Accounting Ch. 8

When a company borrows money to finance construction of a warehouse: a. it expenses the interest incurred over the entire loan. b. it capitalizes the interest incurred during the construction period and expenses the rest. c. it depreciates all of the interest over the entire life of the loan. d. it capitalizes the interest incurred over the entire loan.

a. it expenses the interest incurred over the entire loan.

The costs of intangible assets with an indefinite life, such as goodwill, should: a. be amortized over a reasonable period of time not to exceed 40 years. b. not be amortized. c. be carried as a contra-asset account until fully amortized. d. be expensed entirely in the year in which acquired.

b. not be amortized.

The term acquisition cost is synonymous with: a. historical cost. b. net realizable value. c. net book value. d. None of these choices are correct.

a. historical cost.

A company has discovered the need to change the useful life of equipment purchased 5 years ago. When accounting for the change in its accounting estimates, the company must: a. add the amount of the change to the amount of current year's depreciation expense. b. adjust the financial statements of prior years affected by the change in the estimate. c. determine the effect of the change and report it as a loss on the income statement in other revenues and expenses. d. determine the book value at the time of the change and depreciate that amount over the remaining useful life.

d. determine the book value at the time of the change and depreciate that amount over the remaining useful life.

When plant equipment is purchased, the cash outflow related to this transaction should be reflected in which category of the statement of cash flows? a. building b. operating c. financing d. investing

d. investing

The method of reporting cash flows from operating activities under which income is adjusted for transactions impacting both net income and cash flows, but by different amounts, is called a. the adjusting method. b. the direct method. c. the straight-line method. d. the indirect method.

d. the indirect method.

Jacob company had reported net income of $100,000. It's only operating activity was a gain on sale of assets of $10,000. Under the indirect method, Jacob's cash from operating activities is a. $90,000. b. $110,000. c. $100,000. d. None of these choices are correct.

a. $90,000.

A truck that cost $50,000 had accumulated depreciation to date of $25,000. The truck was sold for $25,000. What is the amount of gain or loss? a. $0 b. $25,000 c. $5,000 d. None of these choices are correct.

a. $0

Savoy Co. purchased a machine on January 1, 2016, for $20,000. Savoy Co. estimated that the machine's life would be five years and its residual value at the end of five years would be $2,000. Savoy Co. has depreciated the machine using the straight-line method for two years. At the beginning of 2018, Savoy believes that the total machine life will be seven years, or another five years beyond the two years the machine has been used. What is the new amount of depreciation as a result of these changes? a. $2,160 b. $3,600 c. $2,000 d. None of these choices are correct.

a. $2,160

Zed Company purchases a property where the land is estimated to have a market value of $40,000 and the building is estimated to have a market value of $80,000. If the total purchase price is $90,000, the land would be recorded at what amount? a. $30,000 b. $10,000 c. $60,000 d. $40,000

a. $30,000

Jacob Company had reported net sales of $100,000. Its average total assets were $72,000. What is Jacob's asset turnover? a. 1.39 b. .72 c. 1.45 d. None of these choices are correct.

a. 1.39

Which of the following best describes a capital expenditure? a. An expenditure that is added to the cost of a long-term asset. b. An expenditure that reduces current net income. c. An expenditure made to maintain a long-term asset. d. An expenditure that reduces the cost of a long-term asset.

a. An expenditure that is added to the cost of a long-term asset.

Avery Company sold a machine for $10,000 that it had used for several years. The machine cost $22,000, and had accumulated depreciation of $19,000 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine? a. Gain of $7,000. b. No gain or loss will be reported. c. Loss of $12,000. d. Loss of $9,000.

a. Gain of $7,000.

When land and building are purchased together for one sum, how are costs allocated between the two assets? a. The purchase price should be allocated on the basis of the proportional fair market values of the two assets. b. One half of the purchase price should be allocated to each asset. c. The purchase price should be allocated on the basis of the seller's historical cost of the two assets. d. Whichever asset is more valuable should be allocated the entire purchase price.

a. The purchase price should be allocated on the basis of the proportional fair market values of the two assets.

A truck had accumulated depreciation to date of $25,000. The engine was replaced at a cost of $6,000. The journal entry to record this replacement would include a a. debit to accumulated depreciation for $6,000. b. credit to accumulated depreciation for $6,000. c. debit to truck for $6,000. d. None of these choices are correct.

a. debit to accumulated depreciation for $6,000.

The journal entry to record amortization would include a a. debit to amortization expense. b. credit to amortization expense. c. debit to accumulated amortization. d. None of these choices are correct.

a. debit to amortization expense.

An asset classified as property, plant, and equipment is reported at: a. the original cost less depreciation since acquisition. b. the average fair market value for the period. c. the historical cost plus accumulated depreciation at the balance sheet date. d. the estimated salvage value at the balance sheet date.

a. the original cost less depreciation since acquisition.

Jacob Company had reported net income of $100,000. It's only operating activity was a loss on sale of assets of $10,000. Under the indirect method, Jacob's cash from operating activities is a. $90,000. b. $110,000. c. $100,000. d. None of these choices are correct.

b. $110,000.

Freebird Company purchased a truck on January 1, 2014 at a cost of $50,000 with a life of 5 years and a residual value of $20,000. On January 1, 2016, the company made major repairs of $30,000 to the truck that extended the life 3 years. As a result, starting with 2016, the truck has a remaining life of 5 years and a salvage value of $8,000. Freebird uses the straight-line depreciation method. What amount should be recorded as depreciation expense in 2016? a. $14,400 b. $12,000 c. $13,600 d. $ 6,000

b. $12,000

Assume that ABC Co. developed a patent for a new shoe product on January 1, 2016. The costs involved with patent approval were $10,000, and the company wants to record amortization on the straight-line basis over a five-year life with no residual value. In this case, the useful life of the patent is less than the legal life. ABC should record yearly amortization over the useful life as a. $0. b. $2,000. c. $10,000. d. None of these choices are correct.

b. $2,000.

A company purchases a truck and equipment for a total purchase price of $135,000. The fair market values for the purchased assets are $30,000 and $75,000, respectively. What are the allocation amounts of the purchase price to these assets? Use approximate amounts. a. Both valued at the purchase price of $135,000. b. $38,570 to truck and $96,417 to equipment. c. The purchase price would be evenly split between the two assets. d. None of these choices are correct.

b. $38,570 to truck and $96,417 to equipment.

What is the net value reported on an asset that has an original cost of $100,000 and accumulated depreciation of $40,000 to date? a. $140,000 b. $60,000 c. $100,000 d. None of these choices are correct.

b. $60,000

If an asset has an estimated useful life of 5 years and the useful life is revised at the beginning of year 3 to 8 years, what is the new estimated useful life? a. 5 b. 6 c. 2 d. 8

b. 6

Which of the following items is added to net income to determine cash flows from operating activities when the indirect method is used to prepare the operating activities category of the statement of cash flows? a. Cost of long-term assets acquired during the year b. Depreciation expense c. Cash proceeds related to the sale of a plant asset d. Accumulated amortization

b. Depreciation expense

Which of the following would not be included in the Property, Plant, and Equipment category of the balance sheet? a. Machinery b. Inventory c. Land d. Equipment

b. Inventory

A truck that cost $15,000 and has been owned for 3 years is sold for cash. Depreciation in the amount of $2,000 had been taken each year. On January 2 of the 4th year, the company sold the truck for $10,000. The transaction to record the sale would include a. a loss of $1,000. b. a gain of $1,000. c. a gain of $10,000. d. None of these choices are correct.

b. a gain of $1,000.

If an asset has a book value of $1,000 and is sold for $800, a a. a gain of $200 should be reported. b. a loss of $200 should be reported. c. a loss of $800 should be reported. d. None of these choices are correct.

b. a loss of $200 should be reported.

The cost of changing the oil in a delivery truck should be recorded as a(n): a. liability. b. expense. c. reduction in accumulated depreciation. d. asset.

b. expense.

Amortization of an intangible asset should be recorded over the: a. useful life. b. legal life or useful life, whichever is shorter. c. legal life or useful, whichever is longer. d. legal life.

b. legal life or useful life, whichever is shorter.

A gain on the sale of an asset occurs when the sales price of the asset is: a. more than the accumulated depreciation of the asset. b. more than the net book value of the asset. c. equal to the net book value of the asset. d. less than the net book value of the asset.

b. more than the net book value of the asset.

Asset turnover is equal to a. average total assets / net sales. b. net sales / average total assets. c. net income /Depreciation Expense. d. None of these choices are correct.

b. net sales / average total assets.

In a group purchase of assets, fair market value is used a. as the amount recorded on the balance sheet. b. to determine purchase price allocation. d. is irrelevant and should be ignored in a group purchase. c. None of these choices are correct.

b. to determine purchase price allocation.

A truck had accumulated depreciation to date of $25,000. The engine was replaced at a cost of $6,000. What will be the balance in accumulated depreciation after this replacement is recorded? a. $25,000 b. $31,000 c. $19,000 d. None of these choices are correct.

c. $19,000

Which of the phrases below best describes asset turnover? a. Uses only elements from the balance sheet for calculation. b. Measures the amount of useful life left in assets. c. Measures the productivity of assets. d. Measures the ability of assets to reduce costs.

c. Measures the productivity of assets.

Which of the following is an intangible asset? a. Factory machinery b. Accounts receivable c. Patent on a pharmaceutical d. Merchandise inventory

c. Patent on a pharmaceutical

The write-off of the cost of intangible assets is called a. depletion. b. depreciation. c. amortization. d. None of these choices are correct.

c. amortization.

The appropriate amount of interest capitalized for an asset should be: a. based on the expenditures that existed at the end of the period. b. based on the rate that a bank charges its best clients. c. based on the average accumulated expenditures. d. based on the inflation rate during the construction period.

c. based on the average accumulated expenditures.

If land and building are purchased together for one sum, it is important to allocate costs between the two assets because: a. land always has a lower value than the building. b. the land is depreciable, but the building is not. c. the building is depreciable, but the land is not. d. the land will have a shorter depreciable life than the building.

c. the building is depreciable, but the land is not.

Intangible assets are generally amortized using a. the units of production method. b. the double declining balance method. c. the straight-line method. d. the sum-of-the-digits method.

c. the straight-line method.

Volta Corp. constructed equipment to manufacture a new line of home products during 2016. The average balance of accumulated expenditures on the equipment during September through December 2016 was $500,000. Construction started on September 1, 2016 and was still in progress at the end of 2016. If Volta borrowed $500,000 for one year on September 1, 2016, to finance the construction, and the interest rate on the construction loan was 6%, how much interest can Volta capitalize as part of the equipment cost for 2016? a. $20,000 b. $ -0- c. $30,000 d. $10,000

d. $10,000

On the balance sheet, the total amount of plant and equipment that has been expensed is reported in an account called: a. Depreciation Expense. b. Depletion Expense. c. Accumulated Amortization. d. Accumulated Depreciation.

d. Accumulated Depreciation.

The average age of a depreciable asset can be calculated with which of the following formulas? a. Asset Cost/Depreciation Expense b. Depreciation Expense/Accumulated Depreciation c. Depreciation Expense/Asset Cost d. Accumulated Depreciation/Depreciation Expense

d. Accumulated Depreciation/Depreciation Expense

Capitalizing interest should be done with which of the following assets? a. Assets with lives over five years. b. All assets purchased by the company. c. All long-term assets. d. All assets constructed by the company.

d. All assets constructed by the company.

Which of the following would be considered a change in depreciation estimate? a. Change in the market value of a depreciable asset. b. Change in the residual value of a depreciable asset. c. Change in the useful life of a depreciable asset. d. Both "change in the residual value of a depreciable asset" and "change in the useful life of a depreciable asset" are changes in a depreciation estimate.

d. Both "change in the residual value of a depreciable asset" and "change in the useful life of a depreciable asset" are changes in a depreciation estimate.

The amount that includes all of the cost normally necessary to acquire an asset and prepare it for its intended use is known as a. market value. b. fair cost. c. retail price. d. None of these choices are correct.

d. None of these choices are correct.

Which of the following costs should be included in the acquisition cost of Property, Plant, and Equipment? a. Advertising costs of the company selling the asset. b. Repair costs of an asset damaged during installation. c. Disposal fees paid when the property is salvaged. d. Transportation charges incurred to deliver the asset to the purchasing company.

d. Transportation charges incurred to deliver the asset to the purchasing company.