Ch 7 Concepts Overview Videos

Which of the following is an example of an intangible asset?

Patents of a drug manufacturer

The amount a company expects to receive from selling a long-term asset at the end of its service life is known as:

residual value

Anderson Company acquires Thompson Company by paying $30 million in cash. The fair value of the identifiable assets acquired is $38 million. The fair value of the identifiable liabilities acquired is $6 million. What will be the amount of goodwill that Anderson Company would record as part of this acquisition?

$0

Sonic Corporation purchases a delivery truck for $24,000. The company expects the truck to be in service for 100,000 miles, and the residual value is estimated to be $4,000. What is the depreciation rate using activity-based depreciation?

$0.20

On January 1, Year 1, a company purchases a machine for $18,000. The estimated residual value is $6,000, and the estimated service life is 8 years or 30,000 units. After three years of use, the company estimates the remaining service life of the machine to be nine years rather than the original eight. Using the straight-line method, calculate the amount of depreciation for Year 4.

$1,250

On January 1, Year 1, a company purchases a machine for $18,000. The estimated residual value is $6,000, and the estimated service life is 8 years or 30,000 units. Using the straight-line method, calculate the amount of depreciation for Year 2.

$1,500

A company purchases a machine for $12,000. The estimated residual value is $4,000. The machine has a useful life of 5 years, and is expected to produce 20,000 units during its lifetime. Use the activity-based depreciation method to calculate the amount of depreciation in Year 1, assuming that the machine was used to produce 6,000 units.

$2,400

Light Company acquires Photon Company by paying $25 million in cash. The fair value of the identifiable assets acquired is $30 million. The fair value of the identifiable liabilities acquired is $8 million. What will be the amount of goodwill that Light Company would record as part of this acquisition?

$3 million

A company pays $5,000 for equipment. Annual depreciation on the equipment is $500. What is the book value of the equipment at the end of Year 2?

$4,000

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?

$4,000

Industrial Metals purchases land, building, and equipment together for $1.2 million. The estimated fair values of the land, buildings, and equipment are $500,000, $800,000, and $200,000, respectively. What amount should be recorded in the separate account for the land?

$400,000

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:

$6,000

On January 1, Year 1, Toy Factory purchases a patent for a printing process for $40,000. The original legal life of the patent was 10 years, and there are 8 years remaining. However, due to expected technological obsolescence, the company estimates that the useful life of the patent is only 5 more years. What will be the amortization expense for the patent in Year 1?

$8,000

Which of the following accounts are affected when recording the expense related to the portion of a patent that expired during the year? (Select all that apply.)

- Amortization Expense - Patents

Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the fourth year, the equipment is exchanged for new equipment worth $110,000. Terra gets a trade-in allowance of $70,000 on the exchange, with the remaining $40,000 paid in cash. Which of the following is true of the net effect of this transaction? Assume the straight-line depreciation method is used. (Select all that apply.)

- Assets increase by $10,000 - Stockholders' equity increases by $10,000

Which of the following intangible assets are usually subject to amortization? (Select all that apply.)

- Patent - Franchise

Infinity Corporation purchased equipment with a 10-year useful life and zero residual value for $10,000. At the end of the fifth year, the equipment was destroyed in a fire. If the equipment is not insured, the entry to record the retirement of this asset will include _______. Assume the straight-line depreciation method is used. (Select all that apply.)

- a debit to Accumulated Depreciation for $5,000 - a debit to Loss for $5,000 - a credit to Equipment for $10,000

Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the seventh year, the equipment is sold for $20,000. The entry to record this sale will include _______. Assume the straight-line depreciation method is used. (Select all that apply.)

- a debit to Cash for $20,000 - a debit to Accumulated Depreciation for $70,000 - a debit to Loss for $10,000 - a credit to Equipment for $100,000

Infinity Corporation purchased equipment with a 10-year useful life and zero residual value for $10,000. At the end of the fifth year, the equipment is sold for $6,000. The entry to record this sale will include _______. Assume the straight-line depreciation method is used.(Select all that apply.)

- a debit to Cash for $6,000 - a debit to Accumulated Depreciation for $5,000 - a credit to Gain for $1,000 - a credit to Equipment for $10,000

The legal life of a patent is _____ years.

20

Prime, Incorporated, purchases $100,000 in construction machinery on January 1, Year 1. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. What will be the depreciation rate if the company uses the double-declining-balance method?

25%

KPR, Incorporated just purchased a plot of land on which it expects to build a new manufacturing facility. The Land account will not include:

All of these costs will be included in the Land account.

When considering total depreciation recorded over the entire life span of an asset, the method resulting in the highest total depreciation is:

All three methods result in the same amount of total depreciation

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

On January 1, Year 1, a company purchases a long-term asset having a service life of ten years. In comparing the straight-line and double-declining-balance methods, the method that produces higher depreciation expense in Year 1 of the asset's life is the straight-line method.

False

The cost of ordinary repairs to equipment during the first year of service is added to the Equipment account.

False

The exclusive right of protection given to the creator of a published work is known as a patent.

False

The owner of an established McDonald's franchise pays fees on a continuing basis to the franchisor. These periodic payments should be capitalized as an intangible asset.

False

When a firm develops a trademark internally through advertising, it records the advertising costs as part of the cost of the intangible asset.

False

Which of the following is not an example of a tangible asset?

Franchise rights

The research and development (R&D) team at a pharmaceutical company is developing a drug for colon cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year?

They are expensed directly in the income statement

A company pays $16,000 in property taxes on land that it acquired ten years ago. The property taxes pertain only to the current year. The company should record the property taxes as an expense in its current-year income statement.

True

A long-term asset is reported on the balance sheet at its original cost plus all expenditures necessary to get the asset ready for use.

True

Goodwill has an indefinite useful life.

True

Land has an unlimited useful life.

True

Repairs and maintenance expenditures that benefit future periods are capitalized as an asset.

True

A trademark is:

a word, slogan, or symbol that distinctively identifies a company, product, or service

The journal entry to record annual depreciation for equipment includes a:

debit to Depreciation Expense

As natural resources are used, their cost is allocated to an expense through a process known as _____________.

depletion

Depreciation is the process of allocating the cost of an asset to a(n) _________ over its service life.

expense

Although the straight-line method of depreciation is the simplest to calculate, it is the least commonly used.

false

An automobile manufacturer replaces a major component of a machine used in its assembly line. This cost should be expensed in the current period.

false

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

When a change in depreciation estimate is required, the company adjusts depreciation in prior periods.

false

An attorney adds an air purification system to his office building. The addition:

increases future benefits and should be capitalized

Accumulated Depreciation:

is a contra asset and has a normal credit balance

We record goodwill as an intangible asset in the balance sheet only when _____.

it is part of an acquisition of another business

Prime, Incorporated, purchases $100,000 in construction machinery on January 1, Year 1. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. If the company uses the double-declining-balance method, the asset will reach its residual value in the ____ year.

sixth

The method that allocates an equal amount of depreciation to each year of an asset's service life is:

straight-line

The cost of an oil change for a company's delivery truck is expensed in the current period.

true

The service life of an asset can be measured in units of time (such as years) or in units of activity (such as miles driven).

true

We record purchased intangible assets at their original cost plus all other costs, such as legal fees, necessary to get the assets ready for use.

true

When an expenditure is not large enough to influence a decision, it is typically recorded as an expense regardless of its expected period of benefit.

true

We do not amortize intangible assets _____.

with indefinite useful lives