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Chapter 7
b.
Both profitability and liquidity will decrease.
c.
Profitability will increase, whereas liquidity will remain unaffected.
d.
Liquidity will decrease, whereas profitability will increase.
75. 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.
Chapter 7
76. Fixed assets are ordinarily presented on the balance sheet:
a.
at its current market value.
b.
at its replacement cost.
c.
at its cost less accumulated depreciation.
d.
under intangible assets.
77. 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.
d.
It measures the profits generated by the fixed and current assets of the company.
Chapter 7
78. 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
79. 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.
Chapter 7
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80. 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
81. 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.
Chapter 7
(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.
82. 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
Chapter 7
83. 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?
84. 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.
Chapter 7
85. A pressurized spray painter was purchased on April 1 of the fiscal year for $3,900. It has a useful life of 4 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.
Chapter 7
86. A company purchased a photocopy machine for $16,000. It has a useful life of 4 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.
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.
Chapter 7
88. A company acquired a truck for $79,000 at the beginning of the fiscal year. It has a useful life of 5 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.
89. A machine with a useful life of 6 years and a residual value of $3,000 was purchased at the beginning of year 1 for
$30,000. The machine was sold for $15,000 on April 1 in year 4.
(a)
What was the book value of the machine at the end of year 3 assuming the straight-line
method of depreciation is used?
(b)
Illustrate the effects on the accounts and financial statements of the depreciation from
January 1 to April 1 of year 4.
(c)
Illustrate the effects on the accounts and financial statements of the sale of the machine on
April 1.
Chapter 7
90. Machine with a useful life of 5 years and a residual value of $6,000 was purchased on January 3, 2016, for $48,500.
The machine was sold on January 5, 2021, for $13,000.
(a)
What is the book value of the machine on January 5, 2021, assuming straight-line
depreciation is used?
(b)
Illustrate the effects on the accounts and the financial statements of the sale of the machine
on January 5, 2021.
(c)
Illustrate the effects on the accounts and the financial statements of the sale of the machine if
it had been sold for $18,000 instead.
Chapter 7
91. A company acquired mineral rights for $7,500,000. The mineral deposit is estimated at 600,000 tons and during the
year 100,000 tons were extracted and sold.
(a)
Calculate depletion expense for the year.
(b)
Show the effects of (a) on the accounts and the financial statements of the company.
(c)
What is the book value of the mineral rights at the end of the current year?
Chapter 7
92. During 2016, Lexie, Inc. acquired Lena, Inc. for $10,000,000. The fair market value of the net assets of Lena, Inc. was
$8,500,000 on the date of purchase. During 2019, Lexie, Inc. determined the goodwill resulting from the Lena acquisition
was impaired and had a value of $1,000,000.
(a)
Determine the amount of goodwill implied during 2016.
(b)
Illustrate the effects on the accounts and the financial statements of the December 31,
2019, adjustment for the goodwill impairment.
93. For each of the following items indicate whether the transactions listed below increased (+), decreased (–) or had no
effect (0) by inserting the appropriate symbol.
Net
Income
Assets
Liab.
Owners'
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
ANSWER:
Chapter 7
94. For each of the following items indicate whether the transactions listed below 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
(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
Chapter 7
95. 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.
Chapter 7
96. 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
Chapter 7
