ch.7 financial accounting practice questions
a _______ is the exclusive right to manufacture a product or use a process granted for a period of _____ years
patent, 20
which of the following are long-term tangible assets? - trademark - copyright - accounts receivable - property - equipment
property, equipment
a ______ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.
copyright
commonly used for financial statement purposes
straight-line
allocation of the cost of a tangible fixed asset
depreciation
True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company.
false (goodwill is an intangible asset that can only be recognized if a company acquires another company. It is values at the price less the fair value of net assets acquired)
The initial valuation of purchased intangible assets requires that the intangible asset is recorded at -net realizable value -net present value -original cost -lower-of-cost-or-market
original cost
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset -provides benefits to the company. -decreases in value. -is owned by the company.
provides benefits to the company
Which of the following items are initially recorded as an expense on the income statement? -Purchased intangibles -Research and development costs -Advertising costs
research and development costs, advertising costs
The depreciable cost of an asset is the asset's cost minus its estimated ________ value
residual
The term used to describe the amount the company expects to receive for an asset at the end of its service life is -historical cost. -lower of cost or market value. -impairment value. -residual value.
residual value
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ______ life of the asset
service
the cost of land improvements are capitalized separately from land because land improvements tend to have a ______ useful life
shorter
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the -units-of-output method. -double-declining-balance method. -MACRS -straight-line method.
straight-line method
Other terms used for an activity-based depreciation method are: -productivity method -units of output method -base depreciation method -units of production method
units of output method, units of production method
If a company generates its own goodwill through advertising or training, how should these costs be treated? -Capitalize the costs and test for impairment. -Capitalize the costs and amortize them over the expected life of the goodwill. -Expense the costs as incurred. -Record as an extraordinary loss in the current year.
expense the costs as incurred
research and development costs
expensed
True or false: Internally developed goodwill should be capitalized as an asset.
false
True or false: Depreciation is a valuation method for property and equipment.
false (depreciation is a process of cost allocation, not valuation)
The formula to calculate an activity-based depreciation rate is: -(cost - residual value)/actual production during the year. -cost/actual production during the year. -(cost - residual value)/estimated total production. -cost/estimated total production.
(cost-residual value)/ estimated total production
The formula for straight-line depreciation is -(cost + residual value)/service life. -service life/(cost + residual value). -cost/service life. -(cost - residual value)/service life.
(cost-residual value)/service life
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1? 4,000 6,000 1,000 1,500
1,500 (($10,000 - 4,000)/4 years = $1,500 per year)
On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021? 70,000 60,000 50,000 100,000
70,000 ($100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.)
Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries? -Credit equipment $120,000 -Debit accumulated depreciation $40,000 -Debit equipment $32,000 -Credit accumulated depreciation $40,000 -Debit equipment $50,000 -Debit loss on exchange $30,000
Credit equipment $120,000, Debit accumulated depreciation $40,000, Debit equipment $50,000, Debit loss on exchange $30,000
Krasel Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries? -Credit accumulated depreciation $70,000 -Credit gain on exchange of asset $30,000 -Credit equipment $70,000 -Debit equipment $50,000 -Debit accumulated depreciation $70,000 -Debit equipment $45,000 -Credit equipment $90,000
Credit gain on exchange of asset $30,000, Debit equipment $50,000, Debit accumulated depreciation $70,000, Credit equipment $90,000
commonly used for tax reporting
MACRS
Which account is credited in a journal entry to record depreciation on machinery? -machinery -accumulated depreciation -depreciation expense -cash
accumulated depreciation (Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A))
Which of the following items are initially recorded as an expense on the income statement? -advertising costs -research and development costs -purchased intangibles
advertising costs, research and development costs
Allocating the cost of intangible assets to expense is referred to as ____
amortization
allocation of the cost of an intangible asset
amortization
The gain or loss on disposal of an asset is calculated as: -the fair value of the asset less the accumulated depreciation -the cost of the asset less the accumulated depreciation -amount received less the book value of asset sold -consideration received less the fair value of the asset sold
amount received less the book value of asset sold
For accounting purposes, depreciation is -the selling price of an asset. -a decline in value of an asset. -an allocation of a cost of an asset.
an allocation of a cost of an asset
The original cost of an asset minus accumulated depreciation is -residual value. -disposal value. -goodwill. -book value.
book value
The original cost of an asset minus accumulated depreciation is -residual value. -goodwill. -book value. -disposal value.
book value
The original cost of the asset less the accumulated depreciation is the ____ of the asset
book value
The formula for calculating the double-declining-balance method is -historical cost less residual value x 2/estimated service life. -book value at beginning of the year less residual value x 2/ estimated service life. -historical cost x 1/service life. -book value at beginning of year x 2/estimated service life
book value at beginning of year x 2 /estimated service life
the term ____ means to record an expenditure as an asset
capitalize
in accounting, expenditures recorded as assets are said to be a. accrued b. expensed c. recognized d. capitalized
capitalized
purchase price plus costs necessary to get asset ready for use
capitalized
the purchase price and all costs to bring an asset to its desired condition and location for use should be ______ -accrued -expensed -capitalized
capitalized
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? -Incorrectly capitalizing an item when it should be expensed -Change in residual value of an asset -Forgetting to record depreciation expense in the previous period -Change in service life of an asset
change in residual value of an asset, change in service life of an asset
clarion purchases land and prepares it for use. which of the following items should be capitalized as land improvements? -cost of driveways -legal fees to acquire land -cost of land -cost of sidewalks -cost of lawn sprinkler system
cost of driveways, cost of sidewalks, cost of lawn sprinkler system
Which of the following items should be capitalized as land improvements? - cost of land - cost of sidewalks - cost of parking lots - cost of fences
cost of sidewalks, cost of parking lots, cost of fences
The depreciable cost is -cost of the asset minus depreciation expense. -the cost of the asset minus the residual value. -historical cost less accumulated depreciation. -cost of the asset plus the residual value.
cost of the asset minus the residual value
The journal entry to retire old equipment that is not fully depreciated includes a: -credit to loss -debit to cash -credit to equipment -debit to accumulated depreciation -debit to loss
credit to equipment, debit to accumulated depreciation, debit to loss
When a company purchases another company and the purchase price is greater than the fair value of the net assets acquired, this excess is referred to as ______. -restricted intangible assets -goodwill -unidentifiable assets -identified intangible assets
goodwill
Using the declining balance method, depreciation will be -lower in earlier years, and lower in later years. -higher in earlier years, and higher in later years. -higher in earlier years, but lower in later years. -lower in earlier years, but higher in later years.
higher in earlier years, but lower in later years
When an asset has a significant decline in value and is written down, this is called _______
impairment
Goodwill may only be recognized -when a company pays less than fair value for an intangible -when assets are impaired -in a business acquisition -when intangible assets are undervalued
in a business acquisition
A change in accounting estimate requires a company to account for the change -as an error in the previous periods -as a prior period adjustment -in the current and future years -by retroactively restating the financial statements
in the current and future years
Amortization refers to the allocation of the cost of ____ assets to expense.
intangible
an asset that has no physical substance is called an ________ asset
intangible
Companies use accelerated depreciation for tax purposes because -it does a better job of matching expenses to revenues of the period. -it reduces taxable income in the early years of the asset's life and -provides better cash flows. -it is required by the IRS.
it reduces taxable income in the early years of the asset's life and provides better cash flows
The distinction between land and land improvements is that: -land has a definite life -land has an indefinite life -land is depreciated and land improvements are not -there is no distinction, they are treated the same for accounting purposes
land has an indefinite life
long-term tangible assets include -patents -land -equipment -goodwill -buildings
land, equipment, and buildings
An estimated residual value ______ the total amount of depreciation recorded over an asset's service life.
lowers
a purchases intangible is valued at its original cost. original cost for acquiring a patent would include -purchase price -accretion expense -legal costs to acquire -net present value of future cash flows -required filing fees
purchase price, legal costs to acquire, required filing fees
patents, copyrights, trademarks, or franchise rights acquired from other companies
purchased intangible asset
Goodwill is recognized only when one company _____ another company
purchases
Otto Inc. retires old equipment with a book value of $2,400. Otto should -recognize a gain of $2,400 -not make a journal entry -debit cash for $2,400 -recognize a loss of $2,400
recognize a loss of 2,400
which of the following costs should be capitalized in the costs of acquiring a building? -remodeling building -insurance on the building -realtor commissions -legal fees to obtain title -current year property taxes
remodeling building, realtor commissions, legal fees to obtain title
The types of expenditures that can occur subsequent to an asset's acquisition are -goodwill -repairs and maintenance -improvements -additions
repairs and maintenance, improvements, additions
Which of the following are expenditures for assets subsequent to acquisition? -Freight charges -Repairs and maintenance -Improvements -Additions
repairs and maintenance, improvements, additions
Which depreciation methods allocate the cost of long-term assets based on time? -valuation method -straight-line -declining-balance -activity methods
straight-line, declining balance
The formula for calculating declining balance depreciation is the depreciation rate per year times -the cost less the residual value less the accumulated depreciation. -the book value at the beginning of the year. -the cost less the residual value.
the book value at the beginning of the year
Straight-line deprecation is calculated as the depreciable cost divided by -the estimated service life of the asset. -the cost of the asset. -the residual value of the asset.
the estimated service life of the asset
The service life or useful life of an asset is -determined by MACRS tables. -the time period from the purchase of the asset until it becomes impaired. -the estimated use that the company expects to obtain from the asset before disposing of it.
the estimated use that the company expects to obtain from the assets before disposing of it
Total depreciation recorded over an asset's service life is: -lowest when the activity-based method is used -lowest when the straight-line method is used -the same regardless of the depreciation method used -highest when the double-declining balance method is used
the same regardless of the depreciation method used
Straight-line and declining balance methods allocate the cost of a long-term asset based on ____________ , while an activity-based method allocates the cost of an asset based on its ____________
time, use
What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life? -Net income is higher. -Total assets are lower. -Net income is lower. -Total assets are higher.
total assets are lower, net income is lower
An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a -copyright -patent -trademark -franchise
trademark
true or false: the initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use
true (all costs should be capitalized to bring the asset to its intended and useful state)
On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021? -34,000 -26,000 -30,000 -20,000
26,000 (Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.)
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1? 30,000 10,000 8,000 28,000
8,000 (($100,000 - 20,000)/10 years = $8,000 per year)
In accounting, the term impairment refers to offsetting liabilities against the related assets. allocation of an asset over its service life. an asset's significant decline in value. cost recovery of an asset for investment purposes.
an asset's significant decline in value.
Where is the account accumulated depreciation on equipment found on the financial statements? -As a contra account to equipment on the balance sheet -As an expense account on the income statement -As an asset account on the balance sheet -As a liability account on the balance sheet
as a contra account to equipment on the balance sheet
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold. -book -fair -net present -net realizable
book
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? -Change in service life of an asset -Incorrectly capitalizing an item when it should be expensed -Change in residual value of an asset -Forgetting to record depreciation expense in the previous period
change in service life of an asset, change in residual value of an asset
The accumulated depreciation account is classified as a(n) -asset. -expense. -contra asset. -liability.
contra asset
allocation of the cost of natural resources
depletion
Straight-line, declining-balance, and activity-based refer to methods commonly used to ______ property, plant, and equipment
depreciate
A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a -trademark -franchise -patent -copyright
franchise
a _______ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time.
franchise
a _______ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time. (Enter one word per blank)
franchise
product or process created internally for which patent may be obtained
internally developed intangible asset
intangible assets that are acquired from other entities are referred to as purchases intangibles, whereas intangibles that are created by a company are referred to as -finite intangibles -indefinite intangibles -goodwill -internally developed intangibles
internally developed intangibles
The profit margin ratio is defined as __________ divided by net sales
net income
Which of the following does not differ among the different depreciation methods? -Depreciation recognized during the last year of the asset's service life. -Depreciation recognized during the earlier years. -Total depreciation recognized over the asset's service life.
total depreciation recognized over the asset's service life
a ______ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service
trademark
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true? -Clem will depreciate the machine for $160,000 over its service life. The maximum depreciation is the $10,000 residual value. -Clem will depreciate the machine for $150,000 over its service life. -Clem must change to straight-line method in year 3.
clem will depreciate the machine for 150,000 over its service life
sarah purchases land to be used for a new storage facility. which of the following items are capitalized in the cost of land? - current year's property taxes - costs to remove an old building - commissions - legal fees to secure title
costs to remove an old building, commissions, legal fees to secure title
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. -gross profit percentage -historical cost -current-year activity or production -total activity or production
current-year activity or production
Which of these are parts of the journal entry to record depreciation? -credit accumulated depreciation -debit accumulated depreciation -credit depreciation expense -debit depreciation expense
debit depreciation expense, credit accumulated depreciation (Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A))
The allocation of the cost of a tangible asset over its service life is referred to as ______
depreciation
The allocation of the cost of a tangible fixed asset is referred to as ________ whereas the allocation of the cost of an intangible asset is referred to as ____
depreciation, amortization
Which of the following costs should be capitalized in the costs of acquiring a building? -utilities for the building -legal fees to obtain title -realtor commissions -purchase price -interest on the loan
legal fees to obtain title, realtor commissions, purchase price
Larry purchases land to be used for a new corporate headquarters. which of the following items are capitalized in the cost of land? - current year's property taxes - legal fees to secure title - grading the land - costs to remove an old building - title insurance
legal fees to secure title, grading the land, costs to remove an old building, title insurance
What is the formula for the profit margin ratio? -Gross profit divided by sales. -Net income divided by average shareholders' equity. -Net income divided by net sales. -Net income divided by average total assets.
net income divided by net sales
A retirement or abandonment of an asset is different from a sale of an asset because -no cash is received. -the residual value is included as a gain. -a gain is recognized for the undepreciated portion of the equipment. -a loss must be recognized for the remaining book value.
no cash is received, a loss must be recognized for the remaining book value
The exclusive legal right to manufacture a product or to use a process is called a(n) _______
patent
____ value is the amount the company expects to receive for the asset at the end of its service life.
residual
an asset _______ occurs when an asset is no longer useful, but cannot be sold.
retirement
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides ______
revenues
