Deck 9: Reporting and Interpreting Long-Lived Tangible and Intangible Assets

Question 1

A declining fixed asset turnover ratio can actually be caused by acquiring additional assets in the current period in preparation for greater future sales.

Answer 1

True

Question 2

Accumulated depreciation is classified as an expense.

Answer 2

False

Question 3

Residual value is the estimate of the asset's value at the end of its useful life.

Answer 3

True

Question 4

The calculation for depletion of natural resources is similar to the calculation for units-of-production depreciation.

Question 5

The purpose of depreciation is to correctly value assets.

Question 6

If an asset is depreciated with the straight-line method and it has a salvage (residual) value, the depreciation will be a level amount over the asset's life until the last year when it will be lower.

Question 7

Land is not subject to depreciation so that means that items that increase the usefulness of the land, such as parking lots, are not depreciated.

Question 8

Impairment occurs when the estimated future cash flows from a long-lived asset fall below its book value.

Question 9

Intangible assets are usually amortized using the straight-line method.

Question 10

Companies within the same industry do not always use the same depreciation method, but will use the same expected useful life for the same piece of equipment.

Question 11

If average net fixed assets decrease, then the fixed asset turnover ratio will increase, assuming all other things equal.

Question 12

Some analysts compare companies by focusing on earnings before interest, taxes, depreciation, and amortization (EBITDA).

Question 13

Depreciation measures the actual decline in the market value of an asset.

Question 14

Goodwill is the most frequently reported intangible asset.

Question 15

Extraordinary repairs, replacements, and additions are added to the appropriate asset accounts rather than being recorded as expenses.

Question 16

If a company produces the same number of units per period over an asset's useful life, straight -line depreciation expense per period will be the same as the depreciation expense recorded using the
units-of-production method.

Question 17

The exclusive right to use a certain name or symbol is called a trademark.

Question 18

The periodic allocation of a natural resource's cost over the period of its extraction or harvesting is called amortization.

Question 19

Assuming no additions, replacements, or extraordinary repairs, the book value of any long-lived asset with a limited life is always less than or equal to its acquisition cost.

Question 20

Accumulated depreciation represents funds set aside to buy new assets.

Question 21

Which of the following statements regarding the nature of long-lived assets is true?

A) Long-lived assets are assets that never decline in value.
B) Another name for a tangible long-lived asset is a fixed asset.
C) Long-lived assets have useful lives between 10 and 20 years.
D) Long-lived assets are defined as assets that are no longer being depreciated.

Question 22

Which of the following statements regarding impairment is correct?

A) Asset impairment losses are a regular operating expense of most businesses.
B) When a company records an asset impairment loss, it will increase net income for that period.
C) The accounting for impairment losses is an application of the cost principle.
D) Asset impairment losses are reported on the income statement as an operating expense.

Question 23

There are no differences between GAAP and IFRS rules of accounting for tangible and intangible assets.

Question 24

The intangible asset most frequently reported by U.S. businesses is:

A) goodwill.
B) trademarks.
C) patents.
D) licensing rights.

Question 25

The MegaHit Film Studio has a licensing right (or agreement) to distribute films produced by the Artsy Film Company. How would the MegaHit Company classify this licensing right on its balance sheet?

A) Tangible asset
B) Intellectual property asset
C) Intangible asset
D) Nonreported asset

Question 26

The MegaHit Film Studio owns a production lot and related equipment. How would MegaHit Company classify these assets on its balance sheet?

A) Tangible asset
B) Other long-lived asset
C) Intangible asset
D) Nonreported asset

Question 27

Ordinary repairs and maintenance on long-lived assets are referred to as capital expenditures.

Question 28

How many of the following statements regarding intangible assets are true?
Goodwill is an example of a self-created intangible asset and is measured by estimating the excess of fair value of the company's assets over their book value.
Goodwill is amortized using the straight-line method.
Intangible assets are not adjusted for asset impairment losses.
Only goodwill purchased from another company can be reported on the balance sheet as an intangible asset.

A) One
B) Two
C) Three
D) Four

Question 29

Which of the following statements is true?

A) Long-lived tangible assets will not be used up within one year of the purchase date, but there is no minimum useful life for long-lived intangible assets.
B) Items in a company's inventory that are not expected to be sold in the next year are considered long-lived assets.
C) All long-lived intangible assets must be amortized over a period of 40 years or less.
D) Intangible assets with unlimited or indefinite lives are not amortized.

Question 30

The right to exclude others from making or using an invention is a

A) patent.
B) copyright
C) franchise.
D) licensing right.

Question 31

Which of McGraw-Hill's intangible assets gives it the legal right to prevent you from borrowing a textbook from a friend and photocopying all of it?

A) Patent
B) Trademark
C) Franchise agreement
D) Copyright

Question 32

Which of the following statements regarding straight-line depreciation is correct?

A) Straight-line depreciation is by far the most common method of depreciation used in the U.S.
B) When the straight-line method is used to compute depreciation, an asset's carrying value remains constant over the life of the asset.
C) Straight-line depreciation is an approved method to allocate the cost of an asset to expense and it serves as a measure of the physical decline in the asset.
D) The straight line method of depreciation results in a straight-line increase of depreciation expense over the life of an asset.

Question 33

The primary difference between ordinary repairs and extraordinary repairs is:

A) ordinary repairs cost less.
B) ordinary repairs are expenditures for routine maintenance and upkeep, whereas extraordinary repairs increase an assets economic usefulness in the future through increased efficiency, capacity, or longer life.
C) extraordinary repairs only maintain the asset for a short time, whereas ordinary repairs increase the usefulness of assets beyond their original condition.
D) extraordinary repairs are expenditures, not expenses.

Question 34

When the amount of depreciation must be revised because of a change in the estimated useful life of an asset that has been depreciated for several years, it is necessary to restate prior years' financial statements.

Question 35

Tax accounting and financial accounting use the same depreciation calculations and there are no differences in the results between the two accounting systems.

Question 36

Trademarks and Goodwill are intangible assets that are not amortized.

Question 37

A real estate management company buys an abandoned apartment complex for $4.5 million. It pays a construction company $500,000 to demolish the old building. Which of the following is true?

A) The company would record $5 million as the cost of the land.
B) The company would record $4.5 million as the cost of the land.
C) The company would record $4 million as the cost of the land.
D) The company would record $500,000 as demolition expense.

Question 38

If a company capitalizes costs that should be expensed, how is its income statement for the current period impacted?

A) Net income will be lower than it should be.
B) Revenues will be lower than they should be.
C) Expenses will be lower than they should be.
D) Assets will be lower than they should be.

Question 39

Which of the following statements regarding capitalization is correct?

A) Capitalizing costs refers to the process of converting assets to expenses.
B) If a company builds its own facility, only the cost of materials is capitalized.
C) Capitalizing a cost means to record it as an asset.
D) Capitalization is an immediate decrease in net income.

Question 40

Under the cost principle, a company capitalizes:

A) all ordinary repair expenditures incurred in the use of an asset.
B) any interest incurred in borrowing money to help pay for asset acquisitions.
C) all reasonable and necessary costs of acquiring an asset and preparing it for use.
D) the total market value of individual assets acquired in a 'basket purchase'.

Question 41

A company expects to use equipment that cost $48,000 for ten years and then sell it for $6,000. Using the straight-line method, the company should report depreciation for the equipment of:

A) $4,200 per year.
B) $8,400 per year.
C) $4,800 per year.
D) $9,600 per year.

Question 42

The Widget Tool and Die Company buys a $400,000 stamping machine that has an estimated residual value of $20,000. The company expects the machine to produce two million units. It makes 400,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is:

A) $80,000.
B) $400,000.
C) $76,000.
D) $380,000.

Question 43

The Buddy Burger Corporation has $3.5 million in long-lived assets and has an accumulated depreciation account of $1.1 million. Which of the following statements is true?

A) The book value of long-lived assets is $2.4 million.
B) The market value of long-lived assets is $3.5 million.
C) The carrying value of long-lived assets is $3.5 million.
D) The resale value of long-lived assets is $2.4 million.

Question 44

Your company buys a computer system from IBM for $3 million and pays IBM $200,000 to install the computer system. Your company should record:

A) $3 million in equipment and $200,000 in expenses.
B) $3.2 million in expenses.
C) $2.8 million in equipment and the rest in expenses.
D) $3.2 million in equipment.

Question 45

If the double-declining balance method were used to depreciate a building that has a 10-year useful life and a residual value equal to 10% of the building's original cost, what depreciation rate would be used?

A) 9%
B) 10%
C) 18%
D) 20%

Question 46

The Gulp convenience store chain buys new soda machines for $450,000 and pays $50,000 for installation. One-half of the total cost is paid in cash; the other half is financed. How should the company record this transaction?

A) Debit cash for $250,000, debit notes payable for $250,000, and credit equipment for $500,000.
B) Debit equipment for $500,000, credit cash for $250,000, and credit notes payable for $250,000.
C) Debit cash for $250,000, debit notes payable for $250,000 credit equipment for $450,000, and credit expenses for $50,000.
D) Debit equipment for $450,000, debit expenses for $50,000, credit cash for $250,000, and credit notes

Question 47

The balance sheet category "intangible assets" includes

A) Patents, trademarks, and franchises
B) Equipment, land, and buildings
C) Investments, receivables, and cash
D) Goodwill, inventory, and vehicles

Question 48

Which of the following statements is true when the straight-line method is used to compute depreciation?

A) The carrying value of an asset is a constant amount during the asset's useful life.
B) Accumulated depreciation is a constant amount during the asset's estimated useful life.
C) Depreciation expense per period is the depreciable cost divided by the number of periods in the asset's useful life.
D) The book value of an asset is an increasing amount during the asset's useful life.

Question 49

Purrfect Pets has a facility that originally cost $375,000. The balance of the accumulated depreciation account for the facility is $258,000. The company expects to be able to sell the facility for $107,000 at the end of its useful life. The residual value of the facility is:

A) $117,000.
B) $151,000.
C) $268,000.
D) $107,000

Question 50

Ordinary repairs and maintenance always:

A) are part of the asset cost of equipment and facilities.
B) are recorded as expenses.
C) are recorded as liabilities.
D) improve the asset beyond the current accounting period.

Question 51

Which of the following is not an amount that is needed to calculate straight-line depreciation?

A) The cost of the asset.
B) An estimate of the asset's useful economic life to the company.
C) The estimated amount that the company will get when it disposes of the asset.
D) The cost the company will be required to incur to replace the asset.

Question 52

Paul Hauling has a fleet of 10 large trucks that cost a total of $1,410,000. The fleet is expected to provide 1,000,000 miles of transportation during an estimated 10-year life, and be sold for 10% of the original cost at the end of that time. If the fleet traveled 125,000 miles in the current twelve-month period, what would be the depreciation expense under the straight-line (SL) and units-of-production (U-of-P) methods?

A) SL = $158,625 & U-of-P = $141,000
B) SL = $141,000 & U-of-P = $158,625
C) SL = $126,900 & U-of-P = $176,250
D) SL = $126,900 & U-of-P = $158,625

Question 53

Your company buys a computer server which it expects to use for eight years and then sell when it upgrades to a more powerful model. The server would probably be used by the business that buys it at that time for another three years. The useful life of the server for your company is:

A) the total length of time the server is used to produce output for your company.
B) eleven years.
C) the total length of time until the server can no longer function.
D) three years.

Question 54

The book or carrying value of an asset is:

A) its acquisition cost less the accumulated depreciation from the acquisition date to the balance s heet date.
B) its acquisition cost plus accumulated depreciation from the acquisition date to the balance sheet date.
C) the amount that could be obtained for the asset on the balance sheet date if it were sold.
D) the annual cost of carrying the asset in inventory.

Question 55

Which of the following statements most appropriately describes the purpose of depreciating a long-lived tangible asset?

A) To indicate how the asset has physically deteriorated.
B) To show that the asset will eventually and gradually become obsolete.
C) To record that the asset's market value declines over time.
D) To match the cost of the asset to the period in which it generates revenue.

Question 56

The Widget Tool and Die Company buys a $400,000 stamping machine that has an estimated residual value of $20,000. The company expects the machine to produce two million units. It makes 400,000 units during the current period. If the units-of-production method is used, the depreciation rate is:

A) $0.95 per unit.
B) $0.19 per unit.
C) $0.05 per unit.
D) $1.00 per unit.

Question 57

A company paid $500,000 to purchase equipment and $15,000 to have the equipment delivered to and installed in the company's production facilities. Commercial use of the equipment began on May 1, 2011. The estimated residual value of the equipment is $5,000. The equipment is expected to be used a total of 28,000 hours throughout its estimated useful life of six years. The company has an October 31, 2011 year-end and had used the equipment a total of 11,200 hours prior to the year-end. Using the units- of- production method, what amount of depreciation expense (to the nearest thousand) would the company report for this equipment in the income statement prepared for the year-ended October 31, 2011?

A) $102,000
B) $198,000
C) $204,000
D) $206,000

Question 58

When a company records depreciation it debits:

A) liabilities and credits expenses.
B) expenses and credits cash.
C) expenses and credits a contra-asset account.
D) long-lived assets and credits expenses.

Question 59

Purrfect Pets has a facility that originally cost $375,000. The balance of the accumulated depreciation account for the facility is $258,000. The company expects to be able to sell the facility for $107,000 at the end of its useful life. The depreciable cost of the facility is:

A) $117,000.
B) $151,000.
C) $268,000.
D) $107,000

Question 60

A machine is purchased on January 1, 2011, for $90,000. It is expected to have a useful life of five years and a residual value of $5,000. The company closes its books on December 31. Under the double-declining balance method, what is the total amount of depreciation to be expensed during the 2012 fiscal year (year 2 of 5)?

A) $21,600
B) $22,000
C) $22,400
D) $34,000

Question 61

One difference between the double-declining-balance method and the straight-line method is that the double-declining-balance method:

A) takes book value below residual value.
B) does not consider the useful life of the asset in the calculation of depreciation.
C) cannot be used for tax purposes.
D) uses book value instead of depreciable cost in the calculation of depreciation.

Question 62

After the early years of an asset's life, accelerated depreciation methods:

A) cause an asset to be carried at a higher book value than the straight-line method.
B) cause an asset to be carried at a lower book value than the straight-line method.
C) cause an asset to be carried at the same book value as the straight-line method.
D) cannot be used if the resulting book value will be significantly different from that which would result from using the straight-line method.

Question 63

What is the depreciation expense for 2011?

A) $4,000.
B) $3,000.
C) $6,000.
D) $8,000.

Question 64

ShadyZ Corporation uses the unit-of-production method to estimate depreciation. A new asset is purchased for $18,000 that willproduce an estimated 100,000 units over its useful life. Estimated residual value is $2,000. What is the depreciation rate per unit?

A) $1.60
B) $1.80
C) $0.16
D) $0.18

Question 65

A company sells a piece of equipment half-way through the accounting period. The straight-line rate of depreciation on the equipment is $40,000 a year. Before recording the asset sale, the company should debit:

A) depreciation expense for $40,000 and credit long-lived assets for $40,000.
B) accumulated depreciation for $40,000 and credit cash for $40,000.
C) depreciation expense for $20,000 and credit accumulated depreciation for $20,000.
D) cash for $20,000 and credit depreciation expense for $20,000.

Question 66

A company paid $17,000 for a vehicle that had an estimated useful life of 4 years, total capacity of 100,000 miles, and a residual value of $1,000. After 2 full years of using the vehicle (20,000 miles in year 1 and 27,000 miles in year 2), the company sold the vehicle for $6,000 and reported a loss on disposal of $3,480. What method of depreciation did the company use?

A) Units-of-production method
B) Double-declining-balance method
C) Straight-line method
D) Units-of-production method in year 1 and straight-line in year 2

Question 67

How does an asset impairment loss impact a company's financial statements?

A) Raises expenses and lowers both revenue and net income.
B) Lowers assets, stockholders' equity, and net income.
C) Raises expenses and lowers net income with no effect on any other items.
D) Raises liabilities and lowers stockholders' equity.

Question 68

When a company sells a long-lived asset, stockholders' equity will change by the:

A) amount of the sale.
B) amount of the asset's book value.
C) amount of the asset's accumulated depreciation.
D) difference between the sales price and the asset's book value.

Question 69

A book manufacturing company sells equipment for $450,000 when the book value of the equipment is $400,000. The company would record the extra $50,000 as:

A) a gain, increasing net income and stockholders' equity.
B) revenue, increasing net income and stockholders' equity.
C) cash, increasing assets and stockholders' equity.
D) accumulated depreciation, increasing assets and stockholders' equity.

Question 70

A company sells a long-lived asset that originally cost $200,000 for $50,000 on December 31, 2011. The accumulated depreciation account had a balance of $110,000 after the current year's depreciation of $45,000 had been recorded. The company should recognize a:

A) $100,000 loss on sale.
B) $40,000 gain on sale.
C) $40,000 loss on sale.
D) $25,000 loss on sale.

Question 71

Under what circumstances should a company record an asset impairment loss?

A) When residual value is greater than the repairs and maintenance expenses needed to keep up the asset.
B) When net book value is less than the residual value of the asset.
C) When accumulated depreciation equals the purchase cost of the asset.
D) When net book value is greater than expected future cash flows for the asset.

Question 72

When a company determines that estimated future cash flows from an asset are less than the book value of the asset, it records:

A) an asset impairment gain, if the value of the cash flows exceeds the asset's book value.
B) an asset impairment loss, if the value of the cash flows exceeds the asset's book value.
C) an asset impairment gain, if the asset's book value exceeds the value of the cash flows.
D) an asset impairment loss, if the asset's book value exceeds the value of the cash flows.

Question 73

What is the adjusted balance in the Accumulated Depreciation account at the end of 2012?

A) $3,200
B) $4,800
C) $9,600.
D) $12,800.

Question 74

A company bought a piece of equipment for $40,000, expecting to use it for eight years. The company then plans to sell it for $3,500. The company has already recorded depreciation of $35,995. Using the double-declining-balance method, the company's annual depreciation expense for the upcoming year would be:

A) $1,001.
B) $9,125.
C) $505.
D) $10,000.

Question 75

When a company sells equipment for cash on a date other than the last day of the accounting period, it must:

A) record depreciation expense for the entire accounting period during which the equipment is sold.
B) record the disposal by reducing equipment and increasing revenue; a gain or loss is reported if the decrease and increase are not equal.
C) first record depreciation expense for the period up to the date of sale, and then record the disposal by decreasing both equipment and accumulated depreciation while increasing cash; a gain or loss is reported if total assets increase or decrease.
D) record accumulated depreciation for the entire current accounting period.

Question 76

A trucking company sold its fleet of trucks for $55,000. The trucks had originally cost $1,410,000 and had accumulated depreciation of $1,269,000 through the date of disposal. What gain or loss did the trucking company record when it sold the fleet of trucks?

A) Gain of $86,000.
B) Gain of $55,000.
C) Loss of $55,000.
D) Loss of $86,000.

Question 77

An asset is purchased on January 1 for $40,000. It is expected to have a useful life of five years after which it will have an expected salvage value of $5,000. The company uses the straight -line method. If it is sold for $30,000 exactly two years after its purchased, the company will record a:

A) gain of $6,000.
B) gain of $4,000.
C) loss of $4,000.
D) loss of $6,000.

Question 78

Your company rents out computers to local businesses and schools. You have 1,000 computers with a net book value of $160,000. As a result of changing technology, your computers are more difficult to rent so you must severely reduce your rental price, which causes a decrease in estimated future cash flows. The fair value of the computers is estimated to be $125,000 because of their outdated technology. Your company should report an asset impairment loss of:

A) $160,000.
B) $125,000.
C) $35,000.
D) $0

Question 79

A company buys a piece of equipment for $48,000. The equipment has a useful life of ten years. Using the double-declining-balance method, the company's depreciation expense in the first year would be:

A) $9,600.
B) $12,000.
C) $4,800.
D) $24,000.

Question 80

A piece of equipment was acquired on January 1, 2010, at a cost of $22,000, with an estimated residual value of $2,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2011?

A) $5,500
B) $10,000
C) $11,000
D) $12,000