MULTIPLE CHOICE—Conceptual

21. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.

22. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years

23. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.

24. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to
tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
25. The cost of land does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.

26. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.

27. If a corporation purchases a lot and building and subsequently tears down the building and uses the property
as a parking lot, the proper accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.

28. The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge
to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.

29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
S30. Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of
the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their original historical cost.
 c. historical cost involves actual transactions and, as such, is the most reliable basis.
d. gains and losses should not be anticipated but should be recognized when the asset is sold.
S31. To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its
own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
32. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead

33. Which of the following assets do not qualify for capitalization of interest costs incurred during construction of
the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their intended use.

34. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.

35. When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if expenditures for asset construction
had not been made.
d. that portion of average accumulated expenditures on which no interest cost was incurred.

36. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have begun.

37. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be
debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual interest cost
incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily invested, any
interest earned should be offset against interest cost incurred when determining the amount of interest
cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest
rate by the amount of average accumulated expenditures on qualifying assets during the period.
38. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to
multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.

39. When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess
funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest
earned on these temporary investments should be
a. offset against interest cost incurred during construction.
 b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
d. recognized as revenue of the period.

40. Interest cost that is capitalized should

a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over a 40-year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of these.
S41. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a
qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company's cost of capital.
d. Activities that are necessary to get the asset ready for its intended use are in progress.
S42. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has
commercial substance is usually recorded at
a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain
(smallest loss) to the company.
P43. The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the
exchange. The exchange is not expected to cause a material change in the future cash flows for either entity.
If a gain on the disposal of the old asset is indicated, the gain will
a. be reported in the Other Revenues and Gains section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner's capital account.

44.Plant assets purchased on long-term credit contracts should be accounted for at

a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.

45. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured
by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. market value of the stock.

46. When a closely held corporation issues preferred stock for land, the land should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.

47. Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of
plant assets except when the exchange has
a. no commercial substance and additional cash is paid.
b. no commercial substance and additional cash is received.
c. commercial substance and additional cash is paid.
d. commercial substance and additional cash is received.

48. For a nonmonetary exchange of plant assets, accounting recognition should not be given to
a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
 c. part of a gain when the exchange has no commercial substance and cash is paid.
d. part of a gain when the exchange has no commercial substance and cash is received.

49. When an enterprise is the recipient of a donated asset, the account credited may be a
a. paid-in capital account.
b. revenue account.
c. deferred revenue account.
d. all of these.

50. A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on
the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. one dollar (since the site cost nothing but should be included in the balance sheet).
d. the value assigned to it by the company's directors.

51. In order for a cost to be capitalized (capital expenditure), the following must be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased.
d. Any one of these.

52. An improvement made to a machine increased its fair market value and its production capacity by 25% without
extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.

53. Which of the following is a capital expenditure?

a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of Federal income taxes
d. None of these

54. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
P55. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully
expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner intended
d. Expenditure made to add new asset services
S56. An expenditure made in connection with a machine being used by an enterprise should be
a. expensed immediately if it merely extends the useful life but does not improve the quality.
b. expensed immediately if it merely improves the quality but does not extend the useful life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine.
S57. When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an
extraordinary item on the income statement if it resulted from
a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
b. a sale prior to the completion of the estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.

58. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
 a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.

59. Which of the following statements about involuntary conversions is false?

a. An involuntary conversion may result from condemnation or fire.
b. The gain or loss from an involuntary conversion may be reported as an extraordinary item.
c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests
in replacement assets.
d. All of these.

MULTIPLE CHOICE—Conceptual

21. The following is true of depreciation accounting.

a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.

22. Which of the following principles best describes the conceptual rationale for the methods of matching
depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

23. Depreciation accounting

a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.
S24. Which of the following most accurately reflects the concept of depreciation as used in accounting?
a. The process of charging the decline in value of an economic resource to income in the period in which
the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to
those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely matches the physical
deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year to the contra asset
account for the purpose of properly recording the fair market value of tangible assets.
S25. The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life refers to how long the
asset will last.
b. physical life is the life of an asset without consideration of salvage value and service life requires the use
of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to
how long the asset will be used by all owners.
P26. The term "depreciable cost," or "depreciable base," as it is used in accounting, refers to
a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

27. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
 c. inadequacy.
d. all of these.

28. The activity method of depreciation

a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.

29. For income statement purposes, depreciation is a variable expense if the depreciation method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.

30. If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset,
factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

31. Use of the double-declining balance method

a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.

32. Use of the sum-of-the-years'-digits method

a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.
33. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis.
Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits
depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right

34. A principal objection to the straight-line method of depreciation is that it

a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.

35. h year a company has been investing an increasingly greater amount in machinery. Since there is a large
number of small items with relatively similar useful lives, the company has been applying straight-line
depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated
depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00.
The most likely explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully depreciated machinery that should have remained in service.

36. For the composite method, the composite

a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.
P37. Roberts Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks
and receives cash from a salvage company, the carrying value of property, plant, and equipment will be
decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
S38. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together and the total divided by the
number of items.
b. the cost of individual units within an asset group is charged to expense in the year a unit is retired from
service.
c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in
the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in the asset account and the
cost of replacements is charged to expense when they are acquired.

39.Depreciation is normally computed on the basis of the nearest

a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

40. Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straight-line method
with an estimated life of fifteen years and no salvage value. On January 1, 2007, Quayle estimated that the
remaining life of this machinery was six years with no salvage value. How should this change be accounted
for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2007
d. By continuing to depreciate the machinery over the original fifteen year life

41. A change in estimate should

a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

42. White Printing Company determines that a printing press used in its operations has suffered a permanent
impairment in value because of technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.

43. Dividends representing a return of capital to stockholders are not uncommon among companies which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.

44. Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.

45. The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
 c. straight-line method.
d. units-of-production method.

46. Reserve recognition accounting

a. is presently the generally accepted accounting method for financial reporting of oil and gas reserves.
b. is a historical cost method similar to the full cost approach and the successful efforts approach.
c. is used for reporting of oil and gas reserves for federal income tax purposes.
d. requires estimates of future production costs, the appropriate discount rate, and the expected selling price
of oil and gas reserves.
S47. Of the following costs related to the development of natural resources, which one is not a part of depletion
cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts
S48. Which of the following disclosures is not required in the financial statements regarding depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.
P49. The book value of a plant asset is
a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related depreciation recorded to date.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.

50. A general description of the depreciation methods applicable to major classes of depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.

51. The asset turnover ratio is computed by dividing

a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.

*52. A major objective of MACRS for tax depreciation is to

a. reduce the amount of depreciation deduction on business firms' tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax depreciation.

*53. Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?
a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value

*54. If income tax effects are ignored, accelerated depreciation methods

a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs on the income statement.
d. tend to decrease the fixed asset turnover ratio.
 MULTIPLE CHOICE—Conceptual

21. Costs incurred internally to create intangibles are

a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.

22. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

23. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.

24. Factors considered in determining an intangible asset’s useful life include all of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.

25. Under current accounting practice, intangible assets are classified as

a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.

26. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of
the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product whose market
would have been impaired by competition from the newly patented product.

27. Riser Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation
purchased on January 1, 2007 a patent on a competing product which was originally issued on January 10,
2003. Because of its unique plant, Riser Corporation does not feel the competing patent can be used in
producing a product. The cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2007.

28. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor.
The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.

29. Which of the following is not an intangible asset?

a. Trade name
 b. Research and development costs
c. Franchise
d. Copyrights

30. Which of the following intangible assets should not be amortized?

a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.

31. When a patent is amortized, the credit is usually made to

a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.

32. Goodwill
a. generated internally should not be capitalized unless it is measured by an individual independent of the
enterprise involved.
b. is easily computed by assigning a value to the individual attributes that comprise its existence.
c. represents a unique asset in that its value can be identified only with the business as a whole.
d. exists in any company that has earnings that differ from those of a competitor.
33. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair market value of the net tangible and identifiable intangible assets as
compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive
at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are recorded at
an amount other than their value.

34. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire
Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the
fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there
was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

35. Purchased goodwill should

a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.

36. The intangible asset goodwill may be

a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.

37. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.

38. Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill have been
impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
 a. Yes Yes
b. Yes No
c No Yes
d. No No

39. The carrying amount of an intangible is

a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related amortization recorded to date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.
40. Which of the following research and development related costs should be capitalized and amortized over
current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in
process

41. Which of the following principles best describes the current method of accounting for research and
development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

42. How should research and development costs be accounted for, according to a Financial Accounting Standards
Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts
involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will
have alternative future uses or unless contractually reimbursable.

43. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing stage

44. If a company constructs a laboratory building to be used as a research and development facility, the cost of
the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from the facility.

45. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

46. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to
promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the
corporation for the entity's entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
47.Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer's need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.

48. The total amount of patent cost amortized to date is usually

a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patent
account.
b. shown in the current income statement.
c. reflected as credits in the Patent account.
d. reflected as a contra property, plant and equipment item.