Financial accounting canadian 5th edition harrison test bank download

Financial Accounting 5ce

Chapter 7 – Property, Plant, and Equipment, and Intangible Assets

Financial Accounting Canadian 5th Edition Harrison

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Chapter 7 Property, Plant, and Equipment, and Intangible Assets

7.1 Describe the types of tangible and intangible assets a business may own

1) Which of the following is not an intangible asset?

A) Copyright

B) Patent

C) Leasehold improvement

D) Trademark

Answer: C

Explanation: A) A copyright is an intangible asset

B) A patent is an intangible asset

C) Leasehold improvements are tangible assets

D) A trademark is an intangible asset

Diff: 2 Type: MC

L.O.: L.O. 7-1

7.2 Measure and account for the cost of property, plant, and equipment

1) Which of the following expenses is most closely associated with tangible long-lived assets?

A) accumulation

B) depreciation

C) interest

D) depletion

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

2) Which of the following is not a long-lived asset?

A) supplies

B) furniture

C) buildings

D) land

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-2

3) All amounts paid to acquire a long lived-asset and to get it ready for its intended use are referred to as:

A) immediate expenses

B) net book value

C) salvage value

D) the cost of an asset

Answer: D

Diff: 1 Type: MC

L.O.: L.O. 7-2

4) The cost of land would include all of the following except:

A) purchase price

B) back property taxes

C) clearing the land

D) sidewalks and curbs

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-2

5) Which of the following is not an intangible asset?

A) accounts receivable

B) patent

C) copyright

D) goodwill

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-2

6) The cost of paving a parking lot should be charged to:

A) land

B) land improvements

C) immediate expense

D) repairs and maintenance expense

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

7) Which of the following would not be included in the Land account?

A) brokerage commissions connected with the purchase of the land

B) survey fees connected with the purchase of the land

C) paving costs for a driveway

D) back property taxes paid

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-2

8) Land, buildings, and equipment are acquired for a lump sum of $950,000. The fair values of the three assets are respectively, $200,000, $500,000, and $300,000. What is the cost assigned to the building?

A) $190,000

B) $475,000

C) $500,000

D) $555,556

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

9) Land is purchased for $60,000. Back taxes paid by the purchaser were $2,400, clearing and grading costs were $3,000, fencing costs were $2,500, and lighting costs were $500. What is the cost of the land?

A) $60,000

B) $65,400

C) $66,400

D) $68,400

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

10) Which of the following would not be included in the Machinery account?

A) cost of transporting the machinery to its setup location

B) cost of a maintenance insurance plan after the machinery is up and running

C) cost of installing the machinery

D) cost of insurance while the machinery is in transit

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

11) Bavarian Purity Corporation purchased equipment for $32,000. Bavarian Purity also paid $400 for freight and insurance while the equipment was in transit. Sales tax amounted to $240. Insurance, taxes, and maintenance the first year of use cost $1,000. How much should Bavarian Purity Corporation capitalize as the cost of the equipment?

A) $32,000

B) $32,400

C) $32,640

D) $31,640

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-2

12) The removal of an old building to make land suitable for its intended use is charged to:

A) land

B) land improvements

C) land improvements expense

D) renovation and restoration expense

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-2

13) Grasshopper Room Company acquired land and buildings for $1,500,000. The land is appraised at $475,000 and the buildings are appraised at $775,000. The debit to the Buildings account will be:

A) $930,000

B) $775,000

C) $1,025,000

D) $570,000

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-2

14) Which expense below would not be considered part of the cost of a tangible long-lived asset?

A) the price paid for the property, plant, and equipment when purchased from the manufacturer

B) taxes paid on the purchase price of property, plant, and equipment

C) commissions paid to the salesperson that sold the property, plant, and equipment

D) repaving a driveway to the building where the property, plant, and equipment is housed

Answer: D

Diff: 1 Type: MC

L.O.: L.O. 7-2

15) The Loft Corporation purchased land and a building for $700,000. An appraisal indicates that the land's value is $400,000 and the building's value is $350,000. The amount that The Loft Corporation should debit to the Building account is:

A) $326,667

B) $350,000

C) $373,333

D) $375,000

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-2

16) The Warthog Company purchased land, buildings, and equipment for $2,400,000. The land has been appraised at $865,000, the buildings at $1,175,000, and the equipment at $510,000. The equipment account will be debited for:

A) $525,000

B) $500,000

C) $480,000

D) $410,156

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-2

17) A major expenditure made to equipment that extends its useful life beyond the original estimate is journalized by:

A) crediting Depreciation Expense

B) debiting Equipment

C) debiting Depreciation Expense

D) debiting Repair Expense

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

18) Expenditures that increase the efficiency of an asset or extend its useful life are referred to as:

A) immediate expenses

B) capital expenditures

C) equity expenditures

D) matching expenditures

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

19) Expenditures of a periodic, routine nature incurred to maintain the asset in its existing condition are referred to as:

A) capital expenditures

B) equity expenditures

C) matching expenditures

D) immediate expenses

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-2

20) Repairs made to equipment as part of a yearly maintenance project would be recorded in the journal by:

A) debiting Equipment

B) debiting Repair Expense

C) debiting Depreciation Expense

D) debiting Accumulated Depreciation

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-2

21) Treating a capital expenditure as an immediate expense:

A) understates expenses and overstates owners' equity

B) understates expenses and understates assets

C) overstates assets and overstates owner's equity

D) overstates expenses and understates net income

Answer: D

Diff: 3 Type: MC

L.O.: L.O. 7-2

22) The cost of land would include all of the following except:

A) survey and legal fees incurred

B) costs of removing any unwanted building on the land

C) paving and fencing

D) costs to grade and clear the land

Answer: C

Diff: 1 Type: MC

L.O.: L.O. 7-2

23) The cost of a tangible long-lived asset includes the purchase price, applicable taxes, purchase commissions, and all other amounts paid to acquire the asset and get it ready for its intended use.

Answer: TRUE

Diff: 1 Type: TF

L.O.: L.O. 7-2

24) Except for goodwill, the accounting for intangibles is similar to accounting for tangible long-lived assets.

Answer: TRUE

Diff: 1 Type: TF

L.O.: L.O. 7-2

25) The cost of land does not include the cost of paving to construct a parking lot.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-2

26) Of the tangible long-lived assets, buildings are unique because they are not amortized.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-2

27) Land improvements are subject to depreciation.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-2

28) Costs of land improvements are not included in the Land account.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-2

29) Improvements to land are considered part of the cost of land since they are tied directly to the use of the land itself.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-2

30) Immediate expenses are those that maintain the existing condition of an asset or restore an asset to good working order.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-2

31) Discuss the type of tangible long-lived assets Canadian Tire owns and controls, and how they are typically recorded on the balance sheet.

Answer: Canadian Tire's assets include buildings, equipment, furniture and fixtures. Canadian Tire's property, plant, and equipment are stated at cost less accumulated depreciation.

Diff: 1 Type: ES

L.O.: L.O. 7-2

32) Rocky Mountain Water Corporation paid $270,000 to purchase equipment for use in its manufacturing operations. In addition, Rocky Mountain Water Corporation incurred the following expenditures relating to the equipment:

∙ $1,500 freight to have the equipment shipped to its manufacturing facility

∙ $750 insurance while the equipment was in transit

∙ $3,200 for special steel and concrete reinforcements used to house the equipment in the factory

∙ $1,200 for a one-year insurance policy on the equipment after it has been installed

∙ $300 to test the equipment before it is placed in service

∙ $400 for maintenance costs during the first year of service

Calculate the cost of the equipment.

Answer: $270,000 + $1,500 + $750 + $3,200 + $300 = $275,750

Diff: 2 Type: ES

L.O.: L.O. 7-2

33) Thompson Glacier Limited purchased a tract of land and contracted with a commercial developer to build an office building. Thompson Glacier Limited also engaged other contractors for fencing, paving, lighting, and landscaping.

Based on the following data, determine the cost of the land, the building, and the land improvements.

∙ Purchased land for $100,000.

∙ Paid $2,000 for seller's back property taxes.

∙ Paid a builder $225,000 to design and build the office building.

∙ Paid an excavation company $6,000 to grade and clear the land to make it suitable for building purposes.

∙ Paid a landscaping company $6,500 for trees and shrubs.

∙ Paid a lighting contractor $10,000 for outside lighting around the parking area and sidewalks.

∙ Paid $15,000 to have the parking lot paved.

∙ Paid a fence builder $12,000 to construct a security fence around the property.

Answer: Land = $100,000 + $2,000 + $6,000 = $108,000

Building = $225,000

Land improvements = $6,500 + $10,000 + $15,000 + $12,000 = $43,500

Diff: 2 Type: ES

L.O.: L.O. 7-2

34) Glenmore Reservoir Corporation paid $4,000,000 in a lump-sum purchase of land, a building, and equipment. The payment consisted of $1,500,000 cash and a note payable for the balance. An appraisal indicated the following fair values at the time of the purchase:

Prepare the journal entry to record this lump-sum purchase (round all percentage calculations to two decimal places).

35) On October 15, 2013, Out West Enterprises purchased new factory equipment for its manufacturing facilities. The new equipment had an invoice price of $16,000, plus a 6% sales tax. In addition, the purchaser was responsible for $950 of freight charges. The sale was subject to 2/10, n/45 credit terms. Upon receipt of the new equipment Out West Enterprises paid $1,200 to have the equipment installed. To finance the purchase, Out West Enterprises borrowed $17,000 from the First Street Bank for 60 days at 12% interest. Out West Enterprises paid the invoice within 9 days.

Calculate the cost of the factory equipment to be capitalized on the books.

Answer: ($16,000 × 1.06) + $950 + $1,200 - ($16,000 × 0.02) = $16,960 + $950 + $1,200 - $320 = $18,790

Diff: 2 Type: ES

L.O.: L.O. 7-2

7.3 Calculate and record depreciation on property, plant, and equipment

1) The process of allocating property, plant, and equipment's cost to expense over the period the asset is used is called:

A) accumulation

B) depreciation

C) interest

D) repairs expense

Answer: B

Diff: 1 Type: MC

L.O.: L.O. 7-3

2) Which of the following depreciation methods best fits those assets that tend to wear out before they become obsolete?

A) depletion method

B) straight-line method

C) double-declining-balance method

D) units-of-production method

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

3) Which accounting principle directs the depreciation process?

A) historical cost

B) going concern

C) full disclosure

D) matching

Answer: D

Diff: 1 Type: MC

L.O.: L.O. 7-3

4) Which of the following statements is true?

A) Depreciation is a process of objective valuation.

B) Depreciation means that a business sets aside cash to replace assets as they become fully amortized.

C) Accumulated depreciation represents a growing amount of cash to be used to replace the existing asset.

D) Accumulated depreciation is that portion of property, plant, and equipment's cost that has already been recorded as an expense.

Answer: D

Diff: 3 Type: MC

L.O.: L.O. 7-3

5) Which of the following depreciation methods best applies to those assets that generate greater revenue earlier in their useful lives?

A) depletion method

B) double-declining-balance method

C) units-of-production method

D) straight-line method

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

6) To measure depreciation for a tangible long-lived asset, all of the following must be known except:

A) estimated useful life

B) current market value

C) estimated residual value

D) historical cost

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

7) One of several terms can be used to identify the expected cash value of a tangible long-lived asset at the end of its useful life. Which term below is not used in this sense?

A) residual value

B) scrap value

C) current carrying amount

D) salvage value

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-3

8) Amortizable cost is defined as:

A) book value

B) salvage value

C) cost minus accumulated depreciation

D) cost minus salvage value

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-3

9) In which of the following depreciation methods is annual depreciation calculated as the difference between the asset's historical cost and its residual value, divided by the asset's useful life in years?

A) double-declining-balance

B) straight-line

C) units-of-production

D) depletion

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

10) Carrying amount is defined as:

A) cost less salvage value

B) cost less accumulated depreciation

C) current market value less salvage value

D) current market value less accumulated depreciation

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

11) On January 2, 2012 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. If McNally's Extra Corporation uses the straight-line method of depreciation, what will be the debit to Depreciation Expense for the year ended December 31, 2013, during which period the asset was used 4,500 hours?

A) $20,000

B) $22,500

C) $24,000

D) $27,000

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-3

12) On January 2, 2012, McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. What is the balance in Accumulated Depreciation on December 31, 2013, if McNally's Extra Corporation uses the doubledeclining-balance method of depreciation?

A) $23,200

B) $36,000

C) $43,200

D) $76,800

Answer: D

Diff: 3 Type: MC

L.O.: L.O. 7-3

13) On January 2, 2012 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. What is the amount of depreciation expense for 2014, if McNally's Extra Corporation uses the asset 4,000 hours and uses the units-of-production method of depreciation?

A) $20,000

B) $24,000

C) $25,000

D) $30,000

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-3

14) The double-declining-balance method of depreciation causes:

A) less depreciation in early years of an asset's use as compared to other depreciation methods

B) more depreciation in early years of an asset's use as compared to other depreciation methods

C) the same amount of depreciation in early years of an asset's use as compared to other depreciation methods

D) is not an acceptable depreciation method according to GAAP

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-3

15) At the end of an asset's useful life, the balance in Accumulated Depreciation will:

A) be greater under units-of-production depreciation than under straight-line depreciation

B) be the same amount under all the depreciation methods

C) be a greater amount under straight-line depreciation than under double-declining-balance depreciation

D) be a lesser amount under double-declining-balance depreciation than under units-of-production depreciation

Answer: B

Diff: 3 Type: MC

L.O.: L.O. 7-3

16) To measure depreciation, all of the following must be known except:

A) the asset's useful life in terms of years, hours, or units

B) the estimated residual value of the asset

C) the cost of the asset

D) the current market value of the asset

Answer: D

Diff: 1 Type: MC

L.O.: L.O. 7-3

17) Depreciation computed under double-declining-balance will decrease each year because:

A) the book value used in the computation each year increases

B) the rate used in the computation each year increases

C) the rate used in the computation each year decreases

D) the book value used in the computation each year decreases

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-3

18) The Accumulated Depreciation account represents a source of cash to be used to replace the asset in the future.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-3

19) In order to calculate depreciation, the cost of the asset, the estimated useful life, and the estimated residual value of the asset must be known.

Answer: TRUE

Diff: 1 Type: TF

L.O.: L.O. 7-3

20) When using the double-declining-balance depreciation method, the asset's residual value is used in computing the first year of depreciation.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-3

21) Book value is determined by subtracting the salvage value from the cost of an asset.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-3

22) The terms residual value and carrying value are synonymous.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-3

23) Double-declining-balance depreciation computes annual depreciation by multiplying the asset's carrying value by two times the straight-line rate.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-3

24) Regardless of the method of depreciation used, accumulated depreciation will be the same when the asset is fully amortized.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-3

25) Big Valley Ltd. purchased machinery on January 2, 2012, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000. During 2012 and 2013, the machinery was used 7,000 and 7,500 hours, respectively.

Compute depreciation under straight-line, units-of-production, and double-declining-balance methods for 2012 and 2013.

26) Explain the concept of depreciation. Include in your discussion one common misconception regarding depreciation and its impact on the finances of a business.

Answer: Depreciation is the process of allocating property, plant, and equipment's cost to expense over the period the asset is used. This process is designed to match the asset's expense against the revenue generated over the asset's life. The primary purpose of depreciation is to help measure income properly.

Depreciation is not a process of valuation, and depreciation does not mean that the business sets aside cash to replace assets as they become fully amortized.

Depreciation is also a noncash expense. Depreciation does not impact cash flows from operations. It is a tax-deductible expense, thus decreasing the income tax payment.

Diff: 2 Type: ES

L.O.: L.O. 7-3

27) For each of the independent situations below, determine the age of the asset in question. All assets were acquired at the beginning of the year.

a. The balance in the Buildings account is $400,000 while the balance sheet shows the book value of the buildings at $217,600. The notes to the financial statements indicate that straight-line depreciation is used for all property, plant, and equipment and that residual values are estimated at 5% of cost. The estimated life of the buildings is 25 years.

b. The book value of the delivery equipment is $51,520. The cost of the delivery equipment was $80,500. The company uses the straight-line method of depreciation for delivery equipment and estimates life at 5 years or 50,000 units. So far, 27,000 units have been produced. Residual value is 10% of cost.

c. The balance in the Accumulated Depreciation account for furniture is $21,875. The furniture has been amortized a total of 43.75% of its original cost. The company's notes to the financial statements indicate that double-declining-balance depreciation is used for all furniture. The company estimates useful life at 8 years and residual value at 20% of cost.

Answer:

a. $400,000 × 0.95 = $380,000 amortizable amount

$380,000/25 = $15,200 annual depreciation

$400,000 - $217,600 = $182,400 balance in accumulated depreciation

$182,400/$15,200 = 12 years old

b. $80,500 × 0.90 = $72,450 amortizable amount

$72,450/5 = $14,490 annual depreciation

$80,500 - $51,520 = $28,980 balance in accumulated depreciation

$28,980/$14,490 = 2 years old

c. $21,875/0.4375 = $50,000 original cost

$50,000 × 0.25 = $12,500 first year's depreciation expense

$37,500 × 0.25 = $9,375 second year's depreciation expense

$12,500 + $9,375 = $21,875 = balance in accumulated depreciation

Furniture is 2 years old

Diff: 3 Type: ES

L.O.: L.O. 7-3

28) Carleton Corporation purchased machinery on October 1, 2013, at a total cost of $98,000. Estimated residual value is $8,000, estimated life of the machinery is 6 years or 50,000 hours. During 2013 and 2014, the machinery was used 1,400 and 8,760 hours, respectively.

Compute depreciation under straight-line, units-of-production, and double-declining-balance methods for 2013 and 2014.

29) Seasons Limited paid $135,000 to purchase equipment at the beginning of 2012. Seasons Limited estimated the useful life of the equipment to be 4 years or 200,000 units. The equipment will be considered fully amortized when the balance in the Accumulated Depreciation account reaches $120,000. The equipment produced 52,000 units in 2015.

Required:

a. Determine the estimated residual value of the equipment.

b. What is the amortizable cost of the equipment?

c. Calculate depreciation expense for 2015 under each of the following methods:

i. straight-line

ii. units-of-production

iii. double-declining-balance

Answer:

a. $135,000 - $120,000 = $15,000

b. $120,000

c. i. $120,000/4 = $30,000

ii. $120,000/200,000 = $0.60; $0.60 × 52,000 = $31,200

iii. 2012 $135,000 × 0.5 = $67,500

2013 $67,500 × 0.5 = $33,750

2014 $33,750 × 0.5 = $16,875

2015 $120,000 - 67,500 - 33,750 - 16,875 = $1,875

Diff: 3 Type: ES

L.O.: L.O. 7-3

30) Explain how a company should decide which depreciation method to use for financial reporting purposes.

Answer: A company should use the method that best matches depreciation expense against the revenues produced by the asset.

Diff: 1 Type: ES

L.O.: L.O. 7-3

31) Rainier Corporation purchased five automobiles at the beginning of 2012 for a total cost of $125,000. Rainier Corporation estimates the total residual value of the five automobiles to be $25,000 and their estimated useful life at 5 years. Use the double declining balance method to calculate the depreciation expense for 2012 and 2013.

Answer: Estimated life: 5 years, so 20%. Double declining balance = 40% per year.

2012: 0.4 × $125,000 = $50,000

2013: 0.4 × $75,000 = $30,000

Diff: 2 Type: ES

L.O.: L.O. 7-3

7.4

Explain additional topics in accounting for long-live tangible assets

1) Rhoundakona Corporation bought property, plant, and equipment on January 1, 2012, at a cost of $35,000. Estimated residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line depreciation. On January 1, 2015, Rhoundakona's management sells the asset for $25,000. The balance in Accumulated Depreciation on January 1, 2015, is:

A) $3,750

B) $4,375

C) $11,250

D) $13,125

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

2) Hot Wort Ltd. purchased equipment on April 1, 2014, for $140,000. The residual value is $20,000 and the estimated life is 6 years or 55,000 hours. Compute depreciation expense for the year ending December 31, 2014 if Hot Wort Ltd. uses the straight-line method of depreciation.

A) $15,000

B) $20,000

C) $14,988

D) $19,983

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-4

3) The Mash Tun Corp. purchased equipment on September 1, 2013 for $200,000. The residual value is $20,000 and the estimated life is 5 years or 60,000 hours. Compute depreciation expense for the year ending December 31, 2014, if the Mash Tun Corp. uses the double-declining-balance method of depreciation.

A) $69,333

B) $48,000

C) $43,200

D) $62,400

Answer: A

Diff: 3 Type: MC

L.O.: L.O. 7-4

4) Kegging & Canning Inc. acquired equipment on June 30, 2013, for $175,000. The residual value is $35,000 and the estimated life is 5 years or 40,000 hours. Compute the balance in Accumulated Depreciation as of December 31, 2015, if Kegging & Canning Inc. uses the double-declining-balance method of depreciation.

A) $99,680

B) $105,840

C) $124,600

D) $117,600

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-4

5) Lauter Tun Corporation acquired equipment on January 1, 2012, for $300,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2015, Lauter Tun Corporation revised the total useful life of the equipment to 8 years and the estimated salvage value to be $10,000. Compute depreciation expense for the year ending December 31, 2015, if Lauter Tun Corporation uses straight-line depreciation.

A) $25,938

B) $38,500

C) $41,500

D) $43,500

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-4

6) Big Rock Times Corporation (BRT) acquired equipment on January 1, 2012, for $300,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2015, BRT Corporation revised the total useful life of the equipment to 6 years and the estimated salvage value to be $10,000. Compute the book value of the equipment as of December 31, 2015, if BRT Corporation uses straight-line depreciation.

A) $148,333

B) $151,667

C) $155,000

D) $190,000

Answer: A

Diff: 3 Type: MC

L.O.: L.O. 7-4

7) A revision of an estimate which extends the asset's useful life:

A) is ignored until the last year of the asset's life

B) requires restatement of prior years' financial statements

C) increases depreciation expense and decreases owners' equity

D) decreases depreciation expense and increases owners' equity

Answer: D

Diff: 3 Type: MC

L.O.: L.O. 7-4

8) A fully amortized asset is an asset:

A) whose book value has reached zero, and therefore has no market value

B) whose amortizable cost has reached its salvage value, and therefore is of no further use to the company

C) that has reached the end of its estimated useful life

D) that has reached the end of its actual useful life

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-4

9) Barlow Trail Corporation purchased office equipment on September 30, 2013, for a total cost of $50,500. Management estimated useful life at 15 years and residual value at $5,500. Straight-line depreciation is used and computed to the nearest whole month. Barlow Trail Corporation's year end is December 31.

Required:

a. Prepare the adjusting entry for depreciation on December 31, 2013.

b. Early in 2015, management revised its estimates of useful life and residual value for the office equipment. Useful life was reduced to a total of 10 years, and residual value was reduced to $2,000. Prepare the adjusting entry for depreciation on December 31, 2015, using the revised estimate.

10) Victory Stables purchased new equipment for their barn on January 1, 2012. The new equipment had a cost of $100,000, estimated salvage of $20,000 and an expected useful life of 10 years. On January 1, 2013 the equipment is not working out to be as durable as first thought so management has now revised its useful life down to 5 years. Prepare the journal entry for the December 31, 2013 amortization.

11) Victory Stables purchased new equipment for their barn on July 1, 2013. The new equipment had a cost of $100,000, estimated salvage of $20,000 and an expected useful life of 10 years. Prepare the journal entry for the December 31, 2013 and 2014 amortization. Note: Victory Stables uses the straight-line method of depreciation.

Answer:

2013 Depreciation Expense $4,000

Accumulated Depreciation-Barn Equipment $4,000

2014 Depreciation Expense $8,000

Accumulated Depreciation-Barn Equipment $8,000

Diff: 3 Type: ES

L.O.: L.O. 7-4

12) Blockware Corporation has selected to use the revaluation model for its assets. Recently it had its building appraised. The appraiser placed a $5.0 M value on the building. Back in 2012 this building was purchased for $4.0M. This increases in value over cost requires a:

A) Dr. to accumulated depreciation

B) Cr. to the building account

C) Cr. to revaluation surplus

D) Dr. to revaluation surplus

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

13) When an organization has determined that a piece of equipment is impaired the journal entry to record an impair of $1000 would require:

A) a cr to the equipment account

B) a dr to accumulated depreciation

C) a cr to accumulated depreciation

D) a cr to impairment loss

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

14) Rhoundakona Corporation bought property, plant, and equipment on January 1, 2012, at a cost of $35,000. Estimated residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line depreciation. On January 1, 2015, Rhoundakona's management sells the asset for $25,000. The gain or loss on disposal is:

A) $1,250 loss

B) $1,250 gain

C) $10,000 loss

D) $25,000 gain

Answer: B

Diff: 2 Type: MC

L.O.: L.O. 7-4

15) When property, plant, and equipment is sold:

A) depreciation should be recorded through the date of sale

B) the book value of the asset should be credited to the asset account

C) no gain or loss should be recognized if depreciation was taken on the asset

D) a loss should be recognized but not a gain if depreciation was taken on the asset

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-4

16) A loss is recorded on the sale of property, plant, and equipment when:

A) the asset is sold for a price greater than the asset's book value

B) the asset's book value is less than the balance in Accumulated Depreciation

C) the asset's book value is greater than the amount of cash received from the sale

D) a loss on the sale of property, plant, and equipment is not allowed according to GAAP

Answer: C

Diff: 1 Type: MC

L.O.: L.O. 7-4

17) Sowthoveer Company sold some office furniture for $4,500 cash. The furniture cost $24,000 and had accumulated depreciation through the date of sale totaling $21,700. The journal entry to record the sale of the furniture will include a:

A) credit to Office Furniture for $2,300

B) debit to Gain on Sale of Furniture for $2,200

C) credit to Gain on Sale of Furniture for $2,200

D) credit to Accumulated Depreciation for $21,700

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

18) Bock Corporation sold equipment costing $30,000 with $28,000 of accumulated depreciation for $5,000 cash. Bock's journal entry to record this sale will involve a:

A) credit to Equipment for $2,000

B) debit to Depreciation Expense for $28,000

C) debit to Gain on Sale of Equipment for $3,000

D) debit to Accumulated Depreciation for $28,000

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-4

19) Equipment costing $35,000 with a book value of $12,000 is sold for $11,500. The journal entry will involve:

A) credit to Accumulated Depreciation for $23,000

B) debit to Accumulated Depreciation for $12,000

C) debit to Accumulated Depreciation for $23,000

D) credit to Equipment for $12,000

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

20) Equipment acquired on January 1, 2012, is sold on June 30, 2015, for $4,500. The equipment cost $10,000, had an estimated residual value of $3,000, and an estimated useful life of 5 years. The equipment has been amortized using the straight-line method. The journal entry to record the sale of the equipment involves a:

A) credit to Accumulated Depreciation for $4,900

B) credit to Gain on Sale of Asset for $600

C) debit to Accumulated Depreciation for $4,900

D) credit to Equipment for $3,000

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-4

21) Stout Corp. sold some fully amortized equipment for $2,600 cash. The equipment had been purchased for $26,500 and Stout Corp. had estimated the useful life at 8 years and residual value at $3,500. The journal entry to record the sale of the equipment will include a:

A) debit to Loss on Sale of Equipment for $900

B) credit to Accumulated Depreciation for $23,000

C) credit to Equipment for $2,700

D) credit to Equipment for $3,500

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-4

22) Rooster Ltd. trades in a printing press for a newer model. The cost of the old printing press was $45,000, and accumulated depreciation up to the date of the trade-in amounts to $33,000. Rooster Ltd. also pays $38,500 cash for the newer printing press. The journal entry to acquire the new printing press will require a:

A) debit to Equipment for $39,000

B) debit to Equipment for $45,000

C) debit to Equipment for $50,500

D) credit to Accumulated Depreciation for $33,000

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

23) The journal entry to sell property, plant, and equipment for cash will always include a:

A) debit to Accumulated Depreciation and a debit to property, plant, and equipment

B) debit to Accumulated Depreciation and a credit to Cash

C) debit to Cash and a debit to Accumulated Depreciation

D) debit to property, plant, and equipment and a credit to Cash

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-4

24) Most companies use an accelerated depreciation method for income tax and financial statement purposes.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-4

25) Depreciation is calculated using full years only.

Answer: FALSE

Diff: 3 Type: TF

L.O.: L.O. 7-4

26) An assets useful life can be subsequently revised requiring a recalculation of depreciation.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-4

27) A change in useful life estimate is very common in Canada.

Answer: FALSE

Diff: 3 Type: TF

L.O.: L.O. 7-4

28) IFRS requires significant components of a building to be depreciated separately.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-4

29) The capital cost allowance form of depreciation is used for income tax purposes.

Answer: TRUE

Diff: 1 Type: TF

L.O.: L.O. 7-4

30) GAAP require that companies use the same depreciation method for financial reporting purposes that they use for income tax purposes.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-4

31) The sale of a property, plant and equipment item may result in a gain but not a loss.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-4

32) If an organization selects the revaluation model, it should revise its depreciation amount with each new carrying amount.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-4

33) When recording the sale of property, plant, and equipment, the balance in the related accumulated depreciation account is not removed from the accounting records.

Answer: FALSE

Diff: 2 Type: TF

L.O.: L.O. 7-4

34) A gain will result when the cash received on the sale of property, plant, and equipment exceeds the book value of the asset.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-4

35) A loss will result on the sale of property, plant, and equipment when the book value of the asset exceeds the cash received.

Answer: TRUE

Diff: 2 Type: TF

L.O.: L.O. 7-4

36) Foothills Industries gathered the following data for the year ended December 31, 2013, related to its equipment.

Based on the above data, prepare the journal entry to record the sale of equipment during the year for $9,000 cash.

37) Prepare journal entries for the following independent transactions.

a. Erratic Corp. traded in several old computers for two new computers at the beginning of April. After updating depreciation prior to the trade-in, the Accumulated Depreciation account had a balance of $5,300 and the original cost of the computers was $10,900. In addition, Erratic Corp. paid $5,000 to acquire the new computers.

b. Terrain Corporation sold office equipment for $10,000 cash. The original cost of the equipment was $15,000; accumulated depreciation up to the date of sale had a balance of $6,900.

c. Glacial Limited disposed of fully amortized office furniture. The office furniture had a cost of $10,200 and no residual value.

38) On January 1, 2012, Kamloops Corporation purchased equipment for $15,500. Kamloops Corporation expected the equipment to remain in service for 4 years and have a residual value of $1,500. Kamloops Corporation amortized the equipment using double-declining-balance depreciation. On June 30, 2014, Kamloops Corporation sold the equipment for $3,750 cash.

Prepare journal entries on June 30, 2014, to record depreciation expense for the six months ended June 30, 2014, and to sell the equipment.

39) Most companies use straight-line depreciation for their books but an accelerated method (CCA depreciation) for the tax return. Explain why companies use these two different methods that result in the need for two sets of records.

Answer: The straight-line method is easy to compute and usually results in proper matching of revenues and expenses according to GAAP. Therefore, many businesses use it to report to creditors and shareholders.

For income tax purposes, a company desires to decrease its income tax payments as quickly as possible. The accelerated method of depreciation does just that. By recording depreciation expense as quickly as possible, a company is able to decrease its immediate tax payments. This conserves the cash for use in the business.

Regardless of which method is used to amortize property, plant, and equipment, over the life of the asset, depreciation expense in total is the same under all methods.

Diff: 3 Type: ES

L.O.: L.O. 7-4

40) Explain how a company should decide which depreciation method to use for income tax purposes. Answer: A company should use the method that produces the fastest tax deduction. CCA, or Capital Cost Allowance, is the method which produces the fastest tax deductions.

A company can use different depreciation methods for financial reporting purposes and for income tax reporting purposes. In Canada, this is considered ethical and is allowed by federal law.

Diff: 2 Type: ES

L.O.: L.O. 7-4

41) At year end the Carleton Corporation reviewed all of its property, plant and equipment assets for impairment. It discovered that its boiler's recoverable amount exceeded its carrying value by $5,500. Another one of its assets, a warehouse building previously written down for an impairment of $12,750 experienced a financial recovery. Prepare the required adjustments. Note Carleton Corporation is a publicly traded corporation.

Answer:

Dr. Loss on Impairment $5,500

Cr. Accumulated Depreciation $5,500

An entry is not required on the building as IFRS does not permit a company to reverse the impairment loss.

Diff: 3 Type: ES

L.O.: L.O. 7-4

42) Key West Corporation, a public company determined its plant has experience an impairment due to a loss in market value. The impairment amount calculated by the controller totals $22,650. Prepare the required journal entry.

Answer:

Dr. Loss on Impairment $22,650

Cr. Accumulated Depreciation - Plant $22,650

Diff: 3 Type: ES

L.O.: L.O. 7-4

43) Key West Corporation, a public company purchased its plant at a cost of $10.7 million, with no residual value. The plant is to be depreciated over 20 years. At this time the company selected the revaluation method.

December 31, 2013 a real estate expert determined this building is now worth $18.6 million. Prepare the required journal entry if any.

Answer:

Dr. Building $7,900,000

Cr. Revaluation Surplus $7,900,000

Diff: 3 Type: ES

L.O.: L.O. 7-4

7.5 Account for intangible assets

1) All of the following are intangible assets except:

A) trademarks

B) natural gas

C) goodwill

D) copyrights

Answer: B

Diff: 1 Type: MC

L.O.: L.O. 7-5

2) Copyrights are granted for the life of the author plus:

A) 10 years

B) 40 years

C) 50 years

D) 100 years

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-5

3) Goodwill is equal to the excess of the cost of an acquired company over the sum of the:

A) book value of its assets

B) market value of its assets

C) book value of its net assets

D) market value of its net assets

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-5

4) The cost of a trademark should be amortized over its useful life. The maximum time period for trademark amortization is:

A) 20 years

B) 30 years

C) 40 years

D) The maximum amortization period is whatever the useful life of the trademark is itself.

Answer: D

Diff: 2 Type: MC

L.O.: L.O. 7-5

5) The cost of a patent should be amortized over:

A) the lesser of 20 years or its economic useful life

B) the greater of 20 years or its economic useful life

C) the lesser of 40 years or its economic useful life

D) the greater of 40 years or its economic useful life

Answer: A

Diff: 2 Type: MC

L.O.: L.O. 7-5

6) Research costs incurred by a company should be:

A) capitalized and amortized over a period greater than 25 years

B) capitalized and amortized over 20 years or less

C) expensed on the current year's income statement

D) either capitalized and amortized or expensed immediately at the option of the accountant

Answer: C

Diff: 2 Type: MC

L.O.: L.O. 7-5

7) Yeast Corporation purchased Bitter Ltd. on August 31, 2014. Yeast Corporation recorded goodwill in the purchase of Bitter. Yeast has determined that the Bitter goodwill will have an indefinite life. How will Yeast account for the Bitter goodwill in future accounting periods?

A) Yeast will amortize the Bitter goodwill over a 50-year life.

B) If the value of the Bitter goodwill increases in subsequent years, Yeast will increase the value in the Bitter Goodwill account.

C) If the value of the Bitter goodwill decreases in subsequent years, Yeast will decrease the value in the Bitter Goodwill account.

D) Yeast is not allowed to change the value of the Bitter Goodwill account regardless of any future increase or decrease in the value of Bitter Goodwill.

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-5

8) Goodwill is an intangible asset that has special features. Which statement below is true regarding the special nature of goodwill?

A) Goodwill is recorded in the books of a company as the company creates it.

B) Goodwill is amortized over a period not to exceed 40 years.

C) Goodwill is recorded only when it is purchased in the acquisition of another company.

D) Goodwill is amortized over a period not to exceed 20 years.

Answer: C

Diff: 3 Type: MC

L.O.: L.O. 7-5

9) Amortization of an intangible asset is similar to which amortization method?

A) CCA amortization

B) units-of-production

C) double-declining-balance

D) straight-line

Answer: D

Diff: 1 Type: MC

L.O.: L.O. 7-5

10) Under federal law a patent is granted to the holder for 25 years.

Answer: FALSE

Diff: 3 Type: TF

L.O.: L.O. 7-5

11) Amortization is not recorded on intangible assets.

Answer: FALSE

Diff: 3 Type: TF

L.O.: L.O. 7-5

12) Intangibles with finite lives are amortized.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-5

13) Intangibles with indefinite lives are never amortized.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-5

14) Amortization for intangibles decreases both assets and liabilities.

Answer: FALSE

Diff: 3 Type: TF

L.O.: L.O. 7-5

15) Intangibles are considered long-lived assets even though they do not have a physical form.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-5

16) All intangibles must be written down when their recognizable amount is less than their carrying amount.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-5

17) An example of an intangible asset is a franchise.

Answer: TRUE

Diff: 3 Type: TF

L.O.: L.O. 7-5

7.6 Analyze and evaluate a company's return on assets

1) Select financial information for Fried Banana's Inc. appears below: 2013 2014

What is the company's net profit margin, total asset turnover, and return on assets for 2014?

Answer: Net profit margin = net income / net sales = $130,000 / $1,200,000 = 10.8% (rounded)

Average assets = $2,250,000 [($2,000,000 + $2,500,000 )/2]; total asset turnover = net sales / average total assets = $1,200,000 / $2,250,000 = 53.3% (rounded

Return on assets = net income / average total assets = $130,000 / $2,250,000 = 5.8% (rounded). Alternatively

ROA = net profit margin × total asset turnover = 10.8% × 53.3% = 5.8% (rounded)

Diff: 2 Type: ES

L.O.: L.O. 7-6

7.7 Interpret tangible and intangible asset activities on the statement of cash flows

1) Prepare adjusting journal entries dated December 31 of the current year for the following independent situations.

a. Hops Corporation acquired several patents on March 1 of the current year for a total price of $48,000. The patents have an estimated remaining legal life of 15 years and an estimated useful, economic life of 8 years.

b. Goodwill amounting to $180,000 was purchased in a company acquisition on July 1 of the current year. The goodwill is believed to have an indefinite benefit.

b. No entry required

Diff: 2 Type: ES

L.O.: L.O. 7-7

2) Prepare journal entries for 2011 for the following independent situations. Assume each organization has a December 31 year end.

a. Keepers Inc. purchases a patent for $225,000 on January 1st. Keepers estimates this patent to have a 5 year useful life.

b. Blue Bat Corporation purchases one of their main competitors on March 31, 2011. Blue Bat paid $160,000 for this purchase which included assets of $120,000 and liabilities of $10,000. The goodwill is believed to have an indefinite benefit.