Question 1

Falling Leaves Lawn Care This company purchased new excavating equipment at the beginning of 2012.The equipment has a cost of $37,000,an estimated life of 5 years,and an estimated residual value of $7,000.A full year's depreciation expense is to be recorded in 2012.The equipment was used 20,000 hours during 2012 and 24,000 hours during 2013.The number of expected hours over five years is 100,000.
-Refer to Falling Leaves Lawn Care.The company wants to use the depreciation method that will result in the highest depreciation expense for 2012.Which method should be used?
A)Straight-line
B)units-of-production
C)double-declining-balance
D)all methods create the same income in 2012

Accepted Answer

The double-declining-balance method will result in the highest depreciation expense for 2012 because it calculates depreciation based on a higher percentage in the early years of an asset's life. This method results in a larger depreciation expense in the earlier years of the asset's life, which decreases over time.

Question 2

Falling Leaves Lawn Care This company purchased new excavating equipment at the beginning of 2012.The equipment has a cost of $37,000,an estimated life of 5 years,and an estimated residual value of $7,000.A full year's depreciation expense is to be recorded in 2012.The equipment was used 20,000 hours during 2012 and 24,000 hours during 2013.The number of expected hours over five years is 100,000.
-Refer to Falling Leaves Lawn Care.The company is comparing the straight-line and double-declining-balance depreciation methods.Of these two methods,which method creates the larger expense and larger tax savings in 2012?
A)Straight-line depreciation creates the larger expense,while double-declining-balance depreciation creates the larger tax savings.
B)Straight-line depreciation creates both the larger expense and the larger tax savings.
C)Double-declining-balance depreciation creates both the larger expense and the larger tax savings.
D)Double-declining-balance depreciation creates the larger expense,while straight-line depreciation creates the larger tax savings.

Accepted Answer

Double-declining-balance method results in larger depreciation expense and larger tax savings in 2012 because it depreciates the asset at a faster rate, resulting in larger depreciation expenses in the earlier years. Straight-line method, on the other hand, spreads the depreciation expense evenly over the useful life of the asset, resulting in lower depreciation expense and tax savings in the early years.

Question 3

Floors 4 U uses straight-line depreciation for its equipment.The company purchased equipment for $250,000 and estimated its useful life at 8 years.The bookkeeper failed to consider the residual value of $25,000.What is the impact on earnings per share and operating income of failing to consider the residual value?
A)Earnings per share will be overstated and operating income will be understated.
B)Earnings per share will be understated and operating income will be overstated.
C)Both earnings per share and operating income will be overstated.
D)Both earnings per share and operating income will be understated.

Accepted Answer

By not considering the residual value, depreciation expense is overstated each year, which leads to understating both operating income and earnings per share.

Question 4

Falling Leaves Lawn Care This company purchased new excavating equipment at the beginning of 2012.The equipment has a cost of $37,000,an estimated life of 5 years,and an estimated residual value of $7,000.A full year's depreciation expense is to be recorded in 2012.The equipment was used 20,000 hours during 2012 and 24,000 hours during 2013.The number of expected hours over five years is 100,000.
-Refer to Falling Leaves Lawn Care.What is the amount by which double-declining-balance depreciation exceeds straight-line depreciation over the 5-year life of the equipment?
A)$ -0-
B)$ 7,000
C)$37,000
D)$ 6,000

Accepted Answer

Both double-declining-balance and straight-line depreciation methods will depreciate the equipment to its residual value over its useful life. Therefore, the total depreciation over the 5-year life will be the same, resulting in no excess.

Question 5

Generally accepted accounting principles (GAAP)require that research and development costs to develop a new product be
A)capitalized in the patents account.
B)expensed in the period incurred.
C)capitalized in the research and development costs account.
D)amortized over the expected economic life of the new product.

Accepted Answer

GAAP requires that research and development costs be expensed in the period incurred rather than capitalized as an asset on the balance sheet. This is because it is uncertain whether the development costs will result in a successful product, and capitalizing these costs would overstate assets and inflate profits. Only when the product is successfully developed and generates future economic benefits can the costs be capitalized as an intangible asset.

Question 6

Which of the following costs related to the purchase of production equipment would be considered a revenue expenditure?
A)Installation costs for equipment
B)Purchase price of the equipment less the cash discount
C)Repair and maintenance costs during the equipment's first year of service
D)Transportation charges for getting the equipment delivered to the business

Accepted Answer

Repair and maintenance costs during the equipment's first year of service are considered revenue expenditures because they are ongoing and necessary expenses for keeping the equipment in good working condition. The other options are considered capital expenditures because they are one-time costs associated with acquiring and setting up the equipment.

Question 7

A company purchased a patent for $100,000 at the beginning of 2012 which it believes has an expected useful life of 5 years.Fortunately,the patent has a legal life of 20 years.How much amortization expense should be recorded in 2012?
A)$0
B)$5,000
C)$20,000
D)$100,000

Accepted Answer

The amortization expense should be calculated using the straight-line method, which means dividing the cost of the patent by its expected useful life.
Therefore, amortization expense per year will be $100,000 / 5 = $20,000.
Hence, the correct answer is option C, which is $20,000.

Question 8

The accounting life of intangible assets is determined by
A)Their legal lives.
B)Their useful lives.
C)Their legal lives or useful lives,whichever is shorter.
D)The tax life mandated by the IRS.

Accepted Answer

The accounting life of intangible assets is determined by the shorter of their legal lives or useful lives, as this reflects the period over which the asset is expected to generate economic benefits.

Question 9

On January 1,2012,a company sold a machine for $5,000 that it had used for several years.The machine cost $11,000,and had accumulated depreciation of $4,500 at the time of sale.What gain or loss will be reported on the income statement for the sale of the machine?
A)Gain of $5,000
B)Loss of $6,500
C)Loss of $1,500
D)Gain of $1,500

Accepted Answer

The gain or loss is calculated by subtracting the book value of the asset from the selling price. The book value of the machine is $6,500 ($11,000 cost - $4,500 accumulated depreciation). The selling price is $5,000. Therefore, there is a loss of $1,500 ($5,000 selling price - $6,500 book value).

Question 10

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price for land,cost to clear the land,cost of paving,cost of lighting for the parking lot,and cost of landscaping for the parking lot.How should the company determine which costs should be recorded as Land Improvements and which costs should be recorded as Land?
A)The costs with an unlimited life are debited to Land,and the costs with a limited useful life are debited to Land Improvements.
B)The costs with a limited life are debited to Land,and the costs with an unlimited useful life are debited to Land Improvements.
C)The costs to be depreciated are debited to Land,and the costs that will not be depreciated are debited to Land Improvements
D)Costs that are depreciable are debited to Land Improvements,while other costs are expensed immediately because of a lack of definite life.

Accepted Answer

The costs with an unlimited life, such as the purchase price for land and cost to clear the land, are debited to Land because they represent a permanent investment that does not depreciate over time. Costs with a limited useful life, such as paving, lighting, and landscaping for the parking lot, are debited to Land Improvements because they enhance the land's value and are subject to depreciation over their useful life.

Question 11

Falling Leaves Lawn Care This company purchased new excavating equipment at the beginning of 2012.The equipment has a cost of $37,000,an estimated life of 5 years,and an estimated residual value of $7,000.A full year's depreciation expense is to be recorded in 2012.The equipment was used 20,000 hours during 2012 and 24,000 hours during 2013.The number of expected hours over five years is 100,000.
-Refer to Falling Leaves Lawn Care.By what amount would double-declining-balance depreciation exceed straight-line depreciation over the 5-year life of the equipment?
A)The salvage value of $7,000.
B)Cost less total depreciation.
C)Cost plus total depreciation.
D)Total depreciation expenses under double-declining-balance and straight-line depreciation are equal.

Accepted Answer

Over the 5-year life of the equipment, total depreciation expenses under both double-declining-balance and straight-line methods will equal the cost minus the residual value, so they are equal.

Question 12

Current accounting standards indicate that the costs of intangible assets with an indefinite life,such as goodwill,should
A)not be amortized,but should be reviewed annually for impairment.
B)be reported on the statement of retained earnings in the year in which acquired.
C)be amortized over a reasonable period of time not to exceed 40 years.
D)be debited to an expense account entirely in the year in which acquired.

Accepted Answer

Accounting standards require that the costs of intangible assets with an indefinite life, such as goodwill, should not be amortized. Instead, they should be reviewed annually for impairment to ensure that their carrying value still reflects their realizable value. This is because their useful life cannot be determined with certainty, and they could potentially provide benefits to the company indefinitely. Therefore, choice A is the best choice.

Question 13

A company purchased land and incurred the following costs: $\begin{array}{l}
\begin{array}{lll}
\text { Purchase Price }\
\text { Excavation Costs }\
\text { Razing Old Building }\
\text { Broker Fees }\
\text { Cost of a Parking Lot  }\
\end{array}
\begin{array}{lll}
\$ 500,000 \
50,000 \
12,500 \
10,000 \
25,000
\end{array}
\end{array}$ 
What is the cost of the land?
A)$550,000
B)$597,500
C)$572,500
D)$562,500

Accepted Answer

The cost of the land is the purchase price plus any additional costs directly associated with the acquisition of the land. In this case, that would be the excavation costs, razing old building costs, broker fees, and cost of the parking lot. Therefore:

Cost of Land = Purchase Price + Excavation Costs + Razing Old Building Costs + Broker Fees + Cost of Parking Lot 
Cost of Land = $500,000 + $50,000 + $12,500 + $10,000 + $25,000 
Cost of Land = $597,500

Therefore, the best choice is (C), $572,500.

Question 14

On the balance sheet,the cumulative amount of plant and equipment already expensed is reported in an account called
A)Accumulated Amortization
B)Accumulated Depreciation
C)Amortization Expense
D)Depreciation Expense

Accepted Answer

Accumulated Depreciation is the account on the balance sheet that represents the total amount of depreciation expensed on a company's plant and equipment assets over time. It is a contra-asset account and is subtracted from the cost of the assets to arrive at their net book value. Choice A, Accumulated Amortization, would be used for intangible assets such as patents or copyrights. Choices C and D, Amortization Expense and Depreciation Expense, are income statement accounts that show the amount of amortization or depreciation that was expensed during a specific period, not the cumulative amount over time.

Question 15

Operating assets with no physical properties are called
A)current assets
B)intangible assets
C)plant assets
D)property,plant,and equipment

Accepted Answer

Intangible assets are non-physical assets with no defined physical shape, such as patents, copyrights, trademarks, and goodwill. These assets generate economic benefits for the company and are considered valuable assets despite having no physical presence. Current assets are short-term assets that can be easily converted into cash, such as inventory and accounts receivable. Plant assets and property, plant, and equipment refer to tangible assets with a lifespan of more than one year, such as buildings, machinery, and land.

Question 16

Goodwill can be recorded as an asset when a(n)
A)business has above normal profitability compared to other businesses in its industry.
B)business can determine that it has created customer goodwill and name recognition.
C)offer is received to purchase the business at a price in excess of the value of the assets.
D)business is purchased and payment is made in excess of the value of the net assets.

Accepted Answer

Goodwill can be recorded as an asset when a business is purchased and payment is made in excess of the value of the net assets. In other words, the excess amount paid is considered to be the value of goodwill.

Question 17

Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value.The CEO points out that the equipment will last much shorter than 10 years,perhaps 5 years.What is the impact on earnings per share and net income of depreciating equipment over 5 years rather than 10 years?
A)Both earnings per share and net income will decrease.
B)Both earnings per share and net income will increase.
C)Earnings per share will decrease and net income will increase.
D)Earnings per share will increase and net income will decrease.

Accepted Answer

Depreciating equipment over a shorter useful life of 5 years will result in higher depreciation expense being recognized each year. This will lower net income, and since earnings per share are calculated by dividing net income by the number of outstanding shares, earnings per share will also decrease.

Question 18

Which of the following accounts would not be reported in the Property,Plant,and Equipment section of a balance sheet? A)Accumulated Depreciation--Buildings B)Buildings C)Depreciation Expense--Buildings D)Land

Accepted Answer

Depreciation Expense is an income statement account used to record the allocation of cost of the building over its useful life. It is not reported in the Property, Plant, and Equipment section of the balance sheet.

Question 19

How should intangible assets be disclosed on the balance sheet?
A)As a reduction of stockholders' equity
B)At cost in the current assets section
C)At the estimated market value at the balance sheet date
D)Net of the costs already amortized

Accepted Answer

Intangible assets are disclosed on the balance sheet at their cost, net of any accumulated amortization, reflecting the portion of the asset's cost that has been expensed over time.

Question 20

Fabian Woodworks This company purchased a truck at a cost of $12,000.The truck has an estimated residual value of $2,000 and an estimated life of 5 years,or 100,000 hours of operation.The truck was purchased on January 1,2012,and was used 27,000 hours in 2012 and 26,000 hours in 2013.
-Refer to Fabian Woodworks.If the company uses the double-declining-balance depreciation method,what amount is the depreciation expense for 2013?
A)$4,800
B)$2,880
C)$1,728
D)$2,000

Accepted Answer

Double-declining-balance method is an accelerated depreciation method that results in higher depreciation expense in the early years of an asset's life. To calculate the depreciation expense for 2013, we need to first calculate the truck's book value at the beginning of the year (January 1, 2013):
Book value at beginning of 2013 = Cost - Accumulated depreciation
Accumulated depreciation at the end of 2012:
Depreciation expense in 2012 = (2/5) x ($12,000 - $2,000) = $4,800
Accumulated depreciation at the end of 2012 = $4,800
Book value at beginning of 2013 = $12,000 - $4,800 = $7,200
Depreciation expense in 2013:
Depreciation rate = 2 x (1/5) = 0.4
Depreciation expense in 2013 = Depreciation rate x Book value at beginning of 2013
= 0.4 x $7,200 = $2,880. 
Therefore, the correct answer is B) $2,880.

Quiz 7: Operating Assets

Generally accepted accounting principles (GAAP) require that research and development costs to develop a new product be

Which of the following costs related to the purchase of production equipment would be considered a revenue expenditure?

A company purchased a patent for $100,000 at the beginning of 2012 which it believes has an expected useful life of 5 years.Fortunately,the patent has a legal life of 20 years.How much amortization expense should be recorded in 2012?

The accounting life of intangible assets is determined by

On January 1,2012,a company sold a machine for $5,000 that it had used for several years.The machine cost $11,000,and had accumulated depreciation of $4,500 at the time of sale.What gain or loss will be reported on the income statement for the sale of the machine?

Current accounting standards indicate that the costs of intangible assets with an indefinite life,such as goodwill,should

On the balance sheet,the cumulative amount of plant and equipment already expensed is reported in an account called

Operating assets with no physical properties are called

Goodwill can be recorded as an asset when a(n)

Which of the following accounts would not be reported in the Property,Plant,and Equipment section of a balance sheet?

How should intangible assets be disclosed on the balance sheet?