Accounting final---Chapter 9

A company decides to exchange its old machine and $55,000 for a new machine. The old machine has a book value of $45,000 and a fair value of $50,000 on the date of the exchange. The exchange has commercial substance. The cost of the new machine would be recorded at

$105,000. The cost of the new machine equals the cash paid plus the fair value of the old machine ($55,000 + $50,000 = $105,000).

Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as

capital expenditures.

Depreciation is a process of

cost allocation

book value:

cost of an asset less accumulated depreciation.

Depreciable cost is the

cost of an asset less its salvage value.

When there is a change in estimated depreciation

current and future years' depreciation should be revised.

The asset turnover is computed by dividing

net sales by average total assets.

The cost of land includes all of the following except

parking lots

Losses on an exchange of assets that has commercial substance are

recognized immediately.

If disposal of a plant asset occurs during the year, depreciation is

recorded for the fraction of the year to the date of the disposal.

All of the following are intangible assets except

research and development costs. (considered to be an expense)

A change in the estimated useful life of equipment requires

that the amount of periodic depreciation be changed in the current year and in future years.

Natural resources include all of the following except

land improvements

Companies amortize the cost of a patent over its

legal life or its useful life, whichever is shorter.

Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial substance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer's books?

$45,000 When an exchange has commercial substance, the debit to the new asset is equal to the fair value of the old asset plus the cash paid ($35,000 + $10,000 = $45,000).

Joe's Copy Shop bought equipment for $60,000 on January 1, 2013. Joe estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Joe decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014?

$60,000/3 years = $20,000 annual depreciation. The book value on January 1, 2014 is $40,000. $40,000/4 remaining years = $10,000 revised depreciation expense for 2014.

Ann Torbert purchased a truck for $11,000 on January 1, 2014. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2015, can be computed by the following formula:

($10,000 / Total estimated activity) X Units of activity for 2014 and 2015.

Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2015. On July 31, 2015, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2015, should be

Because the $150,000 was spent developing the patent rather than buying it from another firm, it is debited to Research & Development Expense. Only the $35,000 spent on the successful defense can be debited to Patents.

Able Towing Company purchased a tow truck for $60,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,000. What was the depreciation expense for 2014?

First, calculate accumulated depreciation from Jan 1, 2012 through December 31, 2013. The accumulated depreciation is $9,600 or ([($60,000-$12,000)/10 years] x 2 years). Next, calculate the revised depreciable cost, which is $48,400 or ($60,000-$9,600-$2,000 = $48,400). Thus, the depreciation expense for 2014 is $12,100 or ($48,400/4).

In the current year, Betz Company incurred $400,000 of research and development costs to develop a patent. It is estimated that these costs will be recouped at the end of 3 years. On August 1 of the current year, the patent was granted. On November 1, Betz Company paid $50,000 in legal fees in a successful defense of the patent. How should Betz Company report the research and development costs and legal fees for the current year?

Research and development costs of $400,000 are included on the income statement as an expense and legal fees of $50,000 are reported on the balance sheet as part of the Patents account.

What term is used by IFRS that is equivalent to "salvage value" for GAAP?

Residual value

Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million. If no salvage value is expected, and 2 million tons are mined and sold in the first year, the entry to record depletion will include a

The amount of depletion expense is determined by computing the depletion per unit ($12 million/20 million tons = $0.60 per ton) and then multiplying that amount times the number of units extracted during the year (2 million tons x $0.60 = $1,200,000). This amount is debited to Depletion Expense and credited to Accumulated Depletion.

Miles Co. earned $250,000 net income last year and their net sales were $4,900,000. Beginning total assets were $12,250,000 and ending total assets $15,750,000. The asset turnover is

The asset turnover is $4,900,000/[($12,250,000 + $15,750,000)/2] = 0.35 times.

The balance in the Accumulated Depreciation account represents the

amount charged to expense since the acquisition of the plant asset.

In exchanges of assets in which the exchange has commercial substance

both gains and losses are recognized immediately.

Factors that affect the computation of depreciation include all of the following except

book value

A gain on sale of a plant asset occurs when the proceeds of the sale exceed the

book value of the asset sold.

The depreciation method that produces a decreasing annual depreciation expense over an asset's useful life is the

declining-balance method.

The method that ignores salvage value in determining the amount of depreciation until the final year of the asset's useful life is the

declining-balance method.

Equipment was purchased for $800,000 on January 1, 2013. It has an estimated useful life of 8 years and a salvage value of $120,000. Depreciation is being computed using the straight-line method. What amount should be shown for the Equipment, net of accumulated depreciation, in the company's 2014 balance sheet?

it deducts one year of accumulated depreciation ($85,000) and the salvage value ($120,000) from the cost of the Equipment ($800,000). Annual depreciation expense = Cost ($800,000) - salvage value ($120,000) / useful life (8 years) = $85,000. Accumulated depreciation, 2013 - 2014 = Annual depreciation expense ($85,000) x 2 years = $170,000. Amount of Equipment, net of accumulated depreciation at December 31, 2014 = Cost of equipment ($800,000) - accumulated depreciation, 2013 - 2014($170,000) = $630,000.

Plant assets decline in service potential over their useful lives except for

land