CPA Quiz: Capitalize And Depreciate Fixed Assets
20 questions · exam conditions
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Capitalize And Depreciate Fixed AssetsQuestion 1 of 20

A company constructs its own building. Costs incurred include: direct materials $600,000, direct labor $250,000, overhead allocated $120,000, and interest on construction loan $45,000. What is the total capitalized cost of the building?

$970,000
$1,015,000
$850,000
$895,000
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CPA Quiz: Capitalize And Depreciate Fixed Assets

Practice Capitalize And Depreciate Fixed Assets in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Capitalize And Depreciate Fixed Assets, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

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Question 1

A company constructs its own building. Costs incurred include: direct materials $600,000, direct labor $250,000, overhead allocated $120,000, and interest on construction loan $45,000. What is the total capitalized cost of the building?

  1. $970,000
  2. $1,015,000 (correct answer)
  3. $850,000
  4. $895,000
Explanation: Self-constructed assets capitalize all direct costs plus overhead and qualifying interest (ASC 835-20). Total = $600,000 + $250,000 + $120,000 + $45,000 = 1,015,000.AnswerBiscorrect.AnswerAomitscapitalizedinterest(1,015,000. Answer B is correct. Answer A omits capitalized interest (970,000 = direct costs + overhead only). Answer C omits both overhead and interest (850,000=materials+laboronly).AnswerD(850,000 = materials + labor only). Answer D (895,000) capitalizes direct costs and interest but excludes allocated overhead, which is also a capitalizable cost of self-constructed assets.

Question 2

A company acquires equipment with a fair value of $80,000 by trading in old equipment (book value $15,000, fair value $20,000) and paying $60,000 cash. The exchange has commercial substance. What gain or loss is recognized on the exchange?

  1. $0; no gain recognized on exchanges.
  2. $5,000 gain. (correct answer)
  3. $65,000 gain.
  4. $5,000 loss.
Explanation: With commercial substance, the old equipment is derecognized at its fair value. Gain = FV of old equipment - book value = $20,000 - $15,000 = $5,000. Answer B is correct. Answer A applies the no-commercial-substance rule. Answer C uses proceeds minus original cost. Answer D reverses the sign.

Question 3

A company uses double-declining balance and switches to straight-line when straight-line produces a higher charge. An asset costs $100,000, has a 5-year life, and no salvage value. In which year does the switch to straight-line first occur?

  1. Year 2
  2. Year 3
  3. Year 4 (correct answer)
  4. Year 5
Explanation: DDB rate = 40%. Y1 BV=60,000;Y2BV=60,000; Y2 BV=36,000; Y3 BV=21,600.Y4DDB=21,600. Y4 DDB=8,640 vs SL remaining=21,600/2=21,600/2=10,800. Since SL (10,800)>DDB(10,800) > DDB (8,640), the switch first occurs in Year 4. Answer C is correct. In Years 1-3, DDB always exceeds SL on the remaining balance.

Question 4

A machine with a cost of $150,000, accumulated depreciation of $90,000, and a remaining life of 3 years is revised to have only 2 remaining years and a new salvage value of $5,000. The company uses straight-line depreciation. What is the revised annual depreciation?

  1. $30,000
  2. $27,500 (correct answer)
  3. $25,000
  4. $20,000
Explanation: A change in estimated useful life is a change in accounting estimate applied prospectively. Book value at revision = $150,000 - $90,000 = 60,000.Revisedannualdepreciation=(60,000. Revised annual depreciation = (60,000 - $5,000) / 2 = $55,000 / 2 = $27,500. Answer B is correct. Answer A uses the original cost divided by the remaining life. Answer C ignores the revised salvage value. Answer D divides remaining book value by 3 years instead of 2.

Question 5

An asset costs $200,000 with no salvage value, depreciated using double-declining balance over 4 years. What is book value at the end of Year 3?

  1. $100,000
  2. $50,000
  3. $12,500
  4. $25,000 (correct answer)
Explanation: DDB rate = 50%. Year 1: $200,000 x 50% = $100,000; BV = $100,000. Year 2: $100,000 x 50% = $50,000; BV = $50,000. Year 3: $50,000 x 50% = $25,000; BV = $25,000. Answer D is correct. Answer A is BV after Year 1. Answer B is BV after Year 2. Answer C would result from a fifth year of DDB.

Question 6

A company purchases a building for $1,200,000 with components: structure $800,000 (40-year life), roof $200,000 (20-year life), HVAC $150,000 (15-year life), elevators $50,000 (10-year life). Using straight-line component depreciation with no salvage values, what is total Year 1 depreciation?

  1. $30,000
  2. $40,000
  3. $35,000
  4. $45,000 (correct answer)
Explanation: Structure: $800,000/40 = $20,000. Roof: $200,000/20 = $10,000. HVAC: $150,000/15 = $10,000. Elevators: $50,000/10 = $5,000. Total = 45,000.AnswerDiscorrect.AnswerA(45,000. Answer D is correct. Answer A (30,000) includes only the structure and roof components. Answer B (40,000)includesstructure,roof,andHVACbutomitstheelevatorcomponent.AnswerC(40,000) includes structure, roof, and HVAC but omits the elevator component. Answer C (35,000) includes structure, roof, and elevators but omits the HVAC component.

Question 7

A company incurs the following costs when purchasing a patent: purchase price $50,000, legal fees to secure the patent $8,000, and research costs that led to the patent discovery $30,000. What amount should be capitalized as the cost of the patent?

  1. $58,000 (correct answer)
  2. $88,000
  3. $50,000
  4. $80,000
Explanation: Under ASC 730, research and development costs are expensed as incurred and may not be capitalized as part of an internally developed or purchased patent. The capitalizable cost of a purchased patent includes the purchase price and directly related legal fees: $50,000 + $8,000 = $58,000. Answer A is correct. Answer B includes R&D costs, which must be expensed. Answer C omits legal fees. Answer D includes R&D costs with a different combination.

Question 8

Under GAAP, which of the following costs incurred during the construction of a self-constructed asset is NOT eligible for capitalization?

  1. Direct materials used in construction.
  2. Allocated manufacturing overhead directly related to construction.
  3. Selling and administrative expenses of the construction division. (correct answer)
  4. Interest on borrowings specifically incurred to finance the construction.
Explanation: Selling and administrative expenses are period costs and are not eligible for capitalization even when they relate to a construction project. Only direct costs (materials, labor, overhead) and qualifying interest under ASC 835-20 may be capitalized. Answer C is correct. Direct materials (A), allocated overhead (B), and qualifying interest (D) are all capitalizable costs of self-constructed assets.

Question 9

A company's fixed asset register shows equipment with a gross cost of $480,000 and accumulated depreciation of $180,000. During the year, the company purchased $60,000 of new equipment and recorded $45,000 in depreciation. What is ending accumulated depreciation?

  1. $180,000
  2. $225,000 (correct answer)
  3. $240,000
  4. $270,000
Explanation: Ending accumulated depreciation = beginning balance + current-year depreciation = $180,000 + $45,000 = $225,000. The new equipment purchase does not affect accumulated depreciation in the period of acquisition (no depreciation recorded until placed in service, or prorated). Answer B is correct. Answer A uses the opening balance only. Answer C adds the equipment purchase to accumulated depreciation. Answer D combines both incorrectly.

Question 10

A company acquires a machine for $75,000 cash and signs a $25,000 non-interest-bearing note due in 2 years. The market rate of interest is 6%. The present value factor for a lump sum at 6% for 2 years is 0.890. At what amount should the machine be capitalized?

  1. $100,000
  2. $96,750
  3. $97,250 (correct answer)
  4. $75,000
Explanation: The machine is recorded at the fair value of consideration given. The note must be discounted to present value: $25,000 x 0.890 = $22,250. Total capitalized cost = $75,000 cash + $22,250 PV of note = $97,250. Answer C is correct. Answer A uses the face value of the note without discounting. Answer B uses a slightly different PV factor. Answer D records only the cash paid, ignoring the note.

Question 11

A company purchases equipment for $100,000 and incurs $5,000 in costs to dismantle and remove it at the end of its useful life. The present value of the dismantlement costs is $3,000. How should the company account for these dismantlement costs at acquisition?

  1. Expense $5,000 immediately as a period cost.
  2. Add $5,000 to the cost of the equipment.
  3. Disclose only; no asset or liability is recognized until the costs are incurred.
  4. Capitalize $3,000 to the asset and recognize a $3,000 asset retirement obligation liability. (correct answer)
Explanation: Under ASC 410, an asset retirement obligation (ARO) is recognized at fair value (present value) when the obligation is incurred. The ARO's present value ($3,000) is added to the carrying amount of the related asset and a corresponding liability is recorded. Answer D is correct. Answer A expenses the cost, ignoring the ARO standard. Answer B capitalizes the undiscounted future cost rather than the present value. Answer C defers recognition until costs are incurred, which violates ASC 410.

Question 12

A company acquires equipment with a list price of $80,000 by trading in old equipment with a book value of $15,000 and a fair value of $20,000, plus paying $60,000 cash. The exchange has commercial substance. What cost is recorded for the new equipment?

  1. $80,000 (correct answer)
  2. $75,000
  3. $60,000
  4. $70,000
Explanation: With commercial substance, new equipment is recorded at the fair value of assets surrendered: FV of old equipment (20,000)+cashpaid(20,000) + cash paid (60,000) = $80,000. A gain of $5,000 (FV $20,000 - BV $15,000) is also recognized. Answer A is correct. Answer B uses book value instead of fair value of old equipment. Answer C records only cash paid. Answer D uses an incorrect blended amount.

Question 13

Under GAAP, which of the following best describes when depreciation on a newly purchased asset should begin?

  1. When the asset is placed in service and available for its intended use. (correct answer)
  2. When the invoice for the asset is received and approved for payment.
  3. On January 1 of the year following the acquisition.
  4. When the asset is fully paid for.
Explanation: Under GAAP, depreciation begins when the asset is placed in service - that is, when it is in the location and condition necessary for its intended use. Answer A is correct. Invoice receipt (B) precedes placement in service. Waiting until the following January (C) is a simplification sometimes used in practice but not GAAP's stated requirement. Full payment (D) may occur before or after placement in service and is not the trigger for depreciation.

Question 14

A company uses the units-of-production depreciation method. A machine costs $90,000 with a $6,000 salvage value and an estimated productive capacity of 42,000 units. In Year 1, the machine produces 8,400 units. What is Year 1 depreciation?

  1. $18,000
  2. $16,800 (correct answer)
  3. $20,000
  4. $15,000
Explanation: Depreciation per unit = ($90,000 - $6,000) / 42,000 = $84,000 / 42,000 = $2.00 per unit. Year 1 depreciation = 8,400 x $2.00 = $16,800. Answer B is correct. Answer A applies $2.14 per unit (ignoring salvage). Answer C uses $90,000 / 42,000 x 8,400. Answer D uses an incorrect rate.

Question 15

A building is purchased for $500,000. The land on which it sits is valued at $100,000 (included in the $500,000 purchase price). The building has a 40-year life and no salvage value. What is annual straight-line depreciation on the building?

  1. $10,000 (correct answer)
  2. $12,500
  3. $11,250
  4. $9,000
Explanation: Land is not depreciated. Building cost = $500,000 - $100,000 = $400,000. Annual depreciation = $400,000 / 40 = $10,000. Answer A is correct. Answer B depreciated the full $500,000. Answer C uses a partial allocation. Answer D applies an incorrect rate.

Question 16

Land improvements such as paving, fencing, and landscaping are depreciated separately from land because:

  1. They have a limited useful life and will eventually need to be replaced, unlike land itself. (correct answer)
  2. The IRS requires separate depreciation for tax purposes, and GAAP follows tax treatment.
  3. Land improvements always have a shorter life than the associated building.
  4. They are intangible in nature and must be amortized.
Explanation: Land has an indefinite useful life and is not depreciated. Land improvements (paving, fencing, landscaping) have finite lives - they wear out and must be replaced. Because they are exhausted over time, they are separately capitalized and depreciated. Answer A is correct. Answer B is incorrect; GAAP does not follow tax treatment in this area. Answer C is not always true - improvements may outlast buildings in some cases. Answer D is incorrect; land improvements are tangible assets, not intangibles.

Question 17

An asset with a cost of $180,000 and no salvage value is depreciated using the double-declining balance method over 4 years. What is the book value at the end of Year 3?

  1. $90,000
  2. $45,000
  3. $11,250
  4. $22,500 (correct answer)
Explanation: DDB rate = 2/4 = 50%. Year 1: $180,000 x 50% = $90,000; BV = $90,000. Year 2: $90,000 x 50% = $45,000; BV = $45,000. Year 3: $45,000 x 50% = $22,500; BV = 22,500.AnswerDiscorrect.AnswerAisbookvalueattheendofYear1.AnswerBisbookvalueattheendofYear2.AnswerCwouldresultfromapplyingDDBforafourthyear(22,500. Answer D is correct. Answer A is book value at the end of Year 1. Answer B is book value at the end of Year 2. Answer C would result from applying DDB for a fourth year (22,500 x 50% = $11,250).

Question 18

A company incurs the following costs related to a purchased patent: acquisition price $50,000 and legal fees to register and defend the patent $8,000. Separately, the company spent $30,000 on R&D that led to the patented invention. What amount is capitalized as the cost of the patent?

  1. $58,000 (correct answer)
  2. $88,000
  3. $50,000
  4. $80,000
Explanation: Capitalizable patent cost includes the acquisition price (50,000)anddirectlyrelatedlegalcosts(50,000) and directly related legal costs (8,000) = $58,000. R&D costs that led to the invention are expensed as incurred under ASC 730 and cannot be capitalized. Answer A is correct. Answer B includes R&D. Answer C omits legal fees. Answer D includes R&D with a different combination.

Question 19

A machine costs $120,000, has a salvage value of $10,000, and a useful life of 5 years. Using the straight-line method, what is annual depreciation expense?

  1. $20,000
  2. $24,000
  3. $22,000 (correct answer)
  4. $11,000
Explanation: Straight-line depreciation = (Cost - Salvage value) / Useful life = ($120,000 - $10,000) / 5 = $22,000. Answer C is correct. Answer A uses an incorrect salvage value of 20,000inthecalculation((20,000 in the calculation ((120,000 - $20,000) / 5 = 20,000).AnswerBignoressalvagevalueentirely,dividingcostbyusefullife(20,000). Answer B ignores salvage value entirely, dividing cost by useful life (120,000 / 5 = $24,000). Answer D divides by 10 rather than the 5-year useful life.

Question 20

A company uses the double-declining balance method. An asset costs $50,000, has a 5-year life, and no salvage value. What is depreciation expense in Year 2?

  1. $20,000
  2. $12,000 (correct answer)
  3. $8,000
  4. $10,000
Explanation: DDB rate = 2/5 = 40%. Year 1 depreciation = $50,000 x 40% = $20,000; book value at start of Year 2 = $30,000. Year 2 depreciation = $30,000 x 40% = 12,000.AnswerBiscorrect.AnswerArepeatstheYear1depreciationamount,ignoringthatDDBisappliedtothedecliningbookvalueeachperiod.AnswerCresultsfromapplyingtheDDBratetoanincorrectintermediatebookvalue.AnswerDisthestraight−lineannualamount(12,000. Answer B is correct. Answer A repeats the Year 1 depreciation amount, ignoring that DDB is applied to the declining book value each period. Answer C results from applying the DDB rate to an incorrect intermediate book value. Answer D is the straight-line annual amount (50,000 / 5 = $10,000), not DDB.