AACT Chapter 9

Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______.

assets to be overstated stockholders' equity to be overstated

Accumulated Depreciation is reported on the ______.

balance sheet netted against the related long-lived asset

An asset's cost minus accumulated depreciation is its ______ value.

book

An asset's useful life ______.

can be expressed in either years or units is the asset's expected economic life to its owner

The old Metropolitan Theater, which had been unused for years, was purchased for $1, renovated at a cost of $3.5 million, and then reopened for business. The renovation cost should be ______.

capitalized as part of the cost of the theater

Sunny Sky paid $30,000 cash for a piece of land to be used for a new corporate headquarters building. The journal entry to record this transaction will include a $30,000 ______.

debit to Land, credit to Cash

A company should depreciate a long-lived tangible asset to ______.

match part of the cost of the asset with the revenues generated by the asset

The formula for the fixed asset turnover ratio equals ______.

net revenue/average net fixed assets

Ace Electronics bought a new cash register for $2,500. Ace originally planned to use the cash register for 4 years and then sell it for $200. After 4 years, Ace had recorded $2,300 of depreciation. If Ace continues to use the cash register, still planning to sell it eventually for $200, then Ace should record ______.

no additional depreciation Reason: The asset should not be depreciated below its residual value. Since this asset's book value is $200, then no additional depreciation should be recorded.

Which account is credited in an adjusting entry to record depreciation on machinery?

Accumulated Depreciation

Which of the following costs are included in the capitalized cost of a tangible asset?

All reasonable and necessary costs to acquire the asset for use All reasonable and necessary costs to prepare the asset for use

Accumulated Depreciation is reported on the _____.

Balance Sheet

A higher residual value will result in a(n) ________ depreciation expense per year and a(n) _____ net income.

Blank 1: lower Blank 2: higher

Which of the following describe long-lived assets?

Business assets acquired for use over one or more years Productive assets

Which term is used to describe what occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations?

Impairment

Depreciation Expense is reported on the _____.

Income Statement

Cost - residual value) x (1/useful life) is the formula for calculating the ______ _______ method of depreciation.

straight line

An asset's residual value is ______.

the same as its salvage value the estimated amount it can be sold for at the end of its useful life

X Circle Company purchased a computer system Black Box, Inc. with a list price of $100,000 plus 5% sales tax. The cost to deliver and install the computer was $10,000. The debit to Equipment equals _____.

$115,000

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's income statement?

- Expenses were too low. - Net income was too high.

Dew Drop Inn had net revenue of $117,000 in 2020 and $100,000 in 2021. Its fixed assets were $400,000 at the end of 2019, $380,000 at the end of 2020, and $360,000 at the end of 2021. In which year was the fixed asset turnover ratio better?

2020, because the ratio was higher. Reason: 2020 ratio is 0.30 times (= $117,000/((400,000 + 380,000)/2)) which is better than the 2021 ratio of 0.27 times (=$100,000/((380,000 + 360,000)/2)). Higher is better because it means the company was able to generate more revenues from its assets.

X-it Company bought a new delivery truck. The manufacturer says that the truck should last for ten years and 120,000 miles. X-it plans to use the truck for 4 years, during which it will be driven 50,000 miles. What is the useful life of the truck for depreciation purposes?

50,000 miles 4 years Reason: The asset should be depreciated over the time that the company plans to use and benefit from the asset, which is 4 years, despite that the asset may last 10 years.

Barry Company sells a patent for $25,000. The patent had an acquisition cost of $120,000 and accumulated amortization of $100,000 at the time of the sale. What was the amount of gain or loss recognized on the disposal of the patent?

Gain of $5,000 Book value = Acquisition cost − Accumulated amortization Book value = $120,000 − $100,000 = $20,000 Gain = Selling price − Book value Gain = $25,000 − $20,000 = $5,000

How is the fixed asset turnover ratio computed?

Net revenues ÷ Average net fixed assets

Which of the following financial statement totals are reduced by the adjusting entry to record amortization?

Total assets on the balance sheet Net income on the income statement Total stockholders' equity on the balance sheet

On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) ______.

decrease to assets on the balance sheet decrease to net income on the income statement

_____ is the allocation of the cost of a long-lived, tangible asset over its useful life creating an expense on the income statement that is matched against the revenue generated by using the asset

depreciation

Straight-line, units-of-production, and declining-balance are commonly used _______ methods.

depreciation or amortization

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash causes total assets to ______.

increase by $8,000 Reason: The entry is recorded with a $10,000 debit to Equipment (+A) and $2,000 credit to Cash (-A) and $8,000 credit to Notes Payable (+L). Total assets increase by $8,000 (=$10,000 debit to Equipment - $2,000 credit to Cash).

The formula for the fixed asset turnover ratio equals net ____ divided by average net fixed assets.

Revenue

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash is recorded with a ______.

$10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

On January 1, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in the 1st year and 280,000 in the 2nd year. Depletion for the 1st year equals ______.

$150,000 Reason: Depletion equals $150,000 or (($2,000,000 - 500,000) x (200,000 cords/2,000,000 cords)).

Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. The cash register's depreciable cost equals ______.

$2,300 Reason: An asset's depreciable cost equals the asset's cost, $2,500, minus the residual value, $200. The depreciable cost equals $2,300 and represents the total amount of usefulness that will be expensed (depreciated) over the asset's useful life.

X-it Company, signed a $500,000, 5-year note payable to buy a new industrial machine. The company paid $2,000 cash for transportation of the machine and $1,000 cash for installation costs. The journal entry to record this transaction will include a ______.

$3,000 credit to Cash $503,000 debit to Machinery $500,000 credit to Note Payable

Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized?

$70,000 cost of lumber to build the lodge $7,000 in architect fees $4,200 paid in sales tax on the lumber to build the lodge

The Three Little Pigs purchased three houses for a total cost of $160,000. Appraisal values for the three completed houses were: straw house, $40,000; wood house $60,000; and brick house $100,000. Using the basket purchase allocation, the recorded value of the brick house should be ______.

$80,000 Reason: The recorded value of the brick house equals $80,000 or ($100,000/($40,000 + 60,000 + 100,000)) x $160,000.

Vango, Inc. bought a new delivery van during the year. Which of these costs should be expensed as ordinary repairs and maintenance?

$900 for cleaning the van during the year $100 oil change on van

Assuming straight-line is used, which of the following is the depreciation formula for the revision of an estimate?

(Book value-new residual value) x (1/remaining life)

The formula for calculating straight-line depreciation is ______.

(cost - residual value) x (1/useful life)

Match the deprecation method and the pattern of usage.

1. All the asset's capitalized costs; Asset's cost 2. Estimate of the asset's useful economic life to the company; Useful life 3. Estimate of the amount the company will receive when it disposes of the asset; Residual value

Which of the following may lead to a revision of an estimate of a company's depreciation expense?

A change in the estimated residual value Extraordinary repairs that significantly extend the asset's usefulness A change in the estimated useful life

Which of the following is true?

Capitalized costs increase long-lived assets.

Which of the following would cause the balance sheet to appear stronger and income statement to appear more profitable than it should?

Capitalizing costs that should be expensed.

The journal entry to record depreciation include which of the following?

Debit Depreciation Expense Credit Accumulated Depreciation

Which of these depreciation methods are allowed by GAAP?

Declining-balance Straight-line Units-of-production

Which of the following is a long-lived asset?

Land on which to build a new store

Cedar Fair purchased land; which of the following should be debited to the Land account?

Legal fees for the land's title search Commissions paid to brokers when purchasing the land Fees for surveying of the land

Which of these are long-lived productive assets?

Machinery and delivery equipment

Vicious Cycle built a new building. Which of the following costs should be expensed?

Party to celebrate grand opening

The expenditure incurred for changing the oil in the company's fleet of trucks is debited to ______.

Repairs and Maintenance Expense

Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable?

Spam Am

Select all of the items below in determining the cost of purchased equipment.

Subtract the purchase discount Add the delivery costs Add the sales tax Add the installation costs Add the list price

Which of the following entries result in a decrease in total assets and stockholders' equity?

The adjusting entry to record the depreciation of long-live assets

X-it Company signed a $500,000, 5-year note payable to buy a new machine. The company paid $2,000 cash for transporting and $1,000 cash for installing the machine. What is the effect of this transaction on the accounting equation?

Total liabilities increase $500,000. Machinery, an asset, increases $503,000. Total assets increase $500,000.

True or false: Land is not depreciated.

True Reason: Land is the only tangible asset that is assumed to have an indefinite life and thus is not depreciated.

Which depreciation method results in higher depreciation expense when the asset is used more?

Units-of-production

Which method should be used to calculate depletion for a natural resource company?

Units-of-production

Acme, Inc., bought land and a building for $150,000. Acme plans to use the building for 20 years and then sell it. What is the useful life of the land?

Unlimited

In the case of a basket purchase, the cost of the land and building is ______.

split among the assets purchased in proportion to the market value of the assets as a whole

What does a company need to do when it disposes of a depreciable asset by "retiring" the asset to a junkyard?

Update the Depreciation Expense and Accumulated Depreciation accounts and then record the disposal.

Revenue expenditures are recorded with a debit to ______.

an expense when they relate to ordinary repairs and maintenance

All costs to get an asset in place and ready for its intended use should be ______.

capitalized

Accountants say costs have been ______when they are recorded as assets rather than as expenses.

capitalized or deferred

An asset's book value or carrying value is its ______

cost minus accumulated depreciation

Thermal, Inc. bought a new office computer for $5,000 cash. The journal entry to record this transaction will include a $5,000 ______. (Check all that apply.)

credit to Cash and debit to Equipment Reason: The computer is capitalized and recorded with a debit to Equipment (a noncurrent asset) and expensed over its useful life. The computer should not be expensed when purchased since the computer will benefit future periods.

Ordinary repairs and maintenance costs should be ______.

expensed as incurred

Capitalized costs differ from expenses in that only capitalized costs result in a(n) ______.

increase to long-lived assets

A productive asset ______.

is used to produce goods or services that will be sold to customers

Acme, Inc. bought land and a factory building for $80,000. The land was appraised at $25,000 and the building at $75,000. Using the basket purchase allocation, Acme would record the ______.

land at $20,000 and the building at $60,000 Reason: The cost principal requires assets to be reported at the cost, not the individual appraised values. The land is 25% of the appraised value (=$25,000/($25,000 + 75,000)) and the building is 75% (=$75,000/($25,000 + 75,000)). Thus, 25% of the $80,000 cost or $20,000 is debited to Land and 75% of the $80,000 cost or $60,000 is debited to Building.

Thermal, Inc. bought a new computer system for $50,000 cash. What is the effect of this purchase on the company's total assets? Total assets ______.

remain the same

Another term for residual value is _____ value.

salvage