Financial Accounting 8th Edition Harrison Test Bank

Financial Accounting 8th Edition
Harrison Test Bank

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Financial Accounting, 8e
Harrison/Horngren/Thomas
Test Item File
Chapter 7: Plant Assets & Intangibles
7.1-1 The cost of any plant asset is the sum of all of the costs incurred to bring the asset to its intended use.
Answer: True
LO: 7.1
Diff: 2
EOC REF: S7-2
AACSB: Analytical skills
AICPA Functional Competencies: Measurement
AICPA Business Perspective Competencies: Strategic/Critical Thinking
7.1-2 The cost of land may include the cost to remove an unwanted building.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-15
7.1-3 Of the plant assets, buildings are depreciated because these are long-term tangible assets.
Answer: True
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-4 Land improvements are not subject to depreciation, as these items are subject to decay.
Answer: False
LO: 7.1
Diff: 2
EOC REF: E7-15
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 1

7.1-5 Buildings depreciate, natural resources are amortized and intangible assets deplete.
Answer: False
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-6 Costs of land improvements are included in the Land account.
Answer: False
LO: 7.1
Diff: 2
EOC REF: S7-2
7.1-7 Any cost to get machinery up and running and ready for its intended use should be part of the cost of the
asset and depreciated.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-8 The cost of leasehold improvements should be expensed immediately, as this is not a capital asset.
Answer: False
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-9 The cost of assets purchased together in a lump sum should be allocated using the market value of each of
the assets.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-16

7.1-10 When a company spends money on a plant asset, it must decide whether to record an asset or an expense.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-31
7.1-11 The distinction between a capital expenditure and an expense is not always clear-cut.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-31
7.1-12 Many companies will have a policy of expensing all items above a certain dollar amount.
Answer: False
LO: 7.1
Diff: 2
EOC REF: E7-31
7.1-13 The depreciation process is in accordance with the matching principle.
Answer: True
LO: 7.1
Diff: 2
EOC REF: E7-18
7.1-14 An example of a long-term tangible asset would be:

A) office supplies.
B) furniture.
C) investment in LQH company.
D) patents.
Answer: B
LO: 7.1
Diff: 2
EOC REF: S7-1

7.1-15 Long-lived tangible assets that are used in the operation of the business are called:
A) intangible assets.
B) natural resources.
C) plant assets.
D) goodwill.
Answer: C
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-16 The only plant asset that does not depreciate is:
A) office supplies.
B) furniture.
C) land.
D) patents.
Answer: C
LO: 7.1
Diff: 1
EOC REF: E7-18
7.1-17 An asset with no physical form, but that has special rights to current and expected future benefits is a(n):
A) intangible asset.
B) natural resource.
C) plant asset.
D) fixed asset.
Answer: A
LO: 7.1
Diff: 2
EOC REF: E7-26

7.1-18 Which of the following statements is TRUE?
A) Land does not depreciate; natural resources are depreciated.

B) Land does not depreciate; buildings depreciate, and natural resources are amortized.
C) Land does not depreciate; natural resources are depleted and intangibles are amortized.
D) Land does not depreciate; buildings and natural resources depreciate.
Answer: C
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-19 All amounts paid to acquire a plant asset and to get it ready for its intended use are referred to as:
A. set up costs.
B. expenditures .
C) maintenance expense.
D) the cost of an asset.
Answer: D
LO: 7.1
Diff: 2
EOC REF: S7-2
7.1-20 Costs that would be included with the purchase of a plant asset are:
A) the sum of all of the costs incurred to bring the asset to its intended use.
B) only costs that exceed a certain amount.
C) only the purchase price.
D) none of the above.
Answer: A
LO: 7.1
Diff: 2
EOC REF: S7-2

7.1-21 Which of the following should be included in the cost of land?
A) Construction cost of a parking lot
B) Landscaping
C) Real estate brokerage commission
D) Lighting
Answer: C
LO: 7.1
Diff: 2
EOC REF: E7-18
7.1-22 Which of the following should be included in the cost of land?

A) Costs of grading and clearing the land
B) Costs of removing an unwanted building
C) Cost of fencing
D) Both A and B
Answer: D
LO: 7.1
Diff: 2
EOC REF: E7-18
7.1-23 Which of the following is NOT an intangible asset?

A) Copyright
B. Goodwill
C) Patent
D) Mineral rights
Answer: D
LO: 7.1
Diff: 2
EOC REF: S7-13

7.1-24 The cost of installing shrubbery should be recorded as:
A) land.
B) land improvements.
C) land maintenance expense.
D) land improvement expense.
Answer: B
LO: 7.1
Diff: 2
EOC REF: E7-15
7.1-25 Although located on the land, they are subject to decay and their cost is depreciated. This is the definition
of:
A) land improvement.
B) plant and equipment.
C) a building.
D) land.
Answer: A
LO: 7.1
Diff: 2
EOC REF: E7-18
7.1-26 The cost of assets acquired in a lump-sum purchase must be allocated using which method?
A) Book-value method
B Cost method
C. Per capita method
D. Relative-sales-value-method
Answer: D
LO: 7.1
Diff: 2
EOC REF: E7-16

7.1-27 Land, buildings and equipment are acquired for a lump sum of $875,000. The market values of the three
assets are, respectively, $200,000, $500,000 and $300,000. What is the cost assigned to the equipment?
A) $250,000
B) $262,500
C) $300,000
D) $342,857
Answer: B
Calculations: (300,000/1,000,000)*875,000= 262,500
LO: 7.1
Diff: 2
EOC REF: E7-16
7.1-28 Land is purchased for $62,500. Back taxes paid by the purchaser were $7,500; total costs to demolish an
existing building were $11,000; fencing costs were $12,500; and lighting costs were $1,500. What is the
cost of the land?
A) $62,500
B) $81,000
C) $93,500
D) $95,000
Answer: B
Calculations: 62,500+7,500+11,000=81,000
Lighting and fencing are land improvements
LO: 7.1
Diff: 2
EOC REF: E7-18
7.1-29 Which of the following should be included in the Machinery account?

A) The cost of transporting the machinery to its setup location
B) The cost of a maintenance insurance plan after the machinery is up and running
C) The cost of calibrating the machinery after it has been used for a year
D) The cost of insurance while the machinery is being overhauled
Answer: A
LO: 7.1
Diff: 2
EOC REF: P7-62
7.1-30 Morton Corporation purchased equipment for $46,000. Morton also paid $1,200 for freight and insurance
while the equipment was in transit. Sales tax amounted to $850. Insurance, taxes and maintenance for the
first year of use was $1,000. How much should Morton Corporation capitalize as the cost of the
equipment?
A) $46,000
B) $46,850
C) $48,050
D) $49,050
Answer: C
Calculations: 46,000+1,200+850=48,050
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-31 A company recently purchased a building that it plans to renovate to get ready for use in its operations.
All expenditures to repair and renovate the existing building for its intended use are charged to:
A) land.
B) land improvements.
C) land improvements expense.
D) building.
Answer: D
LO: 7.1
Diff: 2
EOC REF: E7-20
7.1-32 Maxco Company acquired land and buildings for $1,000,000. The land is appraised at $450,000 and the
buildings are appraised at $800,000. The debits to the Land and Buildings accounts will be:
A) Land $360,000; Building $640,000.
B) Land $500,000; Building $500,000.
C) Land $450,000; Building $800,000.
D) Land $562,500; Building $437,500.
Answer: A
Calculations: land (450,000/1,250,000)*1,000,000=360,000

Building 800,000/1,250,000*1,000,000=640,000
LO: 7.1
Diff: 2
EOC REF: S7-3

7.1-33 In a lump-sum purchase of assets, the relative-sales-value is defined as the:
A) total price paid less the value of the most valuable asset.
B) total price paid compared to the total market value.
C) ratio of each asset’s market value to the total market value.
D) ratio of each asset’s market value to the total book value.
Answer: C
LO: 7.1
Diff: 2
EOC REF: E7-16
7.1-34 Bixby Corporation purchased land and a building for $800,000. An appraisal indicates that the land’s
value is $400,000 and the building’s value is $500,000. When recording this transaction Galaxy should
debit:
A) Land for $800,000.
B) Building for $355,555.
C) Land Improvement-Building for $500,000.
D) Building for $444,444.
Answer: D
Calculations: land (400,000/900,000)*800,000=355,556

Building (500,000/900,000)*800,000=444,444
LO: 7.1
Diff: 2
EOC REF: E7-16
7.1-35 The Augusta Health Company purchased land, buildings and equipment for $2,400,000. The land has
been appraised at $915,000, the buildings at $1,125,000 and the equipment at $510,000. The equipment
account will be debited for:
A) $541,875.
B) $500,000.
C) $480,000.
D) $410,156.
Answer: C
Calculations: equip 510,000/915,000+1,125,000+510,000=

(510,000/2,550,000) x 2,400,000=480,000
LO: 7.1
Diff: 2
EOC REF: S7-3

7.1-36 An expenditure that increases an asset’s capacity or efficiency or extends its useful life is a(n):
A) capital expenditure.
B) expense.
C) addition.
D) improvement.
Answer: A
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-37 A capital expenditure is:

A) debited to an expense account.
B) credited to an expense account.
C) debited to an asset account.
D) debited to a stockholders’ equity account.
Answer: C
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-38 Costs that do not extend the asset’s capacity or its useful life, but merely maintain the asset or restore it to
working order are recorded as:
A) capital expenditures.
B) expenses.
C) additions.
D) improvements.
Answer: B
LO: 7.1
Diff: 2
EOC REF: E7-17

7.1-39 Which of the following costs associated with a delivery van should be capitalized?
I. The van is repainted.
II. The van’s transmission is completely overhauled to extend useful life for two years.
III. The van is modified for a specific use.
A) I and II
B) I and III
C) II and III
D) All of these answers are correct.
Answer: C
LO: 7.1
Diff: 2
EOC REF: E7-31
7.1-40 The journal entry to record a major expenditure to upgrade equipment that extends its useful life beyond
the original estimate would include a:
A) credit to Depreciation Expense.
B) debit to Equipment.
C) debit to Depreciation Expense.
D) debit to Repair Expense.
Answer: B
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-41 Pat’s Pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of the
van was originally estimated to be 7 years. The overhaul is expected to extend the useful life of the van to
9 years. The overhaul is regarded as a(n):
A) revenue expenditure.
B) capital expenditure.
C) equity expenditure.
D) matching expenditure.
Answer: B
LO: 7.1
Diff: 2
EOC REF: E7-31

7.1-42 Capital expenditures are not immediately expensed because these items:
A) do not extend the life of an asset.
B) return an asset to its prior condition.
C) increase the asset’s capacity.
D) do all of the above.
Answer: C
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-43 Repairs made to equipment as part of a yearly maintenance project would be recorded in the journal by
debiting:
A) Accumulated Depreciation.
B) Depreciation Expense.
C) Equipment.
D) Repair Expense.
Answer: D
LO: 7.1
Diff: 2
EOC REF: E7-17
7.1-44 Which of the following should be included in the cost of equipment?

A) Freight costs to deliver the equipment
B) Installation costs for the equipment
C) Testing costs to get the equipment ready for use
D) All of the above
Answer: D
LO: 7.1
Diff: 2
EOC REF: E7-15

7.1-45 A machine is purchased for $70,000. The transportation costs were $4,000, installation costs were $1,000
and taxes on the purchase price were $700. The cost basis of the machine is:
A) $70,000.
B) $74,000.
C) $75,700.
Answer: C
Calculations: 70,000+4,000+1,000+700=75,700
LO: 7.1
Diff: 2
EOC REF: E7-29
7.1-46 On June 1, Puff’s Trucking Company paid $3,000 to overhaul the engine on a delivery truck to allow it to
be used for two additional years. It also paid $75 for an oil change on the truck. Which of the following
statements is true?
A) The $3,000 is a capital expenditure and the $75 is an expense.
B) The $3,000 is an expense and the $75 is a capital expenditure.
C) Both items are capital expenditures.
D) Both items are expenses.
Answer: A
LO: 7.1
Diff: 2
EOC REF: S7-4
7.1-47 Treating a capital expenditure as an immediate expense:

A) overstates assets and overstates owners’ equity.
B) overstates expenses and understates net income.
C) understates expenses and overstates owners’ equity.
D) understates expenses and understates assets.
Answer: B
LO: 7.1
Diff: 2
EOC REF: S7-4

7.1-48 The book value of a plant asset is the:
A) cost less depreciation expense.
B) cost plus accumulated depreciation.
C) cost less accumulated depreciation.
D) original cost of the asset, plus any capital expenditures.
Answer: C
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-49 The process of allocating the cost of a plant asset to expense over its life is:
A) amortization.
B) depletion.
C) matching.
D) depreciation.
Answer: D
LO: 7.1
Diff: 2
EOC REF: S7-1
7.1-50 Which of the following statements is TRUE?

A) Depreciation expense and accumulated depreciation are both reported on the income statement.
B) Depreciation expense and accumulated depreciation are both reported on the balance sheet.
C) Depreciation expense is reported on the income statement and accumulated depreciation is reported
on the balance sheet.
D) Depreciation expense is reported on the balance sheet and accumulated depreciation is reported on the
income statement.
Answer: C
LO: 7.1
Diff: 2
EOC REF: S7-1

7.2-1 Depreciation is:
A) a process of valuation.
B) the setting aside of cash to replace assets as they wear out.
C) the allocation of a plant asset’s cost to expense over its life.
D) not calculated for assets that are appreciating in value.
Answer: C
LO: 7.2
Diff: 2
EOC REF: P7-62
7.2-2 The Accumulated Depreciation account represents a contra-revenue account.
Answer: False
LO: 7.2
Diff: 2
EOC REF: E7-18
7.2-3 Obsolescence may cause an asset’s useful life to be longer than the asset’s physical life.
Answer: False
LO: 7.2
Diff: 1
EOC REF P7-65
7.2-4 When using the units-of-production depreciation method, the asset’s actual cost is used in computing the
first year of depreciation.
Answer: False
LO: 7.2
Diff: 2
EOC REF: E7-24
7.2-5 Book value equals the cost of the asset less the total accumulated depreciation.
Answer: True
LO: 7.2
Diff: 2
EOC REF: E7-18
7.2-6 The normal balance of the accumulated depreciation account is a debit.
Answer: False
LO: 7.2
Diff: 2
EOC REF: S7-5
7.2-7 The straight-line method is one of the most widely used methods of computing depreciation for financial
statement purposes.
Answer: True
LO: 7.2
Diff: 1
EOC REF: P7-66
7.2-8 At the end of its useful life, an asset is said to be fully depreciated.
Answer: True
LO: 7.2
Diff: 2
EOC REF: E7-22
7.2-9 The units-of production method depends directly on the time the asset is used.
Answer: False
LO: 7.2
Diff: 1
EOC REF: E7-43
7.2-10 The three depreciation methods allocate different amounts of depreciation to each period, but all result in
the same total amount of depreciation over the life of the asset.
Answer: True
LO: 7.2
Diff: 2
EOC REF: S7-6

7.2-11 Double-declining-balance depreciation computes total depreciation by multiplying the asset’s book value
by two times the straight-line rate.
Answer: True
LO: 7.2
Diff: 2
EOC REF: S7-6
7.2-12 The process of allocating a plant asset’s cost to expense over the period in which the asset is used is
called:
A) amortization.
B) allocation.
C) depreciation.
D) disclosure.
Answer: C
LO: 7.2
Diff: 2
EOC REF: E7-19
7.2-13 Which accounting principle directs the depreciation process?

A) Full disclosure
B) Going concern
C) Historical cost
D) Matching
Answer: D
LO: 7.2
Diff: 2
EOC REF: P7-66
7.2-14 The length of service that a business expects to get from an asset as expressed in years, units of output,
miles or other measures is the:
A) depreciable cost.
B) estimated useful life.
C) salvage value.
D) accelerated depreciation method.
Answer: B
LO: 7.2
Diff: 1
EOC REF: E7-22
7.2-15 The depreciation process attempts to match the:
A. salvage value of the asset and the future market value of the asset.
B. book value and the current market value of the asset.
C. cost of the asset and the cash required to replace the asset.
D. revenues earned by the asset and the cost of the asset.
Answer: D
LO: 7.2
Diff: 2
EOC REF: S7-9
7.2-16 Which of the following depreciation methods best fits those assets that tend to wear out before they
become obsolete?
A) Straight-line method
B) Depletion method
C) Double-declining-balance method
D) Units-of-production method
Answer: D
LO: 7.2
Diff: 2
EOC REF: E7-19
7.2-17 Double-declining balance depreciation:

A) is an accelerated method of depreciation.
B) ignores the residual value in computing depreciation, except during the last year.
C) is based on book value.
D) is all of the above.
Answer: D
LO: 7.2
Diff: 2
EOC REF: E7-33

7.2-18 Which of the following depreciation methods best applies to those assets that generate greater revenue
earlier in their useful lives?
A) Straight-line method
B) Depletion method
C) Double-declining-balance method
D) Units-of-production method
Answer: C
LO: 7.2
Diff: 2
EOC REF: E7-19
7.2-19 A depreciation method that writes off a relatively larger amount of the asset’s cost nearer the start of its
useful life than the straight-line method is the:
A) units-of-production method.
B) straight-line method.
C) accelerated depreciation method.
D) estimated residual value method.
Answer: C
LO: 7.2
Diff: 2
EOC REF: E7-19
7.2-20 A depreciation method in which an equal amount of depreciation expense is assigned to each year of the
asset’s use is the:
B) straight-line method.
C) accelerated depreciation method.
D) estimated residual value method.
Answer: B
LO: 7.2
Diff: 2
EOC REF: S7-6

7.2-21 Which of the following statements is FALSE?
A) Assets that are increasing in value are still subject to depreciation.
B) Depreciation is a non-cash expense.
C) Accumulated depreciation represents a growing amount of cash to be used to replace the existing
asset.
D) Accumulated depreciation is that portion of a plant asset’s cost that has been recorded previously as
an expense.
Answer: C
LO: 7.2
Diff: 3
EOC REF: E7-18
7.2-22 Which of the following statements is FALSE?

A) As an asset is used in operations, accumulated depreciation increases.
B) As an asset is used in operations, the book value of the asset decreases.
C) As an asset is used in operations, the book value of the asset increases.
D) An asset’s final book value is its residual value.
Answer: C
LO: 7.2
Diff: 3
EOC REF: P7-74
7.2-23 When computing depreciation for a plant asset, which of the following must be estimated?
A) Useful life and residual value
B) Residual value and current market value
C) Useful life and current market value
D) Useful life, current market value, and residual value
Answer: A
LO: 7.2
Diff: 2
EOC REF: S7-5

7.2-24 The expected cash value of a plant asset at the end of its useful life is known as:
A) scrap value.
B) salvage value.
C) residual value.
D) any of the above.
Answer: D
LO: 7.2
Diff: 1
EOC REF: S7-5
7.2-25 The depreciable cost of an asset using straight line depreciation is defined as:
A) cost minus accumulated depreciation.
B) cost minus salvage value.
C) current sales value minus historical cost.
D) cost minus annual maintenance expense.
Answer: B
LO: 7.2
Diff: 2
EOC REF: E7-19
7.2-26 The book value of an asset is defined as:

A) cost minus accumulated depreciation.
B) cost minus salvage value.
C) current sales value minus historical cost.
D) cost minus annual maintenance expense.
Answer: A
LO: 7.2
Diff: 2
EOC REF: S7-5

7.2-27 For financial reporting purposes, most companies use:
A) straight-line depreciation.
B) units-of-production depreciation.
C) double-declining balance depreciation.
D) modified accelerated cost recovery system of depreciation.
Answer: A
LO: 7.2
Diff: 1
EOC REF: P7-74
7.2-28 When compared to the other methods of depreciation, the double-declining-balance method of
depreciation gives depreciation expense that is:
A) less in the earlier periods.
B) more in the earlier periods.
C) approximately the same in earlier periods as with other methods.
D) an accelerated method; therefore, companies cannot use this method.
Answer: B
LO: 7.2
Diff: 2
EOC REF: E7-33
7.2-29 At the end of an asset’s useful life, the balance in Accumulated Depreciation will be the same as the:
A) tax liability.
B) book value.
C) salvage value.
D) total depreciation expense over its useful life.
Answer: D
LO: 7.2
Diff: 3
EOC REF: E7-38

7.2-30 The depreciation method that does NOT use residual value in calculating depreciation expense until the
last year is the:
B) straight-line method
C) double-declining balance method.
D) all of the above.
Answer: C
LO: 7.2
Diff: 3
EOC REF: E7-33
7.2-31 On January 2, 2010, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. If KJ Corporation uses the
units of production method of depreciation, what will be the debit to Depreciation Expense for the year
ended December 31, 2011—assuming that during this period, the asset was used 8,250 hours?
A) $48,000
B) $49,500
C) $51,500
D) $53,625
Answer: B
Calculations: cost-residual value/total units to be produced = depreciation per unit

(260,000-20,000)/40,000= 6 depreciation per hour
8,250 hours*6 per hour=49,500 total deprecation for the year
LO: 7.2
Diff: 2
EOC REF: E7-24

equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the balance in
Accumulated Depreciation on December 31, 2011, if KJ Corporation uses the straight-line method of
depreciation?
A) $96,000
B) $49,500
C) $51,500
D) $53,625
Answer: A
Calculations:
Straight line Cost-salvage value/estimated useful life 260,000-20000/5=
depreciation =
48,000 depreciation expense per
year
Accumulated 48,000 per year * 2 years= 96,000
depreciation =
LO: 7.2
Diff: 2
EOC REF: E7-18
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the book value
of the asset on December 31, 2011, if KJ Corporation uses the straight-line method of depreciation?
A) $80,000
B) $96,000
C) $104,000
D) $164,000
Answer: D
Calculations:
Straight line Cost-salvage value/estimated useful life 260,000-20000/5=
depreciation =
48,000 depreciation expense per
year
Accumulated 48,000 per year * 2 years= 96,000
depreciation =
Book value = Cost- accumulated depreciation 260,000-96,000=164,000
LO: 7.2
Diff: 2
EOC REF: E7-18

Accumulated Depreciation on December 31, 2010, if KJ Corporation uses the double-declining-balance
method of depreciation?
A) $62,400
B) $88,000
C) $96,000
D) $104,000
Answer: D
Calculations:
Double declining Rate * book value 260,000-20000/5=
balance =
Rate= double straight- 1/5=20%*2=40%
line rate
Depreciation year 1 R * BV 40%*260,000=104,000
LO: 7.2
Diff: 2
EOC REF: E7-33
AICPA Business Perspective

Accumulated Depreciation on December 31, 2011, if KJ Corporation uses the double-declining-balance
method of depreciation?
A) $104,000
B) $38,400
C) $166,400
D) $104,000
Answer: C
Calculations:
Double declining Rate * book value 260,000-20000/5=
balance =
line rate
Depreciation year 2 R*BV
.40 * (260,000-104,000) 62,400
Total accumulated 166,400
depreciation
LO: 7.2
Diff: 3
EOC REF: S7-6
7.2-36 On January 10, 2010, Maxim Corporation acquired equipment for $124,000. The estimated life of the
equipment is 3 years or 24,000 hours. The estimated residual value is $10,000. What is the depreciation
for 2010, if Baldwin Corporation uses the asset 9,100 hours and uses the units-of-production method of
depreciation?
A) $43,225
B) $47,017
C) $41,333
D) $38,000
Answer: A
Calculations:
Units of production Cost-salvage value/total units to be produced 124,000-10,000/24,000 hours=
depreciation = 4.75 depreciation per hour
Depreciation for year= Total hours used * 4.75 per hour= 9,100*4.75=43,225
LO: 7.2
Diff: 2
EOC REF: E7-24

7.2-37 On January 10, 2010, Maxim Corporation acquired equipment for $124,000. The estimated life of the
equipment is 3 years or 24,000 hours. The estimated residual value is $10,000. What is the balance of
Accumulated Depreciation on December 31, 2011, if Baldwin Corporation uses the asset 5,500 hours in
2010 and 4,500 hours in 2011?
A) $76,000
B) $61,218
C) $52,083
D) $47,500
Answer: D
Calculations:
Units of production Cost-salvage value/total units to be produced 124,000-10,000/24,000 hours=
depreciation = 4.75 depreciation per hour
Depreciation for 2010= Total hours used * 4.75 per hour= 5,500*4.75= 26,125
Depreciation for 2011= Total hours used * 4.75 per hour= 4,500*4.75= 21,375
Accumulated Depreciation year 2010 + depreciation year 47,500
depreciation= 2011
LO: 7.2
Diff: 2
EOC REF: E7-43
7.2-38 On January 2, 2011, Mosby Corporation acquired equipment for $200,000. The estimated life of the
equipment is 8 years or 35,000 hours. The estimated residual value is $40,000. What is the book value of
the equipment on December 31, 2011, if Mosby Corporation uses the double-declining-balance method of
depreciation?
A) $128,000
B) $150,000
C) $87,500
D) $72,000
Answer: B
Calculations:
Double declining Rate * book value
balance =
Rate= double straight- 1/8=12.5%*2=25%
line rate
Depreciation year 1 R * BV 25%*200000=50,000
Book value= Cost-accumulated depreciation 200,000-50,000=150,000
LO: 7.2
Diff: 2
EOC REF: E7-19

7.2-39 On January 2, 2011, Mosby Corporation acquired equipment for $200,000. The estimated life of the
equipment is 8 years or 35,000 hours. The estimated residual value is $40,000. What is the amount of
depreciation expense for 2011, if the company uses the double-declining-balance method of depreciation?
A) $112,500
B) $87,500
C) $50,000
D) $30,000
Answer: C
Calculations:
balance =
Rate= double straight- 1/8=12.5%*2=25%
line rate
Depreciation year 1 R * BV 25%*200000=50,000
LO: 7.2
Diff: 2
EOC REF: E7-33
7.2-40 On January 2, 2011, Heidi’s Pet Boutique purchased a television for the dog sitting area which cost
$8,000. It had an estimated useful life of 5 years and a residual value of $1,000. What is the amount of
depreciation expense for 2012, the second year of the asset’s life using the double declining-balance
method?
A) $3,200
B) $8,000
C) $1,920
D) $2,080
Answer: C
Calculations:
balance =
line rate
Depreciation year 2 R * BV 40% * (8000-3200)= 1,920
LO: 7.2
Diff: 2
EOC REF: S7-6

7.3-1 The use of the straight-line method of computing depreciation increases a company’s tax liability, thereby
increasing the company’s cash flow.
Answer: False
LO: 7.3
Diff: 2
EOC REF: E7-21
7.3-2 The IRS states that only the straight-line method of depreciation may be used for income tax purposes.
Answer: False
LO: 7.3
Diff: 1
EOC REF: E7-21
7.3-3 It is neither legal nor ethical to use one method of depreciation for financial purposes and another method
for tax purposes.
Answer: False
LO: 7.3
Diff: 1
EOC REF: E7-21
7.3-4 GAAP determines the depreciation method used for financial reporting purposes and tax purposes.
Answer: False
LO: 7.3
Diff: 2
EOC REF: E7-35
7.3-5 Changes in accounting estimates are not allowed under the consistency principle.
Answer: False
LO: 7.3
Diff: 2
EOC REF: E7-22

7.3-6 When the book value of an asset is zero, the asset is worthless.
Answer: False
LO: 7.3
Diff: 2
EOC REF: E7-22
7.3-7 Revising depreciation estimates does not affect the amount of depreciation expense recorded in the prior
financial statements.
Answer: True
LO: 7.3
Diff: 2
EOC REF: E7-22
7.3-8 Under the MACRS depreciation method, automobiles and equipment are depreciated using the:
A) straight-line method.
B) 150%-declining-balance method.
C) double-declining-balance method.
D) IRS units-of-production method.
Answer: C
LO: 7.3
Diff: 2
EOC REF: E7-35
7.3-9 Using an accelerated depreciation method will cause a profitable company to incur:
A) less taxes in early years of the asset’s use as compared to later years.
B) more taxes in early years of the asset’s use as compared to later years.
C) the same amount of taxes in early years of the asset’s use as in the later years.
Answer: A
LO: 7.3
Diff: 2
EOC REF: S7-7

7.3-10 Managers prefer accelerated depreciation over straight-line depreciation for income tax purposes because
accelerated depreciation:
A) provides the fastest tax deductions.
B) decreases immediate tax payments.
C) allows the company to reinvest the tax savings back in the business.
D) does all of the above.
Answer: D
LO: 7.3
Diff: 2
EOC REF: S7-7
7.3-11 A revision of an estimate which will extend the asset’s useful life is called a change in accounting:
A) theory.
B) policy.
C) procedure.
D) estimate.
Answer: D
LO: 7.3
Diff: 1
EOC REF: E7-22
7.3-12 When an asset is fully depreciated:

A) the total depreciation is equal to the accumulated depreciation, and the asset has reached the end of its
actual useful life.
B) the book value is equal to the salvage value, and the asset has reached the end of its estimated useful
life.
C) the depreciable cost is equal to the salvage value, and the asset is of no further use to the company.
D) the book value is zero, and the asset has no market value.
Answer: B
LO: 7.3
Diff: 3
EOC REF: E7-22

7.3-13 A special depreciation method used only for income-tax purposes is:
A) straight-line.
B) units-of-production.
C) modified accelerated cost recovery system.
D) accelerated cost recovery system.
Answer: C
LO: 7.3
Diff: 2
EOC REF: E7-35
7.3-14 Under the modified accelerated cost recovery system, all of the following are TRUE except that:
A) assets are grouped into classes.
B) most real estate is depreciated using the straight-line method.
C) for a given class, the depreciation is computed using a declining-balance method.
D) MACRS can only be used for financial reporting purposes.
Answer: D
LO: 7.3
Diff: 2
EOC REF: E7-35
7.3-15 Which of the following statements regarding depreciation for a partial year is NOT true?
A) If an asset is not purchased at the beginning of the year, depreciation must be computed only for the
portion of the year the company held the asset.
B) Many businesses record no monthly depreciation on assets purchased after the 15th of the month.
C) An asset purchased on June 5 will be depreciated for seven months for the first year.
D) An asset purchased on June 5 will be depreciated for six months for the first year.
Answer: D
LO: 7.3 Diff: 2
EOC REF: E7-35

7.3-16 Carl’s Cigar Corporation’s net income before depreciation and taxes is $310,000. Using straight-line
depreciation, the current year’s depreciation expense would be $24,000. Using double-declining-balance
depreciation, the current year’s depreciation expense would be $36,000. Assuming a tax rate of 35%,
what is Carl’s Cigar Corporation’s net income if the double-declining-balance depreciation method is
used?
A) $171,600
B) $166,400
C) $185,900
D) $178,100
Answer: D
Calculations: 310,000-36,000=274,000 income before taxes

274,000*.35=95,900 income tax expense
274,000-95,900=178,100 net income
LO: 7.3
Diff: 2
EOC REF: P7-66
7.3-17 Income before depreciation and taxes amounts to $167,200. Using straight-line depreciation, the current
year’s depreciation expense will be $31,200. Using double-declining-balance depreciation, the current
year’s depreciation expense will be $41,200. Assuming a tax rate of 30%, what is the net cash saved in
income taxes by using double-declining-balance depreciation over straight-line depreciation?
A) $3,000
B) $4,000
C) $7,000
D) $11,100
Answer: A
Calculations: difference in depreciation = 41,200-31,200=10,000

10,000 additional depreciation expense * .30 tax rate = 3,000 tax savings
LO: 7.3
Diff: 2
EOC REF: S7-7

7.3-18 Art Modell Company reported $61,000 in depreciation expense for the current year using the double-
declining-balance method. The company estimates that it saved net cash of $12,000 in income taxes by
using the double-declining-balance instead of the straight-line method. The company has a 30% tax rate.
What would depreciation expense have been using the straight-line method?
A) $43,857
B) $40,000
C) $21,000
D) $7,200
Answer: C
Calculations: income tax savings/tax rate = 12,000/.30= 40,000 difference in depreciation expense
61,000 double declining -40,000 difference = 21,000straight-line depreciation
LO: 7.3
Diff: 3
EOC REF: S7-7
7.3-19 Deland Company purchased equipment on March 1, 2011, for $130,000. The residual value is $40,000
and the estimated life is 10 years or 60,000 hours. Compute depreciation expense for the year ending
December 31, 2011, if the company uses the straight-line method of depreciation.
A) $7,500
B) $9,000
C) $14,444
D) $21,666
Answer: A
Calculations: 130,000-40,000/10=9,000 per year

9,000*10/12=7,500
LO: 7.3
Diff: 2
EOC REF: S7-8

December 31, 2011, if the company uses the units-of-production method of depreciation and uses the
equipment for 9,000 hours.
A) $9,000
B) $10,500
C) $13,500
D) $29,500
Answer: C
Calculations: 130,000-40,000/60,000=1.5 per hour

9,000*1.5=13,500
LO: 7.3
Diff: 2
EOC REF: S7-8
December 31, 2011, if the company uses the double-declining-balance method of depreciation.
A) $21,666
B) $20,800
C) $26,333
D) $24,666
Answer: A
Calculations: Rate = 1/10=10%*2=20%

Rate* BV= depreciation
.20*130000=26,000 *10/12=21667 depreciation 2010
.20*(130000-21667)=21,666 depreciation 2011
LO: 7.3
Diff: 3
EOC REF: S7-8

7.3-22 Bay Back Company acquired equipment on June 30, 2011, for $210,000. The residual value is $35,000
and the estimated life is 5 years or 40,000 hours. Compute the balance in Accumulated Depreciation as of
December 31, 2013, if Bay Back Company uses the double-declining-balance method of depreciation.
A) $68,040
B) $134,400
C) $141,960
D) $149,520
Answer: D
Calculations: Rate =1/5=20%82=40%

Year 2011 = 40%*210,000=84,000*6/12= 42,000
Year 2012 = 40% * (210,000-42,000) =67,200
Year 2013 = 40% * (210,000-42,000-67,200) =40,320
Total depreciation= 42,000+67,200+40,320=149,520
LO: 7.3
Diff: 3
EOC REF: S7-8
7.3-23 Paul’s Lodging Corporation purchased equipment on January 1, 2010 for $180,000. The equipment had
an estimated useful life of 10 years and an estimated salvage value of $30,000. After using the equipment
for 3 years, the company determined that the equipment could be used for an additional 9 years and
have a salvage value of $9,000. Assuming Paul’s Lodging Corporation uses straight-line depreciation,
compute depreciation expense for the year ending December 31, 2013.
A) $11,250
B) $13,500
C) $15,000
D) $14,000
Answer: D
Calculations: 180,000-30,000/10=15,000 depreciation per year

15,000*3 years = 45,000 total depreciation after 3 years
180,000-45,000-9,000/9=14,000
LO: 7.3
Diff: 3
EOC REF: E7-22

7.3-24 Jackson Corporation acquired equipment on January 1, 2010, for $320,000. The equipment had an
estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2013, Jackson
Corporation revised the total useful life of the equipment to 8 years and the estimated salvage value to be
$20,000. Compute depreciation expense for the year ending December 31, 2013, if Jackson Corporation
uses straight-line depreciation.
A) $26,477
B) $39,300
C) $42,300
D) $46,300
Answer: C

29,500*3 years = 88,500 total depreciation for 3 years
320,000-88500-20,000/5=42,300
LO: 7.3
Diff: 3
EOC REF: E7-22
7.3-25 Jackson Corporation acquired equipment on January 1, 2010, for $320,000. The equipment had an
estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2013, Jackson
Corporation revised the total useful life of the equipment to 6 years and the estimated salvage value to be
$20,000. Using the straight-line method of depreciation, what is the book value as of December 31, 2013?
A) $161,000
B) $159,000
C) $154,333
D) $146,000
Answer: A

320,000-88,500-20,000/3=70,500 depreciation for 2013
Accumulated depreciation = 88,500+70,500=159,000
C-AD = BV
320,000-159,000=161,000
LO: 7.3
Diff: 3
EOC REF: E7-22

7.3-26 The Fall River Corporation bought a plant asset on January 1, 2010, at a cost of $45,000. Estimated
residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line
depreciation. On January 1, 2013, Fall River’s management revises the total estimated life to be 10 years,
with estimated residual value of $2,000. The balance in Accumulated Depreciation on December 31,
2013, is:
A) $16,358.
B) $21,429.
C) $10,000.
D) $19,000.
Answer: D

45,000-15,000-2,000/7=4000 depreciation for 2013
Accumulated depreciation = 15,000+4,000=19000
LO: 7.3
Diff: 2
EOC REF: E7-22
7.3-27 A plant asset is acquired by a business on January 1, 2010, for $30,000. The asset’s estimated residual
value is $8,000 and its estimated life is 5 years. Management chooses to use straight-line depreciation. On
January 1, 2012, management revises the total useful life to 6 years and the residual value to be zero.
Compute the balance in Accumulated Depreciation on December 31, 2012.
A) $4,400
B) $5,300
C) $8,800
D) $14,100
Answer: D

4,400*2 years = 8,800 total depreciation before change
30,000-8,800-0/4=5,300 new depreciation per year
Accumulated depreciation = 8,800+5,300=14,100
LO: 7.3
Diff: 3
EOC REF: E7-22

7.4-1 To account for the disposal of a plant asset, the cost of the asset and its related accumulated depreciation
are removed from the books.
Answer: True
LO: 7.4
Diff: 2
EOC REF: S7-10
7.4-2 When an asset is sold at a gain, total assets and total equity both increase.
Answer: True
LO: 7.4
Diff: 2
EOC REF: S7-10
7.4-3 When computing the gain or loss on the sale of a plant asset, the annual depreciation for the year of sale
must be considered, but if the amount is small, this amount can be ignored.
Answer: False
LO: 7.4
Diff: 2
EOC REF: E7-23
7.4-4 A gain will result when the book value of a plant asset exceeds the cash received from the sale of the
asset.
Answer: False
LO: 7.4
Diff: 2
EOC REF: E7-23

7.4-5 Gains and losses on the sale of plant assets are reported on the income statement as regular income or
expense items.
Answer: False
LO: 7.4
Diff: 2
EOC REFE7-23
7.4-6 Gains on the sale of equipment increase net income while losses on the sale of equipment decrease net
income.
Answer: True
LO: 7.4
Diff: 2
EOC REF: E7-23
7.4-7 If Valtrex Inc. sells a major plant asset:

A) depreciation expense should be recorded through the date of sale.
B) the book value of the asset should be credited to the asset account.
C) no gain should be recognized if depreciation expense was taken on the asset before the asset was sold.
D) a loss should be recognized, but not a gain, if depreciation expense was taken on the asset before the
asset was sold.
Answer: A
LO: 7.4
Diff: 2
EOC REF: S7-10
7.4-8 A loss is recorded on the sale of a plant asset when the:

A) cash received exceeds the asset’s book value.
B) asset’s book value is less than its historical cost.
C) asset’s book value is greater than the amount of cash received from the sale.
D) cash received exceeds the cash paid for the replacement asset.
Answer: C
LO: 7.4
Diff: 2
EOC REF: E7-23

7.4-9 If a machine has been fully depreciated and has no residual value:
A) there will always be a loss on the disposal.
B) there will always be a gain on the disposal.
C) there will be no gain or loss on the disposal.
D) total assets will be increased.
Answer: C
LO: 7.4
Diff: 2
EOC REF: E7-23
7.4-10 If an asset is scrapped before being fully depreciated:

A) the company will incur a loss on the disposal.
B) the equipment account will be credited.
C) the accumulated depreciation account will be debited.
D) all of the above will occur.
Answer: D
LO: 7.4
Diff: 2
EOC REF: E7-44
7.4-11 When plant assets are exchanged:

A) the old asset does not need to be removed from the books.
B) the new asset will be debited for the list price of the asset.
C) the gain or loss on the exchange is equal to the difference between the fair value and the book value
of the old asset.
D) total assets increase.
Answer: C
LO: 7.4
Diff: 3
EOC REF: E7-38

7.4-12 Patch Company sold some office furniture for $4,800 cash. The furniture cost $31,500 and had
accumulated depreciation through the date of sale totaling $29,300. The journal entry to record the sale of
the furniture will include a:
A) debit to Loss on Sale of Furniture for $26,700.
B) debit to Gain on Sale of Furniture for $2,600.
C) credit to Gain on Sale of Furniture for $2,600.
D) credit to Loss on Sale of Furniture for $26,700.
Answer: C
Calculations: C-AD = BV
31,500-29,300=2,200
Cash – BV = gain
4,800-2,200=2,600
LO: 7.4
Diff: 2
EOC REF: E7-23
7.4-13 Hawthorne Company sold an old computer for $3,000 cash. The computer cost $45,000 and had
accumulated depreciation through the date of sale totaling $42,000. The company will recognize:
A) a gain of $3,000.
B) a loss of $3,000.
C) neither a gain nor a loss.
D) a loss of $37,500.
Answer: C
45,000-42,000=3,000
Cash – BV = gain
3,000-3,000=0
LO: 7.4
Diff: 2
EOC REF: S7-10

7.4-14 Smucker’s Company sold equipment costing $65,000 with $60,000 of accumulated depreciation for
$10,000 cash. The company’s journal entry to record this sale will NOT include a:
A) credit to Equipment for $65,000.
B) credit to Gain on Sale of Equipment for $5,000.
C) debit to Accumulated Depreciation for $60,000.
D) debit to Gain on Sale of Equipment for $5,000.
Answer: D
65,000-60,000=5,000
Cash – BV = gain
10,000-5,000= 5,000
JE: Cash 10,000

Accum Dep 60,000
Equip 65,000
Gain on sale 5,000
LO: 7.4
Diff: 2
EOC REF: E7-44
7.4-15 Equipment costing $47,500 with a book value of $22,500 is sold for $26,000. The journal entry will
involve a ___________ to Accumulated Depreciation.
A) credit of $25,000
B) debit of $22,500
C) debit of $25,000
D) credit of $22,500
Answer: C
47,500-AD = 22,500
AD = 25,000
LO: 7.4
Diff: 2
EOC REF: E7-37

7.4-16 Equipment purchased for $85,000 on January 1, 2010, was sold on July 1, 2013. The company uses the
straight-line method of computing depreciation and recognizes $17,000 of depreciation expense annually.
When recording the sale, the company should record a debit to Accumulated Depreciation for:
A) $51,000.
B) $59,500.
C) $68,000.
D) nothing; Accumulated Depreciation is not debited.
Answer: B
Calculations: 17,000 depreciation for year x 6/12 = 8,500 depreciation for 2013
2010 depreciation = 17,000

2012 depreciation= 17,000
Total depreciation 59,500
LO: 7.4
Diff: 2
EOC REF: E7-37
7.4-17 Equipment acquired on January 1, 2010, is sold on June 30, 2013, for $11,200. The equipment cost
$26,800, had an estimated residual value of $6,800, and an estimated useful life of 5 years. The company
prepared financial statements on December 31, and the equipment has been depreciated using the straight-
line method. Prior to determining the gain or loss on the sale of this equipment, the company should
record depreciation of:
A) $2,000.
B) $5,000.
C) $31,700.
D) nothing; no entry is required.
Answer: A
Calculations: Straight-line depreciation = C-SV/EUL

26,800-6,800/5 = 4,000 depreciation per year
Depreciation for 2013 = 4,000 x 6/12= 2,000
LO: 7.4
Diff: 2
EOC REF: E7-37

7.4-18 Great Farms Company sold some fully depreciated equipment for $4,100 cash. The equipment had been
purchased for $49,600, and the company had estimated the useful life at 8 years and a residual value at
$5,600. How will this sale affect Retained Earnings?
A) It will decrease Retained Earnings by $44,000.

B) it will decrease Retained Earnings by $1,500.
C) It will increase Retained Earnings by $4,100.
D) It will have no effect on Retained Earnings.
Answer: B
Calculations: BV= RV= 5,600

BV- cash = loss
5,600-4,100= 1,500 loss
LO: 7.4
Diff: 2
EOC REF: E7-37
7.4-19 Tomas Company trades in a printing press for a newer model. The cost of the old printing press was
$61,500, and accumulated depreciation up to the date of the trade-in amounts to $38,000. The company
also pays $41,200 cash for the newer printing press. The journal entry to acquire the new printing press
will require a debit to Equipment for:
A) $41,200.
B) $61,500.
C) $64,700.
D) $102,700.
Answer: C
Calculations: BV= C-AD

BV= 61,500-38,000
BV= 23,500
New equip = BV old plus cash paid
New equip = 23,500+41,200
New equip = 64,700
LO: 7.4
Diff: 3
EOC REF: E7-38

7.4-20 Mindy’s Turtle Rescue Store has a beginning balance in the equipment account of $70,000. During the
year, they purchased $30,000 worth of equipment. At the end of the year, the balance in the equipment
account was $80,000. The cost of the equipment that Mindy’s Turtle Rescue Store sold was:
A) $100,000.
B) $80,000.
C) $20,000.
D) $180,000.
Answer: C
Calculations: Equipment
Explanation DR CR
Beginning balance 70,000
Purchases 30,000
100,000
???
Ending balance 80,000
100,000-80,000=20,000 cost of disposals
LO: 7.4
Diff: 3
EOC REF: P7-75
7.5-1 Accumulated depletion reduces equity, as this account is a contra-revenue account.
Answer: False
LO: 7.5
Diff: 2
EOC REF: S7-11
7.5-2 Natural resources are reported in the Intangible Assets section of the income statement.
Answer: False
LO: 7.5
Diff: 2
EOC REF: E7-25

7.5-3 Minerals mined from the earth are classified as natural resources.
Answer: True
LO: 7.5
Diff: 1
EOC REF: S7-11
7.5-4 All of the following are classified as natural resources and are depleted EXCEPT for:
A) land.
B) timber.
C) minerals.
D) oil.
Answer: A
LO: 7.5
Diff: 2
EOC REF: S7-11
7.5-5 All of the following are classified as natural resources EXCEPT for:
A) oil.
B) timber.
C) trademark.
D) minerals.
Answer: C
LO: 7.5
Diff: 1
EOC REF: S7-11
7.5-6 The portion of the cost of natural resources that is consumed in a particular period is called:
A) depreciation expense.
B) amortization expense.
C) depletion expense.
D) resource expense.
Answer: C
LO: 7.5
Diff: 1
EOC REF: S7-11

7.5-7 Accumulated Depletion is a(n):
A) contra-asset account.
B) contra-revenue account.
C) contra-liability account.
D) expense account.
Answer: A
LO: 7.5
Diff: 2
EOC REF: E7-39
7.5-8 The computation of depletion expense is most closely related to which method for computing
depreciation?
A) Straight-line
B) Units-of-production
C) Double-declining balance
D) The method selected depends upon the specific natural resource.
Answer: B
LO: 7.5
Diff: 2
EOC REF: E7-39
7.5-9 The correct journal entry to record depletion for an oil well would include:
A) a debit to Depletion Expense, Oil Well.
B) a debit to Accumulated Depletion, Oil Well.
C) a credit to Depletion Expense, Oil Well.
Answer: A
LO: 7.5
Diff: 2
EOC REF: S7-11

7.5-10 The journal entry to record depletion would include:
A) a debit to Depletion Expense and credit to Accumulated Depreciation.
B) a debit to Accumulated Depletion and a credit to Depletion Expense.
C) a debit to Depletion Expense and a credit to Accumulated Depletion.
Answer: C
LO: 7.5
Diff: 2
EOC REF: P7-68
7.5-11 On January 2, 2011, Bantam Oil Company purchased an oil well for $625,000. The well contains an
estimated 150,000 barrels of oil, with an estimated residual value of $25,000. During 2011, 15,000 barrels
of oil were removed from the well. To record depletion for 2011, Bantam Oil Company will debit
Depletion Expense for:
A) $62,500.
B) $60,000.
C) $64,500.
D) $69,444.
Answer: B
Calculations: cost-salvage value/total units of production = depletion per barrel

625,000-25,000/150,000=4.00 depletion per barrel
4.00 x 15,000= 60,000
LO: 7.5
Diff: 2
EOC REF: S7-11

7.5-12 Skyline Mine, Inc., acquired a mineral deposit for $12,000,000 in 2010. Geologists estimate the deposit
contains 2,000,000 tons of ore. During 2010 and 2011, Skyline Mine, Inc. removed 610,000 tons and
480,000 tons of ore, respectively. The balance in the Accumulated Depletion account for the mineral
deposit on December 31, 2011, will be:
A) $2,880,000.
B) $5,490,000.
C) $6,540,000.
D) unknown; the balance cannot be determined without knowing the residual value of the resource.
Answer: C
Calculations: cost-salvage value/total units of production = depletion per ton

12,000,000-0/2,000,000=6.00 depletion per ton
2010depreciation = 6 x 610,000 = 3,660,000 depletion

2011 depletion = 6 x 480,000= 2,880,000 depletion
Accumulated depletion 6,540,000
LO: 7.5
Diff: 2
EOC REF: E7-25
7.6-1 Contra-asset accounts are NOT established to record the accumulated amortization for intangible assets.
Answer: True
LO: 7.6
Diff: 1
EOC REF: E7-26
7.6-2 Intangibles with finite lives that can be measured are amortized.
Answer: True
LO: 7.6
Diff: 2
EOC REF: E7-26

7.6-3 Amortization is usually computed on a units-of-production basis.
Answer: False
LO: 7.6
Diff: 1
EOC REF: E7-26
7.6-4 Goodwill is recognized only when the purchase price exceeds the value of the net liabilities in the
acquisition of another company.
Answer: False
LO: 7.6
Diff: 2
EOC REF: E7-41
7.6-5 Goodwill may arise when the purchaser buys another company that has higher than normal earning
power.
Answer: True
LO: 7.6
Diff: 2
EOC REF: E7-27
7.6-6 A trademark may have an indefinite life and, therefore, not be amortized.
Answer: True
LO: 7.6
Diff: 2
EOC REF: S7-13

7.6-7 Research and development costs are expensed over their useful or legal life.
Answer: False
LO: 7.6
Diff: 2
EOC REF: S7-13
7.6-8 If at the end of the year, goodwill is worth more than at the beginning of the year, then an entry must be
made to increase the goodwill.
Answer: False
LO: 7.6
Diff: 2
EOC REF: E7-27
7.6-9 Amortization is most closely associated with which asset?
A) Copyright
B) Building
C) Natural gas lease
D) All of the above
Answer: A
LO: 7.6
Diff: 2
EOC REF: E7-26
7.6-10 Which of the following statements regarding intangible assets is NOT true?
A) Intangible assets are long-lived assets with no physical form.

B) Intangible assets are recorded at their acquisition cost.
C) Intangible assets with a finite life are not amortized.
D) Intangible assets with an indefinite life are not amortized.
Answer: C
LO: 7.6
Diff: 2
EOC REF: E7-26

7.6-11 Amortization expense:
A) is the title of the expense associated with natural resources.
B) is recorded for intangible assets with a finite life.
C) is recorded for assets with an indefinite life.
D) cannot be credited directly to the asset account.
Answer: B
LO: 7.6
Diff: 2
EOC REF: E7-40
7.6-12 Intangible assets with indefinite lives:

A) are not amortized.
B) are checked annually for any loss in value.
C) include goodwill.
D) are all of the above.
Answer: D
LO: 7.6
Diff: 2
EOC REF: E7-41
7.6-13 All of the following are intangible assets EXCEPT:

A) trademarks.
B) copyrights.
C) goodwill.
D) natural gas.
Answer: D
LO: 7.6
Diff: 1
EOC REF: E7-40

7.6-14 All of the following assets should be amortized EXCEPT:
A) franchises.
B) goodwill.
C) patents.
D) any of the above.
Answer: B
LO: 7.6
Diff: 2
EOC REF: E7-41
7.6-15 Patents are amortized over a period:

A) of 40 years or the expected useful life, whichever is less.
B) of 20 years or the expected useful life, whichever is less.
C) that must exceed 40 years.
D) of 1 year—that is, patents are expensed immediately.
Answer: B
LO: 7.6
Diff: 2
EOC REF: S7-13
7.6-16 The entry to amortize a patent includes a credit to:

A) Patent.
B) Accumulated Amortization—Patent.
C) Amortization Expense—Patent.
D) none of these, as a patent is not amortized.
Answer: A
LO: 7.6
Diff: 2
EOC REF: E7-26

7.6-17 The entry to record amortization:
A) increases total assets and decreases total equity.
B) decreases total assets and increases total equity.
C) decreases both total assets and total equity.
D) increases both total assets and total equity.
Answer: C
LO: 7.6
Diff: 2
EOC REF: E7-40
7.6-18 All of the following statements are true about goodwill EXCEPT:
A) goodwill is only recorded when it is purchased in the acquisition of another company.
B) goodwill is not amortized.
C) in rare cases, companies can record goodwill that they create for their own business.
D) goodwill has an indefinite life.
Answer: C
LO: 7.6
Diff: 2
EOC REF: S7-12
7.6-19 If a company has goodwill on its books:

A) it is amortized over a period not to exceed 40 years.
B) each year, the company must determine if the purchased goodwill has increased and then write it up
to the new value.
C) if goodwill has decreased in value, a loss must be recorded.
D) it has a definite life.
Answer: C
LO: 7.6
Diff: 2
EOC REF: S7-12

7.6-20 If goodwill has decreased in value, it is said to be:
A) worthless.
B) impaired.
C) amortized.
D) a capital expenditure.
Answer: B
LO: 7.6
Diff: 2
EOC REF: S7-12
7.6-21 Godert Pharmaceutical Company has many scientists working in the labs trying to develop an anti-aging
drug. The cost of this research and development must be:
A) expensed as incurred.
B) set up as an intangible asset and amortized over 20 years.
C) set up as an intangible and tested for impairment on a yearly basis
D) not be handled in any of the above ways.
Answer: A
LO: 7.6
Diff: 2
EOC REF: S7-13
7.6-22 ABC Corporation acquired a patent for $120,000. The patent has a legal life of 20 years. Because of
changing technology, the patent is expected to generate revenue for only 6 years. The annual
amortization expense for the patent is:
A) $6,000.
B) $20,000.
C) $0, because the patent cost should be expensed when the patent is purchased.
D) $0, because the patent is not amortized.
Answer: B
LO: 7.6
Diff: 2
EOC REF: E7-26

7.6-23 Research and development costs incurred by a company should be:
A) capitalized and depreciated over a period not to exceed 20 years.
B) capitalized and amortized over the useful life of the asset.
C) either capitalized and depreciated or expensed immediately at the option of the accountant.
D) expensed on the current year’s income statement.
Answer: D
LO: 7.6
Diff: 2
EOC REF: S7-13
7.6-24 The protection against copying computer software programs comes from a:
A) patent.
B) trademark.
C) copyright.
D) license.
Answer: C
LO: 7.6
Diff: 2
EOC REF: E7-40
7.6-25 In 2011, First Company purchased Second Company for $16,000,000 cash. At the time of purchase
Second Company had $18,500,000 in assets and liabilities of $11,000,000. The 2011 balance sheet for
First Company should show goodwill of:
A) $10,500,000.
B) $8,500,000.
C) $3,500,000.
D) $0.
Answer: B
Calculations: 18,500,000-11,000,000=7,500,000 market value of net assets

Goodwill = purchase price – market value of net assets
Goodwill = 16,000,000-7,500,000
Goodwill = 8,500,000
LO: 7.6
Diff: 3
EOC REF: E7-27

7.6-26 Needles Company purchased Boston Company on August 31, 2010. Needles recorded goodwill in the
purchase of Boston and has determined that the Boston goodwill will have an indefinite life. How will
Needles account for the Boston goodwill in future accounting periods?
A) Needles will amortize the Boston goodwill over a 50-year life.
B) If the value of the Boston goodwill increases in subsequent years, Needles will increase the value in
the Boston Goodwill account.
C) If the value of the Boston goodwill decreases in subsequent years, Needles will decrease the value in
the Boston Goodwill account.
D) Needles is not allowed to change the value of the Boston Goodwill account regardless of any future
increase or decrease in the value of Boston goodwill.
Answer: C
LO: 7.6
Diff: 3
EOC REF: S7-12
7.7-1 Depreciation of plant assets is reported as an investing activity on the statement of cash flows.
Answer: False
LO: 7.7
Diff: 3
EOC REF: E7-28
7.7-2 The purchase of equipment on account will appear on the statement of cash flows as a financing activity.
Answer: False
LO: 7.7
Diff: 2
EOC REF: S7-14
7.7-3 Depletion will appear on the statement of cash flows as a financing activity.
Answer: False
LO: 7.7
Diff: 2
EOC REF: P7-77

7.7-4 Depreciation expense is:
A) added to the investing activities on a statement of cash flows.
B) added to net income on a statement of cash flows, since it decreases net income but does not involve
an outflow of cash.
C) subtracted from net income on a statement of cash flows, since it decreases net income but does not
involve an outflow of cash.
D) subtracted from the investing activities on a statement of cash flows.
Answer: B
LO: 7.7
Diff: 3
EOC REF: P7-77
7.7-5 Equipment that had a book value of $6,000 is sold for $20,000 cash. The statement of cash flows will
report a:
A) $20,000 inflow in the investing activities section.
B) $20,000 cash inflow in the financing activities section.
C) $20,000 cash outflow in the investing activities section.
D) $14,000 inflow in the operating activities section.
Answer: A
LO: 7.7
Diff: 2
EOC REF: E7-42
7.7-6 Equipment is acquired by issuing a note payable for $57,000 and a down payment of $30,000. The
statement of cash flows will report a:
A) $30,000 inflow in the operating activities section.

B) $57,000 inflow in the investing activities section.
C) $57,000 cash inflow in the financing activities section.
D) $30,000 cash outflow in the investing activities section.
Answer: D
LO: 7.7
Diff: 3
EOC REF: P7-77

7.7-7 Farmer’s Corp. has the following items that the controller is uncertain of where to place on the statement
of cash flows:
Net Income $ 81,000

Sale of Plant Assets 125,000
Depreciation Expense 35,000
Purchase of Plant Assets 180,000
A total of $_________ would appear in the Investing Activities section.
A) $305,000
b. $116,000
c. ($55,000)
d. ($46,000)
Answer: C
Calculations: 125,000-180,000= (55,000)
LO: 7.7
Diff: 2
EOC REF: E7-42
7.7-8 Farmer’s Corp. has the following items that the controller is uncertain of where to place on the statement
of cash flows:
Net Income $ 81,000

Sale of Plant Assets 125,000
Depreciation Expense 35,000
Purchase of Plant Assets 180,000
Using the indirect method, how much would appear in the Operating Activities section?
A) $305,000
B. ($55,000)
C. ($46,000)
D. $116,000
Answer: D
Calculations: 81,000+35,000=116,000
LO: 7.7
Diff: 3
EOC REF: P7-77

7.7-9 Using the indirect method, the main types of plant asset transactions that appear on the Statement of Cash
Flows in operating and investing activities are:
A. acquisitions, sales and depreciation.
B. acquisitions and sales.
C. sales and depreciation.
D. acquisitions and depreciation.
Answer: A
LO: 7.7
Diff: 3
EOC REF: P7-77

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Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 1

7.1-6 Costs of land improvements are included in the Land account.

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 2

7.1-13 The depreciation process is in accordance with the matching principle.

7.1-14 An example of a long-term tangible asset would be:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 3

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 4

A) Land does not depreciate; natural resources are depreciated.

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 5

7.1-22 Which of the following should be included in the cost of land?

7.1-23 Which of the following is NOT an intangible asset?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 6

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 7

Calculations: (300,000/1,000,000)*875,000= 262,500

7.1-29 Which of the following should be included in the Machinery account?

Calculations: land (450,000/1,250,000)*1,000,000=360,000

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 9

Calculations: land (400,000/900,000)*800,000=355,556

Calculations: equip 510,000/915,000+1,125,000+510,000=

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 10

7.1-37 A capital expenditure is:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 11

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 12

7.1-44 Which of the following should be included in the cost of equipment?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 13

7.1-47 Treating a capital expenditure as an immediate expense:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 14

7.1-50 Which of the following statements is TRUE?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 15

7.2-2 The Accumulated Depreciation account represents a contra-revenue account.

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 17

7.2-13 Which accounting principle directs the depreciation process?

7.2-17 Double-declining balance depreciation:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 19

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 20

7.2-22 Which of the following statements is FALSE?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 21

7.2-26 The book value of an asset is defined as:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 22

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 23

Calculations: cost-residual value/total units to be produced = depreciation per unit

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 24

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 25

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 26

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 27

Book value= Cost-accumulated depreciation 200,000-50,000=150,000

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 28

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 29

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 30

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 31

7.3-12 When an asset is fully depreciated:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 32

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 33

Calculations: 310,000-36,000=274,000 income before taxes

Calculations: difference in depreciation = 41,200-31,200=10,000

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 34

Calculations: 130,000-40,000/10=9,000 per year

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 35

Calculations: 130,000-40,000/60,000=1.5 per hour

Calculations: Rate = 1/10=10%*2=20%

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 36

Calculations: Rate =1/5=20%82=40%