Question 1

Depletion expense is computed in the same manner as straight-line depreciation.

Accepted Answer

Depletion expense is calculated based on the quantity of resources extracted from the earth, which differs from the straight-line method of depreciation that spreads the cost evenly over the useful life of an asset.

Question 2

Platak,Inc.,acquired a silver mine for $4,000,000.The company's survey estimates that 40,000 ounces of silver can be extracted from the mine,but environmental costs to close the mine will be $1,000,000.In the first year of operations,15,000 ounces of silver were extracted.Platak,Inc.,would recognize

Accepted Answer

Depletion expense is calculated by dividing the cost of acquisition ($4,000,000) by the estimated quantity of recoverable units of silver (40,000 ounces). This gives a depletion rate of $100 per ounce. Therefore, depletion expense for the first year of operations (15,000 ounces extracted) would be $1,500,000 ($100 x 15,000). The environmental costs to close the mine are not included in the calculation of depletion expense.

Question 3

U.S.GAAP requires the immediate write-off of goodwill at purchase.

Accepted Answer

U.S.GAAP (Generally Accepted Accounting Principles) requires that goodwill be tested for impairment at least annually and written down if it has lost value, but not immediately written off at purchase. The write-off of goodwill only occurs in certain circumstances, such as in a business combination where there is evidence of goodwill impairment or when a business is sold.

Question 4

Scone Industries 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.Scone Industries would recognize

Accepted Answer

Based on the information provided, Scone Industries acquired a gold mine for $8,000,000 and estimated that 40,000 ounces of gold can be extracted from the mine. Therefore, the cost per ounce of gold is $8,000,000/40,000 = $200 per ounce. In the first year of operations, 15,000 ounces of gold were extracted, which means that the cost of goods sold is 15,000 ounces x $200/ounce = $3,000,000.

Since the cost of goods sold is related to the depletion of natural resources, the correct answer is E, depletion expense of $3,000,000. Depreciation, amortization, and increase in net income are not related to the depletion of natural resources, and therefore, they are not applicable in this case.

Question 5

The process of allocating the cost of natural resources to the periods in which the resources are used is termed amortization.

Accepted Answer

The process of allocating the cost of natural resources to the periods in which the resources are used is termed depletion. Amortization typically refers to spreading the cost of intangible assets over their useful life.

Question 6

Depletion follows a units-of-production approach.

Accepted Answer

Depletion is a method of allocating the cost of natural resources (such as oil, gas, minerals, timber, etc.) over the period they are used up or extracted. Under the units-of-production approach, the cost of depletion is charged against revenues on the basis of the amount of resource extracted in a given period. This means that the depletion expense for a particular period will depend on the number of units (or tons, barrels, board feet, etc.) of the resource extracted during that period, rather than on the passage of time. Therefore, the statement that depletion follows a units-of-production approach is true.

Question 7

Goodwill is recognized when

Accepted Answer

Goodwill is recognized when the purchase price for a company exceeds the fair value of the net identifiable assets (the difference between the fair value of assets and the fair value of liabilities) of the company acquired.

Question 8

Xavier Enterprises has $500,000 of goodwill on the balance sheet.The company determines that an impairment has occurred for $100,000.Xavier Enterprises should

Accepted Answer

When an impairment of goodwill occurs, the company should credit the goodwill account for the amount of the impairment, which in this case is $100,000, to reduce the carrying value of goodwill on the balance sheet.

Question 9

In 20X3,Little Yard Oil,Inc.,purchased drilling rights for $1,000,000.At the time,the engineer estimated 20,000 barrels of oil in the field.In 20X4,4,000 barrels were pumped and in 20X5,5,000 barrels were pumped.Which entry below is correct?

Accepted Answer

Depletion is used to represent the cost allocated to the natural resources extracted during a period. In this case, the company purchased drilling rights for $1,000,000 estimated for 20,000 barrels, so the depletion charge would be $50 per barrel ($1,000,000/20,000). In 20X4, the company pumped 4,000 barrels, so the depletion expense would be 4,000*50=$200,000. Similarly, in 20X5, the company pumped 5,000 barrels, so the depletion expense would be 5,000*50=$250,000. Therefore, option D is the correct answer.

Question 10

A goodwill write-off is a noncash expense.

Accepted Answer

A goodwill write-off is a noncash expense because it does not involve any outflow of cash. It is the accounting practice of reducing the value of goodwill on a company's balance sheet, indicating that the company paid more than the fair value of the assets and liabilities acquired in a merger or acquisition. This write-off reduces the company's net income and taxable income, but it does not affect its cash flow or cash balance.

Question 11

Goodwill occurs when the purchase price of a company exceeds the fair value of all identifiable individual assets less total liabilities.

Accepted Answer

Goodwill is an intangible asset that arises when the purchase price of a company exceeds the fair value of all identifiable individual assets less total liabilities. Therefore, the statement is true.

Question 12

Wall Outlets,Inc.has $600,000 of goodwill on the balance sheet from The Plug Company which was purchased 5 years ago.The goodwill amortization this year should be

Accepted Answer

Goodwill is not amortized but rather tested annually for impairment. Therefore, there should be no goodwill amortization this year or any year.

Quiz 8: Long-Lived Assets