24% (7 out of 29 correct)

Responses to questions are indicated by the

symbol.

1. The cost of land includes closing costs such as title and attorney's fees.
A. True
B. False
This statement is correct (Land).

2. The cost of equipment consists of the cash purchase price, freight charges, motor vehicle
licenses and accident insurance on company vehicles.
A. True
B. False
Motor vehicle licenses and accident insurance are not included in the cost of equipment
(Equipment).

3. Recognizing depreciation on an asset results in an accumulation of cash for replacement

of the asset.
A. True
B. False
Recognizing depreciation on an asset does not result in an accumulation of cash for
replacement of the asset (Depreciation).

4. The units-of-activity method can be used for airplanes, buildings, and furniture.
A. True
B. False
The units-of-activity method is generally not suitable for buildings or furniture (Unitsof-Activity).

5. The declining-balance method is considered an accelerated-depreciation method.

A. True
B. False
This statement is correct (Declining Balance).

6. The Internal Revenue Service (IRS) requires the taxpayer to use the same depreciation
method on the tax return that is used in preparing financial statements.
A. True
B. False
The IRS does not require the same depreciation method on the tax return that is used in
the financial statements (Depreciation and Income Taxes).

7. To determine the revised depreciation expense, the company computes the asset's
depreciable cost at the time of the revision and divides it by the asset's remaining useful
life.
A. True
B. False
This statement is correct (Revising Periodic Depreciation).

8. Companies generally use the units-of-activity method to compute depletion.

A. True
B. False
This statement is correct (Natural Resources).

9. Goodwill is the excess of cost over the fair market value of the net assets acquired.
A. True
B. False
This statement is correct (Goodwill).

10. The gain or loss on exchange of plant assets is the difference between the fair market
value and the cost of the asset given up.
A. True
B. False
The gain or loss on exchange of plant assets is the difference between the fair market
value and the book value of the asset given up (Appendix-Exchange of Plant Assets).

11. Plant assets decline in service potential over their useful lives except for:
A. buildings.
B. equipment.

C. land.
D. land improvements.
All plant assets decline in service potential over their useful lives except for land (Plant
Assets).

12. The cost of land includes all of the following except:

A. real estate brokers' commissions.
B. closing costs.
C. accrued property taxes.
D. parking lots.
Accrued property taxes are considered part of the cost of land (Land).

13. Factors that affect the computation of depreciation include all of the following except:
A. cost.
B. book value.
C. salvage value.
D. useful life.
Correct! All of the options affect the computation of depreciation except book value
which is the cost of a plant asset less accumulated depreciation (Factors in Computing
Depreciation).

14. Depreciable cost is the:

A. book value of an asset less its salvage value.
B. cost of an asset less its salvage value.
C. cost of an asset less accumulated depreciation.
D. book value of an asset.
This is the computation for book value (Depreciation).

15. The depreciation method that produces a decreasing annual depreciation expense over
an asset's useful life is the:
A. straight-line method.
B. units-of-activity method.
C. declining-balance method.
D. None of these options.

The straight-line method produces a constant annual depreciation expense over the
useful life of an asset (Straight-Line).

16. The method that ignores salvage value in determining the amount of depreciation is the:
A. straight-line method.
B. units-of-activity method.
C. declining-balance method.
D. None of these options.
Correct! The declining-balance method ignores salvage value in determining the amount
of depreciation (Declining Balance).

17. When a change in estimated useful life is required, the company makes the change in:
A. current and prior years.
B. current and future years.
C. current year only.
D. prior years only.
When a change in estimate is required, the change is made in current and future years,
but not in prior periods (Revising Periodic Depreciation).

18. Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset
and are referred to as:
A. capital expenditures.
B. expense expenditures.
C. improvements.
D. revenue expenditures.
Capital expenditures are additions and improvements to plant assets that increase either
their capacity or efficiency (Expenditures During Useful Life).

19. A gain on sale of a plant asset occurs when the proceeds of the sale exceed the:
A. salvage value of the asset sold.
B. market value of the asset sold.
C. book value of the asset sold.
D. accumulated depreciation on the asset sold.
Accumulated depreciation is used in computation of book value, not in the gain/loss
computation (Sale of Plant Assets).

20. Natural resources include all of the following except:

A. mineral deposits.
B. oil and gas deposits.
C. standing timber.
D. land improvements.
Oil and gas deposits are considered natural resources because they are replaceable only
by an act of nature (Natural Resources).

21. Companies amortize the cost of a patent over its:

A. useful life.
B. legal life.
C. legal life or its useful life, whichever is shorter.
D. legal life or its useful life, whichever is longer.
Companies amortize the cost of a patent over its 20-year legal life or its useful life,
whichever is shorter (Patents).

22. All of the following are intangible assets except:

A. copyrights.
B. goodwill.
C. patents.
D. research and development costs.
Goodwill is considered to be an intangible asset (Goodwill).

23. The asset turnover ratio is computed by dividing:

A. net income by average total assets.
B. net sales by average total assets.
C. net income by ending total assets.
D. net sales by ending total assets.
The asset turnover ratio is computed by dividing net sales by average total assets
(Analysis).

24. In exchanges of plant assets that have commercial substance:

A. both gains and losses are recognized.
B. neither gains nor losses are recognized.
C. gains are recognized but not losses.
D. losses are recognized but not gains.

In exchanges of plant assets that have commercial substance, both gains and losses are
recognized (Appendix Exchange of Plant Assets).

25. In an exchange of plant assets that has commercial substance, a gain on disposal is:
A. deducted from the cost of the new asset.
B. ignored completely.
C. recognized immediately.
D. offset against the cost of the old asset.
A gain on disposal is recognized immediately when an exchange of plant assets has
commercial substance (Appendix - Exchange of Plant Assets).

26. A company purchased land for $100,000 cash. Accrued real estate taxes on the land,
$2,000, and real estate taxes on the land for the current year, $3,000, were also paid in
cash. Real estate brokers' commission was $8,000 and $10,000 was spent on
demolishing the building that was on the property before construction of a new building
could begin. The company was able to sell some of the salvaged materials from the
demolished building for $2,000 cash. Under the cost principle, the cost of the land
would be recorded at
A. $123,000.
B. $121,000.
C. $100,000.
D. $118,000.
Correct! Cost of Land to be Recorded = Land ($100,000) + Accrued Real Estate Taxes
($2,000) + Real Estate Brokers' Commission ($8,000) + Cost of Demolishing Building
($10,000) Proceeds from Sale of Salvaged Materials ($2,000) (Determining the Cost
of Plant Assets Land).

27. Equipment was purchased for $800,000 on January 1, 2010. It has an estimated useful
life of 8 years and a residual value of $120,000. Depreciation is being computed using
the straight-line method. What amount should be shown for the Equipment, net of
accumulated depreciation, in the company's 2011 balance sheet?
A. $715,000.
B. $630,000.
C. $595,000.
D. $510,000.
This response is incorrect as it deducts one year of Accumulated Depreciation ($85,000)
and the Residual Value ($120,000) from the cost of the Equipment ($800,000). Annual
Depreciation Expense = Cost ($800,000) Residual Value ($120,000) / Useful Life (8

years) = $85,000. Accumulated Depreciation, 2010 2011 = Annual Depreciation

Expense ($85,000) x 2 years = $170,000. Amount of Equipment, net of Accumulated
Depreciation at December 31, 2011 = Cost of Equipment ($800,000) Accumulated
Depreciation, 2010 2011 ($170,000) = $630,000 (Depreciation Straight-Line).

28. An truck which had an original cost of $72,000 and accumulated depreciation of
$11,000 was sold for $57,000. The journal entry to record the sale will include a:
A. debit to Loss on Disposal for $4,000.
B. credit to Loss on Disposal for $4,000.
C. credit to Truck for $57,000.
D. debit to Loss on Disposal for $15,000.
This response is incorrect as it credits Loss on Disposal, instead of debiting it. The
correct response is determined by computing a gain/loss on disposal, book value
($61,000) of the disposed asset as follows: Cost ($72,000) Accumulated Depreciation
($11,000). Book value ($61,000) is then compared to the cash proceeds from the
disposal ($57,000) resulting in a difference of $4,000. Since the cash proceeds ($57,000)
are less than the book value ($61,000), the difference represents a Loss on Disposal,
which warrants a debit in the complete journal entry (Sale of Plant Assets).

29. In the current year, Betz Company incurred $400,000 of research and development costs
to develop a patent. It is estimated that these costs will be recouped at the end of 3 years.
On August 1 of the current year, the patent was granted. On November 1, Betz Company
paid $50,000 in legal fees in a successful defense of the patent. How should Betz
Company report the research and development costs and legal fees for the current year?
A. Both the research and development costs of $400,000 and the legal fees of
$50,000 are included on the income statement as expenses.
B. Both the research and development costs of $400,000 and the legal fees of
$50,000 are included on the balance sheet as part of the Patent account.
C. Research and development costs of $400,000 are included on the income
statement as an expense and legal fees of $50,000 are reported on the balance
sheet as part of the Patent account.
D. Research and development costs of $400,000 are included on the balance sheet as
part of the patent account and legal fees of $50,000 are reported on the income
statement as an expense.
Correct! Research and development costs are recorded as an expense when incurred, and
thus are reported on the income statement. Legal fees incurred for a patent are added to
the Patent account which is an Intangible asset and thus, reported on the balance sheet
(Research and Development Costs).

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