Chapter 7 Practice Questions

Accumulated depreciation is: a. An expense account. b. An asset. c. A contra-asset. d. A liability.

c. A contra-asset.

If equipment is retired, which of the following accounts would be debited? a. Accumulated depreciation. b. Depreciation expense. c. Equipment. d. Cash.

a. Accumulated depreciation.

The amount of the gain on the sale of equipment equals: a. The selling price minus the book value of the equipment. b. The selling price minus the original cost of the equipment. c. The selling price minus the fair value of the equipment. d. The selling price minus accumulated depreciation of the equipment.

a. The selling price minus the book value of the equipment.

The Open Grill incurred the following costs in acquiring a new piece of land: -Cost of the land:$80,000 -Commissions: 4,800 -Liability insurance for the first year: 1,200 -Cost of removing existing building :20,000 -Sale of salvaged materials (4,000) -Total costs: $102,000 What is the total recorded cost of the land? a.$102,000. b. $100,800. c. $106,000. d. $80,000.

b. $100,800.

The book value of an asset is equal to the a. Replacement cost. b. Asset's cost less accumulated depreciation. c. Asset's fair value less its historical cost. d. Historical cost plus accumulated depreciation.

b. Asset's cost less accumulated depreciation.

The asset's cost less accumulated depreciation is called: a. Replacement cost. b. Book value. c. Net fair value. d. Residual value.

b. Book value.

Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life? a. Straight-line method. b. Activity-based method. c. Double declining balance method. d. Each method will result in the same depreciation during the first year.

c. Double declining balance method.

Which of the following expenditures should be recorded as an expense? a. An addition which increases future benefit. b. An improvement. c. Ordinary repairs and maintenance. d. Successful legal defense of an intangible asset.

c. Ordinary repairs and maintenance.

The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year? a. $100,000. b. $82,000. c. $80,000. d. $60,000.

d. $60,000.

Over the entire service life of an asset, which depreciation method records the highest total depreciation? a. The straight-line method. b. The double declining method. c. The activity-based method. d. All the methods result in the same total depreciation.

d. All the methods result in the same total depreciation.

Return on assets is equal to: a. Net income divided by long-term assets. b. Net income divided by average long-term assets. c. Average total assets divided by net income. d. Net income divided by average total assets.

d. Net income divided by average total assets.

Research and development costs a. Are recorded as research and development assets. b. Are capitalized and then amortized. c. Should be included in the cost of the patent they relate to. d. Should be expensed.

d. Should be expensed.

Which of the following intangible assets are not amortized? a. Goodwill. b. Patents. c. Copyrights. d. Franchises.

a. Goodwill.

Which of the following is properly recorded as an intangible asset? a. An internally developed trademark. b. A piece of land. c. A purchased patent. d. An internally developed copyright.

c. A purchased patent.

Which of the following expenditures should be capitalized? a. Research and development costs. b. An improvement to a tangible asset. c. Ordinary repairs and maintenance. d. Unsuccessful legal defense of an intangible asset.

b. An improvement to a tangible asset.

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method? a. $16,000. b. $7,200. c. $8,800. d. $20,000.

a. $16,000.

Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year? a. $8,000. b. $5,000. c. $7,000. d. $5,500.

a. $8,000.

Which of the following expenditures should be recorded as an asset? a. An addition which increases future benefit. b. Repairs that maintain current benefits. c. Maintenance that maintain current benefits. d. Unsuccessful legal defense of an intangible asset.

a. An addition which increases future benefit.

Which of the following expenditures should be recorded as an asset? a. Interest costs during the construction period of a new building. b. Repair of a machine. c. Property taxes incurred on an existing building. d. Depreciation during the first year of an existing building.

a. Interest costs during the construction period of a new building.

An exclusive 20-year right to manufacture a product or to use a process is a: a. Patent. b. Copyright. c. Trademark. d. Franchise.

a. Patent.

Return on assets is equal to: a. Profit margin times asset turnover. b. Profit margin minus asset turnover. c. Profit margin plus asset turnover. d. Profit margin divided by asset turnover.

a. Profit margin times asset turnover.

Which of the following expenditures should be recorded as an expense? a. Repairs and maintenance that maintain current benefits. b. Adding a major new component to an existing asset. c. Replacing a major component of an existing asset. d. Successful legal defense of an intangible asset.

a. Repairs and maintenance that maintain current benefits.

On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)? (Do not round intermediate calculations.) a. $0. b. $50,000. c. $200,000. d. $100,000.

b. $50,000.

A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets. a. 12.5%. b. 8.0%. c. 4.5%. d. 5.0%.

b. 8.0%.

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record: a. A loss of $5,000. b. A gain of $5,000. c. A loss of $70,000. d. A gain of $70,000.

b. A gain of $5,000.

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record: a. No gain or loss. b. A loss of $10,000. c. A gain of $10,000. d. A loss of $35,000.

b. A loss of $10,000.

We normally record a long-term asset at the a. Cost of the asset only. b. Cost of the asset plus all costs necessary to get the asset ready for use. c. Appraised value. d. Cost of the asset, but subsequently adjust it up or down to appraised value.

b. Cost of the asset plus all costs necessary to get the asset ready for use.

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life? a. Short service life, high residual value, and straight-line depreciation. b. Long service life, high residual value, and straight-line depreciation. c. Short service life, low residual value, and double-declining-balance depreciation. d. Long service life, high residual value, and double-declining-balance depreciation.

b. Long service life, high residual value, and straight-line depreciation.

Which of the following is not recorded as an intangible asset in the balance sheet? a. Patents. b. Research and development. c. Trademarks. d. Goodwill.

b. Research and development.

Which of the following will result in higher depreciation expense in the first year of the asset's life? a. Short service life and high residual value. b. Short service life and low residual value. c. Long service life and low residual value. d. Long service life and high residual value.

b. Short service life and low residual value.

Which of the following statements is false regarding the amortization of intangible assets? a. Intangible assets with a limited useful life are amortized. b. The service life of an intangible asset is always equal to its legal life. c. The expected residual value of most intangible assets is zero. d. Goodwill is the most common intangible asset with an indefinite useful life.

b. The service life of an intangible asset is always equal to its legal life.

Tasty Inn and Out incurred the following costs related to its purchase of equipment. -Cost of the equipment: $10,000 -Sales tax (7%): $700 -Annual property insurance: $500 -Shipping: $200 -Initial safety testing: $1,000 -Total costs: $12,400 What is the recorded cost of the equipment? a. $10,000 b. $10,700 c. $11,900 d. $12,400

c. $11,900

A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase? a. $900,000. b. $200,000. c. $180,000. d. $220,000.

c. $180,000.

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase? a. $800,000. b. $500,000. c. $700,000. d. $0.

c. $700,000.

A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation? a. $9,600. b. $12,000. c. $8,000. d. $10,000.

c. $8,000.

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record a. No gain or loss. b. A gain of $10,000. c. A loss of $10,000. d. A loss of $40,000.

c. A loss of $10,000.

Depreciation in accounting is the: a. Decrease in fair value of an asset. b. Decrease in selling price of an asset. c. Allocation of an asset's cost to an expense over time. d. Change in fair value of an asset.

c. Allocation of an asset's cost to an expense over time.

A long-term asset is recorded at the: a. Cost of the asset. b. Additional costs to get the asset ready for use. c. Cost of the asset plus all costs necessary to the asset ready for use. d. Cost of the asset less all costs necessary to the asset ready for use.

c. Cost of the asset plus all costs necessary to the asset ready for use.

Which of the following correctly describes the nature of depreciation? a. Depreciation represents the valuation of property, plant, and equipment over its service life. b. Depreciation represents the valuation of an intangible asset over its service life. c. Depreciation represents the allocation of the cost of property, plant, and equipment over its service life. d. Depreciation represents the allocation of the cost of an intangible asset over its service life.

c. Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.

The company's profitability on each dollar invested in assets is represented by which of the following ratios: a. Profit margin. b. Asset turnover. c. Return on assets. d. Return on equity.

c. Return on assets.

Which of the following statements is true regarding the amortization of intangible assets? a. Intangible assets with a limited useful life are not amortized. b. The service life of an intangible asset is always equal to its legal life. c. The expected residual value of most intangible assets is zero. d. In recording amortization, Accumulated Amortization is always credited.

c. The expected residual value of most intangible assets is zero.

Sandwich Express incurred the following costs related to its purchase of a bread machine. -Cost of the equipment: $20,000 -Sales tax (8%): 1,600 -Shipping: 2,200 -Installation: 1,400 -Total costs: $25,200 At what amount should Sandwich Express record the bread machine? a. $20,000. b. $21,600. c. $23,800. d. $25,200.

d. $25,200.

A company has the following three assets with the information provided: ($ in millions), Equipment, Land, Building -Book value: $8, $20, $12 -Estimated total future cash flows: $6, $35, $14 -Fair value: $5 $30 $10 Determine the amount of the impairment loss, if any. a. $0. b. $5 million. c. $10 million. d. $3 million.

d. $3 million.

The Cheese Factory incurred the following costs related to acquiring a new piece of equipment: -Cost of the equipment:$50,000 -Sales tax (8%): 4,000 -Shipping: 3,000 -Installation: 2,000 -Depreciation during the first month: 1,000 -Total costs: $60,000 What is the total recorded cost of the equipment? a. $60,000. b. $50,000. c. $57,000. d. $59,000.

d. $59,000.

The balance in the Accumulated Depreciation account represents a. The amount charged to expense in the current period. b. A contra expense account. c. A cash fund to be used to replace plant assets. d. The amount charged to depreciation expense since the acquisition of the plant asset.

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