Question 1

A company purchased a patent for $100,000 at the beginning of 2013 which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in 2013?

Accepted Answer

Amortization expense is the allocation of cost over the useful life of an intangible asset. In this case, the patent has a useful life of 5 years. Therefore, the company should record $20,000 ($100,000/5 years) in amortization expense for 2013. Option A is incorrect as the company cannot simply expense the entire cost in the year of purchase. Option B is incorrect as it assumes that the patent has a legal life of 5 years, which is not the case. Option D is incorrect as it does not reflect the fact that the patent has a limited useful life that needs to be amortized over that period.

Question 2

Refer to Falling Leaves Lawn Care. The company wants to use the depreciation method that will result in the highest depreciation expense for 2013. Which method should be used?

Accepted Answer

The double-declining-balance method results in the highest depreciation expense in the early years of an asset's life, which would be most beneficial for Falling Leaves Lawn Care in 2013. This method allows for a larger depreciation expense in the early years and less in the later years.

Question 3

Goodwill can be recorded as an asset when a(n)

Accepted Answer

Goodwill can only be recorded as an asset when a business is purchased and payment is made in excess of the value of the net assets. This excess amount represents the value of the intangible assets such as the business's reputation, customer base, and brand recognition that are not reflected in the net assets.

Question 4

Depreciation is a process by which

Accepted Answer

Depreciation is the process of allocating the cost of plant and equipment to expense over the time periods which benefit from the use of the asset. It doesn't accumulate replacement funds, determine market value, or calculate the difference between current market value and historical cost.

Question 5

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price of land, $900,000; cost to clear the land, $40,000; cost of paving, $35,000; and cost of lighting for the parking lot, $20,000. How much should be recorded in the Land Improvements account?

Accepted Answer

Only the costs directly related to improving the land (i.e. clearing, paving, and lighting) should be recorded in the Land Improvements account. Therefore, the total amount to be recorded in the Land Improvements account is $40,000 + $35,000 + $20,000 = $95,000. However, the purchase price of the land is not included in the Land Improvements account as it is considered a separate asset. Therefore, the correct answer is C, $55,000, which represents the total cost of improving the land.

Question 6

-Refer to Fireworks City. Determine the asset turnover ratio for 2013.

Accepted Answer

The asset turnover ratio is calculated by dividing net sales by average total assets. For 2013, net sales were $12,450,000 and average total assets were $1,587,500. Therefore, the asset turnover ratio for 2013 is $12,450,000 / $1,587,500 = 7.84 times.

Question 7

On January 1, 2013, a company sold a machine for $5,000 that it had used for several years. The machine cost $11,000, and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine?

Accepted Answer

To calculate the gain or loss on the sale of the machine, we need to compare the selling price ($5,000) to the book value of the machine, which is the cost of the machine minus accumulated depreciation. 
Book value = Cost - Accumulated depreciation 
Book value = $11,000 - $4,500 
Book value = $6,500 
Since the selling price ($5,000) is less than the book value ($6,500), the company will realize a loss on the sale. 
Loss = Selling price - Book value 
Loss = $5,000 - $6,500 
Loss = -$1,500 
Therefore, the answer is (C) loss of $1,500.

Question 8

Refer to Fernbank Farms. What amount should be recorded as depreciation expense each year starting in 2013?

Accepted Answer

The answer of Refer to Fernbank Farms. What amount should...

Question 9

Which of the following sets of factors is needed to calculate depreciation on plant and equipment?

Accepted Answer

To calculate depreciation on plant and equipment, the essential factors include the asset's acquisition cost (initial cost), its estimated life (how long it is expected to be useful), and its estimated residual value (the value at the end of its useful life). These elements are used in various depreciation methods to allocate the cost of the asset over its useful life.

Question 10

-Refer to Fireworks City. Using the data for 2013, determine the average life of the company's property, plant, and equipment rounded to one decimal place.

Accepted Answer

The average life of property, plant, and equipment is calculated by dividing the total cost of the assets by the annual depreciation expense. The data for 2013 suggests that the average life is approximately 4.0 years.

Question 11

-Refer to Fireworks City. During the year, the company sold some equipment that had an original cost of $60,000. Which statement is true concerning transactions that must have occurred during the period?

Accepted Answer

The sale of equipment does not directly indicate whether new equipment was purchased or not. However, companies often replace old equipment to maintain or enhance operational capacity, suggesting that the purchase of additional equipment is a common practice.

Question 12

Generally accepted accounting principles (GAAP)require that research and development costs to develop a new product be

Accepted Answer

GAAP requires that research and development costs be expensed in the period incurred because it is difficult to determine the future economic benefits of these costs. Only costs associated with obtaining patents can be capitalized in the patents account. Capitalizing research and development costs is not acceptable under GAAP because it does not accurately reflect the financial position of the company. Additionally, research and development costs cannot be amortized over the expected economic life of the new product because there is no guarantee that the product will generate economic benefits beyond the initial development stage.

Question 13

On January 1, 2013, a company sold a piece of equipment for $30,000 which it had used for several years. The equipment had cost $45,000, and its accumulated depreciation amounted to $20,000 at the time of the sale. What are the net effects on the accounting equation of selling the equipment?

Accepted Answer

The answer of On January 1, 2013, a company sold...

Question 14

Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should

Accepted Answer

According to current accounting standards (specifically, ASC 350), the costs of intangible assets with an indefinite life, such as goodwill, should not be amortized. Instead, they should be reviewed annually for impairment to determine if the carrying value has decreased below the asset's fair value. If so, the asset should be written down to its fair value, and the impairment loss recognized as an expense in the statement of income.

Question 15

If a company's asset turnover ratio decreased from 2012 to 2013, which of the following conclusions can be made?

Accepted Answer

The asset turnover ratio measures how efficiently a company uses its assets to generate revenue. A decrease in the ratio indicates that the company generated less sales for each dollar invested in assets, which means the company was less efficient in using its assets to produce profits. None of the other options can be inferred from a decrease in the asset turnover ratio.

Question 16

Refer to Fernbank Farms. What is the truck's book value at December 31, 2013?

Accepted Answer

According to the information provided in the Fernbank Farms scenario, the truck's book value at December 31, 2013, was $80,000. This is the amount at which the asset is recorded on the company's balance sheet after taking into account any accumulated depreciation. Therefore, choice C is the correct answer.

Question 17

Refer to Fernbank Farms. When calculating depreciation for 2013, the company's accountant should

Accepted Answer

The best choice is to add the additional $30,000 to the book value at the end of the previous year and allocate the revised depreciation basis over the remaining adjusted useful life of 5 years. This method is known as the modified accelerated cost recovery system (MACRS) and is required by the IRS for tax purposes. It accounts for the additional cost by adjusting the depreciation amount over the remaining useful life of the asset, rather than treating it as a separate expense. This results in a more accurate reflection of the asset's value and useful life over time.

Question 18

-Refer to Fireworks City. Using the data for 2013, determine the average age of the company's property, plant, and equipment.

Accepted Answer

The answer of 
-Refer to Fireworks City. Using the data...

Question 19

Which of the following factors is not related to the decline in the usefulness of plant and equipment assets, and therefore does not need to be considered in selecting an appropriate depreciation method?

Accepted Answer

Current replacement cost is not related to the decline in the usefulness of plant and equipment assets. Depreciation methods focus on allocating the cost of an asset over its useful life, considering factors like physical deterioration, obsolescence, and repair/maintenance policies, but not the current replacement cost of the asset.

Question 20

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, cost of lighting for the parking lot, and cost of landscaping for the parking lot. How should the company determine which costs should be recorded as Land Improvements and which costs should be recorded as Land?

Accepted Answer

The costs with an unlimited life, such as the purchase price for land and cost to clear the land, are debited to Land because they represent a permanent investment that does not depreciate over time. Costs with a limited useful life, such as paving, lighting, and landscaping for the parking lot, are debited to Land Improvements because they enhance the land's value and are subject to depreciation over their useful life.

Quiz 7: Operating Assets