Question 1

Which of the following is not an intangible asset?

Accepted Answer

Accounts receivable is a tangible asset as it represents the money owed to a company by another party. Patents, copyrights, and goodwill are intangible assets as they represent legal rights, reputation, and brand recognition, respectively.

Question 2

Hot Wort Ltd. purchased equipment on April 1, 2020, for $140,000. The residual value is $20,000 and the estimated life is 6 years or 55,000 hours. Compute depreciation expense for the year ending December 31, 2020 if Hot Wort Ltd. uses the straight-line method of depreciation.

Accepted Answer

To calculate the annual depreciation expense using straight-line method, we use the formula:

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

Where,

Cost of Asset = $140,000
Residual Value = $20,000
Useful Life = 6 years

So,

Depreciation Expense = ($140,000 - $20,000) ÷ 6 years
Depreciation Expense = $120,000 ÷ 6 years
Depreciation Expense = $20,000 per year

Since the equipment was purchased on April 1, 2020, it was used for 9 months in 2020 (April to December). Therefore, the depreciation expense for the year ending December 31, 2020 would be:

Depreciation Expense = ($20,000 ÷ 12 months) x 9 months
Depreciation Expense = $15,000

Hence, the correct answer is D.

Question 3

Which of the following depreciation methods best fits those assets that tend to wear out before they become obsolete?

Accepted Answer

The units-of-production method best fits assets that wear out before they become obsolete because it allocates depreciation based on the actual usage or production levels of the asset, directly linking the depreciation expense to the wear and tear of the asset.

Question 4

The removal of an old building to make land suitable for its intended use is charged to:

Accepted Answer

The cost of removing an old building to prepare land for its intended use is considered part of the land cost because it is necessary to get the land into a condition suitable for its intended use.

Question 5

To measure depreciation for a tangible long-lived asset, all of the following must be known except:

Accepted Answer

Current market value is not necessary to know when calculating depreciation for a tangible long-lived asset. The other three factors (estimated residual value, historical cost, and estimated useful life) are essential in determining depreciation.

Question 6

Sowthoveer Company sold some office furniture for $4,500 cash. The furniture cost $24,000 and had accumulated depreciation through the date of sale totaling $21,700. The journal entry to record the sale of the furniture will include a:

Accepted Answer

The journal entry to record the sale of the furniture will include a debit to Cash for $4,500, a credit to Office Furniture for $24,000, a debit to Accumulated Depreciation for $21,700, and a credit to Gain on Sale of Furniture for $2,200 ($4,500 - $24,000 + $21,700 = $2,200). Therefore, the correct option is B (credit to Gain on Sale of Furniture for $2,200).

Question 7

At the end of an asset's useful life, the balance in Accumulated Depreciation will:

Accepted Answer

At the end of an asset's useful life, the balance in Accumulated Depreciation will be the same under all depreciation methods because it represents the total amount of the asset's cost that has been expensed over its useful life, regardless of the method used.

Question 8

The cost of a patent should be amortized over:

Accepted Answer

Patents have a legal life of 20 years from the date of filing, but their economic useful life may be shorter. Therefore, the cost of a patent should be amortized over the lesser of 20 years or its economic useful life.

Question 9

Which of the following expenses is most closely associated with tangible long-lived assets?

Accepted Answer

Depreciation is the expense associated with tangible long-lived assets. It represents the allocation of the cost of the asset over its useful life, reflecting the wear and tear and obsolescence that will ultimately limit the asset's usefulness. Accumulation is not an expense but refers to the process of adding together amounts over time. Depletion is an expense associated with natural resources such as oil or timber. Interest is a cost of borrowing money, not an expense associated with tangible long-lived assets.

Question 10

Goodwill is equal to the excess of the cost of an acquired company over the sum of the:

Accepted Answer

Goodwill represents the premium paid to acquire a company beyond its net assets. The net assets are determined by subtracting the liabilities from the assets of the acquired company, and the market value of these net assets is considered the fair value of the company. Goodwill is calculated by subtracting the fair value of the net assets from the purchase price. Therefore, option A is the correct answer.

Question 11

Equipment with a carrying amount of $8,000 is sold for $1,000 cash. The statement of cash flows will report a:

Accepted Answer

The sale of equipment for cash is considered an investing activity, and the cash received from the sale ($1,000) is reported as a cash inflow in the investing activities section of the statement of cash flows.

Question 12

Grasshopper Room Company acquired land and buildings for $1,500,000. The land is appraised at $475,000 and the buildings are appraised at $775,000. The debit to the Buildings account will be:

Accepted Answer

The debit to the Buildings account will be equal to the appraised value of the buildings, which is $775,000. The land appraisal value is not relevant to the debit to the Buildings account. Therefore, the correct answer is option B.

Question 13

Which of the following statements is true?

Accepted Answer

Accumulated depreciation represents the total amount of the property, plant, and equipment's cost that has already been recorded as an expense. It is a contra account that offsets the cost of the asset on the balance sheet. Therefore, option A is the correct statement. Option B is incorrect as accumulated depreciation is not a growing amount of cash, but rather a reduction in the value of the asset. Option C is also incorrect as depreciation involves the subjective estimation of useful life and salvage value. Option D is incorrect as depreciation does not necessarily require setting aside cash for asset replacement.

Question 14

Land, buildings, and equipment are acquired for a lump sum of $950,000. The fair values of the three assets are respectively, $200,000, $500,000, and $300,000. What is the cost assigned to the building?

Accepted Answer

The cost assigned to each asset is based on the proportion of its fair value to the total fair value of all assets. The total fair value of all assets is $1,000,000 ($200,000+$500,000+$300,000). Therefore, the building's proportion of the total fair value is $500,000/$1,000,000, or 50%. This means the cost assigned to the building is also 50% of the lump sum acquisition cost, which is $475,000.

Question 15

Land is purchased for $60,000. Back taxes paid by the purchaser were $2,400, clearing and grading costs were $3,000, fencing costs were $2,500, and lighting costs were $500. What is the cost of the land?

Accepted Answer

To find the cost of the land, we need to add the initial purchase price with all the additional costs. 
Cost of Land = Purchase price + Back taxes + Clearing and grading costs + Fencing costs + Lighting costs 
Cost of Land = $60,000 + $2,400 + $3,000 + $2,500 + $500 
Cost of Land = $68,400 
Therefore, the answer is choice C, $65,400.

Question 16

Which of the following intangible assets is subject to impairment?

Accepted Answer

All intangible assets, including those with definite lives, indefinite lives, and goodwill, are subject to impairment testing and potential impairment charges if their carrying amount exceeds their recoverable amount.

Question 17

Which of the following would not be included in the Land account?

Accepted Answer

Paving costs for a driveway are not included in the Land account because they are considered improvements rather than part of the land's purchase price or the land itself. Improvements like driveways are typically capitalized as Land Improvements and depreciated over their useful life.

Question 18

Blockware Corporation has selected to use the revaluation model for its assets. Recently it had its building appraised. The appraiser placed a $5,000,000 value on the building. Back in 2017 this building was purchased for $4,000,000. This increase in value over cost requires a:

Accepted Answer

According to the revaluation model, when the fair value of an asset increases above its carrying amount (cost less accumulated depreciation), the difference is credited to a revaluation surplus account. Therefore, the correct choice is to credit the revaluation surplus account, as the building has increased in value.

Question 19

Which of the following would not be included in the Machinery account?

Accepted Answer

The cost of a maintenance insurance plan would not be included in the Machinery account as it is an ongoing expense after the machinery is already in use. The other options (B, C, and D) all involve costs directly related to the acquisition and setup of the machinery, which would be included in the Machinery account.

Question 20

For most property, plant, and equipment, depreciation is caused by which of the following:

Accepted Answer

Depreciation is caused by obsolescence, or the wear and tear of the asset over time. Option A (the process of valuation) refers to determining the initial value of the asset and does not impact depreciation. Option C (changes in fair value) refers to an increase or decrease in the value of the asset, but does not directly cause depreciation. Option D (setting aside cash to replace assets as they wear out) is more related to the accounting treatment of depreciation rather than the actual cause.

Quiz 6: Property, Plant, and Equipment, and Intangible Assets