Chapter 9

Fixed Assets and Intangible Assets

OBJECTIVES

Obj 1 Define, classify, and account for the cost of fixed assets.
Obj 2 Compute depreciation using the following methods: straight-line method, units-of-
production method, and double declining-balance method.
Obj 3 Journalize entries for the disposal of fixed assets.
Obj 4 Compute depletion and journalize the entry for depletion.
Obj 5 Describe the accounting for intangible assets, such as patents, copyrights, and
goodwill.
Obj 6 Describe how depreciation expense is reported in an income statement, and prepare
a balance sheet that includes fixed assets and intangible assets.

QUESTION GRID

True / False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 09-01 Moderate 24 09-02 Easy 47 09-03 Easy
2 09-01 Easy 25 09-02 Easy 48 09-03 Easy
3 09-01 Moderate 26 09-02 Moderate 49 09-03 Moderate
4 09-01 Easy 27 09-02 Easy 50 09-03 Easy
5 09-01 Moderate 28 09-02 Easy 51 09-03 Moderate
6 09-01 Moderate 29 09-02 Moderate 52 09-03 Moderate
7 09-01 Easy 30 09-02 Easy 53 09-03 Moderate
8 09-01 Moderate 31 09-02 Easy 54 09-03 Difficult
9 09-01 Easy 32 09-02 Easy 55 09-03 Easy
10 09-01 Moderate 33 09-02 Easy 56 09-03 Easy
11 09-01 Easy 34 09-02 Easy 57 09-04 Easy
12 09-01 Easy 35 09-02 Difficult 58 09-04 Easy
13 09-01 Easy 36 09-02 Difficult 59 09-05 Easy
14 09-01 Easy 37 09-02 Difficult 60 09-05 Easy
15 09-01 Easy 38 09-02 Moderate 61 09-05 Moderate
16 09-01 Easy 39 09-02 Easy 62 09-05 Easy
17 09-01 Moderate 40 09-02 Easy 63 09-05 Easy
18 09-01 Easy 41 09-02 Easy 64 09-05 Moderate
19 09-01 Easy 42 09-02 Easy 65 09-05 Moderate
20 09-02 Easy 43 09-03 Easy 66 09-06 Easy
21 09-02 Easy 44 09-03 Easy 67 09-APP Easy
22 09-02 Moderate 45 09-03 Easy 68 09-APP Moderate
23 09-02 Moderate 46 09-03 Easy

447
448  Chapter 9/Fixed Assets and Intangible Assets

Matching
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 09-01 Moderate 7 09-01 Moderate 13 09-05 Moderate
2 09-01 Moderate 8 09-01 Moderate 14 09-05 Moderate
3 09-01 Moderate 9 09-05 Moderate 15 09-05 Moderate
4 09-01 Moderate 10 09-05 Moderate 16 09-05 Moderate
5 09-01 Moderate 11 09-05 Moderate
6 09-01 Moderate 12 09-05 Moderate

Multiple Choice
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 09-01 Easy 22 09-02 Difficult 43 09-03 Moderate
2 09-01 Easy 23 09-02 Difficult 44 09-03 Moderate
3 09-01 Easy 24 09-02 Difficult 45 09-03 Difficult
4 09-01 Easy 25 09-02 Easy 46 09-03 Difficult
5 09-01 Easy 26 09-02 Difficult 47 09-03 Moderate
6 09-01 Easy 27 09-02 Easy 48 09-03 Easy
7 09-01 Moderate 28 09-02 Easy 49 09-03 Easy
8 09-01 Moderate 29 09-02 Easy 50 09-03 Easy
9 09-01 Moderate 30 09-02 Easy 51 09-03 Difficult
10 09-01 Easy 31 09-02 Easy 52 09-03 Difficult
11 09-01 Easy 32 09-02 Moderate 53 09-03 Moderate
12 09-01 Easy 33 09-02 Easy 54 09-04 Easy
13 09-01 Easy 34 09-02 Difficult 55 09-04 Easy
14 09-01 Easy 35 09-02 Easy 56 09-04 Difficult
15 09-01 Easy 36 09-02 Moderate 57 09-05 Easy
16 09-01 Moderate 37 09-02 Moderate 58 09-05 Easy
17 09-02 Easy 38 09-03 Difficult 59 09-05 Difficult
18 09-02 Easy 39 09-03 Difficult 60 09-05 Moderate
19 09-02 Easy 40 09-03 Difficult 61 09-05 Easy
20 09-02 Moderate 41 09-03 Difficult 62 09-06 Easy
21 09-02 Moderate 42 09-03 Difficult 63 09-APP Moderate

Exercise/Other
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 09-01 Easy 6 09-02 Moderate 11 09-03 Moderate
2 09-01 Easy 7 09-02 Easy 12 09-03 Moderate
3 09-01 Easy 8 09-02 Moderate 13 09-04 Moderate
4 09-02 Moderate 9 09-02 Moderate
5 09-02 Easy 10 09-02 Moderate
 Chapter 9/Fixed Assets and Intangible Assets  449

Problem
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 09-01 Moderate 9 09-02 Difficult 17 09-03 Difficult
2 09-01 Easy 10 09-02 Difficult 18 09-03 Difficult
3 09-01 Difficult 11 09-02 Moderate 19 09-03 Moderate
4 09-01 Moderate 12 09-02 Difficult 20 09-05 Moderate
5 09-01 Moderate 13 09-02 Moderate 21 09-05 Moderate
6 09-02 Difficult 14 09-02 Moderate 22 09-05 Moderate
7 09-02 Difficult 15 09-02 Moderate 23 09-05 Moderate
8 09-02 Moderate 16 09-02 Moderate 24 09-APP Moderate

Chapter 9—Fixed Assets and Intangible Assets

TRUE/FALSE

1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held
for sale in the ordinary course of business are called fixed assets.
ANS: F DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and
necessary costs to get the asset in place and ready for use.
ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

3. When land is purchased to construct a new building, the cost of removing any structures on the land
should be charged to the building account.
ANS: F DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

4. Land acquired as a speculation is reported under Investments on the balance sheet.

ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

5. To a major resort, timeshare properties would be classified as property, plant and equipment.
ANS: T DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

6. Standby equipment held for use in the event of a breakdown of regular equipment is reported as
property, plant, and equipment on the balance sheet.
ANS: T DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

7. The cost of repairing damage to a machine during installation is debited to a fixed asset account.
ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
450  Chapter 9/Fixed Assets and Intangible Assets

8. During construction of a building, the cost of interest on a construction loan should be charged to an
expense account.
ANS: F DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

9. The cost of computer equipment does not include the consultant's fee to supervise installation of the
equipment.
ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

10. When cities give land or buildings to a company to locate in the community, no entry is made since
there is no cost to the company.
ANS: F DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

11. Capital expenditures are costs of acquiring, constructing, adding, or replacing property, plant and
equipment.
ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

12. The cost of new equipment is called a revenue expenditure because it will help generate revenues in
the future.
ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

13. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed
asset are betterments.
ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

14. The cost of replacing an engine in a truck is an example of ordinary maintenance.

ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

15. A capital lease is accounted for as if the asset has been purchased.
ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

16. An operating lease is accounted for as if the lessee has purchased the asset.
ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

17. An intangible asset is one that has a physical existence.

ANS: F DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

18. A capitalized asset will appear on the balance sheet as a long term asset.
ANS: T DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  451

19. Long lived assets held for sale are classified as fixed assets.
ANS: F DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

20. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level
for which it was intended.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

21. The normal balance of the Accumulated Depreciation account is debit.

ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

22. As a company depreciates a piece of equipment, it cash flow goes up.

ANS: F DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

23. All property, plant, and equipment assets are depreciated over time.
ANS: F DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

24. The book value of a fixed asset reported on the balance sheet represents its market value on that date.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

25. The depreciable cost of a building is the same as its acquisition cost.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

26. It is necessary for a company to use the same depreciation method for all of its depreciable assets.
ANS: F DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

27. It is not necessary for a company to use the same depreciation method for financial statements and
for determining income taxes.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

28. An estimate of the amount which an asset can be sold at the end of its useful life is called residual
value.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

29. The units of production depreciation method matches expenses against revenue the best.
ANS: T DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
452  Chapter 9/Fixed Assets and Intangible Assets

30. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each
year has been determined, the amounts can not be changed.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

31. Residual value is not relevant when calculating double-declining-balance depreciation.

ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

32. The double-declining-balance method is an accelerated depreciation method.

ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

33. The double declining balance depreciation method calculates depreciation each year by taking twice
the straight line rate times the book value of the asset at the beginning of each year.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

34. When minor errors occur in the estimates used in the determination of depreciation, the amounts
recorded for depreciation expense in the past should be corrected.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

35. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000,
with an estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line
method.
ANS: F DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

36. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual
value of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-
production method during a period when the asset was used for 4,500 hours.
ANS: F DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

37. The amount of the depreciation expense for the second full year of use of a fixed asset costing
$100,000, with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the
declining-balance method at twice the straight-line rate.
ANS: T DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

38. When depreciation estimates are revised, all years of the asset’s life are affected.
ANS: F DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

39. For income tax purposes most companies use an accelerated deprecation method called double
declining balance.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  453

40. Assets may be grouped according to common traits and depreciated by using a single composite rate.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

41. Regardless of the depreciation method, the amount that will be depreciated during the life of the
asset will be the same.
ANS: T DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

42. Revising depreciation estimates does affect the amounts of depreciation expense recorded in past
periods.
ANS: F DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

43. Capital expenditures are costs that are charged to Stockholders' Equity accounts.
ANS: F DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

44. Though a piece of equipment is still being used, the equipment should be removed from the accounts
if it has been fully depreciated.
ANS: F DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

45. If an asset has not been fully depreciated, depreciation should be recorded prior to removing it from
service and the accounting records.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

46. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less
than the book value of the asset.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

47. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold
should be recorded.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

48. Ordinary gains from the sale of fixed assets should be reported in the other income section of the
income statement.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

49. A gain can be realized when a fixed asset is discarded.

ANS: F DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement
454  Chapter 9/Fixed Assets and Intangible Assets

50. When old equipment is traded in for a new equipment, the difference between the list price and the
trade in allowance is called boot.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

51. When a plant asset is traded for another of similar asset, losses on the asset traded are not
recognized.
ANS: F DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

52. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results.
ANS: F DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

53. Since gains are not recognized in the exchange of similar assets, the cost basis of the new asset is
equal to the book value of the old asset plus boot.
ANS: T DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

54. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, and a trade-in
allowance of $15,000 is granted by the seller, the buyer would report a gain on disposal of fixed
assets of $5,000.
ANS: F DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

55. The entry to record the disposal of fixed assets will include a credit to Accumulated Depreciation.
ANS: F DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

56. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with
the disposal of the asset.
ANS: T DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

57. Minerals removed from the earth are classified as intangible assets.
ANS: F DIF: Easy OBJ: 09-04
NAT: AACSB Analytic | AICPA FN-Measurement

58. The method used to calculate the depletion of a natural resource is the straight line method.
ANS: F DIF: Easy OBJ: 09-04
NAT: AACSB Analytic | AICPA FN-Measurement

59. Intangible assets differ from property, plant and equipment assets in that they lack physical
substance.
ANS: T DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  455

60. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in
usefulness is called amortization.
ANS: T DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

61. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is
amortized over 10 years.
ANS: F DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

62. Costs associated with normal research and development activities should be treated as intangible
assets.
ANS: F DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

63. Patents are exclusive rights to manufacture, use, or sell a particular product or process.
ANS: T DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

64. When a major corporation develops its own trademark and over time it becomes very valuable, the
trademark may not be shown on their balance sheet due lack of a material cost.
ANS: T DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

65. When a company establishes an outstanding reputation and has a competitive advantage because of
it, the company should record goodwill on its financial statements.
ANS: F DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

66. The difference between the balance in a fixed asset account and its related accumulated depreciation
account is the asset's book value.
ANS: T DIF: Easy OBJ: 09-06
NAT: AACSB Analytic | AICPA FN-Measurement

67. The-sum-of-the-years'-digits method is the only depreciation method that does not consider the plant
asset's estimated residual value in the depreciation equation.
ANS: F DIF: Easy OBJ: 09-App
NAT: AACSB Analytic | AICPA FN-Measurement

68. The amount of depreciation expense for the first full year of use of a fixed asset costing $65,000,
with an estimated residual value of $5,000 and a useful life of 5 years, is $20,000 by the sum-of-the-
years’-digits method.
ANS: T DIF: Moderate OBJ: 09-App
NAT: AACSB Analytic | AICPA FN-Measurement
456  Chapter 9/Fixed Assets and Intangible Assets

MATCHING

Classify each of the following as:

a. Ordinary Maintenance and Repairs
b. Asset Improvements
c. Extraordinary Repairs

1. Overhauling an engine in a large truck.

2. Exterior and interior painting

3. Paving a new parking lot

4. New landscaping

5. Installing a new air conditioning system in an old building

6. Resurfacing a pool in an apartment building

7. Adding freon to an air conditioning system

8. Fixing damage due to a car accident

1. ANS: C DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

2. ANS: A DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

3. ANS: B DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

4. ANS: B DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

5. ANS: B DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

6. ANS: C DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

7. ANS: A DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

8. ANS: A DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  457

Match the intangible assets with their proper classification

a. Patent
b. Copyright
c. Trademark
d. Goodwill

9. Rights to sell this book and make a profit

10. McDonald’s Golden Arches

11. A new kitchen gadget that can be profited by only one company

12. Location of a company

13. I-Tunes Music

14. Reputation of a company

15. Nike Swoosh

16. Mickey Mouse

9. ANS: B DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

10. ANS: C DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

11. ANS: A DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

12. ANS: D DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

13. ANS: B DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

14. ANS: D DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

15. ANS: C DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

16. ANS: C DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement
458  Chapter 9/Fixed Assets and Intangible Assets

MULTIPLE CHOICE

1. A characteristic of a fixed asset is that it is

a. intangible
b. used in the operations of a business
c. held for sale in the ordinary course of the business
d. a long term investment
ANS: B DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

2. Land acquired so it can be resold in the future is listed in the balance sheet as a(n)
a. fixed asset
b. current asset
c. investment
d. intangible asset
ANS: C DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

3. Which of the following should be included in the acquisition cost of a piece of equipment?
a. transportation costs
b. installation costs
c. testing costs prior to placing the equipment into production
d. all are correct
ANS: D DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

4. Which of the following is included in the cost of constructing a building?

a. insurance costs during construction
b. cost of paving parking lot
c. cost of repairing vandalism damage during construction
d. cost of removing the demolished building existing on the land when it was purchased
ANS: A DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

5. Which of the following is included in the cost of land?

a. cost of paving a parking lot
b. brokerage commission
c. outdoor parking lot lighting attached to the land
d. fences on the land
ANS: B DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

6. Accumulated Depreciation
a. is used to show the amount of cost expiration of intangibles
b. is the same as Depreciation Expense
c. is a contra asset account
d. is used to show the amount of cost expiration of natural resources
ANS: C DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  459

7. A building with an appraisal value of $137,000 is made available at an offer price of $142,000. The
purchaser acquires the property for $30,000 in cash, a 90-day note payable for $40,000, and a
mortgage amounting to $60,000. The cost basis recorded in the buyer's accounting records to
recognize this purchase is
a. $137,000
b. $142,000
c. $130,000
d. $100,000
ANS: C DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

8. A used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation
costs of $5,000, and special acquisition fees of $2,000, would have a cost basis of
a. $92,000
b. $91,000
c. $87,000
d. $86,000
ANS: A DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

9. A new machine with a purchase price of $94,000, with transportation costs of $8,000, installation
costs of $6,000, and special acquisition fees of $2,000, would have a cost basis of
a. $ 96,000
b. $108,000
c. $102,000
d. $110,000
ANS: D DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

10. Expenditures that add to the utility of fixed assets for more than one accounting period are
a. committed expenditures
b. revenue expenditures
c. current expenditures
d. capital expenditures
ANS: D DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

11. A capital expenditure results in a debit to

a. an expense account
b. a capital account
c. a liability account
d. an asset account
ANS: D DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
460  Chapter 9/Fixed Assets and Intangible Assets

12. Which of the following below is an example of a capital expenditure?

a. cleaning the carpet in the front room
b. tune-up for a company truck
c. replacing an engine in a company car
d. replacing all burned-out light bulbs in the factory
ANS: C DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

13. In a lease contract, the party who legally owns the asset is the
a. lessee
b. lessor
c. operator
d. banker
ANS: B DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

14. All leases are classified as either

a. capital leases or long-term leases
b. capital leases or operating leases
c. operating leases or current leases
d. long-term leases or current leases
ANS: B DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

15. The journal entry for recording an operating lease payment would
a. be a memo entry only
b. debit the fixed asset and credit Cash
c. debit an expense and credit Cash
d. debit a liability and credit Cash
ANS: C DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

16. When determining whether to record an asset as a fixed asset, what two criteria must be met?
a. Must be an investment and must be long lived.
b. Must be long lived and must use the asset in a productive manner.
c. Must be long lived and must be a tangible asset.
d. Must be a tangible asset and must be an investment.
ANS: B DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

17. Factors contributing to a decline in the usefulness of a fixed asset may be divided into the following
two categories
a. salvage and functional
b. physical and functional
c. residual and salvage
d. functional and residual
ANS: B DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  461

18. A fixed asset's estimated value at the time it is to be retired from service is called
a. book value
b. residual value
c. market value
d. carrying value
ANS: B DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

19. All of the following below are needed for the calculation of depreciation except
a. cost
b. residual value
c. estimated life
d. book value
ANS: D DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

20. The method of determining depreciation that yields successive reductions in the periodic
depreciation charge over the estimated life of the asset is
a. units-of-production
b. declining-balance
c. straight-line
d. time-valuation
ANS: B DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

21. When the amount of use of a fixed asset varies from year to year, the method of determining
depreciation expense that best matches allocation of cost with revenue is
a. declining-balance
b. straight-line
c. units-of-production
d. MACRS
ANS: C DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

22. A machine with a cost of $65,000 has an estimated residual value of $5,000 and an estimated life of
5 years or 15,000 hours. It is to be depreciated by the units-of-production method. What is the
amount of depreciation for the second full year, during which the machine was used 5,000 hours?
a. $8,000
b. $20,000
c. $12,000
d. $21,667
ANS: B DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
462  Chapter 9/Fixed Assets and Intangible Assets

23. Equipment with a cost of $160,000 has an estimated residual value of $10,000 and an estimated life
of 5 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used 3,300 hours?
a. $30,000
b. $32,500
c. $34,000
d. $40,000
ANS: A DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

24. A machine with a cost of $65,000 has an estimated residual value of $5,000 and an estimated life of
4 years or 18,000 hours. What is the amount of depreciation for the second full year, using the
double declining-balance method?
a. $15,000
b. $30,000
c. $16,250
d. $32,500
ANS: C DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

25. The most widely used depreciation method is

a. straight-line
b. sum-of-the-years-digits
c. declining-balance
d. units-of-production
ANS: A DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

26. Equipment with a cost of $80,000, an estimated residual value of $5,000, and an estimated life of 15
years was depreciated by the straight-line method for 5 years. Due to obsolescence, it was
determined that the useful life should be shortened by 5 years and the residual value changed to zero.
The depreciation expense for the current and future years is
a. $5,500
b. $11,000
c. $10,000
d. $5,000
ANS: B DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

27. The depreciation method that does not use residual value in calculating the first year's depreciation
expense is
a. straight-line
b. units-of-production
c. double-declining-balance
d. none of the above
ANS: C DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  463

28. If a fixed asset, such as a computer, were purchased on January 1st for $1,950 with an estimated life
of 3 years and a salvage or residual value of $150, the journal entry for monthly expense under
straight-line depreciation is:
(Note: EOM indicates the last day of each month.)
a. EOM Depreciation Expense 50.00
Accumulated Depreciation 50.00
b. EOM Depreciation Expense 600.00
Accumulated Depreciation 600.00
c. EOM Accumulated Depreciation 600.00
Depreciation Expense 600.00
d. EOM Accumulated Depreciation 50.00
Depreciation Expense 50.00
ANS: A DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

29. The proper journal entry to purchase a computer on account to be utilized within the business would
be:
a. Jan 2 Office Supplies 1,250.00
Accounts Payable 1,250.00
b. Jan 2 Office Equipment 1,250.00
Accounts Payable 1,250.00
c. Jan 2 Office Supplies 1,250.00
Accounts Receivable 1,250.00
d. Jan 2 Office Equipment 1,250.00
Accounts Receivable 1,250.00
ANS: B DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

30. Residual value is also known as all of the following except

a. scrap value
b. trade in value
c. salvage value
d. net book value
ANS: D DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

31. The formula for depreciable cost is

a. initial cost + residual value
b. initial cost - residual value
c. initial cost - accumulated depreciation
d. depreciable cost = initial cost
ANS: B DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
464  Chapter 9/Fixed Assets and Intangible Assets

32. Expected useful life is

a. calculated when the asset is sold.
b. estimated at the time that the asset is placed in service.
c. determined each year that the depreciation calculation is made.
d. none of the answers are correct.
ANS: B DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

33. The calculation for annual depreciation using the straight-line depreciation method is
a. initial cost / estimated useful life
b. depreciable cost / estimated useful life
c. depreciable cost * estimated useful life
d. initial cost * estimated useful life
ANS: B DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

34. The calculation for annual depreciation using the units-of-production method is
a. (initial cost/estimated output) * the actual yearly output
b. (depreciable cost / yearly output) * estimated output
c. depreciable cost / yearly output
d. (depreciable cost / estimated output) * the actual yearly output
ANS: D DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

35. Computer equipment was acquired at the beginning of the year at a cost of $56,000 that has an
estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the 2nd year’s
depreciation using straight-line depreciation.
a. $11,200
b. $22,400
c. $10,600
d. $13,600
ANS: C DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

36. Which of the following is true?

a. If using the double-declining-balance the total amount of depreciation expense during the life of
the asset will be the highest.
b. If using the units-of-production method, it is possible to depreciate more than the depreciable
cost.
c. If using the straight line method, the amount of depreciation expense during the first year is
higher than that of the double-declining-balance.
d. Regardless of the depreciation method, the amount of total depreciation expense during the life of
the asset will be the same.
ANS: D DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  465

37. An asset was purchased for $60,000 and originally estimated to have a useful life of 10 years with a
residual value of $3,000. After two years of straight line depreciation, it was determined that the
remaining useful life of the asset was only 2 years with a residual value of $2,000. Calculate this
year’s depreciation using the revised amounts and straight line method.
a. $22,800
b. $11,400
c. $23,300
d. $24,000
ANS: C DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

38. A fixed asset with a cost of $42,000 and accumulated depreciation of $38,500 is traded for a similar
asset priced at $60,000. Assuming a trade-in allowance of $5,000, the cost basis of the new asset is
a. $58,000
b. $58,500
c. $60,000
d. $61,500
ANS: B DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

39. A fixed asset with a cost of $40,000 and accumulated depreciation of $35,000 is traded for a similar
asset priced at $50,000. Assuming a trade-in allowance of $3,000, the cost basis of the new asset is
a. $55,000
b. $48,000
c. $52,000
d. $50,000
ANS: D DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

40. A fixed asset with a cost of $40,000 and accumulated depreciation of $36,500 is traded for a similar
asset priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is
a. $1,000
b. $3,500
c. $ 500
d. $1,500
ANS: C DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

41. A fixed asset with a cost of $30,000 and accumulated depreciation of $27,500 is sold for $3,500.
What is the amount of the gain or loss on disposal of the fixed asset?
a. $2,500 loss
b. $1,000 loss
c. $2,500 gain
d. $1,000 gain
ANS: D DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement
466  Chapter 9/Fixed Assets and Intangible Assets

42. The Brock Company acquired new machinery with a price of $15,200 by trading in similar old
machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated
depreciation of $5,000. In recording this transaction, Brock Company should record
a. the new machinery at $16,700
b. the new machinery at $12,700
c. a gain of $1,500
d. a loss of $1,500
ANS: D DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

43. When a company discards machinery that is fully depreciated, this transaction would be recorded
with the following entry
a. debit Accumulated Depreciation; credit Machinery
b. debit Machinery; credit Accumulated Depreciation
c. debit Cash; credit Accumulated Depreciation
d. debit Depreciation Expense; credit Accumulated Depreciation
ANS: A DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

44. When a company sells machinery at a price equal to its book value, this transaction would be
recorded with an entry that would include the following:
a. debit Cash and Accumulated Depreciation; credit Machinery
b. debit Machinery; credit Cash and Accumulated Depreciation
c. debit Cash and Machinery; credit Accumulated Depreciation
d. debit Cash and Depreciation Expense; credit Accumulated Depreciation
ANS: A DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

45. When a company exchanges machinery and receives a trade-in allowance greater than the book
value, this transaction would be recorded with the following entry:
a. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Disposal
b. debit Machinery and Accumulated Depreciation; credit Machinery and Cash
c. debit Cash and Machinery; credit Accumulated Depreciation
d. debit Cash and Machinery; credit Accumulated Depreciation and Machinery
ANS: B DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

46. When a company exchanges machinery and receives a trade-in allowance less than the book value,
this transaction would be recorded with the following entry:
a. debit Machinery and Accumulated Depreciation; credit Machinery and Cash
b. debit Cash and Machinery; credit Accumulated Depreciation
c. debit Cash and Machinery; credit Accumulated Depreciation and Machinery
d. debit Machinery, Accumulated Depreciation, and Loss on Disposal; credit Machinery and Cash
ANS: D DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  467

47. On December 31, Reach It Batting Cages Company has decided to discard one of its batting cages.
The initial cost of the equipment was $225,000 with an accumulated depreciation of $195,000.
Depreciation has been taken up to the end of the year. The following will be included in the entry to
record the disposal.
a. Accumulated Depreciation Dr. $225,000
b. Loss on Disposal of Asset $195,000
c. Equipment Cr. $225,000
d. Gain on Disposal of Asset $30,000
ANS: C DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

48. On December 31, Reach It Batting Cages Company has decided to sell one of its batting cages. The
initial cost of the equipment was $225,000 with an accumulated depreciation of $195,000.
Depreciation has been taken up to the end of the year. The company found a company that is willing
to buy the equipment for $30,000. What is the amount of the gain or loss on this transaction?
a. Gain of $30,000
b. Loss of $30,000
c. No gain or loss
d. Cannot be determined
ANS: C DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

49. On December 31, Reach It Batting Cages Company has decided to sell one of its batting cages. The
initial cost of the equipment was $225,000 with an accumulated depreciation of $195,000.
Depreciation has been taken up to the end of the year. The company found a company that is willing
to buy the equipment for $10,000. What is the amount of the gain or loss on this transaction?
a. Gain of $10,000
b. Loss of $20,000
c. No gain or loss
d. Cannot be determined
ANS: B DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

50. On December 31, Reach It Batting Cages Company has decided to sell one of its batting cages. The
initial cost of the equipment was $225,000 with an accumulated depreciation of $195,000.
Depreciation has been taken up to the end of the year. The company found a company that is willing
to buy the equipment for $70,000. What is the amount of the gain or loss on this transaction?
a. Cannot be determined
b. No gain or loss
c. Gain of $40,000
d. Gain of $70,000
ANS: C DIF: Easy OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement
468  Chapter 9/Fixed Assets and Intangible Assets

51. On December 31, Reach It Batting Cages Company has decided to trade-in one of its batting cages
for another one that has a cost of $500,000. The seller of the batting cage is willing to allow a trade-
in amount of $40,000. The initial cost of the old equipment was $225,000 with an accumulated
depreciation of $195,000. Depreciation has been taken up to the end of the year. The difference will
be paid in cash. What is the amount of the gain or loss on this transaction?
a. The gain will not be recognized and will be added to the price of the old equipment.
b. The gain will not be recognized and will be added to the price of the new equipment
c. The gain will not be recognized and will be subtracted from the price of the old equipment
d. The gain will not be recognized and will be subtracted from the price of the new equipment.
ANS: D DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

52. On December 31, Reach It Batting Cages Company has decided to trade-in one of its batting cages
for another one that has a cost of $500,000. The seller of the batting cage is willing to allow a trade-
in amount of $12,000. The initial cost of the old equipment was $225,000 with an accumulated
depreciation of $195,000. Depreciation has been taken up to the end of the year. The difference will
be paid in cash. What is the amount of the gain or loss on this transaction?
a. Loss of $12,000
b. Gain of $12,000
c. Loss of $18,000
d. No loss or gain will be recorded.
ANS: C DIF: Difficult OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

53. When a company replaces a component of property, plant and equipment, which statement below
does not account for one of the steps to this process?
a. book value of the replaced component is written off to depreciation expense
b. the asset cost of the replaced component is credited
c. any cost to remove the old component is charged to expense
d. the identifiable direct costs associated with the new component are capitalized
ANS: B DIF: Moderate OBJ: 09-03
NAT: AACSB Analytic | AICPA FN-Measurement

54. The Accumulated Depletion account is

a. an expense account
b. an intangible asset account
c. reported on the income statement as other expense
d. reported on the balance sheet as a deduction from the cost of the mineral deposit
ANS: D DIF: Easy OBJ: 09-04
NAT: AACSB Analytic | AICPA FN-Measurement

55. The process of transferring the cost of metal ores and other minerals removed from the earth to an
expense account is called
a. depletion
b. deferral
c. amortization
d. depreciation
ANS: A DIF: Easy OBJ: 09-04
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  469

56. The Weber Company purchased a mining site for $500,000 on July 1, 2007. The company expects to
mine ore for the next 10 years and anticipates that a total of 100,000 tons will be recovered. The
estimated residual value of the property is $80,000. During 2007 the company extracted 6,000 tons
of ore. The depletion expense for 2007 is
a. $12,600
b. $42,000
c. $25,200
d. $50,000
ANS: C DIF: Difficult OBJ: 09-04
NAT: AACSB Analytic | AICPA FN-Measurement

57. Expenditures for research and development are generally recorded as

a. current operating expenses
b. assets and amortized over their estimated useful life
c. assets and amortized over 40 years
d. current assets
ANS: A DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

58. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of
intangible assets is
a. amortization
b. depletion
c. depreciation
d. allocation
ANS: A DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

59. XYZ Company purchased a patent from ABC for $144,000. At the time of purchase the patent had
been in existence for 8 years. What is the first year's amortization?
a. $7,200
b. $18,000
c. $12,000
d. $144,000
ANS: C DIF: Difficult OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

60. Which intangible assets are amortized over their useful life?
a. trademarks
b. goodwill
c. patents
d. all of the above
ANS: C DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement
470  Chapter 9/Fixed Assets and Intangible Assets

61. The exclusive right to use a certain name or symbol is called a

a. franchise
b. patent
c. trademark
d. copyright
ANS: C DIF: Easy OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement

62. Fixed assets are ordinarily presented in the balance sheet

a. at current market values
b. at replacement costs
c. at cost less accumulated depreciation
d. in a separate section along with intangible assets
ANS: C DIF: Easy OBJ: 09-06
NAT: AACSB Analytic | AICPA FN-Measurement

63. Machinery was purchased on January 1, 2007 for $51,000. The machinery has an estimated life of 5
years and an estimated salvage value of $6,000. Sum-of-the-years'-digits depreciation for 2008
would be
a. $13,600
b. $12,000
c. $15,000
d. $9,000
ANS: B DIF: Moderate OBJ: 09-App
NAT: AACSB Analytic | AICPA FN-Measurement

EXERCISE/OTHER

1. What is the cost of the land, based upon the following data?

Land purchase price $175,000

Broker's commission 15,000
Payment for the demolition
and removal of existing building 5,000
Cash received from the sale of materials
salvaged from the demolished building 1,000

ANS:
$194,000
DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement

2. Comment on the validity of the following statements. "As an asset loses its ability to provide
services, cash needs to be set aside to replace it. Depreciation accomplishes this goal."
ANS:
Depreciation is the periodic transfer of the cost of an asset to expense. Depreciation is a noncash expense.
Depreciation does not accumulate cash for replacements.
DIF: Easy OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  471

3. On April 15, CVC Co. paid $1,550 to upgrade a delivery truck and $65 for an oil change. Journalize
the entries for the delivery truck and oil change expenditures.
ANS:
April 15 Delivery Truck 1,550
Cash 1,550

15 Repairs and maintenance Exp 65

Cash 65

DIF: Easy OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-1

4. Computer equipment was acquired at the beginning of the year at a cost of $56,000 that has an
estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the (a)
depreciable cost, (b) straight-line rate, and (c) annual straight-line depreciation.
ANS:
(a) $53,000
(b) 20%
(c) $10,600

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-2

5. In using this method, a double-declining balance rate is determined by doubling the straight-line rate.
Assume that an asset has a useful life of 10 years, determine the rate to be used if using the double-
declining balance method.
ANS:
10% * 2 = 20%
DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement

6. Copy equipment was acquired at the beginning of the year at a cost of $56,000 that has an estimated
residual value of $3,000 and an estimated useful life of 5 years. It is estimated that the machine has
an estimated 1,000,000 copies. This year 240,000 copies were made. Determine the (a) depreciable
cost, (b) depreciation rate, and (c) the units-of-production depreciation for the year.
ANS:
(a) $53,000
(b) $0.053 per copy
(c) $12,720 (240000*.053)

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-3

7. A machine costing $54,000 with a 6-year life and $6,000 residual value was purchased January 2,
2007. Compute the yearly depreciation expense using straight-line depreciation.
ANS:
($54,000 - $6,000) = $48,000 ÷ 6 years = $8,000 per year
DIF: Easy OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
472  Chapter 9/Fixed Assets and Intangible Assets

8. A machine costing $50,000 with a 5-year life and $5,000 residual value was purchased January 2,
2007. Compute depreciation for each of the five years, using the declining-balance method at twice
the straight-line rate.
ANS:
(1) Year 1 $50,000  .40 = $20,000
(2) Year 2 $30,000  .40 = $12,000
(3) Year 3 $18,000  .40 = $7,200
(4) Year 4 $10,800  .40 = $4,320
(5) Year 5 $6,480 - 5000 = $1,480

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement

9. Computer equipment was acquired at the beginning of the year at a cost of $56,000 that has an
estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the (a)
depreciable cost (b) double-declining-balance rate, and (c) double-declining-balance depreciation for
the first year.
ANS:
(a) $53,000
(b) 40%
(c) $22,400 ($56,000 * 40%)
DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-4

10. An asset was purchased for $60,000 and originally estimated to have a useful life of 10 years with a
residual value of $3,000. After two years of straight line depreciation, it was determined that the
remaining useful life of the asset was only 2 years with a residual value of $2,000. Calculate this
year’s depreciation using the revised amounts and straight line method.

(a) Determine the amount of the annual depreciation for the first two years.
(b) Determine the book value at the end of the 2nd year.
(c) Determine the depreciation expense for each of the remaining years after revision.
ANS:
(a) $5,700
(b) $48,600
(c) $23,300
DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-5
 Chapter 9/Fixed Assets and Intangible Assets  473

11. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was
depreciated using the straight-line method based upon an estimated useful life of 6 years and an
estimated residual value of $7,500.

(a) What was the depreciation for the first year?

(b) Assuming the equipment was sold at the end of the second year for $57,000,
determine the gain or loss on sale of the equipment.
(c) Journalize the entry to record the sale.

ANS:
(a) $11,250
(b) $4,500 Gain
(c)
Cash 57,000
Accumulated Depreciation 22,500
Equipment 75,000
Gain on Sale of Asset 4,500

DIF: Moderate OBJ: 09-03

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-6

12. On the first day of the fiscal year, a new refrigerator with a list price of $42,000 was acquired in
exchange for an old refrigerator and $32,000 cash. The old refrigerator had a cost $24,000 and
accumulated depreciation of $17,000.

(a) Determine the cost of the new refrigerator for financial reporting purposes.
(b) Journalize the entry to record the exchange.

ANS:
(a)
List price $42,000
Trade In 10,000
NBV of old refrig. 7,000
Unrealized gain 3,000
Cost of new truck $39,000

(b)
Equipment (new) 39,000
Accum. Depreciation 17,000
Equipment 24,000
Cash 32,000

DIF: Moderate OBJ: 09-03

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-7
474  Chapter 9/Fixed Assets and Intangible Assets

13. Diamonds are a Girl’s Best Friend Company acquired mineral rights for $60,000,000. The diamond
deposit is estimated at 6,000,000 tons. During the current year, 2,300,000 were mined and sold.

(a) Determine the depletion rate.

(b) Determine the amount of depletion expense for the current year.
(c) Journalize the adjusting entry to recognize the depletion expense.

ANS:
(a) $10 per ton
(b) $23,000,000
(c) Dec 31 Depletion Expense 23,000,000
Accumulated Depletion 23,000,000
Depletion of mineral deposit

DIF: Moderate OBJ: 09-04

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 9-8
 Chapter 9/Fixed Assets and Intangible Assets  475

PROBLEM

1. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c)
Buildings, (d) Machinery and Equipment, or (e) other account.

(1) Cost of paving parking area for employees and customers.

(2) Insurance during construction of building.
(3) Interest incurred on loan during construction of building.
(4) Fee paid for installation of equipment.
(5) Special foundation for new equipment acquired.
(6) Insurance on new equipment while in transit.
(7) Freight charges on new equipment.
(8) Cost of repairing vandalism damage to equipment during installation.
(9) Sales tax on new equipment.
(10) Cost incurred in repairing damage resulting from installation of new equipment.
(11) Cost of land fill for building site.
(12) Cost of lubricating oil purchased for periodic oil changes for equipment.
(13) Parking lot lighting.
(14) Installing a fence around the parking lot.
(15) Repainting the trim on a building.
(16) Special assessment paid to city for extension of water main to property.
(17) Cost of razing and removing the old building on property acquired for a building site.
(18) Delinquent real estate taxes assumed by purchaser on property acquired for a building site.
(19) Attorney's fee for title search.
(20) Architect's fee for building plans and supervision of construction.

ANS:
(a) 11, 16, 17, 18, 19
(b) 1, 13, 14
(c) 2, 3, 20
(d) 4, 5, 6, 7, 9
(e) 8, 10, 12, 15

DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement
476  Chapter 9/Fixed Assets and Intangible Assets

2. Identify the following as a Fixed Asset (FA), or Intangible Asset (IA), or Natural Resource (NR), or
Neither (N)

(a) computer
(b) patent
(c) oil reserve
(d) goodwill
(e) U. S. Treasury note
(f) land used for employee parking
(g) gold mine

ANS:
FA (a) (f)
IA (b) (d)
NR (c) (g)
N (e)

DIF: Easy OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

3. A number of major structural repairs completed at the beginning of the current fiscal year at a cost of
$1,000,000 are expected to extend the life of a building 10 years beyond the original estimate. The
original cost of the building was $7,770,000, and it has been depreciated by the straight-line method
for 50 years. Estimated residual value is negligible and has been ignored. The related accumulated
depreciation account after the depreciation adjustment at the end of the preceding fiscal year is
$5,550,000.

(a) What has the amount of annual depreciation been in past years?
(b) What was the original life estimate of the building?
(c) To what account should the $1,000,000 be debited?
(d) What is the book value of the building after the extraordinary repairs have been made?
(e) What is the expected remaining life of the building after the extraordinary repairs have been
made?
(f) What is the amount of straight-line depreciation for the current year, assuming that the
repairs were completed at the very beginning of the current year?

ANS:
(a) $111,000 ($5,550,000 ÷ 50)
(b) 70 years ($7,770,000 ÷ $111,000)
(c) Accumulated Depreciation - Building
(d) $3,220,000 ($7,770,000 + $1,000,000 - $5,550,000)
(e) 30 years (70 - 50 + 10)
(f) $107,333 ($3,220,000 ÷ 30)

DIF: Difficult OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  477

4. Journalize each of the following transactions:

(a) A wing costing $1,000,000 was added to the building. A new mortgage was issued for the
cost.
(b) Equipment was upgraded to increase its capacity to produce widgets. The upgrade cost of
$10,000 was paid in cash.
(c) A major overhaul costing $5,000 on a machine increased the useful life by 2 years. The
payment was made in cash.

ANS:
(a) Building 1,000,000
Mortgage Payable 1,000,000

(b) Equipment 10,000

Cash 10,000

(c) Accumulated Depreciation-Machinery 5,000

Cash 5,000

DIF: Moderate OBJ: 09-01

NAT: AACSB Analytic | AICPA FN-Measurement

5. XYZ Co. incurred the following costs related to the office building used in operating its sports
supply company:

(a) Replaced a broken window.

(b) Replaced the roof that had been on the building 23 years.
(c) Serviced all the air conditioners before summer started.
(d) Replaced the air conditioners with refrigerated air conditioners in the customer
service areas.
(e) Added a warehouse to the back of the building.
(f) Repainted the interior walls.
(g) Installed window shutters on all windows.

Classify each of the costs as a capital expenditure or a revenue expenditure. For those costs identified
as capital expenditures, classify each as an additional or replacement component.
ANS:
(a) Revenue expenditure
(b) Capital expenditure, replacement
(c). Revenue expenditure
(d). Capital expenditure, replacement
(e). Capital expenditure, additional
(f) Revenue expenditure
(g) Capital expenditure, additional
DIF: Moderate OBJ: 09-01
NAT: AACSB Analytic | AICPA FN-Measurement
478  Chapter 9/Fixed Assets and Intangible Assets

6. Equipment purchased at the beginning of the fiscal year for $150,000 is expected to have a useful
life of 5 years, or 15,000 operating hours, and a residual value of $30,000. Compute the depreciation
for the first and second years of use by each of the following methods:

(a) straight-line
(b) units-of-production (2,500 hours first year; 3,250 hours second year)
(c) declining-balance at twice the straight-line rate

(Round the answer to the nearest dollar.)

ANS:
1st Year
(a) $24,000 ($150,000 - 30,000) = 120,000 ÷ 5
(b) $20,000 ($150,000 - 30,000) = ($120,000 ÷ 15,000 hours) = $8/hr  2,500
(c) $60,000 ($150,000  .40)

2nd Year
(a) $24,000 ($150,000 - 30,000) = 120,000 ÷ 5
(b) $26,000 ($150,000 - 30,000) = ($120,000 ÷ 15,000 hours) = $8/hr  3,250
(c) $36,000 ($150,000 - 60,000) = 90,000  .40

DIF: Difficult OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement

7. Machinery is purchased on July 1 of the current fiscal year for $180,000. It is expected to have a
useful life of 4 years, or 20,000 operating hours, and a residual value of $15,000. Compute the
depreciation for the last six months of the current fiscal year ending December 31 by each of the
following methods:

(a) straight-line
(b) declining-balance at twice the straight-line rate
(c) units-of-production (used for 1,500 hours during the current year)

(Round the answer to the nearest dollar.)

ANS:
(a) $20,625 = ($180,000 - 15,000) = 165,000 ÷ 4 = 41,250  6/12
(b) $45,000 = ($180,000  .50) = $90,000  6/12
(c) $12,375 = ($180,000 - 15,000) = ($165,000 ÷ 20,000 hours) = $8.25  1,500 hours

DIF: Difficult OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  479

8. Determine the depreciation, for the year of acquisition and for the following year, of a fixed asset
acquired on October 1 for $300,000, with an estimated life of 5 years, and residual value of $40,000,
using (a) the declining-balance method at twice the straight-line rate and (b) the straight-line method.
Assume a fiscal year ending December 31.
ANS:
(a) Year of acquisition: $30,000 = (300,000  .40)=120,000  3/12)
Following year: $108,000 = ($300,000 - 30,000)= 270,000  .40
(b) Year of acquisition: $13,800 = ($300,000 - 40,000)=(260,000 ÷ 5) = 52,000  3/12
Following year: $52,000 = ($300,000 - 40,000) = 260,000 ÷ 5

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement

9. Equipment costing $90,000 with a useful life of 10 years and a residual value of $6,000 has been
depreciated for 6 years by the straight-line method. Assume a fiscal year ending December 31.

(a) What is the book value at the end of the fifth year of use?
(b) If early in the seventh year it is estimated that the remaining useful life is 5 years
(instead of 4) and the residual value is still $6,000, what is the amount of depreciation
for the seventh year?

ANS:
(a) $39,600 ($90000 - (90,000 - 6,000 = 84,000/10 = 8,400  6 = 50,400 ))
(b) $6,720 ($39,600 - 6,000) ÷ 5

DIF: Difficult OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement
480  Chapter 9/Fixed Assets and Intangible Assets

10. Mega Sales has bought $110,000.00 in fixed assets on January 1st associated with sales equipment.
The residual value of these assets is estimated at $10,000.00 after they service their 4 year service
life. Mega Sales managers want to evaluate the options of depreciation.

(a) Compute the annual straight-line depreciation and the provide the sample depreciation
journal entry to be posted at the end of each of the years.
(b) Write the journal entries for each year of the service life for these assets with 200%
declining balance method.

ANS:
(a)
Acquisition cost $110,000.00
Less residual value 10,000.00
Depreciable value $100,000.00
Divided by service life 4 years
Annual depreciation $25,000.00

Dec 31 Depreciation Expense Sales Equipment 25,000.00

Accumulated Depreciation - Sales Equipment 25,000.00

(b) 1st year: Acquisition cost - $110,000.00  50% = $55,000.00 first year depreciation
2nd year: ($110,000.00 - $55,000.00)  50% = $27,500.00 second year depreciation
3rd year: ($110,000.00-$55,000.00-$27,500.00)  50% = $13,750.00 third year
depreciation
4th year: $110,000.00-$55,000.00-$27,500.00-$13,750.00-$10,000 residual value =
$3,750.00 fourth year depreciation

1st year, Dec 31 Depreciation Expense - Sales Equipment 55,000.00

Accumulated Depreciation - Sales Equipment 55,000.00

2nd year, Dec 31 Depreciation Expense - Sales Equipment 27,500.00

Accumulated Depreciation - Sales Equipment 27,500.00

3rd year, Dec 31 Depreciation Expense - Sales Equipment 13,750.00

Accumulated Depreciation - Sales Equipment 13,750.00

4th year, Dec 31 Depreciation Expense - Sales Equipment 3,750.00

Accumulated Depreciation - Sales Equipment 3,750.00

Note: The depreciable value is $100,000 and this value is taken into account the computation of the final
year of depreciation.
DIF: Difficult OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  481

11. On July 1st Jackson Hole Construction purchases a bulldozer for $285,000.00. The equipment has a
9 year life with a residual value of $15,000.00. Jackson Hole uses straight-line depreciation.
(a) Calculate the depreciation expense and provide the example the journal entry for the
first year ending December 31st.
(b) Calculate the annual depreciation expense for the following years and provide a
example journal entry.
(c) Calculate the last year’s depreciation expense and provide the example journal entry.

ANS:
Annual depreciation is:
Acquisition cost $285,000.00
Less residual value 15,000.00
Depreciable amount 270,000.00
Service life in years 9
Annual depreciation $30,000.00

(a) First year depreciation is $30,000.00  (6/12) = $15,000.00 (July through December)
Dec 31st Depreciation Expense 15,000.00
Accumulated Depreciation 15,000.00

(b) Annual depreciation journal entry other then first and last year:
Dec 31st Depreciation Expense 30,000.00
Accumulated Depreciation 30,000.00

(c) Last year depreciation is $30,000.00  (6/12) = $15,000.00 (January through June)
Dec 31st Depreciation Expense 15,000.00
Accumulated Depreciation 15,000.00

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement
482  Chapter 9/Fixed Assets and Intangible Assets

12. On July 1st Jackson Hole Construction purchases a bulldozer for $285,000.00. The equipment has a
9 year life with a residual value of $15,000.00. Jackson Hole uses units-of-production method
depreciation and the bulldozer is expected to yield 22,500 operating hours.
(a) Calculate the depreciation expense per hour of operation.
(b) The bulldozer is operated 1,250 hours in the first year, 2,755 hours in the second
year, and 1,225 hours in the third year of operations. Journalize the depreciation
expense for each year.

ANS:
(a) Hourly depreciation is:
Acquisition cost $285,000.00
Less residual value 15,000.00
Depreciable amount 270,000.00
Service life in hours 22,500
Hourly depreciation $12.00

(b) First year - 1,250 hours  $12 per hour = $15,000.00

1st year Depreciation Expense 15,000.00
Accumulated Depreciation 15,000.00

Second year - 2,755 hours  $12 per hour = $33,060.00

2nd year Depreciation Expense 33,060.00
Accumulated Depreciation 33,060.00

Third year - 1,225 hours  $12 per hour = $14,700.00

3rd year Depreciation Expense 14,700.00
Accumulated Depreciation 14,700.00

DIF: Difficult OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  483

13. ABC Country Club has acquired a lot to construct a clubhouse. ABC had the following costs related
to the construction:

Architects’ Fees $20,000

Construction Labor 80,000
Engineers’ Fees 15,000
Fences around building 9,000
Grading and leveling 10,000
Insurance costs incurred during construction 7,000
Interest on money borrowed for construction 5,000
Land 37,000
Building Materials 237,000
Sales Taxes 3,000
Trees and Shrubs 6,000

Determine the cost of the Club House to be reported on the balance sheet.
ANS:
Architects’ Fees $20,000
Construction Labor 80,000
Engineers’ Fees 15,000
Insurance costs incurred during construction 7,000
Interest on money borrowed for construction 5,000
Building Materials 237,000
Sales Taxes 3,000
Cost of Club House $367,000

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement
484  Chapter 9/Fixed Assets and Intangible Assets

14. A copy machine acquired with a cost of $705 has an estimated useful life of 3 years. It is also
expected to have a useful operating life of 12,600 copies. Assuming that it will have a residual value
of $75, determine the depreciation for the first year by the
(a) straight-line method
(b) declining-balance method
(c) production method (4,421 copies were made the first year)

ANS:
(a) Straight-line depreciation = (cost-estimated residual value)/ estimated life
Straight-line depreciation = (705-75)/3
Straight-line depreciation = $210 per year

(b) Declining Balance Method = $472

Book Value at Depreciation

Year Cost Beginning of Year Rate for Year
1 705 705 67%* 472

*Rate = (100%/Life)  2
Rate = (1/3)  2
Rate = .67

(c) Units-of-production = (cost-residual value) / estimated copies

Units-of-production = (705-75)/12,600
Units-of-production = $0.05 per copy

First year depreciation = $221.05 (.05  4,421)

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement

15. A copy machine acquired on March 1, 2007 with a cost of $705 has an estimated useful life of 3
years. Assuming that it will have a residual value of $75, determine the depreciation for the first and
second year by the straight-line method.
ANS:
Straight-line depreciation = (cost-estimated residual value)/ estimated life
Straight-line depreciation = (705-75)/3
Straight-line depreciation = $210 per year

First year = 175 (210 / 12months * 10)

Second year = 210
DIF: Moderate OBJ: 09-02
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  485

16. A copy machine acquired on March 1, 2007 with a cost of $705 has an estimated useful life of 3
years. Assuming that it will have a residual value of $125, determine the depreciation for the first
year by the declining-balance method.
ANS:
First year depreciation = $393 (472 /12 * 10)

Book Value at Depreciation

Year Cost Beginning of Year Rate for Year
1 705 705 67%* 472

*Rate = (100%/Life)  2
Rate = (1/3)  2
Rate = .67

DIF: Moderate OBJ: 09-02

NAT: AACSB Analytic | AICPA FN-Measurement

17. Computer equipment (office equipment) purchased 6 1/2 years ago for $170,000, with an estimated
life of 8 years and a residual value of $10,000, is now sold for $60,000 cash. (Appropriate entries for
depreciation had been made for the first six years of use.) Journalize the following entries:

(a) Record the depreciation for the one-half year prior to the sale, using the straight-line
method.
(b) Record the sale of the equipment.
(c) Assuming that the equipment had been sold for $30,000 cash, prepare the entry for (b)
above to record the sale.

ANS:
(a) Depreciation Expense-Office Equipment 10,000
Accumulated Depreciation-Office Equipment 10,000

(b) Cash 60,000

Accumulated Depreciation-Office Equipment 130,000
Office Equipment 170,000
Gain on Sale of Fixed Assets 20,000

(c) Cash 30,000

Accumulated Depreciation-Office Equipment 130,000
Loss on Disposal of Fixed Assets 10,000
Office Equipment 170,000

DIF: Difficult OBJ: 09-03

NAT: AACSB Analytic | AICPA FN-Measurement
486  Chapter 9/Fixed Assets and Intangible Assets

18. Machinery acquired at a cost of $90,000 and on which there is accumulated depreciation of $50,000
(including depreciation for the current year to date) is exchanged for similar machinery. For financial
reporting purposes, present entries to record the disposition of the old machinery and the acquisition
of new machinery under each of the following assumptions:

(a) Price of new, $115,000; trade-in allowance on old, $4,000; balance paid in cash.
(b) Price of new, $115,000; trade-in allowance on old, $44,000; balance paid in cash.

ANS:
(a) Accumulated Depreciation-Machinery 50,000
Machinery 115,000
Loss on Disposal of Fixed Assets 36,000
Machinery 90,000
Cash 111,000

(b) Accumulated Depreciation-Machinery 50,000

Machinery 111,000
Machinery 90,000
Cash 71,000

DIF: Difficult OBJ: 09-03

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  487

19. Equipment acquired at a cost of $126,000 and a book value of $42,000. Journalize the disposal of
the equipment under the following independent assumptions.
(a) The equipment had no market value and was discarded.
(b) The equipment is sold for $53,000.
(c) The equipment is sold for $27,000.
(d) The equipment is traded-in for a similar asset. The list price of the new equipment is
$63,000.

Journal
Post
Date Description Ref Debit Credit
488  Chapter 9/Fixed Assets and Intangible Assets

ANS:

Journal
Post
Date Description Ref Debit Credit
(a) Loss on Disposal of Fixed Asset 42,000
Accumulated Depreciation - Equip 84,000
Equipment 126,000

(b) Cash 53,000

Accumulated Depreciation - Equip 84,000
Equipment 126,000
Gain on Disposal of Fixed Asset 11,000

(c) Cash 27,000

Accumulated Depreciation - Equip 84,000
Loss on Disposal of Fixed Asset 15,000
Equipment 126,000

(d) Equipment (new Equipment) 42,000

Accumulated Depreciation - Equip 84,000
Equipment (old equipment) 126,000

DIF: Moderate OBJ: 09-03

NAT: AACSB Analytic | AICPA FN-Measurement

20. Prepare the following journal entries and calculations:

(a) A patent that was acquired for $450,000 at the beginning of the current year expires in 15
years and is expected to have value for 4 years. Present the adjusting entry to amortize the
patent for the current year.
(b) Mineral rights on an ore deposit estimated at 4,000,000 tons of ore were acquired for
$2,800,000. Present the adjusting entry to record depletion for the current year, during
which 350,000 tons of ore were removed.
(c) Legal costs incurred to defend the rights that a patent provided were $75,000. At the time
the patent had been in existence for 5 years. Determine the amount to be amortized for the
current fiscal year.
ANS:
(a) Amortization Expense-Patents 112,500
Patents 112,500
($450,000 ÷ 4)

(b) Depletion Expense 245,000

Accumulated Depletion 245,000
(350,000  $.70)

(c) $5,000 ($75,000 ÷ 15)

DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  489

21. My Oil Co. acquired drilling rights for $6,500,000. The oil deposit is estimated at 32,500,000
gallons. During the current year, 2,000,000 gallons were drilled. Journalize the adjusting entry at
December 31, 2007 to recognize the depletion expense.

Journal
Post
Date Description Ref Debit Credit

ANS:

Journal
Post
Date Description Ref Debit Credit
Dec 31 Depletion Expense 400,000*
Accumulated Depletion 400,000

*Depletion rate = cost / estimated size

Depletion rate = 6,500,000/32,500,000
Depletion rate = .2

Depletion expense = depletion rate  quantity extracted

Depletion expense = .2  2,000,000
Depletion expense = $400,000
DIF: Moderate OBJ: 09-05
NAT: AACSB Analytic | AICPA FN-Measurement
490  Chapter 9/Fixed Assets and Intangible Assets

22. On July 1, 2008, HIJ Co. acquired patents rights for $60,000. The patent has a useful life of 8 years
and a legal life of 15 years. Journalize the adjusting entry on December 31, 2008 to recognize the
amortization.

Journal
Post
Date Description Ref Debit Credit

ANS:

Journal
Post
Date Description Ref Debit Credit
Dec 31 Amortization Expense 7,500
Patents 7,500

DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement

23. On December 31 it was estimated that goodwill of $67,000 was impaired. In addition, a patent with
an estimated useful economic life of 10 years was acquired for $120,000 on July 1.

(a) Journalize the adjusting entry on December 31 for the impaired goodwill.
(b) Journalize the adjusting entry on December 31 for the amortization of the patent
rights.

ANS:
(a)
Loss from Impaired Goodwill 67,000
Goodwill 67,000
(b)
Amortization Expense - Patents 6,000
Patents 6,000

DIF: Moderate OBJ: 09-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 9/Fixed Assets and Intangible Assets  491

24. Computer equipment was acquired at the beginning of the year at a cost of $56,000 that has an
estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the depreciation
expense for the five years using the sum-of-the-years-digits depreciation method.
ANS:
Year 1 (53,000*5/15) 17,667
Year 2 (53,000*4/15) 14,133
Year 3 (53,000*3/15) 10,600
Year 4 (53,000*2/15) 7,067
Year 5 (53,000*1/15) 3,533

DIF: Moderate OBJ: 09-App

NAT: AACSB Analytic | AICPA FN-Measurement