Long Term Assets

Medium Practice Test

Introduction to Accounting

Medium Practice Test

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

1. Which of the following is true of book value?

a. it is an approximation of appraised value
b. it is an approximation of current fair market value
c. it is the amount that will be depreciation expense in the future
d. it is the allocation of an asset’s cost over time used

Check Your Answer

C.  Book value is cost less accumulated depreciation.  It is the amount that is not yet expensed. It is not a reflection of fair market value (which is the same thing as appraised value).  (d.) is depreciation expense.

2. Which of the following expenditures should be expensed in the period incurred?

a. oil changes every 5,000 miles on the company’s autos
b. engine overhaul on one of the company’s autos
c. new tires that are expected to last 3 years
d. both a. & c.

Check Your Answer

A.  Routine maintenance and repairs are always expensed.  It does not give future benefit since it will have to be done again in less than one year.  Costs that are capitalized give future benefit for more than one year:
1) extend the useful life (b),
2) improve efficiencies
3) increase output.

3. The asset trademark should include all of the following except

a. employee salaries working on the design of the trademark
b. fees paid to the external law firm that filed for the trademark
c. legal filing fees paid to the government associated with the trademark
d. all of the above should be capitalized as part of the asset

Check Your Answer

A.  Costs related to intangible assets are expensed if they are incurred inside the company.  Costs paid outside the company are capitalized if they provide probable future benefit. Employee salaries are always expensed because they are internal to the company.

4. An asset with a historical cost of $10,000 and accumulated depreciation of $3,600
was sold for $5,000. This will result in

a. a loss of $5,000
b. a gain of $1,400
c. a loss of $1,400
d. a gain of $6,400

Check Your Answer

C.  The book value (cost less accumulated depreciation) is $6,400. This is the net amount currently recorded in the company’s accounts.  The company received less than book value, which is a loss. The entry would be recorded as:

Loss on sale of asset 1,400 plug
Cash 5,000 amount received
Accumulated Depreciation 3,600 cumulative amount to sale
Asset name 10,000 historical cost


5. The straight line method of depreciation is used the most often because

a. it exactly matches revenues produced during the period with the expense
b. assets are always used for an equal amount of time every day
c. it is easy to calculate
d. assets always produce more revenue in the beginning years of use

Check Your Answer

C.   Straight-line is easy to calculate.  It is also assumed that many assets will produce revenues equally over time.  All other choices are incorrect statements. Depreciation is always an estimate (a.).  When (d) is true, it is appropriate to use the double declining method of depreciation. 

6. A cost of an improvement to a machine that increases output of product is

a. expensed
b. capitalized
c. expensed over the subsequent life of the asset
d. both b. & c.

Check Your Answer

D.  This is a subsequent expenditure and subsequent expenditures are capitalized when they extend the useful life or increase productivity, efficiency, output.  All long term assets that have a useful life are expensed over the life of the asset. This cost is added to the cost of the asset and expensed through depreciation. 

7. The main purpose of recording depreciation expense is to

a. record the cost of using the asset over the time revenues are produced with the asset
b. show that the fair market value of assets decreases over time
c. show the replacement cost of the asset
d. report the asset at book value which is the same as fair market value

Check Your Answer

A.  Depreciation is recorded to match the cost (expense) of using the asset to revenues produced, ONLY.  It is not done to approximate fair market value in any way. There are too many factors that determine fair market value for book value to reflect fair market value.  It is an indication that the asset is being used and must be replaced at some point (some books call this wear and tear).

8. Which method of depreciation gives a depreciation expense that is the most difficult to project year to year?

a. straight-line method
b. double declining balance method
c. units of production method
d. all can be projected given the ease of the calculation

Check Your Answer

C.  The depreciation expense recorded using units of production will vary with production in future years which is often difficult to project.  All other methods listed can be projected once an estimate of life and residual value is made.

9. Which of the following could be an intangible asset with an indefinite life?

a. patent
b. goodwill
c. leasehold improvements
d. either b. or c.

Check Your Answer

B. Goodwill most often has indefinite life. Patents are granted for a definite length of time and leasehold improvements last for the life of the lease.

10. The cost of financing the construction of a building to be used for 20 years is

a. capitalized as part of the cost of the building
b. expensed in the period incurred before use of the building
c. capitalized and expensed over the period of construction
d. a subsequent expenditure

Check Your Answer

A.  This cost is part of what it takes to get the asset to the point of using it to produce revenues.  It is a real cost, just like any other costs of construction, and the amount incurred prior to using the asset is capitalized as part of the building account.  It is expensed as part of the building over the life the building is used to produce revenues.

11. State the accounting rules, very briefly and simply, for recording expenditures as an asset or an expense for:

a. property, plant, equipment
b. intangible assets

Check Your Answer

a.  Property/plant/equipment:

Capitalize all costs to get the asset ready to use (prior to use) and subsequent expenditures that extend the life or improves efficiency/output

Expense when the cost benefits one year or less and does not give future benefit

b.  Intangible assets:

Capitalize costs that are paid outside the company and give future benefit

Expense costs that are paid inside the company (salaries) and costs that do not give probable future benefit

12. The company purchased an asset for $100,000 two years ago at the beginning of the year. The asset was expected to be used for 7 years and then be sold for $15,000. At the beginning of the 4 th year the company revised the estimated life to be used for 6 years from this date and residual value to be $10,000. The company uses the straight line method.

A. Compute depreciation expense for the 4th year
B. What is the book value of the asset at the end of the 4th year?

Check Your Answer

First:  Compute depreciation expense for the first 3 years and accumulated depreciation at the end of year 3.

$100,000 – $15,000
         7 years

= $12,143 each year x 3 years 

= $36,429 accumulated depreciation end of 3rd year

The formula for computing depreciation expense in future years after you have added costs or revised an estimate is:

Current book value – new residual value
     New life from this point forward

A. $63,571 – 10,000 = $8,929 
              6 years

each year for the next 6 years 

Cost               100,000
– A/D              (36,429) total for 4 prior years
Book Value     63,571

The 4th year depreciation expense is $8,929

B. Book value at end of 4th year is:

Cost                                                  100,000
– Accumulated Depreciation        (45,358)
= Book Value                                    54,642

36,429 + 8,929 = 45,358 accumulated depreciation

13. A machine was purchased on March 1 st of the current year at a cost of $94,000 and expected to be used for 6 years. After 6 years the machine is expected to be sold for $12,000.

A. Compute depreciation expense for the first 2 years using the straight-line method
B. Compute depreciation expense for the first 2 years using the double declining balance method.
C. The machine is sold on January 1 st of the third year for $65,000. Record the entry to record the sale given the company uses the double declining method of depreciation.

Check Your Answer

A.  94,000 – 12,000
             6 years

= $13,667 annual depreciation expense

Used since March 1st, used 10 months:

 $13,667 x 10/12 = $11,389 for year 1  

(only expense for the part of the year it was used) 

Year 2 is a full year:    $13,667

B.  100% / 6 = 16.67% x 2 = 33.33% x (94,000 – 0)  = $31,330 

Used since March 1st, 10 months    

$31,330 x 10/12 = $26,108 for year one 

same 33.33% x (94,000 – 26,108) = $22,628 for year 2

C. Record the sale.

Cash                                             65,000
Accumulated depreciation       48,736
       Machine                                           94,000
       Gain on sale                                      19,736

Accumulated depreciation is the total depreciation expense recorded for all years and the partial period up to the date of the sale 

Machine is decreased for the original cost

Gain is the difference in cash received and the book value at the time or sale or the amount it takes to make the journal entry balance

Cash received          65,000
– Book Value           (45,264)
= Gain                       24,958

94,000 cost – 48,736 A/D = 45,264 Book value

14. For the following costs, state the account that will be used to record the expenditure (the debit).

A. Legal fees paid to an outside attorney related to a trademark
B. Closing costs related to purchase of an office building
C. Survey costs related to purchasing a plot of land
D. The difference in fair market value of net assets and the amount paid when buying a company
E. Major overhaul to the engine of a truck to extend the life
F. Repairs and maintenance that is done monthly
G. Bulldozing a building on land purchased
H. Training employees to use a new machine
I. Salaries paid to develop a patent
J. Landscaping that will be done every 3 years

Check Your Answer

A. Trademark – pay outside the company, capitalize to the asset
B. Building – prior to using
C. Land – prior to using
D. Goodwill
E. Truck – future benefit, subsequent expenditure, extends the life
F. Repairs & Maintenance expense – no future benefit
G. Land – building is no longer, must do to get land ready for use
H. Machine – prior to use
I. Salary expense – inside the company
J. Land improvements (asset) – future benefit.

J is not “land” because land is not depreciated and land improvements are