Amortization Quiz

QUESTIONS

1. Gross profit is equal to...

        A) Sales minus the cost of goods sold

        B) Sales minus total expenses

 

2. Economies of scale is a business term that refers to...

        A) The increased efficiencies that come with a larger scale business

        B) The increased costs that come with a larger scale business

 

3. The first mover's advantage refers to...

        A) The competitive advantage from being the first to enter a new market

        B) The competitive advantage from being the first to enter a negotiation

 

4. Patents, copyrights, and trademarks are referred to in accounting as...

        A) Intangible assets

        B) Tangible assets

 

5. Purchased intangible assets are slowly transitioned from an asset to an expense through a process called...

        A) Depreciation

        B) Amortization

 

6. The journal entry for recognizing amortization expense is...

        A) Debit: Amortization Expense; Credit: (Accumulated Amortization)

        B) Debit: Amortization Expense; Credit: (Cash)

 

7. A patent that is legally valid for 20 years but will only be economically useful for 7 years would be amortized over...

        A) 20 years

        B) 7 years

 

8. An intangible asset is...

        A) An economic resource that cannot be accurately valued

        B) An economic resource that lacks physical substance

 

9. If you're earning lots of revenues, you're guaranteed to be profitable...

        A) True

        B) False

 

10. Economies of scale exist because...

        A) The more often you do something, the better you get at it

        B) The larger the business grows, the easier it is to manage

 

ANSWER KEY:

1A, 2A, 3A, 4A, 5B, 6A, 7B, 8B, 9B, 10A

 

PRACTICE PROBLEMS

 1. A railroad sells 150,000 tickets at a sales price per ticket of $5. It incurs $250,000 in cost of goods sold and $250,000 in selling, general and administrative (SG&A) costs. What is it's gross profit? Gross profit percentage? Net profit?

2. A company purchases a patent for $50,000 that it estimates will be economically useful for another 5 years but legally valid for another 8 years. How much amortization expense should it recognize in the first year? What will the patent's carrying value be after the end of the third year?

3. A company purchases a copyright worth $25,000 and a printing press worth $10,000. What is the increase in intangible assets? What is the increase in property, plant and equipment (PP&E)? What is the increase in total assets?

 

ANSWER KEY:

1: Revenues = 150,000 x $5 = $750,000

Gross profit = Revenues - Cost of Goods Sold = $750,000 - $250,000 = $500,000

Gross profit % = Gross Profit / Revenues = $500,000 / $750,000 = 67%

Net Profit = Revenues - All Expenses = $750,000 - $250,000 - $250,000 = $250,000

2. $50,000 / 5 = $10,000; $20,000

3. $25,000; $10,000; $35,000