Practice Questions
CHAPTER 10 - TRUE-FALSE STATEMENTS
1.
All capital assets must be amortized for accounting purposes.
2.
When purchasing land, the costs for clearing, draining, filling, and grading should
be charged to a Land Improvements account.
3.
When purchasing delivery equipment, supplies and motor vehicle licences should
be charged to Delivery Equipment.
4.
Service charges are charged on commercial property.
5.
If paid by the purchaser, freight charges and insurance during transit are included
in the cost of equipment.
6.
Land improvements are generally charged to the Land account.
7.
Once cost is established for a capital asset, it becomes the basis of accounting
for the asset unless the asset appreciates in value, in which case, market value
becomes the basis for accountability.
8.
The net book value of a capital asset is always equal to its fair market value.
9.
Recording amortization on capital assets affects the balance sheet and the
income statement.
10.
The amortization cost of a capital asset is its original cost minus obsolescence.
11.
Recording amortization each period is an application of the matching principle.
12.
The Accumulated Amortization account represents a cash fund available to
replace capital assets.
13.
In calculating amortization, both capital asset cost and useful life are based on
estimates.
14.
Using the units-of-activity method of amortizing factory equipment will generally
result in more amortization expense being recorded over the life of the asset than
if the straight-line method had been used.
15.
Residual value is not subtracted from capital asset cost in determining
amortization expense under the declining-balance method of amortization.
16.
The declining-balance method of amortization is called an accelerated
amortization method because it amortizes an asset in a shorter period of time
than the asset's useful life.
17.
If you use the straight-line rate on a declining-balance basis, the asset’s net
worth will never reach its expected residual value.
18.
Under the double declining-balance method, the amortization rate used each
year remains constant.
19.
The Canada Customs and Revenue Agency does not require the taxpayer to use
the same amortization method on the tax return that is used in preparing financial
statements.
20.
A change in the estimated useful life of a capital asset may cause a change in
the amount of amortization recognized in the current and future periods, but not
to prior periods.
21.
A change in the estimated residual value of a capital asset requires a
restatement of prior years' amortization.
22.
To determine a new amortization amount after a change in estimate of a capital
asset's useful life, the asset's remaining amortizable cost is divided by its
remaining useful life.
23.
Additions and improvements to a capital asset that increase the asset's operating
efficiency, productive capacity, or expected useful life are generally expensed in
the period incurred.
24.
Capital expenditures are expenditures that increase the company's investment in
productive facilities.
25.
Ordinary repairs should be recognized when incurred as operating expenditures.
26.
A characteristic of capital expenditures is that the expenditures occur frequently
during the period of ownership.
27.
Once an asset is fully amortized, no additional amortization can be taken even
though the asset is still being used by the business.
28.
The fair market value of a capital asset is always the same as its net book value.
29.
If the proceeds from the sale of a capital asset exceed its net book value, a gain
on disposal occurs.
30.
If management’s objective is to report the lowest net income, it would use the
double declining-balance method of amortization.
31.
The net book value of a capital asset is the amount originally paid for the asset
less anticipated residual value.
32.
A loss on disposal of a capital asset as a result of a sale or a retirement is
calculated in the same way.
33.
A capital asset must be fully amortized before it can be removed from the books.
34.
If a capital asset is sold at a gain, the gain on disposal should reduce the cost of
goods sold section of the income statement.
35.
A loss on disposal of a capital asset can only occur if the cash proceeds received
from the asset sale are less than the asset's book value.
36.
If management’s objective is to report the highest net income, it would use the
double declining-balance method of amortization.
37.
A basket purchase of capital assets requires that the fair market values be
assigned as the cost of each asset.
38.
A basket purchase of capital assets requires an allocation of the cost using a
percentage of the appraised values of the assets.
39.
The cost of natural resources is not allocated to expense because the natural
resources are replaceable only by an act of nature.
40.
Conceptually, the cost allocation procedures for natural resources parallels that
of capital assets.
41.
Natural resources are often called wasting assets because it is difficult to use the
assets in an efficient manner.
42.
Future removal and site restoration costs should be estimated in advance and
allocated over the useful life of a natural resource.
43.
Straight-line amortization will result in a higher net income than the double
declining- balance method in the early years of an asset’s life.
44.
Amortization Expense for a period is only recognized on natural resources that
have been extracted and sold during the period.
45.
The cost of an intangible asset with a definite life must be amortized over a 40year period.
46.
The cost of a patent should be amortized over its 20-year legal life or useful life,
whichever is shorter.
47.
Copyrights give the owners an exclusive right to reproduce and sell an artistic
work.
48.
If an acquired franchise or licence is for an indefinite time period, then the cost of
the asset should not be amortized.
49.
When an entire business is purchased, goodwill is the excess of cost over the
book value of the net assets (assets less liabilities) acquired.
50.
Research and development costs which result in a successful product which is
patentable are charged to the Patent account.
51.
Goodwill is classified as a natural resource.
52.
The cost of internally generated goodwill is amortized, whereas the cost of
purchased goodwill is not.
53.
All research costs should be capitalized and certain development costs with
reasonably assumed benefits should be expensed.
54.
It is not necessary to disclose the amount of accumulated amortization in the
financial statements.
55.
The return on assets is calculated by dividing net income by total assets.
Answers to True-False Statements
Item
1.
2.
3.
4.
5.
6.
7.
8.
Ans.
F
F
F
F
T
F
F
F
Item
9.
10.
11.
12.
13.
14.
15.
16.
Ans.
T
F
T
F
F
F
T
F
Item
17.
18.
19.
20.
21.
22.
23.
24.
Ans.
T
T
T
T
F
T
F
T
Item
25.
26.
27.
28.
29.
30.
31.
32.
Ans.
T
F
T
F
T
T
F
T
Item
Ans.
33.
34.
35.
36.
37.
38.
39.
40.
F
F
T
F
F
T
F
T
Item
41.
42.
43.
44.
45.
46.
47.
48.
Ans.
F
T
T
T
F
T
T
T
Item
49.
50.
51.
52.
53.
54.
55.
MULTIPLE CHOICE QUESTIONS
56.
Intangible assets include
a. property, plant, and equipment.
b. natural resources, such as mineral deposits and oil and gas reserves.
c. assets that provide future benefits through special rights and privileges.
d. government services.
57.
Intangible assets do not include
a. goodwill.
b. patents.
c. copyrights.
d. plant and equipment.
58.
A company purchased land for $70,000 cash. $7,000 was spent for demolishing
an old building on the land before construction of a new building could start.
Under the cost principle, the cost of land would be recorded at
a. $77,000.
b. $70,000.
c. $63,000.
d. $7,000.
Ans.
F
F
F
F
F
F
F
59.
Which one of the following items is not considered a part of the cost of a truck
purchased for business use?
a. Insurance during transit
b. Truck licence
c. Freight charges
d. Cost of lettering on side of truck
60.
Which of the following assets does not decline in service potential over the
course of its useful life?
a. Equipment
b. Furnishings
c. Land
d. Fixtures
61.
The four subdivisions for property, plant, and equipment assets are
a. land, land improvements, buildings, and equipment.
b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment.
d. property, plant, equipment, and land.
62.
The cost of land does not include
a. costs to clear the land.
b. annual property taxes.
c. accrued property taxes assumed by the purchaser.
d. legal fees.
63.
Pippen Clinic purchases land for $90,000 cash. The clinic assumes $1,500 in
property taxes due on the land. The legal fees totalled $1,000. The clinic has the
land graded for $2,200. What amount does Pippen Clinic record as the cost for
the land?
a. $92,200.
b. $90,000.
c. $94,700.
d. $92,500.
64.
Cole Company buys land for $50,000 on 12/31/00. As of 3/31/01, the land has
appreciated in value to $50,500. On 12/31/01, the land has an appraised value of
$51,800. By what amount should the Land account be increased in 2001?
a. $0.
b. $300.
c. $500.
d. $800.
65.
Shannon Company acquires land for $56,000 cash. Additional costs are as
follows:
Removal of shed
$ 1,430
Filling and grading
1,500
Residual value of lumber from shed
120
Paving of parking lot
10,000
Closing costs
560
65.
(cont.)
Shannon will record the acquisition cost of the land as
a. $56,000.
b. $57,690.
c. $59,610.
d. $59,370.
66.
Newman Hospital installs a new parking lot. The paving cost $30,000 and the
lights to illuminate the new parking area cost $12,000. Which of the following
statements is true with respect to these additions?
a. $30,000 should be debited to the Land account.
b. $12,000 should be debited to Land Improvements.
c. $42,000 should be debited to the Land account.
d. $42,000 should be debited to Land Improvements.
67.
Land improvements should be amortized over the useful life of the
a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer.
d. land improvements.
68.
General Molding is building a new plant that will take three years to construct.
The construction will be financed in part by funds borrowed during the
construction period. There are significant architect fees, excavation fees, and
building permit fees. Which of the following statements is true?
a. Excavation fees are capitalized but building permit fees are not.
b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the
building.
d. The capitalized cost is equal to the contract price to build the plant less any
interest on borrowed funds.
69.
A company purchases a remote site building for computer operations. The
building will be suitable for operations after some expenditures. The wiring must
be replaced to computer specifications. The roof is leaky and must be replaced.
All rooms must be repainted and recarpeted and there will also be some
plumbing work done. Which of the following statements is true?
a. The cost of the building will not include the repainting and recarpeting costs.
b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the
additional expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.
70.
The Farzad Company purchases a new delivery truck for $20,000. The logo of
the company is painted on the side of the truck for $600. The truck licence is $60.
The truck undergoes safety testing for $110. What does Farzad record as the
cost of the new truck?
a. $20,770.
b. $21,710.
c. $20,000.
d. $20,710.
71.
Interest may be included in the acquisition cost of a capital asset
a. during the construction period of a self-constructed asset.
b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable.
d. if it is a part of a lump-sum purchase.
72.
The balance in the Accumulated Amortization account represents the
a. cash fund to be used to replace capital assets.
b. amount to be deducted from the cost of the capital asset to arrive at its fair
market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the capital asset.
73.
Which one of the following items is not a consideration when recording periodic
amortization expense on capital assets?
a. Residual value
b. Estimated useful life
c. Cash needed to replace the capital asset
d. Cost
74.
Amortization is the process of allocating the cost of a capital asset (such as
property, plant, and equipment) over its service life in a(n)
a. equal and equitable manner.
b. accelerated and accurate manner.
c. systematic and rational manner.
d. conservative market-based manner.
75.
The net book value of an asset is equal to the
a. asset's market value less its historical cost.
b. asset’s cost less amortization expense.
c. replacement cost of the asset.
d. asset's cost less accumulated amortization.
76.
Accountants do not attempt to measure the change in a capital asset's market
value during ownership because
a. the assets are not held for resale.
b. capital assets cannot be sold.
c. losses would have to be recognized.
d. it is management's responsibility to determine fair values.
77.
Amortization is a process of
a. asset devaluation.
b. cost accumulation.
c. cost allocation.
d. asset valuation.
78.
Recording amortization each period is necessary in accordance with the
a. going concern principle.
b. cost principle.
c. matching principle.
d. asset valuation principle.
79.
In calculating amortization, residual value is
a. the fair market value of a capital asset on the date of acquisition.
b. subtracted from accumulated amortization to determine the capital asset's
amortizable cost.
c. an estimate of a capital asset's value at the end of its useful life.
d. ignored in all the amortization methods.
80.
When estimating the useful life of an asset, accountants do not consider
a. the cost to replace the asset at the end of its useful life.
b. obsolescence factors.
c. expected repairs and maintenance.
d. the intended use of the asset.
81.
Equipment was purchased for $15,000. Freight charges amounted to $700, and
there was a cost of $2,000 for building a foundation and installing the equipment.
It is estimated that the equipment will have a $3,000 residual value at the end of
its 5-year useful life. Amortization expense each year using the straight-line
method will be
a. $3,540.
b. $2,940.
c. $2,460.
d. $2,400.
82.
A truck was purchased for $15,000, and it was estimated to have a $3,000
residual value at the end of its useful life. Monthly amortization expense of $250
was recorded using the straight-line method. The annual amortization rate is
a. 20%.
b. 2%.
c. 8%.
d. 25%.
83.
A company purchased factory equipment on April 1, 2001 for $48,000. It is
estimated that the equipment will have a $6,000 residual value at the end of its
10-year useful life. Using the straight-line method of amortization, the amount to
be recorded as amortization expense at December 31, 2001 is
a. $4,800.
b. $4,200.
c. $3,150.
d. $3,600.
84.
A company purchased office equipment for $10,000 and estimated a residual
value of $2,000 at the end of its 4-year useful life. The constant percentage to be
applied against book value each year if the double declining-balance method is
used is
a. 20%.
b. 25%.
c. 50%.
d. 4%.
85.
The declining-balance method of amortization produces
86.
a. a decreasing amortization expense each period.
b. an increasing amortization expense each period.
c. a declining percentage rate each period.
d. a constant amount of amortization expense each period.
A company purchased factory equipment for $100,000. It is estimated that the
equipment will have a $10,000 residual value at the end of its estimated 5-year
useful life. If the company uses the double declining-balance method of
amortization, the amount of annual amortization recorded for the second year
after purchase would be
a. $40,000.
b. $24,000.
c. $36,000.
d. $21,600.
87.
A capital asset cost $24,000 and is estimated to have a $3,000 residual value at
the end of its 8-year useful life. The annual amortization expense recorded for
the third year using the double declining-balance method would be
a. $2,010.
b. $3,375.
c. $2,953.
d. $2,297.
88.
A factory machine was purchased for $20,000 on January 1, 2001. It was
estimated that it would have a $4,000 residual value at the end of its 5-year
useful life. It was also estimated that the machine would be run 40,000 hours in
the 5 years. If the actual number of machine hours run in 2001 was 4,000 hours
and the company uses the units-of-activity method of amortization, the amount of
amortization expense for 2001 would be
a. $2,000.
b. $3,200.
c. $4,000.
d. $1,600.
89.
Single declining-balance is an amortization method that
a. is used for tax purposes.
b. must be used for financial statement purposes.
c. is required by provincial securities commissions.
d. expenses an asset over a single year because capital acquisitions must be
expensed in the year purchased.
90.
Which of the following methods of calculating amortization is production based?
a. Straight-line
b. Declining-balance
c. Units-of-activity
d. None of these
91.
Management should select the amortization method that
a. is easiest to apply.
b. best measures the capital asset's market value over its useful life.
c. best measures the capital asset's contribution to revenue over its useful life.
d. has been used most often in the past by the company.
92.
The amortization method that applies a constant percentage to amortizable cost
in calculating amortization is
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. none of these.
Use the following information for questions 93–94.
On October 1, 2001, Mack Company places a new asset into service. The cost of the
asset is $8,000 with an estimated 5-year life and $2,000 residual value at the end of its
useful life.
93.
What is the amortization expense for 2001 if Mack Company uses the straightline method of amortization?
a. $300.
b. $1,600.
c. $400.
d. $800.
94.
What is the net book value of the capital asset on the December 31, 2001,
balance sheet assuming that Mack Company uses the double declining-balance
method of amortiza-tion?
a. $5,200.
b. $6,000.
c. $7,200.
d. $7,600.
95.
Which amortization method is most frequently used in businesses today?
a. Straight-line
b. Declining-balance
c. Units-of-activity
d. Double declining-balance
96.
Vickers Company uses the units-of-activity method in calculating amortization. A
new plant asset is purchased for $18,000 that will produce an estimated 100,000
units over its useful life. Estimated residual value at the end of its useful life is
$2,000. What is the amortization cost per unit?
a. $1.60.
b. $1.80.
c. $ .16.
d. $ .18.
97.
Units of activity is an appropriate amortization method to use when
a. it is impossible to determine the productivity of the asset.
b. the asset's use will be constant over its useful life.
c. the productivity of the asset varies significantly from one period to another.
d. the company is a manufacturing company.
98.
The calculation of amortization using the declining-balance method,
a. ignores residual value in determining the amount to which a constant rate is
applied.
b. multiplies a constant percentage times the previous year's amortization
expense.
c. yields an increasing amortization expense each period.
d. multiplies a declining percentage times a constant book value.
Use the following information for questions 99–100.
Fayad Company purchased a new van for floral deliveries on January 1, 2001. The van
cost $20,000 with an estimated life of 5 years and $5,000 residual value at the end of its
useful life. The double declining-balance method of amortization will be used.
99.
What is the amortization expense for 2001?
a. $4,000.
b. $3,000.
c. $6,000.
d. $8,000.
100.
What is the balance of the Accumulated Amortization account at the end of
2002?
a. $3,200.
b. $9,600.
c. $12,800.
d. $4,800.
101.
Palmer Company purchased equipment for $45,000 on January 1, 2001, and will
use the double declining-balance method of amortization. It is estimated that the
equipment will have a 3-year life and a $2,000 residual value at the end of its
useful life. The amount of amortization expense recognized in the year 2003 will
be
a. $5,000.
b. $3,000.
c. $5,444
d. $3,444.
102.
A capital asset was purchased on January 1 for $30,000 with an estimated
residual value of $6,000 at the end of its useful life. The current year's
Amortization Expense is $3,000 calculated on the straight-line basis and the
balance of the Accumulated Amortization account at the end of the year is
$15,000. The remaining useful life of the plant asset is
a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.
103.
A change in the estimated useful life of equipment requires
a. a retroactive change in the amount of periodic amortization recognized in
previous years.
b. that no change be made in the periodic amortization so that amortization
amounts are comparable over the life of the asset.
c. that the amount of periodic amortization be changed in the current year and
in future years.
d. that income for the current year be increased.
104.
Grant Company has decided to change the estimate of the useful life of an asset
that has been in service for 2 years. Which of the following statements describes
the proper way to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the Canada Customs and
105.
Revenue Agency.
b. Retroactive changes must be made to correct previously recorded
amortization.
c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.
Ling's Copy Shop bought equipment for $18,000 on January 1, 2001. Ling
estimated the useful life to be 3 years with no residual value, and the straight-line
method of amortization will be used. On January 1, 2002, Ling decides that the
business will use the equipment for 5 years. What is the revised amortization
expense for 2002?
a. $6,000.
b. $2,400.
c. $3,000.
d. $4,500.
106.
Expenditures that maintain the operating efficiency and expected productive life
of a capital asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Amortization account.
d. not recorded until they become material in amount.
107.
Which of the following is not true of ordinary repairs?
a. They primarily benefit the current accounting period.
b. They can be referred to as operating expenditures.
c. They maintain the expected productive life of the asset.
d. They increase the productive capacity of the asset.
108.
The paneling of the body of an open pickup truck would be classified as a(n)
a. operating expenditure.
b. addition.
c. renovation.
d. ordinary repair.
109.
Additions and improvements
a. occur frequently during the ownership of a capital asset.
b. normally involve immaterial expenditures.
c. increase the net book value of capital assets when incurred.
d. typically only benefit the current accounting period.
110.
A gain or loss on disposal of a capital asset is determined by comparing the
a. replacement cost of the asset with the asset's original cost.
b. net book value of the asset with the asset's original cost.
c. original cost of the asset with the proceeds received from its sale.
d. net book value of the asset with the proceeds received from its sale.
111.
The net book value of a capital asset is the difference between the
a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of amortization expense for the year.
c. cost of the asset and the accumulated amortization to date.
d. proceeds received from the sale of the asset and its original cost.
112.
113.
If a capital asset is retired before it is fully amortized, and the residual value
received is less than the asset's book value,
a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. there is no gain or loss on disposal.
d. additional amortization expense must be recorded.
A company sells a capital asset which originally cost $150,000 for $50,000 on
December 31, 2001. The Accumulated Amortization account had a balance of
$60,000 after the current year's amortization of $15,000 had been recorded. The
company should recognize a
a. $100,000 loss on disposal.
b. $40,000 gain on disposal.
c. $40,000 loss on disposal.
d. $25,000 loss on disposal.
114.
Use of straight-line amortization in comparison to the double declining-balance
method results in
1. a greater amount of amortization in the earlier years of an asset’s
useful life.
2. a greater amount of amortization in the later years of an asset’s useful
life.
3. an equal amount of amortization over an asset’s total useful life.
a. 1.
b. 2.
c. 3.
d. both 2 and 3.
115.
Use of the units-of-activity method of amortization results in
a. varying effects on net income as it depends on actual usage each year.
b. equal effects on net income each year.
c. the least effect on net income compared to other methods.
d. the greatest effect on net income compared to other methods.
Use the following information for questions 116–119.
A company purchased property for $300,000. The property included an acre of land
valued at $50,000, a building valued at $150,000, and equipment valued at $125,000.
116.
The land will be recorded at a cost of
a. $45,000.
b. $48,234.
c. $46,154.
d. $50,000.
117.
The building will be recorded at a cost of
a. $150,000.
b. $140,000.
c. $135,000.
d. $138,461.
118.
The equipment will be recorded at a cost of
a.
b.
c.
d.
$125,000.
$120,000.
$118,723.
$115,384.
119.
The above transaction may be referred to as a
a. market value purchase.
b. capital asset purchase.
c. property purchase.
d. basket purchase.
120.
If disposal of a capital asset occurs during the year, amortization is
a. not recorded for the year.
b. recorded for the whole year.
c. recorded for the fraction of the year to the date of the disposal.
d. not recorded if the asset is scrapped.
121.
If a fully amortized capital asset is still used by a company, the
a. estimated remaining useful life must be revised to calculate the correct
revised amortization.
b. asset is removed from the books.
c. accumulated amortization account is removed from the books but the asset
account remains.
d. asset and the accumulated amortization continue to be reported on the
balance sheet without adjustment until the asset is retired.
122.
Which of the following statements is not true when a fully amortized capital asset
is retired?
a. The capital asset's book value is equal to its estimated residual value.
b. The accumulated amortization account is debited.
c. The asset account is credited.
d. The capital asset's original cost equals its book value.
123.
If a capital asset is retired before it is fully amortized, and no residual or scrap
value is received,
a. a gain on disposal will be recorded.
b. phantom amortization must be taken as though the asset were still on the
books.
c. a loss on disposal will be recorded.
d. no gain or loss on disposal will be recorded.
124.
The net book value of an asset will equal its fair market value at the date of sale
if
a. a gain on disposal is recorded.
b. no gain or loss on disposal is recorded.
c. the capital asset is fully amortized.
d. a loss on disposal is recorded.
125.
A truck costing $35,000 was destroyed when its engine caught fire. At the date of
the fire, the accumulated amortization on the truck was $16,000. An insurance
cheque for $40,000 was received based on the replacement cost of the truck.
The entry to record the insurance proceeds and the disposition of the truck will
include a
a. Gain on Disposal of $5,000.
b. credit to the Truck account of $19,000.
c. credit to the Accumulated Amortization account for $16,000.
d. Gain on Disposal of $21,000.
126.
127.
On July 1, 2001 Lars Kennels sells equipment for $22,000. The equipment
originally cost $60,000, had an estimated 5-year life and an expected residual
value of $10,000. The accumulated amortization account had a balance of
$35,000 on January 1, 2001, using the straight-line method. The gain or loss on
disposal is
a. $3,000 gain.
b. $2,000 loss.
c. $3,000 loss.
d. $2,000 gain.
A loss on disposal of a capital asset is reported in the financial statements
a. in the Other Revenues and Gains section of the income statement.
b. in the Other Expenses and Losses section of the income statement.
c. as a direct increase to the capital account on the balance sheet.
d. as a direct decrease to the capital account on the balance sheet.
128.
Gains and losses on disposal of capital assets occur
a. rarely.
b. frequently.
c. every time a capital asset is disposed of.
d. only if the net book value is zero.
129.
Two commonly used ratios to assess the profitability of total assets are
a. asset turnover and current ratio.
b. asset turnover and receivables turnover.
c. return on assets and quick ratio.
d. return on assets and asset turnover.
130.
Asset turnover is calculated as
a. Net Sales ÷ Average Total Assets.
b. Net Income ÷ Average Total Assets.
c. Net Sales ÷ Owner’s Equity.
d. Net Income ÷ Owner’s Equity.
131.
A high return on assets indicates
a. a profitable company.
b. the amount of sales generated by each dollar invested in total assets.
c. new assets need to be purchased.
d. the company may be in financial difficulty.
132.
For the year ended December 31, 2001, Inko Co. has net assets of $1,000,000
and net income of $290,000. Total assets on January 1, 2001 were $1,750,000
and total assets at December 31, 2001 are $1,245,000. Inko’s return on assets
for 2001 is
a. .57.
b. 16.6%.
c. 23.3%.
d. 19.37%.
133.
Lief Company's delivery truck, which originally cost $28,000, was destroyed by
fire. At the time of the fire, the balance of the Accumulated Amortization account
amounted to $19,000. The company received $16,000 reimbursement from its
insurance company. The gain or loss as a result of the fire was
a. $12,000 loss.
b. $7,000 loss.
c. $12,000 gain.
d. $7,000 gain.
134.
Natural resources are frequently referred to as wasting assets because
a. they are worthless.
b. they are physically extracted in operations and are replaceable only by an act
of nature.
c. there is a lot of inefficiency in their use in operations.
d. there is a lot of spoilage when they are extracted.
135.
According to the matching principle, future removal and site restoration costs
must be
a. expensed as incurred.
b. estimated in advance and allocated over the useful life of the natural
resource.
c. estimated in advance and expensed completely in the year of acquisition of
the related natural resource.
d. expensed in the final year of operations.
136.
Natural resource amortization is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are extracted.
c. the process of allocating the cost of natural resources to expense.
d. the method used to record unsuccessful oil well explorations.
137.
To qualify as natural resources in the accounting sense, assets must be
a. underground.
b. replaceable.
c. of a mineral nature.
d. physically extracted in operations.
138.
All of the following are examples of wasting assets except a
a. coal mine.
b. timber stand.
c. logging truck.
d. gold mine.
139.
The purpose of accruing future removal and site restoration costs is to
a. reduce the company’s taxable income and required tax payments.
b. provide cash to return the resource to its original state at the end of the
project’s life.
c. comply with the revenue recognition principle.
d. match the costs associated with the natural resources to the revenue
generated by the asset.
140.
The method most commonly used to calculate resource amortization is the
a. straight-line method.
b. declining-balance method.
c. units-of-activity method.
d. some other method.
141.
In calculating resource amortization, residual value is
a. always immaterial.
b. ignored.
c. impossible to estimate.
d. included in the calculation.
142.
If a mining company extracts 1,500,000 tonnes in a period but only sells
1,200,000 tonnes,
a. total amortization on the mine is based on the 1,200,000 tonnes.
b. amortization expense is recognized on the 1,500,000 tonnes extracted.
c. amortization expense is recognized on the 1,200,000 tonnes extracted and
sold.
d. a separate accumulated amortization account is set up to record amortization
on the 300,000 tonnes extracted but not sold.
143.
A coal company invests $12 million in a mine estimated to have 20 million tonnes
of coal and no residual value. It is expected that the mine will be in operation for
5 years. In the first year, 1,000,000 tonnes of coal are extracted and sold. What
is the amortization expense for the first year?
a. $600,000.
b. $240,000.
c. $60,000.
d. Cannot be determined from the information provided.
144.
Accumulated Amortization for natural resources
a. is reported on the income statement as a cost of producing the product.
b. has a normal debit balance.
c. is reported in the current asset section of the balance sheet.
d. can be credited directly to the natural resource account.
145.
On July 1, 2001, Manitoba Mining Company purchased the mineral rights to a
granite deposit for $700,000. It is estimated that the recoverable granite will be
400,000 tonnes. During 2001, 100,000 tonnes of granite was extracted and
60,000 tonnes were sold. The amount of the Amortization Expense recognized
for 2001 would be
a. $87,500.
b. $52,500.
c. $105,000.
d. $175,000.
146.
Intangible assets are the rights and privileges that result from ownership of longlived assets that
a. must be generated internally.
b. are amortizable natural resources.
c. have been exchanged at a gain.
d. do not have physical substance.
147.
Identify the item below where the terms are not related.
a. Equipment—amortization
b. Patent—wasting asset
c. Goodwill—amortization
d. Oil well—amortization
148.
An intangible asset should
a. be amortized over a period of 40 years.
b. not be amortized if it has an indefinite life.
c. be amortized over its useful life or 40 years, whichever is longer.
d. be amortized over its useful life or 40 years, whichever is shorter.
149.
The cost of successfully defending a patent in an infringement suit should be
a. charged to Legal Expenses.
b. deducted from the book value of the patent.
c. added to the cost of the patent.
d. recognized as a loss in the current period.
150.
An asset that cannot be sold individually in the market place is
a. a patent.
b. goodwill.
c. a copyright.
d. a trade name.
151.
Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company's
products.
b. when the company acquires a good location for its business.
c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an
entire business.
152.
On July 1, 2001, Marlin Company purchased the copyright to Bodine Computer
Tutorials for $81,000. It is estimated that the copyright will have a useful life of 5
years with an estimated residual value of $6,000. The amount of Amortization
Expense recognized for the year 2001 would be
a. $16,200.
b. $7,500.
c. $15,000.
d. $8,100.
153.
Which of the following is an intangible asset that results from the purchase of an
asset for more than its net asset value?
a. Goodwill
b. Patent
c. Trademark
d. Trade name
154.
A franchise should be classified on the balance sheet as a(n)
a. current asset.
b. prepaid expanse.
c. intangible asset.
d. tangible capital asset.
155.
Cost allocation of an intangible asset is referred to as
a. amortization.
b. depletion.
c. accretion.
d. capitalization.
156.
A patent
a. has a legal life of 40 years.
b. is nonrenewable.
157.
c. can be renewed indefinitely.
d. is rarely subject to litigation because it is an exclusive right.
If a company incurs legal costs in successfully defending its patent, these costs
are recorded by debiting
a. Legal Expense.
b. an Intangible Loss account.
c. the Patent account.
d. an operating expenditure account.
158.
Copyrights are granted by the federal government
a. for the life of the creator or 50 years, whichever is longer.
b. for the life of the creator plus 50 years.
c. for the life of the creator or 50 years, whichever is shorter.
d. and therefore cannot be amortized.
159.
Goodwill
a. is only recorded when generated internally.
b. can be subdivided and sold in parts.
c. can only be identified with the business as a whole.
d. can be defined as normal earnings less accumulated amortization.
160.
In recording the acquisition cost of an entire business,
a. goodwill is recorded as the excess of cost over the fair value of identifiable
net assets.
b. assets are recorded at the seller's book values.
c. goodwill, if it exists, is never recorded.
d. goodwill is recorded as the excess of cost over the book value of identifiable
net assets.
161.
Research costs
a. are classified as intangible assets.
b. must be expensed when incurred under generally accepted accounting
principles.
c. should be included in the cost of the patent they relate to.
d. are capitalized and then amortized over a period not to exceed 40 years.
162.
A computer company has $3,000,000 in development costs relating to successful
research. Before accounting for these costs, the net income of the company is
$2,200,000. What is the amount of net income or loss after these research and
development costs are accounted for?
a. $0.
b. $2,200,000 net income.
c. $800,000 loss.
d. Cannot be determined from the information provided.
163.
Goodwill
a. may be expensed upon purchase if desired.
b. can be sold by itself to another company.
c. can be purchased and charged directly to owner’s equity.
d. is viewed as expected earnings in excess of normal earnings.
164.
165.
Which of the following is not an intangible asset that is reported on the balance
sheet?
a. Goodwill
b. Trademarks
c. Employees
d. Copyrights
Natural resources are generally shown on the balance sheet under
a. Intangibles.
b. Investments.
c. Property, Plant, and Equipment.
d. Owner's Equity.
166.
Which of the following statements concerning financial statement presentation is
not a true statement?
a. Intangibles are reported separately under Intangible Assets.
b. The balances of major classes of assets may be disclosed in the footnotes.
c. The balances of the accumulated amortization of major classes of assets
may be disclosed in the footnotes.
d. The balances of all individual assets, as they appear in the subsidiary capital
asset ledger, should be disclosed in the footnotes.
167.
Intangible assets
a. are not reported on the balance sheet because they are expensed.
b. are not reported on the balance sheet because they lack physical substance.
c. should be reported as Current Assets on the balance sheet.
d. should be reported as a separate classification on the balance sheet, or
under the heading Capital Assets.
168.
A company has the following assets:
Buildings and Equipment, less accumulated amortization of $2,500,000
Copyrights, less accumulated amortization of $240,000
Patents, less accumulated amortization of $1,000,000
Timberlands, less accumulated amortization of $3,500,000
The total amount reported under Capital Assets would be
a. $24,200,000.
b. $18,000,000.
c. $23,000,000.
d. $19,200,000.
$12,000,000
1,200,000
5,000,000
6,000,000
Answers to Multiple Choice Questions
Item
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
Ans.
c
d
a
b
c
a
b
c
a
d
d
d
c
b
d
a
d
Item
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
c
c
d
a
c
c
c
a
b
d
c
c
a
b
b
d
a
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
c
c
c
a
c
a
c
c
a
d
c
b
d
c
d
c
a
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
d
b
c
d
c
b
c
d
a
c
d
d
d
c
d
d
c
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
b
d
d
b
b
d
a
a
d
d
b
b
c
d
c
d
c
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
151.
152.
153.
154.
155.
156.
157.
d
c
a
d
c
d
b
b
c
b
d
b
a
c
a
b
c
Item
158.
159.
160.
161.
162.
163.
164.
165.
166.
167.
168.
Ans.
b
c
a
b
a
d
c
c
d
d
a