Chapter 10: Plant Assets, Natural Resources & Intangible Assets Flashcards
Erin Danielle Company purchased equipment and incurred the following costs. Cash price: $24,000 Sales Taxes: $1,200 Insurance during transit: $200 Installation and testing: $400 Total costs: $25,800
What amount should be recorded as the cost of the equipment?
(a) $24,000.
(b) $25,200.
(c) $25,400
(d) $25,800
(d) All of the costs ($1,200 + $200 + $400) in addition to the cash price ($24,000) should be included in the cost of the equipment because they were necessary expenditures to acquire the asset and make it ready for its intended use.
Additions to plant assets are: (a) revenue expenditures. (b) debited to the Maintenance and Repairs Expense account. (c) debited to the Purchases account. (d) capital expenditures.
(d) When an addition is made to plant assets, it is intended to increase productive capacity, increase the assets’ useful life, or increase the efficiency of the assets. This is called a capital expenditure.
Depreciation is a process of:
(a) valuation.
(b) cost allocation.
(c) cash accumulation.
(d) appraisal.
(b) Depreciation is a process of allocating the cost of an asset over its useful life
Micah Bartlett Company purchased equipment on January 1, 2016, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2017, if the straight-line method of depreciation is used, is:
(a) $80,000.
(b) $160,000.
(c) $78,000.
(d) $156,000.
(d) Accumulated depreciation will be the sum of 2 years of depreciation expense. Annual depreciation for this asset is ($400,000 - $10,000) / 5 = $78,000. The sum of 2 years’ depreciation is therefore $156,000 ($78,000 + $78,000)
Ann Torbert purchased a truck for $11,000 on January 1, 2016. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2017, can be computed
by the following formula:
(a) ($11,000 / Total estimated activity) * Units of
activity for 2017.
(b) ($10,000 / Total estimated activity) * Units of activity for 2017.
(c) ($11,000 / Total estimated activity) * Units of activity for 2016 and 2017.
(d) ($10,000 / Total estimated activity) * Units of activity for 2016 and 2017.
(d) The units-of-activity method takes salvage value into consideration; therefore, the depreciable cost is $10,000. This amount is divided by total estimated activity. The resulting number is multiplied by the units of activity used in 2016 and 2017 to compute the accumulated depreciation at the end of 2017, the second year of the asset’s use.
Jefferson Company purchased a piece of equipment on January 1, 2017. The equipment cost $60,000 and has an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2018 under the double-declining-balance method?
(a) $6,500.
(b) $11,250.
(c) $15,000.
(d) $6,562.
(b) For the double-declining method, the depreciation rate would be 25% or (1/8 * 2). For 2017, annual depreciation expense is $15,000 ($60,000 book value * 25%); for 2018, annual depreciation expense is $11,250 [($60,000 - $15,000) * 25%].
When there is a change in estimated depreciation:
(a) previous depreciation should be corrected.
(b) current and future years’ depreciation should be
revised.
(c) only future years’ depreciation should be revised.
(d) None of the above.
(b) When there is a change in estimated depreciation, the current and future years’ depreciation computation should reflect the new estimates.
Able Towing Company purchased a tow truck for $60,000 on January 1, 2015. It was originally depreci- ated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2017, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2017) and the salvage value to $2,000. What was the depreciation expense for 2017?
(a) $6,000.
(b) $4,800.
(c) $15,000.
(d) $12,100.
(d) First, calculate accumulated depreciation from January 1, 2015, through December 31, 2016, which is $9,600 [($60,000 - $12,000)/10 years] * 2 years. Next, calculate the revised depreciable cost, which is $48,400 ($60,000 - $9,600 - $2,000). Thus, the depreciation expense for 2017 is $12,100 ($48,400 / 4)
Bennie Razor Company has decided to sell one of its
old manufacturing machines on June 30, 2017. The machine was purchased for $80,000 on January 1, 2013, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?
(a) $18,000.
(b) $54,000.
(c) $22,000.
(d) $46,000.
(a) First, the book value needs to be determined. The accumulated depreciation as of June 30, 2017, is $36,000 [($80,000 / 10) * 4.5 years]. Thus, the cost of the machine less accumulated depreciation equals $44,000 ($80,000 - $36,000). The loss recorded at the time of sale is $18,000 ($26,000 - $44,000)
Maggie Sharrer Company expects to extract 20 mil-
lion tons of coal from a mine that cost $12 million. If no salvage value is expected and 2 million tons are mined in the first year, the entry to record depletion will include a:
(a) debit to Accumulated Depletion of $2,000,000.
(b) credit to Depletion Expense of $1,200,000.
(c) debit to Inventory of $1,200,000.
(d) credit to Accumulated Depletion of $2,000,000.
(c) The amount of depletion is determined by computing the depletion per unit ($12 million / 20 million tons = $0.60 per ton) and then multiplying that amount times the number of units extracted during the year (2 million tons * $0.60 = $1,200,000). This amount is debited to Inventory and credited to Accumulated Depletion.
Which of the following statements is false?
(a) If an intangible asset has a finite life, it should be
amortized.
(b) The amortization period of an intangible asset can exceed 20 years.
(c) Goodwill is recorded only when a business is purchased.
(d) Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.
d) Research and development (R&D) costs are expensed when incurred, regardless of whether the research and development expenditures result in a successful patent or not.
Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2017. On July 31, 2017, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2017, should be:
(a) $150,000.
(b) $35,000.
(c) $185,000.
(d) $170,000.
(b) Because the $150,000 was spent developing the patent rather than buying it from another firm, it is debited to Research and Development Expense. Only the $35,000 spent on the successful defense can be debited to Patents.
Indicate which of the following statements is true
(a) Since intangible assets lack physical substance, they need be disclosed only in the notes to the financial statements.
(b) Goodwill should be reported as a contra account in the owner’s equity section
(c) Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.
(d) Intangible assets are typically combined with plant assets and natural resources and shown in the property, plant, and equipment section.
(c) Reporting only totals of major classes of assets in the balance sheet is appropriate. Additional details can be shown in the notes to the financial statements.
Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company’s asset turnover?
(a) 0.90.
(b) 0.20.
(c) 0.72.
(d) 1.39.
(c) Asset turnover 5 Net sales ($180,000) / Average total assets [($200,000 + $300,000) / 2] = 0.72 times
Schopenhauer Company exchanged an old machine,
with a book value of $39,000 and a fair value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial sub- stance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer’s books?
(a) $45,000.
(b) $46,000.
(c) $49,000.
(d) $50,000.
(a) When an exchange has commercial substance, the debit to the new asset is equal to the fair value of the old asset plus the cash paid ($35,000 + $10,000 = $45,000)
