978-1337276337 Test Bank Chapter 8 Part 3

Chapter 8

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salvage value of $8,000. Royal uses the straight-line depreciation method. When calculating depreciation for 2017, Royal

should

a. add the $20,000 to the book value at December 31, 2016, and then allocate the revised basis over the remaining

adjusted useful life of five years.

b. report the effect of the change in life as an expense on the income statement in 2016.

c. ignore the change in life on the original cost of $60,000 and depreciate the additional $20,000 cost separately over

its useful life.

d. expense the $20,000 and depreciate the original cost of $60,000 over its revised estimated total live of seven

years.

99. Barnhill, Inc. uses straight-line depreciation for its equipment with an estimated useful life of ten years and zero

residual value. The CEO points out that the equipment will last much longer than ten years, perhaps up to 20 years. What

is the impact on earnings per share and net income of depreciating equipment over 20 years rather than ten years?

a. Both earnings per share and net income will decrease.

b. Both earnings per share and net income will increase.

c. Earnings per share will decrease and net income will increase.

d. Earnings per share will increase and net income will decrease.

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100. Creighton, Inc. determined that it had incorrectly estimated both the useful life and the estimated residual value of

equipment that it purchased two years ago. When accounting for the change in its accounting estimates, Creighton must

a. correct the financial statements of prior years affected by the errors in the estimates.

b. determine the book value at the point of change and depreciate that amount over the remaining useful life.

c. add the amount of the error to the amount of the current year’s depreciation expense.

d. determine the effect of the error and report it as a loss on the income statement in Other Revenues and Expenses.

101. Recently, companies have been ordered by governmental agencies to clean up environmental damages caused by

business operations. How should costs incurred in these situations be treated?

a. If a legal obligation exists, the cost of restoring the property must be added to the asset account.

b. They should be treated as an expense entirely in one accounting period.

c. They should be treated as an amortized expense in the period the cost is incurred.

d. They should be added to the asset and then depreciated over 15 years.

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102. Capitalizing an expenditure rather than recording it as a revenue expenditure

a. affects the amount of net income reported during an accounting period, but has no effect on the total book value of

plant assets on the balance sheet.

b. affects the total book value of plant assets on the balance sheet, but has no effect on the amount of net income

reported during an accounting period.

c. affects the total book value of plant assets reported on the balance sheet and the amount of net income reported

during a period.

d. has no effect on the book value of plant assets on the balance sheet or the amount of income reported on the

income statement.

103. Crouch Apartments purchased an apartment building to rent to university students on December 15, 2016. The

tenants moved in on January 1, 2017. On Super Bowl Sunday, a student punched a hole in the wall when his favorite team

fumbled the ball. It cost the landlord $400 to repair the hole. How should this cost be recorded?

a. It should be recorded as part of the asset account.

b. It should be recorded as repair and maintenance expense.

c. It should not be recorded as the tenants will be charged for the damage.

d. It should not be recorded since this is an immaterial amount to the landlord.

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104. Which of the following is an example of a capital expenditure?

a. Cleaning the carpet in the front room

b. Tune-up for a company truck

c. Replacing an engine in a company car

d. Replacing burned-out light bulbs in the factory

105. When a company discards machinery that is fully depreciated, how would this transaction affect the company’s

accounts?

a. Decrease Accumulated Depreciation; decrease Machinery

b. Increase Machinery; increase Accumulated Depreciation

c. Increase Cash; increase Accumulated Depreciation

d. Increase Depreciation Expense; increase Accumulated Depreciation

106. A gain is recognized on the disposal of plant assets when the sale price is

a. greater than the book value and less than the residual value.

b. greater than the book value.

c. less than both the book value and the residual value.

d. less than the book value.

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107. Eagle’s Nest sold equipment for $4,000 cash. This resulted in a $1,500 loss. What is the impact of this sale on the

working capital?

a. Reduces working capital

b. Increases working capital

c. Has no effect on working capital

d. The increases offset the decrease.

108. Yellow Dog Transit sold an old truck on December 31, 2017, for $18,400 cash. The following data were available

when the truck sold:

Acquisition cost $75,000

Estimated residual value at time of acquisition 8,000

Accumulated depreciation on December 31, 2017, after adjustment 53,600

When this transaction is recorded, it should include a(n)

a. Loss on Disposal account for $3,000.

b. decrease of $21,400 to the Truck account.

c. Gain on Disposal account for $3,000.

d. Gain on Disposal account for $5,000.

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109. Boalsburg Co. purchased a truck on January 1, 2015, for $30,000. The truck had an estimated life of five years and

an estimated residual value of $5,000. Boalsburg used the straight-line method to depreciate the asset. On July 1, 2017,

the truck was sold for $17,000 cash. The journal entry to record the sale of the truck in 2017

a. increases net income.

b. increases total assets.

c. decreases total expenses.

d. decreases stockholders’ equity.

110. On January 2, 2017, Hannah Company sold a machine for $1,000 that it had used for several years. The machine cost

$12,000 and had accumulated depreciation of $9,000 at the time of sale. What gain or loss will be reported on the income

statement for the sale of the machine?

a. Gain of $2,000

b. Loss of $11,000

c. Loss of $2,000

d. Gain of $3,000

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111. Which of the following statements is not true?

a. IFRS require that estimates of residual value and the life of the asset be reviewed at least annually and revised if

necessary.

b. The FASB standards do not have a specific rule that requires residual value and asset life to be reviewed annually.

c. IFRS do not have a specific rule that requires residual value and asset life to be reviewed annually.

d. The FASB generally requires operating assets to be recorded at acquisition cost, less depreciation, and the assets’

values are not changed to reflect their fair market values or selling prices.

112. On January 1, 2017, Petersen Corp. sold a piece of equipment for $3,000 which it had used for several years. The

equipment had cost $13,000, and its accumulated depreciation amounted to $9,000 at the time of the sale. What are the net

effects on the accounting equation of selling the equipment?

a. Assets and Stockholders’ Equity increases $1,000.

b. Assets decrease and Stockholders’ Equity increases $3,000.

c. Assets and Stockholders’ Equity decrease $1,000.

d. Assets and Stockholders’ Equity decrease $3,000.

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113. Operating assets with no physical properties are called

a. current assets.

b. intangible assets.

c. plant assets.

d. property, plant, and equipment.

114. How should intangible assets be disclosed on the balance sheet?

a. As a reduction of stockholders’ equity

b. At cost in the Current Assets section

c. At the estimated market value at the balance sheet date

d. Net of the costs already amortized

115. Goodwill can be recorded as an asset when a(n)

a. business has above normal profitability compared to other businesses in its industry.

b. business can determine that it has created customer goodwill and name recognition.

c. offer is received to purchase the business at a price in excess of the value of the assets.

d. business is purchased and payment is made in excess of the value of the net assets.

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116. GAAP require that research and development costs to develop a new product be

a. capitalized in the patents account.

b. expensed in the period incurred.

c. capitalized in the research and development costs account.

d. amortized over the expected economic life of the new product.

117. Research and development costs are

a. treated as an expense when incurred.

b. capitalized but not amortized.

c. capitalized and amortized over the periods that will probably benefit from the research and development.

d. included with the cost of the patent resulting from the research and development.

118. All of the following are intangible assets except

a. patents.

b. goodwill.

c. franchises.

d. accounts receivable.

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119. Tarkington Beers, Inc. purchased the most popular and well-known pub in a college town. Its purchase price was

$1,200,000. The appraisers determined that the land should be valued at $400,000, the building at $500,000, and the

equipment at $200,000. Which of the following statements is correct?

a. Tarkington Beers, Inc. should record only the appraised value of the assets.

b. Tarkington Beers, Inc. needs to adjust the value of the assets in proportion to their appraised value so that the total

of the assets equals the purchase price.

c. Tarkington Beers, Inc. paid too much for the business and needs to record a loss.

d. Tarkington Beers, Inc. needs to record goodwill of $100,000.

120. Pocono Co. purchased a patent at the beginning of 2017 for $490,000. Economic benefits were expected for seven

years, but the patent’s legal life was 20 years. Also, during 2017, the company incurred research and development costs of

$150,000. Patent amortization expense for 2017 is

a. $24,500.

b. $150,000.

c. $72,143.

d. $70,000.

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121. Ramirez Stores purchased a trademark at the beginning of 2017 for $340,000. Economic benefits were expected for

ten years, but the trademark’s legal life was 20 years. Also, during 2017, Ramirez incurred research and development costs

of $200,000. The book value of the trademarks at December 31, 2017, is

a. $506,000.

b. $306,000.

c. $323,000.

d. $486,000.

122. At the end of 2017, Clock Products, Inc. determined that one of its patents was worthless. The patent had a cost of

$300,000. The patent had been amortized for five years of its estimated 15-year legal life. Which of the following

statements is correct?

a. Clock Products must continue to amortize the patent over its remaining ten years of life.

b. The patent must be reduced to 5/15, or 33.3% of its original cost and amortized over the remaining ten years.

c. The remaining unamortized cost must be removed from the accounting records and treated as a loss on the income

statement.

d. Clock Products must correct its financial statements for the past five years, so that the entire cost is allocated to

that five-year period.

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124. Waxman Company purchased a patent for $170,000 at the beginning of 2017 and estimated that its expected useful

life was ten years. The patent has a legal life of 17 years. What amount should be recorded as amortization expense for the

patent in 2017?

a. $0

b. $7,000

c. $10,000

d. $17,000

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125. Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill,

should

a. not be amortized.

b. be reported on the statement of retained earnings in the year in which acquired.

c. be amortized over a reasonable period of time not to exceed 40 years.

d. increase an expense account entirely in the year in which acquired.

126. The accounting life of intangible assets is determined by

a. their legal lives.

b. their useful lives.

c. their legal lives or useful lives, whichever is shorter.

d. the tax life mandated by the IRS.

127. Which of the following items is added to net income to determine cash flows from operating activities when the

indirect method is used to prepare the Operating Activities category of the statement of cash flows?

a. Accumulated depreciation

b. Cash from note payable related to truck acquired

c. Cost of plant assets acquired during the year

d. Depreciation expense

128. Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the

indirect method is used?

a. Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in

the Operating Activities section.

b. Depreciation provides cash and therefore must be added to net income.

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c. Depreciation was deducted in arriving at net income on the accrual basis of accounting; however, it did not require

the use of cash.

d. Depreciation reduced the book value of plant assets and, therefore, must be reported as an investing activity.

129. Which of the following statements is not true?

a. International accounting standards are more flexible in allowing the use of fair market values for intangible assets.

b. FASB standards require all research and development costs to be expensed.

c. IFRS require all research and development costs to be expensed.

d. Under IFRS, fair market values for intangibles require an active market.

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130. The income statement of Hope Market, Inc. reported a gain from the sale of land. How are the cash flow effects of

this transaction reported on the statement of cash flows if the direct method is used to prepare the Operating Activities

category?

a. The entire proceeds from the sale of the land are reported as an investing activity.

b. The gain on the sale of land is reported in the Investing Activities category as a cash flow from the sale of land.

c. The entire proceeds from the sale of the land are reported as an operating activity.

d. The cash received from the sale of land is reported in the Financing Activity category as a cash flow from the sale

of land.

131. How are the cash flow effects from the purchase and sale of intangible assets reported on a statement of cash flows?

a. As operating activities

b. As investing activities

c. As financing activities

d. They are not reported on a statement of cash flows.

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132. Refer to the information for Chambersburg Corp.

Using the 2018 data, what is the average age of Chambersburg’s property, plant, and equipment?

a. 1.60 years

b. 2.50 years

c. 4.00 years

d. 10.00 years

133. Refer to the information for Chambersburg Corp.

What is the asset turnover ratio for Chambersburg for 2018?

a. 1.60 times

b. 1.82 times

c. 4.00 times

d. 4.55 times

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134. Refer to the information for Chambersburg Corp.

Between 2017 and 2018, Chambersburg sold some equipment that had an original cost of $57,500. Which statement is

most likely true concerning transactions that must have occurred during the period?

a. Chambersburg also purchased additional equipment during the year.

b. The selling price of the equipment sold was reported with net sales.

c. The equipment that was sold had a book value of $12,500.

d. The equipment sold had not been reported with Chambersburg’s property, plant, and equipment.

135. Refer to the information for Chambersburg Corp.

Using the 2018 data, what is the average life of Chambersburg’s property, plant, and equipment (rounded to one decimal

place)?

a. 1.6 years

b. 2.5 years

c. 4.0 years

d. 10.0 years

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136. If a company’s asset turnover ratio decreased from 2017 to 2018, which of the following conclusions can be made?

a. The company was more efficient during 2018 in using its assets to produce profits.

b. The company produced less sales in 2018 for each dollar invested in assets.

c. The company was less profitable in 2017.

d. The company’s average total assets decreased for relatively stable sales in 2017 and 2018.

137. A machine with a cost of $100,000 and accumulated depreciation of $80,000 was sold at a loss of $6,000. What

amount of cash was received from the sale?

a. $26,000

b. $14,000

c. $20,000

d. $94,000

138. Mayflower Company had a machine with a cost of $123,000 and accumulated depreciation of $87,000 that was sold

at for a gain of $5,000. What amount of cash was received from the sale?

a. $30,000

b. $36,000

c. $41,000

d. $128,000

139. Given the following list of methods of depreciation, select the method that is best for the situation or purpose given.

(Select all that apply.)

Which method is used in situations where technological advances are rapid?

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a. Straight-line

b. Units-of-production

c. Double-declining-balance

d. MACRS

140. Depreciation expense

a. Balance sheet—Property, Plant, and Equipment

b. Balance sheet—Intangible Assets

c. Balance sheet—Current Assets

d. Balance sheet—Other Assets

e. Income statement—Operating section

f. Income statement—Other Revenue and Expense section

g. Statement of cash flows

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141. Gain on sale of plant asset

a. Balance sheet—Property, Plant, and Equipment

b. Balance sheet—Intangible Assets

c. Balance sheet—Current Assets

d. Balance sheet—Other Assets

e. Income statement—Operating section

f. Income statement—Other Revenue and Expense section

g. Statement of cash flows

142. Cash received from the sale of a plant asset

a. Balance sheet—Property, Plant, and Equipment

b. Balance sheet—Intangible Assets

c. Balance sheet—Current Assets

d. Balance sheet—Other Assets

e. Income statement—Operating section

f. Income statement—Other Revenue and Expense section

g. Statement of cash flows