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The Effect of Amortization Topic 8

Determine the effect on a company’s Assets and Net Income from the following transaction: a patent is amortized at year end.

Assets Net Income
A Decreased Decreased
B Decreased No effect
C Increased No effect
D Increased Increased
E None of the above

The Effect of Capital vs Revenue Expenditures Topic 8

If an expenditure is treated as a revenue expenditure, instead of as a capital expense, which of the following statements is true?

  1. The current year’s net income will be higher and future depreciation expense will be higher.
  2. The current year’s net income will be lower and future depreciation expense will be higher.
  3. The current year’s net income will be higher and future depreciation will be lower
  4. The current year’s net income will be lower and future depreciation will be lower.
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Calculating Depreciation using DDB Topic 8

The following is available for a company’s machine on December 31, Year 1:

Cost 6,000 Method Double Declining Balance
Salvage Value 1,500 Purchased January 1, Year 1
Accumulated Depreciation 2,400 Expected Life 5 years
How much depreciation expense will be recorded in Year 3?
  1. $864
  2. $1,824
  3. $1,164
  4. $840
  5. $660

Change in Depreciation Topic 8

The following is available for a company’s machine on January 1, Year 3:

Cost 38,000 Method Straight-line
Salvage Value 6,000 Purchased January 1, Year 1
Accumulated Depreciation 8,000 Expected Life 8 years

On January 1, Year 3 a major overhaul was made on the machine costing $5,000 and the total estimated useful life was extended 4 years. Depreciation expense for year the year ending December 31, Year 3 is:

  1. $3,000
  2. $2,900
  3. $3,200
  4. $3,700
  5. $3,100
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Failure to Record Depreciation Topic 8

Failure to record depreciation expense for the year has what affect on the following:

Assets Liabilities Stockholder’s Equity
1 Overstated No Effect Overstated
2 Understated Understated Understated
3 No Effect No Effect No Effect
4 Understated No Effect Understated
5 Overstated Overstated No Effect
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