Question 1

Which of the following is a capital expenditure?

Accepted Answer

Sales tax paid in conjunction with the purchase of office equipment is a capital expenditure because it is part of the cost of acquiring a long-term asset.

Question 2

The entry to record amortization on a copyright would include:

Accepted Answer

Amortization expense is recognized by debiting the amortization expense account, reflecting the expense associated with the use of the intangible asset (in this case, a copyright) over its useful life. This decreases net income and equity on the income statement.

Question 3

Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?

Accepted Answer

The answer of Armstrong Company recently acquired a new computer...

Question 4

Which of the following would not be considered part of the cost of equipment recently purchased?

Accepted Answer

All three options - sales tax, transportation charges, and installation and setup charges - would be considered part of the cost of equipment recently purchased and would be capitalized as such. Therefore, option D is incorrect as it states that all three are not capitalized costs.

Question 5

Coca-Cola's famous name printed in distinctive typeface is an example of:

Accepted Answer

Coca-Cola's name printed in a distinctive typeface is a trademark, as it is a recognizable symbol of the company's brand and intellectual property.

Question 6

Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?

Accepted Answer

The cost of the land is the purchase price plus the additional costs. Therefore, the cost of the land is:
$256,000 + $15,300 + $2,400 + $1,750 + $8,500 = $284,950.
However, the question asks for the cost of the land, not the total cost including additional fees. Therefore, we subtract the additional fees from the total cost:
$284,950 - $28,950 (additional fees) = $256,000 (cost of the land).
So, the answer is D.

Question 7

Which of the following is not a capital expenditure?

Accepted Answer

Advertising expenditures are considered as operating expenses rather than capital expenditures. Capital expenditures are usually made to acquire, improve, or extend the life of a capital asset such as machinery, building, or land.

Question 8

The term accumulated depreciation, as used in accounting, is best defined as:

Accepted Answer

Accumulated depreciation represents the total amount of depreciation recognized on a plant asset since its acquisition. It is a contra account to the plant asset account and is used to offset the cost of the asset on the balance sheet. Therefore, option A is the correct definition of accumulated depreciation as it reflects the portion of the asset recognized as expense.

Question 9

Which of the following should not be treated as a revenue expenditure?

Accepted Answer

Delivery costs on newly purchased equipment should not be treated as a revenue expenditure because they are part of the capital cost of acquiring an asset, and therefore should be capitalized and depreciated over the useful life of the equipment, not expensed immediately.

Question 10

Which depreciation method is most commonly used among publicly owned corporations?

Accepted Answer

Straight-line is the most commonly used depreciation method among publicly owned corporations as it is easy to calculate, provides a consistent depreciation expense over the asset's useful life, and complies with generally accepted accounting principles (GAAP). While other methods like double-declining balance or units-of-output may be more appropriate for certain types of assets or industries, straight-line is the most widely accepted and understood method.

Question 11

The book value of an asset in the plant and equipment category is:

Accepted Answer

The book value of an asset is the undepreciated cost, meaning the original cost minus any accumulated depreciation.

Question 12

Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation:

Accepted Answer

The purchase price should be apportioned among the Land, Land Improvement, and Building accounts because each asset has a different useful life and depreciation rate. Allocating the entire cost to Plant and Equipment would result in an incorrect allocation of the cost among the assets. Allocating the cost based on appraised value is not appropriate unless the appraised values can be reasonably determined. Allocating the entire cost to land would result in an understatement of net income and an incorrect allocation of the cost.

Question 13

The fair market value of Lewis Company's net identifiable assets is $5,000,000. Martin Corporation purchases Lewis' entire business for $5,800,000. Which of the following statements is not correct?

Accepted Answer

The statement that Martin will record amortization expense over a period not to exceed 40 years is not correct. Goodwill is no longer subject to amortization under U.S. GAAP, but is instead subject to an annual impairment test.

Question 14

Machinery is purchased on May 15, 2009 for $50,000 with a $5,000 salvage value and a five year life. The half year convention is followed. What method of depreciation will give the highest amount of depreciation expense in year 2?

Accepted Answer

Double declining balance method results in higher depreciation expense in the early years of the asset's life. In year 2, this method will result in the highest amount of depreciation expense compared to the other methods listed.

Question 15

An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for $11,600. What amount of gain or loss will be recognized when the asset is sold?

Accepted Answer

The book value of the asset is $18,800 - $6,000 = $12,800. Since the asset was sold for $11,600, there is a loss of $1,200. Therefore, the answer is B, a loss of $1,200.

Question 16

The legal life of most patents is:

Accepted Answer

The legal life of most patents is 20 years from the date of filing. After that, the invention falls into the public domain and can be used by anyone without permission from the original inventor or patent owner.

Question 17

A gain is recognized on the disposal of plant assets when:

Accepted Answer

A gain is recognized on the disposal of plant assets when the sales price is greater than the book value, which means the asset was sold for more than its recorded value on the books. In addition, if the sales price is greater than the residual value, it means the asset was sold for more than the estimated remaining value at the end of its useful life. Therefore, both criteria are met in choice C, making it the correct answer.

Question 18

If the 150% declining balance method is being used and an asset has a useful life of 20 years what is the depreciation rate?

Accepted Answer

The 150% declining balance method is a type of accelerated depreciation that results in a higher depreciation expense in the early years of an asset's life. The depreciation rate for this method is calculated by multiplying the straight-line depreciation rate by 1.5. In this case, the straight-line depreciation rate would be 5% (100% / 20 years). Therefore, the depreciation rate for the 150% declining balance method would be 7.5% (5% x 1.5).

Question 19

When comparing the units-of-output method of depreciation with straight-line depreciation:

Accepted Answer

The units-of-output method calculates depreciation based on the actual usage or production of an asset. Therefore, the depreciation expense in the first year may be greater than, equal to, or less than the straight-line depreciation expense. It will depend on how much the asset is used or produces in that specific year. In contrast, the straight-line method calculates depreciation as a constant percentage of the asset's cost over its useful life, so the depreciation expense will always be the same each year.

Question 20

The application of the matching principle to depreciation of plant and equipment can best be described as:

Accepted Answer

The matching principle requires that expenses be matched with the related revenues. Depreciation is a way of allocating the cost of plant and equipment over their useful life. By offsetting revenue of an accounting period with the portion of the cost of plant and equipment estimated to have been used up during the accounting period, we can match the expense (depreciation) with the related revenue. This is why option C is the best choice.

Quiz 9: Plant and Intangible Assets