3) A company incorrectly records revenue expenditures as capital expenditures on its books. As a result,
which of the following will be true?
A) Net income will be understated for the year.
B) Owner’s equity will be understated at year-end.
C) Total assets will be understated at year-end.
D) None of the above will occur.
4) What is the difference between an extraordinary repair and a betterment?
A) A betterment extends the life of the asset; an extraordinary repair does not.
B) An extraordinary repair is a capital expenditure; a betterment is not.
C) An extraordinary repair may extend the life of the asset; a betterment does not.
D) None of these answers are correct.
5) The entry to record the payment of an extraordinary repair of $5,000 that will extend the life of the
machine 5 years, when the machine cost $30,000, and has accumulated depreciation of $26,000, is to:
A) debit Machinery $5,000; credit Accumulated Depreciation $5,000.
B) debit Accumulated Depreciation $5,000; credit Cash $5,000.
C) debit Accumulated Depreciation $1,000; credit Cash $1,000.
D) debit Machinery $1,000; credit Cash $1,000.
6) A company expanded its manufacturing facility by adding an additional 15,000 square feet to the
building. This is an example of a(n):
A) addition.
B) betterment.
C) extraordinary repair
D) revenue expenditure.
7) Budgeting for items such as equipment and furniture would be considered:
A) capital expenses.
B) capital expenditures.
C) general expenses.
D) general expenditures.
8) Some of the past depreciation is canceled in recording an extraordinary repair.
9) A capital expenditure is recorded in an asset account.
10) Define and compare capital expenditures and revenue expenditures.
11) Prepare journal entries for the following for Bartz, Inc.
May 11 Replaced the engine in a Van #1, paying cash of $5,400.
May 18 Paid cash for a tune-up of the engine in Van #2 of $570.
May 29 Paid cash to add a lift to Van #2 of $3,700
12) A budgeted item such as a building is listed as a ________.
13) Payments for ordinary maintenance of an asset are called ________.
14) Expenditures for changing oil in a machine or repainting a car would be:
A) added to the cost of the asset.
B) added as a capital expenditure.
C) charged to an expense account.
D) added as a betterment.
16.5 Learning Objective 16-5
1) When selling a plant asset, the gain was not recorded, but pocketed. This error would cause:
A) the period’s net income to be understated.
B) the period’s net income to be overstated.
C) the period end assets to be overstated.
D) None of these are correct.
2) When equipment that is fully depreciated is discarded:
A) debit the original cost of the asset.
B) credit the balance of Accumulated Depreciation.
C) debit Accumulated Depreciation and credit Equipment.
D) None of these answers are correct.
3) A loss on disposal of an asset is listed as:
A) a liability on the balance sheet.
B) an asset on the balance sheet.
C) other expense on the income statement.
D) other income on the income statement.
4) A gain on the sale of a plant asset is listed as:
A) a liability on the balance sheet.
B) an asset on the balance sheet.
C) other expense on the income statement.
D) other income on the income statement.
5) A gain on the sale of an asset occurs when:
A) the cash received is less than the book value of the asset.
B) the book value is equal to the cost of the asset, and the cash received is less than the cost of the asset.
C) the cash received is greater than the book value of the asset.
D) None of these answers are correct.
6) A loss on the sale of an asset would occur when:
A) the cash received is less than the book value of the asset.
B) the cash received is equal to the book value of the asset.
C) the cash received is greater than the book value of the asset.
D) None of these answers are correct.
7) The entry to record the disposal of a laptop computer with a cost of $2,500 and an accumulated
depreciation of $1,500 would be:
A) debit Depreciation Expense, $2,500; credit Equipment $2,500.
B) debit Accumulated Depreciation $1,500; debit Loss on Disposal of an Asset $1,000; credit Equipment
$2,500.
C) debit Equipment $2,500; credit Accumulated Depreciation $2,500.
D) debit Cash $2,500; credit Equipment $2,500.
8) If an asset is exchanged for a similar asset, a loss results:
A) when the book value of the old asset is greater than what is received for the trade-in allowance.
B) when the book value of the old asset is less than what is received for the trade-in allowance.
C) when the accumulated depreciation equals the cost of the old asset.
D) None of these answers are correct.
9) When an asset is exchanged for a similar asset and a gain results, under accounting rules the gain is:
A) credited to Gain on Exchange of an Asset.
B) recorded in the other income section of the income statement.
C) absorbed into the cost of the new asset.
D) subtracted from the cost of the new asset.
10) Greetings Online disposed of a van that cost $22,000 with accumulated depreciation of $15,000. The
journal entry would be to:
A) debit Accumulated Depreciation $15,000; credit Van $15,000.
B) debit Accumulated Depreciation $15,000; debit Depreciation Expense $7,000; credit Van $22,000.
C) debit Loss Disposal of Plant Asset $7,000; debit Accumulated Depreciation $15,000; credit Van $22,000.
D) None of these answers are correct.
11) Myers Corporation exchanged an old machine costing $20,000, with an accumulated depreciation of
$17,000, and trade-in value of $5,000 for a new machine cash price of $24,000. What is the journal entry?
A) Debit Machinery $22,000; debit Accumulated Depreciation $17,000; credit Machinery $20,000; credit
Cash $19,000
B) Debit Machinery $19,000; debit Accumulated Depreciation $17,000; credit Gain on Disposal of Plant
Asset $3,000; credit Machinery $20,000; credit Cash $19,000
C) Debit Machinery $24,000; debit Accumulated Depreciation $17,000; credit Machinery $20,000; credit
Cash $19,000; credit Gain on Disposal $3,000
D) None of these answers are correct.
12) Corbin Corporation has a plant asset with a cost of $30,000 that is traded for a similar asset priced at
$60,000. Assuming accumulated depreciation of $25,000 and a trade-in allowance of $7,500, what is the
cost basis for the new asset?
A) $47,500
B) $57,500
C) $50,000
D) $50,500
13) A task station that originally cost $2,500 has no estimated salvage value and was depreciated at the
rate of 20% per year (straight-line depreciation). At the end of the third year, it was sold for $1,500 cash.
The transaction would result in a:
A) loss of $250.
B) gain of $250.
C) loss of $500.
D) gain of $500.
14) A truck that cost $26,000 has been owned for 3 years and is traded for another truck for the same
purpose. Total accumulated depreciation at the time of trade is $15,600. The trade-in value of the old
truck is $12,000 and the new truck has a fair market value of $30,000, the new truck would be recorded at:
A) $10,400.
B) $12,000.
C) $29,400.
D) $28,400.
15) Equipment that originally cost $775 with no salvage value has accumulated depreciation of $700. The
equipment is discarded. The transaction to record the discarding of the equipment would result in a:
A) loss of $75.
B) gain of $75.
C) loss of $700.
D) loss of $775.
16) If an asset is being sold or exchanged, the gain or loss is always computed by comparing the:
A) market value and cost.
B) book value and salvage value.
C) market value and salvage value.
D) market value and book value.
17) The Gain on Disposal account is classified as another revenue account.
18) For tax purposes, the gain or loss on a traded asset is absorbed in the value of the new asset.
19) Gains incurred in selling or trading assets are always recognized.
20) Ken Applegate owned equipment with an original cost of $30,000 with $20,000 of accumulated
depreciation. The equipment was traded in on new equipment costing $50,000 with a trade-in allowance
of $8,000 and the balance in cash. Determine the following.
a. The book value of the old machine was ________.
b. The loss on the exchange was ________.
c. The cost basis on the books for the new machine, assuming accounting rules, is ________.
21) The Cutcut Mower Service owned a truck with an original cost of $70,000 on which there is
accumulated depreciation of $60,000. The truck is exchanged for a new truck priced at $100,000 with a
trade-in allowance of $16,000 and the balance in cash.
a. The book value of the old truck is ________.
b. The gain on the exchange is ________.
c. The cost basis in the new truck, assuming accounting rules is ________.
22) Journalize the following transactions for PetsRUs:
Mar. 5 Sold a truck for $6,000 that cost $9,000 and had an accumulated depreciation of $5,000.
Mar. 10 A machine costing $10,000 with accumulated depreciation of $8,000 was destroyed in a fire. No
claim was filed.
May 15 Traded in a machine costing $20,000, with $15,000 of accumulated depreciation, for a new
machine costing $30,000 with a trade-in allowance of $7,000.
23) A computer server system, which had cost $210,000 and had accumulated depreciation of $147,000,
was traded for a new system with a fair market value of $235,000. The old system and cash of $180,000
were given for the new system. Prepare the journal entry for the exchange of these similar assets.
24) A computer server system, which had cost $210,000 and had accumulated depreciation of $147,000,
was traded for a new system with a fair market value of $235,000. The old system and cash of $180,000
were given for the new system. Prepare the journal entry for the exchange of these similar assets
assuming the income tax method is used to record the exchange.
25) Eagle Works traded a plant asset with a cost of $30,000 and accumulated depreciation of $25,000 for a
similar asset priced at $60,000. Assuming a trade-in of $2,500, the cost basis of the new asset under
income tax rules is:
A) $62,500.
B) $47,500.
C) $49,500.
D) $60,000.
26) If a plant asset is fully depreciated and discarded, no ________ or ________ will be realized.
27) The difference between the item’s cost and accumulated depreciation is the ________.