ACC 210 Chapter 7 (Exam 3)

True or False: A company should record an asset called "Goodwill" when it purchases another company for an amount that exceeds the fair value of the other company's identifiable net assets.

True

True or False: Land used in a company's business operations is generally not depreciated.

True

A retirement or abandonment of an asset is different from a sale of an asset because:

a loss must be recognized for the remaining book value. no cash is received.

trademark

a word, slogan, or symbol that distinctively identifies a company, product, or service protects from use for 10 years and can be renewed indefinitely

cost of equipment

actual purchase price + all other costs necessary to prepare the asset for use

straight line depreciation

allocates an equal amount of depreciation to each. year, implies that asset is used evenly over its useful life depreciation expense = (asset's cost - residual value)/service life

amortization

allocation of the cost of an intangible asset over its service life

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

methods to increase profit margin

increase selling prices to earn more profit per dollar of sales decreasing selling prices to increase sales volume, more sales per dollar invested in assets

strategies for increasing return on assets

increasing profit margin and increasing asset turnover

From the corporation's perspective, the purchase and sale of property, plant, and equipment used in its business is an example of which type of business activity?

investing

We expense an expenditure if:

it benefits only the current period

We capitalize an expenditure as an asset if:

it increases future benefits

When a firm purchases a patent:

it records the patent as an intangible asset at its purchase price plus other costs such as legal and filing fees to secure the patent

Companies use accelerated depreciation for tax purposes because:

it reduces taxable income in the early years of the asset's life and provides better cash flows.

material

large enough to influence a decision

return on assets

net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets = profit margin x asset turnover

addition

occurs when a new major component is added to an existing asset

loss

occurs when we sell an asset for less than its book value debit balance, reported as a decrease to net income

gain

occurs when we sell as asset for more than its book value credit balance, reported as an increase to net income

basket purchase

purchase of more than one asset at the same time for one purchase price

goodwill

purchase price less fair value of the net assets acquired recorded only when one company acquires another company

Otto Inc. retires old equipment with a book value of $2,400. Otto should

recognize a loss of $2,400

capitalize

record an expenditure as an asset

big bath

recording all losses in one year to make a bad year even worse co. is able to report higher earnings in future years

By purposely overestimating the service life or residual value of an asset, a manager:

reduces the reported amount of depreciation expense and thereby inflates net income in the earlier years of an asset's life

Cash received from the sale of salvaged materials:

reduces the total cost of land

Land account

represents land a company is using in its operations

residual value (salvage value)

the amount the company expects to receive from selling the asset at the end of its service life not uncommon to assume a residual value of zero

At the end of a depreciable asset's useful life, the "Accumulated Depreciation" account balance should equal:

the asset's depreciable cost

improvement

the cost of replacing a major component of an asset

service life (useful life)

the estimated use that the company expects to receive from the asset measured in units of time or activity

depreciation

the process of allocating the cost of an asset to expense over its useful life

We record purchased intangible assets at:

their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.

intangible assets subject to amortization:

those with finite useful life patents, copyrights, trademarks (finite life), franchises

intangible assets not subject to amortization:

those with indefinite useful life land, goodwill, trademarks (indefinite life) we do not amortize

For developed intangible assets, rather than reporting them in the balance sheet as assets:

we expense in the. income statement most of the costs for internally developed intangible assets in the period we incur those costs it is difficult to predict what portion of R&D costs will benefit future periods

retirement

when a long term asset it no longer useful but cannot be sold

A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment, respectively. The company recorded the building for $1,080,000. What was the total purchase cost for all three assets?

$1,800,000 The total estimated fair value is $2mil($1.2mil + $600k + $200k). The building represents 60% of the fair value ($1.2mil/$2mil) So, $1,080,000 must equal 60% of the purchase price Price = $1,080,000/.60 = $1,800,000

Suppose a company spends $100,000 during Year X1 to research and develop a safety device for motorcycles. By the end of X1, the company estimates that the new safety device has an 80% chance of generating $500,000 in revenues from sales to customers over the next five years (X2 - X6). For what amount would Research and Development Expense be reported in X1?

$100,000 Research and development expenditures are recognized as expenses in the year the cash is spent. So the entire $100,000 is R&D expense in X1.

KU Enterprises purchased equipment for $60k on January 1, 2020. The equipment is expected to have a five-year service life, with a residual value of $5k at the end of five years. Using the double-declining balance method, depreciation expense for 2021 would be:

$14,400 2020 depreciation = $60k BV x 2/5 = $24k 2021 depreciation = $36k BV x 2/5 = $14.4k

On January 1, 2020, BD Company purchased a commercial truck for $48k and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8k. On December 31, 2022, BD sold the truck for $38k. What amount of gain or loss should BD record on December 31, 2022?

$5,000 gain SL depreciation expense = ($48k - $8k)/8 years = $5k/year After three years accumulated depreciation = $15k The BV on the sale date = $48k - $15k = $33k If sold for $38kthen GAIN = $5k

A company purchased new equipment for $60,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $2,000; and installation cost, $2,500. The correct amount to capitalize in the equipment account would be:

$65,500 All costs incurred in getting the asset ready for its intended purpose should be capitalized. Hence, all of these amounts would be debited to the equipment account: $65,500

return of assets = profit margin x asset turnover

(net income/avg. total assets) = (net income/net sales) x (net sales/avg. total assets)

process of reporting for impairment losses

1. Test for impairment: are future cash flows < book value? 2. If impaired, record loss: loss = book value of asset in excess of fair value of asset

depreciation method

The pattern in which. the asset's depreciable cost (original cost - residual) is allocated over time

tangible assets

include land, land improvements, buildings, equipment, and natural resources referred to as property, plant, and equipment

intangible assets

include patents, trademarks, copyrights, franchises, and goodwill

equipment

includes machinery used in manufacturing, computers, and other office equipment

cost of acquiring a building

includes realtor commissions and legal fees in addition to the purchase price

Companies acquire intangible assets in two ways:

1. They purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other companies. 2. The develop them internally, for instance by developing a new product or process and obtaining a patent.

features of declining balance depreciation

1. We multiply the rate by book value rather than depreciable cost 2. Depreciation expense in the. final year in the amount that reduces book value to the estimated residual value

Accumulated Depreciation

A contra asset account representing the total depreciation taken to date.

Which of the following ratios measures how many sales dollars are generated per dollar of assets invested?

Asset turnover

Krasel Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?

Debit equipment $50,000 Debit accumulated depreciation $70,000 Credit gain on exchange of asset $30,000 Credit equipment $90,000

True or False: For financial accounting purposes, depreciation expense represents the decrease in an asset's fair market value.

False

True or False: Intangible assets can be observed to physically deteriorate over time.

False

True or False: On the balance sheet date, the book value (or carrying value) of an asset should always equal the asset's fair value.

False

True or False: The total amount of depreciation taken over the life of a depreciable asset should be higher if the double-declining balance depreciation method is used than if the straight-line method is used.

False

True or False: When compared to the double-declining-balance (DDB) depreciation method, the straight-line method will yield lower depreciation expense in each year of the depreciable asset's life.

False

True or False: A company's return on assets can be calculated by dividing its profit margin by its asset turnover.

False

True or False: For a particular asset, a company may not use the straight-line depreciation method for financial reporting while using the double-declining-balance (DDB) method for its tax return.

False

Modified Accelerated Cost Recovery System (MACRS)

IRS's prescribed acceleration method for income tax purposes co.s report higher net income using straight-line and lower taxable income using MACRS allows for a more advantageous tax depreciation deduction

franchise

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area initial fee is recorded as an asset, additional periodic payments are expensed as they occur

profit margin

Net income/ net sales, indicates the earnings per dollar of sales

asset turnover

Net sales divided by average total assets, which measures the sales per dollar of assets invested

impairment

Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). asset has significant decline in value

declining-balance depreciation

an accelerated method, more depreciation expense is taken in the earlier years than in the later years of an asset's life declining balance and straight line result in the same total depreciation over the asset's life

book value

an asset's original cost less accumulated depreciation

copyright

an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software gives the exclusive right to reproduce and sell the work for the life of the creator + 70 years

patent

an exclusive right to manufacture a product or to use a process granted for a period of 10 or 20 years

After initially being record as an asset, most capitalized expenditures:

are expensed over time as the asset is used in company operations

natural resources

assets such as oil, natural gas, and timber that we can physically use up or deplete

The formula for calculating the double-declining-balance method is:

book value at beginning of year x 2/estimated service life

as accumulated depreciation increases:

book value decreases

activity-based depreciation

calculates depreciation based on the. activity associated with the asset commonly used to allocate cost of natural resources service life is measured in terms of output dep. rate per unit = depreciable cost/total units expected to be produced

If a firm successfully/unsuccessfully defends an intangible right it should:

capitalize/expense the litigation costs

An account whose balance is reported on the asset side of the balance sheet and reduces total assets as its balance increases is called a:

contra-asset account

initial price of long term asset

cost + any expenditures necessary to get the asset ready for use

The "depreciable cost" of equipment used in a company's business is equal to the asset's:

cost minus residual value

depreciable cost

cost of the asset less residual value

The journal entry to retire old equipment that is not fully depreciated includes a:

debit to accumulated depreciation credit to equipment debit to loss

formula for calculating declining balance depreciation is:

depreciation rate per year times the book value at the beginning of the year.

fair value

estimated stand-alone selling price

repairs and maintenance

expenses that maintain a given level of benefits in the period incurred

land improvements

improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation