Question

1) Smart Company purchased a patent for $50,000 in cash on April 1 of Year 1. The patent has an estimated remaining economic and legal life of 10 years. As is typical with intangible assets, the patent is assumed to have no estimated salvage value. Smart Company uses the straight-line method for computing amortization expense for its intangible assets.

Which ONE of the following is included in the journal entry necessary to record amortization expense on the patent for Year 3?

A) CREDIT to Accumulated Amortization for $15,000

B) CREDIT to Accumulated Amortization for $13,750

C) CREDIT to Accumulated Amortization for $5,000

D) CREDIT to Accumulated Amortization for $3,750

2) Pecos Yo Company purchased a machine for $50,000 in cash on August 1 of Year 1. The machine has an estimated useful life of 10 years and an estimated salvage value of $5,000. Pecos Yo Company uses the straight-line method for computing depreciation expense.

Which ONE of the following is included in the journal entry necessary to record depreciation expense on the machine for Year 2?

A) CREDIT to Accumulated Depreciation for $4,500

B) CREDIT to Accumulated Depreciation for $7,375

C) CREDIT to Accumulated Depreciation for $9,000

D) CREDIT to Accumulated Depreciation for $6,375

E) CREDIT to Accumulated Depreciation for $2,625

Answer 1

· [1]
Correct Answer = Option ‘D’ CREDIT to Accumulated amortisation for $ 3750
This is because the ‘accumulated amortisation’ is credited by the amount of amortisation expense for that year.
In Year 1, no of month for Patent = 9 months [From1 April to 31 Dec]
Amortisation expense = ($50000 / 10 years) x 9months/12 months = $ 3750

· [2]

>Annual 12 month depreciation expense = ($50000 cash - $ 5000 salvage) / 10 year life
= 45000 / 10
= $ 4500
> No of month in Year 1 = 5 months [Aug, Sept, Oct, Nov and Dec]
>year 1 Depreciation expense to be DEBITED = $ 4500 x 5 / 12 = $ 1875
>Year 2 Depreciation expense to be debited by $ 4500 x 12/12 = $ 4500

>Correct Answer = Option ‘A CREDIT to Accumulated Depreciation for $ 4500