Question 1

Which of the following does not properly describe the depreciation process?

Accepted Answer

Depreciation attempts to allocate the cost of an asset over its useful life, which is consistent with the matching principle. It also involves the use of estimates to determine the asset's useful life and salvage value. However, it does not attempt to determine an asset's market value.

Question 2

On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock that Red Company held as an investment. The White common stock cost Red Company $5,000 and on August 1 had a fair value of $4,200. The installation costs for the computer equipment were $700 and shipping costs were $500. What amount should be the total amount debited to the computer equipment account?

Accepted Answer

The total amount debited to the computer equipment account should include the cash payment, the fair value of the White common stock given, the installation costs, and the shipping costs.

Cash payment: $10,000 
Fair value of White common stock given: $4,200 (since this is lower than the cost of $5,000, the loss of $800 should be recognized separately) 
Installation costs: $700 
Shipping costs: $500

Total amount debited to computer equipment account: 
$10,000 + $4,200 + $700 + $500 = $15,400

Question 3

Which of the following equipment related costs is not capitalized on a balance sheet?

Accepted Answer

Equipment maintenance costs are considered expenses and are not capitalized on a balance sheet. The other options (A, B, and D) are all costs associated with acquiring and setting up the equipment, and are therefore typically capitalized.

Question 4

On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $4,000; and installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?

Accepted Answer

The equipment will be recorded at $57,500, which includes the purchase price ($50,000) plus transportation costs ($1,000), sales tax paid ($4,000), and installation cost ($2,500), totaling $57,500.

Question 5

Which of the following statements is incorrect?

Accepted Answer

The answer of Which of the following statements is incorrect?
...

Question 6

A company acquires land by issuing 10,000 shares of its $10 par value common stock which is currently trading at $20 per share, and the appraised value of the land is $250,000. Which of the following statements correctly describes the recording of the land?

Accepted Answer

The land should be recorded at the value of the consideration given up, which in this case is the $200,000 value of the 10,000 shares of $10 par value common stock. The appraised value of the land is not relevant in this transaction. Therefore, there is no gain or loss recognized in this transaction.

Question 7

Which of the following statements is incorrect?

Accepted Answer

Capital expenditures actually increase assets rather than decrease them. They are costs a company incurs to acquire or upgrade physical assets such as property, industrial buildings, or equipment. This is in contrast to ordinary repairs and maintenance, which are expensed and reduce net income.

Question 8

Which of the following costs associated with a land purchase is not a component of the land cost reported on a balance sheet?

Accepted Answer

The land's appraised value is not a cost incurred in the purchase of the land; it is an estimate of the land's market value and does not affect the cost reported on the balance sheet.

Question 9

Which of the following is correct?

Accepted Answer

If a company fails to record depreciation expense, net income will be overstated because the expense is not being deducted. Additionally, assets will be overstated because the company is not reflecting the decrease in value of the assets due to usage over time.

Question 10

Smith Company exchanges assets to acquire a building. The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $250,000. Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for the building?

Accepted Answer

The answer of Smith Company exchanges assets to acquire a...

Question 11

Smith Company exchanges assets to acquire a building. The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $250,000. Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for the building?

Accepted Answer

The answer of Smith Company exchanges assets to acquire a...

Question 12

Which of the following would most likely not be recorded as ordinary repairs and maintenance?

Accepted Answer

Putting a hydraulic lift on a delivery truck is an improvement or enhancement to the truck, rather than just a repair or maintenance expense.

Question 13

Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. At what amount should the truck be recorded on the balance sheet prior to recording depreciation expense?

Accepted Answer

The truck should be recorded at $45,000 on the balance sheet. This includes the purchase price of $40,000, sales tax of $2,000, and shipping and preparation costs of $3,000. The insurance for the first year of operation is not included in the asset's cost as it is considered an operational expense.

Question 14

Gilbert Company made an ordinary repair to a delivery truck during 2016 at a cost of $500 and capitalized the repair cost. What is the effect on the 2016 financial statements as a result of the incorrect capitalization?

Accepted Answer

The repair should be expensed during 2016 rather than be capitalized. As a result, net income is overstated because expenses are understated. Assets are overstated because of the capitalization. Therefore, the correct answer is that assets are overstated and net income is overstated.

Question 15

Which of the following is true when a company constructs an asset for its own use?

Accepted Answer

When a company constructs an asset for its own use, it will incur labor, material, and interest costs for the construction. These costs will be capitalized and added to the cost of the asset, thereby increasing the value of the asset on the balance sheet. This will result in an increase in the company's assets but no immediate impact on the net income. Only when the asset is used, will the related expenses be recognized in the form of depreciation expenses, which will reduce net income over its useful life.

Question 16

What is the effect on the 2016 financial statements when a capital expenditure during 2016 was incorrectly recorded as a repairs and maintenance expense?

Accepted Answer

Assets are understated because the expenditure should have been capitalized. Stockholders' equity is understated because net income is understated due to the expense overstatement.

Question 17

Smith Company exchanges assets to acquire a building. The market price of the Smith stock on the exchange date was $35 per share and the building's book value on the books of the seller was $250,000. Which of the following journal entries is correct for Smith Company when Smith issues 10,000 shares of $10 par value common stock and pays $20,000 cash in exchange for the building?

Accepted Answer

The answer of Smith Company exchanges assets to acquire a...

Question 18

Which of the following describes the effect of recording depreciation expense at year-end?

Accepted Answer

Recording depreciation expense decreases net income, as it is an expense, and it also decreases total assets as the asset is being gradually written off over time.

Question 19

Which of the following best describes the objective of depreciation?

Accepted Answer

The objective of depreciation is to allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue. This is done through a systematic and rational allocation of the asset's cost over its useful life, which reflects the decline in the asset's earning capacity over time. By doing this, the company can match the cost of the asset with the revenue it generates, thereby providing a more accurate picture of its financial performance.

Question 20

If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead of as repairs and maintenance expense, which of the following statements is true?

Accepted Answer

The answer of If an expenditure related to a depreciable...

Quiz 8: Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Which of the following does not properly describe the depreciation process?

Which of the following equipment related costs is not capitalized on a balance sheet?

On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $4,000; and installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?

Which of the following statements is incorrect?

A company acquires land by issuing 10,000 shares of its $10 par value common stock which is currently trading at $20 per share, and the appraised value of the land is $250,000. Which of the following statements correctly describes the recording of the land?

Which of the following statements is incorrect?

Which of the following costs associated with a land purchase is not a component of the land cost reported on a balance sheet?

Which of the following is correct?

Which of the following would most likely not be recorded as ordinary repairs and maintenance?

Gilbert Company made an ordinary repair to a delivery truck during 2016 at a cost of $500 and capitalized the repair cost. What is the effect on the 2016 financial statements as a result of the incorrect capitalization?

Which of the following is true when a company constructs an asset for its own use?

What is the effect on the 2016 financial statements when a capital expenditure during 2016 was incorrectly recorded as a repairs and maintenance expense?

Which of the following describes the effect of recording depreciation expense at year-end?

Which of the following best describes the objective of depreciation?

If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead of as repairs and maintenance expense, which of the following statements is true?