NAME: ________________________________________ HR: ______ DATE: ________________________________CHAPTER 10 – FIXED ASSETS AND INTANGIBLE ASSETS – STUDY GUIDE

TRUE/FALSE

_____ 1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets.

_____ 2. The cost of repairing damage to a machine during installation is debited to a fixed asset account.

_____ 3. The cost of computer equipment does not include the consultant’s fee to supervise installation of the equipment.

_____ 4. When cities give land or buildings to a company to locate in the community, no entry is made since there is no cost to the company.

_____ 5. Capital expenditures are costs of acquiring, constructing, adding, or replacing property, plant and equipment.

_____ 6. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are betterments.

_____ 7. The cost of replacing an engine in a truck is an example of ordinary maintenance.

_____ 8. A capital lease is accounted for as if the asset has been purchased.

_____ 9. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level for which it was intended.

_____ 10. The normal balance of the accumulated depreciation account is debit.

_____ 11. As a company depreciates a piece of equipment, its cash flow goes up.

_____ 12. All property, plant, and equipment assets are depreciated over time.

_____ 13. The depreciable cost of a building is the same as its acquisition cost.

_____ 14. It is necessary for a company to use the same depreciation method for all of its depreciable assets.

_____ 15. It is not necessary for a company to use the same depreciation method for financial statements and for determining income taxes.

_____ 16. An estimate of the amount which an asset can be sold at the end of its useful life is called residual value.

_____ 17. The units of production depreciation method matches expenses against revenue the best.

_____ 18. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts can not be changed.

_____ 19. Residual value is not incorporated in the initial calculations for double-declining-balance depreciation.

_____ 20. The double-declining-balance method is an accelerated depreciation method.

_____ 21. The double declining balance depreciation method calculates depreciation each year by taking twice the straight line rate times the book value of the asset at the beginning of each year.

_____ 22. When minor errors occur in the estimates used in the determination of depreciation, the amounts recorded for depreciation expense in the past should be corrected.

_____ 23. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method.

_____ 24. The amount of depreciation expense for a fixed asset costing, $95,000, with an estimated residual value of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-production method during a period when the asset was used for 4,500 hours.

_____ 25. When depreciation estimates are revised, all years of the asset’s life are affected.

_____ 26. For income tax purposes most companies use an accelerated depreciation method called double-declining- balance.

_____ 27. Assets may be grouped according to common traits and depreciated by using a single composite rate.

_____ 28. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same.

_____ 29. Revising depreciation estimates does affect the amounts of depreciation expense recorded in the past periods.

_____ 30. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated.

_____ 31. If an asset has not been fully depreciated, depreciation should be recorded prior to removing it from service and the accounting records.

_____ 32. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset.

_____ 33. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be recorded.

_____ 34. When old equipment is traded in for a new equipment, the difference between the list price and the trade in allowance is called boot.

_____ 35. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with the disposal of the asset.

_____ 36. Minerals removed from the earth are classified as tangible assets.

_____ 37. The method used to calculate the depletion of a natural resource is the straight line method.

_____ 38. Intangible assets differ from property, plant, and equipment assets in that they lack physical substance.

_____ 39. Patents are exclusive rights to manufacture, use, or sell a particular product or process.

_____ 40. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset’s book value.

MULTIPLE CHOICE

_____ 41. A characteristic of a fixed asset is that it isa. Intangibleb. Used in the operations of a businessc. Held for sale in the ordinary course of the businessd. A long term investment

_____ 42. Which of the following should be included in the acquisition cost of a piece of equipment?a. Transportation costsb. Installation costsc. Testing costs prior to placing the equipment into productiond. All are correct

_____ 43. Which of the following is included in the cost of constructing a building?a. Insurance costs during constructionb. Cost of paving parking lotc. Cost of repairing vandalism damage during constructiond. Cost of removing the demolished building existing on the land when it was purchased

_____ 44. Accumulated Depreciationa. Is used to show the amount of cost expiration of intangiblesb. Is the same as Depreciation Expensec. Is a contra asset accountd. Is used to show the amount of cost expiration of natural resources

_____ 45. A used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $3,000, would have a cost basis of

a. $93,000b. $90,000c. $82,000d. $85,000

_____ 46. Expenditures that add to the utility of fixed assets for more than one accounting period area. Committed expendituresb. Revenue expendituresc. Current expendituresd. Capital expenditures

_____ 47. In a lease contract, the party who legally owns the asset is the a. Lesseeb. Lessorc. Operatord. Banker

_____ 48. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue isa. Declining-balanceb. Straight-linec. Units-of-productiond. MACRS

_____ 49. A machine with a cost of $80,000 has an estimated residual value of $5,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the units-of-production method. What is the amount of depreciation for the second full year, during which the machine was used, 5,000 hours?

a. $5,000b. $25,000c. $15,000d. $26,667

_____ 50. The most widely used depreciation method is a. Straight-lineb. Sum-of-the-years-digitsc. Declining-balanced. Units-of-production

_____ 51. The depreciation method that does not use residual value in calculating the first year’s depreciation expense isa. Straight-lineb. Units-of-productionc. Double-declining-balanced. None of the above

_____ 52. Residual value is also known as all of the following excepta. Scrap valueb. Trade in valuec. Salvage valued. Net book value

_____ 53. The formula for depreciable cost isa. Initial cost + residual valueb. Initial cost – residual valuec. Initial cost – accumulated depreciationd. Depreciable cost = initial cost

_____ 54. Expected useful life isa. Calculated when the asset is soldb. Estimated at the time that the asset is placed in servicec. Determined each year that the depreciation calculation is maded. None of the answers are correct

_____ 55. The calculation for annual depreciation using the straight-line depreciation method isa. Initial cost / estimated useful lifeb. Depreciable cost / estimated useful lifec. Depreciable cost * estimated useful lifed. Initial cost * estimated useful life

_____ 56. The calculation for annual depreciation using the units-of-production method isa. (initial cost/estimated output) * the actual yearly outputb. (depreciable cost/yearly output) * estimated outputc. Depreciable cost/yearly outputd. (depreciable cost/estimated output) * the actual yearly output

_____ 57. Which of the following is true?a. If using the double-declining-balance the total amount of depreciation expense during the life of the

asset will be the highestb. If using units-of-production, it is possible to depreciate more than the depreciable costc. If using the straight line method, the amount of depreciation expense during the first year is higher than

that of the double-declining-balanced. Regardless of the depreciation method, the amount of total depreciation expense during the life of the

asset will be the same

_____ 58. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $5,000, the cost basis of the new asset isa. $54,000b. $59,500c. $60,000d. $60,500

_____ 59. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3.500. What is the amount of gain or loss on disposal of the fixed asset?

a. $2,000 lossb. $1,500 lossc. $3,500 gaind. $2,000 gain

_____ 60. The Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. in recording this transaction, Bacon Company should recorda. The new machinery at $16,700b. The new machinery at $12,700c. A gain of $1,500d. A loss of $1,500

_____ 61. When a company discards machinery that is fully depreciated, this transaction would be recorded with the following entrya. Debit accumulated depreciation, credit machineryb. Debit machinery, credit accumulated depreciationc. Debit cash, credit accumulated depreciationd. Debit depreciation expense, credit accumulated depreciation

_____ 62. On December 31, Strike Company has decided to sell one of its batting cages. The initial cost of the equipment was $215,000 with an accumulated depreciation of $185,000. Depreciation has been taken up to the end of the year. The company found a company that is willing to buy the equipment for $30,000. What is the amount of the gain or loss on this transaction?a. Gain of $30,000b. Loss of $30,000c. No gain or lossd. Cannot be determined

_____ 63. The accumulated depletion account isa. An expense accountb. An intangible asset accountc. Reported on the income statement as other expensed. Reported on the balance sheet as a deduction from the cost of the mineral deposit

_____ 64. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is calleda. Depletionb. Deferralc. Amortizationd. Depreciation

_____ 65. Expenditures for research and development are generally recorded asa. Current operating expensesb. Assets and amortized over their estimated useful lifec. Assets and amortized over 40 yearsd. Current assets

_____ 66. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of intangible asset isa. Amortizationb. Depletionc. Depreciationd. Allocation

_____ 67. Which intangible assets are amortized over their useful life?a. Trademarksb. Goodwillc. Patentsd. All of the above

_____ 68. The exclusion right to a certain name or symbol is called a a. Franchiseb. Patentc. Trademarkd. Copyright

_____ 69. Fixed assets are ordinarily presented in the balance sheeta. At current market valuesb. At replacement costsc. At cost less accumulated depreciationd. In a separate section along with intangible assets

_____ 70. Machinery was purchased on January 1, 2009 for $51,000. The machinery has an estimated life of 7 years and an estimated salvage value of $9,000. Sum-of-year’s-digits depreciation for 2010 would bea. $10,929b. $6,000c. $10,500d. $9,000

_____ 71. When determining whether to record an asset as a fixed asset, what two criteria must be met?a. Must be an investment and must be long livedb. Must be long lived and must use the asset in a productive mannerc. Must be long lived and must be a tangible assetd. Must be a tangible asset and must be an investment

_____ 72. Factors contributing to a decline in the usefulness of a fixed asset may be divided into the following two ‘

categoriesa. Salvage and functionalb. Physical and functionalc. Residual and salvaged. Functional and residual

_____ 73. A fixed asset’s estimated value at the time it is to be retired from service is calleda. Book valueb. Residual valuec. Market valued. Carrying value

_____ 74. All of the following below are needed for the calculation of straight line depreciation excepta. Costb. Residual valuec. Estimated lifed. Units produced

_____ 75. The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset isa. Units-of-productionb. Declining-balancec. Straight lined. Time valuation

PROBLEM

76. Computer equipment was acquired at the beginning of the year at a cost of $45,000 that has an estimated residual value of $3,000 and an estimated useful life of 4 years. Determine the (a) depreciable cost, (b) straight line rate, and (c) annual straight line depreciation

77. Eagle Country Club has acquired a lot to construct a clubhouse. Eagle had the following costs related to the construction:

Architects’ Fees $25,000Construction Labor 80,000Engineers’ Fees 15,000Fences around building 9,000Grading and leveling 10,000Insurance costs incurred during construction 7,000Interest on money borrowed for construction 5,000Land 37,000Building Materials 237,000Sales Taxes 6,000Trees and Shrubs 6,000

Determine the cost of the Club House to be reported on the balance sheet:

78. XYZ Co. incurred the following costs related to the office building used in operating its sports supply company:

a. Replaced a broken windowb. Replaced the roof that had been on the building 23 yearsc. Serviced all the air conditioners before summer startedd. Preplaced the air conditioners with refrigerated air conditioners in the customer service areas.e. Added a warehouse to the back of the buildingf. Repainted the interior wallsg. Installed window shutters on all windows

a. ________________________________b. ________________________________c. ________________________________d. ________________________________e. ________________________________f. ________________________________g. ________________________________