1. Cross Country Trucking Company recently replaced the oil filter on one of its cross country rigs. How should one account for this cost?

a. As a repair and maintenance expense.

b. As an increase in the cost of the truck.

c. As a reduction in accumulated depreciation associated with the truck.

d. As an intangible asset.

Answera. Repair and maintenance expense is recorded because this is a relatively small expenditure benefiting only the immediate period. If it qualified as a capital expenditure, it might be recorded as described in choices "b" or "c." This is clearly not an intangible asset.

 

2. On January 1, 20X2, Lynn Corporation purchased a machine for $100,000. Lynn paid shipping expenses of $1,000 as well as installation costs of $2,400. The machine was estimated to have a useful life of ten years and an estimated salvage value of $6,000. In January 20X3, additions costing $7,200 were made to the machine. These additions significantly improved the quality of output, but did not change the life or salvage value of the machine. If Lynn records depreciation under the straight-line method, depreciation expense for 20X3 is:

a. $9,740

b. $10,340

c. $10,540

d. $11,140

Answerc. $10,540. The original annual depreciation is $9,740 (($100,000 + $1,000 + $2,400 - $6,000)/10 years). The additional amount of depreciation is $800 ($7,200/9 years) per year.

 

3. If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then the firm should reduce the asset in the accounts. In addition,

a. a loss should be recognized.

b. an intangible asset should be recorded.

c. the asset should be discarded.

d. depreciation should cease.

Answera. If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then the firm should reduce the asset in the accounts. In addition, a loss should be recognized.

 

4. A machine that cost $18,000, with a book value of $4,000, is sold for $3,400. Which of the following is true concerning the journal entry to record the sale?

a. Accumulated Depreciation is debited for $4,000.

b. Machinery is credited for $4,000.

c. Loss on sale of machinery is credited for $600.

d. Accumulated Depreciation is debited for $14,000.

Answer

 

5. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were:

a. Less than current market value.

b. Greater than cost.

c. Greater than book value.

d. Less than book value.

Answerd. A loss on the sale of a depreciable asset indicates that the proceeds received from the sale were less than the recorded book value of the asset. A gain would result if the proceeds were greater than cost or book value. Hopefully, the sale proceeds equaled market value; a loss, therefore, suggests that market value is also below book value.

 

6. Equipment costing $3,000 with accumulated depreciation of $2,125 is exchanged for another asset with a fair value of $625. The exchange has commercial substance. How much is the gain or loss on this transaction?

a. A gain of $250 should be recognized.

b. A loss of $250 should be recognized.

c. A loss of $500 should be recognized.

d. No gain or loss should be recognized.

Answerb. The consideration given ($3,000 - $2,125) = $875) is $250 greater than the value of the asset received ($625), necessitating the recording of a loss.

 

7. Deep Gold Mining Company recognizes $4 of depletion for each ton of ore mined. This year, 300,000 tons of ore were mined but only 180,000 were sold. The amount of depletion which should be deducted from revenue this year is:

a. $0

b. $480,000

c. $720,000

d. $1,200,000

Answerc. $720,000. The depletion which should be deducted from revenue equals the 180,000 units sold times the $4 per ton depletion rate. The depletion on the other 120,000 units (300,000 - 180,000) is reported as inventory (120,000 X $4 = $480,000).

 

8. Which of the following terms best relates to natural resources?

a. Depreciation.

b. Depletion.

c. Amortization.

d. Accrual.

Answerb. Depletion is the allocation of the cost of a natural resource. Depreciation relates to plant and equipment and amortization relates to intangible assets. Accrual is a more general concept relating to accounting measurements.

 

9. On January 5, 20X1, a corporation was granted a patent on a product. On January 2, 20X9, to protect its patent, the corporation purchased a patent on a competing idea that was originally issued on January 10, 20X5. Because of its unique nature, the corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be:

a. Amortized over a maximum period of 20 years.

b. Amortized over a maximum period of 13 years.

c. Amortized over a maximum period of 12 years.

d. Expensed in 20X9.

Answerc. Patents have a 20-year life. Because the only purpose for the purchased patent is to protect an existing patent (already 8 years old), the cost of the purchased patent should be spread over no more than the twelve year remaining life of the old patent.

 

10. Which of the following statements regarding goodwill is false?

a. The difference between the price paid to purchase a particular company, and the fair value of the underlying identifiable assets received (less liabilities assumed) is goodwill.

b. Goodwill should not be amortized, but should be evaluated for impairment.

c. Goodwill is an intangible asset.

d. Goodwill may be recorded for a company whether it is internally generated or purchased.

Answerd. Goodwill should only be recorded when it is purchased; internally generated goodwill is not recorded. The comments in the other choices are all correct.