Accounting 201 - Chapter 7 Copy

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  • 1/39 Questions

    Which of the following should be included in the cost of equipment?

    • Freight costs to deliver the equipment
    • Installation costs for the equipment
    • Testing costs to get the equipment ready for use
    • All of the above
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Accounting 201 - Chapter 7 Copy - Quiz
About This Quiz

So far we have covered seven chapters in accounting 201. This most recent chapter we covered assets and how changes in the assets are recorded. Take up the quiz below and see what you recall so far. Give it your best and ensure to do it as a group and ask questions.

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  • 2. 

    All of the following are classified as natural resources and are depleted EXCEPT for: 

    • Land

    • Timber

    • Minerals

    • Oil

    Correct Answer
    A. Land
    Explanation
    Land is not classified as a natural resource that can be depleted because it refers to the surface of the earth, including soil, water bodies, and vegetation. While the use of land can have environmental impacts, it is not a finite resource that can be exhausted like timber, minerals, or oil. These resources can be extracted from the earth and used up over time, leading to their depletion.

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  • 3. 

    The length of service that a business expects to get from an asset as expressed in years, units of output, miles or other measures is the:

    • Depreciable cost.

    • Estimated useful life.

    • Salvage value.

    • Accelerated depreciation method.

    Correct Answer
    A. Estimated useful life.
    Explanation
    The estimated useful life refers to the length of service that a business expects to get from an asset. It is typically expressed in years, units of output, miles, or other measures. The estimated useful life helps businesses determine the depreciation expense for an asset over its useful life. Depreciable cost is the cost of an asset that can be allocated for depreciation, salvage value is the estimated value of an asset at the end of its useful life, and accelerated depreciation method is a depreciation method that allows for higher depreciation expenses in the early years of an asset's life.

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  • 4. 

    A depreciation method in which an equal amount of depreciation expense is assigned to each year of the asset’s use is the:

    • Units-of-production method.

    • Straight-line method.

    • Accelerated depreciation method.

    • Estimated residual value method.

    Correct Answer
    A. Straight-line method.
    Explanation
    The straight-line method is a depreciation method where an equal amount of depreciation expense is assigned to each year of the asset's use. This means that the asset's value decreases by the same amount each year until it reaches its estimated residual value. This method is widely used as it provides a consistent and predictable depreciation expense over the asset's useful life.

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  • 5. 

    Using an accelerated depreciation method will cause a profitable company to incur:

    • Less taxes in early years of the asset’s use as compared to later years.

    • More taxes in early years of the asset’s use as compared to later years.

    • the same amount of taxes in early years of the asset’s use as in the later years.

    • None of the above.

    Correct Answer
    A. Less taxes in early years of the asset’s use as compared to later years.
    Explanation
    When a company uses an accelerated depreciation method, it allows them to deduct a larger portion of the asset's cost in the earlier years of its use. This results in a higher depreciation expense and therefore lowers the company's taxable income. As a result, the company will pay less in taxes in the early years compared to the later years when the depreciation expense is lower. Therefore, the correct answer is that a profitable company will incur less taxes in the early years of the asset's use compared to later years.

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  • 6. 

    Accumulated Depreciation is a(n):

    • Contra-asset account

    • Contra-revenue account

    • Contra-liability account.

    • Expense account.

    Correct Answer
    A. Contra-asset account
    Explanation
    Accumulated Depreciation is a contra-asset account. Contra-asset accounts are used to offset the balance of their corresponding asset accounts. In the case of Accumulated Depreciation, it is used to record the total depreciation expense that has been charged against an asset over its useful life. By deducting the accumulated depreciation from the asset's cost, the net book value or carrying value of the asset can be determined. Therefore, Accumulated Depreciation is a contra-asset account that reduces the value of the asset on the balance sheet.

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  • 7. 

    Costs that would be included with the purchase of a plant asset are:

    • The sum of all of the costs incurred to bring the asset to its intended use.

    • Only costs that exceed a certain amount.

    • Only the purchase price.

    • None of the above.

    Correct Answer
    A. The sum of all of the costs incurred to bring the asset to its intended use.
    Explanation
    The correct answer is the sum of all of the costs incurred to bring the asset to its intended use. This means that all costs associated with acquiring and preparing the plant asset for its intended use should be included, such as the purchase price, transportation costs, installation costs, and any other costs necessary to get the asset ready for use. This comprehensive approach ensures that all relevant costs are accounted for and reflected accurately in the asset's value on the balance sheet.

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  • 8. 

    Which of the following should be included in the cost of land?

    • Construction cost of a parking lot

    • Landscaping

    • Real estate brokerage commission

    • Lighting

    Correct Answer
    A. Real estate brokerage commission
    Explanation
    Real estate brokerage commission should be included in the cost of land because it is a direct expense incurred in acquiring the land. The commission is paid to the real estate broker who facilitated the transaction and helped in finding and negotiating the purchase of the land. Therefore, it is a cost directly associated with the acquisition of the land and should be capitalized as part of its cost.

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  • 9. 

    An expenditure that increases an asset’s capacity or efficiency or extends its useful life is a(n):

    • Capital expenditure.

    • Expense.

    • Addition.

    • Improvement.

    Correct Answer
    A. Capital expenditure.
    Explanation
    A capital expenditure refers to an expense that is incurred to increase the capacity or efficiency of an asset or extend its useful life. This type of expenditure is typically made to acquire or upgrade fixed assets such as buildings, equipment, or machinery. It is considered a long-term investment as it provides benefits over an extended period of time. In contrast, expenses are regular costs incurred in the normal course of business operations. An addition refers to the act of adding something to an existing asset, while an improvement refers to enhancing or upgrading an asset. However, neither of these options specifically addresses the aspect of increasing an asset's capacity or efficiency or extending its useful life, which is why the correct answer is capital expenditure.

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  • 10. 

    An asset with no physical form, but that has special rights to current and expected future benefits is a(n):

    • Intangible asset.

    • Natural resource.

    • Plant asset.

    • Fixed asset.

    Correct Answer
    A. Intangible asset.
    Explanation
    An intangible asset refers to an asset that does not have a physical form but holds special rights to current and anticipated future benefits. This can include things like patents, copyrights, trademarks, and goodwill. Unlike natural resources, plant assets, or fixed assets, intangible assets are not tangible or physical in nature.

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  • 11. 

    Land is purchased for $62,500. Back taxes paid by the purchaser were $7,500; total costs to demolish an            existing building were $11,000; fencing costs were $12,500; and lighting costs were $1,500. What is the cost of the land?           

    • $62,500

    • $81,000

    • $93,500

    • $95,000

    Correct Answer
    A. $81,000
    Explanation
    Calculations: 62,500+7,500+11,000=81,000 Lighting and fencing are land improvements

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  • 12. 

    The book value of a plant asset is the:

    • Cost less depreciation expense.

    • Cost plus accumulated depreciation.

    • Cost less accumulated depreciation.

    • Original cost of the asset, plus any capital expenditures.

    Correct Answer
    A. Cost less accumulated depreciation.
    Explanation
    The book value of a plant asset is the cost of the asset minus the accumulated depreciation. This is because as an asset is used and depreciated over time, its value decreases. The book value represents the remaining value of the asset on the company's balance sheet after accounting for the depreciation expense. Therefore, the correct answer is cost less accumulated depreciation.

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  • 13. 

    The only plant asset that does not depreciate is:

    • Office supplies. (not a plant asset)

    • Furniture.

    • Land.

    • Patents.

    Correct Answer
    A. Land.
    Explanation
    Land is the only plant asset that does not depreciate because its value does not decline over time. Unlike other assets such as furniture or patents, land is considered to have an indefinite useful life and its value is expected to either remain constant or increase over time. Therefore, it is not subject to depreciation, which is the allocation of an asset's cost over its useful life.

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  • 14. 

    Which of the following should be included in the cost of land?

    • Costs of grading and clearing the land

    • Costs of removing an unwanted building

    • Cost of fencing (land inprovements)

    • Both A and B

    Correct Answer
    A. Both A and B
    Explanation
    The costs of grading and clearing the land should be included in the cost of land because these activities are necessary to prepare the land for use. Similarly, the costs of removing an unwanted building should also be included in the cost of land as it is a necessary expense to make the land usable. Therefore, both A and B should be included in the cost of land.

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  • 15. 

    Land, buildings and equipment are acquired for a lump sum of $875,000. The market values of the three assets are, respectively, $200,000, $500,000 and $300,000. What is the cost assigned to the equipment?

    • $250,000

    • $262,500

    • $300,000

    • $342,857

    Correct Answer
    A. $262,500
    Explanation
    Calculations: (300,000/1,000,000)*875,000= 262,500

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  • 16. 

    Costs that do not extend the asset’s capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as:

    • Capital expenditures.

    • Expenses.

    • Additions.

    • improvements.

    Correct Answer
    A. Expenses.
    Explanation
    Costs that do not extend the asset's capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as expenses. This means that these costs are recognized as regular operating expenses in the period they are incurred, rather than being capitalized and spread out over the useful life of the asset. Expenses are typically deducted from revenue to determine net income or loss for a specific period.

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  • 17. 

    If an asset is scrapped before being fully depreciated:

    • The company will incur a loss on the disposal

    • The equipment account will be credited.

    • The accumulated depreciation account will be debited.

    • All of the above will occur.

    Correct Answer
    A. All of the above will occur.
    Explanation
    If an asset is scrapped before being fully depreciated, all of the above will occur. The company will incur a loss on the disposal because the asset is being disposed of before its full value has been depreciated. The equipment account will be credited because the asset is being removed from the company's books. The accumulated depreciation account will be debited because the remaining depreciation that has not been recorded will be removed.

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  • 18. 

    When compared to the other methods of depreciation, the double-declining-balance method of depreciation gives depreciation expense that is:

    • Less in the earlier periods

    • More in the earlier periods

    • Approximately the same in earlier periods as with other methods.

    • An accelerated method; therefore, companies cannot use this method.

    Correct Answer
    A. More in the earlier periods
    Explanation
    The double-declining-balance method of depreciation gives more depreciation expense in the earlier periods compared to other methods. This is because it uses a higher depreciation rate in the beginning, which gradually decreases over time. This accelerated depreciation method allows companies to allocate a larger portion of the asset's cost as an expense in the early years, reflecting the higher wear and tear or obsolescence that typically occurs during that time. This can help companies match expenses with revenues more accurately and reduce their taxable income in the earlier years.

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  • 19. 

    Which of the following should be included in the Machinery account? 

    • The cost of transporting the machinery to its setup location

    • The cost of a maintenance insurance plan after the machinery is up and running

    • The cost of calibrating the machinery after it has been used for a year

    • The cost of insurance while the machinery is being overhauled

    Correct Answer
    A. The cost of transporting the machinery to its setup location
    Explanation
    The cost of transporting the machinery to its setup location should be included in the Machinery account because it directly relates to the acquisition and setup of the machinery. This cost is necessary for the machinery to be operational and is therefore considered a part of its overall cost.

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  • 20. 

    Capital expenditures are not immediately expensed because these items:

    • Do not extend the life of an asset.

    • Return an asset to its prior condition.

    • Increase the asset’s capacity.

    • Do all of the above.

    Correct Answer
    A. Increase the asset’s capacity.
    Explanation
    Capital expenditures are not immediately expensed because they increase the asset's capacity. This means that they enhance the asset's ability to generate future economic benefits, such as increased production or improved efficiency. By increasing the asset's capacity, the expenditure is considered an investment in the long-term growth and productivity of the business, rather than a regular expense that is consumed immediately. Therefore, it is capitalized and recognized as an asset on the balance sheet, and its costs are gradually expensed over its useful life through depreciation or amortization.

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  • 21. 

    The process of allocating the cost of a plant asset to expense over its life is:

    • Amortization.

    • Depletion.

    • Matching.

    • Depreciation.

    Correct Answer
    A. Depreciation.
    Explanation
    The process of allocating the cost of a plant asset to expense over its life is known as depreciation. Depreciation is the systematic allocation of the cost of an asset over its useful life in order to reflect the asset's gradual loss of value or usefulness. This is typically done through various methods such as straight-line depreciation, declining balance depreciation, or units of production depreciation. Depreciation is commonly used for tangible assets like buildings, machinery, and vehicles, while amortization is used for intangible assets like patents and copyrights. Depletion, on the other hand, is the allocation of the cost of natural resources over their extraction or usage. Matching refers to the principle of matching expenses with the revenues they generate.

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  • 22. 

    For financial reporting purposes, most companies use:

    • Straight-line depreciation.

    • Units-of-production depreciation.

    • Double-declining balance depreciation.

    • Modified accelerated cost recovery system of depreciation.

    Correct Answer
    A. Straight-line depreciation.
    Explanation
    Most companies use straight-line depreciation for financial reporting purposes because it is the simplest and most commonly used method. Straight-line depreciation evenly spreads the cost of an asset over its useful life, resulting in a constant depreciation expense each period. This method is easy to understand and calculate, providing a consistent and predictable measure of asset depreciation for financial reporting.

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  • 23. 

    A loss is recorded on the sale of a plant asset when the:

    • cash received exceeds the asset’s book value.

    • Asset’s book value is less than its historical cost.

    • asset’s book value is greater than the amount of cash received from the sale.

    • Cash received exceeds the cash paid for the replacement asset.

    Correct Answer
    A. asset’s book value is greater than the amount of cash received from the sale.
    Explanation
    When a loss is recorded on the sale of a plant asset, it means that the amount of cash received from the sale is less than the asset's book value. This indicates that the asset is being sold for less than its recorded value on the company's books. This can happen when the asset has depreciated in value over time or if it is being sold at a loss due to market conditions or other factors.

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  • 24. 

    Long-lived tangible assets that are used in the operation of the business are called:

    • Intangible assets.

    • Natural resources.

    • Plant assets.

    • Goodwill.

    Correct Answer
    A. Plant assets.
    Explanation
    Plant assets are long-lived tangible assets that are used in the operation of a business. These assets include items such as buildings, machinery, equipment, vehicles, and furniture. Unlike intangible assets, which are non-physical assets like patents or trademarks, plant assets have a physical form and are used to generate revenue for the business. Natural resources refer to assets like oil, gas, or timber, while goodwill represents the value of a company's reputation or customer relationships. Therefore, the correct answer is plant assets.

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  • 25. 

    Managers prefer accelerated depreciation over straight-line depreciation for income tax purposes because accelerated depreciation:

    • Provides the fastest tax deductions.

    • Decreases immediate tax payments.

    • Allows the company to reinvest the tax savings back in the business.

    • Does all of the above.

    Correct Answer
    A. Does all of the above.
    Explanation
    Managers prefer accelerated depreciation over straight-line depreciation for income tax purposes because it provides the fastest tax deductions, decreases immediate tax payments, and allows the company to reinvest the tax savings back in the business. Accelerated depreciation allows companies to deduct a higher portion of the asset's cost in the early years, resulting in larger tax deductions and lower taxable income. This reduces the immediate tax payments and provides more cash flow for the company to reinvest in the business, promoting growth and expansion. Therefore, the correct answer is that accelerated depreciation does all of the above.

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  • 26. 

    The entry to record amortization:

    • Increases total assets and decreases total equity.

    • Decreases total assets and increases total equity.

    • Decreases both total assets and total equity.

    • Increases both total assets and total equity.

    Correct Answer
    A. Decreases both total assets and total equity.
    Explanation
    When recording amortization, an expense is recognized, which decreases total assets. Amortization represents the gradual reduction of an intangible asset's value over time. Since total equity is equal to total assets minus liabilities, when total assets decrease, total equity also decreases. Therefore, the correct answer is that recording amortization decreases both total assets and total equity.

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  • 27. 

    A capital expenditure is:

    • Debited to an expense account.

    • Credited to an expense account.

    • Debited to an asset account.

    • Debited to a stockholders’ equity account.

    Correct Answer
    A. Debited to an asset account.
    Explanation
    A capital expenditure refers to the purchase of a long-term asset that will provide benefits to a company over a period of time. Since assets are resources owned by a company, it makes sense that a capital expenditure would be debited to an asset account. This ensures that the purchase of the asset is properly recorded on the company's balance sheet, reflecting an increase in the value of its assets.

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  • 28. 

    Repairs made to equipment as part of a yearly maintenance project would be recorded in the journal by debiting:

    • Accumulated Depreciation.

    • Depreciation Expense.

    • Equipment.

    • Repair Expense.

    Correct Answer
    A. Repair Expense.
    Explanation
    When repairs are made to equipment as part of a yearly maintenance project, they are considered as expenses incurred to maintain the equipment's functionality. These expenses are recorded in the journal by debiting the Repair Expense account. This helps in accurately tracking and reporting the costs associated with the repairs made to the equipment.

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  • 29. 

    Accumulated Depletion is a(n):

    • Contra-asset account

    • Contra-revenue account

    • Contra-liability account

    • Expense account

    Correct Answer
    A. Contra-asset account
    Explanation
    Accumulated depletion is classified as a contra-asset account because it is used to record the reduction in the value of a natural resource asset over time. Contra-asset accounts have a credit balance, which is opposite to the normal debit balance of asset accounts. Accumulated depletion is subtracted from the related asset account on the balance sheet to determine the net value of the asset. This account helps in accurately reflecting the decrease in the value of the natural resource asset due to its extraction or depletion.

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  • 30. 

    The journal entry to record a major expenditure to upgrade equipment that extends its useful life beyond the original estimate would include a:

    • Credit to Depreciation Expense.

    • Debit to Equipment.

    • Debit to Depreciation Expense.

    • Debit to Repair Expense.

    Correct Answer
    A. Debit to Equipment.
    Explanation
    When a major expenditure is made to upgrade equipment, it increases the value and extends the useful life of the equipment. This is recorded by debiting the Equipment account, as the equipment's value has increased. There is no need to credit Depreciation Expense because the useful life of the equipment has been extended, so the expense will be spread out over a longer period of time. Therefore, the correct answer is debit to Equipment.

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  • 31. 

    Morton Corporation purchased equipment for $46,000. Morton also paid $1,200 for freight and insurance while the equipment was in transit. Sales tax amounted to $850. Insurance, taxes and maintenance for the first year of use was $1,000. How much should Morton Corporation capitalize as the cost of the equipment?           

    • 46,000

    • 46,850

    • $48,050

    • $49,050

    Correct Answer
    A. $48,050
    Explanation
    Calculations: 46,000+1,200+850=48,050

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  • 32. 

    The expected cash value of a plant asset at the end of its useful life is known as:

    • Scrap value.

    • Salvage value.

    • Residual value.

    • Any of the above.

    Correct Answer
    A. Any of the above.
    Explanation
    The expected cash value of a plant asset at the end of its useful life is known as the scrap value, salvage value, or residual value. These terms are used interchangeably to refer to the estimated amount that a plant asset will be worth after it has been fully depreciated. The specific term used may vary depending on the context or industry, but all three terms essentially mean the same thing. Therefore, the correct answer is "any of the above."

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  • 33. 

    Equipment purchased for $85,000 on January 1, 2010, was sold on July 1, 2013.  The company uses the straight-line method of computing depreciation and recognizes $17,000 of depreciation expense annually.  When recording the sale, the company should record a debit to Accumulated Depreciation for:

    • $51,000.

    • $59,500.

    • $68,000.

    • Nothing; Accumulated Depreciation is not debited.

    Correct Answer
    A. $59,500.
    Explanation
    Calculations: 17,000 depreciation for year x 6/12 = 8,500 depreciation for 2013
    2010 depreciation = 17,000
    2011 depreciation = 17,000
    2012 depreciation= 17,000
    2013 depreciation = 8,500
    Total depreciation 59,500

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  • 34. 

    The computation of depletion expense is most closely related to which method for computing depreciation?

    • Straight-line

    • Units-of-production

    • Double-declining balance

    • The method selected depends upon the specific natural resource

    Correct Answer
    A. Units-of-production
    Explanation
    The computation of depletion expense is most closely related to the units-of-production method for computing depreciation. This method calculates depreciation based on the actual usage or production of the natural resource. It is commonly used when the value of the resource is directly related to the amount extracted or used. In contrast, the straight-line method evenly distributes the depreciation expense over the useful life of the asset, while the double-declining balance method accelerates depreciation in the early years of the asset's life. The method selected for computing depletion expense depends on the specific natural resource being depleted.

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  • 35. 

    A company recently purchased a building that it plans to renovate to get ready for use in its operations.  All expenditures to repair and renovate the existing building for its intended use are charged to:

    • Land.

    • Land improvements.

    • Land improvements expense.

    • Building.

    Correct Answer
    A. Building.
    Explanation
    When a company purchases a building with the intention to renovate it for its operations, all expenditures related to repairing and renovating the building are charged to the building account. This is because the company is improving the existing building to make it suitable for its intended use, which increases the value and functionality of the building. Charging these expenses to the building account accurately reflects the investment made by the company in improving the building.

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  • 36. 

    Research and development costs incurred by a company should be:

    • Capitalized and depreciated over a period not to exceed 20 years.

    • Capitalized and amortized over the useful life of the asset.

    • Either capitalized and depreciated or expensed immediately at the option of the accountant.

    • Expensed on the current year’s income statement.

    Correct Answer
    A. Expensed on the current year’s income statement.
    Explanation
    Research and development costs should be expensed on the current year's income statement. This means that these costs are recognized as expenses in the period they are incurred, rather than being capitalized and spread out over a longer period of time. This treatment reflects the uncertainty and risk associated with research and development activities, as well as the difficulty in reliably estimating the future economic benefits that may be derived from these costs. Expensing the costs in the current year provides a more accurate representation of the company's financial performance and helps to avoid potential overstatement of assets and profits.

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  • 37. 

    The journal entry to record depletion would include:

    • A debit to Depletion Expense and credit to Accumulated Depreciation.

    • A debit to Accumulated Depletion and a credit to Depletion Expense.

    • A debit to Depletion Expense and a credit to Accumulated Depletion.

    • None of the above.

    Correct Answer
    A. A debit to Depletion Expense and a credit to Accumulated Depletion.
    Explanation
    The correct answer is a debit to Depletion Expense and a credit to Accumulated Depletion. This is because depletion is the process of allocating the cost of natural resources over their useful life, and Depletion Expense is the account used to record this allocation. Accumulated Depletion, on the other hand, is a contra-asset account that shows the total amount of depletion expense that has been recognized and accumulated over time. Therefore, the journal entry to record depletion would involve debiting Depletion Expense to recognize the expense and crediting Accumulated Depletion to show the accumulation of depletion expense.

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  • 38. 

    Although located on the land, they are subject to decay and their cost is depreciated. This is the definition of:

    • Land improvement.

    • Plant and equipment.

    • a building

    • land.

    Correct Answer
    A. Land improvement.
    Explanation
    Land improvements are assets that are located on land but are subject to decay and their cost is depreciated. This means that over time, the value of these assets decreases due to wear and tear. Land improvements can include things like fences, driveways, and landscaping. Plant and equipment refers to machinery and tools used in a business. A building is a structure that is permanently attached to the land. Land, on the other hand, refers to the actual surface of the earth. Therefore, the correct answer is land improvement.

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  • 39. 

    The depreciation process attempts to match the:

    • Salvage value of the asset and the future market value of the asset.

    • Book value and the current market value of the asset.

    • Cost of the asset and the cash required to replace the asset.

    • revenues earned by the asset and the cost of the asset.

    Correct Answer
    A. revenues earned by the asset and the cost of the asset.
    Explanation
    The depreciation process attempts to match the revenues earned by the asset and the cost of the asset. This means that the depreciation expense is allocated over the useful life of the asset in order to accurately reflect the revenue generated by the asset during that time period and to properly match it with the cost of acquiring and using the asset. This ensures that the financial statements accurately reflect the economic reality of the asset's usage and helps in making informed business decisions.

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  • Mar 21, 2023
    Quiz Edited by
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  • Jul 22, 2012
    Quiz Created by
    Jc173
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