CHAPTER 9
PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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Multiple Choice Questions (Cont.)
a202.
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Brief Exercises
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Exercises
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
50.
TF
62.
MC
68.
MC
74.
MC
237.
Ex
281.
C
2.
TF
57.
MC
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MC
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MC
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Ex
282.
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3.
TF
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Ex
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4.
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Ex
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MA
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TF
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6.
TF
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MC
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MC
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MC
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BE
280.
C
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
9 – 3
Learning Objective 2
7.
TF
76.
MC
92.
MC
108.
MC
118.
MC
135.
MC
246.
Ex
8.
TF
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EX
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TF
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248.
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TF
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EX
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TF
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122.
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222.
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250.
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TF
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MC
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113.
MC
123.
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223.
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251.
EX
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TF
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229.
BE
253.
Ex
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TF
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115.
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126.
MC
230.
BE
284.
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15.
TF
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MC
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116.
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127.
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231.
BE
285.
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TF
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MC
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117.
MC
128.
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232.
BE
286.
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TF
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MC
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MC
118.
MC
129.
MC
237.
Ex
287.
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18.
TF
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MC
119.
MC
130.
MC
241.
Ex
288.
C
19.
TF
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MC
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MC
120.
MC
131.
MC
242.
Ex
289.
C
51.
TF
89.
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MC
115.
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132.
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243.
Ex
303.
MA
52.
TF
90.
MC
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MC
116.
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133.
MC
244.
Ex
305.
SA
75.
MC
91.
MC
107.
MC
117.
MC
134.
MC
245.
Ex
309.
SA
Learning Objective 3
20.
TF
138.
MC
225.
MC
253.
Ex
306.
SA
21.
TF
139.
MC
226.
MC
254.
Ex
22.
TF
140.
MC
232.
BE
255.
Ex
23.
TF
213.
MC
238.
EX
290.
C
136.
MC
214.
MC
248.
Ex
291.
C
137.
MC
224.
MC
252.
Ex
303.
MA
Learning Objective 4
24.
TF
31.
TF
146.
MC
153.
MC
160.
MC
259.
Ex
311.
SA
25.
TF
124.
MC
147.
MC
154.
MC
161.
MC
260.
Ex
313.
SA
26.
TF
141.
MC
148.
MC
155.
MC
215.
MC
261.
Ex
27.
TF
142.
MC
149.
MC
156.
MC
233.
BE
292.
C
28.
TF
143.
MC
150.
MC
157.
MC
256.
Ex
293.
C
29.
TF
144.
MC
151.
MC
158.
MC
257.
Ex
294.
C
30.
TF
145.
MC
152.
MC
159.
MC
258.
Ex
295.
C
Learning Objective 5
32.
TF
36.
TF
162.
MC
166.
MC
170.
MC
234.
BE
265.
Ex
33.
TF
37.
TF
163.
MC
167.
MC
171.
MC
262.
Ex
296.
C
34.
TF
38.
TF
164.
MC
168.
MC
172.
MC
263.
Ex
35.
TF
53.
TF
165.
MC
169.
MC
216.
MC
264.
Ex
Learning Objective 6
39.
TF
173.
MC
180.
MC
187.
MC
194.
MC
269.
Ex
312.
SA
40.
TF
174.
MC
181.
MC
188.
MC
217.
MC
270.
Ex
41.
TF
175.
MC
182.
MC
189.
MC
218.
MC
297.
C
42.
TF
176.
MC
183.
MC
190.
MC
235.
BE
298.
C
43.
TF
177.
MC
184.
MC
191.
MC
266.
Ex
299.
C
54.
TF
178.
MC
185.
MC
192.
MC
267.
Ex
304.
MA
55.
TF
179.
MC
186.
MC
193.
MC
268.
Ex
310.
SA
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 4
Learning Objective 7
44.
TF
195.
MC
198.
MC
201.
MC
236.
BE
273.
Ex
307.
SA
45.
TF
196.
MC
199.
MC
218.
MC
271.
Ex
274.
Ex
46.
TF
197.
MC
200.
MC
219.
MC
272.
Ex
300.
C
Learning Objective a8
a47.
TF
a56.
TF
a204.
MC
a207.
MC
a276.
Ex
a301.
C
a48.
TF
a202.
MC
a205.
MC
a220.
MC
a277.
Ex
a302.
C
a49.
TF
a203.
MC
a206.
MC
a275.
Ex
a278.
Ex
308.
SA
Learning Objective 9
221.
MC
223.
MC
224.
MC
225.
MC
226.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Describe how the historical cost principle applies to plant assets. The cost of plant assets
includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once
cost is established, the company uses that amount as the the basis of accounting for the plant assets
over its useful life.
2. Explain the concept of depreciation and how to compute it. Depreciation is the allocation of the
cost of a plant asset to expense over its useful (service) life in a rational and systematic manner.
Depreciation is not a process of valuation, nor is it a process that results in an accumulation of cash.
Three depreciation methods are:
Effect on
Method Annual Depreciation Formula
Straight-line Constant amount Depreciable cost ÷ Useful life (in years)
Units-of-activity Varying amount Depreciable cost per unit × Units of activity during the year
Declining-balance Decreasing amount Book value at beginning of year × Declining-balance rate
Companies make revisions of periodic depreciation in present and future periods, not retroactively.
They determine the new annual depreciation by dividing the depreciable cost at the time of the
revision by the remaining useful life.
3. Distinguish between revenue and capital expenditures, and explain the entries for each.
Companies incur revenue expenditures to maintain the operating efficiency and productive life of an
asset. They debit these expenditures to Maintenance and Repairs Expense as incurred. Capital
expenditures increase the operating efficiency, productive capacity, or expected useful life of the
asset. Companies generally debit these expenditures to the plant asset affected.
4. Explain how to account for the disposal of a plant asset. The accounting for disposal of a plant
asset through retirement or sale is as follows.
(a) Eliminate the book value of the plant asset at the date of disposal.
(b) Record cash proceeds, if any.
(c) Account for the difference between the book value and the cash proceeds as a gain or loss on
disposal.
5. Compute periodic depletion of natural resources. Companies compute depletion cost per unit by
dividing the total cost of the natural resource minus salvage value by the number of units estimated
to be in the resource. They then multiply the depletion cost per unit by the number of units extracted
and sold.
Plant Assets, Natural Resources, and Intangible Assets
9 – 5
6. Explain the basic issues related to accounting for intangible assets. The process of allocating
the cost of an intangible asset is referred to as amortization. The cost of intangible assets with
indefinite lives is not amortized. Companies normally use the straight-line method for amortizing
intangible assets.
7. Indicate how plant assets, natural resources, and intangible assets are reported. Companies
usually combine plant assets and natural resources under property, plant, and equipment: They show
intangibles separately under intangible assets. Either within the balance sheet or in the notes,
companies should disclose the balances of the major classes of assets, such as land, buildings, and
equipment, and accumulated depreciation by major classes or in total. They also should describe the
depreciation and amortization methods used, and should disclose the amount of depreciation and
amortization expense for the period. The asset turnover measures the productivity of a company’s
assets in generating sales.
a8. Explain how to account for the exchange of plant assets. Ordinarily, companies record a gain or
loss on the exchange of plant assets. The rationale for recognizing a gain or loss is that most
exchanges have commercial substance. An exchange has commercial substance if the future cash
flows change as a result of the exchange.
TRUE-FALSE STATEMENTS
1. All plant assets (fixed assets) must be depreciated for accounting purposes.
2. When purchasing land, the costs for clearing, draining, filling, and grading should be
charged to a Land Improvements account.
3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be
charged to Delivery Equipment.
4. Land improvements are generally charged to the Land account.
5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset
unless the asset appreciates in value, in which case, market value becomes the basis for
accountability.
6. The book value of a plant asset is always equal to its fair market value.
7. Recording depreciation on plant assets affects the balance sheet and the income
statement.
8. The depreciable cost of a plant asset is its original cost minus obsolescence.
Test Bank for Financial Accounting, Ninth Edition
9 – 6
9. Recording depreciation each period is an application of the expense recognition principle.
10. The Accumulated Depreciation account represents a cash fund available to replace plant
assets.
11. In calculating depreciation, both plant asset cost and useful life are based on estimates.
12. Using the units-of-activity method of depreciating factory equipment will generally result in
more depreciation expense being recorded over the life of the asset than if the straight-
line method had been used.
13. Salvage value is not subtracted from plant asset cost in determining depreciation expense
under the declining-balance method of depreciation.
14. The declining-balance method of depreciation is called an accelerated depreciation
method because it depreciates an asset in a shorter period of time than the asset’s useful
life.
15. Under the double-declining-balance method, the depreciation rate used each year
remains constant.
16. The IRS does not require the taxpayer to use the same depreciation method on the tax
return that is used in preparing financial statements.
17. A change in the estimated useful life of a plant asset may cause a change in the amount
of depreciation recognized in the current and future periods, but not to prior periods.
18. A change in the estimated salvage value of a plant asset requires a restatement of prior
years’ depreciation.
19. To determine a new depreciation amount after a change in estimate of a plant asset’s
useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.
Plant Assets, Natural Resources, and Intangible Assets
9 – 7
20. Additions and improvements to a plant asset that increase the asset’s operating efficiency,
productive capacity, or expected useful life are generally expensed in the period incurred.
21. Capital expenditures are expenditures that increase the company’s investment in
productive facilities.
22. Ordinary repairs should be recognized when incurred as revenue expenditures.
23. A characteristic of capital expenditures is that the expenditures occur frequently during the
period of ownership.
24. Once an asset is fully depreciated, no additional depreciation can be taken even though
the asset is still being used by the business.
25. The fair value of a plant asset is always the same as its book value.
26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal
occurs.
27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the
asset sale are less than the asset’s book value.
28. The book value of a plant asset is the amount originally paid for the asset less anticipated
salvage value.
29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the
same way.
30. A plant asset must be fully depreciated before it can be removed from the books.
31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold
section of the income statement.
Test Bank for Financial Accounting, Ninth Edition
9 – 8
32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the
estimated number of units in the resource.
33. The Accumulated Depletion account is deducted from the cost of the natural resource in
the balance sheet.
34. Depletion expense for a period is only recognized on natural resources that have been
extracted and sold during the period.
35. Natural resources are long-lived productive assets that are extracted in operations and
are replaceable only by an act of nature.
36. The cost of natural resources is not allocated to expense because the natural resources
are replaceable only by an act of nature.
37. Conceptually, the cost allocation procedures for natural resources parallels that of plant
assets.
38. Natural resources include standing timber and underground deposits of oil, gas, and
minerals.
39. If an acquired franchise or license has an indefinite life, the cost of the asset is not
amortized.
40. When an entire business is purchased, goodwill is the excess of cost over the book value
of the net assets acquired.
41. Research and development costs which result in a successful product which is patentable
are charged to the Patent account.
42. The cost of a patent must be amortized over a 20-year period.
Plant Assets, Natural Resources, and Intangible Assets
9 – 9
43. The cost of a patent should be amortized over its legal life or useful life, whichever is
shorter.
44. The balances of the major classes of plant assets and accumulated depreciation by major
classes should be disclosed in the balance sheet or notes.
45. The asset turnover is calculated as total sales divided by ending total assets.
46. Research and development costs can be classified as a property, plant, and equipment
item or as an intangible asset.
a47. An exchange of plant assets has commercial substance if the future cash flows change as
a result of the exchange.
a48. Companies record a gain or loss on the exchange of plant assets because most
exchanges have commercial substance.
a49. When plant assets are exchanged, the cost of the new asset is the book value of the old
asset plus any cash paid.
50. When constructing a building, a company is permitted to include the acquisition cost and
certain interest costs incurred in financing the project.
51. Recognition of depreciation permits the accumulation of cash for the replacement of the
asset.
52. When an asset is purchased during the year, it is not necessary to record depreciation
expense in the first year under the declining-balance depreciation method.
53. Depletion expense is reported in the income statement as an operating expense.
54. Goodwill is not recognized in accounting unless it is acquired from purchasing another
business enterprise.
Test Bank for Financial Accounting, Ninth Edition
9 – 10
55. Research and development costs should be charged to expense when incurred.
a56. A loss on the exchange of plant assets occurs when the fair market value of the old asset
is less than its book value.
Answers to True-False Statements
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MULTIPLE CHOICE QUESTIONS
57. The cost of a purchased building includes all of the following except
a. closing costs.
b. real estate broker’s commission.
c. remodeling costs.
d. All of these answers are correct.
58. A company purchased land for $90,000 cash. Real estate brokers’ commission was
$5,000 and $7,000 was spent for demolishing an old building on the land before
construction of a new building could start. Under the historical cost principle, the cost of
land would be recorded at
a. $107,000.
b. $90,000.
c. $70,000.
d. $102,000.
Plant Assets, Natural Resources, and Intangible Assets
9 – 11
59. Which one of the following items is not considered a part of the cost of a truck purchased
for business use?
a. Sales tax
b. Truck license
c. Freight charges
d. Cost of lettering on side of truck
60. Which of the following assets does not decline in service potential over the course of its
useful life?
a. Equipment
b. Furnishings
c. Land
d. Fixtures
61. The four subdivisions for plant assets are
a. land, land improvements, buildings, and equipment.
b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment.
d. property, plant, equipment, and land.
62. The cost of land does not include
a. real estate brokers’ commission.
b. annual property taxes.
c. accrued property taxes assumed by the purchaser.
d. title fees.
63. Gagner Clinic purchases land for $175,000 cash. The clinic assumes $1,500 in property
taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land
graded for $2,200. What amount does Gagner Clinic record as the cost for the land?
a. $157,200
b. $175,000
c. $179,700
d. $157,500
64. Carey Company buys land for $50,000 on 12/31/14. As of 3/31/15, the land has
appreciated in value to $50,700. On 12/31/15, the land has an appraised value of
$51,800. By what amount should the Land account be increased in 2015?
a. $0
b. $700
c. $1,100
d. $1,800
Test Bank for Financial Accounting, Ninth Edition
9 – 12
65. Hull Company acquires land for $86,000 cash. Additional costs are as follows:
Removal of shed $ 300
Filling and grading 1,500
Salvage value of lumber of shed 120
Broker commission 1,130
Paving of parking lot 10,000
Closing costs 560
Hull will record the acquisition cost of the land as
a. $96,000.
b. $87,690.
c. $89,610.
d. $89,370.
66. Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to
illuminate the new parking area cost $25,000. Which of the following statements is true
with respect to these additions?
a. $40,000 should be debited to the Land account.
b. $25,000 should be debited to Land Improvements.
c. $65,000 should be debited to the Land account.
d. $65,000 should be debited to Land Improvements.
67. Land improvements should be depreciated over the useful life of the
a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer.
d. land improvements.
68. Mattox Company is building a new plant that will take three years to construct. The
construction will be financed in part by funds borrowed during the construction period.
There are significant architect fees, excavation fees, and building permit fees. Which of
the following statements is true?
a. Excavation fees are capitalized but building permit fees are not.
b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on
borrowed funds.
Plant Assets, Natural Resources, and Intangible Assets
9 – 13
69. A company purchases a remote site building for computer operations. The building will be
suitable for operations after some expenditures. The wiring must be replaced to computer
specifications. The roof is leaky and must be replaced. All rooms must be repainted and
recarpeted and there will also be some plumbing work done. Which of the following
statements is true?
a. The cost of the building will not include the repainting and recarpeting costs.
b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional
expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.
70. Engler Company purchases a new delivery truck for $55,000. The sales taxes are $4,000.
The logo of the company is painted on the side of the truck for $1,600. The truck license is
$160. The truck undergoes safety testing for $290. What does Engler record as the cost of
the new truck?
a. $61,050
b. $60,890
c. $59,000
d. $60,600
71. All of the following factors in computing depreciation are estimates except
a. cost.
b. residual value.
c. salvage value.
d. useful life.
72. Presto Company purchased equipment and these costs were incurred:
Cash price $65,000
Sales taxes 3,600
Insurance during transit 640
Installation and testing 860
Total costs $70,100
Presto will record the acquisition cost of the equipment as
a. $65,000.
b. $68,600.
c. $69,240.
d. $70,100.
Test Bank for Financial Accounting, Ninth Edition
9 – 14
73. Angie’s Blooms purchased a delivery van for $40,000. The company was given a $4,000
cash discount by the dealer, and paid $2,000 sales tax. Annual insurance on the van is
$1,000. As a result of the purchase, by how much will Angie’s Blooms increase its van
account?
a. $40,000
b. $36,000
c. $39,000
d. $38,000
74. Yocum Company purchased equipment on January 1 at a list price of $120,000, with
credit terms 2/10, n/30. Payment was made within the discount period and Yocum was
given a $2,400 cash discount. Yocum paid $6,000 sales tax on the equipment, and paid
installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete
slab on which to place the equipment. What is the total cost of the new equipment?
a. $125,360
b. $129,360
c. $131,760
d. $123,600
75. Interest may be included in the acquisition cost of a plant asset
a. during the construction period of a self-constructed asset.
b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable.
d. if it is a part of a lump-sum purchase.
76. The balance in the Accumulated Depreciation account represents the
a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market
value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.
77. Which one of the following items is not a consideration when recording periodic
depreciation expense on plant assets?
a. Salvage value
b. Estimated useful life
c. Cash needed to replace the plant asset
d. Cost
Plant Assets, Natural Resources, and Intangible Assets
9 – 15
78. Depreciation is the process of allocating the cost of a plant asset over its service life in
a. an equal and equitable manner.
b. an accelerated and accurate manner.
c. a systematic and rational manner.
d. a conservative market-based manner.
79. The book value of an asset is equal to the
a. asset’s fair value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset’s cost less accumulated depreciation.
80. Accountants do not attempt to measure the change in a plant asset’s fair value during
ownership because
a. the assets are not held for resale.
b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management’s responsibility to determine fair values.
81. Depreciation is a process of
a. asset devaluation.
b. cost accumulation.
c. cost allocation.
d. asset valuation.
82. Recording depreciation each period is necessary in accordance with the
a. going concern principle.
b. historical cost principle.
c. expense recognition principle.
d. asset valuation principle.
83. In computing depreciation, salvage value is
a. the fair value of a plant asset on the date of acquisition.
b. subtracted from accumulated depreciation to determine the plant asset’s depreciable
cost.
c. an estimate of a plant asset’s value at the end of its useful life.
d. ignored in all the depreciation methods.
Test Bank for Financial Accounting, Ninth Edition
9 – 16
84. When estimating the useful life of an asset, accountants do not consider
a. the cost to replace the asset at the end of its useful life.
b. obsolescence factors.
c. expected repairs and maintenance.
d. the intended use of the asset.
85. Useful life is expressed in terms of use expected from the asset under the
a. declining-balance method.
b. straight-line method.
c. units-of-activity method.
d. none of these answer choices are correct.
86. Equipment was purchased for $300,000. Freight charges amounted to $14,000 and there
was a cost of $40,000 for building a foundation and installing the equipment. It is
estimated that the equipment will have a $60,000 salvage value at the end of its 5-year
useful life. Depreciation expense each year using the straight-line method will be
a. $70,800.
b. $58,800.
c. $49,200.
d. $48,000.
87. A truck was purchased for $180,000 and it was estimated to have a $36,000 salvage
value at the end of its useful life. Monthly depreciation expense of $3,000 was recorded
using the straight-line method. The annual depreciation rate is
a. 20%.
b. 2%.
c. 8%.
d. 25%.
88. A company purchased factory equipment on April 1, 2015 for $160,000. It is estimated
that the equipment will have a $20,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2015 is
a. $16,000.
b. $14,000.
c. $10,500.
d. $12,000.
Plant Assets, Natural Resources, and Intangible Assets
9 – 17
89. A company purchased office equipment for $40,000 and estimated a salvage value of
$8,000 at the end of its 5-year useful life. The constant percentage to be applied against
book value each year if the double-declining-balance method is used is
a. 20%.
b. 25%.
c. 40%.
d. 5%.
90. The declining-balance method of depreciation produces
a. a decreasing depreciation expense each period.
b. an increasing depreciation expense each period.
c. a declining percentage rate each period.
d. a constant amount of depreciation expense each period.
91. A company purchased factory equipment for $700,000. It is estimated that the equipment
will have a $70,000 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. $280,000.
b. $168,000.
c. $252,000.
d. $120,960.
92. The units-of-activity method is generally not suitable for
a. airplanes.
b. buildings.
c. delivery equipment.
d. factory machinery.
93. A plant asset cost $288,000 and is estimated to have a $36,000 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. $24,120.
b. $40,500.
c. $35,436.
d. $27,570.
Test Bank for Financial Accounting, Ninth Edition
9 – 18
94. A factory machine was purchased for $375,000 on January 1, 2015. It was estimated that
it would have a $75,000 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. The company ran
the machine for 4,000 actual hours in 2015. If the company uses the units-of-activity
method of depreciation, the amount of depreciation expense for 2015 would be
a. $37,500.
b. $60,000.
c. $75,000.
d. $30,000.
95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method
which
a. is used for tax purposes.
b. must be used for financial statement purposes.
c. is required by the SEC.
d. expenses an asset over a single year because capital acquisitions must be expensed
in the year purchased.
96. Which of the following methods of computing depreciation is production based?
a. Straight-line
b. Declining-balance
c. Units-of-activity
d. None of these answer choices are correct.
97. Management should select the depreciation method that
a. is easiest to apply.
b. best measures the plant asset’s market value over its useful life.
c. best measures the plant asset’s contribution to revenue over its useful life.
d. has been used most often in the past by the company.
98. The depreciation method that applies a constant percentage to depreciable cost in
calculating depreciation is
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. None of these answers are correct.
Plant Assets, Natural Resources, and Intangible Assets
9 – 19
99. On October 1, 2015, Holt 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 depreciation expense for 2015 if Holt Company uses the straight-
line method of depreciation?
a. $4,500
b. $24,000
c. $6,000
d. $12,000
100. On October 1, 2015, Holt 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, 2015, balance
sheet assuming that Holt Company uses the double-declining-balance method of
depreciation?
a. $78,000
b. $90,000
c. $108,000
d. $114,000
101. Which depreciation method is most frequently used in businesses today?
a. Straight-line
b. Declining-balance
c. Units-of-activity
d. Double-declining-balance
102. Mott Company uses the units-of-activity method in computing depreciation. A new plant
asset is purchased for $48,000 that will produce an estimated 100,000 units over its useful
life. Estimated salvage value at the end of its useful life is $4,000. What is the depreciation
cost per unit?
a. $4.40
b. $4.80
c. $.44
d. $.48
103. 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.
Test Bank for Financial Accounting, Ninth Edition
9 – 20
104. 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.
105. Farr Company purchased a new van for floral deliveries on January 1, 2015. 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 2015?
a. $11,200
b. $8,400
c. $16,800
d. $22,400
106. Farr Company purchased a new van for floral deliveries on January 1, 2015. 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 2016?
a. $8,960
b. $26,880
c. $35,840
d. $13,440
107. Moreno Company purchased equipment for $900,000 on January 1, 2014, and will use
the double-declining-balance method of depreciation. It is estimated that the equipment
will have a 3-year life and a $40,000 salvage value at the end of its useful life. The amount
of depreciation expense recognized in the year 2016 will be
a. $100,000.
b. $60,000.
c. $108,880.
d. $68,880.
Plant Assets, Natural Resources, and Intangible Assets
9 – 21
108. A plant asset was purchased on January 1 for $100,000 with an estimated salvage value
of $20,000 at the end of its useful life. The current year’s Depreciation Expense is $10,000
calculated on the straight-line basis and the balance of the Accumulated Depreciation
account at the end of the year is $50,000. The remaining useful life of the plant asset is
a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.
109. Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there
was a cost of $20,000 for building a foundation and installing the equipment. It is
estimated that the equipment will have a $30,000 salvage value at the end of its 5-year
useful life. Depreciation expense each year using the straight-line method will be
a. $35,400.
b. $29,400.
c. $24,600.
d. $24,000.
110. Equipment was purchased for $85,000 on January 1, 2015. Freight charges amounted to
$3,500 and there was a cost of $10,000 for building a foundation and installing the
equipment. It is estimated that the equipment will have a $15,000 salvage value at the end
of its 5-year useful life. What is the amount of accumulated depreciation at December 31,
2016, if the straight-line method of depreciation is used?
a. $33,400
b. $16,700
c. $14,300
d. $28,600
111. A company purchased factory equipment on June 1, 2015, for $160,000. It is estimated
that the equipment will have a $10,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2015, is
a. $15,000.
b. $8,750.
c. $7,500.
d. $6,250.
Test Bank for Financial Accounting, Ninth Edition
9 – 22
112. A plant asset was purchased on January 1 for $60,000 with an estimated salvage value of
$12,000 at the end of its useful life. The current year’s Depreciation Expense is $6,000
calculated on the straight-line basis and the balance of the Accumulated Depreciation
account at the end of the year is $30,000. The remaining useful life of the plant asset is
a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.
113. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000
and had an expected salvage value of $60,000. The life of the equipment was estimated
to be 6 years. The depreciable cost of the equipment is
a. $360,000.
b. $300,000.
c. $200,000.
d. $50,000.
114. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000
and had an expected salvage value of $60,000. The life of the equipment was estimated
to be 6 years. The depreciation expense using the straight-line method of depreciation is
a. $70,000.
b. $72,000.
c. $50,000.
d. None of these answer choices are correct.
115. Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000
and had an expected salvage value of $60,000. The life of the equipment was estimated
to be 6 years. Assuming straight-line deprecation, the book value of the equipment at the
beginning of the third year would be
a. $360,000.
b. $150,000.
c. $260,000.
d. $100,000.
Plant Assets, Natural Resources, and Intangible Assets
9 – 23
116. Tomko Company purchased machinery with a list price of $96,000. They were given a
10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500.
Tomko estimates that the machinery will have a useful life of 10 years and a residual
value of $30,000. If Tomko uses straight-line depreciation, annual depreciation will be
a. $6,150.
b. $6,108.
c. $9,150.
d. $5,640.
117. Drago Company purchased equipment on January 1, 2015, at a total invoice cost of
$1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated
useful life of 5 years. What is the amount of accumulated depreciation at December 31,
2016, if the straight-line method of depreciation is used?
a. $240,000
b. $480,000
c. $234,000
d. $468,000
118. On January 1, a machine with a useful life of five years and a residual value of $30,000
was purchased for $90,000. What is the depreciation expense for year 2 under the
double-declining-balance method of depreciation?
a. $21,600
b. $36,000
c. $28,800
d. $17,280
119. A machine with a cost of $480,000 has an estimated salvage value of $30,000 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. $150,000
b. $90,000
c. $130,000
d. $160,000
Test Bank for Financial Accounting, Ninth Edition
9 – 24
120. Equipment with a cost of $400,000 has an estimated salvage value of $25,000 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. $100,000
b. $113,800
c. $82,500
d. $93,750
121. Eckman Company purchased equipment for $120,000 on January 1, 2014, 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 2016 will be
a. $17,280.
b. $27,360.
c. $28,800.
d. $16,416.
122. Grimwood Trucking purchased a tractor trailer for $171,500. 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 $24,500. If the truck is driven
90,000 miles in its first year, how much depreciation expense should Grimwood record?
a. $12,250
b. $15,435
c. $13,230
d. $14,292
123. On May 1, 2015, Pinkley Company sells office furniture for $300,000 cash. The office
furniture originally cost $750,000 when purchased on January 1, 2008. Depreciation is
recorded by the straight-line method over 10 years with a salvage value of $75,000. What
depreciation expense should be recorded on this asset in 2015?
a. $22,500.
b. $25,000.
c. $33,750.
d. $67,500.
Plant Assets, Natural Resources, and Intangible Assets
9 – 25
124. On May 1, 2015, Pinkley Company sells office furniture for $300,000 cash. The office
furniture originally cost $750,000 when purchased on January 1, 2008. Depreciation is
recorded by the straight-line method over 10 years with a salvage value of $75,000. What
gain should be recognized on the sale?
a. $22,500.
b. $45,000.
c. $47,500.
d. $90,000.
125. Mather Company purchased equipment on January 1, 2015 at a total invoice cost of
$336,000; additional costs of $6,000 for freight and $30,000 for installation were incurred.
The equipment has an estimated salvage value of $12,000 and an estimated useful life of
five years. The amount of accumulated depreciation at December 31, 2016 if the straight-
line method of depreciation is used is:
a. $129,600.
b. $132,000.
c. $144,000.
d. $148,800.
126. Kingston Company purchased a piece of equipment on January 1, 2015. The equipment
cost $200,000 and had an estimated life of 8 years and a salvage value of $25,000. What
was the depreciation expense for the asset for 2016 under the double-declining-balance
method?
a. $21,667.
b. $37,500.
c. $50,000.
d. $39,063.
127. Able Towing Company purchased a tow truck for $180,000 on January 1, 2014. It was
originally depreciated on a straight-line basis over 10 years with an assumed salvage
value of $36,000. On December 31, 2016, before adjusting entries had been made, the
company decided to change the remaining estimated life to 4 years (including 2016) and
the salvage value to $5,000. What was the depreciation expense for 2016?
a. $18,000.
b. $14,400.
c. $45,000.
d. $36,550
Test Bank for Financial Accounting, Ninth Edition
9 – 26
128. Nicholson Company purchased equipment on January 1, 2013, for $80,000 with an
estimated salvage value of $20,000 and estimated useful life of 8 years. On January 1,
2015, Nicholson decided the equipment will last 12 years from the date of purchase. The
salvage value is still estimated at $20,000. Using the straight-line method the new annual
depreciation will be:
a. $4,500.
b. $5,000.
c. $6,000.
d. $6,667.
129. An asset was purchased for $250,000. It had an estimated salvage value of $50,000 and
an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is
revised to $40,000 but the estimated useful life is unchanged. Assuming straight-line
depreciation, depreciation expense in year 6 would be
a. $30,000.
b. $22,000.
c. $15,000.
d. $21,000.
130. Equipment costing $70,000 with a salvage value of $14,000 and an estimated life of 8
years has been depreciated using the straight-line method for 2 years. Assuming a
revised estimated total life of 5 years and no change in the salvage value, the depreciation
expense for year 3 would be
a. $ 8,400.
b. $18,667.
c. $14,000.
d. $11,200.
131. Ron’s Quik Shop bought machinery for $75,000 on January 1, 2014. Ron estimated the
useful life to be 5 years with no salvage value, and the straight-line method of depreciation
will be used. On January 1, 2015, Ron decides that the business will use the machinery
for a total of 6 years. What is the revised depreciation expense for 2015?
a. $12,000
b. $ 6,000
c. $10,000
d $15,000
Plant Assets, Natural Resources, and Intangible Assets
9 – 27
132. Each of the following is used in computing revised annual depreciation for a change in
estimate except
a. book value.
b. cost.
c. depreciable cost.
d. remaining useful life.
133. A change in the estimated useful life of equipment requires
a. a retroactive change in the amount of periodic depreciation recognized in previous
years.
b. that no change be made in the periodic depreciation so that depreciation amounts are
comparable over the life of the asset.
c. that the amount of periodic depreciation be changed in the current year and in future
years.
d. that income for the current year be increased.
134. Enos Company has decided to change the estimate of the useful life of an asset that has
been in service for 2 years. Which of the following statements describes the proper way to
revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation.
c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.
135. Don’s Copy Shop bought equipment for $450,000 on January 1, 2014. Don estimated the
useful life to be 3 years with no salvage value, and the straight-line method of depreciation
will be used. On January 1, 2015, Don decides that the business will use the equipment
for a total of 5 years. What is the revised depreciation expense for 2015?
a. $150,000
b. $ 60,000
c. $ 75,000
d. $112,500
136. Costs incurred to increase the operating efficiency or useful life of a plant asset are
referred to as
a. capital expenditures.
b. expense expenditures.
c. ordinary repairs.
d. revenue expenditures.
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137. Expenditures that maintain the operating efficiency and expected productive life of a plant
asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Depreciation account.
d. not recorded until they become material in amount.
138. Which of the following is not true of ordinary repairs?
a. They primarily benefit the current accounting period.
b. They can be referred to as revenue expenditures.
c. They maintain the expected productive life of the asset.
d. They increase the productive capacity of the asset.
139. The paneling of the body of an open pickup truck would be classified as a(n)
a. revenue expenditure.
b. addition.
c. improvement.
d. ordinary repair.
140. Additions and improvements
a. occur frequently during the ownership of a plant asset.
b. normally involve immaterial expenditures.
c. increase the book value of plant assets when incurred.
d. typically only benefit the current accounting period.
141. If a plant asset is retired before it is fully depreciated and no salvage value is received,
a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. either a gain or a loss can occur.
d. neither a gain nor a loss occurs.
142. A gain or loss on disposal of a plant asset is determined by comparing the
a. replacement cost of the asset with the asset’s original cost.
b. book value of the asset with the asset’s original cost.
c. original cost of the asset with the proceeds received from its sale.
d. book value of the asset with the proceeds received from its sale.
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143. The book value of a plant asset is the difference between the
a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of depreciation expense for the year.
c. cost of the asset and the accumulated depreciation to date.
d. proceeds received from the sale of the asset and its original cost.
144. If a plant asset is sold before it is fully depreciated,
a. only a gain on disposal can occur.
b. only a loss on disposal can occur.
c. either a gain or a loss can occur.
d. neither a gain nor a loss can occur.
145. If a plant asset is retired before it is fully depreciated, and the salvage value received is
less than the asset’s book value,
a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. there is no gain or loss on disposal.
d. additional depreciation expense must be recorded.
146. A company sells a plant asset which originally cost $360,000 for $120,000 on December 31,
2015. The Accumulated Depreciation account had a balance of $144,000 after the current
year’s depreciation of $36,000 had been recorded. The company should recognize a
a. $240,000 loss on disposal.
b. $96,000 gain on disposal.
c. $96,000 loss on disposal.
d. $60,000 loss on disposal.
147. If disposal of a plant asset occurs during the year, depreciation is
a. not recorded for the year.
b. recorded for the whole year.
c. recorded for the fraction of the year to the date of the disposal.
d. not recorded if the asset is scrapped.
148. If a fully depreciated plant asset is still used by a company, the
a. estimated remaining useful life must be revised to calculate the correct revised
depreciation.
b. asset is removed from the books.
c. accumulated depreciation account is removed from the books but the asset account
remains.
d. asset and the accumulated depreciation continue to be reported on the balance sheet
without adjustment until the asset is retired.
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149. Which of the following statements is not true when a fully depreciated plant asset is
retired?
a. The plant asset‘s book value is equal to its estimated salvage value.
b. The accumulated depreciation account is debited.
c. The asset account is credited.
d. The plant asset‘s original cost equals its book value.
150. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is
received,
a. a gain on disposal will be recorded.
b. phantom depreciation must be taken as though the asset were still on the books.
c. a loss on disposal will be recorded.
d. no gain or loss on disposal will be recorded.
151. The book value of an asset will equal its fair market value at the date of sale if
a. a gain on disposal is recorded.
b. no gain or loss on disposal is recorded.
c. the plant asset is fully depreciated.
d. a loss on disposal is recorded.
152. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the
fire, the accumulated depreciation on the truck was $50,000. An insurance check for
$125,000 was received based on the replacement cost of the truck. The entry to record
the insurance proceeds and the disposition of the truck will include a
a. Gain on Disposal of $15,000.
b. credit to the Truck account of $60,000.
c. credit to the Accumulated Depreciation account for $50,000.
d. Gain on Disposal of $65,000.
153. On July 1, 2015, Hale Kennels sells equipment for $220,000. The equipment originally
cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000.
The accumulated depreciation account had a balance of $350,000 on January 1, 2015,
using the straight-line method. The gain or loss on disposal is
a. $30,000 gain.
b. $20,000 loss.
c. $30,000 loss.
d. $20,000 gain.
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154. A loss on disposal of a plant asset is reported in the financial statements
a. in the Other Revenues and Gains section of the income statement.
b. in the Other Expenses and Losses section of the income statement.
c. as a direct increase to the capital account on the balance sheet.
d. as a direct decrease to the capital account on the balance sheet.
155. Yanik Company’s delivery truck, which originally cost $84,000, was destroyed by fire. At
the time of the fire, the balance of the Accumulated Depreciation account amounted to
$57,000. The company received $48,000 reimbursement from its insurance company. The
gain or loss as a result of the fire was
a. $36,000 loss.
b. $21,000 loss.
c. $36,000 gain.
d. $21,000 gain.
156. Equipment that cost $420,000 and on which $200,000 of accumulated depreciation has
been recorded was disposed of for $180,000 cash. The entry to record this event would
include a
a. gain of $40,000.
b. loss of $40,000.
c. credit to the Equipment account for $220,000.
d. credit to Accumulated Depreciation for $200,000.
157. A truck that cost $72,000 and on which $60,000 of accumulated depreciation has been
recorded was disposed of for $18,000 cash. The entry to record this event would include a
a. gain of $6,000.
b. loss of $6,000.
c. credit to the Equipment account for $12,000.
d. credit to Accumulated Depreciation for $60,000.
158. Orr Corporation sold equipment for $30,000. The equipment had an original cost of
$90,000 and accumulated depreciation of $45,000. As a result of the sale,
a. net income will increase $30,000.
b. net income will increase $15,000.
c. net income will decrease $15,000.
d. net income will decrease $30,000.
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159. Powell’s Courier Service recorded a loss of $9,000 when it sold a van that originally cost
$84,000 for $15,000. Accumulated depreciation on the van must have been
a. $78,000.
b. $24,000.
c. $75,000.
d. $60,000.
160. A plant asset cost $90,000 when it was purchased on January 1, 2008. It was depreciated
by the straight-line method based on a 9-year life with no salvage value. On June 30,
2015, the asset was discarded with no cash proceeds. What gain or loss should be
recognized on the retirement?
a. No gain or loss.
b. $20,000 loss.
c. $15,000 loss.
d. $10,000 gain.
161. Nicklaus Company has decided to sell one of its old machines on June 30, 2015. The
machine was purchased for $200,000 on January 1, 2011, and was depreciated on a
straight-line basis for 10 years with no salvage value. If the machine was sold for $65,000,
what was the amount of the gain or loss recorded at the time of the sale?
a. $45,000.
b. $135,000.
c. $55,000.
d. $115,000.
162. On a balance sheet, natural resources may be described more specifically as all of the
following except
a. land improvements.
b. mineral deposits.
c. oil reserves.
d. timberlands.
163. Natural resources are
a. depreciated using the units-of-activity method.
b. physically extracted in operations and are replaceable only by an act of nature.
c. reported at their market value.
d. amortized over a period no longer than 40 years.
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164. Depletion is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are extracted.
c. the allocation of the cost of natural resources to expense.
d. the method used to record unsuccessful patents.
165. To qualify as natural resources in the accounting sense, assets must be
a. underground.
b. replaceable.
c. of a mineral nature.
d. physically extracted in operations.
166. The method most commonly used to compute depletion is the
a. straight-line method.
b. double-declining-balance method.
c. units-of-activity method.
d. effective interest method.
167. In computing depletion, salvage value is
a. always immaterial.
b. ignored.
c. impossible to estimate.
d. included in the calculation.
168. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons,
a. total depletion on the mine is based on the 1,200,000 tons.
b. depletion expense is recognized on the 1,500,000 tons extracted.
c. depletion expense is recognized on the 1,200,000 tons extracted and sold.
d. a separate accumulated depletion account is set up to record depletion on the
300,000 tons extracted but not sold.
169. A coal company invests $15 million in a mine estimated to have 20 million tons of coal and
no salvage value. It is expected that the mine will be in operation for 5 years. In the first
year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the
first year?
a. $750,000
b. $300,000
c. $75,000
d. Cannot be determined from the information provided.
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170. Accumulated Depletion
a. is used by all companies with natural resources.
b. has a normal debit balance.
c. is a contra-asset account.
d. is never shown on the balance sheet.
171. On July 4, 2015, Wyoming Mining Company purchased the mineral rights to a granite
deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons.
During 2015, 100,000 tons of granite was extracted and 60,000 tons were sold. The
amount of the Depletion Expense recognized for 2015 would be
a. $200,000.
b. $120,000.
c. $240,000.
d. $400,000.
172. Depletion expense is computed by multiplying the depletion cost per unit by the
a. total estimated units.
b. total actual units.
c. number of units extracted.
d. number of units sold.
173. Intangible assets are the rights and privileges that result from ownership of long-lived
assets that
a. must be generated internally.
b. are depletable natural resources.
c. have been exchanged at a gain.
d. do not have physical substance.
174. Identify the item below where the terms are not related.
a. Equipment—depreciation
b. Franchise—depreciation
c. Copyright—amortization
d. Oil well—depletion
175. A patent should
a. be amortized over a period of 20 years.
b. not be amortized if it has an indefinite life.
c. be amortized over its useful life or 20 years, whichever is longer.
d. be amortized over its useful life or 20 years, whichever is shorter.
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176. The entry to record patent amortization usually includes a credit to
a. Amortization Expense.
b. Accumulated Amortization.
c. Accumulated Depreciation.
d. Patents.
177. The cost of successfully defending a patent in an infringement suit should be
a. charged to Legal Expenses.
b. deducted from the book value of the patent.
c. added to the cost of the patent.
d. recognized as a loss in the current period.
178. An asset that cannot be sold individually in the market place is
a. a patent.
b. goodwill.
c. a copyright.
d. a trade name.
179. Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company’s
products.
b. when the company acquires a good location for its business.
c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an entire
business.
180. On July 1, 2015, Jenks Company purchased the copyright to Jackson Computer tutorials
for $324,000. It is estimated that the copyright will have a useful life of 5 years with an
estimated salvage value of $24,000. The amount of Amortization Expense recognized for
the year 2015 would be
a. $64,800.
b. $30,000.
c. $60,000.
d. $32,400.
181. All of the following intangible assets are amortized except
a. copyrights.
b. limited-life franchises.
c. patents.
d. trademarks.
Test Bank for Financial Accounting, Ninth Edition
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182. Which of the following is not an intangible asset arising from a government grant?
a. Goodwill
b. Patent
c. Trademark
d. Trade name
183. The amortization period for a patent cannot exceed
a. 50 years.
b. 40 years.
c. 20 years.
d. 10 years.
184. Cost allocation of an intangible asset is referred to as
a. amortization.
b. depletion.
c. accretion.
d. capitalization.
185. A patent
a. has a legal life of 40 years.
b. is nonrenewable.
c. can be renewed indefinitely.
d. is rarely subject to litigation because it is an exclusive right.
186. If a company incurs legal costs in successfully defending its patent, these costs are
recorded by debiting
a. Legal Expense.
b. an Intangible Loss account.
c. the Patent account.
d. a revenue expenditure account.
187. Copyrights are granted by the federal government
a. for the life of the creator or 70 years, whichever is longer.
b. for the life of the creator plus 70 years.
c. for the life of the creator or 70 years, whichever is shorter.
d. and therefore cannot be amortized.
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188. Goodwill
a. is only recorded when generated internally.
b. can be subdivided and sold in parts.
c. can only be identified with the business as a whole.
d. can be defined as normal earnings less accumulated amortization.
189. In recording the acquisition cost of an entire business,
a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets.
b. assets are recorded at the seller’s book values.
c. goodwill, if it exists, is never recorded.
d. goodwill is recorded as the excess of cost over the book value of identifiable net
assets.
190. Research and development costs
a. are classified as intangible assets.
b. must be expensed when incurred under generally accepted accounting principles.
c. should be included in the cost of the patent they relate to.
d. are capitalized and then amortized over a period not to exceed 40 years.
191. A computer company has $2,800,000 in research and development costs. Before
accounting for these costs, the net income of the company is $2,000,000. What is the
amount of net income or loss after these R & D costs are accounted for?
a. $800,000 loss
b. $2,000,000 net income
c. $0
d. Cannot be determined from the information provided.
192. Henson Company incurred $600,000 of research and development costs in its laboratory
to develop a new product. It spent $90,000 in legal fees for a patent granted on January 2,
2015. On July 31, 2015, Henson paid $60,000 for legal fees in a successful defense of the
patent. What is the total amount that should be debited to Patents through July 31, 2015?
a. $600,000
b. $150,000
c. $750,000
d. Some other amount
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193. Given the following account balances at year end, compute the total intangible assets on
the balance sheet of Kepler Enterprises.
Cash $1,500,000
Accounts Receivable 4,000,000
Trademarks 1,000,000
Goodwill 3,000,000
Research & Development Costs 2,000,000
a. $10,000,000
b. $6,000,000
c. $4,000,000
d. $8,000,000
194. Rooney Company incurred $560,000 of research and development cost in its laboratory to
develop a patent granted on January 1, 2015. On July 31, 2015, Rooney paid $84,000 for
legal fees in a successful defense of the patent. The total amount debited to Patents
through July 31, 2015, should be:
a. $560,000.
b. $84,000.
c. $644,000.
d. $476,000.
195. Mehring Company reported net sales of $540,000, net income of $72,000, beginning total
assets of $240,000, and ending total assets of $360,000. What was the company’s asset
turnover?
a. 2.3 times
b. 0.6 times
c. 1.8 times
d. 1.5 times
196. During 2015, Rathke Corporation reported net sales of $3,000,000, net income of
$1,200,000, and depreciation expense of $100,000. Rathke 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. Rathke’s asset turnover is
a. 3 times.
b. 2.4 times.
c. 2.0 times.
d. .96 times.
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197. During 2015, Stein Corporation reported net sales of $5,000,000 and net income of
$2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total
assets of $1,500,000. Stein’s asset turnover is
a. 5.0 times.
b. 4.0 times.
c. 3.3 times.
d. 1.7 times.
198. Natural resources are generally shown on the balance sheet under
a. Intangibles.
b. Investments.
c. Property, Plant, and Equipment.
d. Stockholders’ Equity.
199. Which of the following statements concerning financial statement presentation is not a
true statement?
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.
201. A company has the following assets:
Buildings and Equipment, less accumulated depreciation of $2,000,000 $9,600,000
Copyrights 960,000
Patents 4,000,000
Timberlands, less accumulated depletion of $2,800,000 4,800,000
The total amount reported under Property, Plant, and Equipment would be
a. $19,360,000.
b. $14,400,000.
c. $18,400,000.
d. $15,360,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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a202. A company decides to exchange its old machine and $231,000 cash for a new machine.
The old machine has a book value of $189,000 and a fair value of $210,000 on the date of
the exchange. The cost of the new machine would be recorded at
a. $420,000.
b. $441,000.
c. $399,000.
d. cannot be determined.
a203. A company exchanges its old office equipment and $80,000 for new office equipment. The
old office equipment has a book value of $56,000 and a fair value of $40,000 on the date
of the exchange. The cost of the new office equipment would be recorded at
a. $136,000.
b. $120,000.
c. $96,000.
d. cannot be determined.
a204. In an exchange of plant assets that has commercial substance, any difference between
the fair value and the book value of the old plant asset is
a. recorded as a gain or loss.
b. recorded if a gain but is deferred if a loss.
c. recorded if a loss but is deferred if a gain.
d. deferred if either a gain or loss.
a205. Gains on an exchange of plant assets that has commercial substance are
a. deducted from the cost of the new asset acquired.
b. deferred.
c. not possible.
d. recognized immediately.
a206. Losses on an exchange of plant assets that has commercial substance are
a. not possible.
b. deferred.
c. recognized immediately.
d. deducted from the cost of the new asset acquired.
a207. The cost of a new asset acquired in an exchange that has commercial substance is the
cash paid plus the
a. book value of the old asset.
b. fair value of the old asset.
c. book value of the asset acquired.
d. fair value of the new asset.
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208. The cost of land includes all of the following except
a. real estate brokers’ commissions.
b. closing costs.
c. accrued property taxes.
d. parking lots.
209. A term that is not synonymous with property, plant, and equipment is
a. plant assets.
b. fixed assets.
c. intangible assets.
d. long-lived tangible assets.
210. The factor that is not relevant in computing depreciation is
a. replacement value.
b. cost.
c. salvage value.
d. useful life.
211. Depreciable cost is the
a. book value of an asset less its salvage value.
b. cost of an asset less its salvage value.
c. cost of an asset less accumulated depreciation.
d. book value of an asset.
212. Santayana Company purchased a machine on January 1, 2013, for $60,000 with an
estimated salvage value of $15,000 and an estimated useful life of 8 years. On January 1,
2015, Santayana decides the machine will last 12 years from the date of purchase. The
salvage value is still estimated at $15,000. Using the straight-line method, the new annual
depreciation will be
a. $3,375.
b. $3,750.
c. $4,500.
d. $5,000.
213. Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and
are referred to as
a. capital expenditures.
b. expense expenditures.
c. improvements.
d. revenue expenditures.
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214. Improvements are
a. revenue expenditures.
b. debited to an appropriate asset account when they increase useful life.
c. debited to accumulated depreciation when they do not increase useful life.
d. debited to an appropriate expense account when they do not increase useful life.
215. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the
a. salvage value of the asset sold.
b. market value of the asset sold.
c. book value of the asset sold.
d. accumulated depreciation on the asset sold.
216. The entry to record depletion expense
a. decreases stockholders’ equity and assets.
b. decreases net income and increases liabilities.
c. decreases assets and liabilities.
d. decreases assets and increases liabilities.
217. All of the following are intangible assets except
a. copyrights.
b. goodwill.
c. patents.
d. research and development costs.
218. A purchased patent has a legal life of 20 years. It should be
a. expensed in the year of acquisition.
b. amortized over 20 years regardless of its useful life.
c. amortized over its useful life if less than 20 years.
d. not amortized.
219. The asset turnover is computed by dividing
a. net income by average total assets.
b. net sales by average total assets.
c. net income by ending total assets.
d. net sales by ending total assets.
a220. In an exchange of plant assets that has commercial substance
a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately.
c. losses, but not gains, are recognized immediately.
d. both gains and losses are recognized immediately.
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221. As a recent graduate of State University you’re aware that IFRS requires component
depreciation for plant assets. A friend has asked you to succinctly explain what
component depreciation means. Which of the following correctly describes component
depreciation?
a. The method used to ensure that the depreciation rate remains constant from year to
year.
b. The method that requires that significant parts of a plant asset with different useful
lives be depreciated separately.
c. The method used to prorate annual depreciation on a time basis.
d. The method of depreciation recommended for an asset that is expected to be
significantly more productive in the first half of its useful life.
222. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on
land costing £1,600,000, which Salem Company owned. The building was complete and
ready to be used on January 1, 2015 and it has a useful life of 40 years. The price of the
building included land improvements costing £480,000 and personal property costing
£600,000. The useful lives of the land improvements and the personal property are 10
years and 5 years, respectively. Salem Company uses component depreciation, and the
company uses straight-line depreciation for other similar assets. What total amount of
depreciation expense would Salem Company report on its income statement for the year
ended December 31, 2015?
a. £268,000
b. £160,000
c. £341,000
d. £301,000
223. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on
land costing £1,600,000, which Salem Company owned. The building was complete and
ready to be used on January 1, 2015 and it has a useful life of 40 years. The price of the
building included land improvements costing £480,000 and personal property costing
£600,000. The useful lives of the land improvements and the personal property are 10
years and 5 years, respectively. Salem Company uses component depreciation, and the
company uses straight-line depreciation for other similar assets. What is the net amount
reported for the building on Salem Company’s December 31, 2015 statement of financial
position?
a. £6,132,000
b. £6,059,000
c. £5,187,000
d. £6,240,000
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224. IFRS allows companies to revalue plant assets to fair value. Which of the following
statements is true regarding revaluation?
a. At the time a company purchases an asset it must decide whether to follow
revaluation procedures for the asset; once the election is made, it must be followed for
the remainder of the asset’s useful life.
b. Assets that are experiencing rapid price changes must be revalued quarterly, other
assets can be revalued on an annual basis.
c. The journal entry to record a revaluation when the asset’s price has increased
includes a credit to the account revaluation surplus.
d. All of the choices are correct regarding revaluation of plant assets.
225. IFRS allows companies to revalue plant assets to fair value. When an asset has increased
in value, where is the account “Revaluation Surplus” reported?
a. On the income statement as part of income from continuing operations (other
revenues and gains).
b. On the income statement as part of discontinued operations (discontinuing historical
cost).
c. On the statement of financial position as part of accumulated comprehensive income
(equity).
d. All of the choices are acceptable methods for the reporting of “Revaluation Surplus”.
226. Which of the following statements concerning IFRS and U.S. GAAP is true?
a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits
revaluation of intangible assets.
b. Gains on exchange of assets when the exchange has commercial substance are
recognized under both IFRS and U.S. GAAP.
c. Changes in depreciation method under IFRS are reported in current and future
periods, under U.S. GAAP such changes are treated as prior period adjustments.
d. All of the choices are true regarding IFRS and U.S. GAAP.
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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Answers to Multiple Choice Questions
Test Bank for Financial Accounting, Ninth Edition
9 – 46
BRIEF EXERCISES
BE 227
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 228
Farley 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,
$70,000; 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.
Plant Assets, Natural Resources, and Intangible Assets
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BE 229
Iverson Company purchased a delivery truck for $45,000 on January 1, 2015. The truck was
assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute
depreciation expense using the double-declining-balance method for the years 2015 and 2016.
BE 230
Iverson Company purchased a delivery truck for $45,000 on January 1, 2015. The truck was
assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck
was driven 18,000 miles in 2015 and 22,000 miles in 2016. Compute depreciation expense using
the units-of-activity method for the years 2015 and 2016.
BE 231
Weller 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 $6,000 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 $
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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BE 232
On January 1, 2013, Santo Company purchased a computer system for $30,500. The system had
an estimated useful life of 5 years and no salvage value. At January 1, 2015, the company
revised the remaining useful life to two years. What amount of depreciation will be recorded for
2015 and 2016?
BE 233
Carey Enterprises sold equipment on January 1, 2015 for $10,000. The equipment had cost
$48,000. The balance in Accumulated Depreciation at January 1 is $40,000. What entry would
Carey make to record the sale of the equipment?
BE 234
On January 1, 2015, Petersen Enterprises purchased natural resources for $1,800,000. The
company expects the resources to produce 12,000,000 units of product. (1) What is the depletion
cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion
expense for the month?
Plant Assets, Natural Resources, and Intangible Assets
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BE 235
On January 2, 2015, Kerwin Company purchased a patent for $48,000. The patent has an
estimated useful life of 25 years and a 20-year legal life. What entry would the company make at
December 31, 2015 to record amortization expense on the patent?
BE 236
Using the following data for Renfro, Inc., compute its asset turnover.
Notson, Inc.
Net Income 2015 $ 123,000
Total Assets 12/31/15 2,443,000
Total Assets 12/31/14 1,880,000
Net Sales 2015 2,135,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 50
EXERCISES
Ex. 237
Hunt Company purchased factory equipment with an invoice price of $90,000. Other costs
incurred were freight costs, $1,100; 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, $1,400. 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 double-declining-balance method of depreciation was used, the constant percentage
applied to a declining book value would be __________.
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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Ex. 238
For each entry below make a correcting entry if necessary. If the entry given is correct, then state
“No entry required.”
(a) The $60 cost of repairing a printer was charged to Equipment.
(b) The $5,000 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
Miscellaneous Expense.
(d) A $500 charge for transportation expenses on new equipment purchased was debited to
Freight-In.
Ex. 239
Garrison Company was organized on January 1. During the first year of operations, the following
expenditures and receipts were recorded in random order in the account, Land.
Debits
1. Cost of real estate purchased as a plant site (land and building). $ 250,000
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. 15,000
4. Architect’s fees on building plans. 14,000
5. Excavation costs for new building. 24,000
6. Cost of filling and grading the land. 5,000
7. Insurance and taxes during construction of building. 6,000
8. Cost of repairs to building under construction caused by a small fire. 7,000
9. Interest paid during the year, of which $54,000 pertains to the construction
period. 64,000
10. Full payment to building contractor. 780,000
11. Cost of parking lots and driveways. 46,000
12. Real estate taxes paid for the current year on the land. 4,000
Total Debits $1,219,000
Test Bank for Financial Accounting, Ninth Edition
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9 – 52
Ex. 239 (Cont.)
Credits
13. Insurance proceeds for fire damage. $3,000
14. Proceeds from salvage of demolished building 3,500
Total Credits $6,500
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. 240
On March 1, 2015, Landon Company acquired real estate on which it planned to construct a
small office building. The company paid $90,000 in cash. An old warehouse on the property was
razed at a cost of $7,600; the salvaged materials were sold for $1,700. Additional expenditures
before construction began included $1,100 attorney’s fee for work concerning the land purchase,
$4,000 real estate broker’s fee, $7,800 architect’s fee, and $14,000 to put in driveways and a
parking lot.
Instructions
Determine the amount to be reported as the cost of the land.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 241
Ermler Company purchased a machine at a cost of $80,000. The machine is expected to have a
$5,000 salvage value at the end of its 5-year useful life.
Instructions
Compute annual depreciation for the first and second years using the
(a) straight-line method.
(b) double-declining-balance method.
Ex. 242
Alvarado Company purchased a new machine for $400,000. It is estimated that the machine will
have a $40,000 salvage value at the end of its 5-year useful service life. The double-declining-
balance method of depreciation will be used.
Instructions
Prepare a depreciation schedule which shows the annual depreciation expense on the machine
for its 5-year life.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 54
*Adjusted to $11,840 because ending book value should not be less than expected salvage
value.
Ex. 243
Dougan Company purchased equipment on January 1, 2014 for $90,000. It is estimated that the
equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated
that the equipment will produce 100,000 units over its 5-year life.
Instructions
Answer the following independent questions.
1. Compute the amount of depreciation expense for the year ended December 31, 2014, using
the straight-line method of depreciation.
2. If 16,000 units of product are produced in 2014 and 24,000 units are produced in 2015, what
is the book value of the equipment at December 31, 2015? The company uses the units-of–
activity depreciation method.
3. If the company uses the double-declining-balance method of depreciation, what is the
balance of the Accumulated Depreciation—Equipment account at December 31, 2016?
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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Ex. 244
A plant asset acquired on October 1, 2015, at a cost of $400,000 has an estimated useful life of
10 years. The salvage value is estimated to be $40,000 at the end of the asset’s useful life.
Instructions
Determine the depreciation expense for the first two years using:
(a) the straight-line method.
(b) the double-declining-balance method.
Ex. 245
Jack’s, a popular pizza hang-out, has a thriving delivery business. Jack’s has a fleet of three
delivery automobiles. Prior to making the entry for this year’s depreciation expense, the
subsidiary ledger for the fleet is as follows:
Accumulated
Estimated Depr.—Beg. Miles Operated
Car Cost Salvage Value Life in Miles of the Year During Year
1 $21,000 $3,000 75,000 $2,520 20,000
2 18,000 2,400 60,000 2,340 22,000
3 23,500 2,500 70,000 2,000 19,000
Instructions
(a) Determine the depreciation rates per mile for each car.
(b) Determine the depreciation expense for each car for the current year.
(c) Make one compound journal entry to record the annual depreciation expense for the fleet.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 56
Ex. 246
The Hartley Clinic purchased a new surgical laser for $90,000. The estimated salvage value is
$5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It
was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year
4; 2,000 hours in year 5.
Instructions
(a) Compute the annual depreciation for each of the five years under each of the following
methods:
(1) straight-line.
(2) units-of-activity.
(b) If you were the administrator of the clinic, which method would you deem as most
appropriate? Justify your answer.
(c) Which method would result in the lowest reported income in the first year? Which method
would result in the lowest total reported income over the five-year period?
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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Ex. 247
The December 31, 2014 balance sheet of Jensen Company showed Equipment of $76,000 and
Accumulated Depreciation of $18,000. On January 1, 2015, the company decided that the
equipment has a remaining useful life of 6 years with a $4,000 salvage value.
Instructions
Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation.
Ex. 248
South Airlines purchased a 747 aircraft on January 1, 2014, at a cost of $35,000,000. The
estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On
January 1, 2017 the airline revises the total estimated useful life to 15 years with a revised
salvage value of $3,500,000.
Instructions
(a) Compute the depreciation and book value at December 31, 2016 using the straight-line
method and the double-declining-balance method.
(b) Assuming the straight-line method is used, compute the depreciation expense for the year
ended December 31, 2017.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 58
Ex. 249
Hayden Company purchased a machine on January 1, 2015, at a cost of $90,000. It is expected
to have an estimated salvage value of $5,000 at the end of its 5-year life. The company
capitalized the machine and depreciated it in 2015 using the double-declining-balance method of
depreciation. The company has a policy of using the straight-line method to depreciate equipment
but the company accountant neglected to follow company policy when he used the double–
declining-balance method. Net income for the year ended December 31, 2015 was $55,000 as
the result of depreciating the machine incorrectly.
Instructions
Using the method of depreciation which the company normally follows, prepare the correcting
entry and determine the corrected net income. (Show computations.)
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
9 – 59
Ex. 250
Equipment was acquired on January 1, 2012, at a cost of $90,000. 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, 2015, using the straight-line method. On January 1, 2016,
the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8
years.
Instructions
Determine the depreciation expense for 2016.
Ex. 251
Frank White the new controller of Youngman Company, has reviewed the expected useful lives
and salvage values of selected depreciable assets at the beginning of 2015. His findings are as
follows.
Type of
Asset
Date
Acquired
Cost
Accumulated
Depreciation
1/1/15
Useful Life
in Years
Salvage Value
Old
Proposed
Old
Proposed
Buildings
1/1/09
$1,600,000
$228,000
40
50
$80,000
$52,000
Warehouse
1/1/10
207,000
40,000
25
20
7,000
5,000
All assets are depreciated by the straight-line method. Youngman Company uses a calendar year
in preparing annual financial statements. After discussion, management has agreed to accept
Frank’s proposed changes.
Instructions
(a) Compute the revised annual depreciation on each asset in 2015. (Show computations.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 60
Ex. 252
Fleming Company purchased a machine on January 1, 2015. 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) annual city operating license, (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) installation costs necessary to secure the machinery
to the building flooring.
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)______________
Ex. 253
Foley Word Processing 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.
2014 July 1 Purchased a computer from the Computer Center for $1,900 cash plus sales
tax of $150, and shipping costs of $50.
Nov. 3 Incurred ordinary repairs on computer of $140.
Dec. 31 Recorded 2014 depreciation on the basis of a four year life and estimated
salvage value of $500.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 253 (Cont.)
2015 Dec. 31 Recorded 2015 depreciation.
2016 Jan. 1 Paid $300 for an upgrade of the computer. This expenditure is expected to
increase the operating efficiency and capacity of the computer.
Instructions
Prepare the necessary entries. (Show computations.)
Ex. 254
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) Painting and lettering of a used truck upon acquisition of the truck.
(f) Overhaul of a truck motor. One year extension in useful life is expected.
(g) Purchased a wastebasket at a cost of $10.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 255
On January 1, 2013 Grier 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, 2014 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. Through an error, the
new equipment was debited to Telephone Expense. Grier Company uses the straight-line method
of depreciation.
Instructions
Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation
Expense, and Net Income for each year and in total beginning in 2014 through the useful life of
the new equipment.
Telephone Expense Depreciation Expense Net Income
Overstated Overstated Overstated
Year (Understated) (Understated) (Understated)
___________________________________________________________________________
2014
2015
2016
2017
Ex. 256
Karley Company sold equipment on July 1, 2015 for $75,000. The equipment had cost $210,000
and had $120,000 of accumulated depreciation as of January 1, 2015. Depreciation for the first 6
months of 2015 was $12,000.
Instructions
Prepare the journal entry to record the sale of the equipment.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 257
(a) Brown Company purchased equipment in 2008 for $150,000 and estimated a $10,000
salvage value at the end of the equipment’s 10-year useful life. At December 31, 2014, there
was $98,000 in the Accumulated Depreciation account for this equipment using the straight–
line method of depreciation. On March 31, 2015, the equipment was sold for $40,000.
Prepare the appropriate journal entries to remove the equipment from the books of Brown
Company on March 31, 2015.
(b) Finney Company sold a machine for $15,000. The machine originally cost $35,000 in 2012
and $8,000 was spent on a major overhaul in 2015 (charged to the Equipment account).
Accumulated Depreciation on the machine to the date of disposal was $28,000.
Prepare the appropriate journal entry to record the disposition of the machine.
(c) Stanley Company sold office equipment that had a book value of $12,000 for $16,000. The
office equipment originally cost $40,000 and it is estimated that it would cost $50,000 to
replace the office equipment.
Prepare the appropriate journal entry to record the disposition of the office equipment.
Test Bank for Financial Accounting, Ninth Edition
9 – 64
Ex. 258
Grayson’s Lumber Mill sold two machines in 2016. The following information pertains to the two
machines:
Purchase Useful Salvage Depreciation Sales
Machine Cost Date Life Value Method Date Sold Price
#1 $66,000 7/1/12 5 yrs. $6,000 Straight-line 7/1/16 $15,000
#2 $50,000 7/1/15 5 yrs. $5,000 Double-declining- 12/31/16 $30,000
balance
Instructions
(a) Compute the depreciation on each machine to the date of disposal.
(b) Prepare the journal entries in 2016 to record 2016 depreciation and the sale of each
machine.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 259
Presented below are selected transactions for Werley Company for 2015.
Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on
January 1, 2005. The machine cost $90,000 on that date, and had a useful life of 10
years with no salvage value.
April 30 Sold a equipment for $34,000 that was purchased on January 1, 2012. The equipment
cost $90,000, and had a useful life of 5 years with no salvage value.
Dec. 31 Discarded a business automobile that was purchased on April 1, 2011. The car cost
$27,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.
Instructions
Journalize all entries required as a result of the above transactions. Werley Company uses the
straight-line method of depreciation and has recorded depreciation through December 31, 2014.
Test Bank for Financial Accounting, Ninth Edition
9 – 66
Ex. 260
Zimmer Company sold the following two machines in 2015:
Machine A Machine B
Cost $76,000 $80,000
Purchase date 7/1/11 1/1/12
Useful life 8 years 5 years
Salvage value $4,000 $4,000
Depreciation method Straight-line Double-declining-balance
Date sold 7/1/15 8/1/15
Sales price $35,000 $16,000
Instructions
Journalize all entries required to update depreciation and record the sales of the two assets in
2015. The company has recorded depreciation on the machines through December 31, 2014.
Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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Ex. 261
Lynn Company owns equipment that cost $120,000 when purchased on January 1, 2012. It has
been depreciated using the straight-line method based on estimated salvage value of $15,000
and an estimated useful life of 5 years.
Instructions
Prepare Lynn Company’s journal entries to record the sale of the equipment in these four
independent situations.
(a) Sold for $58,000 on January 1, 2015.
(b) Sold for $58,000 on May 1, 2015.
(c) Sold for $32,000 on January 1, 2015.
(d) Sold for $32,000 on October 1, 2015.
Test Bank for Financial Accounting, Ninth Edition
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9 – 68
Ex. 262
On July 1, 2015, Melton Inc. invested $560,000 in a mine estimated to have 800,000 tons of ore
of uniform grade. During the last 6 months of 2015, 100,000 tons of or were mined and sold.
Instructions
(a) Prepare the journal entry to record depletion expense.
(b) Assume that the 100,000 tons of ore were mined, but only 85,000 units were sold. How are
the costs applicable to the 15,000 unsold units reported?
Ex. 263
Gorman Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no
salvage value. During the first year, 200,000 tons of ore were mined and sold.
Instructions
Prepare the journal entry to record depletion expense.
Ex. 264
Kahn Mining Company purchased a mine for $60 million which is estimated to have 250,000 tons
of ore and a salvage value of $10 million.
(a) In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to
record depletion expense for the first year.
(b) In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold.
Prepare the journal entry to record depletion expense for the second year.
(c) What amount and in what account are the tons of ore not sold reported?
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 265
Quayle Mining Company purchased land containing an estimated 15 million tons of ore at a cost
of $4,200,000. The land without the ore is estimated to be worth $600,000. The company expects
to operate the mine for 12 years. Buildings costing $600,000 are erected on the site and are
expected to last for 25 years. Equipment costing $300,000 with an estimated life of 15 years is
installed. The buildings and the equipment possess no salvage value after the mine is closed.
During the first year of operations, the mining company mined and sold 2 million tons of ore.
Instructions
(a) Compute the depletion charge per ton.
(b) Compute the depletion expense for the first year.
(c) Compute the appropriate first year’s depreciation expense for the buildings.
(d) Compute the appropriate first year’s depreciation expense for the equipment.
(e) Prepare journal entries to record depletion and depreciation expenses for the year.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 266
(a) A company purchased a patent on January 1, 2015, for $2,500,000. The patent’s legal life is
20 years but the company estimates that the patent’s useful life will only be 5 years from the
date of acquisition. On June 30, 2015, the company paid legal costs of $135,000 in
successfully defending the patent in an infringement suit. Prepare the journal entry to
amortize the patent at year end on December 31, 2015.
(b) Trent Company purchased a franchise from Tastee Food Company for $400,000 on January
1, 2015. The franchise is for an indefinite time period and gives Trent Company the
exclusive rights to sell Tastee Wings in a particular territory. Prepare the journal entry to
record the acquisition of the franchise and any necessary adjusting entry at year end on
December 31, 2015.
(c) Kline Company incurred research and development costs of $500,000 in 2015 in developing
a new product. Prepare the necessary journal entries during 2015 to record these events
and any adjustments at year end on December 31, 2015.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 267
On January 2, 2015, Olathe Company purchased a patent for $240,000. The patent has an
8-year estimated useful life and a legal life of 20 years.
Instructions
Prepare the journal entry to record patent amortization.
Ex. 268
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 P—Depletion
D—Depreciation N—None of these
____ 1. Goodwill ____ 7. Timberlands
____ 2. Land ____ 8. Franchises (indefinite life)
____ 3. Buildings ____ 9. Licenses (limited life)
____ 4. Patents ____ 10. Land Improvements
____ 5. Copyrights ____ 11. Oil Deposits
____ 6. Research and development costs ____ 12. Equipment
Ex. 269
For each of the following unrelated transactions, (a) determine the amount of the amortization or
depletion expense for the current year, and (b) present the adjusting entries required to record
each expense at year end.
(1) Timber rights were purchased on a tract of land for $480,000. The timber is estimated at
1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and
sold.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 269 (Cont.)
(2) Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000
was spent in legal costs to successfully defend the patent against competitors. The patent
has an estimated legal life of 12 years.
Ex. 270
During the current year, Marin Company incurred several expenditures. Briefly explain whether
the expenditures listed below should be recorded as an operating expense or as an intangible
asset. If you view the expenditure as an intangible asset, indicate the number of years over which
the asset should be amortized. Explain your answer.
(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully
defended.
(b) Purchased a trademark from another company. The trademark can be renewed indefinitely.
Marin Company expects the trademark to contribute to revenue indefinitely.
(c) Marin Company acquires a patent for $2,000,000. The company selling the patent has spent
$1,000,000 on the research and development of it. The patent has a remaining life of 15
years.
(d) Marin Company is spending considerable time and money in developing a different patent
for another product. So far $3,000,000 has been spent this year on research and
development. Marin Company is very confident they will obtain this patent in the next few
years.
Plant Assets, Natural Resources, and Intangible Assets
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Ex. 271
Presented below is information related to plant assets, natural resources, and intangibles at year
end on December 31, 2015, for Hanley Company:
Buildings $1,280,000
Goodwill 650,000
Patents 480,000
Coal Mine 440,000
Accumulated Depreciation—Bldg. 670,000
Accumulated Depletion 275,000
Instructions
Prepare a partial balance sheet for Hanley Company that shows how the above listed items
would be presented.
Property, Plant, and Equipment
Buildings $1,280,000
Less: Accumulated depreciation—Bldg. 670,000 $610,000
Coal Mine 440,000
Less: Accumulated depletion 275,000 165,000
Total Property, Plant, and Equipment $775,000
Intangibles
Goodwill $650,000
Patents 480,000
Total Intangibles 1,130,000
Ex. 272
Compute the asset turnover based on the following:
Beginning total assets $ 800,000
Ending total assets 1,200,000
Net income 300,000
Net sales 2,500,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 74
Ex. 273
During 2015 Lopez Corporation reported net sales of $3,200,000 and net income of $1,200,000.
Its balance sheet reported average total assets of $1,600,000.
Instructions
Calculate the asset turnover.
Ex. 274
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 ____ 7. Timberlands
____ 2. Land Improvements ____ 8. Franchises
____ 3. Buildings ____ 9. Licenses
____ 4. Accumulated Depreciation ____ 10. Equipment
____ 5. Trademarks ____ 11. Oil Deposits
____ 6. Research and development costs ____ 12. Land
*Ex. 275
Presented below are two independent situations:
(a) Yount Company exchanged an old machine (cost $150,000 less $90,000 accumulated
depreciation) plus $10,000 cash for a new machine. The old machine had a fair value of
$54,000. Prepare the entry to record the exchange of assets by Yount Company.
Plant Assets, Natural Resources, and Intangible Assets
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*Ex. 275 (Cont.)
(b) Lawson Company trades old equipment (cost $90,000 less $54,000 accumulated deprecia-
tion) for new equipment. Lawson paid $36,000 cash in the trade. The old equipment that
was traded had a fair value of $54,000. Prepare the entry to record the exchange of assets
by Lawson Company. The transaction has commercial substance.
*Ex. 276
Dolan Company exchanges equipment with Eaton Company and Pawnee Company exchanges
equipment with Fiero Company. The following information pertains to the exchanges:
Dolan Company Pawnee Company
Equipment (cost) $228,000 $192,000
Accumulated depreciation 100,000 90,000
Fair value of the equipment 150,000 84,000
Cash paid 90,000 -0-
Instructions
Prepare the journal entries to record the exchanges on the books of Dolan Company and Pawnee
Company. The transaction has commercial substance.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 76
Ex. 277
Bell Company and Kene Company exchanged trucks on January 1, 2015. Bell’s truck cost
$140,000, had accumulated depreciation of $115,000, and has a fair value of $15,000. Kene’s
truck cost $105,000, had accumulated depreciation of $90,000, and has a fair value of $15,000.
Instructions
(a) Journalize the exchange for Bell Company.
(b) Journalize the exchange for Kene Company.
Plant Assets, Natural Resources, and Intangible Assets
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aEx. 278
Prepare the journal entries to record the following transactions for Ogleby Company which has a
calendar year end and uses the straight-line method of depreciation.
a) On September 30, 2015, the company exchanged old delivery equipment and $36,000 for
new delivery equipment. The old delivery equipment was purchased on January 1, 2013, for
$126,000 and was estimated to have a $18,000 salvage value at the end of its 5-year life.
Depreciation on the delivery equipment has been recorded through December 31, 2014. It is
estimated that the fair value of the old delivery equipment is $54,000 on September 30,
2015.
(b) On June 30, 2015, the company exchanged old office equipment and $40,000 for new office
equipment. The old office equipment originally cost $80,000 and had accumulated
depreciation to the date of disposal of $35,000. It is estimated that the fair market value of
the old office equipment on June 30 was $60,000. The transaction has commercial
substance.
Test Bank for Financial Accounting, Ninth Edition
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COMPLETION STATEMENTS
279. With the exception of land, plant assets experience a ______________ in service
potential over their useful lives.
280. When vacant land is acquired, expenditures for clearing, draining, filling, and grading
should be charged to the ______________ account.
281. The cost of demolishing an old building on land that has been acquired so that a new
building can be constructed should be charged to the ______________ account.
282. The cost of paving, fencing, and lighting a new company parking lot is charged to a
______________ account.
283. Equipment with an invoice price of $20,000 was purchased and freight costs were $900.
The cost of the equipment would be $______________.
284. ______________ is the process of allocating the cost of a plant asset to expense over its
service life in a rational and systematic manner.
285. The book value of a plant asset is obtained by subtracting ______________ from the
______________ of the plant asset.
Plant Assets, Natural Resources, and Intangible Assets
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286. Three factors that affect the computation of periodic depreciation expense are (1)
_______________, (2) _______________, and (3) _________________.
287. The ________________ method of computing depreciation expense results in an equal
amount of periodic depreciation throughout the service life of the plant asset.
288. The declining-balance method of computing depreciation expense involves multiplying a
_______________ book value by a _______________ percentage.
289. The declining-balance method of computing depreciation is known as an _____________
depreciation method.
290. Ordinary repairs which maintain operating efficiency and expected productive life are
called _______________.
291. Additions and improvements are costs incurred to increase the operating efficiency,
productive capacity, or expected useful life and are referred to as __________________.
292. If disposal of a plant asset occurs at any time during the year, ___________________ for
the fraction of the year to the date of disposal must be recorded.
293. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry
to record the retirement requires a debit to the ___________________________ account
and a credit to the _____________________ account.
294. If the proceeds from the sale of a plant asset exceed its ______________, a gain on
disposal will occur.
295. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at
the end of its 5-year useful life. If at the end of three years, the asset was sold for
$12,000, and had accumulated depreciation recorded of $36,000, the company should
recognize a ______________ on disposal in the amount of $____________.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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296. Natural resources have two distinguishing characteristics (1) they are physically
_______________ in operations, and (2) they are _________________ only by an act of
nature.
297. In recording the purchase of a business, goodwill should be recorded for the excess of
______________ over the _______________ of the net assets acquired.
298. The allocation of the cost of an asset to expense over its useful life is called
_________________ for tangible plant assets, ________________ for natural resources,
and _________________ for intangible assets.
299. The cost of a patent should be amortized over its ____________ life or its ____________
life, whichever is shorter.
300. The ___________________ is calculated by dividing net sales by average total assets.
a301. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the
new asset acquired is equal to the ______________ of the asset given up plus any cash
paid by the purchaser.
a302. A company exchanged an old machine, which originally cost $22,000 and has
accumulated depreciation to date of $12,000, for a new machine. The old machine had a
fair value of $14,000. The cost of the new machine should be recorded at
$_____________.
Answers to Completion Statements
FOR INSTRUCTOR USE ONLY
303. Match the items below by entering the appropriate code letter in the space provided.
A. Plant assets F. Units-of-activity method
B. Depreciation G. Double-declining-balance method
C. Book value H. MACRS
D. Salvage value I. Revenue expenditure
E. Straight-line method J. Capital expenditure
____ 1. Small expenditures which primarily benefit the current period.
____ 2. Cost less accumulated depreciation.
____ 3. An accelerated depreciation method used for financial statement purposes.
____ 4. Tangible resources that are used in operations and are not intended for resale.
____ 5. Equal amount of depreciation each period.
____ 6. Expected cash value of the asset at the end of its useful life.
____ 7. Allocation of the cost of a plant asset to expense over its useful life.
____ 8. Material expenditures which increase an asset’s operating efficiency, productive
capacity, or useful life.
____ 9. An accelerated depreciation method used for tax purposes.
____ 10. Useful life is expressed in terms of units of production or expected use.
304. Match the items below by entering the appropriate code letter in the space provided.
A. Gain on disposal F. Asset turnover
B. Loss on disposal G. Goodwill
C. Trademark H. Amortization
D. Depletion I. Intangible asset
E. Useful life J. Research and development costs
_____ 1. Process of allocating the cost of an intangible asset to expense over its useful life.
_____ 2. Is only recorded when an exchange has commercial substance.
Test Bank for Financial Accounting, Ninth Edition
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_____ 3. Examples are franchises and licenses.
_____ 4. The allocation of the cost of a natural resource to expense over its useful life.
_____ 5. Can be identified only with a business as a whole.
_____ 6. A symbol that identifies a particular enterprise or product.
_____ 7. When book value of asset is greater than the proceeds received from its sale.
_____ 8. Must be expensed when incurred.
_____ 9. Indicates how efficiently a company is able to generate sales with its assets.
_____ 10. An estimate of the expected productive life of an asset.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 305
The declining-balance method is an accelerated method of depreciation. Briefly explain what is
meant by an accelerated method of depreciation and justify the choosing of an accelerated
method.
S-A E 306
Identify the factors that are considered in classifying an expenditure as a capital or a revenue
expenditure. Are there instances where it may be difficult to classify an expenditure as one or the
other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What
basis would be used in a decision?
Plant Assets, Natural Resources, and Intangible Assets
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S-A E 307
What are the similarities and differences between the terms depreciation, depletion, and
amortization?
S-A E 308
In general, how does one determine whether or not an expenditure should be included in the
acquisition cost of property, plant, and equipment?
S-A E 309
Comment on the validity of the following statements: “As an asset loses its ability to provide
services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.”
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
9 – 84
S-A E 310
Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a
whole. If goodwill is an intangible asset, why can’t it be sold like other intangible assets such as
copyrights and patents? Briefly explain what makes goodwill different.
S-A E 311
How is a gain or loss on the sale of a plant asset computed?
S-A E 312 (Ethics)
Physician Reference Service (PRS) provides services to physicians including research
assistance, diagnosis coding and medical practice software including an advanced medical
record cross-referencing system. PRS is aggressive in monitoring other firms’ offerings and
ensuring that its services are comparable to all others.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending
professionals to trade shows. In addition, PRS has agreements with several clients whereby the
client requests a presentation of a competitor’s services. A PRS employee poses as an employee
of the client’s office and attends the presentation, obtaining as much data and sample information
as possible. The cost of the travel and attending presentations is charged to Product
Development and expensed during the current year.
In April of this year, PRS began selling a software product substitute before the competitor’s
software was released. The competitor, Compu-Med, sued for copyright infringement and won.
PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS
immediately negotiated an agreement with Compu-Med to sell Compu-Med’s product (since it
was prohibited from offering its own version for five years.) This agreement cost an additional
$1.3 million, but it allowed PRS to continue to offer a full line of services.
Plant Assets, Natural Resources, and Intangible Assets
9 – 85
PRS’s accountant, Jill Linsey, initially recorded the cash payments as “Loss from Lawsuit” and
“Product Development,” respectively. However, Jack Meyer, the controller, instructed Jill to create
an intangible asset, named “Goodwill” and charge both costs to this account. “We’re protected
from another lawsuit as long as this agreement is in effect,” he says. “It’s about as close to
goodwill as we’ll ever get from our competitors. We might as well amortize the cost rather than
take the full hit to income, anyway.”
Required:
1. What are the ethical issues?
2. What should Jill do?
S-A E 313 (Communication)
The Restor-It is a company specializing in the restoration of old homes. To showcase its work,
the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home
was purchased for $125,000. A new heating and air-conditioning system was added for $30,000.
The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were
added, and the floors and trim were refurbished to their original condition, at a cost of $75,000.
The project was such a success, that Restor-It decided to purchase another very large home, this
time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000.
He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that
a modest return was all that was required, and so they agreed to sell. Only afterward did they
learn that they had a $10,000 loss on the sale. The president of the company, Dan Easler, does
not believe that a loss is possible. “We sold that house for more than we paid for it,” he said. “I
know we put some money in it, but we had depreciated it for three years. How in the world can
we have a loss?”
Required:
Write a short memo to Mr. Easler explaining how it would be possible to have a loss. Do not try to
use specific numbers for cost or depreciation.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Plant Assets, Natural Resources, and Intangible Assets
FOR INSTRUCTOR USE ONLY
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CHALLENGE EXERCISES
CE 1
Jack Kingman the new controller of Henderson Company, has reviewed the expected useful lives
and salvage values of selected depreciable assets at the beginning of 2015. His findings are as
follows.
Type of
Asset
Date
Acquired
Cost
Accumulated
Depr. 1/1/15
Useful life (yrs.)
Salvage Value
Old
Proposed
Old
Proposed
Building
1/1/09
$1,600,000
$228,000
40
50
$80,000
$140,000
Warehouse
1/1/10
300,000
57,000
25
20
15,000
27,000
All assets are depreciated by the straight-line method. Henderson Company uses a calendar year
in preparing annual financial statement. After discussion, management has agreed to accept
Jack’s proposed changes.
Instructions
(a) Compute the revised annual depreciation on each asset in 2015. (Show computation.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2015
(c) Show how the building is reported in the 12/31/15 balance sheet.
$1,344,000
CE 2
Logan Company owns equipment that cost $140,000 when purchased on January 1, 2012. It has
been depreciated using the straight-line method based on estimated salvage value of $14,000
and an estimated useful life of 5 year.
Test Bank for Financial Accounting, Ninth Edition
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CE 2 (Cont.)
Instructions
Prepare Logan Company’s journal entries to record the sale of the equipment in five independent
situations. Update depreciation on assets disposed of at time of sale.
(a) Sold for $65,000 on January 1, 2015.
(b) Sold for $65,000 on April 1, 2015.
(c) Sold for $35,000 on January 1, 2015.
(d) Sold for $35,000 on September 1, 2015.
(e) Repeat (c), assuming Logan uses double-declining balance depreciation.