21
66) The following financial information is from Cook Company:
Accounts Payable
$
55,000
Land
$
90,000
Inventory
$
10,500
Accounts Receivable
$
7,500
Equipment
$
8,000
Deferred Revenue
$
58,500
Short-Term Investments
$
20,000
Notes Receivable (due in 8 months)
$
45,500
Interest Payable
$
2,000
Patents
$
75,000
What is the total amount of property, plant, and equipment assuming the accounts above reflect
normal activity?
A) $90,000.
B) $98,000.
C) $165,000.
D) $110,000.
22
67) The following financial information is from Cook Company:
Accounts Payable
$
55,000
Land
$
90,000
Inventory
$
10,500
Accounts Receivable
$
7,500
Equipment
$
8,000
Deferred Revenue
$
58,500
Short-Term Investments
$
20,000
Notes Receivable (due in 8 months)
$
45,500
Interest Payable
$
2,000
Patents
$
75,000
What is the amount of intangible assets assuming the accounts above reflect normal activity?
A) $95,000.
B) $75,000.
C) $120,500.
D) $140,500.
68) The following financial information is from Cook Company:
Accounts Payable
$
55,000
Land
$
90,000
Inventory
$
10,500
Accounts Receivable
$
7,500
Equipment
$
8,000
Deferred Revenue
$
58,500
Short-Term Investments
$
20,000
Notes Receivable (due in 8 months)
$
45,500
Interest Payable
$
2,000
Patents
$
75,000
What is the total amount of long-term assets assuming the accounts above reflect normal activity?
A) $342,500.
B) $173,000.
C) $273,500.
D) $98,000.
69) The legal life of a patent is:
A) Forty years.
B) Twenty years.
C) Life of the inventor plus fifty years.
D) Indefinite.
70) An exclusive 20-year right to manufacture a product or to use a process is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
71) The exclusive right to benefit from a creative work, such as a film, is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
72) A word, slogan, or symbol that distinctively identifies a company, product, or service is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
73) The exclusive right to use another company’s name and to sell its products within a specified
geographical area is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
74) Research and development costs should be:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Deferred pending determination of success.
D) Expensed if unsuccessful, capitalized if successful.
75) Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug
to cure liver damage. By the end of the year, management feels confident that the new drug will
gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on
this year’s financial statements?
A) Increase Assets.
B) Decrease Revenues.
C) Increase Expenses.
D) Increase Revenues.
76) Suppose a company spends $100,000 on research and development in 2021. As a result of the
products developed, additional revenue is generated over the next five years totaling $600,000.
When is the cost of the research and development in 2021 recognized as an expense?
A) Evenly over the period 2022–2026.
B) Full amount in 2026.
C) Evenly over the period 2021–2025.
D) Full amount in 2021.
77) Suppose a company spends $100,000 in the current year to research and develop a safety
device for motorcycles. By the end of the year, the company estimates that the new safety device
has an 80% chance of generating $300,000 in revenues from sales to customers over the next five
years. For what amount would Research and Development Expense be reported in the current
year?
A) $100,000.
B) $80,000.
C) $20,000.
D) $0.
78) Aspen, Inc. developed a new horse transport device and incurred research and development
costs of $250,000. Rather than continue with its own research, Aspen decided to purchase a patent
for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these
developments?
A) Assets $600,000; Expenses $0.
B) Assets $250,000; Expenses $350,000.
C) Assets $350,000; Expenses $250,000.
D) Assets $0; Expenses $600,000.
79) Research and development costs should be capitalized when the:
A) Future benefit is probable and the amount can be reasonably estimated.
B) Future benefit is reasonably possible and the amount can be reasonably estimated.
C) Future benefit is probable and the amount cannot be reasonably estimated.
D) None of these answer choices are correct.
80) Bio-Lab Pharmaceuticals was engaged in a project to develop a new drug that would
dramatically shorten the recovery period of influenza. The project cost the company $150,000
before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab
then spent $300,000 on another project to develop a shot that would achieve the same goal, and the
company is confident in gaining FDA approval and in generating profits from the shot. What
amount would be expensed for these projects?
A) $0.
B) $150,000.
C) $300,000.
D) $450,000.
81) Goodwill is:
A) Amortized over the greater of its estimated life or forty years.
B) Only recorded by the seller of a business.
C) The value of a business as a whole, over and above the value of its net identifiable assets.
D) Recorded when created internally through advertising expense.
82) In accounting, goodwill
A) May be recorded whenever a company achieves a level of net income that exceeds the industry
average.
B) Is amortized over its useful life.
C) May be recorded when a company purchases another business.
D) Must be expensed in the period it is recorded because benefits from goodwill are difficult to
identify.
83) In accounting, goodwill
A) Is never recorded.
B) May be recorded when a company’s level of net income exceeds the industry average.
C) Must be expensed in the period when it is acquired.
D) May be recorded when the company purchases another business.
84) Which of the following is true concerning goodwill?
A) Goodwill can never be recorded.
B) Goodwill is recorded when a company is purchased for more than the fair value of its
identifiable net assets.
C) Goodwill is recorded when the market value of a company exceeds the fair value of its
identifiable net assets.
D) Goodwill is recorded as a revenue in the income statement.
30
85) The balance sheet of Cattleman’s Steakhouse shows assets of $86,400 and liabilities of
$15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000.
Longhorn paid Cattleman’s $95,000 to acquire all of its assets and liabilities. Longhorn should
record goodwill on this purchase of:
A) $3,600.
B) $5,000.
C) $20,000.
D) $23,600.
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86) Northern purchased the entire business of Southern including all its assets and liabilities for
$600,000. Below is information related to the two companies:
Northern
Southern
Fair value of assets
$
1,050,000
$
800,000
Fair value of liabilities
575,000
300,000
Reported assets
800,000
650,000
Reported liabilities
500,000
250,000
Net Income for the year
60,000
50,000
How much goodwill did Northern pay for acquiring Southern?
A) $100,000.
B) $300,000.
C) $200,000.
D) $150,000.
Purchase price
$
600,000
Less: Fair value of net assets:
Assets
$
800,000
Less: Liabilities assumed
300,000
(500,000
)
Goodwill
$
100,000
32
87) Vikings Inc. reports the following amounts:
Book Value
Fair Value
Assets
$
400,000
$
500,000
Liabilities
45,000
45,000
Net income
25,000
How much goodwill would be recorded if Torretta Holdings purchases Vikings, assuming its
liabilities, for $635,000?
A) $255,000.
B) $280,000.
C) $180,000.
D) $100,000.
Purchase price
Less: Fair value of net assets:
Assets
$
Less: Liabilities assumed
(455,000
)
Goodwill
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88) Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $850,000
cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and
liabilities were:
Book Value
Fair Value
Current assets (net)
$
130,000
$
125,000
Property, plant, equip. (net)
600,000
750,000
Liabilities
175,000
175,000
Lake would record goodwill of:
A) $0.
B) $150,000.
C) $345,000.
D) $850,000.
Purchase price
$
Less: Fair value of net assets:
Assets ($125,000 + 750,000)
$
Less: Liabilities assumed
(700,000
)
Goodwill
$
89) A company has the following expenditures during the year.
Advertising
$
100,000
Employee training
80,000
Customer outreach and consultation
50,000
The company believes that these efforts have increased the fair value of the entire company by
$325,000. How much goodwill can the company recognize at the end of the year associated with
these expenditures?
A) $0.
B) $80,000.
C) $230,000.
D) $325,000.
90) Which of the following subsequent expenditures would be capitalized?
A) Ordinary repair.
B) Costs that increase the service life of an asset.
C) Routine maintenance.
D) Ordinary repair and routine maintenance.
91) Which of the following subsequent expenditures would be capitalized?
A) Ordinary repairs and maintenance.
B) Additions.
C) Improvements.
D) Additions and improvements.
92) The cost of an engine tune-up is an example of which of the following expenditures after
acquisition?
A) Ordinary repairs and maintenance.
B) Additions.
C) Improvements.
D) Capitalized costs.
93) Which of the following subsequent expenditures would not be capitalized?
A) Ordinary repairs and maintenance.
B) Additions.
C) Improvements.
D) Successful legal defense of intangible assets.
94) The cost of replacing a major component on a piece of equipment is an example of:
A) Repairs and maintenance.
B) Improvements.
C) Additions.
D) An expenditure that only benefits the current period.
95) Adding a refrigeration unit to a delivery truck that previously did not have this capability is an
example of:
A) Repairs and maintenance.
B) Additions.
C) Improvements.
D) An expenditure that only benefits the current period.
96) The purchase of a new cooling system for $150,000 to upgrade an office building owned by the
company would be accounted for as:
A) Goodwill.
B) An addition in the Buildings account.
C) An expense in the period of the purchase.
D) A patent.
97) Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods’
accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will
be the effect on Woods’ financial statements?
A) No, the repair was accounted for correctly.
B) Yes, the error overstated assets and net income.
C) Yes, in the years following, net income will be overstated.
D) Yes, the error understated net income.
98) The replacement of a major component increased the productive capacity of equipment from
10 units per hour to 18 units per hour. The expenditure for the replacement component should be
debited to:
A) Repairs Expense.
B) Maintenance Expense.
C) Equipment.
D) Gain from Repairs.
99) Which of the following subsequent expenditures would not be capitalized?
A) Unsuccessful legal defense of intangible assets.
B) Additions.
C) Improvements.
D) Successful legal defense of intangible assets.
100) Which of the following statements accurately describes depreciation?
I. Depreciation is used to allocate the cost of the asset over periods benefited.
II. Depreciation is used to track the fair value of the asset.
III. The book value of an asset is its original cost less accumulated depreciation.
A) I and III
B) I and II
C) II and III
D) All of these statements are correct.
101) Which one of the following regarding the book value of an asset is correct?
A) It is the fair value of the asset if the asset is sold.
B) It reflects the original cost of the asset less accumulated depreciation.
C) It is the original cost of the asset minus the depreciation expense for that asset during the year.
D) It is the original cost at which the asset was purchased.
102) Which of the following is considered a “contra” account?
A) Deferred Revenue.
B) Goodwill.
C) Accumulated Depreciation.
D) Cost of Goods Sold.
103) The factors used to compute depreciation expense are an asset’s:
A) Cost, residual value, and physical life.
B) Cost, residual value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, replacement value, and service life.
104) The depreciable cost used in calculating depreciation expense is:
A) Its service life.
B) The amount allowable under tax depreciation methods.
C) The difference between its replacement value and cost.
D) The asset’s cost minus its estimated residual value.
105) Which depreciation method generally will result in the greatest amount of depreciation
expense in the first year of the asset’s life?
A) Straight-line.
B) Double-declining balance.
C) Activity-based.
D) Capitalization.
40
106) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is
expected to have a five-year service life, with a residual value of $5,000 at the end of five years.
Using the straight-line method, depreciation expense for 2021 would be:
A) $12,000.
B) $11,000.
C) $60,000.
D) None of these.
107) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is
expected to have a five-year service life, with a residual value of $5,000 at the end of five years.
Using the straight-line method, the book value at December 31, 2021, would be:
A) $44,000.
B) $49,000.
C) $55,000.
D) $60,000.