Reporting and Analyzing Long-Lived Assets
9-41
193. The following information is provided for Nguyen Company and Northwest Corporation.
(in $ millions) Nguyen Company Northwest Corporation
Net income 2017 $165 $420
Net sales 2017 1,650 4,900
Total assets 12/31/15 1,000 2,400
Total assets 12/31/16 1,050 3,000
Total assets 12/31/17 1,150 4,000
If Nguyen and Northwest are in the same industry and the industry average for asset
turnover is equal to 1.20 times, which of the following statements is true?
a. Nguyen is operating more efficiently than the industry.
b. Northwest is operating more efficiently than Nguyen.
c. Both Nguyen and Northwest are operating more efficiently than the average company
in their industry.
d. The asset turnover does not address the question of efficient operations.
194. The following information is provided for Nguyen Company and Northwest Corporation.
(in $ millions) Nguyen Company Northwest Corporation
Net income 2017 $165 $420
Net sales 2017 1,650 4,900
Total assets 12/31/15 1,000 2,400
Total assets 12/31/16 1,050 3,000
Total assets 12/31/17 1,150 4,000
If Nguyen and Northwest are in the same industry and the industry average for return on
assets is equal to 30%, which of the following statements is true?
a. Nguyen is more profitable than the average company in its industry.
b. Northwest is more profitable than Nguyen.
c. Both Nguyen and Northwest are more profitable than the average company in their
industry.
d. Nguyen is more profitable than Northwest.
195. Using the following data for Stevenson Industries, compute the return on assets.
Net Income $ 180,000
Total Assets 12/31/17 2,410,000
Total Assets 12/31/16 1,980,000
Net Sales 250,000
a. 7.5%
b. 10.4%
c. 8.2%
d. 11.4%
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-42
196. During 2017, Ronald Corporation reported net sales of $2,000,000, net income of
$900,000, and depreciation expense of $100,000. Ronald also reported beginning total
assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and
accumulated depreciation of $500,000. Ronald’s asset turnover is
a. 2.0 times.
b. 1.6 times.
c. 1.33 times.
d. 0.72 times.
197. During 2017, Phelps Corporation reported net sales of $2,500,000, net income of
$1,320,000, and depreciation expense of $80,000. Phelps also reported beginning total
assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and
accumulated depreciation of $500,000. Phelps’s asset turnover is
a. 1.3 times.
b. 1.1 times.
c. 1.7 times.
d. 2.0 times.
198. Trademarks are generally shown on the balance sheet under
a. Intangibles.
b. Investments.
c. Property, Plant, and Equipment.
d. Current Assets.
199. Which of the following statements concerning financial statement presentation is false?
a. Intangibles are reported separately under Intangible Assets.
b. The balances of major classes of assets may be disclosed in the footnotes.
c. The balances of the accumulated depreciation of major classes of assets may be
disclosed in the footnotes.
d. The balances of all individual assets, as they appear in the subsidiary plant ledger,
should be disclosed in the footnotes.
200. Intangible assets
a. should be reported under the heading Property, Plant, and Equipment.
b. are not reported on the balance sheet because they lack physical substance.
c. should be reported as Current Assets on the balance sheet.
d. should be reported as a separate classification on the balance sheet.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-43
201. A company has the following assets:
Buildings and Equipment,
less accumulated depreciation of $5,000,000 $25,000,000
Copyrights 2,400,000
Patents 10,000,000
Land 12,000,000
The total amount reported under Property, Plant, and Equipment would be
a. $49,400,000.
b. $37,000,000.
c. $47,000,000.
d. $39,400,000.
(Bldg. & Equip. + Land)
202. Plant assets are ordinarily presented in the balance sheet
a. at current market values.
b. at replacement costs.
c. at cost less accumulated depreciation.
d. in a separate section along with intangible assets.
203. A company has the following assets:
Buildings and Equipment,
less accumulated depreciation of $4,000,000 $23,000,000
Copyrights 1,500,000
Patents 3,000,000
Land 5,000,000
The total amount reported under Property, Plant, and Equipment would be
a. $32,500,000.
b. $27,000,000.
c. $29,500,000.
d. $28,000,000.
*204. A company purchased office equipment for $30,000 and estimated a salvage value of
$6,000 at the end of its 8-year useful life. The constant percentage to be applied against
book value each year if the double-declining-balance method is used is
a. 8%.
b. 12.5%.
c. 25.0%.
d. 2.5%.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-44
*205. A company purchased factory equipment for $450,000. It is estimated that the equipment
will have a $45,000 salvage value at the end of its estimated 5-year useful life. If the
company uses the double-declining-balance method of depreciation, the amount of annual
depreciation recorded for the second year after purchase would be
a. $180,000.
b. $108,000.
c. $162,000.
d. $97,200.
*206. A plant asset cost $192,000 and is estimated to have a $24,000 salvage value at the end
of its 8-year useful life. The annual depreciation expense recorded for the third year using
the double-declining-balance method would be
a. $16,080.
b. $27,000.
c. $23,625.
d. $18,375.
*207. On January 1, a machine with a useful life of five years and a residual value of $80,000
was purchased for $240,000. What is the depreciation expense for year 2 under the
double-declining-balance method of depreciation?
a. $57,600.
b. $96,000.
c. $76,800.
d. $46,080.
*208. A factory machine was purchased for $140,000 on January 1, 2017. It was estimated that
it would have a $28,000 salvage value at the end of its 5-year useful life. It was also
estimated that the machine would be run 40,000 hours in the 5 years. If the actual number
of machine hours ran in 2017 was 4,000 hours and the company uses the units–of-activity
method of depreciation, the amount of depreciation expense for 2017 would be
a. $14,000.
b. $22,400.
c. $28,000.
d. $11,200.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-45
*209. A machine with a cost of $640,000 has an estimated salvage value of $40,000 and an
estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units–of–
activity method of depreciation. What is the amount of depreciation for the second full
year, during which the machine was used 5,000 hours?
a. $200,000.
b. $120,000.
c. $173,333.
d. $173,333.
*210. Equipment with a cost of $640,000 has an estimated salvage value of $40,000 and an
estimated life of 4 years or 15,000 hours. It is to be depreciated using the units–of–activity
method. What is the amount of depreciation for the first full year, during which the
equipment was used 3,300 hours?
a. $160,000.
b. $180,800.
c. $132,000.
d. $150,000.
*211. Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an
estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity
method. What is the amount of depreciation for the first full year, during which the
equipment was used 2,700 hours?
a. $112,500.
b. $105,000.
c. $113,400.
d. $108,750.
*212. On October 1, 2017, Hess Company places a new asset into service. The cost of the
asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its
useful life. What is the book value of the plant asset on the December 31, 2017, balance
sheet assuming that Hess Company uses the double-declining-balance method of
depreciation?
a. $78,000.
b. $90,000.
c. $108,000.
d. $114,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-46
*213. Vickers Company uses the units-of-activity method in computing depreciation. A new plant
asset is purchased for $36,000 that will produce an estimated 110,000 units over its useful
life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation
cost per unit?
a. $3.00.
b. $3.27.
c. $0.30.
d. $0.33.
*214. Units-of-activity is an appropriate depreciation method to use when
a. it is impossible to determine the productivity of the asset.
b. the asset’s use will be constant over its useful life.
c. the productivity of the asset varies significantly from one period to another.
d. the company is a manufacturing company.
*215. The calculation of depreciation using the declining-balance method
a. ignores salvage value in determining the amount to which a constant rate is applied.
b. multiplies a constant percentage times the previous year’s depreciation expense.
c. yields an increasing depreciation expense each period.
d. multiplies a declining percentage times a constant book value.
*216. Foyle Company purchased a new van for floral deliveries on January 1, 2017. The van
cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its
useful life. The double-declining-balance method of depreciation will be used. What is the
depreciation expense for 2017?
a. $11,200.
b. $8,400.
c. $16,800.
d. $22,400.
*217. Foyle Company purchased a new van for floral deliveries on January 1, 2016. The van
cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its
useful life. The double-declining-balance method of depreciation will be used. What is the
balance of the Accumulated Depreciation account at the end of 2017?
a. $8,960.
b. $26,880.
c. $35,840.
d. $13,440.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-47
*218. Conley Company purchased equipment for $120,000 on January 1, 2015, and will use the
double-declining-balance method of depreciation. It is estimated that the equipment will
have a 5-year life and a $6,000 salvage value at the end of its useful life. The amount of
depreciation expense recognized in the year 2017 will be
a. $17,280.
b. $27,360.
c. $28,800.
d. $16,416
*219. Interline Trucking purchased a tractor trailer for $112,000. Interline uses the units-of–
activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles
over its 12-year useful life. Salvage value is estimated to be $16,000. If the truck is driven
80,000 miles in its first year, how much depreciation expense should Interline record?
a. $7,110.
b. $8,960.
c. $7,680.
d. $8,296.
*220. Danford Trucking purchased a tractor trailer for $147,000. Danford uses the units-of–
activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles
over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven
80,000 miles in its first year, how much depreciation expense should Danford record?
a. $9,333.
b. $11,760.
c. $10,080.
d. $10,888.
*221. All of the following statements are true regarding the declining-balance method of
depreciation except
a. the declining-balance method ignores salvage value when calculating depreciation.
b. the declining-balance method produces lower depreciation expense in the early years
as opposed to the later years.
c. the declining-balance method is compatible with the matching principle.
d. the declining-balance method is appropriate when assets lose their usefulness rapidly.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-48
Answers to Multiple Choice Questions
Reporting and Analyzing Long-Lived Assets
9-49
BRIEF EXERCISES
Be. 222
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E), or none of these (X).
_____ 1. Parking lots
_____ 2. Electricity used by a machine
_____ 3. Excavation costs
_____ 4. Interest on building construction loan
_____ 5. Cost of trial runs for machinery
_____ 6. Drainage costs
_____ 7. Cost to install a machine
_____ 8. Fences
_____ 9. Unpaid (past) property taxes assumed
_____10. Cost of tearing down a building when land and a building on it are purchased
Be. 223
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E), or none of these (X).
_____ 1. Computer installation cost
_____ 2. Driveway cost
_____ 3. Architect’s fee
_____ 4. Surveying costs
_____ 5. Grading costs
_____ 6. Cost of lighting for parking lot
_____ 7. Insurance while in transit and freight on computer purchased
_____ 8. Material and labor costs incurred to construct factory
_____ 9. Cost of tearing down a warehouse on land just purchased
_____10. Utility cost during first year
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-50
Be. 224
Dobler Company purchased factory equipment with an invoice price of $78,000. Other costs
incurred were freight costs, $1,300; installation wiring and foundation, $2,200; material and labor
costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire
insurance policy covering equipment, $1,500. The equipment is estimated to have a $5,000
salvage value at the end of its 8-year useful service life.
Instructions
(a) Compute the acquisition cost of the equipment. Clearly identify each element of cost.
(b) If the straight-line method of depreciation was used, the annual rate applied to the
depreciable cost would be __________.
Be. 225
Revson Corporation purchased land adjacent to its plant to improve access for trucks making
deliveries. Expenditures incurred in purchasing the land were as follows: purchase price,
$55,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building
on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and
paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should
be included in the Land account.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-51
Be. 226
Equipment was acquired on January 1, 2013, at a cost of $75,000. The equipment was originally
estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has
been recorded through December 31, 2016, using the straight-line method. On January 1, 2017,
the estimated salvage value was revised to $7,000 and the useful life was revised to a total of 8
years.
Instructions
Determine the depreciation expense for 2017.
Be. 227
Equipment was acquired on January 1, 2014, at a cost of $170,000. The equipment was originally
estimated to have a salvage value of $10,000 and an estimated life of 10 years. Depreciation has
been recorded through December 31, 2016, using the straight-line method. On January 1, 2017,
the estimated salvage value was revised to $16,000 and the useful life was revised to a total of 8
years.
Instructions
Determine the depreciation expense for 2017.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-52
Be. 228
Gunselman Company purchased a machine on January 1, 2017. In addition to the purchase price
paid, the following additional costs were incurred:
(a) sales tax paid on the purchase price,
(b) transportation and insurance costs while the machinery was in transit from the seller,
(c) personnel training costs for initial operation of the machinery,
(d) installation costs necessary to secure the machinery to the building flooring,
(e) major overhaul to extend the life of the machinery,
(f) lubrication of the machinery gearing before the machinery was placed into service,
(g) lubrication of the machinery gearing after the machinery was placed into service, and
(h) annual city operating license.
Instructions
Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces
provided: C = Capital, R = Revenue.
(a)_____________ (b)______________ (c)______________ (d)______________
(e)_____________ (f)______________ (g)______________ (h)______________
Be. 229
Identify the following expenditures as capital expenditures or revenue expenditures.
(a) Replacement of worn out gears on factory machinery.
(b) Construction of a new wing on an office building.
(c) Painting the exterior of a building.
(d) Oil change on a company truck.
(e) Replacing an old computer chip with a faster chip, which increases productive capacity. No
extension of useful life expected.
(f) Overhaul of a truck motor. One year extension in useful life is expected.
(g) Purchased a wastebasket at a cost of $10.
(h) Painting and lettering of a used truck upon acquisition of the truck.
Reporting and Analyzing Long-Lived Assets
9-53
Be. 230
For each item listed below, enter a code letter in the blank space to indicate the allocation
terminology for the item. Use the following codes for your answer:
A—Amortization D—Depreciation N—None of these
____ 1. Copyrights _____ 6. Research and Development Costs
____ 2. Land _____ 7. Equipment
____ 3. Buildings _____ 8. Franchises
____ 4. Patents _____ 9. Annual licensing fees
____ 5. Trademarks _____ 10. Land Improvements
Be. 231
Using the following data for Hayes, Inc., compute its asset turnover and the return on assets ratio.
Hayes, Inc.
Net Income 2017 $ 123,000
Total Assets 12/31/17 2,243,000
Total Assets 12/31/16 1,880,000
Net Sales 2017 2,135,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-54
Be. 232
Indicate in the blank spaces below, the section of the balance sheet where the following items are
reported. Use the following code to identify your answer:
PPE Property, Plant, and Equipment
I Intangibles
O Other
N/A Not on the balance sheet
_____ 1. Goodwill _____ 6. Research and Development Costs
_____ 2. Land Improvements _____ 7. Land
_____ 3. Buildings _____ 8. Franchises
_____ 4. Accumulated Depreciation _____ 9. Licenses
_____ 5. Trademarks _____ 10. Equipment
*Be 233
Kinney Company purchased a truck for $66,000. The company expected the truck to last four
years or 100,000 miles, with an estimated residual value of $8,000 at the end of that time. During
the second year the truck was driven 27,000 miles. Compute the depreciation for the second year
under each of the methods below and place your answers in the blanks provided.
Units-of-activity $
Double-declining-balance $
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-55
EXERCISES
Ex. 234
For each entry below make a correcting entry if necessary. If the entry given is correct, then state
“No entry required.”
(a) The $70 cost of repairing a printer was charged to Equipment.
(b) The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs
Expense. The overhaul is expected to increase the operating efficiency of the truck.
(c) The $6,000 closing costs associated with the acquisition of land were debited to Operating
Expenses.
(d) A $300 charge for transportation expenses on new equipment purchased was debited to
Freight-In.
Ex. 235
Kendrick Company was organized on January 1. During the first year of operations, the following
expenditures and receipts were recorded in random order.
Debits
1. Cost of real estate purchased as a plant site (land and building) $ 130,000
2. Accrued real estate taxes paid at the time of the purchase of the real estate 4,000
3. Cost of demolishing building to make land suitable for construction of a new
building 10,000
4. Architect’s fees on building plans 14,000
5. Excavation costs for new building 30,000
6. Cost of filling and grading the land 5,000
7. Insurance and taxes during construction of building 6,000
8. Cost of repairs caused by a small fire shortly after completion of building 7,000
9. Interest paid during the year, of which $45,000 pertains to the construction
period 74,000
10. Full payment to building contractor 955,000
11. Cost of parking lots and driveways 36,000
12. Real estate taxes paid for the current year on the land 4,000
Total Debits $1,275,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-56
Ex. 235 (Cont.)
Credits
13. Proceeds from salvage of demolished building $3,500
Total Credits $3,500
Instructions
Analyze the foregoing transactions using the following tabular arrangement. Insert the number of
each transaction in the Item space and insert the amounts in the appropriate columns.
Item Land Buildings Other Account Title
Ex. 236
On March 1, 2017, Geoffrey Company acquired real estate, on which it planned to construct a
small office building, by paying $85,000 in cash. An old warehouse on the property was
demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional
expenditures before construction began included $1,500 attorney’s fee for work concerning the
land purchase, $5,500 real estate broker’s fee, $9,100 architect’s fee, and $16,000 to put in
driveways and a parking lot.
Instructions
(a) Determine the amount to be reported as the cost of the land.
(b) For each cost not used in part (a), indicate the account to be debited.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-57
Ex. 237
Mark’s Repair Service uses the straight-line method of depreciation. The company‘s fiscal year
end is December 31. The following transactions and events occurred during the first three years.
2016 July 1 Purchased equipment from the Equipment Center for $5,500 cash plus sales
tax of $305, and shipping costs of $250.
Nov. 3 Incurred ordinary repairs on computer of $240.
Dec. 31 Recorded 2016 depreciation on the basis of a four-year life and estimated
salvage value of $455
2017 Dec. 31 Recorded 2017 depreciation.
2018 Jan. 1 Paid $1,800 for a major upgrade of the equipment. This expenditure is
expected to increase the operating efficiency and capacity of the equipment.
Instructions
Prepare the necessary entries. (Show computations.)
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
9-58
Ex. 238
Mike Geary, the controller of Shellhammer Company, has reviewed the expected useful lives and
salvage values of selected depreciable assets at the beginning of 2017. Here are his findings:
Type of
Asset
Date
Acquired
Cost
Accumulated
Depreciation,
Jan. 1, 2017
Useful Life
(in Years)
Salvage Value
Old
Proposed
Old
Proposed
Building
Jan. 1, 2009
$2,700,000
$516,000
40
50
$120,000
$84,000
Warehouse
Jan. 1, 2012
240,000
46,000
25
20
10,000
8,000
All assets are depreciated by the straight-line method. Shellhammer Company uses a calendar
year in preparing annual financial statements. After discussion, management has agreed to
accept Mike‘s proposed changes. (The “Proposed” useful life is total life, not remaining life.)
Instructions
(a) Compute the revised annual depreciation on each asset in 2017. (Show computations.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2017.
Ex. 239
On January 1, 2014, Keller Company purchased and installed a telephone system at a cost of
$20,000. The equipment was expected to last five years with a salvage value of $3,000. On
January 1, 2015, more telephone equipment was purchased to tie-in with the current system for
$10,000. The new equipment is expected to have a useful life of four years and no salvage value.
Through an error, the new equipment was debited to Utilities Expense. Keller Company uses the
straight-line method of depreciation.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-59
Instructions
Prepare a schedule showing the effects of the error on Utilities Expense, Depreciation Expense,
and Net Income for each year and in total beginning in 2015 through the useful life of the new
equipment.
Utilities Expense Depreciation Expense Net Income
Overstated Overstated Overstated
Year (Understated) (Understated) (Understated)
——————————————————————————————————————————
2015
2016
2017
2018
Ex. 240
(a) Faster Company purchased equipment in 2010 for $104,000 and estimated an $8,000
salvage value at the end of the equipment’s 10-year useful life. At December 31, 2016, there
was $67,200 in the Accumulated Depreciation account for this equipment using the straight–
line method of depreciation. On March 31, 2017, the equipment was sold for $21,000.
Prepare the appropriate journal entries to remove the equipment from the books of Faster
Company on March 31, 2017.
(b) Lewis Company sold equipment for $11,000. The equipment originally cost $25,000 in 2014
and $6,000 was spent on a major overhaul in 2017 (charged to the Equipment account).
Accumulated Depreciation on the equipment to the date of disposal was $20,000.
Prepare the appropriate journal entry to record the disposition of the equipment.
(c) Selby Company sold equipment that had a book value of $13,500 for $15,000. The
equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace
the equipment.
Prepare the appropriate journal entry to record the disposition of the equipment.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-60
Ex. 241
Prepare the journal entries to record the following transactions for Reese Company, which has a
calendar year end and uses the straight-line method of depreciation.
(a) On September 30, 2017, the company sold old equipment for $46,000. The equipment was
purchased on January 1, 2015, for $96,000 and was estimated to have a $16,000 salvage
value at the end of its 5-year life. Depreciation on the equipment has been recorded through
December 31, 2016.
(b) On June 30, 2017, the company sold old equipment for $24,000. The equipment originally
cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.