Question 1

Upon the disposal of an asset, if the proceeds are greater than the carrying value of the asset the company must:

Accepted Answer

If the proceeds from the disposal of an asset are greater than its carrying value, the company recognizes a gain. This gain is calculated as the difference between the proceeds and the carrying value of the asset. No adjustment to the accumulated amortization account or the carrying value of the asset is necessary.

Question 2

A building currently has a net book value of $650,000 after three years of straight-line amortization totalling $150,000.The estimated residual value is $50,000.What was the building's original cost?

Accepted Answer

The net book value of an asset is its original cost minus accumulated depreciation. We know that after 3 years of straight-line amortization totaling $150,000, the net book value is $650,000. So, the accumulated depreciation after 3 years is $150,000, and the original cost minus $150,000 is $650,000. Therefore, the original cost of the building is $800,000 ($650,000 + $150,000 + $50,000). Thus, the correct choice is C.

Question 3

Changes in the estimates for residual value or useful life result in changes in the amortization expense calculation.These changes are handled:

Accepted Answer

Changes in estimates for residual value or useful life should be handled prospectively, meaning that the revised estimate is used to calculate the remaining amortization expense. Retroactive adjustments or cumulative changes are not appropriate, as they would require restating prior periods and could potentially misrepresent financial statements. Prior period adjustments are only necessary for errors or omissions in past financial statements, not for changes in estimates.

Question 4

An asset that cost $16,200 with a residual value of $1,200 and a useful life of 5 years was amortized for two years using the straight-line method.In the third year, the useful life was determined to be 2 years longer than initially expected.Amortization in the third year would be:

Accepted Answer

The answer of An asset that cost $16,200 with a...

Question 5

An amortizable asset with a cost of $42,500 has a residual value of $2,500 and a useful life of 8 years.Total estimated units of output are 80,000 and in year 1, 5,200 units were produced.Under the straight-line method and the units-of-activity method the amortization expense for the first year would be: $\begin{array}{ll}\text { Straight-line }&\text { Units-of-activity }\
\text { a. } \$ 5,000.00 & \$ 2,600.00 \
\text { b. } \$ 5,000.00 & \$ 2,762.50 \
\text { c. } \$ 5,312.50 & \$ 2,600.00 \
\text { d. } \$ 5,312.50 & \$ 2,762.50
\end{array}$

Accepted Answer

The answer of An amortizable asset with a cost of...

Question 6

The amortization expense of an asset can change for all of the following reasons except:

Accepted Answer

Regular repairs and maintenance do not affect the estimated useful life or residual value of an asset, so they do not affect the amortization expense. However, additions for major repairs and improvements, changes to the estimated useful life or residual value, and other factors can impact the amortization expense.

Question 7

Accounting income times the tax rate equals:

Accepted Answer

Accounting income multiplied by the tax rate gives us the tax expense, which is the amount of taxes that a company will have to pay to the government based on its reported earnings.

Question 8

Which of the following intangibles would be capitalized?

Accepted Answer

Goodwill acquired in a purchase is capitalized as an intangible asset on the balance sheet. This occurs when a company is purchased for more than the fair value of its net identifiable assets.

Question 9

Water Company purchased a bottling machine on October 1, 2009 for $250,000.The estimated useful life is 25 years and they are using straight-line amortization.During 2011, they spent $46,000 on the machine to double its capacity and $5,000 on routine cleaning.What should the amortization expense be at September 30, 2011? The company's year end is September 30.

Accepted Answer

The amortization expense for the year ending September 30, 2011, is calculated based on the original cost of the machine ($250,000) over its useful life (25 years), which equals $10,000 per year. The $46,000 spent to double the machine's capacity is a capital expenditure that should be added to the asset's cost base, extending its total cost to $296,000. However, this expenditure does not affect the amortization expense for the year ending September 30, 2011, because it occurred during 2011 and the asset's new cost base and revised amortization (if any) would be considered in full in subsequent years. The $5,000 spent on routine cleaning is an expense but does not affect the calculation of amortization. Therefore, the amortization expense remains at $10,000 for the year ending September 30, 2011.

Question 10

Caricature's Inc.bought new computers on January 1 for $18,000 to improve the quality of their animation.The computers have a useful life of 8 years but Caricature's Inc.thinks that continuing technology developments will likely mean they will replace the computers after 4 years, at which time they will be worth $2,000.If they use straight-line amortization the amortization expense for the first year will be:

Accepted Answer

To calculate the annual straight-line amortization expense, we need to subtract the residual value from the original cost and divide it by the useful life. In this case, the calculation would be:
($18,000 - $2,000) / 8 years = $2,000
Therefore, the correct answer is C) $4,000.

Question 11

The method of accounting for oil exploration that capitalizes the costs of all explorations is known as:

Accepted Answer

The full cost method involves capitalizing the costs of all explorations, regardless of the exploration's success or failure. This includes both successful efforts and unsuccessful efforts. The other options, including the successful efforts method and successful costs method, only capitalize costs related to successful explorations.

Question 12

An asset being amortized with the straight-line method has a residual value of $10,000 and accumulated amortization expense of $30,000 in its second year.What was the original cost of the asset if its useful life was 5 years?

Accepted Answer

The answer of An asset being amortized with the straight-line...

Question 13

Which of the following methods of amortization is a company most likely to use for financial statement purposes if it purchases a patent?

Accepted Answer

Straight-line amortization is the most commonly used method for financial statement purposes as it is easy to calculate and results in a consistent expense each period. This method allocates the cost of the patent evenly over its useful life.

Question 14

The capitalized costs for the development of a natural resource are allocated over the expected life of the asset using:

Accepted Answer

Depletion is the appropriate method of allocating the capitalized costs of natural resources such as minerals, oil, and gas over the expected life of the asset. Depreciation is used for tangible assets like buildings and equipment, while amortization is used for intangible assets like patents and trademarks. Accretion is generally used for the gradual increase in the value of certain long-term liabilities.

Question 15

Bayside Ltd.owns a piece of land it had purchased in 2010 for $400,000.When they started to develop the land in 2011, they discovered that there were environmental problems with the land.It is now estimated to be worth only $150,000.Which of the following is the correct way to account for this?

Accepted Answer

According to the principle of conservatism, assets should not be overstated, therefore, the land account should be written down to reflect its current value of $150,000, and a loss of $250,000 should be recognized on the income statement. Writing off the land completely (choice C) is not appropriate as the land still has some value and could potentially be sold or used for other purposes. Amortizing the land (choice D) does not reflect the decline in value and is not appropriate in this situation. Choice A is incorrect as the historical cost of an asset does not necessarily reflect its current value or usefulness.

Question 16

Which of the following is the biggest concern for an analyst when reviewing the value of assets on a company's financial statement?

Accepted Answer

Understanding what assets are not reported on the financial statement is a major concern for an analyst because it can have a significant impact on the actual value of the company's assets. For example, if a company has off-balance sheet liabilities or unreported assets, this can skew the true value of the company. Understanding the amortization method used, estimating the age of the assets reported, and estimating the original cost of the asset are important considerations but are not as significant as knowing what assets are not reported on the financial statement.

Question 17

Taxable income times the tax rate equals:

Accepted Answer

Taxable income multiplied by the tax rate equals taxes payable, which is the amount of taxes owed to the government for the current year. Tax expense refers to the amount of taxes recorded on a company's financial statements, which may not necessarily equate to the taxes payable. Deferred taxes relate to temporary differences between the financial statement and tax basis of assets and liabilities. None of these options accurately represent the equation given.

Question 18

On July 1, 2011, a truck was sold for $10,000.The company originally paid $28,000 on June 30, 2004 and has recorded accumulated amortization on it to date of $15,000.The entry to record the sale would include a:

Accepted Answer

The answer of On July 1, 2011, a truck was...

Question 19

The most commonly used method of calculating depletion is called:

Accepted Answer

The most commonly used method for calculating depletion is the units-of-activity method, which calculates depletion based on the actual physical use of natural resources, such as the number of tons of coal mined or the number of barrels of oil pumped. This method is more appropriate for industries where the depletion rate depends on the amount of resource extracted from the ground, rather than the passage of time.

Question 20

Proctor Paper Products purchased a machine on January 1, 2011, at a cost of $380,000 with an estimated residual value of $30,000 at the end of its estimated useful life of 8 years.On January 1, 2013, Proctor Paper estimates that the machine only has a remaining life of 5 years and a residual value of $20,000.Proctor Paper uses straight-line amortization.Depreciation expense for 2013 would be:

Accepted Answer

To calculate depreciation expense, we need to first determine the depreciable cost of the machine, which is the cost minus the residual value:

Depreciable cost = cost - residual value 
Depreciable cost = $380,000 - $30,000 
Depreciable cost = $350,000

Next, we need to determine the annual depreciation expense:

Annual depreciation expense = depreciable cost / useful life 
Annual depreciation expense = $350,000 / 8 
Annual depreciation expense = $43,750

Since the machine has already been in service for 2 years, the accumulated depreciation for the machine as of January 1, 2013 would be:

Accumulated depreciation = annual depreciation expense x number of years in service 
Accumulated depreciation = $43,750 x 2 
Accumulated depreciation = $87,500

The book value of the machine as of January 1, 2013 would be:

Book value = cost - accumulated depreciation 
Book value = $380,000 - $87,500 
Book value = $292,500

Proctor Paper estimates that the machine has a remaining useful life of 5 years, so the total depreciation expense for the remaining life of the machine would be:

Total depreciation expense = annual depreciation expense x remaining useful life 
Total depreciation expense = $43,750 x 5 
Total depreciation expense = $218,750

However, Proctor Paper also estimates that the residual value of the machine at the end of its useful life is $20,000, not $30,000 as originally estimated. This means that as of January 1, 2013, the remaining depreciable cost of the machine is:

Remaining depreciable cost = depreciable cost - accumulated depreciation - new residual value 
Remaining depreciable cost = $350,000 - $87,500 - $20,000 
Remaining depreciable cost = $242,500

So, we need to adjust the annual depreciation expense to reflect the updated residual value:

New annual depreciation expense = remaining depreciable cost / remaining useful life 
New annual depreciation expense = $242,500 / 5 
New annual depreciation expense = $48,500

Therefore, the depreciation expense for 2013 would be:

Depreciation expense = new annual depreciation expense x number of years in service for the year 
Depreciation expense = $48,500 x 1 
Depreciation expense = $48,500

Therefore, the best choice is B) $54,500.

Quiz 8: Capital Assetstangible and Intangible