Accounting What the Numbers Mean David Marshall 12Th ed - Test Bank

Accounting - What the Numbers Mean, 12e (Marshall) Chapter 3 Fundamental Interpretations Made from Financial Statement Data 1) Financial statement ratios support informed judgments and decision making most effectively: A) when viewed for a single year. B) when viewed as a trend of entity data. C) when compared to an industry average for the most recent year. D) when the trend of entity data is compared to the trend of industry data. Answer: D Difficulty: 2 Medium Topic: Illustration of Trend Analysis Learning Objective: 03-07 Generalize about how trend analysis can be used most effectively. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) When comparing entity financial ratios with industry ratios: A) it should be assumed that the data result from the consistent application of alternative accounting methods. B) relative values at a point in time may not be significant. C) the trend of entity ratios should be compared to the current year's industry ratio. D) entity ratios should not be compared with industry ratios. Answer: B Difficulty: 2 Medium Topic: Illustration of Trend Analysis Learning Objective: 03-07 Generalize about how trend analysis can be used most effectively. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) The return on investment measure of performance: A) is never as important a measure of management effectiveness as the amount of net income. B) relates dividends paid to the entity's assets. C) is calculated using net income as the amount of return. D) is calculated by dividing average assets for a period by the amount of net income for the period. Answer: C Difficulty: 1 Easy Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4) Another term for return on investment is: A) Return on equity. B) Return on assets. C) Return on retained earnings. D) Return to sender. Answer: B Difficulty: 2 Medium Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) The return on investment measure of performance: A) is relevant only to business enterprises. B) is used by individuals to compare investment performance. C) is calculated using sales as the amount of return. D) is calculated using total assets at the beginning of the period as the amount of investment. Answer: B Difficulty: 1 Easy Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) An advantage of the DuPont model for calculating ROI is that: A) it focuses on asset utilization as well as net income. B) it is easier to use than the straightforward ROI formula. C) it uses average assets and the straightforward ROI formula does not. D) it uses average stockholders' equity. Answer: A Difficulty: 1 Easy Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7) Around Square, Inc. had an ROI of 12.5%, turnover of 5.0, and sales of $8 million for the year. Around Square's margin for the year was: A) $1,000,000 B) 2.5% C) 4.0% D) $1,600,000 Answer: B Explanation: 12.5% = ? × 5.0 Solve for missing number: 12.5% divided by 5.0 = 2.5% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) Mamba Metals, Inc. had an ROI of 12%, margin of 3%, and sales of $20 million for the year. Mamba's turnover for the year was: A) 3.0 B) 4.0 C) 36% D) $600,000 Answer: B Explanation: 12% = 3% × ? Solve for missing number: 12% divided by 3% = 4.0 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   9) Rotablade's net income was $600,000 on sales of $24 million for the year. Average assets for the year were $8 million. For the year: A) margin was 4%, turnover was 3.0, and ROI was 12%. B) margin was 2.5%, turnover was 2.0, and ROI was 5%. C) margin was 4%, turnover was 2.0, and ROI was 8%. D) margin was 2.5%, turnover was 3.0, and ROI was 7.5% Answer: D Explanation: Margin = $600,000 / $24,000,000 = 2.5% Turnover = $24,000,000 / $8,000,000 = 3.0 ROI = 2.5% × 3.0 = 7.5% Difficulty: 3 Hard Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 10) United Machining's margin was 2% and turnover was 3.0 on sales of $60 million for the year. On the basis on this information: A) net income for the year was $3,600,000, average assets were $20 million, and ROI was 2%. B) net income for the year was $1,200,000, average assets were $10 million, and ROI was 2%. C) net income for the year was $1,200,000, average assets were $20 million, and ROI was 6%. D) net income for the year was $3,600,000, average assets were $10 million, and ROI was 6%. Answer: C Explanation: Net income = 2% × $60,000,000 = $1,200,000 Average assets = $60,000,000 / 3.0 = $20,000,000 ROI = 2% × 3.0 = 6% Difficulty: 3 Hard Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   11) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. Margin for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: C Explanation: Margin = Net income / Sales = $420,000 / $14,000,000 = 3.0% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. Turnover for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: A Explanation: Turnover = Sales / Average assets = $14,000,000 / $10,000,000 = 1.4 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   13) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. ROI for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: D Explanation: ROI = $420,000 / $10,000,000 = 4.2%, or ROI = Margin × Turnover = ($420,000 / $14,000,000) × ($14,000,000 / $10,000,000) = 3.0% × 1.4 = 4.2% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. Net income for the year was: A) $500,000 B) $1,500,000 C) $2,000,000 D) $6,000,000 Answer: B Explanation: Net income = Margin × Sales = 3% × $50,000,000 = $1,500,000 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   15) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. Average assets for the year were: A) $1,500,000 B) $6,000,000 C) $12,500,000 D) $20,000,000 Answer: C Explanation: Average assets = Sales / Turnover = $50,000,000 / 4.0 = $12,500,000 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. ROI for the year was: A) 3.0% B) 4.0% C) 12.0% D) 12.5% Answer: C Explanation: ROI = Margin × Turnover = 3% × 4.0 = 12% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   17) Another term for return on equity is: A) return on investment. B) return on assets. C) return on retained earnings. D) none of these. Answer: D Difficulty: 2 Medium Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) Return on equity: A) will be the same as return on investment. B) relates dividends and turnover. C) relates dividends and stockholders' equity. D) relates net income and stockholders' equity. Answer: D Difficulty: 1 Easy Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 19) ZeroFued's net income for the year was $300,000. Average assets totaled $2 million, and average liabilities totaled $500,000. Return on equity (ROE) was: A) 12% B) 15% C) 20% D) 60% Answer: C Explanation: $300,000 / ($2,000,000 − $500,000) = 20% Difficulty: 3 Hard Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   20) Compoform's net income for the year was $320,000. Average liabilities totaled $1.6 million and average stockholders' equity totaled $2.4 million. Return on investment (ROI) was: A) 8.0% B) 13.3% C) 20.0% D) 40.0% Answer: A Explanation: $320,000 / ($1,600,000 + $2,400,000) = 8.0% Difficulty: 3 Hard Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21) Which of the following is not usually considered a measure of an entity's liquidity? A) Current ratio. B) Acid-test ratio. C) Cash ratio. D) Working capital. Answer: C Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-05 Explain the meaning of liquidity and discuss why it is important. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 22) A current ratio of 6.0 is usually an indication that the firm: A) has a low degree of liquidity. B) has a reasonable degree of liquidity. C) has not made the most productive use of its assets. D) has made the most productive use of its assets. Answer: C Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   23) For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is that it: A) raises the current ratio. B) lowers the current ratio. C) doesn't affect the current ratio. D) depends on the amount paid. Answer: A Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 24) Which of the following is a universally accepted measure of profitability? A) Return on investment. B) Return on retained earnings. C) Return on liabilities. D) All of these. Answer: A Difficulty: 2 Medium Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25) If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be: A) Higher. B) Lower. C) The same. D) Would depend on the amount borrowed. Answer: C Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 26) Which of the following accounts is part of working capital? A) Retained Earnings B) Sales C) Merchandise Inventory D) Common Stock Answer: C Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) Financial ratios: A) help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes. B) provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time. C) Both of these statements are true. D) Neither of these statements is true. Answer: C Difficulty: 2 Medium Topic: Financial Ratios and Trend Analysis Learning Objective: 03-01 Discuss why financial statement ratios are important. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   28) Presented below are the comparative balance sheets of Joe's Garage, Inc., at December 31, 2020, and 2019. Sales for the year ended December 31, 2020, totaled $1,780,000. JOE'S GARAGE, INC. Balance Sheets December 31, 2020, and 2019 2020 2019 Assets Cash $ 90,000 $ 98,000 Accounts receivable 268,000 212,000 Merchandise inventory 402,000 394,000 Total current assets $ 760,000 $ 704,000 Land 132,000 120,000 Plant and equipment 728,000 650,000 Less: Accumulated depreciation (372,000 ) (314,000 ) Total assets $ 1,248,000 $ 1,160,000 Liabilities Short-term debt $ 98,000 $ 86,000 Accounts payable 184,000 168,000 Other accrued liabilities 128,000 134,000 Total current liabilities $ 410,000 $ 388,000 Long-term debt 174,000 214,000 Total liabilities $ 584,000 $ 602,000 Stockholders' Equity Common stock, no par, 100,000 shares authorized, 35,000 and 28,000 shares issued, respectively $ 204,000 $ 156,000 Retained earnings: Beginning balance 402,000 336,000 Net income for the year 148,000 134,000 Dividends for the year (90,000 ) (68,000 ) Ending balance $ 460,000 $ 402,000 Total stockholders' equity $ 664,000 $ 558,000 Total liabilities and stockholders' equity $ 1,248,000 $ 1,160,000   Required: A) Calculate ROI for 2020. B) Calculate ROE for 2020. C) Calculate working capital at December 31, 2020. D) Calculate the current ratio at December 31, 2020. E) Calculate the acid-test ratio at December 31, 2020. Answer: A) ROI = Margin × Turnover = (Net Income / Sales) × (Sales / Average assets) = ($148,000 / $1,780,000) × [$1,780,000 / (($1,160,000 + $1,248,000) / 2)] = 8.31% × 1.478 = 12.3% B) ROE = Net income / Average stockholders' equity = $148,000 / [($558,000 + $664,000) / 2] = 24.2% C) Working capital = Current assets – Current liabilities = $760,000 – $410,000 = $350,000 D) Current ratio = Current assets / Current liabilities = $760,000 / $410,000 = 1.85 E) Acid-test ratio = (Cash + Accounts Receivable) / Current liabilities = ($90,000 + $268,000) / $410,000 = 0.87 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment; Working Capital and Measures of Liquidity; Return on Equity Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model.; 03-04 Explain the importance and show the calculation of return on equity.; 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   29) Attesson, Inc. has a current ratio of 1.9 and current assets of $136,800. Required: Calculate Attesson's current liabilities and working capital. Answer: $136,800 current assets / 1.9 current ratio = $72,000 current liabilities $136,800 current assets – $72,000 current liabilities = $64,800 working capital Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 30) 2R Designs has accounts receivable of $4,100, cash of $3,500, property, plant, and equipment of $30,200, merchandise inventory of $2,200, accounts payable of $5,700, other accrued liabilities of $1,300, common stock of $10,000, and retained earnings of $23,000. Required: Calculate 2R Designs' working capital and current ratio. Answer: $3,500 cash + $4,100 accounts receivable + $2,200 inventory = $9,800 current assets $5,700 accounts payable + $1,300 other accrued liabilities = $7,000 current liabilities $9,800 current assets – $7,000 current liabilities = $2,800 working capital $9,800 current assets / $7,000 current liabilities = 1.4 current ratio Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   31) One-Two-Tree Landscaping Services has net income of $18,000, sales of $300,000, and average total assets of $125,000. Required: Calculate One-Two-Tree's margin, turnover, and return on investment (ROI). Answer: $18,000 net income / $300,000 sales = 6% margin $300,000 sales / $125,000 average total assets = 2.4 turnover 6% margin × 2.4 turnover = 14.4% ROI, or $18,000 net income / $125,000 average total assets = 14.4% ROI Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 32) NTO Designs has a margin of 7%, turnover of 1.2, and sales of $2,100,000. Required: Calculate NTO Designs' net income, average total assets, and return on investment (ROI). Answer: $2,100,000 sales × 7% margin = $147,000 net income $2,100,000 sales / 1.2 turnover = $1,750,000 average total assets 7% margin × 1.2 turnover = 8.4% ROI, or $147,000 net income / $1,750,000 average total assets = 8.4% ROI Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   33) FGT Motorsports had net assets at the end of the year of $320,000. The only transactions affecting stockholders' equity during the year were net income of $51,000 and dividends of $11,000. Required: Calculate FGT Motorsports' average stockholders' equity and return on equity (ROE). Answer: Net assets = Assets – Liabilities = Stockholders' Equity Thus, "net assets" at the end of the year = ending SE ROE = Net income / Average stockholders' equity Average stockholders' equity = (beginning SE + ending SE) / 2 Thus, you need to calculate beginning stockholders' equity in order to be able to determine the average stockholders' equity. $320,000 ending SE – $51,000 net income + $11,000 dividends = $280,000 beginning SE ($280,000 beginning SE + $320,000 ending SE) / 2 = $300,000 average stockholders' equity $51,000 net income / $300,000 average stockholders' equity = 17% ROE Difficulty: 2 Medium Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation Accounting - What the Numbers Mean, 12e (Marshall) Chapter 6 Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets 1) When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land: A) any of the purchase cost allocated to the old building is reported as a loss. B) the cost assigned to the land excludes the cost of the old building. C) the total cost of the land and old building are capitalized as land cost. D) any of the purchase cost allocated to the old building is capitalized as part of the cost of the new building. Answer: C Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-01 Explain how the cost of land, buildings, and equipment is reported on the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) Expenditures capitalized as long-lived assets generally include those expenditures that: A) are made for normal repairs to maintain the usefulness of the asset over a number of years. B) are for items that have a physical life of more than a year, regardless of their cost. C) are material in amount and that have an economic benefit to the entity only in the current year. D) are material in amount and that have an economic benefit to the entity that extends beyond the current year. Answer: D Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   3) Which of the following accounting concepts/principles is most significant in the development of a capitalization policy? A) Matching of revenue and expense. B) Materiality. C) Original Cost. D) Consistency. Answer: B Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4) Which of the following statements best describes the process of accounting for depreciation? A) A process that attempts to recognize loss in economic value over a period of time. B) A process for setting aside cash so funds will be available to replace the asset. C) A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset. D) A process for recognizing all of the cost associated with using an asset in a revenue generating activity. Answer: C Difficulty: 1 Easy Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   5) The entry to record depreciation expense: A) increases a contra asset and decreases net income. B) decreases a contra asset and decreases net income. C) decreases working capital and decreases net income. D) decreases an asset and increases a contra asset. Answer: A Difficulty: 2 Medium Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) The net book value of a depreciable asset is: A) the fair value of the asset. B) the amount for which the asset should be insured. C) the difference between the asset's cost and accumulated depreciation. D) the difference between the asset's cost and depreciation expense. Answer: C Difficulty: 1 Easy Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   7) It is not unusual for a company to use different depreciation methods for book and tax purposes. When this happens, the firm usually: A) uses an accelerated depreciation method for book purposes. B) uses an accelerated depreciation method for tax purposes. C) is trying to maximize its taxable income. D) is trying to minimize its book income. Answer: B Difficulty: 2 Medium Topic: Depreciation for Income Tax Purposes Learning Objective: 06-05 Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax depreciation differs from financial accounting depreciation. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) The present value concept is widely applied in business because: A) inflation erodes the purchasing power of money. B) money has value over time. C) long-term operating assets depreciate over time. D) most obligations are settled within a year. Answer: B Difficulty: 2 Medium Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   9) When an accelerated depreciation method is used to calculate depreciation expense: A) the net book value of the asset halfway through its useful life will be less than if straight-line depreciation is used. B) the net book value of the asset at the end of its useful life will be less than if straight-line depreciation is used. C) depreciation expense will be less in the early years of the asset's life than if straight-line depreciation is used. D) the accumulated depreciation account balance will increase by a larger amount in the last half of an asset's life than if straight-line depreciation is used. Answer: A Difficulty: 3 Hard Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 10) Moped, Inc. purchased machinery at a cost of $44,000 on January 1, 2020. The expected useful life is 5 years and the asset is expected to have salvage value of $4,000. Moped depreciates its assets using the double-declining balance method. What is the firm's depreciation expense for the year ended December 31, 2020? A) $4,000 B) $8,800 C) $12,000 D) $17,600 Answer: D Explanation: Double-declining rate = Straight-line rate × 2 = 1/5 × 2 = 40% $44,000 × 40% = $17,600 Difficulty: 2 Medium Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   11) Moped, Inc. purchased machinery at a cost of $44,000 on January 1, 2020. The expected useful life is 5 years and the asset is expected to have salvage value of $4,000. Moped depreciates its assets using the double-declining balance method. What is the accumulated depreciation for this asset on December 31, 2021? A) $8,800 B) $10,560 C) $17,600 D) $28,160 Answer: D Explanation: Year 2 accumulated depreciation: $17,600 + $10,560 = $28,160. Difficulty: 3 Hard Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) Moped, Inc. purchased machinery at a cost of $44,000 on January 1, 2020. The expected useful life is 5 years and the asset is expected to have salvage value of $4,000. Moped depreciates its assets using the double-declining balance method. What is the firm's gain or loss if the machinery is sold for $22,000 on December 31, 2021? A) Gain of $8,000 B) Gain of $6,160 C) Loss of $1,200 D) Loss of $8,000 Answer: B Explanation: $44,000 − $28,160 accumulated depreciation = $15,840 net book value. $22,000 − $15,840 = $6,160 gain on sale Difficulty: 3 Hard Topic: Disposal of Depreciable Assets Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   13) When a machine having a net book value of $15,000 is sold for $12,000: A) current assets decrease, equipment (net) increases, and net income increases. B) current assets increase, equipment (net) decreases, and net income increases. C) current assets increase, equipment (net) decreases, and net income decreases. D) current assets increase, equipment (net) increases, and net income decreases. Answer: C Difficulty: 3 Hard Topic: Disposal of Depreciable Assets Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 14) If there is a loss on the disposal of a depreciable asset: A) no cash was received in the disposal transaction. B) the net book value of the asset was negative. C) in retrospect, the life over which the asset was depreciated was too short. D) in retrospect, the depreciation expense recognized over the asset's life was too low. Answer: D Difficulty: 2 Medium Topic: Disposal of Depreciable Assets Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation   15) Which of the following could be a correct journal entry to record the disposition of equipment? A) Dr. Accounts payable Cr. Accumulated depreciation Cr. Depreciation expense B) Dr. Cash Dr. Loss on sale of equipment Dr. Accumulated depreciation Cr. Equipment C) Dr. Gain on sale of equipment Dr. Accumulated depreciation Cr. Equipment D) Dr. Cash Dr. Loss on sale of equipment Cr. Accumulated depreciation Cr. Equipment Answer: B Difficulty: 3 Hard Topic: Disposal of Depreciable Assets Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   16) The Modified Accelerated Cost Recovery System (MACRS) specifies which of the following depreciation methods for buildings? A) 150% declining-balance. B) Double-declining-balance. C) Straight line. D) Buildings are not depreciable assets. Answer: C Difficulty: 3 Hard Topic: Depreciation for Income Tax Purposes Learning Objective: 06-05 Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax depreciation differs from financial accounting depreciation. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17) The Modified Accelerated Cost Recovery System (MACRS) specifies which of the following depreciation methods for land? A) 150% declining-balance. B) Double-declining-balance. C) Straight line. D) Land is not a depreciable asset. Answer: D Difficulty: 2 Medium Topic: Depreciation for Income Tax Purposes Learning Objective: 06-05 Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax depreciation differs from financial accounting depreciation. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   18) If an organization has an obligation to pay $25,000 to a supplier two years from now, the present value of the obligation: A) is less than $25,000. B) is $25,000. C) is more than $25,000. D) could be calculated using an annuity factor from the present value tables. Answer: A Difficulty: 1 Easy Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 19) Depreciation, in accounting, is a process that results in: A) depreciable assets being reported in the balance sheet at their fair value. B) accumulating cash for the replacement of the asset. C) an accurate measurement of the economic usefulness of an asset. D) spreading the cost of an asset over its useful life to the entity. Answer: D Difficulty: 1 Easy Topic: Land, Buildings and Equipment Learning Objective: 06-01 Explain how the cost of land, buildings, and equipment is reported on the balance sheet. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   20) Present Value of $1 Discount Rate Present Value of an Annuity of $1 Discount Rate Periods 8% 10% 8% 10% 5 0.6806 0.6209 3.9927 3.7908 7 0.5835 0.5132 5.2064 4.8684 9 0.5002 0.4241 6.2469 5.7590 The present value of $6,000 to be received in 7 years at 10% is: A) $1,232.44 B) $3,079.20 C) $6,000.00 D) $11,691.34 Answer: B Explanation: $6,000 × PV factor of $1 (0.5132) = $3,079.20 Difficulty: 1 Easy Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   21) Present Value of $1 Discount Rate Present Value of an Annuity of $1 Discount Rate Periods 8% 10% 8% 10% 5 0.6806 0.6209 3.9927 3.7908 7 0.5835 0.5132 5.2064 4.8684 9 0.5002 0.4241 6.2469 5.7590 The present value of $6,000 to be received every year for 9 years, at 10%, is: A) $14,147.60 B) $24,546.00 C) $34,554.00 D) $54,000.00 Answer: C Explanation: $6,000 × PV factor of annuity (5.7590) = $34,554 Difficulty: 1 Easy Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   22) Present Value of $1 Discount Rate Present Value of an Annuity of $1 Discount Rate Periods 8% 10% 8% 10% 5 0.6806 0.6209 3.9927 3.7908 7 0.5835 0.5132 5.2064 4.8684 9 0.5002 0.4241 6.2469 5.7590 The present value of an obligation of $8,000 payable in 7 years at 8% is: A) $3,520 B) $4,668 C) $6,412 D) $7,360 Answer: B Explanation: $8,000 × PV factor of $1 (0.5835) = $4,668 Difficulty: 1 Easy Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   23) Present Value of $1 Discount Rate Present Value of an Annuity of $1 Discount Rate Periods 8% 10% 8% 10% 5 0.6806 0.6209 3.9927 3.7908 7 0.5835 0.5132 5.2064 4.8684 9 0.5002 0.4241 6.2469 5.7590 A particular common stock has an annual cash dividend of $4 per share and is predicted to have a market value of $60 per share 5 years from now. Assuming a discount rate of 10%, a fair market price for the stock today is: A) $40.00 B) $52.41 C) $75.16 D) $112.42 Answer: B Explanation: Present value of the principal + Present value of the interest annuity = ($60 × 0.6209) + ($4 × 3.7908) = $37.25 + 15.16 = $52.41 (rounded) Difficulty: 3 Hard Topic: Time Value of Money Learning Objective: 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   24) Present Value of $1 Discount Rate Present Value of an Annuity of $1 Discount Rate Periods 8% 10% 8% 10% 5 0.6806 0.6209 3.9927 3.7908 7 0.5835 0.5132 5.2064 4.8684 9 0.5002 0.4241 6.2469 5.7590 Psyche Company wants to acquire Trim Company. Trim's ROI has been above average for its industry; net income has averaged $140,000 a year more than the industry average. These "excess" earnings are expected to continue at this amount for 5 years. Assuming a discount rate of 8%, how much goodwill will arise from Psyche's purchase of Trim? A) $81,672 B) $176,314 C) $558,978 D) $700,000 Answer: C Explanation: $140,000 × PV of annuity (3.9927) = $558,978 Difficulty: 3 Hard Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25) Leasehold is an example of which of the following types of assets? A) Current asset. B) Property, plant and equipment. C) Goodwill. D) Intangible asset. Answer: D Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   26) The principal challenge to calculating depletion is estimating: A) the cost of the asset. B) the salvage value of the exploration equipment. C) the demand for the product. D) the quantity of material to be recovered. Answer: D Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all subject to: A) depreciation. B) amortization. C) depletion. D) consolidation. Answer: B Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 28) When a depreciable asset is sold: A) a gain arises if the sales proceeds exceed the net book value. B) a loss arises if the sales proceeds exceed the net book value. C) any cash received results in a gain. D) depreciation expense is adjusted so there is no gain or loss. Answer: A Difficulty: 2 Medium Topic: Disposal of Depreciable Assets Learning Objective: 06-06 Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 29) Goodwill is an asset that arises because the present value of an acquired company's estimated future earnings, discounted at the acquiring firm's ROI: A) is less than the fair value of the net assets of the acquired company. B) is more than the fair value of the net assets of the acquired company. C) is more than the fair value of the net assets of the acquiring company. D) is less than the fair value of the net assets of the acquiring company. Answer: B Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 30) The intangible asset goodwill: A) represents management's assessment of the value of the superior customer service provided by the company. B) may arise when one company purchases another company. C) arises because the fair value of a company's inventory is greater than its cost. D) is recorded on the parent company books at the time a subsidiary company is sold or otherwise disposed of Answer: B Difficulty: 1 Easy Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation   31) Accounting for natural resources: A) involves using the accumulated depreciation account. B) involves estimating the quantity of the natural resource to be recovered. C) involves an exception to the matching concept. D) involves a double-declining balance depletion calculation. Answer: B Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 32) Which of the following is not a term that describes part of the accounting for noncurrent assets? A) Accumulation. B) Depletion. C) Amortization. D) Depreciation. Answer: A Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 33) Many companies use accelerated depreciation for tax purposes because: A) it is easier to calculate than straight-line depreciation. B) it reflects the amount of cash used in depreciation. C) it results in lower taxable income than straight-line depreciation. D) it is used for determining net income reported to stockholders. Answer: C Difficulty: 1 Easy Topic: Depreciation for Income Tax Purposes Learning Objective: 06-05 Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax depreciation differs from financial accounting depreciation. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 34) Which of the following statements concerning repair and maintenance expenditures is true? A) Routine repair costs and preventive maintenance expenditures are capitalized as assets in the period in which they are incurred. B) For income tax purposes, most taxpayers would prefer to capitalize an expenditure and depreciate the asset over time rather than expensing the expenditure and deducting the entire amount in the year it is incurred. C) Maintenance expenditures that extend the useful life and ∕or increase the salvage value of an asset should be capitalized and depreciated over the asset's remaining useful life. D) All repair and maintenance expenditures are accounted for as expenses in the year in which they are incurred. Answer: C Difficulty: 2 Medium Topic: Repair and Maintenance Expenditures Learning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 35) Which of the following statements concerning the accounting for leases is not true? A) The economic impact of a financing lease isn't really any different from buying the asset outright and signing a note payable that will be paid off, with interest, over the life of the asset. B) At the inception of a financing lease, the lessee's total assets and total stockholders' equity are both increased for the present value of the lease payments to be made over the life of the lease. C) Assets rented under a short-term operating lease are not reflected on the lessee's balance sheet, and the rent expense (or lease expense) involved is reported in the income statement as an operating expense. D) A financing lease results in the lessee assuming virtually all the benefits and risks of ownership of the leased asset. Answer: B Difficulty: 2 Medium Topic: Assets Acquired by Lease Learning Objective: 06-07 Describe the difference between an operating lease and a financing lease. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   36) Azubuike Ltd. purchased inventory, land, and a building for a lump-sum purchase price of $1,500,000 from a bankrupt competitor. Appraised values were as follows: inventory, $200,000; land $600,000; building, $1,200,000. The land should recorded as an asset on Azubuike's books for: A) $450,000. B) $500,000. C) $550,000. D) $600,000. Answer: A Explanation: $1,500,000 × ($600,000 / ($200,000 + $600,000 + $1,200,000)) = $1,500,000 × 30% = $450,000 Or, $600,000 × ($1,500,000 / ($600,000 + $200,000 + $1,200,000)) = $600,000 × 75% = $450,000 Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-01 Explain how the cost of land, buildings, and equipment is reported on the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37) Lightfoot Corp. incurred the following expenditures: $8,000 cost of annual property insurance on the company's warehouse; $12,000 cost to develop and register a trademark; $30,000 cost to pave the parking lot for the company's distribution center; $2,000 cost of repairs and maintenance on the company's lawn service equipment. The total amount of these expenditures that Lightfoot Corp. should be capitalized are? A) $38,000. B) $42,000. C) $44,000. D) $50,000. Answer: B Explanation: $12,000 + $30,000 = $42,000 Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   38) Newman Co. purchased CNC router cutting and engraving machinery at a cost of $320,000 in January 2019. The company's estimated useful life of this high tech equipment is 5 years, and the estimated salvage value is $48,000. Using the straight-line method, the depreciation expense to be recognized for 2019, the first year of the machinery's life, would be: A) $54,400. B) $64,000. C) $73,600. D) $128,000. Answer: A Explanation: ($320,000 − $48,000) / 5 years = $54,400 Difficulty: 1 Easy Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 39) Newman Co. purchased CNC router cutting and engraving machinery at a cost of $320,000 in January 2019. The company's estimated useful life of this high tech equipment is 5 years, and the estimated salvage value is $48,000. Using the straight-line method, the net book value at December 31, 2021, after the third year of the machinery's life, would be: A) $128,000. B) $156,800. C) $163,200. D) $211,200. Answer: B Explanation: $320,000 − ($54,400 × 3 years) = $156,800 Difficulty: 2 Medium Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   40) Newman Co. purchased CNC router cutting and engraving machinery at a cost of $320,000 in January 2019. The company's estimated useful life of this high tech equipment is 5 years, and the estimated salvage value is $48,000. Using declining-balance depreciation at twice the straight-line rate, the depreciation expense to be recognized for 2020, the second year of the machinery's life, would be: A) $43,520. B) $51,200. C) $76,800. D) $84,480. Answer: C Explanation: 1/5 years = 20% straight-line rate × 2 = 40% double declining rate. $320,000 × 40% = $128,000 depreciation expense for 2019 (first year). $320,000 − $128,000 = $192,000 book value at the beginning of 2020 (second year) × 40% = $76,800 depreciation expense for 2020. Difficulty: 2 Medium Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation   41) Lawson Co. recently acquired all of Graham Inc.'s net assets in a business acquisition. The cash purchase price was $5,000,000. Graham's assets and liabilities had the following appraised values immediately prior to the acquisition: land, $1,000,000; buildings, $3,200,000; inventory, $2,000,000; long-term notes payable, for which Lawson Co. assumes payment responsibilities, $2,500,000. How much goodwill will result from this transaction? A) $700,000. B) $1,200,000. C) $1,300,000. D) $1,800,000. Answer: C Explanation: Purchase price = $5,000,000. Fair value of net assets acquired = $1,000,000 + $3,200,000 + $2,000,000 − $2,500,000 = $3,700,000. Excess of purchase price of $5,000,000 over fair value of net assets acquired of $3,700,000 = $1,300,000 goodwill. Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 42) Joe's Garage, Inc., purchased a used vehicle lift, brake tester, and wheel aligning equipment for a lump-sum price of $16,000 from a bankrupt competitor. Appraised values were as follows: vehicle lift, $20,000; brake tester, $4,000; and wheel aligner, $6,000. Required: What cost should be recorded for the wheel aligner? Answer: Cost of wheel aligner = [$6,000 / ($20,000 + $4,000 + $6,000)] × $16,000 = $3,200 Difficulty: 2 Medium Topic: Land, Buildings and Equipment Learning Objective: 06-01 Explain how the cost of land, buildings, and equipment is reported on the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   43) Lone Star Sales & Service acquired a new machine that cost $84,000 in early 2019. The machine is expected to have a five-year useful life and is estimated to have a salvage value of $14,000 at the end of its life. (Round your final answers to the nearest dollar.) (a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the second year of the machine's life and calculate the accumulated depreciation after the third year of the machine's life. (b.) Using the double-declining-balance depreciation method, calculate the depreciation expense for the third year of the machine's life and the net book value of the machine at this point in time. Answer: (a.) Depreciation expense = ($84,000 − $14,000) / 5 = $14,000 per year After three years the accumulated depreciation = $14,000 × 3 = $42,000. (b.) Straight-line rate = 1/5 = 20% × 2 = 40% Double-declining-balance rate Year Net Book Value 1/1 Depreciation Expense* Accumulated Depreciation 12/31 Net Book Value 12/31 1 $ 84,000 $ 33,600 $ 33,600 $ 50,400 2 50,400 20,160 53,760 30,240 3 30,240 12,096 65,856 18,144 * Depreciation expense = Net book value on 1/1 × 40% Difficulty: 2 Medium Topic: Depreciation for Financial Accounting Purposes Learning Objective: 06-03 Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   44) Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine $20,000 per year for 5 years. At the time the lease was signed, the interest rate for a 5-year loan was 8%. Required: (a.) Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc. could have paid at the beginning of the lease to buy the machine outright. (b.) What causes the difference between the amount you calculated in part (a.) and the total of $100,000 ($20,000 per year for 5 years) that Lessee, Inc. will pay under the terms of the lease? (c.) What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the time the lease was signed) with respect to this asset? Answer: (a.) The cost of the machine at the beginning of the lease is the present value of the lease payments discounted at the interest rate the lessor would charge. The $20,000 annual lease payment is an annuity. The present value factor for an annuity of 5 periods at a discount rate of 8% in Table 6-5 is 3.9927. Thus, the present value of the lease payments is: $20,000 × 3.9927 = $79,854. (b.) The difference between the total amount paid and the present value of the lease payments is represented by interest of $20,146 in total ($100,000 − $79,854), which would be recognized as an expense over the life of the lease agreement. (c.) The cost to be reported in Lessee's balance sheet is the present value of the lease payments, $79,854. Difficulty: 2 Medium Topic: Time Value of Money; Assets Acquired by Lease Learning Objective: 06-08 Explain the similarities in the financial statement effects of buying an asset compared to using a financing lease to acquire the rights to an asset.; 06-10 Appendix - Explain the role of time value of money concepts in financial reporting and their usefulness in decision making. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation   45) Goodwill results from the purchase of one firm by another for a price that is greater than the fair value of the net assets acquired. On January 1, 2020, Blue Grass Co. purchased Red Grass Co. for $2,400,000 when the net assets were valued at $2,000,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $30,000. Required: (a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the purchase of the business. (b.) What is impairment and how is the first year's impairment recorded in the books? Answer: (a.) Goodwill = $2,400,000 − $2,000,000 = $400,000. (b.) Impairment of goodwill occurs when the book value of goodwill exceeds its fair value; an impairment loss is recorded in an amount equal to the excess. The entry to record the impairment would be: Dr. Goodwill Impairment Loss 30,000 Cr. Goodwill 30,000 Difficulty: 2 Medium Topic: Intangible Assets Learning Objective: 06-09 Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation