Amortization

Question 1

-it is paying off a debt overtime in equal installments.
-part of each payment goes toward the loan principal, and part goes toward interest.
-as the loan amortizes, is the amount going toward principal starts cat small and gradually grows larger month and month.

Answer 1

Amortization

Question 2

What does amortization refer to?A) Increasing the value of an asset
B) Reducing the value of an asset over time
C) Transferring an asset to another entity
D) None of the above

Answer 2

Answer: B) Reducing the value of an asset over time

Question 3

Which of the following is an example of amortization?
A) Paying off a mortgage over time
B) Increasing the value of inventory
C) Selling an asset at a higher price
D) Renting a property for a fixed period

Answer 3

Answer: A) Paying off a mortgage over time

Question 4

What type of assets are typically subject to amortization?
A) Tangible assets
B) Intangible assets
C) Financial assets
D) Current assets

Answer 4

Answer: B) Intangible assets

Question 5

How is amortization expense calculated for an intangible asset?A) Initial cost divided by useful life
B) Initial cost multiplied by useful life
C) Initial cost minus salvage value
D) None of the above

Answer 5

Answer: A) Initial cost divided by useful life

Question 6

Which financial statement reflects the amortization expense?
A) Balance sheet
B) Income statement
C) Cash flow statement
D) Statement of retained earnings

Answer 6

Answer: B) Income statement

Question 7

True or False:
Amortization always results in a cash outflow.
A) TrueB) False

Answer 7

B. False

Question 8

What is the purpose of amortization in accounting?
A) To record the depreciation of tangible assets
B) To allocate the cost of intangible assets over their useful life
C) To determine the market value of an asset
D) None of the above

Answer 8

Answer: B) To allocate the cost of intangible assets over their useful life

Question 9

Which method of amortization evenly allocates the cost of an asset over its useful life?
A) Straight-line method
B) Double-declining balance method
C) Units of production method
D) Sum-of-the-years’-digits method

Answer 9

Answer: A) Straight-line method

Question 10

Which financial ratio is impacted by amortization?
A) Debt-to-equity ratio
B) Current ratio
C) Return on investment
D) Gross profit margin

Answer 10

Answer: A) Debt-to-equity ratio

Question 11

What is the effect of amortization on the book value of an asset over time?
A) Increases the book value
B) Decreases the book value
C) Does not impact the book value
D) Initially increases, then decreases the book value

Answer 11

Answer: B) Decreases the book value

Question 12

Which type of intangible asset is typically not subject to amortization?
A) Patents
B) Goodwill
C) Trademarks
D) Copyrights

Answer 12

Answer: B) Goodwill

Question 13

In the context of loans, what does amortization refer to?
A) Repayment of the principal loan amount over time
B) Payment of interest only
C) Extending the loan term
D) None of the above

Answer 13

Answer: A) Repayment of the principal loan amount over time

Question 14

Which of the following assets is NOT subject to amortization?
A) Land
B) Machinery
C) Patents
D) Software

Answer 14

Answer: A) Land

Question 15

Which financial statement shows the remaining balance of an intangible asset after amortization?
A) Balance sheet
B) Income statement
C) Statement of cash flows
D) Statement of retained earnings

Answer 15

Answer: A) Balance sheet

Question 16

How does amortization differ from depreciation?
A) Amortization is for tangible assets, while depreciation is for intangible assets.
B) Amortization is for intangible assets, while depreciation is for tangible assets.
C) They both refer to the same process.
D) None of the above

Answer 16

Answer: B) Amortization is for intangible assets, while depreciation is for tangible assets.

Question 17

Which method of amortization results in a higher expense in the earlier years of an asset’s life?
A) Straight-line method
B) Double-declining balance method
C) Units of production method
D) Sum-of-the-years’-digits method

Answer 17

Answer: B) Double-declining balance method

Question 18

What happens to the amortization expense if the useful life of an intangible asset is increased?
A) Amortization expense decreases
B) Amortization expense increases
C) Amortization expense remains the same
D) It depends on the method used

Answer 18

Answer: A) Amortization expense decreases

Question 19

How does amortization affect the net income of a company?
A) Increases net income
B) Decreases net income
C) No impact on net income
D) Increases initially, then decreases net income

Answer 19

Answer: B) Decreases net income

Question 20

Which factor does NOT impact the calculation of amortization expense?A) Salvage value
B) Useful life
C) Initial cost
D) Market value

Answer 20

Answer: D) Market value

Question 21

In what section of the cash flow statement would amortization be reported?
A) Operating activities
B) Investing activities
C) Financing activities
D) Non-cash activities

Answer 21

Answer: A) Operating activities

Question 22

Company X purchased a patent for $500,000 with an estimated useful life of 10 years and no salvage value. Calculate the annual amortization expense using the straight-line method.
A) $50,000B)
$45,000
C) $55,000
D) $60,000

Answer 22

Correct Answer: A) $50,000
Solution: Amortization expense = (Cost of the patent - Salvage value) / Useful life = ($500,000 - $0) / 10 years = $50,000 per year

Question 23

A company has an intangible asset with a book value of $600,000 and an annual amortization expense of $80,000. What will be the remaining book value after 5 years?
A) $360,000
B) $200,000
C) $400,000
D) $200,000

Answer 23

Correct Answer: A) $360,000
Solution: Remaining book value = Initial book value - Total amortization expense = $600,000 - ($80,000 * 5) = $600,000 - $400,000 = $200,000

Question 24

A corporation acquired a software license for $300,000 with a useful life of 5 years and a salvage value of $30,000. Calculate the amortization expense for the first year using the double-declining balance method.
A) $72,000
B) $54,000
C) $96,000
D) $60,000

Answer 24

Correct Answer: C) $96,000
Solution: Double-declining balance rate = 1 / Useful life = 1 / 5 = 20%. Amortization expense = Book value at the beginning * Double-declining balance rate = $300,000 * 20% = $60,000 for the first year. Since it’s double declining, the expense remains the same in the first year.

Question 25

A loan of $100,000 is to be amortized over 5 years with an annual interest rate of 8%. Calculate the annual payment using the amortization formula.
A) $24,000
B) $21,289
C) $23,607
D) $22,500

Answer 25

Correct Answer: C) $23,607
Solution: Use the amortization formula to calculate the annual payment: [P = \frac{rP(1+r)^n}{(1+r)^n - 1}] [P = \frac{0.08 \times 100,000 \times (1+0.08)^5}{(1+0.08)^5 - 1}] [P = \frac{0.08 \times 100,000 \times 1.46933}{1.46933 - 1}] [P = \frac{11,754.4}{0.46933}] [P ≈ 23,607]

Question 26

A company bought equipment for $500,000 with a salvage value of $50,000 and a useful life of 8 years. Calculate the accumulated amortization at the end of year 4 using the sum-of-the-years’-digits method.
A) $250,000
B) $300,000
C) $325,000
D) $275,000

Answer 26

Correct Answer: D) $275,000
Solution: The sum of the year’ digits = (n(n + 1)) / 2 = (8(8 + 1)) / 2 = 36. For year 4, the fraction is 4/36. Amortization expense for year 1 = (Cost - Salvage value) * (Remaining useful life / Sum of the years’ digits) = ($500,000 - $50,000) * (5 / 36) = $62,500. Accumulated amortization at the end of year 4 = $62,500 * 4 = $250,000.