ACT 210 Chapter 7 Vocab and Questions

Copyrights

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photography, book, or computer software.

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

A ___________ is the exclusive right to manufacture a product or use a process granted for a period of _______ years.

patent ; 20

Other terms used for an activity-based depreciation method are:

1. Units of output method 2. Units of production method

Trademark

A word, slogan, or symbol that distinctly identifies a company, product or service.

On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?

$26,000; Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

On January 1, year 1, LaRose Corp. purchases equipment for $100,000. LaRose uses the double-declining-balance method of depreciation. The asset has a 5-year service life and a $10,000 residual value. What is depreciation expense for year 1?

$40,000; The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.

The formula for straight-line depreciation is:

(cost - residual value)/service life.

Which of the following items are initially recorded as an expense on the income statement?

1. Research and development costs 2. Advertising costs

Units of production or units of output are alternative terms for the ____-_____ depreciation method.

Activity-based

Attorney fees and other costs necessary to secure a patent should be:

Added to the patent account

Patent

An exclusive right to manufacture a product or to use a process.

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

The key factor in classifying items as repairs and maintenance is that:

Future benefits are not provided beyond those originally anticipated from the asset.

Land Improvements

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

Franchise

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its product within a specified geographical area.

Use of MACRS for tax purposes usually results in ___________ income tax in the earlier years of an asset's life.

Lower

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ____________ life of the asset.

Service

Straight-line and declining balance methods allocate the cost of a long-term asset based on _____________, while an activity-based method allocates the cost of an asset based on its_________________.

Time; activity

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.

current-year activity or production

Using the declining balance method, depreciation will be:

higher in earlier years, but lower in later years.

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.

Tangible Assets

land, land improvements, buildings, equipment and natural resources.

The cost of land improvements are capitalized separately from land because land improvements tend to have a _________________ useful life.

limited/definite

The profit margin ratio is defined as ______________ _________________ divided by net sales.

net income

Capitalize

recording an expenditure as an asset.

The formula for calculating declining balance depreciation is the depreciation rate per year times:

the book value at the beginning of the year.

The declining balance method of depreciation is a multiple of the:

straight-line rate of depreciation.

The depreciable cost is

the cost of the asset minus the residual value.

Straight-line deprecation is calculated as the depreciable cost divided by:

the estimated service life of the asset.

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

What is the straight-line method of depreciation?

It allocates an equal amount of depreciation to each year the asset is used.

The distinction between land and land improvements is that:

Land has an indefinite life.

_________ value is the amount the company expects to receive for the asset at the end of its service life.

Residual

The depreciable cost of an asset is the asset's cost minus its estimated _______________ value.

Residual or salvage

The term used to describe the amount the company expects to receive for an asset at the end of its service life is

Residual value

When an asset is no longer useful, but cannot be sold, it is called an asset ___________

Retirement

Which costs should be capitalized in the costs of acquiring a building?

1. Purchase price 2. Legal fees to obtain title 3. Realtor commissions 4. Remodeling building

Sarah purchases land to be used for a new storage facility. Which items are capitalized in the cost of land?

1. Cost to remove an old building 2. Legal fees to secure title 3. Commissions

Which items should be capitalized in the cost of equipment?

1. Installation and testing of equipment 2. Legal fees to establish title 3. Sales tax 4. Freight to deliver the equipment 5. Purchase price 6. Insurance on equipment during shipping

What is the formula for the profit margin ratio?

Net income divided by net sales.

For accounting purposes, depreciation is:

An allocation of a cost of an asset.

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year service life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?

$60,000; 2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1. Under the double declining balance method, residual value is not included in computing the annual depreciation. However, the asset's book value cannot be depreciated below residual value.

On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?

$70,000; $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

Which are long-term tangible assets?

1. Equipment 2. Property

The original cost of an asset minus accumulated depreciation is:

Book value

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

Book value at beginning of year x 2/estimated service life.

Intangible Assets

Patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. Evidence of their existence is based on a legal contract.

Goodwill

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

If a company generates its own goodwill through advertising or training, how should these costs be treated?

Expense the costs as incurred.

True or false: Internally developed goodwill should be capitalized as an asset.

False: Costs of internally developed goodwill should be expensed as incurred.

True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company.

False: Goodwill is an intangible asset that can only be recognized if a company acquires another company. It is valued at the purchase price less the fair value of net assets acquired.

True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.

True: Repairs and maintenance keep the asset in working order.

The residual value of an intangible asset is usually

Zero

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

1. A loss must be recognized for the remaining book value 2. No cash is received

Clarion purchases land and prepares it for use. Which items should be capitalized as land improvements?

1. Cost of sidewalks 2. Cost of driveways 3. Cost of lawn sprinkler system

Which items should be capitalized as land improvements?

1. Cost of sidewalks 2. Cost of parking lots 3. Cost of fences

Which of the following are commonly used depreciation methods?

1. Declining-balance 2. Activity-based 3. Straight-line

Larry purchases land to be used for a new corporate headquarters. Which items are capitalized in the cost of land?

1. Legal fees to secure title 2. Grading the land 3. Costs to remove an old building 4. Title insurance

What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?

1. Net Income is lower 2. Total assets are lower

Which items are capitalized into the cost of a patent?

1. Purchase price 2. Filing fees 3. Attorney fees to secure patent

Natural Resources

Assets like oil, natural gas, and timber that we can physically use up or deplete.

Basket Purchase

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