Chapter 8

Equipment is acquired for $100,000. Freight costs are $1,800, sales tax amounted to $1,000. Maintenance during the first year of use cost $6,000. What is the cost of the equipment?

A) $102,800

If Compatibility Services uses straight-line depreciation, what is the balance in the accumulated depreciation account on January 1, 20X5?

A) $19,000

Fairfield Company determines the following information at year end about a piece of equipment that has a net book value of $75,000. Assume the equipment will not be for sale. Present value of future expected net cash flows $52,500 Undiscounted future expected cash flows 63,500 The impairment loss is

A) $22,500

Which of the following statements is TRUE?

A) For most assets, MACRS approximates straight-line depreciation. B) MACRS depreciates assets over a longer useful life than would be expected from the asset. C) MACRS allows for greater depreciation expense in the later years of an asset's life, thus reducing the taxes a company will have to pay during those years. D) The purpose of MACRS is to increase a company's income tax liability in the early years of a fixed asset's life. E) None of the above Answer: E

If Kolonial Township used the valuation made by M. Mulhan and assuming it paid cash for the land and building, what journal entry would Kolonial Township make to record the purchase?

A) Land 750,000 Building 1,750,000 Cash 2,500,000

AC Heating & Cooling uses the indirect method to prepare the statement of cash flows. During 2X03, AC Heating & Cooling had $100,000 in net income, which included a gain of $10,000 from the sale of a plant asset. To calculate operating cash flows, AC Heating & Cooling mustA) deduct $10,000 from net income in the operating activities section of the statement of cash flows.

A) deduct $10,000 from net income in the operating activities section of the statement of cash flows.

Useful lives for depreciable assets for tax purposes are frequently shorter than the useful lives used for financial reporting purposes. Because of this, taxable net income would be

A) lower and lower income taxes payable in the early years of an asset's life than the straight-line method.

All of the following are included in the acquisition cost of equipment except

A) maintenance costs one year after purchase.

Component depreciation is

A) required by IFRS

If Compatibility Services uses straight-line depreciation, what is the depreciation expense in 20X4?

B) $ 9,500

If Compatibility Services uses double-declining-balance depreciation, what is the depreciation expense in 20X3?

B) $20,000

What is the balance in the accumulated depreciation account on December 31, 20X4, if Compatibility Services uses double-declining-balance depreciation

B) $35,000

Dugger Excavating bought a machine for $24,000 on January 1, 20X3, with a useful life of 5 years and a salvage value of $4,000. At the beginning of 20X4, Dugger finds the residual value will be zero. Assuming Dugger employs straight-line depreciation, what will be the depreciation expense in 20X4?

B) $5,000

Suppose Hyton, Inc. purchases a $50,000 vehicle and estimates its useful life to be 8 years with a $2,000 salvage value. After 2 full years of use, Hyton, Inc. puts in a new engine costing $6,000 in the vehicle extending its life from a total of 8 years to a total of 10 years. The company uses straight-line depreciation. What is the depreciation expense in year 4?

B) $5,250

Machiel Manufacturing acquired a $60,000 machine on January 1, 20X9. The machine is estimated to have a useful life of 4 years, and a residual value of $10,000. For units-of-production depreciation purposes, the machine is expected to produce 500,000 units. What is the depreciable value of the machine acquired by Machiel Manufacturing?

B) $50,000

What is the cash balance after taxes on December 31, 20X3, if Useful Organizing uses straight-line depreciation?

B) $72,400

Compatibility Services acquired an $80,000 machine on January 1, 20X3. The machine is estimated to have a useful life of 8 years, and a residual value of $4,000. For units-of-production depreciation purposes, the machine is expected to produce 400,000 units. What is the depreciable value of the machine acquired by Compatibility Services?

B) $76,000

) Kolonial Township acquired a building and the 3 acres of land on which it is located. The total purchase price was $2,500,000. For valuation purposes, the company contacted three local commercial real estate agents, who gave the following valuation estimates: If Kolonial Township used the valuation made by T. Grasso, and assuming it paid cash for the land and building, what journal entry would Kolonial Township make to record the purchase?

B) Land 500,000 Building 2,000,000 Cash 2,500,000

Amortization of an intangible asset is similar to which depreciation method?

B) Straight-line

Which statement is FALSE?

B) The cost of developing an intangible asset internally is capitalized as an asset.

Which of the following statements is TRUE?

B) The residual value of a tangible asset is the estimated amount to be received for an asset upon its disposal at the end of its useful life.

In contrast to long-lived tangible assets, U.S. GAAP does not require ________ for indefinite-life intangible assets.

B) a recoverability test

Depreciation expense computed under double-declining-balance will decrease each year because the

B) book value used in the computation each year decreases.

The entry to journalize the impairment loss on equipment would include

B) credit Accumulated Depreciation, Equipment

) To determine depreciation expense for a plant asset, all of the following must be known except:

B) current market value.

Repairs made to equipment as part of yearly maintenance would be recorded in the journal by

B) debiting repairs expense.

The removal of an old building to make land suitable for its intended use is charged to

B) land.

If Compatibility Services uses double-declining-balance depreciation, what is the net book value of the machine on December 31, 20X5?

C) $ 33,750

If Compatibility Services uses double-declining-balance depreciation, what is the depreciation expense in 20X5?

C) $11,250

If Compatibility Services uses double-declining-balance depreciation, what is the depreciation expense in 20X4?

C) $15,000

Assume Dugger employs straight-line depreciation. Additionally assume that at the beginning of 20X4 Dugger finds a $200 attachment that extends the life of the equipment 2 years beyond the original estimate. What will be the depreciation expense in 20X4?

C) $3,367

Jets Company buys Pack Company for $11 million. Pack Company has assets with a fair value of $9 million and liabilities with a fair value of $2 million. Pack's stockholders' equity is recorded at $6 million. What goodwill should Jets Company record?

C) $4 million

What is the cash balance after taxes on December 31, 20X3, if Useful Organizing uses double-declining-balance depreciation?

C) $74,800

Useful Organizing began operations on January 1, 20X3, when the owners invested $80,000 cash in the company. Also on January 1, the company paid for a $30,000 machine. The machine has a useful life of 4 years and a $2,000 residual value. During its first year of operations, the company had sales of $96,000 and operating expenses except depreciation of $67,000. All sales were cash sales and all non-depreciation operating expenses were paid in cash. Useful Organizing has a 30% tax rate and pays all taxes on December 31. What is the cash balance before taxes on December 31, 20X3, if Useful Organizing uses straight-line depreciation?

C) $79,000

Useful Organizing has a 30% tax rate and pays all taxes on December 31. What is the cash balance before taxes on December 31, 20X3, if Useful Organizing uses double-declining- balance depreciation?

C) $79,000

The decision whether to expense or capitalize expenditures for plant assets depends on many factors. Which of the following is NOT a factor for a company choosing to expense or capitalize an expenditure?

C) The decision of whether to expense or capitalize an expenditure is not based on management's judgment since U.S. GAAP provides clear rules on specific types of assets.

Ganley Rental Cars recently acquired several new cars for their fleet. The cars have an estimated life of 4 years and should be driven 80,000 miles. What is the most appropriate method of depreciation to properly match revenues and expenses?

C) Units-of-production

Nonmonetary assets are

C) assets with a price in terms of units of currency that could change over time.

The double-declining-balance method of depreciation

C) causes more depreciation in the early years of an asset's use as compared to other depreciation methods.

Book value is defined as

C) cost less accumulated depreciation.

Xavier Enterprises has $500,000 of goodwill on the balance sheet. The company determines that an impairment has occurred for $100,000. Xavier Enterprises should

C) credit goodwill for $100,000.

Equipment costing $45,000 with a book value of $12,000 is sold for $21,500. The journal entry will involve a

C) debit to accumulated depreciation for $33,000.

major expenditure made to equipment that extends its useful life beyond the original estimate is journalized by

C) debiting equipment.

Platak, Inc., acquired a silver mine for $4,000,000. The company's survey estimates that 40,000 ounces of silver can be extracted from the mine, but environmental costs to close the mine will be $1,000,000. In the first year of operations, 15,000 ounces of silver were extracted. Platak, Inc., would recognize

C) depletion expense of $1,875,000.

A recoverability test for impairment

C) establishes that the asset is impaired.

Treating a capital expenditure as repairs and maintenance expense

C) overstates expenses and understates net income.

All of the following are tangible assets except

C) patent on manufacturing equipment used to make company products.

Goodwill is recognized when

C) the purchase price for a company exceeds the difference between the fair value of assets and the fair value of liabilities of the company acquired

Following U.S. GAAP, land is carried at historical cost

C) unless the fair value of the land has decreased below the original cost and the land meets the recoverability test.

If Machiel Manufacturing used straight-line depreciation, what will be the depreciation expense in 20X9?

D) $12,500

If Machiel Manufacturing uses double-declining-balance depreciation, what is the depreciation expense in 2010?

D) $15,000

Machiel Manufacturing uses units-of-production depreciation and the company produces 80,000 units in 2009; 130,000 units in 2010; and 160,000 units in 2011. What is the depreciation expense in 2011?

D) $16,000

what is the net book value of the machine at December 31, 2012?

D) $16,000

What is the net cash provided by operating activities after taxes for 20X3, if Useful Organizing uses straight-line depreciation?

D) $22,400

Compatibility Services acquired a $100,000 machine on January 1, 20X3. The machine is estimated to have a useful life of 8 years, and a residual value of $10,000. Assume Compatibility Services was considering the use of double-declining-balance depreciation. What is the depreciation expense in 20X3 and 20X4?

D) $25,000 $18,750

What is the balance in the accumulated depreciation account on December 31, 2010, if Machiel Manufacturing uses double-declining-balance depreciation?

D) $45,000

If Compatibility Services uses units-of-production depreciation, and the company produces 40,000 units in 20X3; 60,000 units in 20X4; 50,000 units in 20X5; and 30,000 units in 20X6; what is the net book value of the machine at December 31, 20X6?

D) $45,800

What is the balance in the accumulated depreciation account on December 31, 20X5, if Compatibility Services uses double-declining-balance depreciation?

D) $46,250

If Machiel Manufacturing uses units-of-production depreciation, and the company produces 80,000 units in 20X9, what will be the depreciation expense for 20X9?

D) $8,000

If Compatibility Services uses units-of-production depreciation and the company produces 40,000 units in 20X3; 60,000 units in 20X4; and 50,000 units in 20X5; what is the depreciation expense in 20X5?

D) $9,500

If Kolonial Township used the valuation made by H. Ivan, and assuming it paid cash for the land and building, what journal entry would Kolonial Township make to record the purchase?

D) Land 250,000 Building 2,250,000 Cash 2,500,000

Appott Technologies recently sold some equipment for $6,800 cash. The equipment cost $23,000 and had accumulated depreciation through the date of sale totaling $17,250. The journal entry to record the sale of the equipment will include a

D) credit to gain on sale of equipment for $1,050.

Equipment costing $20,000 with $17,800 of accumulated depreciation is sold for $2,500 cash. The journal entry will involve a

D) debit to accumulated depreciation for $17,800.

The expenditure for an improvement to equipment that would increase output is journalized by

D) debiting equipment.

Which of the following activities can be classified as a betterment?

D) overhauling engine of a car

Expenditures for long-lived assets are expensed when they

D) provide benefits lasting one year or less.

The MACRS allows depreciable assets to have

D) shorter lives than economic lives resulting in lower income taxes in the early years of an asset's life than the straight-line method.

What is the net cash provided by operating activities before taxes for 20X3, if Useful Organizing uses double-declining-balance depreciation?

E) $ 29,000

What is the net cash provided by operating activities before taxes for 20X3, if Useful Organizing uses straight-line depreciation?

E) $ 29,000

Wall Outlets, Inc. has $600,000 of goodwill on the balance sheet from The Plug Company which was purchased 5 years ago. The goodwill amortization this year should be

E) $0.

If Machiel Manufacturing uses straight-line depreciation, what is the depreciation expense in 2011?

E) $12,500

What is the net cash provided by operating activities after taxes for 20X3, if Useful Organizing uses double-declining-balance depreciation?

E) $24,800

If Machiel Manufacturing uses straight-line depreciation, what is the balance in the accumulated depreciation account on January 1, 2011?

E) $25,000

If Machiel Manufacturing uses double-declining-balance depreciation, what is the depreciation expense in 20X9?

E) $30,000

Goetz Construction Company constructed a shed for Paramount Industries. Instead of giving cash, Paramount Industries, gave Goetz Construction Company a used delivery truck originally costing Paramount Industries, $52,000. The book value for the delivery truck on the financial statements of Paramount Industries showed the delivery truck with a value of $40,000. A new delivery truck is currently selling for $44,000, and an independent appraiser said the fair value of the used delivery truck is $48,000. What value should Paramount Industries assign to the shed on its financial statements?

E) $48,000

, Dugger finds the residual value will be zero. Assuming Dugger employs double-declining-balance depreciation, what will be the depreciation expense

E) $5,760

Compatibility Services uses units-of-production depreciation, and the company produces 40,000 units in 20X3, what will be the depreciation expense for 20X3?

E) $7,600

In 20X3, Little Yard Oil, Inc., purchased drilling rights for $1,000,000. At the time, the engineer estimated 20,000 barrels of oil in the field. In 20X4, 4,000 barrels were pumped and in 20X5, 5,000 barrels were pumped. Which entry below is correct?

E) Debit amortization expense of $200,000 in 20X3

Which of the following statements is considered incorrect?

E) Depreciation expense provides a means of setting aside cash for the replacement of an asset.

Which statement is FALSE?

E) Leasehold improvements are subject to depletion.

All of the following are included in the acquisition cost of land except

E) architect fee for new building.

Scone Industries acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. Scone Industries would recognize

E) depletion expense of $3,000,000.

Companies electing to revalue their fixed assets under IFRS are allowed to

E) increase or decrease the carrying value of the fixed asset.

) Businesses do not capitalize improvements.

FALSE

Accounting for changes in residual value must be prospective and retrospective.

FALSE

An operating expense is the cost that is added to an asset account

FALSE

Book value is determined by adding salvage value to the cost of the asset.

FALSE

Both straight-line depreciation and units-of-production depreciation will generate the same depreciation expense during every year of an asset's life.

FALSE

Depreciation expense generates cash.

FALSE

Depreciation is a noncash expense and therefore not tax-deductible.

FALSE

Financial reports for the Internal Revenue Service must abide by generally accepted accounting principles.

FALSE

If land was acquired many years ago, and inflation has occurred over time, the value of the land on the financial statements should be increased to reflect some of the change in the land's valuation. However, the land will still be valued at a relatively conservative amount. The company does not follow IFRS

FALSE

If the net present value of the expected cash flows from the use of the asset and its disposal is greater than the carrying value of an asset, then the asset is considered to be impaired.

FALSE

In order to calculate depreciation, the current market value of the equipment, the salvage value, and the estimated useful life must be known.

FALSE

Land is always depreciated using double-declining-balance depreciation.

FALSE

Long-lived assets include accounts receivable and inventory.

FALSE

Most companies use accelerated depreciation for financial reporting purposes and straight-line depreciation for income tax purposes.

FALSE

Residual value is computed as cost less depreciation expense.

FALSE

The MACRS of depreciation is used for income tax purposes and financial reporting purposes.

FALSE

The accumulated depreciation account represents a growing amount of cash to be used to replace the asset.

FALSE

The sale of a plant asset may result in a gain but not a loss.

FALSE

U.S. GAAP requires the immediate write-off of goodwill at purchase.

FALSE

Units-of-production depreciation is the most popular form of accelerated depreciation.

FALSE

The process of allocating the cost of natural resources to the periods in which the resources are used is termed amortization.

FALSE (depletion)

A gain will result when the cash received from the sale of a plant asset exceeds the book value of the asset.

TRUE

A goodwill write-off is a noncash expense.

TRUE

A leasehold is the right to use a fixed asset for a specified period of time beyond one year.

TRUE

A privilege granted by a manufacturer or distributor to sell a product or service in accordance with specified conditions is termed a franchise.

TRUE

Accounting for changes in useful life is prospective in nature.

TRUE

Depletion follows a units-of-production approach.

TRUE

Depreciation does not generate cash, but it does have a cash benefit if it results in lower taxes

TRUE

Depreciation is not intended to track the decreasing current market value of a tangible asset.

TRUE

Depreciation is recomputed starting in the period that a change in estimate is known.

TRUE

Double-declining-balance depreciation computes annual depreciation by multiplying the asset's book value at the beginning of the year by two times the straight-line rate.

TRUE

Double-declining-balance depreciation may be referred to as accelerated depreciation.

TRUE

Gains on disposal of plant assets are generally shown as "other income" on the income statement.

TRUE

Gains or losses on sales of tangible plant assets are usually measured by the difference between the cash received and the net book value of the asset given up.

TRUE

Goodwill occurs when the purchase price of a company exceeds the fair value of all identifiable individual assets less total liabilities.

TRUE

If a company acquires a new machine, the cost of rewiring the building to accommodate the machine, and the cost to reinforce the floor to support the weight of the machine, are all considered a part of the total cost of the machine.

TRUE

If an improvement increases operating efficiency, then the depreciation schedule is revised.

TRUE

Once a company begins to make revaluation adjustments for plant assets, it must continue to make them.

TRUE

Regardless of the depreciation method used, accumulated depreciation will be the same when the asset is fully depreciated.

TRUE

Research and development costs are expensed on the income statement as opposed to being capitalized on the balance sheet.

TRUE

The acquisition costs for intangible assets are capitalized as assets and are then gradually amortized over the estimated useful lives of the assets.

TRUE

The depreciable value is the difference between the total acquisition cost and the predicted residual value.

TRUE

Using accelerated depreciation instead of straight-line depreciation results in a lower net income but a higher cash balance in the initial years of a fixed asset's life.

TRUE

When computing an impairment loss for a tangible asset, the market price shall be the fair value unless no active market exists for the asset.

TRUE