369
Chapter 11—Investing Activities
True/
False
L.O.’s
Level of
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Level of
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DIFF
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Multiple
Choice
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Multiple
Choice
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Choice
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43
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63
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EASY
370 ♦ Chapter 11
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
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Matching
L.O.’s
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Problem
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Essay
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Essay
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Investing Activities ♦ 371
TRUE/FALSE
1. Expenditures made that extend the life of existing plant assets are recorded as capital
expenditures.
2. Buildings and land purchased by a company would be included in property, plant, and equipment
on the company’s books.
3. The book value of plant assets is calculated as the cost of the assets plus accumulated depreciation.
4. Accelerated depreciation allocates a larger portion of the cost of a plant asset to expense in the
earlier years of the asset’s life than in the later years.
5. Firms must use the same depreciation method for tax as they do for financial reporting purposes.
6. The systematic allocation of the cost of natural resources to the periods that benefit from their use
is known as amortization.
7. The excess of the purchase price of a company’s assets over the book value of the assets is known
as goodwill.
8. Intangible assets would include patents, copyrights, trademarks, and goodwill.
9. Cash received from the sale of long-term assets is considered an operating activity.
372 ♦ Chapter 11
10. Plant assets are reported on the balance sheet at their fair market value.
MULTIPLE CHOICE
1. Which of the following statements is correct concerning investing activities?
a.
they involve obtaining and managing financial resources
b.
they use financial resources to acquire items to sell in the normal course of activities
c.
they use financial resources to acquire assets a company needs to produce and sell its
products
d.
they involve buying and selling a company’s own stock
2. The term “current assets” is usually used to refer to assets that
a.
the organization currently owns
b.
are owed to creditors and will be distributed during the coming fiscal period
c.
are expected to be converted to cash or consumed (used up) during the coming fiscal year
d.
are currently used in operating the company
3. Investments in tangible assets by a company that are intended to be used in the future to
manufacture and/or sell products are recorded in the books as
a.
investments in financial securities
b.
property, plant and equipment
c.
patents, copyrights, trademarks and goodwill
d.
none of the above
4. Which of the following would NOT be included in property, plant, and equipment?
a.
inventory
b.
land
c.
equipment
d.
buildings
5. Which statement below is true about a company’s operating cycle?
a.
it may not exceed one year
b.
it may not be less than a year
c.
it may be longer than a year
d.
it is always one year
Investing Activities ♦ 373
6. Which of the following companies would be MOST likely to have an operating cycle longer than
one year?
a.
Grinder Tool Manufacturing Company
b.
Interstate Bridge Construction & Paving Company
c.
Squeegee Window Cleaning Service
d.
Dade County School of Dance
7. Long-term assets are defined as
a.
assets that extend benefits beyond the coming fiscal year or operating cycle
b.
only tangible assets that extend benefits beyond the coming year or operating cycle,
whichever is longer
c.
assets that are depreciated for a maximum of 40 years
d.
assets that extend no future benefits to a company
8. Which of the following is NOT an intangible asset?
a.
goodwill
b.
patent
c.
copyright
d.
cash
9. Which depreciation method allocates a larger portion of the cost of a plant asset to expense early
in the asset’s life?
a.
replacement
b.
straight-line
c.
units-of-production
d.
accelerated depreciation
10. Which of the following statements about depreciation methods is true?
a.
firms must use the same depreciation methods for tax and financial reporting purposes
b.
firms cannot use the same depreciation methods for tax and financial reporting purposes
c.
firms usually use the same depreciation methods for tax and financial reporting purposes
d.
firms seldom use the same depreciation methods for tax and financial reporting purposes
11. The book value of plant assets
a.
are the cost of the assets less accumulated depreciation
b.
is an indicator of the market value of the assets
c.
are the cost of assets less residual value
d.
always less than market value
374 ♦ Chapter 11
12. On January 1, 2007 a Medical Testing Laboratory acquired new blood processing equipment
costing $400,000. The equipment has an estimated useful life of 10 years and an estimated
residual value of $50,000. After making all necessary calculations and entries on December 31,
2008, what is the accumulated depreciation to date and book value of the equipment? (Assume the
straight-line method is used.)
Accumulated Depreciation Book Value as of
as of December 31, 2008 December 31, 2008
a.
$70,000 $330,000
b.
$70,000 $280,000
c.
$35,000 $365,000
d.
$35,000 $315,000
13. Lincoln Company recorded $40,000 of depreciation as of December 31, 2007 on assets acquired
that were purchased on January 1, 2007. The assets cost $200,000 and had an estimated useful life
of 10 years. The method Lincoln used for depreciating the assets was
a.
the straight-line method
b.
an improper method
c.
a method permitted only for tax purposes
d.
an accelerated method
14. Accelerated depreciation
a.
results in lower net income in earlier years and higher net income in later years
b.
is used more often on the income statement than is the straight-line method
c.
leads to higher book values for depreciable assets than does the straight-line method
d.
allocates larger portions of cost to later periods than to earlier
15. Emergent Markets Corporation purchased a machine for $200,000 on January 1, 2007. The
estimated life is 10 years. What is the book value on the December 31, 2009 balance sheet
assuming straight-line depreciation is used and estimated residual value is zero?
a.
$180,000
b.
$160,000
c.
$140,000
d.
$ 60,000
Investing Activities ♦ 375
16. Which of the following are included as part of the cost of plant assets?
a.
amount paid for the asset only
b.
the cost of site preparation and installation of the asset only
c.
construction costs to make assets usable
d.
all of the above are included as part of the cost of plant assets
17. Which of the following assets would NOT be depreciated?
a.
a factory building
b.
parking lot constructed for employees
c.
land that was purchased for a future building site
d.
equipment used to produce products
18. An expenditure that extends the life of an asset or enhances its value is a(n)
a.
capital expenditure, recorded as an asset
b.
operating expenditure, recorded as an expense
c.
investing expenditure, recorded as an expense
d.
capital expenditure, recorded as an expense
19. How is the depreciation process consistent with the matching principle?
a.
the accumulated depreciation account is matched with the plant asset account on the
balance sheet
b.
the cost of consuming plant assets is matched with the periods that benefit from using the
assets
c.
the book value of the asset is matched with the current market value of the asset
d.
the depreciation method used is matched with the expected productivity of the asset
20. Which of the following is NOT a good reason to use an accelerated depreciation method?
a.
an asset may be more useful earlier in its life than later
b.
using an accelerated method for tax purposes yields larger tax deductions in the early
years
c.
accelerated depreciation will result in lower pretax income, lower taxes and lower cash
outflow
d.
using an accelerated method will result in an asset more quickly reaching a book value
equal to its residual value
376 ♦ Chapter 11
21. Acme Products Company purchased new depreciable equipment as follows:
Cost
$78,000
Residual
6,000
Estimated useful life
4 years
Estimated total units
72,000
Actual Units:
Year 1
18,000
Year 2
12,250
What is the depreciation expense for Year 2 using the units-of-production method of depreciation?
a.
$30,250
b.
$13,230
c.
$18,000
d.
$12,250
22. Extreme Manufacturing purchased machinery as follows:
Cost
$39,000
Residual
4,500
Estimated useful life
5 years
Under the double-declining-balance method, what will depreciation expense be for
Year 2?
a.
$9,360
b.
$5,616
c.
$1,116
d.
$15,600
23. Assume a building was purchased for $250,000 and used for four of its estimated 10-year life. It
has residual value of $50,000 and the straight-line method is used for depreciating the building.
The book value of the building after the four years’ of usage would be reported on the balance
sheet at
a.
$20,000
b.
$80,000
c.
$120,000
d.
$170,000
Investing Activities ♦ 377
24. When a plant asset is sold, the gain or loss on disposal is computed as the difference between
a.
fair market value and accumulated depreciation
b.
selling price and accumulated depreciation
c.
fair market value and selling price
d.
selling price and book value
25. Quick Freight Trucking owned a truck which cost $30,000 when it was purchased on January 1,
2007. It had accumulated depreciation of $18,000 at December 31, 2008. The company originally
estimated the truck would have a residual value after using it for four years of $3,000. It sold the
truck for $22,500 cash on January 1, 2009. The amount of gain (loss) on the sale of the truck was
a.
$4,500 gain
b.
$19,500 gain
c.
$1,500 loss
d.
$10,500 gain
26. The systematic allocation of the cost of natural resources to the periods that benefit from their use
is known as
a.
depreciation
b.
depletion
c.
amortization
d.
matching
27. The systematic allocation of the cost of a patent to the periods that benefit from its use is
a.
amortization
b.
capitalization
c.
depletion
d.
depreciation
28. A coal mine asset was purchased for $660,000. Estimated production is 20,000,000 tons after
which the mine will be sold for $60,000. During a recent year, 6,500,000 tons of coal were
produced and sold. The depletion expense for the year would be
a.
$175,500
b.
$195,000
c.
$214,500
d.
$225,000
378 ♦ Chapter 11
29. Purple Company owns 25% of the common stock of Marroon after purchasing 45,000 shares of
Marroon’s stock at a price of $30 per share on January 1, 2007. At the end of the year, Marroon
reported net income of $100,000 and paid dividends of $40,000. What is the book value of Purple
Company’s investment at year-end?
a.
$1,410,000
b.
$1,450,000
c.
$1,365,000
d.
$1,350,000
30. When companies have a temporary surplus of cash, they often invest it in
a.
short-term marketable securities
b.
long-term marketable securities
c.
intangible assets
d.
property, plant, and equipment
31. Cash received from the sale of long-term assets is reported as
a.
an operating activity
b.
a financing activity
c.
an adjustment to stockholders’ equity
d.
an investing activity
32. Long-term investments in the common stock of another company normally should be accounted
for using the equity method if the investor owns an interest of
a.
more than 50 percent
b.
not less than 90 percent
c.
not less than 20 percent nor more than 50 percent
d.
not more than 20 percent
33. Which of the following is a reason to invest in the securities of other organizations?
a.
to obtain cash
b.
to incur future debt and increase financial leverage
c.
to acquire products from other companies
d.
to fund a future repayment of debt
Investing Activities ♦ 379
34. An investment that yields significant influence or control is
a.
always reported as a long-term asset
b.
reported as a long-term asset if it is an investment in preferred stock
c.
reported as a long-term asset if it is accounted for under the equity method
d.
reported as a long-term asset if it is an investment in the bonds of another company
35. Held-to-maturity securities are reported on the balance sheet at
a.
cost
b.
amortized cost
c.
market value
d.
maturity value
36. Trading and available-for-sale securities are reported on the balance sheet at
a.
market value
b.
maturity value
c.
cost
d.
amortized cost
37. Marbella Company has an investment in stock, classified as available-for-sale, with the following
information at December 31, 2007:
Cost
=
$240,000
Market value
=
$280,000
How would Marbella report this information?
a.
unrealized holding gain of $40,000 added to stockholders’ equity
b.
realized gain added to the income statement of $40,000
c.
unrealized holding gain deducted from stockholders’ equity of $40,000
d.
unrealized holding gain added to the income statement of $40,000
38. Which of the following investments is NOT reported on the balance sheet at current market value?
a.
available-for-sale investment in bonds
b.
trading investment in stocks
c.
held-to-maturity investment in bonds
d.
available-for-sale investment in stocks
380 ♦ Chapter 11
39. Meteorite Company sells its Available-For-Sale stock investment at a price of $61 per share. It
had originally been purchased at $20 per share and its most recent adjustment had been to a
market value of $32 per share. What was the per share realized gain or loss on sale?
a.
$29 realized gain
b.
$41 realized gain
c.
$12 realized loss
d.
$73 realized gain
40. If the long-term investment by one company in another is not large enough for complete control,
but is large enough for significant influence, then
a.
consolidated financial statements are prepared
b.
the lower-of-cost-or-market cost method is used to value the investment
c.
the equity method is used to value the investment
d.
the parent company reports earnings from the investment only when dividends are
received from the subsidiary
41. When a company purchases bonds of another company at a premium, amortization of the bond
premium
a.
increases interest revenue recorded over the life of the bonds
b.
decreases interest revenue recorded over the life of the bonds
c.
is recorded at the time the bonds are purchased
d.
is not recorded until the bonds are sold or mature
42. Wilson Co. purchased bonds issued by Sari Co. The bonds pay interest at a rate of 8% and were
purchased to yield a market rate of 10%. As a result, the bonds were purchased at
a.
their face value
b.
more than their face value
c.
less than their face value
d.
their maturity value
43. The excess of the purchase price of a company over the fair market value of its net assets is known
as
a.
surplus
b.
amortization
c.
goodwill
d.
capital
Investing Activities ♦ 381
44. The excess of cost over the fair market value of net assets acquired when one company purchases
another company should be reported as a(n)
a.
fixed asset
b.
intangible asset
c.
expense of the period in which the acquisition occurs
d.
revenue of the period in which the acquisition occurs
45. The Turboprop Boat Company purchased Wooden Oar Company for $60 million in cash. The
book value of the net assets of Wooden Oar Company were $40 million at the time of the
purchase. The fair market value of the net assets of Wooden Oar Company were estimated to be
$50 million at the time of the purchase. As a result, Turboprop Boat Company should record
a.
goodwill of $10 million
b.
goodwill of $20 million
c.
no goodwill because it paid cash for Wooden Oar Company rather than issuing stock
d.
no goodwill because the fair market value of Wooden Oar’s net assets was equal to the
cash paid
46. Gonzo Company purchased 100% of Bean Corporation for $600,000 cash. Book value of Bean’s
net assets was $500,000 at the time and the fair market value was $580,000. Which of the
following will be recorded on Gonzo’s books for this event?
a.
total assets of Bean Company of $600,000 with goodwill being $100,000
b.
total assets of Bean Company of $500,000 with goodwill being $20,000
c.
total assets of Bean Company of $580,000 with goodwill being $100,000
d.
total assets of Bean Company of $600,000 with goodwill being $20,000
47. Goodwill may be amortized over a period not to exceed
a.
over 10 years
b.
over 20 years
c.
over 30 years
d.
only when it is considered impaired
48. When accountants use the term “deferred charge,” they are referring to a situation in which a(n)
a.
expense has been prepaid but will not be consumed during the current period
b.
asset has been utilized but will not be paid for until some future period
c.
contingent liability has been identified
d.
decision has been made to write off a nonproductive asset but it will not be done until a
future period
382 ♦ Chapter 11
49. The “using–up” process or utilization of intangible assets is referred to as
a.
depreciation
b.
depletion
c.
research and development
d.
amortization
50. Deferred charges are:
a.
typically not amortized
b.
short-term assets
c.
assets prepaid that produce long-term profits
d.
long-term assets included with plant assets
51. GAAP requires that intangibles other than goodwill be amortized over a period of:
a.
100 years
b.
twice the estimated useful life
c.
one-half the estimated useful life
d.
40 years or less
e.
25 years or more
52. Which of the following is NOT true?
a.
the source of financing for plant assets does not affect the way assets are reported on the
balance sheet
b.
intangible assets provide legal rights or benefits to a company
c.
one of the four categories of assets on the balance sheet includes the value of management
and employee skills
d.
long-term investments are investments in the debt or equity securities of other companies
53. When a company owns 20% to 50% of the common stock of another company it is considered by
GAAP to have __________ over that company.
a.
controlling interest
b.
voting majority
c.
significant influence
d.
pre-emptive rights
Investing Activities ♦ 383
54. Machinery with a cost of $150,000 and a book value of $52,500 was sold for $15,000 cash plus a
note receivable of $27,500. What was the net effect of this sale on the financial statement items
listed below?
Assets Net Income
a.
Increase Increase
b.
Increase Decrease
c.
Decrease Decrease
d.
Decrease Increase
55. Long-term investments in the common stock of another company normally should be accounted
for as a consolidated subsidiary if the investor owns an interest of
a.
more than 50 percent
b.
not less than 90 percent
c.
not less than 20 percent
d.
not more than 50 percent
56. A balance sheet reports an investment in common stock under the category of long-term assets.
Which of the following MIGHT be the reason(s) why these shares are reported in that section of
the balance sheet?
Management intends to They are not
hold them long-term marketable
a.
Yes Yes
b.
No Yes
c.
Yes No
d.
No No
384 ♦ Chapter 11
57. Wittenauer Company has an investment in bonds, classified as trading, with the following
information at December 31, 2007:
Face value
=
$100,000
Unamortized premium
=
3,388
Market value
=
102,500
What would Wittenauer report in the financial statements for this investment?
Balance sheet Income statement
a.
investment = $102,500 unrealized holding loss = $888
b.
investment = $103,388 unrealized holding gain = $888
c.
investment = $100,000 unrealized holding loss = $2,500
d.
investment = $102,500 unrealized holding gain = $2,500
58. Trumble Corporation purchased bonds having $200,000 face value that pays 5% cash interest per
year. The purchase price was $197,000 and the firm intends to hold the bonds till maturity in 10
years. The cumulative amount of interest revenue that the firm will report on its income statements
over the ten years is
a.
$123,000
b.
$100,000
c.
$117,000
d.
$103,000
59. A bond is purchased at a discount. What will happen to the net carrying value of the bond on the
balance sheet as its maturity date approaches?
a.
stays the same
b.
increases
c.
decreases
d.
cannot be determined from the data given
60. Murray Company purchased a 5%, $5,000, 10-year bond for $4,800 at the date of issue. The
interest revenue shown on Murray’s income statements over the life of the bond will total
a.
$2,500
b.
$2,700
c.
$2,300
d.
$2,600
Investing Activities ♦ 385
61. Depreciation and amortization
a.
reduce net income and cash flow from operating activities
b.
reduce net income but increase cash flow from operating activities
c.
reduce net income but have no direct effect on cash flow from operating activities
d.
have no direct effect on net income or cash flow from operating activities
62. Investing activities do not directly affect the:
a.
balance sheet
b.
income statement
c.
statement of cash flows
d.
price of the company’s stock
63. All of the following would be included in the investing activities section of the statement of cash
flows except
a.
sale of inventory
b.
sale of property, plant and equipment
c.
purchase of investments
d.
purchase of plant and equipment
386 ♦ Chapter 11
MATCHING
Match each term with the correct statement.
a.
Straight-line
b.
Residual value
c.
Book value
d.
Double declining balance
e.
Units-of-production
1. Produces a level amount of depreciation expense per unit of output
2. Depreciation method that minimizes income tax expense at the beginning of the life of the asset
3. Allocates an equal amount of the cost of a plant asset to expense during each period of an asset’s
expected useful life
4. The amount management expects to receive for an asset at the end of its useful life
5. Cost of a plant asset minus accumulated depreciation
Use the following to classify the accounts listed below as they are listed on the balance sheet:
a.
intangible assets
b.
tangible assets
6. Broadband franchise
7. Accounts receivable
8. Brand name
9. Cash
10. Trademark
11. Patent
12. Goodwill
13. Land
14. Copyright
15. Equipment
Investing Activities ♦ 387
Using the following letters, classify each of the items below according to the section of the balance
sheet in which they would be reported:
a.
Short-term investments
b.
Long-term investments
c.
Property, plant, and equipment
d.
Intangibles
16. Patent
17. Equipment
18. 1,000 shares of Dell stock expected to be sold during the coming year.
19. Land
20. 2,000, 20-year GM Corporation bonds expected to be held to maturity.
21. Goodwill
22. 1,000 shares of Intel stock not expected to be sold during the coming year.