Accounting Ch 9

Front 1

Land improvements are depreciable assets.

Back 1

True; Improvements to land are structural additions made to land, such as driveways, parking lots, fences, landscaping, and sprinklers. Land improvements are depreciated to allocate the cost to periods that benefit from the land improvements.

Front 2

Closing costs incurred to purchase a tract of land are included in the cost of the land.

Back 2

True;Closing costs paid in the purchase of a piece of land are considered part of the cost of the land.

Front 3

Corristan Company purchased equipment and incurred these costs:

Cash price $24,000
Sales taxes 1,200
Insurance during transit 200
Annual maintenance costs ____400
Total costs
$25,800

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

Back 3

$25,400
All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($24,000 + $1,200 + $200 = $25,400). The annual maintenance costs are expensed, not capitalized.

Front 4

Harrington Corporation recently leased a number of trucks from Andre Corporation. In inspecting the books of Harrington Corporation, you notice that the trucks have not been recorded as assets on Harrington’s balance sheet. What type of acquisition are the trucks for Harrington?

Back 4

Operating lease
Operating leases are accounted for as rentals and are not recorded on the balance sheet.

Front 5

Which of the following is not a depreciable asset?

Back 5

Land
Land is not a depreciable asset. Land improvements, equipment, and buildings are depreciated to allocate their costs to the fiscal periods in which they render a benefit.

Front 6

Which one of the following costs will not be included in the cost of equipment?

Back 6

Annual insurance
Because annual insurance costs are ongoing and do not benefit multiple periods, they are expensed in the year incurred. Insurance costs incurred while the equipment is in transit can be appropriately included in the cost of the equipment.

Front 7

Coronado Company purchased land for $80,000. The company also paid $12,000 in accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

Back 7

$95,000
Total costs include all costs necessary to get land ready for use.

Front 8

Massey Corporation purchased a piece of land for $50,000. Massey paid attorney's fees of $5,000 and brokers' commissions of $4,000 in connection with the purchase. An old building on the land was torn down at a cost of $2,000, and proceeds from the scrap were $500. How much is the total cost of the land?

Back 8

$60,500
All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The total to be debited to the land account is the cost of the land of $50,000 plus the attorney’s fees of $5,000, the brokers’ commissions of $4,000, plus the cost of tearing down the old building, $2,000. The proceeds from the scrap sale totaling $500 should be subtracted for a total cost of the land of $60,500.

Front 9

Which of the following costs should not be included in the cost of a building?

Back 9

Parking lot repaving
Parking lot repaving costs are considered to be land improvements and are capitalized in an account separate from buildings.

Front 10

Book value and market value are synonymous terms as they relate to plant assets

Back 10

false. Market value represents a value at which an asset can be sold. Book value is the net amount at which an asset appears on a company’s balance sheet. It is equal to acquisition cost less accumulated depreciation.

Front 11

Which one of the following is not a depreciable asset?

Back 11

Land
and is not a depreciable asset because its usefulness and revenue-producing ability generally stay intact over time. Buildings, driveways, and equipment are all depreciable assets.

Front 12

Which of the following is not a way to express the useful life of a depreciable asset?

Back 12

Cost of acquisition
Cost is not a measure of how a depreciable asset contributes to revenue-producing activities. The useful life of a depreciable asset can be expressed in years, units, or hours.

Front 13

What is depreciation?

Back 13

A cost allocation method
Depreciation is a process of allocating the cost of a long-term asset over its useful service life.

Front 14

When using the straight-line depreciation method, which of the following is not a factor affecting the computation of depreciation?

Back 14

Book value

Front 15

Which depreciation method calculates annual depreciation expense based on book value at the beginning of each year?

Back 15

Declining-balance
All declining-balance methods are affected by the beginning of the year book value.

Front 16

A purchase of equipment for $18,000 also involves freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and 4 years, respectively. Under the straight-line method, how much is annual depreciation expense?

Back 16

$4,750
The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $2,000)/4 = $4,750 per year.
frst, determine depreciable cost; then, calculate annual depreciation expense.

Front 17

Monthly depreciation expense of $600 is recorded on a truck that was purchased for $27,000 and has a $3,000 estimated salvage value. How much is the annual depreciation rate?

Back 17

30%
The depreciable cost is the $27,000 purchase price less $3,000 salvage value, which is $24,000. The annual depreciation cost is $600 per month times 12 months, or $7,200 per year. The rate is $7,200 divided by $24,000 or 30% per year.

Front 18

On September 1, 2014, West Buy purchased an asset for $9,000, with a $1,500 estimated salvage value, and a 4-year useful life. How much is the 2014 depreciation expense using the straight-line method?

Back 18

$625
The purchase price ($9,000) less salvage value ($1,500) is divided by the useful life times the portion of a year that will be expensed: ($9,000 - $1,500)/4 × 4/12 = $625.

Front 19

An asset purchased on January 1 for $48,000 has an estimated salvage value of $3,000. The current year’s depreciation expense is $5,000 and the balance of the Accumulated Depreciation account, after adjustment, is $20,000. If the company uses the straight-line method, what is the asset’s remaining useful life?

Back 19

5 years
Since the depreciable cost is $45,000 ($48,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, this confirms the 9-year life. The balance in Accumulated Depreciation indicates that 4 years of life have been consumed ($20,000/$5,000). Of the total 9 years of life, 5 years remain

Front 20

Cuso Company purchased equipment on January 1, 2013, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used?

Back 20

Since the asset has been in use for two years, the accumulated depreciation at December 31, 2014, is equal to two times the annual depreciation expense: ($400,000 - $10,000)/5 = $78,000 per year. Total accumulated depreciation = $78,000 per year × 2 years = $156,000.
Accumulated depreciation is the sum of current year and prior years’ depreciation.

Front 21

Which one of the following will minimize depreciation expense in the first year of owning an asset?

Back 21

A long estimated life, a high salvage value, and straight-line depreciation

A long estimated life spreads the cost over a longer period of time resulting in a smaller expense each year. The high salvage value limits the cost to be allocated. Straight-line depreciation yields a smaller depreciation charge in the first year than the declining-balance method.

Front 22

At the beginning of the year, Powers Company purchased a piece of machinery for $50,000. It has a salvage value of $5,000, an estimated useful life of 9 years, and estimated units of output of 90,000 units. Actual units produced during the first year were 11,000. How much is depreciation expense for the first year under the straight-line method?

Back 22

$5,000
he annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($5,000) divided by the useful life (9 years) resulting in an annual depreciation value of $5,000.

Front 23

A company purchased a dump truck for $25,000. In addition, freight charges were $500, and an additional payment of $800 was made to paint the company’s logo on the truck. The estimated salvage value and useful life are $3,800 and 5 years, respectively. How much is annual depreciation expense under the straight-line method?

Back 23

$4,500
The purchase price includes all costs necessary to get the truck ready to use: $25,000 + $500 + $800 = $26,300. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($26,300 - $3,800) / 5 years = $4,500.

Front 24

Expenditures to maintain the operating efficiency and expected productive life of the unit are expensed as incurred.

Back 24

True;Expenditures to maintain the operating efficiency and expected productive life of the unit are expensed immediately when incurred. Capital expenditures are incorporated into the value of the asset on the balance sheet.

Front 25

A permanent decline in the market value of an asset is called

Back 25

an impairment
An impairment is recognized when a permanent decline in the market value of an asset exists.

Front 26

An asset purchased on January 1 for $60,000 has an estimated salvage value of $3,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

Back 26

$14,250
The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($60,000 - $3,000)/8 years = $7,125. At the end of the second year, there will be two years of accumulated depreciation for a total of $14,250.

Front 27

On January 1, 2012, Jamacha Company purchased some equipment for $15,000. The estimated salvage value and useful life are $3,000 and 4 years, respectively. On January 1, 2014, the company determines that the asset’s remaining useful life is 3 years. What is the revised depreciation expense for 2014 if the company uses the straight-line method?

Back 27

$2,000
he annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($15,000 - $3,000)/4 years = $3,000 per year. The depreciable cost that remains is $15,000 - $3,000 – (2 years × $3,000) = $6,000. This amount is allocated over the remaining useful life of 3 years, which is $2,000 per year.
First, determine remaining depreciable cost at date of change in useful life; then, depreciate it over the new remaining useful life.

Front 28

When there is a change in estimated depreciation

Back 28

current and future years’ depreciation should be revise
When estimated depreciation changes, the changes should be reflected in the current and future years, not in prior years.

Front 29

Able Towing Company purchased a tow truck for $60,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 more years as of January 1, 2014, and the salvage value was adjusted to $2,000. How much is depreciation expense for 2014?

Back 29

$12,100
or the first two years the depreciation is ($60,000 - $12,000) ÷ 10 = $4,800 per year. The depreciable cost that remains at the beginning of 2014 is $60,000 - $2,000 – (2 years × $4,800) = $48,400. This amount is allocated over the remaining useful life of 4 years, which is $12,100 per year.

Front 30

Which statement is true about additions to plant assets?

Back 30

They are capitalized.
Additions to plant assets are capital expenditures, because they increase either the operating efficiency, productive capacity, or useful life of the asset. Capital expenditures are debited to asset accounts and then depreciated over their expected useful lives.

Front 31

When the book value of a piece of equipment is less than the proceeds from the sale of that equipment, the result is a loss on disposal of plant asset.

Back 31

false. When book value is less than the proceeds from a sale, the result is a gain on disposal of plant assets.

Front 32

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2014. The machine was purchased for $80,000 on January 1, 2010, and was depreciated on a straight-line basis over a 10-year life assuming no salvage value. If the machine was sold for $26,000, how much is the gain or loss to be recorded at the time of the sale?

Back 32

18,000 loss
he selling price less the book value of the machine equals the gain or loss on the sale. Book value of the machine: $80,000 – [($80,000 ÷ 10) × 4.5 yr.] = $44,000. Loss on sale = $26,000 - $44,000 = $18,000 loss.

Front 33

When a plant asset is retired, the difference between original cost and the book value of the asset is

Back 33

recognized on the income statement as a loss on disposal of plant asset

When assets are retired, the entry credits the Equipment account for its original cost, debits the Accumulated Depreciation account for the entire amount of depreciation recorded, debits the cash account for the proceeds received from the sale, and recognizes a gain or loss on the income statement.

Front 34

On April 1, 2014, La Presa Company sells some equipment for $18,000. The original cost was $50,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. On December 31, 2013, the Accumulated Depreciation account had a balance of $29,400. How much is the gain or loss on the sale?

Back 34

$850 loss
First, the accumulated depreciation must be brought up to date. Since the equipment has a $42,000 depreciable cost and a life of 6 years, the depreciation is $7,000 per year or $1,750 for 3 months through April 1, 2014. The Accumulated Depreciation balance at the date of sale is $29,400 plus $1,750 or $31,150. Next, the book value must be determined which is: $50,000 less $31,150, or $18,850. The gain or loss is the selling price less the book value: $18,000 - $18,850 = $850 loss.

Front 35

A company sold for $3,000 a plant asset that had a cost of $10,000 and accumulated depreciation of $7,500. What gain or loss did the company experience?

Back 35

Gain of $500
ook value is $2,500 ($10,000 – $7,500). Since the proceeds ($3,000) exceed the book value ($2,500) by $500, there is a gain.

irst determine book value on date of sale; then, compare to selling price to determine gain or loss.

Front 36

On June 1, 2014, Brislin Company sold some equipment for $22,000. The original cost was $80,000, the estimated salvage value was $8,000, and the expected useful life was 8 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

Back 36

$14,000 gain
The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $22,000 - $8,000 = $14,000 gain.
o determine gain or loss, compare book value to selling price.

Front 37

A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net sales total $250,000. What is the asset turnover?

Back 37

1.25 times
The asset turnover is net sales divided by the average total assets: $250,000 $200,000 = 1.25 times.
Recall the formula for calculating asset turnover.

Front 38

Walk Co’s average total assets are $200,000, net sales total to $100,000, and net income is $40,000. How much net income did Walk Co generate for each dollar of assets invested?

Back 38

$0.20
Return on assets is net income divided by average total assets: $40,000 $200,000 = $0.20

Front 39

Oahu Industries’ average total assets for the year are $4,000,000, its net income is $800,000, and its net sales are $10,000,000. What is the return on assets?

Back 39

20%
eturn on assets is calculated by dividing net income by the average total assets. placeOahu’s return on assets is $800,000 divided by $4,000,000 = 20%.
Recall the formula for calculating return on assets.

Front 40

Which of the following measures provides an indication of how efficient a company is in employing its assets?

Back 40

Asset turnover ratio
The asset turnover rate is an indicator of how efficiently a company is employing its assets.

Front 41

Lake Coffee Company reported net income of $54,000 and net sales totals $800,000. The company’s asset turnover ratio is 4.5 times. What was the company’s return on assets?

Back 41

30.38%
Return on assets = Asset turnover × Profit margin = 4.5 times × ($54,000/$800,000) = 30.38%

Front 42

Research and development costs are capitalized as intangible assets.

Back 42

false. Due to the uncertainty of research and development efforts, the related costs are usually expensed as incurred.

Front 43

Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It spent $20,000 in legal fees for a patent granted on January 2, 2012. On July 31, 2014, Pierce paid $15,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2014?

Back 43

$35,000
Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account through July 31, 2014. The research and development costs spent to develop the new product must be expensed in the year they were incurred.

Front 44

If a company reports goodwill as an intangible asset on its books, what is the one thing you know with certainty?

Back 44

The company purchased another company.
In order to report goodwill, a company must have entered into an exchange transaction that involves the purchase of an entire business.

Front 45

Which of the following statements is false?

Back 45

Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.
Research and development costs are expensed when incurred whether they produce a patent or not.

Front 46

On March 1, 2014, Moreno Company purchased a patent from another company for $90,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. How much is amortization expense for 2014?

Back 46

$7,500
Amortization is calculated using the straight-line method: $90,000 ÷ 10 years × 10/12 = $7,500.

Front 47

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises?

Sales revenue $45,000,000
Cash 1,500,000
Accounts receivable 4,000,000
Land 15,000,000
Equipment 25,000,000
Trademarks 1,000,000
Goodwill 4,500,000
Research & development 2,000,000

Back 47

$5,500,000
e intangibles are trademarks ($1,000,000) and goodwill ($4,500,000) totaling $5,500,000.

Front 48

Which of the following gives the recipient the right to manufacture, sell, or otherwise control an invention for a period of 20 years?

Back 48

Patent
atents give the recipient rights for 20 years. A copyright protects literary and artistic works, and a trademark is a word, phrase, jingle, or symbol that distinguishes or identifies an enterprise or product. A license is an operating right.

Front 49

Given the following account balances at year end, how much is amortization expense on Anisha Enterprises income statement for the current year if Anisha thinks all of its intangibles should be amortized over ten years?

Sales revenue $45,000,000
Patents 1,500,000
Accounts receivable 4,000,000
Land 15,000,000
Equipment 25,000,000
Trademarks 1,000,000
Goodwill 4,500,000
Research & development 2,000,000

Back 49

$250,000
The intangibles are trademarks patents and goodwill. Only trademarks and patents are amortized. ($1,000,000 + $1,500,000)/10 = $250,000.

Front 50

The contra account to property, plant and equipment is accumulated amortizatio

Back 50

false. The contra account in the property, plant, and equipment section of the balance sheet is accumulated depreciation.

Front 51

Which one of these statements is true?

Back 51

Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.

Front 52

With respect to plant assets, which of the following need not be disclosed in the financial statements or notes to the financial statements?

Back 52

Useful life of each plant asset
useful lives of each plant asset need not be disclosed.

Front 53

A company has the following asset account balances:

Buildings and equipment $9,200,000
Accumulated depreciation 1,200,000
Patents 750,000
Land Improvements 1,000,000
Land 5,000,000

How much will be reported on the balance sheet under property, plant, & equipment?

Back 53

$14,000,000
uildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $14,000,000.

Front 54

A company has the following asset account balances:

Buildings and equipment $6,200,000
Accumulated depreciation 1,800,000
Patents 950,000
Inventory 1,000,000
Goodwill 4,000,000

How much is the total amount reported on the balance sheet under property, plant & equipment?

Back 54

$4,400,000
Buildings and equipment less accumulated depreciation are the only amounts included under Plant & Equipment: $6,200,000 - $1,800,000 = $4,400,000.

Front 55

If you bought a new truck for $40,000 for your auto parts delivery service, and you estimated that the truck would last you 200,000 miles with a salvage value of $4,000, what would be your depreciation expense for the first year in which you used the truck for 12,500 miles?

Back 55

$2,250
he depreciation rate per mile is $0.18, which is ($40,000 - $4,000) divided by 200,000 miles. Depreciation expense = $0.18 × 12,500 miles = $2,250.
Determine the depreciation rate per mile and apply it to actual miles driven.

Front 56

Kant Enterprises purchased a truck for $11,000 on January 1, 2013. The truck will have an estimated salvage value of $1,000 at the end of 5 years. If you use the units-of-activity method, which formula can be used to calculate the balance in accumulated depreciation at December 31, 2014?

Back 56

($10,000/Total estimated activity) × Units of activity for 2013 and 2014

he depreciation rate to use for units-of-activity is calculated as: (Cost - Salvage value)/Total activity expected. The depreciation rate should then be multiplied by the units of activity for both 2013 and 2014.