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Financial Accounting, 12e (Thomas/Tietz/Harrison)
Chapter 7 Plant Assets, Natural Resources, & Intangibles
Learning Objective 7-1
1) The costs assigned to the Land account include legal fees, survey fees, and expenditures for
grading and clearing the land.
Answer: TRUE
Diff: 1
LO: 7-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) The cost of land includes the cost of any back property taxes that the purchaser pays.
Answer: TRUE
Diff: 2
LO: 7-1
3) The cost of land includes the cost of fencing the property and paving the parking lot on the
land.
Answer: FALSE
Diff: 2
LO: 7-1
AICPA Bus Persp: Strategic/Critical Thinking
4) Leasehold improvements are not subject to depreciation or amortization.

Answer: FALSE
Diff: 1
LO: 7-1
5) The installation costs for a new machine should be part of the cost of the machine and should
be depreciated.
Answer: TRUE
Diff: 2
LO: 7-1
1
Copyright © 2019 Pearson Education, Inc.
6) The cost of a new building includes the cost to demolish and remove an old building on the
same site as the new building.
Answer: FALSE
Diff: 2
LO: 7-1
7) If a company buys a building and the surrounding land for cash, total assets increase.
Answer: FALSE
Diff: 2
LO: 7-1
8) Major Company purchased equipment to be used in its distribution center. All of the following
should be included in the cost of the equipment EXCEPT for:
A) insurance while in transit.
B) wages of workers who test the equipment before it is placed in service.
C) employee training costs before the equipment is placed in service.
D) insurance costs after the equipment is up and running.
Answer: D
Diff: 2
LO: 7-1
9) Which of the following should be included in the cost of land improvements?

A) fencing
B) sprinkler system for the landscaping
C) driveways
D) all of the above
Answer: D
Diff: 2
LO: 7-1
2
10) Minor Company purchased land which is being prepared for the construction of a new office
building. Which of the following should be included in the cost of the land?
A) cost of removing an old building
B) cost of clearing and grading the land
C) cost of the fence which surrounds the property
D) A and B
Answer: D
Diff: 2
LO: 7-1
11) ABC Company purchased land with an old building. ABC plans to demolish the old building
and then construct a new, modern building. The cost of demolishing the building will be part of
the cost of the:
A) new building.
B) old building.
C) land.
D) land improvements.
Answer: C
Diff: 2
LO: 7-1
AACSB: Analytical Thinking
12) The cost of installing lights in a company's parking lot should be recorded as a cost of:
A) land.
B) land improvements.
C) leasehold improvements.
D) leaseholds.
Answer: B
Diff: 2
LO: 7-1
3
13) The ________ method is used to allocate the cost of multiple assets acquired in a basket
purchase.
A) book-value
B) cost
C) gross margin ratio
D) relative-sales-value
Answer: D
Diff: 2
LO: 7-1
14) A lump-sum purchase of multiple, long-term plant assets requires the company to:
A) record the assets purchased as a single asset.
B) divide the total cost among the various assets according to values estimated by the company's
management.
C) divide the total cost among the various assets according to their market values.
D) divide the total cost among the various assets according to their book values.
Answer: C
Diff: 2
LO: 7-1
15) Which of the following statements is INCORRECT?

A) The cost of land includes fencing and paving.
B) The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use.
C) The cost of a leasehold improvement should be amortized over the shorter of its useful life or
the term of the lease.
D) All of the above statements are correct.
Answer: A
Diff: 2
LO: 7-1
4
16) Land, a building and equipment are acquired for a lump sum of $800,000. The market values
of the land, building and equipment are $400,000, $900,000 and $300,000, respectively. What is
the cost assigned to the equipment? (Do not round any intermediary calculations, and round your
final answer to the nearest dollar.)
A) $0
B) $150,000
C) $300,000
D) $800,000
Answer: B
Explanation: $400,000 + $900,000 + $300,000 = $1,600,000 total market value
($300,000 ÷ $1,600,000) × $800,000 = $150,000
Diff: 2
LO: 7-1
17) Land is purchased for $300,000. Back taxes paid by the purchaser were $8,500; total costs to
demolish an existing building were $12,000 and the cost to clear the land was $22,000. The cost
of paving the parking lot was $8,100. The cost of land is ________ and the cost of land
improvements is ________.
A) $320,500; $30,100
B) $342,500; $8,100
C) $350,600; $0
D) $342,100; $8,500
Answer: B
Explanation: Land: $300,000 + Back taxes $8,500 + Demolition cost $12,000 + Clear the land
cost $22,000 = $342,500
Diff: 2
LO: 7-1
5
18) Jimmy Company leased a delivery van for payments of $11,000 per year for three years. In
addition, Jimmy Company also paid $1,700 for new larger windows in the van and spent $5,400
for special storage racks for the van. Leasehold Improvements equal:
A) $11,000.
B) $1,700.
C) $5,400.
D) $7,100.
Answer: D
Explanation: $5,400 + $1,700 = $7,100
Diff: 2
LO: 7-1
19) Gengler Company acquired three pieces of equipment for $1,700,000. Equipment #1 is
appraised at $470,000, equipment #2 is appraised at $630,000 and equipment #3 is appraised for
$640,000. The cost of equipment #1 is: (Do not round any intermediary calculations, and round
your final answer to the nearest dollar.)
A) $129,941.
B) $126,954.
C) $459,195.
D) $470,000.
Answer: C
Explanation: $470,000 + $630,000 + $640,000 = $1,740,000
($470,000 ÷ $1,740,000) × $1,700,000 = $459,195
Diff: 2
LO: 7-1
6
20) Barbarino Corporation purchased land and a building for $1,000,000. An appraisal indicates
that the land's market value is $600,000 and the building's market value is $900,000. When
recording this transaction Barbarino should debit:
(Do not round any intermediary calculations, and round your final answer to the nearest dollar.)
A) Land for $600,000.
B) Land for $400,000.
C) Building for $900,000.
D) Building for $1,000,000.
Answer: B
Explanation: $600,000 ÷ ($600,000 + $900,000) = 40%
40% × $1,000,000 = $400,000
Diff: 2
LO: 7-1
21) A machine is purchased for $80,000. The transportation cost from the seller was $3,000,
installation costs were $2,000 and taxes on the purchase price were $700. Testing runs of the
new machine cost $3,000. What is the cost of the machine?
A) $80,000
B) $85,000
C) $85,700
D) $88,700
Answer: D
Explanation: All the costs are added to the cost of the machine.
Diff: 2
LO: 7-1
7
22) A company incurred the following costs:
Purchase price of land $270,000

Survey fees 4,000
Payment for demolition of old building on land 20,000
Back property taxes on land 2,000
Paving costs for parking lot 60,000
Fence around perimeter of land 15,000
Lights in parking lot 90,000
Signs for new business 5,000
What is the cost of the land?

A) $270,000
B) $296,000
C) $356,000
D) $294,000
Answer: B
Explanation: Purchase price $270,000 + Survey fees $4,000 + Demolition $20,000 + Back taxes
$2,000 = $296,000
Diff: 2
LO: 7-1
8
23) A company incurred the following costs for a new delivery truck:
Purchase price $110,000

Sales tax 7,000
Delivery charge from seller's location 1,600
Special racks for storage 3,000
Normal repairs to the truck before it was
used for the first time 1,100
Signs painted on the truck 2,000
Insurance on truck before it was used for the
first time 3,000
What is the cost of the delivery truck?

A) $118,600
B) $120,600
C) $123,600
D) $127,700
Answer: D
Explanation: All of the costs should be assigned to the new truck.
Diff: 2
LO: 7-1
24) Land improvements include expenditures for:

A) paving the parking lot.
B) grading and clearing the land.
C) removing an unwanted building.
D) all of the above.
Answer: A
Diff: 2
LO: 7-1
9
25) Which of the following is NOT included in the cost of a building that was constructed by the
company?
A) interest on money borrowed to finance the construction
B) cost of removing an unwanted building from the property
C) architectural fees
D) payments for material, labor and overhead for construction of new building
Answer: B
Diff: 2
LO: 7-1
26) On January 1, of the current year, Roadway Delivery Company purchased a truck for
$20,000. Depreciation Expense is $1,000 per year. During the first year of use, the company paid
$5,000 to repaint the truck and $1,600 for new tires. What is the total expense for the year ended
December 31, end of current year?
A) $1,000
B) $6,000
C) $6,600
D) $7,600
Answer: D
Diff: 2
LO: 7-1
10
27) Miscellaneous costs associated with the purchase of new equipment include:
Insurance costs before the equipment is ready for use $1,000

Maintenance costs before the equipment is ready for use 600
Insurance costs after the equipment is placed into service 1,500
Cost of test run 900
Training costs for employees to learn how to use equipment 400
What is the amount assigned to the new equipment?

A) $2,300
B) $2,500
C) $2,900
D) $4,400
Answer: C
Explanation: Insurance costs before use $1,000 + Maintenance costs before use $600 + Cost of
test run $900 + Training costs $400 = $2,900
Diff: 2
LO: 7-1
28) Dorman Company purchased a new machine for its production process. The following costs
were incurred for the new machine:
Training costs for workers who will operate the machine $18,000
Wages paid to workers who operate the machine during production 108,000
Ordinary repairs to the machine before the first production run 3,000
Cost of platform used to properly secure the machine 20,000
Cost of test run which took place before the first production run 12,000
Which costs should be added to the cost of the machine?

A) $18,000
B) $38,000
C) $53,000
D) $161,000
Answer: C
Explanation: All of the costs should be added except for wages paid to workers who operate the
machine during production.
Diff: 3
LO: 7-1
AICPA Functional: Measurement, Reporting
11
29) The Manson Company purchased assets for a lump-sum price of $1,000,000. An appraisal
indicates the following market prices:
Equipment $560,000
Land $210,000
Building $630,000
Prepare the appropriate journal entry if Manson Company paid cash for this transaction.
Date Account Debit Credit
Answer: ($560,000 + $210,000 + $630,000) = $1,400,000

Equipment: ($560,000 ÷ $1,400,000) × $1,000,000 = $400,000
Land: ($210,000 ÷ $1,400,000) × $1,000,000 = $150,000
Building: ($630,000 ÷ $1,400,000) × $1,000,000 = $450,000

Equipment 400,000
Land 150,000
Building 450,000
Cash 1,000,000
Diff: 3
LO: 7-1
12
30) Auto Shop, Inc., incurred the following costs in acquiring plant assets:
a. Purchased land with a $100,000 down payment and signed a $75,000 note payable for the
balance.
b. Delinquent property tax of $2,500 and legal fees of $1,000 had to be paid before the land
could be purchased.
c. $12,000 was paid to demolish an unwanted building on the land.
d. Architect fee of $7,000 was paid for the design of a new office building.
e. An office building was constructed at a cost of $500,000. A long-term note payable was used
to pay for the cost.
f. $17,500 was paid for fencing around the new building. $55,000 was paid for paving the
parking lot by the new building.
g. $20,000 was paid for lights in the new parking lot.
h. $10,000 was paid for a sprinkler system for the bushes and grass.
Required:
Prepare journal entries for the above transactions. Explanations are not required.
Accounts Debit Credit
13
Answer:
a. Land 175,000
Cash 100,000
Note Payable 75,000
b. Land 3,500
Cash 3,500
c. Land 12,000
Cash 12,000
d. Building 7,000
Cash 7,000
e. Building 500,000
Note Payable 500,000
f. Land Improvements 72,500

Cash 72,500
g. Land Improvements 20,000

Cash 20,000
h. Land Improvements 10,000

Cash 10,000
Diff: 3
LO: 7-1
1) The distinction between a capital expenditure and an immediate expense for a plant asset
requires judgment.
Answer: TRUE
Diff: 2
LO: 7-2
14
2) Expenditures that extend a plant asset's useful life should be capitalized.
Answer: TRUE
Diff: 1
LO: 7-2
3) Costs that do not extend a plant asset's capacity or its useful life, but merely maintain the asset
or restore it to working order are recorded as:
A) capital expenditures.
B) expenses.
C) extraordinary repairs.
D) modification of assets.
Answer: B
Diff: 1
LO: 7-2
4) Which of the following costs associated with a delivery van should NOT be capitalized?
A) The van's engine is overhauled, and this will extend the useful life by five years.
B) The van is modified so it can be used for multiple purposes in the business.
C) The van is repainted after 4 years of use.
D) All of the above items should be capitalized.
Answer: C
Diff: 2
LO: 7-2
5) The journal entry to record an addition to an office building would include:

A) credit to Depreciation Expense.
B) credit to Accumulated Depreciation.
C) debit to Repair Expense.
D) debit to Office Building.
Answer: D
Diff: 2
LO: 7-2
15
6) Pat's Pets recently paid $15,000 to have the engine in its delivery van overhauled. The
estimated useful life of the van was originally estimated to be 4 years. The overhaul is expected
to extend the useful life of the van to 10 years. The overhaul is regarded as a(n):
A) revenue expenditure.
B) capital expenditure.
C) equity expenditure.
D) The answer depends on management's judgment.
Answer: B
Diff: 2
LO: 7-2
7) Capital expenditures are NOT immediately expensed because these items:

A) extend the useful life of a plant asset.
B) return a plant asset to its prior condition.
C) decrease the plant asset's capacity.
D) maintain a plant asset in working condition.
Answer: A
Diff: 2
LO: 7-2
8) Morgan Oaks Company replaced the windshields and painted several of its vehicles during the
year. These costs should be:
A) debited to Equipment.
B) depreciated over the life of the vehicles.
C) credited to Accumulated Depreciation.
D) debited to Repair Expense.
Answer: D
Diff: 2
LO: 7-2
16
9) On June 1, Roadway's Trucking Company paid $9,000 to overhaul the engine on a delivery
truck to allow it to be used for two additional years. It also paid $8,000 to change the storage
capacity of the truck so that it could haul more merchandise. Which of the following statements
is TRUE?
A) The $9,000 is a capital expenditure and the $8,000 is an expense.
B) The $9,000 is an expense and the $8,000 is a capital expenditure.
C) Both items are capital expenditures.
D) Both items are expenses.
Answer: C
Diff: 2
LO: 7-2
10) Treating a capital expenditure as an immediate expense:

A) overstates assets and stockholders' equity in the year of the error.
B) understates assets and stockholders' equity in the year of the error.
C) understates assets and overstates stockholders' equity in the year of the error.
D) overstates assets and understates stockholders' equity in the year of the error.
Answer: B
Diff: 2
LO: 7-2
11) If a company capitalizes a cost that should have been expensed:

A) expenses and net income will be overstated in the year of the error.
B) expenses and net income will be understated in the year of the error.
C) expenses will be overstated and net income will be understated in the year of the error.
D) expenses will be understated and net income will be overstated in the year of the error.
Answer: D
Diff: 3
LO: 7-2
17
12) WorldCom's fraudulent scheme of capitalizing telephone line costs instead of expensing
them was discovered by:
A) external auditors.
B) astute investors.
C) U.S. Securities and Exchange Commission.
D) internal auditors.
Answer: D
Diff: 3
LO: 7-2
AICPA Functional: Risk Analysis
13) Which of the following statements is INCORRECT?

A) The rules for determining whether a cost should be expensed or capitalized are so complete
and clear that judgment is not needed.
B) Capital expenditures are capitalized when the cost is added to an asset account.
C) Most companies expense all small (immaterial) costs regardless of whether the costs are
capital in nature.
D) An expense merely maintains the asset in its present condition or restores it to working order.
Answer: A
Diff: 3
LO: 7-2
14) Which of the following costs for a delivery vehicle should NOT be capitalized?
A) repair dented fender
B) service air conditioning system
C) repair air conditioning system
D) all of the above
Answer: D
Diff: 3
LO: 7-2
18
15) Costs that maintain a plant asset in its present condition should be ________. Costs that
restore a plant asset to working order or its prior condition should be ________.
A) capitalized; capitalized
B) capitalized; expensed
C) expensed; capitalized
D) expensed; expensed
Answer: D
Diff: 3
LO: 7-2
16) A conservative policy with regard to capitalizing or expensing costs associated with plant
assets avoids ________.
A) understating profits and assets
B) overstating profits and assets
C) overstating profits and understating assets
D) understating profits and overstating assets
Answer: B
Diff: 3
LO: 7-2
17) What is the distinction between a capital expenditure (for a long-term asset) and an
immediate expense?
Answer: Does the cost extend the asset's useful life or increase its capacity? If so, record an
asset. If the cost merely maintains the asset in its present condition or returns it to its prior
condition, then record an expense.
Diff: 2
LO: 7-2
1) The depreciation process follows the revenue recognition principle.

Answer: FALSE
Diff: 1
LO: 7-3
19
2) The Accumulated Depreciation account is an income statement account.
Answer: FALSE
Diff: 1
LO: 7-3
3) Obsolescence may cause an asset's useful life to be longer than the asset's physical life.
Answer: FALSE
Diff: 1
LO: 7-3
4) Book value of a plant asset equals the cost of the asset less the current year's depreciation
expense.
Answer: FALSE
Diff: 2
LO: 7-3
5) The normal balance of the Accumulated Depreciation account is a debit.

Answer: FALSE
Diff: 2
LO: 7-3
6) At the end of its useful life, the book value of a plant asset must be zero.
Answer: FALSE
Diff: 2
LO: 7-3
20
7) In the units-of-production method, a fixed amount of depreciation expense is assigned to each
unit of output.
Answer: TRUE
Diff: 2
LO: 7-3
8) When compared to the accelerated depreciation methods, the use of the straight-line method
increases a company's tax liability.
Answer: TRUE
Diff: 2
LO: 7-3
9) Under the double-declining-balance method of depreciation, residual value is initially ignored.

Answer: TRUE
Diff: 2
LO: 7-3
10) Depreciation expense decreases both assets and stockholders' equity.

Answer: TRUE
Diff: 2
LO: 7-3
11) The book value of an asset cannot be less than its residual value.
Answer: TRUE
Diff: 2
LO: 7-3
21
12) The depreciation process follows the ________ principle.
A) revenue recognition
B) expense recognition
C) disclosure
D) consistency
Answer: B
Diff: 2
LO: 7-3
13) An asset is ________ when another asset can do the job more efficiently.
A) fully depreciated
B) deteriorated
C) physically worn
D) obsolete
Answer: D
Diff: 2
LO: 7-3
14) Double-declining-balance depreciation:

A) is an accelerated depreciation method.
B) ignores the residual value in computing depreciation, except during the last year.
C) is based on the book value of the plant asset.
D) is all of the above.
Answer: D
Diff: 2
LO: 7-3
22
15) Which of the following depreciation methods best applies to those assets that generate
greater revenue earlier in their useful lives?
A) straight-line method
B) depletion method
C) double-declining-balance method
D) units-of-production method
Answer: C
Diff: 2
LO: 7-3
16) All of the following are needed to measure depreciation, EXCEPT for:
A) cost.
B) market value.
C) estimated useful life.
D) estimated residual value.
Answer: B
Diff: 1
LO: 7-3
17) A depreciation method in which an equal amount of depreciation expense is assigned to each
year of the asset's use is the:
A) units-of-production method.
B) straight-line method.
C) accelerated depreciation method.
D) estimated residual value method.
Answer: B
Diff: 2
LO: 7-3
23
18) The expected cash value of a plant asset at the end of its useful life is known as:
A) scrap value.
B) salvage value.
C) estimated residual value.
D) all of the above.
Answer: D
Diff: 1
LO: 7-3
19) The depreciable cost of a plant asset equals the:

A) historical cost of the asset plus the estimated residual value.
B) historical cost of the asset minus the estimated residual value.
C) historical cost of the asset minus accumulated depreciation.
D) current replacement cost minus accumulated depreciation.
Answer: B
Diff: 2
LO: 7-3
20) The book value of a plant asset is defined as:

A) historical cost minus estimated residual value.
B) historical cost minus accumulated depreciation.
C) current sales value minus historical cost.
D) replacement cost minus accumulated depreciation.
Answer: B
Diff: 2
LO: 7-3
21) Cost minus residual value divided by useful life, in years, is the formula for the:
A) straight-line depreciation method.
B) units-of-production depreciation method.
C) double-declining-balance depreciation method.
D) modified accelerated cost recovery method.
Answer: A
Diff: 1
LO: 7-3
24
22) When compared to the other methods of depreciation, the double-declining-balance method
of depreciation gives depreciation expense that is:
A) less in the earlier periods.
B) higher in the earlier periods.
C) approximately the same in earlier periods as with other methods.
D) the same from year to year.
Answer: B
Diff: 2
LO: 7-3
23) The journal entry to record depreciation expense for equipment is:
A) debit Depreciation Expense, credit Equipment.
B) debit Accumulated Depreciation - Equipment, credit Equipment.
C) debit Equipment, credit Accumulated Depreciation - Equipment.
D) debit Depreciation Expense - Equipment, credit Accumulated Depreciation - Equipment.
Answer: D
Diff: 2
LO: 7-3
24) As a plant asset is used in operations:

A) accumulated depreciation increases and the book value of the asset increases.
B) accumulated depreciation increases and the book value of the asset decreases.
C) accumulated depreciation remains the same and the book value of the asset decreases.
D) accumulated depreciation increases and the book value of the asset remains the same.
Answer: B
Diff: 2
LO: 7-3
25
25) When computing depreciation using the units-of-production method:
A) a variable amount of depreciation is assigned to each unit of output.
B) a fixed amount of depreciation is assigned to each unit of output.
C) the depreciation expense depends directly on the amount of output or usage.
D) B and C.
Answer: D
Diff: 2
LO: 7-3
26) Which of the following is an accurate statement regarding financial statement and income tax
depreciation methods?
A) Straight-line depreciation is the most popular method for income tax purposes.
B) The IRS expects a company to use accelerated depreciation methods for tax purposes.
C) The Modified Accelerated Cost Recovery System can be used for both financial statement
and income tax purposes.
D) If an accelerated depreciation method is used for income tax purposes, a company will pay
more in income taxes.
Answer: B
Diff: 2
LO: 7-3
27) When a plant asset is fully depreciated:

A) the asset's accumulated depreciation is higher than the historical cost of the asset.
B) the book value is equal to the salvage value.
C) the depreciable cost is equal to the estimated residual value, and the asset is of no further use
to the company.
D) the book value is zero and the asset has no market value.
Answer: B
Diff: 3
LO: 7-3
26
28) When using straight-line depreciation to compute depreciation for a partial year:
A) compute depreciation for a full year under straight-line depreciation and multiply it by 50%.
B) compute depreciation for a full year under straight-line depreciation and use that amount.
C) the straight-line method automatically adjusts for partial periods, so no adjustments are
needed.
D) compute depreciation for a full year under straight-line depreciation and multiply it by the
fraction of the year that you held the asset.
Answer: D
Diff: 2
LO: 7-3
29) On January 2, 2019, Konrad Corporation acquired equipment for $500,000. The estimated
life of the equipment is 5 years or 18,000 hours. The estimated residual value is $14,000. If
Konrad Corporation uses the units of production method of depreciation, what will be the debit
to Depreciation Expense for the year ended December 31, 2020, assuming that during this
period, the asset was used 6,000 hours?
A) $166,667
B) $97,200
C) $162,000
D) $171,333
Answer: C
Explanation: ($500,000 - $14,000) ÷ 18,000 = $27 per hour
$27 × 6,000 = $162,000
Diff: 2
LO: 7-3
27
30) On January 2, 2019, Kaiman Corporation acquired equipment for $700,000. The estimated
life of the equipment is 5 years or 80,000 hours. The estimated residual value is $20,000. What is
the balance in Accumulated Depreciation on December 31, 2020, if Kaiman Corporation uses the
straight-line method of depreciation?
A) $140,000
B) $136,000
C) $272,000
D) $280,000
Answer: C
Explanation: ($700,000 - $20,000) ÷ 5 years = $136,000 depreciation expense per year
$136,000 × 2 years = $272,000
Diff: 2
LO: 7-3
31) On January 2, 2019, Kellogg Corporation acquired equipment for $700,000. The estimated
the book value of the asset on December 31, 2020, if Kellogg Corporation uses the straight-line
method of depreciation? (Round any intermediary calculations to two decimal places and your
final answer to the nearest dollar.)
A) $568,000
B) $436,000
C) $700,000
D) $660,000
Answer: B
Explanation: ($700,000 - $40,000) ÷ 5 years = $132,000 depreciation expense per year
$132,000 × 2 years = $264,000 accumulated depreciation at end of second year
Book value = $700,000 - $264,000 = $436,000
Diff: 2
LO: 7-3
28
32) On January 2, 2019, Kornis Corporation acquired equipment for $1,500,000. The estimated
the balance in Accumulated Depreciation on December 31, 2019, if Kornis Corporation uses the
double-declining-balance method of depreciation?
A) $290,000
B) $300,000
C) $580,000
D) $600,000
Answer: D
Explanation: $1,500,000 × 40% = $600,000
Diff: 2
LO: 7-3
33) On January 2, 2019, Konan Corporation acquired equipment for $900,000. The estimated life
of the equipment is 5 years or 100,000 hours. The estimated residual value is $20,000. What is
the balance in Accumulated Depreciation on December 31, 2020, if Konan Corporation uses the
double-declining-balance method of depreciation? (Round any intermediary calculations to two
decimal places and your final answer to the nearest dollar.)
A) $576,000
B) $352,000
C) $216,000
D) $880,000
Answer: A
Explanation: $900,000 × 40% = $360,000
($900,000 - $360,000) × 40% = $216,000
$360,000 + $216,000 = $576,000
Diff: 3
LO: 7-3
29
34) On January 4, 2019, Margaret's Cafe acquired equipment for $147,500. The estimated life of
the equipment is 4 years or 42,500 hours. The estimated residual value is $20,000. What is the
depreciation for 2019, if Margaret's Cafe uses the asset 14,400 hours and uses the units-of-
production method of depreciation?
A) $31,875
B) $43,200
C) $20,000
D) $36,875
Answer: B
Explanation: ($147,500 - $20,000) ÷ 42,500 = $3 per hour
$3 × 14,400 = $43,200
Diff: 2
LO: 7-3
35) On January 4, 2019, Mary's Cafe acquired equipment for $500,000. The estimated life of the
equipment is 8 years or 60,000 hours. The estimated residual value is $40,000. What is the
balance in the Accumulated Depreciation account at December 31, 2020 if the straight-line
method is used?
A) $40,000
B) $62,500
C) $115,000
D) $57,500
Answer: C
Explanation: ($500,000 - $40,000) ÷ 8 = $57,500
$57,500 × 2 years = $115,000
Diff: 2
LO: 7-3
30
36) On January 2, 2019, Saminski, Inc., acquired equipment for $200,000. The estimated life of
the equipment is 5 years. The estimated residual value is $40,000. What is the Accumulated
Depreciation of the equipment on December 31, 2020, if Saminski uses the double-declining-
balance method of depreciation? (Round intermediary calculations to two decimal places and
your final answer to the nearest dollar.)
A) $64,000
B) $80,000
C) $48,000
D) $128,000
Answer: D
Explanation: $200,000 × 40% = $80,000
($200,000 - $80,000) × 40% = $48,000
$80,000 + $48,000 = $128,000
Diff: 2
LO: 7-3
37) On January 2, 2019, Mumford Corporation acquired equipment for $90,000. The estimated
life of the equipment is 4 years. The estimated residual value is $3,000. What is the amount of
depreciation expense for 2020, if the company uses the double-declining-balance method of
depreciation? (Round intermediary calculations to two decimal places and your final answer to
the nearest dollar.)
A) $21,750
B) $22,500
C) $43,500
D) $45,000
Answer: B
Explanation: $90,000 × 50% = $45,000
($90,000 - $45,000) × 50% = $22,500
Diff: 2
LO: 7-3
31
38) On January 2, 2019, Helmkamp Company purchased a $30,000 machine. It had an estimated
useful life of 5 years and a residual value of $3,000. What is the amount of depreciation expense
for 2020, the second year of the asset's life, using the double declining-balance method? (Round
intermediary calculations to two decimal places and your final answer to the nearest dollar.)
A) $6,000
B) $7,200
C) $5,400
D) $12,000
Answer: B
Explanation: $30,000 × 40% = $12,000
($30,000 - $12,000) × 40% = $7,200
Diff: 2
LO: 7-3
39) Martin Company paid $900,000 for equipment. Martin uses straight-line depreciation.
Currently the Accumulated Depreciation account shows a balance of $180,000. If the asset has
no residual value and an estimated life of 10 years, how many years has the asset been
depreciated? (Round your final answer to the nearest year.)
A) 5
B) 3
C) 2
D) 10
Answer: C
Explanation: $900,000 ÷ 10 = $90,000 per year
$180,000 ÷ $90,000 = 2 years
Diff: 3
LO: 7-3
32
40) Income before depreciation and taxes amounts to $200,000. Using straight-line depreciation,
the current year's depreciation expense will be $13,500. Using double-declining-balance
depreciation, the current year's depreciation expense will be $19,500. Assuming a tax rate of
30%, what is the net cash saved in income taxes by using double-declining-balance depreciation
over straight-line depreciation?
A) $1,800
B) $4,050
C) $6,000
D) $5,850
Answer: A
Explanation: Difference in depreciation = $19,500 - $13,500 = $6,000
$6,000 × 30% = $1,800 savings
Diff: 3
LO: 7-3
41) Roho Company acquired equipment on July 1, 2019, for $100,000. The residual value is
$20,000 and the estimated life is 5 years or 40,000 hours. Compute the depreciation expense for
the years ending December 31, 2019 and December 31, 2020 if Roho Company uses the double-
declining-balance method of depreciation.
A) $40,000 for 2019; $24,000 for 2020
B) $20,000 for 2019; $32,000 for 2020
C) $11,000 for 2019; $35,600 for 2020
D) $5,500 for 2019; $11,000 for 2020
Answer: B
Explanation: $100,000 × 40% × 50% = $20,000 (use 50% for half year as purchased on July 1)
($100,000 - $20,000) × 40% = $32,000
Diff: 3
LO: 7-3
33
42) Lorenzo Corporation purchased equipment on January 1, 2019 for $600,000. The equipment
had an estimated useful life of 5 years and an estimated salvage value of $60,000. After using the
equipment for 2 years, the company determined that the equipment could be used for an
additional 6 years and have a salvage value of $8,000. Assuming Lorenzo Corporation uses
straight-line depreciation, compute depreciation expense for the year ending December 31, 2021.
(Round your final answer to the nearest dollar.)
A) $216,000
B) $64,000
C) $62,667
D) $108,000
Answer: C
Explanation: ($600,000 - $60,000) ÷ 5 × 2 = $216,000
($600,000 - $216,000 - $8,000) ÷ 6 = $62,667
Diff: 3
LO: 7-3
43) Marjorie Corporation acquired a building on January 1, 2019, for $800,000. The building had
an estimated useful life of 20 years and an estimated salvage value of $29,000. On January 1,
2021, Marjorie Corporation determined that the building could only be used for another 10 years
and there would be no salvage value. Compute depreciation expense for the year ending
December 31, 2021, if Marjorie Corporation uses straight-line depreciation.
A) $38,550
B) $115,650
C) $72,290
D) $77,100
Answer: C
Explanation: ($800,000 - $29,000) ÷ 20 = $38,550 × 2 = $77,100
($800,000 - $77,100) ÷ 10 = $72,290
Diff: 3
LO: 7-3
34
44) Cramer Company purchased equipment on May 1, 2019 for $200,000. The residual value is
$20,000 and the estimated useful life is 10 years. What is the Depreciation Expense for the year
ending December 31, 2019, if the company uses the straight-line method? (Round your final
answer to the nearest dollar.)
A) $13,333
B) $12,000
C) $20,000
D) $18,000
Answer: B
Explanation: ($200,000 - $20,000) ÷ 10 = $18,000
$18,000 × 8/12 = $12,000
Diff: 3
LO: 7-3
45) Jerry Willis Company purchased equipment on May 1, 2019 for $900,000. The residual
value is $25,000 and the estimated useful life is 10 years. What is the Depreciation Expense for
the year ending December 31, 2019, if the company uses the double-declining-balance method?
A) $90,000
B) $120,000
C) $180,000
D) $87,500
Answer: B
Explanation: $900,000 × 20% = $180,000
$180,000 × 8/12 = $120,000
Diff: 3
LO: 7-3
35
46) Gary Kraen Company purchased equipment on May 1, 2019 for $800,000. The residual
value is $10,000 and the estimated useful life is 10 years. What is the Depreciation Expense for
the year ending December 31, 2020, if the company uses the double-declining-balance method?
A) $106,667
B) $80,000
C) $138,667
D) $79,000
Answer: C
Explanation: $800,000 × 20% = $160,000 × 8/12 = $106,667
($800,000 -$106,667) × 20% = $138,667
Diff: 3
LO: 7-3
47) Which statement is FALSE?

A) Depreciation is caused by the physical wear and tear of a plant asset.
B) Depreciation is caused by obsolescence of a plant asset.
C) Depreciation is not based on changes in the market value of a plant asset.
D) Accumulated depreciation is a cash fund to be used to replace a plant asset when it wears out.
Answer: D
Diff: 3
LO: 7-3
AICPA Bus Persp: International/Global
48) On January 1, 2019, a machine has a remaining book value of $5,000. The residual value of
the machine is $1,500. The company uses the double-declining-balance method of depreciation.
If 2019 is the last year for depreciation, what is Depreciation Expense for the year ending
December 31, 2019?
A) $0
B) $1,500
C) $3,500
D) $5,000
Answer: C
Explanation: $5,000 - $1,500 Residual Value = $3,500
Diff: 3
LO: 7-3
36
49) For a plant asset that generates revenue evenly over time, which depreciation method best
meets the expense recognition principle?
A) straight-line
B) double-declining-balance
C) modified accelerated
D) units-of-production
Answer: A
Diff: 1
LO: 7-3
50) For a plant asset that wears out because of physical use rather than obsolescence, which
depreciation method best meets the expense recognition principle?
A) straight-line
B) double-declining-balance
C) modified accelerated
D) units-of-production
Answer: D
Diff: 1
LO: 7-3
51) The long-term asset that is not depreciated or amortized is:

A) land improvement.
B) leasehold improvement.
C) office computers.
D) land.
Answer: D
Diff: 1
LO: 7-3
37
52) Weaver Motors purchased a machine that will help diagnose problems with engines. The
machine cost $300,000 on January 3, 2019 and had a residual value of $30,000, with a useful life
of 6 years.
Required:
Calculate the depreciation expense and book value as of December 31, 2019 under both the
straight-line and double-declining-balance methods.
Answer: STRAIGHT-LINE
Depreciation Expense:
($300,000 - $30,000) ÷ 6 = $45,000
Book value:
$300,000 - $45,000 = $255,000
DOUBLE-DECLINING-BALANCE
Depreciation Expense:
($300,000 × 2/6) = $100,000
Book value:
$300,000 - $100,000 = $200,000
Diff: 2
LO: 7-3
38
53) Carrie Heffernan Company purchased a delivery van on January 1, 2019, for $50,000. The
van was expected to remain in service 4 years (or 100,000 miles) and has a residual value of
$5,000. The van traveled 30,000 miles the first year, 25,000 miles the second year, and 22,500
miles in the third and fourth years.
Required:
1. Prepare a schedule of depreciation expense per year for the first four years of the asset's life
using the (a) straight-line method, (b) units-of-production method, and (c) double-declining-
balance method.
2. Prepare a schedule of the book value of the van for each of the four years using the (a)
straight-line method, (b) units-of-production method and (c) double-declining-balance method.
Answer:
(a) Straight-line method:
1a. Depreciation Expense:
($50,000 - $5,000) ÷ 4 = $11,250 per year
2a. Book Value:

12/31/2019 $50,000 - $11,250 = $38,750
12/31/2020 $38,750 - $11,250 = $27,500
12/31/2021 $27,500 - $11,250 = $16,250
12/31/2022 $16,250 - $11,250 = $5,000
(b) Units of production method:

1b. Depreciation Expense:
($50,000 - $5,000) ÷ 100,000 miles = $0.45 per mile

12/31/2019 $0.45 × 30,000 = $13,500
12/31/2020 $0.45 × 25,000 = $11,250
12/31/2021 $0.45 × 22,500 = $10,125
12/31/2022 $0.45 × 22,500 = $10,125
2b. Book Value:

12/31/2019 $50,000 - $13,500 = $36,500
12/31/2020 $36,500 - $11,250 = $25,250
12/31/2021 $25,250 - $10,125 = $15,125
12/31/2022 $15,125 - $10,125 = $5,000
(c) Double declining-balance method:

1c. Depreciation Expense:
12/31/2019 $50,000 × 50% = $25,000

12/31/2020 ($50,000 - $25,000) × 50% = $12,500
12/31/2021 ($25,000 - $12,500) × 50% = $6,250
12/31/2022 $1,250
39
2c. Book Value:
12/31/2019 $50,000 - $25,000 = $25,000
12/31/2020 $25,000 - $12,500 = $12,500
12/31/2021 $12,500 - $6,250 = $6,250
12/31/2022 $6,250 - $1,250 = $5,000
Diff: 3
LO: 7-3
54) A machine costing $40,000 was purchased on January 1, 2019. It has an estimated useful life
of 5 years and a salvage value of $5,000.
Required:
1. Calculate depreciation expense for 2019 and 2020 using (a) straight-line rate, and (b) double-
declining-balance method.
2. Determine the book value of the machine at December 31, 2020 under the (a) straight-line
method and (b) double-declining-balance method.
Answer:
1.
(a) Straight-line:
Depreciation Expense for 2019 and 2020:
($40,000 - $5,000) ÷ 5 = $7,000
(b) Double-declining-balance:
Depreciation Expense for 2019:
$40,000 × 40% = $16,000
($40,000 - $16,000) × 40% = $9,600
2.
(a) Straight-line:
Book value = cost - accumulated depreciation
Book value at 12/31/2020 = $40,000 - ($7,000 + $7,000) = $26,000
(b) Double-declining-balance:
Book value = cost - accumulated depreciation
Book value at 12/31/2020 = $40,000 - ($16,000 + $9,600) = $14,400
Diff: 3
LO: 7-3
40
55) A plant asset is acquired by a business on January 1, 2019, for $100,000. The asset's
estimated residual value is $10,000 and its estimated life is 5 years. Management chooses to use
straight-line depreciation.
On January 1, 2021, management revises the total useful life to 8 years since purchased and the
residual value to $5,000.
Required:
1. Compute the balance in Accumulated Depreciation on January 1, 2021.
2. Compute the Depreciation Expense for the year ending December 31, 2021.
3. Compute the balance in Accumulated Depreciation on December 31, 2021.
4. Prepare the adjusting journal entry on December 31, 2021 for the year. Omit the explanation.
Answer: 1. ($100,000 - $10,000) ÷ 5 = $18,000
$18,000 × 2 = $36,000
2. ($100,000 - $36,000 - $5,000) ÷ 6 = $9,833
3. $36,000 + $9,833 = $45,833
4.
Account Debit Credit
Depreciation Expense 9,833
Accumulated Depreciation 9,833
Diff: 3
LO: 7-3
41
56) On January 1, 2019, Williams Company, Inc. purchased machinery for $350,000 and
depreciated it on a straight-line basis over 20 years. The estimated residual value was zero. On
January 1, 2022, the company realized the machine will remain useful for only 5 more years and
also revised the residual value to $12,000.
Required:
1. What is the depreciation expense per year before the change in estimate?
2. What is the revised depreciation expense per year?
3. Prepare the adjusting journal entry for the year ending December 31, 2022. Omit the
explanation.
Answer:
1. Depreciation Expense:
Original calculation:
($350,000 - 0) ÷ 20 = $17,500 per year
2. Revised depreciation expense:

$17,500 × 3 years = $52,500 Accumulated Depreciation as of December 31, 2021
($350,000 - $52,500 - $12,000) ÷ 5 = $57,100
3.
Depreciation Expense - Machinery 57,100
Accumulated Depreciation -
Machinery 57,100
Diff: 3
LO: 7-3
42
57) Martindale Motors purchased a machine that will help diagnose problems with engines that
are used in its production department. The machine was purchased on January 1, 2019 at a cost
of $210,000. A residual value of $10,000 was estimated. The expected useful life is 5 years. In
2019, Martindale Motors has a gross profit of $400,000 and operating expenses of $180,000. The
tax rate is 35%.
Required:
1. Compute the depreciation expense for 2019 under both the straight-line and double-declining-
balance depreciation methods.
2. What is the net cash saved if the accelerated depreciation method is used in 2019?
Answer: 1. Straight-line:
($210,000 - $10,000) ÷ 5 = $40,000 depreciation expense for 2019
Double-declining-balance:
$210,000 × 40% = $84,000 depreciation expense for 2019
2. ($84,000 - $40,000) × 35% = $15,400

Diff: 3
LO: 7-3
43
58) Katie's Garden Company purchased a machine on July 1, 2019. The machine cost $200,000
and has an estimated residual value of $20,000. The expected useful life is 8 years. The machine
is to be used for 100,000 machine hours.
Required:
1. Calculate the depreciation expense for 2019 and 2020 using the straight-line method.
2. Calculate the depreciation expense for 2019 and 2020 using the units-of-production method.
The machine was used for 8,000 machine hours in 2019 and 23,000 machine hours in 2020.
3. Calculate the depreciation expense for 2019 and 2020 using the double-declining-balance
method.
Answer:
1. Straight-line
Depreciation Expense for 2019 (one-half of year):
($200,000 - $20,000) ÷ 8 × 50% = $11,250

($200,000 - $20,000) ÷ 8 = $22,500
2. Units-of-production
($200,000 - $20,000) ÷ 100,000 = $1.80 per hour
$1.80 × 8,000 = $14,400

$1.80 × 23,000 = $41,400
3. Double-declining-balance
Depreciation Expense for 2019 (one-half of year):
$200,000 × 2/8 × 50% =$25,000

($200,000 - $25,000) × 2/8 = $43,750
Diff: 3
LO: 7-3
44
1) To account for the disposal of a plant asset, the cost of the asset and its related accumulated
depreciation are removed from the books.
Answer: TRUE
Diff: 2
LO: 7-4
2) A Loss on Sale of Equipment will result when the book value of the equipment exceeds the
cash received from the sale of the equipment.
Answer: TRUE
Diff: 2
LO: 7-4
3) The Loss on Disposal of Equipment account is reported as Other income (expense) on the
income statement.
Answer: TRUE
Diff: 2
LO: 7-4
4) Gains on the sale of equipment increase net income while losses on the sale of equipment
decrease net income.
Answer: TRUE
Diff: 2
LO: 7-4
5) Before accounting for the disposal of a plant asset, the business should bring depreciation up
to date in order to determine the asset's original cost.
Answer: FALSE
Diff: 2
LO: 7-4
45
6) In respect to accounting for depreciation, IFRS uses a "components" approach for assets such
as buildings, aircraft, and manufactured equipment.
Answer: TRUE
Diff: 2
LO: 7-4
7) A company purchased a machine for $100,000. The accumulated depreciation on the machine
is now $100,000. Which of the following statements is TRUE regarding the disposal of the
machine for no cash proceeds?
A) The cost of the asset, but not its accumulated depreciation, must be removed from the books.
B) A gain or loss on the disposal can occur.
C) The journal entry to record the disposal will decrease net assets.
D) There will be no gain or loss on the disposal.
Answer: D
Diff: 2
LO: 7-4
8) A company purchased a machine for $700,000. The accumulated depreciation on the machine
is now $120,000. The machine is junked. Which journal entry is prepared to record the disposal?
A) debit Loss on Disposal of Machine for $580,000, debit Accumulated Depreciation - Machine
$580,000 and credit Machine for $1,160,000
B) debit Accumulated Depreciation - Machine for $120,000 and credit Machine for $120,000
C) debit Accumulated Depreciation - Machine for $700,000, credit Machine for $120,000 and
credit Gain on Disposal of Machine for $580,000
D) debit Loss on Disposal of Machine for $580,000, debit Accumulated Depreciation - Machine
for $120,000 and credit Machine for $700,000
Answer: D
Diff: 2
LO: 7-4
46
9) When plant assets are exchanged, the gain or loss on the exchange equals:
A) the difference between the fair value and the book value of the asset received.
B) the difference between the fair value and the book value of the asset given up.
C) the fair value of the asset received plus the cash paid.
D) the fair value of the asset given up plus the cash paid.
Answer: B
Diff: 3
LO: 7-4
10) U.S. Generally Accepted Accounting Principles require the reporting of plant assets at
________ on the balance sheet. International Financial Reporting Standards allow the reporting
of plant assets at ________ on the balance sheet.
A) current replacement cost; fair market value
B) fair market value; fair market value
C) historical cost; fair market value
D) historical cost; net realizable value
Answer: C
Diff: 3
LO: 7-4
11) Franco Company sold office furniture for $2,700 cash. The furniture cost $70,000 and had
accumulated depreciation through the date of sale totaling $34,000. The company will recognize:
A) a gain of $33,300.
B) a loss of $33,300.
C) a gain of $36,000.
D) a loss of $36,000.
Answer: B
Explanation: Book value = $70,000 - $34,000 = $36,000
Cash proceeds $2,700
Loss on sale = $36,000 - $2,700 = $33,300
Loss on sale = Book value - Cash proceeds
Diff: 2
LO: 7-4
47
12) Smiley Corporation sold equipment costing $72,000 with $66,000 of accumulated
depreciation for $11,000 cash. Which of the following journal entries should be prepared?
A) debit Cash for $11,000 and credit Gain on Sale of Equipment for $11,000
B) debit Accumulated Depreciation - Equipment for $66,000 and credit Equipment for $66,000
C) debit Cash for $11,000, credit Equipment for $6,000 and credit Gain on Sale of Equipment
for $5,000
D) debit Cash for $11,000, debit Accumulated Depreciation - Equipment for $66,000, credit
Equipment for $72,000 and credit Gain on Sale of Equipment for $5,000
Answer: D
Explanation: Book value of equipment = $72,000 - $66,000 = $6,000;
Cash proceeds of $11,000 exceed the book value of $6,000, so there is a gain.
Gain = $11,000 cash proceeds -$6,000 book value = $5,000
Diff: 2
LO: 7-4
13) Equipment costing $40,000 with a book value of $16,000 is sold for $23,000. Which journal
entry is used to record the sale?
A) debit Cash for $23,000 and credit Equipment for $23,000
B) debit Cash for $16,000, debit Accumulated Depreciation - Equipment for $24,000 and credit
Equipment for $40,000
C) debit Cash for $23,000, debit Accumulated Depreciation - Equipment for $24,000, credit
Equipment for $40,000 and credit Gain on Sale of Equipment for $7,000
D) debit Cash for $16,000, debit Loss on Sale of Equipment for $7,000 and credit Equipment for
$23,000
Answer: C
Explanation: Cost of $40,000 – book value of $16,000 = $24,000 accumulated depreciation
Cash received is $23,000;
Gain on sale = $23,000 cash proceeds - $16,000 book value = $7,000
Diff: 2
LO: 7-4
48
14) Equipment purchased for $70,000 on January 1, 2020, was sold on July 1, 2023. The
company uses the straight-line method of computing depreciation and recognizes $10,000 of
depreciation expense annually. When recording the sale, the company should record a debit to
Accumulated Depreciation–Equipment for:
A) $0.
B) $30,000.
C) $35,000.
D) $40,000.
Answer: C
Explanation: $10,000 depreciation for year × 3.5 years = $35,000
Diff: 2
LO: 7-4
15) Equipment acquired on January 1, 2020, is sold on June 30, 2024, for $11,200. The
equipment cost $46,200, had an estimated residual value of $6,300, and an estimated useful life
of 5 years. The company prepares financial statements on December 31, and the equipment has
been depreciated using the straight-line method. On June 30, 2024, the company should record
Depreciation Expense for the first six months of the year of:
A) $0.
B) $1,995.
C) $3,990.
D) $7,980.
Answer: C
Explanation: ($46,200 - $6,300) ÷ 5 = $7,980;
$7,980 × 50% = $3,990
Diff: 2
LO: 7-4
49
16) Kolonas, Inc., sold equipment for $5,400 cash. The equipment cost $73,900 and had
accumulated depreciation through the date of sale of $70,000. At the date of sale, the journal
entry to record the sale will have:
A) a Gain on Sale of Equipment for $3,900.
B) a Loss on Sale of Equipment for $3,900.
C) a Loss on Sale of Equipment for $1,500.
D) a Gain on Sale of Equipment for $1,500.
Answer: D
Explanation: Book value = $73,900 - $70,000 = $3,900
Cash proceeds = $5,400
Gain = $5,400 - $3,900 = $1,500
Diff: 2
LO: 7-4
17) Willis Company trades in a printing press for a newer model. The cost of the old printing
press was $60,000, and accumulated depreciation up to the date of the trade-in is $43,000. The
company also pays $43,000 cash for the newer printing press. The fair market value of the newer
printing press is $70,000. The journal entry to acquire the new printing press will require a debit
to Printing Press for:
A) $43,000.
B) $60,000.
C) $70,000.
D) $103,000.
Answer: C
Explanation: Book value of old press = $60,000 - $43,000 = $17,000
Implied fair value of old press = $70,000 new press fair value - $43,000 cash paid = $27,000
Fair value given up: $27,000 old press + $43,000 cash paid = $70,000
Diff: 3
LO: 7-4
50
18) Tom's Roadside Burger Stand has a beginning balance in the Accumulated Depreciation—
Equipment account of $200,000. The depreciation expense on the equipment for the year was
$50,000. At the end of the year, the balance in the Accumulated Depreciation—Equipment
account was $140,000. What was the accumulated depreciation on the equipment sold during the
year?
A) $60,000
B) $90,000
C) $110,000
D) $150,000
Answer: C
Explanation: Accumulated Depreciation, Beg. Balance $200,000 + Depreciation Expense
$50,000 - x = Accumulated Depreciation, End. Balance $140,000
x = $110,000
Diff: 3
LO: 7-4
19) Equipment with a historical cost of $100,000 and Accumulated Depreciation of $100,000 is
junked. Which journal entry is necessary?
A) debit Equipment for $100,000 and credit Accumulated Depreciation - Equipment for
$100,000
B) debit Cash for $100,000 and credit Equipment for $100,000
C) debit Equipment for $100,000 and credit Cash for $100,000
D) debit Accumulated Depreciation - Equipment for $100,000 and credit Equipment for
$100,000
Answer: D
Diff: 3
LO: 7-4
51
20) Equipment with a historical cost of $70,000 and Accumulated Depreciation of $15,000 is
junked. No cash is received upon disposal. Which journal entry is necessary?
A) debit Accumulated Depreciation - Equipment for $70,000 and credit Equipment for $70,000
B) debit Accumulated Depreciation - Equipment for $15,000, debit Gain on Disposal of
Equipment for $55,000 and credit Equipment for $70,000
C) debit Accumulated Depreciation - Equipment for $15,000, debit Loss on Disposal of
Equipment for $55,000 and credit Equipment for $70,000
D) debit Accumulated Depreciation - Equipment for $15,000 and credit Equipment for $15,000
Answer: C
Diff: 3
LO: 7-4
21) Excalibur Company sells equipment for $20,000 cash. The gain or loss on the sale of
equipment equals:
A) the cash received upon the sale.
B) the book value of the equipment.
C) the accumulated depreciation of the equipment plus the cash received from the sale.
D) the difference between the cash received on sale and the book value of the equipment.
Answer: D
Diff: 3
LO: 7-4
22) Tony Company sells equipment for $20,000 cash. The equipment has a historical cost of
$60,000 and accumulated depreciation of $52,000. What is the gain or loss on sale of the
equipment?
A) $12,000 loss
B) $12,000 gain
C) $20,000 loss
D) $20,000 gain
Answer: B
Explanation: Book Value = $60,000 - $52,000 = $8,000
Cash Received = $20,000
Gain = Cash Received $20,000 - Book Value $8,000 = $12,000 gain
Diff: 3
LO: 7-4
52
23) Remini Company sells equipment for $20,000 cash. The equipment has a historical cost of
$80,000 and accumulated depreciation of $50,000. What is the journal entry to record the sale of
the equipment?
A) debit Cash for $20,000 and credit Gain on Sale of Equipment for $20,000
B) debit Cash for $20,000, debit Accumulated Depreciation - Equipment for $50,000 and credit
Equipment for $70,000
C) debit Loss on Sale of Equipment for $10,000, debit Cash for $20,000, debit Accumulated
Depreciation - Equipment for $50,000 and credit Equipment for $80,000
D) debit Cash for $20,000, debit Accumulated Depreciation - Equipment for $50,000, debit Gain
on Sale of Equipment $10,000 and credit Equipment for $80,000
Answer: C
Cash Received = $20,000
Loss = Book Value $30,000 - Cash Received $20,000 = $10,000
Diff: 3
LO: 7-4
24) The Pizza Store trades in a delivery car for a newer model. The old delivery car has a cost of
$9,000 and accumulated depreciation of $7,000. The Pizza Store pays cash of $8,000. The fair
value of the newer car is $16,000. What is the gain or loss for the Pizza Store on the exchange of
vehicles?
A) $6,000 loss
B) $2,000 gain
C) $6,000 gain
D) $8,000 gain
Answer: C
Implied fair value of old car = $8,000 = Fair value new car $16,000 - Cash paid $8,000
Gain = $8,000 - $2,000 = $6,000
Gain = Fair value of old car - Book value of old car
Diff: 3
LO: 7-4
53
25) Beck Company trades in old equipment for new equipment. The old equipment has a cost of
$10,000 and accumulated depreciation of $9,000. Beck Company pays cash of $21,000. The fair
value of the new equipment is $28,000. What is the gain or loss for Beck Company on the
exchange of equipment?
A) $6,000 loss
B) $6,000 gain
C) $1,000 loss
D) $1,000 gain
Answer: A
Implied Fair value of old equipment =
Fair value new equipment $28,000 - Cash paid $21,000 = $7,000
Loss = $7,000 - $1,000 = $6,000
Loss = Fair value old equipment - Book value old equipment
Diff: 3
LO: 7-4
26) A company exchanges an old machine for a new machine and cash is paid for the new
machine. Assume there is a Gain on Exchange of Machine. In the journal entry to record the
exchange by the owner of the old machine, which accounts will be debited?
A) Machine and Accumulated Depreciation - Machine
B) Cash and Machine
C) Accumulated Depreciation - Machine, Cash and Machine
D) Accumulated Depreciation - Machine, Cash, Machine and Gain on Exchange of Machine
Answer: A
Diff: 3
LO: 7-4
27) When recording a nonmonetary exchange of two plant assets, what information is NOT
needed?
A) book value of the asset given up
B) book value of the asset received
C) fair value of asset given up
D) fair value of the asset received.
Answer: B
Diff: 3
LO: 7-4
54
28) At the beginning of the year, the balance in the Buildings account was $800,000. At the end
of the year, the balance in the Buildings account was $1,600,000. During the year, a building was
purchased for $1,500,000. This was the only purchase of buildings during the year. What was the
cost of the building or buildings sold during the year?
A) $0
B) $700,000
C) $800,000
D) $1,500,000
Answer: B
Explanation: Beginning Balance Buildings + Cost of Purchases - Cost of Building Sold =
Ending Balance Buildings
800,000 + 1,500,000 - x = 1,600,000
x = 700,000
Diff: 3
LO: 7-4
55
29) Sullivan Sales purchased a machine on January 1, 2019 which cost $450,000. The machine
had a residual value of $50,000 and a useful life of 10 years. Sullivan Sales can replace this
machine with one that is more efficient and decides to sell the old machine for $100,000 on July
1, 2021.
Required:
Prepare the appropriate journal entries to record the sale of this machine, assuming the company
uses the double-declining-balance method of depreciation. The fiscal year ends on December 31.
Answer:
Depreciation Schedule:
Book Value Annual Accumulated
Year Beginning of Year Rate Depreciation Depreciation Book Value
450,000
2019 450,000 20% 90,000 90,000 360,000
2020 360,000 20% 72,000 162,000 288,000
2021 288,000 20% 28,800* 190,800 259,200
The machine was sold on July 1, 2021. 6 months of depreciation is recorded in 2021 ($57,600 ×
1/2 = $28,800).

July 1, 2021 Depreciation Expense - Machine 28,800
Accumulated Depreciation- Machine 28,800
($57,600 × 1/2)
Cash 100,000
Accumulated Depreciation- Machine 190,800
Loss on Sale of Machine 159,200
Machine 450,000
Diff: 3
LO: 7-4
56
30) A computer, with a cost of $10,000 is sold on July 1. Accumulated depreciation up to the
date of sale is $5,000. Journalize the entries for the disposal of the computer under the following
INDEPENDENT scenarios:
1. The computer was sold for $6,000.
2. The computer was sold for $1,000.
3. The computer is obsolete and was junked.
Date Account DR CR
57
Answer:
Date Account DR CR
1. Cash 6,000
Accumulated Depreciation - Computer 5,000
Gain on Sale of Computer 1,000
Computer 10,000
Book value = $10,000 - $5,000 = $5,000

Cash Received - Book Value = Gain/Loss
$6,000 - $5,000 = $1,000 gain
2. Cash 1,000
Accumulated Depreciation- Computer 5,000
Loss on Sale of Computer 4,000
Computer 10,000
Book value = $10,000 - $5,000 = $5,000

$1,000 - $5,000 = $4,000 Loss
3. Accumulated Depreciation- Computer 5,000

Loss on Disposal of Computer 5,000
Computer 10,000
Book Value = $10,000 - $5,000 = $5,000

0 - $5,000 = $5,000 Loss
Diff: 2
LO: 7-4
1) Natural resources are reported in the Intangible Assets section of the balance sheet.
Answer: FALSE
Diff: 2
LO: 7-5
58
2) Intangible assets can have either finite or indefinite lives.
Answer: TRUE
Diff: 2
LO: 7-5
3) All intangible assets must be amortized.

Answer: FALSE
Diff: 2
LO: 7-5
4) A purchaser is willing to pay for goodwill when the purchaser buys a company that has
abnormal earning power.
Answer: TRUE
Diff: 1
LO: 7-5
5) Goodwill is recorded only when the purchase price exceeds the market value of the net
liabilities in the acquisition of another company.
Answer: FALSE
Diff: 2
LO: 7-5
6) Most intangible assets have a residual value.

Answer: FALSE
Diff: 2
LO: 7-5
59
7) Adoption of IFRS by U.S. companies is expected to result in the recognition of less intangible
assets on their balance sheets than presently exist.
Answer: FALSE
Diff: 2
LO: 7-5
8) Patents are state government grants that give the holder the exclusive right to produce and sell
an invention for 20 years.
Answer: FALSE
Diff: 1
LO: 7-5
9) The useful lives of many franchises are indefinite and therefore are not amortized.
Answer: TRUE
Diff: 2
LO: 7-5
10) Some trademarks have an indefinite life and should not be amortized.
Answer: TRUE
Diff: 2
LO: 7-5
60
11) Which the following statements regarding accounting for natural resources is INCORRECT?
A) Natural resources are often called wasting assets because they are actually physically used up
over time.
B) When the natural resource is extracted, the entity follows an approach much like the straight-
line method of depreciation to account for the production.
C) If all of the natural resource that is extracted is sold, the amount depleted is transferred
directly from long-term assets to the income statement as depletion expense.
D) The portion of the extracted natural resource that is not immediately sold, becomes inventory.
Answer: B
Diff: 1
LO: 7-5
12) The computation of depletion expense is most closely related to which method for computing
depreciation?
A) straight-line
B) units-of-production
C) double-declining balance
D) modified accelerated cost recovery system
Answer: B
Diff: 2
LO: 7-5
13) Which intangible asset is NOT amortized?

A) patents
B) trademarks
C) copyrights
D) goodwill
Answer: D
Diff: 2
LO: 7-5
61
14) Amortization expense is recorded for:
A) intangible assets with an indefinite life.
B) intangible assets with a finite life.
C) goodwill.
D) a franchise established with a contract that allows for unlimited extensions.
Answer: B
Diff: 2
LO: 7-5
15) The journal entry to amortize a copyright affects the accounting equation by:
A) increasing assets and stockholders' equity.
B) decreasing assets and stockholders' equity.
C) increasing assets and decreasing stockholders' equity.
D) decreasing assets and increasing stockholders' equity.
Answer: B
Diff: 2
LO: 7-5
16) When an intangible asset is amortized:

A) stockholders' equity decreases.
B) net income decreases.
C) net assets decrease.
D) all of the above are correct.
Answer: D
Diff: 2
LO: 7-5
17) Patents are amortized over a period of:

A) 20 years.
B) 25 years.
C) 70 years plus the life of inventor.
D) 70 years.
Answer: A
Diff: 2
LO: 7-5
62
18) Which of the following is a CORRECT statement regarding intangible assets?
A) The useful life of a patent can be longer than its legal life.
B) Copyrights do not protect computer software programs.
C) Trademarks are rights to reproduce and sell a work of art.
D) Intangible assets with indefinite lives must be checked annually for any loss in value.
Answer: D
Diff: 2
LO: 7-5
19) The entry to record patent amortization expense:

A) increases total assets and decreases total stockholders' equity.
B) decreases total assets and increases total stockholders' equity.
C) decreases both total assets and total stockholders' equity.
D) increases both total assets and total stockholders' equity.
Answer: C
Diff: 2
LO: 7-5
20) If a company has goodwill on its books, the goodwill:

A) is amortized over 40 years or useful life, whichever is less.
B) is tested for impairment annually.
C) may have been internally created.
D) may be written up to fair value.
Answer: B
Diff: 2
LO: 7-5
63
21) Merck Pharmaceutical Company has many scientists working in their labs trying to develop
a new drug to treat congestive heart failure. Following U.S. Generally Accepted Accounting
Principles, the cost of this research and development must be:
A) recorded as an intangible asset and not amortized.
B) recorded as an intangible asset and amortized over 20 years.
C) recorded as an intangible asset and tested for impairment on a yearly basis.
D) expensed as incurred.
Answer: D
Diff: 2
LO: 7-5
22) According to U.S. GAAP, ________ is not amortized because for many entities, it increases
in value over time.
A) research and development costs
B) goodwill
C) patients
D) copyrights
Answer: B
Diff: 2
LO: 7-5
23) A distinctive identification of a product or a service is a:

A) patent.
B) trademark.
C) copyright.
D) license.
Answer: B
Diff: 1
LO: 7-5
64
24) The exclusive right to produce and sell an invention such as a smart phone requires a:
A) copyright.
B) license.
C) trademark.
D) patent.
Answer: D
Diff: 1
LO: 7-5
25) Marvin Company purchased Marathon Company on August 31st, 2016 and recorded
goodwill. How will Marvin Company account for this goodwill in future accounting periods?
A) Marvin Company will amortize the goodwill over a 40-year life.
B) If the value of the goodwill increases in subsequent years, Marvin Company will increase the
Goodwill account.
C) If the goodwill is impaired in subsequent years, Marvin Company will decrease the Goodwill
account.
D) Marvin Company is not allowed to change the value of the Goodwill account.
Answer: C
Diff: 3
LO: 7-5
26) On June 5, 2019, Mabel Company purchased an oil well for $850,000. The well contains an
estimated $85,000 barrels of oil, with an estimated residual value of zero. During July, 2019,
$25,500 barrels of oil were removed from the well. All of the oil went into inventory. What
amount of Depletion Expense is recorded in July, 2019? (Round your final answer to the nearest
dollar.)
A) $0.
B) $850,000.
C) $85,000.
D) $255,000.
Answer: A
Diff: 2
LO: 7-5
65
27) CBS Corporation acquired a patent for $3,800,000. The patent has a legal life of 20 years.
Because of changing technology, this patent is expected to generate revenue for only 5 years and
have no residual value. The annual amortization expense for the patent is: (Round your final
answer to the nearest dollar.)
A) $0
B) $3,800,000
C) $190,000
D) $760,000
Answer: D
Explanation: $3,800,000 ÷ 5 = $760,000
Diff: 2
LO: 7-5
28) First Company purchased Second Company for $20,000,000 cash. At the time of purchase,
Second Company's assets had a market value of $30,000,000 and the liabilities had a market
value of $14,000,000. At the time of purchase, Second Company's assets had a book value of
$14,000,000 and the liabilities had a book value of $7,000,000. What amount of goodwill is
recorded?
A) $4,000,000
B) $16,000,000
C) $10,000,000
D) $14,000,000
Answer: A
Explanation: Fair value of assets $30,000,000- fair value of liabilities $14,000,000 =
$16,000,000
Goodwill = Cash paid $20,000,000 - $16,000,000 = $4,000,000
Diff: 3
LO: 7-5
66
29) On January 1, 2019, Plenty of Oil, Inc. purchased an oil field that is estimated to have
15,000,000 barrels of oil for $45,000,000. In 2019, 1,300,000 barrels of oil were extracted and
sold. In 2020, 2,100,000 barrels of oil were extracted and sold. The oil field will have no residual
value. What is the book value of the oil reserves that will be reported on the balance sheet as of
December 31, 2020?
A) $10,200,000
B) $34,800,000
C) $38,700,000
D) $45,000,000
Answer: B
Explanation: $45,000,000 ÷ 15,000,000 = $3 per barrel
Accumulated Depletion = $3 × (1,300,000 + 2,100,000) = $10,200,000
Oil Reserves = $45,000,000 - $10,200,000 = $34,800,000
Diff: 3
LO: 7-5
30) If a natural resource is extracted and not sold, which of the following accounts are debited
and credited?
A) debit Depletion Expense and credit Accumulated Depletion
B) debit Cost of Goods Sold and credit Inventory
C) debit Accumulated Depletion and credit Natural Resource
D) debit Inventory and credit Natural Resource
Answer: D
Diff: 3
LO: 7-5
31) If a natural resource is extracted and then immediately sold, which of the following accounts
are debited and credited?
A) debit Cost of Goods Sold and credit Inventory
B) debit Natural Resource and credit Accumulated Depletion
C) debit Depletion Expense and credit Accumulated Depletion
D) debit Depreciation Expense and credit Accumulated Depreciation
Answer: C
Diff: 3
LO: 7-5
67
32) In 2019, the Best Diamond Company purchased mineral rights for a diamond mine
(industrial grade diamonds) by signing a promissory note for $7,000,000. In addition to the
purchase price, Best paid cash of $100,000 for a geological survey and $20,000 for a license fee
to the country where the mine is located. It is estimated that there will be no residual value when
the mine is fully depleted and that the mine contains 1,000,000 carats of diamonds.
During the first year of mining, Best Diamond extracted 50,000 carats of diamonds which were
not sold after they were extracted. In 2020, the company extracted 250,000 carats of diamonds
and sold 200,000 carats of diamonds from its inventory.
Required:
Prepare the journal entry without explanations to:
1. Record the purchase of the diamond mineral rights.
2. Record depletion for 2019.
3a. Record depletion for 2020.
3b. Record cost of goods sold for 2020.
Date Account DR CR
68
Answer:
Date Account DR CR
1 Diamond Mineral Rights 7,120,000

Note Payable 7,000,000
Cash 120,000
($7,000,000 + $100,000 + $20,000)
2 Inventory 356,000
Diamond Mineral Rights* 356,000
($7,120,000/1,000,000 = $7.12 per carat)
($7.12 × 50,000 = $356,000)
3a Inventory 1,780,000
Diamond Mineral Rights* 1,780,000
($7.12 × 250,000 = $1,780,000)
Cost of Diamonds Sold (Cost of Goods

3b Sold) 1,424,000
Inventory 1,424,000
($7.12 × 200,000 = $1,424,000)
*Alternatively, the credit could be Accumulated Depletion.

Diff: 2
LO: 7-5
69
33) For each of the following, match the intangible asset with its definition.
Federal government grants the holder the exclusive right

Copyright A for 20 years to produce and sell an invention.
Franchises B A distinctive identification of a product or service.
Excess of the cost of an acquired company over the sum of
Goodwill C the market values of its net assets.
Exclusive right issued by the federal government to
reproduce and sell a book, musical composition, film or
other work of art extending for 70 years beyond the
Patent D author's life.
Privileges granted by a private business to sell a product or
Trademark E service in accordance with specified conditions.
Copyright
Franchises
Goodwill
Patent
Trademark
Answer:
Copyright D
Franchises E
Goodwill C
Patent A
Trademark B
Diff: 2
LO: 7-5
70
34) 1. On June 1, 2019, Fox Company purchased Wolf Corporation for $26,000,000 cash. At the
time of the purchase, the market value of Wolf Corporation's assets and liabilities were
$30,000,000 and $5,000,000, respectively. The book value of Wolf Corporation's assets and
liabilities were $10,000,000 and $6,000,000, respectively. Record the journal entry for the
acquisition by Fox Company.
2. By December 31, 2019, Fox Company discovered that the goodwill associated with Wolf
Corporation is impaired and is worthless. Wolf Corporation is on the brink of bankruptcy.
Record the journal entry needed by Fox Company.
1.
2.
Answer:
1.
June 1, 2019 Assets 30,000,000
Goodwill 1,000,000
Liabilities 5,000,000
Cash 26,000,000
Fair value of net assets = ($30,000,000 - $5,000,000) = $25,000,000
Goodwill = Cash paid $26,000,000 - Fair value of net assets $25,000,000 = $1,000,000
2.
Dec. 31, 2019 Loss due to Impairment of
Goodwill 1,000,000
Goodwill 1,000,000
Diff: 2
LO: 7-5
71
35) On January 4, 2019, David Company paid $250,000 for an oil field that contains an
estimated 20,000 barrels of oil. The oil field has no residual value. 5,000 barrels are extracted
and sold in 2019 and 6,500 barrels are extracted and sold in 2020.
Required:
Prepare all journal entries. Explanations are not required.
Date Accounts Debit Credit
Answer: $250,000 ÷ 20,000 = $12.50 depletion per barrel
Date Accounts Debit Credit

1/4/2019 Oil Reserve 250,000
Cash 250,000
12/31/2019 Depletion Expense 62,500

Oil Reserve* 62,500
$12.50 × 5,000 = $62,500
12/31/2020 Depletion Expense 81,250

Oil Reserve* 81,250
$12.50 × 6,500 = $81,250
*Alternatively, the credit could be Accumulated Depletion.
Diff: 2
LO: 7-5
72
36) New Tech Company acquired a patent on January 1, 2019 for $35,000. The residual value of
the patent is $0. The patent is expected to benefit New Tech Company for 5 years. After using
the patent one year, it was discovered that the patent would only be useful for 3 more years.
Required:
1. Prepare the journal entry to record the acquisition of the patent. Omit explanations.
2. Prepare the adjusting journal entry at December 31, 2019. Omit explanation.
3. Prepare the adjusting journal entry at December 31, 2020. Omit explanation.
Date Account DR CR
Answer:
Date Account DR CR
Jan. 1, 2019 Patent 35,000

Cash 35,000
Dec. 31, 2019 Amortization Expense—Patent 7,000

Patent 7,000
$35,000 ÷ 5 = $7,000
Dec. 31, 2020 Amortization Expense—Patent 9,333

Patent 9,333
($35,000 - $7,000)÷ 3 = $9,333
Diff: 2
LO: 7-5
73
1) If a long-term plant asset is impaired, generally accepted accounting principles require the
owner to adjust the carrying value downward from its book value to its fair value.
Answer: TRUE
Diff: 2
LO: 7-6
2) Like U.S. GAAP, asset impairments under IFRS may be reversed in future periods for all
types of long-term assets.
Answer: FALSE
Diff: 2
LO: 7-6
3) If a long-term an asset is impaired, estimated future cash flows will exceed the net book value.
Answer: FALSE
Diff: 3
LO: 7-6
4) Which of the following is a CORRECT statement about long-term asset impairment?

A) An asset is impaired if the net book value is less than the expected future cash flows.
B) If an asset is impaired, the expected future cash flows will exceed the fair value of the asset.
C) Under U.S. GAAP, an asset that has been written down because of impairment can be written
back up if it increases in value in the future.
D) If an asset is impaired, the impairment loss is the difference between the net book value and
the fair value.
Answer: D
Diff: 3
LO: 7-6
74
5) Sylvia Company has a long-term plant asset with the following information as of the end of
the year:
Net book value $87,500

Estimated future cash flows $70,000
Fair value $67,000
The amount of the impairment loss is:

A) $17,500.
B) $3,000.
C) $157,500.
D) $20,500.
Answer: D
Explanation: $87,500 - $67,000 = $20,500
Diff: 2
LO: 7-6
6) Samson Company has a machine with the following data:
Net book value $910,000

Estimated future cash flows $760,000
Fair value $60,000
Is the machine impaired?

A) No, the net book value of the machine exceeds the estimated future cash flows from the
machine.
B) No, the estimated future cash flows from the machine exceed the fair value of the machine.
C) Yes, the fair value of the machine is less than the net book value of the machine.
D) Yes, the estimated future cash flows from the machine are less than the net book value of the
machine.
Answer: D
Diff: 2
LO: 7-6
75
7) If a long-term plant asset is impaired, the company is required to adjust the carrying value
downward to its:
A) original cost.
B) present value.
C) expected future cash flows.
D) fair value.
Answer: D
Diff: 2
LO: 7-6
8) What is the impairment test for long-term plant assets?

A) Is the net book value greater than the fair value?
B) Is the fair value greater than the net book value?
C) Is the net book value greater than the estimated future cash flows?
D) Are the estimated future cash flows greater than the net book value?
Answer: C
Diff: 2
LO: 7-6
9) The impairment test for long-term assets applies to:

A) tangible long-term assets.
B) intangible long-term assets.
C) all assets.
D) A and B.
Answer: D
Diff: 2
LO: 7-6
76
10) The impairment loss on long-term plant assets equals:
A) net book value minus fair value.
B) net book value minus estimated future cash flows.
C) estimated future cash flows minus fair value.
D) estimated future cash flows minus present value.
Answer: A
Diff: 2
LO: 7-6
11) For each of the following scenarios, use the two step approach to determine whether a long-
term asset has been impaired and, if so, the amount of loss that should be recorded.
a. Equipment
Net book value: $450,000
Estimated future cash flows: $400,000
Fair value: $425,000
b. Patent
Net book value: $650,000
Estimated future cash flows: $750,000
Fair value: $700,000
Answer:
a. Step 1: Test the asset for impairment.
Net book value $450,000 exceeds estimated future cash flows $400,000.
The asset is impaired.
Step 2: Compute the impairment loss.

Net book value $450,000 - Fair value $425,000 = Impairment loss $25,000
b. Step 1: Test the asset for impairment.

Net book value $650,000 is less than estimated future cash flows $750,000.
The asset is not impaired.
Diff: 3
LO: 7-6
77
1) Return on assets measures how profitably management has used its assets.
Answer: TRUE
Diff: 1
LO: 7-7
2) When determining the rate of return on assets:

A) the DuPont model breaks return on assets down into three component ratios that drive it.
B) the DuPont model calculates the rate of return on assets as the net profit margin ratio times
total asset turnover.
C) it is important for companies to develop strategies to decrease total asset turnover.
D) total asset turnover measures how much every sales dollar generates in profit.
Answer: B
Diff: 2
LO: 7-7
3) Calculate Company Y's total asset turnover based on the following information for the current
year: (Round your final answer to two decimal places.)
Net income $600,000

Assets at the beginning of the year $120,000
Assets at the end of the year $110,000
Net sales $300,000
A) 2.73
B) 5.22
C) 2.61
D) 2.50
Answer: C
Explanation: ($120,000 + $110,000) ÷ 2 = $115,000
$300,000 ÷ $115,000 = 2.61
Diff: 2
LO: 7-7
78
4) The records of Milwaukee Sprinkler Systems report net sales of $520,000, net income of
$130,000 and average total assets of $360,000. Using DuPont analysis, calculate the two ratios
used for return on assets. (Round your final answer to two decimal places.)
A) Net profit margin ratio is 2.77; Total asset turnover is 25%.
B) Net profit margin ratio is 25%; Total asset turnover is 1.44.
C) Net profit margin ratio is 36%; Total asset turnover is 4.00.
D) Net profit margin ratio is 2.50; Total asset turnover is 36%.
Answer: B
Diff: 2
LO: 7-7
5) Return on assets measures:

A) how much the entity earned for each dollar of assets invested by both stockholders and
creditors.
B) net profit margin ratio times total asset turnover.
C) profitability of a company's core business operations.
D) A and B.
Answer: D
Diff: 2
LO: 7-7
6) a. What does total asset turnover measure?

b. List three ways in which asset turnover can be increased.
Answer:
a. Total asset turnover measures how many sales dollars are generated for each dollar of assets
invested. This is a measure of how efficiently the company manages its assets.
b. The asset turnover can be increased by
(1) increasing sales volume or revenue from services; increasing sales prices
(2) keeping less inventory on hand.
(3) closing unproductive or low-performing facilities, selling idle assets, and consolidating
operations to fewer places to reduce the amount of plant assets needed and focus efforts on the
more profitable areas of the business.
Diff: 3
LO: 7-7
AICPA Functional: Decision Modeling
79
7) a. What does the net profit margin ratio measure?
b. List three ways in which this ratio can be increased.
Answer:
a. The net profit margin ratio measures how much every sales dollar generates in profit.
b. The net profit margin ratio can be increased by
(1 ) increasing sales volume or the amount of services performed.
(2) increasing sales prices.
(3) decreasing cost of goods sold and operating expenses.
Diff: 3
LO: 7-7
AICPA Functional: Decision Modeling
1) The disposition of a plant asset is reported on the statement of cash flows as a financing
activity.
Answer: FALSE
Diff: 2
LO: 7-8
2) Acquisitions and sales of long-term assets are reported as investing activities on the statement
of cash flows.
Answer: TRUE
Diff: 2
LO: 7-8
3) Equipment is acquired by issuing a note payable for $58,000 and a making a down payment of
$26,000. The statement of cash flows will report a:
A) $26,000 outflow in the operating activities section.
B) $84,000 outflow in the investing activities section.
C) $58,000 inflow in the financing activities section.
D) $26,000 outflow in the investing activities section.
Answer: D
Diff: 3
LO: 7-8
80
4) Equipment with a book value of $8,000 is sold for $3,000 cash. The statement of cash flows
will report a:
A) $3,000 cash inflow in the operating activities section
B) $3,000 cash inflow in the investing activities section.
C) $5,000 cash outflow in the operating activities section.
D) $5,000 cash outflow in the financing activities section.
Answer: B
Diff: 2
LO: 7-8
AICPA Functional: Reporting
5) Each of the following transactions appear on the statement of cash flows, EXCEPT:
A) acquiring long-lived assets.
B) depreciating long-lived assets.
C) disposing of long-lived assets for no cash proceeds.
D) selling long-lived assets.
Answer: C
Diff: 2
LO: 7-8
81
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in injuries to peripheral nerves,
1182
degeneration of, in labio-glosso-laryngeal paralysis,
1173
employed in telegraphy,
508
509
in writing,
505
506
involved in infantile spinal paralysis,
1121
rigidity of, in paralysis agitans,
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Muscular ataxia, in general paralysis of the insane,
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189
193
atrophy in chronic spinal pachymeningitis,
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in nervous diseases,
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in poisoning by lead,
687
,
688
in progressive unilateral facial atrophy,
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progressive, complicated with infantile spinal paralysis,
1149
contraction, in acute spinal meningitis,
750
system, state of, in the chloral habit,
662
rigidity in diffuse spinal sclerosis,
888
Music, use of, in treatment of catalepsy,
338
Musk, use of, in hysteria,
274
Murmurs, valvular, in chorea,
448
Myelitis, simple acute,
810
Ascending and descending,
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816
Diagnosis,
820
Influence of poisons on cord,
815
Limitation of inflammatory process,
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Myelitic cicatrices,
815
Morbid anatomy,
812
Prognosis and duration,
821
Treatment,
822
Derivation and bloodletting,
823
Electricity,
824
Management of bed-sores,
823
Management of bladder troubles,
824
Position,
822
Rest,
823
Strychnia,
823
Warm baths,
823
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886
in unilateral spinal paralysis,
1168
Myxœdema,
1271
N.
Narcolepsy,
346
Narcotic poisoning, acute, from alcohol,
597
Narcotics, influence on causation of catalepsy,
319
Narcotics and sedatives, value, in melancholia,
160
Nature of stigmata,
350
of symmetrical gangrene,
1261
Nausea and vomiting in lead colic,
684
in the opium habit,
653
657-659
Neglect, treatment of hysteria by,
277
Nerve-centres, syphilitic affections of,
999
Nerve-roots, degeneration of, in infantile spinal paralysis,
1138-1140
lesions of, in tabes dorsalis,
840-842
Nerve-section in neuralgia,
1227
in tetanus,
560
Nerve-stretching in athetosis,
460
in neuralgia,
1228
in spinal sclerosis,
903
in writers' cramp,
538
Nerve-trunks, lesions, in multiple neuritis,
1196
in neuritis,
1191
Nerves, inflammation of,
1189
Anatomical changes in divided nerves and muscles,

1184
Changes in, in chronic alcoholism,
619
Diagnosis of,
1187
Divided, pain, seat and characters of,
1185-1187
Electrical reactions in,
1184
1188
Immediate results of injuries to,
1182
Injuries and irritation of, as a cause of neuralgia,

1220
treatment of,
1189
Lesions of, in neuralgia,
1221
Peripheral diseases of,
1177
Changes in, in chronic alcoholism,
619
Injuries of,
1182
Regeneration and reunion of divided nerves and muscles,
1185
Sensation, disorders of,
1186
1187
Skin, state of,
1183
1187
Symptoms of incomplete destruction of,
1185
Trophic disorders,
1187
Vaso-motor, origin of,
1246
Nervous diseases, general semeiology of,
19
disorders of chronic hydrocephalus,
743
of chronic lead-poisoning,
685-689
of spina bifida,
759
of the chloral habit,
663
665
symptoms of myxœdema,
1272
system, disorders of, in alcoholism,
616
in the opium habit,
656
658
659
ERVOUS
YSTEM
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OCALIZATION OF
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,
65
Cranio-cerebral topography,
93-98
in encephalic mass,
81-93
in systematic lesions,
89
in focal lesions,
89
in base of brain,
91
in cerebellum,
90
in medulla oblongata,
79
80
in peripheral nervous system,
65-69
in spinal cord,
69-79
of æsthesodic system,
69
of kinesodic system,
71
ERVOUS
S
YSTEM
,G
ENERAL
EMEIOLOGY OF
ISEASES OF
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Motory symptoms,
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Psychic symptoms,
19-31
Sensory symptoms,
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in functional diseases of,
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in organic diseases of,
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EURALGIA
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Definition, general, of,
1211

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Learning Objective 7-1

4) Leasehold improvements are not subject to depreciation or amortization.

9) Which of the following should be included in the cost of land improvements?

15) Which of the following statements is INCORRECT?

Purchase price of land $270,000

What is the cost of the land?

Purchase price $110,000

What is the cost of the delivery truck?

24) Land improvements include expenditures for:

Insurance costs before the equipment is ready for use $1,000

What is the amount assigned to the new equipment?

Which costs should be added to the cost of the machine?

Date Account Debit Credit

Answer: ($560,000 + $210,000 + $630,000) = $1,400,000

Date Account Debit Credit

f. Land Improvements 72,500

g. Land Improvements 20,000

h. Land Improvements 10,000

Learning Objective 7-2

5) The journal entry to record an addition to an office building would include:

7) Capital expenditures are NOT immediately expensed because these items:

10) Treating a capital expenditure as an immediate expense:

11) If a company capitalizes a cost that should have been expensed:

13) Which of the following statements is INCORRECT?

Learning Objective 7-3

1) The depreciation process follows the revenue recognition principle.

5) The normal balance of the Accumulated Depreciation account is a debit.

9) Under the double-declining-balance method of depreciation, residual value is initially ignored.

10) Depreciation expense decreases both assets and stockholders' equity.

14) Double-declining-balance depreciation:

19) The depreciable cost of a plant asset equals the:

20) The book value of a plant asset is defined as:

24) As a plant asset is used in operations:

27) When a plant asset is fully depreciated:

47) Which statement is FALSE?

51) The long-term asset that is not depreciated or amortized is:

2a. Book Value:

(b) Units of production method:

($50,000 - $5,000) ÷ 100,000 miles = $0.45 per mile

2b. Book Value:

(c) Double declining-balance method:

12/31/2019 $50,000 × 50% = $25,000

2. Revised depreciation expense:

2. ($84,000 - $40,000) × 35% = $15,400

Depreciation Expense for 2020:

Depreciation Expense for 2020:

Depreciation Expense for 2020:

Date Account Debit Credit

Book value = $10,000 - $5,000 = $5,000

Book value = $10,000 - $5,000 = $5,000

3. Accumulated Depreciation- Computer 5,000

Book Value = $10,000 - $5,000 = $5,000

Learning Objective 7-5