1. Which of the following items should be expensed as incurred?

a. Broker's fees on the purchase of a long-lived asset.

b. Repair of damage occurring during installation of new equipment.

c. Freight charges on the purchase of equipment.

d. Normal installation fees on the purchase of equipment.

Answerb. Items to be expensed are those that do not benefit future periods. Repair of damage occurring during installation has no future value and should be expensed currently. The other items are all ordinary and necessary to acquire equipment and are appropriately considered to be part of an asset's cost.

 

2. Lancer Corporation purchased a parcel of land as a factory site for $150,000. Construction began immediately on a new building. Costs incurred are as follows:

Architect's fees	25,000
Legal fees for land purchase contract	2,000
Construction costs	250,000

Lancer should record the cost of the new land and building, respectively, at:

a. $150,000 and $275,000

b. $152,000 and $275,000

c. $150,000 and $250,000

d. $152,000 and $250,000

Answerb. $152,000 and $275,000. The $152,000 consists of $150,000 site cost and $2,000 legal fees. The $275,000 amount equals the architect's fees and construction costs.

 

3. Reno Acquisitions Company recently bought a furnished hotel for a lump-sum purchase price of $15,000,000. Separately, the land was valued at $6,000,000, the building at $12,000,000, and the furniture and equipment at $2,000,000. How much cost should Reno assign to the land?

a. $1,000,000

b. $4,500,000

c. $6,000,000

d. $8,000,000

Answerb. $4,500,000. The land represents 30% of the package ($6,000,000/ ($6,000,000 + $12,000,000 + $2,000,000)). The $15,000,000 purchase price times 30% equals the $4,500,000 assigned cost.

 

4. The appropriate journal entry to record machinery depreciation of $1,000 is:

a.	Depreciation Expense			1,000
		Accumulated Depreciation				1,000
b.	Depreciation Expense			1,000
		Machine				1,000
c.	Accumulated Depreciation			1,000
		Depreciation Expense				1,000
d.	Accumulated Depreciation			1,000
		Machine				1,000

Answera. Depreciation Expense is increased with a debit, and Accumulated Depreciation, a contra asset, is increased with a credit. The Machine account is not directly affected.

 

5. Omni Corporation purchased a new vehicle on January 1, 20X1. The vehicle cost $100,000, has a five-year life, and a $20,000 residual value. Omni has a December 31 year-end. If Omni depreciates the truck by the double-declining balance method, how much should be recorded as depreciation expense during 20X4?

a. $0

b. $1,600

c. $8,640

d. $40,000

Answer

 

6. Realistic Company purchased a new truck on January 1, 20X1. The truck cost $20,000, has a four-year life, and a $4,000 residual value. The company has a December 31 year-end. If Realistic Company depreciates the truck by the straight-line method, how much should Realistic report as the book value of the truck at the end of 20X3?

a. $1,600

b. $4,000

c. $8,000

d. $16,000

Answer

 

7. On July 1, 20X1, Clem Company purchased factory equipment for $50,000. Residual value was estimated to be $2,000. The equipment will be depreciated over ten years using the double-declining-balance depreciation method. Clem has a December 31 year-end, and during 20X1, one-half of a year's depreciation expense was recorded. How much depreciation expense should be recorded for 20X2? (round computations to the nearest dollar)

a. $4,320

b. $5,000

c. $8,640

d. $9,000

Answer

 

8. A graph is set up with "depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the lines for straight-line and double-declining-balance depreciation expense, respectively, be drawn on this graph?

a. Vertically and sloping down to the right.

b. Vertically and sloping up to the right.

c. Horizontally and sloping down to the right.

d. Horizontally and sloping up to the right.

Answerc. Straight-line depreciation expense would be a straight, flat (horizontal) line. This reflects that the expense is the same every year. Double-declining balance depreciation expense declines year to year, portrayed by a line sloping down to the right.

 

9. On July 1, 20X1, Robinson Company purchased a new machine for $200,000. The machine is estimated to have a service-life of 10 years with an estimated residual value of $5,000. Robinson uses straight-line depreciation. During 20X5, it became apparent that the machine would not be efficient to operate after December 31, 20X7. Furthermore, the machine would have no scrap value. How much should be charged to depreciation expense in 20X5 under generally accepted accounting principles? (round computations to the nearest dollar)

a. $19,500

b. $42,250

c. $43,917

d. $65,000

Answerc. $43,917. The book value on January 1, 20X5, is $131,750. The book value reflects 3.5 years of depreciation at $19,500 per year ($200,000 cost minus accumulated depreciation of $68,250 ($19,500 X 3.5)). Because there is no residual value, the remaining book value must be depreciated over the remaining life of 3 years ($131,750/3 = $43,917).

 

10. Assume that the modified accelerated cost recovery system is used to account for a depreciable asset for tax purposes. In general, which of the following observations is correct?

a. Depreciation amounts will be the same for financial reporting purposes.

b. In the early years of an asset's life, depreciation will be greater for tax than for financial reporting purposes.

c. In the early years of an asset's life, depreciation will be less for tax than for financial reporting purposes.

d. The tax life will exceed the financial reporting life.

Answerb. The modified accelerated cost recovery system generally results in depreciation being recorded faster for tax purposes. Therefore, tax amounts will exceed financial reporting amounts of depreciation in the earlier years of an asset's life.