Multiple Choice Questions
1. Chapman Inc. purchased a piece of equipment in 2010. Chapman depreciated the equipment on a straight-line basis over a useful life of 10 years and used a residual value of $12,000. Chapman’s depreciation expense for 2011 was $11,000. What was the original cost of the building?
a. $98,000
b. $110,000
c. $122,000
d. $134,000
2. Bradley Company purchased a machine for $34,000 on January 1, 2009. It depreciates the machine using the straight-line method over a useful life of 8 years and a $2,000 residual value.
On January 1, 2011, Bradley revised its estimate of residual value to $1,000 and shortened the machine’s useful life to 4 more years. Depreciation expense for 2011 is:
a. $4,000
b. $5,750
c. $6,000
d. $6,250
3. Jerabek Inc. decided to sell one of its fixed assets that had a cost of $55,000 and accumulated depreciation of $35,000 on July 1, 2011. On that date, Jerabek sold the fixed asset for $15,000. What was the resulting gain or loss from the sale of the asset?
a. $5,000 loss
b. $5,000 gain
c. $15,000 loss
d. $15,000 gain
4. Which of the following statements is true?
a. The fixed asset turnover ratio assists managers in determining the estimated future capital expenditures that are needed.
b. The average age of the fixed assets is computed by dividing accumulated depreciation by depreciation expense.
c. If net sales increases, the fixed asset turnover ratio will decrease.
d. A relatively low fixed asset turnover ratio signals that a company is efficiently using its assets.
5. Which of the following is not an intangible asset?
a. Patent
b. Trademark
c. Research and development
d. Goodwill
6. Heston Company acquired a patent on January 1, 2011, for $75,000. The patent has a remaining legal life of 15 years, but Heston expects to receive benefits from the patent for only five years. What amount of amortization expense does Heston record in 2011 related to the patent?
a. $5,000
b. $7,500
c. $15,000
d. $0—patents are not amortized.
7. Howton Paper Company purchased $1,400,000 of timberland in 2010 for its paper operations. Howton estimates that there are 10,000 acres of timberland and it cut 2,000 acres in 2011. The land is expected to have a residual value of $200,000 once all the timber is cut. Which of the following is true with regard to depletion?
a. Depletion will cause Howton’s timber inventory to increase.
b. Howton will record depletion expense of $280,000 in 2011.
c. Howton’s depletion rate is $140 per acre of timber.
d. Howton should deplete the timber at a rate of 20% (2,000 acres 4 10,000 acres) per year.
8. Murnane Company purchased a machine on February 1, 2007, for $100,000. In January 2011, when the book value of the machine is $70,000, Murnane believes the machine is impaired due to recent technological advances. Murnane expects the machine to generate future cash flow of $10,000 and has estimated the fair value of the machine to be $55,000. What is the loss from impairment?
a. $5,000
b. $15,000
c. $30,000
d. $45,000