ACCT Chapter 7 MC Questions

On January 1, Tomcat Enterprises bought a building for $300,000, estimating that it would have a residual value of $0 and a useful life of 40 years. Tomcat uses the straight-line depreciation method, and the book value of the asset on December 31 of the same year was $292,500. Tomcat then decided that the building would have a remaining useful life of 20 years. What is the revised depreciation expense for the upcoming year? a.$15,000 b.$14,625 c.$7,500 d.$14,000

b.$14,625 $292,500 book value - $0 residual value/20 years remaining of revised useful life = $14,625

Tannehill Company bought a machine for $150,000. Three years later when the book value is $60,000, Tannehill suspects that the machine is impaired. It estimates that future cash flows from the machine will be approximately $50,000 and its current fair value is $40,000. The impairment loss is a.$10,000. b.$20,000. c.$90,000. d.$100,000.

b.$20,000. Impairment Loss = Fair Value of the Asset - Book Value of the Asset, or $40,000 - $60,000 = ($20,000)

Tannehill Company bought a machine for $150,000. Three years later when the book value is $60,000, Tannehill suspects that the machine is impaired. It estimates that future cash flows from the machine will be approximately $50,000 and its current fair value is $40,000. The impairment loss is a.$100,000. b.$10,000. c.$20,000. d.$90,000.

c.$20,000. Impairment Loss = Fair Value of the Asset - Book Value of the Asset, or $40,000 - $60,000 = ($20,000)

The book value of an asset is calculated as a.fair market value minus accumulated depreciation. b.cost plus depreciation expense. c.cost minus accumulated depreciation. d.cost plus accumulated depreciation.

c.cost minus accumulated depreciation.

When the fair value of an asset falls significantly below the book value of the asset and this decline is a permanent decline, the asset is said to be a.obsolete. b.depreciated. c.impaired. d.at its book value.

c.impaired.

An improvement is an expenditure that a.extends the asset's useful life. b.adds a new or major component to the asset. c.increases efficiency or productivity of an asset. d.keeps an asset in normal operating condition.

c.increases efficiency or productivity of an asset.

Investors are concerned with the condition and age of a company's fixed assets. Which of the following would help an investor estimate the average age of a company's fixed assets? a.Accumulated Depreciation/Depreciation Expense b.Average Fixed Assets/Depreciation Expense c.Net Sales/Average Fixed Assets d.Accumulated Depreciation/Net Sales

a.Accumulated Depreciation/Depreciation Expense

A company has the following information: Net property, plant, and equipment, beginning of year: $100,000; accumulated depreciation, end of year: $50,000; net property, plant, and equipment, end of year: $150,000; net sales: $250,000; and depreciation expense: $6,000. The average age of the fixed assets is a.8.3 years. b.2.5 years. c.1.6 years. d.4 years.

a.8.3 years. $50,000/$6,000 = 8.3 years

Because fixed assets are a major productive asset of most companies, it is useful for managers and investors to understand if the company is using these assets efficiently. Which of the following is one measure that can be used by an investor to understand if a company is using its fixed assets efficiently? a.Fixed asset turnover ratio b.Asset efficiency ratio c.Return on assets d.Debt-to-equity ratio

a.Fixed asset turnover ratio The fixed asset turnover ratio (net sales/average fixed assets) is one measure of how efficiently a company is using its fixed assets.

Accounting for natural resources is similar to accounting for fixed assets. Which of the following is one of the ways natural resources are different from fixed assets? a.Most natural resources can generally be replaced or restored only by an act of nature. b.Natural resources are accounted for using the straight-line depreciation method. c.Natural resources are intangibles. d.None of the types of natural resources has a residual value.

a.Most natural resources can generally be replaced or restored only by an act of nature.

Three items of information are necessary in order to measure depreciation. Which of the following is NOT one of these three items? a.The fair market value of the fixed asset b.The useful life of the fixed asset c.The residual value of the fixed asset d.The cost of the fixed asset

a.The fair market value of the fixed asset

The historical cost principle requires that a company record its fixed assets at the a.exchange price at the time the asset is purchased. b.suggested retail price at the time the asset is purchased. c.market price plus the cost of interest on any debt used for the purchase. d.exchange price as of the balance sheet date.

a.exchange price at the time the asset is purchased.

An extraordinary repair is an expenditure that a.extends the asset's useful life. b.keeps an asset in normal operating condition. c.increases efficiency or productivity of an asset. d.adds a new or major component to the asset.

a.extends the asset's useful life.

The efficient use of assets can be measured by how well a company generates a.revenue. b.expenses. c.common stock. d.debt.

a.revenue.

A company is required to review an asset for impairment if events or circumstances lead the company to believe that the asset may be impaired. An impairment exists if a.the future cash flows expected to be generated by the asset are less than the asset's book value. b.the expected future fair market value of the asset is greater than the book value today. c.the future cash flow expected when the asset is sold will be less than the asset's book value at the time of the sale. d.the future cash flow expected when the asset is sold will be greater than the asset's book value at the time of the sale.

a.the future cash flows expected to be generated by the asset are less than the asset's book value.

The declining balance depreciation method is used by Famous Company. Assume an asset costs $100,000 and has an expected useful life of 10 years, a residual value of zero, a current book value of $80,000, a straight-line rate of 10%, and a double-declining-balance rate of 20%. Using double-declining-balance depreciation, how much depreciation expense will be recognized for the current year? a.$20,000 b.$16,000 c.$10,000 d.$80,000

b.$16,000 Declining Balance Depreciation Expense = Declining Balance Rate × Book Value ($80,000 × 20% = $16,000 depreciation expense for the current year

On January 1, Lakeview Rentals bought a backhoe for $30,000, estimating that it would have a residual value of $5,000 and a useful life of 10 years. Lakeview uses the straight-line depreciation method, and the book value of the asset on December 31 of the same year was $27,500. Lakeview then completed an overhaul to the backhoe for $6,000 that extended the useful life to a remaining 10 years. What is the revised depreciation expense for the upcoming year? a.$2,750 b.$2,850 c.$3,250 d.$2,500

b.$2,850 ($27,500 book value + $6,000 overhaul) - $5,000 residual value/10 years remaining of revised useful life = $2,850

A patent has a legal life of 20 years. On January 1, Alpha Company acquires a patent that has a remaining legal life of 15 years. The company expects to receive economic benefits from the patent for only 5 years. How many years of amortization expense will the company have? a.15 years b.5 years c.20 years d.Number of years cannot be determined.

b.5 years Patents are amortized over the shorter of the legal or the useful life. The company will amortize the patent over 5 years, which is the shorter useful life of the patent.

The disposal of a fixed asset may result in a gain or loss on disposal. Which of the following would be part of the entry to record a gain on the disposal of a fixed asset? a.The fixed asset account is debited. b.Gain on Disposal is credited. c.Cash is credited. d.Accumulated Depreciation is credited.

b.Gain on Disposal is credited. The fixed asset account is credited to remove it from the books.

Operating assets are long-lived assets. Which of the following is NOT an operating asset? a.Land b.Inventory c.Natural resources d.Property, plant, and equipment

b.Inventory

Which of the following accounting principles provides the conceptual basis for measuring and recognizing depreciation? a.Conservatism principle b.Matching principle c.Consistency principle d.Historical cost principle

b.Matching principle The matching principle provides the conceptual basis for measuring and recognizing depreciation and requires that the cost of a fixed asset be allocated as an expense among the accounting periods in which the asset is used and revenues are generated by its use.

On January 1, Alpha Company acquires a patent for $70,000 and expects to receive economic benefits from it for 5 years, so amortization expense is $14,000. What account will be credited for the amortization expense entry? a.Cash for $14,000 b.Patent for $14,000 c.Amortization Expense for $14,000 d.Account cannot be determined.

b.Patent for $14,000

Accumulated depreciation represents the total amount of depreciation expense that has been recorded for the asset since the asset was acquired. On which of the following financial statements is accumulated depreciation reported? a.The statement of cash flows b.The balance sheet c.The statement of fixed assets d.The income statement

b.The balance sheet

The periodic depreciation expense rises and falls with the asset's use when which of the following depreciation methods is applied? a.MACRS method b.Units-of-production method c.Declining balance method d.Straight-line method

b.Units-of-production method

Depreciation is a(n) a.inventory valuation process. b.cost allocation process. c.fair market valuation process. d.asset valuation process.

b.cost allocation process.

If a fixed asset is impaired, a company should reduce the asset's book value to a.cash flow value. b.fair value. c.future fair market value. d.impairment value.

b.fair value.

Fixed assets are usually disposed of voluntarily. However, disposition may also be involuntary. Voluntary disposal occurs when assets are a.destroyed through theft. b.sold at auction. c.destroyed through acts of nature. d.lost.

b.sold at auction.

On March 1, Duke Company acquired a new high lift from Function, Inc. Duke paid $25,000 in cash and paid sales taxes of $3,000. Duke also paid Joe's Freight $5,000 to haul the high lift across the state to deliver it to its factory. Duke paid $500 to have the machine oiled and lubricated after the first month of operating it. How much should Duke Company record as the cost of the high lift? a.$33,500 b.$28,000 c.$33,000 d.$25,000

c.$33,000 The capitalized costs are $25,000 in cash + $3,000 sales tax + $5,000 freight. Oiling and lubricating the machine is not capitalized but instead is expensed as incurred as routine maintenance.

A company has the following information: Net property, plant, and equipment, beginning of year: $100,000; net property, plant, and equipment, end of year: $150,000; net sales: $250,000; and depreciation expense: $6,000. The fixed asset turnover ratio is a.1.6 times. b.0.4 time. c.2 times. d.2.5 times.

c.2 times. $250,000/[($100,000 + $150,000)/2] = 2 times

The disposal of a fixed asset may result in a gain or loss on disposal. Which of the following would be part of the entry to record a loss on the disposal of a fixed asset? a.The fixed asset account is debited. b.Accumulated Depreciation is credited. c.Loss on Disposal is debited. d.Cash is credited.

c.Loss on Disposal is debited.

Which of the following is the first step to revise the calculation of depreciation expense? a.Calculate capital expenditures added to the asset's cost. b.Revise the estimated residual value. c.Obtain the book value of the asset at the date of the revision of depreciation. d.Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value.

c.Obtain the book value of the asset at the date of the revision of depreciation.

If a company did NOT correctly record all the costs necessary to acquire an asset and prepare it for use, what affect could this have on the financial statements? a.The costs would be reported on the balance sheet, so income would be higher in the current period. b.The costs would be expensed, so income would be higher in the current period. c.The costs would be expensed, so income would be lower in the current period. d.Revenues would be higher so income would be higher in the current period.

c.The costs would be expensed, so income would be lower in the current period.

Which of the following is NOT a reason to revise the calculation of depreciation expense? a.A capital expenditure is added to the asset's cost. b.The estimated residual value is revised. c.The number of units produced by the asset in the current year is higher than the number produced last year. d.The estimated useful life of the asset is changed.

c.The number of units produced by the asset in the current year is higher than the number produced last year. The change of an asset's estimated useful life, residual value, or both will result in a recalculation of depreciation expense. In addition, when a capital expenditure is made, it is also necessary for a company to recalculate depreciation expense.

Which of the following is NOT important with regard to accounting for operating assets? a.The cost of an asset b.The allocation of the cost to expense c.The physical location of an asset in the manufacturing facility d.The types of expenditures related to an asset after acquisition

c.The physical location of an asset in the manufacturing facility

An impairment of an asset may be due to which of the following? a.The FASB determining that the asset is impaired b.The maintenance expense of the asset being higher than expected c.Too little depreciation expense being recorded in previous years d.The replacement cost of the asset increasing

c.Too little depreciation expense being recorded in previous years

Tannehill Company bought a machine for $150,000. Three years later when the book value is $60,000, Tannehill suspects that the machine is impaired. It estimates that future cash flows from the machine will be approximately $50,000 and its current fair value is $40,000. The entry for the impairment loss is a a.debit to Loss from Impairment for $100,000. b.credit to Loss from Impairment for $90,000. c.debit to Loss from Impairment for $20,000. d.credit to Loss from Impairment for $20,000.

c.debit to Loss from Impairment for $20,000.

A capital expenditure does all of the following EXCEPT a.expand the productive capacity of the fixed asset. b.extend the life of the fixed asset. c.maintain the quality of the product produced by the fixed asset. d.increase the efficiency of the fixed asset.

c.maintain the quality of the product produced by the fixed asset. An expenditure that extends the life of the fixed asset, expands the asset's productive capacity, increases the asset's efficiency, or improves the quality of the product produced by the asset is a capital expenditure. If the expenditure simply maintains the current expected life, capacity, efficiency, or product quality, it is a revenue expenditure.

For internally developed intangible assets, the cost of developing the asset is expensed as incurred and normally recorded as a.amortization expense. b.depreciation expense. c.research and development (R&D) expense. d.intangible asset expense.

c.research and development (R&D) expense. For internally developed intangible assets, the cost of developing the asset is expensed as incurred and normally recorded as research and development (R&D) expense.

All of the following are true EXCEPT that a.sales taxes are included in the capitalized cost of equipment. b.excavation costs are included in the capitalized cost of buildings. c.routine maintenance costs are included in the capitalized cost of equipment. d.sales taxes are included in the capitalized cost of land improvements.

c.routine maintenance costs are included in the capitalized cost of equipment.

On July 1, ABC Company acquired a new automatic extruding machine from Dayton, Inc. ABC paid $20,000 in cash and signed a 1-year, 10% note for $80,000. ABC also paid B. J. Contractors $5,000 to install the equipment. How much should ABC Company record as the cost of the extruding machine? a.$108,000 b.$80,000 c.$20,000 d.$105,000

d.$105,000 The capitalized costs are $20,000 in cash + $80,000 note payable + $5,000 installation costs. Interest on the note payable is not capitalized but instead is expensed as incurred.

Shiny Metals Mining purchased a silver mine for $2,500,000. The estimated residual value is $0. It is estimated that there are 2,500,000 ounces of silver in the mine. What will the amount of depletion be in August if it extracts 5,000 ounces of silver from the mine? a.$500 b.$5,087 c.$508.70 d.$5,000

d.$5,000 The mine's depletion rate is ($2,500,000 cost - $0 residual value)/2,500,000 estimated recoverable ounces of silver = $1 per ounce. For August, the depletion amount is 5,000 ounces × $1 = $5,000.

Which of the following is the formula to calculate the depletion rate? a.(Cost + Residual Value)/Recoverable Units b.Cost - (Residual Value/Recoverable Units) c.Cost + (Residual Value/Recoverable Units) d.(Cost - Residual Value)/Recoverable Units

d.(Cost - Residual Value)/Recoverable Units

As the service potential of operating assets declines, the costs of these assets are allocated to an expense for the accounting periods in which the assets are used and benefits received. This process is called __________ for intangible assets and __________ for natural resources. a.amortization; allocation b.allocation; depreciation c.depletion; depreciation d.amortization; depletion

d.amortization; depletion

In addition to expenditures made when property, plant, and equipment are acquired, companies will incur costs over the life of the asset that range from ordinary repairs and maintenance to major overhauls, additions, improvements, and betterments. When a manufacturing firm spends $150,000 to upgrade one of its robotic machines to make it more productive, the expenditure would be classified as a(n) a.revenue expenditure. b.efficiency expenditure. c.productivity expenditure. d.capital expenditure.

d.capital expenditure. Improvements or betterments are expenditures that increase the efficiency or productivity of an operating asset. These expenditures are classified as capital expenditures. The cost of upgrading a robotic machine to make it more productive is an example of a capital expenditure.

The impairment loss is equal to the a.addition of the book value to the fair value of the asset. b.difference between the future cash flows expected to be generated by the asset and the asset's book value. c.difference between the expected future fair market value of the asset and the asset's book value today. d.difference between the book value and the fair value of the asset.

d.difference between the book value and the fair value of the asset.

If a fixed asset is impaired, a company should reduce the asset's book value to a.cash flow value. b.impairment value. c.future fair market value. d.fair value.

d.fair value.

The amount of depreciation expense recorded each period is reported on the a.statement of cash flows. b.balance sheet. c.statement of retained earnings. d.income statement.

d.income statement.

While a company will choose between the three depreciation methods as it prepares its financial statements, the depreciation method used in preparing the tax return is specified by a.GAAP. b.the Securities and Exchange Commission. c.the company's tax manager. d.the Internal Revenue Code.

d.the Internal Revenue Code.