Sample Exam 3
Select the BEST answer for each question below.
Questions Chapter 8
1. / Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.A. / True
B. / False
2. / Salvage value is an estimate of an asset's value at the end of its benefit period.
A. / True
B. / False
3. / Depreciation measures the actual decline in market value of an asset.
A. / True
B. / False
4. / Accumulated depreciation represents funds set aside to buy new assets when the assets currently owned are replaced.
A. / True
B. / False
5. / The modified accelerated cost recovery system (MACRS) is a depreciation method used for tax reporting.
A. / True
B. / False
6. / An asset’s cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
A. / True
B. / False
7. Denver Ski Company purchases an asset which will be fully depreciated after 10 years. In comparing the effects of straight-line (SL) depreciation to the double-declining balance (DDB) method, which of the following statements would be true at the end of Year 1 (after adjusting journal entries are posted)?
A.The asset will have a higher book value with DDB.
B.The income statement will have a higher depreciation expense with DDB.
C.The Accumulated Depreciation account will be higher if DDB is used.
D.Both (B) and (C) are true.
E.Answers (A), (B) and (C) are all true.
8. Which of the following statements is true?
A.When an asset is fully depreciated, book value will equal residual (salvage) value.
B.Double-declining balance method is the most commonly used method for financial statements.
C.Depreciation measures market value.
D.Both (A) and (C) are true.
E. (A), (B) and (C) are all true.
9. / If an asset is sold above its book value, the selling company records a loss.A. / True
B. / False
10. / Land improvements are:
A. / Assets that increase the usefulness of land, and like land, are not depreciated.
B. / Assets that increase the usefulness of land, but that have a limited useful life and are subject to depreciation.
C. / Included in the cost of the land account.
D. / Expensed in the period incurred.
11. Windsor Company had the following expenditures for the month:
Change the oil and grease the joints on the delivery truck$ 50
Install hydraulic lift on the truck to handle heavier loads$4,000
Replace the truck’s engine, increasing its useful life$3,000
Replace the cracked windshield in the truck$ 500
What total amount should Windsor record as capital expenditures for the month?
A.$4,000
B.$7,000
C.$7,500
D.$7,550
12. / Acer Company purchased equipment for its production facilities. The costs associated with the purchase were:Purchase price $175,000
Interest costs to finance the purchase 2,000
Freight costs for delivery to facility 15,000
Installation costs 1,800
What total amount of these costs should be capitalized in the Equipment account?
A) / $175,000
B) / $190,000
C) / $191,800
D) / $192,000
E) / $193,800
13. / The total cost of an asset less its accumulated depreciation is called:
A) / Historical cost.
B) / Book value.
C) / Present value.
D) / Current (market) value.
E) / Replacement cost.
The following information is for the next 7 questions:
Abbot Company purchased a machine on January 1, 2007 for $28,000 cash. The estimated useful life of the machine is 4 years, and expected production in units is 100,000 units It is expected to have a salvage value of $4,000. Treat each question independently – refer back to the initial information.
14.Assume that Abbot uses the straight-line method of depreciation estimation. What is the depreciation expense for the year ended December 31, 2007?
A. $ 7,000
B. $ 6,000
C. $14,000
D. $8,000
15.Assume that Abbot uses straight-line method of depreciation estimation. What is the net asset value (book value) reported on the balance sheet at December 31, 2007?
A. $18,000
B. $22,000
C. $24,000
D. $28,000
16. Assume that Abbot sells the machinery on January 1, 2009, for $20,000 (after 2 years depreciation has been recorded). The journal entry to record the sale on January 1, 2009 would include:
A. a debit to Loss on Sale for $4,000
B. a debit to Machinery for $28,000
C. a credit to Machinery for $16,000
D. a credit to Gain on Sale for $4,000
17. Assume that Abbot keeps the asset for 3 years (and depreciates the asset on a straight line basis), then decides to change the depreciation rate at the beginning of 2010, based on a revised assumption for salvage value of $1,000 and a revised useful life of 6 years, to 12/21/2012. (This equals a remaining life, from the beginning of 2010, of 3 years). The journal entry to record depreciation expense for 2010 would be:
A. Depreciation Expense3,000
Accumulated Depreciation3,000
B. Depreciation Expense9,000
Cash9,000
C. Depreciation Expense4,500
Accumulated Depreciation4,500
D. Accumulated Depreciation4,500
Depreciation Expense4,500
18.Assume the double-declining balance method of estimating depreciation is used. What is Abbot’s depreciation expense for the year ended December 31, 2008?
A. $ 7,000
B. $ 8,000
C. $12,000
D. $14,000
19. Assume the double-declining balance method of estimating depreciation is used. What is Abbot’s Accumulated Depreciation at the end of 2010 (before sale or disposal)?
A. $24,000
B. $26,250
C. $ 3,500
D. $ 1,750
20. Assume the units of production method, and that the machine produced 20,000 units in 2007. What is Abbot’s depreciation expense for the year ended December 31, 2007?
A. $ 7,000
B. $ 6,400
C. $ 5,600
D. $ 4,800
21. / The use of the modified accelerated cost recovery system (MACRS) results in reduced income taxes paid in the early years of an asset’s life.A. / True
B. / False
22. Which of the following items are classified as intangible assets?
A. Patents
B. Goodwill
C. Inventory
D. Only (A) and (B) are intangible assets
E. (A), (B) and (C) are all intangible assets
23.Carbon Corp. conducts research on medical products. The research and development costs on these products should be
A. Capitalized as part of the cost of the Patent
B. Capitalized as a separate asset called Research and Development Costs
C. Expensed in the period incurred
D. All of the above methods are acceptable under GAAP
Answers to Chapter 8 Questions:
1. A
2. A
3. B
4. B
5. A
6. A
7. D
8. A
9. B
10.B
11. B
12.C
13.B
14.B
15.B
16.D
17.A
18.A
19.A
20.D
21.A
22.D
23.C
Chapter 9 Questions
The following information is for the next two questions:
Given the following selected list of accounts from the general ledger of Morrison Company at 12/31/08:
Common Stock $20,000
Retained Earnings18,000
Wages Payable 1,000
Income Tax Payable 4,000
Cash 8,000
Accounts Receivable 5,000
Inventory10,000
Equipment30,000
Accounts Payable 7,000
Estimated Warranty Liability 3,000 (for next 12 months)
1. What are Morrison’s current liabilities on the 2008 balance sheet?
A.$ 5,000
B.$12,000
C.$15,000
D.$27,000
2. What is Morrison’s working capital from the 2008 balance sheet?
A.$38,000
B.$28,000
C.$23,000
D.$ 8,000
3. / Unearned revenues are liabilities.A. / True
B. / False
4. / A contingent liability is recorded in an adjusting journal entry when the amount can be estimated and it is probable that the liability will be owed.
A. / True
B. / False
The following information is for the next two questions:
5. / On December 1, 2008 Martin Company signed a $5,000 3-month 6% note payable, with the principal plus interest due on March 1 of 2009. What amount of interest expense is accrued at December 31 (the fiscal year end) on the note?A. / $0
B. / $25
C. / $50
D. / $75
E. / $300
6. The journal entry on Martin’s books on March 1, 2009 to repay the loan and interest due would include:
A.A debit to cash for $5,075
B.A credit to interest payable for $50
C. A debit to interest expense for $50
D.A credit to cash for $5,300
7. Company Z is involved in a lawsuit. It is reasonably possible that the lawsuit will be settled against Company Z, and Company Z has estimated the amount of the loss to be $10,000. Company Z should prepare an adjusting journal entry to recognize the $10,000 contingent liability.
A. True
B. False
The following information is for the next two questions:
Pecos Company sold 100 computers in January of 2008 for $500 each, and included a 1 year warranty on the computers. Engineers expect that 20% of the computers will need repair in the next 12 months, and that the average repair cost will be $80 per computer.
8. The journal entry to record the estimated warranty liability for the January sales would include:
A.A debit to Estimated Warranty Liability for $8,000
B.A debit to Warranty Expense for $1,600
C.A credit to Cash for $1,600
D.No entry is required under GAAP to record estimated warranty liability.
9. The journal entry to record actual warranty expenditures in 2008 of $1,000 (on the computers sold in January) would include:
A.A debit to Warranty Expense for $1,000
B.A debit to Estimated Warranty Liability for $1,000
C.A debit to Cash for $1,000
D.A debit to Sales Revenue for $1,000
Present Value and Future Value. For the next 5 questions, you should use the Tables provided in your textbook (pages 369 – 372). Your calculators will yield similar numbers, but the rounding in the tables will not necessarily give you the same dollar amount. Additionally, you will not be able to use advanced calculators on the exam, so practice with the Tables (which will be included on the exam) will help you prepare for the exam.
Round your answers to the nearest whole dollar.
10.Assume you want to accumulate $100,000 for your retirement at the end of 30 years. What amount would you need to deposit today, assuming you would earn a 4 % interest rate, compounded annually?
A. $100,000
B. $ 24,300
C. $ 30,800
D. $324,300
11. Assume you receive $10,000 today as a gift. If you invest the money today at an interest rate of 5% compounded annually, what amount will you have at the end of 20 years?
A. $16,530
B. $ 3,770
C. $13,770
D. $26,530
12. Assume that you want to start saving today for your future children’s future education. If you deposit $1,000 at the end of each year for the next 20 years, assuming you earn an interest rate of 6% compounded annually, what amount would you have available at the end of 20 years?
A. $ 3,770
B. $33,770
C. $36,786
D. $20,000
13. You have just won the lottery, and the lottery will pay you $10,000 per year for the next 10 years. At an interest rate of 4% compounded annually, what would be the value today of that annuity?
A. $ 81,110
B. $100,000
C. $ 6,760
D. $ 93,240
14. Assume that the lottery offers to pay you $5,000 every six months (semiannually) for the next 10 years. At an annual interest rate of 4%, compounded semi-annually, what would be the value today of that annuity?
A. $100,000
B. $ 81,755
C. $100,000
D. $ 3,365
Answers to Chapter 9 Questions:
1.C
2.D
3.A
4.A
5.B
6.C
7.B
8.B
9.B
10.C
11.D
12.C
13.A
14.B
Chapter 10 Questions
1. / When referring to the interest rate on the face of the bond, this rate may be called the stated rate or the coupon rate.A) / True
B) / False
The following information is for the next two questions:
On January 1, 2006, Hartley Motorcycles issued $100,000 of its 10 year bonds payable to generate cash for expansion. The bonds will retire in 10 years, and have a stated rate of 5 percent. Interest will be paid annually each December 31, starting December 31, 2006.
2 .If Hartley issued the bonds to yield an effective rate of 6 percent, compounded annually, what amount of cash would Hartley receive at issue (round to nearest whole dollar)?
A. $ 55,840
B. $107,720
C. $100,000
D. $ 92,600
3. If Hartley issued the bonds to yield an effective rate of 4 percent, compounded annually, what amount of cash would Hartley receive at issue (round to nearest whole dollar)?
A. $100,000
B. $108,155
C. $ 67,560
D. $ 92,277
4. / A bond listed at a price of 103 is selling at 103% of its face value.A) / True
B) / False
5. / A bond's face value is always the same as its market value.
A) / True
B) / False
6. / A discount on bonds payable occurs when a company issues bonds with an issue price less than face value.
A) / True
B) / False
7. / The carrying (book) value of a bond payable is the face value of the bonds plus the discount.
A) / True
B) / False
8. / The amortization of a Premium on Bonds Payable reduces the interest expense of the bond (below the stated rate) over its life.
A) / True
B) / False
9. / Amortizing a bond discount:
A) / Allocates a part of the total discount to each interest period.
B) / Increases the market value of the Bonds Payable.
C) / Decreases the Bonds Payable account.
D) / Decreases interest expense each period.
E) / Increases cash flows from the bond.
10. / The Discount on Bonds Payable account is:
A) / A liability.
B) / A contra liability.
C) / An expense.
D) / A contra expense.
E) / A contra equity.
11. / A company issued 5-year, 7% bonds with a face value of $100,000. on January 1, 2007. The company received $98,000 for the bonds. Using the straight-line method for amortization, the amount of interest expense for the first annual interest period is:
A) / $7,000
B) / $3,500
C) / $7,400
D) / $6,600
E) / $2,000
12. Millington Company issued 5-year, 7% bonds with a face value of $100,000. The company received $97,947 for the bonds. The journal entry to record this bond issue on the books of Millington would be:
A)Cash 100,000
Bonds Payable 97,947
Premium on Bonds Payable 2,053
B)Bonds Payable 100,000
Cash97,947
Premium on Bonds Payable 2,053
C)Cash 97,947
Discount on Bonds Pay. 2,053
Bonds Payable 100,000
D)Bonds Payable 97,947
Discount on Bonds Pay. 2,053
Cash 100,000
13. / A company received cash proceeds of $206,948 on a bond issue with a face value of $200,000. At the date of issue, the difference between face value and issue price for this bond is recorded as a:A) / Credit to Interest Income.
B) / Credit to Premium on Bonds Payable.
C) / Credit to Discount on Bonds Payable.
D) / Debit to Premium on Bonds Payable.
E) / Debit to Discount on Bonds Payable.
14. On January 1, 2007, Avalon Company received cash proceeds of $206,000 on a 10 year bond issue with stated rate of 5% and a face value of $200,000. The bond pays interest annually, each December 31, starting December 31, 2007. The amount of interest expense that Avalon would recognize on its 2007 income statement regarding these bonds would be:
A) zero
B) $10,000
C) $10,600
D) $ 9,400
E) $ 600
15. / A company retires its $100,000 face value bonds at 105. The carrying value of the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:A) / Debit to Premium on Bonds Payable
B) / Credit to Premium on Bonds Payable
C) / Debit to Discount on Bonds Payable
D) / Credit to Discount on Bonds Payable
E) / Credit to Bonds Payable.
16. The amount of gain or loss on the previous transaction (in No. 15) would be:
A)$3,745 gain
B)$3,745 loss
C)$1,255 gain
D)$1,255 loss
E)$5,000 loss
17. If a bond is issued at a premium, this means that the stated interest rate must be higher than the investor’s yield rate at the date of issue.
A. True
B. False
Answers to Chapter 10 Questions:
1.A
2.D
3.B
4.A
5.B
6.A
7.B
8.A
9.A
10.B
11.C
12.C
13.B
14.D
15.A
16.D
17.A
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