1 B.
Statement 1: Assets classified as "Property, Plant and Equipment" can either be
acquired for use in operations or acquired for resale.
Statement 2: Assets classified as "Property, Plant and Equipment" must be both
long term in nature and possess physical substance.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
2 C. Plant assets may properly include:
a. deposits on machinery not yet received.
b. idle equipment awaiting sale
c. land held for possible use as a future plant site
d. none of these
3 C. An improvement made to a machine increased its fair market value and its
production capacity by 25% without extending the machine's useful life.
The cost of the improvement should be:
a. expensed
b. debited to accumulated depreciation
c. capitalized in the machinery account
allocated between accumulated depreciation
d.
and the machine account
4 C. Plant assets purchased on long-term credit contracts
should be accounted for at:
a. the total value of the future payments
b. the future amount of the future payments
c. the present value of the future payments
d. none of these
5 C. When computing the amount of interest cost to be capitalized,
the concept of avoidable interest refers to:
a. the total interest cost actually incurred
b. a cost of capital charge for stockholder's equity
that portion of total interest cost which would not have been
c. incurred if expenditures for asset construction had not been
made.
that portion of average accumulated expenditures on which no
d.
interest cost was incurred
6 B. Statement 1: When an ordinary repair occurs, several periods will
usually benefit.
Statement 2: Insurance on equipment purchased, while the equipment
is in transit, is part of the cost of the equipment.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
7 B. The King-Kong Corporation exchanges one plant asset for a similar
plant asset and gives cash in the exchange. The exchange is not
expected to cause a material change in the future cash flows for
either entity. If a gain on the dsiposal of the old asset is indicated,
the gain will
be reported in the Other Revenues and Gains section of the
a. income statement.
effectively reduce the amount to be recorded as the cost of
b. the new asset
effectively increase the amount to be recorded as the cost of
c.
the new asset.
d. be credited directly to the owner's capital account.
8 A. The cost of a nonmonetary asset acquired in exchange for another
non monetary asset and the exchange has commercial substance
is usually recorded at:
the fair value of the asset given up, and a gain or loss is
a. recognized.
the fair value of the asset given up, and a gain but not a loss
b. may be recognized.
the fair value of the asset received if it is equally reliable as
c. the fair value of the asset given up.
either the fair value of the asset given up or the asset
d. received, whichever one results in the largest gain (smallest
loss) to the company.
9 B. Construction of a qualifying asset is started in April 1 and finished
on December 1. The fraction used to multiply an expenditure made
on April 1 to find weighted average accumulated expenditures is:
a. 8/8
b. 8/12
c. 9/12
d. 11/12
10 B. Historical cost is the basis advocated for recording the acquisition
of property, plant and equipment for all of the following reasons
except:
a. at the date of acquisition, cost reflects fair market value.
property, plant and equipment items are always acquired at
b. their original cost.
historical cost involves actual transactions and, as such, is the
c.
most reliable basis.
gains and losses should not be anticipated but should be
d.
recognized when the asset is sold.
11 A. Statement 1: The straight line method is based on assumption that
depreciation expense can be regarded as a constant function of time.
Statement 2: The sum-of-the-year's-digits method of depreciation
ignores salvage value in the computation of an asset's depreciable base.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
12 B. A principal objection to the straight-line method of depreciation is that it:
a. provides for declining productivity of an aging asset
b. ignores variations in the rate of asset use
tends to result in a constant rate of return on a diminishing
c.
investment base.
gives smaller periodic write offs than decreasing charge
d.
methods.
13 A. The term "depreciable cost" or "depreciable base" as it is used in
accounting, refers to:
the total amount to be charged (debited) to expense over an
a. asset's useful life.
the cost of the asset less the related depreciation recorded to
b. date.
c. the estimated market value of the asset at the end of its
useful life.
d. the acquisition cost of the asset.
14 B. Statement 1: An impairment loss is the amount by which the carrying amount of
the asset exceeds the sum of the expected future net cash flows from the use of
that asset.
Statement 2: The declining balance method does not deduct the salvage value in
computing the depreciation base.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
15 B. Which of the following principles best describes the conceptual
rationale for the methods of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
16 D. Use of double-declining balance method
a. results in a decreasing charge to depreciation expense.
means salvage value is not deducted in computing the
b. depreciation base.
means the book value should not be reduced below salvage
c.
value.
d. all of these.
17 B. Statement 1: The three factors involved in the depreciation process
are the depreciation base, the useful life and the risk of obsolescence.
Statement 2: Depreciation is a means of cost allocation, not a matter
of valuation.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
18 D. Statement 1: The units of production approach to depreciation is appropriate
when depreciation is a function of time instead of activity.
Statement 2: An accelerated depreciation method is appropriate when the
asset's economic usefulness is the same each year.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
19 A. The major difference between the service life of an asset and its physical life
is that:
service life refers to the time an asset will be used by a
a. company and physical life refers to how long the asset will
last.
physical life is the life of an asset without consideration of
b. salvage value and service life requires the use of salvage
value.
c. physical life is always longer than service life
service life refers to the length of time an asset is of use to its
d. original owner, while physical life refers to how long the asset
will be used by all owners.
20 B. A change in estimate should:
a. result in restatement of prior period statements
b. be handled in current and future periods
c. be handled in future periods only
d. be handled retroactively
21 A. Statement 1: Internally generated goodwill should not be
capitalized in the accounts.
Statement 2: Intangible assets derive their value from the
right (claim) to receive cash in the future.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
22 C. Goodwill
generated internally should not be capitalized unless it is
a. measured by an individual independent of the enterprise
involved.
b. is easily computed by assigning a value to the individual
attributes that comprise its existence.
represents a unique asset in that its value can be identified
c.
only with the business as a whole.
exists in any company that has earnings that differ from those
d.
of a competitor.
23 C. Which of the following cost should be excluded from
research and development expense?
a. Modification of the design of a product
Acquisition of R & D equipment for use on a current project
b. only
c. Cost of marketing research for a new product
Engineering activity required to advance the design of a
d.
product to the manufacturing stage
24 D. Purchased goodwill should
a.
be written off as soon as possible against retained earnings.
b.
be written off as soon as possible as an extraordinary item
be written off by systematic charges as a regular operating
c.
expense over the period benefited.
d. not be amortized.
25 A. Factors considered in determining an intangible asset’s useful
life include all of the following except
a. The expected use of the asset
Any legal or contractual provisions that may limit the useful
b. life.
Any provisions for renewal or extension of the asset’s legal life
c.
d. The amortization method used
26 C. Statement 1: In a business combination, a company assigns the cost,
where possible, to the identifiable tangible and intangible assets, with
the remainder recorded as goodwill.
Statement 2: Some intangible assets are not required to be amortized
every year.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
27 D. Statement 1: Periodic alterations to existing products are an example of
research and development costs.
Statement 2: Research and development costs that result in patents may
be capitalized to the extent of the fair value of the patent.
Statement 1 Statement 2
a. True False
b. False True
c. True True
d. False False
28 B. The reason goodwill is sometimes referred to as a master
valuation account is because
it represents the purchase price of a business that is about to
a.
be sold.
b. it is the difference between the fair market value of the net
tangible and identifiable intangible assets as compared with
the purchase price of the acquired business.
the value of a business is computed without consideration of
c. goodwill and then goodwill is added to arrive at a master
valuation.
it is the only account in the financial statements that is based
d. on value, all other accounts are recorded at an amount other
than their value.
29 A. Operating losses incurred during the start-up years of a
new business should be
accounted for and reported like the operating losses of any
a.
other business.
b. written off directly against retained earnings.
capitalized as a deferred charge and amortized over five
c.
years.
capitalized as an intangible asset and amortized over a period
d.
not to exceed 20 years.
30 B. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
31 A. Wheeler Corporation constructed a building at a cost of P20,000,000.
Average accumulated expenditures were P8,000,000, actual interest
was P1,200,000 and avoidable interest was P600,000. If the salvage
value is P1,600,000 and the useful life is 40 years, depreciation
expense for the first full year using the straight line method is?
a. 475,000.00
b. 490,000.00
c. 515,000.00
d. 675,000.00
Use the following information for items 32 through 34
On March 1, 2020, Dennis Company purchased land for an office site
by paying P540,000 cash. Dennis began construction on the office building
on March 1. The following expenditures were incurred for construction:
Date Expenditures
1/3/2020 360,000
1/4/2020 504,000
1/5/2020 900,000
1/6/2020 1,440,000
The office was completed and ready for occupancy on July 1. To help pay
for construction, P720,000 was borrowed on March 1, 2020 on a 9%, 3 year
note payable. Other than the construction note, the only debt outstanding
during 2020 was a P300,000, 12%, 6-year note payable dated January 1, 2020.
32 D. The weighted average accumulated expenditures on the construction project
during 2020 were:
a. 384,000.00
b. 2,934,000.00
c. 312,000.00
d. 696,000.00
33 A. The actual interest cost incurred during 2020 was:
a. 90,000.00
b. 100,800.00
c. 50,400.00
d. 84,000.00
34 B. Assume the weighted average accumulated expenditures for the construction
project was P870,000. The amount of interest cost to be capitalized during 2020 is:
a. 78,300.00
b. 82,800.00
c. 90,000.00
d. 100,800.00
Use the following information for item number 35
On January 1, 2020, Quick Delivery Company traded in an old delivery truck for
a newer model. The exchange lacked commercial substance. Data relative to the
old and new trucks follow:
Old Truck
Original cost 24,000
Accumulated depreciation 16,000
Ave. published retail value 7,000
New Truck
List price 40,000
Cash price without trade-in 36,000
Cash price with trade-in 30,000
35 B. What should be the cost of the new truck for financial accounting purposes?
a. 30,000
b. 36,000
c. 38,000
d. 40,000
36 B. Jeter Company purchased machinery for P320,000 in January 1, 2004.
Straight line depreciation has been recorded based on a P20,000
salvage value and a 5-year useful life. The machinery was sold on
May 1, 2008 at a gain of P6,000. How much cash did Jeter receive
from the sale of the machinery?
a. 46,000
b. 54,000
c. 66,000
d. 86,000
37 A. On January 1, 2020, the Accumulated Depreciation - Machinery account
of a particular company showed a balance of P370,000. At the end of 2020,
after the adjusting entries were posted, it showed a balance of P395,000.
During 2020, one of the machines which costs P125,000 was sold for P60,500
cash. This resulted in a loss of P4,000. Assuming that no other assets
were disposed of during the year, how much was the depreciation expense
for 2020?
a. 85,500
b. 93,500
c. 25,000
d. 60,500
38 C. On January 1, 2018, Lopez [Link] machinery. The machinery has an
estimated useful life of eight years and an estimated salvage value of P30,000.
The depreciation applicable to this machinery was P65,000 for 2020, computed
by the sum-of-the-years-digits method. The acquisition cost of the machine
was:
a. 360,000
b. 390,000
c. 420,000
d. 468,000
39 C. Gant Co. purchased a machine on July 1, 2020 for P400,000. The machine has
an estimated useful life of five years and a salvage value of P80,000. The
machine is being depreciated from the date of acquisition by the 150% declining
balance method. For the year ended December 31, 2020, Gant should record
depreciation expense on this machine of:
a. 120,000
b. 80,000
c. 60,000
d. 48,000
40 B. On April 13, 2019, Foley Co. purchased machinery for P120,000. Salvage value
was estimated to be P5,000. The machinery will be depreciated over ten years
using the double-declining balance method. If depreciation is computed on the
basis of the nearest full month, Foley should record depreciation expense
for 2020 on this machinery of:
a. 20,800
b. 20,400
c. 20,550
d. 20,933
41 C. Garrison Corporation purchased a depreciable asset for P420,000 on January 1, 2017.
The estimated salvage value is P42,000 and the estimated total useful life is 9 years.
The straight line method is used for depreciation. In 2020, Garrison changed its
estimates to a useful life of 5 years with a salvage value of P70,000. What is 2020
depreciation expense?
a. 42,000
b. 70,000
c. 112,000
d. 126,000
42 B. Bigbie Company purchased a depreciable asset for P600,000. The estimated salvage
value is P30,000 and the estimated useful life is 10,000 hours. Bigbie used the asset
for 1,100 hours in the current [Link] activity method will be used for depreciation.
What is the depreciation expense on this asset?
a. 57,000
b. 62,700
c. 66,000
d. 570,000
43 C. The general ledger of Vance Corporation as of December 31, 2020, includes the following
accounts:
Copyrights 20,000.00
Deposits with advertising agency (to promote goodwill) 27,000.00
Discount on bonds payable 67,500.00
Excess of cost over fair value of identifiable
net assets of acquired subsidiary 390,000.00
Trademarks 90,000.00
In the preparation of Vance's balance sheet as of December 31, 2020, what
should be reported as total intangible assets?
a. 594,500
b. 527,000
c. 500,000
d. 460,000
44 A. MaBelle Corporation incurred the following costs in 2020:
Acquisition of R&D equipment with a useful life
of 4 years in R&D projects 600,000.00
Start up costs incurred when opening new plant 140,000.00
Advertising expense to introduce new product 700,000.00
Engineering costs incurred to advance a product
to full production stage 350,000.00
What amount should MaBelle record as research and development expense in 2020?
a. 500,000
b. 640,000
c. 950,000
d. 1,340,000
45 C. Blue Sky Company's December 31, 2019 balance sheet reports assets of P5,000,000
and liabilities of P2,000,000. All of Blue Sky's assets' book values approximate
their fair value except for land, which has a fair value that is P300,000 greater
than its book value. On December 31, 2019, Horace Wimp Corporation paid
P5,100,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp
record as a result of this purchase?
a. -
b. 100,000
c. 1,800,000
d. 2,100,000
46 A. On January 2, 2020, Klein Co. bought a trademark from Royce Inc. for P500,000.
An independent research company estimated that the remaining useful life
of the trademark was 10 years. Its unamortized cost on Royce books was P400,000
In Klein's 2020 income statement, what amount should be reported as amortization
expense?
a. 50,000
b. 40,000
c. 25,000
d. 20,000
47 C. During 2020, Leon Co. incurred the following costs:
Testing in search for process alternatives 350,000.00
Costs of marketing research for new products 250,000.00
Modifications of the formulation process 510,000.00
Research and development services performed by Beck Corp
for Leon 325,000.00
In Leon's 2020 income statement, research and development expense
should be?
a. 510,000
b. 835,000
c. 1,185,000
d. 1,435,000
48 A. Riley Co. incurred the following costs during 2020:
Modification to the formulation of a chemical product 160,000.00
Trouble-shooting in connection with breakdowns during commercial
production 150,000.00
Costs of marketing research for new product 200,000.00
Seasonal or other periodic design changes to existing products 185,000.00
Laboratory research aimed at discovery of new technology 215,000.00
In its income statement for the year ended December 31, 2020,
Riley should report research and development expense of
a. 575,000
b. 725,000
c. 415,000
d. 335,000
49 C. A plant asset has a cost of 24,000 and a salvage value of 6,000. The asset
has a three-year life. If depreciation in the third year amounted to 3,000,
which depreciation method was used?
a. Straight line method
b. Declining balance
c. Sum-of-the-years-digits
d. Cannot tell
50 A. Peppers Corporation owns machinery with a book value of P190,000.
It is estimated that the machinery will generate future cash flows of P200,000.
The machinery has a fair value of P140,000. Peppers should recognize
a loss on impairment of
a. -
b. 10,000
c. 50,000
d. 60,000
P20,000,000 + P600,000,000 - P1,600,000
40 years
= P475,000.00
Weighted Average
Date Expenditures Capitalization Period Accumulated Expenditure
1/3/2020 900,000 2/12 P300,000.00
1/4/2020 504,000 3/12 126,000.00
1/5/2020 900,000 4/12 150,000.00
1/6/2020 1,440,000 1/12 120,000.00
P696,000.00
P720,000 x 9% x 10/12 = P54,000.00
300,000 x 12% = 36,000.00
P 90,000.00
P720,000 x 9% = P64,800.00
150,000 x 12% = 18,000.00
P 82,800.00
Fair Market Value of New Truck = P36,000.00
Loss on Disposal = 2,000.00 (P36,000 - P30,000) - P4,000
New Machine = P36,000.00 (P8,000 + P30,000 - P2,000)
* P24,000 - P16,000 = P8,000
P 320,000 - P20,000
5
= P60,000
P60,000 + P6,000 = P66,000.00
P395,000 - P370,000 = P25,000
P125,000 - P60,500 = 64,000
P 89,500
( 4000)
P 85,500.00
(AC - P30,000) x 6/36 = P65,000
P65,000 = P390,000
6/36
P390,000 + P30,000 = P420,000.00
P400,000 x 0.3 x 0.5 = P60,000.00
[P120,000 - (P120,000 x 20% x 175%)] x 20% = P20,400
ary 1, 2017. (P420,000 - P42,000) x 3/9 = P126,000
is 9 years. P420,000 - P126,000 = P294,000
(P294,000 - P70,000)
(5-3)
= P112,000.00
ed salvage (P600,000 - P30,000)
d the asset 10,000
preciation. = P57 x 110
= P62,70.00
es the following
Copyrights = P20,000.00
Trademarks = 90,000.00
Acquired Subsidiary = 390,000.00
P500,000.00
P600,000 / 4 = P150,000
350,000
P500,000.00
e in 2020?
P5,000,000 (P5,000,000 + P300,000) - P2,000,000 = P3,300,000
P5,100,000 - 3,300,000 = P1,800,000.00
P500,000 / 10 = P50,000.00
ortization
P350,000 + P510,000 + P325,000 = P1,185,000.00
P160,000 + P200,000 + P215,000 = P550,000.00
(P24,000 - P6,000)
1/6
= P3,000.00
No recognition of Loss because future cash flow P200,000 > P190,000 book value
d Expenditure
