Question 1

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?

Accepted Answer

Needles will test the Boston goodwill for impairment annually (or more often if indications of impairment arise). If the value of the Boston goodwill has decreased, Needles will decrease the value in the Boston Goodwill account to reflect the new lower value. However, if the value of the Boston goodwill has increased, Needles cannot increase the value in the Boston Goodwill account, as the goodwill has an indefinite life and therefore cannot be amortized or increased.

Question 2

The entry to record amortization:

Accepted Answer

Amortization is the gradual write-off of an asset over its useful life. As a result, it reduces the value of the asset (total assets) and decreases the value of the related liability or equity account, such as Accumulated Amortization (total equity). Therefore, the correct option is C, which states that amortization decreases both total assets and total equity.

Question 3

Equipment that had a book value of $6,000 is sold for $20,000 cash. The statement of cash flows will report a:

Accepted Answer

The sale of equipment results in a cash inflow and is classified as an investing activity on the statement of cash flows. The cash inflow amount of $20,000 should be reported in the investing activities section.

Question 4

If goodwill has decreased in value, it is said to be:

Accepted Answer

When goodwill has decreased in value, it is considered impaired. This means that the value of goodwill is less than the amount recorded on the company's books, and the company must recognize this decrease in value through an impairment charge on its financial statements. Option A is not correct because even if goodwill has decreased in value, it still has some value, and therefore, it is not worthless. Option C is not correct because amortization is the process of gradually reducing the value of an intangible asset over time, and it does not necessarily reflect a decrease in the value of goodwill. Option D is not correct because a capital expenditure refers to an expenditure made to acquire or improve a long-term asset, while impairment of goodwill does not necessarily involve such expenditures.

Question 5

All of the following statements are true about goodwill EXCEPT:

Accepted Answer

Goodwill is only recorded when it is acquired through the purchase of another company and cannot be internally generated or recorded by a company for its own business.

Question 6

The protection against copying computer software programs comes from a:

Accepted Answer

Copyright law provides protection for original works of authorship, including computer software programs. A patent would protect a new and non-obvious invention, a trademark would protect a brand name or logo, and a license is a legal agreement allowing someone to use a product or service under certain terms and conditions.

Question 7

Farmer's Corp. has the following items that the controller is uncertain of where to place on the statement of cash flows:  A total of $_________ would appear in the Investing Activities section.

Accepted Answer

The answer of Farmer's Corp. has the following items that...

Question 8

The purchase of equipment on account will appear on the statement of cash flows as a financing activity.

Accepted Answer

The purchase of equipment on account does not involve cash flow; it is recorded as an increase in assets and liabilities, not affecting the cash flow statement directly.

Question 9

Patents are amortized over a period:

Accepted Answer

Patents are amortized over a period of 20 years or the expected useful life, whichever is less, according to Generally Accepted Accounting Principles (GAAP). This means that the asset is gradually written off over time, reflecting the diminishing value and usefulness of the patent. Option A is incorrect since patents generally have a maximum lifespan of 20 years from the date of filing, so 40 years would exceed this limit. Option C is incorrect since there is no requirement for patent amortization period to exceed 40 years. Option D is incorrect since patents are not expensed immediately, but rather are capitalized and amortized over a period of time.

Question 10

Depreciation expense is:

Accepted Answer

Depreciation expense is a non-cash charge that reduces net income, so it is added back to net income in the operating activities section of the cash flow statement to reconcile net income to net cash provided by operating activities.

Question 11

If a company has goodwill on its books:

Accepted Answer

Goodwill is not amortized but is tested annually for impairment. If its value has decreased, an impairment loss must be recorded.

Question 12

Farmer's Corp. has the following items that the controller is uncertain of where to place on the statement of cash flows:  Using the indirect method, how much would appear in the Operating Activities section?

Accepted Answer

Without specific information about the items, it is impossible to determine the correct answer. However, since the question asks for the amount that would appear in the Operating Activities section, the answer must be a positive number (since the options B and C show negative amounts). Therefore, the only possible answer is D, $116,000.

Question 13

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:

Accepted Answer

The down payment of $30,000 is a cash outflow in the investing activities section because it represents a payment for the acquisition of equipment. The note payable for $57,000 is a financing activity and does not affect the statement of cash flows.

Question 14

In 2011, 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 2011 balance sheet for First Company should show goodwill of:

Accepted Answer

The answer of In 2011, First Company purchased Second Company...

Question 15

The entry to amortize a patent includes a credit to:

Accepted Answer

Patents are amortized over their useful life, and the entry to amortize a patent includes a credit to the Patent account to reduce its book value.

Question 16

ABC Corporation acquired a patent for $120,000. The patent has a legal life of 20 years. Because of changing technology, the patent is expected to generate revenue for only 6 years. The annual amortization expense for the patent is:

Accepted Answer

The annual amortization expense for the patent is calculated as the cost of the patent ($120,000) divided by the shorter of its legal life (20 years) and its useful life (6 years), which is $20,000 per year. Therefore, the correct answer is B. Option A is incorrect since $6,000 is the amount of amortization expense that would be recorded if the patent were being amortized over its legal life of 20 years. Option C is incorrect since the cost of the patent should be capitalized and then amortized over its useful life. Option D is incorrect since patents are typically amortized over their useful life.

Question 17

Depletion will appear on the statement of cash flows as a financing activity.

Accepted Answer

Depletion is not classified as a financing activity in the statement of cash flows. It is considered an operating activity, as it relates to the use of natural resources in a business operation. Financing activities include transactions related to raising or paying back funds, such as issuing and repaying debt or equity.

Question 18

Research and development costs incurred by a company should be:

Accepted Answer

Research and development costs should be expensed on the current year's income statement as they are considered to be current expenses rather than long-term assets. This is in accordance with generally accepted accounting principles (GAAP).

Question 19

Depreciation of plant assets is reported as an investing activity on the statement of cash flows.

Accepted Answer

Depreciation of plant assets is actually reported as a non-cash expense on the income statement, but it is added back to net income in the operating activities section of the statement of cash flows. Therefore, it is not reported as an investing activity.

Question 20

Godert Pharmaceutical Company has many scientists working in the labs trying to develop an anti-aging drug. The cost of this research and development must be:

Accepted Answer

Research and development costs are typically expensed as incurred according to accounting standards, as there is uncertainty about the future economic benefits.

Quiz 7: Plant Assets Intangibles