Fundamental Accounting Principles 14th Canadian Edition Volume 2 By Larson – Test Bank

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Student: ___________________________________________________________________________

  1. Property, plant and equipment are assets held for sale.
    True    False

 

  1. Non-current assets are any liabilities that are used in the operations of a business.
    True    False

 

  1. Non-current assets can be divided into two groups including tangible and intangible assets. These assets are generally used in operations of a business and have useful lives extending over more than one accounting period.
    True    False

 

  1. Land purchased as a building site is a tangible asset called property, plant and equipment and is classified under the “Long-term Investments” section on the balance sheet.
    True    False

 

  1. The cost of an asset includes all normal and reasonable expenditures necessary to get it in place and ready for its intended use.
    True    False

 

  1. If a machine is damaged during unpacking, the repairs are added to its cost.
    True    False

 

  1. To be charged to and reported as part of the cost of property, plant and equipment, an expenditure must be normal, reasonable, and necessary in preparing the asset for its intended use.
    True    False

 

  1. The purchase of real estate that includes land, building, and land improvements is called a lump-sum purchase.
    True    False

 

  1. Any expenditures for legal fees, surveying, and accrued property taxes should not be included in the cost of land.
    True    False

 

  1. Revenue expenditures are additional costs of property, plant and equipment that provide material benefits extending beyond the current period.
    True    False

 

  1. Revenue expenditures are expenditures to keep assets in normal operating condition.
    True    False

 

  1. Capital expenditures are also called balance sheet expenditures.
    True    False

 

  1. SportsWorld spent $17,000 to remodel its store. This cost will be recognized with a debit to Store Building.
    True    False

 

  1. Treating small-dollar-amount capital expenditures as revenue expenditures is likely to mislead users of financial statements.
    True    False

 

  1. The cost principle requires that an asset be recorded at the cash or cash equivalent amount given in exchange.
    True    False

 

  1. Subsequent expenditures are purchases made after the acquisition of equipment to operate, maintain, repair, and improve it.
    True    False

 

  1. Depreciation is the process of allocating the cost of a tangible asset in a rational and systematic manner over the asset’s estimated useful life.
    True    False

 

  1. Residual value is an estimate of an asset’s value at the end of its useful life.
    True    False

 

  1. Inadequacy refers to the condition where the capacity of a property, plant and equipment item is too small to meet the company’s productive demands.
    True    False

 

  1. Depreciation should always be recorded as soon as an asset is purchased.
    True    False

 

  1. Depreciation measures the decline in market value of an asset.
    True    False

 

  1. Because depreciation is based on predictions of residual value and useful life, depreciation is an estimate.
    True    False

 

  1. On the balance sheet, it is not necessary to report both the cost and the accumulated depreciation of an asset.
    True    False

 

  1. Accumulated depreciation represents funds set aside to buy new assets when the assets currently owned are replaced.
    True    False

 

  1. The relevance principle requires that property, plant and equipment be reported at book value rather than at market value.
    True    False

 

  1. Regardless of the method of depreciation, total depreciation expense will be the same over an asset’s useful life.
    True    False

 

  1. Financial accounting and tax accounting require the same recordkeeping; therefore, there should be no difference in results between the two accounting systems.
    True    False

 

  1. Companies are required to use the straight line depreciation method for tax purposes because this method yields the lowest depreciation expense and results in the highest payment of tax.
    True    False

 

  1. The Income Tax Act generally requires that companies use a double-declining-balance method of cost allocation called Capital Cost Allowance to determine the maximum amount of deduction for a taxation year.
    True    False

 

  1. Because land has unlimited life, it is not subject to depreciation. Therefore, items that increase the usefulness of the land such as parking lots are also not depreciated.
    True    False

 

  1. The most frequently used method of depreciation is the straight-line method.
    True    False

 

  1. The cost of an asset plus its accumulated depreciation equals the asset’s book value.
    True    False

 

  1. The units of production method of depreciation charges a varying amount of expense for each period of an asset’s useful life depending on its usage.
    True    False

 

  1. An accelerated depreciation method yields smaller depreciation expense in the early years of an asset’s life and larger charges in later years.
    True    False

 

  1. The double-declining balance method is applied by (1) calculating the asset’s straight-line depreciation rate, (2) doubling it, (3) subtracting residual value from cost, and (4) multiplying the rate times the cost.
    True    False

 

  1. SportsWorld purchased store equipment for $65,000. The equipment has an estimated residual value of $6,000, with an estimated useful life of 10 years. The annual depreciation using the straight-line method will be $3,900 per year.
    True    False

 

  1. A company is required to purchase all assets at the beginning of an accounting period so that a full year’s worth of depreciation can be taken.
    True    False

 

  1. Machinery having a four-year useful life and a residual value of $5,000 was acquired for $65,000 cash on June 28. Using the nearest whole month method, the company would recognize $11,250 for depreciation expense at the end of the first year, December 31.
    True    False

 

  1. A depreciable asset that is purchased on March 18 would be depreciated for nine months of the first year, if the fiscal year ends on December 31 using nearest whole month method.
    True    False

 

  1. The half year rule is the partial-year depreciation method that calculates depreciation by determining if the asset was used for more than half of the month.
    True    False

 

  1. Machinery after two years worth of depreciation has an opening book value of $6,400. At the beginning of the third year, the predicted number of years remaining in its useful life changes from three years to four years and its estimated residual value changes from the original $1,000 to $400. The revised annual depreciation using the straight-line method is $1,500.
    True    False

 

  1. An asset that cost $5,000 has a current book value of $2,000. A revision of the useful life of the asset estimates the asset has a remaining useful life of four years and will have a residual value of $400. Using the straight-line method, the revised depreciation will be $500 per year.
    True    False

 

  1. When the cost of the asset changes because of a subsequent capital expenditure, revised depreciation for current and future periods must be calculated and adjusted.
    True    False

 

  1. Depreciation amounts can be revised because of changes in the estimates for residual value, useful life or because of subsequent revenue expenditures.
    True    False

 

  1. An asset with a current book value of $5,000 has a current market value of $2,000. The company should recognize an impairment loss of $3,000.
    True    False

 

  1. If the book value of a property, plant and equipment item is less than the amount to be recovered through the asset’s use or sale, the difference is an impairment loss and the asset is described as impaired.
    True    False

 

  1. Impairment can result from a variety of situations that include a significant decline in an asset’s market value or a major adverse effect caused by technological, economic, or legal factors.
    True    False

 

  1. Impairment losses must be assessed by companies on an annual basis.
    True    False

 

  1. The gain or loss from disposal of property, plant and equipment is the difference between an asset’s book value and the value received.
    True    False

 

  1. Property, plant and equipment can be disposed of by discarding, sale, or exchange of the asset.
    True    False

 

  1. The first step in accounting for the disposal of property, plant and equipment is calculating the gain or loss on disposal.
    True    False

 

  1. Equipment costing $14,000 with accumulated depreciation of $10,000 was sold for $3,000. The company should recognize a $1,000 loss on disposal of the equipment.
    True    False

 

  1. At the time a plant asset is being discarded or sold, it is necessary to update the accumulated depreciation of the plant asset to the date of disposal.
    True    False

 

  1. When accumulated depreciation equals the asset’s cost, the asset is fully depreciated. The entry to record the removal of the asset is called exchanging the equipment.
    True    False

 

  1. When assigning values to an exchange of assets you should use the fair value of the asset given up.
    True    False

 

  1. When assigning values to an exchange of assets you should always use the fair value of the asset received.
    True    False

 

  1. A patent is an exclusive right granted to its owner to manufacture and sell a patented machine or device, or to use a process, for a specified period of time.
    True    False

 

  1. Intangible assets should be amortized over their anticipated legal, regulatory, contractual, competitive or economic life.
    True    False

 

  1. Amortization is the process of allocating the cost of intangibles over their estimated useful life.
    True    False

 

  1. Drilling rights are legal permissions to extract natural resources from the earth and are treated as intangible assets.
    True    False

 

  1. Intangible assets provide rights, privileges, and competitive advantages to the owner, are used in operations, and have no physical substance.
    True    False

 

  1. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 20 years.
    True    False

 

  1. The cost of developing, maintaining, or enhancing the value of a trademark is capitalized, or added to the value of the asset when incurred.
    True    False

 

  1. Goodwill is an intangible asset.
    True    False

 

  1. Goodwill is not depreciated or amortized but is instead decreased only if its value has been determined by management to be impaired .
    True    False

 

  1. Goodwill is depreciated over its useful life as estimated by the business’s management.
    True    False

 

  1. Goodwill is written down to its fair value if the fair value is less than its carrying value.
    True    False

 

  1. The impairment of goodwill appears directly on the statement of changes in equity and not on the income statement.
    True    False

 

  1. Property, plant and equipment are:
    A. Tangible assets used in the operation of a business having a useful life of more than one accounting period.
    B. Current assets.
    C. Long-term investments.
    D. Intangible assets used in the operations of a business having a useful life of more than one accounting period.
    E. Tangible assets used in the operation of business having a useful life of less than one accounting period.

 

  1. A main accounting issue for property, plant and equipment is:
    A. The cost of property, plant and equipment.
    B. Testing property, plant and equipment for impairment.
    C. Accounting for repairs and improvements to property, plant and equipment.
    D. Disposal of property, plant and equipment.
    E. All of these answers are correct.

 

  1. Property, plant and equipment are:
    A. Current assets.
    B. Used in business operations.
    C. Natural resources.
    D. Long-term investments.
    E. Never depreciated.

 

  1. Property, plant and equipment include:
    A. Land.
    B. Land improvements.
    C. Buildings.
    D. Machinery and equipment.
    E. All of these answers are correct.

 

  1. Land improvements are:
    A. Assets that increase the usefulness of land, but that have a limited useful life.
    B. Assets that increase the usefulness of land, and like land are not depreciated.
    C. Included in the land account.
    D. Expensed in the period incurred.
    E. Never depreciated.

 

  1. The cost of land can include:
    A. Purchase price.
    B. Back property taxes.
    C. Costs of removing existing buildings.
    D. Real estate commissions.
    E. All of these answers are correct.

 

  1. SportsWorld paid $140,000 for a property. The property included land appraised at $67,500, land improvements appraised at $25,000, and a building appraised at $55,500. What should be the allocation of costs in the accounting records (round calculations to 3 decimals)?
    A.  Land $62,000; land improvements, $23,000; building, $45,000.
    B.  Land $62,000; land improvements, $23,800; building, $46,200.
    C.  Land $63,840; land improvements, $23,660; building, $52,500.
    D.  Land $79,500; land improvements, $32,600; building, $47,700.
    E.  Land $87,500; land improvements; $35,000; building; $52,500.

 

  1. SportsWorld purchased property for a building site. The costs associated with the property were:

    What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?
    A. $150,000 to Land; $18,800 to Building.
    B. $190,000 to Land; $3,800 to Building.
    C. $190,800 to Land; $3,000 to Building.
    D. $192,800 to Land; $1,000 to Building.
    E. $193,800 to Land; $0 to Building.

 

  1. SportsWorld purchased property for $100,000. The property included a building, parking lot, and land. The building was appraised at $65,000; the land at $40,000; and the parking lot at $10,000. To the nearest dollar, the value of the land to be recorded in the books should be:
    A.  $56,522.
    B.  $40,000.
    C.  $34,783.
    D.  $36,364.
    E.  $48,696.

 

  1. Revenue expenditures:
    A. Are additional costs related to property, plant and equipment that do not materially increase the asset’s life.
    B. Are balance sheet expenditures.
    C. Extend the asset’s useful life.
    D. Benefit future periods.
    E. Are debited to asset accounts.

 

  1. Additional subsequent expenditures that result in future economic benefits and can be reliably measured should be treated as a(n):
    A. Revenue expenditure.
    B. Asset expenditure.
    C. Capital expenditure.
    D. Contributed capital expenditure.
    E. Balance sheet expenditure.

 

  1. Treating low-cost asset purchases as expenses is allowed by which principle?
    A. Cost.
    B. Prudence.
    C. Materiality.
    D. Matching.
    E. Timeliness.

 

  1. Ordinary repairs:
    A. Are expenditures to keep an asset in normal operating condition.
    B. Do not extend an asset’s useful life.
    C. Do not materially increase the asset’s life or productive capabilities.
    D. Maintain an asset.
    E. All of these answers are correct.

 

  1. Subsequent capital expenditures:
    A. Are expenditures making a property, plant and equipment asset more efficient.
    B. Are often called improvements.
    C. Are added to the cost of the asset.
    D. Often extend an asset’s useful life.
    E. All of these answers are correct.

 

  1. The relevant factor(s) in calculating depreciation is(are):
    A. Cost.
    B. Residual value.
    C. Useful life.
    D. Both cost and useful life.
    E. All of these answers are correct.

 

  1. Residual value is:
    A. The same as an asset’s service life.
    B. The cost of an asset minus its accumulated depreciation.
    C. An estimate of the asset’s value at the end of its useful life.
    D. Another name for market value.
    E. All of these answers are correct.

 

  1. Depreciation:
    A. Measures the decline in market value of an asset.
    B. Measures physical deterioration of an asset.
    C. Is the process of allocating to expense the cost of property, plant and equipment.
    D. Is a cause of obsolescence.
    E. All of these answers are correct.

 

  1. The useful life of a property, plant and equipment asset is:
    A. The length of time it is productively used in a company’s operations.
    B. Another term for its residual value.
    C. Measured by its potential inadequacy.
    D. Is impossible to estimate.
    E. All of these answers are correct.

 

  1. Inadequacy refers to:
    A. The condition where the capacity of a property, plant and equipment asset is too small to meet the company’s productive demands.
    B. An asset that is worn out.
    C. An asset that is no longer useful.
    D. The same as obsolescence.
    E. All of these answers are correct.

 

  1. Obsolescence:
    A. Occurs when an asset is at the end of its useful life.
    B. Refers to a condition where a property, plant and equipment asset is no longer useful in producing goods and services.
    C. Refers to a condition where the capacity of a property, plant and equipment asset is too small to meet the company’s productive demands.
    D. Is the same as inadequacy.
    E. None of these answers is correct.

 

  1. Capital cost allowance:
    A. Is the income tax act equivalent of depreciation.
    B. Is acceptable for financial reporting.
    C. Is not required for tax reporting.
    D. Is not used in Canada.
    E. All of these answers are correct.

 

  1. The straight-line method and the double-declining-balance method of depreciation:
    A. Produce the same total depreciation over an asset’s useful life.
    B. Allocate an asset’s cost in a systematic and rational manner.
    C. Do not produce the same book value each year.
    D. Are both acceptable for GAAP.
    E. All of these answers are correct.

 

  1. The formula for calculating straight-line depreciation is:
    A. Depreciable cost divided by the useful life in years.
    B. Cost plus residual value divided by the useful life in years.
    C. Depreciable cost divided by useful life in units.
    D. Cost divided by useful life in years.
    E. Cost divided by useful life in units.

 

  1. The original cost of an asset minus accumulated depreciation is called:
    A. Historical cost.
    B. Book value.
    C. Present value.
    D. Current value.
    E. Replacement cost.

 

  1. A method that allocates an equal portion of the total depreciation for a property, plant and equipment asset to each accounting period during its useful life is called:
    A. Accelerated depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

  1. A method that allocates an equal portion of the total depreciation for a property, plant and equipment asset to each unit produced is called:
    A. Accelerated depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

  1. A depreciation method in which a property, plant and equipment asset’s depreciation expense for the period is determined by applying a constant depreciation rate each year to the asset’s beginning book value is called:
    A. Book value depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

  1. A depreciation method that produces larger depreciation charges during the early years of an asset’s life and smaller charges in the later years is:
    A. Accelerated depreciation.
    B. Book value depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

  1. On January 1 of this year, SportsWorld purchased a new cash register for $5,400. This register has a useful life of 10 years and a residual value of $400. Using the double-declining-balance method, how much depreciation expense should SportsWorld recognize for next year?
    A. $500.
    B. $540.
    C. $1,000.
    D. $864.
    E. $1,080.

 

  1. SportsWorld purchased a machine for $190,000. The machine has a useful life of 8 years and a residual value of $10,000. SportsWorld estimates that the machine could produce 750,000 units of product over its useful life. In the first year, 95,000 units were produced. In the second year, production increased to 111,000 units. Using the units-of-production method, what is the amount of depreciation that should be recorded for the second year?
    A. $26,640.
    B. $22,800.
    C. $28,000
    D. $36,000.
    E. $49,440.

 

  1. SportsWorld purchased equipment costing $10,000. The equipment has a residual value of $1,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the year were 7,000 units. Calculate annual depreciation using the straight line method.
    A. $1,800.
    B. $4,000.
    C. $1,450.
    D. $2,000.
    E. $1,750.

 

  1. On October 1 of this year, SportsWorld purchased a delivery van for $23,000 with a residual value of $3,000. The van has an estimated useful life of 5 years. Using straight-line depreciation and the half-year rule, how much depreciation expense should SportsWorld recognize on December 31 of this year?
    A. $1,000.
    B. $1,333.
    C. $1,465.
    D. $2,000.
    E. $4,600.

 

  1. Depreciation is usually recorded:
    A. From the beginning of the accounting year in which an asset is purchased.
    B. From the actual date of purchase.
    C. From the first of the month nearest the actual purchase date.
    D. From the end of the month nearest the actual purchase date.
    E. By any of the above methods.

 

  1. A change in accounting estimate is:
    A. Reflected only in current and future financial statements.
    B. Reflected in current and future financial statements and also requires modification of past statements.
    C. A change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.
    D. Both reflected only in current and future financial statements and a change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.
    E. None of these answers is correct.

 

  1. When originally purchased, a vehicle had cost $23,000, with an estimated residual value of $1,500, and an estimated useful life of 8 years. After 4 years of straight-line depreciation, the estimated useful life was revised from 8 to 6 years, but with zero residual value. The depreciation expense in year 5 should be:
    A. $5,543.75.
    B. $2.687.50.
    C. $6,125.00.
    D. $10,750.00.
    E. $2,856.25.

 

  1. A machine originally had an estimated service life of 5 years, and after 3 years, it was decided that the original estimate should have been for 10 years. The remaining cost to be depreciated should be allocated over the next:
    A. 2 years.
    B. 5 years.
    C. 6 years.
    D. 7 years.
    E. 10 years.

 

  1. SportsWorld uses straight-line depreciation for a piece of equipment that cost $12,000, had a trade-in value of $2,000, and a five-year service life. At the end of the third year, the trade-in value was revised to $1,200 and the useful life increased to a total of 6 years. Calculate the amount of depreciation expense for each of the remaining years of the asset’s useful life.
    A. $1,000.
    B. $1,467.
    C. $1,800.
    D. $1,600.
    E. $2,160.

 

  1. Once the estimated depreciation for an asset is calculated:
    A. It cannot be changed due to the historical cost principle.
    B. It may be revised based on new information.
    C. Any changes are accumulated and recognized when the asset is sold.
    D. The estimate itself cannot be changed, however, new information should be disclosed in financial statement footnotes.
    E. It may be revised based on new information and any changes are accumulated and recognized when the asset is sold.

 

  1. At the end of the year, SportsWorld completed an asset impairment test and noted that a piece of equipment, with a book value of 12,000, has a recoverable value of $2,000. Calculate the amount of impairment loss on the equipment.
    A. $2,000.
    B. $2,160.
    C. $14,800.
    D. $12,800.
    E. $10,000.

 

  1. SportsWorld uses straight-line depreciation for a piece of equipment that cost $12,000, had a salvage value of $2,000, and a five-year service life. At the end of the first year, an impairment loss of $2,000 was recognized on the asset. Calculate the amount of depreciation expense for each of the remaining years of the asset’s useful life.
    A. $1,500.
    B. $1,600.
    C. $2,500.
    D. $1,800.
    E. $2,000.

 

  1. If the book value (or carrying amount) of a PPE item is greater than the amount to be recovered through the asset’s use or sale, the asset is said to be:
    A. Exchanged.
    B. Declined.
    C. Accumulated.
    D. Improved.
    E. Impaired.

 

  1. An asset can be disposed of by:
    A. Discarding.
    B. Selling.
    C. Exchanging.
    D. Donating it to charity.
    E. All of these answers are correct.

 

  1. Sports Med sold an X-ray machine that originally cost $100,000 for $60,000. The accumulated depreciation on the machine to the date of sale was $40,000. On this sale, Sports Med should recognize:
    A. $0 gain or loss.
    B. $20,000 gain.
    C. $25,000 gain.
    D. $40,000 loss.
    E. $60,000 gain.

 

  1. SportsWorld discarded a display case it had purchased for $8,000. $7,200 in accumulated depreciation had been recorded to the date of sale. SportsWorld should recognize a gain or loss on disposal of:
    A. $0.
    B. $800 loss.
    C. $800 gain.
    D. $8,000 loss.
    E. $7,200 loss.

 

  1. Creek Construction owned a bulldozer which was destroyed by fire. The bulldozer originally cost $38,000. The accumulated depreciation recorded to the date of loss was $20,000. The proceeds from the insurance company were $20,000. Creek Construction should recognize:
    A. A loss of $2,000.
    B. An expense of $2,000.
    C. A loss of $38,000.
    D. A gain of $20,000.
    E. A gain of $2,000.

 

  1. A machine that cost $40,000 and had accumulated depreciation of $30,000 was traded in on a new machine, which had an estimated 20-year life and a cash price of $50,000. If a $7,000 trade-in allowance was received on the old machine, the new machine should be valued at:
    A. $10,000.
    B. $40,000.
    C. $47,000.
    D. $50,000.
    E. $53,000.

 

  1. SportsWorld bought a new display case for $12,000 and was given a trade-in of $2,000 on an old display case. The old case had an original cost of $7,000 and accumulated depreciation of $4,000 to the date of trade-in. SportsWorld should record the new display case at:
    A. $10,000.
    B. $10,500.
    C. $11,500.
    D. $11,700.
    E. $12,000.

 

  1. Creek Construction purchased a machine for $26,000. It traded in an old machine and received a $4,200 trade-in allowance. The old machine cost $24,000 and had accumulated depreciation of $16,000 to the date of trade-in. At what value should be new asset be recorded?
    A. $21,800.
    B. $24,000.
    C. $26,000.
    D. $29,800.
    E. $30,200.

 

  1. Natural resources:
    A. Include trees, mineral deposits, and oil and gas fields.
    B. Are consumed when used.
    C. Are long-term assets.
    D. Can be amortized.
    E. All of these answers are correct.

 

  1. Legal permissions for the extraction of oil and gas from the earth are known as:
    A. Trademarks.
    B. Patents.
    C. Drilling rights.
    D. Copyrights.
    E. Leaseholds.

 

  1. Factor(s) that might limit an intangible asset’s useful life include:
    A. Legal.
    B. Regulatory.
    C. Contractual.
    D. Economic.
    E. All of the above answers are correct.

 

  1. Intangible assets do not include:
    A. Patents.
    B. Copyrights.
    C. Trademarks.
    D. Goodwill.
    E. Leaseholds.

 

  1. Intangible assets:
    A. Are rights, privileges, and competitive advantages to the owner, used in operations, having no physical substance.
    B. Include patents, leaseholds, and land improvements.
    C. Can be amortized.
    D. Are rights, privileges, and competitive advantages to the owner, used in operations, having no physical substance and can be amortized.
    E. All of these answers are correct.

 

  1. A patent:
    A. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 50 years.
    B. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 20 years.
    C. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 50 years.
    D. The amount by which the value of a company exceeds the fair market value of a company’s net assets if purchased separately.
    E. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 20 years.

 

  1. A copyright:
    A. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 50 years.
    B. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 20 years.
    C. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 50 years.
    D. The amount by which the value of a company exceeds the fair market value of a company’s net assets if purchased separately.
    E. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 20 years.

 

  1. A leasehold:
    A. Is a short-term rental agreement.
    B. Is not an intangible asset.
    C. Refers to the rights granted to the lessee by the lessor in a lease.
    D. Is initially recorded as rent expense.
    E. Is an investment.

 

  1. On April 3, 2015, Rainbow Studios purchased a patent for $56,000. Its remaining legal life is 7 years and Rainbow Studios estimates that the patent will be useful for another 4 years. The correct adjusting entry to record amortization of the patent on December 31, 2015 is:
    A.
    B.
    C.
    D.

 

  1. The appropriate way to amortize goodwill is:
    A. Straight-line over a maximum of 40 years.
    B. Straight-line over a maximum of 20 years.
    C. Double-declining-balance over a period not to exceed 20 years.
    D. Over the estimated useful life of the goodwill.
    E. Goodwill is not amortized or depreciated.

 

  1. Each year goodwill is examined to see if its value has been impaired. If the value has been impaired goodwill will:
    A. Increase.
    B. Not change.
    C. Decrease.
    D. Be amortized.
    E. Be depreciated.

 

  1. Discuss the four issues in accounting for property, plant and equipment.

 

 

 

 

  1. Explain the difference between revenue and capital expenditures and how they are recorded in the accounting system.

 

 

 

 

  1. Mandy Manufacturing purchased a machine on August 1, 2014, and it was installed and ready to run on January 1, 2015. The following costs were incurred in the purchase and installation of the machine.

    Calculate the depreciable cost of the machine.

 

 

 

 

  1. Primadonna Company paid $870,000 plus $10,000 in legal costs for a parcel of real estate. This included land appraised at $350,000; land improvements appraised at $80,000; and a building appraised at $370,000. The plan is to use the building as a manufacturing plant. Determine the amounts that should be debited to:

    Take all percentages to two decimals, e.g. 12.35%

 

 

 

 

  1. Prepare journal entries to record the following transactions of Salem Sales Co. during the current year:

 

 

 

 

  1. Shady Lanes installed automatic sprinkler systems. The electrical work for the installation was $24,000. The invoice price of the sprinkler equipment was $280,000. Additional costs were $5,000 for delivery and $800 for insurance during transportation. During installation a sprinkler line was punctured and was replaced for $200. What is the cost of the sprinkler equipment?

 

 

 

 

  1. Twin Investments purchased land with a building for a total cost of $5,500,000 ($500,000 paid in cash and the balance on a long-term note). The appraised cost of the land and building were $3,000,000 and $2,100,000, respectively. Calculate the costs to be allocated to the land and the building and prepare the appropriate journal entry to record the acquisition. (Round all calculations to two decimals)

 

 

 

 

  1. Pink Lady Co needed a new building, and found a suitable piece of land which had an old building on it. Pink Lady made an agreement to buy the land and the building for $960,000 cash. The old building was demolished to make way for the new building.
    The following is information regarding the demolishing of the old building and construction of the new one:

    Prepare a single journal entry to record the above costs (assume all paid cash).

 

 

 

 

  1. Alpha Co paid $180,000 to purchase a piece of land on which to build a new building. Additional costs incurred were:

    What dollar amount of the above costs should be allocated to Land and what amount should be allocated to the new Building?

 

 

 

 

  1. SASA Company made the following expenditures in connection with the construction of its new soccer facility:

    Prepare a schedule showing the amounts to be recorded as Land, Building, and Machinery and Equipment and Expenses.

 

 

 

 

  1. How is the cost principle applied to property, plant and equipment?

 

 

 

 

  1. RoboCop Company paid $31,400 for a machine that was expected to last 5 years and have a residual value of $5,000.
    During the third year of the machine’s life, $3,700 was paid for replacement parts that were expected to increase the machine’s productivity by 20% each year. Prepare the general journal entry to record this transaction.

 

 

 

 

  1. RoboCop Company paid $31,400 for a machine that was expected to last 5 years and have a residual value of $5,000.
    During the fourth year of the machine’s life, $5,400 was paid for repairs that were expected to increase the service life of the machine from 5 to 7 years. Prepare the general journal entry to record this transaction.

 

 

 

 

  1. Xeno Co. incurred the following transactions concerning its machinery:

    Xeno Co uses the calendar year as its fiscal year.

    Prepare the journal entry to record depreciation expense for 2014.
    Prepare the journal entry to record depreciation expense for 2015.
    Prepare the journal entry to record depreciation expense for 2016.
    Round all values to the nearest dollar.

 

 

 

 

  1. On January 1, 2014, Friar Company purchased a machine for $175,000 that was expected to last 6 years and have a residual value of $16,000. On January 4, 2017, Friar Company paid $25,000 for improvements to the machine, which increased the total estimated useful life from 6 to 10 years and increased the residual value to $19,500. Friar uses straight-line depreciation.

    (1) What account should be debited in the journal entry to record the $25,000 improvements?
    (2) What amount of depreciation expense should be recorded for 2017?

 

 

 

 

  1. Explain depreciation and the elements affecting its calculation.

 

 

 

 

  1. Compare the three different depreciation methods: straight-line, units of production, and double-declining balance.

 

 

 

 

  1. Explain how each of the following depreciation methods is calculated: straight-line, units-of-production, and double-declining-balance.

 

 

 

 

  1. Chervinski Industries recently paid $460,000 to buy a building that has an estimated useful life of 40 years and a residual value of $116,000. Calculate the depreciation expense for the third year after acquisition using double-declining-balance depreciation. Assume a full year of depreciation in the first year.

 

 

 

 

  1. Dersch Co. purchased a machine on January 1, 2014, for $1,500,000. Using the table below, calculate the annual depreciation expense for each year of the machine’s life (estimated at 5 years or 50,000 hours with a residual value of $150,000). During the machine’s life it was used 15,000; 14,000; 10,000; 9,000; and 6,000 hours.

 

 

 

 

  1. Twilight Manufacturing’s property, plant and equipment records reveal the following information:

    Calculate the depreciation expense for each equipment item for the year ended December 31, 2014, using the nearest whole month method.

 

 

 

 

  1. On January 2, 2014, Far Co. purchased a machine for $525,000. The company expects the machine to last for 10 years or 50,000 hours of operation, with an estimated residual value of $15,000. During 2014 the machine was operated for 3,000 hours, while in 2015 it was operated for 2,600 hours. Calculate the depreciation expense for the machine for 2014 and 2015 using the following depreciation methods:

    (a) Straight-line.
    (b) Double-declining-balance.
    (c) Units-of-production.

 

 

 

 

  1. On January 1, 2014, a machine costing $230,000 with a 4-year service life and an estimated $3,000 residual value was purchased. It was also estimated that the machine would produce 50,000 units during its life. The actual units produced during its first 2 years of operation were 9,000 and 10,000 respectively. Calculate the amount of depreciation expense for calendar years 2014 and 2015 under each of the following assumptions:

    (a) The company uses the straight-line method of depreciation.
    (b) The company uses the units-of-production method of depreciation.
    (c) The company uses the double-declining-balance method of depreciation.

 

 

 

 

  1. On October 1, 2014, Fisherman Company purchased a light truck, at a cost of $62,000. The truck is expected to last six years and have a residual value of $5,200. Fisherman Company uses the calendar year as their fiscal year, and the nearest whole month method for depreciation.

    (a) What is the depreciation expense for 2014, assuming the straight-line method is used?
    (b) What is the depreciation expense for 2014 and 2015, assuming the double-declining-balance method is used (round double declining rate to 4 decimals)?

 

 

 

 

  1. A new machine is expected to produce 60,000 units of product during its 5-year life. The machine cost $180,000 and is estimated to have a $20,000 residual value.
    If the machine produces 7,200 units of product during its first year, what is the depreciation for the year calculated by the units-of-production method (round rate to 2 decimals)?

 

 

 

 

  1. A new machine is expected to produce 40,000 units of product during its 5-year life. The machine cost $180,000 and is estimated to have a $20,000 residual value.
    If depreciation on the machine is calculated by the double-declining-balance method, what is the depreciation for the first year?

 

 

 

 

  1. A new machine is expected to produce 40,000 units of product during its 5-year life. The machine cost $38,000 and is estimated to have a $6,000 residual value.
    What is the first year’s depreciation on the machine calculated by the straight-line method?

 

 

 

 

  1. On January 1, 2014, High Flying Airways acquired and placed in service a plane that cost $8,000,000. The plane’s service life and residual value were estimated at 5 years and $1,500,000, respectively. Calculate depreciation for 2014-2018, assuming the following alternative depreciation methods are used:

    (a) Straight-line.
    (b) Double-declining-balance.

 

 

 

 

  1. On July 1, 2014, Delta Company purchased and placed in service a machine that cost $360,000. Delta estimated the service life to be 5 years or 25,000 units of output, with an estimated residual value of $6,000. During 2014, 2,600 units were produced.
    Prepare the necessary December 31, 2014, adjusting journal entry to record depreciation assuming Delta uses:

    (a) The straight-line method of depreciation.
    (b) The units-of-production method of depreciation.

 

 

 

 

  1. On July 1, 2014, Delta Company purchased and placed in service a machine with a cost of $340,000. Delta estimated the service life to be 6 years or 60,000 units of output, with an estimated residual value of $80,000. During 2014, 15,000 units were produced.
    Prepare the necessary December 31, 2014, adjusting journal entry to record depreciation for 2014 assuming Delta uses the double-declining-balance method to the nearest whole month.

 

 

 

 

  1. On September 30, 2014, Sabena Industries acquired and placed in service a machine that cost $850,000. It was estimated that the machine has a service life of five years and a residual value of $69,400.
    Using the double-declining-balance method of depreciation, prepare a schedule showing the depreciation amounts for the years 2014 through 2019 (use the nearest whole month method and round answers to the nearest dollar). Sabena closes its books on December 31 of every year.

 

 

 

 

  1. Jelly Bean had the following property, plant and equipment purchases during 2014:

    (1) On April 4, equipment costing $150,000 with a 5-year service life and an estimated $40,000 residual value was purchased.
    (2) On October 4, a machine costing $230,000 with a 5 year service life and an estimated $50,000 residual value was purchased.
    Assuming Jelly Bean has a December 31 year end, prepare the necessary adjusting journal entries at December 31, 2014 to record depreciation under the following depreciation methods (using the nearest whole month method):

    (a) Straight-line.
    (b) Double-declining-balance.

 

 

 

 

  1. On January 1, 2014, Boone Company purchased a machine for $75,000 that had a 6-year life and a residual value of $6,000. After 3 years of use, on January 1, 2017, Boone Company paid $7,500 to improve the efficiency of the machine. The effect of the expenditure was to increase the productivity of the machine without increasing its remaining useful life or changing its residual value. Boone uses straight-line depreciation.

    (1) What account should be debited in recording the $7,500 expenditure?
    (2) What amount of depreciation expense should be reported for 2017?

 

 

 

 

  1. Explain (1) depreciation for partial years and (2) revision of depreciation when estimates change.

 

 

 

 

  1. A machine was purchased for $37,000 and depreciated for 5 years on a straight-line basis under the assumption it would have a 10-year life and a $1,000 residual value. At the beginning of the machine’s sixth year, it was recognized that it had 3 years of remaining life left, instead of five, and that at the end of the 3 years its residual value would be $1,600. What should the annual depreciation be for the machine’s remaining years?

 

 

 

 

  1. On January 1, 2015, Bailey Company purchased a machine for $106,000 that was expected to last five years and has a residual value of $6,000. At the beginning of 2018, Bailey decided that the machine’s estimated useful life should be revised to a total of 6 years instead of 5. Also, the residual value was now estimated to be $5,500. Straight-line depreciation was used. Calculate the depreciation expense for 2018.

 

 

 

 

  1. Wildcat Company purchased a heating system on January 2, 2003, for $625,000. The system had an estimated useful life of 15 years, with no residual value. On January 2, 2015, the company paid $33,000 cash for a complete renovation of the system, and now expects the system to last 5 years beyond the original estimate. The company uses the straight-line method of depreciation.

    (a) Prepare the journal entry at January 2, 2015, to record the renovation of the heating system.
    (b) Prepare the journal entry at December 31, 2015, to record the depreciation for 2015.

 

 

 

 

  1. At December 31, 2015, Great Coast Coffee Company’s adjusted trial balance shows an espresso machine with a book value of $12,000. As part of the year end procedures GCC completed the asset impairment test on the machine and noted that the recoverable value of the machine was $6,000. Record the impairment loss on the asset.

 

 

 

 

  1. Great Coast Construction (GCC) exchanged a three-year-old excavator for a new excavator that had a list price of $160,000. The old excavator originally cost $175,000 and had accumulated depreciation of $45,000 to the date of exchange. In addition to the $145,000 trade-in given for the old excavator (which was the old asset’s fair value), GCC paid $10,000 cash to complete the deal. The list price for the new excavator is considered unreliable.
    Record the asset exchange.

 

 

 

 

  1. Great Coast Construction (GCC) exchanged a three-year-old excavator for a new excavator that had a list price of $63,000, which was its fair value. The old excavator originally cost $85,000 and has accumulated depreciation of $45,000 to the date of exchange. In addition to the $45,000 trade-in given for the old excavator, GCC paid $8,000 cash to complete the deal.

 

 

 

 

  1. Discuss the accounting procedures involved for asset disposal through discarding, selling, or exchanging an asset.

 

 

 

 

  1. Five years ago, Sanford and Sons purchased equipment for $108,000 which had an estimated useful life of 10 years with an expected residual value of $15,000. At the end of five years, the equipment’s accumulated depreciation is $46,500. Prepare the journal entry to record the sale of the equipment at the end of the fifth year for $45,000 cash.

 

 

 

 

  1. Vroom Company sold for $60,000 a machine that originally cost $100,000. The accumulated depreciation on this machine to date of sale was $47,000. What was Vroom Company’s gain or loss on this sale?

 

 

 

 

  1. Aye Company’s computer was destroyed by fire. The computer originally cost $5,000, and accumulated depreciation to the date of the fire was $900. The company received $2,000 from an insurance policy that covered the computer and will use that money to help pay for a new computer. Prepare the general journal entry to record the loss of the computer and the receipt of cash from the insurance company.

 

 

 

 

  1. The $60,000 original cost of a machine is recorded in an account called Old Machine. After $45,000 of depreciation was recorded, the machine was traded in on a new machine with a cash price of $85,000. A $10,500 trade-in allowance was received on the old machine and the balance was paid in cash. This transaction has commercial substance. Prepare the general journal entry to record the trade; the cost of the new machine should be debited to a New Machine account.

 

 

 

 

  1. Robertson Company exchanged a used machine for a new machine. The old machine cost $80,000, and the new one had a cash price of $95,000. Robertson had recorded a total of $75,000 depreciation on the old machine and was allowed a $4,500 trade-in allowance. This transaction has commercial substance. What gain or loss should be recorded on the exchange?

 

 

 

 

  1. Wilkins Company exchanged its old computer for a newer model. The Old Computer was purchased for $22,000, with related accumulated depreciation of $15,500 to the date of the exchange. The new computer had a cash price of $30,200, and Wilkins Company was given a $7,500 trade-in allowance. This transaction has commercial substance. Prepare the general journal entry to record the exchange, recording the new computer in an account called New Computer.

 

 

 

 

  1. On January 2, 2015, Mullins Company purchased a delivery truck for $45,000 cash. The truck had an estimated useful life of seven years and an estimated residual value of $3,000. Straight-line depreciation was used.
    Assuming the transactions have commercial substance, prepare the journal entries to record the disposition of the truck on September 1, 2019, under each of the following assumptions:

    (a) The truck and $55,000 cash were exchanged for equipment that had a fair value of $70,000.
    |(b) The truck and $40,000 cash were exchanged for a new delivery truck that had a fair value of $70,000.

 

 

 

 

  1. On April 1, 2015, Hogan Industries scrapped a machine that cost $10,000 and had accumulated depreciation through December 31, 2014, of $10,000. Prepare the journal entry to record the disposal of the machine.

 

 

 

 

  1. On April 1, 2015, Lockhart Company discarded equipment that cost $80,000, had a useful life of 5 years, a residual value of $14,000, and, under straight-line depreciation, accumulated depreciation as of December 31, 2014 of $26,400.

    (a) Prepare the journal entry to record depreciation up to the date of disposal of the equipment.
    (b) Prepare the journal entry to record the disposal of the equipment.

 

 

 

 

  1. On April 1, 2015, Sagan Realty disposed of an automobile that had cost $50,000 on January 1, 2013. The automobile had a residual value of $8,000, and a useful life of 5 years. The accounting records showed accumulated depreciation for this asset of $16,800 at December 31, 2014. The asset was discarded after an accident, and $11,500 was received from an insurance claim.
    Prepare the journal entry to record the disposal of the automobile.

 

 

 

 

  1. On April 1, 2015, Thunderbird Co sold a piece of equipment that had cost $35,000 on January 1, 2011. The equipment had a residual value of $5,000, a useful life 10 years, and double-declining-balance depreciation at twice the straight-line rate was used. On December 31, 2014, accumulated depreciation was $20,664. The asset was sold for $14,200.
    Prepare the journal entry to record depreciation up to the date of disposal of the equipment, and the journal entry to record the disposal of the equipment.

 

 

 

 

  1. During 2016, Melanie’s Emporium exchanged an old truck costing $18,000 with accumulated depreciation of $13,000 to the date of exchange for a new truck. The new truck had a cash price of $30,000 and Melanie received a $6,000 trade-in allowance on the old truck. This transaction has commercial substance. Prepare the journal entry to record the exchange.

 

 

 

 

  1. During 2014, Storey Company acquired a new computer with a cash price of $12,800 by exchanging an old one on which Storey received a $1,500 trade-in. The old computer had cost $9,000 and its accumulated depreciation to the date of exchange was $5,500. This transaction has commercial substance. Prepare the journal entry to record the exchange.

 

 

 

 

  1. Upside Down Company purchased new office equipment for $4,300, by trading in old equipment with a cost of $2,000 and accumulated depreciation to the date of trade of $1,900. Upside Down received a $50 trade-in allowance for the old equipment. This transaction has commercial substance. Prepare the journal entry to record the transaction.

 

 

 

 

  1. On April 1, Fog Company traded an old machine that originally cost $32,000 and had been depreciated $24,000 for a new machine that had a cash price of $40,000.
    Assuming that this transaction has commercial substance,

    (1) Prepare the journal entry to record the exchange under the assumption that a $5,000 trade-in allowance was received and the balance was paid in cash.
    (2) Prepare the journal entry to record the exchange under the assumption that instead of a $5,000 trade-in allowance, a $12,500 trade-in allowance was received and the balance was paid in cash.

 

 

 

 

  1. Natsuko Company traded an old forklift for a new forklift, receiving a $10,500 trade-in allowance and paying the remaining $37,200 in cash. The old forklift cost $39,000, and straight-line depreciation of $27,200 had been recorded to the date of trade under the assumption it would last 5 years and have a $5,000 residual value. At the date of trade, the fair value of the old forklift is $11,000, however the fair value of the new forklift is not known.

    (1) What was the book value of the old forklift?
    (2) At what amount should the new forklift be recorded?

 

 

 

 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was sold for $22,000, prepare the general journal entry to record the disposal

 

 

 

 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was sold for $15,000, prepare the general journal entry to record the disposal.

 

 

 

 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was totally destroyed in a fire and the insurance company settled the claim for $18,000 cash, prepare the general journal entry to record the disposal.

 

 

 

 

  1. Danner Co. purchased a computer on January 1, 2014, for $1,600,000. The straight-line method of depreciation was used, based on an expected life of 6 years and a residual value of $130,000. Prepare the journal entries to record depreciation for the first 6 months of 2016 and the sale of the computer on July 1, 2016, for $1,000,000.

 

 

 

 

  1. Discuss accounting for an impairment of property, plant and equipment.

 

 

 

 

  1. Matador & Company was preparing the annual financial statements and, as part of its year-end procedures, prepared the following schedule based on adjusted values at March 31, 2015:

    Record the entry for any impairment loss assuming that Matador & Company recorded no impairment losses in previous years.

 

 

 

 

  1. Matador & Company was preparing the annual financial statements and, as part of its year-end procedures, prepared the following schedule based on adjusted values at March 31, 2015:

    1. Record the entry for any impairment loss assuming that Matador & Company recorded no impairment losses in previous years.
    2. Record the entry for depreciation on each of the assets at March 31, 2015. Assume there was no change in residual or useful lives regardless of impairment losses.

 

 

 

 

  1. Discuss accounting for intangible assets.

 

 

 

 

  1. On January 4, 2015, SportsWorld purchased a patent for $35,000 with a useful life of 10 years. Prepare the journal entry to amortize the patent for the calendar year 2015.

 

 

 

 

  1. Hawaii Kai purchased a leasehold property for $8,500,000. The leasehold expires in 15 years. Prepare the journal entry to record the first year’s depreciation expense.

 

 

 

 

  1. GenX Music purchased a music distributor’s collection of songs for $1,423,000. The copyrights are expected to last another 34 years. Prepare the journal entry to record the amortization expense for the first year.

 

 

 

 

  1. Explain what could cause the impairment of goodwill. How often should goodwill be tested to see if it is impaired?

 

 

 

 

  1. ______________________ are costs that increase the usefulness of land, but have limited useful lives and are thus depreciated.
    ________________________________________

 

  1. Replacement of a roof or renovation of a plant are examples of _______________________.
    ________________________________________

 

  1. The three factors in calculating depreciation are: ____________, __________, ____________.
    ________________________________________

 

  1. _____________ is the Income Tax Act equivalent for depreciation.
    ________________________________________

 

  1. _______________________ depreciation provides for equal amounts of annual depreciation over the life of an asset.
    ________________________________________

 

  1. ______________ is the process of systematically allocating the cost of an intangible asset to expense over its estimated useful life.
    ________________________________________

 

  1. Revising estimates of the useful life or residual value of property, plant and equipment is referred to as a(n) _______________________.
    ________________________________________

 

  1. The three means for disposal of an asset include: ____________, ____________, or ______________.
    ________________________________________

 

  1. Match each of the following terms with the appropriate definition.
1. Depreciation.       A depreciation method in which an asset’s depreciation expense for the period is determined by applying a constant depreciation rate to the asset’s book value at the beginning of the year.   ____
2. Intangible assets       An expenditure that should appear on the current income statement as an expense and be deducted from the period’s revenues because it does not provide a material benefit in future periods.   ____
3. Accelerated depreciation       Depreciation method that produces larger depreciation charges during the early years of an asset’s life and smaller charges in the later years.   ____
4. Goodwill       Repairs made to keep property, plant and equipment in normal, good operating condition   ____
5. Double-declining-balance method       A change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.   ____
6. Change in accounting estimate      A name for the rights granted to the lessee by the lessor in a lease.   ____
7. Leasehold       The amount by which the value of a company exceeds the fair market value of the company’s net assets if purchased separately.   ____
8. Revenue expenditure       Rights, privileges, and competitive advantages to the owner of long-term assets used in operations that have no physical substance.   ____
9. (Ordinary) repairs       An expenditure to make a property, plant and equipment more efficient or productive.   ____
10. Subsequent capital expenditure       The process of matching the depreciable cost of a tangible asset in a rational and systematic manner over the asset’s useful life.   ____

 

  1. Match each of the following terms with the appropriate definition.
1. Patent      Management’s estimate of the amount that will be recovered at the end of a property, plant and equipment item’s useful life through a sale or as a trade-in allowance on the purchase of a new asset.   ____
2. Depreciation       A process of systematically allocating the cost of an intangible asset to expense over its estimated useful life.   ____
3. Book value      Major repairs that extend the useful life of property, plant and equipment beyond original expectations.   ____
4. Amortization       Assets that increase the usefulness of land but that have a limited useful life and are subject to depreciation.   ____
5. Obsolescence       The original cost of a property, plant and equipment item less its accumulated depreciation.   ____
6. Inadequacy      A condition in which, because of new inventions and improvements, property, plant and equipment can no longer be used to produce goods or services with a competitive advantage.   ____
7. Copyright       An exclusive right granted to its owner by the federal government to manufacture and sell a machine or device, or to use a process, for 20 years.   ____
8. Subsequent capital expenditure      The process of matching the depreciable cost of a tangible asset in a rational and systematic manner over the asset’s useful life.   ____
9. Land improvements       A right granted by the federal government or by international agreement giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work during the life of the creator plus 50 years.   ____
10. Residual value      A condition in which the capacity of property, plant and equipment is too small to meet the company’s productive demands.   ____

 

 

 

c10 Key

  1. Property, plant and equipment are assets held for sale.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #1
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Non-current assets are any liabilities that are used in the operations of a business.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #2
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Non-current assets can be divided into two groups including tangible and intangible assets. These assets are generally used in operations of a business and have useful lives extending over more than one accounting period.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #3
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Land purchased as a building site is a tangible asset called property, plant and equipment and is classified under the “Long-term Investments” section on the balance sheet.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #4
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The cost of an asset includes all normal and reasonable expenditures necessary to get it in place and ready for its intended use.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #5
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. If a machine is damaged during unpacking, the repairs are added to its cost.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #6
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. To be charged to and reported as part of the cost of property, plant and equipment, an expenditure must be normal, reasonable, and necessary in preparing the asset for its intended use.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #7
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The purchase of real estate that includes land, building, and land improvements is called a lump-sum purchase.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #8
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Any expenditures for legal fees, surveying, and accrued property taxes should not be included in the cost of land.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #9
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Revenue expenditures are additional costs of property, plant and equipment that provide material benefits extending beyond the current period.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #10
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Revenue expenditures are expenditures to keep assets in normal operating condition.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #11
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Capital expenditures are also called balance sheet expenditures.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #12
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. SportsWorld spent $17,000 to remodel its store. This cost will be recognized with a debit to Store Building.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #13
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Treating small-dollar-amount capital expenditures as revenue expenditures is likely to mislead users of financial statements.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #14
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The cost principle requires that an asset be recorded at the cash or cash equivalent amount given in exchange.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #15
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Subsequent expenditures are purchases made after the acquisition of equipment to operate, maintain, repair, and improve it.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #16
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Depreciation is the process of allocating the cost of a tangible asset in a rational and systematic manner over the asset’s estimated useful life.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #17
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Residual value is an estimate of an asset’s value at the end of its useful life.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #18
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Inadequacy refers to the condition where the capacity of a property, plant and equipment item is too small to meet the company’s productive demands.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #19
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Depreciation should always be recorded as soon as an asset is purchased.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #20
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Depreciation measures the decline in market value of an asset.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #21
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Because depreciation is based on predictions of residual value and useful life, depreciation is an estimate.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #22
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. On the balance sheet, it is not necessary to report both the cost and the accumulated depreciation of an asset.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #23
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Accumulated depreciation represents funds set aside to buy new assets when the assets currently owned are replaced.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #24
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The relevance principle requires that property, plant and equipment be reported at book value rather than at market value.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #25
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Regardless of the method of depreciation, total depreciation expense will be the same over an asset’s useful life.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #26
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Financial accounting and tax accounting require the same recordkeeping; therefore, there should be no difference in results between the two accounting systems.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #27
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Companies are required to use the straight line depreciation method for tax purposes because this method yields the lowest depreciation expense and results in the highest payment of tax.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #28
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The Income Tax Act generally requires that companies use a double-declining-balance method of cost allocation called Capital Cost Allowance to determine the maximum amount of deduction for a taxation year.
    TRUE

 

Difficulty: Hard
Larson – Chapter 10 #29
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Because land has unlimited life, it is not subject to depreciation. Therefore, items that increase the usefulness of the land such as parking lots are also not depreciated.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #30
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The most frequently used method of depreciation is the straight-line method.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #31
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The cost of an asset plus its accumulated depreciation equals the asset’s book value.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #32
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The units of production method of depreciation charges a varying amount of expense for each period of an asset’s useful life depending on its usage.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #33
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. An accelerated depreciation method yields smaller depreciation expense in the early years of an asset’s life and larger charges in later years.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #34
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The double-declining balance method is applied by (1) calculating the asset’s straight-line depreciation rate, (2) doubling it, (3) subtracting residual value from cost, and (4) multiplying the rate times the cost.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #35
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. SportsWorld purchased store equipment for $65,000. The equipment has an estimated residual value of $6,000, with an estimated useful life of 10 years. The annual depreciation using the straight-line method will be $3,900 per year.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #36
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. A company is required to purchase all assets at the beginning of an accounting period so that a full year’s worth of depreciation can be taken.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #37
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Machinery having a four-year useful life and a residual value of $5,000 was acquired for $65,000 cash on June 28. Using the nearest whole month method, the company would recognize $11,250 for depreciation expense at the end of the first year, December 31.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #38
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. A depreciable asset that is purchased on March 18 would be depreciated for nine months of the first year, if the fiscal year ends on December 31 using nearest whole month method.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #39
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. The half year rule is the partial-year depreciation method that calculates depreciation by determining if the asset was used for more than half of the month.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #40
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Knowledge
 

  1. Machinery after two years worth of depreciation has an opening book value of $6,400. At the beginning of the third year, the predicted number of years remaining in its useful life changes from three years to four years and its estimated residual value changes from the original $1,000 to $400. The revised annual depreciation using the straight-line method is $1,500.
    TRUE

 

Difficulty: Hard
Larson – Chapter 10 #41
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. An asset that cost $5,000 has a current book value of $2,000. A revision of the useful life of the asset estimates the asset has a remaining useful life of four years and will have a residual value of $400. Using the straight-line method, the revised depreciation will be $500 per year.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #42
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. When the cost of the asset changes because of a subsequent capital expenditure, revised depreciation for current and future periods must be calculated and adjusted.
    TRUE

 

Difficulty: Hard
Larson – Chapter 10 #43
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. Depreciation amounts can be revised because of changes in the estimates for residual value, useful life or because of subsequent revenue expenditures.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #44
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. An asset with a current book value of $5,000 has a current market value of $2,000. The company should recognize an impairment loss of $3,000.
    TRUE

 

Difficulty: Hard
Larson – Chapter 10 #45
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. If the book value of a property, plant and equipment item is less than the amount to be recovered through the asset’s use or sale, the difference is an impairment loss and the asset is described as impaired.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #46
Learning Objective: 10-05 Explain and record impairment losses.
Type: Knowledge
 

  1. Impairment can result from a variety of situations that include a significant decline in an asset’s market value or a major adverse effect caused by technological, economic, or legal factors.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #47
Learning Objective: 10-05 Explain and record impairment losses.
Type: Knowledge
 

  1. Impairment losses must be assessed by companies on an annual basis.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #48
Learning Objective: 10-05 Explain and record impairment losses.
Type: Knowledge
 

  1. The gain or loss from disposal of property, plant and equipment is the difference between an asset’s book value and the value received.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #49
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Property, plant and equipment can be disposed of by discarding, sale, or exchange of the asset.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #50
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. The first step in accounting for the disposal of property, plant and equipment is calculating the gain or loss on disposal.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #51
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Equipment costing $14,000 with accumulated depreciation of $10,000 was sold for $3,000. The company should recognize a $1,000 loss on disposal of the equipment.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #52
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. At the time a plant asset is being discarded or sold, it is necessary to update the accumulated depreciation of the plant asset to the date of disposal.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #53
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. When accumulated depreciation equals the asset’s cost, the asset is fully depreciated. The entry to record the removal of the asset is called exchanging the equipment.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #54
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. When assigning values to an exchange of assets you should use the fair value of the asset given up.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #55
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. When assigning values to an exchange of assets you should always use the fair value of the asset received.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #56
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. A patent is an exclusive right granted to its owner to manufacture and sell a patented machine or device, or to use a process, for a specified period of time.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #57
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Intangible assets should be amortized over their anticipated legal, regulatory, contractual, competitive or economic life.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #58
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Amortization is the process of allocating the cost of intangibles over their estimated useful life.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #59
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Drilling rights are legal permissions to extract natural resources from the earth and are treated as intangible assets.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #60
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Intangible assets provide rights, privileges, and competitive advantages to the owner, are used in operations, and have no physical substance.
    TRUE

 

Difficulty: Easy
Larson – Chapter 10 #61
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 20 years.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #62
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. The cost of developing, maintaining, or enhancing the value of a trademark is capitalized, or added to the value of the asset when incurred.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #63
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Goodwill is an intangible asset.
    FALSE

 

Difficulty: Easy
Larson – Chapter 10 #64
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Goodwill is not depreciated or amortized but is instead decreased only if its value has been determined by management to be impaired .
    TRUE

 

Difficulty: Moderate
Larson – Chapter 10 #65
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Goodwill is depreciated over its useful life as estimated by the business’s management.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 10 #66
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Goodwill is written down to its fair value if the fair value is less than its carrying value.
    TRUE

 

Difficulty: Hard
Larson – Chapter 10 #67
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. The impairment of goodwill appears directly on the statement of changes in equity and not on the income statement.
    FALSE

 

Difficulty: Hard
Larson – Chapter 10 #68
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Property, plant and equipment are:
    A.Tangible assets used in the operation of a business having a useful life of more than one accounting period.
    B. Current assets.
    C. Long-term investments.
    D. Intangible assets used in the operations of a business having a useful life of more than one accounting period.
    E. Tangible assets used in the operation of business having a useful life of less than one accounting period.

 

Difficulty: Easy
Larson – Chapter 10 #69
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. A main accounting issue for property, plant and equipment is:
    A.The cost of property, plant and equipment.
    B. Testing property, plant and equipment for impairment.
    C. Accounting for repairs and improvements to property, plant and equipment.
    D. Disposal of property, plant and equipment.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #70
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Property, plant and equipment are:
    A.Current assets.
    B. Used in business operations.
    C. Natural resources.
    D. Long-term investments.
    E. Never depreciated.

 

Difficulty: Moderate
Larson – Chapter 10 #71
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Property, plant and equipment include:
    A.Land.
    B. Land improvements.
    C. Buildings.
    D. Machinery and equipment.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #72
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Land improvements are:
    A.Assets that increase the usefulness of land, but that have a limited useful life.
    B. Assets that increase the usefulness of land, and like land are not depreciated.
    C. Included in the land account.
    D. Expensed in the period incurred.
    E. Never depreciated.

 

Difficulty: Easy
Larson – Chapter 10 #73
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The cost of land can include:
    A.Purchase price.
    B. Back property taxes.
    C. Costs of removing existing buildings.
    D. Real estate commissions.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #74
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. SportsWorld paid $140,000 for a property. The property included land appraised at $67,500, land improvements appraised at $25,000, and a building appraised at $55,500. What should be the allocation of costs in the accounting records (round calculations to 3 decimals)?
    A. Land $62,000; land improvements, $23,000; building, $45,000.
    B.  Land $62,000; land improvements, $23,800; building, $46,200.
    C.  Land $63,840; land improvements, $23,660; building, $52,500.
    D.  Land $79,500; land improvements, $32,600; building, $47,700.
    E.  Land $87,500; land improvements; $35,000; building; $52,500.

 

Difficulty: Hard
Larson – Chapter 10 #75
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. SportsWorld purchased property for a building site. The costs associated with the property were:

    What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?
    A. $150,000 to Land; $18,800 to Building.
    B. $190,000 to Land; $3,800 to Building.
    C. $190,800 to Land; $3,000 to Building.
    D. $192,800 to Land; $1,000 to Building.
    E. $193,800 to Land; $0 to Building.

 

Difficulty: Hard
Larson – Chapter 10 #76
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. SportsWorld purchased property for $100,000. The property included a building, parking lot, and land. The building was appraised at $65,000; the land at $40,000; and the parking lot at $10,000. To the nearest dollar, the value of the land to be recorded in the books should be:
    A. $56,522.
    B.  $40,000.
    C.  $34,783.
    D.  $36,364.
    E.  $48,696.

 

Difficulty: Hard
Larson – Chapter 10 #77
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Revenue expenditures:
    A.Are additional costs related to property, plant and equipment that do not materially increase the asset’s life.
    B. Are balance sheet expenditures.
    C. Extend the asset’s useful life.
    D. Benefit future periods.
    E. Are debited to asset accounts.

 

Difficulty: Easy
Larson – Chapter 10 #78
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Additional subsequent expenditures that result in future economic benefits and can be reliably measured should be treated as a(n):
    A.Revenue expenditure.
    B. Asset expenditure.
    C. Capital expenditure.
    D. Contributed capital expenditure.
    E. Balance sheet expenditure.

 

Difficulty: Easy
Larson – Chapter 10 #79
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Treating low-cost asset purchases as expenses is allowed by which principle?
    A.Cost.
    B. Prudence.
    C. Materiality.
    D. Matching.
    E. Timeliness.

 

Difficulty: Moderate
Larson – Chapter 10 #80
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Ordinary repairs:
    A.Are expenditures to keep an asset in normal operating condition.
    B. Do not extend an asset’s useful life.
    C. Do not materially increase the asset’s life or productive capabilities.
    D. Maintain an asset.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #81
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Subsequent capital expenditures:
    A.Are expenditures making a property, plant and equipment asset more efficient.
    B. Are often called improvements.
    C. Are added to the cost of the asset.
    D. Often extend an asset’s useful life.
    E. All of these answers are correct.

 

Difficulty: Hard
Larson – Chapter 10 #82
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The relevant factor(s) in calculating depreciation is(are):
    A.Cost.
    B. Residual value.
    C. Useful life.
    D. Both cost and useful life.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #83
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Residual value is:
    A.The same as an asset’s service life.
    B. The cost of an asset minus its accumulated depreciation.
    C. An estimate of the asset’s value at the end of its useful life.
    D. Another name for market value.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #84
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Depreciation:
    A.Measures the decline in market value of an asset.
    B. Measures physical deterioration of an asset.
    C. Is the process of allocating to expense the cost of property, plant and equipment.
    D. Is a cause of obsolescence.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #85
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The useful life of a property, plant and equipment asset is:
    A.The length of time it is productively used in a company’s operations.
    B. Another term for its residual value.
    C. Measured by its potential inadequacy.
    D. Is impossible to estimate.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #86
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Inadequacy refers to:
    A.The condition where the capacity of a property, plant and equipment asset is too small to meet the company’s productive demands.
    B. An asset that is worn out.
    C. An asset that is no longer useful.
    D. The same as obsolescence.
    E. All of these answers are correct.

 

Difficulty: Hard
Larson – Chapter 10 #87
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Obsolescence:
    A.Occurs when an asset is at the end of its useful life.
    B. Refers to a condition where a property, plant and equipment asset is no longer useful in producing goods and services.
    C. Refers to a condition where the capacity of a property, plant and equipment asset is too small to meet the company’s productive demands.
    D. Is the same as inadequacy.
    E. None of these answers is correct.

 

Difficulty: Hard
Larson – Chapter 10 #88
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Capital cost allowance:
    A.Is the income tax act equivalent of depreciation.
    B. Is acceptable for financial reporting.
    C. Is not required for tax reporting.
    D. Is not used in Canada.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #89
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The straight-line method and the double-declining-balance method of depreciation:
    A.Produce the same total depreciation over an asset’s useful life.
    B. Allocate an asset’s cost in a systematic and rational manner.
    C. Do not produce the same book value each year.
    D. Are both acceptable for GAAP.
    E. All of these answers are correct.

 

Difficulty: Hard
Larson – Chapter 10 #90
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The formula for calculating straight-line depreciation is:
    A.Depreciable cost divided by the useful life in years.
    B. Cost plus residual value divided by the useful life in years.
    C. Depreciable cost divided by useful life in units.
    D. Cost divided by useful life in years.
    E. Cost divided by useful life in units.

 

Difficulty: Easy
Larson – Chapter 10 #91
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. The original cost of an asset minus accumulated depreciation is called:
    A.Historical cost.
    B. Book value.
    C. Present value.
    D. Current value.
    E. Replacement cost.

 

Difficulty: Easy
Larson – Chapter 10 #92
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. A method that allocates an equal portion of the total depreciation for a property, plant and equipment asset to each accounting period during its useful life is called:
    A.Accelerated depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

Difficulty: Easy
Larson – Chapter 10 #93
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. A method that allocates an equal portion of the total depreciation for a property, plant and equipment asset to each unit produced is called:
    A.Accelerated depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

Difficulty: Easy
Larson – Chapter 10 #94
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. A depreciation method in which a property, plant and equipment asset’s depreciation expense for the period is determined by applying a constant depreciation rate each year to the asset’s beginning book value is called:
    A.Book value depreciation.
    B. Double-declining-balance depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

Difficulty: Easy
Larson – Chapter 10 #95
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. A depreciation method that produces larger depreciation charges during the early years of an asset’s life and smaller charges in the later years is:
    A.Accelerated depreciation.
    B. Book value depreciation.
    C. Straight-line depreciation.
    D. Units-of-production depreciation.
    E. Capital cost allowance.

 

Difficulty: Moderate
Larson – Chapter 10 #96
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. On January 1 of this year, SportsWorld purchased a new cash register for $5,400. This register has a useful life of 10 years and a residual value of $400. Using the double-declining-balance method, how much depreciation expense should SportsWorld recognize for next year?
    A.$500.
    B. $540.
    C. $1,000.
    D. $864.
    E. $1,080.

 

Difficulty: Hard
Larson – Chapter 10 #97
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. SportsWorld purchased a machine for $190,000. The machine has a useful life of 8 years and a residual value of $10,000. SportsWorld estimates that the machine could produce 750,000 units of product over its useful life. In the first year, 95,000 units were produced. In the second year, production increased to 111,000 units. Using the units-of-production method, what is the amount of depreciation that should be recorded for the second year?
    A.$26,640.
    B. $22,800.
    C. $28,000
    D. $36,000.
    E. $49,440.

 

Difficulty: Moderate
Larson – Chapter 10 #98
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. SportsWorld purchased equipment costing $10,000. The equipment has a residual value of $1,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the year were 7,000 units. Calculate annual depreciation using the straight line method.
    A.$1,800.
    B. $4,000.
    C. $1,450.
    D. $2,000.
    E. $1,750.

 

Difficulty: Moderate
Larson – Chapter 10 #99
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. On October 1 of this year, SportsWorld purchased a delivery van for $23,000 with a residual value of $3,000. The van has an estimated useful life of 5 years. Using straight-line depreciation and the half-year rule, how much depreciation expense should SportsWorld recognize on December 31 of this year?
    A.$1,000.
    B. $1,333.
    C. $1,465.
    D. $2,000.
    E. $4,600.

 

Difficulty: Moderate
Larson – Chapter 10 #100
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. Depreciation is usually recorded:
    A.From the beginning of the accounting year in which an asset is purchased.
    B. From the actual date of purchase.
    C. From the first of the month nearest the actual purchase date.
    D. From the end of the month nearest the actual purchase date.
    E. By any of the above methods.

 

Difficulty: Moderate
Larson – Chapter 10 #101
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Knowledge
 

  1. A change in accounting estimate is:
    A.Reflected only in current and future financial statements.
    B. Reflected in current and future financial statements and also requires modification of past statements.
    C. A change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.
    D. Both reflected only in current and future financial statements and a change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.
    E. None of these answers is correct.

 

Difficulty: Hard
Larson – Chapter 10 #102
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Knowledge
 

  1. When originally purchased, a vehicle had cost $23,000, with an estimated residual value of $1,500, and an estimated useful life of 8 years. After 4 years of straight-line depreciation, the estimated useful life was revised from 8 to 6 years, but with zero residual value. The depreciation expense in year 5 should be:
    A.$5,543.75.
    B. $2.687.50.
    C. $6,125.00.
    D. $10,750.00.
    E. $2,856.25.

 

Difficulty: Hard
Larson – Chapter 10 #103
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. A machine originally had an estimated service life of 5 years, and after 3 years, it was decided that the original estimate should have been for 10 years. The remaining cost to be depreciated should be allocated over the next:
    A.2 years.
    B. 5 years.
    C. 6 years.
    D. 7 years.
    E. 10 years.

 

Difficulty: Moderate
Larson – Chapter 10 #104
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. SportsWorld uses straight-line depreciation for a piece of equipment that cost $12,000, had a trade-in value of $2,000, and a five-year service life. At the end of the third year, the trade-in value was revised to $1,200 and the useful life increased to a total of 6 years. Calculate the amount of depreciation expense for each of the remaining years of the asset’s useful life.
    A.$1,000.
    B. $1,467.
    C. $1,800.
    D. $1,600.
    E. $2,160.

 

Difficulty: Hard
Larson – Chapter 10 #105
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. Once the estimated depreciation for an asset is calculated:
    A.It cannot be changed due to the historical cost principle.
    B. It may be revised based on new information.
    C. Any changes are accumulated and recognized when the asset is sold.
    D. The estimate itself cannot be changed, however, new information should be disclosed in financial statement footnotes.
    E. It may be revised based on new information and any changes are accumulated and recognized when the asset is sold.

 

Difficulty: Easy
Larson – Chapter 10 #106
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Knowledge
 

  1. At the end of the year, SportsWorld completed an asset impairment test and noted that a piece of equipment, with a book value of 12,000, has a recoverable value of $2,000. Calculate the amount of impairment loss on the equipment.
    A.$2,000.
    B. $2,160.
    C. $14,800.
    D. $12,800.
    E. $10,000.

 

Difficulty: Moderate
Larson – Chapter 10 #107
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. SportsWorld uses straight-line depreciation for a piece of equipment that cost $12,000, had a salvage value of $2,000, and a five-year service life. At the end of the first year, an impairment loss of $2,000 was recognized on the asset. Calculate the amount of depreciation expense for each of the remaining years of the asset’s useful life.
    A.$1,500.
    B. $1,600.
    C. $2,500.
    D. $1,800.
    E. $2,000.

 

Difficulty: Hard
Larson – Chapter 10 #108
Learning Objective: 10-04 Explain and calculate revised depreciation.
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. If the book value (or carrying amount) of a PPE item is greater than the amount to be recovered through the asset’s use or sale, the asset is said to be:
    A.Exchanged.
    B. Declined.
    C. Accumulated.
    D. Improved.
    E. Impaired.

 

Difficulty: Hard
Larson – Chapter 10 #109
Learning Objective: 10-05 Explain and record impairment losses.
Type: Knowledge
 

  1. An asset can be disposed of by:
    A.Discarding.
    B. Selling.
    C. Exchanging.
    D. Donating it to charity.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #110
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Sports Med sold an X-ray machine that originally cost $100,000 for $60,000. The accumulated depreciation on the machine to the date of sale was $40,000. On this sale, Sports Med should recognize:
    A.$0 gain or loss.
    B. $20,000 gain.
    C. $25,000 gain.
    D. $40,000 loss.
    E. $60,000 gain.

 

Difficulty: Easy
Larson – Chapter 10 #111
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. SportsWorld discarded a display case it had purchased for $8,000. $7,200 in accumulated depreciation had been recorded to the date of sale. SportsWorld should recognize a gain or loss on disposal of:
    A.$0.
    B. $800 loss.
    C. $800 gain.
    D. $8,000 loss.
    E. $7,200 loss.

 

Difficulty: Easy
Larson – Chapter 10 #112
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Creek Construction owned a bulldozer which was destroyed by fire. The bulldozer originally cost $38,000. The accumulated depreciation recorded to the date of loss was $20,000. The proceeds from the insurance company were $20,000. Creek Construction should recognize:
    A.A loss of $2,000.
    B. An expense of $2,000.
    C. A loss of $38,000.
    D. A gain of $20,000.
    E. A gain of $2,000.

 

Difficulty: Easy
Larson – Chapter 10 #113
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. A machine that cost $40,000 and had accumulated depreciation of $30,000 was traded in on a new machine, which had an estimated 20-year life and a cash price of $50,000. If a $7,000 trade-in allowance was received on the old machine, the new machine should be valued at:
    A.$10,000.
    B. $40,000.
    C. $47,000.
    D. $50,000.
    E. $53,000.

 

Difficulty: Moderate
Larson – Chapter 10 #114
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. SportsWorld bought a new display case for $12,000 and was given a trade-in of $2,000 on an old display case. The old case had an original cost of $7,000 and accumulated depreciation of $4,000 to the date of trade-in. SportsWorld should record the new display case at:
    A.$10,000.
    B. $10,500.
    C. $11,500.
    D. $11,700.
    E. $12,000.

 

Difficulty: Moderate
Larson – Chapter 10 #115
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Creek Construction purchased a machine for $26,000. It traded in an old machine and received a $4,200 trade-in allowance. The old machine cost $24,000 and had accumulated depreciation of $16,000 to the date of trade-in. At what value should be new asset be recorded?
    A.$21,800.
    B. $24,000.
    C. $26,000.
    D. $29,800.
    E. $30,200.

 

Difficulty: Moderate
Larson – Chapter 10 #116
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Natural resources:
    A.Include trees, mineral deposits, and oil and gas fields.
    B. Are consumed when used.
    C. Are long-term assets.
    D. Can be amortized.
    E. All of these answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #117
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Legal permissions for the extraction of oil and gas from the earth are known as:
    A.Trademarks.
    B. Patents.
    C. Drilling rights.
    D. Copyrights.
    E. Leaseholds.

 

Difficulty: Easy
Larson – Chapter 10 #118
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Factor(s) that might limit an intangible asset’s useful life include:
    A.Legal.
    B. Regulatory.
    C. Contractual.
    D. Economic.
    E. All of the above answers are correct.

 

Difficulty: Easy
Larson – Chapter 10 #119
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Intangible assets do not include:
    A.Patents.
    B. Copyrights.
    C. Trademarks.
    D. Goodwill.
    E. Leaseholds.

 

Difficulty: Moderate
Larson – Chapter 10 #120
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Intangible assets:
    A.Are rights, privileges, and competitive advantages to the owner, used in operations, having no physical substance.
    B. Include patents, leaseholds, and land improvements.
    C. Can be amortized.
    D. Are rights, privileges, and competitive advantages to the owner, used in operations, having no physical substance and can be amortized.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 10 #121
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. A patent:
    A.Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 50 years.
    B. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 20 years.
    C. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 50 years.
    D. The amount by which the value of a company exceeds the fair market value of a company’s net assets if purchased separately.
    E. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 20 years.

 

Difficulty: Moderate
Larson – Chapter 10 #122
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. A copyright:
    A.Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 50 years.
    B. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 20 years.
    C. Is an exclusive right granted to its owner to manufacture and sell a machine or device, or to use a process, for 50 years.
    D. The amount by which the value of a company exceeds the fair market value of a company’s net assets if purchased separately.
    E. Gives the owner the exclusive right to publish and sell a musical or literary work during the life of the creator plus 20 years.

 

Difficulty: Moderate
Larson – Chapter 10 #123
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. A leasehold:
    A.Is a short-term rental agreement.
    B. Is not an intangible asset.
    C. Refers to the rights granted to the lessee by the lessor in a lease.
    D. Is initially recorded as rent expense.
    E. Is an investment.

 

Difficulty: Moderate
Larson – Chapter 10 #124
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. On April 3, 2015, Rainbow Studios purchased a patent for $56,000. Its remaining legal life is 7 years and Rainbow Studios estimates that the patent will be useful for another 4 years. The correct adjusting entry to record amortization of the patent on December 31, 2015 is:
    A.
    B.
    C.
    D.

 

Difficulty: Moderate
Larson – Chapter 10 #125
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Application
 

  1. The appropriate way to amortize goodwill is:
    A.Straight-line over a maximum of 40 years.
    B. Straight-line over a maximum of 20 years.
    C. Double-declining-balance over a period not to exceed 20 years.
    D. Over the estimated useful life of the goodwill.
    E. Goodwill is not amortized or depreciated.

 

Difficulty: Easy
Larson – Chapter 10 #126
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Each year goodwill is examined to see if its value has been impaired. If the value has been impaired goodwill will:
    A.Increase.
    B. Not change.
    C. Decrease.
    D. Be amortized.
    E. Be depreciated.

 

Difficulty: Moderate
Larson – Chapter 10 #127
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Discuss the four issues in accounting for property, plant and equipment.

Property, plant and equipment are tangible assets used in the operations of a company and have a useful life of more than one accounting period. The four main accounting issues include

(1) calculating their costs
(2) allocating their costs to the periods they benefit
(3) accounting for subsequent expenditures such as repairs and improvements, and
(4) recording their disposal.

 

Difficulty: Moderate
Larson – Chapter 10 #128
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Explain the difference between revenue and capital expenditures and how they are recorded in the accounting system.

Revenue expenditures such as repairs expire in the current accounting period. They are debited to expense and are thus matched with current revenues.
Capital expenditures such as subsequent capital expenditures benefit future periods. They are debited to asset accounts and are matched with future periods through depreciation expense.
Immaterial long-term expenditures are treated as current period expenses (materiality principle).

 

Difficulty: Moderate
Larson – Chapter 10 #129
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Mandy Manufacturing purchased a machine on August 1, 2014, and it was installed and ready to run on January 1, 2015. The following costs were incurred in the purchase and installation of the machine.

    Calculate the depreciable cost of the machine.

NOTE ALL OTHER COSTS WOULD BE EXPENSED.

 

Difficulty: Moderate
Larson – Chapter 10 #130
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Primadonna Company paid $870,000 plus $10,000 in legal costs for a parcel of real estate. This included land appraised at $350,000; land improvements appraised at $80,000; and a building appraised at $370,000. The plan is to use the building as a manufacturing plant. Determine the amounts that should be debited to:

    Take all percentages to two decimals, e.g. 12.35%

 

 

Difficulty: Moderate
Larson – Chapter 10 #131
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Prepare journal entries to record the following transactions of Salem Sales Co. during the current year:

 

 

Difficulty: Moderate
Larson – Chapter 10 #132
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Shady Lanes installed automatic sprinkler systems. The electrical work for the installation was $24,000. The invoice price of the sprinkler equipment was $280,000. Additional costs were $5,000 for delivery and $800 for insurance during transportation. During installation a sprinkler line was punctured and was replaced for $200. What is the cost of the sprinkler equipment?

$24,000 + 280,000 + 5,000 + 800 = $309,800

 

Difficulty: Moderate
Larson – Chapter 10 #133
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Twin Investments purchased land with a building for a total cost of $5,500,000 ($500,000 paid in cash and the balance on a long-term note). The appraised cost of the land and building were $3,000,000 and $2,100,000, respectively. Calculate the costs to be allocated to the land and the building and prepare the appropriate journal entry to record the acquisition. (Round all calculations to two decimals)

 

 

Difficulty: Moderate
Larson – Chapter 10 #134
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Pink Lady Co needed a new building, and found a suitable piece of land which had an old building on it. Pink Lady made an agreement to buy the land and the building for $960,000 cash. The old building was demolished to make way for the new building.
    The following is information regarding the demolishing of the old building and construction of the new one:

    Prepare a single journal entry to record the above costs (assume all paid cash).

 

 

Difficulty: Moderate
Larson – Chapter 10 #135
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Alpha Co paid $180,000 to purchase a piece of land on which to build a new building. Additional costs incurred were:

    What dollar amount of the above costs should be allocated to Land and what amount should be allocated to the new Building?

$180,000 + $10,800 + $1,400 + $6,000 + $1,500 – $900 = $198,800 to Land; $-0- to the new Building account.

 

Difficulty: Moderate
Larson – Chapter 10 #136
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. SASA Company made the following expenditures in connection with the construction of its new soccer facility:

    Prepare a schedule showing the amounts to be recorded as Land, Building, and Machinery and Equipment and Expenses.

 

 

Difficulty: Hard
Larson – Chapter 10 #137
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. How is the cost principle applied to property, plant and equipment?

Property, plant and equipment should be recorded at cost when acquired. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. The cost of a lump-sum purchase is allocated among its individual assets based on their relative market values.

 

Difficulty: Moderate
Larson – Chapter 10 #138
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. RoboCop Company paid $31,400 for a machine that was expected to last 5 years and have a residual value of $5,000.
    During the third year of the machine’s life, $3,700 was paid for replacement parts that were expected to increase the machine’s productivity by 20% each year. Prepare the general journal entry to record this transaction.

 

 

Difficulty: Easy
Larson – Chapter 10 #139
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. RoboCop Company paid $31,400 for a machine that was expected to last 5 years and have a residual value of $5,000.
    During the fourth year of the machine’s life, $5,400 was paid for repairs that were expected to increase the service life of the machine from 5 to 7 years. Prepare the general journal entry to record this transaction.

 

 

Difficulty: Easy
Larson – Chapter 10 #140
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Application
 

  1. Xeno Co. incurred the following transactions concerning its machinery:

    Xeno Co uses the calendar year as its fiscal year.

    Prepare the journal entry to record depreciation expense for 2014.
    Prepare the journal entry to record depreciation expense for 2015.
    Prepare the journal entry to record depreciation expense for 2016.
    Round all values to the nearest dollar.

 

 

Difficulty: Hard
Larson – Chapter 10 #141
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. On January 1, 2014, Friar Company purchased a machine for $175,000 that was expected to last 6 years and have a residual value of $16,000. On January 4, 2017, Friar Company paid $25,000 for improvements to the machine, which increased the total estimated useful life from 6 to 10 years and increased the residual value to $19,500. Friar uses straight-line depreciation.

    (1) What account should be debited in the journal entry to record the $25,000 improvements?
    (2) What amount of depreciation expense should be recorded for 2017?

 

 

Difficulty: Moderate
Larson – Chapter 10 #142
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. Explain depreciation and the elements affecting its calculation.

Depreciation is the process of allocating to expense the cost of property, plant and equipment over the accounting periods benefiting from the use of the assets. Three factors determine depreciation: cost, residual value, and useful life.

 

Difficulty: Moderate
Larson – Chapter 10 #143
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Compare the three different depreciation methods: straight-line, units of production, and double-declining balance.

The amount of depreciation expense per period is usually different for different methods. Yet total depreciation expense is the same for all methods. The straight-line method results in the same amount of depreciation for each accounting period. The units-of-production method results in depreciation expense that increases or decreases with the amount of asset usage. The double-declining-balance method is an accelerated method and yields more depreciation expense in the first years of ownership and less in later years than straight-line depreciation.

 

Difficulty: Moderate
Larson – Chapter 10 #144
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Explain how each of the following depreciation methods is calculated: straight-line, units-of-production, and double-declining-balance.

Straight-line depreciation is calculated by subtracting residual value from the cost of a property, plant and equipment item and dividing the result by the useful life in years. The resulting amount is the annual depreciation expense for the asset.
Units-of-production depreciation is calculated by subtracting residual value from the cost of a property, plant and equipment item and dividing the result by the estimated number of units to be produced. The resulting amount is the depreciation expense per unit. That amount is multiplied by the number of units used during each accounting period in order to determine the total amount of depreciation expense for the period.
The double-declining-balance method uses twice the straight-line percent times the beginning book value of the asset. The resulting amount is the annual depreciation expense.

 

Difficulty: Hard
Larson – Chapter 10 #145
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. Chervinski Industries recently paid $460,000 to buy a building that has an estimated useful life of 40 years and a residual value of $116,000. Calculate the depreciation expense for the third year after acquisition using double-declining-balance depreciation. Assume a full year of depreciation in the first year.

 

 

Difficulty: Moderate
Larson – Chapter 10 #146
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. Dersch Co. purchased a machine on January 1, 2014, for $1,500,000. Using the table below, calculate the annual depreciation expense for each year of the machine’s life (estimated at 5 years or 50,000 hours with a residual value of $150,000). During the machine’s life it was used 15,000; 14,000; 10,000; 9,000; and 6,000 hours.

 

 

Difficulty: Hard
Larson – Chapter 10 #147
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. Twilight Manufacturing’s property, plant and equipment records reveal the following information:

    Calculate the depreciation expense for each equipment item for the year ended December 31, 2014, using the nearest whole month method.

 

 

Difficulty: Moderate
Larson – Chapter 10 #148
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. On January 2, 2014, Far Co. purchased a machine for $525,000. The company expects the machine to last for 10 years or 50,000 hours of operation, with an estimated residual value of $15,000. During 2014 the machine was operated for 3,000 hours, while in 2015 it was operated for 2,600 hours. Calculate the depreciation expense for the machine for 2014 and 2015 using the following depreciation methods:

    (a) Straight-line.
    (b) Double-declining-balance.
    (c) Units-of-production.

(a) ($525,000 – 15,000)/10 years = $51,000
(b) Double Declining Rate is 2/10 = 20%

(c) ($525,000 – 15,000)/50,000 hours = $10.20/hour

 

Difficulty: Moderate
Larson – Chapter 10 #149
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. On January 1, 2014, a machine costing $230,000 with a 4-year service life and an estimated $3,000 residual value was purchased. It was also estimated that the machine would produce 50,000 units during its life. The actual units produced during its first 2 years of operation were 9,000 and 10,000 respectively. Calculate the amount of depreciation expense for calendar years 2014 and 2015 under each of the following assumptions:

    (a) The company uses the straight-line method of depreciation.
    (b) The company uses the units-of-production method of depreciation.
    (c) The company uses the double-declining-balance method of depreciation.

 

 

Difficulty: Moderate
Larson – Chapter 10 #150
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. On October 1, 2014, Fisherman Company purchased a light truck, at a cost of $62,000. The truck is expected to last six years and have a residual value of $5,200. Fisherman Company uses the calendar year as their fiscal year, and the nearest whole month method for depreciation.

    (a) What is the depreciation expense for 2014, assuming the straight-line method is used?
    (b) What is the depreciation expense for 2014 and 2015, assuming the double-declining-balance method is used (round double declining rate to 4 decimals)?

 

 

Difficulty: Moderate
Larson – Chapter 10 #151
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. A new machine is expected to produce 60,000 units of product during its 5-year life. The machine cost $180,000 and is estimated to have a $20,000 residual value.
    If the machine produces 7,200 units of product during its first year, what is the depreciation for the year calculated by the units-of-production method (round rate to 2 decimals)?

Rate is ($180,000-20,000)/60,000units= $2.67/unit $2.67/unit ´ 7,200 units = $19,224 depreciation for the first year

 

Difficulty: Easy
Larson – Chapter 10 #152
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. A new machine is expected to produce 40,000 units of product during its 5-year life. The machine cost $180,000 and is estimated to have a $20,000 residual value.
    If depreciation on the machine is calculated by the double-declining-balance method, what is the depreciation for the first year?

2/5 ´ 100 = 40% $180,000 ´ 40% = $72,000 depreciation for the first year

 

Difficulty: Easy
Larson – Chapter 10 #153
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. A new machine is expected to produce 40,000 units of product during its 5-year life. The machine cost $38,000 and is estimated to have a $6,000 residual value.
    What is the first year’s depreciation on the machine calculated by the straight-line method?

($38,000-6,000)/5 years= $6,400

 

Difficulty: Easy
Larson – Chapter 10 #154
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. On January 1, 2014, High Flying Airways acquired and placed in service a plane that cost $8,000,000. The plane’s service life and residual value were estimated at 5 years and $1,500,000, respectively. Calculate depreciation for 2014-2018, assuming the following alternative depreciation methods are used:

    (a) Straight-line.
    (b) Double-declining-balance.

 

 

Difficulty: Hard
Larson – Chapter 10 #155
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Application
 

  1. On July 1, 2014, Delta Company purchased and placed in service a machine that cost $360,000. Delta estimated the service life to be 5 years or 25,000 units of output, with an estimated residual value of $6,000. During 2014, 2,600 units were produced.
    Prepare the necessary December 31, 2014, adjusting journal entry to record depreciation assuming Delta uses:

    (a) The straight-line method of depreciation.
    (b) The units-of-production method of depreciation.

 

 

Difficulty: Moderate
Larson – Chapter 10 #156
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. On July 1, 2014, Delta Company purchased and placed in service a machine with a cost of $340,000. Delta estimated the service life to be 6 years or 60,000 units of output, with an estimated residual value of $80,000. During 2014, 15,000 units were produced.
    Prepare the necessary December 31, 2014, adjusting journal entry to record depreciation for 2014 assuming Delta uses the double-declining-balance method to the nearest whole month.

 

 

Difficulty: Moderate
Larson – Chapter 10 #157
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. On September 30, 2014, Sabena Industries acquired and placed in service a machine that cost $850,000. It was estimated that the machine has a service life of five years and a residual value of $69,400.
    Using the double-declining-balance method of depreciation, prepare a schedule showing the depreciation amounts for the years 2014 through 2019 (use the nearest whole month method and round answers to the nearest dollar). Sabena closes its books on December 31 of every year.

Rate = 2/5 x 100 = 40%

 

Difficulty: Hard
Larson – Chapter 10 #158
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. Jelly Bean had the following property, plant and equipment purchases during 2014:

    (1) On April 4, equipment costing $150,000 with a 5-year service life and an estimated $40,000 residual value was purchased.
    (2) On October 4, a machine costing $230,000 with a 5 year service life and an estimated $50,000 residual value was purchased.
    Assuming Jelly Bean has a December 31 year end, prepare the necessary adjusting journal entries at December 31, 2014 to record depreciation under the following depreciation methods (using the nearest whole month method):

    (a) Straight-line.
    (b) Double-declining-balance.

 

 

Difficulty: Moderate
Larson – Chapter 10 #159
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Type: Application
 

  1. On January 1, 2014, Boone Company purchased a machine for $75,000 that had a 6-year life and a residual value of $6,000. After 3 years of use, on January 1, 2017, Boone Company paid $7,500 to improve the efficiency of the machine. The effect of the expenditure was to increase the productivity of the machine without increasing its remaining useful life or changing its residual value. Boone uses straight-line depreciation.

    (1) What account should be debited in recording the $7,500 expenditure?
    (2) What amount of depreciation expense should be reported for 2017?

(1) Machinery
(2) ($75,000 – [(75,000-6,000)/6 x 3] + $7,500) = $48,000 (NBV at Jan 1/17)
($48,000-6,000)/3 = $14,000

 

Difficulty: Moderate
Larson – Chapter 10 #160
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. Explain (1) depreciation for partial years and (2) revision of depreciation when estimates change.

(1) Partial years’ depreciation is often required because assets are bought and sold throughout the year. Depreciation for assets owned for less than one year can be based on the number of months owned during the year (nearest whole month method) or the half-year convention may be used.
(2). Depreciation is revised when changes in estimates such as residual value and useful life occur. For example, if the useful life of a property, plant and equipment item changes, the remaining cost to be depreciated is spread over the remaining revised useful life of the asset.

 

Difficulty: Hard
Larson – Chapter 10 #161
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Knowledge
 

  1. A machine was purchased for $37,000 and depreciated for 5 years on a straight-line basis under the assumption it would have a 10-year life and a $1,000 residual value. At the beginning of the machine’s sixth year, it was recognized that it had 3 years of remaining life left, instead of five, and that at the end of the 3 years its residual value would be $1,600. What should the annual depreciation be for the machine’s remaining years?

 

 

Difficulty: Moderate
Larson – Chapter 10 #162
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. On January 1, 2015, Bailey Company purchased a machine for $106,000 that was expected to last five years and has a residual value of $6,000. At the beginning of 2018, Bailey decided that the machine’s estimated useful life should be revised to a total of 6 years instead of 5. Also, the residual value was now estimated to be $5,500. Straight-line depreciation was used. Calculate the depreciation expense for 2018.

($106,000 – $6,000)/5 = $20,000 (annual depreciation)
$106,000 – (3 ´ $20,000) = $46,000 (NBV at Jan 1/18)
($46,000 – $5,500)/3 = $13,500

 

Difficulty: Moderate
Larson – Chapter 10 #163
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. Wildcat Company purchased a heating system on January 2, 2003, for $625,000. The system had an estimated useful life of 15 years, with no residual value. On January 2, 2015, the company paid $33,000 cash for a complete renovation of the system, and now expects the system to last 5 years beyond the original estimate. The company uses the straight-line method of depreciation.

    (a) Prepare the journal entry at January 2, 2015, to record the renovation of the heating system.
    (b) Prepare the journal entry at December 31, 2015, to record the depreciation for 2015.

Annual Depreciation 2003-2014 = 625,000/15 years x 12 years = 500,000
At January 2, 2015, book value is 625,000 + 33,000 – 500,000 = 158,000
New annual depreciation 158,000/8 years = 19,750
(15 years – 12 years + 5 years) = 8 years remaining

 

Difficulty: Moderate
Larson – Chapter 10 #164
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Application
 

  1. At December 31, 2015, Great Coast Coffee Company’s adjusted trial balance shows an espresso machine with a book value of $12,000. As part of the year end procedures GCC completed the asset impairment test on the machine and noted that the recoverable value of the machine was $6,000. Record the impairment loss on the asset.

 

 

Difficulty: Easy
Larson – Chapter 10 #165
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. Great Coast Construction (GCC) exchanged a three-year-old excavator for a new excavator that had a list price of $160,000. The old excavator originally cost $175,000 and had accumulated depreciation of $45,000 to the date of exchange. In addition to the $145,000 trade-in given for the old excavator (which was the old asset’s fair value), GCC paid $10,000 cash to complete the deal. The list price for the new excavator is considered unreliable.
    Record the asset exchange.

 

 

Difficulty: Hard
Larson – Chapter 10 #166
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Great Coast Construction (GCC) exchanged a three-year-old excavator for a new excavator that had a list price of $63,000, which was its fair value. The old excavator originally cost $85,000 and has accumulated depreciation of $45,000 to the date of exchange. In addition to the $45,000 trade-in given for the old excavator, GCC paid $8,000 cash to complete the deal.

 

 

Difficulty: Moderate
Larson – Chapter 10 #167
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Discuss the accounting procedures involved for asset disposal through discarding, selling, or exchanging an asset.

When an asset is disposed of through discarding or selling, the depreciation must first be brought up to date. Then the cost of the asset and its related accumulated depreciation are removed from the books, along with recording any cash involved in the transaction and any gain or loss from the disposal.
When a new asset is purchased by trading in an old asset, assuming the transaction has commercial substance, depreciation to date is recorded, the cost of the old asset and its related accumulated depreciation are removed from the books, the new asset is recorded at its fair value, and any cash paid or received and any gain or loss on disposal is recognized.

 

Difficulty: Moderate
Larson – Chapter 10 #168
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Five years ago, Sanford and Sons purchased equipment for $108,000 which had an estimated useful life of 10 years with an expected residual value of $15,000. At the end of five years, the equipment’s accumulated depreciation is $46,500. Prepare the journal entry to record the sale of the equipment at the end of the fifth year for $45,000 cash.

 

 

Difficulty: Easy
Larson – Chapter 10 #169
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Vroom Company sold for $60,000 a machine that originally cost $100,000. The accumulated depreciation on this machine to date of sale was $47,000. What was Vroom Company’s gain or loss on this sale?

Machine Book Value $100,000-47,000 = $53,000
Cash Received = $60,000
Gain on Sale = $7,000

 

Difficulty: Easy
Larson – Chapter 10 #170
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Aye Company’s computer was destroyed by fire. The computer originally cost $5,000, and accumulated depreciation to the date of the fire was $900. The company received $2,000 from an insurance policy that covered the computer and will use that money to help pay for a new computer. Prepare the general journal entry to record the loss of the computer and the receipt of cash from the insurance company.

 

 

Difficulty: Moderate
Larson – Chapter 10 #171
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. The $60,000 original cost of a machine is recorded in an account called Old Machine. After $45,000 of depreciation was recorded, the machine was traded in on a new machine with a cash price of $85,000. A $10,500 trade-in allowance was received on the old machine and the balance was paid in cash. This transaction has commercial substance. Prepare the general journal entry to record the trade; the cost of the new machine should be debited to a New Machine account.

 

 

Difficulty: Moderate
Larson – Chapter 10 #172
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Robertson Company exchanged a used machine for a new machine. The old machine cost $80,000, and the new one had a cash price of $95,000. Robertson had recorded a total of $75,000 depreciation on the old machine and was allowed a $4,500 trade-in allowance. This transaction has commercial substance. What gain or loss should be recorded on the exchange?

 

 

Difficulty: Moderate
Larson – Chapter 10 #173
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Wilkins Company exchanged its old computer for a newer model. The Old Computer was purchased for $22,000, with related accumulated depreciation of $15,500 to the date of the exchange. The new computer had a cash price of $30,200, and Wilkins Company was given a $7,500 trade-in allowance. This transaction has commercial substance. Prepare the general journal entry to record the exchange, recording the new computer in an account called New Computer.

 

 

Difficulty: Moderate
Larson – Chapter 10 #174
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On January 2, 2015, Mullins Company purchased a delivery truck for $45,000 cash. The truck had an estimated useful life of seven years and an estimated residual value of $3,000. Straight-line depreciation was used.
    Assuming the transactions have commercial substance, prepare the journal entries to record the disposition of the truck on September 1, 2019, under each of the following assumptions:

    (a) The truck and $55,000 cash were exchanged for equipment that had a fair value of $70,000.
    |(b) The truck and $40,000 cash were exchanged for a new delivery truck that had a fair value of $70,000.

 

 

Difficulty: Moderate
Larson – Chapter 10 #175
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On April 1, 2015, Hogan Industries scrapped a machine that cost $10,000 and had accumulated depreciation through December 31, 2014, of $10,000. Prepare the journal entry to record the disposal of the machine.

 

 

Difficulty: Moderate
Larson – Chapter 10 #176
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On April 1, 2015, Lockhart Company discarded equipment that cost $80,000, had a useful life of 5 years, a residual value of $14,000, and, under straight-line depreciation, accumulated depreciation as of December 31, 2014 of $26,400.

    (a) Prepare the journal entry to record depreciation up to the date of disposal of the equipment.
    (b) Prepare the journal entry to record the disposal of the equipment.

 

 

Difficulty: Moderate
Larson – Chapter 10 #177
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On April 1, 2015, Sagan Realty disposed of an automobile that had cost $50,000 on January 1, 2013. The automobile had a residual value of $8,000, and a useful life of 5 years. The accounting records showed accumulated depreciation for this asset of $16,800 at December 31, 2014. The asset was discarded after an accident, and $11,500 was received from an insurance claim.
    Prepare the journal entry to record the disposal of the automobile.

 

 

Difficulty: Moderate
Larson – Chapter 10 #178
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On April 1, 2015, Thunderbird Co sold a piece of equipment that had cost $35,000 on January 1, 2011. The equipment had a residual value of $5,000, a useful life 10 years, and double-declining-balance depreciation at twice the straight-line rate was used. On December 31, 2014, accumulated depreciation was $20,664. The asset was sold for $14,200.
    Prepare the journal entry to record depreciation up to the date of disposal of the equipment, and the journal entry to record the disposal of the equipment.

 

 

Difficulty: Moderate
Larson – Chapter 10 #179
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. During 2016, Melanie’s Emporium exchanged an old truck costing $18,000 with accumulated depreciation of $13,000 to the date of exchange for a new truck. The new truck had a cash price of $30,000 and Melanie received a $6,000 trade-in allowance on the old truck. This transaction has commercial substance. Prepare the journal entry to record the exchange.

 

 

Difficulty: Moderate
Larson – Chapter 10 #180
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. During 2014, Storey Company acquired a new computer with a cash price of $12,800 by exchanging an old one on which Storey received a $1,500 trade-in. The old computer had cost $9,000 and its accumulated depreciation to the date of exchange was $5,500. This transaction has commercial substance. Prepare the journal entry to record the exchange.

 

 

Difficulty: Moderate
Larson – Chapter 10 #181
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Upside Down Company purchased new office equipment for $4,300, by trading in old equipment with a cost of $2,000 and accumulated depreciation to the date of trade of $1,900. Upside Down received a $50 trade-in allowance for the old equipment. This transaction has commercial substance. Prepare the journal entry to record the transaction.

 

 

Difficulty: Moderate
Larson – Chapter 10 #182
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. On April 1, Fog Company traded an old machine that originally cost $32,000 and had been depreciated $24,000 for a new machine that had a cash price of $40,000.
    Assuming that this transaction has commercial substance,

    (1) Prepare the journal entry to record the exchange under the assumption that a $5,000 trade-in allowance was received and the balance was paid in cash.
    (2) Prepare the journal entry to record the exchange under the assumption that instead of a $5,000 trade-in allowance, a $12,500 trade-in allowance was received and the balance was paid in cash.

 

 

Difficulty: Moderate
Larson – Chapter 10 #183
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Natsuko Company traded an old forklift for a new forklift, receiving a $10,500 trade-in allowance and paying the remaining $37,200 in cash. The old forklift cost $39,000, and straight-line depreciation of $27,200 had been recorded to the date of trade under the assumption it would last 5 years and have a $5,000 residual value. At the date of trade, the fair value of the old forklift is $11,000, however the fair value of the new forklift is not known.

    (1) What was the book value of the old forklift?
    (2) At what amount should the new forklift be recorded?

(1) $39,000 – $27,200 = $11,800
(2) $11,000 + 37,200 = 48,200
(fair value of old asset plus cash paid)

 

Difficulty: Moderate
Larson – Chapter 10 #184
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was sold for $22,000, prepare the general journal entry to record the disposal

 

 

Difficulty: Moderate
Larson – Chapter 10 #185
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was sold for $15,000, prepare the general journal entry to record the disposal.

 

 

Difficulty: Moderate
Larson – Chapter 10 #186
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Hertzog Company purchased and installed a machine on February 1, 2014, at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no residual value. The machine was disposed of on July 31, 2017.
    Assuming the machine was totally destroyed in a fire and the insurance company settled the claim for $18,000 cash, prepare the general journal entry to record the disposal.

 

 

Difficulty: Moderate
Larson – Chapter 10 #187
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Danner Co. purchased a computer on January 1, 2014, for $1,600,000. The straight-line method of depreciation was used, based on an expected life of 6 years and a residual value of $130,000. Prepare the journal entries to record depreciation for the first 6 months of 2016 and the sale of the computer on July 1, 2016, for $1,000,000.

 

 

Difficulty: Moderate
Larson – Chapter 10 #188
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Application
 

  1. Discuss accounting for an impairment of property, plant and equipment.

If the book value or carrying amount of a PPE item is greater than the amount to be recovered through the asset’s use or sale, the difference is an impairment loss and the asset is described as impaired. To account for the impairment of an asset a company must record a debit to impairment loss and a credit to the impaired asset. When a loss is recorded, revised depreciation must be calculated and recorded in future periods because of the decrease in the carrying amount of the asset caused by the impairment loss.

 

Difficulty: Moderate
Larson – Chapter 10 #189
Learning Objective: 10-05 Explain and record impairment losses.
Type: Knowledge
 

  1. Matador & Company was preparing the annual financial statements and, as part of its year-end procedures, prepared the following schedule based on adjusted values at March 31, 2015:

    Record the entry for any impairment loss assuming that Matador & Company recorded no impairment losses in previous years.

 

 

Difficulty: Easy
Larson – Chapter 10 #190
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. Matador & Company was preparing the annual financial statements and, as part of its year-end procedures, prepared the following schedule based on adjusted values at March 31, 2015:

    1. Record the entry for any impairment loss assuming that Matador & Company recorded no impairment losses in previous years.
    2. Record the entry for depreciation on each of the assets at March 31, 2015. Assume there was no change in residual or useful lives regardless of impairment losses.

  2. 2.

 

Difficulty: Hard
Larson – Chapter 10 #191
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-05 Explain and record impairment losses.
Type: Application
 

  1. Discuss accounting for intangible assets.

Intangible assets are recorded at acquisition cost and are debited to asset accounts. Allocation of the cost of an intangible asset to expense is done by using the straight-line method and is called amortization. Theoretically, a contra account should be used for the accumulated amortization (as with tangible property, plant and equipment and accumulated depreciation), but a credit directly to the asset account is also done in practice.

 

Difficulty: Moderate
Larson – Chapter 10 #192
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. On January 4, 2015, SportsWorld purchased a patent for $35,000 with a useful life of 10 years. Prepare the journal entry to amortize the patent for the calendar year 2015.

 

 

Difficulty: Easy
Larson – Chapter 10 #193
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Hawaii Kai purchased a leasehold property for $8,500,000. The leasehold expires in 15 years. Prepare the journal entry to record the first year’s depreciation expense.

 

 

Difficulty: Easy
Larson – Chapter 10 #194
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Application
 

  1. GenX Music purchased a music distributor’s collection of songs for $1,423,000. The copyrights are expected to last another 34 years. Prepare the journal entry to record the amortization expense for the first year.

$1,423,000/34 = 41,853 rounded

 

Difficulty: Easy
Larson – Chapter 10 #195
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Application
 

  1. Explain what could cause the impairment of goodwill. How often should goodwill be tested to see if it is impaired?

Goodwill could be impaired by an ongoing past or potential cash flow losses or negative changes in variables supporting original calculations of goodwill. Testing for impairment should be done at least annually.

 

Difficulty: Moderate
Larson – Chapter 10 #196
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. ______________________ are costs that increase the usefulness of land, but have limited useful lives and are thus depreciated.
    Land improvements

 

Difficulty: Easy
Larson – Chapter 10 #197
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. Replacement of a roof or renovation of a plant are examples of _______________________.
    Capital expenditures

 

Difficulty: Moderate
Larson – Chapter 10 #198
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Type: Knowledge
 

  1. The three factors in calculating depreciation are: ____________, __________, ____________.
    Cost; residual value; useful or service life

 

Difficulty: Easy
Larson – Chapter 10 #199
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. _____________ is the Income Tax Act equivalent for depreciation.
    Capital Cost Allowance (CCA)

 

Difficulty: Easy
Larson – Chapter 10 #200
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. _______________________ depreciation provides for equal amounts of annual depreciation over the life of an asset.
    Straight-line

 

Difficulty: Easy
Larson – Chapter 10 #201
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Type: Knowledge
 

  1. ______________ is the process of systematically allocating the cost of an intangible asset to expense over its estimated useful life.
    Amortization

 

Difficulty: Easy
Larson – Chapter 10 #202
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Revising estimates of the useful life or residual value of property, plant and equipment is referred to as a(n) _______________________.
    Change in accounting estimate

 

Difficulty: Moderate
Larson – Chapter 10 #203
Learning Objective: 10-04 Explain and calculate revised depreciation.
Type: Knowledge
 

  1. The three means for disposal of an asset include: ____________, ____________, or ______________.
    Discarding; selling; exchanging

 

Difficulty: Moderate
Larson – Chapter 10 #204
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Type: Knowledge
 

  1. Match each of the following terms with the appropriate definition.
1. Depreciation.       A depreciation method in which an asset’s depreciation expense for the period is determined by applying a constant depreciation rate to the asset’s book value at the beginning of the year.   5
2. Intangible assets       An expenditure that should appear on the current income statement as an expense and be deducted from the period’s revenues because it does not provide a material benefit in future periods.   8
3. Accelerated depreciation       Depreciation method that produces larger depreciation charges during the early years of an asset’s life and smaller charges in the later years.   3
4. Goodwill       Repairs made to keep property, plant and equipment in normal, good operating condition   9
5. Double-declining-balance method       A change in a calculated amount used in the financial statements resulting from new information or subsequent developments and from better insight or improved judgment.   6
6. Change in accounting estimate      A name for the rights granted to the lessee by the lessor in a lease.   7
7. Leasehold       The amount by which the value of a company exceeds the fair market value of the company’s net assets if purchased separately.   4
8. Revenue expenditure       Rights, privileges, and competitive advantages to the owner of long-term assets used in operations that have no physical substance.   2
9. (Ordinary) repairs       An expenditure to make a property, plant and equipment more efficient or productive.   10
10. Subsequent capital expenditure       The process of matching the depreciable cost of a tangible asset in a rational and systematic manner over the asset’s useful life.   1

 

Difficulty: Moderate
Larson – Chapter 10 #205
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Learning Objective: 10-05 Explain and record impairment losses.
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

  1. Match each of the following terms with the appropriate definition.
1. Patent      Management’s estimate of the amount that will be recovered at the end of a property, plant and equipment item’s useful life through a sale or as a trade-in allowance on the purchase of a new asset.   10
2. Depreciation       A process of systematically allocating the cost of an intangible asset to expense over its estimated useful life.   4
3. Book value      Major repairs that extend the useful life of property, plant and equipment beyond original expectations.   8
4. Amortization       Assets that increase the usefulness of land but that have a limited useful life and are subject to depreciation.   9
5. Obsolescence       The original cost of a property, plant and equipment item less its accumulated depreciation.   3
6. Inadequacy      A condition in which, because of new inventions and improvements, property, plant and equipment can no longer be used to produce goods or services with a competitive advantage.   5
7. Copyright       An exclusive right granted to its owner by the federal government to manufacture and sell a machine or device, or to use a process, for 20 years.   1
8. Subsequent capital expenditure      The process of matching the depreciable cost of a tangible asset in a rational and systematic manner over the asset’s useful life.   2
9. Land improvements       A right granted by the federal government or by international agreement giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work during the life of the creator plus 50 years.   7
10. Residual value      A condition in which the capacity of property, plant and equipment is too small to meet the company’s productive demands.   6

 

Difficulty: Moderate
Larson – Chapter 10 #206
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost.
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance.
Learning Objective: 10-03 Explain and calculate depreciation for partial years.
Learning Objective: 10-04 Explain and calculate revised depreciation.
Learning Objective: 10-05 Explain and record impairment losses.
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset.
Learning Objective: 10-07 Account for intangible assets and their amortization.
Type: Knowledge
 

 

 

c10 Summary

Category # of Questions
Difficulty: Easy 59
Difficulty: Hard 38
Difficulty: Moderate 109
Larson – Chapter 10 206
Learning Objective: 10-01 Describe property; plant and equipment (PPE) and calculate their cost. 47
Learning Objective: 10-02 Explain; record; and calculate depreciation using the methods of straight-line; units-of production; and double declining-balance. 68
Learning Objective: 10-03 Explain and calculate depreciation for partial years. 16
Learning Objective: 10-04 Explain and calculate revised depreciation. 20
Learning Objective: 10-05 Explain and record impairment losses. 13
Learning Objective: 10-06 Account for asset disposal through discarding; selling; or exchanging an asset. 42
Learning Objective: 10-07 Account for intangible assets and their amortization. 30
Type: Application 85
Type: Knowledge 121

 

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