Chapter 9

Question 1

203.	Bretman, Inc., purchased a tract of land, a small office building, and some equipment for $1,800,000. The appraised value of the land was $1,420,000, the building $650,000, and the equipment $430,000. What is the cost of the land?
A.	$600,000
B.	$1,022,400
C.	$1,420,000
D.	None of the above

Answer 1

Answer: B
Chapter: 7
Explanation:

($1,420,000/($1,420,000+$650,000+$430,000)) x $1,800,000 = $1,022,400

Question 2

204. Which statement is false?
     A. Depreciation is based on the matching principle because it matches the cost of the asset with the revenue generated over the asset’s useful life
     B. Depreciation is a process of allocating the cost of a PPE over its useful life
     C. Depreciation creates a fund to replace the asset at the end of its useful life
     D. The cost of a PPE minus accumulated depreciation equals the asset’s book value

Answer 2

C

Question 3

210. Which of the following is not a capital expenditure?
     A. A complete overhaul of an air-conditioning system
     B. Replacement of an old motor with a new one in a piece of equipment
     C. The cost of installing a piece of equipment
     D. The addition of a building wing
     E. A tune-up of a company vehicle

Answer 3

E

Question 4

211.	Which of the following assets is not subject to a decreasing book value through depreciation, depletion, or amortization? 
A.	Goodwill
B.	Land improvements
C.	Natural resources
D.	Intangibles

Answer 4

A

Question 5

212. Why would a business select an accelerated method of depreciation for tax purposes?
     A. Accelerated depreciation will result in higher gain on disposal of PPE than straight-line depreciation
     B. Accelerated depreciation generates a greater amount of depreciation over the life of the asset than does straight-line depreciation
     C. Accelerated depreciation is easier to calculate because salvage value is ignored
     D. Accelerated depreciation generates higher depreciation expense, immediately, and therefore lowers tax payments in early years of the asset’s life

Answer 5

D

Question 6

213.	A company purchased an oil well for $270,000. It estimates that the well contains 100,000 barrels, has an eight-year life, and has no salvage value. If the company extracts and sells 20,000 barrels of oil in the first year, how much depletion expense should be recorded? 
A.	$33,750
B.	$54,000
C.	$27,000
D.	$67,500

Answer 6

Answer: C
Chapter: 7
Explanation:
$270,000 x (20,000/100,000) = $54,000

Question 7

214. Which item among the following is not an intangible asset?
     A. A copyright
     B. A patent
     C. A trademark
     D. Goodwill
     E. All of the above are intangible assets

Answer 7

E

Question 8

215.	Which account is credited in the adjusting entry to allocate the cost of equipment?
A.	Equipment Expense
B.	Depreciation Expense
C.	Accumulated Equipment
D.	Accumulated Depreciation

Answer 8

D

Question 9

216. An expenditure that increases an asset’s capacity or efficiency or extends its useful life is a(n):
     A. Is treated as a periodic expense
     B. Leads to a change in the future depreciation expenses
     C. Leads to a reduction in the asset account
     D. Is always capitalized below a certain threshold

Answer 9

B

Question 10

217. Which of the following statements is FALSE?
     A. Assets that are increasing in value are still subject to depreciation
     B. Depreciation is a non-cash expense
     C. Accumulated depreciation represents a growing amount of cash to be used to replace the existing asset
     D. Accumulated depreciation is that portion of a PPE’s cost that has been recorded previously as an expense

Answer 10

C

Question 11

218. When an asset is fully depreciated:
     A. The book value is equal to the accumulated depreciation, and the asset has reached the end of its estimated useful life
     B. The book value is equal to the salvage value, and the asset has reached the end of its estimated useful life
     C. The book value is equal to the salvage value, and the asset is of no further use to the company
     D. The book value is equal to the salvage value, and the asset has no market value

Answer 11

B

Question 12

220. Using an accelerated depreciation method will cause a profitable company to incur:
     A. Less taxes in early years of the asset’s use as compared to later years
     B. More taxes in early years of the asset’s use as compared to later years
     C. The same amount of taxes in early years of the asset’s use as in the later years
     D. None of the above

Answer 12

A

Question 13

222. A loss is recorded on the sale of a PPE when the:
     A. Cash received exceeds the asset’s book value
     B. Asset’s book value is less than its historical cost
     C. Asset’s book value is greater than the amount of cash received from the sale
     D. Cash received exceeds the cash paid for the replacement asset

Answer 13

C

Question 14

223.	The adjustment for depreciation is an example of a(n):
A.	Accrual adjustment
B.	Contra adjustment
C.	Deferral adjustment
D.	Unearned revenue adjustment

Answer 14

C

Question 15

224. Which of the following statements regarding the useful life of a long-lived tangible asset is FALSE?
     A. Useful life is the same as an asset’s physical life
     B. Physical deterioration is a factor in determining the useful life of tangible assets
     C. Useful life need not be measured in years
     D. Useful lives are not exact, they are merely estimates

Answer 15

A

Question 16

Whats the formula of depreciable cost?

Answer 16

Cost – Residual value = Depreciable cost

Question 17

228.	An expenditure that increases an asset’s capacity or efficiency or extends its useful life is a(n):
A.	Capital expenditure
B.	Expense
C.	Repair cost
D.	Impairment

Answer 17

A

Question 18

230.	Which accounting principle directs the depreciation process? 
A.	Full disclosure
B.	Cost constraint
C.	Matching 
D.	Historical cost

Answer 18

C

Question 19

231.	Which of the following depreciation methods best applies to assets that generate greater revenue earlier in their useful lives?
A.	Straight-line method
B.	Double-declining-balance method
C.	Units-of-production method
D.	All of the above

Answer 19

B

Question 20

234. DEF Pharmaceutical Company has many scientists working in the labs trying to develop and anti-aging drug. The cost of this research and development must be:
     A. Expensed as incurred
     B. Set up as an intangible asset and amortized over 20 years
     C. Set up as an intangible and tested for impairment on a yearly basis
     D. Not be handled in any of the above ways

Answer 20

A

Question 21

235.	Which term refers to the allocation of the cost of an asset over the asset’s useful life? 
A.	Expiration 
B.	Depreciation
C.	Valuation
D.	Accrual

Answer 21

B

Question 22

236.	All amounts paid to acquire a machine and to get it ready for its intended uses are referred to as:
A.	Set up costs
B.	Expenditures
C.	Maintenance expenses
D.	The cost of the asset

Answer 22

D

Question 23

237. A capital expenditure, which increases an asset’s capacity or efficiency or extends its useful life is:
     A. Credited to an expense account
     B. Debited to the asset account
     C. Debited to an expense account
     D. Debited to a shareholders’ equity account

Answer 23

B

Question 24

238. On June 1, ABC Company paid $3,000 to overhaul the engine on a delivery truck. This overhaul extended the truck’s useful life with two additional years. It also paid $75 for an oil change on the truck. Which of the following statements is TRUE?
     A. The $3,000 is a capital expenditure and the $75 is an expense
     B. The $3,000 is an expense and the $75 is a capital expenditure
     C. Both items are capital expenditures
     D. Both items are expenses

Answer 24

A

Question 25

239. The carrying amount of Property, Plant and Equipment is the:
     A. Original cost of the asset less accumulated depreciation
     B. Original cost of the asset plus accumulated depreciation
     C. Original cost of the asset plus any capital expenditures
     D. Original cost of the asset less depreciation expense

Answer 25

A

Question 26

240. The depreciation process attempts to match the:
     A. Residual value of the asset and the future market value of the asset
     B. Carrying amount of the asset and the current market value of the asset
     C. Cost of the asset and the cash required to replace the asset
     D. The cost of the asset over the period in which it is expected to generate revenues

Answer 26

D

Question 27

245. Which of the following statements regarding intangible assets is NOT true ?
     A. Intangible assets with finite life are not amortized
     B. Intangible assets are long-lived assets with no physical substance
     C. Intangible assets are recorded at their acquisition cost
     D. Intangible assets with an indefinite life are not amortized

Answer 27

A

Question 28

246. Which of the following is not a characteristic of a liability?
     A. It arises from present obligations to other entities
     B. It results from past transactions or events
     C. It must be payable in cash
     D. It represents a probable outflow of the entity’s resources

Answer 28

C

Question 29

247.	Possible liabilities that depend on future events are called
A.	Contingent liabilities
B.	Estimated liabilities
C.	Actual liabilities
D.	Long-term liabilities

Answer 29

A

Question 30

248.	A customer of ABC Company claims that one the products sold by ABC Company resulted in serious injury to the customer. ABC Company believes the customer has a more than probable chance of winning the case. If the customer wins the case, ABC Company will likely have to pay damages to the customer ranging between $500,000 and $600,000. ABC Company should record:
A.	A contingent liability
B.	A liability
C.	Nothing at all
D.	An asset

Answer 30

B

Question 31

250. When computing depreciation for a long-term asset, which of the following must be estimated?
     A. Residual value and current market value
     B. Useful life, current market value, and residual value
     C. Useful life and current market value
     D. Useful life and residual value

Answer 31

D

Question 32

251. What is the effect of recording depreciation on equipment on the financial statements?
     A. Net income, assets and shareholders’ equity all decrease
     B. Assets and net income decrease, but shareholders’ equity is not affected
     C. Assets decrease, but net income and shareholders’ equity are not affected
     D. Net income is not affected, but assets and shareholders’ equity decrease

Answer 32

A

Question 33

252. Which of the following statements is TRUE?
     A. Depreciation expense and accumulated depreciation are both reported on the income statement
     B. Depreciation expense and accumulated depreciation are both reported on the balance sheet
     C. Depreciation expense is reported on the income statement and accumulated depreciation is reported on the balance sheet
     D. Depreciation expense is reported on the balance sheet and accumulated depreciation is reported on the income statement

Answer 33

C

Question 34

254.	Equipment costing $47,500 with a carrying amount of $22,500 is sold for $26,000. The journal entry to record the sale will involve a \_\_\_\_\_\_\_\_ to Accumulated Depreciation
A.	Credit of $25,000
B.	Debit of $22,500
C.	Debit of $25,000
D.	Credit of $22,500

Answer 34

C

Question 35

255. ABC Corporation acquired a patent for $120,000. The patent has a legal life of 20 years. Because of changing technology, the patent is expected to generate revenue for only 6 years. The annual amortization expense for the patent is:
     A. $0, because the patent cost should be expensed when the patent is purchased
     B. $6,000
     C. $20,000
     D. $0, because the patent is not amortized

Answer 35

C

Question 36

256. If the end of the year, a company has a short-term note payable outstanding that was entered into earlier during the current year:
     A. Short-term notes payable and interest payable will appear on the balance sheet and interest expense will appear on the income statement
     B. Short-term notes payable will appear on the balance sheet and interest expense and interest payable will appear on the income statement
     C. Short-term notes payable will be the only item appearing on the balance sheet
     D. None of the above will occur

Answer 36

A

Question 37

257. A company failed to recognize an accrued liability. As a result, the current ratio is:
     A. Understated because current liabilities are overstated
     B. Understated because current liabilities are understated
     C. Overstated because current liabilities are understated
     D. There is no effect on the current ratio

Answer 37

C