11.7: Practice Questions

Multiple Choice

1.

LO 11.1Property, Plant, and Equipment is considered which type of asset?

1. current asset
2. contra asset
3. tangible asset
4. intangible asset

2.

LO 11.1Which of the following would not be considered an intangible asset?

1. goodwill
2. patent
3. copyright
4. inventory

3.

LO 11.1The legal protection that provides a company exclusive rights to produce and sell a unique product is known as which of the following?

1. trademark
2. copyright
3. patent
4. goodwill

4.

LO 11.2Which of the following statements about capitalizing costs is correct?

1. Capitalizing costs refers to the process of converting assets to expenses.
2. Only the purchase price of the asset is capitalized.
3. Capitalizing a cost means to record it as an asset.
4. Capitalizing costs results in an immediate decrease in net income.

5.

LO 11.2Ngo Company purchased a truck for $54,000. Sales tax amounted to $5,400; shipping costs amounted to $1,200; and one-year registration of the truck was $100. What is the total amount of costs that should be capitalized?

1. $60,600
2. $66,100
3. $54,000
4. $59,400

6.

LO 11.2If a company capitalizes costs that should be expensed, how is its income statement for the current period impacted?

1. Assets understated
2. Net Income understated
3. Expenses understated
4. Revenues understated

7.

LO 11.3Depreciation of a plant asset is the process of ________.

1. asset valuation for statement of financial position purposes
2. allocation of the asset’s cost to the periods of use
3. fund accumulation for the replacement of the asset
4. asset valuation based on current replacement cost data

8.

LO 11.3An accelerated depreciation method that takes more expense in the first few years of the asset’s life is ________.

1. units-of-production depreciation
2. double-declining-balance depreciation
3. accumulated depreciation
4. straight-line depreciation

9.

LO 11.3The estimated economic life of an asset is also known as ________.

1. residual value
2. book value
3. salvage life
4. useful life

10.

LO 11.4The amortization process is like what other process?

1. depreciation
2. valuation
3. recognizing revenue
4. capitalization

11.

LO 11.4How are intangible assets with an indefinite life treated?

1. They are depreciated.
2. They are amortized.
3. They are depleted.
4. They are tested yearly for impairment.

12.

LO 11.4If the market value of goodwill is found to be lower than the book value, goodwill is __________ and must be adjusted by __________.

1. worthless; reducing it with a credit
2. impaired; reducing it with a credit
3. impaired; increasing it with a credit
4. worthless; increasing it with a credit

13.

LO 11.4Which of the following represents an event that is less routine when accounting for long-term assets?

1. recording an asset purchase
2. recording depreciation on an asset
3. recording accumulated depreciation for an asset or asset category
4. changing the estimated useful life of an asset

14.

LO 11.4Which of the following is true regarding special issues in accounting for long-term assets?

1. An asset’s useful life can never be changed.
2. An asset’s salvage value can never be changed.
3. Depreciation expense calculations may need to be updated using new and more accurate estimates.
4. Asset values are never reduced in value due to physical deterioration.

15.

LO 11.4The loss in value from all causes within a property except those due to physical deterioration is known as which of the following?

1. functional obsolescence
2. obsolescence
3. true obsolescence
4. deterioration

Questions

1.

LO 11.1What is the difference between tangible and intangible assets?

2.

LO 11.1Define intangible assets.

3.

LO 11.1What is the difference between a patent and a copyright?

4.

LO 11.1What is goodwill, and how is it generated?

5.

LO 11.2For each of the following transactions, state whether the cost would be capitalized (C) or recorded as an expense (E).

1. Purchased a machine, $100,000; gave long-term note
2. Paid $600 for ordinary repairs
3. Purchased a patent for $45,300 cash
4. Paid $200,000 cash for addition to old building
5. Paid $20,000 for monthly salaries
6. Paid $250 for routine maintenance
7. Paid $16,000 for major repairs

6.

LO 11.2What amounts should be recorded as a cost of a long-term asset?

7.

LO 11.2Describe the relationship between expense recognition and long-term assets.

8.

LO 11.3Define natural resources.

9.

LO 11.3Explain the difference between depreciation, depletion, and amortization.

10.

LO 11.4Explain the differences between the process of amortizing intangible assets and the process of depreciating tangible assets.

11.

LO 11.4What is goodwill, and what are the unique aspects of accounting for it?

12.

LO 11.5What are some examples of special issues in accounting for long-term assets? How are they handled?

13.

LO 11.5What is the difference between functional obsolescence and physical obsolescence?

Exercise Set A

EA1.

LO 11.1Fombell, Incorporated has the following assets in its trial balance:

What is the total balance of its Property, Plant, and Equipment?

EA2.

LO 11.2Jada Company had the following transactions during the year:

• Purchased a machine for $500,000 using a long-term note to finance it
• Paid $500 for ordinary repair
• Purchased a patent for $45,000 cash
• Paid $200,000 cash for addition to an existing building
• Paid $60,000 for monthly salaries
• Paid $250 for routine maintenance on equipment
• Paid $10,000 for extraordinary repairs

If all transactions were recorded properly, what amount did Jada capitalize for the year, and what amount did Jada expense for the year?

EA3.

LO 11.3Montello Inc. purchases a delivery truck for $15,000. The truck has a salvage value of $3,000 and is expected to be driven for eight years. Montello uses the straight-line depreciation method. Calculate the annual depreciation expense.

EA4.

LO 11.3Montello Inc. purchases a delivery truck for $15,000. The truck has a salvage value of $3,000 and is expected to be driven for 120,000 miles. Montello uses the units-of-production depreciation method and in year one it expects to use the truck for 23,000 miles. Calculate the annual depreciation expense.

EA5.

LO 11.3Steele Corp. purchases equipment for $25,000. Regarding the purchase, Steele recorded the following transactions:

• Paid shipping of $1,000
• Paid installation fees of $2,000
• Pays annual maintenance cost of $200
• Received a 5% discount on $25,000 sales price

Determine the acquisition cost of the equipment.

EA6.

LO 11.3Calico Inc. purchased a patent on a new drug. The patent cost $21,000. The patent has a life of twenty years, but Calico only expects to be able to sell the drug for fifteen years. Calculate the amortization expense and record the journal for the first-year expense.

EA7.

LO 11.3Alfredo Company purchased a new 3-D printer for $900,000. Although this printer is expected to last for ten years, Alfredo knows the technology will become old quickly, and so they plan to replace this printer in three years. At that point, Alfredo believes it will be able to sell the printer for $15,000. Calculate yearly depreciation using the double-declining-balance method.

EA8.

LO 11.3Using the information from Exercise 11.7, calculate depreciation using the straight-line method.

EA9.

LO 11.3Santa Rosa recently purchased a new boat to help ship product overseas. The following information is related to that purchase:

• Purchase price $4,500,000
• Cost to bring boat to production facility $25,000
• Yearly insurance cost $25,000
• Annual maintenance cost of $30,000
• Received 8% discount on sales price

Determine the acquisition cost of the boat, and record the journal entry needed.

EA10.

LO 11.3Warriors Productions recently purchased a copyright. Although the copyright is expected to last a minimum of twenty-five years, the chief executive officer of the company believes this B-list movie will only be useful for the next fifteen years. Calculate the amortization expense and record the journal for the first year’s expense. The total cost of the copyright was $15,000.

EA11.

LO 11.4The following intangible assets were purchased by Goldstein Corporation:

1. A patent with a remaining legal life of twelve years is bought, and Goldstein expects to be able to use it for seven years.
2. A copyright with a remaining life of thirty years is purchased, and Goldstein expects to be able to use it for ten years.

For each of these situations, determine the useful life over which Goldstein will amortize the intangible assets.

EA12.

LO 11.5Sand River Sales has a fork truck used in its warehouse operations. The truck had an original useful life of five years. However, after depreciating the asset for three years, the company makes a major repair that extends the life by four years. What is the remaining useful life after the major repair?

Exercise Set B

EB1.

LO 11.1New Carlisle, Incorporated, has the following assets in its trial balance:

What is New Carlisle’s total amount of intangible assets?

EB2.

LO 11.2Johnson, Incorporated had the following transactions during the year:

• Purchased a building for $5,000,000 using a mortgage for financing
• Paid $2,000 for ordinary repair on a piece of equipment
• Sold product on account to customers for $1,500,600
• Purchased a copyright for $5,000 cash
• Paid $20,000 cash to add a storage shed in the corner of an existing building
• Paid $360,000 in monthly salaries
• Paid $25,000 for routine maintenance on equipment
• Paid $110,000 for major repairs

If all transactions were recorded properly, what amount did Johnson capitalize for the year, and what amount did Johnson expense for the year?

EB3.

LO 11.3Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for ten years. Montello uses the straight-line depreciation method. Calculate the annual depreciation expense.

EB4.

LO 11.3Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one it expects to use the truck for 26,000 miles. Calculate the annual depreciation expense.

EB5.

LO 11.3Steele Corp. purchases equipment for $30,000. Regarding the purchase, Steele

• paid shipping of $1,200,
• paid installation fees of $2,750,
• pays annual maintenance cost of $250, and
• received a 10% discount on sales price.

Determine the acquisition cost of the equipment.

EB6.

LO 11.3Calico Inc. purchased a patent on a new drug it created. The patent cost $12,000. The patent has a life of twenty years, but Calico expects to be able to sell the drug for fifty years. Calculate the amortization expense and record the journal for the first year’s expense.

EB7.

LO 11.3Kenzie purchased a new 3-D printer for $450,000. Although this printer is expected to last for ten years, Kenzie knows the technology will become old quickly and so she plans to replace this printer in three years. At that point, Kenzie believes she will be able to sell the printer for $30,000. Calculate yearly depreciation using the double-declining-balance method.

EB8.

LO 11.3Using the information from Exercise 11.7, calculate depreciation using the straight-line method.

EB9.

LO 11.3Ronson recently purchased a new boat to help ship product overseas. The following information is related to that purchase:

• purchase price $4,500,000
• cost to bring boat to production facility $15,000
• yearly insurance cost $12,000
• pays annual maintenance cost of $22,000
• received a 10% discount on sales price

Determine the acquisition cost of the boat and record the journal entry needed.

EB10.

LO 11.3Warriors Production recently purchased a copyright on its new film. Although the copyright is expected to last a minimum of twenty-five years, the chief executive officer of the company believes this B-list movie will only be useful for the next five years. Calculate the amortization expense and record the journal for the first-year expense. The total cost of the copyright was $23,500.

EB11.

LO 11.4The following intangible assets were purchased by Hanna Unlimited:

1. A patent with a remaining legal life of twelve years is bought, and Hanna expects to be able to use it for six years. It is purchased at a cost of $48,000.
2. A copyright with a remaining life of thirty years is purchased, and Hanna expects to be able to use it for ten years. It is purchased for $70,000.

Determine the annual amortization amount for each intangible asset.

EB12.

LO 11.5Baglia’s Wholesale Trinkets has a 3-D printer used in operations. The original useful life was estimated to be six years. However, after two years of use, the printer was overhauled, and its total useful life was extended to eight years. How many years of depreciation remain after the overhaul in year 2?

Problem Set A

PA1.

LO 11.1Selected accounts from Phipps Corporation’s trial balance are as follows. Prepare the assets section of the company’s balance sheet.

PA2.

LO 11.1Selected accounts from Han Corporation’s trial balance are as follows. Prepare the detailed schedule showing the Property, Plant, and Equipment.

PA3.

LO 11.2During the current year, Alanna Co. had the following transactions pertaining to its new office building.

1. What should Alanna Co. record on its books for the land? The total cost of land includes all costs of preparing the land for use. The demolition cost of the old building is added to the land costs, and the sale of the old building scrap is subtracted from the land cost.
2. What should Alanna Co. record on its books for the building?

PA4.

LO 11.2During the current year, Arkells Inc. made the following expenditures relating to plant machinery.

• Renovated five machines for $100,000 to improve efficiency in production of their remaining useful life of five years
• Low-cost repairs throughout the year totaled $70,000
• Replaced a broken gear on a machine for $10,000
  1. What amount should be expensed during the period?
  2. What amount should be capitalized during the period?

PA5.

LO 11.2Jada Company had the following transactions during the year:

• Purchased a machine for $500,000 using a long-term note to finance it
• Paid $500 for ordinary repair
• Purchased a patent for $45,000 cash
• Paid $200,000 cash for addition to an existing building
• Paid $60,000 for monthly salaries
• Paid $250 for routine maintenance on equipment
• Paid $10,000 for major repairs
• Depreciation expense recorded for the year is $25,000

If all transactions were recorded properly, what is the amount of increase to the Property, Plant, and Equipment section of Jada’s balance sheet resulting from this year’s transactions? What amount did Jada report on the income statement for expenses for the year?

PA6.

LO 11.3Gimli Miners recently purchased the rights to a diamond mine. It is estimated that there are one million tons of ore within the mine. Gimli paid $23,100,000 for the rights and expects to harvest the ore over the next ten years. The following is the expected extraction for the next five years.

• Year 1: 50,000 tons
• Year 2: 90,000 tons
• Year 3: 100,000 tons
• Year 4: 110,000 tons
• Year 5: 130,000 tons

Calculate the depletion expense for the next five years, and create the journal entry for year one.

PA7.

LO 11.3Tree Lovers Inc. purchased 100 acres of woodland in which the company intends to harvest the complete forest, leaving the land barren and worthless. Tree Lovers paid $2,100,000 for the land. Tree Lovers will sell the lumber as it is harvested and expects to deplete it over five years (twenty acres in year one, thirty acres in year two, twenty-five acres in year three, fifteen acres in year four, and ten acres in year five). Calculate the depletion expense for the next five years and create the journal entry for year one.

PA8.

LO 11.3Referring to Exercise 11.7 where Kenzie Company purchased a 3-D printer for $450,000, consider how the purchase of the printer impacts not only depreciation expense each year but also the asset’s book value. What amount will be recorded as depreciation expense each year, and what will the book value be at the end of each year after depreciation is recorded?

PA9.

LO 11.4For each of the following unrelated situations, calculate the annual amortization expense and prepare a journal entry to record the expense:

1. A patent with a ten-year remaining legal life was purchased for $300,000. The patent will be usable for another eight years.
2. A patent was acquired on a new smartphone. The cost of the patent itself was only $24,000, but the market value of the patent is $600,000. The company expects to be able to use this patent for all twenty years of its life.

PA10.

LO 11.4Buchanan Imports purchased McLaren Corporation for $5,000,000 cash when McLaren had net assets worth $4,500,000.

1. What is the amount of goodwill in this transaction?
2. What is Buchanan’s journal entry to record the purchase of McLaren?
3. What journal entry should Buchanan write when the company internally generates additional goodwill in the year following the purchase of McLaren?

PA11.

LO 11.5Montezuma Inc. purchases a delivery truck for $15,000. The truck has a salvage value of $3,000 and is expected to be driven for eight years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After three years of recording depreciation, Montezuma determines that the delivery truck will only be useful for another three years and that the salvage value will increase to $4,000. Determine the depreciation expense for the final three years of the asset’s life, and create the journal entry for year four.

PA12.

LO 11.5Garcia Co. owns equipment that costs $76,800, with accumulated depreciation of $40,800. Garcia sells the equipment for cash. Record the journal entry for the sale of the equipment if Garcia were to sell the equipment for the following amounts:

1. $47,000 cash
2. $36,000 cash
3. $31,000 cash

PA13.

LO 11.5Colquhoun International purchases a warehouse for $300,000. The best estimate of the salvage value at the time of purchase was $15,000, and it is expected to be used for twenty-five years. Colquhoun uses the straight-line depreciation method for all warehouse buildings. After four years of recording depreciation, Colquhoun determines that the warehouse will be useful for only another fifteen years. Calculate annual depreciation expense for the first four years. Determine the depreciation expense for the final fifteen years of the asset’s life, and create the journal entry for year five.

Problem Set B

PB1.

LO 11.1Selected accounts from Hanna Corporation’s trial balance are as follows. Prepare the assets section of the company’s balance sheet.

PB2.

LO 11.1Selected accounts from Boxwood Corporation’s trial balance are as follows. Prepare the detailed schedule showing the Property, Plant, and Equipment.

PB3.

LO 11.2During the current year, Alanna Co. had the following transactions pertaining to its new office building.

1. What should Alanna Co. record on its books for the land? The total cost of land includes all costs of preparing the land for use. The demolition cost of the old building is added to the land costs, and the sale of the old building scrap is subtracted from the land cost.
2. What should Alanna Co. record on its books for the building?

PB4.

LO 11.2During the current year, Arkells Inc. made the following expenditures relating to plant machinery.

• Renovated seven machines for $250,000 to improve efficiency in production of their remaining useful life of eight years
• Low-cost repairs throughout the year totaled $79,000
• Replaced a broken gear on a machine for $6,000
  1. What amount should be expensed during the period?
  2. What amount should be capitalized during the period?

PB5.

LO 11.2Johnson, Incorporated, had the following transactions during the year:

• Purchased a building for $5,000,000 using a mortgage for financing
• Paid $2,000 for ordinary repair on a piece of equipment
• Sold product on account to customers for $1,500,600
• Paid $20,000 cash to add a storage shed in the corner of an existing building
• Paid $360,000 in monthly salaries
• Paid $25,000 for routine maintenance on equipment
• Paid $110,000 for extraordinary repairs
• Depreciation expense recorded for the year is $15,000.

If all transactions were recorded properly, what is the amount of increase to the Property, Plant, and Equipment section of Johnson’s balance sheet resulting from this year’s transactions? What amount did Johnson report on the income statement for expenses for the year?

PB6.

LO 11.3Underwood’s Miners recently purchased the rights to a diamond mine. It is estimated that there are two million tons of ore within the mine. Underwood’s paid $46,000,000 for the rights and expects to harvest the ore over the next fifteen years. The following is the expected extraction for the next five years.

• Year 1: 50,000 tons
• Year 2: 900,000 tons
• Year 3: 400,000 tons
• Year 4: 210,000 tons
• Year 5: 150,000 tons

Calculate the depletion expense for the next five years and create the journal entry for year one.

PB7.

LO 11.3Tree Lovers Inc. purchased 2,500 acres of woodland in which it intends to harvest the complete forest, leaving the land barren and worthless. Tree Lovers paid $5,000,000 for the land. Tree Lovers will sell the lumber as it is harvested and it expects to deplete it over ten years (150 acres in year one, 300 acres in year two, 250 acres in year three, 150 acres in year four, and 100 acres in year five). Calculate the depletion expense for the next five years and create the journal entry for year one.

PB8.

LO 11.3Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montello’s depreciation expense each year and what the truck’s book value will be each year after depreciation expense is recorded.

PB9.

LO 13.4Prepare the assets section of the balance sheet as of December 31 for Hooper’s International using the following information:

PB10.

LO 11.4For each of the following unrelated situations, calculate the annual amortization expense and prepare a journal entry to record the expense:

1. A patent with a seventeen-year remaining legal life was purchased for $850,000. The patent will be usable for another six years.
2. A patent was acquired on a new tablet. The cost of the patent itself was only $12,000, but the market value of the patent is $150,000. The company expects to be able to use this patent for all twenty years of its life.

PB11.

LO 11.4On May 1, 2015, Zoe Inc. purchased Branta Corp. for $15,000,000 in cash. They only received $12,000,000 in net assets. In 2016, the market value of the goodwill obtained from Branta Corp. was valued at $4,000,000, but in 2017 it dropped to $2,000,000. Prepare the journal entry for the creation of goodwill and the entry to record any impairments to it in subsequent years.

PB12.

LO 11.4Farm Fresh Agriculture Company purchased Sunny Side Egg Distribution for $400,000 cash when Sunny Side had net assets worth $390,000.

1. What is the amount of goodwill in this transaction?
2. What is Farm Fresh Agriculture Company’s journal entry to record the purchase of Sunny Side Egg Distribution?
3. What journal entry should Farm Fresh Agriculture Company write when the company tests for impairment and determines that goodwill is worth $1,000 in the year following the purchase of Sunny Side?

PB13.

LO 11.5Montezuma Inc. purchases a delivery truck for $20,000. The truck has a salvage value of $8,000 and is expected to be driven for ten years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After five years of recording depreciation, Montezuma determines that the delivery truck will be useful for another five years (ten years in total, as originally expected) and that the salvage value will increase to $10,000. Determine the depreciation expense for the final five years of the asset’s life, and create the journal entry for years 6–10 (the entry will be the same for each of the five years).

PB14.

LO 11.5Garcia Co. owns equipment that costs $150,000, with accumulated depreciation of $65,000. Garcia sells the equipment for cash. Record the journal entry for the sale of the equipment if Garcia were to sell the equipment for the following amounts:

1. $90,000 cash
2. $85,000 cash
3. $80,000 cash

PB15.

LO 11.5Urquhart Global purchases a building to house its administrative offices for $500,000. The best estimate of the salvage value at the time of purchase was $45,000, and it is expected to be used for forty years. Urquhart uses the straight-line depreciation method for all buildings. After ten years of recording depreciation, Urquhart determines that the building will be useful for a total of fifty years instead of forty. Calculate annual depreciation expense for the first ten years. Determine the depreciation expense for the final forty years of the asset’s life, and create the journal entry for year eleven.

Thought Provokers

TP1.

LO 11.1You are an accounting student at your local university. Your brother has recently managed to save $5,000, and he would like to invest some of this money in the stock market, so he’s researching various global corporations that are listed on the stock exchange. He is reviewing a company that has “Goodwill” as an item on the balance sheet. He is quite perplexed about what this means, so he asks you for help, knowing that you are taking accounting classes. How would you explain the concept of goodwill to him by comparing it to other types of resources the company has available?

TP2.

LO 11.2Speedy delivery service recently hired a new accountant who discovered that the prior accountant had erroneously capitalized routine repair and maintenance costs on delivery trucks. The costs were added to the overall trucks’ book values and depreciated over time. How should Speedy have recorded routine maintenance and repair costs? What effect did the error have on Speedy’s balance sheet and income statement?

TP3.

LO 11.3Speedy Delivery has a very lazy accountant. When originally setting up the delivery trucks into the accounting system, the accountant did not want to calculate the expected salvage value for each vehicle. He left salvage value at $0 even though this is not the case. Explain what leaving the salvage value at $0 would do for depreciation. Discuss the differences, if any, between straight-line, double-declining, and units-of-production methods.

TP4.

LO 11.4Malone Industries has been in business for five years and has been very successful. In the past year, it expanded operations by buying Hot Metal Manufacturing for a price greater than the value of the net assets purchased. In the past year, the customer base has expanded much more than expected, and the company’s owners want to increase the goodwill account. Your CPA firm has been hired to help Malone prepare year-end financial statements, and your boss has asked you to talk to Malone’s managers about goodwill and whether an adjustment can be made to the goodwill account. How do you respond to the owners and managers?

TP5.

LO 11.5Your family started a new manufacturing business making outdoor benches for use in parks and outdoor venues two years ago. The business has been very successful, and sales are soaring. Because of this success, your family realizes that the equipment purchased to start the business will not last as long as expected because the company has needed to run twenty-four-hour production shifts for most of the past year. There has been a lot of wear and tear on the equipment. The original useful lives and salvage values are not as accurate as your family had hoped. Your aunt, who is the production manager for the family business, has approached you because she is concerned about this issue, and she knows you have had an accounting class. What advice do you have for her? How should the company readjust given the realities of the last few years?