ACCT 206 Chapter 8 Accounting for Long-Term Operational Assets

(T/F) Similar sized companies can be expected to have similar amounts of salary expense.

False

(T/F) Land has an infinite life.

True

(T/F) Regardless of whether a company uses straight-line, double-declining-balance or units-of-production depreciation, the total amount of depreciation expense recognized over the useful life over the asset is the same. The methods simply assign different amounts to accounting periods

True

(T/F) Two companies that experience the exact same accounting events could report different amounts of depreciation expense.

True

The Yellow Taxi Company paid cash for a major expenditure to improve gas mileage on one of its cars. The journal entry to record this transaction would include

a debit to the car account and a credit to the cash account

The term used when recognizing expense for intangible assets with identifiable useful lives is called _________________________.

amortization

A(n) ___________________ protects writings, musical compositions, works of art, and other intellectual property for the exclusive benefit of the creator or persons assigned to the right by the creator.

copyright

A trademark has a(n) ____________________ useful life.

indefinite

The depreciation cost of an asset is the cost of the asset

minus the salvage value

Although they may be represented by physical documents, _____________________ assets are, in fact, rights or privileges that cannot be seen or touched.

intangible

Kate Company submitted an offer to purchase a plot of land that was listed at $120,000. Kate's offer was 10% below the list price and was accepted. Kate paid $10,000 to remove an old structure in order to make the land ready for use as a building site. Title and attorney fees amounted to $3,000. Annual property taxes amounted to $5,000 per year. Based on this information, the cost of the land as shown on the balance sheet would be

$121,000 ($120,000 list price x 90% = $108,000 purchase price + $10,000 structural removal + $3,000 title and attorney fees = $121,000. The cost of the property taxes was not incurred to acquire the land or to make it ready for use so it cannot be included in the cost of the land.)

Buck Company purchased a computer and a desk for $9,000 cash. An appraiser deemed the fair market value of the computer to be $3,000 and the desk to be $7,000. Based on this information, the cost of the computer is ________________ and the cost of the desk is ________________.

$2,700; $6,300

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. BLC expected to drive the limo for 100,000 miles before disposing of it. The limo had a $8,000 salvage value. Actual Miles Drive per year turns out to be 30,000 miles in Year 1, 40,000 miles in Year 2, 20,000 miles in Year 3, and 25,000 miles in Year 4. Based on this information, depreciation expense for Year 2 was (assume units-of-production depreciation)

$28,000 ($12,000 Year 1 depreciation expense + $16,000 Year 2 depreciation expense = $28,000 accumulated depreciation at end of Year 2)

Chen Company paid $80,000 cash and assumed $50,000 of liabilities to acquire a restaurant that had assets with an appraised market value of $90,000. In Year 3, the military base located close to the restaurant was closed, leading to a significant and permanent decline in the revenue generating capacity. After the closing of the base, the fair value of the goodwill was deemed to be $10,000. As a result, Chen would be required to recognized an impairment loss of

$30,000 (Goodwill purchased is $40,000 ($90,000 market value assets - $80,000 purchase price - $50,000 liability assumption); Impairment loss is $30,000 ($40,000 cost of goodwill - $10,000 fair value of goodwill))

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assume BLC uses double-declining-balance depreciation, accumulated depreciation shown on the Year 2 balance sheet is

$36,000 ($48,000 cost - zero accumulated depreciation) x 50% = $24,000 Year 1; ($48,000 cost - 24,000 accumulated depreciation) x 50% = $12,000 Year 2; $24,000 depreciation expense Year 1 + $12,000 depreciation expense Year 2 = $36,000 accumulated deprecation.)

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Actual miles driven per year turns out to be 30,000 miles in Year 1, 40,000 miles in Year 2, 20,000 miles in Year 3, and 25,000 miles in Year 4. Based on this information, depreciation expense for Year 4 was (assume units-of-production depreciation)

$4,000 (25,000 miles x 0.40 = $10,000 Year 3 depreciation expense per formula. However, total depreciation cost is $40,000 ($48,000 - $8,000). Since accumulated depreciation from Year 1 + Year 2 + Year 3 is $36,000, only an additional $4,000 of depreciation expense can be recognized.)

Benson Company paid $180,000 to purchase a competitor's business. At the time of the purchase, the business had assets with a book value of $160,000, liabilities of $20,000 and equity of $130,000. The fair market value of the assets was appraised to be $160,000. Based on this information, the amount of goodwill purchased was

$40,000 (Purchase price ($180,000 + $20,000 liabilities assumed) - fair market value of assets $160,000 = $40,000 goodwill.)

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assume BLC uses straight-line depreciation. At the beginning of Year 3, the limo is sold for $30,000. After recognizing the asset disposal (Select all that apply) -the balance of the Limo account will be $30,000 -the accumulated depreciation account will have a $20,000 balance - the accumulated depreciation account will have a zero balance -the balance in the Limo account will be zero

- the accumulated depreciation account will have a zero balance -the balance in the Limo account will be zero

Which of the following financial statements would be affected by the recognition of cash paid for a capital expenditure that improves the quality of an existing asset? (Select all that apply) -Statement of Changes in Stockholders' Equity -Balance Sheet -Statement of Cash Flows -Income Statement

-Balance Sheet -Statement of Cash Flows

Which of the following statements are true? (Select all that apply) -One designated salvage value must be used for identical assets. -Companies are required to disclose not only the amount of depreciation, but also the methods they use to calculate it. -All companies must assume the same useful life when computing depreciation expense of a specific type of asset. -Different companies may use different methods for identical assets.

-Companies are required to disclose not only the amount of depreciation, but also the methods they use to calculate it. -Different companies may use different methods for identical assets.

Which of the following statements regarding franchises are true? (Select all that apply) -Franchises have a 15 year legal life as defined by federal law -Franchises may be issued by the federal government -Brand labels are trademarks that cannot be franchised -Franchises may be issued by private business

-Franchises may be issued by the federal government -Franchises may be issued by private business

Which of the following statements about the impairment of intangible assets is true? (Select all that apply) -Impairment losses are amortized over the legal life of the intangible asset. -Goodwill must be tested for impairment annually. -If the fair value of goodwill is greater than its book value, an impairment gain must be recognized. -If the fair value of goodwill is lower than its book value, an impairment loss must be recognized.

-Goodwill must be tested for impairment annually. -If the fair value of goodwill is lower than its book value, an impairment loss must be recognized.

Which of the following would be classified as an intangible asset with an identifiable useful life? (Select all that apply) -Goodwill -Patent -Trademark -Copyright

-Patent -Trademark

The recognition of depreciation expense will affect which of the following financial statements? (Select all that apply) -Statement of changes in stockholders' equity -Income statement -Statement of cash flows -Balance Sheet

-Statement of changes in stockholders' equity -Income statement -Balance Sheet

Which of the following would be classified as a natural resource? (Select all that apply) -Stone Quarry -Car -Gold Mine -Furniture

-Stone Quarry -Gold Mine

Intangible assets may have: (Select all that apply) -an identifiable useful life -an indefinite useful life -visible signs of deterioration -a legal useful life

-an identifiable useful life -an indefinite useful life -a legal useful life

If a company has an asset with a four year useful life and uses double-declining-balance depreciation, expense will be at the: (Select all that apply) -lowest amount in Year 1 -lowest amount in Year 4 -highest amount in Year 1 -highest amount in Year 4

-lowest amount in Year 4 -highest amount in Year 1

When an intangible asset with an identifiable useful life is amortized: (Select all that apply) -net income decreases -cash flow from operating activities is not affected -the amount of total assets increases -liabilities are not affected

-net income decreases -cash flow from operating activities is not affected -liabilities are not affected

Intangible assets with identifiable useful lives are: (Select all that apply) -normally amortized using the unit-of-production method. -shown in the asset section of the balance sheet -expensed only if they are deemed to be permanently impaired -amortized over the shorter of their useful or legal lives

-shown in the asset section of the balance sheet -amortized over the shorter of their useful or legal lives

Costs that are incurred: (Select all that apply) -that improve the quality of a long-term asset are capitalized in an asset account -for minor repairs are capitalized in an asset account. -for routine maintenance are capitalized in an asset account. -that extend the life of a long-term asset are capitalized in an asset account.

-that improve the quality of a long-term asset are capitalized in an asset account -that extend the life of a long-term asset are capitalized in an asset account.

When a company recognizes deprecation expense, the amount of (Select all that apply) -the balance in the Accumulated Depreciation account increases -total assets shown on the balance sheet decreases -net income increases -cash outflow for depreciation expense is shown on the statement of cash flows

-the balance in the Accumulated Depreciation account increases -total assets shown on the balance sheet decreases

Goodwill appears on which of the following financial statements?

Balance Sheet (under assets)

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. BLC uses the straight-line depreciation method. At the beginning of Year 3, BLC spent $6,000 to replace the engine of the limo, thereby extending the useful life of the asset. How should BLC handle the $6,000 expenditure?

Debit Accumulated Depreciation for $6,000

Acquiring a group of assets in a single transaction is known as a(n) ________________ purchase.

basket

Gain on the disposal of assets with a ______________ (debit/credit) entry while losses on the disposal of assets are recorded with a ________________ (debit/credit) entry.

credit; debit

The journal entry to recognize depreciation expense should include a ____________________ (debit/credit) to accumulated depreciation and a ____________________ (debit/credit) to depreciation expense.

credit; debit

The journal entry to recognize the impairment of goodwill will include a ___________________---- (debit/credit) to the goodwill account and a ___________________ (debit/credit) to the impairment loss account.

credit; debit

The Stroller Company paid $500,000 to purchase a business competitor. The fair market value of the assets it obtained was $450,000. No liabilities were assumed by Stroller. Based on this information various asset accounts would be _______________________ (debited/credited), the goodwill account would be _______________________ (debited/credited) and the cash account would be ______________________ (debited/credited).

debited; debited; credited

The term used to recognize expense for property, plant, and equipment is __________________.

depreciation

A(n) ________________ grants its owner an exclusive legal right to produce and sell a product that has one or more unique features.

patent

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assume BLC uses double-declining-balance depreciation, accumulated depreciation, depreciation expense Year 4 is

zero

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assume BLC uses straight-line depreciation, cash flow from operating activities for this transaction shown on the Year 2 statement of cash flows is

zero