Exam 4 Chapter 8 and 9

On November 1, GrubStop Company's sells $5,000 of groceries to PD Grocers, terms 2/10, n/30. PD Grocers uses GrubStop's credit card to complete the transaction.
A. $5,000 credit to Accounts Receivable
B. $4,704 credit to Accounts Receivable
C. $5,000 debit to Accounts Receivable
D. None of the above

C. $5,000 debit to Accounts Receivable
Accounts Receivable: 5000
Sales Revenue: 5000

On November 3, PD Grocers returns $200 of the groceries to GrubStop. On November 3, GrubStop's required entry includes a
A. $200 credit to Sales Revenue
B. $200 credit to Accounts Receivable
C. $200 debit to Sales Revenue
D. None of the above

B. $200 credit to Accounts Receivable
Sales Returns and Allowances: 200
Account Receivable: 200

On November 11, PD pays Grubstop for the purchased groceries
A. $4,704 credit to Accounts Receivable
B. $4,800 credit to Accounts Receivable
C. $96 credit to Sales Discount
D. None of the above

B. $4,800 credit to Accounts Receivable
Cash: 4704
Sales Discount: 96
Accounts Receivable: 4800

What is the write off for uncollectible accounts?

Bad Debts Expense: debit
Receivable: credit

What is Bad Debts Expense categorized as?

selling expense

When do you record bad debt expense in the direct write off?

If a particular account is deemed uncollectible

Why is direct write off approach inconsistent with GAAP?

Violates expense recognition principle

Fia's Furniture Store sells $25,000 of goods and accepts a U.S. Bank Visa card that charges a 2% service fee. If Fia's uses a periodic system, the required entry includes a
A. $25,000 debit to Accounts Receivable
B. $500 credit to Service Charge Expense
C. $24,500 debit to Cash
D. None of the above

C. $24,500 debit to Cash
Cash: $24,500
Service Charge Expense: 500
Sales Revenue: 25,000

Accounts Receivable: 100
AFDA: 30
Accounts Receivable, net: 70
If AFDA has an unadjusted credit balance of $5 at the end of the period, the required adjusting entry includes
A. $25 debit to Bad Debts Expense
B. A $25 credit to Accounts Receivable
C. Both (A) and (B) are correct
D. None of the above

A. $25 debit to Bad Debts Expense
Bad Debts Expense: $25
AFDA: 25
Do this to make the AFDA $30 as shown above

Crest Company estimate that $3000 of its $12,000 end of the period accounts receivable balance will be uncollectible. If the AFDA has a $1200 debit balance, the adjustment to record bad debts for the period includes a
A. debit to Bad Debts Expense for $3,000
B. debit to Bad Debts Expense for $4,200
C. debit to Bad Debts Expense for $1,800
D. credit to AFDA for $4,000

B. debit to Bad Debts Expense for $4,200

What is the total interest on a $25,000, 10%, 1-year note receivable?
A. $2,500
B. $25,900
C. $27,500
D. $25,000

A. $2,500
25,000 times .1 times (12/12)= 2500

What is total interest on a $21,000, 6%, 60-day note receivable (use 360 days for calculation)
A. $630
B. $1260
C. $420
D. $210

D. $210
21,000 times .06 times (60/360) = 210

What is the total interest on a $21,000, 2%, 10-month note receivable is
A. $420
B. $4200
C. $350
D. None of the above

C. $350

A local restaurant purchases dishwasher-safe plates and a
vacant lot that is held for resale. The restaurant installs a
cobblestone walkway leading to the front door of the
restaurant.
Which item below lists all the plant assets that appear on
the restaurant’s balance sheet following the purchase of
the plates and vacant lot and the installation of the
walkway?
a. Equipment and Land
b. Equipment, Land and Land Improvements
c. Land, Land Improvements
d. Equipment and Land Improvements

d. Equipment and Land Improvements

Which of the
following is not
properly classified as
property, plant, and
equipment?
A. Building used as a
factory.
B. Land used in
ordinary business
operations.
C. A truck held for
resale by a car
dealership.
D. Land
improvement,
such as parking
lots and fences.

C. A truck held for
resale by a car
dealership.

Graft Company purchased land for a new parking lot. The company paid a total of $99,000 for the site, which included $24,000 for the lot and $75,000 for an existing building located on the property. Graft planned to demolish the existing building. The paving cost $35,000 and lights to illuminate the new parking area cost $12,000. Graft should
A. record a $24,000 increase in the Land account.
B. record a $47,000 increase in Land Improvements.
C. record a $71,000 increase in the Land account.
D. record a $71,000 increase in Land Improvements.

B. record a $47,000 increase in Land Improvements
35,000 + 12,000= 47,000

Avis Athletic Club paid $32,000 for used
gym equipment for the health club and
received a 10% discount for paying within
the discount period. Avis also paid $200
for shipping, sales tax of $1,500 and $500
to have the equipment cleaned before
installing the equipment in the athletic
club.
A. The $500 cleaning fee is a revenue
expenditure.
B. The $500 cleaning fee is capitalizable.

B. The $500 cleaning fee is capitalizable.
It is capitalizable because it has to be done in order to install the equipment.

Roston Company pays a total of $62,000 to acquire land for a new parking lot. The land has an existing shed that is removed to prior to paving the lot.
Additional costs include:
Removal of shed $ 300
Filling and grading $1,500
Salvage value of shed $120
Broker commission $1,130
Paving of parking lot $10,000
Closing costs $560
What is the capitalizable cost of the land?
A. $62,000.
B. $63,690.
C. $65,610.
D. $65,370

D. $65,370
62,000 + 300 + 1500 - 120 +1130 +560= 65,370

What is Property, Plant and, Equipment (PPE)

Long-term, physical resources
Used in the business
Not intended for resale

What are the 4 plant assets?

Land, Land Improvements, Buildings, Equipment

PPE Plant Assets
Land

A business site

PPE Plant Assets
Land Improvements

physical structures attached to land

What are capital expenditures?

Acquire and improve. Include in cost of plant asset on balance sheet. Cost to acquire asset and get it ready for use. Costs that enhance or improve or extend useful life. Generally significant and infrequent

What are revenue expenditures?
Maintain

record as expenses on income statement. Costs incurred to maintain plant asset. Generally recurring, less significant costs

Capitalizable Costs
Land Examples

purchase price, relator fees, razing fees, subtract salvage, closing costs

Capitalizable Costs
Land Improvements and Equipment examples

purchase price, sales tax, installation, subtract discounts, shipping

Capitalizable Costs
Existing building

purchase price, relator fees, closing costs

Capitalizable Costs
New construction building

construction cost, excavation fees, interests during construction, and architect fees

What is direct write off approach?

Method of accounting for bad debts that involves charging receivable balances to Bad Debts Expenses at the time receivable from a particular company are determined to be uncollectible.

What accounts are debited and credited in the direct write off method?

Debit Bad Debts Expense Credit Accounts Receivable

What is the allowance method?

method of accounting for bad debts that involves estimating uncollectible accounts at the end of the period

What accounts are debited and credited in allowance method?

Debit Bad Debt Expenses, Credit Allowance for Doubtful Accounts

What kind of account is Allowance for Doubtful Accounts?

contra account to Accounts Receivables

What debit and credit entries are done when actual uncollectible are written off for the allowance method?

Debit Allowance for Doubtful Accounts, Credit Accounts Receivable

What happens to Allowance for Doubtful Accounts at the end of the fiscal year?

AFDA is subtracted from Accounts Receivable. AFDA is not closed.

What does a write off of an uncollectible account affect?

reduces Accounts Receivable and Allowance for Doubtful Accounts

What is the journal entry for recovering a bad debt?

Reverse the entry made in writing off the account then journalize the collection in a usual matter

What is cash (net) realizable value?

net amount of a company expects to receive in cash from receivables

What are the five steps to managing accounts receivables?

1. determine to whom to extend credit
2. establish a payment period
3. monitor collections
4. evaluate the liquidity of receivables
5. accelerate cash receipts from receivables when necessary

What is a promissory note?

a written promise to pay a specified amount of money on demand or at a definite time

When can promissory notes be used?

1. when individuals and companies lend or borrow money, 2. when the amount of transactions and credit period exceed normal limits 3. settlement of accounts receivable

What is the equation for straight line depreciation?

Depreciable cost(cost - salvage value) times straight line rate (1/estimated useful life)

How is cost defined in depreciation terms?

All expenditures necessary to acquire the asset and make it ready for intended use

What is the definition of useful life in depreciation terms?

estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence

What is salvage value in depreciation terms?

estimate of the asset's value at the end of its useful life

What type of accounting is depreciation expense recorded?

In accrual accounting

What is the depreciable cost equation?

Cost - Salvage Value

What is the straight line rate equation?

1/useful life

What is the annual depreciation expense equation for straight-line depreciation?

depreciable cost times straight line rate

What is the adjusting entry for straight line depreciation?

Depreciation Expense: debit
Accumulated Depreciation: credit

When is an asset fully depreciated?

When book value= salvage value

what is the units of activity rate equation?

estimated activity over useful life= $/unit

What is the depreciation expense equation for units of activity method?

rate times actual activity during the period

What plant assets cannot be used in units of activity method?

Buildings and furniture

On January 1, 2022, BD Company purchased
equipment for $150,000, paid shipping of $7,000
and paid $20,000 to build a foundation and have
the equipment installed. BD’s records showed an
estimated salvage value of $30,000 and an
estimated useful life of five years. If BD uses
straight-line depreciation, the depreciation expense
for 2022 is
a. $35,400.
b. $29,400.
c. $24,600.
d. $24,000.

b. $29,400.
150,000 + 7,000 + 20,000= 177,000
177,000-30,000= 147,000
147,000 times (1/5) = 29,400

Equipment with a cost of $300,000 has an
estimated salvage value of $20,000 and an
estimated life of 4 years or 10,000 hours. If the
equipment is depreciated using the units-of-
activity method, what is the depreciation
expense if the equipment is used 2,700 hours
during the period?
a. $75,000.
b. $70,000.
c. $75,600.
d. $72,500.

c. $75,600.
300,000 - 20,000 = 280,000
280,000/10,000 hrs = 28
28 times 2700 = 75,600

Depreciable cost equals
a. Cost minus Salvage Value.
b. Cost plus Salvage Value.
c. Cost minus Accumulated Depreciation
d. Cost plus Accumulated Depreciation.

a. Cost minus Salvage Value.

Capital expenditures include
a. the cost of improving a Land Improvement.
b. the cost of maintaining a Land Improvement.
c. Both (a) and (b) are correct.
d. The cost of maintaining equipment.

a. the cost of improving a Land Improvement.

An asset is fully depreciated if
a. book value equals depreciable cost.
b. book value equals salvage value.
c. accumulated depreciation equals depreciable cost.
d. Both (b) and (c) are correct.

d. Both (b) and (c) are correct.
For a fully depreciated plant asset, book value will equal salvage
value and accumulated depreciation will equal depreciable cost.

Which statement below is a true statement?
a. When purchasing delivery equipment, sales taxes should be charged to
Equipment and motor vehicle licenses should be classified as revenue
expenditures.
b. When purchasing delivery equipment, sales taxes should be classified as
revenue expenditures and motor vehicle licenses should be charged to
Equipment.
c. When purchasing delivery equipment, sales taxes and motor vehicle
licenses should be charged to Equipment.
d. When purchasing delivery equipment, sales taxes and motor vehicles
should be classified as revenue expenditures.

a. When purchasing delivery equipment, sales taxes should be charged to
Equipment and motor vehicle licenses should be classified as revenue
expenditures.
Explanation: Capitalizable costs include all costs to acquire a plant asset and get
it ready for use. Sales tax is capitalizable as part of the cost of the equipment.
Recurring costs such as a motor vehicle license are revenue expenditures and are
listed as expenses on the income statement.

Which item below explains the underlying rationale for depreciation?
a. The fair market value of plant assets declines over time.
b. The productivity of plant assets is assumed to decline over time.
c. Plant assets should be retired if the assets are fully depreciated.
d. The likelihood that plant assets will be converted into cash increases over
time.

b. The productivity of plant assets is assumed to decline over time.

Vince Corporation purchases an old warehouse as its training facility. The
warehouse requires some work before the company can use the
building. After replacing the wiring to satisfy code standards and replacing
the roof, the company pays a cleaning company to clean all rooms. Due to the
unclean conditions in the warehouse, the cleaning must be completed to
begin using the building as a training facility. Which of the following
statements is true?
a. The cost of the building will not include the cleaning cost.
b. The cost of the building will include the cost of rewiring, replacing the
roof and cleaning.
c. The cost of the building is the purchase price of the building, while the
additional expenditures are all capitalized as Building Improvements.
d. Costs incurred to rewire the warehouse, replace the roof and clean the
warehouse are classified as revenue expenditures.

b. The cost of the building will include the cost of rewiring, replacing the
roof and cleaning.
Explanation: Costs incurred to acquire a plant asset and get it ready for use are
capitalizable, included in the cost of the plant asset that is shown on the balance
sheet. Here, the warehouse cannot be used until it is rewired, the roof is replaced
and the building is cleaned. These costs are all capitalizable. Note that plant assets
include Land, Buildings, Land Improvements and Equipment. “Building
Improvements” is not a plant asset.

Boston Incorporated pays $10,000 to purchase used welding equipment, $400 to
install the welding equipment, $500 to test the equipment before the equipment
can be used in its manufacturing plant and $1,000 to replace a motor on the
equipment. What is the capitalizable cost of the equipment?
a. $11,900
b. $10,900
c. $10,400
d. $10,000

a. $11,900
Capitalizable costs include the acquisition cost of a plant asset and
costs incurred to get the plant asset ready for use. Capitalizable costs also include
improvements, relatively significant costs that extend the useful life or improve the
plant asset. The cost to replace a motor in equipment is therefore capitalizable.

The units-of-activity method of depreciation
a. applies a depreciation rate that is determined by dividing the cost of an asset
by the total expected activity during the useful life of the asset.
b. results in a constant depreciation rate each period.
c. declining depreciation rate each period.
d. constant amount of depreciation expense each period.

b. results in a constant depreciation rate each period.
Explanation: Under the units-of-activity method, depreciable cost (defined as cost
minus salvage) is divided by total estimated activity over the useful life to determine
the depreciation rate. The rate is then multiplied by actual activity during the
accounting period to calculate depreciation expense. Choice A is incorrect
because depreciable cost, not cost, is divided by the total expected activity during
the useful life in calculating the depreciation rate.

Under the direct write-off method of recording bad debts, an entry to write off a
specific account as uncollectible results in
a. a debit to Accounts Receivable.
b. a credit to Allowance for Doubtful Accounts.
c. a debit to Bad Debts Expense.
d. Both (a) and (b) are correct.

c. a debit to Bad Debts Expense.
Explanation: Under the direct write-off method, the entry to write off a specific
account as uncollectible requires a debit to Bad Debts Expense and a credit to
Accounts Receivable. The account “Allowance for Doubtful Accounts” is not used
if the direct write-off method is applied. Allowance for Doubtful Accounts is only
used under the Allowance Method.

An airline company lists the salvage value of its airplanes as $10,000. The
airline’s salvage value is equal to the
a. cost of the airplanes on the date of purchase.
b. depreciable cost of the airplanes.
c. expected value at the end of the useful life of the airplanes.
d. expected repair costs that will be incurred during the useful life of the
airplanes.

c. expected value at the end of the useful life of the airplanes.
Explanation: Salvage value is defined as the estimated value of a plant asset at
the end of its expected useful life.

Downbeat Company paid $25,000 to purchase land for a new corporate office.
The company paid $1,500 to remove an existing barn from the land, $1,000 to
install an underground sprinkler system and $20,000 to an architect to design the
new corporate office. What is the cost of the Land that is shown on Downbeat
Company’s balance sheet?
a. $25,000
b. $26,500
c. $27,500
d. $47,500

b. $26,500
Explanation: The Land account includes all costs to acquire the land and get it
ready for use, $25,000 and $1,500. The $1,000 installation for the sprinkler
system is a Land Improvement cost (cost to get a physical structure placed on
land ready for use) and the $20,0000 architect fee is part of the Building cost.

Phillips Incorporated uses straight-line depreciation and closes its books
every December 31. On January 1, 2019, Phillips Incorporated purchased
$180,000 of equipment with an estimated salvage value of $30,000 and
an estimated useful life of six years. What is the book value of Phillips
Incorporated’s equipment at December 31, 2020?
a. $180,000.
b. $150,000.
c. $130,000.
d. $50,000.

c. $130,000.
Book Value is Cost minus Accumulated Depreciation. Here, the
problem asks for the book value two years after the purchase of the equipment.
That means that two periods of depreciation have been recorded as of December
31, 2020.
Accumulated Depreciation at December 31, 2020 is determined by calculating
Depreciation Expense and determining total depreciation as of December 31,
2020.
Depreciation Expense = $180,000-$30,000/6 =
$25,000/year Depreciation Expense
Accumulated Depreciation at December 31, 2020 is $25,000 x 2 = $50,000
Now, determine the book value at December 31, 2020:
Cost $180,000 - $50,000 Accumulated Depreciation at Dec. 31, 2020 = $130,000

Which item below is classified as a revenue expenditure?
a. Cost to replace an underground sprinkler system
b. Cost to replace a roof
c. Cost to replace a hinge on a shelving unit
d. All items listed above are revenue expenditures.

c. Cost to replace a hinge on a shelving unit
Explanation: Maintenance costs are considered revenue expenditures and are
shown on the income statement as expenses. Here, the cost to replace a hinge is
a maintenance cost. The cost to replace an underground sprinkler is a capitalizable
cost as a Land Improvement. The cost to replace a roof is a capitalizable cost and
is added to the cost of a Building.

Newtown Arena uses straight-line depreciation and issues financial
statements every December 31. On July 1, 2019, Newtown Arena sells
equipment for $66,000. The equipment originally cost $180,000, had an
estimated useful life of five years and an estimated salvage value of $30,000.
The Accumulated Depreciation account had a balance of $105,000 on January
1, 2019. Newtown Arena’s sale of equipment results in a
a. $9,000 gain on disposal.
b. $6,000 loss on disposal.
c. $9,000 loss on disposal.
d. $6,000 gain on disposal.

d. $6,000 gain on disposal.
Explanation: Proceeds minus book value results in a gain if proceeds exceed book
value. Here, $66,000 is the proceeds.
The book value is Cost – Accumulated Depreciation. Determine accumulated
depreciation as of July 1, 2019. We are given the Accumulated Depreciation
balance at January 1, 2019, so we need to add another six months of depreciation
for the period from January through June 2019.
Annual Depreciation Expense =
(Cost $180,000 – Salvage Value $30,000)/useful life 5 yrs = $30,000/year
Depreciation Expense.
We only need to add ½ year of depreciation to the January 1, 2019, balance so
add $15,000 (1/2 of $30,000) to $105,000 for an Accumulated Depreciation
balance of $120,000 at July 1, 2019. Now, proceeds $66,000 – Book Value
($180,000-$120,000) = $6,000 gain

Hugo’s Brewery sells its old beer brewing equipment and records a gain. This
means that
a. the sales price of the brewing equipment exceeds its book value.
b. sales price of the brewing equipment exceeds the capitalizable cost of
the brewing equipment.
c. the book value of the brewing equipment exceeds the sales price of
the equipment.
d. the sale prices of the brewing equipment the depreciable cost of the
equipment.

a. the sales price of the brewing equipment exceeds its book value.

During the current accounting period, Boyd Company records include the cost of
a revenue expenditure in the cost of Land. As a result,
a. Boyd Company’s net income will be overstated during the current
accounting period.
b. Boyd Company’s net income will be correctly stated during the current
period.
c. Boyd Company’s plant assets will be correctly stated during the current
period.
d. Both (b) and (c) are correct.

a. Boyd Company’s net income will be overstated during the current
accounting period.
Explanation: Revenue expenditures should NOT be included in the cost of plant
assets such as Land. Here, Boyd Company has overstated the cost of Land by
including a revenue expenditure on the balance sheet and understated expenses
on the income statement by not including the revenue expenditure as an
expense on the income statement. Understating expenses results in overstating
net income.

Avis Company’s balance sheet shows Accounts Receivable of $10,000 at the end
of the current period. If the company estimates that 10% of its receivables will
be uncollectible, what is the cash realizable value of the company’s receivables
at the end of the current period?
a. More information is needed to answer this question.
b. $11,000
c. $10,000
d. $9,000

d. $9,000
Explanation: Cash realizable value shows the amount that is estimated as
collectible. Here, cash realizable value is $9,000. Avis Company’s balance sheet
will show the cash realizable value on the balance sheet as shown below.
Accounts Receivable $10,000
Allowance for Doubtful Accounts 1,000
Accounts Receivable, net $9,000
The net amount of the receivable shows the difference between the total
receivable of $10,000 and the amount estimated as uncollectible $1,000
(or 10% x $10,000). The $9,000 cash realizable value shows the amount of the
receivable that Avis Company expects to collect.

Stevenson Company operates a plant that manufactures and sells farm machinery.
The company pays $25,000 to purchase used welding equipment for its
manufacturing plant. The company pays $1,000 to install the equipment and $500
to refurbish the equipment to comply with current regulations. After using the
equipment for one week, Dawson pays $50 to replace a worn part on the welding
equipment. What is the amount of Stevenson’s total capital expenditures?
a. $26,550
b. $26,500
c. $26,000
d. $25,000

b. $26,500
Explanation: Capital expenditures include the acquisition cost of a plant asset and
costs incurred to get the plant asset ready for use and costs that improve or extend
the useful life are capitalizable. All costs except for the $50 replacement of the
worn part are capitalizable. The $50 cost is a revenue expenditure since it is a
maintenance cost.

When an account is written off using the direct write-off approach, the
write-off
a. reduces assets.
b. reduces net income.
c. Both (a) and (b) are correct.
d. does not affect net income.

c. Both (a) and (b) are correct.
Explanation: Under the direct write-off approach, writing off an account results
in an increase in Bad Debts Expense and a decrease in Accounts Receivable. The
increase in Bad Debts Expense reduces net income and the decrease in Accounts
Receivable reduces assets.

Rider Company retires a plant asset and records a loss. The company’s loss will
equal
a. the book value of the plant asset at the date of retirement.
b. the depreciable cost of the plant asset at the date of retirement.
c. the salvage value of the plant asset at the date of retirement.
d. the cost of the plant asset minus the estimated salvage value

a. the book value of the plant asset at the date of retirement.
Explanation: To determine the gain or loss on the disposal of a plant asset, subtract
book value from proceeds. Since proceeds are zero if a plant asset is retired, Any
book value existing at retirement will result in a loss at disposal equal to the book
value of the asset at the date of retirement.

Reed Company acquires land for $105,000 cash. Additional costs are as follow.
Removal of tool shed on the land $ 1,000
Filling and grading 3,000
Salvage value of lumber of shed 640
Real estate agent’s commission 2,260
Outdoor lighting 20,000
23
Attorney fees 1,700
Reed Company will record the land on the balance sheet at
a. $112,320.
b. $113,600.
c. $112,960.
d. $105,000.

a. $112,320.
Explanation: Capitalizable costs that are included in the Land account are costs to
acquire the land and get it ready for use. Here, determine the cost of the land as
follows: $105,000 + $1,000 + $3,000 - $640 + $2,260 + $1,700 = $112,320.
The salvage value of the lumber is subtracted since the lumber is sold as helps to
offset the cost of the land. The outdoor lighting cost is a Land Improvement cost,
not a Land cost.

Smithson Corporation’s unadjusted trial balance includes the following balances
(assume normal balances):
• Accounts Receivable $3,357,000
• Allowance for Doubtful Accounts $ 63,900

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt
expense will the company record?
a. $137,520
b. $201,420
c. $133,686
d. $205,254

a. $137,520
Explanation:
Calculate the bad debt expense recorded in the adjusting entry as the amount by which
the Allowance for Doubtful Accounts must be increased to get from the existing $63,900
balance to the new estimate for uncollectible accounts of $201,420 (.06 x $3,357,000).
The bad debt expense is therefore $137,520, the difference between the new estimate
for uncollectible accounts of $201,420 and the existing $63,900 balance in the
Allowance for Doubtful Accounts.

On September 1, 2021, Barber Company lends Monroe Company $30,000
and accepts a four-month, 6% interest note. If Barber Company uses accrual
accounting and prepares financial statements on September 30, 2021, what
adjusting entry should Barber Company prepare on September 30, 2021?
a. Note Receivable 30,000
Cash 30,000
b. Cash 150
Interest Revenue 150
c. Interest Receivable 450
Interest Revenue 450
d. Interest Receivable 150
Interest Revenue 150

d. Interest Receivable 150
Interest Revenue 15

Laurel Company uses straight-line depreciation. On October 1, 2019, the
company paid $80,000 cash for new equipment. The equipment had an
estimated useful life of five years and an estimated salvage value of $20,000.
What amount of depreciation expense will the Laurel Company record in
2019?
a. $3,000.
b. $16,000.
c. $4,000.
d. $8,000.

a. $3,000
Calculation: $80,000-$20,000/5 = $12,000/year Depreciation Expense
Since the equipment was only owned for 3 months in 2019, we need to multiply by
3/12 to get the Depreciation Expense for 2019.
$12,000 x 3/12 =$3,000

Benson Company uses straight-line depreciation. On January 1, 2019, Benson
Company paid $68,000 for new equipment. Additional costs included
delivery of $2,800 and $8,000 to conduct safety testing prior to using the
equipment at the company. At January 1, 2019, Benson recorded an
estimated salvage value of $12,000 salvage value and an estimated useful life
of five years. What amount of accumulated depreciation will be recorded on
Benson Company’s balance sheet at December 31, 2020?
a. $26,720.
b. $13,360.
24
c. $11,440.
d. $22,880.

a. $26,720
Cost: $68,000+$2,800+$8,000=$78,800
$78,800-$12,000/5=$13,360/year Depreciation Expense
After two years, at December 31, 2020, the Accumulated Depreciation balance will
be $13,360x2=$26,720

On January 1, 2020, Regal Company purchased equipment for $90,000 and
paid $4,200 in delivery charges and $12,000 to have the equipment
installed in its production facility. Regal’s records show a $18,000 estimated
salvage value and an estimated useful life of five years. What amount of
depreciation expense will Regal Company record for the year ending
December 31, 2020, using straight-line depreciation?
a. $21,240.
b. $17,640.
c. $14,760.
d. $14,400.

b. $17,640.
Cost: $90,000 +$4,200 + $12,000= $106,200
($106,200 - $18,000)/5=$17,640/year Depreciation Expense

Return on Assets Equation

Net Income/Average Total Assets

Asset Turnover Equation

Net Sales/Average Total Assets