1) Depreciation is ________.
A) the loss in market value of an asset
B) the allocation of a long-term asset’s cost to an expense account over the asset’s life
C) an increase in an asset’s value over time or usage
D) the revenue earned by a long-term asset over its useful life
2) When a company uses cash to purchase a machine, recording the purchase will ________.
A) decrease shareholders’ equity
B) increase expenses
C) exchange one asset for another
D) increase assets, depreciation expense, and liabilities
3) Which of the following is typically a long-term asset?
A) an intangible asset such as a patent or copyright
B) cash
C) common stock
D) depreciation expense
4) All of the following costs would be included in the Equipment account when equipment is
purchased EXCEPT ________.
A) the initial invoice amount
B) costs to have the equipment delivered
C) costs incurred to install the equipment
D) costs to maintain the operating condition of the equipment
5) All of the following costs would be included in the Land account when land is purchased
EXCEPT ________.
A) the costs associated with paving a parking lot on the land
B) the realtor’s fee
C) costs to prepare the land for use such as removing a tree stump
D) the fee paid to transfer title to the land
6) Cost is ________.
A) only the amount of cash paid to buy an asset
B) the amount of an asset consumed during a period
C) the cash plus cash equivalent amount paid to buy an asset
D) the decreases in shareholders’ equity when an asset is purchased
7) Which statement below is TRUE about the cost principle?
A) The cost principle says that all costs associated, directly or indirectly, with buying and using a
long-term asset should be permanently capitalized.
B) The cost principle says that all costs reasonable and necessary to place an asset into a working
condition should be capitalized.
C) The cost principle says that all costs associated with purchasing a long-term asset should be
expensed in the period of the purchase.
D) The cost principle says that only the cash paid to acquire a long-term asset should be
capitalized.
8) Which of the following expenditures should NOT be capitalized?
A) the costs of testing a new machine to get it ready for use
B) purchasing factory equipment with an estimated useful life of 7 years
C) purchasing a used truck with an estimated 40,000 miles of service life remaining
D) the costs of changing the oil in the company’s fleet of delivery trucks
9) Tango Company purchased land and a building for $350,000. If the assets had been purchased
separately, the company would have paid $170,000 for the land and $210,000 for the building.
What amount should be recorded for the BUILDING?
A) $210,000
B) $199,000
C) $193,421
D) $188,901
10) Tango Company purchased land and a building for $350,000. If the assets had been
purchased separately, the company would have paid $170,000 for the land and $210,000 for the
building. What amount should be recorded for the LAND?
A) $156,579
B) $169,405
C) $170,000
D) $187,321
11) Cranberry Company purchased two pieces of equipment from a Canadian vendor for
$400,000. If the assets had been purchased separately, the company would have paid $90,000 for
the first piece of equipment and $360,000 for the second piece of equipment. What amount
should be recorded for the FIRST piece of equipment?
A) $80,000
B) $90,000
C) $360,000
D) $320,000
12) Cranberry Company purchased two pieces of equipment from a Canadian vendor for
$400,000. If the assets had been purchased separately, the company would have paid $90,000 for
the first piece of equipment and $360,000 for the second piece of equipment. What amount
should be recorded for the SECOND piece of equipment?
A) $80,000
B) $90,000
C) $360,000
D) $320,000
13) All of the following account titles are found in the computerized accounting system of GTV
Company. Identify the account that would be a long-term asset.
A) cash
B) accounts receivable
C) building
D) inventory
14) Perfuncto, Inc. built a machine. The costs for the new machine were:
Parts for the machine $80,000
Delivery costs for the machine parts 2,000
Labor costs to build the machine 20,000
Maintenance cost incurred to keep the machine running 10,000
What should Perfuncto, Inc. record as the cost of the machine?
15) Basquets, Inc. purchased land and two factories at a total cost of $800,000. To the right of
the appraised values below, show the amount Basquets should record as the cost of each asset:
Asset Appraised values Recorded Values
1. Land $100,000 $__________
2. Factory 1 300,000 $__________
3. Factory 2 600,000 $__________
16) Long-term assets refer to assets that will last and provide benefits for more than one year.
17) Long-term assets, like factories and equipment, are purchased for resale to customers in the
normal course of operations.
18) Generally accepted accounting principles (GAAP) require that long-term assets be expensed
over their estimated useful lives
19) Generally accepted accounting principles (GAAP) require that long-term assets be expensed
over their useful lives using the straight-line method.
20) Purchasing a machine with a cost of $60,000 that is expected to last five years will result in
an expense of $10,000 in the year of purchase.
21) On January 8, 2011, Safari LLP bought three buildings at a total cost of $60,000,000 by
making a cash down payment of $10,000,000 and signing a 3-year note with 5% interest for the
remainder. One of the buildings is in Havana, one is in Cancun, and the third is in Miami. The
fair market value of the buildings, if they had been purchased separately, would have been
$15,000,000, $36,000,000, and $24,000,000 respectively.
Required:
Use the relative fair market value method to determine how much of the $60,000,000 purchase
price should be used for each of the three separate buildings. Write your answers on the lines
provided and show your work in the space provided below each line.
$______________________ should be used for the cost of the building in Havana.
$______________________ should be used for the cost of the building in Cancun.
$______________________ should be used for the cost of the building in Miami.
22) Explain the cost principle.
23) Identify each of the assets listed below with the appropriate classification:
A = Long-term asset
B = Not a long-term asset
______ 1. Equipment
______ 2. Office furniture
______ 3. Office supplies
______ 4. Accounts receivable
______ 5. Land
______ 6. Patent
______ 7. Inventory
______ 8. Office computers
______ 9. Copyright
______ 10. Building
Learning Objective 6-2
1) Which statement best describes the proper accounting treatment for long-term assets classified
as property, plant, and equipment?
A) Record them as assets and then depreciate them over an estimated useful life.
B) Record them as expenses when purchased using the cost principle.
C) Record them as assets and adjust them to market value each accounting period using the
straight-line method.
D) Record them as revenues and expenses using the matching principle.
2) Capitalizing a cost means to record the cost into a(n) ________ account.
A) contributed capital
B) asset
C) expenditure
D) income statement
3) Which of the following assets will NOT be depreciated?
A) inventory
B) buildings
C) equipment
D) computer
4) All of the following payments were made by UIB Co. for machinery the company bought and
used during the year. Which of these expenditures should NOT be capitalized?
A) a payment made to install the machinery at the factory
B) the cost of electricity to operate the machine for the first year of use
C) the cost of insurance while the machine was in transit from the seller’s warehouse
D) the costs of testing the machine in preparation for use
5) On November 1, 2011, Frigate Shipping Company bought equipment that cost $400,000, with
an estimated useful life of 8 years and an estimated salvage value of $28,000. The company uses
the straight-line method of depreciation and has a fiscal year ending on October 31. For the year
ended October 31, 2012, Frigate Company will report depreciation expense of ________.
A) $50,000
B) $33,333
C) $46,500
D) $31,000
6) On November 1, 2011, Frigate Shipping Company bought equipment that cost $400,000, with
an estimated useful life of 8 years and an estimated salvage value of $28,000. The company uses
the straight-line method of depreciation and has a fiscal year ending on October 31. At October
31, 2013, Frigate Company will report accumulated depreciation of ________.
A) $100,000
B) $66,666
C) $93,000
D) $46,500
7) Which statement about depreciation is TRUE?
A) Depreciation means loss in economic value.
B) Depreciation means to capitalize a cost over several accounting periods.
C) Depreciation refers to an allocation of an asset’s cost to an expense account.
D) Depreciation means to increase net income by transferring balances from shareholders’
equity.
8) Residual (salvage) value means the ________.
A) value an asset has for generating revenue
B) costs capitalized into an asset account
C) cost of an asset plus its accumulated depreciation at the end of its useful life
D) estimated value an asset will have at the end of its useful life
9) Depletion is the ________.
A) allocation of a natural resource’s cost to an expense account as the resource is consumed
B) allocation of an intangible asset’s cost to an expense account over the asset’s estimated useful
life
C) allocation of property, plant and equipment cost to an expense account over the assets’
estimated useful lives
D) capitalization of a long-term asset’s cost
10) Depreciation is the ________.
A) allocation of a natural resource’s cost to an expense account as the resource is consumed
B) allocation of an intangible asset’s cost to an expense account over the asset’s estimated useful
life
C) allocation of property, plant and equipment cost to an expense account over the assets’
estimated useful lives
D) capitalization of a long-term asset’s cost
11) XYZ Company owns an asset with historical cost of $75,000, estimated useful life of 10
years, and salvage value of $5,000. As of December 31, 2011, the asset has accumulated
depreciation of $49,000 after adjustment. The company still owes $20,000 in liabilities from the
purchase of the asset years ago. What is the asset’s book value on December 31, 2011?
A) $70,000
B) $26,000
C) $21,000
D) $6,000
12) Which statement below is TRUE of the straight-line method of depreciation?
A) It is a method that will provide higher amounts of depreciation expense in the early years of
an asset’s life and smaller amounts in the later years.
B) It is a method that results in unequal amounts of depreciation expense each year.
C) It is a method that is based upon the actual amounts of an asset used up each year, such as the
number of miles a truck is driven.
D) It is a method that results in equal amounts of depreciation expense each year.
13) The adjustment to record the use of long-term assets includes a(n) ________.
A) increase in total shareholders’ equity
B) decrease in total shareholders’ equity
C) decrease in total liabilities
D) increase in total liabilities
14) On January 1, 2011, Petrel Shipping Company bought equipment that cost $55,000 with an
estimated useful life of 4 years and an estimated salvage value of $5,000. The company uses the
straight-line method of depreciation. At what rate will the equipment depreciate in 2011?
A) 20%
B) 15%
C) 10%
D) 25%
15) On January 1, 2012, Albatross Shipping Company bought equipment that cost $65,000 and
had an estimated useful life of 5 years and an estimated salvage value of $5,000. The company
uses the double-declining balance method of depreciation. At what rate will the equipment
depreciate in 2012?
A) 20%
B) 15%
C) 10%
D) 40%
16) Which statement about accelerated depreciation methods is TRUE?
A) They provide higher amounts of depreciation expense in the early years of an asset’s life and
smaller amounts in the later years.
B) They provide equal amounts of depreciation expense each year.
C) They provide an unpredictable amount of expense each year because they are based upon the
actual amount of an asset used up.
D) They report more total depreciation expense over the life of an asset.
17) RET Company uses the activity (units-of-production) method to depreciate long-term assets.
The company owns a truck that cost $24,000. The truck is estimated to have a salvage value of
$2,000 and a useful life of 200,000 miles. How much depreciation expense would be reported on
the income statement in a year in which the truck is driven 50,000 miles?
A) $6,500
B) $6,000
C) $5,500
D) $5,000
18) TER Company uses the activity (units-of-production) method to depreciate long-term assets.
The company owns a truck that cost $48,000. The truck is estimated to have a salvage value of
$4,000 and a useful life of 200,000 miles. How much depreciation expense would be reported on
the income statement in a year in which the truck is driven 50,000 miles?
A) $13,000
B) $12,000
C) $11,000
D) $10,000
19) Which of the following assets can NOT be depleted?
A) timber
B) coal
C) diamonds
D) copyright
20) Identify the three acceptable depreciation methods discussed in the textbook.
A) straight-line, capitalization of expense, and activity methods
B) straight-line, operating, and accumulated methods
C) activity, carrying value, and straight-line methods
D) double-declining balance, straight-line, and activity methods
21) Which depreciation method is most like the method that is used to calculate depletion of
natural resources?
A) straight-line
B) double-declining balance
C) activity
D) No depreciation method is similar to depletion.
22) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2011, using the straight-line method?
A) $400,000
B) $40,000
C) $80,000
D) $160,000
23) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2012, using the straight-line method?
A) $300,000
B) $40,000
C) $80,000
D) $160,000
24) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2013, using the straight-line method?
A) $200,000
B) $40,000
C) $80,000
D) $160,000
25) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. What should Ace Electronics report on its
Statement of Cash Flows for the year ended December 31, 2011?
A) $(400,000) cash paid for investing activities
B) $(400,000) cash paid for financing activities
C) $(80,000) cash paid for depreciation
D) $(400,000) cash paid for operating activities
26) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. At December 31, 2011, Ace will have accumulated depreciation
of ________.
A) $400,000
B) $40,000
C) $80,000
D) $160,000
27) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. At December 31, 2012, Ace will have accumulated depreciation
of ________.
A) $320,000
B) $40,000
C) $80,000
D) $160,000
28) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. At December 31, 2013, Ace will have accumulated depreciation
of ________.
A) $240,000
B) $40,000
C) $80,000
D) $320,000
29) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. The book value of the computer at December 31, 2011 is
________.
A) $320,000
B) $400,000
C) $480,000
D) $80,000
30) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. The book value of the computer at December 31, 2012 is
________.
A) $400,000
B) $320,000
C) $240,000
D) $160,000
31) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the straight-line
method to depreciate its assets. The book value of the computer at December 31, 2013 is:
A) $400,000
B) $320,000
C) $240,000
D) $160,000
32) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2011, using the double-declining
balance method?
A) $200,000
B) $40,000
C) $80,000
D) $160,000
33) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2012, using the double-declining
balance method?
A) $160,000
B) $96,000
C) $100,000
D) $40,000
34) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. How much depreciation expense should
Ace Electronics record for the year ended December 31, 2013, using the double-declining
balance method?
A) $57,600
B) $40,000
C) $80,000
D) $160,000
35) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the double-declining
balance method to depreciate its assets. The book value of the computer at December 31, 2011 is
________.
A) $160,000
B) $400,000
C) $240,000
D) $320,000
36) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the double-declining
balance method to depreciate its assets. The book value of the computer at December 31, 2012 is
________.
A) $96,000
B) $144,000
C) $80,000
D) $256,000
37) On January 1, 2011, Ace Electronics paid $400,000 cash for a computer that would be used
to store and process its accounting information. The computer has a 5-year useful life, after
which it will be worthless because it will be obsolete. Ace Electronics uses the double-declining
balance method to depreciate its assets. The book value of the computer at December 31, 2013 is
________.
A) $0
B) $313,600
C) $86,400
D) $57,600
38) Capitalizing a cost means to record the cost as an asset.
39) In an accounting context, cost and expense mean the same thing.
40) Cost means the cash or cash equivalent amount sacrificed to acquire an asset.
41) The amount recorded as the cost of a long-term asset includes all costs reasonable and
necessary for putting the asset in a working condition.
42) An accelerated depreciation method refers to any method of depreciating a long-term, asset
that will result in greater amounts being expensed in the early years of an asset’s life and
comparatively smaller amounts being expensed in the latter years of the asset’s life.
43) To “capitalize” means to record a cost as an asset.
44) All depreciation methods provide the same amount of depreciation expense each year.
45) The TOTAL amount of depreciation recorded over the life of a long-term asset depends on
the method used to depreciate that asset.
46) Timber, Inc. purchased land for $500,000. It is expected to produce a total of 200,000 cords
of wood over 5 years, after which it will be sold for $100,000. In 2011, 39,000 cords of wood
were cut. In 2012, 41,000 cords of wood were cut.
1. What is depletion expense per cord of wood? $__________________
2. How much depletion should be recorded in 2011? $_______________________
3. How much depletion should be recorded in 2012? $_______________________
47) Peterson Company purchased land, building, and equipment for a total cash price of
$900,000. An independent appraiser told management that if the assets had been acquired
separately, the company would have paid $300,000, $700,000, and $200,000, respectively, for
each of the assets purchased. Write your answers on the lines provided and show your work in
the space provided below each question.
1. Use the relative fair market value method to determine how much of the $900,000 purchase
price should be used for each of the three separate assets.
$______________ should be used for the cost of the land.
$______________ should be used for the cost of the building.
$______________ should be used for the cost of the equipment.
2. Determine how much depreciation expense the company will have each full year using the
straight-line method and the following assumptions:
∙ The building has a 30-year useful life and a zero salvage value.
∙ The equipment has an 8-year useful life and a $50,000 salvage value.
$______________ annual depreciation expense for the building
$______________ annual depreciation expense for the equipment