Chapter 7 Quiz

1. Which of the following is not recorded as an intangible asset in the balance sheet?

1. Research and development.
2. Goodwill.
3. Trademarks.
4. Patents.

2. Which of the following statements is false regarding the amortization of intangible assets?

1. The expected residual value of most intangible assets is zero.
2. The service life of an intangible asset is always equal to its legal life.
3. Goodwill is the most common intangible asset with an indefinite useful life.
4. Intangible assets with a limited useful life are amortized.

3. A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase?

1. $220,000.
2. $200,000.
3. $180,000.
4. $900,000.

4. Which of the following expenditures should be recorded as an expense?

1. Ordinary repairs and maintenance.
2. An improvement.
3. An addition which increases future benefit.
4. Successful legal defense of an intangible asset.

5. The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year?

1. $82,000.
2. $60,000.
3. $100,000.
4. 80,000.

6. Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

1. A loss of $35,000.
2. No gain or loss.
3. A gain of $10,000.
4. A loss of $10,000.

7. Which of the following is properly recorded as an intangible asset?

1. An internally developed copyright.
2. A piece of land.
3. A purchased patent.
4. An internally developed trademark.

8. On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)? (Do not round intermediate calculations.)

1. $200,000.
2. $100,000.
3. $50,000.
4. $0.

9.  The asset’s cost less accumulated depreciation is called:

1. Residual value.
2. Net fair value.
3. Book value.
4. Replacement cost.

10. If equipment is retired, which of the following accounts would be debited?

1. Equipment.
2. Cash.
3. Depreciation expense.
4. Accumulated depreciation.

11. An exclusive 20-year right to manufacture a product or to use a process is a:

1. Franchise.
2. Trademark.
3. Patent.
4. Copyright.

12. Accumulated depreciation is:

1. An expense account.
2. An asset.
3. A contra-asset.
4. A liability.

13. Depreciation in accounting is the:

1. Allocation of an asset’s cost to an expense over time.
2. Decrease in fair value of an asset.
3. Decrease in selling price of an asset.
4. Change in fair value of an asset.

14. Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:

1. A loss of $5,000.
2. A gain of $70,000.
3. A loss of $70,000.
4. A gain of $5,000.

15. Return on assets is equal to:

1. Net income divided by long-term assets.
2. Net income divided by average long-term assets.
3. Net income divided by average total assets.
4. Average total assets divided by net income.

16. Return on assets is equal to:

1. Profit margin minus asset turnover.
2. Profit margin plus asset turnover.
3. Profit margin times asset turnover.
4. Profit margin divided by asset turnover.

17. Which of the following expenditures should be recorded as an asset?

1. Repairs that maintain current benefits.
2. Unsuccessful legal defense of an intangible asset.
3. Maintenance that maintain current benefits.
4. An addition which increases future benefit.

18. Which of the following intangible assets are not amortized?

1. Goodwill.
2. Copyrights.
3. Franchises.
4. Patents.

19. Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset’s life?

1. Double declining balance method.
2. Activity-based method.
3. Straight-line method.
4. Each method will result in the same depreciation during the first year.

20. Which of the following expenditures should be recorded as an asset?

1. Interest costs during the construction period of a new building.
2. Property taxes incurred on an existing building.
3. Repair of a machine.
4. Depreciation during the first year of an existing building.

21. Which of the following expenditures should be capitalized?

1. Ordinary repairs and maintenance.
2. An improvement to a tangible asset.
3. Research and development costs.
4. Unsuccessful legal defense of an intangible asset.

22. A long-term asset is recorded at the:

1. Additional costs to get the asset ready for use.
2. Cost of the asset less all costs necessary to the asset ready for use.
3. Cost of the asset.
4. Cost of the asset plus all costs necessary to the asset ready for use.

23. The amount of the gain on the sale of equipment equals:

1. The selling price minus the fair value of the equipment.
2. The selling price minus the book value of the equipment.
3. The selling price minus the original cost of the equipment.
4. The selling price minus accumulated depreciation of the equipment.

24. A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck’s residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?

1. $10,000.
2. $9,600.
3. $12,000.
4. $8,000.

25. Which of the following correctly describes the nature of depreciation?

1. Depreciation represents the valuation of an intangible asset over its service life.
2. Depreciation represents the valuation of property, plant, and equipment over its service life.
3. Depreciation represents the allocation of the cost of an intangible asset over its service life.
4. Depreciation represents the allocation of the cost of property, plant, and equipment over its service life

26  Over the entire service life of an asset, which depreciation method records the highest total depreciation?

1. The activity-based method.
2. The double declining method.
3. The straight-line method.
4. All the methods result in the same total depreciation.

27. Which of the following will result in higher depreciation expense in the first year of the asset’s life?

1. Short service life and low residual value.
2. Short service life and high residual value.
3. Long service life and low residual value.
4. Long service life and high residual value.