7.5-3 Amortization is usually computed on a units-of-production basis.
7.5-4 Goodwill is recognized only when the purchase price exceeds the value of the net liabilities in the
acquisition of another company.
7.5-5 Goodwill may arise when the purchaser buys another company that has higher than normal earning
power.
7.5-6 A trademark may have an indefinite life and, therefore, not be amortized.
7.5-7 Research and development costs are expensed over their useful or legal life.
7.5-8 If at the end of the year, goodwill is worth more than at the beginning of the year, then an entry must be
made to increase the goodwill.
7.5-9 Amortization is most closely associated with which asset?
A) Copyright
B) Building
C) Natural gas lease
D) All of the above
7.5-10 Which of the following statements regarding intangible assets is NOT true?
A) Intangible assets are long-lived assets with no physical form.
B) Intangible assets are recorded at their acquisition cost.
C) Intangible assets with a finite life are not amortized.
D) Intangible assets with an indefinite life are not amortized.
Copyright © 2018 Pearson Education
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7.5-11 Amortization expense:
A) is the title of the expense associated with natural resources.
B) is recorded for intangible assets with a finite life.
C) is not recorded for assets with an indefinite life.
D) cannot be credited directly to the asset account.
7.5-12 Intangible assets with indefinite lives:
A) are not amortized.
B) are checked annually for any loss in value.
C) include goodwill.
D) are all of the above.
7.5-13 All of the following are intangible assets EXCEPT:
A) trademarks.
B) copyrights.
C) goodwill.
D) natural gas.
7.5-14 All of the following assets should be amortized EXCEPT:
A) franchises.
B) goodwill.
C) patents.
D) any of the above.
7.5-15 Patents are amortized over a period:
A) of 40 years or the expected useful life, whichever is less.
B) of 20 years or the expected useful life, whichever is less.
C) that must exceed 40 years.
D) of 1 year—that is, patents are expensed immediately.
7.5-16 The entry to amortize a patent includes a credit to:
A) Patent.
B) Accumulated Amortization—Patent.
C) Amortization Expense—Patent.
D) none of these, as a patent is not amortized.
7.5-17 The entry to record amortization:
A) increases total assets and decreases total equity.
B) decreases total assets and increases total equity.
C) decreases both total assets and total equity.
D) increases both total assets and total equity.
7.5-18 All of the following statements are true about goodwill EXCEPT:
A) goodwill is only recorded when it is purchased in the acquisition of another company.
B) goodwill is not amortized.
C) in rare cases, companies can record goodwill that they create for their own business.
D) goodwill has an indefinite life.
7.5-19 If a company has goodwill on its books:
A) it is amortized over a period not to exceed 40 years.
B) each year, the company must determine if the purchased goodwill has increased and then write it up
to the new value.
C) if goodwill has decreased in value, a loss must be recorded.
D) it has a definite life.
7.5-20 If goodwill has decreased in value, it is said to be:
A) worthless.
B) impaired.
C) amortized.
D) a capital expenditure.
7.5-21 Godert Pharmaceutical Company has many scientists working in the labs trying to develop an anti-aging
drug. The cost of this research and development must be:
A) expensed as incurred.
B) set up as an intangible asset and amortized over 20 years.
C) set up as an intangible and tested for impairment on a yearly basis
D) not be handled in any of the above ways.
7.5-22 ABC Corporation acquired a patent for $120,000. The patent has a legal life of 20 years. Because of
changing technology, the patent is expected to generate revenue for only 6 years. The annual
amortization expense for the patent is:
A) $6,000.
B) $20,000.
C) $0, because the patent cost should be expensed when the patent is purchased.
D) $0, because the patent is not amortized.
7.5-23 Research and development costs incurred by a company should be:
A) capitalized and depreciated over a period not to exceed 20 years.
B) capitalized and amortized over the useful life of the asset.
C) either capitalized and depreciated or expensed immediately at the option of the accountant.
D) expensed on the current year’s income statement.
7.5-24 The protection against copying computer software programs comes from a:
A) patent.
B) trademark.
C) copyright.
D) license.
7.5-25 In 20X7, First Company purchased Second Company for $16,000,000 cash. At the time of purchase
Second Company had $18,500,000 in assets and liabilities of $11,000,000. The 20X7 balance sheet for
First Company should show goodwill of:
A) $10,500,000.
B) $8,500,000.
C) $3,500,000.
D) $0.
7.5-26 Needles Company purchased Boston Company on August 31, 20X6. Needles recorded goodwill in the
purchase of Boston and has determined that the Boston goodwill will have an indefinite life. How will
Needles account for the Boston goodwill in future accounting periods?
A) Needles will amortize the Boston goodwill over a 50-year life.
B) If the value of the Boston goodwill increases in subsequent years, Needles will increase the value in
the Boston Goodwill account.
C) If the value of the Boston goodwill decreases in subsequent years, Needles will decrease the value in
the Boston Goodwill account.
D) Needles is not allowed to change the value of the Boston Goodwill account regardless of any future
increase or decrease in the value of Boston goodwill.
7.6-1 Depreciation of PPE is reported as an investing activity on the statement of cash flows.
7.6-2 The purchase of equipment on account will appear on the statement of cash flows as a financing activity.
7.6-3 Depletion will appear on the statement of cash flows as a financing activity.
7.6-4 Depreciation expense is:
A) added to the investing activities on a statement of cash flows.
B) added to net income on a statement of cash flows, since it decreases net income but does not involve
an outflow of cash.
C) subtracted from net income on a statement of cash flows, since it decreases net income but does not
involve an outflow of cash.
D) subtracted from the investing activities on a statement of cash flows.
7.6-5 Equipment that had a book value of $6,000 is sold for $20,000 cash. The statement of cash flows will
report a:
A) $20,000 inflow in the investing activities section.
B) $20,000 cash inflow in the financing activities section.
C) $20,000 cash outflow in the investing activities section.
D) $14,000 inflow in the operating activities section.
7.6-6 Equipment is acquired by issuing a note payable for $57,000 and a down payment of $30,000. The
statement of cash flows will report a:
A) $30,000 inflow in the operating activities section.
B) $57,000 inflow in the investing activities section.
C) $57,000 cash inflow in the financing activities section.
D) $30,000 cash outflow in the investing activities section.
7.6-7 Farmer’s Corp. has the following items that the controller is uncertain of where to place on the statement
of cash flows:
Net Income
$ 81,000
Sale of PPE
125,000
Depreciation Expense
35,000
Purchase of PPE
180,000
A total of $_________ would appear in the Investing Activities section.
A) $305,000
b. $116,000
c. ($55,000)
d. ($46,000)
7.6-8 Farmer’s Corp. has the following items that the controller is uncertain of where to place on the statement
of cash flows:
Net Income
$ 81,000
Sale of PPE
125,000
Depreciation Expense
35,000
Purchase of PPE
180,000
Using the indirect method, how much would appear in the Operating Activities section?
A) $305,000
B. ($55,000)
C. ($46,000)
D. $116,000
7.6-9 Using the indirect method, the main types of PPE transactions that appear on the Statement of Cash
Flows in operating and investing activities are:
A. acquisitions, sales and depreciation.
B. acquisitions and sales.
C. sales and depreciation.
D. acquisitions and depreciation.