Principles of Accounting Chapter 10 - Long-Term Assets: Fixed and Intangible

Which of the following will be classified as a fixed asset in a movie theater? a. The latest movie b. A popcorn machine c. Trademark d. Land for sale

b. A popcorn machine Fixed assets, such as a movie theater's popcorn machine, are expected to last more than 1 year and are used by the business in a productive manner.

Which of the following depreciation methods provides for the same amount of depreciation expense for each year of the asset's useful life? a. Straight-line method b. Double-declining-balance method c. Units-of-output method d. All of these choices are correct.

a. Straight-line method The straight-line method provides for the same amount of depreciation expense for each year of the asset's useful life.

Cardinal Industries purchased a generator that cost $14,000. It has an estimated life of 5 years and a residual value of $2,000. It is estimated to be good for 5,000 hours. Compute the depreciation expense for the first year using the units-of-activity method of depreciation if the generator was used for 1,080 hours. a. $3,024 b. $2,592 c. $4,800 d. $259.2

b. $2,592 $14,000 - $2,000 = $12,000; $12,000 ÷ 5,000 hours = $2.40 per hour × 1,080 hours = $2,592

The following financial statement data for the year ending December 31 are for Sharp Company: Sales $780,000 Fixed assets: Beginning of year $250,000 End of year $300,000 Determine the fixed asset turnover ratio for the year. a. 3.1 b. 2.6 c. 2.8 d. 2.4

c. 2.8 ($250,000 + $300,000) ÷ 2 = $275,000; $780,000 ÷ $275,000 = 2.8

All of the following would be found in the Property, Plant, and Equipment section of the balance sheet EXCEPT a. parking lot costs. b. land improvements. c. a trademark. d. computer equipment.

c. a trademark. A trademark is a name, term, or symbol used to identify a business and its products, such as McDonald's golden arches. The Intangible Assets section of the balance sheet will include copyrights, patents, goodwill, and trademarks.

The expensing of a natural resource is called a. amortization. b. resource expensing. c. depletion. d. depreciation.

c. depletion. The process of transferring the cost of natural resources to an expense account is called depletion.

All of the following are considered fixed assets EXCEPT a. land. b. land improvements. c. a building. d. copyrights.

d. copyrights. A copyright is the exclusive right to publish and sell literary, artistic, or musical compositions. Copyrights, patents, goodwill, and trademarks will be included in the Intangible Assets section of the balance sheet.

A machine was purchased at a cost of $126,000. The equipment had an estimated useful life of 5 years and a residual value of $11,000. Assuming the equipment was sold at the end of Year 4 for $16,000, determine the gain or loss on the sale of equipment. (Assume the straight-line depreciation method.) a. A loss of $18,000 b. A gain of $18,000 c. A loss of $34,000 d. A gain of $34,000

a. A loss of $18,000 ($126,000 - $11,000) ÷ 5 = $23,000. $23,000 × 4 = $92,000. $126,000 - $92,000 = $34,000. $16,000 - $34,000 = $(18,000) loss.

Which of the following statements regarding goodwill is true? a. In a purchase of a business at a price in excess of the fair value of its net assets, goodwill is recorded as the excess. b. Goodwill is amortized based on the lesser of the useful life or the legal life. c. Goodwill is the exclusive use of a name, term, or symbol used to identify a business or its product. d. Goodwill is amortized based on a 10-year period.

a. In a purchase of a business at a price in excess of the fair value of its net assets, goodwill is recorded as the excess. Goodwill is an intangible asset that allows a business to earn a greater rate of return than normal. Goodwill is not amortized. GAAP only allows goodwill to be recorded if it is objectively determined by a transaction, such as when a company buys another company for an amount greater than the fair value of its net assets. In this case, goodwill is recorded as the excess amount.

On December 31, Slugger Batting Cages Company decides to trade in one of its batting cages for another one that has a cost of $510,000. The seller of the batting cage is willing to allow a trade-in amount of $13,000. The initial cost of the old equipment was $255,000 with an accumulated depreciation of $205,000. Depreciation has been taken up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. Loss of $37,000 b. Gain of $13,000 c. No loss or gain d. Loss of $13,000

a. Loss of $37,000 The book value of the equipment is equal to $50,000 ($255,000 original cost less the accumulated depreciation of $205,000). The trade-in allowance of $13,000 is subtracted from the $50,000 book value resulting in an $37,000 loss.

The following financial statement data for 2 years are for Townson Company: Year 2 Sales $3,695,000 Year 1 Sales $4,300,000 Fixed assets: Beginning of year Year 2 $910,000; Year 1 $830,000 End of year Year 2 $520,000; Year 1 $910,000 Which of the following statements regarding the company's fixed asset turnover ratio is NOT true? a. Townson's fixed asset turnover ratio has decreased between Year 1 and Year 2. b. Townson has become more efficient in generating sales with its fixed assets in Year 2 as compared to Year 1. c. Townson's fixed asset turnover ratio has increased between Year 1 and Year 2. d. Since Year 1, it appears that Townson may have become more labor-intensive, requiring smaller amounts of fixed asset investments.

a. Townson's fixed asset turnover ratio has decreased between Year 1 and Year 2. Townson's fixed asset turnover ratio has increased, rather than decreased, between Year 1 and Year 2. Year 1: ($830,000 + $910,000) ÷ 2 = $870,000; $4,300,000 ÷ $870,000 = 4.9. Year 2: ($910,000 + $520,000) ÷ 2 = $715,000; $3,695,000 ÷ $715,000 = 5.2. This means that Townson has become more efficient in generating sales with its fixed assets in Year 2 as compared to Year 1. Since Year 1, it appears that Townson may have become more labor-intensive, requiring smaller amounts of fixed asset investments.

If the asset is long lived but not used in a productive manner, it will be classified as a(n) a. investment. b. expense. c. intangible asset. d. fixed asset.

a. investment. Long-lived assets held for resale are classified as investments.

A machine was purchased at a cost of $94,000. The equipment had an estimated useful life of 5 years and a residual value of $4,000. Assuming the equipment was sold at the end of Year 4 for $9,000, determine the gain or loss on the sale of equipment. (Assume the straight-line depreciation method.) a. A gain of $13,000 b. A loss of $13,000 c. A loss of $22,000 d. A gain of $22,000

b. A loss of $13,000 ($94,000 - $4,000) ÷ 5 = $18,000. $18,000 × 4 = $72,000. $94,000 - $72,000 = $22,000. $9,000 - $22,000 = $(13,000) loss.

If a company has many classes of fixed assets, which of the following is the most likely financial statement presentation? a. Depreciation expense and amortization expense should be reported on the balance sheet separately or disclosed in a note. b. A single amount may be presented on the balance sheet, supported by a note with a separate listing. c. Intangible assets should be combined with property, plant, and equipment into a single section on the balance sheet and labeled as property, plant, and equipment. d. None of these choices are correct.

b. A single amount may be presented on the balance sheet, supported by a note with a separate listing. If there are many classes of fixed assets, a single amount may be presented on the balance sheet, supported by a note with a separate listing.

A decrease in the fixed asset turnover ratio from 3.0 to 2.2 indicates a. a favorable trend in the efficiency of using fixed assets to generate sales. b. an unfavorable trend in the efficiency of using fixed assets to generate sales. c. an unfavorable trend in the efficiency of using fixed assets to pay down debt. d. None of these choices are correct.

b. an unfavorable trend in the efficiency of using fixed assets to generate sales. A decrease in the fixed asset turnover ratio indicates an unfavorable trend in the efficiency of using fixed assets to generate sales.

Tangible and intangible assets are normally presented a. on the balance sheet in the Tangible and Intangible Assets section. b. in two separate sections on the balance sheet as Property, Plant, and Equipment and Intangible Assets. c. on the income statement. d. all together on the balance sheet in the Property, Plant, and Equipment section.

b. in two separate sections on the balance sheet as Property, Plant, and Equipment and Intangible Assets. The balance sheet presentation will have the tangible assets in the Property, Plant, and Equipment section. Intangible assets are usually reported on the balance sheet in a separate section following property, plant, and equipment.

All of the following will be included in the cost of a fixed asset EXCEPT a. direct costs of new construction. b. mistakes in installation. c. the cost of installing equipment. d. freight costs.

b. mistakes in installation. The costs of acquiring fixed assets include all amounts spent to get the asset in place and ready for use. Unnecessary costs like mistakes in installation are treated as expenses.

The best definition of a patent is a. an asset created from favorable factors such as location, product quality, reputation, and managerial skills. b. the exclusive right to produce and sell goods with one or more unique features. c. a name, term, or symbol used to identify a business or its product. d. the exclusive right to publish and sell literary, artistic, or musical compositions

b. the exclusive right to produce and sell goods with one or more unique features. A patent is the exclusive right to produce and sell goods with one or more unique features.

A copy machine was purchased for $38,000 and had accumulated depreciation of $26,000. The machine was traded in for a new one that had a sticker price of $54,000. The vendor agreed to give a trade-in allowance for the old equipment in the amount of $10,000. How much will the company need to pay in cash, and what is the amount of the gain or loss? a. $54,000; no loss or gain b. $44,000; gain of $2,000 c. $44,000; loss of $2,000 d. $54,000; loss of $2,000

c. $44,000; loss of $2,000

The denominator in the fixed asset turnover ratio is a. Fixed Assets (beginning of year). b. Average Net Realizable Value of Fixed Assets. c. Average Book Value of Fixed Assets. d. Fixed Assets (end of year).

c. Average Book Value of Fixed Assets. The denominator in the fixed asset turnover ratio is Average Book Value of Fixed Assets.

If a fixed asset is fully depreciated, has no residual value, and is discarded, which of the following statements is true? a. The discarded asset is removed from the accounts and ledger, but its accumulated depreciation is not removed. b. The accumulated depreciation of the discarded asset is removed from the accounts and ledger, but the discarded asset is not removed. c. Both the discarded asset and its accumulated depreciation are removed from the accounts and ledger. d. Neither the discarded asset nor its accumulated depreciation is removed from the accounts and ledger.

c. Both the discarded asset and its accumulated depreciation are removed from the accounts and ledger. If a fixed asset is fully depreciated, has no residual value, and is discarded, both the discarded asset and its accumulated depreciation are removed from the accounts and ledger.

What is the first step in discarding a piece of equipment when it has not yet been fully depreciated? a. Debit Equipment for the most recent appraised value of the asset. b. Debit Cash for the amount of the sale of the equipment. c. Debit Depreciation Expense to bring the equipment's depreciation up to date. d. Credit Equipment for the historical cost of the asset.

c. Debit Depreciation Expense to bring the equipment's depreciation up to date. A journal entry must be recorded to bring the depreciation expense on the equipment up to date before a subsequent journal entry will record the removal of the asset from the general ledger with a credit for its historical cost.

On December 31, Tradewinds Company decides to trade in one of its ships for another one that has a cost of $830,000. The seller of the ship is willing to allow a trade-in amount of $90,000. The initial cost of the old equipment was $610,000 with an accumulated depreciation of $555,000. Depreciation has been taken up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. Loss of $90,000 b. No loss or gain c. Gain of $35,000 d. Loss of $35,000

c. Gain of $35,000 The book value of the equipment is equal to $55,000 ($610,000 original cost less the accumulated depreciation of $555,000). The trade-in allowance of $90,000 is subtracted from the $55,000 book value resulting in a $35,000 gain.

Which of the following statements regarding discarding fixed assets is NOT true? a. If a fixed asset is no longer used and has no residual value, it is written off. b. If a fixed asset is no longer used and has no residual value, it is discarded. c. If an asset has not been fully depreciated, depreciation should not be recorded before removing the asset from the accounting records. d. If an asset has not been fully depreciated, depreciation should be recorded before removing the asset from the accounting records.

c. If an asset has not been fully depreciated, depreciation should not be recorded before removing the asset from the accounting records. If an asset has not been fully depreciated, depreciation should be recorded before removing the asset from the accounting records.

Which of the following statements regarding selling fixed assets for cash is NOT true? a. The journal entry is similar to discarding fixed assets. b. The cash receipt is recorded. c. The cash payment to the buyer is recorded. d. If the selling price is more than the book value, a gain is recorded.

c. The cash payment to the buyer is recorded. There is no cash payment to the buyer. There is a cash receipt for the sale of the fixed asset, and it is recorded in the accounting records.

The term "boot" refers to the a. total cost of a new asset. b. amount of the gain or loss on exchange of assets. c. amount of cash paid or liability incurred when buying a new asset and trading in an old asset. d. amount of down payment on an asset.

c. amount of cash paid or liability incurred when buying a new asset and trading in an old asset. Boot is the remaining balance owed (paid either in cash or recorded as a liability) for a new asset, after taking into consideration the trade-in allowance on the exchange of an old asset. Boot is the tax name for this amount.

Accumulated Depletion is reported on the __________ as a __________. a. balance sheet; addition to the cost of the natural resource b. income statement; source of Other Revenue c. balance sheet; deduction from the cost of the natural resource d. None of these choices are correct.

c. balance sheet; deduction from the cost of the natural resource Accumulated Depletion is a contra asset account and is reported on the balance sheet as a deduction from the cost of the natural resource.

Shale Miner Co. acquired mineral rights for $54,600,000. It is estimated that there are 70,000 tons of the resource, and during the current year 15,780 tons were mined and sold. What is the amount of depletion for the current year? a. $54,600,000 b. $7,000,000 c. $150,780 d. $12,308,400

d. $12,308,400 $54,600,000 ÷ 70,000 tons = $780 per ton; $780 × 15,780 tons = $12,308,400

Which of the following is one of the factors used to determine depreciation expense? a. The asset's expected useful life b. The asset's initial cost c. The asset's estimated residual value d. All of these choices are correct.

d. All of these choices are correct. The three factors used to determine depreciation expense are the asset's initial cost, the asset's expected useful life, and the asset's estimated residual value.

The fixed asset turnover ratio is computed as a. Average Book Value of Fixed Assets ÷ Cash. b. Average Book Value of Fixed Assets ÷ Accumulated Depreciation. c. Sales ÷ Accumulated Depreciation. d. Sales ÷ Average Book Value of Fixed Assets.

d. Sales ÷ Average Book Value of Fixed Assets. A decrease in the fixed asset turnover ratio indicates an unfavorable trend in the efficiency of using fixed assets to generate sales.

A gain or loss on the exchange of similar assets will be recorded if the transaction has a. boot. b. a high value. c. a trade-in allowance. d. commercial substance.

d. commercial substance. If an exchange of similar assets has commercial substance, a gain or loss is recognized based on the difference between the book value of the asset given up (exchanged) and the fair market value of the asset received.