MIDDLE EAST TECHNICAL UNIVERSITY FALL 2020

DEPARTMENT OF BUSINESS ADMINISTRATION

BA 1401 – FINANCIAL ACCOUNTING

Elif Nisa Güler
Recitation #9 (​Answer Key Below​)

1.​Fusser Company purchases a new delivery truck for £35,000. The sales taxes are £2,000.
The logo of the company is painted on the side of the truck for £1,200. The truck license is
£120. The truck undergoes safety testing for £220 prior to delivery. What does Bailey record
as the cost of the new truck?

a. £38,200
b. £38,420
c. £37,000
d. £36,420

2. ​International Foods Company purchased equipment and incurred the following costs:

What amount should be recorded as the cost of the equipment?

a. ₩24,000
b. ₩25,200
c. ₩25,400
d. ₩25,800

3.​Lloyds Company purchased land for €100,000 cash. Accrued real estate taxes on the
land, €2,000, and real estate taxes on the land for the current year, €3,000, were also paid in
cash. Real estate brokers' commission was €8,000 and €10,000 was spent on demolishing
the building that was on the property before construction of a new building could begin. The
company was able to sell some of the residual value materials from the demolished building
for €2,000 cash. At what amount should the land be recorded?

a. €123,000
b. €121,000
c. €100,000
d. €118,000
4.​Equipment was purchased for ¥60,000. Freight charges amounted to ¥2,800 and there
was a cost of ¥8,000 for building a foundation and installing the equipment. It is estimated
that the equipment will have a ¥12,000 residual value at the end of its 5-year useful life. How
much is annual depreciation expense if the straight-line method is used?

a. ¥14,160
b. ¥11,760
c. ¥9,840
d. ¥9,600

5.​Depreciation is a process of

a. asset devaluation
b. cost accumulation
c. cost allocation
d. asset valuation

6. ​A plant asset was purchased on January 1 of a prior year for £40,000 with an estimated
residual value of £8,000 at the end of its useful life. The current year's depreciation expense
is £4,000 calculated on the straight-line basis and the balance in the Accumulated
Depreciation account at the end of the year is £20,000. The remaining useful life of the plant
asset is

a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.

7.​In accounting for property, plant and equipment, IFRS requires all of the following with the
exception of:

a. component depreciation.
b. usage of revaluation accounting for property, plant, and equipment.
c. capitalization of development costs once technological feasibility is achieved.
d. differing depreciable costs for an asset dependent upon the depreciation method
used.
8. ​Swiss Confections Company purchased equipment on January 1, 2016, at a total invoice
cost of CHF400,000. The equipment has an estimated residual value of CHF10,000 and an
estimated useful life of 5 years. The amount of accumulated depreciation at December 31,
2017, if the straight-line method of depreciation is used, is

a. CHF80,000.
b. CHF160,000.
c. CHF78,000.
d. CHF156,000.

9. ​Worldwide Supply Company purchased a piece of equipment on January 1, 2016. The

equipment cost ₩60,000 and had an estimated life of 8 years and a residual value of ₩8,000.
What was the depreciation expense for the asset for 2017 under the
double-declining-balance method?

a. ₩6,500.
b. ₩11,250.
c. ₩15,000.
d. ₩6,562.

10. ​Wu Company purchased a tow truck for ¥60,000 on January 1, 2015. It was originally
depreciated on a straight-line basis over 10 years with an assumed residual value of
¥12,000. On December 31, 2017, before adjusting entries had been made, the company
decided to change the remaining estimated life to 4 years (including 2017) and the residual
value to ¥2,000. What is the depreciation expense for 2017?

a. ¥6,000
b. ¥4,800
c. ¥15,000
d. ¥12,100

11.​Welton Company's delivery truck, which had a cost of £56,000 was destroyed by fire. At
the time of the fire, the balance of the Accumulated Depreciation account amounted to
£38,000. The company received £32,000 reimbursement from its insurance company. The
gain or loss as a result of the fire was a

a. £24,000 loss.
b. £14,000 loss.
c. £24,000 gain.
d. £14,000 gain.
12. ​Which one of the following is ​not​an intangible asset?

a. License
b. Goodwill
c. Franchise
d. Research and development

13.​Ann Tremel has prepared the following list of statements about depreciation.

1. Depreciation is a process of asset valuation, not cost allocation.

2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue-producing
ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and
to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement
of the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged
to expense.
9. Depreciation expense and accumulated depreciation are reported on the income
statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and
residual value.

Instructions Identify each statement as true or false. If false, indicate how to correct the
statement.

14. ​Mooney Company completed construction of an office building for $2,400,000 on

December 31, 2013. The company estimated that the building would have a residual value
of $0 and a useful life of 40 years. A more detailed review of the expenditures related to the
building indicates that $300,000 of the total cost was used for personal property and
$180,000 for land improvements. The personal property has a depreciable life of 5 years and
land improvements have a depreciable life of 10 years.

Instructions

Compute depreciation expense for 2014 using component depreciation and the straight line
method.
Answer Key

1. B
2. D
3. D
4. B
5. C
6. D
7. D
8. E
9. B
10. D
11. D
12. D
13.

14.