Q: A company purchases land and a building for a lump-sum price of $$1,000,000. The appraised values are 200$$,000 for land and $800,000 for the building. What is the amount assigned to the land using the relative-sales-value method?

$$200,000 \div (200,000 + 800,000) \times 1,000,000 = 0.2 \times 1,000,000 = 200$$,000$

Q: What is the formula for calculating the annual depreciation expense using the straight-line method?

$$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$$

Q: A company extracts 3,000,000 barrels of oil from a reserve with a depletion rate of $10 per barrel. What is the total depletion expense for the year?

$$3,000,000 \times 10$$ = $$30,000,000$$

Q: What is the formula for calculating the rate of return on assets (ROA)?

$$\text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}}$$

Question 1

Which of the following costs should NOT be included in the cost of land when recording it as a plant asset?

Accepted Answer

Cost of paving a parking lot

Question 2

A company purchases land and a building for a lump-sum price of $$1,000,000. The appraised values are 200$$,000 for land and $800,000 for the building. What is the amount assigned to the land using the relative-sales-value method?

Accepted Answer

$$200,000 \div (200,000 + 800,000) 	imes 1,000,000 = 0.2 	imes 1,000,000 = 200$$,000$

Question 3

Which of the following is a capital expenditure?

Accepted Answer

Engine overhaul that extends the truck’s useful life

Question 4

What is the formula for calculating the annual depreciation expense using the straight-line method?

Accepted Answer

$$	ext{Annual Depreciation} = \frac{	ext{Cost} - 	ext{Residual Value}}{	ext{Useful Life}}$$

Question 5

A truck was purchased for $$41,000 with an estimated residual value of 1$$,000 and a useful life of 5 years. What is the annual straight-line depreciation expense?

Accepted Answer

$$\frac{41,000 - 1,000}{5} = 8$$,000$

Question 6

Which depreciation method is best suited for assets that generate more revenue early in their useful life?

Accepted Answer

Double-declining-balance method

Question 7

A company extracts 3,000,000 barrels of oil from a reserve with a depletion rate of $10 per barrel. What is the total depletion expense for the year?

Accepted Answer

$$3,000,000 	imes 10$$ = $$30,000,000$$

Question 8

Which of the following intangible assets is NOT amortized?

Accepted Answer

Trademark with an indefinite life

Question 9

What is the formula for calculating the rate of return on assets (ROA)?

Accepted Answer

$$	ext{ROA} = \frac{	ext{Net Income}}{	ext{Average Total Assets}}$$

Question 10

If a company sells equipment for $$7,300 that originally cost 10$$,000 and has accumulated depreciation of $3,750, what is the gain or loss on the sale?

Accepted Answer

Gain of $1,050

Question 11

Which Excel function is used to calculate straight-line depreciation?

Accepted Answer

SLN

Question 12

Which of the following is true regarding the disposal of a fully depreciated asset with no residual value?

Accepted Answer

No gain or loss is recognized

Question 13

Which of the following is NOT considered a plant asset?

Accepted Answer

Patent

Question 14

A company changes the useful life of an asset from 10 years to 14 years after 4 years of use. How is this change accounted for?

Accepted Answer

Apply the change prospectively to current and future periods

Question 15

Which of the following transactions would be classified as an investing activity on the statement of cash flows?

Accepted Answer

Cash received from sale of plant assets

Question 16

Which of the following is a correct statement about asset impairment?

Accepted Answer

Impairment occurs when the asset’s net book value exceeds its expected future cash flows

Question 17

Which of the following is NOT a cost that should be capitalized as part of the cost of equipment?

Accepted Answer

Routine maintenance after use

Question 18

Which of the following statements about goodwill is correct?

Accepted Answer

Goodwill is only recorded when purchased

Question 19

Which depreciation method ignores residual value in its annual computation except for the final year?

Accepted Answer

Double-declining-balance method

Question 20

Which of the following is a reason why companies may prefer accelerated depreciation methods for tax purposes?

Accepted Answer

Accelerated depreciation provides faster tax deductions, reducing income tax expense

Chapter 7

Study Guide - Practice Questions

Study Guide - Flashcards