ACCT 301 Quiz 4 solutions complete answers

ACCT 301 Quiz 4 solutions complete answers 

 

In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:

 

In computing capitalized interest, average accumulated expenditures:

 

Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance. 

 
Old Equipment
 
Cash
 
Book Value
 
Fair Value
 
Received
Equipment A
$
74,900
 
 
$
80,400
 
 
$
12,500
 
Equipment B
$
60,100
 
 
$
54,300
 
 
$
9,700
 
 
For Equipment A, Pensacola would record the new equipment at:

 

Grab Manufacturing Co. purchased a 10-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the 10-ton draw press is:

 

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows: 

 
January 1, 2021
$
280,000
 
September 1, 2021
$
396,000
 
December 31, 2021
$
396,000
 
March 31, 2022
$
396,000
 
September 30, 2022
$
280,000
 
 
Kendall borrowed $782,000 on a construction loan at 10% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,660,000 in 7% bonds payable outstanding in 2021 and 2022.
Average accumulated expenditures for 2021 was:

 

Montgomery Industries spent $700,000 in 2020 on a construction project to build a library. Montgomery also capitalized $35,000 of interest on the project in 2020. Montgomery financed 100% of the construction with a 12% construction loan. The project was completed on September 30, 2021. Additional expenditures in 2021 were as follows: 

 
 
 
 
Feb. 28
$
99,000
 
Apr. 30
 
189,000
 
Jul. 1
 
45,000
 
Sept. 30
 
73,000
 
 
Required:
Determine the completed cost of the library. (Do not round intermediate calculations.)

 

Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $390,000. Shipping costs totaled $22,000. Foundation work to house the centrifuge cost $7,800. An additional water line had to be run to the equipment at a cost of $3,800. Labor and testing costs totaled $6,700. Materials used up in testing cost $3,900. The capitalized cost is:

 

Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:

 

Interest is eligible to be capitalized as part of an asset’s cost, rather than being expensed immediately, when:

 

A distinguishing characteristic of intangible assets is that the extent and timing of their future benefits typically are highly uncertain.

 

Bloomington Inc. exchanged land for equipment and $2,900 in cash. The book value and the fair value of the land were $104,000 and $90,000, respectively. 
Assuming that the exchange has commercial substance, Bloomington would record equipment and a gain/(loss) on exchange of assets in the amounts of: 

 
Equipment
 
Gain/(loss)
a.
$
87,100
 
 
$
2,900
 
b.
$
104,000
 
 
$
(2,900
)
c.
$
87,100
 
 
$
(14,000
)
d.
None of these answer choices are correct.
 
 

During 2021, the Longhorn Oil Company incurred $4,900,000 in exploration costs for each of 20 oil wells drilled in 2021 in west Texas. Of the 20 wells drilled, 13 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2021, what oil exploration expense would Longhorn charge for this activity in its 2021 income statement?

 

Russell Enterprises acquired a franchise from Michael Incorporated for $300,000. The franchise agreement is for a period of six years. Russell uses straight-line to amortize all intangible assets. What would be the reported book value of the franchise two years after the purchase?

 

Cutter Enterprises purchased equipment for $69,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $7,200.
Using the straight-line method, the book value at December 31, 2021, would be:

 

Canliss Mining uses the retirement method to determine depreciation on its office equipment. During 2019, its first year of operations, office equipment was purchased at a cost of $12,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2021, equipment costing $4,600 was sold for $510 and replaced with new equipment costing $8,100. Canliss would record 2021 depreciation of:

 

Cutter Enterprises purchased equipment for $54,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $8,100. 
Using the straight-line method, depreciation for 2021 would be:

 

On June 30, 2021, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 308,000 units and no residual value. The cost of the machine was $369,600 and is to be depreciated using the units-of-production method. During the six months of 2021, 32,000 units of product were produced. At the beginning of 2022, engineers estimated that the machine can realistically be used to produce only another 220,800 units. During 2022, 78,000 units were produced.
Prego would report depreciation in 2022 of:

 

Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2022 and the equipment’s book value at December 31, 2022, would be:

 

Losses on the cash sales of property, plant, and equipment:

 

Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, the book value at December 31, 2021, would be:

 

Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2021 would be:

 

Cutter Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $3,300.
Using the sum-of-the-years'-digits method, depreciation for 2022 and book value at December 31, 2022, would be: (Do not round depreciation rate per year)

 

Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining-balance method, depreciation for 2021 and book value at December 31, 2021, would be:

 

Depreciation:

 

In its 2021 annual report to shareholders, Buffalo Burgers Company, Inc., included the following in a disclosure note:
E. Property, Plant, and Equipment
Property, plant, and equipment for the years ended December 28, 2021, and December 29, 2020, consisted of the following ($ in thousands):

 
2021
 
2020
 
Machinery and plant equipment
$
259,664
 
 
$
183,828
 
 
Kegs
 
60,350
 
 
 
46,899
 
 
Land
 
23,260
 
 
 
24,515
 
 
Building and building improvements
 
44,234
 
 
 
36,667
 
 
Office equipment and furniture
 
14,581
 
 
 
12,580
 
 
Leasehold improvements
 
7,600
 
 
 
6,193
 
 
 
 
409,689
 
 
 
310,682
 
 
Less: accumulated depreciation
 
143,131
 
 
 
120,734
 
 
 
$
266,558
 
 
$
189,948
 
 
 
The Company recorded depreciation related to these assets of $23,565 in the 2021 fiscal year.
Also, Buffalo Burgers reported the following information in the annual report ($ in thousands): 

 
Yearsended
12/28/2021
 
12/29/2020
 
Cash flows for investing activities:
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment
$
(100,655
)
 
$
(66,010
)
 
Proceeds on disposal of property, plant, and equipment
$
18
 
 
$
41
 
 
 
Required:
Prepare the journal entry to record Buffalo Burgers' sale of property, plant, and equipment during 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

 

Property, plant, and equipment and intangible assets are:
A) Created by the normal operation of the business and include accounts receivable.
B) All assets except cash and cash equivalents.
C) Current and long-term assets used in the production of either goods or services.
D) Long-term revenue-producing assets.
 
 
The acquisition costs of property, plant, and equipment do not include:
A) The ordinary and necessary costs to bring the asset to its desired condition and location for use.
B) The net invoice price.
C) Legal fees, delivery charges, installation, and any applicable sales tax.
D) Maintenance costs during the first 30 days of use.
 
 
Goodwill is:
A) Amortized over the greater of its estimated life or 40 years.
B) Only recorded by the seller of a business.
C) The excess of the fair value of a business over the fair value of all net identifiable assets.
D) None of these answer choices are correct.
 
 
For financial reporting purposes, goodwill:
A) May be recorded whenever a company achieves a level of net income that exceeds the industry average.
B) Is amortized over its useful life.
C) May be recorded when a company purchases another business.
D) Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify.
 
 
Which of the following is true concerning goodwill?
A) Goodwill is recorded when the market value of a company exceeds the fair value of its identifiable net assets.
B) Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets.
C) Goodwill is recorded as a revenue in the income statement.
D) Two of the other answers are correct.
 
 
Productive assets that are physically consumed in operations are:
A) Equipment.
B) Land.
C) Land improvements.
D) Natural resources.
 
 
An exclusive 20-year right to manufacture a product or use a process is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
 
 
A contractual arrangement under which one party grants another party the exclusive right to use a trademark or tradename is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
 
 
The exclusive right to benefit from a creative work, such as a film, is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
 
 
The exclusive right to display a symbol of product identification is a:
A) Patent.
B) Copyright.
C) Trademark.
D) Franchise.
 
 
The capitalized cost of equipment excludes:
A) Maintenance.
B) Sales tax.
C) Shipping.
D) Installation.
 
 
The capitalized cost of land excludes:
A) The purchase price of the land.
B) Title insurance paid at the time of purchase.
C) Real estate commissions associated with the sale.
D) Property taxes for the first year owned.
 
 
The cost of constructing a new parking lot at the company’s office building would be recorded as:
A) Land.
B) Land improvement.
C) Building.
D) Equipment.
 
 
Asset retirement obligations:
A) Increase the balance in the related asset account.
B) Are measured at fair value in the balance sheet.
C) Are liabilities associated with the restoration of a long-term asset.
D) All of these answer choices are correct.
 
 
If a company incurs legal obligations associated with the retirement of a tangible long-lived asset as a result of acquiring the asset:
A) The company recognizes the obligation at fair value when the asset is acquired.
B) The company recognizes the obligation at fair value when the asset is retired.
C) The company records the difference between the fair value of the asset and the obligation when the asset is acquired.
D) None of these answer choices are correct.
 
 
Which of the following does not pertain to accounting for asset retirement obligations?
A) They accrete (increase over time) at the company’s credit-adjusted risk-free rate.
B) They must be recognized according to GAAP.
C) Statement of Financial Accounting Concepts No. 7 is applied when adjusting cash flow obligations for uncertainty.
D) All of these answer choices pertain to accounting for asset retirement obligations.
 
 
 

Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Cash Outflow Probability
$ 10 million 60 % 
$ 30 million 40 % 
The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:
A) $8.2 million.
B) $14.7 million.
C) $18 million.
D) $30 million.
 
 
Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Cash Outflow Probability
$ 10 million 60 % 
$ 30 million 40 % 
The asset retirement obligation (rounded) that should be reported on MMC’s balance sheet one year after the extraction activities begin is: (Round intermediate calculations to one decimal place. Enter your answers in millions rounded to 1 decimal place.)
A) $0.
B) $14.7 million.
C) $15.7 million.
D) $19.3 million.
 
 
On March 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $6 million. The mine is expected to produce 100,000 tons of mineral. As part of the agreement, Shipley agrees to restore the land to its original condition after mining operations are completed in approximately five years. Management has provided the following possible outflows for the restoration costs that will occur five years from now: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Cash Outflow Probability
$ 300,000 25 % 
400,000 50 % 
500,000 25 % 
Shipley’s credit-adjusted risk-free interest rate is 10%. During 2021, Shipley extracted 18,000 tons of ore from the mine. How much accretion expense will the company record in its income statement for the 2021 fiscal year?
A) $30,326.
B) $20,697.
C) $24,837.
D) $27,294.
 
 
A company purchased land for $75,000 cash. Commissions of $4,500, property taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in back taxes paid by the company on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should the company record the land?
A) $83,500.
B) $84,300.
C) $85,300.
D) $75,000.
 
 
A company purchased a piece of equipment by paying $5,000 cash. A shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of the equipment was $7,000 at the time of the purchase. For what amount should the company record the equipment?
A) $5,000.
B) $5,400.
C) $7,000.
D) $7,400.
 
 
A company purchased new equipment for $60,000. The company 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) $60,000.
B) $61,000.
C) $64,000.
D) $66,500.
 
 
A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:

Purchase price of the land $ 400,000 
Sale of salvaged parts already on the land $ 20,000 
Demolition of the old building $ 30,000 
Ground-breaking ceremony (food and supplies) $ 1,500 
Land preparation and leveling $ 7,500 
What amount should be recorded for the purchase of the land?
A) $437,500.
B) $417,500.
C) $439,000.
D) $419,000.
 
 
A company purchased a commercial dishwasher by paying cash of $8,000. The company incurred $600 transportation costs, $500 installation fees, and $300 annual insurance on the equipment. For what amount will the company record the dishwasher?
A) $8,600.
B) $8,000.
C) $9,100.
D) $9,400.
 
 
 
 
 
 
 
 

A company purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title transfer was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:
A) $366,400.
B) $366,150.
C) $364,650.
D) $231,150.
 
 
Grab Manufacturing Co. purchased a 10-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the 10-ton draw press is:
A) $171,000.
B) $183,600.
C) $187,600.
D) $185,760.
 
 
Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:
A) $455,000.
B) $446,000.
C) $437,000.
D) $435,000.
 
 
Vijay Inc. purchased a three-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract were $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase date. The capitalized cost of the land is:
A) $336,400.
B) $336,150.
C) $334,650.
D) $201,150.
 
 
The balance sheet of Cattleman’s Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman’s $95,000 to acquire all of its assets and liabilities. Longhorn should record goodwill on this purchase of:
A) $3,600.
B) $5,000.
C) $20,000.
D) $23,600.
 
 
Northern purchased the entire business of Southern including all its assets and liabilities for $600,000 on December 31, 2021. Below is information related to the two companies at that date:
Northern Southern 
Fair value of assets $ 1,050,000 $ 800,000 
Fair value of liabilities 575,000 300,000 
Reported assets 800,000 650,000 
Reported liabilities 500,000 250,000 
Net Income for the year 60,000 50,000 
How much goodwill did Northern pay for acquiring Southern?
A) $100,000.
B) $300,000.
C) $200,000.
D) $150,000.
 
 
Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were:
Book Value Fair Value
Current assets (net) $ 420,000 $ 450,000 
Property, plant, & equip. (net) 1,600,000 2,250,000 
Liabilities 500,000 600,000 
Juliana would record goodwill of:
A) $1,180,000.
B) $600,000.
C) $880,000.
D) $100,000.
 
 
 
 
 
 
 
 

Lake Incorporated purchased all of the outstanding stock of Huron Company paying $950,000 cash. Lake assumed all of the liabilities of Huron. Book values and fair values of acquired assets and liabilities were:
Book Value Fair Value
Current assets (net) $ 130,000 $ 125,000 
Property, plant, equip. (net) 600,000 750,000 
Liabilities 150,000 175,000 
Lake would record goodwill of:
A) $0.
B) $75,000.
C) $445,000.
D) $250,000.
 
 
A company has the following expenditures during the year.
Advertising $ 100,000 
Employee training 80,000 
Customer outreach and consultation 50,000 
The company believes that these efforts have increased the fair value of the entire company by $325,000. How much goodwill can the company recognize at the end of the year associated with these expenditures?
A) $0.
B) $80,000.
C) $230,000.
D) $325,000.
 
 
On July 1, 2021, Larkin Co. purchased a $400,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2021 as follows:
Demolition of existing building on site $ 75,000 
Legal and other fees to close escrow 12,000 
Proceeds from sale of demolition scrap 10,000 
What would be the balance in the land account as of December 31, 2021?
A) $400,000.
B) $475,000.
C) $477,000.
D) $487,000.
 
 
Assets acquired in a lump-sum purchase are valued based on:
A) Their assessed valuation.
B) Their relative fair values.
C) The present value of their future cash flows.
D) Their cost plus the difference between their cost and fair values.
 
 
A company purchased land, a building, and equipment for one price of $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?
A) $80,000
B) $90,000
C) $100,000
D) $800,000
 
 
A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building?
A) $720,000.
B) $1,320,000.
C) $1,200,000.
D) None of these answer choices are correct.
 
 
A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment, respectively. The company recorded the building for $1,080,000. What was the total purchase cost for all three assets?
A) $1,600,000.
B) $1,500,000.
C) $2,000,000.
D) $1,800,000.
 
 
Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be:
Building Land Fixtures
a. $ 1,300,000 $ 780,000 $ 520,000 
b. $ 1,200,000 $ 720,000 $ 480,000 
c. $ 720,000 $ 1,200,000 $ 480,000 
d. None of these answer choices are correct.
A) Option A
B) Option B
C) Option C
D) Option D
 
 
Cantor Corporation acquired a manufacturing facility on four acres of land for a lump-sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be:
Building Land Equipment
a. $ 4,500,000 $ 3,000,000 $ 2,500,000 
b. $ 4,500,000 $ 3,000,000 $ 500,000 
c. $ 3,600,000 $ 2,400,000 $ 2,000,000 
d. None of these answer choices are correct.
A) Option A
B) Option B
C) Option C
D) Option D
 
 
Braxwell Corporation acquired the following assets associated with a manufacturing facility for a lump-sum price of $9,000,000. According to independent appraisals, the fair values were $4,000,000, $2,000,000, $3,000,000, and $1,000,000 for the building, patent, land, and equipment, respectively. The initial value of the patent would be:
A) $2,000,000.
B) $2,250,000.
C) $1,800,000.
D) $0.
 
 
 
 
 
 
 
 

Assets acquired under multi-year deferred payment contracts are:
A) Valued at their fair value on the date of the final payment.
B) Valued at the present value of the payments required by the contract.
C) Valued at the sum of the payments required by the contract.
D) None of these answer choices are correct.
 
 
An asset acquired using a long-term note payable always will be recorded at the face amount of the note under which scenario?
A) The note payable explicitly requires the payment of interest at a realistic interest rate.
B) The note is a noninterest-bearing note.
C) The company expects to use the asset for its entire physical life.
D) Interest on the note is not payable until the note is due.
 
 
An asset is acquired using a noninterest-bearing note payable for $100,000 due in two years. Management records the purchase with a debit to the asset for $100,000 and a credit to notes payable for $100,000. Which of the following statements is correct?
A) Management has properly recorded the transaction.
B) Management has not considered the present value of the note in recording the asset.
C) Management should not record the asset until the note has been paid.
D) Management should record the note for more than $100,000 to account for the underlying interest.
 
 
An asset is acquired using a noninterest-bearing note payable for $225,000 due in three years. Which of the following statements most likely is correct?
A) The fair value of the asset is less than $225,000.
B) No interest expense will be reported over the three-year note.
C) The total amount paid for the asset will be less than $225,000.
D) All of the other answer choices are correct.
 
 
On January 1, 2021, Laramie Inc. acquired land for $6.2 million. Laramie paid $1.2 in cash and signed a 6% note requiring the company to pay the remaining $5 million plus interest on December 31, 2022. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?
A) $6.8 million.
B) $5.0 million.
C) $5.6 million.
D) $6.2 million.
 
 
On July 1, 2021, Markwell Company acquired equipment. Markwell paid $160,000 in cash on July 1, 2021, and signed a $640,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 5% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 
For what amount will Markwell record the purchase of equipment?
A) $761,905.
B) $769,523.
C) $609,523.
D) $800,000.
 
 
On July 1, 2021, Markwell Company acquired equipment. Markwell paid $160,000 in cash on July 1, 2021, and signed a $640,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 5% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Which of the following should be included in the journal entry on July 1, 2021? (Round intermediate and final answer to nearest whole dollar amount.)
A) Credit: Notes payable, $609,523.
B) Debit: Equipment, $800,000.
C) Debit: Discount on notes payable, $30,477.
D) Credit: Notes payable, $609,523 and Debit: Discount on notes payable, $30,477.
 
 
On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Corso should record the acquisition of the patent on September 30, 2021, for what amount?
A) $2,000,000.
B) $1,912,385.
C) $1,857,340.
D) $1,714,678.
 
 
On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 
What amount of interest expense, if any, would Corso record on December 31, 2021, the company’s fiscal year end? (Round your answer to nearest whole dollar amount.)
A) $17,147.
B) $20,000.
C) $68,687.
D) $80,000.
 
 
On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) 
What amount of interest expense, if any, would Corso record on December 31, 2022, the company’s fiscal year end? (Round intermediate and final answer to nearest whole dollar amount.)
A) $68,687.
B) $60,000.
C) $80,000.
D) $69,959.
 
 
Assets acquired by the issuance of equity securities are valued based on:
A) Their fair values.
B) The fair value of the equity securities.
C) The fair value of the assets acquired or the fair value of the equity securities, whichever is more reasonably determinable.
D) The fair value of the assets acquired or the fair value of the equity securities, whichever is smaller.
 
 
 
 
 
 
 
 

On June 17, the Lattern Company issued 120,000 shares of its $0.10 par value common stock in exchange for land. On the date of the transaction, the fair value of the common stock, evidenced by its market price, was $10 per share. The journal entry to record this transaction includes:
A) Debit: Land, $1,200,000.
B) Credit: Cash, $1,200,000.
C) Debit: Land, $12,000.
D) No entry for this exchange.
 
 
Maltese is a privately-owned company. On September 3, Maltese exchanged 2,000 shares of its private common stock for equipment. There is no readily available estimate of the stock’s fair value. The equipment currently is selling for $80,000. The journal entry to record this transaction includes:
A) Credit: Stock revenue, $80,000.
B) Credit: Cash, $80,000.
C) Debit: Equipment, $80,000.
D) No entry is recorded for this exchange.
 
 
Donated assets are recorded at:
A) Zero (memo entry only).
B) The donor’s book value.
C) The donee’s stated value.
D) Fair value.
 
 
A company receiving a donated asset will record:
A) An increase in revenue.
B) An increase in liabilities.
C) A decrease in liabilities.
D) An increase in revenue and a decrease in liabilities.
 
 
Savings Mart is a national retail chain. To entice the company to open a mega store in its jurisdiction, the city of Populationville donated a 20-acre tract of land to be used for construction. The land was originally purchased by the city for $250,000 three years ago. The appraisal value at the time of the donation was $300,000. For what amount should Savings Mart record the donated land?
A) $250,000.
B) $275,000.
C) $300,000.
D) $0; Donated assets are not recorded.
 
 
The fixed-asset turnover ratio provides:
A) The rate of decline in asset lives.
B) The rate of replacement of fixed assets.
C) The amount of sales generated per dollar of fixed assets.
D) The decline in book value of fixed assets compared to capital expenditures.
 
 
The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2021. The fixed-asset turnover ratio for 2021 was 4.0, and sales for the year totaled $1,480,000. Net fixed assets at the end of 2020 were:
A) $470,000.
B) $370,000.
C) $420,000.
D) None of these answer choices are correct.
 
 
The basic principle used to value an asset acquired in a nonmonetary exchange is to value it at:
A) Fair value of the asset(s) given up.
B) The book value of the asset given plus any cash or other monetary consideration received.
C) Fair value or book value, whichever is smaller.
D) Book value of the asset given.
 
 
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.
Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:
A) $26,000.
B) $8,000.
C) ($8,000).
D) $0.
 
 
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.
Assuming that the exchange lacks commercial substance, Alamos would record a gain/(loss) on exchange of assets in the amount of:
A) $26,000.
B) $8,000.
C) ($8,000).
D) $0.
 
 
Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively.
Assuming that the exchange has commercial substance, Horton would record land—new and a gain/(loss) on exchange of assets in the amounts of:
Land Gain/(loss)
a. $ 105,000 $ 0 
b. $ 105,000 $ 10,000 
c. $ 95,000 $ 0 
d. $ 95,000 $ 10,000 
A) Option A
B) Option B
C) Option C
D) Option D
 
 
 
 
 
 
 
 

Horton Stores exchanged land and cash of $5,000 for similar land. The book value and the fair value of the land were $90,000 and $100,000, respectively.
Assuming that the exchange lacks commercial substance, Horton would record land—new and a gain/(loss) on exchange of assets in the amounts of:
Land Gain/(loss)
a. $ 105,000 $ 0 
b. $ 105,000 $ 10,000 
c. $ 95,000 $ 0 
d. $ 95,000 $ 10,000 
A) Option A
B) Option B
C) Option C
D) Option D
 
 
Bloomington Inc. exchanged land for equipment and $3,000 in cash. The book value and the fair value of the land were $104,000 and $90,000, respectively.
Assuming that the exchange has commercial substance, Bloomington would record equipment and a gain/(loss) on exchange of assets in the amounts of:
Equipment Gain/(loss)
a. $ 87,000 $ 3,000 
b. $ 104,000 $ (5,000 )
c. $ 87,000 $ (14,000 )
d. None of these answer choices are correct.
A) Option A
B) Option B
C) Option C
D) Option D
 
 
P. Chang & Co. exchanged land and $9,000 cash for equipment. The book value and the fair value of the land were $106,000 and $90,000, respectively.
Assuming that the exchange has commercial substance, Chang would record equipment and a gain/(loss) on exchange of assets in the amounts of:
Equipment Gain/(loss)
a. $ 99,000 $ (16,000 )
b. $ 90,000 $ (25,000 )
c. $ 108,000 $ 16,000 
d. $ 106,000 $ (9,000 )
A) Option A
B) Option B
C) Option C
D) Option D
 
 
Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.
Old Equipment Cash
Book Value Fair Value Paid
Case A $ 50,000 $ 60,000 $ 15,000 
Case B $ 40,000 $ 35,000 $ 8,000 
In Case A, Grand Forks would record the new equipment at:
A) $65,000.
B) $75,000.
C) $50,000.
D) $60,000.
 
 
Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.
Old Equipment Cash
Book Value Fair Value Paid
Case A $ 50,000 $ 60,000 $ 15,000 
Case B $ 40,000 $ 35,000 $ 8,000 
In Case B, Grand Forks would record a gain/(loss) on exchange of assets in the amount of:
A) $5,000.
B) $3,000.
C) ($5,000).
D) ($3,000).
 
 
Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance.
Old Equipment Cash
Book Value Fair Value Received
Equipment A $ 75,000 $ 80,000 $ 12,000 
Equipment B $ 60,000 $ 56,000 $ 10,000 
For Equipment A, Pensacola would record the new equipment at:
A) $68,000.
B) $63,750.
C) $67,250.
D) $80,000.
 
 
Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance.
Old Equipment Cash
Book Value Fair Value Received
Equipment A $ 75,000 $ 80,000 $ 12,000 
Equipment B $ 60,000 $ 56,000 $ 10,000 
For Equipment B, Pensacola would record a gain/(loss) of:
A) $4,000.
B) ($4,000).
C) ($10,000).
D) None of these answer choices are correct.
 
 
Interest may be capitalized:
A) On routinely manufactured goods as well as self-constructed assets.
B) On self-constructed assets from the date an entity formally adopts a plan to build a discrete project.
C) Whether or not there is specific borrowing for the construction.
D) Whether or not there are actual interest costs incurred.
 
 
 
 
 
 
 
 

Interest is not capitalized for:
A) Assets that are constructed as discrete projects for sale or lease.
B) Assets constructed for a company’s own use.
C) Inventories routinely and repetitively produced in large quantities.
D) Interest is capitalized for all of these items.
 
 
Average accumulated expenditures:
A) Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
B) Is computed as a simple average if all construction expenditures are made at the end of the period.
C) Are irrelevant if the company’s total outstanding debt is less than total costs of construction.
D) All of these answer choices are true statements.
 
 
The cost of self-constructed fixed assets should:
A) Include allocated indirect costs just as they are for production of products.
B) Include only incremental indirect costs.
C) Include only specifically identifiable indirect costs.
D) Not include indirect costs.
 
 
On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):
July 1, 2020 54
October 1, 2020 22
February 1, 2021 30
April 1, 2021 21
September 1, 2021 20
October 1, 2021 6
On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company’s only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company’s fiscal year-end is December 31.
What is the amount of interest that Crocus should capitalize in 2020, using the specific interest method?
A) $1.90 million.
B) $1.95 million.
C) $2.96 million.
D) None of these answer choices are correct.
 
 
On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):
July 1, 2020 54
October 1, 2020 22
February 1, 2021 30
April 1, 2021 21
September 1, 2021 20
October 1, 2021 6
On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company’s only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company’s fiscal year-end is December 31.
In computing the capitalized interest for 2021, Crocus’ average accumulated expenditures are:
A) $46.30 million.
B) $103.54 million.
C) $122.30 million.
D) $124.25 million.
 
 
On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):
July 1, 2020 54
October 1, 2020 22
February 1, 2021 30
April 1, 2021 21
September 1, 2021 20
October 1, 2021 6
On July 1, 2020, Crocus obtained a $70 million construction loan with a 6% interest rate. The loan was outstanding through the end of October, 2021. The company’s only other interest-bearing debt was a long-term note for $100 million with an interest rate of 8%. This note was outstanding during all of 2020 and 2021. The company’s fiscal year-end is December 31.
What is the amount of interest that Crocus should capitalize in 2021, using the specific interest method? (Enter your answers to nearest whole dollar amount.)
A) $7,248,000.
B) $7,283,000.
C) $8,740,000.
D) None of these answer choices are correct.
 
 
 
 
 
 
 
 

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 200,000 
September 1, 2021 $ 300,000 
December 31, 2021 $ 300,000 
March 31, 2022 $ 300,000 
September 30, 2022 $ 200,000 
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022. Average accumulated expenditures for 2021 was:
A) $300,000.
B) $350,000.
C) $500,000.
D) $400,000.
 
 
On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 200,000 
September 1, 2021 $ 300,000 
December 31, 2021 $ 300,000 
March 31, 2022 $ 300,000 
September 30, 2022 $ 200,000 
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022. Interest capitalized for 2021 was:
A) $48,000.
B) $42,000.
C) $60,000.
D) $36,000.
 
 
On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 200,000 
September 1, 2021 $ 300,000 
December 31, 2021 $ 300,000 
March 31, 2022 $ 300,000 
September 30, 2022 $ 200,000 
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022. Average accumulated expenditures for 2022 was:
A) $536,000.
B) $1,236,000.
C) $1,200,000.
D) $1,036,000.
 
 
On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 200,000 
September 1, 2021 $ 300,000 
December 31, 2021 $ 300,000 
March 31, 2022 $ 300,000 
September 30, 2022 $ 200,000 
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2021 and 2022. Interest capitalized for 2022 was:
A) $104,625.
B) $86,805.
C) $87,875.
D) $67,500.
 
 
On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 300,000 
September 1, 2021 $ 450,000 
December 31, 2021 $ 450,000 
March 31, 2022 $ 450,000 
September 30, 2022 $ 300,000 
Dreamworld had $5,000,000 in 12% bonds outstanding through both years. Dreamworld’s average accumulated expenditures for 2021 was:
A) $300,000.
B) $450,000.
C) $525,000.
D) $600,000.
 
 
 
 
 
 
 
 

On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 300,000 
September 1, 2021 $ 450,000 
December 31, 2021 $ 450,000 
March 31, 2022 $ 450,000 
September 30, 2022 $ 300,000 
Dreamworld had $5,000,000 in 12% bonds outstanding through both years. Dreamworld’s capitalized interest in 2021 was:
A) $72,000.
B) $63,000.
C) $54,000.
D) $36,000.
 
 
On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 300,000 
September 1, 2021 $ 450,000 
December 31, 2021 $ 450,000 
March 31, 2022 $ 450,000 
September 30, 2022 $ 300,000 
Dreamworld had $5,000,000 in 12% bonds outstanding through both years. The average accumulated expenditures for 2022 by the end of the construction period was:
A) $1,950,000.
B) $1,554,000.
C) $1,254,000.
D) $975,000.
 
 
On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:
January 1, 2021 $ 300,000 
September 1, 2021 $ 450,000 
December 31, 2021 $ 450,000 
March 31, 2022 $ 450,000 
September 30, 2022 $ 300,000 
Dreamworld had $5,000,000 in 12% bonds outstanding through both years. What was the final cost of Dreamworld’s warehouse?
A) $2,154,480.
B) $2,143,860.
C) $1,950,000.
D) $1,254,000.
 
 
Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?
A) $30,000.
B) $40,000.
C) $90,000.
D) $140,000.
 
 
Research and development costs for projects other than software development should be:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Deferred pending determination of success.
D) Expensed if unsuccessful, capitalized if successful.
 
 
Research and development costs should be:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Deferred pending determination of success.
D) Expensed if unsuccessful, capitalized if successful.
 
 
Research and development (R&D) costs:
A) Generally pertain to activities that occur prior to the start of production.
B) May be expensed or capitalized, at the option of the reporting entity.
C) Must be capitalized and amortized.
D) None of these answer choices are correct.
 
 
 
 
 
 
 
 

Research and development expense for a given period includes:
A) The full cost of newly acquired equipment that has an alternative future use.
B) Depreciation on a research and development facility.
C) Research and development conducted on a contract basis for another entity.
D) Patent filing and legal costs.
 
 
A company spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year’s financial statements?
A) Increase assets.
B) Decrease revenues.
C) Increase expenses.
D) Increase revenues.
 
 
Suppose a company spends $100,000 on research and development in 2021. As a result of the products developed, additional revenue is generated over the next five years totaling $600,000. When is the cost of the research and development in 2021 recognized as an expense?
A) Evenly over the period 2022-2026.
B) Full amount in 2026.
C) Evenly over the period 2021-2025.
D) Full amount in 2021.
 
 
Aspen, Inc. attempted to create a new horse transport device and incurred research and development costs of $250,000 in the first half of the current year. Rather than continue with its own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. and purchased the patent for $350,000 on October 1 of the current year. What are the total assets and expenses recorded for these costs with regard to the new transport device?
A) Assets $600,000; Expenses $0.
B) Assets $250,000; Expenses $350,000.
C) Assets $350,000; Expenses $250,000.
D) Assets $0; Expenses $600,000.
 
 
A company incurred the following costs related to research and development (R&D) for the current year:
R&D salaries $ 120,000 
R&D supplies consumed 240,000 
Equipment used in R&D projects 600,000 
Payment for services to others for R&D projects 160,000 
Purchase of in-process R&D in a business acquisition 80,000 
The equipment will be used in other projects. Depreciation in the current year is $70,000. For what amount should the company report research and development expense?
A) $430,000.
B) $670,000.
C) $1,200,000.
D) $590,000.
 
 
A company incurred the follow costs related to research and development for the current year:
Technology development (salaries and supplies) $ 320,000 
Engineering work performed by another company 150,000 
Purchase of equipment 750,000 
Testing new models 60,000 
Legal fees for patent application 30,000 
The equipment will be used in other projects. Depreciation in the current year is $90,000. For what amount should the company report research and development expense?
A) $500,000.
B) $620,000.
C) $650,000.
D) $470,000.
 
 
Software development costs are capitalized if they are incurred:
A) Prior to the point at which technological feasibility has been established.
B) After commercial production has begun.
C) After technological feasibility has been established but prior to the product availability date.
D) None of these answer choices are correct.
 
 
Which of the costs related to research and development would be capitalized?
A) Development costs for software that has reached the point of technological feasibility.
B) R&D performed by the company for sale to others.
C) R&D purchased in a business acquisition.
D) All of the other answers are costs to be capitalized.
 
 
Cebrex Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. The economic life of the software is estimated at four years. For what amount will software be capitalized in 2021?
A) $0.
B) $5,600,000.
C) $1,400,000.
D) $3,200,000.
 
 
A cloud computing arrangement involves:
A) A company’s internal development of software used to increase its operating efficiency.
B) A company purchasing computer hardware for maintaining its own software.
C) A company using software by accessing a vendor’s or a third party’s hardware.
D) A company hiring a vendor or third-party to maintain its computerized recordkeeping.
 
 
Which of the following conditions must exist for a company to capitalize the cost of a cloud computing arrangement?
A) The company has a contractual right to take possession of the software without significant penalty.
B) The company agrees to a contract of at least five years and cannot cancel without significant penalty.
C) The company does not have the ability to run the software on its own.
D) Two of the other answers are correct.
 
 
Which of the following costs would not be capitalized in a cloud computing arrangement?
A) Initial arrangement fee paid by the company to a vendor.
B) Coding and integration with the company’s own software.
C) Customization of the software during implementation to fit the company’s needs.
D) Post-implementation operation.
 
 
 
 
 
 
 
 

A company entered into a two-year cloud computing arrangement by paying $50,000 immediately to a vendor and also incurring the following costs:
Pre-implementation planning $ 10,000 
Integration of software 45,000 
Coding and customization of software 80,000 
Post-implementation operation 25,000 

Determine the amount the company should capitalize at the beginning of the arrangement.
A) $50,000.
B) $175,000.
C) $185,000.
D) $210,000.
 
 
The costs of research and development performed by the company for sale to others (but not yet sold) would be included in which of the following accounts?
A) Research and development expense.
B) Sales revenue.
C) Inventory.
D) Cost of goods sold.
 
 
When one company acquires another company, any acquired “developed technology” is recorded as:
A) Finite-life intangible asset.
B) Property, plant, and equipment.
C) Research and development expense.
D) Indefinite-life intangible asset.
 
 
When one company acquires another company, any acquired “in-process research and development” is recorded as:
A) Finite-life intangible asset.
B) Property, plant, and equipment.
C) Research and development expense.
D) Indefinite-life intangible asset.
 
 
Consider the following scenarios:
Scenario 1: In the current year, a kitchen appliance manufacturer spends $450,000 on R&D costs to develop internally a new heating element for conventional ovens. By the end of the year, the design for the new heating element has been patented. Legal and filing fees associated with the patent are $50,000. The patent has a fair value $600,000 and an estimated useful life of 10 years.
Scenario 2: In the current year, a kitchen appliance manufacturer purchases a patent for heating elements used in conventional ovens from a third-party for $600,000. The patent has an estimated useful life of 10 years.
Under which scenario would the company report greater research and development expense in the current year?
A) Scenario 1.
B) Scenario 2.
C) The expense would be the same under each scenario.
D) An expense is not recorded under either scenario.
 
 
Under International Financial Reporting Standards, research expenditures are:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Capitalized if certain criteria are met.
D) Expensed if unsuccessful, capitalized if successful.
 
 
Under International Financial Reporting Standards (IFRS), development expenditures are:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Capitalized if certain criteria are met.
D) None of these answer choices are correct.
 
 
Cromartie Ltd. prepares its financial statements according to International Financial Reporting Standards. During 2021 the company incurred $1,245,000 in research expenditures to develop a new product. An additional $756,000 in development expenditures were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new product was patented before the end of the 2021 fiscal year. Sale of the product began in 2020. What amount of the above expenditures would Cromartie expense in its 2021 income statement?
A) $2,001,000.
B) $756,000.
C) $1,245,000.
D) $0.
 
 
In accounting for oil and gas exploration costs, companies:
A) May not use the full-cost method.
B) May use the successful efforts method.
C) May use the slippery slope method.
D) All of these answer choices are correct.
 
 
During 2021, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2021 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2021, what oil exploration expense would Longhorn charge for this activity in its 2021 income statement?
A) $0.
B) $30 million.
C) $70 million.
D) $100 million.
 
 
During 2021, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2021. Of the 15 wells drilled, 10 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2021, what amount of these exploration costs would remain in its 12/31/2021 balance sheet?
A) $6 million.
B) $14 million.
C) $20 million.
D) $42 million.
 
 
 
 
 
 
 
 

 

The factors that need to be determined to compute depreciation are an asset’s:
A) Cost, residual value, and physical life.
B) Cost, replacement value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, residual value, and service life.
 
 
The allocation base for an asset is:
A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS.
 
 
An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:
A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.
 
 
Depreciation, depletion, and amortization:
A) All refer to the process of allocating the cost of long-term assets used in the business over future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.
 
 
Which of the following typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods?
A) Depreciation.
B) Amortization.
C) Depletion.
D) Impairment.
 
 
Which of the following typically would cause the service life of an asset to be less than its physical life?
A) The company no longer provides the products or services associated with the use of the asset.
B) Suppliers may develop new technologies that are more efficient.
C) The expected rate of technological change may shorten service life.
D) All of these answer choices are correct.
 
 
The allocation base of an asset refers to which of the following?
A) The asset’s initial capitalized cost.
B) The number of years over which the asset’s cost will be allocated.
C) The asset’s initial capitalized cost minus residual value.
D) The method used to allocate the asset’s cost across years.
 
 
The overriding principle for all depreciation methods is that the method must be:
A) Conservative and economic.
B) Systematic and rational.
C) Consistent and conservative.
D) Significant and material.
 
 
Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
A) Straight-line.
B) Units-of-production.
C) Double-declining-balance.
D) Sum-of-the-years’-digits.
 
 
In the first year of an asset’s life, which of the following methods has the smallest depreciation?
A) Straight-line.
B) Declining-balance.
C) Sum-of-the-years’-digits.
D) All of the other choices result in the same amount of depreciation.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the straight-line method, depreciation for 2021 would be:
A) $13,200.
B) $14,400.
C) $72,000.
D) None of the other answer choices are correct.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the straight-line method, the book value at December 31, 2021, would be:
A) $57,600.
B) $51,600.
C) $58,800.
D) $52,800.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

 

Using the straight-line method, depreciation for 2022 and the equipment’s book value at December 31, 2022, would be:
A) $14,400 and $43,200 respectively.
B) $28,800 and $37,200 respectively.
C) $13,200 and $39,600 respectively.
D) $13,200 and $45,600 respectively.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the double-declining-balance method, depreciation for 2021 and the book value at December 31, 2021, would be:
A) $26,400 and $45,600 respectively.
B) $28,800 and $43,200 respectively.
C) $28,800 and $37,200 respectively.
D) $26,400 and $39,600 respectively.
 
 
 
 
 
 
 
 
 

Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the double-declining-balance method, depreciation for 2022 would be:
A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the double-declining-balance method, the book value at December 31, 2022, would be:
A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the sum-of-the-years’-digits method, depreciation for 2021 and book value at December 31, 2021, would be: (Do not round depreciation rate per year)
A) $22,000 and $44,000 respectively.
B) $22,000 and $50,000 respectively.
C) $24,000 and $48,000 respectively.
D) $24,000 and $42,000 respectively.
 
 
Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the sum-of-the-years’-digits method, depreciation for 2022 and book value at December 31, 2022, would be: (Do not round depreciation rate per year)
A) $19,200 and $30,800 respectively.
B) $17,600 and $26,400 respectively.
C) $19,200 and $28,800 respectively.
D) $17,600 and $32,400 respectively.
 
 
On June 30, 2021, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2021, 24,000 units of product were produced. At the beginning of 2022, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2022, 70,000 units were produced.

Prego would report depreciation in 2021 of:
A) $36,000.
B) $43,900.
C) $18,000.
D) $21,950.
 
 
On June 30, 2021, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2021, 24,000 units of product were produced. At the beginning of 2022, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2022, 70,000 units were produced.

Prego would report depreciation in 2022 of:
A) $135,230.
B) $126,000.
C) $108,000.
D) $105,000.
 
 
Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the straight-line method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $10,000 and $30,000 respectively.
B) $11,250 and $28,750 respectively.
C) $10,000 and $35,000 respectively.
D) $11,250 and $33,750 respectively.
 
 
Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the straight-line method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $10,000 and $20,000 respectively.
B) $10,000 and $25,000 respectively.
C) $11,250 and $17,500 respectively.
D) $11,250 and $22,500 respectively.
 
 
Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining-balance method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $22,500 and $22,500 respectively.
B) $22,500 and $17,500 respectively.
C) $20,000 and $25,000 respectively.
D) $20,000 and $20,000 respectively.
 
 
Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the double-declining-balance method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $10,000 and $5,000 respectively.
B) $10,000 and $10,000 respectively.
C) $11,250 and $6,250 respectively.
D) $11,250 and $11,250 respectively.
 
 
Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the sum-of-the-years’-digits method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $18,000 and $27,000 respectively.
B) $16,000 and $29,000 respectively.
C) $16,000 and $24,000 respectively.
D) $18,000 and $22,000 respectively.
 
 
 
 
 
 
 
 

Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the sum-of-the years’-digits method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $13,500 and $13,500 respectively.
B) $13,500 and $8,500 respectively.
C) $12,000 and $17,000 respectively.
D) $12,000 and $12,000 respectively.
 
 
On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation for 2021 using the straight-line method is:
A) $13,500.
B) $15,000.
C) $4,500.
D) $5,000.
 
 
On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation for 2021, using the double-declining-balance method, would be:
A) $40,000.
B) $10,000.
C) $36,000.
D) $9,000.
 
 
On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation for 2022, using the double-declining-balance method, would be:
A) $32,000.
B) $34,000.
C) $38,000.
D) $40,000.
 
 
On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation (to the nearest dollar) for 2021, using sum-of-the-years’-digits method, would be:
A) $9,091.
B) $24,545.
C) $27,273.
D) $8,182.
 
 
On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation (to the nearest dollar) for 2022, using sum-of-the-years’-digits method, would be:
A) $31,909.
B) $29,455.
C) $35,456.
D) $54,000.
 
 
Jennings Advertising, Inc. reported the following in its December 31, 2021, balance sheet:

Equipment $ 500,000 
Less: Accumulated depreciation—equipment $ 135,000 

In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 10% of cost. What is the average age of the equipment owned by Jennings?
A) 2.7 years.
B) 3 years.
C) 7 years.
D) 7.3 years.
 
 
Gulf Consulting Co. reported the following on its December 31, 2021, balance sheet:

Equipment (at cost) $700,000

In a disclosure note, Gulf indicates that it uses straight-line depreciation over five years and estimates salvage value as 10% of cost. Gulf’s equipment averages 3.5 years at December 31, 2021. What is the book value of Gulf’s equipment at December 31, 2021?
A) $490,000.
B) $441,000.
C) $259,000.
D) $210,000.
 
 
Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would the accumulated depreciation be at the end of year five under the sum-of-the-years’-digits method?
A) $4.5 million.
B) $8.25 million.
C) $12 million.
D) None of these answer choices are correct.
 
 
When selling property, plant, and equipment for cash:
A) The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.
B) The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
C) The seller recognizes losses, but not gains.
D) None of these answer choices are correct.
 
 
Gains on the cash sales of property, plant, and equipment:
A) Are the excess of the book value over the cash proceeds.
B) Are part of cash flows from operations.
C) Are reported on a net-of-tax basis if material.
D) Are the excess of the cash proceeds over the book value of the assets sold.
 
 
 
 
 
 
 
 

When a company reports a gain on the sale of a depreciable asset, which of the following is always true?
A) The company sold the asset for more than its fair value.
B) The company sold the asset for more than its book value.
C) The company sold the asset before its useful life was over.
D) The company sold the asset for more than it was worth.
 
 
When a company reports a loss on the sale of a depreciable asset, which of the following is always true?
A) The company sold the asset for less than accumulated depreciation.
B) The company sold the asset for less than fair value.
C) The company sold the asset for less than book value.
D) The company sold the asset before the useful life was over.
 
 
A company decides to sell equipment it has owned and operated for the past five years. The equipment’s original estimated useful life was eight years. Management calculates the loss on the sale as the equipment’s original purchase price minus its selling price. Which of the following statements is correct?
A) Management should calculate the loss as the present value of expected decrease in cash flows from selling the equipment.
B) Management should subtract the equipment’s accumulated depreciation from the original purchase price before calculating any loss.
C) Management should not record any loss on the sale of equipment if that equipment has been used in operations.
D) Management’s calculation is correct.
 
 
An asset was acquired on January 1, 2021, for $15,000 with an estimated four-year life and $1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on December 31, 2023, for $5,000.
A) $500 gain.
B) $3,000 loss.
C) $1,500 gain.
D) $500 loss.
 
 
Equipment was acquired on January 1, 2021, for $15,000 with an estimated four-year life and $1,000 residual value. The company uses straight-line depreciation. Record the gain or loss if the equipment was sold on December 31, 2023, for $5,000.
A) 
Cash $5,000 
Accumulated Depreciation $10,500 
Equipment $15,000
Gain $500

B) 
Cash $5,000 
Equipment $4,500
Gain $500

C) 
Cash $5,000 
Equipment $3,500
Gain $1,500

D) 
Cash $5,000 
Accumulated Depreciation $7,000 
Loss $3,000 
Equipment $15,000
 
 
An asset was acquired on August 1, 2021, for $22,000 with an estimated five-year life and $2,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on April 30, 2023, for $13,000. Partial-year depreciation is calculated based on the number of months the asset is in service.
A) $3,000 gain.
B) $2,000 loss.
C) $6,000 gain.
D) $4,000 loss.
 
 
An asset was acquired on October 1, 2021, for $78,000 with an estimated five-year life and $13,000 residual value. The company uses units-of-production depreciation and expects the asset to produce 20,000 units. Calculate the gain or loss if the asset was sold on March 31, 2024, for $58,000. Actual production was: 2021 = 500 units; 2022 = 3,000 units; 2023 = 3,500 units; 2024 = 1,000 units.
A) $11,200 gain.
B) $19,000 gain.
C) $6,000 gain.
D) $12,500 gain.
 
 
 
 
 
 
 
 

An asset was acquired on September 30, 2021, for $100,000 with an estimated five-year life and $20,000 residual value. The company uses double-declining-balance depreciation. Calculate the gain or loss if the asset was sold on December 31, 2022, for $50,000. Partial-year depreciation is to be calculated.
A) $1,200 gain.
B) $14,000 gain.
C) $16,000 loss.
D) $4,000 loss.
 
 
An asset acquired January 1, 2021, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2022, for $6,000. The entry to record the sale would be:
A) 
Cash $6,000 
Loss on sale of equipment $9,000 
Equipment $15,000

B) 
Cash $6,000 
Equipment $6,000

C) 
Cash $6,000 
Accumulated depreciation $3,750 
Loss on sale of equipment $5,250 
Equipment $15,000

D) 
Cash $6,000 
Accumulated depreciation $9,000 
Equipment $15,000
 
 
The process of allocating the cost of natural resources over their useful life is known as:
A) Depreciation.
B) Depletion.
C) Amortization.
D) Consumption.
 
 
An activity-based method is most often used to allocate the cost of a natural resource over its useful life because:
A) This method generally results in the highest amount of assets in the earlier years.
B) This is the simplest method, and natural resource activity is hard to estimate.
C) The usefulness of natural resources generally is directly related to the amount of the resources extracted.
D) This method generally results in the highest amount of assets in the later years.
 
 
The cost of natural resources is expensed in the period:
A) The resource is harvested and becomes ready for sale.
B) The resource is acquired.
C) The resource is sold.
D) The resource is paid for.
 
 
Natural resources that have been harvested but not yet sold are accounted for as:
A) Property, plant, and equipment.
B) Cost of goods sold.
C) Operating expense.
D) Inventory.
 
 
Clark Oil and Gas incurred costs of $15.3 million for the rights to extract resources from a natural gas deposit. The company expects to extract 8 million cubic feet of natural gas during a six-year period. Natural gas extracted during years 1 and 2 were 800,000 and 1,600,000 cubic feet, respectively. What was total depletion for year 1 and year 2, assuming the company uses the units-of-production method?
A) $5.10 million.
B) $3.06 million.
C) $8.00 million.
D) $4.59 million.
 
 
On March 31, 2021, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2021, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2021. At January 1, 2022, Belotti estimated that 20,000 tons still remained. During 2022, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.

Belotti would record depletion in 2021 of:
A) $41,000.
B) $32,800.
C) $30,750.
D) $24,600.
 
 
On March 31, 2021, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2021, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2021. At January 1, 2022, Belotti estimated that 20,000 tons still remained. During 2022, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.

Belotti would record depletion in 2022 of:
A) $54,667.
B) $65,600.
C) $52,480.
D) $55,760.
 
 
On February 12, 2021, Forest Incorporated purchased the right to remove timber from a 10,000-acre tract of land over the next three years, and the company estimates no residual value. The timber is to be sold as lumber for new home construction. The cost of the timber rights was $240,000, with estimated salable timber feet of 750,000. During 2021 and 2022, Forest harvested and sold 600,000 feet of timber. What is the book value of the timber rights at the end of 2022, assuming the company uses the units-of-production method?
A) $48,000.
B) $80,000.
C) $160,000.
D) $192,000.
 
 
 
 
 
 
 
 

A company purchased land containing mineral deposits for $6,400,000 on January 1, 2021. The company expects to mine 1,600,000 tons of mineral over the next six years. The company has also purchased mining equipment for $800,000. The equipment has an estimated residual value of $160,000 and an expected life of 10 years and can be used at other mining sites. By the end of 2021, the company has mined and sold 240,000 tons. Management calculates depreciation of the equipment to be $96,000 [($800,000 − $160,000) × (240,000 tons/1,600,000 tons)]. Which of the following statements is correct?
A) Management should depreciate the equipment evenly over six years.
B) Management should not subtract the residual value in calculating depreciation.
C) Management should depreciate the equipment over 10 years.
D) Management’s calculation is correct.
 
 
Foreman Mining purchased land containing a copper deposit for $2,300,000 on January 7, 2021. The company expects to mine 600,000 tons of copper over the next 10 years, and the land is expected to have a residual value of $1,400,000. The company has also purchased mining equipment for $400,000 that will be used only at this site over the 10 years with an estimated residual value of $52,000. By the end of the first year, the company has mined and sold 50,000 tons of copper. What is the cost attributed to copper inventory for 2021, assuming the company uses the units-of-production method?
A) $109,800.
B) $124,800.
C) $104,000.
D) $75,000.
 
 
On April 23, 2021, Trevors Mining entered into an agreement with the state of California to obtain the rights to operate a mineral mine in California for $12 million. Additional costs and purchases included the following:

Preparation of site for excavation $ 4,800,000 
Mining equipment 360,000 
Construction of various structures on site 240,000 

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $60,000. The structures will be torn down. The mine is expected to produce 1,400,000 tons of ore. After the ore is removed, the land will revert back to the state of California. During 2021, Trevors extracted 210,000 tons of ore from the mine. What total amount would be charged to depletion of the mine and depreciation of the mining equipment and structures for 2021, assuming that Trevors uses the units-of-production method for both depletion and depreciation? (Round your final calculations to the nearest whole thousand dollars.)
A) $2,601,000.
B) $2,520,000.
C) $2,610,000.
D) $2,565,000.
 
 
The legal life of a patent is:
A) 40 years.
B) 20 years.
C) Life of the inventor plus 50 years.
D) Indefinite.
 
 
If an intangible asset has a legal life of eight years but contractually the usefulness is limited to six years, a company will amortize the cost over:
A) Eight years.
B) Six years.
C) Seven years.
D) Either six or eight years is allowed.
 
 
Intangible assets that have an indefinite useful life:
A) Are those with no foreseeable limit on the period of time over which the asset is expected to contribute to the cash flows of the entity.
B) Are those with no legal, contractual, or economic factors that are expected to limit their useful life to a company.
C) Are those whose acquisition costs are not amortized over their useful life.
D) All of these answer choices are correct.
 
 
Amortization of capitalized computer software costs is:
A) Either the percentage-of-revenue method or the straight-line method at the company’s option.
B) The greater of the percentage-of-revenue method or the straight-line method.
C) The lesser of the percentage-of-revenue method or the straight-line method.
D) Based on neither the percentage-of-revenue nor the straight-line method.
 
 
Axcel Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,200,000, and costs incurred from June 30 to the product release date were $1,400,000. The 2022 revenues from the sale of the new software were $4,000,000, and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. Amortization of the software development costs for the year 2022 would be:
A) $0.
B) $350,000.
C) $1,840,000.
D) $560,000.
 
 
Micropolis Technology began a new development project in 2020. The project reached technological feasibility on September 1, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to September 1, 2021, were $4,200,000, and costs incurred from June 30 to the product release date were $1,800,000. The 2022 revenues from the sale of the new software were $3,000,000, and the company anticipates additional revenues of $12,000,000. The economic life of the software is estimated at three years. Amortization of the software development costs for the year 2022 would be:
A) $1,400,000.
B) $360,000.
C) $600,000.
D) $2,000,000.
 
 
 
 
 
 
 
 

Short Corporation acquired Hathaway, Inc., for $52,000,000. The fair value of all Hathaway’s identifiable tangible and intangible assets was $48,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?
A) $100,000.
B) $400,000.
C) $200,000.
D) $0.
 
 
Brad Corporation acquired Lail Inc. As part of the acquisition, Brad records goodwill of $4,000,000. Brad estimates that this goodwill can be attributed to acquisition of trained employees ($800,000), loyal customers ($1,200,000), company location ($500,000), and synergies with Brad’s existing operations ($1,500,000). Brad expects these benefits to be realized over the next 10 years. At the end of the first year, management calculates amortization of the goodwill to be $400,000 ($4,000,000 ÷ 10 years). Which of the following statements is correct?
A) Management should not amortize any goodwill.
B) Management should calculate amortization based only on the value of trained employees and loyal customers.
C) Management should calculate amortization based only on company location and synergies with existing operations.
D) Management’s calculation is correct.
 
 
Granite Enterprises acquired a patent from Southern Research Corporation on January 1, 2021, for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite’s patent amortization for 2021, assuming the straight-line method is used.
A) $380,000.
B) $400,000.
C) $760,000.
D) $800,000.
 
 
At the beginning of the year, a company purchases a patent for $2,400,000. The remaining legal life of the patent is 12 years, but management estimates that the patent will generate additional revenue for the next 16 years because there are currently no known competitors. At the end of the first year, management calculates straight-line amortization to be $150,000 ($2,400,000 ÷ 16 years). Which of the following statements is correct?
A) Management should amortize the asset over 20 years.
B) Management should amortize the asset over 12 years.
C) Management should not amortize the asset until its useful life becomes more evident.
D) Management’s calculation is correct.
 
 
In January 2021, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In January 2024, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent and the patent is no longer usable. The amount charged to income (expense and loss) in 2024 related to the patent should be:
A) $40,000.
B) $65,000.
C) $215,000.
D) $25,000.
 
 
On January 1, 2021, Tabitha Designs purchased a patent for $240,000 giving it exclusive rights to manufacture a new type of synthetic clothing. While the patent had a remaining legal life of 15 years at the time of purchase, Tabitha expects the useful life to be only eight more years. In addition, Tabitha purchased equipment related to production of the new clothing for $140,000. The equipment has a physical life of 10 years, but Tabitha plans to use the equipment only over the patent’s service life and then sell it for an estimated $20,000. Tabitha uses straight-line for all long-term assets. The amount to expense in 2024 related to the patent and equipment should be:
A) $40,000.
B) $38,000.
C) $45,000.
D) $31,000.
 
 
Russell Enterprises acquired a franchise from Michael Incorporated for $300,000. The franchise agreement is for a period of six years. Russell uses straight-line to amortize all intangible assets. What would be the reported book value of the franchise two years after the purchase?
A) $300,000.
B) $250,000.
C) $200,000.
D) $100,000.
 
 
On January 3, 2021, Tracer Incorporated purchased a patent for $450,000 to manufacture a new type of chair. The patent has a remaining legal life of 12 years. Tracer plans to manufacture the chair for eight years and then sell the patent for $50,000. The company amortizes intangible assets using the straight-line method. On December 29, 2023, Tracer decides to sell the patent for $325,000. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent?
A) $12,500 gain.
B) $25,000 gain.
C) $58,333 loss.
D) $25,000 loss.
 
 
On June 2, 2021, Tabitha Co. purchased a franchise for $560,000 by signing a five-year contract. At the end of the five years, the franchise right reverts back to the seller. 
On September 1, 2023, Tabitha decides to sell the franchise right for $323,000. The company amortizes intangible assets using the straight-line method and records partial-year amortization based on the number of months in service. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent?
A) $15,000 gain.
B) $13,000 loss.
C) $237,000 loss.
D) $99,000 gain.
 
 
Accounting for a change in the estimated service life of equipment:
A) Is handled prospectively.
B) Requires retroactive restatement of prior year’s financial statements.
C) Requires a prior period adjustment.
D) Is handled currently as a change in accounting principle.
 
 
 
 
 
 
 
 

A change in the estimated useful life and residual value of machinery in the current year is handled as:
A) A retrospective change back to the date of acquisition as though the current estimated life and residual value had been used all along.
B) A prospective change from the current year through the remainder of its useful life, using the new estimates.
C) A cumulative adjustment to income in the current year for the difference in depreciation under the new versus old estimates.
D) All of these answer choices are incorrect.
 
 
Tatsuo Corporation purchased farm equipment on January 1, 2019, for $280,000. In 2019 and 2020, Tatsuo depreciated the asset on a straight-line basis with an estimated useful life of five years and a $90,000 residual value. In 2021, due to changes in technology, Tatsuo revised the residual value to $30,000 but still plans to use the equipment for the full five years. What depreciation would Tatsuo record for the year 2021 on this equipment?
A) $52,000.
B) $58,000.
C) $50,000.
D) $28,000.
 
 
Herman Apparel has purchased equipment on January 1, 2018, for $560,000. In 2018-2020, Herman depreciated the asset on a straight-line basis with an estimated useful life of eight years and an $80,000 residual value. In 2021, Herman has started to change its business strategy and now believes that the equipment will be used for only another two years (five years total) but does not believe the residual value has changed. What depreciation would Herman record for the year 2021 on this equipment?
A) $150,000.
B) $175,000.
C) $124,000.
D) $96,000.
 
 
Nanki Corporation purchased equipment on January 1, 2019, for $650,000. In 2019 and 2020, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $10,000 residual value. In 2021, due to changes in technology, Nanki revised the useful life to a total of six years with no residual value. What depreciation would Nanki record for the year 2021 on this equipment?
A) $108,333.
B) $106,667.
C) $122,500.
D) None of these answer choices are correct.
 
 
Fellingham Corporation purchased equipment on January 1, 2019, for $200,000. The company estimated the equipment would have a useful life of 10 years with a $20,000 residual value. Fellingham uses the straight-line depreciation method. Early in 2021, Fellingham reassessed the equipment’s condition and determined that its total useful life would be only six years in total and that it would have no salvage value. How much would Fellingham report as depreciation on this equipment for 2021?
A) $24,000.
B) $27,333.
C) $36,000.
D) $41,000.
 
 
A change from the straight-line method to the double-declining-balance method of depreciation is handled as:
A) A retrospective change back to the date of acquisition as though the current estimated life had been used all along.
B) A cumulative adjustment to income in the current year for the difference in depreciation under the new versus old useful life estimates.
C) A prospective change from the current year through the remainder of its useful life.
D) None of these answer choices are correct.
 
 
Murgatroyd Co. purchased equipment on January 1, 2019, for $900,000, estimating a five-year useful life and $100,000 residual value. In 2019 and 2020, Murgatroyd depreciated the asset using the double-declining-balance method. In 2021, Murgatroyd changed to straight-line depreciation for this equipment. What depreciation would Murgatroyd record for the year 2021 on this equipment?
A) $74,667.
B) $108,000.
C) $92,333.
D) $160,000.
 
 
Broadway Ltd. purchased equipment on January 1, 2019, for $800,000, estimating a five-year useful life and no residual value. In 2019 and 2020, Broadway depreciated the asset using the straight-line method. In 2021, Broadway changed to sum-of-years’-digits depreciation for this equipment. What depreciation would Broadway record for the year 2021 on this equipment?
A) $120,000.
B) $160,000.
C) $200,000.
D) $240,000.
 
 
On January 1, 2019, Al’s Sporting Goods purchased store fixtures at a cost of $180,000. The anticipated service life was 10 years with no residual value. Al’s has been using the double-declining-balance method, but in 2021 adopted the straight-line method because the company believes it provides a better measure of income. Al’s has a December 31 year-end. The journal entry to record depreciation for 2021 is:
A) 
Depreciation expense $23,040 
Accumulated depreciation $23,040

B) 
Depreciation expense $14,400 
Accumulated depreciation $14,400

C) 
Accumulated depreciation $28,800 
Retained earnings $28,800

D) No entry
 
 
 
 
 
 
 
 

A major addition to equipment should have been capitalized in the year 2021 but was incorrectly expensed. Which of the following is (are) true?
A) Income in 2021 is understated.
B) Income in future years is overstated.
C) Assets in 2021 are understated.
D) All of these answer choices are true.
 
 
If a material error is discovered in an accounting period subsequent to the period in which the error is made:
A) No adjustments are made.
B) No prior years’ financial statements are restated, but corrections are made in future years.
C) Any previous years’ financial statements are retrospectively restated to reflect the correction.
D) No prior years’ financial statements are restated, but prior effects are corrected in the current balance of retained earnings.
 
 
An asset should be written down if there has been an impairment of value that is:
A) Relevant and objectively determined.
B) Material and market driven.
C) Unplanned and sudden.
D) Significant.
 
 
Recognition of impairment for property, plant, and equipment is required if book value exceeds:
A) Fair value.
B) Present value of expected cash flows.
C) Undiscounted expected cash flows.
D) Accumulated depreciation.
 
 
Which of the following represents an event that indicates an asset’s book value may not be recoverable?
A) A significant adverse change in how the asset is being used or in its physical condition.
B) A significant adverse change in legal factors or in the business climate.
C) A realization that the asset will be disposed of significantly before the end of its estimated useful life.
D) All of these answer choices are correct.
 
 
The amount of impairment loss is the excess of book value over:
A) Amortized cost.
B) Undiscounted future cash flows.
C) Fair value.
D) Future revenues.
 
 
Accounting for impairment losses that involve recoverability:
A) Involves a two-step process for recoverability and measurement.
B) Applies to depreciable assets.
C) Applies to assets with finite lives.
D) All of these answer choices are correct.
 
 
In testing for recoverability of property, plant, and equipment, an impairment loss is required if the:
A) Asset’s book value exceeds the undiscounted sum of expected future cash flows.
B) Undiscounted sum of its expected future cash flows exceeds the asset’s book value.
C) Present value of expected future cash flows exceeds its book value.
D) All of these answer choices are incorrect.
 
 
An impairment loss has the effect of:
A) Reducing total assets.
B) Increasing liabilities.
C) Reducing total revenues.
D) None of these answer choices are correct.
 
 
At the end of its 2021 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:

Book value $ 65 million
Estimated undiscounted future cash flows 60 million
Fair value 50 million

The manufacturing facility is:
A) Impaired because its book value exceeds undiscounted future cash flows.
B) Not impaired because its book value exceeds undiscounted future cash flows.
C) Not impaired because it continues to produce revenue.
D) Impaired because its book value exceeds fair value.
 
 
Fryer Inc. owns equipment for which it paid $90 million. At the end of 2021, it had accumulated depreciation on the equipment of $27 million. Due to adverse economic conditions, Fryer’s management determined that it should assess whether an impairment loss should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment’s fair value at that point is $40 million. Under these circumstances, Fryer:
A) Would record no impairment loss on the equipment.
B) Would record a $3 million impairment loss on the equipment.
C) Would record a $23 million impairment loss on the equipment.
D) None of these answer choices are correct.
 
 
Wilson Inc. owns equipment for which it paid $70 million. At the end of 2021, it had accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson’s management determined that it should assess whether an impairment loss should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment’s fair value at that point is $50 million. Under these circumstances, Wilson:
A) Would record no impairment loss on the equipment.
B) Would record an $8 million impairment loss on the equipment.
C) Would record a $20 million impairment loss on the equipment.
D) None of these answer choices are correct.
 
 
Alou Corporation reported the following information at year-end:

Book Value Estimated
Cash Flows Fair Value
Building $ 500,000 $ 380,000 $ 360,000 
Patent $ 35,000 $ 40,000 $ 38,000 
Copyright $ 40,000 $ 38,000 $ 39,000 
Machine $ 100,000 $ 120,000 $ 85,000 

Based on the above information, what is the total amount of impairment loss that Alou should record at year-end?
A) $141,000.
B) $126,000.
C) $123,000.
D) $122,000.
 
 
 
 
 
 
 
 

Oak Inc. has the following information regarding its assets:

Book Value Estimated
Cash Flows Fair Value
Equipment $ 35,000 $ 30,000 $ 28,000 
Building $ 68,000 $ 70,000 $ 65,000 
Patent $ 30,000 $ 34,000 $ 32,000 

What amount of loss should be recorded due to asset impairments?
A) $10,000.
B) $9,000.
C) $8,000.
D) $7,000.
 
 
Jung Inc. owns a patent for which it paid $66 million. At the end of 2021, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung’s management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent’s fair value at that point is $35 million. Under these circumstances, Jung:
A) Would record no impairment loss on the patent.
B) Would record a $7 million impairment loss on the patent.
C) Would record a $15 million impairment loss on the patent.
D) Would record a $31 million impairment loss on the patent.
 
 
In 2020, Antle Inc. had acquired Demski Co. and recorded goodwill of $245 million as a result. The net assets (including goodwill) from Antle’s acquisition of Demski Co. had a 2021 year-end book value of $580 million. Antle assessed the fair value of Demski reporting unit at this date to be $700 million, while the fair value of all of Demski’s identifiable tangible and intangible assets (excluding goodwill) was $550 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2021 is:
A) $150 million.
B) $120 million.
C) $95 million.
D) $0.
 
 
In 2018, Martin Corp. acquired Glynco and recorded goodwill of $100 million. Martin considers Glynco a separate reporting unit. By the end of 2021, the net assets (including goodwill) of Glynco are $320 million and its estimated fair value is $260 million. The amount of the impairment loss that Martin would record for goodwill at the end of 2021 is:
A) $0.
B) $60 million.
C) $40 million.
D) $160 million.
 
 
In 2018, Martin Corp. acquired Glynco and recorded goodwill of $45 million. Martin considers Glynco a separate reporting unit. By the end of 2021, the net assets (including goodwill) of Glynco are $320 million and its estimated fair value is $260 million. The amount of the impairment loss that Martin would record for goodwill at the end of 2021 is:
A) $0.
B) $60 million.
C) $45 million.
D) $15 million.
 
 
Which of the following types of subsequent expenditures normally is capitalized?
A) Additions.
B) Improvements.
C) Rearrangements.
D) All of these answer choices are normally capitalized.
 
 
Which of the following types of subsequent expenditures normally is capitalized?
A) An extension of the useful life of the asset.
B) An increase in the operating efficiency of the asset.
C) An increase in the quality of the goods or services produced by the asset.
D) All of these answer choices are normally capitalized.
 
 
A major expenditure increased a truck’s life beyond the original estimate of life. GAAP permits the expenditure to be debited to:
A) Repairs.
B) Accumulated depreciation.
C) Major repairs.
D) None of these answer choices are correct.
 
 
Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of:
A) Repairs and maintenance.
B) Improvement.
C) Rearrangement.
D) Addition.
 
 
The replacement of a major component increased the productive capacity of production equipment from 10 units per hour to 18 units per hour. The expenditure should be debited to:
A) Repairs expense.
B) Maintenance expense.
C) Equipment.
D) Gain from repairs
 
 
The cost of an engine tune-up is an example of which of the following expenditures taking place after acquisition of the asset:
A) Additions.
B) Improvements.
C) Maintenance.
D) Rearrangements.
 
 
 
 
 
 
 
 

Ryan Company purchased a building on January 1, 2021, for $250,000. In addition, during 2021 the following costs related to the building have been incurred:

Utilities $ 12,000 
Property tax 4,000 
Expansion of the building 53,000 
New air-conditioning system 28,000 
General maintenance $ 19,000 

The amount of expenditures to capitalize for the year (not including the initial purchase of the building) is:
A) $35,000.
B) $85,000.
C) $81,000.
D) $72,000.
 
 
A company purchased equipment on January 1, 2021, for $70,000. In addition, throughout 2021 the following costs related to the equipment have been incurred:

Routine maintenance $ 4,500 
Employee operating costs 14,800 
Utilities cost 3,300 

The amount of expenditures to capitalize for the year is:
A) $70,000.
B) $74,500.
C) $84,800.
D) $92,600.
 
 
In 2021, a company purchased two patents. Related information follows:

Patent 1 Patent 2 
Purchase price $ 500,000 $ 200,000 
Legal and filing fees 25,000 20,000 

In addition, near the end of 2021, the legality of both patents was challenged. The company paid $50,000 to defend Patent 1, and the defense was successful. The company paid $40,000 to defend Patent 2, but the defense was not successful and the patent was determined to have no value. Ignoring any amortization in 2021, the amount of expenditures to capitalize at the end of the year is:
A) $795,000.
B) $575,000.
C) $745,000.
D) $615,000.
 
 
Calloway Shoes purchased a delivery truck on September 30, 2021, for $32,000. The estimated useful life of the truck is 10 years with no residual value. After five years, the refrigeration unit will need to be replaced. The $8,000 cost of the unit is included in the cost of the truck. Calloway uses the straight-line depreciation method. Depreciation for 2021 under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:

U.S.GAAP IFRS
a. $ 3,200 $ 3,200 
b. $ 800 $ 800 
c. $ 800 $ 1,000 
d. $ 3,200 $ 4,000 

A) option A.
B) option B.
C) option C.
D) option D.
 
 
Robertson Inc. prepares its financial statements according to International Financial Reporting Standards (IFRS). At the end of its 2021 fiscal year, the company chooses to revalue its equipment. The equipment cost $540,000, had accumulated depreciation of $240,000 at the end of the year after recording annual depreciation, and had a fair value of $330,000. After the revaluation, the accumulated depreciation account will have a balance of:
A) $240,000.
B) $264,000.
C) $270,000.
D) None of these answer choices are correct.
 
 
Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country indicates that Rice should investigate for possible impairment. Below is information related to the plant’s assets ($ in millions):

Book value $ 190 
Undiscounted sum of future estimated cash flows 210 
Present value of future cash flows 175 
Fair value less cost to sell (determined by appraisal) 180 

The amount of impairment loss that Rice should recognize according to U.S. GAAP and IFRS, respectively, is:

U.S.GAAP IFRS
a. $ 10 million $ 10 million
b. $ 15 million $ 15 million
c. $ 0 $ 10 million
d. There is no impairment under both U.S. GAAP and IFRS.

A) option A.
B) option B.
C) option C.
D) option D.
 
 
 
 
 
 
 
 

Kingston Corporation has $95 million of goodwill on its books from the 2019 acquisition of Reliant Motors. At the end of its 2021 fiscal year, management has provided the following information for its required goodwill impairment test ($ in millions):

Fair value of Reliant (approximates fair value less costs to sell) $ 655 
Fair value of Reliant’s net assets (excluding goodwill) 600 
Book value of Reliant’s net assets (including goodwill) 700 
Present value of estimated future cash flows 670 


Assuming that Reliant is considered a reporting unit for U.S. GAAP and a cash-generating unit for IFRS, the amount of goodwill impairment loss that Kingston should recognize according to U.S. GAAP and IFRS, respectively, is:

U.S.GAAP IFRS
a. $ 45 million $ 45 million
b. $ 55 million $ 45 million
c. $ 0 $ 30 million
d. $ 40 million $ 30 million

A) option A.
B) option B.
C) option C.
D) option D.
 
 
According to International Financial Reporting Standards (IFRS), the revaluation of equipment when fair value exceeds book value results in:
A) An increase in net income.
B) A decrease in net income.
C) An increase in other comprehensive income.
D) A decrease in other comprehensive income.
 
 
According to International Financial Reporting Standards (IFRS), biological assets are valued at:
A) Cost less accumulated depreciation.
B) Fair value less estimated costs to sell.
C) Cost less accumulated depletion.
D) None of these answer choices are correct.
 
 
According to International Financial Reporting Standards (IFRS), the impairment loss for property, plant, and equipment is the difference between book value and:
A) The undiscounted sum of estimated future cash flows.
B) The present value of future cash flows.
C) Fair value less costs to sell.
D) The higher of the present value of estimated future cash flows and the fair value less costs to sell.
 
 
According to International Financial Reporting Standards (IFRS), the level of testing for goodwill impairment is the:
A) Reporting unit.
B) Subsidiary companies.
C) Cash-generating unit.
D) None of these answer choices are correct.
 
 
The normal treatment of litigation costs to successfully defend an intangible right under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:

U.S. GAAP IFRS
a. Capitalize Expense
b. Capitalize Capitalize
c. Expense Capitalize
d. Expense Expense

A) option A.
B) option B.
C) option C.
D) option D.
 
 
Canliss Mining uses the retirement method to determine depreciation on its office equipment. During 2019, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2021, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2021 depreciation of:
A) $3,500.
B) $4,400.
C) $5,400.
D) None of these answer choices are correct.
 
 
Canliss Mining uses the replacement method to determine depreciation on its office equipment. During 2019, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2021, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2021 depreciation of:
A) $3,500.
B) $4,400.
C) $5,400.
D) None of these answer choices are correct.