Question 1

What are operational assets that have physical substance called?

Accepted Answer

Operational assets that have physical substance are called tangible assets. These include property, plant, and equipment, inventory, and other fixed assets that can be seen and touched. Current assets refer to assets that can be easily converted into cash within one year, while long-term investments refer to investments that a company plans to hold for more than one year. Intangible assets are non-physical assets such as patents, copyrights, and trademarks.

Question 2

On April 1, 2014, Michal Company sold equipment for $11,400 cash. The equipment had originally been purchased at a cost of $24,000 on January 1, 2010. The equipment was expected to a useful life of 8 years with no residual value. As of January 1, 2014, had accumulated depreciation of $12,000. The entry to record the sale of the equipment was:

Accepted Answer

The answer of On April 1, 2014, Michal Company sold...

Question 3

Expenditures made after the asset is in use are always capital expenditures.

Accepted Answer

Expenditures made after the asset is in use can be either capital expenditures or revenue expenditures, depending on whether they maintain or improve the asset's productivity and extend its useful life.

Question 4

Foghorn Ltd. has an asset with an original cost of $16,000 and a carrying amount (net book value) today of $4,400. The Company no longer needs the asset and has decided to sell it today for $3,000 cash. The journal entry Foghorn will use to record the sale includes:

Accepted Answer

When an asset is sold, the difference between the carrying amount and the sale price is recognized as a loss or gain on the sale. In this case, the carrying amount is $4,400 and the sale price is $3,000, resulting in a loss of $1,400. The journal entry to record the sale would be:

Debit Cash $3,000
Debit Accumulated Amortization $11,600
Credit Asset $16,000

The debit to accumulated amortization removes the entire accumulated amortization of $11,600 from the books, and the credit to the asset account removes the original cost of $16,000 from the books, leaving a loss of $1,400 on the income statement. The credit to cash is also recorded to reflect the cash inflow from the sale.

Question 5

On March 1, 20A, Jance Company purchased a producing oil well at a cash cost of $100,000. It is estimated that 250,000 barrels of oil can be produced over the remaining life of the well. By December 31, 20A (end of the accounting period), 1,500 barrels of oil were produced and sold. What would be the amount of depletion expense for 20A on this well?

Accepted Answer

The depletion expense is calculated by dividing the cost of the well by the total estimated barrels and then multiplying by the barrels produced. ($100,000 / 250,000 barrels) * 1,500 barrels = $600.

Question 6

When a change in estimate is made, there is no correction of previously recorded depreciation expense.

Accepted Answer

When a change in estimate is made for depreciation, the new estimated useful life or salvage value is used going forward to calculate future depreciation expense. There is no retroactive correction of previously recorded depreciation expenses.

Question 7

The cost of a finite life intangible asset is not amortized, but the asset is tested for impairment.

Accepted Answer

Finite life intangible assets are amortized over their useful life and are also tested for impairment.

Question 8

In 20B, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma?

Accepted Answer

The repair should have been expensed, not capitalized. By debiting the asset account, assets and profit were overstated in 20B.

Question 9

Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting?

Accepted Answer

The double-declining-balance method accelerates depreciation in earlier years, which is most appropriate when an asset is expected to lose its value more rapidly in the first few years of its life.

Question 10

Jeffers Inc. purchased a warehouse and the land upon which it was located. The total price was $450,000. The land was appraised for $180,000 while the warehouse was appraised for $360,000. What account balances should Jeffers show in its general ledger?

Accepted Answer

The answer of Jeffers Inc. purchased a warehouse and the...

Question 11

Johnson Company acquires land and building for $4,000,000 including all fees related to acquisition. The land is appraised at $2,700,000 and the building at $2,100,000. The building is then renovated at a cost of $750,000. What amount is capitalized to the building account?

Accepted Answer

The cost of the building is $2,100,000 and the renovation costs of $750,000 should be added to the initial cost, for a total of $2,850,000. This amount should be capitalized to the building account. Therefore, the best choice is D.

Question 12

Which of the following costs would be excluded from the acquisition cost of equipment purchased from a supplier?

Accepted Answer

A purchases discount offered by the supplier is not included in the acquisition cost of equipment.

Question 13

When an entire business is purchased, goodwill is the excess of cost over the carrying amount of the net identifiable assets acquired.

Accepted Answer

Goodwill represents the value of intangible assets such as a company's reputation, customer base, brand recognition, and patents. It is calculated as the excess of cost over the fair value of net identifiable assets acquired in a business purchase.

Question 14

Belton Corporation uses straight-line depreciation and, for assets acquired during the fiscal year, follows the policy of recording a full month's depreciation for all assets acquired on or before the 15th of the month. No depreciation is recorded for the month if an asset is acquired after the 15th. On May 22, 20A, Belton purchased a car that cost $22,000 which had an estimated residual value of $2,000 and an estimated useful life of five years. To the nearest dollar, what is the amount of depreciation that should be recorded on the car for 20A?

Accepted Answer

Depreciation for 20A = (Cost - Residual Value) / Useful Life * Number of Months of Use= (22,000 - 2,000) / 5 * 8= 20,000 / 5 * 8= 4,000 * 8= $2,333

Question 15

Nadler Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000 residual value at the end of its 8-year useful life. Using the double-declining-balance method, the depreciation expense for the third year would be

Accepted Answer

The double-declining-balance method involves doubling the straight-line depreciation rate. The straight-line rate is 1/8 = 12.5%, so the double rate is 25%. Year 1 depreciation: $48,000 * 25% = $12,000. Year 2 depreciation: ($48,000 - $12,000) * 25% = $9,000. Year 3 depreciation: ($48,000 - $12,000 - $9,000) * 25% = $6,750.

Question 16

A company that is self-constructing a new store, which will open upon completion, is allowed to capitalize the interest during the period of construction if they finance the construction with actual loans.

Accepted Answer

According to accounting standards, interest incurred during the period of construction of a self-constructed asset can be capitalized, provided that the company is financing the construction with actual borrowings.

Question 17

If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of the cash flow statement.

Accepted Answer

The gain on disposal of a building should be reported in the investing section of the cash flow statement, as it relates to the sale of a long-term asset.

Question 18

When events or changes in circumstances reduce the estimated future cash flows of long-lived assets below their book value, the book values should be written down (by recording a loss) to the fair value of the assets.

Accepted Answer

This statement is consistent with the accounting principle of impairment, which requires that assets be written down when their estimated future cash flows are reduced below their book value. This is done to ensure that the company's financial statements reflect the true economic value of the assets.

Question 19

Which of the following is not a factor affecting the calculation of straight-line depreciation?

Accepted Answer

Carrying amount is simply the value of the asset on the financial statements and does not affect the calculation of depreciation. Cost, useful life, and residual value are all factors that do affect straight-line depreciation.

Question 20

The amortization of finite life intangibles is recorded as:

Accepted Answer

Amortization of finite life intangibles involves debiting amortization expense and crediting accumulated amortization, similar to depreciation for tangible assets.

Quiz 9: Reporting and Interpreting Liabilities