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Company A uses an accelerated depreciation method while Company B uses the straight -line method for an asset of the same cost and useful life. Which of the following statements is true?


A) Company A will have higher depreciation expense in the early years, but Company B will have the higher expense towards the end of the asset's useful life.
B) Company A will consistently have higher depreciation expense until residual value is reached.
C) Company B will have higher depreciation expense in the early years, but Company A will have the higher expense towards the end of the asset's useful life.
D) Company B will consistently have higher depreciation expense until residual value is reached.

Correct Answer

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When a company sells a long-lived asset, stockholders' equity will change by the:


A) amount of the sale.
B) amount of the asset's book value.
C) amount of the asset's accumulated depreciation.
D) difference between the sales price and the asset's book value.

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When a company sells equipment for cash on a date other than the last day of the accounting period, it must:


A) record depreciation expense for the entire accounting period during which the equipment is sold.
B) record the disposal by reducing equipment and increasing revenue; a gain or loss is reported if the decrease and increase are not equal.
C) first record depreciation expense for the period up to the date of sale, and then record the disposal by decreasing both equipment and accumulated depreciation while increasing cash; a gain or loss is reported if total assets increase or decrease.
D) record accumulated depreciation for the entire current accounting period.

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Which of the following is not an amount that is needed to calculate straight-line depreciation?


A) The cost of the asset.
B) An estimate of the asset's useful economic life to the company.
C) The estimated amount that the company will get when it disposes of the asset.
D) The cost the company will be required to incur to replace the asset.

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Land is not subject to depreciation so that means that items that increase the usefulness of the land, such as parking lots, are not depreciated.

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Company A uses an accelerated depreciation method while Company B uses the straight -line method. All other things equal, during the first few years of the asset's use, Company A will show which of the following compared to Company B?


A) Higher asset values and net income.
B) Lower asset values and higher net income.
C) Higher asset values and lower net income.
D) Lower asset values and net income.

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A fixed asset turnover ratio of 4.3 indicates that for every


A) $1 in sales revenue, the firm acquired $4.30 of assets.
B) $1 in fixed assets, the firm earned $4.30 of net income.
C) $1 in assets, the firm paid $4.30 of expenses.
D) $1 in fixed assets, the firm generated $4.30 of net sales.

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Identify the category to which each of the following assets belongs.

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When estimated useful life of an asset is revised:


A) depreciation will continue at the current rate.
B) depreciation expense reported in previous years would be changed retroactively.
C) the depreciation expense in subsequent years will be changed but previous
D) calculations will not be changed.
E) generally accepted accounting principles have been violated.

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Many companies use accelerated depreciation in computing taxable income because


A) is required by the tax rules.
B) is required by financial reporting rules.
C) the results are identical to straight-line deprecation.
D) it postpones tax payments until later years because it lowers taxable income in the early years.

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The Widget Tool and Die Company buys a $400,000 stamping machine that has an estimated residual value of $20,000. The company expects the machine to produce two million units. It makes 400,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is:


A) $80,000.
B) $400,000.
C) $76,000.
D) $380,000.

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Companies within the same industry do not always use the same depreciation method, but will use the same expected useful life for the same piece of equipment.

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Tax accounting and financial accounting use the same depreciation calculations and there are no differences in the results between the two accounting systems.

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A company purchases property that includes land, buildings and equipment for $5.5 million. The company pays $180,000 in legal fees, $220,000 in commissions, and $100,000 in appraisal fees. The land is estimated at 25%, the buildings are at 40%, and the equipment at 35% of the property value. Prepare the journal entry that is required to record the purchase assuming that the company paid 50% of the amounts using cash and signed a note for the remainder. Explain how you derived your answer.

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blured image Costs associated with acquiring the pro...

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If an asset value increases, what is the amount of the increase that is recognized according to GAAP?


A) The difference between the net asset cost and the new asset value.
B) The difference between the original cost of the asset and the new value of the asset.
C) The difference between the fair value and the expected future cash flows from the asset.
D) No increase is recognized.

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Company A uses an accelerated depreciation method while Company B uses the straight -line method for an asset of the same cost and useful life. Other things being equal, which of the following is true?


A) Company A will have higher net income in the early years, but Company B will have higher net income towards the end of the asset's useful life.
B) Company A will consistently have the larger net income until residual value is reached.
C) Company B will have higher net income in the early years, but Company A will have higher net income towards the end of the asset's useful life.
D) Company B will consistently have the larger net income until residual value is reached.

Correct Answer

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The MegaHit Film Studio has a licensing right (or agreement) to distribute films produced by the Artsy Film Company. How would the MegaHit Company classify this licensing right on its balance sheet?


A) Tangible asset
B) Intellectual property asset
C) Intangible asset
D) Nonreported asset

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A declining fixed asset turnover ratio suggests that a:


A) company is not as efficient in using its fixed assets as it was in previous periods.
B) company's net sales must be increasing.
C) company must have purchased some intangible assets.
D) company's beginning fixed asset balance must be greater than its ending fixed asset balance.

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If average net fixed assets decrease, then the fixed asset turnover ratio will increase, assuming all other things equal.

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The purpose of depreciation is to correctly value assets.

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