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web.groovymark@gmail.com
- December 12, 2024
Question 01
Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. To record the impairment loss, what should be included in the journal entry?
A. A reduction of income from continuing operations by $205,000
B. A $285,000 credit to the asset account
C. An increase in the asset’s Accumulated Depreciation account by $285,000
D. An extraordinary loss of $80,000
Answer: C. An increase in the asset's Accumulated Depreciation account by $285,000
Explanation: Impairment losses are recorded when the carrying amount exceeds the recoverable amount. In this case, the machinery’s fair value is used to calculate the impairment loss, which is the difference between the book value and fair value.
Question 02
Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000. Which amount should Florence recognize as a loss on impairment?
A. $105,000
B. $0
C. $50,000
D. $55,000
Answer: A. $105,000
Explanation: The impairment loss is calculated as the difference between the book value and the fair value, which results in $520,000 - $415,000 = $105,000.
Question 03
When is the restoration of an impairment loss permitted?
A. On all tangible assets whether held for use or disposal
B. On assets being held for disposal
C. On assets held for use
D. On assets that have already been disposed
Answer: B. On assets being held for disposal
Explanation: Restoration of an impairment loss is allowed only when the asset is held for disposal, as its fair value can change before the sale.
Question 04
An asset impairment occurs when the asset’s carrying amount exceeds what amount?
A. Present value of expected future net cash flows
B. Asset’s book value
C. Asset’s fair value
D. Expected future net cash flows
Answer: D. Expected future net cash flows
Explanation: Impairment occurs when the carrying amount of an asset exceeds the sum of expected future net cash flows, which represents the recoverable amount of the asset.
Question 05
What is true about depletion expense?
A. It is usually part of cost of goods sold.
B. It includes tangible equipment costs in the depletion base.
C. It excludes restoration costs from the depletion base.
D. It excludes intangible development costs from the depletion base.
Answer: A. It is usually part of cost of goods sold.
Explanation: Depletion expense is typically included in cost of goods sold because it represents the cost of natural resources used in production.
Question 06
Usually, companies compute depletion for accounting purposes using which method?
A. Units-of-production method
B. Percentage depletion method
C. Decreasing charge method
D. Straight-line method
Answer: A. Units-of-production method
Explanation: The units-of-production method is the most commonly used method for depletion because it matches the expense with the actual use of the natural resource.
Question 07
Porter Resources Company acquired a tract of land containing an extractable natural resource. Porter is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information includes: Land at $7,500,000 and Estimated restoration costs of $1,500,000. If Porter maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?
A. $3.0
B. $2.6
C. $3.2
D. $3.6
Answer: C. $3.2
Explanation: The depletion charge is calculated as (Cost of Land + Restoration Costs - Land Value after restoration) / Total Recoverable Reserves = ($7,500,000 + $1,500,000 - $1,000,000) / 2,500,000 = $3.2 per ton.
Question 08
Depletion is calculated using the units-of-production method. True or False?
Answer: True
Explanation: The units-of-production method is used to calculate depletion because it relates directly to the amount of the resource extracted.
Question 09
If applicable, acquisition, exploration, intangible development, and restoration costs are all included in the depletion base of an asset. True or False?
Answer: True
Explanation: All these costs are part of the depletion base because they represent the costs necessary to bring the asset to its intended use.
Question 10
Depletion expense per ton is calculated as: Cost of Land + Restoration – Land value after restoration / Tons. True or False?
Answer: True
Explanation: This formula is used to determine the cost per unit of a natural resource, which is then multiplied by the amount extracted to calculate depletion expense.
Question 11
Asset turnover ratio divides what by average total assets for the period?
A. Net income
B. Net sales
C. Operating income
D. Gross profit
Answer: B. Net sales
Explanation: The asset turnover ratio measures how efficiently a company uses its assets to generate sales by dividing net sales by average total assets.
Question 12
Asset turnover ratio tells the number of what dollars produced by each dollar invested in assets?
A. Sales
B. Profit
C. Cash
D. Revenue
Answer: A. Sales
Explanation: The asset turnover ratio indicates how much revenue is generated for every dollar invested in assets.
Question 13
How is return on assets computed?
A. Net income divided by ending total assets
B. Net sales divided by average total assets
C. Net income divided by average total assets
D. Net income divided by ending total assets
Answer: C. Net income divided by average total assets
Explanation: Return on assets is calculated by dividing net income by average total assets, which measures how effectively a company uses its assets to generate profit.
Question 14
In 2020, Bargain Shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $75 billion. What is Bargain Shop’s asset turnover?
A. 2.33 times
B. 0.08 times
C. 0.29 times
D. 13.2 times
Answer: A. 2.33 times
Explanation: Asset turnover is calculated as net sales divided by average total assets. In this case, $175 billion / $75 billion = 2.33 times.
Question 15
For 2020, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,000,000, and net income of $200,000. What is Hammer’s return on assets for 2020?
A. 22.20%
B. 20.0%
C. 18.2%
D. 16.0%
Answer: B. 20.0%
Explanation: Return on assets is calculated as net income divided by average total assets. Average assets = ($900,000 + $1,100,000) / 2 = $1,000,000. Return on assets = $200,000 / $1,000,000 = 20.0%.
Question 16
In its 2017 annual report, Crane Manufacturing Company reports beginning-of-the-year total assets of $2,682,000, end-of-the-year total assets of $2,883,000, total sales of $4,726,000, and net income of $785,000. What is Crane’s Profit Margin on Sales?
A. 40.13%
B. 16.61%
C. 28.21%
D. 28.20%
Answer: B. 16.61%
Explanation: Profit margin on sales is calculated as net income divided by net sales. In this case, $785,000 / $4,726,000 = 16.61%.
Question 17
What is true regarding a general description of the depreciation methods applicable to major classes of depreciable assets?
A. It is not a current practice in financial reporting to report depreciation.
B. It is necessary to include depreciation in corporate financial statements or notes thereto.
C. It is not essential to a fair presentation of financial position to report depreciation.
D. It is necessary to report depreciation in financial reporting only when company policy differs from income tax policy.
Answer: B. It is necessary to include depreciation in corporate financial statements or notes thereto.
Explanation: Depreciation is an important component of financial reporting and is required to be disclosed in financial statements or the accompanying notes.
Question 18
How do you calculate the asset turnover ratio?
A. Net sales divided by ending total assets
B. Net income divided by average total assets
C. Net sales divided by average total assets
D. Net income divided by ending total assets
Answer: C. Net sales divided by average total assets
Explanation: The asset turnover ratio is a measure of how efficiently a company uses its assets to generate sales, calculated as net sales divided by average total assets.
Question 19
What is the book value of a plant asset equal to?
A. The balance of the related accumulated depreciation account
B. The fair market value of the asset at a balance sheet date
C. The assessed value of the asset for property tax purposes
D. The asset’s acquisition cost less the total related depreciation recorded to date
Answer: D. The asset's acquisition cost less the total related depreciation recorded to date
Explanation: The book value is the original cost of an asset minus the accumulated depreciation.
Question 20
This method assumes that depreciation is a function of use or productivity instead of the passage of time.
A. Straight-line method
B. Sum-of-the-years’-digits method
C. Units-of-production method
D. Declining balance method
Answer: C. Units-of-production method
Explanation: The units-of-production method assumes depreciation is based on the actual usage or productivity of the asset, rather than the passage of time.
