1. b

All costs should be capitalized in the machinery account except for the lubrication costs and the worn belt cost, both of which would be repairs and maintenance expenses.

2. a

Yearly depreciation on the car is calculated by dividing the cost less salvage by the useful life or ($25,000 – $1,000) ¸ 5 years or $4,800 per year or $400 per month. If the car was purchased on February of the previous year and it is now December 31, the accumulated depreciation after this 23 months of use would be 23 ´ $400 or $9,200. The book value would be equal to the cost $25,000 less accumulated depreciation $9,200 or $15,800.

3. c

Since the equipment was purchased in 1999, accumulated depreciation must be the sum of depreciation expense for 1999 and 2000 or a total of $8,000. The equipment account per the financial statements is shown net which means that the accumulated depreciation has already been subtracted from the historical cost. Since the net amount is $42,000 and accumulated depreciation is $8,000, the original cost must have been $50,000.

4. b

Yearly depreciation on the car is $4,800 per the income statement in 2000. Note the problem states that the equipment was not retired during 2000 so the $4,800 must be for the full year. This would mean that monthly depreciation must be $400. Accumulated depreciation so far is $4,800 + $3,200 or $8,000 which means the equipment must be 20 months old calculated by dividing the accumulated depreciation of $8,000 by the monthly depreciation of $400.

5. d

The total appraisal amount is $600,000 for both the land and the building. Land represents 25% of the appraisal amount calculated by dividing $125,000 by $600,000 so the land gets 25% of the cost of $500,000 or $125,000. Building represents 75% of the appraisal amount calculated by dividing $425,000 by $600,000 so the building gets 75% of the cost of $500,000 or $375,000.

6. a

The amount of depreciation expense must be disclosed in the footnotes if not stated in the body of the financial statements.

7. d

The amount of cash paid at the time the asset is acquired is shown as a decrease to cash from an investing activity or $10,000 decrease in this case.

8. c

The companies record more depreciation in the early life of the asset and less depreciation in the later years then they would using the straight line method. Total depreciation over the life of the asset is the same for both methods.

9. c

This is the false statement. The term book value means cost less accumulated depreciation.

10. b

Salvage value has nothing to do with the decision process to determine the useful life.

11. a

The entry to record the annual depreciation would be for $1,000 calculated by dividing $10,000 by 10 years. The entry would be a (1,000) in accumulated depreciation and (1,000) in retained earnings described as depreciation expense

12. b

If the bookkeeper forgot to record depreciation, that means that assets would be overstated, and that owners' equity (retained earnings) would be too high as well. Liabilities would not be affected.