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Chapter 8
ACCOUNTING FOR LONG-TERM ASSETS
True / False Questions
1. Plant assets refer to nonphysical assets that are used in the operations of a business.
Answer: False
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 08-C1
Topic: Cost Determination
8-1
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2. Plant assets are used in operations and have useful lives that extend over more than one
accounting period.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
3. If land is purchased as a building site, the cost of removing existing structures is not
charged to the Land account.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
4. The phrase capital-intensive refers to companies with large amounts invested in plant
assets.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-2

5. The process of allocating the cost of a plant asset to expense in the accounting periods
benefiting from its use is called depletion.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Learning Objective: 08-P1
Topic: Depreciation Methods
6. Salvage value is an estimate of an asset’s value at the end of its benefit period.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
7. When plant assets are purchased as a group in a single transaction for a lump-sum price, the
cost of the purchase is allocated among the different types of assets acquired based on their
relative market values.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8. Obsolescence refers to the insufficient capacity of a company’s plant assets to meet the
company’s growing productive demands.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-3

9. Depreciation does not measure the decline in market value of an asset each period.
Answer: True
Blooms: Remember
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 1 Easy
8-4

10. A plant asset’s useful life is the length of time it is productively used in a company’s
operations.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
11. It is necessary to report both the cost and the accumulated depreciation of plant assets in
the financial statements.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
12. Depreciation expense is calculated using its cost, estimates of an asset’s salvage value,
and an estimated useful life.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
13. Once an asset’s book value equals its salvage value, depreciation stops.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-5

14. When an asset is purchased (or disposed of) at a time other than the beginning or the end
of an accounting period, depreciation is recorded for part of a year so that the year of purchase
or the year of disposal is charged with its share of the asset’s depreciation.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Partial-Year Depreciation
15. Revising an estimate of the useful life or salvage value of a plant asset is referred to as a
change in accounting estimate and is reflected in the current, and future financial statements.
Answer: True
Blooms: Remember
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 1 Easy
16. Plant assets are reported on a balance sheet at their undepreciated costs (book value), not
at fair (market) values.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
17. Total depreciation expense over an asset’s useful life will be identical under all methods
of depreciation.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-6

18. Financial accounting and tax accounting require the same recordkeeping and there should
be no difference in results between the two accounting systems.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
19. Depreciation is higher in earlier years and income is lower in the later years when using
straight-line versus accelerated methods.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
20. The book value of an asset when using double-declining-balance depreciation is always
greater than the book value from using straight-line depreciation, except at the beginning and
the end of the asset’s useful life, when it is the same.
Answer: False
Blooms: Understand
AACSB: Reflective Thinking
AICPA BB: Industry
Difficulty: 2 Medium
21. The straight-line depreciation method yields a steady pattern of depreciation expense.
Answer: True
Blooms: Understand
AICPA BB: Industry
8-7

22. The Modified Accelerated Cost Recovery System (MACRS) is part of the U.S. federal
income tax laws and may be used for financial reporting.
Answer: False
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
23. Decision makers and other users of financial statements are especially interested in
evaluating a company’s ability to use its assets in generating sales.
Answer: True
Blooms: Remember
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 08-A1
Topic: Total Asset Turnover
24. Asset turnover is computed by dividing net sales by average total assets.
Answer: True
Blooms: Understand
AACSB: Analytic
Difficulty: 1 Easy
25. Companies that have a relatively large amount invested in assets to generate a given level
of sales are considered capital-intensive.
Answer: True
Blooms: Remember
AACSB: Analytic
Difficulty: 1 Easy
8-8

26. Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its
total asset turnover equals 1.71.
Answer: True
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard
Feedback: Total Asset Turnover = Net Sales/Average Total Assets

Total Asset Turnover = $2,523/$1,476 = 1.71
27. Total asset turnover is calculated by dividing net sales by average total assets.
Answer: True
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard
28. Total asset turnover is calculated by dividing average total assets by net sales.
Answer: False
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard
29. Edmond reported average total assets of $9,965 million and net sales of $10,430 million.
Its total asset turnover equals .96.
Answer: False
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard

8-9

30. An asset’s cost includes all normal and reasonable expenditures necessary to get the asset
in place and ready for its intended use.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-10

31. If a machine is damaged during unpacking, the repairs are added to its cost.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
32. The purchase of a property that included land, building, and related improvements is
called a lump-sum or basket purchase.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
33. When a company constructs a building, the cost of the building includes materials and
labor but not design fees, building permits, or insurance during construction.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
34. Additions to land that increase the usefulness of the land such as parking lots, fences, and
lighting are not depreciated.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Cost of Plant Assets
8-11

35. The cost of fees for insuring the title and any accrued property taxes are included in the
cost of land.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
36. Total asset cost plus depreciation expense equals book value.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
37. The units-of-production method of depreciation charges a varying amount of expense for
each period of an asset’s useful life depending on its usage.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
38. An accelerated depreciation method yields larger depreciation expense in the early years
of an asset’s life and less depreciation expense in later years.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-12

39. The double-declining balance method is applied by (1) computing the asset’s straight-line
depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying
the rate times the net value.
Answer: False
Blooms: Understand
AICPA BB: Industry
40. A company purchased a plant asset for $60,000. The asset has an estimated salvage value
of $4,000, and an estimated useful life of 7 years. The annual depreciation expense using the
straight-line method is $4,000 per year.
Answer: False
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Depreciation Expense = (Cost – Salvage Value)/Estimated Useful Life

Depreciation Expense = ($60,000 – $4,000)/7; Depreciation Expense = $8,000
41. Revenue expenditures, also called income statement expenditures, are additional costs of
plant assets that do not materially increase the assets’ life or productive capabilities.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Additional Expenditures
8-13

42. Capital expenditures, also called balance sheet expenditures, are additional costs of plant
assets that provide benefits extending beyond the current period.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
43. Extraordinary repairs are expenditures extending the asset’s useful life beyond its original
estimate, and are capital expenditures because they benefit future periods.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
44. Revenue expenditures are also called balance sheet expenditures.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
45. Betterments are a type of capital expenditure.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-14

46. Plant assets can be disposed of by discarding, selling, or exchanging them.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Disposals of Plant Assets
47. The first step in accounting for an asset disposal is to calculate the gain or loss on
disposal.
Answer: False
Blooms: Remember
AICPA BB: Industry
48. Accounting for the exchange of assets depends on whether the transaction has commercial
substance; commercial substance implies that it alters the company’s future cash flows.
Answer: True
Blooms: Remember
AICPA BB: Industry
Topic: Exchanging Plant Assets
49. No gain or loss is recorded for exchanges of plant assets without commercial substance.
Answer: True
Blooms: Remember
AICPA BB: Industry
8-15

50. If an asset is sold above its book value, the selling company records a loss.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
51. Gain or loss on the disposal of assets is determined by comparing the disposed asset’s
book value to the market value of any assets received.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
52. A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale
is less than the asset’s book value.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
53. Natural resources are assets that include standing timber, mineral deposits, and oil and gas
fields.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Natural Resources
8-16

54. Amortization is the process of allocating the cost of natural resources to periods when
they are consumed.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
55. Depletion is the process of allocating the cost of natural resources to periods when they
are consumed.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
56. Natural resources may be reported under either plant assets or their own separate category
on the balance sheet.
Answer: True
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
57. When the usefulness of plant assets used to extract natural resources is directly related to
the depletion of a natural resource, their costs are depreciated using the units-of-production
method of depreciation, as long as the assets will not be moved to and used at another site
when extraction of the natural resources is complete.
Answer: True
Blooms: Understand
AICPA BB: Industry
8-17

58. The cost of an intangible asset is systematically allocated to depreciation expense over its
estimated useful life.
Answer: False
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
Topic: Intangible Assets
59. A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.
Answer: True
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
8-18

60. Intangible assets are nonphysical assets used in operations that confer on their owners’
long-term rights, privileges, or competitive advantages.
Answer: True
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
61. Since goodwill is an intangible asset, it is amortized each year using the straight-line
method.
Answer: False
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
62. A patent is an exclusive right granted to its owner to manufacture and sell a patented
device or to use a process for 20 years.
Answer: True
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
8-19

63. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or
artistic work during the life of the creator plus 17 years.
Answer: False
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
64. A trademark is an exclusive right granted to its owner to publish and sell a musical,
literary, or artistic work during the life of the creator plus 70 years.
Answer: False
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
Multiple Choice Questions
65. Plant assets are defined as:

A. Tangible assets that have a useful life of more than one accounting period and are used in
the operation of a business.
B. Current assets.
C. Held for sale.
D. Intangible assets used in the operations of a business that have a useful life of more than
one accounting period.
E. Tangible assets used in the operation of business that have a useful life of less than one
accounting period.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-20

66. One characteristic of plant assets is that they are:
A. Current assets.
B. Used in operations.
C. Natural resources.
D. Long-term investments.
E. Intangible.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
67. The relevant factors in computing depreciation do not include:

A. Cost.
B. Salvage value.
C. Useful life.
D. Depreciation method.
E. Market value.
Answer: E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
68. Salvage value is:

A. Not a factor relevant to determining depletion.
B. A factor relevant to amortizing an intangible asset with an indefinite life.
C. An estimate of the asset’s value at the end of its benefit period.
D. A factor relevant to determining depreciation under MACRS.
E. A factor relevant to determining depreciation that cannot be revised during an asset’s
useful life.
Answer: C
Blooms: Remember
AICPA BB: Industry
8-21

69. Depreciation:
A. Measures the decline in market value of an asset.
B. Measures physical deterioration of an asset.
C. Is the process of allocating the cost of a plant asset to expense.
D. Is an outflow of cash from the use of a plant asset.
E. Is applied to land.
Answer: C
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
70. The useful life of a plant asset is:

A. The length of time it is productively used in a company’s operations.
B. Never related to its physical life.
C. Its productive life, but not to exceed one year.
D. Determined by the FASB.
E. Determined by law.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-22

71. The term inadequacy, as it relates to the useful life of an asset, refers to:
A. The insufficient capacity of a company’s plant assets to meet the company’s growing
production demands.
B. An asset that is worn out.
C. An asset that is no longer useful in producing goods and services.
D. The condition where the salvage value is too small to replace the asset.
E. The condition where the asset’s salvage value is less than its cost.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
72. The term, obsolescence, as it relates to the useful life of an asset, refers to:
A. The end of an asset’s useful life.
B. A plant asset that is no longer useful in producing goods and services with a competitive
advantage.
C. The insufficient capacity of a company’s plant assets to meet the company’s productive
demands.
D. An asset’s salvage value becoming less than its replacement cost.
E. Intangible assets that have been fully amortized.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-23

73. Once the estimated depreciation expense for an asset is calculated:
A. It cannot be changed, based on the historical cost principle.
B. It may be revised based on new information.
C. Any changes are accumulated and recognized when the asset is sold.
D. The estimate itself cannot be changed; however, new information should be disclosed in
financial statement footnotes.
E. It cannot be changed, based on the consistency principle.
Answer: B
Blooms: Understand
AICPA BB: Industry
Topic: Change in Estimates
74. A machine originally had an estimated useful life of 6 years, but after 4 complete years, it
was decided that the original estimate of useful life should have been 10 years. At that point
the remaining cost to be depreciated should be allocated over the remaining:
A. 2 years.
B. 4 years.
C. 6 years.
D. 16 years.
E. 10 years.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: 10 year revised life – 4 years depreciated = 6 years remaining
8-24

75. A change in an accounting estimate is:
A. Reflected in past financial statements.
B. Reflected in future financial statements and also requires modification of past
statements.
C. Reflected in current and future years’ financial statements, not in prior statements.
D. Not allowed under current accounting rules.
E. Considered an error in the financial statements.
Answer: C
Blooms: Understand
AICPA BB: Industry
76. When originally purchased, a vehicle costing $23,000 had an estimated useful life of 8
years and an estimated salvage value of $3,000. After 4 years of straight-line depreciation, the
asset’s total estimated useful life was revised from 8 years to 6 years and there was no change
in the estimated salvage value. The depreciation expense in year 5 equals:
A. $ 5,000.
B. $ 2,875.
C. $ 5,750.
D. $11,500.
E. $ 2,500.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Accumulated Depreciation through the end of year 4:

(Cost of Asset – Salvage Value)/Estimated Useful Life * Years Elapsed
($23,000 – $3,000)/8 * 4 = $10,000
Depreciation in Year 5 = (Cost of Asset – Accumulated Depreciation – Salvage

Value)/Remaining Estimated Useful Life
($23,000 – $10,000 – $3,000)/2 = $5,000
8-25

77. A company used straight-line depreciation for an item of equipment that cost $12,000, had
a salvage value of $2,000 and a five-year useful life. After depreciating the asset for three
complete years, the salvage value was reduced to $1,200 but its total useful life remained the
same. Determine the amount of depreciation to be charged against the equipment during each
of the remaining years of its useful life:
A. $1,000.
B. $1,800.
C. $5,400.
D. $2,400.
E. $2,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Accumulated Depreciation through the end of year 3:

(Cost of Asset – Salvage Value)/Estimated Useful Life * Years Elapsed
($12,000 – $2,000)/5 * 3 = $6,000
Depreciation, years 4 through 5 = (Cost of Asset – Accumulated Depreciation – Salvage

Value)/Remaining Estimated Useful Life
($12,000 – $6,000 – $1,200)/2 = $2,400
78. Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of

$100,000. The asset is expected to have a salvage value of $20,000 at the end of its five-year
useful life. If the asset is depreciated on the double-declining-balance method, the asset’s
book value on December 31, Year 2 will be:
A. $36,000
B. $42,000
C. $54,000
D. $16,000
E. $90,000
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-26

Feedback:
Period BOY BV DB Rate Depreciation Expense EOY BV
Year 1 100,000 40% $40,000 * 3/12 = $10,000 $90,000
Year 2 90,000 40% 36,000 54,000
Accordingly, the asset’s book value at the end of Year 2 would be $54,000.
BOY BV = Beginning of Year Book Value
DB Rate = Declining Balance Rate of Depreciation (1/5 * 2)
EOY BV = End of Year Book Value
8-27

79. Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The
asset will be depreciated using the straight-line method over its four-year useful life.
Assuming the asset’s salvage value is $2,000, what will be the amount of accumulated
depreciation on this asset on December 31, Year 3?
A. $5,000
B. $15,000
C. $15,125
D. $20,000
E. $13,750
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Year 1 [($22,000 – $2,000)/4] * 9/12 = $3,750

Year 2 ($22,000 – 2,000)/4 = $5,000
Year 3 $5,000
Accumulated $13,750
8-28

80. Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The
asset will be depreciated using the straight-line method over its four-year useful life.
Assuming the asset’s salvage value is $2,000, Peavey Enterprises should recognize
depreciation expense in Year 2 in the amount of:
A. $10,000
B. $ 5,000
C. $ 5,500
D. $20,000
E. $ 9,250
Answer: B
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Industry

Depreciation Expense = ($22,000 – $2,000)/4 = $5,000
8-29

81. The following information is available on a depreciable asset owned by Mutual Savings
Bank:
Purchase date July 1, Year 1
Purchase price $85,000
Salvage value $10,000
Useful life 10 years
Depreciation method straight-line
The asset’s book value is $70,000 on July 1, Year 3. On that date, management determines
that the asset’s salvage value should be $5,000 rather than the original estimate of $10,000.
Based on this information, the amount of depreciation expense the company should recognize
during the last six months of Year 3 would be:
A. $8,125.00
B. $7,375.00
C. $4,062.50
D. $3,750.00
E. $7,812.50
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: [(Year 3 book value – revised salvage value / useful life] * fraction of year = second half
of Year 3 depreciation
[($70,000 – $5,000)/8] * 6/12 = $4,062.50.
82. A benefit of using an accelerated depreciation method is that:

A. It is preferred by the tax code.
B. It is the simplest method to calculate.
C. It yields larger depreciation expense in the early years of an asset’s life.
D. It yields a higher income in the early years of the asset’s useful life.
E. The results are identical to straight-line depreciation.
Answer: C
Blooms: Remember
AACSB: Analytic
AICPA BB: Industry
Difficulty: 1 Easy
8-30

83. The modified accelerated cost recovery system (MACRS):
A. Is included in the U.S. federal income tax rules for depreciating assets.
B. Is an outdated system that is no longer used by companies.
C. Is required for financial reporting.
D. Is identical to units of production depreciation.
E. Does not allow partial year depreciation.
Answer: A
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
Difficulty: 1 Easy
84. The straight-line depreciation method and the double-declining-balance depreciation

method:
A. Produce the same total depreciation over an asset’s useful life.
B. Produce the same depreciation expense each year.
C. Produce the same book value each year.
D. Are acceptable for tax purposes only.
E. Are the only acceptable methods of depreciation for financial reporting.
Answer: A
Blooms: Understand
AICPA BB: Industry
85. Total asset turnover is used to evaluate:

A. The efficient use of assets to generate sales.
B. The necessity for asset replacement.
C. The number of times operating assets were sold during the year.
D. The cash flows used to acquire assets.
E. The relation between asset cost and book value.
Answer: A
Blooms: Understand
8-31

86. A total asset turnover ratio of 3.5 indicates that:
A. For every $1 in sales, the firm acquired $3.50 in assets during the period.
B. For every $1 in assets, the firm produced $3.50 in net sales during the period.
C. For every $1 in assets, the firm earned gross profit of $3.50 during the period.
D. For every $1 in assets, the firm earned $3.50 in net income.
E. For every $1 in assets, the firm paid $3.50 in expenses during the period.
Answer: B
Blooms: Understand
AACSB: Analytic
87. The calculation of total asset turnover is:

A. Gross profit divided by average total assets.
B. Average total assets divided by gross profit.
C. Net sales divided by average total assets.
D. Average total assets multiplied by net sales.
E. Net assets multiplied by total assets.
Answer: C
Blooms: Remember
Difficulty: 1 Easy
8-32

88. A company had average total assets of $887,000. Its gross sales were $1,090,000 and its
net sales were $1,000,000. The company’s total asset turnover equals:
A. 0.81.
B. 0.89.
C. 1.09.
D. 1.13.
E. 1.23.
Answer: D
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard

Total Asset Turnover = $1,000,000/$887,000 = 1.13
89. Spears Co. had net sales of $35,400 million. Its average total assets for the period were
$14,700 million. Spears’ total asset turnover equals:
A. 0.42.
B. 0.35.
C. 1.48.
D. 2.41.
E. 3.54.
Answer: D
Blooms: Apply
AACSB: Analytic

8-33

90. Land improvements are:
A. Assets that increase the usefulness of land, and like land, are not depreciated.
B. Assets that increase the usefulness of land, but that have a limited useful life and are
subject to depreciation.
C. Included in the cost of the land account.
D. Expensed in the period incurred.
E. Also called basket purchases.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
91. Which of the following are not classified as plant assets?

A. Land.
B. Land improvements.
C. Buildings.
D. Machinery and equipment.
E. Patent.
Answer: E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
92. The cost of land would not include:

A. Purchase price.
B. Cost of parking lot lighting.
C. Costs of removing existing structures.
D. Fees for insuring the title.
E. Government assessments.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-34

93. A company paid $150,000, plus a 7% commission and $5,000 in closing costs for a
property. The property included land appraised at $87,500, land improvements appraised at
$35,000, and a building appraised at $52,500. What should be the allocation of this property’s
costs in the company’s accounting records?
A. Land $75,000; Land Improvements, $30,000; Building, $45,000.
B. Land $75,000; Land Improvements, $30,800; Building, $46,200.
C. Land $82,750; Land Improvements, $33,100; Building, $49,650.
D. Land $80,250; Land Improvements, $32,100; Building, $48,150.
E. Land $77,500; Land Improvements; $31,000; Building; $46,500.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Total cost to allocate = $150,000 + ($150,000 * .07) + 5,000 = $165,500
Appraisal
Value %
Land $ 87,500 /$175,000 = 50%
Land Improvements 35,000 /$175,000 = 20%
Building 52,500 /$175,000 = 30%
Total $175,000
Appraisal Total
Value % Cost Allocated
Land $ 87,500 50% $165,500 $ 82,750
Land Improvements 35,000 20% $165,500 33,100
Building 52,500 30% $165,500 49,650
Total $175,000 $165,500
8-35

94. Merchant Company purchased property for a building site. The costs associated with the
property were:
Purchase price…………………………………………… $185,000

Real estate commissions ................................................. 15,000
Legal fees 700
Expenses of clearing the land .......................................... 2,000
Expenses to remove old building .................................... 4,000
What portion of these costs should be allocated to the cost of the land and what portion should
be allocated to the cost of the new building?
A. $187,700 to Land; $19,000 to Building.
B. $200,700 to Land; $6,000 to Building.
C. $200,000 to Land; $6,700 to Building.
D. $185,000 to Land; $21,700 to Building.
E. $206,700 to Land; $0 to Building.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Total cost = $185,000 + $15,000 + $700 + $2,000 + $4,000 = $206,700

The entire amount of the cost should be allocated to the land, since the new building is not yet
constructed.
8-36

95. A company purchased property for $100,000. The property included a building, a parking
lot, and land. The building was appraised at $62,000; the land at $35,000, and the parking lot
at $18,000. Land should be recorded in the accounting records with an allocated cost of:
A. $ 0.
B. $ 30,435.
C. $ 35,000.
D. $ 46,087.
E. $100,000.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: $100,000 * [$35,000/($62,000 + $35,000 + $18,000)] = $30,435
96. The formula to compute annual straight-line depreciation is:

A. Depreciable cost divided by useful life in units.
B. (Cost plus salvage value) divided by the useful life in years.
C. (Cost minus salvage value) divided by the useful life in years.
D. Cost multiplied by useful life in years.
E. Cost divided by useful life in units.
Answer: C
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-37

97. The total cost of an asset less its accumulated depreciation is called:
A. Historical cost.
B. Book value.
C. Present value.
D. Current (market) value.
E. Replacement cost.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
98. The depreciation method that charges the same amount of expense to each period of the
asset’s useful life is called:
A. Accelerated depreciation.
B. Declining-balance depreciation.
C. Straight-line depreciation.
D. Units-of-production depreciation.
E. Modified accelerated cost recovery system (MACRS) depreciation.
Answer: C
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
99. The depreciation method that allocates an equal portion of the total depreciable cost for a
plant asset to each unit produced is called:
A. Accelerated depreciation.
Answer: D
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-38

100. The depreciation method in which a plant asset’s depreciation expense for a period is
determined by applying a constant depreciation rate to the asset’s beginning-of-period book
value is called:
A. Book value depreciation.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
101. The depreciation method that produces larger depreciation expense during the early
years of an asset’s life and smaller expense in the later years is a (an):
A. Accelerated depreciation method.
B. Book value depreciation method.
C. Straight-line depreciation method.
D. Units-of-production depreciation method.
E. Unrealized depreciation method.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-39

102. A company purchased a delivery van for $28,000 with a salvage value of $3,000 on
September 1, Year 1. It has an estimated useful life of 5 years. Using the straight-line method,
how much depreciation expense should the company recognize on December 31, Year 1?
A. $5,000.
B. $1,667.
C. $1,400.
D. $1,250.
E. $2,067.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depreciation Expense = (Cost – Salvage Value)/Est Useful Life * Length of Ownership
Depreciation Expense = ($28,000 – $3,000)/5 * 4/12; Depreciation Expense = $1,667
103. Marlow Company purchased a point of sale system on January 1 for $3,400. This system
has a useful life of 10 years and a salvage value of $400. What would be the depreciation
expense for the second year of its useful life using the double-declining-balance method?
A. $ 680.
B. $ 480.
C. $ 544.
D. $600.
E. $300.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate
Depreciation Expense = $3,400 * (2 * 10%) = $680 (Year 1, depreciation)
Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate

Depreciation Expense = ($3,400 – $680) * (2 * 10%) = $544 (Year 2, depreciation)
8-40

has a useful life of 10 years and a salvage value of $400. What would be the depreciation
expense for the first year of its useful life using the double-declining-balance method?
A. $ 680.
B. $2,320.
C. $2,720.
D. $600.
E. $300.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
has a useful life of 10 years and a salvage value of $400. What would be the accumulated
depreciation at the end of the second year of its useful life using the double-declining-balance
method?
A. $2,176.
B. $ 544.
C. $1,200.
D. $ 600.
E. $1,224.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard

Depreciation Expense = ($3,400 – $680) * (2 * 10%) = $544 (Year 2, depreciation)
$680 + $544 = $1,224 Accumulated Depreciation
8-41

has a useful life of 10 years and a salvage value of $400. What would be the book value of the
asset at the end of the first year of its useful life using the double-declining-balance method?
A. $ 680.
B. $2,320.
C. $2,720.
D. $600.
E. $300.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Book value = Cost – Accumulated depreciation
$3,400 – $680 = $2,720
107. A company purchased a weaving machine for $190,000. The machine has a useful life of
8 years and a residual value of $10,000. It is estimated that the machine could produce 75,000
bolts of woven fabric over its useful life. In the first year, 15,000 bolts were produced. In the
second year, production increased to 19,000 units. Using the units-of-production method,
what is the amount of depreciation expense that should be recorded for the second year?
A. $48,133.
B. $45,600.
C. $22,500.
D. $23,750.
E. $81,600.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depreciation Expense = [(Cost – Salvage Value)/Estimated Useful Life (in units)] * Units
Produced
Depreciation per unit = ($190,000 – $10,000) /75,000 units = $2.40 per unit
Depreciation Expense = $2.40 * 19,000 = $45,600
8-42

what is the amount of accumulated depreciation at the end of the second year?
A. $48,133.
B. $45,600.
C. $86,133.
D. $23,750.
E. $81,600.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Depreciation Expense = [(Cost – Salvage Value)/Estimated Useful Life (in units)] * Units
Produced
Accumulated Depreciation = $2.40 * (15,000+ 19,000) = $81,600
what is the book value of the machine at the end of the second year?
A. $108,400.
B. $144,400.
C. $81,600.
D. $190,000.
E. $180,000.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Depreciation Expense = [(Cost – Salvage Value)/Estimated Useful Life in Units] * Units
Produced
Accumulated Depreciation = $2.40 * (15,000+ 19,000) = $81,600
Book Value = Cost – Accumulated Depreciation = $190,000 – $81,600 = $108,400
8-43

110. Revenue expenditures:
A. Are additional costs of plant assets that do not materially increase the asset’s life or its
productive capabilities.
B. Are known as balance sheet expenditures because they relate to plant assets.
C. Extend the asset’s useful life.
D. Substantially benefit future periods.
E. Are debited to asset accounts when incurred.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
111. Another name for a capital expenditure is:

A. Revenue expenditure.
B. Asset expenditure.
C. Long-term expenditure.
D. Contributed capital expenditure.
E. Balance sheet expenditure.
Answer: E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-44

112. To capitalize an expenditure is to:
A. Debit an expense account.
B. Credit an expense account.
C. Credit the owner’s capital account.
D. Credit an asset account.
E. Debit an asset account.
Answer: E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
113. Extraordinary repairs:

A. Are revenue expenditures.
B. Extend the useful life of an asset beyond its original estimate.
C. Are credited to accumulated depreciation.
D. Are additional costs of plants assets that do not materially increase the asset’s life.
E. Are expensed when incurred.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
114. Which of the following is an example of an extraordinary repair?

A. New tires for a truck.
B. Replacement of all florescent light tubes in an office.
C. Carpet cleaning and repair.
D. Replacing the roof on a manufacturing warehouse.
E. Routine machine maintenance.
Answer: D
Blooms: Understand
AICPA BB: Industry
Difficulty: Medium
8-45

115. Ordinary repairs meet all of the following criteria except:
A. Are expenditures to keep an asset in normal operating condition.
B. Are necessary if an asset is to perform to expectations over its useful life.
C. Extend the useful life of an asset beyond its original estimate
D. Include cleaning, lubricating, and normal adjusting.
E. Are treated as expenses.
Answer: C
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
116. Betterments are:

A. Expenditures making a plant asset more efficient or productive.
B. Also called ordinary repairs.
C. Always increase an asset’s life.
D. Revenue expenditures.
E. Credited against the asset account when incurred.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-46

117. An asset’s book value is $18,000 on December 31, Year 5. The asset has been
depreciated at an annual rate of $3,000 on the straight-line method. Assuming the asset is sold
on December 31, Year 5 for $15,000, the company should record:
A. A loss on sale of $12,000.
B. A gain on sale of $12,000.
C. Neither a gain nor a loss is recognized on this transaction.
D. A gain on sale of $3,000.
E. A loss on sale of $3,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Selling price $15,000 – $18,000 Book value = $3,000 Loss.
118. Martinez owns an asset that cost $87,000 with accumulated depreciation of $40,000. The
company sells the equipment for cash of $42,000. At the time of sale, the company should
record:
A. A gain on sale of $2,000.
B. A loss on sale of $2,000.
C. A loss on sale of $5,000.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Selling price $42,000 – Book value ($87,000 – $40,000) = $5,000 loss.
119. Martinez owns machinery that cost $87,000 with accumulated depreciation of $40,000.
The company sells the machinery for cash of $42,000. The journal entry to record the sale
would include:
A. A credit to Accumulated Depreciation of $40,000
B. A credit to Gain on Sale of $2,000.
C. A credit to Machinery of $47,000.
D. A debit to Cash of $42,000.
E. A debit to Accumulated Depreciation of $47,000.
8-47

Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Selling price $42,000 – Book value ($87,000 – $40,000) = $5,000 Loss.
120. An asset’s book value is $36,000 on January 1, Year 6. The asset is being depreciated
$500 per month using the straight-line method. Assuming the asset is sold on July 1, Year 7
for $25,000, the company should record:
A. Neither a gain or loss is recognized on this type of transaction.
B. A gain on sale of $2,000.
C. A loss on sale of $1,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: If the asset’s book value is $36,000 on January 1, Year 6 and is being depreciated $500
per month, $9,000 (18 x $500) of additional depreciation expense would be recognized by July 1, Year
7. Thus, the asset’s book value on that date would be $27,000. If the asset is sold for $25,000, a loss
on sale of $2,000 should be recognized.
121. Marks Consulting purchased equipment costing $45,000 on January 1, Year 1. The
equipment is estimated to have a salvage value of $5,000 and an estimated useful life of 8
years. Straight-line depreciation is used. If the equipment is sold on July 1, Year 5 for
$20,000, the journal entry to record the sale will include a:
A. Credit to cash for $20,000.
B. Debit to accumulated depreciation for $22,500.
C. Debit to loss on sale for $10,000.
D. Credit to loss on sale for $10,000.
E. Debit to gain on sale for $2,500.
Answer: B
8-48

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Annual depreciation is $5,000 [($45,000 – $5,000)/8 years]. On July 1, Year 5, the asset
will have been depreciated for 4.5 years for a total of $22,500. The resulting book value on that date
will be $22,500. The journal entry to record the sale of the asset would be as follows:
Cash 20,000
Accumulated Depreciation 22,500
Loss on Sale 2,500
Equipment 45,000
8-49

122. A machine costing $75,000 is purchased on September 1, Year 1. The machine is
estimated to have a salvage value of $10,000 and an estimated useful life of 4 years. Double-
declining-balance depreciation is used. If the machine is sold on December 31, Year 3 for
$13,000, the journal entry to record the sale will include:
A. A credit to gain on sale for $8,000.
B. A debit to loss on sale for $2,625.
C. A credit to accumulated depreciation for $59,375.
D. A debit to loss on sale for $3,042.
E. A credit to gain on sale for $4,979.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Period BOY BV DB Rate Depreciation Expense EOY BV
Year 1 $75,000 50% 37,500 x 4/12 = $12,500 $62,500
Year 2 62,500 50% 31,250 31,250
Year 3 31,250 50% 15,625 15,625
Accumulated depreciation $59,375
Therefore, the journal entry to record the sale of the machine would be as follows:
Cash 13,000
Acc. Depreciation 59,375
Loss on Sale 2,625
Machine 75,000
BOY BV = Beginning of the year book value

DB Rate = Declining-balance rate of depreciation (100%/4)*2
EOY BV = End of the year book value
8-50

123. An asset can be disposed of by all of the following except:
A. Discarding it.
B. Selling it.
C. Exchanging it for another asset.
D. Donating it to charity.
E. Continuing to use it after it is fully depreciated.
Answer: E
Blooms: Understand
AICPA BB: Industry
124. A company sold equipment that originally cost $100,000 for $60,000 cash. The
accumulated depreciation on the equipment was $40,000. The company should recognize a:
A. $0 gain or loss.
B. $20,000 gain.
C. $20,000 loss.
D. $40,000 loss.
E. $60,000 gain.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback:
Cost of equipment $100,000
Accumulated depreciation (40,000)
Book value $60,000
Cash received (60,000)
Gain or Loss on sale $ 0
8-51

125. A company discarded a computer system originally purchased for $18,000. The
accumulated depreciation was $17,200. The company should recognize a (an):
A. $0 gain or loss.
B. $800 loss.
C. $800 gain.
D. $8,000 loss.
E. $7,200 loss.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback:
Cost of computer system $18,000

Book value $ 800
Cash received ( 0)
Loss on disposal $ 800
8-52

126. A company had a tractor destroyed by fire. The tractor originally cost $85,000 with
accumulated depreciation of $60,000. The proceeds from the insurance company were
$20,000. The company should recognize:
A. A loss of $5,000.
B. A gain of $5,000.
C. A loss of $20,000.
D. A gain of $65,000.
E. A gain of $20,000.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback:
Cost of tractor $85,000
Book value $ 25,000
Cash received 20,000
Loss $ 5,000
127. Natural resources are:

A. Consumable assets such standing timber, mineral deposits, and oil and gas fields.
B. Tangible assets used in the operations of the business.
C. Current assets because they are depleted.
D. Not subject to allocation to expense over their useful lives.
E. Depleted using a straight-line method.
Answer: A
Blooms: Understand
AICPA BB: Industry
8-53

128. Which of the following would be classified as a natural resource?
A. Patent on an oil extraction process.
B. Land held as an investment.
C. Timber purchased by a lumber yard.
D. Diamond mine.
E. Goodwill.
Answer: D
Blooms: Understand
AICPA BB: Industry
129. Depletion is:

A. The process of allocating the cost of natural resources to the period when it is consumed.
B. Calculated using the double-declining balance method.
C. Also called amortization.
D. An increase in the value of a natural resource when incurred.
E. The process of allocating the cost of intangibles to periods when they are used.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-54

130. A company purchased a tract of land for its natural resources at a cost of $1,500,000. It
expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is
expected to be $250,000. The depletion expense per ton of ore is:
A. $0.75.
B. $0.625.
C. $0.875.
D. $6.00.
E. $8.00.
Answer: B
Feedback: Depletion Expense per ton = (Cost – Salvage Value)/ Estimated Useful Life (in tons)
Depletion Expense per ton = ($1,500,000 – $250,000)/2,000,000 = $0.625/ton
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is
expected to be $250,000. If 150,000 tons of ore are mined during the first year, the journal
entry to record the depletion is:
A. Debit Depletion Expense $93,750; credit Natural Resources $93,750.
B. Debit Cash $112,500; credit Natural Resources $112,500.
C. Debit Depletion Expense $93,750; credit Accumulated Depletion $93,750.
D. Debit Cash $93,750; credit Accumulated Depletion $93,750.
E. Debit Depletion Expense $112,500; credit Accumulated Depletion $112,500.
Answer: C
Feedback: Depletion Expense per ton = (Cost – Salvage Value)/ Estimated Useful Life (in tons)
Depletion Expense per ton = ($1,500,000 – $250,000)/2,000,000 = $0.625/ton
Year 1 Depletion Expense = 150,000 * $0.625 = $93,750
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-55

expects to harvest 5,000,000 board feet of timber from this land. The salvage value of the land
is expected to be $200,000. The depletion expense per board foot of timber is:
A. $0.75.
B. $0.24.
C. $0.20.
D. $0.16.
E. $0.04.
Answer: D
Feedback: Depletion Expense per board foot = (Cost – Salvage Value)/ Estimated Useful Life in feet
Depletion Expense per board foot = ($1,000,000 – $200,000)/5,000,000 = $0.16/board
foot
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
133. A company purchased a mineral deposit for $800,000. It expects this property to produce
120,000 tons of minerals and to have a salvage value of $50,000. In the current year, the
company mined and sold 9,000 tons of minerals. Its depletion expense for the current period
equals:
A. $ 15,000.
B. $ 60,000.
C. $150,000.
D. $ 56,250.
E. $139,500.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depletion Expense = [(Cost – Salvage Value)/ Estimated Useful Life (in tons)] * Tons
Mined and Sold
Depletion Expense = [($800,000 – $50,000)/120,000] * 9,000 = $56,250
8-56

134. Intangible assets do not include:
A. Patents.
B. Copyrights.
C. Trademarks.
D. Goodwill.
E. Land held as an investment.
Answer: E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
135. Amortization is:

A. The systematic allocation of the cost of an intangible asset to expense over its estimated
useful life.
B. The process of allocating to expense the cost of a plant asset to the accounting periods
benefiting from its use.
C. The process of allocating the cost of natural resources to periods when they are consumed.
D. An accelerated form of expensing an asset’s cost.
E. Also called depletion.
Answer: A
Blooms: Remember
AACSB: Communications
AICPA BB: Industry
Difficulty: 1 Easy
8-57

136. Owning a patent:
A. Gives the owner the exclusive right to publish and sell a musical or literary work during
the life of the creator plus 70 years.
B. Gives the owner exclusive rights to manufacture and sell a patented item or to use a
process for 20 years.
C. Gives its owner an exclusive right to manufacture and sell a device or to use a process for
50 years.
D. Indicates that the value of a company exceeds the fair market value of a company’s net
assets if purchased separately.
E. Gives its owner the exclusive right to publish and sell a musical or literary work during the
life of the creator plus 17 years.
Answer: B
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
137. Holding a copyright:

A. Gives its owner the exclusive right to publish and sell a musical or literary work during the
B. Gives its owner an exclusive right to manufacture and sell a patented item or to use a
process for 20 years.
C. Gives its owner an exclusive right to manufacture and sell a device or to use a process for
50 years.
D. Indicates that the value of a company exceeds the fair market value of a company’s net
assets if purchased separately.
E. Gives its owner the exclusive right to publish and sell a musical or literary work during the
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-58

138. A leasehold is:
A. A short-term rental agreement.
B. The same as a patent.
C. The rights granted to the lessee by the lessor of a lease.
D. Recorded as revenue expenditure when paid.
E. An asset held as an investment.
Answer: C
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
139. The specific meaning of goodwill in accounting is:

A. The amount by which a company’s value exceeds the value of its individual assets and
liabilities.
B. Long term assets held as investment.
C. The support of the board of directors for the operating decisions of management.
D. The cost of developing, maintaining, or enhancing the value of a trademark.
E. Rights granted an entity to deliver a product or service under specified conditions.
Answer: A
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-59

140. A company’s old machine that cost $40,000 and had accumulated depreciation of
$22,000 was traded in on a new machine having an estimated 20-year life with an invoice
price of $45,000. The company also paid $33,000 cash, along with its old machine to acquire
the new machine. If this transaction has commercial substance, the new machine should be
recorded at:
A. $40,000.
B. $33,000.
C. $45,000.
D. $18,000.
E. $51,000.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Market value of new machine $45,000

Cost of old machine $40,000
Accumulated depreciation ( 22,000)
Book value of old machine $18,000
Plus cash paid in exchange 33,000 51,000
Loss on exchange ($6,000)
Machine (new) 45,000

Loss on disposal 6,000
Accumulated depreciation (old) 22,000
Machine (old) 40,000
Cash 33,000
8-60

141. Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a
cost of $160,000 and accumulated depreciation of $100,000. The new sailboat had an invoice
price of $270,000. Hunter received a trade in allowance of $70,000 on the old sailboat, which
meant the company paid $200,000 in addition to the old sailboat to acquire the new sailboat.
If this transaction has commercial substance, what amount of gain or loss should be recorded
on this exchange?
A. $0 gain or loss.
B. $10,000 gain.
C. $10,000 loss.
D. $60,000 loss
E. $70,000 loss.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Market value of new sailboat $270,000
Book value of old sailboat ($160,000- $100,000) $ 60,000
Cash 200,000 260,000
Gain $ 10,000
8-61

142. Cliff Company traded in an old truck for a new one. The old truck had a cost of $75,000
and accumulated depreciation of $60,000. The new truck had an invoice price of $125,000.
Huffington was given a $12,000 trade-in allowance on the old truck, which meant they paid
$113,000 in addition to the old truck to acquire the new truck. If this transaction has
commercial substance, what is the recorded value of the new truck?
A. $15,000
B. $75,000
C. $113,000
D. $125,000
E. $128,000
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Market value of new truck $125,000
Book value of the old truck ($75,000 – $60,000) $ 15,000
Cash 113,000 128,000
Loss $ 3,000
As the transaction has commercial substance and there is a loss on the exchange, the new asset is
recorded at its market value:
Truck (new) 125,000

Loss on exchange 3,000
Truck (old) 75,000
Cash 113,000
8-62

143. A company bought new heating system for $42,000 and was given a trade-in of $2,000
on an old heating system, so the company paid $40,000 cash with the trade-in. The old system
had an original cost of $37,000 and accumulated depreciation of $34,000. If the transaction
has commercial substance, the company should record the new heating system at:
A. $ 2,000.
B. $ 3,000.
C. $40,000.
D. $42,000.
E. $43,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Market value of new system $42,000

Cost of old system $37,000
Book value of old system $ 3,000
Loss on exchange ($1,000)
Since the transaction has commercial substance, the loss on exchange is recognized and the new
system should be recorded at its $42,000 price.
Equipment (new) 42,000

Loss on exchange 1,000
Equipment (old) 37,000
Cash 40,000
8-63

144. A company purchased equipment valued at $66,000. It traded in old equipment for a
$9,000 trade-in allowance and the company paid $57,000 cash with the trade-in. The old
equipment cost $44,000 and had accumulated depreciation of $36,000. This transaction has
commercial substance. What is the recorded value of the new equipment?
A. $ 8,000.
B. $ 9,000.
C. $57,000.
D. $65,000.
E. $66,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback:
Market value of new equipment $66,000
Cost of old machine $44,000
Book Value of the old equipment $ 8,000
Gain on exchange $ 1,000
Since the transaction has commercial substance, the $1,000 gain is recognized
and the new machine is recorded at its market value of $66,000.
Equipment (new) 66,000

Equipment (old) 44,000
Gain on exchange 1,000
Cash 57,000
8-64

145. Which of the following statements regarding increases in the value of plant assets under
U.S. GAAP and IFRS is true?
A. U.S. GAAP allows companies to record increases in the value of plant assets.
B. IFRS prohibits upward asset revaluations.
C. Under GAAP, a company can reverse an impairment and record that increase in income.
D. U.S. GAAP prohibits companies from recording increases in the value of plant assets.
E. Under IFRS, an impairment increase beyond as asset’s original cost is not recorded.
Answer: D
Blooms: Understand
AICPA BB: Global
AICPA FN: Reporting
Difficulty: 3 Hard
146. Granite Company purchased a machine costing $120,000, terms 1/10, n/30. The machine
was shipped FOB shipping point and freight charges were $2,000. The machine requires
special mounting and wiring connections costing $10,000. When installing the machine,
$1,300 in damages occurred. Compute the cost recorded for this machine assuming Granite
paid within the discount period.
A. $129,800.
B. $132,100.
C. $130,800.
D. $118,800.
E. $120,100.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Cost of Machine = ($120,000 * .99) + $2,000 + $10,000 = $130,800
8-65

147. Wickland Company installs a manufacturing machine in its production facility at the
beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5
years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the
machine produces 84,500 units of product. Determine the machines’ second year depreciation
under the straight-line method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard

under the double-declining-balance method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
Answer: E
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Depreciation Expense = $87,000 * (2 * 20%) = $34,800 (Depreciation Expense, year 1)

Depreciation Expense = ($87,000 – $34,800) * (2 * 20%) = $20,880 (Deprec. Exp, year 2)
8-66

under the units-of-production method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Depreciation Expense = [(Cost – Salvage Value)/ Estimated Useful Life (in units)] *
Production of Units
Depreciation Expense = [($87,000 – $7,000)/400,000] * 84,500 = $16,900
machine produces 84,500 units of product. What journal entry would be needed to record the
machines’ second year depreciation under the units-of-production method?
A. Debit Depletion Expense $16,900; credit Accumulated Depletion $16,900.
B. Debit Depletion Expense $16,000; credit Accumulated Depletion $16,000.
C. Debit Depreciation Expense $16,900; credit Accumulated Depreciation $16,900.
D. Debit Depreciation Expense $16,000; credit Accumulated Depreciation $16,000.
E. Debit Amortization Expense $16,900; credit Accumulated Amortization $16,900.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Production of Units
8-67

151. Minor Company installs a machine in its factory at the beginning of the year at a cost of
$135,000. The machine’s useful life is estimated to be 5 years, or 300,000 units of product,
with a $15,000 salvage value. During its first year, the machine produces 64,500 units of
product. Determine the machines’ first year depreciation under the straight-line method.
A. $27,000.
B. $29,025.
C. $25,800.
D. $23,779.
E. $24,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

product. Determine the machines’ first year depreciation under the double-declining-balance
method.
A. $66,000.
B. $54,000.
C. $24,000.
D. $25,800.
E. $48,000.
Answer: B
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depreciation Expense = Book Value * Double Straight-line Rate

8-68

product. Determine the machines’ first year depreciation under the units-of-production
method.
A. $27,000.
B. $54,000.
C. $24,000.
D. $25,800.
E. $48,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Production of Units
product. What journal entry would be needed to record the machines’ first year depreciation
under the units-of-production method?
D. Debit Depreciation Expense $25,800; credit Accumulated Depreciation $25,800.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Production of Units
8-69

155. Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs
additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000
tons and is expected to take 5 years to extract. Compute the depletion expense for the first
year assuming 418,000 tons were mined.
A. $1,233,100.
B. $1,358,500.
C. $1,300,000.
D. $1,180,000.
E. $1,280,000.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depletion Expense = [(Cost – Salvage Value)/Estimated Useful Life (in tons)] *
Tons Mined
Depletion Expense = [($5,900,000 + $600,000 – $0)/2,000,000] * 418,000 = $1,358,500
156. Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs
additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000
tons and is expected to take 5 years to extract. What journal entry would be needed to record
the expense for the first year assuming 418,000 tons were mined?
A. Debit Depletion Expense $1,233,100; credit Accumulated Depletion $1,233,100.
B. Debit Amortization Expense $1,358,500; credit Accumulated Amortization $1,358,500.
C. Debit Depreciation Expense $1,358,500; credit Accumulated Depreciation $1,358,500.
D. Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.
E. Debit Depreciation Expense $1,233,100; credit Accumulated Depreciation $1,233,100.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depletion Expense = [(Cost – Salvage Value)/Estimated Useful Life (in tons)] *
Tons Mined
Depletion Expense = [($5,900,000 + $600,000 – $0)/2,000,000] * 418,000 = $1,358,500
8-70

157. Bering Rock acquires a granite quarry at a cost of $590,000, which is estimated to
contain 200,000 tons of granite and is expected to take 6 years to remove. Compute the
depletion expense for the first year assuming 38,000 tons were removed and sold.
A. $98,333.
B. $93,158.
C. $38,000.
D. $12,881.
E. $112,100.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depletion Expense = (Cost – Salvage Value)/Estimated Useful Life in tons * Tons removed
Depletion Expense = [($590,000 – $0)/200,000] * 38,000 = $112,100
158. Bering Rock acquires a granite quarry at a cost of $590,000, which is estimated to
contain 200,000 tons of granite and is expected to take 6 years to remove. What journal entry
would be needed to record the expense for the first year assuming 38,000 tons were removed
and sold?
B. Debit Amortization Expense $112,100; credit Natural Resources $112,100.
D. Debit Depletion Expense $93,158; credit Accumulated Depletion $93,158.
E. Debit Depreciation Expense $98,333; credit Accumulated Depreciation $98,333.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Depletion Expense = (Cost – Salvage Value)/Estimated Useful Life in tons * Tons removed
Depletion Expense = [($590,000 – $0)/200,000] * 38,000 = $112,100
8-71

159. Phoenix Agency leases office space for $7,000 per month. On January 3, Phoenix incurs
$65,000 to improve the leased office space. These improvements are expected to yield
benefits for 8 years. Phoenix has 5 years remaining on its lease. Compute the amount of
expense that should be recorded the first year related to the improvements.
A. $20,000.
B. $6,000.
C. $13,000.
D. $65,000.
E. $8,125.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Amortization Expense = Cost/Lesser of Estimated Useful Life or Remaining Lease Length
Amortization Expense = $65,000/5 = $13,000
160. Crestfield leases office space for $7,000 per month. On January 3, the company incurs
$12,000 to improve the leased office space. These improvements are expected to yield
benefits for 10 years. Crestfield has 4 years remaining on its lease. What journal entry would
be needed to record the expense for the first year related to the improvements?
A. Debit Amortization Expense $1,200; credit Accumulated Amortization $1,200.
D. Debit Depletion Expense $12,000; credit Accumulated Depletion $12,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Amortization Expense = Cost/Lesser of Estimated Useful Life or Remaining Length of

Lease
Amortization Expense = $12,000/4 = $3,000
8-72

161. Ngu owns equipment that cost $93,500 with accumulated depreciation of $64,000. Ngu
asks $35,000 for the equipment but sells the equipment for $33,000. Compute the amount of
gain or loss on the sale.
A. $3,500 loss.
B. $5,500 gain.
C. $5,500 loss.
D. $3,000 gain.
E. $3,500 gain.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Feedback: Gain/Loss on Sale = Cash Received – Book Value

Gain/Loss on Sale = $33,000 – ($93,500 – $64,000); Gain of $3,500
162. Gaston owns equipment that cost $90,500 with accumulated depreciation of $61,000.
Gaston asks $30,000 for the equipment but sells the equipment for $26,000. Which of the
following would not be part of the journal entry to record the disposal of the equipment?
A. Debit Accumulated Depreciation $61,000.
B. Credit Equipment $90,500.
C. Debit Loss on Disposal of Equipment $3,500.
D. Credit Gain on Disposal of Equipment $3,500.
E. Debit Cash $26,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Gain/Loss on Sale = Cash Received – Book Value

Gain/Loss on Sale = $26,000 – ($90,500 – $61,000); Loss of $3,500
Cash $26,000
Accumulated Depreciation 61,000
Loss on Sale 3,500
Equipment $90,500
8-73

163. Flask Company reports net sales of $4,315 million; cost of goods sold of $2,808 million;
net income of $283 million; and average total assets of $2,136. Compute its total asset
turnover.
A. 1.31.
B. 2.02.
C. .13.
D. .76.
E. .50.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty:3 Hard

164. Riverboat Adventures pays $310,000 plus $15,000 in closing costs to buy out a
competitor. The real estate consists of land appraised at $35,000, a building appraised at
$105,000, and paddleboats appraised at $210,000. Compute the cost that should be allocated
to the building.
A. $97,500.
B. $105,000.
C. $89,178.
D. $140,000.
E. $93,000.
Answer: A
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Percent Allocated to Building = $105,000/($105,000 + $35,000 + $210,000) = 0.30

Cost Allocated to Building = ($310,000 + $15,000)* 0.30 = $97,500
8-74

165. Riverboat Adventures pays $310,000 plus $15,000 in closing costs to buy out a
competitor. The real estate consists of land appraised at $35,000, a building appraised at
$105,000, and paddleboats appraised at $210,000. Compute the cost that should be allocated
to the land.
A. $93,000.
B. $140,000.
C. $32,500.
D. $31,000.
E. $97,500.
Answer: C
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Feedback: Percent Allocated to Land = $35,000/($105,000 + $35,000 + $210,000) = 0.10

Cost Allocated to Land = ($310,000 + $15,000) * 0.10 = $32,500
166. Victory Company purchases office equipment at the beginning of the year at a cost of
$15,000. The machine is depreciated using the straight-line method. The machine’s useful
life is estimated to be 7 years with a $1,000 salvage value. The journal entry to record the first
year’s depreciation is:
A. Debit Depreciation Expense $2,143, credit Accumulated Depreciation $2,143.
B. Debit Depreciation Expense $2,000, credit Office Equipment $2,000.
C. Debit Office Equipment $2,000, credit Accumulated Depreciation $2,000.
D. Debit Accumulated Depreciation $2,143; credit Office Equipment $2,143.
E. Debit Depreciation Expense $2,000, credit Accumulated Depreciation $2,000.
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

8-75

167. Victory Company purchases office equipment at the beginning of the year at a cost of
$15,000. The machine is depreciated using the straight-line method. The machine’s useful life
is estimated to be 7 years with a $1,000 salvage value. The book value at the end of 7 years is:
A. $2,143.
B. $1,000.
C. $2,000.
D. $14,000.
E. $0.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

$15,000 – ($2,000 * 7) = $1,000
168. Mohr Company purchases a machine at the beginning of the year at a cost of $24,000.
The machine is depreciated using the straight-line method. The machine’s useful life is
estimated to be 5 years with a $4,000 salvage value. Depreciation expense in year 2 is:
A. $4,800.
B. $4,000.
C. $9,600.
D. $20,000.
E. $0.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

8-76

estimated to be 5 years with a $4,000 salvage value. The book value of the machine at the end
of year 2 is:
A. $4,000.
B. $8,000.
C. $12,000.
D. $16,000.
E. $20,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

Depreciation Expense = ($24,000 – $4,000)/5 = $4,000 per year
Book value at end of year 2 = Cost – Accumulated Depreciation
Book value at end of year 2 = $24,000 – ($4,000 * 2) = $16,000
The machine is depreciated using the double-declining-balance method. The machine’s useful
life is estimated to be 5 years with a $4,000 salvage value. Depreciation expense in year 2 is:
A. $4,800.
B. $8,000.
C. $9,600.
D. $5,760.
E. $14,400.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

8-77

life is estimated to be 5 years with a $4,000 salvage value. The machine’s book value at the
end of year 2 is:
A. $12,000.
B. $7,200.
C. $9,600.
D. $8,640.
E. $14,400.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

Book value at end of year 2 = Cost – Accumulated Depreciation
Book value at end of year 2 = $24,000 – ($9,600 + $5,760) = $8,640
The machine is depreciated using the units-of-production method. The company estimates it
will use the machine for 5 years, during which time it anticipates producing 40,000 units. The
machine is estimated to have a $4,000 salvage value. The company produces 9,000 units in
year 1 and 6,000 units in year 2. Depreciation expense in year 2 is:
A. $4,000.
B. $4,000.
C. $9,600.
D. $3,000.
E. $14,400.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-78

Feedback: Depreciation Expense = (Cost – Salvage Value)/Estimated Useful Life (units)
Depreciation Expense = ($24,000 – $4,000)/40,000 = $0.50 per unit
Depreciation Expense = $0.50 per unit * 6,000 units = $3,000
173. Martin Company purchases a machine at the beginning of the year at a cost of $60,000.
estimated to be 4 years with a $5,000 salvage value. Depreciation expense in year 4 is:
A. $15,000.
B. $13,750.
C. $55,000.
D. $60,000.
E. $0.
Answer: B
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

estimated to be 4 years with a $5,000 salvage value. The book value of the machine at the end
of year 4 is:
A. $13,750.
B. $55,000.
C. $30,000.
D. $5,000.
E. $0.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry

Depreciation Expense = ($60,000 – $5,000)/4 = $13,750 per year
8-79

Book value at end of year 4= Cost – Accumulated Depreciation
Book value at end of year 4= $60,000 – ($13,750 * 4) = $5,000
life is estimated to be 4 years with a $5,000 salvage value. Depreciation expense in year 4 is:
A. $13,750.
B. $3,750.
C. $30,000.
D. $2,500.
E. $5,000.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry



Depreciation Expense = ($60,000 – $52,500) * (2 * 25%) = $3,750, but this would reduce
the book value to less than salvage. Therefore, depreciation expense in year 4 is limited to $2,500.
(Book value at the beginning of the year, $7,500, minus the $5,000 salvage.)
8-80

life is estimated to be 4 years with a $5,000 salvage value. The machine’s book value at the
end of year 3 is:
A. $30,000.
B. $45,000.
C. $52,500.
D. $7,500.
E. $6,875.
Answer: D
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry


Book Value at end of year 3 = Cost minus Accumulated Depreciation

Book Value at end of year 3 = $60,000 – ($30,000 + $15,000 + $7,500)
Book Value at end of year 3 = $7,500
8-81

Matching Questions
177. Match each of the following terms with the appropriate definitions.
a. Depletion
b. Betterment
c. Ordinary repairs
d. Units-of production method
e. Intangible assets
f. Accelerated depreciation
g. Amortization
h. Goodwill
i. Total asset turnover
j. Revenue expenditure
____ 1. The amount by which the company’s value exceeds the value of its
individual assets and liabilities.
____ 2. A cost reported as an expense on the current income statement because it
does not provide a material benefit in future periods.
____ 3. An expenditure that makes a plant asset more efficient or productive.
____ 4. A method of depreciation that yields larger expense during the early years of
an asset’s life and smaller expense in the later years.
____ 5. Expenditures to keep a plant asset in normal, good operating condition.
____ 6. The process of allocating the cost of a natural resource to the period when it
are consumed.
____ 7. A measure of a company’s effectiveness in using its assets to generate sales.
____ 8. The process of systematically allocating the cost of an intangible asset to
expense over its estimated useful life.
____ 9. A depreciation method that charges a varying amount to expense for each
period of an asset’s useful life depending on its usage.
____10. Certain nonphysical assets used in operations that confer long-term rights,
privileges, or competitive advantages on their owners.
Answer:
1. H; 2. J; 3. B; 4. F; 5. C; 6. A; 7. I; 8. G; 9. D; 10. E
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-82

178. Match each of the following terms with the appropriate definitions.
a. Extraordinary repairs
b. Obsolescence
c. Leasehold improvements
d. Depletion
e. Salvage value
f. Book value
g. Land improvements
h. Copyright
i. Inadequacy
j. Patent
____ 1. An estimate of an asset’s value at the end its benefit period.

____ 2. Major repairs that extend the useful life of a plant asset beyond its original
estimate.
____ 3. Alternations or improvements to leased property made by the lessee.
____ 4. A right granted that gives its owner the exclusive privilege to publish and
sell musical, literary, or artistic work during the life of the creator plus 70
years.
____ 5. A condition where a plant asset is no longer useful in producing goods or
services with a competitive advantage.
____ 6. The total cost of a plant asset less its accumulated depreciation.
____ 7. The process of allocating the cost of natural resources to the periods when
they are consumed.
____ 8. An exclusive right granted to its owner to manufacture and sell an item, or
to use a process, for 20 years.
____ 9. The insufficient capacity of plant assets to meet the company’s productive
demands.
____ 10. Assets that increase the benefits of land, have a limited useful life, and are
subject to depreciation.
Answer:
1. E; 2. A; 3. C; 4. H; 5. B; 6. F; 7. D; 8. J; 9. I; 10. G
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-83

Short Answer Questions
179. Define plant assets and identify the four primary issues in accounting for them.
Answer: Plant assets are tangible assets used in the operations of a company that have a useful
life of more than one accounting period. The four main accounting issues include (1)
computing their costs, (2) allocating their costs against revenues during the periods they
benefit, (3) accounting for expenditures such as repairs and improvements, (4) and recording
their disposal.
Blooms: Understand
AICPA BB: Industry
180. What is depreciation of plant assets? What are the factors necessary in computing
depreciation?
Answer: Depreciation is the process of allocating the cost of a plant asset to expense in the
accounting periods benefiting from its use. Three factors determine depreciation: cost of the
asset, salvage value, and useful life. In addition, the company must determine the depreciation
method to use.
Blooms: Understand
AICPA BB: Industry
8-75

181. What are some of the variables that make a plant asset’s useful life difficult to predict?
Answer: There are several factors that make it difficult to predict an asset’s useful life. A
major variable is the wear and tear for the asset’s use in operations. Inadequacy, the
insufficient capacity of a company’s plant assets to meet the company’s growing productive
demands, is a second factor. Obsolescence, the issue of a plant asset that is no longer useful in
producing goods and services, is a third factor. Both inadequacy and obsolescence are
difficult to predict because the timing of demand changes, and new inventions, and
improvements is unknown.
Blooms: Understand
AICPA BB: Industry
182. Explain the purpose of and method of depreciation for partial years.
Answer: Partial years’ depreciation is often required because assets are bought and sold
throughout the year. Depreciation for assets owned for less than one year is commonly
calculated as the annual depreciation prorated for the number of months the assets are owned
during the year. This is done so that the year of purchase or the year of disposal is charged
with its share of the asset’s depreciation. Partial year depreciation is consistent with the
matching principle.
Blooms: Understand
AICPA BB: Industry
183. Explain the impact, if any, on depreciation when estimates that determine depreciation
change.
Answer: Depreciation is revised when changes in estimates such as salvage value and useful
life occur. If the asset’s useful life and/or salvage value changes, the remaining depreciable
cost is allocated over the remaining revised useful life of the asset. The new estimate is used
to compute depreciation for current and future periods.
Blooms: Understand
AICPA BB: Industry
8-76

184. Compare the different depreciation methods (straight-line, units-of-production, and
double-declining-balance) with respect to the amounts of depreciation expense per period and
the total depreciation over the life of the asset.
Answer: The amount of depreciation expense per period is usually different for different
methods. Yet total depreciation expense over the life of the asset is the same for all methods.
Specifically, the straight-line method yields the same amount of depreciation for each full
accounting period. The units-of-production method results in depreciation expense that
increases or decreases with the amount of asset usage. The double-declining-balance method
is an accelerated method that yields more depreciation expense in the earlier years of
ownership than straight-line depreciation.
Blooms: Understand
AICPA BB: Industry
185. Explain how to calculate total asset turnover. Describe what it reveals about a company’s
financial condition, whether a higher or lower ratio is desirable, and how it is best applied for
comparative purposes.
Answer: Total asset turnover is calculated by dividing net sales by average total assets. The
result is interpreted as the amount of net sales generated by each dollar of assets. Thus, the
ratio reflects a company’s ability to efficiently use its assets to generate sales. A high number
is desirable; however, it must be interpreted in comparison with prior years as well as with
competitors and industry standards.
Blooms: Understand
AACSB: Analytic
8-77

186. How is the cost principle applied to plant asset acquisitions, including lump-sum
purchases?
Answer: Plant assets should be recorded at cost when acquired. Cost includes all normal and
reasonable expenditures necessary to get the asset in place and ready for its intended use. The
cost of a lump-sum purchase is allocated among its individual assets based on their relative
market (or estimated) values.
Blooms: Understand
AICPA BB: Industry
187. Explain in detail how to compute each of the following depreciation methods: straight-
line, units-of-production, and double-declining-balance.
Answer: Straight-line depreciation is calculated by subtracting salvage value from the cost of
the plant asset and then dividing the result by the useful life. When useful life is measured in
years, the resulting amount is the annual depreciation expense for the asset.
Units-of-production depreciation is calculated by subtracting salvage value from the cost of
the plant asset and then dividing the result by the useful life in units. The resulting amount is
the depreciation expense per unit. That amount is multiplied by the number of units produced
during each accounting period to determine the total amount of depreciation expense for that
period.
The double-declining-balance method uses twice the straight-line rate (100%/useful life in
years) multiplied by the beginning-of-period book value of the asset. The resulting amount is
the depreciation expense for that period.
Blooms: Understand
AICPA BB: Industry
8-78

188. Explain the difference between revenue expenditures and capital expenditures and how
they are recorded in the accounting system.
Answer: Revenue expenditures do not materially increase an asset’s life or productive

capabilities. An example is ordinary repairs where benefits expire in the current accounting
period. Revenue expenditures are debited to expense and are thus matched with current
revenues. Capital expenditures make a plant asset more productive or extend its useful life.
Examples are extraordinary repairs and betterments that benefit future periods. Capital
expenditures are debited to asset accounts and are matched with future periods through
depreciation expense. Immaterial (low cost) long-term expenditures are treated as current
period expenses.
Blooms: Understand
AICPA BB: Industry
189. What are the general accounting procedures for recording asset disposals?
Answer: The first step in the accounting process for asset disposals is to bring the amount of
depreciation up to date. The second step is to then remove the cost of the asset and its related
accumulated depreciation from the accounting records. The third step is to recognize the
amount of cash and/or other assets involved in the transaction. Fourth, record any gain or loss
from the asset disposal by comparing the asset book value to the market value of any asset
received. Exceptions to the fourth step are exchanges without commercial substance
exchange. No gain or loss is recorded for exchanges without commercial substance.
Blooms: Understand
AICPA BB: Industry
8-79

190. Describe the accounting for natural resources, including their acquisition, cost allocation,
and account titles.
Answer: The costs of natural resources are recorded as assets. Depletion is the process of
allocating the cost of a natural resource to the period when it is consumed. Depletion is
calculated by subtracting salvage value from cost and then dividing the result by the expected
total unit production of the resource. The resulting amount is depletion expense per unit. The
depletion per unit is multiplied by total units for the period to calculate the depletion expense
for that period. Total depletion is carried in an accumulated depletion account. Natural
resources are reported on the balance sheet at their cost minus accumulated depletion.
Blooms: Understand
AICPA BB: Industry
191. Describe the accounting for intangible assets, including their acquisition, cost allocation,
and accounts involved.
Answer: Intangible assets are recorded at acquisition cost and are debited to asset accounts.
Allocation of the cost of an intangible asset with a definite life to expense is done by using the
straight-line method and is called amortization. Amortization is recorded with a credit to
accumulated amortization. Intangible assets with indefinite lives are not amortized. Intangible
assets are reported on the balance sheet at their cost minus accumulated amortization.
Blooms: Understand
AICPA BB: Industry
8-80

Problems
192. A company’s property records revealed the following information about its plant assets:
Machine Salvage Purchase Estimated

No. Cost Value Date Life Depreciation Method
1 $42,000 $3,000 10/1 3 years Straight-line
2 86,000 8,600 7/01 5 years Double-declining balance
Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended
December 31.
Machine 1:
Year 1______________________ Year 2 _______________________
Machine 2:
Year 1 ______________________ Year 2 _______________________
Answer:
Machine 1:
Year 1: [($42,000 – $3,000)/3] * 3/12 = $3,250
Year 2: ($42,000 – $3,000)/3 = $13,000
Machine 2:
Year 1: $86,000 x 40% * 6/12 = $17,200
Year 2: ($86,000 – $17,200) * 40% = $27,520
* DDB depreciation rate = 1/5 * 2 = 40%
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-81

193. A company’s property records revealed the following information about its plant assets:
Machine Salvage Purchase Estimated

No. Cost Value Date Life Depreciation Method
1 $82,000 $8,000 1/01 4 years Straight-line
2 46,000 3,600 7/01 5 years Double-declining balance
Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended
December 31.
Machine 1:
Year 1______________________ Year 2 _______________________
Machine 2:
Year 1 ______________________ Year 2 _______________________
Answer:
Machine 1:
Years 1 & 2: [($82,000 – $8,000)/4] = $18,500
Machine 2:
Year 1: $46,000 x 40% * 6/12 = $9,200
Year 2: ($46,000 – $9,200) * 40% = $14,720

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-82

194. A company’s property records revealed the following information about one of its plant
assets:
Salvage Purchase Estimated

Cost Value Date Life Depreciation Method
$450,000 $30,000 10/01 7 years Straight-line
Calculate the depreciation expense for the asset in Year 1 and Year 2 for the year ended
December 31.
Year 1______________________ Year 2 _______________________
Answer:
Year 1 [($450,000 – $30,000)/7] *3/12 = $15,000
Year 2 ($450,000 – $30,000)/7 = $60,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
195. A company’s property records revealed the following information about one of its plant
assets:
Salvage Purchase Estimated

Cost Value Date Life Depreciation Method
154,000 15,000 01/01 10 years Double-declining balance
Calculate the depreciation expense in Year 1 and Year 2 for the year ended December 31.
Year 1 ______________________ Year 2 _______________________
Answer:
Year 1: $154,000 x 20% = $30,800
Year 2: ($154,000 – $30,800) * 20% = $24,640

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-83

196. A company purchased a delivery van on October 1 of the current year at a cost of
$40,000. The van is expected to last six years and has a salvage value of $2,200. The
company’s annual accounting period ends on December 31.
1. What is the depreciation expense for the current year, assuming the straight-line method is
used?
2. What is the book value of the van at the end of the first year?
Answer:
1. [($40,000 – $2,200)/6] * 3/12 = $1,575

2. Cost – Accumulated Depreciation = Book Value; $40,000 – $1,575 = $38,425
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
197. A building was purchased for $370,000 and depreciated for ten years on a straight-line
basis under the assumption it would have a twenty-year life and a $10,000 salvage value. At
the beginning of the building’s eleventh year it was recognized the building had eight years of
remaining life instead of ten and that at the end of the remaining eight years its salvage value
would be $16,000. What amount of depreciation should be recorded in each of the building’s
remaining eight years?
Answer:
($370,000 – $10,000)/20 = $18,000 Original annual depreciation

$18,000 * 10 years = $180,000 Accumulated depreciation after 10 years
$370,000 – $180,000 = $190,000 Undepreciated cost after 10 years
($190,000 – $16,000)/8 years = $21,750 Annual depreciation in last 8 years

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-84

198. Greene Company purchased a machine for $75,000 that was expected to last 6 years and
to have a salvage value of $6,000. At the beginning of the machine’s fourth year the company
decided that the estimated useful life should be revised to a total of 10 years instead of 6
years. Also, the salvage value was re-estimated to be $5,500. Straight-line depreciation was
used throughout the machine’s life. Calculate the depreciation expense for the fourth year of
the machine’s useful life.
Answer:
($75,000 – $6,000)/6 = $11,500 Original annual depreciation
$11,500 * 3 years = $34,500 Accumulated depreciation after 3 years
$75,000 – $34,500= $40,500 Undepreciated cost after 3 years
($40,500 – $5,500)/7 years = $ 5,000 Annual depreciation in the 4th year
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-85

199. On April 1 of the current year, a company purchased and placed in service a machine
with a cost of $240,000. The company estimated the machine’s useful life to be four years or
60,000 units of output with an estimated salvage value of $60,000. During the current year,
12,000 units were produced.
Prepare the necessary December 31 adjusting journal entry to record depreciation for the
current year assuming the company uses:
a. The straight-line method of depreciation

b. The units-of-production method of depreciation
c. The double-declining balance method of depreciation
Answer:
a. Depreciation Expense—Machinery* ............................ 33,750

Accumulated Depreciation—Machinery ......... 33,750
*Depreciation for three quarters of first year = ($240,000 – $60,000)/4 * 9/12 =
$33,750
b. Depreciation Expense—Machinery* ............................ 36,000

Accumulated Depreciation—Machinery ......... 36,000
*Depreciation for current year: [($240,000 – $60,000)/60,000] * 12,000 = $36,000
c. Depreciation Expense—Machinery* ........................... 90,000

Accumulated Depreciation—Machinery .................... 90,000
*Depreciation for three quarters of first year = [($240,000 * ¼ *2) * 9/12 = $90,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-86

200. On September 30 of the current year, a company acquired and placed in service a
machine at a cost of $700,000. It has been estimated that the machine has a service life of five
years and a salvage value of $40,000. Using the double-declining-balance method of
depreciation, complete the schedule below showing depreciation amounts for all six years
(round answers to the nearest dollar). The company closes its books on December 31 of each
year.
Depreciation for the Period End of Period

Beginning of
Period Book Depreciation Depreciation Accumulated Book
Year Value Rate Expense Depreciation Value
1
2
3
4
5
6
Answer:
Depreciation for the Period End of Period
Beginning of
Period Book Depreciation Depreciation Accumulated Book
Year Value Rate Expense Depreciation Value
1 700,000 40% * $70,000 $70,000 $630,000
2 630,000 40% 252,000 322,000 378,000
3 378,000 40% 151,200 473,200 226,800
4 226,800 40% 90,720 563,920 136,080
5 136,080 40% 54,432 618,352 81,648
6 81,648 40% ** 41,648 660,000 40,000
*for 3 months.
**for 9 months; adjusted to the salvage value.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-87

201. On April 1, Year 1, Astor Corp. purchased and placed a plant asset in service. The
following information is available regarding the plant asset:
Acquisition cost ...................................................... $130,000

Estimated salvage value .......................................... $15,000
Estimated useful life ............................................... 5 years
Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year
2 to record depreciation for each year under the straight-line depreciation method.
Answer:
Year 1
Dec. 31 Depreciation Expense ................................................ 17,250
Accumulated Depreciation ................................ 17,250
[($130,000 – $15,000)/5] * 9/12= $17250
Year 2
($130,000 – $15,000)/5 = $23,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-88

202. On April 1, Year 1, Raines Co. purchased and placed a plant asset in service. The
following information is available regarding the plant asset:
Acquisition cost ...................................................... $130,000

Estimated salvage value .......................................... $15,000
Estimated useful life ............................................... 5 years
Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year
2 to record depreciation for each year under the double-declining balance depreciation
method:
Answer:
Year 1
($130,000 x 40%) x 9/12 = $39,000
Year 2
($130,000 – $39,000) x 40% = $36,400
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-89

203. On January 1, Year 1, Naples purchased a computer system that cost $1,480,000. The
estimated useful life of the computer is 3 years and salvage value is $40,000. Straight-line
depreciation is to be used. On January 1, Year 2, Naples determined that the estimated useful
life of the computer would be 4 years instead of 3 years. The estimated salvage value will
only be $10,000.
Prepare the journal entry to record depreciation expense for Year 1.

Prepare the journal entry to record depreciation expense for Year 2.
Answer:
a.
Year 1
Dec. 31 Depreciation Expense—Computer System ........................................ 480,000
Accumulated Depreciation—Computer System ...................... 480,000
($1,480,000 – $40,000)/3 years = $480,000
b.
Year 2
Dec. 31 Depreciation Expense—Computer System ........................................ 330,000
Accumulated Depreciation—Computer System ...................... 330,000
Book value at 12/31/Yr 1 = $1,480,000 – $480,000 = $1,000,000

Depreciation expense ($1,000,000 – $10,000)/3 years = $330,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
8-90

204. The Oberon Company purchased a delivery truck for $95,000 on January 2. The truck
was estimated to have a $3,000 salvage value and a 4 year life. The truck was depreciated
using the straight-line method. At the beginning of the third year, it was obvious that the
truck’s total useful life would be 6 years rather than 4, and the salvage at the end of the 6th
year would be $1,500. Determine the depreciation expense for the truck for the 6 years of its
life.
Year Depreciation expense
1
2
3
4
5
6
Answer:
Depreciation expense
Year
1 $23,000
2 23,000
3 11,875
4 11,875
5 11,875
6 11,875
Calculations:
Year 1–Year 2 depreciation = ($95,000 – $3,000)/4 years = $23,000
Book value at 12/31/Year 2 = $95,000 – ($23,000 x 2) = $49,000
Year 3–Year 6 depreciation = ($49,000 – $1,500)/4 years = $11,875
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-91

205. McClintock Co. had the following transactions involving plant assets during Year 1.
Unless otherwise indicated, all transactions were for cash.
Jan. 2 Purchased a truck for $70,000 plus sales taxes of $3,000. The truck is expected to
have a $14,000 salvage value and a 4 year life.
Jan. 3 Paid $2,500 to have the company’s logo painted on the truck. This did not
change the truck’s salvage value.
Dec. 31 Recorded straight-line depreciation on the truck.
Prepare the general journal entries to record these transactions.
Answer:
Jan. 2 Trucks .............................................................. 73,000

Cash ......................................................... 73,000
Jan. 3 Trucks .............................................................. 2,500

Cash ......................................................... 2,500
Dec. 31 Depreciation expense - Trucks ........................ 15,375

Accumulated depreciation - Trucks ......... 15,375
Calculation: ($75,500 – 14,000)/4 = $15,375
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Topic: Change in Estimate
8-92

206. In year one, McClintock Co. acquired a truck that cost $75,500 with an estimated
$14,000 salvage value and 4 year estimated useful life. Depreciation in the first year was
$15,375. McClintock had the following transactions involving plant assets during Year 2.
Unless otherwise indicated, all transactions were for cash.
Jan. 5 Paid $5,000 to put a new engine in the truck that is expected to make the truck
run more efficiently and increase the truck’s useful life by one year. The salvage
value did not change.
Mar. 1 Paid $2,000 to replace a broken tailgate that was damaged when a heavy carton
was inadvertently dropped on it.
Dec. 31 Recorded straight-line depreciation on the truck.
Prepare the general journal entries to record these transactions.
Answer:
Year 2
Jan. 5 Trucks .............................................................. 5,000.00
Cash ......................................................... 5,000.00
Mar. 1. Repairs Expense .............................................. 2,000.00

Cash ......................................................... 2,000.00
Dec. 31. Depreciation expense - Trucks ........................ 12,781.25

Accumulated depreciation - Trucks ......... 12,781.25
Calculation:
Book value at 1/1/Year 2: $75,500 – 15,375= $60,125
Depreciation expense = ($60,125 + $5,000 – $14,000)/4 =$12,781.25
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
Topic: Change in Estimate
207. A company purchased a cooling system on January 2 for $225,000. The system had an
estimated useful life of 15 years. After using the system for 13 full years, the company
completed a renovation of the system at a cost of $33,000 and now expects the system to be
more efficient and last 8 years beyond the original estimate. The company uses the straight-
line method of depreciation.
(a) Prepare the journal entry at January 3, to record the renovation of the cooling system.
(b) Prepare the journal entry at December 31, to record the revised depreciation for the
thirteenth year.
8-93

Answer:
(a)
Jan. 3 Cooling System ....................................................... 33,000
Cash…………………………………………. 33,000
(b)
Dec. 31 Depreciation Expense ............................................. 6,300
Accumulated Depr. Cooling System………. 6,300
$225,000 – ($225,000/15) * 13] = $30,000
($30,000 + $33,000)/10 = $6,300
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-94

208. A company purchased and installed equipment on January 1 at a total cost of $72,000.
Straight-line depreciation was calculated based on the assumption of a five-year life and no
salvage value. The equipment was disposed of on July 1 of the fourth year. The company uses
the calendar year.
1. Prepare the general journal entry to update depreciation to July 1 in the fourth year.
2. Prepare the general journal entry to record the disposal of the equipment under each of
these three independent situations:
a. The equipment was sold for $22,000 cash.
b. The equipment was sold for $15,000 cash.
c. The equipment was totally destroyed in a fire and the insurance company settled the claim
for $18,000 cash.
Answer:
1. July 1 Depreciation expense - Equipment .................................. 7,200
Accumulated depreciation - Equipment...................... 7,200
$72,000/5 x 6/12 = $7,200
2a. July 1 Cash ................................................................................. 22,000

Accumulated depreciation - Equipment* ........................ 50,400
Gain on Disposal of Asset........................................... 400
Equipment ................................................................... 72,000
*($72,000/5) x 3 ½ years = $50,400
2b. July 1 Cash ................................................................................. 15,000

Accumulated depreciation - Equipment .......................... 50,400
Loss on Disposal of Asset................................................ 6,600
Equipment ................................................................... 72,000
2c. July 1 Cash ................................................................................. 18,000

Accumulated depreciation - Equipment .......................... 50,400
Loss from Fire ................................................................. 3,600
Equipment ................................................................... 72,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-95

209. A company purchased and installed machinery on January 1 at a total cost of $93,000.
Straight-line depreciation was calculated based on the assumption of a five-year life and no
salvage value. The machinery was disposed of on July 1 of year four. The company uses the
calendar year.
1. Prepare the general journal entry to update depreciation to July 1 in year four.
2. Prepare the general journal entry to record the sale of the machine for $27,000 cash.
Answer:
1. July 1 Depreciation expense - Machinery .................................. 9,300
Accumulated depreciation - Machinery ...................... 9,300
$93,000/5 x 6/12 = $9,300
2a. July 1 Cash ................................................................................. 27,000

Accumulated depreciation - Machinery*......................... 65,100
Loss on Disposal of Asset................................................ 900
Machinery ................................................................... 93,000
* ($93,000/5) x 3 ½ years = $65,100
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-96

210. On April 1, Year 5 a company discarded a machine that had cost $10,000 and had
accumulated depreciation of $8,000 as of December 31, Year 4. The asset had a 5-year life
and no salvage value. Prepare the journal entries to record the updating of the depreciation
expense and discarding of this asset in Year 5.
Answer:
Apr. 1 Depreciation expense - Machine 500

Accumulated depreciation - Machine……….. 500
Apr. 1 Loss on Disposal 1,500

Accumulated Depreciation—Machine……… 8,500
Machine……………………………………. 10,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
211. On January 1, 2016, a company disposed of equipment for $16,200 cash that had cost
$35,000, a salvage value of $5,000, and a useful life 10 years. The double-declining-balance
depreciation method was used. On December 31, 2015, accumulated depreciation was
$20,664. Prepare a journal entry to record the disposal of the equipment.
Jan. 1 Cash…………………………………………………… 16,200
Accumulated Depreciation—Equipment …………… 20,664
Equipment…………………………………….. ..... 35,000
Gain on Disposal of Equipment……………… ....... 1,864
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-97

212. On January 2, 2010, a company purchased a delivery truck for $45,000 cash. The truck
had an estimated useful life of seven years and an estimated salvage value of $3,000. The
straight-line method of depreciation was used. Prepare the journal entries to record
depreciation expense and the disposition of the truck on September 1, 2014, under each of the
following assumptions:
a. The truck and $45,000 cash were given in exchange for a new delivery truck that had a cash
price of $60,000. This transaction has commercial substance.
b. The truck and $40,000 cash were exchanged for a new delivery truck that had a cash price
of $60,000. This transaction has commercial substance.
Answer:
a. Aug. 31 Depreciation expense - Delivery Truck .......................... 4,000

Accumulated depreciation - Delivery Truck ............. 4,000
($45,000 – $3,000)/7 years x 8/12
Sept. 1 Delivery Truck (new) ...................................................... 60,000

Accumulated depreciation - Delivery Truck (old) .......... 28,000
Loss on Disposal of Delivery Truck ............................... 2,000
Delivery Truck .......................................................... 45,000
Cash........................................................................... 45,000
Accumulated depreciation at 9/1/14 = ($45,000 –
$3,000)/7 years x 4 ⅔ years = $28,000
Market value of new delivery truck ................................ $60,000

Book value of old delivery truck ($45,000 – $28,000) ... $17,000
Cash................................................................................. 45,000 62,000
Loss ................................................................................. $ 2,000
b. Aug. 31 Depreciation expense - Delivery Truck .......................... 4,000

Accumulated depreciation - Delivery Truck ............. 4,000
Sept. 1 Delivery Truck (new) ...................................................... 60,000

Accumulated depreciation - Delivery Truck (old) .......... 28,000
Delivery Truck (old) ................................................. 45,000
Gain on exchange ...................................................... 3,000
Cash........................................................................... 40,000
Market value of new delivery truck $60,000

Book value of old delivery truck ($45,000 – $28,000) $17,000
Cash 40,000 57,000
Gain $ 3,000
8-98

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
213. A company had net sales of $230,000 for 2015 and $288,000 for 2016. The company’s
average total assets for 2015 were $150,000 and $180,000 for 2016. Calculate the total asset
turnover for each year and comment on the company’s efficiency in the use of its assets.
Answer:
2015: $230,000/$150,000 = 1.53
2016: $288,000/$180,000 = 1.60
In 2015, for every dollar of assets, the company earned $1.53 in net sales.
This increased to $1.60 in net sales for every dollar of assets in 2016.
Its efficiency in the use of its assets improved from 2015 to 2016.
Blooms: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: 3 Hard
214. 196 A company had net sales of $1,540,500 in 2015 and $1,495,000 in 2016. Its average
assets were $810,000 for 2015 and $800,000 for 2016. (1) Calculate the total asset turnover
for each year. (2) Interpret and comment on the company’s efficiency in the use of its assets.
Answer:
2015: $1,540,500/$810,000 = 1.90

2016: $1,495,000/$800,000 = 1.87
Interpretation: For every dollar in assets in 2015, the company generated $1.90 in net sales. In 2016 it
generated $1.87 in net sales for every dollar of assets. Over the two-year period the company reduced
its efficiency in the use of its assets to generate net sales.
Blooms: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: 3 Hard
8-99

215. Schwartz Co. paid $780,000 cash to buy the plant assets of Kimberly Co. that went out
of business. An independent appraiser assigned the following values to the assets acquired:
Land…………………………………….. $522,000
Building…………………………………. 243,000
Equipment………………………………. 135,000
Total…………………………………….. $900,000
Prepare Schwartz’ journal entry to record the acquisition of these assets.
Answer:
Land…………………………………….. 452,400
Building…………………………………. 210,600
Equipment………………………………. 117,000
Cash…………………………………. 780,000
Appraisal Total
Value % Cost Allocated
Land $522,000 /$900,000 = 58% $780,000 $452,400
Building 243,000 /$900,000 = 27% 780,000 210,600
Equipment 135,000 /$900,000 = 15% 780,000 117,000
Total $900,000 $780,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-100

216. A company purchased a special purpose machine on September 15 of the past year, and
it was installed and ready to run on January 1 of this year. The following costs were incurred
in the purchase and installation of the machine. Determine the total cost of the machine.
Invoice price plus sales tax ................................................. $1,270,500

Freight costs ........................................................................ 9,000
Setup costs ........................................................................... 51,000
Costs to adjust machine to appropriate specifications ...... 36,000
Electrical connections ........................................................ 32,000
Maintenance supplies for future use ................................... 108,000
Traffic fine incurred during transport of machine ............. 300
Cost of special foundation for machine 18,500
Answer:
Total machine cost:

Invoice price including sales tax ................................... $1,270,500
Freight costs................................................................... 9,000
Setup costs ..................................................................... 51,000
Electrical connections .................................................. 32,000
Adjustment costs ........................................................... 36,000
Special foundation ......................................................... 18,500
Total ............................................................................... $1,417,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-101

217. A company paid $595,000 for property that included land appraised at $384,000; land
improvements appraised at $128,000; and a building appraised at $288,000. The plan is to use
the building as a manufacturing plant. Determine the amounts that should be recorded as:
(a) Land…………………. $______________________________________

(b) Land Improvements.... $______________________________________
(c) Building……………… $_______________________________________
Answer:
Percent Apportioned
Asset Appraised Value of Total Cost
Land $384,000 /$800,000 = 48% $285,600
Land Improvements 128,000 /$800,000 = 16% 95,200
Building 288,000 /$800,000 = 36% 214,200
Totals $800,000 100% $595,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-102

218. Prepare journal entries to record the following transactions of a company during the
current year:
Mar 1 Purchased a truck for $40,000 with a 5-year useful life and a $5,000
salvage value. Also paid 6% sales tax, $350 for the annual truck license,
$300 to paint the truck with the company’s colors and name, and $1,500 for
maintenance supplies for the future. All payments were in cash.
Mar 10 Purchased a garage from a neighboring business with a 7%, 4-year,
$67,000 note. The seller’s book value for the garage was $42,750. The
estimated remaining useful life of the garage is 10 years.
July 5 Paid $800 cash to replace (uninsured) garage windows broken during a
storm.
Aug 25 Purchased used shop equipment for $10,700 cash. Sales tax was $825,
freight costs $250, $3,200 for a special base to house the equipment, and
reconditioning costs $900, all of which were paid in cash. The estimated
useful life of the equipment is 3 years and salvage value is $500.
Oct 5 Purchased office equipment for $11,500 cash. Paid $1,290 in sales tax,
$550 for repairs incurred from damage during installation, and $2,200 for
supplies to be used for periodic preventive maintenance. The estimated
useful life of the equipment is 8 years and salvage value is $1,200.
Answer:
Mar. 1 Truck ($40,000 + [$40,000 * .06] + $300) ........................... 42,700

Maintenance Supplies ........................................................... 1,500
License Expense .................................................................... 350
Cash……………………………………………… ... 44,550
May 10 Garage ...................................................................................... 67,000

Notes Payable……………………………………… 67,000
July 5 Repairs (or Maintenance) Expense ...................................... 800

Cash………………………………………………… ....... 800
Aug. 25 Shop Equipment ..................................................................... 15,875

Cash ($10,700 +$825 + $250 + $3,200+ $900)…………….. 15,875
Oct. 5 Store Equipment ($11,500 + $1,290) .................................... 12,790

Repairs Expense ................................................................... 550
Supplies ................................................................................ 2,200
Cash………………………………………………... ....... 15,540
8-103

Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
219. A company purchased equipment on June 28 of the current year and placed it in service
on August 1. The following costs were incurred in acquiring the equipment:
Purchase (invoice) price ...................................................... $215,600

Transportation ...................................................................... 1,400
Insurance during shipping ................................................... 200
One-year fire insurance beginning August 1 of the current year 1,200
Installation cost .................................................................... 4,500
Raw materials and direct labor used to test the equipment. 1,500
Determine the amount to be recorded as cost for the equipment.
Answer:
Purchase (invoice) price ...................................................................... $215,600
Transportation ................................................................................... 1,400
Insurance during shipping ................................................................ 200
Installation costs ............................................................................... 4,500
Raw materials and direct labor to test equipment ........................... 1,500
Total………………………………………………………………… $223,200
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-104

220. A company purchased land with a building for a lump-sum cost of $2,570,000 ($500,000
paid in cash and the balance on a long-term note). It was estimated that the land and building
had market values of $600,000 and $2,400,000, respectively.
Determine the cost to be apportioned to the land and to the building and prepare the journal
entry to record the acquisition.
Answer:
Percent
Asset Appraised Value of Total Apportioned Cost
Land $ 600,000 /3,000,000 = 20% $ 514,000
Building 2,400,000 /3,000,000 = 80% 2,056,000
Total $3,000,000 100% $2,570,000
Land ......................................................................................... 514,000

Building…………………………………………………… 2,056,000
Cash………………………………………………......................... ........ 500,000
Long-Term Note Payable…………………………………… ....... ..... 2,070,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-105

221. A company needed a new building. It found a suitable location with an existing old
building on the land. The company reached an agreement to buy the land and the building for
$960,000 cash. The old building was demolished to make way for the needed new building.
Following is information regarding the demolition of the old building and construction of the
new one:
Construction cost of new building $8,900,000

Cost for parking lot………………………………………. ........................... $260,000
Demolition of old building…………………………………. 200,000
Proceeds from sale of salvaged materials from old building 70,000
Prepare a single journal entry to record the above costs assuming all transactions are paid in
cash.
Answer:
Land ($960,000 + $200,000 – $70,000) ........................... 1,090,000
Building ................................................................................ 8,900,000
Land Improvements…………………………………….. 260,000
Cash………………………………………………… 10,250,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-106

222. A company purchased land on which to construct a new building for a cost of $350,000.
Additional costs incurred were:
Real estate broker’s commissions…………………………. ...................... $24,500

Legal fees incurred in purchase of the real estate………… ........................... 1,500
Landscaping……………………………………………….. ........................... 8,000
Cost to remove old house located on land…………… .................................. 3,000
Proceeds from selling materials salvaged from old house 1,000
What total dollar amount should be charged to Land and what amount should be charged to
Building or other accounts?
Answer:
All costs except landscaping, which is a land improvement, should be charged to Land, and
none to Building. Specifically:
Cost of land ......................................................................... $350,000

Broker’s commission .......................................................... 24,500
Legal fees ............................................................................ 1,500
Cost to remove old building ............................................... 3,000
Salvage of old building ....................................................... (1,000)
Total cost charged to Land ................................................. $378,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-107

223. A company made the following expenditures in connection with the construction of a
new building:
Architect’s fees .................................................................... $ 12,000
Cash paid for land and unusable building on the land ........ 300,000
Removal of old building ...................................................... 18,000
Salvage from sale of old building materials ...................... (4,000)
Construction survey ............................................................. 1,500
Legal fees for title search .................................................... 3,000
Excavation for basement construction ................................ 25,000
Machinery purchased for operations ................................... 100,000
Storage and delivery charges on machinery because building
was not ready when machinery was delivered 900
Freight on machinery purchased ......................................... 1,600
Construction costs of new building .................................... 1,000,000
Installation of machinery ..................................................... 2,500
Prepare a schedule showing the amounts to be recorded as Land, Buildings, and Machinery.
Answer:
Land Building Machinery

Architect’s fees ........................................... $12,000
Cash paid for land and old building ............ $300,000
Removal of old building ............................. 18,000
Salvage from old building materials ........... (4,000)
Building site survey .................................... 1,500
Title search legal fees ................................. 3,000
Basement excavation .................................. 25,000
Machinery ................................................... $100,000
Machinery storage and delivery* ............... 0
Freight on machinery .................................. 1,600
New building .............................................. 1,000,000
Machinery installation ................................ 2,500
Totals........................................................... $317,000 $1,038,500 $104,100
*Assigned to operating expenses.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-108

224. A new machine costing $1,800,000 cash and estimated to have a $60,000 salvage value
was purchased on January 1. The machine is expected to produce 600,000 units of product
during its 8-year useful life. Calculate the depreciation expense in the first year under the
following independent situations:
1. The company uses the units-of-production method and the machine produces 70,000 units
of product during its first year.
2. The company uses the double-declining-balance method.
3. The company uses the straight-line method.
Answer:
1. ($1,800,000 – $60,000)/600,000 units = $2.90/unit; 70,000 units * $2.90/unit = $203,000

2. $1,800,000 * 25% = $450,000
3. ($1,800,000 – $60,000)/8 years = $217,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-109

225. A company purchased a machine on January 1 of the current year for $750,000.
Calculate the annual depreciation expense for each year of the machine’s life (estimated at 5
years or 20,000 hours, with a salvage value of $75,000) using each of the below-mentioned
methods. During the machine’s 5-year life its hourly usage was: 3,000; 4,000; 5,000; 5,000;
and 3,000 hours.
Double-declining- balance
Straight-line Units-of-production
Year 1
Year 2
Year 3
Year 4
Year 5
Totals
Answer:
Double-declining-
Straight-line Units-of-production balance
Year 1 $135,000 $101,250 $300,000
Year 2 135,000 135,000 180,000
Year 3 135,000 168,750 108,000
Year 4 135,000 168,750 64,800
Year 5 135,000 101,250 22,200
Totals $675,000 $675,000 $675,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-110

226. A company purchased an equipment system for $325,000 on January 2. The company
expects the equipment to last for eight years or 81,250 hours of operation, with no estimated
salvage value. During the first year, the equipment was in operation for 8,000 hours, while in
the second year, the equipment was in operation for 8,700 hours. Compute the depreciation
expense relating to the equipment for Year 1 and Year 2 using the following depreciation
methods:
a. Straight-line.
b. Double-declining-balance.
c. Units-of-production.
Answer:
a. $325,000/8 = $40,625 for both Year 1 and Year 2
b. DDB Rate = 1/8 * 2 = 25%

$325,000 * .25 = $81,250 for Year 1
($325,000 – $81,250) * .25 = $60,937.50 for Year 2
c. $325,000/81,250 = $4 per hour depreciation rate

$4/hour * 8,000 hours = $32,000 for Year 1
$4/hour * 8,700 hours = $34,800 for Year 2
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-111

227. On January 1, a machine costing $260,000 with a 6-year life and an estimated $5,000
salvage value was purchased. It was also estimated that the machine would produce 500,000
units during its life. The actual units produced during its first year of operation were 110,000.
Determine the amount of depreciation expense for the first year under each of the following
assumptions:
1. The company uses the straight-line method of depreciation.

2. The company uses the units-of-production method of depreciation.
3. The company uses the double-declining-balance method of depreciation.
Answer:
1. ($260,000 – $5,000)/6 = $42,500

2. ($260,000 – $5,000)/500,000 = $0.51/unit; 110,000 * $0.51 = $56,100
3. $260,000 * (1/6 * 2) = $86,667
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-112

228. Suarez Company uses the straight-line method of depreciation. The company purchased
a computer system on January 1, Year 1, for $1,600,000 with an expected life of six years and
a salvage value of $130,000. Assuming the computer is sold on July 1, Year 3 for $1,000,000
cash, prepare the journal entries to record depreciation for the first 6 months of Year 3 and the
sale of the computer.
Answer:
July 1 Depreciation Expense……………………… 122,500
Accumulated Depreciation— Computer 122,500
[($1,600,000 – $130,000)/6 years * 6/12= $122,500]
1 Cash…………………………………………. 1,000,000
Accumulated Depreciation—Computer…... 612,500
Computer Equipment………………….. 1,600,000
Gain on Disposal of computer*……… 12,500
*Original cost……………………………………….. $1,600,000

Accumulated depreciation …………………………. 612,500
[($1,600,000 – $130,000)/6 years] x 2 1/2 years
Book value…………………………………………... $ 987,500
Cash sales price……………………………………… 1,000,000
Gain on sale…………………………………………. $ 12,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-113

229. A company paid $320,000 for equipment that was expected to last five years and to have
a salvage value of $40,000. During the third year of the equipment’s life, $39,000 cash was
paid for replacement parts that were expected to increase productivity by 10% each year.
Prepare the journal entry to record the $39,000 cost incurred in the third year.
Answer:
Equipment……………………………………………………. 39,000
Cash……………………………………………………. 39,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
230. On January 1, a company purchased machinery for $75,000 that had a 6-year useful life
and a salvage value of $6,000. After three years of straight-line depreciation, the company
paid $8,500 cash at the beginning of the year to improve the efficiency of the machinery. The
productivity of the machinery was improved without increasing its remaining useful life or
changing its salvage value. Straight-line depreciation is used throughout the machinery’s life.
1. Prepare the journal entry to record the $8,500 expenditure.

2. Prepare the journal entry to record depreciation expense for the fourth year.
Answer:
1. Machinery ......................................................................................... 8,500

Cash……………………………………………………………... 8,500
2. Depreciation expense ....................................................................... 14,333

Accumulated Depr. —Machinery…………………………….. 14,333
($75,000 – $6,000)/6 x 3 = $34,500 Accumulated depreciation after 3 years

$75,000 – $34,500 = $40,500 Book value after 3 years
($40,500 + $8,500 – 6,000)/3 = $14,333 Depreciation for the fourth year
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
Topic: Revenue and Capital Expenditure
8-114

231. A company sold a machine that originally cost $90,000 for $28,000 cash. The
accumulated depreciation on this machine was $47,000 at the time of the sale. What was the
company’s gain or loss on this sale?
Answer:
Original cost $90,000

Book value $43,000
Selling price (28,000)
Loss $15,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
232. Wallace Company had a building that was destroyed by fire. The building originally cost
$650,000, and its accumulated depreciation as of the date of the fire was $300,000. The
company received $320,000 cash from an insurance policy that covered the building and will
use that money to help rebuild. Prepare the single journal entry to record the disposal of the
building and the receipt of cash from the insurance company.
Answer:
Cash ....................................................................................... 320,000

Accumulated Depreciation—Building ............................... 300,000
Loss from Fire………………………………………….. 30,000
Building…………………………………………….. 650,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-115

233. On April 1, 2015, due to obsolescence resulting from a new technology, a company
discarded a computer that cost $5,000, had a useful life of 4 years, and a salvage value of
$400. Based on straight-line depreciation, the accumulated depreciation as of December 31,
2014 was $3,450.
a. Prepare the journal entry to record depreciation up to the date of disposal of the computer.
b. Prepare the journal entry to record the disposal of the computer.
Answer:
a. Apr 1 Depreciation Expense…………………………………… 287.50
Accumulated Depreciation— Computer……………. 287.50
[($5,000 – $400)/4 years] * (3/12) = $287.50
b. 1 Accumu1ated Depreciation—Computer……………….. ........ 3,737.50
Loss on Disposa1 of Computer………………………... ............ 1,262.50
Computer…………………………………………. 5,000.00
($3,450 + $287.50 = $3,737.50 total accumulated depreciation)
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-116

234. On April 1 of the current year, a company disposed of a truck that had cost $20,000. The
truck had a salvage value of $2,000, and a useful life of 5 years. The accounting records
showed accumulated depreciation for this truck of $8,100 as of April 1 of the current year.
The asset was discarded after an accident, and $10,500 cash was received from an insurance
claim. Prepare the journal entry to record the disposal of the truck.
Answer:
Apr. 1 Accumulated Depreciation—Truck .......................... 8,100
Cash ........................................................................... 10,500
Loss on Disposal* ..................................................... 1,400
Truck .................................................. 20,000
*Cost of truck $20,000

Accumulated depreciation 8,100
Book value of truck $11,900
Cash received 10,500
Loss from disposal…………………………… $ 1,400
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
235. Anderson Company sold a piece of equipment for $28,000 cash on December 31 after
recording the annual depreciation on the asset. The equipment had an original cost of $97,500
and accumulated depreciation of $63,000. Prepare the general journal entry to record the sale
of this asset.
Answer:
Dec. 31 Cash……………………………………………….. 28,000

Accumulated depreciation - equipment……………. 63,000
Loss on disposal of equipment……………………. 6,500
Equipment……………………………………..
97,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
8-117

236. A company purchased mining property for $1,560,000. The property was estimated to
contain 13,000,000 tons of ore. In the current year, the company removed and sold 263,000
tons of ore. Calculate the depletion expense for the current year.
Answer:
$1,560,000/13,000,000 tons = $0.12/ton; 263,000 tons * $0.12 = $31,560
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
237. A company purchased mining property for $4,875,000 containing an estimated

15,000,000 tons of ore. In Year 1, it mined 689,000 tons of ore and in Year 2, it mined
935,000 tons. Calculate the depletion expense for Year 1 and Year 2 and determine the book
value of the property at the end of Year 2.
$4,875,000/15,000,000 tons = $0.325 per ton

Year 1: 689,000 tons * $0.325 per ton = $223,925
Year 2: 935,000 tons * $0.325 per ton = $303,875
Mining property $4,875,000

Accumulated depletion ($223,925 + $303,875) 527,800
Book value at end of Year 2 $4,347,200
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-118

238. A company purchased mining property for $1,837,500 containing an estimated
7,350,000 tons of ore. In Year 1, it mined and sold 857,000 tons of ore. Calculate the
depletion expense for Year 1 and prepare the journal entry to record the depletion.
Answer:
$1,837,500/7,350,000 tons = $0.25 per ton

Year 1: 857,000 tons * $0.25 per ton = $214,250
Depletion Expense……………… 214,250

Accumulated Depletion………. 214,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-119

239. Record the following events and transactions for Leonard Company for the current year.
1. On January 2, Leonard purchased a patent for $35,000 with a remaining useful life of 10
years. Prepare the journal entry to amortize the patent at the end of the first year.
2. On January 3, Leonard made an advance payment on a leasehold of $840,000. The
leasehold expires in 15 years. Prepare the journal entry to amortize the leasehold at the end of
the first year.
3. On January 4, Leonard purchased a music distributor’s collection of lyrics and songs for
$1,425,000. The copyrights have a remaining life of another 30 years. Prepare the journal
entry to amortize the copyright at the end of the first year.
Answer:
1. Amortization Expense—Patent…………... 3,500

Accumulated Amortization-Patent……… 3,500
($35,000/10 years= $3,500)
2. Amortization Expense—Leasehold………… 56,000

Accumulated Amortization-Leasehold……… 56,000
($840,000/15 years = $56,000)
3. Amortization Expense—Copyrights………… 47,500

Accumulated Amortization-Copyrights…… 47,500
($1,425,000/30 years = $47,500)
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-120

240. A company traded an old forklift for a new forklift, receiving a $13,500 trade-in
allowance and paying the remaining $47,200 in cash. The old forklift had cost $43,000, a 5-
year useful life and a $5,000 salvage value. Straight-line accumulated depreciation of $27,200
had been recorded as of the exchange date.
1. What was the book value of the old forklift on the date of the exchange?
2. What amount of gain or loss (indicate which) should be recognized in recording the
exchange, assuming the transaction has commercial substance?
3. What amount should be recorded as the cost of the new forklift?
Answer:
1. Asset cost $43,000

Accumulated depreciation 27,200
Book value $15,800
2. Market value of new forklift ($13,500 + $47,200) $60,700

Book value of old forklift $15,800
Cash paid in the exchange 47,200 63,000
Loss $ 2,300
3. In this case, the new forklift should be recorded at its market value of $60,700.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-121

241. A machine had an original cost of $60,000. After $45,000 of depreciation was recorded,
the machine was traded in on a new machine priced at $75,000. A $10,500 trade-in allowance
was received on the old machine and the balance of $64,500 was paid in cash. This
transaction has commercial substance. Prepare the general journal entry to record this trade-
in.
Answer:
Machine (new)……………………………………………. 75,000
Accumulated Depreciation — Machine (old)……………. 45,000
Loss on Exchange of Machinery…………………………. 4,500
Machine (old)…………………………………………. 60,000
Cash…………………………………………………… 64,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
242. A company exchanged its used machine for a new machine in a transaction that had
commercial substance. The old machine cost $68,000, and the new one had a cash price of
$95,000. The company had taken $59,000 depreciation on the old machine and was allowed a
$2,500 trade-in allowance and the balance of $92,500 was paid in cash. What gain or loss
should be recorded on the exchange?
Answer:
Market value of machine $95,000
Book value of old machine ($68,000 – $59,000) $9,000
Cash 92,500 101,500
Loss $ 6,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-122

243. A company exchanged an old automobile for a newer model. The old automobile
account had a cost of $36,000 and accumulated depreciation of $25,000 as of the exchange
date. The new automobile had a cash price of $34,000, but the company was given a $15,000
trade-in allowance and the balance of $19,000 was paid in cash. Prepare the journal entry to
record the exchange, if the transaction has commercial substance.
Answer:
Automobile (new) 34,000

Accumulated Depreciation—Automobile (old) 25,000
Automobile (old) 36,000
Cash 19,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
244. During the current year, a company exchanged an old truck costing $58,000 with
accumulated depreciation of $52,000 for a new truck. The new truck had a cash price of
$80,000 and the company received a $16,000 trade-in allowance on the old truck with the
balance of $64,000 paid in cash. Prepare the journal entry to record the exchange, assuming
the transaction has commercial substance.
Answer:
Truck (new) 80,000
Accumulated Depreciation—Truck 52,000
Truck 58,000
Cash 64,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-123

245. During the current year, Beldon Co. acquired a new computer with a cash price of
$12,800 by exchanging an old one on which the company received a $1,500 trade-in
allowance (with the balance of $11,300 paid in cash). The old computer cost $9,000 and its
accumulated depreciation was $5,500 as of the exchange date. Assuming the exchange
transaction had commercial substance, prepare the journal entry to record the exchange.
Answer: Computer (new) ....................................................... 12,800

Accumulated Depreciation — Computer (old) ....................... 5,500
Loss on Exchange of Computers............................................. 2,000
Computer (old) ................................................................. 9,000
Cash .................................................................................. 11,300
Market value of new computer $12,800

Book value of old computer ($9,000 – $5,500) $ 3,500
Cash paid in exchange 11,300 14,800
Loss $ 2,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-124

246. A company purchased store equipment for $4,300 by trading in old equipment with a
cost of $2,000 and that had accumulated depreciation of $1,900 as of the exchange date. The
company received a $75 trade-in allowance for the old equipment with the balance of $4,225
paid in cash. Prepare the journal entry to record the exchange, assuming the transaction had
commercial substance.
Answer:
Store Equipment (new) .......................................................... 4,300

Accumulated Depreciation — Store Equip. (old) .................. 1,900
Loss on Exchange of Equipment .......................................... 25
Store Equipment (old) ..................................................... 2,000
Cash ................................................................................. 4,225
Market value of new equipment $4,300

Book value of old equipment ($2,000 – 1,900) $ 100
Cash paid in the exchange 4,225 4,325
Loss $ 25
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-125

247. On April 1 of the current year, a company traded an old machine that originally cost
$32,000 and that had accumulated depreciation of $24,000 for a similar new machine that had
a cash price of $40,000.
1. Prepare the entry to record the exchange under the assumption that a $5,000 trade-in
allowance was received and the balance of $35,000 was paid in cash. Assume the exchange
transaction had commercial substance.
2. Prepare the entry to record the exchange under the assumption that instead of a $5,000
trade-in allowance, a $12,500 trade-in allowance was received and the balance of $27,500
was paid in cash. Assume the exchange transaction has commercial substance.
Answer:
1.
Apr. 1 Machinery (new) ........................................................ 40,000

Accumulated Depreciation—Machinery (old)… 24,000
Loss on exchange of Machinery ................................ 3,000
Machinery (old) ................................................ 32,000
Cash .................................................................. 35,000
2.
Apr. 1 Machinery (new) ................................................... 40,000
Accumulated Depreciation—Machinery (old) 24,000
Machinery (old) ............................................... 32,000
Gain on exchange of Machinery ..................... 4,500
Cash ................................................................ 27,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-126

248. Identify the balance sheet classification of each of the following assets by placing an X
in the correct classification: Plant Assets, Natural Resources, or Intangibles.
Plant Natural Intangible

assets Resources Assets
a. Trademark
b. Oil field
c. Gold mine
d. Building
e. Franchise
f. Timberland
g. Patent
h. Land
i. Copyright
j. Leasehold
Answer:
Plant Natural Intangible
assets Resources Assets
k. Trademark X
l. Oil field X
m. Gold mine X
n. Building X
o. Franchise X
p. Timberland X
q. Patent X
r. Land X
s. Copyright X
t. Leasehold X
Blooms: Understand
AICPA BB: Industry
AICPA FN: Reporting
Topic: Plant Assets
8-127

249. A machine costing $450,000 with a 4-year life and an estimated salvage value of
$30,000 is installed by Peters Company on January 1. The company estimates the machine
will produce 1,050,000 units of product during its life. It actually produces the following
units for the first 2 years: Year 1, 260,000; Year 2, 275,000. Enter the depreciation amounts
for years 1 and 2 in the table below for each depreciation method. Show calculation of
amounts below the table.
Double-
Units-of- Declining-
Year Straight-Line Production Balance
Year 1
Year 2
Answer:
Double
Units-of- Declining-
Year Straight-Line Production Balance
Year 1 105,000 104,000 225,000

Year 2 105,000 110,000 112,500
Straight-line: $450,000- $30,000/4 = $105,000 for each year
Units-of-production: $450,000- $30,000/1,050,000 = $.40

Year 1: $.40 * 260,000 = $104,000; Year 2: $.40 * 275,000 = $110,000
Double-declining:
Year 1: $450,000 x .5 = $225,000; Year 2: ($450,000-225,000) x .5 = $112,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-128

250. On July 1 of the current year, Glover Mining Co. pays $5,400,000 for land estimated to
contain 7,200,000 tons of recoverable ore. It installs machinery on July 3 costing $864,000
that has an 8 year life and no salvage value and is capable of mining the ore deposit in six
years. The company removes and sells 745,000 tons of ore during its first six months of
operations ending on December 31. Depreciation of the machinery is in proportion to the
mine’s depletion as the machinery will be abandoned after the ore is mined. Prepare the
entries Glover must record for (a) the purchase of the ore deposit, (b) the costs and installation
of the machinery, (c) the depletion assuming the land has a zero salvage value, and (d) the
depreciation on the machinery.
Answer:
July 1 Mineral Rights…………………………………… 5,400,000

Cash………………………………………….. 5,400,000
July 3 Machinery……………………………………….. 864,000

Cash………………………………………….. 864,000
Dec. 31 Depletion expense………………………………. 558,750

Accumulated Depletion — Mineral Rights…. 558,750
Dec. 31 Depreciation expense…………………………… 89,400

Accumulated Depreciation — Machinery…… 89,400
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-129

251. On July 1 of the current year, Timberlake Company signed a contract to sublease space
in a building for 7 years. Timberlake Company paid $56,000 for the right to sublease this
space. After taking possession of the leased space, Timberlake pays $140,000 for improving
the office portion of the lease space. The improvements are paid on July 6 of the current year,
and are estimated to have a useful life equal to the 14 years remaining in the life of the
building. Prepare entries for Timberlake to record (a) its payment for the right to sublease
the building space, (b) its payment for the office improvements, (c) the December 31 year-end
entry to amortize the cost of the sublease, (d) the December 31 year-end entry to amortize the
office improvements.
Answer:
July 1 Leasehold.................................................................. 56,000

Cash ..................................................................... 56,000
July 6 Leasehold Improvements .......................................... 140,000

Cash ..................................................................... 140,000
Dec. 31 Rent expense ............................................................. 4,000

Accumulated Amortization — Leasehold.............. 4,000
Dec. 31 Amortization expense — Leasehold Improvements .. 10,000

Accumulated Amortization — Leasehold Improv.. 10,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
Difficulty: 3 Hard
8-130

252. Westport Company reports the following in millions: net sales of $25,300 for 2016 and
$22,640 for 2015; end-of-year total assets of $14,875 for 2016 and $13,680 for 2015.
Compute its total asset turnover for 2016 and assess its level if competitors average a total
asset turnover of 2.0 times.
Answer: Average total assets = ($14,875 + $13,680)/2 = $14,277.50

Total asset turnover = $25,300/$14,277.50= 1.8 times
Westport is not doing as well as its competitors. The company needs to improve relative to its
competitors on total asset turnover.
Blooms: Apply
AACSB: Analytic
Difficulty: 3 Hard
Fill in the Blank Questions
253. __________________ is an estimate of an asset’s value at the end of its benefit period
(or useful life).
Answer: Salvage value (or residual value or scrap value)
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
254. The insufficient capacity of a company’s plant asset to meet the company’s productive
demands is called ______________________.
Answer: inadequacy
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-131

255. _________________ refers to a plant asset that is no longer useful in producing goods or
services with a competitive advantage because of new inventions and improvements.
Topic: Obsolescence
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
256. A ____________________________ results from revising estimates of the useful life or

salvage value of a plant asset.
Answer: change in accounting estimate
Blooms: Remember
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 1 Easy
257. The federal income tax rules for depreciating assets are known as
___________________________.
Answer: MACRS (Modified Accelerated Cost Recovery System)
Blooms: Remember
AICPA BB: Industry
AICPA BB: Legal
258. The depreciation method that recognizes equal amounts of annual depreciation over the
life of an asset is _______________________________.
Answer: straight-line
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-132

259. The depreciation method that charges a varying amount to expense for each period of an
asset’s useful life depending on its usage is ________________________________.
Answer: units-of-production
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
260. The depreciation method that uses a depreciation rate that is a multiple of the straight-
line rate and applies it to an asset’s beginning-of-period book value is
____________________.
Answer: declining-balance
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
261. Capital expenditures that extend an asset’s useful life beyond its original estimate are
called _______________________.
Answer: extraordinary repairs
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
262. Additional costs of plant assets that do not materially increase the asset’s life or
productive capabilities are recorded as ______________________________.
Answer: revenue expenditures

Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-133

263. Additional costs of plant assets that provide benefits extending beyond the current
period; they increase or improve the type or amount of service an asset provides are treated as
_________________________________.
Answer: capital expenditures
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
264. Revenue expenditures to keep an asset in normal, good operating condition; they are
necessary if an asset is to perform to expectations over its useful life are called
_____________________.
Answer: ordinary repairs
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
265. _________________________ are capital expenditures that make a plant asset more
productive but do not always increase an asset’s life; they often involve adding a component
to an asset or replacing one of its old components with a better one.
Answer: Betterments
Blooms: Remember
AICPA BB: Industry
Difficulty: 1 Easy
8-134


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True / False Questions

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Copyright © 2018 McGraw-Hill Education. All rights reserved.

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Copyright © 2018 McGraw-Hill Education. All rights reserved.

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Feedback: Total Asset Turnover = Net Sales/Average Total Assets

Feedback: Total Asset Turnover = Net Sales/Average Total Assets

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Feedback: Depreciation Expense = (Cost – Salvage Value)/Estimated Useful Life

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44. Revenue expenditures are also called balance sheet expenditures.

45. Betterments are a type of capital expenditure.

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Multiple Choice Questions

65. Plant assets are defined as:

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67. The relevant factors in computing depreciation do not include:

68. Salvage value is:

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70. The useful life of a plant asset is:

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Feedback: 10 year revised life – 4 years depreciated = 6 years remaining

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Feedback: Accumulated Depreciation through the end of year 4:

Depreciation in Year 5 = (Cost of Asset – Accumulated Depreciation – Salvage

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Feedback: Accumulated Depreciation through the end of year 3:

Depreciation, years 4 through 5 = (Cost of Asset – Accumulated Depreciation – Salvage

78. Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of

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Feedback: Year 1 [($22,000 – $2,000)/4] * 9/12 = $3,750

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Feedback: Depreciation Expense = (Cost – Salvage Value)/Estimated Useful Life

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82. A benefit of using an accelerated depreciation method is that:

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84. The straight-line depreciation method and the double-declining-balance depreciation

85. Total asset turnover is used to evaluate:

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87. The calculation of total asset turnover is: