Accounting What The Numbers Mean 11th Edition Marshall Test Bank

Accounting What the Numbers Mean
11th Edition Marshall Test Bank

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Chapter 06
Accounting for and Presentation of Property, Plant, and Equipment, and

Other Noncurrent Assets
Multiple Choice Questions
1. When a firm buys land on which there is a building, and the building is torn down so that an
appropriate new building can be constructed on the land:
A. any of the purchase cost allocated to the old building is reported as a loss.
B. the cost assigned to the land excludes the cost of the old building.
C. the total cost of the land and old building are capitalized as land cost.
D. any of the purchase cost allocated to the old building is capitalized as part of the cost of the
new building.
2. Expenditures capitalized as long-lived assets generally include those expenditures that:
A. are made for normal repairs to maintain the usefulness of the asset over a number of years.
B. are for items that have a physical life of more than a year, regardless of their cost.
C. are material in amount and that have an economic benefit to the entity only in the current year.
D. are material in amount and that have an economic benefit to the entity that extends beyond the
current year.
6-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. Which of the following accounting concepts/principles is most significant in the development of a
capitalization policy?
A. Matching of revenue and expense.

B. Materiality.
C. Original Cost.
D. Consistency.
4. Which of the following statements best describes the process of accounting for depreciation?
A. A process that attempts to recognize loss in economic value over a period of time.
B. A process for setting aside cash so funds will be available to replace the asset.
C. A process for recognizing the cost of an asset that should be matched against revenue earned
as a result of using the asset.
D. A process for recognizing all of the cost associated with using an asset in a revenue
generating activity.
5. The entry to record depreciation expense:
A. increases a contra asset and decreases net income.

B. decreases a contra asset and decreases net income.
C. decreases working capital and decreases net income.
D. decreases an asset and increases a contra asset.
6. The net book value of a depreciable asset is:
A. the fair value of the asset.

B. the amount for which the asset should be insured.
C. the difference between the asset's cost and accumulated depreciation.
D. the difference between the asset's cost and depreciation expense.
6-2
7. It is not unusual for a company to use different depreciation methods for book and tax purposes.
When this happens, the firm usually:
A. uses an accelerated depreciation method for book purposes.

B. uses an accelerated depreciation method for tax purposes.
C. is trying to maximize its taxable income.
D. is trying to minimize its book income.
8. The present value concept is widely applied in business because:
A. inflation erodes the purchasing power of money.

B. money has value over time.
C. accounting for operating leases requires its use.
D. most obligations are settled within a year.
9. When an accelerated depreciation method is used to calculate depreciation expense:
A. the net book value of the asset halfway through its useful life will be less than if straight-line
depreciation is used.
B. the net book value of the asset at the end of its useful life will be less than if straight-line
C. depreciation expense will be less in the early years of the asset's life than if straight-line
D. the accumulated depreciation account balance will increase by a larger amount in the last half
of an asset's life than if straight-line depreciation is used.
6-3
10. Moped, Inc. purchased machinery at a cost of $44,000 on January 1, 2017. The expected useful
life is 5 years and the asset is expected to have salvage value of $4,000. Moped depreciates its
assets using the double-declining balance method.
What is the firm's depreciation expense for the year ended December 31, 2017?
A. $4,000
B. $8,800
C. $12,000
D. $17,600
What is the accumulated depreciation for this asset on December 31, 2018?
A. $8,800
B. $10,560
C. $17,600
D. $28,160
What is the firm's gain or loss if the machinery is sold for $22,000 on December 31, 2018?
A. Gain of $8,000
B. Gain of $6,160
C. Loss of $1,200
D. Loss of $8,000
6-4
13. When a machine having a net book value of $15,000 is sold for $12,000:
A. current assets decrease, equipment (net) increases, and net income increases.
B. current assets increase, equipment (net) decreases, and net income increases.
C. current assets increase, equipment (net) decreases, and net income decreases.
D. current assets increase, equipment (net) increases, and net income decreases.
14. If there is a loss on the disposal of a depreciable asset:
A. no cash was received in the disposal transaction.

B. the net book value of the asset was negative.
C. in retrospect, the life over which the asset was depreciated was too short.
D. in retrospect, the depreciation expense recognized over the asset's life was too low.
6-5
15. Which of the following could be a correct journal entry to record the disposition of equipment?
A. Accounts
Dr.
payable
Accumulated
Cr.
depreciation
Depreciation
Cr.
B. Dr. Cash
Loss on sale
Dr.
of equipment
Accumulated
Dr.
depreciation
Equipment
Cr.
C. Gain on sale
Dr.
of equipment
Accumulated
Dr.
depreciation
Equipment
Cr.
D. Dr. Cash
Loss on sale of
Dr.
equipment
Accumulated
Cr.
depreciation
Cr. Equipment
6-6
16. The Modified Accelerated Cost Recovery System (MACRS) specifies which of the following
depreciation methods for buildings?
A. 150% declining-balance.
B. Double-declining-balance.
C. Straight line.
D. Buildings are not depreciable assets.
depreciation methods for land?
C. Straight line.
D. Land is not a depreciable asset.
18. If an organization has an obligation to pay $25,000 to a supplier two years from now, the present
value of the obligation:
A. is less than $25,000.

B. is $25,000.
C. is more than $25,000.
D. could be calculated using an annuity factor from the present value tables.
19. Depreciation, in accounting, is a process that results in:
A. depreciable assets being reported in the balance sheet at their fair value.
B. accumulating cash for the replacement of the asset.
C. an accurate measurement of the economic usefulness of an asset.
D. spreading the cost of an asset over its useful life to the entity.
6-7
20. Present Value of $1 Present Value of an
Discount Rate Annuity of $1
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of $6,000 to be received in 7 years at 10% is:
A. $1,232.44
B. $3,079.20
C. $6,000.00
D. $11,691.34

Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of $6,000 to be received every year for 9 years, at 10%, is:
A. $14,147.60
B. $24,546.00
C. $34,554.00
D. $54,000.00
6-8
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of an obligation of $8,000 payable in 7 years at 8% is:
A. $3,520
B. $4,668
C. $6,412
D. $7,360

Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
A particular common stock has an annual cash dividend of $4 per share and is predicted to have
a market value of $60 per share 5 years from now. Assuming a discount rate of 10%, a fair
market price for the stock today is:
A. $40.00
B. $52.41
C. $75.16
D. $112.42
6-9
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
Psyche Company wants to acquire Trim Company. Trim's ROI has been above average for its
industry; net income has averaged $140,000 a year more than the industry average. These
"excess" earnings are expected to continue at this amount for 5 years. Assuming a discount rate
of 8%, how much goodwill will arise from Psyches' purchase of Trim?
A. $81,672
B. $176,314
C. $558,978
D. $700,000
25. Leasehold is an example of which of the following types of assets?
A. Current asset.
B. Property, plant and equipment.
C. Goodwill.
D. Intangible asset.
26. The principal challenge to calculating depletion is estimating:
A. the cost of the asset.

B. the salvage value of the exploration equipment.
C. the demand for the product.
D. the quantity of material to be recovered.
6-10
27. Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all
subject to:
A. depreciation.
B. amortization.
C. depletion.
D. consolidation.
28. When a depreciable asset is sold:
A. a gain arises if the sales proceeds exceed the net book value.
B. a loss arises if the sales proceeds exceed the net book value.
C. any cash received results in a gain.
D. depreciation expense is adjusted so there is no gain or loss.
29. Goodwill is an asset that arises because the present value of an acquired company's estimated
future earnings, discounted at the acquiring firm's ROI:
A. is less than the fair value of the net assets of the acquired company.
B. is more than the fair value of the net assets of the acquired company.
C. is more than the fair value of the net assets of the acquiring company.
D. is less than the fair value of the net assets of the acquiring company.
30. The intangible asset goodwill:
A. represents the management team's assessment of its value to the company.

B. may arise when one company purchases another company.
C. arises because the fair value of a company's assets is greater than cost.
D. all of the above are correct.
6-11
31. Accounting for natural resources:
A. involves using the accumulated depreciation account.

B. involves estimating the quantity of the natural resource to be recovered.
C. involves an exception to the matching concept.
D. involves a double-declining balance depletion calculation.
32. Which of the following is not a term that describes part of the accounting for noncurrent assets?
A. Accumulation.
B. Depletion.
C. Amortization.
D. Depreciation.
33. Many companies use accelerated depreciation for tax purposes because:
A. it is easier to calculate than straight-line depreciation.

B. it reflects the amount of cash used in depreciation.
C. it results in lower taxable income than straight-line depreciation.
D. it is used for determining net income reported to stockholders.
34. Which of the following statements concerning repair and maintenance expenditures is true?
A. Routine repair costs and preventive maintenance expenditures are capitalized as assets in the
period in which they are incurred.
B. For income tax purposes, most taxpayers would prefer to capitalize an expenditure and
depreciate the asset over time rather than expensing the expenditure and deducting the entire
amount in the year it is incurred.
C. Maintenance expenditures that extend the useful life and ∕or increase the salvage value of an
asset should be capitalized and depreciated over the asset's remaining useful life.
D. All repair and maintenance expenditures are accounted for as expenses in the year in which
they are incurred.
6-12
35. Which of the following statements concerning the accounting for leases is not true?
A. The economic impact of a capital lease isn't really any different from buying the asset outright
and signing a note payable that will be paid off, with interest, over the life of the asset.
B. At the inception of a capital lease, the lessee's total assets and total stockholders' equity are
both increased for the present value of the lease payments to be made over the life of the
lease.
C. Assets rented under an operating lease are not reflected on the lessee's balance sheet, and
the rent expense involved is reported in the income statement as an operating expense.
D. A capital lease results in the lessee assuming virtually all the benefits and risks of ownership of
the leased asset.
Essay Questions
36. Joe's Garage, Inc., purchased a used vehicle lift, brake tester, and wheel aligning equipment for a
lump-sum price of $16,000 from a bankrupt competitor. Appraised values were as follows: vehicle
lift, $20,000; brake tester, $4,000; and wheel aligner, $6,000.
Required:
What cost should be recorded for the wheel aligner?
6-13
37. Lone Star Sales & Service acquired a new machine that cost $84,000 in early 2016. The machine
is expected to have a five-year useful life and is estimated to have a salvage value of $14,000 at
the end of its life. (Round your final answers to the nearest dollar.)
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be
recognized in the second year of the machine's life and calculate the accumulated depreciation
after the third year of the machine's life.
(b.) Using the double-declining-balance depreciation method, calculate the depreciation expense
for the third year of the machine's life and the net book value of the machine at this point in time.
6-14
38. Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine
$20,000 per year for 5 years. At the time the lease was signed, the interest rate for a 5-year loan
was 8%.
Required:
(a.) Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc. could
have paid at the beginning of the lease to buy the machine outright.
(b.) What causes the difference between the amount you calculated in part (a.) and the total of
$100,000 ($20,000 per year for 5 years) that Lessee, Inc. will pay under the terms of the lease?
(c.) What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the
time the lease was signed) with respect to this asset?
6-15
39. Goodwill results from the purchase of one firm by another for a price that is greater than the fair
value of the net assets acquired. On January 1, 2017, Blue Grass Co. purchased Red Grass Co.
for $2,400,000 when the net assets were valued at $2,000,000. Goodwill will be tested annually
for impairment. Assume that after the first year there was an impairment of $30,000.
Required:
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the
purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?
6-16
Chapter 06 Accounting for and Presentation of Property, Plant, and
Equipment, and Other Noncurrent Assets Answer Key
Multiple Choice Questions
1. When a firm buys land on which there is a building, and the building is torn down so that an
appropriate new building can be constructed on the land:
A. any of the purchase cost allocated to the old building is reported as a loss.
B. the cost assigned to the land excludes the cost of the old building.
C. the total cost of the land and old building are capitalized as land cost.
D. any of the purchase cost allocated to the old building is capitalized as part of the cost of the
new building.
AACSB: Analytical Thinking

AICPA: BB Critical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Explain how the cost of land, buildings, and equipment is reported on the balance sheet.
Topic: Land, Buildings and Equipment
2. Expenditures capitalized as long-lived assets generally include those expenditures that:
A. are made for normal repairs to maintain the usefulness of the asset over a number of
years.
B. are for items that have a physical life of more than a year, regardless of their cost.
C. are material in amount and that have an economic benefit to the entity only in the current
year.
D. are material in amount and that have an economic benefit to the entity that extends beyond
the current year.
6-17
AICPA: FN Reporting
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and
equipment.
3. Which of the following accounting concepts/principles is most significant in the development of

a capitalization policy?
A. Matching of revenue and expense.

B. Materiality.
C. Original Cost.
D. Consistency.

AICPA: FN Decision Making
Blooms: Understand
Learning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and
equipment.
4. Which of the following statements best describes the process of accounting for depreciation?
A. A process that attempts to recognize loss in economic value over a period of time.
B. A process for setting aside cash so funds will be available to replace the asset.
C. A process for recognizing the cost of an asset that should be matched against revenue
earned as a result of using the asset.
D. A process for recognizing all of the cost associated with using an asset in a revenue
generating activity.

6-18
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and
compare the relative effects of each on the income statement and the balance sheet.
5. The entry to record depreciation expense:
A. increases a contra asset and decreases net income.

B. decreases a contra asset and decreases net income.
C. decreases working capital and decreases net income.
D. decreases an asset and increases a contra asset.

AICPA: FN Reporting
Blooms: Understand
6. The net book value of a depreciable asset is:
A. the fair value of the asset.

B. the amount for which the asset should be insured.
C. the difference between the asset's cost and accumulated depreciation.
D. the difference between the asset's cost and depreciation expense.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
6-19
7. It is not unusual for a company to use different depreciation methods for book and tax
purposes. When this happens, the firm usually:
A. uses an accelerated depreciation method for book purposes.

B. uses an accelerated depreciation method for tax purposes.
C. is trying to maximize its taxable income.
D. is trying to minimize its book income.

Blooms: Understand
Learning Objective: 06-05 Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax
depreciation differs from financial accounting depreciation.
8. The present value concept is widely applied in business because:
A. inflation erodes the purchasing power of money.

B. money has value over time.
C. accounting for operating leases requires its use.
D. most obligations are settled within a year.

AICPA: FN Measurement
Blooms: Remember
Learning Objective: 06-10 Explain the role of time value of money concepts in financial reporting and their usefulness in
decision making.
Topic: Time Value of Money
6-20
9. When an accelerated depreciation method is used to calculate depreciation expense:
A. the net book value of the asset halfway through its useful life will be less than if straight-line
B. the net book value of the asset at the end of its useful life will be less than if straight-line
C. depreciation expense will be less in the early years of the asset's life than if straight-line
D. the accumulated depreciation account balance will increase by a larger amount in the last
half of an asset's life than if straight-line depreciation is used.
AACSB: Reflective Thinking

Blooms: Analyze
Difficulty: 3 Hard
10. Moped, Inc. purchased machinery at a cost of $44,000 on January 1, 2017. The expected
useful life is 5 years and the asset is expected to have salvage value of $4,000. Moped
depreciates its assets using the double-declining balance method.
What is the firm's depreciation expense for the year ended December 31, 2017?
A. $4,000
B. $8,800
C. $12,000
D. $17,600
Double-declining rate = Straight-line rate × 2 = 1/5 × 2 = 40%

$44,000 × 40% = $17,600

6-21
Blooms: Apply
What is the accumulated depreciation for this asset on December 31, 2018?
A. $8,800
B. $10,560
C. $17,600
D. $28,160
($44,000 - $17,600) × 40% = $10,560

AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
6-22
What is the firm's gain or loss if the machinery is sold for $22,000 on December 31, 2018?
A. Gain of $8,000
B. Gain of $6,160
C. Loss of $1,200
D. Loss of $8,000
$44,000 - $28,160 accumulated depreciation = $15,840 net book value.

$22,000 - $15,840 = $6,160 gain on sale

Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale
or abandonment.
13. When a machine having a net book value of $15,000 is sold for $12,000:
A. current assets decrease, equipment (net) increases, and net income increases.
B. current assets increase, equipment (net) decreases, and net income increases.
C. current assets increase, equipment (net) decreases, and net income decreases.
D. current assets increase, equipment (net) increases, and net income decreases.

AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
6-23
or abandonment.
14. If there is a loss on the disposal of a depreciable asset:
A. no cash was received in the disposal transaction.

B. the net book value of the asset was negative.
C. in retrospect, the life over which the asset was depreciated was too short.
D. in retrospect, the depreciation expense recognized over the asset's life was too low.

Blooms: Create
or abandonment.
6-24
15. Which of the following could be a correct journal entry to record the disposition of equipment?
A. Accounts
Dr.
payable
Accumulated
Cr.
depreciation
Depreciation
Cr.
B. Dr. Cash
Loss on sale
Dr.
of equipment
Accumulated
Dr.
depreciation
Equipment
Cr.
C. Gain on sale
Dr.
of equipment
Accumulated
Dr.
depreciation
Equipment
Cr.
D. Dr. Cash
Loss on sale of
Dr.
equipment
Accumulated
Cr.
depreciation
Cr. Equipment

AICPA: FN Reporting
Blooms: Understand
Difficulty: 3 Hard
or abandonment.
6-25
depreciation methods for buildings?
C. Straight line.
D. Buildings are not depreciable assets.

Blooms: Remember
Difficulty: 3 Hard
depreciation methods for land?
C. Straight line.
D. Land is not a depreciable asset.

Blooms: Remember
6-26
18. If an organization has an obligation to pay $25,000 to a supplier two years from now, the
present value of the obligation:
A. is less than $25,000.

B. is $25,000.
C. is more than $25,000.
D. could be calculated using an annuity factor from the present value tables.

Blooms: Understand
Difficulty: 1 Easy
decision making.
19. Depreciation, in accounting, is a process that results in:
A. depreciable assets being reported in the balance sheet at their fair value.
B. accumulating cash for the replacement of the asset.
C. an accurate measurement of the economic usefulness of an asset.
D. spreading the cost of an asset over its useful life to the entity.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
6-27
20. Present Value of Present Value of an
$1 Discount Rate Annuity of $1
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of $6,000 to be received in 7 years at 10% is:
A. $1,232.44
B. $3,079.20
C. $6,000.00
D. $11,691.34
$6,000 × PV factor of $1 (0.5132) = $3,079.20

Blooms: Apply
Difficulty: 1 Easy
decision making.
6-28
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of $6,000 to be received every year for 9 years, at 10%, is:
A. $14,147.60
B. $24,546.00
C. $34,554.00
D. $54,000.00
$6,000 × PV factor of annuity (5.7590) = $34,554

Blooms: Apply
Difficulty: 1 Easy
decision making.
6-29
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
The present value of an obligation of $8,000 payable in 7 years at 8% is:
A. $3,520
B. $4,668
C. $6,412
D. $7,360
$8,000 × PV factor of $1 (0.5835) = $4,668

AICPA: FN Reporting
Blooms: Apply
Difficulty: 1 Easy
decision making.
6-30
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
A particular common stock has an annual cash dividend of $4 per share and is predicted to
have a market value of $60 per share 5 years from now. Assuming a discount rate of 10%, a
fair market price for the stock today is:
A. $40.00
B. $52.41
C. $75.16
D. $112.42
Present value of the principal + Present value of the interest annuity

= ($60 * 0.6209) + ($4 * 3.7908) = $37.25 + 15.16 = $52.41 (rounded)

Blooms: Create
Difficulty: 3 Hard
decision making.
6-31
Discount Rate
Periods 8% 10% 8% 10%
5 0.6806 0.6209 3.9927 3.7908
7 0.5835 0.5132 5.2064 4.8684
9 0.5002 0.4241 6.2469 5.7590
Psyche Company wants to acquire Trim Company. Trim's ROI has been above average for its
industry; net income has averaged $140,000 a year more than the industry average. These
"excess" earnings are expected to continue at this amount for 5 years. Assuming a discount
rate of 8%, how much goodwill will arise from Psyches' purchase of Trim?
A. $81,672
B. $176,314
C. $558,978
D. $700,000
$140,000 * PV of annuity (3.9927) = $558,978

Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their
costs are reflected in the income statement.
Topic: Intangible Assets
6-32
25. Leasehold is an example of which of the following types of assets?
A. Current asset.
B. Property, plant and equipment.
C. Goodwill.
D. Intangible asset.

AICPA: FN Reporting
Blooms: Remember
26. The principal challenge to calculating depletion is estimating:
A. the cost of the asset.

B. the salvage value of the exploration equipment.
C. the demand for the product.
D. the quantity of material to be recovered.

Blooms: Understand
6-33
27. Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all
subject to:
A. depreciation.
B. amortization.
C. depletion.
D. consolidation.

Blooms: Remember
28. When a depreciable asset is sold:
A. a gain arises if the sales proceeds exceed the net book value.
B. a loss arises if the sales proceeds exceed the net book value.
C. any cash received results in a gain.
D. depreciation expense is adjusted so there is no gain or loss.

AICPA: FN Reporting
Blooms: Remember
or abandonment.
6-34
29. Goodwill is an asset that arises because the present value of an acquired company's
estimated future earnings, discounted at the acquiring firm's ROI:
A. is less than the fair value of the net assets of the acquired company.
B. is more than the fair value of the net assets of the acquired company.
C. is more than the fair value of the net assets of the acquiring company.
D. is less than the fair value of the net assets of the acquiring company.

AICPA: FN Reporting
Blooms: Understand
30. The intangible asset goodwill:
A. represents the management team's assessment of its value to the company.

B. may arise when one company purchases another company.
C. arises because the fair value of a company's assets is greater than cost.
D. all of the above are correct.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
6-35
31. Accounting for natural resources:
A. involves using the accumulated depreciation account.

B. involves estimating the quantity of the natural resource to be recovered.
C. involves an exception to the matching concept.
D. involves a double-declining balance depletion calculation.

Blooms: Remember
32. Which of the following is not a term that describes part of the accounting for noncurrent
assets?
A. Accumulation.
B. Depletion.
C. Amortization.
D. Depreciation.

AICPA: FN Reporting
Blooms: Remember
6-36
33. Many companies use accelerated depreciation for tax purposes because:
A. it is easier to calculate than straight-line depreciation.

B. it reflects the amount of cash used in depreciation.
C. it results in lower taxable income than straight-line depreciation.
D. it is used for determining net income reported to stockholders.

Blooms: Understand
Difficulty: 1 Easy
34. Which of the following statements concerning repair and maintenance expenditures is true?
A. Routine repair costs and preventive maintenance expenditures are capitalized as assets in
the period in which they are incurred.
B. For income tax purposes, most taxpayers would prefer to capitalize an expenditure and
depreciate the asset over time rather than expensing the expenditure and deducting the
entire amount in the year it is incurred.
C. Maintenance expenditures that extend the useful life and ∕or increase the salvage value of
an asset should be capitalized and depreciated over the asset's remaining useful life.
D. All repair and maintenance expenditures are accounted for as expenses in the year in
which they are incurred.

AICPA: FN Reporting
Blooms: Understand
Learning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures.
6-37
35. Which of the following statements concerning the accounting for leases is not true?
A. The economic impact of a capital lease isn't really any different from buying the asset
outright and signing a note payable that will be paid off, with interest, over the life of the
asset.
B. At the inception of a capital lease, the lessee's total assets and total stockholders' equity
are both increased for the present value of the lease payments to be made over the life of
the lease.
C. Assets rented under an operating lease are not reflected on the lessee's balance sheet,
and the rent expense involved is reported in the income statement as an operating
expense.
D. A capital lease results in the lessee assuming virtually all the benefits and risks of
ownership of the leased asset.

AICPA: FN Reporting
Blooms: Understand
Learning Objective: 06-07 Describe the difference between an operating lease and a capital lease.
Topic: Assets Acquired by Capital Lease
Essay Questions
6-38
36. Joe's Garage, Inc., purchased a used vehicle lift, brake tester, and wheel aligning equipment
for a lump-sum price of $16,000 from a bankrupt competitor. Appraised values were as
follows: vehicle lift, $20,000; brake tester, $4,000; and wheel aligner, $6,000.
Required:
What cost should be recorded for the wheel aligner?
Cost of wheel aligner =

[$6,000/($20,000 + $4,000 + $6,000)] * $16,000 = $3,200

AICPA: FN Reporting
Blooms: Analyze
6-39
37. Lone Star Sales & Service acquired a new machine that cost $84,000 in early 2016. The
machine is expected to have a five-year useful life and is estimated to have a salvage value of
$14,000 at the end of its life. (Round your final answers to the nearest dollar.)
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be
recognized in the second year of the machine's life and calculate the accumulated
depreciation after the third year of the machine's life.
(b.) Using the double-declining-balance depreciation method, calculate the depreciation
expense for the third year of the machine's life and the net book value of the machine at this
point in time.
(a) Depreciation expense = ($84,000 - $14,000)/5 = $14,000 per year

After three years the accumulated depreciation = $14,000 * 3 = $42,000.
(b) Straight-line rate = 1/5 = 20%. * 2 = 40%. Double-declining-balance rate
Year Net Book Value Depreciation Accumulated Depreciation Net Book Value
1/1 Expense* 12/31 12/31
1 $84,000 $33,600 $33,600 $50,400
2 50,400 20,160 53,760 30,240
3 30,240 12,096 65,856
* Depreciation expense = Net book value on 1/1 * 40%

Blooms: Apply
6-40
38. Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the
machine $20,000 per year for 5 years. At the time the lease was signed, the interest rate for a
5-year loan was 8%.
Required:
(a.) Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc. could
have paid at the beginning of the lease to buy the machine outright.
(b.) What causes the difference between the amount you calculated in part (a.) and the total
of $100,000 ($20,000 per year for 5 years) that Lessee, Inc. will pay under the terms of the
lease?
(c.) What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at
the time the lease was signed) with respect to this asset?
(a.) The cost of the machine at the beginning of the lease is the present value of the lease
payments discounted at the interest rate the lessor would charge. The $20,000 annual lease
payment is an annuity. The present value factor for an annuity of 5 periods at a discount rate
of 8% in Table 6 - 5 is 3.9927. Thus, the present value of the lease payments is: $20,000 *
3.9927 = $79,854.
(b.) The difference between the total amount paid and the present value of the lease
payments is represented by interest of $20,146 in total ($100,000 - $79,854), which would be
recognized as an expense over the life of the lease agreement.
(c.) The cost to be reported in Lessee's balance sheet is the present value of the lease
payments, $79,854.

Blooms: Apply
Learning Objective: 06-08 Explain the similarities in the financial statement effects of buying an asset compared to using a
capital lease to acquire the rights to an asset.
decision making.
Topic: Assets Acquired by Capital Lease
6-41
39. Goodwill results from the purchase of one firm by another for a price that is greater than the
fair value of the net assets acquired. On January 1, 2017, Blue Grass Co. purchased Red
Grass Co. for $2,400,000 when the net assets were valued at $2,000,000. Goodwill will be
tested annually for impairment. Assume that after the first year there was an impairment of
$30,000.
Required:
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon
the purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?
(a.) Goodwill = $2,400,000 - $2,000,000 = $400,000.

(b.) Impairment of goodwill occurs when the book value of goodwill exceeds its fair value; an
impairment loss is recorded in an amount equal to the excess. The entry to record the
impairment would be:
Dr. Goodwill Impairment Loss 30,000
Cr. Goodwill 30,000

AICPA: FN Reporting
Blooms: Analyze
6-42

Accounting What The Numbers Mean 11th Edition Marshall Test Bank

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Accounting What the Numbers Mean

11th Edition Marshall Test Bank

Accounting for and Presentation of Property, Plant, and Equipment, and

Multiple Choice Questions

2. Expenditures capitalized as long-lived assets generally include those expenditures that:

A. Matching of revenue and expense.

5. The entry to record depreciation expense:

A. increases a contra asset and decreases net income.

6. The net book value of a depreciable asset is:

A. the fair value of the asset.

A. uses an accelerated depreciation method for book purposes.

8. The present value concept is widely applied in business because:

A. inflation erodes the purchasing power of money.

9. When an accelerated depreciation method is used to calculate depreciation expense:

14. If there is a loss on the disposal of a depreciable asset:

A. no cash was received in the disposal transaction.

A. is less than $25,000.

19. Depreciation, in accounting, is a process that results in:

Periods 8% 10% 8% 10%

5 0.6806 0.6209 3.9927 3.7908

7 0.5835 0.5132 5.2064 4.8684

9 0.5002 0.4241 6.2469 5.7590

The present value of $6,000 to be received in 7 years at 10% is:

21. Present Value of $1 Present Value of an

Periods 8% 10% 8% 10%

5 0.6806 0.6209 3.9927 3.7908

7 0.5835 0.5132 5.2064 4.8684

9 0.5002 0.4241 6.2469 5.7590

Periods 8% 10% 8% 10%

5 0.6806 0.6209 3.9927 3.7908

7 0.5835 0.5132 5.2064 4.8684

9 0.5002 0.4241 6.2469 5.7590

The present value of an obligation of $8,000 payable in 7 years at 8% is:

23. Present Value of $1 Present Value of an

Periods 8% 10% 8% 10%

5 0.6806 0.6209 3.9927 3.7908

7 0.5835 0.5132 5.2064 4.8684

9 0.5002 0.4241 6.2469 5.7590

Periods 8% 10% 8% 10%

5 0.6806 0.6209 3.9927 3.7908

7 0.5835 0.5132 5.2064 4.8684

9 0.5002 0.4241 6.2469 5.7590

25. Leasehold is an example of which of the following types of assets?

26. The principal challenge to calculating depletion is estimating:

A. the cost of the asset.

28. When a depreciable asset is sold:

30. The intangible asset goodwill:

A. represents the management team's assessment of its value to the company.

A. involves using the accumulated depreciation account.

A. it is easier to calculate than straight-line depreciation.

What cost should be recorded for the wheel aligner?

Multiple Choice Questions

AACSB: Analytical Thinking

2. Expenditures capitalized as long-lived assets generally include those expenditures that:

AACSB: Analytical Thinking

3. Which of the following accounting concepts/principles is most significant in the development of

A. Matching of revenue and expense.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

5. The entry to record depreciation expense:

A. increases a contra asset and decreases net income.

AACSB: Analytical Thinking

6. The net book value of a depreciable asset is: