Financial accounting, 7e harrison/horngren test item file


1.  ——–are accounted for as long-term assets when purchased or developed, and their cost is transferred to expense through a process called depletion.

A) Intangible assets

B) Franchises

C) Natural resources

D) Trademarks


2. On July 16, 2013, Martsen and Company made the following journal entry:

Accounts Receivable $ 25,000 Sales Revenue $ 25,000 Cost of Goods sold $ 10,000 Merchandise Inventory $ 10,000

What is the Gross Profit from this sale?

A. $ 10,000

B. $ 15,000

C. $ 25,000

D. $ 0


3. Using the Martsen and Company information above, Martsen and Company is using the Inventory system.

A. Periodic

B. Perpetual




4. The choice of an inventory costing method will affect:

A) The ending inventory.

B) The cost of goods sold.

C) The ending inventory and cost of goods sold.

D) None of the above.


5. When inventory prices are increasing, the FIFO costing method will generally yield a cost of goods sold that is:

 A) Higher than cost of goods sold under the LIFO method.

B) Lower than cost of goods sold under the LIFO method.

C) Equal to the gross profit under the LIFO method.

 D) Equal to cost of goods sold under the LIFO method.


6. If prices are rising and a company is using LIFO, large purchases of inventory near the end of the year will

A. increase income taxes paid.

B. decrease income taxes paid.

C. not changes the value of ending inventory.

D. does none of the above.


7. The accounting principle that states that a business should use the same accounting methods and procedures from-period to period is the:

A. Consistency principle.

B. Historical cost principle.

C. Disclosure principle.

D. Conservatism principle.

8. Company A has inventory at the end of the year with a cost of $75,000. Under the LCM rules, the value of the inventory is $72,600.The journal entry to record the write-down to LCM will:

A. increase cost of goods sold and increase ending inventory.

B. increase cost of goods sold and decrease ending inventory.

C. decrease cost of goods sold and decrease ending inventory.

D. decrease cost of goods sold and increase ending inventory.


9. Tonga Industries reported the following

 Net Sales $450,000

Cost of goods sold $360,000

 Operating expenses $60,000

Tax Rate 40%

The gross profit percentage is:

A. 80%.

B. 60%.

C. 32%.

D. 20%.


10. Olive Oil Company has the following information:

Beginning inventory $170,000, Net sales $800,000, Net purchases $430,000, Gross profit rate 45%

Olive Oil estimated ending inventory is:

A. $160,000.

B. $200,000.

C. $240,000.

D. $360,000.


11. Land, buildings and equipment are acquired for a lump sum of $875,000. The market values of the three assets are, respectively, $200,000, $500,000 and $300,000. What is the cost assigned to the equipment?

A. $250,000

B. $262,500

C. $300,000

D. $342,857


12. Morton Corporation purchased equipment for $46,000. Morton also paid $1,200 for freight and insurance while the equipment was in transit. Sales tax amounted to $850. Insurance, taxes and maintenance for the first year of use was $1,000. How much should Morton Corporation capitalize as the cost of the equipment?

A. $46,000

B. $46,850

 C. $ 48,050

D. $49,050


13. On June 1, Puff’s Trucking Company paid $3,000 to overhaul the engine on a delivery truck to allow it to be used for two additional years. It also paid $75 for an oil change on the truck. Which of the following statements is true?

A) The $3,000 is a capital expenditure and the $75 is an expense.

B) The $3,000 is an expense and the $75 is a capital expenditure.

 C) Both items are capital expenditures.

D) Both items are expenses.


14. At the end of an asset’s useful life, the balance in Accumulated Depreciation will be the same as the:

A. tax liability.

B. book value.

C. residual value.

D. depreciable cost


15. On January 2, 2010, KJ Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. If KJ Corporation uses the units of production method of depreciation, what will be the debit to Depreciation Expense for the year ended December 31, 2011—assuming that during this period, the asset was used 8,250 hours?

A. $48,000

B. $49,500

 C. $51,500

D. $53,625



16. On January 2, 2013, KJ Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the balance in Accumulated Depreciation on December 31, 2014, if KJ Corporation uses the straight-line method of depreciation?

A. $96,000

B. $49,500

 C. $51,500

D. $53,625


17. On January 2, 2013, KJ Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. What is the book value of the asset on December 31, 2014, if KJ Corporation uses the straight-line method of depreciation?

A. $80,000

B. $96,000

C. $104,000

D. $164,000




18. Jackson Corporation acquired equipment on January 1, 2013, for $320,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2016, Jackson Corporation revised the total useful life of the equipment to 8 years and the estimated salvage value to be $20,000. Compute depreciation expense for the year ending December 31, 2016, if Jackson Corporation uses straight-line depreciation.

A. $26,477

B. $39,300

C. $42,300

D. $46,300


19. Equipment acquired on January 1, 2013, is sold on June 30, 2016, for $11,200. The equipment cost $26,800, had an estimated residual value of $6,800, and an estimated useful life of 5 years. The company prepared financial statements on December 31, and the equipment has been depreciated using the straight-line method. Prior to determining the gain or loss on the sale of this equipment, the company should record depreciation of:


A. $2,000

B. $5,000

C. $31,700

D. nothing; no entry is required


20. Great Farms Company sold some fully depreciated equipment for $4,100 cash. The equipment had been purchased for $49,600, and the company had estimated the useful life at 8 years and a residual value at $5,600. How will this sale affect Net Income?

A) It will decrease Net Income by $44,000.

B) it will decrease Net Income by $1,500.

C) It will increase Net Income by $4,100.

D) It will have no effect on Net Income.


21. Which of the following statements regarding intangible assets is NOT true?

A) Intangible assets are long-lived assets with no physical form.

B) Intangible assets are recorded at their acquisition cost.

C) Intangible assets with a finite life are not amortized.

D) Intangible assets with an indefinite life are not amortized.


22. Godert Pharmaceutical Company has many scientists working in the labs trying to develop an anti-aging drug. The cost of this research and development must be:

A) Expensed as incurred.

B) set up as an intangible asset and amortized over 20 years.

 C) Set up as an intangible and tested for impairment on a yearly basis

D) Not be handled in any of the above ways.


23. Needles Company purchased Boston Company on August 31, 2013. Needles recorded goodwill in the purchase of Boston and has determined that the Boston goodwill will have an indefinite life. How will Needles account for the Boston goodwill in future accounting periods?

A) Needles will amortize the Boston goodwill over a 50-year life.

B) If the value of the Boston goodwill increases in subsequent years, Needles will increase the value in the Boston Goodwill account.

C) If the value of the Boston goodwill decreases in subsequent years, Needles will decrease the value in the Boston Goodwill account.

 D) Needles is not allowed to change the value of the Boston Goodwill account regardless of any future increase or decrease in the value of Boston goodwill.


24. Tomas Company trades in a printing press for a newer model. The cost of the old printing press was $61,500, and accumulated depreciation up to the date of the trade-in amounts to $38,000. The company also pays $41,200 cash for the newer printing press. The journal entry to acquire the new printing press will require a debit to Equipment for:

A) $41,200.

B) $61,500.

C) $64,700.

D) $102,700.


25. (14 points) Marty Blum is the controller for Hedgehog, Inc. and needs your help. Marty has the following information for April 2013:

·         Sales $80,000

·         Beginning inventory $15,000

·         Cost of goods $56,000

·         Purchases $65,000

·         Sales discounts $ 5,000

·         Purchase discounts $13,000

·         Operating expenses $18,000.

·         Tax rate 40%

Prepare an income statement for Hedgehog, Inc. for the month ending April, 2013.

What is the Ending inventory amount for Hedgehog, Inc. for April 2013?


26. (16 points) The following data was obtained from the records of Bitter Inc., for 2013:

·         0 I /01         Beginning inventory 110 units @ $10

·         02/15          Purchase 200 units @ $12

·         04/22          Purchase 125 units @ $13

·         07/19          Purchase. 90 units @ $14

·         12/31         Ending inventory 75 units



1. Calculate the value of the ending inventory and the cost of goods sold using:

a)      FIFO.

b)      LIFO.

c)       Average-cost.


27. (14 points) The following transactions occurred for Melissa’s Fine Jewellery Store during the year:

a)       Purchased 10 exquisite necklaces on account at $5,000 apiece

b)       Sold three of the necklaces on account at $8,000 each

c)        Melissa paid off the accounts payable

d)      Melissa collected all of the accounts receivable



1. Journalize these transactions for Melissa’s Fine Jewellery Store, which uses the perpetual inventory system.

2. What will Melissa’s Fine Jewellery Store report on the Balance Sheet at the end of the year?

3. Compute the gross profit for Melissa’s Fine Jewellery Store.


28. (8 points) On January 2, 2013, KJ Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated residual value is $80,000. Prepare the depreciation schedule if KJ Corporation uses the double-declining-balance method of depreciation?

Extra credit:


1. Which method of depreciation and inventory that would give the best tax benefit?


2. Which methods would give the best financial statement effect?


3. How do inventory costing methods and depreciation methods affect a company over time?


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