ACC204 Chapter Eight Notes

If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during a construction on the borrowed money is -

capitalized as part of the cost of the plant asset

On January 1, 2013, Duggard Transport Co. purchased a ship for $2,000,000. It has a ten-year useful life and a residual value of $50,000. The company uses the double-declining-method. If Duggard Transport continues to use the ship its in eleventh year, what is the correct accounting procedure?

no longer depreciate it but leave it on the records at its book value at the end of its useful life

Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2400, $1750 to construct a fence and a legal fee of $8500. What is the cost of the land?

$282,200

Blanton Co bought equipment on January 1, 2012 with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for four years. Due to obsolescence, it was determined at the beginning of 2014 that the useful life should be shortened by 3 years and the residual value changed to zero. What is the accumulated depreciation at the end of 2015?

$32,000

On January 1, 2013, Duggard Transport Co. purchased a ship for $2,000,000. It has a ten-year useful life and a residual value of $50,000. The company uses the double-declining-method. What was the depreciation expense for Duggard Transport for the year ended December 31, 2014?

$320,000

On December 1, 2014, Xeon Company bought land and an accompanying warehouse from Yen Company for $800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000, respectively. How much of the purchase price should Xeon Company allocate to the land and how much should be allocated to the building?

$560,000 and $240,000, respectively.

Depreciation is -

an effort to achieve proper matching of the cost of operating assets

A company should choose a depreciation method that -

best allocates the original cost of the asset to the periods benefited by the use of the asset.

The estimated life of an asset, its acquisition cost, and its estimated residual value is needed -

to calculate depreciation on plant and equipment

If technology changes rapidly, a firm should -

consider an accelerate rate of depreciation

Land is NOT depreciated because -

it will provide future benefits for a company for an unlimited period of time

Yellow Dog Transit sold an old truck on December 31, 2013, for $18,400 cash. The following data was available when the truck sold... When this transaction is recorded, it should include -

loss on disposal account for $3000

Using the straight line depreciation method will cause a company to incur ________ tax expense in the early year of an asset's life than they would experience using an accelerated method of depreciation.

more

How would intangible assets be disclosed on the balance sheet?

net of the costs already amortized

Plant assets are depreciated because

the accrual basis of accounting requires matching of costs to revenues

When constructing assets, capitalized interest is based on -

the average accumulated expenditures

Wind Chime and Fire Hut Companies purchased identical equipment having an estimated useful life of ten years. Wind Chime uses the straight line depreciation method and Fire Hunt uses the double declining balance method of depreciation. Assuming the two entities are similar in all other respect, what is correct?

Fire Hut's book value will be less than Wind Chime's book value at the end of year two

Wen's Export CO. purchased a new delivery truck at the beginning of 2013. The truck has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2013. The truck was driven 20,000 miles during 2013 and 24,000 miles during 2014. The number of expected miles over five years is 100,000. By what amount would double-declining balance depreciation exceed straight-line depreciation over the five year life of the truck?

total depreciation expenses under double declining balance and straight line depreciation are equal

Wen's Export Co. purchased a new delivery truck at the beginning of 2013. The truck as a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7000. A full year's depreciation expense is to be recorded in 2013. The truck was driven 20,000 miles during 2013 and 24,000 miles during 2014. The number of expected miles over five years is 100,000. What is the amount by which double declining balance depreciation exceeds straight-line depreciation over the 5 year life of the truck?

$0

The effect of recording depreciation for the year is

a decrease in assets and a decrease in net income

Capitalizing an expenditure rather than recording it as a revenue expenditure -

affects the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period

Which cost is related to the purchase of production equipment incurred by Lincoln Company during 2011 would be considered a revenue expenditure?

repair and maintenance costs doing the equipment's first year of service

Many companies use MACRS depreciation for -

tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes

All of the following are intangible assets except A. patents B. goodwill C. franchises D. accounts receivable

accounts receivable

Oakland Corp. purchased land and a building for a combined cost of $500,000. Oakland must -

allocate the $500,000 acquisition cost to separate land and buildings accounts based on their respective fair market values

Ramirez Stores purchased a trademark at the beginning of 2013 for $340,000. Economic benefits were expected for 10 years, but the trademark's legal life was 20 years. Also, during 2013, Ramirez incurred research and development costs of $200,000. The book value of the trademarks at December 31, 2013, is A. $506,000 B. $306,000 C. $323,000 D. $486,000

$306,000

On January 1, 2013, Duggard Transport Co. purchased a ship for $2,000,000. It has a ten-year useful life and a residual value of $50,000. The company uses the double-declining-method. What was the book value the ship for Duggard Transport at the end of its useful life?

$50,000

Grover Inc. purchase a crane at a cost of $80,000. The crane has an estimated residual value of $5000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2700 hours in 2013 and 2600 hours in 2014. If Grover uses straight-line method, what is the book value at December 1, 2015?

$51,875

Royal Company purchased a dump truck at the beginning of 2012 at a cost of $50,000. The truck had an estimated life of 5 years and an estimated residual value of $20,000. On January 1, 2014, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method What is the book value of the truck to be reported on the balance sheet at December 31, 2014? A. $44,000 B. $50,000 C. $56,000 D. $62,000

$56,000

Grover Inc. purchase a crane at a cost of $80,000. The crane has an estimated residual value of $5000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2700 hours in 2013 and 2600 hours in 2014. If Grover uses the units-of-production method, what is the depreciation rate per hour for the equipment?

$6.00

Harkin Company purchased a building on a tract of land and allocated the entire cost of the purchase to building. Normally, it depreciates buildings over 20 year using the straight line method with zero residual value and does not depreciate land. Because of its accounting treatment of the purchase, Harkin's income before taxes for the next twenty years will be -

understated

Barnhill, Inc. uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value. The CEO points out that the equipment will last much longer than 10 years, perhaps up to 20 years. What is the impact on earnings per share and net income of depreciating equipment over 20 years rather than 10 years? A. Both earnings per share and net income will decrease. B. Both earnings per share and net income will increase. C. Earnings per share will decrease and net income will increase. D. Earnings per share will increase and net income will decrease.

both earnings per share and net income will increase

Which of the following is NOT related to the decline in the usefulness of plant and equipment assets, and therefore does NOT need to be considered in selecting an appropriate depreciation method? a. physical deterioration b. obsolescence c. repair and maintenance policies d. current replacement costs

current replacement cost

When a company discards machinery that is fully depreciated, this transaction would be have an effect on accounting equation as follows: A. decrease Accumulated Depreciation; decrease Machinery B. increase Machinery; increase Accumulated Depreciation C. increase Cash; increase Accumulated Depreciation D. increase Depreciation Expense; increase Accumulated Depreciation

decrease accumulated depreciation; decrease machinery

Lightning Delivery, Inc. purchased a truck on January 1, 2013, for $30,000. The truck had an estimated life of 5 years and an estimated residual value of $5,000. Lightning Delivery used the straight-line method to depreciate the asset. On July 1, 2015, the truck was sold for $17,000 cash. Recording the sale of the truck in 2015 has which of the following effects on the accounting equation? A. decreases stockholder's equity B. increases total assets C. decreases total expenses D. increases net income

decreases stockholder's equity

Operating assets with no physical properties are called -

intangible assets `

Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the company determine which costs should be recorded as land improvements and which cost should be recorded as land?

the costs of an unlimited life will increase land, an the costs with a limited useful life will increase land improvements

Using different depreciation methods for the book purposes versus tax purposes for the same asset is -

the direct result of the differing goals of financial and tax accounting

Research and development costs are A. treated as an expense when incurred. B. capitalized but not amortized. C. capitalized and amortized over the periods that will probably benefit from the research and development. D. included with the cost of the patent resulting from the research and development.

treated an an expense when incurred

Grover Inc. purchase a crane at a cost of $80,000. The crane has an estimated residual value of $5000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2700 hours in 2013 and 2600 hours in 2014. If Grover uses the double declining balance depreciation method, what amount is the depreciation expense for 2014?

$15,000

Waxman Company purchased a patent for $170,000 at the beginning of 2013, and estimated that its expected useful life was 10 years. The patent has a legal life of 17 years. What amount should be recorded as amortization expense for the patent in 2013? A. $ -0- B. $ 7,000 C. $10,000 D. $17,000

$17,000

Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values: land $320,000: building $370,000 and equipment $60,000. What cost should be allocated to the building?

$342,867

Miguel Foods, Inc. purchased a patent at the beginning of 2013 for $350,000. Economic benefits were expected for 7 years, but the patent's legal life was 20 years. Also during 2013, the company incurred research and development costs of $270,000. Patent amortization expense for 2013 is A. $11,000 B. $17,500 C. $31,000 D. $50,000

$50,000

Arena Inc uses straight line depreciation for its equipment. Arena purchased equipment fro $300,000 and estimated its useful life at 8 years. The bookkeeper failed to consider the residual value of $50,000. What is the impact on earnings per share and operating income of failing to consider the residual value?

Both earnings per share and operating income will be understated

All of the following statements are true except: A. IFRS requires that estimates of residual value and the life of the asset be reviewed at least annually and revised if necessary. B. The FASB standards do not have a specific rule that requires residual value and asset life to be reviewed annually. C. IFRS does not have a specific rule that requires residual value and asset life to be reviewed annually. D. The FASB generally requires operating assets to be recorded at acquisition cost, less depreciation, and the assets' values are not changed to reflect their fair market values or selling prices.

IFRS does not have a specific rule that requires residual value and asset life to be reviewed annually

Rose Inc purchased equipment at the beginning of 2013 for $180,000. Rose decided to depreciate the equipment over a 5 year period under the double declining balance method. Rose estimated the equipment's residual value at $30,000. Which statement is true regarding Rose's financial statements at December 31, 2013?

The book value of the equipment is $108,000.

At the end of 2013, Clock Products, Inc. determined that one of its patents was worthless. The patent had a cost of $300,000. The patent had been amortized for 5 years of its estimated 15-year legal life. Which of the following statements is correct? A. Clock Products must continue to amortize the patent over its remaining 10 years of life. B. The patent must be reduced to 5/15, or 33.3% of its original cost and amortized over the remaining 10 years. C. The remaining unamortized cost must be removed from the accounting records and treated as a loss on the income statement. D. Clock Products must correct its financial statements for the past five years, so that the entire cost is allocated to that fie year period.

The remaining unamortized cost must be removed from the accounting records and treated as a loss on the income statement

Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the indirect method is used? A. Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in the Operating Activities section. B. Depreciation provides cash and therefore must be added to net income. C. Depreciation was deducted in arriving at net income on the accrual basis of accounting; however, it did not require the use of cash. D. Depreciation reduced the book value of plant assets and, therefore, must be reported as an investing activity.

depreciation was deducted in arriving at net income and on the accrual basis of accounting; however, it did not require the use of cash.

all of the following are included in the acquisition cost of property, plant, and equipment EXCEPT: a. transportation costs b. taxes on the purchase c. installation costs d. maintenance costs

maintenance costs

Which statement is true concerning operating assets? a. operating assets have no physical properties b. a company's operating assets are important to its short-term liquidity c. operating assets are used over two or more periods to generate revenues d. all operating assets are reported on the balance sheet

operating assets are used over two or more periods to generate revenues

Central National Bank recently acquired a new computer system. Which cost is associated with the computer would NOT increase the equipment account?

replacement of several circuit boards damaged during installation

Depreciation is a process by which -

the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset

Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should A. not be amortized. B. be reported on the statement of retained earnings in the year in which acquired. C. be amortized over a reasonable period of time not to exceed 40 years. D. increase an expense account entirely in the year in which acquired.

not be amortized

Nerco Publishing Company purchased equipment at the beginning of 2014 for $20,000. The company decided to depreciate the equipment over an 8 year period using the straight line method. The company estimated the equipment's residual value at $20000. Recording depreciation expense for 2014 will have what effect the accounting equation?

increase depreciation expense and increase accumulated depreciation for 22500

Interest is capitalized when incurred in connection with the construction of plant assets because

interest is considered a part of the acquisition cost of the related plant asset

Which of the following below is an example of a capital expenditure? A. cleaning the carpet in the front room B. tune-up for a company truck C. replacing an engine in a company car D. replacing all burned-out light bulbs in the factory

replacing an engine in a company car

A gain is recognized on the disposal of plant assets when: A. The sales price is greater than the book value and less than the residual value. B. The sales price is greater than the book value and greater than the residual value. C. The sales price is less than both the book value and the residual value. D. The sales price is greater than the residual value but less than the book value.

the sales price is greater than the book value and greater than residual value

The accounting life of intangible assets is determined by A. their legal lives. B. their useful lives. C. their legal lives or useful lives, whichever is shorter. D. the tax life mandated by the IRS.

their legal lives or useful lives, whichever is shorter

Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should be used for 15,000 hours of flight. What is the most appropriate method of depreciation to properly match revenues and expenses?

units of production

Royal Company purchased a dump truck at the beginning of 2012 at a cost of $50,000. The truck had an estimated life of 5 years and an estimated residual value of $20,000. On January 1, 2014, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method When calculating depreciation for 2014, Royal should A. add the $30,000 to the book value at December 31, 2013 and then allocate the revised basis over the remaining adjusted useful life of 5 years. B. report the effect of the change in life as an expense on the income statement in 2012. C. ignore the change in life on the original cost of $50,000 and depreciate the additional $30,000 cost separately over its useful life. D. expense the $30,000 and depreciate the original cost of $50,000 over its revised estimated total live of 7 years.

add the $30,000 to the book value at December 31, 2013 and then allocate the revised basis over the remaining adjusted useful life of 5 years

Wang Apartments purchased an apartment building to rent to university students on November 18, 2013. How much will Wang Apartment record as an asset?

$351,000

Blanton Company bought equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for 4 years. Due to obsolescence, it was determined at the beginning of 2014 that the useful life should be shortened by 3 years and the residual value changed to zero. The depreciation expense for 2014 is

16,000

On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called -

Accumulated depreciation

Wen's Export Co. purchased a new delivery truck at the beginning of 2013. The truck has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7000. A full year's depreciation expense is to be recorded in 2013. The truck was driven 20,000 miles during 2013 and 24,000 during 2014. The number of expected miles over five years is 100,000. Wen's is comparing the straight-line and double-declining-balance depreciation methods. Of these two methods, which method creates the larger expense and larger tax savings in 2013?

Double-declining-balance depreciation creates both the larger expense and the larger tax savings

Tarkington Beers, Inc. purchased the most popular and well-known pub in a college town. Its purchase price was $1,200,000. The appraisers determined that the land should be valued at $400,000, the building at $500,000 and the equipment at $200,000. Which of the following statements is correct? A. Tarkington Beers, Inc. should record only the appraised value of the assets. B. Tarkington Beers, Inc. needs to adjust the value of the assets in proportion to their appraised value so that the total of the assets equals the purchase price C. Tarkington Beers, Inc. paid too much for the business and needs to record a loss D. Tarkington Beers, Inc. needs to record goodwill of $100,000.

Tarkington Beers inc needs to record goodwill of $100,000.

At the end of 2013, Mirror Productions determined that one of its copyrights was worthless. The copyright had a cost of $320,000. The copyright had been amortized for 8 years of its estimated 25-year legal life. Which of the following statements is the justification for removing the remaining cost of the copyright from the accounting records? A. The copyright no longer represents a future benefit to the company. B. The federal government does not allow copyrights to be recorded as assets once they are deemed worthless. C. The cost of the copyright represents an obligation to return capital contributions to the stockholders. D. The cost of the copyright has usefulness that will impact the net income of future accounting periods.

The copyright no longer represents a future benefit to the company

On January 1, 2013, Petersen Corp. sold a piece of equipment for $3,000 which it had used for several years. The equipment had cost $13,000, and its accumulated depreciation amounted to $9,000 at the time of the sale. What are the net effects on the accounting equation of selling the equipment? A. Assets and Stockholders' Equity increase $1,000. B. Assets decrease and Stockholders' Equity increases $3,000. C. Assets and Stockholders' Equity decrease $1,000. D. Assets and Stockholders' Equity decrease $3,000.

assets and stockholders equity decrease 1000

Grover Inc. purchase a crane at a cost of $80,000. The crane has an estimated residual value of $5000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2700 hours in 2013 and 2600 hours in 2014. What method will produce the maximum depreciation expense in 2014?

units-of-production

Which of the following items is added to net income to determine cash flows from operating activities when the indirect method is used to prepare the Operating Activities category of the statement of cash flows? A. Accumulated depreciation B. Cash from note payable related to truck acquired. C. Cost of plant assets acquired during the year. D. Depreciation expense

depreciation expense

Which of the following would NOT be reported in property, plant, and equipment section of a balance sheet? a. accumulated depreciation - buildings b. buildings c. depreciation expense - buildings d. land

depreciation expense - buildings

Creighton, Inc. determined that it had incorrectly estimated both the useful life and the estimated residual value of equipment which it purchased 2 years ago. When accounting for the change in its accounting estimates, Creighton must A. correct the financial statements of prior years affected by the errors in the estimates. B. determine the book value at the point of change and depreciate that amount over the remaining useful life. C. add the amount of the error to the amount of the current year's depreciation expense. D. determine the effect of the error and report it as a loss on the income statement in Other Revenues and Expenses.

determine the book value at the point of change and depreciate the amount over the remaining useful life

Fall Corp. uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration. Which depreciation method is most appropriate to measure the decline in the usefulness of the company's assets?

double declining balance

Grover Inc. purchase a crane at a cost of $80,000. The crane has an estimated residual value of $5000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2700 hours in 2013 and 2600 hours in 2014. What method of depreciation will produce the maximum depreciation expense in 2013?

double declining balance

Wen's Export Co. purchased a new delivery truck at the beginning of 2013. The truck as a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7000. A full year's depreciation expense is to be recorded in 2013. The truck was driven 20,000 miles during 2013 and 24,000 miles during 2014. The number of expected miles over five years is 100,000. Wen's Export Co. wants to use the depreciation method that will result in the highest depreciation expense for 2013. What method should be used?

double declining balance

A building with an appraisal value of $167,000 is made available at an offer price of $162,000. The purchaser acquires the property for $25,000 in cash, a 90-day note payable for $75,000 and a mortgage amounting to $65,000. The cost basis recorded in the buyer's accounting records to recognize this purchase is -

$165,000

Sacramento Corp. constructed equipment to manufacture a new line of home products during 2013. The average balance of accumulated expenditures on the equipment during September through December 2013 was $500,000. Construction started on September 1, 2013 and was still in progress at the end of 2013. If Sacramento borrows $500,000 for one year on September 1, 2013, to finance the construction, and the interest rate on the construction loan was 6%, how much interest can Sacramento capitalize as part of the equipment cost for 2013?

$10,000

Royal Company purchased a dump truck at the beginning of 2012 at a cost of $50,000. The truck had an estimated life of 5 years and an estimated residual value of $20,000. On January 1, 2014, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method What amount should be recorded as depreciation expense each year starting in 2014? A. $6,000 B. $12,000 C. $13,600 D. $14,400

$12,000

Halifax Resort incurred the following costs to acquire and prepare land during 2013 for a new parking lot: purchase price for land, $800,000; cost to clear the land, $30,000; cost of paving; $40,000; and lighting for the parking lot, $20,000. How much should Halifax record in the land improvements account?

$60,000

Francis Real Estate purchased a building for $600,000 in 2001. At the end of 2013, when it had a book value of $450,000, it was appraised at $1,000,000. A potential buyer offered $900,000. Francis rejected the offer. What amount should be recorded on Francis' records at the end of 2013 in the account called Buildings?

$600,000

Recently, companies have been ordered by governmental agencies to clean up environmental damages caused by business operations. How should costs incurred in these situations be treated? A. If a legal obligation exists, the cost of restoring the property must be added to the asset account. B. As an expense entirely in one accounting period. C. As an amortized expense in the period the cost is incurred. D. Added to the asset, and then depreciated over 15 years.

If a legal obligation exists, the cost of restoring the property must be added to the asset account

Crouch Apartments purchased an apartment building to rent to university students on December 15, 2012. The tenants moved in on January 1, 2013. On Super Bowl Sunday, a student punched a hole in the wall when his favorite team fumbled the ball. It cost the landlord $400 to repair the hole. How should this cost be recorded? A. It should be recorded as part of the asset account. B. It should be recorded as repair and maintenance expense. C. It should not be recorded as the tenants will be charged for the damage. D. It should not be recorded since this is an immaterial amount to the landlord.

It should be recorded as repair and maintenance expense.

Sharp purchased equipment at the beginning of 2013 for $11,000. Sharp decided to depreciate the equipment over a 5 year period using the straight line method. Sharp estimated the equipment's residual value at $1000. The estimated fair market value at the end of 2013 was $10,000. What is true concerning Sharp's financial statement at December 31, 2013?

The book value of the equipment is $9000.

Goodwill can be recorded as an asset when a(n) A. business has above normal profitability compared to other businesses in its industry. B. business can determine that it has created customer goodwill and name recognition. C. offer is received to purchase the business at a price in excess of the value of the assets. D. business is purchased and payment is made in excess of the value of the net assets.

business is purchased and payment is made in excess of the value of the net assets

Assets classified as property, plant, and equipment are reported at -

each asset's original cost less depreciation since acquisition

GAAP require that research and development costs to develop a new product be A. capitalized in the patents account. B. expensed in the period incurred. C. capitalized in the research and development costs account. D. amortized over the expected economic life of the new product.

expensed in the period incurred

Eagle's Nest sold equipment for $4,000 cash. This resulted in a $1,500 loss. What is the impact of this sale on the working capital? A. Reduces working capital B. Increases working capital C. Has no effect on working capital D. The increases offsets the decrease.

increases working capital

On January 2, 2013, Hannah Company sold a machine for $1,000 that it had used for several years. The machine cost $12,000, and had accumulated depreciation of $9,000 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine? A. Gain of $2,000 B. Loss of $11,000 C. Loss of $2,000 D. Gain of $3,000

loss of 2000