Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 7 Plant Assets, Natural Resources, & Intangibles

7.1 Learning Objective 7-1

1) The cost of any plant asset is the sum of all of the costs incurred to bring the asset to its intended use.
Answer: TRUE
Diff: 1
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) The cost of land may include the cost of any back property taxes that the purchaser pays.
Answer: TRUE
Diff: 2
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

3) The cost of leasehold improvements should be depreciated over the life of the improvement.
Answer: FALSE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) The cost of land includes the cost of fencing and paving.

Answer: FALSE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) Land improvements are not subject to depreciation.

Answer: FALSE
Diff: 1
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

6) Costs of land improvements are included in the land account.

Answer: FALSE
Diff: 1
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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7) Any cost to get machinery up and running and ready for its intended use should be part of the cost of
the asset and depreciated.
Answer: TRUE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8) The cost of a building will include the costs to renovate the building for its intended use.
Answer: TRUE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) The cost of assets purchased together in a lump sum should be allocated using the market value of
each of the assets.
Answer: TRUE
Diff: 2
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

10) If a company buys equipment and land in a lump-sum purchase for cash, total assets increase.
Answer: FALSE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) An example of an intangible asset is:

A) land.
B) equipment.
C) coal mine.
D) goodwill.
Answer: D
Diff: 1
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

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12) Long-lived tangible assets that are used in the operation of the business are called:
A) intangible assets.
B) natural resources.
C) plant assets.
D) goodwill.
Answer: C
Diff: 1
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

13) The only plant asset that does not depreciate is:
A) office supplies.
B) furniture.
C) land.
D) patents.
Answer: C
Diff: 1
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

14) An asset with no physical form, but that has special rights to current and expected future benefits is
a(n):
A) intangible asset.
B) natural resource.
C) plant asset.
D) fixed asset.
Answer: A
Diff: 2
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

15) Which of the following is a natural resource?

A) patents
B) timber
C) gas reserves
D) both B and C
Answer: C
Diff: 2
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

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16) All amounts paid to acquire a plant asset and to get it ready for its intended use are referred to as:
A) set up costs.
B) expenditures.
C) maintenance expense.
D) the cost of an asset.
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

17) Company A purchased a used piece of equipment. All of the following costs should be included in the
cost of the equipment EXCEPT for:
A) insurance while in transit.
B) sales tax paid.
C) installation costs.
D) maintenance costs after the equipment is up and running.
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

18) Which of the following should be included in the cost of land?

A) Construction cost of a parking lot
B) Landscaping
C) Real estate brokerage commission
D) Lighting
Answer: C
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

19) Company B purchased some land and is preparing the land for a new building. Company B should
include which of the following in the cost of the land?
A) Cost of driveways
B) Cost of fencing
C) Cost of sprinkler systems for the shrubbery
D) Grading and clearing the land
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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20) ABC Company purchased land with an old building that they plan on demolishing so that they can
construct a new, modern building. The cost of demolishing the building will be part of the cost of the:
A) new building.
B) old building.
C) land.
D) land improvements.
Answer: C
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

21) The cost of installing lights in the parking lot should be recorded as:
A) land.
B) land improvements.
C) building.
D) equipment.
Answer: B
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

22) Although located on the land, they are subject to decay and their cost is depreciated. This is the
definition of:
A) land improvements.
B) plant and equipment.
C) buildings.
D) land.
Answer: A
Diff: 1
LO: 7-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

23) The ________ method is used to allocate the cost of assets acquired in a lump-sum purchase.
A) book-value
B) cost
C) per capita
D) relative-sales-value
Answer: D
Diff: 2
LO: 7-1
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AICPA Functional: Measurement

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24) Which of the following costs should NOT be added to the cost of the machine?
A) The cost of transporting the machine to its setup location
B) The cost of insurance for the machine while it is in-transit
C) The cost of a special platform for the machine
D) The cost of oiling the machine after it has been used for two years
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

25) A company recently purchased a building that it plans to renovate to get ready for use in its
operations. All expenditures to repair and renovate the existing building for its intended use are charged
to:
A) land.
B) land improvements.
C) land improvements expense.
D) building.
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26) A lump-sum purchase of assets:

A) requires the company to record the assets bought as a single asset.
B) requires the company to divided the total cost among the various assets according to their historical
cost.
C) uses the market values of the assets to determine the cost of each individual asset.
D) is also known as the group purchase of assets.
Answer: C
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

27) Which of the following should be included in the cost of equipment?

A) Freight costs to deliver the equipment
B) Installation costs for the equipment
C) Testing costs to get the equipment ready for use
D) All of the above
Answer: D
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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28) Land, buildings and equipment are acquired for a lump sum of $850,000. The market values of the
three assets are, respectively, $250,000, $480,000 and $180,000. What is the cost assigned to the
equipment?
A) $150,132
B) $168,132
C) $180,000
D) $209,590
Answer: B
Explanation: B) 250,000 + 480,000 +180,000 = 910,000 total market value
(180,000/910,000)*850,000 = 168,132
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

29) Land is purchased for $543,710. Back taxes paid by the purchaser were $8,500; total costs to demolish
an existing building and clear the land were $215,000, and costs of paving the parking lot were $106,000.
What is the cost of the land?
A) $543,710
B) $649,710
C) $767,210
D) $873,210
Answer: C
Explanation: C) 543,710 + 8,500 + 215,000 = 767,210
Paving the parking lot is a land improvements
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30) Delivery Company Corporation purchased a delivery van for $32,500. Delivery Company also paid
$1,200 in sales taxes. After driving the van for 5,000 miles, a flat tire needed to be repaired at a cost of
$60.The cost of the van is:
A) $32,500.
B) $32,560.
C) $33,700.
D) $33,760.
Answer: C
Explanation: C) 32,500 + 1,200 = 33,700
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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31) Tanner Company acquired equipment #1, equipment #2, and equipment #3, for $600,000. Equipment
#1 is appraised at $240,000, equipment # 2 is appraised at $310,000 and equipment #3 is appraised for
$110,000.The cost of equipment #2 is:
A) $220,218.
B) $200,000.
C) $281,818.
D) $310,000.
Answer: C
Explanation: C) 310,000/(240,000 + 310,000 + 110,000) * 600,000
(310,000/660,000) * 600,000 = 281,818
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

32) Bixby Corporation purchased land and a building for $800,000. An appraisal indicates that the land's
value is $400,000 and the building's value is $500,000. When recording this transaction Galaxy should
debit:
A) Land for $800,000.
B) Building for $355,555.
C) Land Improvement-Building for $500,000.
D) Building for $444,444.
Answer: D
Explanation: D) Land (400,000/900,000) * 800,000 = 355,556
Building (500,000/900,000) * 800,000 = 444,444
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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33) The Spa Company purchased land, buildings and equipment for $830,000. The land has been
appraised at $300,000, the buildings at $510,000 and the equipment at $90,000. The journal entry to record
this transaction will include a debit to:
A) land for $300,000.
B) land for $470,333.
C) building for $470,333.
D) equipment for $276,667.
Answer: C
Explanation: C) 300,000+500,000+100,000 = 900,000
(300,000/900,000) * 830,000 = 266,667 land
(510,000/900,000) * 830,000 = 470,333 building
(90,000/900,000) * 830,000 = 83,000 equipment
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

34) A machine is purchased for $70,000. The transportation costs were $4,000, installation costs were
$1,000 and taxes on the purchase price were $700. The cost basis of the machine is:
A) $70,000.
B) $74,000.
C) $75,700.
D) none of the above.
Answer: C
Explanation: C) 70,000 + 4,000 + 1,000 + 700 = 75,700
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9
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35) The Meat Company purchased assets for a lump sum price of $1,000,000. The assets purchased had an
appraised value of:
Equipment $560,000
Land $210,000
Building $630,000

Prepare the appropriate journal entry if The Meat Company paid cash for this transaction.
Answer:
Equipment $560,000 / $1,400,000 = 40.00%
Land $210,000 / $1,400,000 = 15.00%
Building $630,000 / $1,400,000 = 45.00%
Total $1,400,000
40.00% × $1,000,000 = $400,000
15.00% × $1,000,000 = $150,000
45.00% × $1,000,000 = $450,000
$1,000,000

Date Account Debit Credit

Equipment 400,000
Land 150,000
Building 450,000
Cash 1,000,000

Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

10
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36) Auto Shop, Inc., incurred the following costs in acquiring plant assets:
a. Purchased land for a $100,000 down payment and signed a $75,000 note payable for the balance.
b. Delinquent property tax of $2,500 and legal fees of $1,000 had to be paid before the land could be
purchased.
c. $12,000 was paid to demolish an unwanted building on the land.
d. Architect fee of $7,000 was paid for the design of a new office building.
e. An office building was constructed at a cost of $500,000.
f. Interest cost on a construction loan for the building totaled $6,000
g. $17,500 was paid for fencing, $12,000 was paid for landscaping, and $55,000 was paid for paving the
parking lot.
Determine the cost of the land, land improvements, and building.
Answer:
Land Land improvements Building
a. $175,000 g. 84,500 d. $7,000
b. 3,500 e. 500,000
c. 12,000 f. 6,000
$190,500 $513,000
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

37) Determine the cost of the land, based upon the following data:

Purchase price of the land $210,000

Survey fees 1,000
Commission 20,000
Payment for demolition of old building on land 30,000
Back property taxes 2,000
Paving parking lot 40,000
Fencing 15,000
Answer: 210,000 + 1,000 + 20,000 + 30,000 + 2,000 = 263,000
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11
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38) Determine the cost of the dump truck, based upon the following data:

Purchase price of the dump truck $130,000

Sales tax 6,500
Delivery charge 1,300
Special wheels for the truck to be installed by the dealer 3,000
Normal repairs to the machine after it has been in use 1,100
Answer: 130,000 + 6,500 + 1,300 + 3,000 = 140,800
Diff: 2
LO: 7-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7.2 Learning Objective 7-2

1) The distinction between a capital expenditure and an expense can be difficult to determine.
Answer: TRUE
Diff: 2
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

2) Many companies will have a policy of expensing all items above a certain dollar amount.
Answer: FALSE
Diff: 2
LO: 7-2
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

3) Costs that extend an asset's useful life should be capitalized.

Answer: TRUE
Diff: 1
LO: 7-2
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

4) An expenditure that increases an asset's capacity or extends its useful life is a(n):
A) capital expenditure.
B) expense.
C) addition.
D) improvement.
Answer: A
Diff: 2
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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5) If an expenditure it capitalized, it is:
A) debited to an expense account.
B) debited to an asset account.
C) credited to an asset account.
D) credited to an expense account.
Answer: B
Diff: 2
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

6) Costs that do not extend the asset's capacity or its useful life, but merely maintain the asset or restore it
to working order are recorded as:
A) capital expenditures.
B) expenses.
C) additions.
D) improvements.
Answer: B
Diff: 1
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7) Which of the following costs associated with a delivery van should be capitalized?
I. The van is repainted.
II. The van's transmission is completely overhauled to extend useful life for two years.
III. The van is modified for a specific use.
A) I and II
B) I and III
C) II and III
D) All of these answers are correct.
Answer: C
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

13
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8) The journal entry to record an addition to an office building would include:
A) credit to depreciation expense.
B) credit to accumulated depreciation.
C) debit to repair expense.
D) debit to office building.
Answer: D
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) Pat's Pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of
the van was originally estimated to be 4 years. The overhaul is expected to extend the useful life of the
van to 10 years. The overhaul is regarded as a(n):
A) revenue expenditure.
B) capital expenditure.
C) equity expenditure.
D) matching expenditure.
Answer: B
Diff: 2
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

10) Capital expenditures are not immediately expensed because these items:
A) do not extend the life of an asset.
B) return an asset to its prior condition.
C) increase the asset's capacity.
D) do all of the above.
Answer: C
Diff: 2
LO: 7-2
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) Company A replaced the tires and painted several of its vehicles during the year. These costs should
be:
A) debited to Equipment.
B) depreciated over the life of the vehicles.
C) credited to Accumulated Depreciation.
D) debited to Repair Expense.
Answer: D
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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12) On June 1, Puff's Trucking Company paid $3,000 to overhaul the engine on a delivery truck to allow it
to be used for two additional years. It also paid $75 for an oil change on the truck. Which of the following
statements is true?
A) The $3,000 is a capital expenditure and the $75 is an expense.
B) The $3,000 is an expense and the $75 is a capital expenditure.
C) Both items are capital expenditures.
D) Both items are expenses.
Answer: A
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

13) Treating a capital expenditure as an immediate expense:

A) overstates assets and overstates owners' equity.
B) overstates expenses and understates net income.
C) understates expenses and overstates owners' equity.
D) understates expenses and understates assets.
Answer: B
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

14) If a company capitalizes a cost that should have been expensed:

A) expenses will be overstated in the year of the error.
B) net income will be understated in the year of the error.
C) assets will be overstated.
D) revenues will be overstated.
Answer: C
Diff: 3
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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15) Which of the following is a correct statement regarding the expensing or capitalization of items?
A) Most companies expense all material costs above a certain amount, even if they are capital items.
B) A conservative policy regarding expensing of items is one that avoids understating assets.
C) The distinction between a capital expenditure and an immediate expense is clear cut.
D) A conservative policy regarding expensing of items is one that avoids overstating profits.
Answer: D
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) WorldCom committed financial statement fraud by:

A) expensing items that should have been capitalized.
B) understating net income.
C) using IFRS to make the company look better.
D) capitalizing items that should have been expensed.
Answer: D
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

17) ABC, Inc. purchased new machinery in order to improve its production process. Classify each of the
following expenditures as a capital expenditure (CE) or an immediate expense (IE):
A) Purchase price
B) Sales tax paid on the purchase price
C) Transportation costs
D) Installation
E) Training of personnel for initial operation of the machinery
F) Wages paid to employees that operate the machinery during production
G) Periodic lubrication after the machinery is placed in service
H) Ordinary repairs to maintain the machinery in working order
I) Major overhaul to extend the useful life
Answer: A) CE, B) CE, C) CE, D) CE, E) CE, F) IE, G) IE, H) IE, I) CE
Diff: 2
LO: 7-2
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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7.3 Learning Objective 7-3

1) The depreciation process follows the matching principle.

Answer: TRUE
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) The Accumulated Depreciation account is an income statement account.

Answer: FALSE
Diff: 1
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

3) Obsolescence may cause an asset's useful life to be longer than the asset's physical life.
Answer: FALSE
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

4) The units-of-production method is an accelerated depreciation method.

Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) Book value equals the cost of the asset less the total accumulated depreciation.
Answer: TRUE
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

6) The normal balance of the accumulated depreciation account is a debit.

Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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7) The straight-line method must be used for computing depreciation for income tax purposes.
Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

8) At the end of its useful life, the book value of an asset must be zero.
Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) In the units-of production method, a fixed amount of depreciation is assigned to each unit of output.
Answer: TRUE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

10) The three depreciation methods allocate different amounts of depreciation to each period, but all
result in the same total amount of depreciation over the life of the asset.
Answer: TRUE
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) Double-declining-balance depreciation computes total depreciation by multiplying the asset's cost by
two times the straight-line rate.
Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

12) The use of the straight-line method of computing depreciation increases a company's tax liability,
thereby increasing the company's cash flow.
Answer: FALSE
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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13) Under the double-declining balance method of depreciation, residual value is initially ignored.
Answer: TRUE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

14) It is illegal to use one method of depreciation for financial purposes and another method for tax
purposes.
Answer: FALSE
Diff: 1
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

15) Since depreciation is an estimate, depreciation must be computed for the entire year, regardless of
when the asset was purchased.
Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) Changes in accounting estimates are not allowed under the consistency principle.
Answer: FALSE
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

17) Depreciation expense decreases both assets and equity.

Answer: TRUE
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

18) The book value of an asset cannot be less than its residual value.
Answer: TRUE
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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19) The process of allocating the cost of a plant asset to expense over the period in which the asset is used
is called:
A) amortization.
B) allocation.
C) depreciation.
D) disclosure.
Answer: C
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

20) The process of depreciating an asset over its useful life is an application of the ________ principle.
A) full disclosure
B) revenue recognition
C) historical cost
D) matching
Answer: D
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

21) Depreciation expense:

A) allocates a portion of the cost of an asset against the revenue the asset helps earn each period.
B) is not required for plant assets according to GAAP.
C) is reported on the balance sheet.
D) is required for land according to GAAP.
Answer: A
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

22) The depreciation process attempts to match the:

A) salvage value of the asset and the future market value of the asset.
B) book value and the current market value of the asset.
C) cost of the asset and the cash required to replace the asset.
D) revenues earned by the asset and the cost of the asset.
Answer: D
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

20
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
23) An asset is ________ when another asset can do the job more efficiently.
A) fully depreciated
B) old
C) physically worn
D) obsolete
Answer: D
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

24) Double-declining balance depreciation:

A) is an accelerated method of depreciation.
B) ignores the residual value in computing depreciation, except during the last year.
C) is based on book value.
D) is all of the above.
Answer: D
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

25) Which of the following depreciation methods best applies to those assets that generate greater
revenue earlier in their useful lives?
A) Straight-line method
B) Depletion method
C) Double-declining-balance method
D) Units-of-production method
Answer: C
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26) All of the following are needed to measure depreciation, EXCEPT for:
A) cost.
B) market value.
C) estimated useful life.
D) estimated residual value.
Answer: B
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

21
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
27) A depreciation method in which an equal amount of depreciation expense is assigned to each year of
the asset's use is the:
A) units-of-production method.
B) straight-line method.
C) accelerated depreciation method.
D) estimated residual value method.
Answer: B
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

28) Depreciation:
A) is a process of valuation.
B) sets aside cash to replace assets as they wear out.
C) can be caused by physical wear and tear.
D) decreases the assets and the expenses of a company.
Answer: C
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

29) When determining the estimated useful life of an asset, the useful life:
A) must be expressed in years.
B) must be the same for all companies.
C) is determined by GAAP.
D) is based on a company's experience and trade publications.
Answer: D
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30) When computing depreciation for a plant asset, which of the following must be estimated?
A) Useful life and residual value
B) Residual value and current market value
C) Useful life and current market value
D) Useful life, current market value, and residual value
Answer: A
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

22
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
31) The expected cash value of a plant asset at the end of its useful life is known as:
A) scrap value.
B) salvage value.
C) residual value.
D) any of the above.
Answer: D
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

32) When computing depreciation:

A) the depreciable cost is the cost of the asset minus its accumulated depreciation.
B) all assets must have a residual value.
C) the depreciable cost is the cost of the asset less accumulated depreciation.
D) the estimated residual value is not depreciated.
Answer: D
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

33) The book value of an asset is defined as:

A) cost minus accumulated depreciation.
B) cost minus salvage value.
C) current sales value minus historical cost.
D) cost minus annual maintenance expense.
Answer: A
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

34) Cost minus residual value divided by useful life in years is the:
A) straight-line method.
B) units-of-production method.
C) double-declining balance method.
D) modified accelerated cost recovery method.
Answer: A
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

23
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
35) When compared to the other methods of depreciation, the double-declining-balance method of
depreciation gives depreciation expense that is:
A) less in the earlier periods.
B) more in the earlier periods.
C) approximately the same in earlier periods as with other methods.
D) the same from year to year.
Answer: B
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

36) At the end of an asset's useful life, the balance in accumulated depreciation will be the same as the:
A) tax liability.
B) book value.
C) salvage value.
D) cumulative depreciation expense.
Answer: D
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

37) The journal entry to record depreciation expense is:

A) debit depreciation expense, credit the asset account.
B) debit accumulated depreciation, credit the asset account.
C) debit the asset account, credit accumulated depreciation.
D) debit depreciation expense, credit accumulated depreciation.
Answer: D
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

38) As an asset is used in operations:

A) accumulated depreciation increases and the book value of the asset increases.
B) accumulated depreciation increases and the book value of the asset decreases.
C) accumulated depreciation remains the same and the book value of the asset decreases.
D) accumulated depreciation increases and the book value of the asset remains the same.
Answer: B
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

24
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
39) When computing depreciation using the units-of-production method:
A) a variable amount of depreciation is assigned to each unit of output.
B) the per-unit depreciation expense is multiplied by the number of units produced during the period.
C) the depreciation expense depends directly on time.
D) residual value is ignored.
Answer: B
Diff: 2
LO: 7-3
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

40) Which of the following is an accurate statement about book and tax depreciation methods?
A) Straight-line depreciation is the most popular method for income-tax purposes.
B) The IRS has their own set of rules to compute depreciation for income tax purposes.
C) The Modified Accelerated Cost Recovery System can be used for both book and tax purposes.
D) If accelerated depreciation is used for tax purposes, a company will pay more in income taxes.
Answer: B
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

41) A revision of an estimate which will extend the asset's useful life is called a change in accounting:
A) theory.
B) policy.
C) procedure.
D) estimate.
Answer: D
Diff: 1
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

42) When an asset is fully depreciated:

A) the total depreciation is equal to the accumulated depreciation, and the asset has reached the end of its
actual useful life.
B) the book value is equal to the salvage value, and the asset has reached the end of its estimated useful
life.
C) the depreciable cost is equal to the salvage value, and the asset is of no further use to the company.
D) the book value is zero, and the asset has no market value.
Answer: B
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

25
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
43) Depreciation for tax purposes:
A) must be the same as depreciation for financial statement purposes.
B) is based on the objective of providing useful information for making economic decisions.
C) can help conserve cash for the business.
D) generally will be lower than depreciation for financial statement purposes.
Answer: C
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

44) Under the modified accelerated cost recovery system, all of the following are true EXCEPT that:
A) assets are grouped into classes.
B) most real estate is depreciated using the straight-line method.
C) for a given class, the depreciation is computed using a declining-balance method.
D) MACRS can only be used for financial reporting purposes.
Answer: D
Diff: 2
LO: 7-3
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

45) When computing depreciation for a partial year:

A) many companies record a full month's depreciation if the asset was purchased after the 15th of the
month.
B) companies are required to compute depreciation on a daily basis.
C) the straight-line method automatically adjusts for partial periods.
D) the units-of-production method automatically adjusts for partial periods.
Answer: D
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
46) On January 2, 2011, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. If KJ Corporation uses the
units of production method of depreciation, what will be the debit to Depreciation Expense for the year
ended December 31, 2012, assuming that during this period, the asset was used 8,250 hours?
A) $48,000
B) $49,500
C) $51,500
D) $53,625
Answer: B
Explanation: B) (cost-residual value)/total units to be produced = depreciation per unit
(260,000-20,000)/40,000 = 6 depreciation per hour
8,250 hours*6 per hour = 49,500 total deprecation for the year
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

47) On January 2, 2011, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the balance in
Accumulated Depreciation on December 31, 2012, if KJ Corporation uses the straight-line method of
depreciation?
A) $96,000
B) $49,500
C) $51,500
D) $53,625
Answer: A
Explanation: A)
Straight line
depreciation = (Cost-salvage value)/estimated useful life (260,000 - 20000)/5=
48,000 depreciation
expense per year
Accumulated
depreciation = 48,000 per year * 2 years= 96,000

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

27
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
48) On January 2, 2011, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the book value of
the asset on December 31, 2012, if KJ Corporation uses the straight-line method of depreciation?
A) $80,000
B) $96,000
C) $104,000
D) $164,000
Answer: D
Explanation: D)
Straight line
depreciation = (Cost-salvage value)/estimated useful life (260,000 - 20000)/5 =
48,000 depreciation
expense per year
Accumulated
depreciation = 48,000 per year * 2 years= 96,000
Book value = Cost-accumulated depreciation 260,000 - 96,000 = 164,000

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

49) On January 2, 2011, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the balance in
Accumulated Depreciation on December 31, 2011, if KJ Corporation uses the double-declining-balance
method of depreciation?
A) $62,400
B) $88,000
C) $96,000
D) $104,000
Answer: D
Explanation: D)
Double declining
balance = Rate * book value
Rate = double straight-
line rate (1/5 * 2) = 40%
Depreciation year 1 R * BV 40% * 260,000 = 104,000

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

28
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
50) On January 2, 2011, KJ Corporation acquired equipment for $260,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the balance in
Accumulated Depreciation on December 31, 2012, if KJ Corporation uses the double-declining-balance
method of depreciation?
A) $104,000
B) $38,400
C) $166,400
D) $208,000
Answer: C
Explanation: C)
Double declining
balance = Rate * book value
Rate = double straight-
line rate (1/5 * 2) = 40%
Depreciation year 1 R * BV 40% * 260,000 = 104,000
Depreciation year 2 R * BV
.40 * (260,000 - 104,000) 62,400
Total accumulated
depreciation 166,400

Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

51) On January 4, 2012, Peggy's Cafe acquired equipment for $180,000. The estimated life of the
equipment is 4 years or 42,500 hours. The estimated residual value is $10,000. What is the depreciation for
2012, if Peggy's Cafe uses the asset 14,100 hours and uses the units-of-production method of
depreciation?
A) $12,056
B) $56,400
C) $59,717
D) $170,000
Answer: B
Explanation: B)
(180,000 - 10,000)/42,500
Units of production (Cost-salvage value)/total hours = 4.00 depreciation
depreciation = units to be produced per hour
Total hours used * 4.00 per
Depreciation for year= hour= 14,100 * 4.00 = 56,400

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
29
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
52) On January 4, 2012, Peggy's Cafe acquired equipment for $180,000. The estimated life of the
equipment is 4 years or 42,500 hours. The estimated residual value is $10,000. What is the balance in the
accumulated depreciation account at December 31, 2013 if the straight-line method is used?
A) $42,500
B) $45,000
C) $85,000
D) $90,000
Answer: C
Explanation: C)
straight-line (Cost-salvage value)/useful (180,000 - 10,000)/4 = 42,500
depreciation = life in years depreciation per year
Depreciation for 2012= 42,500
Depreciation for 2013= 42,500
Accumulated Accumulated depreciation
depreciation = at December 31, 2013 85,000

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

53) On January 2, 2012, Hockey Skates, Inc., acquired equipment for $230,000. The estimated life of the
equipment is 5 years. The estimated residual value is $30,000. What is the book value of the equipment on
December 31, 2012, if Hockey Skates uses the double-declining-balance method of depreciation?
A) $92,000
B) $138,000
C) $150,000
D) $184,000
Answer: B
Explanation: B)
Double declining
balance = Rate * book value
Rate = double straight-
line rate (1/5 * 2)=40%
Depreciation year 2012 R * BV 40% * 230,000 = 92,000

Cost-accumulated
Book value depreciation 230,000 - 92,000 = 138,000

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
54) On January 2, 2012, Mummy Corporation acquired equipment for $45,000. The estimated life of the
equipment is 4 years. The estimated residual value is $5,000. What is the amount of depreciation expense
for 2012, if the company uses the double-declining-balance method of depreciation?
A) $10,000
B) $11,250
C) $20,500
D) $22,500
Answer: D
Explanation: D)
Double declining
balance = Rate * book value
Rate= double straight-
line rate (1/4*2) = 50%
Depreciation year 1 R * BV 50%*45,000 = 22,500

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

55) On January 2, 2012, Heidi's Pet Boutique purchased a $5,000 television for the dog sitting area. It had
an estimated useful life of 5 years and a residual value of $1,000. What is the amount of depreciation
expense for 2013, the second year of the asset's life using the double declining-balance method?
A) $800
B) $1,200
C) $1,360
D) $2,000
Answer: B
Explanation: B)
Double declining
balance = Rate * book value
Rate= double straight-
line rate (1/5 * 2) = 40%
Depreciation year 1 R * BV 40%*5,000 = 2,000
Depreciation year 2 R * BV 40% * (5,000 - 2,000) = 1,200

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

31
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
56) Ben's Burgers paid $300,000 for a piece of equipment. Ben uses straight-line depreciation. Currently
the equipment has a balance in the accumulated depreciation account of $100,000. If the asset has no
residual value and an estimated life of 6 years, for how many years has the asset been depreciated?
A) 1
B) 2
C) 4
D) 6
Answer: B
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

57) Income before depreciation and taxes amounts to $167,200. Using straight-line depreciation, the
current year's depreciation expense will be $31,200. Using double-declining-balance depreciation, the
current year's depreciation expense will be $41,200. Assuming a tax rate of 30%, what is the net cash
saved in income taxes by using double-declining-balance depreciation over straight-line depreciation?
A) $3,000
B) $4,000
C) $7,000
D) $11,100
Answer: A
Explanation: A) Difference in depreciation = 41,200 - 31,200=10,000
10,000 additional depreciation expense * .30 tax rate = 3,000 tax savings
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

58) Best Model Company reported $61,000 in depreciation expense for the current year using the double-
declining-balance method. The company estimates that it saved net cash of $12,000 in income taxes by
using the double-declining-balance instead of the straight-line method. The company has a 30% tax rate.
What would depreciation expense have been using the straight-line method?
A) $43,857
B) $40,000
C) $21,000
D) $7,200
Answer: C
Explanation: C) Income tax savings/tax rate = 12,000/.30= 40,000 difference in depreciation expense
61,000 double declining -40,000 difference = 21,000 straight-line depreciation
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

32
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
59) Buggy Company purchased equipment on June 3, 2012, for $100,000. The residual value is zero and
the estimated life is 10 years. Compute depreciation expense for the year ending December 31, 2012, if the
company uses the straight-line method of depreciation.
A) $5,000
B) $5,833
C) $7,500
D) $10,000
Answer: B
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

60) Buggy Company purchased equipment on June 3, 2012, for $100,000. The residual value is zero and
the estimated life is 10 years or 42,550 hours. Compute depreciation expense for the year ending
December 31, 2012, if the company uses the units-of-production method of depreciation and uses the
equipment for 8,600 hours.
A) $3,210
B) $5,628
C) $11,628
D) $20,210
Answer: D
Explanation: D) (100,000 - 0)/42,550 = 2.35 per hour
8,600 ∗ 2.35 = 20,210
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

61) Buggy Company purchased equipment on June 3, 2012, for $100,000. The residual value is zero and
the estimated life is 10 years. Compute depreciation expense for the year ending December 31, 2012, if the
company uses the double-declining method of depreciation.
A) $10,000
B) $11,667
C) $13,337
D) $20,000
Answer: B
Explanation: B) Rate = (1/10*2)=20%
Rate * BV = depreciation
.20 * 100,000=20,000 * 7/12 = 11,667 depreciation 2012
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

33
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
62) Bay Back Company acquired equipment on July 1, 2011, for $210,000. The residual value is $35,000
and the estimated life is 5 years or 40,000 hours. Compute the balance in accumulated depreciation as of
December 31, 2013, if Bay Back Company uses the double-declining-balance method of depreciation.
A) $68,040
B) $134,400
C) $141,960
D) $149,520
Answer: D
Explanation: D) Rate =(1/5*2)=40%
Year 2011 = 40% * 210,000 = 84,000 * 6/12 = 42,000
Year 2012 = 40% * (210,000 - 42,000) = 67,200
Year 2013 = 40% * (210,000 - 42,000 - 67,200) = 40,320
Total depreciation = 42,000 + 67,200 + 40,320 = 149,520
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

63) Lodging Corporation purchased equipment on January 1, 2010 for $180,000. The equipment had an
estimated useful life of 5 years and an estimated salvage value of $30,000. After using the equipment for 2
years, the company determined that the equipment could be used for an additional 6 years and have a
salvage value of $9,000. Assuming Lodging Corporation uses straight-line depreciation, compute
depreciation expense for the year ending December 31, 2012.
A) $15,000
B) $16,000
C) $18,500
D) $23,500
Answer: C
Explanation: C) (180,000 - 30,000)/5 = 30,000 depreciation per year
30,000*2 years = 60,000 total depreciation after 2 years
(180,000 - 60,000 - 9,000)/6 = 18,500
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

34
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
64) Mouse Corporation acquired a building on January 1, 2010, for $500,000. The building had an
estimated useful life of 20 years and an estimated salvage value of $25,000. On January 1, 2013, Mouse
Corporation determined that the building could only be used for another 10 years and there would be no
salvage value. Compute depreciation expense for the year ending December 31, 2013, if Mouse
Corporation uses straight-line depreciation.
A) $16,667
B) $40,000
C) $42,875
D) $50,000
Answer: C
Explanation: C) (500,000 - 25,000)/20 = 23,750 per year
23,750 * 3 years = 71,250 total depreciation for 3 years
(500,000 - 71,250)/10 = 42,875
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

65) Jackson Corporation acquired equipment on January 1, 2010, for $320,000. The equipment had an
estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2013, Jackson
Corporation revised the total useful life of the equipment to 6 years and the estimated salvage value to be
$20,000. Using the straight-line method of depreciation, what is the book value as of December 31, 2013?
A) $146,000
B) $154,333
C) $159,000
D) $161,000
Answer: D
Explanation: D) (320,000 - 25,000)/10 = 29,500 per year
29,500*3 years = 88,500 total depreciation for 3 years
(320,000 - 88,500 - 20,000)/3=70,500 depreciation for 2013
Accumulated depreciation = 88,500+70,500 = 159,000
C - AD = BV
320,000 - 159,000 = 161,000
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

35
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
66) The Fall River Corpor7ation bought a plant asset on January 1, 2010, at a cost of $45,000. Estimated
residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line
depreciation. On January 1, 2013, Fall River's management revises the total estimated life to be 10 years,
with estimated residual value of $2,000. The balance in accumulated depreciation on December 31, 2013,
is:
A) $10,000.
B) $16,358.
C) $19,000.
D) $21,429.
Answer: C
Explanation: C) (45,000 - 5,000)/8 = 5,000 per year
5,000 * 3 years = 15,000 total depreciation for 3 years
(45,000 - 15,000 - 2,000)/7 = 4000 depreciation for 2013
Accumulated depreciation = 15,000 + 4,000 = 19000
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

36
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
67) Wacky Motors purchased a machine that will help diagnose problems with engines. The machine cost
$300,000 on January 3, 2012 and had a residual value of $20,000, with a useful life of 7 years. Calculate the
depreciation expense and book value as of December 31, 2012 under both the straight-line and DDB
methods.
Answer:
Straight-line

Cost - Residual Value

= Annual depreciation
Useful Life

300,000 - 20,000
=
7

280,000
=
7

40,000 =

Cost - Accumulated depreciation = Book Value

300,000 - 40,000 = 260,000

Double-declining balance

1
depreciation rate = ×2
Useful Life
1
= ×2
7
= 14.28 × 2 = 28.57%

Annual depreciation for 2012 = Cost × DDB rate

= 300,000 × 28.57
= 85,710

Cost - Accumulated depreciation = Book Value

300,000 - 85,710 = 214,290

Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

37
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
68) Marsha Cook owns Marsha's Pie Co. On January 2, 2010, the company purchased an oven for
$325,000. The manufacturer of the oven estimates that the oven will last 12 years or bake 600,000 pies,
with a residual value of $25,000.
The following is a schedule of the pies that the company will produce:

2010 47,500 2014 40,000 2018 41,000

2011 62,500 2015 32,000 2019 40,000
2012 58,500 2016 72,000 2020 60,000
2013 41,500 2017 60,000 2021 45,000

Calculate the accumulated depreciation and book value as of December 31, 2016, using the units of
production method.
Answer:
Cost - Residual Value
Depreciation per unit =
Useful Life

$325,000 - $25,000
=
600,000 units

$300,000
= = $0.50 per unit
600,000 units

Total units used from 2010 through 2016 =

2010 47,500
2011 62,500
2012 58,500
2013 41,500
2014 40,000
2015 32,000
2016 72,000
354,000

Accumulated depreciation for 2010 through 2016 = 354,000 × $0.50

= $177,000

Book value at the end of 2016 = Cost - Accumulated depreciation

= $325,000 - $177,000
= $148,000
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

38
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
69) Credit Company purchased a delivery van on January 1, 2011, for $45,000. The equipment was
expected to remain in service 4 years (or 100,000 miles) and has a residual value of $5,000. The van
traveled 30,000 miles the first year, 25,000 miles the second year, and 22,500 miles in the third and fourth
year.
Prepare a schedule of depreciation expense per year for the four years of the asset's life using the (a)
straight-line method (b) units-of-production method and (c) double declining balance method.
Answer:
(a) Straight-line method:
($45,000 - 5,000)/4 = $10,000 for year 1, 2, 3, 4

(b) Units of production method:

($45,000 - 5,000)/100,000 miles = .40 per mile
Year 1 = .40 * 30,000 = $12,000
Year 2 = .40 * 25,000 = $10,000
Year 3 = .40 * 22,500 = $9,000
Year 4 = .40 * 22,500 = $9,000

(c) Double declining method:

(100% / 4 years * 2) = 50% DDB rate
Year 1 = $45,000 *.50 = $22,500
Year 2 = ($45,000 - 22,500) * .50 = $11,250
Year 3 = ($45,000 - 22,500 — 11,250) * .50 = $5,625
Year 4 = Plug amount for remaining book value to depreciate. ($45,000 cost - 5000 residual) - 22,500 -
11,250 - 5,625 = $625
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

39
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
70) A machine costing $40,000 was purchased on January 1, 2012. It has an estimated useful life of 5 years
and a salvage value of $5,000.
Required:
1. Calculate depreciation expense for 2012 and 2013 using (a) straight-line rate, and (b) double-declining
balance method.

2. Determine the book value of the machine at the end of 2013 under the (a) straight-line method and (b)
double-declining balance method.
Answer: 1.
a. Straight-line

Cost - Residual Value

= Annual depreciation
Useful Life

40,000 - 5,000
=
5

35,000
=
5

7,000 =

Depreciation 2012 7,000

Depreciation 2013 7,000

b. Double-declining balance

1
depreciation rate = ×2
Useful Life
1
= ×2
5
= 0.20 × 2 = 0.4 or 40%

Depreciation for 2012 = Cost × DDB rate

= 40,000 × 40%

Depreciation for 2012 = 16,000

2013 Cost - Accumulated depreciation = Book Value

40,000 - 16,000 = 24,000 Book Value
.40 * 24,000 =
Depreciation for 2013 = 9,600

40
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
2. (a)
Book value = cost - accumulated depreciation
Book value = 40,000 - (7,000 + 7,000) = 26,000

(b)
Book value = cost - accumulated depreciation
Book value = 40,000 - (16,000 + 9,600) = 14,400
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

71) On January 3, 2011, Hank's Excavating Company purchased a bulldozer for $100,000. In addition to
the basic purchase price, the company paid sales tax of $2,000 and freight charges of $6,000. The bulldozer
will be used for 36,000 machine hours. Hank estimates that the bulldozer will have a useful life of 5 years
and no residual value.
Required:
1. Compute the cost of the asset
2. Compute the depreciation expense for 2011 and 2012 using the:
a. straight-line method
b. units-of-production method assuming the bulldozer was used 5,000 machine hours in 2011 and
20,000 machine hours in 2012.
c. Double-declining balance method.
Answer:
1: cost = 100,000 + 2,000 + 6,000 = 108,000
2:
(a) Straight-line method:
(108,000 - 0)/5 = $21,600 for year 2011 and 2012

(b) Units-of-production method:

(108,000 - 0)/36,000 machine hours = 3.00 per mile
Year 2011 = 3.00 * 5,000 = $15,000
Year 2012 = 3.00 * 20,000 = $60,000

(c) Double-declining method:

(1 / 5 years * 2) = 40% DDB rate
Year 2011 = $108,000 *.40 = $43,200
Year 2012 = (108,000 - 43,200) * .40 = $25,920
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

41
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
72) A plant asset is acquired by a business on January 1, 2010, for $60,000. The asset's estimated residual
value is $10,000 and its estimated life is 5 years. Management chooses to use straight-line depreciation.
On January 1, 2012, management revises the total useful life to 8 years and the residual value to $4,000.
Compute the balance in accumulated depreciation on December 31, 2012.
Answer: Calculations:
(60,000 - 10,000)/5 = 10,000 per year
10,000 * 2 years = 20,000 total depreciation before change
(60,000 - 20,000 - 4,000)/6 = 6,000 new depreciation per year
Accumulated depreciation = 20,000 + 6,000 = 26,000
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

73) Assume ABC Inc. purchased machinery for $350,000 and depreciated it on a straight-line basis over 20
years. The estimated residual value was zero. After using the machinery for 3 years, the company
realized it will remain useful for only 5 more years and also revised the residual value to $12,000.
Journalize entries to record the revised depreciation expense.
Answer: Depreciation:
(350,000 - 0)/20 = 17,500 per year
17,500 * 3 years = 52,500 accumulated depreciation

Revised depreciation: (350,000 - 52,500 - 12,000)/5 = 57,100

Journal entry: Depreciation Expense 57,100

Accumulated Depreciation 57,100
Diff: 2
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

42
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
74) Martin Motors purchased a machine that will help diagnose problems with engines. The machine cost
$210,000 on January 10, 2012 and a residual value of $10,000 was anticipated, with a useful life of 5 years.
In 2012, Martin Motors has a gross profit of $400,000 and operating expenses of $180,000.
A) Martin Motors has a tax rate of 35%. Compute the deprecation for 2012 under both the straight-line
and double-declining balance method.
B) Which depreciation method, straight-line or accelerated method, should Martin Motors use for tax
purposes? What is the net cash saved between the 2 methods?
Answer:
A)

Straight-line DDB
400,000 Gross Profit 400,000
180,000 Operating expenses 180,000
Income before depreciation
220,000 and taxes 220,000
40,000 Depreciation 84,000
180,000 Income before taxes 136,000
63,000 Taxes (35%) 47,600
117,000 Net Income 88,400

B) Martin Motors should use DDB, as taxes are $47,600 under DDB, and $63,000 under straight-line–a
savings of $15,400.
Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

43
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
75) Martin Motors purchased a machine that will help diagnose problems with engines. The machine cost
$210,000 on January 10, 2010 and a residual value of $10,000 was anticipated, with a useful life of 5 years.
These statistics are available:

DDB
Gross Profit 400,000
Operating expenses 180,000
Income before depreciation and taxes 220,000
Depreciation 84,000
Income before taxes 136,000
Taxes (35%) 47,600
Net Income 88,400

Martin Motors realized at the beginning of 2012 that the machine would last an additional 8 years. Martin
Motors uses the DDB method.

Prepare the appropriate journal entry to record the depreciation expense for 2012.
Answer:
Book Value
Beginning of Annual Accumulated Book Value
Year Year Rate Depreciation Depreciation End of Year
** 210,000
2010 210,000 40% 84,000 84,000 126,000
2011 126,000 40% 50,400 134,400 75,600
** (1/5*2)=40%

Book value at January 1, 2011 = $75,600

Additional years = 8 Depreciation rate = 200/8 = 25%

The new depreciation for 2012 = $75,600 × 25% = $18,900

Date Account Debit Credit

Depreciation Expense–Machinery 18,900
Accumulated Depreciation–Machinery 18,900

Diff: 3
LO: 7-3
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

44
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
76) Amy's Garden Company purchased a machine on June 6, 2011. The machine cost $100,000 and has a
residual value of $10,000 and an estimated useful life of 5 years. The machine is expected to last 50,000
machine hours.

REQUIRED:
1. Calculate the depreciation expense for 2011 and 2012 using the straight-line method.
2. Calculate the depreciation expense for 2011 and 2012 using the units-of-production method. The
machine was used for 8,000 machine hours in 2011 and 23,000 machine hours in 2012.
3. Calculate the depreciation expense for 2011 and 2012 using double-declining- balance depreciation
Answer:
1. Straight-line

Cost - Residual Value

= Annual depreciation
Useful Life

100,000 - 10,000
= 18,000
5
Year 2011
= 18,000 * 7/12 = 10,500
Year 2012
= 18,000

2. Units-of-production

Cost - Residual Value

= Depreciation per machine hour
Total machine hours

100,000 - 10,000
= 1.80 per machine hour
50,000

Year 2011 = 8,000 * 1.8 = 14,400

Year 2012 = 3,000 * 1.8 = 41,400

3. Declining balance

Depreciation for 2011 = Book Value × DDB Rate

= 100,000 × 40%
= 40,000 × 7/12 = 23,333

Depreciation for 2012:

Cost - Accumulated depreciation = Book Value

100,000 - 23,333 = 76,667
Rate * BV = depreciation
.40 × 76,667 = 30,667
Diff: 2
LO: 7-3
AASCB: Analytical Skills
45
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7.4 Learning Objective 7-4

1) To account for the disposal of a plant asset, the cost of the asset and its related accumulated
depreciation are removed from the books.
Answer: TRUE
Diff: 2
LO: 7-4
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

2) Accumulated depreciation is credited for the amount of depreciation expense for the current period.
Answer: TRUE
Diff: 2
LO: 7-4
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

3) A nonmonetary exchange is based on the fair value of the assets involved.

Answer: TRUE
Diff: 2
LO: 7-4
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) A gain will result when the book value of a plant asset exceeds the cash received from the sale of the
asset.
Answer: FALSE
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) The Loss on Disposal of Equipment account is reported as Other expense on the income statement.
Answer: TRUE
Diff: 2
LO: 7-4
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

46
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
6) Gains on the sale of equipment increase net income while losses on the sale of equipment decrease net
income.
Answer: TRUE
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7) If a company sells a major plant asset:

A) depreciation expense should be recorded through the date of sale.
B) the book value of the asset should be credited to the asset account.
C) no gain should be recognized if depreciation expense was taken on the asset before the asset was sold.
D) a loss should be recognized, but not a gain, if depreciation expense was taken on the asset before the
asset was sold.
Answer: A
Diff: 2
LO: 7-4
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8) Which of the following is a correct statement regarding the disposal of an asset for no proceeds?
A) The cost of the asset, but not its accumulated depreciation, must be removed from the books.
B) If the asset is not fully depreciated, a gain on the disposal can occur.
C) If the asset is fully depreciated, the journal entry to record the disposal will decrease net assets.
D) If the asset is fully depreciated, there will be no gain or loss on the disposal.
Answer: D
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) If an asset is sold:
A) depreciation must be recorded to the date of sale.
B) the cost of the asset is compared to the selling price to determine any gain or loss.
C) the journal entry to record the sale will include a credit to cash.
D) for a gain, total assets remain the same and total equity increases.
Answer: A
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

47
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
10) If an asset is scrapped before being fully depreciated:
A) the company will incur a loss on the disposal.
B) the equipment account will be credited.
C) the accumulated depreciation account will be debited.
D) all of the above will occur.
Answer: D
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) When plant assets are exchanged:

A) the old asset does not need to be removed from the books.
B) the new asset will be debited for the list price of the asset.
C) the gain or loss on the exchange is equal to the difference between the fair value and the book value
of the old asset.
D) total assets increase.
Answer: C
Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

12) Under IFRS:

A) plant assets can be revalued downward, but not upwards to reflect their current value.
B) straight-line depreciation is not allowed.
C) gains, but not losses, can be recorded on the disposal of an asset.
D) a component approach is used to depreciate a building.
Answer: D
Diff: 2
LO: 7-4
AASCB: Multicultural and Diversity Understanding
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

48
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
13) Hawthorne Company sold office furniture for $2,500 cash. The furniture cost $30,000 and had
accumulated depreciation through the date of sale totaling $29,000. The company will recognize:
A) a gain of $1,500.
B) a loss of $1,500.
C) a gain of $2,500.
D) neither a gain or a loss.
Answer: A
Explanation: A) C - AD = BV
30,000 - 29,000=1,000
Cash - BV = gain
2,500 -1,000=1,500
Diff: 2
LO: 7-4
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

14) Smucker's Company sold equipment costing $65,000 with $60,000 of accumulated depreciation for
$10,000 cash. The company's journal entry to record this sale will NOT include a:
A) credit to Equipment for $65,000.
B) credit to Gain on Sale of Equipment for $5,000.
C) debit to Accumulated Depreciation for $60,000.
D) debit to Gain on Sale of Equipment for $5,000.
Answer: D
Explanation: D) C - AD = BV
65,000 - 60,000 = 5,000
Cash - BV = gain
10,000 - 5,000 = 5,000
JE:
Cash 10,000
Accum Dep 60,000
Equip 65,000
Gain on sale 5,000

Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

49
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
15) Equipment costing $37,450 with a book value of $18,410 is sold for $20,000. The journal to record the
sale will include a :
A) debit to cash for $18,410.
B) debit to accumulated depreciation for $18,410.
C) debit to gain on sale of equipment for $1,590.
D) debit to accumulated depreciation for $19,040.
Answer: D
Explanation: D) C - AD = BV
37,450 - AD = 18,410
AD = 19,040
JE:
Cash 20,000
Accum Depreciation 19,040
Gain on sale 1,590
Equipment 37,450

Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) Equipment purchased for $85,000 on January 1, 2010, was sold on July 1, 2013. The company uses the
straight-line method of computing depreciation and recognizes $17,000 of depreciation expense annually.
When recording the sale, the company should record a debit to Accumulated Depreciation for:
A) $0.
B) $51,000.
C) $59,500.
D) $68,000.
Answer: C
Explanation: C) 17,000 depreciation for year × 6/12 = 8,500 depreciation for 2013

2010 depreciation = 17,000

2011 depreciation = 17,000
2012 depreciation= 17,000
2013 depreciation = 8,500
Total depreciation 59,500
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

50
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
17) Equipment acquired on January 1, 2010, is sold on June 30, 2013, for $11,200. The equipment cost
$26,800, had an estimated residual value of $6,800, and an estimated useful life of 5 years. The company
prepared financial statements on December 31, and the equipment has been depreciated using the
straight-line method. Prior to determining the gain or loss on the sale of this equipment, the company
should record depreciation of:
A) $0.
B) $2,000.
C) $5,000.
D) $31,700.
Answer: B
Explanation: B) Straight-line depreciation = (C - SV)/EUL
(26,800 - 6,800)/5 = 4,000 depreciation per year
Depreciation for 2013 = 4,000 × 6/12 = 2,000
Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

18) Happy Acres, Inc., sold equipment for $3,000 cash. The equipment cost $74,300 and had accumulated
depreciation through the date of sale of $70,000. The journal entry to record the sale:
A) will record a gain on the sale of $1,300.
B) will debit Accumulated Depreciation for $74,300.
C) will decrease net assets.
D) will increase stockholders' equity.
Answer: C
Explanation: C) C-AD = BV= 74,300-70,000 = 4,300
BV- cash = loss
4,300-3,000= 1,300 loss
Journal entry:
Cash 3,000
Accum Depreciation 70,000
Loss on sale 1,300
Equipment 74,300

Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

51
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
19) Thomas Company trades in a printing press for a newer model. The cost of the old printing press was
$61,500, and accumulated depreciation up to the date of the trade-in amounts to $38,000. The company
also pays $41,200 cash for the newer printing press. The journal entry to acquire the new printing press
will require a debit to Equipment for:
A) $41,200.
B) $61,500.
C) $64,700.
D) $102,700.
Answer: C
Explanation: C) BV = C - AD
BV = 61,500 - 38,000
BV = 23,500
New equip = BV old plus cash paid
New equip = 23,500 + 41,200
New equip = 64,700
Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

20) Mindy's Boutique has a beginning balance in the equipment account of $137,000. During the year,
they purchased $245,000 worth of equipment. At the end of the year, the balance in the equipment
account was $315,000. The cost of the equipment that Mindy's Boutique sold was:
A) $58,000.
B) $67,000.
C) $108,000.
D) $178,000.
Answer: B
Explanation: B)
Equipment
Explanation DR CR
Beginning balance 137,000
Purchases 245,000
382,000
???
Ending balance 315,000

382,000 - 315,000 = 67,000 cost of disposals

Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

52
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
21) Strategic Sales purchased a machine on January 1, 2010 which cost $210,000, had a residual value of
$10,000 and a useful life of 5 years.
Strategic Sales can replace this machine with one that is more efficient and sells the old machine for
$45,000 on July 1, 2012.
Prepare the appropriate journal entry to record the sale of this machine, assuming the company uses the
double-declining-method of depreciation.
Answer:
Book Value
Beginning of Annual Accumulated Book Value
Year Year Rate Depreciation Depreciation End of Year
** 210,000
2010 210,000 40% 84,000 84,000 126,000
2011 126,000 40% 50,400 134,400 75,600
2012 75,600 40% 30,240 164,640 45,360

** (1/5*2)=40%

Total accumulated depreciation through July 1, 2012

2010 and 2011 134,400

2012 15,120 (30,240 × 1/2)
149,520

Book value 07/01/12 = Cost - Acumulated depreciation through 07/01/12

= 210,000 - 149,520
= 60,480

Date Account Debit Credit

July 1, 2012 Cash 45,000
Accumulated Depreciation 149,520
Loss on Sale of Assets 15,480
Machine 210,000

Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

53
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
22) On January 1, 2012, Sandy's Tax Service acquired a new color copier in exchange for an old color
copier. The old copier had a cost of $14,500 and accumulated depreciation of $8,000. Sandy's Office Store
also paid out $12,000 in cash. Prepare the journal entry to record the exchange.
Answer:
Account DR CR
Copier (new) * 18,500
Accumulated Depreciation (old) 8,000
Cash 12,000
Copier (old) 14,500

* BV old = cash
BV = 14,500 - 8,000 = 6,500
6,500 + 12,000 = 29,000

Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

54
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
23) A computer, with a cost of $8,000 is sold on July 1. Accumulated depreciation up to the date of sale is
$5,000. Journalize the entries for the disposal of the computer under the following INDEPENDENT
scenarios:
1. The computer was sold for $6,000.
2. The computer was sold for $1,000.
3. The computer is obsolete and was thrown in the trash.
Answer:
Date Account DR CR

1. Cash 6,000
Accumulated depreciation 5,000
Gain on sale of computer 3,000
Computer 8,000

BV= C-AD = 8,000 - 5000 = 3,000

Cash - BV=gain or loss
6,000 - 3,000 = 3,000 gain

2. Cash 1,000
Accumulated depreciation 5,000
Loss on sale of computer 2,000
Computer 8,000

BV (per #1) = 3,000

Cash - BV = gain or loss
1,000 - 3,000 = 2,000 loss

3. Accumulated depreciation 5,000

Loss on disposal 3,000
Computer 8,000

BV (per #1) = 3,000

Cash - BV= gain or loss
0 - 3,000 = 3,000 loss

Diff: 2
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

55
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
24) Tom's Roadside Burger Stand has a beginning balance in the Accumulated Depreciation-Equipment
account of $200,000. The depreciation expense for the year was $30,000. At the end of the year, the balance
in the Accumulated Depreciation-Equipment account was $140,000.
Required:
1. Compute the debit to Accumulated Depreciation for the year.
2. What would cause Tom's Roadside Burger Stand to debit Accumulated Depreciation-Equipment?
Answer:
1: Accumulated depreciation-equipment
Explanation DR CR
Beginning balance 200,000
Depreciation expense 30,000
Balance from transactions 230,000
???
Ending balance 140,000

230,000 - 140,000 = 90,000 debit

2: The debit to Accumulated Depreciation—Equipment was from the removal of the accumulated
depreciation on equipment sold during the year.
Diff: 3
LO: 7-4
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7.5 Learning Objective 7-5

1) Accumulated depletion reduces equity, as this account is a contra-revenue account.

Answer: FALSE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) Natural resources are reported in the Intangible Assets section of the income statement.
Answer: FALSE
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

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3) Natural resources are also called wasting assets.
Answer: TRUE
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

4) Intangibles can have finite or infinite lives.

Answer: TRUE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

5) Intangible assets with finite lives that can be measured are amortized.
Answer: TRUE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

6) A purchaser is willing to pay for goodwill when they feel the company they are buying has abnormal
earning power.
Answer: TRUE
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

7) Goodwill is recognized only when the purchase price exceeds the value of the net liabilities in the
acquisition of another company.
Answer: FALSE
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8) Patents are issued by the inventor.

Answer: FALSE
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

57
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9) The useful lives of many franchises are indefinite and therefore are not amortized.
Answer: TRUE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

10) Research and development costs are expensed over their useful or legal life.
Answer: FALSE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

11) Some trademarks have a definite life set by a contract and should be amortized.
Answer: TRUE
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

12) All of the following are classified as natural resources and are depleted EXCEPT for:
A) land.
B) timber.
C) minerals.
D) oil.
Answer: A
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

13) Natural resources:

A) are not physically used up over time.
B) have a contra account, accumulated amortization.
C) are recorded on the books using the relative sales-value method.
D) are depleted using the unit-of-production method.
Answer: D
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

58
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14) The portion of the cost of natural resources that is consumed in a particular period is called:
A) depreciation expense.
B) amortization expense.
C) depletion expense.
D) resource expense.
Answer: C
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

15) ________ are accounted for as long-term assets when purchased or developed, and their cost is
transferred to expense through a process called depletion.
A) Intangible assets
B) Franchises
C) Natural resources
D) Trademarks
Answer: C
Diff: 1
LO: 7-5
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) The computation of depletion expense is most closely related to which method for computing
depreciation?
A) Straight-line
B) Units-of-production
C) Double-declining balance
D) Modified accelerated cost recovery system.
Answer: B
Diff: 2
LO: 7-5
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

17) A company made a journal entry to debit cost of oil sold and credit oil inventory. This entry:
A) records the deletion of the oil well for the year.
B) records the acquisition of the oil well.
C) records the sale of the oil well.
D) records the cost of the oil sold.
Answer: D
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

59
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18) The journal entry to record depletion would include:
A) a debit to Depletion Expense and credit to Accumulated Depreciation.
B) a debit to Accumulated Depletion and a credit to Depletion Expense.
C) a debit to Depletion Expense and a credit to Accumulated Depletion.
D) none of the above.
Answer: C
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

19) ________ would be amortized.

A) Goodwill
B) Buildings
C) Natural gas leases
D) Patents
Answer: D
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

20) Which of the following statements regarding intangible assets is NOT true?
A) Intangible are the most valuable assets of high-tech companies.
B) Intangible assets are recorded at their acquisition cost.
C) The residual value of most intangibles is zero.
D) Intangibles with indefinite lives are amortized.
Answer: D
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

21) Amortization expense:

A) is the title of the expense associated with natural resources.
B) is recorded for intangible assets with a finite life.
C) is recorded for assets with an indefinite life.
D) cannot be credited directly to the asset account.
Answer: B
Diff: 2
LO: 7-5
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

60
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22) Which of the following intangible assets has an indefinite life?
A) Patents
B) Copyrights
C) Research and development
D) Goodwill
Answer: D
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

23) When an intangible asset is amortized:

A) accumulated amortization is decreased.
B) net income decreases.
C) net assets increase.
D) cash is decreased.
Answer: B
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

24) All of the following assets should be amortized EXCEPT:

A) franchises.
B) goodwill.
C) patents.
D) timber.
Answer: B
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

25) Patents are amortized over a period:

A) of 40 years or the expected useful life, whichever is less.
B) of 20 years or the expected useful life, whichever is less.
C) that must exceed 40 years.
D) of one year or less.
Answer: B
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

61
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26) Which of the following is a correct statement regarding intangible assets?
A) The useful life of a patent can be longer than its legal life.
B) Patents protect computer software programs.
C) Franchises are granted by the federal government.
D) Intangibles with indefinite lives must be checked annually for any loss in value.
Answer: D
Diff: 2
LO: 7-5
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

27) The entry to record amortization:

A) increases total assets and decreases total equity.
B) decreases total assets and increases total equity.
C) decreases both total assets and total equity.
D) increases both total assets and total equity.
Answer: C
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

28) Goodwill:
A) that is created internally is recorded on the company's books as an intangible asset.
B) does not need to be tested for impairment.
C) is amortized over a period of ten years.
D) is recorded when it is purchased in the acquisition of another company.
Answer: D
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

29) If a company has goodwill on its books:

A) the goodwill is amortized over a period determined by the Board of Directors.
B) the goodwill must be increased to its market value on a yearly basis.
C) a loss must be recorded if the goodwill has decreased in value.
D) it must expense it immediately.
Answer: C
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

62
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30) If goodwill has decreased in value, it is said to be:
A) worthless.
B) impaired.
C) amortized.
D) a capital expenditure.
Answer: B
Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

31) Godert Pharmaceutical Company has many scientists working in their labs trying to develop an anti-
aging drug. The cost of this research and development must be:
A) expensed as incurred.
B) set up as an intangible asset and amortized over 20 years.
C) set up as an intangible and tested for impairment on a yearly basis
D) not be handled in any of the above ways.
Answer: A
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

32) Research and development costs incurred by a company should be:

A) capitalized and depreciated over a period not to exceed 20 years.
B) capitalized and amortized over the useful life of the asset.
C) either capitalized and depreciated or expensed immediately at the option of the accountant.
D) expensed on the current year's income statement.
Answer: D
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

33) A distinctive identification of a product or a service is a:

A) patent.
B) trademark.
C) copyright.
D) license.
Answer: B
Diff: 1
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

63
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34) Needles Company purchased Boston Company on August 31, 2010. Needles recorded goodwill in the
purchase of Boston and has determined that the Boston goodwill will have an indefinite life. How will
Needles account for the Boston goodwill in future accounting periods?
A) Needles will amortize the Boston goodwill over a 50-year life.
B) If the value of the Boston goodwill increases in subsequent years, Needles will increase the value in the
Boston goodwill account.
C) If the value of the Boston goodwill decreases in subsequent years, Needles will decrease the value in
the Boston goodwill account.
D) Needles is not allowed to change the value of the Boston goodwill account regardless of any future
increase or decrease in the value of Boston goodwill.
Answer: C
Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

35) On June 5, 2012, Cheap Oil Company purchased an oil well for $650,000. The well contains an
estimated 162,500 barrels of oil, with an estimated residual value of zero. During 2012, 32,500 barrels of
oil were removed from the well. To record depletion for 2012, Cheap Oil Company will debit Depletion
Expense for:
A) $ 65,000.
B) $100,000.
C) $108,500.
D) $130,000.
Answer: D
Explanation:
D) (cost-salvage value)/total units of production = depletion per barrel
650,000-0/162,500 = 4.00 depletion per barrel
4.00 × 32,500 = 130,000
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

64
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36) Coal Factory, Inc., acquired a coal mine for $8,500,000 in 2011. Geologists estimate the deposit
contains 2,125,000 tons of coal. Once the coal is mined, the asset will have no residual value. During 2011
and 2012, Coal Factory, Inc. mined 316,410 tons and 406,512 tons of coal, respectively. The balance in the
intangible asset account for the coal on December 31, 2012, will be:
A) $2,891,688.
B) $4,885,390.
C) $5,608,312.
D) $8,500,000.
Answer: C
Explanation: C) (cost-salvage value)/total units of production = depletion per ton
(8,500,000-0)/2,125,000=4.00 depletion per ton

2011 depletion = 4 × 316,410 = 1,265,640 depletion

2012 depletion = 4 × 406,512 = 1,626,048 depletion
total depletion 2,891,688
8,500,000 - 2,891,688 = 5,608,312
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

37) ABC Corporation acquired a patent for $600,000. Patent have a legal life of 20 years. Because of
changing technology, this patent is expected to generate revenue for only 8 years and have no residual
value. The annual amortization expense for the patent is:
A) $0.
B) $30,000.
C) $50,000.
D) $75,000.
Answer: D
Explanation: D) (600,000 - 0)/8 = 75,000
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

65
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38) In 2012, First Company purchased Second Company for $16,000,000 cash. At the time of purchase
Second Company had $18,500,000 in assets and liabilities of $11,000,000. The 2012 balance sheet for First
Company should show goodwill of:
A) $0.
B) $3,500,000.
C) $8,500,000.
D) $10,000,000.
Answer: C
Explanation: C) 18,500,000 - 11,000,000 = 7,500,000 market value of net assets
Goodwill = purchase price - market value of net assets
Goodwill = 16,000,000 - 7,500,000
Goodwill = 8,500,000
Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

39) Plenty of Oil, Inc. purchased an oil field that is estimated to have 15,000,000 barrels of oil for $45
million in 2011. In 2011 and 2012, 1,800,000 barrels and 2,605,300 of oil, respectively were extracted. The
oil field will have no residual value.

What is the value that will be reported on the balance sheet as of December 31, 2012?
Answer:
Cost - Residual Value
= Depletion per unit
Useful Life

$45,000,000 - $0
= $3.00
15,000,000 units

Units extracted in 2011 and 2012 = 1,800,000 + 2,605,000

= 4,405,000

Accumulated depletion for 2011 and 2012 = 4,405,000 × $3.00

= $13,215,000

Book value as of December 31, 2012 = Cost - Accumulated Depreciation

= $45,000,000 - $13,215,000
= $31,785,000
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

66
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40) The Best Diamond Company purchased mineral rights on a diamond mine in 2012 for a price of
$7,000,000. In addition to the purchase price, the Best Diamond Company paid $100,000 for a geological
survey and $20,000 for a license fee to the country where the mine is located. It is estimated that there will
be no residual value when fully depleted. During the first year of mining, Best Diamond extracted 50,000
carats of diamonds and in 2013, the company extracted 250, 000 carats of diamonds. It is estimated that
the mine contains 1,000,000 carats of diamonds.

Make the journal entry to:

1. Record the purchase of the mine.

2. Record depletion for 2012.
3. Record depletion for 2013.
Answer:
Date Account DR CR

1. Natural resource—diamond mine 7,120,000

Cash or Payable 7,120,000

7,000,000 + 100,000 + 20,000

2. Depletion Expense 356,000

Accumulated deletion - diamonds 356,000

(Cost-savage)/ total units to produce=

(7,120,000-0)/1,000,000 = 7.12 per carat
7.12 × 50,000=356,000

3 Depletion Expense 1,780,000

Accumulated depletion - diamonds 1,780,000

7.12 × 250,000 = 1,780,000

Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

67
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41) Several intangible assets are listed in Column I. For each question, select the definition of the
intangible in Column II which describes the intangible asset. Record your choice on the line preceding the
question number. An answer may only be used one time.

Column I Column II
Federal government grants that give the holder
the exclusive right for 20 years to produce and
____ 1. Copyright A) sell an invention.
Franchises and A distinctive identification of a product or
____ 2. licenses B) service.
Excess of the cost of an acquired company over
____ 3. Goodwill C) the sum of the market values of its net assets.
Exclusive right issued by the federal
government to reproduce and sell a book,
musical composition, film or other work of art
____ 4. Patent D) extending for 70 years beyond the author's life.
Privileges granted by a private business or a
Trademark, government to sell a product or service in
____ 5. trade name E) accordance with specified conditions.

Answer:
1. D
2. E
3. C
4. A
5. B

Diff: 2
LO: 7-5
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

68
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42) On June 1, 2011, Conqueror Company purchased Standard Corp for $26 million cash. At the time of
purchase, the market value of Standard's assets was $24,000,000 and Mollie had liabilities of $3,000,000.
Record the purchase transaction on Biddy Corp's books.
Answer:
Purchase Price 26,000,000
Value of assets 24,000,000
Value of liabilities 3,000,000
Value of net assets 21,000,000

Goodwill 5,000,000

Date Account Debit Credit

June 1, 2011 Assets at market value 24,000,000
Goodwill 5,000,000
Liabilities at market value 3,000,000
Cash 26,000,000

Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

43) On June 1, 2011, Conqueror Company purchased Standard Corp for $26 million cash. At the time of
purchase, the market value of Standard's assets was $24,000,000 and Mollie had liabilities of $3,000,000.
At the end of 2012, Conqueror estimated the goodwill on the Standard purchase to be worth only
$3,500,000.
Prepare the journal entry to record the change in the value of the goodwill.
Answer: As the amount of Goodwill decreased from $5,000,000 in June 2011 to $3,500,000 at December
31, 2012, a journal entry must be made to write-down goodwill.

Date Account Debit Credit

December 31, 2012 Impairment Loss on Goodwill 1,500,000
Goodwill 1,500,000

Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

69
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
44) ABC Company purchased XYZ Company for $3,700,000 in cash. The market value of XYZ Company's
assets and liabilities on the acquisition date were $4,000,000 and $1,500,000, respectively.
Compute the cost of the goodwill purchased by ABC Company and journalize the entry to record the
acquisition. How will the company account for this goodwill in future accounting periods?
Answer:
Purchase price $3,700,000
FMV of assets 4,000,000
FMV of liabilities 1,500,000
Value of net assets 2,500,000
Goodwill $ 1,200,000

Assets 4,000,000
Goodwill 1,200,000
Liabilities 1,500,000
Cash 3,700,000

Goodwill will be evaluated annually for permanent impairment losses. If there is no impairment, no
entry is required and the account balance will remain at cost. If there is impairment, an entry is required
to decrease goodwill to the adjusted fair market value and recognize a loss.
Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

70
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
45) Debit Company paid $250,000 for an oil field that contains an estimated 20,000 barrels of oil. 5,000
barrels are extracted in 2011 and 6,500 barrels are extracted in 2012. Journalize entries to record the
depletion for the first and second year and calculate the book value of the oil field at the end of the second
year.
Answer:
$250,000/20,000 = $12.50 depletion per unit

Depletion expense 62,500

Accumulated depletion 62,500
(5,000 * $12.50 = $62,500)

Depletion expense 81,250

Accumulated depletion 81,250
(6,500 * $12.50 = $81,250)

Book value at the end of year 2:

Oil lease $250,000
Accumulated depletion (143,750)
Book value $106,250
Diff: 2
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

46) Advanced Design Sales acquired a patent on January 1 for $35,000. The patent is expected to be of
benefit to Advanced Design Sales for 5 years. Prepare the journal entry to record the acquisition of the
patent and the amortization expense for the first year.
Answer:
Date Account DR CR

Jan 1 Patent 35,000

Cash 35,000

Dec. 31 Amortization expense-Patent 7,000

Patent 7,000

35,000/5 = 7,000

Diff: 1
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

71
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
47) AMC Manufacturing Company acquired a patent for $20,000. The patent was being amortized over 10
years. After being amortized for only 1 year, it was determined that the patent would only be useful for 3
more years. Prepare the journal entry to record the amortization expense for year 2.
Answer:
Year 2 Amortization Expense-Patent 6,000
Patent 6,000

Amortization year 1 = 20,000/10 = 2,000 per year

BV end of year 1 = 20,000 - 2,000 = 18,000
Amortization year 2 = 18,000/3 = 6,000
Diff: 3
LO: 7-5
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7.6 Learning Objective 7-6

1) If an asset is impaired, the company is required to adjust the carrying value downward from its book
value to its fair value.
Answer: TRUE
Diff: 2
LO: 7-6
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) Which of the following is a correct statement about asset impairment?

A) An asset is impaired if the net book value exceeds the estimated future cash flows.
B) If an asset is impaired, the future cash flows will be less than the fair value.
C) Under GAAP, an asset that has been written down because of impairment can be written back up if it
increases in value in the future.
D) If an asset is impaired, the impairment loss is the difference between the net book value and the fair
value.
Answer: D
Diff: 3
LO: 7-6
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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3) ABC Company has a long-term asset with the following information as of the end of the year:

Net book value $ 87,600

Estimated future cash flows $70,000
Fair value $65,000

The amount of the impairment loss is:

A) $15,000.
B) $17,600.
C) $19,000.
D) $22,600.
Answer: D
Explanation: D) 87,600 - 65,000 = 22,600
Diff: 2
LO: 7-6
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7.7 Learning Objective 7-7

1) Return on assets measures how profitably management has used its assets.
Answer: TRUE
Diff: 1
LO: 7-7
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) When determining the rate of return on assets:

A) return on assets is the product of three "drivers" according to the DuPont model.
B) the DuPont model calculates the rate of return as net profit margin times total asset turnover.
C) it is important for companies to develop strategies to decrease total asset turnover.
D) total asset turnover measures how much every sales dollar generates in profit.
Answer: B
Diff: 2
LO: 7-7
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

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3) Calculate Company Y's total asset turnover based on the following information for the current year:

Net income $100,000

Assets at the beginning of the year $800,000
Assets at the end of the year $830,000
Net sales $300,000

A) 10.3%
B) 12.3%
C) 32.8%
D) 36.8%
Answer: D
Explanation: D) net sales/average total assets
average total assets = 800,000 + 830,000/2 = 815,000
300,000/815,000 = 36.8%
Diff: 2
LO: 7-7
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) The following information was taken from the records of the Acme Company for the current year:

Net sales $510,000

Net income $145,000
Average total assets $330,000

Required: Use the DuPont analysis to measure the return on assets.

Answer:
Net profit margin = net income/net sales
Net profit margin = 145,000/510,000 = 28.43%

Total asset turnover = net sales/average total assets

Total asset turnover = 510,000/330,000 = 1.55

ROA = net profit margin *total asset turnover

ROA = 28.43 * 1.55 = 44.067%
Diff: 3
LO: 7-7
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

74
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7.8 Learning Objective 7-8

1) Acquisition of assets will appear on the statement of cash flows as a financing activity.
Answer: FALSE
Diff: 2
LO: 7-8
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

2) Equipment is acquired by issuing a note payable for $57,000 and a down payment of $30,000. The
statement of cash flows will report a:
A) $30,000 inflow in the operating activities section.
B) $57,000 inflow in the investing activities section.
C) $57,000 cash inflow in the financing activities section.
D) $30,000 cash outflow in the investing activities section.
Answer: D
Diff: 3
LO: 7-8
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

3) Equipment with a book value of $8,000 is sold for $3,000 cash. The statement of cash flows will report
a:
A) $3,000 cash inflow in the operating activities section
B) $3,000 cash inflow in the investing activities section.
C) $5,000 cash outflow in the operating activities section.
D) $5,000 cash outflow in the financing activities section.
Answer: B
Diff: 2
LO: 7-8
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

75
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