Accy 303 Final

(T/F): Under the declining-balance depreciation method, salvage value is considered only in computing the amount of depreciation for the final year(s) of an asset's service life.

True

(T/F): Under the group and composite methods, the term group refers to a collection of assets that are similar in nature; composite refers to a collection of assets that are dissimilar in nature.

True

(T/F): Under the recoverability test, the fair value of an asset is measured by its market value if an active market for it exists. If no active market exists, the present value of expected future net cash flows should be used.

True

(T/F): The currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long-term asset such as a sinking fund.

True

(T/F): The fact that a company has the right to refinance at any time permits the company to classify the liability as non-current.

True

(T/F): The general rules that apply to impairments of long-lived assets also apply to intangibles.

True

(T/F): The impairment loss is the amount by which the carrying amount of the asset is greater than the market value or present value of the asset.

True

(T/F): The number of outstanding premium offers that will be presented for redemption must be estimated in order to reflect the existing current liability and to match costs with revenues.

True

(T/F): The straight-line method considers depreciation a function of time rather than a function of usage

True

(T/F): To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements.

True

A contingency is defined by the accounting profession as: A. an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. B. an existing condition, situation, or set of circumstances involving uncertainty as to a possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. C. an event that will result in the requirement to record a liability if it can be shown that an asset is in danger of being lost to the enterprise and the company has no ability to avoid the loss. D. an uncertain event that must have a reasonable chance of occurrence and the amount must be reasonably determinable by the company.

A

An enterprise is required to exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis and: A. the enterprise can demonstrate the ability to consummate the refinancing. B. the obligation is not a part of normal operations. C. it can demonstrate that a negative effect on working capital will result if it is not reclassified. D. the interest rate on the long-term obligation is not above the prime rate

A

Jo Jo Chong, Inc. needs to determine if its property, plant, and equipment has been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are): Recoverability Test Fair Value Test A. Yes Yes B. Yes No C. No Yes D. No No

A

On December 31, 2019, Aquinas Company had equipment that had a carrying amount of $300,000 which the company wrote down to its $250,000 fair value. At the end of 2020 it was determined that the fair value of the equipment had risen to $320,000. At December 31, 2020, assuming Aquinas does not intend to dispose of the equipment, how should Aquinas record the change in fair value of the equipment? A. The carrying amount of the equipment should not change except for the depreciation taken in 2020. B. The equipment should reflect the new cost basis of $300,000. C. The equipment should reflect the new cost basis of $320,000. D. The equipment should reflect the new cost basis of $270,000.

A

On January 15, 2011, Machiavelli Corporation was granted a patent on a product. On January 2, 2020, to protect its patent, Machiavelli purchased a patent on a competing product that originally was issued on January 10, 2013. Because of its unique plant, Machiavelli does not feel that the competing patent can be used in producing a product. The cost of acquiring the competing patent should be: A. amortized over a maximum period of 11 years. B. amortized over a maximum period of 16 years. C. amortized over a maximum period of 20 years. D. expensed in 2020.

A

The economic factors related to an asset's service life include: A. obsolescence. B. wear and tear. C. decay. D. unexpected casualties.

A

The major difference between the service life of an asset and its physical life is that: A. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last. B. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. C. physical life is always longer than service life. D. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

A

When intangible assets are amortized, a journal entry may be made by debiting an expense account and crediting The Intangible Asset Accumulated Amortization A. Yes Yes B. Yes No C. No Yes D. No No

A

When the fair value of the assets acquired in a business purchase exceed the purchase price, a bargain purchase arises. When this happens, GAAP requires that the difference be allocated: A. to a gain. B. to all periods benefited on an equitable basis. C. to reduce proportionately the values assigned to certain noncurrent assets. D. to reduce proportionately the values assigned to both current and noncurrent assets.

A

Which of the following is not an intangible asset? A. Accounts receivable. B. Patents. C. Copyrights. D. Franchises.

A

Which of the following is not one of the differences between the computation of depreciation under GAAP and the computation under the Modified Accelerated Cost Recovery System (MACRS)? A. The recording of depreciation expense is taken directly to retained earnings under the MACRS method. B. A mandated tax life is used which is generally shorter than the economic life of the asset. C. Cost recovery is on an accelerated basis under the MACRS. D. An assigned salvage value of zero is used under the MACRS.

A

Which of the following would not be considered an R&D activity? A. Adaptation of an existing capability to a particular requirement or customer's need. B. Searching for applications of new research findings. C. Laboratory research aimed at discovery of new knowledge. D. Conceptual formulation and design of possible product or process alternatives.

A

In accounting for compensated absences, the difference between vested rights and accumulated rights is: A. vested rights are normally for a longer period of employment than are accumulated rights. B. vested rights are not contingent upon an employee's future service. C. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. D. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

B

Nietzsche Corn Flakes Company offers its customers a silver cereal spoon if they send in 5 boxtops from Nietzsche Corn Flakes boxes and $1.00. The Company estimates that 75% of the boxtops will be redeemed. In 2020 the Company sold 450,000 boxes of Corn Flakes and customers redeemed 220,000 boxtops receiving 44,000 spoons. If the spoons cost Nietzsche Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2020? A. $23,500 B. $35,250 C. $58,750 D. $82,250

B

Smith Co. bought a window franchise from Paine, Inc., on January 2, 2020, for $100,000. A highly regarded independent research company estimated that the remaining useful life of the franchise was 50 years. Its unamortized cost on Paine's books at January 1, 2020, was $15,000. Smith has decided to write off the franchise over the longest possible period. How much should be amortized by Smith Co. for the year ended December 31, 2020? A. $ 375 B. $ 2,000 C. $ 2,500 D. $15,000

B

The Archer Company purchased a tooling machine in 2010 for $30,000. The machine was being depreciated on the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2020, when the machine had been in use for 10 years, the company paid $5,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years. What should be the depreciation expense recorded for this machine in 2020? A. $1,000. B. $1,333. C. $1,500. D. $1,833.

B

The Diana Co. issues a $208,000 6-month, zero-interest-bearing note to the Tang National Bank. The present value of the note is $200,000. The entry to record this transaction by Diana Co. would include: A. a credit to Notes Payable of $200,000. B. a debit to Discount on Notes Payable of $8,000. C. a credit to Discount on Notes Payable of $8,000. D. a debit to cash of $208,000.

B

A liability has three essential characteristics; which of the following is not one of them? A. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. B. The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of their normal business operation. C. The liability must be an unavoidable obligation. D. The transaction or other event creating the obligation must have already occurred.

B

An impairment in the value of property, plant, and equipment is recorded by recognizing a: Loss Reduction in Asset Book Value A. Yes No B. Yes Yes C. No Yes D. No No

B

How should research and development costs be accounted for? A. Capitalized when incurred and then amortized over their estimated useful lives. B. Expensed in the period incurred. C. May be either capitalized or expensed when incurred. D. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will result in the discovery of a profitable product.

B

In 2017, Hume, Inc. purchased Rousseau Metals for $3 million. At December 31, 2020, the Rousseau division reported net assets of $3,300,000 (including $1,700,000 of goodwill). Hume reviewed the Rousseau division and determined that the fair value is estimated to be only $1,800,000 and the fair value of the net assets excluding goodwill is $1,600,000. What entry should Hume record concerning the Rousseau division on December 31, 2020? A. No entry is needed. B. Loss on impairment 1,500,000 Goodwill 1,500,000 C. Loss on impairment 1,700,000 Goodwill 1,700,000 D. Loss on impairment 100,000 Goodwill 100,000

B

The accounting profession does not allow the immediate write-off of goodwill. The best reason for this requirement seems to be that: A. goodwill has a useful life like all assets and should be charged as an expense at a normal rate. B. to write-off goodwill immediately would lead to the incorrect conclusion that goodwill has no future service potential. C. the immediate write-off would cause net income to be much lower than it had been for the company in recent years and comparability would be distorted. D. because the amortization of goodwill is tax deductible, an immediate write-off serves no useful purpose.

B

The amortization of goodwill: A. is dependent upon the number of years a company expects to use the benefits it provides. B. does not happen as it is deemed to have an indefinite life. C. represents as acceptable an accounting practice as does the immediate writeoff method. D. should be computed using the straight-line method unless another method is deemed more appropriate

B

The estimated life of a building that has been depreciated for 30 of its originally estimated life of 50 years has been revised to a remaining life of 10 years. On the basis of this information the accountant should: A. continue to depreciate the building over the original 50-year life. B. depreciate the remaining book value over the remaining life of the asset. C. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years. D. adjust accumulated depreciation to its appropriate balance, through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

B

The reason goodwill is sometimes referred to as a master valuation account is because: A. it represents the purchase price of a business that is about to be sold. B. it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business. C. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation. D. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.

B

Under current accounting practice, intangible assets are classified as: A. amortizable or unamortizable. B. limited-life or indefinite-life. C. specifically identifiable or goodwill-type. D. legally restricted or goodwill-type.

B

When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to: A. charge a full year's depreciation to the year of acquisition. B. determine depreciation expense for the full year and then prorate the expense between the two periods involved. C. use the straight-line method for the year in which the asset is sold or otherwise disposed of. D. use a salvage value equal to the first year's partial depreciation charge.

B

Which of the following disclosures is not required in the financial statements regarding depreciation? A. Accumulated depreciation, either by major classes of depreciable assets or in total. B. Details demonstrating how depreciation was calculated. C. Depreciation expense for the period. D. Balances of major classes of depreciable assets, by nature and function

B

Which of the following most accurately reflects the concept of depreciation as used in accounting? A. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. B. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. C. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. D. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

B

Which of the following statements is the assumption on which straight-line depreciation is based? A. The operating efficiency of the asset decreases in later years. B. Service value declines as a function of time rather than use. C. Service value declines as a function of obsolescence rather than time. D. Physical wear and tear are more important than economic obsolescence.

B

Which of the following would constitute the refinancing of a short-term obligation? A. Actual refinancing after the balance sheet date by issuance of a long-term obligation. B. A statement by the board of directors that refinancing is inevitable. C. Entering into a contractual agreement that clearly permits refinancing on a long-term basis with terms that are readily determinable. D. Actual refinancing after the balance sheet date by issuance of equity securities

B

If a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be reflected by which of the following? A. Record the loss and the related liability, but at an amount that is significantly conservative. B. Record the loss and the related liability, but indicate in a footnote to the financial statements that this loss may not occur because one of the criteria may not be met. C. Disclose in the footnotes to the financial statements (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. D. Do not record the contingency or make mention of it in the financial statements because it lacks meeting the required criteria

C

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

C

Composite or group depreciation is a depreciation system whereby: A. the years of useful life of the various assets in the group are added together and the total divided by the number of items. B. the cost of individual units within an asset group is charged to expense in the year a unit is retired from service. C. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets. D. the original cost of all items in a given group or class of assets is retained in the asset account and the cost of replacements is charged to expense when they are acquired.

C

Current liabilities are: A. liabilities that are due and payable on the balance sheet date. B. liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year. C. due within one year or one operating cycle, whichever is longer. D. void of notes payable, as notes are always long-term.

C

Each year Abner Corporation sets aside an amount of cash equal to depreciation expense on its only machine. When the asset is completely depreciated, the cash fund will allow the corporation to buy a new machine if: A. prices rise throughout the life of the property. B. an accelerated depreciation method was used. C. prices remain reasonably constant during the life of the property. D. the straight-line depreciation method is used.

C

Each year a company has been investing an increasing amount in machinery. Because there are a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation method at a uniform rate to the machinery as a group. The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1. The most likely explanation of this increasing ratio is that: A. the estimated average useful life of the machinery is greater than the actual average useful life. B. the estimated average useful life of the machinery is equal to the actual average useful life. C. the estimated average useful life of the machinery is less than the actual average useful life. D. the company has been retiring fully depreciated machinery that should have remained in service.

C

Goodwill: A. generated internally should not be capitalized unless it is measured by an individual independent of the enterprise involved. B. is easily computed by assigning a value to the individual attributes that comprise its existence. C. represents a unique asset in that its value can be identified only with the business as a whole. D. exists in any company that has earnings that differ from those of a competitor.

C

In January 2020, the Lucky Mine Corporation purchased a mineral mine for $3,400,000 with removable ore estimated by geological surveys at 4,000,000 tons. The property has an estimated value of $200,000 after the ore has been extracted. The company incurred $800,000 of development costs preparing the mine for production. During 2020, 400,000 tons were removed and 375,000 tons were sold. What is the amount of depletion cost that Lucky Mine should record for 2020? A. $375,000 B. $393,750 C. $400,000 D. $420,000

C

In accounting for compensated absences, a company following GAAP would account for the liability using the: Cash Basis Accrual Basis A. Yes Yes B. Yes No C. No Yes D. No No

C

Isa Company has equipment that, due to changes in its use, is reviewed for possible impairment. The asset's carrying amount is $400,000 ($500,000 cost less $100,000 accumulated depreciation). The expected future net cash flows (undiscounted) from the use of the asset and its eventual disposition are determined to be $380,000 and it has a current market value of $350,000. What is the amount of the impairment, if any, that should be recorded by Isa Company? A. $0 B. $ 20,000 C. $ 50,000 D. $400,000

C

Of the following costs related to the development of natural resources, which one is not a part of depletion cost? A. Acquisition cost of the natural resource deposit. B. Exploration costs. C. Tangible equipment costs associated with machinery used to extract the natural resource. D. Intangible development costs such as drilling costs, tunnels, and shafts.

C

On October 1, 2019, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable on October 1, 2020. How will the note payable and the related interest be classified in the December 31, 2019, balance sheet? Note Payable Accrued Interest A. Current liability Noncurrent liability B. Noncurrent liability Current liability C. Current liability Current liability D. Noncurrent liability Noncurrent liability

C

One factor that is not considered in determining the useful life of an intangible asset is: A. legal life. B. expected actions of competitors. C. residual value D. provisions for renewal or extension.

C

Strassberg Co. purchases a truck from Forward Auto for $65,000 on January 2, 2020. Forward estimated the assurance-type warranty costs on the truck to be $800 (Forward will pay for repairs for the first 50,000 miles or two years, whichever comes first). Strassberg Co. also purchases a $1,000 servicetype warranty for an additional 50,000 miles or two years. Forward incurs warranty costs related to the assurance-type warranty of $300 in 2020 and $500 in 2021. Forward records revenue on the service-type warranty on a straight-line basis. What is the amount of warranty liability and unearned warranty revenue that should be shown on the balance sheet of Forward at December 31, 2020? Warranty Liability Unearned Warranty Revenue A. $500 $500 B. $400 $1,000 C. $500 $1,000 D. $400 $500

C

The activity method of depreciation (often called the variable charge approach) assumes that depreciation is a function of: Productivity Passage of Time A. Yes Yes B. No No C. Yes No D. No Yes

C

Thucydides Company purchased a new machine on May 1, 2010, for $25,000. At the time of acquisition, the machine was estimated to have a useful life of 10 years and an estimated salvage value of $1,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2019, the machine was sold for $800. What should be the loss recognized from the sale of the machine? A. $ 0. B. $2,000. C. $3,000. D. $3,400.

C

Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are): Recoverability Test Fair Value Test A. Yes Yes B. Yes No C. No Yes D. No No

C

When a company develops a trademark or trade name the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark or trade name would not be allowed to be capitalized? A. Attorney fees. B. Consulting fees. C. Research and development fees. D. Design costs.

C

Which of the following depreciation methods does not consider salvage value in computing the total depreciation to be taken? A. Straight-line. B. Sum-of-years'-digits. C. Declining-balance. D. Activity or production.

C

Which of the following is not acceptable treatment for the presentation of current liabilities? A. Listing current liabilities in order of maturity. B. Listing current liabilities according to amount. C. Offsetting current liabilities against assets that are to be applied to their liquidation. D. Showing current liabilities immediately below current assets to obtain a presentation of working capital.

C

Which of the following loss contingencies is normally accrued? A. Pending or threatened litigation. B. General or unspecified business risk. C. Obligations related to product warranties. D. Risk of property loss due to fire.

C

Calvin Company incurred the following cost related to the start-up of the business: Attorney's fee ......................................................... $10,000 Underwriter's fee .................................................... 15,000 State incorporation fee ........................................... 7,000 $32,000 The company wishes to amortize these costs over the maximum period allowed under generally accepted accounting principles. Assuming that Calvin Company began operation on January 1, 2020, what amount of the start-up costs should be amortized in 2021? A. $4,400. B. $2,200. C. $ 800. D. $ 0.

D

During 2019 Wannstedt Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: Sales Actual Warranty Expenditures 2019 $200,000 $3,000 2020 500,000 15,000 2021 700,000 45,000 $1,400,000 $63,000 What amount should Wannstedt report as a liability for this assurance type warranty at December 31, 2021? A. $0 B. $5,000 C. $68,000 D. $105,000

D

Hooker Corporation acquired a franchise to operate a Good Pet Dog Kennel in January 2017. The cost of the franchise was $125,000 and was estimated to have a useful life of 40 years. Early in the year 2020, the franchise was deemed worthless due to significant law suits that caused the franchisor to go out of business. What amount of cost or expense should be charged to the income statement of Hooker Corporation for the years noted below? 2017 2022 2023 A. $5,000 $5,000 $5,000 B. $3,125 $3,125 $3,125 C. 0 0 $125,000 D. $3,125 $3,125 $106,250

D

In 2020, Descartes Corporation incurred R&D costs as follows: Materials and facilities .......................................... $ 80,000 Personnel ............................................................. 110,000 Indirect costs ........................................................ 25,000 $215,000 These costs relate to a product that will be marketed in 2020. It is estimated that these costs will be recovered by the end of 2023. What amount of R&D costs should be charged against 2020 income? A. $ 0. B. $ 25,000. C. $190,000. D. $215,000

D

Maimonides Inc. bought a machine on January 1, 2010 for $100,000. The machine had an expected life of 20 years and was expected to have a salvage value of $10,000. On July 1, 2020, the company reviewed the potential of the machine and determined that its undiscounted future net cash flows totaled $50,000 and its discounted future net cash flows totaled $35,000. If no active market exists for the machine and the company does not plan to dispose of it, what should Maimonides record as an impairment loss on July 1, 2020 assuming the straight-line method is used? A. $ 0 B. $ 2,750 C. $ 5,000 D. $17,750

D

Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, and unfavorable outcome is highly probable, and: A. the Marx Company admits guilt. B. the court will decide the case within one year. C. the damages appear to be material. D. the cause for action occurred during the accounting period covered by the financial statements.

D

Plato Corporation purchased a machine with a cost of $165,000 and a salvage value of $9,000 on April 1, 2019. The machine will be depreciated over a 12 year useful life using the sum-of-years'-digits method. The amount of depreciation Plato Corporation would record for the year ended 12/31/20 would be: A. $22,000. B. $24,000. C. $16,500. D. $22,500.

D

(T/F): The amount of unremitted employee and employer social security tax on gross wages paid should be reported by the employer as a current liability.

True

A large publicly held company has developed and registered a trademark during 2017. How should the cost of acquiring and registering the trademark be accounted for if it is considered to have a limited-life? A. Charged to an asset account that should not be amortized. B. Amortized over 10 years regardless of its useful life. C. Expensed as incurred. D. Amortized over its useful life.

D

SL and YD Companies purchase identical equipment having an estimated service life of 5 years, with no salvage value. SL Company uses the straight-line depreciation method; YD Company uses the sum-of-the-years' digits method. Assuming that the companies are identical in all other respects: A. if both companies keep the asset for 5 years, YD Company's 5-year total for depreciation expense will be greater than SL Company's 5-year total. B. if the asset is sold after 3 years, SL Company is more likely to report a gain on the transaction than YD Company. C. SL Company's depreciation expense will be higher during the 1st year than YD's. D. SL Company's net income will be lower during the 4th year than YD Company's.

D

The Xenophon Company acquired a tract of land containing an extractable natural resource. Xenophon Company is required by its purchase contract to restore the land to a condition suitable for recreational use after it extracts the natural resource. Geological surveys estimate that recoverable reserves will be 3 million tons and that the land will have a value of $600,000 after restoration. Relevant cost information follows: Land .................................................... $6,000,000 Restoration.......................................... 900,000 Geological surveys.............................. 300,000 If Xenophon Company maintains no inventories of extracted material, what should be the charge to depletion expense per ton of material extracted? A. $1.80. B. $1.90. C. $2.00. D. $2.20.

D

The currently maturing portion of long-term debt should be classified as a current liability if: A. the debt is to be converted into capital stock. B. the debt is to be refinanced on a long-term basis. C. the funds used to liquidate it are currently classified as a long-term investment on the balance sheet. D. the portion so classified will be liquidated within one year using current assets.

D

Which of the following is a realistic assumption of the straight-line method of depreciation? A. The asset's economic usefulness is the same each year. B. The repair and maintenance expense is essentially the same each period. C. The rate of return analysis is enhanced using the straight-line method. D. Depreciation is a function of time rather than a function of usage.

D

Williams Co., which has a taxable payroll of $300,000, is subject to the FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Williams Co.? A. $35,100 B. $24,600 C. $12,000 D. $ 8,400

D

Wilson Company is involved in a litigation suit concerning the clean-up of old underground oil storage tanks on property it sold to a housing development company five years ago. The attorneys for Wilson Company cannot give a best estimate for the probable liability; however, the attorneys state that the liability to Wilson Company will probably fall within a range of $2 million to $10 million. According to the SEC, what should Wilson Company record with regards to this environmental liability? A. No entry is required. B. A loss and liability of $10 million. C. A loss and liability of $6 million. D. A loss and liability of $2 million.

D

With respect to the following loss contingencies, would a loss normally be accrued or not accrued? Loss Related to Loss Related to Receivable Collections Product Warranties A. Accrued Not Accrued B. Not Accrued Accrued C. Not Accrued Not Accrued D. Accrued Accrued

D

(T/F): A copyright is granted for the life of the creator or 70 years, whichever is longer.

False (A copyright is granted for the life of the creator plus 70 years.)

(T/F): GAAP requires that a liability always be accrued for the cost of compensation for future absences of full-time employees.

False (A liability for the cost of compensation for future absences is required if the four following conditions are met: (a) the employee's services have already been rendered, (b) the obligation relates to rights that vest or accumulate, (c) payment is probable, and (d) the amount can be reasonably estimated.)

(T/F): A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets.

False (A stock dividend distributable is liquidated using capital stock rather than assets. Thus, a stock dividend distributable should be classified in an entity's equity section.)

(T/F): Accelerated depreciation methods accomplish the objective of writing an asset off over a shorter period of time than its useful life.

False (Accelerated depreciation methods provide for a higher depreciation cost in the earlier years and lower charges in later periods. The estimated useful life of an asset is unaffected by the depreciation method used.)

(T/F): An assurance-type warranty is usually recorded in a unearned warranty Revenue account.

False (An assurance-type warranty should be expensed in the period the goods are provided or services performed. A service-type warranty is usually recorded in a Unearned Warranty Revenue Account.)

(T/F): A copyright would generally not be amortized.

False (Because a copyright has a limited life and the useful life is usually less than the legal life, a copyright is generally amortized.)

(T/F): Companies that desire low depreciation during periods of low productivity and high depreciation during high productivity either adopt or switch to a declining balance method.

False (Companies that desire low depreciation during periods of low productivity and high depreciation during high productivity either adopt or switch to an activity method.)

(T/F): The term "loss contingency," as used in accounting, refers to situations that result in a liability after the passage of a specified period of time.

False (Contingencies result in liabilities if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The mere passage of time is not a criteria in determining whether a loss contingency should be recorded as a liability.)

(T/F): Costs incurred internally to create intangibles are generally the basis for recording intangible assets, which are then amortized over the estimated life of the intangible asset.

False (Costs incurred internally to create intangibles are generally expensed as incurred.)

(T/F): The accounting concept of depreciation reflects the decline in value associated with a plant asset.

False (Depreciation is not a matter of valuation but a means of cost allocation in accounting. The concept is defined as the systematic allocation of the cost of an asset.)

(T/F): Development costs include tangible equipment used for transportation and other heavy equipment necessary to extract a natural resource and get it ready for production or shipment.

False (Development costs only include intangible development costs for such items as drilling costs, tunnels, shafts, and wells.)

(T/F): The composite depreciation rate is determined by dividing the depreciation per year by the total cost of the assets.

True

(T/F): Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet.

False (Discount on Notes Payable is a contra account to Notes Payable and therefore is subtracted from Notes Payable on the balance sheet.)

(T/F): For indefinite-life intangibles a recoverability test is used to determine whether an impairment has occurred.

False (For indefinite-life intangibles other than goodwill, only the fair value test is employed. For goodwill, a more complex fair value test is used.)

(T/F): In recording depreciation for tax purposes, companies can use any method as long as the amount reported on the tax return exceeds the amount recorded for financial statement purposes.

False (For tax purposes companies are required to use a Modified Accelerated Cost Recovery System (MACRS) in computing depreciation. The rate of acceleration depends upon the useful life of the asset being depreciated.)

(T/F): Goodwill generated internally should be capitalized in the accounts.

False (Goodwill generated internally should not be capitalized in the accounts.)

(T/F): Goodwill should be amortized over its useful life

False (Goodwill is considered to have an indefinite life and therefore should not be amortized.)

(T/F): Goodwill is often identified on the balance sheet as the excess of the fair value over the cost of the net assets acquired.

False (Goodwill is often identified on the balance sheet as the excess of the cost over the fair value of the net assets acquired.)

(T/F): Lack of physical substance is the only characteristic of intangible assets that distinguishes them from all other assets reported on the balance sheet.

False (In addition to lack of physical existence, the characteristics of an intangible asset are that they also are not a financial instrument.)

(T/F): The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer.

False (In addition to the "operating cycle or one year, whichever is longer" criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities.)

(T/F): Legal fees and other costs incurred in successfully defending a patent suit are expensed as incurred.

False (Legal fees and other costs incurred in successfully defending a patent suit are debited to Patents, an asset account, because such a suit establishes the legal rights of the holder of the patent.)

(T/F): Notes payable are only classified as short-term.

False (Notes payable may be classified as short-term or long-term, depending upon the payment due date.)

(T/F): Preferred dividends in arrears should be recognized as a liability in the balance sheet.

False (Preferred dividends in arrears are not an obligation until formal action is taken by the board of directors authorizing the distribution of earnings (although a disclosure may be involved).)

(T/F): Start-up costs are usually charged to an account called Start-Up Costs and may be carried as an asset on the balance sheet.

False (Start-up costs are to be expensed as incurred.)

(T/F): The Internal Revenue Code allows the use of an accelerated depreciation method for tax purposes as long as the use of the method does not cause the company to report a net loss

False (The IRS adopted an accelerated depreciation system known as the modified accelerated cost recovery system (MACRS). Under this method, the taxpayer determines depreciation expense for an asset by applying a statutory percentage to the historical cost of the property. The use of MACRS is not affected by the reporting of a net loss.)

(T/F): When there is an absence of insurance, a firm should estimate the amount of possible future losses and record a liability at the date of the financial statements.

False (The absence of insurance does not mean that a liability has been incurred at the date of the financial statements.)

(T/F): When a company offers premiums to its customers in return for coupons, the cost of the premiums should be charged to expense when the premiums are distributed to customers.

False (The cost of premiums should be charged to expense during the period in which the sale that gave rise to the premium is made. This method will find some of the premium cost being charged to expense when the premiums are distributed to customers. However, any portion of the estimated premium expense not charged to expense during the period of sale must be accrued at year-end so that a proper matching of revenues and expense takes place.)

(T/F): The straight-line depreciation method is used most often in actual practice. This is because the assumptions upon which it is based apply to most plant assets.

False (The straight-line method is widely employed in practice because of its simplicity. The major objection to the straight-line method is that it rests on tenuous assumptions that in most situations are not realistic. The major assumptions are that (a) the asset's economic usefulness is the same each year and (b) the repair and maintenance expense is essentially the same each period.)

(T/F): Current liabilities are generally measured by the present value of the future outlay of cash required to liquidate them.

False (Theoretically, current liabilities should be measured by the present value of the future outlay of cash required to liquidate them. But, in practice, current liabilities are usually recorded in accounting records and reported in financial statements at their full maturity value.)

(T/F): One factor to consider in determining whether a liability should be recorded with respect to threatened litigation is the effect such a liability will have on a reported financial condition.

False (Threatened litigation is a loss contingency that should be recorded as a liability if it is probable that a liability has been incurred and the amount of the loss is reasonably estimated.)

(T/F): The full costing approach, related to accounting for exploration costs, requires that the full cost of exploration be charged against income in the year it is incurred.

False (Under the full costing approach, all costs, whether related to successful or unsuccessful projects, are capitalized and charged against future operations.)

(T/F): Vested rights exist when an employer has an obligation to make payment to an employee but not if the employee is terminated.

False (Vested rights exist when an employer has an obligation to make payment to an employee even if his or her employment is terminated.)

(T/F): When determining whether an asset has been impaired, the recoverability test compares discounted future net cash flows to the carrying amount of the asset.

False (When determining whether an asset has been impaired, the recoverability test compares expected future net cash flows (undiscounted) to the carrying amount of the asset.)

(T/F): Whenever the economic nature of the asset is the primary determinant of service life, maintenance plays an extremely vital role in prolonging service life.

False (When the economic nature of the asset is the primary determinant of service life, functional factors rather than physical factors (wear and tear) cause the asset to be retired. Functional factors (inadequacy, supersession, and obsolescence) cannot be reversed by repairs and maintenance.)

(T/F): Use of the master valuation approach to measure goodwill requires an estimate of a firm's excess earning power.

False (When the master valuation approach is used to measure goodwill, it is considered to be the excess of the cost over the fair value of the identifiable net assets acquired.)

(T/F): The computation of depletion is essentially the same as the activity method of depreciation.

True

(T/F): The costs of services performed by others in connection with the reporting company's R&D should be expensed as incurred.

True

(T/F): If sick pay benefits accumulate but do not vest, accrual is permitted but not required.

True

(T/F): Intangible assets are amortized over their useful lives unless the intangible can remain in existence indefinitely.

True

(T/F): Losses or gains relating to impaired assets intended to be disposed of should be reported as part of income from continuing operations.

True

(T/F): Marsilius Company secured a copyright on a unique literary work. All conservative estimates indicate that the copyright will be useful for its maximum useful life; thus, this is the period over which the copyright should be amortized.

True

(T/F): One problem associated with the activity method of depreciation concerns estimating the total units of output an asset will produce.

True

(T/F): Physical factors such as wear and tear set the outside limit for the service life of an asset.

True

(T/F): Replacing a black and white monitor with a color monitor for a computer is an example of supersession.

True

(T/F): Reserve recognition accounting is specifically related to the oil and gas industry.

True

(T/F): A bargain purchase arises when the fair value of the asset acquired is higher than the purchase price of the asset.

True

(T/F): A current liability results when a company collects sales taxes from customers.

True

(T/F): A short-term obligation expected to be refinanced may be excluded from current liabilities if (a) the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date or (b) the company has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

True

(T/F): A trademark may properly be considered to have an indefinite life.

True

(T/F): Acceptable accounting practice requires that disclosure be made in the financial statements (generally in the notes) of the total R&D costs charged to expense each period for which an income statement is presented.

True

(T/F): All research and development (R&D) costs should normally be charged to expense when incurred.

True

(T/F): Amortization is the systematic charge to income of the cost of an intangible asset.

True

(T/F): An asset's cost less its salvage value is referred to as the depreciable base.

True

(T/F): An impairment loss is reported as a part of income from continuing operations, generally in the "Other expenses and losses" section.

True

(T/F): Because current liabilities tend to be liquidated within a short period of time, present value techniques are not normally applied.

True

(T/F): Cost is the basis for recording intangible assets, including acquisition price and all expenditures incurred to prepare the asset for its intended use.

True

(T/F): Depletion is the systematic allocation of the cost of natural resources (wasting assets).

True

(T/F): Estimation and judgment are the primary means through which the service life of an asset is determined.

True

(T/F): If a company at the balance sheet date has a liability that will be settled on a long-term basis, this means that the company will not require the use of working capital during the ensuing fiscal year (or operating cycle, if longer

True

(T/F): If a loss contingency is likely to occur and its amount can be reasonably estimated, it should be recorded in the accounts.

True

(T/F): If goodwill is present, it should be reported as a separate item on the balance sheet.

True

(T/F): If one of the estimates used in computing depreciation is subsequently found to require adjustments, no change in prior years' financial statements is required.

True

(T/F): When a company issues a zero-interest-bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable.

True

(T/F): When determining the impairment, if any, of goodwill, the fair value of the reporting unit should be compared to its carrying amount including goodwill.

True