Question 1

Plant assets are depreciated because
A)the accrual basis of accounting requires matching of costs to revenues.
B)cash basis of accounting requires depreciation.
C)the book values equal market values.
D)the replacement cost of plant assets may fluctuate over time.

Accepted Answer

Plant assets are depreciated because the accrual basis of accounting requires matching of costs to revenues. Depreciation is the process of allocating the cost of a plant asset over its useful life in a systematic and rational manner. This allows for an accurate matching of the cost of the asset with the revenue it generates over the years it is in use.

Question 2

During the year, Fisher Apartments purchased an apartment building to rent to university students. It cost the company $250 to repair damage done by a tenant to one of its units. How should this cost be recorded?
A)It should be recorded as part of the asset account.
B)It should be recorded as repair and maintenance expense.
C)It should not be recorded as the tenants will be charged for the damage.
D)It should not be recorded since this is an immaterial amount to the landlord.

Accepted Answer

The cost of repairing the damage done by a tenant should be recorded as a repair and maintenance expense. It is not part of the asset account since it was an expense incurred to maintain the asset, not to improve it. It should be recorded as an expense in the period incurred. It is not appropriate to not record it as it is material to the financial statements. Additionally, it may not be possible to charge the tenants for the damage, so it should be recorded as an expense regardless.

Question 3

The effect of recording depreciation for the year is a(n)
A)decrease in assets and a decrease in net income.
B)decrease in assets but no change in owners' equity.
C)increase in assets and an increase in net income.
D)decrease in net income and no change in assets.

Accepted Answer

Recording depreciation for the year results in a decrease in the value of the asset, which in turn reduces the total assets and the net income of the business.

Question 4

Equipment purchased at the beginning of the year for $200,000 with a residual value of $20,000 is being depreciated over a 5-year period using the double-declining-balance method. Which of the following statements is correct concerning the financial statements at the end of the year?
A)The equipment account now has a balance of $120,000.
B)The book value of the equipment is now $80,000.
C)The accumulated depreciation account balance is now $80,000.
D)Depreciation expense for the year is $72,000.

Accepted Answer

The accumulated depreciation account balance is now $80,000.The double-declining-balance method of depreciation results in a constant depreciation rate over the asset's useful life. The depreciation rate is twice the straight-line depreciation rate. In this case, the straight-line depreciation rate would be 10% ($200,000 - $20,000) / 5 years = $36,000. The double-declining-balance depreciation rate is therefore 20% ($36,000 x 2).The depreciation expense for the year is therefore $40,000 ($200,000 x 20%). The accumulated depreciation account balance at the end of the year is therefore $80,000 ($40,000 x 2).

Question 5

A company sold equipment at a loss. What is the impact on the balance sheet of removing the equipment account and its related accumulated depreciation account?
A)reduces total assets
B)increases total assets
C)has no effect on total assets
D)increase total assets and decrease total equity

Accepted Answer

Removing the equipment account and its related accumulated depreciation account will reduce the total assets of the company, as the equipment was sold at a loss and its value is less than what it was originally recorded at. This will also reduce the total equity, but the question only asks about the impact on the balance sheet's total assets.

Question 6

Capitalizing an expenditure rather than recording it as a revenue expenditure
A)impacts the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period.
B)impacts the total book value of plant assets on the balance sheet, but has no effect on the amount of net income reported during an accounting period.
C)impacts the amount of net income reported during an accounting period, but has no effect on the total book value of plant assets on the balance sheet.
D)has no impact on the book value of plant assets on the balance sheet or the amount of income reported on the income statement.

Accepted Answer

Capitalizing an expenditure means recording it as a long-term asset rather than as an expense in the current period. This increases the total book value of plant assets reported on the balance sheet. Since the expenditure is not expensed in the current period, it reduces the amount of net income reported during that period. Therefore, capitalizing an expenditure affects both the balance sheet and the income statement.

Question 7

Using different depreciation methods for book purposes versus tax purposes for the same asset is
A)not allowed since the amount can only be calculated one way or the other, not both
B)the direct result of the differing goals of financial and tax accounting.
C)contrary to GAAP.
D)against the Internal Revenue Code, and as such, against the law.

Accepted Answer

Financial accounting and tax accounting have different goals and objectives. Financial accounting is concerned with providing relevant financial information to external users of financial information, while tax accounting is concerned with calculating the income tax liability of the business. Therefore, it is not only allowed, but it is also common practice to use different depreciation methods for book and tax purposes.

Question 8

If technology changes rapidly, a firm should
A)expense plant assets immediately because of the uncertainty of future benefits.
B)depreciate plant assets over long periods of time.
C)consider an accelerated rate of depreciation.
D)use the straight-line method of depreciation as it is the easiest.

Accepted Answer

Considering an accelerated rate of depreciation allows for the plant assets to be depreciated quicker and more accurately reflect the changes in technology. This is especially important if the assets are becoming obsolete at a faster rate than originally anticipated.

Question 9

Fantasy Cruise Lines
​
On January 1, 2019 the company purchased a ship for $1,000,000. It has a 10-year useful life and a residual value of $100,000. The company uses the double-declining-balance method.
-Refer to Fantasy Cruise Lines. Compute the amount of depreciation expense for the year ended December 31, 2019.
A)$ 90,000
B)$100,000
C)$180,000
D)$200,000

Accepted Answer

The double-declining-balance method calculates depreciation by doubling the straight-line rate. The straight-line rate is 1/10 = 10%. Double that is 20%. Depreciation for 2019 is 20% of $1,000,000, which is $200,000.

Question 10

Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for
A)financial reporting purposes and a different method for tax purposes.
B)financial reporting purposes because depreciation is not allowed for tax purposes.
C)tax purposes because it results in a larger net income in the early years of a plant asset's life.
D)tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes.

Accepted Answer

MACRS is used for tax purposes to allow companies to report higher expenses in the early years of an asset's life, which can lead to lower taxable income and thus lower taxes during those years.

Question 11

Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31, for $20,000 cash. The following data were available at the time of sale:  When this transaction is recorded, it should include a
A)debit of $80,000 to the Loss on Disposal account.
B)credit of $20,000 to the Equipment account.
C)credit of $5,000 to the Gain on Disposal account.
D)debit of $20,000 to the Accumulated Depreciation account.

Accepted Answer

When an asset is sold, the difference between its sale price and its carrying (book) value is recognized as a gain or loss. Carrying value is the net balance of the asset's account (Equipment) after reducing the value of its accumulated depreciation. In this case, the carrying value of the equipment can be calculated as follows:

Carrying value = Cost of equipment - Accumulated depreciation
Carrying value = $15,000 - $6,000 (assuming accumulated depreciation up to the end of the current year)
Carrying value = $9,000

Since the equipment was sold for $20,000, the gain on disposal is $20,000 - $9,000 = $11,000. Therefore, the entry to record the sale should include a credit of $20,000 to the Equipment account (to reduce its balance to zero), a debit of $9,000 to the Accumulated Depreciation account (to reduce its balance to $0), and a credit of $11,000 to the Gain on Disposal account. No loss is recognized in this case.

Question 12

A company purchased a building for $900,000 on January 1. The building is being depreciated over 40 years with an estimated residual value of $100,000. What will be the book value of the building in 10 years (assuming a December 31 year end)?
A)$575,000
B)$600,000
C)$675,000
D)$700,000

Accepted Answer

The building's depreciable amount is $900,000 (cost) - $100,000 (residual value) = $800,000. Over 40 years, the annual depreciation is $800,000 / 40 = $20,000. After 10 years, the total depreciation is $20,000 * 10 = $200,000. Therefore, the book value after 10 years is $900,000 (cost) - $200,000 (accumulated depreciation) = $700,000.

Question 13

Fresh n' Fit Cuisine purchased land and a building for $320,000 so that it could open a new restaurant. The building's fair market value at the time of purchase was $220,000. In addition, the following costs were incurred prior to the restaurant's opening:  How much will be recorded as land improvements?
A)$25,000
B)$6,000
C)$106,000
D)$125,000

Accepted Answer

The answer of Fresh n' Fit Cuisine purchased land and...

Question 14

Furniture Barn and Furniture World purchased identical equipment having an estimated useful life of 5 years. Furniture Barn uses the straight-line depreciation method whereas Furniture World uses the double-declining-balance method of depreciation. Assuming the two entities are similar in all other respects, which of the following statements is correct concerning the equipment? Hint: Without worrying about amounts, graph depreciation expense over the 5 years.
A)Furniture Barn's depreciation expense will be greater in the second year.
B)Furniture World's equipment book value will be greater at the end of year one.
C)Furniture Barn's net income will be greater in year nine.
D)Furniture World's equipment book value will be less at the end of year two.

Accepted Answer

Furniture World, using the double-declining-balance method, will have a higher depreciation expense in the initial years compared to Furniture Barn, which uses the straight-line method. This results in a lower book value for Furniture World's equipment at the end of year two.

Question 15

Using the straight-line depreciation method will cause a company to incur ____ tax expense in the early years of an asset's life than they would experience using an accelerated method of depreciation.
A)more
B)less
C)equal
D)This cannot be determined from the information given.

Accepted Answer

The straight-line depreciation method allocates equal amounts of the asset's cost to each year of its useful life, resulting in higher tax expense in the early years compared to accelerated methods such as double-declining balance or sum-of-the-years'-digits. This is because the accelerated methods allocate more of the cost to the earlier years, resulting in higher depreciation expense and lower taxable income, which in turn reduces tax expense.

Question 16

Equipment with a residual value of $50,000 at the end of 10 years was acquired at the beginning of 2019 for $500,000. Assuming the use of the straight-line depreciation method, the journal entry to record depreciation expense for 2021 will have a debit to
A)Depreciation Expense and a credit to Accumulated Depreciation for $50,000.
B)Accumulated Depreciation and a credit to Equipment for $50,000.
C)Depreciation Expense and a credit to Equipment for $45,000.
D)Depreciation Expense and a credit to Accumulated Depreciation for $45,000.

Accepted Answer

Straight-line depreciation method means that the depreciation expense is spread out evenly over the useful life of the asset. In this case, the useful life is 10 years and the residual value is $50,000. Therefore, the depreciation expense per year is ($500,000-$50,000)/10 = $45,000.

The journal entry to record depreciation expense for 2021 would be:

Depreciation Expense             $45,000
Accumulated Depreciation    $45,000

So the answer is D - Depreciation Expense and a credit to Accumulated Depreciation for $45,000.

Question 17

On January 1, 2019, a machine with an estimated life of 5 years and an estimated residual value of $5,000 was acquired for $40,000. On July 1, 2021, the machine was sold for $7,000 cash. The journal entry to record the sale
A)decreases stockholder's equity.
B)increases total assets.
C)decreases total expenses.
D)increases net income.

Accepted Answer

The sale of the machine results in a loss on disposal, which decreases stockholder's equity. The amount of the loss can be calculated as: 
(Original cost - Accumulated depreciation) - Sale price = ($40,000 - $24,000) - $7,000 = $9,000. Therefore, the journal entry to record the sale would be:
Cash 7,000
Loss on disposal of machine 9,000 
Machine 40,000 
Accumulated depreciation 24,000

Question 18

Focal Point Engineering purchased a trademark at the beginning of the year for $200,000. Although the trademark's legal life is 20 years, economic benefits were expected for only 10 years. Also, during the year, the company incurred research and development costs of $200,000. The book value of the trademark at the end of the year, is
A)$200,000.
B)$180,000.
C)$175,000.
D)$280,000.

Accepted Answer

The trademark's economic life is only 10 years, so the company can only amortize the trademark over 10 years. Therefore, the amortization expense for the year would be $200,000/10 = $20,000. The book value of the trademark at the end of the year would be its original cost of $200,000 minus the accumulated amortization of $20,000, which is $180,000. The research and development costs cannot be capitalized as a part of the trademark's cost, so they are not relevant to the calculation of the book value.

Question 19

Which of the following is an intangible asset?
A)oil
B)goodwill
C)retained earnings
D)accounts receivable

Accepted Answer

An intangible asset refers to a non-physical asset that has no intrinsic value but holds significant value for the business. Goodwill is an intangible asset that represents the value of a company's brand, reputation, customer base, and other intangible factors. Oil (A) is a physical asset, retained earnings (C) are a part of the equity section of the balance sheet, and accounts receivable (D) are a type of asset that represents money owed by customers to a company.

Question 20

A company purchased equipment at the beginning of the year for $21,000 and decided to depreciate it over a 5-year period using the straight-line method. The equipment's residual value was estimated at $1,000. The estimated fair market value at the end of the year was $20,000. Which of the following statements is correct at the end of the year?
A)The balance in the Equipment account is $17,000.
B)The book value of the equipment is $17,000.
C)The total accumulated depreciation is $4,200.
D)The equipment will be reported on the balance sheet at it fair market value of $20,000.

Accepted Answer

Using the straight-line method, the depreciation expense is calculated as ($21,000 - $1,000) / 5 = $4,000 per year. At the end of the first year, the accumulated depreciation is $4,000. Therefore, the book value of the equipment is $21,000 - $4,000 = $17,000. The fair market value has no impact on the book value of the asset or the accumulated depreciation.

Quiz 7: Operating Assets

Plant assets are depreciated because

During the year, Fisher Apartments purchased an apartment building to rent to university students. It cost the company $250 to repair damage done by a tenant to one of its units. How should this cost be recorded?

The effect of recording depreciation for the year is a(n)

Equipment purchased at the beginning of the year for $200,000 with a residual value of $20,000 is being depreciated over a 5-year period using the double-declining-balance method. Which of the following statements is correct concerning the financial statements at the end of the year?

A company sold equipment at a loss. What is the impact on the balance sheet of removing the equipment account and its related accumulated depreciation account?

Capitalizing an expenditure rather than recording it as a revenue expenditure

Using different depreciation methods for book purposes versus tax purposes for the same asset is

If technology changes rapidly, a firm should

Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for

Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31, for $20,000 cash. The following data were available at the time of sale: When this transaction is recorded, it should include a

A company purchased a building for $900,000 on January 1. The building is being depreciated over 40 years with an estimated residual value of $100,000. What will be the book value of the building in 10 years (assuming a December 31 year end) ?

Using the straight-line depreciation method will cause a company to incur ____ tax expense in the early years of an asset's life than they would experience using an accelerated method of depreciation.

Equipment with a residual value of $50,000 at the end of 10 years was acquired at the beginning of 2019 for $500,000. Assuming the use of the straight-line depreciation method, the journal entry to record depreciation expense for 2021 will have a debit to

On January 1, 2019, a machine with an estimated life of 5 years and an estimated residual value of $5,000 was acquired for $40,000. On July 1, 2021, the machine was sold for $7,000 cash. The journal entry to record the sale

Which of the following is an intangible asset?