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Test bank with answers for financial accounting 6e by libby chapter 08

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Chapter 008: Plant and Equipment

True / False Questions
1. Tangible long-lived, productive assets differ from intangible long-lived, productive assets
in that intangible assets have physical substance whereas tangible assets have no physical
substance.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

2. Patents and trademarks are examples of tangible assets.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1



3. Because of its large investment in equipment, Southwest Air Lines closely monitors the
unused seats on flights since it may be more profitable to reduce fares to fill more seats
thereby using more of the capacity.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

4. Building and equipment are recorded at their cost at acquisition and are subsequently
reported at cost plus accumulated depreciation.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

8-1
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Chapter 008: Plant and Equipment

5. The cash-equivalent cost of an asset received is measured as any cash given plus the current
market value of the non-cash consideration given up. If this value is not determinable, the
current market value of what is received should be used instead.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

6. If a second-hand machine is purchased for productive use in a business, all renovation and
repair costs on the used machine incurred by the purchaser prior to its productive use should
be excluded from the cost of the asset.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

7. In accounting for depreciation, acquisition cost and useful life usually are known quantities,
whereas residual value is an estimate because it relates to an amount in the future.
FALSE

AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 3

8. If an accountant calculates depreciation expense on an asset without taking into account the
asset's residual value of $10,000, depreciation expense for the periods will be higher than it
should have been.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

8-2
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Chapter 008: Plant and Equipment


9. On January 1, 2009 equipment was purchased for $80,000 and its estimated residual value
is $15,000 with an 8 year useful life. In the first year, the depreciation expense under the
double declining-balance method is $16,250.
FALSE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

10. If a long-lived asset has been impaired, then the entry will require a debit to a loss account
and a credit to the long-lived asset account.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

11. If a company has an asset with a book value of $5.0 million and estimates the future cash
flows to be received over the asset's remaining life equal to $5.5 million, no impairment has
occurred and no loss would be recognized.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

12. The first step in recording the disposal of a long-lived asset is to recognize depreciation
expense for the period of time since the last depreciation adjustment was made.
TRUE


AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

8-3
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Chapter 008: Plant and Equipment

13. Using a shorter estimated useful life for their fixed assets allows a company to reduce
reported net income over the fixed assets' useful lives. However, early disposal of these assets
could create reported gains thereby boosting income upon their disposal.
TRUE

AACSB Tag: Relative Thinking

Difficulty: Hard
L.O.: 5

14. The systematic and rational allocation of the acquisition cost of natural resources to those
periods in which the resources contribute to revenue is called depletion.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

15. Goodwill is the most commonly reported intangible asset and is recorded only when an
existing company is bought by another company and the purchase price exceeds the book
value of the purchased company's net assets.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 6

16. Research and development costs are most commonly expensed as incurred and not
capitalized.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

8-4
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Chapter 008: Plant and Equipment

17. Depreciation expense, as computed for financial reporting, has a direct effect on a
corporation's cash flow.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

18. For capital intensive companies like US Steel, depreciation is a significant non-cash
expense included in deriving net income.
TRUE

AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 7

19. Depreciation expense is added to net income under the indirect method when computing
cash flow from investing activities.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

20. When either the estimated useful life or estimated residual value (or both) of a long-lived,
productive asset are changed, all prior financial statements are reissued reflecting the
correction retroactively.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: Sup A

8-5
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Chapter 008: Plant and Equipment

Multiple Choice Questions
21. Long-lived, productive assets do not include the following kind of assets
A. land held for resale.
B. plant and equipment in use.
C. patents in use.
D. mineral deposits being mined.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

22. Rockwell, Inc., a manufacturing company, is preparing their annual financial statements.
Which of the following accounts would not be grouped under long-lived, productive assets?
A. Buildings.
B. Land on which the building is located.
C. Equipment.
D. Finished goods inventory.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1


23. Long-lived, productive assets that have physical substance are
A. Long-term investments.
B. Intangible assets.
C. Tangible assets.
D. Current assets.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

8-6
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Chapter 008: Plant and Equipment


24. Tangible assets include
A. Land, buildings and natural resources.
B. Land, buildings and leaseholds.
C. Natural resources, buildings, and franchises.
D. Licenses, trademarks, and land.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

25. Intangible assets include
A. Natural resources, patents, and trademarks.
B. Accounts receivable, franchises, and trademarks.
C. Copyrights, licenses, and land.
D. Leaseholds, patents and copyrights.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

26. Which statement is false?
A. Shortening the estimated useful lives of operational assets will lead to a higher fixed asset
turnover.
B. Using an accelerated depreciation method instead of straight-line will lead to reporting a
higher fixed asset turnover.
C. Acquiring more long-lived, productive assets when a company is growing will lead to a
lower fixed asset turnover.
D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed
asset turnover.


AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 1

8-7
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Chapter 008: Plant and Equipment

27. On March 1, Wright Company purchased new equipment for $50,000. Wright paid cash
for the equipment. Other costs associated with the equipment were: transportation costs,
$1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the
equipment was
A. $56,500.
B. $54,000.
C. $51,000.

D. $50,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

28. The amount of sales tax paid on the purchase of new machinery should be debited to
A. the machinery account.
B. a separate deferred charge account.
C. a sales tax expense account.
D. accumulated depreciation for machinery.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

29. On August 1, Red Company purchased computer equipment for $10,000 cash and also
gave 100 shares of White common stock held by Red Company as an investment. The White
common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. The
installation cost was $700 and the shipping cost was $500. What amount should be the total
amount debited to the computer equipment account?
A. $14,200.
B. $15,000.
C. $15,400.
D. $16,200.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2


8-8
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Chapter 008: Plant and Equipment

30. Salvia Company recently purchased a truck. The price negotiated with the dealer was
$40,000. Salvia Company also paid sales tax of $2,000 on the purchase, shipping and
preparation costs of $3,000, and insurance for the first year of operation of $4,000. For the
truck, what amount should be debited to the asset account Vehicles?
A. $40,000.
B. $42,000.
C. $43,000.
D. $45,000.

AACSB Tag: Analytic
Difficulty: Medium

L.O.: 2

31. The book value of a tangible long-lived, productive asset is the
A. acquisition cost.
B. current estimated market value.
C. acquisition cost minus the balance in accumulated depreciation.
D. total depreciation that has been recorded on the asset to date.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

32. Which of the following costs would be subtracted from the acquisition cost of equipment
purchased from a supplier?
A. Cost to install the equipment.
B. A purchase discount offered by the supplier.
C. The cost to widen an entrance in the building to bring the equipment into the facilities.
D. The cost of freight paid to get the equipment into the facilities.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

8-9
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Chapter 008: Plant and Equipment

33. If an expenditure is treated as a capital expenditure, instead of as a revenue expenditure,
which of the following statements is true?
A. The current year's net income will be lower and future depreciation expense will be higher.
B. The current year's net income will be higher and future depreciation expense will be lower.
C. The current year's net income will be higher and future depreciation expense will be
higher.
D. The current year's net income will be lower and future depreciation expense will be lower.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

34. Which of the following would not be included in the acquisition cost of a building?
A. The purchase price of a building including title transfer fees.
B. The cost of putting new windows and doors in the building before it opens for operations.
C. The cost of paving the parking lot and outdoor lighting in the lot.
D. The cost of paying an architect to design the remodeling modifications of the building
before the store opens.


AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

35. A company acquires land by issuing 10,000 shares of its $10 par value common stock
currently trading at $20 per share and the appraised value of the land is $250,000. We would
record the land by
A. Using its appraised value of $250,000 and recognize a gain of $50,000 since we are issuing
stock only currently worth $200,000.
B. Record the land at the value of the consideration given up, $200,000.
C. Record the land at the average of its appraised value of $250,000 and the $200,000 value
of the stock issued, thereby recognizing a $25,000 gain.
D. Record the land at the par value of the stock given up, $100,000.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

8-10
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Chapter 008: Plant and Equipment

36. A company may include interest cost as part of the cost of the asset
A. when they buy a piece of equipment and finance its acquisition by a bank loan.
B. when they must borrow money to finance the manufacture of their inventory items.
C. when they are self-constructing a piece of equipment they will use to manufacture their
products but only during the period of construction.
D. under no circumstances as interest is never capitalized.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

37. Which of the following is false?
A. Replacement of a truck's tires would be treated as a capital expenditure.
B. The cost of replacing carpet in a building would be a revenue expenditure.
C. Cost of replacing a roof on a newly purchased building before using it as a store would be
a capital expenditure.
D. The cost of repainting a hallway would be a revenue expenditure.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2


38. In 2010, Gilbert Company made an ordinary repair to a delivery truck at a cost of $500.
Gilbert Company's accountant debited the asset account, Delivery Vehicles. Was this
treatment an error, and if so, what will be the effect on the financial statements of Gilbert
Company?
A. The repair was accounted for correctly.
B. The error increased assets and net income in 2010.
C. In the years following 2010, net income will be too high.
D. The error decreased net income in 2010.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

8-11
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Chapter 008: Plant and Equipment

39. Which of the following would most likely not be a revenue expenditure?
A. Replacing carpet in the sales department's offices.
B. Repairing a leaky roof.
C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver
appliances.
D. Painting the exterior of a store.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

40. The main purpose of recording depreciation is to
A. allocate the cost of a tangible asset to the periods in which its use contributes to generating
revenue.
B. estimate the remaining useful life of the asset.
C. report the asset on the balance sheet at the estimated amount for which the asset could be
sold on the balance sheet date.
D. estimate the current replacement cost of the asset.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

41. Residual value is
A. equal to the acquisition cost of a tangible long-lived, productive asset.
B. the same as book value of an asset.
C. the amount expected to be recovered when an asset is disposed of at the end of its
estimated useful life.

D. the current value of an asset as of the balance sheet date.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

8-12
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Chapter 008: Plant and Equipment

42. In accounting for tangible long-lived, productive assets, the continuity assumption is
important
because it
A. helps a company decide whether to use straight-line depreciation or an accelerated
depreciation method.

B. justifies depreciating the asset over its expected useful life, without anticipating that the
business will liquidate in the near future.
C. provides justification for including residual values in calculating depreciation.
D. is consistent with maintaining assets in the accounting records at market value rather than
acquisition cost.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

43. On January 1, 2009, Woodstock, Inc. purchased a machine with a cash price of $40,000.
Woodstock, Inc., also paid $1,000 for transportation and installation. The expected useful life
of the machine is 6 years and the residual value is $5,000. Assuming straight-line
depreciation, the annual depreciation expense would be
A. $6,100.
B. $6,000.
C. $5,950.
D. $5,750.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

44. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line
basis of $2,700 per year. The residual value was estimated to be 10% of cost. The estimated
useful life is
A. 3 years.
B. 4 years.
C. 5 years.
D. 6 years.


AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

8-13
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Chapter 008: Plant and Equipment

45. Warren Company plans to depreciate a new building using double declining-balance
depreciation. The building cost $800,000. The estimated residual value of the building is
$50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation
expense was recorded properly, what would be the amount of depreciation expense for the
second year?
A. $30,720.

B. $32,000.
C. $58,880.
D. $64,000.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

46. Which method of depreciation results in periodic depreciation expense that fluctuates
from one period to the next, not necessarily in a steadily upward or downward direction?
A. Straight-line.
B. Units-of-production.
C. Amortization.
D. Declining balance.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

47. In which depreciation method is the first year's depreciation computed by applying the
depreciation rate to the total cost of the asset (without reducing it for residual value)?
A. Straight-line.
B. Units-of-production.
C. Amortization.
D. Declining-balance.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3


8-14
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Chapter 008: Plant and Equipment

48. Hill Inc. purchased an asset on January 1, 2009. Hill Inc., chose the accelerated
depreciation method to depreciate the asset. Had Hill Inc., chosen the straight-line method
A. depreciation expense would be smaller in 2009.
B. the book value of the asset would be less at the end of 2009.
C. net income would be less in 2009.
D. the book value of the asset would be less at the end of the asset's life.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3


49. On January 1, 2009, Pyle Company purchased an asset that cost $50,000 (no estimated
residual value, estimated useful life 8 years, straight-line depreciation is used). An error was
made because the total cost amount was debited to an expense account for 2009 and no
depreciation on it was recorded. Pretax income for 2009 was $42,000. The correct pretax
income for 2009 was
A. $35,750.
B. $48,250.
C. $85,750.
D. $92,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

50. Schager Company purchased a computer system on January 1, 2009, at a cash cost of
$25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The
company will use the double declining-balance method. Depreciation expense for the second
year will be
A. $5,000.
B. $4,000.
C. $3,800.
D. $2,200.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

8-15
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Chapter 008: Plant and Equipment

51. A company decided to use the units of production method to calculate depreciation on a
car to be driven by the sales manager. The amount of annual depreciation will most likely
vary with the
A. age of the car.
B. balance in accumulated depreciation.
C. number of miles the car is driven.
D. amount of maintenance expense incurred on the car.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

52. How is the matching principle related to the recording of depreciation on tangible longlived, productive assets?
A. The matching principle requires a company to use the same depreciation.

B. Once a particular depreciation method is adopted for a particular asset, the owner must
continue to use the same method.
C. The accountant who calculates the depreciation may assume that the company will
continue in business as long as the estimated useful life of the asset.
D. A portion of the cost of the asset should be allocated as an expense to the periods in which
the asset helps the business to generate revenue.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

53. Which of the following is false?
A. The book value at the end of an asset's useful life will be the same under all the
depreciation methods allowed under GAAP.
B. The total depreciation in the accumulated depreciation account will be the same at the end
of the asset's useful life under all the methods allowed under GAAP.
C. Once you select a depreciation method, then you must use this method for all depreciable
assets.
D. The annual depreciation expense will differ under the various depreciation methods.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

8-16
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Chapter 008: Plant and Equipment

54. Under what conditions would a company most likely adopt the double declining-balance
method for financial reporting?
A. They have high technology, robotic equipment in their plant that becomes obsolete quickly
and declines in utility to the company more rapidly in the early years of the assets' lives.
B. They have a fleet of trucks where repair costs are minimal as the fleet ages.
C. They expect the asset to lose its market value more rapidly in the first few years of its life.
D. They have a building that has an estimated useful life of 50 years.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

55. Which of the following is a true statement?
A. Companies can change the method of depreciating assets from one year to the next.
B. Companies can affect the book value at the end of an asset's life by choosing one method
of depreciation over another.
C. Companies can use one method of depreciation for some of their long-lived, productive

assets but then use a different method for another group or type of long-lived, productive
assets.
D. Companies can minimize an asset's book value in the first year of use by selecting the
straight line method.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

56. Which of the following is true?
A. Using straight-line depreciation in comparison to an accelerated method will lead to a
lower earnings per share in the first year of an asset's life.
B. Using accelerated depreciation in the first year of an asset's life will report a higher net
profit margin compared to using straight-line.
C. Using accelerated depreciation will lead to a higher total asset turnover in the first year.
D. Using straight-line depreciation in comparison to an accelerated method will lead to a
higher current ratio in the first year of an asset's life.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

8-17
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Chapter 008: Plant and Equipment

57. Which of the following statements about the Modified Accelerated Cost Recovery System
(MACRS) is true?
A. It is similar to the double declining-balance method.
B. It is applied using longer asset lives than the estimated useful lives required by GAAP.
C. It provides a tax benefit because of the higher depreciation expense reported in the early
years of the asset's life.
D. It is acceptable for use when preparing your financial statements.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

58. Which of the following statements about asset impairment is false?
A. Asset impairment is caused by events or circumstances where the estimated future cash
flows are greater than the asset's net book value.
B. If an asset is impaired, a loss would be recognized in the period it can be estimated.
C. Impairment will lead to writing down the asset's cost.
D. Asset impairment is caused by events or circumstances where the estimated future cash
flows are less than the asset's net book value.


AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4

59. Coca Cola has some bottling equipment which cost $8.5 million, has a book value of $4.1
million, and has estimated future cash flows of $3.7 million expected over its remaining life.
The amount to be recorded as a loss equals
A. the $8.5 million cost.
B. the $4.1 million book value.
C. the $.4 million difference between the book value and its future cash flows.
D. the $4.8 million difference between the asset's cost and its future cash flows.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 4

8-18
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Chapter 008: Plant and Equipment

60. If Southwest Airlines determines that an asset has been impaired by $2 million then which
of the following will occur at the end of the current accounting period?
A. No action will be taken to recognize its impairment until the asset is sold.
B. The impairment will not affect the accounts but will be disclosed in the footnotes.
C. A debit to retained earnings will be recorded for the effect of the loss thereby bypassing the
income statement.
D. A credit to the asset's account will be recorded for the amount of the loss.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4

61. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The
original cost of the crane was $5.0 million and its accumulated depreciation equaled $4.2
million on December 31, 2010; they had been using the straight-line depreciation method. The
estimated residual value was zero and its useful life was 25 years. What is the gain or loss on
the equipment on December 31, 2010?
A. $250,000 loss
B. $400,000 gain
C. $200,000 loss
D. $200,000 gain

AACSB Tag: Analytic
Difficulty: Medium

L.O.: 5

62. If a company sold a long-lived, productive asset at a price equal to its book value, the
selling company would record
A. no gain or loss.
B. a gain.
C. a loss.
D. an extraordinary item.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

8-19
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Chapter 008: Plant and Equipment

63. Which of the following is correct when recording the disposal of equipment for a gain?
A. A debit to a gain account.
B. A credit to the equipment account for the asset's book value.
C. A debit to accumulated depreciation for the depreciation accumulated to the time of
disposal.
D. A debit to the asset account.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

64. Carter Co. disposed of an asset at the end of year 8 of the asset's life originally estimated
to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000 and
it was being depreciated under the straight-line method. It was sold for $10,000 cash. What
was the gain or loss on the disposal at the end of year 8?
A. $1,000 gain
B. $4,000 loss
C. No gain or loss
D. $10,000 gain

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 5

65. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life
of five years and residual value of $0. The computer was depreciated by the straight-line
method and was sold at the end of the fourth year of use for $3,000 cash. Amanda Company
should record

A. a gain of $1,000.
B. a loss of $1,000.
C. neither a gain nor a loss the computer was sold at its book value.
D. neither a gain nor a loss the gain that occurred in this case would not be recognized.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 6

8-20
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Chapter 008: Plant and Equipment

66. On March 1, 2009, Anniston Company purchased a producing oil well at a cash cost of
$1,000,000. It is estimated that 1,500,000 barrels of oil can be produced over the remaining

life of the well. By December 31, 2009 (end of the accounting period), 150,000 barrels of oil
were produced and sold. The amount of depletion for 2009 on this well that should be added
to oil inventory would be
A. $100,000.
B. $125,000.
C. $ 90,000.
D. $ 85,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 6

67. Which of the following is most likely to be an intangible asset with an indefinite life?
A. Leasehold rights
B. Franchise
C. Patent
D. Goodwill

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

68. Which one of the following would not be recorded as an intangible long-lived, productive
asset?
A. Leasehold rights
B. Copyright
C. Internally generated goodwill
D. Franchise

AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 6

8-21
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Chapter 008: Plant and Equipment

69. Which of the following methods ordinarily would be the most appropriate to determine
depletion of natural resources for financial reporting purposes?
A. Straight-line.
B. Double declining-balance.
C. Specific identification.
D. Units of production.

AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 6

70. The term used for matching the cost of an intangible asset with the revenues generated
through the use of the asset is
A. depreciation.
B. depletion.
C. amortization.
D. appraisal.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

71. Failure to record amortization expense on a patent during the current year
A. would cause net income to be overstated for the year but would have no effect on total
assets.
B. would cause both net income for the year and total assets to be overstated.
C. would cause total assets to be overstated but would have no effect on net income for the
year.
D. is allowed under Generally Accepted Accounting Principles.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

8-22
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Chapter 008: Plant and Equipment

72. Depletion is recorded for natural resources
A. to recognize increases in market value with the passage of time.
B. to match the cost of resources used up with the revenues that are earned.
C. and for buildings and equipment used in extracting the resource.
D. by a method similar to declining balance depreciation.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

73. In accounting, goodwill
A. may be recorded whenever a company achieves a level of net income that exceeds the
industry average.
B. does not need to be amortized its value never decreases.
C. may be recorded when a company purchases another business.

D. must be expended in the period it is recorded because benefits from goodwill are difficult
to identify.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

74. The Bowtie Company reported net income of $1,872 million in 2009 along with
depreciation expense of $1,412 million and $978 million paid for purchases of property, plant
and equipment. What would be the effect on cash flows from operating activities?
A. Depreciation would increase and the property, plant and equipment purchases would
decrease cash flow from operations.
B. Depreciation would increase and property, plant and equipment purchases would increase
cash flows from operations.
C. Depreciation would increase cash flow from operations but the property, plant and
equipment purchases would have no effect on cash flow from operations.
D. Depreciation is a non-cash expense and would not be used to calculate cash flow from
operating activities.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

8-23
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Chapter 008: Plant and Equipment

75. Landmark Restaurants reported net income in 2008 of 45.9 million and depreciation
expense of $48.8 million. They also report additions to property and equipment of $162.9
million. Which of the following disclosures would appear on the 2008 statement of cash
flows?
A. Depreciation of $48.8 million would be deducted from net income under operating
activities and the additions $162.9 million would be added under investing activities.
B. Depreciation of $48.8 million would be added to net income under operating activities and
the additions $162.9 million would be added under investing activities.
C. Depreciation of $48.8 million would be added to net income under operating activities and
the additions $162.9 million would be deducted under investing activities.
D. Depreciation of $48.8 million would be deducted from net income under operating
activities and the additions $162.9 million would be deducted under investing activities.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 7

76. Williams Company purchased a machine at a cash cost of $25,000 and is depreciating it

over a 10-year estimated useful life with a residual value of $3,000. At the beginning of the
eighth year, a major overhaul on it was completed at a cost of $8,000, and the total estimated
useful life was changed from 10 to 12 years with the residual value unchanged. Depreciation
expense for year 8 would be (assuming straight-line) depreciation
A. $2,200.
B. $2,920.
C. $3,100.
D. $8,800.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: Sup A

8-24
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Chapter 008: Plant and Equipment

77. Augie Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of
five years and estimated residual value of $5,000. At the beginning of year three, Augie's
managers concluded that the total useful life would be four years, rather than five. There was
no change in the estimated residual value. What is the amount of depreciation that Augie
Corporation should record for year 3 under the straight-line method?
A. $15,500.
B. $ 8,250.
C. $11,000.
D. $16,500.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: Sup A

78. Pearson Corporation purchased a machine with an initial cost of $80,000, a residual value
of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Pearson
Corporation spent $10,000 for an extraordinary repair. Following the repair, Pearson
Corporation estimated that the machine had a remaining useful life of 8 years, and that the
residual value was unchanged. Calculate depreciation expense on the machine for the fifth
year, assuming that Pearson Corporation uses the straight-line method.
A. $5,625.
B. $7,250.
C. $7,500.
D. $6,875.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: Sup A


79. A revision of an asset's estimated useful life from 20 to 25 years after the asset has been
depreciated for 10 years would result in
A. reporting a lower fixed asset turnover ratio for year 11.
B. a lower earnings per share reported in year 11.
C. a lower return on equity for year 11.
D. a lower net income for year 11.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: Sup A

8-25
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