Unit 2 of 5
Study guide for CLEP CLEP Financial Accounting — Unit 2: Assets. Practice questions, key concepts, and exam tips.
123
Practice Questions
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Key Topics
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Dixon Company purchased a piece of equipment for $10,000. The equipment has a useful life of 5 years and a residual value of $2,000. If Dixon Company uses the straight-line method of depreciation, what amount of depreciation expense will the company record for the first year?
Answer: A — The correct answer is B. To calculate depreciation using the straight-line method, the formula is: (Cost - Residual Value) / Useful Life. Applying the numbers: ($10,000 - $2,000) / 5 = $8,000 / 5 = $1,600 per year. The other options are incorrect because A is a repeat of the correct answer, C is the residual value, and D is the depreciable base, not the annual depreciation expense.
A company purchases a piece of land for $100,000, with the intention of selling it in the next year. However, due to market conditions, the company decides to hold the land for an additional two years. How should the land be classified on the company's balance sheet after the initial year?
Answer: C — The correct answer is C) Long-term Investment, because the land is being held for investment purposes and is not being used in the company's operations. Although the company initially intended to sell the land within a year, the change in plans means it should be classified as a long-term investment. A) Current Asset is incorrect because the land is no longer expected to be sold within a year. B) Intangible Asset is incorrect because land is a tangible asset. D) Property, Plant, and Equipment is incorrect because the land is not being used in the company's operations.
Mason Inc. purchased a piece of land for $100,000, with the intention of building a new warehouse. However, due to changes in the market, the company decided to sell the land after holding it for two years. The land was sold for $120,000. How should Mason Inc. classify the land on its balance sheet before the sale?
Answer: A — The land is correctly classified as a long-term investment because it was not being used in the operations of the business and was being held for potential future use or sale. It does not qualify as property, plant, and equipment because it was not being used in the business. It is not a current asset because it was not expected to be sold or used within one year. It is not an intangible asset because it is a physical asset, not a right or privilege.
Nova Inc. purchased a piece of land for $100,000 with the intention of building a new warehouse. However, due to changes in market conditions, the company decided to sell the land instead. Which of the following classifications is most appropriate for the land on Nova Inc.'s balance sheet?
Answer: D — The correct answer is D) Other Current Assets. Since Nova Inc. decided to sell the land, it is now considered an asset held for sale, which is typically classified as a current asset. The other options are incorrect because the land was not being used in operations (A), it is a tangible asset (B), and it is not an investment (C).
Mason Corporation purchased a piece of land for $100,000, with the intention of building a new warehouse. However, due to changes in market conditions, the company decided to sell the land after holding it for two years. The land was sold for $120,000. How should Mason Corporation classify the land on its balance sheet during the two years it held the land?
Answer: A — The land was purchased with the intention of building a warehouse, but it was not used for that purpose. Since the land was not used in the operations of the business and was held for potential future use or sale, it should be classified as a long-term investment. Options B, C, and D are incorrect because the land was not used as property, plant, and equipment, it was not expected to be sold within one year or within the company's normal operating cycle, and it is a tangible asset, not an intangible asset.
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