Question 1

Which of the following would most likely not be expensed using the straight-line method?
A)A copyright.
B)A building.
C)A timber reserve.
D)A patent.

Accepted Answer

Depletion of natural resources is recognized in a similar fashion to units-of-production depreciation.

Question 2

George Company purchased oil rights on July 1, 2013 for $2,400,000. If 200,000 barrels of oil are expected to be extracted over the assets life, and 30,000 barrels are extracted and sold in 2013, the recognition of depletion expense on December 31, 2013 would cause:
A)a reduction in equity of $200,000.
B)a reduction in assets of $300,000.
C)a reduction in assets of $360,000.
D)an increase in equity of $400,000.

Accepted Answer

$2,400,000/200,000 barrels = $12/barrel; $12 x 30,000 barrels = $360,000 depletion expense; Recognizing depletion decreases assets (oil rights) and increases expenses, which decreases equity, by $360,000.

Question 3

The recognition of depletion expense
A)decreases assets and equity and decreases cash flow from investing expenses under the direct approach.
B)decreases cash flow from operating activities, and does not affect the amount of total assets.
C)increases assets, equity, and cash flow from operating activities.
D)decreases assets and equity, and does not affect cash flow.

Accepted Answer

Recognition of depletion decreases assets (the natural resource) and increases expenses, which decreases equity. It does not affect cash flows.

Question 4

On January 1, 2012 Eastwood Company purchased an asset that had cost $48,000. The asset had a 8-year useful life and an estimated salvage value of $2,000. Eastwood depreciates its assets on the straight-line basis. On January 1, 2016 the company spent $12,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in 2016 would
A)increase total assets by $8,750.
B)reduce total equity by $8,750.
C)reduce total assets by $9,250.
D)increase total equity by $9,250.

Accepted Answer

($48,000 cost - $2,000 salvage)/8 years = $5,750 original annual depreciation; $5,750 x 4 years = $23,000 accum. depr. at time of improvement; ($48,000 orig. cost - $23,000 accum. depr. + $12,000 improvement - $2,000 salvage)/4 remaining years = $8,750 new annual depreciation; Recognizing the new depreciation expense decreases assets and equity by $8,750.

Question 5

Which of the following statements is true concerning the modified accelerated cost recovery system (MACRS) for the recognition of depreciation expense?
A)7-year property will be depreciated more rapidly than 10-year property under the MACRS depreciation method.
B)Under MACRS more depreciation will be recorded in the second accounting period than in the first accounting period because of the half-year convention.
C)MACRS is used for the determination of depreciation expense that is reported on an income tax return.
D)All of these statements are true.

Accepted Answer

7-year property will be depreciated over 7 years, and 10-year property will be depreciated over 10 years. Because of the half-year convention, MACRS depreciation will be greater in an asset's second year than it its first. MACRS is used for tax reporting, but not for financial statement reporting.

Question 6

If the original expected life remained the same (i.e., 5-years), but at the beginning of 2016, the salvage value was revised to $4,000, the annual depreciation expense for each of the remaining years would be:
A)$2,720.
B)$13,600.
C)$7,400.
D)$6,800.

Accepted Answer

41,000 cost - $2,000 salvage value)/5 years = $7,800 original annual depreciation; $41,000 - ($7,800 x 3 years) = $17,600 book value at the time of revision;($17,600 book value - $4,000 revised salvage value)/2 years of remaining useful life = $6,800 new annual depreciation

Question 7

For 2013, The Oscar Company records depreciation expense of $12,000 on its income statement and $9,000 of MACRS depreciation on its tax return. Which of the following answers is correct regarding the difference between the two figures?
A)Net income is understated by $3,000 on the 2013 income statement.
B)The difference in depreciation expense is caused by differences between GAAP and the tax code.
C)Deferred taxes of $3,000 are subtracted from taxable income of 2013.
D)The amount of depreciation recorded on the income tax return must be incorrect.

Accepted Answer

MACRS will typically produce a different depreciation expense than any of the GAAP methods of calculating depreciation. It does not mean that net income is understated, it is just that net income for financial reporting is different than net income for tax reporting. The resulting deferred tax is a liability that does not affect the income statement.

Question 8

Marsh Company owned an asset that had cost $22,000. The company sold the asset on January 1, 2013 for $8,000. Accumulated depreciation on the day of sale amounted to $16,000. Based on this information, the sale would result in:
A)An $8,000 increase in total assets.
B)An $8,000 cash inflow in the investing activities section of the cash flow statement.
C)A $2,000 gain in the investing activities section of the statement of cash flows.
D)A $2,000 cash inflow in the financing activities section of the cash flow statement.

Accepted Answer

Cash flows are only affected by the $8,000 cash received on the sale. Cash flows are not affected by the book value of the asset. The $8,000 is reported as a cash inflow from investing activities. Total assets increase by $2,000, the difference between the $8,000 cash received and the $6,000 book value of the asset sol

Question 9

On January 1, 2013, Owens Company spent $850 on a plant asset to improve its quality. The asset had been purchased on January 1, 2010 for $4,200 and had an estimated salvage value of $600 and a useful life of five years. Owens uses the straight-line depreciation method. Which of the following correctly shows the effects of the 2013 expenditure on the financial statements? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

A capital expenditure that improves an asset's quality increases one asset (equipment) and decreases another asset(cash) account and is reported as a cash outflow for investing activities.

Question 10

On April 1, 2013, Texas Energy Company purchased an oil producing well at a cash cost of $6,000,000. It is estimated that the oil well contains 600,000 barrels of oil, of which only 500,000 can be profitably extracted. By December 31, 2013, 25,000 barrels of oil were produced and sold. The amount of depletion expense for 2013 on this well would be:
A)$300,000.
B)$400,000.
C)$240,000.
D)$250,000.

Accepted Answer

$6,000,000/500,000 barrels = $12/barrel; $12 x 25,000 barrels = $300,000 depletion expense; The cost of the oil well is distributed over only those barrels that can be profitable extracte

Question 11

Monroe Minerals Company purchased a copper mine for $120,000,000. The mine was expected to produce 50,000 tons of copper over its useful life. During 2013, the company extracted 6,000 tons of copper. The copper was sold for $4,500 per ton. Assume that the company incurred $8,040,000 in operating expenses during 2013. Based on this information, how much net income would Monroe report in 2013?
A)$12,600,000.
B)$4,560,000.
C)$6,360,000.
D)$14,400,000.

Accepted Answer

$120,000,000/50,000 tons = $2,400/ton; 6,000 tons x $4,500 = $27,000,000 revenue; 6,000 x $2,400 = $14,400,000 depletion expense; $27,000,000 revenue - $14,400,000 depletion - $8,040,000 operating expenses = $4,560,000 net income

Question 12

Goldfarb, Inc. uses MACRS for its income tax returns and straight line depreciation for its financial statements. The company purchased 5 year MACRS property on January 1, 2013 that cost $65,000 and has a $5,000 salvage value and an expected 8 year useful life. Given a depreciation percentage of 20% for the first year for 5 year property, the company would show which of the following on its financial records?
A)a deferred tax liability.
B)the same amount of depreciation expense for financial reporting as for income tax preparation.
C)depreciation expense of $13,000 on the income statement and $7,500 on the tax return.
D)less depreciation expense on the tax return than on the income statement.

Accepted Answer

Depreciation on Goldfarb's 2013 income tax return = 20% x $65,000 = $13,000. Using straight-line depreciation, Goldfarb would recognize $7,500 of depreciation expense: ($65,000 - $5,000)/8 years. Because the company will pay less income tax than it will report as income tax expense, it will record a deferred tax liability.

Question 13

On January 1, 2013, Leland Company purchased an asset that cost $20,000. The asset had an expected useful life of five years and an estimated salvage value of $4,000. Leland uses the straight-line method for the recognition of depreciation expense. At the beginning of the fourth year of usage, the company revised its estimated salvage value to $2,000. Based on this information, the amount of depreciation expense to be recognized at the end of 2016 is:
A)$4,200.
B)$3,200.
C)$8,400.
D)$5,200.

Accepted Answer

($20,000 cost - $4,000 orig. salvage value)/5 years = $3,200 original annual depreciation expense; $20,000 cost - ($3,200 x 3 years) = $10,400 book value at the time of the revision; ($10,400 book value - $2,000 revised salvage value)/2 remaining years = $4,200 new annual depreciation expense

Question 14

On January 1, 2013 Ballard Company spent $6,000 on an asset to improve its quality. The asset had been purchased on January 1, 2012 for $26,000. The asset had a $2,000 salvage value and a 6-year life. Ballard uses straight-line depreciation. What would be the book value of the asset on January 1, 2016?
A)$12,000.
B)$10,400.
C)$5,200.
D)$12,400.

Accepted Answer

($26,000 cost - $2,000 salvage value)/6 years = $4,000 original annual depreciation; $26,000 - ($4,000 x 1 year) = $22,000 book value at the time of capital expenditure; ($22,000 book value + $6,000 capital expenditure - $2,000 salvage value)/5 years of remaining useful life = $5,200 new annual depreciation; $32,000 total cost of asset - $4,000 depr. in 2012 - $5,200 depr. in 2013 - $5,200 depr. in 2014 - $5,200 depr. in 2015 = $12,400 book value on 1/1/2016

Question 15

On January 1, 2013 Brewer Company paid $14,000 cash to extend the useful life of a machine. Which of the following general journal entries would be required to recognize this expenditure?
A) 
B) 
C) 
D)

Accepted Answer

Capital expenditures that extend useful life are recorded as a debit (decrease) to accumulated depreciation and a credit (decrease) to cash.

Question 16

At the beginning of 2016, Furst revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:
A)$3,520.
B)$2,200.
C)$3,120.
D)$1,950.

Accepted Answer

($41,000 cost - $2,000 salvage value)/5 years = $7,800 original annual depreciation; $41,000 - ($7,800 x 3 years) = $17,600 book value at the time of revision; ($17,600 book value - $2,000 salvage value)/5 years of revised remaining useful life = $3,120 new annual depreciation

Question 17

On January 1, 2013, the City Taxi Company purchased a new taxi cab for $36,000. The cab has an expected salvage value of $2,000. The company estimates that the cab will be driven 200,000 miles over its life. It uses the units of production method to determine depreciation expense. The cab was driven 45,000 miles the first year and 48,000 the second year. What would be the depreciation expense reported on the 2014 income statement and the book value of the taxi at the end of 2014?
A)$8,640/$19,260.
B)$8,640/$17,260.
C)$8,160/$20,190.
D)$8,160/$18,190.

Accepted Answer

($36,000 - $2,000)/200,000 miles = $0.17/mile; 45,000 miles x $0.17 = $7,650 depreciation expense in 2013; 48,000 miles x $0.17 = $8,160 depreciation expense in 2014; $36,000 - ($7,650 + $8,160) = $20,190 book value at the end of 2014.

Question 18

Allen Company paid cash to prolong the life of one of its assets. Which of the following choices accurately reflects how this event would affect Allen's financial statements? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The expenditure decreases assets (cash) and increases assets (decreases accumulated depreciation). It does not affect the income statement, and is reported as a cash outflow for investing activities.

Question 19

On September 10, 2013, Flagler Company sold a piece of equipment for $3,000. The equipment had an original cost of $17,000 and accumulated depreciation of $15,500 at the time of the sale. Which of the following correctly shows the effect of the sale on the 2013 financial statements? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The cash account increases by $3,000, the equipment account decreases by $17,000, and the accumulated depreciation account decreases by $15,500, resulting in a net increase in assets of $1,500. Because the selling price is $1,500 greater than the equipment's book value ($17,000 - $15,500), Flagler reports a gain on the sale of $1,500, which increases revenue, net income, and equity. The $3,000 cash proceeds are reported as a cash inflow for investing activities.

Question 20

Geode Company paid cash to purchase mineral rights on a large parcel of land. Which of the following choices accurately reflects how this event would affect Geode's financial statements? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The purchase will decrease assets (cash) and increase assets (mineral rights). It is reported as a cash outflow for investing activities.

Quiz 8: Accounting for Long-Term Operational Assets

Which of the following would most likely not be expensed using the straight-line method?

George Company purchased oil rights on July 1, 2013 for $2,400,000. If 200,000 barrels of oil are expected to be extracted over the assets life, and 30,000 barrels are extracted and sold in 2013, the recognition of depletion expense on December 31, 2013 would cause:

The recognition of depletion expense

Which of the following statements is true concerning the modified accelerated cost recovery system (MACRS) for the recognition of depreciation expense?

If the original expected life remained the same (i.e., 5-years) , but at the beginning of 2016, the salvage value was revised to $4,000, the annual depreciation expense for each of the remaining years would be:

For 2013, The Oscar Company records depreciation expense of $12,000 on its income statement and $9,000 of MACRS depreciation on its tax return. Which of the following answers is correct regarding the difference between the two figures?

Marsh Company owned an asset that had cost $22,000. The company sold the asset on January 1, 2013 for $8,000. Accumulated depreciation on the day of sale amounted to $16,000. Based on this information, the sale would result in:

On January 1, 2013 Brewer Company paid $14,000 cash to extend the useful life of a machine. Which of the following general journal entries would be required to recognize this expenditure?

At the beginning of 2016, Furst revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:

Allen Company paid cash to prolong the life of one of its assets. Which of the following choices accurately reflects how this event would affect Allen's financial statements?

On September 10, 2013, Flagler Company sold a piece of equipment for $3,000. The equipment had an original cost of $17,000 and accumulated depreciation of $15,500 at the time of the sale. Which of the following correctly shows the effect of the sale on the 2013 financial statements?

Geode Company paid cash to purchase mineral rights on a large parcel of land. Which of the following choices accurately reflects how this event would affect Geode's financial statements?