Long Term Assets

Hard Practice Test

Introduction to Accounting

Hard Practice Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. An accelerated depreciation method is

a. always used for assets with less than 3 years life
b. most appropriate for assets that produce more revenue in early years used than in later years
c. results in a higher income in early years
d. none of the above

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B.  Accelerated depreciation means that more is expensed in early years of use than the later years.  Depreciation is recorded in order to match the expense with expected revenue produced from the asset.  A higher expense results in lower income (c.)  
The method chosen should be based on estimated revenues.

2.  Goodwill is

a.  recorded by the company when profits are earned during this year
b.  the difference in what was paid for the company and the fair market value of net assets purchased
c.  the difference in what was paid for the company and the book value of net assets purchased
d.  expensed annually as the company uses the benefits to produce revenues

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B.  The technical definition of goodwill is (b.).  The reason the company is willing to pay more than the separate fair market value of net asset is they believe they are getting intangible assets, such as a good management team, name brand, good location, etc, which is the intangible asset goodwill.  Goodwill has indefinite life and is not expensed annually (amortized).

3.  A company sold an asset with a historical cost of $10,000 that was purchased and used 3 years and 6 months prior to the sale.  The asset was estimated to be used for 4 years and have a residual value of $2,000. The entry to record the sale at a price of $4,000 will include

a.  a $1,000 gain
b.  a $1,500 gain
c.  a $1,000 loss
d.  a $4,000 gain

Check Your Answer

A.  First compute annual depreciation expense:  $10,000 – $2,000 / 4 years = $2,000 per year.  3 and ½ years x $2,000 per year gives a total of 7,000 accumulated depreciation expense recorded.  The entry to record the sale is to decrease (credit) the asset for cost, decrease all associated accumulated depreciation (debit), record the cash received (debit) and plug the difference to gain or loss.  The gain or loss will be the difference in cash received and book value.

Book value =  $10,000 – $7,000    = $3,000
Cash received                                     = $4,000
Difference = Gain                               = $1,000

Received more than book value is a gain

4.  An asset cost $110,000, has a residual value of $10,000 and will be used for 5 years.  When will the expense using the straight-line method be higher than the expense using the double declining balance method? 

a.  always, every year
b.  never
c.  after the 2nd year
d.  after the 4th  year

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C.   Straight-line depreciation expense will be $20,000 each year.  Double declining balance is computed as follows:

100% / 5 = 20% x 2 = 40% x 110,000 = 44,000 1st year

= 40% x (110,000 – 44,000) = 26,400 2nd year

= 40% x (110,000 – 44,000 – 26,400) = 15,840 3rd year

5.  Which of the following is true?

a.  book value is never higher than the depreciable base
b.  accumulated deprecation will be the same for all depreciation methods when the asset is fully depreciated
c.  useful life can be longer than legal life
d.  if the estimated useful life is changed, it must be changed to a longer life

Check Your Answer

B.  Useful life estimates can be changed at any time to increase or decrease the life, depending how long management intends to use the asset.  Book value will be equal to cost less residual value when fully depreciated regardless of the method used. Book value is always equal to or higher than depreciable base.

6.  Which of the following regarding long term asset impairment is true?

a.  the impairment loss is always recorded in the period the asset is sold
b.  impairment always increases the asset’s cost
c.  future cash flows are higher than historical cost when impairment occurs
d.  future cash flows are lower than historical cost when impairment occurs

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D.  Impairment occurs when projected future cash flows are lower than historical cost.  An asset can not be reported at higher than expected future benefit. The loss is recorded at the time the impairment is determined (a.).  Assets are never increased to the amount of future cash flows, only decreased.

7.  The cost of developing computer software is most likely

a.  expensed if the software can not be sold
b.  capitalized if there is a market for the software
c.  always expensed
d.  a. and b.

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D.  This is an intangible asset if there is probable future benefit.  Costs are capitalized if there is probable future benefit and expensed if there is not.  When there is a market for the product and it can be sold, there is probable future benefit. 

8.  A productive asset that is typically consumed during operations is

a.  an intangible asset
b.  a natural resource
c.  land
d.  equipment

Check Your Answer

B.  Natural resources are consumed when sold for revenue.  Intangible assets have no physical substance and can not be consumed.  Property, plant and equipment is not consumed, it is used and most often wears out.

9.  The amortization of an intangible asset reduces

a.  the fair market value of the asset
b.  accumulated amortization
c.  the book value of the asset
d.  all of the above

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C.  Book value is cost less accumulated amortization.  Recording amortization expense increases accumulated amortization.  Book value is not an indication of fair market value.

10.  Depreciation expense must be recorded for 

a.  only the time the asset is used
b.  a full year amount when the asset is used for part of the year
c.  time from the day the expenditure is made to the end of use of the asset
d.  any of the above depending on the company’s policy

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A.  The goal of depreciation is to match the cost of using the asset over the time used.  Assets can be purchased before beginning use, and the time before use is not expensed (c.)  Assets used for only part of the year incur less than one year of expense (b.)

11. JEH Trucking uses the straight line method of depreciation and incurred the following costs:.

A)  1/1/2020 Purchased a truck for $195,000, the truck had an expected useful life of 10 years and an estimated residual value of $25,000.
B)   During 2020, spent $19,000 on tires, oil changes, and minor parts replacements that must be done every year.
C)  1/1/2022: Spent $25,000 to rustproof the truck, expected to increase the total life by 6 years.  Residual value is not expected to change.

A.  Record depreciation expense for the year ended 12/31/2021.
B.  Record depreciation expense for the year ended 12/31/2022.
C.  Determine book value on 12/31/2023.

Check Your Answer

A.  The $19,000 is routine maintenance and must be expensed.  It is not added to the cost of the asset. 2021 depreciation expense will be the same as 2020 depreciation expense because the company has not added costs or changed its estimates.

195,000 – 25,000
       10 years

= 17,000 each year for 2020 and 2021

Depreciation Expense               17,000
       Accumulated Depreciation          17,000


B.  $25,000 is capitalized and added to the cost of the truck because rust proofing increased useful life of the truck.  This requires a revised depreciation expense estimate for future years.

New Cost – New residual value – Accumulated Deprec
       New useful life

(195,000 + 25,000) – 25,000 – 34,000 = 11,500
10 – 2 + 6 more years

Depreciation Expense               11,500
Accumulated Depreciation        11,500

C.  Determine book value:  

Cost 195,000 + 25,000                  220,000
– Accumulated Depreciation         (57,000)
= Book Value                                    163,000

A/D = (17,000 x 2 years) + (11,500 x 2 years) = 57,000

12.  The company purchased a new car for its salesman on May 1st of 2020, for $34,000.  The car is expected to be used for 5 years and have a life of 10 years.  At the end of 5 years the company expects to sell the car for $8,000. The salesman is expected to drive the car approximately 150,000 miles.  On February 1st, 2022 the car is sold for $16,000 when the salesman was fired.

A.  Compute the gain or loss on the sale given the company uses the straight-line method.

B.  Compute the gain or loss on the sale given the company uses the double declining balance method.

C.  Compute the gain or loss on the sale given the company uses the units of production method and the car was driven 62,865 miles.

Check Your Answer

A.  To compute the gain or loss, you must know accumulated depreciation on the date of the sale.  Compute all prior year’s depreciation expense to determine this.

34,000 – 8,000 = 5,200 annual expense
5 years

2020 5,200 x 8/12 = 3,467
2021                             5,200
2022   5,200 x 1/12 =   433

Total Accum. Depr.   9,100  

You only depreciate the for the time used in 2020

You must record depreciation expense for the time used in the year of the sale before you record the sale

Loss on sale                                   8,900
Cash                                               16,000
Accumulated Depreciation          9,100
Automobile                                      34,000

B.  Compute total accumulated depreciation first: 

100% / 5 = 20% x 2 = 40% x 34,000 = 
13,600 x 8/12 = $9,067 for 2020

40% x (34,000 – 9,067) = $9,973 for 2021

40% x (34,000 – 9,067 – 9,973) = 
5,984 x 1/12 =   $499 for 2022

Total accumulated depreciation  19,539

Cash                                              16,000
Accumulated Depreciation       19,539
       Automobile                                    34,000
       Gain on sale                                       1,539

C.  Compute total accumulated depreciation first:

34,000 – 8,000 =  $0.173 per mile   150,000 miles

x 62,865 = 10,876 total depreciation expense

You do not need to determine which year the expense occurred in
You only need the total accumulated depreciation to do the entry

Loss on sale                                     7,124
Cash                                               16,000
Accumulated Depreciation        10,876
       Automobile                                      34,000

Important to notice:  The gain or loss will vary with how much has previously been expensed for depreciation.

13.  The company has purchased a new machine that is expected to have increasing maintenance costs each year the machine is used.  Production during the year is expected to be relatively equal each year. State what depreciation method is most appropriate and why?

Check Your Answer

The depreciation expense and all other expense (total expense) of using the machine should be matched to the revenues produced.   Double declining balance is most appropriate. Using this method will record a higher depreciation expense in the beginning years when maintenance is lower.  As years pass, the depreciation expense will decrease and maintenance expense will increase. The two expenses together will be relatively equal from year to year which will more accurately match the cost of using the machine to the revenues produced.  

You may be have answered straight-line because revenues are produced equally each year.  Straight-line give a higher total expense to use the machine each year when revenues from the machine are equal each year.  This is not good matching.