CHAPTER 8: OPERATING ASSETS: PROPERTY, PLANT, AND
EQUIPMENT, AND INTANGIBLES
1. Wyoming Real Estate purchased a building for $600,000 in 2002. At the end of 2014, when it had a book value of
$450,000, it was appraised for $1,000,000. A potential buyer offered $900,000. Wyoming rejected the offer. What
amount should is recorded on Wyoming’s records at the end of 2014 in the account called Buildings?
a. $1,000,000
b. $900,000
c. $600,000
d. $450,000
2. Assets classified as property, plant, and equipment are reported at
a. each asset’s estimated market value at the balance sheet date.
b. each asset’s estimated salvage value at the balance sheet date.
c. the estimated depreciable cost at the balance sheet date.
d. each asset’s original cost less depreciation since acquisition.
3. Which statement is true concerning operating assets?
a. Operating assets have no physical properties.
b. A company’s operating assets are important to its short–term liquidity.
c. Operating assets are used over two or more periods to generate revenues.
d. All operating assets are reported on the balance sheet
4. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance
sheet?
a. Accumulated Depreciation—Buildings
b. Buildings
c. Depreciation Expense—Buildings
d. Land
5. On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account
called
a. Accumulated Amortization
b. Accumulated Depreciation
c. Amortization Expense
d. Depreciation Expense
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
6. Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for
land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should
the company determine which costs should be recorded as Land Improvements and which cost should be recorded as
Land?
a. The costs with an unlimited life will increase Land, and the costs with a limited useful life will increase Land
Improvements.
b. The costs with a limited life will increase Land, and the costs with an unlimited useful life will increase Land
Improvements.
c. The costs to be depreciated will increase Land, and the costs that will not be depreciated will increase Land
Improvements.
d. Costs that are depreciable will increase Land Improvements, while other costs are expensed immediately because
of a lack of definite life.
7. All of the following are included in the acquisition cost of property, plant, and equipment except:
a. transportation costs
b. taxes on the purchase
c. installation costs
d. maintenance costs
8. A building with an appraisal value of $167,000 is made available at an offer price of $162,000. The purchaser
acquires the property for $25,000 in cash, a 90–day note payable for $75,000, and a mortgage amounting to $65,000.
The cost basis recorded in the buyer’s accounting records to recognize this purchase is
a. $167,000
b. $162,000
c. $165,000
d. $140,000
9. Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of
$2,400, $1,750 to construct a fence and a legal fee of $8,500. What is the cost of the land?
a. $256,000
b. $282,200
c. $284,600
d. $281,000
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
10. Central National Bank recently acquired a new computer system. Which of the following costs associated with the
computer should not increase the Equipment account?
a. Installation of a backup power source required for the computer.
b. Replacement of several circuit boards damaged during installation.
c. System programmer wages for personnel hired to prepare the system for use.
d. Insurance coverage covering the transport period from the manufacturer.
11. Shidan Apartments purchased an apartment building to rent to university students on November 18, 2015. The
following costs were incurred during 2015, before the tenants moved in:
Purchase price of the building
$220,000
Purchase price of the land
100,000
Transfer taxes
10,000
Interest incurred on the mortgage loan to purchase
4,000
Attorney and real estate agent’s fees
15,000
Repave the parking lot
6,000
How much will Shidan Apartments record as an asset?
a. $320,000
b. $345,000
c. $351,000
d. $355,000
12. Barton Resort incurred the following costs to acquire and prepare land during 2015 for a new parking lot: purchase
price for land, $800,000; cost to clear the land, $30,000; cost of paving, $40,000; and lighting for the parking lot,
$20,000. How much should Barton record in the Land Improvements account?
a. $30,000
b. $40,000
c. $60,000
d. $90,000
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
13. Which of the following costs related to the purchase of production equipment incurred by Newark Company during
2015 would be considered a revenue expenditure?
a. Installation costs for equipment
b. Purchase price of the equipment less the cash discount
c. Repair and maintenance costs during the equipment’s first year of service
d. Transportation charges to deliver the equipment to Newark Company
14. Oakland Corp. purchased land and a building for a combined cost of $500,000. Oakland must
a. record the $500,000 acquisition cost in an account called Land and Buildings.
b. depreciate the $500,000 acquisition cost, less any residual value, over the expected useful life of the building.
c. because part of the purchase involved land, record all of the cost in the Land account.
d. allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair
market values.
15. Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values:
land $320,000: building $370,000 and equipment $60,000. What cost should be allocated to the building?
a. $370,000
b. $695,000
c. $342,867
d. $399,281
16. On December 1, 2014, Xeon Company bought land and an accompanying warehouse from Yen Company for
$800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000,
respectively. How much of the purchase price should Xeon Company allocate to the land and how much should be
allocated to the building?
a. $457,143 and $342,857, respectively
b. $700,000 and $300,000, respectively
c. $560,000 and $240,000, respectively
d. $500,000 and $300,000, respectively
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
17. Interest is capitalized when incurred in connection with the construction of plant assets because
a. interest is considered a part of the acquisition cost of the related plant asset.
b. the decision to purchase a plant asset is a business decision separate from the financing decision.
c. many plant assets last longer than 20 years.
d. interest is considered an expense of the period.
18. Crimson Corp. constructed equipment to manufacture a new line of home products during 2015. The average balance
of accumulated expenditures on the equipment during September through December 2015 was $500,000.
Construction started on September 1, 2015 and was still in progress at the end of 2015. If Crimson borrowed
$500,000 for one year on September 1, 2015, to finance the construction, and the interest rate on the construction
loan was 6%, how much interest can Crimson capitalize as part of the equipment cost for 2015?
a. $ –0-
b. $10,000
c. $20,000
d. $30,000
19. If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during
construction on the borrowed money is
a. capitalized as part of the cost of the plant asset.
b. amortized over the construction period.
c. reported as interest expense on the income statement.
d. reported as depletion on the income statement.
20. When constructing assets, capitalized interest is based on
a. the amount allowed by the company’s auditors.
b. the expenditures at the end of the of the period.
c. the expenditures at the beginning of the period.
d. the average accumulated expenditures.
21. Depreciation is a process by which
a. replacement funds are accumulated for plant and equipment.
b. the decline in market value of plant and equipment is determined and recorded.
c. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the
asset.
d. the difference between current market value and historical cost of plant and equipment.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
22. A company should choose a depreciation method that
a. best allocates the original cost of the asset to the periods benefited by the use of the asset.
b. saves the most taxes.
c. minimizes net income
d. shows the highest amount of net income.
23. Harkin Company purchased a building on a tract of land and allocated the entire cost of the purchase to building.
Normally it depreciates buildings over 20 years using the straight-line method with zero residual value and does not
depreciate land. Because of its accounting treatment of the purchase, Harkin’s income before taxes for the next 20
years will be
a. overstated.
b. understated.
c. unaffected.
d. in conformance with GAAP.
Bing’s Export Co.
Bing’s Export Co. purchased a new delivery truck at the beginning of 2015. The truck has a cost of $37,000, an
estimated life of 5 years, and an estimated residual value of $7,000. A full year’s depreciation expense is to be
recorded in 2015. The truck was driven 20,000 miles during 2015 and 24,000 miles during 2016. The number of
expected miles over five years is 100,000.
24. Refer to information for Bing’s Export Co.
Bing’s 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 2015?
a. Straight-line depreciation creates the larger expense, while double-declining-balance depreciation creates the
larger tax savings.
b. Straight-line depreciation creates both the larger expense and the larger tax savings.
c. Double-declining–balance depreciation creates both the larger expense and the larger tax savings.
d. Double-declining-balance depreciation creates the larger expense, while straight-line depreciation creates the
larger tax savings.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
25. Refer to information for Bing’s Export Co.
By what amount would double-declining-balance depreciation exceed straight–line depreciation over the 5-year life of
the truck?
a. The salvage value of $7,000
b. Cost less total depreciation
c. Cost plus total depreciation
d. Total depreciation expenses under double-declining-balance and straight–line depreciation are equal.
26. Refer to information for Bing’s Export Co.
What is the amount by which double-declining-balance depreciation exceeds straight–line depreciation over the 5-
year life of the truck?
a. $-0-
b. $7,000
c. $37,000
d. $6,000
27. Refer to information about Bing’s Export Co.
2015. Which method should be used?
a. Straight-line
b. Units–of–production
c. Double–declining–balance
d. All methods create the same income in 2015
Norwood, Inc.
Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an
estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2015 and was used
2,700 hours in 2015 and 2,600 hours in 2016.
28. Refer to the information for Norwood, Inc.
Based on this information, what method of depreciation will produce the maximum depreciation expense in 2015?
a. Straight-line
b. Double–declining-balance
c. Units–of–production
d. All methods produce the same expense in 2015.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
29. Refer to the information for Norwood, Inc,
Based on this information, what method of depreciation will produce the maximum depreciation expense in 2016?
a. Straight-line
b. Double–declining-balance
c. Units–of–production
d. All methods produce the same expense in 2016.
30. Refer to the information about Norwood, Inc.
What amount will Norwood, Inc. report as depreciation expense over the 8-year life of the equipment?
a. $60,000
b. $72,000
c. $75,000
d. $80,000
31. Refer to the information about Norwood, Inc.
If Norwood uses the straight-line method, what is the book value at December 31, 2017?
a. $46,875
b. $51,875
c. $62,500
d. $67,500
32. Refer to the information about Norwood, Inc.
If Norwood uses the units–of-production method, what is the depreciation rate per hour for the equipment?
a. $4.00
b. $5.00
c. $6.00
d. $7.50
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
33. Refer to the information about Norwood, Inc.
If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for
2016?
a. $14,063
b. $15,000
c. $18,750
d. $20,000
34. Arena, Inc. uses straight-line depreciation for its equipment. Arena purchased equipment for $300,000 and estimated
its useful life at 8 years. The bookkeeper failed to consider the residual value of $50,000. What is the impact on
earnings per share and operating income of failing to consider the residual value?
a. Earnings per share will be overstated and operating income will be understated.
b. Earnings per share will be understated and operating income will be overstated.
c. Both earnings per share and operating income will be overstated.
d. Both earnings per share and operating income will be understated.
35. Fall Corp. 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?
a. Double–declining–balance
b. Revenue expenditure method
c. Straight-line
d. Units–of–production
36. Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should be used for 15,000 hours of
flight. What is the most appropriate method of depreciation to properly match revenues and expenses?
a. Double–declining–balance
b. Revenue expenditure method
c. Straight-line
d. Units–of–production
37. Land is not depreciated because it
a. appreciates in value.
b. does not have an established depreciable life.
c. has a useful life that is limited to the period of time a company is in business.
d. will provide future benefits for a company for an unlimited period of time.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
38. Which of the following factors is not related to the decline in the usefulness of plant and equipment assets, and
therefore does not need to be considered in selecting an appropriate depreciation method?
a. Physical deterioration
b. Obsolescence
c. Repair and maintenance policies
d. Current replacement cost
39. Depreciation is
a. an effort to achieve proper matching of the cost of operating assets.
b. an accumulation of funds to replace the related plant asset.
c. the difference between the original cost and salvage value of an asset.
d. the cash allocated each period to maintain a plant asset.
40. If technology changes rapidly, a firm should
a. expense plant asset immediately because of the uncertainty of future benefits.
b. depreciate plant assets over long periods of time.
c. consider an accelerated rate of depreciation.
d. use the straight-line method of depreciation as it is the easiest.
41. Which of the following sets of factors is needed to calculate depreciation on plant and equipment?
a. The asset‘s acquisition cost, replacement cost, and its estimated residual value
b. The estimated residual value of the asset, its replacement cost, and its market value
c. The asset‘s replacement cost, its estimated life, and its estimated residual value
d. The estimated life of the asset, its acquisition cost, and its estimated residual value
42. Sara’s Designs purchased equipment at the beginning of 2015 for $11,000. Sara decided to depreciate the equipment
over a 5-year period using the straight-line method. Sara estimated the equipment’s residual value at
$1,000. The estimated fair market value at the end of 2015 was $10,000. Which of the following statements is
correct concerning Sara’s financial statements at December 31, 2015?
a. The book value of the equipment is $7,200.
b. The book value of the equipment is $9,000.
c. The total accumulated depreciation is $2,200.
d. The equipment will be reported on the balance sheet at it fair market value of $10,000.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
43. Calhoun, Inc. purchased equipment at the beginning of 2015 for $180,000. Calhoun decided to depreciate the
equipment over a 5-year period using the double-declining–balance method. Calhoun estimated the equipment‘s
residual value at $30,000. Which of the following statements is correct concerning Rose’s financial statements at
December 31, 2015?
a. The book value of the equipment is $108,000.
b. The book value of the equipment is $72,000.
c. The total accumulated depreciation is $90,000.
d. Depreciation expense for 2015 is $60,000.
44. Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for
a. financial reporting purposes and a different method for tax purposes.
b. financial reporting purposes because depreciation is not allowed for tax purposes.
c. tax purposes because it results in a larger net income in the early years of a plant asset’s life.
d. tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes.
45. Using different depreciation methods for book purposes versus tax purposes for the same asset is
a. not allowed since the amount can only be calculated one way or the other, not both.
b. the direct result of the differing goals of financial and tax accounting.
c. contrary to GAAP.
d. against the Internal Revenue Code, and as such, against the law.
46. Newco Publishing Company purchased equipment at the beginning of 2014 for $200,000. The company decided to
depreciate the equipment over an 8-year period using the straight-line method. The company estimated the
equipment’s residual value at $20,000. The journal entry to record depreciation expense for 2014 will
a. increase Depreciation Expense and increase Accumulated Depreciation for $25,000.
b. increase Accumulated Depreciation and decrease Equipment for $25,000.
c. increase Depreciation Expense and decrease Equipment for $22,500.
d. increase Depreciation Expense and increase Accumulated Depreciation for $22,500.
47. The effect of recording depreciation for the year is a(n)
a. decrease in assets and a decrease in net income.
b. decrease in assets but no change in owners’ equity.
c. increase in assets and an increase in net income.
d. decrease in net income and no change in assets.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
48. Plant assets are depreciated because
a. the accrual basis of accounting requires matching of costs to revenues.
b. some plant assets last longer than others.
c. useful lives cannot be reasonably estimated.
d. the replacement cost of plant assets may fluctuate over time.
49. Wind Chime and Fire Hut Companies purchased identical equipment having an estimated useful life of ten years.
Wind Chime uses the straight-line depreciation method and Fire Hut 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?
a. Wind Chime’s depreciation expense will be greater in the second year than Fire Hut’s depreciation expense.
b. Fire Hut’s book value will be greater than Wind Chime’s book value at the end of year one.
c. Wind Chime’s net income will be greater than Fire Hut’s net income in year nine.
d. Fire Hut’s book value will be less than Wind Chime’s book value at the end of year two.
50. 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.
a. more
b. less
c. equal
d. This cannot be determined from the information given.
Paulson Transport Company
On January 1, 2015, Paulson Transport Company purchased a ship for $2,000,000. It has a ten-year useful life and a
residual value of $50,000. The company uses the double–declining-balance method.
51. What was the depreciation expense for Paulson Transport for the year ended December 31, 2015?
a. $ -0-
b. $195,000
c. $390,000
d. $400,000
52. What was the depreciation expense for Paulson Transport for the year ended December 31, 2016?
a. $ -0-
b. $160,000
c. $320,000
d. $400,000
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
53. If Paulson Transport continues to use the ship in its eleventh year, what is the correct accounting procedure?
a. Take the asset off the books and record a gain on the disposal
b. Continue to depreciate it
c. The company may not use it any longer
d. No longer depreciate it but leave it on the records at its book value at the end of its useful life
54. What was the book value of the ship for Paulson Transport at the end of the useful life?
a. $-0-
b. $50,000
c. $214,400
d. Need more information to determine this answer.
55. Blanton Company bought equipment on January 1, 2010 with a cost of $160,000, an estimated residual 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 at the beginning of 2014 that the useful life should be shortened by 3 years and the
residual value changed to zero. What is the accumulated depreciation at the end of 2013?
a. $42,667
b. $32,000
c. $40,000
d. $8,000
56. In 2010, Blanton Company bought equipment with a cost of $160,000, an estimated residual value of $40,000, and an
estimated life of 15 years. It was depreciated by the straight-line method for 4 years. Due to obsolescence, it was
determined at the beginning of 2014 that the useful life should be shortened by 3 years and the residual value
changed to zero. The depreciation expense for 2014 is
a. $11,636
b. $16,000
c. $11,000
d. $8,000
57. Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000. The truck had an estimated
life of 6 years and an estimated residual value of $24,000. On January 1, 2014, the company made major repairs of
$20,000 to the truck that extended the life 1 year. Thus, starting with 2014, the truck has a remaining life of 5 years
and a new salvage value of $8,000. Royal uses the straight-line depreciation method
What is the book value of the truck to be reported on the balance sheet at December 31, 2014?
a. $44,000
b. $50,000
c. $56,000
d. $62,000
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
58. Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000. The truck had an estimated
life of 6 years and an estimated residual value of $24,000. On January 1, 2014, the company made major repairs of
$20,000 to the truck that extended the life 1 year. Thus, starting with 2014, the truck has a remaining life of 5 years
and a new salvage value of $8,000. Royal uses the straight-line depreciation method.
What amount should be recorded as depreciation expense each year starting in 2014?
a. $6,000
b. $12,000
c. $13,600
d. $14,400
59. Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000. The truck had an estimated
life of 6 years and an estimated residual value of $24,000. On January 1, 2014, the company made major repairs of
$20,000 to the truck that extended the life 1 year. Thus, starting with 2014, the truck has a remaining life of 5 years
and a new salvage value of $8,000. Royal uses the straight-line depreciation method.
When calculating depreciation for 2014, Royal should
a. add the $20,000 to the book value at December 31, 2013 and then allocate the revised basis over the remaining
adjusted useful life of 5 years.
b. report the effect of the change in life as an expense on the income statement in 2013.
c. ignore the change in life on the original cost of $60,000 and depreciate the additional $20,000 cost separately over
its useful life.
d. expense the $20,000 and depreciate the original cost of $60,000 over its revised estimated total live of 7 years.
60. Barnhill, Inc. uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero
residual value. The CEO points out that the equipment will last much longer than 10 years, perhaps up to 20 years.
What is the impact on earnings per share and net income of depreciating equipment over 20 years rather than 10
years?
a. Both earnings per share and net income will decrease.
b. Both earnings per share and net income will increase.
c. Earnings per share will decrease and net income will increase.
d. Earnings per share will increase and net income will decrease.
61. Creighton, Inc. determined that it had incorrectly estimated both the useful life and the estimated residual value of
equipment which it purchased 2 years ago. When accounting for the change in its accounting estimates, Creighton
must
a. correct the financial statements of prior years’ affected by the errors in the estimates.
b. determine the book value at the point of change and depreciate that amount over the remaining useful life.
c. add the amount of the error to the amount of the current year’s depreciation expense.
d. determine the effect of the error and report it as a loss on the income statement in Other Revenues and Expenses.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
62. Recently, companies have been ordered by governmental agencies to clean up environmental damages caused by
business operations. How should costs incurred in these situations be treated?
a. If a legal obligation exists, the cost of restoring the property must be added to the asset account.
b. As an expense entirely in one accounting period.
c. As an amortized expense in the period the cost is incurred.
d. Added to the asset, and then depreciated over 15 years.
63. Capitalizing an expenditure rather than recording it as a revenue expenditure
a. affects the total book value of plant assets reported on the balance sheet and the amount of net income reported
during a period.
b. affects the total book value of plant assets on the balance sheet, but has no effect on the amount of net income
reported during an accounting period.
c. affects the amount of net income reported during an accounting period, but has no effect on the total book value
of plant assets on the balance sheet.
d. has no effect on the book value of plant assets on the balance sheet or the amount of income reported on the
income statement.
64. Crouch Apartments purchased an apartment building to rent to university students on December 15, 2012. The
tenants moved in on January 1, 2013. 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?
a. It should be recorded as part of the asset account.
b. It should be recorded as repair and maintenance expense.
c. It should not be recorded as the tenants will be charged for the damage.
d. It should not be recorded since this is an immaterial amount to the landlord.
65. Which of the following below is an example of a capital expenditure?
a. cleaning the carpet in the front room
b. tune-up for a company truck
c. replacing an engine in a company car
d. replacing all burned-out light bulbs in the factory
66. When a company discards machinery that is fully depreciated, this transaction have which of the following effect
on the company‘s accounts?
a. decrease Accumulated Depreciation; decrease Machinery
b. increase Machinery; increase Accumulated Depreciation
c. increase Cash; increase Accumulated Depreciation
d. increase Depreciation Expense; increase Accumulated Depreciation
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
67. A gain is recognized on the disposal of plant assets when:
a. The sales price is greater than the book value and less than the residual value.
b. The sales price is greater than the book value and greater than the residual value.
c. The sales price is less than both the book value and the residual value.
d. The sales price is greater than the residual value but less than the book value.
68. Eagle’s Nest sold equipment for $4,000 cash. This resulted in a $1,500 loss. What is the impact of this sale on the
working capital?
a. Reduces working capital
b. Increases working capital
c. Has no effect on working capital
d. The increases offsets the decrease.
69. Yellow Dog Transit sold an old truck on December 31, 2013, for $18,400 cash. The following data was available
when the truck sold:
Acquisition cost $75,000
Estimated residual value at time of acquisition 8,000
Accumulated depreciation on December 31, 2013 after adjustment 53,600
When this transaction is recorded, it should include a(n)
a. Loss on Disposal account for $3,000
b. Decrease of $21,400 to the Truck account
c. Gain on Disposal account for $3,000
d. Gain on Disposal account for $5,000
70. Lightning Delivery, Inc. purchased a truck on January 1, 2013, for $30,000. The truck had an estimated life of 5 years
and an estimated residual value of $5,000. Lightning Delivery used the straight-line method to depreciate the asset.
On July 1, 2015, the truck was sold for $17,000 cash. The journal entry to record the sale of the truck in 2015
a. decreases stockholder’s equity
b. increases total assets
c. decreases total expenses
d. increases net income
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
71. On January 2, 2013, Hannah Company sold a machine for $1,000 that it had used for several years. The machine
cost $12,000, 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?
a. Gain of $2,000
b. Loss of $11,000
c. Loss of $2,000
d. Gain of $3,000
72. All of the following statements are true except:
a. IFRS requires that estimates of residual value and the life of the asset be reviewed at least annually and revised if
necessary.
b. The FASB standards do not have a specific rule that requires residual value and asset life to be reviewed annually.
c. IFRS does not have a specific rule that requires residual value and asset life to be reviewed annually.
d. The FASB generally requires operating assets to be recorded at acquisition cost, less depreciation, and the
assets’ values are not changed to reflect their fair market values or selling prices.
73. On January 1, 2013, Petersen Corp. sold a piece of equipment for $3,000 which it had used for several years. The
equipment had cost $13,000, and its accumulated depreciation amounted to $9,000 at the time of the sale. What are
the net effects on the accounting equation of selling the equipment?
a. Assets and Stockholders’ Equity increase $1,000.
b. Assets decrease and Stockholders’ Equity increases $3,000.
c. Assets and Stockholders’ Equity decrease $1,000.
d. Assets and Stockholders’ Equity decrease $3,000.
74. Operating assets with no physical properties are called
a. current assets
b. intangible assets
c. plant assets
d. property, plant, and equipment
75. How should intangible assets be disclosed on the balance sheet?
a. As a reduction of stockholders’ equity
b. At cost in the current assets section
c. at the estimated market value at the balance sheet date
d. Net of the costs already amortized
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
76. Goodwill can be recorded as an asset when a(n)
a. business has above normal profitability compared to other businesses in its industry.
b. business can determine that it has created customer goodwill and name recognition.
c. offer is received to purchase the business at a price in excess of the value of the assets.
d. business is purchased and payment is made in excess of the value of the net assets.
77. GAAP require that research and development costs to develop a new product be
a. capitalized in the patents account.
b. expensed in the period incurred.
c. capitalized in the research and development costs account.
d. amortized over the expected economic life of the new product.
78. Research and development costs are
a. treated as an expense when incurred.
b. capitalized but not amortized.
c. capitalized and amortized over the periods that will probably benefit from the research and development.
d. included with the cost of the patent resulting from the research and development.
79. All of the following are intangible assets except
a. patents
b. goodwill
c. franchises
d. accounts receivable
80. Tarkington Beers, Inc. purchased the most popular and well-known pub in a college town. Its purchase price was
$1,200,000. The appraisers determined that the land should be valued at $400,000, the building at $500,000 and the
equipment at $200,000. Which of the following statements is correct?
a. Tarkington Beers, Inc. should record only the appraised value of the assets.
b. Tarkington Beers, Inc. needs to adjust the value of the assets in proportion to their appraised value so that the
total of the assets equals the purchase price.
c. Tarkington Beers, Inc. paid too much for the business and needs to record a loss.
d. Tarkington Beers, Inc. needs to record goodwill of $100,000.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
81. Miguel Foods, Inc. purchased a patent at the beginning of 2013 for $350,000. Economic benefits were expected for 7
years, but the patent’s legal life was 20 years. Also during 2013, the company incurred research and development
costs of $270,000. Patent amortization expense for 2013 is
a. $11,000
b. $17,500
c. $31,000
d. $50,000
82. Ramirez Stores purchased a trademark at the beginning of 2013 for $340,000. Economic benefits were expected for
10 years, but the trademark‘s legal life was 20 years. Also, during 2013, Ramirez incurred research and development
costs of $200,000. The book value of the trademarks at December 31, 2013, is
a. $506,000
b. $306,000
c. $323,000
d. $486,000
83. At the end of 2013, Clock Products, Inc. determined that one of its patents was worthless. The patent had a cost of
$300,000. The patent had been amortized for 5 years of its estimated 15-year legal life. Which of the following
statements is correct?
a. Clock Products must continue to amortize the patent over its remaining 10 years of life.
b. The patent must be reduced to 5/15, or 33.3% of its original cost and amortized over the remaining 10 years.
c. The remaining unamortized cost must be removed from the accounting records and treated as a loss on the
income statement.
d. Clock Products must correct its financial statements for the past five years, so that the entire cost is allocated to
that five-year period.
84. At the end of 2013, Mirror Productions determined that one of its copyrights was worthless. The copyright had a cost
of $320,000. The copyright had been amortized for 8 years of its estimated 25–year legal life. Which of the following
statements is the justification for removing the remaining cost of the copyright from the accounting records?
a. The copyright no longer represents a future benefit to the company.
b. The federal government does not allow copyrights to be recorded as assets once they are deemed worthless.
c. The cost of the copyright represents an obligation to return capital contributions to the stockholders.
d. The cost of the copyright has usefulness that will impact the net income of future accounting periods.
Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
85. Waxman Company purchased a patent for $170,000 at the beginning of 2013, and estimated that its expected useful
life was 10 years. The patent has a legal life of 17 years. What amount should be recorded as amortization expense
for the patent in 2013?
a. $-0-
b. $7,000
c. $10,000
d. $17,000
86. Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should
a. not be amortized.
b. be reported on the statement of retained earnings in the year in which acquired.
c. be amortized over a reasonable period of time not to exceed 40 years.
d. increase an expense account entirely in the year in which acquired.
87. The accounting life of intangible assets is determined by
a. their legal lives.
b. their useful lives.
c. their legal lives or useful lives, whichever is shorter.
d. the tax life mandated by the IRS.
88. Which of the following items is added to net income to determine cash flows from operating activities when the
indirect method is used to prepare the Operating Activities category of the statement of cash flows?
a. Accumulated depreciation
b. Cash from note payable related to truck acquired.
c. Cost of plant assets acquired during the year.
d. Depreciation expense
89. Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the
indirect method is used?
a. Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in
the Operating Activities section.
b. Depreciation provides cash and therefore must be added to net income.
c. Depreciation was deducted in arriving at net income on the accrual basis of accounting; however, it did not require
the use of cash.
d. Depreciation reduced the book value of plant assets and, therefore, must be reported as an investing activity.