Gains and Losses Quiz

QUESTIONS

1. The formula to calculate the gross profit margin is...

        A) (Sales - Cost of Goods Sold) / Sales

        B) Cost of Goods Sold / Sales

 

2. The item more likely to be included under the cost of goods sold is...

        A) The cost of tires that go into making a car

        B) The cost of the company president's salary

 

3. The item more likely to be included under selling, general and administrative expenses is...

        A) The cost of a skilled laborer's salary

        B) The cost of factory rent

 

4. Ultimately, the decision whether to expense or temporarily capitalize a cost is based on...

        A) The best judgment of the accountant

        B) The dollar amount of the item

 

5. The retirement of a fixed asset would include a debit to...

        A) Accumulated depreciation

        B) Equipment

 

6. An item that will provide usefulness for years to come is more likely to be...

        A) Expensed

        B) Capitalized

 

7. A company can only be considered a 'going concern' if...

        A) It will be able to meet its debts as they become due

        B) If it has at least ten thousand dollars in the bank

 

7. A company that sells an asset and receives cash in excess of the asset's carrying value will record a...

        A) Gain

        B) Revenue

 

8. A company that sells an asset and receives cash in an amount less than the asset's carrying value will record a(n)...

        A) Expense

        B) Loss

 

9. If you sell an asset for a promise to receive cash in ninety days you'll record a debit to...

        A) Accounts receivable

        B) Accounts payable

 

10. 'Net value,' 'carrying value,' and 'book value' all mean the same number, which is calculated by...

        A) Taking the asset's original cost and subtracting the amount of depreciation or amortization recognized

        B) Taking the asset's original cost and subtracting the salvage value

 

 ANSWER KEY:

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

 

PRACTICE PROBLEMS

1. A company purchases $100,000 worth of equipment and estimates no salvage value with an estimated useful life of 10 years. At the end of the third year, the company sells the equipment for $75,000. What will be the gain or loss recorded on the income statement?

2. A company purchases $100,000 worth of equipment and estimates a $10,000 salvage value with an estimated useful life of 10 years. At the end of the fifth year, the company sells the equipment for $50,000. What will be the gain or loss recorded on the income statement?

3. A company sells 150,000 tickets for a sales price of $5 per ticket. It incurs $250,000 in cost of goods sold, $250,000 in selling, general and administrative (SG&A) costs. It also sells a piece of equipment with a historical cost of $100,000 and accumulated depreciation of $25,000 for $60,000. What is the company's net profit?

 

ANSWER KEY:

1: ($100,000 - $0) / 10 = $10,000 annual depreciation expense

By the end of the third year, the equipment will have a historical cost of $100,000 and accumulated depreciation of $30,000 ($10,000 x 3) and therefore a carrying value of $70,000. Receiving cash worth $75,000 for the equipment will result in a $5,000 gain (credit) to the income statement.

2: ($100,000 - $10,000) / 10 = $9,000 annual depreciation expense

By the end of the fifth year, the equipment will have a historical cost of $100,000 and accumulated depreciation of $45,000 ($9,000 x 5) and therefore a carrying value of $55,000. Receiving cash worth $50,000 for the equipment will result in a $5,000 loss (debit) to the income statement.

3. The sale of the equipment will result in a $15,000 loss, since it had a carrying value of $75,000 ($100,000 - $25,000) and the company received $60,000 in cash. With total revenues and gains of $750,000 (150,000 x $5) and total expenses and losses of $515,000 ($250,000 + $250,000 + $15,000), net profit will be $235,000.