Test Babk Ch8 ACCT

Financial Accounting, 10e (Libby)
Chapter 8 Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and
Natural Resources
1) Tangible long-lived productive assets differ from intangible long-lived productive assets in
that tangible assets have physical substance whereas intangible assets have no physical
substance.
Answer: TRUE
Explanation: Tangible assets have physical substance, whereas intangible assets lack physical
substance.
Difficulty: 1 Easy
Topic: Classifying long-lived assets
Learning Objective: 08-01 Define, classify, and explain the nature of long-lived productive
assets and interpret the fixed asset turnover ratio.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Patents, trademarks, and franchises are examples of tangible assets.
Answer: FALSE
Explanation: Intangible assets lack physical substance and include patents, copyrights,
franchises, licenses, and trademarks.
Difficulty: 1 Easy
Bloom's: Remember
3) The fixed asset turnover ratio measures the amount of operating income generated per dollar
of average fixed assets.
Answer: FALSE
Explanation: The fixed asset turnover ratio measures the amount of sales dollars generated per
dollar of average fixed assets.
Difficulty: 1 Easy
Topic: Ratio analysis - Fixed asset turnover
Bloom's: Remember
1
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4) The equipment cost initially reported on the balance sheet includes the equipment-related
installation and transportation costs.
Answer: TRUE
Explanation: The equipment cost reported on the balance sheet includes the purchase price,
installation costs, transportation costs, and other costs to prepare the equipment for its use.
Difficulty: 1 Easy
Topic: Acquisition cost-Long-lived assets
Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance
of property, plant, and equipment.
Bloom's: Remember
5) An expenditure is capitalized when it is reported as an expense on the income statement.
Answer: FALSE
Explanation: An expenditure is capitalized when it is reported as an asset on the balance sheet.
Difficulty: 1 Easy
Bloom's: Remember
6) The land cost initially reported on the balance sheet may include legal fees and title insurance.
Answer: TRUE
Explanation: The land cost reported on the balance sheet includes the purchase price, legal fees,
title insurance, and other costs directly related to acquiring the land.
Difficulty: 1 Easy
Bloom's: Remember
2
7) The cash-equivalent price of an asset received is measured as the fair value of the
consideration given including cash, or the fair value of the asset received, whichever is more
determinable.
Answer: TRUE
Explanation: The cash-equivalent price is the consideration given to the seller measured as the
cash paid for the asset or, when noncash assets are used as payment, the fair value of the asset
given or asset received is used, depending upon whichever can be more clearly determined.
Difficulty: 2 Medium
Bloom's: Remember
8) If a second-hand machine is purchased for productive use in a business, all renovation and
repair costs on the used machine incurred by the purchaser prior to its productive use should be
reported as part of the asset's cost on the balance sheet.
Answer: TRUE
Explanation: Costs incurred to get an asset ready for its intended use are capitalized and are
reported on the balance sheet as a component of the asset's cost. Although a second-hand
machine is already used, it was not yet used by this purchaser; therefore this purchaser's cost to
ready the asset for use is capitalized and not expensed as repairs.
Difficulty: 1 Easy
Bloom's: Remember
9) Ordinary repairs and maintenance costs are incurred to maintain a long-lived productive asset
and are expensed as incurred.
Answer: TRUE
Explanation: Ordinary costs incurred to repair and maintain a productive asset are reported on
the income statement as expenses as they are incurred.
Difficulty: 1 Easy
Topic: Repairs-Maintenance-Improvements
Bloom's: Remember
3
10) In accounting for depreciation, acquisition cost and useful life usually are known quantities,
whereas residual value is an estimate because it relates to an amount in the future.
Answer: FALSE
Explanation: The useful life is an estimate.
Difficulty: 1 Easy
Topic: Depreciation concepts
Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used
over time.
Bloom's: Remember
11) Depreciation is the process of allocating a long-lived asset's cost over its productive life.
Answer: TRUE
Explanation: Depreciation is a process of allocating an asset's cost to the period of productive
use in generating revenue.
Difficulty: 1 Easy
over time.
Bloom's: Remember
12) Depreciation is the process of estimating a long-lived asset's current market value.
Answer: FALSE
Explanation: Depreciation is a process of cost allocation and is not a process of determining
market value.
Difficulty: 1 Easy
over time.
Bloom's: Remember
4
13) If depreciation expense is calculated without taking into account the asset's residual value,
depreciation expense will be overstated.
Answer: TRUE
Explanation: An asset's depreciable basis is equal to the cost of the asset minus residual value. If
residual value is not used, then the depreciable basis will be too high and thus, the depreciation
expense will also be too high, i.e., overstated.
over time.
Bloom's: Analyze
AACSB: Analytical Thinking
14) The book value of a depreciable asset equals its acquisition cost minus the depreciation
expense recorded since the acquisition date.
Answer: TRUE
Explanation: An asset's book value equals the cost of the asset minus accumulated depreciation.
Accumulated depreciation is the depreciation expense recorded since the acquisition date of the
asset.
Difficulty: 1 Easy
over time.
Bloom's: Remember
15) On January 1, 2019, equipment was purchased for $80,000; the equipment's estimated
residual value is $15,000, and its estimated useful life is 10 years. For 2019, the depreciation
expense under the double-declining balance method is $13,000.
Answer: FALSE
Explanation: 2019 depreciation expense = $16,000 = $80,000 × 2/10. Residual value is not
included in the formula for calculating double-declining balance depreciation expense.
Topic: Depreciation methods - Declining balance
over time.
Bloom's: Apply
AACSB: Knowledge Application
5
16) On January 1, 2019, equipment was purchased for $100,000. The equipment's estimated
residual value is $20,000, and its estimated useful life is 8 years. On December 31, 2019, the
book value using the straight-line method of depreciation is $90,000.
Answer: TRUE
Explanation: 2019 depreciation expense = $10,000 = ($100,000 − $20,000) ÷ 8 years.
The December 31, 2019 book value = $90,000 = Cost − Accumulated depreciation = $100,000 −
$10,000.
Topic: Depreciation methods - Straight-line
over time.
Bloom's: Apply
17) Use of the double-declining-balance method of depreciation results in higher depreciation

expense during the first year of an asset's life relative to use of the straight-line depreciation
method.
Answer: TRUE
Explanation: The double-declining-balance method is an accelerated depreciation method,
which results in higher amounts of depreciation expense in the earlier years of an asset's life.
Difficulty: 1 Easy
Topic: Depreciation methods - Alternatives compared
over time.
Bloom's: Understand
18) Use of the double-declining-balance method of depreciation results in increasing amounts of

depreciation expense over an asset's life.
Answer: FALSE
Explanation: The double-declining-balance method is an accelerated depreciation method,
which results in decreasing amounts of depreciation expense due to the decrease in the
underlying asset's book value.
over time.
Bloom's: Understand
6
19) The units-of-production method of depreciation allocates an asset's cost over its useful life
based on the current period's production relative to its total estimated production.
Answer: TRUE
Explanation: The units-of-production method of depreciation calculates unit depreciation
expense by dividing the depreciable basis (cost minus residual value) by estimated total
production.
Difficulty: 1 Easy
Topic: Depreciation methods - Units of production
over time.
Bloom's: Understand
20) In most cases, the depreciation method chosen for financial reporting purposes (GAAP) must
also be utilized for income tax reporting (IRS).
Answer: FALSE
Explanation: GAAP depreciation accounting differs from depreciation accounting for tax
reporting.
Difficulty: 1 Easy
Topic: Depreciation - Tax v financial reporting
over time.
Bloom's: Remember
21) If a long-lived asset has been impaired, the journal entry will require a debit to a loss account
and a credit to the long-lived asset account.
Answer: TRUE
Explanation: An asset impairment results in a loss and reduces the book value of the impaired
asset.
Difficulty: 1 Easy
Topic: Impairment - Long-lived assets
Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements.
Bloom's: Remember
7
22) If a company has an asset with a book value of $5.0 million and estimates the future cash
flows to be received over the asset's remaining life to be $5.5 million, no impairment has
occurred and no loss would be recognized.
Answer: TRUE
Explanation: The first step in the determination of asset impairment is to compare the asset's
book value to its estimated future cash flows. If cash flows exceed book value, the asset is not
considered to be impaired.
Difficulty: 1 Easy
Bloom's: Apply
23) The first step in recording the disposal of a long-lived asset is to update its book value by
recognizing depreciation expense for the period of time since the last depreciation adjustment
was made.
Answer: TRUE
Explanation: Depreciation expense has to be recorded up to the date of disposal.
Difficulty: 1 Easy
Topic: Disposal - Long-lived assets
Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment.
Bloom's: Understand
24) Gains and losses on disposal of a long-lived asset are determined by comparing the asset's
cost to its book value.
Answer: FALSE
Explanation: Gains and losses on disposal of a long-lived asset are determined by comparing the
asset's book value to its selling price.
Difficulty: 1 Easy
Bloom's: Remember
8
25) Selling a depreciable asset for a gain results in an increase in both net income and assets.
Answer: TRUE
Explanation: Selling a depreciable asset for a gain increases net income. Assets increase because
the consideration received for the selling price exceeds the book value of the asset sold.
Bloom's: Analyze
26) The systematic and rational allocation of the acquisition cost of natural resources to those
periods in which the resources contribute to revenue is called depletion.
Answer: TRUE
Explanation: The allocation of a natural resource cost to future periods is referred to as
depletion.
Difficulty: 1 Easy
Topic: Natural resources - Depletion
Learning Objective: 08-06 Apply measurement and reporting concepts for intangible assets and
natural resources.
Bloom's: Remember
27) The method of depletion used to allocate the cost of natural resources to future periods is
most similar to the straight-line depreciation method.
Answer: FALSE
Explanation: The method is most similar to the units-of-production method of depreciation.
Difficulty: 1 Easy
natural resources.
Bloom's: Understand
9
28) Natural resource depletion is recognized on the income statement for all resources removed
during the period whether they are sold or not.
Answer: FALSE
Explanation: For natural resources sold during the period, depletion is expensed as part of cost
of goods sold. If the natural resources are not sold, the depletion amount is capitalized as part of
the cost of inventory on the balance sheet.
natural resources.
Bloom's: Understand
29) Goodwill is recorded only when an existing company is bought by another company and the
purchase price exceeds the fair value of the purchased company's net assets.
Answer: TRUE
Explanation: Goodwill is recognized when the amount paid for an existing company exceeds the
company's assets at fair value.
Topic: Intangible assets - Capitalize or expense
natural resources.
Bloom's: Remember
30) Under GAAP, research and development costs are capitalized once a product or process has
been developed.
Answer: FALSE
Explanation: Research and development costs are expensed as incurred under GAAP.
Difficulty: 1 Easy
natural resources.
Bloom's: Remember
10
31) When determining cash flow from operating activities using the indirect method,
depreciation and amortization expense are deducted from net income.
Answer: FALSE
Explanation: Depreciation and amortization expense are added to net income.
Topic: Cash flows - Long-lived assets
Learning Objective: 08-07 Explain how the acquisition, use, and disposal of long-lived assets
impact cash flows.
Bloom's: Understand
32) Which of the following would not be classified as property, plant and equipment on a
balance sheet?
A) Land held for investment.
B) Equipment used in the manufacturing process.
C) A building used as corporate headquarters.
D) A natural resource being mined.
Answer: A
Explanation: Land held as an investment would be reported on a balance sheet as an investment.
Bloom's: Remember
33) Which of the following accounts would not be considered a tangible asset?
A) Buildings
B) Land
C) Equipment
D) Copyright
Answer: D
substance.
Difficulty: 1 Easy
Bloom's: Remember
11
34) Which of the following would not be considered an intangible asset?
A) Goodwill
B) Patents
C) Research and development costs
D) Trademarks
Answer: C
substance. Research and development costs are expensed as incurred.
Difficulty: 1 Easy
Topic: Classifying long-lived assets; Intangible assets - Capitalize or expense
assets and interpret the fixed asset turnover ratio.; 08-06 Apply measurement and reporting
concepts for intangible assets and natural resources.
Bloom's: Remember
35) Which of the following transactions would not increase the fixed asset turnover ratio?
A) An increase in sales revenue.
B) A profitable sale of fixed assets for cash.
C) Selling manufacturing equipment for a loss.
D) A decrease in operating expenses.
Answer: D
Explanation: Fixed asset turnover is calculated by dividing net sales by average net fixed assets.
A decrease in operating expenses does not affect net sales or average net fixed assets.
Bloom's: Analyze
12
36) Which of the following includes only tangible assets?
A) Land, buildings, and natural resources.
B) Land, buildings, and licenses and operating rights.
C) Natural resources, buildings, and franchises.
D) Licenses, trademarks, and land.
Answer: A
Explanation: Tangible assets have physical substance. Land, buildings, and natural resources are
assets that have physical substance.
Bloom's: Understand
37) Which of the following includes only intangible assets?

A) Natural resources, patents, and trademarks.
B) Research and development costs, franchises, and trademarks.
C) Copyrights, licenses, and land.
D) Trademarks, patents, and copyrights.
Answer: D
Explanation: Intangible assets have physical form. Trademarks, patents, and copyrights are
assets that lack physical substance.
Bloom's: Understand
13
38) Which of the following statements regarding the fixed asset turnover ratio is incorrect?
A) The numerator is net operating income.
B) The denominator is average net fixed assets.
C) The ratio is used to assess a company's effectiveness in generating sales from its fixed assets.
D) The ratio increases when a company sells a factory building for a gain.
Answer: A
Explanation: The numerator is net sales or operating revenues and the denominator is average
net fixed assets.
Bloom's: Understand
39) The Wilson Company has provided the following information:
• Net sales, $200,000

• Net operating income, $40,000
• Net income, $20,000
• Average total assets, $125,000
• Average net fixed assets; $80,000
What is Wilson's fixed asset turnover ratio?

A) 1.60
B) 2.50
C) 0.25
D) 0.50
Answer: B
Explanation: Fixed asset turnover ratio = 2.50 = Net sales ÷ Average net fixed assets = $200,000
÷ $80,000.
Bloom's: Apply
14
40) Which statement is false?
A) Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset
turnover.
B) Using an accelerated depreciation method instead of the straight-line depreciation method will
lead to reporting a higher fixed asset turnover during the earlier years of an asset's life.
C) Acquiring more long-lived, productive assets when a company is growing will lead to a lower
fixed asset turnover.
D) Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed
asset turnover.
Answer: D
Explanation: Selling long-lived assets results in a decrease in the fixed asset turnover ratio
denominator and therefore an increase in the fixed asset turnover ratio.
Difficulty: 3 Hard
Bloom's: Analyze
41) On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other
costs associated with the equipment were: transportation costs, $1,000; sales tax paid $4,000; and
installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?
A) $57,500.
B) $54,000.
C) $51,000.
D) $53,500.
Answer: A
Explanation: $57,500 = $50,000 + $1,000 + $4,000 + $2,500.
Bloom's: Apply
15
42) On August 1, Red Company purchased computer equipment for $10,000 cash and also gave
100 shares of White common stock that Red Company held as an investment. The White
common stock cost Red Company $5,000 and on August 1 had a fair value of $4,200. The
installation costs for the computer equipment were $700 and shipping costs were $500. What
amount should be the total amount debited to the computer equipment account?
A) $14,200.
B) $15,000.
C) $15,400.
D) $16,200.
Answer: C
Explanation: $15,400 = $10,000 + $4,200 + $700 + $500.
Bloom's: Apply
43) Salvia Company recently purchased a truck. The price negotiated with the dealer was
$40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs of
$3,000, and insurance for the first year of operation of $4,000. At what amount should the truck
be recorded on the balance sheet prior to recording depreciation expense?
A) $40,000.
B) $42,000.
C) $43,000.
D) $45,000.
Answer: D
Explanation: $45,000 = $40,000 + $2,000 + $3,000. The insurance should be recorded as a
prepaid expense.
Difficulty: 1 Easy
Bloom's: Remember
16
44) Which of the following equipment related costs is not capitalized on a balance sheet?
A) Equipment installation costs.
B) Transportation costs associated with the equipment purchase.
C) Equipment maintenance costs.
D) The equipment's purchase price.
Answer: C
Explanation: Equipment maintenance costs are expensed as incurred.
Difficulty: 1 Easy
Bloom's: Remember
45) Operating leases

A) are reported on the balance sheet as an intangible asset.
B) are, in essence, the acquisition of an asset using debt.
C) allow companies to take advantage of various tax benefits
D) have a lease term of one year or less.
Answer: D
Explanation: Operating leases are for one year or less and offer companies flexibility in
managing assets.
Bloom's: Remember
17
46) Smith Company exchanges assets to acquire a building. The market price of the Smith stock
on the exchange date was $35 per share and the building's book value on the books of the seller
was $250,000.
Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10
par value common stock and pays $20,000 cash in exchange for the building?
A) Total assets increase $350,000.
B) Stockholders' equity increases $250,000.
C) Stockholders' equity increases $330,000.
D) Total assets increase $330,000.
Answer: A
Explanation: The building account increases $370,000 = $350,000 common stock + $20,000
cash. Common stock is recorded at its total fair value of $350,000 = 10,000 shares × $35 per
share = $350,000. Total assets would increase $350,000. Building increase of $370,000 and cash
decrease of $20,000.
Difficulty: 3 Hard
Bloom's: Apply
18
was $250,000.
Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10
par value common stock and pays $20,000 cash in exchange for the building?
A) The common stock account increases by $100,000.
B) The building account increases by $370,000.
C) Stockholders' equity increases $350,000.
D) The additional paid-in capital account increases by $100,000.
Answer: D
Explanation: The building account increases $370,000 = $350,000 common stock + $20,000
cash. The issue of shares of common stock is recorded at its total fair value of $350,000 = 10,000
shares × $35 per share = $350,000. Common stock is credited for par value 10,000 shares × $10
per share = $100,000 and additional paid in capital is credited for the excess over par value =
$350,000 − $100,000 = $250,000.
Difficulty: 3 Hard
Bloom's: Apply
19
was $250,000.
Which of the following journal entries is correct for Smith Company when Smith issues 10,000
shares of $10 par value common stock and pays $20,000 cash in exchange for the building?
A)
Building 270,000
Cash 20,000
Common stock 100,000
Additional paid-in capital 150,000
B)
Building 370,000
Cash 20,000
C)
Building 370,000
Cash 20,000
Additional paid-in capital 250,000
D)
Building 370,000
Answer: C
Explanation: The building account is debited for $370,000 = common stock at fair value plus
cash paid. The common stock is credited for the par value of the stock issued = 10,000 shares ×
$10 per share and the additional paid-in capital is credited for the excess of the stock's market
price in excess of the par value = ($35 − $10) × 10,000 shares, and cash is credited for $20,000.
Bloom's: Apply
20
49) Which of the following is true when a company constructs an asset for its own use?
A) Labor and material expenses for construction will increase.
B) Capitalized interest on construction loans will increase interest expense.
C) Assets will increase for labor, material, and interest costs paid for constructing the asset.
D) Net income will be decreased for capitalized costs of construction.
Answer: C
Explanation: When a company constructs assets for its own use, the costs of labor, material, and
interest has the effect of increasing assets, decreasing expenses, and increasing net income.
Bloom's: Apply
50) A company acquires land by issuing 10,000 shares of its $10 par value common stock which
is currently trading at $20 per share, and the appraised value of the land is $250,000. Which of
the following statements correctly describes the recording of the land?
A) Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the
issued stock is currently worth $200,000.
B) Record the land at the $200,000 value of the consideration given up.
C) Record the land at the average of its appraised value of $250,000 and the $200,000 value of
the stock issued, thereby recognizing a $25,000 gain.
D) Record the land at the par value of the stock given up, $100,000.
Answer: B
Explanation: The land should be recorded at the market value of the stock issued (10,000 shares
× $20 per share).
Bloom's: Understand
21
51) If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure,
instead of as repairs and maintenance expense, which of the following statements is true?
A) The current year's net income will be lower and future depreciation expense will be higher.
B) The current year's net income will be higher and future depreciation expense will be lower.
C) The current year's net income will be higher and future depreciation expense will be higher.
D) The current year's net income will be lower and future depreciation expense will be lower.
Answer: C
Explanation: Capitalizing an expenditure for a depreciable asset means that the expenditure is
added to the depreciable asset account rather than being immediately expensed. The asset
account would be too high and, in future years, depreciation expense will be higher than it should
be. The expenditure is not expensed and the current year net income will be higher than it should
be.
Bloom's: Analyze
52) Which of the following statements is incorrect?

A) Ordinary repairs and maintenance decrease net income.
B) Capital expenditures decrease assets.
C) Ordinary repairs and maintenance are recurring in nature.
D) Additions and improvements to a depreciable asset occur infrequently.
Answer: B
Explanation: Capital expenditures increase assets.
Bloom's: Understand
22
A) Replacement of a truck's tires would be a capital expenditure.
B) Replacement of carpet in an office, damaged by a coffee spill, would be a repairs expense.
C) Replacement of a roof on a newly purchased building before using it as a store would be a
capital expenditure.
D) The cost of repainting a hallway would be maintenance expense.
Answer: A
Explanation: Replacing the tires would be considered ordinary maintenance and repairs and is
considered to be a maintenance expense.
Bloom's: Understand
54) Gilbert Company made an ordinary repair to a delivery truck during 2019 at a cost of $500
and capitalized the repair cost. What is the effect on the 2019 financial statements as a result of
the incorrect capitalization?
A) The financial statements are not affected.
B) Assets are understated and net income is overstated.
C) Assets are overstated and net income is overstated.
D) Assets and stockholders' equity are both understated.
Answer: C
Explanation: The repair should be expensed during 2019 rather than be capitalized. As a result,
net income is overstated because expenses are understated. Assets are overstated because of the
capitalization.
Difficulty: 3 Hard
Bloom's: Analyze
23
55) Which of the following would most likely not be recorded as ordinary repairs and
maintenance?
A) Fixing a tear in the carpet in the sales department offices.
B) Mending a leaky roof.
C) Putting a hydraulic lift on a delivery truck, making it easier and quicker to deliver appliances.
D) Painting the exterior of the factory building.
Answer: C
Explanation: The hydraulic lift would be considered a capital expenditure since the lift increases
the truck's operating efficiency.
Difficulty: 1 Easy
Bloom's: Remember
56) What is the effect on the 2019 financial statements when a capital expenditure during 2019
was incorrectly recorded as a repairs and maintenance expense?
A) The financial statements are not affected.
B) Assets and net income are both overstated.
C) Assets are overstated and net income was understated.
D) Assets and stockholders' equity are both understated.
Answer: D
Explanation: Assets are understated because the expenditure should have been capitalized.
Stockholders' equity is understated because net income is understated due to the expense
overstatement.
Difficulty: 3 Hard
Bloom's: Analyze
24
57) Which of the following best describes the objective of depreciation?
A) To allocate the cost of a tangible asset to the periods in which its use contributes to earning
revenue.
B) To estimate the remaining useful life of the asset.
C) To report the asset on the balance sheet at the estimated amount for which the asset could be
sold on the balance sheet date.
D) To estimate the current market value of the asset.
Answer: A
Explanation: Depreciation is a process of allocating to expense a portion of a tangible asset's
cost in the period of benefit in which revenue is earned.
over time.
Bloom's: Remember
58) Which of the following is correct?

A) If a company fails to record depreciation expense, net income and expenses are overstated.
B) If a company fails to record depreciation expense, net income and assets are overstated.
C) If a company overstates depreciation expense, net income is overstated and assets are
understated.
D) If a company fails to record depreciation expense, stockholders' equity, net income, and assets
are understated.
Answer: B
Explanation: If depreciation expense is not recorded, expenses are understated, and net income
is overstated. Also, accumulated depreciation is understated because depreciation has not been
added to it. Since accumulated depreciation reduces assets, understating accumulated
depreciation will overstate assets.
over time.
Bloom's: Analyze
25
59) Which of the following does not properly describe the depreciation process?
A) It is an allocation process.
B) It is consistent with the matching principle.
C) It involves the use of estimates.
D) It attempts to determine an asset's market value.
Answer: D
Explanation: Depreciation is an allocation process, not a valuation process.
over time.
Bloom's: Remember
60) Which of the following describes the effect of recording depreciation expense at year-end?
A) Net income decreases and total assets decrease.
B) Total assets decrease and stockholders' equity is not affected.
C) Net income decreases and total assets increase.
D) Stockholders' equity is not affected and net income decreases.
Answer: A
Explanation: The journal entry to record depreciation expense increases expenses and
accumulated depreciation. This decreases both net income and total assets.
over time.
Bloom's: Analyze
26
61) On January 1, 2019, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also
paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years
and the residual value is $5,000.
How much is the annual depreciation expense, assuming use of the straight-line depreciation
method?
A) $6,100.
B) $6,000.
C) $5,950.
D) $5,750.
Answer: B
Explanation: Annual depreciation expense = $6,000 = ($40,000 + $1,000 − $5,000) ÷ 6.
over time.
Bloom's: Apply
62) On January 1, 2019, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also
paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years
and the residual value is $5,000.
If Woodstock uses the straight-line depreciation method, which of the following statements is
incorrect?
A) The annual depreciation expense is $6,000.
B) The December 31, 2019 book value is $35,000.
C) The December 31, 2021 accumulated depreciation balance is $18,000.
D) The December 31, 2020 book value is $24,000.
Answer: D
Explanation: Annual depreciation expense = $6,000 = ($40,000 + $1,000 − $5,000) ÷ 6.
December 31, 2019 book value = $35,000 = $41,000 − $6,000.
December 31, 2121 accumulated depreciation balance = $18,000 = $6,000 × 3 years.

Two years have passed to December 31, 2020.
Book value after two years = $29,000 = $41,000 – ($6,000 × 2).

over time.
Bloom's: Apply
27
63) A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis
of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life
is
A) 3 years.
B) 4 years.
C) 5 years.
D) 6 years.
Answer: C
Explanation: Annual depreciation expense $2,700 = ($15,000 − $1,500) ÷ N; N = 5.
Difficulty: 3 Hard
over time.
Bloom's: Apply
64) Warren Company plans to depreciate a new building using the double declining-balance
depreciation method. The building cost is $800,000. The estimated residual value of the building
is $50,000 and it has an expected useful life of 25 years.
What is the building's book value at the end of the first year?
A) $736,000.
B) $768,000.
C) $686,000.
D) $690,000.
Answer: A
Explanation: Year 1 depreciation expense = $64,000 = $800,000 × 2/25.
Book value at the end of Year 1 = $736,000 = $800,000 – $64,000.
over time.
Bloom's: Apply
28
65) Warren Company plans to depreciate a new building using the double declining-balance
depreciation method. The building cost is $800,000. The estimated residual value of the building
is $50,000 and it has an expected useful life of 25 years.
Assuming the first year's depreciation expense was recorded properly, what would be the amount
of depreciation expense for the second year?
A) $30,720.
B) $32,000.
C) $58,880.
D) $64,000.
Answer: C
Explanation: Year 1 depreciation expense = $64,000 = $800,000 × 2/25.
Book value at the end of year 1 = $736,000 = $800,000 − $64,000.
Year 2 depreciation expense = $58,880 = $736,000 × 2/25.
over time.
Bloom's: Apply
66) Which method of depreciation results in periodic depreciation expense that fluctuates from
one period to the next, not necessarily in a steadily upward or downward direction?
A) Straight-line.
B) Units-of-production.
C) Modified accelerated cost recovery system.
D) Declining balance.
Answer: B
Explanation: Depreciation expense under the units-of-production method fluctuates directly with
production levels.
over time.
Bloom's: Understand
29
67) Hill Inc. purchased an asset on January 1, 2019. Hill chose an accelerated depreciation
method to depreciate the asset. Which of the following is correct if Hill would have chosen the
straight-line depreciation method instead?
A) Depreciation expense would have been lower in 2019.
B) The book value of the asset would have been lower at the end of 2019.
C) Net income would have been lower during 2019.
D) The accumulated depreciation balance would have been higher at the end of 2019.
Answer: A
Explanation: An accelerated depreciation method has higher amounts of depreciation expense in
earlier years relative to the straight-line method.
over time.
Bloom's: Understand
68) On January 1, 2019, Pyle Company purchased an asset that cost $50,000 and had no
estimated residual value. The estimated useful life of the asset is 8 years and straight-line
depreciation is used. An error was made in 2019 because the total amount of the asset's cost was
debited to an expense account for 2019 and no depreciation was recorded. Pretax income for
2019 was $42,000. How much is the correct 2019 pretax income?
A) $35,750.
B) $48,250.
C) $85,750.
D) $92,000.
Answer: C
Explanation: 2019 pretax income = $85,750.
Pretax income before correction $ 42,000

Add back cost that was deducted 50,000
Less correct depreciation expense (6,250)*
Correct pretax income $ 85,750
*Straight-line depreciation expense = $6,250 = $50,000 ÷ 8.

Difficulty: 3 Hard
Topic: Depreciation concepts; Depreciation methods - Straight-line
over time.
Bloom's: Apply
30
69) Schager Company purchased a computer system on January 1, 2019, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance depreciation method.
How much is the 2020 depreciation expense?

A) $5,000.
B) $4,120.
C) $4,000.
D) $3,520.
Answer: C
Explanation: 2019 depreciation expense = $5,000 = $25,000 × 2/10.
2020 depreciation expense = $4,000 = ($25,000 − $5,000) × 2/10.
over time.
Bloom's: Apply
70) Schager Company purchased a computer system on January 1, 2019, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance depreciation method.
What is the accumulated depreciation balance as of December 31, 2020?

A) $9,000.
B) $4,000.
C) $7,920.
D) $8,520.
Answer: A
Explanation: 2019 depreciation expense = $5,000 = $25,000 × 2/10.
2020 depreciation expense = $4,000 = ($25,000 − $5,000) × 2/10.
December 31, 2020 accumulated depreciation balance = $9,000 = $5,000 + $4,000.
over time.
Bloom's: Apply
31
71) On January 1, 2019, Wasson Company purchased a delivery vehicle costing $40,000. The
vehicle has an estimated 6-year life and a $4,000 residual value.
What is the vehicle's book value as of December 31, 2020, assuming Wasson uses the straight-
line depreciation method?
A) $12,000.
B) $24,000.
C) $30,000.
D) $28,000.
Answer: D
Explanation: Annual straight-line depreciation expense = $6,000 = ($40,000 − $4,000) ÷ 6.
December 31, 2020 book value = $28,000 = $40,000 − ($6,000 × 2).
over time.
Bloom's: Apply
72) On January 1, 2019, Wasson Company purchased a delivery vehicle costing $40,000. The
vehicle has an estimated 6-year life and a $4,000 residual value.
Wasson uses the units-of-production depreciation method and Wasson estimates that the vehicle
will be driven 100,000 miles. What is the vehicle's book value as of December 31, 2020,
assuming the vehicle was driven 10,000 miles during 2019 and driven 18,000 miles during 2020?
A) $29,920.
B) $28,800.
C) $24,800.
D) $25,920.
Answer: A
Explanation: Depreciation expense per mile = $0.36 = ($40,000 − $4,000) ÷ 100,000 miles.
December 31, 2020 accumulated depreciation balance = $10,080 = $0.36 × 28,000 total miles
used.
December 31, 2020 book value = $29,920 = $40,000 − $10,080.
Difficulty: 3 Hard
Topic: Depreciation methods - Units of production
over time.
Bloom's: Apply
32
73) Which of the following statements is false?
A) The book value at the end of an asset's useful life will be the same under all the depreciation
methods allowed under GAAP.
B) The balance in the accumulated depreciation account will be the same at the end of an asset's
useful life under all the methods allowed under GAAP.
C) Once a company selects a depreciation method, it must use this method for all depreciable
assets.
D) The annual depreciation expense and year-end book values will differ under the various
depreciation methods over the life of the asset.
Answer: C
Explanation: A company can utilize different depreciation methods for various assets.
Topic: Depreciation concepts; Depreciation methods - Alternatives compared
over time.
Bloom's: Understand
74) Under what conditions would a company most likely adopt the double-declining-balance
method for financial reporting?
A) The company has high technology, robotic equipment in its plant that becomes obsolete
quickly and declines in utility to the company more rapidly in the early years of the assets' lives.
B) The company wants to maximize its net income during the earlier years of the asset's life.
C) The company wants to maximize the asset's book value in the earlier years of the asset's life.
D) The company wants to maximize the total depreciation expense over the life of the asset.
Answer: A
Explanation: The double-declining-balance depreciation method results in more depreciation in
the earlier years of an asset's life, which will best fit the robotic equipment scenario.
over time.
Bloom's: Understand
33
75) Which of the following statements is correct?
A) Companies will change the method of depreciating assets from one year to the next to reflect
usage of an asset.
B) Companies can maximize net income in the first year of an asset's life by selecting the
double-declining-balance method rather than the straight-line depreciation method.
C) Companies can use one method of depreciation for some of their long-lived productive assets
but then use a different method for another group or type of long-lived productive assets.
D) Companies can minimize an asset's book value in the first year of use by selecting the
straight-line depreciation method rather than the double-declining-balance method.
Answer: C
Explanation: Different depreciation methods can be chosen for various assets.
over time.
Bloom's: Understand
76) Which of the following statements is correct?

A) Using straight-line depreciation in comparison to an accelerated depreciation method will
result in a lower reported amount of total assets at end of the first year of an asset's life.
B) Using accelerated depreciation in the first year of an asset's life will result in a higher net
income during the first year compared to using the straight-line depreciation method.
C) Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for
the first year.
D) Using straight-line depreciation in comparison to an accelerated depreciation method will
lead to a higher book value at the end of an asset's life.
Answer: C
Explanation: An accelerated depreciation method results in more depreciation expense during
the first year and a lower book value at the end of the first year. The lower book value means that
the fixed asset turnover ratio denominator is smaller and the fixed asset turnover ratio is
increased.
Topic: Ratio analysis - Fixed asset turnover; Depreciation methods - Alternatives compared
assets and interpret the fixed asset turnover ratio.; 08-03 Apply various cost allocation methods
as assets are held and used over time.
Bloom's: Understand
34
77) Which of the following statements about the Modified Accelerated Cost Recovery System
(MACRS) is correct?
A) It is similar to the units-of-production depreciation method.
B) It is applied using longer asset lives than the estimated useful lives required by GAAP.
C) It provides a short-term tax benefit because of the higher depreciation expense reported in the
early years of an asset's life.
D) It is acceptable for use when preparing financial statements.
Answer: C
Explanation: MACRS is an accelerated depreciation method, which results in higher amounts of
depreciation expense and less taxable income during the earlier years of an asset's life.
Topic: Depreciation - Tax v financial reporting
over time.
Bloom's: Understand
78) Which of the following statements about asset impairments is false?

A) Asset impairment loss is the difference between an asset's net book value and its estimated
future cash flows.
B) If an asset is impaired, a loss would be recognized in the period it can be estimated.
C) Impairment will lead to writing down the asset's net book value.
D) Asset impairment occurs when the estimated future cash flows are less than the asset's net
book value.
Answer: A
Explanation: An impairment loss is equal to the difference between an asset's net book value and
its fair value.
Bloom's: Understand
35
79) A company has some bottling equipment which cost $8.5 million, has a net book value of
$4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million.
How much is the asset impairment loss?

A) $5.4 million.
B) $4.1 million.
C) $0.4 million.
D) $1.0 million.
Answer: D
Explanation: First, the test for impairment shows that the asset is impaired because the estimated
future cash flows are less than net book value. Second, the calculation of impairment loss shows
the loss to be $1.0 million = the asset's net book value of $4.1 million less its fair value of $3.1
million.
Bloom's: Apply
80) A company has some bottling equipment which cost $8.5 million, has a net book value of
$4.1 million, estimated future cash flows of $3.7 million, and a fair value of $3.1 million.
Which of the following correctly describes the recording of the asset impairment loss?
A) The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.
B) The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.
C) The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.
D) The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.
Answer: A
Explanation: When an impairment loss is recorded, a loss account is debited and the asset
account is credited. First, the test for impairment shows that the asset is impaired because the
estimated future cash flows are less than net book value. Second, the calculation of impairment
loss shows the loss to be $1.0 million = the asset's net book value of $4.1 million less its fair
value of $3.1 million.
Difficulty: 1 Easy
Bloom's: Apply
36
81) On December 31, 2019, Hamilton Inc. sold a used industrial crane for $600,000 cash. The
original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million
on December 31, 2019. What is the gain or loss from the December 31, 2019 equipment sale?
A) $600,000 gain.
B) $600,000 loss.
C) $200,000 loss.
D) $200,000 gain.
Answer: C
Explanation: A $200,000 loss occurs because the book value of $5.0 million − $4.2 million =
$800,000 exceeds the $600,000 selling price.
Bloom's: Apply
82) Which of the following is correct when recording the disposal of equipment for a gain?
A) The company will record a debit to a gain account.
B) The company will record a credit to the equipment account for the asset's book value.
C) The company will record a debit to accumulated depreciation for the total depreciation
accumulated to the date of disposal.
D) The company will record a credit to cash.
Answer: C
Explanation: The accumulated depreciation account normally has a credit balance and is
therefore debited when an asset is disposed of.
Difficulty: 1 Easy
Bloom's: Remember
37
83) Which of the following is correct regarding gain or loss on disposal of a long-lived asset?
A) Failure to report a gain on the sale of an asset results in an overstatement of net income.
B) Failure to report a gain on the sale of an asset results in an understatement of stockholders'
equity.
C) Failure to report a loss on the sale of an asset results in an understatement of net income.
D) Failure to report a loss on the sale of an asset results in an understatement of earnings per
share.
Answer: B
Explanation: Failure to record a gain on the sale of an asset understates net income, which
understates retained earnings. Understated retained earnings results in understated stockholders'
equity.
Bloom's: Analyze
84) Which of the following statements is correct with respect to the sale of a depreciable asset?
A) A gain occurs when the selling price exceeds book value.
B) A sale for a gain results in a decrease in total assets.
C) A sale for a loss results in an increase in total assets.
D) A loss occurs when the selling price is more than book value.
Answer: A
Explanation: A gain occurs when the selling price of a depreciable asset exceeds book value.
Bloom's: Analyze
38
85) Carter Company disposed of an asset at the end of the eighth year of its estimated life for
$10,000 cash. The asset's life was originally estimated to be 10 years. The original cost was
$50,000 with an estimated residual value of $5,000. The asset was being depreciated using the
straight-line method. What was the gain or loss on the disposal?
A) $1,000 loss.
B) $4,000 loss.
C) $5,500 gain.
D) $10,000 gain.
Answer: B
End of year eight book value = $14,000 = $50,000 − ($4,500 × 8).
A $4,000 loss occurs because the selling price of $10,000 is less than book value of $14,000.
Difficulty: 3 Hard
Bloom's: Apply
39
86) Which of the following journal entries is correct when a company owns its office building
for many years and now sells the building?
A)
Cash xxx
Accumulated depreciation xxx
Loss on sale xxx
Building xxx
B)
Cash xxx
Building xxx
Gain on sale xxx
C)
Cash xxx
Loss on sale xxx
Building xxx
D)
Cash xxx
Gain on sale xxx
Building xxx
Answer: C
Explanation: When the building is sold, the building account is removed with a credit, cash is
increased with a debit, accumulated depreciation is removed with a debit, and a loss on sale
account is debited or a gain on sale account is credited.
Bloom's: Analyze
40
87) Which of the following statements is correct with respect to a loss on the sale of a
depreciable asset?
A) Net income decreases and total assets increase.
B) Net income decreases and stockholders' equity increases.
C) Total assets decrease and stockholders' equity decreases.
D) Total assets increase and stockholders' equity decreases.
Answer: C
Explanation: Total assets decrease when an asset is sold at a loss because the proceeds (selling
price) are less than book value. Stockholders' equity decreases because the decrease in net
income reduces retained earnings.
Bloom's: Analyze
88) Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of
five years and a residual value of $1,000. The computer was depreciated by the straight-line
method and was sold at the end of the third year of use for $5,000 cash.
How much of a gain or loss should Amanda record?

A) A gain of $1,000.
B) A loss of $5,000.
C) A gain of $400.
D) A loss of $400.
Answer: C
End of year three book value = $4,600 = $10,000 − ($1,800 × 3).
A $400 gain occurs because the selling price of $5,000 is greater than the book value of $4,600.
Bloom's: Apply
41
89) Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of
five years and a residual value of $1,000. The computer was depreciated by the straight-line
method and was sold at the end of the third year of use for $5,000 cash.
Which of the following statements correctly describes the computer sale?

A) Assets and stockholders' equity both increase by $5,000.
B) Assets decrease $5,000 and stockholders' equity is not affected.
C) Assets and stockholders' equity both decrease by $400.
D) Assets and stockholders' equity both increase by $400.
Answer: D
End of year three book value = $4,600 = $10,000 − ($1,800 × 3).
A $400 gain occurs because the selling price of $5,000 is greater than the book value of $4,600.
Assets increase because the cash received exceeds the book value by $400 and stockholders'
equity increases because the gain increases net income and net income increases retained
earnings.
Difficulty: 3 Hard
Bloom's: Apply
42
90) On March 1, 2019, Anniston Company purchased an oil well at a cost of $1,000,000. It is
estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the
residual value of the well will be $100,000.
During 2019, 15,000 barrels of oil were produced and all of these barrels were sold. Which of the
following statements is incorrect with respect to the accounting for the oil well?
A) The 2019 cost of goods sold was $90,000.
B) The book value of the oil well decreased $90,000 during 2019.
C) The inventory of oil was $90,000 at December 31, 2019.
D) The depletion rate is $6.00 per barrel of oil.
Answer: C
Explanation: If the resources are sold, they are not reported as inventory on the balance sheet.
The depletion rate = $6.00 per barrel = well cost less residual value ÷ estimated production =
($1,000,000 − $100,000) ÷ 150,000 barrels.
The depletion of 15,000 barrels sold × $6.00 per barrel = $90,000 would be included in cost of
goods sold.
natural resources.
Bloom's: Apply
43
91) On March 1, 2019, Anniston Company purchased an oil well at a cost of $1,000,000. It is
estimated that 150,000 barrels of oil can be produced over the remaining life of the well and the
residual value of the well will be $100,000.
During 2019, 15,000 barrels of oil were produced and 10,000 barrels were sold. Which of the
following statements is correct with respect to the accounting for the oil well?
A) The 2019 cost of goods sold was $90,000.
B) The book value of the oil well decreased $60,000 during 2019.
C) The inventory of oil was $30,000 at December 31, 2019.
D) The 2019 cost of goods sold was $30,000.
Answer: C
Explanation: If the resources are not sold, they are reported as inventory on the balance sheet.
The depletion rate = $6.00 per barrel = well cost less residual value ÷ estimated production =
($1,000,000 − $100,000) ÷ 150,000 barrels.
Inventory at December 31, 2019 includes 5,000 barrels × $6.00 per barrel = $30,000.
natural resources.
Bloom's: Apply
92) During 2019, a company purchased a mine at a cost of $3,000,000. The company spent an
additional $600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons
of mineral can be removed from the mine and the residual value of the mine will be $600,000.
During 2019, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold.
Which of the following statements is correct with respect to the accounting for the mine?
A) The 2019 net income decreased $450,000 as a result of the mining during the year.
B) The book value of the mine decreased $350,000 during 2019.
C) The inventory of minerals was $450,000 at December 31, 2019.
Answer: D
Explanation: Depletion rate per ton = $10 = ($3,000,000 + $600,000 − $600,000) ÷ 300,000
tons.
Cost of goods sold = $350,000 = $10 × 35,000 tons.
natural resources.
Bloom's: Apply
44
93) During 2019, a company purchased a mine at a cost of $3,000,000. The company spent an
additional $600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons
of mineral can be removed from the mine and the residual value of the mine will be $600,000.
During 2019, 45,000 tons of mineral were removed from the mine and 35,000 tons were sold.
Which of the following statements is incorrect with respect to the accounting for the mine?
A) The book value of the mine on December 31, 2019 was $2,650,000.
B) The book value of the mine decreased $450,000 during 2019.
C) The inventory of minerals was $100,000 at December 31, 2019.
Answer: A
Explanation: Depletion rate per ton = $10 = ($3,000,000 + $600,000 − $600,000) ÷ 300,000
tons.
The December 31, 2019 book value = $3,150,000 = ($3,000,000 + $600,000) − ($10 × 45,000
tons).
natural resources.
Bloom's: Apply
94) Which of the following is most likely to be an intangible asset with an indefinite life?
A) Licenses
B) Franchise
C) Patent
D) Goodwill
Answer: D
Explanation: Goodwill does not have a legal life and could theoretically increase or decrease in
usefulness to the entity over a period of time. Since the period of time is unknown and cannot be
systematically and rationally allocated to a period of benefit, it is considered to have an indefinite
life.
Topic: Intangible assets - Amortization
natural resources.
Bloom's: Understand
45
95) Which one of the following would not be recorded as an intangible asset?
A) Patents
B) Copyrights
C) Internally generated goodwill
D) Franchises
Answer: C
Explanation: Goodwill is only recorded when a business entity is acquired and goodwill is a
component of the transaction cost.
Difficulty: 1 Easy
natural resources.
Bloom's: Remember
96) Which of the following is not true regarding certain assets?

A) A copyright provides the right to publish, use, and sell equipment.
B) A trademark provides the right to a name, image, or slogan identified with a product.
C) The cost to design a software program for manufacturing equipment will be expensed as
research and development expense.
D) A patent on equipment enables the inventor to sell that equipment.
Answer: A
Explanation: A copyright is for musical, literary, and artistic pieces.
natural resources.
Bloom's: Understand
46
97) Failure to record amortization expense on a patent during the current year will result in
which of the following?
A) Net income will be overstated, but there would be no effect on total assets.
B) Net income for the year and total assets would both be overstated.
C) Assets will be overstated, but there would be no effect on net income for the year.
D) Net income and assets will both be understated.
Answer: B
Explanation: Failure to record patent amortization results in an understatement of expenses and
therefore an overstatement of net income. Assets are overstated because the patent account was
not reduced by the amortization that was not recorded.
natural resources.
Bloom's: Analyze
98) Which of the following properly describes the accounting for goodwill?
A) Goodwill is recorded when it is internally generated.
B) Goodwill is amortized over its useful life.
C) Goodwill is the difference between the amount paid for a company relative to the book value
of the acquired company's net assets.
D) Goodwill is written down when it has been determined to be impaired.
Answer: D
Explanation: Goodwill is not amortized. Instead, it is reviewed for impairment and is written
down when it has been determined to be impaired.
Topic: Intangible assets - Capitalize or expense; Intangible assets - Amortization
natural resources.
Bloom's: Remember
47
99) Which of the following properly describes the accounting for a patent?
A) Research and development costs associated with a patent are capitalized.
B) The patent will be amortized over its useful life.
C) Patent amortization expense is accounted for within the accumulated depreciation account.
D) A patent's legal life extends to 70 years after the death of the inventor.
Answer: B
Explanation: Patents are amortized over their useful life.
Difficulty: 1 Easy
natural resources.
Bloom's: Remember

A) A copyright has a legal life not exceeding 70 years after the author's death.
B) A trademark is recorded on the balance sheet at an amount equal to the related research and
development costs incurred.
C) A patent's legal life is 20 years.
D) A franchise's amortization period is determined by the franchise agreement.
Answer: B
Explanation: Research and development costs are expensed as incurred rather than capitalized.
Topic: Intangible assets - Capitalize or expense; Intangible assets - Amortization
natural resources.
Bloom's: Remember
48
101) During 2019, the Bowtie Company reported net income of $1,872 million, depreciation
expense of $1,412 million and $978 million paid for purchases of property, plant, and equipment.
Using the indirect method of preparing the statement of cash flows, what would be the effect on
cash flows from operating activities during 2019?
A) Cash flows from operating activities would be increased by depreciation expense and
decreased by the property, plant, and equipment purchases.
B) Cash flow from operating activities would be increased by depreciation expense and by the
property, plant, and equipment purchases.
C) Cash flow from operating activities would be increased by depreciation expense but the
property, plant, and equipment purchases would have no effect on cash flow from operating
activities.
D) Depreciation is a noncash expense and would not be used to calculate cash flow from
operating activities.
Answer: C
Explanation: Depreciation expense is a noncash expense and is therefore added back to net
income in the determination of cash flows from operating activities. The property, plant, and
equipment purchases are reported as an investing cash flow.
impact cash flows.
Bloom's: Understand
49
102) Lincoln Restaurants reported net income in 2019 of $45.9 million and depreciation expense
of $48.8 million. It also reported additions to property and equipment of $162.9 million. Using
the indirect method of preparing the statement of cash flows, how will these items impact the
2019 statement of cash flows?
A) Depreciation of $48.8 million would be deducted from net income under operating activities
and the $162.9 million would be added under investing activities.
B) Depreciation of $48.8 million would be added to net income under operating activities and the
$162.9 million would be added under investing activities.
C) Depreciation of $48.8 million would be added to net income under operating activities and the
$162.9 million would be deducted under investing activities.
D) Depreciation of $48.8 million would be deducted from net income under operating activities
and the $162.9 million would be deducted under investing activities.
Answer: C
Explanation: Depreciation expense is a noncash expense and is therefore added back to net
income in the determination of cash flows from operating activities. The property, plant and
equipment additions are reported as an investing cash outflow.
impact cash flows.
Bloom's: Understand
103) Barkley Company has a piece of equipment that it has been depreciating for 3 years. The
equipment originally was estimated to have a useful life of 8 years and at the beginning of the
current year, Barkley determines that the equipment's life has been extended to 10 years. When
Barkley calculates depreciation for the current year, how many years of life should be used to
calculate the depreciation expense?
A) 7 years.
B) 5 years.
C) 8 years.
D) 10 years.
Answer: A
Explanation: A change in estimate of residual value or useful life requires the company to
calculate a new annual depreciation amount. The new depreciation is calculated by dividing the
remaining book value at the beginning of the year of the change in estimate by the remaining
years of life of the asset. The new life is 10 years. There were already 3 years depreciated. There
are 7 remaining years over which the equipment should be depreciated.
Topic: Changes in depreciation estimates - Chapter supp
Learning Objective: 08-(S): Changes in Depreciation Estimates.
Bloom's: Understand
50
104) Williams Company purchased a machine costing $25,000 and is depreciating it over a 10-
year estimated useful life with a residual value of $3,000. At the beginning of the eighth year, a
major overhaul on it was completed at a cost of $8,000, and the total estimated useful life was
changed to 12 years with the residual value unchanged. How much is the year 8 depreciation
expense assuming use of the straight-line depreciation method?
A) $2,200.
B) $2,920.
C) $3,100.
D) $8,800.
Answer: B
Explanation: Years 1-7 annual depreciation expense = $2,200 = ($25,000 − $3,000) ÷ 10.
Beginning of year 8 book value prior to overhaul = $9,600 = $25,000 − ($2,200 × 7).
Book value after overhaul

$17,600
($9,600 + $8,000)
Less residual value (3,000)
Remaining book value $14,600
÷ 5 remaining years of life
Year 8 depreciation expense $2,920
Difficulty: 3 Hard
Bloom's: Apply
51
105) Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of
five years and estimated residual value of $5,000. At the beginning of year three, Augie's
managers concluded that the total useful life would be four years, rather than five years. There
was no change in the estimated residual value. What is the amount of depreciation that Augie
should record for year 3 under the straight-line depreciation method?
A) $15,500.
B) $8,250.
C) $11,000.
D) $16,500.
Answer: D
Explanation: Years 1 & 2 annual depreciation expense = $11,000 = ($60,000 − $5,000) ÷ 5.
Beginning of year 3 book value = $38,000 = $60,000 − ($11,000 × 2).
Book value $38,000

Less residual value (5,000)
Remaining book value $33,000
÷ 2 remaining years of life
Year 3 depreciation expense $16,500
Difficulty: 3 Hard
Bloom's: Apply
106) International Financial Reporting Standards (IFRS) require the recording of research and
development costs as follows:
A) Expense research and development costs.
B) Expense research costs and capitalize development costs.
C) Expense development costs and capitalize research costs.
D) Capitalize research and development costs.
Answer: B
Explanation: IFRS requires that research costs be expensed when incurred and development
costs be capitalized.
natural resources.
Bloom's: Understand
AACSB: Diversity
52
107) International Financial Reporting Standards (IFRS) allow accounting for tangible and
intangible assets at fair value by:
A) Reapplication.
B) Reconsideration.
C) Revaluation.
D) Redefinition.
Answer: C
Difficulty: 1 Easy
over time.
Bloom's: Remember
AACSB: Diversity
108) Which of the following is not true in comparing U.S. GAAP and International Financial
Reporting Standards (IFRS)?
A) IFRS and U.S. GAAP both allow intangible assets to be reported at their cost minus
accumulated amortization.
B) U.S. GAAP requires expensing of all costs of research and development.
C) IFRS allows for adjustments for increases in fair value of tangible assets.
D) IFRS requires capitalizing of research costs and expensing of development costs.
Answer: D
Explanation: IFRS requires expensing of research costs and capitalizing of development costs.
natural resources.
Bloom's: Understand
AACSB: Diversity
53
109) The following information is available for Coca-Cola and PepsiCo:
Coca-Cola PepsiCo
Net fixed assets (beginning of
year) $4,168 $5,266
Net fixed assets (end of year) 4,435 5,438
Net sales for the year 19,889 20,438
Net income for the year 2,177 2,183
Answer: Coca-Cola fixed asset turnover ratio = 4.62 = $19,889 ÷ [($4,168 + $4,435)/2].
PepsiCo fixed asset turnover ratio = 3.82 = $20,438 ÷ [($5,266 + $5,438)/2].
Topic: Ratio analysis-Fixed asset turnover
Bloom's: Apply
110) The following information was available for Landmark Restaurants for the past three years.
Using this information, compute the fixed asset turnover ratio for Year 3 and Year 2. (Round
your answers to two decimal places.)
In thousands Year 3 Year 2 Year 1
Net fixed assets $965,575 $830,930 $587,829
Net sales 1,105,755 894,795 746,642
Net income 45,901 41,522 26,920
Answer: Year 3 fixed asset turnover ratio = 1.23 = $1,105,755 ÷ [($965,575 + $830,930)/2].
Year 2 fixed asset turnover ratio = 1.26 = $894,795 ÷ [($830,930 + $587,829)/2].
Topic: Ratio analysis-Fixed asset turnover
Bloom's: Apply
54
111) On January 1, 2019, Trenton Company purchased a machine costing $50,000. Trenton also
incurred the following costs: transportation, $1,000; installation, $2,000; and sales tax, $3,000.
Prepare the journal entry to record the machine acquisition assuming cash was paid.
Answer:
Machinery* 56,000
Cash 56,000
*Computations:
Invoice $50,000
Transportation 1,000
Installation 2,000
Sales tax 3,000
Total $56,000
Bloom's: Understand
112) Waterloo Corporation purchased factory equipment for a cost of $1,800,000. There was
also the cost of $100,000 for delivery, $220,000 for installation and modifications to the factory
building, and $60,000 in interest costs on borrowed funds used to acquire the equipment.
Calculate the acquisition cost of the new equipment.
Answer: Equipment cost = $2,120,000 = $1,800,000 + $100,000 + $220,000. Interest is not

capitalized because the equipment was purchased and not self-constructed.
Bloom's: Apply
55
113) In Year 4, Landmark Restaurants reported the cost of property and equipment at $1,189.8
million and the accumulated depreciation at $224.2 million. In that same year, Coca Cola
reported $10,149 million in long-lived, productive assets and accumulated depreciation on them
of $4,058.
A. Estimate the approximate percent of remaining life of the assets for Landmark and Coca Cola.
B. Which company appears to have newer assets with longer remaining lives?
Answer: A. Landmark: 81.2% = ($1,189.8 — $224.2)/$1,189.8. Coca Cola: 60.0% = ($10,149

— $4,058)/$10,149.
B. Landmark appears to have "newer" assets than Coca-Cola because 81.2% of its assets' value
remains in book value while Coca-Cola has 60.0% remaining in book value.
Topic: Depreciation concepts; Area: Ratio analysis-Fixed asset turnover
over time.
Bloom's: Understand
114) Hi-Crest Company purchased a machine on January 1, 2019, for $300,000. The machine
has an estimated useful life of 5 years and a $10,000 residual value.
Calculate depreciation expense and the year-end book value for 2019 and 2020 using the double
declining-balance method of depreciation.
Answer:
Depreciation Book Value
Expense (at the end of the
Date (for the year) year)
12/31/2019 $120,000* $180,000
12/31/2020 $72,000** $108,000
*$120,000 = $300,000 × 2/5

**$72,000 = $180,000 × 2/5
Topic: Depreciation methods-Declining balance
over time.
Bloom's: Understand
56
115) The financial statements of Franklin Company contained the following errors:
December December
Item 31, 2019 31, 2020
Depreciation expense $1,000 $900
on office equipment understated overstated
A. Was net income for 2019 understated or overstated? Briefly explain your answer.
B. 1. Considering the effect of the errors of both years at December 31, 2020, is retained
earnings overstated or understated, and by what amount?
2. Briefly explain your answer to part B (1).
Answer:
A. Overstated. If depreciation expense is understated, then net income is overstated.
B. 1. Retained earnings at December 31, 2020 is overstated by $100.
2. Net income of 2019 is overstated by $1,000 because the expense is understated. Net income of
2020 is understated by $900 because the expense is overstated. The net effect on retained
earnings is an overstatement of $100.
over time.
Bloom's: Understand
AACSB: Communication
57
116) On January 1, 2018, Boston Company purchased a heavy duty machine having an invoice
price of $13,000. Boston paid transportation and installation costs totaling $3,000. The machine
is estimated to have a 4-year useful life and a $1,400 residual value.
Calculate depreciation expense and book value for 2018-2021, assuming double declining-
balance method of depreciation.
Answer:
Depreciation Expense Book Value
Date (for the year) (at the end of the year)
12/31/2018 $16,000 × 2/4 = $8,000 $16,000 —$8,000 = $8,000
12/31/2019 $8,000 × 2/4 = $4,000 $16,000 — $12,000 = $4,000
12/31/2020 $4,000 × 2/4 = $2,000 $16,000 — $14,000 = $2,000
12/31/2021 $600** $16,000 — $14,600 = $1,400
**The depreciation expense the last year (the fourth year) is the amount necessary to leave book
value equal to the residual value of $1,400.
Difficulty: 3 Hard
Topic: Depreciation methods-Declining balance
over time.
Bloom's: Apply
58
117) Covey Company purchased a machine on January 1, 2019, by paying cash of $250,000. The
machine has an estimated useful life of five years, is expected to produce 500,000 units, and has
an estimated residual value of $25,000.
A. Calculate depreciation expense to the nearest whole dollar for each year of the machine's
useful life under.
1. Straight-line depreciation method.
2. Double declining-balance method.
B. What is the book value of the machine after three years using the double declining-balance
method?
C. What is the book value of the machinery after three years using the straight-line method?
D. If the machine was used to produce and sell 120,000 units in 2019, what would be the
depreciation expense using the units-of-production method?
Answer:
A. 1. Straight-line depreciation for years 1 through 5 = ($250,000 - $25,000) ÷ 5 years = $45,000
2. Double declining-balance method
Year Depreciation expense Book Value
$250,000
1 $250,000 × 2/5 = $100,000 150,000
2 $150,000 × 2/5 = $60,000 90,000
3 $90,000 × 2/5 = $36,000 54,000
4 $54,000 × 2/5 = $21,600 32,400
5 $32,400 - 25,000 = $7,400* 25,000
*Amount to reduce book value to $25,000

B. $250,000 — $100,000 — $60,000 - $36,000 = $54,000
C. $250,000 — ($45,000 × 3) = $115,000
D. ($250,000 - $25,000) ÷ 500,000 = $.45/unit
$.45 × 120,000 = $54,000
Topic: Depreciation methods-Alternatives compared
over time.
Bloom's: Understand
59
118) Hubbard Company purchased a truck on January 1, 2018, at a cost of $34,000. The
company estimated that the truck would have a useful life of 4 years and a residual value of
$4,000.
A. Calculate depreciation expense under straight line and double declining balance for 2018-
2021.
B. Which of the two methods would result in lower net income in 2018 and 2021?
Answer:
A.
Depreciation
Double
Depreciation Declining-balance
Year Straight-line method method
2018 $7,500 $17,000
2019 $7,500 $8,500
2020 $7,500 $4,250
2021 $7,500 $250
Straight-line: ($34,000 - 4,000) ÷ 4 years = $7,500.

Declining-balance:
2018 2/4 = $17,000.
2019 ($34,000 - $17,000) × 2/4 = $8,500.
2020 ($34,000 - $25,500) × 2/4 = $4,250.
2021 Book value $4,250 - $4,000 residual value = $250.
B. Lower net income: 2018, double declining-balance; 2021, straight-line.
Topic: Depreciation methods-Alternatives compared
over time.
Bloom's: Apply
60
119) Allison Company purchased a machine for $1,200,000 at the beginning of 2018. Allison
was using the double-declining-balance (200%) method to depreciate the asset and its useful life
was estimated to be 5 years with a residual value of $200,000. At the end of 2019, Allison Co.
estimates the future cash flows from the asset to be equal to $500,000 and the fair value to be
$450,000.
What is the amount of the impairment loss?
Answer: At the end of year two, the machine's book value would be $432,000 (year 1
depreciation $480,000 plus year 2 depreciation of $288,000 would be deducted from the asset's
cost of $1,200,000). Since the future cash flows are not below the asset's book value, there is no
impairment loss.
Difficulty: 1 Easy
Topic: Impairment-Long-lived assets
Bloom's: Remember
120) A company purchased equipment for $800,000 and has depreciated it using the straight-line
method for the past 5 years when its original life was estimated to be 10 years with a $200,000
residual value. The equipment's utility to the company has declined because management expects
the equipment to generate net cash flows over the remaining years of $300,000. The asset's fair
value at the end of the fifth year is $200,000.
If the asset has been impaired, record the journal entry to record the impairment.
Answer: Annual straight-line depreciation expense = $60,000 = ($800,000 - $200,000) ÷ 10.

End of year 5 book value = $500,000 = $800,000 - ($60,000 × 5).
There is an impairment because the net future cash flows of $300,000 are less than book value of
$500,000.
The impairment loss ($300,000) is the difference between the asset's book value ($500,000) and
fair value ($200,000).
Loss on Impairment of Asset 300,000

Equipment 300,000
Bloom's: Apply
61
121) Beckworth Company purchased a truck on January 1, 2018, at a cash cost of $10,600. The
estimated residual value was $400 and the estimated useful life 4 years. The company uses
straight-line depreciation computed monthly. On July 1, 2021, the company sold the truck for
$1,900 cash.
A. What was the depreciation expense amount per month?

B. What was the amount of accumulated depreciation at July 1, 2021?
C. Prepare the required journal entries on the date of disposal, July 1, 2021. (Assume no 2021
depreciation had yet been recorded)
Answer:
A. ($10,600 - $400) ÷ 48 = $212.50 per month
B. $212.50 × 42 months = $8,925
C.
Depreciation expense ($212.50 × 6) 1,275
Accumulated Depreciation 1,275
Cash 1,900
Accumulated depreciation ($212.50 × 42) 8,925
Trucks 10,600
Gain on Disposal 225
Topic: Disposal-Long-lived assets; Depreciation Methods — Straight-line
over time.; 08-05 Analyze the disposal of property, plant, and equipment.
Bloom's: Apply
62
122) Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5
years ago for a cost of $800,000. It has been depreciated using the straight-line method over an
estimated useful life of 10 years with an estimated residual value of $50,000.
Prepare the journal entry at the end of year five for the asset's disposal assuming the fifth year's
depreciation had been recorded.
Answer:
Cash 450,000
Accumulated Depreciation* 375,000
Gain on Disposal 25,000
Equipment 800,000
*[($800,000 - $50,000) ÷ 10] × 5
Topic: Depreciation methods-Straight-line; Disposal-Long-lived assets
Bloom's: Apply
123) Bennett Corporation sold a piece of equipment on June 30, 2019, for $50,000 cash. The
equipment had been purchased on January 1, 2015, for $150,000. The equipment had an
estimated useful life of 6 years and a $30,000 residual value. Bennett Corp. has been using the
straight-line method of depreciation and has a year-end of December 31st.
Prepare any necessary journal entries on June 30, 2019, assuming that 2019 depreciation expense
has not been recorded.
Answer:
Depreciation Expense* 10,000
Cash 50,000
Accumulated Depreciation** 90,000
Loss on Disposal 10,000
Equipment 150,000
*[($150,000 - $30,000) ÷ 6] × 6/12
** [($150,000 - $30,000) ÷ 6] × 4.5 years
Bloom's: Apply
63
124) Spa Sources Corporation purchased a machine that had an original cost of $60,000 and an
estimated residual value of $10,000. The useful life was expected to be 8 years and straight-line
depreciation is used. At the end of 2019, the book value of the machine was $35,000. Spa
Sources sold the machine for $32,000 cash on October 1, 2020.
A. Prepare the journal entry to record depreciation for 2020 up to the date of sale.
B. Prepare the journal entry to record the sale of the machine.
Answer:
A.
Depreciation Expense 4,688
Computations:
($60,000 — $10,000) ÷ 8 years = $6,250
$6,250 × 9/12 = $4,688
B.
Cash 32,000
Accumulated Depreciation* 29,688
Gain on Sale of Equipment 1,688
Machine 60,000
*The book value of $35,000 at the end of 2019 equals the asset cost of $60,000 less accumulated
depreciation of $25,000 at the end of 2019. The accumulated depreciation at the date of sale of
$29,688 equals the accumulated depreciation at the end of 2019 plus the depreciation from
requirement A for year 2020 to the date of sale = $25,000 + $4,688.
Bloom's: Apply
64
125) Prepare the required adjusting journal entry at December 31, 2019, the end of the annual
accounting period for the three items below. Assume that no adjusting entries have been made
during the year. If no entry is required, explain why.
A. Polk Company acquired a patent that cost $6,000 on January 1, 2019. The patent was
registered on January 1, 2015. The useful life of a patent is 20 years from registration.
B. Polk Company acquired a gravel pit on January 1, 2019, that cost $24,000. The company
estimates that 30,000 tons of gravel can be extracted economically. When all the gravel has been
extracted, no residual value is anticipated. During 2019, 4,000 tons were extracted and sold.
C. On January 1, 2019, Polk Company acquired a used dump truck that cost $6,000 to use
hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years.
The company uses straight-line depreciation.
Answer:
A.
Patent amortization expense 300
Patent 300
$6,000 ÷ 20 years = $300/year

B.
Depletion expense 3,200
Gravel pit or Accumulated
depletion 3,200
$24,000 ÷ 30,000 = $.80

$.80 × 4,000 tons = $3,200
C.
Depreciation expense 1,350
Accumulated depreciation -
truck 1,350
$6,000 × .90 = $5,400 to be depreciated

$5,400 ÷ 4 years = $1,350
Topic: Depreciation methods-Straight-line; Intangible assets-Amortization; Natural resources-
Depletion
over time.; 08-06 Apply measurement and reporting concepts for intangible assets and natural
resources.
Bloom's: Apply
65
126) Benson Mining Company purchased a site containing a mineral deposit during 2019. The
purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore.
Benson constructed a building at the site, at a cost of $500,000, to be used while the ore is being
extracted. When the ore reserves are gone, the building will have no further value.
A. Explain the objective of recording depletion of natural resources.

B. Determine Benson's depletion rate per ton of ore.
C. Prepare the journal entry to record depletion for the year 2019, when Benson mined and sold
150,000 tons of ore.
D. Prepare the journal entry to record depreciation on the building for 2019. Benson calculates
depreciation on the building using the units-of-production method based on the amount of ore
extracted (150,000 tons in 2019).
Answer:
A. The purpose of recording depletion is to systematically and rationally allocate the cost of a
natural resource over the period of its exploitation.
B. $820,000 ÷ 400,000 tons = $2.05 per ton
C.
Depletion Expense 307,500
Mineral Deposit or Accumulated
Depletion 307,500
$2.05 × 150,000 tons

D.
Depreciation Expense* 187,500
Accumulated Depreciation, Building 187,500
*($500,000 ÷ 400,000 tons) × 150,000 tons

Topic: Depreciation methods-Units of production; Natural resources-Depletion
over time.; 08-06 Apply measurement and reporting concepts for intangible assets and natural
resources.
Bloom's: Apply
AACSB: Communication; Knowledge Application
66
127) On January 1, 2017, Gordon Company purchased a patent for $420,000 from an inventor
who had developed a new manufacturing process. At the time of the purchase, the patent had a
remaining useful life of 10 years.
A. Prepare the journal entry to record Gordon's purchase of the patent.

B. Prepare the journal entry to record amortization of the patent on December 31, 2017.
C. At the end of 2020, after amortization had been recorded through December 31, 2020, Gordon
concluded that the estimated future cash flows from the patent to be $250,000. The patent's
estimated fair value on December 31, 2020 was $200,000. Prepare the journal entry to record the
patent impairment, if necessary.
Answer:
A. Patent 420,000
Cash 420,000
B. Amortization Expense 42,000
Patent 42,000
C. Loss due to impairment 52,000
Patent 52,000
Computations:
The loss is the difference between the patent's book value [$420,000 - ($42,000 × 4) = $252,000]
and its fair value ($200,000). There is an impairment because the book value [$420,000 -
($42,000 × 4) = $252,000] exceeds the net future cash flows ($250,000).
natural resources.
Bloom's: Apply
128) Pier 5 has been in business 8 years with 4 stores in the San Francisco bay area. Its local
reputation for making savory pies such as curried potatoes is well recognized. A national food
distributor has offered to purchase the company. Pier 5 has $0.9 million of net assets at book
value, but those net assets have a fair value of $1.2 million. If the distributor offers to buy Pier 5
for $3.5 million, how much will be recorded as goodwill based on the offered acquisition price?
Answer: Goodwill = $2.3 million = Amount paid minus fair value of net assets acquired = $3.5
million - $1.2 million.
Topic: Intangible assets-Capitalize or expense
natural resources.
Bloom's: Apply
67
129) Landmark Restaurants reported net income of $45.9 million during Year 6. Landmark
reported depreciation and amortization of plant and equipment of $48.8 million and cash paid for
additions to property, plant, and equipment of $162.9 million during Year 6.
Explain where each of these items would be reported and their impact on cash flows on the
statement of cash flows (the indirect method is used to prepare the statement of cash flows).
Answer: The net income would be reported as the first item in the operating activities section
and would have a positive impact on cash flow. The depreciation and amortization would be
added to net income in the operating activities section and would have a positive effect on cash
flow. Finally the cash paid for new property, plant, and equipment would be in the investing
activities section and would have a negative cash flow effect.
Topic: Cash flows-Long-lived assets
impact cash flows.
Bloom's: Understand
AACSB: Communication
68
130) Frankel Feed purchased a new machine on January 1, Year 1. Relevant information is as
follows:
Cost when acquired $26,000
Estimated residual value 2,000
Estimated useful life 10 years
Accumulated depreciation at the end of year 5
(assume straight-line depreciation) 12,000
It is now the beginning of year 6 and the management reevaluated the estimates related to the
machine.
Compute the depreciation expense for year 6 under each of the following independent cases:
Case Event
The estimated total useful life is changed to 15 years; residual
A value is unchanged.
B The residual value is changed to $1,000; useful life is unchanged.
The estimated total useful life is changed to 7 years and the residual
C value is changed to $3,000.
Answer: Annual straight-line depreciation expense = $2,400 = ($26,000 - $2,000) ÷ 10.

A. ($26,000 - $12,000* - $2,000) ÷ (15 years - 5 years) = $1,200 of depreciation expense.
B. ($26,000 - $12,000* - $1,000) ÷ (10 years - 5 years) = $2,600 of depreciation expense.
C. ($26,000 - $12,000* - $3,000) ÷ (7 years - 5 years) = $5,500 of depreciation expense.
*($2,400 × 5 years)
Difficulty: 3 Hard
Topic: Changes in depreciation estimates-Chapter supp
Bloom's: Apply
69
131) Sadler Corporation purchased equipment to be used in manufacturing. The purchase was
made at the beginning of 2018 by paying cash of $150,000. The equipment has an estimated
residual value of $10,000 and an expected useful life of 10 years. At the beginning of 2020,
Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and
that the residual value will be zero. Sadler uses the straight-line method for depreciation.
A. Prepare the journal entry to record depreciation on the equipment for 2019.
B. Prepare the journal entry to record depreciation on the equipment for 2020, including the
effect of the changes in estimates.
C. Describe how and when a business should account for a change in the estimated useful life
and/or residual value of a depreciable asset.
Answer:
A. Depreciation Expense 14,000
Computations:
($150,000 - $10,000) ÷ 10 years = $14,000/year
B. Depreciation Expense 20,333
Computations:
$150,000 - $28,000 ($14,000 depreciation/year × 2 years) = $122,000 remaining depreciable
value.
$122,000 ÷ 6-year remaining useful life = $20,333
C. A change in estimate of residual value or useful life requires the company to calculate a new
annual depreciation amount. The new depreciation is calculated by dividing the remaining book
value less the residual value (if any) at the beginning of the year of the change in estimate by the
remaining years of life of the asset. The change in estimate affects the amount of depreciation for
current and future years. There is no restatement of financial statements for prior years.
Difficulty: 3 Hard
Topic: Changes in depreciation estimates-Chapter supp
Bloom's: Apply
AACSB: Communication; Knowledge Application
70
132) Determine the effect of the following transactions on the financial statement components
identified. Code each item listed under the transaction with the letter A, B, or C, as follows.
A. If the transaction results in an increase in the financial statement component.
B. If the transaction results in a decrease in the financial statement component.
C. If the transaction does not affect the financial statement component.
Transaction 1: The adjusting journal entry to record depreciation expense was properly prepared
and recorded.
Net income _____
Total assets _____
Stockholders' equity _____
Transaction 2: The adjusting journal entry to record patent amortization expense was properly
prepared and recorded.
Net income _____
Total assets _____
Transaction 3: A depreciable asset was sold for a gain and properly recorded.
Net income _____
Total assets _____
Transaction 4: The adjusting journal entry to record an impairment loss was properly prepared
and recorded.
Net income _____
Total assets _____
71
Answer: Transaction 1: The adjusting journal entry to record depreciation expense was properly
Net income B
Total assets B
Stockholders' equity B
Transaction 2: The adjusting journal entry to record patent amortization expense was properly
Net income B
Total assets B
Transaction 3: A depreciable asset was sold for a gain and properly recorded.
Net income A
Total assets A
Stockholders' equity A
Transaction 4: The adjusting journal entry to record an impairment loss for equipment was
properly prepared and recorded.
Net income B
Total assets B
Topic: Depreciation concepts; Disposal-Long-lived assets; Impairment-Long-lived assets; Area:
Intangible assets-Amortization
over time.; 08-04 Explain the effect of asset impairment on the financial statements.; 08-05
Analyze the disposal of property, plant, and equipment.; 08-06 Apply measurement and
reporting concepts for intangible assets and natural resources.
Bloom's: Understand
72

Test Babk Ch8 ACCT

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Test Babk Ch8 ACCT

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Financial Accounting, 10e (Libby)

2) Patents, trademarks, and franchises are examples of tangible assets.

5) An expenditure is capitalized when it is reported as an expense on the income statement.

17) Use of the double-declining-balance method of depreciation results in higher depreciation

18) Use of the double-declining-balance method of depreciation results in increasing amounts of

37) Which of the following includes only intangible assets?

39) The Wilson Company has provided the following information:

• Net sales, $200,000

What is Wilson's fixed asset turnover ratio?

45) Operating leases

52) Which of the following statements is incorrect?

58) Which of the following is correct?

December 31, 2121 accumulated depreciation balance = $18,000 = $6,000 × 3 years.

Book value after two years = $29,000 = $41,000 – ($6,000 × 2).

Pretax income before correction $ 42,000

*Straight-line depreciation expense = $6,250 = $50,000 ÷ 8.

How much is the 2020 depreciation expense?

What is the accumulated depreciation balance as of December 31, 2020?

76) Which of the following statements is correct?

78) Which of the following statements about asset impairments is false?

How much is the asset impairment loss?

How much of a gain or loss should Amanda record?

Which of the following statements correctly describes the computer sale?

96) Which of the following is not true regarding certain assets?

100) Which of the following statements is incorrect?

Book value after overhaul

Book value $38,000

Answer: Equipment cost = $2,120,000 = $1,800,000 + $100,000 + $220,000. Interest is not

Answer: A. Landmark: 81.2% = ($1,189.8 — $224.2)/$1,189.8. Coca Cola: 60.0% = ($10,149

*$120,000 = $300,000 × 2/5

*Amount to reduce book value to $25,000

Straight-line: ($34,000 - 4,000) ÷ 4 years = $7,500.

What is the amount of the impairment loss?

Answer: Annual straight-line depreciation expense = $60,000 = ($800,000 - $200,000) ÷ 10.

Loss on Impairment of Asset 300,000

A. What was the depreciation expense amount per month?

$6,000 ÷ 20 years = $300/year

$24,000 ÷ 30,000 = $.80

$6,000 × .90 = $5,400 to be depreciated

A. Explain the objective of recording depletion of natural resources.

$2.05 × 150,000 tons

*($500,000 ÷ 400,000 tons) × 150,000 tons

A. Prepare the journal entry to record Gordon's purchase of the patent.

Answer: Annual straight-line depreciation expense = $2,400 = ($26,000 - $2,000) ÷ 10.

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