(Multiple Choice)

1. A capital expenditure

a. records additional capital.

b. is a credit like capital (owners’ equity).

c. is expensed immediately.

d. adds to an asset.

2. Which of the following items should be accounted for as a capital expenditure?

a. Taxes paid in conjunction with the purchase of office equipment

b. Maintenance fees paid with funds provided by the company’s capital

c. Costs incurred to repair leaks in the building roof

d. The monthly rental cost of an office building

3. Suppose you buy land for $3,000,000 and spend $1,000,000 to develop the property.

You then divide the land into lots as follows:

Category Sale Price per Lot

15 Hilltop lots................ $480,000

15 Valley lots ................. $270,000

How much did each hilltop lot cost you?

a. $133,333

b. $480,000

c. $96,000

d. $170,667

4. Which statement about depreciation is false?

a. Depreciation is a process of allocating the cost of an asset to expense over its useful life.

b. Obsolescence as well as physical wear and tear should be considered when determining the period over which an asset should be depreciated.

c. Depreciation should not be recorded in years in which the market value of the asset has increased.

d. A major objective of depreciation accounting is to allocate the cost of using an asset against the revenues it helps to generate.

5. At the beginning of last year, Bremond Corporation purchased a piece of heavy equipment for $34,000. The equipment has a life of five years or 100,000 hours. The estimated residual value is $4,000. Bremond used the equipment for 22,000 hours last year and 25,000 hours this year. Depreciation expense for year 2 using double-declining-balance (DDB) and units-of-production would be as follows:

DDB UOP

a. $7,200 .. $8,500

b. $7,200 .. $7,500

c. $8,160 .. $8,500

d. $8,160 .. $7,500

6. Denver Corporation acquired a machine for $26,000, and has recorded depreciation for 3 years using the straight-line method over a 6-year life and $2,000 residual value. At the start of the fourth year of use, Denver revised the estimated useful life to a total of 10 years. Estimated residual value declined to $0.

How much depreciation should Denver record in each of the asset’s last 7 years (that is, year 4 through year 10), following the revision?

a. $13,000

b. $2,600

c. $2,000

d. Some other amount

7- Kline Company failed to record depreciation of equipment. How does this omission affect Kline’s financial statements?

a. Net income is understated and assets are overstated.

b. Net income is overstated and assets are understated.

c. Net income is understated and assets are understated.

d. Net income is overstated and assets are overstated.

8. Jane’s Beauty, Inc., uses the double-declining-balance method for depreciation on its computers. Which item is not needed to compute depreciation for the first year?

a. Estimated residual value

b. Original cost

c. Expected useful life in years

d. All the above are needed.