Chapter 9 Smartbook

A company had equipment that cost $10,000 and had $8,000 of accumulated depreciation when the company sold it for $2,500. What was the amount of the gain or loss, if any, on the disposal?

$500 gain

A company purchases a patent for $100,000. The patent has 15 years of legal life remaining. The company expects the patent to be used in its business for 10 years from the date of purchase. The annual amortization for a full year, if any, is

$10000 (100,000/10)

A company purchases equipment for $100,000 and expects to use it for 5 years. The expected salvage value at the end of that period is $20,000. What is the annual depreciation under the straight-line method?

$16,000 ($100,000 - $20,000)/5 = $16,000

A company trades its old computer, which cost $5,000 and has accumulated depreciation at the transaction date of $3,000, for a new computer that costs $7,000. The trade-in allowance on the old computer is $1,200. What is the gain or loss, if any, on the trade-in of the old computer?

$800 loss Reason: $5,000 - $3,000 = $2,000 book value; $1,200 trade-in allowance - $2,000 book value = $800 loss

A company purchases a franchise for $120,000, which stipulates a 10 year term. Past experience indicates that the franchise can be expected to be used to generate revenue for only 8 years. The amount of the annual franchise amortication is

15,000 (120,000/8)

A company had a truck that cost $30,000 and had accumulated depreciation at the end of the previous year of $18,000. Depreciation for the 3 months of the current year that has not been recognized was $1,000. The truck was sold for $15,000. What was the gain or loss, if any, on the sale?

4,000 gain $30,000 - $19,000 = $11,000 book value; $15,000 sale price - $11,000 book value = $4,000 gain

A company purchases land and a building for $150,000, with a $80,000 allocated to the land and $70,000 allocated to the building. Before occupying the building, $20,000 was spent on renovations. Thereafter, $5,000 was spent on maintenance during the first year of occupying the building. What is the cost of the building for purposes of depreciating the asset?

90,000 70,000+20,000 = 90,000

Depreciation is best described by which statement?

A process of cost allocation.

Which plant asset type would you generally expect to have the longest useful life? A. Building B. Vehicles C. Equipment

A. Buildings

Which depreciation method is most widely used in financial statement? A. Straight-line B. Units of output C. Accelerated

A. Straight-line

The accounting principle of ____________________ generally requires companies to use the same depreciation method in successive accounting periods

Answer: Consistency

A company has equipment that cost $100,000 and has $40,000 of accumulated depreciation as a result of past depreciation charges. Management determines that the current fair value of the asset is $35,000. What accounting treatment should be implemented at this time?

An impairment loss of $25,000 is recognized and the $35,000 book value is depreciated over the remaining useful life.

A company that reports on the calendar year acquires a major piece of equipment at $75,000. It is expected to be used for 5 years with a salvage value of $15,000. The purchase was made on May 1. If partial-year depreciation is calculated to the nearest month, how much is depreciation for the year of acquisition? A. $12,000 B. $0 C. $10,000 D. $8,000

Answer D. $8,000 ($75,000-$15,000)/5 = $12,000 or $1,000 per month; $1,000 X 8 months = $8,000

A company has a truck that cost $18,000 and has accumulated depreciation of $12,000 at the time it is traded in. If granted a trade-in allowance of $7,500, the company has a (gain or loss ) of $__________.

Answer: $1,500 - Gain

A company purchased a crane for use in its construction building activity at a cost of $150,000. The crane was used for 5 years when its accumulated depreciation was $60,000 and it was replaced with a new model at a cost of $200,000. The old crane was sold for $80,000. What was the gain or loss on the sale of the old crane? A. $20,000 B. $10,000 C. $110,000

Answer: $10,000 loss $150,000 - $60,000= $90,000 book value. $80,000 sale price - $90,000 book value = $10,000 loss.

A company purchases equipment for $75,000 which is expected to have a 10 year life and a salvage value of 10% of cost at the end of 10 years. The amount of depreciation for the first year under the double declining balance method is $____________________.

Answer: $15,000

A company acquires land for $150,000 and immediately incurs costs for a drive ($10,000) and fencing ($12,000). What is the cost basis of the land in the accounting records. A. $162,000 B. $160,000 C. $172,000 D. $150,000

Answer: $150,000

A company purchased land and a building for a total price of $90,000. Estimates of the separate market value of the 2 assets acquired are $60,000 for the land and $40,000 for the building. The amount that should be recorded in the building account is ________________.

Answer: $36,000

A company acquires equipment for $50,000 and expects to use the equipment for 5 years. Salvage value at the end is expected to be $10,000. The amount of annual depreciation by the straight-line method is _______________.

Answer: $8,000

A company purchases a computer system at a cost of $100,000. which is expected to have a 5 year life and a residual value of $20,000 at the end of 5 years. What is the fixed percentage that will be used to calculate double-declining balance depreciation? A. 30% B. 40% C. 20%

Answer: 40% 1/5 = 20% x 2 = 40%

Which of the following correctly describe(s) goodwill or accounting for goodwill A. Existence of goodwill is implied by the ability of a company to earn an above average returen B. Goodwill is a separate asset that can be purchased and sold much like other assets C. Goodwill is the excess paid over the fair value of the net assets of another company. D. Goodwill may result from such factors as favorable reputation, positive market share and a reputation for high quality and loyal employees.

Answer: A, C, and D A. Existence of goodwill is implied by the ability of a company to earn an above-average return C. Goodwill is the excess paid over the fair value of the net assets of another company D. Goodwill may result from such factors as favorable reputation, positive market share, and a reputation for high-quality and loyal employees.

Which of the following characterize(s) research and development cost in the U.S. industry? A. They represent a substantial percentage of total expenses for some companies B. Current Accounting practice is intended to standardize accounting for R & D costs. C. They are capitalized as assets and amortized over their useful life D. They are important for the development of new products

Answer: A,B, and D A. They represent a substantial percentage of total expenses for some companies B. Current accounting practice is intended to standardize accounting for R&D costs D. They are important for the development of new products.

A company acquires equipment that it expects to use for 10,000 machine hours over a 5 year period. The cost is $20,000 and the estimated salvage value after 10,000 hours of use is $2,000. If the company uses the units of output method of depreciate, how mush is depreciation expense in the second year in which the machine is used for 1,250 hours? A. $2,250 B. $2,500

Answer: A. $2,250 ($20,000 - $2000)/ 10,000 hours = $1.80; $1.80 * 1,250 hours = $2,250

A company acquires equipment for $100,000, which it expects to use for 5 years. At the end of that period, the company expects to receive a trade-in value of $10,000 on new equipment at that time. How much is the first year depreciation under double declining balance method? A. $40,000 B. $9,000 C. $36,000

Answer: A. $40,000 $100,000 x 40% = $40,000 Salvage value is not considered in calculating first year deprecation.

Plant assets include all of the following except A. accounts and notes receivables from customers B. Natural Resources, such as oil and minerals C. Tangible assets, such as equipment and buildings D. Intangible assets, such as patents and copyrights

Answer: A. Accounts and notes receivable from customers.

Cash effects of plant asset transactions are recognized in the statement of cash flows when which of the following transactions occur(s)? A. Cash is received on the sale of the plant asset B. Depreciation expense is recognized on a plant asset C. Cash is paid to acquire a plant asset.

Answer: A. Cash is received on the sale of a plant asset. C. CAsh is paid to acquire a plant asset

True or false: The cost of plant asset is initially recorded in the income statement and over the asset's life, is gradually transferred to the balance sheet A. False B. True

Answer: A. False The cost is first recorded in the balance sheet

Straight line depreciation results in A. the same amount of deprecation each year in the asset's life B. less depreciation earlier in the asset's life than later C. greater depreciation earlier in the asset's life than later.

Answer: A. The same amount of depreciation each year in the asset's life.

The method of amortization typically used for intangible assets is: A. Straight line amortization B. Accelerated amortization C. Units of output amortization

Answer: A. straight line amortization

The depreciation method most widely used for income tax purposes is _________________________ depreciation.

Answer: Accelerated

Examples of plant assets are A. Cash B. buildings C. Equipment

Answer: B and C B. Buildings C. Equipment

Cash effects of plant asset transactions in the statement of cash flows when which of the following transactions occur(s)? A. Depreciation expense is recognized on a plant asset B. Cash is paid to acquire a plant asset C. Cash is received on the sale of a plant asset.

Answer: B and C. B. Cash is paid to acquire a plant asset C. Cash is received on the sale of a plant asset.

A company purchased equipment for $10,000 and in addition, incurred the following: a delivery cost of $400, an installation cost of $500, a cost to repair damage during shipment of $700, and a first year maintenance cost of $600. What is the cost of the asset for purposes of depreciation over the equipment's estimated useful life? A. $11,800 B. $10,900 C. $10,600 D. $10,000 E. $10,400

Answer: B. $10, 900 ($10,000 +$400 +$500 = $10,900)

A company acquired a warehouse for $500,000, which it expects to use for 25 years with an estimated resiudal value of $100,000 at the end of that time. If the company employs the half year convention, how much is depreciation expense for the year of the acquisition A. $ 0 B. $8,000 C. $20,000 D. $16,000

Answer: B. $8,000 ($500,000-$100,000)/25=$16,000)/2=$8,000

If a trademark is purchased from another company and expected to be used to generate revenue for at least 20 years, which of the following describes the appropriate accounting A. The cost is immediately expensed. B. The cost is capitalized and amortized over the periods expected to benefit from the trademark's use. C. The cost is capitalized and expensed over an arbitrary period by management such as 50 years. D. The cost is an asset and not amortized until it becomes clear that the trademark will no longer be used, then it is immediately turned off.

Answer: B. The cost is capitalized and amortized over the period expected to benefit from the trademark's use.

True or False: The first step in recording the disposal of a plant asset is to update accumluated depreciation to the date of disposal. A. False B. True

Answer: B. True Updated the accounting records to reflect the current book value of the asset is an important first step in recording the disposal of a plant asset.

The difference between the cost of an asset an its accumulated depreciation is referred to as the __________ value.

Answer: Book value

A company has equipment that cost $250,000 and has updated accumulated depreciation of $100,000 when it sells the asset for $125,000. What is the income statement effect of this transaction? A. No gain or loss is apparent B. $25,000 C. $25,000 loss

Answer: C. $25,000 loss $250,000 - $100,000= $150,000 book value; $125,000 sale price - $150,000 book value = $25,000 loss

A company purchased a truck for $30,000, which it expects to use for 50,000 miles and then sell for $8,000. If the units of output method of deprciation is used and depreciation expense for a year is 3960, how many miles was the truck driven. A. 6,600 B. The number of years in the estimated life is required. C. 9,000

Answer: C. 9,000 ($30,000 - $8,000)/ 50,000 hours - $0.44; $3,960/$0.44 = 9,000 miles

Which of the following is NOT included in the cost of land? A. surveys B. a real estate commision C. A building that will be retained and used. D. legal fees related to the transfer of the title

Answer: C. A building that will be retained and used.

The basis for recording an intangible is A. residual value expected to be recovered when the asset is no longer useful B. Cost C. Expected future value

Answer: C. Cost

Land improvements are recorded in separate accounts and depreciated over their useful lives. These include all of the following except: A. Parking Lots B. Streets and Driveways C. Legal fees to transfer the title D. Fencing

Answer: C. Legal fees to transfer the title

Which of the following is an example of a lump sum purchase of plant assets? A. Converting accounts receivable into cash B. Purchasing inventory C. Purchasing land and building in a single transaction

Answer: C. Purchasing land and a building in a single transaction.

Intangible assets include all of the following except: A. trademarkds B. Patents C. Receivables D. Goodwill

Answer: C. Receivables

Which of the following best describes accounting for the impairment of a plant asset? A. The asset is completely written off, regardless of its current fair value. B. The company is required to switch to an accelerated method for the remainder of the asset's life C. The asset is written down to its fair value and an impairement loss is recognized in Income. D. The company is prohibited from using accelerated depreciated for the remainder of the asset's useful life

Answer: C. The asset is written down to its fair value and an impairment loss is recognized in Income.

Under the declining balance method, which of the following is not correct? A. Depreciation expense is based on the remaining book value each year. B. The method is used primarily for income tax purposes C. The depreciation percentage changes each year.

Answer: C. The depreciation percentage change each year. The percentage remains constant but is applied to a declining book value.

A copyright is granted for what period of time? A. Indefinitely B. 50 years C. The life of the creator plus 70 years D. Only the life of the creator.

Answer: C. The life of the creator plus 70 years

Which of the following best describes accounting for a change in the estimated life of a plant asset? A. It results in no depreciation recognized for the remainder of the asset's useful life. B. Such a change is not permitted C. The remaining undepreciated cost is spread over the remaining useful life.

Answer: C. The remaining undepreciated cost is spread over the remaining useful life.

The most common combination of depreciation methods is A. straight line both the financial statements and the tax return B. Accelerated in both the financial statements and the tax return C. Straight line in the financial statements and accelerated in the tax return. D. Accelerated in the financial statements and straight-line in the tax return.

Answer: C. straight line in the financial statements and accelerated in the tax return

The distinction between capital and revenue expenditures is that __________________ expenditures are recorded in asset accounts

Answer: Capital

A trademark is granted for what period of time? A. 10 years, but it may be renewed for additional 10 years. B. The life of the company that applies for and receives the trademark C. The shorter of the life of the trademark's creator or 70 years. D. It's permanent

Answer: D. It's permanent

Allocating the cost of a plant asset to expense over its useful life is referred to as ______________________.

Answer: Depreciation

The process of depreciation gradually moves the asset's cost from the balance sheet to the income statement as a(n) ____________________________.

Answer: Expense

The intangible asset that often results from superior management, a positive reputation, and high market share is called ________________________.

Answer: Goodwill

Land and a building may be purchased with the intent to immediately replace the building. The entire purchase price should be recorded in the account

Answer: Land

Long lived assets that are expected to provide service over several years are referred to as ________________ assets.

Answer: Plant Assets

Which of the following is not descriptive of intangible assets? A. They are recorded as assets only if significant cost are incurred in their acquisition. B. They are recorded at their estimated value regardless of cost. C. They are recorded in the accounts at cost. D. They are classification of plant asset

Answer: They are recorded at their estimated value, regardless of cost

True or false: Land improvements are recorded in separate asset accounts because they have limited lives and the land does not.

Answer: True - Land improvements are recorded in separate accounts and depreciated, while land is not depreciated.

Which of the following is NOT descriptive of intangible assets A. They are recorded in the accounts at cost B. They are a classification of plant asset C. They are recorded at their estimated value, regardless of cost D. They are recorded as assets only if significant costs are incurred in their acquisition.

Answer: c. They are recorded at their estimated value, regardless of cost.=

The cost of a natural resource is gradually transferred to the asset _________________________ as the resource is extracted.

Answer: inventory

True or false: In a lump-sum purchase, the entire cost is added to a single asset account

Answer: False: The cost of each individual asset acquired is established in a separate account

The book value of the fixed assets depreciated by the fixed percentage of declining balance depreciation method decreases every year and represents the ______________________ _________________________ .

Answer: Declining balance

Which of the following is NOT an accurate description f the asset goodwill? A. Goodwill is measured as the price paid for a company in excess of the fair market value of its net assets. B. Goodwill is a separate asset that can be bought and sold apart from other assets C. Goodwill may result from a favorable reputation, positive market share, and other favorable operating characteristics.

Answer: B,

Plant assets represent A. long-term prepaid expense B. Advance purchases of services C. A bundle of future services D. A current asset called prepaid expense

Answers a,b, c A. Long term prepaid expenses B. Advance purchases of services C. A bundle of future services

Which of the following describes the acceptable accounting practice for research and development costs? A. Either expense as incurred or capitalize as an asset, but be consistent over time B. Capitalize as an asset and amortize C. Expense as incurred. D. Capitalize as an asset and do not amortize

C. Expense as incurred.

The book value of the fixed assets depreciated by the fixed-percentage-of-declining-balance depreciation method decreases every year and represents the ___________-___________

Declining balance

Cash effects of plant asset transactions are recognized in the statement of cash flows when which of the following transactions occur(s)?

Depreciation expense is recognized on a plant asset. Cash is received on the sale of a plant asset.

Which of the following best describes accounting for the impairment of a plant asset?

The asset is written down to its fair value and an impairment loss is recognized in income.

If a trademark is purchased from another company and expected to be used to generate revenue for at least 20 years, which of the following describes the appropriate accounting?

The cost is capitalized and amortized over the periods expected to benefit from the trademark's use.

Which of the following best describes accounting for a change in the estimated life of a plant asset?

The remaining underappreciated cost is spread over the remaining useful life.

When the cost of developing a franchise is a material amount, that cost is capitalized and amortized over what period of time?

The shorter of the franchise agreement and the estimated useful life of the franchise.

Which of the following characterize(s) research and development costs in U.S. industry?

They are important for the development of new products.Current accounting practice is intended to standardize accounting for R&D costs.They represent a substantial percentage of total expenses for some companies.

over the useful life of an asset, the depreciation method that results in more depreciation in the early years is referred to as ________ depreciation

accelerated

Which of the following depreciation methods is more conservative in the preparation of financial statements?

accelerated depreciation

The systematic write-off of the cost of an intangible asset is referred to as

amortization

A company purchases a warehouse for $200,000, expects to use it for 10 years and expects to sell it at the end of that period for $50,000. How much is annual depreciation by the straight line method. A. $20,000 B. No answer an be provided due to missing information C. $15,000

answer: $15,000 ($200,000 -$50,000)/10 = $15,000

The distinguishing characteristic of natural resources is that they

are gradually depleted as they are removed and either used or sold are converted into inventory if they are extracted and held for sale or use

Which of the following is included in the cost of a plant asset?

delivery and installation costs

A company purchases a truck and records the cost in an asset account. That cost is gradually moved into an expense account as the truck benefits the company over several accounting periods. This process is referred to as

depreciation

Building maintenance costs are treated as _________ of the current period.

expense

Small expenditures related to plant assets the benefits from whom will be used up in the current period should be recorded in _______ accounts.

expense

Registration of a patent with the federal government gives the holder the exclusive right to use the product or process

for 20 years.

The asset goodwill may result from all of the following except

high employee turnover.

A company had equipment that originally cost $50,000, was used for 5 years, and then was sold for $10,000, at which time the accumulated depreciation was $37,500. The amount of the ____________ on the sale $_________

loss $2500

the cost of equipment includes all of the following except

maintenance costs

Estimating the useful life of a plant asset for accounting purposes is the responsibility of

management of the company that owns and uses the assets

maintaining a plant asset

may lengthen the useful life of an asset

Which of the following cause(s) depreciation?

obsolescence physical deterioration

Expenditures for repair and maintenance of plant assets are referred to as

revenue expenditures.

Which depreciation method is most widely used in financial statements?

straight-line

Copyrights are granted by

the federal government.