Chapter 6 Accounting Questions (Regent University Bus 220 2019)

Renewable Energies, Inc. (REI) paid $100,000 to purchase a windmill. The windmill was expected to have an 8 year useful life and a $20,000 salvage value. At the beginning of the fifth year of operation, REI changed the estimated useful life from 8 years to 14 years. Assuming the Company uses the straight-line method, the amount of depreciation expense on the Year 5 income statement would be

$4000 Explanation Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($100,000 Cost - $20,000 Salvage) ÷ 8 Year life = $10,000 Year Depreciation Expense Accumulated Depreciation Book Value 1 $10,000 $10,000 $100,000 − $10,000 = $90,000 2 $10,000 $20,000 $100,000 − $20,000 = $80,000 3 $10,000 $30,000 $100,000 − $30,000 = $70,000 4 $10,000 $40,000 $100,000 − $40,000 = $60,000 At the beginning of Year 5 the book value is $60,000 and the remaining useful life is 10 years (14 - 4). Revised depreciation expense per year = (Book value - Salvage value) ÷ Useful life Revised depreciation expense per year = ($60,000 Book value - $20,000 Salvage) ÷ 10 Year life = $4,000

Corazon Company purchased an asset with a list price of $14,000. Corazon paid $500 of transportation-in cost, $800 to train an employee to operate the equipment, and $200 to insure the asset against theft after it has been set up in the factory. The asset was purchased under terms 1/20/n30 and Corazon paid for the asset within the discount period. Based on this information, Corazon would capitalize the asset on its books at

15160 Explanation Cost of Asset: List Price $ 14,000 Plus: Transportation in 500 Plus: Training 800 Less: Cash discount ($14,000 list price × 0.01 discount) (140 ) Total cost capitalized $ 15,160 The general rule in determining which costs to capitalize in an asset account is to capitalize any cost that is necessary to obtain the asset or to make it ready for use. Note that the $200 of insurance was not included because it applied to coverage after the asset had been acquired and set up for use.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is

20,000 Explanation Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case the after closing (ending) balance in the accumulated depreciation account will be $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, and $40,000 in Year 4.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. Marino planned to drive the truck for 100,000 miles and then to sell it. The truck was expected to have an $8,000 salvage value. The truck was actually driven 40,000 miles during Year 1; 20,000 miles during Year 2; 35,000 miles during Year 3; and 10,000 miles during Year 4. If Marino uses the units-of-production method, the amount of depreciation expense recognized on the Year 4 income statement is

2000 Explanation Number of miles is used as the measure of production Depreciation expense per mile = ($48,000 Cost − $8,000 Salvage) ÷ 100,000 Miles = $0.40 Year 1 Dep. exp. = 40,000 Miles driven × $0.40 Expense per mile = $16,000 Year 2 Dep. exp. = 20,000 Miles driven × $0.40 Expense per mile = $8,000 Year 3 Dep. exp. = 35,000 Miles driven × $0.40 Expense per mile = $14,000 Year 4 Dep. exp. = 10,000 Miles driven × $0.40 Expense per mile = $4,000; $2,000 Regardless of the amount of depreciation expense computed using the units-of-production formula, you cannot depreciate an asset below its salvage value. In this case, the maximum amount of depreciation expense that can be recognized over the life of the asset is $40,000 ($48,000 cost − $8,000 salvage). The maximum depreciation that can be recognized in Year 4 is $2,000 ($40,000 Maximum depreciation allowed − $38,000 balance in accumulated depreciation at the beginning of Year 4). As a result, $2,000 not $4,000 depreciation expense will be recognized in Year 4.

On January 1, Year 1, East Company purchased West Company. East Company paid $600,000 cash and assumed all of West Company's liabilities. West's books showed tangible assets of $550,000, liabilities of $40,000, and equity of $590,000. An appraiser assessed the fair market value of the tangible assets at $580,000 at the date of acquisition. On December 31, Year 4 East determines that the goodwill suffered a $25,000 permanent impairment. However, on December 31, Year 6 East estimated that it had recovered $5,000 of the impairment that had previously been considered to be a permanent impairment. Based on this information, the book value of the goodwill shown on the December 31, Year 6 balance sheet is

35000 Explanation Computation of goodwill purchased Cash paid $ 600,000 Plus: liabilities assumed $ 40,000 Less: Market value of assets acquired $ (580,000 ) Goodwill purchased $ 60,000 The book value of the goodwill is $35,000 ($60,000 goodwill purchased - $25,000 impairment). Note that the write-down of the goodwill is permanent. The estimated recovery is ignored.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the double-declining-balance method, the amount of depreciation expense recognized on the Year 3 income statement is

4000 Explanation Dep. exp. = Book value at beginning of year x (2 x Straight-line rate) Book value at beginning of year = (Cost of the asset - Beginning balance in accumulated depreciation) Straight-line rate = 1 ÷ 4 = 25% Year 1 Dep. exp. = ($48,000 Cost - $0 Accumulated Depreciation) x (2 x .25) = $24,000 Year 2 Dep. exp. = ($48,000 Cost - $24,000 Accumulated Depreciation) x (2 x .25) = $12,000 Year 3 Dep. exp. = ($48,000 Cost - $36,000 accumulated Depreciation) x (2 x .25) = $6,000; $4,000 Regardless of the amount of depreciation expense computed using the double-declining-balance formula, you cannot depreciate an asset below its salvage value. In this case, the maximum amount of depreciation expense that can be recognized over the life of the asset is $40,000 ($48,000 cost - $8,000 salvage). Since the company has already recognized $36,000 of depreciation ($24,000 in Year 1 plus $12,000 in Year 2) the maximum amount of additional depreciation that can be recognized in Year 3 is $4,000 ($40,000 Maximum depreciation allowed - $36,000 previously recognized). As a result, $4,000 not $6,000 depreciation expense will be recognized in Year 3.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the double-declining-balance method, the amount of accumulated depreciation shown on the Year 3 balance sheet is

40000 Explanation Dep. exp. = Book value at beginning of year × (2 × Straight-line rate) Book value at beginning of year = (Cost of the asset - Beginning balance in accumulated depreciation) Straight-line rate = 1 ÷ 4 = 25% Year 1 Dep. exp. = ($48,000 Cost - $0 Accumulated Depreciation) × (2 × .25) = $24,000 Year 2 Dep. exp. = ($48,000 Cost - $24,000 Accumulated Depreciation) × (2 × .25) = $12,000 Year 3 Dep. exp. = ($48,000 Cost - $36,000 accumulated Depreciation) × (2 × .25) = $6,000; $4,000 Accumulated depreciation at the end of Year 3 is $40,000 ($24,000 from Year 1 + $12,000 from Year 2 + $4,000 from Year 3).

On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase the rights to extract raw stone from a surface pit estimated to hold 50,000 pounds of useable material. GMC extracted 10,000 pounds of stone in Year 1, 20,000 pounds of stone in Year 2, and 25,000 pounds of stone in Year 3. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3. Based on this information, the amount of depletion expense shown on the Year 3 income statement is

4000000 Explanation Number of pounds of stone is used as the measure of production Depletion expense per pound = ($10,500,000 Cost − $500,000 Salvage) ÷ 50,000 Pounds = $200 Year 1 Depletion expense = 10,000 Pounds × $200 Per pound = $2,000,000 Year 2 Depletion expense = 20,000 Pounds × $200 Per pound = $4,000,000 Year 3 Depletion expense = 25,000 Pounds × $200 Per pound = $5,000,000; $4,000,000 Regardless of the amount of depletion expense computed using the units-of-production formula, you cannot depreciate an asset below its salvage value. In this case, the maximum amount of depletion expense that can be recognized over the life of the asset is $10,000,000 ($10,500,000 cost − $500,000 salvage). The maximum depletion that can be recognized in Year 4 is $4,000,000 ($10,000,000 Maximum depletion allowed − $2,000,000 recognized in Year 1 − $4,000,000 recognized in Year 2). As a result, $4,000,000 not $5,000,000 depletion expense will be recognized in Year 3.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino's accounting records contained the balances shown in the following financial statements mode. Balance sheet Income Statement Cash Flow Statement Assets = Cash + Truck − Acc. Dep. = Liab. + Equity Rev. − Exp. = Net Inc. 25,000 + 48,000 − 20,000 = NA + 53,000 NA − NA = NA NA Also, on January 1, Year 3 the company paid $10,000 to replace an engine that extended the useful life of the asset from a total of four years to a total of seven years. Based on this information, the balance in the amount of depreciation expense shown on the Year 3 income statement is

6000 Explanation Depreciation expense for Year 1 and Year 2: ($48,000 Cost - $8,000 Salvage) ÷ 4 Year live = $10,000 Year Depreciation Expense Accumulated Depreciation 1 $10,000 $10,000 2 $10,000 $20,000 Book value before improvement = $48,000 Cost - $20,000 Accumulated Depreciation = $28,000 Book value after improvement = $48,000 Cost - $10,000 Accumulated Depreciation* = $38,000 *The $10,000 investment to extend the useful life has been deducted from the accumulated depreciation account balance. Dep. exp. for Year 3 = (Book value - Salvage value) ÷ Remaining useful life Dep. exp. for Year 3 = ($38,000 Book value - $8,000 Salvage value) ÷ 5 years = $6,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the double-declining-balance method, the amount of book value shown on the Year 3 balance sheet is

8000 Explanation Dep. exp. = Book value at beginning of year × (2 × Straight-line rate) Book value at beginning of year = (Cost of the asset - Beginning balance in accumulated depreciation) Straight-line rate = 1 ÷ 4 = 25% Year 1 Dep. exp. = ($48,000 Cost - $0 Accumulated Depreciation) × (2 × .25) = $24,000 Year 2 Dep. exp. = ($48,000 Cost - $24,000 Accumulated Depreciation) × (2 × .25) = $12,000 Year 3 Dep. exp. = ($48,000 Cost - $36,000 accumulated Depreciation) × (2 × .25) = $6,000; $4,000 Accumulated depreciation at the end of Year 3 is $40,000 ($24,000 + $12,000 + $4,000) Book value at the end of Year 3 = $48,000 Cost - $40,000 Accumulated Depreciation = $8,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino's accounting records contained the balances shown in the following financial statements model. Balance sheet Income Statement Cash Flow Statement Assets = Cash + Truck − Acc. Dep. = Liab. + Equity Rev. − Exp. = Net Inc. 25,000 + 48,000 − 20,000 = NA + 53,000 NA − NA = NA NA Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Which of the following shows how the engine replacement will affect the Company's financial statements on January 1, Year 3? Balance sheet Income Statement Cash Flow Statement Assets = Cash + Truck − Acc. Dep. = Liab. + Equity Rev. − Exp. = Net Inc. A. (10,000) + 10,000 − NA = NA + NA NA − NA = NA (10,000) IA B. (10,000) + 10,000 − NA = NA + NA NA − 10,000 = (10,000) (10,000) IA C. (10,000) + NA − (10,000) = NA + NA NA − NA = NA (10,000) IA D. (10,000) + NA − (10,000) = NA + NA NA − 10,000 = (10,000) (10,000) OA

A is correct Explanation The engine replacement made the truck a better asset. Recording a quality improvement is an asset exchange event. One asset (cash) decreases and another asset (truck) increases. Total assets are not affected. An asset exchange does not affect revenue or expense. Therefore, the income statement is not affected. Since the cash outflow affects a long-term asset, it is an investing activity.

Which of the following conveys an exclusive right to produce and sell the content contained in a textbook?

Copyright

On January 1, Year 5, Raven Limo Service, Inc. Raven sold a used limo that had cost $64,000 and had accumulated depreciation of $36,000. The limo was sold for $26,000 cash. Which of the following shows how the sale of the limo would affect Raven's financial statements? Balance sheet Income Statement Cash Flow Statement Assets = Cash + Limo − Acc. Dep. = Liab. + Equity Gain − Loss = Net Inc. A. 26,000 + (64,000) − (36,000) = NA + (2,000) 2,000 − NA = (2,000) 26,000 IA B. 26,000 + (64,000) − (36,000) = NA + 2,000 2,000 − NA = 2,000 2,000 IA C. 26,000 + (64,000) − (36,000) = NA + (2,000) NA − 2,000 = (2,000) NA D. 26,000 + (64,000) − (36,000) = NA + (2,000) NA − 2,000 = (2,000) 26,000 IA

D is correct Explanation Book value = $64,000 Cost − $36,000 Accumulated depreciation = $28,000 Loss on sale = $26,000 Sales price − $28,000 Book value = ($2,000) The sale would cause cash to increase by $26,000, the limo account to decrease by $64,000 and the accumulated depreciation account to decrease by 36,000. The $2,000 loss would decrease net income and equity. Since Raven sold a long-term asset, the $26,000 cash inflow would be shown as an investing activity.

When the total estimated market value of assets acquired in a basket purchase is greater than the cost of the purchase, the company making the purchase must recognize a gain.

False Explanation Assets are recorded at their cost regardless of their estimated market values. No gains or losses are recognized as a result of purchasing assets. The estimated market values are used only to allocate the total cost to the individual assets.

The book value of most intangible assets is normally greater than the market value. This statement is

False Explanation The book value of most intangible assets is based on their historical cost. The market value of an intangible asset frequently far exceeds its cost. For example, the cost of registering the McDonald's name may have been only a few thousand dollars while the company collects millions of dollars from franchisees who use the McDonald's name to promote the sale of hamburgers.

All training costs associated with the purchase and continuing use of an asset should be capitalized in the asset account. This statement is

False Explanation Only the initial training cost should be capitalized. Training cost incurred after the asset is up and running should be expensed.

Which of the following intangible assets has an indefinite useful life?

Goodwill Explanation How long will a company's reputation last? It could disappear rapidly or last for hundreds of years. The elusive nature of the components of goodwill make estimating its useful life unrealistic. As a result, goodwill is classified as having an indefinite useful life.

Sable Co. paid $400,000 for a purchase that included land, a building, and equipment. An appraiser estimated the market value of the land to be $100,000, the building to be $350,000, and the equipment to be $50,000. Based on this information the cost that would be allocated to each of the assets is Land Building Equipment A. $80,000 $280,000 $40,000 B. $100,000 $350,000 $50,000 C. $80,000 $240,000 $50,000 D. $100,000 $280,000 $40,000

Option A 80,000|280,000|40,000 Relative market values expressed as a percentages: Land: $100,000 / ($100,000 + $350,000 + $50,000) = 20% Building: $350,000 / ($100,000 + $350,000 + $50,000) = 70% Equipment: $50,000 / ($100,000 + $350,000 + $50,000) = 10% Cost allocated to each asset: Land: $400,000 × 20% = $80,000 Building: $400,000 × 70% = $280,000 Equipment: $400,000 × 10% = $40,000

On January 1, Year 1, McGraw Company paid $1,000,000 to obtain a copyright. McGraw expected the copyright to have a 10 year useful life. Which of the following shows the amount of the book value of the copyright, the amortization expense, and the cash flow from operating activities on the Year 3 financial statements?

Option B Explanation Amortization expense = ($1,000,000 Cost - Zero salvage) ÷ 10 years = $100,000 Per year The book value would have decreased by $100,000 per year for three years resulting in a book value of $700,000 shown on the Year 3 balance sheet. The cash flow occurred when McGraw purchased the copyright. There is no cash flow associated with the recognition of amortization expense.

On January 1, Year 1, Martin Manufacturing Company paid $55,000 to obtain a patent. Martin expected the patent to have a 25 year useful life and a $5,000 salvage value. The patent's legal life is 20 years. Which of the following shows how the recognition of amortization expense will affect the Year 3 financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. A. (2,000) = + + (2,000) NA − 2,000 = (2,000) 2,000 OA B. (2,500) = + + (2,500) NA − 2,500 = (2,500) NA C. (2,500) = + + (2,500) NA − 2,500 = (2,500) (2,500) OA D. (2,000) = + + (2,000) NA − 2,000 = (2,000) NA

Option B Explanation Intangible assets must be amortized over the lesser of the legal life versus the useful life of the asset. Since the legal life is shorter than the useful life, the patent will be amortized over 20 years. Also, while it is not specifically stated in the problem, you should know that it is customary to amortize intangible assets using the straight-line method. Accordingly, the amortization expense is calculated as follows: Amortization expense = ($55,000 Cost of patent - $5,000 Salvage value) ÷ 20 year useful life = $2,500 per year. Since the straight-line method is used, the same amount of expense would be recognized each year. Therefore, amortization expense for all years, including Year 3, would be $2,500. Recognizing amortization expense decreases the asset account (patent) and increases amortization expense. The increase in expense decreases net income and ultimately equity (retained earnings). The cash flow occurred at the time the patent was purchased. There is no cash flow associated with the recognition of amortization expense. Therefore, the statement of cash flows is not affected.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, which of the following shows how the adjusting entry to recognize depreciation expense at the end of Year 3 will affect the Company's financial statements? Balance sheet Income Statement Cash Flow Statement Assets = Cash + Truck − Acc. Dep. = Liab. + Equity Rev. − Exp. = Net Inc. A. NA + NA − 30,000 = NA + 30,000 NA − 30,000 = (30,000) NA B. NA + NA − 30,000 = NA + 10,000 NA − 10,000 = (10,000) NA C. NA + NA − 10,000 = NA + 10,000 NA − 10,000 = (10,000) (10,000) OA D. NA + NA − 10,000 = NA + (10,000) NA − 10,000 = (10,000) NA

Option D Explanation Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The adjusting entry to recognize depreciation expense will cause the accumulated depreciation account to increase by $10,000. Note that the question is not asking for the balance in the allowance account but instead it is asking how the entry to recognized depreciation expense will affect the financial statements. The recognition of depreciation expense will cause net income to decrease and ultimately equity (retained earnings) to decrease. There is no impact on the statement of cash flows because the associated cash outflow would have been recognized previously when the truck was purchased.

Land is different from other tangible assets in that its utility is not diminished by its use. This statement is

True

Goodwill is recognized only when it is purchased. This statement is

True Explanation A company may work hard to establish a good reputation. It may even spend money on advertising to promote the company name. Even so, goodwill cannot be recognized unless it is purchased by another company. This is due largely to a lack of an ability to accurately measure its value. What dollar value would you assign to the reputation that Apple has for producing reliable phones? What is the value of a motivated sales staff? The only way to determine the value of such assets is to have someone purchase them. If someone is willing to pay more for a business than it would have to pay for the assets owned by the business minus its liabilities, then we can conclude that they must be purchasing assets plus goodwill. That amount paid in excess of the market value of the assets is the goodwill.

Two companies that experience identical accounting events may still report different amounts of net income. This statement is

True Explanation The measurement of net income involves numerous estimates that may differ for one management team to another. For example, two different companies could buy identical trucks, yet one company could estimate a four year life while the other company estimates a five year life. Under this circumstance, the amount of depreciation expense would differ even though the companies had purchased identical trucks.

Depletion is the term used to recognize expense associated with

natural resources