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Name:
Class:
Date:
chapter 7
Indicate whether the statement is true or false.
1. Physical depreciation occurs when changes in customer needs cause a fixed asset to no longer provide services for
which it was intended.
a. True
b. False
2. Amortization refers to systematic periodic transfer of the cost of a fixed asset to an expense account.
a. True
b. False
3. If a company sells a fixed asset for an amount that is less than its book value, a gain must be recognized.
a. True
b. False
4. The total depreciation across the years of an asset's life is the same under the double-declining-balance method or the
straight-line method.
a. True
b. False
5. The straight-line method of depreciation is appropriate if usage of the asset varies considerably from year to year.
a. True
b. False
6. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the
ordinary course of business are called fixed assets.
a. True
b. False
7. If the proceeds from a sale of equipment are greater than the book value of the equipment as of the date of sale, a loss is
recorded.
a. True
b. False
8. The estimated amount that an asset can be sold for at the end of its useful life is called its book value.
a. True
b. False
9. If an asset is discarded, a loss is recognized equal to its salvage value.
a. True
b. False
10. The double-declining-balance method of depreciation is also referred to as an accelerated depreciation method.
a. True
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11. The inventory turnover measures how efficiently a company is using its operating assets to generate sales.
a. True
b. False
12. Companies usually compute depletion by using the double-declining-balance method.
a. True
b. False
13. A current asset account must be increased for revenue expenditures since they benefit only the current period.
a. True
b. False
14. Depletion is the process of transferring the cost of intangible assets to an expense account.
a. True
b. False
15. Expenditures made to extend an asset's life are called revenue expenditures.
a. True
b. False
16. Fixed assets are reported at their book value on the balance sheet.
a. True
b. False
17. Under the straight-line method, the amount of depreciation expense for the first full year of use of a fixed asset costing
$95,000, with an estimated residual value of $5,000, and a useful life of five years, will be $18,000.
a. True
b. False
18. The difference between a fixed asset's initial cost and its current market value is called the asset's depreciable cost.
a. True
b. False
19. Goodwill refers to the excess of purchase price of a business over the fair value of its net assets.
a. True
b. False
20. The balance in the Accumulated Depreciation account is deducted from the cost of fixed assets on the balance sheet.
a. True
b. False
21. Intangible assets do not exist physically.
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a. True
b. False
22. The acquisition costs of property, plant, and equipment should include all costs necessary to get the asset in place and
ready for use.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
23. _____ occurs due to obsolescence that causes an asset to no longer provide services for which it was intended.
a. Physical depreciation
b. Effective depreciation
c. Accelerated depreciation
d. Functional depreciation
24. The cost of removal of an old building to make the land ready for its intended use is charged to _____.
a. land
b. land improvements
c. buildings
d. operating expenses
25. The cost incurred to extend an asset's useful life is recorded as _____.
a. accrued expenditures
b. maintenance expenditures
c. routine expenditures
d. capital expenditures
26. The book value of an asset is computed as the asset's _____.
a. current market value less tax expense
b. fair value less residual value
c. discounted value plus accumulated depreciation
d. cost less accumulated depreciation
27. A company purchased an oil well for $10 million. It is estimated that five million barrels can be extracted from the
well. Determine depletion expense assuming four million barrels are extracted and sold during the year.
a. $1,250,000
b. $8,000,000
c. $12,500,000
d. $8,750,000
28. A drilling company purchased a mining site for $450,000 on July 1, 20Y8. The company expects to mine ore for the
next 10 years and anticipates that a total of 80,000 tons will be recovered. During 20Y8, the company extracted 5,800 tons
of ore. The depletion expense for the year 20Y8 is _____.
a. $45,000
b. $50,800
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c. $5,860
d. $32,625
29. When natural resources are used, the _____ expense account is increased for a portion of the cost of resources
removed.
a. depletion
b. deferral
c. prepaid
d. amortization
30. Which of the following intangible assets is amortized over its useful life?
a. A trademark
b. Goodwill
c. A patent
d. All of the above
31. To measure depreciation, which of the following must be known?
a. Market value of asset
b. Mixed asset turnover
c. Cost of asset
d. The amount of cash to replace fixed asset
32. Equipment was purchased for $30,000. It has a useful life of five years and a residual value of $4,000. Compute the
depreciation expense for the second year using the double-declining-balance method.
a. $5,200
b. $6,000
c. $6,240
d. $7,200
33. Which of the following is the effect on the transaction metrics of a company when it records depreciation?
a. Its profitability decreases.
b. Its profitability and liquidity remain unaffected.
c. Its profitability increases.
d. Its liquidity increases.
34. Which of the following transactions will have no effect on the liquidity metric of a company?
a. Purchasing an asset
b. Selling an asset for no loss and no gain
c. Selling an asset for loss
d. Discarding a fully depreciated asset
35. Which of the following statement is true about intangible assets?
a. They are usually presented in the balance sheet as fixed assets.
b. They are short-lived assets.
c. They are not held for resale.
d. They have physical existence.
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36. Which of the following is a characteristic of accumulated depreciation account?
a. Accumulated depreciation represents cash reserved for asset replacement.
b. The accumulated depreciation account is a contra-liability account.
c. Accumulated depreciation may be disclosed in the notes to the income statement.
d. Accumulated depreciation is reported on the balance sheet as a deduction from the cost of the asset.
37. A machine was purchased for $35,500, having a useful life of 10 years and a residual value of $6,000. Compute the
annual depreciation expense using the straight-line method.
a. $3,550
b. $4,150
c. $5,800
d. $2,950
38. The cost of a patent should be amortized _____.
a. over 10 years
b. over its economic life
c. over 20 years or its economic life, whichever is shorter
d. only if an impairment occurs
39. Which of the following is not an intangible asset?
a. Goodwill
b. Trademark
c. Copyright
d. Long-term receivable
40. If a fixed asset with an original cost of $18,000 and accumulated depreciation of $2,000 is sold for $15,000, the
company must _____.
a. recognize a loss on the income statement under other expenses.
b. recognize a loss on the income statement under operating expenses.
c. recognize a gain on the income statement under other revenues.
d. recognize a gain on the income statement under revenues.
41. Which of the following is the effect of recording a depletion expense on the profitability and liquidity metrics of a
company?
a. It affects asset turnover while cash flow is unaffected.
b. Its asset turnover decreases.
c. Its affects the Statement of Cash Flows.
d. Operating assets increase.
42. Which of the following is a characteristic of fixed assets?
a. Fixed assets are offered for sale as part of normal operations.
b. Fixed assets do not exist physically.
c. Fixed assets are long-term or relatively permanent assets.
d. Fixed assets that are no longer used in operations are still classified as fixed assets.
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43. A gain is recorded on the sale of fixed assets when _____.
a. the asset is sold for a price less than its book value
b. the asset is sold for a price more than its book value
c. accumulated depreciation on asset is less than its selling price
d. accumulated depreciation on asset is more than its selling price
44. Aquablue Roadways Corporation operates throughout the United States. The following data (in millions) were adapted
from recent financial statements of Aquablue.
Year 2 Year 1
Sales $47,250 $49,675
Beginning of year property, plant, and equipment 18,620 15,730
End-of-year property, plant, and equipment 22,360 18,540
From the above data, what would be the asset turnover for Year 2? (Round the answer to two decimal places.)
a. 1.15
b. 1.22
c. 2.01
d. 2.18
45. A(n) _____ is a contract for the use of an asset for a period of time without having to buy the asset.
a. indenture
b. depreciation hedge
c. revenue option
d. lease
46. A fully depreciated asset must be _____.
a. removed from the books
b. kept on the books until sold or discarded
c. disclosed only in the notes to the financial statements
d. recognized on the income statement as a loss
47. Which method of depreciation considers residual value in computing the normal periodic depreciation?
a. Straight-line
b. MACRS
c. Double-declining-balance
d. Accelerated
48. The accounting term depreciation measures _____.
a. the decline in an asset's market value
b. the amount of cash a company sets aside for asset replacement
c. the amount of asset cost allocated to expense over periods benefited
d. the anticipated loss if an asset is sold in the used-asset market
49. Equipment was purchased for $15,000. It has a useful life of five years and a residual value of $4,000. Determine the
depreciation expense for the first year using the double-declining-balance method.
a. $5,400
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c. $2,200
d. $2,600
50. Land improvements include _____.
a. freight
b. surveying fees
c. sales tax
d. outdoor lighting
51. Which of the following expenditures would be included in the cost of a fixed asset?
a. Uninsured theft
b. Vandalism
c. Sales taxes
d. Mistakes in installation
52. The asset turnover is calculated as _____.
a. net income divided by average long-term operating assets
b. net sales divided by cost of the assets
c. average long-term operating assets divided by net sales
d. net sales divided by average long-term operating assets
53. A company acquired some land for $75,000 to construct a new office complex. Legal fees paid were $2,750,
delinquent taxes assumed were $3,250, and $6,350 was paid to remove an old building. Materials salvaged from the
demolition of the building were sold for $2,300. Determine the cost of the land to be reported on the balance sheet.
a. $85,050
b. $89,650
c. $84,100
d. $87,350
54. A company sold office furniture costing $15,800 with accumulated depreciation of $13,000 for $1,500 cash. The entry
to record the sale would include _____.
a. an increase in accumulated depreciation of $15,800
b. a loss of $1300
c. a total decrease in office furniture of $2,800
d. a decrease in cash of $1,300
55. Losses on discarding fixed assets are considered _____.
a. opportunity costs
b. nonoperating items
c. capital expenditures
d. accumulated depreciation
56. Which of the following is true of asset turnover?
a. It measures the efficiency with which a company uses its operating assets to generate sales.
b. It measures the proportion of operating assets to total assets.
c. It uses net purchases as a denominator in its calculation.
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d. It measures the profits generated by the fixed and current assets of the company.
57. Fixed assets are ordinarily presented on the balance sheet _____.
a. at their current market value
b. at their replacement cost
c. at their cost less accumulated depreciation
d. under intangible assets
58. Which of the following is an example of a capital expenditure?
a. Cleaning the carpet in the front-office room
b. A regular tune-up for a company truck
c. Replacing an engine in a company car
d. Replacing all burned-out light bulbs in the factory
59. A machine was purchased for $68,000. It has a useful life of five years and a residual value of $8,000. Determine the
annual depreciation expense using the straight-line method?
a. $20,000
b. $12,000
c. $60,000
d. $16,000
60. Which of the following is considered under the straight-line method but not under double-declining-balance method?
a. The asset's book value
b. The asset's salvage value
c. The asset's expected useful life
d. The asset's initial cost
61. A company sold a delivery truck for $22,000 cash. The truck costs $45,800 and had accumulated depreciation of
$32,000 as of the date of sale. The entry to record the sale would include _____.
a. an increase in accumulated depreciation for $32,000
b. a total decrease in delivery truck for $13,800
c. a gain of $8,200
d. a loss of $10,000
62. Which of the following is the effect of impaired goodwill on liquidity and profitability metrics?
a. Both profitability and liquidity will remain unaffected.
b. Both profitability and liquidity will decrease.
c. Profitability will increase, whereas liquidity will remain unaffected.
d. Liquidity will decrease, whereas profitability will increase.
63. _____ is an example of a fixed asset.
a. A machine
b. A prepaid expense
c. Land held for investment
d. An accrued revenue
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64. An asset turnover ratio of 1.87 for a company indicates that _____.
a. the company is generating $1.87 of sales revenue for each dollar of long-term operating assets invested
b. the company is generating $1.87 of net income for each dollar of retained earnings
c. the company has $1.87 of long-term debt for each dollar of operating revenue earned
d. the company has $1.87 of current assets for each dollar of fixed assets invested
65. On September 1, a machine was purchased for $47,000 with a useful life of eight years and a residual value of $3,000.
What is the depreciation expense in the year of purchase under the straight-line method, assuming a December 31 year-
end?
a. $3,917
b. $3,667
c. $1,958
d. $1,833
66. If a revenue expenditure is treated as a capital expenditure, then _____.
a. expenses are overstated, and owners' equity is understated
b. expenses are overstated, and assets are overstated
c. expenses are understated, and owners' equity is overstated
d. net income is overstated and owners' equity is understated
67. Depreciable cost are computed as _____.
a. cost less accumulated depreciation
b. book value less residual value
c. cost less residual value
d. market value less residual value
68. Computer equipment was acquired at the beginning of the year at a cost of $56,000 with an estimated residual value of
$5,000 and an estimated useful life of five years. Determine the second year's depreciation expense using the straight-line
method.
a. $10,200
b. $22,400
c. $11,200
d. $12,200
69. The effect of recording a capital expenditure as a revenue expenditure is that _____.
a. expenses are overstated, and owners' equity is understated
b. net profit is understated, and owners' equity is overstated
c. expenses are understated, and accumulated depreciation is overstated
d. assets are overstated, and expenses are understated
70. Paleota Company purchased a patent from Finise for $234,000. At the time of purchase, the patent had a remaining
useful life of 10 years. Determine the patent amortization expense for the first year.
a. $23,400
b. $23,000
c. $14,000
d. $9,800
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71. A capital expenditure is reported on the _____.
a. income statement under operating expenses
b. balance sheet under fixed assets
c. statement of retained earnings under contributed capital
d. cash flow statement under cash flow from financing activities
72. A fixed asset with a cost of $15,000 and accumulated depreciation of $12,500 is sold for $1,750. What is the amount
of gain or loss on disposal of the fixed asset?
a. $750 loss
b. $2,500 loss
c. $2,500 gain
d. $750 gain
73. The Modified Accelerated Cost Recovery System (MACRS) is used to _____.
a. compute income for audit reporting
b. compute depreciation for tax purposes
c. report liabilities
d. ascertain the break-even point
74. Recording depreciation _____.
a. decreases liability and cash flow
b. decreases net income but has no effect on cash flows
c. decreases capital and operating expenses
d. decreases retained earning but has no effect on fixed assets
75. Goodwill is _____.
a. amortized in a manner similar to other intangibles
b. written down only if an impairment in value occurs
c. charged to expense immediately
d. amortized over 40 years or its economic life, whichever is shorter
76. A patent was purchased for $585,000 with a legal life of 20 years. Management estimates that the patent has a 12-year
economic life. The entry to record amortization would include _____.
a. an increase in amortization expense for $29,250
b. an increase in research and development expense for $585,000
c. a decrease in patent for $48,750
d. an increase in accumulated amortization for $585,000
77. Research and development costs incurred for developing patents are recorded as _____.
a. current operating expenses
b. long-term operating assets
c. accrued expenses
d. working capital
78. Which of the following should be included in the acquisition cost of a piece of equipment?
a. Uninsured theft
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b. Mistakes in installation
c. Vandalism
d. Installation costs
79. Which of the following is the effect on a company's liquidity and profitability metrics when it purchases a piece of
equipment?
a. Its free cash flow decreases.
b. Its free cash flow increases.
c. Its asset turnover increases.
d. Its asset turnover remains unaffected.
80. The exclusive right to use a certain name or symbol is called a _____.
a. franchise
b. patent
c. trademark
d. copyright
81. Cook Co. incurred the following costs related to the office building used in operating its sports supply company:
(a) Replaced a broken window.
(b) Replaced the roof that had been on the building for 23 years.
(c) Serviced all the air conditioners before summer started.
(d) Replaced the air conditioners with refrigerated air conditioners in the customer service areas.
(e) Added a warehouse to the back of the building.
(f) Repainted the interior walls.
(g) Installed window shutters on all windows.
Classify each of the costs as a capital expenditure or a revenue expenditure.
82. A company acquired a truck for $79,000 at the beginning of the fiscal year. It has a useful life of five years and a
residual value of $9,000. The company uses the straight-line method of depreciation. After owning the truck for two
years, the company sold it for $34,000. (a) Determine depreciation expense for each of the first two years, and (b)
determine the gain or loss resulting from the sale.
83. A company purchased a photocopy machine for $16,000. It has a useful life of four years and a residual value of
$1,000. Compute depreciation for the second year under each of the following methods: (a) straight-line and (b) double-
declining-balance.
84. For each of the following items, indicate whether the transactions increased (+), decreased (–) or had no effect (0) by
inserting the appropriate symbol.
Net
Income
Assets
Liab. Owners'
Equity Cash
Flows
(a) Sold equipment for cash at a gain
(b) Recorded amortization expense on patents
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(c) Paid cash for minor repairs to an asset
(d) Recorded a revenue expenditure incurred on account
(e) Paid cash to remove old building from land being prepared for use
85. Determine the cost of the land, based on the following data.
Land purchase price $90,000
Broker's commission 7,500
Payment for the demolition and removal of existing building 2,500
Cash received from the sale of materials salvaged from the demolished building 500
86. A company made some expensive repairs to equipment and buildings during the past year. (a) What criteria is used in
determining whether the repairs are capital expenditures or revenue expenditures, and (b) what is the effect on the
company's financial statements if they are incorrectly recorded as capital expenditures?
87. You have been hired by a high-growth startup company to assist in the determination of what depreciation method to
employ for financial reporting. The company's fixed assets are equally divided among buildings and high-tech equipment
(heavily used in the initial years).
(a) Can the company select different methods of depreciation for financial reporting? Explain.
(b) Explain to company management which method of depreciation would be suitable for each type of fixed assets the
company employs. Also, state why.
(c) Which method of depreciation would the company choose for taxes? Explain why.
88. Identify the following as a Fixed Asset (FA), Intangible Asset (IA), Natural Resource (NR), or None of these (N).
(a) Computer
(b) Patent
(c) Oil reserve
(d) Goodwill
(e) U.S. Treasury note
(f) Land used for employee parking
(g) Gold mine
89. A pressurized spray painter was purchased on April 1 of the fiscal year for $3,900. It has a useful life of four years and
a residual value of $300. Determine depreciation expense for the first two years, assuming a fiscal year end of December
31 and using (a) the straight-line method and (b) the double-declining-balance method.
90. You are examining the financial statements of a company. You observe patent amortization expense of $1.5 million
and a loss on impairment of goodwill for $25 million.
(a) Describe how the accountants arrived at these amounts.
(b) Interpret any information provided by these disclosures.
91. For each of the following items, indicate whether the transactions increased (+), decreased (–) or had no effect (0) by
inserting the appropriate symbol.
Net
Income
Assets
Liab. Owners'
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Equity Cash
Flows
(a) Record depreciation expense
(b) Sold equipment for cash at a loss
(c) Recorded loss on impaired goodwill
(d) Recorded depletion expense
(e) Recorded a capital expenditure and issued a note payable
92. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c) Buildings, (d)
Machinery and Equipment, or (e) Other accounts.
(1) Cost of paving parking area for employees and customers
(2) Insurance during construction of building
(3) Interest incurred on money borrowed for construction of building
(4) Fee paid for installation of equipment
(5) Special foundation for new equipment acquired
(6) Transit insurance on new equipment
(7) Freight charges on new equipment
(8) Cost of repairing vandalism damage to equipment during installation
(9) Sales tax on new equipment
(10) Cost incurred in repairing damage resulting from installation of new equipment
(11) Cost of landfill for building site
(12) Cost of lubricating oil purchased for periodic oil changes for equipment
(13) Parking lot lighting
(14) Installing a fence around the parking lot
(15) Repainting the trim on a building
(16) Special assessment paid to city for extension of water main to the property
(17) Cost of razing and removing the old building on property acquired for a building site
(18) Delinquent real estate taxes assumed by purchaser on property acquired for a building site
(19) Attorney's fee for title search
(20) Architect's fee for building plans and supervision of construction
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Answer Key
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