Financial Accounting: Chapter 9: Plant and Intangible Assets: Review Questions

A company acquires equipment that it expects to use for 10,000 machine hours over a 5-year period. The cost is $20,000 and the estimated salvage value after 10,000 hours of use is $2,000. If the company uses the units-of-output method of depreciation, how much is depreciation expense in the second year in which the machine is used for 1,250 hours? -$2,250 -$3,600 -$2,500

$2,250 (Reason: ($20,000 - $2,000)/10,000 hours = $1.80; $1.80 × 1,250 hours = $2,250)

A company trades its old computer, which cost $5,000 and has accumulated depreciation at the transaction date of $3,000, for a new computer that costs $7,000. The trade-in allowance on the old computer is $1,200. What is the gain or loss, if any, on the trade-in of the old computer? -$3,800 gain -$800 gain -$800 loss -No gain or loss is apparent.

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

A company purchases land and a building for $150,000, with $80,000 allocated to the land and $70,000 allocated to the building. Before occupying the building, $20,000 was spent on renovations. Thereafter, $5,000 was spent on maintenance during the first year of occupying the building. What is the cost of the building for purposes of depreciating the asset? -$95,000 -$90,000 -$70,000

$90,000 (Reason: $70,000 + $20,000 = $90,000)

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

40% (Reason: 1/5 = 20% × 2 = 40%)

A company purchased a truck for $30,000, which it expects to use for 50,000 miles and then sell for $8,000. If the units-of-output method of depreciation is used and depreciation expense for a year is $3,960, how many miles was the truck driven? -9,000 -6,600 -The number of years in the estimated life is required.

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

Depreciation is best described by which of the following statements? -A process of valuation. -A continuous adjustment of the recorded amount of the asset to its current value. -A process of cost allocation.

A process of cost allocation.

A company has equipment that cost $100,000 and has $40,000 of accumulated depreciation as a result of past depreciation charges. Management determines that the current fair value of the asset is $35,000. What accounting treatment should be implemented at this time? -An impairment loss of $100,000, the entire cost of the asset, is recognized. -An impairment loss of $60,000 is recognized, reducing the book value to 0, but no depreciation is recognized for the remaining useful life. -An impairment loss of $25,000 is recognized and the $35,000 book value is depreciated over the remaining useful life. -An impairment loss of $25,000 is recognized but no depreciation is recognized for the remaining useful life.

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

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

Cash is received on the sale of a plant asset. Cash is paid to acquire a plant asset.

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

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

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

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

In a lump-sum purchase of assets, the entire purchase price is recorded as an asset of the single asset that is assigned the highest value. -True -False

False

In a lump-sum purchase, the entire cost is added to a single asset account. -True -False

False

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

Goodwill is a separate asset that can be bought and sold apart from other assets.

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

It's permanent.

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

Land

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

Purchasing land and a building in a single transaction.

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

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

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

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

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

The depreciation percentage changes each year.

A company purchases equipment for $75,000 and expects to use it for 5 years. What additional information is needed to compute straight-line depreciation for each year? -None. All required information is provided. -The estimated salvage value after 5 years. -The current value at the end of each year.

The estimated salvage value after 5 years.

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

The life of the creator plus 70 years.

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

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

When the cost of developing a franchise is a material amount, that cost is capitalized and amortized over what period of time? -The shorter of the franchise agreement and the estimated useful life of the franchise. -The estimated useful life, regardless of the franchise agreement. -The life of the franchise contract, regardless of the estimated useful life.

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

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

They are recorded at their estimated value, regardless of cost.

The distinguishing characteristic of natural resources is that they -are converted into inventory if they are extracted and held for sale or use. -are gradually depleted as they are removed and either used or sold. -never decline in value or usefulness to the owner over time.

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

Which plant asset type would you generally expect to have the longest useful life? -buildings -equipment -vehicles

buildings

Examples of plant assets are -cash. -buildings. -equipment. -accounts receivable.

buildings. equipment.

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

consistency

The basis for recording an intangible is -expected future value. -cost. -residual value expected to be recovered when the asset is no longer useful.

cost

The book value of a plant asset represents -the accumulated depreciation on the asset. -cost less accumulated depreciation. -the original cost of the asset. -cost plus accumulated depreciation.

cost less accumulated depreciation.

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

declining balance

Which of the following is included in the cost of a plant asset? -maintenance during the first year of use -repairs resulting from damage during shipment -delivery and installation costs

delivery and installation costs

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

depreciation

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

expense

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

expense

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

expenses

Registration of a patent with the federal government gives the holder the exclusive right to use the product or process -indefinitely. -for 20 years. -during the life of the creator plus 70 years.

for 20 years.

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

gain, $1,500

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

goodwill

The asset goodwill may result from all of the following except -high employee turnover. -positive market share. -favorable reputation. -superior management.

high employee turnover.

The cost of a natural resource that is extracted and held for use or sale is included in the statement of financial position (balance sheet) as _________________.

inventory

Land improvements are recorded in separate accounts and depreciated over their useful lives. These include all of the following except -streets and driveways. -parking lots. -fencing. -legal fees to transfer the title.

legal fees to transfer the title.

Plant assets represent -long-term prepaid expenses. -a current asset called prepaid expense. -advance purchases of services. -a bundle of future services.

long-term prepaid expenses. advance purchases of services. a bundle of future services.

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

loss, $2,500

The cost of equipment includes all of the following except -sales taxes on purchase. -maintenance costs. -installation costs. -delivery costs.

maintenance costs.

Estimating the useful life of a plant asset for accounting purposes is the responsibility of -the vendor that sold the asset to the company. -management of the company that owns and uses the asset. -the auditor of the company that owns and uses the asset.

management of the company that owns and uses the asset.

Maintaining a plant asset -always results in the asset remaining as good as new. -may lengthen the useful life of the asset. -may mean that no depreciation is recognized.

may lengthen the useful life of the asset.

Which of the following cause(s) depreciation? -obsolescence -physical deterioration -decline in replacement cost

obsolescence physical deterioration

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

plant

Intangible assets include all of the following except -trademarks. -patents. -receivables. -goodwill.

receivables.

Expenditures for repair and maintenance of plant assets are referred to as -revenue expenditures. -capital expenditures. -depreciation.

revenue expenditures.

Which depreciation method is most widely used in financial statements? -accelerated -straight-line -units-of-output

straight-line

The method of amortization typically used for intangible assets is -straight-line amortization. -accelerated amortization. -units-of-output amortization.

straight-line amortization.

The most common combination of depreciation methods used is -straight-line in both the financial statements and the tax return. -straight-line in the financial statements and accelerated in the tax return. -accelerated in the financial statements and straight-line in the tax return. -accelerated in both the financial statements and the tax return.

straight-line in the financial statements and accelerated in the tax return.

Depreciation and amortization -have no effect on net income. -tend to make net income more than net cash provided by operations. -tend to make net income less than net cash provided by operations.

tend to make net income less than net cash provided by operations.

Copyrights are granted by -the person or company who prepared the material. -each U.S. state. -the federal government.

the federal government.

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

the same amount of depreciation each year in the asset's life.

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

amortization

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

$150,000

A company purchases equipment for $100,000 and expects to use it for 5 years. The expected salvage value at the end of that period is $20,000. What is the annual depreciation under the straight-line method? -$20,000 -$16,000 -No answer can be determined from the information provided.

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

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

$10,000

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

$10,000 loss (Reason: $150,000 - $60,000 = $90,000 book value; $80,000 sale price - $90,000 book value = $10,000 loss)

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

$15,000

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

$15,000

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

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

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

$25,000 loss (Reason: $250,000 - $100,000 = $150,000 book value; $125,000 sale price - $150,000 book value = $25,000 loss)

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

$36,000

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

$8,000 (Reason: ($75,000 - $15,000)/5 = $12,000 or $1,000 per month; $1,000 × 8 months = $8,000)

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

$8,000 (Reason: (($500,000 - $100,000)/25 = $16,000)/2 = $8,000)

As a general rule, all research and development costs are expensed as incurred. -True -False

True

Depreciation is a process of cost allocation, not valuation. -True -False

True

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

True

The cost of a plant asset includes not only the acquisition price but also all reasonable and necessary expenditures to prepare the asset for use. -True -False

True

The first step in recording the disposal of a plant asset is to update accumulated depreciation to the date of disposal. -True -False

True

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

accelerated

Which of the following depreciation methods is more conservative in the preparation of financial statements? -The straight-line and accelerated depreciation methods are equally conservative. -straight-line depreciation -accelerated depreciation

accelerated depreciation

Plant assets include all of the following except -intangible assets, such as patents and copyrights. -natural resources, such as oil and minerals. -accounts and notes receivables from customers. -tangible assets, such as equipment and buildings.

accounts and notes receivables from customers.