CHAPTER 10

21. Plant assets may properly includea. deposits on machinery not yet received.b. idle equipment awaiting sale.c. land held for possible use as a future plant site.d. none of these.

22. Which of the following is not a major characteristic of a plant asset?a. Possesses physical substanceb. Acquired for resalec. Acquired for used. Yields services over a number of years

23. Which of these is not a major characteristic of a plant asset?a. Possesses physical substanceb. Acquired for use in operationsc. Yields services over a number of yearsd. All of these are major characteristics of a plant asset.

24. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia Hotel should bea. depreciated over the period from acquisition to the date the hotel is scheduled to be

torn down.b. written off as an extraordinary loss in the year the hotel is torn down.c. capitalized as part of the cost of the land.d. capitalized as part of the cost of the new hotel.

25. The cost of land does not includea. costs of grading, filling, draining, and clearing.b. costs of removing old buildings.c. costs of improvements with limited lives.d. special assessments.

26. The cost of land typically includes the purchase price and all of the following costs excepta. grading, filling, draining, and clearing costs.b. street lights, sewers, and drainage systems cost.c. private driveways and parking lots.d. assumption of any liens or mortgages on the property.

27. If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend ona. the significance of the cost allocated to the building in relation to the combined cost

of the lot and building.b. the length of time for which the building was held prior to its demolition.c. the contemplated future use of the parking lot.d. the intention of management for the property when the building was acquired.

28. The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge toa. the machinery account.b. a separate deferred charge account.c. miscellaneous tax expense (which includes all taxes other than those on income).d. accumulated depreciation--machinery.

29. Fences and parking lots are reported on the balance sheet asa. current assets.b. land improvements.c. land.d. property and equipment.

S30. Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons excepta. at the date of acquisition, cost reflects fair market value.b. property, plant, and equipment items are always acquired at their original historical

cost.c. historical cost involves actual transactions and, as such, is the most reliable basis.d. gains and losses should not be anticipated but should be recognized when the asset

is sold.

S31. To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should bea. allocated on the basis of lost production.b. eliminated completely from the cost of the asset.c. allocated on an opportunity cost basis.d. allocated on a pro rata basis between the asset and normal operations.

32. Which of the following costs are capitalized for self-constructed assets?a. Materials and labor onlyb. Labor and overhead onlyc. Materials and overhead onlyd. Materials, labor, and overhead

33. Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?a. Assets under construction for an enterprise's own use.b. Assets intended for sale or lease that are produced as discrete projects.c. Assets financed through the issuance of long-term debt.d. Assets not currently undergoing the activities necessary to prepare them for their

intended use.

34. Assets that qualify for interest cost capitalization includea. assets under construction for a company's own use.b. assets that are ready for their intended use in the earnings of the company.c. assets that are not currently being used because of excess capacity.d. All of these assets qualify for interest cost capitalization.

35. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers toa. the total interest cost actually incurred.b. a cost of capital charge for stockholders' equity.c. that portion of total interest cost which would not have been incurred if expenditures

for asset construction had not been made.d. that portion of average accumulated expenditures on which no interest cost was

incurred.

36. The period of time during which interest must be capitalized ends whena. the asset is substantially complete and ready for its intended use.b. no further interest cost is being incurred.c. the asset is abandoned, sold, or fully depreciated.d. the activities that are necessary to get the asset ready for its intended use have

begun.

37. Which of the following statements is true regarding capitalization of interest?a. Interest cost capitalized in connection with the purchase of land to be used as a

building site should be debited to the land account and not to the building account.

b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized.

d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

38. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures isa. 8/8.b. 8/12.c. 9/12.d. 11/12.

39. When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should bea. offset against interest cost incurred during construction.b. used to reduce the cost of assets being constructed.c. multiplied by an appropriate interest rate to determine the amount of interest to be

capitalized.d. recognized as revenue of the period.

40. Interest cost that is capitalized shoulda. be written off over the remaining term of the debt.

b. be accumulated in a separate deferred charge account and written off equally over a 40-year period.

c. not be written off until the related asset is fully depreciated or disposed of.d. none of these.

S41. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?a. Interest cost is being incurred.b. Expenditures for the assets have been made.c. The interest rate is equal to or greater than the company's cost of capital.d. Activities that are necessary to get the asset ready for its intended use are in

progress.

S42. Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment?a. Capitalize only the actual interest costs incurred during construction.b. Charge construction with all costs of funds employed, whether identifiable or

not.c. Capitalize no interest during construction.d. Capitalize interest costs equal to the prime interest rate times the estimated cost

of the asset being constructed.

S43. Which of the following nonmonetary exchange transactions represents a culmination of the earning process?a. Exchange of assets with no difference in future cash flows.b. Exchange of products by companies in the same line of business with no

difference in future cash flows.c. Exchange of assets with a difference in future cash flows.d. Exchange of an equivalent interest in similar productive assets that causes the

companies involved to remain in essentially the same economic position.

S45. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded ata. the fair value of the asset given up, and a gain or loss is recognized.b. the fair value of the asset given up, and a gain but not a loss may be recognized.c. the fair value of the asset received if it is equally reliable as the fair value of the asset

given up.d. either the fair value of the asset given up or the asset received, whichever one

results in the largest gain (smallest loss) to the company.

47. Plant assets purchased on long-term credit contracts should be accounted for ata. the total value of the future payments.b. the future amount of the future payments.c. the present value of the future payments.d. none of these.

48. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by thea. par value of the stock.

b. stated value of the stock.c. book value of the stock.d. market value of the stock.

49. When a closely held corporation issues preferred stock for land, the land should be recorded at thea. total par value of the stock issued.b. total book value of the stock issued.c. total liquidating value of the stock issued.d. fair market value of the land.

50. Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange hasa. no commercial substance and additional cash is paid.b. no commercial substance and additional cash is received.c. commercial substance and additional cash is paid.d. commercial substance and additional cash is received.

51. For a nonmonetary exchange of plant assets, accounting recognition should not be given toa. a loss when the exchange has no commercial substance.b. a gain when the exchange has commercial substance.c. part of a gain when the exchange has no commercial substance and cash is paid

(cash paid/received is less than 25% of the fair value of the exchange).d. part of a gain when the exchange has no commercial substance and cash is

received (cash paid or received is less than 25% of the fair value of the exchange).

52. When an enterprise is the recipient of a donated asset, the account credited may be aa. paid-in capital account.b. revenue account.c. deferred revenue account.d. all of these.

53. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books ata. the nominal cost of taking title to it.b. its market value.c. one dollar (since the site cost nothing but should be included in the balance sheet).d. the value assigned to it by the company's directors.

54. In order for a cost to be capitalized (capital expenditure), the following must be present:a. The useful life of an asset must be increased.b. The quantity of assets must be increased.c. The quality of assets must be increased.d. Any one of these.

55. An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should bea. expensed.b. debited to accumulated depreciation.c. capitalized in the machine account.d. allocated between accumulated depreciation and the machine account.

56. Which of the following is a capital expenditure?a. Payment of an account payableb. Retirement of bonds payablec. Payment of Federal income taxesd. None of these

57. Which of the following is not a capital expenditure?a. Repairs that maintain an asset in operating conditionb. An additionc. A bettermentd. A replacement

P58. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?a. Expenditure made to increase the efficiency or effectiveness of an existing assetb. Expenditure made to extend the useful life of an existing asset beyond the time

frame originally anticipatedc. Expenditure made to maintain an existing asset so that it can function in the manner

intendedd. Expenditure made to add new asset services

S59. An expenditure made in connection with a machine being used by an enterprise should bea. expensed immediately if it merely extends the useful life but does not improve the

quality.b. expensed immediately if it merely improves the quality but does not extend the useful

life.c. capitalized if it maintains the machine in normal operating condition.d. capitalized if it increases the quantity of units produced by the machine.

S60. When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted froma. an involuntary conversion and the conditions of the disposition are unusual and

infrequent in nature.b. a sale prior to the completion of the estimated useful life of the asset.c. the sale of a fully depreciated asset.d. an abandonment of the asset.

61. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale werea. less than current market value.b. greater than cost.

c. greater than book value.d. less than book value.

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 27. d 33. d 39. d 45. a 51. c 57. a22. b 28. a 34. a 40. d 46. b 52. b 58. c23. d 29. b 35. c 41. c 47. c 53. b 59. d24. c 30. b 36. a 42. a 48. d 54. d 60. a25. c 31. d 37. b 43. c 49. d 55. c 61. d26. c 32. d 38. b 44. a 50. a 56. d 62. c

CHAPTER 11

21.The following is true of depreciation accounting.a. It is not a matter of valuation.b. It is part of the matching of revenues and expenses.c. It retains funds by reducing income taxes and dividends.d. All of these.

22. Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?a. Associating cause and effectb. Systematic and rational allocationc. Immediate recognitiond. Partial recognition

23. Depreciation accountinga. provides funds.b. funds replacements.c. retains funds.d. all of these.

S24. Which of the following most accurately reflects the concept of depreciation as used in accounting?a. The process of charging the decline in value of an economic resource to income in

the period in which the benefit occurred.b. The process of allocating the cost of tangible assets to expense in a systematic and

rational manner to those periods expected to benefit from the use of the asset.c. A method of allocating asset cost to an expense account in a manner which closely

matches the physical deterioration of the tangible asset involved.d. An accounting concept that allocates the portion of an asset used up during the year

to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

S25. The major difference between the service life of an asset and its physical life is thata. service life refers to the time an asset will be used by a company and physical life

refers to how long the asset will last.

b. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.

c. physical life is always longer than service life.d. service life refers to the length of time an asset is of use to its original owner, while

physical life refers to how long the asset will be used by all owners.

P26. The term "depreciable base," or "depreciation base," as it is used in accounting, refers toa. the total amount to be charged (debited) to expense over an asset's useful life.b. the cost of the asset less the related depreciation recorded to date.c. the estimated market value of the asset at the end of its useful life.d. the acquisition cost of the asset.

27. Economic factors that shorten the service life of an asset includea. obsolescence.b. supersession.c. inadequacy.d. all of these.

28. Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed?a. What is the depreciation base to use for the asset?b. What is the asset's useful life?c. What method of cost apportionment is best for this asset?d. What product or service is the asset related to?

S29. Which of the following is a realistic assumption of the straight-line method of depreciation?a. The asset's economic usefulness is the same each year.b. The repair and maintenance expense is essentially the same each period.c. The rate of return analysis is enhanced using the straight-line method.d. Depreciation is a function of time rather than a function of usage.

30. The activity method of depreciationa. is a variable charge approach.b. assumes that depreciation is a function of the passage of time.c. conceptually associates cost in terms of input measures.d. all of these.

31. For income statement purposes, depreciation is a variable expense if the depreciation method used isa. units-of-production.b. straight-line.c. sum-of-the-years'-digits.d. declining-balance.

32. If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm willa. be constant.b. vary with unit sales.c. vary with sales revenue.

d. vary with production.

33. Use of the double-declining balance methoda. results in a decreasing charge to depreciation expense.b. means salvage value is not deducted in computing the depreciation base.c. means the book value should not be reduced below salvage value.d. all of these.

34. Use of the sum-of-the-years'-digits methoda. results in salvage value being ignored.b. means the denominator is the years remaining at the beginning of the year.c. means the book value should not be reduced below salvage value.d. all of these.

35. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn?a. Vertically and sloping down to the rightb. Vertically and sloping up to the rightc. Horizontally and sloping down to the rightd. Horizontally and sloping up to the right

36. A principal objection to the straight-line method of depreciation is that ita. provides for the declining productivity of an aging asset.b. ignores variations in the rate of asset use.c. tends to result in a constant rate of return on a diminishing investment base.d. gives smaller periodic write-offs than decreasing charge methods.

37. Each year a company has been investing an increasingly greater amount in machinery. Since there is a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is thea. company should have been using one of the accelerated methods of depreciation.b. estimated average life of the machinery is less than the actual average useful life.c. estimated average life of the machinery is greater than the actual average useful life.d. company has been retiring fully depreciated machinery that should have remained in

service.

38. For the composite method, the compositea. rate is the total cost divided by the total annual depreciation.b. rate is the total annual depreciation divided by the total depreciable cost.c. life is the total cost divided by the total annual depreciation.d. life is the total depreciable cost divided by the total annual depreciation.

P39. Watkins Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by thea. original cost of the truck.

b. original cost of the truck less the cash proceeds.c. cash proceeds received.d. cash proceeds received and original cost of the truck.

S40. Composite or group depreciation is a depreciation system wherebya. the years of useful life of the various assets in the group are added together and the

total divided by the number of items.b. the cost of individual units within an asset group is charged to expense in the year a

unit is retired from service.c. a straight-line rate is computed by dividing the total of the annual depreciation

expense for all assets in the group by the total cost of the assets.d. the original cost of all items in a given group or class of assets is retained in the

asset account and the cost of replacements is charged to expense when they are acquired.

S41. When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary toa. charge a full year's depreciation to the year of acquisition.b. determine depreciation expense for the full year and then prorate the expense

between the two periods involved.c. use the straight-line method for the year in which the asset is sold or otherwise

disposed of.d. use a salvage value equal to the first year's partial depreciation charge.

42. Depreciation is normally computed on the basis of the nearesta. full month and to the nearest cent.b. full month and to the nearest dollar.c. day and to the nearest cent.d. day and to the nearest dollar.

43. Myers Company acquired machinery on January 1, 2005 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2010, Myers estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Myers?a. As a prior period adjustmentb. As the cumulative effect of a change in accounting principle in 2010c. By setting future annual depreciation equal to one-sixth of the book value on January

1, 2010d. By continuing to depreciate the machinery over the original fifteen year life

44. A change in estimate shoulda. result in restatement of prior period statements.b. be handled in current and future periods.c. be handled in future periods only.d. be handled retroactively.

45. Lynch Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment shoulda. recognize an extraordinary loss for the period.b. include a credit to the equipment accumulated depreciation account.

c. include a credit to the equipment account.d. not be made if the equipment is still being used.

46. Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?a. The estimated life is based on economic or productive life.b. Assets subject to either are reported in the same classification on the balance sheet.c. The rates may be changed upon revision of the estimated productive life used in the

original rate computations.d. Both depreciation and depletion are based on time.

47. Which of the following is not a difference between the accounting treatment for depreciation and cost depletion?a. Depletion applies to natural resources while depreciation applies to plant and

equipment.b. Depletion refers to the physical exhaustion or consumption of the asset while

depreciation refers to the wear, tear, and obsolescence of the asset.c. Many formulas are used in computing depreciation but only one is used to any extent

in computing depletion.d. The cost of the asset is the starting point from which computation of the amount of

the periodic charge is made to operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for depletion.

48. Dividends representing a return of capital to stockholders are not uncommon among companies whicha. use accelerated depreciation methods.b. use straight-line depreciation methods.c. recognize both functional and physical factors in depreciation.d. none of these.

49. Depletion expensea. is usually part of cost of goods sold.b. includes tangible equipment costs in the depletion base.c. excludes intangible development costs from the depletion base.d. excludes restoration costs from the depletion base.

50. The most common method of recording depletion for accounting purposes is thea. percentage depletion method.b. decreasing charge method.c. straight-line method.d. units-of-production method.

51. Reserve recognition accountinga. is presently the generally accepted accounting method for financial reporting of oil

and gas reserves.b. is a historical cost method similar to the full cost approach and the successful efforts

approach.c. is used for reporting of oil and gas reserves for federal income tax purposes.d. requires estimates of future production costs, the appropriate discount rate, and the

expected selling price of oil and gas reserves.

S52. Of the following costs related to the development of natural resources, which one is not a part of depletion cost?a. Acquisition cost of the natural resource depositb. Exploration costsc. Tangible equipment costs associated with machinery used to extract the natural

resourced. Intangible development costs such as drilling costs, tunnels, and shafts

S53. Which of the following disclosures is not required in the financial statements regarding depreciation?a. Accumulated depreciation, either by major classes of depreciable assets or in total.b. Details demonstrating how depreciation was calculated.c. Depreciation expense for the period.d. Balances of major classes of depreciable assets, by nature and function.

P54. The book value of a plant asset isa. the fair market value of the asset at a balance sheet date.b. the asset's acquisition cost less the total related depreciation recorded to date.c. equal to the balance of the related accumulated depreciation account.d. the assessed value of the asset for property tax purposes.

55. A general description of the depreciation methods applicable to major classes of depreciable assetsa. is not a current practice in financial reporting.b. is not essential to a fair presentation of financial position.c. is needed in financial reporting when company policy differs from income tax policy.d. should be included in corporate financial statements or notes thereto.

56. The asset turnover ratio is computed by dividing a. net income by ending total assets.b. net income by average total assets.c. net sales by ending total assets.d. net sales by average total assets.

57. The rate of return on total assets is computed by dividinga. Net income by ending total assets.b. Net sales by average total assets.c. Net sales by ending total assets.d. Net income by average total assets.

*58. A major objective of MACRS for tax depreciation is toa. reduce the amount of depreciation deduction on business firms' tax returns.b. assure that the amount of depreciation for tax and book purposes will be the same.c. help companies achieve a faster write-off of their capital assets.d. require companies to use the actual economic lives of assets in calculating tax

depreciation.

*59. Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?a. Cost of assetb. Property recovery class

c. Half-year conventiond. Salvage value

*60. If income tax effects are ignored, accelerated depreciation methodsa. provide funds for the earlier replacement of fixed assets.b. increase funds provided by operations.c. tend to offset the effect of steadily increasing repair and maintenance costs on the

income statement.d. tend to decrease the fixed asset turnover ratio.

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 27. d 33. d 39. c 45. b 51. d 57. d22. b 28. d 34. c 40. c 46. d 52. c *58. c23. c 29. d 35. c 41. b 47. d 53. b *59. d24. b 30. a 36. b 42. b 48. d 54. b *60. c25. a 31. a 37. b 43. c 49. a 55. d26. a 32. d 38. d 44. b 50. d 56. d

CHAPTER 12

21. Which of the following does not describe intangible assets?a. They lack physical existence.b. They are financial instruments.c. They provide long-term benefits.d. They are classified as long-term assets.

22. Which of the following characteristics do intangible assets possess?a. Physical existence.b. Claim to a specific amount of cash in the future.c. Long-lived.d. Held for resale.

23. Which characteristic is not possessed by intangible assets?a. Physical existence.b. Short-lived.c. Result in future benefits.d. Expensed over current and/or future years.

24. Costs incurred internally to create intangibles area. capitalized.b. capitalized if they have an indefinite life.c. expensed as incurred.d. expensed only if they have a limited life.

25. Which of the following costs incurred internally to create an intangible asset is generally expensed?

a. Research and development costs.b. Filing costs.c. Legal costs.d. All of the above.

26. Which of the following methods of amortization is normally used for intangible assets?a. Sum-of-the-years'-digitsb. Straight-linec. Units of productiond. Double-declining-balance

27. The cost of an intangible asset includes all of the following excepta. purchase price.b. legal fees.c. other incidental expenses.d. all of these are included.

28. Factors considered in determining an intangible asset’s useful life include all of the following excepta. the expected use of the asset.b. any legal or contractual provisions that may limit the useful life.c. any provisions for renewal or extension of the asset’s legal life.d. the amortization method used.

29. Under current accounting practice, intangible assets are classified asa. amortizable or unamortizable.b. limited-life or indefinite-life.c. specifically identifiable or goodwill-type.d. legally restricted or goodwill-type.

30. Companies should test indefinite life intangible assets at least annually for:a. recoverability.b. amortization.c. impairment.d. estimated useful life.

S31. One factor that is not considered in determining the useful life of an intangible asset isa. salvage value.b. provisions for renewal or extension.c. legal life.d. expected actions of competitors.

32. Which intangible assets are amortized?Limited-Life Indefinite-Life

a. Yes Yesb. Yes No

c. No Yesd. No No

33. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should bea. charged off in the current period.b. amortized over the legal life of the purchased patent.c. added to factory overhead and allocated to production of the purchaser's product.d. amortized over the remaining estimated life of the original patent covering the

product whose market would have been impaired by competition from the newly patented product.

34. Broadway Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2009 a patent on a competing product which was originally issued on January 10, 2005. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should bea. amortized over a maximum period of 20 years.b. amortized over a maximum period of 16 years.c. amortized over a maximum period of 9 years.d. expensed in 2009.

35. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor. The cost of this defense should be charged toa. patents and amortized over the legal life of the patent.b. legal fees and amortized over 5 years or less.c. expenses of the period.d. patents and amortized over the remaining useful life of the patent.

36. Which of the following is not an intangible asset?a. Trade nameb. Research and development costsc. Franchised. Copyrights

37. Which of the following intangible assets should not be amortized?a. Copyrightsb. Customer listsc. Perpetual franchisesd. All of these intangible assets should be amortized.

38. When a patent is amortized, the credit is usually made toa. the Patent account.b. an Accumulated Amortization account.c. a Deferred Credit account.d. an expense account.

39. When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?a. Attorney fees.b. Consulting fees.c. Research and development fees.d. Design costs.

40. In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as:a. other assets.b. indirect costs.c. goodwill.d. direct costs.

41. Goodwill may be recorded when:a. it is identified within a company.b. one company acquires another in a business combination.c. the fair market value of a company’s assets exceeds their cost.d. a company has exceptional customer relations.

42. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill?a. A brand name.b. A patent.c. A customer list.d. All of the above.

43. Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?a. Patent.b. Copyright.c. Goodwill.d. Brand Name.

44. The reason goodwill is sometimes referred to as a master valuation account is becausea. it represents the purchase price of a business that is about to be sold.b. it is the difference between the fair market value of the net tangible and identifiable

intangible assets as compared with the purchase price of the acquired business.c. the value of a business is computed without consideration of goodwill and then

goodwill is added to arrive at a master valuation.d. it is the only account in the financial statements that is based on value, all other

accounts are recorded at an amount other than their value.

45. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities

assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount asa. a gain.b. part of current income in the year of combination.c. a deferred credit and amortize it.d. paid-in capital.

46. Purchased goodwill should a. be written off as soon as possible against retained earnings.b. be written off as soon as possible as an extraordinary item.c. be written off by systematic charges as a regular operating expense over the period

benefited.d. not be amortized.

47. The intangible asset goodwill may bea. capitalized only when purchased.b. capitalized either when purchased or created internally.c. capitalized only when created internally.d. written off directly to retained earnings.

48. A loss on impairment of an intangible asset is the difference between the asset’s a. carrying amount and the expected future net cash flows.b. carrying amount and its fair value.c. fair value and the expected future net cash flows.d. book value and its fair value.

49. The recoverability test is used to determine any impairment loss on which of the following types of intangible assets?a. Indefinite life intangibles other than goodwill.b. Indefinite life intangibles.c. Goodwill.d. Limited life intangibles.

50. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)

Recoverability Test Fair Value Testa. Yes Yesb. Yes Noc No Yesd. No No

51. The carrying amount of an intangible isa. the fair market value of the asset at a balance sheet date.b. the asset's acquisition cost less the total related amortization recorded to date.c. equal to the balance of the related accumulated amortization account.d. the assessed value of the asset for intangible tax purposes.

52. Which of the following research and development related costs should be capitalized and depreciated over current and future periods?a. Research and development general laboratory building which can be put to

alternative uses in the futureb. Inventory used for a specific research projectc. Administrative salaries allocated to research and developmentd. Research findings purchased from another company to aid a particular research

project currently in process

53. Which of the following principles best describes the current method of accounting for research and development costs?a. Associating cause and effectb. Systematic and rational allocationc. Income tax minimizationd. Immediate recognition as an expense

54. How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?a. Must be capitalized when incurred and then amortized over their estimated

useful lives.b. Must be expensed in the period incurred.c. May be either capitalized or expensed when incurred, depending upon the

materiality of the amounts involved.d. Must be expensed in the period incurred unless it can be clearly demonstrated

that the expenditure will have alternative future uses or unless contractually reimbursable.

55. Which of the following would be considered research and development?a. Routine efforts to refine an existing product.b. Periodic alterations to existing production lines.c. Marketing research to promote a new product.d. Construction of prototypes.

56. Which of the following costs should be capitalized in the year incurred?a. Research and development costs.b. Costs to internally generate goodwill.c. Organizational costs.d. Costs to successfully defend a patent.

57. Research and development costsa. are intangible assets.b. may result in the development of a patent.c. are easily identified with specific projects.d. all of the above.

58. Which of the following is considered research and development costs?a. Planned search or critical investigation aimed at discovery of new knowledge.b. Translation of research findings or other knowledge into a plan or design for a new

product or process.

c. Translation of research findings or other knowledge into a significant improvement of an existing product.

d. all of the above.

59. Which of the following is considered research and development costs?a. Planned search or critical investigation aimed at discovery of new knowledge.b. Translation of research findings or other knowledge into a plan or design for a new

product or process.c. Neither a nor b.d. Both a and b.

60. Which of the following costs should be excluded from research and development expense?a. Modification of the design of a productb. Acquisition of R & D equipment for use on a current project onlyc. Cost of marketing research for a new productd. Engineering activity required to advance the design of a product to the manufacturing

stage

61. If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings asa. research and development expense in the period(s) of construction.b. depreciation deducted as part of research and development costs.c. depreciation or immediate write-off depending on company policy.d. an expense at such time as productive research and development has been

obtained from the facility.

62. Operating losses incurred during the start-up years of a new business should bea. accounted for and reported like the operating losses of any other business.b. written off directly against retained earnings.c. capitalized as a deferred charge and amortized over five years.d. capitalized as an intangible asset and amortized over a period not to exceed 20

years.

63. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life. These costs should bea. capitalized and never amortized.b. capitalized and amortized over 40 years.c. capitalized and amortized over 5 years.d. expensed as incurred.

64. Which of the following would not be considered an R & D activity?a. Adaptation of an existing capability to a particular requirement or customer's need.b. Searching for applications of new research findings.c. Laboratory research aimed at discovery of new knowledge.d. Conceptual formulation and design of possible product or process alternatives.

65. Which of the following intangible assets should be shown as a separate item on the balance sheet?a. Goodwillb. Franchisec. Patentd. Trademark

66. The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?a. 6b. 5c. 4d. 3

67. Which of the following should be reported under the “Other Expenses and Losses” section of the income statement?a. Goodwill impairment losses.b. Trade name amortization expense.c. Patent impairment lossesd. None of the above.

68. The total amount of patent cost amortized to date is usuallya. shown in a separate Accumulated Patent Amortization account which is shown

contra to the Patent account.b. shown in the current income statement.c. reflected as credits in the Patent account.d. reflected as a contra property, plant and equipment item.

69. Intangible assets are reported on the balance sheeta. with an accumulated depreciation account.b. in the property, plant, and equipment section.c. separately from other assets.d. none of the above.

70. Which of the following is often reported as an extraordinary item?a. Amortization expense.b. Impairment losses for intangible assets other than goodwill.c. Impairment losses on goodwill.d. None of the above.

71. Which of the following is often reported as an extraordinary item?a. Amortization expense.b. Impairment losses for intangible assets.c. Research and development costs.d. None of the above.

*72. Which of the following costs incurred with developing computer software for internal use should be capitalized?a. Evaluation of alternatives.b. Coding.c. Training.d. Maintenance.

*73. When developing computer software to be sold, which of the following costs should be capitalized?a. Designing.b. Coding.c. Testing.d. None of the above.

*74. Capitalized costs incurred to develop internal use computer software should be amortized using the:a. percent-of-revenue approach.b. percent-of-completion approach.c. straight-line approach.d. accelerated amortization approach.

*75. Capitalized costs incurred while developing computer software to be sold should be amortized using the:a. lower of the straight-line method or the percent-of-revenue method.b. higher of the percent-of-revenue method or the percent-of-completion method.c. lower of the percent-of-revenue method or the percent-of-completion method.d. higher of the straight-line method or the percent-of-revenue method.

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. b 29. b 37. c 45. a 53. d 61. b 69. c22. c 30. c 38. a 46. d 54. d 62. a 70. d23. a 31. a 39. c 47. a 55. d 63. d 71. d24. c 32. b 40. c 48. b 56. d 64. a 72. b25. a 33. d 41. b 49. d 57. b 65. a 73. d26. b 34. c 42. d 50. c 58. d 66. b 74. c27. d 35. d 43. c 51. b 59. d 67. d 75. d28. d 36. b 44. b 52. a 60. c 68. c