ACC 211- CHAPTER 7
record the gain on exchange
Dr. Equipment (new) Dr. Accumulated Depreciation Cr. Cash Cr. Equipment (old) Cr. Gain
repairs and maintenance
Expenses that maintain a given level of benefits in the period incurred
Long-term assets are classified as: a) tangible b) intangible c) acquired d) current
a & b
when a long-term asset is no longer useful but can not be sold we have...
a retirement
trademark
a word, slogan, or symbol that distinctively identifies a company, product, or service
Research and development costs should be: a) Expensed in the period incurred. b) Expensed in the period they are determined to be unsuccessful. c) Deferred pending determination of success. d) Expensed if unsuccessful, capitalized if successful.
a) Expensed in the period incurred.
The types of expenditures that can occur subsequent to an asset's acquisition are: a) additions. b) repairs and maintenance. c) goodwill. d) improvements.
a, b, d
The journal entry to retire old equipment that is not fully depreciated includes a: a) debit to loss b) credit to loss c) debit to accumulated d) depreciation e) credit to equipment f) debit to cash
a, c, e
Which of the following are expenditures for assets subsequent to acquisition? a) Additions b) Improvements c) Repairs and maintenance d) Freight charges
a,b, c
most companies create goodwill (to some extent) through...
ads, employee training
straight line depreciation
allocated an equal amount of depreciation to each year of the assets service life
intangible uses which: depreciation/amortization
amortization
goodwill
amount paid for an existing business above the value of its other assets
property insurance & property tax are included...
as an expense, separate from equipment costs
allocation percentage=
asset fair value / total estimated fair value
For accounting purposes, depreciation is: a) the selling price of an asset. b) an allocation of a cost of an asset. c) a decline in value of an asset.
b
Otto Inc. retires old equipment with a book value of $2,400. Otto should: a) debit cash for $2,400 b) recognize a loss of $2,400 c) recognize a gain of $2,400 d) not make a journal entry
b
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______. a) expensed b) capitalized c) accrued
b
T/F: The cost of ordinary repairs to equipment during the first year of service is added to the Equipment account.
false
T/F: The double-declining-balance method produces a higher net income than the straight-line method in the earlier years of an asset's life.
false
T/F: When a firm develops a trademark internally through advertising, it records the advertising costs as part of the cost of the intangible asset.
false
fair value
how much an asset can be sold for
what happened to WorldCom?
improperly capitalizing expenditures- fraud
we dont amortize intangible assets with...
indefinite useful lives
by overestimating the service life or residual value of an asset, depreciation expense is reduced and...
inflates net income in earlier years of an asset's life (makes a companys performance look better)
we expense an expenditure if...
it benefits only the current period
we dont depreciation land because...
it has an unlimited life
we capitalize an expenditure as an asset if...
it increases future benefits
when a long term asset is no longer useful, but cant be sold...
its a retirement
we do not record depreciation for...
land
land improvements have _____________ useful life
limited
Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record:
loss of 10000
big bath: future earnings are higher because the write-down of assets in this year result in
lower depreciation & amortization charges in the future
______________________ cause higher asset turnover
lower prices
Asset Turnover Ratio=
net sales / average total assets
intangible assets have...
no physical substance
natural resources
oil, natural gas, timber, salt
capitalized expenditures are expensed...
over time as the asset is used in the companys operations
______________& ___________ cause a higher profit margin
product differentiation & premium pricing
some companies pursue a higher profit margin through...
product differentiation & premium pricing
basket purchase
purchase of more than one asset at the same time for one purchase price
when a firm purchases a patent, it records it as an intangible asset at its...
purchase price + all other costs (legal/filing fees to secure the patent)
cost of equipment:
purchase price + costs needed to prepare asset for use
capitalized
recording expenditure as an asset
Accumulated Depreciation
reduces asset account (contra asset)
types of expenditures that increase future benefits:
repairs & maintenance, additions, improvements, legal defense of intangible assets
Depleted resources
resources that have been physically used up
land improvements are recorded..
separately from land (b/c they have limited useful life)
straight line method is the...
simplest & most common method for financial accounting
amount of basket purchase=
single purchase price
most companies use _______________ amortization for intangibles
straight-line
cost of equipment=
purchase price + expenditures needed to prepare the asset for use
big bath
recording all losses in one year to make a bad year even worse
residual value (salvage value)
the amount the company expects to receive from selling the asset at the end of its service life
activity-based method is used...
to allocate the cost of natural resources
capitalize
to describe recording an expenditure as an asset
T/F: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
true
depreciation method
the pattern in which the asset's depreciable cost (OG cost - residual value) is allocated over time
declining-balance & straight-line result in..
the same depreciation over the asset's service life
We record purchased intangible assets at..
their original cost + all other costs (legal and filing fees, necessary to get the asset ready for use)
record a loss on sale
Dr. Cash Dr. Accumulated Depreciation Dr. Loss Cr. Equipment
Recording Depreciation
Dr. Depreciation Expense Cr. Accumulated Depreciation
record the impairment loss
Dr. Loss Cr. (whatever the impairment is of- ex: trademark)
impairment loss journal entry
Dr. Loss Cr. (whatever you loss $ on: equipment, trademark, etc)
A company purchases a machine for $10,000. The estimated residual value is $4,000, and the estimated service life is 4 years or 10,000 units. The company uses the straight-line method of depreciation. The depreciable cost of the asset is:
6000
A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets.
8%
Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year?
8000
University Hero purchases new bread ovens at a cost of $110,000. On the date of purchase, the company estimates the ovens will have a residual value of $20,000. University Hero expects to use the ovens for four years or about 9,000 total hours. Use activity based method.
=10
what happens to capitalized expenditures after being recorded as an asset?
they are expensed over time as the asset is used in the companys operations
land has _____________ useful life
unlimited
relative fair value
used to allocate transaction price to more than one performance obligation
Declining Balance methods are used in...
calculating depreciation for tax purposes
3 most common depreciation methods
1. straight-line 2. declining balance 3. activity-based
impairment testing
1. test for impairment (see if future cash flow is less than the book value) 2. if impaired, record the loss
activity based depreciation=
(asset's cost - residual life) / units used
straight line depreciation=
(asset's cost-residual value) / useful life
depreciation expense equation
(assets cost - residual value) / service life or depreciable cost / service life
straight line depreciation equation
(cost - salvage value) / useful life
2 ways companies acquire intangible assets
1. purchase intangible assets (patents, copyrights, trademarks, franchise rights) from other companies 2. develop intangible assets internally (ex: developing new product & obtaining a patent)
record a gain on sale
Dr. Cash Dr. Accumulated Depreciation Cr. Equipment Cr. Gain
Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2021 would be:
11000
Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method?
16000
Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries?
Dr Equipment 50,000 Dr. Accumulated Depreciation 40,000 Dr. Loss on exchange 30,000 Cr. Equipment 120,000
record a loss on retirement
Dr. Accumulated Depreciation Dr. Loss Cr. Equipment
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?
Dr. Accumulated Depreciation 70,000 Dr. Equipment 50,000 Cr. Equipment 90,000 Cr. Gain on Exchange of Asset 30,000
Amortization for intangible assets
Dr. Amortization Expense Cr. (whatever intangible asset- ex: franchise)
On January 1, 2020, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2021, Jacob Inc. sold the truck for $43,000. What amount of gain or loss should Jacob Inc. record on December 31, 2021?
Gain, $5,000.
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 ex: McDonalds
recording purchase intangible assets=
OG cost + expenditures
depreciable cost
OG cost - residual value
book value
OG cost of asset - current balance in accumulated depreciation
book value (carrying value)
OG cost of asset - current balance in accumulated depreciation
Profit Margin x Asset Turnover
Return on Assets
The balance in the Accumulated Depreciation account represents...
The amount charged to depreciation expense since the acquisition of the plant asset.
We normally record a long-term asset at the a) Cost of the asset only. b) Cost of the asset plus all costs necessary to get the asset ready for use. c) Appraised value. d) Cost of the asset, but subsequently adjust it up or down to appraised value.
b) Cost of the asset plus all costs necessary to get the asset ready for use.
Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life? a) Short service life, high residual value, and straight-line depreciation. b) Long service life, high residual value, and straight-line depreciation. c) Short service life, low residual value, and double-declining-balance depreciation. d) Long service life, high residual value, and double-declining-balance depreciation.
b) Long service life, high residual value, and straight-line depreciation.
Which of the following statements is true regarding the amortization of intangible assets? a) Intangible assets with a limited useful life are not amortized. b) The service life of an intangible asset is always equal to its legal life. c) The expected residual value of most intangible assets is zero. d) In recording amortization, Accumulated Amortization is always credited.
c) The expected residual value of most intangible assets is zero.
A retirement or abandonment of an asset is different from a sale of an asset because: a) a gain is recognized for the undepreciated portion of the equipment. b) the residual value is included as a gain. c) no cash is received. d) a loss must be recognized for the remaining book value.
c, d
activity-based depreciation
calculates depreciation based on the activity associated with the asset
capitalize/expense & current/future benefit: Installed a passenger side brake to be used by the instructor, if necessary, at a cost of $1,100.
capitalize, future
capitalize/expense & current/future benefit: Overhauled the engine at a cost $2,200, increasing the service life of the car by an estimated four years.
capitalize, future
capitalize/expense & current/future benefit: Replaced the car's transmission at a cost of $4,100. The repairs are considered extensive and increase future benefits.
capitalize, future
book value equation
cost of asset - accumulated depreciation
depreciation rate per unit
depreciable cost / total units expected to be produced
activity-based depreciation equation
depreciable cost/total units expected to be produced
the residual value is never
depreciated
the residual value is never...
depreciated
The allocation of the cost of a tangible asset over its service life is referred to as
depreciation
tangible uses which: depreciation/amortization
depreciation
partial year depreciation=
depreciation expense (for 1 yr) x (__/12)
The allocation of the cost of a tangible fixed asset is referred to as _______________, whereas the allocation of the cost of an intangible asset is referred to as _______________
depreciation, amortization
conflicting with the desire to report higher net income is the...
desire to reduce taxes by reducing taxable income
a sale is the most common way to..
dispose of an asset
depreciation is an
estimate
management must review long-term assets for a potential write-down when...
events/changes in circumstances indicate the asset's "recoverable amount" is LESS THAN its "recorded amount" in the accounting records
patent
exclusive right to manufacture a product/to use a process
impairment
expected future cash flow generated for a long-term asset falls below book value
capitalize/expense & current/future benefit: Changed the oil and had an engine tune-up at a cost of $350.
expense, current
capitalize/expense & current/future benefit: Paid the annual registration fees of $185.
expense, current
intangible assets are recorded on what type of financial statement?
expense, income statement
service life (useful life)
the estimated use that the company expects to receive from the asset before disposing of it
copyright
the exclusive legal right given to the creator of published work, 70 years
copyright
the exclusive right of protection given to the creator of a published work (song, film, painting, photo, book, computer software)
impairment occurs when
the expected future cash flow (future benefits) generated for a long-term asset fall below book value
declining-balance depreciation
more depreciation expense is taken in the early years than the later years of an asset's life
impairments reduce..
net income & total assets
profit margin equation
net income / average sales
return on assets equation
net income / average total assets
return on assets=
net income / average total assets
profit margin=
net income / net (avg) sales
to maximize profitability, a company needs to increase...
net income per dollar of sales (profit margin) & sales per dollar of assets invested (asset turnover)
Asset Turnover Equation
net sales / average total assets
Early in the fiscal year, The Beanery purchases a delivery vehicle for $40,000. At the end of the year, the machine has a fair value of $33,000. The company controller records depreciation expense of $7,000 for the year, the decline in the vehicle's value. Is the company controller's approach to recording depreciation expense correct? (y/n)
no
Profit Margin x Asset Turnover
return on assets
The company's profitability on each dollar invested in assets is represented by which of the following ratios:
return on assets
loss
sell an asset for LESS THAN its book value
gain
sell an asset for MORE THAN its book value
we allocate a portion of the assets cost to depreciation expense in the year...
the asset provides the benefit
we record intangible assets in an...
income statement, as an expense
Companies acquire intangible assets in two ways:
1. purchase them: patents, copyrights, trademarks, franchise rights from other companies 2. develop them: developing a new product & getting a patent for it
Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, the book value at December 31, 2021, would be: 49,000.
49,000.
University Hero purchases new bread ovens at a cost of $110,000. On the date of purchase, the company estimates the ovens will have a residual value of $20,000. University Hero expects to use the ovens for four years or about 9,000 total hours. Use the double-declining method.
55000
expenditure
An amount of money spent.
We record goodwill as an intangible asset in the balance sheet only when _____. a) it is part of an acquisition of another business b) it is internally generated c) it is more than 50 percent of assets d) we make an acquisition at a price below the fair value of net assets
a) it is part of an acquisition of another business
Amortization
allocating the cost of intangible assets to expense
depreciation
allocation of an asset's cost to an expense over its service life
depreciation
allocation of an assets cost to an expense over time
Depreciation
allocation of the cost of a tangible fixed asset
amortization
allocation of the cost of an intangible asset
depletion
allocation of the cost of natural resources Allocation of the cost of natural resources
Allocating the cost of intangible assets to expense is referred to as
amortization
The gain or loss on disposal of an asset is calculated as: a) the fair value of the asset less the accumulated depreciation b) amount received less the book value of asset sold c) the cost of the asset less the accumulated depreciation d) consideration received less the fair value of the asset sold
b
accumulated deprecation is what type of account
contra asset, it reduces an asset account
recording long term asset =
cost + expenditures necessary to get it ready for use
long-term assets are recorded as
costs + expenditures (used to get the asset ready for use)
Research and development costs a) Are recorded as research and development assets. b) Are capitalized and then amortized. c) Should be included in the cost of the patent they relate to. d) Should be expensed.
d) Should be expensed.
T/F: Kelly Cakes Bakery purchases a new building to use for its baking operations. In addition to the purchase price, the acquisition requires the company owner to pay a commission to a realtor and fees to an attorney. The realtor commissions and legal fees will be expensed in the current period.
false
what intangible assets can you NOT amortize
goodwill & trademarks with INFINITE life
most extensive repairs do what?
increase future benefits
repairs and maintenance: more extensive repairs ______ future benefits, so they are...
increases, capitalized as an asset
Goodwill is recorded when...
one company acquires another company
cost of acquiring a building=
realtor commission + legal fees
cost of acquiring a building:
realtor commissions + legal fees
double-declining depreciation rate =
2 / estimated service life
double-declining depreciation=
2 / estimated service life (x book value)
how long do you have the right to a patent
20 years
Windsor Hospital purchases $90,000 in surgical equipment on October 1, Year 1. The useful life is estimated to be 5 years, and the residual value is estimated to be $10,000. What will be the depreciation expense reported for this equipment in Year 1 if the hospital uses the straight-line method?
4000
Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the first year?
40000 (50000 - 10000)= carrying value
University Hero purchases new bread ovens at a cost of $110,000. On the date of purchase, the company estimates the ovens will have a residual value of $20,000. University Hero expects to use the ovens for four years or about 9,000 total hours. Use the straight-line method.
=22500
