Test Bank For Fundamentals of Financial Accounting 5th Canadian by Phillips

Test Bank for Fundamentals of Financial Accounting 5th Canadian by Phillips
Test Bank for Fundamentals of Financial Accounting

5th Canadian by Phillips
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Chapter 09 - Long-Lived Tangible and Intangible Assets
Chapter 09
Long-Lived Tangible and Intangible Assets
True / False Questions
1. Long-lived assets are assets that are intended for resale.

FALSE
Accessibility: Keyboard Navigation

Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; classify; and explain the nature of long-lived assets.
Topic: 09-01 Definition and Classification
2. Another name for a tangible long-lived asset is a fixed asset.

TRUE

Blooms: Remember
Difficulty: Easy
3. Capitalizing costs refers to the process of converting assets to expenses.

FALSE

Blooms: Understand
Difficulty: Easy
Learning Objective: 09-02 Apply the cost principle to the acquisition of long-lived Assets.
Topic: 09-03 Acquisition of Tangible Assets
9-1
4. When assets are purchased as a group, the total cost must be divided up and allocated to
each asset in proportion to the market value of the assets as a whole.
TRUE

Blooms: Remember
Difficulty: Easy
5. If a company builds its own facility, only the cost of materials is capitalized.
FALSE

Blooms: Understand
Difficulty: Easy
6. Extraordinary repairs, replacements, and additions are added to the appropriate asset
accounts rather than being recorded as expenses.
TRUE

Blooms: Remember
Difficulty: Medium
Topic: 09-04 Use of Tangible Assets
7. The useful life of an asset is always measured in years.

FALSE

Blooms: Remember
Difficulty: Medium
9-2
8. Assuming no additions, replacements, or extraordinary repairs, the book value of any long-
lived asset with a limited life is always less than or equal to its acquisition cost.
TRUE

Blooms: Remember
Difficulty: Medium
9. Research and development costs are treated as a capital asset.

FALSE

Blooms: Remember
Difficulty: Easy
Learning Objective: 09-06 Analyze the acquisition; use; and disposal of long-lived intangible assets.
10. When the straight-line method is used to compute depreciation, an asset's carrying value
remains constant over the life of the asset.
FALSE

Blooms: Understand
Difficulty: Medium
Learning Objective: 09-03 Apply various depreciation methods as economic benefits are used up over time.
11. Depreciation and maintenance are expenses associated with the use of long-lived assets.
TRUE

Blooms: Remember
Difficulty: Easy
9-3
12. Assuming no additions, replacements, or extraordinary repairs, the carrying value of a

long-lived asset is never more than its original cost.
TRUE

Blooms: Understand
Difficulty: Medium
13. If a company produces the same number of units per period over an asset's useful life,
straight-line depreciation expense per period will be the same as the depreciation expense
recorded using the units-of-production method.
TRUE

Blooms: Understand
Difficulty: Medium
14. Asset impairment losses are a regular operating expense of most businesses.
FALSE

Blooms: Understand
Difficulty: Medium
Learning Objective: 09-04 Explain the effect of asset impairment on the financial statements.
Topic: 09-05 Asset Impairment Losses
15. The purpose of depreciation is to correctly value assets.

FALSE

Blooms: Understand
Difficulty: Medium
9-4
16. When a company records an asset impairment loss, it will reduce net income for that
period.
TRUE

Blooms: Understand
Difficulty: Medium
17. The gain or loss resulting from the disposal of a long-lived asset appears below the
"operating income" line on the income statement.
TRUE

Blooms: Understand
Difficulty: Medium
Learning Objective: 09-05 Analyze the disposal of long-lived tangible assets.
Topic: 09-06 Disposal of Tangible Assets
18. A journal entry is usually needed to update depreciation expense on a long-lived asset at
the time of disposal.
TRUE

Blooms: Understand
Difficulty: Medium
19. Expenditures on self-created intangible assets are accounted for in the same way as
expenditures on self-constructed tangible assets.
FALSE

Blooms: Remember
Difficulty: Medium
Topic: 09-08 Acquisition, Use, and Disposal
9-5
20. Intangibles with unlimited or indefinite lives (trademarks and goodwill) are amortized
using straight line depreciation method.
FALSE

Blooms: Understand
Difficulty: Medium
21. Intangible assets are not adjusted for asset impairment losses.
FALSE

Blooms: Understand
Difficulty: Medium
22. A declining fixed asset turnover ratio can actually be caused by acquiring additional assets
in the current period in preparation for greater future sales.
TRUE

Blooms: Understand
Difficulty: Medium
Learning Objective: 09-07 Interpret the fixed asset turnover ratio.
Topic: 09-09 Turnover Analysis
23. All things being equal, if average net fixed assets decrease, then the fixed asset turnover
ratio will increase.
TRUE

Blooms: Understand
Difficulty: Medium
9-6
24. Companies within the same industry do not always use the same depreciation method but
will use the same expected useful life for the same piece of equipment.
FALSE

Blooms: Remember
Difficulty: Medium
Learning Objective: 09-08 Describe factors to consider when comparing companies' long-lived assets.
Topic: 09-10 Impact of Depreciation Differences
25. Some analysts compare companies by focusing on earnings before interest, taxes, and
amortization (EBITDA).
TRUE

Blooms: Remember
Difficulty: Medium
26. The amount of depreciation expense over the life of an asset will be the same in all of the
different methods of depreciation.
TRUE

Blooms: Understand
Difficulty: Easy
27. The amount of net income will be higher in case of straight line depreciation as compared
to double declining method.
FALSE

Blooms: Understand
Difficulty: Medium
9-7
28. According to IFRS and ASPE intangible assets cannot be considered long-lived.
FALSE

Blooms: Remember
Difficulty: Medium
29. Deciding whether a cost is reasonable and necessary to acquire or prepare tangible assets
for use can involve a great deal of judgment.
TRUE

Blooms: Remember
Difficulty: Medium
Topic: 09-02 Tangible Assets
30. If a company buys a piece of used equipment and incurs repair costs before it can be used,
these additional costs would be capitalized as a cost of the equipment.
TRUE

Blooms: Understand
Difficulty: Medium
31. In accordance with accounting convention, all fixed assets must be capitalized.
FALSE

Blooms: Remember
Difficulty: Medium
9-8
32. Purchase cost minus residual value is equivalent to depreciable cost.

TRUE

Blooms: Remember
Difficulty: Easy
33. Purchase cost minus residual value is equivalent to depreciation expense under the
straight-line method.
FALSE

Blooms: Remember
Difficulty: Easy
34. The declining-balance method applies a depreciation rate to the book value of the asset at
the beginning of each accounting period.
TRUE

Blooms: Understand
Difficulty: Easy
35. At the end of an asset's life, after it has been fully depreciated, the total amount of
depreciation will equal the asset's depreciable cost, regardless of the depreciation method
used.
TRUE

Blooms: Understand
Difficulty: Medium
9-9
36. Under ASPE and IFRS, changes in accounting estimates and depreciation methods should
be made only when a new estimate or accounting method "better measures" the periodic
income of the business.
TRUE

Blooms: Understand
Difficulty: Medium
37. Goodwill is a peculiar intangible asset because it represents the value paid for the
identifiable assets of another business.
FALSE

Blooms: Understand
Difficulty: Medium
Topic: 09-07 Intangible Assets
Multiple Choice Questions
38. The MegaHit Film Studio has a licensing right (or agreement) to distribute films produced
by the Artsy Film Company. How would the MegaHit Company classify this licensing right
on its balance sheet?
A. Tangible asset
B. Intellectual property asset
C. Intangible asset
D. Nonreported asset

Blooms: Understand
Difficulty: Medium
9-10
39. The MegaHit Film Studio owns a production lot and related equipment. How would
MegaHit Company classify these assets on its balance sheet?
A. Tangible asset
B. Other long-lived asset
C. Intangible asset
D. Nonreported asset

Blooms: Understand
Difficulty: Easy
40. Which of McGraw-Hill's intangible assets gives it the legal right to prevent you from
borrowing a textbook from a friend and photocopying all of it?
A. Patent
B. Trademark
C. Franchise agreement
D. Copyright

Blooms: Understand
Difficulty: Easy
41. Amazon's website is an example of a:

A. patented intangible asset.
B. technology intangible asset.
C. current tangible asset.
D. copyright tangible asset.

Blooms: Understand
Difficulty: Easy
9-11
42. The intangible asset most frequently reported by Canadian businesses is:
A. goodwill.
B. trademarks.
C. patents.
D. licensing rights.

Blooms: Remember
Difficulty: Medium
43. Which of the following statements is true?

A. Long-lived tangible assets will not be used up within one year, but there is no minimum
useful life for long-lived intangible assets.
B. Items in a company's inventory that are not expected to be sold in the next year are
considered long-lived assets.
C. All long-lived intangible assets must be expensed over a period of 40 years or less.
D. Intangible assets with unlimited or indefinite lives are not amortized.

Blooms: Understand
Difficulty: Medium
44. Under the cost principle:

A. only reasonable and necessary costs of acquiring an asset should be recorded as a cost of
the asset.
B. costs of preparing an asset for use should never be recorded as part of the cost of the asset.
C. all reasonable and necessary costs of acquiring an asset and preparing it for use should be
recorded as a cost of the asset.
D. only the actual purchase price of the asset is recorded as the cost of the asset.

Blooms: Understand
Difficulty: Medium
9-12
45. The main difference between ordinary repairs and extraordinary repairs is:
A. ordinary repairs cost less.
B. ordinary repairs are expenditures for routine maintenance and upkeep, whereas
extraordinary repairs increase an asset economic usefulness in the future through increased
efficiency, capacity, or longer life.
C. extraordinary repairs only maintain the asset for a short time, whereas ordinary repairs
increase the usefulness of assets beyond their original condition.
D. extraordinary repairs are expenses, not expenditures.

Blooms: Remember
Difficulty: Medium
46. If a company capitalizes costs that should be expensed, how is its income statement for
current period impacted?
A. Net income will be lower than it should be.
B. Revenues will be lower than they should be.
C. Expenses will be lower than they should be.
D. Assets will be lower than they should be.

Blooms: Understand
Difficulty: Medium
9-13
47. A real estate management company buys an apartment complex for $4.8 million. An
appraiser values the land at $1.1 million, the building at $3.4 million, and the equipment at
$0.3 million. In addition, the company pays a 5% commission to a broker for arranging the
sale. Which of the following statements is true?
A. The company would record $3.57 million as the acquisition cost of the building.
B. The company would record $1.1 million as the acquisition cost of the land.
C. The company would record $3.7 million as the acquisition cost of the building.
D. The company would record $0.24 million as an expense and $4.8 million as an asset.

Blooms: Apply
Difficulty: Hard
48. Your company buys a computer system from IBM for $3 million and pays IBM $200,000
to install the computer system. Your company should record:
A. $3 million in equipment and $200,000 in expenses.
B. $3.2 million in expenses.
C. $2.8 million in equipment and the rest in expenses.
D. $3.2 million in equipment.
Acquisition cost = Price + Installation costs = $3,000,000 + $200,000 = $3,200,000.

Blooms: Apply
Difficulty: Medium
9-14
49. The Gulp convenience store chain buys new soda machines for $450,000 and pays
$50,000 for installation. One-half of the total cost is paid in cash; the other half is financed.
How should the company record this transaction?
A. Debit cash for $250,000, debit notes payable for $250,000, and credit equipment for
$500,000.
B. Debit equipment for $500,000, credit cash for $250,000, and credit notes payable for
$250,000.
C. Debit cash for $250,000, debit notes payable for $250,000 credit equipment for $450,000,
and credit expenses for $50,000.
D. Debit equipment for $450,000, debit expenses for $50,000, credit cash for $250,000, and
credit notes payable for $250,000.
Equipment is debited for the total cost of the asset ($450,000 + $50,000 = $500,000), Cash is
credited for one-half of the total cost ($500,000/2 = $250,000), and Notes Payable is credited
of the other half of the total cost.

Blooms: Apply
Difficulty: Hard
50. How will the costs of an intangible asset being develop internally or self-constructed be
reported?
A. As capital expenditure
B. As research and development expenses
C. As marketing expenses
D. As a liability

Blooms: Remember
Difficulty: Medium
9-15
51. Ordinary repairs and maintenance always:

A. are part of the asset cost of equipment and facilities.
B. are recorded as expenses.
C. are recorded as liabilities.
D. improve the asset beyond the current accounting period.

Blooms: Remember
Difficulty: Medium
52. ABC Co. purchased land and building at a price of $480,000. ABC also incurred a real
estate broker's fee of $5,000 and legal fees of $2,000 to complete the purchase. ABC paid
$3,000 to obtain a real estate appraisal prior to the purchase. The appraisal indicated that,
valued separately, the land was worth $260,000 and the building was worth $240,000. The
land should be recorded in the accounting records for:
A. $249,600.
B. $253,240.
C. $254,800.
D. $259,600.
$480,000 + $5000 + $2000 + $3000 = $490,000 × .52 = $254, 800 (Land's proportion in the
total market value of the property is 52%. 260,000/240,000 + 260,000 = .52).

Blooms: Apply
Difficulty: Hard
9-16
53. A company paid $500,000 to purchase equipment and $15,000 to have the equipment
delivered to and installed in the company's production facilities. Commercial use of the
equipment began on May 1, 2019. The estimated residual value of the equipment is $5,000.
The equipment is expected to be used a total of 28,000 hours throughout its estimated useful
life of six years. The company has an October 31, year-end and had used the equipment a total
of 11,200 hours prior to the year-end. Using the units-of-production method, what amount of
depreciation expense (to the nearest thousand) would the company report for this equipment
in the income statement prepared for the year ended October 31, 2019?
A. $102,000
B. $198,000
C. $204,000
D. $206,000
(Cost - residual value) * (actual production this period/estimated total production)

($15,000 - $5000) * ($11,200/$28,000) = $204,000.

Blooms: Apply
Difficulty: Hard
54. When a company records depreciation expense it debits:

A. liabilities and credits expenses.
B. expenses and credits cash.
C. expenses and credits a contra-asset account.
D. long-lived assets and credits expenses.

Blooms: Understand
Difficulty: Medium
9-17
55. The Buddy Burger Corporation has $3.5 million in long-lived assets and has an
accumulated depreciation account of $1.1 million. Which of the following statements is true?
A. The book value of long-lived assets is $2.4 million.
B. The market value of long-lived assets is $3.5 million.
C. The carrying value of long-lived assets is $3.5 million.
D. The resale value of long-lived assets is $2.4 million.
Book value or carrying value = Asset Cost - Accumulated depreciation. 3.5 - 1.1 = 2.4
million.

Blooms: Understand
Difficulty: Medium
56. Which of the following is not an amount that is needed to calculate straight-line
depreciation?
A. The cost of the asset.
B. An estimate of the asset's useful economic life to the company.
C. The amount that the company will get when it disposes of the asset.
D. The cost the company will be required to incur to replace the asset.

Blooms: Understand
Difficulty: Medium
9-18
57. The book or carrying value of an asset is:

A. its acquisition cost less the accumulated depreciation from the acquisition date to the
balance sheet date.
B. its acquisition cost plus accumulated depreciation from the acquisition date to the balance
sheet date.
C. the amount that could be obtained for the asset on the balance sheet date if it were sold.
D. the annual cost of carrying the asset in inventory.

Blooms: Remember
Difficulty: Medium
58. Purrfect Pets has a facility that originally cost $375,000. The balance of the accumulated
depreciation account for the facility is $258,000. The company expects to be able to sell the
facility for $107,000 at the end of its useful life. The residual value of the facility is:
A. $117,000.
B. $151,000.
C. $268,000.
D. $107,000

Blooms: Understand
Difficulty: Medium
9-19
59. Paul Hauling has a fleet of 10 large trucks that cost a total of $1,410,000. The fleet is
expected to provide 1,000,000 miles of transportation during an estimated 10-year life, and be
sold for 10% of the original cost at the end of that time. If the fleet traveled 125,000 miles in
the current twelve-month period, what would be the depreciation expense under the straight-
line (SL) and units-of-production (UoP) methods?
A. SL = $158,625 & UoP = $141,000
B. SL = $141,000 & UoP = $158,625
C. SL = $126,900 & UoP = $176,250
D. SL = $126,900 & UoP = $158,625
Straight line depreciation: Dep. Exp. per year = (Cost - residual value) * (1/useful life)
($1,410,000 - $141,000) * (1/10) = 126,900
Unit of Production: Dep Exp this period = (cost - residual value) * (actual prod this period/est
total prod) (1,410,000 - 141,000) * (125,000/1,000,000) = $158,625.

Blooms: Apply
Difficulty: Medium
60. If the double-declining balance method were used to depreciate a building that has a 10-
year useful life and a residual value equal to 10% of the building's original cost, what
depreciation rate would be used?
A. 9%
B. 10%
C. 18%
D. 20%
Double-declining rate is twice the straight-line rate. DDB depreciation rate = 2/useful life;
2/10 = 20%.

Blooms: Apply
Difficulty: Medium
9-20
61. A machine is purchased on January 1, 2018, for $90,000. It is expected to have a useful
life of five years and a residual value of $5,000. The company closes its books on December
31. Under the double-declining balance method, what is the total amount of depreciation to be
expensed during the 2019 fiscal year (year 2 of 5)?
A. $21,600
B. $22,000
C. $22,400
D. $34,000
DDB depreciation rate = 2/5 = 40%. Dep. Exp. per year = (cost - accumulated dep.) *
(2/useful life) Year 1: ($90,000 - 0) * (2/5) = $36,000 Year 2: ($90,000 - $36,000) * (2/5) =
21,600.

Blooms: Apply
Difficulty: Medium
62. Which of the following statements most appropriately describes the purpose of
depreciation of a long-lived tangible asset?
A. To indicate how the asset has physically deteriorated.
B. To show that the asset will eventually and gradually become obsolete.
C. To record that the asset's market value declines over time.
D. To match the cost of the asset to the period in which it generates revenue.

Blooms: Understand
Difficulty: Medium
9-21
63. Purrfect Pets has a facility that originally cost $375,000. The balance of the accumulated
depreciation account for the facility is $258,000. The company expects to be able to sell the
facility for $107,000 at the end of its useful life. The depreciable cost of the facility is:
A. $117,000.
B. $151,000.
C. $268,000.
D. $107,000
Depreciable Cost = Cost - Residual Value Depreciable Cost = $375,000 - $107,000

Depreciable Cost = $268,000.

Blooms: Apply
Difficulty: Medium
64. Your company buys a computer server, which it expects to use for eight years and then
sell when it upgrades to a more powerful model. The server would probably be used by the
business that buys it at that time for another three years. The useful life of the server for your
company is:
A. 8 years; the total length of time the server is used to produce output for your company.
B. eleven years.
C. the total length of time until the server can no longer function.
D. three years.

Blooms: Apply
Difficulty: Medium
9-22
65. A company expects to use equipment that cost $48,000 for ten years and then sell it for
$6,000. Using the straight-line method, the company should report depreciation for the
equipment of:
A. $4,200 per year.
B. $8,400 per year.
C. $4,800 per year.
D. $9,600 per year.
Dep Exp per year = ($48,000 - $6000) * (1/10) = $4,200.

Blooms: Apply
Difficulty: Medium
66. Which of the following statements is true when the straight-line method is used to
compute depreciation?
A. The carrying value of an asset is a constant amount during the asset's useful life.
B. Accumulated depreciation is a constant amount during the asset's estimated useful life.
C. Depreciation expense per period is the depreciable cost divided by the number of periods
in the asset's useful life.
D. None of the answers are acceptable.

Blooms: Understand
Difficulty: Hard
9-23
67. The Widget Tool and Die Company buys a $400,000 stamping machine that has an
estimated residual value of $20,000. The company expects the machine to produce two
million units. It makes 400,000 units during the current period. If the units-of-production
method is used, the depreciation rate is:
A. $0.95 per unit.
B. $0.19 per unit.
C. $0.05 per unit.
D. $1.00 per unit.
($400,000 - $20,000) * (1/2,000,000) = $0.19.

Blooms: Apply
Difficulty: Medium
68. The Widget Tool and Die Company buys a $400,000 stamping machine that has an
estimated residual value of $20,000. The company expects the machine to produce two
million units. It makes 400,000 units during the current period. If the units-of-production
method is used, the depreciation expense for this period is:
A. $80,000.
B. $400,000.
C. $76,000.
D. $380,000.
($400,000 - 20,000)  (400,000/2,000,000) = $76,000.

Blooms: Apply
Difficulty: Medium
9-24
69. A company buys a piece of equipment for $48,000. The equipment has a useful life of ten
years. Using the double-declining-balance method, the company's depreciation expense in the
first year would be:
A. $9,600.
B. $12,000.
C. $4,800.
D. $24,000.
Twice the straight line rate of 1/10 = 2/10 or 20%. $48,000 * .20 = 9,600 or $48,000 * 2/10 =
$9,600.

Blooms: Apply
Difficulty: Medium
70. ShadyZ Corporation uses the unit-of-production method to estimate depreciation. A new
asset is purchased for $18,000 that will produce an estimated 100,000 units over its useful
life. Estimated residual value is $2,000. What is the depreciation rate per unit?
A. $1.60
B. $1.80
C. $0.16
D. $0.18
($18,000 - $2000) * (1/100,000) = $0.16.

Blooms: Apply
Difficulty: Medium
9-25
71. Shaggy Limited purchased a new van on January 1, 2018. The van cost $20,000. It has an
estimated life of five years and the estimated residual value is $5,000. Shaggy uses the
double-declining-balance method to compute depreciation.
What is the depreciation expense for 2018?
A. $4,000.
B. $3,000.
C. $6,000.
D. $8,000.
$20,000 * (2/5) = $8,000.

Blooms: Apply
Difficulty: Medium
72. Shaggy Limited purchased a new van on January 1, 2018. The van cost $20,000. It has an
estimated life of five years and the estimated residual value is $5,000. Shaggy uses the
double-declining-balance method to compute depreciation.
What is the adjusted balance in the Accumulated depreciation account at the end of 2019?
A. $3,200
B. $4,800
C. $9,600.
D. $12,800.
Year 1: $20,000 * (2/5) = $8,000

Year 2: $4,800 * (2/5) = 4,800
Adjusted Accumulated Depreciation after year 2 (2020) = $8,000 + $4,800 = $12,800.

Blooms: Apply
Difficulty: Hard
9-26
73. A piece of equipment was acquired on January 1, 2018, at a cost of $22,000, with an
estimated residual value of $2,000 and an estimated useful life of four years. The company
uses the double-declining-balance method. What is its book value at December 31, 2019?
A. $5,500
B. $10,000
C. $11,000
D. $12,000
Year 1: ($22,000) * (2/4) = $11,000

Accumulated Depreciation end of year 2 = $16,500
Book Value = Cost - Accumulated Depreciation to date
Book Value = $22,000 - $16,500
Book Value = $5,500.

Blooms: Apply
Difficulty: Hard
74. A company bought a piece of equipment for $40,000, expecting to use it for eight years.
The company then plans to sell it for $3,500. The company has already recorded depreciation
of $35,995. Using the double-declining-balance method, the company's annual depreciation
expense for the upcoming year would be:
A. $1,001.
B. $9,125.
C. $505.
D. $10,000.
Depreciation in final year = (Cost - Residual Value) - Accum. Deprec. to date Depreciation in
final year = ($40,000 - $3,500) - $35,995 Depreciation in final year = $505 as the carrying
value cannot go below the residual value.

Blooms: Apply
Difficulty: Hard
9-27
75. One difference between the double-declining-balance method and the straight-line method
is that the double-declining-balance method:
A. takes book value below residual value.
B. does not consider the useful life of the asset in the calculation of depreciation.
C. cannot be used for tax purposes.
D. uses book value instead of depreciable cost in the calculation of depreciation.
The double-declining-balance method ignores residual value and calculates the period's
depreciation at twice the straight-line rate applied to the declining book value of the asset.

Blooms: Understand
Difficulty: Medium
76. After the early years of an asset's life, accelerated depreciation methods:
A. cause an asset to be carried at a higher book value than the straight-line method.
B. cause an asset to be carried at a lower book value than the straight-line method.
C. cause an asset to be carried at the same book value as the straight-line method.
D. cannot be used if the resulting book value will be significantly different from that which
would result from using the straight-line method.

Blooms: Understand
Difficulty: Easy
77. When a company determines that estimated future cash flows from an asset are different
from the book value of the asset, it records:
A. an asset impairment gain, if the value of the cash flows exceeds the asset's book value.
B. an asset impairment loss, if the value of the cash flows exceeds the asset's book value.
C. an asset impairment gain, if the asset's book value exceeds the value of the cash flows.
D. an asset impairment loss, if the asset's book value exceeds the value of the cash flows.

Blooms: Understand
Difficulty: Medium
9-28
78. Under what circumstance should a company record an asset impairment loss?
A. When residual value is greater than the repairs and maintenance expenses needed to keep
the asset.
B. When net book value is less than the residual value of the asset.
C. When accumulated depreciation equals the purchase cost of the asset.
D. When net book value is greater than expected future cash flows for the asset.

Blooms: Remember
Difficulty: Medium
79. How does an asset impairment loss impact a company's financial statements?
A. Raise expenses and lower both revenue and net income.
B. Lower assets, shareholders' equity, and net income.
C. Raise expenses and lower net income with no effect on any other items.
D. Raise liabilities and lower shareholders' equity.

Blooms: Understand
Difficulty: Medium
9-29
80. Your company rents out computers to local businesses and schools. You have 1,000
computers with a net book value of $160,000. As a result of changing technology, your
computers are more difficult to rent so you must severely reduce your rental price, which
causes a decrease in estimated future cash flows. The fair value of the computers is estimated
to be $125,000 because of their outmoded technology. Your company should report an asset
impairment loss of:
A. $160,000.
B. $125,000.
C. $35,000.
D. none of the answers are acceptable.
Impairment Loss = Book Value - Market Value Impairment Loss = $160,000 - $125,000
Impairment Loss = $35,000.

Blooms: Apply
Difficulty: Medium
81. A company sells a piece of equipment half-way through the accounting period. The
straight-line rate of depreciation on the equipment is $40,000 a year. Before recording the
asset sale, the company should debit:
A. depreciation expense for $40,000 and credit long-lived assets for $40,000.
B. accumulated depreciation for $40,000 and credit cash for $40,000.
C. depreciation expense for $20,000 and credit accumulated depreciation for $20,000.
D. cash for $20,000 and credit depreciation expense for $20,000.
Before a disposal is recorded, depreciation must be updated as of the sale. Half-year

depreciation = $40,000 * .5 = $20,000. Depreciation expense is debited and Accumulated
Depreciation is credited.

Blooms: Apply
Difficulty: Medium
9-30
82. A company paid $17,000 for a vehicle that had an estimated useful life of 4 years, total
capacity of 100,000 miles, and a residual value of $1,000. After 2 full years of using the
vehicle (20,000 miles in year 1 and 27,000 miles in year 2), the company sold the vehicle for
$6,000 and reported a loss on disposal of $3,480. What method of depreciation did the
company use?
A. Units-of-production method
B. Double-declining-balance method
C. Straight-line method
D. None of the answers are acceptable
Book Value at time of disposal = Market Value + Loss on disposal Book Value at time of
disposal = $6,000 + $3,480 Book Value at time of disposal = $9,480 Accumulated
Depreciation at time of disposal = Cost - Book Value Accumulated Depreciation at time of
disposal = $17,000 - $9,480 Accumulated Depreciation at time of disposal = $7,520 Units of
production method: Cost - residual value * actual production this period/estimated total
production Year 1: ($17,000 - $1,000) * (20,000/100,000) = $3,200 + 4,320 = 7,520.

Blooms: Analyze
Difficulty: Hard
83. A trucking company sold its fleet of trucks for $55,000. The trucks had originally cost
$1,410,000 and had accumulated depreciation of $1,269,000 through the date of disposal.
What gain or loss did the trucking company record when it sold the fleet of trucks?
A. Gain of $86,000.
B. Gain of $55,000.
C. Loss of $55,000.
D. Loss of $86,000.
Book value = $1,410,000 - $1,269,000 = $141,000

$55,000 - $141,000 = -$86,000 loss.

Blooms: Apply
Difficulty: Hard
9-31
84. A book manufacturing company sells equipment for $450,000 when the book value of the
equipment is $400,000. The company would record the extra $50,000 as:
A. a gain, increasing net income and shareholders' equity.
B. revenue, increasing net income and shareholders' equity.
C. cash, increasing assets and shareholders' equity.
D. accumulated depreciation, increasing assets and shareholders' equity.
Gain/loss = Selling Price - Net Book Value Gain/loss = $450,000 - $400,000

Gain = $50,000.

Blooms: Understand
Difficulty: Medium
85. When a company sells equipment for cash on a date other than the last day of the
accounting period, it must record:
A. depreciation expense for the entire accounting period during which the equipment is sold.
B. the disposal by reducing equipment and increasing revenue; a gain or loss is reported if the
decrease and increase are not equal.
C. the disposal by decreasing both equipment and accumulated depreciation while increasing
cash; a gain is reported if total assets increase.
D. accumulated depreciation for the entire current accounting period.

Blooms: Understand
Difficulty: Medium
9-32
86. An asset is purchased on January 1 for $40,000. It is expected to have a useful life of five
years after which it will have an expected salvage value of $5,000. The company uses the
straight-line method. If it is sold for $30,000 exactly two years after its purchase, the company
will record a:
A. gain of $6,000.
B. gain of $4,000.
C. loss of $4,000.
D. loss of $6,000.
Depreciation: Year 1: ($40,000 - $5,000) * (1/5) = $7,000

Year 2: ($40,000 - $5,000) * (1/5) = $7,000 Total for both years: $14,000
Net book value: $40,000 - $14,000 = $26,000
Gain (loss) = $30,000 - $26,000 = $4,000.

Blooms: Apply
Difficulty: Hard
87. When a company sells a long-lived asset, shareholders' equity will change by the:
A. amount of the sale.
B. amount of the asset's book value.
C. amount of the asset's accumulated depreciation.
D. difference between the sale price and the asset's book value.

Blooms: Understand
Difficulty: Medium
9-33
88. A company sells a long-lived asset that originally cost $200,000 for $50,000 on December
31, 2018. The accumulated depreciation account had a balance of $110,000 after the current
year's depreciation of $45,000 had been recorded. The company should recognize a:
A. $100,000 loss on disposal.
B. $40,000 gain on disposal.
C. $40,000 loss on disposal.
D. $25,000 loss on disposal.
Cost - Accumulated depreciation = Net book value $200,000 - $110,000 = $90,000

Selling Price - Net book value = Gain/loss on sale
$50,000 - 90,000 = ($40,000) Loss.

Blooms: Apply
Difficulty: Hard
89. A truck costing $12,000 and on which $9,000 of accumulated depreciation has been
recorded was disposed of for $2,000 cash. The entry to record this event would include a:
A. gain of $1,000.
B. loss of $1,000.
C. credit to the Truck account for $3,000.
D. credit to Accumulated depreciation for $9,000.
Cost - Accumulated depreciation = Net book value $12,000 - $9,000 = $3,000 Selling Price -
Net book value = Gain/loss on sale $2,000 - 3,000 = ($1,000) Loss.

Blooms: Apply
Difficulty: Medium
9-34
90. If a fully depreciated asset with no residual value is retired without receiving any cash on
retirement:
A. a gain on disposal will be recorded.
B. depreciation must be recorded as though the asset were still on the books.
C. a loss on disposal will be recorded.
D. no gain or loss on disposal will be recorded.

Blooms: Understand
Difficulty: Medium
91. A loss on disposal of an asset is reported:

A. in the Other Revenues section of the income statement.
B. in the Other Expenses section of the income statement.
C. as a direct increase to the asset account on the balance sheet.
D. as a direct decrease to the asset account on the balance sheet.

Blooms: Remember
Difficulty: Medium
92. In recording the acquisition cost of an entire business:

A. goodwill is recorded as the excess of cost over the fair market value of identifiable net
assets.
B. assets are recorded at the seller's book values.
C. goodwill, if it exists, is never recorded.
D. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

Blooms: Remember
Difficulty: Medium
9-35
93. The net amount shown on a balance sheet for an intangible asset with an unlimited life
should be:
A. the price for which it could be sold.
B. its acquisition cost or current market value, whichever is lower.
C. its purchase price minus accumulated depreciation.
D. its purchase price adjusted for inflation.

Blooms: Understand
Difficulty: Medium
94. Your company pays $620,000 for a patent that has 10 years remaining. Each year, your
company should:
A. debit amortization expense for $62,000 and credit accumulated amortization for $62,000.
B. debit intangible assets and credit accumulated amortization for an amount equal to 20% of
book value.
C. debit amortization expense for $31,000 and credit intangible assets for $31,000.
D. report no amortization expense because patents are not subject to amortization.
Amortization Expense = Cost/Useful Life

Amortization Expense = $620,000/10
Amortization Expense = $62,000.

Blooms: Apply
Difficulty: Medium
9-36
95. Your company pays $620,000 for a patent that has 10 years remaining. After two years,
the company sells the patent for $500,000. The company should report:
A. a debit to cash of $500,000 and a credit to patents of $500,000.
B. a debit to patents of $620,000, a credit to cash of $500,000, and a credit to accumulated
amortization of $120,000.
C. a debit to cash of $500,000, a debit to accumulated amortization of $124,000, a credit to
patents of $620,000, and a credit to gains of $4,000.
D. a debit to patents of $496,000, a debit to losses of $4,000, and a credit to cash of $500,000.

Blooms: Apply
Difficulty: Medium
96. Goodwill:
A. should be treated like most other intangible assets and amortized over a useful life of not
more than 40 years.
B. is an accounting measurement of how well a company's employees behave towards the
company's customers.
C. should be recorded as a negative value if a company is purchased for less than the net
carrying value of its assets.
D. is recorded when the purchasers of a business pay more than the fair market value of the
assets purchased.

Blooms: Understand
Difficulty: Medium
9-37
97. Your company has net sales revenue of $36 million during the year. At the beginning of
the year, fixed assets are $8 million. At the end of the year, fixed assets are $10 million. What
is the fixed asset turnover ratio?
A. 4.5
B. 4.0
C. 2.0
D. 3.6
Average Net fixed assets = (8,000,000 + 10,000,000)/2 = 9,000,000

36,000,000/9,000,000 = 4.

Blooms: Apply
Difficulty: Medium
98. The company has net sales revenue of $3.6 million during 2018. The company's records
also included the following information:
Assets 12/31/17 12/31/18

Property, plant, and equipment $2.3 million $2.5 million
Licensing agreements $0.5 million $0.4 million
Goodwill $0.3 million $0.3 million
Investments $0.4 million $0.5 million
9-38
What is the company's fixed asset turnover ratio for 2018?

A. 18.00
B. 1.33
C. 1.00
D. 1.50
Average Net Fixed Assets: (2,300,000 + 2,500,000)/2 = 2,400,000

3,600,000/2,400,000 = 1.5.

Blooms: Apply
Difficulty: Hard
99. Recall that the Fixed Asset Turnover Ratio equals Net Sales Revenue divided by Average
Net Fixed Assets. Assume that, prior to preparing adjusting entries at the end of the year,
Caterpillar Corporation has a fixed asset turnover ratio of 3.4 based on average net fixed
assets of $500,000,000. Which of the following year-end adjustments would cause
Caterpillar's fixed asset turnover ratio to increase?
A. Caterpillar accrues and capitalizes $50,000 of interest for self-constructed assets.
B. Caterpillar accrues a liability for ordinary repair costs in the amount of $50,000.
C. Caterpillar writes-down an impaired piece of equipment by $50,000.
D. None of the answers are acceptable.

Blooms: Understand
Difficulty: Hard
9-39
100. If net sales revenue rises 5% while the average book value of fixed assets falls 5%:
A. the fixed asset turnover ratio will rise.
B. the fixed asset turnover ratio will fall.
C. the fixed asset turnover ratio will stay the same.
D. the impact on the fixed asset turnover ratio cannot be determined since the beginning
values are unknown.

Blooms: Analyze
Difficulty: Medium
101. If net sales revenue and the average book value of fixed assets both rise 5%:
A. the fixed asset turnover ratio will rise.
B. the fixed asset turnover ratio will fall.
C. the fixed asset turnover ratio will stay the same.
D. the impact on the fixed asset turnover ratio cannot be determined since the beginning
values are unknown.

Blooms: Analyze
Difficulty: Hard
102. The fixed asset turnover ratio measures the:

A. useful life of long-lived assets.
B. the average difference between book value and disposal value of fixed assets.
C. useful life of intangible assets.
D. efficiency with which the investment in fixed assets produces revenue.

Blooms: Remember
Difficulty: Medium
9-40
103. Company A uses an accelerated depreciation method while Company B uses the straight-
line method. All other things equal, during the first few years of the asset's use, Company A
will show which of the following compared to Company B?
A. Higher asset values and higher net income.
B. Lower asset values and higher net income.
C. Higher asset values and lower net income.
D. Lower asset values and lower net income.

Blooms: Analyze
Difficulty: Medium
104. A declining fixed asset turnover ratio suggests that a:

A. company is not as efficient in using its fixed assets as it was in previous periods.
B. company's net sales must be increasing.
C. company must have purchased some intangible assets.
D. company's beginning fixed asset balance must be greater than its ending fixed asset
balance.

Blooms: Understand
Difficulty: Medium
9-41
line method. All other things equal, during the first few years of the asset's use, Company B
will show which of the following compared to Company A?
A. A smaller fixed asset turnover ratio and a smaller gain on asset disposal.
B. A larger fixed asset turnover ratio and a larger gain on asset disposal.
C. A smaller fixed asset turnover ratio and a larger gain on asset disposal.
D. A larger fixed asset turnover ratio and a smaller gain on asset disposal.

Blooms: Analyze
Difficulty: Hard
line method for an asset of the same cost and useful life. Which of the following statements is
true?
A. Company A will have higher depreciation expense in the early years but Company B will
have the higher expense towards the end of the asset's useful life.
B. Company A will consistently have higher depreciation expense until residual value is
reached.
C. Company B will have higher depreciation expense in the early years but Company A will
have the higher expense towards the end of the asset's useful life.
D. Company B will consistently have higher depreciation expense until residual value is
reached.

Blooms: Understand
Difficulty: Medium
9-42
107. Assuming two companies use the same accounting methods, other things being equal,
the company with a higher fixed asset turnover ratio:
A. has a greater amount invested in fixed assets than a company with a lower fixed asset
turnover ratio.
B. has less invested in fixed assets than a company with a lower fixed asset turnover ratio.
C. generates less sales revenue than a company with a lower fixed asset turnover ratio.
D. makes better use of its fixed assets to generate revenues than a company with a lower fixed
asset turnover ratio.

Blooms: Understand
Difficulty: Medium
line method for an asset of the same cost and useful life. Other things being equal, which of
the following is true?
A. Company A will have higher net income in the early years but Company B will have
higher net income towards the end of the asset's useful life.
B. Company A will consistently have the larger net income until residual value is reached.
C. Company B will have higher net income in the early years but Company A will have
higher net income towards the end of the asset's useful life.
D. Company B will consistently have the larger net income until residual value is reached.

Blooms: Analyze
Difficulty: Medium
9-43
109. Which of the following methods would be a typical choice for assets that are most
productive when they are new but lose their utility quickly as they get older?
A. Straight line method
B. Double declining method
C. Units of production method
D. Depletion

Blooms: Remember
Difficulty: Medium
110. Decorama Corp. bought a delivery van for $65,000 with a estimated residual value of
$6,000. The van is expected to be used for the next 10 years. The company estimates it will be
used to drive a total of 225,000,000 km (30,000 km in the first year, 25,000 in the second,
third and fourth years and 20,000 in the next six years.
What would be the amount of depreciation expense in year 2 using the straight line
depreciation method?
A. $6,500.00
B. $5,900.00
C. $10,400.00
D. $6,555.55
(65,000 - 6,000)/10 = $5,900.

Blooms: Apply
Difficulty: Medium
9-44
What would be the amount of depreciation expense in year 2 using the double-declining-
balance method of depreciation?
A. $6,500.00
B. $5,900.00
C. $10,400.00
D. $6,555.55
DDB depreciation rate = 2/10 = 20%.

Dep. Exp. per year = (cost - accumulated dep.) * (2/useful life)
Year 1: ($65,000 - 0) * (2/10) = $13,000
Year 2: ($65,000 - $13,000) * (2/10) = $10,400.

Blooms: Apply
Difficulty: Medium
What would be the amount of depreciation expense in year 2 using the units-of-production
method?
A. $6,500.00
B. $5,900.00
C. $10,400.00
D. $6,555.55
(Cost - residual value) * (actual km this period/estimated total km) Year 2: ($65,000 - $6,000)
* (25,000/225,000) = $6,555.55.

Blooms: Apply
Difficulty: Medium
9-45
113. Which of the following methods would be a typical choice when asset use fluctuates
significantly from period to period?
A. Straight line method
B. Double declining method
C. Units of production method
D. Depletion

Blooms: Remember
Difficulty: Medium
114. All of the following costs should be capitalized when land is acquired, except,
A. Purchase cost.
B. Sales taxes.
C. Survey fees.
D. Legal fees.

Blooms: Remember
Difficulty: Easy
115. All of the following costs should be capitalized when equipment is acquired, except,
A. Purchase cost.
B. Sales taxes.
C. Transportation costs.
D. Legal fees.

Blooms: Remember
Difficulty: Easy
9-46
116. All of the following costs should be capitalized when buildings are acquired, except,
A. Purchase cost.
B. Sales taxes.
C. Appraisal fees.
D. Legal fees.

Blooms: Remember
Difficulty: Easy
117. The only asset that is assumed to have an indefinite useful life is:
A. Property, Plant and Equipment.
B. Contra assets.
C. Land.
D. None of the choices are correct.

Blooms: Remember
Difficulty: Easy
118. Straight-line depreciation results in,

A. Depreciation expense being a constant amount each year.
B. Accumulated depreciation increasing by an equal amount each year.
C. Book value decreasing by the same equal amount each year.
D. All of the choices are correct.

Blooms: Remember
Difficulty: Medium
9-47
Short Answer Questions
119. A company purchases property that includes land, buildings, and equipment for $5.5
million. The company pays $180,000 in legal fees, $220,000 in commissions, and $100,000 in
appraisal fees. The land is estimated at 25%, the buildings are at 40%, and the equipment at
35% of the property value. Prepare the journal entry that is required to record the purchase
assuming that the company paid 50% of the amounts using cash and signed a note for the
remainder. Explain how you derived your answer.
dr Land (+A) 1,500,000

dr Buildings (+A) 2,400,000
dr Equipment (+A) 2,100,000
cr Cash (-A) 3,000,000
cr Notes Payable (+L) 3,000,000
Costs associated with acquiring the property should be included in the acquisition cost and
then allocated across the various assets in proportion to their relative market values. This
allocation is necessary because different types of assets are treated differently when it comes
to depreciation.
Acquisition cost = $5,500,000 + $180,000 + $220,000 + $100,000 = $6,000,000
Land = $6,000,000  25% = $1,500,000
Buildings = $6,000,000  40% = $2,400,000
Equipment = $6,000,000  35% = $2,100,000

Blooms: Apply
Difficulty: Medium
9-48
120. At the beginning of 2019, your company buys a $30,000 piece of equipment that it
expects to use for 4 years. The company expects to produce a total of 200,000 units. The
equipment has an estimated residual value of $2,000.
a. Find the depreciable cost.

b. Find the depreciation expense per year under the straight-line method.
c. Prepare an depreciation schedule under the straight-line method.
d. Find the depreciation rate per unit under the units-of-production method.
e. Compare the annual depreciation expense using both methods assuming constant annual
production.
f. Prepare an depreciation schedule under the units-of-production method if 44,000 units are
produced in year one, 53,000 units in year two, 51,000 units in year three, and 52,000 units in
year four.
a. Depreciable cost is acquisition cost minus residual value. Depreciable cost = $30,000 -
$2,000 = $28,000
b. Depreciation expense = depreciable cost times the quotient (1/useful life)
Depreciation expense = $28,000 times 1/4 = $7,000
c. Depreciation schedule under the straight-line method:
Year Depreciation Accumulated Net Book Value

Expense Depreciation
Acquisition Cost $30,000
2019 $7,000 $7,000 23,000
2020 7,000 14,000 16,000
2021 7,000 21,000 9,000
2022 7,000 28,000 2,000
9-49
d. Depreciation rate per unit = depreciable cost/estimated total production

reciation rate per unit = $28,000/200,000 units = $0.14 or 14 per unit
e. If annual production is constant and the equipment makes 200,000 units over a 4-year
useful life, then it produces 200,000/4 or 50,000 units per year.
Depreciation expense = depreciation rate per unit times the actual production
Depreciation expense = 14 per unit times 50,000 = $7,000
The depreciation under units-of-production, when annual production is constant, does not
differ from the straight-line method.
f. Depreciation schedule under the units-of-production method.
Year Depreciation Expense Accumulated Net Book Value

Depreciation
Acquisition Cost $30,000
2019 $6,160 (0.14 × 44,000) $6,160 23,840
2020 7,420 (0.14 × 53,000) 13,580 16,420
2021 7,140 (0.14 × 51,000) 20,720 9,280
2022 7,280 (0.14 × 52,000) 28,000 2,000

Blooms: Apply
Difficulty: Hard
9-50
121. A piece of equipment purchased on January 1, 2017, for $16,000 was estimated to have a
residual value of $4,000 at the end of its three-year useful life. If the equipment was
depreciated using the straight-line method and disposed of on December 31, 2018, for $5,000,
what amount of gain or loss would be reported on the income statement?
Cost $16,000 Selling Price $5,000

-Accumulated Depreciation (8,000) - Book Value (8,000)
= Book Value 8,000 = Loss (3,000)
Blooms: Apply
Difficulty: Hard
9-51
122. During 2018, Company X sells 500,000 units for $8 each. Sales discounts are $100,000
and sales returns and allowances are $300,000. The company reported a total of $710,000 in
fixed assets on January 1, 2018 and $890,000 in fixed assets on December 31, 2018.
a. Calculate net sales revenue.

b. Calculate average fixed assets.
c. Calculate the fixed asset turnover ratio.
d. Assume the 2018 fixed asset turnover ratio was lower than the 2017 ratio. Describe one
circumstance where this change would indicate bad news and one circumstance where this
change would be consistent with good news.
a. Net sales revenue = (500,000  $8) - $100,000 - $300,000 = $3,600,000

b. Average fixed assets = ($710,000 + $890,000)  2 = $800,000
c. Fixed asset turnover ratio = $3,600,000  $800,000 = 4.5
d. On the negative side, the company may be less efficient in the use of its fixed assets; the
company may be experiencing a long-term decline in sales; the company may have
experienced a temporary drop in sales revenue due to conditions beyond its control, such as
weather.
On the positive side, the company may have just replaced older, low value equipment with
new efficient but expensive equipment that will boost its long-run profits; the company may
have recently acquired additional equipment in anticipation of greater future sales or because
of changes in the tax law.

Blooms: Analyze
Difficulty: Hard
9-52
123. Identify the category to which each of the following assets belongs.
T - tangible long-lived asset

I - intangible long-lived asset
N - not a long-lived asset
______ Warehouse
______ Licensing rights
______ Supplies
______ Patents
______ Production equipment
______ Goodwill
______ Land
______ Office computer
T, I, N, I, T, I, T, T

Blooms: Understand
Difficulty: Medium
9-53
124. Match the term and the definition. Not all definitions will be used.
_____ Accelerated depreciation

_____ Goodwill
_____ Patent
_____ EBITDA
_____ Net book value
_____ Fixed assets
_____ Straight-line depreciation
_____ Residual value
_____ Trademark
A. Names or images that appear with a → or TM.

B. A tax law dealing with how companies can depreciate their assets.
C. The premium a company pays to obtain the favourable reputation associated with another
company.
D. Revenue that a company receives through a licensing agreement.
E. Assets whose values do not change over time.
F. When a company expenses the cost of a long-lived asset by a constant annual amount.
G. The acquisition cost of an asset minus its accumulated depreciation.
H. The estimated total use a company expects to receive from an asset.
I. Net income plus interest, taxes, and depreciation expenses.
J. What a company expects to receive when an asset is disposed of at the end of its useful life.
K. What a company presents on its balance sheet as the fair market value of an asset.
L. When a company expenses the entire cost of a long-lived asset in the first year of use.
M. Tangible long-lived assets.
N. When a company receives free publicity in return for charitable contributions.
O. When a company allocates the cost of a long-lived asset at a higher rate in the first years of
use.
P. The exclusive right to sell or use a product or process that is granted to encourage
innovation.
O, C, P, I, G, M, F, J, A.

Blooms: Remember
Difficulty: Medium
9-54
125. Match the term and the definition. Not all definitions will be used.
_____ Depreciation
_____ Capitalized interest
_____ Licensing right
_____ Least and latest rule
_____ Voluntary disposal
_____ Fixed asset turnover ratio
_____ Copyright
_____ Depreciation schedule
_____ Involuntary disposal
A. Allocating the cost of tangible assets over their limited useful life.
B. Generally accepted accounting principle that a company must report assets at the lower of
their most recent market value or acquisition cost.
C. Asset cost minus residual value.
D. Net income divided by average total assets.
E. Allocating the cost of intangible assets over their limited useful life.
F. A method of calculating how a company will use different depreciation methods for an
asset.
G. When a company is no longer able to use an asset because of events beyond its control.
H. Grants the exclusive right to sell or use a creative work.
I. A cumulative record of depreciation expense, accumulated depreciation, and book value.
J. The cost of financing the self-construction of a tangible asset.
K. Net sales revenue divided by average net fixed assets.
L. The principle that companies wish to pay the lowest possible tax at the last possible time.
M. Also known as book value.
N. A contractual agreement that allows limited use of a property.
O. How interest payments are recorded as liabilities on the balance sheet.
P. When a company decides it no longer wants to hold an asset but sells, trades, or donates it
instead.
A, J, N, L, P, K, H, I, G

Blooms: Remember
Difficulty: Medium
9-55
126. Match the term and the explanation. Not all explanations will be used.
_____ Long-lived assets

_____ Average net fixed assets
_____ Capitalization of cost
_____ Units-of-production method
_____ Carrying value
_____ Asset impairment loss
_____ Depreciation
_____ Net sales revenue
_____ Declining-balance method
A. The average proportion of a company's total assets that is long-lived.

B. A depreciation method that produces higher amounts of depreciation expense in the early
years of an asset's life and lower amounts in the later years.
C. The cost of financing an asset.
D. Also known as book value.
E. Assets that will be used for more than three years.
F. The denominator of the fixed asset turnover ratio.
G. Also known as the average total cost of production.
H. How expenses are reported in the income statement.
I. A depreciation method that spreads asset cost by production rather than time.
J. Also known as the initial value or balance forward value.
K. Assets that will be used for more than a year.
L. The process of transferring the cost of long-lived tangible assets to expenses.
M. When a company writes down the value of an asset when estimated future cash flows fall
below the original level estimated.
N. The numerator of the fixed asset turnover ratio.
O. When costs are recorded as assets rather than expenses.
P. When a company writes down the value of an asset because estimated future cash flows fall
below the book value.
K, F, O, I, D, P, L, N, B

Blooms: Remember
Difficulty: Medium
9-56
Test Bank for Fundamentals of Financial Accounting 5th Canadian by Phillips
127. Ski Lodge Inc. purchased a building for $20 million. The building is depreciated using
the straight-line method over 20 years and has no residual value. At the end of year 16, Ski
Lodge Inc. sold the building for $5 million in cash. Depreciation had been updated to the
point in time of the sale. Show the accounting equation effects from this transaction. Also,
write down the journal entry from the disposal.
Assets = Liabilities + Shareholders Equity

Buildings, -$20,000,000 Gain on Disposal, $1,000,000
Acc. Dep’t,$16,000,000
Cash, $5,000,000
Journal Entry:
Account Debit Credit

Cash $5,000,000
Accumulated Depreciation $16,000,000
Buildings $20,000,000
Gain on Disposal $1,000,000

Blooms: Understand
Difficulty: Medium
9-57
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True / False Questions

1. Long-lived assets are assets that are intended for resale.

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2. Another name for a tangible long-lived asset is a fixed asset.

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3. Capitalizing costs refers to the process of converting assets to expenses.

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7. The useful life of an asset is always measured in years.

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9. Research and development costs are treated as a capital asset.

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12. Assuming no additions, replacements, or extraordinary repairs, the carrying value of a

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15. The purpose of depreciation is to correctly value assets.

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32. Purchase cost minus residual value is equivalent to depreciable cost.

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Multiple Choice Questions

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41. Amazon's website is an example of a:

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43. Which of the following statements is true?

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44. Under the cost principle:

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