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# Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and

Disposition

## Multiple Choice Questions

1. The factors that need to be determined to compute depreciation are an asset's:
A. Cost, residual value, and physical life
B. Cost, replacement value, and service life
C. Fair value, residual value, and economic life
D. Cost, residual value, and service life.

D
2. Depreciation, depletion, and amortization:
A. All refer to the process of allocating the cost of long-term assets used in the business over
future periods.
B. All generally utilize the same methods of cost allocation
C. Are all handled the same in arriving at taxable income
D. All of the above are correct

A
3. Assuming an asset is used evenly over a four-year service life, which method of depreciation
will always result in the largest amount of depreciation in the first year?
A. Straight-line
B. Units-of-production
C. Double-declining balance.
D. Sum-of-the-year's digits

C
4. An asset acquired January 1, 2011, for \$15,000 with an estimated 10-year life and no residual
value is being depreciated in an equipment group asset account that has an average service life of
eight years. The asset is sold on December 31, 2012, for \$6,000. The entry to record the sale
would be:

A. Option A
B. Option B
C. Option C
D. Option D .

D .

Under the group depreciation method, it is assumed that the book value of a disposed item
exactly equals any proceeds received, and no gain or loss is recorded.
Cutter Enterprises purchased equipment for \$72,000 on January 1, 2011. The equipment is
expected to have a five-year life and a residual value of \$6,000.

## 5. Using the straight-line method, depreciation for 2011 would be:

A. \$13,200 .
B. \$14,400
C. \$72,000
D. None of the above is correct

## (\$72,000 - 6,000)  5 = \$13,200

6. Using the straight-line method, the book value at December 31, 2011 would be:
A. \$57,600
B. \$51,600
C. \$58,800.
D. \$52,800

## \$72,000 - 13,200 = \$58,800

7. Using the straight-line method, depreciation for 2012 and the equipment's book value at
December 31, 2012 would be:
A. \$14,400 and \$43,200
B. \$28,800 and \$37,200
C. \$13,200 and \$39,600
D. \$13,200 and \$45,600 .

## Depreciation, 2012 = (\$72,000 - 6,000)  5 = \$13,200

Book value, 12/31/12 = \$72,000 - (2  13,200) = \$45,600
8. Using the double-declining balance method, depreciation for 2011 and the book value at
December 31, 2011 would be:
A. \$26,400 and \$45,600
B. \$28,800 and \$43,200 .
C. \$28,800 and \$37,200
D. \$26,400 and \$36,600

## Depreciation, 2011 = \$72,000  40% = \$28,800

Book value, 12/31/11 = \$72,000 - 28,800 = \$43,200
On September 30, 2011, Bricker Enterprises purchased a machine for \$200,000. The estimated
service life is 10 years with a \$20,000 residual value. Bricker records partial-year depreciation
based on the number of months in service.
9. Depreciation for 2011, using the straight-line method is:
A. \$13,500
B. \$15,000
C. \$4,500 .
D. \$5,000

## (\$200,000 - 20,000)  10  3/12 = \$4,500

10. Depreciation for 2011, using double-declining balance, would be:
A. \$40,000
B. \$10,000 .
C. \$36,000
D. \$9,000

## \$200,000  20%  3/12 = \$10,000

11. Depreciation for 2012, using double-declining balance, would be:
A. \$32,000
B. \$34,000
C. \$38,000 .
D. \$40,000

## Depreciation for 2012 = [\$200,000 - (\$200,000 x 20% x 3/12] x 20% = \$38,000

12. Depreciation (to the nearest dollar) for 2011, using sum-of-the-years' digits, would be:
A. \$9,091
B. \$24,545
C. \$27,273
D. \$8,182.

## (\$200,000 - 20,000) x 10/55 x 3/12 = \$8,182

13. A change in the estimated useful life and residual value of machinery in the current year is
handled as:
A. A retrospective change back to the date of acquisition as though the current estimated life and
residual value had been used all along
B. A prospective change from the current year through the remainder of its useful life, using the
new estimates.
C. A cumulative adjustment to income in the current year for the difference in depreciation under
the new vs. old estimates
D. None of the above is correct

B
14) In the first year of an asset's life, which of the following methods has the smallest
depreciation?
A) Straight-line
B) Declining balance.
C) Sum-of-the-years' digits.
D) Composite or group.

18) On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has
an expected capacity of 300,000 units and no residual value. The cost of the machine was
\$450,000 and is to be depreciated using the units-of-production method. During the six months
of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated
that the machine can realistically be used to produce only another 230,000 units. During 2019,
70,000 units were produced.

## Prego would report depreciation in 2018 of:

A) \$36,000
B) \$43,900.
C) \$18,000.
D) \$21,950.

Explanation: Depreciation in 2018 = (\$450,000÷300,000) = \$1.50 per unit × 24,000 = \$36,000
19) Archie Co. purchased a framing machine for \$45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of \$5,000 at the end of four years.

Using the double-declining balance method, depreciation for 2018 and book value at December
31, 2018, would be:
A) \$22,500 and \$22,500
B) \$22,500 and \$17,500.
C) \$20,000 and \$25,000.
D) \$20,000 and \$20,000.

Explanation: Depreciation in 2018 = \$45,000 × 50% = \$22,500
Book value, 12/31/2018 = \$45,000 – 22,500 = \$22,500
20) When selling property, plant, and equipment for cash:
A) The seller recognizes a gain or loss for the difference between the cash received and the fair
value of the asset sold.
B) The seller recognizes a gain or loss for the difference between the cash received and the book
value of the asset sold
C) The seller recognizes losses, but not gains.
D) None of these answer choices are correct.

21) An asset was acquired on January 1, 2018, for \$15,000 with an estimated 4-year life and
\$1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if
the asset was sold on December 31, 2020, for \$5,000.
A) \$500 gain
B) \$3,000 loss.
C) \$1,500 gain.
D) \$500 loss.

Explanation: Depreciation = (\$15,000 − \$1,000)/4 years = \$3,500/year.
Accumulated depreciation = \$3,500 × 3 years = \$10,500.
Book value = \$15,000 – \$10,500 = \$4,500.
Gain = \$5,000 – \$4,500 = \$500.
22) The cost of natural resources is expensed in the period:
A) The resource is harvested and becomes ready for sale.
B) The resource is acquired.
C) The resource is sold
D) The resource is paid for.

23) Clark Oil and Gas incurred costs of \$15.3 million for the rights to extract resources from a
natural gas deposit. The company expects to extract 8 million cubic feet of natural gas during a
six-year period. Natural gas extracted during years 1 and 2 were 800,000 and 1,600,000 cubic
feet, respectively. What was total depletion for year 1 and year 2, assuming the company uses the
units-of-production method?
A) \$5.10 million.
B) \$3.06 million.
C) \$8.00 million.
D) \$4.59 million

Explanation: Depletion rate = \$15.3 million ÷ 8 million cubic feet = \$1.9125/cubic foot.
Total depletion = (800,000 + 1,600,000) cubic feet × \$1.9125 = \$4.59 million.
24) On February 12, 2018, Forest Incorporated purchased the right to remove timber from a
10,000-acre tract of land over the next three years, and the company estimates no residual value.
The timber is to be sold as lumber for new home construction. The cost of the timber rights was
\$240,000, with estimated salable timber feet of 750,000. During 2018 and 2019, Forest harvested
and sold 600,000 feet of timber. What is the book value of the timber rights at the end of 2019,
assuming the company uses the units-of-production method?
A) \$48,000
B) \$80,000.
C) \$160,000.
D) \$192,000.

Explanation: Depletion rate = (\$240,000 ÷ 750,000 timber feet) = \$0.32 per timber foot.
Depletion in 2018 and 2019 = \$0.32/timber foot × 600,000 timber feet = \$192,000.
Book value = \$240,000 − \$192,000 = \$48,000.
25) If an intangible asset has a legal life of eight years but contractually the usefulness is limited
to six years, a company will amortize the cost over:
A) Eight years.
B) Six years
C) Seven years.
D) Either six or eight years is allowed.

26) Short Corporation acquired Hathaway, Inc., for \$52,000,000. The fair value of all
Hathaway's identifiable tangible and intangible assets was \$48,000,000. Short will amortize any
goodwill over the maximum number of years allowed. What is the annual amortization of
goodwill for this acquisition?
A) \$100,000.
B) \$400,000.
C) \$200,000.
D) \$0

Explanation: Goodwill is not amortized.
27) Accounting for a change in the estimated service life of equipment:
A) Is handled prospectively
B) Requires retroactive restatement of prior year's financial statements.
C) Requires a prior period adjustment.
D) Is handled currently as a change in accounting principle.

28) Fellingham Corporation purchased equipment on January 1, 2016, for \$200,000. The
company estimated the equipment would have a useful life of 10 years with a \$20,000 residual
value. Fellingham uses the straight-line depreciation method. Early in 2018, Fellingham
reassessed the equipment's condition and determined that its total useful life would be only six
years in total and that it would have no salvage value. How much would Fellingham report as
depreciation on this equipment for 2018?
A) \$24,000.
B) \$27,333.
C) \$36,000.
D) \$41,000

Explanation: This is a change in estimate, so the remaining deprecation will be spread over the
remaining useful life.

## Accumulated depreciation at 12/31/2017 = 2 × [(\$200,000 – 20,000) ÷ 10] = \$36,000

Book value at 12/31/2017 = \$200,000 – 36,000 = \$164,000. The revised life is six years and two
have passed, leaving four remaining years.
Annual depreciation after change in estimate = \$164,000 ÷ 4 = \$41,000
29) The amount of impairment loss is the excess of book value over:
A) Amortized cost.
B) Undiscounted future cash flows.
C) Fair value
D) Future revenues.

30) Ryan Company purchased a building on January 1, 2018, for \$250,000. In addition, during
2018 the following costs related to the building have been incurred:

Utilities \$ 12,000
Property tax 4,000
Expansion of the building 53,000
New air conditioning system 28,000
General maintenance \$ 19,000

The amount of expenditures to capitalize for the year (not including the initial purchase of the
building) is:
A) \$35,000.
B) \$85,000.
C) \$81,000
D) \$72,000.