Details for Accounting_principles_chap_10

PropertyValue
Name:Accounting_principles_chap_10
Description:
Price 3.00 USD

TRUE-FALSE STATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be

charged to a Land Improvements account.

,

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be

charged to Delivery Equipment.

4. Land improvements are generally charged to the Land account.

5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset

unless the asset appreciates in value, in which case, market value becomes the basis for

accountability.

6. The book value of a plant asset is always equal to its fair market value.

7. Recording depreciation on plant assets affects the balance sheet and the income

statement.

8. The depreciable cost of a plant asset is its original cost minus obsolescence.

9. Recording depreciation each period is an application of the matching principle.

10. The Accumulated Depreciation account represents a cash fund available to replace plant

assets.

11. In calculating depreciation, both plant asset cost and useful life are based on estimates.

12. Using the units-of-activity method of depreciating factory equipment will generally result in

more depreciation expense being recorded over the life of the asset than if the straightline

method had been used.

13. Salvage value is not subtracted from plant asset cost in determining depreciation expense

under the declining-balance method of depreciation.

14. The declining-balance method of depreciation is called an accelerated depreciation

method because it depreciates an asset in a shorter period of time than the asset's useful

life.

15. Under the double-declining-balance method, the depreciation rate used each year

remains constant.

17. A change in the estimated useful life of a plant asset may cause a change in the amount

of depreciation recognized in the current and future periods, but not to prior periods.

18. A change in the estimated salvage value of a plant asset requires a restatement of prior

years' depreciation.

19. To determine a new depreciation amount after a change in estimate of a plant asset's

useful life, the asset's remaining depreciable cost is divided by its remaining useful life.

20. Additions and improvements to a plant asset that increase the asset's operating efficiency,

productive capacity, or expected useful life are generally expensed in the period incurred.

21. Capital expenditures are expenditures that increase the company's investment in

productive facilities.

22. Ordinary repairs should be recognized when incurred as revenue expenditures.

23. A characteristic of capital expenditures is that the expenditures occur frequently during the

period of ownership.

24. Once an asset is fully depreciated, no additional depreciation can be taken even though

the asset is still being used by the business.

25. The fair market value of a plant asset is always the same as its book value.

26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal

occurs.

27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the

asset sale is less than the asset's book value.

28. The book value of a plant asset is the amount originally paid for the asset less anticipated

salvage value.

29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the

same way.

30. A plant asset must be fully depreciated before it can be removed from the books.

31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold

section of the income statement.

32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the

estimated number of units in the resource.

33. The Accumulated Depletion account is deducted from the cost of the natural resource in

the balance sheet.

34. Depletion expense for a period is only recognized on natural resources that have been

extracted and sold during the period.

35. Natural resources are long-lived productive assets that are extracted in operations and

are replaceable only by an act of nature.

36. The cost of natural resources is not allocated to expense because the natural resources

are replaceable only by an act of nature.

37. Conceptually, the cost allocation procedures for natural resources parallels that of plant

assets.

38. Natural resources include standing timber and underground deposits of oil, gas, and

minerals.

39. If an acquired franchise or license has an indefinite life, the cost of the asset is not

amortized.

40. When an entire business is purchased, goodwill is the excess of cost over the book value

of the net assets acquired.

Ans: F,

41. Research and development costs which result in a successful product which is patentable

are charged to the Patent account.

42. The cost of a patent must be amortized over a 20-year period.

43. The cost of a patent should be amortized over its legal life or useful life, whichever is

shorter.

44. The balances of the major classes of plant assets and accumulated depreciation by major

classes should be disclosed in the balance sheet or notes.

45. The asset turnover ratio is calculated as total sales divided by ending total assets.

46. Research and development costs can be classified as a property, plant, and equipment

item or as an intangible asset.

a47. An exchange of plant assets has commercial substance if the future cash flows change as

a result of the exchange.

a48. Companies record a gain or loss on the exchange of plant assets because most

exchanges have commercial substance.

a49. When plant assets are exchanged, the cost of the new asset is the book value of the old

asset plus any cash paid.

50. When constructing a building, a company is permitted to include the acquisition cost and

certain interest costs incurred in financing the project.

51. Recognition of depreciation permits the accumulation of cash for the replacement of the

asset.

52. When an asset is purchased during the year, it is not necessary to record depreciation

expense in the first year under the declining-balance depreciation method.

53. Depletion expense is reported in the income statement as an operating expense.

54. Goodwill is not recognized in accounting unless it is acquired from another business

enterprise.

a56. A loss on the exchange of plant assets occurs when the fair market value of the old asset

is less than its book value.

MULTIPLE CHOICE QUESTIONS

57. The cost of a purchased building includes all of the following except

a. closing costs.

b. real estate broker's commission.

c. remodeling costs.

d. All of these are included.

58. A company purchased land for $90,000 cash. Real estate brokers' commission was

$5,000 and $7,000 was spent for demolishing an old building on the land before

construction of a new building could start. Under the cost principle, the cost of land would

be recorded at

a. $97,000.

b. $90,000.

c. $95,000.

d. $102,000.

59. Which one of the following items is not considered a part of the cost of a truck purchased

for business use?

a. Sales tax

b. Truck license

c. Freight charges

d. Cost of lettering on side of truck

60. Which of the following assets does not decline in service potential over the course of its

useful life?

a. Equipment

b. Furnishings

c. Land

d. Fixtures

61. The four subdivisions for plant assets are

a. land, land improvements, buildings, and equipment.

b. intangibles, land, buildings, and equipment.

c. furnishings and fixtures, land, buildings, and equipment.

d. property, plant, equipment, and land.

62. The cost of land does not include

a. real estate brokers' commission.

b. annual property taxes.

c. accrued property taxes assumed by the purchaser.

d. title fees.

63. Gagner Clinic purchases land for $130,000 cash. The clinic assumes $1,500 in property

taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land

graded for $2,200. What amount does Gagner Clinic record as the cost for the land?

a. $132,200

b. $130,000

c. $134,700

d. $132,500

64. Carey Company buys land for $50,000 on 12/31/09. As of 3/31/10, the land has

appreciated in value to $50,700. On 12/31/10, the land has an appraised value of

$51,800. By what amount should the Land account be increased in 2010?

a. $0

b. $700

c. $1,100

d. $1,800

65. Hull Company acquires land for $86,000 cash. Additional costs are as follows:

Removal of shed $ 300

Filling and grading 1,500

Salvage value of lumber of shed 120

Broker commission 1,130

Paving of parking lot 10,000

Closing costs 560

Hull will record the acquisition cost of the land as

a. $86,000.

b. $87,690.

c. $89,610.

d. $89,370.

66. Wesley Hospital installs a new parking lot. The paving cost $30,000 and the lights to

illuminate the new parking area cost $15,000. Which of the following statements is true

with respect to these additions?

a. $30,000 should be debited to the Land account.

b. $15,000 should be debited to Land Improvements.

c. $45,000 should be debited to the Land account.

d. $45,000 should be debited to Land Improvements.

67. Land improvements should be depreciated over the useful life of the

a. land.

b. buildings on the land.

c. land or land improvements, whichever is longer.

d. land improvements.

68. Mattox Company is building a new plant that will take three years to construct. The

construction will be financed in part by funds borrowed during the construction period.

There are significant architect fees, excavation fees, and building permit fees. Which of

the following statements is true?

a. Excavation fees are capitalized but building permit fees are not.

b. Architect fees are capitalized but building permit fees are not.

c. Interest is capitalized during the construction as part of the cost of the building.

d. The capitalized cost is equal to the contract price to build the plant less any interest on

borrowed funds.

69. A company purchases a remote site building for computer operations. The building will be

suitable for operations after some expenditures. The wiring must be replaced to computer

specifications. The roof is leaky and must be replaced. All rooms must be repainted and

recarpeted and there will also be some plumbing work done. Which of the following

statements is true?

a. The cost of the building will not include the repainting and recarpeting costs.

b. The cost of the building will include the cost of replacing the roof.

c. The cost of the building is the purchase price of the building, while the additional

expenditures are all capitalized as Building Improvements.

d. The wiring is part of the computer costs, not the building cost.

70. Engler Company purchases a new delivery truck for $45,000. The sales taxes are $3,000.

The logo of the company is painted on the side of the truck for $1,200. The truck license is

$120. The truck undergoes safety testing for $220. What does Engler record as the cost of

the new truck?

a. $49,540

b. $49,420

c. $48,000

d. $47,420

71. All of the following factors in computing depreciation are estimates except

a. cost.

b. residual value.

c. salvage value.

d. useful life.

72. Presto Company purchased equipment and these costs were incurred:

Cash price $22,500

Sales taxes 1,800

Insurance during transit 320

Installation and testing 430

Total costs $25,050

Presto will record the acquisition cost of the equipment as

a. $22,500.

b. $24,300.

c. $24,620.

d. $25,050.

73. Angie’s Blooms purchased a delivery van for $20,000. The company was given a $2,000

cash discount by the dealer, and paid $1,000 sales tax. Annual insurance on the van is

$500. As a result of the purchase, by how much will Angie’s Blooms increase its van

account?

a. $20,000

b. $18,000

c. $19,500

d. $19,000

74. Yocum Company purchased equipment on January 1 at a list price of $50,000, with credit

terms 2/10, n/30. Payment was made within the discount period and Yocum was given a

$1,000 cash discount. Yocum paid $2,500 sales tax on the equipment, and paid

installation charges of $880. Prior to installation, Yocum paid $2,000 to pour a concrete

slab on which to place the equipment. What is the total cost of the new equipment?

a. $52,380

b. $54,380

c. $55,380

d. $50,500

75. Interest may be included in the acquisition cost of a plant asset

a. during the construction period of a self-constructed asset.

b. if the asset is purchased on credit.

c. if the asset acquisition is financed by a long-term note payable.

d. if it is a part of a lump-sum purchase.

76. The balance in the Accumulated Depreciation account represents the

a. cash fund to be used to replace plant assets.

b. amount to be deducted from the cost of the plant asset to arrive at its fair market

value.

c. amount charged to expense in the current period.

d. amount charged to expense since the acquisition of the plant asset.

77. Which one of the following items is not a consideration when recording periodic

depreciation expense on plant assets?

a. Salvage value

b. Estimated useful life

c. Cash needed to replace the plant asset

d. Cost

78. Depreciation is the process of allocating the cost of a plant asset over its service life in

a. an equal and equitable manner.

b. an accelerated and accurate manner.

c. a systematic and rational manner.

d. a conservative market-based manner.

79. The book value of an asset is equal to the

a. asset's market value less its historical cost.

b. blue book value relied on by secondary markets.

c. replacement cost of the asset.

d. asset's cost less accumulated depreciation.

80. Accountants do not attempt to measure the change in a plant asset's market value during

ownership because

a. the assets are not held for resale.

b. plant assets cannot be sold.

c. losses would have to be recognized.

d. it is management's responsibility to determine fair values.

81. Depreciation is a process of

a. asset devaluation.

b. cost accumulation.

c. cost allocation.

d. asset valuation.

82. Recording depreciation each period is necessary in accordance with the

a. going concern principle.

b. cost principle.

c. matching principle.

d. asset valuation principle.

83. In computing depreciation, salvage value is

a. the fair market value of a plant asset on the date of acquisition.

b. subtracted from accumulated depreciation to determine the plant asset's depreciable

cost.

c. an estimate of a plant asset's value at the end of its useful life.

d. ignored in all the depreciation methods.

84. When estimating the useful life of an asset, accountants do not consider

a. the cost to replace the asset at the end of its useful life.

b. obsolescence factors.

c. expected repairs and maintenance.

d. the intended use of the asset.

85. Useful life is expressed in terms of use expected from the asset under the

a. declining-balance method.

b. straight-line method.

c. units-of-activity method.

d. none of these.

86. Equipment was purchased for $75,000. Freight charges amounted to $3,500 and there

was a cost of $10,000 for building a foundation and installing the equipment. It is

estimated that the equipment will have a $15,000 salvage value at the end of its 5-year

useful life. Depreciation expense each year using the straight-line method will be

a. $17,700.

b. $14,700.

c. $12,300.

d. $12,000.

87. A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage

value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded

using the straight-line method. The annual depreciation rate is

a. 20%.

b. 2%.

c. 8%.

d. 25%.

88. A company purchased factory equipment on April 1, 2010 for $64,000. It is estimated that

the equipment will have an $8,000 salvage value at the end of its 10-year useful life.

Using the straight-line method of depreciation, the amount to be recorded as depreciation

expense at December 31, 2010 is

a. $6,400.

b. $5,600.

c. $4,200.

d. $4,800.

89. A company purchased office equipment for $40,000 and estimated a salvage value of

$8,000 at the end of its 5-year useful life. The constant percentage to be applied against

book value each year if the double-declining-balance method is used is

a. 20%.

b. 25%.

c. 40%.

d. 4%.

90. The declining-balance method of depreciation produces

a. a decreasing depreciation expense each period.

b. an increasing depreciation expense each period.

c. a declining percentage rate each period.

d. a constant amount of depreciation expense each period.

91. A company purchased factory equipment for $250,000. It is estimated that the equipment

will have a $25,000 salvage value at the end of its estimated 5-year useful life. If the

company uses the double-declining-balance method of depreciation, the amount of annual

depreciation recorded for the second year after purchase would be

a. $100,000.

b. $60,000.

c. $90,000.

d. $43,200.

92. The units-of-activity method is generally not suitable for

a. airplanes.

b. buildings.

c. delivery equipment.

d. factory machinery.

93. A plant asset cost $144,000 and is estimated to have an $18,000 salvage value at the end

of its 8-year useful life. The annual depreciation expense recorded for the third year using

the double-declining-balance method would be

a. $12,060.

b. $20,250.

c. $17,718.

d. $13,785.

94. A factory machine was purchased for $75,000 on January 1, 2010. It was estimated that it

would have a $15,000 salvage value at the end of its 5-year useful life. It was also

estimated that the machine would be run 40,000 hours in the 5 years. The company ran

the machine for 4,000 actual hours in 2010. If the company uses the units-of-activity

method of depreciation, the amount of depreciation expense for 2010 would be

a. $7,500.

b. $12,000.

c. $15,000.

d. $6,000.

95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method

which

a. is used for tax purposes.

b. must be used for financial statement purposes.

c. is required by the SEC.

d. expenses an asset over a single year because capital acquisitions must be expensed

in the year purchased.

96. Which of the following methods of computing depreciation is production based?

a. Straight-line

b. Declining-balance

c. Units-of-activity

d. None of these

97. Management should select the depreciation method that

a. is easiest to apply.

b. best measures the plant asset's market value over its useful life.

c. best measures the plant asset's contribution to revenue over its useful life.

d. has been used most often in the past by the company.

98. The depreciation method that applies a constant percentage to depreciable cost in

calculating depreciation is

a. straight-line.

b. units-of-activity.

c. declining-balance.

d. none of these.

99. On October 1, 2010, Holt Company places a new asset into service. The cost of the asset

is $60,000 with an estimated 5-year life and $15,000 salvage value at the end of its useful

life. What is the depreciation expense for 2010 if Holt Company uses the straight-line

method of depreciation?

a. $2,250

b. $12,000

c. $3,000

d. $6,000

100. On October 1, 2010, Holt Company places a new asset into service. The cost of the asset

is $60,000 with an estimated 5-year life and $15,000 salvage value at the end of its useful

life. What is the book value of the plant asset on the December 31, 2010, balance sheet

assuming that Holt Company uses the double-declining-balance method of depreciation?

a. $39,000

b. $45,000

c. $54,000

d. $57,000

101. Which depreciation method is most frequently used in businesses today?

a. Straight-line

b. Declining-balance

c. Units-of-activity

d. Double-declining-balance

102. Mott Company uses the units-of-activity method in computing depreciation. A new plant

asset is purchased for $24,000 that will produce an estimated 100,000 units over its useful

life. Estimated salvage value at the end of its useful life is $2,000. What is the depreciation

cost per unit?

a. $2.20

b. $2.40

c. $.22

d. $.24

103. Units-of-activity is an appropriate depreciation method to use when

a. it is impossible to determine the productivity of the asset.

b. the asset's use will be constant over its useful life.

c. the productivity of the asset varies significantly from one period to another.

d. the company is a manufacturing company.

104. The calculation of depreciation using the declining balance method,

a. ignores salvage value in determining the amount to which a constant rate is applied.

b. multiplies a constant percentage times the previous year's depreciation expense.

c. yields an increasing depreciation expense each period.

d. multiplies a declining percentage times a constant book value.

105. Farr Company purchased a new van for floral deliveries on January 1, 2010. The van cost

$36,000 with an estimated life of 5 years and $9,000 salvage value at the end of its useful

life. The double-declining-balance method of depreciation will be used. What is the

depreciation expense for 2010?

a. $7,200

b. $5,400

c. $10,800

d. $14,400

106. Farr Company purchased a new van for floral deliveries on January 1, 2010. The van cost

$36,000 with an estimated life of 5 years and $9,000 salvage value at the end of its useful

life. The double-declining-balance method of depreciation will be used. What is the

balance of the Accumulated Depreciation account at the end of 2011?

a. $5,760

b. $17,280

c. $23,040

d. $8,640

107. Moreno Company purchased equipment for $450,000 on January 1, 2009, and will use

the double-declining-balance method of depreciation. It is estimated that the equipment

will have a 3-year life and a $20,000 salvage value at the end of its useful life. The amount

of depreciation expense recognized in the year 2011 will be

a. $50,000.

b. $30,000.

c. $54,440.

d. $34,440.

108. A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of

$10,000 at the end of its useful life. The current year's Depreciation Expense is $5,000

calculated on the straight-line basis and the balance of the Accumulated Depreciation

account at the end of the year is $25,000. The remaining useful life of the plant asset is

a. 10 years.

b. 8 years.

c. 5 years.

d. 3 years.

109. Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there

was a cost of $8,000 for building a foundation and installing the equipment. It is estimated

that the equipment will have a $12,000 salvage value at the end of its 5-year useful life.

Depreciation expense each year using the straight-line method will be

a. $14,160.

b. $11,760.

c. $9,840.

d. $9,600.

110. Equipment was purchased for $17,000 on January 1, 2010. Freight charges amounted to

$700 and there was a cost of $2,000 for building a foundation and installing the

equipment. It is estimated that the equipment will have a $3,000 salvage value at the end

of its 5-year useful life. What is the amount of accumulated depreciation at December 31,

2011, if the straight-line method of depreciation is used?

a. $6,680

b. $3,340

c. $2,860

d. $5,720

111. A company purchased factory equipment on June 1, 2010, for $48,000. It is estimated that

the equipment will have a $3,000 salvage value at the end of its 10-year useful life. Using

the straight-line method of depreciation, the amount to be recorded as depreciation

expense at December 31, 2010, is

a. $4,500.

b. $2,625.

c. $2,250.

d. $1,875.

112. A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of

$8,000 at the end of its useful life. The current year's Depreciation Expense is $4,000

calculated on the straight-line basis and the balance of the Accumulated Depreciation

account at the end of the year is $20,000. The remaining useful life of the plant asset is

a. 10 years.

b. 8 years.

c. 5 years.

d. 3 years.

113. Sargent Corporation bought equipment on January 1, 2010. The equipment cost $90,000

and had an expected salvage value of $15,000. The life of the equipment was estimated

to be 6 years. The depreciable cost of the equipment is

a. $90,000.

b. $75,000.

c. $50,000.

d. $12,500.

114. Sargent Corporation bought equipment on January 1, 2010. The equipment cost $90,000

and had an expected salvage value of $15,000. The life of the equipment was estimated

to be 6 years. The depreciation expense using the straight-line method of depreciation is

a. $17,500.

b. $18,000.

c. $12,500.

d. none of the above.

115. Sargent Corporation bought equipment on January 1, 2010. The equipment cost $90,000

and had an expected salvage value of $15,000. The life of the equipment was estimated

to be 6 years. The book value of the equipment at the beginning of the third year would be

a. $90,000.

b. $75,000.

c. $65,000.

d. $25,000.

116. Tomko Company purchased machinery with a list price of $32,000. They were given a

10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500.

Tomko estimates that the machinery will have a useful life of 10 years and a residual

value of $10,000. If Tomko uses straight-line depreciation, annual depreciation will be

a. $2,050.

b. $2,036.

d. $3,050.

d. $1,880.

117. Drago Company purchased equipment on January 1, 2010, at a total invoice cost of

$600,000. The equipment has an estimated salvage value of $15,000 and an estimated

useful life of 5 years. What is the amount of accumulated depreciation at December 31,

2011, if the straight-line method of depreciation is used?

a. $120,000

b. $240,000

c. $117,000

d. $234,000

118. On January 1, a machine with a useful life of five years and a residual value of $15,000

was purchased for $45,000. What is the depreciation expense for year 2 under the

double-declining-balance method of depreciation?

a. $10,800

b. $18,000

c. $14,400

d. $8,640

119. A machine with a cost of $160,000 has an estimated salvage value of $10,000 and an

estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-ofactivity

method of depreciation. What is the amount of depreciation for the second full

year, during which the machine was used 5,000 hours?

a. $50,000

b. $30,000

c. $43,333

d. $53,333

120. Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an

estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity

method. What is the amount of depreciation for the first full year, during which the

equipment was used 3,300 hours?

a. $60,000

b. $67,800

c. $49,500

d. $56,250

121. Eckman Company purchased equipment for $40,000 on January 1, 2009, and will use the

double-declining-balance method of depreciation. It is estimated that the equipment will

have a 5-year life and a $2,000 salvage value at the end of its useful life. The amount of

depreciation expense recognized in the year 2011 will be

a. $5,760.

b. $9,120.

c. $9,600.

d. $5,472.

122. Grimwood Trucking purchased a tractor trailer for $98,000. Interline uses the units-ofactivity

method for depreciating its trucks and expects to drive the truck 1,000,000 miles

over its 12-year useful life. Salvage value is estimated to be $14,000. If the truck is driven

90,000 miles in its first year, how much depreciation expense should Grimwood record?

a. $7,000

b. $8,820

c. $7,560

d. $8,167

123. On May 1, 2010, Pinkley Company sells office furniture for $90,000 cash. The office

furniture originally cost $225,000 when purchased on January 1, 2003. Depreciation is

recorded by the straight-line method over 10 years with a salvage value of $22,500. What

depreciation expense should be recorded on this asset in 2010?

a. $6,750.

b. $7,500.

c. $10,125.

d. $20,250.

124. On May 1, 2010, Pinkley Company sells office furniture for $90,000 cash. The office

furniture originally cost $225,000 when purchased on January 1, 2003. Depreciation is

recorded by the straight-line method over 10 years with a salvage value of $22,500. What

gain should be recognized on the sale?

a. $6,750.

b. $13,500.

c. $14,250.

d. $27,000.

125. Mather Company purchased equipment on January 1, 2010 at a total invoice cost of

$224,000; additional costs of $4,000 for freight and $20,000 for installation were incurred.

The equipment has an estimated salvage value of $8,000 and an estimated useful life of

five years. The amount of accumulated depreciation at December 31, 2011 if the straightline

method of depreciation is used is:

a. $86,400.

b. $88,000.

c. $96,000.

d. $99,200.

126. Kingston Company purchased a piece of equipment on January 1, 2010. The equipment

cost $80,000 and had an estimated life of 8 years and a salvage value of $10,000. What

was the depreciation expense for the asset for 2011 under the double-declining-balance

method?

a. $8,667.

b. $15,000.

c. $20,000.

d. $8,749.

127. Able Towing Company purchased a tow truck for $75,000 on January 1, 2010. It was

originally depreciated on a straight-line basis over 10 years with an assumed salvage

value of $15,000. On December 31, 2012, before adjusting entries had been made, the

company decided to change the remaining estimated life to 4 years (including 2012) and

the salvage value to $2,500. What was the depreciation expense for 2012?

a. $7,500.

b. $6,000.

c. $18,750.

d. $15,125.

128. Nicholson Company purchased equipment on January 1, 2008, for $20,000 with an

estimated salvage value of $5,000 and estimated useful life of 8 years. On January 1,

2010, Nicholson decided the equipment will last 12 years from the date of purchase. The

salvage value is still estimated at $5,000. Using the straight-line method the new annual

depreciation will be:

a. $1,125.

b. $1,250.

c. $1,500.

d. $1,667.

129. An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and

an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is

revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line

depreciation, depreciation expense in year 6 would be

a. $18,000.

b. $13,200.

c. $9,000.

d. $12,600.

130. Equipment costing $30,000 with a salvage value of $6,000 and an estimated life of 8

years has been depreciated using the straight-line method for 2 years. Assuming a

revised estimated total life of 5 years and no change in the salvage value, the depreciation

expense for year 3 would be

a. $3,600.

b. $8,000.

c. $6,000.

d. $4,800.

131. Ron's Quik Shop bought machinery for $25,000 on January 1, 2010. Ron estimated the

useful life to be 5 years with no salvage value, and the straight-line method of depreciation

will be used. On January 1, 2011, Ron decides that the business will use the machinery

for a total of 6 years. What is the revised depreciation expense for 2011?

a. $4,000

b. $2,000

c. $3,333

d $5,000

132. Each of the following is used in computing revised annual depreciation for a change in

estimate except

a. book value.

b. cost.

c. depreciable cost.

d. remaining useful life.

133. A change in the estimated useful life of equipment requires

a. a retroactive change in the amount of periodic depreciation recognized in previous

years.

b. that no change be made in the periodic depreciation so that depreciation amounts are

comparable over the life of the asset.

c. that the amount of periodic depreciation be changed in the current year and in future

years.

d. that income for the current year be increased.

134. Enos Company has decided to change the estimate of the useful life of an asset that has

been in service for 2 years. Which of the following statements describes the proper way to

revise a useful life estimate?

a. Revisions in useful life are permitted if approved by the IRS.

b. Retroactive changes must be made to correct previously recorded depreciation.

c. Only future years will be affected by the revision.

d. Both current and future years will be affected by the revision.

135. Don's Copy Shop bought equipment for $90,000 on January 1, 2009. Don estimated the

useful life to be 3 years with no salvage value, and the straight-line method of depreciation

will be used. On January 1, 2010, Don decides that the business will use the equipment

for 5 years. What is the revised depreciation expense for 2010?

a. $30,000

b. $12,000

c. $15,000

d. $22,500

136. Costs incurred to increase the operating efficiency or useful life of a plant asset are

referred to as

a. capital expenditures.

b. expense expenditures.

c. ordinary repairs.

d. revenue expenditures.

137. Expenditures that maintain the operating efficiency and expected productive life of a plant

asset are generally

a. expensed when incurred.

b. capitalized as a part of the cost of the asset.

c. debited to the Accumulated Depreciation account.

d. not recorded until they become material in amount.

138. Which of the following is not true of ordinary repairs?

a. They primarily benefit the current accounting period.

b. They can be referred to as revenue expenditures.

c. They maintain the expected productive life of the asset.

d. They increase the productive capacity of the asset.

139. The paneling of the body of an open pickup truck would be classified as a(n)

a. revenue expenditure.

b. addition.

c. improvement.

d. ordinary repair.

140. Additions and improvements

a. occur frequently during the ownership of a plant asset.

b. normally involve immaterial expenditures.

c. increase the book value of plant assets when incurred.

d. typically only benefit the current accounting period.

141. If a plant asset is retired before it is fully depreciated and no salvage value is received,

a. a gain on disposal occurs.

b. a loss on disposal occurs.

c. either a gain or a loss can occur.

d. neither a gain nor a loss occurs.

142. A gain or loss on disposal of a plant asset is determined by comparing the

a. replacement cost of the asset with the asset's original cost.

b. book value of the asset with the asset's original cost.

c. original cost of the asset with the proceeds received from its sale.

d. book value of the asset with the proceeds received from its sale.

143. The book value of a plant asset is the difference between the

a. replacement cost of the asset and its historical cost.

b. cost of the asset and the amount of depreciation expense for the year.

c. cost of the asset and the accumulated depreciation to date.

d. proceeds received from the sale of the asset and its original cost.

144. If a plant asset is sold before it is fully depreciated,

a. only a gain on disposal can occur.

b. only a loss on disposal can occur.

c. either a gain or a loss can occur.

d. neither a gain nor a loss can occur.

145. If a plant asset is retired before it is fully depreciated, and the salvage value received is

less than the asset's book value,

a. a gain on disposal occurs.

b. a loss on disposal occurs.

c. there is no gain or loss on disposal.

d. additional depreciation expense must be recorded.

146. A company sells a plant asset which originally cost $180,000 for $60,000 on December 31,

2010. The Accumulated Depreciation account had a balance of $72,000 after the current

year's depreciation of $18,000 had been recorded. The company should recognize a

a. $120,000 loss on disposal.

b. $48,000 gain on disposal.

c. $48,000 loss on disposal.

d. $30,000 loss on disposal.

147. If disposal of a plant asset occurs during the year, depreciation is

a. not recorded for the year.

b. recorded for the whole year.

c. recorded for the fraction of the year to the date of the disposal.

d. not recorded if the asset is scrapped.

148. If a fully depreciated plant asset is still used by a company, the

a. estimated remaining useful life must be revised to calculate the correct revised

depreciation.

b. asset is removed from the books.

c. accumulated depreciation account is removed from the books but the asset account

remains.

d. asset and the accumulated depreciation continue to be reported on the balance sheet

without adjustment until the asset is retired.

149. Which of the following statements is not true when a fully depreciated plant asset is

retired?

a. The plant asset's book value is equal to its estimated salvage value.

b. The accumulated depreciation account is debited.

c. The asset account is credited.

d. The plant asset's original cost equals its book value.

150. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is

received,

a. a gain on disposal will be recorded.

b. phantom depreciation must be taken as though the asset were still on the books.

c. a loss on disposal will be recorded.

d. no gain or loss on disposal will be recorded.

151. The book value of an asset will equal its fair market value at the date of sale if

a. a gain on disposal is recorded.

b. no gain or loss on disposal is recorded.

c. the plant asset is fully depreciated.

d. a loss on disposal is recorded.

152. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the

fire, the accumulated depreciation on the truck was $50,000. An insurance check for

$125,000 was received based on the replacement cost of the truck. The entry to record

the insurance proceeds and the disposition of the truck will include a

a. Gain on Disposal of $15,000.

b. credit to the Truck account of $60,000.

c. credit to the Accumulated Depreciation account for $50,000.

d. Gain on Disposal of $65,000.

153. On July 1, 2010, Hale Kennels sells equipment for $66,000. The equipment originally cost

$180,000, had an estimated 5-year life and an expected salvage value of $30,000. The

accumulated depreciation account had a balance of $105,000 on January 1, 2010, using

the straight-line method. The gain or loss on disposal is

a. $9,000 gain.

b. $6,000 loss.

c. $9,000 loss.

d. $6,000 gain.

154. A loss on disposal of a plant asset is reported in the financial statements

a. in the Other Revenues and Gains section of the income statement.

b. in the Other Expenses and Losses section of the income statement.

c. as a direct increase to the capital account on the balance sheet.

d. as a direct decrease to the capital account on the balance sheet.

155. Yanik Company's delivery truck, which originally cost $70,000, was destroyed by fire. At

the time of the fire, the balance of the Accumulated Depreciation account amounted to

$47,500. The company received $40,000 reimbursement from its insurance company. The

gain or loss as a result of the fire was

a. $30,000 loss.

b. $17,500 loss.

c. $30,000 gain.

d. $17,500 gain.

ns: D

156. A truck that cost $21,000 and on which $10,000 of accumulated depreciation has been

recorded was disposed of for $9,000 cash. The entry to record this event would include a

a. gain of $2,000.

b. loss of $2,000.

c. credit to the Truck account for $11,000.

d. credit to Accumulated Depreciation for $10,000.

157. A truck that cost $36,000 and on which $30,000 of accumulated depreciation has been

recorded was disposed of for $9,000 cash. The entry to record this event would include a

a. gain of $3,000.

b. loss of $3,000.

c. credit to the Truck account for $6,000.

d. credit to Accumulated Depreciation for $30,000.

158. Orr Corporation sold equipment for $12,000. The equipment had an original cost of

$36,000 and accumulated depreciation of $18,000. As a result of the sale,

a. net income will increase $12,000.

b. net income will increase $6,000.

c. net income will decrease $6,000.

d. net income will decrease $12,000.

159. Powell’s Courier Service recorded a loss of $3,000 when it sold a van that originally cost

$28,000 for $5,000. Accumulated depreciation on the van must have been

a. $26,000.

b. $8,000.

c. $25,000.

d. $20,000.

160. A plant asset cost $45,000 when it was purchased on January 1, 2003. It was depreciated

by the straight-line method based on a 9-year life with no salvage value. On June 30,

2010, the asset was discarded with no cash proceeds. What gain or loss should be

recognized on the retirement?

a. No gain or loss.

b. $10,000 loss.

c. $7,500 loss.

d. $5,000 gain.

161. Nicklaus Company has decided to sell one of its old machines on June 30, 2010. The

machine was purchased for $120,000 on January 1, 2006, and was depreciated on a

straight-line basis for 10 years with no salvage value. If the machine was sold for $39,000,

what was the amount of the gain or loss recorded at the time of the sale?

a. $27,000.

b. $81,000.

c. $33,000.

d. $69,000.

162. On a balance sheet, natural resources may be described more specifically as all of the

following except

a. land improvements.

b. mineral deposits.

c. oil reserves.

d. timberlands.

163. Natural resources are

a. depreciated using the units-of-activity method.

b. physically extracted in operations and are replaceable only by an act of nature.

c. reported at their market value.

d. amortized over a period no longer than 40 years.

164. Depletion is

a. a decrease in market value of natural resources.

b. the amount of spoilage that occurs when natural resources are extracted.

c. the allocation of the cost of natural resources to expense.

d. the method used to record unsuccessful patents.

165. To qualify as natural resources in the accounting sense, assets must be

a. underground.

b. replaceable.

c. of a mineral nature.

d. physically extracted in operations.

166. The method most commonly used to compute depletion is the

a. straight-line method.

b. double-declining-balance method.

c. units-of-activity method.

d. effective interest method.

167. In computing depletion, salvage value is

a. always immaterial.

b. ignored.

c. impossible to estimate.

d. included in the calculation.

168. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons,

a. total depletion on the mine is based on the 1,200,000 tons.

b. depletion expense is recognized on the 1,500,000 tons extracted.

c. depletion expense is recognized on the 1,200,000 tons extracted and sold.

d. a separate accumulated depletion account is set up to record depletion on the

300,000 tons extracted but not sold.

169. A coal company invests $16 million in a mine estimated to have 20 million tons of coal and

no salvage value. It is expected that the mine will be in operation for 5 years. In the first

year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the

first year?

a. $800,000

b. $320,000

c. $80,000

d. Cannot be determined from the information provided.

170. Accumulated Depletion

a. is used by all companies with natural resources.

b. has a normal debit balance.

c. is a contra-asset account.

d. is never shown on the balance sheet.

171. On July 4, 2010, Wyoming Mining Company purchased the mineral rights to a granite

deposit for $800,000. It is estimated that the recoverable granite will be 400,000 tons.

During 2010, 100,000 tons of granite was extracted and 60,000 tons were sold. The

amount of the Depletion Expense recognized for 2010 would be

a. $100,000.

b. $60,000.

c. $120,000.

d. $200,000.

172. Depletion expense is computed by multiplying the depletion cost per unit by the

a. total estimated units.

b. total actual units.

c. number of units extracted.

d. number of units sold.

173. Intangible assets are the rights and privileges that result from ownership of long-lived

assets that

a. must be generated internally.

b. are depletable natural resources.

c. have been exchanged at a gain.

d. do not have physical substance.

174. Identify the item below where the terms are not related.

a. Equipment—depreciation

b. Franchise—depreciation

c. Copyright—amortization

d. Oil well—depletion

175. A patent should

a. be amortized over a period of 20 years.

b. not be amortized if it has an indefinite life.

c. be amortized over its useful life or 20 years, whichever is longer.

d. be amortized over its useful life or 20 years, whichever is shorter.

176. The entry to record patent amortization usually includes a credit to

a. Amortization Expense.

b. Accumulated Amortization.

c. Accumulated Depreciation.

d. Patents.

177. The cost of successfully defending a patent in an infringement suit should be

a. charged to Legal Expenses.

b. deducted from the book value of the patent.

c. added to the cost of the patent.

d. recognized as a loss in the current period.

178. An asset that cannot be sold individually in the market place is

a. a patent.

b. goodwill.

c. a copyright.

d. a trade name.

179. Goodwill can be recorded

a. when customers keep returning because they are satisfied with the company's

products.

b. when the company acquires a good location for its business.

c. when the company has exceptional management.

d. only when there is an exchange transaction involving the purchase of an entire

business.

180. On July 1, 2010, Jenks Company purchased the copyright to Jackson Computer tutorials

for $162,000. It is estimated that the copyright will have a useful life of 5 years with an

estimated salvage value of $12,000. The amount of Amortization Expense recognized for

the year 2010 would be

a. $32,400.

b. $15,000.

c. $30,000.

d. $16,200.

181. All of the following intangible assets are amortized except

a. copyrights.

b. limited-life franchises.

c. patents.

d. trademarks.

182. Which of the following is not an intangible asset arising from a government grant?

a. Goodwill

b. Patent

c. Trademark

d. Trade name

183. The amortization period for a patent cannot exceed

a. 50 years.

b. 40 years.

c. 20 years.

d. 10 years.

184. Cost allocation of an intangible asset is referred to as

a. amortization.

b. depletion.

c. accretion.

d. capitalization.

185. A patent

a. has a legal life of 40 years.

b. is nonrenewable.

c. can be renewed indefinitely.

d. is rarely subject to litigation because it is an exclusive right.

186. If a company incurs legal costs in successfully defending its patent, these costs are

recorded by debiting

a. Legal Expense.

b. an Intangible Loss account.

c. the Patent account.

d. a revenue expenditure account.

187. Copyrights are granted by the federal government

a. for the life of the creator or 70 years, whichever is longer.

b. for the life of the creator plus 70 years.

c. for the life of the creator or 70 years, whichever is shorter.

d. and therefore cannot be amortized.

188. Goodwill

a. is only recorded when generated internally.

b. can be subdivided and sold in parts.

c. can only be identified with the business as a whole.

d. can be defined as normal earnings less accumulated amortization.

189. In recording the acquisition cost of an entire business,

a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets.

b. assets are recorded at the seller's book values.

c. goodwill, if it exists, is never recorded.

d. goodwill is recorded as the excess of cost over the book value of identifiable net

assets.

190. Research and development costs

a. are classified as intangible assets.

b. must be expensed when incurred under generally accepted accounting principles.

c. should be included in the cost of the patent they relate to.

d. are capitalized and then amortized over a period not to exceed 40 years.

191. A computer company has $2,000,000 in research and development costs. Before

accounting for these costs, the net income of the company is $1,600,000. What is the

amount of net income or loss after these R & D costs are accounted for?

a. $400,000 loss

b. $1,600,000 net income

c. $0

d. Cannot be determined from the information provided.

192. Henson Company incurred $300,000 of research and development costs in its laboratory

to develop a new product. It spent $40,000 in legal fees for a patent granted on January 2,

2010. On July 31, 2010, Henson paid $30,000 for legal fees in a successful defense of the

patent. What is the total amount that should be debited to Patents through July 31, 2010?

a. $300,000

b. $70,000

c. $370,000

d. Some other amount

193. Given the following account balances at year end, compute the total intangible assets on

the balance sheet of Kepler Enterprises.

Cash $1,500,000

Accounts Receivable 4,000,000

Trademarks 1,000,000

Goodwill 4,500,000

Research & Development Costs 2,000,000

a. $11,500,000

b. $7,500,000

c. $5,500,000

d. $9,500,000

194. Rooney Company incurred $280,000 of research and development cost in its laboratory to

develop a patent granted on January 1, 2010. On July 31, 2010, Rooney paid $42,000 for

legal fees in a successful defense of the patent. The total amount debited to Patents

through July 31, 2010, should be:

a. $280,000.

b. $42,000.

c. $322,000.

d. $238,000.

195. Mehring Company reported net sales of $270,000, net income of $54,000, beginning total

assets of $240,000, and ending total assets of $360,000. What was the company's asset

turnover ratio?

a. 1.13

b. 0.18

c. 0.90

d. 1.11

196. During 2010, Rathke Corporation reported net sales of $2,000,000, net income of

$1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total

assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and

accumulated depreciation of $500,000. Rathke’s asset turnover ratio is

a. 2 times.

b. 1.6 times.

c. 1.3 times.

d. .96 times.

197. During 2010, Stein Corporation reported net sales of $3,000,000 and net income of

$1,800,000. Stein also reported beginning total assets of $1,000,000 and ending total

assets of $1,500,000. Stein’s asset turnover ratio is

a. 3.0 times.

b. 2.4 times.

c. 2.0 times.

d. 1.4 times.

198. Natural resources are generally shown on the balance sheet under

a. Intangibles.

b. Investments.

c. Property, Plant, and Equipment.

d. Owner's Equity.

199. Which of the following statements concerning financial statement presentation is not a

true statement?

a. Intangibles are reported separately under Intangible Assets.

b. The balances of major classes of assets may be disclosed in the footnotes.

c. The balances of the accumulated depreciation of major classes of assets may be

disclosed in the footnotes.

d. The balances of all individual assets, as they appear in the subsidiary plant ledger,

should be disclosed in the footnotes.

200. Intangible assets

a. should be reported under the heading Property, Plant, and Equipment.

b. are not reported on the balance sheet because they lack physical substance.

c. should be reported as Current Assets on the balance sheet.

d. should be reported as a separate classification on the balance sheet.

201. A company has the following assets:

Buildings and Equipment, less accumulated depreciation of $2,000,000 $9,600,000

Copyrights 960,000

Patents 4,000,000

Timberlands, less accumulated depletion of $2,800,000 4,800,000

The total amount reported under Property, Plant, and Equipment would be

a. $19,360,000.

b. $14,400,000.

c. $18,400,000.

d. $15,360,000.

a202. A company decides to exchange its old machine and $77,000 cash for a new machine.

The old machine has a book value of $63,000 and a fair market value of $70,000 on the

date of the exchange. The cost of the new machine would be recorded at

a. $140,000.

b. $147,000.

c. $133,000.

d. cannot be determined.

a203. A company exchanges its old office equipment and $40,000 for new office equipment. The

old office equipment has a book value of $28,000 and a fair market value of $20,000 on

the date of the exchange. The cost of the new office equipment would be recorded at

a. $68,000.

b. $60,000.

c. $48,000.

d. cannot be determined.

a204. In an exchange of plant assets that has commercial substance, any difference between

the fair market value and the book value of the old plant asset is

a. recorded as a gain or loss.

b. recorded if a gain but is deferred if a loss.

c. recorded if a loss but is deferred if a gain.

d. deferred if either a gain or loss.

a205. Gains on an exchange of plant assets that has commercial substance are

a. deducted from the cost of the new asset acquired.

b. deferred.

c. not possible.

d. recognized immediately.

a206. Losses on an exchange of plant assets that has commercial substance are

a. not possible.

b. deferred.

c. recognized immediately.

d. deducted from the cost of the new asset acquired.

a207. The cost of a new asset acquired in an exchange that has commercial substance is the

cash paid plus the

a. book value of the old asset.

b. fair market value of the old asset.

c. book value of the asset acquired.

d. fair market value of the new asset.

208. The cost of land includes all of the following except

a. real estate brokers’ commissions.

b. closing costs.

c. accrued property taxes.

d. parking lots.

209. A term that is not synonymous with property, plant, and equipment is

a. plant assets.

b. fixed assets.

c. intangible assets.

d. long-lived tangible assets.

210. The factor that is not relevant in computing depreciation is

a. replacement value.

b. cost.

c. salvage value.

d. useful life.

211. Depreciable cost is the

a. book value of an asset less its salvage value.

b. cost of an asset less its salvage value.

c. cost of an asset less accumulated depreciation.

d. book value of an asset.

212. Santayana Company purchased a machine on January 1, 2008, for $12,000 with an

estimated salvage value of $3,000 and an estimated useful life of 8 years. On January 1,

2010, Santayana decides the machine will last 12 years from the date of purchase. The

salvage value is still estimated at $3,000. Using the straight-line method, the new annual

depreciation will be

a. $675.

b. $750.

c. $900.

d. $1,000.

213. Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and

are referred to as

a. capital expenditures.

b. expense expenditures.

c. improvements.

d. revenue expenditures.

214. Improvements are

a. revenue expenditures.

b. debited to an appropriate asset account when they increase useful life.

c. debited to accumulated depreciation when they do not increase useful life.

d. debited to an appropriate asset account when they do not increase useful life.

215. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the

a. salvage value of the asset sold.

b. market value of the asset sold.

c. book value of the asset sold.

d. accumulated depreciation on the asset sold.

216. The entry to record depletion expense

a. decreases owner's equity and assets.

b. decreases net income and increases liabilities.

c. decreases assets and liabilities.

d. decreases assets and increases liabilities.

217. All of the following are intangible assets except

a. copyrights.

b. goodwill.

c. patents.

d. research and development costs.

218. A purchased patent has a legal life of 20 years. It should be

a. expensed in the year of acquisition.

b. amortized over 20 years regardless of its useful life.

c. amortized over its useful life if less than 20 years.

d. not amortized.

219. The asset turnover ratio is computed by dividing

a. net income by average total assets.

b. net sales by average total assets.

c. net income by ending total assets.

d. net sales by ending total assets.

a220. In an exchange of plant assets that has commercial substance

a. neither gains nor losses are recognized immediately.

b. gains, but not losses, are recognized immediately.

c. losses, but not gains, are recognized immediately.

d. both gains and losses are recognized immediately.

BRIEF EXERCISES

BE 221

Indicate whether each of the following expenditures should be classified as land (L), land

improvements (LI), buildings (B), equipment (E), or none of these (X).

_____ 1. Parking lots

_____ 2. Electricity used by a machine

_____ 3. Excavation costs

_____ 4. Interest on building construction loan

_____ 5. Cost of trial runs for machinery

_____ 6. Drainage costs

_____ 7. Cost to install a machine

_____ 8. Fences

_____ 9. Unpaid (past) property taxes assumed

_____10. Cost of tearing down a building when land and a building on it are purchased

BE 222

DeLong Corporation purchased land adjacent to its plant to improve access for trucks making

deliveries. Expenditures incurred in purchasing the land were as follows: purchase price,

$50,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building

on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and

paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should

be included in the Land account.

BE 223

Hadicke Company purchased a delivery truck for $35,000 on January 1, 2010. The truck was

assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute

depreciation expense using the double-declining-balance method for the years 2010 and 2011.

BE 224

Hadicke Company purchased a delivery truck for $35,000 on January 1, 2010. The truck was

assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck

was driven 18,000 miles in 2010 and 22,000 miles in 2011. Compute depreciation expense using

the units-of-activity method for the years 2010 and 2011.

BE 225

Karnes Company purchased a truck for $57,000. The company expected the truck to last four

years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During

the second year the truck was driven 27,000 miles. Compute the depreciation for the second year

under each of the methods below and place your answers in the blanks provided.

Units-of-activity $

Double-declining-balance $

BE 226

On January 1, 2008, Reyes Company purchased a computer system for $20,500. The system

had an estimated useful life of 5 years and no salvage value. At January 1, 2010, the company

revised the remaining useful life to two years. What amount of depreciation will be recorded for

2010 and 2011?

BE 227

Miley Enterprises sold equipment on January 1, 2010 for $5,000. The equipment had cost

$24,000. The balance in Accumulated Depreciation at January 1 is $20,000. What entry would

Robot make to record the sale of the equipment?

BE 228

On January 1, 2010, Lakeside Enterprises purchased natural resources for $1,200,000. The

company expects the resources to produce 12,000,000 units of product. (1) What is the depletion

cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion

expense for the month?

BE 229

On January 2, 2010, Harlan Company purchased a patent for $38,000. The patent has an

estimated useful life of 25 years and a 20-year legal life. What entry would the company make at

December 31, 2010 to record amortization expense on the patent?

BE 230

Using the following data for Notson, Inc., compute its asset turnover ratio.

Notson, Inc.

Net Income 2010 $ 123,000

Total Assets 12/31/10 2,443,000

Total Assets 12/31/09 1,880,000

Net Sales 2010 2,135,000

EXERCISES

Ex. 231

Kemp Company purchased factory equipment with an invoice price of $80,000. Other costs

incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor

costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire

insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000

salvage value at the end of its 5-year useful service life.

Instructions

(a) Compute the acquisition cost of the equipment. Clearly identify each element of cost.

(b) If the double-declining-balance method of depreciation was used, the constant percentage

applied to a declining book value would be __________.

Ex. 232

For each entry below make a correcting entry if necessary. If the entry given is correct, then state

"No entry required."

(a) The $60 cost of repairing a printer was charged to Computer Equipment.

(b) The $5,000 cost of a major engine overhaul was debited to Repair Expense. The overhaul is

expected to increase the operating efficiency of the truck.

(c) The $6,000 closing costs associated with the acquisition of land were debited to Legal

Expense.

(d) A $500 charge for transportation expenses on new equipment purchased was debited to

Freight-In.

Ex. 233

Lewallen Company was organized on January 1. During the first year of operations, the following

expenditures and receipts were recorded in random order in the account, Land.

Debits

1. Cost of real estate purchased as a plant site (land and building). $ 220,000

2. Accrued real estate taxes paid at the time of the purchase of the real estate. 4,000

3. Cost of demolishing building to make land suitable for construction of a new

building. 15,000

4. Architect's fees on building plans. 14,000

5. Excavation costs for new building. 24,000

6. Cost of filling and grading the land. 5,000

7. Insurance and taxes during construction of building. 6,000

8. Cost of repairs to building under construction caused by a small fire. 7,000

9. Interest paid during the year, of which $54,000 pertains to the construction

period. 64,000

10. Full payment to building contractor. 760,000

11. Cost of parking lots and driveways. 36,000

12. Real estate taxes paid for the current year on the land. 4,000

Total Debits $1,159,000

Ex. 233 (Cont.)

Credits

13. Insurance proceeds for fire damage. $3,000

14. Proceeds from salvage of demolished building 3,500

Total Credits $6,500

Instructions

Analyze the foregoing transactions using the following tabular arrangement. Insert the number of

each transaction in the Item space and insert the amounts in the appropriate columns.

Item Land Building Other Account Title

Ex. 234

On March 1, 2010, Joyner Company acquired real estate on which it planned to construct a small

office building. The company paid $70,000 in cash. An old warehouse on the property was razed

at a cost of $7,600; the salvaged materials were sold for $1,700. Additional expenditures before

construction began included $1,100 attorney's fee for work concerning the land purchase, $4,000

real estate broker's fee, $7,800 architect's fee, and $14,000 to put in driveways and a parking lot.

Instructions

Determine the amount to be reported as the cost of the land.

Ex. 235

Conroy Company purchased a machine at a cost of $90,000. The machine is expected to have a

$5,000 salvage value at the end of its 5-year useful life.

Instructions

Compute annual depreciation for the first and second years using the

(a) straight-line method.

(b) double-declining-balance method.

Ex. 236

Guardado Company purchased a new machine for $300,000. It is estimated that the machine will

have a $30,000 salvage value at the end of its 5-year useful service life. The double-decliningbalance

method of depreciation will be used.

Instructions

Prepare a depreciation schedule which shows the annual depreciation expense on the machine

for its 5-year life.

Ex. 237

Marlow Company purchased equipment on January 1, 2009 for $70,000. It is estimated that the

equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated

that the equipment will produce 100,000 units over its 5-year life.

Instructions

Answer the following independent questions.

1. Compute the amount of depreciation expense for the year ended December 31, 2009, using

the straight-line method of depreciation.

2. If 16,000 units of product are produced in 2009 and 24,000 units are produced in 2010, what

is the book value of the equipment at December 31, 2010? The company uses the units-ofactivity

depreciation method.

3. If the company uses the double-declining-balance method of depreciation, what is the

balance of the Accumulated Depreciation—Equipment account at December 31, 2011?

Ex. 238

A plant asset acquired on October 1, 2010, at a cost of $300,000 has an estimated useful life of

10 years. The salvage value is estimated to be $30,000 at the end of the asset's useful life.

Instructions

Determine the depreciation expense for the first two years using:

(a) the straight-line method.

(b) the double-declining-balance method.

Ex. 239

Andy’s, a popular pizza hang-out, has a thriving delivery business. Andy’s has a fleet of three

delivery automobiles. Prior to making the entry for this year's depreciation expense, the

subsidiary ledger for the fleet is as follows:

Accumulated

Estimated Depr.—Beg. Miles Operated

Car Cost Salvage Value Life in Miles of the Year During Year

1 $21,000 $3,000 50,000 $2,520 20,000

2 18,000 2,400 60,000 2,340 22,000

3 20,000 2,500 70,000 2,000 19,000

Instructions

(a) Determine the depreciation rates per mile for each car.

(b) Determine the Depreciation Expense for each car for the current year.

(c) Make one compound journal entry to record the annual Depreciation Expense for the fleet.

Ex. 240

The Nichols Clinic purchased a new surgical laser for $80,000. The estimated salvage value is

$5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It

was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year

4; 2,000 hours in year 5.

Instructions

(a) Compute the annual depreciation for each of the five years under each of the following

methods:

(1) straight-line.

(2) units-of-activity.

(b) If you were the administrator of the clinic, which method would you deem as most

appropriate? Justify your answer.

(c) Which method would result in the lowest reported income in the first year? Which method

would result in the lowest total reported income over the five-year period?

,000) and, therefore, the same total income.

Ex. 241

The December 31, 2009 balance sheet of Cooper Company showed Equipment of $64,000 and

Accumulated Depreciation of $18,000. On January 1, 2010, the company decided that the

equipment has a remaining useful life of 6 years with a $4,000 salvage value.

Instructions

Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation.

10 - 54 Test Bank for Accounting Principles, Ninth Edition

Ex. 242

Northeast Airlines purchased a 747 aircraft on January 1, 2009, at a cost of $35,000,000. The

estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On

January 1, 2012 the airline revises the total estimated useful life to 15 years with a revised

salvage value of $3,500,000.

Instructions

(a) Compute the depreciation and book value at December 31, 2011 using the straight-line

method and the double-declining-balance method.

(b) Assuming the straight-line method is used, compute the depreciation expense for the year

ended December 31, 2012.

Ex. 243

Payton Company purchased a machine on January 1, 2010, at a cost of $80,000. It is expected

to have an estimated salvage value of $5,000 at the end of its 5-year life. The company

capitalized the machine and depreciated it in 2010 using the double-declining-balance method of

depreciation. The company has a policy of using the straight-line method to depreciate equipment

but the company accountant neglected to follow company policy when he used the doubledeclining-

balance method. Net income for the year ended December 31, 2010 was $55,000 as

the result of depreciating the machine incorrectly.

Instructions

Using the method of depreciation which the company normally follows, prepare the correcting

entry and determine the corrected net income. (Show computations.)

Ex. 244

Equipment was acquired on January 1, 2007, at a cost of $80,000. The equipment was originally

estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has

been recorded through December 31, 2010, using the straight-line method. On January 1, 2011,

the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8

years.

Instructions

Determine the Depreciation Expense for 2011.

Ex. 245

Steve White the new controller of Weinberg Company, has reviewed the expected useful lives

and salvage values of selected depreciable assets at the beginning of 2010. His findings are as

follows.

Type of

Asset

Date

Acquired Cost

Accumulated

Depreciation

1/1/10

Useful Life

in Years Salvage Value

Old Proposed Old Proposed

Building 1/1/04 $1,200,000 $171,000 40 50 $60,000 $39,000

Warehouse 1/1/05 160,000 40,000 25 20 7,000 6,000

All assets are depreciated by the straight-line method. Weinberg Company uses a calendar year

in preparing annual financial statements. After discussion, management has agreed to accept

Steve's proposed changes.

Instructions

(a) Compute the revised annual depreciation on each asset in 2010. (Show computations.)

(b) Prepare the entry (or entries) to record depreciation on the building in 2010.

Ex. 246

Kennett Company purchased a machine on January 1, 2010. In addition to the purchase price

paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b)

transportation and insurance costs while the machinery was in transit from the seller, (c)

personnel training costs for initial operation of the machinery, (d) annual city operating license, (e)

major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before

the machinery was placed into service, (g) lubrication of the machinery gearing after the

machinery was placed into service, and (h) installation costs necessary to secure the machinery

to the building flooring.

Ex. 246 (Cont.)

Instructions

Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces

provided: C = Capital, R = Revenue.

(a)_____________ (b)______________ (c)______________ (d)______________

(e)_____________ (f)______________ (g)______________ (h)______________

Ex. 247

Eckan Word Processing Service uses the straight-line method of depreciation. The company's

fiscal year end is December 31. The following transactions and events occurred during the first

three years.

2009 July 1 Purchased a computer from the Computer Center for $2,300 cash plus sales

tax of $150, and shipping costs of $50.

Nov. 3 Incurred ordinary repairs on computer of $140.

Dec. 31 Recorded 2009 depreciation on the basis of a four year life and estimated

salvage value of $500.

2010 Dec. 31 Recorded 2010 depreciation.

2011 Jan. 1 Paid $400 for an upgrade of the computer. This expenditure is expected to

increase the operating efficiency and capacity of the computer.

Instructions

Prepare the necessary entries. (Show computations.)

Ex. 248

Identify the following expenditures as capital expenditures or revenue expenditures.

(a) Replacement of worn out gears on factory machinery.

(b) Construction of a new wing on an office building.

(c) Painting the exterior of a building.

(d) Oil change on a company truck.

(e) Replacing a Pentium II computer chip with a Pentium IV chip, which increases productive

capacity. No extension of useful life expected.

(f) Overhaul of a truck motor. One year extension in useful life is expected.

(g) Purchased a wastebasket at a cost of $10.

(h) Painting and lettering of a used truck upon acquisition of the truck.

Ex. 249

On January 1, 2008 Marsh Company purchased and installed a telephone system at a cost of

$20,000. The equipment was expected to last five years with a salvage value of $3,000. On

January 1, 2009 more telephone equipment was purchased to tie-in with the current system for

$10,000. The new equipment is expected to have a useful life of four years. Through an error, the

new equipment was debited to Telephone Expense. Marsh Company uses the straight-line

method of depreciation.

Instructions

Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation

Expense, and Net Incom

the new equipment

Ex. 249 (Cont.)

Telephone Expense Depreciation Expense Net Income

Overstated Overstated Overstated

Year (Understated) (Understated) (Understated)

___________________________________________________________________________

2009

2010

2011

2012

Ex. 250

Gurney Company sold equipment on July 31, 2010 for $50,000. The equipment had cost

$140,000 and had $80,000 of accumulated depreciation as of January 1, 2010. Depreciation for

the first 6 months of 2010 was $8,000.

Instructions

Prepare the journal entry to record the sale of the equipment.

Ex. 251

(a) Payne Company purchased equipment in 2003 for $90,000 and estimated a $6,000 salvage

value at the end of the equipment's 10-year useful life. At December 31, 2009, there was

$58,800 in the Accumulated Depreciation account for this equipment using the straight-line

method of depreciation. On March 31, 2010, the equipment was sold for $24,000.

Prepare the appropriate journal entries to remove the equipment from the books of Payne

Company on March 31, 2010.

(b) Judson Company sold a machine for $15,000. The machine originally cost $35,000 in 2007

and $8,000 was spent on a major overhaul in 2010 (charged to Machine account).

Accumulated Depreciation on the machine to the date of disposal was $28,000.

Prepare the appropriate journal entry to record the disposition of the machine.

(c) Donahue Company sold office equipment that had a book value of $6,000 for $8,000. The

office equipment originally cost $20,000 and it is estimated that it would cost $25,000 to

replace the office equipment.

Prepare the appropriate journal entry to record the disposition of the office equipment.

Ex. 252

Hanshew's Lumber Mill sold two machines in 2011. The following information pertains to the two

machines:

Purchase Useful Salvage Depreciation Sales

Machine Cost Date Life Value Method Date Sold Price

#1 $66,000 7/1/07 5 yrs. $6,000 Straight-line 7/1/11 $15,000

#2 $40,000 7/1/10 5 yrs. $5,000 Double-declining- 12/31/11 $24,000

balance

Instructions

(a) Compute the depreciation on each machine to the date of disposal.

(b) Prepare the journal entries in 2011 to record 2011 depreciation and the sale of each

machine.

Ex. 253

Presented below are selected transactions for Corbin Company for 2010.

Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on

January 1, 2000. The machine cost $90,000 on that date, and had a useful life of 10

years with no salvage value.

April 30 Sold a machine for $28,000 that was purchased on January 1, 2007. The machine

cost $75,000, and had a useful life of 5 years with no salvage value.

Dec. 31 Discarded a business automobile that was purchased on April 1, 2006. The car cost

$32,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Instructions

Journalize all entries required as a result of the above transactions. Corbin Company uses the

straight-line method of depreciation and has recorded depreciation through December 31, 2009.

Ex. 254

Tidwell Company sold the following two machines in 2010:

Machine A Machine B

Cost $68,000 $80,000

Purchase date 7/1/06 1/1/07

Useful life 8 years 5 years

Salvage value $4,000 $4,000

Depreciation method Straight-line Double-declining-balance

Date sold 7/1/10 8/1/10

Sales Price $30,000 $16,000

Instructions

Journalize all entries required to update depreciation and record the sales of the two assets in

2010. The company has recorded depreciation on the machine through December 31, 2009.

Ex. 255

Koch Company owns equipment that cost $100,000 when purchased on January 1, 2007. It has

been depreciated using the straight-line method based on estimated salvage value of $10,000

and an estimated useful life of 5 years.

Instructions

Prepare Koch Company's journal entries to record the sale of the equipment in these four

independent situations.

(a) Sold for $56,000 on January 1, 2010.

(b) Sold for $56,000 on May 1, 2010.

(c) Sold for $22,000 on January 1, 2010.

(d) Sold for $22,000 on October 1, 2010.

Filename:Chapter10_Acc_principle_An.1.docx
Filesize: 77.84 kB
Filetype:docx (Mime Type: application/octet-stream)
Creator:meenudear
Created On: 03/03/2013 09:31
Viewers:Everybody
Maintained by:Editor
Hits:3 Hits
Last updated on: 03/03/2013 09:32
Homepage:
 

Advertisement

Featured Link:
homeworkhelpanytime
Search Instant Solutions at Homeworkhelpanytime.com
Raaviblog.com
Read articles on latest gadgets and Web Apps.
546873_Discover a New Love Romance Bookstore - 125x125