Deck 7: Fixed Assets, Natural Resources, and Intangible Assets

Question 1

Amortization refers to systematic periodic transfer of the cost of a fixed asset to an expense account.

Answer 1

False

Question 2

The estimated amount that an asset can be sold for at the end of its useful life is called its book value.

Answer 2

False

Question 3

Companies usually compute depletion by using the double-declining-balance method.

Answer 3

False

Question 4

Depletion is the process of transferring the cost of intangible assets to an expense account.

Question 5

Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets.

Question 6

The double-declining-balance method of depreciation is also referred to as an accelerated depreciation method.

Question 7

A current asset account must be increased for revenue expenditures since they benefit only the current period.

Question 8

The straight-line method of depreciation is appropriate if usage of the asset varies considerably from year to year.

Question 9

Goodwill refers to the excess of purchase price of a business over the fair value of its net assets.

Question 10

Expenditures made to extend an asset's life are called revenue expenditures.

Question 11

If the proceeds from a sale of equipment is greater than the book value of the equipment as on the date of sale, a loss is recorded.

Question 12

If a company sells a fixed asset for an amount which is less than its book value, a gain must be recognized.

Question 13

If an asset is discarded, a loss is recognized equal to its salvage value.

Question 14

Intangible assets do not exist physically.

Question 15

The difference between a fixed asset's initial cost and its current market value is called the asset's depreciable cost.

Question 16

Under the straight-line method, the amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000, and a useful life of 5 years, will be $18,000.

Question 17

The total depreciation across the years of an asset's life is the same under the double-declining-balance method or the straight-line method.

Question 18

The balance in Accumulated Depreciation account is deducted from the cost of fixed assets on the balance sheet.

Question 19

The acquisition costs of property, plant, and equipment should include all costs necessary to get the asset in place and ready for use.

Question 20

Physical depreciation occurs when changes in customer needs causes a fixed asset to no longer provide services for which it was intended.

Question 21

A company acquired some land for $75,000 to construct a new office complex.Legal fees paid were $2,750, delinquent taxes assumed were $3,250, and $6,350 was paid to remove an old building.Materials salvaged from the demolition of the building were sold for $2,300.Determine the cost of the land to be reported on the balance sheet.

A) $85,050
B) $89,650
C) $84,100
D) $87,350

Question 22

Which of the following is an example of a capital expenditure?

A) Cleaning the carpet in the front-office room
B) Regular tune-up for a company truck
C) Replacing an engine in a company car
D) Replacing all burned-out light bulbs in the factory

Question 23

Fixed assets are reported at their book value on the balance sheet.

Question 24

Which of the following is a characteristic of fixed assets?

A) Fixed assets are offered for sale as part of normal operations.
B) Fixed assets do not exist physically.
C) Fixed assets are long-term or relatively permanent assets.
D) Fixed assets that are no longer used in operations are still classified as fixed assets.

Question 25

The cost of removal of an old building to make the land ready for its intended use is charged to:

A) land.
B) land improvements.
C) buildings.
D) operating expenses.

Question 26

Which of the following expenditures would be included in the cost of a fixed asset?

A) Uninsured theft
B) Vandalism
C) Sales taxes
D) Mistakes in installation

Question 27

Land improvements include:

A) freight.
B) surveying fees.
C) sales tax.
D) outdoor lighting.

Question 28

Which of the following is considered under the straight-line method but not under double-declining-balance method?

A) The asset's book value
B) The asset's salvage value
C) The asset's expected useful life
D) The asset's initial cost

Question 29

The cost incurred to extend an asset's useful life is recorded as:

A) accrued expenditures.
B) maintenance expenditures.
C) routine expenditures.
D) capital expenditures.

Question 30

A(n) _____ is a contract for the use of an asset for a period of time without having to buy the asset.

A) indenture
B) depreciation hedge
C) revenue option
D) lease

Question 31

Which of the following should be included in the acquisition cost of a piece of equipment?

A) Uninsured theft
B) Mistakes in installation
C) Vandalism
D) Installation costs

Question 32

_____ occurs due to obsolescence that causes an asset to no longer provide services for which it was intended.

A) Physical depreciation
B) Effective depreciation
C) Accelerated depreciation
D) Functional depreciation

Question 33

The inventory turnover measures how efficiently a company is using its operating assets to generate sales.

Question 34

The book value of an asset is computed as the asset's:

A) current market value less tax expense.
B) fair value less residual value.
C) discounted value plus accumulated depreciation.
D) cost less accumulated depreciation.

Question 35

Which of the following is the effect on a company's liquidity and profitability metrics when it purchases a piece of equipment? ​

A) ​Its free cash flow decreases.
B) ​Its free cash flow increases.
C) ​Its asset turnover increases.
D) ​Its asset turnover remains unaffected.

Question 36

If a revenue expenditure is treated as a capital expenditure, then:

A) expenses are overstated and owners' equity is understated.
B) expenses are overstated and assets are overstated.
C) expenses are understated and owners' equity is overstated.
D) net income is overstated and owners' equity is understated.

Question 37

The effect of recording a capital expenditure as a revenue expenditure is that:

A) expenses are overstated, and owners' equity is understated.
B) net profit is understated, and owners' equity is overstated.
C) expenses are understated, and accumulated depreciation is overstated..
D) assets are overstated, and expenses are understated.

Question 38

Depreciable cost is computed as:

A) cost less accumulated depreciation.
B) book value less residual value.
C) cost less residual value.
D) market value less residual value.

Question 39

_____ is an example of a fixed asset.

A) A machine
B) A prepaid expense
C) Land held for investment
D) An accrued revenue

Question 40

Capital expenditure is reported on the:

A) income statement under operating expenses.
B) balance sheet under fixed assets.
C) statement of retained earnings under contributed capital.
D) cash flow statement under cash flow from financing activities.

Question 41

A gain is recorded on the sale of fixed assets when:

A) the asset is sold for a price less than its book value.
B) the asset is sold for a price more than its book value.
C) accumulated depreciation on asset is less than its selling price.
D) accumulated depreciation on asset is more than its selling price.

Question 42

A fixed asset with a cost of $15,000 and accumulated depreciation of $12,500 is sold for $1,750.What is the amount of gain or loss on disposal of the fixed asset?

A) $750 loss
B) $2,500 loss
C) $2,500 gain
D) $750 gain

Question 43

Which method of depreciation considers residual value in computing the normal periodic depreciation?

A) Straight-line
B) MACRS
C) Double-declining-balance
D) Accelerated

Question 44

A machine was purchased for $35,500, having a useful life of 10 years, and a residual value of $6,000.Compute the annual depreciation expense using the straight-line method.

A) $3,550
B) $4,150
C) $5,800
D) $2,950

Question 45

An equipment was purchased for $30,000.It has a useful life of 5 years, and a residual value of $4,000.Compute the depreciation expense for the second year using the double-declining-balance method.

A) $5,200
B) $6,000
C) $6,240
D) $7,200

Question 46

A computer equipment was acquired at the beginning of the year at a cost of $56,000 with an estimated residual value of $5,000, and an estimated useful life of 5 years.Determine the second year's depreciation expense using the straight-line method.

A) $10,200
B) $22,400
C) $11,200
D) $12,200

Question 47

A machine was purchased for $68,000.It has a useful life of 5 years and a residual value of $8,000.Determine the annual depreciation expense using the straight-line method?

A) $20,000
B) $12,000
C) $60,000
D) $16,000

Question 48

Recording depreciation:

A) decreases liability and cash flow.
B) decreases net income but has no effect on cash flows.
C) decreases capital and operating expense.
D) decreases retained earning but has no effect on fixed assets.

Question 49

A company sold office furniture costing $15,800 with accumulated depreciation of $13,000 for $1,500 cash.The entry to record the sale would include:

A) an increase in accumulated depreciation for $15,800.
B) a loss for $1300.
C) a total decrease in office furniture for $2,800.
D) a decrease in cash for $1,300.

Question 50

On September 1, a machine was purchased for $47,000 with a useful life of 8 years, and a residual value of $3,000.What is the depreciation expense in the year of purchase under straight-line method, assuming a December 31 year-end?

A) $3,917
B) $3,667
C) $1,958
D) $1,833

Question 51

Which of the following is a characteristic of accumulated depreciation account?

A) Accumulated depreciation represents cash reserved for asset replacement.
B) Accumulated depreciation account is a contra-liability account.
C) Accumulated depreciation may be disclosed in the notes to the income statement.
D) Accumulated depreciation is reported on the balance sheet as a deduction from the cost of the asset.

Question 52

A company sold a delivery truck for $22,000 cash.The truck costs $45,800 and had accumulated depreciation of $32,000 as of the date of sale.The entry to record the sale would include:

A) an increase in accumulated depreciation for $32,000.
B) a total decrease in delivery truck for $13,800.
C) a gain for $8,200.
D) a loss for $10,000.

Question 53

The accounting term depreciation measures:

A) the decline in an asset's market value.
B) the amount of cash a company sets aside for asset replacement.
C) the amount of asset cost allocated to expense over periods benefited.
D) the anticipated loss if asset is sold in the used-asset market.

Question 54

Losses on discarding fixed assets are _____.

A) opportunity costs
B) nonoperating items
C) capital expenditures
D) accumulated depreciation

Question 55

Which of the following is the effect on the transaction metrics of a company when it records depreciation? ​

A) ​Its profitability decreases.
B) ​Its profitability and liquidity remain unaffected.
C) ​Its profitability increases.
D) ​Its liquidity increases.

Question 56

The Modified Accelerated Cost Recovery System is used to:

A) compute income for audit reporting.
B) compute depreciation for tax purposes.
C) report liabilities.
D) ascertain break-even point.

Question 57

If a fixed asset with an original cost of $18,000 and accumulated depreciation of $2,000 is sold for $15,000, the company must:

A) recognize a loss on the income statement under other expenses.
B) recognize a loss on the income statement under operating expenses.
C) recognize a gain on the income statement under other revenues.
D) recognize a gain on the income statement under revenues.

Question 58

A fully depreciated asset must be:

A) removed from the books.
B) kept on the books until sold or discarded.
C) disclosed only in the notes to the financial statements.
D) recognized on the income statement as a loss.

Question 59

An equipment was purchased for $15,000.It has a useful life of 5 years and a residual value of $4,000.Determine the depreciation expense for the first year using the double-declining-balance method?

A) $5,400
B) $6,000
C) $2,200
D) $2,600

Question 60

To measure depreciation, which of the following must be known?

A) market value of asset.
B) fixed asset turnover
C) cost of asset.
D) the amount of cash to replace fixed asset

Question 61

The exclusive right to use a certain name or symbol is called a:

A) franchise.
B) patent.
C) trademark.
D) copyright.

Question 62

​Which of the following is the effect of impaired goodwill on liquidity and profitability metrics?

A) ​Both profitability and liquidity will remain unaffected.
B) ​Both profitability and liquidity will decrease.
C) ​Profitability will increase, whereas liquidity will remain unaffected.
D) ​Liquidity will decrease, whereas profitability will increase.

Question 63

Which of the following is not an intangible asset?

A) Goodwill
B) Trademark
C) Copyright
D) Long-term receivable

Question 64

When natural resources are used, the _____ expense account is increased for a portion of the cost of resources removed.

A) depletion.
B) deferral.
C) prepaid
D) amortization.

Question 65

An asset turnover ratio of 1.87 for a company indicates that:

A) the company is generating $1.87 of sales revenue for each dollar of long-term operating assets invested.
B) the company is generating $1.87 of net income for each dollar of retained earnings.
C) the company has $1.87 of long-term debt for each dollar of operating revenue earned.
D) the company has $1.87 of current assets for each dollar of fixed assets invested.

Question 66

Goodwill is:

A) amortized in a manner similar to other intangibles.
B) written down only if an impairment in value occurs.
C) charged to expense immediately.
D) amortized over 40 years or its economic life, whichever is shorter.

Question 67

A drilling company purchased a mining site for $450,000 on July 1, 2016.The company expects to mine ore for the next 10 years and anticipates that a total of 80,000 tons will be recovered.During 2016, the company extracted 5,800 tons of ore.The depletion expense for the year 2016 is:

A) $45,000.
B) $50,800.
C) $5,860.
D) $32,625.

Question 68

Which of the following transactions will have no effect on the liquidity metric of a company? ​

A) ​Purchasing an asset
B) ​Selling an asset for no loss and no gain
C) ​Selling an asset for loss
D) ​Discarding a fully depreciated asset

Question 69

A patent was purchased for $585,000 with a legal life of 20 years.Management estimates that the patent has a 12-year economic life.The entry to record amortization would include:

A) an increase in amortization expense for $29,250.
B) an increase in research and development expense for $585,000.
C) a decrease in patent for $48,750.
D) an increase in accumulated amortization for $585,000.

Question 70

A company purchased an oil well for $10 million.It is estimated that 5 million barrels can be extracted from the well.Determine depletion expense assuming 4 million barrels are extracted and sold during the year.

A) $1,250,000
B) $8,000,000
C) $12,500,000
D) $8,750,000

Question 71

Paleota Company purchased a patent from Finise for $234,000.At the time of purchase, the patent had a remaining useful life of 10 years.Determine the patent amortization expense for the first year.

A) $23,400
B) $23,000
C) $14,000
D) $9,800

Question 72

Which of the following is true of asset turnover?

A) It measures the efficiency with which a company uses its operating assets to generate sales.
B) It measures the proportion of operating assets to total assets.
C) It uses net purchases as a denominator in its calculation.
D) It measures the profits generated by the fixed and current assets of the company.

Question 73

Which of the following is the effect of recording a depletion expense on the profitability and liquidity metrics of a company?

A) It affects asset turnover while cash flow is unaffected.
B) Its asset turnover decreases.
C) Its affects the Statement of Cash Flows.
D) Operating assets increase.

Question 74

Which of the following intangible assets are amortized over their useful life?

A) Trademarks
B) Goodwill
C) Patents
D) All of the above

Question 75

Research and development costs incurred for developing patents are recorded as:

A) current operating expenses.
B) long-term operating assets.
C) accrued expenses.
D) working capital.

Question 76

The cost of a patent should be amortized :

A) over 10 years.
B) over its economic life.
C) over 20 years or its economic life, whichever is shorter.
D) only if an impairment occurs.

Question 77

The asset turnover is calculated as _____.

A) net income divided by average long-term operating assets
B) net sales divided by cost of the assets
C) average long-term operating assets divided by net sales
D) net sales divided by average long-term operating assets

Question 78

Aquablue Roadways Corporation operates throughout the United States.The following data (in millions) were adapted from recent financial statements of Aquablue. ? $\begin{array}{|l|r|r|}\hline & { \text { Year 2 } } & { \text { Year 1 } } \\\hline \text { Sales } & \$ 47,250 & \$ 49,675 \\\hline \text { Beginning of year property, plant, and equipment } & 18,620 & 15,730 \\\hline \text { End of year property, plant, and equipment } & 22,360 & 18,540 \\\hline\end{array}$ ?
From the above data, what would be the asset turnover for Year 2? (Round the answer to two decimal places.)

A) 1.15
B) 1.22
C) 2.01
D) 2.18

Question 79

Which of the following statement is true about intangible assets?

A) They are usually presented in the balance sheet as fixed assets.
B) They are short-lived assets.
C) They are not held for resale.
D) They have physical existence.

Question 80

Fixed assets are ordinarily presented on the balance sheet:

A) at its current market value.
B) at its replacement cost.
C) at its cost less accumulated depreciation.
D) under intangible assets.