49) Which of the following is true when a company constructs an asset for its own use?
A) Labor and material expenses for construction will increase.
B) Capitalized interest on construction loans will increase interest expense.
C) Assets will increase for labor, material, and interest costs paid for constructing the asset.
D) Net income will be decreased for capitalized costs of construction.
50) A company acquires land by issuing 10,000 shares of its $10 par value common stock which
is currently trading at $20 per share, and the appraised value of the land is $250,000. Which of
the following statements correctly describes the recording of the land?
A) Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the
issued stock is currently worth $200,000.
B) Record the land at the $200,000 value of the consideration given up.
C) Record the land at the average of its appraised value of $250,000 and the $200,000 value of
the stock issued, thereby recognizing a $25,000 gain.
D) Record the land at the par value of the stock given up, $100,000.
51) If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure,
instead of as repairs and maintenance expense, which of the following statements is true?
A) The current year’s net income will be lower and future depreciation expense will be higher.
B) The current year’s net income will be higher and future depreciation expense will be lower.
C) The current year’s net income will be higher and future depreciation expense will be higher.
D) The current year’s net income will be lower and future depreciation expense will be lower.
52) Which of the following statements is incorrect?
A) Ordinary repairs and maintenance decrease net income.
B) Capital expenditures decrease assets.
C) Ordinary repairs and maintenance are recurring in nature.
D) Additions and improvements to a depreciable asset occur infrequently.
53) Which of the following statements is incorrect?
A) Replacement of a truck’s tires would be a capital expenditure.
B) Replacement of carpet in an office, damaged by a coffee spill, would be a repairs expense.
C) Replacement of a roof on a newly purchased building before using it as a store would be a
capital expenditure.
D) The cost of repainting a hallway would be maintenance expense.
54) Gilbert Company made an ordinary repair to a delivery truck during 2019 at a cost of $500
and capitalized the repair cost. What is the effect on the 2019 financial statements as a result of
the incorrect capitalization?
A) The financial statements are not affected.
B) Assets are understated and net income is overstated.
C) Assets are overstated and net income is overstated.
D) Assets and stockholders’ equity are both understated.
55) Which of the following would most likely not be recorded as ordinary repairs and
maintenance?
A) Fixing a tear in the carpet in the sales department offices.
B) Mending a leaky roof.
C) Putting a hydraulic lift on a delivery truck, making it easier and quicker to deliver appliances.
D) Painting the exterior of the factory building.
56) What is the effect on the 2019 financial statements when a capital expenditure during 2019
was incorrectly recorded as a repairs and maintenance expense?
A) The financial statements are not affected.
B) Assets and net income are both overstated.
C) Assets are overstated and net income was understated.
D) Assets and stockholders’ equity are both understated.
57) Which of the following best describes the objective of depreciation?
A) To allocate the cost of a tangible asset to the periods in which its use contributes to earning
revenue.
B) To estimate the remaining useful life of the asset.
C) To report the asset on the balance sheet at the estimated amount for which the asset could be
sold on the balance sheet date.
D) To estimate the current market value of the asset.
58) Which of the following is correct?
A) If a company fails to record depreciation expense, net income and expenses are overstated.
B) If a company fails to record depreciation expense, net income and assets are overstated.
C) If a company overstates depreciation expense, net income is overstated and assets are
understated.
D) If a company fails to record depreciation expense, stockholders’ equity, net income, and assets
are understated.
59) Which of the following does not properly describe the depreciation process?
A) It is an allocation process.
B) It is consistent with the matching principle.
C) It involves the use of estimates.
D) It attempts to determine an asset’s market value.
60) Which of the following describes the effect of recording depreciation expense at year-end?
A) Net income decreases and total assets decrease.
B) Total assets decrease and stockholders’ equity is not affected.
C) Net income decreases and total assets increase.
D) Stockholders’ equity is not affected and net income decreases.
61) On January 1, 2019, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also
paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years
and the residual value is $5,000.
How much is the annual depreciation expense, assuming use of the straight-line depreciation
method?
A) $6,100.
B) $6,000.
C) $5,950.
D) $5,750.
62) On January 1, 2019, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also
paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years
and the residual value is $5,000.
If Woodstock uses the straight-line depreciation method, which of the following statements is
incorrect?
A) The annual depreciation expense is $6,000.
B) The December 31, 2019 book value is $35,000.
C) The December 31, 2021 accumulated depreciation balance is $18,000.
D) The December 31, 2020 book value is $24,000.
63) A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis
of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life
is
A) 3 years.
B) 4 years.
C) 5 years.
D) 6 years.
64) Warren Company plans to depreciate a new building using the double declining-balance
depreciation method. The building cost is $800,000. The estimated residual value of the building
is $50,000 and it has an expected useful life of 25 years.
What is the building’s book value at the end of the first year?
A) $736,000.
B) $768,000.
C) $686,000.
D) $690,000.
65) Warren Company plans to depreciate a new building using the double declining-balance
depreciation method. The building cost is $800,000. The estimated residual value of the building
is $50,000 and it has an expected useful life of 25 years.
Assuming the first year’s depreciation expense was recorded properly, what would be the amount
of depreciation expense for the second year?
A) $30,720.
B) $32,000.
C) $58,880.
D) $64,000.
66) Which method of depreciation results in periodic depreciation expense that fluctuates from
one period to the next, not necessarily in a steadily upward or downward direction?
A) Straight-line.
B) Units-of-production.
C) Modified accelerated cost recovery system.
D) Declining balance.
67) Hill Inc. purchased an asset on January 1, 2019. Hill chose an accelerated depreciation
method to depreciate the asset. Which of the following is correct if Hill would have chosen the
straight-line depreciation method instead?
A) Depreciation expense would have been lower in 2019.
B) The book value of the asset would have been lower at the end of 2019.
C) Net income would have been lower during 2019.
D) The accumulated depreciation balance would have been higher at the end of 2019.
68) On January 1, 2019, Pyle Company purchased an asset that cost $50,000 and had no
estimated residual value. The estimated useful life of the asset is 8 years and straight-line
depreciation is used. An error was made in 2019 because the total amount of the asset’s cost was
debited to an expense account for 2019 and no depreciation was recorded. Pretax income for
2019 was $42,000. How much is the correct 2019 pretax income?
A) $35,750.
B) $48,250.
C) $85,750.
D) $92,000.
69) Schager Company purchased a computer system on January 1, 2019, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance depreciation method.
How much is the 2020 depreciation expense?
A) $5,000.
B) $4,120.
C) $4,000.
D) $3,520.
70) Schager Company purchased a computer system on January 1, 2019, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance depreciation method.
What is the accumulated depreciation balance as of December 31, 2020?
A) $9,000.
B) $4,000.
C) $7,920.
D) $8,520.
71) On January 1, 2019, Wasson Company purchased a delivery vehicle costing $40,000. The
vehicle has an estimated 6-year life and a $4,000 residual value.
What is the vehicle’s book value as of December 31, 2020, assuming Wasson uses the straight-
line depreciation method?
A) $12,000.
B) $24,000.
C) $30,000.
D) $28,000.
72) On January 1, 2019, Wasson Company purchased a delivery vehicle costing $40,000. The
vehicle has an estimated 6-year life and a $4,000 residual value.
Wasson uses the units-of-production depreciation method and Wasson estimates that the vehicle
will be driven 100,000 miles. What is the vehicle’s book value as of December 31, 2020,
assuming the vehicle was driven 10,000 miles during 2019 and driven 18,000 miles during 2020?
A) $29,920.
B) $28,800.
C) $24,800.
D) $25,920.
73) Which of the following statements is false?
A) The book value at the end of an asset’s useful life will be the same under all the depreciation
methods allowed under GAAP.
B) The balance in the accumulated depreciation account will be the same at the end of an asset’s
useful life under all the methods allowed under GAAP.
C) Once a company selects a depreciation method, it must use this method for all depreciable
assets.
D) The annual depreciation expense and year-end book values will differ under the various
depreciation methods over the life of the asset.
74) Under what conditions would a company most likely adopt the double-declining-balance
method for financial reporting?
A) The company has high technology, robotic equipment in its plant that becomes obsolete
quickly and declines in utility to the company more rapidly in the early years of the assets’ lives.
B) The company wants to maximize its net income during the earlier years of the asset’s life.
C) The company wants to maximize the asset’s book value in the earlier years of the asset’s life.
D) The company wants to maximize the total depreciation expense over the life of the asset.
75) Which of the following statements is correct?
A) Companies will change the method of depreciating assets from one year to the next to reflect
usage of an asset.
B) Companies can maximize net income in the first year of an asset’s life by selecting the
double-declining-balance method rather than the straight-line depreciation method.
C) Companies can use one method of depreciation for some of their long-lived productive assets
but then use a different method for another group or type of long-lived productive assets.
D) Companies can minimize an asset’s book value in the first year of use by selecting the
straight-line depreciation method rather than the double-declining-balance method.
76) Which of the following statements is correct?
A) Using straight-line depreciation in comparison to an accelerated depreciation method will
result in a lower reported amount of total assets at end of the first year of an asset’s life.
B) Using accelerated depreciation in the first year of an asset’s life will result in a higher net
income during the first year compared to using the straight-line depreciation method.
C) Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for
the first year.
D) Using straight-line depreciation in comparison to an accelerated depreciation method will
lead to a higher book value at the end of an asset’s life.
77) Which of the following statements about the Modified Accelerated Cost Recovery System
(MACRS) is correct?
A) It is similar to the units-of-production depreciation method.
B) It is applied using longer asset lives than the estimated useful lives required by GAAP.
C) It provides a short-term tax benefit because of the higher depreciation expense reported in the
early years of an asset’s life.
D) It is acceptable for use when preparing financial statements.
78) Which of the following statements about asset impairments is false?
A) Asset impairment loss is the difference between an asset’s net book value and its estimated
future cash flows.
B) If an asset is impaired, a loss would be recognized in the period it can be estimated.
C) Impairment will lead to writing down the asset’s net book value.
D) Asset impairment occurs when the estimated future cash flows are less than the asset’s net
book value.
79) A company has some bottling equipment which cost $8.5 million, has a net book value of
$4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million.
How much is the asset impairment loss?
A) $5.4 million.
B) $4.1 million.
C) $0.4 million.
D) $1.0 million.
80) A company has some bottling equipment which cost $8.5 million, has a net book value of
$4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million.
Which of the following correctly describes the recording of the asset impairment loss?
A) The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.
B) The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.
C) The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.
D) The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.
81) On December 31, 2019, Hamilton Inc. sold a used industrial crane for $600,000 cash. The
original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million
on December 31, 2019. What is the gain or loss from the December 31, 2019 equipment sale?
A) $600,000 gain.
B) $600,000 loss.
C) $200,000 loss.
D) $200,000 gain.
82) Which of the following is correct when recording the disposal of equipment for a gain?
A) The company will record a debit to a gain account.
B) The company will record a credit to the equipment account for the asset’s book value.
C) The company will record a debit to accumulated depreciation for the total depreciation
accumulated to the date of disposal.
D) The company will record a credit to cash.
83) Which of the following is correct regarding gain or loss on disposal of a long-lived asset?
A) Failure to report a gain on the sale of an asset results in an overstatement of net income.
B) Failure to report a gain on the sale of an asset results in an understatement of stockholders’
equity.
C) Failure to report a loss on the sale of an asset results in an understatement of net income.
D) Failure to report a loss on the sale of an asset results in an understatement of earnings per
share.
84) Which of the following statements is correct with respect to the sale of a depreciable asset?
A) A gain occurs when the selling price exceeds book value.
B) A sale for a gain results in a decrease in total assets.
C) A sale for a loss results in an increase in total assets.
D) A loss occurs when the selling price is more than book value.
85) Carter Company disposed of an asset at the end of the eighth year of its estimated life for
$10,000 cash. The asset’s life was originally estimated to be 10 years. The original cost was
$50,000 with an estimated residual value of $5,000. The asset was being depreciated using the
straight-line method. What was the gain or loss on the disposal?
A) $1,000 loss.
B) $4,000 loss.
C) $5,500 gain.
D) $10,000 gain.
86) Which of the following journal entries is correct when a company owns its office building
for many years and now sells the building?
A)
Cash
xxx
Accumulated depreciation
xxx
Loss on sale
xxx
Building
xxx
B)
Cash
xxx
Building
xxx
Gain on sale
xxx
Accumulated depreciation
xxx
C)
Cash
xxx
Accumulated depreciation
xxx
Loss on sale
xxx
Building
xxx
D)
Cash
xxx
Gain on sale
xxx
Building
xxx