ACC 120 Ch. 9 Adaptive Practice Study Guide

________ a plant asset that increase its operating efficiency, productive capacity, or expected useful life are generally debited to the asset affected.

Additions and improvements to (Additions and improvements to plant assets are considered capital expenditures and improve the overall functionality of an asset.)

Gemini Group ordered motor tune ups and oil changes on their entire fleet of company vehicles in the third quarter. How should this expense be recorded?

As a revenue expenditure. (Motor tune ups and oil changes are considered ordinary repairs. Ordinary repairs are debited to the Maintenance and Repair Expense account as a revenue expenditure.)

TTG Landscaping purchased a dump truck for $150,000. In addition, they spent $12,000 in sales tax, $200 to paint the company's logo on the truck, $900 for a vehicle license, and $2,400 for accident insurance. What is the journal entry for this transaction?

Dr. Equipment 162,200 License Expense 900 Prepaid Insurance 2,400 Cr. Cash 165,500 (The equipment account is debited for the price of the dump truck (including sales tax) and the painting costs. These costs are necessary to prepare the truck for its intended use. The other costs are recurring expenses.)

Compared to other methods of calculating depreciation, how does the declining balance method affect net income in the first year?

It usually results in the lowest net income. (The declining balance method is considered an accelerated deprecation method, and results in a higher depreciation expense for the first year as compared to the straight-line and units-of-activity method. A higher depreciation expense will result in a lower net income.)

Four athletic gear stores have the following net sales and average total assets: Which store has the HIGHEST asset turnover?

Store 2 (Asset turnover is calculated by net sales divided by average total assets. Store 1 has asset turnover of $847,000/$895,000 = 0.95. Store 2 has asset turnover of $592,000/$615,000 = 0.96. Store 3 has asset turnover of $1.45 million/$1.63 million = 0.89. Store 4 has asset turnover of $5.68 million/$6.14 million = 0.93. Therefore, Store 2 has the highest asset turnover.)

Four hardware stores have the following net income and average total assets: Which store has the LOWEST return on assets?

Store 2 (Return on assets is calculated as net income divided by average total assets. Store 1 has return on assets of $186,000 / $2.25 million = 8.27 percent. Store 2 has return on assets of $342,000 / $4.7 million = 7.28 percent. Store 3 has return on assets of $4.9 million / $58 million = 8.45 percent. Store 4 has return on assets of $2.3 million / $29.5 million = 7.80 percent. Therefore, Store 2 has the lowest return on assets.)

How does the journal entry for a retired asset differ from the journal entry for an asset that is sold?

The entry for the retired asset does not include a debit to Cash, but the entry for the sold asset does. (When an asset is retired, the company does not gain cash as it does when they sell an asset. Therefore, the company will not record a debit to Cash for a retired asset, but they will record a debit to Cash for a sold asset.)

Two national companies both sell a variety of soaps and lotions. When looking at the balance sheets, one company lists goodwill as an asset, but the other company does not. What does this tell you about these companies?

The first company purchased an entire business to expand the company, whereas the second company likely has not yet purchased another entire business. (Goodwill is only recorded in a company's books if they have purchased an entire business for more than the fair value of the net assets. If the first company lists goodwill as an asset, then they must have purchased an entire business for more than the fair value of the net assets at some point in the past. If the second company does not list goodwill as an asset, they likely have not purchased an entire business in the past.)

Pine Level Paper has goodwill and trademarks as well as land, equipment and buildings. How should they report these assets?

The land, equipment and buildings would be listed under Property, Plant, and Equipment while goodwill and trademarks would be listed under Intangible Assets. (The Property, Plant, and Equipment section of Pine Level's balance sheet includes the tangible plant assets of land, equipment, and buildings. The Intangible Assets section of the balance sheet includes assets that do not have a physical form but provide value to a company. Pine level's intangible assets include goodwill and trademarks.)

What is the difference between the cost of the plant asset and the accumulated depreciation to date?

book value (The book value of an asset is used to record the difference between the asset's cost and its accumulated depreciation because depreciation is a cost allocation process and not a valuation process.)

Which depreciation method generally results in the lowest net income for the first year a plant asset is utilized?

double declining-balance (The double-declining balance method is considered an accelerated depreciation method and results in a higher depreciation expense for the first year that is double the amount determined by using the straight-line depreciation method. Therefore, the higher depreciation expense will result in a lower net income.)

Leonard Company uses and discloses different depreciation methods for the major classes of property, plant, and equipment. Which accounting principle is Leonard Company addressing?

full-disclosure principle (Full disclosure requires that depreciation methods be explained in the notes to the financial statements.)

When purchasing new equipment, installation costs would be included as a component of

historical cost. (Under the historical cost principle, the initial cost of the new equipment plus any additional expenditures necessary to bring it to its full operating capability, such as the installation, are included in the initial cost of the equipment.)

The accounting for ________ does not generally involve the use of an accumulated ________ account.

intangible assets; amortization (Intangible assets are amortized over its legal or useful life, whichever is shorter. To record amortization, amortization expense is debited and the specific intangible asset is credited. On the other hand, depreciation is allocating expense of plant assets over its depreciable cost while depletion refers to natural resources.)

Companies that sell plant assets at the end of their useful lives estimate the ________ when determining how to depreciate the asset.

salvage value (The salvage value of a plant asset is the amount a company estimates the asset will be worth at the end of its useful life.)

New York Theater purchased the copyright of a famous play for $42,000. The remaining legal life of the copyright was 62 years, but the estimated useful life was 15 years. If the New York Theater uses straight-line amortization, how much of the cost of the copyright should they amortize each year?

$2,800 (New York Theater should use the useful life of the copyright to amortize the cost rather than the legal life. Therefore, amortization will be $42,000/15 = $2,800 per year.)

Voltage Industries, a calendar-year company, purchases equipment for $85,000 on January 2nd, 2022. The equipment's expected useful life is five years, and the expected salvage value of the equipment is $5,000. What is the book value of the equipment on December 31st, 2023, if Voltage uses the double-declining-balance method?

$30,600 (Ignoring the salvage value for the double- declining-balance method, the depreciation percentage per year is calculated by doubling the straight-line rate (100% / 5 years = 20%; 20% × 2 = 40%. For year 1, depreciation expense is $34,000 ($85,000 × 40%). Subtracting the expense from the original cost yields a book value of $51,000 at the beginning of year 2. $51,000 × 40% = $20,400 (year 2 depreciation); subtracting the expense from the year 2 beginning book value ($51,000 - 20,400) results in the book value being $30,600 on December 31st, 2023.)

A computer company has $3,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,400,000. What is the amount of net income or loss after these R & D costs are accounted for?

$600,000 loss (Research and development costs are treated as expenses in the period they are incurred. It is difficult to determine what future benefit may arise from research and development. Therefore, the proper treatment of these costs is expensing in their current period rather than amortizing over a period of time. The computer company then subtracts the $3,000,000 in research and development costs from its net income of $2,400,000 to arrive at a $600,000 loss.)

On December 31, 2021, Bates Company had on their books an assembly machine that was purchased for $392,000 and had accumulated $352,800 in depreciation. On April 1, 2022, Bates Company sold the machine for $40,000. On the date of the sale, they recorded the following journal entry.Cash: $40,000Accumulated Depreciation--Equipment: $352,800Equipment: $392,000Gain on disposal of Plant Assets: $800What error did Bates company make in this journal entry?

They did not account for a partial year of accumulated depreciation. (If a plant asset that accumulates depreciation is sold during the year, the accumulated depreciation account will need to be adjusted for the partial year that the asset was owned by the company. Bates Company did not make this adjustment, as evidenced by a debit to the Accumulated Depreciation-Equipment account that is equal to the accumulated depreciation that was recorded on the previous year's financial statement.)

Wagner Enterprises and Stone Services both disposed of an old asset. When completing the journal entry, Wagner Enterprises included a debit to Cash, but Stone Services did not. Why would the companies have this difference in the journal entry?

Wagner sold their asset, whereas Stone retired their asset. (When an asset is retired, the company does not gain cash as it does when they sell an asset. Therefore, the company will not record a debit to Cash for a retired asset, but they will record a debit to Cash for a sold asset.)