Ch. 8 Quiz

On January 1, a company purchased equipment for $18,000. The estimated salvage value is $4,000 and the estimated useful life is 5 years. On December 31 of the fourth year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by two years giving it a total life of 7 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the fourth year?

$1,400 Solution: The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($18,000 - $4,000)/5 years = $2,800 per year. The depreciable cost that remains is $18,000 - $4,000 - (3 years x $2,800) = $5,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 7 total years minus 3 expired years). Depreciation in the third year is $1,400 (i.e., $5,600/4 years).

On April 1 of the current year, a company purchased a patent from another company for $80,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 5 years. How much is its amortization expense for the current year?

$12,000 Solution: Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 5 years. Amortization expense for the current year = $80,000/5 years x 9/12 = $12,000.

A machine with a cost of $480,000 has an estimated salvage value of $30,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?

$150,000. Solution: Units-of-activity depreciation per unit = (Cost - Salvage)/Life measured in units of activity times units of activity in the current year Units-of-activity depreciation expense = [($480,000 - $30,000)/15,000] x 5,000 = $150,000

A company purchased equipment on January 1 at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at the end of the second year if the straight-line method of depreciation is used?

$156,000 Solution: Since the asset has been in use for two full years, the accumulated depreciation at December 31 of the second year is equal to two times the annual depreciation expense: (i.e., $400,000 - $10,000)/5 = $78,000 per year. Total accumulated depreciation = $78,000 per year x 2 years = $156,000.

A company acquires land for $150,000 cash. Additional costs are as follows: Removal of shed, $200 Filling and grading, $2,000 Salvage value of lumber of shed, $80 Broker commission, $5,000 Paving of parking lot, $15,500 Closing costs, $1,200. The company should record the acquisition cost of the land as Group of answer choices

$158,320 Solution: Purchase price, 150,000 Add: Removal of shed less salvages (i.e., 200 - 80), 120 Add: Filling and grading, 2,000 Add: Broker's commission, 5,000 Add: Closing costs, 1,200 Acquisition costs of land, 158,320 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.

At the start of the current year, a company paid for the following in cash: Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $2,500,000 Research and development, $2,000,000 Supplies, $3,000,000 Trademarks, $1,000,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$250,000

A company purchased equipment on January 1 at a total invoice cost of $360,000. The equipment has an estimated salvage value of $40,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31 of the fourth year if the straight-line method of depreciation is used?

$256,000 Solution: Since the asset has been in use for four full years, the accumulated depreciation at December 31 of the fourth year is equal to four times the annual depreciation expense: $360,000 - $40,000)/5 = $64,000 per year Total accumulated depreciation = $64,000 per year x 4 years = $256,000.

A company purchased equipment for $300,000 on January 1. The equipment's original estimated useful life is 10 years and its estimated salvage value is $60,000. The company uses the straight-line method of depreciation. Before recording adjusting entries in the asset's sixth year, the company revises the estimated salvage value to $48,000. It does not change the estimated useful life. How much depreciation expense should be recorded for the sixth year?

$26,400. Solution: Original depreciation per year: ($300,000 - 60,000)/10 years = $24,000 per year. Revised depreciation per year: ($300,000 - 5 x 24,000 - 48,000)/(10-5) = $26,400 per year

A company purchased equipment and incurred these costs: Cash price, $25,000 Sales taxes, $1,400 Insurance during transit, $300 Annual maintenance costs, $300 What amount should be recorded as the cost of the equipment?

$26,700 Solution: All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($25,000 + $1,400 + $300 = $26,700). The $300 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

On September 1, a company purchased equipment for $40,000. The equipment's estimated salvage value is $4,000. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$3,000 debit to Depreciation Expense and a $3,000 credit to Accumulated Depreciation. Solution: Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (40,000 - 4,000)/4 = $9,000 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., September 1 through December 31) is $9,000 per year x 4/12 = $3,000.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On October 1 of the current year, a company purchased and places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,000. Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($80,000 - 20,000)/5 years = $12,000 per year Depreciation expense for October 1 through December 31 = $12,000 x 3/12 = $3,000

On March 1 of the current year, a company sells some equipment for $30,000. The original cost was $60,000, the estimated salvage value was $12,000, and the expected useful life was 6 years. Straight-line depreciation is used. On January 1 of the currentyear, the Accumulated Depreciation account had a balance of $32,000. How much is the gain or loss on the sale?

$3,333 gain Solution: First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $48,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $60,000 - 12,000) and a life of 6 years, the depreciation is $8,000 per year. In the current year, depreciation expense is $1,333 (i.e., $8,000 per year x 2/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $33,333 (i.e., $32,000 + 1,333). Book value equals cost minus accumulated depreciation. Book value is $26,667 (i.e., $60,000 - $33,333). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $30,000 - 26,667 = $3,333 (i.e., gain).

In the current year, a company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later in the current year, the company paid $15,000 for legal fees in a successful defense of its patent. What is the total amount that should be debited to the company's Patents account in the current year?

$35,000 Solution: Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

At the start of the current year, a company paid for the following in cash: Copyrights, $2,000,000 Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $1,500,000 Prepaid rent, $500,000 Research and development, $500,000 Supplies, $4,000,000 Trademarks, $1,000,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$350,000 Solution: The intangibles are trademarks, patents, copyrights, and goodwill. Only patents and copyrights are amortized. Amortization expense = ($1,500,000 + 2,000,000)/10 years = $350,000 per year Research & development is not an intangible asset even though research & development may lead to new tangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

A company purchased machinery for $125,000 on July 1, 2021. The company also paid freight charges of $10,000 and installation costs of $15,000. It is estimated that the machinery will have a $20,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$39,000 Solution: Depreciation per year = ($125,000 + 10,000 + 15,000 - 20,000)/5 years = $26,000 per year Accumulated depreciation after 1.5 years = $26,000 x 1.5 = $39,000

On May 1 of the current year, a company sells some equipment for $25,000. The original cost was $50,000, the estimated salvage value was $5,000, and the expected useful life was 5 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $18,000. How much is the gain or loss on the sale?

$4,000 loss Solution: Since the equipment has a $45,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 5,000) and a life of 5 years, the depreciation is $9,000 per year. In the current year, depreciation expense is $3,000 (i.e., $9,000 per year x 4/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $21,000 (i.e., $18,000 + 3,000).Book value equals cost minus accumulated depreciation. Book value is $29,000 (i.e., $50,000 - $21,000).A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $25,000 - 29,000 = ($4,000) (i.e., loss).

A company has the following asset account balances: Buildings, $5,800,000 Accumulated depreciation, $1,600,000 Patents, $1,050,000 Inventory, $1,000,000 Goodwill, $4,000,000 How much will be reported on the balance sheet under property, plant & equipment?

$4,200,000 Solution: Buildings and accumulated depreciation are the only amounts included under Property, plant & equipment. Accumulated depreciation in a contra asset. Plant assets = $5,800,000 - $1,600,000 = $4,200,000.

A company purchased equipment that has an invoice price of $18,000. It also paid freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and four years, respectively. Under the straight-line method, how much is annual depreciation expense?

$4,750 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $2,000)/4 = $4,750 per year

A company sells a plant asset that originally cost $240,000 for $80,000 on December 31 of the current year. The accumulated depreciation account had a balance of $120,000 after the current year's depreciation of $20,000 had been recorded. The company should recognize a

$40,000 loss on disposal. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset more than its book value, the company recognizes a gain. If it sells it for less than the book value, the company recognizes a loss Book value = Cost - Accumulated depreciation = $240,000 - $120,000 = $120,000 Since the sales price is less than the book value, the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $120,000 - 80,000 = $40,000

A corporation recorded a loss of $6,000 when it sold equipment that originally cost $56,000 for $10,000. Accumulated depreciation on the equipment must have been

$40,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company recognized a loss. So, the plant asset's book value exceeds the proceeds from selling the plant asset by $6,000. Since it sold the plant asset for $10,000, the book value must be $16,000. Book value = Cost - Accumulated depreciation Re-arranging: Accumulated depreciation = Cost - Book Value Accumulated depreciation = $56,000 - 16,000 = $40,000

At the start of the current year, a company paid for the following in cash: Copyrights, $1,500,000 Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $2,500,000 Research and development, $1,500,000 Supplies, $4,000,000 Trademarks, $1,200,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$400,000 Solution: The intangibles are trademarks, patents, goodwill, and copyrights. Only patents and copyrights are amortized. Amortization expense for the year equals ($2,500,000 + $1,500,000)/10 = $400,000

A company purchased land for $350,000. It also paid a real estate brokers' commission of $25,000 and spent $35,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $1,000. Additionally, the company assumed $2,500 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$411,500. Solution: Total cost: $350,000 + $25,000 + ($35,000 - 1,000) + 2,500 = $411,500

A company purchased land for $420,000. It also paid a real estate brokers' commission of $22,000 and spent $33,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,500. The company also assumed $4,000 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$476,500. Solution: Total cost = $420,000 + $22,000 + ($33,000 - 2,500) + 4,000 = $476,500

In the current year, a company incurred $140,000 of research and development costs in its laboratory to develop a new product. It also spent $30,000 in legal fees for a patent on that new product. Later in the current year, the company paid $18,000 for legal fees in a successful defense of its patent. What is the total amount that should be debited to the company's Patents account in the current year?

$48,000 Solution: Only the $30,000 in legal foos and the $18,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $6,000 and an estimated useful life of 8 years. How much is depreciation expense for the first year under the straight-line method?

$5,500 Solution: The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($6,000) divided by the useful life (8 years) resulting in an annual depreciation value of $5,500. Depreciation expense per year = (50,000 - 6,000)/8 = 5,500 per year.

A corporation purchased a piece of land for $50,000. The corporation paid attorney's fees of $5,000 and brokers' commissions of $3,000 in connection with the purchase. An old building on the land was torn down at a cost of $1,500, and proceeds from the scrap were $500. The corporation also assumes $6,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

$65,000

On August 1, a company purchased equipment for $8,000. The equipment's estimated salvage value is $800. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$750 debit to Depreciation Expense and a $750 credit to Accumulated Depreciation. Solution: Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (8,000 - 800)/4 = $1,800 per year The correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $1,800 per year x 5/12 = $750. The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On August 1 of the current year, a company purchases and places into service new equipment. The cost of the equipment is $75,000. It has an estimated 3-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$8,333. Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = (75,000 - 15,000)/3 years = $20,000 per year Depreciation expense for August 1 through December 31 = $20,000 x 5/12 = $8,333

A company purchased equipment for $100,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $25,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, the company decides to revise the estimated salvage value to $20,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

$8,500 Solution: Original depreciation per year: ($100,000 - 25,000)/20 years = $7,500 per year. Revised depreciation per year: ($100,000 - 5 x 7,500 - 20,000)/(10-5) = $8,500 per year

A company purchased equipment for $50,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $10,000. The company uses the straight-line method of depreciation. On December 31 of its second year, before year-end adjusting entries have been recorded, the company decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the second year?

$8,750 Solution: Original depreciation per year = [($50,000 - $10,000)/8] x 1 $5,000 Revised depreciation per year = [($50,000 - 5,000) - $10,000]/(5-1) = $8,750

Equipment with a cost of $480,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?

$99,000. Solution: Units-of-activity depreciation per unit = (Cost - Salvage)/Life measured in units of activity times units of activity in the current year Units-of-activity depreciation expense = [($480,000 - $30,000)/15,000] x 3,300 = $99,000

When equipment is sold for cash in an amount that is less than its book value, the company debits the following

(i) Accumulated Depreciation, (ii) Cash, and (iii) Loss on Disposal of Plant Assets

When equipment is sold for cash in an amount that is less than its book value, the company debits the following Only cash (i) Accumulated Depreciation, (ii) Cash, and (iii) Loss on Disposal of Plant Assets (i) Cash and (ii) Loss on Disposal of Plant Assets (i) Accumulated Depreciation and (ii) Cash (i) Depreciation Expense and (ii) Accumulated Depreciation

(i) Accumulated Depreciation, (ii) Cash, and (iii) Loss on Disposal of Plant Assets

A company's average total assets are $250,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,200,000. Net sales total $300,000. What is the total asset turnover?

1.2 Solution: Total asset turnover is net sales divided by the average total assets: $300,000/$250,000 = 1.2 times.

A company has the following: Net income for the current year is $275,000 Net income in the prior year was $250,000 Net sales for the current year is $1,500,000 Net sales in the prior year were $1,400,000 Total assets as of the end of the current year is $1,150,000 Total assets at the end of the prior year was $1,050, 000 What is the company's total asset turnover ratio for the current year?

1.36 times

During the current year, a corporation reported net sales of $3,000,000, net income of $1,320,000, and depreciation expense of $80,000. It also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Its total asset turnover ratio is

2.4 times. Solution: Assets turnover ratio = Net sales/Average total assets Assets turnover ratio = $3,000,000/[($1,000,000 + 1,500,000)/2] = 2.4 or 2.4 times per year

A company purchased a plant asset for $45,000. It has a salvage value of $5,000 and a useful life of 8 years. It calculates depreciation using the straight-line method. The balance of the company's Accumulated Depreciation account at the end of the current year after-adjusting entries is $25,000. What is the asset's remaining useful life?

3 years Depreciation per year = (Cost - salvage value)/Useful life Solving for useful life: Useful life = ($45,000 - 5,000)/8 years = $5,000 per year Years expired = Accumulated depreciation/Depreciation per year = $25,000/$5,000 = 5 years Remaining life = Useful life - Years expired = (8-5) = 3 years

A company purchased a plant asset for $74,000. It has a salvage value of $10,000 and a five year life. It calculates depreciation using the straight-line method. The balance of the company's Accumulated Depreciation account at the end of the current year after-adjusting entries is $25,600. What is the asset's remaining useful life?

3 years Solution: Since the depreciable cost is $64,000 (i.e., $74,000 purchase price less the salvage value of $10,000) and life is 5 years, its annual depreciation expense is $12,800 (i.e., $64,000/5 years = $12,800). The balance in Accumulated Depreciation indicates that 2 years of life have expired (i.e., $25,600/$12,800 per year = 2 years). Since the asset has a 5 year life and 2 years have passed then 3 years remain.

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $10,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

5 years

A company uses straight-line depreciation. It purchased a truck for $42,000. The truck's salvage value is $6,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

6 years Solution: The depreciable cost equals the cost minus the salvage value; it is the $42,000 purchase price less $6,000 salvage value, which is $36,000. The annual depreciation cost is $6,000. Since $36,000 will be depreciated by $6,000 per year, the useful life is 6 years (i.e., $36,000/$6,000 per year = 6 years).

Which one of the following will maximize depreciation expense in the first year of owning an asset?

A short estimated life, a low salvage value, and declining balance depreciation

A corporation has equipment that originally cost $70,000. Its accumulated depreciation is $52,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $52,000 Debit the Loss on Disposal of Plant Assets account for $18,000 Credit the Equipment account for $70,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset more than its book value, the company recognizes a gain. If it sells it for less than the book value, the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation = $70,000 - 52,000 = $18,000 Since the sales price is zero and the book value is more than zero, the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $18,000 - 0 = $18,000 The company will debit the loss, and it will credit the plant asset for its cost, debit the accumulated depreciation for its balance.

Which of the following is not a depreciable asset? Buildings Land Land improvements Trucks Equipment

Land

A company paid for an ordinary repair to its equipment. What account should the company debit as a result of this transaction?

Maintenance and Repairs Expense

Which of the following costs should not be included in the cost of a building?

Parking lot repaving

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? Salvage value. Estimated useful life. Cost. Depreciation method. Price of replacing the plant asset.

Price of replacing the plant asset.

When using the straight-line depreciation method, which of the following is not a factor that affects the computation of depreciation?

Replacement value of the asset

Which of the following statements is true? The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter. Research and development costs are usually added to the cost of an asset rather than expensed when incurred. Goodwill is recorded when a business invests in itself by acquiring property, plant & equipment. Trademarks are amortized over a period of 20 years. If an intangible asset has an unspecified or indeterminate life, it should be amortized.

The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter.

Which statement is true about additions to plant assets? Their cost is immediately expensed. They are capitalized. They increase the Purchases account. They are revenue expenditures. They increase a Repair Expense account.

They are capitalized.

When there is a change in a depreciable asset's useful life or salvage value

only that asset's current and future years' depreciation will be affected.

When a plant asset is retired, the difference between the plant asset's cost and the accumulated depreciation of the same plant asset is

recognized on the income statement as a loss on disposal of plant asset.

A change in the estimated useful life of equipment requires

that the amount of periodic depreciation be changed in the current year and in future years.