Final Exam Accounting

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Q 9.1: When can interest be included in the acquisition cost of a plant asset?

during the construction period of a self-constructed asset

Q 9.2: ________ are the costs incurred to increase the operating efficiency or useful life of a plant asset.

Capital expenditures

Q 9.3: Pat’s Garage installed a new parking lot. The paving cost $10,000 and the lights to illuminate the new parking area cost $5,000. These additions require that

$15,000 should be included in land improvements account

Q 9.4: A company purchased land for $70,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at

not 77,00

Q 9.5: To find the book value of a plant asset, you find the difference between the

cost of the asset and the accumulated depreciation to date.

Q 9.6: In selecting a depreciation method, a company should choose the method that

best measures the plant asset’s contribution to revenue over its useful life.

Q 9.7: If the estimated useful life of equipment changes, then this change requires

that the amount of periodic depreciation be changed in the current year and in future years.

Q 9.8: To find the book value of a plant asset, you find the difference between the

cost of the asset and the accumulated depreciation to date.

Q 9.9: Where is the loss on disposal of a plant asset reported in the financial statements?

in the Other Expenses and Losses section of the income statement

Q 9.10: Where is the loss on disposal of a plant asset reported in the financial statements?

in the Other Expenses and Losses section of the income statement

Q 9.11: How is depreciation accounted for if disposal of a plant asset occurs during the year?

It is recorded for the fraction of the year to the date of the disposal.

Q 9.12: Wells Company’s delivery truck, with a cost of $56,000 was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $38,000. The company received $32,000 reimbursement from its insurance company. The gain or loss as a result of the fire was

Not 14,000 loss

Q 9.13: Companies can amortize a patent for a period that cannot exceed ________ years.

20

Q 9.14: A patent that has a legal life of 20 years and a useful life of less than 20 years should

be amortized over its useful life.

Q 9.15: A computer company has $3,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,400,000. What is the amount of net income or loss after these R & D costs are accounted for?

6,000 loss

Wilmington Sports has the following account balances at year end. What are the total intangible assets on the balance sheet?

Not the 31ooooo one

Q 9.17: Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2nd, 2017. On July 31st, 2017, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31st, 2017, should be

$35,000

Q 9.18: To find the asset turnover ratio, divide net ________ total assets.

sales by average

Q 9.19: Which of the following should be disclosed in the balance sheet or the notes to the financial statements?

all of the choices are correct

Q 9.22: ______ will be recorded if a plant asset is retired and is fully depreciated.

No gain or loss on disposal

Q 9.23: What is the relationship between net sales and asset turnover?

An increase in net sales will cause an increase in asset turnover.

Q 9.24: When land is acquired, expenditures for paving, fencing, and lighting a new company parking lot should be charged to the ________ account.

land improvement

Q 9.25: What is the purchase price of an asset if it is depreciated using the straight-line method and annual depreciation is $24,000 per year for six years with an estimated salvage value of $3,000?

147,000

Q 9.26: How does the journal entry for a retired asset differ from the journal entry for an asset that is sold?

The entry for the retired asset does not include a debit to Cash, but the entry for the sold asset does.

Q 9.27: Your friend Pete owns a small business, and he’s not sure how he should treat fully depreciated assets on his company’s balance sheet. What advice should you offer to Pete?

"Even though the assets are fully depreciated, you need to continue to report both the assets and their accumulated depreciation on the balance sheet to indicate that the assets are still in use. However, you must be careful not to take any additional depreciation on the assets, because in no situation can the accumulated depreciation on an asset exceed its cost."

Q 9.28: Franklin Designs purchased the patent of a new couch design. The patent had a remaining life of 18 years, so Franklin amortized the cost of the patent over 18 years. However, experts believe that the couch design will only be popular for six years. How will this affect the accuracy of Franklin’s financial statements?

Amortization expense will be understated, net income will be overstated, and assets will be overstated.

Q 9.30: On December 1, 2016, Acme Company places a new asset into service. The cost of the asset is $50,000 with an estimated five-year life and $10,000 salvage value at the end of its useful life. What is the depreciation expense for 2017 if Acme Company uses the straight-line method of depreciation?

$8,000

Q 9.32: Xenon Tech acquired a patent on January 1st, 2013, for $26,400. The patent was estimated to have a useful life of 12 years. On July 1st, 2017, the company incurred legal fees of $6,000 to successfully defend the patent in an infringement suit. How much amortization expense will Xenon Tech recognize on the Income Statement for the year ended December 31st, 2017?

$2,600 Intangible assets are amortized using the straight-line method. Original amortization was $2,200 ($26,400 ÷ 12) per year, current half-year amortization before the litigation was $1,100, and 4.5 years ($9,900) of amortization has accumulated up to the date of litigation. Book value is $16,500 ($26,400 – 9,900), and the legal fees are added to this amount for a new book value of $22,500. Dividing the new book value by the 7.5 remaining years of useful life results in $1,500 (= 3,000 ÷ 2) amortization for the second half of 2017. Adding this amount to the $1,100 of amortization from earlier in the year results in amortization expense of $2,600 for 2017.

Q 9.33: Leonard Company uses and discloses different depreciation methods for the major classes of property, plant, and equipment. Which accounting principle is Leonard Company addressing?

full-disclosure principle

Q 9.36: Voltage Industries, a calendar-year company, purchases equipment for $85,000 on January 2nd, 2017. The equipment’s expected useful life is five years, and the expected salvage value of the equipment is $5,000. What is the book value of the equipment on December 31st, 2018, if Voltage uses the double-declining-balance method?

$30,600 Ignoring the salvage value for the double- declining-balance method, the depreciation percentage per year is calculated by doubling the straight-line rate (100% ÷ 5 years = 20%; 20% × 2 = 40%. For year 1, depreciation expense is $34,000 ($85,000 × 40%). Subtracting the expense from the original cost yields a book value of $51,000 at the beginning of year 2. $51,000 × 40% = $20,400 (year 2 depreciation); subtracting the expense from the year 2 beginning book value ($51,000 – 20,400) results in the book value being $30,600 on December 31st, 2018.

Q 9.37: Jamison Industries disposed of two pieces of equipment in 2017. When they disposed of the first piece of equipment, they did not subtract a partial year of depreciation from the book value. However, when they disposed of the second piece of equipment, they did subtract a partial year of depreciation from the book value. Why did their calculation of book value differ for these two pieces of equipment?

The first was disposed of at the beginning of the fiscal year, whereas the second was disposed of later in the fiscal year. A partial year of depreciation must be subtracted from the book value of an asset when it is disposed of if the asset is sold sometime other than immediately after the start of a new fiscal year. Because the first piece of equipment did not have a partial year of depreciation subtracted from the book value, the equipment was likely sold at the beginning of the fiscal year. However, the second piece of equipment did have a partial year of depreciation subtracted from the book value, so it had to have been disposed of later in the year.

Q 9.40: Which depreciation method generally results in the lowest net income for the first year a plant asset is utilized?

double declining-balance

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