Test bank For Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short

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Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short – Test bank 

 

ch03

 

Student: ___________________________________________________________________________

 

  1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

True   False

 

  1. According to the periodicity assumption, to measure and report financial information periodically, we assume the long life of the company can be cut into shorter periods.

True   False

 

  1. The operating cycle is of a similar duration for most companies. True False

 

  1. The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption.

True   False

 

  1. The income statement provides investors with information about a company’s investing activities. True False

 

  1. A Taco Bell restaurant would most likely have a longer operating cycle than Walmart. True False

 

  1. When a growing company finds they need to buy more inventory before cash has been collected from customers, they often use short term credit such as accounts or notes payable to finance the inventory purchases.

 

True   False

 

  1. Revenues are decreases in assets or settlements of liabilities from ongoing operations. True False

 

  1. The net income of a business is computed by subtracting revenues from expenses. True False

 

  1. Losses are decreases in assets or increases in liabilities from peripheral activities. True False

 

  1. Income tax expense will appear on the balance sheet. True False

 

  1. A common source of revenue for a restaurant chain such as Arby’s is franchise royalties and fees. True False

 

  1. A gain causes an increase in income as a result of normal operating activities. True False

 

  1. Cost of sales is usually the largest expense for manufacturing or merchandising companies. True False

 

  1. Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid.

True   False

 

  1. Using the accrual basis of accounting, a company recognizes expenses when they are paid. True False
  1. The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable.

True   False

 

  1. Cash basis accounting is often adequate for very small businesses such as a small retail store or a doctor’s office.

True   False

 

  1. Accrual basis accounting recognizes revenues when cash is received from the customer. True False

 

  1. Expenses incurred, but not yet paid, create a receivable (i.e., an asset) until payment occurs. True False

 

  1. Accrued in the case of expenses means paid in advance, and deferred in the case of expenses means not yet paid.

True   False

 

  1. Deferred in the case of revenues means collected in advance of being earned and accrued in the case of revenues means not yet collected.

True   False

 

  1. Expenses are recognized when an exchange takes place of productive assets, the earnings process is complete or nearly complete, and collection is likely.

True   False

 

  1. The matching process recognizes liabilities when incurred in earning revenue. True False

 

  1. Transactions where cash is received before being earned often result in adjusting entries at the end of the period to record income in the proper period.

True   False

 

  1. The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are completed.

True   False

 

  1. The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

True   False

 

  1. Revenue recognition most commonly occurs at the point of delivery of goods or services to the customer.

True   False

 

  1. A company that ships product to its customers in January 20B but records them as revenue in December 20A has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end.

 

True   False

 

  1. We record insurance as an expense when we pay for a three year policy. True False

 

  1. Shareholders’ equity is increased by investments of the owners and is decreased by net income. True False

 

  1. Revenue collected in advance of being earned represents a liability until it is earned. True False

 

  1. Utilities expense and wages payable are both elements of the income statement. True False
  1. The sale of merchandise for cash usually will increase assets. True False

 

  1. Revenues increase shareholders’ equity, so they are recorded with credits. True False

 

  1. Revenues earned decrease assets and shareholders’ equity. True False

 

  1. Expenses incurred but not paid decrease assets and shareholders’ equity. True False

 

  1. The balance sheet is affected by the sale of merchandise for cash. True False

 

  1. An increase in revenue represents an increase in shareholders’ equity. True False

 

  1. An increase in expenses represents an increase in shareholders’ equity. True False

 

  1. When the board of directors declares a cash dividend to be paid to shareholders, shareholders’ equity increases.

True   False

 

  1. Revenue accounts normally have debit balances because they represent assets received while expense accounts normally have credit balances because they represent assets used.

True   False

 

  1. Usually, the market price of shares is not adversely affected by lower than expected quarterly earnings.

True   False

 

  1. Collection of a customer’s account has an impact on total assets. True False

 

  1. The income statement reports income or loss at a point in time. True False

 

  1. A company can experience difficulty even if it does not report a loss. True False

 

  1. Unadjusted financial statements do not reflect revenues earned or expenses incurred in the accounting period if the receipt or payment of cash occurs in a different period.

True   False

 

  1. Profit differs from cash flow from operations because the revenue recognition and matching processes result in the recognition of revenues and related expenses that are independent of the timing of cash receipts and payments.

 

True   False

 

  1. A high asset turnover signifies efficient management of assets; a low asset turnover ratio signifies less efficient management.

True   False

 

  1. In a well-run business, creditors expect the total asset turnover ratio to fluctuate due to seasonal upswings and downturns.

True   False

  1. The periodicity assumption is the basis for which of the following?
    1. dividing the activities of a business into a series of time periods for accounting and reporting purposes.
    2. the cut-off of revenue recognition only.

 

  1. keeping the company’s transactions separate from the owners’ transactions.

 

  1. the cut-off of expense recognition only.

 

  1. Financial analysts look to the income statement to determine which of the following?
    1. whether the company has generated income from operations

 

  1. if the company has invested too much cash in its inventory

 

  1. whether the company has generated sufficient cash to pay its bills

 

  1. if the company is collecting its receivables on time

 

  1. The operating cycle of a business is best defined as which of the following?
    1. the period of time for which we prepare our financial statements

 

B.the length of time over which our plant and equipment assets are expected to be used by the company in generating revenues

 

Cthe time it takes for a company to purchase and pay for goods or services from suppliers, sell those . goods or services to customers and collect cash from the customers

  1. one year

 

  1. Which of the following businesses would most likely have the shortest operating cycle?
    1. A retail chain such as Walmart

 

  1. A jewellery manufacturer such as Mappins

 

  1. A grocery chain such as Loblaws
  2. A pizza franchise such as Pizza Pizza

 

  1. If total revenues are the same as total expenses, then a company has which of the following?
    1. a net loss.
    2. a net profit.

 

  1. neither a profit nor a loss.

 

  1. negative net income.

 

  1. Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Walmart?
    1. Wage, salary and benefits expense

 

  1. Advertising

 

  1. Cost of Sales
  2. Income tax expense

 

  1. Which of the following is not considered an asset?
    1. Equipment
    2. Dividends

 

  1. Accounts receivable

 

  1. Inventory

 

  1. Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million, net income of $7.5 million, and income before taxes of $10.5 million.
    1. 5%

 

  1. 35%

 

  1. 40%
  2. It cannot be computed with the above information

 

  1. Which of the following activities will most likely result in a reported loss on the income statement?
    1. The sale of inventory to customers
    2. The sale of old equipment

 

  1. The wages and benefits paid to employees

 

  1. Interest expense
  1. Which of the following expenses is usually listed last on the income statement?
    1. Advertising expense
    2. Cost of sales

 

  1. General administrative expenses

 

  1. Income tax expense

 

  1. Why is the cash basis of accounting not appropriate for use by publicly traded corporations?
    1. the OSC (Ontario Securities Commission) does not allow its use

 

B.no assets or liabilities other than cash would ever appear on the balance sheet, giving a distorted picture of financial position

 

Cthe income reported could not be distorted if a large customer paid for goods in advance or we . postponed paying for goods or services until the next accounting period

  1. the cash basis is not permitted for tax purposes

 

  1. The matching principle states that expenses should be matched with revenues because
    1. efforts should be matched with accomplishments.

 

  1. dividends should be matched with shareholder investments.

 

  1. cash payments should be matched with cash receipts.

 

  1. assets should be matched with liabilities.

 

  1. During 20B, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20C. The 20B income statement of the company should report which of the following amounts for service revenues?

 

  1. $80,000.
  2. $120,000.

 

  1. $200,000.

 

  1. $320,000.

 

  1. At the end of December, the owner of an apartment complex realized that the December rent had not been collected from one of the tenants. December 31 was the end of the accounting year; therefore, the owner made the appropriate adjusting entry at that time. When the December rent was collected in January of the following year, the entry made by the apartment owner should include which of the following?

 

  1. debit to Rent revenue receivable.
  2. credit to Rent revenue receivable.

 

  1. debit to Rent revenue collected in advance.

 

  1. credit to Rent revenue.

 

  1. Under the accrual basis of accounting
    1. cash must be received before revenue is recognized.

 

  1. net earnings are calculated by matching cash outflows against cash inflows.

 

C the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are

.  prepared under generally accepted accounting principles.

D events that change a company’s financial statements are recognized in the period they occur rather than

.  in the period in which cash is paid or received.

 

  1. Accrued expenses which must be recorded in adjusting entries represent which of the following?
    1. expenses incurred but not yet paid.

 

  1. expenses incurred but not recorded or paid.

 

  1. expenses paid in advance.

 

  1. expenses paid in advance and not recorded.

 

  1. Revenue is always recognized when which of the following occurs?
    1. expenses are paid.

 

  1. cash is collected.

 

  1. it is earned.
  2. the end of the period arrives.
  1. Which of the following is not an example of the application of the revenue principle?
    1. Recording the sale of merchandise on credit in sales revenue.
    2. Recording rent received in advance in unearned rent revenue.

 

  1. Recording interest collected on unearned rent revenue.

 

D.Reducing the service revenue account for service revenue collected but not yet performed at the end of the accounting period.

 

  1. In applying the revenue principle to a given transaction, the most important moment or period in time is when which of the following happens?
    1. related cash inflows occur.

 

  1. related expenses are incurred.
  2. sales transaction is completed (i.e., ownership passes) or services are rendered.

 

  1. the service contract is signed regarding service to be performed.

 

  1. Which principle holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period?
    1. revenue principle.

 

  1. matching principle.

 

  1. timing principle.

 

  1. liability principle.

 

  1. During the accounting period, Luxor Company had the following data:

 

Sales of products:

 

Expenses:

This is the first year of business.

 

 

 

 

What were the sales revenue and expenses?

  1. Choice A

 

  1. Choice B

 

  1. Choice C

 

  1. Choice D

 

  1. Which of the following is not normally a condition that must be met for revenue to be recognized (recorded) under the revenue principle?
    1. The earnings process is complete or nearly complete

 

  1. The promise to perform an exchange in the future has been made
  2. Collection of receivables from credit sales is reasonably assured

 

  1. All cash must be received in advance of exchanging the goods

 

  1. Which of the following liability accounts is likely to be satisfied with other than payment of cash?
    1. Wages payable

 

  1. Deferred subscriptions revenue

 

  1. Accounts Payable

 

  1. Income taxes payable

 

  1. Tony’s Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?

 

  1. May 31
  2. June 5

 

  1. June 1

 

  1. June 6
  1. A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20. Which of the following statements is false?
    1. Cash will be reported on the statement of cash flows for the month of March

 

  1. Revenue will be recorded and reported on the income statement for April

 

  1. A liability will be reported on the balance sheet at the end of March

 

  1. Revenue will be recorded and reported on the income statement for March

 

  1. Which of the following activities does not violate the revenue recognition principle?
    1. Recording revenue in December 2009 for units manufactured but not yet sold to customers

 

  1. Recording cash received in advance from customers as revenue when the product is not yet shipped

 

  1. Not recording interest earned in 2009 until the cash is received in 2010
  2. Recording cash received in advance from customers as a liability when the product is not yet shipped

 

  1. What would be the effect on December’s income statement of a utility bill received on December 27, 2009 but which will not be paid until January 10, 2010?
    1. No expense will be recognized until the bill is paid in January

 

  1. We would cause an increase in income by recording the expense in December

 

  1. Recording the expense in December when it is incurred will increase expenses

 

  1. Income will be decreased when we pay the bill in January

 

  1. Which group of accounts contains only those that normally have a debit balance?
    1. Accounts receivable; Accumulated depreciation; Fees earned.

 

  1. Bond investment; Cash; Share capital.

 

  1. Cash; Inventory; Prepaid insurance.
  2. Notes receivable; Wages payable; Operating expenses.

 

  1. During 20B, Blue Corporation incurred operating expenses amounting to $100,000, of which $75,000 were paid in cash; the balance will be paid in January 20C. Transaction analysis of operating expenses for 20B, should reflect which of the following?

 

  1. decrease shareholders’ equity, $75,000; decrease assets, $75,000.

 

  1. decrease assets, $100,000; decrease shareholders’ equity, $100,000.

 

  1. decrease assets, $100,000; increase liabilities, $25,000; decrease shareholders’ equity, $100,000.

 

  1. decrease shareholders’ equity, $100,000; decrease assets, $75,000; increase liabilities, $25,000.

 

  1. Which of the following phases of the accounting information processing cycle is performed at the end of the accounting period?
    1. Adjusting entries.
    2. Peer reviews.

 

 

  1. Transaction entries.

 

  1. When a corporation pays a dividend, the
    1. expense account will be increased with a debit.

 

  1. dividends account will be increased with a credit.

 

  1. retained Earnings account will be directly increased with a debit.

 

  1. dividends account will be increased with a debit.

 

  1. If Global Company paid $500 for the telephone bill, this would do which of the following?
    1. decrease assets.

 

  1. increase assets.
  2. decrease expenses.

 

  1. increase liabilities.

 

  1. If Golden Corporation declared a dividend to its shareholders which has not been paid, this would
    1. increase liabilities.

 

  1. increase shareholders’ equity.

 

  1. decrease liabilities.

 

  1. increase assets.
  1. Which of the following items has no effect on retained earnings?
    1. dividends
    2. revenue

 

  1. hiring a new employee

 

  1. expense

 

  1. During 20B, Melon Company incurred operating expenses amounting to $250,000, of which $120,000 were paid in cash; the balance will be paid in January 20C. On the 20B income statement of the company, what amount should be reported for operating expenses?

 

  1. $120,000.

 

  1. $130,000.
  2. $250,000.

 

  1. $370,000.

 

  1. With respect to shareholders’ equity, indicate which one of the following statements is correct.

 

  1. Revenues are recorded as credits to the revenue accounts and expenses are recorded as debits to the expense accounts.

 

  1. Revenues are recorded as debits to the revenue accounts and expenses are recorded as credits to the expense accounts.
  2. Contributions (investments) by owners are recorded as debits to the share capital accounts.
  3. Withdrawals by owners are recorded as credits to the share capital accounts.

 

  1. Hill’s Copy Service performed photocopy services during December, 20A, but had not collected any cash (or other assets) from its customers by the end of the accounting period, December 31, 20A. What effect did performing these services have on the fundamental accounting model?

 

  1. Increased assets and increased liabilities.

 

  1. Increased assets and increased shareholders’ equity.

 

  1. Increased assets and decreased shareholders’ equity.

 

  1. Decreased liabilities and decreased shareholders’ equity.

 

  1. The statement of retained earnings is dependent on the results of
    1. the balance sheet.

 

  1. the income statement.
  2. a company’s share capital.

 

  1. the cash flow statement.

 

  1. On December 31, 20A, Ted Corporation paid $2,000 for next year’s insurance coverage. How should this

 

 

 

 

 

 

 

transaction be recorded by Ted Corporation?

  1. Choice A

 

  1. Choice B
  2. Choice C

 

  1. Choice D

 

  1. On January 1, 20B, Grover Inc., started the year with a $22,000 credit balance in its retained earnings account. During 20B, the company earned net income of $40,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20B, would be which of the following?
    1. $42,000.

 

  1. $52,000.
  2. $57,000.

 

  1. $67,000.
  1. Golden Company had these transactions during the accounting period. Sold merchandise for $600; its cost was $400.

 

Collected $400 from an account receivable. The account was established in the previous year. Used office supplies of $50.

Golden’s net income for the period would be which of the following?

 

  1. $50.

 

  1. $150.
  2. $600.

 

  1. $900.

 

  1. Cash receipts from interest and dividends are classified as
    1. financing activities.

 

  1. investing activities.

 

  1. operating activities.

 

  1. either financing or investing activities.

 

  1. The category that is generally considered to be the best measure of a company’s ability to continue as a going concern is
    1. cash flows from investing activities.

 

  1. cash flows from operating activities.
  2. cash flows from financing activities.

 

  1. usually different from year to year.

 

  1. For a merchandising company, the largest operating cash outflow would result from which of the following?
    1. payments to suppliers from whom we have purchased inventory on credit

 

  1. payment of wages and benefits to employees

 

  1. payment of taxes to the various government entities

 

  1. payment of interest on notes payable

 

  1. Operating cash inflows and outflows are primarily connected to which of the following?
    1. acquisitions and sale of long lived assets

 

  1. the sale of goods and services to customers and costs incurred to operate the business
  2. issuance of shares, bank borrowings and repayments, and dividend payments

 

  1. purchase and sale of long-term investments

 

  1. Asset turnover measures
    1. how often a company replaces its assets.

 

  1. how efficiently a company uses its assets to generate sales.

 

  1. the portion of the assets that have been financed by creditors.

 

  1. the overall rate of return on assets.

 

  1. A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last year’s total assets were $75 million. What is the current year’s asset turnover ratio?

 

  1. 46
  2. 50

 

  1. 55

 

  1. 61

 

  1. If Pizza Pizza reports an asset turnover ratio of 2.34 for 2010 and their competitor Pizza Hut reports 3.79 for their 2010 ratio, it means which of the following?
    1. Pizza Pizza is better able to pay their current obligations with their current assets

 

  1. Pizza Pizza has been more effective in managing the use and level of its assets

 

  1. Pizza Pizza has been less effective in managing the use and level of its assets
  2. Pizza Pizza is less able to pay off their current obligations with their current assets
  1. The Upton Country Store had the following transactions in April:
    1. Sold $25,000 of goods to customers and received $22,000 in cash and the rest are on account
    2. The cost of the inventory sold was $13,000

 

  1. The store purchased $8,000 of inventory and paid for $4,000 in cash and the rest were bought on account
  2. They paid $7,000 in wages for the month

 

  1. Received a $600 bill for utilities for the month that will not be paid until May

 

  1. Received rent for the adjacent store front for the months of April and May in the amount of $3,000 Complete the following statements:

Cash Basis Income Statement

 

 

 

 

 

Revenues:

Accrual Basis

 

Income Statement

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

100.Small Company rendered services to customers amounting to $6,000 during 20A; the related cash was collected as follows: $4,000 in 20A; $2,000 in 20B. During 20A, $3,000 was incurred for wages expense; the related cash payments were made as follows: $1,200 in 20A; in 20B, $1,800. Based only on these

 

 

data, provide the following amounts:

 

 

 

 

 

 

 

 

 

 

101.Explain why a $500 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account.

102.Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?

 

 

 

 

 

 

 

 

 

 

103.Complete the chart below for McRae Corporation by entering check marks in the appropriate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

spaces.

 

 

 

 

 

 

 

 

 

 

104.Indicate the sequential order of the following steps in the accounting information processing cycle by entering numbers to the left. The earliest step will be 1 and the last step will be 6. ______ Analyzing transactions ______ Preparing financial statements ______ Developing a trial balance ______ Collecting original data ______ Posting to the accounts ______ Journalizing transactions

105.Part A. Perform transaction analysis for Cress Company regarding the following transactions for May.

Indicate an increase (+) or decrease (-) to the account in front of the amount.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part B. Determine whether the transactions (A)-(F) above affected cash flows. If so, determine the type of activity as an operating activity, an investing activity, or a financing activity. If cash is not affected use “no effect.” Place a check mark under the appropriate column for each transaction

106.Immediately after the adjusting entries were journalized and posted for the 20B year, the accounts of Way Corporation showed the following

 

 

 

 

 

 

 

 

 

 

 

balances:

 

 

 

 

 

 

 

 

 

 

107.The following accounts for Juliet Enterprises, Inc., are listed in alphabetical order. Enter the number associated with each to identify the accounts that would be used in the journal entry for each transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

given below.

108.On June 1, 20A, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On June 30, the accounting records contained the following

 

 

 

 

 

 

 

 

 

 

 

 

amounts:

 

 

 

 

 

 

 

 

 

 

109.Explain why the net income reported on the income statement is usually not equal to net cash flows from operating activities on the statement of cash flows.

 

 

 

 

 

 

 

 

 

 

110.The following data is from Gauthier Machine

 

 

 

 

 

Shop:

Compute Gauthier Machine Shop’s asset turnover ratio for the two most recent years

  • 20C __________
  • 20B __________

 

 

 

 

 

 

 

 

 

 

111.Match the following statements with the terms given below by entering the appropriate letter in the blank space.

1. Deferred An expense incurred, but not yet recorded nor ____
expense paid.  
2. Accrued An expense paid, but not yet incurred. ____
revenue    
3. Deferred revenue earned, but not yet recorded nor ____
revenue collected.  
4. Accrued A revenue collected, but not yet earned. ____
expense    

 

ch03 Key

 

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  1. (a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000, (g) $1,500, (h) $13,000, (i) $7,000, (j) $600, (k) $5,900

 

 

 

 

100.

 

  1. A debit is recorded to cash because a receipt of cash increases this asset account. A corresponding credit to a liability account (unearned revenue) is appropriate because the customer is “owed” services in the future. If the services are not performed, the customer would get a refund.

 

  1. Managers want their companies to appear successful when financial statements are issued. With revenues as high as possible and expenses as low as possible, net income will be elevated. Managers might be tempted to report revenues even though the earnings process is not complete. Also, if some expenses can be put off until a later time, net income will appear larger. Many times manager bonuses are calculated based on net income. Lower net income could cause an adverse reaction in the market place regarding share prices. This could cause some managers to lose their jobs.

 

 

 

 

 

 

 

 

 

 

103.

 

  1. 2-6-5-1-4-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105.

 

 

 

 

 

106.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107.

 

 

 

 

 

 

 

 

108.

 

  1. Net income on the income statement is an application of the accrual basis of accounting. Revenues are reported when earned and expenses incurred are matched to those earned revenues. The net cash flows from operating activities on the statement of cash flows are reported on the cash basis of accounting. That is, amounts received from customers and amounts paid for expenses are on the statement of cash flows. Therefore, the difference in net income and net cash from operating activities is a timing issue.

 

  1. (a) 2.05, (b) 1.95

 

  1. Accrued expense :: An expense incurred, but not yet recorded nor paid. and  Deferred expense :: An expense paid, but not yet

 

incurred. and Accrued revenue :: revenue earned, but not yet recorded nor collected. and Deferred revenue :: A revenue collected, but not yet earned.

ch03 Summary

 

  Category   # of Questions
Difficulty: Easy 18
Difficulty: Hard 15
Difficulty: Medium 78
Learning Objective: 1 11
Learning Objective: 2 14
Learning Objective: 3 37
Learning Objective: 4 33
Learning Objective: 5 10
Learning Objective: 6 6
Libby – Chapter 03 111

ch09

 

Student: ___________________________________________________________________________

 

  1. Tangible operational assets differ from intangible operational assets in that tangible assets have physical substance whereas intangible assets have no physical substance.

True   False

 

  1. A corporation may choose to list its operational assets in the current asset section of the balance sheet.

True   False

 

  1. Intangible assets have value to a business because they represent rights that are useful to the business. True False

 

  1. Noncurrent assets are those that a business retains for long periods of time for use in the course of normal operations rather than for sale.

True   False

 

  1. One of the most important challenges facing managers is forecasting the level of productive capacity (fixed assets) needed in the long run to meet customer demand.

True   False

 

  1. Because of its large investment in equipment, West Jet closely monitors the unused seats on flights since it may be more profitable to reduce fares to fill more seats thereby using more of the capacity.

True   False

 

  1. The cost allocation method utilized affects the amount of net property, plant, and equipment that is used in the computation of the fixed asset turnover ratio.

True   False

 

  1. Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less accumulated amortization.

True   False

 

  1. When an operational asset is acquired for noncash consideration, the cost of the asset received always is measured as the book value of the noncash consideration given up.

True   False

 

  1. If a second-hand machine is purchased for operational use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its operational use should be excluded from the cost of the asset.

 

True   False

 

  1. Acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus all reasonable and necessary expenditures made to acquire and prepare the asset for its intended use. True False

 

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

 

  1. Behren Company purchased a building and the parcel of land on which the building was located for a total purchase price of $810,000. To record the acquisition, the account, Building, should be debited for $810,000.

 

True   False

 

  1. Because of depreciation, the net carrying amount of an asset declines over time and profit is reduced by the amount of the expense.

True   False

 

  1. When a company acquires land by issuing 10,000 of its common shares currently trading for $20 per share, the company must get an appraisal of the land and recognize a gain if the appraised value is more than the $200,000 value of the shares issued.

 

True   False

 

  1. 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.

 

True   False

 

  1. In conformity with the historical cost principle, cost (less any estimated residual value) is allocated to periodic expense over the periods benefited.

True   False

 

  1. The cost of a major addition to an operational asset should be recorded as an asset and amortized over its useful life.

True   False

 

  1. All tangible operational assets (classified as property, plant, and equipment) are subject to amortization.

True   False

 

  1. 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.

 

True   False

 

  1. In accounting for amortization, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future.

True   False

 

  1. Revenue expenditures on operational assets are accounted for as expenses, while capital expenditures are accounted for as assets.

True   False

 

  1. Extraordinary repairs on operational assets are classified as capital expenditures if they extend the life of the asset.

True   False

 

  1. Ordinary repairs and maintenance of operational assets should be capitalized and amortized over the remaining useful life of the related asset.

True   False

 

  1. Only the actual acquisition cost, the estimated useful life, and the method of amortization of an operational asset are required to compute the amortization expense for a period.

True   False

 

  1. Amortization and depletion conceptually are different because they apply to different kinds of operational assets.

True   False

 

  1. One example of a capital expenditure is ordinary maintenance cost such as an oil change for a company truck.

True   False

 

  1. If an accountant calculates amortization expense on an asset without taking into account the asset’s residual value of $5,000, amortization expense for the periods will be lower than it should have been. True False

 

  1. No clear line distinguishes capital expenditures (assets) from revenue expenditures (expenses); therefore, it requires managers to exercise judgment in making a subjective decision.

True   False

 

  1. When Ford Motor Company expenses a $200 tool used in manufacturing, instead of capitalizing its cost as an asset, it does so because of the conservatism convention.

True   False

 

  1. The estimated useful life is the total years we expect an asset to be used by all potential users. True False

 

  1. The declining-balance method of amortization is based on the assumption that amortization expenses can be regarded as a constant function of time.

True   False

 

  1. The book value of an operational asset initially declines less rapidly under the straight-line method than under the declining-balance method.

True   False

 

  1. When using the declining-balance method of amortization, a declining percentage is applied to a constant book value.

True   False

 

  1. The straight-line amortization method assumes an approximately equal decline in the economic usefulness of the asset each period and provides greater tax benefits early in the useful life of the asset.

 

True   False

 

  1. Accelerated amortization methods are not desirable from the income tax point of view because the asset will produce a greater net income when it is new (the early years) than when it is older (the later years).

 

True   False

 

  1. When either the estimated useful life or estimated residual value (or both) of an operational asset are changed, all prior financial statements are reissued reflecting the correction retroactively.

True   False

 

  1. A change in the estimated useful life of a tangible operational asset may be required due to economic or technological changes.

True   False

 

  1. The declining-balance method of amortization is appropriate for companies that expect their equipment or other assets to become obsolete fairly rapidly.

True   False

 

  1. Regardless of the method of amortization used under generally accepted accounting principles (GAAP), the ending book value will be the same at the end of the asset’s economic life.

True   False

 

  1. The estimate of residual value made at the beginning of the useful life has no relationship to the book value at the end of the asset’s useful life.

True   False

 

  1. Since the Capital Cost Allowance is used by most corporations for tax reporting, the majority of corporations no longer use accelerated methods for financial reporting since there is no tax advantage to be gained by using those methods.

 

True   False

 

  1. While estimated residual value is not used to calculate annual amortization expense under the double declining-balance method, it is used in calculating the asset’s book value at the end of its estimated useful life.

 

True   False

 

  1. The consistency principle requires we use only one method of amortization for all our types of operational assets.

True   False

 

  1. Use of an accelerated amortization method would lead to a higher reported expense and lower income in the first year of an asset’s life in comparison to a non-accelerated method.

True   False

 

  1. It is illegal to maintain two sets of books so we must adopt the same amortization method for both financial reporting and tax reporting.

True   False

 

  1. Companies cannot change the method of amortization adopted for a group of assets. True False

 

  1. Amortization expense, as computed for financial reporting, has a direct effect on a corporation’s cash flow.

True   False

 

  1. Acquiring and disposing of long-lived assets are financing activities on the cash flow statement. True False

 

  1. Depreciation expense is a noncash expense that has no effect on cash. True False

 

  1. The fixed asset turnover ratio is computed by dividing net income by the average fixed assets amount.

True   False

 

  1. When assets are disposed of through sale or abandonment, recognize any gains or losses when the asset’s net carrying amount is not equal to the cash received.

True   False

 

  1. When assets are disposed of through sale or abandonment, record additional depreciation since the last adjustment was made.

True   False

 

  1. The fixed asset turnover ratio measures how much net income is generated by use of operational (fixed) assets.

True   False

 

  1. A company with relatively small amounts of long-lived operational assets but which has a high level of inventory would most likely have a lower total asset turnover but a higher fixed asset turnover ratio. True False

 

  1. Use of straight-line amortization will lead to reporting a higher fixed asset turnover in the early years of an asset’s life in comparison to using an accelerated amortization method.

True   False

 

  1. An expanding company that is acquiring more operational assets most likely will experience a decrease in its asset turnover ratio until higher future sales are generated.

True   False

 

  1. The cost principle should be applied in recording the acquisition of natural resources and intangible assets.

True   False

 

  1. Natural resources should be depleted (usually by the units-of-production method) usually with the amount of the depletion expense capitalized to a revenue account.

True   False

 

  1. Intangibles with definite useful lives are amortized using the straight-line method. True False

 

  1. Most companies do not estimate a residual value for intangible assets since the legal benefits they provide are completely used up at the end of their useful or legal lives, whichever is shorter.

True   False

 

  1. Operational assets do not include which of the following kinds of assets?
    1. Plant and equipment in use.

 

  1. Land held for resale.
  2. Patents in use.

 

  1. Mineral deposits being mined.

 

  1. Wilson, Inc., a manufacturing company, is preparing their annual financial statements. Which of the following accounts would not be grouped under operational assets?

 

  1. Land on which the building is located.

 

 

  1. Finished goods inventory.

 

  1. What are operational assets that have physical substance called?
    1. Long-term investments.

 

  1. Tangible assets.
  2. Intangible assets.

 

  1. Current assets.

 

  1. Tangible assets include which of the following?
    1. Land, buildings, and leaseholds.

 

  1. Land, buildings, and natural resources.

 

  1. Natural resources, buildings, and franchises.

 

  1. Licenses, trademarks, and land.

 

  1. Intangible assets include which of the following?
    1. Natural resources, patents, and trademarks.

 

  1. Accounts receivable, franchises, and trademarks.

 

  1. Copyrights, licenses, and land.
  2. Leaseholds, patents, and copyrights.

 

  1. Depletion is recorded for which of the following?
    1. Uncollectible accounts receivable.
    2. Natural resources.

 

  1. Intangible assets.

 

  1. Land and buildings.

 

  1. Which of the following would be classified as an operational (fixed) asset?
    1. Land purchased and held for sale by a realtor.
    2. Land purchased and held for development by Wal-Mart as a new store site.

 

  1. Land and buildings owned by Toys “R” Us that are store sites closed due to restructuring and consolidating operations.
  2. A Ford Motor Company manufacturing plant used to manufacture the Taurus line in Oakville, Ontario.

 

  1. On March 1, Chapine Company purchased a new stamping machine for $5,000. Chapine paid cash for the machine. Other costs associated with the machine were: transportation costs, $300; sales tax paid, $200; and installation cost, $100. What cost was recorded for the machine?

 

  1. $5,000
  2. $5,200

 

  1. $5,500

 

  1. $5,600

 

  1. To which account should the amount of sales tax paid on the purchase of new machinery should be debited?
    1. A sales tax expense account.

 

  1. A separate deferred charge account.

 

  1. The machinery account.
  2. Accumulated depreciation for machinery.

 

  1. Airbury Company acquired manufacturing equipment at an invoice price of $80,000 and paid $750 to have it delivered to the factory. $400 was spent to repair a door that was damaged while installing the equipment. At what amount should this equipment be recorded on the company’s books?

 

  1. $80,000

 

  1. $80,400

 

  1. $80,750

 

  1. $81,150

 

  1. Martinelli Company recently purchased a truck. The price negotiated with the dealer was $85,000. Martinelli also paid sales tax of $6,000 on the purchase, shipping and preparation costs of $950, and insurance for the first year of operation of $2,000. For the truck, what amount should be debited to the asset account Vehicles?

 

  1. $85,000

 

  1. $85,950

 

  1. $91,000

 

  1. $91,950

 

  1. Belmont Corporation made a basket purchase of land, a building and equipment, paying a total of

 

$1,500,000. Market values for the assets were not available, but the appraised values were $300,000 for the land, $900,000 for the building, and $600,000 for equipment. What amounts should be recorded in the Land, Building, and Equipment accounts, respectively?

 

  1. $300,000, $900,000, and $600,000

 

  1. $1,500,000, $-0-, and $-0-

 

  1. $250,000, $750,000, and $500,000

 

  1. $500,000, $500,000, and $500,000

 

  1. What is the book value of a tangible operating asset?
    1. Acquisition cost.

 

  1. Current estimated market value.
  2. Acquisition cost minus the balance in accumulated amortization.

 

  1. Total amortization that has been recorded on the asset to date.

 

  1. Which of the following costs would be excluded from the acquisition cost of equipment purchased from a supplier?
    1. Cost to install the equipment.

 

  1. The cost of freight paid to get the equipment to our factory.

 

  1. The cost to widen an entrance in the building to bring the equipment into the facilities.

 

  1. A purchases discount offered by the supplier.

 

  1. The Land account would include all of the following costs except
    1. drainage costs.

 

  1. the cost of building a fence.

 

  1. title fees.
  2. the cost of tearing down a building.

 

  1. Which of the following would not be included in the acquisition cost of a building?

 

  1. An apportioned amount of the purchase cost when both the land and building are acquired in a basket purchase.
  2. The cost of putting new windows and doors in the building before it opens for operations.

 

  1. The cost of paving the parking lot and outdoor lighting in the lot.

 

  1. The cost of paying an architect to design the remodelling modifications of the building before the store opens.

 

  1. Peters Clinic Ltd. purchases land for $87,500 cash. The title and legal fees totalled $1,200. The clinic has the land graded for $3,000. What amount does Peters Clinic record as the cost for the land?
    1. $87,500.
    2. $88,700.

 

  1. $90,500.

 

  1. $91,700.

 

  1. When may a company include interest cost as part of the cost of the asset?
    1. When they buy a piece of equipment and finance its acquisition by a bank loan.

 

  1. When they must borrow money to finance the manufacture of their inventory items.

 

C When they are self-constructing a piece of equipment they will use to manufacture their products, but . only during the period of construction.

  1. Interest is never allowed to be capitalized.

 

  1. 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?

 

  1. $2,078,125

 

  1. $2,500,000

 

  1. $2,375,000

 

  1. $4,000,000

 

  1. The apportionment of the acquisition cost of an operational asset to future periods in which the benefits contribute to earning revenue must be which of the following?
    1. Systematic and/or rational.
    2. Systematic and rational.

 

 

 

  1. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?

 

  1. The cost of the building will not include the repainting and recarpeting costs.
  2. The cost of the building will include the cost of replacing the roof.

C The cost of the building is the purchase price of the building, while the additional expenditures are all

.   capitalized as Building Improvements.

  1. The wiring is part of the computer costs, not the building cost.

 

  1. What is the main purpose of recording amortization?
    1. To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue.
    2. To estimate the remaining useful life of the asset.

 

  1. To report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date.
  2. To estimate the current replacement cost of the asset.

 

  1. Residual value is which of the following?
    1. Equal to the acquisition cost of a tangible operational asset.

 

  1. The same as book value of an asset.

 

  1. The amount expected to be recovered when an asset is disposed of at the end of its estimated useful life.
  2. The current value of an asset as of the balance sheet date.

 

  1. In accounting for tangible operational assets, the continuity assumption is important because of which of the following?
    1. It helps a company decide whether to use straight-line depreciation or an accelerated depreciation

method.

 

B.It justifies depreciating the asset over its expected useful life, without anticipating that the business will liquidate in the near future.

  1. It provides justification for including residual values in calculating depreciation.

 

  1. It is consistent with maintaining assets in the accounting records at market value rather than acquisition cost.

 

  1. What is an extraordinary repair to a building?
    1. It is a revenue expenditure and it is debited to an expense account.

 

  1. It is a capital expenditure and it is debited to an asset account.

 

  1. It is a capital expenditure and it is debited to an expense account.

 

  1. It is a revenue expenditure and may be debited to accumulated amortization.

 

  1. 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?

 

  1. The repair was accounted for correctly.

 

  1. The error increased assets and net income in 20B.

 

  1. In the years following 20B, net income will be too high.

 

  1. The error decreased net income in 20B.

 

  1. If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false?
    1. Income for the year of acquisition will be higher.

 

  1. The initial cost basis of the asset will be higher.
  2. Amortization expense will be higher over the asset’s life.

 

  1. It will be expensed in the year in which the expenditure takes place.

 

  1. Which of the following would most likely not be a revenue expenditure?
    1. Replacing carpet in the sales department’s offices.

 

  1. Repairing a leaky roof.

 

  1. Putting a hydraulic lift on our delivery truck making it easier and quicker to deliver appliances.

 

  1. Painting the exterior of our store.

 

  1. In 2010, WD Company reported the cost of their parks, resorts and other related property at $15,869 million and accumulated depreciation on these assets at $6,220 million. The remaining estimated life of these assets is approximately

 

  1. 61%.
  2. 39%.

 

  1. 45%.

 

  1. Cannot be determined from the given information.

 

  1. With respect to depreciation policies, the principle of consistency means:

 

  1. A company should disclose on the financial statements the depreciation method for all its capital assets.
  2. A company should use the same depreciation method from year to year for a given capital asset.

 

  1. A company should use the same depreciation methods as other companies in the same industry.

 

  1. A company should use the same depreciation method in computing depreciation expense on all its assets.

 

  1. On January 1, 20A, Straight, Inc., purchased a machine with a cash price of $9,500. Straight also paid $500 for transportation and installation. The expected useful life of the machine is 5 years and the residual value is $500. Assuming straight-line amortization, the annual amortization expense would be which of the following?

 

  1. $1,800

 

  1. $1,900

 

  1. $2,000

 

  1. $2,100

 

  1. Lowe Company purchased a machine at a cash cost of $25,000 and is amortizing it over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated useful life was changed to

12 years with the residual value unchanged. Amortization expense for year 8 would be which of the following (assuming straight-line depreciation)?

  1. $2,200

 

  1. $2,920

 

  1. $3,100
  2. $8,800

 

  1. A machine, acquired for a cash cost of $6,000, is being amortized on a straight-line basis of $900 per year. The residual value was estimated to be 10% of cost. What is the estimated useful life?
    1. 3 years

 

  1. 4 years

 

  1. 5 years

 

  1. 6 years

 

  1. Bethany Company plans to depreciate a new building using declining-balance amortization with 200 percent acceleration rate. The building cost $400,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year’s amortization expense was recorded properly, what would be the amount of amortization expense for the second year?

 

  1. $15,360

 

  1. $16,000

 

  1. $29,440

 

  1. $32,000

 

  1. Which method of amortization results in periodic amortization expense that fluctuates from one period to the next, not necessarily in a steadily upward or downward direction?
    1. Straight-line.

 

  1. Units-of-production.

 

  1. Declining-balance.

 

  1. Management should select the depreciation method that
    1. is easiest to apply.

 

  1. best measures the asset’s fair value each period over its useful life.

 

  1. best reflects the pattern in which the asset’s future economic benefits are to be consumed.

 

  1. has been used most often in the past by the company.

 

  1. Bubba Inc. purchased an asset on January 1, 20A. Bubba chose the straight-line method to amortize the asset. Had Bubba chosen an accelerated amortization method, which of the following would be false?
    1. Amortization expense would be greater in 20A.

 

  1. The book value of the asset would be less at the end of 20A.

 

  1. Net income would be less in 20A.

 

  1. Amortization expense would be the same each year.

 

  1. On January 1, 20A, Johns Company purchased an asset that cost $10,000 (no estimated residual value, estimated useful life 8 years, straight-line amortization is used). An error was made because the total cost amount was debited to an expense account for 20A and no amortization on it was recorded. Pretax income for 20A was $11,250. What was the correct pretax income for 20A?

 

  1. $12,000

 

  1. $19,200

 

  1. $20,000

 

  1. $20,750

 

100.Trumble Company purchased a machine on January 1, 20B, for $10,000. The company bookkeeper incorrectly used a 6-year life instead of a 5-year life to depreciate the machine. What would be the effect of this error on the 20B financial statements?

  1. Overstatement of assets offset by an understatement of shareholders’ equity.
  2. Overstatement of assets offset by an understatement of retained earnings.

 

  1. Overstatement of assets, income, and shareholders’ equity.

 

  1. Overstatement of assets and an understatement of liabilities.

 

101.Sure Company purchased a machine on January 1, 20A, at a cash cost of $12,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the declining-balance method based on a 150 percent acceleration rate. What will be the amortization expense for the second year?

  1. $900

 

  1. $1,350

 

  1. $1,530

 

  1. $1,800

 

102.Bangor Industries purchased a car for $22,000 on January 1, 20A. The car had an estimated useful life of 80,000 miles and an estimated residual value of $4,000. In the second year of ownership (20B), the car was driven 25,000 miles. Using the units of production method, what was the amount of amortization expense for 20B?

  1. $4,500

 

  1. $5,000

 

  1. $5,625

 

  1. $6,875

 

103.A company decided to use the units of production method to calculate amortization on a car to be driven by the sales manager. The amount of annual amortization will vary with which of the following?

  1. Age of the car.
  2. Balance in accumulated amortization.

 

  1. Number of miles the car is driven.
  2. Amount of maintenance expense incurred on the car.

 

104.A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual value of $10,000. What is the first year for which amortization would be greater under the straight-line method than under the declining-balance method with an acceleration rate of 200%?

  1. The first year.
  2. The second year.

 

  1. The third year.

 

  1. The fourth year.

 

105.Most companies keep separate sets of accounting records for financial reporting and for income tax computations. Which of the following statements is true?

 

  1. They do it even though this practice is illegal and in violation of generally accepted accounting principles.
  2. They do it because the Income Tax Act requires companies to keep separate records for tax purposes.
  3. They do it because financial reporting rules and ITA regulations differ in many ways.

 

  1. They do it to enable a company to do a reconciliation between taxable income and reported net income.

 

106.Belton Corporation uses straight-line amortization and, for assets acquired during the fiscal year, follows

the policy of recording a full month’s amortization for all assets acquired on or before the 15th of the month. No amortization 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 amortization that should be recorded on the car for 20A?

  1. $2,000
  2. $2,333

 

  1. $2,667

 

  1. $4,000

 

107.Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Angstrom’s managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of amortization that Angstrom should record for year 3 under the straight-line method?

  1. $8,250

 

  1. $11,000

 

  1. $15,500

 

  1. $16,500

 

108.Recording amortization expense does which of the following?

  1. It reduces both net income and the amount of cash generated by a company.

 

  1. It does not affect net income or the amount of cash generated by a company.

 

  1. It reduces net income and increases the amount of cash generated by a company.
  2. It reduces net income but does not affect the amount of cash generated by a company.

 

109.How should an expenditure for an ordinary repair to factory equipment be recorded?

  1. As an expense in the period incurred.
  2. Debited to an asset account but not amortized over future years.

 

  1. Debited to an asset account and amortized over the current and future years.

 

  1. Debited to accumulated amortization.

 

110.Helm Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Helm spent $10,000 for an extraordinary repair. Following the repair, Helm estimated that the machine had a remaining useful life

of 8 years, and that the residual value was unchanged. Calculate amortization expense on the machine for the fifth year, assuming that Helm uses the straight-line method.

  1. $5,625
  2. $6,875

 

  1. $7,250

 

  1. $7,500

 

111.How is the matching principle related to the recording of amortization on tangible operational assets?

  1. The matching principle requires a company to use the same amortization.

 

  1. Once a particular amortization method is adopted for a particular asset, the owner must continue to use the same method.

 

C The accountant who calculates the amortization may assume that the company will continue in business

.  as long as the estimated useful life of the asset.

D A portion of the cost of the asset should be allocated as an expense for the periods in which the asset

.  helps the business to earn revenue.

 

112.Which of the following is false?

 

A.The book value at the end of an asset’s useful life will be the same under all the amortization methods allowed under GAAP.

 

B The total amortization in the accumulated amortization account will be the same at the end of the asset’s . useful life under all the methods allowed under GAAP.

  1. The annual amortization expense will differ under the various amortization methods.
  2. The annual amortization expense using the straight-line method increases each year.

 

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

 

AThey have high technology, robotic equipment in their plant that becomes obsolete quickly and declines . in utility to the company more rapidly in the early years of the assets’ lives.

  1. They have a fleet of trucks where repair costs increase annually as the fleet ages.
  2. They expect the asset to lose its market value more rapidly in the first few years of its life.

 

  1. Two of the responses are correct.

 

114.Which of the following is a false statement?

  1. Companies can change the method of amortizing assets from one year to the next.

 

  1. Companies can affect the book value at the end of an asset’s life by choosing one method of

amortization over another.

C Companies can use one method of amortization for some of their operational assets but then use a

.  different method for another group or type of operational assets.

  1. Companies cannot change their estimate of the salvage value of a long-term asset.

 

115.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?

  1. Land $180,000; Warehouse $360,000

 

  1. Land $150,000; Warehouse $300,000
  2. Land $166,667; Warehouse $333,333

 

  1. Land $150,000; Warehouse $350,000

 

116.Barnes Company purchased a machine on April 4, 2009, for $210,000. The machine had an estimated useful life of five years and a salvage value of $30,000. The machine is being depreciated using the double declining balance method. Barnes depreciates its assets from the first day of the month nearest the date of purchase. The asset balance, net of accumulated depreciation, at December 31, 2010, should be:

  1. $75,600

 

  1. $88,200

 

  1. $94,800

 

  1. $105,600

 

117.Which of the following statements is false?

A A company can change the method used for amortizing assets if the change can be justified because it

.  provides a better measure of the company’s income.

BA change in estimate requires the company to recalculate and restate all the prior years’ estimates of

. amortization and adjust the impact on the balance sheet and income statement.

C A change in estimate is frequently necessary because the estimates of useful lives or residual values

.  may change over time because conditions change.

 

D.Either a change in estimate or a change in method can only be justified on the basis it provides a better measure of income.

 

118.Godfrey’s Gadgets sold an obsolete piece of equipment for $4,000. Original cost of the item had been $12,500 and its accumulated depreciation was $7,200. This transaction would result in a:

  1. Loss of $3,200
  2. Loss of $1,300

 

  1. Gain of $4,000

 

  1. Loss of $8,500

 

119.Which of the following statements is false?

AAmortization expense is added to net income in the operating activities section of the statement of cash

. flows because it had no cash effect on net income under the indirect method.

  1. Amortization expense is included in the investing activities section of the cash flow statement.

 

  1. The only cash effect for amortization is the tax savings provided by its deduction to derive taxable income.
  2. Amortization is a non-cash expense that reduces net income but involves no outflow of cash.

 

120.WD Company reports net income in 2010 of $1,300 million and depreciation expense of $851 million. They also report investment in new theme parks, resorts, and other property of $2,134 million for 2010. Which of the following disclosures would appear on their statement of cash flows?

A Amortization of $851 million would be deducted from net income under operating activities and the

.  $2,134 million would be added under investing activities

B Amortization of $851 million would be added to net income under operating activities and the $2,134

.  million would be added under investing activities

C Amortization of $851 million would be added to net income under operating activities and the $2,134

.  million would be deducted under investing activities

DAmortization of $851 million would be deducted from net income under operating activities and the

.  $2,134 million would be deducted under investing activities

 

121.The records of Pam Company showed the following about a machine on January 1, 20H:

Purchased 1/1/20E for $35,000

Accumulated amortization at January 1, 20H, $26,400

 

On July 1, 20H, the machine was sold for $7,000. Amortization for the first six months of 20H was $1,467. The gain or loss on disposal would be which of the following?

  1. $133 loss
  2. $133 gain

 

  1. $1,600 loss

 

  1. $1,600 gain

 

122.If a company sold an operational asset at a price equal to its book value, the selling company would record which of the following?

  1. No gain or loss.
  2. A gain.

 

  1. A loss.
  2. An extraordinary item.

 

123.Kovacic Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was amortized by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. What should Kovacic record?

  1. A gain of $1,000.
  2. A loss of $1,000.

 

  1. Neither a gain nor a loss – the computer was sold at its book value.

 

  1. Neither a gain nor a loss – the gain that occurred in this case would not be recognized.

 

124.In 2001, DAL Co. had a fixed asset turnover of 1.63 compared to ABC Co. of 1.10. What is the most likely cause of DAL Co.’s higher ratio?

  1. DAL Co. is less efficient in generating net sales from its operational assets.
  2. DAL Co. is more efficient at generating net income from employing its operational assets.

 

  1. DAL Co. is able to generate greater sales from its operational assets.
  2. DAL Co. is able to generate less net income from its operational assets.

 

125.In 2009, DAL Co. reported a fixed asset turnover ratio of 1.83 and in 2010, 1.63. What was the most likely cause of this drop?

  1. An increase in sales.
  2. An increase in fixed assets.
  3. A decrease in fixed assets.

 

  1. An increase in net income.

 

126.Which statement is false?

  1. Shortening the estimated useful lives of our assets will increase the fixed asset turnover.

 

  1. Using an accelerated amortization method instead of straight-line will lead to reporting a higher fixed asset turnover.

 

  1. Acquiring more operational assets when a company is growing will lead to a lower fixed asset turnover.

 

  1. Selling off operational assets while maintaining sales will cause fixed asset turnover to decrease.

 

127.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?

  1. $300

 

  1. $450

 

  1. $600

 

  1. $750

 

128.On January 1, 2010, Stacy Company purchased the College Book Store for $350,000. At the date of purchase, it was determined the recorded assets had a total market value of $325,000, comprised of inventory (books), $275,000; fixtures, $30,000; and other assets $20,000. It is estimated that the goodwill (if any) has an economic useful life of 20 years. What is the amount of amortization expense for goodwill for 2010?

  1. $1,250

 

  1. $1,500

 

  1. $16,250

 

  1. $17,500

 

129.Carpenter Corporation purchased a mineral deposit, making payment as follows: Cash $10,000 and 6,000 Carpenter Corporation common shares. On the date of the purchase, the mineral deposit had an appraised value of $75,000; the common shares were quoted on the market at $11 per share. Other acquisition costs amounted to $3,000 cash. What was the cost recorded for the mineral deposit?

  1. $70,000

 

  1. $73,000

 

  1. $75,000

 

  1. $79,000

 

130.The Orser Mining Company acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. The Orser Mining Company would recognize:

  1. An increase in net income of $3,000,000
  2. Amortization expense of $3,000,000

 

  1. Cost of goods sold of $3,000,000

 

  1. Depletion expense of $3,000,000

 

131.Which of the following methods ordinarily would be the most appropriate to determine depletion of natural resources for financial reporting purposes?

  1. Straight-line.
  2. Two hundred percent declining-balance.

 

  1. Specific identification.

 

  1. Units of production.

 

132.What is the term used for matching the cost of an intangible asset with the revenues generated through the use of the asset?

 

  1. Book value.

 

133.Which of the following is true of a failure to record amortization on a patent during the current year?

  1. It would cause net income to be overstated for the year but would have no effect on total assets.
  2. It would cause both net income for the year and total assets to be overstated.

 

  1. It would cause total assets to be overstated but would have no effect on net income for the year.

 

  1. It is allowed under Generally Accepted Accounting Principles.

 

134.Which of the following is true of depletion recorded for natural resources?

  1. It recognizes increases in market value with the passage of time.

 

  1. It matches the cost of resources used up with the revenues that are earned.

 

  1. It is also recorded on buildings and equipment used in extracting the resource.

 

  1. It is determined by a method similar to declining balance depreciation.

 

135.In accounting, which of the following is true of goodwill?

 

  1. It may be recorded whenever a company achieves a level of net income that exceeds the industry average.
  2. It does not need to be amortized because its useful life is indeterminate.
  3. It may be recorded when a company purchases another business.

 

  1. It must be expended in the period it is recorded because benefits from goodwill are difficult to identify.

 

136.On January 1, 20A, Reagan Company purchased a machine. The price quoted by the seller was $10,000 less 2% if paid within 15 days of the invoice date. Paid with cash were: transportation, $300; installation, $600; and sales tax, $200. Give the entry to record the acquisition.

 

137.Rebuild Inc. purchased a plant and the land on which the plant was located for a total of $300,000 cash. The separate market values of the plant and land were not known, so Rebuild hired an independent appraiser who gave the following estimated market values: plant, $220,000; land, $110,000. Complete the entry to record the acquisition (show computation).

 

 

 

 

 

 

 

 

 

 

138.Raco Inc. purchased two used machines together to get a lower total cash price of $90,000. The machines were different, although of the same general type. They were designated as Machines A and B. New machines of the same type could be purchased for: Machine A, $25,000; Machine B, $75,000. Complete

 

 

 

the following entry to record the purchase and show your computations.

 

 

 

 

 

 

 

 

 

 

 

139.Yell Company made a lump sum purchase of an office building, including the land and some fixtures, for cash of $160,000. The tax assessments for the past year reflected the following: Land, $22,500; Building, $58,500; and Fixtures, $9,000. Complete the following entry for the

 

 

 

acquisition:

 

 

 

 

 

 

 

 

 

 

140.In 2010, WD Company reported the cost of its theme parks, resorts, and other assets at $14,037 million

 

and the accumulated depreciation at $5,382 million. In that same year, “Toys 4 U” reported $5,610 million in operating assets and accumulated depreciation on them of $1,398 million.

  1. Estimate the approximate remaining life of the assets for WD Company and “Toys 4

 

U”

  1. Which company appears to have newer assets with longer remaining lives?

 

141.Chamber Company purchased a truck on January 1, 20A, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life 4 years. The company uses straight-line amortization computed monthly. On July 1, 20D, the company sold the truck for $1,700 cash. A. What was the amortization expense amount per month?

  1. What was the amount of accumulated amortization at July 1, 20D?

 

  1. Give the required journal entries on the date of disposal, July 1, 20D. (Assume no 20D amortization had yet been recorded).

 

 

 

 

 

 

 

 

 

 

142.Sutter Company purchased a machine on January 1, 20A, for $16,000. The machine has an estimated useful life of 5 years and a $1,000 residual value. It is now December 31, 20B, and Sutter is in the process of preparing financial statements. Complete the following schedule assuming declining-balance method of depreciation with a 150% acceleration

 

 

 

rate.

 

 

 

 

 

 

 

 

 

 

143.The financial statements of Betty Company contained the following

 

errors:

Respond to each of the following (disregard income taxes):

  1. Income for 20A, was understated or overstated (circle one).

 

  1. Total combined income for the two-year period ended December 31, 20B, was overstated or understated (circle one).

 

144.On January 1, 20A, Stern Company (a calendar year corporation) purchased a heavy duty machine having an invoice price of $13,000 plus transportation and installation costs of $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Assuming the company uses the declining-balance method amortization and a 150% acceleration rate, complete the following schedule (round to the

 

 

 

 

 

nearest dollar).

 

 

 

 

 

 

 

 

 

 

145.Tweed Feed & Seed purchased a new machine on January 1,

 

 

20A:

Accumulated amortization at the end of year 5 (assume straight-line amortization) $12,000

 

It is now the beginning of year 6 and the management re-evaluated the estimates related to the machine. Compute the amortization expense for year 6 under each of the following independent

 

 

 

 

cases:

 

 

 

 

 

 

 

 

 

 

146.Duval Company acquired a machine on January 1, 20A, that cost $2,700 and had an estimated residual value of $200. Complete the following schedule using the three methods of amortization: A.) straight-line, B.) units-of-production, C.) declining-balance at 150% acceleration

 

 

 

 

 

 

rate.

 

147.On January 1, 20B, Walton Corporation made a basket purchase of land, a building, and furniture and fixtures. The total purchase price was $313,000. Walton also paid $3,000 for title fees and $4,000 in legal fees related to the purchase. Appraised values at the time of the purchase were: land $70,000; building, $227,500; and furniture and fixtures, $52,500.

Required:

  1. Make the journal entry to record the purchase of the assets, with cost based on appraised values.

 

  1. The building had an estimated useful life of 20 years and residual value of $30,000. Make the journal entry to record amortization for 20B using the declining-balance method and a 150% acceleration rate.
  2. The furniture and fixtures are expected to have useful lives of 5 years and no residual value. What is the amount of amortization on the furniture and fixtures for 20B, assuming that Walton uses the straight-line method of amortization for such assets.

 

  1. Based on the information in part 3, what is the book value of the furniture and fixtures at the end of 20B?

 

  1. Under generally accepted accounting principles, would Walton be able to use the declining-balance method for the building and the straight-line method for furniture and fixtures? Discuss briefly.

 

 

 

 

 

 

 

 

 

 

148.Macon Assembly Company purchased a machine on January 2, 20C, by paying cash of $85,000. The machine has an estimated useful life of five years (or the production of 200,000 units) and an estimated residual value of $5,000.

Required:

  1. Determine amortization expense (to the nearest dollar) for each year of the machine’s useful life under

 

(a). straight-line amortization; and (b). the declining-balance method with a 200% acceleration rate.

 

  1. What is the book value of the machine after three years with the declining-balance method and a 200% acceleration rate?
  2. What is the book value of the machinery after three years with straight-line amortization.

 

  1. If the machine was used to produce and sell 48,000 units in 20C, what would the amortization expense be under the units of production method?

 

149.On September 7, 20B, Belverd Corporation purchased a building and land at a total acquisition cost of $500,000. An appraiser estimated that 80% of the purchase price should be assigned to the building and the remainder to the land.

Required:

  1. Make the journal entry for the acquisition of the land and building.

 

  1. Make the journal entry to record amortization of the building for 20B. Belverd takes a full month

 

of amortization for assets acquired in the first half of the month and uses the straight-line method. The building has a residual value of $40,000 and an estimated useful life of 20 years.

  1. Based on the information in part 2, what will the book value of the building be at the end of 20C?

 

  1. Why was it important for Belverd to separate the cost of the land and the cost of the building?

 

 

 

 

 

 

 

 

 

 

150.Hilman Company purchased a truck on January 1, 20A, at a cost of $34,000. The company estimated that the truck would have a useful life of 4 years and a residual value of $4,000.

Required:

 

 

 

 

 

 

  1. Complete the following table:

 

  1. Which of the two methods in part 1 would result in: a. Lower net income in 20A? ___________
  2. Lower net income in 20D? ___________

 

 

 

 

 

 

 

 

 

 

151.FAL Corporation purchased a robot to be used in manufacturing. The purchase was made at the beginning of 20A by paying cash of $500,000. The robot has an estimated residual value of $20,000 and an expected useful life of 10 years. At the beginning of 20C, FAL concluded that the total useful life of the robot will be 8 years rather than 10, and that the residual value will be zero. FAL uses the straight-line method for amortization.

Required:

  1. Make the journal entry to record amortization on the robot for 20B.

 

  1. Make the journal entry to record amortization on the robot for 20C, including the effect of the changes in estimates.

 

  1. Describe how a business should account for a change in the estimated useful life and/or residual value of a amortizable asset.

 

152.The following information is available for C Co. and P

 

 

 

 

Co.:

 

  • Compute the fixed asset turnover ratio for the year for both C Co. and P Co. a. C Co. __________
  1. P Co. __________

 

 

 

 

 

 

 

 

 

 

153.Soule Corporation purchased a machine that had an original cost of $60,000 and an estimated residual value of $10,000. The useful life was expected to be 8 years and straight-line amortization is used. At the end of 20E, the book value of the machine was $35,000. Soule sold the machine for $32,000 cash on October 1, 20F.

Required:

 

  1. Prepare the journal entry to record amortization for 20F up to the date of sale. Round the amount to the nearest dollar.
  2. Prepare the journal entry to record the sale of the machine.

 

 

 

 

 

 

 

 

 

 

154.Give the required adjusting entry at December 31, 20F, the end of the annual accounting period for the three items below. If no entry is required, explain why.

 

  1. Web Company acquired a patent that cost $4,260 on January 1, 20F. The patent was registered on January 1, 20A. The legal life of a patent is 17 years from registration. Web expects to use the patent the remaining legal life.

 

  1. Web Company acquired a gravel pit on January 1, 20F, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 20F 4,000 tons were extracted and sold.

 

  1. On January 1, 20F, Web Company acquired a dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line amortization.

 

155.Weaver Mining Company purchased a site containing a mineral deposit in 20C. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Weaver constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value.

Required:

  1. Explain the purpose for recording depletion on natural resources.

 

  1. Calculate Weaver’s amortization rate per ton of ore for this deposit.

 

  1. Make the journal entry to record depletion for the year 20C, when Weaver mined and sold 150,000 tons of ore.

 

  1. Make the journal entry to record amortization on the building for 20C. Weaver calculates amortization on the building using the units of production method based on the amount of ore extracted (150,000 tons in 20C).

 

 

 

 

 

 

 

 

 

 

156.On January 2, 20D, Daintry Company purchased a patent for $380,000 from an inventor who had developed a new manufacturing process. At the time of the purchase, the patent had a remaining legal life of 12 years, but Daintry estimated the useful life to the company to only be 10 years.

Required:

  1. Prepare the journal entry to record Daintry’s purchase of the patent.

 

  1. Prepare the journal entry to record amortization of the patent for 20D, assuming that no contra account is used.

 

  1. At the start of 20G, after amortization had been recorded for three years, Daintry concluded that the total useful life of the patent would be 7 years, rather than 10. Record Daintry’s amortization expense for

 

 

 

 

 

 

 

 

 

 

157.Pied Piper Pies has been in business 8 years with 4 stores in the San Francisco bay area. Their local reputation for making savoury pies such as curried potatoes is well recognized. A national food distributor has offered to purchase the company. Pied Piper has $1.2 million of assets on their books but those assets have $1.5 million in value at fair market value and $.3 million of liabilities. If the distributor offers to buy Pied Piper for $3.5 million and assume the liabilities of Pied Piper, how much will goodwill be based on the offered purchase price?

 

 
9. intangible asset
10. property, plant and equipment 11. patent
12. leasehold
 
6. units-of-production amortization
7. declining-balance amortization
8. residual value
 
4. capital expenditure
5. amortization
 
2. revenue expenditure
3. depletion

158.A company purchased equipment for $800,000 and has depreciated it for the past 5 years when its

original life was estimated to be 10 years with a $200,000 residual value. The equipment’s utility to the

company has declined because they expect it to generate a net cash flow over the remaining years of

$200,000 from its operation. If the asset has been impaired, how much will be recorded as a loss in the

current year?

 

 

 

 

 

 

 

 

 

 

159.Match the assets with the cost allocation method by entering the appropriate letter.

1. Amortization Uranium reserves (being exploited) ____
2. None Building, Tex-Mex Chile Franchise (in use) ____
3. Depletion Long-term investment in shares of Swift Tea, Inc. ____
160.Match each type of asset category with the appropriate allocation method.
1. Amortization Intangible assets, Property, plant, and equipment ____
2. Depletion Natural resources ____

 

161.Write the letter of the definition in the blank before the term.

 

  1. book value Cost minus accumulated amortization of a tangible __ operational asset. __

 

Expenditure for an asset that is debited to an asset __ account. __

 

An exclusive right to make a product or use a __ particular process. __

 

An asset that confers rights upon the owner and __ that lacks physical substance. __

 

Causes the amortization expense for an asset to __ decrease with passage of time. __

 

Estimated amount to be recovered at the end of the __ useful life of an operational asset. __

 

An ordinary repair, for example.   __

__

 

Rights granted to a lessee under the terms of a __ contract. __

 

A heading used on the balance sheet for tangible __ operating assets. __

 

Allocation of the cost of a natural resource to the __ periods in which revenues are earned. __

 

Allocation of the cost of an intangible asset to the __ periods when it is used. __

 

Causes the amortization expense for an asset to __ vary with the use of the asset. __

 

ch09 Key

 

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  1. B

 

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  1. D

 

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  1. D

 

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  1. C

 

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  1. D

 

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  1. C

 

  1. D

 

  1. B

 

  1. C

 

  1. D

 

  1. C

 

  1. B

 

  1. B

 

  1. B

 

  1. A

 

  1. C

 

  1. B

 

  1. B

 

  1. B

 

  1. D

 

  1. C

 

  1. A

 

  1. B

 

  1. B

 

  1. B

 

  1. D

 

  1. C

 

  1. B

 

  1. C

 

  1. D

 

  1. C

 

  1. C

 

  1. C

 

  1. C

 

  1. C

 

  1. C

 

  1. C

 

  1. B

 

  1. D

 

  1. D

 

  1. A

 

  1. B

 

  1. D

 

  1. D

 

  1. D

 

  1. C

 

  1. B

 

  1. B

 

  1. B

 

  1. B

 

  1. B

 

  1. C

 

  1. A

 

  1. A

 

  1. A

 

  1. C

 

  1. B

 

  1. D

 

  1. C

 

  1. A

 

  1. D

 

  1. D

 

  1. D

 

  1. B

 

  1. B

 

  1. B

 

  1. C

 

 

 

 

 

 

 

 

 

 

 

136.

 

 

 

 

 

 

137.

 

 

 

 

 

 

 

138.

 

 

 

 

139.

 

  • “Toys 4 U” appears to have “newer” assets than WD Company because 75% of their assets’ value remains in book value while “Toys 4 U” has 62% in remaining book value.

 

  1. (1) a. 62% ($14,037-$5,382)/$14,037; b. 75% ($5,610-$1,398)/$5,610;

 

 

 

 

 

 

 

 

 

 

141.

 

 

 

 

142.

 

  1. A. Overstated; B. Understated

 

 

 

 

 

 

 

 

 

 

 

 

 

144.

 

CASE C: (26,000 – 12,000 – 3,000) ÷ (7 years – 5 years) = $5,500 Amortization expense

CASE B: (26,000 – 12,000 – 1,000) ÷ (10 years – 5 years) = $2,600 Amortization expense

  1. CASE A: (26,000 – 12,000 – 2,000) ÷ (15 years – 5 years) = $1,200 Amortization expense

 

 

 

 

 

 

 

 

146.

 

  1. Generally accepted accounting principles allow a company to use different amortization methods for different assets or groups of assets. Walton would be able to use the declining-balance for buildings and straight-line amortization for furniture and fixtures.

 

  1. $48,000 – $9,600 = $38,400

 

  1. $48,000 ÷ 5 years = $9,600 $208,000 x 1/20 x 150% = $15,600

 

 

2.

Furniture and Fixtures: ($52,500 x $320,000)/$350,000 = $48,000

Building: ($227,500 x $320,000)/$350,000 = $208,000

Land: ($70,000 x $320,000)/$350,000 = $64,000

Total appraised value: $70,000 + $52,500 + $227,500 = $350,000

Total acquisition costs: $313,000 + $3,000 + $4,000 = $320,000

Computations:

 

 

 

 

  1. 1.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

148.

 

  1. Belverd separated the cost of the building and the cost of the land when it made the original entry to record the acquisition because amortization must be recorded for the building and not for the land. Recording the assets in separate accounts simplifies the process of properly recording amortization.

 

  1. Book value = $400,000 – 24,000 accumulated amortization = $376,000 $18,000/yr x 4 months/12 months = $6,000

 

($400,000 – 40,000)/20 years = $18,000/year Computation:

 

 

2.

 

 

 

  1. 1.

 

 

 

 

 

 

 

 

 

 

  1. Lower net income: (a) 20A Declining-balance 200% acceleration rate; (b) 20D Straight-line 20D Book value $4,250 – $4,000 target book value = $250

 

20C 1/4 x 200% x ($34,000 – $25,500) = $4,250 20B 1/4 x 200% x ($34,000 – $17,000) = $8,500 20A 1/4 x 200% x $34,000 = $17,000 Declining-balance:

 

Straight-line: ($34,000 – 4,000)/4 years = $7,500

 

 

 

 

 

 

150.

 

 

 

 

 

 

 

 

 

  1. A change in estimate of residual value or useful life requires the company to calculate a new annual amortization amount. The change in estimates affects the amount of amortization for current and future years. There is no restatement of financial statements for prior years. $500,000 – $48,000 amortization/year x 2 years = $404,000 remaining amortizable value $404,000/6 year remaining useful life = $67,333 Computations:

 

 

2.

($500,000 – $20,000)/10 years = $48,000/year

Computations:

 

 

  1. 1.

 

  1. (1) a. 5.08 ($18,813/[$3,743 + $3,669]/2); b. 3.29 ($22,348/[$6,261 + $7,318]/2)

 

 

 

 

 

 

$6,250 x 9/12 = $4,688

($60,000 – 10,000)/8 years = $6,250

Computations:

 

153.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

154.

 

 

 

4.

 

 

3.

  1. $820,000/400,000 tons = $2.05/ton

 

  1. 1. The purpose of recording depletion is to match the cost of a natural resource with revenues earned from extracting and selling the resource.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

156.

 

  1. $2.3 million ($3.5 million minus {$1.5 million minus $.3 million})

 

  1. $300,000 (Remaining book value $500,000 minus $200,000 expected cash flow)

 

  1. Depletion :: Uranium reserves (being exploited) and Amortization :: Building, Tex-Mex Chile Franchise (in use) and None :: Long-term investment in shares of Swift Tea, Inc.

 

  1. Amortization :: Intangible assets, Property, plant, and equipment and  Depletion :: Natural resources

 

  1. book value :: Cost minus accumulated amortization of a tangible operational asset. and capital expenditure :: Expenditure for an asset that is debited to an asset account. and patent :: An exclusive right to make a product or use a particular process. and intangible asset :: An asset that confers rights upon the owner and that lacks physical substance. and declining-balance amortization :: Causes the amortization expense for an asset to decrease with passage of time. and residual value :: Estimated amount to be recovered at the end of the useful life of an operational asset. and revenue expenditure :: An ordinary repair, for example. and leasehold :: Rights granted to a lessee under the terms of a contract. and property, plant and equipment :: A heading used on the balance sheet for tangible operating assets. and depletion :: Allocation of the cost of a natural resource to the periods in which revenues are earned. and amortization :: Allocation of the cost of an intangible asset to the periods when it is used. and units-of-production amortization :: Causes the amortization expense for an asset to vary with the use of the asset.

 

ch09 Summary

 

  Category   # of Questions
Difficulty: Easy 36
Difficulty: Hard 17
Difficulty: Medium 108
Learning Objective: 1 24
Learning Objective: 2 41
Learning Objective: 3 72
Learning Objective: 4 2
Learning Objective: 5 6
Learning Objective: 6 20
Learning Objective: 7 5
Learning Objective: Sup A 1
Libby – Chapter 09 161

 

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