Chapter 9

Mayer Instrumentation sold a depreciable asset for cash of $390,000. The original cost of the asset was $1,380,000. Mayer recognized a gain of $41,000 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? A) $1,031,000 B) $349,000 C) $1,339,000 D) $1,072,000

A) $1,031,000 Gain on sale of $41,000 = Sales proceeds of $390,000 − Book value Book value = $390,000 − $41,000 = $349,000 Book value of $349,000 = Cost of $1,380,000 − Accumulated depreciation Accumulated depreciation = $1,380,000 − $349,000 = $1,031,000

Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after three years, that is, at the end of the ninth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be: A) $8,000 B) $10,000 C) $13,000 D) $24,000

A) $8,000 Annual depreciation for Years 1 through 6 = ($80,000 − $20,000) ÷ 10 years = $6,000 Accumulated depreciation at end of Year 6 = $6,000 × 6 = $36,000 Depreciation for Year 7 = ($60,000 − $36,000) × 1/3 = $24,000 × 1/3 = $8,000

On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $4,000 residual value. Tilton uses a calendar year-end for financial reporting. Assume that in its financial statements, Tilton Products uses the 150%-declining-balance method and the half-year convention. Depreciation expense in Year 1 and Year 2 will be: A) $8,250 in Year 1 and $14,953 in Year 2. B) $16,500 in Year 1 and $14,953 in Year 2. C) $16,500 in Year 1 and $16,500 in Year 2. D) $15,750 in Year 1 and $13,547 in Year 2.

A) $8,250 in Year 1 and $14,953 in Year 2. Depreciation for Year 1 = ($88,000 ÷ 8 years × 150%) × ½ = $16,500 × ½ = $8,250 Depreciation for Year 2 = ($88,000 − $8,250) ÷ 8 years × 150% = $14,953

If the 150% declining balance method is being used and an asset has a useful life of 20 years. What is the accelerated depreciation rate? A) 7.5% B) 10% C) 15% D) 150%

A) 7.5%

The entry to record amortization on a copyright would include: A) A debit to amortization expense. B) A debit to accumulated amortization. C) A debit to copyright. D) A credit to amortization expense.

A) A debit to amortization expense.

Coca-Cola's famous name printed in distinctive typeface is an example of: A) A trademark B) A patent C) A copyright D) Goodwill

A) A trademark

All of the following may be considered intangible assets except: A) Accounts Receivable B) Copyrights C) Franchises D) Goodwill

A) Accounts Receivable

Which of the following is not a capital expenditure? A) Advertising expenditures to introduce a new product line B) Sales tax paid in conjunction with the purchase of new machinery C) Installation of elevators to replace escalators D) An amount paid to acquire a patent with a remaining life of only three years

A) Advertising expenditures to introduce a new product line

Revenue expenditures are recorded as: A) An expense B) An asset C) A liability D) Income

A) An expense

Which of the following should not be treated as a revenue expenditure? A) Delivery costs on newly purchased equipment B) Annual fire insurance premiums on plant and equipment C) Repair to an elevator of a five-year-old building D) The purchase of a pencil sharpener for $10 used in an office

A) Delivery costs on newly purchased equipment

Which of the following would not be amortized? A) Goodwill B) Copyright C) Franchise fee D) Patent

A) Goodwill

Which of the following is a capital expenditure? A) Sales tax paid in conjunction with the purchase of office equipment B) Monthly rent of a delivery truck C) Monthly fuel costs for a truck owned by the company D) Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket

A) Sales tax paid in conjunction with the purchase of office equipment

Tomasa Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation: A) The purchase price should be apportioned among the Land, Land Improvement, and Building accounts. B) The entire purchase price should be debited to the Land account only. C) Land, Land Improvement, and Building accounts should each be credited for the respective appraisal value of each item. D) Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

A) The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.

The book value of an asset in the plant and equipment category is: A) The undepreciated cost of the asset. B) The current replacement cost of the asset. C) The original cost of the asset. D) The accumulated depreciation on the asset to date.

A) The undepreciated cost of the asset.

On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting. If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, Year 2 will be: A) $90,000 B) $107,500 C) $106.667 D) $105,000

B) $107,500 Depreciation for Year 1 = [($160,000 − $20,000) ÷ 4 years] × ½ = $35,000 × ½ = $17,500 Depreciation for Year 2 = [($160,000 − $20,000) ÷ 4 years] = $35,000 Book value at end of Year 2 = $160,000 − ($17,500 + $35,000) = $107,500

On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $300,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 8 years. Victor uses a calendar year-end for financial reporting. If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, Year 2 will be: A) $230,000 B) $247,500 C) $245,000 D) $187,500

B) $247,500 Depreciation for Year 1 = [($300,000 − $20,000) ÷ 8 years] × ½ = $35,000 × ½ = $17,500 Depreciation for Year 2 = [($300,000 − $20,000) ÷ 8 years] = $35,000 Book value at end of Year 2 = $300,000 − ($17,500 + $35,000) = $247,500

Gloucester Associates sold office equipment for cash of $142,000. The accumulated depreciation at date of sale amounted to $138,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been: A) $260,000 B) $262,000 C) $280,000 D) $156,000

B) $262,000 Gain on sale of $18,000 = Sales proceeds of $142,000 − Book value Book value = $142,000 − $18,000 = $124,000 Book value of $124,000 = Cost − Accumulated depreciation of $138,000 Cost = $124,000 + $138,000 = $262,000

Land and a warehouse were acquired for $840,000. What amounts should be recorded in the accounting records for the land and for the warehouse if an appraisal showed the estimated values to be $560,000 for the land and $830,000 for the warehouse? (Round intermediate percentage calculations to 1 decimal place.) A) $560,000 for land; $840,000 for warehouse B) $338,520 for land; $501,480 for warehouse C) $560,000 for land; $830,000 for warehouse D) $10,000 for land; $830,000 for warehouse

B) $338,520 for land; $501,480 for warehouse Total estimated values = $560,000 + $830,000 = $1,390,000 $560,000 ÷ $1,390,000 = 40.3% Amount allocated to land: 0.403 × $840,000 = $338,520 Amount allocated to building: $830,000 ÷ $1,390,000 = 59.7% 0.597 × $840,000 = $501,480

The legal life of most patents is: A) 5 years B) 20 years C) 40 years D) 50 years

B) 20 years

An asset that costs $28,800 and has accumulated depreciation of $6,000 is sold for $21,600. What amount of gain or loss will be recognized when the asset is sold? A) A gain of $1,200 B) A loss of $1,200 C) A loss of $7,200 D) A gain of $7,200

B) A loss of $1,200 Loss on sale = $21,600 − ($28,800 − $6,000) = ($1,200)

The cost of a new windshield wiper on a delivery vehicle would be classified as: A) A capital expenditure B) A revenue expenditure C) Part of the cost of goods sold D) An unusual and infrequent expense

B) A revenue expenditure

The book value of equipment: A) Increases with the passage of time. B) Decreases with the passage of time. C) Remains the same with the passage of time. D) May increase or decrease depending upon the economy.

B) Decreases with the passage of time.

Machinery is purchased on May 15, Year 1, for $65,000 with a $5,000 salvage value and a five-year life. The half-year convention is followed. What method of depreciation will give the highest amount of depreciation expense in Year 2? A) Straight line B) Double-declining balance C) 150% declining balance D) Amount cannot be determined

B) Double-declining balance

On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting. Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) $40,000 in Year 1 and $30,000 in Year 2. B) $23,333 in Year 1 and $30,000 in Year 2. C) $17,500 in Year 1 and $35,000 in Year 2. D) $20,000 in Year 1 and $35,000 in Year 2.

C) $17,500 in Year 1 and $35,000 in Year 2. Depreciation for Year 1 = [($160,000 − $20,000) ÷ 4 years] × ½ = $35,000 × ½ = $17,500 Depreciation for Year 2 = ($160,000 − $20,000) ÷ 4 years = $35,000

Early in the current year, Amazon Company purchased the Rio Silver Mine at a cost of $30,000,000. The mine was estimated to contain 400,000 tons of ore and to have a residual value of $7,500,000 after mining operations are completed. During the year, 115,000 tons of ore were removed from the mine. At year-end, the book value of the mine is: A) $22,500,000. B) $6,468,750. C) $23,531,250. D) $30,000,000.

C) $23,531,250. Depletion rate per ton = ($30,000,000 − $7,500,000) ÷ 400,000 tons = $56.25 per ton Depletion = 115,000 tons × $56.25 per ton = $6,468,750 Book value = Cost of $30,000,000 − Accumulated depletion of $6,468,750 = $23,531,250

On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar year-end for financial reporting. Assume that in its financial statements, Tilton Products uses straight-line depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in Year 1 and Year 2 will be: A) $2,333 in Year 1 and $7,000 in Year 2. B) $5,833 in Year 1 and $10,000 in Year 2. C) $6,667 in Year 1 and $10,000 in Year 2. D) $10,000 in Year 1 and $10,000 in Year 2.

C) $6,667 in Year 1 and $10,000 in Year 2. Depreciation for Year 1 = [($88,000 − $8,000) ÷ 8 years] × 8/12 = $10,000 × 8/12 = $6,667 Depreciation for Year 2 = ($88,000 − $8,000) ÷ 8 years = $10,000

With respect to depreciation policies, the principle of consistency means: A) A company should use the same depreciation methods in its financial statements that it uses in its income tax returns. B) A company should use the same depreciation methods as other companies in the same industry. C) A company should use the same depreciation method from year to year for a given plant asset. D) A company should use the same depreciation method in computing depreciation expense on all its assets.

C) A company should use the same depreciation method from year to year for a given plant asset.

International standards require that goodwill: A) Be capitalized and amortized over 20 years or less. B) Be capitalized and amortized over 40 years or less. C) Be capitalized and reviewed annually and its value should be adjusted if subject to impairment. D) Be expensed immediately.

C) Be capitalized and reviewed annually and its value should be adjusted if subject to impairment.

Which of the following situations is impossible? A) Book value is greater than residual value. B) Book value is equal to the residual value. C) Book value is less than residual value. D) Book value is less than the original cost.

C) Book value is less than residual value.

Which of the following assets is not subject to depreciation and does not decline in usefulness over time? A) Patents B) Copyrights C) Land D) Coal mine

C) Land

An accelerated depreciation method: A) Results in reporting higher earnings every year. B) Depreciates an asset over a shorter life than does the straight-line method. C) Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years. D) Is required for assets that become technologically obsolete before they physically wear out.

C) Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years.

Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account? A) Insurance coverage purchased by Armstrong to cover the computer during shipment from the manufacturer B) Wages paid to system programmers hired to prepare the new computer for use C) Replacement of several circuit boards damaged during installation D) Installation of new electrical power supplies required for the computer

C) Replacement of several circuit boards damaged during installation

Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A) $65,000 B) $75,000 C) $100,000 D) $110,000

D) $110,000 Loss on sale of ($5,000) = Sales proceeds of $35,000 − Book value Book value = $35,000 + $5,000 = $40,000 Book value of $40,000 = Cost − Accumulated depreciation of $70,000 Cost = $40,000 + $70,000 = $110,000

Clark Imports sold a depreciable plant asset for cash of $34,000. The accumulated depreciation amounted to $74,000, and a loss of $3,500 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A) $70,500 B) $77,500 C) $104,500 D) $111,500

D) $111,500 Loss on sale of ($3,500) = Sales proceeds of $34,000 − Book value Book value = $34,000 + $3,500 = $37,500 Book value of $37,500 = Cost − Accumulated depreciation of $74,000 Cost = $37,500 + $74,000 = $111,500

Harvard Company purchased equipment having an invoice price of $11,500. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as the cost of this equipment is: A) $11,845 B) $12,776 C) $11,615 D) $12,546

D) $12,546

Yale Company purchased equipment having an invoice price of $21,500. The terms of sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320 delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the cost of this equipment is: A) $21,070 B) $21,500 C) $21,740 D) $22,923

D) $22,923 ($21,500 × 0.98) + $320 + $350 + $1,183 = $22,923

Land is purchased for $227,000. Additional costs include a $16,200 fee to a broker, a survey fee of $2,400, $2,510 to construct a fence, and a legal fee of $10,000. What is the cost of the land? A) $227,000 B) $255,710 C) $258,000 D) $255,600

D) $255,600

On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting. Assume that in its financial statements, Victor uses straight-line depreciation and rounds depreciation for fractional years to the nearest whole month. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) $23,333 in Year 1 and $35,000 in Year 2. B) $40,000 in Year 1 and $30,000 in Year 2. C) $20,000 in Year 1 and $35,000 in Year 2. D) $26,250 in Year 1 and $35,000 in Year 2.

D) $26,250 in Year 1 and $35,000 in Year 2. Depreciation for Year 1 = [($160,000 − $20,000) ÷ 4 years] × 9/12 = $35,000 × 9/12 = $26,250 Depreciation for Year 2 = ($160,000 − $20,000) ÷ 4 years = $35,000

Harvard Company purchased equipment having an invoice price of $33,100. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $205 delivery charge, $215 installation charge, and $967 sales tax. The amount recorded as the cost of this equipment is: A) $33,520 B) $34,487 C) $32,858 D) $33,825

D) $33,825 ($33,100 × 0.98) + $205 + $215 + $967 = $33,825

Total stockholders' equity of Tucker Company is $4,000,000. The fair market value of Tucker's net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation makes an offer to purchase Tucker 's entire business for $5,800,000. In this situation: A) Tucker Company should report goodwill of $800,000 in its balance sheet. B) Tucker Company should report goodwill of $1,800,000 in its balance sheet. C) Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized. D) Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.

D) Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.

Which of the following statements is not correct with respect to an asset with a five-year life owned by a company that uses straight-line depreciation and the half-year convention? A) It will have the same depreciation expense in the first and last years. B) It will be depreciated over six accounting years. C) It will have a book value that exceeds its salvage value at the end of its economic life. D) It will have a smaller depreciation expense in Year 4 than it does in Year 2.

D) It will have a smaller depreciation expense in Year 4 than it does in Year 2.

The inclusion of the intangible asset goodwill in the financial statements of a company indicates: A) That the company has a favorable reputation with its customers. B) A monopoly position in the industry or superior management. C) An unbroken record of annual earnings and dividends. D) That the company has purchased a going business at a price in excess of the fair market value of the net identifiable assets.

D) That the company has purchased a going business at a price in excess of the fair market value of the net identifiable assets.

Which of the following would not be considered as part of the cost of equipment recently purchased? A) Sales tax B) Transportation charges C) Installation and setup charges D) The cost to repair damage incurred after dropping the equipment

D) The cost to repair damage incurred after dropping the equipment

Wilbur Company purchased $10,000 of equipment on December 20, Year 1 on terms 2/15, net 30. Wilbur paid for the equipment on the 15th day following purchase and took advantage of the discount. Which of the following statements is correct? A) Wilbur will record a cash outflow from investing activities of $10,000 in its Year 1 financial statements. B) Wilbur will record a cash outflow from investing activities of $9,800 in its Year 1 financial statements. C) Wilbur will record a cash outflow from investing activities of $10,000 in its Year 2 financial statements. D) Wilbur will record a cash outflow from investing activities of $9,800 in its Year 2 financial statements.

D) Wilbur will record a cash outflow from investing activities of $9,800 in its Year 2 financial statements.

For the financial statements of publicly traded companies, MACRS: A) is recommended B) is required C) is optional D) is not considered to be in conformity with GAAP

D) is not considered to be in conformity with GAAP