ACCT 2110 Test 4

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

C

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

D

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

A

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

A

When acquiring a building, which of the following costs would NOT be capitalized? a. First month's electricity bill b. Purchasing price of the building c. Building permit fees d. Closing costs

A

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

A

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

A

Interest to be paid on an 18-month, $2,000 loan at 6% interest is a. $180. b. not able to be calculated until payment is due. c. $120. d. $10.

A. FACE x RATE x TIME 2000 x 0.06 x 18/12

A company has the following information: Net property, plant, and equipment, beginning of year: $250,000; net property, plant, and equipment, end of year: $350,000; net sales: $500,000; and depreciation expense: $60,000. The fixed asset turnover ratio is a. 1.67 times. b. 2 times. c. 2.5 times. d. 1.42 times.

A. $500,000/[($250,000 + $350,000)/2] = 1.67 times

The following information is taken from the financial statements for Rhoades Golf Carts. Current liabilities $145,622 Receivables $ 26,915 Cash and equivalents 244,963 Inventories 614,832 Marketable securities 18,767 Cash flows from operating activities 125,173 The quick ratio (rounded to two decimal places) is a. 2.00. b. 0.86. c. 1.81. d. 1.74.

A. 2.00 The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities.

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

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 fixed assets b. The balance sheet c. The income statement d. The statement of cash flows

B

An impairment of an asset is a permanent decline in the future benefit or __________ of the asset. a. cost b. service potential c. gain d. accumulated depreciation

B

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

B

Expenditures that do NOT increase the future economic benefits of the fixed asset are called a. asset expenditures. b. revenue expenditures. c. expense expenditures. d. capital expenditures.

B

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. $20,000 b. $105,000 c. $80,000 d. $108,000

B

Rarely do disposals occur on the first or last day of an accounting period. Therefore, the disposal of property, plant, and equipment usually first requires a journal entry to a. remove the accumulated depreciation from the accounting records by crediting the contra-asset. b. record depreciation expense up to the date of disposal. c. remove the asset's book value from the accounting records by debiting the asset. d. remove the asset's residual value from the accounting records.

B

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

B

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

B

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. productivity expenditure. b. capital expenditure. c. efficiency expenditure. d. revenue expenditure.

B.

A driver for Wolverine Charters was involved in an accident in which several passengers were injured. Attorneys for Wolverine Charters estimated that it is probable that damages amounting to $2 million will be awarded. It is possible that damages of $3.25 million could be awarded, and it is remotely possible that damage awards could exceed $5 million. Which of the following is correct? a. A liability will be debited for $3.25 million. b. A liability will be credited for $2 million. c. A liability will be debited for $2 million. d. A liability will be credited for $3.25 million.

B. The probable amount is $2 million, which would be first recorded with a credit. No journal entry is made if a contingency is reasonably possible. However, information regarding the contingency should be disclosed in the financial statement footnotes.

A note payable arises when a business borrows money. The company should use which of the following entries to correctly record borrowing money from a bank? a. Notes Payable debit; Cash credit b. Cash debit; Accounts Payable credit c. Cash debit; Notes Payable credit d. Cash debit; Notes Receivable credit

C

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

C

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. $7,500 c. $14,625 d. $14,000

C

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. Cash is credited. b. Accumulated Depreciation is credited. c. Gain on Disposal is credited. d. The fixed asset account is debited.

C

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. Straight-line method c. Units-of-production method d. Declining balance method

C

The result of liability management and accounting recognition, measurement, and reporting issues for those activities appears in which of the following sections of the balance sheet? a. Assets b. Retained earnings c. Liabilities d. Stockholders' equity

C

Which of the following is consistent with the accounting for a contingent liability? a. LIFO reserve adjustments b. Adjustments for NSF checks c. Estimating uncollectible receivables d. Recording unearned revenues

C.

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. Which of the following is one of the steps in impairment testing? a. The asset is impaired if the expected future fair market value of the asset is greater than the book value today. b. An impairment exists if 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. c. An impairment exists if the future cash flows expected to be generated by the asset are less than the asset's book value. d. An impairment exists if 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.

C. One of the steps in impairment testing is the existence test. This test indicates that an impairment exists if the future cash flows expected to be generated by the asset are less than the asset's book value.

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

D

An account payable arises when a business purchases goods or services on credit. An account payable is a liability. Which of the following is the correct entry to record a purchase of goods on credit? a. Accounts Payable debit; Cash credit b. Inventory debit; Accounts Receivable credit c. Accounts Payable debit; Inventory credit d. Inventory debit; Accounts Payable credit

D

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. Return on assets b. Debt-to-equity ratio c. Asset efficiency ratio d. Fixed asset turnover ratio

D

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

D

Most liabilities are recognized when a. payments are made for goods or services received. b. borrowed money is repaid. c. a future event is less than likely to occur. d. goods or services are received.

D

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

D

The more efficiently a company uses its assets, the __________ the fixed asset turnover ratio will be. a. weaker b. more stable c. lower d. higher

D

Which of the following depreciation methods is classified as an accelerated depreciation method? a. Amortization b. Straight-line c. Units-of-production d. Declining balance

D

Which of the following is NOT a contingent liability? a. There is a lawsuit against the company, and the company will probably lose an estimated $100,000. b. Smokes, Inc., is involved in tobacco litigation. It has been ordered to pay a large sum of money to the people that were harmed by its product. c. There is a lawsuit against a doctor. The courts have agreed the doctor was negligent. The judge has set the amount of damages at $2,000,000. d. A large agriculture business thinks that it will have drought damage but is unsure of the amount of possible loss.

D

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. 1.6 years. b. 2.5 years. c. 4 years. d. 8.3 years.

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

Assume an asset costs $100,000, has an expected useful life of 10 years, and has a residual value of zero. Using straight-line depreciation, how much depreciation expense will be recognized for 1 month? a. $83.33 b. $100.00 c. $1,000.00 d. $833.33

D. ($100,000 - $0)/(10 years × 12 months per year) = $833.33 depreciation

If the expenditure simply maintains the current expected life, capacity, efficiency, or product quality, it is a ____________

Revenue expenditure.

When making an adjusting journal entry to record the estimated warranty liability, which of the following entries is correct? a. Warranty Expense debit; Estimated Warranty Liability credit b. Estimated Warranty Liability debit; Repairs and Maintenance credit c. Warranty Expense debit; Cash credit d. Estimated Warranty Liability debit; Warranty Expense credit

a

The cost of an intangible asset with a finite life, like a tangible asset, is allocated to accounting periods over the life of the asset. This process is referred to as a. amortization. b. depreciation. c. synchronization. d. depletion.

a.

A particular franchise has a legal life of 10 years. On January 1, Alpha Company acquires it for $70,000 and expects to receive economic benefits for 5 years. The company Alpha purchased the franchise from expected the economic life to be 7 years. How much amortization expense will Alpha have the first year? a. $10,000 b. $14,000 c. $7,000 d. Amount cannot be determined.

b

Accounting for natural resources is similar to accounting for fixed assets. Which of the following is the formula to calculate depletion? a. Depletion Rate × Units to Be Recovered b. Depletion Rate × Units Recovered c. Depletion Rate/Units Recovered d. Depletion Rate - Units Recovered

b

Carney's Feed Mill sold for cash 2,500 bags of grain during the month of July at $18 per bag. Sales taxes for the state of Ohio are 6.5%, and Clermont County sales taxes are 2.0%. All sales taxes will be paid to the appropriate taxing authoring at the end of September. How much did Carney's collect from its customers? a. $45,000 b. $48,825 c. $45,900 d. $47,925

b

Accounting for natural resources is similar to accounting for fixed assets. Which of the following accounts is debited when recording the entry for the depletion of a coal mine? a. Intangibles b. Inventory c. Natural Resources d. Accumulated Depletion

b.

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. $508.70 b. $5,000 c. $5,087 d. $500

b. 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.

How is the operating cash flow ratio calculated? a. (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities b. Cash Flows from Operating Activities/Current Liabilities c. (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities d. (Cash + Marketable Securities)/Current Liabilities

b. Cash Flows from Operating Activities/Current Liabilities.

Companies estimate warranty costs based on a. failure rates during quality control testing. b. IRS standards. c. past experience. d. industry standards.

c

Kerry's Kampers sells all new campers with a 12-month warranty. Kerry's estimates that 5% of these campers will require warranty service. Based on past experience, Kerry estimates that the average claim will be $585. Kerry sold 320 campers during the year. No warranty work has been performed as of December 31. As of November 30 of the following year, Kerry had incurred $2,930 cost for parts and $6,555 in labor costs related to warranty repairs. What is the balance in the warranty liability account on November 30? a. $0 b. $9,485, debit c. $125, debit d. $9,360, credit

c $9,360 credit - $2,930 debit - $6,555 debit = $125 debit.

If a fixed asset is impaired, a company should reduce the asset's book value to fair value in the year a. when the fair value increases back to book value. b. after the impairment is identified. c. when the impairment occurs. d. before the impairment is identified.

c.

TruBlue Company bought a machine for $300,000. Three years later when the book value is $100,000, TruBlue determines 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 $60,000. The impairment loss is a. $220,000. b. $200,000. c. $40,000. d. $150,000.

c. Impairment Loss = Fair Value of the Asset - Book Value of the Asset $60,000 - $100,000 = ($40,000)

Older assets tend to be __________ than newer assets. a. more reliable b. more efficient c. more stable d. less efficient

d.

The current ratio is often used to analyze a company's ability to meet its current obligations. How is the current ratio calculated? a. (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities b. Current Assets/Stockholders' Equity c. (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities d. Current Assets/Current Liabilities

d. CA / CL

A contingent liability is not recognized in the accounts unless the event on which it is contingent is ______ AND a ___________ of the loss can be made.

probable; Reasonable estimate