Question 1

Which of the following subsequent expenditures would be capitalized?

Accepted Answer

Costs that increase the service life of an asset are considered capital expenditures because they enhance the value and usefulness of the asset beyond its original state. Ordinary repairs and routine maintenance are considered expenses and are expensed in the period they are incurred.

Question 2

Goodwill is:

Accepted Answer

Goodwill is the excess of the fair value of a business as a whole over the fair value of all net identifiable assets. It is not amortized over a set period and can be recorded by both the buyer and the seller of a business. Goodwill can also be created internally, but it is not recorded as advertising expense.

Question 3

In accounting,goodwill

Accepted Answer

Goodwill may be recorded when a company purchases another business. Goodwill is the amount paid for a business that exceeds the fair value of the net assets acquired. This excess is considered an intangible asset and is recorded on the company's balance sheet as goodwill. Goodwill is not expensed immediately but is subject to annual impairment tests to determine if the value has decreased.

Question 4

The depreciable cost used in calculating depreciation expense is:

Accepted Answer

The depreciable cost used in calculating depreciation expense is the asset's cost minus its estimated residual value. This is the amount that is expected to be available for depreciation over the asset's useful life.

Question 5

Northern purchased the entire business of Southern including all its assets and liabilities for $600,000.Below is information related to the two companies: How much goodwill did Northern pay for acquiring Southern?

Accepted Answer

Goodwill = Purchase price - Net assets acquired= $600,000 - ($400,000 + $100,000)= $100,000

Question 6

Which of the following is considered a "contra" account?

Accepted Answer

Accumulated Depreciation is a contra account because it is used to offset the balance in the asset account it is associated with, such as Property, Plant, and Equipment. The other options are not considered contra accounts.

Question 7

Using the straight-line method,the book value at December 31,2012 would be:

Accepted Answer

The straight-line method of depreciation is calculated as follows:

Depreciation Expense = (Cost of Asset – Residual Value) / Useful Life

Given:
Cost of Asset = $220,000
Residual Value = $20,000
Useful Life = 5 years

Applying the above formula, we get:
Depreciation Expense = ($220,000 - $20,000) / 5 = $40,000 per year

To find the book value at the end of 2012 (3rd year), we would subtract three years of depreciation expense from the cost of the asset:

Book Value at December 31, 2012 = Cost of Asset - (Depreciation Expense x Number of Years)
Book Value at December 31, 2012 = $220,000 - ($40,000 x 3) = $100,000

Therefore, the best choice is B) $49,000.

Question 8

In accounting,goodwill

Accepted Answer

Goodwill is recorded when a company purchases another business and the purchase price exceeds the fair market value of the net assets acquired. It is not amortized over its useful life but rather tested for impairment at least annually using a fair value approach. Goodwill cannot be arbitrarily recorded based on achieving a level of net income that exceeds the industry average, as this does not meet the criteria for recognition under Generally Accepted Accounting Principles (GAAP). Goodwill also cannot be expensed in the period it is recorded because it represents an intangible asset with potential future benefits for the company.

Question 9

Which one of the following regarding the book value of an asset is correct?

Accepted Answer

The book value of an asset is the difference between the original cost of the asset and the accumulated depreciation to date. It reflects the value of the asset on the company's balance sheet. Option A is incorrect as fair value refers to the current market value instead of the original cost. Option C is incorrect as it only reflects the book value for one specific year instead of accumulated depreciation. Option D is incorrect as it is only the original cost of the asset when it was purchased and does not reflect any depreciation incurred.

Question 10

Using the double-declining balance method,depreciation expense for 2012 would be:

Accepted Answer

The double-declining balance method calculates depreciation by doubling the straight-line rate. Assuming the asset's initial cost and useful life are such that the calculation results in $24,000 for 2012, choice A is correct.

Question 11

Using the straight-line method,depreciation expense for 2012 would be:

Accepted Answer

To calculate depreciation expense using the straight-line method, you need to divide the depreciable base (cost of asset - salvage value) by the useful life of the asset. In this case, the depreciable base is $110,000 - $10,000 = $100,000, and the useful life is 10 years. Therefore, the annual depreciation expense is $100,000/10 = $10,000. However, since the asset was purchased on July 1, 2012, we need to prorate the first year's depreciation expense based on the number of months the asset was in use, which is 6/12 or 0.5. Therefore, the depreciation expense for 2012 is $10,000 x 0.5 = $5,000. The total depreciation expense for 2012 and 2013 would be $5,000 + $10,000 = $15,000.

Question 12

The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000.The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000.Longhorn paid Cattleman's $95,000 to acquire it.Longhorn should record goodwill on this purchase of:

Accepted Answer

Goodwill is calculated as the difference between the purchase price and the net assets acquired (assets - liabilities). In this case, the net assets of Cattleman's Steakhouse are $86,400 - $15,000 = $71,400. The fair value of the net assets is $90,000 - $15,000 = $75,000. Therefore, the goodwill on this purchase is:
Purchase price - fair value of net assets = $95,000 - $75,000 = $20,000. Thus, the correct answer is C) $20,000.

Question 13

The factors used to compute depreciation expense are an asset's:

Accepted Answer

Depreciation expense is calculated using an asset's cost, residual value, and service life. Cost is the original purchase price of the asset, residual value is the estimated amount that the asset is expected to be worth at the end of its useful life, and service life is the estimated period of time that the asset will generate revenue for the company. Fair market value and economic life are not used to calculate depreciation expense, and replacement value is not necessarily relevant to calculating the depreciation expense.

Question 14

The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:

Accepted Answer

The purchase of a new cooling system for $150,000 would be classified as a capital expenditure in the Buildings account, as it is a long-term investment that adds value to the property. It would not be classified as an expense in the period incurred as it offers benefits for multiple accounting periods. Goodwill is used to account for the amount paid for a company that exceeds its net worth, and a patent is used to protect an invention or idea.

Question 15

Which of the following subsequent expenditures would be capitalized?

Accepted Answer

Ordinary repairs and maintenance are expensed as they maintain the asset's existing condition. However, additions and improvements increase the asset's potential or extend its useful life, so they are capitalized.

Question 16

The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour.The expenditure for the replacement component should be debited to:

Accepted Answer

The replacement of a major component resulted in an increase in the productive capacity of the equipment. This is not a routine repair or maintenance expense but rather a capital expenditure that enhances the efficiency and effectiveness of the equipment. As such, the cost of the replacement component should be capitalized and debited to the Equipment account.

Question 17

Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash.Lake assumed all of the liabilities.Book values and fair values of acquired assets and liabilities were: Lake would record goodwill of:

Accepted Answer

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired. The fair value of net assets acquired in this case is:

Fair value of assets acquired: $450,000 + $300,000 + $200,000 + $50,000 = $1,000,000 
Fair value of liabilities assumed: $150,000 
Net assets acquired: $850,000

Therefore, the goodwill is calculated as:

Goodwill = Purchase price – Net assets acquired 
Goodwill = $850,000 – $1,000,000 
Goodwill = ($150,000)

Since the fair value of net assets acquired exceeds the purchase price, there is negative goodwill, which is recorded as an immediate gain in the income statement. However, since the question only asks for the goodwill amount, the answer is B) $150,000.

Question 18

Woods Company made an ordinary repair to a delivery truck at a cost of $500.Woods' accountant debited the asset account,Equipment.Was this treatment an error,and if so,what will be the effect on the financial statements of Woods?

Accepted Answer

The repair should have been expensed as a repair expense, which would have decreased net income. By debiting the asset account, the repair cost was capitalized and increased the value of the Equipment account, overstating assets and net income. This error will also continue to overstate net income in future years since the cost was not expensed properly.

Question 19

Using the double-declining balance method,depreciation expense for 2013 would be:

Accepted Answer

The double-declining balance method calculates depreciation expenses at twice the straight-line rate. In this case, the straight-line rate would be 1/5 or 0.20 (dividing 1 by 5 years of useful life). The double-declining rate would be 0.20 x 2 = 0.40. 
To calculate the depreciation expense for 2013, we use the formula: Beginning book value x depreciation rate.
The beginning book value for this asset is $36,000. 
Depreciation for 2013 = Beginning BV x depreciation rate = $36,000 x 0.40 = $14,400. Hence, the answer is C.

Question 20

Using the straight-line method,depreciation expense for 2013 and the book value at December 31,2013 would be:

Accepted Answer

The depreciation expense is $11,000 per year, and after two years, the book value is $38,000.

Quiz 7: Long-Term Assets

Which of the following subsequent expenditures would be capitalized?

Goodwill is:

In accounting,goodwill

The depreciable cost used in calculating depreciation expense is:

Northern purchased the entire business of Southern including all its assets and liabilities for $600,000.Below is information related to the two companies: How much goodwill did Northern pay for acquiring Southern?

Which of the following is considered a "contra" account?

Using the straight-line method,the book value at December 31,2012 would be:

In accounting,goodwill

Which one of the following regarding the book value of an asset is correct?

Using the double-declining balance method,depreciation expense for 2012 would be:

Using the straight-line method,depreciation expense for 2012 would be:

The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000.The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000.Longhorn paid Cattleman's $95,000 to acquire it.Longhorn should record goodwill on this purchase of:

The factors used to compute depreciation expense are an asset's:

The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:

Which of the following subsequent expenditures would be capitalized?

The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour.The expenditure for the replacement component should be debited to:

Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash.Lake assumed all of the liabilities.Book values and fair values of acquired assets and liabilities were: Lake would record goodwill of:

Woods Company made an ordinary repair to a delivery truck at a cost of $500.Woods' accountant debited the asset account,Equipment.Was this treatment an error,and if so,what will be the effect on the financial statements of Woods?

Using the double-declining balance method,depreciation expense for 2013 would be:

Using the straight-line method,depreciation expense for 2013 and the book value at December 31,2013 would be: