Choose the best answer for each of the given questions and enter the identifying letter in the space provided.
Question 1. When the sum-of-the-years'-digits method is used, depreciation expense for a given asset will
a. decline by a constant amount each year.
b. be the same each year.
c. decrease rapidly and then slowly over the life of the asset.
d. vary from year to year in relation to changes in output.
Question 2. Maris Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $165,000. At the time of acquisition Maris paid $15,000 to have the assets appraised. The appraisal disclosed the following values:
Land $96,000
Buildings 76,800
Equipment 19,200
What cost should be assigned to the land, buildings, and equipment, respectively?
a. $120,000, $96,000, and $24,000.
b. $82,500, $66,000, and $16,500.
c. $90,000, $72,000, and $18,000.
d. $60,000, $60,000, and $60,000.
Question 3. In accordance with GAAP, the maximum period over which a patent can be amortized is
a. 20 years.
b. 28 years.
c. 40 years.
d. 50 years.
Question 4. Purchased goodwill represents
a. excess of price paid over fair market value of net assets obtained in a combination.
b. excess of price paid over the book value of the net assets obtained in a combination.
c. the difference in the aggregate amount of the market prices of the stock of the combining companies.
d. a tangible asset.
Use the following data to answer questions 5 through 9:
Venus Company purchased a new piece of equipment on July 1, 2004 at a cost of $600,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $50,000. The current year end is 12/31/05. Venus records depreciation to the nearest month.
Question 5. What is straight-line depreciation for 2005?
a. $55,000.
b. $60,000.
c. $110,000.
d. $120,000.
Question 6. What is sum-of-the-years'-digits depreciation for 2005?
a. $146,666.
b. $165,000.
c. $180,000.
d. $183,333.
Question 7. What is double-declining-balance depreciation for 2005?
a. $144,000.
b. $192,000.
c. $220,000.
d. $240,000.
Question 8. If Venus expensed the total cost of the equipment at 7/1/04, what was the effect on 2004 and 2005 income before taxes, assuming Venus uses straight-line depreciation?
a. $490,000 understated and $110,000 overstated.
b. $540,000 understated and $60,000 overstated.
c. $545,000 understated and $110,000 overstated.
d. $600,000 understated and $60,000 overstated.
Question 9. If, at the end of 2006, Venus Company decides the equipment still has five more years of life beyond 12/31/06, with a salvage value of $50,000, what is straight-line depreciation for 2006? (Assume straight-line used in all years.)
a. $60,000.
b. $64,166.
c. $72,500.
d. $110,000.
Use the following data for questions 10 through 17. Each question is independent of the other questions.
Gorman Corporation has a machine (Machine A) that it acquired on 1/1/04 for $180,000. On 12/31/04 such machines have a selling price and fair market value of $207,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
Cline Corporation has a machine (Machine B) that it acquired on 1/1/04 for $243,000. On 12/31/04 such machines have a selling price and fair market value of $180,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
On 12/31/04 Cline gave Machine B plus $27,000 cash to Gorman in return for Machine A.
Question 10. Assume that both Gorman and Cline are new machine dealers and that the machines are still new. At what amount will Machine A be recorded on Cline's books?
a. $243,000.
b. $207,000.
c. $270,000.
d. $180,000.
Question 11. Given the assumptions in 10 above, at what amount will Machine B be recorded on Gorman's books?
a. $156,522.
b. $243,000.
c. $180,000.
d. $210,523.
Question 12. Assume that instead of dealers, both Gorman and Cline are machine manufacturers and use the machines in production. At what amount will Cline record Machine A?
a. $180,000.
b. $207,000.
c. $243,000.
d. $270,000.
Question 13. Given the assumption in 12 above, at what amount will Gorman record Machine B?
a. $185,870.
b. $135,000.
c. $167,868.
d. $140,870.
Question 14. Given the assumption in 12 above except that the fair market values of Machines A and B are $252,000 and $225,000, respectively, at what amount will Cline record Machine A?
a. $218,700.
b. $252,000.
c. $225,000.
d. $245,700.
Question 15. Return to the original problem. Assume that Gorman is a dealer selling new machines and that Cline is a manufacturer. Also assume that Cline's asset is a transport truck that has been used to deliver machines to customers. For this transaction, at what amount will Gorman record the truck?
a. $180,000.
b. $245,700.
c. $207,000.
d. $218,700.
Question 16. Given the assumptions in 15 above, at what amount will Cline record Machine A?
a. $180,000.
b. $207,000.
c. $202,500.
d. $182,250.
Question 17. Given the assumptions in 15 above except that the selling prices and fair market values of A and B are $252,000 and $225,000, respectively, at what amount will Cline record Machine A?
a. $218,700.
b. $202,500.
c. $252,000.
d. $225,000.
For the following two questions, indicate the nature of the account or accounts to be debited when recording each transaction.
Question 18. A replacement, which extended the life but did not increase the quality of units produced by the asset, cost $15,000.
a. Asset(s) only.
b. Accumulated amortization, or depletion or depreciation only.
c. Expense only.
d. Asset(s) and expense.
Question 19. Jim Trane and Matt Sloan, maintenance repairmen, spent five days in unloading and setting up a new $30,000 precision machine in the plant. Their wages earned in this five-day period totaled $800.
a. Asset(s) only.
b. Accumulated amortization, depletion, or depreciation only.
c. Expense only.
d. Asset(s) and expense.
Question 20. Property, plant, and equipment are conventionally presented in the balance sheet at
a. replacement cost less accumulated depreciation.
b. historical cost less salvage value.
c. original cost less accumulated depreciation.
d. acquisition cost less net book value thereof.
Question 21. As generally used in accounting, what is depreciation?
a. It is a process of asset valuation for balance sheet purposes.
b. It applies only to long-lived intangible assets.
c. It is used to indicate a decline in market value of a long-lived asset.
d. It is an accounting process which allocates long-lived asset cost to accounting periods.