Deck 9: Reporting and Interpreting Liabilities

Question 1

When may a company include interest costs as part of the cost of the asset?

A) When they are self-constructing a piece of equipment they will use to manufacture their products, but only during the period of construction.
B) Interest is never allowed to be capitalized.
C) When they must borrow money to finance the manufacture of their inventory items.
D) When they buy a piece of equipment and finance its acquisition by a bank loan.

Answer 1

A

Question 2

Sure Company purchased a machine on January 1, 20A, at a cash cost of $12,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the declining-balance method based on a 150 percent acceleration rate. What will be the depreciation expense for the second year?

A) $1,800
B) $900
C) $1,350
D) $1,530

Answer 2

D

Question 3

Intangible assets

A) should be reported as Current Assets on the statement of financial position.
B) can be reported separately from Property, Plant, and Equipment.
C) are not reported on the statement of financial position because they lack physical substance.
D) must be reported under the heading Property, Plant, and Equipment.

Answer 3

B

Question 4

With respect to depreciation policies, the principle of consistency means:

A) a company should use the same depreciation methods as other companies in the same industry.
B) a company should disclose on the financial statements the depreciation method for all its capital assets.
C) a company should use the same depreciation method in computing depreciation expense on all its assets.
D) a company should use the same depreciation method from year to year for a given capital asset.

Question 5

Recording depreciation expense does which of the following?

A) It reduces profit but does not affect the amount of cash generated by a company.
B) It does not affect profit or the amount of cash generated by a company.
C) It reduces profit and increases the amount of cash generated by a company.
D) It reduces both profit and the amount of cash generated by a company.

Question 6

The concept of depreciation is best explained by which accounting principle or assumption?

A) Economic entity assumption.
B) Going concern assumption.
C) Cost principle.
D) Expense recognition.

Question 7

On January 1, 2013, Stacy Company purchased the College Book Store for $350,000. At the date of purchase, it was determined the recorded assets had a total market value of $325,000, comprised of inventory (books), $275,000; fixtures, $30,000; and other assets
$20,000. It is estimated that the goodwill (if any) has an economic useful life of 20 years. What is the amount of amortization expense for goodwill for 2013?

A) $17,500
B) $16,250
C) $1,250
D) $0

Question 8

Carpenter Corporation purchased a mineral deposit, making payment as follows: Cash $10,000 and 6,000 Carpenter Corporation common shares. On the date of the purchase, the mineral deposit had an appraised value of $75,000; the common shares were quoted on the market at $11 per share. Other acquisition costs amounted to $3,000 cash. What was the cost recorded for the mineral deposit?

A) $79,000
B) $70,000
C) $75,000
D) $73,000

Question 9

The records of Pam Company showed the following about a machine on January 1, 20H: Purchased 1/1/20E for $35,000 Accumulated depreciation at January 1, 20H, $26,400
On July 1, 20H, the machine was sold for $7,000. Depreciation for the first six months of 20H was $1,467. The gain or loss on disposal would be which of the following?

A) $133 gain.
B) $133 loss.
C) $1,600 loss.
D) $1,600 gain.

Question 10

The Orser Mining Company acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. The Orser Mining Company would recognize:

A) depletion expense of $3,000,000.
B) depreciation expense of $3,000,000.
C) an increase in profit of $3,000,000.
D) cost of goods sold of $3,000,000.

Question 11

Helm Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Helm spent $10,000 for an extraordinary repair. Following the repair, Helm estimated that the machine had a remaining useful life of 8 years, and that the residual value was unchanged. Calculate depreciation expense on the machine for the fifth year, assuming that Helm uses the straight-line method.

A) $5,625
B) $7,500
C) $6,875
D) $7,250

Question 12

Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Angstrom's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Angstrom should record for year 3 under the straight-line method?

A) $15,500
B) $8,250
C) $16,500
D) $11,000

Question 13

A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?

A) The cost of the building will include the cost of replacing the roof.
B) The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
C) The wiring is part of the computer costs, not the building cost.
D) The cost of the building will not include the repainting and recarpeting costs.

Question 14

On March 1, Chapine Company purchased a new stamping machine for $5,000. Chapine paid cash for the machine. Other costs associated with the machine were: transportation costs, $300; sales tax paid, $200; and installation cost, $100. What cost was recorded for the machine?

A) $5,000
B) $5,200
C) $5,600
D) $5,500

Question 15

The apportionment of the acquisition cost of an operational asset to future periods in which the benefits contribute to earning revenue must be which of the following?

A) Random.
B) Revised annually.
C) Impaired.
D) Rational.

Question 16

Martinelli Company recently purchased a truck. The price negotiated with the dealer was $85,000. Martinelli also paid sales tax of $6,000 on the purchase, shipping and preparation costs of $950, and insurance for the first year of operation of $2,000. For the truck, what amount should be debited to the asset account Vehicles?

A) $91,950
B) $85,000
C) $85,950
D) $91,000

Question 17

AA Riser owns machinery for moving and delivering plants to its customers. The recorded cost of the machinery is $38,000. It is estimated that the machinery will be able to move 120,000 plants over its life. The company depreciates the machinery using straight-line depreciation over a useful life of twelve years and an estimated residual value of $2,000. The amount that will be charged annually as depreciation will be:

A) $3,600
B) $3,000
C) $3,167
D) $3,800

Question 18

Bangor Industries purchased a car for $22,000 on January 1, 20A. The car had an estimated useful life of 80,000 kilometres and an estimated residual value of $4,000. In the second year of ownership (20B), the car was driven 25,000 kilometres. Using the units-of-production method, what was the amount of depreciation expense for 20B?

A) $5,000
B) $6,875
C) $4,500
D) $5,625

Question 19

Airbury Company acquired manufacturing equipment at an invoice price of $80,000 and paid $750 to have it delivered to the factory. $400 was spent to repair a door that was damaged while installing the equipment. At what amount should this equipment be recorded on the company's books?

A) $80,400
B) $80,000
C) $80,750
D) $81,150

Question 20

A company decided to use the units-of-production method to calculate depreciation on a car to be driven by the sales manager. The amount of annual depreciation will vary with which of the following?

A) Amount of maintenance expense incurred on the car.
B) Age of the car.
C) Balance in accumulated depreciation.
D) Number of kilometres the car is driven.

Question 21

On the statement of cash flows, cash flows from the purchase and sale of long-lived assets are shown in which section?

A) Financing activities.
B) Investing activities.
C) Operating activities.
D) They are not reported on the statement of cash flows.

Question 22

Intangible assets include which of the following?

A) Trade receivables, franchises, and trademarks.
B) Copyrights, licences, and land.
C) Buildings, patents, and trademarks.
D) Leaseholds, patents, and copyrights.

Question 23

Barnes Company purchased a machine on April 4, 2011, for $210,000. The machine had an estimated useful life of five years and a salvage value of $30,000. The machine is being depreciated using the double-declining-balance method. Barnes depreciates its assets from the first day of the month nearest the date of purchase. The asset balance, net of accumulated depreciation, at December 31, 2012, should be:

A) $105,600
B) $75,600
C) $88,200
D) $94,800

Question 24

The depreciable amount is:

A) the original cost less the residual value.
B) the net present value.
C) the original cost less the accumulated amortization.
D) the accumulated amortization less residual value.

Question 25

All of the following statements are true, except:

A) Copyrights extend for the life of the creator plus 10 years.
B) The cost of a copyright consists of the cost of acquiring and defending it.
C) A copyright gives the owner the exclusive right to reproduce and sell an artistic or published work.
D) A copyright is amortized over its useful life.

Question 26

A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be

A) $14,400
B) $11,000
C) $13,200
D) $12,000

Question 27

How should an expenditure for an ordinary repair to factory equipment be recorded?

A) Debited to accumulated depreciation.
B) Debited to an asset account and depreciated over the current and future years.
C) As an expense in the period incurred.
D) Debited to an asset account but not depreciated over future years.

Question 28

Which of the following would be classified as an operational (fixed) asset?

A) A Ford Motor Company manufacturing plant used to manufacture the Focus line in Oakville, Ontario.
B) Land purchased and held for sale by a realtor.
C) Land purchased and held for development by Wal-Mart as a new store site.
D) Land and buildings owned by Toys "R" Us that are store sites closed due to restructuring and consolidating operations.

Question 29

When an asset is retired, the amount of the gain is equal to:

A) the asset's carrying amount.
B) the accumulated depreciation.
C) the amount of cash received.
D) the difference between the carrying amount and the proceeds.

Question 30

Which of the following would not be included in the acquisition cost of a building?

A) An apportioned amount of the purchase cost when both the land and building are acquired in a basket purchase.
B) The cost of paving the parking lot and outdoor lighting in the lot.
C) The cost of putting new windows and doors in the building before it opens for operations.
D) The cost of paying an architect to design the remodelling modifications of the building before the store opens.

Question 31

A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual value of $10,000. What is the first year for which depreciation would be greater under the straight-line method than under the declining-balance method with an acceleration rate of 200%?

A) The first year.
B) The second year.
C) The fourth year.
D) The third year.

Question 32

All of the following are examples of intangible assets except:

A) trademarks.
B) research costs.
C) copyrights.
D) franchises.

Question 33

Belmont Corporation made a basket purchase of land, a building and equipment, paying a total of $1,500,000. Market values for the assets were not available, but the appraised values were $300,000 for the land, $900,000 for the building, and $600,000 for equipment. What amounts should be recorded in the Land, Building, and Equipment accounts, respectively?

A) $250,000, $750,000, and $500,000
B) $300,000, $900,000, and $600,000
C) $500,000, $500,000, and $500,000
D) $1,500,000, $-0-, and $-0-

Question 34

Trumble Company purchased a machine on January 1, 20B, for $10,000. The company bookkeeper incorrectly used a 6-year life instead of a 5-year life to depreciate the machine. What would be the effect of this error on the 20B financial statements?

A) Overstatement of assets, profit, and shareholders' equity.
B) Overstatement of assets offset by an understatement of retained earnings.
C) Overstatement of assets offset by an understatement of shareholders' equity.
D) Overstatement of assets and an understatement of liabilities.

Question 35

A loss on disposal of an asset is reported in the financial statements

A) in the non-operating section of the income statement.
B) as part of Cost of Goods Sold.
C) as part of Other Comprehensive Income.
D) in the operating section of the income statement.

Question 36

Most companies keep separate sets of accounting records for financial reporting and for income tax computations. Which of the following statements is true?

A) They do it because the Income Tax Act requires companies to keep separate records for tax purposes.
B) They do it even though this practice is illegal and in violation of international financial reporting standards.
C) They do it to enable a company to do a reconciliation between taxable income and reported profit.
D) They do it because financial reporting rules and ITA regulations differ in many ways.

Question 37

WD Company reports profit in 2013 of $1,300 million and depreciation expense of $851 million. They also report investment in new theme parks, resorts, and other property of $2,134 million for 2013. Which of the following disclosures would appear on their statement of cash flows?

A) Depreciation of $851 million would be deducted from profit under operating activities and the $2,134 million would be deducted under investing activities.
B) Depreciation of $851 million would be added to profit under operating activities and the $2,134 million would be added under investing activities.
C) Depreciation of $851 million would be deducted from profit under operating activities and the $2,134 million would be added under investing activities.
D) Depreciation of $851 million would be added to profit under operating activities and the $2,134 million would be deducted under investing activities.

Question 38

Lawson Pet Shop Limited bought new grooming equipment on January 1, 2013 for $13,000. The useful life is estimated to be 3 years with a residual value of $1,000. The company uses straight-line depreciation. On January 1, 2014, Pierre determined that the value of the equipment is impaired, as its recoverable amount is expected to be $4,800. The journal entry to record the impairment would involve debits and credits to the following accounts:

A)
B)
C)
D)

Question 39

An asset being amortized with the straight-line method has a residual value of $20,000 and amortization expense of $25,000 in its second year. What was the original cost of the asset if its useful life was 10 years?

A) $270,000
B) $200,000
C) $185,000
D) $250,000

Question 40

What is an extraordinary repair to a building?

A) It is a capital expenditure and it is debited to an expense account.
B) It is a revenue expenditure and it is debited to an expense account.
C) It is a revenue expenditure and may be debited to accumulated depreciation.
D) It is a capital expenditure and it is debited to an asset account.

Question 41

How is the matching principle related to the recording of depreciation on tangible operational assets?

A) The matching principle requires a company to use the same depreciation.
B) The accountant who calculates the depreciation may assume that the company will continue in business as long as the estimated useful life of the asset.
C) A portion of the cost of the asset should be allocated as an expense for the periods in which the asset helps the business to earn revenue.
D) Once a particular depreciation method is adopted for a particular asset, the owner must continue to use the same method.

Question 42

Operational assets do not include which of the following kinds of assets?

A) Plant and equipment in use.
B) Patents in use.
C) Mineral deposits being mined.
D) Land held for resale.

Question 43

Which of the following statements is false?

A) A company can change the method used for depreciating assets if the change can be justified because it provides a better measure of the company's profit.
B) Either a change in estimate or a change in method can only be justified on the basis it provides a better measure of profit.
C) A change in estimate requires the company to recalculate and restate all the prior years' estimates of depreciation and adjust the impact on the statement of financial position and income statement.
D) A change in estimate is frequently necessary because the estimates of useful lives or residual values may change over time because conditions change.

Question 44

Which of the following costs would normally not be included in the cost of equipment?

A) Insurance for equipment after it has started being used.
B) Installation of equipment.
C) Freight paid by buyer to have equipment shipped.
D) Testing of equipment.

Question 45

A machine, acquired for a cash cost of $6,000, is being depreciated on a straight-line basis of $900 per year. The residual value was estimated to be 10% of cost. What is the estimated useful life?

A) 5 years
B) 4 years
C) 3 years
D) 6 years

Question 46

Depletion is recorded for which of the following?

A) Natural resources.
B) Intangible assets.
C) Land and buildings.
D) Uncollectible trade receivables.

Question 47

Newson's Courier Service recently purchased a new delivery van for $29,000. The van is estimated to have a useful life of 8 years or 250,000 kilometres. The van will have a residual value of $1,000. The company uses the units-of-production method of depreciation. Assuming the van travelled 36,000 kms. during the first year, what is the depreciation expense for the van in year 1?

A) $4,176
B) $3,500
C) $4,032
D) $3,625

Question 48

On January 1, 2013, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double-declining-balance method, the depreciation expense for the year ending December 31, 2014 would be

A) $5,400
B) $10,000
C) $9,000
D) $6,000

Question 49

Which of the following statements is false?

A) The only cash effect for depreciation is the tax savings provided by its deduction to derive taxable income.
B) Depreciation is a non-cash expense that reduces profit but involves no outflow of cash.
C) Depreciation expense is included in the investing activities section of the cash flow statement.
D) Depreciation expense is added to profit in the operating activities section of the statement of cash flows because it had no cash effect on profit under the indirect method.

Question 50

Kovacic Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. What should Kovacic record?

A) Neither a gain nor a loss-the computer was sold at its book value.
B) A loss of $1,000.
C) Neither a gain nor a loss-the gain that occurred in this case would not be recognized.
D) A gain of $1,000.

Question 51

What is the book value of a tangible operating asset?

A) Acquisition cost minus the balance in accumulated depreciation.
B) Total depreciation that has been recorded on the asset to date.
C) Acquisition cost.
D) Current estimated market value.

Question 52

On January 1, 2013, Enid Corporation purchased a patent from another company for $190,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. The Amortization Expense for 2013 is:

A) $68,000.
B) $12,667.
C) $85,000.
D) $19,000.

Question 53

The Land account would include all of the following costs except

A) drainage costs.
B) the cost of tearing down a building.
C) the cost of building a fence.
D) title fees.

Question 54

Fraser Ltd. has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate?

A) Both the current and future years will be affected by the revision.
B) Retroactive changes must be made to correct previously recorded depreciation.
C) Only future years will be affected by the revision.
D) Revisions in useful life are permitted if approved by Canada Revenue Agency.

Question 55

To which account should the amount of sales tax paid on the purchase of new machinery be debited?

A) The separate deferred charge account.
B) The machinery account.
C) The accumulated depreciation for machinery account.
D) The sales tax expense account.

Question 56

On September 1, 2013, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 2013 depreciation expense using the double-declining-balance method would be:

A) $2,250
B) $625
C) $750
D) $1,875

Question 57

Tangible assets include which of the following?

A) Land, buildings, and leaseholds.
B) Land, buildings, and equipment.
C) Licences, trademarks, and land.
D) Natural resources, buildings, and franchises.

Question 58

In accounting for tangible operational assets, the continuity assumption is important because of which of the following?

A) It is consistent with maintaining assets in the accounting records at market value rather than acquisition cost.
B) It provides justification for including residual values in calculating depreciation.
C) It helps a company decide whether to use straight-line depreciation or an accelerated depreciation method.
D) It justifies depreciating the asset over its expected useful life, without anticipating that the business will liquidate in the near future.

Question 59

If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false?

A) Profit for the year of acquisition will be higher.
B) Depreciation expense will be higher over the asset's life.
C) It will be expensed in the year in which the expenditure takes place.
D) The initial cost basis of the asset will be higher.

Question 60

Which of the following would most likely not be a revenue expenditure?

A) Repairing a leaky roof.
B) Putting a hydraulic lift on our delivery truck making it easier and quicker to deliver appliances.
C) Replacing carpet in the sales department's offices.
D) Painting the exterior of our store.

Question 61

What are operational assets that have physical substance called?

A) Tangible assets.
B) Current assets.
C) Intangible assets.
D) Long-term investments.

Question 62

On April 1, 2014, Michal Company sold equipment for $11,400 cash. The equipment had originally been purchased at a cost of $24,000 on January 1, 2010. The equipment was expected to a useful life of 8 years with no residual value. As of January 1, 2014, had accumulated depreciation of $12,000. The entry to record the sale of the equipment was:

A)
B)

C)
D)

Question 63

Expenditures made after the asset is in use are always capital expenditures.

Question 64

Foghorn Ltd. has an asset with an original cost of $16,000 and a carrying amount (net book value) today of $4,400. The Company no longer needs the asset and has decided to sell it today for $3,000 cash. The journal entry Foghorn will use to record the sale includes:

A) a debit to the asset account for $4,400.
B) a credit to cash account for $3,000.
C) a debit to accumulated amortization for $11,600.
D) a credit to the asset account for $4,400.

Question 65

On March 1, 20A, Jance Company purchased a producing oil well at a cash cost of $100,000. It is estimated that 250,000 barrels of oil can be produced over the remaining life of the well. By December 31, 20A (end of the accounting period), 1,500 barrels of oil were produced and sold. What would be the amount of depletion expense for 20A on this well?

A) $300
B) $600
C) $450
D) $750

Question 66

When a change in estimate is made, there is no correction of previously recorded depreciation expense.

Question 67

The cost of a finite life intangible asset is not amortized, but the asset is tested for impairment.

Question 68

In 20B, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma?

A) In the years following 20B, net income will be too high.
B) The error increased assets and profit in 20B.
C) The error decreased profit in 20B.
D) The repair was accounted for correctly.

Question 69

Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting?

A) They expect the asset to lose its value more rapidly in the first few years of its life.
B) They have high technology, robotic equipment in their plant that have a long usable life.
C) They expect the asset to lose its value in a huge portion after some years of its use.
D) They have a fleet of trucks where repair costs increase annually as the fleet ages.

Question 70

Jeffers Inc. purchased a warehouse and the land upon which it was located. The total price was $450,000. The land was appraised for $180,000 while the warehouse was appraised for $360,000. What account balances should Jeffers show in its general ledger?

A) Land $180,000; Warehouse $360,000
B) Land $150,000; Warehouse $350,000
C) Land $166,667; Warehouse $333,333
D) Land $150,000; Warehouse $300,000

Question 71

Johnson Company acquires land and building for $4,000,000 including all fees related to acquisition. The land is appraised at $2,700,000 and the building at $2,100,000. The building is then renovated at a cost of $750,000. What amount is capitalized to the building account?

A) $2,078,125
B) $4,000,000
C) $2,375,000
D) $2,500,000

Question 72

Which of the following costs would be excluded from the acquisition cost of equipment purchased from a supplier?

A) Cost to install the equipment.
B) A purchases discount offered by the supplier.
C) The cost of freight paid to get the equipment to our factory.
D) The cost to widen an entrance in the building to bring the equipment into the facilities.

Question 73

When an entire business is purchased, goodwill is the excess of cost over the carrying amount of the net identifiable assets acquired.

Question 74

Belton Corporation uses straight-line depreciation and, for assets acquired during the fiscal year, follows the policy of recording a full month's depreciation for all assets acquired on or before the 15th of the month. No depreciation is recorded for the month if an asset is acquired after the 15th. On May 22, 20A, Belton purchased a car that cost $22,000 which had an estimated residual value of $2,000 and an estimated useful life of five years. To the nearest dollar, what is the amount of depreciation that should be recorded on the car for 20A?

A) $2,333
B) $2,000
C) $2,667
D) $4,000

Question 75

Nadler Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000 residual value at the end of its 8-year useful life. Using the double-declining-balance method, the depreciation expense for the third year would be

A) $9,000
B) $6,188
C) $6,750
D) $5,500

Question 76

A company that is self-constructing a new store, which will open upon completion, is allowed to capitalize the interest during the period of construction if they finance the construction with actual loans.

Question 77

If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of the cash flow statement.

Question 78

When events or changes in circumstances reduce the estimated future cash flows of long-lived assets below their book value, the book values should be written down (by recording a loss) to the fair value of the assets.

Question 79

Which of the following is not a factor affecting the calculation of straight-line depreciation?

A) Carrying amount.
B) Cost.
C) Useful life.
D) Residual value.

Question 80

The amortization of finite life intangibles is recorded as:

A) a credit to accumulated amortization and a debit to amortization expense.
B) a debit to accumulated amortization and a credit to amortization expense.
C) a debit to cost of goods sold and a credit to accumulated amortization.
D) a credit to accumulated amortization and a debit to the asset account.