Chapter 9—Fixed Assets and Intangible Assets Key
1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in
the ordinary course of business are called fixed assets.
2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary
costs to get the asset in place and ready for use.
3. When land is purchased to construct a new building, the cost of removing any structures on the land should
be charged to the building account.
4. Land acquired as a speculation is reported under Investments on the balance sheet.
5. To a major resort, timeshare properties would be classified as property, plant and equipment.
6. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property,
plant, and equipment on the balance sheet.
7. The cost of repairing damage to a machine during installation is debited to a fixed asset account.
8. During construction of a building, the cost of interest on a construction loan should be charged to an expense
account.
9. The cost of computer equipment does not include the consultant’s fee to supervise installation of the
equipment.
10. When cities give land or buildings to a company to locate in the community, no entry is made since there is
no cost to the company.
11. Capital expenditures are costs of acquiring, constructing, adding, or replacing property, plant and
equipment.
12. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the
future.
13. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are
betterments.
14. The cost of replacing an engine in a truck is an example of ordinary maintenance.
15. A capital lease is accounted for as if the asset has been purchased.
16. An operating lease is accounted for as if the lessee has purchased the asset.
17. An intangible asset is one that has a physical existence.
18. A capitalized asset will appear on the balance sheet as a long term asset.
19. Long lived assets held for sale are classified as fixed assets.
20. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level for which
it was intended.
21. The normal balance of the accumulated depreciation account is debit.
22. As a company records depreciation expense for a period of time a corresponding cash inflow from investing
activities is reported on the statement of cash flows.
23. All property, plant, and equipment assets are depreciated over time.
24. The book value of a fixed asset reported on the balance sheet represents its market value on that date.
25. The depreciable cost of a building is the same as its acquisition cost.
26. It is necessary for a company to use the same depreciation method for all of its depreciable assets.
27. It is not necessary for a company to use the same depreciation method for financial statements and for
determining income taxes.
28. An estimate of the amount which an asset can be sold at the end of its useful life is called residual value.
29. The units of production depreciation method provides a good match of expenses against revenue.
30. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year
has been determined, the amounts can not be changed.
31. Residual value is not incorporated in the initial calculations for double-declining-balance depreciation.
32. The double-declining-balance method is an accelerated depreciation method.
33. The double declining balance depreciation method calculates depreciation each year by taking twice the
straight line rate times the book value of the asset at the beginning of each year.
34. When minor errors occur in the estimates used in the determination of depreciation, the amounts recorded
for depreciation expense in the past should be corrected.
35. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an
estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method.
36. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of
$5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-production method
during a period when the asset was used for 4,500 hours.
37. The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000,
with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the declining-balance
method at twice the straight-line rate.
38. When depreciation estimates are revised, all years of the asset’s life are affected.
39. For income tax purposes most companies use an accelerated deprecation method called double declining
balance.
40. Assets may be grouped according to common traits and depreciated by using a single composite rate.
41. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will
be the same.
42. Revising depreciation estimates does affect the amounts of depreciation expense recorded in past periods.
43. Capital expenditures are costs that are charged to Stockholders’ Equity accounts.
44. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it
has been fully depreciated.
45. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the
book value of the asset.
46. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be
recorded.
47. Ordinary gains from the sale of fixed assets should be reported in the other income section of the income
statement.
48. A gain can be realized when a fixed asset is discarded.
49. When old equipment is traded in for a new equipment, the difference between the list price and the trade in
allowance is called boot.
50. When a plant asset is traded for another similar asset, losses on the asset traded are not recognized.
51. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results.
52. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, and a trade-in allowance of
$15,000 is granted by the seller, if the transaction is deemed to have commercial substance, the buyer would
report a gain on disposal of fixed assets of $5,000.
53. The entry to record the disposal of fixed assets will include a credit to accumulated depreciation.
54. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with the
disposal of the asset.
55. Minerals removed from the earth are classified as intangible assets.
56. The method used to calculate the depletion of a natural resource is the straight line method.
57. Intangible assets differ from property, plant and equipment assets in that they lack physical substance.
58. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in
usefulness is called amortization.
59. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is
amortized over 10 years.
60. Costs associated with normal research and development activities should be treated as intangible assets.
61. Patents are exclusive rights to manufacture, use, or sell a particular product or process.
62. When a major corporation develops its own trademark and over time it becomes very valuable, the
trademark may not be shown on their balance sheet due to lack of a material cost.
63. When a company establishes an outstanding reputation and has a competitive advantage because of it, the
company should record goodwill on its financial statements.
64. The difference between the balance in a fixed asset account and its related accumulated depreciation
account is the asset’s book value.
65. When a seller allows a buyer an amount for old equipment that is traded in for new equipment of similar
use, this amount is known as boot.
66. An exchange is said to have commercial substance if future cash flows remain the same as a result of the
exchange.
67. A characteristic of a fixed asset is that it is
68. Land acquired so it can be resold in the future is listed in the balance sheet as a(n)
69. Which of the following should be included in the acquisition cost of a piece of equipment?
70. Which of the following is included in the cost of constructing a building?
71. Which of the following is included in the cost of land?
72. Accumulated Depreciation
73. A building with an appraisal value of $154,000 is made available at an offer price of $172,000. The
purchaser acquires the property for $40,000 in cash, a 90-day note payable for $45,000, and a mortgage
amounting to $75,000. The cost basis recorded in the buyer’s accounting records to recognize this purchase is
75. A new machine with a purchase price of $109,000, with transportation costs of $12,000, installation costs of
$5,000, and special acquisition fees of $6,000, would have a cost basis of
76. Expenditures that add to the utility of fixed assets for more than one accounting period are
77. A capital expenditure results in a debit to
78. Which of the following below is an example of a capital expenditure?
79. In a lease contract, the party who legally owns the asset is the
80. All leases are classified as either
81. The journal entry for recording an operating lease payment would
82. When determining whether to record an asset as a fixed asset, what two criteria must be met?
83. Factors contributing to a decline in the usefulness of a fixed asset may be divided into the following two
categories
84. A fixed asset’s estimated value at the time it is to be retired from service is called
85. All of the following below are needed for the calculation of straight-line depreciation except
86. The method of determining depreciation that yields successive reductions in the periodic depreciation
charge over the estimated life of the asset is
87. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation
expense that best matches allocation of cost with revenue is
88. A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5
years or 15,000 hours. It is to be depreciated by the units-of-production method. What is the amount of
depreciation for the second full year, during which the machine was used 5,000 hours?
89. Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10
years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for
the first full year, during which the equipment was used 2,100 hours?
90. A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of 4 years
or 18,000 hours. What is the amount of depreciation for the second full year, using the double declining-balance
method?
91. The most widely used depreciation method is
92. Equipment 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 that the useful
life should be shortened by 3 years and the residual value changed to zero. The depreciation expense for the
current and future years is
93. The depreciation method that does not use residual value in calculating the first year’s depreciation expense
is
94.
If a fixed asset, such as a computer, were purchased on January 1st for $3,750 with an estimated life of 3 years
and a salvage or residual value of $150, the journal entry for monthly expense under straight-line depreciation
is:
(Note: EOM indicates the last day of each month.)
95. The proper journal entry to purchase a computer costing $975 on account on January 2 to be utilized within
the business would be:
96. Residual value is also known as all of the following except
97. The formula for depreciable cost is
98. Expected useful life is
99. The calculation for annual depreciation using the straight-line depreciation method is
100. The calculation for annual depreciation using the units-of-production method is
101. Computer equipment was acquired at the beginning of the year at a cost of $57,000 that has an estimated
residual value of $9,000 and an estimated useful life of 5 years. Determine the 2nd year’s depreciation using
straight-line depreciation.
102. Which of the following is true?
103. An asset was purchased for $120,000 on January 1, 2010 and originally estimated to have a useful life of
10 years with a residual value of $10,000. At the beginning of 2012, it was determined that the remaining
useful life of the asset was only 4 years with a residual value of $2,000. Calculate the 2012 depreciation
expense using the revised amounts and straight line method.
104. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset
priced at $60,000 in a transaction with commercial substance. Assuming a trade-in allowance of $5,000, the
cost basis of the new asset is
105. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset
priced at $50,000. Assuming a trade-in allowance of $4,000, the cost basis of the new asset is
106. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,500 is traded for a similar asset
priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is
107. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3,500. What is
the amount of the gain or loss on disposal of the fixed asset?
108. The Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery
and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of
$5,000. In recording this transaction, Bacon Company should record
109. When a company discards machinery that is fully depreciated, this transaction would be recorded with the
following entry
110. When a company sells machinery at a price equal to its book value, this transaction would be recorded
with an entry that would include the following:
111. When a company exchanges machinery and receives a trade-in allowance greater than the book value, this
transaction would be recorded with the following entry (assuming the exchange was considered to have
commercial substance):
112. When a company exchanges machinery and receives a trade-in allowance less than the book value, this
transaction would be recorded with the following entry:
113. On December 31, Strike Company has decided to discard one of its batting cages. The initial cost of the
equipment was $310,000 with an accumulated depreciation of $260,000. Depreciation has been taken up to the
end of the year. The following will be included in the entry to record the disposal.
114. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the
equipment was $310,000 with an accumulated depreciation of $260,000. Depreciation has been taken up to the
end of the year. The company found a company that is willing to buy the equipment for $50,000. What is the
amount of the gain or loss on this transaction?
115. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the
equipment was $310,000 with an accumulated depreciation of $260,000. Depreciation has been taken up to the
end of the year. The company found a company that is willing to buy the equipment for $20,000. What is the
amount of the gain or loss on this transaction?
116. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the
equipment was $310,000 with an accumulated depreciation of $260,000. Depreciation has been taken up to the
end of the year. The company 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?
117. On December 31, Strike Company has decided to trade-in one of its batting cages for another one that has
a cost of $500,000. The seller of the batting cage is willing to allow a trade-in amount of $11,000. The initial
cost of the old equipment was $215,000 with an accumulated depreciation of $185,000. Depreciation has been
taken up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on
this transaction?
118. When a company replaces a component of property, plant and equipment, which statement below does not
account for one of the steps in the process?
119. The accumulated depletion account is
120. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense
account is called
121. The Weber Company purchased a mining site for $1,750,000 on July 1, 2014. The company expects to
mine ore for the next 10 years and anticipates that a total of 400,000 tons will be recovered. The estimated
residual value of the property is $150,000. During 2014 the company extracted 6,500 tons of ore. The
depletion expense for 2014 is
122. Expenditures for research and development are generally recorded as
123. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of
intangible assets is
124. Xtra Company purchased goodwill from Argus for $96,000. Argus had developed the goodwill over 12
years. How much would Xtra amortize the goodwill for its first year?
125. Which intangible assets are amortized over their useful life?
126. The exclusive right to use a certain name or symbol is called a
127. Fixed assets are ordinarily presented in the balance sheet
128. Machinery was purchased on January 1, 2010 for $51,000. The machinery has an estimated life of 7 years
and an estimated salvage value of $9,000. Double-declining balance depreciation for 2011 would be
129. On June 1, 2014, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of
$90,000 and an estimated useful life of 3 years and 30,000 hours.
Using straight line depreciation, calculate depreciation expense for the first year.
130. On June 1, 2014, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of
$90,000 and an estimated useful life of 3 years and 30,000 hours.
Using straight line depreciation, calculate depreciation expense for the second year.
131. On June 1, 2014, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of
$90,000 and an estimated useful life of 3 years and 30,000 hours.
Using straight line depreciation, calculate depreciation expense for the last year.