Chapter 8—Fixed Assets and Intangible Assets Key
1. Which of the following accounts would not be reported in the property, plant, and equipment section of a
balance sheet?
2. Which of the following costs related to the purchase of production equipment incurred by ABC Company
during 2011 would be considered a revenue expenditure?
3. On the balance sheet, the cumulative amount of depreciation expense recognized to date on a fixed asset is
called:
4. Able Company purchased land and incurred the following costs:
Purchase price
$1,000,000
Excavation costs
100,000
Razing old building
25,000
Broker fees
20,000
Cost of property taxes
50,000
What is the cost of the land?
5. Depreciation is a process by which:
6. Land is not depreciated because:
7. Assets classified as property, plant, and equipment are reported at:
8. Depreciation is:
9. The effect of recording depreciation for the year is a(n):
10. Plant assets are depreciated because:
11. Fisher Apartments purchased an apartment building to rent to university students on December 15, 2011.
The tenants moved in on January 1, 2012. On Super Bowl Sunday, a student punched a hole in the wall when
his favorite team fumbled the ball. It cost the landlord $400 to repair the hole. How should this cost be
recorded?
12. Which of the following should be included in the acquisition cost of a piece of equipment?
13. Which of the following is included in the cost of constructing a building?
14. Aggie, Inc.
Aggie, Inc. purchased a truck at a cost of $12,000. The truck has an estimated salvage value of $2,000 and an
estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2011, and was
used 27,000 hours in 2011 and 26,000 hours in 2012.
Refer to Aggie, Inc.’s information presented above, what method of depreciation will maximize depreciation
expense in 2011?
15. Aggie, Inc.
Aggie, Inc. purchased a truck at a cost of $12,000. The truck has an estimated salvage value of $2,000 and an
estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2011, and was
used 27,000 hours in 2011 and 26,000 hours in 2012.
Refer to Aggie, Inc.’s information presented above, if Aggie uses the straight-line method, what is the book
value at December 31, 2013?
16. Aggie, Inc.
Aggie, Inc. purchased a truck at a cost of $12,000. The truck has an estimated salvage value of $2,000 and an
estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2011, and was
used 27,000 hours in 2011 and 26,000 hours in 2012.
Refer to Aggie, Inc.’s information presented above, if Aggie uses the units-of-activity method, what is the
depreciation rate per hour for the equipment?
17. Aggie, Inc.
Aggie, Inc. purchased a truck at a cost of $12,000. The truck has an estimated salvage value of $2,000 and an
estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2011, and was
used 27,000 hours in 2011 and 26,000 hours in 2012.
Refer to Aggie, Inc.’s information presented above, if Aggie uses the double-declining-balance depreciation
method, what amount is the depreciation expense for 2012?
18. Clear Window Cleaners
Clear Window Cleaners purchased new cleaning equipment at the beginning of 2011. The equipment has a cost
of $53,000, an estimated life of 5 years, and an estimated residual value of $3,000. A full year’s depreciation
expense is to be recorded in 2011. The equipment was used 20,000 hours during 2011 and 24,000 hours during
2012. The number of expected hours over five years is 125,000.
Refer to the information provided for Clear Window Cleaners. Clear Window is comparing the straight-line
and double-declining-balance depreciation methods. Of these two methods, which method creates the larger
expense and larger tax savings in 2011?
19. Clear Window Cleaners
Clear Window Cleaners purchased new cleaning equipment at the beginning of 2011. The equipment has a cost
of $53,000, an estimated life of 5 years, and an estimated residual value of $3,000. A full year’s depreciation
expense is to be recorded in 2011. The equipment was used 20,000 hours during 2011 and 24,000 hours during
2012. The number of expected hours over five years is 125,000.
Refer to the information provided for Clear Window Cleaners. By what amount would double-declining-
balance depreciation exceed straight-line depreciation over the 5-year life of the equipment?
20. Clear Window Cleaners
Clear Window Cleaners purchased new cleaning equipment at the beginning of 2011. The equipment has a cost
of $53,000, an estimated life of 5 years, and an estimated residual value of $3,000. A full year’s depreciation
expense is to be recorded in 2011. The equipment was used 20,000 hours during 2011 and 24,000 hours during
2012. The number of expected hours over five years is 125,000.
Refer to the information provided for Clear Window Cleaners. What is the amount by which double-declining-
balance depreciation exceeds straight-line depreciation in the first year of the equipment?
21. Clear Window Cleaners
Clear Window Cleaners purchased new cleaning equipment at the beginning of 2011. The equipment has a cost
of $53,000, an estimated life of 5 years, and an estimated residual value of $3,000. A full year’s depreciation
expense is to be recorded in 2011. The equipment was used 20,000 hours during 2011 and 24,000 hours during
2012. The number of expected hours over five years is 125,000.
Refer to the information provided for Clear Window Cleaners. Clear Window Cleaners wants to use the
depreciation method that will result in the highest net income for 2011. Which method should be used?
22. If the depreciation method is known, which of the following sets of factors is needed to calculate
depreciation on plant and equipment?
23. Butler Corporation uses plant assets that are subject to rapid decreases in value due to obsolescence and
physical deterioration. Which of the following depreciation methods is most appropriate to measure the decline
in the usefulness of the company’s assets?
24. Fly High Airlines acquires a new aircraft. It has an estimated life of 10 years and should be used for 20,000
hours of flight. What is the most appropriate method of depreciation to properly match revenues and expenses?
25. A company should choose a depreciation method that:
26. If technology changes rapidly, a firm should:
27. Wilshire purchased equipment at the beginning of 2011 for $19,000. Wilshire decided to depreciate the
equipment over a 6-year period using the straight-line method. Wilshire estimated the equipment’s salvage value
at $1,000. The estimated fair market value at the end of 2011 was $18,000. Which of the following statements is
correct concerning Wilshire’s financial statements at December 31, 2011?
28. Zero, Inc. purchased equipment at the beginning of 2011 for $200,000. Zero decided to depreciate the
equipment over a 5-year period using the double-declining-balance method. Zero estimated the equipment’s
salvage value at $20,000. Which of the following statements is correct concerning Zero’s financial statements at
December 31, 2011?
29. Using different depreciation methods for book purposes versus tax purposes for the same asset is:
30. Disc Company purchased equipment at the beginning of 2010 for $200,000. The company decided to
depreciate the equipment over an 5-year period using the straight-line method. The company estimated the
equipment’s salvage value at $20,000. The journal entry to record depreciation expense for 2011 is a debit to:
31. ABC and XYZ Companies purchased identical equipment having an estimated useful life of ten years. ABC
uses the straight-line depreciation method and XYZ uses the double-declining-balance method of depreciation.
Assuming the two entities are similar in all other respects, which of the following statements is correct?
32. Using the straight-line depreciation method will cause a company to incur ____ tax expense in the early
years of an asset’s life than they would experience using an accelerated method of depreciation.
33. Gump Shrimp Company
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a
salvage value of $100,000. The company uses the double-declining-balance method.
Refer to the information provided for Gump Shrimp Company. What was the depreciation expense for Gump
Shrimp for the year ended December 31, 2011?
34. Gump Shrimp Company
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a
salvage value of $100,000. The company uses the double-declining-balance method.
Refer to the information provided for Gump Shrimp Company. What was the depreciation expense for Gump
Shrimp for the year ended December 31, 2012?
35. Gump Shrimp Company
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a
salvage value of $100,000. The company uses the double-declining-balance method.
Refer to the information provided for Gump Shrimp Company. What would be the book value of the ship after
ten years?
36. Gump Shrimp Company
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a
salvage value of $100,000. The company uses the double-declining-balance method.
Refer to the information provided for Gump Shrimp Company. What was the book value of the ship at the end
of the third year?
37. All of the following below are needed for the calculation of straight-line depreciation except:
38. A machine with a cost of $80,000 has an estimated salvage value of $5,000 and an estimated life of 5 years
or 15,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for
the second full year, during which the machine was used for 5,000 hours?
39. The depreciation method that does not use salvage value in calculating the first year’s depreciation expense
is:
40. Capitalizing an expenditure rather than recording it as a revenue expenditure:
41. Expenditures that increase the expected useful life or productivity of the asset are:
42. A capital expenditure results in a debit to:
43. Which of the following is an example of a capital expenditure?
44. On January 1, 2011, James Company sold a machine for $10,000 that it had used for several years. The
machine was purchased at $22,000, and had accumulated depreciation of $9,000 at the time of sale. What gain
or loss will be reported on the income statement for the sale of the machine?
45. On January 1, 2011, XYZ Corporation sold a piece of equipment for $30,000 which it had used for several
years. The equipment had cost $45,000, and its accumulated depreciation amounted to $20,000 at the time of
the sale. What are the net effects on the accounting equation of selling the equipment?
46. Arnold, Inc. purchased a truck on January 1, 2009, for $40,000. The truck had an estimated life of 5 years
and an estimated salvage value of $5,000. Arnold Inc. used the straight-line method to depreciate the asset. On
July 1, 2012, the truck was sold for $7,000 cash. The journal entry to record the sale of the truck in 2012:
47. Stricker Company sold equipment for $4,000. This resulted in a $1,500 loss. What is the impact of this sale
on the balance sheet?
48. Lighting Company sold an old machine on December 31, 2011, for $22,000 cash. The following data was
available when the truck sold:
Acquisition cost
$100,000
Estimated salvage value at time of acquisition
8,000
Accumulated depreciation on December 31, 2011, after adjustment
85,000
When this transaction is recorded, it should include:
49. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the
equipment was $250,000 with an accumulated depreciation of $210,000. Depreciation has been taken up to the
end of the year. Strike found a company that is willing to buy the equipment for $25,000. What is the amount of
the gain or loss on this transaction?
50. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the
equipment was $215,000 with an accumulated depreciation of $185,000. Depreciation has been taken up to the
end of the year. Strike found a company that is willing to buy the equipment for $55,000. What is the amount of
the gain or loss on this transaction?
51. Everett, Inc.
Information for Everett, Inc. for 2011 and 2010 is presented below. Everett uses the straight-line depreciation
method.
2011
2010
Fixed assets
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Total revenues
525,000
405,000
Total assets
625,000
475,000
Refer to the information provided for Everett, Inc. Using the data for 2011, determine the average useful life of Everett’s fixed assets rounded to one
decimal place.
52. Everett, Inc.
Information for Everett, Inc. for 2011 and 2010 is presented below. Everett uses the straight-line depreciation
method.
2011
2010
Fixed assets
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Total revenues
525,000
405,000
Total assets
625,000
475,000
Refer to the information provided for Everett, Inc. Using the data for 2011, determine the average age of Everett’s fixed assets.
53. Everett, Inc.
Information for Everett, Inc. for 2011 and 2010 is presented below. Everett uses the straight-line depreciation
method.
2011
2010
Fixed assets
$ 250,000
$190,000
Accumulated depreciation
100,000
85,000
Depreciation expense
62,500
47,500
Total revenues
525,000
405,000
Total assets
625,000
475,000
Refer to the information provided for Everett, Inc. Determine the fixed asset turnover ratio for Everett for 2011.
54. If a company’s fixed asset turnover ratio decreased from 2010 to 2011, which of the following conclusions
can be made?
55. Max’s Tire Center Company
Selected data from the financial statements of Max’s Tire Center are provided below.
2012
2011
Fixed assets
$ 150,000
$ 138,000
Depreciation expense
45,000
42,000
Total assets
500,000
490,000
Cash flow from operations
320,000
289,000
Net sales
370,000
360,000
Capital expenditures
15,000
13,000
Refer to the selected data provided for Max’s Tire Center. Which of the following would result from a horizontal analysis of Max’s balance sheet?
56. Refer to the selected data provided for Max’s Tire Center. Which of the following would result from a
horizontal analysis of Max’s income statement?
57. Refer to the selected data provided for Max’s Tire Center. Which of the following would result from a
vertical analysis of Max’s balance sheet in 2012?
58. Refer to the selected data provided for Max’s Tire Center. Which of the following would result from a
vertical analysis of Max’s income statement in 2012?
59. Refer to the selected data provided for Max’s Tire Center. What is Max’s fixed assets turnover in 2012?
60. Cash paid to purchase significant amounts of fixed assets would be reported in the statement of cash flows
in:
61. A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of
cash flows under:
62. Cash flows from acquiring and disposing of long-term assets are classified as:
63. Which of the following is not an investing activity?
64. Which balance sheet section is most affected by investing activities?
65. Upon review of Mack’s statement of cash flows, the following was noted:
Cash flows from operating activities
$ 30,000
Cash flows from investing activities
45,000
Cash flows from financing activities
(40,000)
From this information, the most likely explanation is that Mack is:
66. Upon review of Bert’s statement of cash flows, the following was noted:
Cash flows from operating activities
$ 60,000
Cash flows from investing activities
(125,000)
Cash flows from financing activities
115,000
From this information, the most likely explanation is that Bert is:
67. A disposal of a used delivery truck is a transaction shown on the statement of cash flows under:
68. Resources that are used in operations more than one year with no physical substance are called:
69. The accounting life of intangible assets is determined by:
70. How should intangible assets be disclosed on the balance sheet?
71. Victor Company purchased a patent for $250,000 at the beginning of 2011, and estimated that its expected
useful life was 10 years. The patent has a legal life of 20 years. What amount should be recorded as
amortization expense for the patent in 2011?
72. According to accounting standards, the costs of intangible assets with an indefinite life, such as goodwill,
should:
73. Goodwill can be recorded as an asset when a(n):
74. Peck Tech. purchased a patent at the beginning of 2011 for $400,000. The patent’s legal life was 20 years,
but economic benefits were expected for 10 years. Also, during 2011, Peck’s incurred research and development
costs of $200,000. The book value of the patents at December 31, 2011, is:
75. Hit and Miss, Inc. purchased a patent at the beginning of 2011 for $250,000. Economic benefits were
expected for 10 years, but the patent’s legal life was 20 years. Also during 2011, the company incurred research
and development costs of $270,000. Patent amortization expense for 2011 is:
76. Which of the following is an intangible asset?
77. Xtra Company purchased goodwill from Argus for $144,000. Argus had developed the goodwill over 6
years. How much would Xtra amortize the goodwill for its first year?
78. The exclusive right to use a certain name or symbol is called as:
79. American Corporation purchased a building for $900,000 at the end of year 2002. The building will be
depreciated over 40 years and is estimated to have a $100,000 salvage value. At the end of 2012, when it had a
book value of $700,000, it was appraised for $1,100,000. A potential buyer offered $900,000. American
rejected the offer. At what amount should the net book value of the building be at the end of 2012.
80. Equipment with a cost of $160,000, an estimated salvage value of $40,000, and an estimated life of 15 years
was depreciated by the straight-line method for 4 years. Due to obsolescence, it was determined that the useful
life should be shortened by 3 years and the salvage value changed to zero. The depreciation expense for the
current and future years is:
81. Lopez Corporation purchased equipment with a cost of $400,000 at the beginning of 2011. The equipment
has an estimated life of 8 years or 100,000 units of product. The estimated salvage value is $50,000. During
2011, 12,000 units of product were produced with this machinery. Determine the following:
A)
Amount of total accumulated depreciation at December 31, 2011, using units–of-activity depreciation
B)
Book value at the end of 2011 using straight-line depreciation
C)
Why would the company choose units-of-activity depreciation instead of straight-line?
A)
($400,000 – 50,000) / 100,000 ´ 12,000 = $42,000
B)
($400,000 – 50,000) / 8 = $43,750
$400,000 – 43,750 = $356,250
82. Apache, Inc. purchased equipment at the beginning of 2011 for $91,000. In addition, Apache paid $5,000
for delivery of the equipment to its plant and $5,000 for installation of the equipment. The equipment has an
estimated salvage value of $9,000 and an estimated life of 8 years or 100,000 hours of operation. Apache is
looking at alternative depreciation methods for the equipment. Determine the following:
A)
The depreciation expense for the year 2011 using the straight-line depreciation method.
C)
The book value of the equipment at December 31, 2011, using the double-declining-balance depreciation method.
Which of the above methods is considered accelerated?
What are the advantages of using an accelerated depreciation method as compared to the straight-line method?