Multiple Choice Questions

1. Which of the following is an intangible asset?

a. Franchise

b. Oil reserves

c. Land

d. Repairs

2. Depreciation is the systematic allocation of the cost of an asset

a. Over the periods during which the asset is paid for.

b. Over the periods during which the market value of the asset decreases.

c. Over the periods during which the company uses the asset.

d. Over the life of the company.

3. Writing off a cost means

a. Putting the cost on the balance sheet as an asset.

b. Evaluating the useful life of the asset.

c. Recording the cost as an expense.

d. Deferring the expense.

4. Suppose a firm purchases a new building for $500,000 and spends an additional $50,000 making alterations to it before it can be used. How much will the firm record as the cost of the asset?

a. $500,000

b. $550,000

c. $450,000

d. It depends on who performed the alterations.

5. Suppose a firm buys a piece of land with a building for $100,000. The firm’s accountant wants to divide the cost between the land and building for the firm’s financial records. Why?

a. Land is always more expensive than buildings.

b. Land will not be depreciated but the building will be depreciated, so the accountant needs two different amounts.

c. Land will appreciate and its recorded cost will increase over time, whereas the building will be depreciated.

d. Depreciation expense will be separated from accumulated depreciation after the first year.

6. When an expenditure to repair an existing asset extends the useful life of the asset, the cost should be

a. Classified as a revenue expenditure because it will result in increased revenue.

b. Capitalized and written off over the remaining life of the asset.

c. Expensed in the period of the repair.

d. Presented on the income statement or in the notes.

7. When goodwill is determined to be impaired, a firm will

a. Increase its book value to market value.

b. Sell it immediately.

c. Reduce the value of the goodwill with a charge against income (impairment loss).

d. Reduce the value of the goodwill with a charge to paid-in capital (reduce paid-in capital).

8. When a company’s balance sheet shows goodwill for $300,000, what does that mean?

a. The company has developed a strong reputation valued at $300,000 if the company were to be sold.

b. The company is worth $300,000 more than the balance sheet indicates.

c. The company purchased another company and paid $300,000 more than the fair market value of the company’s net assets.

d. The company has invested $300,000 in new equipment during the period.

9. Suppose a firm purchased an asset for $100,000 and estimated its useful life as 10 years with no salvage value on the date of the purchase. The firm uses straight-line depreciation. After using the asset for five years, the firm changes its estimate of the remaining useful life to four years (a total of nine years rather than the original 10 years). How much depreciation expense will the firm recognize in the sixth year of the asset’s life?

a. $12,500

b. $10,000

c. $11,111

d. $31,111

10. Suppose a firm purchased an asset for $50,000 and depreciated it using straight-line depreciation for its 10-year useful life, with no salvage value. At the end of the seventh year of use, the firm decided to sell the asset. Proceeds from the sale were $17,500. What was the gain or loss from the sale of the asset? How did the sale affect the statement of cash flows?

a. $2,500 loss; $2,500 cash outflow from investing activities

b. $32,500 loss; $17,500 cash inflow from investing activities

c. $17,500 gain; $17,500 cash inflow from investing activities

d. $2,500 gain; $17,500 cash inflow from investing activities