1. In which of the following situations should the named company not record any depreciation expense on the asset described?
a. Commuter Airline is required by law to maintain its aircraft in “as good as new” condition.
b. Metro Advertising owns an office building that has been increasing in value each year since it was purchased.
c. Computer Sales Company has in inventory a new type of computer, designed “never to become obsolete.”
d. None of the above answers is correct—in each case, the named company should record depreciation on the asset described.
2. Which of the following statements is (are) correct?
a. Accumulated depreciation represents a cash fund being accumulated for the replacement of plant assets.
b. The cost of a machine includes the cost of repairing damage to the machine during the installation process.
c. A company may use different depreciation methods in its financial statements and its income tax return.
d. The use of an accelerated depreciation method causes an asset to wear out more quickly than does use of the straight-line method.
3. On April 1, 2014, Sanders Construction paid $10,000 for equipment with an estimated useful life of 10 years and a residual value of $2,000. The company uses the double-declining-balance method of depreciation and applies the half-year convention to fractional periods. In 2015, the amount of depreciation expense to be recognized on this equipment is:
a. $1,600.
b. $1,440.
c. $1,280.
d. Some other amount.
4. Evergreen Mfg. is a rapidly growing company that acquires equipment every year. Evergreen uses straight-line depreciation in its financial statements and an accelerated method in its tax returns. Identify all correct statements:
a. Using straight-line depreciation in the financial statements instead of an accelerated method reduces Evergreen’s reported net income.
b. Using straight-line depreciation in the financial statements instead of an accelerated method increases Evergreen’s annual net cash flow.
c. Using an accelerated method instead of straight-line depreciation in income tax returns increases Evergreen’s cash flow from operating activities.
d. As long as Evergreen keeps growing, it will probably report more depreciation in its income tax returns each year than it does in its financial statements.
5. Ladd Company sold a plant asset that originally cost $50,000 for $22,000 cash. If Ladd correctly reports a $5,000 gain on this sale, the accumulated depreciation on the asset at the date of sale must have been:
a. $33,000.
b. $28,000.
c. $23,000.
d. Some other amount.
6. In which of the following situations would Daniel Industries include goodwill in its balance sheet?
a. The fair market value of Daniel’s net identifiable assets amounts to $2,000,000. Normal earnings for this industry are 15 percent of net identifiable assets. Net income for the past five years has averaged $390,000.
b. Daniel Industries acquired Baxter Electronics at a price in excess of the fair market value of Baxter’s net identifiable assets.
c. Daniel Industries spent $800,000 during the current year for research and development for a new product that promises to generate substantial revenue for at least 10 years.
d. A buyer wishing to purchase Daniel’s entire operation has offered a price in excess of the fair market value of the company’s net identifiable assets.