Chapter 9 Practice

Which of the following is not a depreciable asset?

land

Coronado Company purchased land for $80,000. The company also paid $12,000 in 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?

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 accrued taxes of $12,000, 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.

A company sold for $3,000 a plant asset that had a cost of $10,000 and accumulated depreciation of $7,500. What gain or loss did the company experience?

Book value is $2,500 ($10,000 - $7,500). Since the proceeds ($3,000) exceed the book value ($2,500) by $500, there is a gain.

A company has the following asset account balances: Buildings and equipment $9,200,000 Accumulated depreciation 1,200,000 Patents 750,000 Land Improvements 1,000,000 Land 5,000,000 How much will be reported on the balance sheet under property, plant, & equipment?

Buildings and equipment ($9,200,000-$1,200,000), land improvements ($1,000,000), and land ($5,000,000), less accumulated depreciation are included for a total of $14,000,000.

Book value and market value are synonymous terms as they relate to plant assets. (T/F)

F - Market value represents a value at which an asset can be sold. Book value is the net amount at which an asset appears on a company's balance sheet. It is equal to acquisition cost less accumulated depreciation.

The contra account to property, plant and equipment is accumulated amortization. (T/F)

F - The contra account in the property, plant, and equipment section of the balance sheet is accumulated depreciation.

When the book value of a piece of equipment is less than the proceeds from the sale of that equipment, the result is a loss on disposal of plant asset. (T/F)

F - When book value is less than the proceeds from a sale, the result is a gain on disposal of plant assets.

On April 1, 2017, La Presa Company sells some equipment for $18,000. The original cost was $50,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. On December 31, 2016, the Accumulated Depreciation account had a balance of $29,400. How much is the gain or loss on the sale?

First, the accumulated depreciation must be brought up to date. Since the equipment has a $42,000 depreciable cost and a life of 6 years, the depreciation is $7,000 per year or $1,750 for 3 months through April 1, 2017. The Accumulated Depreciation balance at the date of sale is $29,400 plus $1,750 or $31,150. Next, the book value must be determined which is: $50,000 less $31,150, or $18,850. The gain or loss is the selling price less the book value: $18,000 - $18,850 = $850 loss

A permanent decline in the market value of an asset is called

an impairment

Which one of the following costs will not be included in the cost of equipment?

annual insurance

Which of the following gives the recipient the right to manufacture, sell, or otherwise control an invention for a period of 20 years?

patent

When a plant asset is retired, the difference between original cost and the book value of the asset is

recognized on the income statement as a loss on disposal of plant asset.

Walk Co's average total assets are $200,000, net sales total to $100,000, and net income is $40,000. How much net income did Walk Co generate for each dollar of assets invested?

Return on assets is net income divided by average total assets: $40,000 ÷ $200,000 = $0.20

What is depreciation?

A cost allocation method

Research and development costs are capitalized as intangible assets.

F - Due to the uncertainty of research and development efforts, the related costs are usually expensed as incurred.

A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net sales total $250,000. What is the asset turnover?

The asset turnover is net sales divided by the average total assets: $250,000 $200,000 = 1.25 times.

Corristan Company purchased equipment and incurred these costs: Cash price $24,000 Sales taxes 1,200 Insurance during transit 200 Annual maintenance costs 400 Total costs $25,800 What amount should be recorded as the cost of the equipment?

($24,000 + $1,200 + $200 = $25,400). The annual maintenance costs are expensed, not capitalized.

Expenditures to maintain the operating efficiency and expected productive life of the unit are expensed as incurred. (T/F)

T

losing costs incurred to purchase a tract of land are included in the cost of the land. (T/F)

T

An asset purchased on January 1 for $60,000 has an estimated salvage value of $3,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($60,000 - $3,000)/8 years = $7,125. At the end of the second year, there will be two years of accumulated depreciation for a total of $14,250.

If a company reports goodwill as an intangible asset on its books, what is the one thing you know with certainty?

The company purchased another company.

A purchase of equipment for $18,000 also involves freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and 4 years, respectively. Under the straight-line method, how much is annual depreciation expense?

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 - $2,000)/4 = $4,750 per year.

On September 1, 2017, West Buy purchased an asset for $9,000, with a $1,500 estimated salvage value, and a 4-year useful life. How much is the 2017 depreciation expense using the straight-line method?

The purchase price ($9,000) less salvage value ($1,500) is divided by the useful life times the portion of a year that will be expensed: ($9,000 - $1,500)/4 × 4/12 = $625.

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2017. The machine was purchased for $80,000 on January 1, 2013, and was depreciated on a straight-line basis over a 10-year life assuming no salvage value. If the machine was sold for $26,000, how much is the gain or loss to be recorded at the time of the sale?

The selling price less the book value of the machine equals the gain or loss on the sale. Book value of the machine: $80,000 - [($80,000 ÷ 10) × 4.5 yr.] = $44,000. Loss on sale = $26,000 - $44,000 = $18,000 loss.

When using the straight-line depreciation method, which of the following is not a factor affecting the computation of depreciation?

book value

Which statement is true about additions to plant assets?

they are capitalized