NU LAGUNA 1ST HOMEWORK

NAME: ________________________ SECTION :___________ DATE:_______

DEPRECIATION, IMPAIRMENTS, AND DEPLETION

MULTIPLE CHOICE—Conceptual
21. The following is true of depreciation accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.

22. Which of the following principles best describes the conceptual rationale for the
methods of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

23. Depreciation accounting

a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.
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24. Which of the following most accurately reflects the concept of depreciation as used in
accounting?
a. The process of charging the decline in value of an economic resource to income in
the period in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic
and rational manner to those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely
matches the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the
year to the contra asset account for the purpose of properly recording the fair
market value of tangible assets.
11 - 2 Property, Plant and Equipment, Depreciation and Intangibles
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25. The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life
refers to how long the asset will last.
b. physical life is the life of an asset without consideration of salvage value and
service life requires the use of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while
physical life refers to how long the asset will be used by all owners.
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26. The term "depreciable cost," or "depreciable base," as it is used in accounting, refers
to
a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

27. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. all of these.

28. The activity method of depreciation

a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.

29. For income statement purposes, depreciation is a variable expense if the depreciation
method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.

30. If an industrial firm uses the units-of-production method for computing depreciation on
its only plant asset, factory machinery, the credit to accumulated depreciation from
period to period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

31. Use of the double-declining balance method

a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.

32. Use of the sum-of-the-years'-digits method

a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.

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33. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on
the horizontal axis. Assuming linear relationships, how would the graphs for straight-
line and sum-of-the-years'-digits depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right

34. A principal objection to the straight-line method of depreciation is that it

a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.

35. Each year a company has been investing an increasingly greater amount in
machinery. Since there is a large number of small items with relatively similar useful
lives, the company has been applying straight-line depreciation at a uniform rate to the
machinery as a group. The ratio of this group's total accumulated depreciation to the
total cost of the machinery has been steadily increasing and now stands at .75 to 1.00.
The most likely explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful
life.
d. company has been retiring fully depreciated machinery that should have remained
in service.

36. For the composite method, the composite

a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.
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37. Roberts Truck Rental uses the group depreciation method for its fleet of trucks. When
it retires one of its trucks and receives cash from a salvage company, the carrying
value of property, plant, and equipment will be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
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38. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together and
the total divided by the number of items.
b. the cost of individual units within an asset group is charged to expense in the year
a unit is retired from service.
c. a straight-line rate is computed by dividing the total of the annual depreciation
expense for all assets in the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in the
asset account and the cost of replacements is charged to expense when they are
acquired.

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11 - 4 Property, Plant and Equipment, Depreciation and Intangibles

39. Depreciation is normally computed on the basis of the nearest

a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

40. Quayle Company acquired machinery on January 1, 2002 which it depreciated under
the straight-line method with an estimated life of fifteen years and no salvage value.
On January 1, 2007, Quayle estimated that the remaining life of this machinery was six
years with no salvage value. How should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book value on
January 1, 2007
d. By continuing to depreciate the machinery over the original fifteen year life

MULTIPLE CHOICE—Computational
55. Harrison Company purchased a depreciable asset for $100,000. The estimated
salvage value is $10,000, and the estimated useful life is 10 years. The straight-line
method will be used for depreciation. What is the depreciation base of this asset?
a. $9,000
b. $10,000
c. $90,000
d. $100,000

56. Prentice Company purchased a depreciable asset for $200,000. The estimated
salvage value is $20,000, and the estimated useful life is 10 years. The straight-line
method will be used for depreciation. What is the depreciation base of this asset?
a. $18,000
b. $20,000
c. $180,000
d. $200,000

57. Lennon Company purchased a depreciable asset for $200,000. The estimated salvage
value is $10,000, and the estimated useful life is 10,000 hours. Lennon used the asset
for 1,100 hours in the current year. The activity method will be used for depreciation.
What is the depreciation expense on this asset?
a. $19,000
b. $20,900
c. $22,000
d. $190,000

58. Starr Company purchased a depreciable asset for $150,000. The estimated salvage
value is $10,000, and the estimated useful life is 8 years. The double-declining
balance method will be used for depreciation. What is the depreciation expense for the
second year on this asset?
a. $17,500
b. $26,250
c. $28,125
d. $37,500

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59. Bigbie Company purchased a depreciable asset for $600,000. The estimated salvage
value is $30,000, and the estimated useful life is 10,000 hours. Bigbie used the asset
for 1,100 hours in the current year. The activity method will be used for depreciation.
What is the depreciation expense on this asset?
a. $57,000
b. $62,700
c. $66,000
d. $570,000

60. Pine Company purchased a depreciable asset for $360,000. The estimated salvage
value is $24,000, and the estimated useful life is 8 years. The double-declining
balance method will be used for depreciation. What is the depreciation expense for the
second year on this asset?
a. $42,000
b. $63,000
c. $67,500
d. $90,000

61. On July 1, 2006, Rodriguez Corporation purchased factory equipment for $150,000.
Salvage value was estimated to be $4,000. The equipment will be depreciated over ten
years using the double-declining balance method. Counting the year of acquisition as
one-half year, Gonzalez should record depreciation expense for 2007 on this equipment
of
a. $30,000.
b. $27,000.
c. $26,280.
d. $24,000.

62. Norris Corporation purchased factory equipment that was installed and put into service
January 2, 2006, at a total cost of $60,000. Salvage value was estimated at $4,000. The
equipment is being depreciated over four years using the double-declining balance
method. For the year 2007, Norris should record depreciation expense on this
equipment of
a. $14,000.
b. $15,000.
c. $28,000.
d. $30,000.

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11 - 6 Property, Plant and Equipment, Depreciation and Intangibles

63. On April 13, 2006, Foley Co. purchased machinery for $120,000. Salvage value was
estimated to be $5,000. The machinery will be depreciated over ten years using the
double-declining balance method. If depreciation is computed on the basis of the
nearest full month, Foley should record depreciation expense for 2007 on this
machinery of
a. $20,800.
b. $20,400.
c. $20,550.
d. $20,933.

64. Vinson Co. purchased machinery that was installed and ready for use on January 3,
2006, at a total cost of $69,000. Salvage value was estimated at $9,000. The
machinery will be depreciated over five years using the double-declining balance
method. For the year 2007, Vinson should record depreciation expense on this
machinery of
a. $14,400.
b. $16,560.
c. $18,000.
d. $27,600.

65. A plant asset has a cost of $24,000 and a salvage value of $6,000. The asset has a
three-year life. If depreciation in the third year amounted to $3,000, which depreciation
method was used?
a. Straight-line
b. Declining-balance
c. Sum-of-the-years'-digits
d. Cannot tell from information given

66. On January 1, 2006, Carson Company purchased a new machine for $2,100,000. The
new machine has an estimated useful life of nine years and the salvage value was
estimated to be $75,000. Depreciation was computed on the sum-of-the-years'-digits
method. What amount should be shown in Carson's balance sheet at December 31,
2007, net of accumulated depreciation, for this machine?
a. $1,695,000
b. $1,335,000
c. $1,306,666
d. $1,244,250

67. On January 1, 2000, Barnes Company purchased equipment at a cost of $50,000. The
equipment was estimated to have a salvage value of $5,000 and it is being
depreciated over eight years under the sum-of-the-years'-digits method. What should
be the charge for depreciation of this equipment for the year ended December 31,
2007?
a. $1,250
b. $1,389
c. $2,500
d. $5,625

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PROPERTY, PLANT AND EQUIPMENT

MULTIPLE CHOICE—Computational
Use the following information for questions 60 and 61.

Seiler Co. purchased land as a factory site for $600,000. Seiler paid $60,000 to tear down two
buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title
investigation and making the purchase. Architect's fees were $31,200. Title insurance cost
$2,400, and liability insurance during construction cost $2,600. Excavation cost $10,440. The
contractor was paid $2,200,000. An assessment made by the city for pavement was $6,400.
Interest costs during construction were $170,000.

60. The cost of the land that should be recorded by Seiler Co. is
a. $660,480.
b. $666,880.
c. $669,880.
d. $676,280.

61. The cost of the building that should be recorded by Seiler Co. is
a. $2,403,800.
b. $2,404,840.
c. $2,413,200.
d. $2,414,240.
62. On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site
for $200,000. An old building on the property was demolished, and construction began
on a new building which was completed on November 1, 2007. Costs incurred during
this period are listed below:
Demolition of old building $ 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for $10,000.)
Morgan should record the cost of the land and new building, respectively, as
a. $225,000 and $1,115,000.
b. $210,000 and $1,130,000.
c. $210,000 and $1,125,000.
d. $215,000 and $1,125,000.

63. Tyson Chandler Company purchased equipment for $10,000. Sales tax on the
purchase was $500. Other costs incurred were freight charges of $200, repairs of
$350 for damage during installation, and installation costs of $225. What is the cost of
the equipment?
a. $10,000
b. $10,500
c. $10,925
d. $11,275

64. Carpenter Company purchased equipment for $12,000. Sales tax on the purchase
was $600. Other costs incurred were freight charges of $240, repairs of $420 for

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11 - 8 Property, Plant and Equipment, Depreciation and Intangibles

damage during installation, and installation costs of $270. What is the cost of the
equipment?
a. $12,000.
b. $12,600.
c. $13,110.
d. $13,530.

65. During self-construction of an asset by Jannero Pargo Company, the following were
among the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 40,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0-
b. $35,000
c. $40,000
d. $75,000

66. During self-construction of an asset by Mitchellson Company, the following were

among the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 60,000
Variable overhead attributable to self-construction 55,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0-
b. $ 55,000
c. $ 60,000
d. $115,000

67. Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average

accumulated expenditures were $4,000,000, actual interest was $600,000, and
avoidable interest was $300,000. If the salvage value is $800,000, and the useful life is
40 years, depreciation expense for the first full year using the straight-line method is
a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.

68. Sweet Knee Company is constructing a building. Construction began in 2008 and the
building was completed 12/31/08. Sweet Knee made payments to the construction
company of $1,000,000 on 7/1, $2,100,000 on 9/1, and $2,000,000 on 12/31. Average
accumulated expenditures were
a. $1,025,000.
b. $1,200,000.
c. $3,100,000.
d. $5,100,000.

69. Wheeler Corporation constructed a building at a cost of $20,000,000. Average

accumulated expenditures were $8,000,000, actual interest was $1,200,000, and
avoidable interest was $600,000. If the salvage value is $1,600,000, and the useful life
is 40 years, depreciation expense for the first full year using the straight-line method is

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a. $475,000.
b. $490,000.
c. $515,000.
d. $675,000.

70. Hackleman Company is constructing a building. Construction began in 2008 and the
building was completed 12/31/08. Hackleman made payments to the construction
company of $1,500,000 on 7/1, $3,300,000 on 9/1, and $3,000,000 on 12/31. Average
accumulated expenditures were
a. $1,575,000.
b. $1,850,000.
c. $4,800,000.
d. $7,800,000.

71. On May 1, 2007, Royster Company began construction of a building. Expenditures of

$120,000 were incurred monthly for 5 months beginning on May 1. The building was
completed and ready for occupancy on September 1, 2007. For the purpose of
determining the amount of interest cost to be capitalized, the average accumulated
expenditures on the building during 2007 were
a. $100,000.
b. $120,000.
c. $480,000.
d. $600,000.

INTANGIBLES

MULTIPLE CHOICE—Computational
49. Lynne Corporation acquired a patent on May 1, 2008. Lynne paid cash of $20,000 to
the seller. Legal fees of $800 were paid related to the acquisition. What amount should
be debited to the patent account?
a. $800
b. $19,200
c. $20,000
d. $20,800

50. Maris Corporation acquired a patent on May 1, 2008. Maris paid cash of $25,000 to
the seller. Legal fees of $1,000 were paid related to the acquisition. What amount
should be debited to the patent account?
a. $1,000
b. $24,000
c. $25,000
d. $26,000

51. Jeff Corporation purchased a limited-life intangible asset for $120,000 on May 1, 2006.
It has a useful life of 10 years. What total amount of amortization expense should have
been recorded on the intangible asset by December 31, 2008?
a. $ -0-
b. $24,000
c. $32,000
d. $36,000

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52. Rich Corporation purchased a limited-life intangible asset for $180,000 on May 1,
2006. It has a useful life of 10 years. What total amount of amortization expense
should have been recorded on the intangible asset by December 31, 2008?
a. $ -0-.
b. $36,000
c. $48,000
d. $54,000

53. ELO Corporation purchased a patent for $180,000 on September 1, 2006. It had a
useful life of 10 years. On January 1, 2008, ELO spent $44,000 to successfully defend
the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5
years. What amount should be reported for patent amortization expense for 2008?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.

54. LRF Corporation purchased a patent for $450,000 on September 1, 2006. It had a
useful life of 10 years. On January 1, 2008, LRF spent $110,000 to successfully
defend the patent in a lawsuit. LRF feels that as of that date, the remaining useful life
is 5 years. What amount should be reported for patent amortization expense for 2008?
a. $103,000.
b. $100,000.
c. $94,000.
d. $78,000.

55. The general ledger of Vance Corporation as of December 31, 2007, includes the
following accounts:
Copyrights $ 20,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 67,500
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 390,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2007, what should be
reported as total intangible assets?
a. $594,500.
b. $527,000.
c. $500,000.
d. $460,000.

56. In January, 2002, Findley Corporation purchased a patent for a new consumer product
for $720,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful
life of only ten years. During 2007 the product was permanently removed from the
market under governmental order because of a potential health hazard present in the
product. What amount should Findley charge to expense during 2007, assuming
amortization is recorded at the end of each year?
a. $480,000.
b. $360,000.
c. $72,000.
d. $48,000.

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57. Kerr Company purchased a patent on January 1, 2006 for $180,000. The patent had a
remaining useful life of 10 years at that date. In January of 2007, Kerr successfully
defends the patent at a cost of $81,000, extending the patent’s life to 12/31/18. What
amount of amortization expense would Kerr record in 2007?
a. $18,000
b. $20,250
c. $21,750
d. $27,000

58. On January 2, 2007, Klein Co. bought a trademark from Royce, Inc. for $500,000. An
independent research company estimated that the remaining useful life of the
trademark was 10 years. Its unamortized cost on Royce’s books was $400,000. In
Klein’s 2007 income statement, what amount should be reported as amortization
expense?
a. $50,000.
b. $40,000.
c. $25,000.
d. $20,000.

59. Wildcat Baseball Company had a player contract with Carter that was recorded in its
accounting records at $5,800,000. Aggie Baseball Company had a player contract with
Jeter that was recorded in its accounting records at $5,600,000. Wildcat traded Carter
to Aggie for Jeter by exchanging each player's contract. The fair value of each
contract was $6,000,000. What amount should be shown in the accounting records
after the exchange of player contracts?
Wildcat Aggie
a. $5,600,000 $5,600,000
b. $5,600,000 $5,800,000
c. $5,800,000 $5,600,000
d. $6,000,000 $6,000,000

60. A company acquires a patent for a drug with a remaining legal and useful life of six
years on January 1, 2005 for $1,200,000. The company uses straight-line amortization
for patents. On January 2, 2007, a new patent is received for a timed-release version
of the same drug. The new patent has a legal and useful life of twenty years. The least
amount of amortization that could be recorded in 2007 is
a. $200,000.
b. $40,000.
c. $54,545.
d. $60,000.

61.Blue Sky Company’s 12/31/08 balance sheet reports assets of $5,000,000 and liabilities of
$2,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for land,
which has a fair value that is $300,000 greater than its book value. On 12/31/08, Horace
Wimp Corporation paid $5,100,000 to acquire Blue Sky. What amount of goodwill should
Horace Wimp record as a result of this purchase?
a. $ -0-
b. $100,000
c. $1,800,000
d. $2,100,000

62. Turner Company’s 12/31/08 balance sheet reports assets of $6,000,000 and liabilities
of $2,500,000. All of Turner’s assets’ book values approximate their fair value, except
for land, which has a fair value that is $400,000 greater than its book value. On

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11 - 12 Property, Plant and Equipment, Depreciation and Intangibles

12/31/08, Benedict Corporation paid $6,100,000 to acquire Turner. What amount of

goodwill should Benedict record as a result of this purchase?
a. $ -0-
b. $ 100,000
c. $2,200,000
d. $2,600,000

63. Distributor Company purchases Supplier Company for $800,000 cash on January 1,
2007. The book value of Supplier Company’s net assets, as reflected on its December
31, 2006 balance sheet is $620,000. An analysis by Distributor on December 31, 2006
indicates that the fair value of Supplier’s tangible assets exceeded the book value by
$60,000, and the fair value of identifiable intangible assets exceeded book value by
$45,000. How much goodwill should be recognized by Distributor Company when
recording the purchase of Supplier Company?
a. $ -0-
b. $180,000
c. $120,000
d. $75,000

64. General Products Company bought Special Products Division in 2006 and
appropriately booked $250,000 of goodwill related to the purchase. On December 31,
2007, the fair value of Special Products Division is $2,000,000 and it is carried on
General Product’s books for a total of $1,700,000, including the goodwill. An analysis
of Special Products Division’s assets indicates that goodwill of $200,000 exists on
December 31, 2007. What goodwill impairment should be recognized by General
Products in 2007?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.

65. During 2007, Bond Company purchased the net assets of May Corporation for
$950,000. On the date of the transaction, May had $300,000 of liabilities. The fair
value of May's assets when acquired were as follows:
Current assets $ 540,000
Noncurrent assets 1,260,000
$1,800,000
How should the $550,000 difference between the fair value of the net assets acquired
($1,500,000) and the cost ($950,000) be accounted for by Bond?
a. The $550,000 difference should be credited to retained earnings.
b. The $550,000 difference should be recognized as an extraordinary gain.
c. The current assets should be recorded at $375,000 and the noncurrent assets
should be recorded at $875,000.
d. A deferred credit of $550,000 should be set up and then amortized to income over
a period not to exceed forty years.

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