Test Bank Financial Accounting 6E by Libby Chapter 08

Chapter 008: Plant and Equipment

True / False Questions

1. Tangible long-lived, productive assets differ from intangible long-lived, productive assets in that intangible assets have physical substance whereas tan gible assets have no physical substance. FALSE

AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 1

2. Patents and trademarks are examples of tangible assets. FALSE


3. Because of its large investment in equipment, Southwest Air Lines closely monitors the unused seats on flights since it may be more profitable to reduce fares to fill more seats thereby using more of the capacity. TRUE

AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 1

4. Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost plus accumulated depreciation. FALSE


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5. The cash-equivalent cost of an asset received is measured as any cash given plus the current market value of the non-cash consideration c onsideration given up. If this value is not determinable, the current market value of what is received should be used instead. TRUE

AACSB Tag: Relative Thinking Difficulty: Hard L.O.: 2

6. If a second-hand machine is purchased for productive use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its productive use should be excluded from the cost of the asset. FALSE


7. In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future. FALSE


8. If an accountant calculates depreciation expense on an asset without taking into account the asset's residual value of $10,000, depreciation expense e xpense for the periods will be higher than it should have been. TRUE


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5. The cash-equivalent cost of an asset received is measured as any cash given plus the current market value of the non-cash consideration c onsideration given up. If this value is not determinable, the current market value of what is received should be used instead. TRUE


6. If a second-hand machine is purchased for productive use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its productive use should be excluded from the cost of the asset. FALSE


7. In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future. FALSE


8. If an accountant calculates depreciation expense on an asset without taking into account the asset's residual value of $10,000, depreciation expense e xpense for the periods will be higher than it should have been. TRUE


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9. On January 1, 2009 equipment was purchased for $80,000 and its estimated residual value is $15,000 with an 8 year useful life. In the first year, the depreciation expense under the double declining-balance method is $16,250. FALSE

AACSB Tag: Analytic Difficulty: Medium L.O.: 3

10. If a long-lived asset has been impaired, then the entry will require a debit deb it to a loss account and a credit to the long-lived asset account. TRUE


11. If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life equal to $5.5 million, no impairment has occurred and no loss would be recognized. TRUE


12. The first step in recording the disposal of a long-lived asset is to recognize depreciation dep reciation expense for the period of time since the last depreciation adjustment was made. TRUE


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13. Using a shorter estimated useful life for their fixed assets allows a compan y to reduce reported net income over the fixed assets' useful lives. However, early disposal of these assets could create reported gains thereby boosting income upon their disposal. TRUE


14. The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion. TRUE


15. Goodwill is the most commonly reported intangible asset and is recorded only when an existing company is bought by another company and the purchase price exceeds the book value of the purchased company's net assets. FALSE


16. Research and development costs are most commonly expensed as incurred and not capitalized. TRUE


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17. Depreciation expense, as computed for financial reporting, has a direct effect on a corporation's cash flow. FALSE


18. For capital intensive companies like US Steel, depreciation is a significant non-cash expense included in deriving net income. TRUE


19. Depreciation expense is added to net income under the indirect method when computing cash flow from investing activities. FALSE


20. When either the estimated useful life or estimated residual value (or both) of a long-lived, productive asset are changed, all prior financial statements are reissued reflecting the correction retroactively. FALSE

AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Sup A

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Multiple Choice Questions

21. Long-lived, productive assets do not include the following kind of assets A. land held for resale. B. plant and equipment in use. C. patents in use. D. mineral deposits being mined.


22. Rockwell, Inc., a manufacturing company, is preparing their annual financial statements. Which of the following accounts would not be grouped under long-lived, productive assets? A. Buildings. B. Land on which the building is located. C. Equipment. D. Finished goods inventory.


23. Long-lived, productive assets that have physical substance are A. Long-term investments. B. Intangible assets. C. Tangible assets. D. Current assets.


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24. Tangible assets include A. Land, buildings and natural resources. B. Land, buildings and leaseholds. C. Natural resources, buildings, and franchises. D. Licenses, trademarks, and land.


25. Intangible assets include A. Natural resources, patents, and trademarks. B. Accounts receivable, franchises, and trademarks. C. Copyrights, licenses, and land. D. Leaseholds, patents and copyrights.


26. Which statement is false? A. Shortening the estimated useful lives of operational assets will lead to a higher fixed asset turnover. B. Using an accelerated depreciation method instead of straight-line will lead to reporting a higher fixed asset turnover. C. Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover. D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.


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27. On March 1, Wright Company purchased new equipment for $50,000. Wright paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was A. $56,500. B. $54,000. C. $51,000. D. $50,000.


28. The amount of sales tax paid on the purchase of new machinery should be debited to A. the machinery account. B. a separate deferred charge account. C. a sales tax expense account. D. accumulated depreciation for machinery.


29. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock held by Red Company as an investment. The White common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. The installation cost was $700 and the shipping cost was $500. What amount should be the total amount debited to the computer equipment account? A. $14,200. B. $15,000. C. $15,400. D. $16,200.


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30. Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia Company also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. For the truck, what amount should be debited to the asset account Vehicles? A. $40,000. B. $42,000. C. $43,000. D. $45,000.


31. The book value of a tangible long-lived, productive asset is the A. acquisition cost. B. current estimated market value. C. acquisition cost minus the balance in accumulated depreciation. D. total depreciation that has been recorded on the asset to date.


32. Which of the following costs would be subtracted from the acquisition cost of equipment purchased from a supplier? A. Cost to install the equipment. B. A purchase discount offered by the supplier. C. The cost to widen an entrance in the building to bring the equipment into the facilities. D. The cost of freight paid to get the equipment into the facilities.


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33. If an expenditure is treated as a capital expenditure, instead of as a revenue expenditure, which of the following statements is true? A. The current year's net income will be lower and future depreciation expense will be higher. B. The current year's net income will be higher and future depreciation expense will be lower. C. The current year's net income will be higher and future depreciation expense will be higher. D. The current year's net income will be lower and future depreciation expense will be lower.


34. Which of the following would not be included in the acquisition cost of a building? A. The purchase price of a building including title transfer fees. B. The cost of putting new windows and doors in the building before it opens for operations. C. The cost of paving the parking lot and outdoor lighting in the lot. D. The cost of paying an architect to design the remodeling modifications of the building before the store opens.


35. A company acquires land by issuing 10,000 shares of its $10 par value common stock currently trading at $20 per share and the appraised value of the land is $250,000. We would record the land by A. Using its appraised value of $250,000 and recognize a gain of $50,000 since we are issuing stock only currently worth $200,000. B. Record the land at the value of the consideration given up, $200,000. C. Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain. D. Record the land at the par value of the stock given up, $100,000.


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36. A company may include interest cost as part of the cost of the asset A. when they buy a piece of equipment and finance its acquisition by a bank loan. B. when they must borrow money to finance the manufacture of their inventory items. C. when they are self-constructing a piece of equipment they will use to manufacture their products but only during the period of construction. D. under no circumstances as interest is never capitalized.


37. Which of the following is false? A. Replacement of a truck's tires would be treated as a capital expenditure. B. The cost of replacing carpet in a building would be a revenue expenditure. C. Cost of replacing a roof on a newly purchased building before using it as a store would be a capital expenditure. D. The cost of repainting a hallway would be a revenue expenditure.


38. In 2010, Gilbert Company made an ordinary repair to a delivery truck at a cost of $500. Gilbert Company's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gilbert Company? A. The repair was accounted for correctly. B. The error increased assets and net income in 2010. C. In the years following 2010, net income will be too high. D. The error decreased net income in 2010.


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39. Which of the following would most likely not be a revenue expenditure? A. Replacing carpet in the sales department's offices. B. Repairing a leaky roof. C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances. D. Painting the exterior of a store.


40. The main purpose of recording depreciation is to A. allocate the cost of a tangible asset to the periods in which its use contributes to generating revenue. B. estimate the remaining useful life of the asset. C. report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date. D. estimate the current replacement cost of the asset.


41. Residual value is A. equal to the acquisition cost of a tangible long-lived, productive asset. B. the same as book value of an asset. C. the amount expected to be recovered when an asset is disposed of at the end of its estimated useful life. D. the current value of an asset as of the balance sheet date.


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42. In accounting for tangible long-lived, productive assets, the continuity assumption is important because it A. helps a company decide whether to use straight-line depreciation or an accelerated depreciation method. B. justifies depreciating the asset over its expected useful life, without anticipating that the business will liquidate in the near future. C. provides justification for including residual values in calculating depreciation. D. is consistent with maintaining assets in the accounting records at market value rather than acquisition cost.


43. On January 1, 2009, Woodstock, Inc. purchased a machine with a cash price of $40,000. Woodstock, Inc., also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. Assuming straight-line depreciation, the annual depreciation expense would be A. $6,100. B. $6,000. C. $5,950. D. $5,750.


44. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated useful life is A. 3 years. B. 4 years. C. 5 years. D. 6 years.


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45. Warren Company plans to depreciate a new building using double declining-balance depreciation. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation expense was recorded properly, what would be the amount of depreciation expense for the second year? A. $30,720. B. $32,000. C. $58,880. D. $64,000.

AACSB Tag: Analytic Difficulty: Hard L.O.: 3

46. Which method of depreciation results in periodic depreciation expense that fluctuates from one period to the next, not necessarily in a steadily upward or downward direction? A. Straight-line. B. Units-of-production. C. Amortization. D. Declining balance.


47. In which depreciation method is the first year's depreciation computed by applying the depreciation rate to the total cost of the asset (without reducing it for residual value)? A. Straight-line. B. Units-of-production. C. Amortization. D. Declining-balance.


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48. Hill Inc. purchased an asset on January 1, 2009. Hill Inc., chose the accelerated depreciation method to depreciate the asset. Had Hill Inc., chosen the straight-line method A. depreciation expense would be smaller in 2009. B. the book value of the asset would be less at the end of 2009. C. net income would be less in 2009. D. the book value of the asset would be less at the end of the asset's life.


49. On January 1, 2009, Pyle Company purchased an asset that cost $50,000 (no estimated residual value, estimated useful life 8 years, straight-line depreciation is used). An e rror was made because the total cost amount was debited to an expense account for 2009 and no depreciation on it was recorded. Pretax income for 2009 was $42,000. The correct pretax income for 2009 was A. $35,750. B. $48,250. C. $85,750. D. $92,000.


50. Schager Company purchased a computer system on January 1, 2009, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining-balance method. Depreciation expense for the second year will be A. $5,000. B. $4,000. C. $3,800. D. $2,200.


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51. A company decided to use the units of production method to calculate depreciation on a car to be driven by the sales manager. The amount of annual depreciation will most likely vary with the A. age of the car. B. balance in accumulated depreciation. C. number of miles the car is driven. D. amount of maintenance expense incurred on the car.


52. How is the matching principle related to the recording of depreciation on tangible longlived, productive assets? A. The matching principle requires a company to use the same depreciation. B. Once a particular depreciation method is adopted for a particular asset, the owner must continue to use the same method. C. The accountant who calculates the depreciation may assume that the company will continue in business as long as the estimated useful life of the asset. D. A portion of the cost of the asset should be allocated as an expense to the periods in which the asset helps the business to generate revenue.


53. Which of the following is false? A. The book value at the end of an asset's useful life will be the same under all the depreciation methods allowed under GAAP. B. The total depreciation in the accumulated depreciation account will be the same at the end of the asset's useful life under all the methods allowed under GAAP. C. Once you select a depreciation method, then you must use this method for all depreciable assets. D. The annual depreciation expense will differ under the various depreciation methods.


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54. Under what conditions would a company most likely adopt the double declining-balance method for financial reporting? A. They have high technology, robotic equipment in their plant that becomes obsolete quickly and declines in utility to the company more rapidly in the early years of the assets' lives. B. They have a fleet of trucks where repair costs are minimal as the fleet ages. C. They expect the asset to lose its market value more rapidly in the first few years of its life. D. They have a building that has an estimated useful life of 50 years.


55. Which of the following is a true statement? A. Companies can change the method of depreciating assets from one year to the next. B. Companies can affect the book value at the end of an asset's life by choosing one method of depreciation over another. C. Companies can use one method of depreciation for some of their long-lived, productive assets but then use a different method for another group or type of long-lived, productive assets. D. Companies can minimize an asset's book value in the first year of use by selecting the straight line method.


56. Which of the following is true? A. Using straight-line depreciation in comparison to an accelerated method will lead to a lower earnings per share in the first year of an asset's life. B. Using accelerated depreciation in the first year of an asset's life will report a higher net profit margin compared to using straight-line. C. Using accelerated depreciation will lead to a higher total asset turnover in the first year. D. Using straight-line depreciation in comparison to an accelerated method will lead to a higher current ratio in the first year of an asset's life.


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57. Which of the following statements about the Modified Accelerated Cost Recovery System (MACRS) is true? A. It is similar to the double declining-balance method. B. It is applied using longer asset lives than the estimated useful lives required by GAAP. C. It provides a tax benefit because of the higher depreciation expense reported in the early years of the asset's life. D. It is acceptable for use when preparing your financial statements.


58. Which of the following statements about asset impairment is false? A. Asset impairment is caused by events or circumstances where the estimated future cash flows are greater than the asset's net book value. B. If an asset is impaired, a loss would be recognized in the period it can be estimated. C. Impairment will lead to writing down the asset's cost. D. Asset impairment is caused by events or circumstances where the estimated future cash flows are less than the asset's net book value.


59. Coca Cola has some bottling equipment which cost $8.5 million, has a book value of $4.1 million, and has estimated future cash flows of $3.7 million expected over its remaining life. The amount to be recorded as a loss equals A. the $8.5 million cost. B. the $4.1 million book value. C. the $.4 million difference between the book value and its future cash flows. D. the $4.8 million difference between the asset's cost and its future cash flows.


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60. If Southwest Airlines determines that an asset has been impaired by $2 million then which of the following will occur at the end of the current accounting period? A. No action will be taken to recognize its impairment until the asset is sold. B. The impairment will not affect the accounts but will be disclosed in the footnotes. C. A debit to retained earnings will be recorded for the effect of the loss thereby bypassing the income statement. D. A credit to the asset's account will be recorded for the amount of the loss.


61. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million on December 31, 2010; they had been using the straight-line depreciation method. The estimated residual value was zero and its useful life was 25 years. What is the gain or loss on the equipment on December 31, 2010? A. $250,000 loss B. $400,000 gain C. $200,000 loss D. $200,000 gain


62. If a company sold a long-lived, productive asset at a price equal to its book value, the selling company would record A. no gain or loss. B. a gain. C. a loss. D. an extraordinary item.


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63. Which of the following is correct when recording the disposal of equipment for a gain? A. A debit to a gain account. B. A credit to the equipment account for the asset's book value. C. A debit to accumulated depreciation for the depreciation accumulated to the time of disposal. D. A debit to the asset account.


64. Carter Co. disposed of an asset at the end of year 8 of the asset's life originally estimated to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000 and it was being depreciated under the straight-line method. It was sold for $10,000 cash. What was the gain or loss on the disposal at the end of year 8? A. $1,000 gain B. $4,000 loss C. No gain or loss D. $10,000 gain


65. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Amanda Company should record A. a gain of $1,000. B. a loss of $1,000. C. neither a gain nor a loss the computer was sold at its book value. D. neither a gain nor a loss the gain that occurred in this case would not be recognized.


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66. On March 1, 2009, Anniston Company purchased a producing oil well at a cash cost of $1,000,000. It is estimated that 1,500,000 barrels of oil can be produced over the remaining life of the well. By December 31, 2009 (end of the accounting period), 150,000 barrels of oil were produced and sold. The amount of depletion for 2009 on this well that should be added to oil inventory would be A. $100,000. B. $125,000. C. $ 90,000. D. $ 85,000.


67. Which of the following is most likely to be an intangible asset with an indefinite life? A. Leasehold rights B. Franchise C. Patent D. Goodwill


68. Which one of the following would not be recorded as an intangible long-lived, productive asset? A. Leasehold rights B. Copyright C. Internally generated goodwill D. Franchise


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69. Which of the following methods ordinarily would be the most appropriate to determine depletion of natural resources for financial reporting purposes? A. Straight-line. B. Double declining-balance. C. Specific identification. D. Units of production.


70. The term used for matching the cost of an intangible asset with the revenues generated through the use of the asset is A. depreciation. B. depletion. C. amortization. D. appraisal.


71. Failure to record amortization expense on a patent during the current year A. would cause net income to be overstated for the year but would have no effect on total assets. B. would cause both net income for the year and total assets to be overstated. C. would cause total assets to be overstated but would have no effect on net income for the year. D. is allowed under Generally Accepted Accounting Principles.


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72. Depletion is recorded for natural resources A. to recognize increases in market value with the passage of time. B. to match the cost of resources used up with the revenues that are earned. C. and for buildings and equipment used in extracting the resource. D. by a method similar to declining balance depreciation.


73. In accounting, goodwill A. may be recorded whenever a company achieves a level of net income that exceeds the industry average. B. does not need to be amortized its value never decreases. C. may be recorded when a company purchases another business. D. must be expended in the period it is recorded because benefits from goodwill are difficult to identify.


74. The Bowtie Company reported net income of $1,872 million in 2009 along with depreciation expense of $1,412 million and $978 million paid for purchases of property, plant and equipment. What would be the effect on cash flows from operating activities? A. Depreciation would increase and the property, plant and equipment purchases would decrease cash flow from operations. B. Depreciation would increase and property, plant and equipment purchases would increase cash flows from operations. C. Depreciation would increase cash flow from operations but the property, plant and equipment purchases would have no effect on cash flow from operations. D. Depreciation is a non-cash expense and would not be used to calculate cash flow from operating activities.


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75. Landmark Restaurants reported net income in 2008 of 45.9 million and depreciation expense of $48.8 million. They also report additions to property and equipment of $162.9 million. Which of the following disclosures would appear on the 2008 statement of cash flows? A. Depreciation of $48.8 million would be deducted from net income under operating activities and the additions $162.9 million would be added under investing activities. B. Depreciation of $48.8 million would be added to net income under operating activities and the additions $162.9 million would be added under investing activities. C. Depreciation of $48.8 million would be added to net income under operating activities and the additions $162.9 million would be deducted under investing activities. D. Depreciation of $48.8 million would be deducted from net income under operating activities and the additions $162.9 million would be deducted under investing activities.


76. Williams Company purchased a machine at a cash cost of $25,000 and is depreciating it over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated useful life was changed from 10 to 12 years with the residual value unchanged. Depreciation expense for year 8 would be (assuming straight-line) depreciation A. $2,200. B. $2,920. C. $3,100. D. $8,800.

AACSB Tag: Analytic Difficulty: Hard L.O.: Sup A

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77. Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Augie's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Augie Corporation should record for year 3 under the straight-line method? A. $15,500. B. $ 8,250. C. $11,000. D. $16,500.

AACSB Tag: Analytic Difficulty: Medium L.O.: Sup A

78. Pearson Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Pearson Corporation spent $10,000 for an extraordinary repair. Following the repair, Pearson Corporation estimated that the machine had a remaining useful life of 8 years, and that the residual value was unchanged. Calculate depreciation expense on the machine for the fifth year, assuming that Pearson Corporation uses the straight-line method. A. $5,625. B. $7,250. C. $7,500. D. $6,875.

AACSB Tag: Analytic Difficulty: Hard L.O.: Sup A

79. A revision of an asset's estimated useful life from 20 to 25 years after the asset has been depreciated for 10 years would result in A. reporting a lower fixed asset turnover ratio for year 11. B. a lower earnings per share reported in year 11. C. a lower return on equity for year 11. D. a lower net income for year 11.

AACSB Tag: Relative Thinking Difficulty: Hard L.O.: Sup A

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80. An extraordinary repair to a building A. is a revenue expenditure and is debited to an expense account. B. is a capital expenditure and is debited to an expense account. C. is a capital expenditure and is debited to an asset account. D. is a revenue expenditure and may be debited to accumulated depreciation.

AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Sup A

Essay Questions

81. The following information is available for Coca-Cola and PepsiCo:

Compute the fixed asset turnover ratio for both Coca Cola and PepsiCo. Coca-Cola 4.61 ($19,889/ [$4,168 + $4,453]/2) PepsiCo 3.82 ($20,438/ [$5,266 + $5,438]/2)


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82. The following information was available for Landmark Restaurants for the past three years. Using this information to compute the fixed asset turnover ratio for 2 008 and 2007.

2008 = 1.23 ($1,105,755 / [$965,575 + $830,930 / 2]) 2007 = 1.26 ($894,795 / [$830,795 + $587,829 / 2])


83. On January 1, 2009, Trenton Company purchased a machine. The price quoted by the seller was $50,000. Paid with cash were: transportation, $1,000 installation, $2,000; and sales tax, $3,000. Give the entry to record the acquisition.


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84. Waterloo Corporation purchased factory equipment for a cost of $1,800,000. It cost $100,000 for its delivery, $220,000 for its installation and modifications to the production building, and cost $60,000 in interest costs on borrowed funds used to acquire the equipment. What is the acquisition cost of the new equipment? $2,120,000 ($1,800,000 + 100,000 + 220,000). Interest is not capitalized because the equipment was purchased and not self-constructed.


85. In 2008, Landmark Restaurants reported the cost of fixed assets at $1,189.8 million and the accumulated depreciation at $224.2 million. In that same year, Coca Cola reported $10,149 million in fixed assets and accumulated depreciation on them of $4,058. A. Estimate the approximate remaining percentage life of the assets for Landmark Restaurants and Coca Cola B. Which company appears to have newer assets with longer remaining lives? A. Landmark's 81.2% ($1,189.8 $224.2)/$1,189.8, Coca Cola 60.0% ($10,149 $4,058)/$10,149 B. Landmark's appears to have "newer" assets than Coca-Cola because 81.2% of their assets' value remains in book value while Coca-Cola has 60.0% remaining in book value.


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86. Hi-Crest Company purchased a machine on January 1, 2009, for $300,000. The machine has an estimated useful life of 5 years and a $10,000 residual value. It is now December 31, 2010 and Hi-Crest Company is in the process of preparing financial statements. Calculate depreciation expense and book value for 2009 and 2010, using the double declining-balance method of depreciation.


87. The financial statements of Franklin Compan y contained the following errors:

Respond to each of the following (disregard income taxes): A. Was net income for 2009 understated or overstated? B. Was total combined net income for the two-year period ended December 31, 2010 overstated or understated? A. Overstated (If depreciation expense is understated, then income is overstated.) B. Overstated (2009's income was overstated by $1,000. 2010's income was understated by $900. The net is an overstatement of $100.)


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88. On January 1, 2009, Boston Company purchased a heavy duty machine having an invoice price of $13,000 plus transportation and installation costs of $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Calculate depreciation expense and book value for 2009-2012, assuming 150% declining-balance method of depreciation. (Round to the nearest dollar.)

* Straight-line rate: 1 4 years = .25 Declining-balance rate: .25 1.50 = .375 ** Even though $3,906 .375 = $1,465, the depreciation expense the last year (the fourth year) is the amount necessary to leave book value equal to the residual value of $1,000.


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89. Cherokee Company acquired a machine on January 1, 2009, that cost $2,700 and had an estimated residual value of $200. Complete the following schedule using the three methods of depreciation: A. straight-line, B. units-of-production, C. 150% declining-balance.


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90. Covey Company purchased a machine on January 2, 2008, by paying cash of $250,000. The machine has an estimated useful life of five years (or the production of 50 0,000 units) and an estimated residual value of $25,000. Required: A. Determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (1.) straight-line depreciation; and (2.) the 200% d eclining balance method. B. What is the book value of the machine after three years using the 200% declining- balance method? C. What is the book value of the machinery after three years with straight-line depreciation? D. If the machine was used to produce and sell 120,000 units in 2008, what would the depreciation expense be under the units of production method? A. 1. Straight-line depreciation for years 1 through 5 = ($250,000 $45,000 2. Declining balance method 200% acceleration rate

*Amount to reduce book value to $5,000 B. $250,000 100,000 60,000 36,000 = $54,000 C. $250,000 ($45,000 3) = $115,000 D. (250,000 25,000)/500,000 = $.45/unit $.45 120,000 = $54,000


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$25,000/5 years) =


91. Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The company estimated that the truck would have a useful life of 4 years and a residual value of $4,000. Required: A. Calculate depreciation expense under straight line and double declining balance for 20092012. B. Which of the two methods in part 1 would result in: (1.) Lower net income in 2010? (2.) Lower net income in 2012? A.

Straight-line: ($34,000 4,000)/4 years = $7,500 Declining-balance: 2009 ¼ 200% $34,000 = $17,000 2010 ¼ 200% ($34,000 $17,000) = $8,500 2011 ¼ 200% ($34,000 $25,500) = $4,250 2012 Book value $4,250 $4,000 target book value = $250 B. Lower net income: (1.) 2010 Double declining-balance; (2.) 2012 Straight-line.


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92. Allison Company purchased a machine for $1,200,000 on January 1, 2009. It was using the double declining-balance (200%) method to depreciate the asset and its useful life was estimated to be 5 years with a residual value of $200,000. At December 31, 2010 (year 2), Allison Company estimates the future cash flows from the asset to be equal to $500,000. What is the amount of the impairment loss? Zero. At the end of year two, the machine's book value would be $432,000 (year 1 depreciation $480,000 plus year 2 depreciation of $288,000 would be deducted from the asset's cost of $1,200,000). Since the future cash flows are not below the asset's book value, there is no impairment loss.


93. A company purchased equipment for $800,000 and has depreciated it using the straightline method for the past 5 years when its original life was estimated to be 10 years with a $200,000 residual value. The equipment's utility to the company has declined because they expect it to generate a net cash flow over the remaining years of $200,000 from its operation. If the asset has been impaired, record the journal entry to recognize the loss.


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94. Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life was 4 years. The company uses straight-line depreciation computed monthly. On July 1, 2012, the company sold the truck for $1,700 cash. A. What was the depreciation expense amount per month? B. What was the amount of accumulated depreciation at July 1, 2012? C. Give the required journal entries on the date of disposal, July 1, 2012. (Assume no 2012 depreciation had yet been recorded) A. ($10,600 $400) 48 = $212.50 per month B. 212.50 6 months = $1,275 C.

AACSB Tag: Analytic Difficulty: Medium L.O.: 3, 5

95. Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5 years ago for a cost of $800,000. It has been depreciated using the straight-line method over an estimated useful life of 10 years with an estimated residual value of $50,000. Record the journal entry at the end of year five for the asset's disposal assuming the fifth year's depreciation had been recorded.


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96. Bennett Corporation sold a piece of equipment on June 30, 2012 for $50,000 cash. The equipment had been purchased on January 1, 2008 for $150,000. It had an estimated useful life of 6 years and a $30,000 residual value. Bennett Corporation has been using the straightline method of depreciation and has a year-end of December 31st. Give any journal entry (ies) required at the time of disposal. Round final calculations to nearest whole dollar.


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97. Spa Sources Corporation purchased a machine that had an original cost of $60,000 and an estimated residual value of $10,000. The useful life was expected to be 8 years and straightline depreciation is used. At the end of 2010, the book value of the machine was $35,000. Spa Sources Corporation sold the machine for $32,000 cash on October 1, 2011. Required: A. Prepare the journal entry to record depreciation for 2011 up to the date of sale. Round the amount to the nearest dollar. B. Prepare the journal entry to record the sale of the machine.


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98. Give the required adjusting entry at December 31, 2011, the end of the annual accounting period for the three items below. If no entry is required, explain why. A. Polk Company acquired a patent that cost $6,000 on January 1, 2011. The patent was registered on January 1, 2006. The legal life of a patent is 20 years from registration. Polk expects to use the patent the remaining legal life. B. Polk Company acquired a gravel pit on January 1, 2011, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 2011 4,000 tons were extracted and sold. C. On January 1, 2011, Polk Company acquired a dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line depreciation.

AACSB Tag: Analytic Difficulty: Medium L.O.: 3, 6

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99. Benson Mining Company purchased a site containing a mineral ore deposit in 2008. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Benson Mining Company constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value. Required: A. Explain the purpose for recording depletion on natural resources. B. Calculate Benson Mining Company depreciation rate per ton of ore for this deposit. C. Make the journal entry to record depletion for the year 2008, when Benson mined and sold 150,000 tons of ore. D. Make the journal entry to record depreciation on the building for 2008. Benson Mining Company calculates depreciation on the building using the units of production method based on the amount of ore extracted (150,000 tons in 2008). A. The purpose of recording depletion is to match the cost of a natural resource with revenues earned from extracting and selling the resource. B. $820,000/400,000 tons = $2.05/ton


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100. On January 1, 2009 Gordon Company purchased a patent for $420,000 from an inventor who had developed a new manufacturing process. At the time of the purchase, the patent had a remaining legal life of 10 years. Required: A. Prepare the journal entry to record Gordon Company's purchase of the patent. B. Prepare the journal entry to record amortization of the patent on December 31, 2009 assuming that no contra account is used. C. At the end of 2012 after amortization had been recorded through December 31, 2011, Gordon Company concluded that the estimated future cash flows from the patent to be $200,000 as required to test for impairment. Record the impairment if necessary.

Computations: [420,000

(42,000

4) = 252,000

200,000]


101. Pier 5 has been in business 8 years with 4 stores in the San Francisco Bay Area. Their local reputation for making savory pies such as curried potatoes is well recognized. A national food distributor has offered to purchase the company. Pier 5 has $1.2 million of assets on their books but those assets have a fair market value of $1.5 million and $.3 million of liabilities. If the distributor offers to buy Pier 5 for $3.5 million and assume the liabilities of Pier 5, how much will be recorded as goodwill based on the offered purchase price? $2.3 million ($3.5 million minus {$1.5 million minus $.3 million})


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102. Landmark Restaurants reported net income of $45.9 million in 2008. They reported depreciation and amortization of plant and equipment of $48.8 million and cash paid for additions to property, plant and equipment of $162.9 million in 2008. Explain where each of these items would be reported and their impact on cash flows on the statement of cash flows. The net income would be reported as the first item in the operating activities section and would have a positive impact on cash flow. The depreciation and amortization would be added to net income in the operating activities section and would have a positive effect on cash flow. Finally the cash paid for new property, plant and equipment would be in the investing activities section and would have a negative cash flow effect.


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103. Frankel Feed purchased a new machine on January 1, 2009:

It is now the beginning of year 6 and the management reevaluated the estimates related to the machine. Compute the depreciation expense for year 6 under each of the following independent cases:

A. (26,000 B. (26,000 C. (26,000

12,000 12,000 12,000

2,000) 1,000) 3,000)

(15 years (10 years (7 years

AACSB Tag: Analytic Difficulty: Medium L.O.: Sup. A

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5 years) = $1,200 Depreciation expense 5 years) = $2,600 Depreciation expense 5 years) = $5,500 Depreciation expense


104. Sadler Corporation purchased equipment to be used in manufacturing. The purchase was made at January 1, 2009 by paying cash of $150,000. The equipment has an estimated residual value of 10,000 and an expected useful life of 10 years. At January 1, 2011, Sadler Corporation concluded that the total useful life of the equipment will be 8 years rather than 10, and that the residual value will be zero. Sadler uses the straight-line method for depreciation. Required: A. Make the journal entry to record depreciation on the equipment for 2010. B. Make the journal entry to record depreciation on the equipment for 2011, including the effect of the changes in estimates. C. Describe how a business should account for a change in the estimated useful life and/or residual value of a depreciable asset.

Computations: $150,000 $28,000 (14,000 depreciation/year 2 years) = $122,000 remaining depreciable value $122,000/6 year remaining useful life = $20,333 C. A change in estimate of residual value or useful life requires the company to calculate a new annual depreciation amount. The change in estimates affects the amount of depreciation for current and future years. There is no restatement of financial statements for prior years.

AACSB Tag: Analytic Difficulty: Medium L.O.: Sup A

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Matching Questions

105. Match the assets with the cost allocation method. 1. Long-term investment in stock of Swift Tea, Inc. 2. Tex-Mex Chile Franchise (in use) 3. Building 4. Uranium reserves (being exploited)

Depletion Depreciation Amortization None

4 3 2 1


106. Match each type of asset category with the appropriate allocation method. 1. Property, plant, and equipment 2. Natural resources 3. Intangible assets

Amortization 3 Depletion 2 Depreciation 1


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Test Bank Financial Accounting 6E by Libby Chapter 08

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