Concept of depreciation as used in accounting

Concept of depreciation as used in accounting

1.  Which of the following most accurately reflects the concept of depreciation as used in accounting?

A. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
B. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
C. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
D. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

2. Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

A. Associating cause and effect
B. Partial recognition
C. Immediate recognition
D. Systematic and rational allocation

3. If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

A. be constant.
B. vary with unit sales.
C. vary with production.
D. vary with sales revenue.

4. Starr Company purchased a depreciable asset for $150,000. The estimated salvage value is $10,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

A. $17,500
B. $26,250
C. $37,500
D. $28,125

5. Prentice Company purchased a depreciable asset for $200,000. The estimated salvage value is $20,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?

A. $18,000
B. $20,000
C. $200,000
D. $180,000

6. Lennon Company purchased a depreciable asset for $200,000. The estimated salvage value is $10,000, and the estimated useful life is 10,000 hours. Lennon used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?

A. $19,000
B. $20,900
C. $190,000
D. $22,000

7. Costs incurred internally to create intangibles are

A. capitalized.
B. capitalized if they have an indefinite life.
C. expensed only if they have a limited life.
D. expensed as incurred.

8. Factors considered in determining an intangible asset’s useful life include all of the following EXCEPT

A. the expected use of the asset.
B. any legal or contractual provisions that may limit the useful life.
C. the amortization method used.
D. any provisions for renewal or extension of the asset’s legal life

9. Under current accounting practice, intangible assets are classified as

A. amortizable or unamortizable.
B. limited-life or indefinite-life.
C. legally restricted or goodwill-type.
D. specifically identifiable or goodwill-type.

10. General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product’s books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?

A. $0.
B. $200,000.
C. $300,000.
D. $50,000.

11. Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Fleming record in 2008?

A. $ -0-
B. $350,000
C. $600,000
D. $250,000

12.  Malcom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

A. $10,000,000
B. $6,400,000
C. $4,800,000
D. $8,000,000

13.  Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Easton is to report the amount as

A. an extraordinary gain.
B. a deferred credit and amortize it.
C. paid-in capital.
D. part of current income in the year of combination.

14.  The reason goodwill is sometimes referred to as a master valuation account is because

A. it represents the purchase price of a business that is about to be sold.
B. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
C. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.
D. it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.

15.  Goodwill

A. generated internally should NOT be capitalized unless it is measured by an individual independent of the enterprise involved.
B. represents a unique asset in that its value can be identified only with the business as a whole.
C. exists in any company that has earnings that differ from those of a competitor.
D. is easily computed by assigning a value to the individual attributes that comprise its existence.

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