Cost of Asset/Journal Entry for purchase
Plant assets are defined as:
A. Current assets.
B. Tangible assets used in a company’s operations that have a useful life of more than one accounting period.
C. Assets that are physically consumed when used.
D. Intangible assets used in the operations of a business that have a useful life of more than one accounting period.
E. Tangible assets used in the operation of business that have a useful life of less than one accounting period.
B. Tangible assets used in a company’s operations that have a useful life of more than one accounting period.
Learning Objective: 08-C1 Compute the cost of plant assets.
Depreciation:
A. Measures the decline in market value of an asset.
B. Measures physical deterioration of an asset.
C. Is the process of allocating the cost of a plant asset to expense while it is in use.
D. Is an outflow of cash from the use of a plant asset.
E. Is applied to land.
C. Is the process of allocating the cost of a plant asset to expense while it is in use.
Learning Objective: 08-P1 Compute and record depreciation using the straight-line, units-of-production, and declining-balance methods.
Revenue expenditures:
A. Are costs that do not materially increase a plant asset’s life or capabilities.
B. Are known as balance sheet expenditures because they relate to plant assets.
C. Extend the asset's useful life.
D. Substantially benefit future periods.
E. Are debited to asset accounts when incurred.
A. Are costs that do not materially increase a plant asset’s life or capabilities.
Learning Objective: 08-C3 Distinguish between revenue and capital expenditures, and account for them.
The term, obsolescence, as it relates to the useful life of an asset, refers to:
A. The halfway point of an asset’s useful life.
B. The process of becoming outdated and no longer used.
C. The inability of a company’s plant assets to reach its book value.
D. An asset’s salvage value becoming less than its replacement cost.
E. Intangible assets that have been fully amortized.
B. The process of becoming outdated and no longer used.
Learning Objective: 08-P1 Compute and record depreciation using the straight-line, units-of-production, and declining-balance methods.
A machine originally had an estimated useful life of 6 years, but after 2 complete years, it was decided that the original estimate of useful life should have been 11 years. At that point the remaining cost to be depreciated should be allocated over the remaining:
A. 4 years.
B. 7 years.
C. 11 years.
D. 6 years.
E. 9 years.
E. 9 years.
11 year revised life − 2 years depreciated = 9 years remaining
Learning Objective: 08-C2 Explain depreciation for partial years and changes in estimates.
An asset is said to be fully depreciated when:
A. It is unable to meet its productive demands.
B. It is outdated and no longer used.
C. Amortization is nearly complete.
D. Accumulated depreciation is less than the asset’s cost.
E. Accumulated depreciation equals the asset’s cost.
E. Accumulated depreciation equals the asset’s cost.
Learning Objective: 08-P2 Account for asset disposal through discarding or selling an asset.
A company purchased a delivery van for $20,700 with a salvage value of $2,100 on October 1, Year 1. It has an estimated useful life of 6 years. Using the straight-line method, how much depreciation expense should the company recognize on December 31, Year 1?
A. $3,100.
B. $3,450.
C. $775.
D. $65.
E. $1,150.
C. $775.
Depreciation Expense = (Cost − Salvage Value)/Estimated Useful Life × Length of Ownership
Depreciation Expense = ($20,700 − $2,100)/6 × 3/12; Depreciation Expense = $775
Learning Objective: 08-C2 Explain depreciation for partial years and changes in estimates.
To capitalize an expenditure is to:
A. Increase an expense account.
B. Decrease an expense account.
C. Increase the revenue account.
D. Decrease an asset account.
E. Increase an asset account.
E. Increase an asset account.
Learning Objective: 08-C3 Distinguish between revenue and capital expenditures, and account for them.
An asset's book value is $18,200 on December 31, Year 5. Assuming the asset is sold on December 31, Year 5 for $14,800, the company should record:
A. A gain on sale of $3,400.
B. A loss on sale of $3,400.
C. A loss on sale of $13,400.
D. A gain on sale of $13,400.
E. Neither a gain nor a loss is recognized on this transaction.
B. A loss on sale of $3,400.
Selling price $14,800 − $18,200 Book value = $3,400 Loss.
Learning Objective: 08-P2 Account for asset disposal through discarding or selling an asset.
A total asset turnover ratio of 3.5 indicates that:
A. For every $1 in net sales, the firm acquired $3.50 in assets during the period.
B. For every $1 in assets, the firm produced $3.50 in net sales during the period.
C. For every $1 in assets, the firm earned gross profit of $3.50 during the period.
D. For every $1 in assets, the firm earned $3.50 in net income.
E. For every $1 in assets, the firm paid $3.50 in expenses during the period.
B. For every $1 in assets, the firm produced $3.50 in net sales during the period.
Learning Objective: 08-A1 Compute total asset turnover and apply it to analyze a company's use of assets.
Cala Manufacturing purchases land for $390,000 as part of its plans to build a new plant. The company pays $33,500 to tear down an old building on the lot and $47,000 to fill and level the lot. It also pays construction costs of $1,452,200 for the new building and $87,800 for lighting and paving a parking area. Prepare a single journal entry to record these costs incurred by Cala, all of which are paid in cash.
A. Cash 2,010,500
Land & Building 2,010,500
B. Land & Building 2,010,500
Cash 2,010,500
C. Land 470,500
Land improvements 87,800
Building 1,452,200
Cash 2,010,500
D. Cash 2,010,500
Land 470,500
Land Improvements 87,800
Building 1,452,200
E. Plant Assets 1,452,200
Cash 1,452,200
C. Land 470,500
Land improvements 87,800
Building 1,452,200
Cash 2,010,500
A company purchased a weaving machine for $239,800. The machine has a useful life of 8 years and a salvage value of $13,000. It is estimated that the machine could produce 756,000 bolts of woven fabric over its useful life. In the first year, 108,000 bolts were produced. In the second year, production increased to 112,000 units. Using the units-of-production method, what is the amount of depreciation expense that should be recorded for the second year?
A. $32,400.
B. $34,257.
C. $33,600.
D. $66,000.
E. $35,526.
C. $33,600.
Depreciation Expense = [(Cost − Salvage Value)/Estimated Useful Life (in units)] × Units Produced
Depreciation per unit = ($239,800 − $13,000)/756,000 units = $.30 per unit
Depreciation Expense = $.30 × 112,000 = $33,600
Learning Objective: 08-P1 Compute and record depreciation using the straight-line, units-of-production, and declining-balance methods.
Which of the following is an example of an extraordinary repair?
A. An oil change for a truck.
B. Replacement of all florescent light tubes in an office.
C. Carpet cleaning and repair.
D. Replacing the roof on a manufacturing warehouse.
E. Routine machine maintenance.
D. Replacing the roof on a manufacturing warehouse.
Learning Objective: 08-C3 Distinguish between revenue and capital expenditures, and account for them.
A company purchased a tract of land for its natural resources at a cost of $1,500,000. It expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is expected to be $250,000. The depletion expense per ton of ore is:
A. $0.750.
B. $0.625.
C. $6.000.
D. $8.000.
E. $0.875.
B. $0.625.
Depletion Expense per ton = (Cost − Salvage Value)/Estimated Useful Life (in tons)
Depletion Expense per ton = ($1,500,000 − $250,000)/2,000,000 tons = $0.625/ton
A company had average total assets of $912,000. Its gross sales were $1,089,000 and its net sales were $985,000. The company's total asset turnover equals:
a. 1.11.
b. 0.93.
c. 1.08.
d. 1.23.
e. 0.84.
c. 1.08.
Total Asset Turnover = Net Sales/Average Total Assets
Total Asset Turnover = $985,000/$912,000 = 1.08
Merchant Company purchased land for a building site. The costs associated with the property were:
Purchase price $ 186,000; Real estate commissions 16,100; Legal fees 1,900; Expenses of clearing the land 3,100; What is the total recorded cost of the land?
A. $186,000
B. $202,100
C. $189,900
D. $204,000
E. $207,100
E. $207,100
Total cost = $186,000 + $16,100 + $1,900 + $3,100 = $207,100
Learning Objective: 08-C1 Compute the cost of plant assets.
On April 1, Cyclone Co. purchases a trencher for $280,000. The machine is expected to last five years and have a salvage value of $40,000. Compute depreciation expense for the first year assuming the company uses the straight-line method.
A. 48,000
B. 36,000
C. 28,000
D. 240,000
E. 280,000
B. 36,000
(Cost - Salvage Value)/Estimated Useful Life
(280,000 - 40,000)/5 = $48,000 per year
48,000 * 9/12 = $36,000
Paid $14,870 cash for significant repairs to increase the useful life of the equipment from four to seven years. What account is debited in the journal entry?
A. Repairs Expense
B. Equipment
C. Cash
D. Plant
E. Extraordinary Repairs Account
B. Equipment
Milano Gallery purchases the copyright on a painting for $480,000 on January 1. The copyright is good for 8 more years. The company plans to sell prints for 12 years. What account is debited for annual amortization and how much?
A. Depreciation - Copyright, $80,000
B. Depletion - Copyright $40,000
C. Amortization expense -Copyright $60,000
D. Accumulated Amortization - Copyright $480,000
C. Cash $60,000
C. Amortization expense -Copyright $60,000
Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of $104,000. The asset is expected to have a salvage value of $15,100 at the end of its five-year useful life. If the asset is depreciated on the double-declining-balance method, the asset's book value on December 31, Year 2 will be:
A. $22,464
B. $19,224
C. $28,836
D. $93,600
E. $56,160
E. $56,160
Year 1 $104,000 40% $41,600 × 3/12 = $ 10,400 $ 93,600
Year 2 $93,600 40% $37,440 $ 56,160
Accordingly, the asset's book value at the end of Year 2 would be $56,160.
A company paid $165,500 for property. The property included land appraised at $87,500, land improvements appraised at $35,000, and a building appraised at $52,500. What should be the allocation of this property’s costs in the company’s accounting records?
A. Land $75,000; Land Improvements, $30,000; Building, $45,000.
B. Land $75,000; Land Improvements, $30,800; Building, $46,200.
C. Land $82,750; Land Improvements, $33,100; Building, $49,650.
D. Land $80,250; Land Improvements, $32,100; Building, $48,150.
E. Land $77,500; Land Improvements; $31,000; Building; $46,500.
C. Land $82,750; Land Improvements, $33,100; Building, $49,650.
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Total cost to allocate = $165,500
Appraisal Value: Land $ 87,500/$ 175,000= 50%; Land Improvements 35,000/$ 175,000= 20%; Building 52,500/$175,000 = 30%
Land 50% * $ 165,500 = $ 82,750; Land Improvements 20% * $ 165,500 = $ 33,100; Building 30% * $ 165,500 = $ 49,650; Total Cost Allocated: $ 165,500
When originally purchased, a vehicle costing $26,100 had an estimated useful life of 8 years and an estimated salvage value of $3,300. After 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5 equals:
A. $5,868.00.
B. $3,018.00.
C. $2,850.00.
D. $5,700.00.
E. $11,400.00.
D. $5,700.00.
Accumulated Depreciation through the end of year 4:
(Cost of Asset − Salvage Value)/Estimated Useful Life × Years Elapsed
($26,100 − $3,300)/8 × 4 = $11,400
Depreciation in Year 5 = (Cost of Asset − Accumulated Depreciation − Salvage Value)/Remaining Estimated Useful Life
($26,100 − $11,400 − $3,300)/2 = $5,700
Learning Objective: 08-C2 Explain depreciation for partial years and changes in estimates.
Paid $30,000 cash for a new component expected to increase the equipment’s productivity.
What kind of repair expense is this and what account is debited?
a. Extraordinary Repair, Repair Expense
b. Ordinary Repair, Repair Expense
c. Extraordinary Repair, Equipment
d. Betterment , Equipment
e. Betterment, Repair Expense
d. Betterment , Equipment
Equipment $30,000
Cash $30,000
Robinson Company purchased Franklin Company at a price of $3,840,000. The fair market value of the net assets purchased equals $2,700,000. What is the amount of goodwill that Robinson records at the purchase date?
a. $1,000,000
b. 2,000,000
c. 1,140,000
d. $3,840,000
e. $2,700,000
c. $1,140,000
Peavey Enterprises purchased a depreciable asset for $29,000 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $3,400, what will be the amount of accumulated depreciation on this asset on December 31, Year 3?
A. $25,600
B. $6,400
C. $17,600
D. $21,333
E. $5,333
C. $17,600
Year 1 [($29,000 − $3,400)/4] × 9/12 =$ 4,800
Year 2 ($29,000 − 3,400)/4 =$ 6,400
Year 3 $ 6,400
Accumulated $ 17,600