BAT4M Accounting
Chapter 10: Practice Quiz
Name:________
Section A: Multiple Choice
1. 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.
2. ABC 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.
3. 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.
4. 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.
5. 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.
6. The declining-balance method of amortization produces
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.
7. 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.
8. 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.
9. 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
10. 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
11. 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.
12. 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.
13. 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.
Use the following information for questions 14–16.
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.
14. The land will be recorded at a cost of
a. $45,000.
b. $48,234.
c. $46,154.
d. $50,000.
15. The building will be recorded at a cost of
a. $150,000.
b. $140,000.
c.
$135,000.
d. $138,461.
16. The equipment will be recorded at a cost of
a. $125,000.
b. $120,000.
c. $118,723.
d. $115,384.
17. The following items should NOT be capitalized regarding a Truck:
a. Purchase price
b. Freight in
c. Yearly oil change
d. The cost of a new licence plate
Section B: Application Problem
1. Avengers Company purchased a truck on January 1, 2001, for $60,000. It is estimated that the equipment will
have a $5,000 residual value at the end of its five-year useful life. It is also estimated that the equipment will travel
100,000 Km over its five-year life. Instructions: Answer the following independent questions:
A. Calculate the amount of amortization expense for the year ended December 31, 2001, using the double
declining balance method of amortization.
B. If 16,000 Km are traveled in 2001 and 24,000 Km are traveled in 2002, what is the book value of the truck at
December 31, 2002? The company uses the units-of-activity amortization method.
C. Calculate the amount of amortization expense for the year ended December 31, 2002, using the straight-line
method of amortization.
Section C
1. Hannah Company purchased factory equipment with an invoice price of
$60,000. Other costs incurred were freight costs, $1,100;
installation
wiring and foundation, $2,200; material and labour
costs in testing equipment, $700; oil lubricants and supplies to be
used with equipment, $500; fire insurance policy covering equipment,
$1,400. The equipment is estimated to have a $5,000 residual value
at the end of its 8-year useful service life.
INSTRUCTIONS
(a) Calculate the acquisition cost of the equipment. Identify each
element of cost clearly.
(b) If the double declining-balance method of amortization was used,
the constant percentage applied to a declining book value would
be __________.
2. MLR Company purchased equipment on January 1, 2001 for $60,000.
It is estimated that the equipment will have a $5,000 residual value
at the end of its 5-year useful life. It is also estimated that the
equipment will produce 100,000 units over its 5-year life.
INSTRUCTIONS
Answer the following independent questions.
1. Calculate the amount of amortization expense for the year ended
December 31, 2001, using the straight-line method of
amortization.
2. If 16,000 units of product are produced in 2001 and 24,000 units
are produced in 2002, what is the book value of the equipment at
December 31, 2002? The company uses the units-of-activity
amortization method.
3. If the company uses the double declining-balance method of
amortization, what is the balance of the Accumulated
Amortization——Equipment account at December 31, 2003?
3. For each of the following unrelated transactions, (a) determine the
amount of the amortization expense for the current year, and (b)
present the adjusting entries required to record each expense at
year end.
(1) Timber rights were purchased on a tract of land for $480,000.
The timber is estimated at 2,800 cubic metres. During the
current year, 180 cubic metres of timber were cut and sold.
(2) A company purchased another company on July 1 and recorded
goodwill of $80,000.
(3) Costs of $1,000 were incurred on January 1 to obtain a patent.
Shortly thereafter, $29,000 was spent in legal costs to
successfully defend the patent against competitors. The patent
has an estimated legal life of 20 years and a 12-year useful
life.
4. When vacant land is acquired, expenditures for clearing, draining,
filling, and grading should be charged to the _________________
account.
5. The cost of paving, fencing, and lighting a new company parking lot
is charged to a _________________ account.
6. Equipment with an invoice price of $20,000 was purchased and freight
costs were $600. The cost of the equipment would be $____________.
7. The net book value of a capital asset is obtained by subtracting
_________________ from the __________________ of the capital asset.
8. A copyright is an example of a(n) _______________ asset.
Section D: Chapter 10 – Amortization Application Questions
1. In recent years, Gadget Company purchased three machines. Amortization methods were chosen
based on the estimated life and use of each machine:
Date
Purchased
Machine
Cost
Residual
Value
Useful
Life
Amortization
Method
A
Jan. 1, 2000 $85,000
$5,000
10
Straight-Line
B
Jan. 1, 2001 $100,000
$10,000
5
Declining Balance
C
Feb. 1, 2002 $90,000
$5,000
6
Units of Activity
For the declining balance, the company uses double the straight-line rate. For units of activity, the
machine is expected to produce 50,000 units. The actual usage for 2002 was 8,000 units, 2003 usage
was 10,000 units and 2004 was 9,000 units.
a) Calculate the amortization for each machine in 2002, 2003, and 2004.
b) Calculate the accumulated amortization for each machine at December 31, 2004.
2. Vijay's Deliveries purchased a truck on February 1, 2005. The truck cost $40,000, has a useful life
of seven years and a residual value of $5,000. It is estimated that in the life of the truck, it will be able
to travel 500,000 km. It traveled 120,000 km in 2005, and is projected to travel 110,000 km in 2006.
a) Calculate the amortization for 2005 using the three methods of amortization (straight-line, usage
and double declining balance) at December 31.
3. At the beginning of 1999, the Beliveau Gold Company bought mining equipment costing $50,000.
It was estimated then that the equipment had a useful life of five years and a residual value of
$5,000. The straight-line method is considered the most appropriate method to use for
amortization. The amortization will be recorded at the end of each year.
At the beginning of 2001, an adjustment is made in the estimation of the useful life. It is now
estimated that the equipment will have a useful life of seven years, not five.
At the beginning of 2003, the residual value is reduced to $2,500.
Calculate the Amortization Expense using the following table:
Year
1999
…
2005
Amortization Expense
Accumulated
Amortization
Answers:
Section A: Multiple Choice
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. The declining-balance method of amortization produces
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.
7. 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.
8. 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.
9. 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
10. 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
11. 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.
12. 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.
13. 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.
Use the following information for questions 14–16.
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.
14. The land will be recorded at a cost of
a. $45,000.
b. $48,234.
c. $46,154.
d. $50,000.
15. The building will be recorded at a cost of
a. $150,000.
b. $140,000.
c.
$135,000.
d. $138,461.
16. The equipment will be recorded at a cost of
a. $125,000.
b. $120,000.
c. $118,723.
d. $115,384.
17. The following items should NOT be capitalized regarding a Truck:
a. Purchase price
b. Freight in
c. Yearly oil change
d. The cost of a new licence plate
Section B: 1. Determining Amortization Amounts
Avengers Company purchased a truck on January 1, 2001, for $60,000. It is estimated that the equipment will
have a $5,000 residual value at the end of its five-year useful life. It is also estimated that the equipment will travel
100,000 Km over its five-year life.
Instructions: Answer the following independent questions:
a) Calculate the amount of amortization expense for the year ended December 31, 2001, using the double
declining balance method of amortization.
b) If 16,000 Km are traveled in 2001 and 24,000 Km are traveled in 2002, what is the book value of the truck at
December 31, 2002? The company uses the units-of-activity amortization method.
c) Calculate the amount of amortization expense for the year ended December 31, 2002, using the straight-line
method of amortization.
ANSWER:
A. Double declining rate is 100/5 x 2 = 40%
Amortization Expense = 60,000 x .40 = 24000
B. Amortization/Unit = (60000-5000)/100000= $0.55/km
Amortization for 2001 = (16000 x 0.55) = 8800
Amortization for 2002 = (24000 x 0.55) = 13200
Total Amortization = 8800+13200= 22000
Book Value = Cost – Amortization = 60000 – 22000 = 38000
C. Straight line = (60000 – 5000)/5 = 11000/year
Section C
1. (10 min.)
(a) Invoice cost
Freight costs
Installation wiring and foundation
Material and labour costs in testing
Acquisition cost
$60,000
1,100
2,200
700
———————
$64,000
(b) If the double declining-balance method of amortization was
used, the constant percentage applied to a declining book value
would be
25%
(8 years = 12.5% x 2).
—————
2. (15 min.)
1. Straight-line method: $60,000 - $5,000
———————————————— = $11,000 per year
5
2. Units-of-activity method:
2001
2002
$60,000 - $5,000
———————————————— = $.55 per unit
100,000 units
16,000 units x $.55
24,000 units x $.55
Accumulated amortization
Cost of asset
Less: Accumulated Amortizaton
Net book value
=
=
=
$ 8,800
13,200
———————
$22,000
$60,000
22,000
———————
$38,000
3. Double declining-balance method:
2001
2002
2003
Net Book Value
Beginning
of Year
x
——————————————
$60,000
36,000
21,600
DecliningBalance Rate
————————————
40%
40%
40%
=
Amortization
Expense
————————————
$24,000
14,400
8,640
Accumulated
Amortization
————————————
$24,000
38,400
47,040
3. (10 min.)
(1) Calculation of amortization/cubic metre:
$480,000 ÷ 2,800 = $171.43/cubic metre
180 x $171.43 = $30,857.40
Amortization Expense ....................... 30,857.40
Accumulated Amortization .................
30,857.40
(2) No entry. Goodwill is not amortized.
(3) Legal costs to successfully defend a patent
are capitalized.
Amortization Expense .......................
Patent ...................................
($30,000 ÷ 12 years = $2,500)
2,500.00
2,500.00
4. Land
5. Land Improvement
6. $20,600.
7. accumulated amortization, cost
8. intangible
Section D
Gadget Company Amortization
a)
Machine A
Straight Line = (Cost - Salvage Value)/Useful
Life
=(85000-5000)/10
=$8000/year
Therefore, the Amortization Expense in 2002,
2003 and 2004 will be $8000.
b) The accumulated amortization at the end of 2004 will be $24,000.
Machine B
Straight Line Rate = 100%/Useful Life
=100/5
=20%
Double the Straight Line Rate = 20% x 2
Year
2001
2002
2003
Book
Value
$100,000
$60,000.00
$36,000.00
Constant
Rate
40%
40%
40%
Amortization
Expense
$40,000.00
$24,000.00
$14,400.00
=40%
2004
2005
2006
$21,600.00
$12,960.00
$10,000.00
40%
40%
$8,640.00
$2,960.00
Adjusted
for residual
value
Therefore the Amortization expense will be:
2002 = 24,000
2003 = 14,400
2004 = 8640
b) The accumulated amortization at the end of 2004 will be $78,400.
Machine C
Usage per Unit = (cost-residual value)/# of units
= (90,000-5,000)/50,000
=$1.70/Unit
Year
2002
2003
2004
Number of
Units
8000
10000
9000
Amortization Expense
$13,600.00
$17,000.00
$15,300.00
Therefore the Amortization Expense will be:
2002 = $13,600
2003 = $17,000
2004 = $15300
b) The accumulated amortization at the end of 2004 will be $45,900.
2. Vijay's Deliveries purchased a truck on February 1, 2005. The truck cost $40,000, has a useful life
of seven years and a residual value of $5,000. It is estimated that in the life of the truck, it will be able to
travel 500,000 km. It traveled 120,000 km in 2005, and is projected to travel 110,000 km in 2006.
a) Calculate the amortization for 2005 using the three methods of amortization (straight-line, usage and
double declining balance) at December 31.
a) Straight Line Amortization Amount for 2005
=(Cost-Residual Value)/Useful Life
=(40,000-5,000)/7*(11/12)
This is a slightly different formula because we need to find the amount for 11 months, not 12.
We first calculate the Amortization per month and then multiply by the number of months we
need.
$4,583.33
Usage Amortization for 2005
Cost per Km=(Total Cost-Residual Value)/Total Km
=(40,000-5,000)/500,000
=$0.07 per Km
In 2005 the truck traveled 120,000 Km so the amortization is:
=0.07 x 120,000
=$8,400
Double Declining Balance for 2005
Declining balance rate = 100%/years
=100/7
=14.29
The double declining rate per year is:
=14.29 x2
=29%
The Amortization for 2005 is:
=(40,000 x 0.29)x(11/12)
=$10,633.33
3. At the beginning of 1999, the Beliveau Gold Company bought mining equipment costing $50,000. It
was estimated then that the equipment had a useful life of five years and a residual value of $5,000. The
straight-line method is considered the most appropriate method to use for amortization. The amortization
will be recorded at the end of each year.
At the beginning of 2001, an adjustment is made in the estimation of the useful life. It is now estimated
that the equipment will have a useful life of seven years, not five.
At the beginning of 2003, the residual value is reduced to $2,500.
Calculate the Amortization Expense using the following table:
Year
Amortization Expense
Accumulated
Amortization
1999
2000
2001
2002
2003
2004
2005
3.
Year
1999
2000
2001
2002
2003
2004
2005
Amortization
Expense
9,000.00
9,000.00
5,400.00
5,400.00
6,233.33
6,233.33
6,233.33
Accumulated
Amortization
9,000.00
18,000.00
23,400.00
28,800.00
35,033.33
41,266.67
47,500.00
Amortization Expense = (50,000-5000)/5
Amortization Expense = (50,000-18000-5000)/5
Amortization Expense = (50,000-28800-2500)/3