ACG 2021 Ch. 9 Test 4, ACTG 211 - Midterm 2

Aber Company buys land for $145,000 on 12/31/13. As of 3/31/14, the land has appreciated in value to $152,000. On 12/31/14, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2014? A) $0. B) $7,000. C) $3,400. D) $10,400.

A) $0.

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? A) $150,000. B) $90,000. C) $130,000. D) $160,000.

A) $150,000.

On January 1, a machine with a useful life of 5 years and a residual value of $40,000 was purchased for $120,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? A) $28,800. B) $48,000. C) $38,400. D) $23,040.

A) $28,800.

Schofield Retailers accepted $60,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $60,000 and a debit(s) to A) Cash for $57,600 and Service Charge Expense for $2,400. B) Accounts receivable for $57,600 and Service Charge Expense for $2,400. C) Cash for $60,000. D) Accounts Receivable for $60,000.

A) Cash for $57,600 and Service Charge Expense for $2,400.

Under the allowance method, writing off an uncollectible account A) affects only balance sheet accounts. B) affects both balance sheet and income statement accounts. C) affects only income statement accounts. D) is not acceptable practice.

A) affects only balance sheet accounts.

The declining-balance method of depreciation produces a(n) A) decreasing depreciation expense each period. B) increasing depreciation expense each period. C) declining percentage rate each period. D) constant amount of depreciation expense each period.

A) decreasing depreciation expense each period.

Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally A) expensed when incurred. B) capitalized as a part of the cost of the asset. C) debited to the Accumulated Depreciation account. D) not recorded until they become material in amount.

A) expensed when incurred.

The calculation of depreciation using the declining-balance method A) ignores salvage value in determining the amount to which a constant rate is applied. B) multiplies a constant percentage times the previous year's depreciation expense. C) yields an increasing depreciation expense each period. D) multiplies a declining percentage times a constant book value.

A) ignores salvage value in determining the amount to which a constant rate is applied.

Goods held on consignment are A) never owned by the consignee. B) included in the consignee's ending inventory. C) kept for sale on the premises of the consignor. D) included as part of no one's ending inventory.

A) never owned by the consignee.

If goods in transit are shipped FOB destination A) the seller has legal title to the goods until they are delivered. B) the buyer has legal title to the goods until they are delivered. C) the transportation company has legal title to the goods while the goods are in transit. D) no one has legal title to the goods until they are delivered.

A) the seller has legal title to the goods until they are delivered.

Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts A) total assets decrease. B) total assets are unchanged. C) net income is unchanged. D) liabilities decrease.

A) total assets decrease.

During 2014 Sedgewick Inc. had sales on account of $264,000, cash sales of $108,000, and collections on account of $168,000. In addition, they collected $2,900 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable balance indicates a A) $201,100 increase. B) $ 96,000 increase. C) $ 93,100 increase. D) $204,000 increase.

B) $ 96,000 increase.

A plant asset cost $128,000 and is estimated to have a $16,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be A) $10,720. B) $18,000. C) $15,750. D) $12,250.

B) $18,000.

On January 15, Nifty Company sells merchandise on account to Martinez Associates for $3,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $600 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received? A) $2,400 B) $2,328 C) $2,310 D) $1,680

B) $2,328

An asset was purchased for $300,000. It had an estimate salvage value of $60,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $48,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be A) $36,000. B) $26,400. C) $18,000. D) $25,200.

B) $26,400.

During the year, Sarah's Pet Shop's merchandise inventory decreased by $40,000. If the company's cost of goods sold for the year was $600,000, purchases would have been A) $640,000. B) $560,000. C) $520,000. D) Unable to determine.

B) $560,000.

Rains Company purchased equipment on January 1 at a list price of $75,000, with credit terms 2/10, n/30. Payment was made within the discount period. Rains paid $3,750 sales tax on the equipment, and paid installation charges of $1,320. Prior to installation, Rains paid $3,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? A) $78,750. B) $81,570. C) $83,070. D) $75,750.

B) $81,570.

During 2014, Ronald Corporation reported net sales of $1,500,000, net income of $900,000, and depreciation expense of$100,000. Ronald 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. Ronald's asset turnover ratio is A) 1.5 times. B) 1.2 times. C) 0.98 times. D) 0.72 times.

B) 1.2 times.

In periods of rising prices, which is an advantage of using the LIFO inventory costing method? A) Ending inventory will include latest (most recent) costs and thus be more realistic. B) Cost of goods sold will include latest (most recent) costs and thus will be more realistic. C) Net income will be the highest and thus reflect the prosperity of the company. D) Phantom profits are reported.

B) Cost of goods sold will include latest (most recent) costs and thus will be more realistic.

The cost of a long-term asset is expensed A) when it is paid for. B) as the asset benefits the company. C) in the period in which it is acquired. D) in the period in which it is disposed of.

B) as the asset benefits the company.

Receivables are A) one of the most liquid assets and thus are always considered current assets. B) claims that are expected to be collected in cash. C) shown on the income statement at cash realizable value. D) always the result of revenue recognition.

B) claims that are expected to be collected in cash.

If a company fails to record estimated bad debts expense, A) cash realizable value is understated. B) expenses are understated. C) revenues are understated. D) receivables are understated.

B) expenses are understated.

Net income will result if gross profit exceeds A) cost of goods sold. B) operating expenses. C) purchases. D) cost of goods sold plus operating expenses.

B) operating expenses.

A characteristic of a plant asset is that it is A) intangible. B) used in the operations of a business. C) held for sale in the ordinary course of the business. D) not currently used in the business but held for future use.

B) used in the operations of a business.

In 2014 Wilkinson Company had net credit sales of $1,500,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of$36,000. During2014, $60,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be I0% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $400,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014? A) $ 40,000 B) $150,000 C) $ 64,000 D) $ 60,000

C) $ 64,000

Aber Company sells merchandise on account for $1,800 to Borth Company with credit terms of2/10, n/30. Borth Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? A) $1,464 B) $1,476 C) $1,470 D) $1,350

C) $1,470

A company purchased factory equipment on April 1, 2014, for $96,000. It is estimated that the equipment will have a $12,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014, is A) $9,600. B) $8,400. C) $6,300. D) $7,200.

C) $6,300.

A company sells a plant asset that originally cost $225,000 for $75,000 on December 31, 2014. The accumulated depreciation account had a balance of $90,000 after the current year's depreciation of $22,500 had been recorded. The company should recognize a A) $150,000 loss on disposal. B) $60,000 gain on disposal. C) $60,000 loss on disposal. D) $37,500 loss on disposal.

C) $60,000 loss on disposal.

Davies Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period? A) $9,000 B) $8,856 C) $8,820 D) $7,200

C) $8,820

Andrea's Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company's gross profit rate is 40%, Andrea's will report monthly net sales revenue and cost of goods sold of A) $95,000 and $57,000. B) $93,000 and $37,200. C) $93,000 and $55,800. D) $95,000 and $55,800.

C) $93,000 and $55,800.

Pearson Company bought a machine on January 1, 2014. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. The book value of the machine at the beginning of the third year would be A) $144,000. B) $120,000. C) $96,000. D) $48,000.

C) $96,000.

Rains Company is a furniture retailer. On January 14, 2014, Rains purchased merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014 and the accounts receivables were settled on January 30, 2014. Which statement is correct? A) Cash flows were affected on January 14 and January21. B) Gross profit percentage is 60%. C) On January 30, 2014, customers should remit cash in the amount of$79,200. D) There is not enough information available to answer this question.

C) On January 30, 2014, customers should remit cash in the amount of $79,200.

Which of the following accounts is classified as a contra revenue account? A) Sales Revenue B) Cost of Goods Sold C) Sales Returns and Allowances D) Purchase Discounts

C) Sales Returns and Allowances

In computing depreciation, salvage value is A) the fair value of a plant asset on the date of acquisition. B) subtracted from accumulated depreciation to determine the plant asset's depreciable cost. C) an estimate of a plant asset's value at the end of its useful life. D) ignored in all the depreciation methods.

C) an estimate of a plant asset's value at the end of its useful life.

Depreciation is a process of A) asset devaluation. B) cost accumulation. C) cost allocation. D) asset valuation.

C) cost allocation.

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a A) debit to Bad Debt Expense for $4,500. B) debit to Allowance for Doubtful Accounts for $5,700. C) debit to Bad Debt Expense for $5,700. D) credit to Allowance for Doubtful Accounts for $4,500.

C) debit to Bad Debt Expense for $5,700.

When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when A) a sale is made. B) an account becomes bad and is written off. C) management estimates the amount of uncollectibles. D) a customer's account becomes past due.

C) management estimates the amount of uncollectibles.

The accounts receivable turnover is computed by dividing A) total sales by average receivables. B) total sales by ending receivables. C) net credit sales by average receivables. D) net credit sales by ending receivables.

C) net credit sales by average receivables.

The cost of an intangible asset with an indefinite life should A) be amortized over 20 years. B) be amortized over the life of the creator plus 70 years. C) not be amortized. D) None of these answer choices are correct.

C) not be amortized.

A company purchased land for $350,000 cash. Real estate brokers' commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at A) $385,000. B) $350,000. C) $375,000. D) $410,000.

D) $410,000.

Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period? A) $9,000 B) $31,000 C) $40,000 D) $49,000

D) $49,000

A plant asset was purchased on January 1 for $75,000 with an estimated salvage value of $15,000 at the end of its useful life. The current year's Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is A) 15 years. B) 12 years. C) 5 years. D) 7 years.

D) 7 years.

Which of the following expressions is incorrect? A) Gross profit - Operating expenses = Net income B) Sales revenue - cost of goods sold - Operating expenses = Net income C) Net income+ Operating expenses= Gross profit D) Operating expenses - Cost of goods sold= Gross profit

D) Operating expenses - Cost of goods sold= Gross profit

The account Allowance for Doubtful Accounts is classified as a(n) A) liability. B) contra account of Bad Debt Expense. C) expense. D) contra account to Accounts Receivable.

D) contra account to Accounts Receivable.

The entry to record a sale of $1,200 with terms of 2/10,n/30 will include a A) debit to Sales Discounts for $24. B) debit to Sales Revenue for $1,176. C) credit to Accounts Receivable for $1,200. D) credit to Sales Revenue for $1,200.

D) credit to Sales Revenue for $1,200.

When an account is written off using the allowance method, the A) cash realizable value of total accounts receivable will increase. B) net accounts receivable will decrease. C) allowance account will increase. D) net accounts receivable will stay the same.

D) net accounts receivable will stay the same.

Goodwill can be recorded A) when customers keep returning because they are satisfied with the company's products. B) when the company acquires a good location for its business. C) when the company has exceptional management. D) only when there is an exchange transaction involving the purchase of an entire business.

D) only when there is an exchange transaction involving the purchase of an entire business.

If an account is collected after having been previously written off A) the allowance account should be debited. B) only the control account needs to be credited. C) both income statement and balance sheet accounts will be affected. D) there will be both a debit and a credit to accounts receivable.

D) there will be both a debit and a credit to accounts receivable.

Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

Debit Bad Debt Expense:6000 Credit Allowance for Doubtful Accounts:6000

An asset purchased on January 1 for $50,000 has an estimated salvage value of $5,000. The current useful life is 9 years. How much is total accumulated depreciation using the straight-line method at the end of the third year of life? a. $15,000 b. $10,000 c. $9,000 d. $7,125 e. $5,000

a. $15,000 The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($50,000 - $5,000)/9 years = $5,000 At the end of the third year, there will be two years of accumulated depreciation for a total of $15,000

Caruso 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? a. $156,000 b. $78,000 c. $80,000 d. $160,000 e. $99,500

a. $156,000 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

Corian Company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment? a. $25,400 b. $26,100 c. $24,000 d. $25,200 e. $25,800

a. $25,400 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 ($24,000 + $1,200 + $200 = $25,400). The $400 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated

Bubba's Trucking Company purchased a new semi-truck on January 1, 2017 for $180,000. Its useful life is expected to be 6 years and its salvage value is estimated at $35,000. What is the depreciation expense for 2018 using the declining-balance method at double the straight-line rate (i.e., the double-declining balance method)? a. $40,000 b. $37,500 c. $87,500 d. $100,000 e. $45,000

a. $40,000 The depreciation expense for the first year would be ($180,000 - 0) x (2 x 1/6) = $60,000. This produces a book value of $120,000 (i.e., $180,000 - 60,000) at the end of the first year. The depreciation expense for the second year would be based on the book value at the start of the second year: $120,000 x (2 x 1/6) = $40,000

At the beginning of the current year, a company purchased machinery for $60,000. It has a salvage value of $6,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method? a. $6,000 b. $5,556 c. $5,300 d. $5,500 e. $5,150

a. $6,000 The annual depreciation is calculated as the sum of the purchase price ($60,000) less the salvage value ($6,000) divided by the useful life (9 years) resulting in an annual depreciation value of $6,000. Depreciation expense per year = (60,000 - 6,000)/9 = 6,000 per year

Adams Trucking Inc. purchased a new semi-truck on January 1, 2017 for $250,000. Its useful life is expected to be 5 years and its salvage value is estimated at $20,000. What is the depreciation expense for 2018 using the declining-balance method at double the straight-line rate (i.e., the double-declining balance method)? a. $60,000 b. $87,500 c. $50,000 d. $48,000 e. $72,500

a. $60,000 The depreciation expense for the first year would be ($250,000 - 0) x (2 x 1/5) = $100,000. The asset's book value becomes $150,000 (i.e., $250,000 - 100,000). The depreciation expense for the second year would be based on the book value at the start of the second year: $150,000 x (2 x 1/5) = $60,000. Alternatively, the depreciation expense for the second year = ($250,000 - 100,000) x 2/5 = $60,000

An asset was purchased on January 1 for $74,000 has an estimated salvage value of $10,000. The depreciation expense in the second year is $12,800 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the second year is $25,600. If the company uses the straight-line method, what is the asset's remaining useful life? a. 3 years b. 4 years c. 6 years d. 8 years e. 5 years

a. 3 years Since the depreciable cost is $64,000 (i.e., $74,000 purchase price less the salvage value of $10,000) and the annual depreciation is $12,800, it has a 5-year life. The balance in Accumulated Depreciation indicates that 2 years of life have been consumed ($25,600/$12,800 per year = 2 years). Of the total 5 years of life, 3 years remain. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other method

Lake Coffee Company reported net income of $64,000 and net sales of $600,000. The company's asset turnover ratio is 3.5 (or 3.5 times). What was the company's return on assets? a. 37.33% b. 6.75% c. 30.38% d. 14.81% e. 45%

a. 37.33% Return on assets = Asset turnover x Profit margin = 3.5 x ($64,000/$600,000) = 37.33%

When equipment is sold for cash in an amount that is greater than its book value, the company debits the following a. Accumulated Depreciation and Cash b. Accumulated Depreciation, Cash, and Loss on Disposal of Plant Assets c. Accumulated Depreciation, Cash, and Gain on Disposal of Plant Assets d. Cash and Gain on Disposal of Plant Assets e. Cash

a. Accumulated Depreciation and Cash When assets are sold for cash in an amount that is greater than its book value, the asset is sold at a gain. Debit entries include (1) Cash and (2) Accumulated Depreciation

Which of the following is an acceptable way to express the useful life of a depreciable asset? a. All of these b. Expected number of hours the depreciable asset will remain productive c. Expected number of miles a depreciable vehicle will be driven d. Expected number of units to be produced by the depreciable asset e. Expected life in years of the depreciable asset

a. All of these The expected useful life of a depreciable asset can be expressed in years, units, hours and/or miles drives depending on the type of depreciable asset

Which one of the following costs will not be included in the cost of equipment? a. Maintenance costs b. Installation costs c. Sales taxes associated with buying the equipment d. Delivery fees e. Assembly costs

a. Maintenance costs Because maintenance costs are ongoing and recurring throughout the asset's useful life, maintenance costs are expensed in the year incurred rather than added to the original cost of the asset. Insurance costs incurred while the equipment is in transit can be appropriately included in the cost of the equipment. Delivery fees, including insurance costs incurred while the equipment is in transit, should be included in the cost of the equipment. The installation costs of equipment should be included in the acquisition cost of equipment because this cost is part of the cost of getting the equipment ready to use. Testing and adjustments necessary to ensure equipment is working properly (e.g., assembly costs) should be included in the acquisition cost of the equipment because this cost is part of the cost of getting the equipment ready to use. Sales taxes paid when acquiring an asset is included in the asset's cost. Freight (e.g., delivery charges) to transport equipment is a cost that is included in the acquisition cost of the equipment because this cost is part of the cost of getting the equipment ready to use

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

a. The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter Research and development costs are expensed when incurred whether they produce a patent or not. The cost of intangibles with unspecified or indeterminate lives are not amortized. Those with definite lives are amortized. Intangibles are amortized over the asset's legal or useful life, whichever is shorter. For patents, the legal life is 20 years. In order to report goodwill, a company must have entered into an exchange transaction that involves the purchase of an entire business

Which ratio is computed by dividing net income by net sales? a. The profit margin ratio b. The return on assets c. The debt to assets ratio d. Inventory turnover ratio e. The asset turnover ratio

a. The profit margin ratio The profit margin ratio is net income divided by net sales. It tells how effective a company is in turning its sales into income. It measures how much income is provided by each dollar of sales (on average)

In the current year, Brogan Company sold equipment for $20,000. The original cost was $80,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale? a. $14,000 loss b. $12,000 gain c. $50,000 loss d. $7,000 gain e. $5,400 gain

b. $12,000 gain The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $8,000 = $12,000 gain

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $3,200 and 4 years, respectively. How much is the accumulated depreciation under the straight-line method after two years? a. $13,500 b. $12,500 c. $6,250 d. $4,500 e. $8,500

b. $12,500 The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $3,200)/4 years = $6,250. Accumulated depreciation after three years = $6,250 x 2 = $12,500

Ben's Razor Company purchased a machine for $70,000 on January 1, 2016 and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $29,000 on June 30, 2019, what would be the company's gain or loss from the sale? a. $27,000 loss b. $16,500 loss c. $18,000 loss d. $54,000 gain e. $12,000 gain

b. $16,500 loss The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $70,000 - [($70,000/10 years) x 3.5 years] = $45,500. The gain (loss) on the sale = sales price minus book vale = $29,000 - $45,500 = ($16,500)

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $50,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is a. $60,000 b. $300,000 c. $50,000 d. $350,000 e. $200,000

b. $300,000 Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $350,000 - 50,000 = $300,000

Kent Enterprises purchased a truck for $80,000 on January 1 of its first year. The company uses the units-of-activity method and it estimates that the truck's useful life will be 120,000 miles. The truck will have an estimated salvage value of $5,000. The company drives the truck 20,000 miles in the first year and drives it 30,000 miles in the second year. How much accumulated depreciation will be reported on the company's balance sheet as of the end of the second year? a. $22,500 b. $31,250 c. $24,000 d. $33,333 e. $18,750

b. $31,250 The depreciation rate to use for units-of-activity is calculated as: (Cost - Salvage value)/Total activity expected. To compute accumulated depreciation at the end of two years, the depreciation rate (i.e., per mile) should then be multiplied by the units of activity (i.e., miles driven) for both years. Depreciation rate = ($80,000 - 5,000)/120,000 miles = $0.625 per mile Accumulated depreciation = (20,000 + 30,000) x $0.625 per mile = $31,250

On May 1 of the current year, La Presa 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? a. $1,400 gain b. $4,000 loss c. $5,000 loss d. $3,000 loss e. $7,000 loss

b. $4,000 loss First, the accumulated depreciation must be brought up to date to the date of sale. 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)

Schneider Trucking Inc. purchased a new truck on January 1 of the current year for $180,000. Its expected useful life is 5 years and its salvage value is estimated at $25,000. What is the depreciation expense for the current year using the declining-balance method at a double the straight-line rate (i.e., the double-declining balance method)? a. $50,000 b. $72,000 c. $53,333 d. $43,750 e. $87,500

b. $72,000 The depreciation expense for 20X1 would be the truck's cost times 2 divided by the life in years = $180,000 x (2 x 1/5) = $72,000

On May 1 of the current year, Moreno Company purchased a patent from another company for $96,000. The estimated useful life of the patent is 8 years, and its remaining legal life is 12 years. How much is Moreno's amortization expense for the current year? a. $7,500 b. $8,000 c. $10,000 d. $12,000 e. $6,000

b. $8,000 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 8 years. Amortization expense for the current year = $96,000/8 years x 8/12 = $8,000

A company sold a plant asset for $3,500. It had cost $11,000 and its accumulated depreciation is $8,500. What gain or loss did the company experience? a. Gain of $5,000 b. Gain of $1,000 c. Loss of $7,000 d. Loss of $750 e. Loss of $500

b. Gain of $1,000 Book value is $2,500 ($11,000 - $8,500). Since the proceeds ($3,500) exceed the book value ($2,500) by $1,000, there is a gain

Clarence Trucking Inc. purchased a new truck on January 1, 2017 for $200,000. Its useful life is expected to be 10 years and its salvage value is estimated at $40,000. The company uses the declining-balance method at double the straight-line rate (i.e., the double-declining balance method). What is the truck's book value at the end of December 31, 2018? a. $160,000 b. $132,000 c. $128,000 d. $187,500 e. $133,333

c. $128,000 The depreciation expense for the first year would be ($200,000 - 0) x (2 x 1/10) = $40,000 which produces a book value of $160,000 at the end of the first year (i.e., $200,000 - 40,000). The depreciation expense for the second year would be based on the book value at the start of the second year: $160,000 x (2 x 1/10) = $32,000. The book value at the end of the second year equals the asset's cost minus its accumulated depreciation = $200,000 - 40,000 - 32,000 = $128,000

A company has the following asset account balances: Buildings and equipment, $9,500,000; Accumulated depreciation, $1,500,000; Patents, $750,000; Land Improvements, $800,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment? a. $15,150,000 b. $13,550,000 c. $13,800,000 d. $12,400,000 e. $14,000,000

c. $13,800,000 Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $13,800,000. (i.e., 9,500,000+800,000+5,000,000-1,500,000=13,800,000)

Santiago Corporation bought equipment on January 1. The equipment cost $350,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years and straight-line depreciation is used. The book value of the equipment at the end of the fourth year would be a. $120,000 b. $50,000 c. $150,000 d. $350,000 e. $200,000

c. $150,000 Depreciation per year = ($350,000 - 50,000)/6 years = $50,000 per year Accumulated depreciation after 4 years = $50,000 x 4 = $200,000 Book value = Cost minus accumulated depreciation Book value = $350,000 - 200,000 = $150,000

Massey Corporation purchased a piece of land for $50,000. Massey paid attorney's fees of $5,000 and brokers' commissions of $4,000 in connection with the purchase. An old building on the land was torn down at a cost of $2,000, and proceeds from the scrap were $500. Massey also assumes $5,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land? a. $60,500 b. $59,000 c. $65,500 d. $55,000 e. $57,500

c. $65,500 All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The total to be debited to the land account is the cost of the land of $50,000 plus the attorney's fees of $5,000, the brokers' commissions of $4,000, plus the cost of tearing down the old building, $2,000. The proceeds from the scrap sale totaling $500 should be subtracted and the assumption of $5,000 of accrued taxes added results in a total cost of the land of $65,500

Coronado Company purchased land for $80,000. The company also assumes $12,000 of accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records? a. $92,000 b. $83,000 c. $95,000 d. $80,000 e. $89,000

c. $95,000 All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. Coronado should include the purchase price of $80,000, the assumption of accrued taxes of $12,000 (i.e., Coronado agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $5,000 less the payment received for the salvaged materials in the amount of $2,000. This results in an acquisition cost of $95,000

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $800,000, its gross margin is $2,000,000, and its net sales are $10,000,000. What is Oahu's return on assets? a. 26.67% b. 32.5% c. 20% d. 25% e. 40%

c. 20% Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $800,000 divided by $4,000,000 = 20%

Which one of the following will maximize depreciation expense in the first year of owning an asset? a. A long estimated life, a low salvage value, and declining-balance depreciation b. A short estimated life, a high salvage value, and straight-line depreciation c. A short estimated life, a low salvage value, and declining balance depreciation d. A long estimated life, a high salvage value, and straight-line depreciation e. A long estimated life, a high salvage value, and declining-balance depreciation

c. A short estimated life, a low salvage value, and declining balance depreciation A short estimated life spreads the cost over a shorter period of time resulting in a larger expense each year. A low salvage value increases to the cost to be allocated. Declining-balance depreciation yields a larger depreciation charge in the first year than the straight-line method

Harrington Corporation recently leased a number of trucks from Andre Corporation. In inspecting the books of Harrington Corporation, you notice that the trucks have not been recorded as assets on Harrington's balance sheet. Based on this information, what type of acquisition are the trucks for Harrington? a. Purchase of trucks b. Capital expenditure c. Operating lease d. Budget lease e. Capital lease

c. Operating lease Operating leases are accounted for as rentals and are not recorded on the balance sheet. If the leased assets were accounted for as a capital lease, they would be reported on the balance sheet. If the assets were purchased, they would be reported on the balance sheet. Capital expenditures are costs that are not expensed immediately. They are capitalized and reported on the balance sheet in a plant asset account

Which one of these statements is true? a. Goodwill should be reported as a contra account in the stockholders' equity section b. All of these are true c. Research and development costs are expensed in the year incurred d. Intangible assets are typically combined with plant assets and natural resources and then shown in the property, plant, and equipment section e. Since intangible assets lack physical substance, they need to be disclosed only in the notes to the financial statements

c. Research and development costs are expensed in the year incurred Research and development costs are expensed in the year incurred.rather than reported as assets. GAAP allows details on assets to be disclosed in the notes to the financial statements. Even though intangible assets lack substance, they should still be reported in the balance sheet. Goodwill should be reported as an intangible asset, not as a contra account in the stockholders' equity section. Intangible assets are not combined with plant assets and natural resources and reported in the property, plant, and equipment section

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year? a. $15,000 b. $4,800 c. $11,000 d. $12,100 e. $6,000

d. $12,100 For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years

On January 1, 2015, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $2,000 and the estimated useful life is 5 years. On December 31, 2017, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment one year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for 2017? a. $3,200 b. $2,800 c. $2,500 d. $2,400 e. $3,500

d. $2,400 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 - $2,000)/5 years = $3,200 per year. The depreciable cost that remains is $18,000 - $2,000 - (2 years x $3,200) = $9,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 6 total years - 2 expired years). Depreciation in the third year is $2,400 (i.e., $9,600/4 years)

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; Goodwill, $4,500,000; and Copyrights, $1,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year. a. $850,000 b. $250,000 c. $600,000 d. $400,000 e. $520,000

d. $400,000 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. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, 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 uses straight-line depreciation. It purchased a truck for $42,000. The truck's salvage value is $2,000. The truck's monthly depreciation expense is $500. What is the truck's useful life? a. 5 years b. 6 years c. 5.55 years d. 6.67 years e. 7.2 years

d. 6.67 years The depreciable cost equals the cost minus the salvage value; it is the $42,000 purchase price less $2,000 salvage value, which is $40,000. The annual depreciation cost is $500 per month or $6,000 per year. Since $40,000 will be depreciated by $6,000 per year, the useful life is 6.67 years (i.e., $40,000/$6,000 per year = 6.67 years)

The calculation of depreciation using the declining-balance method a. multiplies a declining percentage times a constant book value b. results in an increasing depreciation expense each period c. multiplies a constant percentage times the previous year's depreciation expense d. ignores salvage value in determining the amount to which a constant rate is applied e. all of these

d. ignores salvage value in determining the amount to which a constant rate is applied The declining-balance method of computing depreciation is based on multiplying a constant percentage (or rate) by the asset's book value to compute depreciation expense. Each year's depreciation expense increases the asset's accumulated depreciation. As the asset's accumulated depreciation increases year-by-year, the asset's book value declines (i.e., recall that book value if the asset's cost minus its accumulated depreciation). Since a constant percentage is multiplied against book value—and book value declines year-by-year—depreciation expense declines year-by-year. Salvage value is not used when determining the amount to which the constant rate is applied

Lorek Company acquires land for $160,000 cash. Additional costs are as follows: Removal of shed, $500; Filling and grading, $2,000; Salvage value of lumber of shed, $120; Broker commission, $6,000; Paving of parking lot, $15,500; Closing costs, $1,000. Lorek Company Should record the acquisition cost of the land as a. $184,880 b. $167,620 c. $169,620 d. $162,500 e. $169,380

e. $169,380 Purchase price, 160,000 Add: Removal of shed less salvages (i.e., 500 - 120), 380 Add: Filling and grading, 2,000 Add: Broker's commission, 6,000 Add: Closing costs, 1,000 Acquisition costs of land, 169,380 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land

A business bought a new truck for $40,000 for its auto parts delivery service. It estimated that the truck would last 200,000 miles with a salvage value of $4,000. What would be the depreciation expense for the first year assuming it is driven 12,500 miles in the first year? a. $2,000 b. $2,500 c. $2,925 d. $1,250 e. $2,250

e. $2,250 The truck's depreciation rate per mile is $0.18, which is computed as ($40,000 - $4,000) divided by 200,000 miles. Depreciation expense in the first year = $0.18 X 12,500 miles = $2,250

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense? a. $4,320 b. $4,000 c. $4,125 d. $3,950 e. $3,600

e. $3.600 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 - $3,000)/5 = $3,600 per year

In the current year, Pierce 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 i the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year? a. $50,000 b. $150,000 c. $75,000 d. $185,000 e. $35,000

e. $35,000 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

A company has the following asset account balances:Buildings and equipment, $6,400,000; Accumulated depreciation, $1,600,000; Patents, $1,050,000; Inventory, $1,200,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment? a. $7,750,000 b. $9,350,000 c. $10,350,000 d. $6,300,000 e. $4,800,000

e. $4,800,000 Buildings and equipment less accumulated depreciation are the only amounts included under Plant & Equipment: $6,400,000 - $1,600,000 = $4,800,000

On October 1, Year 1, Best Buy purchased an asset for $10,000, with a $2,000 estimated salvage value, and a 5-year useful life. How much is the year 1 depreciation expense using the straight-line method? a. $1,600 b. $2,250 c. $625 d. $525 e. $400

e. $400 The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($10,000 - $2,000)/5 x 3/12 = $400. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Land, $15,000,000; Equipment, $25,000,000; Franchises, $500,000; Trademarks, $1,700,000; and Goodwill, $2,800,000. The company also paid $1,500,000 for research & development during the current year. a. $7,500,000 b. $4,500,000 c. $5,900,000 d. $6,500,000 e. $5,000,000

e. $5,000,000 The intangibles are trademarks of $1,700,000, franchises of $500,000, and goodwill of $2,800,000 totaling $5,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights

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 asset turnover? a. 1.55 b. 3.33 c. 0.8 d. 4.17 e. 1.2

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

A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's depreciation expense is $4,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting entries is $24,000. The remaining useful life of the plant asset is a. 3 years b. 10 years c. 6 years d. 8 years e. 2 years

e. 2 years Depreciation per year = (Cost - salvage value)/Useful life Solving for useful life: Useful life = ($40,000 - 8,000)/$4,000 = 8 years Years expired = Accumulated depreciation/Depreciation per year = $24,000/$4,000 = 6 years Remaining life = Useful life - Years expired = (8 - 6) = 2 years

A permanent decline in the market value of an asset is called a. a write-down b. a depreciation c. a disposal d. a capital expenditure e. an impairment

e. an impairment An impairment is recognized when a permanent decline in the market value of an asset exists

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What is a write-down?

what is done when there is an impairment

What is a capital expenditure?

when a company spends funds on an asset and capitalizes that amount

When does a disposal occur?

when an asset is sold or otherwise removed from operations