Acct 2121 BAP Exam 3 Review (Solutions) Pg 1 of 17 Beta Alpha Psi Practice Questions (Solutions) Accounting 2121 Exam 3 Chapter 8 1. What is the difference between a capital expenditure and a revenue expenditure? Capital expenditures are those that are included in the cost of a plant asset (example: initial acquisition) while revenue expenditures are expensed immediately (example: repair expense). 2. How would you record the following expenditures? You may use options more than once. A Capitalize to Equipment account B Expense C Capitalize to Land account D Capitalize to Land Improvement account E Capitalize to Building account C Purchase price of land C Cost to demolish a building in order to get land ready for intended use A Fair value of asset given up to acquire equipment A Cost of shipping equipment to our warehouse upon purchase E Interest paid during construction of building D Amount paid to install a parking lot B Amount paid to repair roof 5 years after purchase (does not increase efficiency or life of building) E Amount paid to repair roof immediately after purchase of building, to get building ready for its intended use B Cost of annual vehicle registration A Cost to test equipment when purchased C Cost to drain land when purchased A Cost to paint and letter a vehicle 3. If a firm improperly capitalizes a revenue expenditure, what is the effect on net income? Net income will be overstated if a revenue expenditure is capitalized. 4. On which financial statement will you find Equipment? At what value is it reported? Equipment is listed in the Property, Plant and Equipment section of the Balance Sheet. It is reported at book value (cost of the asset less any accumulated depreciation).Acct 2121 BAP Exam 3 Review (Solutions) Pg 2 of 17 5. What is the purpose of recording depreciation? We record depreciation in order to allocate the cost of the asset over the period of time in which it provides benefit. We do NOT record depreciation in an attempt to match the book value with the asset’s fair market value. 6. What is the most common method used to depreciate Land? Trick question! We don’t depreciate Land! 7. XYZ purchases an asset (printer) on 1/1/2024 at a cost of $12,000. The printer has an estimated residual value of $2,000 and an anticipated useful life of 5 years. A. Using the Straight Line method, determine amounts needed in the tables below. Depreciation Expense = ($12,000 – $2,000) / 5 years = $2,000 per year Accumulated Depreciation = Total of all Depreciation Expense to date Book Value = Cost – Accumulated Depreciation Year 1 Year 2 Year 3 Acquisition Cost 12,000 12,000 12,000 Depreciation Expense 2,000 2,000 2,000 Accumulated Depreciation 2,000 4,000 6,000 Book Value 10,000 8,000 6,000 B. Using the Straight Line method, record the adjustment needed for Year 1 depreciation expense. Assets Liab Stockholders’ Equity Date Cash Equipment - Accumulated Depreciation = Liability + C/S + Revenue - (Depreciation) Expense - Div 12/31/24 2,000 2,000 Explanation: Assets = Liabilities + Stockholders’ Equity Accum Depreciation; Increase; 2,000 Depreciation Exp; Increase; 2,000 (Increase Contra Asset) (Decrease Retained Earnings) Decrease Assets; 2,000 Decrease Stockholders’ Equity; 2,000Acct 2121 BAP Exam 3 Review (Solutions) Pg 3 of 17 C. Assume the printer was sold on January 1, Year 3, for $2,500 cash. (i) Using the Straight Line method, calculate the gain or loss on sale of the printer. Sale Proceeds - Book Value = Gain (Loss) 2,500 - 8,000 = -5,500 5,500 loss (ii) Using the Straight Line method, record the transaction for the sale of the printer. Assets Liab Stockholders’ Equity Date Cash Equipment - Accumulated Depreciation = Liability + C/S + Revenue - (Loss on Sale) Expense - Div 1/1/26 2,500 (12,000) (4,000) 5,500 Explanation: Assets = Liabilities + Stockholders’ Equity Cash; Increase; 2,500 Loss on Sale of Equipment; 5,500 Equipment; Decrease; 12,000 (Decrease Retained Earnings) Accum Depreciation; Decrease, 4,000 (Increase Assets) Decrease Assets; 5,500 Decrease Stockholders’ Equity; 5,500 D. Assume instead, that the printer was sold on January 1, Year 3, $10,500. (i) Using the Straight Line method, calculate the gain or loss on sale of the printer. Sale Proceeds - Book Value = Gain (Loss) 10,500 - 8,000 = 2,500 2,500 gain (ii) Using the Straight Line method, record the transaction for the sale of the printer. Assets Liab Stockholders’ Equity Date Cash Equipment - Accumulated Depreciation = Liability + C/S + (Gain on Sale) Revenue - Expense - Div 1/1/26 10,500 (12,000) (4,000) 2,500 Explanation: Assets = Liabilities + Stockholders’ Equity Cash; Increase; 10,500 Gain on Disposal of Equip; 2,500 Equipment; Decrease; 12,000 (Increase Retained Earnings) Accum Depreciation; Decrease, 4,000 (Increase Assets) Increase Assets; 2,500 Increase Stockholders’ Equity; 2,500Acct 2121 BAP Exam 3 Review (Solutions) Pg 4 of 17 8. What is an intangible asset? Provide some examples. Intangible assets provide rights and privileges (benefits) to the firm but do not have physical properties. Examples are: (i) Patents - rights to an invention which last for a 20 year period; (ii) Copyrights - rights to artistic or published works which last for the life of the creator plus 70 years; (iii) Trademarks and trade names - rights to distinctive marks, insignia or jingles which last for a 20 year period but are renewable indefinitely; (iv) Franchises - rights to sell certain products or services; may have definite or indefinite life; (v) Goodwill - the positive difference between what is paid for an entire business
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