1. (CMA adapted, Dec 88 #15) Lambert Company acquired a machine on October 1, Year 6, that was placed in service on November 30, Year 6. The cost of the machine was $63,000, of which $20,000 was given as a down payment. The remainder was borrowed at 12 percent annual interest. Additional costs included $2,500 for shipping, $4,000 for installation, $3,000 for testing, and interest on the borrowed funds of $1,290. How much should be reported in the machine account on Lambert Company's Statement of Financial Position as of November 30, Year 6 for this acquisition?

a. $63,000
b. $69,500
c. $72,500
d. $73,790

2. A manufacturing firm decided to construct a new warehouse facility. At the beginning of Year 3, the firm borrowed $500,000 at 10% and internally financed the remainder. The firm had other borrowing of $2,000,000 at an average rate of 11%. The average balance of the warehouse-under-construction account during the year is $800,000. How much interest is capitalized to the warehouse-under-construction account for Year 3?

a. $83,000
b. $80,000
c. $50,000
d. none of the above

3. In calculating depreciation for all years of an asset's life, which method(s) ignores the estimate of a salvage value for the asset?

a. sum-of-the-years' digits
b. declining balance
c. accelerated cost recovery system
d. both (b) and (c)

4. Which method of depreciation will result in the greatest depreciation charge in the last year of the asset's life?

a. MACRS
b. straight-line
c. 150% declining balance
d. sum-of-the-years' digits

5. (CMA adapted, Jun 90 #27) When a fixed plant asset with a five-year estimated useful life is sold during the second year, how would the use of a decreasing charge method of depreciation instead of the straight-line method affect the gain or loss on the sale of the fixed plant asset?

a.

Gain	Loss
Increase	Increase

b.

Gain	Loss
Increase	Decrease

c.

Gain	Loss
Decrease	Increase

d.

Gain	Loss
Decrease	Decrease

6. In Year 1, a firm purchased a truck for $12,000. The estimated salvage value was $2,000 and the estimated useful life was 10 years. In Year 4, it was determined that the salvage value would only be $1,000 and that the truck would have a total estimated useful life of 7 years rather than 10. Assuming the straight-line method is used, what is the depreciation expense for Year 4 of the truck?

a. $1,000
b. $1,750
c. $1,950
d. $2,000

7. Repairs and maintenance do not include

a. the costs of restoring an asset's service potential after breakdowns
b. expenditures that increase the asset's life
c. routine costs such as for cleaning and adjusting
d. major tune-ups including labor and parts

8. Which of the following is not capitalized as an intangible asset?

a. costs of an internally developed patent
b. legal costs to defend a patent successfully
c. goodwill acquired when company purchased another company
d. costs to purchase a patent

9. The Purple Company spent $300,000 on research and development during Year 8 to generate new product lines. One of the three projects resulted in a successful patented product while the other two projects resulted in unsuccessful efforts. How much of the $300,000 should be recognized as an expense in Year 8?

a. $300,000
b. $200,000
c. $100,000
d. $0

10. A software development firm currently expenses all software development costs in the year incurred. This firm is now contemplating the desirability of capitalizing software development costs incurred after a software development project reaches commercial feasibility and then subsequently amortizing the capitalized costs over the expected period of benefit. The firm wishes to know which of the following statements about the effect of such a capitalization policy on the financial statements (relative to continuing to expense all software development cost when incurred) is correct (ignore income tax effects)?

a. Total assets turnover will be higher.
b. Debt-equity ratio will be higher.
c. Cumulative net income from the time of the switch to at any point in the future will be lower.
d. Cash flow from operations divided by average total liabilities will be higher.

(c) 2003 South-Western, All Rights Reserved