Multiple-Choice Questions

1. Simon Company and Allen Company both bought a new delivery truck on January 1, 2008. Both companies paid exactly the same cost, $30,000, for their respective vehicles. As of December 31, 2011, the net book value of Simon’s truck was less than Allen Company’s net book value for the same vehicle. Which of the following is an acceptable explanation for the difference in net book value?

a. Both companies elected straight-line depreciation, but Simon Company used a longer estimated life.

b. Simon Company estimated a lower residual value, but both estimated the same useful life and both elected straight-line depreciation.

c. Because GAAP specifies rigid guidelines regarding the calculation of depreciation, this situation is not possible.

d. Simon Company is using the straight-line method of depreciation, and Allen Company is using the double-declining-balance method of depreciation.

2. Barber, Inc., followed the practice of depreciating its building on a straight-line basis. A building was purchased in 2010 and had an estimated useful life of 20 years and a residual value of $20,000. The company’s depreciation expense for 2010 was $20,000 on the building. What was the original cost of the building?

a. $360,000

b. $380,000

c. $400,000

d. $420,000

3. ACME, Inc., uses straight-line depreciation for all of its depreciable assets. ACME sold a used piece of machinery on December 31, 2011, that it purchased on January 1, 2010, for $10,000. The asset had a five-year life, zero residual value, and $2,000 accumulated depreciation as of December 31, 2010. If the sales price of the used machine was $7,500, the resulting gain or loss upon the sale was which of the following amounts?

a. Loss of $500

b. Gain of $500

c. Loss of $1,500

d. Gain of $1,500

e. No gain or loss upon the sale.

4. Under what method(s) of depreciation is an asset’s net book value the depreciable base (the amount to be depreciated)?

a. Straight-line method

b. Units-of-production method

c. Declining-balance method

d. All of the above

5. What assets should be amortized using the straight-line method?

a. Natural resources

b. Intangible assets with definite lives

c. Intangible assets with indefinite lives

d. All of the above

6. A company wishes to report the highest earnings possible for financial reporting purposes. Therefore, when calculating depreciation,

a. It will follow the MACRS depreciation tables prescribed by the IRS.

b. It will select the shortest lives possible for its assets.

c. It will estimate higher residual values for its assets.

d. It will select the lowest residual values for its assets.

7. How many of the following statements regarding goodwill are true?

■ Goodwill is not reported unless purchased in an exchange.

■ Goodwill must be reviewed annually for possible impairment.

■ Impairment of goodwill results in a decrease in net income.

a. None

b. One

c. Two

d. Three

8. Company X is going to retire equipment that is fully depreciated with no residual value. The equipment will simply be disposed of, not sold. Which of the following statements is false?

a. Total assets will not change as a result of this transaction.

b. Net income will not be impacted as a result of this transaction.

c. This transaction will not impact cash flow.

d. All of the above statements are true.

9. When recording depreciation, which of the following statements is true?

a. Total assets increase and stockholders’ equity increases.

b. Total assets decrease and total liabilities increase.

c. Total assets decrease and stockholders’ equity increases.

d. None of the above are true.

10. Thornton Industries purchased a machine for $45,000 and is depreciating it with the straight-line method over a life of 10 years, using a residual value of $3,000. At the beginning of the sixth year, a major overhaul was made costing $5,000, and the total estimated useful life was extended to 13 years. Depreciation expense for year 6 is:

a. $1,885

b. $2,000

c. $3,250

d. $3,625

e. $4,200