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Chapter 7
42. Which method of depreciation considers residual value in computing the normal periodic depreciation?
a.
Straight-line
b.
MACRS
c.
Double-declining-balance
d.
Accelerated
43. 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 asset is sold in the used-asset market.
Chapter 7
44. The Modified Accelerated Cost Recovery System is used to:
a.
compute income for audit reporting.
b.
compute depreciation for tax purposes.
c.
report liabilities.
d.
ascertain break-even point.
45. Recording depreciation:
a.
decreases liability and cash flow.
b.
decreases net income but has no effect on cash flows.
c.
decreases capital and operating expense.
d.
decreases retained earning but has no effect on fixed assets.
Chapter 7
46. To measure depreciation, which of the following must be known?
a.
market value of asset.
b.
fixed asset turnover
c.
cost of asset.
d.
the amount of cash to replace fixed asset
47. A machine was purchased for $68,000. It has a useful life of 5 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
Chapter 7
48. An equipment was purchased for $15,000. It has a useful life of 5 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
b.
$6,000
c.
$2,200
d.
$2,600
49. A 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 5 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
Chapter 7
50. An equipment was purchased for $30,000. It has a useful life of 5 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
51. On September 1, a machine was purchased for $47,000 with a useful life of 8 years, and a residual value of $3,000.
What is the depreciation expense in the year of purchase under straight-line method, assuming a December 31 year-end?
a.
$3,917
b.
$3,667
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c.
$1,958
d.
$1,833
52. 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.
53. 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.
Chapter 7
a.
$3,550
b.
$4,150
c.
$5,800
d.
$2,950
54. 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.
Chapter 7
55. Losses on discarding fixed assets are _____.
a.
opportunity costs
b.
non-operating items
c.
capital expenditures
d.
accumulated depreciation
56. 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
Chapter 7
57. 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.
58. 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.
Chapter 7
59. 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 for $8,200.
d.
a loss for $10,000.
60. 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 for $15,800.
b.
a loss for $1300.
c.
a total decrease in office furniture for $2,800.
d.
a decrease in cash for $1,300.
Chapter 7
61. 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
62. A company purchased an oil well for $10 million. It is estimated that 5 million barrels can be extracted from the well.
Determine depletion expense assuming 4 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
Chapter 7
63. 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.
64. A drilling company purchased a mining site for $450,000 on July 1, 2016. The company expects to mine ore for the
next 10 years and anticipates that a total of 80,000 tons will be recovered. During 2016, the company extracted 5,800 tons
of ore. The depletion expense for the year 2016 is:
a.
$45,000.
b.
$50,800.
c.
$5,860.
d.
$32,625.
Chapter 7
65. Which of the following is the effect of recording a depletion expense on the profitability and liquidity metrics of a
company?
a.
Its free cash flow and asset turnover remains unaffected.
b.
Its asset turnover decreases.
c.
Its asset turnover increases.
d.
Its free cash flow decreases.
66. 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.
Chapter 7
67. Which of the following is not an intangible asset?
a.
Goodwill
b.
Trademark
c.
Copyright
d.
Long-term receivable
68. Which of the following intangible assets are amortized over their useful life?
a.
Trademarks
b.
Goodwill
c.
Patents
d.
All of the above
Chapter 7
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69. 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.
70. The exclusive right to use a certain name or symbol is called a:
a.
franchise.
b.
patent.
c.
trademark.
d.
copyright.
Chapter 7
71. 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
72. Research and development costs incurred for developing patents are recorded as:
a.
current operating expenses.
b.
long-term operating assets.
Chapter 7
c.
accrued expenses.
d.
working capital.
73. 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.
74. Which of the following is the effect of impaired goodwill on liquidity and profitability metrics?
a.
Both profitability and liquidity will remain unaffected.
