included as part of the cost of land?
A) Razing an old building.
B) Cost of a permit to construct a building at the site.
C) Cost of driveways.
D) Shrubs and trees with limited lives.
Diff: Easy
Learning Objective: 9.2
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 36 / None
37) When companies construct their own long-lived assets, all costs required to get the asset into operating condition must be:
A) expensed immediately.
B) included in the long-lived asset's cost and subject to depreciation.
C) recognized as a maintenance cost.
D) treated as a cost necessary to maintain the plant asset's current level of productivity.
Diff: Easy
Learning Objective: 9.2
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 37 / None
38) Salvage value is:
A) a method of depreciating plant assets.
B) the dollar amount that can be recovered when the asset is sold, traded, or scrapped.
C) an asset's current estimated market value.
D) a physical obsolescence condition.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 38 / None
39) Which one of the following is not one of the questions asked when accounting for long-lived assets?
A) Over what period of time should this cost be allocated?
B) What dollar amount should be included in the capitalized cost of the long-lived asset?
C) At what rate should this cost be allocated?
D) How much will a replacement asset cost?
Diff: Medium
Learning Objective: 9.1
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 39 / None
40) Which of the following is the least problematic factor to determine when preparing to calculate depreciation?
A) Useful life
B) Estimated salvage value
C) Technical obsolescence
D) Replacement cost of the asset
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 40 / None
41) Once a company establishes that an estimated useful life of a plant asset has changed significantly:
A) the plant asset must be disposed.
B) the change must be made for the current and future years.
C) a correcting journal entry must be made.
D) the previous year's financial statements must be corrected.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 41 / None
42) The calculation of a 'depreciation base' requires subtracting:
A) the salvage value from the asset's book value.
B) the asset's book value from its original cost.
C) the asset's salvage value from its capitalized cost.
D) accumulated depreciation from the asset's original cost.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 42 / None
43) The units of production method of depreciation:
A) allocates the cost of the long-lived asset based on an activity.
B) allocates an equal amount of plant asset cost to each accounting period.
C) is an accelerated method.
D) is used when an asset has no salvage value.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: Critical None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 43 / None
44) During 2020, Erie Inc. developed a new process for packaging products. Erie paid its employees $450,000 over the past five years in creating this process. On January 1, 2020, Erie paid $12,000 to register the packaging patent. The company believes the patent will produce profits for 10 years. The patent has a 20-year legal life. How much amortization expense should be recognized during 2020?
A) $27,118
B) $46,200
C) $1,200
D) $647
Explanation: $12,000/10
Diff: Medium
Learning Objective: 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 44 / None
45) One primary reason management may choose a particular depreciation method is:
A) to save cash for the replacement of the plant asset.
B) to avoid violation of debt covenants tied to net income.
C) to decrease the cash flows of the company.
D) to hide judgment errors that managers have made during the accounting period.
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 45 / None
46) Once a plant asset becomes fully depreciated, the:
A) asset may no longer be used.
B) asset may still be used.
C) asset should be retired.
D) cost of the asset must be removed from the accounting records.
Diff: Easy
Learning Objective: 9.5
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 46 / None
47) When a plant asset is sold, its original cost and its:
A) market value must be removed from the accounting records.
B) accumulated depreciation must be removed from the accounting records.
C) salvage value must be expensed immediately.
D) related maintenance costs must be transferred to the income statement immediately.
Diff: Easy
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 47 / None
48) When a plant asset is traded in for a dissimilar asset, the valuation of the new plant asset should be:
A) at the original cost of the old asset.
B) at the fair market value of the asset given up, or the asset received, whichever is more clearly evident.
C) at the replacement cost of the old asset.
D) at the value at which the new asset received was carried in the accounting records of the manufacturer.
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 48 / None
49) Intangible assets differ from plant assets in that they:
A) are consumed in the current accounting period.
B) include prepaid expenses that extend beyond the current accounting period.
C) have no physical existence.
D) are matched against the revenue in the period the related revenue is recognized.
Diff: Easy
Learning Objective: 9.5
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 49 / None
50) Which one of the following costs would be capitalized as an 'organizational cost'?
A) Goodwill
B) Underwriting a company's first stock issuance
C) Copyrights
D) None of the above would be capitalized
Diff: Medium
Learning Objective: 9.5
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 50 / None
51) Jeter Inc. acquired machinery on January 1, 2015 at a cost of $55,000. The machinery was depreciated over five years using the straight line method and a salvage value of $2,000. In early 2020 the machinery was sold for $3,000. The income statement for 2020 will reflect which of the following?
A) Gain of $1,000
B) Gain of $3,000
C) Loss of $52,000
D) No gain or loss
Explanation: $3,000 - ($55,000 - $53,000) = $1,000
Diff: Medium
Learning Objective: 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 51 / None
52) On December 1, Douglas Corp. purchased a tract of land for $285,000 to be used as a factory site. An old unusable building on the land was razed (torn down), and the salvaged materials from the demolition were sold. These cash expenditures and receipts and other costs incurred during December are as follows:
Demolition of old building | $51,000 |
Proceeds from sale of salvaged materials | 8,000 |
Legal fees to transfer land title | 7,000 |
Title guarantee insurance | 2,500 |
What would be the balance in Douglas's Land account on its December 31 balance sheet?
A) $285,000
B) $337,500
C) $340,500
D) $331,000
Explanation: $285,000 + $51,000 - $8,000 + $7,000 + $2,500 = $337,500
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 52 / None
53) On January 1, Eagle Co. paid $65,000 for a new truck. It was estimated that the truck would be driven 300,000 miles during the next 5 years, at which time it would have a salvage value of $10,000. At the end of the first and second years, the odometer registered 55,000 and 115,000 miles, respectively. What is the book value of the truck using straight-line depreciation at the end of the second year?
A) $47,000
B) $43,000
C) $43,533
D) $56,000
Explanation: Depreciation expense = ($65,000 - $10,000) / 5 years = $11,000 per year
Cost $65,000
Less accumulated depreciation (22,000)
Book value $43,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 53 / None
54) On July 31, 2020, equipment is purchased for $66,000 with a 4-year life expectancy and salvage value of $5,000. If the double-declining-balance method is used, calculate depreciation expense for the year ending December 31, 2020.
A) $13,750
B) $12,708
C) $33,000
D) $31,000
Explanation: ($66,000 × (2/4) × (5/12) = $13,750
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 54 / None
55) On February 1, 2016, James Co., which uses straight-line depreciation, purchased equipment for $88,000 with a useful life of 12 years and $4,000 salvage value. On February 1, 2020, the equipment was sold for $56,000. Which of the following would James recognize as a result of this disposition?
A) $7,000 loss
B) $4,000 loss
C) $4,000 gain
D) No gain or loss
Explanation: Expense = ($88,000 - $4,000)/12 × 4 years = $28,000
Loss = $56,000 - [$88,000 - $28,000] = $4,000
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 55 / None
56) On January 1, Mondale Co. paid $92,000 for a new truck. It was estimated that the truck would be driven 200,000 miles during the next 8 years, at which time it would have a salvage value of $7,000. At the end of the first three years, the odometer registered 27,000, 53,000, and 78,000 miles, respectively. What is the book value of the truck using the activity method of depreciation at the end of the third year?
A) $67,150
B) $24,850
C) $51,850
D) $58,850
Explanation: Accumulated depreciation expense = ($92,000 - $7,000) × (158,000 / 200,000) = $67,150
Cost $ 92,000
Less accumulated depreciation (67,150)
Book value $ 24,850
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 56 / None
57) The following items represent common post-acquisition expenditures incurred on equipment.
A. An overhaul to increase useful life of the equipment
B. Replacement of muffler
C. Lubrication service
D. Costs of redesign to increase output
A) A only
B) A, B, and D
C) A and D
D) A and B
Diff: Medium
Learning Objective: 9.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 57 / None
58) Which of the following items represent common post acquisition expenditures incurred on equipment.
A. Replacement of defective parts
B. Rewiring costs to increase operating speed
C. Painting costs
D. Reconstruction of the major circuitry of the equipment to extend its life
A) A and C
B) C only
C) A, B, and C
D) A, C, and D
Diff: Medium
Learning Objective: 9.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 58 / None
59) Rio Grande Company purchased equipment on January 1, 2017 for $75,000. The estimated useful life of the equipment is 5 years, the salvage value is $10,000, and the company uses the double-declining balance method to depreciate fixed assets. Which of the following journal entries would Rio Grande record if the equipment is scrapped after three years?
A)
Equipment 75,000
Gain on Disposal of Plant Asset 16,200
Accumulated Depreciation–Equipment 58,800
B)
Accumulated Depreciation–Equipment 58,800
Loss on Disposal of Plant Asset 16,200
Equipment 75,000
C)
Accumulated Depreciation–Equipment 58,800
Cash 16,200
Equipment 75,000
D)
Depreciation Expense 58,800
Loss on Disposal of Plant Asset 16,200
Equipment 75,000
Explanation: Assuming that Rio Grande Company kept the equipment for its entire five-year estimated useful life, the depreciation schedule on the equipment would be as follows.
Date | Depreciation Factor | Depreciation Expense | Cost | Accumulated Depreciation | Book Value |
1/1/17 | $75,000 | $ 0 | $75,000 | ||
12/31/17 | 40% | $30,000 | 75,000 | 30,000 | 45,000 |
12/31/18 | 40% | 18,000 | 75,000 | 48,000 | 27,000 |
12/31/19 | 40% | 10,800 | 75,000 | 58,800 | 16,200 |
12/31/20 | 40% | 6,200* | 75,000 | 65,000 | 10,000 |
12/31/21 | 40% | 0 | 75,000 | 65,000 | 10,000 |
__________________
* Because the equipment's book value can't drop below its estimated salvage value, depreciation expense for 2020 can't exceed $6,200.
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 59 / None
60) Rio Grande Company purchased equipment on January 1, 2017 for $75,000. The estimated useful life of the equipment is 5 years, the salvage value is $10,000, and the company uses the double-declining balance method to depreciate fixed assets. How much depreciation would Rio Grande record for the fourth year of the equipment's use?
A) $6,480
B) $6,200
C) $5,616
D) $6,000
Explanation: Assuming that Rio Grande Company kept the equipment for its entire five-year estimated useful life, the depreciation schedule on the equipment would be as follows.
Date | Depreciation Factor | Depreciation Expense | Cost | Accumulated Depreciation | Book Value |
1/1/17 | $75,000 | $ 0 | $75,000 | ||
12/31/17 | 40% | $30,000 | 75,000 | 30,000 | 45,000 |
12/31/18 | 40% | 18,000 | 75,000 | 48,000 | 27,000 |
12/31/19 | 40% | 10,800 | 75,000 | 58,800 | 16,200 |
12/31/20 | 40% | 6,200* | 75,000 | 65,000 | 10,000 |
12/31/21 | 40% | 0 | 75,000 | 65,000 | 10,000 |
__________________
* Because the equipment's book value can't drop below its estimated salvage value, depreciation expense for 2020 can't exceed $6,200.
Diff: Hard
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement, Reporting
TOT: 4 min.
Title/Media Ref.: Multiple Choice Question 60 / None
61) Rio Grande Company purchased equipment on January 1, 2017 for $75,000. The estimated useful life of the equipment is 5 years, the salvage value is $10,000, and the company uses the double-declining balance method to depreciate fixed assets. Which of the following journal entries would Rio Grande record if the equipment is scrapped after five years?
A)
Equipment 75,000
Gain on Disposal of Plant Asset 10,000
Accumulated Depreciation–Equipment 65,000
B)
Accumulated Depreciation–Equipment 75,000
Equipment 75,000
C)
Accumulated Depreciation–Equipment 65,000
Loss on Disposal of Plant Asset 10,000
Equipment 75,000
D)
Depreciation Expense 65,000
Loss on Disposal of Plant Asset 10,000
Equipment 75,000
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 61 / None
62) Rio Grande Company purchased equipment on January 1, 2017 for $75,000. The estimated useful life of the equipment is 5 years, the salvage value is $10,000, and the company uses the double-declining balance method to depreciate fixed assets. Which of the following journal entries would Rio Grande record if the equipment is sold for $17,000 after three years?
A)
Equipment 75,000
Loss on Disposal of Plant Asset 800
Cash 17,000
Accumulated Depreciation–Equipment 58,800
B)
Cash 17,000
Gain on Disposal of Plant Asset 6,200
Equipment 10,800
C)
Cash 17,000
Depreciation Expense 10,800
Loss on Disposal of Plant Asset 47,200
Equipment 75,000
D)
Cash 17,000
Accumulated Depreciation–Equipment 58,800
Equipment 75,000
Gain on Disposal of Plant Asset 800
Explanation: Assuming that Rio Grande Company kept the equipment for its entire five-year estimated useful life, the depreciation schedule on the equipment would be as follows.
Date | Depreciation Factor | Depreciation Expense | Cost | Accumulated Depreciation | Book Value |
1/1/17 | $75,000 | $ 0 | $75,000 | ||
12/31/17 | 40% | $30,000 | 75,000 | 30,000 | 45,000 |
12/31/18 | 40% | 18,000 | 75,000 | 48,000 | 27,000 |
12/31/19 | 40% | 10,800 | 75,000 | 58,800 | 16,200 |
12/31/20 | 40% | 6,200* | 75,000 | 65,000 | 10,000 |
12/31/21 | 40% | 0 | 75,000 | 65,000 | 10,000 |
__________________
* Because the equipment's book value can't drop below its estimated salvage value, depreciation expense for 2020 can't exceed $6,200.
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 62 / None
63) Rio Grande Company purchased equipment on January 1, 2017 for $75,000. The estimated useful life of the equipment is 5 years, the salvage value is $10,000, and the company uses the double-declining balance method to depreciate fixed assets. Which of the following would be included in the journal entry that Rio Grande would record at the end of the fifth year, if the equipment and $19,000 cash are traded for a dissimilar fixed asset with a FMV of $25,000?
A) A credit to Fixed Assets for $25,000.
B) A credit to Equipment for $10,000.
C) A credit to Gain on Disposal of Plant Assets for $4,000.
D) A debit to Loss on Disposal of Plant Assets for $4,000.
Explanation: The entry is
Loss on Disposal of Plant Assets 4,000
Equipment 25,000
Accumulated Depreciation — Equipment 65,000
Equipment 75,000
Cash 19,000
Diff: Medium
Learning Objective: 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 63 / None
Matching Questions
64) For each account listed in 1 through 12 below, identify which reporting section (a through d) each would appear on a company's financial statements. You may use each letter more than once or not at all.
Reporting Sections of Financial Statements
a. Balance sheet–property, plant, and equipment
b. Balance sheet–intangible assets
c. Balance sheet–other
d. Income statement
_______ 1. Depreciation expense
_______ 2. Accumulated depreciation
_______ 3. Betterments
_______ 4. Oil reserve
_______ 5. Land
_______ 6. Organizational costs
_______ 7. Amortization expense
_______ 8. Total amortization since inception
_______ 9. Gain on disposal of plant assets
_______ 10. Copyright
_______ 11. Patents
_______ 12. Goodwill
1. d
2. a
3. a
4. c or a
5. a
6. d
7. d
8. b
9. d
10. b
11. b
12. b
Diff: Easy
Learning Objective: 9.1; 9.3; 9.4; 9.5
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 5 min.
Title/Media Ref.: Matching Question 1 / None
65) For each transaction numbered 1 through 6 below, identify its effects on the accounting equation by selecting from the effects listed in a through f. You may use each letter more than once or not at all.
Accounting Effects
a. - A and - SE (Retained Earnings)
b. + A and + SE (Retained Earnings)
c. - A and - L
d. - A and - SE (Contributed Capital)
e. + A and + L
f. No change in total A, L, or SE
_______ 1. Equipment is purchased by incurring a long-term mortgage payable and paying the balance in cash
_______ 2. Paid for transportation of equipment shipped from the vendor to our plant
_______ 3. Paid for speeding ticket received while transporting the equipment to the manufacturing plant
_______ 4. Depreciated the equipment during the first year of use
_______ 5. Paid for lubrication and periodic tune ups of the equipment
_______ 6. Sold the equipment, receiving more money than its book value
1. e
2. f
3. a
4. a
5. a
6. b
Diff: Easy
Learning Objective: 9.2; 9.3; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Matching Question 2 / None
66) For each transaction numbered 1 through 5 below, identify in which account listed in a through d it would be reported. You may use each letter more than once or not at all.
Accounts
a. Land
b. Buildings
c. Equipment
d. Not capitalized
_______ 1. Freight charges related to the acquisition costs of a production machine
_______ 2. Interest costs incurred during the construction period of a building built by a company for its own use
_______ 3. Costs paid to clear land
_______ 4. Annual painting costs of an office building
_______ 5. Sales taxes paid related to a machine purchased
1. c
2. b
3. a
4. d
Diff: Easy
Learning Objective: 9.2; 9.3
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Matching Question 3 / None
67) For each cost that appears in items 1 through 6 below, select the account in which it would be included and reported from those listed in a through c. You may use more than one answer for each cost. If the cost is not capitalized, place an 'X' in the space provided.
Accounts
a. Land
b. Buildings
c. Equipment
_______ 1. Installation costs of a special attachment to newly acquired equipment
_______ 2. Freight costs for shipping the equipment into our manufacturing facility
_______ 3. Costs of repairing a hole knocked in the wall during installation of new equipment
_______ 4. Interest costs on a mortgage loan used to purchase a newly acquired building
_______ 5. Property taxes paid on land for the current year on which a new building was erected
_______ 6. Annual maintenance expenditures on equipment
1. c
2. c
3. X
4. X
5. X
6. X
Diff: Easy
Learning Objective: 9.2; 9.3
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Matching Question 4 / None
68) Select the method of depreciation listed in a through c that is best for each purpose listed in items 1 through 4.
Methods
a. Straight-line
b. Units-of-production
c. Double-declining-balance
_______ 1. Creates the largest net income in the early years of life
_______ 2. The best at matching the use of the asset with the benefit it creates
_______ 3. Creates the smallest taxable income in the early years of life
_______ 4. More extreme accelerated method than sum-of-the-years' digits
1. a
2. b
3. c
4. c
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Matching Question 5 / None
69) For each transaction numbered 1 through 5 below, identify which effect(s) (a through d) that each transaction would have on the current and debt/equity ratios. You may use each letter more than once or not at all. Some transactions have two answers.
Effects
a. Slows down asset turnover
b. Speeds up asset turnover
c. Decreases capital structure leverage
d. Increases capital structure leverage
_______ 1. Equipment is purchased by incurring a long-term note payable and paying the balance in cash
_______ 2. Paid for transportation of equipment shipped from a supplier
_______ 3. Depreciated the equipment during the first year of use
_______ 4. Paid for lubrication and periodic maintenance of the equipment
_______ 5. Retired a partially-depreciated piece of equipment
1. a, d
2. a, d
3. b, d
4. d
5. b, d
Diff: Easy
Learning Objective: 9.2; 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: None / BB: None; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Matching Question 6 / None
70) For each transaction numbered 1 through 6 below, identify which accounting treatment—capitalized or expensed—should be used to properly account for the transactions. You may use each letter more than once or not at all.
Accounting Treatments
E. Expensed immediately
C. Capitalized as part of the cost of the new asset
_______ 1. Freight costs on production equipment in transit
_______ 2. Sales tax on equipment purchase
_______ 3. Damage during installation and repair costs
_______ 4. Interest paid on construction loan during the building period
_______ 5. Survey costs by contractor
_______ 6. Construction insurance to cover theft or vandalism during building
1. C
2. C
3. E
4. C
5. C
6. C
Diff: Easy
Learning Objective: 9.2; 9.3
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Matching Question 7 / None
Short Problems
71) Lincoln Co. purchased a piece of property (land and building) at a tax sale for $110,000. A reliable estimate of the fair market value of the land and building is $114,000. What is the gain that Lincoln Co. should record from this advantageous purchase?
Diff: Easy
Learning Objective: 9.2
Bloom's: Comprehension
AACSB/AICPA: None / BB: None; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 1 / None
72) On December 1, Dominican Corp. purchased a tract of land for $325,000 to be used as a factory site. An old unusable building on the land was razed (torn down), and the salvaged materials from the demolition were sold. These cash expenditures and receipts and other costs incurred during December are as follows:
Demolition of old building $11,000
Proceeds from sale of salvaged materials 5,000
Legal fees to transfer land title 3,000
Title guarantee insurance 1,000
Calculate the balance in Dominican's Land account on its December 31 balance sheet.
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 2 / None
73) Apple Inc. purchased a used pickup truck with an advertised price of $18,900 for $17,000 cash. While Jeff, the CEO, was driving the truck to get supplies, he was stopped by a highway patrol woman and received a $50 speeding ticket and a warning for a nonfunctioning brake light. Jeff had failed to notice this problem when he purchased the truck. If Jeff knew about the brake light condition, he would have paid only $16,500 for the car. The cost, not under warranty, of replacing the brake light was $50. Calculate the cost to be capitalized to the truck account.
Diff: Easy
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 3 / None
74) Arnez Company purchased a building and equipment for $110,000. Although a reliable market value of the building could not be determined, the equipment's market value is $70,000. What are the separate costs assigned to the building and equipment?
Diff: Easy
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement, Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 4 / None
75) On January 1, Hampton Company paid $48,000 for a new delivery truck. It was estimated that the truck would be driven 100,000 miles during the next 5 years, at which time it would have a salvage value of $3,000. During the first and second years, the truck was driven 22,000 and 18,000 miles, respectively. How much is accumulated depreciation using the activity (miles driven) method at the end of year 2?
Year 1: $0.45 × 22,000 = $9,900
Year 2: $0.45 × 18,000 = $8,100
Accumulated depreciation = $9,900 + $8,100 = $18,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 5 / None
76) On January 1, 2020, Blackwell Company paid $90,000 for a new delivery truck. It was estimated that the truck would be driven 300,000 miles during the next 6 years, at which time it would have a salvage value of $9,000. At the end of the second year, the odometer registered 88,000 miles. Show how the plant asset would appear in Blackwell Company's balance sheet at December 31, 2021 assuming the company uses the activity method depreciation.
Balance Sheet
Delivery Truck $90,000
Less accumulated depreciation: ($0.27 × 88,000 miles) (23,760)
Book value $66,240
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 6 / None
77) Harvey Ltd. purchased land in exchange for 50,000 shares of its stock that is trading on the New York Stock Exchange at $20 a share. Although the market value of the land is unknown, the current assessed value is $900,000. What is the cost of the land?
Diff: Medium
Learning Objective: 9.2; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement, Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 7 / None
78) On January 1, Bisbee Co. paid $80,000 for a new truck. It was estimated that the truck would be driven 400,000 miles during the next 8 years, at which time it would have a salvage value of $8,000. At the end of the first and second years, the odometer registered 45,000 and 97,000 miles, respectively. Calculate the book value of the truck using straight-line depreciation at the end of the second year.
Cost $80,000
Less accumulated depreciation (18,000)
Book value $62,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 8 / None
79) On January 1, Marriott Company paid $80,000 for a copy machine. It was estimated that the machine would produce 200,000 copies over the next 8 years, at which time it would have a salvage value of $8,000. During the first and second years, the copies totaled 24,000 and 51,000, respectively. Calculate accumulated depreciation using the double-declining-balance method at the end of year two.
Year 1: [(2 × $80,000)/8] = $20,000
Year 2: [(2 × ($80,000 - $20,000))/8] = $15,000
Accumulated depreciation = $20,000 + $15,000 = $35,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 9 / None
80) On January 1, Weston Company paid $88,000 for a copy machine. It was estimated that the machine would produce 1,000,000 copies over the next 8 years, at which time it would have a salvage value of $8,000. During the first and second years, the copies totaled 180,000 and 300,000, respectively. Calculate depreciation expense using the activity method for each of the first two years.
Year 1: [(180,000/1,000,000) × $80,000] = $14,400
Year 2: [(300,000/1,000,000) × $80,000] = $24,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 10 / None
81) On January 1, equipment is purchased for $55,000 with an 8-year life expectancy and salvage value of $5,000. If the double-declining-balance method is used, calculate the book value of the equipment at the end of year 2.
Cost $55,000
Year 1 = ($55,000 × 2/8) = $13,750
Year 2 = ($41,250 × 2/8) = 10,313
Total accumulated depreciation (24,063)
Book value $30,937
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 11 / None
82) On January 1, equipment is purchased for $40,000 with a 20-year life expectancy and salvage value of $4,000. If the double-declining-balance method is used, how much depreciation expense is recorded for the first year?
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 12 / None
83) On September 30, 2020, equipment is purchased for $50,000 with a 4-year life expectancy and salvage value of $2,000. If the straight-line method is used, calculate depreciation expense for the year ending December 31, 2020.
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 13 / None
84) Zack Co. incurred the following costs related to equipment during November 2020.
1. Purchased equipment with a list price of $90,000 for $87,300.
2. Had the equipment installed and paid the installer $2,000.
3. Paid the freight bill for delivery of the equipment, $1,000.
4. Advertised a product that will be produced by the new equipment, $3,400.
5. Paid sales taxes of $3,800 on the purchase of the new equipment.
Calculate the cost of the equipment.
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 14 / None
85) Carson Co. purchased a printer for $10,000, for which it paid $1,000 a month for 10 months. Carson had the option of paying $9,500 cash for the printer but chose the delayed payment plan. It cost Carson $80 to transport the printer to its place of business and $200 for installing and initial timing adjustments to the printer. Calculate the cost of the printer.
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 15 / None
86) On January 1, Summers Co. purchased equipment with a 10-year life and zero salvage value for $900,000. Summers uses the straight-line method on its financial statements and double-declining-balance method on its income tax returns. By what amount does the tax deduction for depreciation exceed depreciation expense on Summers' income statements for each of the first two years?
Year 1: SL = $900,000/10 = $90,000; DDB = $900,000/10 × 2 = $180,000
Difference = $180,000 − $90,000 = $90,000
Year 2: SL = $900,000/10 = $90,000; DDB = ($900,000 − $180,000)/10 × 2 = $144,000
Difference = $144,000 − $90,000 = $54,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 16 / None
87) Farmdale Company's president purchased an extremely used automobile on November 1 by paying $2,000. He immediately had it towed to his mechanic who overhauled the auto in order to get the car ready to be safely driven. The cost of the tow was $40 and the initial overhaul was $1,500. While driving from his mechanic's garage, he ran over a nail that punctured a tire and cost $35 to repair. Calculate the cost of the auto.
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 17 / None
88) On April 1, Tarpon Co. made the following expenditures on its printing press:
Purchase of stapling attachment $8,000
Installation of attachment 2,000
Cleaning and oiling press costs prior to renovation 1,000
Replacement parts for renovation of printing press 1,000
Labor used in press renovation 3,000
The renovation increased the expected life and the attachment increased the productivity of the press. What are the total expenditures capitalized to the printing press?
Diff: Medium
Learning Objective: 9.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 18 / None
89) On April 1, 2016, Cardot Co., which uses straight-line depreciation, purchased equipment for $60,000 with a useful life of 7 years and $4,000 salvage value. On April 1, 2020, the equipment was sold for $30,000. What gain should Cardot recognize as a result of this disposition?
Gain = $30,000 - [$60,000 - $32,000] = $2,000
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 19 / None
90) Harrahs Corporation purchased a dump truck at the beginning of 2018 at a cost of $60,000. The truck had an estimated life of 5 years and an estimated salvage value of $5,000. On January 1, 2020, the company made major repairs of $3,000 to the truck that extended its life 2 more years. Starting with 2020, the truck has a remaining life of 5 years. The company uses the straight-line depreciation method.
How much is the book value of the truck to be reported on the balance sheet at the end of 2019?
Book value at 12-31-2019: $60,000 - $11,000 - $11,000 = $38,000
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 20 / None
91) Harrahs Corporation purchased a dump truck at the beginning of 2018 at a cost of $60,000. The truck had an estimated life of 5 years and an estimated salvage value of $5,000. On January 1, 2020, the company made major repairs of $3,000 to the truck that extended its life 2 more years. Starting with 2020, the truck has a remaining life of 5 years. The company uses the straight-line depreciation method.
What amount should be recorded as depreciation expense each year starting in 2020?
Book value at 12-31-2019: $60,000 - $11,000 - $11,000 = $38,000
2020 depreciation: ($38,000 + $3,000 - $5,000)/5 = $7,200
Diff: Medium
Learning Objective: 9.3; 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 21 / None
92) Harrahs Corporation purchased a dump truck at the beginning of 2018 at a cost of $60,000. The truck had an estimated life of 5 years and an estimated salvage value of $5,000. On January 1, 2020, the company made major repairs of $3,000 to the truck that extended its life 2 more years. Starting with 2020, the truck has a remaining life of 5 years. The company uses the straight-line depreciation method.
If Harrahs sells the truck at the end of 2020 for $20,000 cash, how much gain or loss would be recognized?
Book value at 12-31-2019: $60,000 - $11,000 - $11,000 = $38,000
2020 depreciation: ($38,000 + $3,000 - $5,000)/5 = $7,200
Accumulated depreciation at end of 2020 = $11,000 + $11,000 + $7,200 = $29,200
Loss on disposal: $20,000 - ($63,000 - $29,200) = ($13,800)
Diff: Medium
Learning Objective: 9.3; 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 22 / None
93) Calculate depreciation expense for each of the first two full years of life for an airplane with a cost of $600,000, salvage value of $40,000, and an estimated life of 4 years under the double-declining-balance depreciation method.
Year 1: $600,000 × 2/4 = $300,000
Year 2: ($600,000 - $300,000) × 2/4 = $150,000
Diff: Medium
Learning Objective: 9.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 23 / None
94) Courtney Corp. has significant stock that can be issued by the company. The managers are planning to sell the stock for more than its worth by fraudulently inflating the current year's reported earnings. To accomplish this plan, at the beginning of the year the company purchased equipment for $800,000 and included it in the land account. The equipment has an 4-year expected life, zero salvage and the company uses straight-line depreciation. What is the amount of Courtney's net income overstatement for the current year?
Diff: Medium
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 24 / None
95) Raymond Corporation is a new business that recycles consumption leftovers. The investors in Raymond's stock, expecting losses in the early stages of business, are impressed with its early net incomes resulting in the ballooning of its stock price to $32 a share. During the second year of operations, Raymond's reported net income of $1,300,000. However, a few months later, independent auditors reported existence of accounting irregularities concerned with the capitalization of $3 million dollars of expenditures to Raymond's land account that should have been expensed. What is the appropriately adjusted net income for the second year of operations?
Diff: Medium
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 25 / None
96) The balance in accumulated depreciation on January 1 and December 31 is $60,000 and $70,000, respectively, during a year in which an asset with a cost of $20,000 and net book value of $5,000 was sold for $3,000. Calculate the amount of depreciation expense for the current year.
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 26 / None
97) Laney Inc. and Monroe Company each ordered a new computer on January 1, 2020. The cost of each computer was $3,500. The economic life expectancy of each computer is three years with a $500 expected salvage value. During the current year Laney and Monroe experienced identical operating events with the only difference being that Laney used the straight-line depreciation method, while Monroe used the double-declining-balance depreciation method. Both became disenchanted with their computers during the year due to the introduction of a new generation of computers, and on December 31, 2020, each sold the computer for $800.
Calculate Laney's depreciation expense and loss (gain) from the disposal of the computer.
Loss from the disposal of the computer: $800 - ($3,500 - $1,000) = ($1,700)
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 27 / None
98) Laney Inc. and Monroe Company each ordered a new computer on January 1, 2020. The cost of each computer was $3,500. The economic life expectancy of each computer is three years with a $500 expected salvage value. During the current year Laney and Monroe experienced identical operating events with the only difference being that Laney used the straight-line depreciation method, while Monroe used the double-declining-balance depreciation method. Both became disenchanted with their computers during the year due to the introduction of a new generation of computers, and on December 31, 2020, each sold the computer for $800.
Calculate Monroe's depreciation expense and loss (gain) from the disposal of the computer.
Loss from the disposal of the computer: $800 - ($3,500 - 2,333) = ($367)
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 28 / None
99) Laney Inc. and Monroe Company each ordered a new computer on January 1, 2020. The cost of each computer was $3,500. The economic life expectancy of each computer is three years with a $500 expected salvage value. During the current year Laney and Monroe experienced identical operating events with the only difference being that Laney used the straight-line depreciation method, while Monroe used the double-declining-balance depreciation method. Both became disenchanted with their computers during the year due to the introduction of a new generation of computers, and on December 31, 2020, each sold the computer for $800.
Indicate how the current year's net income statements for Laney and Monroe would differ.
Laney:
Depreciation expense using the straight-line method = (1/3) × ($3,500 - $500) = $1,000
Loss from the disposal of the computer: $800 - ($3,500 - $1,000) = ($1,700)
Total income statement effect = ($1,000) + ($1,700) = ($2,700)
Monroe:
Depreciation expense: ($3,500 × 2/3) = $2,333
Loss from the disposal of the computer: $800 - ($3,500 - $2,333) = ($367)
Total income statement effect = ($2,333) + ($367) = ($2,700)
The bottom line net incomes for both companies would be the same. However, Laney has a $1,333 greater operating net income that is neutralized by a $1,333 greater loss from the disposal of the computer, which is included in other revenues and expenses.
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Problem 29 / None
100) Mondova Corporation began operations on January 1. Below is Mondova's current net income statement and December 31 balance sheet calculated using straight-line depreciation.
Income Statement
Sales revenue $20,000
Cost of goods sold 9,000
Gross profit 11,000
Depreciation (Note 1) 3,000
Net income $ 8,000
Balance Sheet
Current assets $44,000
Equipment $20,000
Accumulated depreciation 3,000 17,000
Total assets $61,000
Liabilities (all current) $45,000
Shareholders' equity 16,000
Total liabilities & shareholders' equity $61,000
Note 1: Equipment was purchased on January 1. Straight-line depreciation method was used with an estimated economic life of 5 years.
A. Determine the estimated salvage value of the equipment being depreciated using the straight-line method.
B. Prepare an income statement and balance sheet in the same format as presented above assuming that Mondova Corporation uses the double-declining-balance depreciation method. The equipment has an estimated economic life of 5 years.
C. Calculate and compare Mondova's December 31 current ratio, debt/equity ratio, and debt to assets ratio using the financial statements constructed using the straight-line and double-declining-balance methods of depreciation.
A. Straight-line depreciation expense = (1/life) × (cost - salvage)
$3,000 = 1/5 × ($20,000 - S.V.) Salvage value = $5,000
B.
DDB depreciation expense and accumulated depreciation = 2/5 × $20,000 = $8,000
Income Statement
Sales revenue $20,000
Cost of goods sold 9,000
Gross profit 11,000
Depreciation (Note 1) 8,000
Net income $ 3,000
Balance Sheet
Current assets $44,000
Equipment $20,000
Accumulated depreciation 8,000 12,000
Total assets $56,000
Liabilities (all current) $45,000
Shareholders' equity 11,000
Total liabilities & shareholders' equity $56,000
C.
Straight-line DDB
Current ratio 0.98 0.98
Debt/Equity 2.81 4.09
Debt/Assets 0.74 0.80
The current ratio is not affected by alternative depreciation methods used because the measure of current assets and current liabilities is not influenced by depreciation measurements. However, total assets and net income (retained earnings portion of shareholders' equity) are decreased when the double-declining-balance depreciation method is used instead of straight-line. Hence, the debt/assets and debt/equity ratios increased (deteriorated) when the accelerated depreciation method is applied during the early portion of the asset's life.
Diff: Hard
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 15 min.
Title/Media Ref.: Short Problem 30 / None
101) Several years ago, Welch Company purchased a copyright, which it amortizes on a straight-line basis over its estimated useful life. The company's balance sheets follow at December 31, 2020, and 2019:
December 31, December 31,
(In thousands) 2020 2019
Copyright, less accumulated amortization of $15,000
(2019) and $18,000 (2020) $132,000 $135,000
A. How much amortization expense did Welch record during 2020?
B. Calculate the original cost of the patent.
C. As of December 31, 2020, over how many years has Welch amortized the copyright?
A. $135,000 - $132,000 = $3,000
B. $15,000 + $135,000 = $150,000
C. $18,000 / $3,000 = 6 years
Diff: Medium
Learning Objective: 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 5 min.
Title/Media Ref.: Short Problem 31 / None
102) On January 1, the balance in accumulated depreciation is $28,000. During the current year, depreciation expense is $10,000 and equipment with a cost of $9,000 was sold for $3,000 at a loss of $1,000. Calculate the December 31 balance in accumulated depreciation.
Diff: Medium
Learning Objective: 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 32 / None
103) The balance of accumulated depreciation on January 1 and December 31, 2020 is $54,000 and $58,000, respectively. During 2020, depreciation expense is $18,000, and equipment with a cost of $20,000 is sold for $4,000. Calculate the loss or gain from the sale of equipment.
$20,000 - $14,000 - $4,000 = $2,000 loss
Diff: Medium
Learning Objective: 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: None; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 33 / None
Short Essay Questions
104) Dorman Company purchased a new web server on January 1. The following information and expenditures related to this acquisition were made:
List price $5,000
Cash price paid 4,200
Transportation-in 300
Insurance during transport 100
Interest paid for the current year related to financing the web server 240
Installation cost 200
One-year maintenance contract 400
Disk drive installed into the web server 1,000
Specify and justify which of the preceding expenditures should be added to the cost of the web server and disclose that cost. Indicate how the expenditures excluded from the cost of the web server would be classified.
Diff: Medium
Learning Objective: 9.2
Bloom's: Analysis
AACSB/AICPA: Analytic; Communication / PC: Communication; FC: Reporting
TOT: 7 min.
Title/Media Ref.: Short Essay Question 1 / None
105) Many years ago, a well-known American company publicly advertised with the slogan "Our most important asset is our employees". More recently, other companies have realized that quality employees working in an excellent work environment that respects those employees produce quality products at a reasonable cost. Although this may be the foundation for American companies to become more internationally competitive, there is no recognition of an employee asset on the balance sheet. Why is there not an asset on the balance sheet that recognizes the contribution of employees to the future profit-making ability of a firm?
Diff: Hard
Learning Objective: 9.1; 9.2
Bloom's: Synthesis
AACSB/AICPA: Communication; Reflective Thinking; Diversity / BB: None; FC: Measurement
TOT: 7 min.
Title/Media Ref.: Short Essay Question 2 / None
106) On January 1, Tavis Corp. sold a piece of equipment for $10,000 that it had used for several years. The equipment had cost $50,000, and the accumulated depreciation account had a balance of $34,000 at the time of the sale. Describe the effects on the accounting equation of selling the equipment.
Diff: Medium
Learning Objective: 9.5
Bloom's: Analysis
AACSB/AICPA: Analytic; Communication / PC: Communication; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Essay Question 3 / None
107) Identify the role of the matching principle in accounting for long-lived assets.
Diff: Medium
Learning Objective: 9.1
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / PC: Communication; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Short Essay Question 4 / None
108) What problems are inherent in recording trade-ins of plant assets?
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Short Essay Question 5 / None
109) How do intangible assets differ from long-lived plant assets?
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Short Essay Question 6 / None
110) During a meeting of top executives of the Alcorn Corporation, a discussion of the current downturn of sales and profits was taking place. Expecting vigorous competition to extend this difficult situation well into the next decade, the executives searched for ways to soften its impact on the financial statements. Attention was focused upon the company controller who was answering inquiries concerning the possibility of changing accounting procedures in order to give shareholders' the "best view of a bad situation". Responding to the inquiries, the controller authoritatively observed: "Alcorn uses a 10-year expected life on its long-term assets and a salvage value equal to 5% of cost in calculating depreciation expense using the straight-line method. This policy was quite conservative in light of the industry average of a 15-year life expectancy and a 10% of cost salvage value. In light of the 3 billion dollars of depreciable assets (net book value), switching to the industry average would certainly improve the measured results of operations." Everyone was thrilled about the possibility of improving measured profits except for one middle-top executive. She questioned whether the switch would be acceptable to the auditor. The controller responded that switching to industry average expectations would not violate GAAP and would be acceptable to the auditor (whose firm depends greatly on Alcorn's account). Alcorn would disclose the change in the footnotes and the effect of this change on accounting estimates in the current year's net income. The questioning executive would not object to the plan to liberalize income measurement but stated that Alcorn has always been known as a conservative firm. And if things ultimately go from bad to worse, Alcorn may get some negative press concerning the change because of the appearance of delaying disclosure on the income statement of the financial trouble Alcorn is facing. It was decided to change the depreciation policy using the industry average expected life and salvage value.
Comment on this change of depreciation measurement in light of generally accepted accounting principles and the problem of appearance. Include the amount of increase in net income caused by this change in depreciation parameters.
Diff: Hard
Learning Objective: 9.4
Bloom's: Analysis
AACSB/AICPA: Communication; Reflective Thinking / PC: Communication; FC: Measurement, Reporting
TOT: 15 min.
Title/Media Ref.: Short Essay Question 7 / None
111) What are post acquisition expenditures? How are they accounted for?
Diff: Medium
Learning Objective: 9.3
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 8 / None
112) How should management choose an acceptable cost allocation method for accounting purposes?
Diff: Medium
Learning Objective: 9.4
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Short Essay Question 9 / None
113) Identify the steps necessary in recording the retirement of the long-lived asset.
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 10 / None
114) Intangible assets can be divided into two broad categories; those with definite lives, and those with indefinite lives. Assets with indefinite lives are not subject to amortization while those with definite lives are. Explain why this is the case and give at least one example of an intangible asset with a definite life and one example of an intangible asset with an indefinite live.
Assets with indefinite lives are not subject to amortization because their cost can't be allocated to a finite number of accounting periods, when their lives are infinite or indeterminable. Intangible assets with definite lives are amortized over their legal or useful lives, whichever is shorter.
Diff: Medium
Learning Objective: 9.5
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 11 / None
115) How do long-lived assets differ from inventory?
Diff: Medium
Learning Objective: 9.1
Bloom's: Comprehension
AACSB/AICPA: Communication / PC: Communication; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 12 / None
116) The Dayton Symphony recently acquired cellist from the Cincinnati Symphony in exchange for violinist. These artists' contracts are capitalized and reported as assets by the symphonies. What complications arise in determining the cost of each artist's contract for accounting purposes?
Diff: Medium
Learning Objective: 9.5
Bloom's: Synthesis
AACSB/AICPA: Communication; Reflective Thinking / PC: Communication; FC: Reporting
TOT: 7 min.
Title/Media Ref.: Short Essay Question 13 / None
IFRS Questions
117) Under IFRS a special land account is often found on the balance sheet. This account is called:
A) Land Improvements.
B) Depreciable Land.
C) Investment Property.
D) Accumulated Depreciation — Land.
Diff: Easy
Learning Objective: 9.2
Bloom's: Knowledge
AACSB/AICPA: Diversity / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 1 / None
118) A significant difference in long-lived accounting between US GAAP and IFRS accounting is that in IFRS:
A) management has the option of periodically revaluing property, plant and equipment to market value.
B) management is mandated to revaluing property, plant and equipment to market value.
C) management may use hypothetical future value in depreciating assets.
D) There are no differences in long-lived asset accounting between US GAAP and IFRS.
Diff: Easy
Learning Objective: 9.4
Bloom's: Knowledge
AACSB/AICPA: Diversity / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 2 / None
119) With respect to accounting for long-lived assets, IFRS appears to be:
A) moving away from market-value accounting and toward historical cost accounting.
B) moving toward market-value accounting and away from historical cost accounting.
C) moving toward hypothetical future value accounting.
D) There is no discernable trend.
Diff: Easy
Learning Objective: 9.6
Bloom's: Knowledge
AACSB/AICPA: Diversity / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 3 / None
Data Analytic Questions
Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.
Key ratios for food service giant Mondelez for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.
Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income
120) The change in ROE from 2018 to 2019 was driven by:
A) the change in leverage.
B) the change in the company's ability to control total expenses.
C) the change in long-term asset turnover.
D) the change in asset turnover.
Diff: Hard
Learning Objective: 9.7
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 1 / None
121) Least important to the change in asset turnover was:
A) the change in accounts receivable turnover.
B) the change in inventory turnover.
C) the change in the productivity of the company's long-term assets.
D) the change in long-term asset turnover.
Diff: Hard
Learning Objective: 9.7
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 2 / None
122) Choose the best answer.
A) Mondelez's ability to control its total expenses improved over the 3-year period.
B) The productivity of Mondelez's assets increased over the 3-year period.
C) The productivity of Mondelez's long-term assets increased over the 3-year period.
D) Mondelez became more reliant on leverage over the 3-year period.
Diff: Hard
Learning Objective: 9.7
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 3 / None
123) Which of the following statements is false?
A) Mondelez's long-term assets relative to its sales increased over the 3-year period.
B) Mondelez's inventory levels relative to the cost of its sold inventory generally increased over the 3-year period.
C) The change in Mondelez's reliance on debt financing across the 3-year period was a primary driver in explaining the change in ROE.
D) Mondelez' ability to control its operating expenses improved from 2018 to 2019.
Diff: Hard
Learning Objective: 9.7
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 4 / None
Video Questions
124) Which one of the following assets is not an example of a long-lived asset?
A) Goodwill
B) Equipment
C) Large equity investments in other companies
D) Patent
Diff: Easy
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 1 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
125) Which of the following costs should not be included in the capitalized cost of a piece of equipment?
A) The cost of purchasing the equipment
B) The cost of transporting the machine to the facility in which it will be used
C) The cost of training the employees on how to use the equipment
D) The monthly salary of the equipment operator
Diff: Easy
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 2 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
126) Which of the following post-acquisition expenditures should be expensed?
A) The cost of repairing storm damage to the roof of a building
B) The cost of replacing the roof of a building with shingles that improve the insulation quality of the roof
C) The cost of recalibrating a machine so that it increases the number of inventory items it can produce each day
D) The cost of overhauling an engine to add several years to the useful life
Diff: Easy
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Knowledge
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 3 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
127) This method of depreciating or amortizing a long-lived asset is the most common one used by major U.S. companies.
A) Straight-line
B) Accelerated
C) Activity
Diff: Easy
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Knowledge
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 4 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
128) This method of depreciating or amortizing a long-lived asset is the normally the best application of the matching principle.
A) Straight-line
B) Accelerated
C) Activity
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 5 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
129) This method of depreciating or amortizing a long-lived asset is the most popular for tax purposes.
A) Straight-line
B) Accelerated
C) Activity
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 6 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
130) This method of depreciating or amortizing a long-lived asset can give the impression that net income is increasing across time.
A) Straight-line
B) Accelerated
C) Activity
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 7 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
131) If the market value of a long-lived asset drops permanently below the balance sheet (book) value of the asset:
A) the depreciation or amortization method being used should be modified.
B) the asset should be removed from the balance sheet.
C) the balance sheet value of the assets should be reduced to its market value and an impairment expense should be recognized on the income statement.
D) the maintenance costs on the asset should be increased.
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 8 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
132) If a long-lived asset is sold for a dollar amount greater than its balance sheet (book) value:
A) a realized gain should be posted directly to a shareholders' equity account.
B) an unrealized gain should be recognized.
C) a realized gain should be recorded, increasing net income on the income statement.
D) cash flows from operations should be increased.
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 9 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
133) Why are non-cash impairment charges added back to net income in the computation of net cash from operating activities on the statement of cash flows?
A) Impairment charges increase operating cash flows.
B) Impairment charges understate net income and adding them back corrects the misstatement.
C) Impairment charges create investing cash inflows.
D) Impairment charges decrease net income, but they do not decrease operating cash flows.
Diff: Medium
Learning Objective: 9.2; 9.3; 9.4; 9.5
Bloom's: Analysis
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Long-lived assets - Barnes & Noble Video: Question 10 / Video: Long-lived assets - Barnes & Noble. www.wiley.com/go/pratt/financialaccounting11e
© 2021 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
Document Information
Connected Book
Test Bank | Financial Accounting Enhanced eText 11e by Pratt Peters
By Pratt Peters
Explore recommendations drawn directly from what you're reading
Chapter 7 Merchandise Inventory
DOCX Ch. 7
Chapter 8 Investments in Equity Securities
DOCX Ch. 8
Chapter 9 Long-Lived Assets
DOCX Ch. 9 Current
Chapter 10 Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies
DOCX Ch. 10
Chapter 11 Long-Term Liabilities: Notes, Bonds, and Leases
DOCX Ch. 11