978-1337276337 Test Bank Chapter 8 Part 2

Chapter 8

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55. On December 1, 2017, Xeon Company bought land and an accompanying warehouse from Yen Company for

$800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000,

respectively. How much of the purchase price should Xeon Company allocate to the land, and how much should be

allocated to the building?

a. $457,143 and $342,857, respectively

b. $700,000 and $300,000, respectively

c. $560,000 and $240,000, respectively

d. $500,000 and $300,000, respectively

56. Interest is capitalized when incurred in connection with the construction of plant assets because

a. interest is considered a part of the acquisition cost of the related plant asset.

b. the decision to purchase a plant asset is a business decision separate from the financing decision.

c. many plant assets last longer than 20 years.

d. interest is considered an expense of the period.

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57. Cranberry Corp. constructed equipment to manufacture a new line of home products during 2017. The average

balance of accumulated expenditures on the equipment during September through December 2017 was $500,000.

Construction started on September 1, 2017, and was still in progress at the end of 2017. If Cranberry borrowed $500,000

for one year on September 1, 2017, to finance the construction, and the interest rate on the construction loan was 6%, how

much interest can Cranberry capitalize as part of the equipment cost for 2017?

a. $0

b. $10,000

c. $20,000

d. $30,000

58. If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during

construction on the borrowed money is

a. capitalized as part of the cost of the plant asset.

b. amortized over the construction period.

c. reported as interest expense on the income statement.

d. reported as depletion on the income statement.

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59. When constructing assets, capitalized interest is based on

a. the amount allowed by the company’s auditors.

b. the expenditures at the end of the of the period.

c. the expenditures at the beginning of the period.

d. the average accumulated expenditures.

60. Depreciation is a process by which

a. replacement funds are accumulated for plant and equipment.

b. the decline in market value of plant and equipment is determined and recorded.

c. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the

asset.

d. the difference between current market value and historical cost of plant and equipment is determined.

61. A company should choose a depreciation method that

a. best allocates the original cost of the asset to the periods benefited by the use of the asset.

b. saves the most taxes.

c. minimizes net income.

d. shows the highest amount of net income.

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62. Harkin Company purchased a building on a tract of land and allocated the entire cost of the purchase to building.

Normally, it depreciates buildings over 20 years using the straight-line method with zero residual value and does not

depreciate land. Because of its accounting treatment of the purchase, Harkin’s income before taxes for the next 20 years

will be

a. overstated.

b. understated.

c. unaffected.

d. in conformance with GAAP.

63. Refer to the information for Wexford Co.

Wexford is comparing the straight-line and double-declining-balance depreciation methods. Of these two methods, which

method creates the larger expense and larger tax savings in 2017?

a. Straight-line depreciation creates the larger expense, while double-declining-balance depreciation creates the larger

tax savings.

b. Straight-line depreciation creates both the larger expense and the larger tax savings.

c. Double-declining-balance depreciation creates both the larger expense and the larger tax savings.

d. Double-declining-balance depreciation creates the larger expense, while straight-line depreciation creates the

larger tax savings.

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64. Refer to the information for Wexford Co.

By what amount would double-declining-balance depreciation exceed straight-line depreciation over the five-year life of

the truck?

a. The residual value of $7,000

b. Cost less total depreciation

c. Cost plus total depreciation

d. Total depreciation expenses under double-declining-balance and straight-line depreciation are equal.

65. Refer to the information for Wexford Co.

By what amount would double-declining-balance depreciation exceed straight-line depreciation over the five-year life of

the truck?

a. $0

b. $7,000

c. $37,000

d. $6,000

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66. Refer to the information about Wexford Co.

Wexford Co. wants to use the depreciation method that will result in the highest depreciation expense for 2017. Which

method should be used?

a. Straight-line

b. Units-of-production

c. Double-declining-balance

d. All methods create the same income in 2017.

67. Refer to the information for Norwood, Inc.

Based on this information, what method of depreciation will produce the maximum depreciation expense in 2017?

a. Straight-line

b. Double-declining-balance

c. Units-of-production

d. All methods produce the same expense in 2017.

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68. Refer to the information for Norwood, Inc.

Based on this information, what method of depreciation will produce the maximum depreciation expense in 2018?

a. Straight-line

b. Double-declining-balance

c. Units-of-production

d. All methods produce the same expense in 2018.

69. Refer to the information for Norwood, Inc.

What amount will Norwood, Inc. report as depreciation expense over the eight-year life of the equipment?

a. $60,000

b. $72,000

c. $75,000

d. $80,000

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70. Refer to the information for Norwood, Inc.

If Norwood uses the straight-line method, what is the book value at December 31, 2019?

a. $46,875

b. $51,875

c. $62,500

d. $67,500

71. Refer to the information for Norwood, Inc.

If Norwood uses the units-of-production method, what is the depreciation rate per hour for the equipment?

a. $4.00

b. $5.00

c. $6.00

d. $7.50

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72. Refer to the information for Norwood, Inc.

If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2018?

a. $14,063

b. $15,000

c. $18,750

d. $20,000

73. Arena, Inc. uses straight-line depreciation for its equipment. Arena purchased equipment for $300,000 and estimated

its useful life at eight years. The bookkeeper failed to consider the residual value of $50,000. What is the impact on

earnings per share and operating income of failing to consider the residual value?

a. Earnings per share will be overstated and operating income will be understated.

b. Earnings per share will be understated and operating income will be overstated.

c. Both earnings per share and operating income will be overstated.

d. Both earnings per share and operating income will be understated.

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74. Fall Corp. uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration.

Which of the following depreciation methods is most appropriate to measure the decline in the usefulness of the

company’s assets?

a. Double-declining-balance

b. Revenue expenditure method

c. Straight-line

d. Units-of-production

75. Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should be used for 15,000 hours of

flight. What is the most appropriate method of depreciation to properly match revenues and expenses?

a. Double-declining-balance

b. Revenue expenditure method

c. Straight-line

d. Units-of-production

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76. Land is not depreciated because it

a. appreciates in value.

b. does not have an established depreciable life.

c. has a useful life that is limited to the period of time a company is in business.

d. has an unlimited life.

77. Which of the following factors is not related to the decline in the usefulness of plant and equipment assets, and

therefore does not need to be considered in selecting an appropriate depreciation method?

a. Physical deterioration

b. Obsolescence

c. Repair and maintenance policies

d. Current replacement cost

78. Depreciation is

a. an effort to achieve proper matching of the cost of operating assets.

b. an accumulation of funds to replace the related plant asset.

c. the difference between the original cost and salvage value of an asset.

d. the cash allocated each period to maintain a plant asset.

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79. If technology changes rapidly, a firm should

a. expense plant assets immediately because of the uncertainty of future benefits.

b. depreciate plant assets over long periods of time.

c. consider an accelerated rate of depreciation.

d. use the straight-line method of depreciation as it is the easiest.

80. Which of the following sets of factors is needed to calculate depreciation on plant and equipment?

a. The asset’s acquisition cost, replacement cost, and its estimated residual value

b. The estimated residual value of the asset, its replacement cost, and its market value

c. The asset’s replacement cost, its estimated life, and its estimated residual value

d. The estimated life of the asset, its acquisition cost, and its estimated residual value

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81. Biglersville Corp. purchased equipment at the beginning of 2017 for $16,000. Biglersville Corp. decided to depreciate

the equipment over a five-year period using the straight-line method. Biglersville Corp. estimated the equipment’s residual

value at $1,000. The estimated fair market value at the end of 2017 was $15,000. Which of the following statements is

correct concerning Biglersville Corp.’s financial statements at December 31, 2017?

a. The book value of the equipment is $30,000.

b. The book value of the equipment is $13,000.

c. The total accumulated depreciation is $1,000.

d. The equipment will be reported on the balance sheet at it fair market value of $15,000.

82. Calhoun, Inc. purchased equipment at the beginning of 2017 for $180,000. Calhoun decided to depreciate the

equipment over a five-year period using the double-declining-balance method. Calhoun estimated the equipment’s residual

value at $30,000. Which of the following statements is correct concerning Calhoun’s financial statements at December 31,

2017?

a. The book value of the equipment is $108,000.

b. The book value of the equipment is $72,000.

c. The total accumulated depreciation is $90,000.

d. Depreciation expense for 2017 is $60,000.

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83. Many companies use accelerated depreciation for

a. financial reporting purposes and a different method for tax purposes.

b. financial reporting purposes because depreciation is not allowed for tax purposes.

c. tax purposes because it results in a larger net income in the early years of a plant asset’s life.

d. tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes.

84. Using different depreciation methods for book purposes versus tax purposes for the same asset is

a. not allowed since the amount can only be calculated one way or the other, not both.

b. the direct result of the differing goals of financial and tax accounting.

c. contrary to GAAP.

d. against the Internal Revenue Code, and as such, against the law.

85. Newco Publishing Company purchased equipment at the beginning of 2017 for $200,000. The company decided to

depreciate the equipment over an eight-year period using the straight-line method. The company estimated the

equipment’s residual value at $20,000. The adjustment for depreciation expense for 2017 will

a. increase Depreciation Expense and increase Accumulated Depreciation for $25,000.

b. increase Accumulated Depreciation and decrease Equipment for $25,000.

c. increase Depreciation Expense and decrease Equipment for $22,500.

d. increase Depreciation Expense and increase Accumulated Depreciation for $22,500.

86. The effect of recording depreciation for the year is a(n)

a. decrease in net income and no change in assets.

b. decrease in assets but no change in owners’ equity.

c. increase in assets and an increase in net income.

d. decrease in assets and a decrease in net income.

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88. Wind Chime Co. and Fire Hut Co. each purchased identical equipment having an estimated useful life of ten years for

the same price. Wind Chime uses the straight-line depreciation method and Fire Hut uses the double-declining-balance

method of depreciation. Assuming the two entities are similar in all other respects, which of the following statements is

correct?

1.

c. Wind Chime’s net income will be greater than Fire Hut’s net income in Year 9.

d. Fire Hut’s equipment’s book value will be less than Wind Chime’s equipment’s book value at the end of Year 2.

89. Using the straight-line depreciation method will cause a company to incur __________ in the early years of an asset’s

life than it would experience using an accelerated method of depreciation.

a. more tax expense

b. less tax expense

c. an equal tax expense

d. This cannot be determined from the information given.

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92. If Grove City Corp. continues to use the ship in its eleventh year, what is the correct accounting procedure?

a. Take the asset off the books and record a gain on the disposal.

b. Continue to depreciate it.

c. The company may not use it any longer.

d. No longer depreciate it but leave it on the records at its book value at the end of its useful life.

93. What was the book value of the ship for Grove City Corp. at the end of its useful life?

a. $0

b. $50,000

c. $214,400

d. Need more information to determine this answer.

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94. Blanton Company bought equipment on January 1, 2013, with a cost of $160,000, an estimated residual value of

$40,000, and an estimated life of 15 years. It was depreciated by the straight-line method for four years. Due to

obsolescence, it was determined at the beginning of 2017 that the useful life should be shortened by three years and the

residual value changed to zero. What is the accumulated depreciation at the end of 2016?

a. $42,667

b. $32,000

c. $40,000

d. $8,000

95. In 2013, Blanton Company bought equipment with a cost of $160,000, an estimated residual value of $40,000, and an

estimated life of 15 years. It was depreciated by the straight-line method for four years. Due to obsolescence, it was

determined at the beginning of 2017 that the useful life should be shortened by three years and the residual value changed

to zero. The depreciation expense for 2017 is

a. $11,636.

b. $16,000.

c. $11,000.

d. $8,000.

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96. Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life

of six years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000

to the truck that extended the life one year. Thus, starting with 2017, the truck has a remaining life of five years and a new

salvage value of $8,000. Royal uses the straight-line depreciation method. What is the book value of the truck to be

reported on the balance sheet at December 31, 2017?

a. $44,000

b. $50,000

c. $56,000

d. $62,000

97. Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life

of six years and an estimated residual value of $24,000. On January 1, 2017, the company made major repairs of $20,000

to the truck that extended the life one year. Thus, starting with 2017, the truck has a remaining life of five years and a new

salvage value of $8,000. Royal uses the straight-line depreciation method. What amount should be recorded as

depreciation expense each year starting in 2017?

a. $6,000

b. $12,000

c. $13,600

d. $14,400

98. Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life

of six years and an estimated residual value of $24,000. On January 1, 2017, the company made major repairs of $20,000