Long-Term Assets Exam

Lancer Corporation purchased a parcel of land as a factory site for $150,000. Construction began immediately on a new building. Costs incurred are as follows: Architect's fees 25,000 Legal fees for land purchase contract 2,000 Construction costs 250,000 Lancer should record the cost of the new land and building, respectively, at: -$150000 and $275000 -$152000 and $275000 -$150000 and $250000 -$152000 and $250000

$152000 and $275000

Omni Corporation purchased a new vehicle on January 1, 20X1. The vehicle cost $100,000, has a five-year life, and a $20,000 residual value. Omni has a December 31 year-end. If Omni depreciates the truck by the double-declining balance method, how much should be recorded as depreciation expense during 20X4? -$0 -$1600 -$8640 -$40000

$1600

On July 1, 20X1, Robinson Company purchased a new machine for $200,000. The machine is estimated to have a service-life of 10 years with an estimated residual value of $5,000. Robinson uses straight-line depreciation. During 20X5, it became apparent that the machine would not be efficient to operate after December 31, 20X7. Furthermore, the machine would have no scrap value. How much should be charged to depreciation expense in 20X5 under generally accepted accounting principles? (round computations to the nearest dollar) -$19500 -$42250 -$43917 -$65000

$43917 ($200,000 - $5,000 = $195,000. $195,000/10 years = $19,500. $200,000 - ($19,500 x 6/12) = $190,250. $190,250 - ($19,500 x 3 years) = $131,750. $131,750 / 3 = $43,917)

Reno Acquisitions Company recently bought a furnished hotel for a lump-sum purchase price of $15,000,000. Separately, the land was valued at $6,000,000, the building at $12,000,000, and the furniture and equipment at $2,000,000. How much cost should Reno assign to the land? -$1000000 -$4500000 -$6000000 -$8000000

$4500000 ($6,000,000/$20,000,000 = 0.3. $15,000,000 x 0.3 = $4,500,000)

Investor Corporation owns 30% of Investee Corporation. Investee had net earnings of $100,000 during the year and paid dividends of $30,000. Investor's Investment in Investee account contained a $70,000 balance at the beginning of the year. How much dividend income will Investor record? -$0 -$9000 -$30000 -$39000

$0

On January 1, 20X2, Lynn Corporation purchased a machine for $100,000. Lynn paid shipping expenses of $1,000 as well as installation costs of $2,400. The machine was estimated to have a useful life of ten years and an estimated salvage value of $6,000. In January 20X3, additions costing $7,200 were made to the machine. These additions significantly improved the quality of output, but did not change the life or salvage value of the machine. If Lynn records depreciation under the straight-line method, depreciation expense for 20X3 is: -$9740 -$10340 -$10540 -$11140

$10540 (original depreciable basis $103,400 - $6,000 = $97,400. original annual amount $97,400 / 10 = $9740. $7,200 / 9 years = $800. $9740 + $800 = $10,540

Ace Corporation has a long-term investment in the common stock of another entity. The investment does not render the investor with the ability to exercise significant influence or control over the investee. A journal entry to record a $10,000 decline in market value below cost would necessarily involve: -a debit to unrealized gain/loss -a credit to unrealized gain/loss -a debit to long term investments -a debit to investment revenue

a debit to unrealized gain/loss

Equipment costing $3,000 with accumulated depreciation of $2,125 is exchanged for another asset with a fair value of $625. The exchange has commercial substance. How much is the gain or loss on this transaction? -a gain of $250 should be recognized -a loss of $250 should be recognized -a loss of $500 should be recognized -no gain or loss should be recognized

a loss of $250 should be recognized ($2,125 - ($3,000 - $625) = $-250)

If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then the firm should reduce the asset in the accounts. In addition, -a loss should be recognized -an intangible asset should be recorded -the asset should be discarded -depreciation should cease

a loss should be recognized

A premium on an investment in bonds would likely result when the contract rate is "what" in relation to the going market rate? -above -below

above

A machine that cost $18,000, with a book value of $4,000, is sold for $3,400. Which of the following is true concerning the journal entry to record the sale? -accumulated depreciation is debited for $4000 -machinery is credited for $4000 -loss on sale of machinery is credited for $600 -accumulated depreciation is debited for $14000

accumulated depreciation is debited for $14000

Presently, the accounting profession purports to use which conceptual approach to measuring income: -current operating -all inclusive

all inclusive

Depreciation is a process of: -valuation -allocation

allocation

The _____________ _____________ method is used to account for held-to-maturity investments.

amortized cost

Cross Country Trucking Company recently replaced the oil filter on one of its cross country rigs. How should one account for this cost? -as a repair and maintenance expense -as an increase in the cost of the truck -as a reduction in accumulated depreciation associated with the truck -as an intangible asset

as a repair and maintenance expense

Investments in Bonds that the investor intends to hold to maturity should be disclosed on the balance sheet: -at their face value minus any unamortized premiums -at their face value plus any unamortized premiums -at their maturity value -at their face value

at their face value plus any unamortized premiums

The _____________ _____________ _____________ securities category is used to account for securities that are neither trading nor held to maturity.

available for sale

In evaluating the correct accounting choice (e.g., held-to--maturity, etc.) for a particular investment, which of the following is most apt to be regarded as the "default" choice? -trading securities -available for sale securities

available for sale securities

Which of the following expenditures meet at least one of the criteria for capitalization? -repairs -betterments

betterments

_____________ , also known as improvements or extraordinary repairs, generally improve or increase future service potential of an asset.

betterments

Cost minus residual value is known as depreciable base, whereas cost minus accumulated depreciation is known as _____________ _____________ .

book value

Additional monetary consideration in an exchange transaction is known as _____________ .

boot

In addition to a change in estimated service life, what other type of change would likely result in a revision of depreciation amounts? -change in useful life -change in accumulated depreciation

change in useful life

Briefly stated, gains and losses are to be recognized on exchanges that have _____________ _____________ .

commercial substance

The appropriate journal entry to record machinery depreciation of $1,000 is: -debit depreciation expense for 1000 and credit accumulated depreciation for 1000 -debit depreciation expense for 1000 and credit machine for 1000 -debit accumulated depreciation for 1000 and credit depreciation expense for 1000 -debit accumulated depreciation for 1000 and credit machine for 1000

debit depreciation expense for 1000 and credit accumulated depreciation for 1000

On June 1, Pennell Corporation purchased $100,000 of 9%, 5-year bonds. The bonds are dated June 1, 20X1. The bonds were issued at 96, and pay interest on December 1 and June 1. The entry to record the investment in bonds is: -debit investment in bonds for 100,000 and credit cash for 100,000 -debit investment in bonds for 96,000 and credit cash for 96,000 -debit investment in bonds for 104,000 and credit cash for 104,000 -debit investment in bonds for 96,000, debit income for 4,000 and credit cash for 100,000

debit investment in bonds for 96,000 and credit cash for 96,000

An accelerated depreciation method which involves applying a fixed depreciation rate to the remaining book value of an asset is known as the _____________ _____________ method.

declining balance

Premium amortization causes interest income to _____________ .

decrease

The amortization of the premium on an investment in bonds will cause the investment in bonds account to _____________ .

decrease

Asset cost minus residual value is termed: -book value -depreciable base

depreciable base

The process used to allocate the cost of long-lived assets to the accounting periods benefited is known as: -obsolescence -depreciation

depreciation

Bond investment _____________ amortization causes investment income to be increased beyond the amount of cash received.

discount

With the equity method, _____________ and losses cause a decrease in the Investment account.

dividends

The equity method involves journal entries at the time the investee's earnings are announced, as well as when: -dividends are paid -market value declines

dividends are paid

The term "service life" is synonymous with: -physical life -economic life

economic life

The equity method focuses principally on changes in the investee's _____________ , rather than on changes in the market value of the investee's stock.

equity

Under the equity method, the investor's investment account goes up and down with the investees: -equity -cash

equity

The available-for-sale securities are reported on the balance sheet at _____________ _____________ _____________ .

fair market value

Goodwill is the excess of the investment cost over "book value" or over "fair value" of the subsidiaries identifiable assets? -book value -fair value

fair value

A company must utilize the same depreciation methods for financial reporting and taxes purposes. true or false?

false

For costs incurred after asset acquisition, capitalization will occur only if the service life of an asset is prolonged. true or false?

false

The specific accounting treatment for a long-term investment depends on the type of security purchased, not the intent of the investment. true or false?

false

The straight-line method generally results in the highest possible (as compared to accelerated depreciation methods) depreciation expense during an asset's early years of usage. true or false?

false

Many lease agreements provide a period of use nearly equal to the entire service life of the leased assets. Such agreements frequently contain a provision for the lessee to acquire the property at a bargain purchase price, and are called _____________ _____________ .

financing leases

Briefly stated, which of the following should not be recognized on exchanges that lack commercial substance? -gains -losses

gains

When a subsidiary is acquired at a premium over the fair value of the identifiable assets, _____________ will appear in the consolidated statements.

goodwill

_____________ occurs when the value of a company as an operating entity exceeds the value of its individual tangible assets and liabilities.

goodwill

A graph is set up with "depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the lines for straight-line and double-declining-balance depreciation expense, respectively, be drawn on this graph? -vertically and sloping down to the right -vertically and sloping up to the right -horizontally and sloping down to the right -horizontally and sloping up to the right

horizontally and sloping down to the right

Under the units-of-output depreciation method, the depreciable base is divided by the service life: -in output -in years

in output

Assume that the modified accelerated cost recovery system is used to account for a depreciable asset for tax purposes. In general, which of the following observations is correct? -depreciation amounts will be the same for financial reporting purposes -in the early years of an asset's life, depreciation will be greater for tax than for financial reporting purposes -in the early years of an asset's life, depreciation will be less for tax than for financial reporting purposes -the tax life will exceed the financial reporting life

in the early years of an asset's life, depreciation will be greater for tax than for financial reporting purposes

Business growth may cause certain items of depreciable property, plant, and equipment to become deficient in their service capabilities. Such action is termed: -physical deterioration -inadequacy

inadequacy

Incidental expenditures incurred when purchasing equipment (like freight, installation, and brokerage fees) that are ordinary and necessary for the acquisition should be: -expensed as incurred -included in an asset's cost

included in an asset's cost

An asset impairment is normally accompanied by a direct charge to: -retained earnings -income

income

The excess of the cash received on a bond investment over the initial investment cost is recognized as: -return of investment -income

income

The amortization of a discount on a bond investment causes interest income to be: -reduced -increased

increased

The correct classification of an investment is based upon the _____________ for which it was acquired.

intent

If the parent and sub have done business with one another, adjustments will be needed to avoid reporting _____________ transactions.

intercompany

A company whose shares were acquired by an investor is known as the _____________ .

investee

The _____________ account will appear in the parent's separate balance sheet, but not the consolidated balance sheet.

investment

When consolidating, which of the following accounts would be eliminated from the consolidated presentation: -goodwill -investment in subsidiary

investment in subsidiary

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were: -less than current market value -greater than cost -greater than book value -less than book value

less than book value

Which party pays the other for the use of property? -lessee -lessor

lessee

A lease is an arrangement that allows one party, the _____________ , to use the assets of another party, the _____________ , for a stated period of time.

lessee lessor

For tax purposes, the exchange of similar assets will normally result in no gain or _____________ .

loss

If a cash sale of an item of depreciable property occurs, and the journal entry to record the sale is balanced by the recording of a debit, then a _____________ should be recognized.

loss

A _____________ - _____________ purchase occurs when a package of assets are acquired for a single purchase price amount.

lump sum

In an apportionment of the amount paid to acquire a package of assets, the amount assigned to a specific asset is based on its relative appraised value. The approach described relates to a: -cash purchase -lump sum purchase

lump sum purchase

The cost/benefit theme is consistent with the concept of _____________ , which refers to the significance of a particular item or transaction.

materiality

Tax laws permit asset cost to be charged against specific years via use of the _____________ _____________ _____________ _____________ _____________ .

modified accelerated cost recovery system

Under which type of lease does the lessee obtain the rights to use leased property for a limited period of time and treat amounts paid as expense? -operating lease -financing lease

operating lease

Changes in the value of available for sale securities are reported in _____________ _____________ _____________ .

other comprehensive income

The equity of a consolidated entity will tend to mirror the equity of the _____________ .

parent

In determining an asset's useful life, consideration must be given to three factors: _____________ _____________ , obsolescence, and inadequacy .

physical deterioration

When bonds are sold at more than face value, the difference between the issue price and the face value is commonly referred to as a _____________ .

premium

The amortization of a premium on a bond investment causes interest income to be: -reduced -increased

reduced

Which of the following items should be expensed as incurred? -broker's fees on the purchase of a long lived asset -repair of damage occurring during installation of new equipment -freight charges on the purchase of equipment -normal installation fees on the purchase of equipment

repair of damage occurring during installation of new equipment

Another name for economic or useful life is _____________ _____________ .

service life

Changes in market value of available-for-sale securities will directly impact: -stockholders' equity -net income

stockholders' income

One of the most popular depreciation methods is the _____________ - _____________ method.

straight line

The amortization method that results in a level amount of interest income each period was illustrated in this chapter. An alternative amortization method will be illustrated in subsequent chapters. The method shown is this chapter was the: -straight line method -effective interest method

straight line method

Consolidation is required for greater than 50% owned _____________ .

subsidiaries

The Modified Accelerated Cost Recovery System is primarily used for: -tax purposes -financial reporting purposes

tax purposes

When the contract interest rate for a bond exceeds the effective interest rate of the bond, then: -the price of the bond will be equal to the future cash flow associated with the bond -the bond will be issued at a premium -the bond will be issued at a discount -the face value of the bond will fluctuate over its life

the bond will be issued at a premium

Which of the following categories/methods would be used to account for an investment in debt securities, where the intent of the investment was primarily for short-term profits? -trading securities -available for sale securities -held to maturity securities -equity method

trading securities

Bond investments are initially entered into the accounts at cost; that is, the purchase price plus brokerage fees and other related acquisition costs. true or false?

true

Dividends received on investments are reported as income. true or false?

true

If an asset with a book value of $1,000 is abandoned, a $1,000 loss will be recognized in the income statement. true or false?

true

The difference between the book value of an asset and the proceeds received from its sale should be reported as a gain or loss. true or false?

true

The process to adjust depreciation for a change in service life entails spreading the remaining depreciable base over the remaining useful life. true or false?

true

Under double-declining balance depreciation, salvage value is ignored in the preliminary depreciation calculation. true or false?

true

When accounting for available-for-sale securities, the amount of investee earnings has no direct effect on the investor's Investment account. true or false?

true

Consolidated financial statements are normally required when the investor's ownership level exceeds the: -20% level -50% level

50% level

On July 1, 20X1, Clem Company purchased factory equipment for $50,000. Residual value was estimated to be $2,000. The equipment will be depreciated over ten years using the double-declining-balance depreciation method. Clem has a December 31 year-end, and during 20X1, one-half of a year's depreciation expense was recorded. How much depreciation expense should be recorded for 20X2? (round computations to the nearest dollar) -$4320 -$5000 -$8640 -$9000

$9000 ($50,000 x .2 (twice the straight line rate of .1) x .5 (6/12 months) = $5,000. ($50,000 - $5,000) x .2 = $9,000)

Investor Corporation owns 30% of Investee Corporation. Investee had net earnings of $100,000 during the year and paid dividends of $30,000. Investor's Investment in Investee account contained a $70,000 balance at the beginning of the year. What would be the correct balance of this account at the end of the year? -$70000 -$91000 -$100000 -$140000

$91000 ($100,000 + $30,000 = $130,000. $130,000 x 0.3 = $39,000. $130,000 - $39,000)

On January 1, 20X2, Miller Corporation purchased $100,000 of 5%, 10-year bonds dated January 1, 20X2, at 98. Interest is paid on June 30 and December 31 of each year. Assuming use of the straight-line amortization method, the proper amount to report for Investment in Bonds at December 31, 20X3 is: -$98000 -$98400 -$100000 -$101600

$98400 ($100,000 x 0.98 = $98,000 in investment in bonds. $2000 x 0.05 x .5 (6/12 months) = $50.

Mega Corporation owns 100% of Wolf Corporation's stock. Mega paid $1,000,000 for its investment. At the time of the initial investment, Wolf had total stockholders' equity of $600,000. All of Wolf's assets and liabilities were carried at amounts that equaled their fair value, except for a building that was undervalued by $100,000. How much goodwill would you anticipate finding in the consolidated balance sheet? -$0 -$100000 -$300000 -$400000

$300000

On April 1, 20X1, Collinge Corporation purchased $100,000 of 7%, 5-year bonds dated April 1, 20X1, at 101. Interest is paid on March 31 and September 30. Assuming use of the straight-line amortization method, the proper amount of income to record on September 30, 20X1 is: -$7000 -$3400 -$3500 -$3600

$3400

Realistic Company purchased a new truck on January 1, 20X1. The truck cost $20,000, has a four-year life, and a $4,000 residual value. The company has a December 31 year-end. If Realistic Company depreciates the truck by the straight-line method, how much should Realistic report as the book value of the truck at the end of 20X3? -$1600 -$4000 -$8000 -$16000

$8000 ($16,000/4 = $4,000. $4,000 x 3 years = $12,000. $20,000 - $12,000)

The equity method is appropriate for accounting for investments where the investor has acquired over _____________ percent of the voting stock of another company.

20

The equity method of accounting for an investment occurs when the investor has the ability to exercise significant influence over the investee, which is presumed to be the case when the investment level reaches: -10% -20%

20%