Chapter 7 Quiz

Select all that apply Which of the following are expenditures for assets subsequent to acquisition? a. Additions b. Improvements c. Freight charges d. Repairs and maintenance

a. Additions b. Improvements d. Repairs and maintenance

The allocation of the cost of a tangible fixed asset is referred to as 1.______, whereas the allocation of the cost of an intangible asset is referred to as 2._______.

1. depreciation 2. amortization

Select all that apply Which of the following items are intangible assets? a. Patent b. Copyright c. Land d. Equipment e. Trademark

a. Patent b. Copyright e. Trademark

Select all that apply Which of the following items are capitalized? a. Replacing a major component b. Major repair that increases future benefits c. Successful legal defense of a patent d. Repair expense to maintain equipment

a. Replacing a major component b. Major repair that increases future benefits c. Successful legal defense of a patent

The formula to calculate an activity-based depreciation rate is: a. cost/actual production during the year. b. (cost - residual value)/estimated total production. c. cost/estimated total production. d. (cost - residual value)/actual production during the year.

b. (cost - residual value)/estimated total production.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______. a. accrued b. capitalized c. expensed

b. capitalized

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. a. gross profit percentage b. total activity or production c. current-year activity or production d. historical cost

c. current-year activity or production

Straight-line deprecation is calculated as the depreciable cost divided by a. the cost of the asset. b. the residual value of the asset. c. the estimated service life of the asset.

c. the estimated service life of the asset.

Because the future benefits of research and development costs are uncertain, FASB requires that research and development costs be treated as a. an asset on the balance sheet. b. a contra asset on the balance sheet. c. a liability on the balance sheet. d. an expense on the income statement.

d. an expense on the income statement.

The original cost of an asset minus accumulated depreciation is a. residual value. b. goodwill. c. disposal value. d. book value.

d. book value.

Straight-line, declining-balance, and activity-based refer to methods commonly used to _______ property, plant, and equipment.

depreciate

Which of the following items are expensed? a. Costs related to maintaining equipment b. Major repair that increases future benefits c. Replacing a major component d. Successful legal defense of a patent

a. Costs related to maintaining equipment

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset a. provides benefits to the company. b. decreases in value. c. is owned by the company.

a. provides benefits to the company.

Costs of periodically servicing equipment is an example of: a. an addition b. repair and maintenance c. a capital expenditure d. a betterment

b. repair and maintenance

_________ value is the amount the company expects to receive for the asset at the end of its service life.

Residual

True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.

True

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

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? a. Credit equipment $120,000 b. Credit accumulated depreciation $40,000 c. Debit loss on exchange $30,000 d. Debit accumulated depreciation $40,000 e. Debit equipment $32,000 f. Debit equipment $50,000

a. Credit equipment $120,000 c. Debit loss on exchange $30,000 d. Debit accumulated depreciation $40,000 f. Debit equipment $50,000

Which of the following does not differ among the different depreciation methods? a. Total depreciation recognized over the asset's service life. b. Depreciation recognized during the earlier years. c. Depreciation recognized during the last year of the asset's service life.

a. Total depreciation recognized over the asset's service life.

Select all that apply 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? a. Credit equipment $70,000 b. Debit accumulated depreciation $70,000 c. Debit equipment $45,000 d. Debit equipment $50,000 e. Credit accumulated depreciation $70,000 f. Credit equipment $90,000 g. Credit gain on exchange of asset $30,000

b. Debit accumulated depreciation $70,000 d. Debit equipment $50,000 f. Credit equipment $90,000 g. Credit gain on exchange of asset $30,000

Select all that apply A retirement or abandonment of an asset is different from a sale of an asset because a. the residual value is included as a gain. b. a loss must be recognized for the remaining book value. c. a gain is recognized for the undepreciated portion of the equipment. d. no cash is received.

b. a loss must be recognized for the remaining book value. d. no cash is received.

The key factor in classifying items as repairs and maintenance is that a. the asset must be a current asset used in the normal course of business. b. future benefits are not provided beyond those originally anticipated from the asset. c. the invoice must be less than $1,000 for productive assets.

b. future benefits are not provided beyond those originally anticipated from the asset.

An asset that has no physical substance is referred to as a(n) a. current asset b. intangible asset c. depreciable asset d. finite asset

b. intangible asset

The FASB requires research and development costs to be expensed because a. research and development costs have no future value. b. it is difficult to determine whether costs will result in future benefits. c. the costs of research are greater than the benefits.

b. it is difficult to determine whether costs will result in future benefits.

The formula for calculating declining balance depreciation is the depreciation rate per year times a. the cost less the residual value less the accumulated depreciation. b. the book value at the beginning of the year. c. the cost less the residual value.

b. the book value at the beginning of the year.

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the a. double-declining-balance method. b. MACRS c. straight-line method. d. units-of-output method.

c. straight-line method.

On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year service life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1? a. $190,000 b. $350,000 c. $200,000 d. $240,000

d. $240,000 2 x 1/5 x $400,000 = $160,000 depreciation expense in year 1. Book value is calculated as cost less accumulated depreciation ($400,000 - $160,000 = $240,000) book value at end of year 1.

The formula for straight-line depreciation is a. cost/service life. b. service life/(cost + residual value). c. (cost + residual value)/service life. d. (cost - residual value)/service life.

d. (cost - residual value)/service life.

An asset _____ occurs when an asset is no longer useful, but cannot be sold.

retirement

Select all that apply Cheng 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 $40,000. The new equipment received had a fair value of $40,000 and a book value of $35,000. The journal entry to record this exchange will include which of the following entries? a. Credit equipment $90,000 b. Debit accumulated depreciation $40,000 c. Debit loss on exchange $10,000 d. Debit equipment $35,000 e. Debit equipment $40,000 f. Credit accumulated depreciation $40,000 g. Debit loss on equipment $15,000

a. Credit equipment $90,000 b. Debit accumulated depreciation $40,000 c. Debit loss on exchange $10,000 e. Debit equipment $40,000

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year service life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1? a. $50,000 b. $25,000 c. $30,000 d. $60,000

d. $60,000

On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year service life and a $10,000 residual value. What is the book value at the end of year 1? a. $160,000 b. $120,000 c. $162,000 d. $50,000

a. $160,000 The depreciation rate is 2 x 1/10 = 20%. $200,000 x 20% = $40,000 depreciation expense in year 1. Book value at the end of year 1 is cost less accumulated depreciation, $200,000 - $40,000 = $160,000.

Total depreciation recorded over an asset's service life is: a. lowest when the straight-line method is used b. lowest when the activity-based method is used c. the same regardless of the depreciation method used d. highest when the double-declining balance method is used

c. the same regardless of the depreciation method used

Which of the following are expenditures for assets subsequent to acquisition? select all that apply a. Additions b. Freight charges c. Repairs and maintenance d. Improvements

a. additions c. repairs and maintenance d. improvements

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. a. book b. net realizable c. net present d. fair

a. book

The formula for calculating the double-declining-balance method is a. book value at beginning of year x 2/estimated service life b. book value at beginning of the year less residual value x 2/ estimated service life. c. historical cost less residual value x 2/estimated service life. d. historical cost x 1/service life.

a. book value at beginning of year x 2/estimated service life

Select all that apply The journal entry to retire old equipment that is not fully depreciated includes a: a. debit to accumulated depreciation b. debit to loss c. debit to cash d. credit to equipment e. credit to loss

a. debit to accumulated depreciation b. debit to loss d. credit to equipment

The journal entry to retire old equipment that is not fully depreciated includes a: a. debit to loss b. debit to cash c. credit to equipment d. debit to accumulated depreciation e. credit to loss

a. debit to loss c. credit to equipment d. debit to accumulated depreciation

An accelerated depreciation method is appropriate when the asset will provide a. greater benefits in the earlier years of the asset's life. b. greater benefits in the later years of the asset's life. c. equal benefits each year of the asset's life.

a. greater benefits in the earlier years of the asset's life.

Otto Inc. retires old equipment with a book value of $2,400. Otto should a. recognize a loss of $2,400 b. not make a journal entry c. debit cash for $2,400 d. recognize a gain of $2,400

a. recognize a loss of $2,400

The service life or useful life of an asset is a. the estimated use that the company expects to obtain from the asset before disposing of it. b. determined by MACRS tables. c. the time period from the purchase of the asset until it becomes impaired.

a. the estimated use that the company expects to obtain from the asset before disposing of it.

The issues that are important for tangible and intangible assets, include determining: a. how to expense the cost of the asset over its life b. how to record the disposal of the asset c. on which financial statement to record the asset d. what amounts to include in the cost

a. how to expense the cost of the asset over its life b. how to record the disposal of the asset d. what amounts to include in the cost

The term used to describe the amount the company expects to receive for an asset at the end of its service life is a. residual value. b. impairment value. c. lower of cost or market value. d. historical cost.

a. residual value.

Companies use accelerated depreciation for tax purposes because a. it does a better job of matching expenses to revenues of the period. b. it reduces taxable income in the early years of the asset's life and provides better cash flows. c. it is required by the IRS.

b. it reduces taxable income in the early years of the asset's life and provides better cash flows.