Deck 6: Accounting for and Presentation of Property, Plant and Equipment,and Other Noncurrent Assets

Question 1

Moped, Inc. purchased machinery at a cost of $22,000 on January 1, 2014. The expected useful life is 5 years and the asset is expected to have salvage value of $2,000. Moped depreciates its assets using the double-declining balance method. What is the firm's gain or loss if the machinery is sold for $11,000 on December 31, 2015?

A) Gain of $4,000
B) Gain of $3,080
C) Loss of $600
D) Loss of $4,000

Answer 1

B

Question 2

Which of the following accounting concepts/principles is most significant in the development of a capitalization policy?

A) Matching of revenue and expense.
B) Materiality.
C) Original Cost.
D) Consistency.

Answer 2

B

Question 3

The present value concept is widely applied in business because:

A) inflation erodes the purchasing power of money.
B) money has value over time.
C) accounting for operating leases requires its use.
D) most obligations are settled within a year.

Answer 3

B

Question 4

Depreciation, in accounting, is a process that results in:

A) depreciable assets being reported in the balance sheet at their fair value.
B) accumulating cash for the replacement of the asset.
C) an accurate measurement of the economic usefulness of an asset.
D) spreading the cost of an asset over its useful life to the entity.

Question 5

Moped, Inc. purchased machinery at a cost of $22,000 on January 1, 2014. The expected useful life is 5 years and the asset is expected to have salvage value of $2,000. Moped depreciates its assets using the double-declining balance method. What is the firm's depreciation expense for the year ended December 31, 2014?

A) $2,000
B) $4,400
C) $6,000
D) $8,800

Question 6

Moped, Inc. purchased machinery at a cost of $22,000 on January 1, 2014. The expected useful life is 5 years and the asset is expected to have salvage value of $2,000. Moped depreciates its assets using the double-declining balance method. What is the accumulated depreciation for this asset on December 31, 2015?

A) $4,400
B) $5,280
C) $8,800
D) $14,080

Question 7

When a machine having a net book value of $5,000 is sold for $4,000:

A) current assets decrease, equipment (net) increases, and net income increases.
B) current assets increase, equipment (net) decreases, and net income increases.
C) current assets increase, equipment (net) decreases, and net income decreases.
D) current assets increase, equipment (net) increases, and net income decreases.

Question 8

Which of the following statements best describes the process of accounting for depreciation?

A) A process that attempts to recognize loss in economic value over a period of time.
B) A process for setting aside cash so funds will be available to replace the asset.
C) A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset.
D) A process for recognizing all of the cost associated with using an asset in a revenue generating activity.

Question 9

Expenditures capitalized as long-lived assets generally include those expenditures that:

A) are made for normal repairs to maintain the usefulness of the asset over a number of years.
B) are for items that have a physical life of more than a year, regardless of their cost.
C) are material in amount and that have an economic benefit to the entity only in the current year.
D) are material in amount and that have an economic benefit to the entity that extends beyond the current year.

Question 10

Leasehold is an example of which of the following types of assets?

A) Current asset.
B) Property, plant and equipment.
C) Goodwill.
D) Intangible asset.

Question 11

If there is a loss on the disposal of a depreciable asset:

A) no cash was received in the disposal transaction.
B) the net book value of the asset was negative.
C) in retrospect, the life over which the asset was depreciated was too short.
D) in retrospect, the depreciation expense recognized over the asset's life was too low.

Question 12

If an organization has an obligation to pay $5,000 to a supplier two years from now, the present value of the obligation:

A) is less than $5,000.
B) is $5,000.
C) is more than $5,000.
D) could be calculated using an annuity factor from the present value tables.

Question 13

It is not unusual for a company to use different depreciation methods for book and tax purposes. When this happens, the firm usually:

A) uses an accelerated depreciation method for book purposes.
B) uses an accelerated depreciation method for tax purposes.
C) is trying to maximize its taxable income.
D) is trying to minimize its book income.

Question 14

The net book value of a depreciable asset is:

A) the fair value of the asset.
B) the amount for which the asset should be insured.
C) the difference between the asset's cost and accumulated depreciation.
D) the difference between the asset's cost and depreciation expense.

Question 15

Which of the following could be a correct journal entry to record the disposition of equipment?
A. Dr. Accounts payable
$\quad$ $\quad$ Cr. Accumulated depreciation
$\quad$ $\quad$ Cr. Depreciation

B. Dr. Cash
Dr. Loss on sale of equipment
Dr. Accumulated depreciation
$\quad$ Cr. Equipment

C. Dr. Gain on sale of equipment
Dr. Accumulated depreciation
$\quad$ Cr. Equipment

D. Dr. Cash
Dr. Loss on sale of equipment
$\quad$ Cr. Accumulated depreciation
$\quad$ Cr. Equipment

A) Option A
B) Option B
C) Option C
D) Option D

Question 16

The Modified Accelerated Cost Recovery System (MACRS) specifies which of the following depreciation methods for land?

A) 150% declining-balance.
B) Double-declining-balance.
C) Straight line.
D) Land is not a depreciable asset.

Question 17

When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land:

A) any of the purchase cost allocated to the old building is reported as a loss.
B) the cost assigned to the land excludes the cost of the old building.
C) the total cost of the land and old building are capitalized as land cost.
D) any of the purchase cost allocated to the old building is capitalized as part of the cost of the new building.

Question 18

The Modified Accelerated Cost Recovery System (MACRS) specifies which of the following depreciation methods for buildings?

A) 150% declining-balance.
B) Double-declining-balance.
C) Straight line.
D) Buildings are not depreciable assets.

Question 19

When an accelerated depreciation method is used to calculate depreciation expense:

A) the net book value of the asset halfway through its useful life will be less than if straight-line depreciation is used.
B) the net book value of the asset at the end of its useful life will be less than if straight-line depreciation is used.
C) depreciation expense will be less in the early years of the asset's life than if straight-line depreciation is used.
D) the accumulated depreciation account balance will increase by a larger amount in the last half of an asset's life than if straight-line depreciation is used.

Question 20

The entry to record depreciation expense:

A) increases a contra asset and decreases net income.
B) decreases a contra asset and decreases net income.
C) decreases working capital and decreases net income.
D) decreases an asset and increases a contra asset.

Question 21

Many companies use accelerated depreciation for tax purposes because:

A) it is easier to calculate than straight-line depreciation.
B) it reflects the amount of cash used in depreciation.
C) it results in lower taxable income than straight-line depreciation.
D) it is used for determining net income reported to stockholders.

Question 22

Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2013. The machine is expected to have a five-year useful life and is estimated to have a salvage value of $7,000 at the end of its life. (Round your final answers to the nearest dollar.)
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the second year of the machine's life and calculate the accumulated depreciation after the third year of the machine's life.
(b.) Using the double-declining-balance depreciation method, calculate the depreciation expense for the third year of the machine's life and the net book value of the machine at this point in time.

Question 23

Goodwill is an asset that arises because the present value of an acquired company's estimated future earnings, discounted at the acquiring firm's ROI:

A) is less than the fair value of the net assets of the acquired company.
B) is more than the fair value of the net assets of the acquired company.
C) is more than the fair value of the net assets of the acquiring company.
D) is less than the fair value of the net assets of the acquiring company.

Question 24

The principal challenge to calculating depletion is estimating:

A) the cost of the asset.
B) the salvage value of the exploration equipment.
C) the demand for the product.
D) the quantity of material to be recovered.

Question 25

The intangible asset goodwill:

A) represents the management team's assessment of its value to the company.
B) may arise when one company purchases another company.
C) arises because the fair value of a company's assets is greater than cost.
D) all of these are correct.

Question 26

When a depreciable asset is sold:

A) a gain arises if the sales proceeds exceed the net book value.
B) a loss arises if the sales proceeds exceed the net book value.
C) any cash received results in a gain.
D) depreciation expense is adjusted so there is no gain or loss.

Question 27

Goodwill results from the purchase of one firm by another for a price that is greater than the fair value of the net assets acquired. On January 1, 2014, Blue Grass Co. purchased Red Grass Co. for $1,200,000 when the net assets were valued at $1,000,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $15,000.
Required:
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?

Question 28

Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all subject to:

A) depreciation.
B) amortization.
C) depletion.
D) consolidation.

Question 29

Accounting for natural resources:

A) involves using the accumulated depreciation account.
B) involves estimating the quantity of the natural resource to be recovered.
C) involves an exception to the matching concept.
D) involves a sum-of-the-year's-digits depletion calculation.

Question 30

Which of the following is not a term that describes part of the accounting for noncurrent assets?

A) Accumulation.
B) Depletion.
C) Amortization.
D) Depreciation.